Jirsch Sutherland and CBA present: Flattening the Insolvency Curve (Session 2)

00:06
Good afternoon, everyone, and welcome to the second webinar of our three-part series on flattening the insolvency curve, a how-to guide for business advisors. Once again, we are very proud to receive the support of CBA to bring this webinar to you. My name is Andrew Spring, and I’m one of the partners in our Sydney office.

00:27
As most of you are aware, Jirsch Sutherland is a national insolvency and business restructuring firm. We specialise in assisting individuals and corporations that find themselves in some form of financial distress. For those of you who are joining us for the first time, and to recap for everyone else, this webinar series is designed to give you some tools to help you assist your clients in making good decisions at good times to minimise the impact of the COVID-19 crisis.

00:56
For those who missed last week’s webinar, we discussed the general economic conditions and considered some of the legislative reform and stimulus measures in conjunction with the first of our three hypothetical scenarios, the quarantine. As a reminder, both the slides and video content are available for download on our website, jirschsutherland.com.au

01:20
Keeping in mind our goal of helping to flatten the insolvency curve by eliminating panic and blind optimism, our aim is to arm advisors and their clients with the information to adequately assess their options. This can be as simple as starting a conversation. After all, we are in this together.

01:39
This week, we’ll update you on some of the weekly economic data before looking at our next hypothetical scenario, time to see a doctor. We will explore examples from two market sectors, being the construction and not-for-profit sector. However, this could be equally relevant for businesses in tourism, hospitality, retail or education. And I’ll also take this time to remind you of the list of industries at risk outlined by Ryan in last week’s webinar.

02:09
Once again, we’re very fortunate to be joined by Ryan Felsman from CommSec. Ryan is a senior economist with CommSec and he’s going to provide an update on recent business survey data. Ryan is also going to provide some insights into our two industry sectors. Stuart Free, one of my Newcastle partners, returns to outline our two examples and attempt to balance the impact of the crisis restrictions versus the stimulus measures that are available to date.

02:37
And finally, we will hear from Chris Baskerville from our Brisbane office. Chris, despite being unlikely to work in references to Einstein, Churchill and the whack-a-mole arcade game this week, will explore in no doubt an equally entertaining fashion the solutions that are available to our second business case scenario. Please remember to log any questions you have on the Q&A board and we’ll address as many as we can at the end, subject to time. Ryan, over to you.

03:08
Thanks, Andrew. I hope everyone’s safe and well and enjoyed their long weekend. Of course, it’s been another sobering day here in Australia and globally. The coronavirus cases have hit a new milestone, unfortunately, with about 2 million cases and over 126,000 recorded deaths globally as well. Pleasingly, though, Australia’s virus curve continues to flatten, so that’s particularly good news. But, of course, the IMF, the International Monetary Fund, was out and about last night.

03:36
forecasting the sharpest Australian economic downturn since the Great Depression. The Australian economy is tipped by the IMF to contract by 6.7% in 2020 before a V-shaped recovery, rebounding by 6.1% in 2021. But unemployment is forecast to average 7.6% this year, around the CBA’s forecast of 7.8%, and then lifting again to 8.9% in 2021.

04:02
Westpac and the Melbourne Institute also released their latest update on consumer sentiment this morning, and we saw a 17.7% plunge in consumer confidence during the month of April, and consumer confidence is now at the lowest level in 29 years. 7% of respondents reported losing their job in the past month, with a further 14% stood down temporarily, so not a particularly good outcome. But it’s not all bad news. With China’s back to work

04:30
ratio hitting 95% last week. Pilbara’s port shipments rose by 3% and iron ore exports lifted by 16% compared with the previous month. So it’s not all that bad news. But if we look at slide two, certainly we are seeing the continuing impact

04:47
of those restrictive government measures in particular on the Australian business sector. Certainly the lockdown and social distancing measures have really impacted Australian business. Last week, I conveyed some messaging around turnover. Turnover being down around 66%.

05:03
due to the coronavirus restrictions and more broadly, weaker demand for goods and services. And yesterday, the National Australia Bank, don’t want to give our competitors a plug, but of course I have to, and they released their business survey for the month of March. That covers 500 firms across the non-farm sector.

05:20
And they were surveyed between the 25th of March and 1st of April. And really the impact on the business sector of the coronavirus containment measures has become immediately obvious. In fact, business conditions fell to the lowest level since the early 1990s in March, down by 21 points to minus 21 points.

05:38
Business confidence fell by even more to the lowest level on record, down by 64 points to minus 66 points. So if you look at the slide deck, you can see there that the business conditions and confidence really have fallen off a cliff.

