by Matt Riedy

With the Dick Smith saga well into maturity, aggrieved creditors continue to dominate the media. With the help of Senator Xenophon, creditors are able to voice their frustration and concerns over gift cards in particular or outstanding deliveries. Understandably so!

The main concerns surround the point of the continuation of trade and timing of the commencement of the saga, together with the failure to honour previous sales or gift cards. This is part and parcel of the insolvency industry as a whole – and I thought I would take the opportunity to attempt to explain the process.

The current status of Dick Smith involves two insolvency practitioners – and their roles are vastly different. These terms are commonly mixed up. Dick Smith currently has in the mix:

  1. Receivers & Managers; and
  2. Voluntary Administrators.

 Receivers & Managers

A Receiver and Manager acts for a secured creditor – someone who has provided funds or goods with a “security”, allowing them to take possession of and if necessary sell the assets of the company (known as a non-circulating security interest), or the Company itself (known as a circulating security interest), until their debts are released in full.

The formal appointment of a Receiver & Manager is at its core, a debt collection process. The Receiver & Manager will recover funds for the secured creditor that appointed them and them alone. Put simply; a Receiver and Manager does not have any obligation to report to, or act in the interests of, any other person or creditor.

The core role of the Receiver & Manager is to assess the business and decide what is the best course of action to recover the outstanding funds. This may be as simple as selling an asset, or as complex as trading the business of the company with a view of selling the business as a whole or in parts.

The only real restrictions on a Receiver & Manager are:

  • They are confined to the security that their secured creditor is entitled to hold – For a creditor with security over the entirety of the company (known as “All present & after-acquired property with no expectations” – ALLPAP), this gives the Receivers & Managers unrestricted access to the business and its assets;
  • They are confined to the role that the secured creditor limits them to;
  • They must make their best endeavours to achieve market value for any asset or business they sell; and
  • If non-physical assets are sold, all debts to employees and ‘trade-on’ suppliers must be met before they meet the liabilities of their appointor.

The final point is incredibly relevant. Dick Smith does not hold sufficient cash, nor be able to generate enough cash flow, to meet its expenses, hence why it’s in the situation its in. It also does not hold a lot of physical assets, which restricts the Receivers & Managers’ ability to achieve the desired outcome, which is payment in full to as many creditors as possible. The continuation of Dick Smith comes down to the ability to meet ongoing payroll and ‘fresh’ trading expenses (noting that all debts prior to the appointment are frozen), whilst being able to sell physical inventory which does not fall under the final point. The sales will assist in finding the bigger prize, a new owner who may provide the best form of recovery for the secured creditor.

Suppliers who have outstanding amounts gain the benefit of ongoing business. Commercially, this may be the best result and most suppliers “cut their losses”, and continue to supply. After all, some money is better than none and will continue their own cashflow and trading in the short term.

Further, and more importantly, employees will get the benefit of the Receivers & Managers taking active control of ensuring that people with outstanding accounts pay up (a non-physical asset which they get the benefit of), and looking into the best outcome for the secured creditor. This may be only reducing their debt to a comfortable level, not discharging it in full.

Voluntary Administrators

Voluntary Administrators are appointed due to the company being insolvent, or likely to become insolvent. It is an appointment over every aspect of the business and must act in the best interests of all creditors.

The Voluntary Administrators’ role is significantly hindered by the appointment of Receivers & Managers. In this instance, they must take a back foot in the entire process, particularly if the security interest is circulating.

The goal of Voluntary Administration is:

  • “to maximise the chances of the company, or as much as possible of its business, continuing in existence; or
  • If it is not possible for the company or its business to continue in existence – results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.”

The most common ways of doing this are:

  • Selling off part or all of the business; or
  • The execution of a Deed of Company Arrangement.

In the case of Dick Smith, the Administrators will ‘move in’ once the Receivers and Managers have completed their obligation to the secured creditor. They will investigate its affairs as a whole and report generally to the body of creditors.

So wait, why haven’t they honoured my gift card?

Great question. The typical rules of gift cards are difficult to explain in such a short blog, however effectively:

  • A gift card is a contract between you and the company, essentially, making you an ordinary unsecured creditor until you redeem it;
  • Gift cards do expire, and are legally allowed to do so.

The appointment of an Administrator cancels all contracts, and it is a matter for the Administrator to make a commercial decision on whether that contract be continued. Where a Receiver & Manager is involved, that responsibility may also fall on them.

In Dick Smith’s case, the responsibility does currently fall on the Receivers & Managers. Taking in account my previous comments on who the Receivers & Managers act for – honouring gift cards would effectively be giving inventory away for free which should be recovered for the secured creditor. Whilst it would be a great PR move for both the receiver and the secured creditor, it really doesn’t achieve the purpose of the appointment at all. After all, one does not lend money with the intention of not getting it back.

In the grand scheme of the appointment, Dick Smith maintains a significant level of creditors outside the gift card holders – people who experience this situation on a near daily basis.

I suppose I’m playing devil’s advocate here in explaining that the Administration process must be fair and equitable for all creditors. I accept that the claims of card holders in most circumstances in proportion to the claims of others has a greater effect on one than the other. After all, $100 to me could mean significantly more, or significantly less, to someone else.

Unfortunately, the law does not operate in this fashion, and nor should it. Each claim is treated individually in the Administration. It would be incredibly unfair to meet one liability and leave the others in the dark, simply because one group makes more noise than the other. All creditors have been effected in a certain dollar value by this process, and that effect should be treated equally.

Conclusion

I really hope I’ve cleared up some dirty air on this. Whilst I empathise with the situation entirely – it became clear to me that no-one in the mainstream media sought to explain the process (deliberately or not).

That being said, if you’re having trouble paying your bills, or having trouble with someone paying yours, Veritas Advisory’s experienced team are here to help. Contact us via our website or call us on 02 8999 9330.  All calls are treated with the utmost consideration and confidentiality, and we’ll listen and provide the advice you need to make a decision. 

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