If you are attending in person, you should arrive for registration at least fifteen (15) minutes prior to the meeting.

Transcription

1 28 July 2015 TO CREDITORS Dear Sir/Madam Wendy s Supa Sundaes Pty Ltd (Administrators Appointed) ACN ( the Company ) We refer to our appointment as Voluntary Administrators of the Company on 2 July 2015 pursuant to Section 436A of the Corporations Act 2001 ( the Act ). Please find enclosed our report to creditors pursuant to Section 439A(4)(a) of the Act. We are now in a position to convene the second meeting of creditors of the Company in order to determine the Company s future. We enclose the following with respect to the meeting of creditors. 1. Notice of Meeting. Please note that the meeting (chaired in Adelaide) will be held at the offices of Ferrier Hodgson in Adelaide, Brisbane, Melbourne, Perth and Sydney on Thursday, 6 August 2015 as detailed below: Location Ferrier Hodgson, Adelaide Level 6, 81 Flinders Street, Adelaide Ferrier Hodgson, Brisbane Level 7, 145 Eagle Street, Brisbane Ferrier Hodgson, Melbourne Level 43, 600 Bourke Street, Melbourne Ferrier Hodgson, Sydney Level 13, 225 George Street, Sydney Ferrier Hodgson, Perth Level 28, 108 St Georges Terrace, Perth Commencement Time (Local time) 11:00am 11:30am 11:30am 11:30am 9:30am If you are attending in person, you should arrive for registration at least fifteen (15) minutes prior to the meeting. If you are unable to attend in person, you may attend the meeting via telephone by dialling in as follows:

2 To the Creditor as Addressed 28 July 2015 Page 2 Telephone Number: Meeting Number: *814957* 2. Formal Proof of Debt form for voting purposes. If you submitted a Proof of Debt form for the purposes of the first meeting of creditors, you do not need to submit another one for this meeting unless you seek to amend your claim. A person is not entitled to vote at the meeting unless they provide particulars of the debt or claim to the Administrators before the meeting. Please note this form is for voting purposes only. All creditors must furnish full details of their claim, indicating whether they rank as secured, preferential or unsecured, and whether they claim title to any goods supplied to the Company or any lien/pledge over goods in their possession which are property of the Company. 3. Appointment of Proxy form. The form enables you to appoint another person to act on your behalf at the meeting. Proxy forms submitted for the first meeting of creditors are not valid for this meeting and so to be eligible to vote at the second meeting you must complete and lodge the attached Proxy form. The Proof of Debt form and Appointment of Proxy Form should be lodged with the Ferrier Hodgson Adelaide office by no later than 4:00pm on the business day prior to the meeting. Forms can be sent by facsimile on (08) marked to the attention of Jack Heithersay or scanned and ed to jack.heithersay@fh.com.au. However, Corporations Regulation A requires lodgement of the original of the proxy form with the Administrators office within 72 hours of lodging the faxed copy. Please note that a corporation may only be represented by proxy or by an attorney appointed pursuant to Corporations Regulation and respectively or, by a representative appointed under Section 250D of the Corporations Act. 4. Administrators Report to creditors pursuant to Section 439A(4)(a) of the Act which includes an opinion, with supporting reasons, on each of the following matters: 1) Whether it would be in the creditors interest for the Company to execute a Deed of Company Arrangement ( DOCA ); or 2) Whether it would be in the creditors' interests for the administration to end; or 3) Whether it would be in the creditors' interests for the Company to be wound up.

3 To the Creditor as Addressed 28 July 2015 Page 3 The second creditors meeting can be adjourned for up to 45 business days. At the time of issuing this letter no formal DOCA proposal has been received. However, on 27 July 2015, we received a letter from solicitors acting for related parties of the Company, including Supatreats Australia Pty Ltd, requesting an adjournment of the second meeting of creditors for up to three weeks to enable a formal DOCA proposal to be formulated. We recommend that the second meeting of creditors be adjourned for three weeks to allow the DOCA proponents to formulate and submit a final proposal for a DOCA. In the absence of a formal DOCA proposal, the only option available is to place the Company into liquidation. Please refer to our Section 439A report for further commentary in respect of the above. Administrators Remuneration The Administrators Remuneration Report, which is attached as Annexure C of the Section 439A report, includes detailed schedules explaining the remuneration and setting out a summary of the work undertaken to date, and expected to be undertaken up to the second meeting of creditors on 6 August 2015, by the Administrators and their staff. For further information concerning the Voluntary Administration process or Ferrier Hodgson, you may wish to visit our website at Should you have any queries in relation to the administration or the enclosed Section 439A report, please do not hesitate to contact Tara Martin or Jack Heithersay of this office on (08) Yours faithfully Wendy s Supa Sundaes Pty Ltd (Administrators Appointed) MD Lewis & TD Mableson Joint and Several Voluntary Administrators Encl.

4 FORM 529 Corporations Act 2001 Subregulation (2) WENDY S SUPA SUNDAES PTY LTD (ADMINISTRATORS APPOINTED) ACN ( the Company ) NOTICE OF SECOND MEETING OF CREDITORS OF COMPANY UNDER ADMINISTRATION NOTICE is given that a second meeting of the creditors of the Company will be held on 6 August 2015 at the following locations and times:- Location Ferrier Hodgson, Adelaide Level 6, 81 Flinders Street, Adelaide Ferrier Hodgson, Brisbane Level 7, 145 Eagle Street, Brisbane Ferrier Hodgson, Melbourne Level 43, 600 Bourke Street, Melbourne Ferrier Hodgson, Sydney Level 13, 225 George Street, Sydney Ferrier Hodgson, Perth Level 28, 108 St Georges Terrace, Perth Commencement Time (Local time) 11:00am 11:30am 11:30am 11:30am 9:30am AGENDA 1. To consider and if thought fit approve the Administrators remuneration and any future remuneration of the Administrators. 2. To consider the Administrators report in relation to the Company s affairs and any other matters raised relating to the Company s future and then to resolve either that: (a) (b) (c) (d) the meeting be adjourned; or the Company execute a Deed of Company Arrangement; or the Administration should end; or the Company be wound up. 3. If it is resolved that the Company is wound up, to consider the appointment of an alternative liquidator(s). 4. If it is resolved that the Company is wound up, to consider whether a Committee of Inspection is to be appointed, and if so, the members of that committee. 5. Any other business that may be lawfully brought forward. Proxies to be used at this meeting must be lodged at the office of the Administrators by 4:00pm on the day prior to the meeting. A corporation may only be represented by proxy or by an attorney appointed pursuant to Corporations Regulations and respectively or, by a representative appointed under Section 250D of the Corporations Act 2001.

5 In accordance with Subregulation (1) of the Corporations Regulations, creditors will not be entitled to vote at the meeting unless they have previously lodged particulars of their claim against the Company in accordance with the Corporations Regulations and that claim has been admitted, for voting purposes, wholly or in part. Parties attending by telephone do so at their own cost and are not entitled to be reimbursed for any costs in attending. Any creditors wishing to attend the meeting via telephone must dial in as follows:- Telephone Number: Meeting Number: *814957* DATED this 28 th day of July 2015 MD Lewis & TD Mableson Joint and Several Voluntary Administrators C/- Ferrier Hodgson Tel: (08) Fax: (08)

6 Form 535 Formal Proof of Debt or Claim (General Form) Corporations Act 2001 Regulation (2) Wendy s Supa Sundaes Pty Ltd (Administrators Appointed) ACN ( the Company ) Instructions: Please complete Sections A, B and C and submit to: Wendy s Supa Sundaes Pty Ltd (Administrators Appointed) C/- Ferrier Hodgson GPO Box 2558, ADELAIDE SA 5001 Tel: (08) Fax: (08) adelaide@fh.com.au * Strike out if inapplicable. A. Name and Contact Details of Creditor (the Creditor) (if in a personal capacity, given name and surname; if a corporate entity, full name of company, etc) of (address) Tel: Fax: Tick this box to elect to receive electronic notification of notices or documents, in accordance with Section 600G of the Corporations Act 2001, at the address or fax number specified above. B. Details of Debt or Claim To the Administrators of the Company 1. This is to state that the Company was, on 2 July 2015, and still is justly and truly indebted to the Creditor for dollars (amount in words) and cents (inclusive of GST, if applicable).

7 Particulars of the debt are: Date Consideration 1 Net ($) GST ($) Total ($) Remarks 2 1. Under "Consideration" state how the debt arose, for example "goods sold and delivered to the company between the dates of...", "moneys advanced in respect of the Bill of Exchange". 2. Under "Remarks" include details of vouchers substantiating payment. 2. To my knowledge or belief the Creditor has not, nor has any person by the Creditor s order, had or received any satisfaction or security for the sum or any part of it, *except for: (insert particulars of all securities held. If the securities are on the property of the company, assess the value of those securities. If any bills or other negotiable securities are held, indicate refer attached above and show them in a schedule in the following form:) Date Drawer Acceptor Amount ($) Due Date 3. *I am employed by the Creditor / *I am the Creditor s agent *and authorised in writing by the Creditor to make this statement. I know that the debt was incurred for the consideration stated and that the debt, to the best of my knowledge and belief, remains unpaid and unsatisfied. C. Signature Dated: Signature: Name / Capacity # : # If the Creditor is an individual, insert full name If the Creditor is a sole trader, insert in accordance with the following example: full name, proprietor If the Creditor is a partnership, insert in accordance with the following example: full name, partner of the firm named in Section A above If the Creditor is a company, insert in accordance with the following example: full name, director / secretary / director/secretary of the company named in Section A above or under the hand of some officer duly authorised in that capacity, and the fact that the officer is so authorised must be stated in accordance with the following example: full name, for the company named in Section A above (duly authorised under the seal of the company). Where this form is completed by, for example, a solicitor or accountant of the Creditor, sign this form as the Creditor s authorised agent; where this form is completed by an authorised employee of the Creditor, indicate occupation (eg: credit manager, etc).

8 Form 532 Appointment of Proxy Corporations Act 2001 Regulation Wendy s Supa Sundaes Pty Ltd (Administrators Appointed) ACN ( the Company ) Instructions: Please complete Sections A, B, C and D and submit in accordance with the Section E. * Strike out if inapplicable. A. Name and Contact Details of Person or Entity Entitled to Attend Meeting (if entitled in a personal capacity, given name and surname; if a corporate entity, full name of company, etc) of (address) Tel: Fax: B. Appointment of Person to Act as Proxy Note: You may nominate the Chairperson of the meeting as your proxy (or your alternate proxy in the event that the first-named proxy is not in attendance). *I / *We, as named in Section A above, a *creditor / *contributory / *debenture holder / *member of the Company, appoint (name of person appointed as proxy) (address of person appointed as proxy) or in his / her absence (name of person appointed as alternate proxy) (address of person appointed as alternate proxy) as *my / *our proxy to vote at the meeting of creditors to be held on 6 August 2015 as outlined in the Notice of Meeting dated 28 July 2015, or at any adjournment of that meeting in accordance with the instructions in Section C below.