05:53
on the back of the covert impact on Australia’s businesses and certainly if you look at the chart below you can see a huge impact on trading conditions operating conditions are very very challenging as you’d expect supply restraints and also that chain being impacted as well so profitability trading conditions and employment also large declines in the month with profit

06:15
profitability the weakest of all three components hitting record lows so not only do we have trading conditions which are very challenging but also business profits in this environment are very challenged due to weaker demand from both offshore and also domestically with consumers that really

06:30
holding back their spending. Forward orders, an indicator of business going forward, they fell by 25 points to minus 29 points. Capacity utilization, which is a good reflection of what’s happening in the economy at the moment, fell to an exceptionally low level of 75% as well. So the survey saw a sharp deterioration in the employment index during the month, and that’s consistent with the unemployment rate being around 7% in the coming months.

06:56
Recall the unemployment rate is currently at 5.1%. We’re getting the latest March data out tomorrow. About 30,000 jobs are expected to be lost during the month of March, for starters. But also at the same time, the Treasury Department is now forecasting unemployment to soar to 10% in the three months to June.

07:14
that JobKeeper wage subsidy, the $130 billion, which is tying workers to their employers, the jobless rate could potentially have been even higher at 15%. Of course, all industries, if you look at the chart in the bottom right-hand side of the presentation, we did see an impact across all industries during the month. Certainly conditions deteriorated sharply with the exception of the whole trade sale

07:35
sector, which was up by 17 points, and construction was down just a modest three points. But recreation and personal services saw the largest decline, followed by mining and finance, business and property services, and really we saw wholesale trade once again standing out. But all industries broadly reported negative conditions, and confidence declined sharply across all industries during the month.

07:57
and construction, which we’re going to focus on, declined by almost 80 points, with the bulk of the other industries falling by between 60 and 70 points. So conditions fell between 18 and 25 points across the states. All states across the country and territories now are in negative territory.

08:12
But the survey, I would add, though, largely predates the government’s phase three fiscal package, which included 130 billion wage subsidy scheme JobKeeper. And that could provide some level of support to businesses in the April survey. But of course, the ongoing containment measures will likely see further falls in conditions over the course of the next few months. Now, looking at the construction sector on the next slide.

08:35
Really, what we have seen there is a significant downturn take place over the last few years. Of course, we did see property prices fall up until the May election last year, and that’s had a big impact on dwelling starts and particularly business investment. But the Australian Industry Group actually has a leading indicator of the construction activity, which it releases on a monthly basis. Released it a couple of weeks ago. It’s called the Performance of Construction Index. And really what we saw there in March was the lowest level since May 2013.

09:03
down at 37.9 points. And if you look at that chart on the top left side, that implies a contraction in activity. So economic uncertainty due to the COVID-19 pandemic has really dampened client confidence in the construction sector. And that’s really increased risk aversion and lowered demand broadly.

09:21
some businesses reporting supply disruptions slowing demand and diminishing orders due to the restrictive measures particularly for imported building materials and home building despite remaining quite resilient to date contacting new orders and

09:36
the sector’s vulnerability to the deteriorating conditions is really going to be something to look out for going forward. And we did see sentiment in the Westpac Consumer Confidence Survey around housing, particularly around assessments, time to buy a house and price expectations, plunged to the most negative level since the GFC. So that’s not a good indicator of where home prices and building activity will go forward. In other sectors, if you look at apartments,

09:58
We have seen a lot of weakness in the apartment sector, a lot of oversupply, particularly in Melbourne, Sydney and Brisbane. Activities experiencing ongoing declines amid weak flow of work opportunities and new invitations to tender. So a lot of supply in particular.

10:14
And if you look at engineering, that component as well, respondents continue to report soft demand conditions due to a lack of new contracts to replace completed infrastructure projects, despite having quite a significant pipeline, particularly around transport and public transport-related projects. Commercial and social building categories, including industrial premises, schools, and hospitals are likely, of course, to be impacted

10:36
by those restrictive COVID-19 measures. Now broadly, if you look at construction employment, it’s one of the biggest employers in Australia. In fact, about 1.2 million people are currently employed in construction as of February, and that’s about 9% of the total workforce. So any slowdown will really have a big impact on jobs in that sector.

10:54
That said, construction employment was up by over 3% in the year to February. But if you look at the employment index from the Australian Industry Group’s performance construction survey, you can see it’s currently at seven year lows at just 36 points. So that’s indicating really a decline in terms of job hiring intentions in the sector going forward. So the low result really suggests businesses are cautious about their labour commitments at the moment.

11:18
And that’s, of course, due to the downturn in construction activity and concerns about the outlook, particularly around the economy. And if you look at seek job construction ads in the bottom right hand corner, you’ll have to squint a little bit there. But those ads are down 64 percent over 12 months to April the 7th. So not a particularly positive situation. Now, turning our attention to.

