Squirrel Limited v Cadmon Advisory Pty Ltd
[2019] FCA 1006
•28 June 2019
FEDERAL COURT OF AUSTRALIA
Squirrel Limited v Cadmon Advisory Pty Ltd [2019] FCA 1006
File number(s): VID 367 of 2019 Judge(s): O’BRYAN J Date of judgment: 28 June 2019 Catchwords: PRACTICE AND PROCEDURE – party seeking release from undertaking given to the Court – whether there has been a material change in circumstances such that the continuation of the undertaking would be unjust – application granted
CORPORATIONS – application for interlocutory injunction to restrain the appointment of a receiver – whether applicant has made out prima facie case – whether balance of convenience favours grant of injunction – application dismissed
Legislation: Australian Consumer Law (Schedule 2 of the Competition and Consumer Act 2010 (Cth)) ss 18, 21
Australian Securities and Investments Commission Act 2001 (Cth) ss 12CA, 12CB, 12DA, 12DB
Cases cited: ACCC v CG Berbatis Holdings Pty Ltd (2003) 214 CLR 51
Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170
ASIC v Kobelt [2019] HCA 18
Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266
Commercial Bank of Australia Limited v Amadio (1983) 151 CLR 447
H Lundbeck A/S v Commissioner of Patents [2019] FCA 535
Kakavas v Crown Melbourne Ltd (2013) 250 CLR 392
Louth v Diprose (1992) 175 CLR 621
Paciocco v Australian and New Zealand Banking Group Limited (2015) 236 FCR 199
Samsung Electronics Co Ltd v Apple Inc (2011) 217 FCR 238
Thorne v Kennedy (2017) 350 ALR 1; 91 ALJR 1260
Date of hearing: 3, 5 and 6 June 2019 Registry: Victoria Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 150 Counsel for the Applicant: Mr D K Carlile Solicitor for the Applicant: MurdockCheng Legal Practice Counsel for the Respondent: Ms C van Proctor Solicitor for the Respondent: Arnold Bloch Leibler ORDERS
VID 367 of 2019 BETWEEN: SQUIRREL LIMITED (ACN 605 835 514)
ApplicantAND: CADMON ADVISORY PTY LTD (ACN 616 484 756)
Respondent
JUDGE:
O’BRYAN J
DATE OF ORDER:
28 JUNE 2019
THE COURT ORDERS THAT:
1.The parties are released from the undertakings given to the Court on 15 April 2019.
2.The applicant’s interlocutory application dated 6 May 2019 is dismissed.
3.By 19 July 2019, the parties are to file written submissions of no longer than 5 pages on the question of costs of the applications the subject of these orders.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
O’BRYAN J:
A. INTRODUCTION
There are two interlocutory applications before the Court. The first is an application by the respondent (Cadmon) to be released from an undertaking it gave to the Court on 15 April 2019. The second is an application brought by the applicant (Squirrel), against the contingency that the Court releases Cadmon from its undertaking, for an interlocutory injunction to the same effect as the undertaking given by Cadmon. I heard both applications together. The background is as follows.
On 11 April 2019, Squirrel made an urgent ex parte application to the Court seeking orders to restrain Cadmon from enforcing powers granted to Cadmon under a document titled Deed of Variation entered into by the parties on 21 January 2019. Justice Beach granted the injunction sought by Squirrel for a period of 4 days until 15 April 2019 to enable an originating application and supporting affidavit to be served on Cadmon. His Honour listed the matter for further hearing on an inter partes basis on 15 April 2019.
As discussed in more detail below, the Deed of Variation varied an earlier Deed of Settlement entered into by the parties on 19 October 2018. By the Deed of Settlement, the parties agreed terms to settle a commercial dispute that had arisen between them. A brief synopsis of the dispute and its settlement is as follows:
(a)Squirrel is a public unlisted company that has developed and markets cloud-based self‑managed superannuation fund (SMSF) administration software and services through its wholly owned subsidiary, Squirrel Superannuation Services Pty Ltd (Squirrel Superannuation). The software allows individuals to establish and manage their SMSF virtually by consolidating the services of an accountant, lawyer, financial advisor and auditor into one platform. Squirrel Superannuation administers approximately $240 million worth of SMSF members’ funds. Squirrel Superannuation holds an Australian Financial Services Licence (AFSL), an Australian Credit Licence and is a Registered Tax Agent.
(b)Cadmon provides corporate advisory services and capital to companies that are either listed or preparing to list on the Australian Securities Exchange (ASX). Cadmon also holds an AFSL.
(c)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 totalling $4 million (referred to by the parties as the pre-IPO capital raising) which would be followed by an initial public offering (IPO) at a later date (I will refer to this mandate as the pre-IPO mandate).
