Can a single lease guarantee destroy an entire business empire? In this cautionary episode, Darren Vardy shares how a holding company's guarantee on one subsidiary's lease brought down three profitable businesses. Learn why proper corporate structures can be undone by simple mistakes, discover alternatives to personal and holding company guarantees, and understand why shareholder agreements are essential business prenups. Darren reveals the importance of getting proper advice before signing guarantees and why negotiating lease terms upfront can save your entire business structure.

KEY TOPICS COVERED:

• How holding company structures protect individual entities • The danger of holding company guarantees on subsidiary leases • Case study: One lease dispute bringing down three profitable businesses • Alternatives to guarantees - increased security bonds and negotiation strategies • Why shareholder agreements are essential business prenups • The emotional toll of shareholder disputes and business divorces • Red flags when landlords insist on guarantees over increased bonds • How litigation complicates business turnarounds • The importance of rules of engagement for shareholder exits • Why most small businesses don't seek proper structural advice

KEY TAKEAWAYS:

✓ A single holding company guarantee can expose your entire business structure ✓ One lease dispute forced the sale of three profitable subsidiaries ✓ Increased security bonds (6 months vs 2-3 months) can eliminate guarantee requirements ✓ Shareholder agreements are like prenups - essential for managing disputes ✓ Most small businesses don't get proper advice when setting up structures ✓ Shareholder disputes are as emotionally charged as divorces ✓ Directors of liquidated companies face challenges borrowing money for future ventures ✓ Negotiating lease terms upfront is easier than dealing with consequences later ✓ Litigation significantly complicates any turnaround or restructure attempt ✓ Early engagement with advisors and negotiated solutions are always cheaper than litigation

Holding companies and guarantees when good structures go bad.

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Welcome to IO Insolvency Options

with Darren Vadi, the managing

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Director of Insolvency Options and

a registered liquidator with over

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30 years of experience helping

businesses and individuals.

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Navigate financial challenges.

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In today's episode, Darren

reveals how good businesses

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can fail for boring reasons.

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Sharing a shocking case study of

a holding company that collapsed

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due to a single lease guarantee.

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He explains how one property dispute

brought down three profitable

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subsidiaries costing the owners

their entire business empire.

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You'll learn about the dangers

of holding company guarantees,

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alternatives, like increased

security bonds, and why shareholder

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agreements are essential prenups.

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For business partnerships.

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I'm your co-host, Anthony Pearl.

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Let's dive into unlocking

more about insolvency options.

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Darren, I want to turn our

attention to a whole idea around.

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Businesses that go bad for,

I guess, boring reasons.

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And there's a tangled web that can

happen with holding companies is, and

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you and I had a bit of a discussion

about this before we started recording.

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I think this is a fascinating tale

because holding companies is something

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that people are familiar with and think

it's all very straightforward, but

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it's pretty easy for that to go astray.

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Darren Vardy: Yes, it is the, quite often

those who get proper advice will put a, an

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appropriate tructure in place for the type

of business that they're going to get,

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invest in and get themselves involved in.

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And it's easy for a business owner to.

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Make a simple mistake and inadvertently

expose a holding company for debts

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directly of their subsidiaries.

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We had a situation just recently

where there was a retailer who had a

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number of different venues or shops,

and with the different shops being

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in different geographical locations,

they'd set up those shops as independent

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subsidiaries, all with different suppliers

in those local geographical areas.

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So they had the holding company, which

was running the management and oversight

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of all the businesses, but the shops were

their own independent operating entities.

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Now, structurally that's good because

if one shop fails, generally it doesn't

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have an impact on the holding company

or the other individual entities

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operating In this instance, however, we

had a situation where the landlord of

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one of the operating entities required

a guarantee of the holding company.

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For which the holding company

actually provided that guarantee.

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Now, as a result of that, the holding

company providing the guarantee, the

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holding company, was then exposed

to the entirety of the lease of that

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particular venue, of that one shop.

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Now, as it happened, the.

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A lease dispute in respect

to that shop was incurred.

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There were issues with the

premises litigation and some very

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expensive litigation in insured,

all of which exposed the holding

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company because the holding company

wasn't guarantor on the lease.

