Rubicor creditors stare into the abyss of incompetence and debt

It’s been just over four weeks since the Rubicor Group went into voluntary administration.

In my blog of that week I outlined the specific culpability of the Rubicor directors; Angus Mason, Sharad Loomba and David Hutchison.

The Rubior administrators, Joanne Dunn and John Park of FTI Consulting, have just released their Report to Creditors (Report). The 127 pages of forensic analysis and commentary covers the current state of the Rubicor Group, the causes of the company’s collapse, the options available to the creditors and FTI Consulting’s recommended course of action.

The Report is a comprehensive and exhaustive document and I acknowledge the excellent work completed by the FTI Consulting team to produce such a document for consideration by the creditors.

The Rubicor Group creditors (including the creditors of all Group subsidiaries) meet next Monday, 9 September, to vote on a course of action.

To very briefly summarise what’s been detailed by the administrators in the Report:

Key causes of the company’s collapse: 

i) Incompetent financial management leading to a cash flow crisis: As the Group’s sales continued to decline ($204 million in FY2015 to $140 million in FY2019), costs were unable to be reduced at a fast enough rate to avoid an operating loss. In fact, stupefyingly, during that same timeframe the Rubicor directors voted themselves massive pay rises, instituted retention bonuses for themselves with no performance clauses and presided over nearly $9 million in ‘restructuring costs’, including $3 million for external consultants, $1.8 million in staff redundancies and $1.5 million on new systems. Employee salaries and benefits jumped from 68% of gross profit in FY2016 to 82% of gross profit in FY2019.

The updated Balance Sheet provided for the four financial years covering 2016 through to 2019 lists borrowing of $40 million which the administrators note is predominantly a debtor finance facility (mostly factoring) services provided by Scottish Pacific.

“Our preliminary view is that the Group was likely insolvent as at 31 March 2017 and remained so until our appointment on 5 August 2019” (FTI Report to Creditors, page 13)

ii) Loss of large customers due to non-payment of superannuation to temporary and contract workers: After the March 2018 quarter, due to insufficient operating cashflow, Rubicor consistently failed to meet their superannuation obligations (SGL) to temporary workers, contractors and employees. The current amount outstanding is $10.3 million (before ATO interest and administration charges). The administrators estimate the total of all statutory obligations covering BAS, PAYG, Payroll tax, SGL and FBT to be $15.2 million.

In November 2018 Rubicor was removed from the Western Australian Government temporary supplier contract for non-payment of state payroll tax. In FY2018 this contract generated $27 million in revenue.

As important customers discovered the extent of Rubicor’s failure to pay temp/contractor superannuation entitlements these customers moved to terminated their contracts with Rubicor as follows:

  • Coca Cola Amatil (FY2018 contract revenue circa $30 million, terminated March 2019)
  • Telstra (c$23 m, March 2019)
  • Steel Mains (c$9 m, July 2019)

At the time of termination (within two days of each other) the CCA and Telstra contracts contributed 28% of Rubicor’s overall revenue.

In March 2019 Yahoo 7 (now Verizon) chose not to extend their contract with   Rubicor (FY2018 contract revenue circa $2.6 million) although Verizon’s stated reason was due to an internal restructure, it’s unlikely to be the only reason for the decision.

The Report notes that in the twelve months prior to Rubicor going into administration different parties put forward offers to buy various divisions of Rubicor. No offers were accepted by the Rubicor directors and consequently no sales took place.

One of the subsequent post-administration bidders for Rubicor’s assets, Polygon, was also a, pre-administration, preferred buyer for the same assets, however Scottish Pacific, the third party in the transaction, did not agree to the conditions of the sale. The administrators do not state a reason for Scottish Pacific’s decline.

Action against the former company directors

The administrators have reason to believe that the following offences may have been committed by the Rubicor directors:

  • Trading while insolvent (in breach of section 588G of the Corporations Act, 2001)
  • Failing to properly discharge their duties by the failure to pay outstanding superannuation payments (in breach of sections 180 and 181 of the Corporations Act, 2001)

The Report notes that director penalty notices (DPNs) have been issued by the ATO to CEO Sharad Loomba and executive chair David Hutchison, meaning they each could have personal assets seized for not paying employees and on-hire staff their superannuation. Angus Mason was only a director of the consolidated entity. He was not a director of any of the subsidiaries that owe the various statutory liabilities.

The Report also noted that $9.1 million of preference payments were made across the Group (primarily superannuation payments to Xpand temps and contractors, contrary to the interests of the ATO; the priority creditor.

Parties interested in buying the Rubicor Group’s assets:

From 30 enquiries three Deeds of Company Arrangements (DOCAs, I’ll call it an offer) were received.

