Jirsch Sutherland and CBA present: Flattening the Insolvency Curve (Session 3)

00:06
Good afternoon, everyone, and welcome to the final webinar of our three-part series on flattening the insolvency curve, a how-to guide for business advisors. Once again, we are proud to welcome the contribution and support of the CBA in assisting with this webinar series. My name is Andrew Spring, and I’m one of the partners in our Sydney office. As most of you are aware, Jirsch Sutherland is a national insolvency and business restructuring firm.

00:33
We specialise in assisting individuals and corporations that find themselves in some form of financial distress. For those 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. For those who missed our previous two webinars, do not panic.

00:59
Both our two prior webinars, which gave information on DIY options, safe harbour conditions, and the effective use of the voluntary administration regime, are available for download on our website, jirschsutherland.com.au. We will also upload today’s slides and reporting to the website for download. It would seem that our message of flattening the insolvency curve must have resonated with the Board of Virgin Australia, who took the steps to appoint voluntary administrators yesterday.

01:28
The fact that we’re on this webinar tells you that we didn’t get the gig. But whilst the background to the appointment will become more apparent as the administration process proceeds, with all flights grounded,

01:41
and with significant fixed costs being accrued by the business, the elements that we described last week in our two examples fit reasonably comfortably to Virgin Australia. The effect of the appointment of the voluntary administrators will be twofold. Firstly, it will protect the board from any further breach of their director duties. And secondly, it will maximise the chances of a business rescue plan being developed to deal with all pre and post-crisis debt.

02:08
It would seem likely that the plan will be to financially restructure the business through a compromise proposal, bailout advance or sale of business. Why a VA, you may perhaps ask? Well, to answer that, I will refer you to our webinar from last week.

02:24
But in short, the advantages of the moratorium on creditor actions, the continued access to the government stimulus support, the protection for the directors, the time to negotiate with external support options such as government or financiers or angel investors or purchasers, the ability to bind a minority

02:43
of uncooperative creditors to a compromise proposal or outcome. And lastly, the VA regime being designed to protect businesses from extraordinary events makes quite a compelling argument for the use of this process by Virgin Australia. But this week, once again, we will update you on the economic data that has been released in the last week, tracking how we and our communities are adjusting to life in lockdown.

03:10
We will then look at our final hypothetical scenario, intensive care. We will explore examples from high risk sectors, being the retail and hospitality sector.

03:21
It is my pleasure to again welcome our enigmatic economic expert, Ryan Felsman from CommSec. Ryan is a senior economist with CommSec and is going to provide an update on recent data regarding business and consumer behaviours. Ryan is also going to undertake a deeper dive into the high risk sectors of retail, hospitality and tourism.

03:42
Stuart Free, one of my Newcastle partners, will again introduce the metrics of our two examples and attempt to balance the impact of the crisis restrictions versus the ever-evolving stimulus measures that are available to date. And finally, we will hear from Chris Baskerville from our Brisbane office, who recently disclosed to me his goal in life of being the first liquidator to have his own desktop calendar of quotable tidbits.

04:07
Chris’s love affair with Churchill will no doubt continue as he discusses the options available to deal with our intensive care scenarios. Please remember to log any of your questions on the Q&A board and we’ll address as many as we can at the end, subject to time. Ryan, over to you. Thank you, Andrew. And thank you, everyone, for joining us again for our third webinar.

04:30
Hope everyone’s safe and well. And of course, I begin with my usual update on the coronavirus timeline. Of course, as it stands, COVID-19 cases have now topped 2.6 million worldwide, with deaths exceeding 177,000. Here in Australia, we currently have

04:47
around 6,650 coronavirus cases with 74 deaths. The cases pleasingly appeared to have peaked in late March with less than 50 new cases per day. So in good news, the growth rate has been less than 1% now for nine consecutive days and has averaged less than 0.5% for the past three days. Now, in terms of the economic data that we’ve received in the last week, we’ve had quite a

05:17
job vacancies, home sales and also retail trade. So I’ll just provide a brief update on some of that information before I get into the presentation. Firstly, new weekly data derived from the tax office’s payroll returns has shown a substantial hit to Australian household wage and salary earnings due to the coronavirus economic shutdown. So from the

05:39
March the 28th to April the 4th, employment fell by 6%, and that’s the equivalent of about 785,000 job losses, which means if we keep the participation rate unchanged, which is highly unlikely because participation will decline in this environment, but if we did keep it stable, the unemployment rate would jump from current levels to

05:58
of 5.2% to about 10% in April. So that’s quite concerning, of course. And if you look at the data we saw yesterday, accommodation and food services, which we’ll concentrate on during this presentation, it saw job losses of 26% and arts and recreational services were down by 19%. Retail trade saw declines in jobs of 3%. So perhaps that hoarding in terms of stockpiling at supermarkets have helped in terms of job creation there.

