Dick Smith’s creditors are likely to be left at least $260 million out of pocket, although the collapsed retailer’s staff have received, or will soon receive, their full entitlements, according to the company’s administrator.
The news was generally not good for creditors in McGrathNicol’s report to them, released today.
After having sold off Dick Smith’s online brand to now-listed rival Kogan in March and engaged in a massive stock clearance sale, McGrathNicol said the failed company was still in excess of $260 million short of the amount it owed creditors.
Employees, who stand right near the front of the creditors’ queue, have been paid their entitlements in full, except for an outstanding amount of $2.1 million relating to historical staff underpayments that McGrathNicol said will be paid this calendar year.
Banks which had issued secured loans to Dick Smith stand further down the order and “are likely to suffer a significant shortfall” in recovering their debts according to the administrator.
However, the worst news is for unsecured creditors, including gift card holders, and Dick Smith shareholders, who are not expected to receive any return unless “very significant” recoveries are made in the liquidation process.
Potential legal actions hang over Dick Smith management
One type of recovery that is possible is the potential for legal action against Dick Smith’s former directors and managers, which may allow the banks involved (HSBC and NAB) to claim against the directors’ insurance policies, as reported in the Financial Review on Monday.
Unlike the receiver’s view, which attributed much responsibility for the collapse at the feet of management and the directors, the administrator’s report blamed tough market conditions combined with some poor decisions.
“Management were very focussed on increasing revenue and generating profitability. This ultimately came at the expense of sustainable growth and the business struggled to maintain performance,” said Joe Hayes from McGrathNicol.
“These expansion plans went unchecked during early to mid-2015, and major inventory purchasing decisions meant Dick Smith was carrying too much stock that was not saleable and was overvalued.
“By December 2015, a rapid clearance sale was needed at a time the business should have been achieving strong margins. However, cash receipts were simply insufficient to meet commitments.”
The administrators said it is too early to draw conclusions about the nature of claims that might be brought relating to Dick Smith’s failure.