Appointment of Administrators: For over twelve months, the businesses of Surfstitch Group Limited (ASX: SRF) have been faced with several significant, external challenges including two class actions, the protracted Coastalwatch litigation and an ASIC investigation. Notably, these challenges have been said to bring high levels of uncertainty and material costs that became outside of the control of the Group operational businesses, while impacting the Companies’ cash flow position. Subsequently, considering the Board’s continuous assessment of the Group’s financial position and as part of its ongoing efforts to optimise business operations, it has been decided to appoint the administrators for listed entity and its holding company (SurfStitch Group Limited and SurfStitch Holdings Pty Limited) respectively. Accordingly, John Park, Quentin Olde and Joseph Hansell of FTI Consulting have been appointed to act as Administrators. However, the Group’s on-line companies, SurfStitch (Aus), SurfDome (UK) and Swell (US), and publishing businesses MagicSeaweed (UK) and Stab (Aus & US) are unaffected by the Appointments and will continue to trade as normal. Customers will continue to receive their merchandise as usual and suppliers and employees will be paid in the ordinary course of business.

Given the challenges that SRF faced since 2016, the stock fell about 85% in last one year.


Group Corporate Structure; (Source: Company reports)

Importantly, appointment of Administrators reflects the exceptional circumstances that have impacted the SurfStitch Group for well over a year. The Company seeks to put the business on a sustainable footing for the future and to remove uncertainties at the listed and holding company level, without impacting the business as usual at the subsidiary operating level. The legal proceedings against the Non-Operating SurfStitch Companies will be stayed following the appointments, which will provide the Group with breathing space to focus on trading into the critical December peak period. Moreover, the Administrators will investigate the potential for a recapitalisation of the Non-Operating SurfStitch Companies and, will provide a high-level update on the progress of the administration and strategy moving forward at a creditor meeting to be held on 5 September 2017.

Summary of the Statement of Claim: In May 2017, SurfStitch Group has been served with a Statement of Claim in Supreme Court of Queensland. The Claim has been commenced as a representative proceeding (a ‘class action’) in the Supreme Court of Queensland by representative shareholders, on their own and on behalf of group members. The claim alleged that the Company has engaged in misleading or deceptive conduct in contravention of section 1041H of the Corporations Act 2001 (Cth) and section 12DA of the Australian Securities and Investments Commission Act 2001 (Cth) and failed to comply with its continuous disclosure requirements, in contravention of section 674(2) of the Corporations Act in the period 27 August 2015 to 9 June 2016.  
 
Crown Financial Litigation and ASIC investigation:  In August 2016, entities in the Crown Financial group brought litigation proceedings (Crown Financial Proceedings) against members of the SurfStitch group in relation to the Contested Contracts. Further, the Company has lodged extensive defences and cross claims in these proceedings. The Company has sought, and continues to seek, to resolve these proceedings and to explore the possibility of settlement within parameters that have regard to (a) the financial position of the Company; (b) the nature of the conduct alleged in the defences and cross claims to the Crown Financial Proceedings; and (d) the two class action proceedings. In July 2016, ASIC commenced an investigation into disclosures made by the Company, including in relation to the Contested Contracts. Since then, the scope of the investigation has expanded and, the investigation is ongoing.

With the above background, the administrators might evaluate the company’s position to understand any potential of recapitalisation in order to secure better outcomes for stakeholders.

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