Oliver Brown franchisor could face franchisee rebellion

The owner of collapsed Belgian chocolate cafe chain Oliver Brown is facing a possible franchisee rebellion if his proposal to maintain control of the business proceeds.

The circa 50-store franchise chain, which appointed administrators last month amid a dispute with the taxman, is due to have its future decided at a creditor meeting tomorrow (13 June).

Creditors will vote on whether to liquidate Doutmost Pty. Ltd. – which trades as Oliver Brown –  or accept one of three deed of company arrangement (DOCA) proposals that will keep the business together.

Administrator Tim Heesh of TPH Insolvency has recommended that creditors vote in favour of a proposal put forward by the current director and owner of Doutmost, Byung Sun Song, despite having found that he likely traded the business while insolvent.

But several franchisees Inside Retail has spoken to have described feeling like they have a gun to their heads over the future of the business, with Song leveraging the support of key creditors and Oliver Brown’s intellectual property holder to maintain control.

“If he’s put back in charge it will be a tragedy,” one franchisee said.

“The major concern is that we’ll end up in the same position in a few years,” another said.

A syndicate has come together, led by Oliver Brown Miranda managing director Jagrati Lalchandani, to submit its own offer to take control of the business, providing an opportunity for franchisees to buy a stake.

But the bid is not expected to succeed due to its lack of stakeholder support, leaving many in the network considering their options.

Franchisees Inside Retail spoke to said that they were considering striking out on their own or pursuing legal action against Song over claims that he left them in the dark about insolvency issues facing the business and his history with Oliver Brown’s intellectual property.

The claims come amid an Senate inquiry into the franchising sector that’s examining the effectiveness of the franchising code of conduct after a series of scandals involving prominent franchisors.

A chequered history

Song has a chequered history as the sole director of Doutmost, having placed the business into administration after a two-year dispute with the taxman over a $5.1 million bill.

In early 2016, following an audit, the Australian Taxation Office (ATO) began chasing Doutmost for millions in unpaid taxes, but Song disputed how much the business owed.

In July last year, after Doutmost refused to pay the taxes, the ATO began chasing franchisees for the money through garnishee notices. The notices left several franshisees Inside Retail spoke to bewildered as to where the money they had been paying in fees to Doutmost for several years prior had gone.

While accounts prepared by administrators show that the company brought in $152,328 in revenue from 8 – 29 May, shoddy bookkeeping has obscured a substantial amount of the company’s historical trading information.

It is the view of administrator Tim Heesh that Doutmost, despite overseeing a franchise network of around 50 trading caf_s, did not maintain proper books or accounting practices for most of its history, and that Song likely traded the business while insolvent from at least 30 June last year.

But a syndicate of franchisees that have made a competing DOCA proposal for the business have claimed that they were not informed that the company was insolvent in repeated communication with Song as late as February 2018.

Song was aware of possible insolvency issues since at least August 2017 though, having reached out to Heesh to discuss possible problems, documents lodged with the corporate regulator show.

While Song could be subject to insolvency action if liquidators are appointed to wind up the company, it is understood that he will not be pursued if large amounts of debt are rolled over onto company books through his DOCA proposal.

Inside Retail reached out to Song through his lawyer, Han Ko of Strathfield Law. He declined to comment on when Song became aware of the solvency issues facing the company or whether Song traded the company while insolvent.

The curious case of Oliver Brown

Despite Song’s accounting failures, Heesh has recommended Song’s proposal to purchase the business as the best option available to creditors.

One of the reasons Heesh recommended Song’s proposal was that it maintains the support of Oliver Brown’s intellectual property holder, In Sook Kuen.

Doutmost licenses the Oliver Brown brand, logo and other related intellectual property from Kuen, which it then sub-licenses to franchisees.

But it hasn’t been that way for long. In December 2016, amid the ATO dispute, Doutmost transferred Oliver Brown’s intellectual property to Kuen, according to documents lodged with IP Australia.

According to IP Australia filings Kuen, who is based in South Korea, has listed Sydney-based Strathfield Lawyers as the address for service in the trademarks.

Strathfield Lawyers has also acted for Song in dealings with administrators in the last 12 months and is listed as a minor creditor of Doutmost.

Inside Retail was unable to determine the terms of Doutmost’s transaction of the Oliver Brown trademarks to Kuen but it is believed that they are the company’s most valuable assets.

Song’s lawyer declined to comment on the details of his relationship with Kuen, the nature of the trademark transaction or the reason it was undertaken.

Trademark arrangement ‘scares off’ potential buyers

Heesh declined to comment on the transfer of Oliver Brown’s intellectual property to Kuen when asked, but said in a report to creditors filed with ASIC on 1 June 2017 that the trademark license arrangement has had a “material impact” on the administration.

“It has reduced the ability to sell the business or have a DOCA proposed by anyone who is unable to get the support of the licensor,” he said.

By the date of his report, Heesh had requested the details of the IP transaction from Song, but said he was yet to receive that information and was unable to say whether the deal resulted in any breaches of law.

Heesh said it was unlikely that an external party looking to buy the business from administration would have been able to secure the support of Kuen.

Compounding problems for any potential buyer, voluntary administration is treated as an instance of default under the trademark agreement between Kuen and Doutmost, which means the license can be cancelled at any time, without notice.

Song’s DOCA proposal said that the license agreement between Kuen and Doutmost would not be offered under any proposal other than Song’s.

