The Sounds of the Baskerville Podcast Episode Transcripts 2026

109: Intelligent Uncertainty

The Sounds of the Baskerville – Episode 109 Transcript

James Flaherty
Talking about uncertainty, think, is there a quote or a thought that you could put about just how hard it is to predict?

Chris Baskerville
Good morning. Welcome to The Sound of the Baskerville, season six. I am Chris Baskerville, the star of the show, allegedly, together with my colleague, James Flaherty.

James Flaherty
Hello. How are you, Chris?

Chris Baskerville
Welcome to my show, James.

James Flaherty
It’s great to be back on your show. So we wanted to talk this year about, at the start of the year, about uncertainty. Now, often, that’s not uncertainty as in when we sit together in the morning, often, and sit there and go, we’re quite often uncertain about what we’re going to talk about. But somehow or other, we seem to get there in the end. But talking about uncertainty, think, is there a quote or a thought that you could put about just how hard it is to predict? Like, have you seen what’s happened in the last 12 months? Has anyone predicted it would be this much of a…

Chris Baskerville
It’s funny. I think it’s very hard for the average punter out there to sort of predict what’s going on without having some extant knowledge that’s out there. And particularly from people that have the ability or have effective influence over power. Because, I mean, you can have a look at the Americas. I can see big power plays there. Now, of course, if you’re not in the inner circle of that, you wouldn’t know what’s coming. So to the average punter, when we see these moves, we go, oh, it’s all uncertain. We didn’t… unpredictable. But I think, you know, the cynic in me says that the more powerful people get, the more they can actually magically predict the future, like knowing exactly which stocks to buy in defense at the right time, as an example.

James Flaherty
Yeah. So there is a proximity to power and proximity to money surely helps. Is that what we’re saying? But what about the rest of us, though? I mean, if you think about a lot of the world in which we live, a small to medium sized enterprise and people employed by it or people who own it.

Chris Baskerville
Well, isn’t there…

James Flaherty
How do we navigate that? How do we navigate?

Chris Baskerville
Well, that’s the thing. Isn’t there this wonderful quote by Ursula Le Guin that says, the only thing that makes life possible is permanent, intolerable uncertainty, not knowing what comes next.

James Flaherty
Wow. So I suppose it keeps it interesting. But how the hell are you running a business if you don’t know what’s coming at you?

Chris Baskerville
Yeah, that’s right. And then, you know, you’re sort of… you’re running along and then, you know, there’s change, you know, change in government, change in legislation, you know, change to conditions. The Americans go and do something.

James Flaherty
Yeah. Well, I mean, like, for example, one of the things that struck me was that, you know, at one stage, the good people at Australia Post were not sending parcels to America because of the tariff onset. So what happens if you’re running a North American, you get a nice, quite a nice little import export business to North America and you can’t deliver to your client? Because, I mean, there’s other ways to do it. But it’s these kind of road blocks. I mean, we’ve navigated COVID. I don’t think any of us saw the enormity of that coming. We… and then did you say something about, like, imagine then in the middle of that year, then massive legislative change impacts, like, probably, what, half of your business?

Chris Baskerville
Yeah. The things that none… I guess we were looking at the world as it is, assuming where the market started to make their changes in response. And then we used that information and said, oh, well, when you see all these markets and people and businesses and people having to make these changes, you sort of put that in your prediction formula and you go, well, it’s going to be a train smash. But then you’ve got to… what we weren’t factoring in was what would be the government or legislature’s response to that, which is we’re just going to rewrite or write in new laws. We’re going to start… we’re going to throw a heap of money into the economy, semi-strategically, and we’re going to tell the Australian Taxation Office that ordinarily would be enforcing the recovery of taxes at vigorous levels. We’re going to tell them to take their foot off the pedal. And you can see it in the data is very, very clear that that’s what they did. So you got all those responses from government and certain organisations. And that changes our ability to be able to see the future.

James Flaherty
That’s right. And I think the thing that was really interesting about that was that, you know, this was almost… you’d say it was unprecedented. I mean, maybe during the big flu epidemic, apparently after this first world war, apparently there was barbed wire at the Tweed Head’s Queensland border. So it’s not unheard of. It’s just out of our memory, we have had something as dramatic as that. And in a world that’s as connected as ours, having a massive change like that so quick.

Chris Baskerville
Yeah. And what was really interesting, I mean, I think every one of the citizenry understands, all right, the country shuts its borders down. Get that. But when you start to see the state borders shut, in other words, we’re not going to let those New South Wales people into Queensland. And then Northern Territory saying, no, we don’t want Queenslanders in here. You’re like, wow, don’t you create division within the population.

James Flaherty
Oh, don’t you ever. And then we’re still reaping the seeds, reaping some of those seeds, so on. So then you go, okay, well, we’ve gone through. Then we had the supply shock, shock. So, you know, I think I’ve said on the show before, we pulled a pulley because we had nowhere to… got a fella, got a good price. But by the time COVID was finishing, material costs had gone up. He couldn’t get staff like it was, and he had people just hammering him for work. Whereas at the beginning, he didn’t know if he had a business and truth be told, neither did I. So that change didn’t even in that period. Now you go a few years on, we’ve got tariff uncertainty in America, but massive population growth. So we were in Southeast Queensland. There’s a huge number of people coming to Southeast Queensland. Weather’s nice, people are nice. That puts pressure on infrastructure. So like there’s a whole lot of squeezes and yet people are still saying they can’t find good enough, they can’t find enough staff. How did you, how would you see that coming? I don’t know how you predict that.

Chris Baskerville
Yeah. And I remember in COVID, we had a mass exodus of let’s call it the people that would turn up and do work. And then, or particularly the work that some of us don’t want to do. In other words, you know, sort of things that are outside, you know, using your brainpower to solve problems. But, and then I was like, well, did all the workers just magically go back to Worker Island where they’re no longer available and to do the job. So yeah. And obviously Australia’s response is, well, we’re just going to import people into the country. It seems to be a few other countries have done the same thing. So, you know, that’s going to have its own issues. We don’t want to get too political here, but yeah.

James Flaherty
There are implications for all of these decisions that you make, especially if everybody wants to live in one particular part of the country, then it puts pressure on the infrastructure.

Chris Baskerville
Yeah.

James Flaherty
I was talking to my father, had a fall. Ambulance people came in, some of the same crew had been for the fall before. Ambulance service were fabulous. Hospital service were fabulous, but even they were saying the population growth in South East Queensland has made their jobs harder because it’s hard to keep up with the infrastructure and the numbers of people that are needed to support our growing population. Not making any comments about that. It’s just, it is what it is. So, but then again, I still, you know, still can’t find enough people to work in aged care and all that sort of stuff. So it’s a bit like we were saying, it’s, could you have predicted it? Could you have predicted this? I don’t think so.

Chris Baskerville
No, it’s been, and then, you know, what’s the knock on effect? Yeah. I asked the, sorry, I said to the former teachers of my former high school that were teaching economics, and I’ve been obviously away from school for many decades now, but I said to the economics teacher, listen, there is only one lesson, one lesson only that you need to teach anybody in economics, and it’s very much supply, demand, and its impact on prices. Because that, if you understand demand, supply, and how prices rise and fall as a result, that’s the only lesson these kids need to know, because that is copy pasted through every market, every condition, all populations, the whole gamut is, still applies to supply demand. So we go on turbo charge demand in the middle of COVID, particularly in construction, but we don’t have the supply chains are broken. So you go on turbo charge demand, you’ve got broken supply chains. Well, what’s the impact on labour, prices, goods? It all skyrockets. And it’s continuing to just keep growing and growing and growing. The knock on effect then is people having to pay more. The knock on effect is price values going up, and then when you put demand into the population and you don’t have the supply of housing, there is only one way prices are going to go.

James Flaherty
So in that context with, you know, those kind of pressures going on, you’re running a small business, it’s hard to find staff. So you, I’m sure, have seen businesses coming to you where they can’t get enough people to generate the revenue that they could if they had enough people to actually do the work. You know, you end up with some builders say that they would do more if they could, but they haven’t got the team to be able to actually execute the extra work because there just isn’t enough arms and legs. Yeah, pretty wild. It’s pretty wild. This is completely different from I’ve got nothing for all these people to do, but still the same a business problem because I can’t grow if I’ve got a tax debt, I can’t grow enough to pay it off, you know, all these kind of questions. So how does a business person, like, how do you navigate that? And I’m not saying we have to answer it now. So I wondered about if with your, it’s your show, but if we got maybe some business people and some of the other people we’ve had before, just ask them. Yeah, well, some basic concepts.

Chris Baskerville
One is knowledge is power. So if you want to know how to handle a situation, get more knowledge, right? And knowledge is not subject to diminishing returns. In other words, you can’t have too much knowledge. In other words, just go and grab as much information as you can. I think you’ve got to be super adaptable, become super efficient. So in other words, if you focus your businesses on becoming more and more efficient, let’s just assume your revenue doesn’t change. How could you squeeze the lemon more out of it? You’ve got to become super efficient. But one thing I’ve done, I know my partners are very similar, is, I mean, I like having a large network of people that all have different skills, qualities, industries that they’re all part of. Because isn’t it a great opportunity to be able to reach out, share some information about how they all see the world? And then you can stitch your own sort of view on where you think things are going. But I think COVID showed us one very, very valuable lesson, is that there will always, no matter uncertain times, certain times, there will always be winners. And there will always be losers. And they’re not always the same as you transition through the changing environment. And there are some really smart people out there that can spot opportunity and absolutely exploit it. So I don’t think uncertainty is anything to be afraid of. If anything, the mindset should be uncertainty creates opportunity.

James Flaherty
Yep. So that’s, I’m just listening to all of those things and thinking, well, that’s pretty much a great sound grab for this particular podcast, because that’s pretty much in a nutshell how you think about all the stories we’ve told over the last five seasons, and all the lessons that you’ve been able to impart to the people who listen and the feedback we get. So if you go, okay, well, don’t be afraid of uncertainty. I am scared of you saying getting too much knowledge, because at my age, stuff starts to leak out of my head just as fast as it goes in. And we haven’t even talked about the big elephant in the room being AI, which kind of, where the hell does that go?

Chris Baskerville
It’s going to be a game changer. I think is absolutely for certain how I think we are still working it out. There really is no, everyone is still on that, right on the edge of that very fast learning curve, like everybody on the planet at today. But what’s going to happen is the more you do not sort of take it up and embrace it and learn it and all that, the more you’re going to be left behind on this wave that we’re all riding on at the moment. But to be left behind in an AI world, I think it will be an exponential. Like in other words, if you miss the last six months of AI, you probably might still be close to the edge of the wave and you can potentially catch up. But if you go one year behind and you’re not sort of keeping up, you probably actually start to be left behind in greater time periods.

James Flaherty
So you say it’s like in those shows where the fella’s chasing his girlfriend who’s on the train and he starts running along as the train goes along the platform. He’s got to jump on the train pretty soon because if he doesn’t, the train’s going to be too far along the platform and he’ll have to do like, you know, grab onto the end of it. So I suppose what we’re saying is, yeah, if the train is leaving the station, you better want to make sure that you don’t have to have a seat, but you need to at least be on the carriage.

Chris Baskerville
And you don’t have to have a comfortable seat. You’ve got to be on there. You know those mass trains that go through India and you’ve got like a hundred people on the roof. Just be someone on that train.

James Flaherty
Just get on that train. Yeah, that’s right. So I think that’s the thing. I mean, and I think that’s the lesson. I think if I were to summarise, and I love the way you describe it, it’s kind of don’t be, we have to embrace the uncertain. It’s a reality. Ursula’s told us at the beginning that it’s, you know, that’s part of what makes life what it is. We’ve talked about winners and losers in this episode, and we’ve talked in previous shows about it’s not necessarily a business person’s fault that a business might necessarily fail if legislation changes or some event impacts them. But at least if you’re, am I right in summarising that at least if you’ve understood the opportunities that are in front of you and taken your best educated guess at what the right play is, that’s at least a start.

Chris Baskerville
At least you’re on, you’re in the game. And then if that’s your starting point, like everyone’s got to start at ground zero. And then if that’s your starting point, well then you’re going to start to learn to adapt and work out what does work, what does not work. But you can’t start the journey without at least taking that first step, the journey of a thousand miles begins with the first step. But yeah, you’ve at least got to be got to be there. So yeah, it’s certainly something I’m cognizant of and it’s something that I really want to promote in my business is that we’re embracing it to become more efficient. Assuming nothing changes with revenue, can we become more efficient in our output?

James Flaherty
And that’s the opportunity of AI and it’s also the opportunity of understanding demand and supply, supply and demand, and cash flow. Messages you’ve told us for many a year, so we’re going to unashamedly revisit those this year I think, Chris, but we’ll get a few other bodys in to come and talk to us. And thanks for those who listen and welcome back to your own show.

Chris Baskerville
Thank you, James. Thank you for being on my show.

James Flaherty
A reminder that these podcasts are general in nature and do not constitute advice and they don’t take into account your personal circumstances. So if you think though that some of the issues raised might apply to you, you should seek qualified financial, legal or counselling advice.

110: Running a Business is Hard Enough

The Sounds of the Baskerville – Episode 110 Transcript

James Flaherty
So, here we are in Sydney. We really wanted to just sort of, we’ve got a media personality and we’ve also got one of the most googled insolvency practitioners in the industry.

Chris Baskerville
As self-diagnosed.

James Flaherty
As self-diagnosed.

Stephen Hathway
What were they googling you about?

Chris Baskerville
I think it starts with P.

James Flaherty
Personal insolvency. So, I thought it would be an interesting science experiment to put you in the same space and see what actually happened. You’re both members of the Insolve panel. Insolve was designed to get together independent insolvency practitioners and we’re trying to get people to get the right advice from qualified people as soon as they possibly can. So, why don’t I ask, throw it to you. What do you think that business people should be alive to now? And we were talking about things like AI. We talked about the impact of that. Or is it increased complexity?

Stephen Hathway
I think everyone observes the speed at which businesses and the business world is moving and the pace of innovation and the pace of adapting to the laws and what’s the government thinking? What’s the regulations? What else is coming from competition? So, this constant need to be up to date and to be ahead and it all comes back to some really basic lessons that I think we all learn. We all know what’s one of the reasons that companies fail. It’s usually to proper books and records and a head for management. So, as soon as the books and records start to say that there’s signs of trouble, get ahead. Get ahead of the game. I’ll add one more thought. As soon as you think you’ve got a problem, you must act because the time clock, it’s faster now than it was before. The time of lodging, the time of the debt, the time of the debt becomes personal. It’s got faster and tighter than it may have been before. So, you don’t have the luxury of spending it and pacing it out.

James Flaherty
Chris, in his own sort of talking about it when he was on the panel, Steve said that running a business was never easy anyway. Do you think it’s harder or are you following on that? Oh, it’s a piece of cake.

Chris Baskerville
It’s so easy. Just start a business and it just magically makes money. Money falls from the heavens. Everyone loves you and it always grows.

James Flaherty
There you are. So, no.

Chris Baskerville
So, no. Yeah.

James Flaherty
So, you’re feeling that it’s – I mean, is it more administrative overhead than there always was? I mean, I thought with online, MYOB, Xero, all those sorts of things and then suggesting how to do stuff, it would be so much easier that businesses would be able to do their books and records so much faster and better than they ever did before.

Stephen Hathway
Lots there. Can I just talk about banking? Going into a bank, you’ve got your cheques, you’re depositing them, you’re writing up your deposit slips. Sounds terribly time-consuming. Then you get your bank statements once a month and you’ll be able to tick it off and do your accounts. Now we’ve got this almost instantaneous payment of helping and receiving funds. But the other side of it is that you try finding anyone in the bank that you’d like to talk to about a problem which doesn’t relate to a screen and those problems are compounding out there in the small SME world. So on one hand, we may have made some brilliant moves with banking but the interaction with people and actually getting some real humans behind the transactions that are happening can make it very difficult. And so you’ve solved one problem but in fact you’ve opened up another issue. Streamlining banking has also resulted in problems in doing banking. My statement about it has always been difficult to do business. Well, but there’s different issues that arise from time to time in every cycle of technology or cycle of business. Yes, you might be able to easily log on and get some information but try doing anything outside that system and very difficult. How many times have you tried to ring the tax department and get someone that may respond unless you’ve got the Deputy Commissioner’s personal phone number?

Chris Baskerville
I had, just on that, I had Superfund cheques coming in from the ATO. I don’t know why they sent me a cheque as opposed to just simply an EFT straight to the bank account. I then take those cheques down to my bank and they made a decision we no longer accept cheques. But this is valid currency and they’ve just decided on this particular date, it happened to be Valentine’s Day this year, no more cheques.

Stephen Hathway
I love that.

Chris Baskerville
Now I’ve got to follow up the ATO and try and get them to convert a cheque into an EFT. Yes. I’d rather just go, it’s not worth the time.

Stephen Hathway
You can’t do that responsible. Cheques are a fascinating thing. Once again, you probably bank at the same bank that I do and this profound problem around what you do with it and there’s still sections of the community that still want to move in cheques. They’re slowly phasing out of money from very good security reasons, doing up your petty cash and doing these things, but then it’s all related to your ability to get on to electronic banking.

Chris Baskerville
I remember, and just going back to the chair, we’re harbouring it a little bit, but late 90s, you get your wages by way of cheques made out to Johnny Cash. You then go and take your cheque. You stand in line with everybody else that got paid that day because you’re trying to turn your cheque into cash so that you can go and spend it. Anyway, we’ve come a long way.

James Flaherty
We have. I used to, when I had my first uni job, I think it was Envelope Weekly with cash in it, which was pretty cool.

Chris Baskerville
Yeah.

James Flaherty
That business went broke. But the thing that’s interesting, I suppose, is I suppose when I started, I’ve got two of the greater minds in the profession. So how do I tell, what should business people worry about or navigate that you’ve seen that’s either different, saying it’s no easier than it was, it’s just hard for different reasons? Is that what we’re really saying? Like there’s always something around the corner that will snare you if you’re not watching out? I might jump in before Stephen.

Chris Baskerville
So it used to be survival of the fittest. Now it’s survival of the most adaptable. And I think it goes to Stephen’s beginning point, which is like things are moving that quick that if you’re not adapting to that, you are being left behind. And I think AI is one of those classic ones, which is if you’re not on that curve or the initial wave and you get left behind in that realm, you don’t just go back a year. You now get left behind light years. And the commentary seems to be if you’re not embracing AI, you’re going to be replaced by someone that is embracing AI.

Stephen Hathway
Can I say something on a personal note? I’ve been in this industry for about 40 years. I’d have to say the first 20 years’ experience has no application to what I do now because of this change. You’re solving problems in the era that you’re involved in. So all of us need to be up to date with all sorts of trends and that includes the advisors. There’s another piece of advice. Do you go into a doctor that hasn’t operated on a person for 10 years or do you go into someone that constantly does operations? I guess you’d work the answer. So it’s the same thing in our space. Unless you’ve got people regularly in the space operating on failed businesses, they’re the ones you’ve got to get. They’re the ones that know what’s happening in the market. They might have immediate experience for the same type of industry you got to. But if you’re going to be talking to someone that does very few operations and they’ve got to go and learn something on the hop, at your expense generally, that might not be a good investment decision. So back to the panel.

Chris Baskerville
And just on the AI quick change and the banking quick change, we’ve now also got labour issues, which is like remember with the COVID, all of a sudden you had no one coming into the country, a lot of people exiting the country. So somehow this labour shortage was created. Then demand goes through the roof. Then wages go through the roof. We’re trying to work out how do you solve that. So what do we do? We now offshore. A lot of businesses are now offshore used to be hypothetical. Now it’s like how quickly can I implement it? So you think about that. But that’s how we’ve had to adapt really quickly because otherwise our bottom lines get obliterated.

Stephen Hathway
Yeah. Another observation in 40 years is that how we wrote insolvency reports and covered all the issues was a 10 or 15-page report. And some of the matters now just to complete with the statutory requirements can be 50 or 60 pages. It was a little bit of exaggeration. So it tells you that the generation of information is a bit of an overload. Still needs to be done. But you need mechanisms to get it done and outsourcings clearly. Look at it being adopted by the banks and the big end of town for a long time.

James Flaherty
I love the view, though, following what you’re saying, that you and I have both spoken about this, that there surely are statutory requirements to produce pages and pages of documentation and deep reporting which someone helps. We’ll get AI to help them write and it will then get sent to somebody else who will then get AI to help them read. So it’ll start from about 10 words. Here are the key points. Here’s 100 pages. Here’s 100 pages. Here’s the key points. So maybe AI, I think you’re absolutely right. If you don’t embrace these things, you’re effectively operating with a brick tied to your foot because there’s somebody who’s able to do something that much faster than you.

Stephen Hathway
I’m not saying the service was any better. I’m not even suggesting that a 50-page report or what you can do in 15 pages, and that I think is a bit of a shame of it. The issues can still be covered briefly and succinctly.

James Flaherty
Is that a whack-a-mole load? Because they’re trying to stamp out practices that just merge over. It’s a bit like that sort of pre-insolvency advisors where I always rant on about. They sort of just move around to the next level as the new change comes in.

Chris Baskerville
They change their tactics. Absolutely.

Stephen Hathway
Complexity is good for some professionals. If you make it more complicated, you might think that you need to get more advisors around the space. That’s unfortunate, but that’s how regulation sometimes works. I can’t really go on about lawyers, but there’s a problem, isn’t there? You constantly make something a little bit more complicated and then people need other professionals to solve the problem that we’ve got.

Chris Baskerville
That probably goes to hyper-speciality. We all used to be generalists. You’d start off as an accountant. Yeah, I could do liquidations and tax returns. Then we went, oh, the tax returns suck. Let’s just stick to liquidations. Now we’re seeing hyper-speciality inside our own professions, which is we are now just SBR guys and CBLs are nothing more. We’re not going to do any of those more thought-provoking creative solutions to this restructuring.

Stephen Hathway
You leave them for me, because I like doing this.

Chris Baskerville
But just as an example, and we’re starting to see it in the numbers, aren’t we? We’re starting to see certain firms and practices are like, well, we specialise in these areas. Then you’ve got guys that are generalists in all areas.

James Flaherty
Yeah, but the argument is, does AI mean that you can do that or maybe you can’t because it’s just not possible in that world to be able to be competitive, to be able to do everything. You’ve got to be really good at something.

Chris Baskerville
Yeah, it depends on the model. It depends on the model you’re trying to achieve. Some are high-volume type models. In other words, we’re going to do very high numbers and potentially there’s a price reduction element to that, which satisfies a certain market. Others are a bit more custom and complex, but you’re going to have to pay for that.

James Flaherty
We were talking prior to this session about the tactile nature of film and vinyl. That’s a real different experience from video and a CD or a podcast or a download of music on Spotify or Apple Music. But you can listen to a lot of music and it’s a lot cheaper and you can have- Terabytes. Yeah, we’d have lots of videos. A lot of you are going to produce. I think the question for any business person then is that model that you’re talking about, just in the insolvency profession, I would think would apply. You either pay for premium or you’ve got to have a really lean model that you can afford to be able to do something at quite low cost. I mean, that’s always been the case, hasn’t it? I mean, you either super high value, low transaction, or if you’re getting low margins, you’ve got to make a lot of business to make that money.

Chris Baskerville
Well, I remember, I mean, I saw a couple of insolvency firms exit the market just as COVID hits, right? And the reason is because when you’re operating at a volume, you need the volume to keep coming in. And as we experienced during COVID, we basically say goodbye to 50% of new business for about three years. So if you’re relying on that engine, yeah, we saw practitioners exit.

Stephen Hathway
These issues are real. We’re not minimising them into trivia. It’s really serious stuff. Our sort of work too, you not only deal with the person’s business, but you look at the director and say, now, how are you going? Because there’s an enormous amount of emotional damage can be done. Not only is the bank account depleted, but the emotional and physical wellbeing of people. Now, that close to not wanting to live, it can be that confronting. So these things are really serious. Earlier on about discussion about coming in early and getting someone to talk to it and go through it, because half the time we’re therapists as well. And frankly, after all these years, it really is only about money. There’s much more important things. Your partner, your family, your kids, your mum and dad, far more important than running a business. There’ll be another chance for most of us to have another go because the capital system in Australia allows you to have another go. It’s extraordinary. Nobody really gets locked up for failed companies. If you’re a fraud in a company, well, that’s a different thing. But if you’re honestly trying to entrepreneurially have a go, there’s space, you know, and there’s space to do it again. Do it a few many times and you might get into trouble. But let’s just put that for a pause. Do not let the thing consume you. Get in and see an expert before it damages everyone else in your life and before even the pet will look at you and stop coming over and kicking me because I’m sick of that and he might run away too. So you’ll lose your favourite dog.

Chris Baskerville
That’d be terrible, wouldn’t it? We put all of our partners and senior managers through Mental Health First Aid because nearly every one of us has had to pull someone off a ledge that was just about to go. Like, just, it happens. And it reminds me of an example I had this week, actually, is a guy goes bankrupt by court order. AFSA ends up with the job. AFSA goes, oh, there’s a property there. It’s too hard. They flick it out to industry. So I get it. And we haven’t heard from this guy. So we lock everything down with caveats and transmissions and all that. And then we finally got a hold of the guy. And we said, mate, you’ve just gone down for, call it a $200,000 debt. What do you got in the estate? He goes, well, I’ve got 400 grand in assets in my house. And I said, okay, well, why don’t we work out a solution where we can get that, unlock that 200, get the accredited body paid. Then you’re out of bankruptcy. You become annulled by way of paying full debt. And as soon as I brought that to the surface, got his sister involved, because she’s going to be the one to sort of help. She then called me days later and said, whatever it is that you said to solve that, everyone’s now cool, calm, collected. We’re at peace.

Stephen Hathway
Got a plan.

Chris Baskerville
We’ve got a game plan. We’re no longer stressed. We know it might take two months to resolve, but totally grateful that we didn’t just go. What is time? It didn’t go around.

Stephen Hathway
What is time?

Chris Baskerville
Yeah.

James Flaherty
So, well, thank you for sharing those. So then should people still run businesses or is it all just too hard?

Stephen Hathway
That’s a really interesting economic question. There’s only so many people you can be employed by the government unless you want to fully socialise everything. And I don’t think anyone’s got an appetite for that. So it’s been the same for 40 years. There’s about 25, 28% of the population is employed by governments. And that’s local, state, and federal, and armed forces, and police, and et cetera. And there’s nothing shameful about that. That’s about the average of most economies run at those sorts of numbers. And then there’s the big end of town, the big mining companies, the big banks, and they take up another 30% or 40%. So it’s the rest of us who need to find a spot that allows this entrepreneurial ability to keep going and be innovative and change. And you need a healthy number. And if I put it to you another way, you also have a percentage of failures because failures also demonstrate someone’s having a go, but also you need liquidators also to sort of. And you’ve probably done this too. You’ve finally walked in and you said, this is not a business. This has got no viable way out of this room. You need to stop. What’s an example? They shut the border and these tourist shops are trying to sell product to Chinese tourists. So you can’t think you’ve got a model that’s got to work. You just need to close shop, hibernate. The borders will open eventually. So we’ve all got stories. So what I’m saying is that you can’t close this idea of what small SMEs are about. And we also need to be a very healthy environment, allow them to it. And I’ve made the comment before, nobody goes to jail unless you’re deliberately frauding and you’re playing with the Crimes Act, misleading and deceptive conduct, but just getting in and trying and having a go. And if you do risk your own assets, well, that’s what you risk too. But no, capitalism is the most exciting things because it invents most things. You don’t leave it to the government to invent anything. Big business will consume the imagination of a lot of people, but sometimes they’re buying up. Well, they will, because they’ll nullify it into a sort of public service mentality. So if you’re working for the Commonwealth Bank, it’s probably got very similar characteristics of working for a public service. That’s interesting, because the bank used to be owned by the government. So you’ve got to allow these entrepreneurials to come up with some ideas, give it a go. The failure rates are unfortunately there, but we blessedly read in the financial papers people who buy waterfronts. Now, how did that happen?

Chris Baskerville
I came to the conclusion, I said, business owners make all the money. And then I was thinking, maybe landowners make all the money, ultimately. So it’s a combination between monopoly and learn how to make cash flow. And you don’t want to stymie that, because I think you want people to have that opportunity to go for greatness, because rising tide lifts all ships. So if I’m successful, people around me will follow, as opposed to, nah, we’re going to cut creativity and everyone’s going to be an employee. And, you know, that would just. Sounds too dull. There needs to be a bit of excitement about it.

James Flaherty
So isn’t it about then, so obviously learn the lessons that you can share. That’s, I think, what we’re trying to do with this podcast, is just get a sense of some of the things you’ve seen, get the help that you need early. It is about being adaptable. And sometimes adaption means, hey, this is not a business, doesn’t it? It means having the strength to call it sooner rather than later, isn’t it?

Chris Baskerville
Some people just have a glorified job because they are the asset. Like if you remove you from the equation, there is nothing. But you just don’t want to be employed.

Stephen Hathway
Can I just leave one closing thought, and it’s about anyone in any business. There’s generally an association or a society or a group or a club that people of like-minded join. It’s been around for hundreds of years. You know, there’s the Smith’s Silver Workers of London or the Guildhalls of London. It’s not a new idea, but it’s an idea that’s still relevant today. You can face things on your own, or you can face them collectively. You can work out what else is happening in that industry. So most industries have an association sometimes. They have conferences. They have magazines. And I sometimes think we forget about them. And it’s, I think, to your own expense. If someone else is going through the similar situations you are and they’ve worked out how to solve it, well, wouldn’t it be good to get to those people rather than trying to soldier out and endeavour to conquer the problem yourself? Yeah, and don’t be a martyr. Well, ultimately it ends to possibly, and this is just a statement out there, because I don’t belong to all the industries. From time to time we come across them. It’s the nature of our work. But in each of these spaces, the technology moves on, but there’s someone else collectively doing that research. Our own industry’s got a stand-out association called the AIIP, but that’s by liquidators getting together and having regular conferences and discussion groups. So if someone else is having these problems, get out there and, you know, it’s surprisingly you think it’s counterintuitive if you want to talk to a competitor. But collectively we can advance the industry and the collective knowledge, and certainly to our staff that we owe the next generation to come along after us, a very important, you know, lead-in. But collectively, I don’t know if photographers have got themselves a guild of some sort, but knowing what’s going on and someone reviewing the camera products is equally beneficial. You’re going to buy three cameras and try to do your own comparison or reach for a magazine. I know you picked Canon. I guess that should be for product plugging. So that was my closing thought. Don’t abandon the idea that associations or groups are not offering anything, because I think that they are really absolutely important. And, you know, I don’t have time. I’ve got my head down. I’m just trying to. But looking ahead, someone else has possibly been looking further ahead. One or two articles might save you a hell of a lot of grief later on.

James Flaherty
Keeping your head out of just doing this and trying to raise your head above it.

Stephen Hathway
But if someone’s done the research…

James Flaherty
Listen to a podcast, a vodcast like this. Get some advice from great wise heads. Hey, don’t know where that ended up. It sort of started…

Stephen Hathway
I’ve got greyer hair than you, eh? Thank you both. I’ve been practising.

James Flaherty
Stephen Hathaway and Chris Baskerville, thank you both for your time this afternoon. Oh, great. It’s been a pleasure.

Stephen Hathway
Life should be fun, shouldn’t it?

James Flaherty
A reminder that these podcasts are general in nature and do not constitute advice, and they don’t take into account your personal circumstances. So if you think, though, that some of the issues raised might apply to you, you should seek qualified financial, legal or counselling advice.

111: Dirty Money, Clean Getaway?

The Sounds of the Baskerville – Episode 111 Transcript

I wanted to talk today though on this whole anti money laundering. Than welcome back to the Sounds of the Basketbrill. I am with Chris Baskell. How Chris Morning James to have you back on your own show.

We’ve done some interesting ones of late, including one in Sydney. With the Great Steve Hathaway. There’s a few things going on at the moment, but anyway, I wanted to talk today though. On this whole anti money laundering thing.

Any money laundering is, and you can explain what that is. What do you think any money launding is? Pop quiz? Pop quiz. Obviously what is money laundering is effectively taking ill gotten monies and turning it into not all gotten money, or cleaning the money as they say, so, how do you take dirty money and make it clean? That’s that’s what money laundering is. So obviously the anti approach is to prevent that activity from happening, mainly because that that style of activity is associated with nefarious organizations.

So it’s this is an example of say I’ve come into some money in say the early nineties, and I could have gone to also say two thousands I went. I came into some money, and I decided to go to my local pub, the White Cockatoo, and say and put some money into the into the machine. I think by. That stage they might have had some tracks.

But if I’d have been in the doing that the eighties and whatever that pub was called, then I I could just put the money into the machine and play a few rounds and then take it out. Couldn’t I like, Yeah, couldn’t I use a poker machine to launder money? Couldn’t I? Like? That? Is that something that would have happened? Yeah? I think what’s the hardest thing to track cash? So you know, you know, if I have one hundred bucks in my wallet, I’ve taken it out of my ATM machine, you can’t really see where that money has gone if I’ve literally just handed. It to yourself. So how what if people were conducting business in a way that’s all cash, Well, how does the government tax that if it happens to be so that that that’s the trickiness behind it.

But also how would you also then know whether that money is you know, clean money or dirty money? So yeah, I mean one of the most obvious ways to clean a handful of cash, I cash is you know, throw ten thousand dollars into a pokem machine, play for your rounds, lose a couple of hundred bucks, and then cash out. So so cash out at nine eight hundred bucks, except this time you’re getting a check from the relevant gambling organization. And when you deposit that into your bank account. Well, that is a in theory, a clean set of.

Flo And I mean, in fairness, is the public in that particular place, he was quite on top of making sure that nothing the farius went on there. And now you’ve. Got to have like an ID card or things like that. But I mean, I did wonder if kind of in the eighties it’s almost a way of state governments just getting taxing the proceeds of crime because like, yeah, because I’ve got to get him somehow, so I’ll get them.

I’ll get them with a poker machine. Levy or whatever it is. I don’t know, I mean, am I being completely cynical, but I don’t know. Yeah, well, I think the government or government there and you sort of watch where the taxes are being applied.

Basically are applying taxes to all the elements that we would necessarily call fun So you know, you’re gambling your alcohol, your cigarettes, all the all the fun elements of society. They’re they’re hitting those. Fun It’s interesting turn because that bites you on the behind. When my father was in hospital recently and the one guy, one guy who was working in the hospital said to another who buys her husband’s smokes from the same source, said, well, I never really liked the.

Biking until I could get cheap tobacco. So you create a problem where you’ve got organized crime find the spots to the weak points. So now tobacco is now a real problem with organized crime making quite a lot of money out of SIGI. Yeah.

Correct. And also the use of recently cryptocurrencies because again the traceability of it is a lot more difficult. So instead of now converting cash, good dirty cash into clean cash, we turn cash, get it into a platform that then turns into a cryptocurrency, which basically could be withdrawn or utilized anywhere on the globe. So that’s hard for you when you’re chasing the money.

Yeah, because when you’re in our conference that we had earlier in the year in Bali, where you were talking about how the different ponzis, you’re telling the audience how you had to do chase the different ponzis and then as you’ve done other ones with particular indiviuals, and you wonder if they have tried to siphon money away. Oh, it’s it’s and look, it’s one of the challenges. It’s not impossible. It’s one of the challenges the profession faces.

And I literally have inherited a very live example and as investigation is currently underway. But the use of cryptocurrency, we’re in conjunction with a Ponzi scheme where investors have effectively taken their hard earned cash given it to someone via wallet, and the wallets have all been identified. And then and then of course when they call for their money, and there was a classic mister Ponzi esque which is a promise of ninety percent return thirty days, and of course they’ve gone, well, here’s our money. And at the thirtieth day, we now demand our ninety percent on our original investment.

Let’s just call it a doubling of your investment. And of course where’s the money. It’s no longer there. And to be honest, if the guy, the guy would have been more honest to say, I’ll just give you ninety percent of honey back probably who still water to go? But such does that? So what is that telling us? It’s alive and well for the ponzi stuff, the scams, the schemes, the theft of money, the ways to try and then get the money away, well we’re more power to the government and other regulators for trying to chase this stuff down and make your jobs a bit easier.

But it shows you how hard the challenge is. The challenge is always this, which is, no matter what government does to improve regulation and improve legislation around any area, right they’re trying to sort of clamp down as problem areas. The counterside to that is someone is trying to figure out a way to get around. Those exact laws.

So, in other words, it’s always a game of captain mouse. I think there’s a good point, just pause that particular thought and go well. One of the good things we’re talked about a lot in these series over the years is. You can play a long game, and you’ve got quite a good number of powers, and you do have sometimes quite motivated affected creditors who will sometimes fund you to investigate.

So just because you’re thinking, well, I can have a bit of a crack and set myself up at Ponzi and I’ll put it in a bit a bit whatever those walllets are. Don’t think that you can get away with it, because you’ve got some quite good powers. You were talking before this that you can find stuff out about people with your with your with the team you’ve got behind you, and the and the roles and powers of liquid. Yeah, there are several publicly available databases, and there’s several elements of evidence we can get access to.

There is a limit, so we certainly don’t have the powers of say the AFP or any of those top end easy or you know, those trying to defend domestic terrors. You’re going to cut those guys if you sniffs up, and you’ll cut those guys in. Yeah. Correct.

But obviously, and from there perspective, they’d be looking at it from the criminal site, which is all right, we need to charge someone with a crime and take away their liberties, whereas obviously we’re trying to hunt down where legitimately is property that is available to repay the creditor body. So we’re very civil to the extent, so that that is a challenge. But the powers of discovery for a corporation and a human very broad, so we can alwait, we can we can go down either path. And I suppose that’s thinking about civil too, is that you have a lower threshold in some cases to try and prove things, and say an actual criminal fraud case.

Yeah, civil in legal terms is on the balance of probabilities. In other words, is it more probable that, say, the liquidator is right, that this transaction should not have happened. And when we say more probable, it’s a tipping of the scale fifty one percent in our favor, forty nine percent against right. So you’ve tipped the scales.

It’s more probable. When you’re dealing with criminal it’s beyond reasonable doubt. So let’s use a mathematical phrase, it’s your your level of evidence has got to be better than seventy five percent. In other words, you just got to go beyond what reasonable doubt would entail.