9 C. Voting Instructions Note: A general proxy is entitled to vote on any resolution, subject to Regulation of the Corporations Regulations 2001, as they see fit at the meeting tick the general proxy box. A special proxy in entitled to vote only in accordance with your specific instructions tick the special proxy box and indicate your specific voting instructions by ticking one option only for each resolution for which you wish to give such instructions. Your proxy may act as both a special proxy, in accordance with your instructions in relation to specific resolutions, and as a general proxy, in relation to resolutions where you have not issued specific instructions tick both the general proxy and special proxy boxes. Your proxy will then be authorised to vote specifically in accordance with your instructions in relation to those resolutions where specific instructions have been given, and generally in relation to resolutions where no specific instructions have been given, and other business of the meeting. *My / *Our proxy, as named in Section B above, is entitled to act as *my / *our : general proxy, to vote on *my / *our behalf generally, as *he / *she determines, subject to any specific instructions below, if applicable. and / or special proxy, to vote on *my / *our behalf specifically, in accordance with the following special instructions: (for each resolution for which you wish to give specific voting instructions, please tick one option only) Resolutions Future of the Company For Against Abstain 1. A resolution that the meeting be adjourned for three weeks to enable a formal Deed of Company Arrangement proposal to be formulated. 2. A resolution that the Company execute a Deed of Company Arrangement, under Part 5.3A of the Corporations Act, in the same form as the proposal statement which accompanies the notice of meeting (Note: currently no formal DOCA proposal has been received). 3. A resolution that the Administration should end. 4. A resolution that the Company be wound up. Resolutions Remuneration For Against Abstain 1. That the remuneration of the Voluntary Administrators as set out in the Remuneration Approval Request Report dated 28 July 2015, for the period from 2 July 2015 to 28 July 2015 be fixed in the amount of $240,996.25, plus any applicable disbursements and GST, and the Voluntary Administrators can draw the remuneration as required.

10 2. That the remuneration of the Voluntary Administrators as set out in the Remuneration Approval Request Report dated 28 July 2015, for the period from 29 July 2015 to 6 August 2015 be fixed in the amount of $30,000, plus any applicable disbursements and GST, and the Voluntary Administrators can draw the remuneration as required. Resolutions Other Liquidation Resolutions (if required) For Against Abstain 1. That an alternative liquidator(s) be appointed. 2. That a Committee of Inspection be appointed, the members of which are to be determined by the meeting. D. Signature Dated: Signature: Name / Capacity # : # If an individual, insert full name If a sole trader, insert in accordance with the following example: full name, proprietor If a partnership, insert in accordance with the following example: full name, partner of the firm named in Section A above If a company, pursuant to Regulations and A of the Corporations Regulations 2001, it may only be represented by proxy or attorney respectively, or by a representative appointed under Section 250D of the Corporations Act The document appointing the proxy, attorney or representative must be in executed in accordance with Section 127 of the Corporations Act 2001, in which instance, insert in accordance with the following example: full name, director / secretary / director/secretary of the company named in Section A above or under the hand of some officer duly authorised in that capacity, and the fact that the officer is so authorised must be stated in accordance with the following example: full name, for the company named in Section A above (duly authorised under the seal of the company) a copy of authority / power of attorney is to be annexed.

11 Certificate of Witness (to be completed only in special circumstances see below) This certificate is only to be completed only if the person giving the proxy is blind or incapable of writing. The certificate of the creditor, contributory, debenture holder or member must not be witnessed by the person nominated as proxy. I (name of witness) of (address of witness) certify that the above instrument appointing a proxy was completed by me in the presence of and at the request of the person appointing the proxy and read to him/her before he/she signed or marked the instrument. Dated: Signature: E. Submitting the Proxy For a person to be eligible to attend and vote at the meeting on your behalf, this form is to be completed and submitted by no later than 4:00pm (Adelaide time) on 5 August 2015 to: Wendy s Supa Sundaes Pty Ltd (Administrators Appointed) C/- Ferrier Hodgson GPO Box 2558, ADELAIDE SA 5001 Tel: Fax: adelaide@fh.com.au Note: In accordance with Regulation A of the Corporations Regulations 2001, if a proxy is submitted by facsimile, the original document must be lodged within 72 hours after lodging the faxed copy.

12 Wendy's Supa Sundaes Pty Ltd (Administrators Appointed) ACN ("the Company") Report by the Administrators Pursuant to Section 439A(4)(a) of the Corporations Act MD Lewis and TD Mableson 28 July 2015

13 Table of Contents Section Page Statement by Administrators Executive Summary Purpose of the appointment and this report Basis of Report First Meeting of Creditors Second Meeting of Creditors Declaration of independence, relevant relationships and indemnities Company Information Statutory Information Incorporation date and registered office Historical Financial Information Preparation of financial statements Profit and loss statement and preliminary analysis Balance sheet and preliminary analysis Statement by Director Summary of Director s Statement for the Company Statutory Investigations Nature and Scope of review The Company s solvency Potential liquidator recoveries voidable transactions Summary of potential liquidator recoveries Potential Liquidator recoveries - insolvent trading Proposal for DOCA Creditors options, dividend estimate and cost estimate Company to execute a DOCA Administration to end Winding up Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015

14 8 Administrators opinion Administration to end DOCA Winding up of the Company Further queries Glossary of terms Annexure A B C ARITA Creditor Information Sheet Offences, Recoverable Transactions and Insolvent Trading Request for Adjournment of Second Meeting Administrators Remuneration Report Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015

15 Statement by Administrators In reviewing this Report, creditors should note: This Report is based upon our preliminary investigations to date. Any additional material issues that are identified subsequent to the issue of this Report may be the subject of a further written report and/or tabled and discussed at the second meeting of creditors. The statements and opinions given in this Report are given in good faith and in the belief that such statements and opinions are not false or misleading. We reserve the right to alter any conclusions reached based on any changed or additional information which may be provided to us between the date of this Report and the date of the second meeting (except where otherwise stated). In considering the options available to creditors and formulating our opinion and recommendation, we have necessarily made forecasts of asset realisations and total creditors claims based on our best assessment in the circumstances. These forecasts and estimates may change as asset realisations progress, we conduct further investigations, and we receive creditor claims and consequently the outcome for creditors might differ from the information provided in this Report. Creditors should consider seeking their own independent legal advice as to their rights and the options available to them at the second meeting of creditors. Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 2

16 1 Executive Summary The Wendy s brand was founded in South Australia in 1979 by Geoff Davis and Phil Rogers who started with one store in an Adelaide shopping centre. The franchise grew and the Company was incorporated in Over the last 35 years Wendy s built up a number of franchisee stores to have stores located in every state of Australia and the Northern Territory, with a total of over 200 stores in Australia and New Zealand. The Company acted as franchisor under a franchise structure which included the following franchise agreements: Australian Unit Franchise Agreements for individual franchisee stores in Australia; Multi-Unit Franchise Agreement for the On the Run outlets; and Master Franchise Agreement for New Zealand. The Company entered into the lease agreements for all stores (as head lessee) with the various landlords in respect of each individual franchise store in Australia (not applicable for the On the Run outlets). This is common practice amongst many franchise models. However, when a number of franchisees were unable or unwilling to meet the costs of the lease, or where franchise sites became vacant, the Company is responsible for the lease. Debts owing to lessors are a major reason for the Company s appointment of Voluntary Administrators. The Company s sole shareholder is Australian Retail Franchise Group Pty Ltd ( ARFG ), which is ultimately owned by Lamivest Sdn Bhd ( Lamivest ). On 31 August 2014 the Company and Innovation Ice Cream (IIC) Pty Ltd ( IIC ) entered into a Sale and Purchase Agreement with Global Food Retail Group Pte Ltd ( GFRG ) under which Wendy s and IIC s Intellectual Property ( IP ) was sold to GFRG for a purchase price of $10 million. GFRG is a subsidiary of the Singaporean listed entity, Global Yellow Pages Limited. On 10 September 2014 the sale completed and the Wendy s IP was assigned to GFRG. The sale of the Wendy s IP is discussed in detail in Sections and of this Report. Also on 31 August 2014, a Share Sale and Purchase Agreement was entered into between Isitola Ltd ( Isitola ) and Asia Food Retail Group Pte Ltd ( AFRG ) under which AFRG acquired Isitola s shares in Lamivest ( the Lamivest SPA ). The sale resulted in the Company re-organising its operations, including entering into a Services Agreement ( Services Agreement ) with Supatreats Australia Pty Ltd ( Supatreats Australia ) and being provided with an Intellectual Property Sub-Licence ( IPSL ) to continue to utilise Wendy s IP. On 25 June 2015, citing an Insolvency Event as having occurred on 2 February 2015 which was not remedied, Supatreats Australia terminated the Services Agreement. We have been informed that the termination of the Services Agreement immediately caused the IPSL to be terminated, and that this has resulted in any right the Company had to utilise the Wendy s IP ceasing. Following the events referred to above we understand that on 26 June 2015 one hundred and forty one franchise agreements were assigned to Supatreats Australia. The Company has had a number of different directors since its incorporation in 2006, with the Company s current Director, Mr Peter D Alfonso, being appointed as the sole Director on 15 May 2015 (ie only six weeks prior to our appointment as Administrators). After conducting a Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 3

17 review of the Company s financial position including its liabilities to various landlords and the termination of the IPSL, it became apparent to the Director that the Company was insolvent and it was appropriate to appoint Voluntary Administrators to the Company. The Director appointed us as Voluntary Administrators of the Company on 2 July Creditors ratified our appointment as Administrators of the Company at the first meeting of creditors held on 14 July Creditors also elected the following creditors to a Committee of Creditors: Creditor BAM (209) Investments Pty Ltd ( BAM ) Supatreats Australia, IIC, AFRG & ARFG Petra Weiss Representative Kim Baker Justin Courtney (and/or nominee) Peter Coventry On our appointment the Company owned and operated five stores located at Bay City (Geelong), Dandenong, Karratha, Alice Plaza and Marion. We ceased trading these five stores immediately following our appointment with the staff employed at these stores having their employment with the Company terminated effective 2 July We have corresponded with landlords of both the assigned and non-assigned franchisee stores advising of the Company s Intention Not to Exercise Property Rights pursuant to Section 443B(3) of the Act. We have also corresponded with both the assigned and non-assigned franchisees to advise them of their respective positions and put them on notice that:- The continued use of the Wendy s IP by the non-assigned franchisees, including its branding, may result in an infringement of intellectual property rights; and Asserting any rights in relation to the premises from which they are trading would be done so at their own risk and neither the Company nor the Voluntary Administrators personally accept any liability with respect of same. All landlords and franchisees should obtain their own independent legal advice regarding the above issues. We have carried out preliminary investigations into the Company s affairs in order to determine whether there are any claims that may be available to a liquidator should the Company be wound up at the second meeting of creditors. These investigations, whilst preliminary in nature given the time constraints of the voluntary administration process, are necessary to assist in formulating our opinion as to what is in the creditors best interests. The main issues arising from our investigations to date into the Company s affairs are: It is our preliminary determination that the Company was likely insolvent at some stage between 9 February 2015 and 26 June This is discussed further in Section 5.2 of this Report. However, further investigation may result in the Administrators re-evaluating their view. Such further investigations would be conducted in the event that the Company is placed into liquidation. Given the above, there may, subject to legal advice, be the potential for recoveries from transactions which are deemed to be voidable and which occurred on or after 9 February Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 4

