Trends Australia Group Pty Ltd (Administrators Appointed) ACN (Trends) Circular to Creditors

Transcription

1 Trends Australia Group Pty Ltd (Administrators Appointed) ACN (Trends) Circular to Creditors As you are aware, Anthony Connelly and I were appointed Administrators of Trends on 6 November The purpose of this circular is to provide you with information about the second statutory meeting of creditors. At the meeting, creditors will be entitled to vote on whether Trends should enter a Deed of Company Arrangement, whether the administration should end, or whether Trends should be wound up. The second meeting of creditors will be held as follows: Date: 11 December 2017 Time: 11:00 AM Address: Chartered Accountants Australia & New Zealand, Waterfront Place, Level 13, 1 Eagle Street, Brisbane Qld 4000 Teleconference facilities will also be available for those unable to attend in person: Telephone number: Access participant pin: # To enable creditors to make an informed decision about the future of Trends, we enclose our Administrators Report about the company s business, property, affairs and financial circumstance, including our opinion as to which outcome of the administration process is in the creditors best interests. We enclose a notice of meeting. To participate in this meeting, you must submit a proof of debt and information to substantiate your claim. If you have already lodged a proof of debt, you are not required to do so again. If the creditor is a person and will attend the meeting, this is all that is required. However, if the creditor is another type of entity (such as a company), they must also appoint a person a proxy or person authorised under a power of attorney to vote on behalf of the creditor at the meeting. A proxy should also be appointed if the creditor is a person, but is not available to attend the meeting. You can appoint the chairperson of the meeting as your proxy and direct the chairperson how you wish your vote to be cast. If you choose to do this, the chairperson must cast your vote as directed. Proxy forms lodged by creditors for the first meeting cannot be used for the second meeting. Proof of debt and proxy forms are enclosed, together with guidance notes to assist you when you complete them. To ensure that the meeting is conducted as efficiently as possible, completed proof of debt and, if applicable, proxy forms must be returned to my office by post, fax or by 4:00pm on 8 December We also enclose general information for attending and voting at meetings of creditors. Remuneration We will seek your approval of our remuneration at this meeting. Detailed information about what tasks we have undertaken and the costs of those tasks are provided in our Remuneration Report (enclosed). What you should do next You should: read the enclosed information; decide whether you are going to participate in the second meeting; and if so complete and return your proof of debt and proxy form (if required) by 4:00pm on 8 December

2 If you have any queries, please contact Michael Owens on (07) Dated: 4 December 2017 Jamie Harris Administrator Enclosures: Administrators Report to Creditors Remuneration Report Notice of Meeting Proof of Debt Form (Form 535) Proof of Debt Guidance Notes Proxy Form Proxy Form Guidance Notes General information for attending and voting at meeting of creditors 2

3 Trends Australia Group Pty Ltd (Administrators Appointed) ACN ( Trends ) Report to creditors pursuant to Insolvency Practice Rules (Corporations) December 2017

4 Contents Introduction... 5 Appointment... 5 Purpose of this report... 5 Object of administration... 5 First meeting... 5 Second meeting... 5 Executive summary... 7 Administrators prior involvement... 9 Ongoing assessment... 9 Background and statutory information Background Statutory details, shareholders and officers Security interests Background to the appointment of Administrators Books and records Historical financial performance and position Financial performance Financial position Financial position based on Report as to Affairs Report as to Affairs Liabilities Secured creditors Employee entitlements Unsecured creditors Explanation for difficulties Director s reasons for failure Administrators view Outstanding winding up applications Offences, insolvent trading and voidable transactions Offences Insolvent trading Director defences Voidable transactions Breach of Directors duties Funding to pursue insolvent trading and voidable transactions Insolvent trading Tests of insolvency Administrators conclusions regarding solvency Voidable transactions Unfair preference claims Uncommercial transactions D TRENAUS01-AdministratorsReport-MJO 2

5 Unfair loans Breach of directors duties Directors asset position Administrators actions to date Asset realisation and investigations Tasks undertaken by Administrators Anticipated return to creditors Basis and assumptions Estimated return to unsecured creditors Alternative courses of action Administration to end Deed of Company Arrangement Trends be wound up Opinion summary Creditor information on remuneration Committee of inspection Creditor meeting details Annexures 1. Remuneration Report Trends Australia Group Pty Ltd (Administrators Appointed) 2- D TRENAUS01-AdministratorsReport-MJO 3

6 Glossary Glossary Abbreviation Description Act Corporations Act 2001 (Cth) Administrators Jamie Harris and Anthony Connelly ARITA Australian Restructuring, Insolvency & Turnaround Association ASIC Australian Securities and Investments Commission Brisbane Showroom Trends leased premises at 8 Edmondstone Street, Newmarket, Qld BSQ Building Services Queensland Pty Ltd (In Liquidation) BSQ Liquidators Leon Lee and Brendan Nixon of SM Solvency Accountants COI Committee of Inspection Director Helen Marie Barber DIRRI Declaration of Independence, Relevant Relationships and Indemnities DOCA Deed of Company Arrangement Former Directors The former directors of Trends, as set out at section 4.2 of this report. FY Financial year FY15 Actual financial results for the period 1 July 2014 to 30 June 2015 FY16 Actual financial results for the period 1 July 2015 to 30 June 2016 FY18 YTD Actual financial results for the period 1 July 2017 to 30 September 2017 Gold Coast Premises Trends leased premises at 24 Junction Road, Burleigh Heads, Qld Grays Grays Asset Services IBR Independent business review IPR Insolvency Practice Rules (Corporations) Lloyds Lloyds Asset Valuers m Million POD Proof of Debt PPSA Personal Property Securities Act 2009 PPSR Personal Property Securities Register Trends Trends Australia Group Pty Ltd (Administrators Appointed) Westpac Westpac Banking Corporation Trends secured creditor WIP Work in progress YTD Year to date 2- D TRENAUS01-AdministratorsReport-MJO 4