So I suppose that from our creditor’s perspective, I’m listening to this Ukka, Well, with this AML, I think this guy’s got off with the cash. You may not hook him criminally, but you’ve certainly got the avenues to pursue to fund you even if you’re you know, get the other creditors together, So just go after these cats who have taken our money. And that’s definitely something that you always advocate. If someone is aggrieved and they have some funds just for sometimes just out of a matter of principle, and they want to go these people who have taken their money, Well, then am I right in thinking you’re happily alive? Yeah? Well, I think one the intelligence that you get from a grief creditors is brilliant sometimes so because you know, usually that creditor they’ve got a real beef beef because they’ve lost a lot of money and they’ve been misled, and they’re generally some of them are actually quite wealthy people, which is exactly the person you don’t want to annoy, because they can just throw money at a problem like that just for funsies.

So now I see that as an opportunity to then go to that credit and say, hey, have you been completely aggrieved and do you want to sort of stick the knife in a bit further, because if you can actually fund us to discover things, you never know, we may actually find where the pots of gold actually are, or more importantly, who is the controlling mind of the pots of gold, because it might not be the guy you think. Yeah, I spread that goes back. We go back to money laundering and what part of your world be I mean, I think I’ve asked you this question before, and I don’t have needs of definitive answer. How many super well run, super well documented, expertly cash flow managed liquidations and investigations you do versus just moneys don’t know where the money’s gone in terms of you know, on a scale between fantastically organized and hit bad luck through to absolute omni shambles and I don’t know where the money is or it’s a complete scam like a PONSI and everything in between.

I mean, is that most of them are reasonably disorganized or most of them organized and just bad luck. I mean, that’s a question without notice, but it’s an interesting one. Probably the better the better way to frame it is, I’ve had both investigations where there’s a lack of records and the excellent records, and certainly having better records gives us that sort of sort of that leap straight if it experedites our investigations, So that’s always that’s always handy. But we can do the investigations with or without because we have those extended powers to go and get the information that we need from third party sources anyway.

So and then if and then also a lack of records can also work against someone trying to say no, no, no, I was completely innocent in all this, and it’s like, well, should give us the records and evidence I don’t have it. Well that thank you very much, because what you’ve just done now is with the evidence we have been able to collect, it’s going to tip the scales more in my favor and than against you. So your lack of delivering me records will work against you at some point. So that’s not the answer to my question.

But no, no, it’s a good one, and I’ll run with it. So I suppose the thing is where I was kind of going with that was do you in the case of a money launing situation or there is money launering, I suppose he’s criminal. Effectively, like it’s an. Attempt to hide ill gotten gains, which is not something you would I mean, it’s a Ponsi scheme.

That’s that’s effectively a situation where you’d have money laundering if you try to take it. Ponzi scheme is effectively a fraud deceptive conduct, and. The laundering of the money would be trying to take the money out. Of the so called fund he’s got inverted commas with his fingers and stick it into something else and try and make it look like clean, clean money somewhere else like buy property or Yeah.

Money laundry would typically be associated with, like you said, ill gotten gains, which is money that has been generated through illegal means. So you know, I’m selling narcotics, I’m selling, you know, things that shouldn’t be sold, making gains for it. So I’m accumulating lots of cash, but I can’t exactly stick it in the bank account because because you know, most of the world now is tracking cash deposits, cash withdraws. So I need to find a way to turn this ill gotten gains of cash and turn it into something that could be perceived as legitimate.

Because where this all goes, and it’s probably something worth following up is for accountants who listen to this, or lawyers and others and also just business people what they should expect. There are going to be. Extra reporting requirements for accountants, insolvency practitioners about anti money lauding, about the amount of reporting that’s going to be done. So I think we’ll kind of won’t try to answer that today because it’s evolving.

But there’s sort of a March one, twenty six deadline where you’ve got to be done. Apparently there’s year if you’re not if you’re not in, thereby if you’re not in and habitcy processes in places, quite substantial fines are for full practitioners who aren’t ready and don’t have their practice and can’t prove that they’re ready to go. And there will be some imagine there’ll be some extra reporting or it goes beyond just giving Chris and his team your driver’s license front and. Back, that sort of thing.

So there is some stuff around any money lauding because the government’s legitimately trying to stop proceeds of crime. And so I mean this is where AML does touch you. Easy case there. So like even if you’re doing something that you don’t typically deal with out and out crooks, but a crookers can be the same guy runs upon this scheme and takes mums and Dad’s money, he’s a crook.

Well, she’s a crook, just like anyone in a different form. And what they do with their money. That’s money on it, you know. Yeah, again turning turning dirty money into clean Yeah, absolutely.

I mean it did remind me of a classic example during COVID there was a lawyer that where the Law Society went in and actually appointed receivers of his practice because what he was effectively doing is, you know, a certain foreign nationals can’t buy property in Australia. So this guy was effectively saying, well, why don’t you give me your money from a foreign jurisdiction and then I will be your I’ll be the guy on title, but effectively it’s your money, you know. And so basically he was holding property on trust. But I think everyone was seeing through that, so the law society said that’s unethical behavior, so bom the way you go.

So whilst his practice then had to file for bankruptcy because he just. They just just got wiped out. So yeah, I think that I suppose maybe that’s the other lesson, like little tricky workarounds don’t necessarily. Yeah, and of course he’s getting a fee for the service.

Yeah, And it’s usually a margin on money, so it’s not a here’s my alley rate to my bill, it’s here’s a percentage of the money that is flowing through that I’m going to take. So I suppose that’s the usual stories of these things, that if someone’s offering you a ninety percent return in three months was itty days, So then you do need to be skeptical. And that the other lesson I think I’ve come away with from today, other than the fact that you do have being organized or disorganized as pros and cons from a director, just perspective. If they go to you and yeah, thinking you’re going to get past something past you, guys, that’s maybe the main lesson.

You will open open an open book and a clear story, and if you’re a Ponzi scheme runner, then run away from Chris.

112: Hope is not a Strategy

The Sounds of the Baskerville – Episode 112 Transcript

James Flaherty
Welcome back to The Sounds of the Baskerville. Good afternoon, Chris. How are you?

Chris Baskerville
Good afternoon, James.

James Flaherty
Yeah, the afternoon edition of a vodcast series we’ve been doing post 100 episodes. So this is the 100 something episode, Chris. So and we’ve been sort of walking through the last hundred or so about different topics we’ve talked about.

Chris Baskerville
A hundred very well planned and thought-out podcasts.

James Flaherty
Thoroughly researched. Now, in fact, a lot of it’s been about trying to pull your own experience. And in this case, we’re very pleased to once again be joined by Ginette Muller, GM advisory. How are you, Ginette?

Ginette Muller
Hi, guys. Very well, thank you. Thanks for having me again.

James Flaherty
Well, I think as a friend of the show, shall we say, thanks, Ginette, for coming along. I thought a concept that we talk about a bit, Chris, is that match fit idea. And we basically lifted that from Ginette, didn’t we?

Chris Baskerville
It was a trademark that we did steal from Ginette. And it was basically getting, is a client ready to undertake any of the hats that we have to wear? And most often they’re not, unless they’re willing to just literally blow the whole business up immediately. In which case you always match fit. You just hand us the keys immediately and walk away. But if there’s a restructuring element you want to survive in through the process, you’ve got to get match fit.

Ginette Muller
Yeah, 100%. I think I coined that term about five years ago at a conference in Canberra where it was as cold as it is today. But anyway, it’s really about liaising with the directors of the company and sort of just making sure that they know what’s going to happen to them when they go through door A, B, C or D. And it’s just helpful for them. But it’s also helpful for the practitioner, I’d have to say.

Chris Baskerville
Oh, hugely. Like someone that’s already ready to go, which, you know, your director advocates have already prepared them. Then it’s just hit the green button and go.

James Flaherty
So like an intelligent director or a director, maybe rephrase that, a director who is prepared.

Ginette Muller
Oh, 100%. Not only for what they’re about to experience emotionally, but also in terms of have we got the tax returns done? Have we cleaned out any of the messes, et cetera? Just all of those questions that they want to know what if this happens or what if that happens, which they really shouldn’t be asking their practitioner about because the practitioner ultimately has an obligation or a responsibility or a duty, in fact, to creditors and not to the director. And they need to understand these lines and a lot of them don’t.

James Flaherty
So that’s an interesting question because we often do say to people, Chris, that they should approach you first. But your job is also to manage all stakeholders, though, isn’t it?

Chris Baskerville
Yeah. But if I looked at someone and I said, I think there’s a survivability element here, but you’re not ready for me yet. Well, that’s the ideal referral out to someone that can help them get ready. To make them match fit.

Ginette Muller
To either make them match fit or to deal with the issue that they’re facing at the moment. Do you really need to go into liquidation? Could you get financing? Could you do a voluntary administration? Could you do a small business restructuring? So these types of questions and answers are something that someone like me might do. Even if the company goes to Chris in the first instance, he might say, yeah, look, I can see that there’s a number of options here available for you. You need to talk to someone else at this point in time, be it your accountant, your lawyer or someone like myself, just to tell you what those options are. And if, say, for example, Safe Harbor might be one of those options, to walk through that door with them.

Chris Baskerville
Why I often say, just come to me with all your problems, right, is because I have a knack for digesting and figuring out what the actual problem is. Because a lot of the time people want to talk to me about an issue. I’ve got problem A over here. And then you sort of walk through the process. You’re like, you know, you don’t have problem A, yours is C. You’ve got a completely different problem. But I like to think that with the networks that we’ve got and the professionals around us, that there is someone in my network that you can be directed to, to solve all the other issues that might be there.

Ginette Muller
Oh, yeah. Look, I’d have to reinforce that and say that I totally agree. There’s not a lot of people who really get it and say, oh, I see what your problem is. It’s not what you think it is because you, as a layman and not an experienced in this area, don’t know what you don’t know. Whereas someone like Chris knows a lot, knows a lot about a lot in our area and can pinpoint it and say, well, you need to do this or, yep, no worries, I can help you right now. Or you need to go and see this person first. So, yeah, it’s a true skill. And people who’ve been engaged in insolvency for a long time have it and can really help directors in that circumstance.

James Flaherty
So I think we’ve talked about this before. And is that without sort of getting too wound up in it, there’s that old expression about if all you’ve got is a hammer, then everything looks like a nail.

Ginette Muller
Well, that comes from the expression that a person like Chris doesn’t just have nails, doesn’t just have a hammer, right? He can differentiate between different problems and doesn’t just say, oh, I can help you. That’ll be a liquidation hammer. No, you need to go to the right insolvency practitioner, obviously.

James Flaherty
And that comes from experience. I suppose that’s part of the background of why we started. You come up with the idea of having a podcast to sit there and go, well, distill some of the experience that you’ve got over the years to give a broader perspective than, oh, that looks like a liquidation. Oh, tick box one. Oh, there is no box two.

Chris Baskerville
And dispel some myths. I mean, even I refer to myself as a corporate undertaker. That’s really just a pun just to see how intelligent the other party is. But it was to dispel the myth that we’re not there to just – the biggest fear is the only advice we give is give us the keys to your business. Because that’s not true. No, no. It’s very one-dimensional thinking. Whereas I’m pretty sure for my entire time in this career, my first thought is always can I run this business? That’s the first thoughts I run. And then through lines of questioning, I then either digest that that answer is in the affirmative or the negative, and in which case then you think, all right, what are your next options?

James Flaherty
So say a situation where you go, hey, Ginette, there’s something here. It’s not a liquidation maybe yet or it’s – I don’t know what it is. It might come to you, is that – and then your job is to go to the director.

Ginette Muller
That’s right. My job is to go a bit deeper, maybe speak to the accountants, maybe speak to the lawyers, have a look at any underlying litigation, look at what options the client actually has and why they haven’t exercised some of those options. Why haven’t you taken that offer of finance? Why haven’t you sought partnership with another person or whatever it might be and just sort of give them the options. Option A will lead you to here. Option B will lead you to here. There’s risks involved in those. Or option C might be maybe it’s time, maybe you’re not getting on with your partner in your business and maybe it is time to call in Chris and maybe he can sell it or if it’s not saleable, maybe there’s some assets that can be sold and pay off the creditors. So looking – every matter is going to be different. They’re all bespoke. They’re all different. You can’t just say – you just can’t use the cookie cutter for each one, I don’t think. For each client that I engage with, it’s like they’ll have special situations that apply just to them. Give them the time of day. Listen to them. Find out what’s really going on, as Chris says, and then it might be exactly as you say. It might go straight back to Chris because they really do need a liquidation. But it might be a case of getting organised because even if you are going to go into liquidation, sometimes you need to understand what has happened over the years leading up to that liquidation, what transactions might be undone. What are the consequences? Have you done any insolvent trading? Just be prepared to know what’s going to happen once you do put the company into liquidation. I suppose that’s where a lawyer or someone like myself comes in and that we can just tell them the facts. Sometimes that might assist them with finding a little bit of extra money or working a little bit harder with that partner or maybe getting a line of credit to keep things going and to implement a different course of action in their business planning.

Chris Baskerville
I had literally this discussion yesterday and I swear this accountant calls me in because she realises that her clients don’t listen to her. So she goes, okay, well, I’m going to bring in an expert. And my job was to scare the bejesus out of their client so that they go, I should listen to the accountant. I swear that’s the other way. But anyway, this lady received a DPN and a direct penalties notice and of course 21 days it becomes personally liable. We’re within that 21 days. And through lines of questioning at the end of the discussion, it took about an hour, she goes, yeah, I think I’ll just pay the debt. I just went, okay, great. But again, it was using company resource facilities to draw down on to pay the debt because as we all now know from 1 July 2025, you don’t get tax deductions on the interest you pay for tax debts anymore. So by converting that tax debt into a commercial loan facility, you now actually can get the tax deduction. This is not tax advice course. But so in weighing up the options, it was better to draw down on a company facility to pay the tax debt than it was to accept personal liability or try to draw down from a mortgage over the property.

James Flaherty
Yeah. How often though, Ginette, would you find a company that has those kind of options? More often it’s minutes to midnight, isn’t it, for lots of them?

Ginette Muller
Oh, look, for sure. Again, it’s difficult to categorise everyone in the same boat. But, you know, I was speaking to an accountant yesterday who was telling me that he feels like it’s the worst business conditions he’s seen in a very long time. So the availability to credit, not everyone’s going to have that. You know, they’ve come out of COVID. That old excuse is gone. Now it’s just trading conditions. And a lot of his clients are feeling the pinch at the moment and there’s no other alternative options out there for them in terms of accessing finance. So, yeah, it’s difficult.

James Flaherty
So time is running out.

Chris Baskerville
Yeah, and unless you’ve got real estate, which, you know, real estate behind the director, which has been appreciating over these last few years, creating equity, and you can access that and then finance that. So, you know, people can access it. Like you might have a million dollars in equity in your property, but could you finance an extra million dollar facility if you had to? So obviously they create hurdles. But it was funny, I was talking with an accountant and the specialty was in the trades. So that’s their specialty. He said last year he’d lost 40% of his business because 40% of his clients all of a sudden hit walls that they couldn’t get over or around. So imagine that impact to your business.

James Flaherty
So we’re often talked about don’t have one client, like the government or somebody like that.

Chris Baskerville
Yeah, don’t have one client or a concentration risk, I think is what they call it. So don’t concentrate in any one industry, don’t concentrate in any one field or segment, you know, have a bit of a variety. And I think there was another insolvency firm many years ago I picked up on this, they said, you know, no one client should represent more than 25% of your revenue because if you think about it, if that one client goes, 25%, there goes your net profits if that one client goes.

James Flaherty
Yeah. But it’s interesting, a person who’s lost 40% of their income from a portfolio of clients. Yeah. That’s tough for any business to survive. And would you, is that sort of a safe harbour scenario potentially for somebody like just as a shock like that?

Ginette Muller
Oh, absolutely. That would certainly encourage directors properly advised to go and say, hey, there’s something on the horizon here, there’s danger Will Robinson basically. If we don’t plug that hole, we’ve got some serious issues because, you know, we’re now starting to fall, you know, below break-even probably. So let’s, you know, another loss of a customer could cause all sorts of difficulties. So are we going, when they look at their cash flows, which everyone should be doing, what does our future look like? Are we going to head into a zone of insolvency if we don’t plug this? Well, you can have the best hopes in the world that we’ll find a way to plug the hole, but what if you don’t? And so that might be a time when you consider putting in place safe harbour because your ability to meet your debts and as and when they fall due when you’re starting to get into that zone will be the first thing that a liquidator will say, well, you know, you ought to have known you’re starting to miss payments, you’re probably insolvent and then start to hold you personally liable. So, yeah, look, you would want to be considering safe harbour if it’s getting serious and that’s what a lot of companies do.

Chris Baskerville
As a former mayor of New York City, Rudy Giuliani, he said hope is not a strategy.

James Flaherty
That’s it.

Chris Baskerville
You know, it’s not a strategy.

James Flaherty
And we’ve talked about that Reverend Egypt as well, so not denial. So, and there’ll be ones that, and there’s ones that you can save, Ginette, and there’ll be ones that you can go, you know, what?

Ginette Muller
Well, in terms of safe harbour, what I find is, you know, I like safe harbour. It’s because it puts into a company a formal structure of governance. The better outcome plan forces directors to get together and look at what their plan is, look at how they’re going to make things better. That’s why it’s called a better outcome plan. What are the strategies? There’s about nine different strategies that they have to look at or headings that they need to focus on each month or week or whatever it might be in their particular case. They start measuring and looking at how those plans and those strategies are panning out. Are we getting better? Are we getting worse? So, you’ve got that real focus for a start that those directors, those captains of the ship are implementing and it just really helps them get focused. But what it also does is it goes, remember that offer we got last year that we turned our nose up at because we didn’t think it was enough? Well, maybe it’s enough now.
Let’s get those guys back on the phone. Or remember that there was someone who said that they’d buy 25% of our business? Maybe we need to get them. It really starts to focus people’s attention on everything’s on the table. Start looking at all of your options. We’ve got a cash flow problem or whatever it might be or, you know, start thinking outside the box. Now, it’s easier to think outside the box when you feel that you’re protected from insolvent trading. Even if you don’t know what insolvent trading is, it sounds bad, right? But what it is, and when directors get to this stage, they pretty much know what it is. I’m going to be held personally liable for the debts that I incur today and that sends shiver up their spine, shivers up their spine. So, I don’t want to be feeling that way when I’m trying to turn this ship around. So, I need something, a shield, protection to come in and say, hey, we’ve got you, you’re going to be all right, just hold the course, do what you need to do. And if worst case happens, you go into liquidation, well, I’m not going to be sued personally for having a red hot go at this better outcome plan. So, yeah, you can save them. Many are saved. I haven’t seen, oh, look, it’s difficult to say the percentages but, yeah, just would rather not say how many I’ve seen go down and how many survive. With me, majority survive, but that’s probably because I prefer to go with clients that are likely to succeed.

James Flaherty
I think one of the things, if I understand what you do, is you’re more like an assurance, like you’re not actually in there doing, you’re sort of saying that’s a valid plan, this is a valid process, as opposed to necessarily people who get in there and try and be the turnaround person and then give safe harbour at the same time.

Ginette Muller
Sure, otherwise, you know, if you’re the director, for example, you’re the one in control of the ship, it’s your risk. If you can’t do it today and you can’t do it tomorrow, what are you doing? Why are you there? Are you going to rely on outsourcing your obligations, your responsibilities, your ideas, your strategies forever? Maybe this is not for you if you can’t write that plan. By all means, go and get some temporary help, but I really do put a lot of stock in the people that I’m working with that they need to come up with a solution or they need to change their board and put someone on the board that can actually come up with the solutions. And from that perspective, I sit with those people and look at their plans and help them with the governance side of things more so than the turnaround side of things.

James Flaherty
It wouldn’t be your trouble to be trying to get sacked, wouldn’t it? Wouldn’t it be your trouble to be trying to get off some of these people because some boards would like just being someone there telling them kind of not what to do but to keep them accountable to each other.

Chris Baskerville
Small Business, they identify their company with their human selves and they’re intertwined. So, you know, when they say, oh, this is my company. I’m the shareholder. I’m the director. I can do whatever I want with it. It’s like, not really. Not when your company owes money to other people. You can’t be just ripping money out left, right, and centre. Don’t get me wrong. If you’re paying all your bills on time, you’ve got loads of retained earnings and it’s great. You know, go nuts.

James Flaherty
Yeah, yeah.

Chris Baskerville
But not when as soon as your company goes into a period where it can’t pay its bills on time, there’s a duty to the creditors that is just placed upon the shoulders immediately, right? So, you know, you can’t have this mindset of the company and me are one.

James Flaherty
It’s not entirely mine. It’s not entirely under my control.

Chris Baskerville
And the governance element actually I imagine just keeps them. The company is its own legal identity. You have to treat it separately to whoever the human directors are.

Ginette Muller
Yeah. It’s the quid pro quo for being able to operate behind a shield yourself. You have a corporate veil and the reason you’re entitled to do that is because you have responsibilities and you have director’s duties. So that’s fine. You don’t have to operate in your own name and the company can have a separate legal entity. But just be aware in exchange for that there are responsibilities and duties and those director’s duties are to be acting honestly, acting in the best interest of the company, not insolvent trading, et cetera. So that’s the trade-off.

James Flaherty
It’s interesting to have a bit of an update. We’ve talked about Safe Harbour over the five series, the five seasons. So it’s been interesting to get a bit of a kind of an update of where things are up to and, again, how that’s sort of evolved and how it’s still a thing and directors should probably use it.

Chris Baskerville
Have we seen any cases yet where a defence has been raised with Safe Harbour and has been challenged? Have we seen that? Still not.

Ginette Muller
Well, we’ve still only got the Balanz case, which was a pretty pathetic attempt at the last minute of trying to defend against an insolvent trading case. Really sad case. But, you know, we still haven’t advanced beyond that at this point. So, you know, either liquidators are quite happy with the job people like myself are doing and are quite happy with the director’s claims or they’re just throwing them out.

Chris Baskerville
No director’s gone down with loads of assets behind them to be challenged.

Ginette Muller
At this point.

Chris Baskerville
At this point.

Ginette Muller
Yeah, exactly.

James Flaherty
We’ll watch this space. We’ll follow that one through in future episodes, shall we, Chris? Yeah. But anyway, so thanks again, Ginette, for joining us on the Sounds of the Baskerville on our hundred and something episode.

Ginette Muller
Honoured to be here. Thank you, guys.

James Flaherty
A reminder that these podcasts are general in nature and do not constitute advice and they don’t take into account your personal circumstances. So if you think, though, that some of the issues raised might apply to you, you should seek qualified financial, legal or counselling advice.

113: Here are the Keys

The Sounds of the Baskerville – Episode 113 Transcript

James Flaherty
You know, Chris, look, there’s money in the bank. I know there’s people who owe me money. I owe some to some people. Probably haven’t done my tax return. Here’s the keys. Sort it out. Welcome back to the Sounds of the Baskerville. James Flaherty is here with the great man, the Hound. How are you, Chris?

Chris Baskerville
Good morning, James.

James Flaherty
Good morning, Chris. So, you and I have been talking a little about businesses that might have been quite successful over, you know, quite some years. Of late, both of us have had sort of principals or firms or directors coming up to us and saying, look, you know, I want to call time. Some of them have been fighting what we would describe as potentially a losing battle for a long time, whereas others have been able to wash their face off for whatever reason, call it AI or change of government or change of a particular policy or just changing social tastes or whatever. What seemed like a good business model, no longer. They either can’t sell it or it’s just not making any more money for them. I mean, you’ve seen that. You’ve seen that all the time. And there are also disputes as well, you’ve said, that sometimes it’s a dispute or cause a business to stop.

Chris Baskerville
Yeah, or the director is nearing retirement and they’re just over it. I’m kind of done. I’ve had two of those discussions actually by accountants recently where the director is coming in and they’re nearing retirement or they’ve accumulated enough wealth that they don’t need to be in this business. So this business is really just annoying them. And both times they’re foreshadowed a potential and contingent liability if this thing keeps running, usually because of a warranty claim or liquidated damages claim in the event of faulty workmanship. So even though it’s not on foot now, but it’s something that’s anticipated and they just don’t want to deal or worry about it. But also to maintain the insurance policy, to keep that protection in place is becoming more and more expensive. So they’re getting that I’m just over it part.

James Flaherty
So is part of that then, I think what we’re saying is that there are a multitude of reasons why what might have been a good business or a business that’s run its course needs to close. So I suppose the question I was going to ask you is, well, okay, then how do I shut it down? Like a lot of people just sort of seem to walk away and just hope it all goes away.

Chris Baskerville
Well, that happens a lot. So some of our referrals do come from directors that are just over it and they just go, here’s the keys, wind up the affairs of the company. So that does happen. We always encourage directors, well, if you’ve got the stamina to do this, if you can just do an orderly winding down of your own business and get the bills paid to the best you can or the extent possible, it’s going to reduce our involvement and our fee exposure. Do your best. But if you do end up at that overage stage, hand us the keys, we’ll deal with chaos ensues.

James Flaherty
I suppose, okay, so let’s go scenario one. I’m sick of it, I want to wind it up. I pay everybody out. So I say, okay, here’s Fred, here’s Sally, here’s Tom. I just pay the money out as I go and then I just stop paying the asset bill. So eventually it deregisters. That’s one way. I mean, some people just, there are some people who don’t pay some of the people and still let it deregister and hope for the best. But let’s go with the person who’s trying to do the right thing. Just let it deregister. There is a risk though with that, isn’t it, that ASIC, if someone comes out of the woodwork or something like that, they can just re-register it. I mean, if it’s done by ASIC, my understanding of the legislation is they can just, it is relatively easy to re-register.

Chris Baskerville
Yeah. So companies get deregistered on the initiation of ASIC, which is usually non-payment of the annual fee to keep a company alive. And depending on the type of company depends on the annual fee. And they’re not so quick to do that. Sorry to jump in.

James Flaherty
They’re not as quick to do that.

Chris Baskerville
No, that usually takes two to three years or, you know, 18 months to three years seems to be the window because, you know, I guess a little bit of leniency is given and certainly ASIC doesn’t instantly kill a company off the minute they don’t pay their annual fees. And look, that’s a system that’s being talked about at the moment that needs to be approved. But so non-payment of the annual fee will trigger ASIC to initiate its own deregistration process simply on that basis. The other way that can be initiated by the directors is once they have paid all the bills and there is less than a thousand dollars in assets, there’s no litigation on foot, no liabilities, the director can literally file a form that says, I declare the company’s done and ASIC will then say, thank you for that. We will initiate the deregistration in two to three months time. So that’s the director making a declaration to deregister the company, but that usually means all the bills are paid. So that’s quite nice. Thirdly, the directors can just go, look, I’d rather a liquidator just clean up the tail end of this company, make sure that all the tax returns have been lodged, the ATO clearances all there, grab in whatever elements of cash or other assets might be out there, pool funds and then get them out to the shareholder body. So that is a member’s voluntary liquidation. That’s an appointment.

James Flaherty
So you’ve gone from a situation where you said, hey, I’ll just do it all myself or with my accountant. What you’ve said here is now, hang on, I just want to kind of draw this a bit more formally and have a person who can sort of put their lick on the process a bit. When would you do that? Is that because there might be a few people involved and you want to make sure there’s a separate set of…

Chris Baskerville
Yeah, there’s a couple of different reasons. Mainly these referrals for a member’s voluntary liquidation, which the company must remain solvent all the way through the process. In other words, the company has to pay all of the bills all the way through.

Those referrals typically come from accountants. It’s usually because there are retained earnings in there or there’s a pre-CGT asset that needs to be dealt with. And by distributing the property of the company via that means, there’s huge tax advantages to the shareholders that ultimately receive the property of the company at the end, albeit in species, which is, we’re not necessarily getting cash, but we’re getting a document that says, here’s the property that you have received on paper, but it gives them some huge tax advantages.

James Flaherty
Yeah, I imagine you’d be seeing less and less pre-CGT assets. As time goes on. As time goes on. But there’s definitely this retained earnings and some of those kinds of things. Yeah, return of share capital. Yeah, and that remains a legitimate and important thing for people with slightly more complex affairs to kind of keep in mind when it’s time to call time is how to manage some of these processes.

Chris Baskerville
And it’s also at the end of the process, the member’s voluntary liquidator appointed, that will be the person that initiates the deregistration. So it’s not an ASIC initiated deregistration, it’s actually the liquidator initiating the deregistration.

James Flaherty
Yeah. And that gives them a bit of peace of mind that it’s going to be done properly. The distribution, there’s no kind of preferences, it’s all gone. Everyone got paid. Everyone got paid. Would there be any benefit in doing an SBR, a small business restructure, rather than even if it still ended in a formal liquidation at the end, but if it was a bit fiddly, is there any benefit of doing a small business register, which even still said, okay, creditors are going to get 10, 100 cents in the dollar, but it’s going to take me a while to figure it out. But I mean, especially if there’s a bit of a sort of democlase, or is that just a bit too fancy?

Chris Baskerville
Well, you got to remember a couple of different things there. One is a small business restructuring really should be used to maintain a viable business.

James Flaherty
Gotcha.

Chris Baskerville
So if the business is really end of life and it needs to be terminated or brought to an end, SBR is not the appropriate product for that. And even if you successfully get through the SBR, the company is still alive and in control of the director’s hands, which means the director has to make a second decision now. That’s right. Yeah. What do I do next?

James Flaherty
So just because it’s a fancy thing that’s out there, it’s not really the right use for that. Yeah. Okay. So then the reason I raised the question is, okay, I either don’t have the energy to finish this, or I’m having a stash with the other shareholder. That’s a business that may have a life after this particular company, but not with me in it. So what do I do then?

Chris Baskerville
So again, you got to initially understand the company structure. So let’s hypothetically say in your scenario, you’ve got one person that’s running the company and it’s director, but you have two shareholders that are no longer seeing eye to eye. Well, first of all, you need 75% of the shareholders to agree to put a liquidator in, in the first place. So if 50% of the shareholders agree and 50% don’t agree, you’re at loggerheads. There’s no resolution being passed, right? So then the only mechanism a director has at that point is potentially an SBR, but that doesn’t really resolve the future, is really to appoint a voluntary administrator. That’s the only mechanism a director has. So it’s the only kind of lever that they’ve got. But imagine this, imagine you got the same two 50-50 shareholders are the same two 50-50 directors, if you want to put it like that, right? You basically can’t get any resolutions across the board. So what that means is either one shareholder director has to capitulate to the other person’s position or find that compromise, or alternatively, you’re off to court and say, we think this thing should be wound up because we’ve reached complete loggerheads at all levels of this company. In other words, the company cannot make a decision to go forwards, backwards, sideways.

James Flaherty
That would happen in say shareholder disputes often in relation to say family office or divorces and things like that with their husband and wife or spouse. Yeah, you hear that all the time. Yeah. And so that’s where you have to say, okay, if you guys cannot or will not make a decision here, then we’re going to have to go to court to strike it out.

Chris Baskerville
Obviously you mitigate that risk and good governance would suggest that we should have a shareholder’s agreement, which is very similar to a binding financial agreement for humans.

James Flaherty
Yeah, that’d be in season one in a relationship. I don’t want people to talk about that. And how did it go? How many more have you seen since then, Chris?

Chris Baskerville
Well, maybe the reason I haven’t seen too many is because the people with the proper governance in place are not usually the people that end up in their lap is the people that don’t that end up.

James Flaherty
Okay, I’ll pay that. Well done.

Chris Baskerville
But let’s go to the shareholder agreement in built in the shareholders agreement should be the mechanism on how we resolve disputes, you know.

James Flaherty
Isn’t that beholden upon any accountant who gets an off the shelf company for somebody or set some structure up with the dialacompany.com.au like, you know, something like that. They’ve really got to say, hey, like you’ve said in I don’t know how many times you’ve said this, finish with the end in mind and all that sort of, you know, what happens if something bad does happen if we don’t agree? Because otherwise it’s you and lawyers at court trying to duke it out.

Chris Baskerville
Yeah. And look, I’ll say history tells me that whenever shareholders or directors go into a fight over a business that is trading, it generally, in my perspective, leads to a very valuable appointment for me as a liquidator because the underlying business has some value. It might even be profitable and cashflow positive. Yeah. So in other words, we’re rolling in there as court appointed liquidators of a very valuable asset. So that just means more fees for me, more fees for my lawyer friends, more fees for the people that I need to use as consultants. And less for the owners. Less for the owners. And don’t get me wrong, I’ve certainly returned multiples of monies to shareholders over the time, but there could have been so much more if they didn’t have the fight. That’s the irony. So I think that’s where the value of a shareholder’s agreement really plays a part.

James Flaherty
So let’s go down Avenue 1. I’m a sole director. I’m just sick of it. I’d say, you know, Chris, look, there’s money in the bank. I know there’s people who owe me money. I owe some to some people. Probably haven’t done my tax return. Here’s the keys. Sort it out. Does that happen from time to time? Yeah, all the time. Yeah. I’m over this, mate. I suppose there’s an amount of risk if you happen upon something that you can’t then unsee. But if the person’s been propping the company up with their own money, it’s more than likely a fair enough way to do it if you’re just over it, is it? As long as you’ve been a good citizen, you’ve been doing your best.

Chris Baskerville
Yeah.

James Flaherty
Is that a fair call?

Chris Baskerville
Yeah, because if you think about it, it’s kind of like the doctor’s oath. You do no harm. So similar to a director of a company, you know, you’ve got duties to do no financial harm to the company. And if you do get to the tipping point where you can’t pay your bills on time, you’ve got a duty to stop it. Right. So how do you enact that duty is once you realize that this company has reached that tipping point, it can’t pay its bills on time, put the external administrator in whatever hat they come in wearing and surrender the control to experts that deal with these problems day in, day out, and bring your liability to an end. Draw that line in the sand and go, right, this is where my term ends. Leave it with the external administrator.

James Flaherty
This friend is legal with me. Okay. So I say this to people all the time. If you can’t battle on and you don’t want to try and solve it yourself, you know, to be honest, there’s probably not as much money as you’d like to keep everybody happy. Go and have an honest, open conversation with the liquidator like Chris Baskerville that you’re going to appoint and he can give you some information. But you have a job. You’re not their friend. You’re the liquidator. So it’s an independent job that you do. You’re not going to be their special friend. We’ve talked about that a lot.

Chris Baskerville
And we have to have the creditor’s interest in mind. Of course you do. Always.

James Flaherty
But at least if you go with someone with an open book saying, hey, this is what it is, at least we’ve got a roadmap, as opposed to people who just hope it all goes away and then they get the court point of view. So that’s the last option, isn’t it? Where you sit there and say, oh, I’m just going to ignore it and hope it all goes away. And then eventually someone will send me a summons or something, probably to the wrong address because I’ve put everything I’ve done on my asset record. And eventually I’ll discover that I’m one of the companies in liquidation and I may or may not be subject to bankruptcy proceedings and I’ve just ignored it.

Chris Baskerville
Well, to go back to Churchill, really, doesn’t it? So if you see danger coming and you meet the danger head on in an unflinching way, the danger halves. But if you ignore it, the danger doubles. So by ignoring potential problems and storm clouds that are on the horizon, yeah, it’s going to come and hit you a lot harder than what you think. Whereas if you actually go and meet the issue head on, I think you’d be surprised by the issue actually becoming 50% of what it actually was, particularly in your mind.

James Flaherty
So here’s another question that I don’t expect an easy answer to, or even the actual answer, which is, how many would you say you’ve seen where a director’s called time versus how many do you see where the directors just walked off into the night and just let the cards fall as they may?

Chris Baskerville
Yeah, certainly the greater majority of the work we do is the directors waving the white flag and opening up the books because that’s the voluntary appointment style. I prefer that one because the directors are generally, they tried, it didn’t quite work and they’ve just gone, we’re surrendering, here’s the white flag, here’s all the books. Thank you very much. That’s the greater majority of the work we do. The other side is the people that bury their head in the sand and go and tell everyone to get stuffed and then wonder why there’s so many legal proceedings coming at them and why caveats are being put all over the place. And they’re the people that have just turned their back on their own duty. So it’s going to hurt those guys a lot.

James Flaherty
And I do wonder, I mean, you have a difficult job, but I do wonder about some of the so-called bad press or someone who’s ignored it and then gets all the stuff from the woodwork sort of being a grave, they’ll be naturally upset, but there is always an important question to ask someone who has had a bad experience, just how did they get to that point?

Chris Baskerville
Generally, the directors that are voluntary surrendered generally got a reasonably good moral compass and conscience about the harm they’re doing to others and they don’t want to cause harm and they’re up at night stressing. And the other guys run for the hill, turn their back and all that sort of stuff. I always find it very funny because if you’re one of the directors that turns your back and tells everyone to get stuffed and I’m not going to cooperate here, there and everywhere, right? Let’s just say in two years’ time, three years’ time, five years’ time, you want to go and get that home loan and you need that letter of the one person that you just told to go and get stuffed. Imagine how fast we want to move on complying with that.

James Flaherty
Yeah, and that’s right. So it’s protect you from yourself from yourself.

Chris Baskerville
Correct. And that’s the thing, you might not see the pain today, but wait a few years.

James Flaherty
We’ve talked about this before and sometimes some people are actually in the worst situation where they just ignore it. They don’t say get stuffed, they just disappear and don’t respond. But they may still lie awake at night worrying about the implications of it. This could go on for years. So you’ve just got to rip off the band-aid, don’t you?

Chris Baskerville
It probably goes back to that records chat that we had before. If we get all the records up front and we can quickly go through those investigations, we can also make a conclusion reasonably quickly. Is it a green light, red light sort of scenario or investigations? And if we have come to the conclusion that there’s nothing further to see here, then we can then go and apply for deregistration off ASICs database and then the whole thing’s buried and we never have to deal with it again. But if it’s the other way, then investigations remain open for potentially years. So if you want to rip the band-aid off quick and a reasonably quick death, then just come to us, give us all the records and let us do our job as fast as humanly possible.

James Flaherty
We’ve got two good ways to go to sleep. One is to listen to the sounds of the Basketball Podcast. Or two, if you’ve got something that’s bothering you, give Chris a call. Thanks Chris.

Chris Baskerville
See you mate.

114: One shot in Seven Years

The Sounds of the Baskerville – Episode 114 Transcript

James Flaherty
You’re on a Sounds of the Baskerville vodcast. Hi, Chris, how are you?

