Codicote Pty Ltd (Administrators Appointed) ACN ("the Company")

Transcription

1 Codicote Pty Ltd (Administrators Appointed) ACN ("the Company") Administrators' Section 439A Report 21 April 2015 Key Contacts: Himaja Paramatmuni Senior Accountant T E himaja.paramatmuni@au.gt.com Jeff Marsden Manager T E jeffrey.marsden@au.gt.com 2015 Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April 2015

2 Contents Section Page 1. Executive summary 5 2. Introduction 8 3. Company's History and Reasons for Failure Actions undertaken to date Offences, voidable transactions and insolvent trading Estimated return to creditors Employees and Employee Entitlements Administrator's recommendation Remuneration Meeting 52 Appendices A. DIRRI B. Administrators' Remuneration Report C. Notice of second meeting of creditors D. Proof of Debt form E. Proxy form 2015 Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

3 Glossary The Act Corporations Act 2001 Administrators AFR ANZ ARITA ASIC ATO BAS CA Company/ Codicote D S Jenkins Holdings DEEWR Director DIRRI DOCA EBITDA Andrew Sallway and Gayle Dickerson of Grant Thornton Australia Ltd, Voluntary Administrators of the Company Australian Financial Review Australia and New Zealand Banking Group Ltd Australian Restructuring Insolvency and Turnaround Association Australian Securities and Investments Commission Australian Taxation Office Business Activity Statements Confidentiality Agreement Codicote Pty Ltd (Administrators appointed) D S Jenkins Holdings Pty Ltd Department of Education, Employment and Workplace Relations David Jenkins Declaration of Independence, Relevant Relationships and Indemnities Deed of Company Arrangement Earnings before interest, tax, depreciation and amortisation 2015 Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April EOI EOS ERV FEG Former Director Expression of Interest Estimate Outcome Statement Estimated Realisable Value Fair Entitlements Guarantee Scheme Paul Jones FY12/13/14/15 Financial Year ending 30 June 2012, 30 June 2013, 30 June 2014 and 30 June 2015 Grant Thornton GST IAS k Licensee m Melbourne Property MYOB NPBT OSR p.a. Partnership Paul Jones Holdings Grant Thornton Australia Ltd Goods and Services Tax Income Activity Statement Thousands Verlea Pty Ltd Millions Level 2, McKillop Street, Melbourne VIC 3000 Mind Your Own Business Accounting Program Net Profit Before Tax Office of State Revenue Per Annum David Jenkins and Paul Jones Paul Jones Holdings Pty Ltd

4 Glossary PPSR RATA S439A Report Personal Property Securities Register Report as to Affairs A report on the company's business, property, affairs and financial circumstances required to be given to creditors pursuant to Subsection 439A(4) of the Act Statutory Priorities The priority for the payment of unsecured creditor claims set down in Subsection 553, 560 and 561 of the Act Sydney Property Suite 16.02, 1 Margaret Street, Sydney NSW 2000 Verlea Westpac WIP Verlea Pty Ltd Westpac Banking Corporation Work in Progress YTD Year To Date, being the nine months ended 31 March Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

5 Section 1 Executive summary 01. Executive summary 02. Introduction 03. Company's History and Reasons for Failure 04. Actions undertaken to date 05. Offences, voidable transactions and insolvent trading 06. Estimated return to creditors 07. Employees and Employee Entitlements 08. Administrator's recommendation 09. Remuneration 10. Meeting 2015 Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April 2015

6 Executive summary Executive summary Introduction Refer to Section 2 Background Information Refer to Section 3 Actions Since Appointment Refer to Section 4 Offences, voidable transactions and insolvent trading Refer to Section 5 Estimated Return to Creditors Refer to Section 6 Andrew Sallway and Gayle Dickerson were appointed Joint and Several Administrators of the Company on 17 March The first meeting of creditors was held on Friday 27 March At the first meeting of creditors, creditors elected not to appoint a Committee of Creditors. The Company was incorporated on 25 July 2007 and operated from offices in Melbourne and Sydney. The business operated in a number of industries including retail, commercial, residential and aviation. The Company's services are split into two main categories, being construction project management and project planning. The Administrators entered into a Licence Agreement with Verlea, an entity controlled by the Director, on 19 March 2015 to ensure that the Company could continue to operate whilst a sale campaign was undertaken. The Administrators commenced an urgent sale campaign for the assets of the business on 23 March There were eight interested parties, however, only one offer was received. The offer was from Verlea and resulted in a superior return compared to a liquidation scenario and resulted in all employees retaining their employment. Accordingly the offer was accepted and the sale completed on 21 April The net proceeds (excl. GST) totalling $32k (after an adjustment for transferring employee entitlements and outstanding superannuation of $68k) were paid into the Administrators' account. Voidable transactions Based on our investigations, we have not identified any voidable transactions to third parties or related parties that would result in a material recovery for the benefit of creditors. Insolvent trading Based on our review of the books and records and analysis of the financial position of the Company, it is the Administrators' view that the Company was insolvent from February The estimated return to creditors in a Liquidation scenario is 40 to 64 cents in the dollar. Please note that this is an estimate and is dependent on a number of factors. Accordingly, this estimate is subject to change Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

7 Executive summary Summary (cont'd) Employees and Employee Entitlements Refer to Section 7 Administrators' recommendation Refer to Section 8 Remuneration Refer to Section 9 Meeting Refer to Section 10 There were 13 people employed by the Company at the date of our appointment. In accordance with the sale agreement with Verlea, all employees and their respective leave entitlements were transferred to Verlea on completion of the sale. In addition, Verlea was provided an adjustment on settlement for outstanding superannuation and is responsible for meeting this liability. Section 439A(4)(b) of the Act requires the Administrators of the Company to prepare a statement setting out their opinion on the future options for the Company. In this report, we have recommended that creditors resolve to wind the Company up for the following reasons: A winding up would allow time for more detailed investigations into the Company's affairs and the conduct of the Director; We understand that the Former Director is contemplating a DOCA proposal, however, at this stage, we have not received a proposal. Accordingly, we are unable to recommend a DOCA at this stage. The Company is insolvent, therefore ending the Administration is not a viable option for creditors. We note that the Director and Former Director are contemplating jointly submitting a DOCA proposal prior to the second meeting of creditors on 30 April If this occurs, it may be appropriate for creditors to adjourn the meeting for up to 45 business days to allow the Administrators to assess the proposal and provide a recommendation to creditors. The Administrators will be seeking approval from creditors for their remuneration at the forthcoming meeting of creditors. A Remuneration Report is enclosed at Appendix B, providing details of work performed to date, estimated future remuneration up to the second meeting of creditors and estimated remuneration of the Liquidators/Deed Administrators, depending on the creditors' decision of the outcome of the Company at the second meeting. The second meeting of creditors will be held on Thursday 30 April 2015 at 10:00AM at the offices of Grant Thornton, Level 17, 383 Kent Street, Sydney NSW We note that teleconference facilities will also be available at our Melbourne Office, The Rialto, Level 30, 525 Collins Street, Melbourne VIC Registration will open 30 minutes prior to the meeting The notice in regards to this meeting is enclosed at Appendix C. A Proof of Debt and Proxy Form are enclosed at Appendices D and E and are to be returned to our office by 12:00PM, Wednesday 29 April Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

8 Section 2 Introduction 01. Executive summary 02. Introduction 03. Company's History and Reasons for Failure 04. Actions undertaken to date 05. Offences, voidable transactions and insolvent trading 06. Estimated return to creditors 07. Employees and Employee Entitlements 08. Administrator's recommendation 09. Remuneration 10. Meeting 2015 Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April 2015

9 Introduction Appointment and Meetings of Creditors Appointment of Administrators Andrew Sallway and Gayle Dickerson were appointed Joint and Several Administrators of the Company under Part 5.3A of the Act on 17 March 2015 by the Director. The purpose of the appointment of an administrator is to allow for an independent insolvency practitioner to take control of and investigate the affairs of an insolvent company. During that time creditors' claims are put on hold. At the end of that period we are required to provide creditors with information and recommendations to assist creditors to decide upon the Company's future. Licence Deed Following our appointment, we negotiated a Licence Agreement with Verlea. The purpose of the Licence Agreement was to allow the Company to continue to operate during the Administration whilst the Administrators undertook an urgent sale of the business. Verlea is an entity controlled by the Director of the Company. The Licence Agreement operated for an initial period of three weeks and was extended until the earlier of 30 April 2015 or the execution of a sale agreement between the parties. The licence agreement was terminated on 21 April 2015 when the business was sold. Sale of Business The Administrators commenced an urgent sale process on 23 March 2015 via an advertisement in the AFR. We received eight enquiries, which resulted in one party, Verlea, submitting a formal EOI. The sale to Verlea completed on 21 April 2015 and further information is provided in Section 4. First Meeting of Creditors The first meeting of the Company's creditors was held on 27 March 2015 at the offices of Grant Thornton. At this meeting, creditors elected not to form a Committee of Creditors. A quorum was present for the Company. A copy of the minutes of the first meeting of creditors is available on the ASIC and Grant Thornton websites. Second Meeting of Creditors The second meeting of creditors will be held at 10:00am on Thursday, 30 April 2015 at the office of Grant Thornton, Level 17, 383 Kent Street, Sydney. The notice of meeting is attached as Appendix C. Creditors are also invited to attend Grant Thornton's Melbourne office, Level 30, 525 Collins Street, Melbourne, where a teleconference facility will be available. Teleconference facilities for the meeting will be available. Please contact Himaja Paramatmuni on (02) or himaja.paramatmuni@au.gt.com to obtain dial in details. The purpose of the second meeting is to consider the Administrators' report on the Company's business, property, affairs and financial circumstances and to consider the Administrators statement of opinion in respect of each of the options available to creditors. At the meetings, creditors will be required to determine the future of the Company and to resolve one of the following resolutions for the Company: That the Administration end; That the Company executes a DOCA; That the Company be wound up; or That the meeting be adjourned for up to 45 business days. The Administrators understand that it is the intention of the Director and Former Director to jointly submit a DOCA proposal, which may include, amongst other things, a proposal as to the future conduct or resolution of the legal proceedings discussed on page 28. On the basis that this proposal is received prior to the meeting on 30 April 2015, it may be appropriate for creditors to resolve to adjourn the meeting for up to 45 business days to allow the Administrators to consider the DOCA proposal and provide a recommendation to creditors. In the event that creditors elect not to adjourn the meeting or a DOCA proposal is not received, the Administrators recommend that creditors of the Company resolve to wind-up the Company Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

