Friday, 20 March 2020

Without deep co-operation between government, business and stakeholders we are heading for a death spiral of company failures.

The Federal Government and the business community urgently need to flatten the bankruptcy curve to prevent catastrophic damage to Australia’s businesses. Ultimately, it is people’s jobs and livelihoods at risk.

A tidal wave of business failures threatens to do more damage to more people than the health impact of coronavirus.

Thousands of businesses have been hit with an overnight disappearance of revenue with no reduction in fixed costs. Nothing like this has happened before.

The Commonwealth has announced important measures for small business and more is likely to be on the way.  But the big numbers are in the medium and large businesses.

The coronavirus health policies are aimed at flattening the curve of infection, so the peak is later and more subdued, making the pandemic more manageable. The same must apply to business policy.

Here’s a few measures that can be considered to help flatten the bankruptcy curve:

  1. Provide Government-backed 1 per cent “Coronavirus Unsecured Bridge Loans” for 1, 2 or 3 years to businesses that have temporary cashflow problems but a proven track record of viability before the coronavirus.​

  2. Provide similar Coronavirus Unsecured Loans for smaller financial institutions (bank and non-bank).

  3. Identify ways to release the vast amounts of cash in superannuation to support business cashflows.

  4. There needs to be a discussion about rent, holidays and employee breaks comprising a mix of leave, unpaid leave, stand-downs and job-sharing. The terms of the Qantas stand-downs announced yesterday were an example of a strategy in these unique times; no-one can expect businesses to carry normal overheads when revenue dries up.

  5. Change Australia’s insolvency laws to give directors more scope to ride the storm and restructure. Under present laws, perhaps the toughest in the world, directors face personal liability and jail if found to be trading while insolvent. We need to encourage turnaround and restructuring.

  6. ATO policy changes regarding Director Penalty Notices and the personal liability of directors.

  7. Change the Fair Entitlements Guarantee (FEG) Scheme to allow payments to be made to workers when companies are in Administration. At the moment, eligibility is restricted to companies sent into liquidation. FEG policy should encourage businesses to be saved.

There needs to be special assistance for industries most affected by the virus. Help has already been announced for the airlines; they will fail without government intervention. Other high-impact industries include sport and entertainment where there are likely to be fatal consequences. Our universities are probably already technically insolvent because of the loss of foreign student fees. Retail is staggering and so are all industries that rely on people movement and on-site attendance, including cleaning, restaurants and personal services, such as beauty salons. These businesses employ an enormous number of everyday Australians who we need to support.

There should be an accord between Government, business and unions based on an understanding of shared pain rather than destructive drawn-out negotiations. 

Open, confronting conversations will be necessary. Socialising the impact must be the key; using every possible mechanism will be critical to success.

Unless there are material and ground-breaking collaborative solutions between business owners and their cost base (employees, landlords, lessors) many businesses will find themselves in a death spiral. We must go hard and go early.

Mark Korda is partner and co-founder of KordaMentha. He has advised on some of Australia’s biggest restructures over 40 years.

This article was originally written by Mark Korda for The Australian Financial Review.

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