Chris Baskerville
Hello, James.

James Flaherty
Great to have you back on your own vodcast. And good afternoon. And we’re once again joined by a friend of the Sounds of the Baskerville, Ginette Muller. How are you, Ginette?

Ginette Muller
I’m very well. Thanks for having me on again, guys.

James Flaherty
Now, Chris, we’ve made some bold predictions before, and we’ve got about an 0 in 5 hit rate, I think, in terms of actually not necessarily that they won’t come to pass, but certainly any of the times we’ve ever said, yeah, so zombie apocalypse comes to mind. So a number of things were predicted. So one thing that we’ve sort of speculated about, Ginette, was whether this whole small business restructuring seemed to be on the up and up, like there just seems to be more of them, more people getting into them. That’s not necessarily what I think either of us, many of us are seeing.

Ginette Muller
Well, that was the story until about July 2025, and then it’s just stopped effectively. They’re declining. They’re still higher than last year. Sorry, they’re still high, but certainly in July we had our first lower than last year, which is interesting to say the least. So we were going like this, and now we’re going like that. Now, insolvencies are still high. So I don’t know, Chris, what’s your take on why?

Chris Baskerville
Yeah, I wonder if we’ve flushed out all the zombies through either just a straight-out liquidation or through SBR, so to speak, and maybe the snake that eats the pig. Have we gotten through that moment? Yeah. But certainly the insolvencies, including SBR, way over the GFC level in 2012 I think was the highest peak post the GFC.

James Flaherty
And you’ve talked about that lag before.

Chris Baskerville
Yeah, about a four-year lag. I don’t know. Australia just seems to throw money and try and create a buffer to stop a train wreck hitting immediately.

James Flaherty
And sort of people can die with dignity over a period of time as opposed to one big spike.

Chris Baskerville
Exit with grace or trade on, you know.

Ginette Muller
Well, I suppose the truth is somewhere in between, as it always is. But, you know, Australia’s biggest taxpayer is the Australian Taxation Office, as we all know. So really I think the answer is probably look at them. What are they doing? And anecdotally you’d have to say that their skill base in the area of assessing small business restructuring has improved significantly. They have tooled up. They have a lot more staff working there now. They have skills, we’re told. We had recently I attended a conference with the Tax Office and they were very proud of their new skills and their new team. And so there’s this added level of scrutiny that I think a lot of practitioners and a lot of plans are coming under. What do you think about that?

Chris Baskerville
Yeah, that was interesting because I remember because it was introduced in 1 January 2021 and it was one guy decided all of the SBRs and we were very proud of ourselves going we know who that guy is. We know how to contact them. They want to see the plans five days in advance and you can actually talk to them and say, hey, what does this plan feel like? And then 18 months you couldn’t get a hold of this one fellow because they replaced it with another thousand. That might be a slight exaggeration. But there’s more of them. There’s more of them and more being trained. And I think you’re right. They’re now asking the tough questions that they wouldn’t necessarily ask in the beginning. In fact, I think in the early days they were trying to find ways to say yes and now it feels like they are looking for the what is the main reason to say no in a lot of cases.

James Flaherty
So is it gone? So if we say the major creditor is usually the Tax Office and you and I have done the Chris and I have looked at this a couple of times with the ASIC reports, usually the Tax Office. And if it’s not just the Tax Office, it’s mostly them.

Chris Baskerville
I think 80% was the Tax Office was the deciding factor in the small business restructuring.

James Flaherty
So do you think the Tax Office, if the biggest creditor is getting a little less, they’re spending a bit more time on them and they’re a bit more scrutiny, then that means that people who aren’t putting in the effort for their report, is that, is this anecdotal?

Ginette Muller
There’s a number of things from my take and the Rosetta Stone comes to mind. So you do get feedback from the Tax Office prior to them voting. They always said that they were going to give practitioners feedback. If you get your report in on time and you’ve got all of the things that they’ve asked for, they will give you some feedback. And a lot of times it will sound something like this, you need to increase the offer substantially. Oh, my goodness, what does substantially mean? So that’s the first thing. How do we interpret this language? The second thing is your client has some compliance issues. Oh, what does that mean? Compliance personally, compliance for the company? What is compliance? Is that they were late with a few BASIs? They didn’t lodge a tax return in 2020? I mean, what does that mean? So, you know, it’s a bit of a minefield to walk through to try to interpret this new language. But, you know, a lot of people are giving it their best shot and we’ve come up with some ideas on what the new language means. And you know the clients that you have to increase the offer, $0.20 or $0.10 is not going to cut it for those particular clients that have these issues on their record. Div 7A is another one that comes to mind. It’s a director’s loan. A director’s loan account, yeah. And understandably so. If you’ve taken money out of the company and you’re now asking for the tax office to take a haircut, well, they don’t like that. So find a way to get them to yes. It’s all about moving them to this yes and you get one shot at it. So I don’t know if you’ve experienced something like that, Chris.

Chris Baskerville
Yeah, the interesting part, I remember, and we talked about this previously, is where the director’s loan account equals the tax debt. So it’s kind of like and then the obvious question then is, well, if the director just pays the loan back, you can pay all of your taxes. So why should we compromise? Or let this company go to the liquidator and let the liquidator go and recover the loan from the director. That was the attitude.

Ginette Muller
Yeah, that’s it. But I also should say that I think there’s another issue other than the tax office. I think we are starting to see, particularly in the firms that do a lot of SBRs, that their percentages of success are starting to come down. And so I suppose from their perspective, they’re going, well, you know, I don’t want to do these if this has too many of these red flags that the tax office considers red flags. And that’s what they call them. Red flag, compliance, red flag, Div 7A, red flag, never honoured a repayment plan, et cetera, et cetera. So they see that.

James Flaherty
So they won’t put up ones that they know.

Ginette Muller
I don’t know how the conversation goes, but I presume there are certain things that go, well, you know, they’re honest with the client potentially and just say, you’re not going to, it’s not going to work out for you, maybe you should look at something else. And my fear about that, and obviously present company excluded, is that we might start seeing a bit of a rise in phoenixing now. So we go back to the bad old days. Oh, well, here was a hit. Don’t worry, that path was open to you, the SBR path. But don’t worry about it, we’ll just liquidate and you can buy your assets back and we’ll do a phoenix. So, you know, I hope I’m wrong. I hope that’s not what’s happening. But it is very concerning to see that going down after it was going like that. So I don’t know what your take on the situation is.

Chris Baskerville
Yeah, that’s an interesting part. That actually is a fallout because, you know, if you’ve got one shot at it, you know, one every seven years for the company and the director, so neither party can then use this process again for seven years, yeah, what would you do if you wanted to keep your businesses alive but the ATO just rejected your…

Ginette Muller
And of course, there’s no guarantees. And everyone says that, every client I see, there’s no guarantees. But I can tell you from experience, I’ve looked at your proposal and I’ve looked at your compliance and it looks very good and I think you’ve got good prospects, no guarantees.

Chris Baskerville
Yeah, that’s the tricky part. And I guess, you know, the two interesting things with small business restructuring is one is if it does fail, if it fails on the vote, then the company just reverts back to its registered status as if you didn’t take any action whatsoever. So now you’re back in, okay, great, what do I do with this company? So you’re always in control. And the other one is you win 51% of the dollar value of the vote of creditors which sometimes rests in one creditor’s hands which is normally the ATO. So, you know, the way you write your reports, you do everything. If you know the ATO is your, is the only one you need to convince here, you’d throw everything in the kitchen sink to help the ATO make those decisions including disclosing loan accounts and all that sort of jazz because they’re going to ask for it anyway. So we would front load everything when you’re dealing with the ATO.

James Flaherty
Yeah, and I think you may have made the point on previous episodes, Ginette, that the tax office in fact ask for more than say the legislation or regulations would suggest that they’re required to receive but if they’re the biggest creditor and you want their vote, if they ask for it and they don’t get it, well, you know which way the vote’s likely to go, don’t you?

Chris Baskerville
But also you don’t want to waste time because what would happen is if you didn’t front load the evidence to the ATO that we know they’re going to ask the question. What happens is on the 11th hour of the 11th day is when you get the request for information and the last thing you want to be doing at 4.30 on a Friday is having this conversation with the ATO to get them all this hardcore finance information, you know. So now that we are aware of what they’re asking for, well, we just front load it with the report. There’s your report. There’s your proposal. Here’s everything we know you’re going to ask us in advance. Bang, make your decision.

James Flaherty
So there’s clearly a savvy people providing them what they want. We know the bar sounds like it’s gone a bit higher, maybe a few more cents in the dollar. If it’s got hairs on it like they’re not great compliance history, we think they haven’t put in their bazzers or something. It’s not going to be 20 cents.

Ginette Muller
It’s going to cost you a bit more and then you’re going to have to make, as a director, you’re going to have to make a decision. Have you got a DPN? I mean, that’s the other issue too. You’ve got a director’s penalty notice there. Maybe this is one of your only options. Maybe you have to do an SBR just because of that and, you know, it might fail but maybe it’s worth that risk because of the DPN that’s hanging over your head.

Chris Baskerville
And we’ve even seen people use SBR deliberately to obviously intercept a non-lockdown DPN, right? So a non-lockdown DPN gives you your four options within a 21-day period. So we’re going to start the SBR process and then what happens is the directors seem to ghost. We’re chasing the director for all this information but I think they’re deliberately just using small business restructuring as a pause to buy a little bit more time to defeat the DPN because they know once the SBR fails, the ATO has to reissue the DPN again. So in other words, all you’re doing is buying some time. And some people even say that once you’ve defeated the first DPN, the ATO doesn’t issue a second one. But I wouldn’t want to put that out.

James Flaherty
Yeah, I wouldn’t want to test that hypothesis. You’re not the only practitioner we’ve heard saying that they’ve had people ghost them. So it is – but I would describe that as – It’s rare.

Chris Baskerville
I shouldn’t say that that’s rare. That’s not in our wheelhouse of normality. That’s your 1% outlier.

James Flaherty
I would describe that as an extremely risky strategy.

Ginette Muller
And potentially expensive. You wasted your chance of doing it.

James Flaherty
That’s a good point.

Ginette Muller
Your one in seven years and all the people associated with that. I mean if you’re going to have a shot, make it count.

Chris Baskerville
Yeah, and it’s potentially cost you $20,000 in advisor’s fees and the SBR fees just to start the process to begin with. And it’s always up front.

James Flaherty
That’s right. And then to walk away. It doesn’t make a lot of sense. Yeah, wow. So I think the thing is that there’s some nuance, there’s some sophistication now required, which we see. And I think that’s a real risk because there were the spruikers saying, we’ll save you X percent of your tax bill. And clearly the tax man’s not going to be happy with hearing that sort of story. So if that’s an abusive process, but if we tighten it too much, do we then really – your real concern is – That’s right.

Ginette Muller
If you tighten it too much, then you destroy what was a real lifeline for these businesses. So tightening it up too much, consequences. Having it loose, consequences, was a bit of an unfair playing field potentially. People with huge div 7A loans were getting through and, you know, the tax office was learning on the job, of course. They’ve admitted to all of that. So some SBRs got through that maybe ought not to have. And so, you know, it’s finding that balance that keeps the economy ticking and, you know, ATO is 93 – the number is 93% of all SBRs that have done up until July had the ATO as a creditor. So, you know, they’re calling the shots. So I suppose the call is don’t make it too hard. Don’t take us back to phoenixing. It’s just not where we want to go. Because SBR, for all its problems and imperfections, at least has this layer of transparency that I think we all like and the ATO appreciates and you have a good go and the directors get a chance. They know it’s their one chance in seven years. And from most accounts, particularly that ASIC report that came out recently, majority of them are continuing to thrive and survive. So the data is there to say it’s working. Let’s just not make it so hard that it fails.

Chris Baskerville
And that same report, again in June 25, said that SBR returned over $100 million of monies back to creditors. Now, if you sort of flip that and put it into the liquidation context, imagine if those guys couldn’t access small business restructuring and the only other option was liquidation. You know, 90% of liquidations end up with 0% return to creditors. So at least it’s a mechanism of getting something back.

Ginette Muller
Yes.

James Flaherty
Getting us money. So I suppose if we ran this, it’s interesting the conversation about kind of where things are up to. What are the key messages for a business person or their advisor accountant from this? What are we learning? Like you should have done it two years ago maybe, but what else? What are the key messages? It’s compliance, is it?

Ginette Muller
Well, I’d say it’s a little bit about the match fit that we did an earlier podcast on this, James. It’s about if you’re an advisor, help the client to get match fit. Help them to have a crack at putting the compliance in place. And if that takes a little bit more time up front to get them organised and to put the I’s and the T’s in the right spots, then, you know, do that. Give them a chance at doing these SBRs because I think from my perspective, phoenixing is dangerous. There’s no guarantee that a liquidator is not going to undo those and any advisor that’s telling them, oh, it’s going to be fine, it’s a legal phoenix, I think it’s fraught with danger. That would be my take.

Chris Baskerville
Yeah, and I think, you know, I don’t know how many liquidations are under the belt now, but if you sort of think you look back, with all the investigations we have to do, you look back and there’s about a 12 or 18-month mark before our arrival is when they probably should have been talking to us because at that 12 or 18 months before they got us involved, they had options. They had a lot of options. And then over time and the pressure mounds and the creditor pool increases, your options decrease rapidly.

James Flaherty
Yeah, so as the clock ticks, you’ve just got to try and hear it, I think, isn’t it?

Chris Baskerville
Yeah.

James Flaherty
And so that’s an accountant who may or may not be getting their bills paid, that’s one of the red flags to say, hang on, this person needs to get advice now. So still worth it, still going, but they’re a little bit harder to do SBR. So if you’ve got one shot in seven years, you don’t waste it like what we’ve talked about and you make sure that you put the best story forward to you as an SBR practitioner, SBR practitioner number two in the country, second one in the country. So, yeah, you need to get the best story that you can put forward to the ATO. Yeah.

Chris Baskerville
And we want to match the narrative you tell us with the data, the financial data. So in other words, if you tell us, you know, it was COVID that triggered the issue, well, we want to look back at your financial data and see that COVID really was the issue as opposed to you were fine during COVID, you just went and bought three houses and a boat last year, might be the issue, you know.

James Flaherty
And then obviously that’s something that you do too, you know, you’re getting people in this match fit. So that narrative is quite clear to the SBR team.

Ginette Muller
I suppose it’s the same thing, isn’t it? In a way, it’s like, don’t pick a lazy advisor, get someone who’s going to do the hard yards with you to get you match fit.

James Flaherty
Maybe that’s where it ends this episode is if it sounds too good to be true, it probably is. And if sometimes it takes a bit of work to get the right solution. Hey, thanks very much, Ginette, for joining us on the Sounds of Basketball and thanks very much, Chris, for this vodcast series. We’ve had hundreds and something in your own show. Thanks again.

115: When the Storm Hits

The Sounds of the Baskerville – Episode 115 Transcript

James Flaherty
10% of people’s disposable incomes just vanished in the last couple of weeks. Welcome back to the Sounds of the Baskerville. I’m James Flaherty, here with the star of the show, The Hound. Chris, how are you?

Chris Baskerville
Good morning, James.

James Flaherty
Look, I was wondering what I thought was an existential crisis. I thought the best way of describing what’s going on at the moment is an existential crisis. Then, I looked at what someone described as my imaginary friend, Claude, and it said an existential crisis is a bit like when you say, what is the meaning of life? I don’t know if people are going to tune in for that, necessarily, Chris.

Chris Baskerville
I don’t think I’m your guide.

James Flaherty
You’re pretty good at a quote, so I will leave you with that thought. We’ve talked a little bit more about this before. It’s probably a little bit more about what you call externalities, which is just when something that’s not your fault impacts you badly. We talked, I mean, one of the biggest externalities we’ve had for ages was COVID. That pretty much, that was an externality. You didn’t really see that coming along. That completely messed us all up. I was thinking, well, is someone going invading someone in the Middle East without telling any of their closest allies much? That could be described as an externality because it’s put the prices fuel up.

Chris Baskerville
Yeah, it’s pretty wild. I guess no business owner could really prepare or get a heads up on that.

James Flaherty
It’s pretty hard to bear because you think about, well, we’re still talking. If you live in places in North Queensland, floods and cyclones are one of those things you’ve just got to manage. It’s tough to manage, but it’s one of the things, you know, you get weather events. If you live in the low-lying parts of Brisbane, these days you seem to get floods more than you might have. I don’t know, is that something you can kind of plan for?

Chris Baskerville
It’s like an old saying, I’m pretty sure my old man said it, but you don’t change your business to suit the weather, you only do business where the weather suits. In other words, one of the greatest ice cream franchises exists in Cairns, which makes sense. Yes. But let’s not change the ice cream business if you’re going to try and open up in Melbourne during winter, just put your ice cream shop in Cairns.

James Flaherty
That’s right, so go to where it makes sense. But people still have ice rinks in Brisbane and places like that. It shows that you can make a buck if you’re prepared to deal with the risks and the challenges of the environment you’re in, I think you’re saying. Is that kind of where you’re at?

Chris Baskerville
Yes, it’s the same as, I think, the United Arab Emirates has indoor ski fields in the middle of a desert.

James Flaherty
But you go, hang on, it’s a lot cheaper for those guys than, mind you, you’ve got any number of good airlines, you can fly to anywhere you’d like. But you’re right, you can say, I can go to the shops and I can go and ski Thredbo, which I think it’s based on some of those things. Cool. Okay, so then what happens if then, let’s face it, things were getting a little tight anyway, aren’t they? Things like the inflation’s been creeping up, we saw the recent interest rates increase. Things were already starting to get a little kind of tighter than we’d all like.

Chris Baskerville
Yeah, well I’ve definitely noticed it just in watching, say, home prices, particularly in South East Queensland. It’s just eye-watering what people are having to now pay for homes here in South East Queensland. But just the growth rates are in over 10%, some nearing 15% to 18%. Now that’s humongous growth of property. Obviously there’s a strong element of demand there, but that’s just amazing. And that’s just over in the last six months, 12 months I’ve been watching this thing, it’s just astronomical.

James Flaherty
And maybe, conversely, things are cooling in places like Melbourne and Sydney maybe, but does it mean that if you’re trying to fork out for a house now and the price has gone up 10% while you’ve been trying to save money, even with the RBA’s interest rate, you’re not going to get, how do you save, there’s very few investments that get you a very safe 10% per annum to keep up with the house price growth. And let’s face it, we’ve talked about Ponzi schemes that don’t offer much more than that, which have been winding up over the last few years. So how do you get ahead?

Chris Baskerville
Yeah, it’s crazy because when you think about it, let’s just say, I think median home prices in Queensland, or Brisbane potentially, is just tipped over, gone to a million bucks. So let’s just say you do find a property for a million, 10% deposit is 100 grand, but then you also need your stamp duty on top of that. So let’s just round it out at 140,000, 150,000. Now, how long is it going to take the average pundit to save that to get that? It’s almost like two people in a household working in reasonably senior positions, one person’s paying all the bills, the other one’s saving every dollar they probably get in order to raise that within, say, a 12-month period. And that’s pretty fast.

James Flaherty
And that’s assuming they already haven’t got kids, because if they’ve got kids, that’s going to choose. And let’s face it, people want to have kids. So that balancing act, I mean, people would say, it’s always been that hard, Chris. Is it any harder? I mean, it has to be hard.

Chris Baskerville
It’s all relative. It doesn’t matter which period you grow up in, it’s always hard for that period, it’s relative.

James Flaherty
We ran that vodcast not so long ago with Steve Hathaway, where we talked about, is it harder to run a business now than it was? He says, the challenges have always been there, but they’re different. But this seems quite acute for a lot of young people to, I mean, the percentage of your income that you need to service a mortgage and buy a house is much, much more than I would have thought when our parents started out. And I mean, you know, they started out, you know, in modest circumstances and then just sort of some of them kind of did well and moved closer to town.

Chris Baskerville
Yeah, well, I think, you know, there is some data and obviously we’ve done zero research for this vodcast, which is pretty standard, but there is the relationship between household income and then what you have to spend for, say, accommodation. And you compare today with yesterday, and I’m going back to the 80s and all that sort of stuff. And yeah, you know, households could afford one income earner to be able to cover all the relevant bills. Whereas now what it’s showing is that it’s almost impossible for one party to do that. It almost needs two people in a household earning.

James Flaherty
Yeah, that’s a good point. We’ll throw that in a transcript, actually. That’s quite a good idea, just to refer to that, because there’s a number of bits of research to support what you’re saying. Yeah, it’s a higher percentage of your income and often on two people’s income. Yeah. Plus you’ve also got the advent of the 30-year mortgage.

Chris Baskerville
And if the problems were relative to yesteryear, right, we might have the same struggles as, say, the 1980s, but if you could still maintain all those lifestyle costs with just the single earner household, which is the same as what it was in the 80s, well then, yeah, everything is kind of relative to your time. But I think the data is showing it’s grown, the cost of living has grown, outstripped that.

James Flaherty
So I think that was where it kind of led into this. So we think, yeah, things have been tight. It’s tough to save money to buy a home. Rents are high, rent demand is, especially in southeast Queensland and other parts of regional parts of Queensland, it’s pretty hard to find somewhere to rent. So in all of that going on, and then suddenly the price of oil goes up by a hundred bucks, whatever, it’s a hundred dollars a barrel. A hundred US a barrel. So then you go, well, so suddenly it’s costing, I think I went to Costco the other day and it was $2.50 or something a litre for, bless them, Costco, that was the cheap price, that’s the cheap fuel, $2.50 a litre. So I thought, well, that hurts.

Chris Baskerville
Unless you’re an electric vehicle driver.

James Flaherty
Yes. And so anyway, there’s a few smug people. Which I am one. Yes. And so fortunately our other car is electrical and it’s cost, I think it’s cost about, I think it’s cost about the price of one tank of fuel for the last six months to fill that. So that was lucky. But anyway, not everybody’s in that situation. You’re a tradie driving a ute, there are some electric utes, but most of them are diesel. Diesel is fiendishly expensive. And then if you’re, anyone who’s like trying to do a transport business, all the guys running, I listened to the radio the other day, apparently Australia is one of the highest road transport dependent countries in the world. So in terms of big trucks coming along, and if you’ve driven along the Newell Highway, you know exactly what we’re talking about.

Chris Baskerville
It’s the tyranny of distance for Australia. Like, you know, the East Coast is two, 3000 kilometres top to bottom.

James Flaherty
Chris is waving his arm around here just to demonstrate how big Australia is, but I mean, the idea is that you’re right.

Chris Baskerville
Then go east and west. Well, there’s 6000 kilometres, you’ve got an idea to cover, like the tyranny of distance. And as the stickers that we often see on the back of trucks, without trucks, Australia stops. So yeah, without those diesel-fuelled engines running those trains on the road.

James Flaherty
So I’ve already got an import, and it’s not just the cost of the Bowser going to fill up. But you’re right, I think he was sort of talking about this a number of times. It’s not just the pain that you feel, you know, I’ve got to make the mortgage, pay the school fees or the childcare, all that sort of stuff. But then I’ve got to pay extra to run the vehicle for whatever job that I’m doing. But that’s part of how those kind of externalities, like someone invading our country, not going into the politics of it, but the price of fuel’s gone up. But that means all your groceries go up. It means that, you know, parcel delivery or, you know, if you’re getting stuff by, you know, we’ve changed our letterbox so we can get parcels put in it and locked away. You know, lots of stuff comes by, that stuff goes up. You know, veggies, the cost of farmers goes up, everything goes up. And that takes a little while to flow through, doesn’t it? So if you’re trying to run a business in that environment where you know, hang on, as I tell you, what, 10% of people’s disposable incomes just vanished in the last couple of weeks. That’s got to hurt if you’re already on a razor’s edge already, doesn’t it?

Chris Baskerville
Yeah, it’s wild. And what we will see, and it might, depending on how high the fuel prices stay at this level, but I mean, there’s talk of the US dollars going, sorry, the barrel price going to 120 US dollars a barrel. Now, someone’s already put an article out that if it just goes up effectively 20%, like the knock-on inflation puts us into 5% inflation. So, yeah, and that’s… That’s the R word, isn’t it? Yeah, I think, so that then, I think the government, the Treasurer has already put a flag up saying, look, there is a potential, and they’re obviously trying to blame the war as the major factor of the magic R word in the Australian economy.

James Flaherty
This will soften us up.

Chris Baskerville
Now, obviously, the insolvency guys will be cheering, but there is an inverse correlation between that, which is cheering because now you’ve got a lot of distressed business out there. Our workflow will naturally increase, and these economic shocks, it doesn’t just impact us the next year or the year after. The runoff is about eight years of runoff from that type of an event.

James Flaherty
It’s funny because you, as a profession, you laugh at yourself saying, well, you know, things would be good for us, you know, but in fact, if I listen to these podcasts and as you talk, what you most enjoy is saving a business, saving jobs, turning it around. So, finding value in an enterprise that you can sell to somebody else who can have another crack at it, that’s not going to be any easier than in a recession. That’s not going to make your life that easy.

Chris Baskerville
Well, that’s right. I should have finished my saying, which is the positive side from our perspective is increased workflow. The negative side is we have assets as well, and we have super funds. So, we get impacted negatively on that side. So, it’s an interesting, it’s a conundrum, but you’re right. Oh, most of us… And you hear the world’s smallest violin playing in the background. No one ever feels sorry for us animals.

James Flaherty
That’s right. So, we’re not going to start now after saying that.

Chris Baskerville
People don’t even think we’re human.

James Flaherty
I can profess that, and very human, you all are, and of course, in your own way. But I think, so, if you’re going to be busy, going from COVID where you had nothing to do to now where you’re quite busy, you could be very busy or a lot busier, but your life doesn’t look like it’s going to get that much easier like the rest of us, because as you say, it’s all very well to have a great asset, but it’s only a great asset if there’s someone with enough money to buy it.

Chris Baskerville
Willing to buy it and cash. So, I’m already hearing from, say, private lenders in business space is even your second tier lending organisations are starting to tighten up their lending criteria. So, where the banks would kind of step out going, oh, look, it’s a bit too outside our wonderful box, your second tier lenders will come in, fill the box. They usually don’t have to ask as many questions as required, but we’re starting to see even that mezzanine and second tier financing is starting to tighten up with credit. So, yeah, all of this sort of indicates that, you know, once the cash stops moving, you know, that’s when the whole world stops spending. Now, I’m not projecting doom and gloom here, but these are all in this year that we have seen in the past that kind of leads us to potentially a slowing down somewhere. Now, either it’s going to happen by force of the consumer not spending, which obviously has its own trickle effect, and they’re not spending because it’s too expensive, or alternatively something catastrophic like high fuel bills that people just can’t afford that potentially just tips the whole thing over into a recession. But, you know, if you want to curb inflation, I think this is what some of the smart business operators in Australia will say, is if you want to curb inflation fast, you just got to trigger that recession, rip the band-aid off, and then you build back up to something more sustainable.

James Flaherty
It’s sort of creative destruction type. It is creative destruction. It’s all a little bit dog-eat-dog. You and I have famously predicted the zombie apocalypse probably earlier than other people, and other people took it up and were therefore consequentially also wrong. But certainly the effect that I think we predicted eventually came, which was that all of that stuff had to be washed out. Businesses that really wound businesses were eventually found out. This is another one of those scenarios where businesses that were already struggling, already relying on a tenuous amount of disposable income.

Chris Baskerville
And we got this existential crisis.

James Flaherty
Existential crisis for externality, one of the two. Anyway, let’s stay on that theme. I will just sort of keep track of that one. The world’s least effective predictors of the future. But anyway, great to chat, Chris.

Chris Baskerville
Thanks, James.

116: You can't Sell more Time

The Sounds of the Baskerville – Episode 116 Transcript

Chris Baskerville
If you want to preserve your margins or do better, you’ve got to constantly be pushing those prices up.

James Flaherty
Welcome back to the Sounds of the Baskerville. James Flaherty. Here I am with Chris Baskerville. How are you, Chris? Morning, James. So Chris, I’ve been going to a few of those, you see clubs or surf clubs or places like that, they might have a sign up saying, yeah, the world is short of good staff, so be nice to the ones who show up, you know. So there certainly seems to be a bit of a report around the place that it’s, you know, it’s hard to find good staff, despite what AI is going to take well of our jobs. It’s hard to find people to do work and then to be able to make, to help businesses sort of, you know, serve the demand, it seems. Mindful of things we’ve talked about in previous episodes of looming recessions and zombie apocalypses. But in the context of today’s conversation, what do you do if you can’t find enough good people to actually make enough money or more money to cover your costs or your debts?

Chris Baskerville
Yeah, replace them with robots and AI.

James Flaherty
Well, we’ve all gone to those places. I can remember during COVID where you had those QR codes and you could, you know, the whole idea of having to order at your table, I thought, was an anathema. But then that’s just everybody.

Chris Baskerville
Yeah, they’re a way of life. And what that does, it cuts down on a couple of bodies that are required to run to a table, take the order, run back to the counter, put the order in, come back to the customer to check and all that. And now it’s just simply you, the customer, order and deliver and pay immediately for what you want. And we will just simply deliver what it is that you want to your table.

James Flaherty
Happy days. Those people say it’s hard to find good enough. Yeah. Imagine, yeah, in that world where you still can’t find enough people to do the work.

Chris Baskerville
Well, let’s go one step further. There’s a famous, well, not so much famous, I’m exaggerating in my head, but my kids love going to this Chinese restaurant in Carindale where there’s a robot that delivers the food to you. So let’s think about this, James. We’ve ordered it, we’re paid from the table, so no interaction with any staff yet. And the food turns up by way of a robot.

James Flaherty
So, and you know, that’s, and that’s, it’s funny, that’s a side note. There could be a robot that looks at you and smiles. And there’s another one that says, watch out at a Japanese sushi place in Newstead. And I sit there and I don’t know if I like being told to get out of the way by a robot, but then again, it’s probably carrying your food. So you’d probably want to, you want me to get there as fast as you can. You’re right. So hang on, so you’re saying I’m in a place where the only human interaction is the person probably actually doing the food out the back.

Chris Baskerville
Yeah. Although have you seen, I remember going to Tokyo one year and there was a bar where the, whatever cocktail you wanted, two robot arms came, mixed the whole thing up and delivered it. So, so even that is being outsourced to robots. And I think there’s also robot cafes where they’ve now got robots actually making the food in the kitchen.

James Flaherty
So, so maybe the whole concept of this, this, this episode is, is sort of moot, moot, because like maybe we’re all going to be replaced by AR. At the moment, as I read something, I think it was in the Economist or something, a robot that’s in a factory that looks like a human is about 40% as efficient as putting boxes on a production line as a human is. So it’s not the, you and I are safe for now for our production line jobs when we’ve been AI’d out of existence because we don’t need liquidators and consultancy people anymore because, but anyway, in the meantime, if I want to get a sandwich at my local surf club and I order it from the QScan and I have to go and pick it up from the counter, there’s still a whole bunch of people there behind that counter working away at business and they could do with some more people to help them because the place is heaving. So you go, that place is heaving, but it could be busier or it could have even more, there’s so many people go by that particular business and other businesses would know this. How do you, if you can’t get enough good stuff, there’s kind of a maximum amount of money that you can make because if you follow the logic of what we’ve said in the previous episode, there’s not as much disposable income in an environment where petrol prices are going up, interest rates are going up. So there’s only so much you can charge. I think that’s what I’m thinking.

Chris Baskerville
So yeah, everything has a limit and it also depends on your target market. So if you think about whatever the product or service you’re offering, who’s your target market? Is it your mum and dad’s in your average kind of income or are you targeting the elites or are you targeting the not so elite? So because those that have worked out how to make money and make really good money, potentially have solved that financial problem for life, they just want really good service and products at an elite offering, they will continue to turn up. Whereas, and I’m referring to a couple of restaurants locally who made a deliberate decision. We are only targeting the sort of elite businessmen or elite people at that top level and no matter, even during COVID, except for what the government forced them to do, otherwise they maintain their key staff, maintain their shifts, kept their prices at where the prices are. In fact, the prices keep sneaking up and up and up, but they’re not noticing a difference because their target market was that top 5% type thing.

James Flaherty
And I suppose if you’re smart and you’ve got that kind of niche, that’s good. If you’re like a Blake I met, he was his great fellow shining the shoes in a mall in Sydney, in a shopping centre in the CBD of town. He said pre-COVID his turnover was about the same as it is now. But of course, his rent’s gone up, wages have gone up, and he can’t actually charge that much more for people to shine shoes. His other interesting thing was he said that in the age of working from home, the general standard of dress has gone down. So certainly men are not getting their shoes shined as much as they were.

Chris Baskerville
Yeah, well you don’t need to shine your thongs.

James Flaherty
Don’t need to shine your thongs or your trainers, which is, yeah, so he and I were a shocker. And I wear a particular type of shirt that has cufflinks in it, which only other people apparently wear them are waiters. But anyway, so there’s a lot less people. His market has got small. He can only charge what he could only ever charge. He can’t employ as many staff. He doesn’t have as many customers. So even though he’s got the same amount of money coming in the door, it’s not staying in his- On my challenge, that thinking a little bit.

Chris Baskerville
Now, this is not your thinking. Now, this is from an accountant that specialises in helping businesses understand their numbers and the levers that they can pull. And I remember him telling me one day, he said, you can actually afford to put your prices up, say 10%, and potentially lose like about 20% of your customers and you’ll still make the same amount of money. But if you discount that price, then it takes you one and a half times in order to make up that loss. So he says you’re better off pushing your prices up and even losing a handful of customers to make that same particular margin. As an example, the local barber in our local area in town here, they have done nothing but constantly push their prices up nearly every six months or 12 months at least. I keep turning up. I keep paying the same amount because I know the service that you get. And I actually admire that thinking, which is I know you need to survive in business. You need to put those prices up constantly. We totally get that. I want that service to continue. So I will actually now pay the extra.

James Flaherty
I’m talking to Patrick from Alaris, a good friend of our show. He’s still talking about coffees though. He and I have a long black. If someone’s charging me $6.50 or $7 for a long black, the pod machine in the office starts to look a lot more attractive. And so I haven’t quite gone to the powder, but certainly the producers of pods, be them Swiss multinationals or Honest Toilers doing it in places like Melbourne and Sydney, keep doing what you’re doing because we’re coming back.

Chris Baskerville
Good point because when you think about it, those pods that typically go into machines that we use, roughly about 40 cents to 50 cents per pod, which you can make your own coffee for that. And then contrast that to the six to seven to the $8 that you’re going to pay.

James Flaherty
Yeah, yeah. It’s not as good, but as a good friend of mine said, he used to drink red wine and coffee for effect. So I figured that’s kind of how my coffee … I think he’s on the money. If you believe in the service you provide your account, if you believe the service you provide and you’ve got a view of what people are prepared to pay, if you lose one or two, you can still make it up. And I think that’s … if you’ve got an older product, I think it seems to be something that happened in publishing. Some of the old … probably I’m a bit older than you, but when you used to start in accounting, there was big books that sit behind the accountant’s desk and you’d take some pages out when the law changed and you’d have to sit there and clip some new pages in. And that was an old business model that predated the interweb. And basically, I think the process of them just kept putting the price up because the people who were buying that were going to keep using it irrespective. You might lose one or two, went to the interweb, but yeah, I mean, you were able to make money out of that model for a period of time.

Chris Baskerville
Well, I mean, I’ve got to remember these famous letters written in the 50s about business, but it was talking about inelastic demand, inelastic pricing and all this stuff. But I think fundamentally, businesses should always have a price increasing strategy on the sale of whatever it is that you have to. Because your cost base is constantly increasing. Whether you know it or not, whether you pick up on it or not, it is increasing. So you’ve got to … if you want to pushing those prices up.

James Flaherty
And I mean, that is true because there’s also … there is an amount of efficiency. So we assume AI will help us. There are people in accounting offshore, accounting especially will offshore to places like the Philippines, Indonesia, those sort of … India, those sort of countries where they’ll get people to work offshore for … I do wonder if that sort of … that gives you a bit of a cost saving. But if you’re running a business where the service is provided locally by local people, you don’t have the advantage of those kind of tools. You’ve really got to sit there and focus on what is the service you’re providing and who you’re providing it for. Yeah, okay.

Chris Baskerville
And I guess also, like probably more reference to say, let’s just say professional office life or someone in commerce, et cetera, with that is becoming more efficient at what you do. So let’s just hypothetically say you can’t change your pricing as to what you’re selling to your customers. Well, then the only thing you can really attack is your efficiency in how you deliver that same product. So is technology the answer? Is cocktail making robots the answer? Is robot delivery tools the answer? Is putting the product and just saying, well, get it from the interwebs rather than a physical delivery of a product. So yeah, how could you become more efficient?

James Flaherty
This is like our usual kind of podcast. I’m kind of coming to the point now where I started, I think, where I was trying to think about a job that was labor intensive. So concreting is an example. People in manufacturing or building where they can’t find a good enough staff or they can’t find enough staff who will stay with them to be able to grow the business because there’s only so much that you can automate. There’s only so much that they can charge because it’s a competitive environment, but there’s work that they could do if they had more arms and legs. So it’s sort of a little bit like in COVID where you only had half the number of tables that you could serve because of the social distancing. In that world, the cafe couldn’t pay off its tax debt if it accumulated because even if it wanted to, it only had half the covers that it could possibly serve on a night. I was just wondering about that idea where if there’s only so many people that you can employ who will do the work that you’ve got, then it’s very hard for you to ever trade out. If you can’t put your price up and there’s not enough people to meet unmet demand, then you end up with a situation where you’re chasing your tail a bit, aren’t you? Because what do you do in that business? Go do something else? I mean, what’s the answer to that?

Chris Baskerville
Do an SBR, I think. Well, that’s the thing. If you think about it, a classic example, we’ll use our colleagues at the bar, a typical barrister, right? They typically have to work as effectively a sole trader. They can obviously outsource some of the admin functions, but let’s just say as a sole trader, the maximum amount of hours that barrister can work in any one day is 24.

James Flaherty
Yeah.

Chris Baskerville
So they can’t make any more than 24 hours worth of input or revenue. Effectively, you’ve got to fix the amount of, yeah. That’s your revenue cap is based on that. So you’ve either got to either put your hourly rates up to get more money out of it or you’ve got to work out how to input costs less.