10 Introduction Report to creditors The purpose of this report is to provide creditors with sufficient information for them to make an informed decision about the future of the Company, including: Background information about the Company; Reasons for the Company's failure; The results of our investigations; The estimated return to creditors; and The options available to creditors and our opinion on each of these options. In the time available to us, we have undertaken preliminary investigations to prepare this report and formulate our opinion. At the meeting of creditors to be held on 30 April 2015, creditors will be asked to make a decision by passing a resolution in respect of options available to them. In this report we have recommended to creditors that the Company be placed into liquidation and detailed why this option, in our opinion, is in creditors' best interests. Creditors also have the option to adjourn the meeting for up to 45 business days. We understand that the Director and Former Director are considering jointly submitting a DOCA proposal and if this occurs prior to the second meeting of creditors, it may be appropriate to adjourn the meeting to allow the Administrators to assess the proposal and provide a recommendation to creditors. The Administrators have relied on information provided from numerous sources to prepare the report, including: Discussions with the Director of the Company; Discussions with the Company's accountant and legal advisors; Discussions with the Shareholders and their representatives; Advice obtained from our legal advisors; Information available from public sources, such as ASIC and the PPSR; and A review of the Company's books and records provided to date. Whilst we have no reason to doubt the accuracy of any information, we have not performed an audit and we reserve the right to alter our conclusions, should the underlying data prove to be inaccurate or change materially from the date of this report. In the event that the Company proceeds to liquidation, this report will form the basis of our further investigations. Provided that funding is available, the investigations will be more extensive than those undertaken to date, particularly due to the time constraints of the voluntary administration process. Further investigations may be supported by public examinations of the Director, Former Director and others who may be able to provide information about the Company's examinable affairs as that expression is defined in the Act. It is the Administrators' view that this report provides sufficient information to creditors to allow them to make an informed decision as to the Company's future and allows the Administrators to make a reasoned and fair recommendation based upon their opinions and the options available to creditors Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

11 Introduction Compliance, Independence and Communications Compliance with best practice We confirm that this report complies with the statements of best practice issued by the Australian Restructuring, Insolvency and Turnaround Association ("ARITA"), with regard to content of the Administrators' report and the Code of Professional Practice with regard to remuneration. Independence As disclosed in our First Notice to Creditors dated 17 March 2015, the Administrators undertook a proper assessment of the risks in relation to their independence prior to accepting the appointment. Our assessment identified no real or potential risk to our independence. We confirm that there have been no changes to the DIRRI as stated in the initial Notice to Creditors. A copy of the DIRRI is enclosed at Appendix A for your information. Communications with various parties The Administrators have liaised with various parties during the administration, including: All known creditors (including employees) via a creditor circular; The Director and Former Director of the Company to understand the business' underlying activity, financial position and reasons for failure; and Various other parties, including customers/debtors of the Company, the Company's legal advisors, the Director's legal advisors and the Former Director's representative. Disclaimer In reviewing this report, creditors should note the following: This report is based on information from the books, records and other information provided by the Director and Former Director. Whilst the Administrators have reviewed the information, there has been no independent verification of the information. In considering the options available to creditors and formulating their recommendations, the Administrators have necessarily made forecasts of asset realisation and total creditors. These forecasts and estimates may change. Whilst the forecasts and estimates are the result of the Administrators' best assessments in the circumstances, creditors should note that the outcome for creditors may differ from the information provided in this report. This report is not for general circulation, publication, reproduction or any use other than to assist creditors in evaluating their position as creditors and must not be disclosed without the prior approval of the Administrators. The Administrators do not assume or accept any responsibility for any liability or loss sustained by any creditor or any other party as a result of the circulation, publication, reproduction or any use beyond that permitted above. The statements and opinions given in this report are given in good faith and in the belief that such statements are not false or misleading. Except where otherwise stated, we reserve the right to alter any conclusions reached on the basis of any changed or additional information which may be provided to us between the date of this report and the date of the second meeting. Neither the Administrators, nor any member or employee thereof are responsible in any way whatsoever to any person in respect of any errors in this report arising from incorrect information. Creditors should seek their own independent legal advice as to their rights and the options available to them at the second meeting of creditors Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

12 Introduction Key events in the Administration The timeline below details the key milestones during the Administration. Since the date of appointment, we have undertaken an urgent sale process and conducted investigations into the reasons for the Company's failure. The reasons for the Company's failure and outcome of these investigations are discussed in Section 3 and Section 5. The Administrators have undertaken the following key actions: Preparation of the s.439a report; Held discussions with the shareholders and director in relation to asset realisations and the DOCA proposal; Undertaken a preliminary review of creditor and employee claims; and Undertaken investigations into the Company's affairs. 17 March March March March March April April April 2015 Date of appointment of Voluntary Administrators. Licence Agreement with Verlea commenced. Urgent sale process for the assets of the Company commenced. First creditors' meeting convened. Closure of sale process due date for EOIs. The Administrators issued their s.439a report to creditors. Completion of sale of assets of the Company. Second meeting of creditors when creditors will decide on the outcome of the Company, which will determine whether: 1. The Administration ends; or 2. The company executes a DOCA; 3. The company is wound up; or 4. Adjourn for up to 45 business days. Preliminary investigations undertaken by the Administrators in relation to voidable transactions and potential insolvent trading Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

13 Section 3 Company's History and Reasons for Failure 01. Executive summary 02. Introduction 03. Company's History and Reasons for Failure 04. Actions undertaken to date 05. Offences, voidable transactions and insolvent trading 06. Estimated return to creditors 07. Employees and Employee Entitlements 08. Administrator's recommendation 09. Remuneration 10. Meeting 2015 Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April 2015

14 Company's History and Reasons for Failure Organisational structure Officeholders and shareholders Directors Date appointed Date ceased David Jenkins (Director and Secretary) 25 July 2007 N/A Paul Jones (Director) 15 August April 2014 Shareholders Shareholder class Number issued D S Jenkins Holdings Pty Ltd Ordinary 50 Paul Jones Holdings Pty Ltd Ordinary 50 D S Jenkins Holdings Pty Ltd D Class 1 PPS Register Chargee Charge Date Capital Finance Officeholders and shareholders Commercial Other Goods 23 January 2013 The Company officeholders and shareholders are detailed above, as identified from a search of the ASIC database. At this point, we have not identified any other person who may be considered or deemed to be a shadow director of the Company. According to the ASIC database, there has been one change to the officeholders in the 12 months prior to the appointment date, being the removal of Paul Jones as a director of the Company on 1 April This is, amongst other things, the subject of ongoing litigation. We discuss this further in Section 4. Secured creditors A review of the PPSR identified one registered security interest, which is detailed in the table above. The registration relates to a photocopier lease, which was disclaimed by the Administrators on 30 March Books and records Pursuant to Section 286 of the Act, a company must keep written financial records that correctly record and explain its transactions, financial position and performance and enable true and fair financial statements to be prepared and audited. Financial records must be kept for seven (7) years after the transactions covered by the records are completed. Failure to maintain books and records may give rise to a presumption of insolvency pursuant to Section 588E of the Act. This presumption may be relied upon by a Liquidator in an application for compensation for insolvent trading and other actions for recoveries pursuant to Part 5.7B of the Act. During the limited time available to the Administrators to undertake investigations, the Company's books and records appear to be adequately maintained, however, we will investigate further should the Company be placed into liquidation. Related entities The following creditors are related parties of the Company: David Jenkins (Director and shareholder) has lodged a claim against the Company totalling $340k. The claim primarily relates to the balance of employee entitlements (c.$273k). Paul Jones, (shareholder and former director) has lodged a claim against the Company totalling $1.04 million in relation to a contingent employment claim and contingent oppression claim, both of which are the subject of ongoing litigation. DS Jenkins and PA Jones Partnership owns the Melbourne property that the Company operates from. The Partnership is owed $8k, in relation to rent owing by the Company. Whilst there is no formal lease in place, the Company has operated from the premises since it was purchased by the Partnership. All related party transactions have been investigated by the Administrators. Please refer to Section 5 of this report for further information Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

15 Company's History and Reasons for Failure Principal Activities Principal Activity of the Company The Company was incorporated on 25 July 2007 and operated from offices in Melbourne and Sydney. The business operated in a number of industries including retail, commercial, residential and aviation. The Company's services are split into two main categories: Construction project management; and Project planning. Construction Project Management Construction project management services include: Project management; Design management; Procurement; and Project delivery. At the date of our appointment, the Company had c. 6 project management contracts on foot with a total contract value of $1.63 million. In addition, the Company had tendered for 4 projects with a combined value of $1.90 million prior to our appointment. These contracts have not yet been awarded. Project Planning Project planning services include: Planning, feasibility and procurement management; Construction planning and programming; Strategic planning; Logistics; and Presentation. These services were typically provided on an agreed hourly rate or fixed fee basis. At the date of our appointment, the Company had c. 15 project planning projects, however, it is noted that not all of these were active, with a number of clients only requiring services on an ad hoc basis. The Director indicated that a further 3 projects with a combined value of $20,000 had not yet commenced but were likely to be awarded to the Company Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

