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2021 Outlook – Adjustment in uncertain times

Lockdown, Vaccination, and the Future of Government Business Support in Australia

Contact: Quentin Olde, Liam Healey, Preeti Inchody, Luke Pittorino

February 8, 2021

In this update, we take a look at how Governments have supported Australian businesses during the COVID-19 pandemic, what recent insolvency statistics tell us about the effectiveness of those support measures, and the broader state of the economy. We also examine what might eventuate in 2021 as key support initiatives end, mass vaccination of the population commences, and Australia learns to live with COVID-19. [1]

Business operators and directors need to carefully consider the impact of the expected changes, and the challenges facing the sectors in which they operate.

“You can’t run the Australian economy on taxpayers’ money forever”[2]

Scott Morrison, Prime Minister of Australia 1 February 2021 

1. Key business support measures provided by Government during the COVID-19 pandemic

During the pandemic, the Federal and State Governments have provided a range of assistance measures to businesses including the following:

JobKeeper

  • Government wage subsidy support to business, effective from 1 March 2020.
  • The program has been scaled back progressively from September 2020 and is set to end on 28 March 2021.

Commercial tenants mandatory code of conduct

  • Hold on eviction for renters in distress, as well as a set of good faith leasing principles for commercial tenancies to facilitate temporary rent reductions as required.
  • The code of conduct ceases when the JobKeeper program ends.

Loan guarantees

  • The Federal Government guaranteed 50% in value of new loans issued by eligible financial institutions to small-to-medium enterprises (including sole traders and not-for-profits).
  • Phase 1 of the scheme ended on 30 September 2020, and Phase 2 will run until 30 June 2021.

Australian Taxation Office (ATO) cash flow boost

  • Credits delivered to business through the activity statement system which were generally equivalent to quarterly taxation amounts withheld from employee wages.
  • Applied to the June and September 2020 quarters only.

Temporary insolvency legislation

  • Increased dollar threshold requirement for creditor statutory demands (from AUD 5,000 to AUD 20,000, and a longer time period for companies to respond to those demands from 21 days to 6 months).
  • Temporary relief was also given to directors from personal liability for trading while insolvent for debts incurred in the ordinary course of business.
  • The temporary insolvency relief expired on 31 December 2020 (subject to transitional arrangements) and was followed by small business insolvency reforms (see Section 3).

State and territory measures

  • Various measures delivered by State governments, for example, payroll tax payment deferrals. 

2. What do recent ASIC insolvency statistics tell us about the impact of assistance measures?

The Australian Securities and Investments Commission’s (ASIC) most recent publication of Australian corporate insolvency statistics on 28 January 2021 shows that all corporate insolvency appointments have decreased by an average of over 40% for the rolling twelve months to 10 January 2021 when compared to the same period in the prior year.  This decrease can largely be attributed to the support measures put in place by Government, and forbearance by stakeholders such as the Australian Taxation Office (ATO) and financiers.

All types of insolvency appointments decreased with Court liquidations decreasing significantly (67.8%). This can be attributed to the insolvency legislation relief associated with creditor statutory demand thresholds and timing deadlines that were in place throughout 2020.

Type of Appointment 12 months to Jan-20 12 months to Jan-21 % Change
Court wind-up 2,276 733 (67.8%)
Creditors wind-up 4,100 2,772 (32.4%)
Controller appointments 662 517 (21.9%)
Voluntary Administration 1,262 826 (34.6%)
Total 8,300 4,848 (41.6%)

The rolling twelve months figure of 4,848 corporate insolvencies compares to the 5-year annual average number of 8,582 (FY15-FY19)[3], representing a 44% decrease.

3. January 2021 insolvency reforms

Insolvency reforms were introduced by the Federal Government on 1 January 2021 which aim to reduce the complexity of restructuring options available to small businesses (liabilities less than $1m, excluding related parties) in the wake of the COVID-19 pandemic and anticipated increase in businesses requiring restructuring throughout 2021.

Two (2) new processes have been introduced:

Small business restructuring process

  • Seeks to provide a faster and less complex mechanism for businesses to restructure their existing debts.
  • Directors work with a small business restructuring practitioner to develop and propose a plan to creditors which can be accepted or rejected, and directors remain in control of the business operations during this process.

Simplified Liquidation

  • Provides a pathway for small businesses to allow faster and lower-cost liquidation.
  • Formal meetings of creditors are not held, liquidator investigations are limited (reporting to ASIC is only necessary if misconduct is identified) and the liquidator is only able to make one dividend payment. 

4. The Future of Government Support for Business & Key Considerations

In his recent address to the National Press Club[4], Australian Prime Minister Scott Morrison outlined the Federal Government’s intention to undertake a nation-wide rollout of COVID-19 vaccinations during 2021. In addition, Mr. Morrison shared some insight into the Federal Government’s 2021 plan regarding its approach to ongoing business support measures.

Mr. Morrison reiterated that the Federal Government was unlikely to continue the JobKeeper wage subsidy beyond its March end date and noted that all business support measures would be “temporary and accompanied by a clear fiscal exit strategy”.[5]

Some of the key issues facing businesses and the wider economy as government support measures end are shown below:

End of Government support measures

  • Government support measures are set to end throughout 2021. Most significant is the end of JobKeeper on 28 March 2021.
  • How will directors and their businesses plan and prepare for the withdrawal of this support?

Accumulation of distressed and insolvent companies which have not been dealt with

  • Corporate insolvencies were down significantly in 2020 when compared to prior year and historic averages over the long term.
  • Coupled with the end of Government support measures, will this result in an influx of businesses entering into restructuring processes in 2021?
  • What mechanisms are available to these businesses and what steps should prudent directors take?
  • How will business supply chains be impacted by restructuring actions taken by stakeholders?

