Morris Powerlec Pty Limited (Administrators Appointed) A.C.N Administrators' Section 439A(4) Second Report to Creditors

Transcription

1 Morris Powerlec Pty Limited (Administrators Appointed) A.C.N Administrators' Section 439A(4) Second Report to Creditors 23 December 2010

2 Glossary The Act Corporations Act 2001 Grays Grays (Aust) Holdings Pty Ltd The Administrators Mr Trevor Pogroske and Mr Said Jahani of Grant Thornton GST Goods and Services Tax ASIC Australian Securities and Investments Commission IP Intellectual Property ATO Australian Taxation Office IPA Insolvency Practitioners Associations of Australia AWA c. Company Director DOCA FY2005 FY2007 FY2008 FY2009 FY2010 GEERS Australian Workplace Agreement Circa Morris Powerlec Pty Ltd (Administrators Appointed) Mr Peter Bonselaar Deed of Company Arrangement Financial year ending 30 June 2005 Financial year ending 30 June 2007 Financial year ending 30 June 2008 Financial year ending 30 June 2009 Financial year ending 30 June 2010 General Employee Entitlements and Redundancy Scheme Management MIS OSR PAYG PPE RATA Scottish Pacific/SPBF St George WIP YTD2011 Management of the Company, primarily Mr Peter Bonselaar and Mr Mark Clinghan Management Information Systems Office of State Revenue Pay As You Go Plant, Property and Equipment Report as to Affairs Scottish Pacific Business Finance Pty Ltd St George Bank a division of Westpac Banking Corporation Work in Progress The four month period of 1 July 2010 to 31 October

3 Contents Section Page 1. Introduction 4 2. Executive Summary 8 3. Company History and Reasons for Failure 9 4. Actions during the Administration and Sale of Assets Report as to Affairs Historical Performance Investigations Employees and Employee Entitlements Estimated Outcome Statement Administrators Recommendation Remuneration and Second Meeting 40 Appendices A. IPA Creditor Information Sheet B. Form 529 Notice of Meeting C. Form 532 Appointment of Proxy D. Form 535 Formal Proof of Debt E. Retrospective Remuneration Report F. Prospective Remuneration Report G. Liquidators' Estimated Remuneration Report H. Grant Thornton Scale of Rates (NSW) 3

4 Section 1 Introduction Introduction Executive Summary Company History and Reasons for Failure Actions during the Administration and Sale of Assets 5. Report as to Affairs 6. Historical Performance 7. Investigations 8. Employees and Employee Entitlements 9. Estimated Outcome Statement 10. Administrators Recommendation 11. Remuneration and Second Meeting

5 Introduction Second Meeting of Creditors Appointment and First Meeting of Creditors Trevor Pogroske and Said Jahani were appointed Joint and Several Administrators of Morris Powerlec Pty Ltd on 30 November 2010 pursuant to Section 436A of the Corporations Act The First Meeting of Creditors was held on 10 December 2010 at the offices of Grant Thornton and the appointment of the Administrators was confirmed by creditors. At this meeting the creditors did not nominate a Committee of Creditors for the Voluntary Administration. Second meeting of Creditors The Second Meeting of Creditors will be held on Friday, 7 January 2011 at 3.00pm and will be held at the offices of Grant Thornton, Level 17, 383 Kent Street, SYDNEY NSW The notice of meeting is set out in Appendix B. The purpose of the second meeting is to consider the Administrators' report on the Company's business, property, affairs and financial circumstances and to consider the Administrators statement of opinion in respect of each of the options available to creditors. At the meeting, creditors will be required to determine the future of the Company and to resolve one of the following: That the administration end; That the Company executes a Deed of Company Arrangement ("DOCA"); or That the Company be wound up. For reasons stated in this report it is our opinion that it is in the interests of creditors to vote that the Company be wound up. Second Report to Creditors Creditors should note that in preparing this report we have relied on information that has been provided from the following sources: Discussions with the Director of the Company; Discussions with key personnel of the Company; Discussions with potential purchaser's; Discussions with employees of the Company; Discussions with our legal advisors; Information available from the ASIC; Discussions with various creditors, including the secured creditor; and A review of the Company s books and records. Whilst we have no reason to doubt the accuracy of any information contained in this report, we have not performed an audit and we reserve the right to alter our conclusions should the underlying data prove to be inaccurate or change materially from the date of this report. In the event that the Company proceeds into liquidation, this report will form the basis of our further investigations. Provided that funding is available, the investigations will be more extensive than that undertaken to date, particularly due to the time constraints of the voluntary administration process. Further investigations may be supported by public examinations of the Director, officers and others who may be able to provide information about the Company s examinable affairs (as that expression is defined in the Act). It is our view that this report provides sufficient information to creditors to allow them to make an informed decision as to the Company s future, and allows the Voluntary Administrators to make a reasoned and fair recommendation based upon their opinions and the options available to creditors. 5

6 Introduction Compliance and Independence Compliance with Best Practice We confirm that this report complies with the statements of best practice issued by the Insolvency Practitioners Association of Australia ( IPA ) with regard to content of Administrators reports and the Code of Professional Practice with regard to remuneration (effective 21 May 2008). Independence As disclosed in our first notice to creditors dated 30 November 2010, the Administrators undertook a proper assessment of the risks in relation to their independence prior to accepting the appointment. This assessment identified no real or potential risks to their independence. We have not undertaken any prior engagements for the Company or its director prior to the appointment. We note that other offices within Grant Thornton Australia Limited have provided certain advisory services to Scottish Pacific Business Finance Pty Ltd, the secured creditor, in the ordinary course of conducting business over the past two years. We do not consider this advisory work to impact upon our independence in relation to this matter as this did not pertain to the Company. We have not received any indemnities for costs incurred by the Administrators. We confirm that there have been no changes to the Declaration of Independence, Relevant Relationships and Indemnities as stated in the initial Notice to Creditors. 6

7 Introduction Key events of the Administration The timeline below details the key events of the Administration, including: The sale of stock, plant and equipment which commenced immediately upon appointment. The sale of the assets is discussed in greater detail in Section 4. Since the date of appointment, we have conducted investigations into the reasons for the Company's failure. The outcome of these investigations is discussed in Section 7. At the second meeting of creditors on 7 January 2011 the Company's future will be decided. The Administrators prepared their s.439a report, and commenced reviews of employee entitlements (for immediate action once the outcome of meeting is known) and continue to undertake investigations. Employees terminated totalling 25. First creditors Meeting End of convening period 30 November April December December December December January 2011 Appointment date of Voluntary Administrators Stock, plant & equipment of the Company sold via Gray's online auction, commencing 14 December 2010 & ending 17 December The Administrators Issued their s.439a report to creditors. Second Meeting of Creditors. Creditors decide outcome: 1. The Administration ends; or 2. The Company executes a DOCA; or 3. The Company is wound up. Formal investigations as required during the Administration period. 7

8 Section 2 Executive Summary Introduction Executive Summary Company History and Reasons for Failure Actions during the Administration and Sale of Assets 5. Report as to Affairs 6. Historical Performance 7. Investigations 8. Employees and Employee Entitlements 9. Estimated Outcome Statement 10. Administrators Recommendation 11. Remuneration and Second Meeting

9 Executive Summary Overview Introduction Refer to Section 1. Principal Activity Refer to Section 3. Company History and Reasons for Failure Refer to Section 3. Trading during the Administration Refer to Section 4 Trevor Mark Pogroske and Said Jahani were appointed Joint and Several Administrators of Morris Powerlec Pty Ltd on 30 November 2010, pursuant to section 436A of the Corporations Act. The Second Meeting of Creditors will be held on Friday, 7 January 2011 at 3.00pm at the offices of Grant Thornton, Level 17, 383 Kent Street, SYDNEY NSW The Company operated in the materials handling industry; designing, manufacturing, supplying and servicing lifting and specialised engineering equipment. The Company operated from two leased premises. The main premises were located at 4 Muir Place, Wetherill Park with a second site at 27 Waterloo Avenue, Thornton. The Company also commenced operations from Melbourne in 2006, however, ceased to trade in Melbourne in January The Company s financial position deteriorated from a small net profit of $23,702 in FY2008 to net losses in FY2009 and FY2010 of $462,000 and $174,000 respectively. The Company had a net liability position for the past three financial years with a deficiency of $1.9 million in YTD2011. Our review has identified that the following factors contributed to the failure of the business: As the Administrators were without funding to continue to trade, the Company's operations were ceased immediately upon the Administrators appointment on 30 November The decision to cease operations was made for the following reasons: Poor Management; Trading losses; Significant arrears of both taxation liabilities and employee entitlements; and Inadequate MIS. There were no cash reserves available to meet trading liabilities and conduct a more extensive sale campaign; There was no external funding available from any related or third party; There had been a history of trading losses; and The secured creditor held first ranking priority over the book debts of the Company. Accordingly, whilst expenses were incurred to preserve the assets of the Company, there have been no 'trading' receipts. 9

10 Executive Summary Overview Sale of Business and Assets Refer to Section 4. Investigations Refer to Section 7. Estimated Return to Creditors Refer to Section 9. Negotiations were held with interested parties for the sale of the business and assets, including with a party who had conducted due diligence in July No acceptable offers were received from the various interested parties who were concerned about the following: Investigations to date have focused on the trading history during the months leading up to the appointment and the reasons for the Company being placed into Voluntary Administration. The investigations also focused on issues such as insolvent trading, preference payments and uncommercial transactions. The Company appears to have been insolvent from as early as June Potential preference payments are estimated at circa $547,000 (based on the 6 months ending on the relation-back date). These preferences will be investigated further should the Company be placed into liquidation. It should be noted that preference payment actions can be costly and protracted with no guarantee of any recovery. We have also identified potential uncommercial transactions as well as unreasonable director related transactions which will require further investigations (by a liquidator). Following consideration of the estimated realisations, administration costs and priority of payments, we do not foresee there being any return to ordinary unsecured creditors. We do however estimate the likelihood of a return to other classes of creditors as follows: The poor records of the Company; Limited value of work in progress; and Ageing of plant and equipment. A short sale process was also conducted for the IP of the business. Despite five parties proceeding to due diligence, no offers were received. In the absence of any in globo offers for the business and assets, an online auction campaign was held for the stock, plant and equipment. On conclusion of the auction on 17 December 2010, gross realisations were circa $183,000 with costs of c. $33,000. This result compares favourably to the valuation prepared by Grays on appointment which valued the assets sold for $77,000 on an auction basis (and $205,000 on an existing use basis). Secured Creditor: Full return likely Employees: Partial return via GEERS GEERS: Potential partial return 10

11 Executive Summary Overview Administrators' Recommendation Refer to Section 10. Remuneration and Second Meeting Refer to Section 11. As we have not received any proposal in respect of a DOCA and as the Company is insolvent, we believe the winding up of the Company to be the most appropriate option available. As the Company is insolvent we do not recommend the administration simply end. We therefore recommend that it is in the best interest of creditors that the Company be wound up. Remuneration from the date of our appointment to close of business on 22 December 2010 is $102,163 excluding GST and disbursements Remuneration for the period 23 December 2010 to the Second Meeting of Creditors is estimated to be $20,000 excluding GST and disbursements. Our estimate of prospective fees from 7 January 2011 to the conclusion of the liquidation (should the Company proceed to Liquidation) is $100,000 excluding GST and disbursements. 11

