Company Two – Automotive Retailer

OVERVIEW

 

MOTOR TRADE – FLOOR PLAN FUNDING – ADMINISTRATION – FRAUD – TRADING ON – POSITIVE RESULT – KEY NEGOTIATION REQUIREMENTS

Following advice that Company Two had received from their solicitors the Directors had been instructed to place the Company into Administration.

Company Two had commenced operating some five years earlier as a Used Car Dealership in outer north western Sydney. Some two years earlier the Directors moved the Dealership closer into the central urban area and then one year earlier opened another Dealership in outer western Sydney. The two separate Dealerships were now operating concurrently.

The Directors had been driven to their solicitors as a result of cash flow problems and increasing pressure from Creditors, including the Australian Taxation Office. The business had been funded using a typical Automotive Floor Plan and like many businesses in their condition their record keeping was wanting. It was this that led to their nightmare.

There were a number of complex issues involved with this Administration/Liquidation. These included:

  • Extensive Retention of Title claims as against stock acquired from other wholesalers,
  • Vehicles existing not subject to the Floor Plan,
  • Vehicles not existing that were on the Floor Plan,
  • An increasing questioning by a growing number of parties as to the owners bona fides.

At the time of our appointment, we arranged for a member of staff to conduct a random audit of the stock held against the stock schedule maintained by the Company and with the documents supplied by the Floor Plan Funder (FPF). As a result of this process it quickly became apparent that there were significant claims by parties asserting Retention of Title against stock which was also subject to secured charges held by the Secured Creditor.

Following our appointment, we were advised that the Company had purchased items of stock from several Auction Houses and Motor Vehicle Wholesalers that the Company had not paid for. Notwithstanding this the Company had also “Floor Planned” some of these vehicles to assist with cash flow. This resulted in the two parties having an interest in the same vehicle.

Upon receiving notification of the possible Retention of Title claim, we gave immediate instructions to secure all the vehicles such that they were no longer for sale, and the vehicles were not to be used. This was an important process in order to protect the Company (and its former Directors) from any further exposure for their activities.

We subsequently sought advice as to the validity of the ROT claims confirming that in some instances valid ROT claims existed. This issue was therefore resolved by merely contacting the ROT claimants and permitting them to collect their vehicles.

In terms of the FPF who was owed in excess of $1.3 million, after conducting our own review of the Company’s stock, we were able to ascertain that of the total number of cars subject to the Floor Plan were no longer in the possession of the Company, or now had been returned as part of the ROT clauses. The loans for the vehicles were at cost not retail prices and as the available fleet diminished so did the Company’s equity in the vehicles.

Accordingly, the shortfall in the book value of the Secured Creditor’s “secured motor vehicles” was in the order of $335,000 at cost. We were ultimately able to resolve this issue by seeking agreement from the FPF to permit us to continue to trade the company so that I could have an opportunity to mitigate a portion of the exposure to the FPF.

Finally, and in order to maximize the potential recoveries for Unsecured Creditors, we decided to continue to trade the business on during the administration period. The main benefit of continued trading is the preservation of the value of the business, in particular, maintaining the Floor Plan which was secured. The value of the Floor Plan stock was able to be maintained as our continued trading prevented the need for sending the stock to auction, which could result in proceeds which were less than the total funds outstanding to the FPF.

During the course of the administration period, we were able to realise an excess of $239,000 from vehicle sales, and based on the projected future sales and expenses, in certain circumstances, we would have ordinarily expected the Company to generate sufficient funds to enable the continued trading of the Company.

However, given the lack of faith many of the Creditors had developed in the Directors and no independent purchaser in the wings it was ultimately resolved to place the Company into Liquidation.

Since the date of our appointment, we had received the support of a number of key Trade Suppliers, Wholesalers, Auction Houses and the FPF. It is noted that without this ongoing support, the cash flow projections as forecasted would not have been achievable and the ongoing trading performance would be severely impacted.

Our decision to continue to trade the business enabled all of the claims by Priority Employee Creditors to be paid in full. This is an excellent result compared to the prospects that faced this class of Creditor at the time of our appointment.

From an overall sense, this matter would be seen by some as reasonably ordinary. However, with the significant shortfall to the secured creditor becoming apparent in the early stages of the administration, and the legal issues surrounding the dealing with stock we were directly able to achieve support from the FPF in order to provide the best available opportunity to themselves, Priority Employee Claimants, and U Creditors generally.