Directors Should Act Urgently Before Insolvency Tsunami

TIS Insolvency Tsunami

Experts warn of an insolvency tsunami in October. According to a survey conducted by Jirsch Sutherland found that 51% of businesses and directors are contemplating the insolvency route in the next six months. Because of this, experts warn of an insolvency tsunami in October. A study by the Australian Bureau of Statistics (ABS) also found that ever since the government rolled out its stimulus package, an increasing number of businesses have become so-called “zombie companies” or companies that are being kept alive by the current economic supports in place.

More than 50% of the respondents to the Jirsch Sutherland survey said they are expecting to explore insolvency or restructuring options in the next six months. The firm’s national managing director, Bradd Morelli, said this lack of cash flow will trigger insolvencies and business failures.

TIS Insolvency Tsunami

Lack of cash flow may lead to insolvency tsunami

It is not lack of profit, but lack of cash flow, that lead to business failures, which further lead to an insolvency tsunami, Mr. Morelli said.

Survey respondents said the end of the government’s JobKeeper program on 25 September is not what is keeping them awake. It is the lack of cash flow that would enable them to continue to operate their business after September. Late payments and cash crunch surge in June, according to date compiled by CreditorWatch.

The ABS survey shared this same sentiment. One in three businesses has cash flow that will allow them to operate for only up to three months or until September, the ABS survey found. This is around the same time the government will lift the moratorium on insolvent trading laws. To recall, the government imposed a moratorium on insolvent trading laws in March. This was to prohibit a creditor from pursuing any legal action against an insolvent debtor within six months from the date of suspected insolvency.

Other businesses have even indicated in the ABS survey that their cash flow will not last them three months. If businesses are still operating now, they are operating because their directors cannot be pursued in court. This is because the moratorium allows a debtor to pay only in January next year. This applies if the debtor receives the payment demand between 25 March and 25 September. After 25 September, the debtor must pay within the customary 21 days. The time after 25 September is crucial because this is when the insolvency tsunami may happen.

Directors should act now

Act now with urgency, rather than later, insolvency experts warn directors. Directors should create a business viability review program to try to avoid having the business join the insolvency tsunami.

Mr Morelli pointed out that the rate of insolvencies is over 40% below what is normally expected. He said this means that many businesses are really just hanging on and “protected” by the temporary insolvent trading laws. Directors should take actions that not only benefit the business but also provide greater return to creditors. Most of these creditors have already waited more than 90 days to get paid.

Moreover, businesses should not delay until the government switches off the stimulus. Directors should seek professional advice, a restructuring expert at Duff and Phelps Australia said. Directors must also prepare for what’s to come when the stimulus ends.

The government’s purpose in putting a temporary halt on insolvent trading laws is to let directors focus on maximizing positive outcomes for the company. Directors received the minimum hibernation period so that they would not be distracted by litigation.

Mr Lord suggested directors examine liquidity and inventory. In addition, directors should review the availability of trade credit. Particularly, directors should look into whether suppliers are operating on different terms or implementing fundamental shifts to business models.

“It’s crucial for company directors to be aware of their responsibilities. While it might not be your fault that your business is in trouble, it is your responsibility. It’s your responsibility to gather all the available information to then make an informed decision — no matter what situation the business is facing.”

Businesses should seek professional help

Google is not a substitute for professional advice.

The Jirsch Sutherland survey found that of the businesses looking to explore insolvency or restructuring options, 34% said they would turn to Google for insolvency information, compared to 33% who said they would approach their accountant for advice.

“Seeking professional advice is vital, as insolvency procedures and restructures can be complex and stressful. It’s important to appoint a practitioner that is a right fit for the business, takes the time to understand a business’s unique issues and recommends a solution that achieves the best possible outcome,” Mr Morelli said.

To avert a possible insolvency tsunami, Chartered Accountants Australia and New Zealand and CPA Australia have called on the government to fund a voucher scheme for businesses to access professional advice. The Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, has also pushed the government to provide a $5,000 voucher for businesses to use with an accredited professional, ranging from an accountant to an insolvency practitioner.

Here at The Insolvency Service, we guide directors to make the right decisions to conserve cash flow to keep the business afloat and not be affected by the insolvency tsunami. The government-imposed moratoriums have helped zombie businesses to continue trading but these are temporary measures. In fact, Covid-19 is testing the new safe harbour rules meant to protect directors. Directors will still need to make the difficult decision of finding turnaround options for their financially distressed companies.

Photo by Matt Hardy on Unsplash

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