Payless Shoes Pty Ltd ACN (Administrators Appointed)

Transcription

1 Payless Shoes Pty Ltd ACN (Administrators Appointed) Report to creditors pursuant to Section 439A of the Corporations Act 16 March 2017

2 Table of Contents Section Page Statement by Administrators Executive summary Introduction Background information Historical financial information Report as to affairs and director s reasons for failure The Administration Administrator s investigations Offences and voidable transactions Proposal for DOCA Return to creditors Administrator s opinion Further information and enquiries Glossary of terms Annexure A Notice of meeting B Appointment of proxy form C Proof of debt form D Remuneration approval request report dated 16 March 2017 E ARITA creditor information sheet F DOCA Proposal dated 15 March \B09 16 March 2017

3 Statement by Administrators In reviewing this Report, creditors should note: This Report is based upon our preliminary investigations to date. Any additional material issues that are identified subsequent to the issue of this Report may be the subject of a further written report and/or tabled at the Second Meeting. The statements and opinions given in this Report are given in good faith and in the belief that such statements and opinions are not false or misleading. We reserve the right to alter any conclusions reached based on any changed or additional information which may be provided to us between the date of this Report and the date of the Second Meeting (except where otherwise stated). In considering the options available to creditors and formulating our opinion and recommendation, we have necessarily made forecasts of asset realisations and total creditors claims based on our best assessment in the circumstances. These forecasts and estimates may change as asset realisations progress and we receive creditor claims and consequently the outcome for creditors might differ from the information provided in this Report. Creditors should consider seeking their own independent legal advice as to their rights and the options available to them at the Second Meeting \B09 16 March 2017 Page 1

4 1 Executive summary The executive summary aims to provide creditors with basic information with respect to the administration of the Company. Further details are provided throughout this Report. Question What is Payless Shoes? What is the purpose of this Report? What is the current status of the Company? What is the ownership structure of the Company? Why do the Directors of Company believe it became insolvent? When do the Administrators believe the Company became insolvent? Payless Shoes was established in Australia in the 1980 s and grew its store network over the following three decades to become one of the largest independent shoe retailers in Australia operating more than 250 stores. In September 2012, Vaughan Strawbridge and David Lombe of Deloitte were appointed as Voluntary Administrators of ACN (formerly Payless Shoes Pty Ltd). In March 2013, a subsidiary of Payless Shoesource Inc. (USA) subsequently purchased the Payless business and certain assets incorporating a smaller 150 store footprint from the Voluntary Administrators. At the date of our appointment, Payless Shoes operated 132 stores throughout Australia together with an online store. The business employed over 700 staff. The purpose of this Report is to provide creditors with details about the business, property, affairs, and financial circumstances of the Company in preparation for the forthcoming Second Meeting. This Report also informs creditors about the investigations undertaken to date together with the Administrators opinion as to each option available to creditors at the Second Meeting. James Stewart, Peter Gothard and Jim Sarantinos were appointed as Administrators of the Company on 22 November Following their appointment, the Administrators assumed day-to-day responsibility for the management of the Company and immediately marketed the business for sale. Whilst we received a number of expressions of interest from various parties, there were no acceptable offers for the business. As a result, we commenced the managed wind down of the business on 14 December 2016 with all stores closed by 28 February The Company is wholly owned by Collective Brands, an entity registered in the Netherlands. This entity is ultimately owned by Payless Shoesource Inc. (USA). Please see Section 3 for further details in respect of the Payless group structure. The Directors have not provided a written statement as to the reasons why the Company became insolvent. Since its incorporation in April 2013, the Company operated at a significant loss, which was funded by PSS Holdings, a subsidiary of Payless Shoesource Inc. A Letter of Financial Support of up to $11 million was provided on 11 August 2016 by Collective Brands and guaranteed by PSS Holdings, a company registered in the Cayman Islands. This Letter of Financial Support also outlined the subordination of certain amounts owing to PSS Holdings and Dynamic Assets Limited (DAL), a supplier to the Company, 16 March 2017 Page 2

5 Question (also a subsidiary of Payless Shoesource Inc) to other creditor claims. DAL was not a party to the Letter of Financial Support. We have been advised that both Collective Brands and PSS Holdings have minimal assets, however, we have requested further documentation to verify this which we expect to receive prior to the Second Meeting. Financial support continued to be provided by PSS Holdings until 21 November 2016, when it was determined that further funding would not be provided. Following the withdrawal of funding the Directors took immediate steps to place the Company into Voluntary Administration. We consider the Company may have been insolvent from at least 21 November 2016, or at an earlier date subject to determining the circumstances around the adequacy and availability of the funding available under the Letter of Financial Support and the effectiveness of the subordination commitments. Identifying a specific date of insolvency will require further investigation from a liquidator should one be appointed at the Second Meeting. What was the outcome of the sale of business process? What is the purpose of the second meeting of creditors? What do the Administrators recommend creditors should do? We did not receive a suitable offer for the sale of the business as a whole, or a selected portfolio of stores. Further information is provided in Section 6.2. Subsequently, the Administrators commenced a managed wind down program in December 2016 to realise all remaining inventory. At the Second Meeting, creditors will decide the future of the Company by voting on one of the following options: That the administration should end and control of the Company revert to its directors; or, That the Company should be wound up; or That the Company execute a Deed of Company Arrangement (DOCA). PSS Holdings has proposed a DOCA which is estimated to provide a return to creditors of between 48 and 76 cents in the dollar. The Administrators recommend that creditors resolve to execute the DOCA Proposal received from PSS Holdings on the basis that: i) It provides for a higher and more certain return to creditors than a liquidation; ii) iii) iv) It eliminates the risk of challenge to the subordination of PSS Holdings claim which, if successful, would significantly dilute the return to unsecured creditors and delay the timing of any distribution; There is a high degree of uncertainty and risk surrounding potential recoveries from voidable transactions that would be available to a liquidator but not a deed administrator; and Recoveries from potential actions against Directors and / or Auditors remain available to the deed administrators. This recommendation is subject to receiving the further information requested in relation to the financial position of Collective Brands and PSS Holdings prior to the Second Meeting. Should the information received alter our opinion, at the Second Meeting to be held on 27 March 2017, it may be appropriate to adjourn the meeting (for up to 45 days) to allow creditors to properly consider any new information. In either a Liquidation or a DOCA scenario, we expect that all priority employee creditors will receive 100 cents in the dollar. The majority of priority creditors will be paid prior to the Second Meeting being held. 16 March 2017 Page 3

6 Question The return to unsecured creditors in either a Liquidation or a DOCA scenario is significantly impacted by claims made by related parties, specifically, PSS Holdings, which funded the Company s losses since incorporation. As described above and examined throughout this Report, a Letter of Financial Support was provided to the Company on 11 August 2016 in which it appears that $38.8 million of intercompany loans provided up to that date would be subordinated to other creditor claims. PSS Holdings provided a further $2.6 million in funding post this date which at this stage would appear to be not subject to subordination. Based on information and documentation received to date, the PSS Holdings subordination appears to be effective as at 11 August 2016, however, the documentation surrounding the arrangements is not clear, and there is some risk that: i) the effective date of the subordination could be challenged such that it could apply from 30 January 2016 as opposed to 11 August This would result in PSS Holdings non-subordinated claim increasing from $2.6 million to $7.8 million; and / or ii) the subordination itself could be challenged such that the entirety of PSS Holdings $41.4 million intercompany loan could be a nonsubordinated unsecured creditor claim. While there are a number of other factors impacting the unsecured creditor pool (i.e. contingent claims by landlords and suppliers), either of the above scenarios would significantly reduce the return to unsecured creditors. The DOCA Proposal does not contemplate an injection of further funds. It does however offer to formally subordinate to other creditors any claims by PSS Holdings and remove any uncertainty that may exist. The DOCA Proposal also requires that the Company agree to forbear any right to claim payment from Collective Brands or PSS Holdings under the Letter of Financial Support or the Confirmation of Financial Support from Collective Brands to the Company dated 16 June The PSS Holdings proposal eliminates the risk of a protracted dispute regarding its claim. Any dispute with PSS Holdings: Runs the risk of its non-subordinated claim increasing significantly, thereby eroding the overall return to non-related creditors; Is likely to result in much higher costs associated with the liquidation of the Company; and Would also be likely to significantly delay distributions to creditors. Further, in a DOCA scenario, any potential claims which may be brought against the Directors / and or Auditors remain available to the deed administrators. The risks associated with bringing such claims are discussed below. Based on our present calculations (detailed further in Section 10), we estimate that under the DOCA Proposal, unsecured creditors will receive between 48 cents and 76 cents in the dollar. This excludes any potential costs or recoveries from other actions which may be available to a deed administrator. We have conducted preliminary investigations into potential recoveries in a liquidation which would largely be focussed on any actions in relation to the $11 million in funding made available under the Letter of Financial Support and any potential actions available against the Directors and / or Auditors. 16 March 2017 Page 4

7 Question While any recoveries made could increase the pool of funds available for creditors, there are significant risks associated with pursuing these recoveries including: i) The purported minimal assets held by both Collective Brands (registered in the Netherlands) and PSS Holdings (registered in the Cayman Islands) to meet their obligations under the Letter of Financial Support; ii) iii) iv) The cost, risk and complexity associated with commencing proceedings in the Netherlands and / or Cayman Islands and / or United States; The cost, risk and complexity associated with commencing proceedings against the Directors and / or Auditors which are likely to be vigorously defended with uncertainty around the prospects of recovery in the event the subordination of PSS Holdings claim was held to be invalid; and The significant delays in making distributions to creditors which are likely to occur where there is ongoing litigation. What claims would a liquidator investigate? Whilst the Administrators have considered the underlying reasons for failure of the Company our investigations remain at an early stage. Please see Sections 7 and 8 for further details regarding our investigations to date. A liquidator has the power to void certain transactions which are either not beneficial, or are detrimental, to a company. Based on preliminary investigations outlined above, it appears that a liquidator may have two potential sources of recoveries arising from investigations, being: i) The Letter of Financial Support, up to $11 million; and ii) Other potential actions against the Directors and / or Auditors, the quantum of which is presently unknown. As outlined above, these actions would remain available to a deed administrator. Whilst we believe there may be some merit in pursuing these claims should the Company be placed into Liquidation the creditors should be aware that based on current information, the outcome of any recovery action would be inherently uncertain and take significant time and expense to progress and finalise. While a liquidator would also conduct further investigations into other potential voidable transactions (including unfair preferences), it appears unlikely that such recoveries would be available. Will employees be paid their outstanding entitlements? All pre-appointment employee entitlements will be paid in full with the majority of employees having their entitlements paid on 15 March The only remaining payments to be made post 15 March 2017 are: Any outstanding superannuation contributions relating to the post appointment trading period; and Final wages, on costs and entitlements relating to the remaining 5 head office employees. We expect the above outstanding payments to have been processed by the end of March Employees who have received their entitlements in full prior to the Second Meeting will no longer be creditors and will not be entitled to vote at the meeting. 16 March 2017 Page 5

8 Question Will the secured creditor be repaid its debt? Apart from employees, will unsecured creditors be paid a dividend? The Company did not utilise any secured debt facilities and relied solely on unsecured funding from the wider Payless group entity to fund any trading shortfalls. We currently estimate the return to creditors as follows: Priority (employee) creditors Unsecured creditors Subordinated creditors Liquidation Low Liquidation High DOCA Low DOCA High 100% 100% 100% 100% 33% 62% 48% 76% Nil Nil Nil Nil Shareholders Nil Nil Nil Nil Whilst we have assumed PSS Holdings to have a claim of $7.8 million in a Liquidation Low case, there remains a possibility that PSS Holdings may successfully challenge a liquidator s adjudication, and be entitled to claim as a non-subordinated unsecured creditor for its full outstanding balance of $41.4 million. In this scenario, we anticipate that most other variables would be unaffected, and the return to unsecured creditors would be between 15% - 17%. The return to unsecured creditors is largely contingent upon: The finalisation of all trading accounts for the administration period; The quantum of landlord claims following the closure of the store network and the Company s head office; The claims from overseas suppliers relating to long dated purchase orders that were cancelled by the Administrators following the announcement of the wind down program in December 2016; Recoveries from any actions available to the deed administrators. Should the creditors vote against the DOCA Proposal and the Company is placed into Liquidation then the return to unsecured creditors will be dependent on the following additional factors: Any successful challenge by PSS Holdings as to the liquidator s determination of its subordinated claim; Whether the Letter of Financial Support of up to A$11 million provided by Collective Brands is recoverable in part or in whole; and Whether there are any other recoveries made by the liquidators as a result of their investigations that are not otherwise available to the deed administrators. See Section 10 for a detailed analysis of our estimated return to unsecured creditors. 16 March 2017 Page 6

9 Question Where can I get more information? Should you have any enquiries, please contact the following: Creditor queries Phone: (02) paylesscreditors@fh.com.au Employee queries Luke Meany Phone: (02) paylessemployees@fh.com.au Landlord queries Courtney McLean Phone: (03) courtney.mclean@fh.com.au [THIS SECTION IS INTENTIONALLY LEFT BLANK] 16 March 2017 Page 7

10 2 Introduction This section provides information on the entities subject to the voluntary administration process, the objectives of the Administration, the purpose of this Report, meetings of creditors, and a summary of the Administrator s remuneration 2.1 Appointment of voluntary administrators James Stewart, Peter Gothard and Jim Sarantinos and were appointed as Joint and Several Administrators of Payless Shoes Pty Ltd (Company) on 22 November 2016 by resolution of the Company s Directors, pursuant to Section 436A of the Corporations Act 2001 (Act). On appointment, the Administrators assumed control of the Company s operations and notified employees, creditors and other stakeholders of their appointment. The Administrators then conducted an urgent financial and commercial review of the Company with the assistance of key personnel and key stakeholders including customers and suppliers. 2.2 Objective of voluntary administration In a voluntary administration, Administrators are empowered by the Act to assume control of an insolvent company, superseding the powers of the Directors and Officers, to manage the company s affairs and deal with its assets in the interests of its creditors. The intention of a voluntary administration is to maximise the prospects of a company continuing in existence or, if that is not possible, to achieve better returns to creditors than would be achieved by its immediate liquidation. During a voluntary administration there is a moratorium over most pre-administration creditor claims. Administrators are also required to investigate the Company s affairs and report to creditors on the Administrator s opinion as to which outcome of the voluntary administration process is in the creditors best interest, informing the creditors prior to their voting at the Second Meeting (please see Section 11 for further details). 2.3 Purpose and basis of report Section 439A(4) requires a voluntary administrator to provide a report (the 439A Report or this Report) to all creditors ahead of the Second Meeting, outlining: Details regarding the business, property, affairs and financial circumstances of the entity under administration; The Administrator s opinion and recommendation on each of the options available to creditors; and If a DOCA is proposed, the details of the DOCA. This Report also informs creditors about the preliminary investigations undertaken by the Administrators to date. Accordingly, the views formed in this Report are not final and may be subject to change. Any additional material issues that are identified subsequent to this Report may be subject to a further written report and/or tables at the forthcoming Second Meeting. This Report has been prepared primarily from information obtained from the Company s books and records and discussions with the Directors. Although the Administrators have conducted certain investigations of the affairs of the Company, there may be matters which we are unaware of as an audit of the Company has not been undertaken. In order to complete our Report, we have utilised information from: The ASIC; The PPSR; The Company s book and records; Discussions with the Directors and former directors of the Company; Discussions with key employees of the Company; Discussions with creditors of the Company; and Other public databases. 16 March 2017 Page 8

11 2.4 Declaration of independence, relevant relationships and indemnities In accordance with Section 436DA of the Act and the Australian Restructuring, Insolvency & Turnaround Association (ARITA) Code of Professional Practice, a Declaration of Independence, Relevant Relationships and Indemnities (DIRRI) was enclosed with the Administrators first communication to creditors (and tabled at the First Meetings of Creditors). The DIRRI disclosed information regarding the Administrators independence, prior personal or professional relationships with the Company or related parties and any indemnities received in relation to the appointment. This assessment identified no real or potential risks to the Administrators independence. There has been no change in the declaration since that time. 2.5 First Meetings of Creditors Section 436E of the Act requires the Administrators to convene the first meeting of creditors within eight business days of being appointed. The first meetings of creditors of the Company was held on 2 December 2016 (the First Meetings of Creditors), whereby the Administrators appointment was confirmed. Creditors resolved at the First Meetings of Creditors to appoint a Committee of Creditors (COC). 2.6 Committee of Creditors Creditors elected the following creditors to a COC: COC member ISPT Pty Limited PSS Holdings Scentre Group Representative Bede Haines Julian Gratiaen Andrew Clark The Committee has been kept appraised and consulted with the Administrators in relation to: The sale of business process and offers received from interested parties; The subsequent managed wind down program; Approval of the Administrators remuneration; and Other matters of significance relating to the Administration. The matters discussed at the COC meetings and the resolutions passed by the COC are summarised in the following table. Meeting date Matters discussed Resolution passed 22 December 2016 To consider a report from the Administrators providing a general trading update and overview of the sale of business campaign to date. To fix the remuneration of the Administrators 14 February 2017 To consider a report from the Administrators providing a general trading update and overview of managed wind down program. To fix the remuneration of the Administrators. Remuneration of the Administrators for the period 22 November 2016 to 9 December Remuneration of the Administrators for the period 10 December 2016 to 31 January Upward revision of the remuneration of the Administrators for the period 22 November 2016 to 9 December March 2017 Page 9

