Insolvency expert Bradd Morelli explains the options available to businesses weighing up whether to keep trading in tough COVID-19 conditions

Newcastle born and bred, I moved to Sydney after finishing my commerce degree at Newcastle Uni. I joined accounting firm Grant Thornton when they were handling the restructure of Patrick Stevedores during the 1988 Australian waterfront dispute, which helped change Australian workplace law forever. I also handled the voluntary administration of Turf Monthly magazine, which saw me trade the business, publish a few editions and later sell it. I was hooked! In 2008, I returned to Newcastle.

What does your role entail at Jirsch Sutherland?

I joined the firm in 2007 and have been National Managing Partner since 2018, overseeing national operations. I'm also one of the firm's 15 registered liquidators, which involves taking formal appointments over companies that require either restructuring or an orderly wind-down. My role usually requires a lot of regional and interstate travel. That's been replaced by Zoom meetings!

Jirsch Sutherland just did a survey of more than 1000 business owners/directors. The main findings?

Cash flow and turnover are major concerns for businesses. Many are exploring insolvency or expect to in the next six months. When people are looking for an insolvency recommendation, around a third ask their accountant. Speaking with a trusted adviser is crucial.

More businesses fail from lack of cash flow than lack of profit. If a business is in financial stress, it's vital to assess current and future cash flow and revenue streams, particularly when the government life raft ends.

Why do you think the survey found regional businesses are more concerned about JobKeeper ending?

Cash flow and turnover are still huge concerns for regional businesses, but they're also slightly more concerned than metro businesses about JobKeeper ending. My view is that all SMEs are concerned about what will happen when the financial support ends.

How crucial has JobKeeper been?

It's provided SMEs with a vital lifeline, allowing good businesses to continue in this uncertain period. It would have been a big failing if government had not taken these steps and allowed good businesses to fail. But it's also allowed inefficient ('Zombie') businesses to continue. Businesses have had this lifeline for several months; the challenge now is to gradually wean them off. It's a short-term buoy and not a long-term prospect.

Jobkeeper will reduce after September. What impact will this have?

It will put additional pressure on SMEs, particularly those already struggling. Businesses will need to make some tough decisions around strategy, cost rationalisation, restructuring options or winding their business down.

What should SMEs be doing now to prepare for the "cliff" after JobKeeper?

How is Hunter business faring?

Confused. We deal with a lot of accountants, lawyers and other advisers, and recent discussions indicate a large proportion of their clients, while concerned about the future, are doing well. While you can make some sense of this in the short term, it's definitely not what I would have expected in the current pandemic and economic climate.

What responsibilities do directors have if a business is under duress?

Directors have an obligation to not continue trading a business when unable to pay debts as they fall due. If they do, that's insolvent trading. If a director trades a business while it's insolvent, they run a risk that a liquidator may pursue them for certain elements of the company's debts.

What options are there for businesses weighing up whether to trade on?

The main option to attempt to save a business is voluntary administration. This allows a business to continue to operate while considering restructuring and turnaround options.

Where will we be when restrictions end?

Australia has been due for a reset for a number of years. It should have happened when the GFC occurred but didn't. As the downturn continues and direct government support is reduced and redirected to other sectors, many businesses will struggle and some will ultimately fail. Most of these will be marginal, poorly managed businesses with insufficient capital reserves - e.g. Zombie companies. Unfortunately, there will be collateral damage; good businesses will also fail as result of the economic climate.