Commercial Law

September 25 – the day of reckoning for businesses facing insolvency?

The number of Australian businesses that entered external administration in April 2020 was 410 – a surprisingly low figure considering the average for April in the previous three years was 608, and represents the lowest figure since ASIC started publicly reporting this statistic in 2013.
That’s a 33% fall in the number of businesses going broke in the middle of a recession.

So, in the midst of an economic crisis we’ve not only managed to avoid a catastrophe for small business, we’ve actually kept more businesses afloat than would usually go broke.

So what’s going on?

Two key factors are probably at play here – JobKeeper payments and a relaxation of insolvency laws.

Temporary JobKeeper payments of $1,500 per fortnight per employee for SMEs that have seen a 30% drop in turnover, is almost certainly the primary reason for the high survival rates. As at the time of writing, the Prime Minister was insisting that the JobKeeper would end on 30 September and the fear is that the scheme may be responsible for keeping businesses afloat artificially whilst they receive payment for their biggest overhead, their staff, but that these businesses are ultimately doomed to fail when government support is withdrawn because revenue streams have disappeared and are not likely to re-emerge for some time yet.

In addition significant amendments were made by the Federal Government to the insolvency laws (applying from 25 March 2020 for at least 6 months) to account for the collapse of the business environment caused by the pandemic – including an extension of the statutory demand period from 21 days to 6 months and an increase in the minimum indebtedness from $2,000 to $20,000. Together with the fact creditors generally are less likely to initiate formal recovery action in such an environment – means the urgency usually associated with insolvency has in many cases been removed.

Again these temporary changes mean that, throughout the pandemic, businesses can build up debt without fear of imminent consequences.
But the law is set to change back on September 25.

Ominously, this temporary respite ends on 25 September – a week before JobKeeper is slated to conclude and raises genuine fears of a tsunami-like increase in insolvencies in the last quarter of the year as we lead up to Christmas.

Bottom line – keep an eye on your numbers. Do the modelling – understand your reliance on JobKeeper, ask the question now whether your business can sustain itself without these payments, and what might be needed in terms of costs savings or revenue recovery to achieve sustainability.

Talk to your accountant – and talk to us.

EZRA Legal is here to help http://ezralegal.com.au/#our-advice

Our two senior practitioners, Michael Fabbro and Damian McGrath http://ezralegal.com.au/damian-mcgrath/, have over 50 years combined experience in the area of business restructuring and the insolvency regime. We know the industry and the players in that industry, and understand acutely the reality for small business owners. In cooperation with directors and their accounting support, including external advisors, we can quickly assess your options when a Company is failing or heading that way.

Call us on 08 8231 6100 or email reception@ezralegal.com.au

We look forward to hearing from you soon.

Kind Regards,
Damian McGrath, Special Counsel

Damian McGrath

Ezra Legal – Damian McGrath

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