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COVID INSOLVENCY RELIEF EXTENDED – CASH FLOW IMPACTS AND MORE!

Fact Sheet

by Paul Gidley24.09.20

The Morrison Government has extended the insolvency relief measures under the COVID stimulus package to 31 December 2020. In a nutshell, the insolvency relief provides a level of protection to directors from insolvent trading and more or less pushes out any formal debt collection activity through the Courts out to 31 December 2020.

The Morrison Government claims this is to avoid an avalanche of personal and corporate insolvencies, protect jobs and protect business. Avoid? Delay ✓

Personally I am respectfully skeptical that the Insolvency Relief Measures (IRMs) will achieve these objectives. Efficient and effective operation of our Insolvency Laws is essential to maintain a solvent and competitive marketplace, regardless of status of the economy.

Time is an extremely important variable in successful credit policy enforcement. Swift enforcement action can defeat unscrupulous debtors who attempt to shift assets beyond creditors’ reach.

I have witnessed examples of the IRMs impacting negatively on the cash cycle of healthy businesses, already struggling under the current economic climate to maintain positive cash flows, adding further concern about the depth of the forecast recession and the time it will take to return to normal operating conditions, driving negative sentiment.  

I strongly urge business owners to be strict on terms of trade given the unprecedented moratorium the Government has put in place on the debt collection process. It is arguable that any ageing should result in an immediate request for cash on delivery, credit limits revisited and security sought where necessary.

In summary, I raise the following concerns in relation to the COVID IRMs:

  1. There is opportunity for unscrupulous behavior by directors and individuals to take advantage of the deficiencies the IRMs have wedged into the Insolvency Laws resulting in a lack of accountability in the COVID insolvency system.

  2. The IRMs have contributed to the false economies in the marketplace, distorting competition and impacting negatively upon the market’s cash flow.

  3. They have created a vacuum in the proper operation of the marketplace, enhancing the likelihood of illegal phoenixing and insolvent trading, as time is of the essence in thwarting such activities.

  4. They may lead to the advent of zombie companies, entities who are simply in existence to take advantage of various stimulus packages available in the COVID-19 economy, as there is no apparent accountability.

Simply put, it is a “finger in the dike” approach by the Government. We should be concerned insolvencies and bankruptcies will flood the market once that finger is removed even if only for the thousands of delayed appointments that would have normally occurred if COVID-19 hadn’t!

Please do not hesitate to contact the directors at Shaw Gidley.