Worried about solvency? What you can do now and how your options reduce over time

The COVID-19 global pandemic has without a doubt caused significant social and economic disruption, with many businesses struggling to maintain "business as usual". With the situation continuing to evolve, and with no clear end in sight, more and more companies are facing solvency issues. With the Federal Government's effective moratorium over creditor recovery actions through statutory demands and bankruptcy notices ending in less than a month, from 25 September 2020 those solvency issues will only become more of a reality for many businesses.

Even if the Federal Government extends the moratorium over creditor recovery actions, as well as other mechanisms in place to assist business continuity, are these mechanisms going to help your business continue trading in the long term, or are they just delaying the inevitable? If your business does not rebound quickly, and you are forced to make staff redundant and pay out large sums in employee entitlements, while also facing a sudden barrage of claims from creditors and landlords, you will probably be wishing you had acted sooner. Should you perhaps instead be using this period of reprieve to plan a turnaround for your business?

Don't… adopt an ostrich policy

In any climate, but more so during periods of unexpected economic disruption, the worst thing you can do as a business owner is stick your head in the sand. The longer you wait, the fewer prospects there may be to recapitalise, redirect debt and/or sell your business (or part of your business) as a going concern.

So, what should you be doing now to manage the risks of insolvency for your business?

Do…be vigilant and act early

In short, you should take action as early as possible.

Earlier this month, we posted an article about starting to have those "difficult but necessary" conversations with customers about repayment of debts. If insolvency is an impending issue for your business, you will need to do more than just chase up aged debt to remain viable in the long term, and consider approaching a lawyer and/or insolvency practitioner for advice. The earlier a person seeks medical advice, the more likely it is their doctor will be able to find a remedy. The same concept applies to company directors approaching an insolvency professional. If your business is not already teetering on the precipice of insolvency, the more likely an insolvency professional will be able to assist with turning around your business, for example, by proposing a Deed of Company Arrangement (DOCA) in a Voluntary Administration process or assisting with a Creditors' Scheme of Arrangement.

If there is still a viable business underneath the mounting debt, onerous contracts, and various management and employee problems, the better chance you will have of winning over your creditors with a restructuring or turnaround proposal. Engineering a viable arrangement such as a DOCA only becomes harder as your liabilities increase. A factor sometimes overlooked is the issue of employee entitlement pay-outs that must be made following redundancies. These payments must still be made if redundancies occur as a result of a DOCA, and many businesses may have higher than usual employee entitlements accrued during the COVID-19 pandemic if their employees have been on JobKeeper and have not taken any leave. A further consideration is that the longer you wait to address solvency issues, the more likely it is your creditors will be facing solvency issues of their own, making it less likely they will be amenable to any restructuring or turnaround proposal.

Our team is actively monitoring and considering the implications of legal and regulatory developments in response to the COVID-19 pandemic. You can find our COVID-19 collection here.