To all Creditors 16 November 2012

Transcription

1 Ernst & Young LLP 100 Barbirolli Square Manchester, M2 3EY Tel: Fax: To all Creditors 16 November 2012 Ref: CR/SJW/TV/EG/NWM1137 Direct line: DirectFax: Dear Sir HI Group plc Hardman Isherwood Limited HI International Limited Frigidaire Consolidated Limited H.I. Investments Limited Fridgemaster Corporation Limited Whitwood Warehouse Limited (all in Administration) (together the Companies ) I write further to the appointment of Jonathan Peter Sumpton, Thomas Andrew Jack and I as Joint Administrators of the Companies on 26 September The Joint Administrators will shortly be issuing their proposals to creditors in accordance with paragraph 49 of Schedule B1 to the Insolvency Act In accordance with Section 246B of the Insolvency Act 1986 and Rule 12A.12 of the Insolvency Rules 1986 the Joint Administrators hereby give notice that their proposals are available for viewing and downloading via the website with effect from 19 November Creditors may also request a hard copy of the proposals free of charge by contacting the Joint Administrators at the postal address, address or telephone number set out in the letterhead. Meetings of creditors will be held on 4 December 2012 to consider and vote on the following matters: 1. The approval of the Joint Administrators proposals. 2. The formation of a creditors committee. To be validly constituted, a creditors committee must have at least three and not more than five members. 3. In the event that a creditors committee is not formed, to fix the basis of the Joint Administrators remuneration as provided for in the proposals. 4. In the event that a creditors committee is not formed, to authorise the Joint Administrators to draw Category 2 disbursements in accordance with the statement of disbursements set out in the proposals. The UK firm Ernst & Young LLP is a limited liability partnership registered in England and Wales with registered number OC and is a member firm of Ernst & Young Global Limited. A list of members names is available for inspection at 1 More London Place, London SE1 2AF, the firm s principal place of business and registered office.

2 2 5. In the event that a creditors committee is not formed, to approve payment of unpaid preadministration costs which were incurred with a view to the company entering administration, as set out in the proposals. Key documents to be made available at will include the following: Joint Administrators proposals From 19 November 2012 Formal notice of the meeting (Form 2.20B) From 19 November 2012 Initial Creditors meeting proxy form (Form 8.2) From 19 November 2012 Notice of claim for voting purposes From 19 November 2012 To be eligible to vote at the meeting you must provide me with written details of your claim by 12 noon on the business day before the meeting and, unless you are attending the meeting in person, you must download and complete and return the proxy form by the date of the meeting. Please ensure that you only complete forms relating to the company or companies in which you have outstanding amounts owing to you. Creditors seeking further information regarding the Administrations can egilpin@uk.ey.com or write to the Joint Administrators at Ernst & Young LLP, 100 Barbirolli Square, Manchester, M2 3EY. If there are any matters concerning the company s affairs which you consider may require investigation and consequently should be brought to our attention, please forward the details to me in writing as soon as possible. Yours faithfully for the Companies S J Woodward Joint Administrator Samuel James Woodward and Thomas Andrew Jack are licensed in the United Kingdom to act as insolvency practitioners by The Institute of Chartered Accountants in England and Wales. Jonathan Peter Sumpton is licensed in the United Kingdom to act as an insolvency practitioner by the Association of Chartered Certified Accountants. The affairs, business and property of the Companies are being managed by the Joint Administrators, S J Woodward, J P Sumpton and T A Jack, who act as agents of the Companies only and without personal liability. We may collect, use, transfer, store or otherwise process (collectively, 'Process') information that can be linked to specific individuals ('Personal Data'). We may Process Personal Data in various jurisdictions in accordance with applicable law and professional regulations including (without limitation) the Data Protection Act 1998.

3 HI Group plc Fridgemaster Corporation Limited Frigidaire Consolidated Limited Hardman Isherwood Limited HI International Limited H.I. Investments Limited Whitwood Warehouse Limited (all in Administration) (together the Group ) Administrators Statement of Proposals 16 November 2012

4 Abbreviations Abbreviations California Drive Crown Directors EY FCL Frigidaire FYXX the Group Wider Group HI Distribution HIF Hilco Appraisal Hisense Home Delivery HSBC Bank HWE International Investments ISDAL Plc ROT Sanderson Weatherall TUPE Tuscany Way White Goods Business Whitwood Freehold property at California Drive, Normanton Crown Corporation (UK) Limited David Isherwood, Andrew Trotter, Nick Isherwood, Debbie Tennant Ernst & Young LLP Fridgemaster Corporation Limited Frigidaire Consolidated Limited 12 month period ending 28 February 20XX FCL, Frigidaire, HI Distribution, International, Investments, Plc and Whitwood the Group, ISDAL and Crown Hardman Isherwood Limited (t/a HI Distribution) HSBC Invoice Finance (UK) Limited Hilco Appraisal Limited Hisense Kelon Electrical Holdings Co Limited A division of HI International Ltd t/a HI Way Express Home Delivery HSBC Bank plc The unlimited partnership trading as HI Way Express HI International Limited H.I. Investments Limited Independent Service (Domestic Appliances) Limited HI Group plc Retention of title Sanderson Weatherall LLP Transfer of Undertaking (Protection of Employment) Regulations 2006 Freehold property at Tuscany Way, Normanton (the Group s head office and principal warehouse) A division of International and Frigidaire that traded as a distributor of refrigeration white goods Whitwood Warehouse Limited Ernst & Young i

