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“Ripped Off” Insolvent Harris Scarfe Allegro Funds Deal, Looks Like Another Dick Smith Anchorage Capital Saga

Allegro Funds executives are today ducking for cover after it was revealed that Harris Scarfe became insolvent the moment the Company took control from scandal plagued South African retail conglomerate Steinhoff Asia Pacific who trade in Australia as Greenlit Brands.

Consumer electronics and appliance distributors claim that they have been “ripped off” by the actions of the South African led private equity firm Allegro Funds who like Anchorage Capital who owned Dick Smith another failed retailer, pocketed millions at the expense of small suppliers.

Administrator BDO Australia has found the Harris Scarfe group of companies became insolvent when Allegro Funds formally took control and quickly siphoned off $70M in cash leaving suppliers with only cents when the business was placed into administration.

Allegro Funds Directors: Left Adrian Loader Director Allegro Funds, and right former South African Director of Allegro Funds Chester Moynihan who is also Chairman of Pizza Hut.

Sydney-based Allegro tipped Harris Scarfe into voluntary administration, owning unsecured creditors such as suppliers and landlords between $146.1 million and $236.4 million.

The Harris Scarfe deal has left distributors bitter given Allegro positioned itself as a key secured creditor ahead of placing Harris Scarfe into administration.

At the end of the day they like Anchorage Capital are hoping that they will still be able to pocket $70 million in cash.

The Harris Scarfe drama unfolded when a critical line of credit provided by former owner Greenlit Brands was severed.

Allegro, took over Harris Scarfe and Best and Less through an entity called Australian Retail HoldCo, on December 2, Harris Scarfe that was bleeding cash at the time something which Allegro Funds would have known, but their pot of gold was the $70M still sitting in the accounts of the retailer.

The loss-making department store was then placed into voluntary administration on December 11 but not before money in the retailer’s accounts had been transferred into new accounts.

The BDO report reveals that Harris Scarfe could have traded while insolvent for more than a week.

“From our investigations, despite generating trading losses, with the support of the parent entity, the group (Harris Scarfe) was solvent up until the date of the ARH (Australian Retail HoldCo) sale transaction,” the final creditors report prepared by BDO administrator Duncan Club says.

“From this date, the financial support previously provided by the parent entity was unavailable, the group had no working capital funding and the group was not in a position to fund its ongoing trading losses and meet its liabilities as and when they fell due.

“Based on our preliminary investigations, the group was insolvent from the date of completion of the ARH sale transaction on 2 December 2019.”

The report notes Allegro — an experienced buyer of distressed businesses — was working on a rescue plan for Harris Scarfe and its executives would have a number of defences against any charge of insolvent trading.

ChannelNews understands that the Allegro Funds business which is led by former South African business executive Chester Moynihan is already exploring additional opportunities among struggling retailers who are facing hard times due to the COVID-19 epidemic.

In the case of Harris Scarfe Allegro did not increase the liabilities of Harris Scarfe and did not order any stock after taking control.

“Even if a liquidator is able to establish that the company was insolvent from 2 December 2019, there is unlikely to be a claim for insolvent trading pursuant to section 588G of the (Corporations) Act,” the report says.

To protect themselves prior to stripping the Company of cash T Allegro sought out specific legal advice on “safe harbour” provisions, which protect directors from trading while insolvent claims the BDO report.

Separate filings show Allegro spent almost $50,000 on legal advice about the insolvency process, including shelling out $17,500 on safe-harbour advice from consultancy house Ankura.

Distributors that ChannelNews has spoken to believed that following the Dick Smith collapse and the pocketing of over $520 Million by Anchorage Capital that laws were in place to prevent venture capital Companies from stripping funds out of retail businesses.

Back in 2012 Anchorage capital turned $10m found on the books of the then Woolworths owned Dick Smith in to $520m in less than two years?

Anchorage Capital Executives Phil Cave Left, Former Chairman of Dick Smith. Seen with former CEO Nick Aboud.

The private equity group has pulled off one of the great heists of all time, using all the tricks in the book, to turn Dick Smith from a $10m piece of mutton into a $520m lamb claimed one observer the losers like in the Harris Scarfe case was the suppliers which the likes of Greenlit Brands and Allegro Funds are quite prepared to but at risk by their actions.

At the time Anchorage set up a holding company called Dick Smith Sub-holdings that they used to acquire the Dick Smith business from Woolworths in the same way that Allegro Funds used Australian Retail HoldCo to engineer their $70M windfall.

What Allegro Funds took advantage of was a change in insolvency rules that were overhauled in 2017, allowing directors to trade while insolvent so long as they are working on a plan that may result in a better return to creditors than an immediate liquidation.

Sydney-based Allegro tipped Harris Scarfe into voluntary administration, owning unsecured creditors such as suppliers and landlords between $146.1 million and $236.4 million.

Unsecured creditors last week [April 14] signed off on a deal to sell the department store chain to Spotlight Group in a transaction that will let them as little as 1.3c in every dollar they are owed. The maximum they can expect to receive is 20.5c.

Best known for its namesake haberdashery chain, Spotlight also owns camping supplies chain Anaconda and outdoor clothing label Mountain Designs.

Allegro, which BDO says bought Harris Scarfe for a “nominal sum”, did not respond to questions from Business Daily.

Its website highlights investments including Best&Less but does not mention Harris Scarfe.

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