18 2015. There is no guarantee that a Liquidator would recover funds in pursuing such a claim(s) or that the costs of pursuing such a claim(s) would not outweigh any benefit to creditors from any recovery that could be made. Supatreats Australia, IIC, AFRG and ARFG ( the DOCA Proponents ) provided us with an indicative Deed of Company Arrangement ( DOCA ) proposal on 27 July 2015 which is discussed in Section 6 of this Report. In order that the DOCA Proponents can formalise the proposal for creditors to properly consider and vote upon, it is our view that it is appropriate to adjourn the second meeting of creditors for three weeks. An adjournment of the meeting will enable us to progress our investigations and consider and report on the final DOCA proposal from the DOCA Proponents. We recommend that the second creditors meeting be adjourned for a period of three weeks to allow the DOCA Proponents to submit a final proposal for a DOCA. Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 5

19 1.1 Purpose of the appointment and this report The purpose underlying an Administrators appointment is to allow for the independent control and an investigation of an insolvent company s affairs. During the administration period, creditors claims are put on hold. We are required to provide creditors with information and recommendations to assist creditors to decide on the future of the Company. Section 439A(4) of the Act explains the purpose of an Administrators' report in providing that the notice (of a second meeting) must be accompanied by a copy of: a) A report by the Administrator about the company s business, property, affairs and financial circumstances; and b) A statement setting out the Administrators' opinion about each of the following matters: o o o o Whether it would be in the creditors interest for the company to execute a Deed of Company Arrangement; or Whether it would be in the creditors interest for the administration to end; or Whether it would be in the creditors interest for the company to be wound up; and His or her reasons for those opinions; and c) If a Deed of Company Arrangement is proposed a statement setting out details of the proposed deed. 1.2 Basis of Report This Report has been prepared primarily from information received from the Director, the Company s former solicitors, Supatreats Australia (who were performing the Company s obligations to the franchisees pursuant to the terms of a Services Agreement commencing 1 January 2015) and the Company s books and records. Whilst the Administrators have conducted certain preliminary investigations into the affairs of the Company, there may be matters which we are unaware of at the date of this report as an audit of the Company has not been undertaken. In order to complete this Report we have also utilised information from: Australian Securities and Investments Commission ( ASIC ); Personal Property Securities Register ( PPSR ); The Company s book and records; The Director of the Company, particularly the statement of assets and liabilities and questionnaire for the Company he completed which was received by us on 10 July 2015; The Transaction Documents for the sale of the Wendy s IP and the sale and purchase of the shares in Lamivest; Discussions and meetings with Supatreats Australia s Directors, management and staff; Discussions with former employees of the Company; Discussions and correspondence with the Company s former solicitors; Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 6

20 Discussions and meetings with Supatreats Australia s solicitors; Discussions with the first ranking secured creditor of the Company, National Australia Bank ( NAB ); Discussions and correspondence with assigned and non-assigned franchisees; Discussions and correspondence with landlords; Discussions and meeting with Shahin Enterprises Pty Ltd ( Shahin Enterprises ) and their solicitors in relation to the Multi Unit Franchise Agreement for the On the Run outlets; Correspondence with Cone Enterprises (New Zealand) Limited solicitors in relation to the Master Franchise Agreement for New Zealand franchises. Discussions and correspondence with unsecured creditors of the Company; and Other public databases. 1.3 First Meeting of Creditors Creditors attended a first meeting of creditors of the Company which was held at Cliftons meeting venues in each capital city across Australia but chaired from Adelaide. At that meeting, creditors ratified our appointment as Administrators of the Company. Creditors also resolved to appoint a Committee of Creditors for the Company consisting of Kim Baker representing BAM, Justin Courtney and/or nominee representing Supatreats Australia, IIC, AFRG and ARFG and Peter Coventry representing Petra Weiss. 1.4 Second Meeting of Creditors Pursuant to Section 439A of the Act, the second meeting of creditors of the Company is convened for Thursday, 6 August 2015 and will be held at the following locations (but chaired from Adelaide): Location Ferrier Hodgson Adelaide Level 6, 81 Flinders Street, Adelaide SA 5000 Ferrier Hodgson Brisbane Level 7, 145 Eagle Street Brisbane QLD 4000 Ferrier Hodgson Melbourne Level 43, 600 Bourke Street, Melbourne VIC 3000 Ferrier Hodgson Sydney Level 13, Grosvenor Place, 225 George Street Sydney NSW 2000 Ferrier Hodgson Perth Level 28, 108 St George s Terrace Perth WA 6000 Commencement Time (Local time) 11.00am 11:30am 11:30am 11:30am 9:30am At the second meeting, creditors will decide the Company s future by voting on one of the following options: That the Company execute a DOCA; or Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 7

21 That the administration should end and control of the Company reverts back to its Director; or That the Company should be wound up. Alternatively, creditors are able to adjourn the second meeting of creditors for a period of up to 45 business days to allow further time for the Administrators to conduct further investigations or attend to outstanding issues, including consideration of any final DOCA proposal, if such is considered desirable. 1.5 Declaration of independence, relevant relationships and indemnities A Declaration of Independence, Relevant Relationships and Indemnities ( the Declaration ) was prepared for the Company and provided to creditors with our first circular to creditors dated 3 July The Declaration was also tabled at the first meeting of creditors. There has been no change to the Declaration since it was first issued to creditors on 3 July Company Information 2.1 Statutory Information A search of the ASIC database has revealed the following information: 2.2 Incorporation date and registered office The Company was incorporated on 16 May The registered office is listed as Innovation Ice Cream (IIC) Pty Ltd, 36 Popes Road, Keysborough VIC Company officers The officers for the Company over the past 12 months are summarised below: Name Role Appointment Date Cessation Date D Alfonso, Peter Director 15 May 2015 Current Angseesing, Louis Jean Mee Secretary 26 November 2014 Current Lucas, Blair Andrew Director 26 November May 2015 Yeo, Cheng Boon Director 10 September November 2014 Lau, Chi Ming Secretary 5 July November 2014 McKay, Robert Jeremy Director 5 July October 2014 Octoman, Michael John Director 7 July September 2014 A search of the National Personal Insolvency Index maintained by the Australian Financial Security Authority shows that the Director is not bankrupt nor subject to a Personal Insolvency Agreement under Part X of the Bankruptcy Act Shareholders The Company s ownership structure is depicted at The ASIC database discloses the current and previous shareholder of the Company to be: Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 8

22 Current Shareholder per ASIC Shareholder Class Number of Shares Paid ARFG Ordinary 100 $100 Previous Shareholder per ASIC Shareholder Class Number of Shares Paid Subscriber 1 Pty Limited Ordinary 1 $ Personal Property Securities Register ( PPSR ) A search of the ASIC database has revealed the following security interests were registered with the PPSR over various assets and undertakings of the Company: Security Holders Collateral Types Number of Registrations Note NAB All PAAP No Exceptions 3 1 Isitola All PAAP No Exceptions 1 2 Gracemere Shoppingworld Pty Ltd ( Gracemere ) Quest Payment Systems Pty Ltd ( Quest ) Other Goods 1 3 Other Goods 2 3 Bidvest Australia Limited ( Bidvest ) Other Goods 1 3 Note 1 NAB As at the date of our appointment, NAB had three registered general security interests over all of the assets of the Company and was the first ranking secured creditor. The reason for the NAB registrations is largely historical, as prior to the sale which completed on 10 September 2014, NAB had been the primary financier for ARFG, IIC and the Company ( the Wendy s Group ). The sale resulted in $7.458 million being returned to NAB which we understand paid out all the Wendy s Group NAB banking facilities except for the NAB bank guarantee facility. NAB retained an additional approximately $420,000 on settlement in a term deposit to cover the outstanding bank guarantees issued to landlords for leases entered into by the Company prior to settlement. On our appointment, NAB advised that the unpresented bank guarantees issued by the Company had reduced to approximately $222,000, still secured by equivalent funds held in a term deposit. As bank guarantees continue to be presented, this figure will reduce further. Following our appointment, we provided notice to NAB pursuant to Section 450A(3) of the Act which allows a secured creditor to appoint a Receiver or Receiver and Manager at any time within the "Decision Period" (with the Decision Period being a period of 13 business days following our appointment). Given the NAB bank guarantee facility is fully secured by equivalent funds held in a term deposit, NAB has decided not to exercise its rights by enforcing its securities. Note 2 Isitola According to ASIC searches, the Company s second ranking secured creditor is Isitola. This entity is related to the Company s previous ultimate owner Navis Capital. There was a debt 8 Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 9

23 due to Isitola by ARFG of approximately $13.1 million at the date of the Lamivest SPA. There was no direct debt owing by the Company to Isitola other than we understand the Company was a guarantor of the ARFG debt to Isitola. Pursuant to the terms of the Amendment Deed to the Lamivest SPA this debt was forgiven. We note that, in addition to the above loan, there was also a loan from Isitola to Lamivest in the amount of US$15,499,452 which was also forgiven pursuant to the terms of the Amendment Deed to the Lamivest SPA. Following our appointment, we provided notice to Isitola pursuant to Section 450A(3) of the Act as Isitola s general security interest was still registered on the PPSR notwithstanding we understand any debt owed to Isitola had been forgiven. We have sought details from Isitola with regards to its debt (if any) and security interest (if any over the Company), however, at the date of this Report no response has been received from Isitola. Note 3 Other Goods We provide a brief summary of the three other parties with registered security interests on the PPSR in respect of the Company: Bidvest was a supplier which provided the Company with stock for its Company Owned and Company Operated ( COCO ) stores. Bidvest have lodged a Proof of Debt for $25,319. Given the cost of realising any stock from the COCO stores was greater than the value of the stock, the Company and the Administrators have not taken possession of any stock and Bidvest has not sought to claim its security interest. Gracemere was a landlord of the Company s leased Gracemere store. Gracemere have submitted a Proof of Debt in the amount of $218,295 for outstanding lease commitments, which includes amounts due to the end of the term of the lease. We are unsure under what basis Gracemere has a registered security interest. Further information has been sought from Gracemere in this regard. Quest supplied five EFTPOS terminals to various stores (three of these stores have been assigned to Supatreats Australia). Quest has not submitted a Proof of Debt at the date of this report nor sought to claim its security interest, however, we understand that approximately $3,000 is owed by the Company to Quest Winding up applications In or around December 2014, following the sale of the Wendy s IP, the Company relocated its head office from its leased premises on Fullarton Road in South Australia to Melbourne. The Fullarton Road lease had over four more years to run. The landlord of the Fullarton Road premises, BAM, has submitted a Proof of Debt in the amount of approximately $594,000 in respect of that lease (eg rent and unexpired lease obligations). However, from subsequent conversations with BAM we understand this debt to be approximately $530,000. On 30 June 2015 BAM filed an Application to Wind Up the Company in the Federal Court of Australia ( the Court ). The first directions hearing for this application is due to be heard by the Court on 29 July We have instructed our solicitors to attend this hearing to represent the Company and seek an adjournment of that application on the basis that there is a voluntary administration in process. Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 10

