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.