Company “A” had been formed by its owners to operate a number of franchised food outlets operated by the one Franchisor Group. Two of the stores were core businesses (C-MD and C-P), and one store was not INC-PHI. The Company was structured as a corporate trustee: with two separate discretionary trusts which operated the three stores located in westem Sydney. One trust having two stores. and the other trust having the remaining store. To fund the acquisition and operations of the Group, the Company had an arrangement with one of the major banks (the Secured Creditor); which sought to obtain all of the relevant securities and guarantees, including the personal assets of the Directors.

Unfortunately over the period the company was trading. they never reached the anticipated levels of turnover. As it often does, this lead to increased stress amongst family members, and the breakdown of relationships. Pressure continued to grow, and the Owners/Directors were referred to Condon Advisory Group. Our assessment immediately confirmed that the businesses could not continue to operate under current circumstances; the Directors were now becoming increasingly exposed to prosecution for Trading Whilst Insolvent. The Company was then placed into Voluntary Administration, due to the following:.

  • The NC-RH store placed a significant cash flow dra n on the Company
  • The NC.RH store was a new store in a new shopping centre.
  • The actual level of sales being achieved was significantly less than originally forecast
  • Attempts had been made to negotiate a revised rent but all efforts were to no avail.
  • As a result of the low profitability of the NC-PH store, the Directors invested more time and effort into this store; which diverted their attentions away from the other stores

Ultimately a notice was issued by the Secured Creditor questioning the continuance of the Banking Facilities to the Company. This notice and pressure from other Creditors, resulted in the Directors seeking advice from their accountant and ultimately Condon Advisory Group). Once appointed, vie sought to continue trading for the three businesses: we then tried to preserve the value of the Company’s assets by seeking to sell the three businesses. Unfortunately a formal insolvency appointment will not of itself reverse or change underlying significant business errors. This quickly became obvious with the NC.RH store, where continuing levels of turnover could not sustain any potential improvement in the overall value of those assets. Consequently, with the landlord unwilling to vary the rent, and no other Franchisees willing to acquire the business the decision was made to close its operations and dispose of the assets.

The future of the other two stores was now much more positive. We were able to ontinue trading C-MD and C-P, thus ensuring a modest and improving profit being generated. The issues of fixed/ high leasing costs, Franchisor constraints, and the impact of a Secured Creditor – combined to significantly reduce the value of the overall business. In the likely event that businesses of this nature find themselves under pressure, they must always focus on protecting themselves and their Creditors first. In this case, one failing store ultimately brought about the demise of the whole group,  and financial losses for a significant number of parties.

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