06:27
But certainly, though, JobKeeper has also been a key conduit for really retaining workers or at least tying them to their employers. Tasmania and Victoria had the largest decline in jobs, down by 7.3% and 6.8% respectively. And total wages paid by businesses decreased by almost 7% over the period, with accommodation and food services down by 30% and retail trade down by almost 8%.

06:53
This morning, we had an update from the Department of Employment on job vacancies. So that’s a leading indicator of jobs growth going forward. This is a little bit backward looking in terms of the fact that it was for the March month, but it is forward looking in terms of hiring intentions. We saw a record fall in those job vacancies, skilled ones, down by 22.3%.

07:13
And of course, that was a significant fall. Now, the Housing Industry Association also said new home sales fell by 23.2% during the month of March. So of course, those social distancing measures are hitting auction activity already. And of course, we have seen home prices fall back a little bit

07:31
in recent weeks. Now Reserve Bank Governor Philip Lowe was out and about yesterday provided an update on the economy and he thinks that economic growth or GDP growth is expected to fall by about 10% in the first half of this year and the jobless rate will be around 10% by June with total hours worked down 20% in the first half of this year. Now if we turn our attention to slide number two looking at confidence and consumption of course

07:59
We’ve had an update from Westpac and Melbourne Institute in recent weeks. The Consumer Confidence Index pledged by 18% in April. It’s at its lowest level in 29 years, so roughly around the same time as we had our last recession in the early 90s. That said, ANZ Roy Morgan produced a more timely weekly update on consumer sentiment. That was for last week.

08:21
And we have seen with the announcement of JobKeeper and also a bit of a pickup in the share market up until this week, sentiment has lifted last week by almost 8% and has lifted by almost 27% since hitting record lows of 65 points back on March 29. So we have seen a little bit of a bottoming when it comes to consumer confidence and sentiment.

08:42
This morning, the Bureau of Statistics released its preliminary retail trade data for March. Once again, this is backward-looking. That said, we did see spending or retail sales lift by 8.2% during March. That’s the most on record, even more than what we saw back in June 2000, where households spent ahead of the implementation of the GST.

09:03
You can see that basically March’s data reflects widespread panic buying around the coronavirus, particularly at supermarkets, with 100% increases in spending on toilet paper, rice and pasta. But that, of course, is old data. The Commonwealth Bank, we produce credit and debit card data on a weekly basis. And last week, to the 17th of April, we saw spending down by 18% compared to levels a year ago.

09:28
so spending is lower across most categories of course services is down by 37 percent install spending is down by 27 percent of course online spending has held up somewhat it has lifted by three percent but clearly the trends in place across all categories we are seeing a decline food and alcohol benefited initially from the crisis as people stockpiled and continued to go out and eat and drink before venues were closed except takeaway but of course with people no longer allowed to go out

09:57
And about spending on food and alcohol services has fallen sharply by 5% to 24%, respectively, in the last week over the period to 12 months ago. Spending on food to be consumed at home, that’s still 12% higher than a year ago, of course. But spending on alcohol to be consumed at home is up by just 4%. Broadly, we’ve seen spending over the last 12 months to last week

10:20
for clothing by almost 60%, on transport almost 50% and recreational activities almost 40%. All activities have been hit hard by the COVID-19 restrictions and job losses in particular. We have seen a slight rebound in education, private school fees are due and of course some schools are returning online this week and next. The exception of course at the same time is household furnishings and equipment. We’ve taken the opportunity over the Easter period to do some DIY projects perhaps at home.

10:49
and we have seen spending there up by 34%, so Bunnings will be very pleased. By state, though, we have seen the services-led economies of Victoria and New South Wales and the ACT being hit quite hard. Spending is down by 21% in Victoria and 19% in New South Wales, and the ACT is quite reliant on international student numbers, which have been hard hit by travel bans. So we have seen spending in the ACT down by 19%. Now, turning our attention to slide number three,

11:16
If you look at these charts here, we have seen ACA research in fifth quadrant create what’s called a COVID-19 SME sentiment tracker. And they basically interviewed 300 SMEs online, these people are business owners with up to 500 employees. And they did this between the 3rd and 5th of April.

