THE ECONOMIC IMPACT OF COVID-19 IS BEING FELT ACROSS AUSTRALIA
As of late March 2020, there are more than 932,000 confirmed cases of COVID-19. The virus has also claimed more than 46,000 lives.
The economic impacts of COVID-19 are being felt across Australia. It has put many individuals and businesses in a state of insolvency. What’s worse, it could cause bankruptcy if it continues this trajectory.
Understanding insolvency and bankruptcy is crucial at this point in time. You should know what both terms mean, what the consequences are, and where you can look for help.
Keep reading to learn more about the effects of the virus on Australia and what this could mean for individuals and businesses in the near future.
COVID-19 In Australia
The World Health Organization has officially declared COVID-19 to be a pandemic. A pandemic is a global outbreak of a disease or virus, and it affects even the countries without widespread cases.
Australia is one of the countries not currently seeing widespread community transmission of COVID-19. As of late March, 184,000 tests have been conducted. Of those, there are approximately 3,100 confirmed cases in the country and only 13 Australian have died – but these numbers are expected to increase at a rapid rate.
Australia is treating the COVID-19 as a health emergency. As such, the federal government has implemented a special plan. This is called the Emergency Response Plan for Novel Coronavirus.
COVID-19 and the Impact on the Australian Economy
The spread of COVID-19 around the world has increased at a rapid rate. This has led many governments to close their borders, halt trade, and either request or mandate that citizens remain in their homes. And this situation is now expected to be more prolonged than initially believed.
The measures being taken by governments around the world are intended to slow the spread of the virus and protect the most vulnerable populations among us. At the same time, these mitigation measures have a significant impact on economies, both internationally and domestically. Australia is not exempt from the impacts.
This is a time of great uncertainty. It’s still unclear how long these measures will be in place and what the ultimate impact on the Australian economy will be. What is clear is that the economic outlook of the Australian Government has deteriorated since they released their first Economic Response at the beginning of March.
Today, it’s believed that over half a million jobs are at risk. Some of the country’s top economic experts are warning Cabinet ministers that, within months or as early as weeks, the number of unemployed Australians could rise to over one million. That figure doesn’t disclose the impact on small businesses and large businesses alike, especially those who are already struggling to stay afloat.
What we do know is that the Government is already taking steps to try and alleviate those struggles. These measures are intended to support both households and businesses in the wake of economic uncertainty.
In addition to a $2.4 billion health package that’s aimed at protecting all Australians, the government has also announced a $17.6 billion economic support package. This package should encourage investment and support businesses in keeping their employees working.
COVID-19 Relief for Businesses and Individuals
In order to curb the spread of COVID-19, the Government has closed all non-essential businesses. These include:
- public places
- gyms and fitness classes
- indoor sporting venues
- beauty salons
- play centres
- pubs, licensed clubs, and hotels (with the exception of their use as accommodation)
- restaurants and cafes
Restaurants and cafes may only operate as takeaways at this point. Some of the only businesses remaining open are pharmacies and supermarkets.
Of course, these closures have a direct effect on the cash flow of businesses. It also has an impact on the employees that rely on business operations for their income and livelihood.
This is why the Australian Government has put together an assistance plan aimed at helping financially distressed businesses and their employees. The plan includes:
- Supporting apprentices and trainees
- Increasing cash flow for employers
- Backing investment in businesses
- Providing temporary relief for financially distressed businesses
- Increasing the instant asset write-off
Below we’ve provided a bit more detail regarding each of these points.
Support for Apprentices and Trainees
In order to help small businesses, keep apprentices and trainees employed, there is a wage subsidy of 50% of the apprentice or trainee wage. This subsidy is available to eligible employers for 9 months. If an apprentice can’t be kept by one employer, the subsidy will be made available to the new employer of that apprentice.
Cash Flow for Employees
For small and medium-sized businesses as well as not-for-profits that employ people, the Government will provide up to $100,000 in relief payments. The minimum payment for eligible organizations is $20,000. The intention of this payment is to provide cash flow that should help them pay rent, electricity, and other bills while still being able to retain and pay their staff.
It’s thought that this measure will help almost 700,000 businesses and 30,000 not-for-profits. These businesses employ 7.8 million people who would be financially insecure if they were to lose their jobs.
In order to help support investment and boost economic growth, the Government is accelerating depreciation deduction. This is accomplished through the introduction of a time-limited 15-month investment incentive.
Increasing Asset Write Off
The instant asset write-off threshold has been increased from $30,000 to $150,000. Businesses with an annual aggregated turnover of less than $500 million are now included. This measure alone will support over 99% of businesses in Australia.
Temporary Relief From Financial Distress
The Government of Australia recognizes that COVID-19 could cause financial distress for profitable and viable businesses. To counteract this, they’ve revised legislation having to do with insolvency.
The following is an outline of the safety net that they’ve created.
Increase of Statutory Demand Threshold and Timeline for Responding
The Government has temporarily increased the amount at which creditors can issue a statutory demand as well as the time that companies have to respond to that demand. The threshold has been increased from $2,000 to $20,000 and the timeline for responding has increased from 21 days to 6 months. These changes will apply for six months.
Increase of Threshold for Initiating Bankruptcy
A creditor cannot initiate bankruptcy proceeding against a debtor until that debt has reached $20,000. This is an increase from $5,000 and it will apply for six months.
