Effective 1 July 2024, the sale, supply, manufacture, importation, and commercial possession of non-therapeutic vapes in Australia is prohibited under the Therapeutic Goods and Other Legislation Amendment (Vaping Reforms) Bill 2024.
Following a Senate meeting on 24 June, the Federal Senate voted in favour of this Bill, making the sale of all vaping products illegal except through pharmacies from 1 July 2024 onwards.
The Bill not only mandates that all stores selling vaping products must cease trading in them, spelling doom for most of those businesses, but it also effectively gives vape store owners less than a week to cease all trading of vaping products. This abrupt change forces them to grapple with profound implications for their livelihoods and financial commitments, including lease obligations and other liabilities.
Minimising the financial impact will be of utmost importance to vape business owners.
Lease Obligations
Among the pressing concerns for vape shop owners during the bans are how to deal with existing lease obligations. Commercial leases typically bind tenants to long-term agreements, often spanning several years, encompassing financial responsibilities such as rent payments, utilities, and maintenance costs, regardless of fluctuations in business performance or regulatory changes.
When confronted with a regulatory crackdown like vape bans, business owners find themselves in a precarious position. The impairment or complete end of revenue and the closure of most vape businesses mean owners may struggle to meet their ongoing lease obligations. Moreover, some leases may include clauses that restrict tenants from altering their business nature or product offering, further exacerbating the dilemma for vape shop owners.
Negotiation and Legal Considerations
As business viability ends, vape shop owners are compelled to explore various options to mitigate financial losses and potential legal repercussions. Negotiating lease terms or early termination clauses with landlords is a common strategy. However, landlords may not always be receptive, especially if they perceive the legal impositions as beyond their responsibility or have their own financial commitments tied to the property.
Legal advice becomes invaluable during these negotiations, as lease agreements are legally binding contracts that require careful navigation to avoid penalties or defaults. Vape shop owners may seek legal counsel to assess their lease rights and obligations, explore potential legal remedies and negotiate favourable settlement terms with landlords.
Options available to vape shop owners
In the wake of the Vaping Reform Bill, vape shop owners’ primary concern will be minimising the financial harm from ceasing operations.
The options available to business owners will primarily depend on whether they operated under a corporate structure, as a sole trader, or in a partnership, and the level of personal exposure from guaranteed liabilities or the risk of insolvent trading actions by a liquidator.
Vape business operating in a corporate structure
Directors of vape shop businesses operating in a corporate structure now face various decisions and options, including the possibility of liquidating their companies through solvent or insolvent administrations, or pivoting to continue trading in alternative goods and services.
In a typical insolvency context, businesses experiencing financial distress would ordinarily consider a restructuring path such as a Voluntary Administration or a Restructuring Proposal Plan under the Corporations Act. These types of administration can allow businesses to make a resolution to their creditors to pay back a portion of their debt in full, potentially preserving the business and offering creditors a better rate of return.
Unfortunately, restructuring is not an option for most because their primary revenue source is no longer available to make ongoing trading economically viable. Therefore, the only viable options remaining are liquidation, either as a solvent or insolvent administration.
Personal Exposure for vape shop businesses trading as companies
A vape shop director looking to liquidate their company should give consideration to the following aspects to make a fully informed decision and evaluate personal financial impacts.
Directors need to have a good understanding of their potential exposure to the debts of the company. The following list outlines some of the risk areas where directors may face personal financial exposure.
- Issuance of personal guarantees for loans, leases, hire purchase agreements and supplies under the company’s name.
- In the event the company goes into liquidation, a director could face personal liability for any debts incurred while the company was insolvent, i.e. debts that continued to accumulate after the company was unable to pay its debts, such as renewing leases after the legislation was proposed and ongoing and increasing supplier liability.
- A director may be made personally liable for unpaid company tax liabilities in the form of a Director Penalty Notices (DPN’s) issued by the ATO.
- Excessive drawings from the company account will create a loan account and liability against the director and will be pursued by the liquidator if the company goes into liquidation.
- Director of a corporate trustee incurring liabilities on behalf of a trust that it cannot repay and are not indemnified from the trust.
Having established their personal exposure, directors will need to evaluate which personal assets may be at risk, and which are protected.
A director faced with a great deal of personal exposure as a consequence of liquidation may find themselves with no other option than to consider bankruptcy.