11:35
Now, what we found looking at the data was that two and three SMEs have reported decline in revenue. That’s pretty consistent with what we’ve seen with your Bureau statistics data in recent times. And that’s really occurred over the course of the last few weeks. And over one in four have already had to temporarily or permanently close their operations or hibernate. So it’s not surprising that about 74% of business owners are concerned about the survival of their business.

12:02
And in our key industry focus today, 66% of business owners in the hospitality sector and 33% of leaders in retail trade industries are very concerned about the survival of their businesses. 28% and 47% respectively are quite concerned. And two thirds of SMEs have reported a decline in revenue due to the COVID-19 outbreak with 47% declining.

12:27
reporting a decline in revenue of 30% or more. And in the hospitality industry, that increases to 77% and 54% in the retail sectors. A further 25% have reported a decline in revenue of up to 30% as well. Now, of course, we’ve had the federal government announce a bunch of stimulus measures, of course, of the $130 billion focused on the wage subsidy. JobKeeper is the key one. We have seen in terms of this survey,

12:55
this being welcomed by 59% of SME owners, but 21% of SME owners were dissatisfied. And these businesses claim that the relief package in particular has come too late for them. These measures would not be enough to keep the businesses going in this environment.

13:11
And this is particularly true of the hospitality industry with 14% dissatisfied and retail with about 17% dissatisfied. Big neutral response from hospitality too at 35%. So the jury’s out for some of these business owners. Interestingly, 60% of food and accommodation businesses have applied for JobKeeper with about 46% applying from retail trade so far.

13:34
The research also indicates that about 14% of SMEs have been actively looking for ways to reduce their costs. The most common measures have been reducing work hours and wages, which I’ve just explained from the Bureau of Statistics data. We’ve seen a termination in terms of staff and then, of course, forcing employees to take unpaid leave. 56% of businesses owners are working from home in retail trade and 56% of those in hospitality report that they aren’t working from home. In fact, they’re either not working or having to

14:02
obviously go to their premises to work. Now, turning our attention to slide four, or retail trade. Of course, we had some good numbers in March, which I’ve just explained, but if you look at what’s happened over the course of the last 12 months or so, retail trade or retail spending has remained very anemic. Declines in demand are anticipated to intensify

14:24
The retail sector’s already bleak outlook for 2020. We think that the jump in March is temporary. That’s been reflected in the April data from the CBA, of course. And we, despite supply disruptions, declining consumer sentiment following the COVID-19 outbreak, really is expected

14:40
to acutely affect retail sales going forward. And certainly, supply from China is expected to be disrupted in the short term for those highly exposed industries, such as electronics products. And consumers are also delaying those major purchases, such as cars and motorcycles.

14:57
Now, we’ve done some modelling and had a look at some of those economic indicators around retail trade and also the hit to specific sectors in certainly the economy. And what we’ve modelled is in an extreme social distancing scenario,

15:13
this would have more profound impacts on gross domestic product or economic growth than currently assumed. So, for example, if you take the data from the December quarter of 2019, if you look at those gross value added per sectors, we can see which industries would likely be hit the most and what the economic costs of such a shutdown would be on the overall economy. The industries which are most susceptible, as you expect, to strict social distancing measures are retail trade, food and accommodation and tourism, which we’re focusing on today,

15:41
Our modelling suggests that gross value added could fall by around $113 billion in the June quarter compared with the December quarter and that would yield a collapse in production of around 20% with retail trade income or GVA down by $10 billion and food and accommodation services down by $6 billion. So these developments really follow an already extremely challenging backdrop for retailers given weak domestic demand in the calendar year that

16:06
that we just saw in 2019. Of course, household consumption remains anemic. And of course, at the same time, the retail sector has been dealing with the bushfires and smoke hazes. So if you look at the chart in the bottom left-hand side there, you can see that real retail spending fell for the first time in 28 years at the end of last year. So a bit of a precursor to the recession that we’re having now in advance of COVID-19 anyway. And over 2019,

16:30
we saw real retail sales rise by just 0.3%, which is the slowest annual growth rate for a calendar year on record. At the same time with annual retail spending in New South Wales,

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declining to a negative growth rate. We have seen that fall by about 0.5%. That’s the weakest in eight and a half years in February. And that’s really after those bushfires on the south coast, Hunter Valley and Snowy Mountain regions really impacted spending. And in Sydney, the smoke hazes that we continually had here over the course of a few weeks, crimps spinning at cafes and restaurants in particular,

17:05
So really, that has led to a very weak backdrop in advance of COVID-19. Now, if we look at the outlook in terms of the NAB business survey in March, retail business conditions, as you’d expect, are at the lowest in 11 years. So around the same levels as we saw in the last recession back in 2000 and sorry, back in 2010.

