Jirsch Sutherland and CBA present: Flattening the Insolvency Curve (Session 1)

00:08
Good afternoon, everyone. On behalf of Josh Sutherland, with the proud support of CBA, I would like to welcome everyone to the first of our three webinars, Flattening the Insolvency Curve, a how-to guide for business advisors. This webinar series is designed to give you some tools to help you assist your clients in making good decisions in the crazy new world we find ourselves in. As most of you are aware, Josh Sutherland,

00:38
is a national insolvency and business restructuring firm. We specialise in assisting individuals and corporations that find themselves in some form of financial distress. All businesses are impacted by COVID-19,

00:53
whether that be the challenge of working through a pandemic under increased demand conditions, such as food suppliers and household good retailers, or situations where the business demand has been slashed due to operational restrictions enforced by legislation or government policy or market and client sentiment. Professional service providers are not immune to the latter, with the majority of providers finding their clients’ cashflow strain impacting their own businesses.

01:22
Indeed, we have noticed that the rate of insolvency appointments has dropped significantly as the uncertainty about the future, positive or negative, causes an environment of deferral and therefore procrastination. Our concern is that this will lead to a spike in the insolvency curve. Now, what is the insolvency curve, you may ask? Well, as shown here, the impact of either panic,

01:44
or blind optimism in bailout packages will create a spike in insolvency appointments, which may leave good businesses otherwise capable of a successful restructure above the curve and without a hospital bed, as the timing of their restructure plan works against them. As advisors to businesses, we all have a major role to play in flattening the curve by calming the panicked and rationally guiding the blindly optimistic.

02:13
As insolvency specialists, we have considered how our new rapidly evolving world is affecting businesses. We believe the majority of businesses negatively impacted by the COVID-19 crisis will fall into three categories shown here. The majority of advisors, whilst feeling the impact themselves, will be worried about their clients.

02:33
Over the next three weeks, along with reviewing the changing economic and legislative landscape, we will unpack three scenarios that we believe will assist advisors when speaking with their clients that have been adversely impacted by COVID-19. We are very fortunate to be joined by Ryan Felsman from CommSec. Ryan is a senior economist with CommSec and he’s going to talk to us about the rapidly evolving economic conditions we are facing.

03:00
We will also hear from Stuart Free, one of my fellow partners from our Newcastle office, who will explore the evolving stimulus packages being provided by the government in the context of our first business scenario, the neutral balance sheet. And last, but by no means least, we will hear from Chris Baskerville, one of my partners from our Brisbane office. Chris will explore the solutions that are available to our first business case scenario.

03:26
Please log any questions you have on the Q&A board and we’ll address as many as we can at the end, subject to time. Ryan, over to you. Thank you, Andrew. Good afternoon, everyone. Thank you very much for joining us. I hope you’re safe and well. And of course, I’m going to provide a very brief economic update in this presentation with a strong focus on the business environment, certainly impacted by the coronavirus pandemic.

03:55
Looking at my first slide, I’m an economist after all. Economy 2020, the new abnormal. I’ve got my coronavirus tracker chart on there. And the latest numbers, of course, are 1.43 million people or cases of coronavirus around the world with about 82,000 deaths. So certainly the pandemic is the worst since the Spanish flu. And really, it’s going to have a significant impact on both the global and Australian economy. Now, moving on to the next slide, in terms of the global backdrop,

04:25
Certainly what we have seen really is a significant impact on the global economy from the pandemic. So we began the year in pretty good shape. Of course, Australia had its bushfire tragedy. But globally, we saw better economic growth momentum on the back of easing geopolitical tensions, particularly between the United States and China. Everyone’s forgot about the trade war that went for two years. And of course, that now seems like a distant memory.

04:52
The global economy has suffered multiple shocks in the first few months of the year, of course, from the spread of COVID-19 outside of China to the collapse of oil prices and the unfolding realisation the virus has rapidly broke out across Europe and the United States and have obviously hit our shores here in Australia. So with economies locking or shutting down, the global recession involving Australia is now our base case.

