CMI Industrial Pty Ltd (Administrators Appointed ... · (Administrators Appointed) (Receivers and Managers Appointed) Second Report to Creditors 21 May 2012 Matthew Byrnes ... Windsor
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Matthew Byrnes, Greg Keith, Graham Killer and Michael McCann were appointed joint and several Voluntary Administrators ("Administrators") of CMI Industrial Pty Ltd ("the Company") on 26 April 2012 pursuant to section 436A(1) of the Corporations Act.
Immediately following our appointment, Keith Crawford and Matthew Caddy of McGrathNicol were appointed as Receivers and Managers of the Company.
The Second Meeting of Creditors has been called for Tuesday, 29 May 2012 at 11.00am and will be held at the Ballroom, Windsor Hotel, 111 Spring Street, Melbourne, 3000.
Introduction
Refer Section 2
We initially met with the Director in December 2011 to discuss the Company's financial position. The Company was facing difficulties as a result of declining sales levels and working capital constraints, and the Director had been issued with a Director Penalty Notice ("DPN") in relation to outstanding statutory taxation obligations. The Company sought funding from key stakeholders in December 2011 and received funding totalling $1.4 million in December and February 2012. The Company continued to trade until 20 April 2012 when a dispute over rental payments resulted in the landlord of the Campbellfield site locking the Company out of the premises. The Director placed the Company into voluntary administration on 26 April 2012.
Our review has identified the following key factors which were significant in contributing to the failure of the business:
• Declining sales levels and on-going financial losses;
• Unplanned maintenance issues and resultant shutdowns at the Toowoomba site;
• Inadequate cash flow;• Reduction in working capital;• Pressure from creditors, including the ATO;• Inability to raise further capital; and• Rental arrears resulting in the Company being
locked out of the Campbellfield site.
Events leading up to appointmentReasons for failure
Refer Section 4
Trading during the Administration
Refer Section 6
We recommend that the Company be placed into Liquidation at the Second Meeting of Creditors.
Employee entitlements
Refer Section 8
Administrators' recommendation
Refer Section 9
Matthew Byrnes and Andrew Hewitt were appointed joint and several Voluntary Administrators ("Administrators") of Precision Reinforcements Pty Ltd ("the Company") on 23 February 2011 pursuant to section 436A(1) of the Corporations Act.
The Second Meeting of Creditors has been called for Thursday, 31 March 2011 at 10:00am and will be held at the offices of Grant Thornton, Level 2, 215 Spring Street, Melbourne, Victoria.
The Administrators and Receivers have continued to trade the Victorian and Queensland sites throughout the Administration.
Employee entitlements have been calculated in accordance with employees relevant award or industrial agreement.
An agreement was reached with GEERS whereby funding would be made available for eligible employees who had their employment terminated by the Receivers during the Administration.
Should the Company be placed into Liquidation at the Second Meeting of Creditors, we will be referring this matter to GEERS so that all employees will have the opportunity to submit claims for their entitlements.
The Company’s financial position and performance declined markedly since FY09 with sales decreasing by 60% and net assets declining by $19.6 million to FY12YTD.
The Company incurred significant trading losses totalling $22.9 million during the period FY09 to FY12YTD.
Historical trading
Refer Section 3
Remuneration from our appointment to the close of business on Sunday, 20 May 2012 is $309,323.00 excluding GST and disbursements.
Remuneration for the period 21 May 2012 to the Second Meeting of Creditors is estimated to be $95,000 excluding GST and disbursements.
Should the Company be placed into liquidation at the Second Meeting of Creditors, our estimate of prospective fees from 29 May 2012 to the conclusion of the Liquidation is $300,000 excluding GST, disbursements, and any amounts received from the General Employee Entitlements and Redundancy Scheme ("GEERS").
Appointment of Voluntary Administrators and Receivers and Managers
� Matthew Byrnes, Greg Keith, Graham Killer and Michael McCann were appointed joint and several Voluntary Administrators ("the Administrators") of CMI Industrial Pty Ltd ("the Company" or "CMI") on 26 April 2012 pursuant to section 436A(1) of the Corporations Act ("the Act").
� Immediately following the appointment of Voluntary Administrators, Keith Crawford and Matthew Caddy of McGrathNicol were appointed as Receivers and Managers ("the Receivers") of the Company.
� The Receivers assumed control of the Company's Victorian assets and operations, along with the Company's head office located in Brisbane, Queensland. We advise that the Receivers remain responsible for these sitesincluding ongoing trading, employee related issues and sale of the business/assets.
� The Administrators took control of the Company's two Queensland sites in Toowoomba and Bundaberg and are responsible for the ongoing trading, employee related issues and sale of the business and/or assets for these sites.
Events leading up to the Administrators' Appointment
� We initially met with the Director in December 2011 to discuss the Company's financial position. The Company was facing difficulties due in part to the following:
− Continued reduction in sales volume since 2009;
− The Company had working capital shortfalls and it was unable to fund the cash requirements for wages over the Christmas shut down period; and
− The Director had been served with a Director Penalty Notice ("DPN") by the ATO, which he was unable to comply with.
� Following our meeting in December 2011, the Director executed documents appointing administrators, which were held in escrow pending the outcome of ongoing discussions with key stakeholders regarding additional funding.
Introduction and background
� An agreement was reached in December 2011 with a number of parties including the Victorian State Government, and key customers, for funding to be provided totalling c.$3.4 million.
� Management have advised that they believed the funds requested were sufficient for the Company to:
1. Fund its cash shortfall over the Christmas shut-down period;
2. Negotiate a payment plan with the ATO; and
3. Implement and fund a reduction in head count at some sites to allow the Company to remain financially viable.
� As some funding was received in December 2011 the appointment of Administrators was not finalised at that time.
� In April 2012, we were approached again regarding the appointment of administrators as:
− Only partial funding had been received from the key stakeholders totalling $1.4 million. As such the Company was unable to implement the required restructure in line with their plan; and
− The Company had been locked out of the Campbellfield site by the landlord on 20 April 2012 due to non-payment of rental arrears.
� Following advice from his solicitors, the Director placed the Company into Voluntary Administration on 26 April 2012.
Mr Stev en Franklin AMWU - QLD Branch Numerous employ ees in Queensland
Introduction (2 of 3)
Statement of independence
� We, Matthew James Byrnes, Gregory John Keith, Graham Robert Killer and Michael Gerard McCann of GTAL have undertaken a proper assessment of the risks to our independence prior to accepting the appointment as Joint and Several Voluntary Administrators of the Company in accordance with the law and applicable professional standards.
� This assessment identified no real or potential risks to our independence. We are not aware of any reasons that would prevent us from accepting this appointment.
First meeting of creditors
� Section 436E of the Act requires us to conduct a meeting of creditors of the Company within eight (8) business days of our appointment.
� The First Meeting of Creditors was held on 8 May 2012 at The Ballroom, Windsor Hotel, 111 Spring Street, Melbourne and our appointment as Administrators was confirmed by creditors.
� At this meeting, under Section 436E of the Act creditors voted for the appointment of a Committee of Creditors, consisting of the following members:
Introduction and background
Committee of creditors
� The purpose of a committee of creditors is to meet and consult with the Administrators on an as needed basis about matters relating to the Voluntary Administration.
� We note that a Committee of Creditors is not empowered to give directions to the Administrator other than to request the Administrator to report on matters relating to the Voluntary Administration in accordance with Section 436F(2) of the Act.
� Members are personally appointed, are not paid for their services and meet on an irregular basis usually at the Administrator’s office.
� Although no formal meetings of the Committee have taken place during the during the administration, we have continued to liaise with and update the Committee Members by email and telephone regarding key matters.
� This report has been prepared in accordance with Section 439A(4) of the Act, and has been prepared from information obtained from the Company's books and records, and discussions held with the Director, Management, the Receivers and other relevant stakeholders.
� Our investigations into the Company's business, property, affairs and financial circumstances have been limited due to the short time period granted pursuant to the Act which requires us to issue a report to creditors prior to the Second Meeting of Creditors. The information contained in this report is based on information available at the date of this report, however, should further information become available that may assist in our investigations, we will provide a further update to creditors at the Second Meeting of Creditors.
� The purpose of this report is to present creditors with information on the options available to you as a creditor, together with information about the Company’s business, property, affairs and financial circumstances.
� The options presented by the Act to be voted on by creditors at the meeting are that:
− The Administration be terminated; or
− The Company be wound up (Liquidation); or
− The Company execute a Deed of Company Arrangement ("DOCA").
� The Act requires us to make a recommendation to creditors as to the option that we believe would be in the interests of creditors.
� We have evaluated each option and recommend that the Company be placed into Liquidation at the Second Meeting of Creditors. The recommendation, and our reasons for doing so are discussed in further detail in Section 9 of this report.
Introduction and background
� A copy of this report is available on the Grant Thornton website which can be found at www.grantthornton.com.au and available in the 'Creditors Info' tab.
Second meeting of creditors
� Section 439A of the Act requires us to convene a second meeting of creditors of the Company to consider the future of the Company, which is to be held within the statutory timeframe provided by the Act.
� The Second Meeting of Creditors has been called for Tuesday, 29 May 2012 at 11.00am and will be held at the Ballroom, Windsor Hotel, 111 Spring Street, Melbourne, Victoria 3000.