17:25
the early 90s, but also during the GFC, we’re back towards those levels too. So around those 11-year lows. Of course, there’s been a very long list of retail businesses that have announced store closures. So far, I won’t go through all of them. But if you look at Kepler store traffic in terms of foot traffic to retail stores, over 80% of stores are currently closed and retail sales are falling at around 80% at the beginning of April. So you can see that reflected in those two charts. So very much a plunge in that retail traffic.

17:55
Tim Jones, Now moving on to the next slide around food and beverage services. Tim Jones, You can see there that restaurants cafes pubs and food service establishments have often generated Tim Jones, Of course, a significant portion of the income from tourists and China is our biggest source of tourists or has been in terms of the numbers of the rivals and the amount of spending.

18:16
We’ll talk about that in a minute. But the current travel ban is likely to reduce the pool of customers available for food services going forward. And demand for restaurants has fallen sharply, with many restaurants closing down their operations. If you look at the chart on the bottom left-hand side there, data from OpenTable shows that restaurant bookings in Australia have collapsed by about 100%. And that’s after the federal government obviously implemented a ban on operators offering dine-in services from the 24th of March.

18:44
Revenue growth in the sector broadly was already very weak. Revenue growth particularly

18:50
Certainly, if you look across the sector, sector compound annual revenue growth has declined by about 2% for fast food and takeaway services and almost 3% for cafes and coffee shops over the past five years. Restaurants and pubs, bars, nightclubs have seen modest growth of less than 1%. So we already had a very challenging backdrop for businesses with revenue growth already under pressure prior to the COVID-19 crisis.

19:14
We’ve done some modeling with the help of IBIS World and just looked at potential forecasts for this year and next. It’s obviously very difficult at the moment to come up with these numbers based on the uncertainty around the virus in terms of the length of restrictions and really the consumer backdrop at the same time. But if you look at fast food and takeaway services,

19:34
The outbreak of COVID-19 is expected to have a significant impact, with a sharp drop in consumer confidence expected to lead to a decline in industry revenue of about 16% in 2020. We think there will be a rebound of 11% in 2021. The cafes and shops and coffee shops, with the announcement of restrictions on March 23rd,

19:54
Of course, that’s the exception of takeaway services. We estimate a 23% decline in revenue in the current year before a 12% rebound in revenue for cafes and coffee shops over the course of the next 12 months or so. We’re also predicting a modest lift in restaurant and pubs, bars and clubs revenues next year, up by probably 0.1 to 0.5%, and that’s after declines of up to 0.5% in 2020.

20:20
Now, if you move to the next slide, slide six, tourism and accommodation services, of course, if you look at the ABS data, Bureau of Statistics data that we’ve seen most recently, approximately half of all Australians were reported having to change or cancel their travel plans during March. That’s the latest data we have due to the spread of COVID-19. Australia’s tourism industry was obviously a money spinner last year. In fact, in 2019, 9.5 million Australians

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tourists came to Australia, the highest year on record. And those tourists, international tourists in particular, of course, spent a record $45 billion worth on food, accommodation, theme parks and airfares. So that’s a lot of lost income for the Australian economy, of course, and a record 1.4 million Chinese tourists visited the country. And they spent around $12 billion lost though here. But of course, travel bans were placed on Chinese visitors in February, and

21:15
And we’ve seen the latest tourist arrival data, which is in February, that visitor arrivals from China plummeted by 20% from the year before. And of course, Australia’s international education sector is a big income spinner. It’s our fourth biggest export. And that income’s worth $38 billion. And international student numbers fell by almost 8%.

