SurfStitch non-executive director Abigail Cheadle yesterday sent a letter to shareholders, outlining an ‘enhanced’ proposal for a deed of company arrangement (DOCA), urging them to appoint her as their proxy ahead of a creditors’ meeting on 4 April that will decide the future of the collapsed business.

The letter comes a week after administrators from FTI Consulting recommended that creditors approve a rival DOCA from multi-channel retailer EziBuy to acquire Surfstitch over a previous offer from Cheadle, which had the backing of general manager Justin Hillberg and co-founder Lex Pederson.

Cheadle’s new proposal contains a few key changes. Class action creditors now receive cash dividends in an estimated aggregate amount of between $3.4 and $4.3 million, which is in line with EziBuy’s offer. They will also be issued shares in SurfStitch Pty Ltd, rather than SurfStitch Group Limited.

This would resolve a key issue administrators had with Cheadle’s previous proposal, since it depended on the ASX waiving its requirement for shareholder approval to issue shares to class action creditors. By issuing shares in the subsidiary rather than the listed company, that approval is no longer be necessary.

“I’m not a lawyer but it’s my understanding that there would not be a problem with us issuing shares in the subsidiary. There’s no prohibition against that,” Cheadle told Inside Retail on Tuesday.

The new proposal also includes higher estimated returns to creditors based on a different valuation of the company, which Cheadle said better reflects the trading potential of SurfStitch Pty Ltd.

“When [the administrators] looked at the valuation on our offer, they only looked at trading figures whilst [SurfStitch] has been under administration, not when it was previously profitable, nor the top-line revenue of SurfStitch Pty Ltd, which has been up around $80 million, nor comparable listed companies that have a similar top-line revenue,” Cheadle said.

When asked whether shareholders could really expect SurfStitch to bounce back to its pre-administration valuation, Cheadle pointed out that many of the original group’s non-core businesses have been sold off.

“I’m talking about restructuring SurfStitch Australia, which is the main platform. The administrators said the company was solvent when it went into administration. We’re recapitalising with $4 million [from private equity company, Greenwich Capital] and my first step will be to get back into relationships with suppliers,” she said.

Creditors will have an opportunity to decide for themselves which path forward is most likely to deliver a return. But while Cheadle said the shareholder response to her letter has been “favourable” thus far, at least one of the two law firms bringing a class action against SurfStitch remains unconvinced.

“We have looked at it but still prefer the EziBuy proposal. We think the revised Cheadle [proposal] is tinkering around the edges,” said Glenn McGowan, partner and chief counsel at Gadens, which is representing shareholders in a class action against SurfStitch.

Cheadle said it would be helpful to have the support of the law firms representing class action creditors, but said ultimately it’s up to the shareholders to decide.

“I think our proposal has always had a couple fundamental goals – that creditors get 100 cents a dollar, that as much of the company as possible gets returned back to shareholders and that they have a recapitalised revitalised board. Those are still the same today as they were when the administrators looked at [the offer] last week,” she said.

A spokesperson from FTI Consulting said the administrators are reviewing the letter closely and will update creditors with their opinions in due course.

“As with the previous communication issued by this party to shareholders in January 2018, the circular was issued without the administrators’ knowledge and was not authorised by the administrators or the companies,” the spokesperson said.

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