� A formal notice of this meeting is attached to this report.
� Tasks undertaken by the Administrators' include:
− Issuing the First Circular to Creditors advising of our appointment, providing general information regarding our appointment and providing details of the first meeting of Creditors and Proof of Debt and Proxy forms for voting purposes at the meeting.
− Providing creditors with details surrounding the circumstances leading to our appointment including trading information, general creditor information and the process of the Administration.
− Corresponding with creditors and union and employee representatives to assist in their understanding of the role of Administrators.
− Convening the first meeting of Creditors.
− Assessing the Company's trading viability at the Toowoomba and Bundaberg sites and liaising with Creditors regarding future trade arrangements and providing support to employees. A more detailed assessment on the trading of the Queensland sites by the Administrators is provided at Section 6.
− Corresponding with Payroll, GEERS and employees and their representatives in respect of outstanding employee entitlements.
− Conducting investigations into the Company's affairs and trading history, from which our findings are detailed at section 7 of this report.
− Responding to trade creditors, employees and other stakeholders as required regarding the process of the Administration.
− Corresponding with the Receivers regarding Company information and issues going forward so as to maximise the outcome for stakeholders by avoiding doubling-handling of work.
− Preparation of the Second Report to Creditors
Introduction and background
− Convening the Second Meeting of Creditors
− Liaising with the Committee of Creditors regarding key matters
� CMI Industrial Pty Ltd was incorporated and registered in January 2008 and was used as the vehicle to acquire the manufacturing division of CMI Limited, an ASX listed entity which was founded by the current director, Mr Max Hoffmeister.
� The Company purchased the division from CMI Limited in April 2008 and the business operated from the CMI sites in existence at the date of our appointment.
� The Company is known as a leading manufacturer of a range of specialist components for the white goods, transportation and water storage industries, as well as a key manufacturer and supplier of a number of products to the automotive industry, including for customers such as Ford, Toyota and Holden.
Trading premises
� The Company’s head office is located in Brisbane, Queensland and it trades from a number of sites located throughout Victoria and Queensland. Refer to the Group Structure on the following page for further details.
� The Company also has an office in South Carolina, United States and a wholly owned subsidiary operating in Auckland and Christchurch, New Zealand. These overseas entities are not subject to any insolvency appointments.
Company office holders and shareholders
� A search of the Australian Securities and Investments Commission (“ASIC”) database confirmed that the sole Director of the Company is Mr Maxwell John Hofmeister, appointed on 25 January 2008.
� We have not identified any other person who may be considered a deemed director or shadow director of the Company.
� At the date of our appointment the Company’s shareholding consisted of 1 fully paid ordinary share of $1 issued to a related party, Transport Water and Power Holding Pty Ltd ("TWPH"). The sole shareholder of TWPH is Carluke Capital Pty Ltd (“Carluke”), of which Mr Hofmeister and Mrs Margaret Isobel Hofmeister are the joint shareholders.
� We advise that Carluke is also a secured party in relation to a number of fixed charge or non-circulating assets currently in the possession of the Company. Refer to Section 5 for further commentary on this.
� There have been no recent changes to the Company's office holdings.
� We have undertaken a review of the Director's other formal positions and shareholdings, as detailed below.
� We note that a number of these entities trade with the Company or are closely related to the operations of the Company. Preliminary investigations have been undertaken into these entities and we refer creditors to Section 7 of this report for a further discussion on these dealings.
Head Office Toowoomba Bundaberg Ballarat Campbellfield Footscray Horsham Total
Full Time Staff at the date of appointment
4 129 4 68 79 84 31 399
Annual Sales ($)
• FY12 YTD
• FY11 Actual
N/A
N/A
12,592,566
25,562,876
298,908
761,367
7,082,786
10,851,538
9,880,227
17,551,937
3,595,280
4,657,923
3,388,367
4,949,880
36,837,134^
64,335,521^
Net Profit/(Loss)
• FY12 YTD
• FY11 Actual
(3,354,254)
(3,546,908)*
(1,306,219)
875,946
(190,034)
(317,158)
(710,617)
110,116
(172,350)
811,517
(2,664,367)
(3,335,685)
(373,101)
(354,969)
(8,770,942)^
(5,757,141)^
Key Products N/A − Cast iron products
Poly Water Tanks
Ductile Fittings Distribution for
TMT
Light Pressed Metal Components
Cylinder Machining for TMT
Pressed Metal Components
Machining
Robotic Welding
EDP Paint Line
Forged Metal
Machined Forged Products
Cast Metal
*Please note that as the Brisbane Head Office has no sales, this 'Net Loss' is simply expenditure attributable to Head Office.^ Note that the balance of annual sales and net profit/(losses) in FY12YTD and FY11 relate to the United States site which generated sales of $3.3 million in FY11 and net losses of $83,000. During FY12YTD, this division generated sales of $2.2 million and net losses of $167,000.
Net profit before tax 4,173 (8,108) (5,840) (8,953)
Key Metrics
Annual sales grow th N/A (45.0)% (7.7)% (23.0)%
Gross margin 53.4% 59.1% 55.8% 55.0%
EBITDA % 7.9% (4.9)% (1.7)% (13.0)%
NPBT % 3.1% (11.1)% (8.6)% (22.9)%
Wages as a % of sales 30.5% 43.9% 39.7% 48.8%
Interest Cover Ratio 2.0 (2.2) (0.9) (2.3)
Statutory accounts Management accounts
Profit and loss statementOverview
� The Company's historical trading results are shown opposite. We note that a detailed analysis of the trading results by location has not been provided so as to not prejudice the Receivers sale process.
� After generating profit of $4.2 million in FY09, the Company incurred significant losses during the periods FY10 and FY11 totalling $13.9 million. During the period 1 July 2011 to 30 March 2012, the Company continued to trade unprofitably, incurring a net loss of $8.9 million.
These losses were largely driven by:
− Declining sales, which is evident by a reduction in sales of 49% from FY09 to FY11, with a further reduction in FY12YTD of 23% against FY11 on an annualised rate (sales in FY12YTD were just 40% of FY09 on an annualised rate); and
− An inability to 'right-size' the operations, particularly head count, in line with declining sales levels.
� While the Company was able to maintain a gross margin of between 53% and 59% during the period reviewed, it had insufficient funds to effect the necessary redundancies. Wages as a percentage of sales increased from 30% in FY09 to just under 50% in FY12YTD. During this period, other operating expenses remained largely in line with the reduction in sales.
� Due to the losses experienced at the EBIT level, the Company held a negative ICR for the FY10, FY11 and FY12YTD periods, with interest effectively being funded by stretching or non-payment of creditors.
The Company incurred losses of $22.9 million during the period FY10 to
FY12YTD, which was driven largely by declining sales (which reduced by
60% from FY09) and an inability to downsize the business in line with
trading conditions.
Historical trading
Notes: FY09 and FY10 figures were sourced from statutory financial accounts prepared by the external accountant as at 30 June 2010FY11 and 26 April 2012 figures were sourced from management accounts.
Total Current Liabilities 31,315 49,451 61,661 64,157
Non-Current Liabilities
Borrow ings 21,598 8,208 - -
Prov isions 4,011 3,330 - -
Total Non-Current Liabilties 25,609 11,538 - -
Total Liabilities 56,924 60,989 61,661 64,157
Net Assets 4,351 (1,536) (7,614) (15,353)
Key Metrics
Current Ratio 0.97 0.56 0.34 0.24
Debtor Day s N/A 66 70 66
Creditor Day s N/A 69 92 177
Statutory accounts Management accounts
Balance sheet (1 of 2)
Overview
� The Company's net asset position significantly deteriorated between FY09 and the date of appointment, with continual trading losses resulting in a net liability position of $15.3 million as at 31 March 2012.
� In this regard we make the following comments:
− While the decline in trade receivables from FY10 to FY12 is consistent with the reduction in sales levels, debtor days increased year on year placing strain on the Company's cash flow. This was partially reduced in FY12YTD as the Company sought reduced trading terms with key customers;
− Inventory held by the Company also reduced year on year, however, stock turnover deteriorated from 3.9 times per year in FY09 to 2.4 during FY12YTD. This suggests that:
− Stock levels were too high for the reduced trading levels; and/or
− Obsolescence of stock existed.
− Trade and other creditors have increased $8.6 million since FY09, which in light of the significant reduction in sales during this period highlights the company's inability to pay creditors as and when they became payable.
− The Company also sought additional funding from third parties, represented in an increase of $5 million in borrowings since FY09, the majority of which was provided by related parties and customers. This further highlighted the Company's reliance on borrowings to fund shortfalls in working capital.
� The Company's debtor book was subject to a debtor financing facility with the Bank, and at the date of appointment the Bank was owed c.$4.5 million which accounted for 46% of debtors.
The Company has experienced a significant decline in financial position
since June 2009, resulting in a net liability position of $15.3 million as at 31
March 2012.
Historical trading
Investment made in CMI Springs (NZ) in FY11
Creditor days increased substantially as the Company stretched payment terms.
� As detailed in the graph opposite, there has been a downward trend in total trade receivables since July 2011 reflecting a reduction in turnover during this period.
� As a percentage of sales against debtors, the Company has been able to maintain the ageing of debtors throughout this period, with between 70% and 80% of total debtors remaining less than 60 days.
