The Australian Securities and Investments Commission (ASIC) is suing Noumi – formerly Freedom Foods Group – and its former CEO and managing director Rory Macleod and former CFO Campbell Nicholas for alleged disclosure failures and breaches of director and officer duties.
ASIC alleges Freedom Foods failed to disclose material information about the value of inventories in its financial reports for the full year ending 30 June 2019 and the half year ending 31 December 2019.
Freedom Foods made plant-based cereals, snacks, and beverages, including MilkLab, and had a specialty seafood business. The first public hint that the company was in trouble was a trading update to the ASX on 29 May 2020, when McLeod said the company was “reshaping” its commercial and organisational structures to reflect the company’s “new operational footprint and key products, channels and markets”. He warned the costs of restructuring and the write down of non-cash obsolete and discontinued stock provisions would be required in FY20, and that the write down would be approximately $25 million.
Macleod also announced he expected a provision of approximately $4 million would be needed in 2H FY20 in respect of “an export account”.
But it was the sudden exit of Nicholas on 23 June 2020 and McLeod going on leave the following day that pulled that loose thread and began to unravel the entire outfit. McLeod resigned on 29 June.
Then chair Perry Gunner, who called the early days of the near demise as “certainly not the company’s finest hour"”, said it was the $4 million bad debt mentioned by Macleod that triggered a more detailed review.
In fact, Macleod’s proposed $25 million write downs in May, swiftly blew out to more than $60 million by the end of June with the $4 million bad debt ballooning to $10 million.
ASIC deputy chair Sarah Court said directors and company officers are fundamentally responsible to ensure their business complies with the law.
“However, in this case ASIC alleges Freedom Foods’ former CEO and CFO misled investors, auditors and directors, and allowed their company to breach continuous disclosure laws by failing to disclose a significant write-down, leading to an uninformed market,” Court said.
There seemed little stopping Freedom Foods’ annus horribilis. It went into a trading halt that ultimately lasted nine months, and when trading resumed, shares fell more than 82 per cent to 53 cents. At close of trade today (27 Feb), its share price was 13.5 cents.
In October 2020, the US almond growers' group Blue Diamond Growers launched legal action, accusing Freedom Foods of fraud, and breaching its licence agreement. Noumi settled the case in January 2022, for US$35 million.
It sold its Freedom Foods snacks and cereals business to The Arnott’s Group for $20 million in December 2020, just as the first of two class actions was launched, this one by Slater & Gordon. The second was by Phi Finney McDonald in March 2021. The two combined into one action in January 2022.
The company renamed to noumi after selling the Freedom Foods business to Arnott’s.
Through all of this, the majority shareholder – Arrovest, the private investment arm of the Perich family – kept the company afloat, pumping $200 million into the business to reassure major lenders HSBC and NAB, and holding up its $256 million recapitalisation plan.
All told, the company uncovered significant issues regarding inventory management, its staff equity incentive plan and other accounting matters, including not recording $372 million capital expenses as capital expenses.
Its net debt increased to $275 million and was expected to be in the vicinity of $335 million by the time of recapitalisation.
The company recorded $590 million in write-downs; almost $175 million in losses for the year; restating several years’ results, including FY19 pivoting from an $11.6 million profit to a $145.8 million loss.
ASIC also alleges the company failed to disclose material information about its sales revenue, gross profit and profit after tax in its financial report for the half year ending 31 December 2019.
It alleges that Macleod and Nicholas were involved in Freedom Foods’ failures to disclose this information and that by allowing these failures, they breached their duties as a director and officer.
ASIC further alleges that Macleod gave false or misleading information to directors, auditors, and shareholders of Freedom Foods, as well as the ASX, by representing that the full year and half year reports were accurate.
Nicholas is also alleged to have provided false or misleading information to Freedom Foods’ auditors and directors.
In April 2022, Freedom Foods/noumi's aditor Deloitte Touche Tohmatsu told ASIC it has a conflict of interest with its client due to the class action proceedings being brought against it in relation to its role as the company’s auditor when it was operating as Freedom Foods Group.
Deloitte told ASIC it intends to plead a proportionate liability defence and identify noumi as a concurrent wrongdoer, and a defensive crossclaim against the company.
ASIC deputy chair Court said that combatting governance failures is a key priority for ASIC.
“When directors and officers fail in their obligations, as we allege in this case, they not only cause harm to investors by denying them the information they are entitled to, they also erode confidence in Australia’s financial markets.
“ASIC is continuing its focus on potential breaches of company officer and director duties, and we will continue to take court action seeking penalties and other sanctions in appropriate matters,” she said.
ASIC is seeking declarations of contravention, pecuniary penalties, disqualification orders and costs.
The date for the first case management hearing is yet to be scheduled by the Court.
