Coronavirus Company Administration – How global health can affect your company’s financial future

Since the end of 2019, the global pandemic known as COVID-19 has impacted millions. Thousands have contracted the virus, and many have lost their lives as it continues to sweep across the globe in 2020. Economies around the world have also been adversely affected, with many companies turning insolvent due to loss of business revenue.

Australia has not been immune to the economic effects of COVID-19. Many businesses face the inevitability or have already been placed into voluntary administration as difficulties paying operational expenses and other debts increase.

Pressure mounts for Aussie companies as a result of travel bans and social distancing regulations that were introduced to ‘flatten the curve’ of COVID-19’s spread but have also resulted in reduced commercial activity and the subsequent drop in cash flows. Should this occur, you may face company administration.

Impact of COVID-19

In March 2020, the Australian Bureau of Statistics surveyed 3,000 businesses to get a sense of the national impact of COVID-19 and found that almost half of the Australian businesses surveyed (49%) had been affected. This was the case even before the Australian Government’s announcement of Phase 1 Social Distancing Measures, which included restrictions on people leaving their homes for social, dining and other recreational purposed or non-essential retail.

Coronavirus Company Administration
Trend of impacts experienced by Australian businsesses, based on data from March 2020. Source: ABS

Adverse impacts of the pandemic include reductions in local demand, which was the most common impact (82%) experienced as a direct result of non-essential travel restrictions and social distancing which was introduced to help ‘flatten the curve’ and limit the virus’ spread across the country.

Businesses adversely impacted by Coronavirus (COVID-19), current and expected, by type of impact, March 2020. Source: ABS

According to the ABS’ March figures, more than a third of affected businesses also experienced staff shortages (36%). Due to the ongoing travel and interaction restrictions, 59% of businesses expected to experience staff shortages in coming months.

Australia’s Accommodation & food services sector was the most affected by adverse impacts of COVID-19, with 78% of businesses (or more than three quarters) already reporting impacts and 96% of businesses reporting that they expected impacts in coming months.

In March, cash flow was a prominent issue for businesses as the pandemic forced new behaviours. Without a consistent stream of customer spending, or new projects or client contracts, two thirds (66%) of Australian businesses reported a reduced turnover or cash flow.

The fallen cash flows made it difficult for businesses to maintain a steady rate of operations. Nearly half of businesses (47%) were forced to make changes to their workforce arrangements as a result of COVID-19. These arrangements include:

  • Temporarily reducing or increasing staff working hours;
  • Changing the location where staff worked (including working from home); and
  • Placing staff on leave.

Many businesses were also forced to restructure their business model to stay afloat. Two in five businesses (38%) changed how they deliver their products or services, including shifting to online services, and over a third of businesses have renegotiated their lease and rental arrangements and a quarter have deferred loan repayments.

The ongoing pandemic

Since the initial outbreak, Australia has seen more than 7,000 cases of COVID-19 as at 7 June 2020, with more than 100 people dead.

New figures, as of 28 May 2020, revealed that 72% of businesses had less income as a result of COVID-19. This meant that many businesses were forced to seek additional funds to stay afloat – one in ten, in fact. Of those businesses that sought additional funds, more than half of them (57%) borrowed from banks or financial institutions, while others sought out personal lines of credit or savings or sourced funds from other businesses. The pandemic also forced many businesses to think further than simple loans, with 73% of businesses resorting to support measures like wage subsidies, rent negotiations or lease arrangements and deferred loan payments.

Proportion of businesses trading that made changes to workforce arrangements as a result of COVID-19, as at March 2020. Source: ABS

The lack of money and necessity to seek out loans meant that businesses have been forced to make vital staffing decisions to stay solvent. Around 53% of all businesses were forced to reduce their staff’s work hours while 24% of businesses have been forced to take it step further and reduce the total number of employees working for them.

With personnel changes and income shortages, Australian businesses have been forced to acknowledge that they could not continue operating the way they used to. The ABS reported that 74% of businesses actively trading have changed how they operate, which includes modifications like caps on customer numbers in store or adopting digital practices to replace physical meetings or the use of hard-copy documents.