12 2.7 Second Meeting of Creditors On 9 December 2016, the Administrators applied to the Federal Court of Australia to extend the convening period for the Second Meeting of Creditors. The objective of the extension was to provide the Administrators with a sufficient period of time to exhaust all options in relation to a sale of the business and / or to conduct an orderly store closure process in order to maximise recoveries from the Company s inventory for the benefit of creditors. Pursuant to Section 439A(6) of Act, an extension of the convening period for the Second Meeting of Creditors of the Company until 20 March 2017 was granted by the Federal Court of Australia on 9 December A copy of the sealed order can be found on our website at In accordance with Section 439A(2) of the Act, the meeting must be held within five business days before, or within five business days after, the end of the convening period (i.e. being 20 March 2017), Pursuant to Section 439A of the Act, the Second Meeting is convened for Monday 27 th of March 2017 at The Grace Hotel, 77 York Street, Sydney at 11:00am. At the Second Meeting, creditors will decide the future of the Company by voting on one of the following options: That the administration should end and control of the Company revert to its directors; or That the Company should be wound up; or That the Company execute a DOCA. The Notice of Meeting of Creditors (Form 529) is attached at Annexure A along with an appointment of proxy form (Annexure B) and a proof of debt or claim form (Annexure C). Creditors have the opportunity to adjourn the Second Meeting for up to a period of 45 business days to enable further investigations to be undertaken. On 10 March 2017, a DOCA Proposal was received from PSS Holdings. On 15 March 2017, a revised DOCA Proposal was received from PSS Holdings. The key terms of the DOCA Proposal are as follows: formally subordinate to other creditors all amounts owing by the Company to PSS Holdings as at 22 November 2016; and the Company agree to forbear any right to claim payment from Collective Brands or PSS under the Letter of Financial Support or the Confirmation of Financial Support from Collective Brands to the Company dated 16 June Based on our assessment of the DOCA Proposal and the current uncertainty surrounding the level of estimated return to creditors in a Liquidation, the Administrators recommend that the creditors should accept the current DOCA Proposal, subject to receiving certain information in relation to the financial position of Collective Brands and PSS Holdings prior to that meeting. Please see Sections 10 and 11 for further information. 2.8 Remuneration An Administrator s remuneration can only be fixed by resolution of a COC, the Company s creditors, or by application to the Court. In accordance with Section 449E of the Act and the ARITA Code of Professional Practice, a Schedule of Remuneration Methods and Hourly Rates were provided to creditors with our initial communication and tabled at the First Meeting of Creditors. ARITA has issued an Approving remuneration in external administrations information sheet providing general information for creditors on the approval of an administrator s fees in a liquidation, a voluntary administration or a DOCA. This information sheet is available from the ARITA website ( At COC meetings held, the following remuneration was approved for the applicable periods: Meeting date Remuneration period Amount approved $ (ex GST) 22 December November December 2016 $431, February November December 2016 (upward revision) $16, February December January 2017 $474, Total $922, The total amount approved has been drawn in full. 16 March 2017 Page 10

13 A Remuneration Report is provided in Annexure D to this Report for the following periods: 1 February 2017 to 8 March 2017; 9 March 2017 to 27 March 2017; 28 March 2017 to the conclusion of the DOCA (if applicable); and 28 March 2017 to the conclusion of the liquidation (if applicable). The remuneration approval sought for either the DOCA or the liquidation does not account for time associated with pursuing recoveries from potential actions which may become apparent. Should further initial investigations identify claims worth pursuing, further approval will be sought from creditors / a committee (if established at the Second Meeting). The Remuneration Report provides details of the key tasks undertaken and to be undertaken throughout these periods, along with a summary of the receipts and payments to date. Copies of previously approved remuneration reports for the periods 22 November 2016 to 9 December 2016 and 10 December 2016 to 31 January 2017 are available on request. A summary of all previously approved remuneration, together with remuneration we will be seeking approval for at the Second Meeting is as follows (GST exclusive): Period Amount (ex GST) Total past remuneration approved 22 November December , November December 2016 (upward revision) 16, December January , Current remuneration being sought 1 February 2017 to 8 March , March 2017 to 27 March , March 2017 to the conclusion of the DOCA (if applicable) OR 424, OR 28 March 2017 to the conclusion of the liquidation (if applicable) 504, Estimated total remuneration DOCA $2,012,375 Estimated total remuneration Liquidation $2,092,250 Please refer to our remuneration approval request report enclosed at Annexure D for further details. 2.9 Non-disclosure of certain information There are sections of this Report where we have considered it not to be in the creditors interests to disclose certain information to creditors. We recognise the need to provide creditors with complete disclosure of all necessary information relating to the Company. However, where we believe information is commercially sensitive and it is not in creditors interests for us to disclose the information publicly at this stage it has been excluded from this Report. Such information includes: Valuations and estimated realisations of specific assets; and Details of offers received during the sale of business process. 16 March 2017 Page 11

14 3 Background information This section provides creditors with information on the history of the Company and the circumstances leading up to the appointment of Administrators, details regarding related entities including statutory information, and an overview of the operating businesses. 3.1 Group structure Provided below is the corporate structure of all relevant entities and ownership: Payless Shoesource Inc. United States Entity PSS Holdings Collective Brands Cayman Finance Ltd. Cayman Islands Entities Note % 0.1% Note 3 Note 1 Collective Brands II Cooperatief U.A. 100% 100% Netherlands Entity Payless Shoes Pty Ltd (Administrators Appointed) Payless Shoesource Holdings AU Pty Ltd Australian Entities 100% New Look Shoes Pty Ltd Notes 1. Letter of Financial Support provided (up to $11 million) 2. Guarantor of obligations under Letter of Financial Support 3. Unsecured funding of $41.4 million (subordinated in total or in part) 16 March 2017 Page 12

15 Key points to note in relation to the corporate structure are as follows: Payless Shoes Pty Ltd is the primary trading entity of the Australian business. The Administrators appointment does not extend to Payless Shoesource Holdings AU Pty Ltd. This entity holds the vast majority of intellectual property relating to the Australian business including the trading name Payless Shoesource and associated logos and trademarks. In addition, Payless Shoesource Inc. controls the global licenses to sell the majority of brands and licenced items sold by the Company. Payless Shoes Pty Ltd is the sole shareholder of New Look Shoes Pty Ltd (New Look). We have been advised by New Look s sole Director (Mr Mark Jeffrey) that the entity is dormant and holds no assets and as such we will seek to voluntarily deregister this entity shortly. Collective Brands is an entity registered in the Netherlands and the 100% shareholder of the Company. PSS Holdings is an entity registered in the Cayman Islands who we understand is ultimately owned by Payless Shoesource Inc. 3.2 Letter of Financial Support As detailed above, since incorporation the trading losses of the Company have been funded by Payless Shoesource Inc. and its subsidiaries. Historically, the Company has been provided with Letters of Financial Support, confirming this commitment to funding. On 11 August 2016, a Letter of Financial Support was issued to the Directors by the Company s parent, Collective Brands. This letter was provided to give the Directors comfort in respect their obligations under Section 295(4)(c) of the Act in relation to the FY16 financial report. This section of the Act requires directors to declare whether in their opinion, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. The Letter of Financial Support confirmed: Financial assistance of up to $11 million would be provided should the Company require it to continue its operations. From 11 August 2016 approximately $2.5 million of funding was provided to the Company; and The repayment of outstanding intercompany balances totalling approximately $40.7 million would be subordinated in favour of all other creditors. The $40.7 million is comprised of: o o $38.8 million in respect of intercompany loans provided by PSS Holdings; and $1.9 million outstanding to Dynamic Assets Limited (DAL), a Hong Kong registered subsidiary of Payless Shoesource Inc., in respect of inventory supplied to the Company. The undertakings in the Letter of Financial Support are provided for a minimum period of 12 months from 11 August PSS Holdings entered into a Counter Guarantee Agreement with Collective Brands whereby PSS Holdings undertook to indemnify Collective Brands in respect of its obligations under the Letter of Financial Support. Previous Letters of Financial Support have been issued in relation to prior period financial reports, however only the 11 August 2016 letter is relevant to the administration and potential recoveries Financial Support Based on enquiries made to date, we understand that neither Collective Brands or PSS Holdings hold any significant assets to enable recoveries under the Letter of Financial Support. Any action to pursue the promise of financial support is further complicated by the requirement to commence proceedings in offshore jurisdictions in order to pursue these recoveries. We have requested documentation to verify the financial position of these two entities and expect to have received it prior to the Second Meeting of Creditors Subordination of PSS Holdings Intercompany Loan The $38.8 million intercompany loan balance referred to in the Letter of Financial Support relates to funding advanced by PSS Holdings to the Company between July 2014 and 11 August Based on information received to date, we are of the view that this balance is subordinated to the claims of other creditors. PSS Holdings (as is the case for any other creditor) has a right to challenge any adjudication made by a liquidator with respect to its claim. Any such challenge would need to brought in an Australian court. During the period 11 August 2016 to 26 October 2016, approximately $2.6 million of funding was provided by PSS Holdings to the Company. Based on our current analysis, on the basis that these amounts post-date the 16 March 2017 Page 13

16 subordination obligations contained within the Letter of Financial Support, claims made in respect of these amounts only is likely to rank equally with the claims of other ordinary unsecured creditors Subordination of Dynamic Assets Limited intercompany balance The $1.9 million intercompany loan balance referred to in the Letter of Financial Support relates to amounts owed by the Company to DAL, a subsidiary of Payless Shoesource Inc. and a supplier of inventory to the Company. There is some uncertainty as to whether the purported subordination of amounts owing to DAL is legally effective as we do not have sufficient information to determine the circumstances by which it's debt was included in the Letter of Financial Support. We have requested further information on this issue. However, there is a possibility that DAL's debt may not have been properly subordinated. The Company continued to trade with DAL on a day-to-day basis following the Letter of Financial Support and as at the date of administration the Company owed DAL approximately $2.5 million. To the extent that the Company incurred debt to DAL following the Letter of Financial Support, it is likely that it would be entitled to claim such debt as an ordinary unsecured creditor and the subordination provisions in the Letter of Financial Support would not affect its ability to make a claim. Please see Section 7 and 8 for further information regarding the Letter of Financial Support and subordination of intercompany balances. 3.3 Statutory information Statutory details for the Company extracted from ASIC s national database at the time of our appointment are summarised below. Payless Shoes Pty Ltd ACN Incorporation date 22 February 2013 Shareholder Collective Brands II Cooperatief U.A. Registered address / principal place of business Unit R, South Street, Rydalmere, NSW 2116 Secretary The Company s officers over the past 12 months were: Name Role Date appointed Date ceased Stephen John Gish Director 18 June 2013 N/A N/A Mark Robert Jeffery Director 15 December November 2016 Rex Alan Tessendorf Director 15 May 2015 N/A Neil Gary Hansen Alternate Director 13 March 2013 N/A The ASIC database discloses the Company s shareholders to be: Name Shares held Class Fully Paid Joint Holding Collective Brands II Cooperatief U.A. 15,699,435 Ordinary Shares Yes No 16 March 2017 Page 14

17 3.4 Company history Year February 1984 September 2012 February 2013 March 2013 April 2013 April 2013 to November 2016 Key event Payless Shoes incorporated as ACN Pty Ltd (formerly Payless Shoes Pty Ltd). Appointment of Vaughan Strawbridge and David Lombe of Deloitte as Voluntary Administrators over ACN Pty Ltd which was operating an Australian store network of approximately 250 locations. The Company is incorporated as Collective Brands AU Pty Ltd, a subsidiary of Payless Shoesource Inc. Collective Brands AU Pty Ltd purchased the business and certain assets from the Voluntary Administrators. The re-structured business consisted of a store portfolio of approximately 150 locations. Collective Brands AU Pty Ltd changes its business name to Payless Shoes Pty Ltd. Since incorporation, the business operated at a significant loss, recording the following losses in each year of operation: FY14 - $10.2m FY15 - $10.8m FY16 - $16.7m FY17 - $9.2m (per management accounts to 31 October 2016) The above losses were funded by PSS Holdings. 22 November 2016 Appointment of James Stewart, Jim Sarantinos, and Peter Gothard of Ferrier Hodgson as Voluntary Administrators over the Company. As at the date of our appointment the Company had a store portfolio of 132 stores. 3.5 Business operations At appointment, the Company operated 132 stores nationally: State Total Stores New South Wales / Australian Capital Territory 70 Queensland 33 Victoria 20 South Australia 1 Western Australia 8 Total 132 Excluded from the above analysis is the head office and distribution centre based in Rydalmere, NSW, at which the Company based its operations. Aside from receiving monetary support from the Parent entity, and the intellectual property being registered to a different corporate entity, Payless Shoes operated independently with employees, suppliers, trade creditors and other third parties. On appointment, the Company employed 739 employees. All staff Full time equivalent Part time Casual Total Store Head Office Warehouse Total March 2017 Page 15

18 3.6 Registered security interests Under the Personal Properties Securities Act 2009 (PPSA) legislation that took effect on 30 January 2012, security over property (except land and certain other asset categories) must be registered as a security interest on the Australian and New Zealand Personal Properties Securities Registers (PPSR). Briefly, the concept of fixed and floating charges was replaced under the PPSA by security interests over noncirculating assets and security interests over circulating assets respectively. In the case of inventory, title to any inventory will require registration as a PMSI on the PPSR. A PMSI is similar to a ROT provision in terms of trade. Unless a supplier (including a ROT supplier) registers a PMSI as a security interest on the PPSR, the goods under the ROT clause may become property of the companies and amount to a windfall to the companies and its creditors. The PPSR identified 30 security interests over the Company as at the date of the Administrators appointment: Collateral class Secured party Registrations APAAP SM Brands Pty Ltd 1 Other Goods (Equipment Leasing) CSG Finance Australia Pty Ltd & Co 10 Motor vehicles Toyota Material Handling Australia Pty Ltd 2 Motor vehicles Custom Service Leasing Pty Ltd 2 Motor vehicles Crown Equipment Pty Ltd 1 Other Goods (Motor vehicles) Crown Equipment Pty Ltd 1 Other Goods Various 13 Total 30 The Company does not hold any bank debt facilities. Upon receipt of information from secured parties, and any further PPSA claims that were received, a detailed assessment of the registered securities was completed. Where suppliers held valid security interests, their goods on hand were either returned or alternatively, if the goods were used in the ordinary course of business, these goods were paid for during the course of the Administration. At the time of this report, we are yet to finalise a settlement position for one of the above registrations. Further details of the registered security interests are available to creditors on request. 16 March 2017 Page 16

19 3.7 Events leading to our appointment Set out below is a summary of the events leading to our appointment as Administrators of the Company: Date Event 11 August 2016 Letter of Financial Support is issued to the Company by Collective Brands, together with a guarantee from PSS Holdings (issued on 9 July 2016). 17 August 2016 Funding of $1,538,550 provided to the Company by PSS Holdings to fund ongoing trading losses. 13 September 2016 Financial statements for the 12 months ending 30 January 2016 are signed by the Directors and Auditor. 26 October 2016 Funding of $1,032,950 provided to the Company by PSS Holdings to fund ongoing trading losses. Further funding requests were made in late October / early November. While there was continued discussions regarding these requests, further funding was not received by the Company. 2 November 2016 The solicitor acting on behalf of Payless Shoesource Inc. approached James Stewart of Ferrier Hodgson to conduct an independent situation assessment of the Company. 7 November 2016 The Company engages Ferrier Hodgson to undertake the independent situation assessment. 7 November 2016 Mark Jeffery resigns as Director of the Company although continues with his role as managing director of the Company. 8 & 9 November 2016 Representatives of Ferrier Hodgson meet with key management personnel to gather information required to prepare an independent situation assessment and assess available options in the event of an insolvency. 16 November 2016 Independent situation assessment report presented to representatives of Payless Shoesource Inc. via conference call. 18 November 2016 Discussion between General Counsel of Payless Shoesource Inc. and James Stewart regarding the possible appointment of Voluntary Administrators to the Company. 21 November 2016 PSS Holdings withdraws ongoing funding for the Company. 22 November 2016 The Directors resolved to appoint Administrators to the Company. 16 March 2017 Page 17

20 4 Historical financial information This section provides information on the historical financial performance of Payless Shoes during the FY14, FY15 and FY16 financial years, together with recent draft profit and loss accounts. 4.1 Preparation of financial statements Audited Special Purpose Financial Statements were prepared up to 30 January The Company has a financial year end at 30 January in FY16 (albeit previous years had a year end of 31 January). Financial Year Period Auditor FY14 Part period ending 31 January 2014 Price Waterhouse Coopers Australia FY15 12 Months ending 31 January 2015 Byrons Chartered Accountants FY16 12 Months ending 30 January 2016 Moore Stephens NSW (formally Byrons Chartered Accountants) Whilst management accounts have also been prepared, these have not been referenced within this Report, with the exception of analysis on FY17 discussed further in Section Management accounts have not been audited and are not comparable to the Audited Special Purpose Financial Statements. The financial statements were not consolidated with Payless Shoesource AU Holdings Pty Limited or any other related entity Going concern emphasis of matter In all reporting periods since incorporation of the Company in 2013, the Auditor s Report has placed an Emphasis of Matter (EOM) on the going concern of the Company, highlighting: Significant trading losses; and Liabilities exceeding assets. The ability of the Company to continue as a going concern and meet debts as and when they fell due was, and has been, dependent upon the continuing financial support of Payless Shoesource Inc. and its subsidiaries. Within the FY16 Financial Statements (which were signed on 13 September 2016), notes regarding the going concern principle refer to a seven-year plan implemented by the Directors, to improve profitability and return to a positive earnings position. The report goes on to state: The continuing viability of the company and its ability to continue as a going concern and meet its debts and commitments as they fall due are dependent upon the company being successful in receiving the continuing support of its parent entity, negotiating additional funding and achieving sufficient future cash flows to enable its obligations to be met. Funding and support received from Payless Shoesource Inc. and its subsidiaries is discussed further in Section We are not aware of any additional funding received from other external sources. 16 March 2017 Page 18