� We understand that the Company sought assistance from key customers during 2012 by reducing terms from 30+ days to 7 days. We note that the improvement in ageing of receivables since December 2011 was due largely to this assistance.
Creditors
� Total creditors have remained relatively consistent since July 2011, however the ageing of these has deteriorated since this time, with 56% of creditors aged over 90 days at 31 March 2012 (as opposed to 34% at 31 October 2011).
� This led to a number of suppliers implementing stop supply and cash on delivery requirements as well as an increased occurrence of legal letters and statutory demands being issued to the company.
� Given the extent of creditors aged greater than 90 days it is clear the company regularly exceeded standard terms and was unable to pay creditors as and when they fell due.
Due to a tighter working capital position, the Company stretched terms
with trade creditors resulting in 56% of trade creditors being aged over 90
days as at 31 March 2012.
Historical trading
Significant stretching of creditors observed since November 2011
� As detailed in the graph opposite, the Company's working capital position declined markedly in the months leading up to our appointment resulting in a negative working capital position. This was due to a combination of factors, including:
1. Reduction in debtors: a combination of the Company experiencing a significant decline in turnover during FY12 and reduced payment terms with customers resulted in the Company's debtor levels declining from $12.0 million at 30 June 2011 to $8.7 million as at 31 March 2012.
2. Declining inventory holdings: Inventory and WIP reduced by $1.5 million and $70k respectively from July 2011 to 31 March 2012.
3. Increase in creditors: Despite a decline in sales, and a number of suppliers enforcing cash on delivery terms, trade creditors increased from $7.6 million at 30 June 2011 to $8.9 million at 31 March 2012.
4. Accruals: The balance of the movement in working capital is due to an increase of $1.8 million in accruals, which includes unpaid wages, unremitted superannuation and taxation obligations and other accruals.
� As a result of the above, the Company's working capital position had declined by c.$8.3 million since July 2011. This reflects the state of the Company's financial position at the date of appointment whereby the Company had used all available sources of funding by the time Administrators were appointed. A further discussion on this is in Section 7 of this report.
The Company's working capital position worsened c.$7.9 million during
� The Company held separate trading accounts for each of the trading locations in Victoria and Queensland. Each of the Forge, Campbellfield, Ballarat, Horsham, Toowoomba and Bundaberg trading accounts had their end of day balance transferred to the Corporate account, administered by the head office in Brisbane. Accordingly, these accounts held nil balances at days end.
� The Company's corporate trading account was held with the Bank and had a facility limit of $2.0 million, which was regularly breached in the period immediately leading up to our appointment.
� Although the Company appeared to maintain a largely stable cash position during FY12, a significant amount of funding was received from key stakeholders to assist in their cash position. As detailed in the graph opposite, $3.8 million was received from direct injections from these stakeholders during FY12.
� The Company also held individual debtor financing accounts ("NDF") for the Forge, Campbellfield, Ballarat, Horsham and Toowoomba sites, along with a USD account. The closing debtor financing account balances (as seen in the graph below opposite) were in direct correlation to the level of trade undertaken by the individual site.
� It can be seen that while Campbellfield's facility remained largely at the same level as at July 2011, the remaining five sites experienced significant decreases in their NDF accounts, reflecting declining sales levels for these sites.
Historical trading
Trading accounts
Debtor financing accounts
Funding of $1.0 million received from Ford in December 2011 and $400k received from Bosch in February 2012
The Company received $2.4 million from Carluke Capital Ltd in July 2011. We understand that this was unsecured.
Introduction This section explains the key events we have identified and key reasons we have attributed to the failure of the business.
It is important to note that it was the combined effect of these reasons that caused the failure of the business rather than each individual factor.
Financial losses and
declining sales levels
The Company had experienced declining turnover and significant trading losses for an extended period of time prior to the appointment of Administrators. Losses totalling c.$8.9 million were incurred during FY12YTD, bringing losses for the period FY09 to FY12YTD to $22.9 million. The industry in which the Company operates has faced a number of challenges, including a reduction in manufacturing volumes and both scheduled and unscheduled non-production days.
Since the beginning of FY11, sales declined from around $5.7 million per month during FY10 to around $5.0 million in FY11, and $4.3 million per calendar month in FY12YTD. The graph below highlights this general decline in monthly sales. This decline in sales was seen across the board, with each of the Company's operating sites experiencing reduced sales levels during this period.
The Company forecast an uplift in sales to be achieved in FY12 from both the Toowoomba ($4.0 million increase from FY11) and Forge ($4.2 million increase) sites. As shown in the graph above, the Company failed to reach budget for any of the months during the period January 2011 to April 2012.
The decline in monthly sales, although achieved at the historical average gross margin of between 52% and 58%, were insufficient to cover the Company's operating expenses. In some months these reductions resulted in the Company's monthly wage expense not being adequately covered by the contribution generated at the gross margin level.
Unplanned shutdowns The Company experienced a number of 'down-days' at their Toowoomba operations during FY12 as a result of machinery breakdowns. The Toowoomba site was also subject to damage caused by the Queensland floods in early 2011.
Following the reduction in sales levels (discussed above) the Company had limited ability to absorb the costs associated with these unplanned 'down-days'.
Pressure from creditors The Company experienced an increase in total creditors and a deterioration in the ageing of creditors through FY12YTD. This was evident for trade creditors, statutory creditors (including ATO and superannuation obligations) and rental payments. The Company received numerous demands from creditors, and were actively managing and monitoring all payments to suppliers.
We understand that while it was historically common for terms of 60+ days throughout the industry, due to a number of high profile collapses during FY12, the industry as a whole began to tighten their trading terms. Accordingly, due to the Company's creditor ageing profile, it was subject to stop-supply and cash on delivery terms which further impacted trading cashflow.
The Company entered into negotiations with the ATO in late 2011 regarding the repayment of the Company's tax arrears. An informal repayment arrangement was reached with the ATO for the repayment of approximately $2.3 million in arrears, of which $1.45 million was to be repaid at a rate of $20k per month for the first 12 months, increasing to $50k per month for the following 12 months, with the balance of c.$600k being paid after a period of two years. We understand that the Company was on similar payment plan with the Office of State Revenue of Queensland in relation to payroll tax arrears, and had agreed on the terms of a plan with the State Revenue Office of Victoria regarding unpaid payroll tax and WorkCover.
Insufficient cash flow Although the Company generated a cash inflow of c.$100k during FY12YTD, this included $3.8 million of funding from external parties (refer page 7 for further discussion on this). The business failed to generate sufficient free cash flow from operations, and without the injection of external funding, would have been unable to continue to operate. This is highlighted in the graph below, showing that without funding received in December 2011 and February 2012 totalling $1.4 million, the Company would have exceeded their overdraft facility by c.$1.3 million at the date of appointment:
Inability to raise further capital The Company had been in ongoing discussions with a number of parties regarding potential funding during the six months leading up to the appointment of Administrators. Although these discussions resulted in funding of $1.4 million being received, an additional $1.9 million which had been verbally approved by third parties was not realised. As discussed in Section 2 these funds were to be used to restructure and improve the viability of the Company.
We make the following high level commentary on the status of these negotiations for funding to be provided:
1. Ford – negotiations were held with Ford to have $2.0 million of funding provided over two tranches of $1.0 million each. An initial payment of $1.0 million was received from Ford in late December 2011 which allowed the Company to meet their obligations through the holiday period. We understand that the second tranche of $1.0 million was conditional on the Company obtaining confirmation from the ATO regarding a repayment plan (refer page 22 for further discussion on this), and other funding being provided by additional parties. We note that the additional funding was not received by the Company.
2. Victorian Government – ongoing discussions were held with the Victorian Government with a Government Grant of $0.9 million sought by the Company. The Company was verbally advised that two payments of $500k and $480k would be made by the Government. Following receipt of funds from Ford, the Government commissioned an independent financial review, which suggested a number of conditions be attached to any funds provided by the Government, including the appointment of an advisory committee and an interim CEO to be based at the Company's Campbellfield site.
3. Bosch – the Company also entered into discussions with another key customer, Bosch, seeking funding assistance. In February 2012, $400k was received from Bosch to assist with working capital. The terms of this loan called for this amount to be repaid over the course of normal trading by way of reduced payments on future monthly invoices.
In addition to this, we understand that the Company had approached a number of parties regarding the sale of the Company as a whole, or individual sites, however, none of these discussions resulted in an offer being received.
From our discussions with Management, we understand that the Company had exhausted their options with regards to raising further funding.
Poor financial management The Company employed an interim CFO in January 2011 who subsequently resigned in January 2012. We understand that this employee had limited financial experience and had come from an IT background.
Given the size and nature of the CMI business, and the financial difficulties it was experiencing, the business required a suitably qualified CFO managing the financial affairs of the company to ensure that timely reliable financial information was available to assist decision making.
Landlord arrears A number of the Company's sites were significantly in arrears in regards to their rental obligations. In December 2011, these arrears totalled c.$600k of which $175k was aged over 60 days.
On 20 April 2012, the Company was locked out of the Campbellfield site due to rental arrears owing of c.$150k, including costs. We understand that the landlord of this site had demanded full payment of all arrears, and six months rental payment upfront, totalling $650k. Following our appointment an application was filed in Federal Court and a settlement was secured between the Receivers and the landlord and re-entry was granted to the Receivers on 27 April 2012.
