RSM Australia

COVID-19 and the impact on insolvencies

Restructuring Insights

Last week the government announced a new and more targeted extension to the stimulus spending supporting organisations in Australia that remain affected by COVID-19.

In addition to payments being progressively reduced, businesses will be subject to more stringent testing which aims to weed out those that are inadvertently benefiting from the financial uplift, compared to those that would otherwise be profitable if it weren’t for the pandemic.

For all businesses, the announcement of an extension is a timely reminder of 3 things:

  1. Stimulus measures are finite and will end
  2. Insolvent trading relief is temporary, but your director’s duties remain
  3. Companies being kept alive by the measures should start planning now

Let’s consider what this means for directors and creditors as we move into the second half of 2020.

The calm before the stormInsolvent Company Advice

According to recent statistics, insolvency figures are sitting at 40% below long-term averages – meaning a vast number of companies would have already been wound up if it weren’t for the stimulus measures keeping them alive.

As the stimulus measures are reduced and eventually removed, many of these businesses will be forced to close their doors.

It’s important to note too that while insolvent trading laws have been relaxed during COVID (ending this September), director’s duties have remained unchanged. All directors are still required to prove they acted with due care and diligence if their company is liquidated.

This means if you are a director of a company that goes into liquidation, you must be able to justify the decisions you have made and are making right now – or you could face personal financial and legal consequences.

For directors and business owners, it’s crucial to have a conversation with a trusted qualified restructuring adviser to understand your options moving forward.

The impact to creditors

Individuals and businesses have rallied to help each other through the challenges of this pandemic, which has been really positive to see.

However, when the chips start to fall we’re likely to see many creditors deeply affected by the liquidation of companies that are their key customers, suppliers, and stakeholders.

With this in mind, our advice is to be extra careful with your credit management during these difficult times.

Ideally, ask your trusted financial advisor to undertake a comprehensive risk assessment so you can develop mitigation strategies and approach the coming months with more clarity and confidence. 

Our advice to directors and business owners

If your business model is fundamentally strong and likely to be viable longer term, you should be looking at strategies to position and improve your business for when normal returns.

If, however, your business is under financial stress, a practical business recovery plan will help you:

  • limit your lossesCorporate insolvency
  • review your risk and asset protection strategies
  • support your recovery

Keep in mind that any personal guarantees you have provided to suppliers, financiers, and landlords in the past remain effective. So too do ATO powers for issuing a Director Penalty Notice for outstanding superannuation, GST and PAYG amounts (including superannuation that is accruing on JobKeeper payments).

If you need assistance developing a robust business recovery plan, or wish to get advice from a qualified restructuring adviser, speak to an expert at your local RSM office. We can support you in navigating the current landscape and making informed decisions about where to go from here.

 

To develop your business recovery plan, contact your local RSM office.

RSM's Restructuring & Recovery are available nationally.
Please contact us for detailed information. 

Contacts


Greg Dudley
National Head of Restructuring & Recovery

Jonathon Colbran
Partner - Canberra

Richard Stone
Partner - Sydney

David Mutton
Partner - Melbourne

Mitchell Herrett
Partner - Brisbane

Andrew Bowcher
Partner - Wagga Wagga

Tim Gumbleton
Principal - Mid-North Coast NSW