21 4.1.2 Historical profit and loss $000s FY14 FY15 FY16 Revenue 62,490 73,207 76,457 Less: Costs of goods sold (29,345) (32,996) (38,438) Gross profit 33,145 40,211 38,019 Gross profit margin % 53% 55% 50% Other income Expenses Store costs (20,094) (21,574) (21,639) Employment (19,994) (23,459) (24,567) Administration - (2,017) (3,238) Finance (441) (481) (705) Other (3,431) (3,491) (4,583) Net Profit/(Loss) for the period (10,225) (10,811) (16,713) Source: Special Purpose Financial Statements We make the following observations: Generally, the performance of the business appears to have been impacted by a number of factors, including but not limited to: o The absence of a vertically integrated supply chain which impacted margins; o The size of the store network and the associated overhead costs; and o Competition from other discount bricks and mortar and online shoe retailers. At no stage has the business generated a net profit since the Company was incorporated in February 2013; Sales revenue reported in FY14 is less than subsequent years, due to reporting of a part period from the date of acquisition to 31 January Gross profit margin deteriorated by 5% from FY15 to FY16. The Former Director attributed this deterioration to unseasonal weather and the Company s inventory lead time, resulting in the subsequent discounting of stock. Other costs increased during FY16 due to an increase in depreciation and amortisation charges. Based on the above and the continuing losses in FY17, it is clear that the Company s operations were not self-sustainable. The Company s plan for improved profitability relied on external funding in the medium term. 16 March 2017 Page 19

22 4.1.3 Historical balance sheet $000s FY14 FY15 FY16 Current assets Cash and cash equivalents 3,431 3,358 3,813 Trade and other receivables ,183 Inventories 12,856 13,741 15,887 Other current assets Total current assets 17,430 18,239 21,352 Non-current assets Plant and equipment 1,986 2,756 5,878 Total non-current assets 1,986 2,756 5,878 Total assets 19,416 20,995 27,230 Current liabilities Trade and other payables (8,717) (8,636) (9,679) Borrowings - (14,696) (33,587) Provisions (1,553) (2,070) (1,735) Total current liabilities (10,270) (25,402) (45,001) Non-current liabilities Borrowings (6,867) - - Deferred Income (264) (236) (1,680) Provisions (2,555) (1,744) (2,597) Total non-current liabilities (9,685) (1,980) (4,277) Total liabilities (19,955) (27,382) (49,278) Net assets (539) (6,387) (22,048) Source: Special Purpose Financial Statements We make the following observations: Although inventory holding has increased from FY14 to FY16, the Company held minimal impaired stock at the date of our appointment. Plant and Equipment includes store fixtures and fittings, warehouse racking and equipment, I.T. equipment, and motor vehicles. Funding (borrowings) provided by PSS Holdings exceeded $33.5 million as at 30 January Funding has supported ongoing trading losses since incorporation in April March 2017 Page 20

23 4.1.4 Recent trading results and Management forecasts We have used audited accounts for the purpose of analysis of the historical financials. However, given at the date of appointment the Company was well into FY17, we have provided the below analysis of the management accounts and forecasts. These figures should not be directly compared to the audited financial statements, and the below should instead be used as a reference point, given that interest, tax, depreciation and amortisation have not yet been accounted for in the management accounts. Profit & loss FY16 FY17 FY17 FY17 YOY Variance $'000s Total Q1 - Q3 Q4 Forecast Total $ % Sales 76,572 51,717 22,491 74,207 (2,365) (3.1%) Gross Profit ($) 38,062 28,584 13,476 42,060 3, % Gross profit margin (%) 49.7% 55.3% 59.9% 56.7% n/a 7.0% Store Expenses 40,199 29,626 9,516 39,141 1, % Store Contribution (2,137) (1,041) 3,960 2,919 5, % Warehouse costs 1,748 1, , % District Manager Costs (83) (10.1%) Contribution Before H/O (4,710) (2,905) 3, , % Marketing 2, ,398 1, % Head Office costs 6,201 5,413 1,721 7,134 (933) (15.0%) EBITDA - Pre-Bonus (13,486) (9,173) 1,040 (8,134) 5, % Bonus & Incentives (37) (308.4%) EBITDA (13,498) (9,222) 1,040 (8,183) 5, % Source: Management internal reporting and forecast We make the following observations: Management forecasted a significant improvement in EBITDA performance during Q (1 November 2016 to 31 January 2017), which was predicated on the business performing strongly during the Back to School sales period during January Management forecasted a FY17 year-end EBITDA loss of $8.2 million, representing an improvement of $5.3 million (39.4%) on FY16. Improvement in EBITDA was largely driven by: o o An improvement in gross margin of 7% as a result of improved management of inventory purchasing and pricing; and Savings of $1.1 million and $1.2 million in store expenses and marketing costs respectively. We have not included balance sheet information as at the date of appointment on the basis that the accounts remain in draft. The asset and liability position as at the date of appointment is addressed in the RATA in Section Parent funding Since its incorporation in 2013, the Company has incurred trading losses and was reliant on funding from PSS Holdings to support its operations. From 31 January 2016, PSS Holdings contributed further funding, both prior ($5.207 million) and subsequent to ($2.571 million) Collective Brands issuing the Letter of Financial Support on 11 August Further discussion and analysis of the Letter of Financial Support and the subordinated nature of the intercompany funding is discussed at Sections 7 and 8. We understand that further requests for funding were made in late October / early November While there were continued discussions regarding these requests, further funding was not received by the Company. 16 March 2017 Page 21

24 5 Report as to affairs and director s reasons for failure This section provides a summary of the report as to affairs submitted by the directors, together with a detailed explanation of the director s reasons for failure of the Company 5.1 Report as to affairs Section 438B of the Act requires the directors to give an administrator a statement about the company s business, property, affairs and financial circumstances. The directors have collectively prepared and lodged a report as to affairs (RATA) for the Company with the assistance of the Company s internal accountant. We received the RATA on 28 February In the Statement, the Directors detailed the assets and liabilities of the Company at book value and ERV. The following tables summarise the book value of assets and liabilities disclosed in the Directors Statement. The Administrators have not audited the Company s records or the book values. The below schedules should not be used to determine the likely return to creditors as a number of realisable values are based on the Company s records and remain subject to the review of the Administrators and, in particular: The Administrators are not in a position to confirm (or otherwise) certain asset values which are commercially sensitive and/or subject to ongoing settlement negotiations. The value of creditor claims remains subject to change as further claims may be received and require adjudication. The tables below do not provide for trading expenses or professional costs associated with the administration process. Further detail on the estimated return to creditors from the administration is contained in Section 10. $000s Notes RATA Administrators Est. Liquidation Position Assets Book Value ERV Low High Cash on hand Cash at bank 2 2,171 2,171 2,195 2,195 Debtors Inventory 4 14,693 14,693 27,400 27,500 Plant and equipment 5 6, Other assets Unknown Unknown Total assets 24,108 17,454 29,928 30,070 Liabilities Employees 7 1,851 1,851 3,844 3,844 Secured creditors Preferential claims Nil Nil Unsecured creditors 10 47,149 47,149 14,732 8,651 Contingent claims ,898 6,598 Total liabilities 49,558 49,558 30,564 19,183 Surplus / (deficiency) (25,450) (32,104) (636) 10, March 2017 Page 22

25 Notes 1. Cash on hand of $72k relates to cash held and banked by stores as at close of business on 21 November All cash has been realised by the Administrators in the ordinary course of business. 2. At appointment, the Company held approximately $2.2 million across a series of bank accounts and term deposit accounts. All funds (net of any outstanding credit card liabilities) were realised shortly following appointment. 3. Debtors consist of approximately 40 parties including; community agencies, government organisations, and schools. The organisations issued job seekers and students with a voucher for shoes, which was presented in store and subsequently invoiced by the Company to the issuing organisation. This arrangement was initially continued during the Administration until unfeasible due to low stock levels. We expect to recover the majority of the outstanding $8k pre appointment debtor balance. 4. Inventory of $14.7 million listed in the RATA represents the cost of all stock held in stores and the distribution centre as at close of business on 21 November Following the conclusion of the managed wind down of the store network, all inventory on hand as at the date of appointment has now been realised for approximately $27.5 million, noting that a further c.$2.5 million in sales were achieved from inventory purchased during the administration. There were significant trading costs incurred in realising this inventory including occupancy and payroll costs for the trading period of the administration. Further detail on these trading costs is contained in Section The Company owns plant and equipment including office furniture, warehouse equipment and racking, store fixtures and fittings, IT equipment, and motor vehicles which was listed in the RATA. Due to the specific nature and ageing of the fixtures and costs and complexities associated with removing the assets from their existing locations it is likely that realisations will be at a significant discount to book value. 6. Other assets include two bank guarantees relating to leasehold properties ($448k) and various intellectual property assets. One bank guarantee ($350k) has already been called in full by the landlord and we expect the other to be called upon in the short term. Both parties will be required to quantify and substantiate the loss incurred. Should a liquidator be appointed then an assessment of the cost / benefit of pursuing any potential recoveries in relation to the Letter of Financial Support will be undertaken. Please see Sections 7 and 8 for further commentary regarding the Administrators current view as to collectability of this debt and any potential claims against the Directors and / or the Auditor. Please note that these potential recoveries discussed above have not been included in the Directors RATA. 7. The Directors have allocated outstanding pre-appointment superannuation amounts of $88k to preferential claims, however, these amounts should be classified as priority employee claims. Other employee claims included in the RATA include pre-appointment annual leave and long service leave. The Administrators estimate includes notice and redundancy entitlements for employees terminated during the administration. We expect the majority of employee claims to be paid on 15 March 2017 with all priority employee claims likely to be paid in full by 31 March A summary of estimated employee entitlements is provided below: Entitlement $000s Annual leave 722 Annual leave loading 80 Long service leave 692 Car allowance 1 Superannuation 80 Pay In Lieu of Notice (PILN) 446 Redundancy 1,634 Senior Management Retention Bonuses (i) 55 Annual Incentive Program (AIP) (ii) 133 Total estimated employee entitlements 3, March 2017 Page 23

26 Please note the following in respect of the above table: i) Certain key employees of the Company had long term retention periods stipulated in their employee contracts. Our advice has confirmed that on the basis that each eligible employee was made redundant by the Company following our appointment these claims would form part of each employee s priority entitlement claim. ii) Certain members of the Company s senior management team were eligible to participate in an Annual Incentive Program (AIP) whereby should the Company meet a budgeted EBITDA target for the financial year they would be entitled to a bonus payment based on a percentage of their annual salary. Our advice has confirmed that despite the Company being placed into Administration should the Company meet its annual financial target and the employee continued to be employed as at 31 January 2017 (being the end of the Company s financial year) then outstanding AIP payments would form part of each eligible employee s priority entitlement claim. We confirm that the Company met the required Threshold EBITDA Target for FY17 (having taken into account the costs of the Administration) and therefore payments under the AIP are required to be made to eligible employees. 8. The Directors RATA estimates Purchase Money Security Interest (PMSI) claims totalling $470k. We are currently finalising our review of these claims. Any creditor whose PMSI registration is deemed ineffective will have an unsecured claim in the Administration. 9. As discussed at note 7, preferential claims of $88k relate to outstanding pre-appointment superannuation balances. 10. Per the RATA, unsecured creditors total $47.1 million and include: a. Loans to related party entities totalling $44.4 million, made up of; i. $470k intercompany loan account; ii. $2.5 million intercompany inventory account relating to inventory received from Dynamic Assets Limited (DAL), a Hong Kong registered subsidiary of Payless Shoesource Inc.; and iii. $41.4 million intercompany funding (cash) account due to PSS Holdings. b. ATO debt of $288k c. Trade supplier claims of $2.1 million d. Other trade creditors of $437k. The Administrator s ERV of unsecured creditors and contingent claims in a liquidation scenario is calculated as follows: Low $000s High $000s Trade Creditors 6,954 6,080 PSS Holdings 7,778 2,571 Unsecured Creditors 14,732 8,651 Landlord and Overseas Supplier Contingent Claims 11,898 6,598 Contingent Claims 11,898 6,598 Trade creditors represents all stock and non-stock creditors per the Company s books and records as at 22 November 2016, together with any unsecured employee entitlement claims. This includes the balance of $2.5 million owing to DAL. The PSS Holdings claim in the low case is based on an effective subordination date of 30 January The claim in the high case is based on an effective subordination date of 11 August Contingent liabilities are comprised of an estimate of the following: Overseas supplier claims relating to purchase orders placed by the Company and subsequently cancelled by the Administrators in January Landlord claims, with respect to losses which may be incurred as a result of the business ceasing to trade. 16 March 2017 Page 24

27 In forming the estimate with respect to the above contingent claims, we have made certain assumptions around the obligations of creditors to mitigate their loss. These obligations have been communicated to creditors throughout the administration and will be assessed during the claim adjudication process. It is not the duty of an Administrator to adjudicate on unsecured claims and this role will be performed by a subsequently appointed deed administrator (or a liquidator should creditors vote against the DOCA Proposal at the Second Meeting). 5.2 Omissions from statement We have not identified any material omissions from the Directors statement. 5.3 Directors opinions as to the reasons for failure At the date of the Report the Directors have not provided any reasons as to why the Company became insolvent. 5.4 Administrator s opinions as to the reasons for failure Our preliminary view is that the Company was placed into Administration due to the withdrawal of financial support by PSS Holdings, as a result of: Increased competition within the specialist shoe industry and discount department stores; and Inability to exit unprofitable stores and minimise costs due to long lease terms and break fees. [THIS SECTION IS INTENTIONALLY LEFT BLANK] 16 March 2017 Page 25

28 6 The Administration This section provides an overview on the conduct of the Administration, including the trading of the business, the sales process undertaken and the controlled wind down program. 6.1 The business at the commencement of the Administration On appointment, the Administrators assumed control of the Payless Shoes business. Appropriate controls and systems were put in place with respect to cash, banking, purchase orders, stock control and financial reporting. Whilst we conducted an urgent assessment of the business we continued to trade in the ordinary course. In particular, we: Opened new accounts with service providers, utilities and other non-stock suppliers Liaised with stock providers regarding the status of open purchase orders Continued employment of all staff and kept all 132 stores trading Continued marketing and promotional activity Negotiated certain payments of necessity to ensure continued supply of business critical services and ensure the availability of in transit inventory Prepared an Administration trading forecast and cash flow Took steps to preserve leases and extend the second meeting convening periods to assist in preserving sale options Reviewed the procedures for IT services and back up processes for information on site Reviewed the adequacy of the insurance policies held and entered into arrangements for policy continuation. The Administrators initial strategy review confirmed that: There was sufficient stock in the distribution centre, in stores and in transit at appointment to allow the business to trade throughout the Christmas and key back to school period in January 2017 and that only small quantities of stock would be required to be purchased by the Administrators to supplement the stock range. The Administrators could not commit to the purchase of inventory expected to be sold after the Back to School period until such time that a purchaser for the business was identified. The business would generate sufficient cash flow through the proposed trading period to pay wages and all other operational costs. The Company was adequately staffed and there were no material deficiencies. The Administrators strategy was to maintain a business as usual approach whilst an accelerated sale of business campaign was completed. 6.2 The sale of business process From 24 November 2016, expressions of interest were sought for the going concern sale of the business. Initially the Administrators sought offers to sell the business as a whole but advised parties that they would consider offers for portfolios of stores should a sale of the entire business not be possible. 16 March 2017 Page 26

29 The key dates for the sale process were as follows: Date Sale program 24 November 2016 Advertisement appeared in the Australian Financial Review 24 November 2016 Opportunity Overview document issued to interested parties 1 December 2016 Information memorandum (IM) made available to interested parties 6 December 2016 Non-binding indicative offers to be received 8 December 2016 Selected parties provided access to secure data room 15 December 2016 Commencement of store portfolio sale 15 December 2016 Selected parties provided access to secure data room 21 December 2016 Binding offers due In addition to the general marketing campaign the Administrators contacted various identified parties to discuss the purchase of the business as a going concern. Those parties were identified based upon discussions with key management personnel and our assessment of possible trade buyers. In conjunction with the preparation of the IM the Administrators, together with the senior management team, built a financial restructuring model to allow interested parties to assess the profitability of different sized store networks and to demonstrate how the Company could return to profitability. The Administrators received expressions of interest from over 20 parties. Three non-binding offers were subsequently received none of which were at acceptable values when compared to estimated realisations that would occur from a stock liquidation process. Given the lack of acceptable offers a managed wind down program was announced on 14 December 2016 which was run in parallel together with the Administrators advancing discussions with parties who were interested in the transfer of specific portfolios of stores and employees. Unfortunately, no assignments of individual stores could be finalised as we found that parties were prepared to wait for the store to become vacant and then negotiate with the landlord directly. In the Administrators opinion, the lack of interest in the business as a going concern was impacted by significant trading losses for the past three years. This was viewed by parties as a difficult base from which to turn the business around given current market conditions within the retail footwear sector. 6.3 Managed wind-down process In parallel with the sale process, the Administrators assessed the options available for winding down the business, in the event that no acceptable offers were received. In doing so, the Administrators requested three stock liquidation specialists to provide a proposal on the optimal store closure process to be undertaken should a going concern sale not be ultimately agreed. On 14 December 2016, the Administrators announced that there were no acceptable offers for the business as a whole. As a result of this announcement, Hilco Merchants Australia (Hilco), a stock liquidation specialist firm was engaged to assist with managing the wind down program in conjunction with the Administrators and Company management. Hilco undertook various activities including determining the appropriate pricing (discount) and advertising campaign to ensure that all inventory, together with store furnishings, fixtures and fittings, were sold, in order to maximise value and minimise costs. Our trading strategy following the announcement of the managed wind down program was to trade the business to 28 February 2017 which would allow us to take advantage of the key back to school sales period during January 2017 and allow sufficient time following the end of this sales campaign to sell all remaining stock. Whilst trading into February 2017 meant increased store and operational overheads being incurred we believed this was the optimal strategy as it allowed us to control the discounting of products which ultimately resulted in significantly improved trading result. 6.4 Trading results Trading results since the store closures announcement have exceeded our initial expectations and realisation plan set by Hilco. This was largely driven by a successful and targeted Back to School marketing and inventory discounting campaign. The duration of the stock liquidation campaign was largely focused on maximising sales margin in January 2017, prior to the commencement of the school year. 16 March 2017 Page 27