12 Section 3 Company History and Reasons for Failure Introduction Executive Summary Company History and Reasons for Failure Actions during the Administration and Sale of Assets 5. Report as to Affairs 6. Historical Performance 7. Investigations 8. Employees and Employee Entitlements 9. Estimated Outcome Statement 10. Administrators Recommendation 11. Remuneration and Second Meeting

13 Company History and Reasons for Failure Background and Overview Principal Activity The Company was registered with the ASIC on 3 February The Company operated in the materials handling industry; designing, manufacturing, supplying and servicing lifting and specialised engineering equipment. 25 employees were engaged by the Company at the time of the Administrators' appointment with a historical annual turnover of $5.5 million. Background The business was initially established in 1981 and in 1998 became part of Morris Material Handling Inc, an international manufacturer of overhead material handling equipment. The business was purchased from Morris Material Handling Inc by Peter Bonselaar, via the Company in February 2003 with a plan to focus on the Sydney, Newcastle (and at that stage Queensland) sales and servicing. Since the acquisition the Company has continued to focus on sales, service and major projects, delivering and supporting materials handling and lifting equipment. Registered Office and Principle Place of Business The latest ASIC search reflects the following as the Company's registered office and principal place of business: 4 Muir Place, Wetherill Park NSW The Company operated from leased premises at: 4 Muir Place, Wetherill Park, NSW; and 27 Waterloo Avenue, Thornton NSW. Operations were previously conducted from premises in Melbourne. The Company ceased these operations in January 2010 and returned its focus to New South Wales. Company Office Holders A search of the ASIC database confirmed the sole director and secretary of the Company were as follows: Name Capacity Appointment Date Peter Bonselaar Director 3/02/2003 Peter Bonselaar Secretary 3/02/2003 Sources: ASIC Company search According to the ASIC database, there have been no changes to the office holders in the past 12 months, or since incorporation. Company Shareholding At the date of our appointment the Company s shareholding comprised of 100 fully paid up ordinary shares with a total par value of $100. According to ASIC records, this shareholding was held as follows: Name Share Class Shares Held Par Value ($) Frances Bonselaar Ordinary Peter Bonselaar Ordinary 1 1 Bonselaar Pty Ltd Ordinary Total Sources: ASIC Company search Given the substantial shortfall to creditors, there will be no return available to the shareholders of the Company and accordingly these shareholdings are deemed to have nil value. 13

14 Company History and Reasons for Failure Background and Overview Secured Creditor Scottish Pacific Business Finance Pty Ltd (Scottish Pacific) holds a registered fixed and floating charge over the Company which was registered on 27 May The charge became effective as a result of a debtor factoring facility. In addition to a fixed and floating charge, Scottish Pacific have priority over all past, present and future book debts. As at the date of appointment, $368,851 was owed to the secured creditor. Collections of $250,097 have been received by Scottish Pacific from debtors during period 30 November 2010 to 21 December 2010, with a further $298,337 of book debts remaining outstanding for collection. Accordingly, it is likely that the secured creditor's remaining debt of $122,000 may be discharged from future debtor collections. Pursuant to Section 443B of the Act, the Administrators elected not to exercise their rights in relation to the assets subject to finance leases and hire purchase agreements and notified the finance companies accordingly. This was on the basis that there was no equity in the assets subject to those agreements. Partially Secured Creditors The Company entered into a number of lease and finance agreements with the following financiers: Leasewise Australia Pty Ltd; CIT Group (Australia) Ltd; Dell Financial Services; Australian Integrated Finance Pty Ltd; Alleaseing Pty Ltd; and Australian Integrated Finance Pty Ltd. The Company's fleet of 20 vehicles were leased through Leasewise. Following Grays valuations, it was determined that there was no equity in any of the vehicles. All other agreements relate to office equipment. 14

15 Company History and Reasons for Failure Reasons for Failure Director's Questionnaire The questionnaire completed by the Director, dated 6 December 2010 attributed the causes of the company's failure to: The death of an employee in September 2009 affecting morale and productivity; and Unpaid taxes. Administrators' Comments From the investigations undertaken to date and discussions with key management personnel, we believe the following additional factors may have contributed to the Company s failure: Poor Financial Management The Director, although competent in the daily operations and technical aspects of the business, appears to have limited financial knowledge to manage the Company's financial position. This was further compounded by inadequate reporting and support being provided by the financial controller to enable the Director to properly understand the financial position. This has been highlighted by Balance Sheets not being able to be produced, month end reports being described as 'inaccurate' until FY2011, and lack of transparent accounts. Poor financial management supports what appears to be insolvent trading for a period (refer to Section 7). Inadequate Management Information Systems The SYSPRO accounting system relied upon by the Company was not sufficient for the Company's needs, nor was it adequately maintained. Limitations to the system meant that Balance Sheets were not able to be produced, accounts could not be printed retrospectively and only set reports could be generated. Combined with its limitations, the system was poorly maintained resulting in material deficiencies and discrepancies being evident between the accounting system and supporting documentation. Examples of poor management information systems include stock never being accurately captured or reported in the system and the fixed asset register last being updated in January The fixed assets register also varied significantly from SYSPRO and the valuation prepared on behalf of the Administrators. Trading Losses The Management accounts revealed the Company recorded trading losses for at least the past two financials years (totalling $635,000) with only a small profit $24,000 being recorded in FY2008. Year to date FY2011 (October 2010) records a profit, however, historically, the first quarter has been the strongest and it is unknown how accurate these accounts are. Working Capital Deficiency Based upon a reconstruction of the balance sheets from the Company's general ledgers, the Company appears to have a history of net liabilities from FY2008 to YTD2011(c. $1.9 million). This is prior to adjustments for assets which appear to be overstated. Current assets decreased year on year with the trade creditor position remaining high (c. $1 million) and ageing of these creditors deteriorating. The deficiency was further evident by a number of trade creditors exerting pressure on the company for payment and statements of claim being issued. Increasing Statutory Debt Statutory liabilities increased with the Company being unable to meet its taxation obligations since at least March Repayment plans were entered into with the OSR and ATO (including a super guarantee component). Further investigation into the reasons for failure of the company will be undertaken by the Liquidators should the Company be placed into Liquidation. 15

16 Section 4 Actions during the Administration and Sale of Assets Introduction Executive Summary Company History and Reasons for Failure Actions during the Administration and Sale of Assets 5. Report as to Affairs 6. Historical Performance 7. Investigations 8. Employees and Employee Entitlements 9. Estimated Outcome Statement 10. Administrators Recommendation 11. Remuneration and Second Meeting

17 Actions during the Administration and Sale of Assets Actions During the Administration Period and Sale of Business Trading During Administration As the Administrators were without funding to continue to trade, the Company's operations were ceased on their appointment on 30 November The decision to cease operations was made for the following reasons: No cash was available to meet ongoing trading liabilities or to conduct a more extensive sale campaign; No external funding was available from any related or third party who was interested in acquiring the business; The secured creditor's first ranking priority over the book debts under its factoring agreement did not allow any free cash to be generated for trading; and There had been a history of extensive trading losses. All employees were terminated on the date of appointment and the focus of the Administrators was directed towards realisation of the business and assets for the benefit of the creditors. Despite there being no trading receipts, some expenses have been necessary to incur in order to preserve the assets of the Company. Pre-appointment debtor collection At the date of appointment, the Books and Records of the Company indicated that debtors outstanding were $622,000. This is in contrast to the records of Scottish Pacific, who through the debtor factoring facility informed the administrators that the book debts totalled $548,000. A further $13,000 of unbilled work has since been invoiced. As a result of the debtor finance facility, Scottish Pacific have security over the past, present and future book debts, as well as a fixed and floating charge over all assets. Collections from the date of appointment to 21 December 2010 total $250,000 with approximately $298,000 of remaining book debts to be collected. At the date of appointment, Scottish Pacific was owed $368,851. At 21 December 2010 as a result of collections the exposure to Scottish Pacific has been reduced to $121,574. Sale of Business The Company had been in discussions with a third party from as early as July 2010 with respect to the sale of the business and assets. A substantial amount of confidential detailed information was provided to the third party prior to our appointment to enable them to conduct due diligence and make an offer for the business. An offer was received in the amount of $425,000 in July 2010 and subsequently rejected. Under the terms of the deal, cash consideration of only $20,000 would be paid with the remainder to be an adjustment for employee entitlements. Following the appointment of the Administrators, negotiations continued with the same third party. An offer of $319,000 was received on 30 November 2010 with cash consideration of $25,000 to be paid and the balance to be adjusted against the employee entitlements. The offer was considered unacceptable by the Administrators and was subsequently withdrawn by the third party. Simultaneous discussions were held with other parties for the sale of the business. Despite several inspections, no other offers were received with the following risks and concerns being noted by potential purchasers: Sale of IP Poor and unreliable books and records; Limited value and depth of work in progress; Aged plant and equipment; and High level of employee entitlements. In the absence of any acceptable offers for the business and assets, a sale process immediately commenced for the intellectual property of the Company. A sense of urgency was present given the deteriorating value of these assets, particularly in light of the knowledge held by employees and the tight competitive nature of the industry. A due diligence package was prepared following our appointment providing an overview of the service agreements, customer database and WIP. 17

18 Actions during the Administration and Sale of Assets Sale of Assets continued Competitors were contacted and informed of the sale process with several parties contacting the Administrators office directly. A total of 5 parties were provided with the due diligence material after executing confidentiality agreements. Unfortunately no offers were received. Sale of Stock, Plant and Equipment Grays Online were engaged to prepare a valuation of all stock (including work in progress) and plant and equipment at the Company's premises. Set out below is a table summarising the Grays' valuation which is substantially lower than the Company's fixed asset register of $833,000 and inventory listing of $387,000 pursuant to the accounting system SYSPRO. The valuations below have been reduced by 'excluded items', being assets subsequently determined to be third party assets or fixtures, and not available for sale. Site Existing Use Value Auction Value Wetherill Park 191,330 68,410 Thornton 89,190 30,490 Adjustment for Excluded Items (76,000) (22,000) Total 204,520 76,900 In lieu of any in globo offers for the business and assets, it was determined the most appropriate method of sale for the stock, work in progress, and plant and equipment would be via an online auction with the assets to remain in situ. It was necessary to hold the auction as soon as possible to minimise the Administrators' rental liability for their period of occupation until the assets could be sold and relocated. In the absence of funds, a commercial compromise was reached with each of the landlords whereby the overhead gantry cranes would not be sold and removed in lieu of rent. A proposal was received from Grays Online and an online auction process commenced immediately with the following key dates: Cataloguing of assets: 6 December 2010 Online auction commenced: 14 December 2010 Online auction closed: 17 December 2010 Final collection of assets: 23 December 2010 Estimated auction results and realisation costs are set out below. Due to the auction only recently concluding and the receipt of funds and collection of assets being underway at the date of this report, the results are estimates only and subject to change. Wetherill Park 135,104 Thornton 47,480 Total Sale Proceeds 182,584 Realisation Costs (33,183) Net Realisations 149,401 At the date of this report, the Administrators have not yet received the funds from the realisation of assets, but are expected to be collected prior to the date of the creditors meeting on 7 January $ 18