James Flaherty
Yeah, that’s right. You’ve got to fix the amount of, it’s like a doctor, any of those sort of people, there’s only a certain number of slots per day that you can fill. So the job you’ve got to do is make sure that there are, it’s a bit like aeroplane seats, you almost need to have them to make sure that, because if you have an empty aeroplane seat on a popular flight, then not only is someone else missed out, because, well, I think the point I’m trying to make is that there’s only a finite amount of seats on the plane.

Chris Baskerville
Yeah. So you- But something with a very heavy fixed overhead.

James Flaherty
Yeah, overhead. Yeah. So the same as a barrister, you want to make sure that you’ve got as much work on it as you can manage because effectively, there’s only so much of your time you can sell. Now, there was a time-saving, one of those kind of companies that used to sell those diaries and it would sit there and say, we won’t give you more time, we’ll just give you all the time there is. So I think, and that’s probably a good place to probably end this. I don’t think we’ve solved anything, we’ve highlighted some issues, which I do like the way that your accountant thinks. I do like the barrister’s conscious of the top, of the fact they’ve only got so much time to sell. How do you sell it as efficiently, as profitably as you can? Know your client. And if you can only get so much money for what you are doing, then what is the future of that business? And ask yourself the hard question. Thanks, Chris. I certainly learned something. I appreciate it. Thanks.

117: When Business and Marriage Both Fall Apart

The Sounds of the Baskerville – Episode 117 Transcript

James Flaherty
Welcome back to the Sounds of the Baskerville. I’m James Flaherty. I’m here with Chris Baskerville, the star of the show. Good to see you, Chris.

Chris Baskerville
Good afternoon, James.

James Flaherty
Again, joined by Pierce Carstensen, who combines not only interesting things to say, but probably one of the more interesting names of all of the guests we’ve had on this show. So welcome back, Pierce.

Pierce Carstensen
It’s obviously a low bar.

James Flaherty
The interesting part or the interesting name?

Pierce Carstensen
Both.

James Flaherty
So that’s done amazing things for the listenership of the show, but thanks very much for joining us, Pierce.

Chris Baskerville
We’ve increased to four people now.

James Flaherty
So I think one of the things that was really part of the reason why it was great to have you join us is that sort of intersection between the two worlds of family law and insolvency and sort of saving businesses and otherwise having to sort of keep good ones alive and break ones apart if they have to. So that’s kind of the background to why we thought it would be a good idea to have Pierce in today, wasn’t it, Chris?

Chris Baskerville
Yeah, and I think Pierce over the years, he’s been combating against us and for us in different matters, depending on where the money is.

Pierce Carstensen
Primarily for, though. Primarily for. And what I do say…

James Flaherty
So you’re mostly his friend. Mostly his friend, yeah.

Pierce Carstensen
Depends who’s listening. But I do say all the time that insolvency practitioners tend to leave a lot of money on the table whenever there’s a family law element to whatever work they’re up to. I speak to insolvency practitioners all the time. And it’s often the case that as soon as the matter touches on the family law jurisdiction, they pack up their tools and bat and ball and all go home.

Chris Baskerville
Well, I’ll tell you this. When were the major changes, 8 and 9, 10, 11, 12, when were the major… Because they changed family law to basically come and overrule insolvency.

Pierce Carstensen
And I’m not… Well, I think there’s two parts to that question. I’m not quite sure exactly when the changes to the Act was. But I also would bet my bottom dollar that neither family law practitioners or most insolvency practitioners would know either and would reference any of those changes as to why they don’t do these things. I think the struggle that a lot of insolvency practitioners have is with the procedural elements, point one. And point two, the utter disinterest from most family law practitioners to involve the insolvency practitioners at all. So that requires then the insolvency people to come into the family court, into the family law jurisdiction and punch on with practitioners who are very used to litigating in that space. And they feel that they’re a disadvantage there.

James Flaherty
So let’s get to the nub of the issue from… So the people who listen to this podcast are people who have learned how to learn about insolvency, like some guys who’ve phoned you, who’d listened to all the episodes and tooled themselves up. So if I’m a director of a business or if I’m a family in a dispute or if I’ve husband and wife or partners in life who are having a dispute, is this the sort of, is this the why I should care? Or like, what’s the piece that’s, what is the, what’s the bit that’s being missed and how does it impact on the sort of people who would listen to this show?

Pierce Carstensen
So there’s a couple of audiences for the conversation really. There are those people who are separating and either they or their spouse are involved with a business in whatever capacity or are considering bankruptcy and wonder how that would impact on their family law settlement, right? Now, I think the first stop for a lot of those people is to speak to an insolvency practitioner and deal with the insolvency event, whether that’s a personal or a business insolvency event, first and foremost, right? So that has to be taken care of. They should get all the proper advice around that. And the family law system deals with those people in their stride. So for example, if you were to go bankrupt or enter bankruptcy, the family law system deals with your trustee in the same way as they deal with you, right? So that’s reasonably simple. Where I think it’s more interesting is if you are one of the insolvency practitioners themselves, right? So you’ve got the old story of Eddie Groves who, his business went south and then sadly for him, his marriage went south and he got a terrible outcome in his family law matter. And so the story goes, at least I haven’t seen the documents. And his wife got everything, but luckily he got to continue living with her and things went on and things didn’t seem from the outside looking in to change all that much for him. Happy days, lucky man. And it’s amazing how many people separate from their wives when their business goes south and their creditors come along and they say, sorry guys, my wife got everything in the separation, but I’m fortunate enough to stay living with her in the same house, probably the same bedroom, driving the same car as I used to drive, but she owns it now and I’ve got nothing for you. What a tragedy. And I think often the challenge conceptually of pulling apart that and seeing what’s actually going on behind the scenes is seen as just too much effort. And so these people often I think get away with it, which is unfortunate because there are a lot of tools that a family lawyer could use in the Family Law Act to have a very, very close look at whatever transactions went on and reverse them without any great effort.

Chris Baskerville
I remember there was, why I was asking about when the major amendments came in is because there was two moments in my career where I thought, oh my God, the antichrist has just arrived. One was trying to understand trust law. And it sounds really like trust, like a trust, hang on, a trust doesn’t exist, but somebody who owns all this property and all this stuff. So he’s trying to, that was a weakness in my understanding. The other one was the introduction of these amendments to family law, so much so that if a bankrupt, and I think where peace is going is bankruptcy triggers the vesting of property to the trustee. That is the standard Czech born to king form. Family law will overrule what is the bankruptcy law position and readjust so much of the property away from the trustee, and there’s not much we can do about it. If that’s the decision, that’s a determination of the family court under certain circumstances. But yeah, they were the two elements in my career where I just went, the antichrist is coming. I think this is why most practitioners do shy away from it when family law is involved. Having said that though, having met this guy and got to know him over what, 10 plus years, give me huge confidence to understand, oh no, we just follow the process, intervene where we need to, work out which hat we’re kind of wearing in this wonderful dance between these two powerhouse law systems, and just get on with it.

James Flaherty
I get it. But if I’m a person who was contemplating such a scheme, which of course I’m not, or if I’m a person probably more listening to this show, might have been a potential creditor victim of such a scheme. This is a really interesting, okay, let’s explore that scenario. Is there some way that you can, can you put a bit of meat to the bones of the sort of scenario you’re talking about there for us?

Pierce Carstensen
So I’ll touch on one more thing quickly and talk about your experience. I was sitting, and I’ve done this on a number of occasions, sitting in the back of court waiting for my turn to go on and seeing some hapless insolvency practitioner or their commercial solicitor who’s found their way to the appropriate courtroom for the first time, you know, in the family court, never been there before, getting up, looking very confused about the court process. And within about 30 seconds, you know what they’re after. And what they’re after is simply to have their client’s rights as a third party creditor taken into account. And there is reams of authorities that say that that absolutely should happen. And the interest of third party creditors should be placed ahead of those of the husband and wife, all else being equal. There’s a bit more nuance about that, but in effect, they should be. But standing up in front of some family court judge who already doesn’t recognize you, you start speaking, you’re speaking using different words than they used to, and they immediately take a dislike. And you can see it in their face, just start. The blood pressure starts to escalate. And you’re at the back of court, you say, buddy, I know what you want. Just say this, do it, say this. And you try and send them good thoughts. And they just get it wrong. And it’s like, you know, they can take one approach or the other, it’s left or right. And they just, without fail, say the wrong thing at the wrong time. And they end up getting shouted at. And you want to come and talk to them afterwards and say, buddy, you just need to go about it like this. And you’ll get the right result because what you’re asking for is not unreasonable. And you can see that this is a waste of my time. And they walk out and you know it’s not being pursued. You want to chase them down and say, I’ll take it over. I’ll sort you out.

Chris Baskerville
Give them a cuddle. Give them a cuddle. I’ll take it from you. Yeah, that’s right.

Pierce Carstensen
But it happens all the time. Vastly more often than I’m sitting in the back of court and I see someone get up and I say, your honor, we represent the third party creditor here. We have an interest here as the judgment debt or whatever it might be. And direct them to an authority that would say that this should be recognized. But as I said, there’s plenty of them.

Chris Baskerville
It’s almost now like if I ever get the sense that there is a family law element to either a liquidation or a bankruptcy, I’m actually looking forward if the court proceedings are already on foot because then there’s a proper way to intervene into that. What sort of worries us is if the parties are very covert on how they’re going to deal with their property. So there’s no proceedings on foot. So you can’t look that up. And we’re just going to do a private deal somewhere. And there is a chance you’re never going to know what the proper deal was until after the fact.

Pierce Carstensen
And there’s two situations that we see. Either they do what’s called a binding financial agreement, which is a contract between two separating spouses. And in those circumstances, you don’t see until I expect that you would go and say to someone, well, what’s happened here? Where’s the property? Why has it been transferred? Whatever it might be. But there is a section in the Family Law Act which says effectively that the title of the section is tearing down agreements wherein the interests of creditors are ignored. It’s not called quite that, but that’s the effect.

James Flaherty
Tearing down doesn’t seem very legal.

Pierce Carstensen
But effectively, it is about redoing agreements where the interests of creditors are ignored.

James Flaherty
So you can bust it open. And so easily.

Pierce Carstensen
And that’s the intent of the section. And that’s flagged in the title. And then if one were to go through the court and either not disclose these legitimate third party interests or do consent orders between the parties and just have it registered by the court, sealed, then there’s a section there, 79A, which does the same thing. And it specifically references the rights of trustees in bankruptcy or other insolvency practitioners to go off and re-examine those agreements. And there are edge cases. You might be talking about when a debt might crystallise and there might be some debate about that. But by and large, if an agreement has been entered into, you don’t even have to prove the intent of the agreement was to defraud creditors or to diminish their interests. But rather if that is simply the effect, then the court is absolutely interested in dissolving those agreements and allowing those third party creditors to go off and enforce their interests.

Chris Baskerville
Yes, that’s right. I think the interesting crossover where in terms of the language, very similar to family law and what’s under the Corporations Act is anything that’s used to defeat the creditors is in our language, voidable transaction or voidable agreement. So it seems to be very similar to family law as well. Anything designed to defeat the creditor body. So that’s usually how we intervene is we either represent the creditor body or maybe we’re coming in as a creditor because we’re entitled to under whatever it is that we’re coming after.

James Flaherty
So I think that’s in the great tradition of the Sounds of the Baskerville, Piers has answered the question he wanted, not the one he got, but it was still quite useful.

Chris Baskerville
It’s all part of the edits, James. Sorry, we’ve got great editors.

James Flaherty
But okay, that’s been great about the, that’s fine. You certainly welcome a member of our show because that’s how we do things in the Sounds of the Baskerville. Just tell what needs to be said. I’ve got a good insight there for the what, but tell me about some whens. So when are these things like, when does it happen? So is there a situation that you have been in where you’ve seen that? Give me an example of a case where this has come to mind.

Pierce Carstensen
So certainly we’ve got a range of cases where we could talk to. One, I think that it resolved in really good terms for, I think almost everyone. I know that someone, a director of a business came and spoke to you about some issues they had with the business. And he has also disclosed he’s going through a family law matter right at the start, beginning of the process. You referred him to me. And then over the course of a few years, it was a very hard fought matter. We were able to ensure that our client got a fair deal. There were half a dozen other practitioners involved, accountants, lawyers, insolvency practitioners, liquidators and trustees, both. Everyone got paid out their debts that they should have. I don’t think anyone took a haircut on fees. I think all the creditors were properly paid. And ultimately everything was worked out in a fairly controlled and very fair way, notwithstanding the enormous degree of conflict in the family court about almost every single point. We got to the right answer in the end. And I would think, as I recall it at least, there wasn’t a lot of need for anyone else to be involved. You guys weren’t involved in the family court process. That was handled by us. And all these various rights from all these various parties were all taken into account. And those were ultimately discharged.

Chris Baskerville
And we just waited and waited.

Pierce Carstensen
Waited patiently.

Chris Baskerville
We were like, sorry, lying in wait. Is that what they say? When you’re waiting for the opportunity moment to strike. And that’s what we did. So we were just following along and then bang. Then you go in. So from our perspective, it took nine years to resolve. From his perspective, probably three or four. So, but yeah, I mean, that takes a lot of patience, Jake.

James Flaherty
It does have patience. And one of the things is that it’s a skill to be able to navigate the… because it sounds like a bit of acrimony. And so there’s that skill that a family lawyer brings to be able to try and find some kind of certainty out of the emotion of the situation. But that’s the really interesting thing. That’s why it’s great to have you along, understand when does Chris… at what point does Chris come in and what’s his role?

Chris Baskerville
But one of the other ones, and this is where Piers was showing us basically the full effect of where the vesting element that we talked about. So we go into a matter, and this might have been one where Piers was actually on the other side. So we go into a matter and I’ve gone in as the 50% legal owner of a property. Piers is on the other side. So my position is as the trustee, I’m half the house. So come and do a deal with me. But when you factor in the contributions, I imagine, in the relationship and all that, instead of being 50%, I end up maybe at the 30% mark. And that being a fair deal. So in other words, let’s just say the spouse, the other spouse, walks away with 70% of that and 30% comes our way.

James Flaherty
Do you think about it from the perspective of the stakeholders? So you go, okay, well, if I’m the bankrupt in that situation, and you’re the trustee of them, suddenly the protection of bankruptcy is reduced because… or the idea of that settlement, more of the house is owned by me than the final situation that brought you to that point.

Chris Baskerville
Yeah. The question is, does legal title supersede the equitable adjustments under family law?

Pierce Carstensen
So it would be looked at like this, though. So supposing there was a million dollars equity in the house and there were third-party creditors of the bankrupt for $600,000. What would normally happen is that $600,000 from the sale of the house goes to the creditors and the trustee in that way. And then of the remaining equity, that would be divided up in the normal way. So it’s not the case that the bankrupt gets his 50% of the house and has to pay out $600,000 worth of debts from $500,000 of equity. Because all that would have the effect of is defeating the interests of those third-party creditors. And what would normally happen, and this is always a funny argument, right? So hypothetically speaking, you might have one party in the marriage who largely has stayed at home, and the other party in the marriage who has run a business, right? Pretty common. And clearly then if you own this house and you have equity, it’s because that equity, the mortgage has been paid, the house has been bought, all the different expenses have been paid by the income of the party who owns the business, right? Cycles change, business falls over, and the party who stayed at home goes, well, the house is in my name. I’m going to keep it. And I don’t care. It’s not my business. I’m not interested in what debts there are. And of course, the director of the business is now often on the hook by way of guarantees, personal guarantees, but certainly he’s interested in A, paying out the creditors often, but B, that person’s proper share of the house. And it’s amazing that people who’s, every time they’ve tapped their credit card over the last 20 years, it’s gone through, suddenly have very, very little interest in the third-party creditors owed money from this same pool. Amazing.

Chris Baskerville
Amazing how quickly they forget. Yeah, as soon as the money dries up.

Pierce Carstensen
So we’ve had a number of matters where we’ve acted for directors of businesses, particularly when there are personal guarantees that they’re now on the hook for. And they’ve gone into these family law matters and been told that the spouse is washing their hands of that business. If it’s gone under, that’s the other person’s fault and they need to live with the consequences. And in the meantime, they just like to stay in this house. Thank you very much. And we go off and explain that, no, actually there is definitely a link between the income earned by this business and the house. And now in circumstances where there is money to be put back the other way, well, then we will take that from the house.

James Flaherty
There are times too where there might be a director’s loans, if say that both spouses were in and one spouse then is no longer a director but doesn’t want to pay the director loan back. Yeah, I see that all the time.

Chris Baskerville
We had a roofing matter and that’s probably the best way I can describe it. But there was like two companies within the group, both in liquidation, two different liquidators. At the same time, we’ve got two sets of spouses that jointly were in partnership with each other. So you got effectively four people in the partnership. Then those two spouses started to split amongst themselves because they were in a family law dispute. So what used to be this awesome behemoth of an organisation has been split in two by the two liquidations and then the respective relationships have now split again, almost like atoms exploding. Yeah, wow.

James Flaherty
All sort of Swedish rock bands. Yeah, pretty much.

Chris Baskerville
And then all of the assets that they all collectively owned in partnership and in business were all cross collateralised with each other. So that meant that as you were selling down the assets, the bank is getting their money first and foremost and everybody’s kind of losing their equity. And then it ultimately ends up with a chunk of change at the end that we now are all fighting over.

Pierce Carstensen
Yeah, which is a much diminished pool, I imagine. It can be. But I think in that particular example, I think we did it pretty well. I think there are a whole bunch of people who ultimately decided it wasn’t worth the fight and those people tapped out. But in respect to the people I was talking to, there was a trustee, there was two liquidators, all those creditors who were tied up with those professionals, they all got paid. Both spouses exited with an amount that I think they should have been quite satisfied with. Ultimately, we avoided a trial, which was a bit touch and go, but we got there in the end. So a lot of these things, when it boils down to the elements of family law, are not that complex. If you owe money by way of a mortgage to a bank, no one argues the fact that you have to pay the mortgage to the bank when it’s secured against your house. That’s pretty obvious. And it should be no different if you owe money by way of a personal guarantee associated with your business. It’s just a liability and you have to pay it and it gets taken into account in the family law process. And family lawyers are adept at putting all this mumbo jumbo around what is otherwise really simple concepts to make people who aren’t in that area think that family law operates on these completely different principles. And it just doesn’t.

Chris Baskerville
But here’s the interesting question for you, right, is if the insolvency practitioner in these matters took no positive steps to actually want to intervene on behalf of the creditors they represent, it is likely that property pool will be divided up without concern or consideration for the interest you represent. Absolutely. So in other words, we were talking about the antichrist, you just had to get good at it. You just had to learn that this is just a necessary part of our journey is you’ve got to understand when to intervene.

James Flaherty
Navigate to what gets thrown in front of you. That’s been a really good place to finish. It wouldn’t be the only profession that comes up with fancy words to try and make it sound more complicated than it is, but your job is complicated, Pierce. It’s an interesting world in which you live and it’s good to have a competent person that can share those thoughts with us. I think let’s get our hands dirty in another episode. So can I get you to stay with us? We’ll do another one. But I’d like a few more war stories. And I think the bit of the watchouts for a company that’s in distress, what have the directors got to know if there’s family law issues going on or if I’m a creditor chasing some money. Let’s get into some of that and perhaps share a few stories from the family law world as we go along. So stay with us, please, Pierce. Thanks, Chris.

Chris Baskerville
Thanks, James.

118: Drugs, Diamonds & Divorce

The Sounds of the Baskerville – Episode 118 Transcript

James Flaherty
Welcome back to the Sounds of the Baskerville with Chris Baskerville. How are you, the hound?

Chris Baskerville
Good afternoon.

James Flaherty
Yeah, good afternoon. Afternoon show. So, probably better with a cocktail. Anyway, good to see you, Pierce Carstensen. Thank you very much for coming back.

Pierce Carstensen
Thank you. Thank you.

James Flaherty
So, last episode, or vodcast, you gave us a lot of the kind of, a bit of the kind of why you and Chris should be not only friends socially, but also there’s a real interaction between. The jury’s still out on that, James. No, okay, all right. Run with it for now. We’ve only got 15 minutes. But so, the point is that, yeah, there’s a real role for insolvency practitioners in the family law scenario in certain circumstances. You gave us a really good overview of when those times could be.

Pierce Carstensen
Yeah.

James Flaherty
Okay, let’s get our hands dirty. Let’s talk about when some of this stuff happened. So, is there an example or a time you can think of that some of this stuff that we talked about last episode kind of rings true?

Pierce Carstensen
There are. I mean, we could, there’s a hundred stories about how it kind of rolls in with insolvency law.

James Flaherty
But even if it doesn’t, tell us a story.

Pierce Carstensen
Family law in general, though, is replete with good stories. I always say that family law is pretty funny if it’s not happening to you. And that has remained true over many, many years. And I actually had someone come up to me at a barbecue the other day and said, tell me what’s the most common reason why people separate? And I started telling him, it’s very boring about communicating with your spouse. I mean, it’s not very exciting stuff. Anyway, I said, forget that, though. Let me tell you a good story. And so, the one I normally roll out first, because it’s a happy story, had a good ending. But there was two people, they lived down in Sydney, married for 40 years, long time, and worth about $20 million. They were wholesale diamond merchants living in Vaucluse. It all, you know, checks all the boxes.

Anyway, worth about 20 mil. The wife, her mother, passes away, and she is worth about 20 mil. And all that’s going to come to this couple. And the wife says, you know, when probate’s nearing and the money’s going to come in soon, says to the husband, we should go to the Hong Kong Diamond Expo. And he goes, yeah, right-o, that sounds great. It’s the kind of thing we often do. She goes, great, great, great. And then she pulls the laptop out, and she said, I’ll get the tickets. He goes, oh, OK, well, it’s normally what I do, but fair enough. Thanks. Well, so she does that. She goes, I actually got your tickets on points. So you’re going, I’m going straight to Hong Kong, but you’re going via Singapore. He goes, oh, OK, that’s fine. Thanks for that. Anyway, day before they depart, he’s going to leave the day before. Day before he departs, she comes downstairs. She goes, I packed your bag for you. She goes, oh, that’s lovely. Thank you for that. I really appreciate that. She goes, and I put it in the boot of the car, and I’ll drive you. He goes, oh, you do too much. Too good a wife. Too good a wife. So he jumps on the plane, and they fly to Singapore. He gets off for his two-hour layover, walks out looking for a burger, and gets a tap on the shoulder. He turns around. There’s two nondescript Singaporeans. And he says, oh, can I help you? Oh, yes, we’re the secret police. We’re just going to take him to this room. We’ve got your bag. We just want to have a look at it. He goes, oh, OK. Strange. Must be a random thing. Goes in there. They open up the bag, and there’s this eight ball of coke strapped to the inside of the bag. And we basically posted stickers with little arrows pointing to it so no one could miss it. Wrapped in neon. Yeah, yeah, yeah. And they say, oh, OK, buddy. You’re coming with us. And we just want to tell you that importing drugs into Singapore, that’s a capital offense. And the way we do things, you’re off to death row, and then you can work your way up from there if you’re sufficiently lucky. And so off he goes, rings the wife, says, listen, I’ve just been picked up for running drugs into Singapore. She goes, well, why did you do that? And he goes, I didn’t do it. I didn’t do it.

Chris Baskerville
I didn’t do it.

Pierce Carstensen
And I don’t know what’s happened, but I certainly didn’t do it. And I need money for a lawyer. And she goes, but you just told me you were running drugs into Singapore. He goes, yeah, but I need a lawyer. She goes, that just sounds like we’d be throwing good money after bad. And that was the end of the phone call. And he’s got to wait another month to make another phone call. And he rings up his adult daughters, and they get a private investigator on to the matter. And he contacts me for some assistance. And I say, oh, well, OK, well, first things first, this guy needs money for a lawyer. What we’ll do is we’ll do a partial property settlement of the family court. So we’ll go up to the family court. We’ll say this guy needs an amount of money. There’s plenty of money there. So half a million dollars to fund his legal fight in Singapore. We speak to this guy over the phone. We said, so we’re going to run that in the family court. He goes, OK, well, that makes sense. But one question in my mind is, how do we do that if we haven’t separated? I said, oh, buddy, I think you need to separate it all. And he goes, why do you mean? I said, because I think your wife put drugs in your bag, buddy. And he goes, no, no, it wouldn’t have been her. Why would she have done it? And I thought to myself, am I in some bizarre alternate reality here? Like, who else would have done it? Who else packed your bag and is about to inherit $20 million?
I feel it all lines up. I haven’t played Cluedo for a while, but I reckon all the elements are there.

James Flaherty
You’re telling me you’re the bloke who broke it to him.

Pierce Carstensen
And he goes, no, no, no. I said, OK, well, nonetheless, this is the only way I see that you’re going to get the money for your lawyer. So we’re just going to have to pretend. OK, we’ll just pretend it’s her. And you are separated. The definition of separation is living separately. There was a case called Stanford that set all that out. So we’re not lying. We’re not misleading the court. But we just have to be able to say that you’re separated. You need a partial property settlement. OK? He goes, fine, fine. OK, we’ll do that. Illegal fiction, you called it. We’ll stick with that. I said, great. Oh, my God. Anyway, I worked with the private investigator. And we were able to demonstrate how unlikely it was that this guy was running an eight ball into Singapore and decided not to hide it or anything like that. And said some other things, made some submissions. And then, very, very surprisingly, they actually let him go. And so we were able to get him off. And it certainly wasn’t just me who did that.
A lot of other people worked very hard to get him out. But anyway, he’s flown back to Australia. And he’s very excited. He has a big homecoming. He’ll see his wife again. Turns up there about three hours later. She’s called the police and alleged some domestic violence incident.

Chris Baskerville
God.

Pierce Carstensen
So he gets escorted out. And so now he accepts that he has to have a property settlement. He’s got no money. She’s living in the house in Vaucluse. She’s got all the cash. Got no money. And so the first thing I do is I send a subpoena off to Vodafone. Because I want to see who the wife has been talking to in this period leading up to the trip. And so the subpoena is returned to the court. So the court’s got all the phone records. In the meantime, her lawyer sends me the 20-page summary of all the calls. But it’s missing page 11. And on the bottom of page 10, it says, no further calls made this day. Page 11 is missing. And then we go on to page 12. And funnily enough, that page 11 was the day he flew overseas. What a coincidence. Amazing. Amazing. So we subpoena it. And we ask for permission to inspect. They object to the subpoena. The solicitors object to us getting that one page of the subpoena. There’s a hearing. The registrar says, no, no, I’ll release it. Doesn’t seem to be any harm. So they review the decision of the registrar. And so we have this in-person hearing. And they go and retain probably certainly one of the two best family law barristers in Australia, like a real heavyweight. And $25,000 a day. And you’d always charge a day prep, day appearance. So that’s $50,000. As a junior barrister, who’s also a very senior junior, let’s just say that one was $10,000. Then you’ve got the partner of the law firm, the senior associate and a junior. So let’s just say it’s say $80,000 on that side of the bar table. We definitely didn’t want to see this. And so we had silk as well. And we had a hearing that went the better part of the day that concerned whether or not the provision of this statement that would allow us to see whether or not she tipped off the Singaporean police was relevant to the family law matter, the property settlement and how it was. And on the face of it, it’s not. We’re just very interested to know if she tried to set him up to be executed so she could keep all the money. It’s more of a conspiracy for murder than anything else. And ultimately, the court said, your interest in seeing this probably doesn’t rise to a level such that it would be relevant to the property settlement. Now, under the current legislation, it almost certainly would. Hopefully, one would hope it would be seen as a family violence to try and plot to kill your husband and probably would. In those days, it didn’t. And so we never saw it. We never saw it, unfortunately, never actually got the smoking gun.

Chris Baskerville
Wow.

Pierce Carstensen
That would show that she was the one who phoned the police.

Chris Baskerville
How convenient that one page was missing and they spend $80,000 to stop that one page being- Such a coincidence.

Pierce Carstensen
Such a coincidence. And ultimately, a 40-year relationship, the $20 million of their property was split 50-50. And then the money that came in over this period of time and the mother, the husband got some of that as well. It wasn’t a very complex matter. These people were in their 60s. They would have struggled to spend the money they got anyway. It would be the kids behind them. Well, all the kids, they were largely separate. And often we do find that kids form camps behind one parent or the other. But it wasn’t the case here. It was just some rampant greed. Underestimate greed.

James Flaherty
We’ve had some good stories on this show. And that’s certainly one of the better ones we’ve heard, isn’t it? I think that’s up there with some of the crackers.

Chris Baskerville
Yeah, it’s now the sounds of Carstensen. So I’m now redundant from my own show. Yeah, yeah.

James Flaherty
So there are situations though where you guys have worked together. That’s a fascinating story. But there are situations where you can say, an example where you two have told us last episode you had to wait nine years to get something. Often you must get faster results than that. You must be faster than that.

Chris Baskerville
Yeah, well, it was a super complex. Well, sorry, not super complex, but we were up against tough opponents even from the liquidation side. And Piers got to see the opponent at full noise. Personally, I believe you went all the way to the high court in one of the challenges.

Pierce Carstensen
We got the property settlement done by way of consent. It’s property and parenting. On about, I think, day two of trial, after the cross-examination of the wife, we got a consent order, which was in perfectly fair and reasonable terms. And I think her counsel worked very hard to elicit that. But then she had second thoughts a few weeks later and appealed, and it went to the full court, and was shot down. And then she applied for special leave to the high court, and that was refused. And then she filed a separate application to void the orders, and that was thrown out. And then she ran a half a dozen contravention applications. And one funny thing that wasn’t particularly legally related, but all the money was coming from the sale of this property down in New South Wales, in Sydney. And we had all been waiting a long time for this, and I was doing it on a deferred basis. So I definitely wanted to get paid. Everyone else was wanting to get paid. And there was plenty of money in this property.

James Flaherty
I’d say some of the parties probably in their hearts wouldn’t have minded if it would be over.

Pierce Carstensen
No, yeah, that too. Well, one party was more than keen to continue, but certainly our client was willing to get it all paid. But anyway, the auction was on the internet, and I couldn’t watch it. I went. But let’s just say that the wife’s name was Janet. I got a text from one of my staff members who did. They all sat back at work and, over a bottle of wine, I think, watched the auction. Someone texted. They go, Janet just won the auction. I thought, she’s got no money to buy the house. All this is going to do is delay everything. She’s probably committed a further fraud. This is now going to be another two years of my life. Oh, disaster. Anyway, so I reported it to the managing partner. I said, we’re all waiting on this money, but I worry it’s going to be delayed another 12, 18 months because of Janet, who’s now gone off and put this bid. She won’t be able to settle on the contract, but it’s all just going to go again. So I’m sorry. It’s going to be, I would guess, another 12 to 18 months. I went back to our section in the office, and someone said, where were you? I said, I just spoke to the managing partner, told them that Janet won the bid, the auction rather, and we’re not going to see that money for a while. They’re like, we were joking. She didn’t really.

Chris Baskerville
I’m like, oh, my. That’s a little family law joke.

Pierce Carstensen
Gotcha.

Chris Baskerville
But I think what’s relevant in this context, and I think just to paint the picture of the persons that we’re dealing with, they were husband and wife at one stage. Husband really had no money. The wife came from, let’s just say, came from wealth. So they then set up a business, but they put the husband in as the director, which makes sense. Now, obviously, through the splitting of the property here, which is where the wealth element was, the husband is still responsible to the creditors for what he has caused harm to them. So that’s my job, is to basically represent that part. Pierce was obviously to get the property settled. But, yeah, the lying in wait was basically waiting for when does the money moment come, and then we had to basically go and sue the husband as if it was on behalf of all the creditors that he caused harm with his director hat on.

Pierce Carstensen
Yeah, so in theory, I guess, we were actually on opposing sides to a degree. But, of course, if you go off and do your job right and you’re able to prove all these debts, and my client clearly owed them insofar as he did, there was no doubt about that. We got the money. We got his entitlement. Those debts were taken into account during the property settlement, that they were debts that were owing by him, and they were taken into account, and that’s part of the reason at least why he got the amount he did, because he would then have to go off and settle those debts, and ultimately that’s what happened. So I think the creditors were taking care of you guys, that the professionals were taking care of my client, got a fair outcome. It was good. I mean, that’s how the law should work, right?

Chris Baskerville
Yeah, that was common sense. Common sense law.

Pierce Carstensen
Yeah, that’s right.

James Flaherty
Have you ever chased a rat bag, some fellow who tried to hide it? You’ve done that before. You chase rat bags all the time.

Chris Baskerville
Yeah, that’s my side hustle. My primary job is to save business. The side hustle is chasing the rat bags. Yeah, yeah.

Pierce Carstensen
One of your colleagues rang me up last year. There was a well-known, well-known in some circles anyway, a barrister, and he had entered into a loan with a brothel madam, as you do. That’s where I get all my…

Chris Baskerville
That’s where I get my money from. My money from.

Pierce Carstensen
But she’d done everything properly. She’d got a loan agreement. She got it all done up. Anyway, he laid her down on the track, said he’s not going to pay, and so she sued him for it, sued him on the agreement, and she won, and then she went to collect, and he goes, terrible news, terrible, terrible news. I’ve split the sheets with the missus, and she got everything. I don’t have a cent to my name. What do you do? And then he entered into bankruptcy. And so we were approached by the trustee. Sorry, we were approached by this lady, rather, to deal with the trustee and try and recover this money. But to do that, what had to happen was the family law agreement had to be overturned, which was not particularly challenging. There are very hard and fast rules.

James Flaherty
So you’re saying it was a little too easy. In fact, from the perspective of a barrister, he probably could have done better than that, or do you think it was just the very fact of that artifice was inadequate in the beginning?

Pierce Carstensen
Well, both, really. I mean, it’s one of the truisms of family law is that every kid wins a prize. If you’re together with someone for 20 years, at law, the starting point isn’t officially that it’s 50-50, but people should be getting an amount of money which represents their contributions, and your contributions over a long relationship tend towards being equal. So put those two things together, and if someone walks out of a 20-year relationship with… Zero percent. Zero percent, then there are some very significant questions to ask and finding answers to those.

Chris Baskerville
That’s what I think is really… I think that really changed my mindset is… And I asked Pierce this ages ago, does anybody in family law in Australia walk out with 100% of the joint collective property pool generated by husband or by spouses, right? And generally, the answer is no.

Pierce Carstensen
Very, very rarely.

Chris Baskerville
In other words, so then put it in the insolvency context, right? But if some of the interests that creditors want or the property investing in, either the company or a trustee, and it involves the property between two warring spouses in family law, it doesn’t mean that any one of those parties is going to walk away with 100%. There is an interest in the property pool that we have, and we’ve just got to take proactive steps to get it.

Pierce Carstensen
And really simply and quickly, the way property settlements work is that the very first step is working out what the net property pool is, which is the assets of the parties, however owned, whether in their own names, joint names, or in the names of companies or trusts that they control. So very wide. Minus the liabilities that are sorted out in the same way. And then there is a net property pool that’s divided. So taken to its conclusion, it means that the liabilities of the parties get paid out of the assets of the parties, and then the party splits what’s left. Now, there are some very discreet times where that may be changed slightly. But if the liabilities are being paid out of the assets and then the parties divide what’s left over, well, you can see that the third-party creditors are in a really strong position. They just need to be able to put their case properly and prove those debts. But it’s not, and it should not be a difficult task to do so. And often, I would say that it’s easier to do that in the family law space than in the state courts, not least because in the family courts, there are very, very wide compulsive powers and it’s relatively easy to reverse transactions and it’s relatively easy to infer ownership into assets. So for lots of reasons, I think it’s often a court of choice or it could be a court of choice to recover all these assets.

Chris Baskerville
It is interesting because there is a roll-up effect if, and this is written in the relevant statutes in Bankruptcy and Corporations Act, that I think if we are commencing an action that is dealing with property that would otherwise be considered in the property settlement, I believe the family court has the power or those Supreme Courts and Federal Courts have the power to roll that matter into the family court. So in other words, it’s kind of like saying, well, you are challenging property that is already being challenged under a family law environment, so I’ll tell you what we’re going to do. Everyone’s going to roll straight into the family court and we deal with it in one by a judge or registrar.

Pierce Carstensen
And Division 1 of the Federal Family Court and Federal Circuit Court, which is the old family court, but we’ll say family court, has accrued jurisdiction and can deal with matters under the Corporations Act, the Bankruptcy Act anyway. So while those judges might not be as familiar as the judges in other jurisdictions with those matters, there’s still the power to appoint receivers and deal with liquidators and all those different things that you would see under the Corporations Act can be done in the family court as well. And there are a number of members at the bar who can deal with those questions, barristers who can deal with those questions as well. So there just isn’t any good reason to avoid conflict in the family court if you could otherwise prove your debts. Yeah.

Chris Baskerville
Yeah, that’s interesting. That’s what I’ve learned over the years and I’ve certainly had a lot more confidence having a peers in my camp.

Pierce Carstensen
Sadly, we’ve gone from drugs running into Singapore to back to insolvency again.

James Flaherty
Yeah, that’s the sound of the basketball. We go from anything from bags of, anyway, bags of this to things of that. That’s been fascinating. So I think we’ve kind of gone from the how to the why to the what. I really appreciate you coming in, Piers. That’s been really enlightening. And I think this is kind of a must-listen couple of episodes for people who are in a situation with business in distress or there’s family law matters of forts or you’re a creditor in a situation that’s been confronted with perhaps an effort to try and hide monies from you. These two episodes are a must, really are a must-listen, I would describe it. So I really appreciate you coming in. Thanks again, Chris, for the great insight. Imagine that, you and I being stuck for words. Who knew? But anyway, awesome. We’ll get you back. Let’s go. Thanks.

Chris Baskerville
Thank you, guys.

James Flaherty
A reminder that these podcasts are general in nature and do not constitute advice and they don’t take into account So if you think, though, that some of the issues raised might apply to you, you should seek qualified financial, legal or counselling advice.

119: Not every Job is a Nail

The Sounds of the Baskerville – Episode 119 Transcript

James Flaherty
Talking to liquidators like you, Chris, if you’re a liquidator, my view is that if you’ve just got a hammer, then everything looks like a nail. Welcome to the Sound of Baskerville. This is a bit different from usual, isn’t it, Chris? Because we’re prepared. Prepared? What’s wrong with us? So we are going to read for… No, we’re not. Anyway, hey, Chris, how are you?