05:17
One of the sharpest bear markets in terms of equity corrections took place in the March quarter as well. The biggest correction since 1987. So a lot to contend with at the moment. In terms of the global economy, what we’re seeing as far as the data is concerned so far is

05:34
Bloomberg actually has a tracker of high frequency data indices. And what we have seen in the March quarter so far is the first contraction since the GFC take place. The global economy is actually contracting on an annualized rate of 0.5% already. That’s down from a positive number of 0.1% in February and 4.2% at the start of the year. So we certainly have lost momentum in economic activity. And of course, shutdowns, supply disruptions

06:04
And certainly what we have seen is Chinese economic growth really fall off a cliff as well at the same time. So with lockdowns deepening across the world, we predict the world economy will contract by about 2.6% in 2020. And that’s a much deeper contraction than we saw in the GFC back in 2008-9, where we saw an economic contraction of 0.1%. We’re expecting to see particular weakness, of course, is really in the developed world.

06:29
Places like the United Kingdom, the Eurozone in the United States expecting to see growth contract by about 7% in 2020. And then of course, what we’re forecasting here in Australia is for a contraction of 3.4%.

06:42
And China’s growth will decelerate from 6% annualized to just 3%, so effectively half. So that’s going to have a massive impact given that China represents about 16% of global growth in terms of its contribution. Of course, policymakers have unveiled a massive fiscal and monetary stimulus around the world.

07:01
developed central banks have certainly looked to cut interest rates virtually to zero we’ve seen a flood of short-term funding markets to ease credit and obviously borrowing and lending stresses as well and that’s really to stop the health crisis morphing into a financial crisis at this point in time it’s more of an economic crisis rather than the financial crisis but

07:19
What we have seen is the US Federal Reserve cut interest rates by 150 basis points. United Kingdom, the Bank of England, they’re 65 basis points. And our own Reserve Bank of Australia has announced $19 billion worth of stimulus measures, including cutting rates by 50 basis points to a record low 0.25%. It’s also targeted the three-year government bond yield at 0.25% to try and get borrowing costs down. And has announced extensive loan facilities and bond buying programs, quantitative easing, if you like, for the very first time.

07:49
So unprecedented stimulus around the world, pretty much 3% of global growth, and certainly that GDP number. So it’s a very significant stimulus that we have seen deployed by central banks and governments, and really the US, UK, European, and Australian governments are really targeting unemployment relief, deferred taxes for businesses, as well as wage subsidies for workers. So that’s around 5% to 10% of GDP. So very sizable stimulus.

08:16
Now, here in Australia, we’re forecasting a recession. You can see those forecasts there. Certainly, this will be the first recession in at least 29 years. The last one we saw was back in 1991. And really, the consumer situation will be very, very weak going forward. So we had a very weak backdrop going into 2020 already. But we think that consumer spending will certainly contract due to social distancing and rising unemployment. And also, investment will decline in this environment. We have seen the Morrison government and also

08:45
with the Reserve Bank combined announced $320 billion worth of stimulus, and that includes the government’s $130 billion wage subsidy package called JobKeeper, where people are paid $1,500 per fortnight, and that’s really to tie in workers with employers, keep them really tied together,

09:03
And certainly when businesses come out of hibernation, they will look to reemploy those temporarily or stood down workers. But we don’t think that’s enough to prevent a recession. We think that, of course, an uncontrolled outbreak is a preeminent risk. We are seeing a bit of a flattening of the curve taking place in Australia, which is good news. But of course, households have hefty debt burdens in this country.

09:25
So we expect in the June quarter, the Aussie economy to contract by 7.5% and by 3.4% in 2020. Of course, household consumption, business and dwelling investment, together with net exports, particularly with weakening out of China, our biggest trading partner, we expect that to have a knock-on effect to the Aussie economy, but public consumption, certainly government spending, will be a support. So we expect the economy to remain partially shut down until at least the September quarter,

09:53
And of course, colder weather will probably enable the transmission of COVID-19. But some restrictions will probably ease into September. So we’re penciling intensively at this stage. Forecasting is very difficult in this environment. Growth of around 2.5% in the third quarter. So really, what we’re expecting to see is a bit of a pickup going into the December quarter as the pandemic eases. So our central scenario is for a U-shaped recovery

10:19
particularly with growth of about 3.5% in that final quarter. But of course, the biggest impact really from a social standpoint and as targeted by the government is around the jobs market. Yesterday, we saw ANZ job ads fall by 10.3% in March. That was the biggest decline since the GFC. We’ve seen over 120,000 Aussie workers has furloughed or stood down so far.

