1. MARCH 2015 || AUSTRALIAN INSOLVENCY JOURNAL 11
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PIE FACE
CASE STUDY
Pie Face Deed Administrator, Sule Arnautovic of Jirsch Sutherland,
discusses how the Pie Face Group came close to going under
before a foreign distressed lender extended a lifeline.
L
ess than six weeks after signing
off on the Deed of Company
Arrangement for the Pie Face
manufacturing and franchise group,
a majority of shareholders expressed
their dissatisfaction with one key
detail of the DoCA.
On 12 February 2015, at an
extraordinary meeting of the
company’s shareholders, Wayne
Homschek, Pie Face’s co-founder and
chief visionary was forced off the board
of directors.
Perhaps it’s fair enough. After
raising up to $40 million since founding
Pie Face in 2003, a radically diminished
Pie Face emerged from voluntary
administration with Homschek still on
the board on 30 December 2014.
Under the terms of the Pie
Face DoCA unsecured creditors
will get no more than 19 cents in
the dollar. Total creditor claims
(excluding inter-company claims)
stand at approximately $50 million.
Homschek’s continuing presence on
the board no doubt irked the many
facing serious losses.
Further undermining his
justifications for remaining on the
board were the director penalty notices
served on him by the Australian Tax
Office and Office of State Revenue,
which are also creditors. That’s quite a
Pty Ltd on 21 November 2014. Pie Face
Holdings owns 100 percent of Pie Face
Franchising and Pie Face Pty Ltd.
Their second report to creditors
revealed that Pie Face Holdings’ fund
raising activities were what was keeping
the operating companies afloat. And Pie
Face Franchising and Pie Face Pty Ltd
were failing to generate the returns they
and Pie Face Holdings needed to service
their obligations.
Pie Face Franchising issued the
franchise agreements. Pie Face Pty Ltd
made the pies and sausage rolls and
supplied the other goods for sale both
through Pie Face’s 24 company-owned
outlets and the 46 franchisee-operated
stores. And the latter entity was losing
heavily.
‘Accumulated losses of the Group
arise from the accumulated losses
of Pie Face Pty Ltd, which have
substantially increased between
2009 and 2012,’ the VAs said in
their second report to creditors on
18 December 2014.
‘It is also evident that the capital
raised through Pie Face Holdings had
been significantly exhausted through
Pie Face Pty Ltd. This is apparent
through the loan account from Pie Face
Holdings to Pie Face Pty Ltd totalling
approximately $33 million as at
November 2014.’
burden for someone lumbered, fairly or
otherwise, with primary responsibility
for Pie Face’s spectacular implosion in
the latter half of last year.
Publicly, Pie Face’s problems
appeared to snowball following
reports that American casino tycoon
Steve Wynne had filed a lawsuit in a
Delaware court on 3 October 2014
seeking $US20 million in damages
from Pie Face Holdings.
As well as being the parent company
of Pie Face Australia, Pie Face
Holdings is Wynne’s partner in US
company Pie Face Holdings Inc. And
while this wasn’t the first dispute to hit
Homschek’s embryonic US operations,
it was by far the severest vote of no
confidence.
PIE FACE’S FINANCES LAID BARE
Behind the scenes though, Pie Face’s
accounts had for several years been
showing the unpalatable truth;
significant losses and mounting costs.
But its parlous financial position
was openly revealed to investors and
suppliers only after Sule Arnautovic
and Rod Sutherland of Jirsch
Sutherland were appointed voluntary
administrators.
The Jirsch Sutherland partners
took charge of Pie Face Holdings,
Pie Face Franchising and Pie Face

2. 12 AUSTRALIAN INSOLVENCY JOURNAL || MARCH 2015
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HOW THE SECURED CREDITOR
UNCOVERED CRITICAL FUNDS
While Wynne’s $US20 million lawsuit
looked on the surface to have been
the catalytic event leading to the
appointment of VAs, the truth is that
Pie Face’s worsening financial position
and its funding arrangements with
secured creditor Macquarie Bank
meant an insolvent restructure was
inevitable.
The appointment of the VAs in fact
followed an attempt by the board of
directors to reach an in-principle
refinance of Macquarie Bank, which
would have been conditional on a DoCA
being later executed.
As Sutherland and Arnautovic’s
reports show, Pie Face Holdings was
indebted to its secured lender for in
excess of $4 million. The loan – agreed
to in August 2011 – was due to be
repaid with interest by February 2014.
Realising at some point last year
he would have to bare Pie Face’s
soul to Macquarie if he was to avert
insolvency, Homschek assembled a
team of advisors:
• McGrathNicol to prepare a report
on whether a solvent or insolvent
restructure could save the Group
• Arnautovic and Sutherland to advise
on insolvency and restructuring
issues
• lawyer Tim Unsworth
• Main Street Capital, a specialist
finance broker and adviser, and
• Wellington Shields, a US-based
finance broker and adviser, tasked
with finding an alternate funder to
replace Macquarie.
