We were recently referred a client which had a business in financial difficulty. The business was about to cease trading and only had two material debts, a large debt to a related party and a lease debt. The company’s premises lease had 7 years to run and rent for the premises was around $800,000 a year. The directors of the company had not signed personal guarantees for the lease however, there was a rental bond of three months’ rent.
Initial meeting with our client
We met with our client and advised them that the two main options for the company were liquidation or to seek to settle the debt with the landlord. In these circumstances there were limited risks to the directors in liquidation, other than that the company was part of a large group of entities and liquidation may have impacted other entities finance arrangements.
Settling the debt with the company’s landlord
Given the nature of the company’s business, the premises would be difficult to re-lease and the landlord stood to suffer significant loss for the remainder of the lease which could have totaled over $1 million.
The company in question also had limited assets which could be sold in a liquidation and we considered that there were limited other recovery prospects. The landlord was also therefore looking at a situation that they would receive no return if the company was placed in liquidation.
We contacted the landlord and wrote to them informing them that:
- The company was insolvent and may be placed in liquidation.
- We did not consider there would be any return to them in liquidation.
- Our client was prepared to pay them $20,000 over what they were entitled to claim from the rental bond.
- Our client would leave the company’s fit out and assets at the premises (which had limited value) which the landlord could use to help bring in a new tenant.
The landlord’s only two options were really have the company go into liquidation in which case its assets would be sold and there would be no return or accept our client’s offer which included an amount of $20,000 payable and the transfer of a small amount of assets. The landlord agreed to our client’s offer and we arranged for a Deed of Settlement to be prepared and funds were paid and the company was released from its only unrelated debt.
This was obviously a great result for our client, but also it was a much better result for the landlord than liquidation, so it was really a win-win outcome.
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