10:42
predominantly in the airline and retail sectors. Sectors most exposed to the downturn represent about 23% of the labour market, so roughly 3 million people. And of course, there are about 2.5 million workers that have basically worked with their employer for less than 12 months. So they’re not covered by the wage subsidy program. And that includes 950,000 casuals. So

11:04
There are some people that fall out of the safety net and it’s up to the government really to address that issue. So our forecast in the June quarter is for job losses of 580,000 combined with falling population growth. We think population growth will ease from 1.5 to 0.6%.

11:20
Of course, with travel bans in place, we think workforce participation will fall by about 1.5 percentage points. It’s around 64%. We think the unemployment rate will probably peak around 7.8% in the quarter. But as the economy comes online again towards the end of the year, 250,000 jobs could be added. That’s very much a ballpark round number based on our modelling as those restrictions ease. So we think the unemployment rate will come down somewhat, but certainly not as bad in our view as in 1991.

11:50
where we saw the unemployment rate of around 11%. Of course, the biggest impact apart from the jobs market is to the services sector. And what we have seen already there is a significant contraction. The Commonwealth Bank has a purchasing manager index where we basically survey Aussie businesses and find out how they’re going. And that purchasing manager index collapsed to a record low in March at just 38.5 points. You can see that in the chart in the bottom right-hand side.

12:15
and businesses reporting a downturn in new sales, new export business, reduced selling prices, lower consumer demand, and deteriorating business confidence. So business confidence is currently around six-year lows. And then we saw the ANZ Roy Morgan Weekly Consumer Index last week fall to a record low, lowest since 1973. So it’s a very, very bad situation for the services sector and consumers more broadly. Now on slide three,

12:40
I’m really going to give you an update on the consumer backdrop here before I move on to businesses. And what we have seen so far is a significant impact on those sectors of the economy which are really focused on consumers like retail trade, accommodation and food and the like. And what we have seen in terms of our predictions, of course, is that the key part of economic growth or GDP growth, of course, is household consumption. That’s about 60% of GDP.

13:06
And we think that what will happen in the June quarter with the restrictions, social distancing, self-isolation in place, we think that household consumption will collapse by about 11% over the quarter. That really dragged the economy down. We think that in terms of our forecast for spending, restaurants and cafes will be limited.

13:25
and basically just to just take away which is which we’ve seen since march and our forecast is for activity in this category to sit about a third lower than its normal level in the june quarter of course recreation transport purchases of vehicles clothing are all expected to fall very sharply and that’s reflected in our credit and debit card data so we’ve been looking at these numbers

13:46
Over the course of the last few weeks, trying to ascertain a high frequency level, the impact on the consumer and our analysis shows that nominal spending was down by 13% over the week to April 3. And it’s 15% lower than a year ago. And you can see that spending on services has really fallen sharply.

14:04
Spending on food last week did fall by 12%, but we did see a significant lift in spending on food due to stockpiling and still up 4% compared to a year ago. But we have seen limitations around grocery purchases, toilet paper, for example, and also farmers and supermarkets have reassured Australians at the same time that there’s not a shortage of essential items out there. So that probably has led to a bit of a fall there. Of course, we’ve been self-medicating with alcohol. We have seen those

14:32
spending on alcohol 433% last week. We have stocked up and certainly we’ve got a lot of booze in reserve probably in our houses at the moment.

14:41
But what we have seen is very strong spending on alcohol up until that point. Social distancing requirements around gatherings of two or more people have certainly been put in place. And that’s really stymied spending on alcohol for parties, for example. We’ve also seen a drop off in spending on clothing and footwear down by 60 and 56% respectively. People are choosing to stay at home, save their coin, don’t need to look good, apart from these webinars, of course. And then spending on household furnishing and equipment remains strong.

