Dick Smith directors face court battle worth millions
- 20 March, 2017 10:49
Dick Smith receivers, Ferrier Hodgson, have gone after eight former directors and executives of the collapsed electronics retailer with a damages claim worth millions, according to reports.
The details of the legal action, which was laid out in a statement of claim lodged in the Supreme Court of NSW on 17 March, include allegations that the former Dick Smith directors and executives breached their duties by failing to implement “adequate system” related to rebates and inventory management, Fairfax Media reported on 19 March.
The legal action, which alleges that Dick Smith’s earnings in 2015 were inflated thanks to the use of a “rebate maximising” strategy that compelled managers to make stock purchasing decisions based on rebates instead of customer demand, is part of an attempt by the failed retailer’s receivers to retrieve funds for creditors, according to the report.
The statement of claim reportedly takes aim at former executives, Nick Abboud and Michael Potts, as well as former directors, Bill Wavish, Jami Tomlinson, Rob Murray and Phil Cave.
Ferrier Hodgson have also set their sights on a number of insurers that provided cover for the former executives and directors, Fairfax Media reported.
The legal action comes more than a year after the electronics retailer, which operated around 390 stores across Australia and New Zealand, appointed Joseph Hayes, Jason Preston, William Harris and Matthew Caddy of McGrathNicol as voluntary administrators.
Following that appointment, a syndicate of lenders, which held security interests over Dick Smith and a number of associated entities, appointed James Stewart, Jim Sarantinos and Ryan Eagle of Ferrier Hodgson as receivers and managers.
The collapse of the retailer, along with the closure of its stores, followed close behind a $60 million inventory write-down revealed in late 2015 by the previously Australian Securities Exchange (ASX)-listed company, which was prompted by disappointing performance in October and November of that year.
According to a report released in July 2016 by administrators, McGrathNicol, aggressive store expansion, buying too much inventory, strained supplier relationships and not generating enough sustainable profit were some of the numerous triggers that led to Dick Smith’s collapse.
The “rebate-driven buying practices” reportedly outlined in the statement claim by Ferrier Hodgson has since been identified as a core factor behind the multimillion inventory write-down in 2051.
Following court hearings in 2016, it emerged that the company had been buckling under the pressure of excess stock, holding 141 months’ worth of AA batteries, enough to supply the Australian and New Zealand markets for 12 years, and its stock of AAA batteries set to run out in 2026.
Dick Smith was selling “too many products”, admitted former chairman, Phil Cave, during a Supreme Court hearing in October last year.
The questionable stock practices saw a “spike” in Dick Smith’s inventory at the turn of 2015, with company stock rising to $350 million, according to Fairfax Media reports in late 2016.
It was subsequently revealed that the retailer adopted a “whiteboard process” for accounting, which literally amounted to recording the rebates in question on a whiteboard in a company office.
The fallout of the company’s catch saw Australian e-commerce entrepreneur, Ruslan Kogan, buy Dick Smith's intellectual property, revamping the company as an online-only consumer electronics retailer.
According to Fairfax Media, the legal action now being faced by some of the company’s former leadership team involves the recovery of more than $27 million in dividends that were allegedly incorrectly paid out, and losses understood to be worth tens of millions of dollars that allegedly resulting from the purchase of “bad stock”.