An insider’s account of the “spectacular implosion” of Pie Face

Sule Arnautovic, managing director of Jirsch Sutherland and one of the administrators responsible for keeping Pie Face alive, has admitted there was a point during the voluntary administration of the pie chain when there was “no really obvious parachute” to save the company.

In an inside account of a voluntary administration that is rare in corporate life, Arnautovic has given his account of the episode in Pie Face’s chequered history in the March edition of the Australian Insolvency Journal.

“There were certainly some tough conversations on the way through the voluntary administration between [fellow administrator] Rod Sutherland and I about what sort of tolerance we would take risk to because there were big numbers accumulating that we were personally on the hook for,” said Arnautovic.

Arnautovic is referring to the deal the administrators netted with Pie Face secured creditor TCA Global, which “advanced a couple of million US dollars to get the thing out of a pickle and they have now advanced another $US2 million to keep it trading”.

The deal with TCA Global was a key part to the deed of company arrangement presented by Arnautovic and Sutherland and accepted by creditors at the end of December 2014.

Under the deal, Pie Face creditors accepted no more than 19 cents in the dollar for total creditor claims, excluding inter-company claims, worth $50 million.

But editorialising on the outcome of the administration, the Australian Insolvency Journal said it’s “perhaps fair enough” that Pie Face shareholders chose to oust co-founder and “chief visionary” Wayne Homschek from the company’s board as the chain was “radically diminished” by the time it emerged from administration.

The article also reveals Homschek was served “director penalty notices” by both the Australian Tax Office and the Office of State Revenue, which were both Pie Face creditors.

“That’s quite a burden for someone lumbered, fairly or otherwise, with primary responsibility for Pie Face’s spectacular implosion in the latter half of last year,” the publication said.

“A sale was not a live option”

Consistent with his defence of the administration process to SmartCompany in January, Arnautovic said in the article it became “very obvious very quickly” the administrators would not be able to sell the whole company.

“People might buy some equipment, or take over some leases. But there wasn’t going to be a global solution that worked for creditors generally, and in particular the secured creditors of the group being TCA Global and convertible noteholders owed some $7.5 million.”

But Arnautovic says the administrators had started their appointment “underfunded” – with Pie Face directors managing to pull together just $400,000 to go towards the $1 million in starting funds needed to keep the business trading – and for the first few weeks of the appointment “we weren’t sure on a day to day proposition whether we were going to be shutting the thing down or not”.

“Ordinarily we would’ve loved to have advertised the business and gone to the market a lot sooner than we did,” Arnautovic said.

With reluctance to buy into a proposed restructure or refinance on the part of secured creditor Macquarie Bank, the conversation quickly turned to an alternative financer, TCA Global, which was need to refinance Macquarie first and then take on risk for the business.

“It took until the 18th of December to get any comforting flow of funds,” said Arnautovic, recalling the tense conversations.

“Macquarie and their lawyers were very cautious. They didn’t want to touch the cash at bank in holdings even though they had their foot on it because they were concerned about priority employee entitlements in the group.”

TCA Global eventually paid out Macquarie around $4.6 million, which helped Arnautovic and his team keep the business trading, although in a slimmer format. Overall 20 company-owned Pie Face stores were closed during the administration and around 150 employees lost their jobs.

The refinance from TCA was “dovetailed” into the proposed DOCA and as a result TCA now has representatives on the Pie Face board.

But the battle is not over yet

Despite surviving voluntary administration, and plans for revamping its menu, Arnautovic said Pie Face still has work to do if it is going to last the distance.

“The problem with funding Pie Face is there are no significant tangible assets to secure your money against,” he said.

“There’s no real estate, equipment and fitouts are not worth much in a shut-down, and most of the directors didn’t want to provide personal guarantees.”

“I was very surprised the TCA deal happened … but it got done with a hell of lot of effort by all involved. The real challenging aspect of it was the trading risk and exposure that we put ourselves under by believing we could save it.”