E-Store administrator stirs the can of worms

E-Store administrator Star Dean-Willcocks has recommended creditors of the troubled dotcom vote to keep it afloat, despite uncovering a multitude of serious legal and financial stumbling blocks on E-Store's books.

Arguing that liquidation would result in little return for shareholders, the administrator has proposed a deed-of-company arrangement in the hope that creditors will keep the business afloat when they vote on its future on Tuesday.

But the administrator may find some difficulty in backing the continuation of the E-Store business while simultaneously presenting a report to creditors that highlights several grey areas in the company's records.

The report to creditors said there were several factors that indicated the E-Store business may have traded while insolvent, but said it was up to the courts to confirm if such offences were committed.

The administrator's investigation uncovered that earlier this year E-Store was engaged in several financial transactions that may now be "voidable". That is, these transactions were made before whatever date a court may decide the company had become insolvent.

One such transaction was a group of three payments E-Store made to IT distributor Tech Pacific as part of a disputed debt. Tech Pacific claimed the e-tailer owed it $1.1 million, while E-Store's records showed a debt of less that $500,000. The two companies settled on a payment of $593,250.

Another transaction being treated with suspicion was a loan repayment E-Store made to former director Adam Power, who resigned from the company at the end of August. His employer at the time, ZDNet, disapproved of his involvement in the dotcom. Power had loaned $120,000 to E-Store in August 2001, of which $70,000 was paid back in September, and the balance paid back the day before Star Dean-Willcocks was appointed as administrator. If a court were to find E-Store was trading while insolvent, this transaction would be scrutinised to ascertain whether unfair preference toward one creditor was given over others.

The administrator also identified several possible offences for which the directors of E-Store may be held accountable. As well as the aforementioned insolvent trading, it was identified that the directors "failed to act with due care and diligence", "gained an unfair and improper advantage", and "used their position dishonestly with the intention of directly or indirectly gaining advantage for themselves or someone else causing detriment to the corporation".

In addition, the administrator mentioned the possibility of fraud charges for over $160,000 worth of unfulfilled customer orders from the E-Store site. These orders were paid for but not delivered, just prior to E-Store's administration.

While its investigations expose the mass of problems brewing behind the scenes at the e-tailer, the administrator recommends against both liquidation and legal action. Litigation, which would cost the creditors anywhere between $20,000 and $100,000, would not produce any great financial gain for the creditors, who would be attempting to retrieve funds from two directors and one former director that are all struggling with their own finances. The administrator has received statements of assets and liabilities, supported by statutory declarations, that former director Adam Power has a "net asset deficiency" and directors Steve Spilly and Dino Bruni have little more than "nominal surpluses" to win back through the courts.

With that in mind, the administrator is hoping creditors will allow the e-tailer to continue operating while it negotiates sale agreements with as many as 12 interested parties.

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