Debacle of ABC Learning unfolds

ONE year after the failure of ABC Learning Centres, the turbulence is finally subsiding for Australia's childcare industry. But for investors and creditors owed billions from the collapse as well as executives like Eddy Groves who presided over the debacle the white-knuckle ride is just about to begin.

The impending sale of the 700-odd profitable centres still owned by ABC will remove the remaining constraints that have kept details of the collapse under wraps for more than a year. It will also clarify just how little money will be left for creditors who are owed billions of dollars.

By the time ABC Learning's receivers are expected to exchange contracts on the remaining centres before Christmas the company's administrators will have started their public examination of the company's collapse.

Taking liberties not normally given to an administrator, the examination is expected to set the groundwork for liquidation of the company when the second creditors' meeting is held next year.

"In normal circumstances, issues such as the investigation of voidable transactions and preferences would fall within the powers of a liquidator," the administrators, led by Ferrier Hodgson's Greg Moloney, said in a report to creditors. But given that the "commercial issues" surrounding the sale of ABC assets meant an unusually long convening period for the second meeting of creditors, the administrators have "significantly progressed investigations".

While the drama of who knew what and when will provide the most interest for spectators, the main game for the administrators and creditors is whether the banks' lock on any proceeds from ABC can be unpicked.

As things stand, if the banks maintain their right to be at the front of the queue, all the other creditors will get nothing.

The inquiry will kick off in the Federal Court in Brisbane with some of ABC Learning's lesser-known figures next month. But the real interest begins in February when the big names surface.

These include Groves, former Brisbane mayor and former ABC chairman Sallyanne Atkinson, ABC's former auditor, Pitcher Partners, and a cluster of banks including Australia's big four which helped finance the whole debacle. Forget about tarnished corporate careers, if the examination reveals breaches of the Corporations Law, the penalties could be severe.

The examination will go a long way to determining who will wear the losses now clocking into the billions of dollars, because the sale of the ABC centres is not even expected to cover the $1 billion of debt owed to the banks.

John Walker, from litigation funder IMF which is bankrolling the inquiry says it will probably be found that ABC "never made any money".

It appears the directors were coming to the same understanding before putting the company into administration on November 6 last year.

According to the directors' report as to affairs their final report on the state of the company before pulling the plug they had slashed asset values by more than $2 billion just before ABC's collapse.

The value of its intangible assets was more than halved to $621 million, while "investment" write-downs and impairments added another $1.43 billion in losses.

The size of the write-down was not hard to justify given ABC's market value was less than $300 million when the now-worthless stock last traded. These were the ephemeral assets that helped pump up ABC Learning's balance sheet and underpinned the debt binge and capital raisings in the years leading up to its demise.

Walker describes the ABC schmozzle as the "misallocation of money in a bubble".

"Overvalued assets caused equity markets to allocate approximately $3 billion in capital over the last three to four years plus $1 billion from debt markets," he said.

With the bubble now pricked, many aggrieved parties are scrambling for what little remains.

Walker is already lining up shareholders to claim back their investments from the company, based on its materially mistated earnings.

By the end of July, 1971 investors had lodged a contingent claim for $1.134 billion of losses and this figure is expected to rise dramatically. This is on top of unsecured creditors claiming $800 million.

A big chunk of this is owed to Commonwealth Bank, which, on top of being owed $240 million in secured debt, owned more than $300 million of convertible notes that now rank as unsecured debt.

The bank consortium gained paramountcy over other creditors thanks to a charge taken over ABC's assets in June last year. If the administrator cannot find enough grounds to allow a future liquidator to wrestle these charges from the banks, there is no hope for any other creditors.

If the charge is overturned in liquidation, the banks will join the same queue as everyone else for an equally meagre slice of the action.

The inquiry could also test the validity of the $400 million delivered to the banks in the months before its collapse. The problem for the banks is timing.

The security was taken, and the $400 million payment made, within six months of ABC's demise, meaning if the company is put into liquidation both transactions will be on the radar of the liquidator and are potentially voidable.

"A lot of work needs to be done to prove that," cautions ABC administrator Greg Moloney.

"It's 'voidable' . . . but I've got to prove it."

Voidable or not, the charges were certainly unusual. The initial charge was made via an oral agreement with ABC's remaining directors. A properly documented charge was not lodged for another month.

"I've never seen it happen," says Walker of the oral agreement, which he says let the banks "jump the queue".

There is also the issue of whether ABC traded while insolvent. A solvency report was prepared in May, but it did not prove conclusive.

"It is the opinion of the administrators that substantial further analysis is necessary before a final view on the issue of solvency may be reached," the administrators reported in September.

The uncertainty of any return to unsecured creditors is one reason why the administrator has yet to tackle the $1 billion-plus claim that IMF is trying to lodge on behalf of investors, utilising the Sons of Gwalia ruling rather than launching a shareholder class action.

The judgment allowed shareholders who could prove they had been misled by Sons of Gwalia to rank alongside unsecured creditors in the liquidation.

"Until I know that I've got funds to distribute, it's too early to determine how shareholder claims will progress," says Moloney.

The banks' charge over assets covers more than the company's physical assets. It also puts them first in the queue if any money is recovered from the auditors if they are found to have breached their duties.

Unsecured creditors at least get equal footing when it comes to any potential legal action against ABC's directors for breach of duty.

Watching the examinations closely will be the Australian Securities and Investments Commission, which started its own investigations well before ABC's collapse. The corporate watchdog has yet to take any action.

If the sale of the remaining ABC centres remains on track, ABC creditors will finally get to hold the second creditors' meeting that will almost certainly end with the company being placed into liquidation.

The only other alternative is a deed of company arrangement if someone wanted to cut a deal with creditors and revive the company in its current state.

Moloney considers this very unlikely given the state of the company.

"No, I don't anticipate that it would be very hard to unscramble the egg," he says.