Oliver Brown vote delayed amid mounting trademark concern
Creditors for the café chain, which fell into administration in May, were due to vote on whether to liquidate Doutmost pty. Ltd. – which trades as Oliver Brown – or accept one of three deed of company arrangement proposals for control of the business last Wednesday (13 June).
But administrator Tim Heesh of TPH Insolvency adjourned the meeting to allow creditors time to consider several updated proposals, amid mounting concern from franchisees over current director and owner Eric Song’s attempt to maintain control of the business.
The delay comes a week after Inside FMCG detailed a variety of unanswered questions about Song’s history with Oliver Brown, including trademark transfers and allegations of insolvent trading. Creditors will meet again on Friday (22 June) to vote on the new proposals, including those from Song and a consortium of franchisees trying to wrestle control of the circa 50-store chain.
Heesh has also, for the second time, formally requested that Song provide details of the sale of Oliver Brown’s intellectual property in December 2016 after creditors raised concerns about the nature of the transaction last Wednesday.
Trademark transfer documents lodged with IP Australia show that Doutmost sold Oliver Brown’s intellectual property to In Sook Kuen, who is based in South Korea, in late 2016, amid a dispute with the taxman over a $5.1 million bill.
Compounding franchisee concern over the nature of the trademark sales, Strathfield lawyers, a firm that represents Song, is listed as the address for service on Kuen’s IP Australia documentation. It is also not the first time Oliver Brown’s trademarks have traded hands, having been bought by Doutmost in 2012 for $5000 from Oliver Brown Pty. Ltd., just weeks before that company fell into administration.
Oliver Brown Pty. Ltd. was eventually liquidated, but less than two years later Doutmost began trading the intellectual property again. Song was the largest shareholder in Oliver Brown Pty. Ltd., having bought a 50 per cent stake in the business for $50 in 2010.
Doutmost’s current general manager Jacob Jihoon Kim was the director of Oliver Brown Pty. Ltd. and was also a major shareholder, having bought a 39 per cent stake alongside Song in 2010. In 2014, two years after Doutmost was founded, Song bought a 100 per cent stake in that business and became its sole director. Song’s lawyers have declined to comment on the trademark sales.
Franchisees sweeten the deal
While questions about Song’s history with the business swirl, a consortium of franchisees has sweetened its offer to creditors in an attempt to gain control of the business. Originally the syndicate, led by Oliver Brown Miranda managing director Jagrati Lalchandani, had proposed a $1 million fund to pay back creditors in a scheme that would see franchisees buy shares in the company.
The fund has now been increased to $1.5 million, the bulk of which would be paid within three months of the deal proceeding. This brings the payback to creditors under the franchisee proposal above the $1.2 million proposed to be paid back under Song’s DOCA. But crucially, the franchisees still don’t have the support of trademark holder Kuen, who has provided exclusive support to Song’s proposal in writing.
License agreement holds business hostage, franchisees say
Doutmost currently has a trademark license arrangement with Kuen that enables the network to trade under Oliver Brown’s intellectual property. But because the business fell into administration Kuen is entitled to terminate the deal without notice. Kuen has said she will not terminate the agreement, but only if Song’s proposal is accepted.
“If any deed of company arrangement proposal (other than Song’s offer) is accepted or any other circumstances arise, the license agreement will be terminated, and the intellectual property rights will only remain with me,” Kuen wrote in a letter to administrators.
Several franchisees have told Inside FMCG that Song’s relationship with Kuen is akin to having a gun put to their heads over the future of the business, while administrators have conceded that the arrangement has made it difficult for potential buyers. But Inside FMCG understands that there were at least two parties interested in the business even without its trademarks.
Both parties said they paid a $2000 fee to administrators to conduct due diligence into the business prior to the adjourned meeting last Wednesday, but one said they were told that it was effectively too little too late to make a bid. Heesh, who has maintained his support for Song’s proposal despite having alleged that he traded the business while insolvent, did not respond to requests for comment.
“The best DOCA proposal, in my opinion, is the directors’ proposal, as it provides greater certainty with respect to return and provides the greatest chance of the business surviving,” Heesh wrote in a supplementary report filed with the corporate regulator.
It also remains uncertain whether landlords, who Song has made significant personal guarantees to, would support the franchisee proposal, which would effectively see leases transferred directly to business owners over time.
Landlords are Doutmost’s largest creditor class, potentially owed around $21 million of the $29 million the company has in outstanding debt. Some franchisees are considering legal action against Song, with the syndicate having been advised that it could claim more than $10 million in damages over his alleged failure to share information about Doutmost’s solvency and trademark ownership information. The syndicate has also received legal advice that it may be able to challenge the 2016 trademark sale to Kuen.
Director updates his proposal
Song has also updated his own DOCA proposal, the major change being that he has nominated company contractor Ben Nash for the position of general manager of the business. Heesh said he thought the change occurred considering “creditor feedback” at the second meeting regarding Song’s accounting acumen.
An initial administrator assessment of Doutmost found that Song did not maintain proper books or accounting practices for several years running the business, to the point that Heesh was not able to determine the historical financial position of the business with certainty.
Administrators also believe Song traded the business while insolvent from at least 30 June 2017 until the collapse on 8 May 2018. Franchisees Inside FMCG has spoken to said Song maintaining control of the business would be a “disaster” or lead the network back into the same position it is currently in.
Franchisees have been chased by the ATO through garnishee notices over the last year related to Doutmost’s unpaid taxes. Heesh said in a supplementary report dated 15 June that Nash’s appointment “may go some way” to satisfying the concerns of creditors if Song’s core management structure were to continue under his DOCA proposal.
“I have worked with Nash for the period of the administration and from what I have observed he has strong financial, management and operational skills,” Heesh said.
The bulk of Song’s $1.2 million creditor fund is being contributed by a consortium of companies, who until 15 June were unknown to administrators or other creditors. In the updated proposal Song identified his backers as MIR Holdings Pty. Ltd., Coffeekong Dul Pty. Ltd, SKRG Pty. Ltd and HSK F&B Pty. Ltd. The companies have the same accountant, Woori Accounting Services, which has formally vouched for the ability of the companies to pay the $800,000 within twelve months.
New creditor comes forward
Revelations have also surfaced that a disgruntled former Oliver Brown franchisee is seeking around $900,000 from Doutmost over a loan she claims to have made to the business in 2013. Details of the claim, which only became known to administrators on 8 June after being forwarded on by Song, allege that Anna Kim, the former owner of Oliver Brown Eastwood, loaned Doutmost more than $800,000 in 2013.
It remains unclear why this money was borrowed, but Kim’s lawyers said she funded the loan with her loans of her own, and that the amount owed (with interest) has ballooned to more than $900,000 in the intervening years. In a letter to Song and Doutmost general manager Jacob Kim dated 22 December 2017 lawyers for Anna Kim threatened legal action over the claim.