Recession

Perhaps unsurprisingly, news broke in early June 2020 that a recession was on Australia’s horizon. Treasurer Josh Frydenberg conceded Australia would enter into a technical recession upon release of the June quarter GDP data.

Australia’s GDP fell 0.3 per cent in seasonally adjusted, chain volume terms in the March quarter 2020 and growth slowed to 1.4 per cent through the year, according to ABS figures.

Recessions are typically classified as an outcome resulting from negative GDP growth for two consecutive quarters.

Australian Bureau of Statistics Chief Economist Bruce Hockman said, “this was the slowest through-the-year growth since September 2009 when Australia was in the midst of the Global Financial Crisis and captures just the beginning of the expected economic effects of COVID-19.”

Social distancing and reduced business activity have certainly affected our economy’s health, but because the pandemic’s longevity, a timeline for a cure and the duration of restrictions are all yet to be confirmed, it is difficult to tell if a recession will be a passing moment or have severe lingering effects on the country. It was best said by Sydney Morning Herald Senior Economic Writer Jessica Irvine on March 13, 2020:

“What really matters is if the economy losses so much momentum that firms start to anticipate a sustained period of revenue shrinkage. In such a world, companies may decide to lay off their workers in a bid to avoid going insolvent, or they may just go under, regardless.

“If lots of companies are downsizing at the same time, sacked workers may find it hard to pick up another job. If they can’t get a job, they can’t pay their mortgages. If they can’t pay their mortgages, the bank might sell their homes. If that happens to enough people, home values may fall. That could lead even more people to spend even less, forcing even more job losses. And so forth.”

Looking ahead

For 74% of actively trading businesses operating under modified conditions, the future continues to look challenging. The ABS reported that within the next two months (at least), 71% of business expect some level of impact from social distancing measures, while 61% expect restrictions on trading and 50% expect impacts from travel restrictions.

Coronavirus Company Administration
Expected impacts to business in the coming months. Source: ABS

Data from May revealed businesses in accommodation and food services (75%) and arts and recreation services (67%) were the most likely to report that trading restrictions are expected to impact the business to a great extent over the next few months. Businesses in these two industries were also the most likely to report that they expect social distancing restrictions to impact the businesses to a great extent (50% and 68% respectively).

It seems the economic effects of COVID-19 will be felt for many months to come and businesses will need to be vigilant to avoid becoming insolvent. However, months of isolation and stringent social distancing have cleared the path for optimism and Australia has started to look to the future. In several states, people have been gradually returning to work and taking tentative steps toward small social gatherings. Several government restrictions are still in effect and across Australia but plans are in place to create a roadmap to recovery.

 

All data, graphs and statistics were sourced from the Australian Bureau of Statistics and its range of existing and ongoing statistical products produced exclusively to measure the impacts of COVID-19.

What happens if I experience Coronavirus company administration?

If the pandemic has caused your company financial hardship that may not improve in the short term, then you may decide that the company should be placed into administration. An administrator will take control of the company and attempt to reach a compromise or arrangement with creditors, which may save the company, the business and jobs while maximising the return to creditors.

The process gives the appointed administrator the opportunity to review the company’s financial situation and see if which option is best:

  • Accept a proposal for a Deed of Company Arrangement;
  • End the company administration and pass control of the company back to the company directors; or
  • Liquidate the company.

However, as a result of the ongoing effects since the initial Coronavirus outbreak, temporary legislation regarding liquidation was introduced by the Australian Government on 24 March 2020 to alleviate financial pressure on companies.

These measures includes increasing the minimum amount of debt a creditor can rely upon to file a winding up application and extending the timeframe that a company has to respond to a creditor’s statutory demand. The temporary amendments also included measures providing limited relief from insolvent trading provisions.

Click here to find out more about the new temporary legislation.

Should the economic effects of Coronavirus cause your company to face administration, it is important to speak to one of the professional insolvency experts at Insolvency Guardian for more information about your situation and your options.