American Apparel Australia Pty Limited (Administrators Appointed) Report to creditors pursuant to Section 439A of the Corporations Act 2001

Transcription

1 American Apparel Australia Pty Limited (Administrators Appointed) Report to creditors pursuant to Section 439A of the Corporations Act December

2 Contents Glossary Introduction... 3 Executive summary... 5 Administrators prior involvement... 6 Background and statutory information... 7 Administrators actions to date No going concern sale Historical financial performance and position Financial position based on Report as to Affairs Explanation for difficulties Books and records Offences, insolvent trading and voidable transactions Alternative courses of action Creditor information on remuneration Receipts and Payments Committee of inspection Creditor meeting details

3 Glossary 439A Report Glossary Term Administrators or Liquidators American Apparel Australia or the Company ARITA ASIC ATO c. Circa CFO COC COI DIRRI DOCA EBIT FEG Former Director FX Expanded Jason Preston and Barry Kogan American Apparel Australia Pty Limited (Administrators Appointed) Australian Restructuring, Insolvency and Turnaround Association Australian Securities and Investments Commission Australian Taxation Office Chief Financial Officer Committee of Creditors Committee of Inspection Declaration of Independence, Relevant Relationships and Indemnities Deed of Company Arrangement Earnings before interest and tax Fair Entitlement Guarantee Act Brian Turtledove Foreign exchange 2015 Year ended 31 December 2015 Liquidity Ratio Parent Entity POD PPSR RATA Liquidity Ratio = cash + cash equivalents current liabilities American Apparel, Inc. Proof of Debt Personal Properties Securities Register Report as to Affairs Relation back date 9 November 2016 RRP Recommended Retail Price the Act Corporations Act 2001 the Director Bennet Nussbaum YTD 2016 Calendar year to date ended 30 September

4 1 1.1 Introduction Appointment Jason Preston and Barry Kogan ( Administrators ) were appointed Joint and Several Voluntary Administrators of American Apparel Australia Pty Limited ( American Apparel Australia or the Company ) on 9 November 2016 by resolution of the Company s Director, pursuant to Section 436A of the Corporations Act 2001 ( the Act ). 1.2 Purpose of this report The purpose of this report is to provide creditors with details about the Company s 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 creditors meeting, together with their opinion as to the course of action that the Administrators recommend is in creditors best interests. 1.3 Object of administration In an administration, administrators are empowered by the Act to assume control of an insolvent company, superseding the powers of its directors and officers, to manage the company s affairs and deal with its assets in the interests of its creditors. The intention of a voluntary administration is to maximise the prospects of a company, 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. 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. 1.4 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 the Company was held on 21 November There were no nominations to appoint an alternative Administrator and no resolution was made by creditors of the Company in respect of the appointment of a Committee of Creditors at the meeting. 1.5 Second meeting The purpose of the second meeting is for creditors to: resolve the future of the Company. In this regard, the options available include whether the Company should: a. be returned to its Director; or b. enter into a Deed of Company Arrangement ( DOCA ); or c. enter into liquidation. If creditors do not wish to make an immediate decision, they may also resolve to adjourn the meeting for a period of up to 45 business days. consider and, if thought fit, approve the remuneration of the Administrators; if creditors resolve to enter into a DOCA: consider and if thought fit approve the Deed Administrators remuneration; and if the Company is wound up: a. consider and, if thought fit, approve the Liquidators remuneration; b. consider the appointment of a Committee of Inspection; c. consider authorising the Liquidators to compromise debts of the Company under Section 477(2A) of the Act; and 3

5 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. The second meeting of creditors has been convened to be held at McGrathNicol s office at: Level 12, 20 Martin Place, Sydney NSW 2000 on Tuesday, 13 December 2016 at 3:00pm. Additional details with respect to the second creditors meeting can be found in Section 16. 4

6 2 2.1 Executive summary Background Provided below is background information regarding American Apparel Australia s history and trading affairs: American Apparel Australia is an apparel retailer selling American Apparel branded products since 2008; American Apparel Australia operated from three retail outlets in Sydney, Melbourne and Adelaide at the date of our appointment; American Apparel Australia also sold through concession stores in MYER between May 2012 and July 2016; American Apparel Australia derived its revenue from the sale of American Apparel branded products; the Parent Entity advised American Apparel Australia that it would not supply American Apparel branded products to it or Australian customers on 8 November 2016; the Parent Entity terminated the license agreement with American Apparel Australia on 12 November 2016 and provided a 90 day period to sell inventory on hand; the Parent Entity entered into Chapter 11 in the United States (for the second time) on 14 November Sale of business and assets On 12 November 2016 (subsequent to the appointment), the Parent Entity terminated the license agreement with American Apparel Australia in respect of rights to use intellectual property owned by the Parent Entity (including the American Apparel brand and various operating systems licenced from the Parent Entity), and provided a 90 day period to sell inventory on hand. Without access to American Apparel branded product, and limited ability to utilise American Apparel intellectual property and operating systems, the Company s ability to trade was severely restricted. Accordingly, a view was formed by the Administrators that other than the inventory on hand, there were no trading assets of material value and it was uncommercial to conduct a sale of the business on a going concern basis. Instead, the Administrators asset realisation strategy has been primarily focussed on the realisation of inventory on hand and recovery of other assets listed in the Company s records. 2.3 Assets and creditors at appointment As at the date of our appointment, the Company s major assets were inventory holdings of c.$1,600,000 (at book value not estimated realisable value) and cash on hand / cash at bank of c.$235,000. The Company also had an intercompany loan receivable from the Parent Entity recorded as c.$959,000, any recovery from this is uncertain. Per the RATA, the Company s creditors at appointment were c.$50,000 comprised of superannuation of c.$13,000 and accounts payable of c.$38,000. We note however creditor claims will increase significantly in a liquidation scenario from what is recorded in the RATA (in particular in respect of employee termination payments and lease liabilities), potentially to c.$2,000, Anticipated return to creditors In both the high and low liquidation scenarios, there is expected to be a shortfall in the return to unsecured creditors and no funds available for shareholders of the Company (subject to recoveries from any third party or antecedent transactions). It is forecast that there will be sufficient recoveries to cover priority unsecured creditor claims. A return in the range of 14 to 89 cents in the dollar is forecast to ordinary unsecured creditors. Creditors should note that the above estimates are preliminary only and are subject to change as creditor claims are considered and adjudicated and assets are better understood. No warranty as to the accuracy or reliability of this estimate is provided. 2.5 Administrators overall opinion and recommendation As there is no DOCA for the Administrators consideration and the Company is insolvent, the Administrators recommendation is that creditors resolve that the Company be placed into liquidation. 5

7 In our opinion, it is in the best interests of creditors to vote in favour of the Company being wound up. 3 Administrators prior involvement In accordance with Section 436DA of the Act and the Australian Restructuring, Insolvency & Turnaround Association ( ARITA ) Code of Professional Practice, a Declaration of Independence, Relevant Relationships and Indemnities ( DIRRI ) was enclosed with our first communication to creditors (and tabled at the first meeting of creditors). The DIRRI disclosed information regarding our independence, prior personal or professional relationships with the Company or related parties and indemnities received in relation to this appointment. For convenience, a copy of this DIRRI is included as Appendix A. 3.1 Ongoing assessment Since the date of our appointment, we have continued to assess whether any potential conflict of interest issues have developed. At the date of this report, our opinion has not changed in that there is no change to the information provided in the DIRRI. The Administrators remain of the view that their relationships as outlined in the DIRRI do not create or give rise to any potential conflict of interest. 6

