Options for SME Businesses in financial trouble due to Covid-19

Options for SME Businesses in financial trouble due to Covid-19

The Australian Government has introduced a number of temporary relief measures to support SME’s during these unprecedented times, including protecting directors from personal liability from insolvent trading.

Notwithstanding the above, a director still has a legal obligation to monitor the financial position of the business.

When a business is in financial distress, a director should undertake a review of the business together with their personal financial position as follows:

  • Thoroughly and un-emotively evaluate the current financial position of the business which should include all outstanding liabilities being statutory creditors (ATO), rent,  interest charges, employee liabilities (leave entitlements and superannuation), trade creditors and any other expenses of the business;
  • Prepare an income and expenses forecast for the next 12 months based on best case, worst case, and likely case scenarios;
  • Evaluate personal financial position (assets and liabilities), including risks in continuing to trade the business and whether personal guarantees have been provided in relation to company debts.


A director should contact their usual accountant or a trusted advisor to assist with preparing any of the figures discussed.

Following a review of the financial position of the business a director will need to decide whether the business can continue to trade profitably in the future or whether action is required to be taken.

There are various options available to a director depending on the financial position of the business:

Deregistration of the company

  • There should be no creditors or legal action on foot;
  • Assets should be less than $1,000.

Informal Settlements

  • Engage and negotiate informal settlements with major creditors outside a formal insolvency appointment to enable ongoing trading, including ATO, landlord and financiers.

Safe Harbour

Sale of business

  • Offer the business for sale to the market;
  • Directors should beware of schemes where assets are transferred to related parties for below value and creditors are left behind (illegal phoenix)

Formal Insolvency Appointment

A director needs to consider the costs relating to a formal insolvency appointment.  If the company has no assets and paying for a formal insolvency appointment is not an option a director may have to wait for a creditor to initiate a winding up of the company by way of a court liquidation.  However, a director should cease trading the business in order to avoid trading the business whilst insolvent.

It is important that a director obtains advice from a reputable qualified advisor such as an accountant, lawyer or registered liquidator.

Financial Distress Solutions are available to provide expert advice and discuss the options available to a director.


The views, information, or opinions expressed in this article are solely those of the author and do not necessarily represent those of the various affiliates of Financial Distress Solutions and its employees. Financial Distress Solutions and the author are  not responsible or liable for any errors or omissions, or for the results obtained from the use of this information. All information in this article is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information The information contained in this article is general in nature and should not be considered to be legal, tax, accounting, consulting or professional advice. You should not rely on the information in this article as every situation will depend upon its own facts. In all cases you should consult with professional advisors with an understanding of your particular factual circumstances for advice concerning your specific circumstances before making any decisions.
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