The directors of aged care organisations have a range of duties to consider in times of insolvency or mergers and acquisitions, writes Alison Choy Flannigan.
The aged care sector is facing significant challenges. With the Royal Commission into Aged Care Quality and Safety and the introduction of new Aged Care Quality Standards, many approved providers are looking to exit in the short or medium term.
The sudden closure of Earle Haven Retirement village at Nerang, Queensland on 11 July 2019 left residents homeless and sent shockwaves through the industry.
The StewartBrown March 2019 Aged Care Sector Financial Performance Survey reported that 43.1 per cent of residential aged care facilities experienced a negative earnings before tax (EBT) in the period during the 12 months ending March 2019; and 19.5 per cent of facilities negative earnings before interest, tax, depreciation and amortisation (EBITDA). The average EBT per bed day for survey average was $3.93 or $33.44 for the first 25 per cent.
Aside from the royal commission and the new Aged Care Quality Standards, the sector is under significant pressure from facilities becoming outdated and requiring major capital works to meet the new standards, the prospect of mandatory staff ratios being imposed, which will significantly increase costs, and increasing insurance premiums.
Directors and officers of approved providers have several common law and statutory obligations. The statutory obligations are set out in the Corporations Act 2001 (Cth) for for-profit companies and under the Australian Charities and Not-for-profits Commission Act 2012 (Cth) for not-for-profit companies that are registered charities.
It still surprises me how many directors are unaware of securities registered under the Personal Property Securities Act 2009 (Cth) over their organisation’s assets, which provide creditors rights to come in and seize possession of assets, potentially shutting down the approved provider’s operations.
In addition, few directors truly appreciate the time required for assessing options and dealing with the merger or sale process to obtain the best outcome for both the operator, staff and clients.
A director has a duty to exercise their powers and duties with the care and diligence that a reasonable person would have, which includes taking steps to ensure they are properly informed about the financial position of the company and the business risks.
Under the ‘business judgement rule’, a director or other officer of a corporation who makes a business judgment is taken to meet the requirements of the duty to act with care and diligence of a reasonable person, and their equivalent duties at common law and in equity, in respect of the judgment if they:
- (a) make the judgment in good faith for a proper purpose; and
- (b) do not have a material personal interest in the subject matter of the judgment; and
- (c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and
- (d) rationally believe that the judgment is in the best interests of the corporation.
The director’s or officer’s belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.
As well as general directors’ duties, a director also has a positive duty to prevent the company trading if it is insolvent. A company is insolvent if it is unable to pay all its debts as and when they fall due.
This means that before the company incurs a new debt the director must consider whether they have reasonable grounds to suspect that the company is insolvent or will become insolvent as a result of incurring the debt.
Contravening the insolvent trading provisions of the Corporations Act can result in civil penalties personally against directors, including pecuniary penalties of up to $200,000 and compensation to creditors.
If you believe that your business in financial difficulty or if you are considering selling or merging, then you should seek financial and legal advice on your options, including taking advantage of the ‘safe harbour rules’, corporate restructuring and the option of entering into a joint venture, in addition to checking your directors and officers insurance coverage.
Some approved providers are selling now for a number of reasons.
Unique challenges arise in relation to the sale or merger of not-for-profit organisations as directors of not-for-profit organisations must act in accordance with the best interests of the organisation’s charitable objects and this will limit potential partners and acquirers, and there are no shares to sell.
Recently, we advised the sellers on the sale of shares for a 95-bed aged care facility in Sydney owned by the same family since 1965.
The sellers were interested in both optimising the sale price and also finding a buyer with the right culture who would look after staff and residents going forward.
Alison Choy Flannigan is partner, leader health and community at Hall & Wilcox.
This article first appeared in Australian Ageing Agenda magazine (September-October 2019).