There is lots of movement across the commercial landscape as the Federal Government attempts to minimise the impact of the pandemic on the Australian economy. Some of the material changes are summarised below by FIA Financial and Business Advisory Partner, HLB Mann Judd, along with potential implications for businesses to consider.
1. JobKeeper Changes Impacts
The JobKeeper changes that commenced late September 2020 (JobKeeper 2) result in three categories of businesses moving forward - summarised below. Businesses in the Uncertain and Trouble categories are those where the trading relationship should be monitored and carefully managed to attempt to mitigate a loss.
Other factors to consider, aside from JobKeeper:
- What will happen to businesses still in JobKeeper when JobKeeper 2 ends in March 2021 – will some businesses not be able to recover as expected?
- Building a plan for the rest of 2020 and try to plan for the start of 2021 to understand what the position may look like and what decisions may be needed/considered on funding, costs and strategy.
- Landlord Code of Conduct ended in October 2020; however, has been extended in most states until at least 31 December 2020.
- Disclosure requirements on the impact of the pandemic to date and going forward for the ASX, banks, ATO, landlords etc
- COVID Loan Repayments started in October/November 2020; however we understand that lenders have greater flexibility to determine repayment holiday periods.
- Bank approach to lending and valuations; and
- ATO approach on arrangements/extensions.
What does that mean?
JobKeeper 2 has provided some certainty for business severely impacted by COVID-19; however, there remains inherent uncertainty on what position these businesses will find themselves in at March 2021. All businesses need to be careful in dealings with customers over the next few months to ensure that goods and services supplied/provided are paid for to avoid distressed businesses impacting your own businesses.
2. Extension of Insolvent Trading Relief
In early September 2020, the Federal Government extended the temporary insolvent trading, winding up and bankruptcy protections for a further 3 months to 31 December 2020. The full press release can be found on the Treasury website www.treasury.gov.au ‘Extension of temporary relief for financially distressed businesses’
This extension delays the potential winding up of businesses by unpaid creditors and the failure of a number of businesses probably until February/March 2021, as another extension is somewhat inevitable.
What does this mean?
Personal Liability - As distressed businesses continue to operate further debt may be incurred that cannot be paid with the Directors not being personally liable for those debts whether they have acted with the best or nefarious of intentions. Although there is relief for insolvent trading, personal liability, Directors’ Duties and obligations to act honestly, not mislead and in the best interests of the Company remain in force.
Some experienced lawyers have indicated from their review of the publications that the relief granted for insolvent trading only applies if the company enters external administration prior to the lifting of the temporary measures (currently 31 December 2020). So the relief may not apply if appointment is made after the relief period ends.
Trading Wise -Balance Protection and Profit - As outlined above careful management of business relationships is needed to attempt to avoid damage from distressed businesses using the goods or services supplied (but not paid for) to:
- punt on a recovery that may not be possible; and/or
- to generate and liberate cash for Directors (or repay personally guaranteed/secured debts) before folding the business, leaving suppliers with the shortfall.
Business Confidence and Economic Growth – More Uncertainty before Confidence returns across the board - Until the unfortunate process of unviable, unsustainable businesses being sold/closed or another solution reached, real confidence and recovery of the economy is unlikely to occur with debts continuing to be incurred.
3. Insolvency Reforms for Small Business
Aside from the above reforms and other legislative changes made to assist businesses post COVID-19, further draft (subject to further review and discussion before being implemented before 31 December 2020) reforms have been proposed for SMEs:
- New Formal Debt Restructuring Process for SME’s with less than $1m in liabilities; and
- New Simplified Liquidation Pathway to enable faster and lower cost Liquidation for SMEs.
The above represent an attempt to streamline the current Administration approach for small/micro businesses given the costs, red tape and reporting obligations of the current Administration regime that can make the process uncommercial for Directors and creditors as the costs erode any return.
Similar commercial arrangements for SME businesses have been implemented in other jurisdictions that enable Directors to consider options available then put the preferred option to creditors.
There is also similarity with the Safe Harbour Corporate Plans where Companies/Directors can assess the options and pursue an improved return for creditors compared to Liquidation.
Effectively, Directors with assistance of an independent, skilled and experienced restructuring professional (to be defined) are empowered to put a commercial compromise to creditors for consideration to enable the business to continue with the reduced costs of the process (compared to the Voluntary Administration process) enabling further funds to be available for creditors.
HLB Mann Judd will continue to update members as new information is released.
If you have any questions please contact Kim Kelloway, Head of Clients and Markets at HLB Mann Judd on 02 9020 4285 or email kkelloway@hlbnsw.com.au.
Authors Todd Gammel, Partner Advisory, HLB Mann Judd
Matt Hocking, Director, Advisory, HLB Mann Judd
