Starleaton administrators are recommending creditors accept a Deed of Company Arrangement put forward by company director Ben Eaton.
Eaton has been confirmed as the ‘related party’ identified as offering a Deed of Company Arrangement (DOCA) the day before creditors were likely to vote that the business should enter liquidation.
Starleaton administrators issued a new document last week – Voluntary Administrators’ Supplementary Report to Creditors and based on their findings and the DOCA received from Eaton that his proposal represents a better chance of a return to creditors than placing the business into liquidation.
“Our opinion, is to execute the DOCA as it provides more likelihood of a better return than a liquidation,” the report said.
“The Administrators consider that the DOCA proposal provides more likelihood of a superior return to unsecured creditors than a liquidation (subject to funding) and should be accepted by creditors at the Second Meeting. We have come to this conclusion based on the following reasons/assumptions – employee entitlements are paid in full in a DOCA scenario, including superannuation and based on the low liquidation scenario it is likely that there will be no return to ordinary unsecured creditors and only a partial dividend to priority creditors in a liquidation scenario.
The second creditors meeting will be held on 10.00am on Friday 15 March and if successful, Eaton may regain control of the business by April Fool’s Day (within 15 days).
“On execution of the DOCA, full control of the Companies and its businesses (if any) shall return to the Companies’ directors,” Eaton said in his DOCA.
“On execution of the DOCA, all available assets of the Companies (if any) with the exclusion of assets comprising the DOCA Fund, will be retained by the Companies and utilized in the normal course of business,” the DOCA says.
“Security for the deed fund is to be via an ALLPAAP security interest over the Companies assets in favour of the Deed Administrators. The following ALLPAAP secured creditors will agree to subrogate their security and provide the Deed Administrators ALLPAAP priority ahead of their security interests: Peter & Leanne Eaton; Starleaton Pty Limited and SDS Distributions Pty Ltd,” the DOCA said.
Critical components of Eaton’s DOCA
Critical components of Eaton’s DOCA are that $800,000 of funds will be allocated to restructure the business – $33,333 per month for 24 months and that all staff entitlements amounting to $1,384,325.64 will be repaid.
Eaton has agreed to make additional repayments if required to ensure that employee creditors are paid 100 cents in the dollar and unsecured creditors are paid 1 cent in the dollar.
A 24-month business plan submitted by Eaton as part of his DOCA shows the business remaining profitable every month for 24 months.
Sales are estimated to fluctuate within a 24-month period from 150,000 in March 2024 as high as $349,615 in July 2024 with an average income of $294,686 or roughly $10,000 daily.
Costs to operate the business on income of $7,072,466 are estimated to be $7,021,844 with a profit of $50,623 after 24 months of operation – and this accounts for $800,000 of contributions – $33,333 per month.
Of the 24 months in the cashflow forecast, 10 months are expected to operate at a loss with a single 30-day deficit up to $74,622 estimated in September 2025.
Eaton proposes to restructure business, scale down operations and staff
Under the DOCA, Eaton plans to restructure the business to operate with scaled down facilities and staff with six employees located from a single warehouse based at St Leonards in Sydney and focus purely on high-margin consumables without relying on expensive hardware as well as the service engineers that are required to support this equipment.
“We understand the intention is for the business to continue operations in the following format,” said Voluntary Administrators’ Supplementary Report to Creditors issued late last week.
“A single consumables line of business at 50-65 per cent gross margin; approximately a 50/50 split between contract revenue and sales from regular repeat customers; reduced overheads with a single centralised location in St Leonards, NSW; no physical presence in Brisbane, Perth or Melbourne; and reduced staff overheads with staff reduction from 28 to 6 employees.
“We understand the Deed Proponent’s cashflow forecast has been prepared based on the following assumptions: the sell down of existing stock over the 24-month period; the continuation of existing contractual arrangements with certain suppliers (which we cannot disclose as they are commercially sensitive in nature); forecast sales levels being approximately 45% of the historical sales figures for the relevant consumables business segment; stock purchases are on cash on delivery terms; and sales are a blend of cash in advance, 7 day terms and 30 day end of month sales.
“We have reviewed the cash flow forecast provided by the Deed Proponent, compared those to the Companies’ historical financial performance and the Administration period trading results and note it appears reasonable based on the restructured streamlined business format as outlined above. Accordingly, it appears reasonably likely that the Companies will be able to achieve the proposed contributions,” the administrators said in the report to creditors.