19 Section 5 Report as to Affairs Introduction Executive Summary Company History and Reasons for Failure Actions during the Administration and Sale of Assets 5. Report as to Affairs 6. Historical Performance 7. Investigations 8. Employees and Employee Entitlements 9. Estimated Outcome Statement 10. Administrators Recommendation 11. Remuneration and Second Meeting

20 Report as to Affairs Report as to Affairs Report as to Affairs Book value Estimated Realisable Value Administrators Value Description Note ($) ($) ($) Cash at Bank Cash on Hand Debtors ,000 Inventory/Stock 271,800 unknown 3 Plant & Equipment unknown unknown 182,584 Other Assets Total Assets 271, ,584 Less: Amount owing to Secured creditor (368,851) Amount owing to Priority creditors 5 unknown unknown (528,503) Surplus / (Deficit) in asset before the claims of unsecured creditors 271,800 - (166,770) Amount owing to Unsecured creditors 6 unknown unknown (1,593,913) Surplus / (Deficit) before Realisation and Administration costs Source: Directors RATA for the Company RATA 271,800 - (1,760,683) Report as to Affairs ("RATA") Pursuant to Section 438B(2) of the Act, the Director of the Company is required to submit a statement about the Company s business, property, affairs and financial circumstances in the form of a RATA. The RATA is a snapshot in time of the assets and liabilities of the Company, disclosing book values and the estimated realisable values for assets. On 30 November 2010, a written request was issued to the Director to complete the RATA for the Company. An incomplete RATA was returned to the Administrators on 14 December Opposite is a summary of the RATA prepared by the Director. The Director has omitted the book value and estimated realisable value of the assets and liabilities of the Company. In particular sections of the RATA, the Director has provided details of the assets/liabilities, however, he has not stipulated the value. The RATA submitted confirms the Director s lack of knowledge regarding the financial position of the Company. In the questionnaire submitted, the Director acknowledges that he has been unaware of the Company s financial position and that he relied solely on the financial controller to manage the financial operations of the Company. We comment briefly on the RATA prepared by the Director. Please refer to Section 9 for discussion on the Administrators' estimated outcome assessment. 20

21 Report as to Affairs Report as to Affairs Note 1. Cash at Bank As a result of overdrawn accounts, only petty cash of $910 was available upon appointment. Note 2. Debtors The Director has not provided a list or value of the debtors outstanding as at the date of our appointment, despite this information being available. As at the date of our appointment, we believe the amount of debtors outstanding was $548,000. The records of the Company indicated that the debtors outstanding were $622,000. Collections by Scottish Pacific from the date of appointment to 21 December 2010 total $250,000. Note 3. Inventory/Stock and Plant & Equipment The Director has provided a high level schedule of the plant and equipment of the Company, however, has not provided the book value or estimated realisable value. Immediately on our appointment, we engaged Grays to value and subsequently sell the plant, equipment and stock of the Company. The valuation prepared by Grays provided an existing use value of $280,520 and an auction value of $98,900 for the unencumbered items. We note that the plant, equipment and stock of the Company was sold for a gross value of circa $180,000 Note 4. Amount owing to secured creditor Scottish Pacific as the secured creditor of the Company were owed $368,851 at the date of appointment. This amount has subsequently been reduced to $121,000 as a result of the debtor collections. Note 5. Amount owing to priority creditors The Director has provided a list of the employees of the Company who are owed outstanding entitlements, however, the amount outstanding has not been disclosed. From our investigations, we have determined that the outstanding employee entitlements is $528,503 which relates to unpaid wages, annual leave and long service leave entitlements, pay in lieu of notice, redundancy and superannuation. Note 6. Amounts owing to unsecured creditors The Director has provided a list of 15 unsecured creditors who have not been paid in full as at the date of our appointment, however, he has not provided the balances owing. The number of unsecured creditors whose debts remain outstanding as at the date of our appointment were circa 150. The Company s books and records indicated that there are creditors of $954,000. We estimate the amount owing to unsecured creditors is circa $1.59m. The amount of $1.59m is based on a comparison between of the Company s books and records and the informal proofs of debt received from unsecured creditors. The higher value for creditors (ie $1.59m) has been utilised to determine the projected amount owing under a worst case scenario. 21

22 Section 6 Historical Performance Introduction Executive Summary Company History and Reasons for Failure Actions during the Administration and Sale of Assets 5. Report as to Affairs 6. Historical Performance 7. Investigations 8. Employees and Employee Entitlements 9. Estimated Outcome Statement 10. Administrators Recommendation 11. Remuneration and Second Meeting

23 Historical Performance Profit and Loss Summary Profit and Loss Summary FY2009 to YTD2011 Notes FY2008 FY2009 FY2010 YTD2011 Sales Revenue 1 7,265,789 5,395,099 5,711,234 1,648,972 Less: Cost of Sales 2 (4,442,212) (3,149,535) (3,549,438) (914,937) Gross Profit 3 2,823,577 2,245,564 2,161, ,035 Operating Expenses 4 (2,854,174) (2,746,526) (2,398,978) (639,492) Other Income 54,299 39,199 63,661 6,477 Net Profit / (Losses) 5 23,702 (461,763) (173,521) 101,020 Sources: Client's Profit and Loss Statements for FY2009, FY2010 and YTD2010 produced from SYSPRO Notes: 1) Sales Revenue: The Company experienced a decline in sales by 26% from FY2008 to FY2009, whilst the gross profit declined by 20% for the same period. The Company experienced an increase in sales by 6% from FY2009 to FY2010, however the gross profit declined by 4% during the same period. YTD2011 sales revenue is reported as being $1.65m. Sales revenue for the corresponding period (1 July 2009 to 31 October 2009) was $2.30m. The YTD2011 sales revenue has declined by 28%, noting that the Melbourne operation ceased during this comparative period. 2) Cost of goods sold: The Company's cost of sales as a percentage of sales remained stable from FY2008 to YTD2011, being circa 60% for each respective period. 3) Gross Profit: The Company's gross profit declined from $2.82m in FY2008 to $734,036 in YTD ) Operating Expenses: The Company s operating expenses declined from $2.85m in FY2008 to $2.40m in FY2010, which correlates with the decline in sales (40% of sales). It should be noted that during this period, the debt owed to the ATO and unpaid superannuation continued to increase. Management Accounts The Company s Profit and Loss Statements for FY2008, FY2009, FY2010 and YTD2011 are summarised opposite and discussed in more detail on the following page. It should be noted that the YTD2011 figures only account for the 4 month period between 1 July 2010 and 31 October 2010 with management accounts for November 2010 not having been prepared at the time of appointment. Creditors should note that these accounts have not been audited and the Administrators are unable to provide any assurance as to their accuracy or reliability. The last externally prepared accounts for the Company was for FY2007. We note that there were material variances between the management accounts of the Company and the externally prepared accounts in that year. For comparative purposes, and given that accounts have not been prepared externally since FY2007, we used the management accounts as the basis of our investigations. The Company s financial accounts clearly demonstrate that financial difficulties were experienced from FY2008 to FY2010. Whilst the Profit and Loss Statement for YTD2011 indicates that the Company generated a net profit, the balance sheet for YTD2011 highlights a negative net asset position. As at 31 October 2010, the Company reported a net asset deficiency of $1.92m. 5) Net Profit / (Losses): The Company s performance deteriorated between FY2008 to FY2009 from a net profit of $23,702 to a net loss of $461,763. The Company s net losses reduced from $461,763 in FY2009 to $173,521 in FY2010. However, it should be noted that the net profits/(losses) reflected in the Profit and Loss Statements do not take into consideration interest, tax and depreciation expenses. As such, we are unable to determine the true net profit/(loss) position of the Company. The Company has recorded a net profit of $101,020 for YTD2011, however, the net profit historically declined for the period December to June of each financial year. 23

24 Historical Performance Balance Sheet Summary Balance Sheet Summary Notes FY2008 FY2009 FY2010 YTD2011 Current Assets Cash and Cash Equivalents 1 14,073,399 13,982,512 33,269 (11,020) Trade Receivables 2 1,321,536 1,331, , ,208 Inventory/Stock 3 1,041,527 1,686, , ,203 Prepayments (324,286) (234,701) (217,408) (244,705) Total Current Assets 16,112,176 16,766,576 1,250, ,686 Non-Current Assets Plant, Property and Equipment 4 541, , , ,108 Depreciation (170,174) (170,174) (170,174) (170,174) Goodwill 2,290 2,290 2,290 2,290 Total Non-Current Assets 373, , , ,224 Total Assets 16,485,986 17,193,764 1,677,481 1,424,910 Current Liabilities Trade Creditors 5 (1,210,824) (1,239,912) (1,095,986) (987,283) Suspense Accounts (373,443) (1,189,060) (606,417) (295,578) Provisions - FBT (6,870) (5,218) 1,485 1,229 Provisions - Workers Compensation (35,100) (25,089) (28,854) (49,506) Statutory Liabilities 6 (106,616) (230,124) (458,506) (406,879) Other Current Liabilities (68,887) (15,031) (21,602) (92,503) Total Currrent Liabilities (1,801,740) (2,704,434) (2,209,880) (1,830,519) Non-Current Liabilities Hire Purchase Liabilities Provision - Employee Benefits 7 (392,259) (617,353) (582,813) (539,958) Bank Loans 8 (14,888,093) (14,582,275) (393,295) (508,108) Unsecured Loans 9 (278,524) (446,743) (465,243) (465,243) Total Non-Current Liabilities (15,558,730) (15,646,226) (1,441,205) (1,513,163) Total Liabilities (17,360,470) (18,350,660) (3,651,085) (3,343,682) Net Liabilities (874,484) (1,156,896) (1,973,605) (1,918,772) Sources: Client's Trial Balances for FY2009, FY2010 and YTD2010 produced from SYSPRO According to management, the accounting system utilised by the Company, SYSPRO, did not facilitate the Company to generate balance sheets. As such, apart from the externally prepared financial statements for FY2007 and FY2005, the Company never prepared balance sheets. The balance sheet summary presented in this section has been reconstructed by the Administrators from the trial balances produced by the Company. It should be noted that the Administrators are unable to provide any assurance as to the accuracy and reliability of the account balances used to reconstruct the balance sheet summary. We provide commentary on the Balance Sheet as follows: Note 1. Cash at Bank The cash balance of $14.07m and $13.98m for FY2008 and FY2009 respectively, appears to be grossly overstated. Management has confirmed that accounting errors, which were not rectified until FY2010, were the cause of the material overstatement. For comparative purposes, this should be offset against bank loans. The Company s available cash deteriorated from FY2010 to YTD2011 from a positive cash balance of $33,269 to an overdrawn balance of $11,020. Cash held in credit accounts at the date of appointment totalled $2,250 with a further account having an overdrawn balance of $9,226. Accordingly, no cash was available upon appointment. Note 2. Trade Receivables Trade receivables decreased from $1.32m in FY2008 to $649,045 in FY2010. This could be attributed to the decline in sales revenue from $7.27m in FY2008 to $5.71m in FY2010. Scottish Pacific are continuing to collect debtors which were $548,000 at appointment. 24