15:08
With us stuck at home, we’re spending money on home maintenance in particular. So we did see a fall of 7% last week, but it’s up 20% over the last year. So Bunnings have benefited from those home renovation projects. But spending on medical and health perversely is down by 27%, recreation down by 10%. They posted quite large falls last week. Moving on to the fourth slide, really the focus of this seminar, of course, is on businesses. So

15:35
What we’ve identified at Commonwealth Bank really is a bunch of sectors and industries where we think the economic shutdown will really impact businesses in particular. We’ve seen references to job losses, cash flow issues, certainly social distancing, working from home, all those types of issues.

15:52
And really, we’re expecting to see the biggest impact, of course, is on those sectors of the economy. Around 25% will be hit very hard. If you look at that chart there, you can certainly see the arts and recreation services sector, rental, real estate sectors, wholesale trade, accommodation and food services. So that 25%.

16:09
of the economy will be shut down. The OECD is forecasting that the partial or complete shutdown of the Aussie economy will reduce GDP to the tune of around 22%. So really these lockdowns are going to have a big impact on these industries. I’ve identified industries most at risk. You can see they very much

16:26
vary from agriculture all the way through to manufacturing to air transportation and even tertiary education and residential care services and industries least at risk identified from printing and petroleum all the way through to furniture and other manufacturing, motor vehicle parts and even defence.

16:46
These slides will be provided to you guys, if you wish, at the end of the presentation, so you can go through all those sectors at your own leisure. But certainly if we move on to the next slide, this will really focus on some of the data and surveys that we’ve seen so far. So in the latest figures I have to hand, about 90% of Aussie businesses have reported that they were still operating last week. And that ranges from 90% of small businesses, they’re the biggest contributor to the Aussie economy and the most,

17:13
to 95% of large businesses with 200 people employed or more. So really the biggest impact has been on smaller businesses thus far. And by industry, less than half of businesses in the arts and recreational services sector are operating. So if you look at the chart in the top left-hand side there, you can see those particularly impacted industries operating at a lot less capacity than they were a few months ago.

17:38
And you compare and contrast that to say professional services, for example, accountants, 96% in that industry, professional scientific and technical services are currently operating. So there are wide discrepancies and variations across the Australian economy, of course, and certain industries are more impacted than others in particular, but

17:57
About 10% of businesses have reported, of those 10% of businesses that reported that aren’t trading, 70% have reported that’s due to COVID-19 and 84% of those are reporting the pause is due to the introduction of restrictive government measures. So really the government measures have had a big impact on the way businesses are operating.

18:16
About 45% of those pausing operations did so due to weaker conditions, particularly demand for products and services in particular. So in terms of the largest impacts on businesses due to COVID-19, two-thirds of Aussie businesses are reporting a reduction in turnover or cash flow. You can see that in the bottom left-hand chart. A number of businesses are reporting an increase in turnover of cash flow due to going online. So we have seen about 4%.

18:43
actually announced an increase in turnover cash flow. So obviously the majority are experiencing a reduction in turnover and cash flow. Really what we are seeing at the same time, certainly a reduction in demand for products and services at 64%. 48% is attributable to government restrictions and 29% identifying certainly difficulty in sourcing goods and services and raw materials. So those supply disruptions are having a big impact. There are 11%

19:10
They have said they’ve got an increase in demand for products. So we are seeing some opportunities there for some businesses at the same time. According to a survey from Deloitte, 44% of private business leaders flagged that cash flow revenue is the biggest single concern right now. So we’re seeing this Bureau statistics survey come off bank data and Deloitte’s data all showing the same thing.

19:32
By industry, if you look at the chart in the top right-hand side, about 90% of businesses in accommodation and food services are reporting that government restrictions are certainly having an impact on their operations at present. So certainly those sectors are having a big, big impact as far as those restrictions are concerned. Now, looking at workforce arrangements, according to the Deloitte survey as well, staffing HR redundancy matters resonated as the biggest concern for 25% or a quarter of all Aussie businesses surveyed.