11:39
The next slide really around the construction sector. I’ve really focused here really on the impact of COVID-19 on various parts of the sector. And of course, the sector, as I mentioned, is highly labour intensive. It relies on

11:53
the contracting of labourers. So any restrictive measures around the sector will have a big impact on those workers. And certainly at the same time, building construction firms, they require equipment and materials. They may be more difficult to source due to supply disruptions. So supply chains and labour supply could be disrupted in these environments. But of course, record low interest rates

12:13
Low borrowing costs, support from the banks could provide some support to developers more broadly, but there’ll be less demand, of course, from foreign investors in particular. So that’s something also to note. At the same time, we have seen all prices last night at just 21 bucks a barrel.

12:30
And despite OPEC and its allies trying to stabilise the oil price, we have seen diesel and unleaded petrol prices really come down sharply across the country to around a dollar a litre currently. So that is assisting businesses with their input costs somewhat. But broadly, if you look at what’s going on,

12:45
in the heavy and engineering construction sectors. They have been quite buoyant, particularly with the pipeline of resources and public transport related infrastructure projects. But there have been some bottlenecks and rising import costs in those sectors. And of course, any restrictions, particularly around labour supply, would also have an impact to the government’s desire, I’d say next year, to really ramp up

13:08
its focus on infrastructure in the nation building type exercise. Now if you move to the next slide we’ll talk about the not-for-profit sector and what’s happening there. Of course Australians are quite a generous bunch of people despite the fact that we’re obviously in the middle of a recession and really if you look at the top left hand chart there you can see over the past decade Australia’s consistently scored amongst the highest countries when it comes to the charities aid foundation index. We’re currently ranked fourth on metrics which include helping a stranger,

13:37
donating money and volunteering time. So we are quite a generous bunch, but of course with an economic downturn that really stretches our finances and our ability to pay bills, particularly with unemployment increasing. So really that’s something to be mindful of going forward. So Australia’s not-for-profit or charity sector currently employs around 1.3 million people and that contributes roughly 145 billion to the Aussie economy. And according to the most recent charities report, there are about 45,000 charities Australia-wide.

14:05
with 38 percent of those being deductible gift recipient status or dgf tax purposes and of course there’s a lot of religious affiliation if you look at the bottom left hand chart there that dominates the sector 14 000 in total or 31 of the total and education is the next biggest size with about 4 800 charities by revenue extra small charities number about 13 000 or 35 percent in total but extra large charities as you’d expect generate the most revenue

14:34
of around 70 billion dollars or 49 of the total so larger businesses are more likely to partner with with not-for-profit organizations compared with smes who are more likely to give donations of course and given the covert 19 crisis understandably not-for-profits and charities

14:50
really concerned about funding going forward. So charities have really three primary sources of funding or income from the government giving by people like ourselves and from other income revenue streams such as membership sales and investments. Governments make up roughly 48% of the 68 billion in funding with giving at around 37% or 57 billion. So really the NFP sector leaders are really focused on that at the moment and of course,

15:20
They’re talking about emergency and relief charities are being at high risk of not being able to deliver services because of operational difficulties, particularly around funding. And that will continue to be a bit of an issue. So what we are seeing at the moment is charities continue to report major increase in demand for help.

15:36
And we have seen a drop so far in donations and certainly volunteering numbers. And of course, that’s going to have a significant impact going forward in terms of really generating income. So really, if you look at the chart on the right-hand side there, you can see that in previous downturns, the biggest falls for not-for-profit organisations really came from investment incomes and certainly corporate funding and also from major donors and philanthropic trusts and foundations have also had some issues too.

16:05
And as a result, we have seen the biggest falls really in those investment incomes, corporate funding, and also funding from major donors and those philanthropic trusts as well. So we’re expecting to see those reserve funds decreasing and organisations running down their reserves to compensate for those shortfalls, particularly in funding. But we have seen historically, though, really not significant demand for borrowing on the back of that.

16:30
Now, if you look at the final slide just around the not-for-profit sector, of course, there’s been various calls by politicians and sectors for not-for-profits to be included in future stimulus packages, although the Morrison government to this point has remained fairly coy.

16:46
Certainly, government departments could provide some immediate relief by relaxing contract requirements for all government-funded community services. And there has been some concern about some charities missing out on government support or grants due to the bushfire crisis, where obviously they received certainly some well-deserved funding there or an increase in terms of support at the same time.

17:07
We have seen as well in a pleasing development as well. At the same time, the charities are now eligible for the 1500 fortnightly JobKeeper payment. Of course, that depends on where the turnover falls by 15% due to the COVID-19 impact. It also extends to charities with a turnover of a billion or more. Previously, they were excluded from receiving that JobKeeper payment if they didn’t meet the criteria that was previously outlined. And of course, charities and businesses are not all the same. Community organisations do rely on funding from various sources.