7 Introduction Appointment Jamie Harris and Anthony Connelly were appointed Administrators of Trends Australia Group Pty Ltd (Administrators Appointed) on 6 November 2017 by Westpac Banking Corporation, pursuant to Section 436C of the Corporations Act Purpose of this report The purpose of this report is to provide creditors with details about Trends business, property, affairs and financial circumstances in preparation for the forthcoming second meeting of creditors. This report also informs creditors about the investigations undertaken by the Administrators and the Administrators opinion about each of the options available to creditors at the second meeting of creditors, together with our opinion as to the course of action that the Administrators recommend is in creditors best interests. This report has been prepared in accordance with Insolvency Practice Rules (Corporations) It has been prepared pursuant to the new regulations found in the Insolvency Law Reform Act 2016, which substantially commenced on 1 September Object of administration In an administration, Administrators are empowered by the Act to assume control of an insolvent company, superseding the powers of the Directors and Officers, to manage the company s affairs and deal with its assets in the interests of its creditors. The intention of administration is to maximise the prospects of a company, or as much as possible of its business, continuing in existence or, if that is not possible, to achieve better returns to creditors than would be achieved by its immediate liquidation. During an administration there is a moratorium over most pre-administration creditor claims. The Administrators are required to investigate the company s affairs and report to creditors on the Administrators opinion as to which outcome of the administration process is in the creditors best interests so as to inform creditors prior to voting at the second meeting. First meeting Section 436E of the Act requires the Administrators to convene the first meeting of creditors within eight business days of being appointed. The first meeting of creditors of Trends was held on 16 November 2017 and there were no nominations to appoint an alternative Administrator for Trends. Creditors of Trends did not resolve to appoint a Committee of Inspection. Second meeting Pursuant to the Act, the second meeting is required to be held on or before 11 December 2017 unless an extension to the convening period has been sought from the Court. The Administrators have not applied to the Court for an extension to the convening period. The purpose of the second meeting is for creditors to: 1. resolve the future of Trends. In this regard, the options available include whether Trends should: a. be returned to the control of its Director; or b. enter into a DOCA; or c. enter into liquidation. If creditors do not wish to make an immediate decision, they may also resolve to adjourn either or both of the meeting for a period of up to 45 business days; 2. consider and, if thought fit, approve the remuneration of the Administrators; and 3. if Trends is to be wound up: a. consider and, if thought fit, approve the Liquidators remuneration; 2- D TRENAUS01-AdministratorsReport-MJO 5

8 b. consider the appointment of a Committee of Inspection; c. consider authorising the Liquidators to compromise debts of Trends under Section 477(2A) of the Act; and d. consider authorising the Liquidators to enter into agreements that may take longer than three months to complete under Section 477(2B) of the Act. 4. if Trends is to enter into a DOCA: a. consider and, if thought fit, approve the remuneration of the Deed Administrators; and b. consider the appointment of a Committee of Inspection. The forthcoming second meeting of creditors for Trends has been convened to be held on 11 December 2017 at Chartered Accountants Australia & New Zealand, Waterfront Place, Level 13, 1 Eagle Street, Brisbane, Queensland, 4000 at 11:00am. Additional details with respect to the second meeting are included at section 15 of this report. 2- D TRENAUS01-AdministratorsReport-MJO 6

