This is an Important Time for Company Directors of Small Businesses and Charities
The last few weeks have presented a unique and very fast-moving set of circumstances for Directors of family companies and small charities. We have been working with our clients over the past few weeks to assist them in placing their businesses into what we have described as Preservation Mode
This concept is now generally accepted as an appropriate method by the Government who have been actively referring to the term “Hibernation”. https://www.pm.gov.au/media/press-conference-australian-parliament-house-act-270320. Preservation (or hibernation) mode, aims to strategically put businesses on pause for now, with the intention of slowly restarting after some time. We are anticipating that businesses should be prepared to be in Preservation mode for six to nine months. This is in line with Government stimulus measures and communication.
However, Preservation mode is not the time for Directors to be complacent about their obligations. Here is a list of steps we recommend Directors should follow:
Step 1 – Establish all the entities where you are the Director
This seems obvious, but we often see that small business owners have agreed to become a Director of a company and not kept up to date with its current status. Directors should always be engaged with any entity they are a Director of. If this applies to you, please re-engage and find out the status of that entity. We can assist you in double checking this through a search.
Step 2 – Understand your obligations as Director
Directors are responsible for the oversight of the company and this encompasses many different things. The Australian Security and Investment Commission (ASIC) provides a very thorough summary of the “key responsibilities of company directors”. We recommend you access that information here: https://asic.gov.au/for-business/small-business/starting-a-company/small-business-company-directors/
Step 3 – Ensure as Director you understand your Health and Safety obligations
It is important you are taking appropriate steps to manage Workplace Health and Safety for all Stakeholders. There is specific guidance for what this looks like in light of the Coronavirus, with specific attention to how it is interrupting and changing the business.
The obligations may differ from state to state. You can better understand your responsibility as Company Director by accessing state governing body websites. The websites below are a good starting point for Directors of Queensland & New South Wales based companies:
Step 4 – Ensure all company liabilities (what you owe) are being appropriately managed
If your business has now entered or is transitioning to “Preservation Mode”, you should be anticipating a drop in turnover and be expecting that it may not return for some time. As Director you should know all company liabilities and have steps in place to proactively manage these amounts. There is no “one-size-fits-all” strategy and you should review your financial statements in detail and seek help where you need it. Communication is key. This may include, but is not limited to, superannuation, pay as you go withholding, GST, trade creditors, leases, bank loans etc.
It is not okay to simply ignore the amounts that are due. Where you are unable to pay you should negotiate these in advance. Possible strategies might be deferred payments, payment plans etc.
Preservation Mode is not the time to create new debts. For example, product companies may look to cease orders, particularly if future sales are uncertain. While the Government has increased the limit to place a company into insolvency to $20,000, most small businesses can easily accidentally exceed this amount.
Step 5 – Secure the assets of the company
Directors should look to secure all bank accounts, trade debtors, plant and equipment, inventory, investments and other assets to ensure they retain value.
Step 6 – Attempt to secure additional working capital
Directors can try to secure additional working capital by way of loan or equity injection to assist with funding the business during this time. Traditional methods of increasing sales to increase working capital may backfire in this climate and should only be used with caution – sales are great, but rising or very high debtor amounts are not.
Every business is unique, and this is a unique circumstance. Please talk to your advisor about what strategy is best for you. The government has various incentives available to assist which you can read more about here The Macro Group Ideas Page.
Step 7 – Document your decisions
Most Directors and their teams have no choice but to act quickly and decisively as the business climate continues to slow and change. However, now is not the time for Directors to relax on “best practice” documentation. All decisions should be recorded in some format. All verbal agreements should be documented and if possible both parties receive a copy of this documentation.
An example may be if you have made a verbal agreement to reduce your rental obligation with your landlord for six months. This information is so important to document and ensure both parties are in written agreement. You don’t want to get six months down the track to find out your landlord thought you were “deferring” for six months rather than an agreed reduction.
Step 8 – Know what Directors are personally liable for
Directors can be held personally liable for a range of different liabilities of the company. We list some of the common ones below:
- a) Debts incurred while trading insolvent: Directors may be liable for debts entered into, when the company is not able to pay for those debts as and when they fall due – This is otherwise known as “trading while insolvent”. In response to the Coronavirus, the Australian Government has provided some relief to small businesses under those “trading while insolvent” rules for six months. A quote from the Government:
“To make sure that companies have confidence to continue to trade through the Coronavirus health crisis with the aim of returning to viability when the crisis has passed, directors will be temporarily relieved of their duty to prevent insolvent trading with respect to any debts incurred in the ordinary course of the company’s business. This will relieve the director of personal liability that would otherwise be associated with the insolvent trading. It will apply for six months. Temporary relief from personal liability for insolvent trading will apply with respect to debts incurred in the ordinary course of the company’s business. Egregious cases of dishonesty and fraud will still be subject to criminal penalties. Any debts incurred by the company will still be payable by the company.” https://treasury.gov.au/sites/default/files/2020-03/Fact_sheet-Providing_temporary_relief_for_financially_distressed_businesses.pdf
Note that this concession will expire and should only be considered with extreme caution. If you are unable to successfully negotiate the debts that you owe during this time, please seek advice immediately.
- b) ATO Debts: Certain ATO debts relating to – GST (from 1 April 2020), PAYG Tax, Superannuation Guarantee under the ATO Director Penalty Regime. https://www.ato.gov.au/business/your-workers/in-detail/director-penalty-regime/?anchor=Asadirector#Asadirector. It is for this reason, that it is essential that all any unpaid tax debts are put on an official deferral or payment plan with the ATO. We can assist with this process. We are generally finding the ATO to be very accepting of such arrangements at this time.
- c) Personal Guarantees: Where a Director has agreed to personally guarantee a Company debt – for example a lease, a bank loan or a company trade credit account. These amounts will be unique to each company. We recommend Directors review all agreements and determine what personal guarantees have been provided and ensure those debts are being managed proactively.
We understand this may be confusing, we are here to help. Please reach out to us at any time if you are having difficulty in implementing these steps. We have connections with various lawyers and specialist practitioners who can assist with your individual circumstances.
Date published: 2 April 2020