24 2.2.5 Company history The Company was incorporated on 16 May 2006 and owned and operated the Wendy s IP and franchise system from that date. The Company has had a number of different Directors since its incorporation, with the Company s current Director, Peter D Alfonso, being appointed as the sole Director on 15 May 2015 (ie only six weeks prior to our appointment as Administrators). The Company s sole shareholder is ARFG which is ultimately owned by Lamivest Rights to the Wendy s IP Prior to the sale, the Company and IIC owned the Wendy s IP. This allowed the Company to grant access to the Wendy s IP, as it saw fit, to the various franchisees pursuant to the franchise agreements. However, the sale in September 2014 (discussed below at Section 2.2.7) resulted in the Wendy s IP being transferred to GFRG. This meant that from settlement the Company required authority from GFRG to be able to use the Wendy s IP. We have been informed that GFRG entered into a Master Intellectual Property Licence ( MIPL ) with Asia Food Retail Group Pty Ltd ( AFRG ) on 31 August 2014 which granted AFRG with the rights to use the Wendy s IP in Australia and New Zealand. The Company was subsequently granted access to the Wendy s IP through an undated Intellectual Property Sub- Licence ( IPSL ) between AFRG, GFRG and the Company which commenced on 1 January It is not clear of the agreement in place, if any, that provided the Company with access to act as head franchisor for the Wendy s IP for the period 10 September 2014 to 31 December We have queried this with GFRG but at the date of this Report have not received a response. It is possible that an informal licence existed for the duration of that period. Prior to the IPSL the Company was provided with the right to use the Wendy s IP to enable the Company to fulfil its obligations and duties under the following various franchise arrangements: 1. Australian Unit Franchise Agreements ( AUFA ) between the Company and individual franchisees, pursuant to which individual franchisees would operate Wendy s outlets in Australia. With respect to the AUFA s, it was typically the case that the Company entered into a lease with the lessor for the relevant premises and that the right of the franchisee to occupy and use the premises was provided by the Company pursuant to the AUFA. 2. A Multi-Unit Franchise Agreement ( MUFA ) between the Company and Shahin Enterprises Pty Ltd as Trustee for the Shahin Family Trust ( Shahin Enterprises ) dated 12 August 2013 pursuant to which Shahin Enterprises was obliged to open 50 Wendy s outlets in Shahin Enterprises On the Run stores by 31 October A Master Franchise Agreement ( MFA ) between the Company and Cone Enterprises (New Zealand) Limited ( Cone Enterprises ) dated 1 July 2014 pursuant to which the Company sought to expand Wendy s into New Zealand and empowered Cone Enterprises to provide the Wendy s IP to New Zealand franchisees. The Company also ran a small number of COCO stores directly that were not subject to any franchise agreements. A summary of the structure of the IP licences prior to and following the sale is as follows: Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 11

25 Wendy s IP- Prior to Sale The Company (Owner of the Wendy s IP) AUFA MUFA MFA Various Franchisees (Australia) Shahin Enterprises Cone Enterprises On the Run Outlets NZ Franchisees Wendy s IP - Post Sale GFRG (Owner of the Wendy s IP) MIPL IPSL AFRG The Company AUFA MUFA MFA Various Franchisees (Australia) Shahin Enterprises Cone Enterprises On the Run Outlets NZ Franchisees * 1 MIPL = Master Intellectual Property Licence * 2 IPSL = Intellectual Property Sub-Licence Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 12

26 On 7 October 2014 Supatreats Australia was incorporated. Supatreats Australia and the Company entered into a Services Agreement ( Services Agreement ) with effect from 1 January Pursuant to the Services Agreement, Supatreats Australia provided the franchisor services of the Company to the various Company franchisees in consideration for a management fee calculated at 95% of the gross annual income received by the Company or at least $2 million per annum. We have been told that around this time Supatreats Australia was provided with an intellectual property sub-licence, similar to that of the Company, which allowed it to use the Wendy s IP for the purposes of entering into franchise agreements direct with non-company franchisees. We have requested a copy of this sub-licence but have not been provided with same at the date of this Report. On 2 February 2015 the Company had a Judgment issued against it for an amount of $19, which was owed to a landlord of a franchisee operated store. This Judgment was not satisfied by the Company within the required seven days and was relied upon as an Insolvency Event (as defined) for the purpose of Supatreats Australia formally terminating the Services Agreement by written notice dated 25 June It was recorded in the subsequent Deed of Assignment (discussed further below at paragraph 2.2.8) that the termination of the Services Agreement caused the IPSL to be terminated. We consider these circumstances are relevant for the purpose of considering the Company s approximate date of insolvency as discussed in Section 5 below. This termination of the IPSL appears to have terminated any right the Company had to utilise the Wendy s IP. Notwithstanding this, we have to date, and to the extent possible, sought to preserve the Company s interest in any franchise agreements which may still be operative, and which do not appear to have been assigned to Supatreats, which in our view is consistent with the interests of the Company and its creditors IP and share sale to GFRG In August 2014 the Company and related entity, IIC, entered into a number of agreements to effect a sale of the Wendy s IP. We have now been provided with a copy of these agreements and confirm the structure of the sale to be as follows (collectively the Transaction Documents ):- a) Sale and Purchase Agreement ( IPSPA ) dated 31 August 2014 between the Company, IIC, GFRG and Isitola. The key terms of this agreement are as follows:- The Company and IIC sold to GFRG the IP including recipes, trademarks, domain and business names associated with the Wendy s brand for an amount of $10 million. This amount was largely paid to NAB which was a secured creditor of the Company at the time and which discharged the Company s indebtedness to NAB (although a bank guarantee facility continued cash backed by funds held on term deposit). It was a condition precedent to completion of the IPSPA that a separate Sale and Purchase Agreement ( Lamivest SPA ) between Isitola and AFRG was entered into for the sale and purchase of all of the shares in a Malaysian incorporated entity known as Lamivest. As at the date of the IPSPA, Isitola was the parent company of Lamivest. Lamivest was the parent company of ARFG. ARFG was the parent company of the Company and IIC. Pursuant to the Lamivest SPA we understand Isitola sold all shares in Lamivest to AFRG. Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 13

27 b) Deed of Assignment of (Australian) Trade Marks and Deed of Assignment of Software dated 10 September 2014 between the Company and GFRG pursuant to which the Company s Australian registered trademarks were assigned to GFRG. c) Deed of Assignment of (New Zealand) Trade Marks between the Company and GFRG pursuant to which the Company s New Zealand registered trademarks were assigned to GFRG pursuant to the IPSPA. In order to provide creditors with details of the sale we have prepared a diagram of the Wendy s Group structure prior to the sale and a diagram of the Wendy s Group structure following the sale. Wendy s Group Structure Prior to Sale Isitola 100% Lamivest 100% ARFG 100% 100% The Company IIC Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 14

28 Wendy s Group Structure Post Sale Global Yellow Pages Limited (ultimate parent entity) GFRG AFRG Supatreats Australia Holdings Pty Ltd Lamivest 100% Supatreats Australia ARFG 100% 100% The Company IIC The above group structure is for diagrammatic purposes only to provide creditors with an understanding of the Company s position within the group structure pre and post the IPSPA. We note that there are other entities in the structure, such as Supatreats Australia s related entities which are also owned by Supatreats Australia Holdings Pty Ltd, which are not depicted in this diagram. The sale settled on 10 September We note the following with respect the sale of the Wendy s IP generally:- On the basis of the information presently available to us, it does not appear that the Company was insolvent at or around the time the Transaction Documents were entered into or that it became insolvent because of entering into the Transaction Documents. This is further discussed at Section 3.3; The Company received $10 million in exchange for its IP, which was used primarily to discharge the Company s first ranking secured debt owed to NAB. On the basis of the information presently available to us, it does not appear that $10 million was inadequate consideration for the Company s IP or that the payment of the majority of that amount to NAB (as a secured creditor) amounted to an unfair preference; and The Transaction Documents appear to have been entered into on an arm s length basis, and followed a public campaign which marketed the Company s IP for sale over an extended period of time. Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 15

29 We have requested, and are yet to be provided with, a number of further documents and additional information which may be relevant to the transactions which were undertaken pursuant to the Transaction Documents. Subject to receiving and reviewing these further documents and additional information, and which we anticipate will likely be of minor importance, in the circumstances described above we consider that the sale of the Company s IP appears to have been undertaken on commercial terms and in a manner consistent with the interests of the Company Events following the termination of the Services Agreement and IPSL On 26 June 2015 the Company assigned approximately two thirds, based on store numbers, of the Company s franchise agreements to Supatreats Australia pursuant to a Deed of Assignment. There was no consideration paid by Supatreats Australia for this assignment. This Deed of Assignment and the details of this transaction is provided at Section Excluding the New Zealand Master Franchise Agreement (which was not assigned), our understanding of the stores assigned and non-assigned on 26 June 2015 is as follows:- Details Number of Stores Stores assigned to Supatreats Australia 141 Non-assigned stores - On the Run Trading Stores 32 - Other Franchisee Trading Stores 34 - Non-Trading Stores 22 - COCO Stores 5 Total Non-Assigned Stores 93 Total Stores 234 The above position continues to be fluid and will likely further change as we understand that Supatreats Australia continues to liaise directly with the various non-assigned franchisees in relation to potentially entering into a new franchise agreement direct with Supatreats Australia. In addition, we note that one of the COCO stores (which is discussed below) was sold prior to our appointment (but with settlement occurring post appointment) with the sale proceeds for the plant and equipment and goodwill paid to the Company. Supatreats Australia has engaged Lease1 to assist the assigned franchisees, and their respective landlords, in arranging new lease agreements which we understand is progressing. Lease1 has set up a dedicated hotline and address in this regard which was detailed in our previous circulars to both franchisees and landlords. As discussed at Section above, BAM filed an application in the Court on 30 June 2015 to wind up the Company. Based on our discussions with the Company s Director, the Company was dealing with a number of significant claims from landlords in relation to unpaid rent and unexpired lease obligations. The Application to Wind Up from BAM was anticipated to be the first of a number of potential applications from landlords. Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 16

30 Due to the termination of the IPSL and other potential significant landlord claims, the Director was of the view that the Company had no ability to satisfy the debt to BAM to discharge the Application to Wind Up. Consequently, the Director resolved that the Company was insolvent and appointed us as Administrators Summary of critical events To summarise the above, below is a timeline of the major events which we have either ascertained through the course of our investigations to date, or which we have been informed of and are subject to our ongoing investigations: From 1 July 2014 to 25 June & 2. IPSPA, Lamivest SPA and MIPL Executed 4. Supatreats Australia Incorporated 6. Services Agreement Effective 8. to Franchisees 31 August September October January February April Sale of IP Completed 5. IPSL Effective 7. Unsatisfied Judgment From 25 June 2015 to 2 July Deed of Assignment of Franchise Agreements 12. Appointment of VA 25 June June June July Termination of IPSL and Services Agreement 11. BAM Application to Wind Up Details of the major events are as follows: 1. On 31 August 2014 the Company, IIC, GFRG and Isitola enter the IPSPA. On the same date Isitola and AFRG entered into the Lamivest SPA. 2. We have been told that on 31 August 2014 GFRG entered into the MIPL with AFRG to use the Wendy s IP. 3. On 10 September 2014 the sale of IP to GFRG was completed. 4. On 7 October 2014 Supatreats Australia was incorporated. Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 17

