Harris Scarfe claim: Insolvent ‘from the word go’
Department store chain Harris Scarfe may have traded while insolvent for more than a week after it was sold to a private equity firm, according to a searing new analysis.
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Harris Scarfe became insolvent the moment private equity firm Allegro Funds took control of the struggling department store chain, a detailed creditors report alleges.
Administrator BDO Australia has found the Harris Scarfe group of companies became insolvent when Allegro formally took control and a critical line of credit provided by former owner Greenlit Brands was severed.
Allegro, through Australian Retail HoldCo, took over Harris Scarfe on December 2.
The loss-making department store business, purchased as part of a wider deal that also handed Allegro the Best&Less chain, was placed into voluntary administration on December 11.
The BDO report opens up the possibility Harris Scarfe traded while insolvent for more than a week.
“From our investigations, despite generating trading losses, with the support of the parent entity, the group (Harris Scarfe) was solvent up until the date of the ARH (Australian Retail HoldCo) sale transaction,” the final creditors report prepared by BDO administrator Duncan Club says.
“From this date, the financial support previously provided by the parent entity was unavailable, the group had no working capital funding and the group was not in a position to fund its ongoing trading losses and meet its liabilities as and when they fell due.
“Based on our preliminary investigations, the group was insolvent from the date of completion of the ARH sale transaction on 2 December 2019.”
The report notes Allegro — an experienced buyer of distressed businesses — was working on a rescue plan for Harris Scarfe and its executives would have a number of defences against any charge of insolvent trading.
These include that Allegro did not increase the liabilities of Harris Scarfe and did not order any stock after taking control.
“Even if a liquidator is able to establish that the company was insolvent from 2 December 2019, there is unlikely to be a claim for insolvent trading pursuant to section 588G of the (Corporations) Act,” the report says.
Section 588G establishes a director’s duty to prevent insolvent trading.
The BDO report also notes Allegro sought out specific legal advice on “safe harbour” provisions, which protect directors from trading while insolvent.
Separate filings show Allegro spent almost $50,000 on legal advice about the insolvency process, including shelling out $17,500 on safe-harbour advice from consultancy house Ankura.
The nation’s insolvency rules were dramatically overhaul in 2017, allowing directors to trade while insolvent so long as they are working on a plan that may result in a better return to creditors than an immediate liquidation.
Sydney-based Allegro tipped Harris Scarfe into voluntary administration, owning unsecured creditors such as suppliers and landlords between $146.1 million and $236.4 million.
Unsecured creditors last week [April 14] signed off on a deal to sell the department store chain to Spotlight Group in a transaction that will net them as little as 1.3c in every dollar they are owed. The maximum they can expect to receive is 20.5c.
Best known for its namesake haberdashery chain, Spotlight also owns camping supplies chain Anaconda and outdoor clothing label Mountain Designs.
The Harris Scarfe deal has left suppliers bitter given Allegro positioned itself as a key secured creditor ahead of placing Harris Scarfe into administration.
It will receive its debt in full, walking away with $70 million.
Allegro, which BDO says bought Harris Scarfe for a “nominal sum”, did not respond to questions from Business Daily.
Its website highlights investments including Best&Less but does not mention Harris Scarfe.