Government protections for companies that were put in place during the early days of the COVID-19 pandemic are due to be lifted on 31 December, potentially exposing the economy to a raft of bankruptcies and liquidations.
Among the package of stimulus measures announced in March, federal, state and territory governments suspended some of the rules that apply to companies in danger of collapse. The protections included a suspension of insolvent trading laws that prohibit directors from continuing to trade while unable to pay their debts; a temporary increase in the threshold at which creditors can seek to bankrupt someone or liquidate a company; and a moratorium preventing landlords from evicting commercial tenants, offering a lifeline during a period of uncertain trading conditions.
But the protections will end on 31 December, and economists and financial advisors are warning there will be some tough times ahead.
RSM partner Jonathon Colbran says the measures were designed to keep businesses alive and give directors some breathing space to regroup, refocus and plan, but for companies that may have been in trouble before the pandemic, their day of reckoning may be approaching.
“There is no doubt that for some businesses, these measures have been the lifeline they needed and they will pick up and trade on, but as we are now moving towards a resumption of normal business practices – that require businesses to repay their debts to creditors, including banks, landlords, the ATO and suppliers – and full business obligations, a lot of businesses which won’t be able to do this need to be exploring their options, and unfortunately many are still waiting,” he says.
Jonathon says the ATO and the banks have been treading softly with businesses that have been unable to pay their loans and tax debts.
“The ATO has been very quiet this year and the banks have been very accommodating, but we expect this to end in the new year,” he says. “2021 is not Armageddon, but businesses will do best if they proactively take control of their own destiny.”
Jonathon says cash flow is the first thing to focus on, and a critical component of this is your debt repayments.
“Restructuring debts to pay them over longer periods of time will assist to clean up the balance sheet and provide some certainty,” he says. “If you have a tax debt, get on the phone and arrange a repayment plan. The same goes for trade creditors.
“Contact your accountant or business advisor and arrange to meet with them more regularly, at least monthly, to discuss your business, your plans for 2021 and your challenges. Your business advisor will be your best friend when the chips are down.
“If you are looking to loan personal money to your business, get advice on whether you should take security for this loan. If possible, I recommend you always do – it gives you far more options and rights in the event your business starts to struggle.
“The worst thing you can do when you are navigating difficult trading periods is put your head in the sand. As a good friend of mine always says: ‘You don’t know what you don’t know. It might just be that there is a better solution to your problem.
“Be proactive and seek advice from your trusted business advisor. Focus on your cash flows and prepare a plan that explores all your options and you will be in the best possible position to navigate the path ahead because for businesses with significant debt, 2021 will almost certainly be more challenging than 2020.”
For more information, visit RSM.