Harris Scarfe landlords, suppliers mull legal action

Harris Scarfe landlords and suppliers are believed to be weighing up the possibility of taking legal action against the company on the grounds that the retailer may have been trading while insolvent.

The Australian department store that sells kitchenware, homewares, electrical appliances and apparel collapsed into administration last month, only days after it was purchased by private equity firm Allegro Funds Management, and later into receivership.

Allegro also owned the company’s debt.

It became the preferred creditor for the business, with $69m owing, and now lawyers are focused on whether the directors appointed under the new owners knew whether the company could not afford to pay the interest rates on the loans and was trading while insolvent.

Suppliers are also disappointed that the company was placed into administration before Christmas, a time when all the retailer’s supplies were at its highest point.

According to the sales documents that circulated in the market for Harris Scarfe before it was sold to Allegro, the company generated $5.2m in earnings before interest, tax, depreciation and amortisation for the year to September.

While receivers want to treat Harris Scarfe as a going concern, there are expectations that almost half its 66 stores will close, threatening hundreds of jobs.

Suppliers include Linen House, owed $5.3m, Haines, which was owed $3.1m, Brands Collective, owed $2.2m, and Fackelmann Housewares, which is owed $2m. Kaufland and Solomon Lew’s Voyager Distributing were also owed money.

Landlords, which include Lendlease, Perpetual’s The Trust Company and Blackstone, owner of Adelaide’s Rundle Place, are also said to be weighing their options.

Market experts say directors, which include a new director appointed by Allegro, could be sued personally if the company was buying stock while insolvent on the grounds that they were knowingly involved in misleading and deceptive conduct and negligence.

Up to a dozen parties are said to remain interested in the business, as earlier reported by The Australian, with final offers due by February 14.

Vaughan Strawbridge, Kathryn Evans and Tim Norman of Deloitte Restructuring Services are working as receiver and managers for Harris Scarfe and associated entities.

Mr Strawbridge did not return a call to DataRoom on Monday.

Deloitte has thrown up the possibility of a restructure involving a dramatic reduction of its store network, creating a smaller portfolio that generates annual sales of $285m and pre-tax earnings of $16m.

However, the firm had earlier indicated that a buyer would have the option to take on the larger store network, particularly if shopping centre landlords were prepared to do a deal on rents.

Harris Scarfe, which has a more dominant presence in Victoria, South Australia and Tasmania, has annual sales of $380m and has faced receivership in 2001.

It was placed on the market by Greenlit Brands, the renamed Australian subsidiary of Steinhoff International, which also has Freedom, Fantastic Furniture, Snooze and Plush in its stable.

The sale was part of a wider divestment of its Australian general merchandise division to Allegro Funds, which also included Best & Less and Postie.

Allegro Funds founding partner Chester Moynihan last month defended the private equity firm’s decision to put the retailer into administration, saying it had hoped for a better outcome and made the purchase with the best of intentions.

It is understood that Allegro was more focused on other brands that it acquired within the Greenlit portfolio. Mr Moynihan did not return a call on Monday.