CreditorWatch is calling on the federal government to avoid extending the temporary moratorium on insolvent trading as it could do more harm than good to both businesses and creditors.
The safe harbour measures, expected to end by 31 December, have been providing businesses and their owners with extra protections amidst the ongoing COVID-19 pandemic.
"While these measures served the economy well during the severe contraction caused by COVID-19 lockdowns, the economy is now on its way to resuming normal trading conditions," said Patrick Coghlan, CEO of CreditorWatch.
If the moratorium is extended, Coghlan feels strongly it should only apply to small businesses with annual revenue of less than $10m, as companies this size do not typically have the same cash reserves and access to debt funding as larger organisations.
"Extending this provision for all businesses will only kick the can further down the road by allowing insolvent businesses to remain open and potentially put good businesses at risk, which are offering payment terms to zombie businesses that should have shut their doors months ago," he said.
Coghlan added that more details around the draft legislation proposing a simplified administration and liquidation process for small businesses would be helpful, ideally soon, as it’s slated to commence next year.
Under the proposal, small businesses with debts not exceeding $1m would be allowed to remain in control of their operations for 20 days. During the period, businesses will have to come up with a restructuring plan, after which creditors will be given 15 days to assess and vote on the plan.
For small businesses to be able to take advantage of this measure, they will need to disclose they are insolvent or about to become so in the next three months.
For creditors, the proposal ensures that companies seeking to depend on temporary harbour measures will be more transparent about their intentions.
"We support the legislation in principle as it should make it much simpler for small businesses to wind up their operations. But we need more detail on what the government is proposing," Coghlan said.