In today’s episode, Chamberlains’ Managing Director, Stipe Vuleta, is again joined by Condon Advisory’s Managing Principal Schon Condon , Associate Gavin King, and Chamberlains’ Director Harold O’Brien, to discuss all things corporate insolvency post COVID-19. 

As with all Chamberlains Lawcast episodes, the information provided cannot be considered as legal advice, if you have any questions in relation to any information presented, please contact our office on 02 6188 3600 or visit our website at chamberlains.swelldev.com.au   

Presented by; Stipe Vuleta ft. Schon Condon, Gavin King & Harold O’Brien
Date; 20/11/2020
at Chamberlains Law Firm, Canberra.

 

Transcript

Stipe Vuleta: Hi listeners it’s Stipe from Chamberlains again, and we’re back chatting to Condon Advisory and Harry from our property and commercial team. Gentlemen, how are you going?

Schon Condon: Good. Really well.

Gavin King: Yeah, not too bad.

Stipe Vuleta: Look, it’s an auspicious day we’re here chatting about all things, property, all things, corporate insolvency, and a lot of what’s going on with the federal government’s decision with respect to tenants, nationally, Harry have you seen a lot of distress in the market with respect to the tenant side?

Harold O’Brien: Uh, I have in fact, yes. Um, and not only are tenants suffering, but also landlords. Um, and I, and I I’ve seen it on the faces of some landlords… Really genuinely stressed.

Stipe Vuleta: Wow. Um, yeah, look, I guess it’s concerning because something that we worry about a lot in the context of the corporate insolvency space is generally the conduct of landlords and, and even historically the very aggressive action they’ve taken against their corporate tenants.

Uh, you know, we’ll all recall the changes to the, to the voluntary administration regime really very much led by, you know, the conduct of Westfield in South Australia and what it used to do when people would suffer corporate financial distress. Schon, you’ve been in the industry for almost 40 years. Tell us a bit about what happened.

 Schon Condon: Look, it’s really interesting. I remember one, one job while I had myself. It was in one of the centres I can’t say that it’s the brand name that you mentioned, but, it was in one of the centres and we got appointed by the courts and we got notification about lunchtime. And I went out to the premises that afternoon and it was an interior decorating shop. So, it had a bit of paint, mainly papers, wallpapers, and all of those sorts of things. I’ve arrived at the, there wasn’t a lot left. Um, the director, um, hadn’t been there that day, so It had been closed up and I managed to access to the premises and there was some fit out, a bit of stock and, and whatnot.

So I ended up going and seeing the centre manager, told him that I was going to get a valuer out, um, the following morning, uh, and went to sort out, uh, whatever it is they deal with, that’s all fine. But I queried him about selling the business and he said, look, we’re not really interested in these types of business there anymore. Um, because its not generating the turnover that we expect to cover the rents that they were demanding. And I accepted that now the following morning when I arrived with my, my, um, valuer. We were confronted with a completely empty stall. And I was bewielded. We went down to city center management and there’s no one around, there was nobody to speak to.

Schon Condon: And I ended up managing to speak to one of the other shop owners who took me out the back, into the delivery bay area behind the shops, on the, on the condition of, I didn’t disclose to anyone, who had done it, but he said that what effectively happened, he said mate, five minutes after you left yesterday. They came in and they pulled everything out of the store and put it at the back, and the message was given to all of the shopkeepers that anything that I wanted that could have.

Um, and so with any ability to trade the business on or anything was lost. In that one single action in that bloody mindedness. If we don’t care, um, was, was it, and there is, there is a lot for some certain groups of landlords was, uh, to pay for, and, you know, they’ve driven rents to, to levels, which were unsustainable, which is the first point was the thing that drove, uh, the internet supply people to the position that they were.

I mean, the minute you, you say you’ve got this, a similar situation occurred actually in the taxi industry, um, because you’ve suddenly got an amazing cost to buy the plate. Um, and the return on the plate meant that that had to be added to the, to the cabfare, which meant it became a disproportionate. So Uber’s ability to walk through the door and, and squash it. Uh, was quite successful. And now it’s quite interesting that the cost of a Uber fare in certain instances can be very similar, if not, more than a uh, an ordinary taxi fare. So it’s, it’s really interesting. This change has had come, and I think as Harold was saying, in the current market. Um, this is probably one of the best situations where landlord and tenant need to sit down.