Increase in the Timeline for Responding to Bankruptcy Notice
Debtors will now have 6 months to respond to a bankruptcy notice rather than 21 days. This applies for six months. This extension also applies to the period of protection after a debtor makes a declaration of intention to present a debtor’s petition.
Temporary Relief from Personal Liability
Directors will be absolved of personal liability for trading while insolvent. This will apply for six months.
What Is Insolvency?
Despite these relief efforts, many organizations may find themself in a state of insolvency as a result of COVID-19. Insolvency is the inability of an organization to pay their debts when those debts become due.
Insolvency is more of a financial state than a legal term. As in, it insolvency only turns into a legal financial problem when creditors seek to collect their debts and the organization cannot pay
The three most common corporate insolvency procedures are:
- Voluntary administration:
- Liquidation: and
This insolvency procedure is designed to resolve a company’s future direction quickly whereby an independent and suitably qualified person, known as the voluntary administrator, takes full control of the company to try to work out a way to save either the company or its business.
If it isn’t possible to save the company or its business, the aim is to administer the affairs of the company in a way that results in a better return to its creditors than they would have received if the company had instead been placed straight into liquidation. A mechanism for achieving these aims is through a Deed of Company Arrangement.
A voluntary administrator is usually appointed by a company’s directors, after they decide that the company is insolvent or likely to become insolvent. Less commonly, a voluntary administrator may be appointed by liquidator, provisional liquidator, or a secured creditor.
If a company is in financial difficulty, its shareholders, creditors or the court can put the company into liquidation.
The purpose of liquidation of an insolvent company is to have an independent and suitably qualified person, known as the liquidator, take control of the company so that its affairs can be wound up in an orderly and fair way for the benefit of all creditors.
There are two types of insolvent liquidation:
- Creditors’ voluntary liquidation; and
- Court liquidation.
Creditor’s voluntary liquidation is occurs when:
- Creditors vote for liquidation following a voluntary administration or a terminated deed of company arrangement; or
- An insolvent company’s shareholders resolve to liquidate the company and appoint a liquidator.
A court liquidation is one in which a court appoints a liquidator to wind up a company following an application that has been made by a director, a shareholder, ASIC, others, but it is usually by a creditor.
Once a company has entered into liquidation, unsecured creditors cannot commence or continue legal proceedings against the company, the exception being where the court permits.
A company enters into receivership when a secured creditor or a court appoints an independent and qualified ‘receiver’ to take control of some or all of the company’s assets.
The receiver will:
- Collect and sell charged assets to repay the debt owed to the secured creditor;
- Pay out the money collected in the order required by law; and
- Report to ASIC any possible offences or other irregular matters they come across.
The receiver’s leading duty is to the secured creditor who appointed them, and their subsequent duty is owed to unsecured creditors of ensuring that reasonable care is taken during the sales process not to sell for less than its market value, or if there is no market value, the best price reasonable obtainable.
Personal insolvency procedures
Personal insolvency procedures that apply to a person, that aren’t a company, are bankruptcy and personal insolvency agreements.
What Is Bankruptcy?
Whereas insolvency is a financial state of distress, bankruptcy involves financial law. The two are linked, though, because you’ll need to demonstrate that you’re insolvent before you can make a claim for bankruptcy.
In bankruptcy, a court order decides how a debtor will deal with creditors that they’re unable to pay. They’ll be appointed a trustee who helps the debtor sell all of their assets in order to pay some creditors, though likely not all. This trustee will also look into all of your financial affairs, especially if you’ve transferred money prior to claiming bankruptcy.
After a business or individual goes into bankruptcy, they have a permanent record with the National Personal Insolvency Index (NPII). These records can be accessed by anybody wishing to access them. Any income earned over a certain amount and for a specified number of years (usually 3 but it can be extended) will be recovered.
Insolvency, Bankruptcy, and COVID-19
Bankruptcy has a severe impact on a debtor’s credit rating. It affects their ability to borrow money for years following the bankruptcy. And it costs money to become bankrupt.
It’s just a short step from insolvency to bankruptcy for some businesses. And in the current state of economic uncertainty, those steps are even shorter. This is why the Government is updating the rules – at least temporarily – to help.
One of the most important changes to these rules regards the right to trade when a company is insolvent. Usually, directors have personal liability if they trade a company with the knowledge that it’s insolvent.
But directors do have some options here. In 2017, the Corporations Act has section 588GA added. Under this section, directors have a safe harbor if they trade while insolvent, as long as they followed certain conditions. As long as directors accessed the safe harbor criteria before trading, they could trade their business while undergoing a challenging period.
How We Can Help
COVID-19 most certainly represents a challenging period. As mentioned, the government has already introduced measures in the economic package to deal with insolvency. This package includes temporary relief for directors from personal liability for trading while insolvent.
But navigating that legislation takes expertise and experience. The rules have changed, and you’ll need a professional to help you understand why you can forego the need for a formal insolvency appointment. And in the case of bankruptcy, you might be able to save your businesses with some of the cash flow measures being provided by the Government.
Before taking any drastic measures, consult with us. We can help you understand the new options available to you, whether you’re struggling due to the COVID-19 outbreak, or whether you’ve been struggling for some time now, these relief efforts are available to businesses of all sizes – all you need to know is how to qualify. Contact us to keep your business up and running during these uncertain times.