30 Due to operational constraints, 14 stores were closed in January 2017, with the remaining stores closed between 13 and 28 February Early store closures were strategically selected in consultation with Hilco in order to: Minimise trading costs by closing stores with poor historical performance; and Consolidate stock in locations with multiple stores, to minimise occupancy and payroll costs. Head Office and Distribution operations were progressively scaled down throughout the trading period, and all inventory held in the distribution centre was dispatched across the store network by the end of January. This allowed the Administrators to provide notice of redundancy and reduce Head Office staff from 71 to 14 employees by 3 February Further reductions were made as the needs of the business diminished. Throughout the trading period, the Administrators have co-operated with the Head Office landlord by: Granting early access for tenant inspections to be conducted; Providing access to proposed tenants and their agents to take measurements; and Facilitating and allowing improvement works to be performed on the premises. This co-operation was provided in order to accelerate occupancy after the Company vacates the premises, thereby mitigating the landlord s loss and claim against the Company. Provided below is a summary of daily sales and margin for the Administrators trading period. $'000s Stock Realisation & Trading performance 1, % 100% 50% 0% (50%) (100%) (150%) (200%) (250%) (300%) (350%) Daily revenue (LHS) Gross margin % (RHS) 22 Nov Appointment of Administrators Hilco Appointed 14 Dec Stock liquidation 27 Feb Final day of trade commencement We make the following observations: Sales peaked in mid to late January, driven by strong Back to School sales with customers responding well to our discounting strategy. Following the end of the Back to School campaign sales margin progressively decreased with a sharp decline (below cost) during final days of trading to enable us to clear all remaining and inventory and exit the store network in an orderly fashion. Gaps in the above graph are due to public holiday closures during the Christmas and New Year period, as well as a margin system reporting error on 3 and 4 February. 16 March 2017 Page 28

31 6.5 Summary of trading receipts and payments The Administrators trading receipts and payments for the period of 22 November 2016 to 8 March 2017 is summarised below: Trading Receipts $000 (excl GST) Sales (including in-store fixtures) 30,157 Total trading receipts 30,157 Trading Payments Wages & Payroll Expenses (6,427) Rent & Outgoings (4,230) Stock Purchases (1,789) Consultancy Fees and Costs (714) Freight (662) Marketing (306) Other Trading Expenses (1,097) Total trading payments (15,225) Net Realisations from Trading 14,932 Full particulars of all receipts and payments for the period of 22 November 2016 to 8 March 2017 is included as part of the Administrators Remuneration Approval Request Report attached as Annexure D. 6.6 The sale of other assets Following our appointment, we made appropriate enquiries with management and statutory databases to ascertain assets available for realisation in the administration. Assets available for realisation (excluding inventory and trade debtors) included a number of motor vehicles, computer equipment, pallet racking and office furniture located at the head office. The Administrators explored realisation options for these fixed assets and subsequently engaged Slattery Auctions Australia to conduct a sale campaign regarding various asset categories. We expect all assets to be realised by 30 April March 2017 Page 29

32 7 Administrator s investigations This section provides creditors with information on the preliminary investigations undertaken by the Administrators to date, and whether there have been any potential actions identified that may be pursued by a liquidator should creditors vote against accepting the DOCA Proposal. Should a DOCA be accepted, a deed administrator does not have recourse to recoveries from voidable transactions. 7.1 Nature and scope of review The Act requires an administrator to carry out preliminary investigations into a company s business, property, affairs and financial circumstances. The investigations are preliminary and have been delayed by the Directors Statements (RATA) being received on 28 February The Director questionnaires are yet to be received. Notwithstanding this, the Administrators have made enquiries with the following sources in order to conduct preliminary analysis: Discussions with Payless Shoesource Inc. and key staff members. The Directors Statement. Management accounts, books and records, board reports and financial statements. The Company s internal accounting system. Correspondence and discussions with the Company s creditors. An independent valuation of the Company s assets. Searches obtained from relevant statutory authorities. Records maintained by the ATO. Publicly available information. Investigations centre on transactions entered into by a company that a liquidator might seek to void or otherwise challenge where the company is wound up. Investigations allow an administrator to advise creditors what funds might become available to a liquidator such that creditors can properly assess whether to accept a DOCA proposal or resolve to wind up the company. We investigated matters to the extent possible in the time available. A liquidator may recover funds from certain voidable transactions or through other avenues; for example, through action seeking compensation for insolvent trading or breach of director duties. Funds recovered would be available to the general body of unsecured creditors including secured creditors but only to the extent of any shortfall incurred after realising their security. A deed administrator does not have recourse to voidable transactions. 7.2 The Company s solvency In order for a liquidator to recover funds through the voiding of certain transactions or through other legal action, such as seeking compensation from directors for insolvent trading, the company s insolvency must be established at the relevant time. There are two primary tests used in determining a company s solvency, at a particular date, namely: i) Balance sheet test; and ii) Cash flow or commercial test. The Courts have widely used the cash flow or commercial test in determining a company s solvency at a particular date along with several other indicators. We have summarised below the insolvency indicators adopted by the Courts and the ASIC together with our comments in relation to the Company. 16 March 2017 Page 30

33 7.2.1 Insolvency indicators Insolvency indicator Present Comment Working capital deficiency Yes Working capital ratios can be used as a general indicator of liquid assets available to pay debts as and when they fall due within 12 months. A working capital ratio of less than 1 indicates a company may not be able to pay its debts as and when they fall due. Based on the Audited Financial Accounts, the Company recorded the following working capital ratios: FY FY FY FY (per management accounts to 31 October 2016) Net asset deficiency Yes Based on the Audited Financial Accounts, the Company recorded the following net asset positions: FY14 ($0.5m) FY15 ($6.4m) FY16 ($22.0m) FY17 ($28.0m) (per management accounts to 31 October 2016) Ageing of creditors No The vast majority (97%) of the Company s general trading expense creditors (excluding rent and inventory), were aged between 0 and 30 days as at the date of our appointment. Inability to extend finance facilities and breaches of covenants Inability to meet other financial commitments / default on finance agreements No No Inventory suppliers and landlords were also paid to terms. The Company did not rely on bank financing and accordingly there were no breaches of covenants. To our knowledge, and prior to the Parent entity s withdrawal of financial support, there were no defaults on any operating or finance lease obligations at the date of administration. Profitability / trading losses Yes Based on the Audited Financial Accounts, the Company recorded the following loss: Cash flow difficulties No access to alternative sources of finance (including equity capital) Inability to dispose of non-core assets Yes In absence of Parent funding N/A N/A Dishonoured payments No None identified to date. FY14 ($10.2m) FY15 ($10.8m) FY16 ($16.7m) FY17 ($9.2m) (per management accounts to 31 October 2016) Management has advised that cash flow was closely monitored and forecast on a regular basis. In the event that a cash flow shortfall was identified, i.e. anticipated expenditure exceeded anticipated income in a particular month, a request for funding would be made by management to the Parent entity. This funding arrangement is discussed further throughout this Report. While the business experienced cash flow challenges, funding support from Payless Shoesource Inc. and its subsidiaries was not withdrawn until 21 November We are not aware of any strategy that was agreed upon by the Company to raise additional capital from external sources in the lead up to our appointment. We are not aware of any strategy that was agreed upon by the Company to sell non-core assets in the lead up to our appointment. 16 March 2017 Page 31

34 Insolvency indicator Present Comment Overdue Commonwealth and State taxes No forbearance from creditors / legal action threatened or commenced by creditors No No We are not aware of any payment plans entered into with the ATO or any other government body. At the date of our appointment, the Company had not lodged or paid its November 2016 Business Activity Statement (BAS). This BAS was not due or outstanding at the date of our appointment. We understand all other Commonwealth and State taxes remain current. We are not aware of any involvement in litigation or legal disputes, other than negotiations with suppliers and landlords as would be expected in the ordinary course of business. The subordination to other creditors of $38.8 million owed to PSS Holdings is an indication of forbearance from creditors Preliminary conclusion as to solvency As detailed earlier in this report, the Company has incurred significant losses since its incorporation. These losses have been funded by PSS Holdings. Absent this funding, the Company would have been insolvent shortly after it commenced trading (i.e. as early as some time in FY14). While the Company was insolvent at least from 21 November 2016 when funding was withdrawn, in order to determine whether there was an earlier date of insolvency, a liquidator would need to consider a number of issues, including but not limited to: i) Whether the $11 million committed under the Letter of Financial Support was adequate and accessible (in a timely manner), given the financial position of both Collective Brands and PSS Holdings; ii) iii) iv) The effectiveness of the subordination of the intercompany balance due to PSS Holdings of $38.8 million, should this be subsequently challenged; Subject to items (i) and (ii), the general reliance that should / should not have been placed by the Directors on the Letter of Financial Support; and A review of the correspondence between the Company and Payless Shoesource Inc. in relation to requests for funding made post 26 October 2016 (being the date of the last funding instalment). Our preliminary investigations have revealed s confirming a willingness and intention of Payless Shoesource Inc. and certain subsidiaries to transfer funds to the Company in early November A liquidator, if appointed, would need to conduct further investigations to ultimately determine the timing of insolvency. Further commentary on potential recoveries arising from any insolvent trading is contained in Section Winding up applications At the date of our appointment, there was no outstanding winding up application against the Company. 7.4 Books and records Section 286 of the Act requires a company to keep written financial records that correctly record and explain the company s transactions, financial position and performance and would enable true and fair financial statements to be prepared. The financial records must be retained for a period of seven years after the transactions covered by the records are completed. The failure to maintain books and records in accordance with Section 286 provides a rebuttable presumption of insolvency which might be relied upon by a liquidator in an application for compensation for insolvent trading. The books and records of the Company were principally maintained by the internal finance team and we are satisfied that the Directors have provided all books and records in their possession. We are of the opinion that the Company s books and records were maintained in accordance with Section 286 of the Act at all times in the lead up to the Appointment. 16 March 2017 Page 32

35 7.5 Other matters arising from investigations Falsification of books Pursuant to Section 1307 of the Act, it is an offence for a person to engage in conduct that results in the concealment, destruction, mutilation or falsification of any securities of or belonging to the company or any books affecting or relating to affairs of the company. If a breach is proven, Part 9.4 of the Act provides for criminal penalties only. Therefore, any breaches of Section 1307 will not result in recovery of funds by a liquidator. Our investigations do not reveal any evidence of falsification of books False or misleading statements Pursuant to Section 1308 of the Act, a company must not advertise or publish a misleading statement regarding the amount of its capital. It is an offence for a person to make or authorise a statement that, to the person s knowledge is false or misleading in a material particular. Our investigations do not reveal any evidence of any false or misleading statements False information Pursuant to Section 1309 of the Act, it is an offence for an officer or employee to make available or give information to a director, auditor, member, debenture holder, or trustee for debenture holders of the company that is to the knowledge of the officer or employee: False or misleading in a particular matter; or Has omitted from it a matter the omission of which renders the information misleading in a material respect. In view of the challenges arising in connection with the enforcement of the Letter of Financial Support, consideration would need to be given to whether Collective Brands (the sole shareholder of the Company) in giving the Letter of Financial Support or whether the directors or auditors of the Company have in any way contravened this section. At this stage, we have not formed any views on this issue Litigation We are not aware of any litigation on foot at the time of the Appointment, to which the Company was either a plaintiff or defendant Letter of Financial Support As detailed in Section 3.2, on 11 August 2016 a Letter of Financial Support was provided to the Company by Collective Brands, and guaranteed by PSS Holdings. On 12 December 2016, we wrote to the General Counsel of Payless ShoeSource, Inc requesting information in relation to the group structure and financial position of Collective Brands and PSS Holdings. On 28 February 2017, the General Counsel of Payless ShoeSource, Inc verbally advised that Collective Brands and PSS Holdings would be unable to satisfy the obligations under the Letter of Financial Support. This advice was later confirmed in writing. Specifically, we have been advised that the entities hold minimal intellectual property assets and bank accounts with available funds of less than $50,000. This is yet to be verified with further information anticipated prior to the Second Meeting. Based on advice received to date, the only recourse available to the Company under the Letter of Financial Support is to Collective Brands. There is no contractual relationship between the Company and PSS Holdings, or any other entity within the broader Payless group. We note that the Directors of the Company have relied on the Letter of Financial Support when making declarations in relation to the solvency of the Company in its financial accounts. We also note the Company s auditor has taken into consideration the Letter of Financial Support when providing an audit opinion on the Company s financial statements. Potential actions and recoveries from the Directors and Auditor, which would be available to both a liquidator and a deed administrator are discussed in Section Director residency obligations Upon the retirement of Mr Mark Jeffery, the Company had two directors, both who ordinarily reside in the United States of America. Pursuant to Section 201A of the Act, a proprietary company must have at least one director that ordinarily resides in Australia. 16 March 2017 Page 33

36 There are no recoveries available to creditors in relation to this breach, however a liquidator would report the breach to the ASIC in accordance with the statutory reporting obligations and the ASIC would have discretion as to what action, if any, should be taken. [THIS SECTION IS INTENTIONALLY LEFT BLANK] 16 March 2017 Page 34

37 8 Offences and voidable transactions This section informs creditors about potential voidable transactions that occurred prior to the appointment of the Administrators, and where the property of Payless Shoes was disposed of or dealt with, may be recovered by a liquidator. Given that investigations undertaken to date are preliminary, the prospects of any recoveries would need to be properly assessed by a liquidator should creditors decide to vote against the DOCA Proposal at the Second Meeting. Any recoveries from voidable transactions would not be available in a DOCA. It should be noted that any actions available against the Directors and Auditors of the Company would be available to both a liquidator and a deed administrator. 8.1 Potential liquidator recoveries voidable transactions A liquidator has the power to void certain transactions which are either not beneficial, or are detrimental, to a company. Voidable transactions include: Unfair preference payments; Uncommercial transactions; Unfair loans; Unreasonable director-related transactions; Creation of circulating security interests within 6 months of commencement of Administration; and Transactions for the purpose of defeating creditors. For the purposes of examining voidable transactions, the liquidator would review transactions that occurred during the relevant time period (as prescribed under that Act for each of the transaction types listed above), looking back from the "relation back day". The relation back day for Payless Shoes is the date that the Administrators were appointed, being 22 November Enclosed at Annexure E is a creditor information sheet published by ARITA. This information sheet details the types of transactions which a liquidator can seek to void. We have undertaken an initial review of the books and records of the Company, including bank statements, in order to determine whether any voidable transactions were entered into. We have not identified any voidable transactions at this stage Unfair preferences An unfair preference payment is a transaction, generally occurring in the six months prior to the relation back day, between the company and a creditor, resulting in the creditor receiving from the company, in relation to an unsecured debt owed to the creditor, a greater amount than it would have received in relation to the debt in a winding up of the company. This period is extended up to four years for transactions entered into with a related entity. A transaction can only be considered an unfair preference if the company was insolvent at the time the transaction took place, or the company became insolvent as a result of the transaction. There are various defences that may be available to a party that may have received the benefit of a voidable transaction. Whilst our preliminary investigations have not identified any potential unfair preferences in the Company s records, a liquidator, if appointed, would need to conduct further investigations and, should unfair preferences be identified, make an assessment as to whether there are defences available to the creditor and whether the costs likely to be incurred in voiding the transactions will outweigh the return. Should there be any identified transactions, it is likely that a liquidator would require funding to cover the costs of any recovery actions in relation to this process. Depending on the source and quantum of funding, these costs could be substantial Uncommercial transactions An uncommercial transaction is a transaction which a reasonable person in the place of the company would not have entered into, taking into account the benefits and the detriment to the company, the respective benefits to the other parties involved and any other related matters. The period for recovering uncommercial transactions is generally two years. This period is extended up to four years for transactions entered into with a related entity. 16 March 2017 Page 35