16 Company's History and Reasons for Failure Reasons for failure Director's reasons for failure A questionnaire was sent to the Director and Former Director of the Company following the appointment of the Administrators. The Director and the Former Director returned the completed questionnaire on 26 March 2015 and 1 April 2015 respectively, and the Director has submitted the RATA (discussed further in this section on page 21). The Director has listed the following reasons for the failure of the Company: The Company debtors stretching payment terms, primarily due to industry trends of delayed payment of invoices as a result of internal processes of customers; Impact of the Company's inability to collect outstanding funds owing from Paul Jones; Impact of mismanagement and improper handling of certain clients by the Former Director. The Former Director has advised that as the Company was profitable and operating successfully at the time of his termination in April 2014, he believes that the likely reason for failure of the Company is mismanagement by the Director. Administrators' Comments From investigations undertaken to date and discussions with key stakeholders, we believe the following factors may have contributed to the Company's insolvency: Distraction of the Director away from the day-to-day operations caused by ongoing litigation with the Former Director; Legal fees incurred as a result of ongoing litigation with the Former Director; A lack of free cash flow, due to four major projects (Myer Emporium, 180 Lonsdale Street, 385 Bourke Street and Marina Quays apartments) all concluding within the space of four months and the Company's inability to recover the loans provided to the Former Director; A number of customers stretching payment terms with the Company; and High cost of salaries and wages, relative to revenue. Further investigation into the reasons for failure of the Company will be undertaken by the Liquidators should the Company be placed into liquidation Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

17 Company's History and Reasons for Failure Historical financials Historical Profit and Loss FY12 YTD FY15 FY12 $ FY13 $ FY14 $ YTD FY15 $ Revenue Project Management 1,330,103 2,152,503 2,050,413 1,178,492 Project Planning , ,828 Other Income 43,281 24, Total Revenue 1,373,385 2,176,732 2,276,287 1,721,319 Expenses Accounting Fees (11,650) (34,000) (33,300) Consulting Expenses (1,275) (63,300) (179,084) (228,311) Director Fees (65,162) (60,000) - - Meal Entertainment Expenses (40,289) (30,024) (79,555) (32,990) Insurance (11,439) (9,867) (15,144) (11,471) Legal Fees - - (57,226) (162,927) Office Supplies (15,987) (20,566) (21,215) (11,049) Overtime Meals (18,277) (25,583) (41,522) (31,208) Payroll Tax (19,653) (30,095) (43,661) (26,520) Rent (79,505) (83,498) (117,824) (103,889) Salaries & Wages (862,019) (992,325) (1,290,610) (926,668) Superannuation (50,795) (80,690) (114,325) (87,255) Other employee expenses (11,981) (27,543) (472,448) (350,092) Telephone (19,531) (22,160) (26,583) (16,795) Travel (34,603) (52,188) (63,367) (63,633) Other Expenses (114,423) (78,661) (149,926) (80,094) Unallocated expenses (39,042) Total Expenses (1,344,940) (1,588,149) (2,706,491) (2,205,244) EBITDA 28, ,582 (430,204) (483,924) Depreciation (49,314) (56,131) (63,667) (69,323) Interest 20,868 15,230 11,861 6,842 NPBT (2) 547,681 (482,010) (546,405) Profit and Loss Overview A summary of the Company's Profit and Loss statement is shown to the left. The historical information has been sourced from both the Company's unaudited financial statements (FY12 to FY14) and MYOB management accounts as at the date of appointment. The Company reports on a 30 June year end. The Company's accounts were prepared and maintained by B.P. Woodward & Associates, who acted as the Company's external accountants. The Company recorded a net profit of $548k in FY13 driven largely by the margin generated by the Myer Emporium contract. The Company incurred a $482k loss in FY14 due in large to the recognition of a $408k contingent claim by the Former Director (included in Other Employee Expenses). A net loss of $546k was incurred YTD FY15 as a result of a decline in revenue (on an annualised basis), and recording leave entitlements of the Director that had not previously been recorded (included in Other Employee Expenses). Revenue The Company's total revenue increased by 58% from FY12 to FY13, as a result of increased revenue from the Myer Emporium project which accounted for c. 63% of total project management revenue in FY13. Project management revenue declined c. 25% on an annualised basis in FY15, primarily due to the completion of the Myer Emporium project in May The Company commenced a project planning business unit in November The Company currently employs 2 senior planners and a planning manager in the business unit. Planning revenue increased 140% in YTD FY15 as the business continued to establish itself and increase its customer base Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

18 Company's History and Reasons for Failure Historical financials Profit and Loss Overview (cont'd) Expenses Consulting expenses primarily comprised fees for project management services and marketing. Consulting expenses increased significantly in FY14 as a result of engaging Sydney-based General Manager, Ian Watson, as a consultant and engaging a full time marketing consultant, Nikki Licastro. Director fees were recorded on a non-cash basis by the Company to off-set the Directors' repayment obligations on the loan accounts. Legal fees of $57k and $163k were incurred in FY14 and YTD FY15 respectively, in relation to legal advice provided to the Company in relation to the litigation with the Former Director of the Company. Please refer to Section 5 of this report for further information. The rent expense increased by 41% in FY14 due to the Company leasing space at the external accountants office in Sydney. As the business continued to expand its Sydney operations, the Company entered into an office lease at a new premises in Sydney in December 2014 at an annual rate of $115k p.a. Given the nature of the business, the Company's largest recurring expense was salaries and wages. The wages expenses increased $300k in FY14 due to the Company hiring an additional 5 employees in FY14. The Former Director of the Company was terminated on 1 April 2014, resulting in a reduction of $264k in FY15 (on an annualised basis). A termination payment of $32k was paid to the Former Director following his termination. Other employee expenses in FY14 included a contingent liability totalling $408k for an employment claim relating to the Former Director's termination. Please refer to the Section 5 of this report for further information. As the liability is the subject of ongoing litigation, we consider that it should only be treated as a contingent liability. Other employee expenses in FY15 included an accrual of $308k for leave entitlements of the Director, which had not previously been recognised in the accounts of the Company. Other expenses includes general and administration expenses and motor vehicle expenses. The increase of $71k in other expenses from FY13 to FY14 primarily relates to an increase in bookkeeping fees ($15k), computer expenses ($14k), entertainment expenses ($18k), and motor vehicle repairs and maintenance ($24k). At the date of our appointment, the Company had unallocated expenses totalling $39k. This relates to the reimbursement of Company expenses paid directly by the Director. It was the Company's practice to reimburse the Director and allocate once the receipts were collated and input into the Company's MYOB system. This practice is not uncommon in small businesses Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

19 Company's History and Reasons for Failure Historical financials Historical Balance Sheet 30 June 2012 to 17 March 2015 At 30 June 2012 $ At 30 June 2013 $ At 30 June 2014 At 17 March 2015 $ $ Current Assets Cash at Bank 300, , ,429 24,218 Term Deposit ,000 Trade Debtors 42, ,121 56, ,105 Funds held in trust ,000 42,000 Total Current Assets 342, , , ,323 Non-Current Assets Fixtures, fittings & furniture 322, , , ,722 Vehicles - 117,185 95,168 79,659 Related Party Loans 285, , , ,343 Total Non-Current Assets 608,952 1,141, , ,724 Total Assets 951,385 1,638,802 1,289,640 1,297,047 Current Liabilities Trade Creditors 9,488 10, ,589 Provision for Project Management Costs 935, , , ,070 Tax Provision 29, ,838 32, ,430 Provision for employees 25,120-16, ,300 Provision for employment claim , ,818 Related Party Loans 65,096 Vehicle Chattel Mortgage - 119,943 45,574 - Total Current Liabilities 999,468 1,305,643 1,438,491 1,992,303 Non-Current Liabilities Total Liabilities 999,468 1,305,643 1,438,491 1,992,303 Net Assets/(Liabilities) (48,083) 333,159 (148,851) (695,256) Balance Sheet Overview A summary of the Company's balance sheet is shown to the left Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April Assets Cash at bank as at the date of our appointment is significantly lower than prior periods due to the Company funding ongoing trading losses, increased expenditure on legal fees, and difficulty in converting debtors to cash. The $80k term deposit was provided as security for a bank guarantee in relation to the lease of the Sydney office, which commenced in December We anticipate that the term deposit will be released to the Administrators following the completion of the sale of the business which requires the replacement of the rental security by the purchaser. The trade debtors balance of $366k as at 17 March 2015 comprises invoices owing from 15 customers, with 3 major customers comprising c. 50% of the receivables balance. At the date of our appointment, debtor days totalled 63 days, compared to 7 days at 30 June 2014 and 26 days at 30 June The Company's debtor profile has historically been lumpy due to the nature of the services provided to customers. We provide further commentary on the debtors on page 27. Based on the Company's management accounts, $42k of funds were held on trust by the Company's legal advisors. However, we understand that his amount has already been allocated to outstanding invoices due to the legal advisors. The Company provided loans totalling $520k to the shareholders in FY13 from available cash resources in the Company. The Director repaid the loan in May At 17 March 2015, the balance of the related party loans consisted of: $263k (Paul Jones shareholder loans) $84k (Paul Jones Division 7A loan) $54k (Paul Jones alleged misappropriated funds) We note the above loan amounts are the subject of ongoing litigation. Please refer to Section 5 for further details.