25 Historical Performance Balance Sheet Summary Note 3. Inventory/Stock We note that the accounting system utilised did not have the capability to adequately record and monitor the movement in stock and therefore the stock value reported has most likely been overstated. Despite annual stock takes being undertaken, the system remains incorrect. The valuation undertaken by Grays noted minimal stock on hand at the date of appointment. Note 4. Plant, Property and Equipment PPE consisted of plant and machinery, motor vehicles, office equipment and furniture and fittings. A significant number of the items recorded in the general ledger were encumbered with the corresponding leasing liability not having been recorded. This is a further indication that the books and records were not properly maintained. Management provided a fixed asset register which stated that the value of all PPE was $833,013. Management has acknowledged that this value was last reconciled in January 2009, which further highlights the fact that the Company did not adequately maintain its books and records. Following our appointment we engaged Grays to value and subsequently sell the PPE and stock of the Company. The valuation prepared by Grays provided a market value of $280,520 and an estimated realisable value of $98,900 for all unencumbered PPE and stock. These values were significantly lower than the value that was recorded in the balance sheet. (Refer to Section 4 for further detail on realisations of these assets). The PPE and stock of the Company was realised for circa $180,000 (gross). Note 5. Trade Creditors Whilst the amount owing to trade creditors reduced from $1.21m in FY2008 to $987,283 in YTD2011, it should be noted that the ageing of trade creditors increased significantly from 43% of creditor balances outstanding for 90+ days in FY2008 to 79% in YTD2011. Note 6. Statutory Liabilities Statutory liabilities consist of GST, PAYG and payroll tax liabilities. The statutory liabilities increased from $106,616 in FY2008 to $406,879 in YTD2011. The Company entered into a repayment arrangement with the ATO around May 2009, however, the payments made to date have been insufficient to discharge the Company s statutory liabilities. A payment plan was also entered into with the OSR in May The ATO and OSR have lodged proofs of debt in the amount of $245,208 and $75,479 respectively. Note 7. Employee Benefits This consists of unpaid superannuation and provisions for annual leave and long service leave. The employee benefits liability has increased from $392,259 in FY2008 to $539,958 in YTD2011. Superannuation has remained unpaid from at least March 2009 and as such forms a superannuation guarantee charge. Further, a number of employees who resigned prior to appointment have not been paid out entitlements (including superannuation).. 25

26 Historical Performance Balance Sheet Summary Note 8. Bank Loans These amounts should most likely have been set off against the cash balances. We have not been able to determine the reasons for the methodology used in accounting for these loans. As noted previously, accounting errors which were not rectified until FY2010, are the cause of this material overstatement and for comparative purposes, this should be offset against the cash balance for the respective periods. At the date of our appointment Scottish Pacific, the secured creditor was owed $368,851. This amount has subsequently been reduced to $122,000 as a result of the debtor collections. Note 9. Unsecured Loans At the date of appointment, the Company s records reflected the following loan (liability) accounts: Summary of Unsecured Loans Amount ($) Director - Peter Bonseelar (302,975) Advance from Mark Clinghan (70,000) Other Unsecured Loans (92,268) Total (465,243) Sources: Client's Trial Balances for FY2009, FY2010 and YTD2010 produced from SYSPRO Should the Company be placed into liquidation, the Liquidators will be required to review the ledgers and nature of these loan accounts. 26

27 Section 7 Investigations Introduction Executive Summary Company History and Reasons for Failure Actions during the Administration and Sale of Assets 5. Report as to Affairs 6. Historical Performance 7. Investigations 8. Employees and Employee Entitlements 9. Estimated Outcome Statement 10. Administrators Recommendation 11. Remuneration and Second Meeting

28 Investigations Voidable Transactions Antecedent transactions recoverable by a Liquidator In accordance with Regulation 5.3.A.02, the administrator of a company under administration, in setting out his or her opinions in a statement mentioned in paragraph 439A (4)(b) of the Act, must specify whether there are any transactions that appear to the administrator to be voidable transactions in respect of which money, property or other benefits may be recoverable by a liquidator under Part 5.7B of the Act. The administration process set down in Part 5.3A of the Act, provides a very short time within which to conduct investigations into potential recoveries from voidable transactions. At this stage, due to the short time frame allowed, it is difficult to definitively identify the likely courses of actions and / or recoveries that may be available to a liquidator. Such conclusions would usually be made after more detailed investigations have been undertaken. Such investigations would normally include: Detailed review of documentation produced by relevant parties upon enquiry by a Liquidator / Administrator. The public examination under oath, of relevant parties regarding the transactions concerned. Accordingly, whilst we have conducted the necessary enquiries required of an Administrator, the conclusions drawn herein with respect to our investigations into the company s affairs should be viewed as preliminary and may be confirmed, or otherwise, by way of other sources of investigation should the company proceed to liquidation. The transactions generally fall into two categories, being insolvent trading and voidable transactions (comprising unfair preferences, uncommercial transactions and unfair loans). Voidable transactions Pursuant to Section 588FA and the associated provisions of the Act, a liquidator is able to recover from creditors any payments, preferences or advantages obtained by the creditor from the company. Unfair preferences The payments referred to are generally recoverable under Section 588FA of the Act if the payments were made during a period of six months prior to the commencement of the winding up date, or the date the Voluntary Administrators were appointed (otherwise known as the relation back date ), which in this case would be the period 31 May 2010 to 30 November We have examined payments made to creditors during the last six months and it appears the Company made payments to creditors, which may constitute unfair preferences. That is, they have received more than they would have if the payment of their debt was set aside and they were to prove for their debt in the winding up of the Company. To constitute an unfair preference payment, it must be proven that the Company was insolvent at the time of the payment and that the creditor had a suspicion or ought to have had a suspicion that the Company was insolvent. The following factors can be demonstrative of that suspicion: The Company having failed repayment arrangements; making payment(s) to suppliers outside of normal trading terms; and/or seeking additional finance or cash injection. 28

29 Investigations Voidable Transactions Creditors resorting to legal actions to recover the debts; receiving post-dated cheques following the commencement of legal proceedings; entering into COD payment arrangements with suppliers; making demands for clearance of the debt unrelated to a promise to recommence supply; and/or seeking additional security to secure the debt. Payments totalling $547,462, which possess the characteristics of potential unfair preference payments, have been identified as being made during the relation back period. The payments we identified were paid to: Recipient No. of Creditors Amount ($) Statutory Creditors 3 ATO 305,262 OSR - NSW 12,500 OSR - Victoria 10, ,762 Trade Creditors ,213 Creditors who have issued statutory demands 5 61,487 Total Preference Payments Identified ,462 Uncommercial transactions Section 588FB(1) of the Act defines an uncommercial transaction as a transaction of the company if, and only if, it may be expected that a reasonable person in the company s circumstances would not have entered into the transaction, having regard to: The benefits (if any) to the company of entering into the transaction; The detriment to the company of entering into the transaction; and The respective benefits to other parties to the transaction. Section 588FC of the Act defines an insolvent transaction as one which is an uncommercial transaction and entered into when the company was insolvent at the time of the transaction, or would become insolvent as a result of entering into the transaction. Based on our initial examination of the books and records of the Company, we have identified 3 potential uncommercial transactions totalling $6,180. A liquidator would also conduct a more detailed investigation into all transactions that occurred in the period up to two years prior to the relation back date. Should we be appointed as liquidators, a more detailed investigation would be undertaken and creditors should note that any funds recovered, would be diluted by the fact that the individual creditor who may be forced to disgorge the amounts would be able to prove for those amounts in the liquidation. It should be noted that pursuing preference recoveries can be a costly, lengthy and not necessarily successful exercise. 29

30 Investigations Voidable Transactions Books and records Sections 588E(3) and 588E(4) of the Act provides a presumption of insolvency for a period of 12 months from the relation back date if it is proved that the Company failed to keep proper financial records in accordance with Section 286 of the Act. A Liquidator would investigate whether the Company maintained adequate books and records that provided reliable reports to the Director relating to the monthly financial position of the Company. A liquidator would further investigate whether the Company maintained adequate books and records in accordance with Section 286 of the Act. Accordingly, in the event that a liquidator was successful in establishing that the books and records were indeed deficient, this would assist in considering whether any action might be taken against the Director of the Company in accordance with the Act. The records collected from the Company included: Bank statements; Management accounts; The latest financial statements; Accounting system back ups; Statutory and ASIC filings; Shared IT drive system back up and copies of key personnel accounts; Files containing financial information including invoices etc; A copy of all recent ATO correspondence and filings; and Employee records. During the limited time available to us to undertake investigations, it is apparent that books and records were maintained at a transactional level, however the Company did not prepare adequate financial reports and management information in an accurate or timely manner. In the Director s questionnaire submitted, the Director acknowledges that draft month end reports were produced, however they were not accurate until As noted in Section 6, accounting errors caused material misstatements in key asset and liability accounts until the accounts were reconciled for FY2010. It is our opinion that the Director of the Company may have committed offences in relation to the maintenance of proper books and records for the Company pursuant to Sections 286 and 588 of the Act. Our opinion is premised upon the following: Management accounts were not prepared in a timely manner; Inaccuracies in key asset and liability accounts were carried forward and not reconciled until FY2010; Balance Sheets were never produced as a result of the shortcomings of SYSPRO; and Reliable and accurate reports could not be produced as a result of the shortcomings Director Related Transactions Payments, the issue of securities, conveyances or other dispositions of property by the company in favour of a director, a relative or de facto spouse of a director may constitute an unreasonable director related transaction in accordance with section 588FD. The loan account owing to the Director at the date of appointment was recorded in the Company books at $302,975. This amount represents a loan advanced to the Company from the Director which was provided prior to FY2008. Should we be appointed liquidators, it will be necessary to review and investigate the nature of the loan account further. 30

