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Temporary Relief Measures for Financially Distressed Businesses Extended – Proceed with Caution

09/09/2020 by Bruce Gleeson

The Federal Government announced on 7 September 2020 a further extension to 31 December 2020 of temporary relief measures that were previously set to expire on 24 September 2020. Curiously, such measures were announced within 24 hours after the Victorian Premier extended the stage 4 lockdown timeline until 26 October 2020. But where does this leave businesses at the end of it? There are differing views.

Whilst moratoriums provide much needed breathing space for businesses, debt nonetheless continues to accumulate. Therefore, does this ultimately leave businesses in a better position? It is a finely balanced argument, because a period of time was needed for the Governments to respond to the crisis during the early phases. However, I would argue that any further extensions beyond 31 December 2020 and in the absence of a significant second wave will have unintended consequences.

Firstly, what were the initial temporary relief measures?

  1. A temporary increase in both the threshold from $2,000 to $20,000 by which creditors can issue a Statutory Demand on a company and the time a company has to respond to a Statutory Demand received from 21 days to 6 months.
  2. A temporary increase in both the threshold for a creditor to initiate bankruptcy proceedings against an individual from $5,000 to $20,000 and the time period for an individual to respond to a Bankruptcy Notice received from 21 days to 6 months.
  3. Temporary relief for directors from a personal liability for trading whilst insolvent during the 6 months period up to 24 September 2020.

The above measures were implemented so that businesses were not unnecessarily pushed into insolvency (for example liquidation) during the pandemic. The recent announcement extending the above three (3) measures until 31 December 2020 stated:

“These changes will help to prevent a further wave of failures before businesses have had the opportunity to recover.”

It is interesting to note the words “prevent a further wave” when looking at the appointment statistics produced by the Australian Securities & Investments Commission (“ASIC”) [for corporate insolvencies] and Australian Financial Security Authority (“AFSA”) [for personal insolvencies]. When reviewing the statistics the following points can be made:

  1. There hasn’t been a wave of reported failures during Covid 19 if you determine this with reference to the statistics? However, the pipeline is continuing to build the longer extensions are continued.
  2. ASIC statistics as at FY20 reveal the total number of external administrations has dropped to a level not seen since 2004. And remember this only takes into account a decrease in external administrations effectively in the fourth (4th) quarter of FY20.

    Based on ASIC weekly statistics during the period 31 March 2020 to 26 August 2020, the number of external administrations has decreased on average by approximately  50% when compared to the same time last year. Given the recent extensions announced, it is very conceivable that this decrease will at least be maintained and could possibly get larger into FY21 before contracting in FY22 when it is likely that the external administrations will increase significantly.
  3. AFSA statistics reveal that for the June 2020 quarter, personal insolvencies were approximately 35% lower than the prior year period. Relevantly bankruptcy numbers in the June 2020 quarter were at their lowest level since the March 1990 quarter!

    During the period 1 July 2020 to 23 August 2020 personal insolvency rates have decreased approximately 47% when compared to the same prior year period. Again with extensions in place until the end of the calendar I believe it is very likely that such declined will be maintained.
  4. In summary, during COVID-19 both corporate and personal insolvency volumes have decreased by about 50% when compared to the prior year. And in case you are wondering 2019 was not a high-volume year. Accordingly, I don’t believe that the numbers actually support the comment made in the release because there has not been a wave failures.

However, the longer the can is kicked down the road and there is a forced slow down on the effective circulation of capital, there will be a catch up in corporate and personal insolvency levels. This is something accountants and business advisors need to be actively evaluating with their clients by ensuring that financial assessments are ongoing and also where required that other professional advice is obtained as early as possible. I have outlined below some key considerations

  1. For every debtor, there is a creditor. For example, your client. Whilst moratoriums / extensions have been worthwhile and with specific focus on what business your client is in, have they looked at:
  • The current debtors ledger by individual debtor – particularly corporates and the realisability of amounts owed? Which of their debtors may not be able to pay and how are they going to avoid potentially getting caught as an unpaid creditor over the next 12 months? I have previously written about the rise in the number of zombie companies.
  • The terms upon which they will trade with debtors over the next 12 months.
  • In a recent report by joint report, Creditor Watch confirmed that payment times have risen exorbitantly. This is relevant because many small businesses only have cash reserves in normal times of about six (6) weeks. And whilst actual defaults may have declined, it is unlikely that this is a true representation of reality. The joint report also remarked feedback from some debtors “don’t even call me about debts, because the government has said I don’t need to pay them”.
  1. Are they undertaking ongoing cashflow modelling given realistic revenue assumptions and sensitivity analysis? In particular, have they considered certain non-recoverability of debtors?
  2. Are they factoring in the recommencement of debt facility payments again?
  3. Have they kept up to date with Australian Taxation Office (“ATO”) lodgements during COVID 19? Whilst the ATO has indicated it will temporarily withhold enforcement actions regarding Director Penalty Notices exposures – this is not a reason to become complacent with reporting on time at a minimum. What is the level of the ATO debts – does a payment plan need to be considered now or into the future.

There are likely to be certain possible scenarios for businesses presently:

  • Businesses that may be insolvent presently but will survive as we move out of this pandemic; or
  • Businesses that know they are insolvent and are in a form of denial; or
  • Businesses that are somewhat unaware of their true financial position.

Perhaps it is worth looking at which scenario your client/s may be in and whether it is appropriate to seek some reassurance! It is also important to appreciate that insofar as the temporary protection for insolvent trading is concerned, there are of course no reported cases or commentary as to the level of such protection that may exist when a company is placed into liquidation outside of the moratorium period as yet!

There will undoubtedly be some businesses that will require some form of external administration (such as voluntary administration or voluntary liquidation) due to the sole impact that Covid 19 has caused. For other businesses, perhaps Covid 19 has also magnified the financial stress they were in some level of pre-Covid 19. Regardless, it is critically important that business owners reach out and get help from a qualified insolvency and restructuring professional if they are concerned about the financial viability of their business.

Seeking professional advice on options to manage financial distress should not be viewed as an admission of failure. Failure alone is not fatal, but failure to change generally is. We actively encourage business owners (particularly those family businesses) and also households not to wait until all the stimulus and extensions run out to the consider their options. Seek advice early.

Jones Partners have been helping businesses and individuals for over twenty-five (25) years understand their options when they are in financial distress by tailoring a strategy to show them there is a light at the end of the tunnel. If you have a client that may be in some level of financial distress, we are available via zoom, telephone conference or directly depending on the locality of your client.

Bruce Gleeson, FCA, FCPA, RITF
Principal, Jones Partners Insolvency & Business Recovery