Homschek wanted Macquarie to
agree to a restructure via a DoCA. The
promise was that if the lender agreed
it would be paid out after the DoCA was
accepted.
Homschek was able to make
the offer because by this time he
had identified a potential source
of alternate financing. He had
$US4 million sitting in an Australian
lawyer’s trust account, ready to
be released if Macquarie agreed.
But the secured lender wouldn’t be
rushed. It appointed Ferrier Hodgson
to undertake a detailed financial
investigation. Arnautovic recalls what
happened next.
‘There was $3.5 million dollars in a
bank account in the holding company
[Pie Face Holdings] that would provide
all the working capital to see the group
through the VA,’ Arnautovic recalls.
(The $3.5 million was essentially
payment in respect of licensing
arrangements Pie Face had with
parties in Japan.)
‘Macquarie then appointed Ferrier
Hodgson’s Steve Sherman and Peter
Gothard as receivers over the bank
account,’ he said.
SUTHERLAND AND ARNAUTOVIC
APPOINTED AS VAS BUT RECEIVERS
HOLD THE FUNDS
The appointment of receivers on
18 November 2014 forced Homschek’s
hand. Three days later Arnautovic and
Sutherland were installed as VAs.
‘We were absolutely up against it,’
Arnautovic admitted. ‘We were trying
to enter the job with at least $1 million
in starting funds to be able to pay the
trading costs because you can imagine
there were some serious trading
obligations in this matter’, he said.
‘The directors managed to put
together about $400,000 as an upfront
costs indemnity so we entered the VA
underfunded. Ordinarily we would’ve
loved to have advertised the business
and gone to the market a lot sooner
than we did, but for the first few
weeks we weren’t sure on a day to day
proposition whether we were going to
be shutting the thing down or not.’
The way Arnautovic tells it,
Macquarie’s refusal to buy into the
proposed restructure/refinance
(subject to a DoCA being executed)
fast tracked the involvement of the
alternative financier waiting in the
wings, US distressed lender TCA
Global.
‘The talks with TCA became less
about refinancing Macquarie after
the DoCA and more about refinancing
Macquarie first and taking the risk
themselves to keep the business
trading,’ Arnautovic said.
But while scenarios were swapped
between hemispheres, Arnautovic
and Sutherland and their team were
under pressure, trying to operate as a
going concern a group of companies
losing almost twice as much a week
as it earned. They needed a decision
fast.
‘It took until the 18th of December
to get any comforting flow of funds,’
Arnautovic said. ‘Macquarie and their
lawyers were very cautious. They
didn’t want to touch the cash at bank
in holdings even though they had
their foot on it because they were
concerned about priority employee
entitlements in the group.’
TCA GAMBLES ON A DOCA
The VAs advised Macquarie that there
were no employees in the holding
company, and then the talks with TCA
suddenly bore fruit.
‘The funder [TCA] paid out
Macquarie approximately
$4.6 million, the receivers took their
foot off the cash, the cash then went
partly to us and the balance to the
incoming funder. This flow of funds
was sufficient for us to keep the thing
open,’ Arnautovic said.
‘About a week to 10 days into it
we really had to talk to management
and ask what a restructured Pie
Face would look like and what had
to be pruned. In the end we let go
about 150 staff and closed about
20 company-owned stores.’
At the time of the VA’s appointment
Pie Face had approximately 400 staff,
many of them part-time and casuals
working in the company-owned
stores and at its head office and
manufacturing plant in leased
premises at Rosehill.
Arnautovic said it was tough but
necessary and the trickle of cash at
bank funds from the TCA refinance
gave the VAs time to consider whether
a sale of Pie Face as a going concern
was an option for creditors.

3. MARCH 2015 || AUSTRALIAN INSOLVENCY JOURNAL 13
‘The tricky thing with a sale
was working out how to get all
these franchise agreements, lease
agreements and employee issues
worked out in the statutory time frame,
particularly given the uncertainty still
applying to funding arrangements.
‘It became very obvious very quickly
that a sale was not a live option. People
might buy some equipment, or take
over some leases. But there wasn’t
going to be a global solution that
worked for creditors generally, and
in particular the secured creditors
of the Group being TCA Global and
convertible noteholders [owed some
$7.5 million].
‘So we basically dovetailed the
refinance out of Macquarie with TCA
into the initial DoCA contributions
to save the thing, and TCA obviously
wanted some new directors in place,
which is always tricky,’ Arnautovic
said.
