Dick Smith Directors Borrowed To Pay Dividends To Themselves As Company Collapsed
The Directors of failed retailer Dick Smith are being pursued for millions of dollars after it was revealed that they got more than $2 million in tax-free cash in 2015 after declaring dividends that should never have been paid.
It’s also been revealed that the directors went out of their way to source borrowing so that they could pay dividends to themselves.
This information makes up part of a claim, lodged in the NSW Supreme Court by Dick Smith’s receivers, James Stewart, Jim Sarantinos and Ryan Eagle from Ferrier Hodgson, following the collapse of Dick Smith with debts of over $400M
The receivers believe that the directors are now liable to compensate Dick Smith for both dividends they received on their shares as well as the entire $28.3 million paid in distributions in 2015.
On top of this the receivers are trying to claw back $189 million in bad stock that accumulated because of the company’s buying strategy which they claim was built around rebates and not store sales.
The receivers are suing eight former directors and ten of its insurers after alleging that directors breached their duties, among those facing massive payouts if the case goes against them are former CEO Nick Aboud, former Chairmen Phil Cave, from Anchorage Capital Partners, and Robert Murray, finance director Michael Potts, and non-executive directors Bill Wavish, Lorna Raine, Robert Ishak and Jamie Tomlinson.
It’s also claimed that the directors allowed financial results to be published for which there was no proper basis.
The insurers being pursued include Allianz Australia, QBE Insurance (Europe), AIG Australia, ACE Insurance and Liberty Mutual.
According to the claim, Dick Smith adopted a strategy of maximising rebates from suppliers by at least May 2014, six months after its $520 million initial public offer in December 2013.
The claim details that from as early as December 2014 the group engaged in a practice of uplifting invoices, which involved cancelling previous invoices for stock that had been issued without rebates and asking suppliers to issue new invoices showing rebates and an equivalent increase in the cost of the goods.
From at least July 2014, certain types of rebates, including over and aboves, were recognised in the accounts immediately after being negotiated with suppliers – before the rebates were received and before the stock had been paid for or sold -in breach of accounting standards. with the aim of boosting reported earnings.
When ChannelNews challenged both Nick Aboud and former Marketing Director Neil Merola about these practises and the profits being reported they claimed that “Our sources were wrong”.
By February 2014, as like-for-like sales and cashflows deteriorated, Dick Smith sought to extend finance facilities with Westpac and Macquarie Bank and was forced to ask certain suppliers to defer delivery of goods or extend payments because it had insufficient funds.
Despite this disaster unfolding the directors on February 12 2015, passed a resolution that Dick Smith pay a 7¢ a share interim dividend. In order to pay the $16.6 million dividend, the company had to extend an overdraft facility.
Over the next five months Dick Smith’s cashflows worsened and stock levels continued to build. Despite the company’s increasingly precarious situation, on August 17 2015 directors – who at this stage included Mr Abboud, Mr Potts, Mr Murray, Mr Tomlinson, Ms Raine and Mr Ishak – approved a resolution to adopt the full-year accounts and pay a 5¢ a share final dividend.
Dick Smith paid the $11.8 million dividend in September 2015 and the following month was forced to seek a short term $20 million increase in its loan facility.
Later that month directors were told by external consultants that more than one third of Dick Smith’s current inventory was bad stock which exceeded $100 million. By November 13 bad stock had risen to $152 million and by November 23 it had reached $189 million or 56 per cent of inventory, prompting Dick Smith to book non-cash impairment charges of $60 million.
By December 29 directors had called in McGrathNicol to advise on the company’s cash flows and solvency and by January 4 directors had placed the company into voluntary administration.
Questions now being asked as to how Accountants Deloitte could sign off the books during this period.