Schon Condon: Um, and work out a solution, which is not going to be what either party wants. But it’s got to be found on common ground. The landlord must understand what’s going on and what potential future demands on business premises could well be. And, um, they can, they can set a level of rent where the bloke says, where the tenant says, I can’t operate at that point. And so they will go and find alternative solutions, whether it’s telling staff to work from home, um, you know, with, with the lack of having the need to bring people in the offices, then you can go and get a, um, factory unit style of thing and have the staff coming in there, and then you’ve got storage space and, and all sorts of options that the whole world is a very changing place. But I think for any landlord, that wants to go for a confrontational approach. Um, and for the very large retailers, cause I think they’re the only ones that are actually driving, uh, a tenant confrontational approach.

Um, I think it could be a very costly decision at the end of the day. One of the interesting quotes that I read the other day coming out of the U.S there’s actually malls now that are buying up the dying [00:06:00] brands. The franchise type brands, and buying them up. So that it’ll switch from being landlord to actually the business owner of a number of stores, which they operate in a number of environments. So the market’s changing underneath everyone right now.

 Stipe Vuleta: Wow. That is, um, that’s quite illuminating because what you were saying and what Harry mentioned got me thinking about. Um, this intersection of the preservation of value, you know, for the last 20 years in particular and insolvency, we’re really, we really talk about the preservation of value to the extent that we can. It’s not about being punitive. It’s not just about investigation. It’s about preserving businesses in the VA process or through schemes of arrangement or, preserving value, at least some value for creditors in the context of the liquidation. But this seems to be emerging of how do you preserve the value of, of landlord businesses and their enterprises, particularly the mega landlords across the nation, and the value to society and the potential detriment of their many tenants continuing to face ongoing financial distress.

Harold do you think that there is a way forward for a consensus based landlord tendency advocacy process?

Harold O’Brien: Well, it’s an interesting question Stipe.. I’ve often thought whether it, the landlord and the tenant form, form some sort of cooperative or joint venture in a sense, and tried to share in the profits, let’s say of the business itself and rent be determined in accordance with that somehow. Um, yes. Yeah, it’s a difficult, it’s a difficult question.

Stipe Vuleta: Yeah, look, I mean, I think even, even hearing you work through the question in your mind, I can see that it’s going to require if something like that was to be successful, it’s going to require a shift in thinking, um, for landlords and tenants. Um, Gavin, have you seen any scenarios over the last couple of years where, you know, had some consensus been reached between landlords and tenants? A corporate insolvency might have turned from, I guess, uh, a failure to a success.

Gavin King: Yeah. I think there’s a number of businesses that we’ve been involved in. Like, uh, one that comes to mind is like a little tyre automotive type deal. Um, it was clearly, you know, the business had issues and they had VREO in fact, it wasn’t working in the business anymore. He was more just managing staff and not managing that staff well. Um, but our dealing with the landlord levels effectively absent for most of the appointment, um, went through a VA, do a lick them. Yeah, try to try it on to sell it, um, until it becomes to a point where it was just untenable to sell anymore. Because they couldn’t reach an agreement when we had to get it all out, you know, so effectively a, I say on type value rather than trying to find someone that would take over the lease because the landlord just wouldn’t not negotiate on the lease. They thought they had this prime spot. Anyone would walk into it. Um, you know, I think we took the appointment a year and a half, two years ago. I think it’s still vacant.

Um, because you know, they just couldn’t see sense in, getting someone back in there with a reduced rent, doing the same thing, versus having an empty shop. So I think that’s where some of these, big, mega sort of landlords, um, they’re going to find a lot of issue. They’re going to be these, bigger retailers, franchise retailers are going to be closing up. I think they’ll find a lot more difficult to find they were going to come in wanting to pay the rents that they’re seeking

Schon Condon: A sobering form of education. Um, Google abandoned, particularly abandoned, um, buildings and structures and things like that. And when you go through and there are complete shopping malls that look like, you know, Western Paramatta, uh, that had been abandoned and abandoned for years full of trees and water and all sorts of things. And it really puts it into perspective, um, that, that these, these are realities that are not of the future. These are realities that can be [00:10:00] found in places around the world right now. Abandoned places.