21:35
in February to 572,000 international student visitors down 6%. So that economic hit to the tourism industry and the higher education sector is going to be very elevated for the higher education or universities that it’s been estimated to be about $3 billion in total. And if you look at the chart in the top left hand side, you can see here that travel exports

21:56
So tourism and education combined, as well as passenger transportation, that is down by 14.8% to just under $5 billion. So we have seen that fall from record highs. And you can see that reflected in those numbers of flights, the travel ban, which has become

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even more focused around the world. So, of course, Australia’s international borders are shut at the moment. We have seen those flight movements really, really come down enormously. For example, Sydney has generally over 400 plus flights coming in on a daily basis, and that’s fallen to around 40 to 50 most recently. And you can see…

22:34
The impact on companies too. Sydney Airport has recently revealed domestic passengers fell by 97% and also international passengers down by 96% in the first two weeks of April. And the airport’s had to raise an additional $850 million in short-term debt to increase liquidity to deal with the situation. The federal government’s been out and about. It’s announced some

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packages for the airlines on the on march 18th they announced the 715 million airline package and then march 28th a package of almost 200 million dollars focusing on regional airlines but of course that’s not been enough to say virgin australia which has now entered administration with deloitte aiming to restructure the business and find new owners

23:15
And really what we’re expecting to see on the back of that is revenue for international airlines to decrease by 32%, at least in 2020, and domestic airline revenue to decrease by 24% this year as well. And of course, that has a knock-on effect to the hotel and resort sector. Hotels that remain open are currently operating at just 10% occupancy rates. Of course, some of them are taking…

23:38
some of those quarantined COVID-19 people, particularly off the Ruby Princess. But of course, we have seen key staff retained on the back of that for the eventual recovery. Of course, revenue in hotels and resorts is forecast to decrease by at least 11% this year, with an 8% rebound expected in 2021. Thank you very much for your time.

24:01
Well, thank you very much, Ryan. I’ve heard it, I’m living it, but I still can’t really believe it. Some of those numbers are staggering. Over 70% of SMEs concerned about their business’s survival.

24:19
So it’s no sort of coincidence that we term this set of scenarios intensive care. So just to talk through our examples, I’m going to hand over now to Stuart. Stuart?

24:35
Thanks Andrew and thanks Ryan. So today we’re focusing on two of the three sectors that Ryan has discussed at length. We’re looking at some retail and looking at a

24:50
But some of those stats that Ryan spoke about are quite frightening. 10% unemployment, 22% drop in vacancies, 20% drop in hours. All these tie into a family’s discretionary spending, which these two industries are heavily reliant on. So if we go to the next slide,

25:19
The first one we’re going to look at is just a low-price fashion chain, the $10 to $20 female garment sector. It’s got 10 locations operating on the Eastern Seaboard. It’s got 75 employees. It sources all of its stock from overseas, and they’ve had some accrued foreign customers.

25:41
currency losses. They’re three months behind on their leases, but amazingly, they have no personal guarantees. As Ryan alluded to, it’s been the worst summer trading since its inception, so it’s got no war chest to get through. Its lodgements are now being made on time, but the directors are subject to a lockdown PAYG, super debt of $300,000.

26:07
The directors do have substantial assets, but they’re also looking to minimise any future loss and look to exit the business. So if we go to their concerns on the next slide, again, the significant fixed costs being the rent and the wages, the evaporation, I should have coined that, of their revenue.

26:29
and the risk of the PG exposures on any of the shop fit-outs and the like. So we go to the next one. This one’s just a small restaurant. Many of you will have clients in this space. It’s been operating for five years. It’s got an accrued ATO debt, just basically GST and a bit of PAYG. Their rent’s a pretty substantial amount, 15%.

26:54
of their turnover. The lease has only got four months left on its terms. Kitchen is subject to finance. We’ll go to the next one. Their concerns, again, significant fixed costs, the home delivery margin, which their takeaways, such as Uber Eats and Deliveroo, are biting into it. There is some news around of these home delivery companies

27:24
modifying or slashing their margins. That seems to be on a case-by-case scenario, and it seems to be in the States where that is at the moment. Uber Eats in Australia has announced a fund, but they haven’t as yet, from what I can see, announced a discount on their margin.

27:44
And their concerns is also the PG. I also want to raise something that is very relevant to hospitality, especially a restaurant. We can assume here for the hypothetical purposes that the head chef in this restaurant is out here on a 457 visa.

