JobKeeper, the approximately $100 billion Federal stimulus program designed to support businesses affected by the COVID-19 pandemic, is set to expire on 28 March 2021. This comes after temporary insolvency relief measures also designed to help distressed businesses, including relief from insolvent trading and an increased statutory demand time and monetary threshold, concluded on 31 December 2020 (Temporary Measures).
For some companies, JobKeeper has provided a critical safety net to see them through the pandemic in Australia in order to adapt, restructure or recapitalise their business operations. For many companies, however, JobKeeper has been their sole lifeline keeping them from closure.
The government protections coming to an end will place considerable pressure on those companies already weakened by the COVID-19 pandemic, especially in the hospitality and tourism sectors. A wave of insolvencies has been predicted for some time but as of yet has not materialised. The end of the Temporary Measures in December 2020 did not produce any discernable spike in insolvencies and one can only surmise that JobKeeper has been the primary government protection holding back formal appointments.
It is now estimated that the end of the JobKeeper scheme may result in thousands of businesses failing in the coming months, pushing up to an estimated 250,000 people out of work.
The straw that may break the camel’s back
JobKeeper and JobKeeper 2.0 have been a lifeline for many companies and their employees. The Reserve Bank of Australia (RBA) has estimated that the payments helped to reduce total employment losses by at least 700,000. If the program is judged by the stated aim of preventing a wave of insolvencies, it is surely a success.
Whilst this is encouraging, many companies still carry the scars of the pandemic in the form of deferred liabilities on their balance sheet and an overall reduction in revenue. Many of those in the tourism and hospitality sectors, for example, continue to hibernate in the face of reduced trading conditions, with no incoming cash flow other than JobKeeper to pay the wages of employees. In such circumstances, a company is already likely insolvent as it cannot meet debts that are due and payable from other means.
The end of the Temporary Measures and JobKeeper could signal a period of above normal insolvencies as the 2020 backlog is cleared. The Australian Securities and Investments Commission’s (ASIC) latest insolvency statistics show a clear and significant reduction in insolvencies since the commencement of government support for businesses affected by COVID-19. For example, registered liquidators are reporting an average decline of 50 per cent in formal appointments for the first half of FY 2020/2021 compared to the previous corresponding period.
Suppliers and creditors also need to be conscious of the indirect impact of JobKeeper ending. Certain businesses not necessarily taking advantage of the scheme themselves may still experience pain as there will almost certainly be increased truancy in payments as corporate failures increase. Businesses with significant exposure to the hospitality and tourism sectors should also start considering their position on the assumption a number of their customers will permanently close post-March.
We note that the Federal Treasurer has foreshadowed post-JobKeeper support, which will be unveiled in the coming days, however at this point in time we can expect significant reductions in support available to Australian businesses going forward and it is likely any further support will be targeted to particular regions or sectors.
How should businesses prepare for the end of JobKeeper?
If directors are concerned that the end of JobKeeper payments may push their company further into distress, now is the time for directors to take proactive steps to protect themselves and their business.
Proactive steps include the following:
- engage qualified advisors and begin contingency planning;
- work with internal finance teams or external accountants to stress test cash flow forecasts without JobKeeper payments included and a reversion back to full rent payable;
- consider refinancing options for existing debts;
- engage in restructuring outside of formal insolvency processes, involving direct negotiation with individual creditors;
- enter (or re-enter) the formal safe harbour regime as prescribed by section 588GA of the Corporations Act 2001 (Cth) if the company satisfies the statutory criteria;
- consider whether the new small business restructuring process (SME Process) is appropriate and whether the company meets the eligibility criteria (i.e. debts of less than $1 million not including employees, amongst other things);
- until 31 March 2021 companies can register a declaration of an intention to access the SME Process with ASIC, if they meet the eligibility criteria. A company that registers this intention will have up to 3 months temporary restructuring relief (including insolvent trading relief) prior to appointing a small business restructuring practitioner; and
- the board may consider appointing a voluntary administrator. A voluntary administrator will provide directors personal protection and may allow a distressed business to be restructured or recapitalised with a view to maximising the chances of the business continuing, as well as providing a better return for creditors than an immediate winding up of the company.
For more detail on the above steps that directors can take, you can read our previous article here.
Whilst the conclusion of JobKeeper and other measures will be fatal for some businesses, those that proactively address any cash shortfall (whether forecast or actual) caused by the end of JobKeeper will be better positioned to survive.
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 toptier experience acting for a variety of stakeholders in distressed scenarios. For more information please contact Nicholas Edwards, Zina Edwards or Brit Ibanez.