Submission to Queensland Government on Proposed Tenancy Reforms

December 19, 2018 Edward Dever

Set out below is an edited version of a submission made to the Queensland Government in relation to its proposed tenancy reforms. The deadline for submissions was 30 November 2018.

MEMORANDUM

Reference is made to the proposed changes to Queensland's tenancy laws.

We note that there is a possibility that Queensland will follow the Victorian model of allowing tenants to keep animals on a rental property as of right unless the landlord obtains a contrary order from VCAT. (https://www.vic.gov.au/rentfair/pets-are-welcome.html)

Should the Victorian model regarding animals be adopted in Queensland, we have a number of concerns as follows:

Landlords would be required, as an example, to allow tenants to keep a dog (of any size) in each rental property as of right, unless one could successfully argue against this, presumably with QCAT. In our view, certain properties are not suitable for animals such as dogs. Landlords would therefore be required to obtain orders from QCAT to allow them to refuse to permit animals in their properties.
Where properties rent on either a six- or twelve-month lease, it is possible that landlords with multiple properties would need to submit a significant number of applications per year to QCAT. While we agree that is unlikely that all tenants would wish to keep a dog or other animal, a high number of applications remains a possibility.
QCAT has confirmed that the current estimated timeframe for hearing an animal related order (a non-urgent tenancy related matter) following the conciliation process managed by the Residential Tenancies Authority is twenty weeks from lodgement to hearing. Without some form of streamlined process, it is unlikely that a matter would be resolved until most of a six-month tenancy has expired.
It is likely that QCAT would require additional funding and staff levels to deal with the potential significant number of applications from landlords in Queensland seeking animal related orders. QCAT have previously noted that “the judicial structure of the tribunal remains inadequate to address the caseload issues, the appeal load and the provision of the necessary management support to the tribunal. Additional staff and space is urgently required.” (https://www.qcat.qld.gov.au/__data/assets/pdf_file/0011/559928/qcat-annual-report-2016-17.pdf)
Where rental properties have no front fence, no driveway gate and no exterior fenced exclusive use areas for tenants to keep animals such as dogs, these animals would need to remain in each unit at all times, including while the tenant was at work. This is likely to cause significant nuisance to neighbours. Multiple dogs residing in different units in a complex would likely increase the nuisance to neighbours. In our view, this would lead to increased tenant turnover.
Without modification, the requirement to allow animals such as dogs would put landlords in breach of certain Council requirements regarding the maximum permitted number of dogs on premises. It is not clear whether landlords would be required to make excess pet applications and whether such an application would need to be completed on a continual basis as tenants move in and out with animals such as dogs.
In one apartment complex example, without the right to refuse animals such as dogs, a situation could arise where there is a maximum of 16 dogs across eight apartments. This is based on the maximum number of dogs permitted per unit under the relevant Council regulations. Such an outcome is likely to result in significant nuisance to neighbours and increased tenant turnover within the apartment complex. Landlords and community title schemes should retain the right to refuse animals on reasonable grounds.
Pet bonds equivalent to, for example, four weeks rent are unlikely to cover the damage which may be incurred by landlords from animals, particularly for premises rented on a furnished basis.
The costs related to QCAT proceedings and any relevant council permit applications as well as likely increased tenant turnover would put upward pressure on rents.

Should the Queensland Government consider adopting the Victorian model of allowing tenants to keep animals on a rental property as of right, we would suggest the following points:

That the Queensland Government defer following the Victorian model until such time as the Victorian model is fully implemented and problems associated with this model can be identified, including issues related to the additional burden placed on VCAT. All the Victorian reforms are expected to be implemented by 1 July 2020. (https://www.vic.gov.au/rentfair/pets-are-welcome.html)
That landlords be permitted to refuse to allow animals such as dogs on reasonable grounds such as the type and size of animal, size of the property, lack of appropriate fencing or outdoor areas and proximity to other dwellings. The Queensland Government should recognise that certain premises such as small units and units close together are not suitable for all types of animals. Landlords are best placed to determine what animals are suitable for particular types of premises.
That community title schemes in Queensland retain the right to refuse to allow animals on reasonable grounds.
If landlords are required to make application to QCAT in order to refuse to allow an animal, a system be introduced whereby a landlord could make a once-off application in relation to a particular property rather than needing to make repeated applications to QCAT as new tenants lease the property and seek to keep animals. An alternative would be to allow such an application to be made in relation to a particular property, for example, once every three years. This would reduce the cost and administrative burden on both landlords and QCAT.

