IT services company Data#3 has taken a hit of around $2 million to soothe the creditors and customers of the disastrous Queensland Software Services (QSS) joint venture.
A disappointed but resolute John Grant, chief executive officer of Data#3, said that his company had come to an arrangement with the administrators (KPMG) and receivers (PricewaterhouseCoopers) of its joint-venture partner, Powerlan Queensland, to take control of all of the assets and liabilities of the QSS joint venture so that he could ensure suppliers and customers would be paid.
"First and foremost we have to do the right thing by our customers and creditors," he said.
Grant can now wash his hands of any involvement with Powerlan or its subsidiaries, with the exception of remaining a creditor of Powerlan Qld.
The debacle began on August 15, when Powerlan Qld was suddenly placed into administration. Powerlan Qld and Data#3 were joint-venture partners in two businesses -- Queensland Desktop Services (QDS) and Queensland Software Services (QSS), which supplied software and hardware to Queensland Government agencies.
Under the terms of QSS, funds paid by the customer would be distributed to the joint-venture partners, Data#3 and Powerlan Qld, several weeks before QSS was due to pay its suppliers, in this instance, Microsoft and its distributors. These funds were expected to be distributed back to QSS, minus a small profit for the joint-venture partners, when QSS' suppliers were due to be paid.
Powerlan Qld was contractually obliged to forward its share of the revenues ($3.8 million) to QSS to pay its creditors by the end of August 2002. Instead, its parent company, Powerlan Ltd, sold off most of Powerlan Qld's assets to large reseller NetOptions and placed the shell of the company into administration just prior to this date. ASX-listed Powerlan had pulled a similar move with the XSI storage business.
As soon as the joint venture was thrown into receivership on August 15, all of its assets and operations were frozen. All payments to creditors and staff, and all customer orders were frozen. By August 22, the Queensland Government had cancelled all contracts and formulated new contracts in which Data#3 would be the prime supplier.
This created an enormous strain on Data#3, whose customers had unfulfilled orders and creditors, including its most valued business partners, were unpaid. Grant said that in order to maintain customer goodwill and the integrity of his business, his only option was to take responsibility for all of the assets and liabilities of QSS. With liabilities far outweighing assets, Grant concedes that it was a "negative acquisition". "Nothing about this whole experience could be positive," he quipped.
The company had originally estimated it would be exposed to a liability of between $2 million and $8 million as a result of the fiasco, but opted against pursing legal action in order to minimise the potential for larger losses. In doing so, Data#3 has also limited its exposure to the lower end of the $2 to $8 million it originally estimated. "The worst-case scenario involved us taking the matter to court over an extended period of time, and losing the case," said Grant. "Now I believe that the only way this will ever see a court is if Powerlan Qld goes into liquidation."
The $3.8 million that Powerlan Ltd never passed on to QSS seems now to be out of reach of all parties with legitimate claims to it. It is the best assessment of the administrators that these funds were "repatriated to Powerlan Ltd".
Grant praised the patience and understanding of his suppliers, particularly Microsoft, Hewlett-Packard, Tech Pacific and Ingram Micro, and Data#3's government customers. "It is an overwhelming endorsement of the close and constructive relationships Data#3 has had with these organisations over many years."