9 Summary Executive summary A DOCA has not been proposed for Trends. The Administrators recommend that creditors of Trends resolve that Trends be wound up at the second meeting of creditors to be held on 11 December Based on the information reviewed to date, a dividend is not likely to be available to the unsecured creditors of Trends. Further investigation is required to determine whether any recoveries may be made pursuant to insolvent trading or voidable transaction provisions. Trends operated a business specialising in custom-made kitchens and cabinetry, operating from leased premises at: Burleigh Heads on the Gold Coast (head office, showroom, warehouse and workshop); and Newmarket in Brisbane (showroom). As a result of cash flow constraints, on or around 9 October 2017, Trends: suspended operations; and stood down (but did not terminate) staff. These staff were subsequently terminated by the Administrators on appointment. Prior to the Administrators appointment and as a result of rental arrears, both the Burleigh Heads and Newmarket lessors re-entered possession of the leased premises with Trends unable to access the premises. On 6 November 2017, Westpac appointed Jamie Harris and Anthony Connelly as administrators of Trends pursuant to section 436C of the Act. The assets located at the Newmarket premises were not expected to result in any net commercial benefit flowing to Trends. Accordingly, the Administrators have not exercised property rights in relation to the Newmarket leased premises. The Burleigh Heads lessor has provided the Administrators with access as required; however, there are also limited realisable assets remaining at this premises. We understand that certain assets were removed prior to the Administrators appointment and we would welcome any information from employees and creditors regarding the whereabouts of these assets. The server containing electronic accounting and financial information of Trends appears to have been removed from the Burleigh Heads premises prior to the appointment of Administrators. The lack of financial records has made it difficult for the Administrators to identify possible recoveries by a liquidator pursuant to insolvent trading and voidable transaction provisions. The Administrators have undertaken preliminary investigations in relation to the conduct of the Director and other parties, and whether there are any amounts that could be recovered in a liquidation of Trends. That initial work has been hindered by the lack of electronic records available to the Administrators. Further investigation may be required if Trends is wound up, including a commercial assessment on the merits and likelihood of recovery from pursuing any claim. It appears that the employment of a number of former employees of Trends was transferred to an associated entity, Building Services Queensland Pty Ltd (In Liquidation), in around November BSQ then provided these employees as labour to Trends after this transfer, at cost plus a profit margin. Liquidators were appointed to BSQ on 10 November 2017 and further investigations regarding the relationship between BSQ and Trends are required, in conjunction with the BSQ liquidators. Prior to the Administrators appointment, the Director/Former Directors were negotiating the sale of the majority of Trends share capital to assist with cash flow. In addition, the interested party was proposed to place orders of a large quantity. Following our appointment, we continued negotiations with the pre-appointment interested party with a view to selling Trends assets/business. Following extensive negotiations and documenting a sale agreement to complete 2- D TRENAUS01-AdministratorsReport-MJO 7

10 a transaction, the interested party did not proceed with the transaction by the deadline required by the Administrators. The Administrators are now pursuing an asset realisation strategy to realise Trends assets by public auction, conducted by Grays. Based on our preliminary investigations and the Proofs of Debt received by the Administrators, it is unlikely that there will be a return to the unsecured creditors of Trends. Further investigation is required to determine whether any recoveries may be made pursuant to insolvent trading or voidable transaction provisions. The second meeting of creditors for Trends will be held on 11 December 2017 at Chartered Accountants Australia & New Zealand, Waterfront Place, Level 13, 1 Eagle Street, Brisbane, Queensland, 4000 at 11:00am. The purpose of the second meeting is for creditors to: resolve the future of Trends; consider and, if thought fit, approve the remuneration of the Administrators; if Trends is to be wound up, consider and, if thought fit: > > > > approve the Liquidators remuneration; consider the appointment of a Committee of Inspection; consider authorising the Liquidators to compromise debts of Trends under Section 477(2A) of the Act; and consider authorising the Liquidators to enter into agreements that may take longer than three months to complete under Section 477(2B) of the Act. Having considered all of the options available for creditors, the Administrators recommend that Trends should be wound up. Further information regarding the Administrators recommendations is outlined at section D TRENAUS01-AdministratorsReport-MJO 8

11 Administrators prior involvement In accordance with Section 436DA of the Act and the Australian Restructuring, Insolvency & Turnaround Association Code of Professional Practice, a Declaration of Independence, Relevant Relationships and Indemnities dated 9 November 2017 for Trends was enclosed with our first communication to creditors, which was the notice convening the first meeting of creditors of Trends. Ongoing assessment The Administrators undertook a proper assessment of the risks to their independence prior to accepting the appointment as Administrators of Trends in accordance with the law and applicable professional standards. This assessment identified no real or potential risks to our independence. The Administrators are not aware of any reasons that would prevent us from acting as Administrators. At the date of this report, the opinion as to the Administrators independence has not changed. The Administrators remain of the view that their prior professional relationships as outlined in the DIRRI do not create or give rise to any conflict of interest. 2- D TRENAUS01-AdministratorsReport-MJO 9

12 Background and statutory information Background A brief overview of the background to Trends is as follows: Trends operated a business specialising in custom-made kitchens and cabinetry, operating from leased premises at: Burleigh Heads on the Gold Coast (head office, showroom, warehouse and workshop); and Newmarket in Brisbane (showroom). In addition, Trends imported kitchen and bathroom-related products from overseas and on-sold them on a wholesale basis. We understand that this business decreased substantially following the closure of Trends key customer, Masters Home Improvement. Prior to the Administrators appointment, the Director/Former Directors were negotiating the sale of the majority of Trends share capital to assist with cash flow. In addition, the interested party was proposed to place orders of a large quantity. As a result of cash flow constraints, on or around 9 October 2017, Trends: suspended operations; and stood down (but did not terminate) staff. These staff were subsequently terminated by the Administrators on appointment. It appears that the employment of a number of former employees of Trends was transferred to an associated entity, BSQ, in around November BSQ then provided these employees as labour to Trends after this transfer, at cost plus a profit margin. Liquidators were appointed to BSQ on 10 November 2017 and further investigations regarding the relationship between BSQ and Trends are required, in conjunction with the BSQ liquidators. Prior to the Administrators appointment and as a result of rental arrears, both the Burleigh Heads and Newmarket lessors re-entered possession of the leased premises with Trends unable to access the premises. Statutory details, shareholders and officers A search of the records maintained by the Australian Securities and Investments Commission as at the date of the Administrators appointment revealed the following statutory details: Company name ACN Registered office Incorporation date Trends Australia Group Pty Ltd Mermaid Shopping Centre A Counting Pty Ltd Suite 1 House (Qld) 2563 Gold Coast Highway Mermaid Beach Qld 4218 Source: ASIC company searches 20 December 2005 Set out below are Trends shareholders as at the date of the Administrators appointment: Shareholder Issued capital % total Patrick James Paul Sexton $10 10 Helen Marie Barber $90 90 Source: ASIC company searches 2- D TRENAUS01-AdministratorsReport-MJO 10

