Small and family businesses have had it tough. Consecutive natural disasters have devastated the small business community. The bad news? This economic crisis is far from over.
The Coronavirus Economic Response Package Omnibus Bill, effect from March 2020, was intended to help businesses avoid unnecessary insolvencies and bankruptcies. The Government introduced two key measures. The first included raising the threshold on statutory demands to $20,000 and extending the timeframe from 21 days to 6 months. The second was an automatic “Safe Harbour” protection for directors from insolvent trading personal liability. Under normal circumstances, directors are prohibited from trading a business that is insolvent. The Government’s temporary “Safe Harbour” enabled companies to continue trading despite uncertainty and disruption.
In addition to stabilising unemployment, jobkeeper has also provided some respite for struggling businesses.
Indeed, evidence would suggest that these stimulus measures worked. Perhaps too well. Statistics from ASIC and AFSA show corporate and personal insolvency appointments have perversely experienced record falls in the June and September quarters. This is despite Australia experiencing the sharpest economic contraction since the Great Depression.
The insolvency statistics are concerning. It is natural for businesses to fail. It is an essential component for weeding out unprofitable businesses that are not capable of adapting and surviving. There are fears that emergency COVID support has resulted in “zombie” businesses – carrying excessive debt, under poor management and propped up by jobkeeper. Many of these businesses are simply not viable in a post COVID world.
On 31 December 2020 these economic ‘band aids’ will be ripped off. Sharply too. The deadline for responding to statutory demands reverts from 6 months to 21 days. The automatic “Safe Harbour” also abruptly ends, meaning directors lose protection and, if insolvent, will be held personally liable for debts incurred by the company. It would be reasonable to assume there is a long line of creditors eager to chase payment of their debt, most likely motivated by fear of their own financial position. The ATO has been extremely accommodating throughout the 2020 crisis but, inevitably, unpaid taxes will be recouped eventually.
So what action can be taken by small and family businesses?
If you have concerns about cash flow, it is imperative to act immediately. There are many free resources available. “My Business Health” by the Australian Small Business and Family Enterprise Ombudsman (asbfeo.org.au) provides a huge range of online information and tools to help businesses get back on track. If you would rather speak to an adviser in person, you can seek out a financial counsellor. Rural Business Support provides financial counselling to struggling businesses outside of the metro area.
Business turnaround and restructuring professionals are also a great resource. Subject to certain thresholds being met, a suitably qualified professional can continue the “Safe Harbour” protection for directors where insolvency poses a risk. Turnaround Practitioner Eddie Griffith of TurnAbout AU has a successful track record in advising small and family businesses on how to utilise the “2017 Safe Harbour”. Eddie is helping directors seamlessly transition to the “2017 Safe Harbour” process so that they can retain protection from insolvent trading personal liability into 2021. What’s more, Eddie Griffith is approved by the SA Government to help SMEs access a grant which pays half the cost of advisory fees up to a value of $10,000 (ex GST).
Hot off the press is the announcement of new legislative reform by the Government as part of the 2020-21 Budget. The Corporations Amendment (Corporate Insolvency Reforms) Bill 2020 will strengthen the insolvency system to better support small businesses dealing with the economic crisis.
Effective from 1 January 2021, this legislation introduces a new, simplified debt restructuring process. The process draws on key features of the Chapter 11 bankruptcy model in the United States and will apply to incorporated businesses with liabilities of less than $1 million.
By moving from a rigid one-size-fits-all “creditor in possession” model to a more flexible “debtor in possession” model, eligible small businesses can restructure their existing debts while remaining in control of their business. Eddie Griffith believes the new regime will help eligible businesses formally restructure without having to pay overly expensive liquidator fees.
The key takeaway? Act quickly and get professional advice now – we’re ready to help you here at Rural Business Support. Small and family businesses should speak with a professional and buy some breathing space. Then they can assess all their options and make decisions from an informed position. After all, there could be another COVID cluster just around the corner.
Will your business survive another round of Government restrictions and business shutdowns to contain the spread of the virus?
Stuart joined RBS in September 2020 as a Small Business Financial Counsellor to work with small business owners impacted by COVID-19. Stuart has more than 25 years’ experience in the banking and finance sector.
Stuart provides a high level of professionalism, customer service and communication skills. Being relationship-driven and collaborative, he enjoys getting back to his grass roots in his RBS role and helping small business owners to prosper and thrive.
On weekends Stuart enjoys spending time with his wife and three children – chasing them around different sporting events, and can often be found cycling in his beloved Adelaide Hills or enjoying the food and wine it has to offer.