Losses at the Forge site and
inability to restructure
The Company's Forge site in West Footscray, Victoria operated at a loss for some time, generating losses of $3.3 million in FY11 and $2.6 million in the nine months to 31 March 2012. Although Management viewed this site as a viable division, they were subject to higher than required staffing numbers, and had failed to generate sufficient monthly contributions at the gross margin level since July 2010 to cover the division's monthly wage expense, let alone additional operating expenses.
Management had previously identified that approximately 30 redundancies would be required to 'right-size' the workforce at the Forge site, at a cost of c.$1.5 million. The annual wage savings as a result of these redundancies was estimated to be c.$1.8 million. The funding which was to be received from third parties in early 2012 (refer page 7 for further discussion) was to be applied to funding these redundancies. As these funds were not received, the Company was unable to undertake the proposed restructure program for this site.
Industry-wide decline The Company was heavily exposed to any downturn in the automotive industry, which has experienced a significant decline in volumes since the GFC. We understand a number of the Company's key customers were subject to financial pressure which lead to a reduced demand for the Company's products. The result of this was a substantial reduction in turnover from FY09 ($133 million) to FY11 ($68 million ) and FY12YTD ($40 million).
Due to the increasing strength of the $AUD, we understand that a number of the Company's key customers either closed or downsized their Australian operations during this period, further dampening the Company's domestic sales levels.
Reduction in working capital As detailed on page 18 of this report, the Company's working capital position declined markedly during the period November 2011 to April 2012. The Company experienced an increase in both the quantum of creditor amounts owing, and the ageing of creditors, with c.56% of creditors at 31 March 2012 being aged over 90 days. The inclusion of restricted trading terms (ie cash on delivery and shorter terms) from some suppliers placed further strains on the Company's working capital position.
During this period, the Company also experienced a decline in debtors, which was due to a combination of lower sales levels and restricted payment terms. In late 2011, a number of customers were asked to enter into payment terms of 7 days to provide assistance to cashflow which they agreed to.
Pursuant to Section 438B(2) of the Act, the Director of the Company is required to submit to the Administrators a statement about the Company’s business, property, affairs and financial circumstances in the form of the Report as to Affairs ("RATA").
A written request was issued to the Director to complete the RATA for the Company within 7 days. The Director requested an extension to 30 May 2012 to complete the report which has subsequently been approved.
I confirm that we have based our comments in the following section on the amounts obtained from the management accounts and other information available to us. Should the RATA be presented to our office prior to the Second Meeting of Creditors we will provide an update to creditors accordingly.
1 Interest in Land � A search of the Victorian Land Titles does not show any land currently owned by the Company.
2 Loans owing to the Company
Related party loans
� We did not identify any related party loan accounts owing to the Company.
Employee loans
� We did not identify any employee loan accounts owing to the Company.
Director loans
� We did not identify any director loan accounts owing to the Company.
3 Cash at Bank and on Hand
� Upon appointment, we identified 13 bank accounts held with the NAB including:
− One main trading account which was administered from the Company's head office in Brisbane;
− A USD account which was used predominantly for the distribution centre in the US;
− Six bank accounts held for each of the trading sites in Victoria and Queensland. These accounts had their balances swept to the main corporate account at the end of each day, and accordingly did not hold any funds on the date of appointment; and
− Five debtor financing facility accounts for each of the Ballarat, Campbellfield, Toowoomba, Horsham and Forge trading sites. These accounts held negative balances as they represented the funds owing to the Bank in regards to funds advances against debtors.
� The following table shows the bank account balances upon appointment:
� We note that the Receivers have taken control of the Corporate account and those accounts which relate to the Victorian trading locations. The Administrators are in control of the accounts relating to the Toowoomba and Bundaberg sites.
4 Stock on hand � Stock takes have been conducted on appointment by the Administrators and Receivers at the relevant sites, however we have not been provided with details of the Receivers' stocktake.
� Not withstanding the above, based on the Company's accounts, stock totalling $5.8 million was reflected in the Company's accounts as at 31 March 2012. This was made up as follows (across both the Victorian and Queensland sites):
5 Plant and equipment � Written down plant and equipment totalling $23.3 million was included in the Company's accounts.
� Valuations have been undertaken by the Receivers and Administrators on the Company's plant and equipment, however given the sales process being undertaken by both parties, we are not able to provide details of these valuations.
6 Debtors � The Company's debtor book showed $9.7 million, however the Bank held a secured interest over these debtors and were owed $4.5 million in relation to this.
� The surplus of the debtor book totalling c.$5.2 million has been partially used to fund the ongoing trading operations of the Receivers and Administrators.
7 Other assets � The Company held a deferred tax asset of $4.6 million, however, should the Company be placed into liquidation, we suggest that this would have no value.
NAB Ov erdraft and NDF facilities First 1,887 Fix ed and floating, GSA
CMI Ltd Vendor loan Second 18,811 Fix ed and floating, GSA
Ford Vendor loan Third 1,000 Fix ed and floating, GSA
RATA Summary
Ref Liabilities Commentary
8 Secured Creditors The following parties were listed as secured creditors of the company:
� The Bank provided an overdraft facility and debtor financing facilities to the Company. The Bank holds a first ranking, fixed and floating charge (general security) over the Company's assets.
� CMI Ltd provided a vendor loan of $17.0 million to the Company in 2008, and registered a fixed and floating charge against the Company at that time. As discussed previously, this loan became due and payable in December 2011, however we understand that negotiations had been in place for this debt to be reduced to $8.5 million. We have been advised that the current debt owing is c.$18.8 million.
� As previously detailed, Ford provided funding totalling $1.0 million in December 2011 and registered a fixed and floating charge over the Company at that time.
9 Partly Secured Creditors
Leased assets
� The Company leased assets from Carluke who was owed c.$5.0 million at the date of appointment by way of equipment loans and other lease liabilities payable. We have not been provided with payout figures in relation to these loans and are therefore unable to comment on the realisable value of these assets, if any.
� The Company also held a number of other leases relating to a range of assets including gas cylinders, office equipment and other tooling and machinery. We have not been provided with payout figures for these loaned assets and are therefore unable to comment on the realisable value of these assets, if any.
� We note that a leased asset schedule has been prepared by the Administrators and Receivers and these parties have been contacted regarding the ongoing use of these assets during the Administration and Receivership.
� The Company held c.$7.2 million of vesting employee entitlements in their books and records as at 31 March 2012, which is summarised in the table below;
1. We note that unpaid wages at the date of appointment were paid by the Receivers and Administrators.
2. Accrued annual leave entitlements totalling $1.3 million were identified in the Company's accounts. The Receivers and the Administrators are currently reviewing employee records and the Company's accounts to determine the amount of annual leave owing.
3. Unpaid superannuation contributions totalling $1.1 million were included in the Company's accounts. We note that this figure is likely to increase once the accounts for the period 1 April 2012 to 26 April 2012 are finalised, and additional accruals are included in this figure. We are continuing to work with the relevant superannuation funds to quantify the exact amount of unpaid superannuation and this will be confirmed at the Second Meeting of Creditors.
4. The Company included provisions for long service leave and redundancy pay. We note that this does not reflect the amounts owing to those employees who are eligible for these entitlements. As previously discussed the Receivers and the Administrators are calculating employee entitlements owing at the date of our appointment.
5. Some employees were entitled to Rostered Days Off, with $133k being accrued as at 31 March 2012. A review of this amount will continue to be undertaken by the Receivers and Administrators and will be communicated to eligible employees accordingly.
� The Administrators have been provided with updated employee entitlements for employees at the Toowoomba and Bundaberg sites, which are summarised on page 51 of this report.
� We note that the above figures are likely to change once the management accounts are finalised as at 26 April 2012, and each employee's entitlements are calculated. We anticipate being able to provide final entitlements by the Second Meeting of Creditors.
� The Company's records show over 600 trade and statutory creditors were owed c.$14.2 million at the date of appointment. We note that the Company is still finalising their accounts as at the date of appointment and as such we would expect this number may change once these accounts are finalised.
Statutory creditors
� We note that statutory creditors accounted for $4.8 million of this amount, as detailed in the table below:
� We note that the amount included in the debt for the ATO does not include unpaid statutory superannuation.
� We are yet to receive proofs of debt from these statutory bodies and as such the above amounts may change.
Trade creditors
� The remaining $9.5 million relates to ordinary trade creditors which we are continuing to receive proofs of debt from. Accordingly, we would anticipate that the amount owing to trade creditors may increase once these proofs are provided.
� The Administrators have continued to operate the Toowoomba site while assessing the financial viability and considering a sale of this site.
� Immediately on appointment, we contacted all key suppliers and key customers advising of our appointment and our intentions, if possible, to continue to trade these sites during the Administration.
� We sought assistance from these key stakeholders by way of a short-term price surcharge while these sites were under the control of the Administrators.
� There has been a level of support received from these parties by way of:
− Pre-payment of invoices of up to a week in advance; and
− A number of parties providing funding to assist with our working capital requirements to ensure the Toowoomba site will not operate at a loss during the Voluntary Administration period.
� We note that the majority of suppliers have continued to seek either cash on delivery for products, or on reduced trading terms of 7 days.
� Staff who were employed at the date of our appointment have remained employed by the Administrators, and have continued to be paid in line with their industrial awards or enterprise agreements.