13 Set out below are Trends recent office holders: Name Role Appointment date Cease date Bharti Sakarlal Hunt Director 20 December March 2007 Patrick James Paul Sexton Director 20 December March 2007 Jeffrey Graham Barber Director 23 May March 2007 Helen Marie Barber Director 12 March 2007 N/A current Patricia Sexton Director 27 March July 2010 Bradley Stewart Hunt Director 27 March September 2016 Bharti Sakarlal Hunt Secretary 20 December March 2007 Bradley Stewart Hunt Secretary 27 March September 2016 Source: ASIC company searches For the purpose of this report, the term Former Directors relates only to the former directors set out in the above table. Security interests A search of the Personal Property Securities Register database as at the date of the Administrators appointment identified the following security interests held over Trends: Secured parties Type of security Automotive Holdings Group Limited ACN BMW Australia Finance Limited ACN Caroma Industries Ltd ACN Carter Holt Harvey Pinepanels Pty Limited ACN Carter Holt Harvey WoodProducts Australia Pty Limited ACN Classic Lacquer Pty Ltd ACN Compass Capital Services Pty Limited ACN Electrical Distributors Australia Pty. Limited ACN Hafele Australia Pty. Ltd. ABN Laminex Group Pty Limited ACN Lincoln Sentry Group Pty Ltd ACN Macquarie Leasing Pty Ltd ACN Tradelink Pty Limited ACN Westpac Banking Corporation ACN Winning Appliances Pty Ltd ACN Source: PPSR Note: In many cases, there are multiple security interests granted to the secured parties. Other goods Motor vehicle Other goods Other goods Other goods Other goods Other goods Other goods Other goods Other goods Other goods Other goods Other goods All Present and After Acquired Property, other goods, general intangible and motor vehicle Other goods 2- D TRENAUS01-AdministratorsReport-MJO 11

14 Background to the appointment of Administrators A brief background to the appointment is as follows: As outlined in our DIRRI, Westpac Banking Corporation engaged McGrathNicol Advisory Partnership as investigative accountants to prepare a short-form independent business review of Trends. The IBR was completed and provided to Westpac on 17 October On 6 November 2017, Westpac appointed Jamie Harris and Anthony Connelly as administrators of Trends pursuant to section 436C of the Act. 2- D TRENAUS01-AdministratorsReport-MJO 12

15 Books and records The Administrators are required to provide an opinion on whether Trends books and records were maintained in accordance with the requirements of Section 286 of the Act. This section of the Act requires that a company must keep written financial records that: correctly record and explain its transactions and financial position and performance; and would enable true and fair financial statements to be prepared and audited. Failure to maintain books and records in accordance with Section 286 of the Act provides a presumption of insolvency. This presumption can be relied upon by a Liquidator in an application for compensation for insolvent trading and other actions for recoveries pursuant to the Act from Directors and other related parties. The Administrators have secured various physical documents and computers of Trends from the Gold Coast Premises. It appears that Trends server, which was expected to have held the majority of relevant accounting and financial information had been removed from the Gold Coast Premises prior to the Administrators appointment. The Administrators consider that a company operating the type of business undertaken by Trends in order to comply with Section 286 of the Act should, as a minimum: maintain readily accessible electronic accounting and financial records; and maintain regularly-updated records of plant & equipment, stock on hand and work in progress. The Director has asserted that all books and records are located at the Gold Coast Premises. Despite this assertion, the server containing electronic records appears to have been removed from the premises and the physical records do not adequately explain all transactions undertaken by Trends. Whilst some paper records were recovered, due to the deficiencies in the electronic records caused by the apparent removal of the server, we consider that, on balance, Trends books and records were not maintained in accordance with Section 286 of the Act. Pursuant to Section 588E of the Act, Trends is to be presumed to have been insolvent throughout the period if it is proved that it: has failed to keep financial records in relation to a period as required by subsection 286(1); or has failed to retain financial records in relation to a period for the seven years required by subsection 286(2). It appears that Trends failed to maintain records in accordance with Section 286 of the Act. Accordingly, there may be a presumption of insolvency of Trends. It is possible that our view may change as our investigations continue. 2- D TRENAUS01-AdministratorsReport-MJO 13

