Transcript

Welcome back to the fourth and final video in our series on the process of voluntary administrations and Deeds of Company Arrangements. My name is Chris Cook, a principal at Worrells Brisbane. In this video, I’d like to conclude the series by providing an example of how a Deed of Company Arrangement (DOCA) can effectively save a business. I was one of the appointed administrators to Napoleon Perdis Cosmetics Australia Pty Ltd. For those unfamiliar with the company, Napoleon Perdis was a large cosmetic brand that had fallen on difficult times due to the increasingly competitive cosmetics industry.

At the time of our appointment, the company was operating 55 stores with a turnover of approximately $22 million. There was very little cash available, even to cover the wages of staff, and the pressure on the business was immense. The director had several options, which is not uncommon for many directors in similar situations.

The first option was to do nothing, but this wasn’t viable as the company had run out of cash, and closure was imminent, potentially leading to liquidation. This would have put the company in a much worse position than it was at that time. The second option was to close the doors and immediately appoint liquidators, which would have resulted in the termination of staff, crystallization of employee entitlements (costing an additional $2 million), and the loss of approximately $7 million worth of stock. Without proper sales channels, the value of the stock would have been significantly reduced, leading to a lower return in a liquidation scenario. Furthermore, the landlords would have had claims against the company for the balance of their outstanding leases, which would have increased creditor claims by over $20 million.

The third and final option was for the director to appoint administrators with the goal of continuing to trade the business and attempt to sell it as a going concern. After weighing the options, the director decided to appoint us as administrators with this goal in mind.

Once appointed, our key tasks included assessing and securing the company’s assets. This involved visiting each store and securing the premises. We had to continue trading the business, establish internal controls, negotiate the sale, propose a DOCA, and investigate the company's affairs to provide a report to creditors.

A profitability analysis of the 55 stores revealed that 28 were unprofitable and not capable of becoming profitable. We made the tough decision to close these stores, but along with other adjustments, this made the business profitable and more attractive to potential buyers. We launched a detailed marketing campaign, which attracted over 40 interested parties. By the end, the list was narrowed down to five genuinely interested buyers. Ultimately, we found the right buyer, and after much consideration, determined that the best way forward was through a DOCA.

The DOCA proposal was structured as follows: all assets, including intellectual property and stock, would remain with the company; the retail, online, and wholesale arms of the business would form part of the sale; employees would remain employed, which was crucial. The buyer would make a lump-sum payment for the benefit of all creditors, and a creditors’ trust would be established. The DOCA would then be completed immediately, with the payment transferred to the creditors’ trust. This allowed the company to emerge from the administration process and focus on its future without being burdened by the ongoing administration.

We issued a report to creditors, summarizing the DOCA proposal and comparing it to a liquidation scenario. In this instance, we recommended that creditors vote in favor of the DOCA as it provided a better outcome. At the second creditors’ meeting, the proposal was accepted, and the business survived.

In summary, the voluntary administration and DOCA provided several advantages. The process allowed us to right-size the business, something that wouldn't have been possible outside of voluntary administration. It preserved the brand and stock value, as well as key relationships with suppliers, landlords, employees, and customers. All of this was accomplished within an incredibly short timeframe of four months, thanks to the establishment of the creditors' trust.

We hope you’ve enjoyed our video series on voluntary administrations. If you’d like more information, please feel free to reach out to your local Worrells principal. Thank you for taking the time to watch these videos.