5 Contents Contents 1. Introduction, background and circumstances giving rise to the appointments Introduction Purpose, conduct and end of Administrations Purpose of the Administrations Conduct of the Administrations The End of the Administrations Statement of affairs Secured creditors Preferential creditors Non-preferential creditors Prescribed part Administrators' remuneration and disbursements and payments to other professionals Pre-administration costs Appendix A Statutory information Appendix B Directors' statement of affairs Appendix C Statement of administrators' charging policy for remuneration and disbursements pursuant to Statement of Insolvency Practice No Appendix D Administrators' receipts and payments account for the period from 26 September 2012 to 9 November Appendix E Summary audited financial results Ernst & Young i

6 Section 1: 1. Introduction, background and circumstances giving rise to the appointment 1. Introduction, background and circumstances giving rise to the appointments 1.1 Introduction On 26 September 2012 the Group entered Administration and Samuel James Woodward, Jonathan Peter Sumpton and Thomas Andrew Jack were appointed to act as Joint Administrators. This document, including its appendices, constitutes the Joint Administrators statement of proposals to creditors pursuant to paragraph 49 of Schedule B1 to the Insolvency Act 1986 and Rule 2.33 of the Insolvency Rules Certain statutory information relating to the Group and the appointment of the Joint Administrators is provided at Appendix A Background Group structure diagram HI Group PLC Hardman Isherwood Limited (T/A HI Distribution Frigidaire Consolidated Limited HI International Limited HI Investments Limited Dormant companies (WhitwoodWarehouse Limited, Fridgemaster Corporation Limited) Independent Service (Domestic Appliances Limited) Crown Corporation (UK) Limited (Dormant) Key: The Wider Group The Group Principal trading activities The Group s principal trading activity is as a national distributor of white and brown goods to major high street retailers, supermarkets, DIY stores, cash & carry outlets, web based retailers and independent retailers. The Group owned or held exclusive licences to a number of brands including Frigidaire, Fridgemaster, Crown, Philco and Univa. These brands were predominantly traded by the following entities: International (through divisions named Fridgemaster, Crown and Philco ); and Frigidaire; and HI Distribution. Ernst & Young 1

7 Section 1: 1. Introduction, background and circumstances giving rise to the appointment Other trading activities The Group also operated a warehousing, logistics and business to consumer distribution business, from California Drive, known as Home Delivery (a trading division of International). Other Group entities The Group also includes a property holding company (Investments) which owns the Tuscany Way site (including adjacent development land) and two dormant entities (Whitwood and FCL). All other land and buildings owned by the Group are owned by HI Distribution. The ultimate controlling entity within the Group is Plc, a holding company. All entities within the Group are incorporated in the United Kingdom and the Group is primarily operated from Tuscany Way and California Drive, Normanton, West Yorkshire. The Wider Group ISDAL is a domestic appliance warranty and servicing business which operated as a single entity and is a fully owned subsidiary of Plc. Crown Corporation Limited is a dormant entity. On 26 September 2012 ISDAL and Crown Corporation Limited also entered Administration and Samuel James Woodward, Jonathan Peter Sumpton and Thomas Andrew Jack were appointed to act as Joint Administrators. ISDAL is a distinct business with largely separate creditors to the Group and its Proposals are covered by a separate document. As Crown is a dormant entity and has nominal assets and no creditors, its Proposals are also covered by a separate document. Hi Way Express ( HWE ) HWE is an unlimited liability partnership whose partners include three of the four Directors of the Group (David Isherwood, Nick Isherwood and Debra Tennant). It is a warehousing and bulk distribution business that provided services to the Group as well as its own third party customers. Whilst HWE provided services to the Group it did this by utilising the Group s operational assets and employees. This lead to a complex series of recharges which has resulted in a debt being due from HWE and is discussed further later in the document. We understand that HWE has ceased trading but is not subject to any form of insolvency proceedings. Connected party transactions As per the statutory accounts, connected party transactions include: Plc (consolidated) (representing charges from various group entities) Recharges to HWE for management charges (FY11: 72,000, FY10: 23,000); Recharges to HWE for property costs (FY11: 1,349,000, FY10: 1,257,000); Recharges to HWE for staff costs (FY11: 3,935,000, FY10: 4,232,000). Ernst & Young 2