31 5. Effective 1 January 2015 GFRG and AFRG entered the IPSL with the Company which provided the Company with the rights to use the Wendy s IP for the purpose of the various franchise arrangements. 6. We have been told that effective 1 January 2015 Supatreats Australia and the Company entered into a Services Agreement. 7. On 2 February 2015 the Company had a Judgment issued against it for $19, which was owed to a landlord of a franchisee operated store. On 9 February 2015 this Judgment became an Insolvency Event (as defined in the Services Agreement) as it had not been remedied within the required seven days. 8. On 27 April 2015 all franchisees of the Company were notified of Supatreats Australia appointment under the Services Agreement and that going forward, franchisees would receive invoices in respect of a management fee (in lieu of previous franchise/management fees invoice by the Company) from Supatreats Australia and not the Company. 9. On 25 June 2015 the Company received written notice from Supatreats Australia to the effect that it was terminating the Services Agreement by reason of the Company not satisfying the Judgment issued by 9 February This automatically triggered the IPSL being terminated. 10. On 26 June 2015 the Company entered into the Deed of Assignment of Franchise Agreements. 11. On 30 June 2015 BAM lodged an Application to Wind Up the Company in the Court. 12. On 2 July 2015 Martin Lewis and Tim Mableson were appointed Joint and Several Administrators of the Company. 3 Historical Financial Information Key comments Based on management accounts the Company:- Incurred a loss of $1.33 million for the period 1 July 2014 to 30 June Had negative net assets (including a working capital deficiency) for the period 1 July 2014 to 30 June Preparation of financial statements We understand that audited statutory financial statements have been prepared for ARFG, which includes the Company and IIC on a consolidated basis up to year ended 30 June 2014 ("FY14"). We contacted Ernst and Young to request a copy of these financial statements as the auditor of the Wendy s Group. Given that Ernst and Young were engaged by ARFG and not the Company, we have been advised that they are not in a position to provide us with these financial statements. We have also requested a copy of these financial statements from the Company but have not received them at the date of this Report. Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 18

32 In any event, it is unlikely that these financial statements will provide much insight into the Company s performance and position as they were being prepared on a group basis for ARFG. We have been provided with Company management accounts for various periods prior to our appointment. We have also received a copy of the Company s Attaché (accounting software) file. We previously advised our intention to forensically image the Company s server. However, we were advised that the previous server was transmitted to the cloud. We have issued a request to access the Company s information, which is being progressed. Please note that for the purposes of this Report we have not sought to audit or verify the financial information of the Company. 3.2 Profit and loss statement and preliminary analysis Set out below is a summary of the monthly profit and loss statement for the Company for the period 1 July 2014 to 30 June 2015: ($000s) Jul-14 Aug-14 (Pre- Sale) Revenue Sep-14 (Post- Sale) Oct-14 Nov-14 Dec-14 Franchise & Management Fees Sales Cost of Sales (125) (82) (72) (104) (90) (76) Gross Profit Other Income Expenses (632) (556) (677) (739) (579) (863) Net Profit / (Loss) (42) 18 (182) ($000s) Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 FY15 Revenue Franchise & Management Fees (609) ,162 Sales ,548 Cost of Sales (80) (51) (6) 8 (140) (64) (883) Gross Profit (601) ,828 Other Income 2 3 (5) Expenses (649) (561) (100) (142) (490) (185) (6,171) Net Profit / (Loss) (151) (142) (89) (742) (119) (79) (1,334) *Unaudited management accounts We make the following brief comments in relation to the above: The Company incurred a loss of $1.33 million over the period 1 July 2014 to 30 June 2015, which is predominantly attributable to the cumulative losses incurred by the Company following effecting the Services Agreement (ie after 1 January 2015). Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 19

33 The sale of the Company s IP to GFRG, in the short term, had a minimal effect on the franchise/management fees collected by the Company until February/March This corresponds with Supatreats Australia commencing invoicing the franchisees directly in early March 2015 for the management fees. In April 2015 the Company recognised in its management accounts franchise and management fees of negative $609,000. We understand that this amount notionally represents the franchise/management fee which should have been invoiced by Supatreats Australia for January and February 2015 pursuant to the terms of the Services Agreement but was invoiced and collected by the Company. The Company had a number COCO stores operating prior to our appointment. From March 2015, Supatreats Australia was collecting the sales revenue from these stores which was brought to account as sales in the Company s accounts in May The Company commenced recognising a royalty expense of approximately $175,000 per month to AFRG which we have been informed was for the use of the Wendy s IP from September This ceased in March 2015 which is when Supatreats Australia commenced invoicing the franchisees directly. The wage costs, which had averaged $220,000 for the five months prior, increased to $573,000 for the month of December 2014 which was largely due to the relocation of the Company s head office to Melbourne which resulted in a number of redundancy payments. Whilst we have been provided with the Company s management profit and loss statements for FY14, given the structure of the Company significantly changed following the sale of the Wendy s IP in September 2014, we consider that providing a comparison of the Company s FY15 management accounts to the FY14 financial statements would be of little relevance. 3.3 Balance sheet and preliminary analysis Set out below is a summary of the balance sheet for the Company as at 31 August 2014 and 30 September 2014, which relate to the months before and after the sale together with the balance sheets as at 31 December 2014, 31 March 2015 and 30 June 2015: Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 20

34 ($000s) 31 Aug-14 (Pre-Sale) 30 Sep-14 (Post- Sale) 31 Dec Mar Jun-15 Assets Cash and Cash Equivalents Trade and Other Receivables Loan - ARFG (11,324) (1,051) (660) (590) (550) Loan - IIC (1,416) (1,632) (2,155) (2,290) (2,320) Loan - AFRG - (572) (591) (420) (420) Loan - Franchisees Current Acc - WSS Development (13) (13) Current Acc - Marketing (660) (655) (710) (663) (699) Current Acc Supatreats Australia (921) Stock on Hand Other Current Assets Current Assets (12,074) (1,985) (2,257) (2,239) (3,369) Non-Current Assets IP Goodwill 5, Trademarks 3, Franchise Agreements 5, Less: Amortisation (4,080) Total IP 10, Property, Plant & Equipment Non-Current Assets 10, Total Assets (1,648) (1,588) (2,012) (2,239) (3,144) Liabilities Loan AFRG - Royalty (646) (678) Provision for Onerous Leases (813) (787) (766) (755) (755) Trade and Other Payables (1,571) (1,695) (1,612) (1,176) (906) Current Liabilities (2,384) (2,482) (2,378) (2,578) (2,339) Non-Current Liabilities Provision for Long Service Leave (326) (326) (142) (9) 0 Total Liabilities (2,710) (2,809) (2,520) (2,587) (2,339) Net Assets / (Liabilities) (4,358) (4,397) (4,532) (4,826) (5,484) We make the following brief comments in relation to the above: At all times the Company had a negative net asset position which deteriorated from $4.36 million at 31 August 2014 to $5.48 million at 30 June 2015; Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 21

35 The Company s goodwill, trademarks and franchise agreements written down value reduced from a total of $10 million as at 31 August 2014 to nil as at 30 September 2014 due to the IPSPA on 10 September 2014 and the transfer of the Company s IP to GFRG. The Wendy s Group facilities comprised:- o A loan from NAB of $7.46 million as at 10 September 2014 with the primary borrower being ARFG. o A loan from Isitola of $13.1 million (as at 30 June 2014) with the primary borrower also being ARFG. In respect of each of the above loans, the debts were secured by charges over all of the assets of each of the Wendy s Group entities. Further, we understand that the Isitola debt was subordinated to the NAB s position. In other words, pursuant to a Deed of Subordination the NAB s debt was to be repaid in full prior to any payment being made to Isitola. The completion of the IPSPA resulted in the ARFG loan reducing by approximately $10 million. The Company was the head lessee with the various landlords in respect of each Australian franchisee store, excluding On the Run outlets and New Zealand, and the lessee of the former head office. There were a number of stores where the franchisees were unable or unwilling to meet the costs of the lease, or where franchisee stores became vacant. In order to recognise these liabilities, as at 30 June 2015, the Company recorded a Provision for Onerous Leases of approximately $755,000 reflecting the landlords claims being received since February 2015 and is an indication of the Company s view as to the extent of the potential claims from landlords in relation to lease obligations. As discussed in Section 3.2, the Company recognised that it had to pay royalties to AFRG following the sale of the IP. The Company did not pay the royalties but recognised a liability due to AFRG in respect of unpaid royalties of $678,000 as at 30 June It would appear from the above that the Company had a deficiency in net assets immediately prior to and post the sale. This was likely as a consequence of a write down in intangible assets which historically had carrying values in excess of likely realisable values as determined by external sale campaigns and indicative offers. As discussed, under the Lamivest SPA, AFRG acquired Isitola s shares in Lamivest which in turn owned the Wendy s Group entities. Accordingly, AFRG acquired the legal structure and its associated liabilities. It is not unusual under these circumstances for the legal entities to be acquired given:- The assumed initial objective is to retain the franchise system intact and its associated agreements, including the rights to premises, rather than effect a transfer or novation of same; and The likely intent of recapitalising the entities, particularly the Company, consistent with achieving the above objective. Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 22

36 It is not readily apparent to us that the Company was, in fact, recapitalised following the sale. Notwithstanding the deficiency in net assets of the Company as at the date of the sale, it is important to note that the financial position of the Wendy s Group (as acquired by AFRG pursuant to the Lamivest SPA) as at 30 June 2014 per management accounts indicated positive net assets of $4.37 million. In addition, our review of the trade and statutory creditors of the Company as at that date indicated debts being paid in accordance with terms. We also note that under the Lamivest SPA, the seller (Isitola) provided a warranty that neither Lamivest or the Wendy s Group were subject to any Insolvency Event (as defined). 4 Statement by Director Key comments The major asset of the Company on appointment was cash at bank which has now been realised. The liabilities of the Company are estimated to be in excess of $8 million including related entities. 4.1 Summary of Director s Statement for the Company The following table summarises the assets and liabilities described in the Director s Statement for the Company and a comparison of our Administrators estimated realisable value ( ERV ): Statement as at 2 July 2015 $000s Assets Report Reference Director's ERV Administrators' ERV High Cash at Bank/Bank Guarantee Cash on Hand/Takings (COCO stores) Debtors Unknown 0 WIP Sale of COCO Store/Plant and Equipment Total Assets (before realisation costs) Liabilities Employee Entitlements (Priority) (16) (21) (21) Secured Creditors 4.1.7/ Partly Secured Creditors Related Party Creditors (4,889) (4,889) Unsecured Creditors (3,392) (3,392) Contingent Creditors Unknown Unknown Total Liabilities (16) Unknown Unknown Surplus/(Deficiency) 942 Unknown Unknown We comment on the Director s Statement as follows: Low Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 23