Trading during the Administration
Sale of the Toowoomba business
� We have been in negotiations with an interested party in relation to the sale of assets and continuation of the Toowoomba site.
� These negotiations are continuing as at the date of this report, and we are not able to provide a detailed summary until such time that a deal is finalised, which we expect may occur prior to the Second Meeting of Creditors.
� The proposed transaction, should it proceed, provides that:
− There will be a continuation of business and most, or all staff will have employment maintained;
− All employees who are maintained will have their entitlements preserved;
− No class of creditor worse off under this deal as opposed to a wind-down scenario in a liquidation;
− The deal requires the consent of the secured creditor to release assets; and
− An upfront payment will be made.
� A more detailed assessment of this deal will be provided to creditors at the Second Meeting of Creditors.
Summary of receipts and payments
� A summary of receipts and payments for the trading of the Toowoomba site for the period 26 April 2012 to 18 May 2012 has been provided at Appendix D.
� We note that during this period, the Administrators have traded at around a break-even level.
� On 26 April 2012, shortly after the appointment of Voluntary Administrators, Keith Crawford and Matthew Caddy were appointed as Receivers and Managers of the Victorian operations (located at Campbellfield, Footscray, Horsham and Ballarat) and the Brisbane head office of the Company.
� The Receivers and Managers have continued to trade each of the sites, whilst assessing the viability of the business and the potential for achieving a going concern sale of any of the sites.
� Key tasks undertaken by the Receivers since appointment have included:
1. Obtaining access to and securing the assets located at the sites and head office:
− Access to all sites except Campbellfield was obtained on the date of appointment, and access to the Campbellfield site was obtained on 27 April 2012, following an application by the Voluntary Administrators to the Federal Court of Australia;
2. Stabilising customer relationships and negotiating terms for continued supply.
− All ongoing key customers have entered (or are entering into) six month binding supply agreements with revised payment terms and prices;
3. Stabilising supplier relationships and negotiating terms for continued supply.
− All suppliers have been contacted and terms for continued supply have or are currently being agreed;
4. Taking immediate steps to right size the workforce across the sites including head office;
5. Implementing other cash generation or savings measures as needed such as strict expenditure control, sale of surplus inventory, collection of book debts and commencing relocation of head office activity and technological infrastructure to the Footscray site (to allow the head office to be shut down in the near future).
Trading during the Administration
Sales process
� The Receivers have also commenced a sale process for both the Australian business (which includes the US distribution centre) and for the shares in CMI Limited (the wholly owned New Zealand subsidiary). This process has included the following:
− Advertisements placed in national media, including the Western Australian and the Australian Financial Review. Advertisements were also placed in the New Zealand Herald and Christchurch Press for CMI Limited (NZ).
− Preparation and distribution of an Information Memorandum with a target closing date for indicative non-binding bids of 18 May 2012.
� The Receivers have advised that there has been strong interest to date with 30 expressions of interest registered, and 17 information memorandums provided.
� Due to the ongoing sale campaign and sensitivities associated with this, we are not in a position to provide further information, however an update will be provided at the Second Meeting of Creditors.
Employees
� Employees have continued to be employed in line with the terms contained in their relevant employment award or industrial agreement.
� The Receivers have advised that a number of redundancies have been made to date which has allowed the Company to continue operating. A total of 51 redundancies have been made across the Receivers sites.
� As detailed on page 51, following an agreement reached with GEERS whereby funds would be made available for those staff who had their employment terminated by the Receivers or Administrators, payments of $5,000 were facilitated by the Receivers in respect of the employees entitlements. These payments were made to eligible employees on 17 May 2012.
In accordance with the Corportations Act 2001, as Administrators we are required to undertake investigations into the Company's business operations, financial situation, property, and other areas. The following findings will assist in the preparation of statutory reports to be submitted to the Australian Securities and Investments Commission ("ASIC") as well as assist any potential legal action surrounding a case for insolvent trading or pursuing voidable transactions in liquidation.
We note that pursuant to Regulation 5.3A.02 of the Act, as Administrators, we are also required to investigate and report to creditors on any possible recovery actions which may be available to a Liquidator should the Company be placed into Liquidation at the Second Meeting of Creditors.
Our preliminary findings in areas investigated are discussed in the following order:
1. Insolvent Trading; and
2. Voidable Transactions
Creditors should note that recoveries from Insolvent Trading actions and Voidable Transactions are only available to a Liquidator.
1. INSOLVENT TRADING
Section 588J of the Act provides that a liquidator, and under certain circumstances a creditor, may recover from the directors of an insolvent company compensation in respect of losses suffered by creditors from transactions entered into at a time when a company is insolvent. By definition, a company is insolvent when it cannot pay its debts as and when they fall due. Directors have a statutory duty to prevent insolvent trading under Section 588G of the Act.
Investigations
Should it be proven that the Company traded whilst insolvent, there is potentially a claim against the Director of the Company either by the liquidator or in limited circumstances a creditor, for allowing the Company to continue to trade whilst insolvent. The likelihood of there being any monies available to creditors as a result of such recoveries is dependent upon the financial position of the Director.
We note that the Director may also have valid defences available to him in such circumstances as noted under Section 588H of the Act. Prior to commencement of any legal action, any defences raised by the Directors would first need to be assessed.
We have conducted preliminary investigations and the likelihood of a claim and potential recovery will continue to be assessed once we are appointed Liquidators of the Company.
If creditors have information which would assist our investigations then we request that you please provide the same in writing. Additionally, in liquidation if there are creditors who wish to pursue and fund such an action please contact us to discuss this in further detail.
2. VOIDABLE TRANSACTIONS
In circumstances where a Liquidator is appointed he or she may be able to recover certain payments or dispositions of property that appear to the Liquidator to be voidable transactions pursuant to Part 5.7B of the Act. Please see page 44 for a detailed discussion on voidable transactions.
In order to determine whether the Director engaged in insolvent trading, we must first ascertain the timeframe of the Company's insolvency.
Common law has determined that certain factors, if present, constitute reasonable grounds for suspecting insolvency.
These factors make up the two common tests of insolvency. The two common tests of insolvency are the “Balance Sheet Test” and the “Cash Flow Test”.
� The “Balance Sheet Test” analyses the financial performance of the Company and generally a deficiency in assets is viewed as failure of this test.
� The second common test of insolvency, the “Cash Flow Test”, is more subjective and requires more pragmatic evidence such as significantly overdue creditors and the inability to obtain further funding.
We reiterate that recoveries of this nature are only available if the Company is
placed into liquidation.
Procedures
The following procedures were undertaken as part of the insolvent trading review:
Our investigations to date indicate that the Company is likely to have
been trading whilst insolvent during the relation back period.
Investigations
Insolvent Trading Investigation Procedures
1. Balance Sheet Test of insolvency
1. Review of maintenance of books and records in accordance with Section 286 of the Act
2. Testing the integrity and completeness of transaction data provided
3. Analysis of the financial position of the Company and Balance sheet test of insolvency
4. Analysis of liquidity ratios
5. Analysis of financial performance of the Company
2. Cash Flow Test of insolvency
1. Analysis of the cash flow test of insolvency
2. Relationship with financiers, shareholders or other funders
3. Review of the Company's history of remittance of Commonwealth and State taxes
4. Identification of any post-dated or dishonoured cheques
5. Review of creditor ageing and other overdue payables
6. Review of any demands for repayment or legal action pending
In the following pages we discuss our investigations in respect of indicators of insolvency.
� We are satisfied that the books and records of the Company which are available have been adequate for us to conduct our investigations and the Company appears to have maintained appropriate books and records in accordance with the Act.
� We have been able to review bank statements for the preceding 10 months and have been provided with the Company's management accounts and legal file to assist in our investigations. Although the Company failed to submit statutory accounts for FY11, we understand that these were in the process of being completed just prior to our appointment.
1.2 Financial position Balance Sheet Test of Insolvency:
� We have assessed the following liquidity ratios for the Company during the six month period leading up to our appointment. The results of these ratios assist in the determination of the timeframe of the Company's balance sheet insolvency.
Current Ratio
− Throughout the relation back period being 26 October 2011 to 26 April 2012, the Company’s current ratio declined from 0.33 to 0.25, well below the desired level. We note that this ratio is heavily impacted by the CMI Ltd loan ($18.8 million) becoming payable in December 2011, and therefore being classified as current.
− A current ratio of less than one indicates that the company had liquidity issues, specifically an inability to fund short term obligations with liquid assets, which is evident with the Company.
Quick Ratio (Acid Test)
− A review of the Company's quick ratio, or acid test ratio, indicated that at the date of our appointment the Company held just $0.15 of quick assets (i.e. cash plus trade debtors), for every $1 of current liabilities. This suggests that the Company did not hold sufficient liquid assets to pay current liabilities should they be required to be paid immediately.
Balance sheet review
� Our review of the Company's financial position indicates that the Company held a deficiency in net assets of c.$15.4 million as at 31 March 2012. This position consists largely of loans payable, including $24.2 million to related parties (CMI Limited and Carluke Capital Pty Ltd) and $1.4 million to customers who had provided funding to the business in late 2011 (Ford) and early 2012 (Bosch).
� The Company has experienced a significant decline in the net asset position since FY09, as shown in the graph below:
− The Company's net working capital position declined in the months prior to our appointment, as shown in the graph below.