20:01
And the ABS survey, the Bureau Statistics Survey, shown 47% of businesses have already made changes to their workforce arrangements. So there’s been a temporary reduction in work hours reported by about a quarter of businesses with 19 or less employees, so mainly self-protect practitioners. Two in five businesses with 20 to 199 employees.

20:22
and a third of businesses with 200 or more employees. So really the bulk of companies and businesses and industries are basically changing the way their workers operate in this environment, working from home as well. But what we have seen is certainly some laying off of staff, temporary furloughing in particular. So basically where we have seen some industries that have temporarily increased their staff hours, of course, are education and training at 12%, healthcare at 9%, and retail trade.

20:51
at 8% mainly because of supermarkets and government support and administration at 5%. Now moving to the final slide, sorry, I’ve been quite quick here, but in the interest of time, I’ll get through the final one in terms of

21:05
identifying really where there’s opportunities for business. So it’s not all doom and gloom at the moment. There are 26% of businesses surveyed by Bureau of Statistics that have actually brought forward their business investment plans. They may see it as an opportunity. The product and process related changes, such as changing the method of delivery

21:24
Certainly for products or services, moving to online services was reported by 38% of businesses with only 10% reporting having introduced new products. So really what we are seeing in terms of the biggest impacts is 38% of businesses have changed their method of delivery.

21:41
Some have shifted online. Some have introduced new products, about 10%. Importantly, we have seen 38% renegotiating their property rental and lease agreements, so changing their financial arrangements and deferring loan payments. So certainly we have seen quite dispersed outcomes when it comes to how businesses are responding to COVID-19. Thanks for your time. Thank you, Ryan.

22:06
Well, there’s a lot to digest amongst that for everybody. Some surprising elements I thought that I noted was the medical and health profession down 20%, which is probably a little bit outside of what I was thinking might have been going on. But in so saying that, I was recently appointed to a dental profession

22:30
um surgery uh which is suffering from a massive downturn in revenue by virtue of these restrictions so i guess perhaps that’s not as um uh not as out of the uh world as what we might have thought it was anyway um

22:45
It looks like we’re in for a tough quarter two based on the CBA forecasts. Stewie, do you want to tell us a little bit about how the government’s responded and potentially how that may assist the scenario that you’d like to talk about this week?

23:02
Thanks very much, Andrew. Ryan’s a very hard act to follow, but I’ll try my best here. Over the next three weeks, we’re going to be looking at three different scenarios. The first scenario being basically a company that has a neutral balance sheet. So if we can just have a look at the next slide. We’ve made the assumptions that it has, it’s either neutral or in positive net assets. It has no Division 7A loans, which would usually be an issue with any sort of insolvency proceedings.

23:32
Their tax lodgements are done on time and they have a minimal tax debt, but they have low liquidity, so they’re asset rich.

23:40
Their debtors are in line with trade creditors and they’re talking with them at the moment. The complicating factor is they’ve probably got some leased equipment out there. So this is the scenario we’re going to look at of how the stimulus packages A and B, which is package B is currently going through the parliament as we speak, how we’ll address this company. Next slide.

24:04
So the federal stimulus, I’m actually going to deal with the second one first. It’s the JobKeeper payments. We’ll wait to see who’s actually in and who’s out. There’s talk about casuals, there’s talk about trusts, there’s talk about shareholder dividends, all the sorts. I’ll have a summary of that available in the next couple of days.

24:23
But for business owners, the key element of this is that the benefits accrue to the employer, not the employer. You’re basically a check cashing facility. You have to be able to fund at least a fortnight’s worth and it gets paid in arrears. It gets paid starting from the 1st of May and it’s applicable from mid-March. Sorry, from the 30th of March to the middle of April is the first fortnight that it’s dealing with.

24:51
If employees get paid less, then of course you can top them up for $1,500 per fortnight. Next one.