8 Section 1: 1. Introduction, background and circumstances giving rise to the appointment In the individual accounts of Frigidaire, HI Distribution and International cumulative distribution costs charged by HWE total 4,423,000 in FY11 (FY10: 4,643,000). In addition, we are also aware of trademark royalties paid by International to Hardmark Pension Scheme (of which some of the Directors are members) (FY11: 104,000, FY10: 104,000). The audited financial results of the Wider Group are summarised below. The individual results of each entity are summarised in Appendix E. HI Group Plc (consolidated) Period year or period ended Type audited/ draft Turnover Gross profit Gross profit % Directors remuneration Net profit after tax Accumulated reserves 29/02/2012 Draft 51,254 6,998 14% n/a (6,302) 14,142 28/02/2011 Audited 59,164 10,859 18% ,142 28/02/2010 Audited 68,207 11,772 17% ,550 28/02/2009 Audited 75,002 10,833 14% 981 (429) 17,454 28/02/2008 Audited 86,618 11,315 13% , Circumstances Giving Rise to the Appointment of the Administrators The turnover of the Wider Group has been in decline since FY08, primarily due to difficult market conditions in the Group s principal white goods business. As the table above highlights, turnover peaked at 86.6m in FY08 but had declined by 41% to 51.2m in FY12. As a result, in FY12 the Group incurred a net loss of 6.3m including exceptional costs of 4m. The financial position of the Wider Group was further impacted by the losses made by HWE, which provided warehousing and logistics services mainly to the Group but also to third party customers. As the turnover of the Group reduced, the level of income for HWE also reduced and its losses were effectively funded by the Group. As a result of the losses incurred in FY12 the Directors identified and implemented a number of restructuring initiatives in order to improve profitability and cash flow. By early August 2012, it became apparent that trading performance was falling materially below forecast due to continuing difficult market conditions and that the Wider Group would be unable to continue to trade without further funding, which was not available. In August 2012, EY were engaged to commence an accelerated sale process of the Wider Group. A solvent sale of the Group was not possible however, two separate sales of business and assets as a going concern were concluded shortly after our appointment as Administrators and are explained in detail below. Pre-appointment costs incurred by the Joint Administrators Prior to our appointment, EY incurred certain pre-administration costs that remain unpaid. The Administrators are seeking approval for these costs as an expense of the Administration. Please see section 6 of these proposals for further details. Ernst & Young 3

9 Section 2: Purpose, conduct and end of administration 2. Purpose, conduct and end of Administrations 2.1 Purpose of the Administrations The purpose of the administrations is to achieve one of three objectives: a. To rescue the Group as a going concern b. To achieve a better result for the Group s creditors as a whole than would be likely if the company were wound up (without first being in administration) c. To realise property in order to make a distribution to one or more secured or preferential creditors Insolvency legislation provides that objective (a) should be pursued unless it is not reasonably practicable to do so or if objective (b) would achieve a better result for the company s creditors as a whole. Objective (c) may only be pursued if it is not reasonably practicable to achieve either objective (a) or (b) and can be pursued without unnecessarily harming the interests of the creditors of the company as a whole. As a result of the work undertaken by EY prior to Administration, we consider it unlikely that the first objective could be achieved due to the following: Significant losses had been incurred in FY12; No further funding was available from the existing lenders or shareholders, with no further unencumbered assets to offer as security to existing or new lenders; and No offers were received for the shares of any of the businesses during the marketing process. In addition, the Group s complex operational and legal structure made a solvent sale of any of the individual businesses unlikely as: Several trading divisions straddle a number of Group entities; Significant intercompany debts exist between Group entities, which would have needed to be satisfied as part of any going concern sale; and The accounting and finance function within the Group was poor, with insufficient time available for the due diligence that would have been required by an equity purchaser. As a result, the Administrators have concluded that it is not reasonably practicable to achieve the rescue of the Group entities as going concerns in accordance with paragraph 3(1)(a) of Schedule B1 to the Insolvency Act Accordingly, the Joint Administrators strategy focused on objective (b), to achieve a better result for the Group s creditors as a whole than would be likely if the Group was wound up, without first being in Administration. Ernst & Young 4

10 Section 2: Purpose, conduct and end of administration 2.2 Conduct of the Administrations Pre-packaged sale of the Group s business and assets Shortly after our appointment, we completed two separate sales of part of the Group s business as a going concern as follows: On 26 September 2012, the business and assets of Home Delivery were sold to Key Sales Limited for a total consideration of 1,017,339. On 28 September 2012, a sale of certain assets of the Group s White Goods Business was completed to Hisense UK Limited for a total consideration of 632,328. This involved the sale of certain assets of Frigidaire, HI Distribution and International. As far as the Joint Administrators are aware, none of the directors of the Group have given any personal guarantees in respect of the company s debts. Further information regarding the transactions is given below. This information was previously included in our letter to all known creditors dated 5 October Marketing process On 1 August 2012, EY were instructed by the Directors to undertake an accelerated sale process of the Wider Group. Based on discussions with the directors and EY s own network of contacts, a list of potentially interested parties was produced who were considered to be able to complete a purchase in accelerated timescales. This list consisted of: 15 financial buyers, including specialist turnaround investors; 11 trade buyers, including direct competitors of the Wider Group; and 3 specialist stock dealers. Shortly after the the sale process began, the Directors were approached by Hisense Kelon Electrical Holdings Limited ( Hisense ), the Group s main supplier of white goods and major creditor, who expressed an interest acquiring all or part of the Wider Group. Hisense requested a two week period of exclusivity in order to undertake due diligence, which was granted by the Directors on 22 August Although there were intensive negotiations, at the end of the exclusivity period further time was required by Hisense to formulate an offer. Accordingly, on 6 September 2012, the sale process was resumed. In total, 30 parties were contacted, with 19 parties signing up to confidentiality agreements and subsequently receiving detailed information relating to the Wider Group. Ernst & Young 5

