Class action "the only hope" for Smiles Inclusive partners on the sidelines

Class action "the only hope" for Smiles Inclusive partners on the sidelines

Smiles Inclusive (ASX: SIL) joint venture partners (JVPs) have have raised concerns that they, their employees and shareholders could be left high and dry by the dental group's voluntary administration.

Before the embattled Gold Coast-headquartered company and its affiliate brand Totally Smiles entered administration last week, appointing Deloitte Restructuring Services to handle the process, a group of requisitioning shareholders were attempting to organise a board coup to turn their fortunes around.

Now those hopes have been dashed and aggrieved dentists are threatening a class action they believe is worth $80 million. 

These alleged amounts owing are worth around four times what SIL needs to pay National Australia Bank (ASX: NAB), which was at the centre of loan repayment negotiations to keep Smiles Inclusive afloat and ultimately spurred the voluntary administration decision.

Half-yearly accounts from the six months to December 2019, which are the most up-to-date figures Smiles has released, show JVPs were owed more than $13 million at the end of last year; a reduction of the $21 million put into the 2018 IPO, according to a spokesperson for the JVPs.

The spokesperson added a further $20 million was owed from guaranteed annual JVP payments.

The balance of the $80 million worth of claims relates to investments by other shareholders in the IPO, and does not include a further $20 million allegedly owed to landlords and another $2 million of leave entitlements for staff. 

However, the seed of doubt has been sown as to whether any of that money will be paid.

The spokesperson claims a Zoom meeting was held last Monday evening (9 November) between two Smiles executives, Deloitte and 13 JVPs, in which the administrators allegedly claimed they did not believe the partners' economic interest would be recognised as a creditor.

One of the well-known requisitioning shareholders, Dr Arthur Walsh, raised the alarm in a letter to Deloitte the next day and received the following written response:

"In relation to last night's meeng with the Joint Venture Participants, we noted that we were considering the precise nature of the Joint Venture Participant's creditor status (and did not say that the Joint Venture Participants are not creditors at all)," one of the administrators wrote to him.

"Indeed, we are comfortable that, to the extent that Joint Venture Participants can demonstrate that monies are owing under the Joint Venture Partner Agreements, they will be unsecured creditors of the relevant company."

Lawyers representing Deloitte then sent a letter to Walsh and another dissident partner Dr John Camacho, alleging their outspoken claims against the group and attempts to sway other JVPs could be in breach of their Facilities and Services Agreements (FASA) with Smiles Inclusive which they exited in April, urging them to cease this kind of conduct.

Late last month a senior figure from Smiles Inclusive shared legal documents from August making similar claims against Camacho over his FASA, also noting various aspects of the agreement including not being allowed to employ, engage or hire dentists, staff or contractors from the business or group within a two-year restraint period.

Camacho has told Business News Australia his lawyers have contacted Smiles' legal representatives, vigorously denying all their allegations.

In a press release this morning, another of the aggrieved JVPs Dr Philip Makepeace alleged the JVPs had been advised by the Queensland Health Authority that in the last 10 days it has referred a high-ranking Smiles executive to the Queensland Crime and Corruption Commission (CCC). 

"Directly related to this referral to CCC, ASIC yesterday confirmed to us in writing that 'ASIC will closely monitor the administration' of Smiles," he said, omitting the name of the executive concerned. It is unclear whether this relates to current executives or one of the raft of executives who have departed the company over the past year.

"I speak for a great many Smiles JVPs. We will not accept a reincarnation of the nightmare. We are done with advisors lining their pockets at our expense and conduct resulting in referral to [the] CCC."

There are also allegations from the JVPs of loan fraud at Smiles in relation to borrowings from JVP Dr Henry Chen, which were relayed by Walsh to the administrators.

Camacho reiterated the allegation about the Queensland corruption watchdog, lamenting a "complete wipe-out" for shareholders and unsecured creditors.

"A class action is the only hope now. $80 million is worth fighting for," he said.

"Smiles directors & officers, past and present, along with many professional advisors that have milked Smiles for fees, are directly responsible for a monumental destruction in value in such a short period of time. We intend to go after those personally responsible.

"Deloitte is meant to act for all creditors including staff and the ATO, not just the NAB and Smiles Board."

Walsh said the JVPs intended to get full access to Smiles' books, correspondence, emails and finances in order to support a class action, which he claims would benefit shareholders and all creditors.

"We will not be denied by Deloitte, the current Administrator appointed by Smiles Board last week," he said.

In response to today's press release from the dentists, Deloitte emphasised that if JVPs had a claim against the group based on circumstances that occurred prior to its appointment, then they are creditors.

"Our duties as administrators are to act in the best interests of the creditors of the Group as a whole and we have complied, and will continue to comply, with all of the obligations and duties imposed upon us," Deloitte Restructuring Services partner Luci Palaghia said.

"We reject any allegation that calls into question our impartiality and independence."

Administration outcome puts dentist's lifeblood in the balance

Bryan Fleming, a Totally Smiles JVP based in Dalyellup, WA, no longer earns a living from the practice that entered a deal with the Gold Coast-based corporate.

The announcement the company had entered voluntary administration was a relief for him, but now Fleming is left wondering whether Smiles will be liquidated and he can get the practice back, or transferred in which case the FASA will prevent him from seeing patients he has built relationships with over the course of years. 

He said no dentists had worked at the Dalyellup practice for around five months, and whilst he believed the JVP relationship was still valid he was no longer an employee of Totally Smiles.

"They failed to pay me as an employee in the first week of April, and that was basically the very beginning of COVID but they were under severe financial pressure at that stage," Fleming told Business News Australia

"What's most important to me is that as the lead practitioner I'm still the front of the practice. The patient base regards me as still the practice - they don't really see it as Totally Smiles.

"It's my reputation as such that's taking a dive, and going to another corporate issue would not assist that at all."

Fleming said his financial outlook depended on whether he could get his practice or not.

"With the goodwill of my practice, unless I can go back as my own entity I don't think my practice is going to be worth anything much again," he said.

"That's why we need a positive solution. If Totally Smiles is liquidated, then the aspect of the FASA is no longer applicable."


Smiles Inclusive founder watched $10m 'evaporate in his hands' before selling up


There has been a silver lining for Fleming in that he has another practice 54km away, which lies outside the 50km exclusion area set in the FASA, but that is little consolation for his personal brand or his patients.

"The disappointing part, specifically in my situation, is many of my patients have been grossly disadvantaged. I have got a lot of orthodontic treatment that has been compromised dramatically," he said.

"It has been a very poor situation, to the extent that Totally Smiles have really done nothing to address that. All they've said is 'you go back and work again', which I don't believe is the answer.

"I think the answer is that it was a mistake, the money has been lost. I think it's obvious the entire concept of a JVP approach is a total failure. I think we should go back to the way we were."

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