25:00
And then there’s the ATO cash flash. With the scenario that we’re talking about where there’s minimal tax debt, this company benefits from it. But is it enough? So there’s boost one and boost two. It applies and overlaps between the BAS lodgements. And I’ve only dealt with those that are dealing with monthly BASs. If you’re dealing with quarterly BASs, treat it the same, but the timing’s a bit different.

25:24
Basically, you’ll get 100% of your PAYG withheld up to a limit of $50,000 in the first tranche, and then you’ll get exactly what you got in the first tranche and the second tranche over four equal monthly payments. So next slide. Treasury gives an example of a business that employs 12 people, and it’s the average salary, which is the key, of $90,000 across a workforce with a monthly PAYG bill of 15 grand.

25:53
That’s what it reports on its March BAS. Then on its March BAS, it gets a credit of $45,000, which is three times the monthly hit. Upon the lodgement of the April BAS, which they report again, 15,000, they’ll get 4,976, which takes them up to the $50,000 limit. In May and June, they get nothing. And then the next one, next slide, please. And then in tranche two, they got 50 grand in tranche one,

26:22
they get 12 and a half grand for payments. Because they don’t have a tax debt, it’s going to be cash in hand, but you can see that it’s spread over quite a period of time.

26:36
If you do have a tax debt, it’s a credit against it and the cash won’t be readily available. Next one, please. And I am running through this a bit quickly just because I’m cognizant of time. There are also a lot of other stimulus packages out there. State-based packages focus on payroll tax relief, so refunds and deferments. Some are giving a 25% discount at the moment.

27:00
The Western Australian government has got a grant for $17,500 to all businesses habited in WA. New South Wales has a $10,000 grant for all businesses habited in New South Wales if they employ under 19 people. And it can prove that they’ve been affected and have an annual payroll of less than $900,000.

27:24
What we’re waiting to see today is how the landlord issue is going to be tackled for commercial tenants. So there’s rent relief and deferment. Really, the relief is in line with the downturn of income moving forward. So if you’re expecting a 50% discount on your turnover from this time last year, you can expect a 50% discount on your rent. But you might be deferring

27:52
The rent moving forward, the remaining 50%, that can be the sting in the tail at the back end. So we’re waiting to see how that mechanism actually plays out. Next one, please. So…

28:09
Taking that into account, and I know I have rushed it, the net asset position for the company that we spoke about at the start has deteriorated due to accruing liabilities such as employees’ rent and leases. It gets the benefit of a $100,000 cash injection, but it still has some liquidity issues. If it wants to try and sell some of its assets, who’s got the cash to buy it? Some do, some won’t. Depends heavily…

28:37
in the industry in which it’s working or which it’s operating. They’ll be heavily reliant on the pipeline of work opening up and the major complication is going to be the access to capital to commence trading. The federal government has tried to put the business community into hibernation. That only works if you take a grizzly bear analogy that he spends all of spring

29:02
gorging himself to make sure he’s got enough reserves to get through and then power on after the hibernation ends. This happened so fast that businesses weren’t able to pre-prepare for something like this. So it’s really not a hibernation, it’s just a pause. And do we have the, or do business owners have the ability to start up again? And at that point, I guess it’s on to Chris to talk about the options that are available. Thanks very much.

29:32
Yeah, thanks, Julie. Appreciate that. I mean, certainly that’s a very valid point around the fact that this sort of struck everybody without a lot of notice. And I think this concept of a pause leads into a discussion around

29:50
forgiveness versus deferral and how that impacts businesses and potentially what business owners or directors need to be thinking about next. So, Chris, I think you’re going to give us a bit of a few tips in relation to what people could potentially be doing to sort of deal with a lot of these complications and utilise some of these stimulus resources.

30:12
Thanks, Andrew. For those of you listening in, you’ll be pleased to know I’m the last speaker and this is the last slide. So I’m going to run through these final points pretty quickly. But we came up with this analogy of DIY. In other words, how would you solve the problem yourself? Now, when you think about DIY at home, home renovations, you can still do those issues yourself. You just call in experts to do key specific things, like you call in the concreter to build your driveway, you call in the pool guy to build your pool thing.