11 Section 2: Purpose, conduct and end of administration Offers received Three offers were received for different parts of the Group, one of which was subsequently withdrawn. The remaining two offers are summarised below. 1. Home Delivery One offer was received in respect of Home Delivery, which was from Key Sales Limited (a subsidiary of Pacifica Group Limited). This offer consisted of: Consideration of 50,000 for the trade and fixed assets of Home Delivery; Acquisition of the book debts relating to Home Delivery for consideration of 967,339 (these debts had a book value of 1,662,610 and had been assigned to HIF;) Transfer of 57 employees in accordance with TUPE; A 15 month lease to be granted by HI Distribution to Key Sales Limited (annual rental of 282,000) to enable the business to continue operating from the current trading address; and All consideration to be paid on completion. 2. White Goods Business A second offer was made for the White Goods Division by a subsidiary of Hisense, Hisense UK Limited. This offer consisted of: Consideration of 608,225 for the Group s refrigeration stock originally supplied by Hisense (split 275,492 for International stock and 332,733 for Frigidaire stock); Consideration of 4 for the goodwill and certain other assets of the Group including the Fridgemaster brand and a license in relation to the Univar and Atlant brands; Transfer of 11 employees in accordance with TUPE; Hisense UK Limited to fulfil all of the Group s historical warranty obligations in respect of refrigeration stock, thereby potentially mitigating the risk of counter claims by the Group s customers and improving the realisation prospects in respect of the Group s white goods book debts; Hisense UK Limited to collect the three largest book debts of the Group on its behalf, in return for a commission based on collections achieved; A two month licence to occupy part of the warehouse and office space at the Group s Tuscany Way premises; and All consideration to be paid on completion. Rationale for the transactions and the decision not to trade in Administration Home Delivery There were no other offers received for the Home Delivery business (an alternative offer was previously submitted but subsequently withdrawn). The alternative course of action would be to try and sell the business and assets as a going concern during the Administration. We did not consider it possible for the Home Delivery business to continue trading during Administration for the following reasons; Ernst & Young 6

12 Section 2: Purpose, conduct and end of administration The key contracts included insolvency termination clauses and it would have been relatively straight-forward for these customers to seek alternative service providers. As a consequence, the customer base of the business would have quickly eroded; and The business was reliant on over 20 sub-contractors to deliver customers products in the UK. The sub-contractors were owed c. 0.5m which would have required to be paid in full to ensure continued service and avoid lien being taken over customer s stock. It was not possible to fund this level of ransom creditor payment given the likely termination of customer contracts. Based on the above factors, we considered that a period of ongoing trading to achieve a sale as a going concern was not achievable and an immediate closure of the business would have been necessary, which would have significantly impacted debtor realisations and employment. Therefore the only option to achieve a sale of the Home Delivery business as a going concern was a pre-packaged sale which could be completed immediately following the appointment of Administrators. Valuation We instructed Hilco Appraisal Limited ( Hilco Appraisal ) to value the limited tangible assets included in the Home Delivery sale which comprised office fixtures and fittings, IT equipment and goodwill. Market valuations of the assets of Home Delivery were at 6,500 on an in situ basis and 3,500 on an ex-situ basis. Accordingly the offer of 50,000 from Key Sales Limited was significantly in excess of both valuations. In addition, as a part of the sale Key Sales Limited has also agreed to enter into a 15 month lease in respect of the property at California Drive. This equates to rental income of 282,000 which represents additional income in the Administration of HI Distribution and also mitigates vacant property holding costs. With regard to the sale of the book debts (which had been assigned to HIF), there was a risk that collections in an insolvency scenario would have been significantly impacted by counterclaims from customers. It was therefore considered that the certainty afforded by the offer to purchase the sales ledger outweighed the collection risk. White Goods Business No other offers were received for a going concern sale of the White Goods Business. We did not consider it was possible to continue to trade the business in Administration (other than in a wind down) for the following reasons; This part of the business had incurred significant losses in recent years and it was unlikely this position could be materially improved in an Administration scenario; It was unlikely that existing retail customers would wish to continue to purchase goods (without a significant discount) given the lack of warranty and after-sales service required by consumers; and The Group did not have the necessary stock to meet major customers requirements and it was considered unlikely that this stock could have been sourced on a timely basis from existing suppliers. In addition, Hisense are the Group s major supplier and strategic partner in the UK and it appeared highly unlikely that any other party would have the same strategic interest in acquiring the business as a going concern and preserving employment. We instructed Hilco Appraisal to undertake a valuation of the Group s stock, which indicated a potential realisation of c.42.6p/ before costs of realisation. Ernst & Young 7

