- Two-thirds of businesses in Australia have taken a hit to revenue or cash flow due to COVID-19 lockdowns.
- New Zealand’s economy could contract by 10%.
- The sooner business owners take action and speak to a restructuring and insolvency expert, the more options they will have.
By Susan Muldowney
When the Australian government announced further social distancing restrictions and business closures to curb the spread of coronavirus in the final week of March, Lisel Montague FCA saw her clients switch from feeling mildly nervous to deeply distressed.
A director of Montague Partners in Perth, she works with businesses ranging from large automotive dealerships to trainers and jockeys in the racing industry, but her hospitality clients were among the hardest hit.
“It feels like they are on hold and I tell them that they need to brace themselves for the months ahead,” she says. “A couple of our hospitality clients have adapted to just offering takeaway and we have some pubs up in Broome that are using their drive-through takeaway bottle shops. Others are literally having to close at this point.
“What will feel like normal in six months is going to be far from the normal that we are all used to, and I don’t think anyone can forecast how it’s going to be.”
Navigating an economic crisis
Montague established her practice with husband Glenn in 2008, with the aim of helping businesses succeed rather than merely survive. Today, she is helping them navigate an economic crisis of unprecedented scale.
Data from the Australian Bureau of Statistics shows two-thirds of businesses across all sectors have reported taking a hit to revenue or cash flow due to COVID-19. A similar number have suffered decreased demand: 70% of businesses in the hospitality sector have reduced staff hours, and 43% have laid off their workers or placed them on unpaid leave.
By the first week of April, about 780,000 Australians had lost their jobs. By the end of the month, the Reserve Bank of Australia (RBA) predicted a 10% decline in national output in the first half of 2020.
In New Zealand, modelling from Treasury shows unemployment may surge to double figures – up from 4% at the end of December last year. Meanwhile, estimates show New Zealand’s economy could contract by as much as 10%.
“At night time, I’m lying in bed crunching numbers and wondering what advice I should be giving to my clients,” says Montague. “You can’t just switch off in this situation because these people have been with us for years and you develop such a trusted relationship with them. I don’t want to see any of my clients go down.”
“These people have been with us for years and you develop such a trusted relationship with them. I don’t want to see any of my clients go down.”
As COVID-19’s toll on human life continues to mount, the economic effects of the crisis are also coming into focus.
Sule Arnautovic CA, a partner at insolvency specialist Jirsch Sutherland in Sydney, says few industries are immune to the risk of collapse.
“I’ve been in this industry for more than 20 years and I’ve never known of a dentist to get into trouble, but we’ve met with some dentists in the past week because they just can’t perform procedures unless they’re considered an emergency,” he says.
New Zealand’s government spent more than NZ$20 billion on wage subsidies and other support during its COVID-19 lockdown. Finance Minister Grant Robertson announced more measures in the 14 May “Rebuilding Together” budget, including a NZ$3.2 billion extension of the Wage Subsidy Scheme, originally slated to end in June.
All up, the NZ government will spend up to NZ$50 billion fighting the coronavirus crash, funding jobs, training and infrastructure, although only NZ$15.9 billion of that spending was outlined on Budget night.
In Australia, the federal government announced a number of temporary measures at the end of March to help keep the economy running, including the JobKeeper payment to help keep Australians in jobs (initially estimated at A$130 billion, but revised down to A$70 billion in May) as well as amendments to insolvency and corporations laws.
There is a short-term increase in the threshold at which creditors can issue a statutory demand on a company from A$2000 to A$20,000. There is also a temporary lift in the threshold for a creditor to initiate bankruptcy proceedings and a temporary relief for directors from any personal liability for trading while insolvent. The measures are planned to be in place until 24 September 2020.
“A lot of businesses are saying, ‘Well I’m not going to do anything just yet because the government has essentially given me six months of assistance’,” says Arnautovic. “But I’m also seeing some businesses saying, ‘Here are the keys, get rid of the business, I’m totally stuffed’.”
Andrew Yeo, a partner at Pitcher Partners in Melbourne, is seeing business owners divided into similar binary camps. He says their attitudes are largely determined by the state of their working capital.
“It’s all relative to the amount you’ve got inside your business,” he says. “If you have to put in, say, A$100,000 of your own money to save the business, the key questions you’ll probably be asking are, ‘Is this a business I really want and is this a business that is actually going to make me money next year, the year after, the year after that?’
“The thing is, if a business was borderline viable in January or February this year, the government might help you get through to the end of September, but there’s going to be a reckoning day.
“The danger is that you end up losing not just your business, but also that extra A$100,000, which could have been your start-up capital for something else.”