37 4.1.1 Cash at Bank The Director s Statement has reported cash on hand, which we understand is an incorrect reference to cash at bank, of $717,000, being the amount of cash and cash equivalents reported in the Company s management accounts as at 31 May On our appointment the Company had a number of bank accounts with various financial institutions. The balances in the Company s pre-appointment bank accounts totalled approximately $309,000 before the term deposit (discussed below). As at the date of this report, all funds (excluding $3,000 held by one bank) have been transferred to bank accounts which are controlled by the Administrators of the Company. In addition to the cash at bank, the Company had a term deposit with NAB which was due to mature on 7 July The value of the term deposit at maturity was approximately $412,000. This term deposit was being used as security for the Company s bank guarantee facility with NAB. The issued bank guarantees, which totalled approximately $222,000 at the date of our appointment but has reduced to $197,000 at the date of this Report, had been issued by the Company to various landlords as security for leases of premises. The available funds of approximately $190,000 in the term deposit on our appointment were paid into the Administrators bank account on 15 July There is potential, albeit unlikely, for up to a further $197,000 to be returned to the Company from cash in the term deposit assuming no further calls on the bank guarantees. As there is likely to be further calls, we have not included any further recovery from the $197,000 of outstanding issued bank guarantees as the status of which is unknown. Included in our above Administrators ERV is approximately $42,000 which may be being held on trust on behalf of the franchisees in respect of marketing and development amounts. We have quarantined these funds whilst we obtain legal advice on this issue and determine whether these funds are in fact impressed with a trust. The Director separately disclosed $20,963 as an asset with the reference bank guarantee which was a bank guarantee issued by the Company in relation to the Dandenong store in February The Administrators have not exercised an interest in this site and are investigating the circumstance of this bank guarantee which was issued by ANZ (rather than NAB) Cash on Hand/Takings We advise that we banked approximately $9,000 of takings from the various COCO stores. Following closing the Karratha store, Supatreats Australia instructed the manager to re-open the store without our knowledge. During this brief period of trading, the store continued to bank into an administration account. Supatreats Australia has requested that the takings for this period be provided to them given they have now paid the costs (estimated to be $5,000), including wages, for the same period. We are currently considering this request Debtors The Director has disclosed sundry debtors of $204,000 which comprise amounts owed by franchisees in respect of outstanding rent and franchise fees and franchisee loans. The Company s books and records indicate an amount totalling approximately $395,000 could be outstanding in this regard. We have received approximately $4,000 in franchise fees which relate to non-assigned stores which were incorrectly direct debited by Supatreats Australia. We are confirmed the position in respect of these funds. Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 24

38 At this stage, we expect the Company would be entitled to recover any such amounts attributable to the period up to 25 June 2015, being the date on which the Company was informed it has no rights to continue using the IP. We are investigating whether any such amounts attributable to on and after 25 June 2015 might be recoverable by the Company. Any such amounts may (potentially) be subject to offsetting claims asserted by these debtors against the Company. For the purposes of our ERV assessment we attributed a nil value in the Low case Work in Progress The Director has included work in progress of $16,000. We have queried this amount as we understand the Director may have been referring to stock and plant and equipment in the COCO stores (refer Section below). We note that the Company has no work in progress. In addition, we note the following Company assets which were not disclosed in the Director s Statement: COCO Store Assets Prior to our appointment the Company had entered into an agreement to sell the COCO store at Karratha, Western Australia. The sale settled on 13 July The sale of this store has resulted in approximately $43,000 (excluding GST) being paid to the Administrators bank account for the Company for plant and equipment and goodwill. The Company had minor plant and equipment and stock in its other four COCO stores. Following our appointment, we arranged for GraysOnline to inspect three of the COCO stores. GraysOnline have advised us that it is their view is that the costs associated with removal and sale of the plant and equipment and stock would not result in a positive return to creditors for all the sites except for Dandenong (which was a slightly larger store with better equipment relative to other COCO stores inspected). Accordingly, we have only instructed GraysOnline to recover and sell by public auction the plant and equipment from the Dandenong COCO store which GraysOnline estimate will result in net sale proceeds of between $3,000 and $5, Priority Creditors (Employees) The Director disclosed an amount of $16,000 owing to employees in his Statement in relation to unpaid superannuation. We note that the Director did not disclose in his Statement any amounts owing to employees in respect of unpaid wages, annual leave and payment in lieu of notice. As at the date of our appointment, the Company employed within its COCO stores 34 staff members (mainly casual), according to its last payroll report. Following our appointment, we arranged for the five COCO stores to cease trading which involved advising the applicable employees that their employment with the Company was terminated effective 2 July Set out in the table below is a summary of the employee entitlements as calculated by us with reference to the Company s books and records: Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 25

39 Unpaid Wages 9 Superannuation 6 Annual Leave (incl Leave Loading) 4 Payment in Lieu of Notice 2 $000s Redundancy - Total Employee Entitlements (Priority Claim) 21 We make the following comments: Employee claims are afforded a priority of repayment pursuant to Section 556 of the Act in the event that the Company was to be wound up. The amount owing to employees is lower than initially advised in the Administrators preliminary report to creditors as read to the first meeting of creditors due to staff at the Yeperenye store, which was sold to Supatreats Australia just prior to our appointment, being determined to be Supatreats Australia employees. We are not aware of any employees that would be considered as Excluded Employees for the purposes of Section 556 of the Act. In the event that the Company was to proceed to liquidation and has insufficient circulating assets to meet employee entitlements, employees may be eligible to submit an application to the Federal Government s Fair Entitlement Guarantee Scheme ( FEG ) to be compensated for unpaid entitlements (excluding superannuation) Secured Creditors We refer to our comments at Section regarding NAB and Isitola Given the term deposit supporting the NAB bank guarantee facility and the sale (which we understand would have dealt with the Isitola debt), we expect that it is unlikely that there will be any amounts payable to the secured creditors from the funds held in the voluntary administration of the Company Partly Secured Creditors (ie PMSI/ROT Creditors) Based on ASIC searches, there are five creditors (including NAB and Isitola) who hold eight registered security interests against the Company. We have contacted each of these creditors following our appointment and provided details of these creditors at Section Related Party Loans There is approximately $4.9 million owing to related parties based on the Proofs of Debt we have received from the Company s related parties as summarised in the table below: $000s Amount Agreed to June 2015 Balance Sheet ARFG 550 IIC 2,320 AFRG 1,098 Supatreats Australia 921 Total 4,889 Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 26

40 We have requested that the related parties in the table above provide us with support for the outstanding loans. At the date of this Report, the only response received to these requests has been a partial response from AFRG. The AFRG loan of $1.098 million has two components. Firstly an amount of $420,000 which reflects the initial term deposit amount retained by NAB as security for the Company s bank guarantee facility following the completion of the sale of the Wendy s IP to GFRG. A portion of this amount has been released to the Company as detailed in Section The second component of $678,000 relates to outstanding royalties due from the Company to AFRG. Our investigations into the related party loans are continuing Unsecured Creditors The majority of claims from non-related party unsecured creditors are from landlords. At the date of this Report we have received Proof of Debt claims, excluding related parties detailed above at Section 4.1.9, totalling approximately $3.39 million. We continue to receive Proofs of Debt, some of which are contingent claims and we have therefore allowed approximately $1.22 million in our ERV Low (refer Section 7.3) for this contingency. 5 Statutory Investigations 5.1 Nature and Scope of review The Act requires Voluntary Administrators to carry out preliminary investigations into a company s business, property, affairs and financial circumstances. We reiterate that the investigations are preliminary and have been limited due to the following:- The limited time available in the voluntary administration process; The information which is available to us at the date of this report; and The complexity of the affairs of the Company and its related entities. Investigations centre on transactions entered into by a company that a liquidator may seek to void or otherwise challenge where the company has been wound up. Investigations allow the Voluntary Administrators to advise creditors what funds might become available to a liquidator in order that creditors can properly assess for the purpose of voting at the second meeting of creditors whether to accept a DOCA proposal or resolve to wind up the Company. Funds recovered would be available to the general body of unsecured creditors including secured creditors, if any, but only to the extent of any shortfall incurred after realising their security. Liquidators may recover funds from each type of transaction detailed in the creditor information sheet described in Annexure A of this report. Deed Administrators do not have recourse to these voidable transactions. Liquidators may also recover funds through other avenues for example, through action seeking compensation for insolvent trading or breach of director duties, if applicable. Voluntary Administrators are not obliged to carry out investigations to the same extent as a liquidator. Liquidators may require many months of investigation and conduct public examinations before forming a concluded view on recovery action. We have investigated matters to the extent possible in the time frame available and the dividend estimate in a liquidation scenario for the Company as set out in Section 7 of this Report reflects the outcome of our investigations to date. Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 27

41 5.2 The Company s solvency Our preliminary determination is that the Company was likely insolvent at some stage between 9 February 2015 and 26 June 2015 subject to further investigations Overview A precursor to the recovery of funds by a liquidator through the voiding of certain transactions or through other legal action such as seeking compensation from the director for insolvent trading, is establishing the company s insolvency at the relevant time. Establishing insolvency is a complex matter due in part to the complexity of corporate financial transactions and the lack of clear prescriptive legal authority on proof of insolvency. Notwithstanding, there are two primary tests used in determining a company s solvency, at a particular date; namely: Balance sheet test; and Cash flow test or "commercial test". The Courts have widely used the cash flow test or "commercial test" in determining a company s solvency at a particular date. Section 95A of the Act also contains a definition of solvency. That definition reflects the "commercial test" in stating that a person is solvent if the person is able to pay all the person s debts as and when they become due and payable. However, the "commercial test" is not the sole determinant of solvency. Determining solvency derives from a proper consideration of a company s financial position in its entirety and in the context of commercial reality. Relevant issues include, but are not limited to the following: The degree of illiquidity. A temporary lack of liquidity is not conclusive; Regard should be had to: o o Cash resources; Monies available through realisations of surplus assets, borrowings against the security of assets or equity/capital raising; All of the company s assets might not be relevant when considering solvency. For example, where a company proposes selling assets which are essential to its business operations, the proceeds of those assets should not be taken into account; The voluntary and temporary forbearance by creditors not to enforce payment terms; and Timing of any return to profitability such that any cash is generated in sufficient time to meet debts as and when they fall due. In summary, it is a company s inability using such resources as are available to it through the use of its assets, or otherwise, to meet its debts as they fall due, which indicates insolvency Preliminary determination We have undertaken a preliminary investigation into the financial records of the Company to assess whether it may have traded whilst insolvent. Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 28

42 It is our preliminary determination that the Company was likely insolvent at some stage between 9 February 2015 and 26 June 2015 based on the following:- On 2 February 2015 a Judgment was awarded against the Company in the amount of $19, by a NSW Court in the matter of Perpetual Ltd & Anor v Wendy s Supa Sundaes Pty Ltd. This Judgment was not satisfied by the Company, which in turn was relied upon by Supatreats Australia as constituting an Insolvency Event on and from 9 February 2015, and being grounds for terminating the Services Agreement. The Company had a deficiency of net assets before and after the sale of the IP, with that deficiency increasing from $4.4 million as at 31 August 2014 to $5.5 million as at 30 June 2015 (discussed further below). The Company appears to have incurred losses in each of the six months from 1 January 2015 to 30 June Accordingly, it is reasonable to assume that the Company had not been able to operate profitably following the advised commencement of the Services Agreement. As at the date of our appointment, the Company had a number of disputes with landlords with respect to various claims for unpaid rent/early termination of lease agreements. A number of these disputes commenced from March 2015 onwards and are in addition to the Judgment of 2 February 2015 and the Application for Winding Up lodged by BAM on 30 June 2015, both of which have been mentioned in this Report. The Company had recognised a provision for onerous leases of over $750,000. It is our view that this provision may have been understated as BAM alone is claiming to be owed approximately $530,000. It is also clear from the Company s balance sheet that the Company did not have sufficient current assets to meet all of the potential landlord and other obligations. Supatreats Australia, rather than the Company, commenced invoicing the franchisees directly in March This resulted in the Company having a substantial decrease in its revenue which it required to meet its creditors. The Company had support from Supatreats Australia by virtue of an increasing loan account ($1 million during the period 1 April 2015 to 30 June 2015). However, we note the following in relation to this support:- o o The support was not documented, informal and at the discretion of the various related entities; and It would appear the support was inadequate to meet the landlord and other obligations which were becoming due over the period. Further to the above and subject to receipt and consideration of the full circumstances surrounding the related entity loans, there is the potential argument that the related entity creditor loans may not be due and payable. If this was to be the case, the Company s working capital position would be improved, albeit still insufficient to meet current liabilities (which we note was the case throughout the whole period of review). The table below considers the Company s working capital position after adjusting for the related entity loans. Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 29