38 A liquidator must investigate transactions deemed to be uncommercial, having regard to the detriment to the company suffered as a consequence of the transaction in the period two years prior to the date of administration. Based on the books and records in my possession we have not identified any transactions at this stage which would constitute uncommercial transactions. A liquidator, if appointed, would need to conduct further investigations in relation to this matter Unfair loans An unfair loan is a loan agreement where the interest or charges are considered to be extortionate. Unfair loans made to the Company any time prior to the appointment of the Administrator may potentially be overturned by a subsequently appointed liquidator, whether or not the Company was insolvent at the time the loan was entered into. A liquidator must investigate loans to the company which may be considered unfair due to extortionate interest rates or charges. At this stage we are not aware of any unfair loans which Payless Shoes entered into. A liquidator, if appointed, would need to conduct further investigations in relation to any potential unfair loans Unreasonable director-related transactions An unreasonable director-related transaction is a payment, conveyance or other disposition by the company of property to a director or close associate of the director. Furthermore, it is required that it may be expected that a reasonable person in the company s circumstances would not have entered into the transaction having regards to the benefits (if any) and detriment to the company of entering into the transaction. The transaction must have been unreasonable, and entered into during the four years prior to the relation back day, regardless of the solvency at the time the transaction occurred. These can include remuneration, bonuses, loans, loan forgiveness and asset transfers to company officers with the four-year period ending on the relation-back date A liquidator must investigate related party transactions within four years of the date of administration and determine whether any transactions occurred when the company was insolvent or was likely to become insolvent as a result of the transaction. Our preliminary investigations do not disclose any unreasonable director-related transactions Voidable transaction to defeat creditors A transaction of a company is voidable where a transaction is entered into for the purpose of defeating, delaying or interfering with the rights of any or all of its creditors. The transaction must have occurred at a time when the company was insolvent, or the company must become insolvent as a result of the transaction, and have occurred within ten years of the relation back day. Our investigations to date have not highlighted any voidable transaction for the purpose of defeating creditors. A liquidator, if appointed, would need to conduct further investigations in this regard. 8.2 Insolvent trading Section 588G of the Act imposes a positive duty upon company directors to prevent insolvent trading. If a director is found guilty of an offence in contravening Section 588G, the Court may order him or her to pay compensation to the company equal to the amount of loss or damage suffered by its creditors. The Court may also impose upon the directors one of two types of civil penalty orders, the first can include a fine or an order prohibiting the directors from participating in the management of a company. The second, where there is criminal intent and conviction, a director could also be imprisoned for up to five years. This action is not a right that is available to an administrator or a deed administrator. Applications for compensation payable to the company are usually made by a liquidator, or in specified circumstances, a creditor. The substantive elements of Section 588G are: A person must be a director of a company at a time when the company incurs a debt; The company must be insolvent at the time or becomes insolvent by incurring the debt; and The director must have reasonable grounds for suspecting that the company is insolvent or would become insolvent. The defences available to directors contained in Section 588H are: The directors had reasonable grounds at the time the debt was incurred to expect the company to be solvent and would remain solvent even after the debt was incurred; 16 March 2017 Page 36

39 The directors relied on another competent and reliable person to provide information about whether or not the company was insolvent; The directors were ill or for some other good reason did not take part in the management of the company; and The directors took reasonable steps to prevent the incurring of debt. A liquidator must form an opinion as to the date of insolvency and determine the debts incurred from that date; thereby quantifying the loss to the company. Our preliminary view is that Payless Shoes was solvent up until the point at which support from the Parent was withdrawn. The Directors resolved to then immediately appoint Administrators. As outlined in Section 7.5.5, we have been advised that Collective Brands and PSS Holdings do not have the financial capacity to honour the commitments in the Letter of Financial Support. Accordingly, there is some potential that the Company was insolvent at an earlier point in time. A liquidator would undertake an investigation to determine whether there are grounds to pursue an insolvent trading action against the directors due to there being no substance to the Letter of Financial Support provided by the parent company. A particular focus of this would be what knowledge the two US based directors had of the financial capacity of Collective Brands and PSS Holdings. In determining a course of action, a liquidator would give consideration to the costs and risk of any proceedings, and the ability to fund any proceedings, including whether creditors are prepared to forgo any scheduled dividends and / or the cost of litigation funding as an alternative. We have not assessed the Directors capacity to meet any claims should it be determined that insolvent trading has occurred. 8.3 Holding company liability Section 588V of the Act provides that a holding company may be held liable for the debts of a subsidiary in certain circumstances. The substantive elements of Section 588V are: The corporation is the holding company at the time when the company incurs a debt; The subsidiary is insolvent at that time, or becomes insolvent by incurring that debt; The holding company, or one or more of its directors, is aware at that time that there are grounds for suspecting the subsidiary is insolvent; or Having regard to the nature and extent of the holding company s control of the subsidiary s affairs, then it would be reasonable to expect that: o o The holding company would be aware of the subsidiary s financial position; or The holding company s directors would also be aware of the subsidiary s financial position. The defences the holding company may rely upon are set out in Section 588X and are essentially the same as those a director may rely upon under Section 588H. Furthermore, the Courts have held that, as a defence to such proceedings, a holding company can off-set any claim by a liquidator under Section 588W against monies owing under an intercompany loan account. A liquidator, if appointed, would need to conduct further investigations in relation to any holding company liability, however, as outlined above, any claim may be difficult to pursue given the extent of the funding provided by the Parent. 8.4 Other potential liquidator recoveries Compensation for breach of director s duties Sections 180 to 184 of the Act set out the duties, obligations and responsibilities imposed on Directors which are designed to promote good governance and ensure that Directors act in the best interests of the company. These duties include: Duty of care and diligence; Duty of good faith; Duty not to make improper use of position; and 16 March 2017 Page 37

40 Duty not to make improper use of information. Our investigations with respect of any breaches committed by the Directors are continuing. In the event that the Company is would up, further investigations may be undertaken into any such breaches Arrangements to avoid employee entitlements Part 5.8A of the Act aims to protect the entitlements of a company s employees from agreements that deliberately defeat the recovery of those entitlements upon insolvency. Under Section 596AB(1) of the Act, it is an offence for a person to enter into a transaction or relevant agreement with the intention of, or with intentions that include: Preventing recovery of employee entitlements; or Significantly reducing the amount of employee entitlements recoverable. We are not aware of any such transactions although his matter may be further investigated by any liquidator Letter of Financial Support The FY15 and FY16 financial accounts have been prepared on a going concern basis. In making this assumption, the Directors have relied on a Letter for Financial Support from Collective Brands which confirms funding of up to $11m and subordinates the related party debt in favour of all other creditors. In addition, the Auditor has confirmed the going concern basis of the accounts, albeit with an emphasis of matter contained in the report. In the absence of the Letter of Financial Support, it is possible a qualified audit opinion would have been issued if the Directors had maintained a going concern basis of accounting. As outlined in Section 7.5.5, the enforceability and recoverability of the Letter of Financial Support is uncertain. While any recoveries made would significantly increase the pool of funds available for creditors, there are significant risks associated with pursuing these recoveries including: i) The limited assets held by both Collective Brands (registered in the Netherlands) and PSS Holdings (registered in the Cayman Islands) to meet the obligations under the Letter of Financial Support. This is yet to be verified with further documentation expected to be received prior to the Second Meeting; ii) iii) The cost, risk and complexity associated with commencing proceedings in the Netherlands and / or Cayman Islands; The cost, risk and complexity associated with commencing proceedings against the Directors and / or Auditors which are likely to be vigorously defended with uncertainty around the prospects of recovery; iv) The significant delays in making distributions to creditors which are likely to occur where there is ongoing litigation. A liquidator would conduct further investigations into the statements contained in the financial accounts, with particular emphasis on whether the Directors knew about the financial limitations of the entities behind the Letter of Financial Support. A liquidator would also need to take appropriate legal advice on the merit of any action and potential recoveries that would be available. In accordance with the terms of the proposed DOCA, the Company is required to forbear any right to claim payment from Collective Brands or PSS Holdings with respect to the Letter of Financial Support. It should be noted however that any potential actions against the Directors and / or Auditors available to a liquidator would also be available to a deed administrator. 8.5 Summary of potential liquidator recoveries Based on preliminary investigations outlined above, it appears that a liquidator may have two potential sources of recoveries arising from voidable transactions, being: i) The Letter of Financial Support, up to $11 million; and ii) Other potential actions available against the Directors and / or Auditors, the quantum of which is presently unknown. Whilst we believe there may be some merit in pursuing these claims should the Company be placed into Liquidation creditors should be aware that the outcome of any recovery action would be inherently uncertain and take significant time, risk and expense to progress and finalise. 16 March 2017 Page 38

41 While a liquidator would conduct further investigations into other potential voidable transactions (including unfair preferences), it appears unlikely that such recoveries would be available. 8.6 Directors ability to pay a liquidator s claims At this stage, the Administrators have not made any assessment as to the financial capacity of the Directors to meet any potential actions that we may identify. 8.7 Reports to the ASIC Section 438D of the Act requires us to lodge a report with the ASIC should we become aware of: Any offences committed by a past or present officer of the companies; Evidence that money or property has been misapplied or retained; Evidence that a party is guilty of negligence, default, breach of duty or breach of trust in relation to the companies. At the time of writing this Report, we have not identified any offences that require reporting to the ASIC pursuant to Section 438D of the Act. Creditors should be aware that any report lodged pursuant to Section 438D (or an investigative report lodged by a liquidator pursuant to Section 533 of the Act) is not available to the public. [THIS SECTION IS INTENTIONALLY LEFT BLANK] 16 March 2017 Page 39

42 9 Proposal for DOCA On 10 March 2017 a DOCA Proposal was received from PSS Holdings. Subsequent iterations of the DOCA Proposal were submitted with the final DOCA Proposal was received on 15 March Under the DOCA Proposal, PSS Holdings agrees to subordinate to other creditors all amounts owing by the Company to it, totalling $41.4 million. The DOCA Proposal also requires that the Company agree to forbear any right to claim payment from Collective Brands or PSS Holdings under the Letter of Financial Support dated 11 August 2016 or the earlier Confirmation of Financial Support from Collective Brands to the Company dated 16 June Proposal received We have received a DOCA proposal from PSS Holdings, a related party to the Company. We consider that the proposed DOCA complies with section of the Code. The terms of the DOCA will be in a form capable of being executed shortly after the second meeting of creditors. The DOCA term sheet is set out at Annexure F. 9.2 Key features of the proposal The proposed DOCA includes the following key features: Key element DOCA Liquidation PSS Holdings creditor claim Forbearance of claims under funding letters PSS Holdings agrees subordinate to all other creditors all amounts owing to it by the Company as at 22 November The practical effect of this is that PSS Holdings $41.4 million creditor claim will be subordinated to all other creditors. In consideration of PSS Holdings compromising its claim, the Company agrees to forbear any right to claim payment from: Collective Brands; or PSS Holdings; under the Letter of Financial Support dated 11 August 2016 or the Confirmation of Financial Support from Collective Brands to the Company dated 16 June As outlined above, as at the date of administration, the Company owed PSS Holdings $41.4 million. The Letter of Financial Support provided on 11 August 2016 suggests that $38.8 million of this balance should be subordinated to other creditor claims, however, the documentation surrounding this subordination is unclear. There is therefore a risk that this position could be challenged by PSS Holdings which could result in significant costs being incurred, a delay in the distribution to creditors, and a reduction in the quantum of the dividend. Based on preliminary investigations, the primary action available in a liquidation as it concerns Collective Brands and PSS Holdings would be potential recoveries under the Letter of Financial Support. As detailed throughout this report, our understanding is that these two entities hold limited assets, and commencing proceedings in the relevant overseas jurisdictions is likely to be time consuming and costly. We have requested further documentation to verify this which we expect to receive prior to the Second Meeting. We are of the opinion that the DOCA proposal put forward by PSS Holdings should be accepted by creditors as it provides a more certain return to unsecured creditors than liquidation. This is subject to receiving the requested information in relation to the financial position of Collective Brands and PSS Holdings, and that information not impacting the recommendation. While there is a possibility of additional recoveries from voidable transactions in a liquidation, this is counterbalanced by the risk of a challenge by PSS Holdings to the assessment of its claim and the additional costs of the liquidation and likely delay in the timing of a dividend caused by protracted litigation. Returns to priority creditors are not impacted by the DOCA Proposal, with a dividend of 100 cents in the dollar expected in either a DOCA or a Liquidation. Should creditors resolve to execute a DOCA, any recoveries from voidable transactions that would be available to a liquidator will not be recoverable in a DOCA. 16 March 2017 Page 40

43 9.3 Further information for creditors Creditors should seek their own legal advice as to their rights and the effects of their position in entering into the DOCA. Creditors can obtain further information from the ASIC website at under Regulatory Resources Insolvency Insolvency for Creditors. [THIS SECTION IS INTENTIONALLY LEFT BLANK] 16 March 2017 Page 41

44 10 Return to creditors Based on the realisations made during the administration and the absence of a secured creditor, it is expected that priority employee entitlements will be paid in full and a dividend will be paid to unsecured creditors. The table and commentary below provides a range of the estimated outcomes in both a Liquidation and DOCA together with an explanation of the issues likely to impact the timing and quantum of a dividend to unsecured creditors. In the absence of a secured creditor, any funds received from the sale of the Company s non-circulating assets (including plant and equipment) will be applied to repay creditors in the same manner as circulating assets. Any funds received from circulating assets (including cash, debtors and inventory), subject to the costs of the administration, will be applied in the following order. i) First, priority (employee) creditors; ii) Second, unsecured creditors (including intercompany and related party creditors); iii) Third, subordinated creditors; and iv) Fourth, any claims made by shareholders The figures presented in the tables below represent the range of estimated low and high outcomes for creditors in a liquidation and DOCA scenario, based on current available information. The assumptions made in each scenario are detailed in the notes within this section. In summary, we presently estimate that the dividends payable to each class of creditor will be as follows: Class of Creditor (cents in $) Liquidation Low Liquidation High DOCA Low DOCA High Priority (employee) creditors 100% 100% 100% 100% Unsecured creditors 33% 62% 48% 76% Subordinated creditors Nil Nil Nil Nil Shareholders Nil Nil Nil Nil * Whilst we have assumed PSS Holdings to have a claim of $7.8 million in a Liquidation Low case, there remains a possibility that PSS Holdings could successfully challenge a liquidator s adjudication, and be entitled to claim as an unsecured creditor for its full outstanding balance of $41.4 million. In this scenario, we anticipate that most other variables would be unaffected, and the return to unsecured creditors would be between 15% - 17%. In any scenario, it is expected that the majority of employee entitlements will be paid on or around 15 March 2017, with any remaining entitlements to be paid shortly thereafter. On the basis that trading has now ceased and the majority of assets realised and operating costs paid or quantified, there is a reasonable degree of certainty as to the pool of funds available for unsecured creditors, with the exception of any potential recoveries from voidable transactions which may be made by a liquidator. Any such recoveries would not be available in a DOCA. Any recoveries arising from potential actions against the Directors and / or Auditors would be available to both a liquidator and deed administrator. At present, the prospects and quantum of any recoveries from voidable transactions are unknown and therefore difficult to quantify. A liquidator will also need to consider whether the costs and risks associated with pursuing any such claims is likely to outweigh any potential benefit so as not to erode the potential return to creditors. Further, the return to unsecured creditors will also be significantly impacted by the size of the creditor pool, with a number of factors influencing this in both a DOCA and a liquidation, including: The finalisation of all trading accounts relating to the administration period; The quantum of landlord claims following the closure of the store network and the Company s head office; The level of supplier claims from overseas suppliers relating to long dated purchase orders that were subsequently cancelled by the Administrators following the announcement of the managed wind down program in December 2016; and Any recoveries from potential actions against the Directors and / or Auditors. 16 March 2017 Page 42

45 Should the creditors vote against the DOCA Proposal and the Company is placed into Liquidation then the return to unsecured creditors will be dependent on the following additional factors: Any successful challenge by PSS Holdings as to the liquidator s determination of its claim; Whether the Letter of Financial Support of up to A$11 million provided by Collective Brands (and guaranteed by PSS Holdings) is recoverable in part or in whole; and Whether there are any other recoveries made by a liquidator from voidable transactions. Please note that these calculations are an estimate only and will be subject to change, with the final pool of creditors to only be determined once a liquidator commences a dividend process during which claims will be adjudicated upon. At that time, creditors will be required to provide full particulars supporting any claim made. $000s Note CIRCULATING ASSETS Liquidation ERV Low Liquidation ERV High DOCA ERV Low DOCA ERV High Cash ,195 2,195 2,195 2,195 Debtors Inventory ,036 30,046 30,036 30,046 Interest and Other Income Antecedent Recoveries Unknown 0 Unknown Less: PMSI Claims (91) (91) (91) (91) Less: Trading Costs (16,934) (16,634) (16,934) (16,634) Net Circulating Asset Realisations 15,309 15,631 15,309 15,631 Less: Estimated Costs Administrators remuneration (1,588) (1,588) (1,588) (1,588) Administrators disbursements (105) (95) (106) (96) Liquidators remuneration (505) (505) 0 0 Liquidators disbursements (30) (20) 0 0 Deed Administrators remuneration (425) (425) Deed Administrators disbursements (30) (20) Legal fees and other professional costs (570) (470) (420) (320) Total Estimated Costs (2,797) (2,677) (2,568) (2,448) Net Circulating Assets Available 12,513 12,955 12,741 13,183 Less: Employee priority creditors (3,844) (3,844) (3,844) (3,844) Estimated Surplus / (Deficiency) 8,668 9,110 8,897 9,339 Estimated Return to Priority Creditors 100% 100% 100% 100% NON-CIRCULATING ASSETS Plant & Equipment and Motor Vehicles Less: Costs of Realisation (30) (25) (30) (25) Less: PMSI Claims Net Non-Circulating Assets Total Assets Available for Unsecured Creditors 8,893 9,380 9,122 9,609 Trade creditors (6,954) (6,080) (6,954) (6,080) Contingent liabilities (11,898) (6,598) (11,898) (6,598) PSS Holdings (7,778) (2,571) 0 0 Total Unsecured Creditors (26,630) (15,249) (18,852) (12,678) Estimated Surplus / (Deficiency) (17,737) (5,869) (9,730) (3,069) Estimated Return to Unsecured Creditors 33% 62% 48% 76% 16 March 2017 Page 43