17:37
and which some of those can’t be repurposed across an organization easily so it’s not the same as a traditional business in that sense and really we have seen Anglicare come out and be quite strident about this situation of course it owns a lot of child care facilities and really meeting the criteria in this environment particularly with a bunch of businesses or a bunch of not-for-profit or charity businesses running underneath that that structure is presenting some challenges for not-for-profits at the moment

18:07
Thank you very much for your time. Ryan, well, thank you very much once again. I mean, the IMF calling this the deepest recession since the Great Depression, the uncertainty that that creates for lenders, developers and anyone working in the construction industry.

18:30
No specific real stimulus in that space. The issues associated with charitable bodies trying to raise funds in a time of increased demand for their services. These are not the obvious industries impacted by COVID-19, which is why we’ve chosen them to demonstrate how widespread this is.

18:52
But Stuart, over to you to sort of elaborate a little bit more on a couple of scenarios that we see and potentially the issues that they might raise.

19:02
Thanks, Andrew, and thanks, Ryan, for another concise examination of the current state of affairs. So we’ve taken the position to present to you today two different companies, but in a similar financial position at the start of March, but operating in two separate industries. So I’ve gone over the next slide. We’ll have a look at the first company. We’ve taken a labour hire firm that operates in the construction field

19:32
It’s got 100 employees. It’s got positive net assets, but it does have an extensive bank exposure. It has an ATO debt, which is in a repayment plan with due to a super audit from the ATO.

19:47
Like with the NDIS provider that I’ll talk about in a minute, it’s got a negative cash flow cycle, so it incurs the liability, has to pay for it, and then doesn’t get paid for two to four weeks after that. It’s got lease premises that they’re behind with.

20:05
It has a mixture of leased and unencumbered equipment. Their lodgements are being done on time. Their debtors are in line with their trade creditors. But the risk is for the directors, their PGs that they’ve given out. So if we have a look at the area of concerns for this company on the next slide.

20:23
So there’s a significant fixed cost element to the business. It’s got a very high wage bill. Like we said, the cash flow cycle works against it. There’s a loss of revenue from the labour hire business at the moment with the downturn in the construction, which has been so well articulated by Ryan. And of course, the risks to the directors of the PG. So if we go to the next slide.

20:46
The next one is an NDIS provider. It’s a not-for-profit, has 20 employees, again, positive net assets. It’s got extensive bank exposure because it’s still only a relatively new business. It’s only been operating for a few years as the NDIS has.

21:03
It has a negative cash flow cycle because it again gets paid after incurring the liability because it’s still a juvenile type of business. It’s got an accrued ATO debt. Its debtors are in line with its trade creditors, however. And again, there’s a PG risk mixture of leased and unencumbered equipment. So the concerns for that are in the next slide.

21:29
Again, significant fixed cost element to the business, cash flow cycle works against the business. This one, the social distancing has really seen a marked decline in their face-to-face service offerings. So they’ve had to pivot, but that takes costs and there’s a long lead time for that to start to eventuate.

21:47
which is the project business side of things, moving towards more of an app-based service offering. And again, the concerns being the risks directed to the PLEG. So we’ll just run through the stimulus packages that are available.

22:04
As we recapped last week, and as Ryan has mentioned, the federal stimulus JobKeeper payments, both of them get it. The labour hire company being the direct employer of the employees is eligible for it and not the host employer.

22:22
In addition, the labour hire company, if they have any apprentices that are being placed, they’re eligible for a 50% payment on payments made to their apprentices. So they get a little bit more than the $1,500 per eligible employee. They get a little bit of a top up there. If we go to the next slide.

22:51
Landlords, again, this was very new at the last webinar. It only just had been announced in the hours just previous to it. But there’s a rent relief versus deferment argument still. So with a downturn of 30%, then the rent relief would be 15% and the deferment would be 15%. That’s how we understand this mechanism will work.

23:17
So you’re really only getting a 15% discount on the lease. In relation to the labour hire company, they’re three months behind. The landlord is barred from touching it as we understand the bond at the moment and must then do a mediation.

23:35
But at the moment, how we see this package, it’s at best a 15% rental reduction, even though the deferment can be paid out over 12 months moving forward, coming at the back end of this next six months. The next…

23:55
The ATO cash splash, both companies get it. I’m not going to recap how it actually all works, but unfortunately it’s just offset against their debt that they hold. Whilst it’s good for the ATO debt to be reduced, they don’t get ready access to the cash, which is what everybody is requiring at the moment. Good news, creditors can’t put them into liquidation at the moment.

24:22
The statutory demand period, which was 21 days, has now of course moved to the six month compliance timeframe. So everybody’s got a bit of breathing space there. So there’s no huge impending doom from a creditor at the moment. Next slide.