Chris Baskerville
Good afternoon.

James Flaherty
Yes, good afternoon. So I’ve been really fascinated by just some conversations we had just prior to coming on today. And I’m reminded of when I first heard Bruce Wilson, who was a former minister of Conservative Government in Australia, he’s quite an interesting speaker. And he was at one stage was the Small Business and Family Enterprise. There’s some sort of very strange acronym for whatever that’s called. But it’s like, you know, the sort of person who spoke up for small business. And he said, well, talking to liquidators like you, Chris, if you’re a liquidator, my view is that if you’ve just got a hammer, then everything looks like a nail.

Chris Baskerville
Agree.

James Flaherty
But the thing is, we’ve spent the last six seasons of The Sound of Baskerville talking about the fact that given the opportunity, you love to help fix, make, change, uplift, turn around, do all those other things.

Chris Baskerville
Yeah, I think that’s always been the common theme is if I can help a business restructure and survive distress, that’s a nice way to earn your money. And it feels good. And you sleep at night and you’ve actually helped someone that was entirely in distress. So that’s always my preferred option. And there are some people that end up in that situation and it’s usually not their fault. And you either have tied yourself too much to government or your concentration risk of your revenue is too much in one or two person’s hands, changes in legislation, or your business, you know, fly a flight of its own, you know, and you’re out of business. So I would really like to help those businesses that do experience that distress. And they’ve tried everything in vain. On a similar front, where are all the best stories come from?

James Flaherty
And we’ve got something coming up for us, I know.

Chris Baskerville
He’s always in the conflict and the heinous nature that some directors go by where they actually deliberately try and cause people harm. And I feel sometimes that, well, you obviously bullied some people to get into this position. So I am now your bully.

James Flaherty
That’s right. Maybe you might get a dose. Yeah. And then, you know, you and I have predicted things that have ultimately come to pass sometimes or ultimately never come to pass, like the zombie apocalypse. But we’ve also, when we first heard about this kind of small business restructure, we thought, well, that’s a thought bubble. Where the hell does that come from? Anyway, it turned out to be quite a good thing.

James Flaherty
And then of course the whole received wisdom of, oh, it’s so much better than a voluntary administration because it’s cheaper and the director stays in control. So surely it’s a no brainer. Well, it’s still a million dollar threshold for unsecured creditors, isn’t it?

Chris Baskerville
Yeah. In my view, it is a no brainer for the director body, particularly when you position the maths that says, here’s our costs. Here’s what we expect the return to your creditor body is going to be. So in other words, with these two payments, the cost to us, and then the money you’re going to raise for your creditor body, what you are going to be able to discount the debt value on your balance sheet could be 80 to 70%. So in other words, that’s the change in the company’s benefit by making those two contributions. And so once you present the maths, a good director will go, yeah, well, that’s a no brainer. I’m in. What do I need to do?

James Flaherty
Just explain that again. So basically you’re saying if I put a hundred grand in, that’s better than blowing the whole thing up. Is that effectively what you’re saying?

Chris Baskerville
Yeah. Let’s assume someone comes to us at their absolute $1 million threshold. Let’s just call the $999,999.

James Flaherty
Yeah, which we may have had some experience with.

Chris Baskerville
Let’s say this, right? Let’s say that director says, look, if this company blows up, everyone gets $0, right? But what I’m going to do, I’m going to borrow from mom, dad, the bank, whatever, draw off my equity. I’m going to sell my soul to the devil. And imagine if I can come up with $200,000, which is within the range of acceptability. Of course it is, yeah. By the payment of the $200,000, I get to effectively wipe out my $1 million debt down to 20%.

James Flaherty
And I’m the creditor and I go, well, oh God, really? I’m going to take a haircut. I’m only going to get 20 cents. But in a small business restructuring, 20 cents is still better than nothing.

Chris Baskerville
Still better than nothing. That’s right. And the creditor body expects us, using our expertise and our best guess, is to always present the position of, this is what Armageddon and liquidation looks like in your business. This is what the proposal under small business restructuring looks like. Can you see that there is a much better outcome?

James Flaherty
So therefore, in that situation, ordinarily I would say SBR every day of the week. But I’ve not seen, prior to you showing, to me we should certainly find some way to circulate and direct people to a blog from Josh Sutherland about this. Give me a beauty contest then. If SBR is always the best, then give me pros and cons of each, if you don’t mind. Mindful of, say I’m a business that could do one or the other, or I’ve got a choice, what’s a tick and what’s a cross?

Chris Baskerville
Well, I guess if we were to say, where are these two types of systems different? That’s a good place to go. Yeah. Both of them, and this is the commonality between the two, they’re both restructuring tools for a company, they’re director initiated, and our job is to help find a way to make the businesses viable, or trying to promote or keep preserved a viable business. And if it can’t, well then there is only one option for it. So it’s a director led program that both are used for companies, and their goal is to keep business alive. So that’s where they’re both common. Is it also to preserve value though? Yeah, preserving value. You can say that- And employment, and preserve a tax paying entity. So the way we kind of pitch it to the tax man is by saying, hey, yeah, these guys made some mistakes with their laundry history or whatever in the past, but they’ve had the big kick in the butt from the accountant and us, because we’re telling him how important this thing is, and they have assured us in the form of the agreements that they’re going to meet.

James Flaherty
Okay, that’s great. And they’re going to continue to pay. They’re the same, but SBR is cheaper, so I still want SBR.

Chris Baskerville
But yeah, where they are different, and I think this is really interesting, because you can’t just go in there with blinkers on and just go, every job is a small business. But where they’re different is SBR will keep the director in control of the business, and that’s a huge tick. That’s a huge bonus. Voluntary administration does not put the control in the director. The administrator takes control. So in other words, I become the director. I now sit at the board. I now take all the risk, and for us, it’s personal liability risk.

James Flaherty
My wife is a lawyer by training, and she just still shakes her head at the lunacy of the fact that you are target on your back to take this on.

Chris Baskerville
A thousand percent, and it is lunacy.

James Flaherty
So you’re not really selling it to me so far. So I still want an SBR because my good friend, Chris, doesn’t have a target on his back, and I’m still in control of my company. I still want to be an SBR.

Chris Baskerville
Yeah, so debtor in possession is the SBR, which is taking the leaf out of the US system, right?

James Flaherty
And that’s like where the sort of chapter 11 kind of concept.

Chris Baskerville
That’s right. Yeah, chapter 11. Now SBR, again, this is where they’re different. SBR has very strict qualification criteria. In other words, not every company can access small business restructuring because the number one hurdle to cross is, do we have admissible debts of less than $1 million? If the answer is yes, you are looking eligible. There’s one more test that you’re in the eligibility criteria. Whereas voluntary administration, the company just has to be insolvent or likely to become insolvent, but that could be on the debt of $100. Or it could be on the debt of $100 million. The directors make that resolution, the thing is insolvent, likely to become insolvent, and that’s it. That’s your trigger for the voluntary administration.

James Flaherty
You don’t have this kind of arbitrary number to worry about.

Chris Baskerville
No, no. It could be anywhere from $1 technically all the way up to unlimited.

James Flaherty
And we look at that US example, which is different again, because that’s secured and unsecured 7.5 mil, isn’t it?

Chris Baskerville
Yeah, I think our extensive research into chapter 11, subdivision 5 of the Bankruptcy Company. Subdivision 5. Subdivision 5. The Americans put restructuring or small business restructuring at an aggregate value of 7.5 million US. One in all. But that includes secured and unsecured debts as a package. So in other words, they take it out. What are the bank debts that you’ve got as well?

James Flaherty
But it’d be pretty easy if you have a property in your business that could be worth some millions of dollars. Say you own your factory, but you’ve only got, for whatever reason, you know, you’ve taken out a few of those kind of drawdown or whatever. You say you’ve had a bit of a cash flow crisis. You’ve got a few unsecured credit. You can still go into SBR. In Australia, you could theoretically go into SBR with an aggregate of more than 7.5 million even. Yeah.

Chris Baskerville
So imagine this. Imagine you bought a factory worth 10 million and you mortgaged it to the eyeballs or you got a 100% loan on it.

James Flaherty
Yeah, gotcha.

Chris Baskerville
You technically owe 10 million on a $10 million asset. So in the eyes of the Australian law, there’s enough security there to match the secured creditor’s debt. Therefore, it is not an admissible debt for small business restructuring. So then let’s have a look at who you owe to the taxman, work cover, payroll tax, and we total those debts up. And as long as they’re less than a million dollars, you can still apply small business restructuring.

James Flaherty
So Chris, I still want to do a small business restructuring because so far it’s all sounding pretty sweet. So as long as I’m underneath the threshold, yeah, it’s cheaper, I’m in control, and if I meet the criteria, and that’s where there’s a few little hooks, isn’t there? There’s that hook. You’ve got to watch out for them.

Chris Baskerville
That’s right. SBR or small business restructuring does not require a meeting of creditors. What typically happens is you get a plan in place. One, we obviously have to notify that small business restructuring is there, but we have to get a report out with the proposal and demonstrate how the proposal impacts the creditor body. Gotcha. And we give them a voting slip. Yes. So they basically complete the voting slip saying, I’m either in favour of the plan or I am not. So there’s no meeting requirements. So you don’t have to gather the geese.

James Flaherty
Oh, you don’t have to gather the geese, which is interesting. I might use that one. And that’s all cool. And the voting is slightly different. We’ve talked about this before. The vote is just in terms of dollars, isn’t it?

Chris Baskerville
Yes. It’s a dollar threshold. So you meet the majority in dollar value of credit bodies and that’s it. You win the day.

James Flaherty
So an SBRP and that’s a scenario. You, when you’re a practitioner in that scenario, there’d only be a situation of where the creditors for the amount were exactly the same that you’d have to give a casting vote. Or what would you do then?

Chris Baskerville
Is there a mechanism for that? So going back to the meeting requirements, so there’s no meeting in small business restructuring. Whereas in voluntary administration, there are two statutory meetings that must take place. So, and it all, it all happens within the same timeframe, but yeah, two statutory meetings. The first meeting decides, do we want to put a committee of creditors together to help the administrator? And do we actually like the administrator? If not, we want to replace the administrator with someone else that we do like. So that first meeting under voluntary administration gives creditors the opportunity to replace the practitioner really. And then you reconvene for a second meeting. And this is where the future of the company is decided, but it’s decided at a meeting of the creditor body. In other words, you have to put a time, date, place for the creditors to meet. So that means your credit body has to turn up at that time, on that day, at that place. Which is onerous. Yeah, it can be. Obviously we are allowed to use technology to allow people to invite, but on an extreme case, we have hired out halls or conference centres to actually prepare for a hundred, two hundred creditors turning up, which has happened in the past.

James Flaherty
We’ve talked also in the case of that Grace case, you were an administrator of some of that, trying to chase some of that gold sky money. And there was a risk to you that someone might try and say, put somebody else instead of you, even though you’d done all the hard work to get to that point. The creditors do otherwise say, well, yeah, but I don’t like the colour of your eyes. And you’re entitled to do that. Whereas we’ve talked before, and I do recommend people listen to those podcasts in terms of some of the shenanigans that went on all around that. So, so far, it sounds a bit more complicated. Sounds like there’s a lot more for you to do in a VA. And I’ve given my control of my company to you and you’re taking on a personal risk. I’m still not really sold. I can see why we’ve been talking about it so much over the last few years. I do get the bit that if I’ve got more than a million bucks, I’ve got no choice.

Chris Baskerville
There’s no choice. Yeah, gotcha. I get that bit. And that probably leads to the, just going back to that strict criteria, right? So there’s two hurdles for small business restructuring. One is to get in the door, which is you’re hitting the whole threshold and you can’t have used small business in the last seven years. So in other words, you only get one in seven years short for small business restructuring, right? Whereas voluntary administration, there’s no cap on the dollar value amount and there’s no real cap on how many times you can use it, except you can’t use it while you’re already in it.

James Flaherty
But I, say I’m behind on my super and I’m going to struggle to catch up. I certainly couldn’t do SBR. But can I do VA if I’m?

Chris Baskerville
Yeah, absolutely.

James Flaherty
I shouldn’t be, naughty me, but I can.

Chris Baskerville
Yeah, that’s right. So this is the second qualification criteria for small business restructuring is before your plan goes out the door to the accredited body for acceptance or rejection, before that plan goes out, all employee entitlements have to be squared away under small business restructuring. All your super’s got to be paid and any crystallised employee entitlement, like if some dude had some annual leave that had crystallised, well, unfortunately, you got to pay that to that person. Like every dollar has to be squared away. And of course, you have to have all your tax lodgments in. And a tax lodgment does include in the eyes of the ATO, at least, a part year and part BAS period lodgment. So if you have to lodge a half year tax return, you have to lodge a half year tax return. If you have to lodge a half a month BAS statement, you have to lodge a half a month BAS. So like you got to be right on the hammer. Voluntary administration don’t need that to engage it. So yeah, if like you said, if you are behind in your super, you’re not going to stop using BA.

James Flaherty
Yeah, and that’s a lot more flexible than that.

Chris Baskerville
Yeah, huge. And you can always build in mechanisms. And when we talk voluntary administration in restructuring context, we always want to talk about the deed of company arrangement that follows it, because that’s your restructuring proposal outline for the world to see. So yeah, you build in these mechanisms, which is Mr. or Mrs. Director, do you agree that if we get this deed of company arrangement up, that you will go and lodge all your outstanding tax returns within 30 days? Do you agree to get all that done? And then generally a director will say, yeah, you kind of got me. I will lodge all the outstandings. Just please approve my restructuring.

James Flaherty
Please approve, please approve. But you don’t necessarily have a certain kind of time, like in SBI, you can build in the timeframe, whereas SBR, you’ve got quite specific periods. I’ve never really seen a kind of a side by side comparison of the two. So I think it’s probably a good time to stop at this point. But I think, can we do another one, Strokes of Solomon, where we go, okay, fine. Tell me when I would do one and when I’ll do the other. You happy to do that?

Chris Baskerville
Yeah, well, I think what would be really good for the next part would be talking about the creditor matrix, because that can be your differential factor in which adventure do you choose? Okay.

James Flaherty
Well, going all Keanu Reeves here for the matrix. Let you go. Thanks, Chris.

James Flaherty
A reminder that these podcasts are general in nature and do not constitute advice, and they don’t take into account your personal circumstances. So if you think though, that some of the issues raised might apply to you, you should seek qualified financial, legal or counselling advice.

120 The Creditor Matrix

The Sounds of the Baskerville – Episode 120
Chris Baskerville
Which adventure do you choose?James Flaherty
Okay, well going all Keanu Reeves here for The Matrix. Welcome back to the Sound of the Baskerville, I’m here with Mr. Anderson. No, actually it’s Chris Baskerville. And the reason I call him Mr. Anderson is because last episode you were talking about The Matrix. The Creditor Matrix. The Creditor Matrix. Doesn’t sound quite as exciting as The Matrix. So anyway, hey Chris, good to have you back on your own show. We’ve been doing six seasons of this, and I think we ran a really interesting topic last time for us, based on extensive research, which was in a world of SBR where everybody tries to go for SBR, well hang on, voluntary administration was a really cool Australian invention. It hasn’t gone by the wayside, and there are times that you would use it, even though on the face of it, it seems very expensive, quite complicated and puts you at personal financial risk.

Chris Baskerville
Yeah, and don’t get me wrong, I actually like both restructuring operations, but for their different reasons. I really like small business restructuring because it is very systemised, programmed. It is rigid, so there’s not much flexibility there, and the directors are in control, and more importantly, I don’t take a big risk on that, and we just follow the bouncing ball. I really like that, and it helps a lot of people, right? I think, what, nearly three and a half, four thousand companies have taken advantage. I really like it from that perspective. Voluntary administration, with a view to a data company arrangement, really, one, tests you, keeps you on the edge, and you’ve got to really think outside the square and solve complex problems, because that is our ultimate reason for existence, is we’re coming in at the 11th hour, someone’s in distress, and you’ve got to solve a very complex problem, and time is not on your side. And look, voluntary administration can be used for massive companies. Virgin Airlines, I think, used a data company arrangement, plus some other mechanisms, and, I mean, that was a billion dollar, yeah, restructuring, when you look at it, like the facilities.

James Flaherty
Well, I suppose that’s where I’m going. There’s been three or four thousand companies using it. Most of them are not Virgin, either. That’s a great example of where a fundamentally good business was able to be restructured, such that it became slimmer, better, competitive. Well done, then. And most creditors got some. Not everybody. A lot of people didn’t. Whereas we look at James’s pie shop, I’m not selling enough pies. I reckon I could sell some more pies, Chris, but I’m not selling enough at the moment. I’m getting behind on my tax money. Like VA, that sounds very complicated.

Chris Baskerville
Yeah, the cost benefit analysis, oh, you’ve got to factor that in. And, you know, I mean, it’s crystal ball, but we have to use our best guess as to what our fee’s going to be. But the beautiful part in small business restructuring, completely fixed on both sides. The upfront contribution is fixed. The percentage from the fund going to creditors is fixed.

James Flaherty
Yeah, so effectively, what do you get paid up front?

Chris Baskerville
And the clip that you get is from the pot of gold that ends up in creditors’ hand. So it’s not like the pot of gold that turns up, it’s what lands in creditors’ hand.

James Flaherty
And you’re talking about restructuring and insolvency. So it’s not really a pot of gold. It’s more like sugar, copper. At least there’s something of value there. And so with the pot of copper that you’ve got, it’s pretty discreet. So, okay, well, that’s cool. I get all that. So why would I, in a business where I’ve got the choice of the two, we’ve done one recently, haven’t you? We could have done one or the other, or can you put a finger on something that you could just talk me through it?

Chris Baskerville
Yeah, most of my colleagues now have run multiple small business restructurings. And we’ve also done the trading voluntary administration in a deed combo. So we’ve covered both bases. And our job, really, as the professional advisors with the qualifications we have, is to be able to help the directors make the sensible choices to which one to go to and give them the reasons and the outline why we think that way, and hopefully explain it enough so the director goes path one or path two, which way, and it makes sense to pick the right one.

James Flaherty
I’ve not met a director who’s wanted to pay me more money for one versus the other.

Chris Baskerville
No.

James Flaherty
So you have to do a good explanation. Yeah. Yeah.

Chris Baskerville
So one of the advantages of both types of restructuring regimes compared to liquidation, there’s no black mark that gives them an indicia that you could be in line for a director banning by using a restructuring tool that creditors accept that gets accredited back their money and keeps your business alive. It’s almost seen as using a restructuring tool actually goes to your duties as a director to act in the best interest of the company.

James Flaherty
Yeah, but both of those do that.

Chris Baskerville
Yeah, that’s right. Both those regimes basically do give the directors those protections, which are the avoidance of the terminating the company on your watch.

James Flaherty
There’s a good reason to fight on if you can and you want to keep running businesses. So, but okay, well, if I’ve got the choice of either, why would I do a VA then? Because you want more flexibility. You want better to earn. I want more time to pay, better terms. But I’ve got to pay you more money to do it. So I’ve got to decide whether that benefit is more.

Chris Baskerville
That’s the cost benefit analysis. That’s all right. Yeah.

James Flaherty
Hang on. It’s James’ pie shop. I’ve spent a fortune of my own money trying to prop this sucker up and I made more money than anyone else. Is there a situation like that?

Chris Baskerville
Oh, yeah. Well, that comes back to our accredited matrix, I think is what we were getting at. So tell me through the matrix. So the best way to describe it is this. In nearly 80% of all small business restructuring that’s happened, the ATO is more than half of the creditor matrix or the creditor pool, if you want to call it that, right? In other words, it’s got the majority. So the majority of debt is aligned with the ATO. What does that mean? That means from voting up or down a restructuring proposal under SBR, the ATO has full control. And all they have to do is cast their vote either in the affirmative or negative. And that’s it. Your plan lives or dies. Yeah. Now, if we know that the ATO is the major creditor, obviously, we design the report to satisfy and tick as many of the boxes we expect the ATO to ask. And we actually front-load that information, basically saying, we already know the questions you’re going to ask. So here is the answers before you even ask them. And we still think on balance, it’s a good plan and cast your vote. But if the scenario was the ATO is not that, then consider the matrix and go, well, which creditors here do make up more than the majority? Yeah. And if so, are they friendly? Is it related? Do they like you? Do they not? Is there goodwill there? Do they absolutely despise you? Like there is so much that you’ve got to consider because you might have to win the hearts and minds of three or four creditors if it’s not the ATO as you’re dominating creditors.

James Flaherty
If you go to the building industry, and this is probably an exact point that’s useful because we’re talking about VA, it’s certainly SBRs, the QPCC in Queensland will let you do that without that triggering. You still have to do a new report about your finances.

Chris Baskerville
Yeah, you’ve got to keep your MFR. So you’ve got to remain viable.

James Flaherty
But you can still stay in the game having done an SBR. But there are situations where we’ve done an SBR where the ATO is only a very small creditor. And a lot of larger creditors were favourable, even though they knew they were going to take a haircut. They were still positively disposed to the director because he was a good guy and they knew what had happened to him at the hands of a developer. Yeah. So they thought he was a good guy, not your fault, didn’t get much at all. So you’re saying that’s a situation where you could also do a VA, couldn’t you?

Chris Baskerville
The example you gave of a construction company using SBR, the question nearly with every business that we have to ask almost immediately is what is the licensing requirements that keep your business on foot? And then you’ve got to look at, okay, is there an insolvency event that triggers a suspension or an automatic termination? So as an example, using small business restructuring for a construction company seems to have the support of the QBCC.
So they allow the licence to remain on foot, provided you don’t have a bad licence history relating to the quality of your workmanship and complaints. But we’re lucky in that regard. We’re very lucky in that regard. So that’s one example of where it’s supported. If you were to do voluntary administration for the same company, it is an automatic suspension of licence with a view to terminating it. In other words, if you did do voluntary administration for a construction company, it’s 99.99% going to be cancelled on arrival.

James Flaherty
So it’s a different scenario. So, okay, then you go VA. So VA is better suited to firms where there’s not an evented default type, sort of, you know, your licence gets…

Chris Baskerville
When there’s no licence behind it, that would terminate your operations as a business. Because there’s no point doing a trade-on voluntary administration if on the day one of my appointment, I lose the company’s ability to even operate the business.

James Flaherty
Of course. That makes sense.

Chris Baskerville
I mean, there are reasons to do a deed of company arrangement with creditors, even if you’re not trading. And we’ve got plenty of examples of that. But it’s the first question we have to ask. Because as soon as we roll in, we need to know, well, what do we do with the licence?

James Flaherty
Okay. So we’ve got a company. It could do one or could do the other. No licensing, particularly. Liquor licensing, that’s okay. You can be in VA over liquor licensing.

Chris Baskerville
Yeah, typically liquor licensing, we typically apply and become nominated on the existing licence and we become responsible for it.

James Flaherty
Further to my, kind of, my taking risks, I think. Okay. Say you’ve got a liquor licence. If I’m owed a lot of money in VA, I can vote, hey?

Chris Baskerville
If you are a related party, the director, or a family member, or a related company of the company that we’re talking about, related parties get a vote. Related parties can even, in voluntary administration, put their hand out and get a chunk of change from the fund that is created under the restructuring proposal.

James Flaherty
So you can become a beneficiary of something that, in the case of the director, you may have helped contribute to why it is where it is. But you could, in theory, participate in the pot of copper, as we’ll call it.

Chris Baskerville
And the other advantage in voluntary administration is a secured creditor can participate as a voting party. Oh, okay. And they don’t surrender their security during the voluntary administration process. Which is cool. Yeah, so in other words, if there is a larger bank or conglomerate of banks behind an organisation and they’re completely in support of a voluntary administration, completely in support of a restructuring deal, then the banks come in at full value of their vote and you’ve got to listen.

James Flaherty
Okay. Is that why sometimes, historically, they might have tried to push for their own administrator? Because obviously they say, well, we think this is a good company, but we know…

Chris Baskerville
Yeah, that’s happened a few times. I mean, there’s some classic stories about that massive steel mill in Wayala, I think. And a certain firm decided to go on the board and the banking conglomerate said, no, we want our preferred. And they’ve taken it on board anyway. And guess who used their voting power to kick out the said administrator? So if you really want to lose friends and alienate people, just follow that example.

James Flaherty
Okay. Yeah, it’ll be a long memory, I imagine, for that one. So that would be a scenario though, where if I made a lot of money too, ESPR, I don’t get on a related party. I can be admitted, but I don’t get any… Is that how it kind of works?

Chris Baskerville
Related parties can’t vote, but must receive the benefit from the restructuring plan. So you’ve got a hundred grand to distribute, you can’t vote to get that plan in place. But if it does get up, you are a beneficiary of the restructuring plan.

James Flaherty
Unless you forgive your debt.

Chris Baskerville
Unless you forgive your debt.

James Flaherty
And how does that work in VA though? What’s the scenario with that? So if I want the creditors to vote and I’m a significant creditor myself, that would be a scenario where VA could work quite well, isn’t it?

Chris Baskerville
Yeah, correct. Because again, creditor matrix and creditor voting power, right? So in voluntary administration, every creditor gets a vote. And for the value of the admitted debt. So the way you would handle related parties is you allow the related parties to vote. If we are absolutely sure of the quantum and the evidence that supports their debt, you admit them in full or to the extent that it is proved. And if in doubt, or there’s not enough supporting material, you allow them to vote for $1. Which allows participation of the creditor body. And I’ve read sovereignist case law that you’ve got to allow the creditors to participate. So even if you are in doubt as to how much, give them $1. There’s your nominal figure. So at least their vote counts. At least their vote counts. Because in voluntary administration, it’s number and dollar value, isn’t it? Well, first of all, it’s actually on the voices. The voices. So in other words, if you hear more yays than nays, well, then the yays carry the day. Until someone goes, no, I want to call a poll. Every creditor gets a vote for the value that’s admitted. And you’ve got to tally your number and your dollar value. And if more than 50% are in number and more than 50% in dollar value, the resolution passes. Or fails, I should say.

James Flaherty
What if you’ve got one major creditor who’s worth 60% and all the rest of them are worth 40. And there’s 50 of them in one. What happens then?

Chris Baskerville
Yeah, it happens all the time. So when a poll is created, and this only applies to the voluntary administration in this scenario, polls are applied to nearly all creditor meetings under the Corporations Act. But a poll in that scenario is if you’ve got more than 50% for in number and then you’ve got more than 50% against in dollar value. So what ends up happening is you haven’t quite met the number and value test. Then the chairperson of the meeting casts the ultimate vote. And the chairperson then has to go, is that in favour of the resolution, against the resolution, or abstains from casting a resolution. Because a resolution that’s at loggerheads can’t pass, right? So therefore it must fail.

James Flaherty
So it could stay in administration while you guys try and thrash things out. You could take your casting vote and then have security protect you from one or the other group, one or other or all of the creditors, depending on what sort of jobs go.

Chris Baskerville
And particularly in voluntary administration, because one of the criteria of the report that goes out to the creditor body is the administrator must make a recommendation as to, well, which way do you recommend? Does it go into liquidation or does it go into a deal company arrangement or do you recommend the company just simply be handed back to the directors? Right, so the law requires me to put that recommendation in the report and then I’ve got to give my reason for which way I’ve got. Now, why that is critical to the meeting and the casting vote is if you’re recommended that a deal company arrangement should be accepted by the credit body and now you’re forced to cast a vote whether creditors should accept a deal company arrangement, I think your casting vote should match your recommendation. Yes, it should. And I’ll tell you what, if it doesn’t, you better have some absolutely bloody good reason.

James Flaherty
So I think clearly, despite its complexity, it is a good idea, voluntary administration, and it’s got definite benefits where there might be one large influential creditor that needs to be managed. Or, hang on, I’ve put my heart, life and soul into my business and I’ve hawked my house. I want to be part of this process.

Chris Baskerville
We want to keep the company alive.

James Flaherty
The clock’s not ticking quite like it is in SBR, you’ve got a bit more time.

Chris Baskerville
The timeframes for SBR and VA as they’re written in statute are almost identical. In other words, you’ve got 20 business days to get your plan out the door. You’ve got 20 business days to convene the second meeting. The ticking time clocks are virtually the same. The best I can give you in SBR is an extra 10 business days before I have to get your plan out the door. So tiny little bit of flex, but not much. Whereas voluntary administration, if within the first 20 business days, I go, wow, this is bigger than Ben Hur and I need more time, I can march off to the court, convince the court that I need three months, six months, 12 months, 18 months, a year before I can call that second meeting accreditors, I can actually get those orders. Of course, I’ve got to convince a judge that that’s be the case. Alternatively, just with the powers that administrators have and how we operate the accredited meeting, I can at least adjourn the second meeting for up to 45 business days.

James Flaherty
Yeah, wow.

Chris Baskerville
With the powers that come with being an administrator. So a lot more flexibility in voluntary administration. I can buy time. Time is probably the one thing I can buy you as a director in voluntary administration.

James Flaherty
Just to give you a bit more time to try and sell it if you had to sell it. It’s not like a shotgun sale or like a everything must go type. If you’re trying to do something a bit more complicated.

Chris Baskerville
Yeah, it’s usually the more the asset, the more complex, the more time you need. So like as an example, try and sell a mine, try and sell a copper mine that’s being mothballed and how long does it take to sell that? Whereas in this current market, we could sell residential real estate within 30 days. Yeah, of course. And shares could be sold within a minute. Of course. But that requires time and I need the protection of voluntary administration. Won’t go into the details in this cast. So you buy time.

James Flaherty
Time is on your side. Okay, well, that’s a win. Okay, I’m not so anti anymore. Thanks for taking me into the matrix. Appreciate it. Thanks, Chris.

121 The Nightclub and The Engineer

The Sounds of the Baskerville – Episode 121

James Flaherty
So now you’re a nightclub owner, am I right? Welcome back to the Sound of the Baskerville and listeners of this show will know that quite often Chris will answer the question he would like to have been asked, not the one necessarily he was given. And so hi Chris, how are you?

Chris Baskerville
Hello James, good.

James Flaherty
In the last kind of couple of podcasts we’ve been into the Matrix, we’ve looked at James’s Pie Shop, but really what I think I wanted to know Chris was, give me some examples of when you do one or the other. Having now had several years of small business restructuring and voluntary administration, one has not replaced the other. We know that. We’ve spent the last two episodes talking about when you would and when you wouldn’t. So okay, well tell me when you did and tell me when you didn’t.

Chris Baskerville
Yeah, well there was a classic example, and this is interesting because this was, let’s just call it a nightclub on the Gold Coast, and it was in small business restructuring by the time I arrived on the scene, right? In other words, I’ve got no idea this nightclub’s in small business restructuring, but that’s how it came to me. And the lawyer for the director quickly realised, which obviously the lawyer wasn’t involved in the decision of the small business restructuring, otherwise the lawyer would have picked up on this right at the beginning. He realised that in the nightclub example, the director was owed two times whatever the other creditors were owed. So in other words, let’s just say the other creditors were three quarters of a million dollars. Well, the director was nearly 1.4, 1.5 million owed. So in other words, the director is the largest creditor in the company alongside every other creditor which represented one third, right? So if you look at it in percentages, the director is 66% of the creditor pool. The other creditors were 33% of the creditor pool.

James Flaherty
So definitely an example of your heart and soul is clearly in it.

Chris Baskerville
Yeah, correct. And it’s subject to small business restructuring, right? I don’t know how it passed the million dollar threshold because clearly you add up three quarters of a million dollars and 1.5, that is way more than one million.

James Flaherty
Well, the only way you’d be able to do that is if the person effectively gave it up.

Chris Baskerville
Yeah, or magically waved a wand and yeah, that’s right. If the director had of forgiven that entire loan, sure, you’d scrape through it or at least forgive it to the value so much that you can still fit under the one million dollar threshold. Anyway, that’s a story for another day.

But what we saw is small business restructuring was the wrong tool for that specific nightclub given the very specific creditor matrix that it had in its portfolio. So the recommendation was we do a voluntary administration. Now, because of the small business restructuring, the risk was on the director to trade, but as soon as voluntary administration rolls in, the risk is on me to trade.

James Flaherty
Because now you’re a nightclub owner, who’s not?

Chris Baskerville
So now I am effectively in control of a nightclub and we can do things and license things and ensure things in certain ways to mitigate the risk, but the risk does not disappear, right? No. So I’ve effectively run this nightclub for about a four-week period and then our second meeting of creditors is convened very sprightly because if the director was 66% of the voting pool and the other creditors were only a third, it’s pretty clear that if the director wants to do a restructuring proposal at 1 cent, 10 cent, 20 cents, 30 cents on the dollar, I think it’s going to get up. Now, the criticism that we would face if we didn’t do our job properly in that circumstance is this. Is that director’s loan legitimate? That’s the test. So we knew right from the beginning, we would have to go and dig quite deep into that. So we matched his director loan with banking transactions and we had to do almost a full forensic trace because I had to present that information to the other third of creditors in the mix and say, look, we’ve traced most of this, it all looks… This director, they’ve done what they’ve said that they’ve done. Yeah, correct. And we gleaned information as to where the money came from in the first place and it really did come from a personal injury compensation. So always the person has suffered a horrendous personal injury, got a payout and instead of this person lying in bed and feeling sorry for himself, they said, well, I’m going to take some of his money and create a purpose with it. I’m going to create Iron the Nightclub and that’s what he did with his money. He actually wanted to stay engaged, stay on the front foot, learn business, understand business, like he didn’t just give up.

James Flaherty
So that does help your arguments, you go, this particular person, man, woman has put in their own money from a cool boat claim for which they are quite clearly deserved of. And if you accept this proposal, you’re not going to get your full amount back, but you’ll get something and this person can stay doing what they’re doing, having learned the bitter lessons that have got them in this position in the first place.

Chris Baskerville
Absolutely. And look, you know, what was really interesting is we went down, I mean, because I’m a voluntary administrator, I’m running this business, right? And one of the first things we’re going to do, one, assess all the assets, but we also have to assess the OH&S of the operations of the nightclub because you know what I don’t want to find is a chest full of gums. I want to make sure that if a patron was going to sit on the chair, it’s not going to collapse and cause some injury. So we’ve run all the hub H&S and independent reports are saying, look, it’s clean systems, very organised, very clean workspaces too, everything was very systemised. So that gave me a lot of confidence. And all of the business information all went and fed into an accounting program, properly managed and operated by professional accountants to make sure everything all reconciled. So I had confidence in the business numbers, I had confidence in its operations, I had confidence in the actual landscape where the business was being traded and the director was a pretty competent operator. And I was drilling him and going, what you need to be focused on as a director, and you’re going to get a lifeline from us, right? But you might not be able to use this again, but you need to put in good systems, good procedures. You almost have to be able to run this business without you being in the business. The way you’ve got to think about it is you need to become redundant in your own business. And I just left him with that.

James Flaherty
How did the creditors react in the end? The non-related one.

Chris Baskerville
Yeah, the non-related ones, unhappy, unhappy. They wanted more money. They obviously wanted more money. And look, the director did throw in a decent chunk of change. They wanted more money. They wanted more cents in the dollar. But like if I think about it from the director’s position, if I’m the director and I’m making a proposal where my vote is so powerful that it’s going to carry the day, realistically, why would I want to give up and pay any more money than I have to? So the director held firm and he said, no, this is the proposal. I’m sorry you don’t like it. I get that. But this is the proposal. And mind you, can I just let you know, third party creditors, is that I will be making sure I lodge everything on time, paying everything on time. But I also employ about 30 to 35 people in the hospitality game and I keep them employed as long as this business can keep going. So don’t let me crush 30 other people’s lives by voting this thing down for the better good as a taxpaying entity. I need to stay alive.

James Flaherty
So basically, I will put this money in, because if I don’t, you’ll get nothing. Isn’t that the other part of it?

Chris Baskerville
That’s right. So again, it goes back to one of the podcasts earlier, that comparison always between this is what liquidation looks like versus this is what any restructuring plan looks like. And when you sort of think about it, what is a nightclub? It’s a dancefloor, fixed on BBL. So the bar is all fixed to the landlord, most of the kitchen is all fixed. There’s a lot of fixed assets that really turn into landlord property in the event of liquidation. The only thing that we were able to potentially remove was maybe a dishwasher and the sound system. Wow. So when you sort of look at it from a liquidation scenario, what is it that I can actually sell in that? It’s really, yeah, the dishwasher and the sound system. And my auction agents were going.

James Flaherty
So Chris has just shaved his head for those, this thing. So clearly, because on the face of it, you go, how can that be fair? If the bloke who’s running it can suddenly vote against, because of how much money he’s owed, he can sit there and tell everyone else, like, you’re only getting 10 cents on the dollar. He’s not. He’s going, I will put more of my own money on top of what I’ve already lost in this already to keep it alive for all the reasons you’ve just said. And if I do that, you’ll get 10 cents or 5 cents or whatever. But if I don’t do that, you’ll get nothing.

Chris Baskerville
But that’s the way you’re going to think about it. I get that perception. And if you sort of think about it, right, the director is two thirds of the credit pool. So who’s biggest loser in that event? It’s the director who has literally poured, and the money, we can actually see the flow of money coming in. The person that put the 1.5 million bucks in is him. And he’s the only one that he stands to lose all that.

James Flaherty
I mean, if you think about it, a person listening to this show is going to go, yeah, when you pay your money, it takes a chance. That’s one of the risks of running a small business. So it’s an interesting scenario where you can actually mitigate your own personal financial risk a little bit. Or at least you use the advantage in voluntary administration of having made such a significant investment. That’s preserved in voluntary administration, in a sense, because you can vote.

Chris Baskerville
Yeah.

James Flaherty
So that blood, sweat and tear in my case, this poor person’s compo, at least they can still play that card in voluntary administration.

Chris Baskerville
What the director really should have done, and this is probably one of the advice they made, is he should have secured the money he gave to the company. So in other words, if you are a director and you are pouring your personal wealth into a company entity for business purposes, right, you should secure that money just like if you borrowed the money from a bank. Because I know that the bank is going to put their money into your business as long as they get security out of the business, security out of your house, personal guarantee by you, your wife, your dog, your goldfish. They’ll take everything. So you should have the same mindset. If you’re giving your own personal wealth to a company, it doesn’t matter if it is 100% your company, treat it as though you’re the bank, secure the money. That was the only mistake he made.