8 4 4.1 Background and statutory information Appointment Jason Preston and Barry Kogan were appointed Joint and Several Voluntary Administrators of American Apparel Australia on 9 November 2016 by resolution of the Company s Director, pursuant to Section 436A of the Act. Further information regarding the Company s background, shareholder, office holder and creditors are detailed below. Our appointment is solely over American Apparel Australia and does not extend to other entities including, but not limited to, its Parent Entity or any of the international operations operating under the American Apparel banner. While American Apparel branded goods were also sold online in Australia through the American Apparel website and The Iconic, we note these operations were managed by the Parent Entity and were independent of American Apparel Australia Background Operations American Apparel Australia was incorporated in 2007 and was a retailer of American Apparel branded apparel and accessories. This involved American Apparel Australia purchasing inventory from its Parent Entity and selling this inventory to customers at a margin. As at the date of our appointment, the Company had three retail stores located at: 82 Oxford Street, Sydney; 262 Chapel Street, Prahan; and Rundle Street, Adelaide. While the Company also operated concession stores through Myer in Melbourne and Sydney prior to the appointment of Administrators, these operations were discontinued in July American Apparel Australia had approximately 95,000 units of inventory with a book value of c.$1,600,000, equivalent to approximately 26 weeks worth of stock (based on historical sell through rates). Monthly sales across the three retail stores and two concession stores in the nine months to 30 September 2016, prior to the appointment of Administrators averaged c.$500,000. The Company had 44 employees at appointment across the three retail stores (most of which were employed on a casual basis) and at a district level, with day to day operations overseen by the District Manager who was reporting, and ultimately responsible, to the Parent Entity Events leading up to the appointment of Administrators On 3 November 2016, the Parent Entity advised Brian Turtledove, the Former Director (and sole director at the time), it could not guarantee ongoing supply of inventory to the Company. As a result, Brian Turtledove announced he would resign as Director of American Apparel Australia. Bennet Nussbaum was appointed as Director of American Apparel Australia by the Parent Entity on 3 November 2016 and a formal notice of resignation as Director was received from Brian Turtledove on 4 November The Parent entity subsequently determined it would discontinue supply of inventory to the Company. As a consequence of not having access to ongoing supply of American Apparel branded inventory the Director formed the view that the Company was likely to be unable to meet liabilities to creditors (including landlords and employees) at some point in the future and appointed Voluntary Administrators on 9 November

9 4.2.3 Timeline of key events Timeline of key events Year Description 5 June 2007 American Apparel Australia incorporated. 15 March 2008 Melbourne store opened at 262 Chapel Street, Prahan. 25 July 2008 Sydney store opened at 82 Oxford Street, Darlinghurst. 8 December 2008 Adelaide store opened at Rundle Street, Adelaide. May 2012 May 2015 July 2016 Agreement with Myer executed. Commences concession operations through Myer's Melbourne and Sydney stores. American Apparel Inc. entered Chapter 11 in the United States for the first time. American Apparel Australia is unaffected. Concession operations through Myer discontinued in both Melbourne and Sydney. 26 October 2016 American Apparel Inc. appoints McGrathNicol Advisory to provide advice in relation to insolvency options in respect of its subsidiary American Apparel Australia. 3 November 2016 American Apparel Inc. advises that it could not guarantee ongoing support for the Australian business (amongst other jurisdictions) or supply of American Apparel branded products to American Apparel Australia (or Australian customers). 3 November 2016 Bennet Nussbaum appointed as Director of American Apparel Australia by American Apparel Inc.. 4 November 2016 Brian Turtledove resigned as Director of American Apparel Australia. 8 November 2016 American Apparel Inc. determined it would cease to supply American Apparel branded products to American Apparel Australia. 8 November 2016 Director resolved to appoint administrators to American Apparel Australia (upon receipt of consent). 9 November 2016 Jason Preston and Barry Kogan provided their consent and were appointed Voluntary Administators of American Apparel Australia. 12 November 2016 License from American Apparel Inc. for use of intellectual property including the American Apparel brand and operating systems terminated Statutory details, officers and shareholders A search of the records maintained by the Australian Securities and Investments Commission ( ASIC ) database as at the date of our appointment reveals the following statutory details: Statutory details Company name ACN Registered office Incorporation date American Apparel Australia Pty Limited Level 12, Pitt StreetSydney NSW June 2007 Source: ASIC company search Set out below is the Company s office holder at the date of our appointment: 1 2 Statutory details Name Role Appointment date Retirement date 1 Hassan Noormohamed Natha Director 4 February October 2016 Bennett Nussbaum Director 3 November n/a Source: ASIC company search, company records 1 We have sighted a Notice of Resignation as Director of American Apparel Australia, but note that the ASIC records had not been updated as at the date of our appointment. 2 We have sighted a Notice of Appointment as Director of American Apparel Australia, but note that the ASIC records had not been updated as at the date of our appointment. 8

10 As at the date of our appointment Bennet Nussbaum was the sole Director of the Company and the Company did not have any Australia resident Directors. There was no registered secretary. Two other office holders held appointed positions as Directors in the twelve months prior to our appointment as Administrators: Hassan Natha - resigned as Director of the Company on 31 October 2016 Brian Turtledove - resigned as Director of the Company on 4 November 2016 Set out below is the Company s shareholding as at the date of our appointment: Shareholder register Shareholder Issued Capital ($) % total American Apparel, Inc % Total % Source: ASIC company search Security interests A search of the Personal Properties Securities Register ( PPSR ) on our appointment did not identify any security interests registered against the Company. 9

11 5 Administrators actions to date The Administrators and their staff have attended to the following matters since our appointment: Notifying major financial institutions of our appointment, seeking to freeze any bank accounts held by the Company; Attending to statutory duties including informing ASIC, the Australian Taxation Office ( ATO ), the Office of State Revenue and various other statutory authorities of our appointment; Liaising with the Director, Former Director accounting service providers, and the Parent Entity to understand the background and financial position of the Company; Issuing requests to the Director and the Former Director to complete Reports as to Affairs, Directors questionnaire and deliver the books and records of the Company to the Administrators; Securing books and records including certain electronic accounting records; Reviewing the books and records of the Company and undertaking preliminary investigations to ascertain the Company s financial position and any transactions that may be recoverable by a Liquidator; Following up with the Director and Former Director to obtain additional information in respect of the Company and its operations prior to appointment; Attending all three retail stores and briefing employees upon appointment; Continuing to trade the three retail stores to sell inventory on hand; Implementing trading protocols and controls; Establishing and attending regular trading teleconferences with store managers; Preparing and issuing circulars to suppliers and creditors; Issuing our Notices of Appointment and Circular to Creditors; Liaising with key stakeholders, including: the Parent Entity; the Company s lawyers; landlords; employees; external accountant; and unsecured creditors; Dealing with the Parent Entity in relation to access to the Company s customer database and social media accounts; Investigating the existence of any security interests over the Company; Considering the optimal method to realise the assets of the Company (in particular inventory); Conducting detailed analysis in respect of inventory holdings, historical sell through rates, previous results from different promotions; Proactively contacting various third parties to determine interest in acquiring bulk inventory through wholesale channels and providing information relating to this inventory; Developing a wind down and store rationalisation plan; Dealing with landlords in respect of retail stores; Instructing and liaising with lawyers in relation to various legal matters; Convening the first meeting of creditors held on 21 November 2016; Preparing for, attending and chairing the first meeting of creditors held on 21 November 2016; Lodging the minutes of the first meeting of creditors with ASIC; 10

