Recently, the Government extended the temporary insolvent trading, winding up and bankruptcy protections for a further 3 months to 31 December 2020.

The full press release is here: Treasury Statement 14 September 2020.

This extension delays the potential winding up of businesses by unpaid creditors and failure of several businesses probably until February/March 2021. As distressed businesses continue to operate for the next five months, further debt may be incurred that cannot be paid with the Directors not being personally liable for those debts whether they have acted with best or nefarious intentions.

Without personal liability exposure for insolvent trading to ensure the conduct of Directors within obligations, how can suppliers be confident of getting paid?

Comments from industry, directors and banks around the extension

  • Australian Institute of Company Directors: “With this measure extended, many businesses will now be able to weather the immediate storm, which in the long-run will be a better outcome for the Australian economy.” (Source: 7 September 2020)
  • Australian Restructuring Insolvency & Turnaround Association– “The fundamental problem is that what this is doing is transferring the harm from bad businesses to perfectly good businesses. Insolvency acts like a quarantine that stops sick companies from spreading the virus of bad debts to other companies. The extension of this moratorium just allows the contagion to keep spreading.” (Source: 8 September 2020)
  • ANZ Bank – “We expect our small business [clients] to come in a second wave, effectively, where we need to have those in-depth conversations next year.” (Source: 8 September 2020)

Full industry comments and consideration of the reasons for Government approach is available here, but it appears that the extension aims to delay a potential large unemployment event in late 2020 until 2021 by reducing pressure on Directors from insolvent trading concerns – hoping that the economy is in more stable and potentially showing signs of recovery at that time.

The extension is not a solution but a postponement.

What does this mean?

Trading wise -balance protection and profit
Businesses need 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 themselves (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, it is unlikely that the real confidence and recovery of the economy will occur, meaning further debt will be incurred by governments and businesses that will take years to recover or repay.

What actions should business owners consider?

Business protection actions will be relevant for each business, supply arrangements/relationships, industry, contracts etc; however, it should include:

  1. Review of customer base to identify any clients that may be distressed, engage with customers on supply terms, consider tightening and upgrade of supply terms to reduce exposure including PPSR registrations, debtor insurance and credit card/pre-payment arrangements for large or new customer orders/contracts/services;
  2. Secure any related party funding being provided via a secured facility using legal documentation or a product like KRODOK; and
  3. Consideration of proactive review of issues facing the business and options available to make the business easier to operate, manage and make decisions; manage cash & get the right facilities to reduce interest & costs and manage strategy for value creation.

Overall, focus on the basic business cycle during the period of uncertainty.

Delivery of value to customers and make sure you get paid for it.

More detail around supply protection and proactive actions is available here.