46 We provide the following comments in relation to the table above: Cash At appointment, the Company held $2,165,581 in a business account. The Company also held a USD account and a business credit card (secured by $20k term deposit). These amounts, less any outstanding credit card balances were realised shortly following appointment Inventory As at the date of Administration, based on the books and records the Company held approximately $14.7 million of inventory at cost. A further $1.8 million in inventory was purchased by the administrators to drive the back to school sale period. Through the course of trading, all of the inventory on hand was sold, with $30.1 million (gross sales) realised. There were significant trading costs incurred in realising this inventory including occupancy and payroll costs for the trading period of the administration which are detailed in Note Antecedent recoveries It appears that a liquidator may have two potential sources of recoveries arising from investigations, being: i) The Letter of Financial Support, up to $11 million; and ii) Other potential actions available against the Directors and / or Auditors, the quantum of which is presently unknown. Whilst we believe there may be some merit in pursuing these claims should the Company be placed into Liquidation, creditors should be aware that the outcome of any recovery action would be inherently uncertain and take significant time and expense to progress and finalise. Therefore, the potential recoveries from such claims is unknown at this time and would require further investigation to form a view on the prospects. While a liquidator would conduct further investigations into other potential voidable transactions (including unfair preferences), it appears unlikely that such recoveries would be available. Under the current DOCA Proposal the Company is required to forbear any right to claim payment from Collective Brands or PSS Holdings. For the reasons outlined throughout this report, we consider any recoveries from these entities will be problematic, however, we await further documentation regarding the financial position of the two entities. While recoveries from voidable transactions would not be available to a deed administrator, potential actions available against the Directors and / or Auditors remain live PMSI claims During the course of the administration Purchase Money Security Interest (PMSI) claims totalling $470k were made. Each claim has either been reviewed or is in the process of being reviewed. To date, valid PMSI claims totalling $91k have been settled and in certain circumstances, goods have been returned where there was no financial benefit for the administration in realising the asset. Any creditor whose PMSI registration is deemed ineffective will have an unsecured claim in the Administration Trading costs In order to maximise asset recoveries and preserve value for creditors during the administration, trading costs were incurred to initially pursue a sale of the business and thereafter facilitate an orderly wind down of the Company s assets. The primary categories of costs incurred included salaries and wages, occupancy costs, inventory purchases, marketing and advertising and logistics. A summary of the trading results for the period of 22 November 2016 to 8 March 2017 is contained in Section 6.4 of this Report. We are in the process of finalising all trading accounts, however, given all major trading expenses have now been paid or quantified, we have a reasonable degree of confidence as to the final quantum Remuneration Please refer to Section 2.8 and our remuneration report attached at Annexure D for a detailed breakdown of our remuneration incurred to date and our future remuneration proposed. Please note that our future remuneration is an estimate only, subject to approval it will only be drawn to the extent that fees and costs are incurred Legal fees Legal fees include advice provided to date in respect of the general conduct of the administration including employment related issues, dealing with supplier claims, landlord / leasing issues and advice with respect to the preliminary investigations undertaken to date including assessing intercompany claims. 16 March 2017 Page 44

47 It is expected that further fees will be incurred in both a DOCA and a liquidation with respect to the review and adjudication of creditor claims. In a liquidation, legal fees are likely to be higher than in a DOCA due to further initial investigations into potential voidable transaction recoveries. As noted above, we have not included the costs of pursuing any such recoveries, and will obtain creditor / committee of inspection approval prior to commencing any such action Priority creditors A detailed break-down of all employee priority claims is contained in Section 5. As outlined above, all categories of employee entitlements will be paid in full in either a liquidation or a DOCA, with the majority of these entitlements paid on 15 March Plant and equipment The Company owns plant and equipment including office furniture, warehouse equipment and racking, store fixtures and fittings, IT equipment, and motor vehicles. We have engaged Slattery s auctioneers to assist with the realisation of these assets. We are not aware of any claims against any of the owned assets to be realised Trade and other creditors Creditor ($000s) Liquidation Low Liquidation High DOCA Low DOCA Trade creditors (1) (6,954) (6,080) (6,954) (6,080) Contingent liabilities (2) (11,898) (6,598) (11,898) (6,598) PSS Holdings (3) (7,778) (2,571) 0 0 Total (26,630) (15,249) (18,852) (12,678) High The figures in the above table with respect to trade creditors and contingent liabilities are an estimate only and are subject to change pending a claim adjudication process. 1. Trade creditors represents all stock and non-stock creditors per the Company s books and records as at 22 November 2016, together with any unsecured employee entitlement claims. This includes the balance of $2.5 million owing to DAL. 2. Contingent liabilities are comprised of: a) Overseas supplier claims relating to purchase orders placed by the Company and subsequently cancelled by the Administrators in January b) Landlords, with respect to losses which may be incurred as a result of the business ceasing to trade. Factors which may impact claims include: Vacancy period; Make good costs; Re-letting costs, including incentives, legal costs and marketing; Rent differentials; and Agent s commission In forming the estimate with respect to the above contingent claims, we have made certain assumptions around the obligations of creditors to mitigate their loss. These obligations have been communicated to creditors throughout the administration and will be assessed during the claim adjudication process. 3. Based on information currently available, it appears that $38.8 million of PSS Holdings $41.4 million claim would be subordinated to other creditors in a liquidation. There remains a risk however, that this position would be challenged. At present, it appears that the most likely challenge would be as to the effective date of the subordination, such that only amounts advanced to 30 January 2016 would be subordinated. This would result in PSS Holdings unsecured claim increasing to $7.8 million. Under the DOCA Proposal, PSS Holdings has agreed to subordinate its claim in full. 16 March 2017 Page 45

48 10.2 Timing of dividend to unsecured creditors Given the complexity associated with adjudicating unsecured claims (particularly landlord and other contingent claims), we expect this process to take a minimum of 3-6 months. This will involve the deed administrators / liquidators calling for proofs of debt, followed by a formal adjudication process. The onus for proving claims and providing all supporting documentation rests with the creditor. In the event that potential further recoveries are identified from the actions available to a deed administrator, the creditors / the committee of creditors (if established) will be consulted to determine any appetite to pursue such claims, including considering the consequences on the timing and quantum of the dividend. In this instance we would envisage that an interim dividend would still be paid within the 3-6 month timeframe. Should creditors vote against the DOCA proposal and a liquidator is appointed, the dividend timetable may be materially impacted as a result of any potential challenge by PSS Holdings to the subordination of its claim and the liquidator s assessment of any potential recoveries from voidable transactions. At this stage there is too much uncertainty to provide an estimate on the timing of a dividend in this circumstance. [THIS SECTION IS INTENTIONALLY LEFT BLANK] 16 March 2017 Page 46

49 11 Administrator s opinion We recommend that creditors vote in favour of the DOCA Proposal at the Second Meeting. This recommendation is subject to receiving the further information requested in relation to the financial position of Collective Brands and PSS Holdings prior to the Second Meeting. Pursuant to Section 439A(4)(b) of the Act, we are required to provide creditors with a statement setting out our opinion on whether it is in creditors interests for the: Administration to end; Company to be wound up; or Company to execute a DOCA. Each of these options is considered below. In forming our opinion, it is necessary to consider an estimate of the dividend creditors might expect and the likely costs under each option Administration to end In the absence of further funding from PSS Holdings, the Company is insolvent and unable to pay its debts as and when they fall due. Accordingly, returning control of the Company to the Directors would be inappropriate and is not recommended DOCA The final DOCA Proposal from PSS Holdings was received on 15 March 2017 and has been subsequently assessed by the Administrators in the context of whether it would provide a better return to unsecured creditors than a liquidation. Based on our analysis we recommend that the creditors vote in favour of the DOCA Proposal at the Second Meeting given: i) It provides for a higher and more certain return to creditors than a liquidation; ii) iii) iv) Eliminates the risk of challenge to the subordination of PSS Holdings claim which if successful would significantly dilute the return to unsecured creditors and significantly delay the timing of any distribution; There is a high degree of uncertainty and risk surrounding potential recoveries from voidable transactions that would be available to a liquidator but not a deed administrator; and Recoveries from potential actions against Directors and / or Auditors remain available to the deed administrators. This recommendation is subject to receiving the further information requested in relation to the financial position of Collective Brands and PSS Holdings prior to the Second Meeting. Should the information received alter our opinion, at the Second Meeting to be held on 27 March 2017, it may be appropriate to adjourn the meeting (for up to 45 days) to allow creditors to properly consider any new information Winding up of Payless Shoes Should the unsecured creditors vote against the DOCA proposal then the Company will be placed into liquidation. If appointed, a liquidator would be in a position to conduct detailed investigations into the conduct of the Directors and the financial affairs of the Company. A liquidator is also empowered to: Complete the realisation of assets in an orderly manner. Pursue various potential recoveries under the Act to recover funds for creditors. Distribute recoveries made in accordance with the priority provisions of the Act. Report to the ASIC on the results of investigations into the company s affairs. 16 March 2017 Page 47

50 12 Further information and enquiries The ASIC has released several insolvency information sheets to assist creditors, employees and shareholders with their understanding of the insolvency process. You can access the relevant ASIC information sheets at We will advise creditors in writing of any additional matters that come to our attention after the release of this Report, which in our view is material to creditors consideration. Should you have any questions regarding the administration or the Report, please do not hesitate to contact the relevant Ferrier Hodgson representative: Creditor queries Phone: (02) Employee queries Luke Meany Phone: (02) Landlord queries Courtney McLean Phone: (03) Dated this 16th day of March 2017 Jim Sarantinos James Stewart Peter Gothard Joint and Several Administrators of Payless Shoes Pty Limited 16 March 2017 Page 48

51 Glossary of terms Abbreviation ACN Description Australian Company Number Act Corporations Act 2001 Administrators Administrators Remuneration Approval Request Report APAAP Appointment ARITA ASIC ATO Code COC Company Collective Brands DAL Directors DIRRI DOCA DOCA Proposal EBITDA ERV FEG Former Director Jim Sarantinos, James Stewart and Peter Gothard The report attached as Annexure D All present and after-acquired property no exceptions Appointment of Jim Sarantinos, James Stewart and Peter Gothard as Joint and Several Administrators of Payless Shoes on 22 November 2016 Australian Restructuring, Insolvency & Turnaround Association Australian Securities & Investments Commission Australian Taxation Office ARITA Code of Professional Practice Committee of Creditors Collective Brands II Cooperatief U.A. Dynamic Assets Limited Stephen Gish, Rex Tessendorf and Neil Hansen (alternate director) Declaration of Independence, Relevant Relationships and Indemnities, pursuant to s436da of the Act and Code. Deed of Company Arrangement The Deed of Company Arrangement Proposal received from PSS Holdings Limited on 15 March 2017 Earnings before interest, tax, deprecations and amortisation Estimated Realisable Value Fair Entitlements Guarantee Mr. Mark Jeffrey First Meeting First meetings of creditors held on 2 December 2016 FY FYxx Financial year (being 31 January to 30 January) Financial year ended 31 January 20xx Letter of Financial Support Letter Provided by Collective Brands to the Company dated 11 August 2016 New Look Parent Payless Shoes PMSI PPSA PPSR PSS Holdings RATA New Look Shoes Pty Ltd Collective Brands II Cooperatief U.A. (trading as Payless Shoesource Inc) Purchase Money Security Interest Personal Property Securities Act 2009 (Cth) Personal Property Securities Register PSS Holdings Limited Report as to Affairs 16 March 2017 Page 49

52 Abbreviation Remuneration Report Report ROT Second Meeting Statement Description The Administrators Remuneration Approval Request Report attached as Annexure D This report, prepared pursuant to Section 439A of the Act Retention of Title Second meeting held pursuant to Section 439A of the Act, where creditors determine the future of the Company. Report As To Affairs 16 March 2017 Page 50

53 Annexure A - Notice of meeting Form 529 Notice of Meeting Corporations Act 2001, Subregulation (2) (Company) ACN NOTICE is given that a meeting of creditors of the Company will be held on Monday, 27 th March 2017 at 11.00am (AEDT) at The Grace Hotel, 77 York Street, Sydney NSW Agenda 1. To consider a statement by the Directors about the Company s business, property, affairs and financial circumstances. 2. To consider the circumstances leading to the appointment of the Administrators to the Company, details of the proposed DOCA and the various options available to creditors. 3. To consider the report of the Administrators. 4. To fix the remuneration of the Administrators. 5. To resolve that: The Company execute a DOCA; The Company be wound up; or The Administration should end. 6. If it is resolved that the Company execute a DOCA, to fix the remuneration of the Deed Administrators. 7. If it is resolved that the Company execute a DOCA, consider whether a Committee of Creditors is to be appointed, and if so, the members of that Committee. 8. If it is resolved that the Company be wound up, to fix the remuneration of the Liquidators 9. If it is resolved that the Company be wound up, consider whether a Committee of Inspection is to be appointed, and if so, the members of that Committee. 10. If it is resolved that the Company be wound up, consider whether, pursuant to Section 477(2A) of the Corporations Act 2001 (Act), creditors authorise the Liquidators to compromise a debt owed to the Company of any amount. 11. If it is resolved that the Company be wound up, consider whether pursuant to Section 477(2B) of the Corporations Act 2001, creditors authorise the Liquidators to enter into any agreement on the Company s behalf where the term of the agreement may end; or obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance; more than three months after the agreement is entered into. 16 March 2017 Page A-1

54 12. If it is resolved that the Company be wound up, consider whether, subject to obtaining the approval of the Australian Securities & Investments Commission (ASIC) pursuant to Section 542(4) of the Act, the books and records of the Company and of the Liquidators may be disposed of by the Liquidators 12 months after the dissolution of the Company or earlier at the discretion of ASIC. 13. Any other business that may be lawfully brought forward. For a person to be eligible to attend and vote at the meeting on your behalf, a Form 532, Appointment of Proxy, is to be completed and submitted by no later than 4.00pm (AEDT) on Friday 24 th March 2017, to: c/- Ferrier Hodgson GPO Box 4114 Sydney NSW 2001 Tel: (02) Fax: (02) paylesscreditors@fh.com.au Note: In accordance with Regulation A of the Corporations Regulations 2001, if a proxy is submitted by facsimile, the original document must be lodged within 72 hours after lodging the faxed copy. A company may only be represented by proxy or by an attorney appointed pursuant to Corporations Regulations and respectively or, by a representative appointed under Section 250D of the Act. In accordance with Subregulation (1) of the Corporations Regulations, creditors will not be entitled to vote at the meeting unless they have previously lodged particulars of their claim against the Company in accordance with the Corporations Regulations and that claim has been admitted, for voting purposes, wholly or in part. Dated this 16 th day of March 2017 Jim Sarantinos Administrator 16 March 2017 Page A-2

55 Annexure B - Appointment of proxy form Form 532 Appointment of Proxy Corporations Act 2001 Regulation (the Company) ACN Instructions: Please complete Sections A, B, C and D and submit in accordance with the Section E. See back page for instructions on completion. A. Name and Contact Details of Person or Entity Entitled to Attend Meeting 1 (if entitled in a personal capacity, given name and surname; if a corporate entity, full name of company, etc) 2 of (address) 3 Tel: 4 Fax: B. Appointment of Person to Act as Proxy Note: You may nominate the Chairperson of the meeting as your proxy (or your alternate proxy in the event that the first-named proxy is not in attendance). 1 *I / *We, as named in Section A above, a *creditor / *eligible employee creditor / *contributory / *debenture holder / *member of the Company, appoint 2 (name of person appointed as proxy) 3 4 or in his / her absence (address of person appointed as proxy) 5 (name of person appointed as alternate proxy) 6 7 as *my / *our proxy (address of person appointed as alternate proxy) to vote at the meeting of creditors to be held on Monday 27 th March 2017 at The Grace Hotel, 77 York Street, Sydney NSW 2000 at 11:00am (AEDT), or at any adjournment of that meeting in accordance with the instructions in Section C below. 16 March 2017 Page A-3

56 C. Voting Instructions 1 *My / *Our proxy, as named in Section B above, is entitled to act as *my / *our : 2 general proxy, to vote on *my / *our behalf generally, as *he / *she determines, subject to any specific instructions below, if applicable. and / or 3 special proxy, to vote on *my / *our behalf specifically, in accordance with the following special instructions: (for each resolution for which you wish to give specific voting instructions, please tick one option only) Resolution For Against Abstain 1. That the remuneration of the Administrators, as set out in the Remuneration Approval Request Report dated 16 March 2017, for the period from 1 February 2017 to 8 March 2017 be fixed in the amount of $417, (plus GST) and may be paid. 2. That the remuneration of the Administrators, as set out in the Remuneration Approval Request Report dated 16 March 2017 for the period from 9 March 2017 to 27 March 2017 or to the date of execution of the DOCA be fixed up to a maximum amount of $248, (plus GST) but subject to upward revision by resolution of creditors, or the Committee of Creditors should one be appointed and that the Administrators be authorised to make periodic payments on account of such accruing remuneration as incurred. 3. That, pursuant to Section 439C of the Corporations Act 2001 (the Act), the Company execute a Deed of Company Arrangement, under Part 5.3A of the Act, in the same form as the proposal statement presented to the meeting (even if it differs from the proposed Deed (if any) details of which accompanied the notice of meeting). 4. That the remuneration of the Deed Administrators, as set out in the Remuneration Approval Request Report dated 16 March 2017, for the period from execution of the DOCA to completion of the DOCA be fixed up to a maximum amount of $424,680 (plus GST), but subject to upward revision by resolution of creditors, or the Committee of Creditors should one be appointed, and that the Deed Administrators be authorised to make periodic payments on account of such accruing remuneration as incurred. 16 March 2017 Page A-4

