THE founding directors of the Ella Rouge Beauty chain allegedly engineered a phoenix company transaction in 2008 because demands for unpaid payroll tax, workers compensation and other debts threatened to destroy their business.
According to the recently released findings of a liquidator's disciplinary hearing, in early 2008 Mr Ali Hammoud and his wife Ms Manel Issa-Hammoud completed the transfer of assets worth approximately $4 million from their company Ella Rouge Beauty (ERB) to a second company they controlled, Beauty World International (BWI).
The transfer of ERB's assets to a related party via a Business Sale Agreement took place on or around March 28, 2008 but was subsequently backdated to February 28. At the time of the transaction, BWI was the trustee of the Hammoud's Shanel Family Trust. On March 28, ERB changed its name to ERB International Pty Limited.
On April 2, the directors placed ERB International into liquidation, appointing Pino Fiorentino and Bill Hamilton of Hamiltons Chartered Accountants as joint liquidators, with Fiorentino having primary, day-to-day responsibility. The following day, they registered a new company, Ella Rouge Beauty Pty Ltd. This would go on to replace BWI as trustee of the Shanel Family Trust.
In a visualization of their corporate interests provided by Encompass Corporation Ali Hammoud and Manel Issa (Hammoud) were confirmed as sole directors and shareholders of ERB and BWI at the time the transfer, name change and liquidation were effected.
The Australian Securities and Investments Commission (ASIC) - which has confirmed to Sydney Insolvency News that its investigation into ERB International is ongoing - has alleged that the Business Sale Agreement amounted to a phoenix transaction, which left an insolvent ERB with no valid claim against BWI and debts of approximately $800,000, owed to the Office of State Revenue (OSR), GIO, and specialist workers compensation claims manager Gallagher Basset.
In spite of the allegations, it should be noted that no findings of wrongdoing have been made against Ali and Manel Hammoud. Neither replied to multiple requests for comment.
The allegations have surfaced following a lengthy investigation by ASIC into the conduct of the company's liquidators.
The investigation commenced on September 16, 2011 and culminated in ASIC serving notice on Fiorentino and Hamilton on June 12, 2013, advising them that it was applying to the Companies Auditors and Liquidators Disciplinary Board (CALDB) to have their liquidator's registrations cancelled.
In April this year CALDB ruled that Hamilton's registration be suspended for six months from June 2. CALDB heard ASIC's application against Fiorentino in February this year.
In June the board ordered he be stripped of his ticket and in July it published its reasons.
The allegations are contained in submissions ASIC made to the disciplinary board and are detailed extensively in CALDB's Determinations and Reasons document.
" ..on its face, the transaction had the appearance of a phoenix transaction, whereby the directors had preserved their business by transferring it to a related third party, leaving the OSR liability in the ERB corporate shell," CALDB said.
"In our view, having received the Report as to Affairs (RATA), it must have been apparent to Mr Fiorentino that there was at least a question mark over whether Mr Hammoud intended the Business Sale Agreement and liquidation to operate as a phoenix transaction or that the whole transaction, in fact, had that effect."
In its submissions to CALDB, ASIC said legal advice provided to Fiorentino and ERB by barrister Julian Svehla indicated the transfer could only take place if BWI either paid fair commercial value for ERB's assets or alternatively, accepted liability for all, rather than some, of ERB's debts. ASIC alleged that the Business Sale Agreement executed between BWI and ERB provided for neither and CALDB agreed.
"In view of the fact that he (the liquidator) had been party to the conversation with Mr Svehla a few weeks earlier, in which Mr Svehla had advised that it was not possible to transfer the business to a related third party, unless a proper commercial price was paid or the purchaser took over the OSR liability, Mr Fiorentino ought to have been seriously concerned about the legitimacy of the transaction," CALDB concluded.
Based on the timeline detailed by CALDB, ERB ran into trouble when the OSR advised on October 13, 2006, that is was "commencing an investigation into the payroll tax obligations of ERB and any associated businesses.
"ERB had not registered for nor paid payroll tax despite having a liability to do so since 2002," CALDB reported, adding that ASIC's submissions on this point where backed by documentary evidence and that CALDB accepted them as "factual allegations".
"On 16 May 2007, the OSR approved an instalment plan for ERB to pay the outstanding payroll tax liability which, at that point in time, had increased to $724,246.45,".
Between August and December 2007 ERB's directors sold four salons for $3.19 million plus ongoing royalty payments.
In December 11, 2007 ERB paid the OSR $200,000 in part-repayment of the debt. Additional payments of $20,000 per month were to be made from January, 2008 to June 2008. According to CALDB the OSR recovered a total of $330,000 from ERB.
Then on February 13, 2008 Gallagher Bassett advised ERB that accounting firm Deloitte would be carrying out a workers compensation audit and wage inspection for the period of June 18, 2006 to June 18, 2007.
Less than three months later Deloitte provided Fiorentino - by then in charge of ERB International as its liquidator - with summaries of its wage audit which listed millions of dollars in wages as having been under-reported.
In ruling that Fiorentino had failed in his duties as a liquidator CALDB said: "In the circumstances, ASIC alleged that by 28 April 2008 at the earliest, Mr Fiorentino knew, or ought to have known that the Directors may have been guilty of an offence under a law of the Commonwealth in relation to:
"(a) entering into the Business Sale Agreement in circumstances where insufficient consideration was paid by BWI to ERB and the liability to the OSR was not transferred to BWI in breach of ss 184(1)(a) and (c) of the Act; and
(b) making false and misleading statements to a licensed insurer by understating the actual wages paid by ERB in breach of sections 164 and 173A of the Workers Compensation Act 1987."
In 2009 the Hammouds won the Ethnic Business Award for Initiative. In a statement, lawyers for the Ethnic Business Awards and its founder Joseph Assaf said EBA award winners are "required to submit detailed financial reports with supporting references. These references are carefully reviewed prior to nominees being placed on a shortlist for judging.
"...at the time of the awards in 2009 EBA was not aware of any investigations underway and no information was provided to the EBA suggested any impropriety on the part of Ali and Manel.
"Joseph Assaf and the EBA regret that now, in 2014, investigations are being undertaken in relation to the Hammouds, although it is our understanding that no findings have been made against them personally at this time," the statement said.
For ERB's creditors, the long wait may be drawing to an end. In March this year, NSW Supreme Court Justice Paul Brereton ordered that ERB International - which had been de-registered by Fiorentino in January 2010 - be restored to the companies register. That order followed an application to the court by Fiorentino in November 2013 seeking its reinstatement.
Since that judgement was handed down, SiN has obtained a copy of a letter sent to ERB International's creditors on July 1, 2014. It was sent by the reinstated entity's new liquidators, Simon Cathro and Philip Campbell-Wilson of Ernst & Young.
"We advise that following the deregistration of the Company on 24 January 2010, the Company was reinstated by an Order of the Supreme Court of New South Wales on 10 March 2014.
"We further advise that Philip Campbell-Wilson and I were appointed as joint and several Liquidators of the Company by the same Order, replacing previous liquidators, Mr Pino Fiorentino and Mr William James Hamilton.
"We understand you may be a creditor of the Company. The directors of the Company are currently determining whether to put forward a Deed of Company Arrangement."
If accepted, a Deed of Company Arrangement or DoCA promises to open the way for the OSR, the GIO and ERB's other creditors to be repaid, either in part or in total.