13 Section 2: Purpose, conduct and end of administration The Hisense UK Limited offer equated to a realisation of approximately 40p/ in respect of the stock, broadly similar to the valuation received from Hilco Appraisal (before costs) and similar to alternative offers from parties interested in acquiring the stock only. However, the other parties were not willing to fulfil the Group s warranty obligations which at previous run rates were estimated to be c. 1m. As a result of the warranty provided by Hisense, the debtor collections from the White Goods Business have the potential to be significantly higher as customers should not seek to make deductions to cover future warranty claims which the Group is unable to honour. Furthermore, the transfer of 11 employees in accordance with TUPE, will restrict preferential claims and maximise realisations available to creditors. Consultation with creditors Consultations were held with HIF (which holds a fixed charge over certain of the Group s book debts and a second ranking debenture over the other assets of the Wider Group) and HSBC Bank (which holds a first ranking debenture over the other assets of the Wider Group) before the offer was accepted. In addition, Hisense are by far the largest unsecured creditor of the Group. Given the imminent Administration appointment (as the Group no longer could trade within its facilities) and the need to complete a transaction to preserve value in the business, it was not possible to consult other unsecured or preferential creditors. Significant assets not included in the sale agreements All other assets relating to other divisions of the Group were excluded from the transactions, including but not limited to: the freehold properties and other fixed assets; intellectual property; stock; cash balances; trade debts; and contingent assets such as the right to prepayments, insurance claims and corporation tax refunds Strategy Following the completion of the sales, our strategy is focused on, but not limited to, the following: The sale of the Group s freehold properties; Managing the clearance of a significant volume of third party stock from the warehouse at Tuscany Way; The sale of residual Group stock; The collection of the Group s book debts; Realising value from any other assets; and An orderly wind down of the Group s operations Third party stock clearance On appointment approximately 19,000 pallets of third party owned stock was held at Tuscany Way (using c.80% of the warehouse capacity). The vast majority of this stock related to five parties (Greencore Grocery Limited, Exel Europe Limited (DHL), Combined Independent (Holdings) Limited, Olympia Tools (UK) Limited and Renshaw Napier Limited). We contacted these parties to arrange an orderly removal of their stock and negotiated an agreement for the settlement of outstanding book debts and for the customers to cover the Ernst & Young 8

14 Section 2: Purpose, conduct and end of administration incremental costs of the Group associated with the removal of their goods (to include wages, rates, utilities and equipment hire over an estimated removal period of four weeks. This agreement represented a cost effective solution to a potentially time consuming matter, whilst at the same securing book debt collections of c. 0.6m for the Group. All third party owned property relating to these customers has now been removed from site Employees At the date of our appointment, the Group employed 249 employees. As a result of the Home Delivery and White Goods Business transactions, a total of 68 employees have been transferred to the respective purchasers (Key Sales Limited and Hisense UK Limited). To date 152 employees have been made redundant as part of the Administration process or have resigned. The remaining 29 employees have been retained in the short term to assist with the Administration Asset realisations Freehold Properties The Group owns five freehold properties, all of which are located on the Wakefield Europort distribution park in Normanton, West Yorkshire and are summarised below. These properties are all subject to fixed charges in favour of HSBC Bank. Property name Owned by Total square feet Tenants Tuscany Way Investments 281,000 unit plus 6.2 acres of development land California Drive (Units A,C, E) HI Distribution 200,000 Key Sales Limited California Drive (Unit B) HI Distribution 65,000 Polymer Logistic UK Limited Unit 1, Midway Point HI Distribution 40,372 Asda Stores Limited Unit 2, Midway Point HI Distribution 28,000 Sigma ACC Limited Disposal Strategy In the current economic climate, there are a wide range of potential outcomes regarding the sale of the properties in terms of value and timescales. The Joint Administrators have instructed Sanderson Weatherall and Jones Lang Lassalle to advise on disposal strategy and market the Group s properties for sale and are working closely with our agents to maximise realisations. The ultimate values achieved from the sale of the freehold property will largely dictate the outcome for the Bank and other creditors and we will provide a further update in our next report. - Ernst & Young 9

15 Section 2: Purpose, conduct and end of administration Rental income California Drive Warehouse A, C & E As part of the sale of the Home Delivery business, a 15 month lease was granted to Key Sales Limited. Rental income will be 282,000 over the term of the lease. Warehouse B This property is currently leased to Polymer Logistics for 5 years from May 2012 at 250,000 per annum. Unit 1, Midway Point This property is currently leased to Asda Stores Limited under a short term (12 month) lease which expires in March 2013 with an annual rent of 169,000. Unit 2, Midway Point The property is presently occupied on a temporary Tenancy at Will arrangement by Sigma ACC Limited who are vacating on 15 November Book debts At the date of our appointment, book debts across the Group totalled 7.8m across the three trading entities (Frigidaire, HI, International) from c. 600 customers. All debts at the date of appointment have been assigned to HIF under the terms of a Confidential Invoice Discount agreement. As at 26 September 2012, 1.7m was due to HIF from the Group before contractual post appointment interest and charges. Summary of Group debtor collections from appointment to 9 November 2012 Opening balance on Payments Provisions for Outstanding preappointment Post appointment Net collectible Currency: 000 appointment * received uncollectible amounts balance invoices balance Frigidaire 1,790 (638) (57) 1,095 (3) 1,092 HI Distribution 2,243 (1,046) (142) 1, ,150 International 3,795 (1,286) (2,188) Total Group debtors 7,829 (2,971) (2,388) 2, ,564 * Opening balance on appointment excludes any intercompany debts or amounts owing to Group companies from HWE In the six weeks to 9 November 2012, we have collected c. 3.0m of the 7.8m opening balance at the date of appointment. Around 1.0m of collections in International ( 1.3m in total) relate to the sale of the Home Delivery book debts to Key Sales Limited for 60p in the pound, as detailed earlier in the report. The other 2.0m of collections to date relate to: Customers of HI Distribution ( 1.0m) relating to purchases of small domestic appliances, third party branded stock and warehousing services; and Customers of the White Goods Business ( 1.0m) with the majority relating to purchases of Frigidaire branded products ( 0.64m). The remaining 0.36m collected in International relates to purchases of the Group s other brands (predominantly Fridgemaster). Provisions for uncollectible amounts At present we estimate that there will be uncollectible amounts of 2.4m which relate to the following: Ernst & Young 10

