Unprofitable Pie Face traded while insolvent: creditors’ report, Eli Greenblat

THE Pie Face group of companies was trading while insolvent for at least 12 months before collapsing into voluntary administration in late November and did not appear to have ever been profitable, a damning creditors’ report on the failed fast food chain has claimed…While it is revealed in the report that Mr Homschek probably has no personal assets in Australia, the Pie Face founder and his wife have now put forward a deal to seize back control of the group from voluntary administrators with the backing of TCA and a fresh capital raising on Wall Street.

The Australian
December 22, 2014

Unprofitable Pie Face traded while insolvent: creditors’ report
Eli Greenblat

pieface8.jpg

Founders Wayne Homschek and Betty Fong at a Pie Face in Sydney’s Bondi Junction in the early days. Picture: Troy Bendeich Source: News Corp Australia

THE Pie Face group of companies was trading while insolvent for at least 12 months before collapsing into voluntary administration in late November and did not appear to have ever been profitable, a damning creditors’ report on the failed fast food chain has claimed.

Parts of the now collapsed Pie Face empire could have been insolvent as far back as 2012, with further investigations also required to discover if the company’s management engaged in any uncommercial transactions.

It is believed the corporate regulator, the Australian Securities & Investments Commission, will soon be sent a copy of the report and claims of insolvent trading.

Pie Face, founded in 2003 by former Wall Street banker Wayne Homschek and his fashion designer wife Betty Fong, rang up losses consistently between 2009 and 2014 with superannuation benefits for employees unpaid and bills from the Australian Taxation Office climbing above $4 million at the time of the business’ failure, the report reveals.

The report also claims a $1.2m loan from Pie Face to Mr Homschek has yet to be repaid, while the chances of recovering an unsecured loan of $850,000 to the food company’s US arm, made just before it collapsed, remains uncertain.

But Mr Homschek has now proposed a rescue plan, The ­Australian can reveal, pitching to creditors a proposal to grab back control of the fast food chain with the support of a new external investor, TCA Global Master Fund.

TCA, which has offices in Florida, London and Sydney, has a $2m loan waiting in the wings if creditors support a deed of ­company arrangement, while Mr Homschek also seems to have ­secured a commitment from a Wall Street broker called Wellington Shields & Co to underwrite a capital raising for Pie Face in the US of up to $10m.

Meanwhile, the creditors’ report, released last week and obtained by The Australian, provides a stark snapshot of Pie Face’s ­financial state when the administrators, Jirsch Sutherland, were called in to salvage the business last month.

The report concluded that two Pie Face arms, Pie Face Franchising Pty Ltd and Pie Face Pty Ltd, may have been insolvent for at least 12 months to two years ­before its appointment as voluntary administrators.

“It is also our view that the (Pie Face) companies would have traded while insolvent for at least 12 months prior to our appointment,’’ the creditors’ report said.

“In conclusion, it appears in hindsight that the Pie Face Franchising and Pie Face may have been insolvent for at least 12 months to two years prior to our appointment.

In this respect, our investigations at this time have identified a potential breach of Section 180 of the Act (Care and Diligence) as the directors may have traded the companies while they were insolvent.’’

The financial records attached to the creditors report reveals Pie Face incurred losses between 2009 and 2014, with its solvency fluctuating, as it relied heavily on successive capital raisings.

The consolidated Pie Face group saw sales jump from $10.6m in 2010 to $27.23m by 2012 and $32.18m for fiscal 2013. But it never made a profit. A loss of $1.97m was recorded in 2010, shrinking to a loss of $225,534 by 2012 but then blowing out to $5.3m in 2012 and $5.6m in 2013.

“From a consolidated perspective, the group does not appear to have ever been profitable,’’ according to the report.

While Mr Homschek has told the administrators the reasons for Pie Face’s collapse were poor returns in the cafe industry over the past 18 months, negative publicly from a lawsuit with a franchisee in Queensland and an upgrade to its kitchen not meeting expectations, the administrators have sheeted blame elsewhere.

But the report states Pie Face didn’t have enough franchise outlets, had too many underperforming stores, suffered from significant exposure to principal funder Macquarie, substantial tax debts and did not generate enough income and assets to pay debts. Pie Face also carried poor point of sale controls and paid above-market rents.

While it is revealed in the report that Mr Homschek probably has no personal assets in Australia, the Pie Face founder and his wife have now put forward a deal to seize back control of the group from voluntary administrators with the backing of TCA and a fresh capital raising on Wall Street.

That proposal will be put to creditors at a meeting slated for tomorrow in Sydney. The administrators have recommended creditors vote in favour of the proposal by Mr Homschek.

Mr Homschek was not available for comment.

The creditors’ report says in its provisional findings that Pie Face entered into repayment plans with its suppliers as long as 18 months ago with the solvency of Pie Face having direct effect on Pie Face Holdings and Pie Face Franchising.

It claims that there were grounds to believe directors would have suspected the companies were insolvent, given the age and size of Pie Face’s unpaid tax and superannuation bills as well as trade and expense debts.

According to the creditors’ report, Pie Face Holdings directors have included Mr Homschek, Betty Fong, John Nicolis, Angus Geddes and Brian Bickmore and Benjamin Davis. There are no claims made against these individuals or any other Pie Face directors in the creditors’ report.

http://www.theaustralian.com.au/business/unprofitable-pie-face-traded-while-insolvent-creditors-report/story-e6frg8zx-1227163759322


Brought to you by WikidFranchise.org

Risks: Australian Competition and Consumer Commission, Encroachment (too many outlets put in territory) , Deceptive business practices, Expands too quickly, Franchisees are pawns in insolvency flip, Franchisees' equity destroyed in unrelated part of trademark system, Hubris, Initial public offering, IPO, Intentional franchisor insolvency creates huge fees for legal, accounting, consulting firms, Lease controlled by franchisor, Lease margins are an important source of franchisor revenue, Predatory business practices, Opportunism Test: If asset ownership were reversed, would decision likely change?, Opportunism: contract creates powers which are used to strip investor value during relationship, Raining litigation, Insolvency, Insolvent trading, Short-term profits to franchisor much higher with cannon fodder investors, Overstatement of sales and profits, Resales (after termination) seen as a profit center, Government investigation, Unpaid government obligations, Appearance of government oversight, Insolvency strips employees' severance payments, Insolvent system renamed and sold to a relative, Australia, 20141222 Unprofitable pie

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License