16 Historical financial performance and position This section of the report sets out historical financial information for Trends. Historical financial information has been sourced from: FY15 and FY16: Trends external accountant (prepared by the external accountant); and FY18 YTD to September 2017: Westpac (prepared internally by Trends). The Administrators have not yet obtained financial statements for FY17 as the electronic records of Trends were not located in the premises at appointment and had not been prepared by Trends external accountant. As discussed in the prior section, the server containing the electronic data and financial records appears to have been removed from the premises prior to the Administrators appointment. Creditors should note that we have not carried out an audit, nor have we verified the financial information presented in this section. Accordingly, the analysis set out below is for illustrative purposes only and we do not provide any warranty as to its accuracy or reliability. Financial performance A summary of the profit and loss statements for FY15, FY16 and FY18 YTD (to 30 September 2017) for Trends is set out below: Trends - Profit & loss statement ($'000) Gross profit FY15 Total FY16 Average monthly FY18 YTD to Sep-17 FY15 FY16 FY18 YTD to Sep-17 Sales 7,939 9,520 1, Cost of goods sold (4,857) (6,043) (518) (405) (504) (173) Gross profit from trading 3,082 3, Expenditure Accountancy & bookkeeping (62) (67) (16) (5) (6) (5) Advertising (190) (205) (16) (16) (17) (5) Commissions on sales (66) (58) (1) (6) (5) (0) Depreciation (127) (115) - (11) (10) - Directors' salaries (274) (368) - (23) (31) - Electricity & telephone (69) (66) (11) (6) (6) (4) Employee & labour (1,556) (1,822) (477) (130) (152) (159) Insurance (49) (62) (1) (4) (5) (0) Interest paid (173) (138) (30) (14) (12) (10) Motor vehicle expenses (54) (56) (11) (5) (5) (4) Other expenses (141) (140) (52) (12) (12) (17) Rent (265) (251) (48) (22) (21) (16) Travelling expenses (38) (42) (1) (3) (4) (0) Total expenditure (3,064) (3,390) (664) (255) (283) (221) Other income Profit before income tax (107) 5 9 (36) Income tax expense (12) (37) (7) (1) (3) (2) Profit after income tax (114) 4 6 (38) Source: FY16 financial statements, FY18 YTD financial statements 2- D TRENAUS01-AdministratorsReport-MJO 14

17 We make the following comments on the above profit & loss statements: The Director/Former Directors advised that the FY18 YTD accounts contained a number of inaccuracies. Average monthly gross profit: increased by approximately 13% from FY15 to FY16; and then decreased significantly by 40% from FY16 to FY18 YTD. Average monthly total expenditure: increased by approximately 11% from FY15 to FY16, in line with the increased gross profit; decreased by only 13% from FY16 to FY18, which was significantly less than the rate of decrease in gross profit. Average monthly employee and labour costs increased slightly (5%) from FY16 to FY18 YTD, despite the decreased sales and gross profit. This may have been as a result of the profit margin on labour charged by BSQ. Given the lack of current financial information available, it is currently difficult to identify specific reasons or indicators for Trends failure. 2- D TRENAUS01-AdministratorsReport-MJO 15

18 Financial position A summary of the balance sheets for FY15, FY16 and FY18 YTD (to 30 September 2017) for Trends is set out below: Trends - Balance sheet ($'000) FY15 FY16 Current assets FY18 YTD to Sep-17 Cash Trade debtors 1,912 1, Stock 1, Work in progress 1,070 2, Total current assets 4,718 4,635 1,249 Non-Current Assets Plant & equipment (WDV) ,079 Display stock Goodwill ,600 Total non-current assets 1,629 1,791 3,679 Total assets 6,347 6,426 4,928 Current liabilities Westpac: business (87) (202) (504) Other loans - - (287) Credit cards - (42) (192) Trade creditors (322) (571) (756) Payroll accruals (23) (46) (46) Superannuation (13) (23) (82) Tax and GST (125) (70) (62) Total current liabilities (570) (954) (1,929) Non-current liabilities Westpac: trade finance (2,681) (2,657) (2,544) Westpac: other (669) (497) (42) Vehicle finance - - (85) Equity loans - - (521) Other - - (200) Total non-current liabilities (3,350) (3,154) (3,392) Total liabilities (3,920) (4,108) (5,321) Net assets 2,427 2,318 (393) Source: FY16 financial statements, FY18 YTD financial statements 2- D TRENAUS01-AdministratorsReport-MJO 16

19 We make the following comments on the above balance sheets: The Director/Former Directors advised that the FY18 YTD accounts contained a number of inaccuracies. Despite a small cash balance at FY18 YTD, we were advised by the Director that there was no cash at that date and we have identified limited cash at bank since our appointment. Work in progress is the difference between the total orders received and invoices raised/paid for those orders. Accordingly, WIP may include amounts where the work has not yet commenced or limited work has been completed. We were provided with a separate WIP report that disclosed total WIP of $0.71m. We have not physically identified significant WIP since our appointment. We were provided with a separate stock report that disclosed total stock of $0.12m. The inventory reporting system appeared to have been be poor and regular stocktakes were not conducted. Net assets decreased slightly by 5% from FY15 to FY16. We are not aware of any reasons that support the significant increase in the value of goodwill. Despite the significant increase in goodwill value, the net asset position became negative between FY6 and FY18 YTD. Current liabilities increased significantly which may indicate the increasing cash pressure on the business and an inability to pay debts as and when they became due and payable: by 67% from FY15 to FY16; and by 202% from FY16 to F18 YTD. Trends has incurred additional credit card and other liabilities between FY16 and FY18 YTD. 2- D TRENAUS01-AdministratorsReport-MJO 17