The administrators regarded two of these offers as having insufficient detail or too many unaddressed issues to put forward to the creditors; one from former Rubicor director Angus Mason (as CEO of private equity groups Cashel) and one from Rubicor creditor Paul Egan.

The remaining offer, from Polygon Talent, is the offer that will be put to the upcoming creditors meeting on Monday.

There are far too many details with respect to the Polygon to list here (go to pages 50-55 in the Report if you’re interested) but the basic facts are these:

  • Polygon (sole director: James Polyzoidis) is an investment vehicle of Pacific Capital Executive Director, Jeff Locke and his wife Elizabeth.
  • Polygon proposes to delist Rubicor and take the Group private
  • Polygon’s offer is actually two separate offers; one for Rubicor Workforce creditors and one for the remaining creditors of the Rubicor Group and its subsidiaries.
  • The payments to priority creditors would be made from October 2020 to September 2024 with proposed percentage of current debts to be extinguished ranging from from 69% to 100%. Unsecured creditors would receive a maximum of two cents in the dollar. Rubicor Workforce creditors will receive nothing.
  • The payments ($10.1 million in a creditors’ trust fund) made by Polgon to Rubicor’s creditors would largely be funded from the expected cash flow deriving from Rubicor’s continuing operations.

The three choices facing creditors:

Either accept the Polygon offer, liquidate Rubicor and all its associated subsidiaries or defer a decision for a further 45 days to enable any other suitable offers to be put to the administrators. Every day that goes past reduces the value of the company as staff resign and customers take their business elsewhere (Google, an Xpand client, has already advised Xpand that it will cease their relationship due to “Xpand’s prior conduct surrounding employment obligations and the impact on market perception as the key driver the for the termination.”)

The fatal flaw with the Polygon offer:

Reviewing the administrators projected revenue, gross profit and operating profit it seems fanciful in the extreme to project the current financial state of the business as a low point and by this time next year the group will have grown gross profit by around 10% and operating profit will be just under $1 million (see page 55).

Nobody publicly associated with the Polygon offer has any recruitment industry expertise. How are they going to retain existing Rubicor consultants who have been so completely let down by the most recent Rubicor directors? Where are they going to hire the leaders of the calibre required to turn Rubicor around? The Rubicor brand has been completely and thoroughly trashed over the past four years.

What high calibre leader or consultant would possibly be interested in being employed by Rubicor, especially a Rubicor controlled by private equity interests? Look how that turned out when Cashel took control in June 2015 and installed Angus Mason, David Hutchison and Sharad Loomba as directors.

I have nothing against Mr Locke and Mr Polyzoidis, who I am sure are both ethical and capable operators, but short of a new board containing Geoff Morgan, Andrew Banks and Greg Savage I can’t see how Rubicor can be returned to profit, not next year, not by 2022, not ever.

I don’t blame the administrators, who are making a recommendation that is merely the least-worst option for Rubicor creditors.

The reality is that Rubicor is as dead as a dodo and nothing short of a miracle can change that.

 

Related blogs

Australia’s worst directors culpable as Rubicor collapses

Rubicor: the incompetence and delusion continues

Rubicor joins Clarius on the slide to irrelevance

Rubicor 2018 results: Looks like a duck, walks like a duck, quacks like a duck

Bad news for Rubicor shareholders and staff comes in threes

Rubicor releases laughable FY2018 update

11 Comments

  1. Charlie Sugar on 06/09/2019 at 9:27 am

    Another important point under the “fatal flaw” section should be that Polygon is basically funding the exercise from Rubicor’s future cash flow so that the deal is ultimately paying for itself – or not!

  2. Astounded on 06/09/2019 at 10:59 am

    One thing many punters may not be aware of is that the administrators are not entirely independent, nor were the previous ones in 2016. All provided/recommended by advisory firm chief at 22Capital who had the data room for the botched sales of parts of Rubicor.

    And now we have Polygon headed up by personal acquaintances of Loomba himself. No independence shown that could ultimately lead to lining the pockets of these crooked Directors even further. Polygon, and Egan’s DOCA are horrific. This business has no right to be resurrected by any party.

  3. Bob Olivier on 07/09/2019 at 6:55 am

    Excellent article Ross. As you know I share your frustration and anger that Rubicor is a financial mess. It is “criminal” that staff, creditors, temps, and shareholders can have been so duped by their executive and board. It’s also a dreadful situation that detractors of our industry will only exploit.

    The Administrators report reveals much about the irregularities and mismanagement. I am only disappointed that it looks like the executive directors will not be pursued under the Directors Penalty Notices issued.

