Ever walk past a store in your local shopping centre and just wonder how they are surviving? In recent times, we are seeing more and more retailers suffering financial hardship with no realistic exit strategy.
A recent matter undertaken by our Worrells Gold Coast office dealt with a company operating a sunglasses retail store that had traded on the coast for over twenty years. Over time, sales continued to decrease, as the company's suppliers had all set up their own online stores, marketing the same products at much lower prices—and sold exclusive seasonal products only available through their online stores.
Prior to seeing Worrells, the company director tried to compete, from continual sales campaigns, becoming the sole employee, to the director selling his home to help support the businesses cash flow. However, the sales revenue, cutting overheads, and injecting further capital didn't solve the company's financial woes.
When we first met with the director, he said that he could no longer deal with the stress of it all and saw no future in the business. With that in mind, he set a date for a final sale and subsequently handed the keys back to the landlord. When he closed the doors, he had no stock remaining but owed just under $80,000 to several suppliers who the director had given personal guarantees to.
At that point, the director and the company had a number of options including:
- The company could be placed into liquidation (voluntarily through a resolution of the company's shareholder, or by one of the suppliers applying to the court for the company to be wound up). Given the company had no remaining assets and the director had personally guaranteed all the outstanding suppliers, it was likely that if the company was wound up, the suppliers would enforce their guarantees and chase the director personally for the company's debts.
- The director (who at the time held no personal assets) could immediately file for bankruptcy to deal with the company debts he had guaranteed.
- The director could look to negotiate the settlement of the outstanding debts with the suppliers (and thus potentially avoid the company's liquidation and/or the director's bankruptcy).
After considering these options, the director chose to try and negotiate the settlement of the outstanding debts with the suppliers for the following reasons:
- The director's family were willing to give him $40,000 to help him move on.
- Suppliers applied large margins on the sunglasses sold to the company, so the director believed an offer of at least half of what the company owed would at least cover the supplier's costs.
- If those negotiations failed, the director was prepared to file for bankruptcy. Given he held no assets and was now unemployed, he was of the view that if suppliers didn't accept a deal, then under a bankruptcy scenario, it was likely that they would have to write off their entire outstanding debts.
The director then engaged Worrells to issue a report to the company's remaining suppliers to outline:
- the company's financial position
- the director's personal financial position
- the proposal to settle the debts (which is this case was a payment of "50 cents in the dollar")
- Worrells' recommendation to accept the proposal as it would likely result in a return to creditors as opposed to liquidation and/or bankruptcy, which would likely result in zero returns
- formal deed of settlement for the parties to sign (the terms stated that by creditors agreeing they release the company and the director from their claims; the creditors would withdraw notices lodged with credit reporting agencies; and any proceedings against company and/or the director be discontinued).
Following the report issuance, all the company's suppliers agreed to the proposed settlement terms, which released the company and director from the outstanding debts and enabled the director to move on from the failed business.
This scenario highlights that given the current economic climate, small business operators who see no future for their business may have several options to move on from the stress of their failed business.
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