Creditors of a collapsed gym franchise have been left fuming after learning they will only receive one cent for every dollar they are owed.
News.com.au previously reported that mixed martial arts gym chain UFC Gym Australia had gone into administration after becoming embroiled in a messy $5.8 million court case with three disgruntled franchisee owners.
Things have taken a new turn as several creditors are battling to replace the administrator and are now exploring their legal options as they are unhappy with the “pathetic” amount of money they will recover.
The revelations emerged at a creditor’s meeting at the end of last month but the minutes were only made available to attendees this Thursday.
According to a meeting transcript obtained by news.com.au, creditors voted on a deed of company arrangement (DOCA) proposal, which is where the directors offer a payment to satisfy creditors and then take back control of the company rather than placing the business into liquidation.
The approved DOCA was proposed by a related entity called Train Different Pty Ltd and there is a total of 62 creditors cumulatively owed $15.6 million.
Karim Girgis, the owner of UFC Balcatta in Perth and one of the three companies that took the gym chain to court and won – told news.com.au the small 1.06c return was “pathetic”.
UFC Gym Australia owes Mr Girgis’ company $1.236 million, according to proof of debt documents accepted by the administrator, which means he will only get back roughly $13,000.
In May, Justice Tom Thawley from the Federal Court of Australia ruled in favour of the three disgruntled franchisees — Balcatta in Perth, and Castle Hill and Blacktown in Sydney — after a four-year legal battle against the master franchise holder of UFC Gym Australia and New Zealand.
He ordered Ultimate Franchising Group Pty Ltd and Ultimate Franchising Group Properties, the parent companies of UFC Gym Australia, to pay $5.8 million to the franchisees, finding that the company and its directors had “engaged in misleading and deceptive conduct” during the process of selling said franchises to them.
One of Ultimate Franchising Group’s directors, Mr Husseini, is in the process of trying to appeal this.
“The administrators considered that if the group were to execute a DOCA, it would see a return of 1.06c/$ for participating unsecured creditors and potentially an additional $200,000 return to the litigant franchisees,” the meeting transcript read.
“This is estimated to be greater than the projected liquidation scenario which is estimated to be a nil return.”
However, the additional $200,000 will only be paid out to the “litigant franchisees” if UFC Gym Australia is able to generate a net profit of at least 15 per cent within the first year of its operations. Otherwise, they won’t receive anything extra.
The franchisees also must sign a non-disparagement agreement.
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Indeed, this is what 28 creditors voted for in the meeting.
One of the appointed administrators, Rajiv Goyal, cast the deciding vote in favour of the DOCA.
Mr Goyal defended his decision to vote in favour of the DOCA.
“Besides the return, it’s about keeping the business going,” he told news.com.au.
“If we liquidated the company it would have impacted all the franchisees.”
The control of UFC Gym Australia has now reverted back to its original directors. The administrator is no longer in control, and is instead acting as the deed administrator to ensure the DOCA is carried out as proposed.
The three franchisees cumulatively spent a total of $850,000 on legal fees to win their case and have taken umbrage at the outcome of the creditor’s meeting which means they will only make back around one per cent of their losses.
A new administrator was proposed to replace Mr Goyal at the meeting but this motion ultimately did not pass through.
“Given these issues, we are considering legal avenues and are committed to ensuring justice is served,” Mr Girgis said.
He has indicated he has engaged lawyers to dispute the DOCA in court.
In the federal court proceedings, the Balcatta gym was awarded total damages of $1.7 million while the Blacktown one’s total payout came to $1.9 million.
The Castle Hill gym was granted $2 million in damages.
At the recent creditor meeting, their proof of debts were downgraded slightly.
alex.turner-cohen@news.com.au