30:40
So this is why we’re saying here’s our DIY advice. Now, it sounds really crazy that you come and join a professional service firm. The first point they say to you is just do something. But it’s not as crazy as it sounds because when the coronavirus really was a epidemic about to become a pandemic, well, governments went to the World Health Organization and said, well, what do we do?

31:01
And World Health Organization basically said in a press conference, do something is better than doing nothing. So on the concept of do nothing, I turned to my learned colleague, Winston Churchill, who basically said, one ought never turn one’s back on threatened danger and try and run away from it. If you do, the danger will double. If you meet it without flinching, the danger will halve. In other words, we have to meet this problem head on. So you do something. Cash is king.

31:27
I think it’s no secret. Brian just pointed out cash flow is number one key concern for most businesses. Businesses are cash flow. That’s it. Once the cash flow stops, you’ve got no business. I think Dylan Hammer was the CEO of Volvo in 1988, just after the 1987 stock market crash that allegedly coined the phrase cash is king. And here we are with another stock market crash. We’re saying the same thing.

31:50
What are we seeing? We’re seeing businesses draw down on finance facilities. So we’re seeing people, if you’ve got a overdraft facility, if you’ve got any funding arrangement where you put capital in reserve, they’re actually being drawn down and converted to cash because the thinking is, I would rather the cash in my bank account than lean on a facility that might not be there the next day. You’re probably familiar with the old banking expression, a bank will give you an umbrella for a sunny day, but as soon as it rains, it reserves the right to take that umbrella off you.

32:20
What are we looking at? Draw down facilities, get the monies in, look at things that are non-essential and stop the outflow of money. So, you know, do you need the flowers for a receptionist that no people are coming to see? Do you need the paper subscription? Do you need Foxtel? Could you be looking at ways to reduce your rent like what Stu and Ryan were talking about? People are actually taking these steps to do it.

32:46
Deferment can be detriment, relief can be relished. I’m hoping I’m the first one that put all that together, because I’m going to trademark it in the future. But why deferment can be detriment is the concept of compound interest. So if we consider deferring loan facilities, while you get a short-term savings, I would say that, referring to my learned colleague, Albert Einstein, he said, compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.

33:16
So, one thing you want to be worried about in deferring your loan repayments is you’re going to be paying interest on top of the interest, on top of the interest, on top of the interest, etc. Where you want is relief. Rent relief is the key. So, you know, if you can get six months rent free as an example, that is going to be so much better for the business down the track as opposed to just simply kicking the can down the road. Eventually, you have to pay the piper.

33:40
Now, just moving on to safe harbour is a great analogy about chips, and that is a ship in a harbour is safe, but that is not what it’s built for. You know, businesses aren’t built for hibernation. We aren’t built to put the pause button on business, you know. Safe harbour is a great tool to protect directors from insolvent trading.

34:00
But what we’re saying is the process of going through the safe harbour process is actually probably more important than the actual protection for just the sole director. Because if you go through the process of the safe harbour, you actually are forced to look at the business as a whole. And so you need to think about a solution that is holistic, not just save the directors, but you’re talking about how do we deal with the business as a whole.

34:25
The basically the quick essential elements of safe harbour is simple. You get an appropriately qualified person to run an assessment of what the liquidation scenario looks like today. You then organise a game plan for the future. In other words, how does the game, if I stick to this game plan, am I going to create a better result overall for my creditors than the immediate winding up of the company right now?

34:49
And as long as you stick to the game plan, you are in the safe harbour. The minute that your game plan starts to fail, you are now out of the harbour. But at least the process tells you and your clients to delve within, start looking inwards to your business. Go line by line in all your expense items, your liability items. What can we deal with here? And informal agreements, what’s good here is that you can just privately negotiate with your clients

35:18
and it’s kind of like a bit like whack-a-mole. So if any of you guys remember going to the arcade and you get a big bat and a mole pops up, you whack it on the head.