12 Preparing this Report pursuant to Section 439A of the Act; Convening the second meeting of creditors to be held on 13 December 2016; and Attending to other general and statutory requirements. 11

13 6 6.1 No going concern sale Overview Immediately prior to our appointment, on 8 November 2016, the Parent Entity confirmed it would discontinue supply of inventory to the Company. As the only manufacturer of American Apparel branded products the Company could not access product to sell in its stores. Furthermore, on 12 November 2016 (subsequent to the appointment), the Parent Entity terminated the license agreement with American Apparel Australia in respect of rights to use intellectual property owned by the Parent Entity (including the American Apparel brand and various operating systems licenced from the Parent Entity), and provided a 90 day period to sell inventory on hand. Without access to American Apparel branded product, and limited ability to utilise American Apparel intellectual property and operating systems, the Company s ability to trade was severely restricted. Accordingly, a view was formed by the Administrators that there were no trading assets of material value and it was uncommercial to conduct a sale of the business on a going concern basis. Instead, the Administrators asset realisation strategy has been primarily focussed on the realisation of inventory on hand and recovery of other assets listed in the Company s records. 12

14 7 Historical financial performance and position This Section of the report sets out historical financial information for the Company. American Apparel Australia s financial accounts were historically prepared for calendar years, and on a going concern basis. Historical financial information for the year ended 31 December 2015 ( 2015 ) and the nine-month period ended 30 September 2016 ( YTD 2016 ) have been sourced from the Company s unaudited management accounts. Given the timing of our appointment, management accounts for October 2016 and from 1 to 9 November 2016 were not available. We have based our comments on bank statements and accounting entries for this period. We have not carried out an audit, nor have we verified the management accounts presented below. Accordingly, they are provided for illustrative purposes only and the Administrators do not provide any warranty as to the accuracy or reliability of these figures. 7.1 Financial performance A summary of the Company s historical of financial performance as extracted from its management accounts is set out below: Statement of financial performance Key points: The Company made a net profit in 2015 and through the nine months ended 30 September However, we noted fluctuations in the underlying monthly results. Revenue was primarily generated from the sale of American Apparel branded products to the general public through the Company s three retail stores and Myer concession stores in Sydney and Melbourne. Selling expenses relate to the Company s operating expenses including but not limited to employee wages and on costs, utilities, repairs and maintenance, marketing and travel costs. General and Administration expenses include corporate administration charges, professional fees, bank fees, bad debts, claims and penalties. The gross profit margin improved year on year from 57.8% in 2014 to 77.3% in YTD EBIT and net profit margins remained relatively stable at the three balance dates YTD 2016 Sales revenue 10,314,554 8,269,072 4,492,731 Cost of sales (4,354,954) (3,016,980) (1,018,204) Gross profit 5,959,600 5,252,093 3,474,527 Gross profit margin 57.8% 63.5% 77.3% Selling expenses (4,640,859) (3,980,746) (2,553,292) General & administrative expenses (1,112,450) (1,105,965) (831,380) Other expenses - - (371) EBIT 206, ,382 89,484 EBIT margin 2.0% 2.0% 2.0% Interest income 1, Income tax paid (22,810) (49,728) (7,042) Net profit/(loss) 184, ,031 82,659 Net profit margin 1.8% 1.4% 1.8% Source: Management accounts 13

15 7.2 Financial position A summary of the Company s historical financial position as shown in its management accounts is as follows: Statement of financial position Key points: Net assets were positive at each month and year-end reviewed. 31 December December September 2016 Cash and cash equivalents 145, , ,727 Trade receivables 25,297 28,343 39,216 Prepaid expenses 138, , ,856 Inventory 2,213,407 1,396,043 1,586,670 Tax assets 87,023 9,075 79,943 Total current assets 2,609,384 1,644,620 2,004,412 Property, plant and equipment 693, , ,275 Tax assets 30,011 92,939 92,939 Deposits 136, , ,329 Intercompany loan 211,661 1,246, ,882 Total non current assets 1,072,019 1,845,196 1,402,425 TOTAL ASSETS 3,681,403 3,489,816 3,406,837 Accounts payable (47,423) (5,554) (8,602) Accrued expenses (605,854) (438,636) (369,347) Tax liabilities (53,626) (74,685) (74,685) Deferred rent (119,587) (138,151) (166,375) Total current liabilities (826,490) (657,026) (619,009) Deferred expenses (361,667) (223,516) (95,894) Total non current liabilities (361,667) (223,516) (95,894) TOTAL LIABILITIES (1,188,157) (880,542) (714,903) NET ASSETS 2,493,246 2,609,274 2,691,934 Source: Management accounts Cash balances were positive over the 12-month period prior to our appointment and the Company was not reliant on external debt or equity capital to fund operations. Inventory represented the most material asset of the Company over the period reviewed. Plant and equipment relates to the fixtures and fittings, computer equipment and leasehold improvements, and is net of depreciation. The Company had no major capex during the review period. Tax assets relate to deferred tax assets and intercompany tax receivables. These amounts / calculations are based on accounting principles. Deposits relate to bank guarantees and security deposits provided to landlords to support commitments under various lease agreements. A further bank guarantee was provided to Australia Post in respect potential postage liabilities given the historical volume of transactions with this supplier. The intercompany loan is primarily comprised of amounts in respect of the provision for inventory and corporate / overhead charge backs, as well as cash sweeps back to the Parent Entity. We note that while loan advances were recorded and reconciled in the Company s accounts, we understand there are no formal loan agreements to govern interest, term, amortisation or repayment terms. The value of the intercompany loan reduced by $289, between 1 January 2016 and 30 September 2016 given liabilities incurred to the Parent Entity exceeded the level of cash swept. 14

16 Accounts payable represent amounts owed to suppliers, utility / service providers and council fees. The low balance of accounts payable reflects the payment of trade creditors on an as due basis. Accrued expenses comprise of gift vouchers, marketing accruals and employee entitlements and on costs. Tax liabilities relate to deferred tax liabilities and the amount / calculation is based on accounting principles. Deferred rent is an accounting adjustment to recognise the lease liability over the term of the lease on a straight line basis. 7.3 Cash flow The Company did not prepare a standalone cash flow statement. We understand that the Parent Entity prepared a high level cash flow statement to identify surplus funds available to be swept and adjusted against the intercompany loan. We have requested copies of these cash flow statements but have not yet been provided with this. Accordingly, we have reviewed the cash journals for the Company for 2015, YTD 2016 and bank statements for the subsequent period and note the following: The Company held positive cash balances at all times during the period reviewed. Trading receipts were primarily generated from sales of inventory, with these being sufficient to cover operating, general and administration liabilities to third parties. The operation of the intercompany loan / arrangements and associated cash sweep meant the payments to related parties for inventory and corporate charge backs could be deferred, or settled against the loan account in lieu of cash payments. This provided a mechanism that we understand was intended to ensure that sufficient cash was retained by American Apparel Australia to meet liabilities to external creditors as and when they fell due. 15