43 ($000s) Aug-14 (Pre- Sale) Sep-14 (Post- Sale) Dec-14 Mar-15 Jun-15 Current Assets (12,074) (1,985) (2,257) (2,239) (3,369) Add back related parties amounts Loan ARFG 11,324 1, Loan IIC 1,416 1,632 2,155 2,290 2,320 Loan AFRG Current Acc Marketing Total Adjustments 13,400 3,909 4,116 3,963 3,989 Adjusted Current Assets 1,325 1,924 1,859 1, Current Liabilities (2,384) (2,482) (2,378) (2,578) (2,339) Adjusted Working Capital / (Deficiency) (1,058) (558) (519) (854) (1,720) We note the following in relation to the above:- The Company had a working capital deficiency, albeit lower, at all dates reviewed regardless of the status of the related party loans which is a possible indicator that the Company was unable to pay its debts as and when they fell due; In addition to the related entity loans, we have also removed the account denoted Current Acc Marketing. As discussed at Section 5.3.1, there is the possibility that certain contributions by franchisees towards marketing and development may constitute funds held on trust on behalf of the franchisees, although based on the information we have considered to date we do not believe the funds are, in fact, impressed with a trust. This issue is still being reviewed by our solicitors. The Current Acc Marketing account in the Company s balance sheet records the extent to which these funds were borrowed by the Company; and The working capital position deteriorated from 1 January 2015 through to 30 June 2015 due to an increase in the loan account due to Supatreats Australia which had a balance of $921,000 as at 30 June 2015 and was considered to be due and payable within the next 12 months. As detailed in Section 4.1.9, we have requested further particulars from the various related entities in respect of their loans which is still to be received. We may amend our above comments once this information has been provided. Finally, on the information provided to us, it is the case that the Company was insolvent no later than 26 June 2015, on the basis that at this time, the Company had lost a significant component, if not all, of its revenue stream, by the reason of the termination of the Services Agreement, IPSL and the entry into the Deed of Assignment. In the context of all of the above, it is our preliminary determination that the Company was likely insolvent at some stage between 9 February 2015 and 26 June Presumption of insolvency inadequate books and records Failure to keep or retain adequate books and records in accordance with Section 286 of the Act provides the rebuttable presumption of insolvency under Section 588E of the Act. Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 30

44 Liquidators can rely on the presumption of insolvency and litigation including: Compensation claims arising from insolvent trading; and Recovery of voidable transactions from related entities. The presumption cannot be relied upon in the recovery of an unfair preference except where the recovery is sought from a related entity. A preliminary view is that the Company maintained adequate books and records in accordance with Section 286 of the Act. Accordingly, a presumption of insolvency under Section 588E would not be available. 5.3 Potential liquidator recoveries voidable transactions We have identified payments totalling $2.1 million that need to be investigated further to determine if they may be voidable in a liquidation scenario Purchase of Chip Fryers from Meris Investments Pty Ltd On 24 June 2015 (i.e. a week prior to our appointment) an amount of $736,725 was paid from the Company s bank account denoted for marketing to Meris Investments Pty Ltd trading as Perfect Fry Company. Meris Investments Pty Ltd is not related to the Wendy s Group. We queried this transaction and have been provided with an invoice which stated that the payment was in respect of the purchase of 95 chip fryers at a cost of $7,755 (including GST) per chip fryer. Payment of the transaction by the Company was made under the direction of a Supatreats Australia Director. We have queried the purchase of the chip fryers, including which franchisees would receive a chip fryer and have been informed that:- Franchisees had requested that they be provided with chip fryers, through their respective regional managers; and The funds held in the Company s marketing bank account which were used to purchase the chip fryers were held on trust by the Company for the franchisees as beneficiaries. We have been advised that the chip fryers are currently being manufactured overseas. We have requested further information from Supatreats Australia in relation to this transaction. The circumstances of this transaction and any recoverability of same continue to be investigated by us. Whether or not this transaction might be voidable in any liquidation is also subject to the issue of whether or not the funds were in fact held on trust Potential voidable related party transactions (payments to AFRG and Supatreats Australia) Liquidators investigate related party transactions within the four years of the date of administration in order to determine whether any transactions occurred when the company was insolvent or was likely to become insolvent as a result of the transaction. We note that the Company made the following payments to related parties between 9 February 2015 and our appointment on 2 July 2015:- Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 31

45 Payment Details Amount Related Party Payment Date $000s Investigations 209 AFRG 13 May 2015 continuing AFRG 20 March 2015 Investigations 250 continuing Supatreats Australia 18 March 2015 Repayment of Loan 925 to 18 June 2015 Total 1,384 We have requested further information from AFRG and Supatreats Australia in relation to these transactions in order to advance our investigations and determine whether any of the above payments may potentially be voidable in a liquidation scenario Entering the Services Agreement, the IPSL and subsequent Deed of Assignment We are still in the process of investigating the transactions undertaken pursuant to the IPSL, the Services Agreement and Deed of Assignment with a view to ascertaining whether these agreements were in the interests of the Company. It is not yet clear to us when the IPSL and Services Agreement were executed or were intended to have commenced. We have inquired about whether there was some (further) arrangement in place pursuant to which the Company had the ability to use the IP sold to GFRG for the purpose of the Company s ongoing franchise agreements immediately following settlement of the sale of Wendy s IP, but prior to the execution of the IPSL. At this stage, the nature of the Company s rights in this regard are not clear to us. We have formally requested further documents and information relating to these agreements and issues to enable us to continue our investigations in this regard. Whilst these further documents and information have yet to be provided, our request has been acknowledged and we have been advised a formal response is being prepared Unfair Preferences A payment to a creditor is preferential if it is made at a time when a company is insolvent and it results in a recipient receiving a greater return than they would receive if the payment was set aside and the creditor lodged a claim in liquidation. Once a liquidator establishes any such unfair preference payments, these amounts may be recouped thereby increasing the funds available to ordinary unsecured creditors. If a creditor disgorges an unfair preference payment to a liquidator, the creditor is entitled to prove for such an amount for dividend purposes as an unsecured creditor. Therefore, whilst recovering an unfair preference increases the pool of funds available to creditors, it also increases total creditor claims. Based on our preliminary investigations, we are not aware of any unfair preferences, other than the payments discussed above at Section 5.3.2, which may be deemed unfair preferences Uncommercial transactions A transaction is an uncommercial transaction if it is made at a time when a company is insolvent and it may be expected that a reasonable person in a company s circumstances would not have entered into the transaction having regard to: The benefits or detriment to the company of entering into the transaction; and The prospective benefits to other parties to the transaction upon entering into it. Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 32

46 Should a liquidator establish any such uncommercial transactions, those transactions may be set aside, thereby increasing the funds available to ordinary unsecured creditors. Based on our preliminary investigations, and aside from the transactions already referred to above, we are not aware of any uncommercial transactions Unfair loans A liquidator must investigate loans to a company which may be considered unfair due to extortionate interest rates or charges. Based on our investigations to date, we do not consider that there are any unfair loans Unreasonable director related transactions Pursuant to Section 588FDA of the Act, a transaction is unreasonable director related transaction of a company if: The transaction is a payment, transfer of property, issue of securities or incurring of an obligation by the company; Made to the director or close associate of the director; and A reasonable person in a company circumstances would not have entered into the transaction having regard to the benefit or detriment of the company or other parties. Should a liquidator establish any such transactions, they may be set aside, thereby increasing the funds available to unsecured creditors. Based on our investigations to date, we do not consider that there is any unreasonable director related transactions Obstruction of creditors rights Section 588FE of the Act provides for the voiding of transactions designed to defeat, delay or interfere with creditors rights. Our investigations do not disclose any such transactions. 5.4 Summary of potential liquidator recoveries Set out below is a summary of transactions that a liquidator would investigate further if the Company is placed into liquidation. Potential recovery item Report Reference ERV Low ERV High Purchase of Chip Fryers Unknown 736 Voidable Related Party Transactions ,384 Other Claims (i.e. Services Agreement and Deed of Assignment) Unknown Total Unknown Unknown Given the complex legal issues involved with a number of the transactions detailed above, our investigations are continuing in relation to these matters. 5.5 Potential Liquidator recoveries - insolvent trading Section 588G of the Act imposes a positive duty upon company directors to prevent insolvent trading. If a director is found guilty of an offence in contravening Section 588G, the Court may Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 33

47 order him or her to pay compensation to the company equal to the amount of loss or damage suffered by its creditors. The Court may also impose upon the directors one of two types of civil penalty orders, the first can include a fine or an order prohibiting the director from participating in the management of a company. The second, where there is criminal intent and conviction, a director could also be imprisoned for up to five years. This action is not a right that is available to an administrator or a deed administrator. Applications for compensation payable to the company are usually made by a liquidator, or in specified circumstances, a creditor. The substantive elements of Section 588G are: A person must be a director of a company at a time when the company incurs a debt; The company must be insolvent at the time or becomes insolvent by incurring the debt; and The director must have reasonable grounds for suspecting that the company is insolvent or would become insolvent. The defences available to directors contained in Section 588H are: The directors had reasonable grounds at the time the debt was incurred to expect the company to be solvent and would remain solvent even after the debt was incurred; The directors relied on another competent and reliable person to provide information about whether or not the company was insolvent; The directors were ill or for some other good reason did not take part in the management of the company; and The directors took reasonable steps to prevent the incurring of debt. Further, Section 588V of the Act provides for circumstances where the holding company of a subsidiary at the time when the subsidiary is insolvent and incurs a debt may be held to be liable pursuant to Section 588W of the Act to compensate the subsidiary for loss resulting from insolvent trading. Defences apply pursuant to Section 588X of the Act. A liquidator must form an opinion as to the date of insolvency and determine the debts incurred from that date; thereby quantifying the loss to the company. The costs of proceeding with an insolvent trading action must be considered. In our opinion it is arguable that there may be an insolvent trading claim for debts incurred subject to the final determination of a date of insolvency. However, we understand no new leases were entered into by the Company post 31 August 2014, the Services Agreement was in place effective from 1 January 2015 and the Company only operated a small number of COCO stores. This suggests minimal debts were likely incurred by the Company during the period that we have identified as potentially being when the Company was insolvent. To be recoverable as a debt comprising an insolvent trading claim, the debt must be incurred whilst the Company is insolvent. It is accepted under law that any debt (ie for rent or otherwise) arising to landlords under lease was incurred when the lease was entered into (not when the rental invoice was raised, for instance). Excluding related party debts, the majority Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 34

