Federal Court rules against SMSF admin firm in recent dispute
The Federal Court has granted an application filed by a business management consultant which would allow it to appoint a receiver over the assets of an SMSF administration and investment firm.
The case of Squirrel Limited v Cadmon Advisory Pty Ltd involved two interlocutory applications, the first application by Cadmon Advisory Pty Ltd to be released from an undertaking it gave to the court on 15 April 2019, and a second application brought by SMSF administration and investment services provider Squirrel Limited.
The court documents explained that Squirrel Limited is a public unlisted company that developed cloud-based SMSF administration software and services through its wholly owned subsidiary, Squirrel Superannuation Services Pty Ltd.
The software allows individuals to establish and manage their SMSF virtually by consolidating the services of an accountant, lawyer, financial adviser and auditor into one platform.
Cadmon provides corporate advisory services and capital to companies that are either listed or preparing to list on the ASX.
On 9 April 2018, Squirrel executed a mandate letter appointing Cadmon to act as the sole lead manager of a private capital raising by way of the issue of convertible notes in two tranches totaling $4 million, which would be followed by an initial public offering (IPO) at a later date.
By 3 May 2018, Cadmon had raised the first tranche of the pre-IPO capital raising in an amount of $2 million through the issue by Squirrel of convertible notes to clients of Cadmon.
On 11 May 2018, Squirrel executed a further mandate letter appointing Cadmon to act as the sole lead manager of the proposed IPO to raise $10 million through an offer of ordinary shares to the public and the listing of the shares on the ASX by the end of 2018.
By 28 June 2018, Cadmon had raised the second tranche of the pre-IPO capital raising in an amount of $2 million through the issue by Squirrel of convertible notes to clients of Cadmon.
In early August 2018, a dispute arose between the parties relating to the pre-IPO mandate and the IPO mandate.
On 19 October 2018, Squirrel and Cadmon entered into the deed of settlement to settle the dispute. Pursuant to that deed, Squirrel agreed to make offers to the holders of the convertible notes to redeem the notes by paying $1.05 per note.
In accordance with the deed of settlement, Squirrel made the redemption offers to the convertible noteholders, all of which were accepted. Squirrel thereby became obligated to redeem the convertible notes by 1 January 2019.
According to the court documents, Squirrel defaulted on its obligation to redeem the convertible notes by 1 January 2019. Following the default, the parties negotiated the deed of variation, which was entered into on 21 January 2019.
Pursuant to the deed of variation, the due date for payment to the convertible noteholders was extended to 31 March 2019. In consideration for that extension, Squirrel granted various forms of security in favour of Cadmon which were to be held by Cadmon on trust for the noteholders. Under the deed of variation, Cadmon had the right to appoint a receiver over the assets of Squirrel in the event of default.
Squirrel defaulted on its obligation to redeem the convertible notes by 31 March 2019.
On 12 April 2019, following the ex parte hearing on 11 April 2019, Squirrel filed an originating application seeking interlocutory and final relief restraining Cadmon from enforcing the rights and powers granted to it under the deed of variation, including in particular the right to appoint a receiver.
When the matter returned to court on 15 April 2019, there was no contested hearing, and orders were made by Justice Beach by consent. Mutual undertakings were given by Squirrel and Cadmon to the court until the hearing and determination of the final relief sought by Squirrel in the proceeding.
Squirrel undertook to carry on its business in the ordinary and usual course and not in any way to dispose of, deal with, encumber or diminish the value of the whole or any part of its assets, including by increasing or incurring any liabilities, other than in the ordinary and proper course of its business or with the prior written consent of Cadmon.
For its part, Cadmon undertook that it would not by itself, its servants or agents seek to enforce any power granted to it in the deed of variation.
Cadmon then sought an urgent case management conference. On 1 May 2019, Cadmon filed an informal application to be released from its undertaking given to the court on 15 April 2019.
The primary contention was that, when the undertaking had been given, Cadmon had acted on the understanding, caused by Squirrel’s conduct, that Squirrel’s claim was narrowly framed and could be determined by late May 2019; however, the submissions filed by Squirrel on 29 April 2019 showed that the claims proposed to be advanced by Squirrel in the proceeding were both broad and unclear and that there was no prospect of the claim being determined in a short time frame.
Squirrel also brought an application against the contingency that the court released Cadmon from its undertaking, for an interlocutory injunction to the same effect as the undertaking given by Cadmon.
In his decision, Justice Michael O’Bryan released both parties from the undertaking given to the court on 15 April 2019 and dismissed Squirrel’s application for an interlocutory injunction.
The grant of an injunction preventing Cadmon from exercising its powers under the deed of settlement and the deed of variation, he said, would be likely to cause Cadmon and the noteholders substantial prejudice.
“The evidence discloses that the financial position of Squirrel is precarious and it is likely that its position will worsen over time. Squirrel has made losses in each of four successive financial years FY15–FY18. In evidence was a consolidated financial forecast for Squirrel, apparently prepared as at March 2019, which disclosed a forecast loss for FY19 of approximately $2 million,” Justice O’Bryan stated.
“The evidence shows that Squirrel has twice failed to raise funds to enable the redemption of the convertible notes. Recently, a winding-up application has been filed.”
Justice O’Bryan also noted that Squirrel’s director and chief executive, Damien Linn, gave evidence indicating that Squirrel has liabilities of approximately $7.8 million, including approximately $1.2 million for accounts payable; $870,000 for debt facilities; $1.4 million in liabilities owing to regulatory bodies; and $4.3 million owing to the noteholders.
“An injunction restraining Cadmon from exercising rights granted to it by Squirrel under the deed of settlement and the deed of variation would be highly prejudicial to the commercial interests of Cadmon and the noteholders,” he stated.