PELEN

November 2018

The content of this publication is intended to provide a general overview on matters which may be of interest. It is not intended to be comprehensive. It does not constitute advice in relation to particular circumstances nor does it constitute the provision of legal services, legal advice or financial product advice.

When Non-Lawyers Engage in Legal Work - The Hidden IED in Companies in Asia

August 24, 2018 Edward Dever

There is an old saying that a small amount of legal knowledge is a dangerous thing. Worse still is no legal knowledge at all. Any lawyer with exposure to Asia business transactions and work with companies based in Asia can provide examples of legal documents prepared or modified by non-lawyers that are, at best, unenforceable and, at worst, create significant potential liabilities.

At one point, I was working with part of a conglomerate in Asia. One of their previous marketing campaigns came across my desk. The marketing team had created a high-profile advertising campaign for their new product around a Hollywood action star’s image and the name of one of his famous movie franchises. Obtaining consent for use of the star’s image and to appropriate the movie franchise’s iconic name seemed to have escaped the attention of the marketing team and management. No one had thought to consult either internal or external lawyers. Fortunately, the misuse of the image and name also escaped the attention of the Hollywood studio and the campaign never again saw the light of day.

In any due diligence exercise in Asia, one of the more important questions to ask, and one that is rarely asked in transactions involving small to mid-sized targets, is who does the target company's legal work? Often, these companies may regard themselves as too small to hire in-house legal counsel and budget considerations limit their use of outside counsel. In these circumstances, it falls to management to resolve legal issues and deal with contract issues. Although attitudes are changing, many companies in parts of Asia simply do not see the need for lawyer involvement in transaction work and other issues.

A prime risk of non-lawyers engaging in legal work is that there may be hidden risks in contracts where management has not fully appreciated the legal implications of certain provisions in a contract and has agreed to provisions which are not in the company's best interests and which may come back to haunt any buyer. Examining material contracts in detail is a crucial part of any due diligence.

Contract provisions which may have been effective at one point in time may now be outdated given changes to the law. Non-lawyers may not be up to date with recent local and international legal developments which may affect liability under contracts or their enforceability. This is particularly true of day-to-day documents such as employment agreements and standardised sales contracts. Often, these are rarely updated or may be changed on a piecemeal basis without considering the implication of such changes on the rest of the contract. This may create inconsistencies or affect the contract’s enforceability.

A further risk to companies and to any buyer is regulatory compliance failure. While many companies in Asia have government affairs teams to deal with regulatory issues, they are often more focused on personal relationships with government departments to improve efficiency of government dealings. There is a significant compliance risk of using non-lawyers for regulatory issues. Regulatory compliance failures expose the company, its directors and management to potential civil and criminal penalties. While representations and warranties under a purchase agreement may afford financial recourse to a buyer for any such failures, the buyer will still need to remedy the failures and implement systems to ensure future compliance.

Ultimately, companies need to balance the cost of using external legal counsel or employing in-house legal counsel against the liability risk of problems occurring if management is reliant on its own resources to resolve legal issues.

PELEN

August 2018

Community Title Schemes - Slow and Steady Wins The Race

June 5, 2018 Edward Dever

If you are the member of a Community Title Scheme, you would be aware of how difficult it can be to gain agreement for expenditure and completing necessary works. Often, much time is wasted holding Committee Meetings or General Meetings only to have resolutions defeated.

This is a particular problem with older apartment complexes, especially if the works involve special levies. Agreement to proceed can be difficult to obtain where a number of owners are not involved and those who take an interest are against incurring costs. This can result in a stalemate where necessary repairs and upgrades are not undertaken and the complex becomes less attractive for tenants, impacting owners' income and investment returns. In areas where newer, more attractive developments are being built and rental vacancy rates are increasing, there is a continual need to maintain and improve the complex common areas to attract tenants and ensure their retention.

In my experience, there are two key factors to a successful community title scheme.

First, in order to ensure resolutions are passed at either Committee Meetings or General Meeting, you should try to build a broad consensus to the proposals ahead of any meeting. Many owners are frustrated when blindsided by expenditure requests in meeting agenda. It is preferable to flag these issues early and gain agreement for the expenditure before anyone sets foot in a meeting room. By building consensus among the owner group, the risk of resolutions being defeated and the associated waste of people's time and scheme funds should be minimised. The meeting should be a mere formality.

