Directors under pressure, need to take action NOW!


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Directors under pressure, need to take action NOW!

With COVID wreaking havoc both financially and emotionally, what do directors of struggling companies do to ensure they are not in the firing line when things start to normalise?

During these difficult times, directors are under pressure to refocus and make important decisions on all aspects of business, such as corporate strategy, funding and capital requirements.  These decisions need to be made carefully and in a timely manner to ensure that they are reflecting their duties to act with due care and diligence and in the best interest of the company and shareholders.

Presently many companies are merely treading water or are just hanging on by a thread.   But this time around it is different, the Federal Government has not invoked any special insolvency provisions to protect directors. Directors need to consider their position, especially in relation to insolvent trading provisions.

Consequently, they have neither the money nor the appetite to take costly legal action to recover outstanding debts, especially given the prospect of little recovery from their debtors who are likely to be in an equal or even worse financial position.

Outstanding debts need to be addressed  

COVID-19 has had a huge impact to our economy, and it is not clear how much longer it will continue; however, it is inevitable that the tide will turn and the Australian Tax Office (ATO) will become more aggressive in recovering its burgeoning outstanding debts.

In a report recently published by the Inspector-General of Taxation, outstanding collectable debts owed to the ATO are at record levels, having blown out to $34.10 billion for FY20.  This figure was under $20 billion just 5 years ago.  With a government carrying its highest level of debt ever, we know this can only go one way.  They will be very keen to actively start recovering much needed revenue.

Interestingly, the above debt is split with:

  • small businesses accounting for about 62% of this debt (over $21 billion)
  • individuals accounting for 20.6% (over $7 billion)

In terms of industry sectors:

  • construction is by far the biggest debtor, accounting for about 47% of the collectable debt
  • professional services represent about 12.5%
  • while accommodation and food services account for about 11.5%.

However, it is worth noting that these figures are for the 2020 financial year. A year that has had the benefit of government support, primarily Jobkeeper, and also other legislative protections, grants etc. These recent lockdowns have been more pervasive, and it is expected that the hospitality, retail, and food sectors will be more significantly adversely affected.

So, what does this mean for directors?

When the ATO ramps up collection efforts, companies will be increasingly put in a position where they will need to either pay the full debt immediately or consider the alternatives.

If they are not able to collect outstanding debtors (and let’s face it, they are probably going to be in the same boat), then they may not be able to meet the ATO demands once they are made.

If a Company’s financial position is rapidly deteriorating and a director feels they may be heading down this road, they should not wait to be backed into a corner and be placed in a pressured position with limited options.

In this situation, insolvent trading laws state that their personal assets could be exposed to meet the claims of the company’s creditors.  This would be the worst-case scenario and can be avoided if help and advice are obtained at the right time.  Simply put, the alternatives and options that are available reduce with time and by any action being taken against you.

 ATO’s new approach

The ATO has recently presented at various industry bodies indicating a move to increase debt collection activity. The ATO’s collection team has stated that the present approach will have to change, likely when restrictions lift.

Company directors need to be proactive. If there is a significant ATO debt, they need to reach out to the ATO and consider entering a payment plan.

If this is not possible, then urgent advice from an insolvency practitioner is needed to determine what alternatives are available.

To do nothing and just wait for that legal letter reduces the options and risks the personal assets.

Directors need to take control and act in the best interests of the company and all stakeholders.

Should you wish to talk to us to understand your position and what options are available, please contact Riad Tayeh on 02 9633 3333 or mail@dvtgroup.com.au.

dVT Group is a business advisory firm that specialises in business strategy, turnaround, forensic investigations and insolvency (both corporate and personal).