Sidelined JV partners weigh in on Smiles Inclusive board stoush

Written on the 11 April 2019 by Matt Ogg

Sidelined JV partners weigh in on Smiles Inclusive board stoush

Joint venture partners of struggling dental practice Smiles Inclusive (ASX: SIL) are hopeful the current board upheaval could pave the way for an "amicable solution" to a problem they allege has cost around $20 million in lost profit share.

Australian Aged Dental Care, which trades as Australian Mobile Dental Care, was one of 56 practices acquired by Smiles Inclusive in a joint venture in April last year when mobile clinics were brought under the brand Smiles OnSite.

The company's general counsel Cabral Douglas (pictured) says $2.8 million of the $7 million in proceeds from the sale were reinvested for growing the business, which was expected to benefit greatly from a Medicare scheme called the Child Dental Benefits Schedule (CDBS).

CDBS gives $1,000 worth of dental treatments over two years to children aged two to 17, and Douglas claims Smiles OnSite has consent forms for students in schools across New South Wales and Victoria.

"At the time of the acquisition in April last year, the company was treating 30,000 children a year with plans afoot to expand our operations of five mobile dental clinics," Douglas tells Business News Australia

But everything fell apart shortly after. The company was hit by fines of almost $200,000 in August for illegally X-raying children in New South Wales, and its directors and employees - including Douglas who was COO at the time - were fired in October.

Smiles Inclusive (also known as Totally Smiles) alleges the directors failed to disclose radiation court proceedings during the takeover, but Douglas refutes the claim and in court documents notes only two schools cancelled the service in the relevant period.

"It's important to note that at no time did Australian Aged Dental ever operate without an up-to-date Radiation Management License (for all 5 clinics) nor did we ever operate without up to date Radiation Compliance Certificates as required by law in each clinic," says Douglas.

"Since acquiring the business back in April, Totally Smiles had not even bothered to obtain a Radiation Management License, and operated for several months in violation of the relevant provisions of the Radiation Act 1990 which is a criminal offence.

"However, this is a matter for the EPA prosecutors to determine whether or not they choose to prosecute," he says clarifying that the company was prosecuted because even though its clinics were fully licensed, the person who pressed the X-ray button may not have been in the cases in question.

Douglas believes the EPA prosecution is the result of "outdated legislation" that doesn't take into account the practicalities of operating medical and dental services, whereby owners are not necessarily present in the location where services are being approved and provided.

Nonetheless, it is an issue that may have served as a pretext for the joint venture's downfall.

"What eventually happened was just after six months of listing on the ASX and entering into the joint venture, Totally Smiles shut down the dentistry business on the 26 October and retrenched all of the employees - this was all contrary to the intention of the parties when they entered into the agreement," says Douglas.

He alleges this was an "unsavoury opportunistic attempt" for Smiles Inclusive to seize control of the vans, as under the terms of the joint venture it had control of company but not its assets, which were leased.

"The clause of the lease agreement said if any of the key staff are fired with cause then we automatically have to transfer ownership of the mobile clinics to them," he says.

"We say not only were these dismissals unfair and without cause, but we will be pursuing damages in the Supreme Court for our 40 per cent profit share, which amounts to some $20 million over the lifetime of the least period which is five years, not to mention the value of the five dental clinics which have been parked and have not been in operation since October 26 of 2018."

In response, the company has lodged proceedings against Smiles Inclusive with the Fair Work Commission and the Supreme Court.

"We are the ones that instituted legal proceedings against Totally Smiles. Totally Smiles haven't instituted legal proceedings against us in any court, so we are the plaintiffs," he clarifies.

"We are the ones that are seeking damages, both under the lease agreement, under the business sale agreement and the employment contracts."

He claims Smiles Inclusive contacted Australian Aged Dental Care last week requesting consent for a 2.5 week delay to respond to allegations, in light of the turmoil surrounding the board.

Douglas points to recent claims from Smiles Inclusive that the company, under the leadership of Mike Timoney and David Herlihy, had fallen short of expectations.

"What I would add to that on behalf of our interests is also that it's below the expectation of the joint venture partners, the actual dental practitioners themselves," he says.

"We agree with the position of the board that Mike Timoney is not suitable to run the business. We agree with the board that Mike Timoney has never put forward a business plan to improve the performance of the business, and we agree that Mike Timoney should step down."

What transpires with the board is likely to be decided at an extraordinary general meeting (EGM) set to be held on 22 May. If Timoney and Herlihy are indeed kicked off the board, Douglas is optimistic about what a leadership team without "historical baggage" could mean for rebuilding the joint venture.  

"It could pave the way for more constructive dialogue to take place between us and the company so that we can resolve the issues in front of us in a more amicable manner that could possibly lead to us working together to turn the company around," he says.

"We believe the only way that you can turn the company around is to employ the mobile dental clinics that have unlimited potential because of the fact there's poor service offerings in rural and remote Australia, and also because of the fact because they're mobile you can send them anywhere that they need to be sent."

New Smiles Inclusive chairman David Usasz tells Business News Australia everything that happened with Smiles OnSite was effectively managed and run through Mike Timoney.

"When we've got to try to identify what actually happened we have to actually get his [Mike's] involvement, which is near impossible at the moment," says Usasz.

However, he is open to a reconciliation with joint venture partners at Australian Aged Dental Care to get the business back on track.

Mike Timoney was not available for comment.

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Author: Matt Ogg

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