‘TCA advanced a couple of million
US dollars to get the thing out of a
pickle and they have now advanced
another $US2 million to keep it
trading post-DoCA.
‘There are some seriously high-net
worth investors in the secured
convertible note ranks and they really
need to get some more funds into the
group to get to where they need to get
to,’ Arnautovic said.
The new board includes
representatives of TCA and various
convertible note holders. Pie Face
has raised more than $30 million
from high-net worth Australians
including the wealthy Darling family’s
Alfred Street Nominees, retailer
Brett Blundy, Rothschild Australia
chairman Trevor Rowe, and Fat
Prophets founder Angus Geddes. As
part of the DoCA, Pie Face’s directors
will also pursue a $US10 million
capital raising underwritten by
Wellington Shields.
But having endured a white-
knuckle ride as VA and now in his
role as a co-Deed Administrator,
Arnautovic isn’t letting Pie Face’s
reprieve obscure the challenges it
faces.
‘The problem with funding Pie Face
is there are no significant tangible
assets to secure your money against.
There’s no real estate, equipment and
fitouts are not worth much in a shut-
down, and most of the directors didn’t
want to provide personal guarantees,’
he said.
‘I was very surprised the TCA deal
happened ... but it got done with a
hell of lot of effort by all involved. The
real challenging aspect of it was the
trading risk and exposure that we put
ourselves under by believing we could
save it.
‘There were certainly some tough
conversations on the way through
the VA between Rod Sutherland and I
about what sort of tolerance we would
take risk to because there were big
numbers accumulating that we were
personally on the hook for, with no
really obvious parachute.’
Pie face let go about 150 staff and closed around 20 company-owned stores

4. 14 AUSTRALIAN INSOLVENCY JOURNAL || MARCH 2015
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ARITA’S PROPOSED
INDEPENDENT INSOLVENCY
AND BANKRUPTCY TRIBUNAL
Plans to implement an independent tribunal to deal with conduct
matters and provide independent dispute resolution services.
NARELLE FERRIER
Technical Director,
ARITA
T
wo of ARITA’s key objectives are to maintain world
class ethical and professional standards and promote
the ideals of the profession to the public at large.
This often presents a challenge for ARITA, with the
need to both be an advocate for our membership body and,
occasionally, investigate and discipline individual members.
From a community perspective, this duality is especially
unsatisfactory; it can create the perception of a lack of
independence of our otherwise very robust approach to
professional conduct.
The ARITA 2017 Strategic Plan (available on our website)
outlines the Association’s commitment to upholding the
highest professional standards, including the requirement
that, in some instances, our members meet higher
standards than those imposed by the regulators and
courts.
The ARITA Code of Professional Practice (the Code),
now in its third iteration, has built a reputation for leading
professional standards. It has achieved wide recognition
and acclaim and is a key differentiator in the market: ARITA
members hold themselves to a higher level of account by
taking on Professional Membership.
Internally, complaints and concerns1
are managed
through a rigorous process with oversight by the ARITA
Insolvency Specialists Team. The Professional Conduct
Committee, drawn from ARITA members, deliberates on
significant matters.
ARITA expects that our members would welcome and
support a robust investigation process which aims to not
only identify and correct areas of concern, but also provide
for the ongoing education of our members and profession.
The majority of our members subject to member
discipline inquiry are generally receptive to the process.
However, it invariably displeases some practitioners (who
often regard it as harsh and believe ARITA should represent
them in complaints as opposed to questioning their
conduct) and some complainants (who see it as lacking any
transparency and independence).
A further impetus for improving our approach is a
growing public debate in political circles around the need
for regulation to be on a user-pays basis. Recently, ASIC
claimed that the regulation of insolvency practitioners cost
ASIC some $11 million annually.2
Although ARITA takes
issue with this claim, were this figure to be accepted and full
costs passed on, there would be a significant imposition on
the profession that would have major impacts on the viability
of some practices.
With this in mind, ARITA has been working on a new
member conduct framework that would see ARITA
retain proper governance over complaints and concerns,
preserve the leadership of our Code and deliver on issues of
independence.
AN IMPROVED FRAMEWORK
The improved framework embraces the processes already
well refined in the Code, but adds an Independent Insolvency
and Bankruptcy Tribunal, so that matters can be reviewed
with a higher degree of independence.
1 Concerns are similar to complaints, but arise from information available to ARITA about the professional conduct of a member other than by way of a complaint e.g. recorded
judgments, announcements of action taken by a regulator, media articles or general feedback from external parties, including other members. 2 Senate inquiry into the
performance of the Australian Securities and Investments Commission, Submission 45 – Supplementary Submission by ASIC, Supplementary submission on a better funding
model for ASIC, May 2014.