16 Section 2: Purpose, conduct and end of administration Stock International and Frigidaire: 1.6m in respect of debts owed by Comet Group plc ( Comet ). Comet entered Administration on 2 November Whilst we are pursuing claims in respect of ROT and VAT Bad Debt Relief, the Group will rank as an unsecured creditor of Comet and therefore future recoveries are highly uncertain. International: a 0.6m write off relating to the sale of the Home Delivery book debts at 60p in the pound; HI Distribution: 0.1m relating to full and final settlements completed with two customers. Whilst we believe the level of collections achieved have been enhanced by the sale of the White Goods Business, specifically the ongoing servicing obligations to be performed by Hisense, warranty counterclaims remain a risk to debtor collections in all three entities. We continue to pursue the remaining collectible balance of 2.6m. At the date of appointment, the Group held stock with a book value of c. 4.4m. Frigidaire, HI and International To date, we have sold stock for consideration totalling 0.6m as part of the sale of the White Goods Business to Hisense UK Limited. This included all refrigeration products manufactured and supplied to the Group by Hisense and resulted in realisations of 333,000 in Frigidaire and 275,000 in International. We have subsequently agreed a deal with Stratton Partners Limited, a subsidiary of GA Europe Investments 3000 Limited, in respect of a sale of the majority of the remaining stock held by the Group that is not subject to ROT claims (a book value of c. 1.4m). The consideration of c. 429,000 is subject to a final stock count and is currently expected to result in realisations of circa 0.2m in Frigidaire, 0.1m in HI Distribution and 0.1m in International. Further realisations in Frigidaire, HI and International may be achievable from the following: Goods in transit: At the date of our appointment, Cosco International Holdings Limited ( Cosco ) took a lien over c. 0.6m of stock in transit in respect of debts owing to it from the Group (c.$2.0m). Our legal advisors consider that it may not be cost effective to challenge the validity of the lien. However, we are in negotiations regarding a potential sale of the Group s interest in this stock. Damaged stock The Group has c.300 pallets of damaged or returned stock. We have recently engaged In2c Auctions (a specialist clearance auctioneer) to dispose of this stock. It has been agreed that they will be paid on a commission basis. Ernst & Young 11

17 Section 2: Purpose, conduct and end of administration Other assets Motor vehicles At the date of our appointment, the Group s fixed asset register indicated that it operated 36 motor vehicles of which 24 were owned 12 were subject to finance agreements. Summary of motor vehicles by entity on appointment Entity No. cars owned No. cars subject to HP Total Frigidaire HI International Total To date, we have sold six cars via private treaty (five owned and one subject to a finance agreement) with net realisations (after amounts paid to the finance provider) of 31,335 ( 21,750 in International and 9,585 in HI Distribution). The remaining vehicles will be sold at auction by our agents. Number plates There are nine private number plates owned by International that will be marketed and sold by our agents. IT Equipment, fixtures and fittings To date, we have realised c. 50,000 (in International) which relates to the sale of Home Delivery to Key Sales Limited. Debt due from HWE At the date of appointment, the most recently available management accounts (July 2012) indicate that there was a net debt due to the Group from HWE of c. 4.0m, as per the following table: Amounts owing by HWE to Group entities as per most recent management accounts (July 2012) s Amounts owing from HWE to Group Amounts owing from the Group to HWE Net HI Distribution 7,083-7,083 Investments International - (3,195) (3,195) Frigidaire - (645) (645) Total as per July management accounts 7,837 (3,840) 3,997 We understand that this position has built up over a number of years through intercompany recharges. We are in the process of investigating the background to this debt with a view to pursuing HWE for recovery. As stated above, HWE has ceased trading and we understand from intital discussions that this debt is disputed. Ernst & Young 12