Gavin King: I seen one the other day on that point on that was, you know, the, the roof had collapsed there also mosquitoes had started getting in and water had gotten in, and I think the locals had all put fish in there, um, to sort of kill the mosquitoes. And so potentially as a food source, but like, it’s just, it’s interesting in that, you know, I think America is a classic example of having these just vacant malls, where they spent, billions of dollars on setting them up and end up having no one in them.

Stipe Vuleta: Yeah. Well, I guess it’s, um, it’s, it’s an interesting thing to talk about and certainly when you jump online, they make for really good browsing. But I guess we’ve just fallen into a recession recently. I mean, not to date this particular recording, but it’s, it’s a big deal first time in 60 or 70 years and, and, maybe something like this will be a reality in the future, but, but that being said, insolvency for the time being corporate insolvency numbers are still pretty flat. 

Schon Condon: They’re well down, I mean, I’ve been watching, we get a daily list of what’s what’s happening thats, been diminishing the further we go into these pandemic, um, And that’s probably a lot to do with the hiatus that we seem to have been parked in. It’s almost like a Dick Tracy watch where they say, I hold everything and there’s this pause. And then they sort of think about what’s going on in, in the middle. Uh, and I don’t think that’s really going to change until we get out of that. But the situation is if you’re insolvent before, particularly in the retail space, then I’m not sure that there’s going to be any change to this, that’s going to bring you at the other end and magically make you solid.

Schon Condon: Um, the recessions an interesting point as well, because yes, over the last few days we’ve, we’ve had it announced that, Australia’s now in recession first time in 30 years, um, prior to, well, the last one was in 91, 92. And prior to that, we tended to live in a seven year business cycle, which went from boom to, to the recessional, not quite depression, but a recession or, bust. And in, in many ways it was sort of like a cleansing process. There was an amount of insolvency, it wasn’t massive. I mean, it was talked about in big terms, but it wasn’t catastrophic. And it was when you really looked at it, most of the businesses that went broke were the ones that should’ve gone broke. It was almost that part of the business cycle, that cleaned the system out. And I’ve said for the last 30 years, Um, their have played with cheap interest rates, the whole lot.

Schon Condon: There’s been a lot of businesses kept alive artificially that really should have been out of existence well before now, uh, and strong ones. And you know, when you’ve got, when you’ve got a competitive, you put two shops, let’s call them computer shops. Um, one’s a decent business doing all the right things, and the bloke next door to it, is not paying his tax. And he’s just counting his prices to get the trade by not paying his tax. Well, he will go broke at the end of the day because the tax department will come out after him. But meanwhile, the bloke next door running, the legitimate business will go broke as well because the customers aren’t coming to him. Cause they can get it cheaper next door.

So that’s the damage that’s been done to society? Uh, in, in this process there’s been various industries have been recession within the last 30 years, we as a country haven’t been. And that’s been mining and property and various other things that have kept the overrule up there, but there’ve been certainly component to the Australian economy that have been suffering for years.

Stipe Vuleta: Well, are there any, you know, forget retail because we spent a lot of today’s recording talking about retail and landlords and tenants, but are there any particular industries you think are, are particularly at risk in the context of what is happening and what may very well get worse before we see this cleansing process? You so speak of Schorn or Gavin?  

Gavin King: Yeah, I think the cleansing is going to be a lot of industries that rely on other, like the retail add on type stuff. Um, so if you’re supplying shop fitting, you know, all that sort of manufacturing type stuff, it’s probably going to be for a bit of struggle. Um, car tyre manufacturing type stuff, people aren’t driving as much anymore. They’re all staying home. So that sort of thing, that’s probably a big issue as well. And that’ll flow onto the subsidiary issues in that. Um, but I think it’s, there’s a lot of, you know, looking at it and where it goes from the top line to where people aren’t spending money anymore. I see. No, one’s traveling for a long time. Um, so I think we need to talk about travel agents and potential airlines, and they can grow, say nice from the news. Um, we don’t need to spend any more time talking about them. Um, but it’s also the smaller ones.

Um, you know, like healthcare services, personal services, people aren’t getting their haircuts done as much, nails, all that sort of thing, I think will impact as well. Um, when a personal note, my wife, she’s a dog groomer, hasn’t been busier. Um, everyone’s at home with their pets.