57 Resolution For Against Abstain 5. That a Committee of Creditors be appointed, the members of which are to be determined by the meeting. 6. That the Company be wound up. 7. That the remuneration of the Liquidators, as set out in the Remuneration Approval Request Report dated 16 March 2017, for the period from 28 March 2017 to completion of Liquidation be fixed up to a maximum amount of $504, (plus GST), but subject to upward revision by resolution of creditors, or the Committee of Inspection should one be appointed, and that the Liquidators be authorised to make periodic payments on account of such accruing remuneration as incurred. 8. That a Committee of Inspection be appointed, the members of which are to be determined by the meeting. 9. That, pursuant to Section 477(2A) of the Corporations Act 2001, creditors authorise the Liquidators to compromise a debt owed to the Company of any amount. 10. That, pursuant to Section 477(2B) of the Corporations Act 2001, creditors authorise the Liquidators to enter into any agreement on the Company s behalf where: a) the term of the agreement may end; or b) obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance; more than three months after the agreement is entered into. 11. That, subject to obtaining the approval of the Australian Securities & Investments Commission (ASIC) pursuant to Section 542(4), the books and records of the Company and of the Liquidators be disposed of by the Liquidators 12 months after the dissolution of the Company or earlier at the discretion of ASIC. 12. That the Administration should end. 16 March 2017 Page A-5

58 D. Signature 1 Dated: 2 Signature: 3 Name / Capacity: Certificate of Witness (to be completed only in special circumstances see below) This certificate is only to be completed only if the person giving the proxy is blind or incapable of writing. The certificate of the creditor, contributory, debenture holder or member must not be witnessed by the person nominated as proxy. I (name of witness) of (address of witness) certify that the above instrument appointing a proxy was completed by me in the presence of and at the request of the person appointing the proxy and read to him/her before he/she signed or marked the instrument. Dated: Signature: E. Submitting the Proxy For a person to be eligible to attend and vote at the meeting on your behalf, this form is to be completed and submitted by no later than 4:00pm (AEDT) on 24 March 2017 to: c/- Ferrier Hodgson GPO Box 4114 Sydney NSW 2001 Tel: (02) Fax: (02) paylesscreditors@fh.com.au Note: In accordance with Regulation A of the Corporations Regulations 2001, if a proxy is submitted by facsimile, the original document must be lodged within 72 hours after lodging the faxed copy. 16 March 2017 Page A-6

59 Creditor Assistance Sheet: Completing a Proxy Form Section A Name and Contact Details of Person or Entity Entitled to Attend Meeting 1. Insert the full name of the employee, individual, sole trader, partnership or company that the debt is owed to. 2. Insert the address of the employee, individual, sole trader, partnership or company that the debt is owed to. 3. Insert the telephone number of the employee, individual, sole trader, partnership or company that the debt is owed to. 4. Insert the fax number of the employee, individual, sole trader, partnership or company that the debt is owed to. Section B Appointment of Person to Act as Proxy 1. Cross out any wording that is not applicable. For example, if the employee/individual/sole trader/partnership/company is a creditor, cross out *eligible employee creditor, *contributory, *debenture holder and *member. 2. Insert the name of the person who will be exercising the creditor s vote at the meeting. If someone is attending the meeting in person, that person s name should be inserted. Alternatively, if someone is unable to attend, but you still want to cast a vote at the meeting, then you can appoint the Chairperson of the meeting to vote on your behalf by inserting the words the Chairperson here. 3. Insert the address of the person nominated at (2) that will be attending the meeting as proxy. If you have elected the Chairperson because no one is attending in person, leave this row blank. 4. Cross out any wording that is not applicable. 5. If the person you have elected to attend is unavailable on the day, you may nominate a second person to attend in their absence. Alternatively, you can appoint the Chairperson of the meeting to vote on your behalf by inserting the Chairperson. 6. Insert the address of the second person here. If you have elected the Chairperson, leave this row blank. 7. Cross out any wording that is not applicable. Section C Voting Instructions 1. Cross out any wording that is not applicable. 2. Insert an X in this box if you want the person who is attending the meeting to vote as they see fit on each of the resolutions in the Resolution table. If you select this option, proceed to Section D, unless you wish to vote specifically on certain resolutions, in which case you also insert an X in the special proxy box and select For, Against or Abstain on the resolutions. The person voting at the meeting will have discretion to vote as they see fit on any resolutions where you have not selected For, Against or Abstain. 3. Insert an X in this box if you want the person who is attending the meeting, to vote exactly in accordance with your instructions. If you select this option, you must select For, Against or Abstain for each of the resolutions in the Resolution table. Do not tick more than one box for each resolution. Section D Signature Instructions 1. Insert the date that the proxy form is being signed. 2. The form should be signed by one of the following persons: If the debt is owed to an employee/individual, then the individual that the debt is owed to; or If the debt is owed to a sole trader, then the sole trader that the debt is owed to; or If the debt is owed to a partnership, then one of the partners of the partnership; or If the debt is owed to a company, then a duly authorised office of the company (normally a director or secretary of the company). 3. Insert the name of the person signing the form, and note their capacity (that is, their role): If the debt is owed to a sole trader, note their capacity as proprietor, eg: [Full name], proprietor ; or If the debt is owed to a partnership, note their capacity as partner, eg: [Full name], partner of the firm named in Section A above ; or If the debt is owed to a company, note their capacity as director or secretary, eg: [Full name], director/secretary of the company named in Section A above 16 March 2017 Page A-7

60 Annexure C - Informal Proof of Debt for the Purposes of Voting Corporations Act 2001 Regulation (Company) ACN Name of creditor Amount of debt claimed: (see note) Consideration for debt: Whether debt secured or unsecured: If secured, give details of security including dates, etc: Balance, if any, after deducting value of security (see note):... Creditor (or person authorised by creditor) Note: Under the Corporations Regulations, a creditor is not entitled to vote at a meeting unless (Regulation ): a. his claim has been admitted, wholly or in part, by the Administrator; or b. he has lodged with the Administrators particulars of the debt or claim, or if required, a formal proof of debt. 16 March 2017 Page A-8

61 Annexure D - Remuneration Approval Request Report Corporations Act 2001 Section 449E ACN (the Company) 1 Declaration We, James Stewart, Peter Gothard and Jim Sarantinos of Ferrier Hodgson, have undertaken a proper assessment of this remuneration claim for our appointment as Administrators of the Company in accordance with the Corporations Act 2001 (Cth) (Act), the Australian Restructuring Insolvency & Turnaround Association (ARITA) Code of Professional Practice (Code) and applicable professional standards. We are satisfied that the remuneration claimed is in respect of necessary work, properly performed, or to be properly performed, in the conduct of the administration. Please note that the resolutions detailed in this remuneration report are numbered in accordance with the resolution numbering stipulated in the Appointment of Proxy Form provided at Annexure B. 2 Executive summary 2.1 Summary of remuneration approval sought for the Company To date, remuneration totalling $922, has been approved and paid in the administration of the Company. This remuneration report details approval sought for the following fees: Period Past remuneration approved: Voluntary administration Report reference Amount (ex GST) $ 22 November 2016 to 9 December , November 2016 to 9 December 2016 (upward revision) 16, December 2016 to 31 January , Total past remuneration approved 922, Current remuneration approval sought: Voluntary administration Resolution 1: 1 February 2017 to 8 March , Resolution 2: 9 March 2017 to 27 March , Total current remuneration being sought 665, Total Voluntary Administration* 1,587, March 2017 Page A-9

62 Period Deed of Company Arrangement (DOCA) (if applicable) Report reference Amount (ex GST) $ Resolution 4: 28 March 2017 to completion of the DOCA* , Total Deed of Company Arrangement* (if applicable) 424, Liquidation (if applicable) Resolution 7: 25 March 2017 to finalisation of the Liquidation* , Total Liquidation* (if applicable) 504, * Approval for the future remuneration sought is based on an estimate of the work necessary to the completion of the administration. Should additional work be necessary beyond what is contemplated, further approval may be sought from creditors. OR Please refer to Parts 3 and 4 for full details of the calculation and composition of the remuneration approval sought. 2.2 Comparison to estimate of costs provided in Initial Advice to Creditors The remuneration approval sought for the Voluntary Administration period totalling $1,587,695 (excluding GST) is consistent with the estimate of costs provided in the Initial Advice to Creditors on remuneration contained in our first notification to creditors dated 23 November 2016, which estimated a cost to completion of the administration of between $1,600,000 and $1,800,000 (excluding GST). 16 March 2017 Page A-10

63 3 Description of work completed / to be completed 3.1 Resolution 1 Company: Administration Type: Voluntary Administration Practitioners: James Stewart, Peter Gothard and Jim Sarantinos of Ferrier Hodgson Period: 1 February 2017 to 8 March 2017 Task area General description Includes Assets hours $31, (excl GST) Creditors hours $72, (excl GST) Plant and equipment Assets subject to specific charges Debtors Stock Other assets Leasing Creditor enquiries Retention of title claims Liaising with valuers, auctioneers and interested parties Reviewing asset listings Liaising with landlords regarding possible sale of store fixtures All tasks associated with realising a charged asset All tasks associated with disclaiming a charged asset Correspondence with debtors Reviewing and assessing debtor ledger Realisation of remaining stock via store network Reviewing stock levels Reviewing stock values Dealing with damaged stock Tasks associated with realising other assets Reviewing leasing documents Updating leasing information on file Liaising with owners of leased premises Liaising with managing agent of head office premises for re-letting purposes Dealing with bank guarantee claims relating to leasehold premises Tasks associated with disclaiming leases Receive and follow up creditor enquiries via telephone and Maintaining creditor enquiry register Review and prepare correspondence to creditors and their representatives via facsimile, and post Correspondence with committee of creditors members Maintain retention of title file Meeting with claimants as required Complete file notes on retention of title claim Seek legal advice where necessary Adjudicate retention of title claim Forward correspondence to claimant notifying outcome of adjudication 16 March 2017 Page A-11

64 Task area General description Includes Employees hours $122, (excl GST) Creditor reports Dealing with proofs of debt Employee enquiries Calculation of entitlements Workers compensation claims Other employee issues Preparation of payment vouchers to satisfy valid claim Preparation of correspondence to claimant to accompany payment of claim (if valid) Preparing section 439A report to creditors Holding initial discussions with PSS Holdings regarding possible DOCA proposal Preliminary investigations with regards to PSS Holdings subordination of creditor claims and Collective Brands Letter of Financial Support Receipting and filing proofs of debt when not related to a dividend Corresponding with OSR and ATO regarding proofs of debt when not related to a dividend Receive and follow up employee enquiries via telephone Maintain employee enquiry register Review and prepare correspondence to employees and their representatives via facsimile, and post Receive and prepare correspondence in response to employees objections to leave entitlements Update frequently asked questions document for employees Prepare regular updates on the progress of the administration Calculating employee entitlements Reviewing employee files and Company s books and records Correspondence with employees regarding their employee entitlements Reconciling superannuation accounts Reviewing contracts, awards and other relevant legislation and policies Liaising with solicitors regarding entitlements Liaising with insurers and solicitors regarding claims Identification of potential issues requiring attention of insurance specialists Correspondence with insurer regarding initial and ongoing workers compensation insurance requirements Correspondence with previous brokers Correspondence with Child Support Correspondence with Centrelink 16 March 2017 Page A-12

65 Task area General description Includes Trade on hours $129, (excl GST) Investigation hours $18, (excl GST) Administration hours $42, (excl GST) Trade-on management Customers Employees Processing receipts and payments Budgeting and financial reporting Conducting investigation Correspondence Document maintenance / file review / checklist Attendance on site Managing store closure and stock realisation program Managing wind down of Head Office and decommissioning of IT infrastructure Liaising with suppliers Liaising with management and staff Authorising purchase orders Maintaining purchase order registry Preparing and authorising receipt vouchers Preparing and authorising payment vouchers Liaising with OSR regarding payroll tax issues Monitoring a dedicated customer account and phone line Respond to customer queries regarding refunds and exchanges Maintain a customer query register Respond to fair trade queries Preparation and processing of weekly payroll Responding to queries regarding ongoing payroll issues Liaising with superannuation funds regarding contributions, termination of employees employment Liaising with payroll officer to facilitate ongoing wages payments Entering receipts and payments into accounting system Reviewing Company s trading statements Preparing financial reports Meetings to discuss trading position Collection of Company books and records Reviewing Company s books and records Collection and preservation of electronic books and records Conducting and summarising statutory searches Review and preparation of Company nature and history Preliminary preparation of investigation file General correspondence Filing of documents File reviews Updating checklists 16 March 2017 Page A-13

66 Task area General description Includes Insurance Bank account administration ASIC Form 524 and other forms ATO and other statutory reporting Planning / review Books and records / storage Correspondence with insurer regarding initial and ongoing insurance requirements Correspondence with insurer regarding active claims Reviewing insurance policies Correspondence with previous brokers Preparing correspondence opening and closing accounts Requesting bank statements Bank account reconciliations Correspondence with bank regarding specific transfers including term deposits Preparing and lodging ASIC forms Correspondence with ASIC regarding statutory forms Preparing BASs Completing group certificates Discussions regarding status / strategy of administration Internal team strategy meetings Dealing with records in storage Reviewing company files and storing required documents Preparing box listings for documents to go to storage 16 March 2017 Page A-14

67 3.2 Resolution 2 Company: Administration Type: Voluntary Administration Practitioners: James Stewart, Peter Gothard and Jim Sarantinos of Ferrier Hodgson Period: 9 March 2017 to 27 March 2017 Task area General description Includes Assets hours $9, (excl GST) Creditors hours $104, (excl GST) Plant and equipment Assets subject to specific charges Debtors Stock Other assets Leasing Creditor enquiries Retention of title claims Creditor reports Liaising with valuers, auctioneers and interested parties Reviewing asset listings All tasks associated with realising a charged asset All tasks associated with disclaiming a charged asset Correspondence with debtors Reviewing and assessing debtor ledgers Dealing with damaged stock Tasks associated with realising other assets Liaising with owners of leased premises Liaising with managing agent of head office premises for re-letting purposes Liaising with head office landlord for purpose of granting early access to leased premises. Dealing with bank guarantee claims relating to leasehold premises Tasks associated with disclaiming leases Receive and follow up creditor enquiries via telephone and Maintaining creditor enquiry register Review and prepare correspondence to creditors and their representatives via facsimile, and post Maintain retention of title file Complete file notes on retention of title claim Seek legal advice where necessary Adjudicate retention of title claim Forward correspondence to claimant notifying outcome of adjudication Preparation of payment vouchers to satisfy valid claim Preparation of correspondence to claimant to accompany payment of claim (if valid) Preparing section 439A report to creditors 16 March 2017 Page A-15

68 Task area General description Includes Employees hours $38, (excl GST) Trade on hours $83, (excl GST) Dealing with proofs of debt Meeting of creditors Employee enquiries Calculation of entitlements Workers compensation claims Other employee issues Trade-on management Progressing discussions with PSS Holdings regarding possible DOCA proposal Detailed analysis of return to creditors in a Liquidation and DOCA scenario Preliminary investigations with regards to PSS Holdings subordination of creditor claims and Collective Brands Letter of Financial Support Receipting and filing proofs of debt when not related to a dividend Corresponding with OSR and ATO regarding proofs of debt when not related to a dividend Preparation of meeting notices, proxies and advertisements Forward notice of meeting to all known creditors Preparation of meeting file, including agenda, certificate of postage, attendance register, list of creditors, reports to creditors, advertisement of meeting and draft minutes of meeting Preparation of minutes of meeting Holding Second Meeting of Creditors Receive and follow up employee enquiries via telephone Maintain employee enquiry register Review and prepare correspondence to employees and their representatives via facsimile, and post Finalising employee entitlements including dealing with all disputes received from employees Processing entitlement payment run including all related on costs Issuing PAYG certificates to employees Liaising with insurers and solicitors regarding claims Correspondence with insurer regarding initial and ongoing workers compensation insurance requirements Correspondence with previous brokers Correspondence with Child Support Correspondence with Centrelink Attendance on site Managing wind down of Head Office and decommissioning of IT infrastructure Vacation of head office Liaising with suppliers Liaising with remaining management and staff 16 March 2017 Page A-16

69 Task area General description Includes Administration hours $11, (excl GST) Customers Employees Processing receipts and payments Budgeting and financial reporting Correspondence Document maintenance / file review / checklist Insurance Bank account administration ASIC Form 524 and other forms ATO and other statutory reporting Planning / review Books and records / storage Finalising any residual trade on liabilities and issues Preparing and authorising receipt vouchers Preparing and authorising payment vouchers Monitoring a dedicated customer account and phone line Respond to remaining customer queries regarding refunds and exchanges Preparation and processing of weekly payroll Liaising with payroll officer to facilitate ongoing wages payments Finalising all outstanding payrolls Entering receipts and payments into accounting system Finalising the Company s trading statements General correspondence File reviews Updating checklists Correspondence with insurer regarding initial and ongoing insurance requirements Preparing correspondence opening and closing accounts Requesting bank statements Bank account reconciliations Correspondence with bank regarding specific transfers including term deposits Preparing and lodging ASIC forms Correspondence with ASIC regarding statutory forms Preparing BASs Completing group certificates Internal team strategy meetings Dealing with records in storage Reviewing company files and storing required documents Preparing box listings for documents to go to storage 16 March 2017 Page A-17

70 3.3 Resolution 4 (if applicable) Company: Administration Type: Deed of Company Arrangement Practitioners: James Stewart, Peter Gothard and Jim Sarantinos of Ferrier Hodgson Period: 28 March 2017 to completion of the DOCA Task area General description Includes Assets hours $24, (excl GST) Creditors hours $292, (excl GST) Employees hours $25, (excl GST) Trade on hours $43, Plant and equipment Assets subject to specific charges Debtors Leasing Litigation / recoveries Creditor enquiries Retention of title claims DOCA proponent reporting Creditor reports Dealing with proofs of debts Employee enquiries Trade-on finalisation Tasks associated with realising residual plant and equipment Tasks associated with realising other remaining assets All tasks associated with disclaiming a charged asset Correspondence with outstanding debtors Finalising pre-appointment debtor ledger Liaising with owners of leased premises Dealing with bank guarantee claims relating to leasehold premises Tasks associated with disclaiming leases Preliminary assessment of potential recoveries from actions available to the Deed Administrators Receive and follow up creditor enquiries via telephone and Maintaining creditor enquiry register Review and prepare correspondence to creditors and their representatives via facsimile, and post Finalisation of outstanding retention of title claims Responding to DOCA proponent s queries Preparing reports to creditors regarding DOCA status, general reports and meetings Receipting and filing proofs of debts Adjudicating proofs of debt Adjudicating and substantiating landlord claims to account for past and future loss Requesting further information from claimants regarding proofs of debt Preparation of correspondence to claimant advising outcome of adjudication Finalising and processing remaining employee entitlements payments for remaining head office employees Dealing with outstanding employee queries regarding entitlement calculations Finalising any residual trade on liabilities and issues 16 March 2017 Page A-18