20 Company's History and Reasons for Failure Historical financials Balance Sheet Overview (cont'd) Liabilities The provision for Project Management Costs of $935k was raised in relation to the Emporium Myer project which the Company expected would result in additional expenses for construction work due to the ambiguity of the scope of the project. A provision was raised for this amount, however, following completion of the Myer contract in May 2014, it was determined that the expenses would not be incurred and the provision was no longer required. The Director advised that the provision was scheduled to be reversed in the FY15 annual accounts. We note that reversal of the provision will likely result in an income tax liability of c. $280k and we envisage that the ATO will lodge a claim for this amount. A provision for the Former Director's termination claim of $408k was raised in FY14. In our view, this is a contingent liability and its exclusion would improve the net liability position at 17 March 2015 to a net asset position of $260k. The provision for employees increased $337k in FY15 due to the recognition of the Director's annual and long service leave, which had not previously been accounted for. We understand that the calculation is based on the Director's length of service, however, it remains subject to further investigation and calculation to determine the validity of the claim Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

21 Company's History and Reasons for Failure Directors' report as to affairs (RATA) Report as to Affairs Summary Description Note Book value Directors' Estimated Realisable Value $ $ Assets not specifically charged Sundry Debtors 1 772, ,461 Cash at Bank 2 3,239 3,239 Work in progress 3 93,402 93,402 Plant and equipment 4 374,635 99,595 Other Assets 5 80,000 Unknown Net assets not subject to specific charge 1,324, ,697 Assets subject to specific charges (3,541) - Total Assets 1,320, ,697 Less: Amount owing to Priority creditors 6 (50,166) (50,166) Amount owing to Preferential creditors 7 (23,114) (23,114) Surplus / (Deficit) in assets before the claims of unsecured creditors 1,247, ,417 Amount owing to Unsecured creditors 8 (546,590) (546,590) Surplus / (Deficit) before Realisation and Administration costs 9 700,670 (53,172) Director's Report as to Affairs Pursuant to Section 438B(2) of the Act, the Director of the Company is required to provide a statement about the Company's business property, affairs and financial circumstances, also known as the RATA. The RATA is a snapshot in time as at the date of our appointment of the assets and liabilities of the Company, disclosing book values and the estimated realisable value (ERV) for the Company's assets. On 17 March 2015 a written request was issued to the Director to complete the RATA for the Company. A RATA completed by the director was received on 8 April 2015, prepared as at the date of appointment of the Administrators. A summary of the RATA is detailed to the left. We comment on each asset and liability in greater detail on the following pages of this report Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

22 Company's History and Reasons for Failure Directors' report as to affairs (RATA) RATA Commentary Note Assets Commentary 1 Sundry Debtors Sundry debtors includes trade debtors of $370k (discussed further on page 27), and related party receivables of $402k comprised of shareholder loans provided to the Former Director. We note that there is a $4k variance to the balance sheet, which relates to a cheque that was received and recorded against trade debtors, however, it was banked subsequent to our appointment. The Director has indicated that all trade debtors are collectible and the Administrators have been working with the Director and the Licensee to realise the debtors. The value of any potential recovery of the related party receivables is unknown at this time, and is subject to ongoing litigation. 2 Cash at Bank At the date of our appointment, there was a total of $3.2k in the Company's bank accounts with Westpac and ANZ. These funds have been secured by the Administrators. We note that there is a $21k variance to the balance sheet which relates to the abovementioned debtor cheque of $4k and $17k of unreconciled transactions in the three days prior to our appointment. 3 Work in progress At the date of our appointment, $93k was recorded as work in progress relating to unbilled time costs. We note that this amount was not included on the balance sheet at the date of appointment and is in addition to the trade debtors amount. Immediately following our appointment, all work in progress was billed by the Company and will be collected by the Administrators. 4 Plant and equipment Plant and equipment includes fixtures and fittings, IT equipment and office fit-out, for the Sydney and Melbourne offices. It also includes 2 motor vehicles, one of which is currently in the possession of the Former Director of the Company. Based on the asset register of the Company, plant and equipment had a written down value of $375k. There is a $7k variance to the balance sheet which relates to the depreciation of one of the Company's motor vehicles. The Administrators commissioned an external valuation of all plant and equipment, which is summarised as follows: Motor vehicles ($92k) Sydney office equipment ($2.5k) Melbourne office equipment ($5k) All plant and equipment owned by the Company (excluding the vehicle in the possession of Paul Jones) is to be included in the sale to the purchaser of the business, Verlea Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

23 Company's History and Reasons for Failure Directors' report as to affairs (RATA) RATA Commentary Note Liabilities Commentary 5 Other Assets Other Assets includes a term deposit of $80k held by Westpac as cash security for a rental guarantee in respect of the Sydney office. In accordance with the sale agreement, the purchaser is required to replace the bank guarantee. Accordingly, we expect that the term deposit will be realised by the Administrators. 6 Priority Creditors Accrued employee leave entitlements at the date of our appointment totalled $50k (excluding the entitlements of the Director recorded in the balance sheet). The Administrators' calculation of employee entitlements is set out in Section 7. All employees were employed by Verlea as part of the business sale and their entitlements have been transferred. Accordingly, these employees will no longer have a claim against the Company for their leave entitlements. 7 Preferential Creditors The preferential creditor amount relates to outstanding superannuation of $23k. The purchaser has assumed liability for this amount and a corresponding adjustment was provided on settlement of the sale. 8 Unsecured Creditors The Director's RATA indicates that there are 24 unsecured creditors of the Company, with a combined amount owing of $546k. The unsecured creditors comprise trade creditors ($115k), the ATO and OSR ($86k), a director loan ($47k), employee and contractor expense reimbursements ($24k) and excluded employee entitlements ($274k). Should creditors elect to place the Company into liquidation, the liquidator will seek formal proofs of debt from all creditors. 9 Deficit before Realisation and Administration costs The estimated deficit recorded in the Director's RATA ($53k) excludes realisation costs (agents, legal fees etc), and the Administrators' remuneration an disbursements (discussed further in Section 9) Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

24 Section 4 Actions undertaken to date 01. Executive summary 02. Introduction 03. Company's History and Reasons for Failure 04. Actions undertaken to date 05. Offences, voidable transactions and insolvent trading 06. Estimated return to creditors 07. Employees and Employee Entitlements 08. Administrator's recommendation 09. Remuneration 10. Meeting 2015 Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April 2015

25 Actions undertaken to date Actions undertaken to date Trading During Administration On 19 March 2015 the Administrators entered into a Licence Agreement with Verlea to allow the Company to continue to operate during the Administration. Verlea is an entity controlled by the Director of the Company. The primary purpose of the Licence Agreement was to allow the business to continue to operate and service its clients whilst we undertook an urgent sale of the business. Upon entering into the Licence Agreement, control of the Company's operations transferred to Verlea during the period of the Licence Agreement and Verlea became responsible for all expenses incurred during the Licence period. Sale of Business The Administrators undertook a sale campaign for the sale of the business. Please refer to page 26 for further information. Notification of Appointment Upon the appointment of the Administrators, all creditors and employees were notified of the appointment of the Joint and Several Administrators, and were advised that the Administrators were continuing to trade the business in the short term. All creditors were also notified of the first meeting of the Company's creditors. Obtaining Books and Records The Administrators have been liaising with the Director and the Company's external accountants in order to obtain the books and records of the Company. The records of the Company have been retained by the external accountant, however the Administrators have been provided unfettered access to all records required to undertake the necessary investigations. First Meeting of the Creditors of the Company The first meeting of the creditors of the Company was convened and held on 27 March At the meeting creditors ratified the appointment of the Administrators and elected not to form a Committee of Creditors. Other actions Other actions undertaken by the Administrators since their appointment included: Attended to all statutory lodgements; Addressed all employee queries concerning their entitlements and the Administration process; Liaised with the Director and Former Director in relation to their statutory duties; Attended to creditor enquiries; Liaised with the tax office and essential services providers; Liaised with the Company s legal representatives and our solicitors to understand the ongoing litigation that the Company is a party to; and Undertook initial investigations into the Company s business, property, affairs and financial circumstances Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

26 Actions undertaken to date Sale of the business Overview The Administrators commenced an urgent sale campaign on Monday 23 March 2015 via an advertisement in the AFR inviting expressions of interest for the purchase of the business and/or assets of the Company. The EOI process was undertaken in a compressed timeframe, within the Administrators convening period, as summarised below: Stage Deadline 1. Execute CA and receive information pack On request 2. Formal expression of interest due 30 March Review of EOI's received 30 March April Contract negotiations with preferred bidder. 2 April April Sale contract signed with preferred bidder. 21 April 2015 Sale Process The sale process sought interest from parties to either acquire the business of the Company or the assets of the Company. Interested parties were invited to submit offers for the assets of the Company to be split between Plant and Equipment, Intellectual Property and Goodwill. Whilst the EOI process was run in a compressed timeframe, interest was sought from the following parties: Industry participants; Existing shareholders of the Company; and Responses to the AFR advertisement. The EOI process resulted in eight enquiries (excluding the Director of the Company), and information packs were issued to three of these parties. Sale to Verlea Pty Ltd The Administrators received one formal EOI from Verlea Pty Ltd, with the key details of the offer as follows: Headline price of $100k (excl. GST), split as follows: Plant & Equipment ($70k); and Goodwill ($30k). Purchase price to be paid in cash (i.e. no requirement for bank funding); The motor vehicle in the possession of Paul Jones and the photocopier machine (leased asset) to be excluded from the sale; All staff to be transferred to the purchaser on identical employment conditions, with all employee entitlements transferred to the purchaser; An adjustment to the purchase price of $68k, being an amount equivalent to the value of the annual leave entitlements (excluding the Director's accrual) and superannuation outstanding to employees; Assignment of existing customer contracts; and Assignment of the Sydney office lease and the replacement of the Company's $80k bank guarantee provided to the landlord as security. This will result in the release of $80k cash security to the Administrators. The Administrators accepted the offer for the following reasons: The offer exceeded the valuation of the plant and equipment on a liquidation basis; The offer resulted in all employees being offered employment with the purchaser and the transfer of their employee entitlements. The sale completed on 21 April 2015 and the Administrators received the net proceeds for the benefit of creditors. The sale excluded the Company's pre-appointment debtors. Accordingly, the Administrators will continue to collect these amounts for the benefit of creditors. We envisage that the $80k cash security for the bank guarantee will be released to the Administrators in the next 3 to 4 weeks, following replacement of the bank guarantee by the purchaser Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