28:03
because that becomes relevant as we go through the stimulus packages. All their casual staff and the like are all citizens, but their head chef is on a 457 visa. So if we go to the next slide,

28:19
We’ll quickly have a look at these stimulus packages which we’ve gone through before and we do have a major update on one of them but the JobKeeper payments, the 1500 per fortnight, they’re all eligible for it except the head chef. The head chef of 457 Visa cannot get it and of course that’s going to have a massive issue back for those individuals whether or not they return home, if they can return home,

28:48
or where they actually get some financial support from. There is some relief should the…

28:56
companies wish to pursue it. And the ATO cashflash, which we have, or I have, looked at in the last two weeks, I have assumed, based on my reading of the legislation, that the credits that would be applied from the BAS lodgements would be offset against legacy debt. The ATO has come out, and this was raised by one of the attendees at the webinar last week, and I thank them for that.

29:26
Any excess credit will not be applied against any legacy debt. It’s only going to be applied against the debt that’s accrued in that VAS. But it might be offset against other debts with other government agencies. So the companies, the upshot is the companies will get the benefit of up to $50,000 to June and then up to $50,000 up to September.

29:47
They’ll get ready access to the cash. Whether or not they applied against that legacy debt, that legacy debt would remain. So if we go to the next slide. State-based stimulus is, again, the payroll tax relief. The fashion chain may be able to get it, but they’re looking to exit anyway. The business grants, the fashion chain’s not eligible. It’s too large. And this is across each of the states. Assuming that the…

30:16
restaurants inhabited in New South Wales, they would be eligible for the New South Wales government state grant of $10,000. Again, if there’s any finance on either of those companies, they would be able to get reduction in payments on their interest would just be capitalised. We’ve got the next slide. So the outcome…

30:39
Both companies are worse off, terrible trading conditions. They do get the benefit of $100,000 up to the $100,000 cash injection. And this is where advisors would be wise to step in and really focus the director’s minds on where to deploy that money.

30:57
The fashion chain, the director wants to exit and the restaurant, I just think they’re too far behind the eight ball. And with the 457 visa head chef potentially exiting, how are they going to restart and reboot the business? And that leads us on to my learning colleague, Mr. Baskerville, to talk about the options. So thank you.

31:20
Thank you, Stuart. Yeah, I like the suggestion around identifying early that this is going to be a difficult process to ride out. Utilise the stimulus to get good advice to be able to help you make the right decisions. So I think that segues beautifully for what Chris is going to talk to us about. Chris?

31:44
Yeah, why the love affair with Winston Churchill? Very simply, Winston Churchill rose to power in the UK at a time where the UK was going through its own crises. And out of all the European leaders that were there, he was the one that refused to bend the knee to Nazi Germany. So here we are today with webinar three. We’re showing you guys how you don’t bend the knee to coronavirus. But let’s lead off with my favourite learned colleague. That is, success is going from failure to failure with no loss of enthusiasm.

32:12
And I think if those remember the history correctly, Winston Churchill was the Minister of Defence that actually ordered the landing at Gallipoli, which obviously we’ll be celebrating in its anniversary this weekend. And just to add to the history lesson before we move on, it then reminds me of a quote from General Rommel, who was the leader of the German armies in North Africa. And he said, if I had to take hell, I would use the Australians to take it and I’d use New Zealanders to defend it.

32:41
So moving on to the next slide, this is the pie chart representing the insolvency appointments in the last financial year, so to 30 June 19. You can see half of them where the directors have voluntarily decided to wind up the company, mainly due to insolvency reasons, obviously, and over a quarter of that is the court order winding up. So this is usually a creditor that obviously remains unpaid, that is obviously pursuing their debt using the court system.

33:11
The webinar number two that we concentrated on was in this green quadrant, the 15%. Because this is where Virgin Australia is currently in at the moment is that green slice of the pie. Because this is where the ability to formally restructure and actually get the affairs of the company back on track comes to play, which is great.

33:31
Moving on to the next slide, we go back to that business curve and I will, business life cycle, and I will just confess, this is not a Gersh inspired diagram. I have borrowed this from the internet, but it actually simply explains the business life cycle, which is startup, growth, maturity, and the point in decline.

33:48
Where the fork in the road is in the red area there, the decline part, that is ideally the place where you want to be considering the appointment of a volunteer administrator, because it allows the company to rebirth in some form, albeit under new context. Today, obviously, we’re rolling through to what does liquidation side look like?

34:08
So most often liquidators are appointed at the near death or death part of that business lifecycle. And as you can see, the more the business spins wildly out of control, the less options directors have to deal with their own affairs. So when we come to the realistic options on the next slide about

34:26
When a director is faced with some pretty tough questions that they have to ask, well, obviously, one of the first ones is obviously, hey, sale of the business or alternatively the assets. Now, we want to stress to people out there that if this is one of the options that are there for you, make sure you get proper professional advice. And we have to say this, but you’ve got to be really aware of untrustworthy advisers.