− The reduction in working capital was due to a decline in the Company's debtors and stock levels, and an increase in creditors and accruals. These movements are symptomatic of the trading losses and financial difficulties the Company faced during this period. The negative working capital position indicates that the Company was funding losses as it sought to extend payment terms and delay payments to creditors.
Conclusion on the review of the financial position of the Company
On the basis of our review of the Company's financial position, it is apparent that the Company failed the Balance Sheet test of solvency during the relation back period. We base this on the following:
• The Company's net asset position had deteriorated substantially since FY09;
• Limited liquid assets to cover current, short term obligations; and
• Working capital position had deteriorated since July 2011.
� We utilised both independent third party documents such as bank statements and the Company's records to undertake the Cash Flow review. The graph below demonstrates movement in the Company's cash position since July 2011. We note that while the position remained largely within the overdraft facility limit of $2.0 million, this was breached on a number of occasions leading up to the date of appointment.
Profit and loss
� We have been provided with management accounts for FY11 and FY12 YTD, and information from FY09 and FY10 has been taken from audited financial accounts.
� The Company incurred significant financial losses throughout FY10 to FY12YTD. As highlighted in the graph below, the Company failed to make a profit in any of the 33 months during the period July 2009 to March 2012.
Conclusion on the review of cash flow test
The Company was unprofitable for an extended period of time prior to our appointment and was unable to generate positive cashflow from its business operations. Without the short term funding which was received in December 2011 and February 2012, the Company would have breached the overdraft facility by c.$1.3 million. Given the quantum of the continued losses incurred by the Company, this placed ongoing pressure on the company's cashflow and the Company resorted to other strategies such as non-payment or delayed payment of creditors.
1.4 Outstanding / overdue commonwealth and state taxes
(cont.)
� A review of all outstanding statutory obligations was undertaken at the beginning of our appointment. Our review identified significant arrears of statutory superannuation contributions, payroll tax, PAYG and GST obligations. The graphs below summarise the movement in these accruals over the period July 2011 to 31 March 2012, which are the latest accounts available:
� The Company had entered into discussions with the ATO regarding a payment plan (refer page 22 for further discussion on this) and a Director Penalty Notice had been issued against the Director in December 2011.
� The Office of State Revenue Queensland also had a payment plan arrangement with the Company, receiving monthly large round sum payments totalling $475k throughout that last six months. We understand that this payment plan was close to being fully paid, while a similar payment plan had recently been agreed with the State Revenue Office of Victoria regarding outstanding payroll tax arrears.
� As detailed in the graph above, the Company's statutory superannuation obligations arrears increased by c.$350k during the period September 2011 to March 2012. Our investigations into outstanding statutory superannuation contributions included meetings with the Industry Funds Credit Control ("IFCC") who administer superannuation contributions. Discussions with the IFCC revealed that the majority of employee accounts had failed to receive contributions from the Company since August 2011. This has resulted in approximately $1.2 to $1.5 million of outstanding statutory superannuation contributions as owing at the date of appointment (to be confirmed).
� We note, however, that these amounts are likely to increase as the Company's accounts for April are finalised.
1.5 Post-dated and dishonoured cheques
� Our review of the Company's books and records failed to identify any post-dated or dishonoured cheques.
1.6 Creditor ageing � The Company maintained an aged creditor listing which was used for the following analysis.
� As shown from the following table, the Company had a large majority of their creditors aged greater than 90 days. Management have advised that it was standard within the industry to operate on trading terms of 60+ days, however based on the ageing of creditors it is evident that the Company operated largely outside these informal trading terms.
� During the period October 2011 to January 2012, the Company experienced a significant increase in ageing with creditors aged over 90 days increasing by $1.5 million during this period, which resulted in 56% ($3.7 million) of creditors being aged greater than 90 days as at 31 January 2012.
� This is consistent with indications that the Company was experiencing cash flow and working capital issues, and as a result, creditors were being paid outside their normal trading terms.
� We note that the percentage of creditors aged over 90 days remained at around 60% since December 2011 as the Company actively managed payments to those who were placing pressure on the Company for payment.
1.7 Ability to generate additional capital / further funding
� The Company owed loans to a number of related and unrelated parties.
� We understand from discussions with Management that some interested parties had undertaken a review of the Company's financial position to consider injecting additional capital. None of these discussions resulted in the Company receiving capital injections.
� In December 2011 the Company sought funding from key customers, including Ford and Bosch, and from the Victorian Government. While an agreement was reached with each of these parties, only partial funding was received.
� We note that while the Company maintained a debtor finance facility with the NAB, although funds were provided to the Company by way of the facility, the extent of these funds was limited to the quantum of invoices raised by the Company.
� It is apparent that the Company had exhausted all other avenues for additional funding being injected into the business.
1.8 Other indicators � Our review of the Company's legal file identified numerous solicitor demands for payment and other legal demands and notices against the Company.
� This again indicates that the Company had significant cashflow and working capital problems resulting in creditors not being paid.
Conclusions on the timeframe for insolvency
It is apparent that the Company was in significant financial distress for an extended period of time leading up to our appointment. The Company had failed to generate a profit for any of the months during the period July 2009 to March 2012, and incurred significant losses during this period.
It is evident from our preliminary investigations that the Company experienced further declines in the financial position and performance in December 2011, and although they had sought and received some funding during H1FY12, it is evident that this offered only a temporary relief and the Company was not able to implement its planned restructure to reduce overhead costs.
Although the Company being locked out of the Campbellfield site was the catalyst for the Director to appoint Voluntary Administrators, it is likely that the Company was insolvent at least throughout the relation back period and possibly longer. Further investigations will be undertaken in this regard should the Company be placed into liquidation at the Second Meeting of Creditors.
In circumstances where a Liquidator is appointed he or she may be able to recover certain payments or dispositions of property that appear to the Liquidator to be voidable transactions pursuant to Part 5.7B of the Act.
Voidable transactions include the following:
The above transactions and preliminary findings are discussed in detail in the following pages.
The assessment of voidable transactions is relevant to creditors in choosing between the three options available at the second meeting of creditors, as they are only recoverable in a liquidation scenario.
Should we be appointed as Liquidators of the Company, we will conduct a further detailed assessment of payments in order to assess whether there are any likely recoveries.
Pursuing such payments may incur substantial costs by us as Liquidators and our legal advisors and there are a number of defences available to creditors in defending a preferential or uncommercial transaction action brought against them by a liquidator.
An unsuccessful action can result in a negative return as the Liquidator would be required to settle both the Company’s and the defendant’s legal fees. Accordingly, a Liquidator is required to fully investigate the circumstances surrounding the payment before commencing legal action. I wish to stress that by no means should you assume that each of the payments referred to are recoverable.
Recoveries of this nature are only available if the Company is placed into
To be recoverable, the following circumstances must have existed at the time the unfair preference transaction was entered into:
� The Company is insolvent or becomes insolvent at the time of entering into the transaction;
� The transaction was entered into in the six (6) months prior to the appointment of the Voluntary Administrators of the Company, being 26 October 2011 onwards ("the relation back date")';
� The transaction results in the creditor receiving from the Company more than the creditor would otherwise have received in respect to the debt in a winding up of the Company;
� A reasonable person in the creditors circumstances would have been aware the Company was insolvent; and
� The creditor must not have an offset for goods or services provided after the payment which remain unpaid, for an amount greater than the payment.
Ordinarily, this would be investigated further in liquidation and any payments to creditors in the six months prior to the appointment of the Voluntary Administrator will be identified and considered. Certain transactions which may be pursued by a liquidator (depending on the findings regarding insolvency) and potentially recoverable under these provisions will be based on indicators including, but not limited to:
� Threats to suspend or stop future supply;
� Being paid outside of their documented or agreed trading terms;
� Receiving large rounded payments upon the suspension of the supply of goods;
� Being advised that the Company is experiencing cash flow problems and being requested to hold off on presentation of cheques;
� Warnings that future supply would be dependant on Cash on Delivery (“COD”) or payment prior to delivery i.e. altered trading terms; and/or
� Requests that outstanding invoices be paid or at least part paid before further future supply would be entertained.
The following procedures were carried out in determining whether an unfair preference occurred:
� Analysis of ageing of all creditors as at the appointment date and an analysis of all creditor balances by month throughout the relation-back period.
� Review of the legal file to identify any demands for payment or other action taken.
� Review of bank statements throughout the relation back date period identifying any large, round sum or regular payments.
� Discussions with the director and other relevant stakeholders of the Company.
� Analysis of running account balance for those creditors identified as being at risk of receiving unfair preferences.
� Quantifying the value of transactions which may be considered unfair preferences.
Findings
We have examined payments made to creditors during the last six months and identified payments totalling $3.0 million to a number of creditors, which may constitute unfair preferences. That is, they have received more than they would have if the payments to these creditors were set aside and they were to prove for their debt in the winding up of the Company. In summary, the payments identified are:
We have found numerous demands and other legal notices issued from creditors regarding payment arrears, and have been advised by Management that a number of informal payment plans were entered into with the Company. We do not propose to discuss the details of each of these individual cases in this report, however further investigation will be undertaken in respect of recoveries of voidable transactions in the liquidation.
