As 2020 comes to an end, it’s fair to say most of us will be thinking, “good riddance”. A new year generally brings with it fresh hope, but with the imminent removal of financial support measures around COVID-19, 2021 is also heralding a number of concerns.
These concerns were covered in one of our recent webinars, Preparing for the COVID recovery, which not only looked at the importance of accountants and advisers staying in close contact with their clients, but it also discussed how 2020 presented the Australian economy with its biggest shock since the Great Depression of the 1930s.
Two of the most common words being Googled at the moment are apparently “recession” and COVID”. Unfortunately, Australia is in a recession and the euphoria around Australia’s rise in GDP in the September quarter of 3.3 per cent (following the dramatic fall of 7.2 per cent in the June quarter) does not mean it’s over. Annual growth is still negative and Australia’s economy is 3.8 per cent smaller than it was a year ago.
COVID has given us the third-deepest recession since World War I; we are a long way from digging ourselves out of this hole.
There are various statistics that show we need to be concerned. The International Monetary Fund’s real GDP growth figures from 2009 show that following the dotcom crash, the GDP of advanced economies fell on average 3.3 per cent, while globally, the fall was 0.1 of a percentage point. In 2020, with COVID-19, the GDP of advanced economies fell 5.8 per cent and globally the fall is 4.4 per cent. This indicates the negative impact on the world’s economies of COVID may be up to 40 times larger than in 2009.
However, ASIC data shows yearly insolvency appointments across Australia have fallen dramatically since COVID. This may seem counterintuitive but is largely the result of businesses being saved by the billions of dollars the government has pumped into the economy to keep it operating. The average number of insolvency appointments per year is usually around 12,000, and while this number rose following the dotcom crash and the GFC, it has halved to around 6,000 during COVID. We expect this to change next year.
The $300 billion of support measures the government has poured into the economy during COVID (compared to $46 billion during the GFC) has helped keep a lot of businesses alive. However, for some, the funds are really just a type of financial life support. As the funding well dries up, as it will over the next few months, some businesses will find themselves falling further into financial distress. It is incumbent on all businesses to know now if they are capable of surviving once this happens. Any delay in addressing a potential issue makes the likelihood of returning to solvency more difficult — and it potentially puts your clients’ personal assets at risk.
Sometimes, unshackling the business from its legacy debt will allow it to trend back up, but that action needs to be taken earlier rather than later. If left too late, the recovery becomes unlikely to gain stakeholder support.
While most of us are aware of the measures the government introduced to support businesses and the economy during COVID, such as JobKeeper, one of the most overlooked is the safe harbour on insolvent trading changes, which are due to finish at the end of December. Businesses can still get protection but only as long as action is taken before 31 December.
The same applies with the measures around statutory demands being nullified. Creditors have stopped chasing debts, but come 1 January, there will be a backlog and then no doubt lawyers will be chasing them up again. Anecdotally, there are millions of dollars of debts sitting on lawyers’ desks waiting for 1 January. Understanding your clients’ positions around debt now, and advising them accordingly, is one of the best courses of action to be taking at this time.
Meanwhile, new programs are being introduced to help with the challenges facing small businesses, including the Simplified Liquidation and Small Business Restructuring programs, which are slated to kick in from 1 January. From my understanding, around $53 billion is owed to the ATO at the moment, so it’s important to deal with any clients that may be struggling, to find out what opportunities are available when the support is withdrawn. Hard decisions need to be taken now.
Despite these insolvency reforms, I still have faith in the existing system and believe it is more effective and the best path for struggling businesses to venture down.
A solution such as a Deed of Company Arrangement (DOCA) is one of the best tools available because they are fast to enact and have built-in flexibility. And the earlier these are considered, the better, as creditors can get agitated and lose patience the longer action is avoided.
Businesses may find it easier to believe everything will turn out okay and put off any firm action, especially when government support is helping to cushion or hide any problems. But deferment can be to your clients’ detriment. As advisers and accountants, it’s important to engage by asking questions, plan to prevent poor performance, and to identify stress points. One way is to check the ATO portal to make sure your clients are lodging their BAS and paying on time.
And, of course, seek assistance if you have concerns. Insolvency practitioners such as Jirsch Sutherland operate like an extra club in your golf bag that you can pull out when needed, so feel free to contact us to talk through any concerns.
Malcolm Howell, partner, Jirsch Sutherland
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