If any other circumstances other than Song’s DOCA prevail then the trademark agreement would be terminated and Oliver Brown’s intellectual property would only remain with Kuen, the proposal said.

The syndicate of franchisees have claimed that Song did not disclose “significant aspects” of Oliver Brown’s trademark license terms with the franchisee network.

“It can be argued that the failure to disclosure [sic] such facts could render franchise agreements void,” the syndicate said in its DOCA proposal.

While the ATO’s garnishee notices have significantly impacted the business, franchisees Inside Retail spoke to said that the underlying health of the network is otherwise relatively robust, and that Song’s position has scared off potential interest.

If creditors appoint liquidators Song could face an investigation into the IP transaction, but if his DOCA proceeds then it is understood that such scrutiny may be foregone.

Song’s lawyer declined to comment on claims that the trademark arrangement had scared away potential interest in the business.

Not the first-time trademarks have changed hands before collapse

It is not the first-time stakeholders trading under the Oliver Brown trademarks have faced an uncertain future.

Oliver Brown has actually existed since 2010, around two years before Doutmost was formed.

The original incarnation of the business, Oliver Brown Pty. Ltd., was liquidated in August of 2012 after falling into voluntary administration in July of that year.

Less than a month before the original business appointed administrators an application was filed with IP Australia to transfer Oliver Brown’s intellectual property to Doutmost, which had been registered as an Australian company earlier in 2012.

Oliver Brown Pty. Ltd. sold its trademarks for $5000 to the business that would subsequently begin trading the Belgian chocolate cafe chain less than a  year later.

Song was not a director of Doutmost at the time, having purchased the business from Junghee Park two-years later in 2014, but he was the largest shareholder in Oliver Brown Pty. Ltd. when it was liquidated.

Song’s lawyer declined to comment on the reason why Oliver Brown Pty. Ltd.’s trademarks were sold to Doutmost in 2012,  or whether he was involved in making the decision.

Trademark sold “under market value”

While Song was not a director in Oliver Brown Pty. Ltd, he bought a 50 per cent stake in the business in July 2010 for $50, documents lodged with the corporate regulator show.

In 2012 Jirsch Sutherland, in their capacity as liquidators, remarked that Oliver Brown’s intellectual property appeared to have been sold “under market value” prior to the collapse of the business.

A spokesperson for Jirsch Sutherland said that it appeared at the time as though Doutmost was an unrelated third party to Oliver Brown.

“We identified in our reports to creditors that this was not sufficient consideration and that it was an uncommercial transaction,” the spokesperson said.

“We did not receive enough funds to pursue the uncommercial transaction. We did not even receive any remuneration as appointees.”

ASIC provided clearance to Jirsch Sutherland to finalise the liquidation in December of 2012.

Several franchisees told Inside Retail that Song had not disclosed the history of the Oliver Brown’s intellectual property.

“We’re only just finding out about all this now,” one franchisee said.

Song’s lawyer declined to comment when asked whether Song believed the trademark sale to Doutmost was not commercial, or whether it was his intention that the trademarks would continue to trade after Oliver Brown Pty. Ltd. was wound up.

“Personal guarantees” provided to creditors

Despite Song’s history, Heesh said that the majority of Doutmost’s landlord creditors, who all together are potentially owed just under $21 million, appear to be supportive of Song maintaining control of the business.

Heesh said that it appeared as though Song had provided “significant” guarantees to landlords and trade creditors, bringing his exposure to more than $21 million.

Inside Retail understands that Song guaranteed store leases with landlords himself and then undertook arrangements with franchisees where they would guarantee their own leases with him.

Under Song’s DOCA proposal the lease liabilities would remain on Doutmost’s books, with an intention that landlords would be paid off over the course of normal trading.

The support of landlords was said to have been of “critical significance” in assessing Song’s proposal.

Unknown investors come to the rescue

It remains likely, with the support of landlords, that Song’s DOCA proposal will be passed by creditors on 13 June.

Song has proposed the creation of a $1.2 million deed fund to pay back a range of creditors, while lease liabilities would remain on the books.

Under Song’s DOCA Heesh would oversee the business as a deed administrator and ensure it met its obligations to creditors, including the ATO – whose garnishee notices would persist.

But stakeholders still do not know the identity of those funding the majority of the debt slush fund.

While Song has committed to throwing in $200,000 himself and $200,000 from the company a further $800,000 is claimed to have been secured from unnamed “contributors”.

Heesh qualified his recommendation of Song’s DOCA on 1 June, saying that he reserved the right to withdraw his recommendations if he was not able to ascertain the capacity of these contributors to foot the bill.

Heesh declined to comment on whether he had ascertained the identity of Song’s contributors in the week leading up to the second creditors meeting.

While some franchisees remain concerned that Song cannot be trusted with the company’s books again, the director has informed administrators that new accounting systems have been implemented since 1 July 2017, and that moving forward the company will be able to meet its financial and bookkeeping obligations.

Franchisees Inside Retail spoke to said they will consider their options after the creditors meeting on 13 June if Song maintains control of the business, with spinning off into their own cafe ventures or pursuing legal action remaining possibilities.

Song’s lawyer declined to comment on the identity of Song’s backers or allegations that he did not inform franchisees adequately about the solvency position of Doutmost or its trademark arrangements.

Dean Blake contributed reporting to this story. Inside Retail is a sibling publication to Inside Franchise Business.