As a wave of insolvency approaches Australia’s shore, business owners should prepare to exit gracefully


Andrew Yeo is a partner at Pitcher Partners.

There’s a moment before a tsunami where the tide pulls back, and the beach is bare and calm — just before a devastatingly big wave crashes in.  

That’s the moment Australian businesses are facing right now, where after months of challenging trading, JobKeeper and rent relief, government packages and cash injections, we are in a brief second of unnatural calm.  

Right now, the creditors can’t come calling.  

Right now, the debts can remain unpaid.  

But within 80 days, the waves will start to wash away the work of business owners who have built up their companies over years only to lose them in the wake of COVID-19.  

To get a sense of how big the wave might be, let’s look at the ripples we can see already.  

Back in March, with the prospect of thousands of businesses collapsing overnight, the federal government put in place key initiatives to forestall that event.  

Since a moratorium preventing creditors issuing statutory demands was introduced, the number of businesses entering external administration has nearly halved.  

Under the moratorium, the minimum amount for creditors issuing a statutory demand jumped from $2,000 to  $20,000, and the time to reply to the demand increased from 21 days to six months.  

At the same time, the government also introduced a temporary safe harbour defence against civil insolvent trading, which would normally make directors personally liable for debts incurred when they should have suspected their company to be insolvent. 

Both changes were due to run until mid-September but were extended again until the end of December.  The impact of the moratorium is obvious.  

Over the past three years, an average of 2,100 companies entered external administration in the June quarter. This year, it was just 1,200. Statistics for this quarter suggest appointments since July are down nearly 60%.  

It’s not real, it’s not sustainable and time has run out.  

From December 31, businesses will snap back into the sights of creditors — an issue keeping many owners awake at night.  

In such situations and such dire times, business owners can easily fall prey to sharks — the so-called pre-insolvency ‘experts’ out hunting for the desperate, with dodgy debt-fix schemes that only delay the situation or make it worse. 

Don’t go there. Seek out advice that is credible and ethical, and understand your options before circumstances force your hand.  

Over 30 years, I’ve found that most entrepreneurs are hopeful optimists, for whom running a business is not just about dollars and cents. They are tough. They have to be to run a small business.  

For some, it is part of their identity. For others, it is all they know how to do: opening the doors in the morning working all day and, if they are lucky, banking something for their trouble.  

When those owners are forced finally to call time, they share a sense of grief that the legacy of hard work,  investment and enterprise could end this way. 

They don’t want to let anyone down, but the physical and mental toll is enormous.  

If this is you, then remember, stepping away from a business that is not viable doesn’t mean leaving the industry that you love or ceasing being able to run a business.  

With the right help, there are legitimate ways to carry on.  

You deserve a more dignified exit than ghosting suppliers you have worked with for years. And you should be able to look employees in the eye and assure creditors you’ve done your best as far as possible to settle debts.  

The wave is coming and many Australian businesses are about to sink.  

Waiting on the beach to see just how big the tsunami might be is not the best option.

NOW READ: Cut costs and keep staff: Everything startups and SMEs need to know about employee share schemes

NOW READ: Business insolvencies rose by 11% in September amid some improvement in payment times


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