Second, accept that progress is sometimes slow and incremental. Modernising a complex is often akin to a jigsaw puzzle, working on different pieces while considering the overall picture. Unless your scheme is awash with funds and can afford a project manager to complete all project items at once, you may need to adopt an incremental approach - making progress based on time and funding constraints. Choose projects based both on a strict order of necessity subject to available funding. Ensure progress is made before asking owners for any special levies. Owners are far more likely to agree to special levy payments if they are able to see where progress has been made and are satisfied with progress to date. Works which involve safety issues are an exception and should proceed as a priority in any upgrade timeline.

Obviously, it helps if the owners are in general agreement on expenditure and maintenance issues. I have seen examples where the level of acrimony between owners is so bad that certain owners will vote against particular resolutions merely on the basis of their dislike of the person proposing the resolution, dislike of particularly committee members or the committee in general. Mediation in these circumstances may help but involves additional time and cost commitments.

PELEN

June 2018

Employee work safety - operating in a safety vacuum

May 16, 2018 Edward Dever

One of the key roles of management is to ensure employee safety. This applies whether employees spend their days in factories, in offices or on the road.

In parts of Asia, there is often a more relaxed view about employee safety. This is mainly due to a combination of poor regulation and a lack of enforcement. There is simply less of an employee safety culture in many parts of Asia although this is slowly changing. Many would be aware of the factory fire horror stories over the years in different parts of Asia where employees were unable to escape because exits were padlocked. Employers claimed the locked doors were necessary to prevent workers stealing items.

Increasing foreign investment into parts of Asia has enhanced employee safety as these corporate investors have used workplace benchmarks from their home countries which often exceed the requirements of the countries in which they operate. Examples include the workplace health and safety cultures implemented by Japanese, British and American companies in parts of South East Asia, particularly in the automotive sector.

On one restructuring, it was necessary to implement a more rigorous approach to workplace safety, particularly in relation to fire safety. Employees worked in various offices spread throughout South-East Asia. In a number of locations, there was heavy reliance on the safety standards of the buildings where office space was leased. But what happens when those landlords fail to implement even minimal fire safety standards? What does management do in the event of a safety standard vacuum?

In implementing adequate employee safety standards in the Head Office on a high floor in a city office building in South-East Asia, I looked at examples of companies involved in the collapse of the Twin Towers on 9/11. Some of the companies that had been affected by the 1993 basement bombing of the WTC North Tower subsequently had very strict evacuation procedures in place which assisted evacuations on 9/11. In one case, the company had fitted small backpacks to the seat back of all employees' chairs which included a face mask, light and bottle of water. Another company's safety procedures made evacuation mandatory if there was an incident involving the other tower.

For this company, we implemented a multi-pronged approach to improving employee safety which included:

- introducing a company-specific fire drill conducted independent of the annual building fire drill.

- walking all fire stairs periodically to ensure there were no blockages.

- ensuring the office emergency exits had working light bulbs which would illuminate in the event of a power outage. I expect that, if I had checked all the floors in that building, there was little likelihood of seeing any working emergency exit signs.

- educating employees on how many fire exits there were and splitting the office into zones to ensure the use of all exits on an evacuation.

- placing current lists of all employees at all fire exits so designated fire wardens could collect the lists on their way through the exit and accurate employee head counts could be taken at ground level.

- storing glow sticks at emergency exits for employees to use in case of stairwell lighting failure. These were imported from Australia due to a lack of local supplies at the time.

- instructing employees not to listen to anyone on the fire stairs advising them to return to their office. It was mandatory to go to the ground level and wait for an update from the company's fire wardens.

- adding portable fire extinguishers at designated office locations.

We also conducted reviews of all other offices and implemented procedures to improve safety standards. We could never rule out a fire or other incident occurring but, by improving safety standards, we could improve the chances of all employees being safely evacuated. In the case of the Head Office building, I thought it was more likely that it would be hit by an errant Government helicopter passing through the nearby air traffic corridor than a fire. We planned for a number of possible scenarios.

Many of the safety improvements outlined above may seem standard to those working in countries with highly developed workplace health and safety regimes. However, it is not surprising to see companies in South East Asia where no safety standards exist or standards exist in company manuals but have never been properly implemented. Where legislative regimes do exist, compliance failures present liability issues for companies and management. But beyond that, management has a moral obligation to take all reasonable steps to ensure worker safety. A consumer backlash can be quite fierce on a company seen to be falling short of its obligations in this area.

PELEN

May 2018

Restructuring Stalemate - When Management Paralysis Sets In

April 28, 2018 Edward Dever

It is often said that the best CEO is the one who waits until the last possible moment to make a decision, thus ensuring that they have all available information and can make the best decision for the company based on that information.

