Early last month, we published a blog asking ‘How solid is your business continuity and crisis management plan? in light of COVID-19.

At that point, the crisis seemed manageable. Unfortunately, as we’re all too aware, things have now worsened and the risk the Coronavirus pandemic presents to public health and, as a result, the economy and business owners, has become very real.

If you’re worried about what’s ahead, here are some of the options open to you and your business if or when financial hardship strikes.

In Australia, we now have 375 confirmed cases* of COVID-19 – the majority of which are in NSW (170). The Government’s response has been border restrictions, self-isolation and social gathering bans. In addition, impending school and work closures are on the cards.

While supermarket profits are skyrocketing as panic buyers stock up, other retailers and businesses across the country are starting to feel the strain as closures are enforced, and people stop going out, start cutting back and focus their priorities elsewhere.

Fewer customers, more cashflow issues

These closures and the simultaneous drop in customers and sales can, and already are, having a big impact on working capital. Businesses without sufficient reserves at this time face imminent cashflow issues.

While the situation is alarming, it’s not a time to be sticking your head in the sand. If you’re having any concerns about the financial stability of your business, acting swiftly will help ensure your business survives the outbreak. But what can you do?

Crisis management and stabilisation is critical. Here are some useful resources:

If there is a solvency issue, one of the most powerful actions you can take if you hit serious hardships is seeking leniency from creditors through Australia’s insolvency regimes: voluntary administration, deed of company arrangement (DOCA), and safe harbour.

These can buy you time to determine the future of your company.

Enter voluntary administration to avert crisis

Voluntary administration can give you space to breathe. It can also ensure you’re able to keep staff employed, and that you can trade as usual.

It’s important to understand that voluntary administration doesn’t mean the same as liquation. Liquidation spells the end; voluntary administration doesn’t. What it does involve is placing your business into the hands of an independent person who can assess all of your options and generate the best outcome for you and your creditors.

If, after initial investigations, your administrator recommends you continue trading, a deed of company arrangement (DOCA) can be drawn up. This is a binding agreement between you and your creditors that governs how your affairs are to be dealt with following the voluntary administration period.

A holding DOCA – a different kind of DOCA

A holding DOCA is different to a standard DOCA – though the purpose of the documents is the same. While a DOCA sets out asset distribution to creditors, a holding DOCA typically does not contain any concrete provisions. Instead, it merely discloses assets available to pay creditors without an agreement for immediate payment.

Because of this, it can buy you time against creditor demands, bypassing the need to apply to the court for an extension. Importantly though, a holding DOCA shouldn’t be left too open-ended. In addition, creditors should be kept regularly updated on progress.

When the pandemic begins to dissipate and market conditions stabilise, the administrator can then work with your creditors to amend the holding DOCA to resolve their outstanding creditor claims. The desired result? You stay in business.

Protect yourself with safe harbour

As well as using voluntary administration and a holding DOCA to turn things around and appease creditors, you also need to consider protecting yourself personally against business downturn as a result of COVID-19.

Under the Corporations Act 2001, directors have legal obligations to ensure their company does not trade (incur debt) while insolvent. Failing to meet these could result in penalties and criminal charges. However, you can seek sanctuary with safe harbour protection.

Essentially, safe harbour offers you a defence against insolvent trading – but to be protected you must continue to meet certain conditions. These include developing one or more courses of action that are reasonably likely to lead to a better outcome, staying informed of your financial position and seeking expert advice.

So make sure that you are keeping appropriate records of all your decisions from now.

While the outlook seems bleak at this point, we hope financial strife for your business is an ‘if’  rather than a ‘when’ situation. However, knowing you have these options available to you can be a comfort – and provide hope that you can, and will, get through these turbulent times.

Is your business being negatively affected by the COVID-19 pandemic and facing potential insolvency? Contact us today to arrange a consultation.

*Correct as of 17 March, 2020.