Fundamental changes to the Australian business environment in a short period as a result of the coronavirus (COVID-19) pandemic are clearly evident, with many business owners asking what's next.

COVID-19 has resulted in a great deal of uncertainty. Depending on geographic location, businesses have had to remain agile in their response. After nationwide lockdowns in March, we saw an easing of restrictions by June, only to see a new and even more rigid lockdown for Victoria in July when a second wave of COVID-19 infections impacted the state.

The situation around the rest of the nation has been mixed, with several localised clusters emerging in New South Wales and Queensland which have so far been contained. Nevertheless, restrictions on free movement and pre-COVID-19 economic and social activity remain in many parts of the country.

Globally, we have seen the situation escalate, with Europe experiencing a third wave in many geographic regions, with France and the UK recently re-entering lockdown situations. While COVID-19 remains active globally and nationally, it is difficult to determine what will happen next. With this, it is evident that for businesses, risk will remain for some time—especially within high-risk industries.

The sudden change to the business environment in March and then again in July for Victoria, does not quite work in reverse. With restrictions being eased, green shoots began to appear as businesses started reopening. However, as indicated by the disastrous outbreak in Victoria and ongoing uncertainty in New South Wales, a return to normal may be further away than once thought. We will likely see sluggish economic activity as a result of the current recession, coinciding with the concern surrounding the second or even potential third wave of infections.

As many relief packages—both public and private—were originally planned to end in September, there was a growing concern that without a transition plan, many Australian businesses deferring payments would face a 'debt (or fiscal) cliff' and, if unprepared, would not survive.

As a result, on 21 July 2020, the federal government (government) announced the extension of the JobKeeper relief packages until 28 March 2021 for eligible businesses, with JobSeeker also being extended to 31 December 2020. With this extension, eligible businesses will see their 'debt cliff' pushed to March 2021.

However, in light of the worsening situation in Victoria, on 7 August 2020 the Federal Treasurer (Treasurer) announced the easing of the tougher eligibility rules for the second phase of the JobKeeper scheme. Now, employers will only have to demonstrate a reduction in turnover in the quarters ending in September and December 2020. From 3 August 2020, the test date of employment will also move from 1 March 2020 to 1 July 2020.

Further, on 7 September 2020, the Treasurer extended the 'safe harbour' protections for directors from insolvent trading to 31 December 2020 (previously expiring 30 September). At the same time as extending the safe harbour protections, the Treasurer announced radical changes to Australia's insolvency and restructuring laws, due to take affect from 1 January 2021 (the day safe harbour protections expire).

In addition to the above measures, banks initially gave borrowers the ability to take a six-month holiday from repayments. Various legislative provisions passed by the states in accordance with the government's Code of Conduct for Commercial Tenancies' gave tenants relief from paying the full value of rent for up to six months or more in some instances.

These support measures are also expiring from September, with many borrowers and commercial tenants expected to start repaying loans and leases again at normal rates from as early as October 2020.

Therefore, we now have a three-tiered 'cliff' emerging as follows:

• October 2020: Repayment of loans and leases recommenced and JobKeeper reduced or expired for many businesses
• January 2021: Expiry of the safe harbour protection for directors from insolvent trading (and implementation of new restructuring laws) while JobKeeper payments further reduce
• April 2021: JobKeeper expiry.

While it is true that directors need to be planning for the here and now, they must also plan to deal with their accrued debts and assess whether they will make it past the tiered debt cliff. As mentioned, although the JobKeeper and JobSeeker schemes and safe harbour protections have been extended, the safe harbour for directors is set to expire on 1 January 2021. Therefore, it is critical that businesses are checking their solvency to prevent directors from being held personally liable in a breach of their duty to prevent insolvent trading.

Over the past few months, many businesses have gone from panic to information overload to an understanding of how they will make it through COVID-19. Yet, while businesses have begun to acclimatise, many are not thinking too far into the future.

This paper provides a recap on what has happened, analyses the impending debt cliff, and encourages businesses to rethink a way forward to come out the other side.

A quick recap

It's important to understand what has happened so as to understand what is coming.

1. The panic phase: 12 March to 22 March

As COVID-19 cases started growing, the government responded by enacting social distancing measures, restricting the movement of its citizens and enforcing closures of certain businesses.