Small business reforms

  • Will small businesses use the new small business restructuring regime? If yes, how will the regime be used and will directors take early decisive action?
  • How will the use of the new regime be received by creditors and other stakeholders and, in turn, how effective will they be in achieving the desired outcome?
  • What options remain for businesses that are not able to access these new mechanisms due to size or not fulfilling the requirements to use the regime?

Further outbreaks and lockdowns

  • How will businesses react to further lockdowns or state border closures if they occur?
  • How can restructuring mechanisms be used now by prudent directors to protect businesses against any further restrictive measures?
  • Consumer confidence in the travel, tourism, and hospitality sector will remain weak whilst border closures continue on an ad hoc basis.
  • Will vaccines be administered efficiently by the Government and will current vaccines remain effective against new variants of the virus?

Behaviour of key stakeholders

  • What approach will key stakeholders (e.g. ATO, financiers including the big 4 banks) take to dealing with distressed and insolvent businesses that are not viable without Government support?

Continued shift online

  • How does your business seize the opportunity with the consumer shift to online?
  • Have assessments been undertaken and projects initiated to act with conviction?
  • Are implementation projects funded and how does the business minimise downside risk?

5. Our view

Regardless of the size of the business or restructuring regime available, there are several considerations that are applicable in respect of all business restructurings.

Early action is essential

  • Given the significant reduction in Government business support measures in 2021, the time for action is now.
  • As part of business planning and monitoring for 2021, Directors and management should consider the impact on their business of withdrawal of Government support.
  • Not only should this review be internally focussed but it should also consider the potential impact on suppliers, customers and stakeholders as a result of the steady withdrawal of Government support throughout 2021.
  • A key focus should be on mental health and ability of the business owner to focus on building the new or fixed business vs the struggle to hold on to an underperforming business.
  • Early action enables businesses to address the key issues now and be well placed to capture the upside of a post-COVID-19 recovery, or alternatively be better prepared to weather future downturns that might eventuate.

Strategy and business planning

  • Documenting and establishing the direction of the business – this includes an assessment of where the business is and where it is going in light of the 2021 outlook.
  • Early identification and assessment of operational, supply chain and people issues, and how best to address them.
  • Stakeholder management strategy throughout 2021 for any key issues identified.

Funding requirements and limitations must be known

  • As part of strategy and business planning for 2021, a review of funding sources and options should be undertaken including with current financiers, alternative lenders, equity investment, or unlocking capital through working capital improvement measures.
  • Many funding options exist across alternative debt and equity funding solutions including inventory finance, sale and leaseback of assets, debtor finance, special situation funds and private equity.
  • Review of current Foreign Investment Review Board requirements and whether these measures will impact funding plans for 2021.

Safe Harbour as an early intervention tool

  • Safe Harbour provisions remain a powerful restructuring tool for directors of insolvent or potentially insolvent businesses.
  • Safe Harbour provisions under the Corporations Act give directors breathing space to assess options and implement a restructuring plan for non-performing businesses, all while being protected from the personal liability normally associated with insolvent trading.
  • The process allows the formulation of a well-documented restructuring plan with assistance from professionals who understand the options and alternatives, and provides the time needed to execute the plan.

Formal insolvency as a contingency / final option

  • After all avenues have been explored, and when considering all contingencies, formal insolvency appointments remain a necessary option for businesses in distress.
  • Formal insolvency appointments may be utilised as part of a broader restructuring strategy to enable the business to re-emerge stronger and with less baggage from the crisis.
  • Early and decisive action provides increased optionality for the business.

6. How Ankura can help

Ankura has experience advising boards, management and other stakeholders on navigating businesses through times of change and disruption. Taking early and decisive action and dealing with issues proactively increases optionality.

Corporate Advisory

  • Financial forecasting and modelling
  • Debt and capital structuring
  • Business review and planning
  • Valuation and debt capacity analysis
  • Business preparation for sale or IPO
  • CFO support services

Special Situations and Transactions

  • Carve-outs, divestments and equity sell down
  • Acquisition opportunities
  • Transaction management and due diligence
  • Debt refinancing
  • Scenario modelling

Turnaround & Restructuring

  • Company restructuring advisory
  • Lender restructuring advisory
  • Interim management
  • Expert witness and litigation support
  • Safe harbour advisory
  • Formal insolvency services

“21 Outlook – Adjustment in uncertain times,” Ankura Consulting, 02/08/2021; Olde, Quentin; Healey, Liam; Inchody, Preeti; Pittorino, Luke.

Sources

https://asic.gov.au/regulatory-resources/find-a-document/statistics/insolvency-statistics/

https://business.gov.au/risk-management/emergency-management/coronavirus-information-and-support-for-business

https://treasury.gov.au/coronavirus/business-investment

https://www.revenue.nsw.gov.au/news-media-releases/covid-19-tax-relief-measures

https://business.gov.au/risk-management/emergency-management/coronavirus-information-and-support-for-business/temporary-relief-for-financially-distressed-businesses

https://www.sbs.com.au/news/scott-morrison-s-plan-to-vaccinate-all-australians-by-the-end-of-2021

https://download.asic.gov.au/media/5921130/asic-insolvency-statistics-series-1-published-january-2021.xlsx

 

[1] This article does not provide any legal advice or recommendations.

[2] https://www.sbs.com.au/news/scott-morrison-s-plan-to-vaccinate-all-australians-by-the-end-of-2021

[3] https://download.asic.gov.au/media/5921130/asic-insolvency-statistics-series-1-published-january-2021.xlsx

[4] https://www.pm.gov.au/media/address-national-press-club-barton-act

[5] https://www.sbs.com.au/news/scott-morrison-s-plan-to-vaccinate-all-australians-by-the-end-of-2021