Former companies that used to run The Grounds café empire in liquidation over $1.6m tax debt
Liquidators have been appointed to four companies used to run The Grounds cafe empire. The Sunday Telegraph can also reveal the cafe empire’s founders Ramzey Choker and Jack Hanna are no longer on speaking terms. INTERACTIVE: SHOW ME THE MONEY
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Sydney’s Insta-famous cafe empire, The Grounds, failed to pay $1.6 million in tax and its high-profile founders have been referred to ASIC for investigation and may face being banned from running companies.
Liquidators have been appointed to four companies that were used to run the glamorous eateries — before they clocked up more than $2 million in debts in the three years before the end of the 2018 financial year.
But you wouldn’t know it if you popped in this week, where it was business as usual.
The operation’s aesthetically perfect garden wonderland, The Grounds of Alexandria, was bustling with staff delivering artistically styled food to crowded tables.
In the CBD, people lined up outside The Grounds of the City in the hope of landing a lunchtime booth at the 1920s-inspired eatery, which boasts a no-expense-spared fit-out.
The Grounds’ characteristic green wholesale coffee bean delivery vehicles buzzed all over Sydney.
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On Thursday, The Grounds’ co-owner Ramzey Choker left his waterfront eastern suburbs apartment driving a Mercedes AMG G-63, which has a price tag starting at $148,000.
All this was happening while four of the companies that were previously used to run major facets of the business had ceased to operate after striking financial disaster.
Two of the liquidated companies were used to operate the cafes at The Grounds of Alexandria and The Grounds of the City.
In December 2018 they were both put in the hands of liquidators owing $747,934 and $491,817 respectively in unpaid tax.
A third included the company used to run the restaurant oasis inside the Alexandria complex, known as The Potting Shed, which owed the ATO $167,152.
The operation’s coffee bean wholesaling operation had tax debts of $201,084.
Yet in a two-year period, when the companies were hitting the financial iceberg, Mr Choker and his business partner Jack Hanna were paid six-figure wages from at least one of the companies, according to the liquidator’s reports filed with ASIC.
In 2017 and 2018, Mr Choker and Mr Hanna were paid a combined $703,195 by the operation and were likely further remunerated by other arms of the business, the reports said.
Liquidators are also dissecting the operation’s financial records in an attempt to uncover where the company paid more than $9 million in other “management fees” between 2016 and 2018, the documents said.
The liquidator has recommended ASIC investigate Mr Choker and Mr Hanna for a range of corporate breaches, including failing to pay tax and incomplete financial records.
The liquidator also raised the prospect of holding Mr Choker and Mr Hanna personally responsible for the $1.1 million in insolvent trading debts and banning them from directing companies for a maximum of five years.
An ASIC spokesman said the organisation did not confirm if investigations were active.
In response to questions sent to the two directors, Mr Choker’s lawyer Mark O’Brien responded with an email that said Mr Choker had “fully complied with his obligations as a former director of the companies” and as the “ongoing sole director” of the business as it continues to operate.
The letter also revealed that Mr Choker and Mr Hanna, who founded the wildly popular cafe in 2012, had fallen out and were no longer in business together.
“Our client (Mr Choker) ceased business activities in the companies, which are now subject to administration, in March 2018 following the breakdown of his relationship with Mr Hanna,” Mr O’Brien wrote. “Mr Hanna and Mr Ramsey (sic) no longer share any common business interests.”
He also wrote that Mr Choker had “personally arranged for payment of a great majority of unsecured creditors” and “handed to the liquidator all the relevant documents in his possession relating to the companies”.
“Significantly, the liquidator has not commenced any proceedings against our client,” Mr O’Brien wrote.
The liquidator, Adam Shepard, from Farnsworth Shepard did not return calls.
Attempts to contact Mr Hanna via phone, email and multiple addresses
were unsuccessful.
It is not the first time companies used to run The Grounds have been put in the hand of receivers.
Between 2014 and 2016, three other companies were put in the hands of receivers owing $1.7 million to a range of creditors, including $1.3 million to the ATO with only a portion recovered.
So how has the business kept operating?
