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We understand shareholders may have received further information in respect of a revised Cheadle proposed Deed of Company Arrangement (Enhanced Cheadle DOCA) this week, as reported in the Australian Financial Review article published on 28 March 2018, page 18.

Upon preliminary review of the Enhanced Cheadle DOCA, we maintain our recommendation that the EziBuy DOCA be preferred. In forming this view, we make the following comments:

  • The Enhanced Cheadle DOCA is ambiguous in many respects.
  • Cash Offer: The Enhanced Cheadle DOCA now matches the cash offer under the EziBuy DOCA of $3.4M to $4.3M, compared to the previous offer of $0.5M to $1.4M, withholding $2.45M for working capital. Group Member Claimants can take their cash as a dividend reinvestment or in cash at SurfStitch Australia’s The cash offer therefore may be more illusionary, than real.
  • Shares: Under the Enhanced Cheadle DOCA Group Member Claimants will be issued with 60% shares in SurfStitch Australia. Applying 60% shares to the administrators’ values calculates to an offer of $7.74M – $12.168M, which remains below the EziBuy DOCA of $6.018M to $19.955M.
  • The administrators’ report to creditors has EBITDA for SurfStitch Australia of between $1.99M to $2.29m. For SurfStitch Australia to achieve a value of $43M requires a multiple of 13 to 19, rather than the administrators’ view of 10 – 12. As SurfStitch Australia is now a sub scale business with limited working capital, we believe these new calculations to be unrealistic.
  • The Enhanced Cheadle DOCA appears to create value in SurfStitch Australia which does not exist, by comparing it to non-existent comparatives.
  • The Enhanced Cheadle DOCA proposes shares will be issued to General Member Claimants as soon as legally practicable, with the shareholder exit a possible IPO, trade sale or other liquidity event. The original proposal contemplated seeking retention of SurfStitch Australia’s listing, which now appears to be abandoned, meaning General Member Claimants will receive illiquid shares in a public unlisted company.
  • We remain confident in the expertise of EziBuy’s executives being most likely to achieve an IPO, given Alceon’s former achievements with EziBuy itself.
  • In a worst case scenario General Member Claimants will benefit from receiving a convertible note in the EziBuy/SurfStitch Australia merged entity, ranking them above shareholders, whereas under the Enhanced Cheadle Proposal, General Member Claimants, as shareholders in SurfStitch Australia would be last in line if SurfStitch Australia went into Liquidation.

The administrators remain favourably disposed to the EziBuy DOCA. The administrators circular to creditors dated 28 March in response to the Enhanced Cheadle DOCA can be viewed here, and a supplementary report to creditors will be accessible on its website on Thursday 29 March after 10:00 am. That report can be accessed at http://www.fticonsulting-asia.com/creditors/surfstitch-group-limited by inserting the password 457365.SGL

If not already submitted to our office, we recommend Group Member Claimants lodge their Proofs of Debt and Proxies immediately on the “LINK” portal, nominating Glenn McGowan QC and Damien Hodgkinson in the alternative before the administrators deadline of 2:00 pm Thursday 29 March. Please ensure copies are emailed to our office at vic-surf-stitch@gadens.com to complete records.

Please contact a member of our team should you have any queries.

Glenn McGowan QC

Partner & Chief Counsel

Rebecca Di Rago

Lawyer


This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

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The creditors report pursuant to section 439A of the Corporations Act 2001 has been released by the Administrators, providing an overview of the position of SurfStitch and their recommendation to enter in a Deed of Company Arrangement (EziBuy DOCA) with Ezibuy Holdings Limited (Ezibuy).

Under the terms of the EziBuy DOCA, Ezibuy will acquire SurfStitch Australia Pty Limited (SurfStitch Australia) and some related intellectual property in exchange for a convertible note in Ezibuy, convertible for up to 8% of the equity of the combined entity in 3 years’ time.

In respect to the proposal we make the following comments:

  • The offer put forward by Ezibuy was in part negotiated by our advisers, when it became apparent there was no reasonable offer to restructure the business from the sales process instigated by the Administrators.
  • The financial performance of SurfStitch Australia has deteriorated significantly, with falling working capital, worsening credit terms and management security.  The business is no longer sustainable in its own right. In the event of liquidation NO value would be returned to shareholders and limited returns to the class action participants.
  • We did make attempts to negotiate better terms and more certainty from the Cheadle proposal but were unable to reach a satisfactory position.
  • Ezibuy and their management team, along with their sponsors Alceon have a proven track record in turning around struggling retail businesses including NoniB Limited and Ezibuy itself.
  • The merger will be transformational for both companies: Ezibuy will get access to SurfStitch platform technology, and SurfStitch will get access to Ezibuy greater buying power, lower transport cost structures, greater working capital and experienced retail management.
  • The resultant merger if approved however, will mean that the SurfStitch Group is likely to be delisted from the ASX.  The value of SurfStitch shares on a stand-alone basis are nil. Any future value will only result from a sale of the listed shell or the value of the convertible note.
  • We recommend the Ezibuy DOCA proceed, because it represents a greater return than the liquidation option, and provides shareholders with a return.
  • The proposal does not include legal actions against the former directors which we have already commenced and are outside the Ezibuy DOCA.