    I too have misgivings about the company offering the DOCA that the Administrators are recommending to creditors. Polygon Talent appears to only have been established in July (a month before Rubicor went into VA which in itself is strange….). We don’t know the current or proposed capital base from which the initial payment will be made to preferential creditors and, given what’s been going on, the ability of this Vulture Fund to generate an operating profit from the carcass of Rubicor looks unlikely to succeed.

    Surely the Administrators can secure a better deal?

  4. Greg on 09/09/2019 at 9:31 am

    These blogs are excellent Ross. Really clear analysis. Although sadly as with all these things – it sounds like its the recruiters and the small suppliers who are going to be the ones hit hardest.

    If the comment by Astounded above is correct then the creditors should run like the wind from the Polygon offer. Perhaps worth emailing it to them.

  5. NosuperMason on 10/09/2019 at 9:21 pm

    Dear NoSuper Mason.

    Great lobbying, however didn’t you decide not to pay superannuation to staff and contractors 15 months ago.

    Dear Rubicor Stakeholder

    Notwithstanding that FTI have indicated they did not have enough time to review our proposal first presented last week, I urge you to VOTE in FAVOUR of the CASHEL DOCA using the attached Proxy form for Rubicor Group LImited.

    A VOTE for the Cashel DOCA results in the following:
    A Deed of Company Arrangement (DOCA) for Rubicor Group and Xpand Entities
    The DOCA sees the payment of all super and employee entitlements in Rubicor Group and Xpand Group
    It pays redundancies for staff in head office
    Subject to working capital (which FTI has provided us with no information on) all payments to staff may be made as quickly as 3 months, but up to 18 months (subject to FTI’s fees and Scottish Pacific)
    It results in a lower cost, sustainable profitable business (once and for all)
    It provides Upfront Funding and Working Capital Funding for the DOCA and Post DOCA business
    It brings in new executives and directors Kevin McLain (Chair and CFO PS&C ex IBM et al) and Stephen Chetcuti (ex RXP) to provide decisive leadership, financial management and sales experience
    It has the support of the Xpand employees
    The Cashel DOCA proposal enables the business to rebuild its tarnished reputation…. and allow Xpand to flourish (and with it Rubicor to be renamed Xpand).

    SHOULD you vote the alternative, and in favour of Liquidation,
    You are unlikely to receive super
    You are unlikely to receive leave entitlements
    You are unlikely to receive redundancy
    Reference FTI report dated today (page 18) –

    Image

    Should you wish to vote for the Cashel DOCA please use the attached form, you may appoint myself or another person to represent you at the meeting tomorrow at 12.

    Please email signed proxies through to myself

    Best regards​

    Angus Mason
    Chief Executive Officer

  6. NosuperMason on 10/09/2019 at 9:32 pm

    Hi NosuperMason

    Unfortunately the staff and creditors don’t appreciate your last minute lobbying.

    Be a bigger man and think about all lives you have destroyed.

    Thank you for providing an opportunity for an exchange of views.

    No doubt your communication was well intentioned, but it was at least in part, misleading. You refer to only two options when in truth there are four options to be voted on tomorrow: Cashel, Polygon, Liquidation, End Administration.

    I must also take issue with your assessment of the risks of Liquidation. According to the Administrators’ reports and the guidance provided by the ASIC website and the independent legal and insolvency advice I have paid for, the situation is very different from the way you set it out.

    SHOULD creditors vote for Liquidation succeed, then via the FEG scheme, eligible employees:

    The advice I have received
    Your statements
    Are guaranteed to receive leave entitlements
    Are unlikely to receive super
    Are guaranteed to receive redundancy
    Are unlikely to receive leave entitlements
    Are unlikely to receive super
    Are unlikely to receive redundancy

    Obviously the advice I have sought and received may be in error. I will assess that risk for myself, thank you, and I do not suggest to anyone that they should act on my account of that advice. The only thing I would urge my fellow creditors to do is assess for themselves the information provided in the reports, including projected budgets, the administrators’ comments and the track record of all parties involved, then make their own decision.

  7. NosuperMason on 10/09/2019 at 10:35 pm

    NosuperMason

    More lies. Wasn’t it you who decided not to pay superannuation???

    Dear Rubicor Stakeholder

    Notwithstanding that FTI have indicated they did not have enough time to review our proposal first presented last week, I urge you to VOTE in FAVOUR of the CASHEL DOCA using the attached Proxy form for Rubicor Group LImited.