Stipe Vuleta: It’s funny you raise that. I mean, um, Harry and I were working on a restructure of a business, uh, sort of over the last few months and the superficial indicators during the context of Corona sort of implied that they, they might really struggle. And, and we were looking at it from the context of a tendency advocacy perspective. You start looking at the structure of a business and trying to get out of inefficient leases and really just prod them in the right direction so they can continue to be profitable. And as people started approaching the end of the lockdown period, this particular business boomed, because they supplied premium goods for the household and people were sitting at home and deciding they want, those new things around them to make them feel better about all this time they’re spending at home.

So I think there’ll definitely be some winners, uh, but I feel like, you know, for every winner there might be more than a few losers. And, do you guys think that the current insolvency industry is going to be, is going to be able to handle all this corporate insolvency?

Schon Condon: Absolutely. I don’t think, I mean, there are people coming through the profession. Um, the industry has been smashed for awhile, the largest contractor, all of it has been, um, the, the treatment of the industry. And that’s very sad. Um, but there is a need for insolvency that as long as people are lending, there will be people don’t break and therefore you need a proper system and a properly organized system to deal with that. Um, but with the, the onslaught, we have been under utilized for some time now, and this will just mean that we will get busy. We’ve been busy before and there’s, I think Gavin won’t let her come in a little bit earlier. Um, when you’ve gotta hook in, we hook in, and you get the job done and you do it. Hopefully what this might do is, give everyone a chance to look at what parts of these are inefficient, and maybe now’s the time to get some of the garbage out of the system, um, in how we deal with things. Something that can be done in 15 minutes, takes two and a half hours because of the red-tape that gets added to it. They’re the sorts of things that could truly be focused on at this point in time.

Stipe Vuleta: Yeah. It’s an interesting point because you, you circle back to things like creditor outcomes and, and I guess the primary goals of the, the corporate insolvency system in Australia, at least outside of the voluntary administration process and, and you think how much better would creditors be if it was just cheaper and easier for those independent persons like yourselves who are involved in industry to get better outcomes for them? I mean, ultimately red tape doesn’t help anyone other than government, but it’s, um, it’s an interesting thought as well. I think in the context of. People really thinking about where they will be six, 12, 18 months from now.

So not so much insolvency practitioners and lawyers, but our clients in the industry. Um, am I someone who hasn’t yet fully appreciated the financial, social, cultural impacts of this recession or of what’s about to happen in my sector? Um, am I being supported by government stimulus and incentives? And maybe now is the time for them to get advice. Um, at a previous session we had about personal insolvency, we talked about getting good advice early, being decisive, taking action and mitigating risk. Uh, I genuinely fear that there are a lot of industry participants, a lot of small businesses who are sticking their head in their sand at the moment. And the ultimate loser for that will be society.

Gavin King: Yeah, I think I agree. Stipe. The issue with most of the people putting it down with insolvency is, they do put their head in the sand, they don’t look at their options. Um, and they tend not to look at those options until they’re forced to, either a creditor, pushing them towards something, the ATO chasing its debts, or, you know, your suppliers putting you on CAD and you’re going well, I don’t have any cash anymore. Um, how do I [00:19:00] deal with it? Um, and I think it’s a huge swath of businesses out there that are, that are being funded by the government at the moment that will not debate.

Um, but again, really struggled with some of the benefits of the current situation staff being removed, um, and will ultimately, you know, the best thing they should be doing right now is going well, my I am being funded by the government right now. Maybe I need to go speak with unsolved practitioner so I can clear some of the old Deadwood that’s in my business, grow through a proper restructure and then be able to come out on the other side, clean up leaner a bit more mean because you’d have to go through this process and really had to have the hard conversations with some, professionals about what your business needs to look like to make money in the future.

Stipe Vuleta: Look, I think that’s a really pertinent and meaningful point to end on. I think this is all about helping people to continue to make money and to continue to be prosperous. And if you’re not getting advice today, then maybe you’re not going to get the outcomes that you want. So gentlemen, it’s been lovely chatting and thank you for coming on today. 

Schon Condon: Thank you very much for the opportunity. It’s been, really good.

Gavin King: Thank you.