34:49
You’ve got to be aware that there are people out there that are obviously trying to take advantage of people that are in distress, that can’t see the forest for the trees. They’re looking for that clarity. So all we say is just make sure you use trustworthy advisors in that. Getting valuations, make sure that they’re from an appropriately qualified person. So make sure they’ve got proper professional valuations, they’re qualified accountants, they’ve got proper business valuation experience and business advisors, etc.,

35:15
If you have to sell, marketing is, it’s really important that businesses are properly marketed that draws attention to the sale. You know, there’s no point in putting an ad in the back of the courier mail that no one’s ever going to read. Make sure it is systematic. Make sure there’s four ads in four consecutive courier mails.

35:32
make sure also that the proceeds of the sale actually go to the vendor because these are all the red flags that liquidators are constantly looking for is where did the sale proceeds go and was the asset sold at fair market value so moving on to the next slide when we have to deal with the closure of a business this is a really really tough decision for most directors to make and usually it comes at a point emotionally where they’re just sick of it they’re kind of i’m done

35:56
I don’t want the stress of this business carrying over into my family life. I don’t want the stress of the business carrying over and affecting my kids. So they’re kind of done. So we obviously are promoting out there that we want people to make sure they get the proper advice, get proper valuations. And there’s no point, there’s no reason why you can’t engage as an insolvency practitioner to walk you through what would be the orderly windup of a business. And we say that director’s mindset, if this is it, if this is the decision that needs to be made,

36:26
It’s thinking about how do I mitigate losses? How do I stop more financial harm happening to the people that are out there?

36:34
So leading on to liquidation in the next slide, the purpose of the liquidator and their role is really to make sure that a company is wound up equitably and fairly. And at a conceptual level that even goes from, why do liquidators exist? Most people don’t like us, we get that, but like why are you here? And in essence, we’re there to basically redistribute the assets of a failed entity, redeployment for someone in a successful entity.

37:02
which we find for some time. So what is the process? If we go into the next slide on, you know, what is liquidation? Effectively, it is to bring an end to the company. And the view is to then deregister it off ASIC’s database. At that point in time, it ceases to exist. So for those that are unfamiliar with what a liquidator does, here is, in essence, is what we do. We realise the assets that are there.

37:26
and we claw back the assets that are not there that should have been there. So effectively what we find is some people tend to make assets disappear to mum, grandma, the step kid, the dog for virtually no consideration. So our job is to get those assets back and make sure we turn them into cash and get those money back to the people that rightly erode the money. We have to report to creditors and ASIC

37:49
And we investigate the conduct of the affairs of the company and the director. And obviously then, once we’ve got our pool of cash there, we then distribute those monies in an order of priority. And the order of priority is set out in the Corporations Act. And I won’t bore you with any of those details today. We can talk about that later. Ultimately, once the monies are gone, the people are repatriated with some monies, hopefully, then we then deregister the company from ASIC. When do you put a liquidator in? Pretty easy. As soon as the company can’t pay its bills on time.

38:19
That’s the short and the sweet of it. In webinar two, we talked about when was an ideal time to consider a voluntary administration appointment. And I’ll just direct you to the slides for webinar number two. How we’re typically appointed, as you saw by the pie chart, it’s usually voluntarily by the shareholders of a company, of an insolvent company, because they’re going, we can’t pay our bills on time. We’re kind of toast. Sometimes the director is the shareholder and they’re kind of sick of it.

38:45
The other alternative is by court order. And occasionally we end up with shareholders of an actual solvent company putting us in. But again, that’s a webinar for another day. So what are the advantages as we move on to the next slide of liquidation? Really from typically a creditor perspective, it’s someone independent is taking control of a company that is hopelessly insolvent.

39:07
It allows assets to be clawed back. And there are very, very strong powers that liquidators have to do this. It’s still a creditor-driven process. The courts can get involved, but mainly it’s driven by the people that are actually aggrieved. And the essence of it is to balance fairness. So is it fair?

39:24
that a director of a distressed entity that knows his company is distressed, is it fair that he moves assets to his family trust and creditors get nothing? Is it fair that the director’s mates all get paid out their debts and the creditors that aren’t the director’s mates get nothing? Is that fair?