27 Actions undertaken to date Debtors Book Debts At the commencement of the Administration, the book value of the Company's trade debtors was $370k and the book value of the Company's loan debtors was $402k comprised of various loans and advances to the Former Director. Upon our appointment, all WIP ($93k) was billed and these invoices were issued to customers increasing the total value of trade debtors to $463k. These debtors are being collected by the Administrators. On 19 March 2015 a customer letter was provided to the Licensee, to be circulated to all customers advising of the appointment and the License Agreement with Verlea. In accordance with the License Agreement, the Licensee acted as the Administrators' agent for the purpose of collecting debts. To date the Administrators have realised $237k in trade debtors. We note that there has been a delay in receiving cash from debtors, as the majority of debtors have continued to pay into the Company's pre-appointment bank account. Whilst this account is frozen and funds are intermittently swept to the Administrators' account, there is a time lag in the Administrators receiving the funds. The director has indicated in his RATA that 100% of the customer debtor balance as at appointment is realisable. The realisation of the Company's loans to the Former Director is subject to ongoing litigation. Please refer to the following page of this report for further information Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

28 Actions undertaken to date Legal Proceedings Litigation At the date of our appointment, the Company was party to two proceedings in the Supreme Court of Victoria: A claim by the Company against Paul Jones filed in May 2014 seeking the repayment of the shareholder loans, alleged misappropriated funds and the return of Company property (including the motor vehicle) in his possession. Paul Jones counterclaims against the Company for damages in respect of the termination of his employment in April 2014; and A claim for shareholder's relief brought by the shareholder, Paul Jones Holdings Pty Ltd, filed in June 2014 seeking orders against the Company and the other shareholder, D S Jenkins Holdings Pty Ltd. Upon appointment of the Administrators, the shareholder proceedings against the Company were automatically stayed in accordance with section 440D of the Act. A directions hearing was set down for 27 March The Administrators sought, and obtained by consent, an adjournment to the proceedings to allow the Administrators to consider both proceedings and form a view as to the merits of the claims and the benefit to creditors and shareholders in pursuing the claims. Both proceedings were adjourned to 8 May We are unable to provide further information on the proceedings as they are ongoing, however, we will provide an update to creditors in due course. At this stage, the Administrators have not incurred the considerable expense of a detailed independent legal opinion as to the merits and prospects of success of the Company's claim against Paul Jones, however, a preliminary independent opinion has been obtained. It would be inappropriate to disclose this advice due to the ongoing litigation Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

29 Section 5 Offences, voidable transactions and insolvent trading 01. Executive summary 02. Introduction 03. Company's History and Reasons for Failure 04. Actions undertaken to date 05. Offences, voidable transactions and insolvent trading 06. Estimated return to creditors 07. Employees and Employee Entitlements 08. Administrator's recommendation 09. Remuneration 10. Meeting 2015 Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April 2015

30 Offences, voidable transactions and insolvent trading Investigations overview summary of key findings Insolvent Trading Refer to page 37 to 41 Based on our review of the books and records and analysis of the financial position of the Company, it is the Administrators' view that the Company was insolvent from February 2015, being the time that the Company's net asset position deteriorated to a net liability position and creditors were stretched beyond their standard payment terms. Books and Records In accordance with Section 286 of the Act, we have not identified any material deficiencies in the books and records provided. Unfair Preferences Refer to page 32 Uncommercial transactions Refer to page 33 Directors transactions Refer to page 33 Breaches of director duties Refer to page 36 Based on our investigations, we have not identified any unfair preference payments to third party creditors. The creditors of the Company were paid within standard payment terms until February 2015 and we have not identified any payments that possess the characteristics of unfair preference payments. The recovery of any unfair preferences would be limited to the period of insolvency. Based on our investigations, we have not identified any uncommercial transactions to third parties or related parties that would result in a material recovery for the benefit of creditors. We have undertaken preliminary investigations into a number of potential director related transactions. Based on these investigations, the Administrators are of the view that these transactions do not constitute unreasonable director related transactions. Should a liquidator be appointed, the reasonableness of these transactions will be investigated further. In particular, further investigation is required in respect of expense reimbursements made by the Company to the Director and Former Director. We have not identified anything to indicate the directors intentionally avoided the payment of employee entitlements. Our brief investigations undertaken during the voluntary administration period have not identified any material breaches of director duties. However, should the Company be placed into Liquidation, the liquidators will review any potential breaches of directors' duties further Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

31 Offences, voidable transactions and insolvent trading Investigations Overview Antecedent transactions recoverable by a Liquidator In accordance with Regulation 5.3.A.02, the administrator of a company, in setting out his or her opinions in a statement mentioned in paragraph 439A (4)(b) of the Act, must specify whether there are any transactions that appear to the administrator to be voidable transactions in respect of which money, property or other benefits may be recoverable by a liquidator under Part 5.7B of the Act. The administration process set down in Part 5.3A of the Act, provides a very short time within which to conduct investigations into potential recoveries from voidable transactions. At this stage, due to the short time frame allowed, it is difficult to definitively identify the likely courses of actions and/or recoveries that may be available to a liquidator. Such conclusions would usually be made after more detailed investigations have been undertaken. Such investigations may include: A detailed review of documentation produced by relevant parties upon enquiry by a Liquidator/Administrator; and The public examination under oath, of relevant parties regarding the transactions concerned. Accordingly, whilst we have conducted the necessary enquiries required of an Administrator, the conclusions drawn herein with respect to our investigations into the Company's affairs should be viewed as preliminary and may be confirmed, or otherwise, by way of other sources of investigation should any of the Company proceed to liquidation. The transactions generally fall into two categories, being insolvent trading and voidable transactions (comprising unfair preferences, uncommercial transactions and unfair loans). The prospect of recovery of any antecedent transactions will depend on two key issues: Availability of funding to allow the cost of further investigation and litigation to be met. At this stage, we are unable to quantify the funds estimated to pursue such actions and a cost benefit analysis would be conducted prior to instigation of actions as well as consultation with the creditors and/or a Committee of Creditors; and The ability of the party (potential defendant) to be able to meet and pay any successful judgement against it in favour of the liquidators. A cost benefit analysis will need to be conducted on each case to determine if there is merit and a net recovery to creditors in pursuing action Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

32 Offences, voidable transactions and insolvent trading Voidable Transactions Unfair preference payments The payments referred to are generally recoverable under Section 588FA of the Act if the payments were made during a period of six months prior to the commencement of the winding up date, or the date the Voluntary Administrators were appointed (otherwise known as the relation back date ), which in this case would be the period 17 September 2014 to 16 March To constitute an unfair preference payment, it must be proven that the company to the transaction was insolvent at the time of the payment and that the creditor had a suspicion or ought to have had a suspicion that the company was insolvent. As a general guide, the following factors can be demonstrative of that suspicion: The Company: Having failed repayment arrangements; Making payment(s) to suppliers outside of normal trading terms; Making round figure payments or payments after pressure from the creditor; and/or Seeking additional finance or cash injections. Creditors: Resorting to legal actions to recover the debts; Receiving post-dated cheques following the commencement of legal proceedings; Entering into Cash On Delivery payment arrangements with suppliers; Making demands for clearance of the debt unrelated to a promise to recommence supply; and/or Seeking additional security to secure the debt. We have undertaken the following procedures in determining whether unfair preferences occurred: Analysis of ageing of suppliers as at the appointment date and over the relation back period; Review of the Company's books and records; Identification of suppliers at risk of unfair preferences; and Review of bank statements produced during the relation back period identifying large, round sum or regular payments. Preference Payment Findings Based on our investigations, the majority of creditors were paid within terms and no creditors appear to have placed any pressure on the Company for payment. Further, we have not identified any payment plans or letters of demand issued to the Company. In our view, the Company may have only been insolvent from February Should the Company be placed into liquidation, we will investigate further, however, the recoverability of preference payments is limited to the period of insolvency. We have not identified any potential preference payments, however, if the Company is placed into liquidation, we will undertake further detailed investigations. It should be noted that pursuing preference recoveries can be costly, lengthy and not necessary a successful exercise. We also stress that any party subject to an unfair preference payment claim may have valid defences preventing a claw back by a Liquidator Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