As this unfolded, the response from our clients and businesses generally was of concern and even contained a hint of panic. By mid-March, our clients started to see revenues falling and many businesses were forced to close. The rising cases of COVID-19, the rapid slowdown in economic activity and uncertainty of the situation was causing a lot of concern. This was reflected on the Australian Securities Exchange, with the All Ordinaries bottoming in March (after a peak only a month earlier).

At this time, we were advising our partners and clients on the use of the safe harbour, risks of insolvent trading and restructuring options. There was genuine concern for the solvency of many clients and contacts with whom we spoke. Those in tourism, retail, hospitality, sports, entertainment, hotels, accommodation and education were most impacted.

2. The information overload phase: 22 March to 7 April

As COVID-19 cases were rising and the economic impacts were rapidly emerging, the government (and other stakeholders) announced new support measures almost every other day. We were beginning to see the evidence the pandemic was having on trading revenue. Businesses went from panic to a holding stage with cautious optimism as new measures were explained. The discussions we were having around safe harbour and insolvency were no longer critical, with the announcement of the suspension of insolvency laws until September.

During this time, our conversations were around understanding support measures, encouraging clients to build cash flows and understand their runway [the amount of time a business can remain solvent]. As more measures were announced and understood, many businesses came back from the brink—but only in terms of short term cash flow.

3. The realisation phase: 28 April

As the government announced plans to ease restrictions, and government and other stakeholder support measures now released, some businesses were starting to see revenues stabilise and new norms understood -- with the ability to now comprehend and forecast for the immediate future.

This was the first time businesses were able to forecast with some level of confidence since COVID-19 swept Australia. Most businesses were able to trade through on a cash flow basis for six months because of liability deferrals and JobKeeper assistance. However, there were exceptions, with COVID-19 being the impetus for corporate collapses, seeing business failures including Virgin, Tigerlily, Techfront, and Colette, which all went into voluntary administration.

4. Up to mid-year fiscal update: 21 July

The government announced that economic support packages (JobKeeper, JobSeeker) would continue past the originally planned end date of September 28 2020, albeit with newly determined rates and eligibility requirements for applicants.

Shortly afterwards on 7 September, the government announced an extension of the safe harbour protections from insolvent trading for directors to 31 December 2020 with the intent that new restructuring laws would commence from 1 January 2021. (These new laws have not yet been finalised.)

A debt cliff coming

5. The next phase: 28 September 2020 to March 2021

With public and private institutions pumping money into businesses and households to reduce the financial impact of COVID-19, many businesses have found they can carry on. However, with the recent extension and adjustments to the economic relief packages currently available to businesses, it is important to stay informed of these changes to avoid unfavourable surprises.

As of 7 August 2020, the eligibility requirements for the JobKeeper payment are as follows:

From 28 September 2020 to 3 January 2021, employers must reassess their eligibility with reference to actual goods and services tax (GST) turnover in the September quarter 2020 compared with the actual GST in the September quarter in 2019.

From 4 January 2021 to 28 March 2021, reassessment of eligibility will be in reference to actual GST turnover in the December quarter 2020 compared with the actual GST in the December quarter in 2019.

Employers no longer need to show a relevant decline in turnover in the June and September 2020 quarters.

In addition to the above, the date of employment has also been expanded. From 3 August 2020, the relevant date of employment will move from 1 March 2020 to 1 July 2020. Other conditions for eligibility have not changed.

Some economists believe that Australia is in a position to be government-supported through a long, slow recovery, stating that a sudden cessation to government support could be detrimental to the economy.

At the same time, business debts are ballooning. Debts such as Australian Taxation Office debt, rent, payroll tax and loan repayments have continued to accrue during 2020, as many businesses were given payment holidays but not permanent debt relief from these liabilities.

There is a security blanket that is slowly being removed (from October to March) as this economic relief ceases -- can all businesses trade out to the other side?

What other factors will impact recovery?

At the peak of the debt cliff are the various economic scenarios that are interdependent to Australia's recovery. These include:

• Consumer behaviour
• The recession,
• The health and safety of the population
• The risk of further 'waves' as seen in other countries and the resultant shutdowns to all, or parts of, industry and community.

Such an economic scenario has already occurred in Victoria as positive case numbers increase drastically. Victoria accounts for around 25% of Australia's gross domestic product (GDP) and employment. The lockdown that came into force from midnight 8 July 2020 is estimated to have wiped out $6 billion in third-quarter national GDP. The lockdown is also likely to cripple consumer spending and be the final 'nail in the coffin' for many small businesses -- both of which will further add to the deterioration of Australia's economic prospects.