James Flaherty
I think I’ve seen that once, but I’m sure you’ve seen hopefully a bit more than that. And people don’t secure, it’s a bit like family and friends. Make sure you secure it. So that was one thing he could have done to improve his situation.

Chris Baskerville
Could have improved the situation and voluntary administration would still work the same way. So the secured credit can vote without surrendering their security for the full value of their debt. So he still gets the vote. But here’s the extra element that the director would have had if he had secured it. If any other creditor decided to make a move and try and apply for court orders to liquidate, wind up, whatever, because I’m secured and I have security over all or substantially the whole of the assets, I can just go and appoint my own receiver over the top of the liquidator and go and deal with effectively my own asset. Or alternatively, I could have placed myself as the controller.

James Flaherty
I mean, not so much that last one, but that’s not unusual where the people themselves can call a receivery. The controller people can call their own receivery.

Chris Baskerville
Yeah, if you flip the script, instead of the director owing the money, it’s a big bank and the bank sees that an administrator is going in or a bank sees a liquidator going in to protect their asset, the bank will appoint a receiver to go and deal with it, which overrides.

James Flaherty
Well, it’s a while back. I’m trying to remember what’s the episode numbers, but there was definitely where we’ve talked about what the difference is between these different jobs. So that’s an interesting one, because if he’d have secured himself, if SBIR had been the right option, say he wasn’t in the majority and he secured himself, he really can’t vote in SBIR because he’s got no rights. And if he’s secured, is he out of the credit of Paul?

Chris Baskerville
Well, remember, with respect to secured position in Australia, different to the US, secured position in Australia, you effectively include the secured party’s debt to the extent it is now unsecured. So let’s just say a nightclub owner had a 1.5 million dollar debt. The obvious question is what assets back the 1.5 million dollar debt? And if I said it was a dishwasher, that would better be one hell of a dishwasher.

James Flaherty
Yeah, I think the rest of your business might be unsecure. It’s very insecure.

Chris Baskerville
Yeah, gotcha. So he’d still not qualify for SBIR because the shortfall to the director would be always the same.

James Flaherty
OK, so that’s a really good example of where it’s not a massive business, but VA is the right way to go. Yeah. Can you think of other ones? Well, I mean, lots of situations.

Chris Baskerville
Oh, there’s been, obviously, any time we promote small business restructuring is because we believe that’s the way it should go. But I do distinctly remember, and this was probably in the first year that SBIR was introduced, and I see this engineer bloke, I’m stressed to the eyeballs, and during COVID in his engineering consulting business, his cost of goods just on wages went to 98% for every $1 generated in income. So if I make $1, I give 98% just to my employees. So costs have completely skyrocketed, revenue drops because of the pipeline of engineering consulting dropped off dramatically, and he’s just basically scraping by. But he manages to get himself back into a position where, OK, now the contracts are starting to come live, and I didn’t want to let go of my team because I just knew the pipeline’s coming. And he was a great example of where SBIR was just perfect because we could see the hockey stick turn back to a positive business model. Now he’s making money again. We’re now in gross profit territory. But the difficulty is he incurred all of this debt during the COVID years, and he just had no money to pay it.

James Flaherty
You’re never going to get rid of that sack of rocks, are you?

Chris Baskerville
That’s right, yeah. So he has turned his engineering business back into black, as we say, positive cash flow and profitability. But he was just weighed down by the legacy of COVID. Gotcha. And so he ticked the Bible business as an extraordinary reason to be there. The guy did everything he can to turn the ship around himself. He just needed this one break, and then he’s flying again. That was a perfect example for SBR. And he obviously came in under the endorsement threshold. His accounts were squared away. And I think he only had the last quarter superannuation he had to pay, which is pretty current.

James Flaherty
Here’s a really good example of why it’s so cool. And it’s now having a few years down the path. It still stands as exactly what it was designed for. But there’s still businesses where you sit there, like it’s a flood, or it’s not COVID now necessarily, but it’s an event which gives you a burden that you either can’t employ enough people or there isn’t enough work. You can make a business that’s profitable, but with the sack of rocks of accumulated debt and a disaster, like ill health of a director or all these things that cause a good business to somehow find themselves in trouble. So I think what we’ve learned today is that SBIR is definitely great for that. But also, so VA is too, and VA gives you a bit more flexibility, especially if you’ve got a few little moving parts. So we go back to when we started this whole conversation of, well, Bruce is now no longer the ombudsman of whatever that thing was, but it’s never been so true to say that liquidators are not just going to hammer the one nail of liquidation. In fact, you’ve got more tools in your chest. And don’t forget, even though it sounds expensive and scary, that it doesn’t have to be SBIR.

Chris Baskerville
No. The way I look at my job, and obviously my role is to meet the advisors and the directors, and having heard the information that I’m getting, obviously recommend the right tool with reasons why, right? So that means the way I look at it is my real responsibility is I need to ask the correct questions, the tactical questions, so I get a really good understanding of the business, the numbers and all that sort of stuff, and potentially even follow up with, give us extracts from your accounting program, just so I can marry up the numbers and all that. But it’s really my job is to ask the right questions so that I can recommend which way to go. And SBIR has just added another tool, but I always go in there. My first thought is, how do I keep this business alive? It’s always my first thought. And if it can’t, well then, what’s our next option?

James Flaherty
Okay. Well, chat to Chris at Jirsch Sutherland if you want to keep your business alive. Don’t wait till it’s too late. He’s a nice fella. Give him a call. It’s not designed to be a pitching show, but if I just think about all the stuff we’ve talked about, the earlier you get involved in, the more stuff that people tell you and the more helpful that they are to you with.

Chris Baskerville
Who’d have thought there’s options to help you? Yeah. Thanks, Chris. Chat soon.

James Flaherty
A reminder that these podcasts are general in nature and do not constitute advice, and they don’t take into account your personal circumstances. So if you think though that some of the issues raised might apply to you, you should seek qualified financial, legal or counselling advice.

122 You Guys Are Going to BE Busy

The Sounds of the Baskerville – Episode 122

James Flaherty
That easy money is no more. We know the taxman’s all over you like a rash these days if you get behind. It’s not so easy to get a repayment plan as it used to be. Welcome back to Sound of the Baskerville. I’m James Flaherty. Morning, Chris Baskerville. How are you?

Chris Baskerville
Good morning, James.

James Flaherty
Let’s do one, this one, Chris. Has anyone ever called up to you after, say, like the budget recently and said, hey, you guys are going to be really busy. Have you heard that before?

Chris Baskerville
Yeah, there’s certainly been a lot of talk. I think there’s a bit of budget fatigue out there. What we’re also hearing is whatever the budget considered on budget night, it’s been amended again and changed again. So who knows? It’s a moving beast. But everyone is looking to the insolvency profession and going, well, you guys are in for a cracking time. I even had some IT guys today say they want to invest in the firm, which I politely said, well, look, we got absolutely annihilated in COVID. We lost half our business for three years. So we need to recall and reposition those losses in today’s games.

James Flaherty
And they’re still probably trying to populate the skillset. You’ve still got to try and scale up to be able to manage what’s going on at the moment. So you lost a lot of good people in COVID to other places, didn’t you?

Chris Baskerville
Yeah. The way most insolvency practitioners operated during COVID was they weren’t hiring to replace people. They just allowed a natural attrition to occur, therefore organically sort of reducing the headcount. But there were a few insolvency firms, particularly ones that were based on super high volume, very small margin. They just shut the door. Because you don’t have that quality of job where it requires either quality of assets to be dealt with or quality investigations to be done.

James Flaherty
Okay, Chris, you’re going to be business. You did a bit of research. What does Australia do? Where’s the money all come from? I think we were talking about this prior. We dig stuff out of the ground. There’s a bit of manufacturing, a bit of agriculture. A lot of the stuff comes from services, doesn’t it? A lot of Australia’s GDP is from services that you and I provide. Accounting. Yeah. Financial, health. That’s right. Education. Retail, hospitality. Those are the services. So it’s stuff that’s kind of all of its time. So without going to the budget, there are a whole bunch of memes, weren’t there? I haven’t really followed them. 47% investor or something like that? Yeah.

Chris Baskerville
I think the general perception from looking at the Australian budget was that, all right, well, we’re just going to tax everything. In other words, we’re going to tax every trust. That includes testamentary discretionary trust. So you know how we’ve got discretionary trust in the operation of a business. It also applies to the trust created by a dead person to asset protect for their future generation. So obviously, the law is not settled yet and how the budget actually transcribes into legislation. But it’s basically everyone’s just getting taxed up the wazoo. And co-founder memes have been floating around basically saying, hey, have a look at our new member of our company that provides no money in, provides no labour, doesn’t work the midnight oil, doesn’t hustle to keep the foundation of the business operating, but gets to take 40% of all our revenue.

James Flaherty
Swing on for that gig. Yeah, of course. Yeah. So there’s a bunch of them around and I understand the maths doesn’t quite stack in some situations, but that’s certainly, that’s where the whole death taxes thing comes from. Because if you can tax and testamentary trust at 30 cents, well, that’s a death tax, isn’t it?

Chris Baskerville
Yeah. Well, death and taxes.

James Flaherty
That’s true, I suppose. Going back to certainties then, okay, well, we’re going to be a family business. So people in this sort of world, and you’re a qualified and storied liquid owner and bankruptcy trustee. So in people such as myself who kind of assist in this world, we’ll be busy. So you go, okay, well, the changes to the capital gains tax. So that means the old discount that was on houses and shares is now reduced more to the old sort of figure out the inflation amount and take the inflation amount out. And what was left over was the kind of profit you made over inflated. Never really could figure it out. So that 50% thing that came in, and now it’s back. So I suppose the question for you is where I’m going with that is house prices have been going up, especially in Southeast Queensland, not so much down South so much. So if I’m running a small business and I need extra capital, nine times out of 10, doesn’t the bank say to you, yeah, well, what’s that secured against? I’m secured against my business, but I’ll probably have a little bit of a slice of your house as well. Is that something that you’ve seen in your travels?

Chris Baskerville
One of the easiest sources for a small business director to get capital, aside from not paying your taxes and putting that on a payment plan and not paying your supplies and putting that on a payment plan, putting those two elements aside is go and reach into the equity in the home because yes, property prices have been growing, you know, what, 10, 11% per annum for the last little bit. Let’s just say we’ve got some equity. We haven’t had to do too much to get this extra equity. We just had to pay the mortgage and the easiest way for people to access it. But what am I fundamentally doing by accessing the equity to pay for, say, a small business restructuring or even a deal coming arrangement, whichever way you want to put a label on the restructuring in your business. Well, what is the core problem in the first place? The core problem is your company or business is a leaky bucket. And as we’ve said in plenty of podcasts is it doesn’t matter how much water you put into a leaky bucket, it’s going to leak. So same for a business. If you haven’t plugged the holes in your business and found out how to make this bucket solid, it doesn’t matter how much money you pour into it. And directors get caught in that trap. Really what they’re really doing, if you’ve got a business that is not working and the model does not work and you’re losing money all over the place, what you’re doing by accessing the equity in your home and pouring that into the business is you’re just buying yourself time. But the inevitable is coming. Like if you don’t fix the underlying model in the business, inevitably it doesn’t matter how much money you pour into it, you lose.

James Flaherty
So this is a piece for the people who listen to this show who always get bored with me harping on. So this is where you can go make a cup of tea or skip it, like the two 15-second things on the other podcast thing. So they should come and speak to you earlier if they haven’t addressed the problem. One of the whole positions of this show we’ve been doing over the six seasons is get advice early, make a decision early, rip off the bandaid. So there has been a bit of an easy to top up with equity in your home. Okay, I’ll just take some more money out and I’ll stick it into the company and I’ll fix it. Sometimes I’ll fix it, never comes. And then all I’ve ended up with was more debt, same problems, and then they still come to you to aid. So my kind of wonder is if the idea was to reduce the growth in house prices so more people could get into a home, that’s a good thing. But it certainly does mean the people who aren’t addressing the problems in their business, that time is coming. That easy money is no more. We know the taxman’s all over you like a rash these days if you get behind. It’s not so easy to get a repayment plan as it used to be. And certainly if you’ve annoyed him enough, it’s very hard to get a tax repayment plan. So that easy money isn’t so good. Is that true?

Chris Baskerville
Commercial lenders, they are noticing a real spike in demand for commercial loans to be able to perform one of these SBR docker manoeuvres or alternatively draw on the equity and just completely pay out all your creditors in full, which is fine as well. But it’s an area that your top tier banks won’t touch if there’s an ATO issue. And this is policy by policy. So every credit lender has their own set of policies, their own risk appetite, which also means they come with their own percentage interest rate that combats the risk. So you can’t use main tier lending ordinarily to discharge a company ATO problem that you’ve got. So now you’ve got to come to the second, maybe even third tier lenders. Now, as you come down the tier, the interest rate and fees go up. And because it’s commercial, you are not protected by the ordinary consumer lending laws. So where ordinary banks have to not lead an individual into error or put them into an unjust loan, those rules don’t apply to commerce. It’s buyer beware.

James Flaherty
And it’s not to say that people operating that zone necessarily are leading people into a situation where the debt’s too high. Each of them have got a risk appetite and a business model. And one of the things we often say about directors is you’re an adult and you’re on your own in this one. Like there’s no special person holding your hand or protecting you from yourself if you’re director of a company and you sell into a commercial instrument with someone. That’s on you. And so if you don’t get financial or legal advice, neither of which we’re providing, it’s on you. And you are potentially accessing money in the family home, which you could lose, money and home, if you don’t fix the problem.
Chris Baskerville
And then not only do you lose the business, you potentially lose the relationship that is attached to the same family home.

James Flaherty
Now, if you’ve heard us saying this before, could I just ask you just to flick this podcast on to somebody who needs to hear it? Because to be honest, when people say that you guys are going to be busy, we would rather be busy helping people turn a corner, wouldn’t we? Rather than, God, here we go. There’s another one I’ve got to try and hit.

Chris Baskerville
Yeah. I mean, where we are, I need business. Like no one wants us. No one wants to go, do you know what? I’m starting my day on Monday morning. I can’t wait to have a cup of coffee with the local liquidator or the local bankruptcy trustee. Like that will never, ever appear in anyone’s conversations, except for those that we work very closely with. They love having a beer and a coffee with us. But where it has needed business, which means no one knows about us. No one even knows what we actually do, what powers and skills we bring to the table until they need us. And then the conversation, particularly when with a successful restructure or a successful data company arrangement, whatever that kind of looks like, people go, wow, we didn’t actually realise how much you guys bring to the table, your skills, your knowledge, your tactical advantage, your understanding of the legal process and systems, human management when dealing with the accredited body. And then you’ve got to stand up and deliver at a meeting where all the eyes are on you, including every regulator under the sun. That’s right. So people, then they go, oh, wow, these guys are actually super skilful at what they do. They’re super confident. They’re very well-knowledged, but no one will ever know that until they need us.

James Flaherty
Well, the thing that’s really interesting about it, as you’re saying, so we set up the Insolve panel as a way of people accessing a kind of a group of different practitioners who they can rely on to get things done if they needed to get it wound up or shut down or get some straight level advice from. But you also know, and that’s why we set up thesolvers.com.au, is you often will say, hey, this isn’t me, but why don’t you go speak to these people about Safe Harbour or go and speak to this lawyer about your family situation before you come and see us. The stuff you’ve got to solve here before we even negotiate this. What’s the restructuring? Are they going to do a VA or something? Or even if it’s a go get some business advice and some finance, you can dig yourself out of this without me. Is that true, what I’m saying?

Chris Baskerville
Well, the people’s greatest fear, there’s probably two, but I think the greatest fear when they’re talking to any insolvency practitioner is that we’re very one-dimensional in our advice, which is just give me the keys to your business. I’ll take it from here. In other words, as soon as I go and talk to this person, they’re only going to tell me the one thing, which is, hand me the keys to your business. But if you think about, say, the business life cycle, and just think of a bell curve in the ordinary statistical context. We’ve talked about this a bit. Yeah. So on the left-hand side, when you’re starting up, you’re obviously losing money, but then you go into a real growth period. So now we’ve got a hockey stick up type approach. We then potentially mature or start to go into decline. Now, that’s the other curve.

James Flaherty
Chris is waving his hands, yes.

Chris Baskerville
We start to curve, and now we’re on a downhill slide. Now, this is not saying every business follows this, but this is a cycle of what can happen now. When the business starts to turn south, and now we’re on the downhill slide, we say as practitioners, and directors should potentially consider this, get your advice really early. So when you see that turn coming, talk to guys like us, because we may actually say, look, you don’t need us yet. We probably hope that you don’t need us at all. But what you’ve got, you’ve got a problem here, here, and potentially you need to either chop off one of the limbs of your business that isn’t working, which is a hard reality to face. Maybe you’ve got to downscale your headcount. Maybe you shouldn’t expand into Europe when you’re struggling to deal with New Zealand. It’s that kind of a thinking. And then if you don’t take any positive action, and your business is in decline, well, then you’re on a ski slope to death and destruction.

James Flaherty
And you don’t have the skills, and the only trajectory is down.

Chris Baskerville
Now, where do people normally call us? They don’t call us when we’re in the tip of the curve. They call us when we are nose diving a plane, and we’re about to hit the ground. And then they expect a miracle at that moment in time. And don’t get me wrong, we have pulled miracles out at that last minute, like basically just got the plane to fly again. But there’s a lot of skill and resources required to make that happen.

James Flaherty
Yeah, and we talked about that a bit. I think you’re absolutely on the be good if people speak to you, maybe when the plane was still in the sky, or they’re contemplating the black run. How do I get down there in one piece?

Chris Baskerville
And you’re going to pay a big price for that service, that last minute emergency service to pull the plane out of a nosedive before it hits the ground. You’re going to pay a big price for that.

James Flaherty
Yeah, that’s right. So I think I’m interested to keep talking on that. So I suppose my advice to listeners is talk about these sort of ideas with people who you know, we all know people who’ve got a business model, which is either tired or unchanging or not working. So let me just continue on that theme on the next one. I’ve got to scoot now Chris, but let’s chat soon. Thanks.

James Flaherty
A reminder that these podcasts are general in nature and do not constitute advice, and they don’t take into account your personal circumstances. So if you think though that some of the issues raised might apply to you, you should seek qualified financial, legal or counselling advice.

123 You Guys Need to GET Busy

The Sounds of the Baskerville – Episode 123

James Flaherty
We talked about business people coming and talking to you before it’s too late. If you’re in it day to day, then you know it’s too late. Welcome to the Sound of the Baskerville, I’m James Flaherty here with the great man, Chris Baskerville.

Chris Baskerville
Good morning James, good to be back.

James Flaherty
So let’s continue on what we talked about the other day, which was you guys are going to be busy. So I call that episode, you guys are going to be busy one, so you guys are going to be busy two.

Chris Baskerville
James, we’re not making predictions.

James Flaherty
Yeah, good point. So one thing that you can reasonably reliably say that if I say it’s going to be sunny tomorrow, you should potentially bring an umbrella. Is that what we’re kind of roughly saying?

Chris Baskerville
Well, I think what happened in COVID, we made all these predictions. None of it came true until that third, fourth year of COVID. And now we’re starting to see, you know, higher than GFC level insolvencies from the corporate context, you know, humongous uptake in small business restructuring, like in the nearly 4,000 potentially companies. And we’re also starting to see voluntary administrations also on the rise. So in other words, any opportunity directors have to restructure their affairs of the company, whether they’re small or just a bit too big to be small businesses, they’re all on the rise. So we might’ve been just a bit too early.

James Flaherty
I’m thinking as you’re talking, if you predict rain in a drought, eventually you’re right, because eventually it will rain.

Chris Baskerville
Is that like the broken clock is right twice a day? No, that’s right.

James Flaherty
But I do think we couldn’t put a time on it. Rather than the zombie apocalypse, it was just more of a number of different things. And we talked about this last episode, just as the collapse in business from COVID in one side affected business, then there was also in lockdowns, there was also easy money and then everything really picked up and property prices have gone up. So therefore businesses were able, as we were talking in our last episode, able to draw against equity in a home to prop a business up that may not necessarily be propped. We talked about business people coming and talking to you before it’s too late. If you’re in it day to day and you know it’s too late, is that if you’re continuing to take money out onto one of those things to pay your tax bill, is that an indicative that you need to do so?

Chris Baskerville
It’s a good question because a director’s mindset of their own business is this is my baby and you’re not going to throw the baby out with the bathwater and you’re going to do everything you can to preserve that baby. And so they will go to great lengths, like directors, I say this quite often, what I’ve seen in my time in this game is directors of their own business can hold on to that business by the skin and the nails of their hands and I’m making a tiger claw representation here, but they will hold on until the bitter end because what’s the other alternative? They’ve got to put a bullet in the company and go and get a job. That’s right. And I think to someone that views my business, I’m finally free to determine my own destiny. I’m not at someone else’s whim, even though ironically you are your worst boss because you’ve got to work 60 hours a day. For $2 an hour. For $2 an hour. You might as well go to McDonald’s, Flip Burgers. But yeah, directors will just hang on to the bitter end. So at what point does a director turn the cogs in their brain to go I think I’ve got an unmanageable problem here. Obviously, they’ve got to get advice like your accountants and lawyers will be able to say, hey, we’re seeing this pattern or you’re watching this trend. You’ve got some serious problems. Go back to the leaky bucket thing. You’re not fixing the leaks in the bucket. You know, we’re just pouring more resources at it. But I think that definitely comes an exhaustion to the directors either in their mind, body or soul or an exhaustion from the close spouse that’s saying to the other working spouse, what I’m seeing here, you’re just sort of a depleted version of who you are. You’ve thrown everything in the kitchen sink to make this work. At some point, you’ve just got to draw the line in the sand and bring the guillotine down.

James Flaherty
Yeah. And then sometimes one of those other exhaustions is that there is just simply no more money.

Chris Baskerville
Or completely run out of money or someone’s brought the guillotine down on you involuntarily.

James Flaherty
And so people say, you guys are going to be busy. We’re not predicting who we are. We do want to help people. So again, get someone to listen to these couple of podcasts. Okay. If any of this sounds like you or a friend of yours, just get them to think about some of the stuff we’re saying or others are saying. It’s not financial or legal advice, but listen to the sounds. If you’re drawing money against your home, you’re going to non-bank lenders to pay your tax bill.

Chris Baskerville
And constantly stressed, not sleeping and it’s taking a toll on your mind, body and soul. You’ve got to factor that in.

James Flaherty
You’ve got to factor it in. It doesn’t mean you stop when you ask the question. Because I think the tax changes are supposed to talk about maybe there won’t be so much house growth. I don’t know if there’ll be people who’ve got their 10 Airbnbs. I mean, they’re income producing assets now. So you weren’t necessarily planning to sell those potentially anyway. So are they going to be massively impacted? Don’t know. The trusts, do you think there’ll be much work for liquidators and restructuring people as people try to unpick trust arrangements and that sort of stuff? Or is there more people just jiggling stuff around and making the accountants and lawyers busy?

Chris Baskerville
I really feel for our accounting colleagues out there. Because whether they like it or not, and whether they view it or not, they’re effectively, well, I guess they’re a paid employee of the tax office really, to basically do the ATO’s work on getting your clients to pay and lodge their tax returns. And then also be the whistleblower if your clients- Oh yeah, that’s right. Yeah, that’s like far out, man. And those accountants, in COVID, they got absolutely belted. So they are working 65 million hours a day just to try and get their clients in the zone for survival of COVID. They really copped the brunt of it. So yeah, let’s just add some more.

James Flaherty
Because now they’re going to have arrangements which were legit and still are legit. It’s just that you’re going to, the tax affairs will change. And we talked in the last episode about taxing trusts at 30%. And then when the distributions come out, you get taxed on them. So it’s a double whammy.

Chris Baskerville
Yeah. Or you don’t get the franking associated with the distribution. So your trust might say, take 30% to pay tax on that, but that franking credit does not flow to the next beneficiary in certain circumstances. Thank you. Well clarified. Thank you. But yeah, the general consensus that we’re hearing, say, from the tax professional, let’s just say that that includes accountants and the lawyers, is it’s basically one July next year, everything you’ve done prior to that is under the old rules. And then everything after that is now in the new rules. So you’re going to be across the board. So it’d be very similar to when did they introduce CGT and you got pre-CGT assets. So we’re going to have to remember that day in July next year as a defining moment.

James Flaherty
So that leads me onto an interesting question. And one of the things, it’s a double edged sword. I know it’s been talked to death, the AI jobs apocalypse. I’m not going to mention anything about that because we’ve got that wrong. Some feedback from one of the accounting professional bodies was that grads aren’t saying which body I should do a bunch of them, which of them should I join necessarily. The question that they’re being asked more is, is accounting going to be replaced by AI? Is my job as an accountant at risk? If I choose to become a graduate in accounting, will I lose my job to a bot? Which is a very interesting question. If I look at anything that happens with GST and that sort of stuff, that sort of made the software accounting industry kind of got the biggest shot in the arm you possibly could get because they introduced a new tax and happy days. So these new businesses and enterprises were set up, ones that were chugging along. Suddenly everybody had to be far more formal with their tax. So I don’t know the answer to that question. I’m not going to make predictions.

Chris Baskerville
But I predicted that with the incoming zero and mild online type accounting programmes coming in, where the bank feed automatically feeds in straight from the banking data straight into the accounting programme. And by training the accounting programme that, Hey, have a look at these styles of transactions. They are always going to be bank fees. They’re always going to be interest. They’re always going to be a supplier. You’ve got automatic bookkeeping fingertips. And I thought, well, with those softwares coming in and zero was super aggressive. I think they took more than half the industry. I said, bookkeepers are done. Like that’s it. It’s all over. But what happens is bookkeepers just adapted. And so bookkeepers became more than just, Hey, I’m going to keep your books and get your lodgements in. We’re going to add in software that bolts into zero to make your business more efficient and giving business a dashboard that says, well, look, here’s all your metrics. More up-to-date stuff. Yeah. They just adapted.

James Flaherty
Is that another wrong prediction by you and I? It probably was. So there’s a recurring theme here. I don’t think you’re right. So the job modifier, and that’s maybe a message to somebody who’s having that lie awake at night moment. It’s not, am I done? But that old pivot question, what do I do to adapt?

Chris Baskerville
If we take a leaf out of Darwinism, it used to be survival of the fittest was the underlying edge. We probably can add a variant to that, which is it’s survival of the most adaptable now. Yeah. I’m a professional accountant and I have a certain skillset. I absolutely see disruption on the horizon. Absolutely. Our challenge will be, how do we see this disruption and start to adapt to make ourselves better, more efficient, et cetera. And we are currently going through this process at the moment. So, and just even thinking about how this could impact our business, would AI, with all of this information and data on the financials for 10 years, could AI, using some solvency metrics, pinpoint the day where the company stopped being able to pay its bills on time? I’m thinking the answer is going to be yes. And then we go to credibility, which is how do you present this information as evidence? Because at the moment, the courts effectively reject anything created by AI and we want a real expert in, so will the AI’s version of solvency, as an example, match an expert of 30 years who’s seen the numbers? But yeah, I think there’s disruption coming across nearly every industry will be disrupted in some way. So perhaps we just have to learn how to adapt and embrace and move forward and become better operators within our industry. So when accounting is the underlying science behind every business, you have to know your numbers. If you don’t know your numbers, then you’re gone.

James Flaherty
I think you’ve got to know your numbers and be prepared to act on them. And that’s the thing I think about the things I’m doing myself with my own business. It’s like kind of, what am I going to do with this? So prices go up, income, business activities, how do I market for more leads, all that sort of thing. If I’m running a business that relies on search engine optimisation, when over half the people just go to Claude or search for the answer, that’s a whole job that 20 years ago, SEO optimisation, that was a thing for people to do up until not so long ago.

Chris Baskerville
I remember this great teacher at my old high school, and I got into trouble a lot, that won’t surprise anybody. But there was only one lesson he was really trying to teach us in modern history, right? Modern history is obviously just learn the facts and all that. But he said, you’ve always got to be critical of your sources of information. So in other words, it doesn’t matter what you read. It doesn’t matter if you read the newspaper, a book, your social media posts or whatever, you always be critical of your sources of information. And it took me a while to really kind of grapple with that concept until you start having to do research topics to produce an assignment and where you start to learn, oh wow, there’s a bias over here to this author, there’s a bias over there to that author. So where’s the answer here? So what I worry about with people not learning critical thinking and not learning this wonderful brain that we have inside our head is if you are given responses by AI, do you question it and go, is AI actually pulling from the right source? And has it actually summarised the correct? Because if you’re not second guessing or questioning the information that’s coming at you and having that always be critical of your source of information, how are you going to be able to stress test what is real, what is not, and what is the right answer?

James Flaherty
It’s really interesting because you’ve got bunches of people who listen to people on Facebook and all those other sorts of things tell them that it’s a giant conspiracy and don’t believe anybody. And then I plug something into AI and do exactly what it says. So you’re right. So you sit there and go, you can’t have it both ways. Well, yes, I can. So I think you’re right. It is to test, to think, to challenge. It’s sort of that gap in the director or the business owner’s mind between 1 and 2 a.m. in the morning. I know one bloke, he sits there, he just has a notepad by his bed and he’s got a thought in the middle and he writes it down.

Chris Baskerville
Brilliant. I love that.

James Flaherty
He just write it down and then say, I’ll deal with it tomorrow, but I can’t deal with it if I can’t get a night’s sleep right now. And that’s a notepad.

Chris Baskerville
And I like Einstein was quoted as saying, intelligence is the ability to entertain an idea without accepting it. So in other words, you can actually engage in a meaningful discussion with someone, even though I don’t accept your position, I can actually entertain the discussion. That is the definition of intelligence.

James Flaherty
And I think also to respect it, right, to believe it and not shout it down without listening. The shouting down is probably one issues that we’re all facing at the moment is people shouting down without necessarily listening to the perspective before they challenge it. So that’s a different podcast entirely. So the thing that struck me, just so you know, announcements in New Zealand, they’re going to reduce the public service by 11,000 people by efficiencies, mostly around AI. So we know, I think that whatever it is, it’s coming. We know what it is because we’re not predicting it, but we can be assured of change. If you’re in a building or running a coffee shop in an organisation which provides services that are replicable by AI, your customer base may change. May not. Are you thinking about these things? You go, yeah, Chris, James, leave me alone. I’m just trying to earn a buck. I just run my pie van on the side of the road. That’s fine. Hey, I can’t eat pies. Yeah, I can’t eat pies, neither can I. But AI can’t make bad decisions when you’re having a few drinks. That’s right. So that’s the thing. I mean, these things are coming and I’m not asking you to change. Neither of us are saying change everything it is you do, but just think about it.

Chris Baskerville
In the early days, when I mean early days, like I’m going back to black and white television era or even caveman era, early days as in like last year when AI was really starting to gain some traction, the underlying message was AI may not replace your job, but people that know how to use AI will replace your job. So learn it, you know, and we’re all learning. And we haven’t had it on foot for that long that anybody can really say they are the expert because it is still a learning thing. I mean, there’s some brilliant minds out there, don’t get me wrong, particularly those that created artificial intelligence. I think you’ve got to give them credit. But we’re all in this, on this wave, let’s learn, adapt, let’s hear stories, let’s share. But eventually the input, and the prediction is this, you know, it takes the knowledge that we’ve generated over a hundred years will be absorbed into AI within five. So in other words, what it is that’s taken humans a hundred years to get to this point, AI will do it in five. And then it’s quite amazing.

James Flaherty
It is quite amazing. I suppose to round off, I mean, I remember in the early days of the interweb, trying to figure out how you can turn a buck from it. My sense is that this change is even more dramatic and more profound than even it was. So, and that’s possibly only because of that change occurred anyway. So now it’s the whole interconnectedness of what we’ve got. It’s probably a really exciting, if somewhat terrifying time to run a business.

Chris Baskerville
Is it creative destruction or?

James Flaherty
Creative destruction. We might be busy, but by the same token, there’ll be opportunities for the people who think about how this all impacts them. I suppose that’s all we’re asking people to do.

Chris Baskerville
And there are people that are out there actually saying, hey, I know how to implement AI into your business and make it more efficient. Stop using Excel spreadsheets, start using systemisation through AI. You know, the guy’s closely aligned to us and that is his entire message. So there’s people you can talk to to get help.

James Flaherty
That’s right. And I think you shouldn’t be afraid to get help. Righto. I think that’s been really interesting. So I think we might be busy, we might not, but I think the thing is what we do need to do is get busy about thinking about what happens next. Okay. Thanks mate.

124 It's All on You

The Sounds of the Baskerville – Episode 124

Chris Baskerville
The larger the business is, the more access to capital you get, so you typically are playing with other people’s capital.

James Flaherty
Welcome back to the Sound of the Baskerville. James Flaherty here with The Hound. Chris Baskerville, how are you, Chris? Good morning, James. Good to be back. Yeah, it’s good to have you back on your own show. Look, a little while ago you sent me a list of quotes, as anyone would want to quote people. You sent one from John Maynard Keynes, the famed economist. Did he say something like… Was it something like… Well, anyway, probably you sent it to me. Do you remember what it was?

Chris Baskerville
No, if you owe a hundred bucks, you’ve got the problem. When you owe a hundred million, the bank has a problem.

James Flaherty
Oh, yep, yep. So I think the idea is that really… When I was reading it, I kind of thought about it. Clearly not enough to actually remember it verbatim, but I did think about it. In your experience, what’s… And I think we have a lot of people who are either working with small to medium-sized businesses who listen to this podcast. What’s the experience of a director of a business, a small business, who encounters an insolvency event versus the director of like a listed entity or a larger company with a more structured board? And I was really like, is that the journey the same? I mean, but with more money associated? What is that?

Chris Baskerville
No, the obvious difference that comes to mind is when a small business, it’s not just the business that’s in trouble, it’s the person’s entire life. Like, because they intertwine their entire personal financial position, their families into the business. Like it’s all intertwined. Whereas if you’re a director of a larger company, AS6, or even a public non-listed entity, it’s almost like you pull the trigger on a liquidation or a voluntary administration and then just walk away. Because your home’s safe, everything’s all safe. You’re just there almost in a ceremonial position sometimes.

James Flaherty
And how can that be? Like, hang on, I’m completely invested in this. My whole soul, my life, my kids go to school and they know that their mother or their father is an eminent business person who runs this small business and everybody knows. Versus what you just said about the top entity.

Chris Baskerville
Well, this probably ties into financing. Or how the entities are capitalised. So obviously with small business, typically people put their own house on the line. So in other words, I’m putting my house on the line. The larger the business is, the more access to capital you get. So you typically are playing with other people’s capital. In other words, you’re getting series A funding, series B funding. So in other words, you’re relying on the inputs from other people. So when you are the thinking mind of the organisation of something that’s quite large, yeah, the zeros are more in the catastrophe quantum element. But it’s not typically your personal assets that have gone into it. Your personal assets are generally far removed. But small business, you intertwine the family home with the family business.

James Flaherty
And I think we’ve talked many a time about structuring and how you think about the exit that you want to have when you start a business. But you also think about how to structure yourself when you’re going to take on risk. And often small business people don’t think about- They don’t separate risk from asset. From asset. Whereas you’re saying more often than not, in a larger organisation which can afford proper legal advice, they’ve got accountants and lawyers who should be able to support them. Directors and decision makers do typically have a better structure? Or are you really saying that the nature of the enterprise that they’re running partly protects them anyway?

Chris Baskerville
Yeah, it’s a good question. So typically the larger the organisation, the more governance is needed to run it. So in other words, you can’t really run BHP with one person. It needs a board of directors which have a particular area of BHP that they are attending to and have to report in on. And it’s the collective voice of that that steers the ship. And whereas when you are in small business, you represent every element of the business. You represent the marketing department, the finance department, the employment department, and then ultimately you’re the strategic officer as well. So the larger the organisation gets, the more governance should be in place, the more separation of duties should apply. So in other words, we’re splitting the elements that make up the business, giving it to different people that use their specialty to come in. And then ultimately with a collective voice, very democratic.

James Flaherty
I mean, I’m not… I think aspiration should be rewarded. Hard work should be rewarded. So if I’m running a small business, it seems from what you’re just saying, the consequences for me if it goes bad are personally quite dire. But if I run a multi-million dollar enterprise, the consequences are not multi-million dollars worse for me if it goes wrong. In fact, if anything, it’s the other way. Is that kind? It could be the other way. I mean, I’m not putting words in your mouth and you deal with all sorts of people.

Chris Baskerville
So… Yeah, the advantage that people or directors in larger companies or ASX companies and large unlisted entities have access to, again, generally there’s more resources. The larger the company, the more resources is directors and officers insurance policy, which is an insurance policy that sits behind the director that if they did happen to make a mistake in their capacity as a director, there is an insurance policy behind them that generally protects them. That insurance is expensive and it’s also meant to be kept secret.

James Flaherty
Nice.

Chris Baskerville
In other words, you can’t actually disclose that it’s there. Um, so it’s an interesting insurance policy. Now, it’s expensive, it’s kept in secret, that generally protects your larger directors at a larger end, but the small business owner typically doesn’t have the resources to be able to fund that, you know, because, I mean, that’s an expensive policy.

James Flaherty
If you’ve got something like that, is that an issue? If you were a liquidator and you said, oh, hang on, why have you guys got DNO in this situation? Or is that…

Chris Baskerville
Well, if you were a prudent director, right? If there was a policy there that would protect third parties in the event that you made a tactical mistake or even up to potentially negligent mistakes. So in other words, if you were negligent in your duties, the person impacted will have some recourse to some funds to make them whole again. That doesn’t sound cheap. No, it’s not, not. And quite often, because of the way DNO policies exist, you have to make the claim while the policy is alive to activate it. Yeah, of course. Because what typically happens is if you were to resign as a director, then you, or the directors just made a collaborative decision not to have the DNO policy anymore. There is a window where you’ve got to make a claim and as soon as you miss the window, that’s it. The insurance doesn’t have to respond.