20 Financial position based on Report as to Affairs Report as to Affairs We have received a RATA from the Director setting out the Director s views of Trends financial position. The RATA is deficient as almost all values for assets and liabilities are stated as not known, unknown or are blank. A letter from the Director included with the RATA stated that as the Director did not have access to the records of Trends, she was unable to complete the form accurately. As stated earlier in this report, the server containing the electronic records of Trends was removed from Trends premises prior to the appointment of Administrators. Accordingly, the Administrators are not in a position to provide the records to the Director to assist with completion of her RATA. As the server appears to have been removed prior to the Administrators appointment, the Director and/or former management would be best-placed to confirm the whereabouts of the server. Despite numerous attempts and demands for this information, the server has not been returned or its whereabouts confirmed. We also requested but did not receive a RATA from one of the Former Directors, Bradley Hunt. A summary of the information disclosed in the Director s RATA is set out in the table below. Director s RATA A$ Trends Australia Group Pty Ltd Director s estimated Valuation realisable value Assets Interest in land Nil Nil Sundry debtors Not known - Cash on hand Not known - Cash at bank Not known - Stock Not known - Work in Progress Not known - Plant and equipment Not known - Assets subject to specific charges Not known - Total assets - - Liabilities Secured creditors Unknown Unknown Employee entitlements (92,994.58) (92,994.58) Unsecured creditors Unknown Unknown Total liabilities - - Net assets - - Source: Director s RATA Our comments in relation to the RATA are set out below. 2- D TRENAUS01-AdministratorsReport-MJO 18

21 Liabilities Secured creditors The Director s RATA does not disclose amounts outstanding to Trends primary secured creditor, Westpac or any of the other secured parties set out at section 4.3. Based on proofs of debt received and advice from Trends secured creditors, the Administrators understand that the secured creditor position for Trends as at 6 November 2017 was approximately as follows: Secured creditors Party We have not yet reviewed and confirmed the validity of the security interests of the creditors listed above. Employee entitlements Amount per Trends records ($) POD lodged ($) Discharged/registered The Directors RATA disclosed outstanding employee entitlements totalling $92, as at 6 November This amount relates specifically to outstanding wages and annual leave entitlements. The Director has not disclosed amounts owing for superannuation or other entitlements. As discussed prior, it appears that the employment of a number of former employees of Trends was transferred to an associated entity, BSQ, in around November BSQ then continued to provide labour to Trends after this transfer. Liquidators were appointed to BSQ on 10 November 2017 and further investigations regarding the relationship between BSQ and Trends are required, in conjunction with the BSQ liquidators. Until the employing status of these former employees can be determined, it is difficult to quantify the potential claims that employees may have. Based upon employee entitlement information provided in the RATA to the Administrators, the estimated unpaid employee entitlements position as at 6 November 2017 was as follows: Property rights not exercised by Administrators' Automotive Holdings Group Limited - 1, Registered - BMW Australia Finance Limited 95, , Registered Yes Caroma Industries Ltd - - Discharged - Carter Holt Harvey Woodproducts Australia Pty Limited - - Discharged - Classic Lacquer Pty Ltd 17, , Registered - Compass Capital Services Pty Limited - - Discharged - Electrical Distributors Australia Pty. Limited 1, , Registered - Hafele Australia Pty. Ltd. 22, , Registered - Laminex Group Pty Limited 28, Registered - Lincoln Sentry Group Pty Ltd - - Registered - Macquarie Leasing Pty Ltd - 51, Registered - Westpac Banking Corporation 3,330, Registered - Total 3,496, , Source: Proofs of debt and information provided by secured parties 2- D TRENAUS01-AdministratorsReport-MJO 19

22 Trends - estimated unpaid employee entitlements Item Amount ($) Source Wages 8, Director's RATA Annual leave 84, Director's RATA and entitlements schedule dated 07/10/2017 Long service leave - Director's RATA Time in lieu Entitlements schedule dated 07/10/2017 Superannuation 81, FY18 YTD balance sheet (greater than superannuation report dated 16/10/2017) Redundancy Unknown Pay-in-lieu of notice Unknown Total 175, (+ redundancy and pay-in-lieu of notice) Pursuant to Section 556 of the Act, outstanding employee entitlements receive priority in any distribution over ordinary unsecured creditors. Additionally, in the event that Trends is wound up, the FEG scheme may be available to meet payments of certain employee entitlements. Employees become entitled to redundancy and pay-in-lieu of notice on termination. Those entitlements also have priority over other unsecured creditor claims. Certain employee entitlements are also afforded a priority out of certain types of asset realisations over claims of secured creditors. Unsecured creditors As at 30 November 2017, the Administrators have received proofs of debt totalling approximately $0.498m. Based on the limited records of Trends (and discussions with various creditors who have not yet submitted proofs of debt), the potential claims that may be made against Trends by unsecured creditors is likely to be in excess of $0.78m. The Director s RATA did not disclose an amount for unsecured creditors as discussed prior. 2- D TRENAUS01-AdministratorsReport-MJO 20

