What a year 2020 has been! The world faced the unforeseen challenge of COVID-19, turning Australia and the rest of the world on its head. The impact has been felt in almost every facet of life, from the hits to the economy including interruption to international trade, hospitality and tourism, as well as other vital sectors employing many thousands of people, to prolonged shutdowns and varying restrictions across different states creating a sense of isolation that has never been felt before. The Government’s response was swift and decisive and time will tell whether the various measures delivered the intended outcomes.
From a debt recovery standpoint we saw Australia’s insolvent trading laws temporarily amended in March this year, resulting in the response time to a statutory demand and bankruptcy notice extending from 21 days to 6 months. This moratorium was subsequently further extended to 31st December 2020 as the economic magnitude of the pandemic became clearer. At the same time, the threshold for initiating either a bankruptcy or wind up was increased to $20,000 and a temporary COVID-19 safe harbour defence for directors from insolvent trading liability was also introduced. Many thousands of commercial and consumer loans were deferred while various government support packages were quickly launched to assist organisations and individuals impacted by downturns, shutdowns and job losses.
To further support businesses and individuals impacted by the pandemic, the ATO was encouraged to provide greater flexibility and accommodate the circumstances of tax payers with a range of support packages including temporary reduction of payments or deferrals, and suspension of enforcement action including Directors Penalty Notices and company wind ups.
As 31st December approaches we know that the temporary relaxation of insolvency laws will not be extended again. Instead, the Government will introduce a simplified version of the Administration process for SME’s making access to insolvency advice and restructuring easier and less costly. This is expected to commence on 1st January 2021 with the legislation having passed on 10th December. The regulations relating to the new legislation are yet to be released, so it remains to be seen how effective the new restructuring and insolvency processes will be and how many distressed entities will be able to take advantage of the new legislation. We do know however, that there is a significant amount of unpaid and/or deferred debt that has accumulated in the economy since March 2020, particularly in those industries and regions hardest hit by the pandemic. At some point this debt will need to be repaid.
The new ‘debtor-in-possession’ debt restructuring process aims to maximise the chance of survival for small businesses in trouble. Under this process, the directors of the company will work with an independent small business restructuring practitioner (SBRP) to develop and implement a debt restructuring plan. Whilst the plan is being developed, directors will retain control of the company, a moratorium will prevent creditors enforcing their debt and the company will be permitted to trade in the ordinary course of business. The plan is developed by the directors and the SBRP over a period of 20 business days following which it is circulated by the SBRP for creditors to vote upon. If more than 50% of the company’s creditors (by value) vote in favour of the plan, it is adopted.
Click here for a link to the Government fact sheet which contains more information.
The Government’s intention is that in 2021, the economy will gradually return to normal and businesses and individuals will be required to support themselves rather than rely on stimulus measures to see them through. The real test will come after all the stimulus measures are removed and the natural eco system of our economy is allowed to return. For credit professionals 2021 will be a busy year. Management of credit risk has always been central to everything we do, but in 2021 the fine line between achieving sales growth and containing bad debt will be more difficult to identify and manage as the various support mechanisms are removed.
Logic suggests that insolvency activity is likely to increase, if only to catch up and account for the many organisations that would ordinarily have failed in 2020, but that have been kept alive by the Government’s response to the pandemic. With this in mind, businesses should be investing in credit management with the view to strengthening skills and capabilities in this critical area. In a time of economic recovery or ‘return to normal’, time is of the essence. Overdue accounts should be monitored and followed up swiftly, disputed accounts resolved promptly and more forceful recovery action should be considered to recover debts without delay. Like in a game of musical chairs, no one wants to be the last person standing when the music stops.
The team at AMPAC have had a busy year and will be taking a short break from Thursday the 24th of December and will return to work on Monday the 4th of January 2021 ready to assist in any way we can, however if something urgent arises during this period we will still be available via email firstname.lastname@example.org or phone 1300 426 722 and select option (3). In the meantime, we would like to thank all our clients, suppliers and friends for their wonderful support throughout the year and we look forward to working with you again next year.
Do you have debt that needs recovering? Are you unsure on where to start? Contact AMPAC Debt Recovery for solutions today and speak to one of our qualified consultants to get you started.