But what happens when the CEO or management won't make that decision? What impact does that have on a restructuring?

I have seen restructuring examples where all parties agree that certain parts of the business need to be shut or sold off only to have the decision deferred, often on spurious grounds. Many years ago, I was involved in an acquisition where the sale of one of the businesses was agreed but, once the vendor's CEO had flown out of the country, the remaining management declared that they had no interest in selling the business. Quite a surprise. There was clear conflict between the CEO and his local management team and we had to wait until the CEO returned to finalise the acquisition.

In certain restructurings, you wonder how many losses the business must suffer before management take the necessary closure or downsizing steps. Is it misplaced optimism that trading will somehow miraculously turnaround? Is it a failure to recognise that the fundamentals of the business or the market it operates in have shifted? Is it the likely loss of face on the part of management if they admit failure and close the business? While the business remains open, it is easier to give the impression that it is operating normally although anyone privy to the financials knows the real story.

In some instances, the rationale for continuing to operate the business can be perplexing. I have seem examples where management proposes shutting part of the business but retaining all the employees without reallocating them to other business units. Retaining all employees would not remove the continuing financial burden of these costs on the business. Plans to change their remuneration structure to reduce costs would have constituted termination in some jurisdictions. While it is understandable that terminating long-term employees is a difficult step, retaining them on the payroll is likely to cause further harm to business finances.

Where there is a failure by management to make a decision, the most obvious solution is to escalate the issue to the ownership level. The shareholders can then impose their decision on management or replace management with those who will implement their decision. This becomes more complex if management has a shareholding in the business or, as is often the case in Asia, management are related to one or more of the major shareholders. In such cases, it will be difficult to have management replaced in order for the restructuring to proceed although I have seen examples where the relevant management are promoted out of the way to allow the restructuring to proceed.

If an impasse is encountered, it may only be possible to complete the restructuring up to a particular point with recommendations on further action. Ultimately, it is up to the relevant management and owners to make decisions regarding a restructuring. There is little further to be achieved if, for example, shareholders will not commit the appropriate level of funding for the business or will not agree to the necessary management changes to enable the restructuring to be completed.

PELEN

April 2018

Flashback - The Crisis That Saved Cambodia's Angkor Wat

March 3, 2018 Edward Dever

On a typically hot Phnom Penh morning in 1996, I was meeting with two senior Cambodian officials when one of them declared that, when people rediscovered Angkor Wat, tourism in Cambodia would boom.

He was absolutely correct. In 2017, nearly 2.5 million people visited the Angkor Archaeological Park. In just over 20 years, Angkor Wat has been rediscovered, is safe to visit and is now firmly on the world tourism map. Tourists can fly into Siem Reap from numerous international departure points such as Bangkok, Hong Kong and South Korea.

Many would argue that the increased development in Siem Reap and the sheer volume of tourists is spoiling Angkor. But it could have been much worse.

It is a little known nugget of history that, in the latter part of 1996 and early 1997, there was a grand plan to erect a sound and light show at Angkor Wat. This proposal would have seen management of the temple complex outsourced to a Malaysian conglomerate which would have had full authority over the area. Cambodians were to be excluded from their own temple other than on particular religious holidays. The Malaysian group was to have total control over the content of the sound and light show and would be entitled to make modifications to the temple complex as they erected their equipment and built fencing.

Of greater concern was the plan to build hotels right up to the front of Angkor Wat, a detrimental step that was unlikely to have ever been reversed.

The contract was a particularly one-sided affair with the Cambodians effectively ceding sovereignty over Angkor to a foreign corporation. Such was my disbelief at the contract's broad terms, I thought the easiest solution was to insert the word 'not' after every use of 'shall'. Perhaps not a practical solution but, as the midnight hour of contract reviewing approaches, strange thoughts come to mind.

Ultimately, I prepared countless pages of comments and amendments to try to rebalance the contract. If the Cambodians were going to cede control of Angkor Wat to a foreign corporation, some rights needed to be reserved. At that time, there were many examples of foreign companies trying to take advantage of the Cambodian government as it tried to encourage foreign investment. Land speculation deals were sometimes dressed up a rice farming projects. Our role as international counsel to the Cambodian government was to create a more balanced negotiating position between the parties.

