Australian business does not operate in a vacuum and is subject to global events which can impact the smallest businesses in ways that no one is able to predict. These external shocks can have a devastating impact on any business, let alone one that is already exhibiting signs of financial distress.
Over the last six years, external shocks such as COVID, global inflation, tariffs and armed conflict have resulted in:
- increased fuel costs;
- interest rate increases; and
- increased input costs.
Certain industries appear to have been affected more than others, including transport, hospitality and construction.
The question is what should the director(s) do when these external shocks cause a significant impact on their business?
To navigate these times of uncertainty, the planning must begin well before any external shock is encountered.
Planning involves understanding your business and ensuring it complies with its obligations. Key steps that should be undertaken (not exhaustive) includes:
- Producing timely and accurate financial reports, whether they are from internal management accounts or externally produced by the business’ external accountant;
- Maintaining, at a minimum, a cashflow forecast, but preferably three-way forecasts;
- Maintaining communication with key stakeholders (e.g. financier); and
- Lodging all tax returns (including BAS) and Superannuation Guarantee Charge forms on time, even if payment in full is unable to be achieved.
The above steps do not prevent the external shock from impacting the business, however they allow the director(s) to objectively review their business at short notice to understand steps that can be taken to treat the symptoms of the external shock.
- The treatment may consist of:
- Internal restructuring;
- Formal restructuring arrangements; or in the worst case
- Winding up the business.
Internal restructuring
By having information readily available, the director(s) are able to review their business and take appropriate steps to address the symptoms of the external shock, either on their own or with the help of their advisors.
Such steps may include passing on the increased costs to the consumers in the instances of increased fuel costs or input costs wherever possible or restructuring/refinancing the debt to reduce the impact of increased interest rates.
Properly prepared forecasts will enable the director(s) to ascertain how those steps may impact the ongoing viability of the business.
The steps that will be taken will often be specific to the business and having the information at the director’s fingertips will allow for quick adjustment where required.
The key steps that should be undertaken are also required should the director(s) wish to undertake a Safe-Harbour engagement under section 588GA of the Corporations Act 2001 (Act). Please see the previous article on Safe-Harbour engagements for further information.
Formal restructuring arrangements
Unfortunately, the external shock may be so significant that internal restructuring may not prevent the business from failing. The Act provides for formal mechanisms to provide a company with space whilst a restructuring plan is put into place by the way of:
- Voluntary Administration (VA); or
- Small Business Restructuring (SBR).
Whilst a VA is available to every company regardless of size, an SBR has certain eligibility criteria, including unsecured debts of less than $1million, taxation and superannuation lodgements must be up to date and employee entitlements must be paid. Subject to meeting the criteria, the company would then have the ability to enter into the SBR.
The key steps provided above lay the ground work for assisting the creditors to understand how the external shock has impacted the business and may provide the best possible opportunity for creditors voting favourably on any formal restructuring proposal.
Winding up the business
If the external shock is far too significant or causes the failure of the business, then the director(s) can wind up the business and the company.
In the circumstances where the debts are unable to be paid in full, a liquidation is required to wind up the business. Having taken the above steps, the director may avoid falling liable for the company’s ATO debts by way of a lockdown Director Penalty Notice (link article).
What if no plans exist?
Running a business is a difficult endeavour and the smaller the business the greater the challenge on the director(s). There will be instances where the recommended planning has not been undertaken for a variety of reasons and especially so, where the business is facing financial distress.
Whilst the best time to have undertaken the planning was yesterday, the next best time is today. We recommend that the director(s) work with their accountants and business advisors to ensure proper planning is put in place.
Where the business is facing financial distress, getting early advice on the options to deal with that financial distress is highly recommended. The longer the situation is left, the worse it may become thereby limiting the available options.
Final thoughts
The old saying goes, the past is history and the future is a mystery. Whilst we can use what we have learnt from the past, we can only predict what may come. With good planning and forecasts, the director(s) will be in a stronger position to navigate the symptoms of external shock than those who have no plans in place.
Here at SV Partners, we have a team of restructuring experts who can assist with providing the options that exist to navigate the external shocks impacting the business.
Article by Travis Olsen (Director) – Adelaide