Excerpts from the Voluntary Administrators’ Supplementary Report to creditors
These are additional direct excerpts from the Voluntary Administrators’ Supplementary Report to creditors:
“Prior to the second meetings, on 22 February 2024, Mr Ben Eaton submitted a proposal for a DOCA with respect to the Companies. To allow the administrators and creditors adequate time to review and consider the DOCA proposal, we adjourned the second meetings. We have undertaken the following tasks in relation to the DOCA proposal: Liaised with the Directors and creditors with respect to the DOCA proposal; Reviewed and assessed the DOCA proposal; and Liaised with solicitors with respect to the DOCA proposal.
“Employee entitlements are estimated to be: Wages ($105,445.55) for 28 employees; Superannuation ($133,396.73) for 35 employees; Annual Leave ($140,899.94) for 24 employees; Long Service Leave ($261,715.46) for 14 employees; Pay In Lieu Of Notice ($190,635.36) for 27 employees and Redundancy ($552,232.60) for 26 employees.
“In addition to the above, we understand there may be some unpaid commissions owing to sales staff. At this stage we are unable to quantify any unpaid commissions. We are working with management to reconcile same.
“If the DOCA proposal is accepted by creditors, employee entitlements are anticipated to be paid in full within 12 to 24 months of the DOCA being executed.
“Assets under the DOCA are estimated to be $2.0m-$2.2m and liabilities are $6.8m-$7.1m. In liquidation, the assets are $1.7m-$2.4m and the liabilities are $14.8m to $22m.
“Under the DOCA, employees will receive 100 cents in the dollar and unsecured creditors will receive 1-3 cents. Under liquidation, employees will receive between 83 to 100 cents in the dollar, secured creditors will receive 3-14 cents and unsecured will receive 0-3 cents.
“The DOCA proposal presents the likelihood of a greater dividend to creditors than in a Liquidation scenario.
“In a Liquidation scenario the payment of any outstanding superannuation component is not certain. Payment is dependent upon recoveries being made following successful claims for uncommercial transactions and insolvent trading. Claims will likely require litigation. Litigation will require funding and is costly, particularly if defended. The Companies are presently without funds to litigate. Defended Proceedings can be protracted. Additionally, the outcome is uncertain as is the scope for recovery.
“The DOCA proposal contemplates the superannuation component of the outstanding employee entitlement being paid in full.
“The DOCA proposal allows for a dividend to unrelated ordinary unsecured creditors. In a Liquidation scenario no return is anticipated for that category of creditors absent recoveries being made following successful claims for uncommercial transactions and insolvent trading.
“The Deed Administrators will hold an ALLPAAP security interest over the assets of the Companies which extends to the contributions into the DOCA Fund. The Deed Administrators’ ALLPAAP security interest will stand in priority to those of the related party ALLPAAP holders, who have agreed to subordinate their interests to the Deed Administrators. If the DOCA fails and a liquidation scenario applies, the Deed Administrators’ ALLPAAP should retain priority for the benefit of the creditors.
“Related party creditors will not participate in the dividend. That should in turn provide a higher return to unrelated party creditors.
“The DOCA proposal contemplates the continued trade of the Companies which serves to benefit suppliers and customers with future trading.
“In relation to the costs of administrators, the costs for Cathro & Partners are estimated to be $445,885 up to the end of this week. Under a DOCA, additional administration costs will be $100,000 and under liquidation, administration costs will be an additional $175,000.
“A DOCA is a binding arrangement between a company and its creditors governing how the company’s affairs will be dealt with. A DOCA is one of the three outcomes which creditors may resolve to occur at the end of the Voluntary Administration process, provided a DOCA proposal has been made which forms part of the Administrators’ report to creditors.
“If creditors vote for a proposal that a company enter into a DOCA, the DOCA must be executed within 15 business days of the creditors’ meeting, unless the court allows a longer time. If this does not happen, the company will automatically enter into liquidation, with the Administrators becoming the Liquidators. The DOCA binds all unsecured creditors, even if they vote against the proposal.
“We commenced a sale of business campaign shortly after our appointment which procured reasonable interest. All interested parties have now withdrawn from the sale process and a sale of business has not been achieved.
“We have continued to trade the business operated by Starleaton Holdings in a limited capacity during the Voluntary Administration to improve realisations of stock and pursue a sale of the business as a going concern. Controls were appropriately implemented on appointment and we achieved strong realisations from inventory during the trading period.”