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The outcome of the litigation

was that pursuant to the lease,

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an amount needed to be paid.

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Couldn't be paid by the operating

entity by, at that time, was no longer

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operating within the premises because

of the property issues that they faced,

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and therefore, the landlord turned to

the holding company to pay the debt.

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Now, the holding company didn't have

the ability or the funds to pay the

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debt, and as a result of saying it

was pursued through the courts to

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get a judgment and then pursued into

winding up, which a creditor can.

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To wind up a company for

a debt that's outstanding.

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As a result of that, that then brought

down the other three operating entities

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that were operating profitably.

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Because they were subsidiaries

or the shares held by the holding

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company in those entities that then

bought the whole structure undone.

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And the business in its entirety

was exposed by virtue of the holding

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company having provided that guarantee.

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And what resulted from that is those three

other businesses having to actually be

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sold as a going concern to then deal with.

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And pay out all the

creditors in those entities.

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Any surplus that existed went up the

chain as a return to the shareholder, the

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holding company, and then the liquidator

of the holding company then was to use

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that money to then repay each creditors,

primarily the landlord from that other.

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Subsidiary entity.

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Anthony Perl: So let's go

back to where this all began.

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Was the mistake in the guarantee in

the first place, was there another way

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that they should have gone about it?

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Darren Vardy: Well, you know, generally

other leases you can negotiate whether

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guarantees are provided or not.

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Quite often the weight

and the negotiate out of.

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A guarantee is to provide a greater

security bond, for instance.

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So instead of providing a one month,

two months, three month bond, you

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might provide a six month bond,

which will satisfy the landlord for

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their risk as opposed to a guarantee.

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So they could have maybe negotiated

better on entering the lease as opposed to

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simply agreeing to providing a guarantee.

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Particularly where they've got

advice and paid good money to set the

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structure up to protect the individual

trading entities from each other.

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Anthony Perl: Yeah, I mean, I

guess there's a few things here.

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Is that in the first place,

is that a red flag for people?

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If there is an insistence that No, no, no,

we're not gonna accept a stronger bond,

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we actually need this guarantee from here.

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Is that a bit of a red flag

for someone who's taking out

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a lease in the first place?

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Darren Vardy: Absolutely.

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And the question might be, do we

really need to take this property?

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Are there alternative properties that

we can look to secure that doesn't have

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those stringent requirements and put

our business in its entirety at risk?

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Anthony Perl: When you got involved

with this particular company,

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how aware were they that they

had made that mistake to put that

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guarantee in place in the beginning?

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Was that something that was, didn't

become apparent until issues started

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arising, or were they fully aware?

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Darren Vardy: It didn't become apparent

until they were in the litigation?

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And when the holding company became the

second defendant to that litigation, it

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was only then that they realized that

and went back and looked at the lease

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to that a guarantee from the holding

company had in fact been, uh, provided.

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Anthony Perl: So as a result of all

of this, where did it leave the other

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businesses that were then in this chain?

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Darren Vardy: So where it left the owners

was that they were without a business

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'cause they had no alternative but to then

go and sell the other three businesses as

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a going concern with the funds, with all

the creditors being paid of those entities

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and any surplus funds going back up to the

holding company to then repay the debt.

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Anthony Perl: Do those businesses run now

as individually as functioning business?

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Darren Vardy: I believe so, yes.

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Anthony Perl: At the end of all of

that kind of process, the owners

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of this now, they don't have a

business as a result of all of this.

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How does it impact them in terms of

trying to run a business in the future?

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Darren Vardy: Well, it

impacts them in two ways.

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Firstly, any funds that they've put in to

set everything up in the first instance

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is not recoverable by then, given that

there was no funds available to flow back.

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Secondly, they are

directors of two companies.

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That have gone into liquidation.

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So ultimately if they set up a new

business and they wanna borrow money,

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that will be a little bit more difficult

than normal to borrow money and

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potentially get trade credit accounts.

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Anthony Perl: I mean, that's an

interesting one too, because there

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are circumstances here that happened

that wasn't really about the

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businesses not running profitably.

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Darren Vardy: Correct.

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Anthony Perl: How much does

that get looked into when you

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are a business owner that's.

