Swift action urged to avoid SME insolvency crisis

An insolvency crisis is almost inevitable if distressed SMEs don’t take urgent action now, accrording to voluntary insolvency firm Jirsch Sutherland. And, while financial support announced by the federal government will be helpful to some business owners, the firm believes that many of them may put off making important decisions as their debt obligations continue to accrue, ultimately resulting in financial trouble.

“A debt deferment strategy may be understandable, but business owners need to realise they may just be postponing the inevitable,” Sule Arnautovic, Jirsch Sutherland partner, said. “It’s crucial to make changes now to help flatten the ‘Insolvency Curve’ that’s looming. This is especially important for those that were already experiencing financial distress prior to the COVID-19 crisis.”

Arnautovic said that the federal government’s debt deferral strategy means that in six months’ time there will be a proliferation of SME businesses getting into dire financial straits.

“Imagine having to pay six months of rent, utilities and financing costs, as a lump sum, before you can open your doors,” Arnautovic said. “That’s what some businesses will be facing when we move from the crisis to a recovery environment. “

Arnautovic does not believe that many businesses that would be able be able to take that type of capital hit.

“With the challenge of re-establishing market position, renewing trading relationships with suppliers and adapting to a changing environment, a lot of businesses will be forced into a financial restructure through an insolvency procedure,” he said. “Debt deferment with no exit or recovery strategy is fatal.”

He warned that insolvency and restructuring professionals are likely to be pushed to their limits when stimulus packages expire and the Insolvency Curve will likely increase dramatically.

Arnautovic suggested a number of measures that can help position businesses face the said crisis:

  • Early restructuring – utilising the framework established under the Safe Harbour legislation.
  • Create a Creditors’ Trust for participating creditors – a legal arrangement used to accelerate a company’s exit from external administration.
  • Merger and consolidation
  • Implement “Holding”, “Hibernation” or other Deeds of Company Arrangements (DoCAs) – to extend the period of debt moratoriums and buy time to look into potential restructuring opportunities.
  • Liquidate now and minimise losses – to allow a business to restart further down the track.

For business owners struggling prior to the COVID-19 crisis and had accrued losses and unpaid liabilities, Arnautovic insists that the time to act is now.

“The regulatory and ethical obligations upon directors have never been so great – and neither have the consequences for the individuals who get it wrong,” he said. “Good intentions can still result in directors becoming personally liable for making the wrong call. Deliberately avoiding the debt issue can land directors in even hotter water. The recent government moratorium on insolvent trading is somewhat of a red herring, given the raft of director obligations stipulated in Australia’s corporate legislation.”

For those who believe their businesses may have prospects on the other side of the crisis, Arnautovic advised, “All businesses will be impacted in some way by this crisis and I urge directors to seek professional advice immediately to understand all of their options, which should include the formal insolvency/restructuring options that are available. And it’s not just the financial ramifications that are at play here, the mental health implications are also massive. Dealing with a business problem early can offer clarity for all involved and help reduce ongoing stress and anxiety.”

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