17 8 Financial position based on Report as to Affairs We have received a Report as to Affairs ( RATA ) from the Director and Former Director, setting out the Company s financial position as at the date of our appointment. A summary of the Director s RATA is set out below: Summarised Report as to Affairs - as at 9 November 2016 Estimated realisable value Note Book value (Director's estimate) Cash at bank , ,051 Sundry debtors ,882 - Plant and equipment ,275 Unknown Inventory ,586,670 Unknown Other assets , ,265 Total assets 3,136, ,316 Preferential creditors (12,678) (12,678) Ordinary unsecured creditors (39,055) (39,055) Total liabilities (51,734) (51,734) Surplus / (deficiency) 8.3 3,084, ,582 Source: Director's RATA Our comments in relation to the Director s RATA are set out below. 8.1 Assets Set out below is our commentary on the Company s assets Cash at bank / on hand The RATA reports cash at bank of $239,051 as at the date of our appointment. The Company held four operating bank accounts with Australia and New Zealand Banking Group ( ANZ ) which held credits totalling $229, Additionally, each store held an amount of petty cash and till floats. We have secured the four operating accounts held with ANZ and have intermittently arranged balance transfers into accounts controlled by the Administrators. The petty cash and tills have continued to be utilised for ongoing trading. We also note that the Company had $89, in accounts supporting three bank guarantees as at the date of our appointment. The Company also provided two rental bonds totalling $45, in lieu of bank guarantees. We note that these are held as security for leases suppliers and we are unable to access these funds at this time. These were reported as other assets in the RATA. Separately, we have written to all major Australian banks to identify and secured any additional funds held by the Company (no additional funds have been located) Sundry debtors Sundry debtors relate to an intercompany loan between the Parent Entity and the Company with a balance of $958,882 owing to the Company. This is consistent with the Company s books and records. We have not been provided any formal loan agreement governing the terms, interest applicable to or repayment of their loan. The Director has attributed no realisable value to this intercompany loan. Whilst the Parent Entity is currently in Chapter 11 in the United States, the Company will issue a letter of demand for repayment of the current balance of the loan account. At this date, we have not received guidance around the expected timing or quantum of any return from the Parent Entity, so the likely level of recoverability, if any, is uncertain. 16

18 8.1.3 Plant and equipment The Director reported a book value of plant and equipment of $216,275 in the RATA. This value is consistent with the Company s books and records. Listed plant and equipment comprises software, computers, furniture, fixtures and leasehold improvements. The Director has reported the realisable value of the plant and equipment as unknown. Given the written down book value of plant and equipment is based on cost less depreciation, it is not necessarily indicative of its market value. We also note a substantial proportion relates to fixtures and fittings which may not be commercial (or we may be unable) to remove from the premises Inventory The Director recorded $1,586,670 in inventory (at cost) in the RATA. This is consistent with the Company s books and records. Inventory consists largely of American Apparel branded goods including clothing, swimwear / underwear, accessories and other personal items. Based on the inventory listings provided, this was made up of c.95,000 units on hand as at the date of our appointment, being a mix of current collections, styles and aged inventory. Many items were already discounted below RRP at the date of appointment, and we are aware of additional items not listed on the inventory system, including damaged goods and obsolete lines. The Director has reported the realisable value of the inventory on hand as unknown. The realisable value of inventory will ultimately depend on sell through in store and the channel through which the balance is realised Other assets Other assets are recorded in the RATA with a total book value of $135,265.70, which is consistent with the Company s books and records. These other assets relate to cash held against three bank guarantees totalling $89, as well as two rental bonds, totalling $45, provided to landlords to support lease obligations. The Director has indicated in his RATA that he believes these amounts are recoverable in full. The ultimate recoverability of these assets will depend on the outcome of the administration, as some of the parties holding these guarantees and bonds are likely to have the right to set off these amounts against their unsecured creditor claims and therefore in our assessment these are unlikely to be recovered in full Assets not included We note the last prepared statement of financial position recorded a number of other assets which were not included in the RATA by the Director (e.g. tax assets, prepaid expenses). These assets may have some realisable value or be applied to reduce administration liabilities, and ultimately increase the amount available for creditors. 8.2 Liabilities Set out below is our commentary on the Company s liabilities Employees The Directors has recorded an amount of $12,678 as preferential creditor claims in the RATA. These preferential creditor claims relate to outstanding employee superannuation entitlements for the period 1 October 2016 to 9 November This is consistent with the books and records of the Company. No provision was made in the RATA for any unpaid wages, annual or long service leave liabilities or potential termination entitlements that are likely toy crystallise in the future, given the Company will not be able to continue to trade given the withdrawal of support of the Parent Entity. This will significantly increase the value of the employee claims against the Company from the amount indicated as owing in the RATA. As at the date of appointment there were unpaid wages for the period 31 October 2016 to 9 November These amounts have been paid as part of the administration. 17

19 8.2.2 Unsecured creditors The Director s RATA lists eleven unsecured creditors, with estimated claims totalling $37,799. The creditors are listed below: Summary of unsecured creditors Creditor Name Nature RATA amount ($) Kambel Holdings Pty Ltd (Pasat Properties) Lease liability 15, MBP Advisory Tax and accounting services 12, TCF International-International Freight Forwarders Freight and logistic services 4, Suez Environment Recycling & Waste Waste management services 2, Halkin Group Accounting and bookkeeping services 1, Iinet Technologies Internet and telephone usage 1, Impact Distribution Services Storage of stock Neverfail Springwater Ltd Delivery of filtered water products PRV Locksmits Locksmith services Staples Australia Pty Ltd Stationery supplies Australia POST Postal services Total 37, Source: Director's RATA Comments regarding RATA and creditor claims generally: The majority of unsecured creditor claims relate to service providers pertaining to the trading of the business where invoices had been received. No provision for accrued expenses has been included in the RATA. There are no inventory creditors listed as all inventory was sourced from the Parent Entity. As noted in Section 7 liabilities for inventory were adjusted against the intercompany loan balance, with an amount-owing to American Apparel Australia from the Parent entity as at the date of our appointment. The management accounts record a gift card liability of $190,392 as at 30 September 2016 which relates to unused gift vouchers that had not yet expired. We have not been able to obtain details around the individual holders of these gift cards or been able to verify this liability accurately. While tax lodgements were up to date, the Business Activity Statement for October 2016 and the period from 1 November 2016 to 9 November 2016, income tax return for 1 July 2016 to 9 November 2016 and payroll tax return for the period from 1 November 2016 to 9 November 2016 were not yet due at the date of our appointment and there may be amounts outstanding for these periods. We note no accruals were included in the RATA for any potential tax liability. The Company has substantial future commitments under various leases entered into, which had not crystallised as at the date of our appointment. Rent was historically paid in advance, so landlords do not appear in the RATA as creditors of the Company for these amounts. However, an amount in respect of outgoings for one property remained outstanding to one of the landlords, Kambel Holdings Pty Limited,) as at the date of our appointment. Prior to payment of a distribution to unsecured creditors, we are required to call on creditors to submit a proof of debt substantiating their claim against the Company (which will be adjudicated upon). In the interim, those creditors wishing to attend and vote at the forthcoming meeting on 13 December 2016 should prepare and submit a POD Form with full supporting documentation ahead of the meeting. 8.3 Net asset surplus The Director s RATA suggests a net asset surplus of $322,582 based on the realisable values attributed by the Director, plus any realisations from inventory or plant and equipment. We note however creditor claims are likely to increase in a liquidation scenario to what is recorded in the RATA (in particular in respect of employee termination payments and lease liabilities). Additionally, there remains uncertainty around the realisable value of the non-cash assets. 18