James Flaherty
So as a director, I get DNO, this is interesting. I get DNO because if I manage the business poorly or something goes wrong, there’s recourse for people impacted by it if they can prove it. Whereas if I’m in safe harbour as a director, I’ve got a safe harbour that protects me as a director whilst I try and turn the business around because of whatever’s gone wrong. Is that a simplification of…

Chris Baskerville
Yeah, safe harbour will act as a defence in certain claims. Gotcha. Certain claims, right? So safe harbour protects directors in certain ways, right? The most obvious is in self and trading. So that’s the most obvious one. And there’s some credit-defeating dispositions and things like that that it also protects. But DNO is meant to cover the broader spectrum as well. So in other words, and it all comes down to the wording. So you’ve got to get the wording behind the policy because they may say things like, yeah, okay, we’ll protect you on your director duties, breaches of director duties. We might protect you for in self and trading but what we’re not going to cover you for is gross negligence from an OH&S perspective. We’re not going to cover gross negligence on this.

James Flaherty
All these carve outs.

Chris Baskerville
Yeah.

James Flaherty
So if I follow this, if I’m putting everything on the line as a small business director, it’s all on me. If I’m a director of a large corporation, I’ve got, I don’t have to do half the stuff for the person who stays awake at night, worrying about HR policies or whatever they have to do with the latest thing we’ve got to worry about like AML or something like that, anti-money laundering. Am I consequently doing so much a better job as a director? If you, and I don’t know, if I look at some of the people who I encounter as directors of large corporations, I’m not convinced that I’m getting tremendously great value for money. If, am I getting the best of the best if the best and the best are completely in a white knuckle situation at the small end of town? I don’t know.

Chris Baskerville
Yeah. The challenge always for small business, operating business on their own is that they have to be the masters of sales, the masters of marketing, the masters of HR, the masters of IT, the masters, like you have to be, you’re jack of all trades. Obviously the larger the organisation you go, the more you can compartmentalise those services and maybe give technology to someone that is experienced in technology, give HR to someone that is experienced in HR, you know, who would have thought? But so it’s becoming more like that. What I have noticed is this concept of fractional CFO, fractional HR, which means instead of hiring a full-time CFO to work inside your business, you find someone that will give you the CFO skillset on demand or on retainer, not hiring someone full-time, but on a subscription-based type modelling with some extras built in. So in other words, you can now outsource your HR, you can outsource your CFO, you can outsource your IT to different people that have that skillset. But collectively, it all comes back to the…

James Flaherty
And that certainly in the age of AI with people using AI tools to support them to do that sort of job and having a fairly good legal protection if things go wrong, that seems, I mean, because ultimately one of the things about directorship is that you’re still on the hook for these decisions. So as a director of a bigger company, for example, things like workers’ comp or HR, you’re still on the hook for a lot of these things, even if you’ve got a specialist who’s kind of… So I suppose that accountability stays with you as a director. Always, yeah, yeah. You can’t get off the hook just because there’s another $100 million attached to all of the transaction and you’ve got someone who says that they’re an expert. Well, you’ve got a… Well, recent court case aside as a non-executive director, you should go through the detail in sufficient detail. I’m being a bit snarky, but I think there is a question that you should be across the detail of your director of a large corporation, even if it’s hard. Is that the best way of describing it?

Chris Baskerville
Yeah, let’s go to BHP as an example. Obviously, we’re using the largest company in Australia as the… To always talk about the extremes, right? Even though you may be the director and your specialty is HR, you still have to get across the financing numbers. You still have to get across the OH&S issues. You’ve still got to be across all the other elements that make BHP work, like you have a duty to get across your books and records. You’ve got a duty to look after your staff. You’ve got a duty to provide safe environments for people to operate in. So even though your specialty is technology, but if you’ve got the director hat on, you are obligated to understand everything.

James Flaherty
And in fairness to the good people at BHP, of which I think my super fund’s a shareholder, nice job, keep up the good work. But the thing I suppose I was just trying to get back to, so if I’m in the teeth of disaster, the number of SBRs that you and I would see where the director has tried to take a step back, taken on a manager, and it’s just not been run as well. It’s just not worked as well, or the sales bit that they thought that the salesperson that they hired was gonna… The problem that was gonna be solved was not solved.

Chris Baskerville
Well, I’ll give you a classic example because it literally landed in my lap about two years ago, potentially even three now. But a guy with a really good construction mindset was able to automate the installation of kitchen cabinetry to the tune where, with the automation of this factory, and he could install two levels of kitchens in a high-rise a day. So if we’re building a high-rise tower, his production system was that elite that he can go level one, level two kitchens are all installed. Then we go to three and four the next day, five and six the day after that. That’s a humongous amount of output. And he was able to do it with very lean human staff. And you just put the boards in one end of the machine, and with all the programming and all that, and the laser cutting and the robotic arms and all that, out comes your boxed kitchen. Bloody brilliant. The guy’s on a tear. So he’s actually now crushing it because he’s got all these top tier, tier one contracts. Then he goes, well, it looks like I’ve set it up. It looks pretty automated to me. Exactly puts the managers in place. He steps out of the business for three years. When he comes back three years, I’m sure he kept an eye on it every now and then, but he’s not being told the real story. Now, for some reason, they’ve hired two thirds more people than what was required. The numbers are actually now going backwards, and he’s starting to realise that this whole ship has actually taken a massive nosedive. He then throws himself and some of his capital in to basically imagine trying to get the plane out of a nosedive. You’ve just got to pull that nose up as hard as you can to try and get that plane flying again. He jumps into that situation, jumps back into the pilot seat, so to speak, but just couldn’t quite turn the nose of the plane around in time. We could see the improvement coming, but he just couldn’t quite get it out there in time. And that was a real shame because Australia needed guys like this to survive. They needed him to survive because what he was doing was really, really, really smart. So yeah, I’ll never forget that job because I mean, I just looked at it and went, that’s the guy that we need to protect in Australia because he can manufacture things in a very smart, efficient way, still employing people, but just a smart business operator.

James Flaherty
And we might do the next podcast on that particular issue as I think about it. So I suppose if we go back, there’s a few lessons that comes out of this for me. If you are invested as a small business person and so much of about who you are is the company, you still need to think of it as another self, another entity and separate yourself from it, family home as much as you possibly can.

Chris Baskerville
Oh, huge, huge. Yeah, you have to, people out there that are running their own company because their accountant said, I think you should set up your own company, right? You gotta understand your company is a separate human and a separate person rather to you.

So you, the director, you are a natural person. The company is still a person, it’s just not a natural person, but they are two identities. And you have to compartmentalize your thinking that the company is separate to you. So you gotta treat it that way. You gotta look after that company the way it needs to be looked after, very similar to your own child. You should look after your child the way they need to be looked after.

James Flaherty
And I suppose to round off, I mean, if I’m in a modest suburb like in Brisbane and such as you and I, and our business is unsuccessful, you know, there’s definite family and reputational consequences. And if I’m in a leafy inner city, Melbourne suburb or on the edges of Sydney Harbour or looking over the river in Brisbane or I’m looking over the river in Perth, there could be real financial damage to me if a large business goes down. It’s just that you’re in a far better situation to be able to protect yourself if you’re in a larger company than a small. And I suppose it’s not fair, but it seems from what we’ve discussed that one of the many risks that you take if you go into small business is it’s on you. And if you don’t structure yourself properly, despite it being unfair, it will be worse for you. Is that fair?

Chris Baskerville
Yeah, I think, yeah, it just goes back to your everything. All the good and all the bad and it all rests.

James Flaherty
So keep listening. It’s not designed to be a bad note, it’s just to say there’s any number of episodes, transcripts that we’ve talked about how to set yourself up. There’s a bunch of lawyers have been on this show. There’s any number of experts that can talk to you about just some simple things. Just listen, we’re not financial advisors, but just separate yourself. Separate risk from asset.

Chris Baskerville
And if you are setting up a company, you’ve got to recognize it is a separate person that needs to be looked after separately.

James Flaherty
And hopefully you’ll be able to list it on the ASX and get and keep your GST, capital gains carve out. Good luck with that. Thanks.

Chris Baskerville
Thanks.

125 Does Anyone Actually Want This

The Sounds of the Baskerville – Episode 125

Chris Baskerville
The ideal business is one that makes money in your sleep, where you as the business owner have become redundant in your own business.

James Flaherty
Welcome back to the Sounds of the Baskerville with Chris Baskerville. How are you, Chris?

Chris Baskerville
Good morning, James. Good to be back.

James Flaherty
So today I’m going to talk about zombies, and it’s a completely different type of zombie. So keep listening, keep listening. I’m not predicting anything. Stay with me, folks. I’m not saying anything special other than there’s an economist article floating around talking about zombie unicorns.

Chris Baskerville
Zombie unicorns?

James Flaherty
Zombie unicorns, which seems to be that someone’s come up with this great new thing, a unicorn, the idea of a unicorn. It’s going to be sensational. It’s a flying horse with a horn. But in business, it’s going to be a money-making machine if they can just get people to actually buy the product that it’s selling. But we should all invest in it nonetheless. And a zombie unicorn seems to be one that just hasn’t flown, hasn’t done anything. You know, you see zombie unicorns, you see unicorns like flying over rainbows in children’s rooms. This one hasn’t flown. It’s just absorbed a large amount of money, but no one’s been prepared to put it to death. And you go, well, there is an example of what seems like a great idea that people have put money into. And it’s been called a unicorn. It’s in that IT space, and it’s going to make a fortune. But there are people who are venture capitalists and private equity people who put in, and they realize that a bunch of these things are never going to make any money. And you’ve just got to hope that every once in a while, one of them will, or some of them will. And you want, I think, some of them to make a lot to cover off all the other ones. So I suppose when I was thinking about that, tell me what you’ve learned, question without notice, and knowing you, you won’t necessarily answer it. But the question without notice, what have you, think of some of the products we’ve talked about over the years. The guy in the banana plantation.

Chris Baskerville
He was developing a liquid fertilizer from organic material. So take organic material, mix it through a magical time machine with a mystical fusion button in it, and it turns into liquid fertilizer and makes your strawberries bloom and your fruit.

James Flaherty
Okay, so that’s a good product. Sounds like a great idea. Yeah. And then there was some blokes who were doing some stuff around that sort of health sciences, sort of space revolutionary stuff that could help people with disabilities and stuff like that, but couldn’t quite get the money and that sort of stuff. Then there was, wasn’t there the fellow with the bread doughnuts? Like, you know, it doesn’t sound on the face of it.

Chris Baskerville
The non-deep fried doughnuts.

James Flaherty
Healthy doughnuts, yeah, yeah.

Chris Baskerville
How does that achieve it?

James Flaherty
And I mean, good on him. And then we’ve dealt with the inevitable pie franchise. And so, yeah, these are people driven with good ideas. You were talking in our last episode about a person who automated kitchen joinery. I mean, that’s frigging, it’s awesome. And then in Australia, I often say in Australia, it seems if, how does you make, how does an Australian succeed in small business? You give him a large one to start with. I mean, these are the sort of enterprises, well done for having a go. We’re giving you some examples that have come across your desk. Some of those are really good ideas. The bread doughnut, maybe not, but the rest of them.

Chris Baskerville
What is the ideal business? The ideal business is one that makes money in your sleep where you as the business owner have become redundant in your own business. That is the ideal business. Now, whatever that looks like, so imagine a digital product that’s out there on the interwebs where people can buy it and download it infinite amount of times. You’re asleep and the money’s just rolling in the bank.

James Flaherty
Yeah.

Chris Baskerville
That’s the ideal business and that’s what we should all be striving for. And it generates a passive income stream that requiring very little input from you as the owner.

James Flaherty
You can end up buying yourself a very large boat in a business like that.

Chris Baskerville
Correct. So that I think is the ultimate goal of any business owner is to become redundant in your own business because you’ve been able to find a way to generate a passive revenue stream that requires not much of your time. So most of, say, people in the profession are exchanging their time for money. So you provide us with one hour of your time, we provide you with money equivalent to one hour of your time. We charge our time out to the punters for every hour we’re working on your file, we’re charging you for that.

James Flaherty
But there is only one crisp basket.

Chris Baskerville
But there is only a limit to how many hours are there in one 24-hour cycle. Magically, there’s 24 hours. So the maximum, I have a cap on the income that could be earned in that style. But if I have a $1 digital widget out there that could be downloaded infinite amount of times, then that is unlimited upside on that. That’s the ideal.

James Flaherty
That’s the ideal. So hold that thought. A lot of us who run businesses haven’t got that situation where we can afford lunch. We have also talked about the analogy of businesses needing hands-on management. Sort of talk about like holding the snake by the head, because if you hold the snake by the tail, it will come around and bite you. And the example might have been that one we talked about in our last episode with the Kiption cabinetry guy. So steps back, this is automated, this should look, this should just do it all.

Chris Baskerville
Any monkey could run this.

James Flaherty
And then hire some people who end up perhaps being more like monkeys than he’d hoped. And I’ve encountered good people with good businesses who have tried to, for whatever reason, be ill health or need for a change or step back from the business only to discover it doesn’t have the same energy, direction, enterprise. So for those people, you’re still in it. So those people have got a business which it does matter how they spend those 24 hours. And I suppose where I was going with that is if I’m driven by I have got a brand new, I hate the word widget, but I’ve got a new thing that does something fantastic. It tells me that my sleep apnea is okay and it’ll be fine. And I’d pay quite happy money for that, just something that told me that I slept well every night. I’d pay 100 bucks and I’m going to go around and tell everybody to pay $100 for this thing that tells you all your problems will be solved. I’ll probably make a fortune. But apart from that, it’s a great idea. I’ve come to you, Chris, though, because I’ve chewed up all my money. What have I done wrong?

Chris Baskerville
So going back to that founder, I think the really interesting point you raised is that what the founder brings to the business. And the reality for business owners is no one is going to drive your business harder and faster and further than you. So in other words, you can’t expect your management to come into your business and drive it at the same veracity and passion and non-negotiable sort of powers.

James Flaherty
Except that, so I’m sorry to interrupt. So yes, I think that’s true. We’ve talked about this before. You are the driver and energy and the beat rate of the business. I suppose, keep going. But the question I’m asking you is then when you see people who have applied that energy and vigour to something that has been unsuccessful, what lessons can you draw from it? So keep going. I’m sorry to interrupt you.

Chris Baskerville
Yeah. So along the lines of people do pursue ideas that aren’t that good.

James Flaherty
Bread and doughnuts. I mean, the guy probably 24 hours a day probably knew his numbers. The guy in the banana plantation.

Chris Baskerville
We’re making doughnuts that are not deep fried and not using the sort of high carbohydrate version of the doughnut. Great. You’ve made a healthier doughnut. Fantastic. But does the market want a healthy doughnut? Or when we go and eat a doughnut, we accept that it is unhealthy, but that’s exactly why we eat the doughnut. We just don’t eat it every day. So obviously our bread making doughnut guy, he’s no longer around, but doughnut king still is.

James Flaherty
So there’s an appetite for something and not for the other.

Chris Baskerville
Yeah. Not everybody wants to eat healthy. Sure, a lot of people do and don’t begrudge anyone that does want that. But there are certain products that we know are bad for ourselves, but we just want it anyway. Like I’m sure Coca-Cola, didn’t Elon Musk recently say, or his largest tweet on X was put cocaine back in Coca-Cola. He’s basically saying, listen to your market. Now we all know Coca-Cola is not good for you or is probably not the best product in terms of its carbohydrate and sugar content. But occasionally I drink Coca-Cola because in that moment, it is the greatest possible drink I can have in a particular moment.

James Flaherty
I haven’t had my first can today, but I will continue to do so. And that’s not, in fairness, I also like Pepsi Max. But the point that you’re saying is that there’s a need, a want, it meets a requirement. And I mean, that’s different from what we’ve talked about before about, hang on, my business is going down because I’m doing the same thing. This is a different point here. We’re not talking about a business that’s been doing well in the past that needs to have a think about, do people still want it? I think at this particular conversation, I was really interested about the kind of the startup phase where people have mortgaged the house, used the inheritance, taken the redundancy money and thrown it into a breaded, it wasn’t a franchise, but a breaded donut franchise, something like that. Yeah. They are going to work for $2 an hour and they’re going to put all that energy and they’re going to look at you and say, I gave it everything I had. And you can look at them and say, what are you going to say? You can say, did you actually ask anyone if they wanted a breaded donut?

Chris Baskerville
Yeah. Did you do any market research? Who wants a donut made of bread? I’m pretty sure this guy was trying to go head to head with a very famous donut franchise that landed in Australia. Of course, when this other franchise donut company comes to Australia, very novel, he’s got queues around the block. And it’s a wonderful type of donut. Sure, you can’t eat it every day, but it’s still a good donut.

James Flaherty
And some fads come and go, like wasn’t there nitrogen ice cream?

Chris Baskerville
Yeah. So the question is, you could run and you could throw everything behind an idea that the market just does not accept, but you have it in your mind. But in my mind, this is the greatest product known to man, but you haven’t tested it or you are currently testing it because the market is responding. Maybe the market might not be there for that type of product. I mean, there’ll be countless inventions being created, particularly in the digital space, of things that just don’t fly. But then again, you find that unicorn, instead of it being a zombie, it’s a rocket. So it’s a unicorn on a rocket where the market just resonates so much with that and then boom, shanker.

James Flaherty
And so unfortunately, some of this is no science. I mean, it’s sort of like pop songs. There could be a million pop songs, rock music and whatever produced and get something, something captures the attention of somebody and they play it a bit more and it gets, it’s got an earworm and away you go.

Chris Baskerville
One thing I’ve always enjoyed about America is particularly if you’ve traveled over there and you watch their television advertisements, right? And the conclusion I came to looking at the way the American thinking and all that is, you can take a pretty average product, right? Take just a boring pen, take a boring can of something. And as long as you market the absolute bejesus out of it, it will gain traction. Like, and it might not gain traction forever, but it’s going to gain traction. And that might be your pump and dump style product. Same as they do with the share market is, you know, look at SpaceX. I think it started at a hundred odd dollars a share, goes up to 300. And then just as quickly as it went up there, it came, comes back down to its original IPO listing price.

James Flaherty
Okay. Well, that’s good to know. I might have a look at that. So the GameStop, I think, I suppose you’ve got some really interesting thoughts there. Some of it’s about, I need, if this is a good idea and I think it’s a good idea and I’m going to put everything into it, I’m only going to put in as much as I can put into it. And I need to be able to call it when the market’s turned on me, when nitrogen ice cream isn’t as big as the latest next thing. I’ve got to be able to say, hang on, I’ve got to somehow pick the drop. And I don’t know how you do that. How do you pick the point at which the curve starts to fall? Or do you sell it to somebody else as a franchise?

Chris Baskerville
Yeah. Well, again, this is the begin with the end in mind scenario, which is what product or service am I actually offering here? And does it have a long shelf life or is it a short shelf life? So you’ve got to sort of map that out in the beginning. And so as you’re saying, if this product or service I’m about to deliver has got a limited shelf life, like the opportunity only exists for the next five years, well, then it’s pretty clear you’re going to have to run like the clappers to get that business up and running and sell out ideally at its optimal time. If you knew it only had a five-year shelf life, and I guess a classic example would be someone that has developed a particular patent and has only just commercialized it, but your runoff period is you’ve only got three or four years to exploit its exclusivity. Then you better run hard in that three to four years, because guess what happens at the end of the fourth year? That patent now goes to the world.

James Flaherty
So it’s about market, budget. It’s about being really honest with about when you need to jump in and jump out. And some of it’s understanding the risk. I was just thinking as you’re talking, bless them, those people made up, I think it was called a puddle or a pubble or something that combined all of the, it was a box that you could buy. All the subscriptions would come to this one box, like Disney and Netflix and all those. You could have this one central box, Netflix, and it’d all be the one interface. So you’d be able to find your way. And you and I both know, I think probably the one customer that probably bought this thing. So, because no one bought it. So it was a product that seemed on the face of it, a really good idea, but no one bought it. And so, well, not nobody, but like maybe a hundred thousand people, including my business partner.

Chris Baskerville
Well, this final thing might resonate. And I remember hearing it, it might’ve been a TED talk, but the essence of it was this, you will be paid commensurate with the problem that you solve. So if you solve a large problem, you’ll be paid accordingly. If you’re solving a small problem, you’ll be paid accordingly. As an example, if the problem is we need a whole dug, that’s not a very big problem. We need a versus, we need to solve, create some pharmaceutical that stops obese kids exploding by year three. That’s a pretty big problem because kids don’t want it. That’s an extreme example, but that is a big problem if that’s the case. So you’re going to be paid commensurate with the problem that you solve. So find that problem that needs to be solved, that whatever that looks like.

James Flaherty
I love the nobility of that thought. I love the fact that it’s driven by, it doesn’t explain how come those Chinese soft toys with angry teeth on them are making a fortune.

Chris Baskerville
Well, that’s the American style. Take a crap product and market the bejesus out of it and it becomes successful.

James Flaherty
So I think there you go. So you either have the strategy that gets what you’ve got as much as you can and realize how long it’s going to last or solve something that’s got a real payoff and a real demand and test it and test it and change and adapt. Yeah, that’s been useful. I was really interested. So no bread and donuts, no pies, no liquid fertilizer. Okay. Thanks, Chris. Appreciate it.

Chris Baskerville
Thanks, James.

126 Why SBRs Are Losing the Room

The Sounds of the Baskerville – Episode 126

Chris Baskerville
Small business restructuring has obviously dropped nearly half.

James Flaherty
Welcome back to the Sound of the Baskerville. I’m James Flaherty. I’m here with Chris Baskerville, star of the show. How are you, Chris?

Chris Baskerville
Good morning, James. Good to be back.

James Flaherty
Yeah, good. After a little bit of a hiatus there, we all kind of got busy in school holidays. We’ve been talking about SBRs, small business restructures, close to our heart, and we’ve been talking about this sort of a drop-off in not only the number of them that are being put up, but also a drop-off in the acceptance rates. Haven’t we, Chris, just in recent months?

Chris Baskerville
Yeah, it looks like from, based on ASIC’s insolvency statistics recently published, that from June of 2025 until we get to June 2026, we see nearly a halving of the uptake of small business restructuring. And during that period, it looks like there’s been a lower acceptance rate. So what used to be around that 80% mark seems to have dropped to about 60-odd percent.

James Flaherty
And the good people at the Australian tax office have kind of shared some numbers recently about where their head’s at and what they’re doing. And I suppose there’s some interesting stuff. So kind of based on their numbers, end of 2025, there were a whole lot of, there was still a decent number put in. Was it about 800-odd end of 2025? Is it Q2 2025?

Chris Baskerville
Yeah, Q2 2025 is about 831-odd.

James Flaherty
Yeah, happy days. That’s really good. So they’re all going in. So they’re people who are going in somewhere between 1st of October through to the 31st of December. In fairness, the ATO did say, hey, look, we’re on holidays, don’t send us too much if you need feedback. But sometimes if you get a director’s penalty notice and you’ve got 21 days, remember, if you get a director’s penalty notice, you’ve got 21 days to do something. And that doesn’t include trying to negotiate a debt repayment plan. So anyway, but if you look at some graphs there, which we hope that our friends from the ATO might let us circulate, but that drops off, doesn’t it? The acceptance rate sort of kind of falls off a bit of a, not a cliff, but certainly a ski jump, doesn’t it?

Chris Baskerville
Yeah, well, basically it drops from about 85-80% success rate down to 67-66. So in other words, instead of giving 80% of the plans a green light, it’s only two-thirds of the plans now are getting a green light, but it stays consistent rate for basically an entire near financial year, or at least four consecutive quarters. And then it seems to change right in the June 2026 quarter.

James Flaherty
Oh, is it after the budget?

Chris Baskerville
Yeah, magically after the budget is announced in the beginning of 2026, all of a sudden we’re going to now start increasing our acceptance rate. Problem being is that it looks like the amount of small business taking up small business restructuring has obviously dropped nearly half.

James Flaherty
Yeah, there’s a few things that, because one of the things that didn’t come out of that discussion was what’s the average dividend. And we’re talking about dividends in shares, we’re talking about dividends as in how much will I accept? Because certainly, I mean, anything that I’ve been involved in, so I’m interested in your feedback, anything I’ve heard is, yeah, we want more money and it’s going to be more than you might’ve been used to paying in the past. So where it might’ve been 20 cents, now it’s a bit higher. So it’s not only lower acceptance rates, but it’s showing me a bigger amount of money. Is that a fair statement or from your perspective?

Chris Baskerville
Yeah, they released a report and this is about the 18 month mark of SBRs being in existence. Remember, they only came in in January 2021. And of course, after the report was issued, then SBRs just accelerate at a rate of knots. But it was basically showing the average acceptance is for a 20% return to creditors in those first 18 months. And this seemed to be consistent with the way the practitioners were all talking to each other going, oh, what are you getting? What do you think his proposal is good? And that’s not anti-competitive. It’s just colleagues sharing knowledge because we’re all kind of against the same common, not so much enemy, but the same common creditor pool that we’re all dealing with.

James Flaherty
And in fairness, trying to make up some of this stuff, we went along because the legislation was quickly put in, shall we say.

Chris Baskerville
Yeah, with the rampant speed and we’re all trying to play catch that football. But then the word on the street was, no, the dominant creditor that usually receives the most benefit from SBR is now requesting close to the 30 cents in the dollar. So I accept that. I think that’s the same sort of discussion we have with our directors is, look, we used to be able to get away with 20% return is now sort of edging more towards 30%. Now, I’ve gotten successful SBRs away for less than 20 cents in the dollar. Yes, you have. And people have pitched more than 30 cents in the dollar, nearly 60 to 80, even a hundred cents return to creditors. And those plans have also been rejected. So in other words, a plan to return more than where the standard average is, even almost a hundred percent of their money is also being rejected.

James Flaherty
And the industry or the profession have said to creditors and obviously the tax office, just be consistent and tell us why isn’t 60% debt okay? Because if you go into liquidation, remember, you might get five cents, but you’ll probably get nothing. So I suppose what the effect of that is, I want more money and I’m not going to be quite so yes-oriented as I was before. Lo and behold, the numbers go from what, 800 and something, wasn’t it? 800 and something in the end of 20, was that end of 25, sort of goes down from high 700 to now at 300, like basically half. So you have the numbers. So I was just trying to do some really high level maths because you and I’ve talked about this before. What’s the threshold to get these things to make it worthwhile to go through the whole exercise? In insolvency, as you have often famously said, insolvency costs money to go broke. So in this particular case, we’re trying to not make you broke. We want to help you battle on, but there’s fees and obviously the money you’ve got to pay to the taxman. So it costs a bit of money. It sounds a bit disingenuous, but if people come to us with a $100,000 tax debt, you go, look, just pay it. Because it’s not, an SBR is hard to justify economically, isn’t it?

Chris Baskerville
Am I right? So let’s just say, for argument’s sake, that the market value of initiating small business restructuring, to get a practitioner in the door to basically put their hand up to say, all right, I’m going to help guide you through this and give you a one in seven year shot at reducing your company’s balance sheet debts, right? Let’s just say the fixed upfront component is about $20,000, and then there’s a percentage of the pool that is returned to creditors on the back end. Let’s just loosely say that is somewhere, let’s just call that 10 grand as an example, just to loosely give some numbers of context. If you’re coming to us with a $100,000 tax debt, and that could be quite significant for a lot of people, so I’m not dismissing that, but you’re going to effectively pay $30,000 to the small business restructuring practitioner to put your proposal forward for a $0.30 in the dollar proposal, which potentially has a high chance of success rate. So you’re basically spending $30,000 with us. You’re then coming up with the $30,000 to pay the creditor body on $100,000 debt. Well, what benefit have you actually got? It’s really maybe a marginal 40 grand benefit in terms of the debt burden that’s been released from the balance sheet. But when you start talking the average being somewhere around $600,000 of balance sheet debts, getting up to a million dollars, then I’ll tell you what, $30,000 to save what potentially could be $700,000 to $800,000 worth of balance sheet debts, that’s starting to look like a great return on investment, so to speak.

James Flaherty
And I get the taxman’s point. I mean, you sit there and you save your tax and the tax says, well, hang on, if you’re asking me, the taxman, to cut a deal with you on behalf of the taxpayer, which is all of us, and cut your debts by X, you’ve got to have a good reason. And I think that’s not an unreasonable thing for them to say. We would argue though, one of the good reasons is if you don’t do this, don’t let me battle on, get away with this ex-COVID, there’s still COVID debt floating around, there’s debts from cyclones, there’s debts from all sorts of different things, all the things that always happen to small business, they’re still happening, if not only more so, you’ll get nothing, or cents. So tell me if my maths is wrong here. So if we said 350 less SBRs were happening, and we said the average money at risk was $500,000, that’s $175 million of money that’s not even going to liquidation or whatever they do. At risk. At risk.

Chris Baskerville
It’s money at risk.

James Flaherty
Straight at risk. And then if you say to me that- You can get a third or a 30% of that money. I think you’d take it, don’t you? But then the thing is, if I follow the logic of what I’m saying, 175 million, please come, the listeners, both of you, if you do come back to us and say, if my maths is wrong, 175, I don’t know what that number means.

Chris Baskerville
52 and a half million dollars. If that money was at risk in small business restructuring, with an average of half a million dollars for 350 SBRs that are initiated, then you’ve got 175 million at risk. And if all of them were able to give 30 cents in the dollar and accepted, then the return to the creditor body, let’s just also acknowledge the taxman is usually the largest one, it’s 52 and a half million dollars going back into the coffers of the government. So what could 52 and a half million dollars get you? Some would just say, that’s just the current government’s private staff and headquarters. But others would say, well, you might be able to build a couple of schools with 52 and a half million.

James Flaherty
And then it’s interesting because I suppose if you follow that logic, I can get 52 if I say yes. But I’m saying to you, there’s 175 million at risk that’s not even being put forward anymore. So they’re either going to liquidation or they’re doing something else. Let’s assume that some of them are surviving. Not all of them are failing. Some of them might go into voluntary administration, some of them battle on, but I’m pessimistic.

Chris Baskerville
Well, potentially also, potentially the thing about this, remember small business restructuring was initiated and brought into fruition as a response to COVID. So, or at least that was what was being pitched to us, right? Yeah, gotcha. Having said that though, I find the mechanism quite effective for legitimate small business restructuring. I think it’s a wonderful regime. It doesn’t suit every business, but I think the concept of debtor in possession type model and a very speedy outcome, I really like it and a very fixed transparent process. I really like it. I really honestly hope they stay. I’m hoping it’s not going to be a temporary, hey, we’ve solved the COVID equation now, ladies and gentlemen, now we’re going to end as a small business restructuring. I think there’s room to expand the threshold so that you can capture a few more businesses that potentially up to about 3 million and kind of follow the lines of the UK, follow the lines of the USA. Because again, it makes our fixed component of our fees completely economical if we’re dealing with a larger creditor debt pool. But anyway, that’s my so far.

James Flaherty
I think you’re right. I mean, there’s sort of a big step up to a voluntary administration from an SBR based on a fairly arbitrary figure of a million dollars. A million dollars sounds like a lot of money, but I don’t know if you’ve seen a median house price in any country. A million dollars is…

Chris Baskerville
It’s almost like that’s your basic home in an area where no one previously wanted to live. That’s right. You would still pay a million dollars for it. So a million dollars has now become this benchmark of like, meh.

James Flaherty
I don’t feel rich enough a millionaire anymore. So I suppose the point about it, I mean, if you sit down and go, okay, well, who’s that with? Well, it’s policy. And one of the things is that the conferences we were at last week, small business is the backbone of the economy, the employer, people taking risks. You start with a small business and you try and grow it. So everything should be about trying to reward risk as well as manage it. So taking risks shouldn’t include not paying your super. I think we’re comfortable with that. That’s not a risk. That’s just not fair.

Chris Baskerville
That’s robbing your employees of their retirement for them spending their life with you building your business.

James Flaherty
But if you’re being asked to take a punt that requires you to hock your house, you’re taking a risk. Where’s the reward? And sometimes it doesn’t work. And if it doesn’t work, SBR and intent is designed to help you. So I’m saying to policy makers and policy people who do listen to this, you know, if you’re serious, it’s got to be a decent, and in fairness to the tax office, they’ve said that the quality of the reports and the plans they’re getting has improved. So I think we can all say that we’re trying to follow the guidelines that the tax man has asked us for. So if we follow the type of guidelines and we say, here’s the maths or asking us for a consistent commercial, is that right? Commercial reply? Am I being wrong?

Chris Baskerville
Yeah. I mean, obviously we want creditors to say yes to SBR. We, and we really love to know exactly the framework. And when it comes to when the tax man is the decision maker, what is it that you guys want? We’ve got some loose guides, nothing definitive. So we’re taking our best educated guess as to what we need. And when it does come to where the tax office is the most influential deciding factor, we anticipate that they’re going to need more information than what we put into the report that the ordinary creditor would be happy with. So we have to upload a consistent amount of documents going back a few years in certain circumstances to front load it so that effectively the tax office doesn’t have to ask questions of us right at the death before the vote is due, which does happen from time to time, because we’re basically saying we anticipate the answers, sorry, the questions you’re going to ask us. So here’s the reporting that we think you need to help make an informed decision. But definitely when the tax man is the most influential deciding factor in SBR, we are typically going above and beyond what really should happen in small business. Other creditors just go, I accept 30% of my money back is better than zero. I accept that position. There’s my yes vote. That’s a commercial way of thinking. The opposite is a policy way of thinking.

James Flaherty
That’s a fair point. So I suppose where do we end up? We congratulate them being the major creditor body, creditor for communicating with us and sharing what they’re doing. But we ask them again, consistency, and there’s money on the table that you can get for the tax man, that you can get for the taxpayer. And so I think one of the things I did notice, one of the slides they just brought up was that, and I don’t know if I can make this statement, but I’ll say it, the amount of tax that was at risk or overdue seemed to go up in the last part of this year. And I just wonder, if you say no, more and less people are incentivized to do them. Isn’t that kind of one of the contributing factors to that? Anyway, I’ll leave you on that note. Thanks, Chris. A reminder that these podcasts are general in nature and do not constitute advice and they don’t take into account your personal circumstances. So if you think though that some of the issues raised might apply to you, you should seek qualified financial, legal or counselling advice.

127 7 Lessons from ASIC's Biggest Restructuring Review

The Sounds of the Baskerville – Episode 127

James Flaherty
And how would that contrast to liquidation? Ninety percent.

Chris Baskerville
Ninety percent. Ninety percent end up with what we affectionately call doughnuts, also known as zero percent.

James Flaherty
Thanks for tuning in once again to the Sounds of the Baskerville. James Flaherty again here with the great man himself, Chris Baskerville. How are you, Chris?

Chris Baskerville
Morning, James.

James Flaherty
Hey, Chris. Good to see you on your own show. Tell us about this really interesting thought piece that Jirsch Sutherland, your firm, have put to the market for us to all absorb.

Chris Baskerville
Yeah. So ASIC have done the biggest review ever of voluntary administration.

James Flaherty
Right.

Chris Baskerville
Separate to small business restructuring.

James Flaherty
Which we talked about last week.

Chris Baskerville
That’s right. And it was famously released in the ASIC Report 836 for those that are playing at home. And it analysed voluntary administration and deeds of company arrangement between 1 July 2021 and 30 June 2025, which is effectively four financial years. Yeah, righto. And then we’ve, I mean, every man and his dog in the game is obviously giving their three cents worth on this. So Jess said, well, why don’t we give seven cents worth and see if we can. It’s not a bad dividend. Let’s see if we can get a better return to the punters that are out there reading this. So we came up with effectively seven lessons, which we will be soon releasing throughout relevant channels.

James Flaherty
So we’ll put this podcast, we’ll go out in tandem with that, which is great. So seven lessons from ASIC’s biggest ever review of voluntary administration.

Chris Baskerville
Over four financial years. And it’s a review of 5000 companies.

James Flaherty
Wow. Okay. So it’s a decent set. So there’s five, I mean, the first thing that just strikes to mind, there’s 5000 that are reviewed in the period. So that’s a fairly decent number anyway, isn’t it? Yeah.

Chris Baskerville
Yeah. Well, something’s obviously done a deep dive here and you can tell by the content of the report, which, yeah, it’s quite dense. But yeah, I mean, the high level summary is it still presents voluntary administration as a program is still an effective restructuring tool here in Australia. And at one point was really the only major restructuring tool available to the directors.

James Flaherty
Right. So don’t tell us the end of the story at the beginning. Let’s go through the seven lessons, shall we?

Chris Baskerville
Begin with the end in mind.

James Flaherty
Yeah, that’s right. Yeah, yeah.

Chris Baskerville
So the key takeaway, lesson number one for us is larger businesses were more likely to restructure successfully. So, you know, 48 odd percent of the data analyzed were businesses with liabilities in excess of $10 million entering into a dock up.

James Flaherty
And I suppose, what are your lessons from that? I mean, you’ve got to be, well, SBR has taken a lot of the less, not less sophisticated, is not the right word, but SBR is the right thing for businesses that might have done this in the past, which we’ll go on to. But this is saying that you’ve got to be of a certain, the bigger you are, the more chance you’ve got the resources and rationale and story. Is that right?

Chris Baskerville
Yeah, that’s right. It’s the access to capital and advice as well and options. So like what I’ve experienced is when you’re dealing with larger companies, generally emphasis on governance, more advisors to the board. So that’s an advantage that small business doesn’t quite have. And of course, you know, sometimes you can be too big to fail sometimes, which is, you know, you’ve got such a debt burden, yes, but you’ve also got some decent assets in there. They may not be capable of turning into cash anytime soon, but you’ve got some assets you can leverage from. So yeah, more opportunity for larger business. Having said that though, 15% of the VAs were for companies carrying debts less than $250,000. So it was still a tool and it’s still a tool for small business.

James Flaherty
This is an episode in its own right, because what do I do if I’ve got debts over a million dollars and VA and I’m not particularly, don’t have the large amounts of money. These other ones we were talking about there. And then if I only owe $250,000, why aren’t I doing an SBR? And there’s a whole bunch of reasons, but that’s an interesting point to consider. Okay. Well, so in general, the bigger you are, the more chance you got, but not necessarily. Okay. What about number two?

Chris Baskerville
So number two is the restructuring landscape has changed. Where voluntary administration leading up to COVID, so we’re talking 2001 all the way to 2019. So in that year before the infamous COVID comes in, voluntary administration accounted for about a third to 40% of all external administration. So it was a large chunk of the pie and now that has dropped to 10%.

James Flaherty
And that’s because they went to SBR?

Chris Baskerville
Yeah. Because of the introduction of SBR. So in other words, giving the directors a second alternative now. So instead of just being VA being the dominant one or the only one, we now have small business restructuring. So in other words, we’re now able to say, all right, companies with debts less than a million dollars, you have your own express lane for restructuring.

