By Brad Tonks, Brad TonksBusiness Recovery and Insolvency Partner
16 September 2020
As we move towards the back end of 2020, COVID has become a ubiquitous part of day-to-day life with no clear signs of that changing any time soon.
The Australian economy contracted 0.3% in the March quarter and economists predict that with the official results for the June quarter, set to be released on 2 September 2020, that a significant further contraction will be confirmed, bringing about the Australian economy’s first recession since 1991.
With the backdrop of unemployment set to reach 10% by the end of the year and many businesses wondering what life after JobKeeper will entail, you would be excused for thinking that business collapses must be climbing.
The surprising reality is that corporate insolvency rates have not increased. In fact, they have fallen by 50% or more compared to this time last year. The Australian Financial Security Authority also recently announced that personal insolvencies are at their lowest levels in 30 years.
How is it that Australia is facing its worst economic outlook in recent memory, yet insolvency rates are at their lowest point in decades? And what does this say about what lies ahead?
The short explanation is Government intervention. To date, Government support to combat the impact of the COVID-19 pandemic is in excess of $300 billion. The temporary breathing space provided to many businesses can be categorised into three main areas, all having a direct impact on holding back insolvencies. These include:
- Political or commercial changes, such as:
a) A general hold on bank recovery action and extensions to existing facilities.
b) No apparent recovery action by the Australian Taxation Office, despite new Director Penalty
Notice powers relating to GST coming into effect in April 2020; and
c) Massive Government Stimulus including Cash Flow Boost and JobKeeper.
- Limiting the rights of creditors to collect debts, by:
a) Increasing the minimum claims for:
i) Statutory Demands from $2,000 to $20,000; and
ii) Bankruptcy Notices from $5,000 to $20,000.
b) Increasing the amount of time that a creditor has to respond to a Statutory Demand and/or Bankruptcy Notice from three weeks to six months; and
c) Limiting Landlords’ powers to recover arrears or evict tenants.
- Relaxing director obligations - Providing directors with temporary protection from insolvent trading laws.
The overall effect of these changes is the absence of pressure upon debtors that would otherwise have placed them into a position where they would need to be making tough decisions about their future viability.
The Government’s eligibility criteria for JobKeeper 2.0, despite being relaxed somewhat after Victoria’s second wave, means that many businesses will miss out after September. At the same time, the temporary changes to creditor rights and director obligations will revert back to their pre-COVID state.
Where will you, your clients and your suppliers be after September 2020?
If you haven’t already asked yourself this question, now is the time to do so. With time running out, businesses need to be on top of their situation and have clarity around their business model going forward, especially in circumstances where they have deferred debts or income levels remain low.
Where to start?
Seeking professional assistance early increases your ability to identify and implement effective strategies to navigate the impacts of COVID-19 now and in the future. Initial considerations should include:
- Knowing what steps you need to take and when;
- Know your cash flow and key assumptions. Remember ‘Cash is King’;
- Monitor your trading closely and revisit assumptions regularly;
- Employ strategies to reduce debtor days. Consider compromising difficult debts;
- Negotiate with creditors; and
- Think about ‘Plan B’ before you need it. Don’t forget that the implementation of Safe Harbour Laws in 2017 gives businesses more options.
PKF can assist by formulating realistic financial modelling and providing effective communication to stakeholders. As trusted advisers, our expertise can help provide the necessary breathing space to businesses implementing a recovery plan.