31 Investigations Insolvent Trading Insolvent trading Overview In order to ascertain if these transactions, and any others, were uncommercial a Liquidator must determine whether the Company was insolvent at the date of the transaction, or became insolvent as a result of the transaction. Having established the likely date the Company became insolvent, a Liquidator can investigate whether the Director incurred debts at a time when he suspected or should have suspected the Company was insolvent (insolvent trading). There is a specific requirement under the Act that directors must take action to avoid insolvent trading. If it is proven that there were any breaches of the Act by the director/s for insolvent trading, then the director/s can be held personally liable for any additional debts incurred whilst the company traded whilst insolvent. Pursuant to Sections 588G and 588M of the Act, a Liquidator may seek to recover from the director/s of the company any debt incurred by the company after a time that a reasonable person would suspect that the company could not pay its debts as and when they fell due i.e. after the date it became insolvent. Insolvent trading is governed by section 588G(1) of the Act and applies if: a) A person is a director at the time the debt is incurred; and b) The company is insolvent at that time; and c) At that time, there are reasonable grounds for suspecting that the company is insolvent. This section is breached if: a) The person is aware at that time that there are grounds for suspecting insolvency; or b) A reasonable person in a like position in a company in the company s circumstances would be aware of suspecting insolvency. For there to be a breach of these provisions, the company had to be insolvent at the time the debt was incurred. The Courts have held that insolvency is the inability to pay the company s debts as and when they fall due, although it has been held that cash flow shortages or problems are not evidence of the inability to pay debts as and when they fall due. If creditors have information which would assist our investigations, it is requested that this is provided to the Administrators in writing. In addition, should the Company be placed into Liquidation, creditors are invited to fund an insolvent trading action. In this regard, please contact the Administrators to discuss in further detail. We reiterate that recoveries of this nature are only available if the Company is placed into liquidation. Defences There are four distinct statutory defences where a contravention of 588G has occurred. The defences are designed at protecting a director where one of the following has occurred: The director had reasonable grounds to expect solvency (588H(2)); The director had reasonable grounds to expect solvency based on information supplied by a subordinate (588H(3)); Illness or other good reason, prevented the director from being involved in management activity (588H(4)); and The director took all reasonable steps to prevent the company from incurring the debt (588H(5)). Personal Financial Position of Directors We are unaware of the personal financial position of the Director, however should the Company be placed into Liquidation, we would assess more carefully the cost/benefit in pursuing an insolvent trading claim against the Director. Whilst our investigations highlight that the Company was likely to have been insolvent since June 2008 (possibly earlier), we have not ascertained the prospect of recovery based on the current financial position of the Director. 31

32 Investigations Insolvent Trading Indicators of insolvency Indicator Overview Administrators' investigations Cashflow test The test for solvency and consequently insolvency is prescribed by Section 95A of the Act which states that: "(1) a company is solvent if, and only if, the company is able to pay all the company's debts, as and when they become due and payable; and (2) a company who is not solvent is insolvent." This translates into the "cashflow test", however analysis of the balance sheet is also important in forming a view as to solvency. We have conducted a review of the Company s cash account balance as reflected in the monthly trial balances and compared this to the bank statements for the relative period. When compared, we note that the balances recorded in the trial balance differed to the corresponding bank statement balance. Should Liquidators be appointed, further investigation will need to be undertaken to ascertain the true historical movement in the cash accounts. As noted in Section 6, accounting errors existed between June 2008 and June 2010 in respect of the cash balances, and for comparative purposes would need to be offset against the bank loans account. The chart below highlights the movement in the cash balance (adjusted for comparative purposes) between June 2008 and October 2010, based on the Company s trial balances. It can be seen that the Company s bank account was continually overdrawn during this period, and as such, the Company had insufficient cash to meet its debts as and when they fell due and payable. Cash Balance Analysis 0 (100) (200) (300) (400) (500) (600) (700) June 2008 September 2008 December 2008 March 2009 June 2009 ($'000) September 2009 December 2009 March 2010 June 2010 September

33 Investigations Insolvent Trading Indicators of insolvency Indicator Overview Administrators' investigations Balance sheet test The balance sheet test considers whether a Company may be insolvent if the total liabilities exceed the value of the assets and there are insufficient assets to discharge the liabilities. We have undertaken a series of liquidity ratios, such as: Current Ratio; Quick Ratio (Acid Test); and Net Working Capital Ratio. The results of these ratios assist in the determination of the Company s balance sheet solvency, or in this case, the lack of solvency. This analysis is based upon the balance sheet reconstructed by our staff from the trial balance of the Company. The chart below reveals that the Company reported a net liability position from as early as June 2008 and has been undercapitalised during this period to the date of our appointment. The reconstructed balance sheets shows that net liabilities deteriorated from $874,484 at 30 June 2008 to $1,918,772 at 31 October An analysis of the quick ratio reflects that the Company did not have sufficient liquid assets (i.e. cash and receivables) to discharge the current liabilities during the period June 2009 to the date or our appointment. An analysis of the net working capital ratios reveals that from July 2008, the Company experienced a shortage of working capital. On this basis the Company's net asset position indicates insolvency since at least June Net Asset Analysis from 30 June 2008 to 31 October (500,000.00) (1,000,000.00) ($) (1,500,000.00) (2,000,000.00) (2,500,000.00) June 2008 September 2008 December 2008 March 2009 June 2009 September 2009 December 2009 March 2010 June 2010 September 2010 FY2008 FY 2009 FY2010 YTD

34 Investigations Insolvent Trading Indicators of insolvency Indicator Aged Creditors Other tests/investigations An ageing analysis has been performed based on the management accounts and the outstanding creditor balance at the date of our appointment. The Company did not have sufficient cash resources to discharge outstanding creditor balances at any time from June 2008 to the date of our appointment. The chart below highlights the ageing of the outstanding creditor balances which deteriorated from 43% being overdue by greater than 90 days in June 2008 to 79% in October Aged Creditors Analysis 100% 90% (%) 80% 70% 60% 50% 0-30 days days days 90+ days 40% 30% 20% 10% 0% Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Ability to generate additional capital Other indicators The Company's net asset position was deficient to the point that it would be extremely risky to advance the Company further funds. It would have been highly unlikely that the Company would have been able to source additional capital and the Director was looking to sell the business and assets. During the investigations we undertook to prepare this report, the following additional indicators of insolvency were established: Solicitor letters and statements of claims issued to the Company from five creditors. Management advised that there may be additional creditors who have issued such notices. There is a series of correspondence from creditors seeking payment and expressing concerns as to the ageing of debts. 34

35 Section 8 Employees and Employee Entitlements Introduction Executive Summary Company History and Reasons for Failure Actions during the Administration and Sale of Assets 5. Report as to Affairs 6. Historical Performance 7. Investigations 8. Employees and Employee Entitlements 9. Estimated Outcome Statement 10. Administrators Recommendation 11. Remuneration and Second Meeting

36 Employees and Employee Entitlements Employees Employees At the date of appointment there were 25 employees, inclusive of 5 casual and part time employees. All employees were notified that their employment with the Company had to be terminated at the date of appointment. Employees had only been paid up to 23 November 2010 as at the date of appointment. Wages for the period 24 November 2010 to 30 November 2010 remained outstanding. Our review of the books and records has identified the following outstanding entitlements which will rank as priority claims: Summary of Outstanding Employee Entitlements Type Notes to the summary of Outstanding Employee Entitlements 1. Unpaid wages are for the period from 24 November 2010 up to the date of appointment. 2. Annual leave balances up to the date of appointment are in accordance with the Company's books and records. 3. Long service leave balances up to the date of appointment are for eligible employees only and are based on the books and records of the Company. 4. Payment in lieu of notice has been calculated in accordance with the respective AWA's and awards. 5. Redundancy pay has been calculated at rates set out in the respective AWA's and awards. 6. Outstanding superannuation has been calculated for the period January 2010 up to the date of appointment only. This amount also includes superannuation calculated on payment in lieu of notice. Notes Amount owing at appointment ($) Wages 1 19,334 Annual Leave 2 61,500 Long Service Leave 3 94,935 Payment In Lieu of Notice 4 72,261 Redundancy 5 168,623 Sub Total 416,653 Superannuation 6 111,850 Total 528,503 Included in the schedule of entitlements is outstanding superannuation of $107,227 for the 2010 calendar year only. The ATO has previously been advised of outstanding superannuation for prior periods which will be included in their claim under the superannuation guarantee charge. Accordingly, these amounts are not included in the above calculation. Also included in the above table is superannuation outstanding of $16,868 for ex-employees of the Company who had ceased working for the Company prior to the appointment of the Administrators. Excluded Employees Pursuant to section 556(2) of the Act, an employee of the Company who at any time during the previous 12 months has been a director, or is a relative of the Director, is an excluded employee. Any claim by the Directors or their relatives for outstanding entitlements is capped as follows: $1,500 for outstanding leave entitlements $2,000 for unpaid wages and superannuation Any amounts claimed which fall outside these amounts will rank as an unsecured claim against the Company. There were two excluded employees. The table of entitlements opposite is calculated on the basis that the entitlements in respect of these two employees have been capped. 36

37 Employees and Employee Entitlements Employee Entitlements Government Employee Entitlements And Redundancy Scheme ( GEERS ) Should the Company be placed into Liquidation following the second meeting of creditors, we would likely refer priority claims to the Government s General Employee Entitlements and Redundancy Scheme (GEERS). The Scheme covers outstanding employee entitlements (excluding superannuation). GEERS is a safety net scheme for unpaid employee entitlements where employees are terminated as a result of insolvency after 12 September Under GEERS, where employees have a legal entitlement derived from legislation, an award, a statutory agreement or a written contract of employment, they are eligible to receive the following: Unpaid wages for up to 3-months; All annual leave (excluding annual leave loading); All payment in lieu of notice; Up to sixteen (16) weeks redundancy pay; and All long service leave. Should the Company be placed in Liquidation, we would immediately notify GEERS to ensure prompt processing of employee claims. Employees would be advised to submit their GEERS claim forms. Throughout the liquidation we would continue to liaise with GEERS in order to assist in the provision of outstanding entitlements to employees. Please note that should a payment to employees be made by GEERS, these funds are recoverable by GEERS pursuant to Section 560 of the Corporations Act. GEERS will take over the employee s priority position as a creditor of the Company to the extent of amounts paid by GEERS. Accordingly, the payment of employee entitlements by GEERS does not affect the likelihood or quantum of potential recoveries available for distribution to ordinary unsecured creditors. If you are or were an employee of the Company and believe you are owed outstanding entitlements please: Ensure you have lodged a proof of debt with our office, including your estimate of outstanding entitlements. Please provide as much supporting documentation as possible. Dependent on the outcome of the second meeting of creditors, the Liquidators will be in contact to verify the amounts outstanding and will commence the priority distribution process, through GEERS. Please contact Mr Jarred Erceg of this office on (02) should you have any employee related questions. 37

38 Section 9 Estimated Outcome Statement Introduction Executive Summary Company History and Reasons for Failure Actions during the Administration and Sale of Assets 5. Report as to Affairs 6. Historical Performance 7. Investigations 8. Employees and Employee Entitlements 9. Estimated Outcome Statement 10. Administrators Recommendation 11. Remuneration and Second Meeting