James Flaherty
Yeah, gotcha.

Chris Baskerville
Those are obviously in excess of a million dollars. The existing regime is still there for you.

James Flaherty
And your sales story, I suppose, if you’ve got your two choices, well, SBR can be cheaper, but not always, as we’ve talked about in the previous episode, depending on what the amount that you have to put forward is. But there’s reasons why you’d do both. And again, it sort of talks to having a bit of a deeper dive into it. But so that’s interesting that they’re still going. So SBR is still, is only part of the story. And the bit I was trying to sort of get around in my, are more companies doing some type of restructure than pre-COVID against just going into liquidation or some type of sort of, you know, formal liquidation where the assets get sold and it all falls to pieces. Don’t know necessarily, but were you saying there’s more companies in, there’s more now in some type of formal process than there were pre-COVID or?

Chris Baskerville
Yeah, well, 2025 and obviously 2026, you know, we’re still above GFC level insolvency activity in a corporate landscape. So, you know, what’s that? 12 to nearly 15,000 companies per year. The average is around about eight to 9,000. That was the average. It was about eight to 9,000 companies a year using external administration. But now we’re definitely in that 12 to 15,000 range. So to round off, there’s a lag typically. And look, the asset data does show that as an example, just briefly, let’s just say the GFC hits the world around 2008. Um, it’s not until 2012 that you really start to hit that peak, uh, insolvency as a result of it. So, and the same, same pattern we’re starting to see with COVID is yes, COVID, uh, hits us all about 2020, but it’s not until 24, 25 that we’re really starting to feel the impact from a, an insolvency perspective.

James Flaherty
Yeah. Right. Okay. And then so, um, interesting, but another thing took me through this number three. Is this a good statistic?

Chris Baskerville
Uh, lesson number three being nearly half of voluntary administrations did result in a deed of company arrangement. So, uh, loosely about 44% of those companies entering into voluntary administration, um, there was a deed of company arrangement behind it.

James Flaherty
And is that a good statistic from your perspective?

Chris Baskerville
Uh, yeah, I think it is. Yeah. I mean, well, one is that’s, that is a deed of company arrangement can be, and we’ll get to that in, in lesson number four, but, but you’re, you’re keeping a business alive or we’re selling a business, uh, as a going concern. So in other words, we’re, we’re trying to keep that business alive or we’re getting the business in the hands of someone that might actually be able to run it a bit better or has better capital behind them. Um, and in a few other cases is, this is my version of a compromise with my creditor body that I wouldn’t be able to achieve any other way.

James Flaherty
I suppose the question in my mind, well, wouldn’t it be better if it was 54%?

Chris Baskerville
Well, but also you got to think about also sometimes we get appointed as a voluntary administration tour. And the first question we ask is, are you going to propose a deed of company arrangement? And all they’re really saying to us is no, that was just one of the options to avoid. Uh, the creditors liquidated from coming in within a certain period of time.

James Flaherty
So we wanted to get onto the front foot. We wanted to get on the front foot and have, um, appoint somebody who at least has got some commercial focus and understanding. That’s right. Blah, blah, blah.

Chris Baskerville
We’re, our head’s on the chopping block anyway. So in 30 days we, we die by someone else’s hand. So we would rather pick our own executioner please. So, so that’s probably not the most effective way of voluntary administration.

James Flaherty
And that’s, is that, that’s not an abusive process or is that’s just using, it’s just using one of the levers that is a legitimate path that people can take.

Chris Baskerville
Yeah. It’s, it’s a, it’s, it’s in, in some cases it was kind of the only, only option a director could take. So if a director did not take positive steps, then the creditor decides the fate of the company.

James Flaherty
We might have another, that’s another podcast in its own right. And then anything else in this, uh, learned lessons?

Chris Baskerville
Um, yeah. Lesson number four is, um, there isn’t just one definition of a successful restructure. So it comes in, in what we, what we say is about three different reasons or three different outcomes is one is, is half of the, uh, deeds of company arrangement or voluntary administrations that were started. We were preserving, uh, continuing trading business. Um, 22%. So nearly, nearly half was preserving a trading business. 22% was involving a business sale as part of the restructuring.

James Flaherty
So you said, okay, I can’t save. I’m going to sell this in a voluntary administration for a bunch of reasons. And I’m not going to continue on, but some, the good bits are being sold. Is that sort of what you mean?

Chris Baskerville
Yeah, loosely. And the common ones that, um, I’ve been involved in, it’s more without voluntary administration, the business is carrying a lot of, um, a lot of dead weight and a lot of, uh, uh, sort of debts that just can’t get it on top of. So the use of a deed of company arrangement is to effectively clean up its balance sheet. Um, reorganise, uh, either the deployment of capital and work out what assets we do want and which assets we do not want. And therefore you, you’re actually selling a neat package to whoever the purchaser is.

James Flaherty
We haven’t done podcasts on this sort of thing before, but it’s probably worth revisiting again, just in terms of, for example, when it’s not just about the debt and why you do it in voluntary administration rather than trying to sell it beforehand. There’s a whole bunch of reasons why you’d do that. So then, um, talk me through this well-structured proposals, lessons number five.

Chris Baskerville
So, so the question, uh, obviously if we’re not selling, um, a business, which is generally where most of the money would be coming from in, in first instance, or you’re not trading a business where in theory, if you’ve got a business that is profitable generating positive cashflow, it’s just weighed down by a whole heap of legacy debt. Nearly, nearly two thirds of proposals for a deed of company arrangement involved a third party coming in with funds to fund the deed of company arrangement. So in other words, the, the money and the property isn’t coming from the company. It’s coming from a third party. Now, why that can be really powerful in a restructuring is because the question that creditors will often ask is, well, if the company was capable of paying all this money, why doesn’t it? That’s the obvious one. Whereas we are saying, well, first of all, a third party is delivering the money. And if this third party did not deliver the money, you’re not going to get access to it in the event you pick liquidation. That’s right. So in other words, here is effectively a white knight situation. To your problem. And, um, and the other, the other element, and this is, this is actually a key difference between voluntary administration and small business restructuring is involuntary administration related party creditors can vote. In small business restructuring related party creditors cannot vote, but must receive the benefit of the pool that is being created. So, so in small business restructuring, the related party creditors can’t have a say on the vote, but they must receive the benefit. Involuntary administration is almost the exact opposite. The related parties can vote and it, and it’s, and we always say related parties should not benefit from the fund that is created. So in other words, you related parties, great, um, put your hand up to vote it in, but don’t take any of the benefit from the fund.

James Flaherty
So yes, you get the power of your vote, but you can’t benefit from the vote you’ve just cast directly. Other than the general fact, if you’re a related party and you’d like to think that the whole idea of voting in the first place is because you want the deed of company arrangement to get up. Gotcha.

Chris Baskerville
And the deed of company arrangement is, is I’m not going to say completely customizable, but it is customizable. Whereas, uh, small business restructuring is so rigid.

James Flaherty
Yeah.

Chris Baskerville
It is a rigid process. I’m not saying that’s a bad thing. It’s just rigid, right? But voluntary administration, sorry, deed to company arrangement can build in flexibility or alternatively you can exercise certain powers that gives creditors the right to vary and amend the proposal they originally accepted.

James Flaherty
Yeah, this is fascinating. So then, and then say, um, what I was really interested about that was that, um, there are times and we’ve talked about this before where it’s good and bad that related parties can and can’t vote in voluntary administration. There’s almost a podcast in its own right. We’ve talked about them before and Sarah, but then, um, okay, what else have we got there, Chris?

Chris Baskerville
Uh, lesson number six is, um, uh, when the deeds of company arrangement succeed, then obviously creditors benefit. I mean, that, that in theory, that is sort of in theory, in practice, that is exactly what we are here to do is to act in the interest of the creditor body. So on our review of ASICs, uh, report 836, we see, uh, 81% of dockers that were entered into were fully effectuated. So let’s just go 80% loosely of dockers that begin actually complete. So that’s not bad. Yeah. So that, but that basically means only one in five don’t make it. So in other words, one in five terminate or potentially a condition precedent wasn’t met.

James Flaherty
Done the, put the docker, been voted, put it up four times in five.

Chris Baskerville
They, they, can they complete?

James Flaherty
Yeah. And then the things that, yeah, there’s always reasons why they won’t. And you just give us a couple of reasons why it wouldn’t, why wouldn’t one get up. Couldn’t sell the business or?

Chris Baskerville
Uh, that, that could be one, or, uh, what we say is a condition precedent wasn’t met. Um, so as an example, um, let’s just say the transfer of a business from party A or sorry, the sale of a business from party A to party B required the transfer of certain licenses as well, or that, that the purchaser buying the entity was able to obtain a certain license and they just don’t quite get the license. That would be an example of a condition precedent, um, for that coming into play.

James Flaherty
And that could be professional qualified, like a professional or like a, you know, industry certification or something like that or anything, isn’t it?

Chris Baskerville
Or as an example, um, uh, one that we’re looking at is, uh, imagine, uh, and you usually see this in mining, which is we’ve raised a whole bunch of money from mums and dads. We’ve gone and speculatively gone digging for gold. Um, we’ve missed it. In other words, we’d never found gold. The shareholding is effectively worthless, but someone sees value in acquiring that company, but only if they acquire all the shares in the company. So that would be another example of, I will tip my money in to save most of you creditors, but only if I can get the, the entire shareholding. Now, as most of us know, you need court to ratify that.

James Flaherty
Yeah. Okay. Uh, interesting, uh, one of the 20, 20 odd cents in the dollar is the average dividend. That’s SBR country.

Chris Baskerville
Yeah, correct. And 90% of these company arrangements, um, 90% resulted in a return to unsecured creditors.

James Flaherty
And how would that contrast to liquidation?

Chris Baskerville
The 90%, 90%, 90% end up with what we affectionately called donuts, also known as 0%.

James Flaherty
0%. So clearly, clearly worth, uh, if one of these is put up, it’s worth counting. Okay. So what are, what have we learned here? We’ve learned it’s good to do it. The landscape’s changed in the world of SBR. Uh, nearly half of them resulted in a nearly half or just under half come up with a, with a plan. Um, the plans can be all sorts of different things. Uh, and obviously the better that they’re done, well, that makes sense. The more structured, less than five, the more better structured they are, the more chance they are likely to succeed. It’s not unreasonable. Um, but the big one, number six is, DOCAs succeed, creditors benefit. So what’s less than seven?

Chris Baskerville
Is don’t wait. And I guess this all goes back to the theme.

James Flaherty
Who’s that message to as well? Sorry.

Chris Baskerville
That message would be given to, uh, the directors that are out there trading a business and you’re sort of teetering on the edge, which is like, I feel like, uh, we’ve got a problem. Um, but I don’t know what to do about it. Then we always say, and it’s been the message I think throughout all of our podcasts is you need early advice or early intervention, because if you get the advice early, you have more options. And generally you’ve just gotten maybe enough resources to make a restructuring work, but, but equally you’re maintaining what I like to call creditor goodwill. So at the moment, your creditors are tolerant and you haven’t lost them yet, but the longer you continue to dig a hole for yourself and you end up in this nose dive for your business, you’re now losing your creditor goodwill, which ironically, when you try and put a proposal to them and ask them to accept lesser amount of money, good luck doing that to people that hate you. Yeah, that’s right. At least if you keep the credit goodwill there, that they’ll understand. But also your options, you know, uh, they’re the earlier you get in the, the longer you leave it. Um, and it’s not saying we can’t pull a miracle out of a head of our butt sometimes, but the longer you leave it, the less options you got.

James Flaherty
And we’ve said that a lot, but one of the things that’s interesting about this is armed with, uh, you know, we’ve said that, we’ve said that for what, six series. I like to think some people have listened to us and actually gone a bit early, but armed with a document like Josh have put together, which shows a director, Hey, this is, this is something you can do, but it’s also something they could share to a creditor and say, Hey, I’m doing this because this is likely to be a better outcome for all of us. So good document. Well done, you guys. That’s, uh, that’s going to be really good. So, um, I’ll be looking forward to this getting out and we’ll certainly, uh, throw this podcast into the mix because the more people who learn about a good Australian invented process. Wasn’t it the survey?

Chris Baskerville
It was a result of the Harmer report. Um, I think back in the late, early nineties, basically saying, um, the Australian landscape prior to the Harmer report. And when companies law was state-based, not federal, but made for a really clunky system and it involved the court being one of the overseers. So it’s sort of, it really slowed things up. And Harmer said, I reckon we’ve got to take a leaf. And, uh, instead of making these court driven processes, make it a creditor driven process and have someone go in there independently and say, right, here’s your proposal. Here’s your deal. Let’s let’s let’s dance.

James Flaherty
Okay. A good Australian product. Well done. Let’s go. Thanks, Jack. Thanks. A reminder that these podcasts are general in nature and do not constitute advice and they don’t take into account your personal circumstances. So if you think though that some of the issues raised might apply to you, you should seek qualified financial, legal or counselling advice.

128 Ten Million a Year: The Case for Starting a Business

The Sounds of the Baskerville – Episode 128

Chris Baskerville
Sells that business for nearly a hundred million, if not more than a hundred million dollars, ten years later.

James Flaherty
Welcome back to the Sound of the Baskerville. James Flaherty here with the man himself. Chris, how are you, Chris? Good afternoon, James. Good to be back. Gee, does that happen quickly this afternoon. So, Chris, we’ve talked a lot about, you know, directors over the years. We’ve talked about, you know, how complicated it is to set up a business. We’ve talked about how you should start with the end in mind and how do you get out of this thing when you start it. We talked the other day about a whole lot of tax changes, which make, and then also the fact that they’re focussing on trusts and new offers. You know, you’ve talked to us in previous episodes about keeping, you know, being tax effective and personal asset protection effective is not necessarily the same thing. There’s a whole lot of stuff you’ve got to know at the beginning. And the question I’ve asked you every season, how many people phone you up and say, this isn’t something my accountant set up, and I don’t understand how it works. Still get that? Yeah. Are you annoyed with that? I know I am.

Chris Baskerville
Well, yeah, that’s the thing. There’s a, there’s a limit to how much you can be sort of ignorant in business where you’re sort of pointing the finger at someone else because by taking on a director role, you are, you know, deemed to assume all these duties, whether you like it or not. And you are deemed to know the laws around business, whether you like it or not.

James Flaherty
And it’s interesting because since we’ve started this, things like personal liability for supers started during this show. And then obviously the, the, the getting your lockdown DPNs are fixing for late lodgements happened during the life of this show, I’m pretty sure. So there’s a whole lot of stuff that’s made it even harder to be a naughty boy, not saying anyone wants to be, but if you’re late or you’re slow, the structures and the strictures are harder. Is that, would that be true than even it was when we started this? Or is it feel like?

Chris Baskerville
Yeah, the ATOs are absolutely on the hammer with every variation of enforcement that they can bring, which is something most of us haven’t seen in our respective lifetimes in, in this game. And the most recent WTF moment was the actual threat of criminal prosecution for failing to lodge income tax returns, meaning jail time and horrendous fines are in store for certain persons.

James Flaherty
And this is really interesting because, um, if you’re running a small business, um, and certainly in, and we’ve talked about this in a previous episode about this anti-money laundering has come in, uh, tax agents are talking about the obligations to them to, um, dobbing a dodgy person, even if they’re not sure. There’s a whole lot of different rules that are laid on to other professionals and to people owning a business as a director, for example. These are the people who’ve gone to the trouble of setting up a company, mind you, Chris, you’re a trustee in bankruptcy. How many people run a mowing French or like a mowing business? How many people run a mowing business who, um, don’t even have, um, any structured orders, goes in the bank account in and out?

Chris Baskerville
So, uh, I guess is, is the real question we’re angling for is, is there still an incentive to go into business?

James Flaherty
I think so. And, and, and if it is to you, you answer whatever question you like. So why don’t you answer what you want to answer, which is all right. That’s what there’s like, I think it’s two questions, isn’t it? Why would you bother? And if you’re gonna bother, what shape should it have when you start it now? And this is a different answer from say episode series four, as far as I’m concerned.

Chris Baskerville
Hmm. Business is not easy. Right. And I think it, it, it in itself is a barrier to entry, which is this process you’re about to go through is not going to be an easy process, right? Super complex, lots of rules, lots of regulations, lots of things to navigate, right? That’s your, you know, compliance, legal landscape and all that. But if you get it right, and if you build a good solid business, then in theory, what you are actually building or in practise, what you’re actually building should be a cash generating machine that does not require your time to produce that cash, which means it’s freeing up your time to do whatever it is that you actually want to do. Like that’s the way I see business. Or, and I guess you can, by extension, you could say investments in cash generating investments also do the same thing. But that in business, that’s effectively what you’re trying to do. So what is the most valuable thing here for a business owner is time. Can I get my time back? Because here’s your alternative. Work nine to five for someone for the rest of your life or try and build something, build an engine, build a machine that can generate the cash to free your time up. Now, but to get to that point is not easy. I mean, first of all, you’ve got to find a product or a service that’s in demand, that someone wants. You then need to produce that product or that service for less than what you receive in revenue. So in other words, we sell a widget at a dollar, but it only cost me 10 cents to make the widget. So now we’ve got a profit. We want to be turning that profit into cash as quickly as humanly possible, i.e. when you make the sale, you get paid. That would be such a fantastic model. Who would have thought that’s already happening already on the Internet? And then that gives you your shareholder value. And I think we’ve already said the purpose of business, really a business owner’s goal should be to become redundant in their own business.

James Flaherty
And maybe business owners who do listen to this would say, well, hang on, Chris. I’m here because I love it. I want to be in it. It’s part of me. It’s part of who I am. And a lot of business owners would say it’s a very long path to make yourself redundant of your own business, especially because so many of them, to use that example I’ve talked to you about before, where they say if you hold the snake, if the business is a snake, you hold it by the head. Because if you hold it by the tail, it will come and bite you. If I talk about that as either step back and preside over my empire phase, that would be a lovely place for many business people to find themselves. If I think about, say, people who we talk to in the market who sell businesses, often the business owner is working in the business themselves, wants to work out or wants to retire and take some of that. Take that equity that they’ve built up over time with a view to hopefully I can retire on this.

Chris Baskerville
Yeah. Well, that does lead to an interesting problem that is starting. Sorry, it has started to emerge already, and it can only be exacerbated over the next, say, five years. And it will be exactly that, the baby boomers that began some element of a business that are reaching that cash out and retire phase. And the problem that they will have is there’s no successor. So there’s no one coming behind them that is going to take over. The kids don’t want to take the responsibility. The kids probably don’t want to work. The kids have probably enjoyed the fruits of the labours of the first generation to produce the benefit for the second generation and don’t want to take it over. So now you’ve got baby boomers reaching that retirement phase where there’s no one succeeding them. So how do you get out of that business? Well, you could try and sell it. And certainly if the business is capable of generating its own independent cash in the absence of the owners or the founders or the directors, brilliant. That means you’ve got a saleable asset because you’ve effectively created an ATM machine. But if that business is entirely reliant on the directors, right, means the directors are the asset, not the business. So how much is that business worth? Sure, there might be an earn out over a period of time as you transition the business, great. But that’s going to be an interesting thing. I’ve already seen businesses that basically were reasonably good businesses, but they had to go into some form of external administration because no successor. We’ve tried to flog the business on the open market. Nobody wants it. No one sees value in it. And I don’t want to be here anymore. I’m literally shutting the doors.

James Flaherty
Yeah, shut me down.

Chris Baskerville
Just shut it down.

James Flaherty
And that’s a year, that’s a lifetime of love and work. And I mean, this is a thought question without notice. You don’t have to answer it. But I mean, in this popular stage of anti-immigration where we’ve got these boomers who have retired, or getting to retirement age, but might have put the kids through uni and they’ve all got good and interesting jobs that aren’t maybe as uninteresting but profitable as dad and mum’s business was. Do we need to get people from overseas to buy some of these things? Just a question. I don’t know. But I mean, because there’s lots of money around. There’s people in super, but you can’t really invest super money into a small business. So someone’s got to have money to buy or get money from a bank to invest in a business. None of these things are particularly easy.

Chris Baskerville
It’s difficult. So you’re right. So then that comes back to business, right? Are you really buying a job? So as an example, I can’t stand working for my boss, whoever that boss might be. I’m sick of the nine to five and being told what to do. I’m going to buy Insert Franchise because they’ve kind of already created the formula for me and they’ve guaranteed me some element of success. Brilliant. Brilliant. I’m now in business for myself. But are you in business or have you just swapped the nine to five job for a nine to nine business now? A business that almost does not shut down.

James Flaherty
That’s right. It doesn’t shut down. And if it’s your job, yeah, it’s your baby, you own it. You can’t switch off. And if it fails the franchise, we might take it off.

Chris Baskerville
I love that. My old man said, he said, you know, the beautiful part about being in business is you get to work half days. You just have to pick which 12 hours you want to work.

James Flaherty
That is right. And so I suppose, okay, so we’re not selling it, but we know that there’s people who go and start an Insta business as a side hustle. We’ve had the great Duncan Perkins talking about the tax implications of side hustles on previous episodes. So it’s probably worthwhile whatever Duncan’s up to these days coming back in. But there are things that sort of form into small businesses. Brisbane’s got great examples of where people have got together, have got a common idea and built something really interesting. So entrepreneurship is alive and well, I think.

Chris Baskerville
And you want to encourage it. And, and, you know, I still have my baseline level of assumption that I sort of came to, you know, just wandering the earth and understanding that the landscape of the world I live in is I still maintain business owners make all the money. Now, all the money might be a stretch, but basically business owners are the ones that have worked out how to create cash out of almost thin air and to maintain the lifestyle that they actually want. Obviously, the offshoot to that is smart people should be using the cash generated from the business to then go and invest. And again, we’re not providing financial advice, but you’re generating cash to invest because long term your investments is what ultimately builds your wealth and your cash into retirement. But yeah, I mean, business is, it’s not easy, but is it worth it? That’s the question. And, and there are people that absolutely want to be in business because they’re chasing that wonderful dream. But there’s also people in business that just can’t work for anybody. So they have to be in business because they just can’t be an employee at all costs. And we know a few of those people in the house.

James Flaherty
So I suppose there’s a number of reasons why you’d go in. You can’t work for somebody else. No one else will employ you. It’s just, and as I’ve said, keep on thinking of wise words. A business owner in Sydney said to me years ago, yeah, she lived in Sydney. So she would go, well, you know, if I work for somebody, I’ll have my holidays in Queensland. If I work for myself, I can go on holiday in Europe. Yeah. And that’s the upside.

Chris Baskerville
Well, I’ll tell you, this came across my desk recently, but one of my lawyer colleagues, their client had taken the risk of buying a business that was subject to voluntary administrators being appointed. So, and let’s just say the investment was about half a million bucks to acquire a business that was in distress, purchased from an administrator. That same person, 10 years later, sells that business for nearly a hundred million, if not more than a hundred million dollars, 10 years later. Now, if that is not the critical incentive to get people into business or the reasons why you would not, sorry, reasons why you would want to be in business. Well, that is, that’s the game. That is what is on offer to people that get it right. And obviously there was a huge risk taken right at the beginning, but the person obviously had a vision and a strategy and a way forward to then ultimately end up.

James Flaherty
That’s an episode in its own right. Because it’s really, because you think about it, the capital of the people who have invested in that first business has been much diminished because it’s now in VA. It’s now in voluntary administration. So, a lot of that money’s gone. So, if someone can buy, it’s a bit like those people who bought those road tunnels after everyone had lost their skin, lost their shirts. There’s one road tunnel in Sydney that went from nowhere in particular to nowhere, that cross river one. I think some people did their shirts on it. Eventually, the third person who bought it clips the tolls at each end. He’s effectively paid next to nothing. Happy days. Because he doesn’t have the capital cost. He’s just got to pay a reasonable amount. If he has that as a head start. Then he’s got a great chance, hasn’t he?

Chris Baskerville
And then let’s think about this, right? So, amortise that example of selling our business at $100 million that was worth $500,000 at the beginning over a 10-year period. If you amortise the benefit, every one year this person worked in the business was worth $10 million. Now, tell me anybody on the planet that has a job that pays $10 million a year. And sure, there might be outliers and exceptions, i.e. major financial hedge funds and insurance and all that. But, I mean, that’s what’s on offer. That is what’s on offer in business. So, here I am. I’m sometimes referred to as the grim reaper, the toe cutter, the corporate undertaker, smiling assassin, insert, whatever adjective people wish to describe me. But again, I am in my heart of hearts pro-business because I do see that it is a game changer if you get it right. Some people have to fail a few times before they get it right. And I’m always encouraging people to get back on the horse again.

James Flaherty
There’s another episode in that, not for today. Let’s talk about, well, let’s have maybe another bit of a revisit on how to actually set yourself up then. I think this is why you set this whole thing up, which was what lessons and what insights can you offer from your experience so people can be successful next time around or make sure they avoid the pitfalls. Thanks, Chris. No worries. Appreciate it. A reminder that these podcasts are general in nature and do not constitute advice and they don’t take into account your personal circumstances. So if you think though that some of the issues raised might apply to you, you should seek qualified financial, legal or counselling advice.

129. 500 Companies, One Collapse

The Sounds of the Baskerville – Episode 129

Chris Baskerville

We don’t feel like spending our money. So who’s that then going to hurt? That hurts all your hospitality.

James Flaherty

Welcome back to the Sound of the Baskerville. Been a bit of a while, hasn’t it, Chris? How are you, Chris?

Chris Baskerville

Good afternoon, James. Welcome to the afternoon edition.

James Flaherty

Yes. Well, I’m not, we’ve put up a recent one, but yeah, we’ve been busy, haven’t we, Chris?

Chris Baskerville

Yeah, look, the last few weeks have just been insane. And yeah, just one day. It is a day in the life of any administrator is one day, we started Monday, we went down to Mullendena and had to terminate 22 staff of a factory that specialises in marble, beautiful marble kitchens and cabinetry. And then that same day, we then kick off a trading voluntary administration trying to preserve six or seven jobs. Which is where they design VR for training purposes. So great. That’s a day in the life.

James Flaherty

Okay, so that’s, and obviously preserving the jobs is always a rewarding thing if you can pull it off. So, and risks in all of these things. So, Chris, you’ve been flat out. Certainly you think things are busy. We’ve talked a few times about why we think that is. It’s just sort of things are a bit tight. Prices have gone up.

Chris Baskerville

Yeah, yeah. Well, there’ve been some big construction failure in New South Wales known as the Bassler Group going down for 3.4 billion. I was talking with a colleague this morning about a clothing retail store that had 55 outlets. That’s gone as well. So it seems to be following the ASIC data, construction being number one and typically is always is number one industry, then retail accommodation and hospitality. So basically, where is it hurting? Property prices appear to be declining as a result of potentially budgetary changes like cost of credits going up, cost of materials and labour going up. So you’ve got a perfect storm in the construction space. When people’s home values come down, we stop feeling rich. Yes. Right. We stop feeling confident. So what does that do for the consumer? Because it seems to be Australia does run a lot on consumer sentiment. We don’t feel like spending our money. So who’s that then going to hurt? That hurts all your hospitality and the discretionary spend element. So, yes, it doesn’t look positive for the economy at large, but this is the phase that we’re going into.

James Flaherty

So if you’ve got… Okay, let’s think. You’ve been much in the news. You’re not appointed to the Bathla Group, but you’ve got a lot of experience around construction industry and other projects. Just give us a quick summary of why Bathla matters.

Chris Baskerville

Yeah, Bathla owed $3.4 billion in debt and it fell over just at the tail end of August 2026. Just to say $3 billion is secured. So there’s a lender that attaches to the asset. They get first bite of the cherry. But you’ve got $400 million in unsecured debts. The taxman’s in there for $100 plus. Subcontractors, suppliers are in there for $100 plus. Employees, $4 million in unpaid super is what we’re hearing. So we’ve got some serious debts there and these companies don’t fall over overnight. The rule of thumb, if you were to look back tactically at the movement of the financials, I will loosely say that the writing was on the wall probably 12, 18 months before the actual pulling of the trigger. But anyway, this is where we are. Administrators have been called in. They started with no cash because they told the world they had no cash. They then go and borrow a million dollars from their own firm to start the job. And that million dollars was there to pay some, what I like to call hustle cash, like registering vehicles, fuel supplies, just the general day to day. Magically, they came up with $3.5 million and I think they had to find it from a source to pay just the wages that the administrators had incurred. So they had to find that $3.5 million just to do that. They then asked state government for $20 million in funding just to get them through the administration period. State government said, no, rightly so. Why should our taxes pay for a corporate collapse? State government then said, well, it’s actually a lender’s problem now. So you financiers, you secured parties, it’s your problem, deal with it. And what we were trying to do, why we got so much press around this is because we took the Baffler collapse and then we looked at it and compared it to the Carillion collapse in 2018 in the United Kingdom because that was UK’s second largest builder and we were trying to map what’s the fallout going to be, particularly for subbies and suppliers and employees, and what’s the timing of that all look like. So there’s the Reader’s Digest version in a very short period of time.

James Flaherty

And Jirsch Sutherland have done some thought pieces on that or there’s some stuff that we could link to that people could look at some of what you’ve learned. Is that or, I mean, what are the lessons?

Chris Baskerville

Yeah, yeah. But we, well, let’s just take the high level sort of briefing and this is what we were seeing is, let’s say, let’s just go to 2018 Carillion, United Kingdom. Carillion owed six billion pounds, like just shy of that, right? So what ended up happening in terms of the fallout, and bearing in mind, Carillion had 30,000 stakeholders in and around that collapse. Baffler has 12,000 stakeholders in and around its collapse. So we’re talking big numbers of people that are going to be affected by this, but effectively within 24 hours of Carillion falling over, subcontractors began laying off workers and stuff and people are already pulling up distress flags saying, we’re now going to alert the world that us as suppliers aren’t going to meet our profit targets now and we’re going to be short millions of pounds. Two weeks later, the first subbie sort of goes, next four weeks, the next four or five trading suppliers attach go, but the real fallout is from day one to 12, 18 months, that’s where most of the damage was caused because that’s people hanging on for this money and it’s never going to come. And then it just created a wave of insolvencies. Carillion was already, sorry, the UK was showing already hyperinflated figures for construction collapses, but what the academics have seen over the last five years is Carillion added another 20% to the failure rate of construction just over that 18 and 19 financial years. So yeah, it’s huge.

James Flaherty

It’s massive. There’s a whole lot of questions in that. Does a firm that’s not actually pricing its product properly prop up more businesses that otherwise might’ve failed? I’d like to get a blip because some businesses are getting more work than they otherwise might. If I think about it, you’ve often talked about an 18-month lag after seminal events like the GFC or COVID. There’s that big sort of wash on that happens to you in the administration, liquidation, trustee world. Are we really saying that it’s like a mini, it is a mini terminal event for many people in New South Wales?

Chris Baskerville

One of the questions I was asked was, would the Baffler collapse in New South Wales trigger another global financial crisis style event, albeit limited to the geography of New South Wales, where I would expect most of the trade supplies and subcontractors are?

James Flaherty

And what did you say?

Chris Baskerville

Yeah, that’s an interesting one. It’s hard to deny that there’s not going to be a humongous fallout when you look at and you compare, but what happened with Carillion and 30,000 stakeholders versus Baffler and its 12,000 stakeholders, that it’s not going to do that. We think dominoes are going to fall. And the analogy I could best describe it as, any collapse of a company is a bit like you throw a little pebble into the pond and you watch the ripples from the epicentre out. What we’ve just seen with Baffler is someone’s dropped a boulder in a lake. So the epicentre is going to be a huge fallout, but the ripples that come with it.

James Flaherty

And the ripples, it’s a lake, so some of the impact will be a bit later when the ripple eventually gets to them, yada, yada, yada. And so it is, I think your answer is yes, it is like a mini. And I was thinking about, as you’re talking about Carillion and an economy three times the size of Australia’s, probably at that stage. So this is going to be a pretty significant piece of damage in Australia with a smaller economy and quite a concentrated place like that. The other thing too, just quickly on that, isn’t it different in this case because there’s so much private lender money in this one? So there’s no gang of four banks.

Chris Baskerville

Yeah, we’re not dealing with major top tier banks here. And it’s interesting the rise of private credit because that was one of the, I think Bloomberg might be really hammering on that. And if you sort of think about it, where banks retreat out of a certain space and look, banks are smart. They’re ahead of the curve, right? So that’s why they fix their rates well before the variables are kicking in, right? So there’s a little clue for those playing at home, but the banks are ahead of the curve. But where banks retreat out of certain industries and certain spaces, it leaves a vacuum where private credit goes, well, I see an opportunity. And the opportunity is, well, we got money. We can lend that in to fill the vacuum. And the best part is, because it is not consumer debt, we’re coming in and we can actually charge interest rates that the banks can’t, usually more and higher.

James Flaherty

And that’s because they think that’s a higher risk appetite, but there’s a whole bunch of people, small amounts of funds, lots of different people, lots of rats and mice to herd who might be sitting on all sorts of losses are not as transparent perhaps as they would be if they were in a publicly listed company or a big bank that’s supposed to report to APRA and those sorts of people. And that was one of the things in today’s financial review was about, is there a GFC looming around driven by private debt? So here’s a smack in the face for private debt, smack in the face for mainly New South Wales, but certainly a large portion of the New South Wales construction industry with a major collapse. Is there anything there? Is there anything in it? Like what’s the stuff that could be salvaged?

Chris Baskerville

And look, we’re only grabbing, what I’d love to do is get a, and I’m going to do this for say the Good Builder podcast, because they’ve asked me to come back and decipher the matrix code that is the report. But my understanding from the grabs that are out there is the administrators for Battler on balance sheet expect $4.5 billion worth of asset value to be there to realise in order to discharge effectively the debt. But the question is, do the values stack up? Does the value actually meet the debt? Now, I think this is the link between the global financial crisis is that were financial products being sold to a market where they’re sold at a hyper value, but the underlying security behind it is nowhere to be seen. So the GFC triggered in our mind the concept of negative equity coming into play, which is now your home is no longer worth the money to even get rid of your first ranking mortgage. So that was the negative equity position. Now, is that going to be the case here? It’s a case by case basis. But if you thinly capitalised your entry into property, and let’s say you took advantage of the 5% home buyer scheme or the 2% home buyer scheme and property values have served 10% negative, one would think by default, you are somewhere between negative 5% and negative 8% on your new home now. Now, that might not be a problem if you want to remain in there and live in there and this is your forever home. But what if you’re under distress? What if you are forced to sell? This is the comparison.

James Flaherty

And there’s always reasons why people are forced to sell. There’s marriage breakups. There’s all sorts of reasons why people have to sell. There’s also, again, suggesting that unit prices in Sydney and Melbourne may be starting to be sold at a loss already. This is absolutely the ones in this portfolio. So you’ve got a scenario where you’ve got people already belt tightening because there’s changes in the budget. Investors have changed their tax scenario. You’ve now got a major failure, which is going to impact on other people. And you’ve also got assets that were probably already fairly aggressively sort of priced and funded now facing, if they can be completed, if they, depending on what the guys find, if they’re completable, they won’t be, they’re no longer a feasible outcome. There’s not a product. Is that, is that?

Chris Baskerville

Yeah. What could be going through the secured lender’s mind and is, do we tip money in to complete the project? Yes or no. So that’ll come down. This is all a commercial case, right? But the decision making might be sent, not so much centred around on, are we going to take a loss to our profits in doing this? It could be we need to mitigate a loss.

James Flaherty

Yes, yes.

Chris Baskerville

And that, that’s a completely different mindset, which is, oh, we need to now tip in more money. Not so much because we’re going to get our money back and then some, it’s actually to mitigate the losses we are going to suffer.

James Flaherty

So I put a hundred bucks in. If I want to get 50 bucks out, I’m going to have to put another 25 in. Basically.

Chris Baskerville

Yeah. Or to stop that $100 becoming 1000 as a liability. Yeah. Okay.

James Flaherty

Yeah. So that’s what- We’ll just have to do the maths. But that’s where private debt could actually help the scenario because they don’t, some of them may be able to accommodate that kind of loss when, how do I, what do I have to tip in to get myself out scenario, which is perhaps a little bit more flexible for some of them. So I think what we’re saying it’s, it’s so to summarise where we’re up to, a major, a major event, major kick on effects in a market where people were probably already tightening their belts anyway, and there are real property price falls. Then you as a liquidator are also dealing with the fact that you’re seeing across the market anyway, general decline in discretionary income.

Chris Baskerville

And- With interest rate interest. And think about this. So we just said major banks are nowhere to be seen in Bathlar. So the major banks are not exposed immediately, right? But who do you think the owners are going to go to in order to effectively get their hands to buy their individual homes? They’re going to go back to the major banks. So the major banks are adjusting their percentage rates and risk appetite, and they’ve already done it. They’ve already done it just after the budget. They adjusted all their risk profiling. So the risk might be that a major bank may not even fund the punter to acquire the property that they were buying off the Bathlar group. So yeah, it could be very interesting fallout to see how this all plays out. I’m very interested to see the administrator’s report. My guess is the administrators for Bathlar, given just the enormity of this job, ordinarily the administrator has to get a report out in four weeks that helps the creditors decide, make an informed decision to decide the future of the company. I think they’re going to extend that by court order because this is a behemoth. This is a huge complex web that they have to understand. One of my colleagues in the insolvency game mentioned over coffee this morning that the Bathlar group is one of, sorry, the group itself is 500 companies.

James Flaherty

500 companies.

Chris Baskerville

500 companies makes up the group. So imagine having to unpick that web.

James Flaherty

Yeah, in the statutory period. Okay, so you’ve been on TV, radio, you name it. You mentioned a podcast that you just did.

Chris Baskerville

Yeah, the Good Builder podcast.

James Flaherty

Okay, so we should certainly definitely link people to that. But also you’re going to go back, which is great. If there’s anything else that you can link to us for the Jirsch material on this, I think this is a story we’d better keep an eye on. Let’s not make any bold predictions. Our bold predictions don’t necessarily come off, but we do often end up right in the end. So hey, appreciate you flat out. Thanks, Chris.

Chris Baskerville

All right, thanks, James.

James Flaherty

A reminder that these podcasts are general in nature and do not constitute advice, and they don’t take into account your personal circumstances. So if you think though that some of the issues raised might apply to you, you should seek qualified financial, legal or counselling advice.