We all know Jobkeeper is due to come to an end on 28 March 2021. For some businesses, this will mark the start of their COVID Safe journey albeit carrying some battle scars from 2020. Others, however, will be approaching the end of the month with great trepidation. These business owners will be asking; “What will happen after 28 March?”, and they will be expecting you to know the answer.

As trusted advisors, the role of accountants in helping these business owners assess the viability (now the biggest factor in determining whether a business has a future or not) and recoverability of their business cannot be understated. In undertaking this assessment, the accountant will be called upon to work with the owners to:

• Prepare cash flows
• Determine the likely time frame for a return to profitability
• Assess the ability of the business to pay down historic debt
• Consider the mental fatigue upon the owners that a protracted recovery may bring
• Potentially negotiate repayment arrangements with suppliers and/or ATO
• Assess solvency

For some, a refinance of existing lending facilities may be needed while others have a debt burden that, with a little help, can be overcome pending a return to viability. In this regard, consideration can be given to the newly announced revamped SME Recovery Loan Scheme.

SME Recovery Loan Scheme

This scheme is designed to support and assist businesses by offering finance to maintain and grow their business when JobKeeper ends. This will give them the ability to recover and invest for the future. This scheme, however, has strict eligibility criteria; the most critical one being that it is only available to viable businesses.

Other criteria includes:

• it only applies to businesses that have a turnover of up to $250 million and
• who received JobKeeper between 4 January 2021 and 28 March 2021.
• Both self-employed individuals and not-for-profit businesses are eligible. Businesses that have accessed loans in Phase 1
• and Phase 2 can also apply for loans under the scheme.

The mechanics of the scheme are:

• The Government will guarantee 80% of the loan amount
• Lenders are allowed to offer borrowers a repayment holiday of up to 24 months. Loans can be used for a broad range of business purposes but cannot be used to:
  • purchase residential property;
  • purchase financial products;
  • lend to an associated entity; or
  • lease, rent, hire or hire purchase existing assets that are more than halfway into their effective life
  • refinance loans where those loans are more than 30 days in arrears or where borrowers are insolvent
• Borrowers can access up to $5 million in total, in addition to the Phase 1 and Phase 2 loan limits
• Loans are for terms of up to 10 years, with an optional repayment holiday period.
• Loans can be either unsecured or secured (excluding residential property)
• The interest rate on loans will be determined by lenders, but will be capped at around 7.5 per cent, with some flexibility for interest rates on variable rate loans to increase if market interest rates rise over time

A note of caution

While the Government has increased its guarantee of the loan from 50% to 80%, personal guarantees are required to be provided. In the unfortunate situation where the loan cannot be repaid by the borrower, those parties who guaranteed the debt can be pursued personally (incl potentially into bankruptcy) for the amount outstanding.

Unfortunately, as the borrower cannot be insolvent to receive these loans, they are unable to be used to fund formal insolvency arrangements such as Deeds of Company Arrangement or the new Small Business Restructure process.

Specific Assistance for Tourism and Hospitality

The Government has also recently announced it will be providing interest-free loans to specific businesses that have been significantly impacted by COVID-19, namely the tourism and hospitality sectors. Details are yet to be announced however Treasurer Frydenberg has indicated these businesses would need to show they had been a viable operation in pre-COVID times.

Where the Company is insolvent but a turnaround is thought to be achievable over the longer term, protections against trading whilst insolvent actions are available for its directors via the Safe Harbour regime. In order for the directors to be able to avail themselves of the Safe Harbour Defence, they must be able to meet qualifying conditions. In the main, this is about being able to show the company has a viable plan which will see it return to solvency, and that plan is being regularly tracked by an appropriately qualified person. It is extremely important that accountants who are supporting clients as they tread the insolvency high wire have a clear understanding of the Safe Harbour regime or risk being embroiled in costly litigation down the track. Further information on Safe Harbour can be found here.

The Accountants Dilemma

So when advising your clients, the real question that will need to be answered is: “Is this business capable of being saved?”
For those businesses that started last year in financial distress and are continuing to carry the burden of debts incurred long before COVID was on the radar, pouring good money after bad may not be the answer. Even if further debt can be negotiated or existing debt renegotiated, if the core business is not viable and unlikely to ever be viable, then any further funds will only be a temporary solution.

For those businesses which are insolvent or for which the mental strain upon directors to steer the business through a period of recovery is too great, consultation with the Partners of Brooke Bird is recommended.

The individuals behind the ending of Jobkeeper

We will also likely see employees that were able to be kept employed due to Jobkeeper face unemployment. This is expected to lead to an increase in the number of people experiencing personal financial difficulties. As with those facing corporate financial difficulties, reaching out to your creditors as early as possible is important in maintaining positive relationships.

Facing financial difficulties is a very difficult and stressful time. Knowing the options available to resolve a particular situation is very important. Information in relation to personal insolvency can be found here or by contacting us for a confidential conversation.