Extending safe harbour laws key to mitigating insolvency challenges

  • By Christine St Anne

The government needs to consider how the safe habour laws will be extended in order to tackle the “inevitable insolvencies” that will follow post September.

This is the assessment of CreditorWatch CEO Patrick Coghlan.  

Recent analysis from the credit reporting firm revealed that a surge of insolvencies is expected in September.

In response to the COVID 19 pandemic the government introduced temporary amendments to safe harbour provisions. A moratorium on trading insolvent was included which provides owners with time to plan and prepare to either exit or reopen their business.

Small Business Ombudsman Kate Carnell has called for the moratorium to be extended by 12 months.  

Coghlan believes said that phasing out the initiative should be at least staggered.

“This would allow us additional time to plan for the inevitable insolvencies that will follow and give the SME sector the best fighting chance of finding some stability,” Coghlan said.

Nevertheless, he believes measures such as the jobkeeper are supporting some business  - known, as zombie businesses afloat – that is in the absence of a pandemic these firms should have never been in business.

Here, the role of banks will be key.

“The current level of support, provided by the major banks – whether it’s payment deferrals or lowering lending rates for small businesses – has provided SMEs with the breathing room they need to navigate this unprecedented situation.”

Removing untenable businesses will clear the pathway and allow the banks to consider individual situations and determine appropriate strategies/support for their survival.”

However, be believes that the challenge arises when there are too many businesses on deferral, which it makes it hard to assess each situation on a case-by-case basis and banks run the risk of losing valued customers.

In fact, it was an issue already highlighted by Australia’s largest business lender - National Australia Bank’s Ross McEwan.  

“Greater clarity will come in September, when businesses are forced to take a hard look at themselves and decide if they have a future,” Coghlan said.

“Removing untenable businesses will clear the pathway and allow the banks to consider individual situations and determine appropriate strategies/support for their survival.”

He also sees a role for non-bank lenders.

“Fintech platforms like Prosper and Zip Co – with responsible and transparent lending options – are recovery alternatives for SMEs.”

“Their risk assessments and innovation provide SMEs with access to flexible repayment structures and could be the key to providing small and medium businesses with quick recovery relief.”

Another initiative put forward and backed by Coghlan is legislating 30-day payment terms for small businesses.

According to CreditorWatch, its first quarter 2020 data showed that payment times by SMEs stretched out by an average of nearly 40 per cent.

“Cash flow is crucial to the survival of small businesses and as such, every business – big or small – has a responsibility to pay their accounts on time.”

However, he also noted that while legislating a 30-day payment term for small businesses would go a long way in ensuring that these businesses can access the capital they need to continue to operate, it is a process that is unlikely to happen overnight

“Faster payment times is something that we need to work towards collectively as a sector, and perhaps in doing so, we can consider ways in which we can categorise businesses, dependent on their size, to allow SMEs to receive payments faster.”