39 Estimated Outcome Statement Estimated Return to Creditors Estimated Outcome Statement Assets PPE at auction (net of costs) 1 149, ,000 Debtors 2 493, ,800 Potential preference payment recoveries 3 410,597 - Total assets available for distribution 1,053, ,800 Less: Secured Creditor 4 (368,851) (368,851) Surplus available 684,347 59,949 - Voluntary Administrators Estimated Fees and Disbursements (125,000) (115,000) - Liquidators Estimated Fees and Disbursements 5 (100,000) (75,000) - Deed Administrators' Estimated Fees and Disbursements Estimated Operating Costs Estimated Legal & Agent Fees 5 (100,000) (20,000) Total Professional Fees and Operating Costs (325,000) (210,000) Surplus / (Deficiency) of Fixed/Floating Charge Assets 359,347 (150,051) Employee Entitlements 6 (528,503) (570,000) (Deficiency) after Priority Claims (169,157) (720,051) Unsecured Creditors 7 (954,135) (1,593,913) Total (Deficit) (1,123,292) (2,313,964) Notes: Refer opposite for notes and further discussion Estimated Return to Creditors Set out above is a summary of the expected realisations and estimated returns to the various classes of creditors. Our calculations indicate it is highly likely there will not be a dividend available to unsecured creditors. Creditors should note that the amounts provided in this section are estimates only. Our estimate indicates the following likely return for each class of creditor: Class of Creditor Secured Creditor Employees GEERS (in lieu of payments to employees) Estimated return Full return likely Partial retrun via GEERS Potential partial retrun Unsecured creditors No return likely Notes High $ Low $ Notes and Commentary 1. The PPE was sold via online auction with net proceeds of $149,401 being realised. As the process has only recently completed, the proceeds are still being reconciled and there is a possibility that further realisation expenses may be incurred. This is reflected in the low scenario. 2. Of the debtors at appointment of $548,000, we have assumed collection of 90% and 60% in the high and low cases respectively. To date the secured creditor has collected c. $250,000 of debtors. 3. As detailed in Section 7, there are potential recoveries in respect of preference payments of $547,000 and possible insolvent trading recoveries, both of which a duly appointed liquidator will need to investigate further. It may be a costly, lengthy and not necessarily a successful exercise to pursue preference payment recoveries in certain circumstances. Accordingly, the return to the creditors under the liquidation scenario is dependant upon success of the preference proceedings. For reasons noted above, this is not certain and in any event there may likely be substantial delays and expenses involved. 4. The secured creditor was owed $369,000 at the date of appointment which has subsequently been reduced to $122,000 at 21 December 2010 following the collection of debtors. It is likely that the secured creditor's debt will be paid out in full. 5. Professional fees for both legal and liquidation costs will be dependant on future activity required. Pursuing preference payments is likely to involve significant legal fees and further detailed investigations by the duly appointed liquidator. 6. Employee entitlements are discussed in Section 8 of this report. 7. The books and records of the company indicated there were unsecured creditors of $954,000 at the date of appointment. Following the receipt by the Administrators of correspondence from creditors, this amount may be understated by the number or creditors excluded from the Company's records or recorded at lesser amounts. Unsecured creditors may total c. $1.5 million. 39

40 Section 10 Administrators Recommendation Introduction Executive Summary Company History and Reasons for Failure Actions during the Administration and Sale of Assets 5. Report as to Affairs 6. Historical Performance 7. Investigations 8. Employees and Employee Entitlements 9. Estimated Outcome Statement 10. Administrators Recommendation 11. Remuneration and Second Meeting

41 Administrators Recommendation Options available to creditors and Administrators' recommendation Pursuant to Section 439A(4)(d) of the Act, the Administrators are required to express an opinion whether it would be in the best interests of creditors of the Company to: Execute a DOCA; End the Administration; or Wind up the Company. Execute a DOCA Neither the Director nor any other party has to date formally proposed a DOCA. The Director has not indicated a desire to submit a DOCA. Should a DOCA proposal be received prior to the second meetings of creditors, we shall seek an adjournment of the meeting for a period of up to 45 business-days to enable the Voluntary Administrators to review the terms of any proposed DOCA. If no DOCA proposal is received prior to the meeting, we recommend that the Company be wound up. End the administration Should creditors resolve to end the administration, the Company would be placed in a similar position to that which existed prior to our appointment (i.e. as if the administration did not occur). Creditors would then have the option of pursuing their usual recovery actions against the company such as court actions to obtain judgements, warrants of execution or even winding up the company. As the Company is insolvent, we do not believe there would be any benefit to creditors in ending the administration. The return of control of the Company to the Director without the protection of a DOCA is not satisfactory for unsecured creditors and is therefore not recommended. Adjourn the meeting We do not believe there is any reason to adjourn the meeting, although this may be necessary should a DOCA proposal be received. Wind up the Company We believe that this is the best option for the Creditors as the Company is insolvent. Should creditors resolve to wind up the Company, the Company will be placed into liquidation and we will be appointed liquidators. A liquidator is required to realise company property and distribute the proceeds to creditors in accordance with the priorities detailed in the Act. A liquidator is also required to undertake further investigations into the company s previous activities and the conduct of its director. Pursuant to Section 439A(4)(b) of the Corporations Act, the Administrators are required to make a recommendation to creditors as to which of the options available is in their best interests. Based on the options available to creditors we consider that it is in the best interest of creditors that the Company be wound up. 41

42 Section 11 Remuneration and Second Meeting Introduction Executive Summary Company History and Reasons for Failure Actions during the Administration and Sale of Assets 5. Report as to Affairs 6. Historical Performance 7. Investigations 8. Employees and Employee Entitlements 9. Estimated Outcome Statement 10. Administrators Recommendation 11. Remuneration and Second Meeting

43 Remuneration and Second Meeting Remuneration Administrators remuneration The Voluntary Administrators remuneration is to be approved by creditors. Costs Approved to Date At the date of this report, no remuneration has been approved by creditors. At the forthcoming meeting of creditors we will be requesting creditors to approve the Administrators' remuneration. In accordance with the Code of Practice issued by the IPA, please find enclosed an IPA Creditor Information Sheet (as Appendix A) providing information on approval of remuneration. Remuneration to be Approved At the forthcoming meeting of creditors on 7 January 2011, creditors will be requested to approve our remuneration as follows: Administrators' Remuneration Detailed information on the calculation of remuneration is provided in the attached Remuneration Reports at Appendix E and Appendix F. Remuneration to be Approved Liquidation It will be necessary for creditors to approve the drawing of remuneration for the period of liquidation should creditors vote that the Company be placed into liquidation. The remuneration to be approved will be calculated on a time basis by applying the hours worked by the applicable charge out rate for the person involved. Our estimates are based on the calculations as detailed in Appendix G. Staffing of Administration The Administrators staff team is structured such that tasks are completed by staff with the appropriate level of experience. Grant Thornton Sydney s hourly charge out rates are included in Appendix H. Actual Remuneration - 30 November 2010 to 22 December ,163 Estimated Remuneration - 23 December 2010 to 7 January ,000 Total Voluntary Administrators' Remuneration 122,163 Estimated Remuneration - Liquidation 100,000 We note that the above amounts exclude GST and disbursements. Remuneration to be Approved Work to Date At the meeting, creditors will be requested to approve remuneration for work undertaken from 30 November 2010 to 22 December Creditors will also be requested to approve remuneration for work undertaken for the period 23 December 2010 to 7 January $ 43

44 Remuneration and Second Meeting Second meeting of creditors Second meeting of creditors The second meeting of creditors is to be held at the offices of Grant Thornton, Level 17, 383 Kent Street, SYDNEY NSW 2000 at 3.00pm on Friday, 7 January The notice in regards to the meeting is enclosed as Appendix B. We advise that the complete Report as to Affairs ( RATA ) will be available for the creditors to inspect one hour prior to commencement of the creditors meeting. The meeting will be open to creditors for questions and general discussion. Should you wish to have us address any issue in detail please advise us prior to the meeting date. This will allow sufficient time to prepare a detailed response to your question. Please note that attendance at the meeting is not compulsory. Telephone Attendance Should you not be able to attend the second meeting of creditors in person, creditors are invited to attend via telephone. In order to do so, you will be required to submit a proof of debt and proxy in favour of the party attending via telephone as detailed below. Please contact Jarred Erceg of this office no later than 5.00pm on the business day prior to the meeting, being Thursday 6 January 2011 to obtain dial in details. Lodging of proof of debts Should you not have already lodged a proof of debt, you are required to complete the proof of debt as attached as Appendix D. Lodging of proxies Proxies lodged for the previous meeting are not valid for this meeting and therefore, fresh proxies and formal proofs of debt need to be lodged to enable creditors to vote at the second meeting. Please ensure that the proxies are signed under seal, where appropriate (if you are a company) and if the proxy is executed by a power of attorney, that a copy of the power of attorney is enclosed with the proxy form. The proxy form is enclosed as Appendix C. Proxies for the meeting can be lodged in the following ways: Post: to arrive no later than 5.00pm on the business day prior to the meeting; Facsimile: to (02) no later than 5.00pm on the business day prior to the meeting; In Person: by person with a person attending the meeting; or by to [email protected] no later than 5.00pm on the business day prior to the meeting. If proxies are lodged by facsimile or , the law requires that the original proxy must be lodged with the Voluntary Administrators within 72 hours of lodging the faxed or ed copy. Contact details Should you have any queries in relation to any matter raised in this report then please do not hesitate to contact Mr Fahim Ahmed or Mr Jarred Erceg of this office on (02) or (02) Yours faithfully MORRIS POWERLEC PTY LTD (ADMINISTRATORS APPOINTED) Trevor M Pogroske JOINT AND SEVERAL ADMINISTRATOR 44

45 2010 Grant Thornton Australia Ltd Morris Powerlec Pty Limited December 2010 Appendices A. IPA Creditor Information Sheet B. Form 529 Notice of Meeting C. Form 532 Appointment of Proxy D. Form 535 Formal Proof of Debt E. Retrospective Remuneration Report F. Prospective Remuneration Report G. Liquidators' Estimated Remuneration H. Grant Thornton Scale of Rates (NSW)

46 Appendix A IPA Creditor Information Sheet 2010 Grant Thornton Australia Ltd Morris Powerlec Pty Limited December 2010

47 Insolvency Practitioners Association of Australia ABN Erskine Street, GPO Box 3921, Sydney NSW 2001 P F Creditor Information Sheet Approving remuneration in external administrations If company is in financial difficulty, it can be put under the control of an independent insolvency administrator. Such a person is called a liquidator or a voluntary administrator or an administrator of a deed of company arrangement depending on the type of administration involved. For the purposes of this guide, we use the collective word administrator. This information sheet gives general information for creditors on the approval of an administrator s fees in a liquidation, a voluntary administration or a deed of company arrangement (other forms of insolvency administration are beyond the scope of this information sheet). It outlines the rights that creditors have in the approval process. Work undertaken by administrators The work undertaken by administrators depends on the type of administration concerned and the issues that need to be resolved. Some issues are straightforward, while others are more complex. However, what is common amongst all administration types is that an administrator is, by law, required to undertake a number of tasks which may not directly benefit creditors (for example, the preparation of reports to the Australian Securities and Investments Commission or the preparation of six monthly receipts and payments). An administrator is still entitled to remuneration for undertaking these statutory tasks. For more information on the tasks involved ind different administrations, see ASIC s information sheets: Liquidation: a guide for creditors and Voluntary administration: a guide for creditors. Entitlement to fees and costs An administrator is entitled: to be paid reasonable fees, or remuneration, for the work they perform, once these fees have been approved by a creditors committee, creditors or a court, and to be reimbursed for out-of-pocket costs incurred in performing their role (these costs do not need creditors committee, creditor or court approval). Administrators are entitled to an amount of fees for the necessary work that they and their staff properly perform in the administration. Out-of-pocket costs that are commonly reimbursed include: legal fees valuer s, real estate agent s and auctioneer s fees