20 9 9.1 Explanation for difficulties Director s reasons for failure The Director has not attributed any specific reasons for the failure of the Company however, we understand it is in connection with the withdrawal of support from and cessation of supply of American Apparel branded products by the Parent Entity. 9.2 Administrators view Without support from the Parent Entity and supply of American Apparel branded products, the Company would be restricted in its ability to trade (based on its existing operations which exclusively sold American Apparel), in that it would be unable to secure supply of American Apparel branded product to allow it to generate sales revenue to cover future operating expenses. Without ongoing supply, it would be uncommercial for the Company to continue trading in the long term, and by ceasing operations, certain material liabilities would crystallise (i.e. employee termination, landlord) which may exceed the net realisable value of the Company s assets. 9.3 Outstanding winding up applications We are not aware of any winding up applications against the Company. 19

21 10 Books and records One of the matters we are required to provide an opinion on is whether the Company s 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 the Director and other related parties. The administrative functions of the Company were largely contracted to third party service providers or managed by the Parent Entity with the majority of financial records kept by the Former Director. Other records were maintained by the external accountants, engaged to prepare and maintain detail around sales, payments, payroll and bank reconciliations. We have secured various physical and electronic books and records of the Company from the Parent Entity, Former Director and external accountants. The electronic information provided includes bank statements and MYOB accounting files. Physical documents included bank statements, supplier invoices, expense receipts, financial statements, statutory lodgements, leases, board meeting minutes and employee records. Transactional, operational and sales data, at a retail level, was maintained in various systems including Retail Pro, Workbrain Webmail and Store Force operating in the cloud. We have been provided with a range of electronic records and reports from these systems. We consider that a company operating this type of business should, as a minimum, maintain the following books and records in order to comply with Section 286 of the Act: Accounting files and associated working papers The Company s accounting and transactional files were maintained in MYOB and were up to date as at the date of our appointment. Financial statements Financial statements were prepared by the Parent Entity and have been sighted for the 8 years prior to our appointment and monthly management accounts in excel have been sighted for the period from 1 January 2016 to 30 September October 2016 management accounts were incomplete as at the date of our appointment given the short time period between month end and our appointment. Banking records including account statements Bank reconciliations were prepared using the MYOB accounting system, and are up to date. Bank statements for the last 8 years have been provided. Copies of creditor invoices Copies of creditor invoices were kept in an orderly manner. Lease contracts / supplier agreements We have been provided with the lease agreements. We note that no formal agreement existed with major suppliers, in particular, the Parent Entity. Intercompany transactions and balances An intercompany loan with the Parent Entity was historically maintained in the books and records of the Company, in respect of inventory supply, overhead charge backs and cash transfers, amongst other items. We note that while loan advances were recorded and reconciled in the Company s accounts, we understand there are no formal loan agreements to govern interest, term, amortisation or repayment terms. 20

22 Asset registers The Company conducted a weekly stocktake in each store utilising RFID technology and maintained a live inventory system on this basis. The Company sporadically undertook non-inventory stocktakes (noting the value of these items is relatively minor). The management accounts prepared by the Parent Entity included an inventory and asset register (including regular depreciation charges). Company registers and board minutes The Company held annual review meetings and maintained board minutes for these. The Company s corporate registers have been provided by the Former Director. Conclusion Based on the books and records of the Company provided to me, I am of the opinion that the Company s books and records are adequate pursuant to Section 286 of the Act. 21

23 11 Offences, insolvent trading and voidable transactions Should creditors resolve that the Company be wound up at the second meeting of creditors, there may be transactions where money, property or other benefits can be recovered by a Liquidator. 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 Johnathon Tawil on (02) 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 Insolvent trading A director may be personally liable to a company if the director fails to prevent a company from incurring a debt when at the time, the director knew, or should have known, that the company was insolvent. A director s requirement to compensate the company for insolvent trading is equal to that of the debt incurred when the company was insolvent, as long as that debt remains unpaid at the time of liquidation. Where a Voluntary Administrator has been appointed, assessment of the issue of insolvent trading can be important to creditors when choosing between a DOCA and a liquidation. In considering a DOCA, creditors have to assess the advantages and the likely return to them from a DOCA (which does not include proceeds from insolvent trading actions) compared to in a liquidation (which could include the proceeds of any successful insolvent trading action). Other than in cases of fraud, a director of a company may only be sued for insolvent trading if the company is in liquidation. An action for insolvent trading is generally undertaken by a liquidator; however, in the event that a liquidator elects not to pursue a director, liquidation also preserves the possibility of individual creditors taking action in their own right. Claims for insolvent trading are often difficult to prove, and directors have a number of defences available to them pursuant to Section 588H of the Act. 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 debts 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 or Former Director traded the Company at a time when it was insolvent, we have considered the Company s ability to pay its debts as and when they fall due (the cash flow test), the Company s net asset position (the balance sheet test) and indicia of insolvency established in certain case law Cash flow test Section 95A of the Act provides that a company is solvent if, and only if, the company is able to pay all the company s debts as and when they fall due and payable. A company which is not solvent is insolvent. The cash flow test examines if a company is able to pay its debts as and when they fall due, from existing funds or readily realisable sources of funds. We have reviewed the Company s records and note the following: all trade creditors appeared to have been paid on an as due basis ; sufficient funds were on hand or at appointment to meet creditor payments due in the immediate term in full; while the Company did not maintain a cash flow forecast, it appears that monthly periods of both positive and negative cash flow were identified throughout the period of examination; long term debt was not required to fund operations due to consistent sales revenue and the historical level of capitalisation; 22