23 Explanation for difficulties Director s reasons for failure The Director has advised of the following in relation to Trends failure: There was a tightening of cash flow in mid-september The cash flow issues were manageable as a sale of Trends was being negotiated at the same time. As the purchase negotiations dragged into the first week of October 2017, employees were stood down and the business ceased trading due to Trends having insufficient funds to continue. The sale of Trends did not proceed as planned and Trends was unable to continue trading. Despite several attempts to contact the Director and the Former Directors, only limited information has been received and no more detailed explanation for Trends failure has been provided to the Administrators. Administrators view Based upon investigations to date, the Administrators view is that the following factors contributed to Trends failure: Trends was likely trading unprofitably and did not have sufficient cash available to pay its debts as and when they became due and payable. Trends imported kitchen and bathroom-related products from overseas and on-sold them on a wholesale basis. We understand that this business decreased substantially following the closure of Trends key customer, Masters Home Improvement. We have been advised that there was a consequent build-up of obsolete stock; however, we note that there was minimal stock on our appointment. Assets of Trends appear to have been transferred out of Trends prior to the Administrators appointment. We have not been provided with sufficient books and records to determine whether fair value (or any value) was provided for these assets. This is only a preliminary view as without access to the electronic financial records of Trends, it is difficult to pinpoint the precise reasons for Trends failure. As we have noted in section 9.1.1, below, our preliminary investigations indicate that Trends was insolvent, although have not yet reached a view on the timing of when Trends became insolvent. The presumption of insolvency provided by Section 588E of the Act for failure to maintain adequate books and records may also apply in this case. Outstanding winding up applications The Administrators are not aware of any outstanding winding up applications. A supplier of Trends, Classic Lacquer Pty Ltd, issued a statutory demand on Trends dated 8 November 2017; however, that was subsequent to the appointment of Administrators. A statutory demand is a preliminary step to seeking an application to wind up a company in insolvency. 2- D TRENAUS01-AdministratorsReport-MJO 21

24 Offences, insolvent trading and voidable transactions As noted above, Helen Marie Barber was the sole appointed director of Trends noted on the ASIC records. Pursuant to the Act, a person may be considered to be a director of a company even if they are not appointed as director if: they act in the position of a director; or the directors of the company or body are accustomed to act in accordance with the person's instructions or wishes. Further investigations are required to determine whether any of the Former Directors continued to act in the position of director. Accordingly, references to director in this section may also extend to the Former Directors. Offences ARITA has issued an Offences, Recoverable transactions and Insolvent trading information sheet providing general information for creditors about insolvent trading and voidable transactions. This information sheet is available from the ARITA website ( If you are unable to access this website, please contact Michael Owens of this office on (07) to obtain a copy. The following sections provide an overview of potential recoveries or actions available in a liquidation and provide details around key considerations. Our specific commentary in relation to Trends follows at section onwards. Insolvent trading Other than in cases of fraud, the director of a company may only be sued for insolvent trading if the company is in liquidation. Where an Administrator has been appointed, assessment of the issue of insolvent trading can be important to creditors if they are being asked to choose between a DOCA and a liquidation. In that instance, creditors have to assess the advantages to them of a DOCA (which does not include proceeds from insolvent trading actions) compared to the likely return to them in a liquidation (which could include the proceeds of any successful insolvent trading action). A liquidation also preserves the possibility of individual creditors taking action in their own right. Before a court will order that a person pay compensation in respect of insolvent trading, a Liquidator must establish that: the person was a director of the company at the time the company incurred the debt(s) that are the subject of the claim; the company was insolvent at that time or became insolvent by incurring the debt; at that time, there were reasonable grounds for suspecting that the company was insolvent or would become insolvent by incurring the debt; and the debt the subject of the claim was wholly or partly unsecured and the creditors to whom debts are owed have suffered loss and damage. In determining whether the Director/Former Directors traded Trends at a time they were insolvent, we have considered a range of insolvency tests (refer to section 9.2 of this report). Director defences Section 588H of the Act sets out statutory defences available to the Director/Former Directors in respect of any claim for insolvent trading. These include: at the time of incurring debts, the Director/Former Directors had reasonable grounds to expect that the company was solvent; the Director/Former Directors relied on information provided by a competent and reliable person which concluded that the company was solvent at the time debts were incurred; and the Director/Former Directors took reasonable steps to prevent the debt being incurred. Voidable transactions If Trends is wound up, certain transactions that occurred prior to the appointment of the Administrators, and where the property of Trends was disposed of or dealt with, may be recovered by the Liquidators under Part 5.7B of the Act. This 2- D TRENAUS01-AdministratorsReport-MJO 22