48 trading costs involved in running the company s business during the administration (e.g. for the purchase of stock) stationery, photocopying, telephone and postage costs retrieval costs for recovering the company s computer records, and storage costs for the company s books and records. Creditors have a direct interest in the level of fees and costs, as the administrator will, generally, be paid from the company s available assets before any payments to creditors are made. If there are not enough assets, the administrator may arrange for a third party, for example another creditor, to pay any shortfall. As a creditor, you should receive details of such arrangements. If there are not enough assets to pay the fees and costs, and there is no third party payment arrangement, any shortfall is not paid and the administrator is in effect out of pocket. Calculation of fees Fees of an administrator may be calculated using one of a number of different methods, such as: on the basis of time spent by the administrator and their staff, according to hourly rates, a quoted fixed fee, based on an estimate of the costs, or a percentage, usually of asset realisations. Charging on the basis of time spent is the most common method. Administrators have a scale of hourly rates, with different rates for each category of staff working on the administration, including the administrator. If the administrator intends to charge on a time basis, you should receive a copy of these hourly rates before the administrator requests approval of their fees. The administrator and their staff will record the time taken for the various tasks involved, and a record will be kept of the nature of the work performed. It is important to realise that administrators are professionals who are required to have accounting qualifications and maintain up-to-date knowledge of accounting, business and legal issues. They have serious responsibilities under the law. Their hourly rates and those of their qualified staff reflect this. The hourly rates do not represent an hourly wage for the administrator and their staff. The administrator is running a business an insolvency practice and the hourly rates will be based on the cost of running the business, including overheads such as rent for business premises, utilities, wages and superannuation for staff who are not charged out at an hourly rate (such as personal assistants), information technology support, office equipment and supplies, insurances, and taxes with allowance then made for profit. Many of the costs of running an insolvency practice are fixed costs that must be paid, even if there are insufficient assets available to pay the administrator for their services. These are all matters that committee members or creditors should be aware of when considering the fees presented. However, regardless of these matters, creditors have a right to question the administrator about the fees and whether the rates are negotiable. It is up to the administrator to justify why the method chosen for calculating fees is an appropriate method for the particular administration. As a creditor, you also have a right to question the administrator about the calculation method used and how the calculation was made. Insolvency Practitioners Association of Australia Creditor Information SheetRemuneration Page 2

49 Report on proposed fees In order to seek approval of fees, the administrator must hold a meeting of the members of any committee of creditors, or, if there is no committee, the creditors themselves. A report must be sent, with the notice of meeting, setting out: information that will enable the committee members/creditors to make an informed assessment of whether the proposed fees are reasonable a summary description of the major tasks performed, or to be performed, and the costs associated with each of these tasks. The report should also provide a summary of out-of-pocket costs incurred or expected to be incurred. Committee members/creditors may be asked to approve fees for work already performed or fees based on an estimate of work yet to be carried out. If the work is yet to be carried out, it is advisable for creditors to set a maximum limit ( cap ) on the amount that the administrator may receive. For example, future fees are approved calculated on hours worked at the rates charged (as set out in the provided rate scale) up to a cap of $X. If the work involved then exceeds this figure, the administrator will have to ask the creditors committee/creditors to approve a further amount of fees, after accounting for the fees already incurred. Who may approve fees Who may approve fees depends on the type of external administration: see Table 1. The administrator must provide sufficient information to enable the creditors committee, the creditors or the court to make an informed assessment as to whether the fees are reasonable. Table 1: Who may approve fees Creditors committee Creditors Court Administrator in a voluntary administration Administrator of a deed of company arrangement Creditors voluntary liquidator Court-appointed liquidator 1, 6 2, If there is one. If there is no creditors committee or the committee fails to approve the fees. If there is no approval by creditors. If there is no creditors committee. Unless an application is made for a fee review. If insufficient creditors turn up to the meeting called by the liquidator to approve fees, the liquidator is entitled to be paid up to a maximum of $5,000, or more if specified in the Corporations Regulations Insolvency Practitioners Association of Australia Creditor Information SheetRemuneration Page 3

50 Creditors committee approval If there is a creditors committee, members are chosen by a vote of creditors as a whole. In approving the fees, it is important that the members realise that they represent all the creditors, not just their own individual interests. A creditors committee will generally only be set up where there are a large number of creditors. If there is one, then they will ask the committee to approve their fees. A creditors committee makes its decision by a majority in number of its members present in person at a meeting, but it can only act if a majority of its members attend. If you would like to know more about creditors committees and how they are formed, see ASIC s information sheets: Liquidation: a guide for creditors, Voluntary administration: a guide for creditors and Insolvency: a glossary of terms. Creditors approval Creditors approve fees by passing a resolution at a creditors meeting. The vote requires a simple majority of creditors present and voting, in person or by proxy, indicating that they agree to the resolution. Unlike committee members, creditors may vote according to their individual interests. If a poll is taken at the meeting (that is, rather than a vote being decided on the voices or by a show of hands, a count of each vote and its value is taken), a majority in number and value of creditors present and voting must agree. A poll requires the votes of each creditor to be recorded. A proxy is a document whereby a creditor appoints someone else to represent them at a creditors meeting and to vote on their behalf. A proxy can be either a general proxy or a special proxy. A general proxy allows the person holding the proxy to vote how they want on a resolution, while a special proxy directs the proxy holder to vote in a particular way. A creditor will sometimes appoint the administrator as a proxy to vote on the creditor s behalf. An administrator, their partners or staff must not use a general proxy to vote on approval of their fees; they must hold a special proxy in order to do this. They must vote all special proxies as directed, even those against approval of their fees. Deciding if fees are reasonable If you are asked to approve an amount of fees either as a committee member or by resolution at a creditors meeting, your task is to decide if that amount of fees is reasonable, given the work carried out in the administration and the results of that work. The IPA s Code of Professional Practice: Remuneration outlines the steps administrators should take to make sure they fulfil their responsibilities to creditors when asking creditors to approve fees, including when those creditors are acting in their capacity as committee members. This guide is available on the IPA website at If you need more information about fees than is provided in the administrator s report, you should let them know before the meeting at which fees will be voted on. What can you do if you think the fees are not reasonable? If you do not think the fees being claimed are reasonable, you should raise your concerns with the administrator. It is your decision whether to vote in favour of, or against, a resolution to approve fees. Insolvency Practitioners Association of Australia Creditor Information SheetRemuneration Page 4

51 Generally, if fees are approved by a creditors committee/creditors and you wish to challenge this decision, you may apply to the court and ask the court to review the fees. Special rules apply to court liquidations. You may wish to seek your own legal advice if you are considering applying for a court review of the fees. Reimbursement of out-of-pocket costs An administrator should be very careful incurring costs that must be paid from the administration as careful as if they were incurring the expenses on their own behalf. Their report on fees sent to creditors should also include information on the out-of-pocket costs of the administration. If you have questions about any of these costs, you should ask the administrator and, if necessary, bring it up at a creditors committee/creditors meeting. If you are still concerned, you have the right to ask the court to review the costs. Queries and complaints You should first raise any queries or complaints with the administrator. If this fails to resolve your concerns, including any concerns about their conduct, you can lodge a complaint with the IPA at or write to: Complaints Manager IPA GPO Box 3921 SYDNEY NSW 2001 You can also contact ASIC at or write to: Manager National Assessment & Action ASIC GPO Box 9827 IN YOUR CAPITAL CITY Complaints against companies and their officers can also be made to ASIC. For other enquiries, ASIC through [email protected], or call ASIC s Infoline on for the cost of a local call. To find out more For an explanation of terms used in this information sheet, see ASIC s Insolvency: a glossary of terms. For more on insolvency administration, see ASIC s related information sheets at Voluntary administration: a guide for creditors Voluntary administration: a guide for employees Liquidation: a guide for creditors Liquidation: a guide for employees Receivership: a guide for creditors Receivership: a guide for employees Insolvency Practitioners Association of Australia Creditor Information SheetRemuneration Page 5

52 Insolvency: a guide for shareholders Insolvency: a guide for directors These are also available from the Insolvency Practitioners Association (IPA) website at The IPA website also contains the IPA s Code of Professional Practice that is applicable to its members. Important note: This information sheet contains a summary of basic information on the topic. It is not a substitute for legal advice. Some provisions of the law referred to may have important exceptions or qualifications. This document may not contain all of the information about the law or the exceptions and qualifications that are relevant to your circumstances. Insolvency Practitioners Association of Australia Creditor Information SheetRemuneration Page 6

53 Appendix B Form 529 Notice of Meeting 2010 Grant Thornton Australia Ltd Morris Powerlec Pty Limited December 2010

54

55

56 Appendix C Form 532 Appointment of Proxy 2010 Grant Thornton Australia Ltd Morris Powerlec Pty Limited December 2010

57

58

59 Appendix D Form 535 Formal Proof of Debt 2010 Grant Thornton Australia Ltd Morris Powerlec Pty Limited December 2010

60

61

62 Appendix E Retrospective Remuneration Report 2010 Grant Thornton Australia Ltd Morris Powerlec Pty Limited December 2010

63 Remuneration methods There are four basic methods that can be used to calculate the remuneration charged by an Insolvency Practitioner. They are: a. Time based / hourly rates This is the most common method. The total fee charged is based on the hourly rate charged for each person who carried out the work multiplied by the number of hours spent by each person on each of the tasks performed.. b. Fixed Fee The total fee charged is normally quoted at the commencement of the administration and is the total cost for the administration. Sometimes a Practitioner will finalise an administration for a fixed fee. c. Percentage The total fee charged is based on a percentage of a particular variable, such as the gross proceeds of assets realisations. d. Contingency The practitioner s fee is structured to be contingent on a particular outcome being achieved. At the meeting of creditors which is to be held on 7 January 2011, we will be seeking approval from creditors for our retrospective and prospective remuneration as Administrators/Liquidators. Retrospective Remuneration Retrospective remuneration from the date of our appointment on 30 November 2010 to close of business on 22 December 2010 is $102, excluding GST and disbursements. Method chosen Given the nature of this administration and that all remuneration previously charged has been using the time based/hourly rate method, this will continue to be applied. This is the most common method and we believe that this method truly reflects the hours worked by individual staff members and the expenses associated with conducting the administration. Explanation of hourly rates The rates for our remuneration calculation are set out in the attached Charge Rates together with a general guide showing the qualifications and experience of staff who may be engaged in the liquidation. The hourly rates charged encompass the total cost of providing professional services and should not be compared to an hourly wage Grant Thornton Australia Ltd Morris Powerlec Pty Limited December

64 Description of work completed from 30 November 2010 to 22 December 2010 Task Area Assets hours $35, General Description Plant and equipment Debtors Sale of Business Stock Includes Identifying and securing assets and property Liaising with independent valuers and insurers Reviewing asset registers and listings Preparing vehicle to technician reconciliations Corresponding with all leasing companies regarding the appointment and collection of disclaimed assets Collation of debtor records Reviewing and assessing debtors ledger and related records Correspondence with SPBF in relation to the collection and reconciliation of debtors from the date of appointment up to the date of this report Determining the sale of business assets strategy Numerous meetings and discussions with potential purchasers Preparation of all schedules and list of assets for due diligence Conducting valuations of certain assets Liaising with Grays in coordinating an online auction Overseeing stock takes undertaken by Grays at each site Reviewing stock levels, values and obsolescence Liaising with suppliers and Grays regarding third party stock and trading matters Liaising with customers 2010 Grant Thornton Australia Ltd Morris Powerlec Pty Limited December