24:43
We looked at a couple of state-based stimulus packages. Each state offers different packages. The payroll tax relief in New South Wales for if you have wages of no more than $10 million, then the annual tax liability is going to be reduced by 25% and they won’t have to make any payments for March, April or May.

25:06
There are some business grants available in relation to New South Wales. There’s a $10,000 business grant available if you have between one and 19 employees and can show that you’ve been severely impacted by the social distancing requirements and that that money can be used for utilities, payments of necessity,

25:27
and advisors, so legal advice, financial advice, and I guess, insolvency advice. The next slide.

25:38
Other stimulus, there’s a reduction in repayments, of course. Bank debts are on hold. If you’re eligible for it, there’s also some guaranteed loans from the federal government. But the interest is just going to be capitalised on it. I would also note that there is a specific NDIS support package that came out from the NDIA. In relation to that, it’s…

26:04
they get a little bit of grants upfront and a little bit of bonus payments on some service offerings up to 10% higher. And there is a reduction in their cancellation policy. So if people have been cancelling because of the social distancing requirements, they’re still actually able to fund it. But moving forward,

26:27
that timeframe of the cancellation will be less and less relevant and the drop off in revenue will be quite substantial, we understand. Next slide.

26:42
So the outcome for both of them, they’re both worse off because of accruing liabilities. The business of the labour hire company has a potential upturn coming out the back end with a potential lift in construction if they pivot into the right sector of the construction industry.

27:05
The NDIA is definitely a good candidate for survival and a potential restructure because of the ongoing need that their clients will require.

27:17
The social distancing impacts of the NDIS service offering, they’re pivoting to an online delivery, but there’ll be a slow take up in that. And of course, the big issue coming out of these is where is the capital going to come from to commence trading moving forward? So if we go to the next slide, the realistic options, I’ll hand that back to Andrew and Chris to deal with. So thank you very much.

27:49
Thanks, Jude. Yeah, it’s a bit concerning, isn’t it, with uncertainty in the mix. As you say, opportunity presents itself in recovery, but it’s about getting there. How do we actually get a business that’s continuing to accrue liabilities it can’t meet?

28:07
to a point where it can capitalise on a potential recovery. I think that’s the scenario we’re talking about here. I will note an interesting comment about the relief in rent. You mentioned it was 30%, which would be reduced to a 15%. I imagine if we’re talking about different industries that were affected from a revenue perspective to 100%, that would only be a 50% reduction in rent. So that’s quite a significant reduction.

28:35
impact on those businesses that aren’t generating any revenue as an aside. Anyway, Chris, I’ll pass over to you to talk to us a little bit more about these solutions. Yeah, thanks, guys. Look, I think the key to remembering, and this is for all the advisors that are out there, is

28:53
is we’ve got to get our clients heads right. And that is the headspace is this, it’s not your fault that you’re in this situation, but it is now your responsibility. So with the VA regime leading to a data company arrangement, it was all designed to salvage and save these businesses that had accrued all these legacy debts. And we foresee in the coming six to 12 months, we’re going to end up with a lot of companies out there. They’re going to be weighed down by all of these deferments that are going to cause effectively a ball and chain on the business.

29:23
And they’re going to need something pretty, a little bit more extreme than simply just managing cash flows and do the whack-a-mole thing that Andrew was talking about moments ago. But I guess it also means a change in mindset as to what is the voluntary administrator. A lot of people sort of think the voluntary administrator is a very necessary evil and they sort of look at us from a negative light. I totally get that. I understand why. Most voluntary administrations really end in liquidation.

29:48
But I’m going to change the mindset on you today. I’m going to get you thinking more along the voluntary administrators more aligned to, I’m going to use an analogy here. In the US Air Force has a special troops division that jumps in to get down pilots behind enemy lines and they’re called pararescue. And the reason why pararescue exists is because sometimes Navy SEALs need to call 911 from time to time.

30:10
But the mantra is excellent. It’s so that others may live. And if you think about the voluntary administrator as that pararescue guy that deals with downed businesses in times of supreme stress, that is our effective principal role. So as we move on to the next slide, what is a voluntary administration?

30:29
Andrew challenged me and he said, no way you can put a quote from Einstein in here, but I’m gonna throw one in here, which is basically, if you can’t explain it simply enough, you don’t understand it well enough. So I’m about to give you guys 20 years of voluntary administration experience in seven slides.

30:45
So what is it? Basically, it’s a mechanism that gives the directors and secured creditors a chance to save an insolvent company. And this is why we promote these products so well. It is completely designed, it’s written in statute, that it is to maximise the chance of an insolvent company continuing into existence. But it’s also the critical first step before formal restructuring.