33 Offences, voidable transactions and insolvent trading Voidable Transactions Uncommercial transactions Section 588FB(1) of the Act defines an uncommercial transaction as a transaction of the company if, and only if, it may be expected that a reasonable person in the company s circumstances would not have entered into the transaction, having regard to: The benefits (if any) to the company of entering into the transaction; The detriment to the company of entering into the transaction; and The respective benefits to other parties to the transaction. Section 588FC of the Act defines an insolvent transaction as one which is an uncommercial transaction and entered into when the company was insolvent at the time of the transaction, or would become insolvent as a result of entering into the transaction. As part of our investigations into uncommercial transactions, we conducted a review of: The Company's records for payments made out to cash ; and Any significant transactions entered into by the Company. At the date of this report we have not become aware of any uncommercial transactions entered into by the Company. Director Related Transactions Payments, the issue of securities, conveyances or other dispositions of property by the Company in favour of a director, a relative or de facto spouse of a director may constitute an unreasonable director related transaction in accordance with section 588FDA, if it may be expected that a reasonable person in the Company's circumstances would not have entered into the transaction. Director Related Transactions Findings As part of our investigations, we conducted a review of payments made to the Director and Former Director, including director fees, annual salaries, reimbursement of expenses, shareholder loans and any other benefits received by the Director and Former Director. Director Salaries The table below summarises the gross salaries paid to the Director and Former Director from 1 July 2011 to the date of our appointment. FY12 FY13 FY14 YTD FY15 Total David Jenkins 379, , , ,552 1,424,278 Paul Jones 367, , ,141-1,044,633 Total 746, , , ,552 2,468,911 % of Total Revenue 54% 34% 30% 17% 33% Neither the Director nor Former Director had a formal written employment agreement with the Company. However, we understand that there was a verbal agreement between them that each would draw a similar salary from the business. Mr Jones was terminated on 1 April 2014 and paid 5 weeks' notice. This remains the subject of ongoing litigation which is discussed further in Section 4 of this report. Whilst the salaries accounted for a substantial portion of revenue, the business was heavily reliant on the Director and Former Director to generate work for the business and manage the ongoing projects to generate revenue. In addition, the shareholders who are parties related to the Director and Former Director, did not receive any dividends from the Company. Accordingly, it is unlikely that the salaries could be considered uncommercial Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

34 Offences, voidable transactions and insolvent trading Voidable Transactions Shareholder Loans The table below summarises the balance of shareholder loans at the date of our appointment, based on the books and records of the Company: Loan $ Paul Jones - Shareholder loan 263,242 Paul Jones - Shareholder loan 84,850 Paul Jones - Other Loan 54,251 David Jenkins - Loan to Codicote (65,096) Total 337,247 Based on our investigations, it is unlikely that these loans could be considered uncommercial transactions as at the time they were made, the Company appeared to be solvent and had sufficient cash resources to allow for the loans to be made, in lieu of paying shareholder dividends. Expense Reimbursements The tables below summarise the expense reimbursements received by the Director and Former Director for the period 1 July 2013 to the date of our appointment. Each of the shareholders was advanced $260k, on an interest free basis, in FY13 to assist with the purchase of the Company's Melbourne office. These funds were withdrawn in lieu of shareholder dividends as there was excess cash in the business at the time. In addition, the shareholders received loans pursuant to Division 7A of the Income Tax Assessment Act. Following the acquisition of the Melbourne office by the shareholders, rent was paid by the Company to the shareholders. A portion of the rent (c. $3k per month) was repaid to the Company to ensure the minimum repayment requirements were met in respect of these loans. The Director repaid all loans outstanding from him in FY15. The balance outstanding from Paul Jones ($402k) remained outstanding at the date of our appointment and is the subject of ongoing litigation. Based on our investigations, it appears that the loans were made in accordance with various loan agreements between the Company, the Director and the Former Director. The loan documents indicate that the loans are repayable in accordance with sections 109E(6) and 109N(3) of the ITAA. Should the Company be placed into liquidation, the liquidators will review the validity of the loan agreements and the recoverability of the outstanding loans. David Jenkins Expense Reimbursements Date of Reimbursement Amount $ 18/10/ ,319 17/12/ ,418 30/06/ ,678 27/11/ ,021 27/01/ ,702 Total 323,139 Paul Jones Expense Reimbursements Date of Reimbursement Amount $ 1/07/2013 8,542 29/07/2013 9,086 1/09/2013 9,327 30/09/2013 6,546 4/02/ ,275 Total 48, Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

35 Offences, voidable transactions and insolvent trading Voidable Transactions Expense Reimbursements (continued) The Company had no formal policy in respect of expense reimbursements and we understand that a significant amount of company expenses were met by the Director personally, which is not uncommon for a small business. We have requested copies of all expense claims and receipts from the Director and Former Director, however, have not received these at the date of this report. Should the Company be placed into liquidation, we will review the reasonableness of the expense reimbursements paid by the Company to the Director and Former Director. If any of the expenses claimed by the Director or Former Director are deemed not to be bona fide business expenses, these amounts may be recoverable as uncommercial director related transactions. Legal Fees During the period 1 April 2014 to the date of our appointment, the Company incurred legal fees totalling $272k in relation to the proceedings against Paul Jones and defending the proceedings brought against the Company by Paul Jones Holdings. Based on our investigations, it appears that the Company engaged its legal advisors in early April 2014, after the termination of Paul Jones as a director. The first proceeding was commenced by the Company in May 2014 to recover funds alleged to be owing from Paul Jones in his personal capacity. The second proceeding was commenced by Paul Jones Holdings in its capacity as a shareholder of the Company in June Whilst the claim predominantly relates to actions by the other shareholder, D S Jenkins Holdings, Codicote was joined to the proceedings and therefore required legal representation. We have reviewed copies of all legal invoices during this period to determine whether any legal fees paid by the Company were in respect of legal work relating to the shareholders rather than the Company. Based on the narrations and information provided to date, it is not clear whether the Company was meeting legal expenses on behalf of the shareholder, D S Jenkins Holdings. Should the Company be placed into liquidation, the nature of the legal fees paid by the Company will be investigated further. Unfair Loans Pursuant to Section 588FD a Liquidator is able to recover from directors or related parties any unfair loans which are extortionate or have become extortionate. The Director made a loan of $47k to the Company on 17 March 2015 via direct payment of Company expenses. This advance to the Company was not documented in a loan agreement and no interest has been charged by the Director. We have not identified any unfair loans made by the Director or related parties of the Company. Arrangement to avoid employee entitlements A director may be ordered to pay compensation if agreements or transactions were entered into with the intention of avoiding payment of employee entitlements or reducing the amount of entitlements that can be recovered. No transactions or agreements of this nature or intention were discovered during our investigations Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

36 Offences, voidable transactions and insolvent trading Possible breaches of Director Duties Potential Breaches of Director Duties Upon further investigation by the liquidator (should one be appointed), if any of the potential director related transactions described in this section of the report are found to be voidable transactions, they may also constitute a breach of director duties. These duties are summarised in the below table: Section Description of Duties 588G(3) Insolvent Trading 590 Offences by officers or employees 180 Care and diligence 181 Good faith - directors' and officers' duties 182 Use of position - Directors' and employees' duties 183 Use of information - Directors' and employees' duties 184 Good faith, use of position and use of information 286/344 Failure to keep adequate books and records A high level of detailed evidence is required for a Liquidator to be successful in proceeding with such actions and is dependant on whether there is funding available for a Liquidator to conduct further investigations and to commence proceedings and litigate such matters. Report Pursuant to Section 438D In accordance with section 438D of the Act, an Administrator is required to submit a report to ASIC if he/she becomes aware that: A past or present officer, employee or member of a company has been guilty of an offence in relation to the company; or A person who has taken part in the formation, promotion, Administration, management or winding up of the company has: (i) Misapplied or retained, or may have become liable or accountable for money, or property (in Australia or elsewhere) of the company; or (ii) Been guilty of negligence, default, breach of duty or breach of trust in relation to the company. At this stage, we do not consider it appropriate to submit a report to ASIC. Should the Company be placed into liquidation and our investigations identify any director related offences, a report pursuant to section 533 of the Act will be lodged with ASIC Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

37 Offences, voidable transactions and insolvent trading Insolvent trading Indicators of Insolvency Indicator Overview Administrators findings Cash Flow Test The test for solvency and consequently insolvency is prescribed by Section 95A of the Act which states that: "(1) a company is solvent if, and only if, the company is able to pay all the company's debts, as and when they become due and payable; and (2) a company who is not solvent is insolvent." This translates into the "cashflow test", however analysis of the balance sheet is also important in forming a view as to solvency. The chart below highlights the movement in the cash balance between July 2013 and February 2015 on a monthly basis, based on the Company's bank statements and management accounts. The Company did not hold an overdraft facility and therefore needed to maintain a positive cash balance. Over the period of review, the Company had sufficient cash to meet trade creditor liabilities within payment terms until February The cash balance remained steady until June 2014, at which time there was a significant decrease of $560K, following the termination of the Former Director on 1 April 2014, and commencement of legal action to recover funds owing to the Company. Cash outflows in June 2014 included payments to the Company's legal advisors, Corrs Chambers Westgarth ($105k), reimbursement of expenses to David Jenkins ($104k), the FY13 income tax payment ($158k), Payroll tax ($4k) and May 14 PAYG withholding tax ($23k). During the period 1 April 2014 to the date of our appointment, the Company incurred total legal fees of $220k, which had a significant impact on the cash flow of the business. Refer to page 35 for further information in relation to the legal expenses. The creditor balance over the review period remained consistent with creditors paid within payment terms. There was an increase of c. $86k in April 14 as a result of accounting fees totalling $73k and an increase of $106k in February 2015 comprising outstanding legal fees ($30k), consulting fees ($32k) and accounting fees ($36k). On the basis of the cash flow test the Company has potentially been insolvent since the end of February $' Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Bank balance Group Trade Creditor Balance 2015 Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

