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Insolvency Measures Extended (Covid-19)

The Government have extended the covid-19 insolvency measures until December 31. These measures can cause real issues for businesses that are coping with the covid-19 economic disaster better than others.

 

Why? These measures allow businesses to continue to trade even though they are insolvent, and increase the amount at which creditors can force a business to negotiate with them. ASIC data shows that insolvencies are close to ½ of what they were in 2019, before covid-19, the majority of these had less than 5 employees. That means there could be upwards of 3,500 businesses out there trading insolvent.

 

With the extension of the relief for insolvent trading it is more important than ever to understand your customers business, and ensure you manage your trading terms. A customer could have been trading insolvent for many months now, racking up bigger and bigger debts. The first you will hear of it will be in January when they suddenly declare themselves insolvent. Under normal circumstances a director would be personally liable for the debts incurred while trading insolvent, this usually keeps those with something personal to lose inline. But not under the covid-19 measures, a director gets a free ride.

If you are not managing your trading terms well, you could find yourself with an insolvent customer owing you 10’s if not 100’s of thousands of dollars. Now is the time to engage more with your customers and understand their businesses better. If you suspect a customer may have issues, engage with them quickly so you understand their situation. One business going insolvent can bring down a lot of others, particularly in the current economic climate.  

Collecting debts, don’t be the last business inline, you need to engage with customers early to collect debts. With the increase of the threshold at which a creditor can issue a statutory demand from $2,000 to $25,000 it makes it much harder to bring poor paying customers to heal. Debt collection 101, be polite, calm and persistent, if need be call the customer every day. If you supply goods before they are paid for, register them on the PPSR, otherwise you can lose the right to reclaim them from an administrator if the customer becomes insolvent.

It’s not only customers that can be an issue, suppliers can cause you problems also. If you have pre-paid for goods or rely heavily on a particular supplier, you can find yourself in trouble if they go under. Be careful about paying up front particularly for costly items with a long lead time. Understand your suppliers, and have a plan in place in case they go out of business. I have seen a number of business get themselves in a real bind when they find they cannot source parts and products they need from their normal suppliers.