31:06
So before I’ll get into these company arrangements, which I’ll do a little bit later, first got to go through this. When do you appoint the administrator? Very simply, when the company cannot pay its existing bills on time, or that the company looks ahead and goes, we are unlikely to pay our

31:21
debts on time. So the message we, and I’m talking as a profession here, we say to a lot of company directors out there, appoint early. Why? Because you’ve got more options. Why? Because you end up with a better result at the end of the day. How do we appoint it? Very simply, most of the times by the resolution of the board of directors in writing. So this is an opportunity for a director, a captain of the ship, captain of the plane to make a decision that yes, we are in trouble waters and we need help.

31:50
Also, a secured creditor can also appoint us in writing as long as their security interest is enforceable. But that’s not really the discussion for today’s topic. So as we move on to the next slide, you’ll see this is a, now I’m going to confess, this is not my image or Jeff Sutherland’s image. I have stolen this from the website.

32:07
But effectively, this is an example of a business life cycle. It starts off as a concept and then you have this wonderful growth. The business then starts to mature a little bit, but it can be a point where it starts to decline. The reasons for decline vary. Where is the decision point for when the voluntary administrator should be appointed? We say round about the start of the decline, and you can see in that diagram there, there’s a fork in the road. And that is, if you don’t do something at that moment in time,

32:37
That’s the time to appoint the administrator. The time to not appoint the administrator, typically, is when the business is too far gone, like it’s too late, which you see in the curve there, that’s the death of the business. At least for the administration and data company range, you’ve got a chance to renew the business. So on the next slide,

32:56
The concept of voluntary administration, very, very simple in our eyes. Process is very basic. You appoint the administrator. There’s a first meeting that’s called. The administrator then has time to put together a report, usually within about two, three weeks. And then we convene a second meeting of creditors. It’s at the second meeting where the decision of the future of the company provides. And it’s up to creditors to decide. Now, this process can be

33:22
Fast or furious, it can take 20 business days, we can wrap up the outcome. Or alternatively, we exercise our ability to adjourn the meeting, we can push it out to 70 business days. And that’s without actually getting in the course intervention. On the next slide, you’ll see…

33:39
Yeah, so what are the advantages? The key things is the company can continue to trade. And a lot of the investigations that Stu’s done shows that a lot of, even a company in administration can still take advantage of federal stimulus that’s out there.

33:54
There’s a moratorium against creditors trying to kneecap the company. It binds all creditors. It’s designed to be fast and furious. It is a creditor-driven process and it can be done without any need for the court. And generally, the majority of voices determines the day. So moving on to the next slide when we just deal with what is a deed of company arrangement.

34:17
If I could explain it simply, it’s a fully customizable compromise to your creditors documented in a deed. It is an agreement by law between the company and its creditors. It’s administered through your voluntary administrator slash deed administrator.

34:33
But it allows the company to survive subject to a professional oversight until a compromise has been achieved. So we’re in a voluntary administration process we would ordinarily trade. Once the deed comes into effect, we hand the control back to the directors, give them the key, but we stay in control and monitor the process to make sure the director meets their promises.

34:52
The appointment usually is affected within 15 business days after creditors resolve that the company executes a docker. And then, of course, once the data company arrangement is fully executed, the terms then come into effect. So if we move on to the next slide, one of the two options we’re giving creditors, particularly on the scenarios, is your traditional data company arrangement, which generally says, I’ve got a promise to make to my creditors.

35:16
I’m going to appoint a deed administrator to make sure I meet my promises. The deed administrator’s job is to then make sure the promises are kept, usually cash or assets are then realised, and then get that money back out to creditors. And if that process is successfully achieved, the deed comes to an end, full control of the company comes back to the directors. A holding docker.

35:38
This is only an affectionate term. So this is something you won’t find in any black letter law, but a holding docker, it just inserts an extra step in there, which basically says, hey, we don’t have a solution today. We think we can figure it out, but with the dramatic impact of COVID and how quickly it has impacted our business, we just need some time to figure it out.

35:59
One live example that we were talking with a charity that’s registered, a national Australian charity, and as a result of Covoid,

36:10
Gyms were closed, so they lost 40% of their revenue. If they declare schools closed, which is obviously hanging on a knife edge at the moment, they lose the other 60%. So here we have a national charity that is a much needed service. This service must survive Cowboy. What it does for the community, it just has to survive. It’d be one of my recommendations that you’d put that type of entity into a holding docker. Just give them time to figure out a solution. And of course, it’s all fully customizable.

36:38
So if we go on to the next slide, one of the key advantages of a deed, a company arrangement, the best part is it binds all creditors. So there’s no need for whack-a-mole. There’s no need to just have these individual skirmishes with each one of your creditors. It binds all creditors. So one document takes care of everything. While the deed is in effect,

36:58
The company can’t be wound up. So in effect, it’s like putting bubble wrap around your business. It’s like protecting it from the outside. And it’s fully customizable, but also equally important, it’s very flexible. So let’s say during the terms of the deed, a company arrangement that you originally proposed, something has changed or something has improved.