Voidable Transactions
Investigations
Creditor Value ($)
Various Trade Creditors 728,227
Statutory Creditors 475,000
Related Entity 185,000
Other possible preference payments requiring further inv estigations 1,137,500
Other Cheques identified w hich are possible preferences 515,769
These are transactions that a reasonable person would not have entered into having regard to the benefit (if any) and detriment to the Company of entering into the transaction and the benefit to other parties of entering into the transaction.
Procedures undertaken
The following procedures were carried out in determining whether any Uncommercial Transactions occurred:
� Identification of recurring payment amounts throughout the relation back date.
� Identification of all payments made to 'cash' and payment transactions not allocated to a supplier code.
� Consideration of whether the substance of the identified transactions are on commercial terms.
� Tracing identified payments through to supporting documentation.
Findings
We identified a number of payments which may constitute an uncommercial transaction, including a number of recurring payments and other payments made to cash. Further investigations will be undertaken during the liquidation process in relation to these transactions.
2.3 Unfair Loans: section 588FD
What is an Unfair Loan
Section 588FD(1) of the Act states a loan to a company is unfair "if and only if the interest of the loan was extortionate when the loan was made or has since become extortionate."
Regard is made to the risk of the lender, the value of security (if any), the terms of the loan, amount and any other relevant matters.
The following procedures were carried out in determining whether any unfair loans occurred:
� Review of the terms of financing arrangements to the Company.
� Review of the Company's historical loan repayment and drawings throughout the relation back-date period.
� Consideration of whether the interest rates on the identified financing arrangements are on commercial terms.
Findings
Further investigations will be undertaken during the liquidation process, however, our preliminary investigations have not identified any unfair loans that would be recoverable.
2.4 Unreasonable Director Related Transactions: section 588FDA
What is a Director Related Transaction
For a transaction to be voidable under these provisions a director or an associate of a director must have benefited from the transaction in circumstances where a reasonable person would not have entered into the transaction given the nature of the resulting benefits and detriments to the respective parties.
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.
Procedures undertaken
The following procedures were carried out in determining whether any unreasonable director related transactions occurred:
� Identification of related and associated parties to the Company.
� Identification of all significant payments to Directors and others throughout the relation back period.
� Identification of all significant payments to related entities throughout the relation back period.
� Tracing all identified payments to supporting documentation.
2.4 Unreasonable Director Related Transactions: section 588FDA
(Cont.)
Findings
Our investigations have identified the following in relation to director related transactions:
• The Director was not paid an annual salary, however payments were made to a number of related parties which the Director was also a shareholder and/or a director of.
• Carluke Capital Pty Ltd is a related company of which the Director is a shareholder. Carluke owns a substantial amount of the Company's plant and equipment which is leased to the Company. We have reviewed the terms of these arrangements including interest charges,however our preliminary review indicates that these arrangements appear commercial in nature.
• Carluke also provided working capital funding in the sum of $2.4 million in July 2011, with interest levied at 12% per annum, and we have identified interest payments totalling $175,000 which were made during FY12YTD. We would suggest that while this is above the standard business-loan interest rate of 8-10% that this loan likely does not constitute an unreasonable director related transaction.
• Further investigations will be undertaken into these transactions during the liquidation.
Unpaid employ ee superannuation contributions 1,005 - 1,005
PILN n/a n/a n/a
Redundancy n/a n/a n/a
Total 1,672,940 4,651,222 6,324,163
Employees
� As previously detailed, the Administrators and Receivers have continued to trade the respective sites in Victoria and Queensland. Staff where employment continued through the Administration have continued to accrue their entitlements per their contracts or other industrial agreements. We note that the obligations for payment of these entitlements rests with either the Administrators or the Receivers, depending on which site the employee is located.
� We confirm that any employee made redundant by either the Administrators/Liquidators or Receivers, will be entitled to lodge a claim with GEERS for amounts owed at the date of appointment, being 26 April 2012.
� Employee entitlements have been calculated from the Company's payroll records, and have been calculated in line with the employee's award or other industrial agreement.
� Once these calculations are finalised, employees will be notified accordingly.
Terminations
� We were advised by the Receivers that following their appointment a total of 51 staff had their employment terminated with the Company. The table below shows the location of these employees:
� No redundancies have been made by the Administrators in relation to the Queensland sites.
Employee entitlements
Employees and employee entitlements
Notes
1. The Administrators have worked with the payroll officer for Toowoomba and Bundaberg to calculate the entitlements owed to employees at the date of appointment.
2. The Receivers have provided indicative figures only for their calculations of employee entitlements as they are in the process of finalising these. An update will be provided at the Second Meeting of Creditors in this regard.
GEERS payment during the Administration
� Following the first meeting of creditors the Department of Education, Employment and Workplace Relations ("DEEWR") confirmed that funding would be made available to those employees who were made redundant during the Administration (ie prior to Liquidation).
� We understand that GEERS has commenced an initial payment to those employees made redundant by the Receivers in respect of their outstanding employee entitlements to assist those employees prior to liquidation.
� The GEERS process is discussed further overleaf.
General Employee Entitlements and Redundancy Scheme ("GEERS")
Government Employee Entitlements and Redundancy Scheme (“GEERS”)
As there are unlikely to be sufficient funds to enable a dividend to be paid to priority creditors, we intend to refer this matter to the General Employee Entitlements & Redundancy Scheme ("GEERS").
GEERS is a discretionary government safety net scheme for unpaid employee entitlements where employees are terminated as a result of insolvency. As GEERS is a discretionary fund, distributions from it cannot be guaranteed.
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:
� Any unpaid wages (including regular allowances, any Salary Sacrifice not remitted to a Superannuation Fund and any outstanding Rostered Days Off) in the three (3) month period leading up to our appointment;
� All unpaid annual leave (including Annual Leave Loading);
� Any pay in lieu of notice up to a maximum of five (5) weeks;
� Redundancy payments up to a maximum of four (4) weeks redundancy pay per completed year of service; and
� All long service leave.
Please note that GEERS does not cover amounts owed for the statutory 9% superannuation contribution.
Employees and employee entitlements
As previously advised, both the Administrators and the Union have been in ongoing contact with DEEWR regarding the availability of GEERS. We received confirmation from the Department that they would be approving applications for GEERS funding prior to the Company being placed into Liquidation at the Second Meeting of Creditors.
Throughout the administration we will continue to liaise with GEERS in order to assist in the provision of outstanding entitlements to employees. This will assist GEERS to review the claim.
Please note that should a payment to employees be made by GEERS, these funds are recoverable by GEERS pursuant to Section 560 of the Act. That is, GEERS will take over the employee’s priority position as a creditor of the Company to the extent of entitlements paid by GEERS.
Employees must lodge their claim with GEERS to be entitled to monies. This can be done either via the GEERS website at www.deewr.gov.au/WorkplaceRelations/Programs/EmployeeEntitlements/GEERS/InfoForEmployee or by completing a GEERS claim form and submitting via post. We recommend that employees lodged their claim forms online as this will ensure a quicker response from GEERS.
We stress, the employee must lodge the initial form following liquidation. Please contact Ms Tianne Nagy-Jones on (03) 8663 6454 should you have any queries in relation to this process.
- CMI Ltd Unknown, but at least partial return likely
- Ford Unknown
- Carluke Payment in full likely v ia fix ed charge ov er plant and equipment
Priority creditors
- Employ ee entitlements Payment in full likely from GEERS, or entitlements preserv ed
- Statutory superannuation Unknown - dependant on realisations from floating charge assets
Unsecured creditors No return likely
Estimated return to creditors
Estimated return to creditors and Administrators' Recommendations
Overview
� As previously noted, the Receivers have taken control of the Company's Victorian assets and operations. Accordingly, we have been unable to estimate the value of the assets relating to these sites and any likely proceeds these assets might realise.
� While the Company's Toowoomba site continues to be subject to the control of the Administrators, our review of the Company's financial position at the date of appointment would suggest that it is unlikely any material returns would be available to unsecured creditors.
� Based on our review, any realisations through the sale of the Company's business and assets will be provided first in payment to secured creditors.
� Priority creditors (employees) who are made redundant through the Receivership or the Administration/Liquidation are entitled to lodge a claim with GEERS to have their entitlements paid through GEERS.
� We confirm that following discussions between the Union, the Department and ourselves, an agreement was reached whereby funding would be made available to eligible employees who had had their employment terminated by the Receivers or Administrators prior to the Company being placed into Liquidation. We note, however, that GEERS is a discretionary fund and as such, distributions from this can not be guaranteed by the Administrators/Liquidators.
� We further note that GEERS does not cover outstanding superannuation entitlements.
� Given the quantum of the secured creditors and employee clams, subject to any recoveries by the liquidator for insolvent trading or voidable transactions, there are unlikely to be sufficient realisations from the Company's assets to allow for a distribution to unsecured creditors.
Options available to creditors and Administrators' recommendation
Estimated return to creditors and Administrators' Recommendations
3. The Company be wound up (Liquidation)
� Creditors may resolve to wind up the Company which would result in the Company being placed into Liquidation. If creditors do not nominate a different person to be Liquidator, Matthew Byrnes, Greg Keith, Graham Killer and Michael McCann will be taken as having been nominated as Liquidators of the Company.
� A more detailed review of the Company’s financial affairs would be conducted and as a consequence a report on its affairs and the conduct of its officers would be prepared and the findings conveyed to ASIC.
