The 50-store franchise chain has been in the hands of Tim Heesh of TPH insolvency since 8 May and may have traded while insolvent, a creditors report filed with the corporate regulator said.
The company’s director Eric Song was embroiled in a fight with the Australian Taxation Office prior to the collapse, contesting $5.1 million in tax identified after an audit in 2016.
Mid-way through last year the ATO served franchisees with garnishee notices requiring them to pay fees to them rather than the franchisor.
$5.2 million is now being claimed by the ATO as a statutory creditor, while a further $20.7 million is owed to various landlords.
An administrator assessment concluded that it did not appear as though the business had maintained proper books, records and accounting systems from its incorporation in 2012 to 1 July 2017.
“Along with poor financial records the company has a poor compliance history with respect to its obligations to lodge various taxation returns with the ATO,” Heesh wrote in a report to creditors.
Franchisees were recorded to have owed around $750,000 to Doutmost pty.ltd., which traded as Oliver Brown, at 8 May but an assessment of its ledger found it had not been regularly updated.
It was also the opinion of Heesh the business traded while it was insolvent for a period, which could leave Song liable for some of the company’s debt if the business proceeds into liquidation.
Franchisees have continued to trade through the administration, with three deed of company arrangement (DOCA) proposals to be voted on by creditors on 13 June.
Director submits proposal
Despite concerns over his accounting acumen, Heesh has recommended that a DOCA proposal levied by Song be accepted by creditors, which would see the business continue trading.
Under the proposal a $1.2 million deed fund would be established to pay back creditors, which Heesh said was a superior outcome to two other formal proposals.
The fund would consist of a $200,000 payment levied by Song, $200,000 from the company and a further $800,000 from unnamed contributors, due within 6-12 months.
However, Heesh qualified his recommendation, saying that financial details pertaining to the contributors of the Song DOCA were yet to be provided as of last Friday.
“I reserve my decision to change my recommendation if that information is not provided or if I am unsatisfied of their ability to meet the terms of the proposal,” he said.
Outstanding obligations to the ATO would be met under the Song DOCA, while lease liabilities would remain on the books.
But Heesh warned that Song may have lost support from critical stakeholders in the business and that the consequences of garnishee notices remaining enforceable under the DOCA will strain the company’s future trading position.
A further $3.5 million claim was lodged by trade creditor Pablo & Rusty’s in relation to contractual damages, but it appears that Song has personally guaranteed the potential liability, which he could use for voting purposes at the forthcoming creditors meeting.
The proposal, which also has the support of Oliver’s intellectual property holder, would see Heesh appointed as an overseer to ensure the business met its obligations to creditors.
Crucially, it is thought that the Song DOCA will preserve the integrity of the franchise group itself, allowing the business to continue trading largely as is.
It is understood that possible insolvency claims against Song will be dealt with through the DOCA if it proceeds.
Heesh indicated that the underlying Oliver’s business was relatively sound, and that there could be a future for the chain.
“If the franchise continues with the same overhead structure and franchisors in the group continuing to perform as they do then I have a personal view that the franchise group will survive,” he said on Tuesday.
It is also understood that Song has committed to improving accounting practices and that with the benefit of external financial advice would be positioned to run the business appropriately.
Under another DOCA proposal submitted a creditors trust would be formed to oversee a $1 million deed fund to pay back outstanding liabilities, but Heesh said he had not been able to confirm the capacity of associated parties to fund the deal.
A third proposal put forward came from a syndicate of franchisees, which would see an amount paid of up to $1 million (or 50 per cent of payable royalties and fees over two years) to creditors.
Heesh said it did not appear as though the franchisee syndicate had the support of the trademark holder, unlike Song, and that there were serious concerns about the ability of the syndicate to run the business given the garnishee notices.
If the company were to be liquidated only $201,000 is expected to be realised from assets in a best-case scenario.