37:17
we get the ability to go back in front of the creditors or the court and actually vary the terms, which could add or subtract to the performance of the docker. But it’s in creditors’ hands or the court’s hands if you so chose. But one of the big reasons why directors usually love to exercise the deed of company arrangement is because creditors give up creditors

37:41
Sorry, in exchange for proving in the deed fund to get paid, they give up the pursuit of insolvent trading. They give up unfair preference claims and they give up unreasonable director-related transactions. So for a director, it’s very good protection mechanism for them. Because as you know, business is risk. And to throw in there a Teddy Roosevelt quote, risk is like fire.

38:06
If it’s controlled, it’ll help you. If you let it uncontrolled, it’ll rise up and destroy you. So that one was Brad Morelli. So on the last slide then, I finish off with Winston Churchill and I basically finalise by saying, look, success is not final. Failure is not fatal.

38:24
It’s the courage to continue that is what really counts here. And so we’re giving people an opportunity to allow them to continue their business in the most adversarial times they’ve got to hand. And you’ve got some skilled experts here.

38:39
Now, I will just make a quick note that there is only 648 registered liquidators in Australia effective December 19. And if I could use the medical analogy here, there are business hospital beds available now. What happens when the tsunami hits? That’s going to be the question mark because I just feel it’s going to stretch a lot of our resources to the test. And what we don’t want is we don’t want good businesses missing an opportunity

39:07
to grab one of those hospital beds to survive into the future if you miss that opportunity now. So we say get in early. It gives you more options and gives you better results. Over to you, Andrew.

39:22
Well, thanks very much, Chris. I think a key takeaway in respect to the VA docker regime is that it’s not a terminal regime. It provides plenty of flexibility, ultimately designed to save businesses. And that’s why an early intervention gives you the opportunity for better results.

39:43
But you just led in nicely to the next slide, which is, I guess, the insolvency curve we put up last week. And I thought I’d just talk to it very quickly for everyone. So I guess you get a little bit more appreciation of what we mean by the insolvency curve. And it is a play on the words used by the Prime Minister and governments from the health perspective. But this is what we’re talking about from an insolvency perspective.

40:09
Okay. Our chart here represents our forecast for the number of insolvency appointments at various points in time during the crisis. The science here is more for the picture, more than the numbers themselves, but the chart

40:28
predicts numbers and timing of appointments with three assumptions in mind. So if you look firstly at the red line, this is our panic assumption, which is spiking appointments at the beginning of the crisis, which we’ve thankfully avoided by the use of fiscal and monetary policy intervention. If we look secondly at the blue line, this is the blind optimism assumption,

40:51
where the appointments spike after the conclusion of the crisis, which is our current concern due to government stimulus and messaging around this deferral regime. So this is what we think deferral is likely to throw up.

41:07
And finally, if we look at the green line, then this is our smart decision-making assumption, which is remaining calm, working through the options pragmatically, building flexible plans, and accepting the reality of the situation presented. You’ll note the purple line is sort of, I guess, an average number of appointments that was likely to occur

41:28
in a healthy economy. So under all the assumptions, we’re higher than that. And that’s representative of obviously the crisis that we’re facing. So we believe that ultimately there will be businesses that are irreparably damaged by virtue of the crisis. And I don’t think that’s a conclusion that will be disputed too much. But I think what we’re trying to demonstrate here is that

41:51
The hospital beds, so to speak, from Chris’s analogy, are best used at the right time for each of those companies. Okay, if we just move on, then I’d also like to remind everyone that this crisis is affecting more than just our financial and physical health.

42:15
This is a good opportunity to continue the discussion around building a healthy approach towards our mental health. As most of you will be aware, Jirsch Sutherland are very proud to have partnered with Beyond Blue to promote that conversation. So once again, I’d just like to say, please remember to stay in touch with your family, friends and colleagues. We’re in physical distancing, but we need to remain socially connected.

42:38
Okay, and finally, don’t delay starting the conversation. Feel free to make the call and make the right decisions at the right times. And that can be as easy as just reaching out to the clients you know maybe in some of the circumstances that we’ve described. Okay, we’ll move on now to a couple of questions that we’ve received.

43:02
The first one, I think, is probably going to be best landing with Ryan, and that is there’s news coming out of Japan, the US and Germany, sort of helping companies to relocate and leave China, I assume part of the manufacturing elements in China. Is there any indication as to what the world and or Australian economies are doing and what type of impact that may well have on our economies?