39:40
So obviously our job is to balance that fairness. We also become the champions for all creditors. So any individual creditor sometimes might not have the means or the powers in order to get their money back. So our job is to be that one champion for all. And obviously,

39:57
Toe in toe with doing that job is giving us the powers to obviously investigate and recover records. And we are not averse to using a public examination process where people are stuck in a courtroom and ask a whole series of questions. Or alternatively, if we know where assets and records are, getting a warrant to actually go and grab those assets.

40:16
But part of those investigations process and reporting back to creditors is giving creditors real transparency over the entire process. And that’s part of the reason why we kind of exist to be independent and be transparent.

40:30
So in closing, for those of you that have a bit of light reading of the Bible from time to time, King Solomon, Proverbs 24.10, if a man falls to pieces in a crisis, there was not much to him to begin with. So again, let’s not bend the knee to coronavirus. Let’s stand firm and deal with the issue that’s at hand.

40:48
And of course, I can’t close without at least one more quote from Winston Churchill, and that is, a pessimist sees the difficulty in every opportunity, an optimist sees the opportunity in every difficulty. And in crisis, there is danger, yes, there is also opportunity. Thank you, Andrew.

41:06
Thanks, Chris. I’ll note that we’ve had an interesting comment here saying that perhaps you should be looking at Marcus Aurelius, who was a Roman emperor, who Churchill was quoted as copying. So perhaps that might be for another time for your reading. That’ll be webinar 29. OK, before we get to some of the questions, I would like to revisit the insolvency curve, which is the concept that sort of brought all of these webinars together.

41:34
Like the Virgin Australia board, it’s about making the right decision at the right time rather than panicking or relying on deferral tactics.

41:44
This week, I thought I would talk to a recent example that I’ve experienced. I was approached by a tour operator who had pre-sold vouchers for experiences, events and holidays, which are now largely unavailable. The business has been frantically trying to placate the voucher holders by offering alternative support options.

42:04
However, due to the uncertainty of the landscape, this has created significant stress for both parties as a realistic solution is simply not available at this time. The board have considered utilising the VA regime to deal with the extraordinary breakdown of their business model. The advantages of the VA here is a consistent and coordinated approach to voucher holders

42:25
thereby providing transparency and time for the consideration of alternative arrangements. The appointment also protects the business from enforcement actions or litigation by any of the contingent creditors and the directors from breaching their duties through their good intentions to honour the vouchers. This is just one example of where early intervention can help restore a semblance of balance to a business.

42:49
The stress of this scenario is also a good segue into my next reminder that the challenge of this crisis continues to affect us all in different ways. And Chris just mentioned that quite often when people come to see us at a point when they need to close their business down, they feel like the weight of the world is on their shoulders. This week I’ve had discussions with people about the stresses of working from home. And thanks to our partnership with Beyond Blue,

43:15
I’ve been able to point them in the direction of the valuable material and messages that they have on their website. I’d encourage everybody to make the time to go and have a look.

43:25
And finally, don’t delay starting that conversation. Your friendly neighbourhood JS insolvency specialist is always available to talk through specific scenarios. We love solving complex financial problems to help preserve value in business and life. Make the call and make the right decision at the right time. Now, I think there was a couple of questions and comments that have been opened up here. The first one was in relation to sort of

43:55
the real economy, business to business and manufacturing, which Ryan’s kindly made some notes on. It wasn’t necessarily the focus of today’s webinar or update, but the point is that everybody’s struggling at the moment. So I guess, Stuart, if you’d want to reach out in relation to that a little bit more, then feel free to. Now,

44:23
We’ve got another comment here around just Virgin Australia’s early action and this being potentially a good case study in future for how it could be a successful VA can be utilised. Well, we’ll be interested to see that, but certainly I think we agree that it’s not the time for deferral, it’s the time for action. So thanks, Matt. Yeah, like I mentioned earlier, slides will be available on the website shortly after this webinar finishes.

44:54
Okay, and I think that’s about it. Okay, thanks everyone once again for your attendance. We are considering a range of further webinars to focus on some of the areas we are continually being questioned about, such as personal insolvency and director duties. However, we’d love to hear from you on topics that may interest you in the future. So please drop a comment in the Q&A box with some feedback. We’re gonna leave it open for the next 15 minutes or so.

45:23
We’ll also shortly circulate a questionnaire about our webinar series. We would greatly appreciate your feedback so that we can improve any future sessions. Stay safe and well, everyone, and see you again soon.