A few weeks ago a notice appeared in the Australian Financial Review calling for offers on the Heritage Fine Wines business. For readers not familiar with Heritage it was, in a nutshell, touted as a wine investment vehicle through which wine was purchased and cellared, with the expectation of excellent returns. Incredibly good returns, in fact, was the suggestion made by the former operators before it went belly-up.  The directors, Andrew Lyon, Simon Tilley, Ben Tilley, Cameron Hall, David Greek, and founder Simon Farid, are under investigation, as is the operation of Heritage, by Nicholas Crouch of Crouch Insolvency, the author of the sale notice appearing in the Fin Review. Heritage was set up in 1999 with around 3000 investors putting $70 million into it. Whether it was an exercise undertaken in good faith by investors or participation driven by plain greed is unknown.  Many were presumably “average” investors with a penchant for wine. Others included the likes of former premier Nick Greiner, Alex Menzies of JP Morgan and Bill Farlane of Corrs. Directors of KPMG and Clayton Utz were also reportedly investors into the wine fund. But what is it the administrators are selling? Reportedly the business appears to be, in essence, nothing more than a promise that the remaining 2000 or so wine holders will retain their wine in storage with whoever buys the business. The administrators were reportedly seeking offers of $500,000 for the business, possibly more. It would be interesting to see if anyone actually spends good money to buy some vague promise. It will be even more interesting to see if the investors actually get off their collective behinds and move to protect the value of their wine. Current storage costs are apparently around $1.70 per bottle, per annum. But the reality is that storage can be secured for more competitive prices than this. Examples abound but Cellarit, Glen Ewin Cellars, Wine Ark and others provide much better rates on wine storage, with charges ranging from around 90 cents per bottle per annum and up. Given the state of the wine market at this time, and the amount of money the Heritage wine holders need to recoup, perhaps the best thing they can do is take ownership and control of their own wine and move it into less expensive storage. It’s interesting that the administrator is looking to raise $500,000 or more for essentially nothing more than a reliance on the inertia of former Heritage wine investors. But even more interesting is that this sale comes after a “levy” applied to each bottle of $5.08. The levy was applied by Nicholas Crouch in order to raise funds to undertake activities including ongoing storage, insurance, audit, reconciliation and the like. It is possible, however, that the cost per bottle, to undertake the complete range of activities needed to be applied to the physical wine holdings of Heritage, were more likely between 60 cents and $1.00 a bottle — at the most. Moreover, competitive quotes for such services were supplied to Crouch Insolvency over a year ago.  Even with a dollar of that $5.08 being returned to each Heritage investor, as is possible although seemingly more unlikely with the passing of each day, that leaves a lot of money left over. Allocate another $1.00 per bottle for legal and administration/liquidation expenses and what you end up with is a massive profit for Crouch Insolvency. It is unlikely that anyone would begrudge an administrator or liquidator a reasonable fee for undertaking the complex and difficult task of sorting out a failed company. There are certainly costs and overheads to be met and a profit must be made. Administrators and liquidators are not charities. Moreover, they assume a personal legal liability in their undertakings which means that they are indeed taking a risk. Compensation is appropriate for that as well. But to slug Heritage investors with a charge possibly five times more than the actual costs of reconciliation, auditing, storage, insurance and consolidation, is pretty rich. Perhaps the only mitigating aspect is that the Heritage investors appear quite happy to be bent over yet again. Of course, Mr Crouch would undoubtedly argue that his actions were approved by the courts, and this is true. Unfortunately, the courts have demonstrated, repeatedly, that they do not have the ability to rule on issues of companies in administration or entering liquidation.  Ansett is a case in point. After five years the administrators of that company still continue to make excellent money while staff and other creditors are still awaiting up to half their legal entitlements and monies owing. Court rulings on that particular episode remain disturbing. In the case of Heritage, had the courts requested independent quotes for the mechanical costs included in the Heritage administration then it is likely they would never have approved a levy of $5.08 per bottle. It is more likely that it would have been somewhere between $1 and $2.00. So far Heritage appears to have been, if nothing more, at least an excellent retirement fund generator for some. It remains to be seen whether any individual or group is silly enough to buy Heritage under circumstances where the entire depositor base could move out the next day or, more likely, depart in a steady stream to less expensive storage over the coming months. Of course, any buyer may look to offset that risk by running out the “practicable” delivery of wine (at great expense to the owner) for as long as they can. Not sure if that is what the courts had in mind. Heritage and other companies in administration have demonstrated that, at the very least, the courts must be more attentive to the commercial realities of administration costs. To date they have not, and that ends up hurting the very people the courts are trying to protect, viz: the creditors. Also problematic is the practice of administrators and liquidators charging hourly fees over, sometimes, very long periods of time during which they control a company. It may be far more reasonable to allow administrators and liquidators to charge hourly fees for assessment and then open a process for tendering a single charge to undertake the administration or liquidation. The whole point of administration is to determine whether or not a company can trade back into solvent operation, or at least be wound down or liquidated so that maximum returns can be made to creditors. Hourly rates of administrators simply squander available funds.  Company administration and liquidation may be complex, it may sometimes require innovative, imaginative, even daring approaches and an assumption of real risk. But it is not rocket science.  The whole business of company administration and liquidation in Australia is in dire need of reform. Whether this ought also to include adoption of a Chapter 11-like function may be a part of that. 

Peter Fray

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