    A VOTE for the Cashel DOCA results in the following:
    A Deed of Company Arrangement (DOCA) for Rubicor Group and Xpand Entities
    The DOCA sees the payment of all super and employee entitlements in Rubicor Group and Xpand Group
    It pays redundancies for staff in head office
    Subject to working capital (which FTI has provided us with no information on) all payments to staff may be made as quickly as 3 months, but up to 18 months (subject to FTI’s fees and Scottish Pacific)
    It results in a lower cost, sustainable profitable business (once and for all)
    It provides Upfront Funding and Working Capital Funding for the DOCA and Post DOCA business
    It brings in new executives and directors Kevin McLain (Chair and CFO PS&C ex IBM et al) and Stephen Chetcuti (ex RXP) to provide decisive leadership, financial management and sales experience
    It has the support of the Xpand employees
    The Cashel DOCA proposal enables the business to rebuild its tarnished reputation…. and allow Xpand to flourish (and with it Rubicor to be renamed Xpand).

    SHOULD you vote the alternative, and in favour of Liquidation,
    You are unlikely to receive super
    You are unlikely to receive leave entitlements
    You are unlikely to receive redundancy
    Reference FTI report dated today (page 18) –

    Image

    Should you wish to vote for the Cashel DOCA please use the attached form, you may appoint myself or another person to represent you at the meeting tomorrow at 12.

    Please email signed proxies through to myself

    Best regards​

    Angus Mason
    Chief Executive Officer

  8. NosuperMason on 10/09/2019 at 10:39 pm

    Hi NosuperMason

    You can’t fool the market, ATO and employee for the third time. Man up and live by the values of your Cashel House website.

    Thank you for providing an opportunity for an exchange of views.

    No doubt your communication was well intentioned, but it was at least in part, misleading. You refer to only two options when in truth there are four options to be voted on tomorrow: Cashel, Polygon, Liquidation, End Administration.

    I must also take issue with your assessment of the risks of Liquidation. According to the Administrators’ reports and the guidance provided by the ASIC website and the independent legal and insolvency advice I have paid for, the situation is very different from the way you set it out.

    SHOULD creditors vote for Liquidation succeed, then via the FEG scheme, eligible employees:

    The advice I have received
    Your statements
    Are guaranteed to receive leave entitlements
    Are unlikely to receive super
    Are guaranteed to receive redundancy
    Are unlikely to receive leave entitlements
    Are unlikely to receive super
    Are unlikely to receive redundancy

    Obviously the advice I have sought and received may be in error. I will assess that risk for myself, thank you, and I do not suggest to anyone that they should act on my account of that advice. The only thing I would urge my fellow creditors to do is assess for themselves the information provided in the reports, including projected budgets, the administrators’ comments and the track record of all parties involved, then make their own decision.

  9. Ex Rub on 11/09/2019 at 7:24 pm

    Anyone know what the decision was today?

    Not sure why all the hate above for Angus. He’s lost more money than anyone and all the people who continued to have jobs as long as they did probably wouldn’t have if it wasn’t for his investment. He’s a “non-executive” director meaning a lot of times he wasn’t aware of what was actually going on in the company. I feel bad for him really.

    Also, let’s all be honest here… if you didn’t see this coming for the last 2 years, you’re fooling yourself. The wise ones got out while they still could and the ones that stuck around only did so hoping for a pay out. Such a joke!

    Good luck to everyone involved, truly. Especially the contractors who were actually clueless.

  10. No masonsiprr on 17/09/2019 at 10:52 pm

    Hi no super mason

    How do you have theses values below when you have ruined the lives of so many staff, contractors and suppliers of Rubicor?

    Man up mate and pay some money to Rubicor people or the truth of what you may or may not have done or not done with the money maybe released.

    Why don’t you put your opinion forward, we would love to know what happened to the money.

    Man up and tell us. I guess if you don’t yell us us what happened to the money it must be in an offsite account somewhere.

    When I founded Cashel House in 2007, it wasn’t to fill my days with more ‘work’, rather quite the opposite.

    Like most people, I desired choice – in how much time I could spend with my growing family, where we holidayed, and how much time I could focus “on” improving performance within my business interests. I wanted flexibility to shape how we lived our lives and how we impacted those around us.

    I believed it then and do so today, that most people innately share this same desire.

    Throughout my life I’ve met hard working, talented families who deserved more than the choices they were sold, and I wondered what had held them back. It took many years working in the financial sector until I learned the reason that less than 20% of Australian’s had a financial plan. Put simple, it was due to the complexity of financial and credit industries and the conflicts that existed between financial product distribution and product manufacturing that deterred them from trusting a financial adviser. In many cases they were right not to trust.

    The recent Royal Commission into the Banking and Financial Services section has correctly highlights that most financial products are one sided and that the classic financial advice industry has been established as a distribution channel rather than an unbiased advice and education channel.

  11. MosuperMason on 17/09/2019 at 10:59 pm

    Hi All,

    Who is ready for Angus Mason to come clean and tells is where the money has gone to this great business?

    Ross Cennett would you like more information about Angus Mason and where it is alleged the money is.?

    I’m sure everyone is ready to talk now.

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