43:32
Well, Andrew, certainly we’ve had this discussion over the course of the last few years. So really the focus of the trade war between the United States and China really was on the U.S. really recalibrating its trade situation with the Chinese. In fact, it ran up a record trade deficit. And on the back of the election of President Trump, we saw really a focus on recalibrating that situation and

43:55
Paul Mitchell Jr.: We saw the imposition of tariffs or import duties by the US on China and then we saw a tit for tat situation play out that went for a couple of years, we did see a bit of a detente take place. Paul Mitchell Jr.: Particularly in January, we thought the global economy was going to obviously respond with that optimistic scenario with the phase one trade deal announced.

44:16
where the Chinese would buy back $200 billion worth of US goods and services. But what this is all about, of course, is the fact that the United States, amongst others, would like to reshore much of its manufacturing sector, maybe auto sector as well, back from China. Of course, China has become the world’s global factory.

44:35
And what really the COVID-19 virus crisis has also highlighted is the dependencies, all the co-dependencies really, in terms of supply chains and trade between China and certainly the rest of the world. So what we expect to see on the back of this situation really evolve is the fact that those populist type leaders such as President Trump

44:56
potentially we’ll look to really incentivise American companies, some of those tech companies, chip makers, whatever they may be, to reshore back to the US and to potentially rebuild manufacturing. And of course, there’ll be a lot of focus on medical equipment and supplies in the back of that. Australia, of course, we’ve reshored a lot of our manufacturing sector, including the auto sector, which is closed down, textiles, clothing, footwear, amongst others. And of course, we are at the forefront of

45:22
some of the world’s manufacturing, particularly around medical supplies, but also those beverages which we, in terms of like

45:30
baby formula and others which we transport overseas to the middle classes of China. So I’m expecting to see really a recalibration of the world oil, particularly around trade as an outcome of the virus crisis. And there’ll be a lot of attention in really on nationalistic type outcomes around rebuilding manufacturing and self-sufficiency going forward. And as far as those economies are concerned that you’ve mentioned, Alexander, who posed the question, thank you very much for it.

45:59
Certainly, what we’re expecting to see over the course of the next 12 months or so is a significant economic downturn. We saw the IMS forecast last night. It’s going to be the biggest downturn since the Great Depression, not only here in Australia, but also globally. That said, though, China’s economy is expected to grow by 9% next year, and 95% of China’s economy is now back at work, which is good for our mining sector in particular.

46:22
And certainly what we’re expecting to see really going forward is that economic slowdown continue, but also a recalibration in terms of countries’ trade arrangements going forward.

46:35
Yeah, thanks, Ryan. Okay, I’ll move on. The next question is around, I assume, the stat demand six-monthly timeframe being extended. And this question is, what if a creditor sues in the ordinary fashion? Well, interestingly, I was on another webinar where there were some lawyers talking about this and ultimately just saying that

47:01
The path to enforcement through the courts is obviously being significantly hampered by the change in the way the courts are operating at the moment as well. So whilst I’m not specifically qualified to answer that question, my understanding is that if you get something like a pursuing through to judgement, statement of claim to judgement, to then winding up proceedings, you’re most likely going to be looking at six months in any event.

47:28
And lastly, I know we’re just slightly over time, so last question I want to deal with is, the question is, isn’t factoring or debtor finance the obvious solution for the labour hire firm’s restart and cashflow issues? Again, just quickly answer that. Certainly, debt finance can provide an excellent solution to the negative cashflow cycle that Stuart was talking about.

47:56
In this scenario, in the scenarios we’ve discussed, I don’t think it is the solution in the sense that the accrued liability, the cash flow impact is not a balance sheet item. So the accrued liabilities are going to be incurred over this period is still going to need to be dealt with. So unless, you know, with creditors and debtors being sort of an equal footing in this sort of scenario, there’s real concern that you’re actually just hindering yourself from a balance sheet perspective.

48:24
And finally, one’s just popped in. What’s the strategy for export businesses? Interesting question. Does anyone want to pop up and answer that? I haven’t really thought of a response there. Otherwise, we might have to come back on that particular question.

48:48
Okay, so I’ll come back to Sanjay in relation to that. I’ll just turn my mind to it.

48:56
Look, if anybody would like to speak further about any aspect of this presentation or their insolvency or restructuring options for their clients, then please feel free to reach out to us or to your Jirsch Sutherland contacts. Thanks, everyone, once again for your attendance. Please note we will be back at the same time next week to hear from Ryan and to consider with Stuart and Chris our final scenario, the last of our three weeks, and that one’s on intensive care.

49:23
And look, as a final thought, let’s remember that under pressure, cold becomes a diamond. When I see the support for our healthcare and essential workers, the ingenuity and adaptability of our businesses and generally the community spirit that is being displayed, I can’t help but feel that the other side of this crisis may hold some gems for us yet. So please stay safe and well and see you all next week.