Crunch time: don’t ignore insolvency warning signs

Can your business survive without government support?

If your response to this question is “no” or “not sure”, I encourage you to perform a business health check as soon as possible to identify any red flags, because in a matter of weeks, on 31 December, many of the federal governments COVID-19 relief measures come to an end. These include:

  • The insolvent trading moratorium.
  • The temporary statutory demand threshold.
  • The first tranche of JobKeeper 2.0.
  • The commercial eviction moratorium in some states/territories*.

On top of this, loan repayment deferrals began to end in September, with banks starting to contact customers about restarting their payments, and the ATO has recommenced small business audits and “soft” debt collection in most parts of the country.

The federal government’s raft of support measures has enabled many businesses to go into “hibernation mode” and to put off making tough decisions about their businesses. But eight months have flown past – and crunch time is now.

It’s time to “awaken from hibernation” and take action if you’re currently experiencing, or are likely to experience, cashflow or other financial challenges. And while some vulnerable businesses might currently have cash in the bank, once the stimulus measures end, this cash may begin to gradually deplete, particularly as businesses are required to meet their deferred payment obligations, which includes tax and rent. Additionally, with the removal of JobKeeper at the end of March, businesses will need to fund their full payroll themselves.

As a company director, it’s also important to understand your responsibilities and liabilities and ensure you don’t allow a company to trade while insolvent. You need to be fully aware of your legal duties and take action to mitigate personal risk. You could be left exposed once the support measures end if you don’t take action now.

Red flags

The below infographic lists 12 key warning signs your business could be heading towards insolvency. If you identify any red flags, talk to your accountant or a business recovery / insolvency practitioner as soon as possible. In my experience, the sooner you take action generally, the more options and a better chance of saving your business or winding it up before you incur further losses, in addition to minimising personal exposure and risks to your own assets. And if you have been trading while insolvent, an insolvency practitioner can also help mitigate risk and prevent against subsequent action once the insolvent trading moratorium ends.

In addition to assessing your business, it’s also important to assess your mental health, as a period of financial difficulty can be a demanding and stressful time.

Bradd Morelli, National Managing Partner, Jirsch Sutherland

*Commercial eviction moratorium deadlines at the time of writing: NSW, December 31; VIC, December 31; QLD, December 31; WA, March 31; SA, March 31; ACT, January 31, 2021.

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