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With the much-publicised further relaxation of restrictions starting on Monday in New South Wales and anticipated by the end of October in Victoria, businesses reliant on government support to maintain the status quo should be considering how they will manage with significantly reduced or no support.
For the reasons outlined below, there has been a discernible uptick in enquiry from businesses around how to deal with potential cash flow shortages in light of:
As the nation moves into the new reality of living with COVID, prudent boards and management must prepare their businesses for how they will manage in this new normal.
Government Support to Dry Up
The Federal government has announced that financial support will cease once a state or territory reaches 80 percent double vaccination. After this, businesses will largely be on their own, unless states provide additional support. Links to the Federal government’s media release can be found here for NSW, here for Victoria and here for the ACT.
New South Wales, for instance, has already tapered JobSaver payments from 40 percent to 30 percent of weekly payroll. When the state hits 80 percent (predicted to be 25 October 2021), the Federal government will cease contributing to JobSaver. The NSW government will continue to make payments of 15 percent of weekly payroll until JobSaver officially ends on 30 November 2021. A link to the NSW government’s media release can be found here.
In Victoria, while an additional funding package of $2.27 billion was announced in late September to support businesses until the state reaches 70 percent (26 October 2021) and 80 percent double vaccination (5 November 2021), the majority of support will cease after those targets are met.
What can companies expect?
At the same time as government support reduces and restrictions ease, it is safe to assume most businesses will not be operating at full capacity or indeed at pre-COVID levels. Ongoing restrictions, such as vaccination passports, restrictions on travel and limits on capacity will remain in place. Businesses in the hospitality industry for example, will face reduced cash flows and staffing shortages in the short term. Further, there will be ongoing uncertainty arising from infection episodes at venues, with staff potentially forced to isolate and their businesses required to shut for a ‘deep clean’. It will be hard to compensate for these one-off events, with businesses unlikely to be able to pivot to take-away for one weekend only. Whilst many businesses have shown ingenuity and courage during the lockdown period, moving to take-away, home delivery or even cook-at-home meals, over the coming weeks they will be reverting back to ‘normal’ and it will be difficult to move rapidly back to off-site options once steps are taken to re-open.
Directors must now be considering how they will steer their companies through these lulls in revenue and contemplate whether the company will still be in a position to pay its known debts at some point in the future.
Easing of support measures including rent relief
As well as government financial support ending, directors must also prepare for other supportive COVID regulations and legislation ending in the coming months. For example, the Retail and Other Commercial Leases (COVID-19) Regulation 2021 (NSW) only remains in force until 13 January 2022, after which landlords will not be obligated to engage in discussions around rental relief. This means that come mid-January 2022 many commercial tenants will be back paying full rent and no doubt the deferred components of the COVID rental relief will begin to become payable. It doesn’t take much to imagine a retail business struggling to pay full rent on top of staffing costs given a potentially heavy leasehold footprint and with the very real prospect of reduced foot traffic as a result of a structural shift to online shopping.
Increased debt recovery by ATO and others
Further, the ATO, which has otherwise been relatively passive, has made a number of public declarations it will begin to levy penalties once again and look to recover outstanding amounts. Albeit the Commissioner has made clear he does not want to destroy businesses and it will be soft engagement in the short term, the ATO will often be one of the largest creditors for small to medium sized businesses and many of those debts are due and payable today. Further with the debt owing to the ATO growing to record levels and many businesses using the ATO as an effective line of credit there will be an inevitable time when such monies need to be recovered.
It also goes without saying that lenders who have been otherwise accommodating will begin to want to see a return on their capital with payment holidays ending and potential recovery action looming for businesses that are unable to meet interest payments.
Even if, having conducted a thorough review, directors are satisfied with their company’s own financial position, companies will not be immune to the risks of counterparties’ financial situation. Prudent directors and management must consider the risks presented by their exposure to major customers and suppliers. If major customers or suppliers are struggling to resume usual levels of trade, businesses can be exposed to significant cash flow and credit risks and need to be aware of their rights and options if there is a risk of an insolvency situation in their network.
What should directors do now?
Directors planning for the coming months should prepare a realistic short- and medium-term cash flow including assessment of all debts that may soon be payable including outstanding ATO payments, full rent and staffing costs as well as deferred rent. Directors must act as early as possible to preserve their businesses and avoid unnecessary distress.
If a director is of the view their company is likely to experience a cash flow shortage in the short term, now is the time to consider taking proactive steps. Companies who forecast they will have liabilities that cannot be met should consider:
Further detail on pre-emptive steps that may be taken by directors is detailed in our previous article here.
Need for Action
Whilst many of us are elated at the easing of restrictions and are in the process of booking restaurants, planning outings and looking forward to catching up with family and friends, businesses need to take a realistic view of what the immediate future holds. Industries like hospitality, retail, logistics and tourism that have experienced the worst of the lockdown restrictions and have relied on government support are more vulnerable to this forthcoming transition period. There are likely to be a number of twists and turns yet as we return to ‘normality’ but we do know for sure that government support measures are winding back as we hit vaccination targets and any remaining measures will be unlikely to sustain businesses. Directors, management and businesses will be best placed to survive this period if they undertake an honest review of their forward-looking position and take action now.
We recommend reaching out for expert advice should you have a query, or wish to consider your options, either as a company looking to understand its options or as a creditor. The Hamilton Locke restructuring and insolvency team have a broad range of top-tier experience acting for a variety of stakeholders in distressed scenarios.