24 the operation of the intercompany loan account with the Parent Entity in theory should have ensured sufficient funds were retained on hand (where funds would only be swept to the extent funds were surplus to the immediate needs of the Company); and the liabilities which gave rise to the future solvency concerns of the Director were future or contingent liabilities not yet due and payable and / or had not yet crystallised Balance sheet test The balance sheet test provides that a company will be insolvent if liabilities exceed assets. Considering the net asset position of a company requires a review of the assets and liabilities disclosed in its balance sheet. For the purpose of our preliminary investigations, we have examined the statements of financial positions for 2015 and YTD 2016 (the Company s summarised statements of financial position are at Section 7 of this report), being the most current available. We have not been provided with October 2016 management accounts as they had not been finalised prior to our appointment. We have reviewed individual transactions between 1 October 2016 and the date of our appointment on 9 November 2016, and note that the transactions appear consistent with prior periods and the position did not change materially, so consider the YTD 2016 accounts provide a sufficient basis on which to conduct our initial investigations. Based on the review of the 2015 and YTD 2016 accounts we make the following comments: the Company s net asset position was positive throughout the period reviewed prior to and including 30 September 2016 and the subsequent period; and it appears that the Company had sufficient current assets (at book value) to meet current liabilities throughout the period reviewed; the major asset supporting this position was the inventory balance; the financial statements also recorded an intercompany loan to the Parent Entity (a receivable for the Company) on a going concern basis of c.$1,000,000 as at 30 September 2016 and it appears this materially remained (albeit at a slightly reduced balance) at the date of our appointment; accounts payable were of minimal value throughout the periods reviewed and paid within terms (as and when they fell due); accrued liabilities related to supplier liabilities where invoices had not yet been received, employee entitlements and taxation and were not yet due. These amounts were paid as and when they fell due. Gift vouchers were also included in accrued liabilities and were historically redeemed on presentation; the Company did not have any external debt; the company generally had access to timely and accurate financial information. We note however, the Company had a number of future or contingent liabilities, specifically in relation to landlords for future payments under various leases and employee termination entitlements under their employment contracts (not yet due and payable and / or had not yet cystalised) that were not included in the balance sheet at any time during this period. We note the Company historically prepared its accounts on a going concern basis and we have not found any evidence that balance sheet assessment on a liquidation basis was ever prepared Indicia of insolvency Case law has established a number of indicia of insolvency which we have also taken into consideration as follows: Indicia of Insolvency Continuing losses Liquidity Ratio below 1 Overdue Commonwealth & State taxes Supplier placing the debtor on COD terms, otherwise demanding special payments before resuming supply Y/N N Y N N 23

25 Indicia of Insolvency Creditors paid outside trading terms Issuing of post-dated cheques Dishonoured cheques Special arrangements with selected creditors Solicitors letters, summons(es), judgements or warrants issued against the company Payments to creditors of rounded figures, which are irreconcilable to specific invoices Poor relationship with present bank including ability to borrow additional funds No access to alternative finance Inability to raise further equity capital Inability to produce timely and accurate information to display the company s trading performance and financial position, and make reliable forecasts. Source: Management accounts, discussions with Former Director, McGrathNicol investigations Y/N N N N N N N n/a N N N Comments: American Apparel Australia reported a net profit in 2015 and YTD 2016 (including for five of the nine months to September 2016). The Liquidity Ratio was below one at 31 December 2015 and 30 September 2016, and at the end of each month during the intervening period. All creditors (including statutory and tax creditors, but with the exception of the Parent Entity loan account which had no set repayment terms) were paid as and when due and there were no instances of demands from, or special arrangements with, creditors. The bank statements from 10 November 2015 to 9 November 2016 did not indicate previous instances of cheques being dishonoured and no evidence has been identified to suggest post-dated cheques were used. The Company had no external debt and had not sought to raise additional debt or equity capital during the period reviewed Director defences Section 588H of the Act sets out statutory defences available to directors in respect of a claim for insolvent trading. These include: at the time of incurring debts, a director had reasonable grounds to expect that the company was solvent; a director relied on information provided by a competent and reliable person which concluded that the company was solvent at the time debts were incurred; a director was ill (and therefore did not take part in management) at the time the debt was incurred; and a director took reasonable steps to prevent the debt being incurred Administrators conclusions regarding solvency As stated above, solvency is a question of fact to be ascertained from a consideration of a company s financial position as a whole. From our analysis set out above, it appears likely that the Company was solvent up to, and including, the date of the appointment, being 9 November On the basis that creditors were within terms and historically paid as and when they fell due, the balance sheet (prepared on a going concern basis) indicates a substantial surplus of net assets at all times (including the period immediately prior to appointment) and the absence of multiple indicia of insolvency. 24

26 While further investigation may establish that the Company may have been insolvent at an earlier period prior to our appointment, our preliminary assessment is that a liquidator is unlikely to recover any significant sums in relation to insolvent trading for the following reasons: the difficulty with establishing when the Company becomes insolvent; the fact that the majority of the Company creditors in this case were incurred at a time well before insolvency might be established (given that liabilities under leases are deemed to be incurred when the leases are entered into); the steps taken by the Former Director and Director in respect of limiting any exposure to a potential period of insolvent trading, in particular resigning as a director and taking steps to appoint administrators, respectively; the range of defences available to the Director and Former Director; and the costs of pursuing an insolvent trading claim as against the level of potential recoveries. Should the Company be placed into liquidation at the second creditors meeting, further investigations will be undertaken to consider these matters further Funding to pursue insolvent trading claims Insolvent trading claims can only be pursued in liquidation and further investigations and any subsequent proceedings incur significant costs. Funding may be required from creditors or litigation funders should the liquidators (if appointed) seek to commence such action. We note that our investigations to date are preliminary. If the Company is wound up, further investigations and a cost benefit analysis of pursuing recovery action will need to be undertaken. The Liquidators would also need to consider the likelihood the Director, or the Former Director, having sufficient assets to compensate the Company for any claim made) when determining whether there would be likely to be any benefit to creditors to pursue any potential insolvent trading claims Voidable transactions In the event that a company is wound up, certain transactions that occurred prior to the appointment of the Administrators, and where the property of the Company was disposed of or dealt with, may be recovered by the liquidator under Part 5.7B of the Act. This may result in, among other things, a requirement for a third party to return property and / or money to the company and thereby increase the assets available to the liquidator and creditors. These are known as voidable transactions. Corporations Regulation 5.3A.02 requires an administrator to specify whether there are any transactions that appear to the administrator to be voidable transactions. As with the insolvent trading analysis above, this issue is relevant to creditors when choosing between a DOCA and a liquidation, because voidable transactions are only recoverable if a liquidation occurs. Voidable transactions include: unfair preference payments, discussed at Section of this report; uncommercial transactions, discussed at Section of this report; unfair loans, discussed at Section of this report; unreasonable Director-related transactions, discussed at Section of this report; circulating security interests, discussed at Section of this report; and transactions for the purpose of defeating creditors, discussed at Section of this report. Creditors are advised that, for the purposes of voidable transactions, the relevant relation back date for considering specific transactions is considered to be the date that the Administrators were appointed to the Company, being 9 November To the extent that information has been available, we have reviewed the books and records to determine whether there have been any unfair loans made to or from the Company and reviewed deposits and withdrawals into, or out of, the Company s bank accounts to determine whether any creditor has been preferred over the general body of creditors as a result of any transaction. 25