The sheer weight of comments on the contract had the effect of creating a stalemate and both parties put the proposal in the too hard basket for a period of time. In the second half of 1997, an economic tsunami hit Asia. A number of Asian economies fell like dominoes commencing with Thailand. Malaysia enacted currency and capital controls, effectively walling itself off from the rest of Asia. The economic crisis severely impacted the Malaysian conglomerate and it went home to try to revive its finances. Its grand plans for Angkor Wat came to nothing. The economic crisis had saved what would arguably have been Angkor Wat's destruction.

Today, as tourists gaze at the wonder of Angkor Wat, they should say a quick thank you to one of the silver linings of the Asian Economic Crisis. Siem Reap may have too many hotels and the temples may seem overrun by tourists but it could have been so much worse.

PELEN

March 2018

The Perils of Joint Ventures in Asia

February 7, 2018 Edward Dever

A joint venture is sometimes described as two people sleeping in the same bed dreaming different dreams.

This is often the case in Asia. So parties need to be prepared for eventual problems.

The most important provisions in any joint venture agreement are the dispute resolution provisions and the governing law and jurisdiction provisions. These are the provisions with which most care should be taken. As they are normally towards the back of the agreement, parties often rush though them to complete the transaction.

In most joint ventures, the executed joint venture agreements are filed away and only dusted off in the event of disputes arising between the parties. So it is important that care is taken when drafting these so-called back end provisions.

Local legal advice is necessary to ensure that the dispute resolution provisions and the governing law provision work in the particular jurisdiction where the joint venture will be established. As an example, in some jurisdictions it is preferable to use the local law as the governing law but use arbitration in an offshore jurisdiction as foreign arbitral awards are more readily enforced than taking action through that country's civil courts. In some jurisdictions, civil court procedures can be used by a party to prolong proceedings and frustrate the other party. It can become expensive to fly in experts to give evidence only to have proceedings adjourned for several months before the expert has been able to make their appearance.

There are many things which may go wrong with a joint venture and it is near impossible to predict every eventuality. The joint venture partner may run short of funds and be unable to provide further agreed funding. I have seen examples where the joint venture was established in a factory within one party's property. When the parties fell out, that party then refused to allow the other access to the factory. It is advisable to establish the joint venture on neutral ground such as a government promoted industrial estate to minimise access issues.

Control of the joint venture is a critical issue. Often, foreign ownership restrictions will limit the foreign party to a minority position. There may be exceptions to this through government promoted investment schemes or through the use of commonly accepted shareholding structures and management arrangements. Foreign parties should never accept at face value claims by the local party that local law prevents majority foreign ownership as there may be options available to achieve majority ownership.

Care needs to be taken with any related party transactions involving the local party. A foreign party sometimes finds the joint venture unprofitable because of a number of related party transactions between the joint venture and the local party. That party is, in effect, taking more than their share of the joint venture's profits via inflated and sometime fraudulent transactions with parties related to them.

Reputation risk is another factor in joint ventures. Where success of the venture relies heavily on one party, any adverse change in their reputation can be disastrous for the joint venture. In one case which relied heavily on the reputation and business standing of one of the partners, the venture imploded overnight when that party's reputation was destroyed through their own actions which became headline news.

Finally, it is best to avoid what I refer to as 'absent partner syndrome' where a foreign party buys into a business effectively establishing it as a joint venture and goes home expecting the local partner to treat it is a joint venture. In one case, the local party continued to treat the business as his own and spent the profits on a fleet of Mercedes-Benz vehicles for himself and his family. Such was the hands-off approach by the foreign party, the true extent of the financial calamity was only revealed when the foreign party flew in to confront their partner after waiting in vain for the flow of joint venture dividends.

PELEN

February 2018

Business in Asia - Avoiding Cultural Foot in Mouth Syndrome

January 29, 2018 Edward Dever

I was sitting in a hotel business centre in Bangkok recently when I overhead a visiting businessman discussing issues with a number of Thais.

As the meeting wrapped up, the foreign businessman moved the conversation to issues relating to the Thai Royal family. The discomfort shown by the Thais was clearly evident as they shifted uncomfortably in their chairs and glanced awkwardly around to see who might be listening.

The businessman seemed oblivious to discussing issues which are regarded as highly sensitive to Thai people. New in his position, it was clear that he had been given no instruction or training on cultural sensitivities when working in foreign countries. The more awkward the situation became, the more he pressed on. Rather than fostering a new business relationship, it was more likely that those meeting with him would do whatever they could to avoid future meetings in public.

Regardless of the country with which you are dealing, it is worth spending at least a small amount of time studying issues of cultural sensitivity. Google them.

It may just save a business relationship.

