Extension of changes to Insolvency Laws

Federal Government Insolvency laws
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Glenn Harris

Company Director – Audit Assurance

Are You Being Paid – Managing Your Cashflow

Federal Government Insolvency laws

Running your business in 2020 is presenting many new and unique challenges. Most of these challenges come back to one problem MANAGING CASHFLOW.

Managing Cashflow on the daily

As a business owner, you are required to make many decisions each day in relation to customers, stock, staff, finance, compliance… the list is endless. However, most of these business decisions hinge on understanding how much cash you will have available in your business today, tomorrow, next week and next quarter!

Changes to Insolvency Laws in response to COVID-19

One major legislative change this month which may have gone under the radar is the Federal Government has extended the temporary changes to Australia’s insolvency laws to 31 December 2020. These will predominately apply to small businesses with liabilities of less than $1m. These changes were originally introduced in March by the Federal Government in response to the economic impacts of COVID-19 and were due to expire 25 September 2020.

Why this should be of concern for you as a business operator?

Most businesses have had situations where goods or services have been provided to a customer and they have not paid, and debt recovery has been difficult. Under the current temporary rules, as a business operator, if you have another business customer who refuses or cannot pay, your options to remedy this have been removed.

Directors of insolvent businesses can now continue to order goods or services from you without being held personally liable.

Feed the family or pay the bills??

Imagine a case of a business operator who requires goods or services from you to keep their business open so they can pay their mortgage or feed their family. Their choice of where to use their cash will not be a difficult one for them.

The treasurer has also stated these rule changes “will allow small businesses to remain in control of their debts while remaining in control of their business”. This is also of concern as these are the same business operators who may have steered the business into troubled waters to begin with.

According to the government, there has been a 46 percent decrease in the number of companies that have gone into external administration over the period from March to July 2020 compared with the same period last year. Given the economic conditions since March, this is unbelievable. This deferral of business going into external administration has led to an expectation of a Tsunami of business closures when the Government COVID-19 support is wound back early next year.

HOT OF THE PRESS – Extension of Insolvency Laws Amendments

On 24th September the Federal Government also announced further plans to overhaul insolvency rules, adopting an American-style model to help small businesses restructure or liquidate.

The changes allow small business owners to keep control of their company and assets, rather than immediately being placed in the hands of an administrator or creditors.

An insolvent small business would have 20 days to come up with a restructuring plan, and creditors would have to vote on whether to accept it within 15 days after that.

For small businesses that can’t be revived, liquidation would be changed, too, in an effort to make it quicker and easier with a cut to liquidators’ investigative processes, mandatory meetings and reporting requirements.

payment fro supplies upfront to manage cashflow

We recommend payment upfront for supplies or a review of the credit worthiness of all customers and suppliers in this current climate.

What are these changes and how could they impact my business?

In technical terms, the changes provided a temporary COVID-19 safe harbour defense for directors from liability for insolvent trading (s. 588GAAA of the Corporations Act 2001 (Cth)).

Also, the option to use statutory demands and bankruptcy notices will be reduced. Furthermore, in each case, the monetary thresholds were increased, and the time for compliance was extended to six months.

In plain English, this means; directors of a business which incurs a debt in the ordinary course of business, after 25 March 2020, even if the business is insolvent, will be offered significant protection from being held personally liable for these debts as was previously the case.

The treasurer’s media release early this month stated the following key items:

“The extension of these measures will lessen the threat of actions that could unnecessarily push businesses into insolvency and external administration at a time when they continue to be impacted by health restrictions

“These changes will help to prevent a further wave of failures before businesses have had the opportunity to recover.

“As the economy starts to recover, it will be critical that distressed businesses have the necessary flexibility to restructure or to wind down their operations in an orderly manner.”

Act now! Manage Your Cashflow 

It is more important now than ever that you know who your customers are before you provide them with goods or services. We strongly suggest you review the credit worthiness of all customers in this current environment before the Tsunami of insolvencies in the new year and you end up with a collection of BAD DEBTS!

If you are experiencing any trouble with your cash flow, please contact us so that we can assist you to manage this in the best way possible for your business. Alternatively, you can complete the form below to make an inquiry.