On 23 December 2013 Justice Robb of the Supreme Court of New South Wales set-aside the resolution of creditors of Retail Adventures Pty Limited (Administrators Appointed) (RAPL) to execute a Deed of Company Arrangement. The Administrators (Messrs Strawbridge, Grieg and Lombe of Deloitte) were subsequently appointed as liquidators.
The liquidators have now flagged their intention to commence proceedings to pursue a voidable security claim against a related party creditor which claims to hold valid security for a debt of $77.49 million. The Liquidators believe that the security may be voidable as to $49.77 million of that amount, which would leave only $27.72 million secured.
If successful the action could result in a substantial claim against the purchaser of the RAPL business, another related party creditor, DSG Holdings Pty Limited (DSG).
DSG purchased the business on terms that the purchase price would be set-off against the $77.49 million secured debt. However, under the business sale agreement, if at any stage the security for the $77.49 million was in part declared void, DSG would be required to pay to RAPL an amount equal to the extent that the remaining secured amount was less than the purchase price.
A successful action by the liquidators could leave the new owner of the RAPL business with a substantial liability.
The news is worse for the directors. The Administrators have previously stated that if RAPL enters liquidation it may have a claim against its directors, Jan Cameron, Penny Moss and Bruce Irvine, of $48.284 million.
What went wrong?
How did the Retail Adventures plan, which looked to be a new benchmark in pre-administration planning, end up a shambles?
The problem was the size of the proposed Deed Fund.
The Contributing Related Creditors offered only $5.5 million as a deed fund for unsecured creditors. The resulting distribution to the unsecured creditors was estimated by the Administrators to be 6.46 cents in the dollar. The Administrators estimated that in liquidation the distribution to unsecured creditors would be between 20.71 and 45.12 cents in the dollar.
The judge concluded that the size of the Deed fund was too low by a significant margin. Using the powers provided by section 600A(1)(c)(ii) of the Corporations Act he set aside the resolution on grounds that it prejudiced the creditors that opposed the resolution.
The judge was also clearly unimpressed by the decision of the related party creditors to acquire $35 million of creditor debts (from creditors they considered to be important to the ongoing business) so that the defendants would have the votes to pass the resolution while offering only $5.5 million to the remaining unsecured creditors.
A key strategy of the Retail Adventures plan was to tie the survival of the business to the company entering into a DOCA. In Court the related creditors argued that the liquidation of RAPL would be a catalyst for the winding up of the new business owner, DSG which in turn would jeopardize the continuation of the business. While Justice Robb considered that issue to be of significance there was insufficient evidence of the likelihood of that occurring.
For all its sophisticated planning, the Retail Adventures plan ultimately failed for the simplest of reasons – the contributing creditors did not place an appropriate value on the power of the opposing creditors.
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