18 Section 2: Purpose, conduct and end of administration Administrators receipts and payments A summary of the Administrators receipts and payments for the period from 26 September 2012 to 9 November 2012 is attached at Appendix D Initial Meeting of Creditors The Administrators will be holding an initial meeting of the Group s creditors on Tuesday 4 December 2012 at 12.00pm at The Park Plaza Hotel, Boar Lane, Leeds, LS1 5NS. The meeting will be held to consider and, for each of the Group entities, on the following: The approval of the Joint Administrators proposals; The formation of a creditors committee and if approved, the membership of a Creditors Committee. To be validly constituted, a Creditors Committee must have at least three and not more than five members; In the event that a Creditors Committee is not formed, to fix the basis of the Joint Administrators remuneration as provided for in the Proposals; In the event that a Creditors Committee is not formed, to authorise the Joint Administrators to draw Category 2 disbursements in accordance with the statement of disbursements set out in the proposals; and In the event that a Creditors Committee is not formed, the approval of the payment of unpaid pre-appointment costs incurred by the Administrators firm as an expense of the Administrations. As detailed in our letter to creditors dated 16 November 2012, formal notice of the meeting, together with a proxy form and notice of claim form are available at To be eligible to vote at the meeting you must provide: Written details of your claim by 12.00pm on the business day before the meeting; and Unless you are attending the meeting in person, you must complete and return the proxy form by the date of the meeting. The Joint Administrators are of the opinion that it is not yet possible to make a reliable estimate as to which entities within the Group will have sufficient property to enable a distribution to be made to unsecured creditors Future conduct of the Administrations It is proposed that the Joint Administrators will continue to manage the affairs, business and property of the Group in order to achieve the purpose of the Administrations, namely to achieve a a better result for the Group s creditors as a whole than would be likely if the Group s entities were wound up, without first being in Administration. This will include, inter alia: Realising the Group s remaining tangible assets, principally freehold property, stock, motor vehicles and number plates, fixtures and fittings and IT equipment; Collection of outstanding book debts; Investigating and pursuing the recovery of any debts owing to the Group from HWE; Collection of rent from tenants occupying the Group s freehold properties; Agreeing preferential creditor claims, including dealing with employee claims, queries and the Redundancy Payments Office; Ernst & Young 13

19 Section 2: Purpose, conduct and end of administration Dealing with unsecured creditor and customer enquiries; Distributing realisations to the secured and preferential creditors Calculation of the final corporation tax and VAT positions of the Group for the period of trade up to 25 September 2012 and realisation of any value; Assisting creditors in the return of third party assets; Dealing with any ROT claims; If the Joint Administrators deem appropriate to seek an extension, or further extensions, to the Administration from the Court as required, without recourse to creditors; Dealing with statutory reporting and compliance obligations; Finalising the Administrations including the payment of all Administration liabilities; and Any such actions required to be undertaken by the Administrators to fulfil the purpose of the Administrations. 2.3 The End of the Administrations The Administrations will end automatically on 25 September 2013 although they can be extended by creditors or by the Court. It is proposed that, at the end of the Administrations, the Companies will move straight into Creditors Voluntary Liquidation upon the filing with the Registrar of Companies of a notice pursuant to paragraph 83 of Schedule B1 to the Insolvency Act It is proposed that the liquidators will be Samuel James Woodward, Jonathan Peter Sumpton and Thomas Andrew Jack of Ernst & Young LLP and that any act required or authorised under any enactment to be done by the liquidators may be done by either or all of them. In accordance with paragraph 83(7) of Schedule B1 to the Insolvency Act 1986 and Rule 2.117A(2)(b) of the Insolvency Rules 1986, creditors may nominate a different person as the proposed liquidator, provided that the nomination is made after the receipt of these proposals and before the proposals are approved. It should be noted in this regard that a person must be authorised to act as an insolvency practitioner in order to be appointed as liquidator. If at the end of the Administration the Companies have no property which might permit a distribution to their creditors, the Joint Administrators will send a notice to that effect to the Registrar of Companies. On registration of the notice the Joint Administrators appointment will come to an end. In accordance with the provisions of paragraph 84(6) of Schedule B1 to the Insolvency Act 1986 the Companies will be deemed to be dissolved three months after the registration of the notice. If there is property available at the end of the Administration, but the Joint Administrators think it is insufficient to enable a distribution to be made in a Creditors Voluntary Liquidation, the Joint Administrators will petition the court, pursuant to paragraph 79 of Schedule B1 to the Insolvency Act 1986, for an order to bring the administration to an end with a consequential order for the compulsory winding up of the Companies. Ernst & Young 14

20 Section 3: Statement of affairs 3. Statement of affairs The Directors have submitted their Statement of Affairs as at 26 September A summary is attached at Appendix B. We would make the following comments in relation to the Directors Statement of Affairs: Freehold properties (Hardman Isherwood Limited and H.I. Investments Limited) As mentioned previously, there are a wide range of potential outcomes in respect of the freehold properties and we would highlight that we consider the Directors estimate is a very best case outcome which is unlikely to be achieved in an Administration scenario. As a result the outcome shown for creditors in Hardman Isherwood Limited (HI Distribution) in particular is considered unrealistic. Group bank indebtedness The Directors Statement of Affairs include individual cash positions of each company. In practice a Group overdraft facility was operated with the individual balances being aggregated. As a result, the Bank is entitled to offset individual balances to arrive at its overall net indebtedness of 18.7m. Once all assets have been realised and the outcome for the Bank and creditors is known it may be necessary to perform a marshalling exercise to allocate any surplus funds prior to distribution to creditors. As a result it is difficult to estimate at present which companies may have surplus funds for distribution to creditors. HWE (Hardman Isherwood Limited and H.I. Investments Limited) As mentioned above, certain of the Directors (who are also partners of HWE) dispute the existence of debts totalling 4.0m (on a net basis) owing from HWE to Group entities and have omitted any balances owing to Group entities from the Statement of Affairs. Our limited knowledge to date indicates that this potentially relates to amounts due to HI Distribution and Investments. Ernst & Young 15

