Former Dick Smith Directors To Appear In Court Over Dodgy Rebate Practices
16 months after Dick Smith collapsed with debts of over $400M, the directors of the Company have been served notices to appear in the Supreme Court over allegations that they breached their duties by failing to put in place adequate systems in relation to rebates and inventory management.
It’s also been alleged that the company earnings in 2015 were inflated due to questionable activates relating to the way that rebates to suppliers were manipulated.
The case against the directors was outlined in a statement of claim lodged in the Supreme Court of NSW on Friday afternoon.
The statement alleges if directors and officers had performed their duties properly, Dick Smith would have posted a loss or a substantially lower profit in 2015.
This strategy allegedly resulted in management being motivated to buy stock that was driven by rebates rather than customer demand, creating a stockpile of products that were “unsaleable” or “bad”.
It also enabled the company to pay dividends that it allegedly couldn’t afford, putting a further strain on its finances.
It’s alleged that no later than December 28, 2014, Dick Smith should have made, but failed to make, provisions and write-offs with respect to bad stock held or likely to be held as at December 28, 2014.
It says in order to pay an interim dividend of 7¢, Dick Smith required an extension to its overdraft limit.
The damages claim includes recovering the dividends that it alleges were wrongly paid out, estimated to have cost more than $27 million, along with the losses arising from the purchase of bad stock, estimated to be tens of millions of dollars.
It says the “rebate-driven buying practices” resulted in Dick Smith taking a $60 million impairment in November 2015 with respect to bad stock.
Among the directors singled out are former CEO Nick Aboud, Bill Wavish, Phil Cave of Anchorage Capital, Rob Murray, Jamie Tomlinson and Michael Potts.
Also in the receivers Ferrier Hodgson’s sights is Neil Merola the former Marketing Director of the failed retailer.
Ferrier Hodgson are seeking damages totalling tens of millions of dollars from both the directors and their insurance Companies including the primary insurer Allianz and the nine insurers that provided various levels of excess insurance policies.
At the heart of the allegations is the use – or alleged misuse – of rebates and that the rebate accounting policy didn’t comply with Australian Accounting Standards. It alleges it facilitated reporting gross profit, earnings before interest tax, depreciation and amortisation and net profit higher than should have been reported had it complied with Australian Accounting Standards and in particular AASB 102.
By adopting this policy, the cash flow became strained and Dick Smith became reliant on increasing external borrowings to fund its cash flow requirements (including using external borrowings to fund the purchase of bad stock).
Sid Wang from Clayton Utz, who is representing Abboud and Potts, told the Australian Financial Review the suggestion that the company and management were buying excessive stock to procure rebates was fanciful. He said the interim and final dividend were paid out of profits in consultation with the external auditors. The external auditors were Deloitte.
The latest actions of the receiver following an extensive grilling of several directors last year when a a public examination of directors and executives was held in NSW.
The purpose of the examination was to find out why Dick Smith collapsed. But it also enabled the receivers to assess whether claims could be made against the company’s directors’ and officers’ insurance policies.
During those hearings Bill Wavish hit the headlines with comments that retailers can’t survive without rebates and for most retailers, rebates exceed profit. “You avoid maximising rebates at your peril,” he told the Supreme Court of NSW.
Wavish was a director of the electronics empire until he retired in March 2015, 10 months before its demise. He was a major player in the purchase of Dick Smith from Woolworths in September 2012 for $94 million and its listing on the ASX just over a year later at a massive $520 million.
During the examination Wavish questioned the role of the auditor Deloitte. Deloitte did sample testing of the stock.
Deloitte was also raised by another former director Jamie Tomlinson, who read out the full audit plan for rebates for 2015 as well as the audit report for the 2015 full-year result. Deloitte said in that report that Dick Smith complied with accounting standards. “Based on our work performed, we have not identified any unadjusted differences.” Tomlinson joined the board nine months before its collapse and is being sued by the receivers.
According to the AFR, Deloitte hasn’t been joined in this legal action but there are whisperings that some of the parties are considering a cross claim against the auditor.
In a statement, non executive directors Rob Murray, Jamie Tomlinson, Lorna Raine and Robert Ishak said they “strongly” denied any wrongdoing and said they would defend the action.
“In broad terms, the receivers claim that the non-executive directors breached their duty of care to Dick Smith by failing to put in place adequate systems in relation to rebates and inventory management,” the statement said.