SurfStitch class actions put on hold, while litigation against Cameron continues

Heather McIlvaine

30th Aug 2017

Online surf and skate wear retailer SurfStitch went into voluntary administration last week, appointing administrators from FTI Consulting to restructure the non-operating companies, SurfStitch Group Limited and SurfStitch Holdings Pty Limited.

The move has effectively pushed the pause button on two class actions that were brought against the non-operating companies earlier this year, providing SurfStitch with “breathing space to focus on trading into the critical December peak period”, according to John Park, corporate finance and restructuring leader at FTI Consulting.

The operating brands – SurfStitch in Australia, Swell in the US and SurfDome in the UK – are not involved in the legal proceedings and are unaffected by the administration process. They will continue to trade as normal.

While it’s too early to say what form the restructure will take, some possibilities include the sale of various business units or a merger with another player. The restructure is expected to take three to four months, but administrators will provide a high-level update on their progress and strategy at a creditors meeting on 5 September.

Cameron still facing litigation

SurfStitch has been struggling to right the ship since May 2016, when former CEO Justin Cameron unexpectedly resigned. The online retailer went on to report a $155 million full-year loss in August 2016, wiping out more than $500 million in shareholder value and laying the foundation for the shareholder class actions.

In May 2017, Quinn Emanuel Urquhart & Sullivan filed the first class action against SurfStitch in the Supreme Court of Queensland based on the claim that the company breached its continuous disclosure obligations to shareholders. Gadens filed a similar class action against both SurfStitch and the company’s former CEO Justin Cameron in New South Wales in June.

While the legal proceedings against the company have been stayed, Gadens’ claim against Cameron is unaffected by the administration process and will continue.

“We always expected [administration] was not just on the cards but pretty likely. That’s one reason we sued Cameron,” Gadens’ Melbourne-based partner Glenn McGowan, QC, told IRW.

“We were always pessimistic about collecting money from the company because it was so poorly run…As one shareholder put it to me, ‘We were only ever in this for the insurance’,” he said.

It is common practice for companies to take out insurance on their directors and officers in case of financial fallout from poor decisions or actions. This is what McGowan is going after in the class action against Cameron.

According to McGowan, shareholders are unlikely to see a penny from the company, especially now that it has entered voluntary administration. Although administrators are meant to act in the best interest of creditors – which includes shareholders – McGowan believes they will be last on the list to recoup losses.

The next hearing in the class action against Cameron will take place in Sydney on Friday, when McGowan expects orders will be made for the filing of the defense.

“That will tell us the details of why they say Cameron is not liable,” he explained.

McGowan said he could not say at this time how large the final claim will be.

“It all depends on how loss is to be calculated. What’s more, we don’t know the full spread of members of the class in order to make that calculation, but it will be a large claim,” he said.

IRW asked Quinn Emanuel Urquhart & Sullivan for comment, but they had not replied at the time of this writing.

This story first appeared in issue 2155 of Inside Retail Weekly. To subscribe, click here.