Collar creditors stuck between a rock and a hard place - Ross Clennett: High Performance Recruitment Coach (2024)

Collar Group’s administrators have submitted two reports (29 May and 24 June) to creditors and held an initial meeting with them (7 June). Earlier this week Collar’s founder, Ephram Stephenson, submitted a bid to regain control of the company, which the administrators recommend being accepted.

Here are the key facts (based on the minutes of the initial creditors meeting and subsequent reporting by Shortlist ($link) of the second administrators report).

• Collar Group entered voluntary administration on Monday 27 May, with David Ross, I&R Advisory, appointed as the company administrator
• As of this date, Collar’s sole director, Ephram Stephenson, was no longer in control of Collar Group
• The catalyst of the appointment of the administrators was the issuance of a Director Penalty Notice by the ATO for approximately $18 million.
• Collar continued trading with 32 staff made redundant
• Secured creditor was APositive (approx.. $8 million)
• Priority creditors were employees’ unpaid superannuation ($3.3 million) and terminated staff entitlements ($450k)
• Unsecured creditors were: ATO ($20 million); trade creditors ($1.06 million); various state revenue offices (est. $1.8 million)
• The company’s taxation obligations became unmanageable around December 2022, and subsequently, the company may have been trading while insolvent from that time or even earlier.
• In early 2023 three major accounts were unexpectedly lost and a subsequent drive to acquire new business succeeded only through the offer of very low and ultimately unsustainable margins
• Company revenue for the 2023 financial year (ended 30 June 2023) was $43.3 million and had risen to to $82.3 million by the date of the voluntary administration.
• Trading losses were incurred in 28 or the most recent 35 months of trading
• David Ross advised creditors on 7 June that the business was not for sale and the purpose of the Administration was to allow Stephenson to put forward a Deed of Company Arrangement (DOCA).
• The administrators report Stephenson may have breached section 180 of the Corporations Act (care and diligence), and section 181 (good faith)
• Stephenson’s offer to re-take control of Collar (via a DOCA) comprises an upfront contribution of just over $3.3 million to be funded by Collar’s debtor finance facility and the balance of $2.87 million to be paid over 14 months, in monthly instalments ranging between $100k and $250k.The total offer is approximately $6.2 million, meaning unsecured creditors will receive 9 cents in the dollar owed.
• Administrators are recommending creditors accept Stephenson’s offer
• Administrators advise that under a liquidation scenario, employees might receive only 80% of any unpaid wages and superannuation and none of their leave and redundancy entitlements (as opposed to 100% of all under the deed).
• Creditors will vote on the DOCA (Stephenson’s offer) next Tuesday, 2 July.

From the evidence, it seems creditors have three choices:

1. Accept Stephenson’s offer
2. Decline Stephenson’s offer and advise Mr. Ross and his team to find a better solution
3. Sack Mr. Ross and appoint a new administrator

The main problems with option 1 are:

• If Stephenson is charged and successfully prosecuted for breaching section 180 of the Corporations Act, then the likely, almost certain penalty will be his disqualification as a company director for a to-be-determined period. Should that occur, what happens to Collar’s ownership then?
• Given the voluntary administration of Stephenson’s two previous recruitment companies, Kona & Co and Design and Construct, it appears he is not yet skilled in growing a self-sustaining recruitment agency – why would a fourth opportunity be any different?
• Stephenson’s DOCA has not proposed additional directors whose presence on the Collar board may give some confidence to creditors (and other stakeholders) that there’s appropriate oversight of his decision-making
• Collar’s brand has suffered such damage in the past four weeks (not just because of the VA but how it was communicated to employees) that it seems difficult to imagine Stephenson can retain key employees and attract other talent to Collar to help him rebuild the business
• Burned existing creditors (and wary potential ones) are unlikely to provide products and services to Collar on anything but COD (cash-on-delivery) or secured terms.

Options 2 and 3 require an additional investment of time and money, and there is no guarantee that a better offer for creditors will emerge as a result.

It seems Collar creditors are well and truly stuck between a rock and a hard place.

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