Insolvency relief measures

The Qubik Team

Treasurer, Josh Frydenberg, has announced he intends to implement further changes to insolvency legislation.  These changes will be detailed in the budget next week but will essentially comprise of a two-tiered system.

Significantly this system will see a change for small businesses with liabilities of less than $1M. These business, who normally would be required to undergo the expense of appointing an administrator, will now retain control of their company and assets, and will have 20 days to come up with a plan to restructure. If the company cannot be saved, changes to liquidator’s investigative processes, reporting and mandatory meetings are also on the cards

The announcement of the changes comes after the Federal Government extended insolvent trading relief measures to 31 December 2020. More details of these changes will be announced in the budget next week.

That extension means directors will continue to be relieved from personal liability in the case of a company trading while insolvent until 31 December. It also applies to the increased thresholds at which creditors can issue a demand notice on a company (raised from $2,000 to $20,000 with response times extended from 21 days to 6 months) or initiate bankruptcy initiation proceedings.

Qubik CEO, Dominic Guinea, says these changes should help to give struggling businesses a leg up without needing to give up control of their business or appoint an insolvency practitioner which can cost many thousands of dollars.

Mr Guinea says the extension to the insolvency relief will be welcome news to many small and medium sized businesses.

“It will give many small and medium sized businesses a better chance to come through COVID-19 and to have a manageable plan to take them forward.

“It buys them some time to deal with the impacts of the reduction in subsidies like the JobKeeper scheme.”

He says in some cases the extension will only prolong the inevitable for some businesses truly on the brink, but with the right advice and guidance, the additional time could give many businesses the chance to change their outlook.

“During the period of insolvency relief, if businesses can’t make ends meet, despite subsidies and support from governments and banks, they will be able to put their business into hibernation.  In doing this, they effectively become one of the ‘zombie’ companies that we hear about that, whilst not trading and in hibernation, do not have to pay debts.  If they have staff, they may continue to receive JobKeeper to ensure wages are paid, but other than that they have no immediate debts to pay. Being able to move into hibernation is of course on the proviso that once things improve, the company can be brought back to life and those outstanding debts paid.”

“During this window of extended relief, it’s important to be clear on where you are at. Your accountant can help by providing an overview of your tax debt and create a plan to manage any cash flow issues. Unfortunately there will be a lot of businesses looking at voluntary administration.”

But what does this mean for businesses who are traditionally paid after services are performed or goods delivered? Mr Guinea says going forward, business owners will need to consider the risk of advancing credit to customers.

“Business owners should be discerning around the arrangements they have with customers; we’re not saying they shouldn’t trade or transact, but like any business they should assess the risk of non-payment. If they provide services to a customer that subsequently doesn’t pay – the impact is significant.  It’s not only the profit on the sale that is lost, it is also the cost of materials and labour expended for that service.

“If you extend credit to a customer and that customer doesn’t pay you, you’re looking at a minimum of 6 months, likely to be longer, until you can take enforcement action, and even then you can not take action if the amount is less than $20,000.

He says business owners, whilst at risk of long outstanding debts, will have some offset through ongoing support from other parties including the ATO (deferrals), banks (loan holidays) and of course schemes like JobKeeper which will continue to assist in the payment of employee wages.

More details around these the extension of the initial insolvency measures and additional changes for smaller businesses will be available when the budget is announced on Tuesday 6 October 2020.

If you would like to know more about how these changes could impact you and your business, contact our office on 07 3205 8938.

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