Case Studies

Note:  Client names have been changed for Confidentiality. PY = Protect Yourself.

Case Study No. 1

“K-Co” was a family business that had been operating for more than thirty years and had grown to become a supplier to many of Australia’s largest manufacturing companies. K-Co designed and built industrial moulds and its reputation for quality, service and competitive price was second to none.

For the last several years, however, competition from China began to erode K-Co’s market share and it found itself unable to compete with product sourced in China. K-Junior, son of the Company’s founder, vigorously pursued the competition for years – even sourcing many components for the moulds in China rather than manufacturing locally. In parallel he began rationalising the Company’s operations, which meant retrenching staff who had been with K-Co for many years.

K-Co employed about 40 people in its mould business. A second company delivered a line of mould products integrated with other applications. K-Senior, founder of the Company, owned K-Co’s premises and rented them to the Company. He began to “carry” the rental payments when K-Co couldn’t make them. One expense that couldn’t be carried, however, was lease payments on more than $2 million of K-Co’s $5 million in plant and equipment.

By the time K-Co came to see PY, K-Junior freely admitted that he had lost the battle. “I can have my latest mould built from scratch to my exact specifications in China and have it delivered to my existing Clients at nearly half the price K-Co can manufacture locally – and I don’t need any personnel, plant or equipment to do so.”

K-Junior also admitted it looked like he had not only lost the battle but was about to lose the war. While fighting the battle, K-Co’s reserves had been depleted; creditors had grown; regular paying customers had been slowly replaced by new customers who were not paying their debts on time; K-Junior himself had drawn only minimal wages from the business; rent to K-Senior was unpaid; and many of the remaining personnel had large entitlements such as 20 years long service leave. Worse still, the family was the major “lender” to K-Co and, if it failed, the loss would have been catastrophic.

PY undertook a review of the business and identified the alternatives available to protect K-Senior and K-Junior’s interests. Central to the strategy was maintaining control of decisions affecting the sale of assets should hostile creditors succeed in placing K-Co in Liquidation. This meant ensuring control of decisions made by creditors in a Liquidation.

Family ownership of K-Co meant that a number of the financial arrangements, while clear and functioning, were not properly documented. PY ensured that arrangements such as a formal lease agreement for the premises were documented, properly executed and stamp duty paid. New external funds brought in to support the Company by family members were documented as a formal loan agreement with a Charge granted over K-Co’s assets and all necessary documents filed with ASIC. These loan agreements were also linked to some of working director’s assets by granting mortgages over those assets, thereby giving some protection from third party guarantees.

PY independently negotiated with the Bank, which held an existing charge over the company – successfully purchasing that overdraft and gaining first charge. PY also negotiated with the Lessors for the plant and equipment to ensure that repossession and subsequent sale of the equipment was handled smoothly – obtaining fair market value rather than “fire sale” process and without large fees for handling the asset sales.

Finally, when it became obvious that a major re-structure was required, PY advised K-Co’s Directors to put the company in Administration, but with the protection of the Charge over the assets, securing loans by family members etc and allowing for a much greater degree of control over discussions with creditors. PY advised K-Co’s Directors throughout the Administration, attending all Creditors’ meetings and negotiating with the Administrator to put in place a Deed of Company Arrangement – effectively settling all past debts on favourable terms.

As a direct result of PY’s strategies, K-Co was able to be brought out of Administration with a “clean slate”. Assets of the Directors were protected and no creditor action was commenced against the Directors, including under the personal guarantees on equipment leases. A significant component of family funds put into the business was ultimately recovered.
If PY’s strategies had not been followed, the future of this family would have lain entirely in the hands of a faceless Committee of Creditors, most likely hostile and with no interest in whether or not anyone associated with the business even survived. Loss to the family would have been total, while they watched from the sidelines as thirty years of their life was fire-saled.

K-Junior cannot speak too highly of PY: “We were so lucky” he said. “Not just because we were referred to Protect Yourself but because we were referred in time. My father and I had been working long hours and hoping we’d trade through, so everything else was let slide. If we’d waited even another few months there wouldn’t have been time to do what Protect Yourself recommended. They saved us, despite ourselves”.

Case Study No. 2

Karen and John had been living together for just over two years when Karen decided to set up a Personnel Agency. They formed a new company, owning it together; and Karen worked in the business full time. John was employed elsewhere but referred business to the Agency from time to time.

The business thrived. Karen was a natural, Clients loved her and she soon had a team of people, strong regular sales to major Clients and a profitable business. After a couple of years, everything was going well, at least in the business. Karen and John’s relationship, however, began to deteriorate.

The Agency had given Karen and John a great lifestyle. Karen hadn’t thought much about drawing an appropriate salary for the hours she was putting in. As long as the money was there to draw – and it was – Karen and John used the profits to travel and enjoy life.

Once their relationship began to deteriorate, however, John continued to expect Karen to put in the hours working for the business – a business in which he did no work – and that he had a right to an equal share of anything and everything in the business.

Karen was having lunch with a friend after she had her first real fight with John about this and – fortunately for Karen – her friend referred her to Protect Yourself.

PY personnel met with Karen for a confidential discussion and went through the history of the business and her personal objectives. A strategy was developed to ensure that Karen would maintain control of the business, even if John became completely hostile.

PY drew up an Executive Services Agreement for Karen that contained a number of protections for her. As the “Key Man/Key Person” in the business, the Agreement between the Agency and Karen’s personal company provided her with a number of entitlements and rights – including the ability to register a charge over the Company in the event contract payments and other conditions were not met.

PY advised Karen as her relationship with John worsened and he began issuing legal demands on her in an attempt to access company assets. He even attempted to force the Company into Administration by refusing to sign documents.

PY then perfected the charge permitted by the Executive Service Agreement and filed with ASIC. As the business was continuing to trade profitably, all other creditors were kept up to date and the debt owed to Karen’s personal company – secured by the charge – made her the controlling creditor in any Administration.

John tried coming at Karen from several legal angles, but in the end it all came back to control. Karen had control, not only as the founder and key person in the business, but also over the Agency’s business future.

If Karen had not implemented PY’s strategy, it is likely that John would have succeeded in forcing the Company into Administration as part of their personal break-up; and that in that Administration Karen would have no control as she watched her business wound up. In the process she would have to argue her entitlement to salary or wages. John most likely would have succeeded in making sure she received a lesser result that that to which she was really entitled and would have gained access to 50% of the remaining assets, which included the Agency’s cash reserves.

“I never thought he’s go as far as he did” said Karen. “Protect Yourself certainly protected me. I still have my business, John signed over his shares on my terms, not his – and life has never been better.”