21 Section 3: Statement of affairs 3.1 Secured creditors HSBC Bank HSBC Bank had total indebtedness at the date of appointment of 18,898,669, subject to accruing interest, charges and the maturation of two forward exchange contracts and a duty deferment bond with HMRC. Including ISDAL (the Wider Group) the total indebtedness (subject to accruing interest and charges) totals 18,747,879. Summary of indebtedness for Group and Wider Group to HSBC Bank Indebtedness at the date of appointment (subject to further Currency: 000 charges) Frigidaire 1,170 FCL (2,414) HI Distribution (10,239) International 7,087 Investments (17,065) Plc (20) Whitwood 2,583 Group (other than ISDAL) (18,898) ISDAL 150 Wider Group (18,748) HSBC Bank holds fixed and floating charges over the Group s assets and chattel mortgages over certain motor vehicles and the number plates. The Bank also holds unlimited composite guarantees across the Wider Group (the Group, ISDAL and Crown). HIF HIF holds a fixed charge over the book debts at the date of appointment of Frigidaire, HI Distribution and International. Total amounts owing to HIF by the Group at appointment were 1,706,767 excluding post appointment interest and termination charges. Post appointment termination charges total 365,096. Summary of indebtedness to HIF (Group only) Currency: 000 Debt Charges Total indebtedness Frigidaire HI Distribution International Total 1, ,072 HIF have now been repaid in full and any surplus funds for book debts are charged to HSBC Bank under the terms of a Deed of Assignment. Ernst & Young 16

22 Section 3: Statement of affairs 3.2 Preferential creditors We currently estimate preferential creditors of c. 165,000 in respect of claims for employees salaries, holiday pay and pension contributions. Currency: 000 Estimated preferential creditors HI Distribution 148 International 11 Frigidaire 6 Total Group debtors 165 At this stage it is too early to confirm the outcome for preferential creditors with certainty. 3.3 Non-preferential creditors These creditor claims continue to be submitted. It is estimated that total non-preferential claims for the Group will be in the region of 17.7m, as per the Directors Statement of Affairs for all Group entities. As mentioned above, the outcome for creditors is largely dependent on the realisations of the freehold properties where a wide range of outcomes is possible. We currently believe there may be sufficient realisations to enable a distribution to non-preferential creditors of some Group companies however for the reasons previously set out it is too early to give any indication of dividend prospects by entity. Once all assets have been realised and the outcome for the Bank and creditors is known it may be necessary to perform a marshalling exercise to allocate any surplus funds prior to distribution to creditors. As a result it is difficult to estimate at present which companies may have surplus funds for distribution to unsecured creditors. Ernst & Young 17

23 Section 4: Prescribed part 4. Prescribed part The prescribed part is a proportion of floating charge assets set aside for unsecured creditors pursuant to section 176A of the Insolvency Act The prescribed part applies to floating charges created on or after 15 September The date of the charges means that the Prescribed Part applies to all Group entities, however in the event that HSBC Bank is repaid in full and there are surplus funds, the Prescribed Part will not apply. It is not currently possible to accurately calculate the Prescribed Part. However, we consider it possible that HSBC Bank will be paid in full and therefore the Prescribed Part would not apply. Ernst & Young 18

24 Section 5: Administrators' Remuneration and Disbursements 5. Administrators' remuneration and disbursements and payments to other professionals Remuneration The statutory provisions relating to remuneration are set out in Rule of the Insolvency Rules Further information is given in the Association of Business Recovery Professionals publication A Creditors Guide to Administrators Fees, a copy of which may be accessed from the web site of the Insolvency Practitioners Association at (follow Regulation and Guidance then Creditors Guides to Fees ), or is available in hard copy upon written request to the Joint Administrators. In the event that a creditors committee is not formed, the Joint Administrators propose that their remuneration be fixed on the basis of time properly given by them and their staff in dealing with matters arising in the Administration. Attached at Appendix C is a detailed analysis of time spent, and charge out rates, for each grade of staff for the various areas of work carried out to 9 November 2012, as required by the Association of Business Recovery Professionals Statement of Insolvency Practice No. 9. Disbursements Appendix C also includes a statement of the Joint Administrators policy for charging disbursements. In the event that a Creditors Committee is not formed, the Joint Administrators propose they be permitted to charge Category 2 disbursements in accordance with the charging policy set out in Appendix C. Payments to other professionals The Joint Administrators have engaged the following other professionals to assist them. They were chosen on the basis of their experience in similar assignments. Name of firm Nature of service How contracted to be paid DLA Piper UK LLP Sanderson Weatherall LLP Jones Lang Lassalle Hilco Appraisal Limited Legal advice relating to sale and purchase agreements, appointment matters, leases, ROT claims, general advice Valuation advice, marketing of freehold, properties and property management services Marketing of freehold properties Valuation of and marketing of other assets Time costs basis Time costs basis for valuation advice Commission based on realisations Commission based on realisations Time costs basis for valuation advice. Commission based on realisations In2c Auctions Auctioning damaged / returned stock Commission based on realisations No fees have been paid to date. Ernst & Young 19