65 Description of work completed from 30 November 2010 to 22 December 2010 Task Area Creditors 86.4 hours $28, Employees 21.1 hours $4, General Description Creditor enquiries Secured creditor reporting Creditor reports Meeting of creditors Employee enquiries Calculation of entitlements Includes Receiving and following up creditor enquiries via telephone, facsimile and Reviewing and preparing correspondence to numerous creditors and their representatives via facsimile, and post Correspondence with the secured creditor throughout the Administration regarding the sale of assets and collection of debtors Preparation of First Report to Creditors including attachments Preparation of Administrators Section 439A Report to Creditors including attachments Preparing meeting notices and report attachments Providing notice of both the first and second meetings to all known creditors Preparing of meeting file, including agenda, statement of postage, attendance register, list of creditors, reports to creditors, advertisement of meeting and draft minutes of meeting. Preparing and lodging minutes of meetings with ASIC Responding to stakeholder queries and questions Receiving and following up employee enquiries on site, by telephone and by Reviewing and preparing correspondence to employee creditors Reviewing employee files and the Company s books and records Reconciling entitlements Reviewing applicable awards and AWA's Preliminary calculation of entitlements pursuant to awards and AWA's Liaising with the Director and CFO regarding employee entitlements 2010 Grant Thornton Australia Ltd Morris Powerlec Pty Limited December

66 Description of work completed from 30 November 2010 to 22 December 2010 Task Area Trading 11.4 hours $4, Investigations 23.1 hours $6, General Description Trading shut down Budgeting & financial reporting Conducting investigations Includes Attendance at all Morris Powerlec sites in Wetherill Park and Thornton Correspondence and liaison with suppliers Liaising with utility providers and cancellation of accounts Liaising with key personnel on site assisting in the shut down of operations Reviewing Company s budgets and financial statements Review of Company books and records maintained on site Identifying and securing key books and records Initial review of the Company's books and records Liaising with the Directors and key personnel to assist in our investigations Conducting and reviewing statutory searches Preparation of investigation file Investigating antecedent transactions Investigating and determining the date of insolvency 2010 Grant Thornton Australia Ltd Morris Powerlec Pty Limited December

67 Description of work completed from 30 November 2010 to 22 December 2010 Task Area Administration 83.2 hours $21, General Description Document maintenance / file review / checklist Insurance Bank account administration ASIC Forms ATO & other statutory reporting Planning / Review Includes Filing of documents in work files File reviews to ensure compliance with obligations Updating checklists and checklist management Identification of potential issues requiring attention of insurance specialists Correspondence with Blue Insolvency regarding initial and ongoing insurance requirements Reviewing insurance policies Preparing correspondence for the freezing of bank accounts and opening accounts Reviewing Company bank statements Conducting bank account reconciliations Preparing and lodging ASIC forms regarding the notice of appointment,minutes of meeting etc Notification of appointment Requesting information under the Freedom of Information Act Discussions regarding the status of the administration Strategy meetings and reviews 2010 Grant Thornton Australia Ltd Morris Powerlec Pty Limited December

68 Appendix F Prospective Remuneration Report 2010 Grant Thornton Australia Ltd Morris Powerlec Pty Limited December 2010

69 Remuneration methods There are four basic methods that can be used to calculate the remuneration charged by an Insolvency Practitioner. They are: a. Time based / hourly rates This is the most common method. The total fee charged is based on the hourly rate charged for each person who carried out the work multiplied by the number of hours spent by each person on each of the tasks performed.. b. Fixed Fee The total fee charged is normally quoted at the commencement of the administration and is the total cost for the administration. Sometimes a Practitioner will finalise an administration for a fixed fee. c. Percentage The total fee charged is based on a percentage of a particular variable, such as the gross proceeds of assets realisations. d. Contingency The practitioner s fee is structured to be contingent on a particular outcome being achieved. At the meeting of creditors which is to be held on 7 January 2011, we will be seeking approval from creditors for our retrospective and prospective remuneration as Administrators/Liquidators. Prospective Remuneration Remuneration for the period 23 December 2010 to the date of the Second Meeting of Creditors on 7 January 2011 is estimated to be $20,000 excluding GST and disbursements. Please note that this amount is an estimate of remuneration required for the period 23 December 2010 to 7 January 2011 and the actual remuneration for this period will be confirmed and presented to the meeting of creditors on 7 January Method chosen Given the nature of this administration and that all remuneration previously charged has been using the time based/hourly rate method, this will continue to be applied. This is the most common method and we believe that this method truly reflects the hours worked by individual staff members and the expenses associated with conducting the administration. Explanation of hourly rates The rates for our remuneration calculation are set out in the attached Charge Rates together with a general guide showing the qualifications and experience of staff who may be engaged in the liquidation. The hourly rates charged encompass the total cost of providing professional services and should not be compared to an hourly wage Grant Thornton Australia Ltd Morris Powerlec Pty Limited December

70 Description of work to be completed from 23 December 2010 to 7 January 2011 Task Area Assets 15 Hours $4, Creditors 21 hours $6, Employees 7 Hours $2, General Description Plant and Equipment Debtors Creditor enquiries Employee enquiries Includes Liaising with Grays in respect of the sale of remaining assets Further correspondence with SPBF in relation to the collection and reconciliation of debtors Receiving and following up creditor enquiries in response to our 439A report Reviewing and preparing correspondence to numerous creditors and their representatives via facsimile, and post Receiving and following up employee enquiries Reviewing and preparing correspondence to employee creditors and their representatives via facsimile, and post 2010 Grant Thornton Australia Ltd Morris Powerlec Pty Limited December

71 Description of work to be completed from 23 December 2010 to 7 January 2011 Task Area Investigations 6 hours $1, Administration 20 hours $5, General Description Conducting investigations Document maintenance / file review / checklist Insurance Bank account administration Includes Ongoing review of the Company's records and discussions with stakeholders in relation to the Company's affairs Further investigation into antecedent transactions as highlighted in our report Filing of documents in work files File reviews to ensure compliance with obligations Updating checklists and checklist management Correspondence with Blue Insolvency regarding ongoing insurance requirements (if any) Processing costs in relation to the Administration of the Company ASIC Forms Planning / Review Preparing and lodging ASIC forms Correspondence with ASIC regarding statutory forms Discussions regarding status of administration Strategy meetings and reviews 2010 Grant Thornton Australia Ltd Morris Powerlec Pty Limited December

72 Appendix G Liquidators' Estimated Remuneration 2010 Grant Thornton Australia Ltd Morris Powerlec Pty Limited December 2010

73 Remuneration methods There are four basic methods that can be used to calculate the remuneration charged by an Insolvency Practitioner. They are: a. Time based / hourly rates This is the most common method. The total fee charged is based on the hourly rate charged for each person who carried out the work multiplied by the number of hours spent by each person on each of the tasks performed.. b. Fixed Fee The total fee charged is normally quoted at the commencement of the administration and is the total cost for the administration. Sometimes a Practitioner will finalise an administration for a fixed fee. c. Percentage The total fee charged is based on a percentage of a particular variable, such as the gross proceeds of assets realisations. d. Contingency The practitioner s fee is structured to be contingent on a particular outcome being achieved. At the meeting of creditors which is to be held on 7 January 2011, we will be seeking approval from creditors for our retrospective and prospective remuneration as Administrators/Liquidators. Liquidators Estimated Remuneration Should the Company be wound up, our estimate of prospective fees from 7 January 2011 to the conclusion of the Liquidation is $100, (excluding GST and disbursements) and any amounts received from the General Employee Entitlements and Redundancy Scheme ( GEERS ). Any additional remuneration is subject to further approval from Committee of Inspection, creditors or the Court. Method chosen Given the nature of this administration and that all remuneration previously charged has been using the time based/hourly rate method, this will continue to be applied. This is the most common method and we believe that this method truly reflects the hours worked by individual staff members and the expenses associated with conducting the administration. Explanation of hourly rates The rates for our remuneration calculation are set out in the attached Charge Rates together with a general guide showing the qualifications and experience of staff who may be engaged in the liquidation. The hourly rates charged encompass the total cost of providing professional services and should not be compared to an hourly wage Grant Thornton Australia Ltd Morris Powerlec Pty Limited December

74 Description of work to be completed should the Company be placed into Liquidation Task Area Assets 35 hours $10, Creditors 85 Hours $25, Employees 90 hours $26, General Description Plant and Equipment Debtors Creditor enquiries Creditors reports Employee enquiries Employee claims Includes Liaising with our agents in respect of the sale of remaining assets Continuing to liaise with SPBF regarding the collection of debtors and accounting for these collections Review books and records to substantiate collection of debtors Receiving and following up creditor enquiries in response to our 439A report and the second meeting of creditors Reviewing and preparing correspondence to numerous creditors and their representatives via facsimile, and post Accounting for proofs of debt as and when lodged with our office Advertising, declaring and paying dividends (if applicable) Investigations, meetings and general reports to creditors Receive and follow up employee enquiries Review and prepare correspondence to employee creditors and their representatives via facsimile, and post Notifying GEERS in respect of the appointment of Liquidators Verifying employee entitlements and submitting to GEERS Ongoing correspondence with GEERS in relation to the payment of employee entitlements Distribution of GEERS funds to employees 2010 Grant Thornton Australia Ltd Morris Powerlec Pty Limited December

75 Description of work to be completed should the Company be placed into Liquidation Task Area Investigations 90 hours $25, Administration 50 hours $14, General Description Conducting investigations ASIC reporting Document maintenance / file review / checklist Insurance Bank account administration ASIC Forms Planning / Review Includes Ongoing review of the Company's records and discussions with stakeholders in relation to the Company's affairs Further investigation into antecedent transactions as highlighted in our report Preparation of a report pursuant to section 533 of the Act Liaising with ASIC Making necessary lodgements with ASIC Filing of documents in work files File reviews to ensure compliance with obligations Updating checklists and checklist management Correspondence with Blue Insolvency regarding ongoing insurance requirements (if any) Processing costs in relation to the liquidation of the Company Preparing and lodging ASIC forms Correspondence with ASIC regarding statutory forms Discussions regarding status of administration Strategy meetings and reviews 2010 Grant Thornton Australia Ltd Morris Powerlec Pty Limited December

76 Appendix H Grant Thornton Scale of Rates (NSW) 2010 Grant Thornton Australia Ltd Morris Powerlec Pty Limited December 2010

77 Grant Thornton Recovery & Reorganisation Charge Out Rates New South Wales (Effective 1 July 2010) (excluding GST) Grant Thornton Australia Limited is a member firm within Grant Thornton International Ltd. Grant Thornton International Ltd and the member firms are not a worldwide partnership. Grant Thornton Australia Limited, together with its subsidiaries and related entities, delivers its services independently in Australia. Liability limited by a scheme approved under Professional Standards Legislation.