In today’s climate banks are often reluctant to incur the costs involved with appointing a receiver or controller when businesses struggle. When shortfalls are experienced de Jonge Read has had a great deal of success in being able to negotiate commercial settlements for directors who are prepared to assist the banks in obtaining the best return possible. This month’s case study outlines one of these success stories.
BACKGROUND
We were engaged by a client who operated a real estate business that had encountered a number of financial difficulties within its group of companies. The result of these difficulties saw its primary financier (a big four bank) pull funding. The real estate business effectively stopped trading and was left with the task of repaying an insurmountable debt back to the bank.
The director of the company had personally guaranteed the bank debt as is found in most cases. The director also jointly owned his family home with his wife, however there was little equity left as it has been used to secure bank loans when business operations required critical cash injections to pay bills. The wife of the director desperately wanted to retain the family home as they had young children and were entrenched in the local area. If the guarantee was called on there were minimal other personal assets which could be used to repay the debt. The expected result would have been bankruptcy and the loss of the family home.
The business’s only real remaining asset was its rent roll. The bank was reluctant to take operational control over this but did recognise that there was some real value to be gained if it was able to be maintained and sold on the market in a “non-distressed fashion”.
STRATEGY
It was ascertained that the trading of the rent roll was positively geared excluding capital repayments. As such de Jonge Read entered negotiations with the bank with a proposal to allow the client sell the rent roll whilst maintaining the operations with all sales proceeds being paid to the bank. The director stayed on and ran the business and drew a minimal wage during this period. The sale of the rent roll took some time to be achieved however de Jonge Read worked closely with the bank to ensure all reporting requirements and other essential actions were being done. The bank was updated at all times with the progress of the sale and other matters which required the bank’s consent.
Our strategy was to keep the bank comfortable that all was being done in order to achieve the best result for the bank. This included preserving the bank’s security value, minimizing the bank’s costs and their time spent managing the file. Once the book was sold it was then our intention to enter into negotiations with the bank in an effort to settle the director’s personal guarantee.
OUTCOME
The result was a sizable addition to the amount recovered from the bank’s security (in excess of $200K) due to the cooperation of the client and the efforts of de Jonge Read.
Negotiations with the bank saw them settle the personal guarantee for a substantially lower amount than originally demanded. This saw the client avoid bankruptcy, being able to retain the family home and the ability to move forward with life.
THE TAKE HOME
de Jonge Read has found that banks in this current climate appreciate and take into consideration when directors put in the extra effort to maximise the sale of securities to minimise the bank’s losses.
Should you have clients or associates that you know are struggling with financial issues, our team of Strategists would be pleased to discuss options that are available on how to best design and implement insolvency strategies. Call us now on 1300 765 080.