38 Offences, voidable transactions and insolvent trading Insolvent trading Indicators of Insolvency Indicator Overview Administrators findings Balance Sheet Test The balance sheet test considers whether a company may be insolvent if the total liabilities exceed the value of the assets and there are insufficient assets to discharge the liabilities. We have undertaken analysis including reviewing liquidity ratios such as the Current Ratio, and have also analysed the Net Asset position of the Company. Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Current Ratio (excl. provision) 1 N/A N/A Cash - Trade Creditors 287, , , , , ,305 70, ,048 (29,191) (102,472) Net Working Capital (excl provision) 1 385, , , , , , , , , ,747 Net Assets (excl. employment claim) 2 259, , , , , , , , ,277 (286,438) Notes 1. The Current Ratio and Net Working Capital workings for the above periods exclude a provision of $935k relating to the Myer Emporium contract 2. The Net Asset workings for the above periods exclude the provision for Paul Jones' claim of c.$408k We highlight our key findings: In each of the periods shown above, the Company had a current ratio of greater than 1, which evidences that they held sufficient current assets to discharge their current liabilities. As noted above however, we have excluded the provision of $935k relating to the Myer Emporium project, as the provision was required to be reversed upon completion of the project. We note that the Company had no current liabilities in June and July 2014, as all accounts payable were paid within the month. At the date of appointment, the current ratio was 2.08, indicating that the Company had sufficient current assets to discharge its liabilities, however the Company was impacted by timing issues in relation to the collection of debtors. The provision of $935k has also been excluded from the net working capital calculations as it would shortly be reversed in the accounts, which presents a positive net working capital position for the Company over all periods tested. The Company's net cash position (i.e. available cash less creditors) after discharging its trade creditor liabilities remained positive until February 2015, where it declined by 110% from June 2014 to a negative cash position of $29k in February, and $102k in March. We note that the primary reason for this decline was difficulty in converting debtors to cash and significant legal fees resulting in an increase in the trade creditor balance. Despite the decrease in cash, the net asset position of the Company remained positive for all of the above periods due to the debtor balance. As noted above, the provision for Paul Jones' claim of $408k has been excluded from non-current liabilities, as it is contingent on the outcome of the ongoing litigation. The provision was raised in June 2014, and would result in a negative net asset position for all periods above, if included. On a balance sheet test of solvency, it is the Administrators view that the Company was solvent up until the date of our appointment Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

39 Offences, voidable transactions and insolvent trading Insolvent Trading Indicators of Insolvency Indicator Aged Creditors Other tests/investigations The following graph represents aged creditor balances of the Company between June 2014 and March The graph excludes amounts due in relation to unpaid employee entitlements. 140, ,000 $ 100,000 80,000 60,000 40,000 20, days plus days days Current (0-30 days) 0 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 We highlight our key findings: We note that the Company had limited trade creditors as it was a service based business with limited suppliers. The majority of expenses were wages, professional fees and statutory payments. All creditor balances during the period June 2014 to February 2015 were current, with the exception of 5% of the total creditor balance in January 2015, which were aged between 30 and 60 days. The creditor balance increased significantly from $2k to $116k during the period June 2014 to February 2015, driven primarily by an increase in legal fees. The total creditor balance in March 2015 immediately prior to our appointment, was $126k, of which $47k (37%) was aged between 30 and 60 days. In summary, the graph above shows that the Company was meeting its liabilities as and when they fell due until March Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

40 Offences, voidable transactions and insolvent trading Insolvent Trading - Source and Application of funds Indicators of Insolvency Indicator Source and Application of Funds Other tests/investigations The following graph highlights the application of the Company's cash funds as disclosed in the management accounts and financial statements between the period of 1 July 2012 and 17 March The Company's primary source of funding was through revenue received from project management services. The graph below reflects the application of cash funds between trading activities, and the financing of shareholder loans. During FY13 the Company provided shareholder loans totalling $520K to the shareholders to assist with the purchase of the Melbourne office property. The portion owing by David Jenkins was subsequently repaid during FY14, resulting in a cash inflow to the business. Throughout FY13 and FY14, the Company's net cash flows from trading activities, and net cash position remained consistent. Cash inflows from trading activities decreased by 39% during FY15 however, due to difficulty in converting debtors to cash. 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, , ,310, , ,417 (1,747,022) 863,601 (520,000) 3,151,788 (3,418,938) 1,924,009 (2,187,220) 343, , , ,429 24,218 Cash inflows from trading activities Cash outflows from trading activities Shareholder loans Cash inflows from trading activities Cash outflows from trading activities Shareholder loans Cash inflows from trading activities Cash outflows from trading activities Shareholder loans $ 1/07/12 Opening Cash 30/06/13 Closing Cash 30/06/14 Closing Cash 17/03/15 Closing Cash 2015 Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

41 Offences, voidable transactions and insolvent trading Insolvent Trading Indicators of Insolvency Indicator Outstanding/ overdue Commonwealth and State taxes Winding up applications Books and Records Legal proceedings and agreements with trade creditors Other tests/investigations The RATA submitted by the Director indicates that the ATO is a creditor of the Company in the amount of $80K in relation to tax payments arising from the December 2014 BAS and February 2015 IAS lodgements. The NSW and VIC OSR have also been listed as creditors of the Company for the amount of $2K and $4K respectively. We note that the NSW OSR have confirmed there is no debt owing by the Company as at the date of appointment, and the VIC OSR have confirmed an outstanding debt of $5K. We have requested confirmation of the outstanding debts of the Company from the ATO, however have not received a response to date. Based on a review of the ASIC database there were no winding up applications filed against the Company prior to the appointment of the Administrators. Sections 588E(3) and 588E(4) of the Act provides a presumption of insolvency for a period of 12 months from the relation back date if it is proved that a company failed to keep proper financial records in accordance with Section 286 of the Act. A Liquidator would investigate whether a company maintained adequate books and records that provided reliable reports to the Director/(s) relating to the monthly financial position of the company. Our investigations to date have not identified any material concerns with the books and records provided. We are aware of legal proceedings brought against the Company and the Director by the shareholder, Paul Jones Holdings Pty Ltd, as well as proceedings commenced by the Company against the Former Director. As part of our investigations we have liaised with the Company's legal advisors and our solicitors to understand the ongoing litigation that the Company is party to, and the quantum of any claims. We have not become aware of any statutory demands from trade creditors having been issued against the Company in the 12 months prior to the Administrators' appointment Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

42 Section 6 Estimated return to creditors 01. Executive summary 02. Introduction 03. Company's History and Reasons for Failure 04. Actions undertaken to date 05. Offences, voidable transactions and insolvent trading 06. Estimated return to creditors 07. Employees and Employee Entitlements 08. Administrator's recommendation 09. Remuneration 10. Meeting 2015 Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April 2015

43 Estimated return to creditors Estimated return to creditors Estimated return from a winding up Liquidation Note Low ($) High ($) Non-Circulating Assets Plant & Equipment 1 70,000 70,000 Goodwill 2 30,000 30,000 Total Non-Circulating Assets 100, ,000 Circulating Assets Cash at bank/on hand 3 83,239 83,239 Trade Debtors 4 296, ,461 Loan Debtors Insurance Refund WIP 6 74,722 93,402 Total Circulating Assets 455, ,010 Total Assets Available 555, ,010 Voluntary Administrators Fees and Disbursements 7 (110,000) (100,000) Liquidators Fees and Disbursements 8 (40,000) (30,000) Estimated legal and accounting costs 9 (110,000) (90,000) Total Administration Costs (260,000) (220,000) Total Assets Available for Creditors 295, ,010 Priority Creditors Adjustment for Employee Entitlements on Sale 10 (67,780) (67,780) Priority Creditors 11 (4,000) (4,000) Total Assets available to Unsecured creditors 223, ,230 Unsecured creditor claims 12 (552,356) (552,356) Estimated Dividend to Unsecured Creditors (cents/$) Surplus/(Shortfall) to Unsecured Creditors (328,898) (196,125) A summary of the estimated return to creditors in a liquidation scenario is provided to the left. Our commentary in relation to the EOS are provided on the following pages of this report Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

44 Estimated return to creditors Notes to Estimated Outcome Statement Note Administrators' comments 1 The value of the plant and equipment of $70k is based on the sale value as discussed in Section The value of the goodwill of $30k is based on the sale value as discussed in Section Cash at bank/on hand includes cash of $3.2k that has been secured by the Administrators and a term deposit of $80k held by Westpac as cash security for a rental guarantee in respect of the Sydney office. In accordance with the sale agreement, the purchaser is required to replace the bank guarantee. Accordingly, we expect the term deposit will be available to the Administrators. 4. Trade debtors totalled $370k at the date of our appointment. The Administrators estimate that the full value of the debtor balance will be realisable in a high scenario. The Director has advised that none of the debtors have disputed the invoices and we therefore believe that all debts are collectible. However, for the sake of conservatism we have estimated that 80% of debtors will be realisable in a low scenario. 5. As at the date of appointment, the Company was owed $402k in shareholder loans from Paul Jones. The recoverability of this amount is subject to the outcome of ongoing litigation. At this stage, the Administrators cannot confirm the likelihood of recovery of the loans and therefore cannot quantify the amount that will be realisable. 6. WIP at the date of appointment was $93k. This was subsequently invoiced by the Administrators and it is estimated that the full value of the WIP balance will be realisable in a high scenario. We estimate that $74k (representing 80% of total WIP) will be realisable in a low scenario. 7. The Administrators are afforded a priority in respect of their remuneration and disbursements (subject to creditor approval). As discussed in Section 9, we estimate that the remuneration of the Administrators in dealing with both non-circulating and circulating assets of the Company will total between $100k and $110k (excl. GST and disbursements). 8. As discussed further in Section 9, the Administrators estimate that should the Company be placed into Liquidation, the total cost to conduct the winding up would be between $30k and $40k (excl. GST and disbursements). 9. The Administrators have engaged Norton Rose Fulbright Australia to provide legal advice and prepare any relevant legal documentation associated with the Administration. The Administrators have also engaged B.P. Woodward to prepare updated financial reports, assist with invoicing and debtor collections and assist with the preparation of the RATA. We estimate that the total costs incurred during the Administration and liquidation will be in the range of $90k to $110k Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