27 Unfair preference payments An unfair preference payment is a transaction, generally occurring in the six months prior to the appointment of the liquidator or the relation back day, between the company and a creditor, resulting in the creditor receiving from the company, in relation to an unsecured debt owed to the creditor, a greater amount than it would have received in relation to the debt in a winding up of the company. This period is extended to four years for transactions entered into with a related entity. A transaction can only be considered an unfair preference if the company was insolvent at the time the transaction took place, or the company became insolvent as a result of the transaction. We have reviewed the Company s MYOB records and bank statements for the period of 10 May 2016 to 9 November 2016, and transactions with related parties during the period from 9 November 2012 and 8 November We note that the regular payments were made by American Apparel Australia to the Parent entity and adjusted against the intercompany loan to meet liabilities owed to the Parent Entity and presumably in lieu of distributions of retained earnings. The value of this intercompany loan fluctuated throughout the four-year period reviewed. Based on the value at the balance date of annual financial statements available the loan balance reached a peak indebtedness of $1,246,671 owed to American Apparel Australia at 31 December 2015, but had reduced to $958,882 as at the date of our appointment. This balance is recorded as an asset of the Company and is being pursued as part of the administration. We have not specifically reviewed the commerciality of individual payments made to the Parent Entity at this time. The reduction of the level of the debt owed to the Parent Entity from December 2015 could potentially represent an unfair preference. However, a key element of a recovery action for an unfair preference is to demonstrate that the company making the payment is insolvent, which as noted above has not been able to be clearly established for American Apparel Australia. Accordingly, we have not attributed any value to this potential claim for the purposes of this report. Based on our preliminary investigations, we have not identified any other payments that appear to constitute potential unfair preference payment. Should the Company be placed in to liquidation at the second creditors meeting, further investigations will be undertaken to consider these matters further Uncommercial transactions An uncommercial transaction is a transaction which a reasonable person in the place of the company would not have entered into, taking into account the benefits and the detriments to the company, the respective benefits to the other parties involved and any other related matters. The period for recovering uncommercial transactions is generally two years. This period is extended to four years for transactions entered into with a related entity. A transaction can only be considered uncommercial if the company was insolvent at the time the transaction took place, or the company became insolvent as a result of the transaction. We note that the regular payments were made by American Apparel Australia to the Parent entity and adjusted against the intercompany loan to meet liabilities owed to the Parent Entity and in lieu of distributions of retained earnings. The value of this intercompany loan fluctuated throughout the four-year period reviewed. Based on the value at the balance date of annual financial statements available the loan balance reached a peak indebtedness of $1,246,671 owed to American Apparel Australia at 31 December 2015, but had reduced to $958,882 as at the date of our appointment. This balance is recorded as an asset of the Company and is being pursued as part of the administration. We have not specifically reviewed the commerciality of individual payments made to the Parent Entity at this time. Although the Parent Entity was the supplier of all stock to American Apparel Australia and therefore many of the loan account transactions appear to be legitimate payments for purchases of stock. However, there are a number of transactions whereby cash amounts are withdrawn from American Apparel Australia and paid to the Parent Entity and further investigation would be required to determine whether each of these transactions was commercially beneficial from American Apparel Australia s perspective, or might constitute an uncommercial transaction. As for potential claims for unfair preferences, a liquidator must establish that the company is insolvent in order to recover a claim for an uncommercial transaction. We have not attributed any value to this potential claim for the purposes of this report. Based on our preliminary investigations, we have not identified any other uncommercial transactions. 26

28 Should the Company be placed in to liquidation at the second creditors meeting, further investigations will be undertaken to consider these matters further Unfair loans An unfair loan is a loan agreement where the interest or charges are considered to be extortionate. Unfair loans made to a 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 note the only loan received historically was from the Parent Entity and no interest was charged. Based on our investigations, we have not identified any unfair loans entered into by the Company Unreasonable director-related transactions An unreasonable director-related transaction is a payment, conveyance or other disposition by a company of property to a director or close associate of the director. Furthermore, it is required that it may be expected that a reasonable person in the company s circumstances would not have entered into the transaction having regards to the benefits (if any) and detriment to the company of entering into the transaction. The transaction must have been unreasonable, and entered into during the four years leading up to the company s liquidation, regardless of the solvency at the time the transaction occurred. While the Former Director was not paid any remuneration or director fees, $688,066 was paid to MBP (a company which the Former Director is a Director) in the four years from 10 November 2012 to 9 November We have reviewed these transactions and they appear to be made in respect of tax and advisory services provided by the Former Director and MBP staff. On face value, there appears to be a commercial basis for these payments. Further, in the four years from 10 November 2012 to 9 November 2016, $14,505, was paid to the Parent Entity (of which the Director and Mr Natha were employed). These payments were recorded in the intercompany loan balance as wire transfers being surplus cash swept to the Parent Entity, in lieu of distribution of retained earnings. No dividends were paid during the period reviewed, despite the Company trading profitably throughout that time. The intercompany loan balance was also adjusted for FX, investor and corporate / overhead chargebacks but no physical payment appeared to occur specific to these amounts. Should the Company be placed in to liquidation at the second creditors meeting, further investigations will be undertaken to consider these matters further Circulating security interests A circulating security interest is voidable if the security interest was created during the six months ending on the relationback day, and the security interest was created to secure borrowings that were advanced prior to the creation of the security interest. We have conducted PPSR searches and note that there were no circulating security interests created in the six months prior to the relation back date Transactions for the purpose of defeating creditors A transaction by a company is voidable where a transaction is entered into for the purpose of defeating, delaying or interfering with the rights of any or all of its creditors. The transaction must have occurred at a time when the company was insolvent, or the company must have become insolvent as a result of the transaction, and have occurred within ten years of the date of the commencement of the winding up. A transaction can only be considered voidable if the company was insolvent at the time the transaction took place, or the company became insolvent as a result of the transaction. Based on our preliminary investigations, we have not identified any transactions that appear to have been entered in to for the purpose of defeating creditors. Should the Company be placed in to liquidation at the second creditors meeting, further investigations will be undertaken to consider these matters further. 27

29 Funding to pursue voidable transactions Voidable transactions can only be pursued in a liquidation and further investigation and any subsequent proceedings will incur significant costs. Furthermore, there is no certainty that pursuing these transactions would result in funds being returned to the Company. Funding may be required from creditors or litigation funders should the Liquidators (if appointed) seek to commence such action Director and officers responsibilities Sections 180 to 184 of the Act sets 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 the 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. We confirm that these duties extend to parties acting in the position of a director whose instructions or wishes are accustomed to be acted upon (i.e de-facto or shadow directors). At this stage, we have not identified any matters that cause concern surrounding the discharge of the director s duties and responsibilities under the Act. The Administrators will give further consideration to the Director and Former Director s discharge of their duties if the Company is wound up Offences Pursuant to Section 438D of the Act, if we become aware of a possible offence(s) under the Act committed by the officers of the Company, we are required to report these offences to ASIC. The Administrators are only able to investigate the affairs of the Company. Previous company failures are monitored by ASIC, and ASIC have the power to disqualify persons from managing corporations if, within a period of seven years, the person has been an officer of two or more company failures. In the event that the Company is wound up, we will conduct further investigations into any breaches by the Director and Former Director of the Company. If that investigation reveals that possible offences have been committed, we will be obliged to report these breaches to ASIC pursuant to Section 533 of the Act. 28