Additionally, directors of vape stores are at risk of potential claims of insolvent trading by a liquidator. This is particularly true if the company continued to incur liabilities or renew leases despite knowing about the potential shutdown of the market due to legislative reform proposed in 2023.
Vape business operating as a sole trader or partnership
Many key factors will determine which solution will provide the best outcome and minimise the impact on individuals who are now forced to shut their vape businesses.
Below are some of the key factors that will inform which solution is optimal:
- The value of personal assets
- Whether the debt is secured or unsecured
- Size and age of the debt(s)
- Attitudes of creditors
- Occupation of debtor and any licensing requirements
Options Explored – Informal
Individuals seeking a solution to their debt problems should determine whether an informal alternative would provide a better outcome than bankruptcy.
Refinance and debt negotiation
This is a good option for individuals who have sufficient assets to pay all or some of their debts and would be adversely affected by bankruptcy.
A refinance could involve using personal property or selling off some assets to pay towards their liabilities.
Negotiating with creditors using a professional is often the best way to settle their claims. An offer can consist of one-off lump sum payment, payments in instalments or a combination of both.
Informal Arrangement
An informal arrangement is a structured negotiation with some or all creditors through a professional who acts as an agent for the individual.
It is an alternative for individuals who wish to avoid bankruptcy and keep their financial difficulties confidential. For this to be effective, you must be able to bind all creditors.
Options in Bankruptcy
The 3 main options individuals have in bankruptcy are:
- Debt Agreement
- Personal Insolvency Agreement
- Bankruptcy
Debt Agreements and Personal Insolvency Agreements are both legal alternatives to bankruptcy to individuals who prefer to avoid bankruptcy.
These alternatives allow an individual to make an offer to their creditors. If accepted, the agreement binds all unsecured creditors.
Debt Agreement
Debt Agreements are a streamlined administration that does not require a meeting of creditors to vote on a resolution.
Certain eligibility requirements must be met to qualify for a Debt Agreement.
Personal Insolvency Agreement (PIA)
A PIA does not have any thresholds and therefore any individual is eligible.
Similar to a Debt Agreement, a PIA allows an individual to make an offer to their creditors. The offer will usually involve either a lump sum settlement or payment in instalments. So long as the individual maintains their agreement, they will be able to carry on with their lives without the control of a trustee in bankruptcy. All creditors are bound if the majority of creditors agree.
Bankruptcy
Bankruptcy may be the only option for some vape shop owners who face significant claims from landlords or other legacy debts that have personally exposed them, especially when creditors are in advanced stages of seeking legal proceedings.
The current statutory length of bankruptcy in Australia is 3 years and one day.
Bankruptcy releases an individual from all their unsecured debts and allows them a fresh start. However, during the 3-year period, the bankrupt’s eligible assets vest in the trustee and bankrupts are also liable to pay income contributions if their income is above a certain threshold.
Bankrupts are also required to adhere to certain duties to cooperate with the trustee.
A bankrupt cannot be a director of a company or obtain credit without disclosing the bankruptcy status.
Financial Planning and Adaptation
Amidst the challenges posed by vape bans, proactive financial planning becomes crucial. In most cases, vape store operators faced with ceasing trading in vape products may need to reassess their business models and explore new products and alternative revenue streams to sustain operations. These adjustments often require additional investments or rebranding efforts, further complicating financial projections and lease obligations.
In some cases, business owners may opt to sublet their premises to mitigate costs or consolidate operations to a more cost-effective location. Such decisions necessitate compliance with lease terms and local zoning regulations, highlighting the complexity of navigating contractual obligations amid regulatory changes.
Conclusion
In conclusion, the vape bans in Australia have marked the end of all vape businesses in the country, placing a sudden end to their operations. This will put many of those business owners in a financially precarious situation, exposing them to the implications and ramifications of seeking a solution in insolvency.
Business owners must remain resilient and resourceful in safeguarding their livelihoods, navigating lease obligations, assessing their personal exposure and minimising the inevitable financial harm.
If you would like to discuss your situation and have a professional review the options available to you, the overall impact of a liquidation and your personal exposure, please feel free to contact our liquidator and trustee in bankruptcy Anthony Bagala at dVT Group on (02) 9633 3333 or by email at abagala@dvtgroup.com.au.
dVT Group is a business advisory firm that specialises in business turnaround, insolvency (both corporate and personal), business valuations and business strategy support.
July 2024
