National firm Jirsch Sutherland has advised business owners to refrain from putting off important decision while their various debt obligations continue to accrue in the background, warning that this could lead to a financial cliff many will fail to scale.
Sule Arnautovic, a Jirsch Sutherland partner, opined that while government support will certainly help some, its debt deferral strategy means that in six months’ time there will be a proliferation of SME businesses getting into dire financial straits.
Calling on business owners to flatten the “insolvency curve”, Mr Arnautovic explained that while a debt deferment strategy may be understandable, business owners need to realise they may just be postponing the inevitable.
“It’s crucial to make changes now to help flatten the ‘insolvency curve’ that’s looming. This is especially important for those that were already experiencing financial distress prior to the COVID-19 crisis,” Mr Arnautovic said.
“Imagine having to pay six months of rent, utilities and financing costs, as a lump sum, before you can open your doors. That’s what some businesses will be facing when we move from the crisis to a recovery environment.”
He judged that there are not many businesses that will be able to take that type of capital hit.
“With the challenge of re-establishing market position, renewing trading relationships with suppliers and adapting to a changed environment, a lot of businesses will be forced into a financial restructure through an insolvency procedure,” he said.
“Debt deferment with no exit or recovery strategy is fatal.”
He warned that similarly to medical professionals being “pushed to their limits” to assist those who are critically ill, insolvency and restructuring professionals are likely to be pushed to their limits when stimulus packages expire.
“That’s when the insolvency curve is likely to increase dramatically,” he said.
“If viable businesses are being inundated with mass terminal insolvencies of their clients at that time, it may cause some contagion to other businesses that might otherwise be saved/restructured, as creditors scramble to deal with the fallout to their own businesses.”
Tips to ride out the crisis
Mr Arnautovic said there’s a range of measures that can help position businesses to ride out the crisis or restart once it’s all over.
Among them is an early restructure, utilising the framework established under the safe harbour legislation.
Another option, Mr Arnautovic noted, is the implementation of a “hibernation” or other Deeds of Company Arrangement (DOCAs) to extend the period of debt moratoriums.
“This will buy time to investigate potential restructuring opportunities,” he said.
Also worth considering, Mr Arnautovic noted, are a merger and consolidation or an early liquidation that could minimise losses in order to allow a business to restart further down the track.
He advised business owners that were struggling to make ends meet prior to the COVID-19 crisis and had accrued losses and unpaid liabilities to act now.
“The regulatory and ethical obligations upon directors have never been so great — and neither have the consequences for the individuals who get it wrong,” Mr Arnautovic said.
“Good intentions can still result in directors becoming personally liable for making the wrong call. Deliberately avoiding the debt issue can land directors in even hotter water.”
And for those who believe their businesses may have prospects on the other side of the crisis, Mr Arnautovic has this advice: “All businesses will be impacted in some way by this crisis, and I urge directors to seek professional advice immediately to understand all of their options, which should include the formal insolvency/restructuring options that are available.
“And it’s not just the financial ramifications that are at play here, the mental health implications are also massive.
“Dealing with a business problem early can offer clarity for all involved and help reduce ongoing stress and anxiety.”