30 12 Alternative courses of action As Administrators, we are required to provide creditors with a statement of our opinion about each of the courses of action in respect of which creditors are entitled to vote at the second meeting convened for 13 December The matters requiring our opinion are: whether it would be in the creditors interests for the administrations to end, with control of the Company reverting to the Director; or whether it would be in the creditors interests for the Company to execute a DOCA; or whether it would be in the creditors interests for the Company to be wound up. In addition, creditors are entitled to adjourn the meeting for up to 45 business days Administration to end Creditors may consider ending the administrations and returning the control of the Company to its Director. We do not believe this to be a commercially viable option, given the Company is currently without sufficient funds to meet creditor liabilities, and therefore insolvent. If control of the Company was returned to its Director, he would resume control of the Company s assets and be able to deal with them as he deems appropriate. This would place the Company in a similar position to that existing prior to the appointment of the Voluntary Administrators (noting that the Company s ability to trade is severely restricted). In our opinion, it is not in the best interests of creditors to vote for the administration to end Deed of Company Arrangement A DOCA is a binding arrangement between a company and its creditors governing how the company s affairs will be dealt with. It aims to maximise the chances of the company, or as much as possible of its business, continuing, or to provide a better return for creditors than an immediate winding up. A DOCA binds all unsecured creditors, even if they voted against the proposal. To date, no DOCA proposal has been forward to the Administrators for their consideration. As such, there is no DOCA proposal on which the Administrators can report or provide an opinion on, or on which creditors can vote. As no DOCA has been proposed, it is not possible for creditors to vote in favour of a DOCA The company to be wound up Given that American Apparel Australia is insolvent or will become insolvent once contingent creditors claims are crystallised, and that no DOCA has been proposed, the Administrators recommend that creditors vote in favour of the Company being placed into liquidation. The liquidation of the Company would involve: realisation of remaining available assets; the completion of a more detailed investigation into the affairs of the Company and the conduct of its Director and Former Director; further enquiries with regard to potential insolvent trading and voidable transaction actions; reporting to ASIC in relation to offences (if any) committed by the Director of the Company; and adjudication of creditor claims and payment of dividends. The costs of administering the liquidation would depend to a large extent on the nature of further investigations in relation to voidable transactions and other recovery actions. In our opinion, it is in the best interests of creditors to vote for the Company to be wound up. Accordingly, based on the analysis outlined above, our overall recommendation is that creditors resolve for the Company to be wound up. 29

31 12.4 Anticipated return to creditors Our current estimate of the return available to creditors and shareholders on a high and low basis under a liquidation scenario is set out below. American Apparel Australia Pty Limited - Estimated return to creditors in a liquidation Particulars High $ Low $ Assets Cash on hand 4,020 4,020 Cash at bank 777, ,694 Clearing account 67,339 67,339 Inventory 750, ,000 Deposit recoveries 15,000 - Loan recoveries 898,882 - Plant and equipment 2,000 - Other recoveries Unknown Unknown less costs GST payable (101,418) (44,145) Income tax payable Unknown Unknown Legal costs (15,000) (20,000) Other trading costs (40,000) (60,000) Employee wages and on costs (75,000) (100,000) Rent (100,000) (120,000) Contingency (25,000) (50,000) Administrators' fees to 2 December 2016 (199,437) (199,437) Estimated Administrators' fees and disbursements from 3 December 2016 (30,000) (40,000) Estimated future Liquidators' fees and disbursements from 14 December 2016 (70,000) (120,000) Amount available for unsecured creditors 1,859, ,471 Employee entitlements (72,000) (62,000) Estimated return to priority creditors 100.0% 100.0% Amount available for ordinary unsecured creditors 1,787, ,471 Unsecured creditor claims (2,000,000) (2,000,000) Estimated return to ordinary unsecured creditors 89.4% 14.2% Residual funds available to shareholders Nil Nil Source: McGrathNicol calculations Creditors should note that the above estimates are preliminary only and are subject to change as creditor claims are considered and adjudicated and assets are better understood. No warranty as to the accuracy or reliability of this estimate is provided. Key points: In both the high and low liquidation scenarios, there is expected to be a shortfall on the return available to unsecured creditors and no funds available for shareholders of the Company (subject to any third party recoveries). Cash on hand / Cash at bank is based on cleared funds held at close of business on 4 December The high scenario includes the full recovery of the intercompany loan and recovery of the Australia Post bank guarantee but no recoveries from the other bank guarantees / deposits. The low scenario assumes no recoveries from the intercompany loan nor bank guarantees / deposits. 30

32 The estimates do not include any specific recoveries from voidable transactions at this time as we regard the likelihood of any recovery being made as low. It is expected that income tax will be payable by the Company. At this date, it is unknown what this amount will be and whether there are any tax losses which may reduce this. Any income tax liability will reduce the available funds for distribution to creditors. It is expected that there will be sufficient funds to meet employee entitlements claims in full. In the event the Company has insufficient funds to meet preferential employee entitlements claims in full, under a liquidation scenario, employees would gain access to FEG, allowing them to claim reimbursement of any outstanding entitlements (subject to FEG approval and excluding unpaid superannuation). In those circumstances, FEG would have a right of subrogation in relation to any employee claim paid. 31

33 13 Creditor information on remuneration Appendix H of this report deals with remuneration incurred to date and future remuneration required to deal with the remainder of the administration of the Company (and the liquidation of the Company, depending on the outcome of the meeting of creditors convened for 13 December 2016). ARITA has issued an Approving remuneration in external administrations information sheet providing general information for creditors on the approval of an External Administrators fees in a liquidation scenario, a voluntary administration or a DOCA. This information sheet is available from the ARITA website ( If you are unable to access this website, please contact Johnathon Tawil on (02) to obtain a copy. 32

34 14 Receipts and Payments A summary of receipts and payments for the Company from 9 November 2016 to 25 November 2016 is included as Appendix J. Funds in the Administrators bank account total $645, as at 25 November

35 15 Committee of inspection In the event that creditors resolve that the Company be wound up, the Act provides that a Committee of Inspection ( COI ) may be formed. In these circumstances, a COI would provide the Liquidators with a sounding board as to likely creditor views on any contentious issues, and may approve certain matters (for example compromises of claims and remuneration requests). At the meeting of creditors convened for 13 December 2016, creditors will be invited to consider whether a COI should be formed, and if so, to nominate members. 34

36 16 Creditor meeting details The second statutory meeting of creditors have been convened to be held at McGrathNicol s offices, Level 12, 20 Martin Place, Sydney NSW 2000 on Tuesday, 13 December 2016 at 3:00pm. Creditors who have already lodged a proof of debt form do not need to complete a new proof. Under the Act, the proxy forms lodged by creditors for the first meeting cannot be used for the second meeting. Accordingly, creditors who are unable to attend the meeting and wish to be represented, as well as corporate creditors, should ensure that a proxy form, power of attorney or evidence of appointment of a company representative is completed. Documents may be lodged with our office prior to the meeting or may be brought to the meeting. A formal notice of meeting, proof of debt form and proxy form are enclosed with the accompanying circular to creditors. Should you wish to attend this meeting via teleconference, please notify Johnathon Tawil on or before Monday, 12 December If you have any further queries in relation to this report or the administration, please do not hesitate to contact Mr Tawil on (02) Dated: 6 December 2016 Jason Preston Joint and Several Administrator 35

37 APPENDIX A: Declaration of Independence, Relevant Relationships and Indemnities

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