71 Task area General description Includes (excl GST) Dividend hours $26, (excl GST) Administration hours $12, (excl GST) Customers Employees Processing receipts and payments Dividend processes Correspondence Document maintenance / file review / checklist Insurance Bank account administration Preparing and authorising receipt vouchers Preparing and authorising payment vouchers Monitoring and responding to any residual customer queries Finalising all outstanding payrolls and employment liabilities for administration period Entering receipts and payments into accounting system Preparation of correspondence to potential creditors inviting lodgement of proofs of debt Preparation of correspondence to creditors advising of intention to declare dividend Advertisement of intention to declare dividend Obtain clearance from ATO to allow distribution of Company s assets Preparation of dividend calculations Preparation of correspondence to creditors announcing declaration of dividend Advertise announcement of dividend Preparation of distribution Preparation of dividend file Preparation of payment vouchers to pay dividend Preparation of correspondence to creditors enclosing payment of dividend Re-distribution of any returned dividends Forward any unclaimed dividend to ASIC General correspondence Finalise administration period file review Six-monthly administration reviews File reviews Updating checklists Correspondence with insurer regarding ongoing insurance requirements Correspondence with insurer regarding DOCA and conditions Finalising insurance policies Preparing correspondence opening and closing accounts Requesting bank statements Bank account reconciliations Correspondence with bank regarding specific transfers including term deposits 16 March 2017 Page A-19

72 Task area General description Includes ASIC Form 524 and other forms ATO and other statutory reporting Planning / review Finalisation Books and records / storage Correspondence with ASIC regarding statutory forms Notification of appointment as liquidator Preparing BASs Completing group certificates Internal team strategy meetings Notifying ATO of finalisation Cancelling ABN / GST / PAYG registration Completing checklists Finalising WIP Dealing with records in storage Reviewing company files and storing required documents Preparing box listings for documents to go to storage 16 March 2017 Page A-20

73 3.4 Resolution 7 (if applicable) Company: Administration Type: Liquidation Practitioners: James Stewart, Peter Gothard and Jim Sarantinos of Ferrier Hodgson Period: 28 March 2017 to completion of the Liquidation Task area General description Includes Assets hours $48, (excl GST) Creditors hours $292, (excl GST) Plant and equipment Assets subject to specific charges Debtors Leasing Creditor enquiries Retention of title claims Creditor reports Dealing with proofs of debts Meeting of creditors Tasks associated with realising residual plant and equipment Tasks associated with realising other remaining assets All tasks associated with disclaiming a charged asset Correspondence with outstanding debtors Finalising pre-appointment debtor ledger Liaising with owners of leased premises Dealing with bank guarantee claims relating to leasehold premises Tasks associated with disclaiming leases Receive and follow up creditor enquiries via telephone and Review and prepare correspondence to creditors and their representatives via facsimile, and post Finalisation of outstanding retention of title claims Preparing reports to creditors regarding investigations, general reports and meetings Receipting and filing proofs of debts Adjudicating proofs of debt Adjudicating and substantiating landlord claims to account for past and future loss Request further information from claimants regarding proofs of debt Preparation of correspondence to claimant advising outcome of adjudication Preparation of meeting notices, proxies and advertisements Forwarding notice of meeting to all known creditors Preparation of meeting file, including agenda, certificate of postage, attendance register, list of creditors, reports to creditors, advertisement of meeting and draft minutes of meeting Preparation of minutes of meeting, finalising and lodging with ASIC Respond to stakeholder queries and questions immediately following meeting 16 March 2017 Page A-21

74 Task area General description Includes Corresponding with members of any Committee of Inspection Employees hours $25, (excl GST) Trade on hours $43, (excl GST) Investigation hours $47, (excl GST) Dividend hours $26, (excl GST) Employee enquiries Trade-on finalisation Customers Employees Processing receipts and payments Conducting investigation Litigation / recoveries Processing proofs of debt Finalising and processing remaining employee entitlements payments for remaining head office employees Dealing with outstanding employee queries regarding entitlement calculations Finalising any residual trade on liabilities and issues Preparing and authorising receipt vouchers Preparing and authorising payment vouchers Monitoring and responding to any residual customer queries Finalising all outstanding payrolls and employment liabilities for administration period Entering receipts and payments into accounting system Collection of Company books and records Reviewing Company s books and records Preparation of comparative financial statements Preparation of deficiency statement Review of specific transactions and liaising with directors regarding certain transactions Preparation of investigation file Lodgement of investigation with ASIC Preparation and lodgement of supplementary report if required Internal meetings to discuss status of litigation Preparing brief to solicitors Liaising with solicitors regarding recovery actions Attending to negotiations Attending to settlement matters Preparation of correspondence to potential creditors inviting lodgement of proofs of debt Preparation of correspondence to creditors advising of intention to declare dividend Advertisement of intention to declare dividend Obtain clearance from ATO to allow distribution of Company s assets Preparation of dividend calculations Preparation of correspondence to creditors announcing declaration of dividend 16 March 2017 Page A-22

75 Task area General description Includes Administration hours $21, (excl GST) Correspondence Document maintenance / file review / checklist Insurance Bank account administration ASIC Form 524 and other forms ATO and other statutory reporting Planning / review Finalisation Books and records / storage Advertise announcement of dividend Preparation of distribution Preparation of dividend file Preparation of payment vouchers to pay dividend Preparation of correspondence to creditors enclosing payment of dividend Re-distribution of any returned dividends Forward any unclaimed dividend to ASIC General correspondence Finalise administration period file review Six-monthly administration reviews File reviews Updating checklists Correspondence with insurer regarding ongoing insurance requirements Finalising insurance policies Preparing correspondence opening and closing accounts Requesting bank statements Bank account reconciliations Correspondence with bank regarding specific transfers including term deposits Preparing and lodging ASIC forms including 505, 524, 911, etc Correspondence with ASIC regarding statutory forms Notification of appointment as liquidator Preparing BASs Completing group certificates Internal team strategy meetings Notifying ATO of finalisation Cancelling ABN / GST / PAYG registration Completing checklists Finalising WIP Dealing with records in storage Reviewing company files and storing required documents Preparing box listings for documents to go to storage 16 March 2017 Page A-23

76 4 Calculation of remuneration 4.1 Resolution 1 Employee Position Rate Total Task area (ex Administration Assets Creditors Employees Investigations Trade on GST) $/Hr Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ Hrs $ Stewart, James, H. Partner , , Sarantinos, Jim Partner , , , , , , , Hunter, Craig, C. Executive Director , , , Taylor, Samantha Executive Director , , Dampney, James Director , , , , , , Saini, Anmol Senior Manager , , , Creedon, Liam Senior Manager , , , , Crabtree Morton, James Assistant Manager , , , , , , McLean, Courtney Senior Analyst , , , , , Fasanella, Liana Senior Analyst , , Williams, Haydn Analyst , , Meany, Luke Analyst , , , , , Nicolaci, Christopher Accountant , , LeRoux, Astrid Accountant , , , Kobylinski, Sonya Khin, Zin Evans, Louise Total (excluding GST) Accounts Supervisor Accounts Supervisor Accounts Supervisor , , , , , , , , GST 41, Total (including GST) 458, Average Hourly Rate March 2017 Page A-24

77 4.2 Resolution 2 Voluntary Administration The remuneration estimate may be summarised as follows: Task Hours Amount $ Assets , Creditors , Employees , Trade on , Administration , Total , Resolution 4 Deed of Company Arrangement (if applicable) Task Hours Amount $ Assets , Creditors , Employees , Trade on , Dividend , Administration , Total 1, , Resolution 7 - Liquidation (if applicable) Task Hours Amount $ Assets , Creditors , Employees , Trade on , Investigation , Dividend , Administration , Total 1, , Please note that the above summaries for resolutions 2, 4 and 7 are estimates only. If costs exceed the estimate, creditors will be advised accordingly and further approval will be sought. 16 March 2017 Page A-25

78 5 Statement of remuneration claim 5.1 Resolutions to be put to creditors at the meeting convened for 27 March 2017 At the meeting of creditors convened for 27 March 2017, creditors will be asked to consider the following resolutions: Voluntary administration period Resolution 1: 1 February 2017 to 8 March 2017 "That the remuneration of the Administrators, as set out in the Remuneration Approval Request Report dated 16 March 2017, for the period from 1 February 2017 to 8 March 2017 be fixed in the amount of $417, (plus GST), and may be paid." Resolution 2: 9 March 2017 to 27 March 2017 That the remuneration of the Administrators, as set out in the Remuneration Approval Request Report dated 16 March 2017, for the period from 9 March 2017 to 27 March 2017 or to the date of execution of the DOCA be fixed up to a maximum amount of $248, (plus GST), but subject to upward revision by resolution of creditors, or the Committee of Creditors should one be appointed and that the Administrators be authorised to make periodic payments on account of such accruing remuneration as incurred. Please note that the above is an estimate only. Final costs depend heavily upon time incurred relating to: The finalisation of all outstanding trading issues and accounts for the period 22 November 2016 to 28 February 2017; The decommissioning of the Company s IT infrastructure and exit from its head office premises; The finalisation and payment of employee entitlements on or around 15 March 2017; The preparation and finalisation of the Second Report to Creditors issued to creditors on 16 March 2017; Preliminary investigations into the Company s pre appointment affairs particularly regarding the subordination of intercompany debts and the Letter of Financial Support; and Negotiations with the PSS Holdings regarding its DOCA Proposal initially received by the Administrators on 10 March If costs exceed the estimate, creditors will be advised accordingly and further approval of the Administrators remuneration will be sought in the future. 16 March 2017 Page A-26

79 5.1.2 DOCA period (if applicable) Resolution 4: 28 March 2017 to completion of the DOCA That the remuneration of the Deed Administrators, as set out in the Remuneration Approval Request Report dated 16 March 2017, for the period from execution of the DOCA to completion of the DOCA be fixed up to a maximum amount of $424,680.00, (plus GST), but subject to upward revision by resolution of creditors, or the Committee of Creditors should one be appointed, and that the Deed Administrators be authorised to make periodic payments on account of such accruing remuneration as incurred. Please note that the above is an estimate only. Final costs predominantly depend upon: The finalisation of all outstanding trading issues and accounts for the period 22 November 2016 to 28 February 2017; The level of work required to adjudicate on unsecured creditor claims, particularly regarding contingent landlord and suppler claims; and The level of work ultimately required to investigate and subsequently pursue any potential recoveries from actions available to the Deed Administrators. If costs exceed the estimate, creditors will be advised accordingly and further approval of the Deed Administrators remuneration will be sought in the future Liquidation period (if applicable) Resolution 7: 28 March 2017 to conclusion of the liquidation That the remuneration of the Liquidators, as set out in the Remuneration Approval Request Report dated 16 March 2017, for the period from 28 March 2017 to conclusion of the liquidation be fixed up to a maximum amount of $504,555.00, (plus GST), but subject to upward revision by resolution of creditors, or the Committee of Inspection should one be appointed, and that the Liquidators be authorised to make periodic payments on account of such accruing remuneration as incurred. Please note that the above is an estimate only. Final costs depend heavily upon: The finalisation of all outstanding trading issues and accounts for the period 22 November 2016 to 28 February 2017; The level of work required to adjudicate on unsecured creditor claims, particularly regarding contingent landlord and suppler claims; and The level of work ultimately required to investigate and subsequently pursue any potential recoveries from voidable transactions available to the Liquidators. If costs exceed the estimate, creditors will be advised accordingly and further approval of the Liquidators remuneration will be sought in the future. 5.2 Remuneration approved and drawn to date The Administrators remuneration approved by the Committee of Creditors and drawn to date is as follows: 16 March 2017 Page A-27

80 Period Amount approved $ Amount drawn $ 22 November December , , November December 2016 (upward revision) 16, , December January , , Total 922, , Remuneration recoverable from external sources The Administrators have not received, and are not entitled to receive, any funding from external sources in respect of remuneration. 7 Disbursements 7.1 Types of disbursements Disbursements are divided into three types: Externally provided professional services. These are recovered at cost. An example is legal fees. Externally provided non-professional costs such as travel, accommodation and search fees. These disbursements are recovered at cost. Internal disbursements such as photocopying, printing and postage. These disbursements, if charged to the administration, would generally be charged at cost; though some expenses such as telephone calls, photocopying and printing may be charged at a rate which recoups both variable and fixed costs. The relevant rates are set out below: Disbursement type Advertising Couriers Data room hosting Mileage reimbursement Photocopying (colour) Photocopying (mono) Photocopying (outsourced) Printing (colour) Printing (mono) Printing (outsourced) Postage Searches Storage and storage transit Telephone calls Note: Above rates are applicable for the financial year ending 30 June 2017 Charges (ex GST) At cost At cost At cost $0.66 per kilometre $0.50 per page $0.20 per page At cost $0.50 per page $0.20 per page At cost At cost At cost At cost At cost 16 March 2017 Page A-28

81 7.2 Disbursements paid from the administration to Ferrier Hodgson The following disbursements have been paid from the administration to Ferrier Hodgson for the period from 22 November 2016 to 8 March Disbursements paid Basis Total (ex GST) $ Externally provided non-professional services Accommodation At cost 17, ASIC Fees At cost Search Fees At cost Travel expenses (including taxi s and airfares) At cost 17, Computer items At cost 2, Courier At cost Room Hire At cost Miscellaneous At cost Internal disbursements Photocopying - mono 3,959 $0.20 /page Photocopying colour 527 $0.50/page Printing - mono 1,808 $0.20/page Printing colour 206 $0.50/page Postage At cost Fax At cost 5.40 Telephone calls At cost Staff vehicle use 4,715 km $0.66 per km 3, Total 44, In relation to disbursements paid from the administration to Ferrier Hodgson for the period from 22 November 2017 to 8 March 2017, we advise the following: We have undertaken a proper assessment of disbursements claimed for the Company, in accordance with the law and applicable professional standards. We are satisfied that the disbursements claimed are necessary and proper. Where amounts have been paid to Ferrier Hodgson for externally provided services and costs, those payments are in reimbursement of costs previously paid by Ferrier Hodgson, either due to a lack of funds in the administration at the time the payment was due, or the direct invoicing of Ferrier Hodgson by the supplier. All of the transactions in the above table appear in the summary of receipts and payments at Part 9 as Appointee disbursements. Where payments to third parties are paid directly from the administration bank account, they are included in the summary of receipts and payments at Part 9. Creditor approval for the payment of disbursements is not required. However, the Administrators must account to creditors. Creditors have the right to question the incurring of disbursements and can challenge disbursements in court. 16 March 2017 Page A-29

82 Future disbursements provided by Ferrier Hodgson will be charged to the administration on the same basis as the table in Part Report on progress of the administration The Remuneration Approval Request Report must be read in conjunction with the report to creditors dated 15 March 2017 which outlines the progress of the administration. 9 Summary of receipts and payments A summary of receipts and payments for the period 22 November 2016 to 8 March 2017 is set out in the table on A-31 of this Report. 10 Queries If you require further information in respect of the above, or have other queries, please contact James Crabtree Morton of this office on (02) Information available The partners of Ferrier Hodgson are members of ARITA. Ferrier Hodgson follows the Code. A copy of the Code may be found on the ARITA website at An information sheet concerning approval of remuneration in external administrations can also be obtained from the Australian Securities & Investments Commission website at DATED this 16 th day of March 2017 Jim Sarantinos Administrator 16 March 2017 Page A-30

83 Receipts and Payments Account for the period 22 November 2016 to 8 March 2017 Receipts and payments Total $ (ex GST) Receipts Sales (Inc. Fixtures & Fittings sold in situ) 30,156,535 Cash at Bank on appointment 2,194,604 Interest Income 42,271 Pre-appointment refunds 21,529 Other Income 14,729 Fixtures & Fittings 13,136 Motor Vehicles Sales 10,524 Pre-appointment Accounts Receivable 5,722 Total receipts 32,459,05 Payments Wages & Payroll Expenses (5,851,795) Rent & Outgoings (4,230,195) Stock (1,698,511) PMSI Claims (90,712) Administrators Remuneration (922,647) Administrators Disbursements (44,513) Hilco Consultancy Costs (713,703) Legal Fees (119,661) Freight (661,873) Marketing (306,283) Superannuation Paid/Withheld (394,390) Payroll Tax (180,665) GST Paid (159,290) Bank Charges (159,001) Utilities (109,389) Work Cover (95,483) PAYG Paid (79,965) Insurance (59,385) Software/Systems Cost (48,065) Hire & Leasing (22,821) Warehouse Expenses (18,665) Payments of Commercial Necessity (322,050) Subcontractors (7,998) Maintenance (7,984) Printing & Stationary (4,050) Other Office Expenses (1,466) Room Hire (1,165) Postage (76) Other expenses (22,739) Total payments (16,311,800) GST withheld 2,137,826 PAYG withheld 963,598 Closing cash at bank 19,248, March 2017 Page A-31

84 Annexure E - ARITA creditor information sheet 16 March 2017 Page A-32