In March this year the Australian Government introduced temporary changes to the insolvency laws in Australia which were designed as a safety net to enable businesses to continue trading during the COVID-19 pandemic. The temporary changes included raising the threshold for creditors to issue statutory demands (the preliminary step to winding up a company) and removing directors from personal liability for trading whilst insolvent in relation to debts incurred in the ordinary course of business.

While these temporary reforms may have been met with an initial sigh of relief from businesses and directors, CreditorWatch, one of Australia’s largest credit reporting companies, has warned that the temporary reforms have created an army of “zombie companies” that are being propped up by Government relief packages, but cannot realistically sustain their activities once those relief packages end in September. It is predicted that once these relief packages end, and the insolvency laws return to normal, there will be a spike in the number of wind up and bankruptcy applications made to the Courts because it is predicted that a large number of companies will be unable to meet their debts.

What does this mean for accountants?

1. Now is the time for you to reach out to your clients.  Clients who are having cashflow problems often wait until it’s too late (for example: when they are served with a statutory demand or wind up application) before they reach out for help and, in some instances, this can make the situation much harder to navigate.

2. Encourage your clients to be realistic about their financial situation and the way in which they do business.  COVID-19 has forced many industries to be flexible and adapt to the changing demands and restrictions. If there are aspects of your client’s business that are no longer sustainable, then now could be a perfect opportunity to consider if they should continue those aspects in the short or long term and to restructure their business accordingly.

3. If your clients are experiencing cashflow problems, and are only surviving because of the Government’s relief packages, then make a plan with your client now for how they can get on top of their debts over the coming months. It is important that your clients get on top of their finances early and make a plan that will be sustainable for their business. For example, one approach may be to encourage your clients to be transparent with their creditors and see whether a payment arrangement can be reached for any outstanding debts that will allow your client to balance their obligations.

Although the predicted spike of bankruptcy and insolvency applications seem inevitable once the insolvency laws return to normal, businesses should use the current temporary reforms to assess their situation and make a plan so that they can survive and thrive.

If you have a query relating to any of the information in this piece, please do not hesitate to get in touch with a member of Coleman Greig’s Litigation & Disputes team, who would be more than happy to assist you.