Updated: Feb 4
Right now, it seems like a lot of life and business is on hold. There has been a reprieve of sorts and everybody seems to have taken a deep breath. Government support packages have been announced, and everyone is busy checking what they qualify for, what the details are and getting the applications in. This is great, and an important first step, but then what? Getting these applications in does not mean it is business as usual.
Importantly, the Coronavirus Economic Response Package Omnibus Act 2020 (Cth)(the Act), has provided some relief with a temporary extension of the timeframes in which to respond to Creditors Statutory Demands and Bankruptcy Notices from 21 days to 6 months, as well as relief from insolvent trading claims in some circumstances.
So, what are businesses doing with this time? A lot of them are continuing to trade where possible, often on a smaller scale. It can be hard to deal with operational problems imposed by social distancing requirements forcing firms to have staff working from home. Some of our referrers and their clients though are ahead of the curve. They are now looking at how to position their business for the post COVID-19 economy. In many cases, this is not necessarily about crisis management, but about opening up strategic options for the future.
So, what are they doing? Since this crisis started, we have been assisting our referrers and their clients in a number of different areas, including:
Ensuring equipment hire agreements between related entities are properly registered on the Personal Property Securities Register (PPSR).
Documenting and taking appropriate security for loans provided to the business by the directors or related parties.
Reviewing debtor-creditor relationships within the business group and Division 7a loan positions.
Compiling a Personal Guarantee Register and identifying credit agreements with caveatable interest clauses.
Reviewing directorships and moving to one director where appropriate.
Reviewing the ownership of family assets with a view to risk minimisation.
Unfortunately, COVID-19 is going to treat businesses the same way it treats people. Those that are already vulnerable are much less likely to survive that a business that is fit and healthy. Even some businesses that are fit and healthy right now might not make it. Certain business operators are using this time wisely to make their businesses more resilient and robust.
In some cases, the failure of a business can have a domino effect. A company goes into liquidation and a related entity faces a claim for the loan it owes. The loans that were granted to the company by related entities are all unsecured. Division 7A loans and personal guarantees can lead to claims against the directors. Personal guarantees can also lead to caveats on the family home.
Some of the above actions can be the circuit breakers to stop the dominos falling. Managing debtor-creditor relationships between related entities is critical. As directors usually provide personal guarantees, why have both a husband and wife as directors? Shareholdings may be a better way of addressing the interests in a business. With personal assets, consider who signed all the personal guarantees and who should own the family home.
Right now there is some time to review the position of a business without the pressure of imminent creditor demands. This time is crucial, and what businesses do with it may be the difference between whether they thrive in the post COVID-19 economy or not.
At some point things will go back to something close to what was normal. Quite frankly, nobody really knows what that will look like right now. Those businesses that are ahead of the curve will be the ones with the strategic options and flexibility to adapt to whatever may lie ahead.
Should you have clients or associates that you know are struggling with financial issues or need assistance in reviewing their business affairs in preparation for what’s around the corner, our team of Strategists would be pleased to discuss options that are available on how to best design and implement insolvency strategies. Call us now on 1300 765 080