� The assets of the Company would continue to be realised in conjunction with the Receivers. The likelihood of success for claims in relation to voidable transactions and insolvent trading would be made as well as a determination to proceed with such claims.
� Upon the sale of assets and collection of funds, monies would be distributed in accordance with the provisions of Section 556 of the Act.
� We note that should the Company be wound up this will not impact the ability of the Receivers to continue to trade the Victorian sites.
Having regard to the above, the only viable option available to creditors is for
the Company to be wound up.
In accordance with Section 439A(4)(b) of the Act, we are obliged to make a recommendation to creditors as to which of the options available to them is in their best interests. The following options are available for creditors to vote on at the meeting convened pursuant to Section 439A of the Act:
1. The Administration terminates
� Creditors may resolve to terminate the Voluntary Administration. Should this occur the Company would be handed back to the Director.
This option is clearly not viable as the Company is insolvent and creditors
claims need to be dealt with under a formal administration.
2. The Company executes a Deed Of Company Arrangement
� The provisions of Part 5.3A of the Act allow the Company and its creditors to negotiate a proposal to deal with the Company’s affairs and in such circumstances execute a Deed of Company Arrangement ("DOCA").
� A DOCA is a flexible arrangement which is available to Companies in Voluntary Administration and is usually proposed by the Directors.
� A DOCA can allow a Company to continue to operate in a restructured form after administration.
� In order for a DOCA to be considered and put forward to creditors it must provide creditors with a greater return than that of liquidation.
There has been no DOCA proposed therefore this option is not available to
creditors to vote upon at the second meeting.
Administrators' recommendation to creditors
Given the above, we must recommend at this time that the Company be
placed into Liquidation at the Second Meeting of Creditors.
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.
Method chosen
Given the nature of this administration we propose to apply the time based/hourly rate method. 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.
Actual fees from 26 April 2012 to 20 May 2012 195,676 113,647 309,323
Estimated fees from 21 May 2012 to 29 May 2012 80,000 15,000 95,000
Total retrospectiv e fees 275,676 128,647 404,323
Estimated fees from 29 May 2012 to finalisation of liquidation 150,000 150,000 300,000
Total estimated fees 425,676 278,647 704,323
Remuneration Cont.
Disbursements
Disbursements are divided into three types: A, B1, B2.
A disbursements are all externally provided professional services and are recovered at cost. An example of an A disbursement is legal fees.
B1 disbursements are externally provided non-professional costs such as travel, accommodation and search fees. B1 disbursements are recovered at cost.
B2 disbursements are internally provided non-professional costs such as photocopying and document storage. B2 disbursements are charged at cost except for photocopying, printing and telephone calls which are charged at a rate which is intended to recoup both variable and fixed costs.
I expect that disbursements will be approximately $50,000 which includes (but is not limited to): legal fees, statutory notices, external production of creditor correspondence to all creditors (for the first, second and final reports), photocopying, travel and postage.
Remuneration
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.
� At the meeting of creditors which is to be held on 29 May 2012, we will be seeking approval from creditors for our retrospective and prospective remuneration as Administrators/Liquidators.
� Retrospective remuneration from the date of our appointment on 26 April 2012 to close of business on Sunday, 20 May 2012 is $309,323.00 excluding GST and disbursements.
� Remuneration for the period 21 May 2012 to the date of the Second Meeting of Creditors on 29 May 2012 is estimated to be $95,000 excluding GST and disbursements. Please note that this figure contains an estimate of remuneration required for the period 21 May 2012 to 29 May 2012. The actual remuneration figure for this period will be confirmed and presented to the meeting of creditors on 29 May 2012.
� Our estimate of prospective fees from 29 May 2011 to the conclusion of the liquidation is $300,000 excluding GST, disbursements, and any amounts received from the General Employee Entitlements and Redundancy Scheme (“GEERS”).
As outlined in detail in our First Report to Creditors (please refer to the Declaration of Independence, Relevant Relationships and Indemnities), immediately prior to taking the appointment, the Administrators were aware that Receivers & Managers were to be appointed to take control of the business and assets related to the Victorian sites. Accordingly, as the control of most of CMI’s assets were likely to be in the hands of Receivers, the Administrators would have access to only limited funds or assets in the administration. We therefore sought funding from third parties including Ford and the other secured creditors in relation to our costs and expense as detailed in our DIRRI. Creditors should note that our fees for the administration an liquidation summarised in the table will be substantially funded through these third party sources.
The meeting will be open to creditors for questions and general discussion. Should you wish to have us address any issues in detail, please complete the attached question sheet and return to me prior to the meeting date.
This will allow sufficient time to prepare a detailed response to your question.
This concludes our Section 439A(4) Second Report to Creditors.
Should you have any queries in relation to any matters in this report, then please do not hesitate to contact Mr Edwin Clark of this office on (03) 8663 6000.
Description of work completed from 26 April 2012 to 20 May 2012
Task Area General Description Includes
Assets
32.5 Hours
$14,335.50
Debtors (Queensland sites) � Collation of debtor records
� Reviewing and assessing debtors ledger and related records
� Correspondence with financier
Leased assets � Review of leasing documents
� Liaising with owners/lessors
Creditors
187.7 Hours
$62,100.50
Creditor enquiries � Receive and follow up creditor enquiries via telephone, facsimile and email
� Maintaining creditor enquiry register
� Review and prepare correspondence to numerous creditors and their representatives via email and post
� Correspondence and liaison with the committee of creditors
Creditor reports � Preparation of First Circular to Creditors advising of appointment
� Preparation of First Report to Creditors including attachments
� Preparation of Second Circular to Creditors
� Preparation of Second Report to Creditors including attachments
� Preparation of Administrators’ Section 439A Report to Creditors including attachments
Meeting of creditors � Preparation of meeting notices, proxies, proofs of debt and other report attachments
� Forward notice of meeting to all known creditors
� Preparation of meeting file, including agenda, certificate of postage, attendance register, list of creditors, advertisement of meeting and draft minutes of meeting.
� Preparation and lodgement minutes of meetings with ASIC
� Responding to stakeholder queries and questions
� Convening the First Meeting of Creditors
Secured Creditor � Correspondence with secured creditors and providing updates
Classification Charge Rate Guide to Level of Insolvency Experience
Notes:
2. Time spent on matters is recorded and charged in six (6) minute intervals.
3. Charge rates shown are per hour and excluding GST.
Registered Trustee. Partner/Director bringing specialist skills to Administrations and Insolvency matters. Controlling all matters relating to the assignment.
PARTNER(PERSONAL)
$510
PARTNER(CORPORATE)
$615Registered Liquidator. Partner bringing specialist skills to Administrations and Insolvency matters. Controlling all matters relating to the assignment.
GRANT THORNTON RECOVERY (VIC) PTY LTD
RECOVERY & REORGANISATION SERVICES
CHARGE RATES (EXCLUDING GST)
AS AT 1 JANUARY 2012
ASSOCIATE DIRECTOR $510
Qualified accountant (CA/CPA). 8+ years experience. Well developed technical and commercial skills. Planning and control of all Administration and Insolvency tasks. Controlling substantial matters relating to the assignment and reporting to the appointee.
SENIOR MANAGER $465Typically CA/CPA Qualified. 6-8 years experience. Well developed technical and commercial skills. Planning and control of Administration and Insolvency tasks with the assistance of the appointee.
ASSISTANT MANAGER(CORPORATE)
$380Typically CA/CPA Qualified. 4+ years experience. Co-ordinates planning and control of small to medium Administrations and Insolvency tasks. Conducts certain aspects of larger administrations.
MANAGER $440Typically CA/CPA Qualified. 6-8 years experience. Well developed technical and commercial skills. Planning and control of Administration and Insolvency tasks with the assistance of the appointee.
Typically first 6 months experience. Required to assist with the day to day fieldwork on Administrations and Insolvency tasks under the supervision of intermediate and senior staff.
$215
$350Typically undertaking CA/CPA Qualification or recently Qualified. 3-5 years experience. Required to conduct the fieldwork on Administrations and Insolvency tasks.
SENIOR 2 $320Typically CA/CPA Qualified. 3-5 years experience. Required to control the fieldwork on Administrations and Insolvency tasks.
SENIOR 1
1. This guide to the level of insolvency experience is intended only to be a guide as to the qualifications and experience of the staff engaged. It should be noted that in some instances staff may be engaged under an appropriate classification principally due to their experience.
PA/SECRETARY $185 Carries out all secretarial functions relating to an administration.
UNDERGRADUATE $180Typically in final year of tertiary studies and undergoing vacation employment or part time work.
ASSISTANT MANAGER(PERSONAL)
Typically CA/CPA Qualified. 4+ years experience working on personal insolvecny files. Co-ordinates planning and control of all personal insolvency files.
$365
JUNIOR $140 Carries out all junior roles relating to an administration
ADMINISTRATOR $210 Conducts all aspects relating to administering the accounts function.
ACCOUNTANT 2 $240Commencing CA/CPA Qualification. Up to 2 years experience. Required to assist with the day to day fieldwork on smaller Administrations and Insolvency tasks under the supervision of more senior staff.
ACCOUNTANT 1 $305
Typically undertaking CA/CPA Qualification. Up to 3 years experience. Required to conduct the fieldwork on smaller Administrations and Insolvency tasks and assist with fieldwork on medium to large Administrations and Insolvency tasks.