John Fisk FCA, a partner at PwC in Auckland and chair of RITANZ (Restructuring Insolvency and Turnaround Association of New Zealand), says businesses in New Zealand experienced “significant shock” when they were forced to either cease or drastically restrict trading in March.
“I think the real pain is going to hit in the next month or two when they try to work out how they’re going to deal with the longer term,” he says. “We’ve seen a couple of receiverships of companies that were probably teetering before COVID hit.”
Fisk says the sooner businesses take action, the more options they will have.
“To quote our prime minister, ‘Go early and go hard’,” he says. “This includes having early discussions with your bank, with your shareholders, with your customers and your suppliers. If supply chain is a big issue for you, what is plan B? What is plan C? If your supply chain gets broken, how will you adapt to that?”
Michelle Viscardi, restructuring and insolvency manager at William Buck chartered accountants and advisers, says businesses should look to create a conservative cash-flow forecast.
“It’s not business as usual at this point,” she says. “If they are worried, they should speak to an insolvency professional at the earliest opportunity. Options might include alternate financing or debt factoring arrangements, but if they wait until a point where these options aren’t available, they might only be able to consider liquidation.”
Consolidation may also be an option, says Arnautovic. “A business may be able to take a loss and, at a time down the track, rebirth under a different operating model.”
Viscardi says accountants should not wait for clients to contact them for advice during the crisis. By that point, it might be too late,” she says.
Picture: Michelle Viscardi,restructuring and insolvency manager at William Buck chartered accountants and advisers.
Fisk adds that accountants should be looking at the “levers you can pull to cut costs and reduce the outflow of funds as much as possible”.
“If it looks like the business is going to continue to incur creditors that they can’t reasonably pay, that’s obviously when you need to tell your client that they should be either looking at an insolvency process or some sort of transaction to transfer the assets into a vehicle that will be solvent,” he says.
“In these sort of crisis situations, everything comes back to cash flow.”
More than numbers
Economic uncertainty is taking an emotional toll on business owners, but Viscardi says accountants are feeling it, too. “We pick up on the emotion from our clients,” says Viscardi. “Appointing us is almost like a relief for them, and then we take on the stresses.”
But for CAs in practice, such as Montague, there are also concerns about the health of the practice. Some of her clients can’t afford to pay their bills and are not prioritising tax returns and other compliance services at this time. When Montague spoke to Acuity, she had scaled back the working hours for some of her six employees and was planning to apply for the JobKeeper allowance.
“We probably wouldn’t make the turnover test for the quarter of March, but we can already feel the impact of the downturn,” she says. “For myself and Glenn, I’d say our non-billable hours probably account for 90% of our time at this point. We are trying to help our clients get through this time and we just want to cover our costs.”
In April, Reserve Bank of Australia governor Philip Lowe delivered some words of hope for the nation’s economy. “We need to remember that once the virus is satisfactorily contained, all those factors that have made Australia such a successful and prosperous country will still be there,” he said.
Yeo agrees there’s room for economic optimism.
“I started work in 1991 during what was probably the deepest recession we’d had since the Great Depression,” he recalls. “In some respects, there’s a similar feeling right now, but when the lights comeback on, a lot of clients will be able to bounce straight back up.
“There will certainly be a high number of insolvencies, but we’ll just have to wait and see how it pans out in September.”
Trading while insolvent
In Australia, the government has introduced temporary relief for directors from personal liability for trading while solvent, but William Buck’s Viscardi questions what will happen when this is over.
“At the end of September, the claim against the director might be significantly higher than right now,” she says. “That’s a personal risk that the directors face because they can be sued personally for insolvent trading.”
She adds that directors should also consider all the personal guarantees they may have signed – including for equipment and rental leases – as the debt may have increased by the end of the six-month reprieve.
“A lot of businesses that are trading while insolvent now might not be able to be rescued after the six months reprieve, and might be forced into liquidation,” Viscardi says.
A lot of businesses that are trading while insolvent now might not be able to be rescued after the six months reprieve, and might be forced into liquidation.
With many businesses facing unprecedented economic conditions, are we likely to see a rise in phoenixing?
Arnautovic says it’s possible that illegal phoenixing could increase out of desperation, but he suspects the majority of businesses that rise from the ashes
after COVID-19 would have folded for genuine reasons.
“I don’t think we’ll see growth in illegal phoenixing strictly as a result of COVID-19,” he says. “If businesses are later resurrected, it will largely be because they were forced to shut down and then, when the economy recovers, they’ve been able to start up a similar business.”
But Viscardi believes there is likely to be a significant deficiency in assets to liabilities, and that we may see a spike in illegal phoenixing in six to 12 months’ time.
“Only time will tell,” she says.
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