PELEN

January 2018

Business Survival using a Cash Flow Waterfall

November 28, 2017 Edward Dever

Cash flow is the life blood of all businesses.

There are many examples of business collapses due to cash flow deficiencies, particularly in seasonal businesses. Cash flow issues can occur for many reasons and may be exacerbated by the inability to obtain appropriate credit facilities for the business.

A cash flow waterfall is a very simple method of managing a business's cash flow during a restructuring to assist with its survival. At its core is the assumption that cash flow is insufficient to pay all outstandings and, therefore, cash must be allocated in a manner which best allows the business to continue. Some deferment of payments is essential.

Monthly cashflow cascades down a list of priority payments commencing with fixed costs such as rent, utilities, employee salaries and other priority payments. General creditors are then paid on an oldest to newest invoice basis to minimise the payables ageing schedule. Depending on cashflow levels, it may then be possible to keep general creditors within a payment period such as 30 or 60 days.

Creditors who are aware of the business's cash flow issues may be more willing to extend payment terms where they can see their invoices are being paid on a regular yet slow basis. It is generally not in anyone's interest that the business collapse.

There will always be creditors who wish to jump to a higher level of the waterfall and it is management's responsibility to manage their expectations. Priority given to one creditor may cause a stampede of other creditors demanding equal treatment.

It may also be necessary to deal with rumours regarding the solvency of the business. To do this effectively, you may need to create exceptions to the cashflow waterfall approach.

One business with severe cash flow issues that I restructured faced an interesting situation. Rumours of insolvency started spreading through one part of the country. As best as we could determine, the rumours centred around a particular group of trade creditors who were owed a limited amount of money but it had been outstanding for many months. A failure to stamp out these rumours may have caused angst amongst the broader creditor group in other parts of the country. By paying out these creditors in full, we were able to contain the rumours and continue to manage the other creditors using the cashflow waterfall mechanism.

Cash flow waterfalls work best in jurisdictions which are more debtor friendly. In these countries, civil proceedings may be arduous affairs and bankruptcy proceedings may be considered only as a last resort. These jurisdictions allow more latitude in negotiations with creditors than may be possible where trade debts can be easily enforced.

Directors of companies also need to be mindful of the responsibilities of trading while insolvent. In some Asian countries, this is less of an issue and there may be no personal liability placed upon directors for trading while insolvent. In some cases, it is lenders who are penalised for extending credit to insolvent companies rather than the directors. Legal advice is necessary to ensure compliance with local laws.

PELEN

November 2017

Restructuring Businesses - Knowing When to Hold and When to Fold

November 7, 2017 Edward Dever

Often while working on a restructuring, there is a point in time when you get a real sense of whether it will succeed or not.

What seem like endless meetings making no progress reach a point where seasoned advisers can determine with a reasonable degree of probability whether the business will survive or whether it will be consigned to the corporate scrap heap.

There are, however, no guarantees.

All successful restructurings require buy-in from stakeholders. This includes shareholders, management, lenders and other creditors as well as significant customers. When one or more of these groups or a significant member of any group is at odds with the restructuring proposal, the chances of success diminish.

Many restructurings involve a dilution of existing shareholders' holdings or a debt haircut or write-down by lenders and the agreement of both these groups is crucial to success.

Often, it is best to ensure that the banking personnel involved in the original lending are not part of the restructuring process to remove any emotional tension between the lender and the debtor's management.

I have seen restructurings fail or taken to the brink of failure for many reasons.

In one major restructuring involving the first ever public listing swap in that country's history, the new investor almost pulled out of the transaction when they discovered the founder's brother was still on the company's payroll. The fact that this person passed away five years earlier did not seem to bother the founder but was very troubling for the investor.

Restructurings can fail due to reluctance on the part of owners or management to recognise that the business environment has changed and the business in its current form is unlikely to ever be profitable. If agreement cannot be reached on the closure of unprofitable parts of the business, there may be little point continuing with the restructuring. Sentimentality has no place in restructurings.

At times, external issues determine the course of a restructuring. Economic and political events may impact on the business. As strange as it may seem, restructurings can fail due to issues such as alcoholism and other addictions on the part of business owners or management. Draining business cash flow to fund owners' personal lifestyles is another potential death knell for a restructuring. These personal issues can affect the business to the extent that a restructuring becomes non-viable. Some form of lifestyle adjustment by business owners is often inevitable if the business is to survive.

There may be examples where a restructuring can be brought to a successful conclusion without full commitment from all stakeholders but it would generally be the exception rather than the norm.

PELEN

November 2017