25 may result in, among other things, a requirement for a third party to return property and/or money to Trends and thereby increase the assets available to the Liquidators and creditors. These are known as voidable transactions. IPR (3)(b)(vi) requires an Administrator to 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. As with the insolvent trading analysis above, this issue is relevant to creditors if they are being asked to choose between a DOCA and a liquidation, because voidable transactions are only recoverable if a liquidation occurs. Voidable transactions include: unfair preference claims: transactions between a company and a creditor, resulting in the creditor receiving from the company, in relation to an unsecured debt owed to the creditor, a greater amount than it would have received in relation to the debt in a winding up of the company; uncommercial transactions: transactions which a reasonable person in the place of the company would not have entered into, taking into account the benefits and the detriment to the company, the respective benefits to the other parties involved and any other related matters; and unfair loans: being a loan agreement where the interest or charges are considered to be extortionate. Unfair loans made to the company any time prior to the appointment of the Administrator may potentially be overturned by a subsequently appointed Liquidator, whether or not the company was insolvent at the time the loan was entered into. We have conducted the following investigations to determine the existence of voidable transactions: requested information from the ATO; reviewed paper records obtained from Trends premises; made enquiries with the liquidators of BSQ regarding the employment status of various employees; issued demands for books and records and assets to the Director and Former Directors; and requested information from the Director and Former Directors. Breach of Directors duties Sections 180 to 184 of the Act set out the duties, obligations and responsibilities imposed on directors, which are designed to promote good governance and ensure that directors act in the interests of a company. These duties include: duty of care and diligence; duty of good faith; duty not to make improper use of position; and duty not to make improper use of information. Funding to pursue insolvent trading and voidable transactions Insolvent trading and voidable transactions can only be pursued in a liquidation and further investigation and any subsequent proceedings may incur significant costs. Funding may be required from creditors or litigation funders should the Liquidators (if appointed) seek to commence such action. 2- D TRENAUS01-AdministratorsReport-MJO 23

26 Insolvent trading Tests of insolvency There are a range of tests and indicators which can be considered to determine if and when Trends became insolvent. As stated throughout this report, the inadequate books and records and lack of information provided to the Administrators means that determining when Trends became insolvent is difficult. We examine a range of these tests and/or indicators below: Tests of insolvency Cash flow test ongoing losses and poor cash flow Administrators comments There are insufficient records available to conduct a thorough cash flow analysis. However, the surrounding circumstances, including the fact employees were stood down several weeks prior to the appointment of the Administrators suggest cash flow was not sufficient to continue trading. It is therefore reasonable to conclude that operating cash flow losses experienced for at least a period of several weeks prior to the appointment. Balance sheet tests of insolvency There are insufficient records available to conduct a thorough balance sheet analysis. Based on the following, it is reasonable to conclude that liabilities significantly outweighed the value of Trends assets as either a going concern or the realisable value of its assets: a valuation of Trends assets conducted by Grays; the significant debts owed to secured creditor Westpac; the proofs of debt received to date by the Administrators; the negative net asset position as per the FY18 YTD financial statements. Absence of a business plan Incomplete financial records or disorganised internal accounting procedures Lack of cash-flow forecasts and other budgets No business plan or detailed explanation of the operations of Trends business has been provided to the Administrators; however, we note we have been provided with limited information to date. There are significant deficiencies associated with Trends financial records, most notably the server containing electronic records removed the Burleigh Heads premises (refer section 5). We consider this may lead to the presumption of insolvency based on a failure to maintain proper financial records. We have received a cash flow forecast that assumed a third party would inject equity funds and support going concern operations via increased sales. We are not aware of any other cash flow forecasts. 2- D TRENAUS01-AdministratorsReport-MJO 24

27 Tests of insolvency Increasing debt, overdraft limit reached, increased monitoring by financier and inability to obtain finance Administrators comments The below indicators exist: Westpac engaged McGrathNicol Advisory Partnership to prepare an IBR on Trends (increased monitoring); overdraft facility in excess of limit; and increased liabilities per the FY15, FY16 and FY18 YTD balance sheets. Problems selling stock or collecting debts We were advised that there was a significant amount of obsolete stock that was intended to be sold to Masters Home Improvement. During the IBR, we were advised that some older stock had been realised through Lloyds but some stock had been returned as it could not be sold. We note however that there was limited stock present at Trends premises on our appointment. Unrecoverable loans to related parties Creditors unpaid outside usual terms, special arrangements with creditors and/or payments to creditors of rounded sums There do not appear to be loans to related parties included in the FY18YTD balance sheet. The proofs of debt received and Administrators communications with various creditors indicate that a number of creditors were unpaid outside their usual trading terms. We understand that Trends had entered into payment plans with the ATO for PAYG and superannuation obligations. Further information regarding the payment plan arrangements has been requested from the ATO. We were advised that Laminex Group Pty Limited had declined to provide continue supply to Trends, prior to the Administrators appointment. As a result of rental arrears, the lessors of both the Gold Coast Premises and the Brisbane Showroom had re-entered possession of the leased premises. Solicitors letters, demands and other judgements Suppliers placing the company on cash on delivery terms and/or collecting stock A supplier of Trends, Classic Lacquer Pty Ltd, issued a statutory demand to Trends dated 8 November 2017, subsequent to the appointment of Administrators. The amount disclosed in the statutory demand as owing was $24, We were advised that a number of creditors had placed Trends on cash on delivery terms. Overdue taxes and superannuation liabilities We are awaiting information from the ATO regarding the tax records and lodgements of Trends. Discussions with former employees indicate that Trends had outstanding PAYG and superannuation obligations that were not paid. The FY18 YTD balance sheet indicates that there are overdue taxes and superannuation liabilities. 2- D TRENAUS01-AdministratorsReport-MJO 25