Baubridge & Kay, Covers, Bettina Liano, Belinda International, Satch, Ed Harry. These are just a few of the brands which have recently fallen victim to a tough trading environment and, subsequently, been placed into administration.
While for many companies dealt this fate, a wind-up of operations or sale seems the most likely scenario, some businesses have explored another option. Fashion label Bettina Liano is one of them. Following the company's collapse in July, director Bettina Liano, determined to retain ownership of her 28-year-old company, issued a DOCA or Deed of Company Arrangement to administrators Ferrier Hodgson.
The DOCA, a document which records the terms of restructuring a company and completes the process of a voluntary administration, would allow Liano to make an offer to creditors in a bid to have her company handed back to her intact. According to Brendan Wyhoon, partner at local law firm Middletons, the process can be complicated and each situation is unique. However, in the right circumstances, he says, the option should be given consideration in consultation with an appropriate expert.
“A DOCA usually involves some funds being injected to increase the dividend available to unsecured creditors (like the ATO and suppliers) to above what they would receive in a liquidation should that have been the outcome,” he says. “At a high level some external funds and a good relationship with creditors is required. The process has some complexity so good advice is absolutely essential. But this is an option which can allow the business to continue for the benefit of all stakeholders including major suppliers who would otherwise lose a customer.”
Should the company owner choose to go ahead with a DOCA under the right circumstances, the steps usually involve two meetings of creditors which are held over a period of, commonly, about two months, where a majority of creditors in number and value must approve a restructure plan. The restructure plan must be viable and also show to some extent that the company will be able to continue trading and regain profitability post-DOCA. While the vote is usually taken by creditors, if there is a tie, the administrator can also in some cases also exercise a casting vote.
The final outcome depends on each individual situation and Wyhoon says there are “all manner of possibilities”.
“A deed of company arrangement can contain many types of restructure arrangements, however, the usual goal is sanctioning of the old debts under some type of repayment arrangement under the deed of company arrangement to allow the business to continue trading,” he says.
In Liano's case, the ruling was favourable, and on August 29, industry speculation rang true with Bettina Liano Pty Ltd handed back to its original owner and sole director, along with six stand-alone stores.
According to a report by administrators John Lindholm and Brendan Richards of Ferrier Hodgson, the outcome also confirmed a deal for secured creditors (except related parties) and the landlords (for continuing stores) to be paid in full. It was also decided that unsecured creditors would receive an estimated 9.6 cents in the dollar.
While a DOCA is one way for directors to retain ownership of their businesses after administration, there are other ways to salvage a company and for significant stakeholders to retain ownership, post-administration. For Ed Harry chief executive David Clark, it was a case of executing an Asset Sale Agreement (“the Sale Agreement”), effectively representing a Management Buy Out (MBO).
“I suppose management, given that they are working within a business always have intimate knowledge of the business,” he says. “In our case we were working through a very structured plan to regenerate the business already, subject to surviving. So when the business was in administration, it was a matter of deciding whether we wanted to continue those plans. And we thought, yes, absolutely we would like to have the opportunity to continue the revitalisation program and the regeneration of the business and therefore, got on with our attempts buy the business out of administration.”
The events which followed saw Clark and chief financial officer John Read purchase the Ed Harry Menswear business via Specialty Mens Apparel Pty Ltd (SMA), an entity owned by both parties, effectively resulting in an MBO. The end result saw Clark and Read officially take ownership of 78 stores Ed Harry outlets nationwide. The company is now pegged for a fresh start, with regeneration plans already underway via store refurbishments, a narrowing of customer target market, design collaborations and an expansion into new product categories. A website with e-commerce facilities is also scheduled for launch next year.
However, Clark admits it's been a baptism of fire for the Ed Harry brand, and while there future looks bright, he warns that retailers need to carefully consider the pros and cons of any type of management buyout.
“A management buyout is a fairly difficult process, so every retailer has to weigh up their own situation. Lot's of things can go wrong with retail businesses, particularly post-administration,” he says. “There's a lot of stress placed on a business when it's in administration, so first you've got to evaluate that impact on your business and have a pretty sound business model that can deal with the ups and downs. You also have to factor in a very conservative plan and not base your decision-making on aggressive targets.
“That's essential to ensure that and you and your business are well-equipped to deal with all of the challenges that come your way. This includes the current retail environment, and rebuilding confidence in your employees and your customers after you have been through an administration and all the publicity that goes with it.”