The answer is that when the four companies ran into financial trouble, their operations were shifted to two new companies, known as The Grounds of Alexandria (Trading) and The Grounds (CBD), the liquidation documents said.
Mr Choker is the sole director of both companies, according to ASIC records.
He was a director of three of the previous companies but says he ceased business activities in those companies in March 2018 and business records show he formally quit in October 2018, prior to the companies being put into liquidation.
Mr Hanna is still the current director of all four failed companies and has no involvement in the new companies.
The previous companies were put into liquidation in December 2018 after the ATO took action over the unpaid tax.
In the worst case, the liquidator has estimated returns to creditors between zero for one company. The best would return between 31 and 40 per cent.
The question of whether the debts can be recovered from the new companies will hang on whether the liquidator can show that money or assets was improperly transferred or the existence of certain contracts, an industry insider said.
Mr Choker’s lawyer wrote that no money had been unlawfully transferred.
In their responses to the liquidator’s questionnaire, Mr Choker and Mr Hanna’s explanations about why the companies failed were brief.
Mr Choker put it down to “insufficient funds to pay creditors”, which he said became apparent “towards the end of 2018”.
Mr Hanna nominated “poor cash flow management” that he noticed in the period from “November to December 2018”.
However, the liquidator estimates the companies had been trading while insolvent since between April and July 2017 until they ceased operating around mid 2018.
According to the liquidator’s report, Mr Hanna may have breached the Corporations Act “in view of the level of remuneration paid to him by the company”.
Financial records for the coffee bean wholesale business showed Mr Hanna was paid $495,579 in 2017 and 2018 with the liquidator noting the latter amount “appears to be excessive” and could be a breach. However, the liquidator later wrote in the report: “I do not consider the above remuneration paid to Mr Hanna to be excessive”.
Mr Choker told the liquidator he hadn’t been paid by the coffee bean wholesaling company for the four years prior to 2018. However, the liquidator claims the accounts revealed Mr Choker was paid $207,616 over two years.
Mr O’Brien wrote that there was nothing improper about Mr Choker’s remuneration.
The financial results in the liquidator’s report painted an alarming picture.
From 2017 to 2018, the reports said the four companies’ financial positions plummeted by a combined $2.3 million.
The liquidator has also recommended ASIC investigate whether the pair should be banned from acting as company directors for up to five years given they have presided over two or more companies that have been liquidated within seven years.
In relation to the $1.1 million in debts which the liquidator claims the companies may have run up while insolvent, the liquidator has recommended Mr Choker and Mr Hanna be held personally liable if it is proved the companies were trading while insolvent.
However, the report noted that this action could be pointless because an Australia-wide search for property and assets owned by Mr Choker and Mr Hanna returned no results.
In a statutory declaration provided to liquidators, Mr Hanna stated he owned $17,000 worth of assets, including motor vehicles worth $12,000 plus $5000 in cash and $2000 worth of shares. His liabilities totalled $88,040.
The liquidator noted: “I have not received a statutory declaration from Mr Choker”.
According to the reports, the liquidators were given incomplete books and records, leaving them with a fragmented picture of the company’s financial history.
Mr O’Brien wrote that Mr Choker “handed to the liquidator all the relevant documents in possession relating to the companies”.
The company that ran The Grounds of the City had three bank accounts with a collective debt of $24, the documents said.
Liquidators have now asked ASIC to assist in recovering the missing financial documents.
According to the documents, Mr Hanna told the liquidators there were no vehicles registered to the coffee bean wholesale company.
However, a search of the Roads and Maritime Services register showed a 2016 Porsche Macan with $103,762 owing on it and a 2016 Range Rover Evoque with $45,285 outstanding were both registered to the company.
Liquidators found records of five other vehicles were registered to the company before being transferred to another. This included two motorbikes and a Jeep Wrangler, the documents said.
The liquidators also reported that the sale of assets between the companies also warranted further investigation.
Liquidators uncovered an invoice saying the company that ran The Potting Shed sold $550,000 worth of furniture and fixtures to a related company.
The liquidator is now trying to confirm that the money was received by the company.
Mr O’Brien wrote: “As highlighted by the liquidator’s report, any stock or other assets owned by the companies were sold at fair market value.”
The liquidation is expected to be completed in June.