Article supplied by Ryan Bradbury, manager at specialist accountants Nicols & Brien.
It’s likely you will have seen headlines screaming about “Zombie businesses facing the cliff” once the government’s COVID-19 funding packages come to a close in March. While there may be some businesses that fit the tagline, in the majority of cases it’s not quite that simple.
Running a successful business is hard work and COVID has doubled down on the degree of difficulty – particularly for the hospitality industry. The degree of financial difficulty being faced should temper your response to the problem.
Dealing with the issue – as opposed to falling off the virtual cliff in lemming-like fashion – is really my key message for today.
If you are on top of your business, you probably don’t need a checklist of things to look for when facing financial difficulty, but typical warning signs include: ongoing losses; poor cash flow; creditors not paid within usual terms; suppliers putting the company on COD terms; letters of demands, judgments or warrants issued against the company; overdraft limit reached or defaults on loan or interest payments; overdue taxes and superannuation liabilities.
A recent article by Brew Accounting suggested key to dealing with a downturn is to have a Plan B, and to react to uncertainty in a proactive way. I thoroughly agree, but note a lot of people that end up on my door as an insolvency practitioner have no Plan A, let alone a Plan B.
If you are facing financial difficulty, there are options. Be proactive, and seek advice from your trusted advisers to work through the issues particular to your business. Your accountant/lawyer/financial adviser can help you to formulate a plan.
The role of an insolvency practitioner is often to simply provide a mechanism or vehicle to facilitate the plan, and perhaps act as an independent sounding board for the commercial prospects. If time is required, an insolvency practitioner can provide assistance; from 1 January the Government introduced a new insolvency format directed towards assisting small business.
The “Temporary Restructuring Relief” is available if certain criteria are reached, and presupposes that the directors of the company have determined they wish to enter into a “Small Business restructuring Plan”. The temporary relief continues the debt recovery restrictions that were in place up to 31 December, and continues to protect directors from insolvent trading claims whilst under the relief provisions. It only lasts three months.
Problems don’t go away, they are just forestalled, with emphasis that the company has an intention to enter into a small business restructuring plan with its creditors.
The second and more practically relevant change to the legislation, is the introduction of the concept of a “Small Business Restructuring Plan”, providing a process whereby a company can formulate a tailored plan to deal with its creditor’s claims. Creditors will determine whether the plan is accepted, with the outcome determined by the majority (by value) of affected creditors who reply during the acceptance period.
In many ways the new legislation copies the concepts and conduct of Voluntary Administrations, which have been around for a long time. The major difference is that the new legislation envisages the process being largely driven by the company and its directors, with the control of the day-to-day business operations resting with the directors while creditors consider the plan.
An insolvency practitioner provides the vehicle for the plan to be put to creditors. Limiting the role of the insolvency practitioner is anticipated to reduce the costs of the process, leaving more funds available for creditors.
Criteria for small businesses include: creditor claims must be less than one million dollars, all taxation lodgements must be up to date (ie. BAS, tax returns, Superannuation), all employee entitlements must be up to date (includes Super Guarantee).
I personally believe it is regrettable the last two criteria were included, as they will limit the number of companies who can utilise the provisions.
Details of the new legislation can be sourced from Nicols + Brien, and the ASIC website provides summary papers.
In closing I would like to reiterate the main point: if facing financial hardship, get some advice so you can make informed decisions on your choices and DO SOMETHING.