What you need to do

The Administrators have advised that they will call for proof of debts and proxies from claimants through Link Insolvency Solutions and that these must be lodged by no later than 2.00 pm on 29 March 2018. 

  1. If you have already completed a proof of debt and proxy and submitted it to us, you do not have to complete another form and we will lodge the proofs for you.
  2. If you have not lodged your proof of debt and proxy, then we request you complete the forms on the “LINK” portal before 27 March 2018. You will be asked to attach additional information, your buy and sell confirmations if you have them will be sufficient.
  3. Where it asks you to nominate a proxy (a representative at the meeting) put the name “Glenn McGowan QC” or in his absence “Damien Hodgkinson”. Glenn will hold your vote at the meeting.
  4. Lodge the proof of debt and proxy on the portal and print a copy for your records, and email a copy to us so we can check off our records.

Valuing your claim

As per our previous emails, if you have an estimate of your loss, please include this amount, or use the default estimate for investors with bundles less than $50,000 of an estimated loss of $10,000. The estimate in your proof of debt is just for voting purposes at the meeting and it is not a complete estimate of your actual loss, and would be adjusted before any distribution is completed.

It is likely that the Administrators will only admit the proof of debt for a nominal amount for voting purposes (because our class action claim is unproven at present).

Participating for a Dividend

In order to participate in the convertible note distribution, shareholders must be a member of a class action. If you are not currently registered, please register on our website.

The date of the Meeting

The date of the second creditors’ meeting has now been set for Wednesday 4 April 2018.  We will report on the outcome of the meeting and approval in due course.

Glenn McGowan QC

Partner & Chief Counsel

Rebecca Di Rago

Lawyer


This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

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McConnell Proceeding against former CEO Justin Cameron

Despite the stay of our class action against SurfStitch, it continues to progress against the Second Defendant and former CEO Justin Cameron in his personal capacity (McConnell Proceeding).

On 14 December 2017, upon application by the lead plaintiff in this proceeding, the Court did not make a common fund order for the time being.

On 9 February 2018, directions were made concerning an amended defence from Mr Cameron and discovery by SurfStitch of some 8000 documents. These were delivered to our office on 16 February 2018 and we are attending to review same for relevant evidence to support the case.

The next directions hearing in the McConnell Proceeding is listed for 23 March 2018, when it is believed the Court will deal with subpoenas, directions will be made regarding further discovery, any additions to the parties and further preparations towards trial.

We continue to work closely with the Gadens’ lead plaintiff who has been very helpful and co-operative.

As always, we will endeavour to keep you informed of relevant progress in this claim and if you should have any queries you can always contact one of our staff.

 

Glenn McGowan QC

Partner & Chief Counsel

 

Rebecca Di Rago

Lawyer

(03) 9252 7710

rebecca.dirago@gadens.com

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SurfStitch is in voluntary administration, and a number of the operating subsidiaries have already been sold.  Part of the process of administration is attending creditors’ meetings to vote on how the administration should proceed, including how any proceeds of sale should be distributed and how the remaining business will be managed.

Administration Proceeding

The Administrators continue to negotiate with all interested parties for a Deed of Company Arrangement.

Upon application by the Administrators, on 11 December 2017 the Court made orders in the Administration of SurfStitch (Administration Proceeding) extending the date for convening of the second creditors’ meeting to no later than 31 March 2018.

On 22 February 2018 the Court made orders in response to the Administrators application under s600H of the Corporations Act 2001 (Act), to permit group member claimants and any person with a subordinate claim (as defined by section 531A(2) of the Act) to vote at the second creditors’ meeting if:

  1. they can establish they have a claim; and
  2. they lodge particulars of proofs of that claim by the time specified in the notice convening the second creditors’ meeting.

Further orders were also made in respect of the notice requirements for the meeting. Please review the Administrators’ Circular to Creditors dated 6 December 2017, 21 December 2017 and 1 March 2018 and the Court Orders of His Honour Justice Brereton dated 22 February 2018 listed on our website for complete details.

The Administrators advise they intend to convene the second creditors’ meeting in the coming weeks and before 31 March 2018, once the terms of all deed of company arrangement proposals are finalised. The latest Circular to Creditors contains further details regarding how claimants, including group member claimants, can lodge their proofs of debt.

If you would like to join the McConnell Proceeding and submit your proof via our class action, please click the “register” link on our website and we will forward you relevant forms to join.

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