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Finds that, that this has happened

to banks and the like, and,

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and looking at running future

businesses, does that get taken into

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consideration the circumstances,

or is it all just by the book?

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Darren Vardy: Generally

it's all just by the book.

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There are some lenders who will take

into consideration, but generally

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they're sort of second, third,

fourth tier lenders where the

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price of funds comes at a premium.

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Unlike your, for of a better term,

big banks who provide the most

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commercial rates on borrowings.

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Anthony Perl: I mean, this is a

difficult situation, isn't it,

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for business owners like this.

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They, they are, they were

running good businesses.

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They were doing the right thing.

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So they thought made a small mistake

and it's had a catastrophic impact.

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Darren Vardy: Correct?

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Correct.

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And you know, this all started from

at least dispute, which in reading the

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material, there were genuine issues with

the property, water leaks and the light

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resulting from some rain events, which.

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Adversely impacted the operation

of that particular venue and

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that particular business.

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Anthony Perl: So in this kind of

situation, how difficult is it for

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you when there's a litigation issue

to walk in and do what you do?

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Is that become a significant factor?

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How much do you look at the

fact that they were trading?

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Profitably and that there's an opportunity

here to come in and do the right thing,

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or does it immediately put some red flags

that you have to take a step back and have

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a good look at it before you get involved?

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Darren Vardy: Sure.

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Look, and immediately, wherever there's

litigation, there's an immediate issue of.

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Is there an ability to do a turnaround

whilst they may have traded at a profit?

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Can they resurrect the business and

the trading of that business back

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to the position that they were in?

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And litigation complicates any

turnarounds, and it really depends on the.

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Financial circumstances and the

financial wherewithal of the parties

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to be able to, you know, muster up the

necessary working capital to execute a

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recovery plan because without working

capital, no recovery is successful.

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Anthony Perl: I guess this whole idea

of good businesses going bad is not as

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uncommon as we might think because there's

lots of reasons that businesses break up.

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Darren Vardy: Correct.

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Anthony Perl: And that can lead

to lots of issues because people

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go in with eyes glowing in terms

of, oh, we're gonna get on great.

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You know, I'm sure there's examples

of dual business owners and going

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in with a great relationship and

something happens and it goes south,

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and then that becomes a big issue.

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Darren Vardy: Yeah, look, at the end

of the day a lot of businesses get

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set up and, and quite often they don't

think about the what if scenario.

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And it's when that what if scenario

becomes reality is when it's more

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difficult to then deal properly and

appropriately with the issues at hand.

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Anthony Perl: And what are some of the

big red flags that you've seen over

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the years where these are legitimately

good businesses and then something has

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happened, like this example of the lease?

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Where it's just that people haven't

realized that there are red flags

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here that they should have looked at.

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Darren Vardy: Yeah, look, you know,

one of the typical ones is shareholder

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agreements, where as you indicated,

people are friends, they're all loving,

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do lovey-dovey when they get into

business, but when business is hard.

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There's no two ways about that.

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Business is hard, and when these

people, these directors, these

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shareholders are running a business

and hit tough times, that's when

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human nature comes to the forefront.

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And quite often, shareholders disputes

arise because parties don't know how

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to deal with, or they don't have a

framework with dealing with problems.

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And one of those.

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May simply be the exit of a shareholder.

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Now, if there's no rules of engagement

to deal with the exit of a shareholder

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or the incoming, or a new shareholder and

the like, that all adds to frustration

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and angst amongst the parties.

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And quite often good businesses we see can

fail as a result of shareholder's dispute.

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Anthony Perl: Yeah, it's a

bit like a prenup, isn't it?

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But for business owners, and I

think there's a difference between

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A, we won't get into that debate,

but you go in always with the best

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of intentions to these things.

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And I imagine, again, going back

to the lease agreement, you went

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in with the best of intentions

thinking, oh yeah, everything will

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be sweet, but suddenly when it's not,

that's when the challenges arise.

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And is it just a case of

people not getting good advice?

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What is it that is leading to.

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Darren Vardy: I think it's a case

of not getting advice at all.

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It's not whether the

advice is good or bad.

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It's not getting advice.

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In the first instance when setting

up a business, you refer to a prenup,

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and that's exactly what it is.

