Kleins collapse turns nasty

The administrator of collapsed jeweller Kleins will investigate breaches of the Corporations Act as accusations grow that the company was involved in misleading and deceptive conduct.

Stephen Giles, partner at law firm Deacons, was working with a large group of franchisees and also trying to introduce potential buyers to the administrators to get the business sold. “We tried and we almost pulled a rabbit out of the hat,” he says.

Giles wants further investigation of Kleins’ management. “I would expect that the franchisees will instruct me to make a complaint to the ACCC,” he says.

Giles is particularly concerned by reports he has received of franchises being sold “fairly recently” when it was clear Kleins was in trouble. “It’s difficult to understand how there was not misleading and deceptive conduct in relation to those transactions,” Giles says.

Frank Zumbo, an associate professor at the University of New South Wales who has studied Australia’s franchising sector closely, has been in contact with several Kleins franchisees in recent weeks. He says he has heard allegations of breaches of the franchise code, bullying, and mismanagement by the franchisor that he expects to investigated by the ACCC.

Administrator James Stewart of Ferrier Hodgson says he will be investigating Kleins for possible Corporations Act breaches, but it is too early to say what he will find.

Kleins owner Glen Campbell could not be contacted.

Stewart announced yesterday that Kleins would close after the last potential bidder for the chain pulled out late yesterday morning. Stewart says 36 expressions of interest and eight bids were received for the chain since it was placed in administration in early May.

“It was always going to be difficult to sell. None of the bidders could get comfortable that going forward, this business would meet their expectations and allow them to manage their risk,” Stewart says.

“Most of all, they had to spend a fair bit of money to reposition the business and inject some working capital that would make it viable in the future.”

Kleins’ 35 company-owned stores and 130 franchised stores in Australia will start a three-week closing down sale this weekend, with the business expected to be liquidated in about five weeks. It is expected that 100 Kleins employees will be made redundant.

The business has debts of around $25 million, with $15 million owed to secured creditors. Stewart says there may be some sales of individual stores in the next few months, but it is highly unlikely unsecured creditors will receive anything.

Franchisees will be given 14 days notice of the intention of the administrator to terminate their franchise.

Now that Kleins has collapsed, franchisees want answers to what went wrong.

Stewart concedes that the Kleins episode has exposed weaknesses in the way franchises operate. “I think that the collapse of Kleins may be a mini-watershed for the franchise industry.”

He particularly points to the franchise agreement at Kleins, which meant franchisees were unable to extricate themselves even when it became obvious that Kleins was falling behind its competition (such as rival jewellery chain Diva) and heading for trouble.

“They didn’t have the ability to walk away if the franchisor doesn’t perform. They are reliant on the franchisor to perform to the specifics of the franchise agreement and also to keep the business model relevant.”

Zumbo says the Kleins collapse will put pressure on the Federal Government to adopt the recommendations of a recent South Australian Parliamentary inquiry into the franchsie sector, particularly disclosure laws.

Giles, who is also a director of the Franchise Council of Australia, believes the current laws are adequate but says companies or individuals need to be fully prosecuted. “The laws are there. If someone has breached the law, they need to feel the full force of the laws and I am confident that the ACCC will act.”

The ACCC would not comment on whether it was investigating, but it is believed it has been approached over the Kleins collapse.

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