45 Estimated return to creditors Notes to Estimated Outcome Statement Note Administrators comments 10. As discussed in Section 4, the Administrators sold the business to Verlea on 21 April 2015 for a headline price of $100k (excl. GST). In accordance with the sale agreement, an adjustment to the purchase price of $68k was provided to account for the value of employee entitlements and outstanding superannuation transferred to the purchaser. 11. All employee leave entitlements and outstanding superannuation was transferred to the purchaser on completion of the sale. We note that no adjustment was made for the Director's outstanding superannuation or Nikki Licastro's outstanding superannuation. Accordingly, these amounts have been included as a priority claim. Should a dividend become payable, these claims will be formally adjudicated. 12. The unsecured creditor balance includes a potential income tax liability of c.$280k arising from the unwinding of a provision of $935K (discussed in Section 3). We expect the ATO to lodge a claim for this amount. Based on our analysis, unsecured creditors of the Company will receive a dividend of between 40 and 64 cents in the dollar on their admitted claims in a liquidation scenario. Any dividend to unsecured creditors will be subject to a formal adjudication and dividend process Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

46 Section 7 Employees and Employee Entitlements 01. Executive summary 02. Introduction 03. Company's History and Reasons for Failure 04. Actions undertaken to date 05. Offences, voidable transactions and insolvent trading 06. Estimated return to creditors 07. Employees and Employee Entitlements 08. Administrator's recommendation 09. Remuneration 10. Meeting 2015 Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April 2015

47 Employees and Employee Entitlements Employees Overview All employees of the Company were retained by the Administrators. In accordance with the License Agreement, the Licensee was responsible for payment of all staff wages during the administration period. Detailed in the table below is a summary of the estimated amounts owing to employees at the date of appointment, calculated by the Administrators. Please note that the summary below is an estimate only and each employee claim will require formal adjudication. Entitlement Total Outstanding ($) Wages 702 Superannuation 1 23,114 Annual Leave 2 28,702 Long Service Leave 3 20,762 Total 73,280 Notes: 1. The above table includes superannuation owing to excluded employees (capped at $2k) 2. Annual leave does not include c.$238k owing to the Director per the books and records of the Company 3. Long service leave does not include c.$70k owing to the Director per the books and records of the Company. Excluded Employees Pursuant to Section 556(2) of the Act, an employee of the Company who at any time during the previous 12 months has been a director, or is a relative of the Director, is an excluded employee. Any claim by the Director(s) or their relatives for outstanding entitlements is capped as follows: $1,500 for outstanding leave entitlements; and $2,000 for unpaid wages and superannuation Any amounts claimed which fall outside these amounts will rank as an unsecured claim in the Administration/Liquidation. Transfer of Entitlements In accordance with the sale agreement, all employee entitlements (including outstanding superannuation) were transferred to Verlea Pty Ltd. Accordingly, employees no longer have a claim against the Company for these amounts. In accordance with section 556 of the Act, employee entitlements are afforded a priority claim in the Administration of the Company. The assets of a company are split into two types, non-circulating (i.e. real property, goodwill, IP etc) and circulating charge assets (i.e. cash, stock and debtors). Employee claims are given a priority over circulating charged asset realisations Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

48 Section 8 Administrator's recommendation 01. Executive summary 02. Introduction 03. Company's History and Reasons for Failure 04. Actions undertaken to date 05. Offences, voidable transactions and insolvent trading 06. Estimated return to creditors 07. Employees and Employee Entitlements 08. Administrator's recommendation 09. Remuneration 10. Meeting 2015 Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April 2015

49 Administrator's recommendation Administrators' Recommendation Options The following options are available to creditors to decide pursuant to s439c of the Corporations Act, being that: The Company execute a Deed of Company Arrangement; The Administration should end; or The Company be wound up. Our opinion on each option and the reasons for our opinion are set out in the following: a) The Company execute a DOCA At this stage, we have not received a DOCA proposal, however, we understand that the Director and Former Director are considering jointly submitting a proposal prior to the second meeting. Should this occur, it may be appropriate for creditors to resolve to adjourn the meeting for up to 45 business days to allow the Administrators to assess the proposal and provide a recommendation to creditors. b) The Administration should end Should creditors resolve to end the Administration, the Company would be placed in a similar position to that which existed prior to our appointment (i.e. as if the Administration did not occur). Given that the assets of the Company have been sold, there would be no benefit in returning control of the legal entity to the Director as creditors would then have to pursuing their usual recovery actions against the Company such as court actions to obtain judgements, warrants of execution or even winding up the Companies. As the Company is insolvent, we do not believe there would be any benefit to creditors in ending the Administration. The return of control of the Company to the Director would not be a satisfactory solution for creditors and is therefore not recommended. c) The company should be wound up Creditors may resolve to wind up the Company which would result in Andrew Sallway and Gayle Dickerson being appointed Joint and Several Liquidators of the Company. A winding-up would allow time for more detailed investigations into the Company's financial affairs to be conducted and to prepare a report on their affairs and the conduct of the Company's officers to ASIC. Given we have not received a DOCA proposal and ending the Administration is not a viable option, we recommend that creditors resolve to wind the Company up. Administrators' Recommendation It is the Administrators' recommendation that creditors resolve to wind the Company up. However, we note that the Director and Former Director are considering jointly submitting a DOCA proposal prior to the second meeting. Should a proposal be submitted it may be appropriate for creditors to resolve to adjourn the meeting for up to 45 business days to allow the Administrators to assess the proposal and provide a recommendation to creditors Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

50 Section 9 Remuneration 01. Executive summary 02. Introduction 03. Company's History and Reasons for Failure 04. Actions undertaken to date 05. Offences, voidable transactions and insolvent trading 06. Estimated return to creditors 07. Employees and Employee Entitlements 08. Administrator's recommendation 09. Remuneration 10. Meeting 2015 Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April 2015

51 Remuneration Remuneration Voluntary Administrators' remuneration (excl. GST and disbursements) Description Joint and Several Administrators remuneration for the period 17 March 2015 to 20 April Joint and Several Administrators' estimated future remuneration for the period 21 April 2015 to 30 April 2015, being the date of the second meeting Liquidators' future remuneration (excl. of GST and disbursements) Description Joint and Several Liquidators' remuneration for the period from 1 May 2015 to the finalisation of the Liquidation. Amount ($) 88, , Amount ($) $40, Remuneration Enclosed at Appendix B is the Administrators' Remuneration Report, which provides details of: Voluntary Administrators' remuneration to be approved Liquidators' future remuneration to be approved Creditors should note that all works has, and will be, performed by the appropriate level of staff in order to optimise any potential realisations which may be available to unsecured creditors Voluntary Administrators' remuneration The remuneration has been split between actual fees incurred for the period 17 March 2015 to 20 April 2015 and the estimated future fees to be incurred for the period 21 April 2015 to 30 April 2015, being the date of the second meeting. Liquidators' future remuneration It will be necessary for the creditors to approve the drawing of remuneration for the Liquidators, should creditors vote that the Company be placed into liquidation 2015 Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

52 Section 10 Meeting 01. Executive summary 02. Introduction 03. Company's History and Reasons for Failure 04. Actions undertaken to date 05. Offences, voidable transactions and insolvent trading 06. Estimated return to creditors 07. Employees and Employee Entitlements 08. Administrator's recommendation 09. Remuneration 10. Meeting 2015 Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April 2015

53 Meeting Second meeting of creditors Second meeting of creditors The second meetings of creditors is to be held at the offices of Grant Thornton at 10:00AM on Thursday, 30 April Please arrive 30 minutes before hand to allow sufficient time for registration. The notice in regards to the meeting is enclosed as Appendix C. The meeting will be open to creditors for questions and general discussion. Should you wish to have us address any issue in detail please advise us prior to the meeting date. This will allow sufficient time to prepare a detailed response to your question. Please note that attendance at the meeting is not compulsory. Telephone Attendance Should you not be able to attend the second meeting of creditors in person, creditors are invited to attend via telephone. In order to do so, you will be required to submit a proof of debt and proxy in favour of the party attending via telephone as detailed below. Please contact Himaja Paramatmuni of this office at himaja.paramatmuni@au.gt.com no later than 12:00PM on the business day prior to the meeting, being Wednesday, 29 April 2015 obtain dial in details. Lodging of proofs of debt Should you not have already lodged a proof of debt, you are required to complete the proof of debt attached as Appendix D. Lodging of proxies Proxies lodged for the previous meeting are not valid for this meeting and therefore, new proxies need to be lodged to enable voting at the second meeting. Please ensure that the proxies are signed under seal, where appropriate (if you are a company) and if the proxy is executed by a power of attorney, that a copy of the power of attorney is enclosed with the proxy form. The proxy form is enclosed as Appendix E. Proxies for the meeting can be lodged in the following ways: Post: to arrive no later than 12:00PM on the business day prior to the meeting, being Wednesday, 29 April Facsimile: to no later than 12:00PM on the business day prior to the meeting, being Wednesday, 29 April In Person: by person with a person attending the meeting; or by to himaja.paramatmuni@au.gt.com no later than 12:00PM on the business day prior to the meeting, being Wednesday, 29 April If proxies are lodged by facsimile or , the law requires that the original proxy must be lodged with the Voluntary Administrators within 72 hours of lodging the faxed or ed copy. Contact details Should you have any queries in relation to any matter raised in this report then please do not hesitate to contact Himaja Paramatmuni on Yours faithfully Andrew Sallway Joint and Several Administrator Gayle Dickerson Joint and Several Administrator 2015 Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

54 Appendices A. DIRRI B. Administrators' Remuneration Report C. Notice of second meeting of creditors D. Proof of Debt form E. Proxy form 2015 Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April 2015

55 Appendices A. DIRRI 2015 Grant Thornton Codicote Pty Ltd (Administrators appointed) 21 April

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