To Litigate Or Not To Litigate
This month’s case study looks at a very successful business operating in the marine sector. The business had an enviable record of success and had won a number of major contracts. Businesses can face problems from unexpected events that are impossible to predict. In this case we look at the options the company director, Brad, had and what he did to protect his business.
Brad and some friends had started the business from the ground up. They primarily provided components for docks and pontoons used in marinas. Brad was passionate about the business and had invested considerable effort into its success. The business was trading well, all the bills were being paid on time and life was good.
Out of the blue the company become embroiled in a legal dispute. A client made a claim that their products were defective and had caused considerable damage and required expensive repair works to be undertaken. After looking into the matter, Brad was certain that the products had been used inappropriately, and not for their intended purpose. He believed the claim against his company was without merit. The dispute escalated and the client sent Brad’s company a Statement of Claim for a significant amount.
This whole situation had blindsided Brad, so he went off to see his solicitor. Brad got some good news and some bad news. His solicitor advised that she was confident the claim could be defended and that Brad was in a strong position. So, that was the good news. The bad news? The estimated legal fees to defend the claim. Brad’s solicitor required an initial amount to act on the company’s behalf. This was not a problem. However, the amount needed to proceed if the matter went to Court was a real shock for Brad. He then decided he needed to seek additional advice, just to satisfy himself there was not a better way to deal with this issue.
What happened next?
Brad went to visit his accountant to seek his advice on what other options he might have. The accountant arranged a meeting with de Jonge Read to assess the situation. We reviewed the situation facing the company and found that;
The overwhelming majority of physical assets and all intellectual property was actually in the name of an asset holding entity.
The trading entity operated the business under a licence agreement with the asset holding company.
The trading entity had minimal assets, limited to some computer and office equipment, some loans to other entities and some vehicles used by the director and other shareholders.
Brad had sought advice when he and his friends established the company, and they had implemented an effective corporate structure as recommended by their accountant. The situation did need attention though, as there were loans owed by other related parties, the arrangement to use the asset holding entities assets had not been documented and there were some assets in the name of the trading entity.
Brad was looking for a Plan B, just in case the legal dispute could not be resolved without the company incurring significant legal fees. We provided him with a comprehensive written report outlining how the group’s robust business structure could be used to effectively deal with the litigation the company was facing. The report included our fixed fee to manage the process and a detailed estimate of any other professional fees he may incur.
The creditor became even more aggressive, and Brad realised the matter could only be resolved through the Courts. He decided to implement a restructure as a commercial necessity. This entailed:
Valuing all assets held by the trading entity and selling them to the asset holding entity for full market value.
Conducting an assessment of the related parties’ capacity to repay their loans, and either having them paid in full or settling them for a commercial amount with funds banked into the trading entity’s account.
Incorporating a new entity to trade the business owned by the asset holding entity.
The asset holding entity cancelling the licence agreement with the trading entity and entering into a similar arrangement with the new company.
Documenting the agreement with the asset holding entity and ensuring that appropriate Personal Property Security Register (PPSR) registrations were put in place.
The trading entity distributing all available funds according to priority and security positions.
The trading entity appointing a liquidator to bring finality to its financial affairs.
At the end of the day Brad could have chosen to defend the claim against the trading entity. However, when he understood his options and how “Plan B” could work he realised that there was another way he could deal with the issue. This removed all uncertainty from the equation, with the restructure delivering a known and predictable outcome. While he was confident of his legal position, there was always the chance that things could go against him in Court.
Brad and his colleagues can now focus on the continued growth and development of their business without the incurring legal fees and still potentially facing an adverse outcome from the litigation.
de Jonge Read can assist clients in a number of different ways, not just insolvency matters. Our team have a diverse skill set, making us an ideal choice to assist business owners develop a Plan B in the face of unexpected challenges, such as when litigation becomes uncommercial or when a robust corporate structure is not in place.
Should you have clients or associates that you know are struggling with financial issues or need assistance in reviewing their business affairs in preparation for what’s around the corner, our team of Strategists would be pleased to discuss options that are available on how to best design and implement insolvency strategies.
Contact us now on p. 1300 765 080 | firstname.lastname@example.org