48 of the unsecured creditors are landlords for debts arising pursuant to leases entered into prior to the assumed date of insolvency. We therefore do not expect a liquidator would pursue an insolvent trading claim based on our investigations to date. As an aside, any claim for insolvent trading is also limited to the period a person is a director of the Company. In this case it is noted that the current Director of the Company was appointed only 6 weeks prior to our appointment. 6 Proposal for DOCA At the time of issuing this report no formal DOCA proposal had been received. However, on 27 July 2015, we received a letter from solicitors acting for Supatreats Australia, GFRG, IIC and ARFG requesting an adjournment of the second meeting of creditors for up to 3 weeks to enable a formal DOCA proposal to be formulated. A copy of the letter is attached as Annexure B. 7 Creditors options, dividend estimate and cost estimate 7.1 Company to execute a DOCA Following receipt of the letter discussed at Section 6 above, we specifically asked for an approximate range or an indication of the amount that might be offered as part of any DOCA proposal. In response we were advised that the DOCA Proponents are not able to provide any approximate figure at this stage, as these details are still being formulated. Given that Supatreats Australia, GFRG, IIC and AFRG are owed in total $4.9 million which we estimate represents at least 50% of the unsecured claims and the letter received states that they will create a DOCA Fund and these related party claims of $4.9 million will not participate in any distribution of the DOCA Fund, it is our opinion that it is in the creditors interests to adjourn the second meeting of creditors to enable the DOCA proposal to be formulated as it could potentially result in a better outcome than liquidation by virtue of a cash contribution combined with the $4.9 million of claims that would prove in a liquidation but not the DOCA. 7.2 Administration to end Creditors may resolve that the administration should end if it appears that the Company is insolvent or for some reason, control of the Company should revert back to its Director. Based on our preliminary investigations and analysis of the Company s financial position, the Company is insolvent. There appears to be no valid commercial reason why control of the Company should revert back to its Director. If the administration was to end, there is no mechanism controlling an orderly realisation of assets and distribution to creditors. In those circumstances we are unable to say what the Company might ultimately pay its creditors or what costs it might incur. Therefore our opinion is that it is not in the creditors interest for the Company s administration to end. It is appropriate that the Company s affairs be dealt with under Part 5.3A of the Act. 7.3 Winding up Set out below is a table of an estimate of the return to creditors in a liquidation scenario for the Company. Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 35

49 $000s (GST exclusive) Circulating Assets Liquidation Report Ref ERV High ERV Low Cash and Other Cash Equivalents Cash on Hand/Takings (COCO stores) Debtors Unknown 0 Sale of COCO Store/Plant and Equipment (net estimate) Estimate of Funds Potentially Held on Trust 0 (42) Total Assets Available (before costs) Unknown 507 Less: Realisation and Administration Costs Legal Fees Voluntary Administration (65) (80) Administrators Fees & Disbursements (to 6 August 2015 meeting) (270) (270) Liquidators Fees & Disbursements (100) (150) Legal Fees Liquidation (50) (80) Printing Costs (5) (5) Room Hire (6) (6) Total Estimated Realisation Costs (496) (591) Estimated Funds Available for Priority Employee Entitlements Unknown Nil Employee Entitlements (21) (21) Total Funds Available for Unsecured Creditors Unknown Nil Add: Payment for Chip Fryers (only available in a liquidation) Unknown Add: Voidable Transactions (only available in a liquidation) ,384 0 Add: Other Voidable Transactions (only available in a Unknown 0 liquidation) Total Funds Available for Unsecured Creditors Unknown Unknown Estimated Unsecured Creditors & (8,281) (9,500) Estimated Dividend to Unsecured Creditors (cents in the dollar) Unknown Nil We note the following in relation to the above: The above analysis provides a high and low estimate of the ERV of the assets in the event that the Company was wound up together with an estimate of the costs of the voluntary administration and subsequent liquidation and an estimate of the creditor claims (including a contingency in the ERV Low as discussed at Section ). If the Company is placed into liquidation, employees can apply to FEG to have their entitlements paid (excluding superannuation). FEG subrogates the employee s priority position in any winding up for the entitlements FEG advances to employees. Whether there is a return to priority creditors (i.e. FEG) and/or non-priority creditors will depend upon: Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 36

50 o o The extent of any recoveries of potential voidable transactions (refer Sections to inclusive); and The final amount claimed by creditors once Proof of Debt forms are received and adjudicated upon. 8 Administrators opinion We recommend that the second creditors meeting be adjourned for three weeks to allow the DOCA Proponents to formulate and submit a final proposal for a DOCA. Pursuant to Section 439A(4)(b) of the Act, we are required to provide creditors with a statement setting out our opinion on whether it is in creditors interests for the: Company to execute a DOCA Administration to end; or Company to be wound up. Each of these options is considered below. In forming our opinion, it is necessary to consider an estimate of the dividend creditors might expect and the likely costs under each option. 8.1 DOCA Given the uncertainty with respect to a return to unsecured creditors in a liquidation scenario, it is in creditors interests to consider whether a return is available via a DOCA. This will only become known once the terms of a DOCA proposal are formulated. It is our opinion that the second meeting of creditors should be adjourned for 3 weeks to enable the proponents to formulate and submit their final DOCA proposal. 8.2 Administration to end The Company is insolvent and unable to pay its debts as and when they fall due. Accordingly, returning control of the Company to its Director would be inappropriate and is not recommended. 8.3 Winding up of the Company In the absence of a formal DOCA proposal, it is our opinion that the Company should be placed into liquidation. A liquidator would be in a position to conduct detailed investigations into the financial affairs of the Company and potential voidable transactions. A liquidator will also be empowered to: Assist employees in applying for FEG for the payment of certain employee entitlements that cannot otherwise be funded by the Company; Pursue various potential recoveries under the Act; Distribute recoveries made in accordance with the priority provisions of the Act; and Report to ASIC on the results of investigations into the Company s affairs and the conduct of its past and present officers. 9 Administrators Remuneration Report Pursuant to Section 449E of the Act, we enclose as Annexure C the Administrators Remuneration Report which provides a summary of the work undertaken to date, and Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 37

51 expected to be undertaken up to the second meeting of creditors, by the Administrators and their staff in the administration. Given the outcome of the second meeting is uncertain at this stage, we have limited our remuneration request in this Report to the period from our appointment up to the date of the second meeting of creditors on 6 August Further queries We will advise creditors in writing, if practicable, of any additional matter that comes to our attention after the dispatch of this report that, in our view, is material to creditors deliberations. Further information regarding Ferrier Hodgson and the Administrators can be obtained from the firm s website at In the meantime, should creditors have any queries, please do not hesitate to contact Tara Martin of our office. DATED this 28 th day of July 2015 MD Lewis & TD Mableson Joint & Several Voluntary Administrators Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 38

52 Glossary of terms Abbreviation ACN Description Australian Company Number Act The Corporations Act 2001 AFRG ARFG ASIC AUFA BAM Bidvest COCO Company Cone Enterprises DOCA DOCA Proponents ERV FEG Asia Food Retail Group Pte Ltd Australian Retail Franchise Group Pty Ltd Australian Securities and Investments Commission Australian Unit Franchise Agreements BAM (209) Investments Pty Ltd Bidvest Australia Limited Company Owned Company Operated Wendy s Supa Sundaes Pty Ltd (Administrators Appointed) Cone Enterprises (New Zealand) Limited Deed of Company Arrangement Supatreats Australia, ARFG, AFRG and IIC Estimated Realisable Value Fair Entitlements Guarantee FY14 Financial Year 2014 FY15 Financial Year 2015 GFRG Gracemere IIC IP IPSL IPSPA Isitola Lamivest Lamivest SPA MFA MIPL MUFA Global Food Retail Group Pte Ltd Gracemere Shoppingworld Pty Ltd Innovation Ice Cream (IIC) Pty Ltd Intellectual Property Intellectual Property Sub-Licence Agreement Intellectual Property Sale and Purchase Agreement Isitola Limited Lamivest Sdn Bhd Lamivest Share Sale and Purchase Agreement Master Franchise Agreement Master Intellectual Property Licence Multi-Unit Franchise Agreement Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 39

53 NAB PPSR Quest Services Agreement Shahin Enterprises Supatreats Australia the Court the Declaration Wendy s Group National Australia Bank Personal Properties Securities Register Quest Payment System Pty Ltd Services Agreement between the Company and Supatreats Australia Shahin Enterprises Pty Ltd ATF Shahin Family Trust Supatreats Australia Pty Ltd Federal Court of Australia A Declaration of Independence, Relevant Relationships and Indemnities The Company, AFRG and IIC Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015 Page 40

54 Annexure A ARITA Creditor Information Sheet Offences, Recoverable Transactions and Insolvent Trading Administrators Report Pursuant to Section 439A of the Corporations Act 28 July 2015

55 Creditor Information Sheet Offences, Recoverable transactions and Insolvent Trading Offences A summary of offences that may be identified by the administrator: Section Offence 180 Failure by officer to exercise a reasonable degree of care and diligence in the exercise of his powers and the discharge of his duties. 181 Failure to act in good faith. 182 Making improper use of position as an officer or employee, to gain, directly or indirectly, an advantage. 183 Making improper use of information acquired by virtue of his position. 184 Reckless or intentional dishonesty in failing to exercise duties in good faith for proper purpose. Use of position or information dishonestly to gain advantage or cause detriment. 206A Contravening an order against taking part in management of a corporation. 206A, B Taking part in management of corporation while being an insolvent under an administration. 206A, B Acting as a director or promoter or taking part in the management of a company within five years after conviction or imprisonment for various offences. 209(3) Dishonest failure to observe requirements on making loans to directors or related companies. 254T Paying dividends except out of profits. 286 Failure to keep proper accounting records. 312 Obstruction of auditor Failure to comply with requirements for financial statement preparation. 437C Performing or exercising a function or power as officer while a company is under administration. 437D(5) Unauthorised dealing with company's property during administration. 438B(4) Failure by directors to assist administrator, deliver records and provide information. 438C(5) Failure to deliver up books and records to administrator. 590 Failure to disclose property, concealed or removed property, concealed a debt due to the company, altered books of the company, fraudulently obtained credit on behalf of the company, material omission from Report as to Affairs or false representation to creditors. Voidable Transactions Preferences A preference is a transaction such as a payment between the company and one or more of its creditors, in which the creditor receiving the payment is preferred over the general body of creditors. The relevant time period is six months before the commencement of the liquidation. The company must have been insolvent at the time of the transaction, or become insolvent as a result of the transaction. Where a creditor receives a preferred payment, the payment is voidable as against a liquidator and is liable to be paid back to the liquidator subject to the creditor being able to successfully maintain any of the defences available to the creditor under either the Corporations Act. Uncommercial Transaction An uncommercial transaction is one that it may be expected that a reasonable person in the company's circumstances would not have entered into having regard to: the benefit or detriment to the company; the respective benefits to other parties; and any other relevant matter. To be voidable, an uncommercial transaction must have occurred during the two years before the liquidation. However, if a related entity is a party to the transaction, the time period is four years and if the intention of the transaction is to defeat creditors, the time period is ten years. ARITA ACN Level 5, 33 Erskine Street, Sydney NSW 2000 Australia GPO Box 9985, Sydney NSW 2001 t f e admin@arita.com.au arita.com.au AUSTRALIAN RESTRUCTURING INSOLVENCY & TURNAROUND ASSOCIATION