35:28
This is what informal agreements are like. Generally, the squeaky wheel gets the oil. So you can privately negotiate your agreements with all your stakeholders and suppliers. The only one upside is it’s not a formal arrangement. It’s not on a radar. It doesn’t trigger any formal insolvency elements. The negative side is you have to make 57 different informal agreements to keep your business alive. My suggestion is you’ve got to work out

35:55
you look at your supply mix and you break your supplies down into these kind of key categories, your statutory taxes.

36:02
The ATO and payroll are very amenable at the moment. Take advantage of that. Finance liabilities and landlords. In other words, the people that have an asset that you kind of need and you need to kind of fund it, but you just have to work out how to reduce the outflow in the short term, maybe extend some facilities at the end. You then look at essential services. Electricity and water has to be given to a business, non-negotiable. I don’t think you’re going to get problems with the essential services in negotiating with them.

36:28
You then have non-essential services, which I would immediately consider getting rid of straight away. As an example, we got rid of Foxtel just because it’s just not essential. And then lastly, you’ve got ransom creditors. Ransom or critical suppliers, as we say. Basically, a ransom and a critical supplier is this. If you don’t pay them, you’re out of business the next day. So consider how you’re going to tackle those in your informal agreement by categorising those people that way. Back to you, Andrew.

36:58
Chris, excellent work. Thank you very much. I’m conscious that we’ve gone a bit over time, but I do have a couple of questions which I will raise for the benefit of everybody. Do you expect to see a large increase in personal insolvencies as a result of business owners, directors personally guaranteeing loans? I might throw this one to Stuart as our trustee in New South Wales and just see what his thoughts are. So, Stuart, do you want to take that one?

37:28
Short answer is we won’t see anything immediately. Mortgage pressures on individuals are certainly an abatement of the piece for the next six months with the mortgage relief they’ve got. Whether or not people take the opportunity, if they have some sort of recurring income, to pay down debt.

37:52
they might end up in a better household debt situation than when they went into it and they’ve just extended their loan term for six months. That said, it’s just uncharted territory. We just don’t know. I imagine when the economy does start to kick back up, people will be very, very cash hungry

38:14
and there will be a lot of pressure being applied. There is the current, under the first stimulus package, the stat demands to wind somebody up or to bankrupt somebody. You had 21 days to comply with any demand for that. That’s now been extended out to six months. Whether or not that means there’s a flood of that coming in six months’ time, we’ll just have to wait and see. Back to you.

38:42
Yeah, I think that’s a good point, Stu, in relation to sort of enforcement actions being taken by creditors, whether that be under a PG scenario or not. I would say that in addition to that, when thinking about a personal guarantee position attaching to, say, a corporate debt, that should be another thing that we add to our DIY list is assess all personal guarantee positions, work out whether…

39:10
Ultimately, you’re accruing personal liability without knowing it under some form of deferral program. So definitely something to think about. Could well be an increase in the spike. Now, last question. Do businesses have to prove they’ve been affected by COVID-19 before it receives a cash splash from the ATO? I might throw that to Stu as well. My understanding is no. Stu, is that correct?

39:38
That’s correct. At the moment, it just has to have a year-on-year comparable monthly decrease of 30% or a belief that that will occur. The rules around this typically, like a lot of those sorts of things, are vague and ambiguous to try and get most people under the hook.

40:01
Whether or not you end up reporting that your turnover has not declined by that amount and you have to pay it back, again, we’ll have to wait and see.

40:10
Yeah, okay. All right, well, we might just move on. Oh, sorry, there’s one last question. Company tax having been lodged end of March, early April, are they eligible? I’m assuming that’s a question around whether you need to have your returns lodged in order to be eligible. My understanding is that is correct.

40:35
Okay, so I’d like to thank everyone for their attendance. We’ll be back at the same time next week to hear more from Ryan and to consider with Stuart and Chris our second scenario, when is it time to see a doctor? But before we go, please remember that whilst all of our lives are going through varying degrees of upheaval at the moment,

40:55
Our strength of character is built through the challenges we face. We, our clients and business, may not be the same after this crisis, but it also doesn’t mean that it will be worse. Stay safe and well. Let’s see you all next week. Thank you very much.