Dick Smith hit with new lawsuit

Dick Smith Electronics store on Karangahape Rd, Auckland. Photo / Nick Reed

The insurers of the former directors of collapsed electronics retailer Dick Smith could be hit with a hefty bill from disgruntled shareholders if a class-action lawsuit gets the go-ahead and proves successful.

Just under 1000 former shareholders of the company, who individually lost anywhere from $500 (NZ$524) to nearly A$2m when the company went under in January 2016, have signed up for the class action initiated by Bannister Law and underwritten by international litigation funder Vannin Capital.

Kris Pierce, who runs a small horticulture business in Coffs Harbour, lost about A$8000 in Dick Smith shares. Mr Pierce says he's only a casual investor but does his due diligence and studies the markets before making a share purchase.

"I wanted to support an Australian company," he said. "It just seemed like a strong, solid retail company - there was no detail to say otherwise."

Mr Pierce said despite the share price dips, nothing in the company's financials suggested it was the beginning of the end. "For things to go so bad, so quickly after a positive financial report, something was clearly wrong. There were certainly no external factors that explain that rapid collapse."

Bannister Law has applied for leave with the Supreme Court of NSW to file the class action, with a hearing scheduled for later this month. The law firm requires the court's permission as the company in liquidation.

The claim alleges Dick Smith breached its continuous disclosure obligations under the Corporations Act. It is alleged that during 2015, the company made decisions about what stock to purchase primarily based on the rebates that could be obtained from suppliers, rather than what customers wanted to buy.

This led to an increase in bad stock that could not be sold and an increase in debt. In November 2015, the company was forced to announce a A$60m writedown of bad stock, leading to a share price rout.

The suit alleges Dick Smith was aware of the accumulation of bad stock earlier in 2015 and failed to advise the market, in breach of its legal obligations. It is also alleged that the accounting treatment of the rebates - reporting them under profit before the stock to which they were attached had been sold - was not in accordance with Australian Accounting Standards.

The shareholders allege the effect of the accounting treatment was to artificially inflate Dick Smith's profits as reported in its 2015 financial statements, in contravention of the Corporations Act. They allege the share price was inflated as a result of the breaches, leading to loss and damage.

Bannister Law's Diane Chapman was also critical of the company's decision to pay a dividend in late 2015. "The most horrible thing is [these shareholders] actually lost money in the period between August 2015 when the annual report came out, and January 2016 when the company went into receivership," she said.

"Because the share price was going down, they thought it was a bargain. The company was such a good brand, and it did pay a dividend, which would indicate to more sophisticated investors that the company was in good health.

"In October when they had their consultants do the stock audit, they did have to announce at the time there would be a writedown of inventory. We're going to allege they had to have had some knowledge [of the situation], and to pay a dividend in those circumstances was really not the best indication for the market."

With the company in liquidation, Ms Chapman said any money from a successful outcome would come from the insurance companies of the directors and officers.

"We're actually suing the company via the directors' and officers' insurance policies," she said. "The directors and officers have insurance policies which cover them for negligent acts. We believe that the information that was provided to the market and the way the rebates fell within the company reporting is sufficient to bring a claim."

Earlier this year, receivers Ferrier Hodgson took separate action in the NSW Supreme Court against eight former Dick Smith executives and directors - former chief executive Nick Abboud, chief financial officer Michael Potts, and directors Bill Wavish, Phil Cave, Rob Murray, Jamie Tomlinson, Robert Ishak and Lorna Raine.

The executives and directors have been accused of breaching their duty to exercise reasonable care ahead of the company's financial collapse.

But the law firm representing Mr Murray, Mr Tomlinson, Ms Raine and Mr Ishak said in a statement that the four non-executive directors would vigorously defend the receivers' allegations that they failed to put in place adequate systems to manage supplier rebates and inventory.

It is understood the other executives and directors will also defend the matter.