In his report to Creditors ahead of the second meeting on Tuesday 27th August, the Administrator of Clear Skies Corp Pty Ltd, trading as Skope Group Services Manufacturing, Scream Visual Wholesale Manufacturing and FM Engineering & Wholesale Sign Manufacturing – Mr Simon Thorn of PKF states that the Company may have traded insolvently since 2017. Sign company Skope Group has put in an offer to buy Clear Skies for $100K and guarantee the 22 jobs, plus most entitlements.
He adds: “Following an urgent review of the Company and its cashflow position, it became apparent that the Company had insufficient working capital to continue paying for materials to complete work-in-progress.”
He goes on to say that he would have had no option but to cease Clear Skies’ trading entirely but that its major customer (80% of Clear Skies work), started to pay for materials to complete its jobs. He also completed a Heads of Agreement for Skope Group to be liable for the on-going trading costs of the Clear Skies’ businesses, during the administration.
Skope Group has also made an offer of $100,000 to acquire Clear Skies as a going concern, conditional upon creditors voting for the DOCA, and to fund this Deed of Company Arrangement for it to continue trading (DOCA). Mr Thorn states that: “It is my recommendation that creditors resolve to execute the Deed as it will allow for greater realisation from the Company’s assets and provide a more certain and timely return for creditors of the Company.”
Jobs could be saved
If the DOCA is supported by creditors next Tuesday, Mr Thorn anticipates that all (approx. 22) employees of Clear Skies will be employed by the new owners and their accrued entitlements, excluding SGC, will be taken over by the purchaser of the business. While under the DOCA, SGC will be paid by the new owners. He anticipates a return to unsecured creditors of 30 cents in the dollar. If the DOCA is not executed and the company is liquidated, all employees would be terminated and there would probably be zero return for creditors.
Mr Thorn’s preliminary findings are that Clear Skies may have been trading while insolvent. His review of past accounts show the Company lost $116,793 in FY 2016-17; $853,132 in FY 2017-18 and $842,126 in FY 2018-19.
Clear Skies’ sole director, Mr Robert Price, has put these loses down to a downturn in business, increased costs, bad debts, poor accounting advice and the loss of key staff.
As at 30th June 2019, total assets are $576,168 while liabilities are $1,844,435 -a shortfall of $1,268,267.
PKF’s estimated overall deficiency once receivables are in and other liabilities taken into consideration, is $3.2 million and this is “subject to costs of administration or liquidation.”
Unsecured creditors are owed an estimated $2.28 million as follows:
Australian Tax Office: $813,599
Trade Creditors: $724,861
Skope Group Entities: $738,549
The ‘Skope Group Entities’ are: Stressa Enterprises Pty Ltd, Comm-Klad Pty Ltd and Allworx Building & Maintenance Service Pty Ltd. Mr Thorn states that they may be ‘Associated Entities’ and may be investigated accordingly in a liquidation scenario.
If the DOCA is accepted by creditors and Skope Group buys Clear Skies as a going concern, all employees would be offered employment and the sum of $288,096 would be paid over 2 years to the ATO to cover the unremitted SGC (Superannuation). Additionally, $500,000 would be paid into a Deed Fund within 3 years, for even distribution to unsecured creditors.
Mr Thorn reports that ‘voidable’ or ‘preferential’ payments may have been made totalling about $399,000 and that these might be recoverable (‘clawed-back’) as they were made while Clear Skies was insolvent.
Related parties
He rebuts claims that Skope Group and its entities were ‘nothing to do with Clear Skies’ by stating that “My investigations have revealed that Skope may be considered a related party and that the Company had an unusual trading relationship with Skope…”
He also identifies that: “…Preliminary investigations indicate there are transactions between the Company and the Skope Group Entities that appear unreasonable should they satisfy the test and be considered related parties to the Company. He goes on to say that a director of the Skope Entities may be a ‘shadow or de facto director’ of the Company Clear Skies Pty Ltd. and may even “amount to a Holding Company relationship” – in which case could make Skope Entities liable for claims against Clear Skies under section 588V of the Corporations Act 2001.
Mr Thorn notes that in order to prove the insolvent trading and/or existence of related entities or holding company status, considerable investigation, with attendant legal costs, would be necessary and only possible if the Company was wound up and liquidated. He recommends the Deed of Company Arrangement as offering the best financial outcome for creditors.
For employees of Clear Skies and its entities, the DOCA is certainly better as it would provide for continued employment and full payment of all priority employee claims, and a dividend of 30 cents in the dollar to ordinary unsecured creditors.
In a liquidation scenario, employees are likely to get only 16 cents in the dollar (excluding any FEGS payments) and unsecured creditors nothing.
It’s all for creditors to decide next Tuesday, 27th August.
