Andrew Barnden, Director of Rodgers Reidy and Chair of the Insolvency Management Committee of CA AANZ was interviewed by Acuity Magazine in providing practical advice in respect to COVID-19, especially whether it is time to pause or exit a business entirely. The full article is set out below. If you require any assistance with a company in financial difficulty or an insolvency related matter, especially COVID-19 related, then do not hesitate to contact one of the Directors of Rodgers Reidy in your State or Territory.

 

In Brief

In the wake of coronavirus restrictions and shutdowns, businesses are facing the tough decision of whether to pause operations or close permanently. Business owners must work out their financial position now, and what it will be in two, four and six months.
They should also consider what support measures they can access, including low-interest loans and options to reduce costs.
At midday on Monday [24 March] cafes, gyms, bars and restaurants across Australia shut their doors or severely curtailed operations amid a government-ordered shutdown. Beauty therapists (but not yet hairdressers) will soon follow suit. In New Zealand, a month-long, nationwide shutdown starts at 11.59 pm on Wednesday 25 March.

Many businesses had already been suffering for weeks as travel restrictions designed to slow the virus’s spread slammed the tourism and hospitality sectors.

“I don’t think in living memory we have been in an environment as potentially dire as this,” says Stephen Longley CA, a partner in PwC’s Financial Advisory business. “There isn’t one company out there that’s got a scenario plan that ever envisaged anything like this.”

Tens of thousands of businesses of all sizes are facing the difficult decision over whether to shut their operations for good amid the catastrophic fallout of the coronavirus – or to do their best to reopen once the new measures are relaxed.

Chartered accountants say while businesses can explore options to keep their operations alive, they need to be realistic, aware of legal and personal liabilities, and also act to protect their mental health.

“You may have to make a hard decision and close the company,” says Andrew Barnden FCA, the NSW director of international insolvency network Rodgers Reidy and chair of CA ANZ’s Insolvency Management Committee. “That might potentially save a lot of stress and mental issues.”

Planning for the unknown

Longley says the only scenario you can plan for with any certainty is having no revenue at all for six months. But many businesses are saddled with fixed costs, including staff and rents.

The big question is how long will the shutdown and revenue crash last? “No-one knows how long it’s going to carry on for,” Barnden says.

Businesses must work out their position now, Barnden says, then what their position will be in two, four and six months. “If you’re not going to be better off in two, four or six months, why hold on for that chance when you might be significantly further in debt? Are you going to be better off if you bite the bullet now?”

Businesses also need to consider the state of the economy in six months if they choose to keep going. When they reopen, businesses could face a Depression-like scenario. In the US, Treasury Secretary Steve Mnuchin reportedly warned of unemployment surging to 20% if the Senate did not pass a US$1 trillion coronavirus rescue package.

How can owners seek support to continue a business?

Businesses should look at various virus-related support measures from government and banks, including low-interest loans, as well as options to reduce costs. “There are some things you have to look at before you make a decision to close the doors,” says Michael Basedow CA, a principal at Pitcher Partners in Adelaide.

“If [business owners] have been struggling until now, it might be the last straw for them and I think they need to make some hard decisions.”Michael Basedow CA, Pitcher Partners
Businesses should talk with their landlords and suppliers to try to renegotiate better terms and seek support, as well as consider options for staff, such as standing them down and bringing annual and long service leave forward.

“For simple financial survival it boils down to two things: what are your levers to generate cash and what are the interventions to minimise expenses?” Longley says.

“For simple financial survival it boils down to two things: what are your levers to generate cash and what are the interventions to minimise expenses?” –Stephen Longley CA, PwC

What are the liabilities around closing a business?

When making a decision to shut a business by walking away or liquidation, business owners and directors need to be aware of their financial and legal liabilities. Barnden says those considering shutting a business should understand their personal risks and liabilities, particularly around personal guarantees for things like equipment and rental leases.

Longley says directors can be personally liable if a company trades while insolvent, although the government is legislating to provide relief from those insolvent trading laws for six months during the crisis.

The final decision is in your client’s hands

Basedow says the ultimate decision to shut the doors “is very much a personal decision for the business owner” and depends on a case-by-case basis.

“If forecasts suggest the business isn’t going to change or turn around for six months and they can’t afford to carry on, they have to seriously have a look at that decision.

“If there is the ability to restructure their business to allow them to continue to trade over the short to medium term, then I think grab those options,” he adds. “If they have been struggling until now, it might be the last straw for them and I think they need to make some hard decisions.”

Barnden says many businesses are being proactive and considering their options. “The base advice is to act early, seek professional advice and review decisions on a regular basis as things change.”

But mental wellbeing is also a key factor.

“People need to monitor both their physical and mental health,” Basedow says. “Financial stress affects both. If people are struggling, they should seek the necessary help.”

Barnden says the decision to close sooner rather than later and walk away or liquidate the company “can potentially save a lot of stress and mental issues”.

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