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A shareholder's dispute

is a divorce, right?

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And if you don't have a prenup or a

shareholder's agreement, a rules of

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engagement as to how to deal with

things when a separation needs to occur.

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Then there is a lot of time, energy,

and emotional energy, because it's

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almost as highly emotive as a divorce

because the parties have put their

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blood, sweat, and tears into their

business to grow it to a certain level.

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So when there is a dispute and a

separation, it is quite often very like

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a divorce from an emotional point of view

where there's a shareholder's agreement

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and a prenup, as you say, of rules of

engagement as to how to deal with it.

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That can take the emotion away from the

situation and deescalate the situation

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because there is a process to follow that

everyone has agreed on from the outset.

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I

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Anthony Perl: mean, you've spoken about

it before then the whole what if scenario

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that people need to examine, don't they?

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You know, it's different.

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So the emotion attached to an actual

marriage is a little bit different, and

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no one wants to go in thinking that that's

going to be anything other than for life.

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But when it's business, it very

rarely is a for life decision.

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There's always.

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Reasons why things break up and

they can be legitimate reasons.

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Someone gets sick, someone decides

to move to another country.

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There's any number of reasons that can

happen that can separate things out.

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That's completely different to

that sort of marriage scenario.

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Is it common that people actually

get the proper advice beforehand,

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or do you see it more often

than not that this is happening?

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Darren Vardy: Certainly in small

business, land advice is not sought.

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When people come together to go

into business, and whilst they

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may rely upon the Corporation's

Act standard constitution, the

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replaceable rules, there's more to

that that needs to be considered.

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As I say, the what if the worst case

scenario needs to be considered, and they

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term set out as to how you deal with that.

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If it actually eventuates.

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Anthony Perl: Yeah,

it's a challenging one.

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I mean, what are the lessons that you

would give to small business owners

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who are finding, I mean, there's one

thing to get the advice in the first

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place, but if they're starting to find

that there is an issue here, the steps

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that they can take before it escalates

to the point where you get involved?

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Darren Vardy: Oh, look, absolutely.

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Absolutely.

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And the step to take is engage

early with your advisors.

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Get your advice as to what

your position is so you know

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legally what your position is.

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And then negotiate a solution.

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It's always cheaper to negotiate a

solution than it is to end up with

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protracted expensive litigation

over something that may or may

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not commercially be worthwhile.

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Anthony Perl: Just to wrap this up,

I mean, how difficult it is for you

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walking into a business where you have

two parties or more that are in dispute

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with one another because you are coming

over and above and just looking at

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the business as a whole, but dealing

with that extra layer of disputes

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within owners, that's a huge challenge.

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Darren Vardy: Well, generally,

in those situations.

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Where these disputes escalated and

no agreement can in fact be made.

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My involvement is generally being

appointed by the court as a liquidator or

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a receiver following an application being

made by one of the parties, one of the

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warring parties to have me appointed on a

what's called a just and equitable basis.

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And then obviously once I'm appointed,

while I have to give some regard to

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the directors and shareholders, my

appointment is generally governed

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by either the Corporations Act

or the appointment document.

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Whatever the court determines my role is

going to be, which generally is realize

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the assets, pay the creditors, and if

there's any surplus left at the end,

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divide that up amongst the shareholders.

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So to negotiate an outcome

where one of the parties

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continues on with the business.

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And that business continues to trade into

the future is a far better situation.

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Even though neither party's gonna be

happy with that outcome, and they're gonna

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expect that the other parties take an

advantage, but it's a far better outcome.

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Then the alternative, which is

a liquidator being appointed

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the business, ceasing the trade

assets realized, and you get back

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whatever's left at the end of the day.

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Anthony Perl: And that's all we

have time for in this episode.

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But next time on IO insolvency options.

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We'll explore the critical difference

between optimism and realism in business.

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Darren will share insights on why

hope can be the enemy of good decision

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making, and reveal how early engagement

with advisors can transform outcomes.

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It's an essential listening

for every business owner.

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Facing challenges.

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For details on how to get in touch

with Darren and his team on Insolvency

291

Challenges, please consult the show notes.

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team at podcast done for you.com

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Until next time, remember, there's always

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