Kleenmaid's loyalty program was too good to be true

So while the "public" face of Kleenmaid showed $567,000 in assets, the "private" side, Orchard KM, contained $82 million in debts. In late 2007, the financial waters were muddied by a complicated restructuring of the Kleenmaid group, linking the companies to others owned by the Young brothers and their wives. "The difficulty with this group of companies is there's such a large intermingling of affairs of both parts of the group that it's very difficult to ascertain with any clarity … as to what the clear position is," Mr Greig said after the creditors' meeting in Brisbane.

The Australian
May 30, 2009

Kleenmaid's loyalty program was too good to be true
Natasha Bita

A FEW weeks before surrendering his company Kleenmaid to the corporate undertakers, Andrew Eric Young had a bright idea.

As Kleenmaid sank, its director — a washing machine repairman who started the national franchising chain 24 years ago — decided to start a new customer rewards program.

My Kleenmaid Rewards was registered on February 23, with Mr Young the sole director and company secretary, and Kleenmaid Pty Ltd the sole shareholder.

Customers on Kleenmaid's database were mailed glossy brochures offering "exclusive savings" at "thousands" of reputable retailers such as David Jones and Woolworths, plus movie and accommodation discounts, all for the price of $299 a year.

They were promised a "free luxury holiday valued at $1400" if they joined the loyalty program by March 20. The offer was signed by Mr Young's younger brother Bradley, as "chief executive officer".

Joanna Dregmans, who had paid $10,688 for new kitchen appliances and was awaiting their delivery, reckoned it looked like a "good deal" and signed up.

"I thought it seemed too good to be true," she told The Weekend Australian. "Obviously, it was."

A fortnight later, Kleenmaid's directors put the company and 13 of its subsidiaries into voluntary administration. But My Kleenmaid Rewards was quarantined, so only its owner knows exactly how much cash was raised from unsuspecting customers.

On Monday, Kleenmaid's creditors voted to wind up the group, after the administrator, Deloitte partner John Greig, said it was likely it had been trading while insolvent since 2007 and appeared to have suffered cash-flow problems since 2004.

The corporate watchdog, the Australian Securities and Investments Commission, is investigating the allegation. A director convicted of the white-collar crime of insolvent trading can face up to five years in prison. To date, no charges have been laid.

With barely $2 million in assets and at least $82 million in debts (which the liquidators expect to reach $100 million), none of the creditors is likely to see a cent.

Customers like Ms Dregmans — who never did receive her expensive whitegoods, let alone her loyalty program or her free holiday — are seething.

"I want to know: where is the $100 million?" she says.

Merv Kennedy, who paid $550,000 for a Kleenmaid franchise in Brisbane in January last year, says he is "filthy" that directors failed to admit to financial problems when he pressed them.

He became suspicious last December, when a representative from GE — one of the biggest manufacturers of Kleenmaid products — turned up at his Newstead store to count the fridges.

"Suddenly, we weren't getting a regular supply of stock," he says. The directors arranged a phone hook-up to tell the 15 franchisees that "GE's gone, we've dumped them".

When Mr Kennedy asked if there was any threat of receivership, he claims, Brad Young hung up on him.

Then, in mid-February, the franchisees were called to Kleenmaid's headquarters for a meeting. "Brad Young stood there and convinced us all was well," Mr Kennedy says.

He heard of Kleenmaid's slide into administration on a news bulletin the Thursday before Easter. He says he was never paid $72,000 in commissions, and his franchise is worthless.

Heavily pregnant, marketing employee Bek Wall found out at a staff meeting on Easter Thursday that she no longer had a job in the marketing division. She is among 397 workers owed $3million in wages, holiday pay and long service leave.

"Sales weren't going very well," she said. "We'd had a round of redundancies in June or July the previous year. In January, we had our first pay hiccup and that's when we started to wonder. We didn't get paid one day, and they said it was a banking error."

Ms Wall, who is owed $24,000 in unpaid wages and superannuation, considers herself "lucky" because her husband has a job. Some of her former colleagues — bread-winners with mortgages — are living on the breadline.

Lynne Sheil manages a Kleenmaid repair contractor, Beenleigh Electrical and Refrigeration, which has lost $50,000. The first sign of trouble came in February, she recalls, when spare parts started arriving weeks late and she had to chase Kleenmaid for unpaid invoices.

Ms Sheil believes suppliers ought to have been alerted when Kleenmaid's sister company, Orchard KM, was placed in temporary receivership over the new year break.

"The public has a right to know and I think the company laws have got to change," she says. "It's the little people out there who have to work for a living who suffer."

The Australian Taxation Office tried to wind up Kleenmaid Holdings Pty Ltd in 1996, in the Supreme Court of NSW, but the application was dismissed.

Unbeknown to most of its customers, suppliers, contractors and even the staff, an arm of the luxury whitegoods retailer was forced into receivership over the new year break. A key supplier and financier, GE Commercial Corporation, appointed the receiver to Orchard KM on December 29, removing it on January 22 only after negotiating a confidential deed of settlement.

Kleenmaid illegally stopped paying hundreds of thousands of dollars in superannuation contributions to some of its employees in July last year.

Care Superannuation's chief executive, Julie Lander, said 190 workers were owed "hundreds of thousands of dollars" of the compulsory 9 per cent super levy, which Kleenmaid had failed to pay since June last year.

The company also owes the Tax Office $3.8 million, according to liquidator Deloitte.

Audits of Kleenmaid's financial accounts did not reveal any of these problems. Yet only half the group was audited, by accounting firm PKF, to comply with franchising regulations. The other side of the group was not subjected to independent scrutiny, as it held private companies that did not legally require auditing.

So while the "public" face of Kleenmaid showed $567,000 in assets, the "private" side, Orchard KM, contained $82 million in debts.

In late 2007, the financial waters were muddied by a complicated restructuring of the Kleenmaid group, linking the companies to others owned by the Young brothers and their wives.

"The difficulty with this group of companies is there's such a large intermingling of affairs of both parts of the group that it's very difficult to ascertain with any clarity … as to what the clear position is," Mr Greig said after the creditors' meeting in Brisbane.

Mr Greig revealed that Deloitte was applying to ASIC for taxpayer funding to pursue its preliminary finding of insolvent trading, and to track the directors' assets. The Young brothers, whose wives own luxury properties on the Sunshine Coast, have no publicly known assets in their own names, and refused to comment.

http://www.theaustralian.news.com.au/story/0,25197,25559032-2702,00.html


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