Australia’s geographic isolation from the rest of the world means the spread of coronavirus has so far been contained. Despite our good fortune on the health front, Australian businesses have still suffered as a result of restrictions, border closures, lockdowns and supply chain disruptions. Some businesses have flourished, some have been forced to adapt and many will need to close permanently. One can logically conclude that once jobkeeper disappears, those businesses that ought to close, will close.
The number of business closures will have an adverse impact on employment and the economy. Failure begets failure. The domino effect is concerning, and it is for this reason that business owners remain on edge.
The simple definition for insolvency is an inability to pay debts as and when they fall due. Directors have a positive duty to prevent insolvent trading. The truth is that definitive insolvency is extremely hard to distinguish from financial distress. Insolvency is the ‘point of no return’ – akin to the event horizon of a black hole. Insolvency is often only truly identifiable in retrospect after considerable investigation by accounting and legal specialists. For most small business owners they simply do not have the time delve into lengthy investigations into their own intertwined personal and corporate affairs. Such a course of action would, most likely and ironically, lead to failure of the business itself.
On 31 December 2020, the Government removed its economic band aid and the automatic ‘safe harbour’ from insolvent trading personal liability came to an abrupt end. Directors now face personal liability for debts incurred if their company is insolvent.
Recent legislative reforms to the insolvency regime include a ‘temporary restructuring relief’ which is designed to give directors time to consider if their business can undertake a restructuring process. The temporary restructuring relief extends the temporary measures introduced in March 2020. These included increasing the threshold for statutory demands to $20,000, extending the deadline to respond to statutory demands to six months and, importantly, it reactivates the ‘safe harbour’ for directors from insolvent trading personal liability. Directors wishing to head down this route must apply for the temporary restructuring relief with ASIC before the end of March 2021.
The new restructuring process itself comes with a simplified liquidation process. These changes have been boldly touted as the most significant to Australia’s insolvency framework in 30 years.
The debt restructuring process will allow directors to retain control of their businesses, and its properties and affairs, while a plan is developed to restructure their debt with the assistance of professionals. When compared to the existing voluntary administration process, it is said to be easier and cheaper (more accessible for small and family businesses).
The new simplified liquidation process is also intended to provide a faster liquidation at a lower cost. It is boldly claimed that this will increase returns for both creditors and employees. Time will tell, however, historically returns to creditors are about as likely as winning the lottery (minus the financial reward).
So should directors of struggling companies just go ahead and lodge their application with ASIC and take advantage of the temporary restructuring relief measures? The answer is ‘no’ unless specialist professional advice has been sought.
Business Turnaround Practitioner Eddie Griffith of TurnAbout AU has been successfully advising struggling South Australian businesses for many years. Eddie has concerns that directors all too easily be enticed by the relief measures and irreparably damage their business by seeking temporary restructuring relief. The smallprint here is that the application is made public and published on ASIC’s website for all to see. Credit reporting bureaus are already sending out real-time alerts to businesses to notify them if a debtor has declared eligibility for the temporary restructuring relief. Eddie Griffith says there is no faster way to destroy credit lines and end up on ‘cash on delivery’ trading terms with your supplier.
The message here is that the legislation is too new and fraught with danger. Like new software rushed to market to beat the competition, this legislation has not stood the test of time and there are likely to be many errors, kinks and glitches that must be fixed before it is ‘fit for purpose’. Wherever there are concerns about financial distress or solvency, the ideal solution is to seek professional advice from a business turnaround and restructuring specialist.
So small business owners should continue to proceed cautiously into 2021. After all, we are all still in unchartered waters and there exist many other forms of natural disasters that Australia may yet face.
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.