Debt recovery options for small business

By Jarryd Willson

The headlines were alarming. ‘Winter is coming’ as JobKeeper payments ended. ‘Tsunamis’ of insolvencies and government debt recovery looming.

However, that’s not what we’ve been seeing or hearing anecdotally. Nor has there been a ‘snapback’ or a ‘v-shaped curve’. While the situation may not be as dire as feared, ASIC lodgement data does show a small increase in the insolvency numbers, including in late March / early April coinciding with the end of JobKeeper.

The federal government is hoping businesses are emerging from a Covid-19 induced hibernation. Although surely hibernation ought to feel more restful than the last 12 to 14 months trying to adapt to ever-evolving trading conditions. It is true that many plans that were put on hold are being implemented now that there is some prospect of returning to a ‘new normal’. We know many of our clients are trying to understand their financial position and start planning for future growth.

Understanding your debt position

Being clear about your current and future debt position (including the composition of those debts) is important for several reasons.

Firstly, now that the temporary stimulus measures, business protections and the moratorium on insolvent trading have ended (on 31 March 2021), company directors again need to be extra vigilant as to the overall health of their business. Getting this wrong could mean you become personally liable for company debts if you continue to trade while insolvent. Over the next few months we are also expecting to start seeing the ATO issue director penalty notices to directors of companies who have fallen behind in their tax lodgements. So if you have any concerns about your business solvency, or over your ability to comply with your taxation obligations, it is essential to seek advice from properly qualified legal and professional advisors.

Secondly, and on a much more optimistic note, in order to move forward with your planning and building into FY2021/22 and beyond, your business will need a solid grasp of how much cash it is actually going to have on hand, and when.

Looking into your books

For many small-medium sized enterprises (SME), recovering debts has been paused, and in some cases come to a complete standstill. Following the federal government’s interventions last year, there has seemingly been a shift in the shape of some SME’s debtor ledgers. Some debts, large and small, have simply stayed on the books, remained unpaid and just matured. So, now is a great time to pause and critically assess your financial position and examine both sides of your ledger.

Even if you have been trading for some time as an SME, you may never have had to do this kind of deep dive into your debtor ledger, and it can seem daunting, so do not hesitate to seek professional advice.

Debt recovery options: can you negotiate?

Once you have assessed which debts are good, bad or which ones you are not sure about, it is important to understand your options to recover debts owing, and what happens if you need to write debts off.

Right now, we are encouraging clients to negotiate with their creditors and debtors, including leaving room for compromises and repayment arrangements. SMEs are run by people who understand the true value of their relationships with their trading partners. Negotiating does not mean being a push-over, it means being clear and realistic about what debts you have owing, what debts you can collect on and where compromises should be made. It is important to stay on top of debts that are maturing. If you are worried, it is always better to follow up on any unpaid debts.

While things continue to be uncertain, it seems the tax office and regulators are still taking a softer approach to accruing debts and are adopting a negotiate-first approach. The ATO, for example, has stated it is concerned to avoid destroying business recovery as it starts to resume enforcement. It has been much more flexible in agreeing to payment plans, so long as the taxpayer is continuing to engage with them and keeps their lodgements up to date (even if they can’t pay right away).

Statutory demands

If the debt cannot be negotiated, enforcement options are available (again). There have been some legislative changes, and it is always important to consider the costs and time involved in taking these options. Again, seeking professional advice can be critical.

The protective legislative provisions with respect to Creditor’s Statutory Demands expired on 31 December 2021. These mechanisms are again available and, with some exceptions, the time frame for appropriately responding has now reverted to 21 days. The minimum debt amount is $2,000.

Restructuring and insolvency mechanisms

A new addition to the Corporations Law for 2021 was the small business restructuring regime. This was intended to provide a mechanism for small businesses in financial distress to restructure debt and remain in control of their business, while attempting to trade their way out of difficulty.

Uptake of scheme has so far been limited. However, small businesses may be eligible to access it if:

  1. their liabilities are less than $1 million; and
  2. the company or directors have not accessed the process in the last seven years.

Creditors are generally entitled to vote on whether to approve the proposed scheme under the small business restructuring regime. If this regime is not available, the more familiar voluntary administration procedures continue to apply.

Again, if you are worried about maturing debts and what that might mean for your businesses own financial situation, it is important to take action early and get professional advice so that you are in the best position to do what needs to be done to succeed in your business in 2021 and beyond.


Any decision that affects your business has legal implications. Contact us today to help secure your business for whatever tomorrow brings.

Jarryd recently joined Pryor Tzannes & Wallis’ Corporate Litigation team, having worked in litigation, disputes and insolvency teams in Sydney, Melbourne and Canberra. His practice focuses on commercial disputes and insolvency. Jarryd’s clients value his advice for its common business sense and strategic outlook.

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