(d)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.
(e)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 (I will refer to this mandate as the IPO mandate).
(f)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.
(g)In early August 2018, a dispute arose between the parties relating to the pre-IPO mandate and the IPO mandate (collectively, the Cadmon mandates) and the planned IPO.
(h)On 19 October 2018, Squirrel and Cadmon entered into the Deed of Settlement in settlement of 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 (being 105% of the face value of each note and an aggregate amount of $4.2 million).
(i)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.
(j)It is not in dispute that 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 has the right (amongst other rights) to appoint a receiver over the assets of Squirrel in the event of default.
(k)It is not in dispute that 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. Squirrel also filed an affidavit of its Director and Chief Executive Officer, Damien Stewart Linn, affirmed 11 April 2019. Those documents were served on Cadmon.
When the matter returned to court on 15 April 2019, there was no contested hearing and orders were made by Beach J 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. As a result of these mutual undertakings, Beach J dismissed Squirrel’s application for interlocutory relief and made orders timetabling the proceeding for a final hearing which contemplated that:
(a)Squirrel would file and serve any evidence and an outline of submissions relating to final relief by 25 April 2019;
(b)Cadmon would file and serve any evidence and an outline of submissions relating to final relief by 8 May 2019;
(c)Squirrel would file and serve any reply evidence and any reply outline of submissions relating to final relief by 15 May 2019; and
(d)the matter was listed for a case management hearing on 22 May 2019.
On 29 April 2019, Squirrel filed a second lengthy affidavit of Mr Linn (which had been affirmed on 26 April 2019) and submissions pursuant to the orders made by Beach J on 15 April 2019 (albeit that the affidavit and submissions were filed late).
Cadmon then sought an urgent case management conference, which I listed on 2 May 2019. On 1 May 2019, and for the purposes of the case management conference, Cadmon filed an affidavit of Teresa Jane Ward and an outline of submissions. Those documents disclosed an informal application by Cadmon to be released from its undertaking given to the Court on 15 April 2019. The basis of the application was that there had been a change in circumstances since the undertaking had been given sufficient to warrant the discharge of the undertaking. 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 timeframe.
It was not possible to determine Cadmon’s application to be released from its undertaking on 2 May 2019, as Squirrel had not had sufficient notice of the application. Accordingly, I proposed a timetable for the hearing and disposition of the application. If Cadmon’s application was granted, it was apparent that Squirrel might then wish to renew its application for an interlocutory injunction (which had been dismissed on 15 April 2019 by reason of the mutual undertakings that had been given). I determined that the most efficient course was to hear Cadmon’s application to be released from its undertaking, and any consequential application by Squirrel for an interlocutory injunction in place of that undertaking, at the same time. The latter application was, of course, contingent on the outcome of the former. I made orders timetabling the filing of interlocutory applications by Cadmon and Squirrel, the filing of a statement of claim by Squirrel to enable its claims to be understood with more precision and the filing of evidence and submissions by the parties.
I heard the applications on 3, 5 and 6 June 2019. The parties relied on affidavit evidence which exhibited a large number of documents and the parties also tendered a small number of additional documents. Squirrel read 4 affidavits of Mr Linn affirmed 11 April 2019, 26 April 2019, 2 June 2019 and 5 June 2019. With respect to the last affidavit, only paragraphs 1 to 4 and 5 were read. Squirrel also read an affidavit of Squirrel’s lawyer, Damin William Murdock of MurdockCheng Legal Practice (MCLP), affirmed 3 June 2019. Cadmon read 3 affidavits of its lawyer, Teresa Jane Ward of Arnold Bloch Leibler (ABL) affirmed 1 May 2019, 24 May 2019 and 5 June 2019. With respect to the last affidavit, only paragraphs 1 to 6, 11, 12, 16 to 18, 32, 35 and 36 were read. None of the deponents were cross-examined. There were no objections to the affidavit evidence, but both parties submitted that the affidavit evidence contained a large amount of opinion which should be given little weight. Those submissions are correct. The affidavits contained considerable opinion and assertion. They were also somewhat piecemeal, no doubt suffering from being prepared in haste, which made the task of establishing a chronology of relevant events more difficult. I have placed more weight on the documentary record than the unsupported assertions in the affidavits.
For the reasons that follow, I release both parties from the undertakings given to the Court on 15 April 2019 and I dismiss Squirrel’s application for an interlocutory injunction.
B. CADMON’S APPLICATION TO BE RELEASED FROM ITS UNDERTAKING
By interlocutory application filed on 3 May 2019 (in accordance with the orders I made on 2 May 2019), Cadmon seeks an order that it be released from the undertaking recorded in the orders of Beach J made on 15 April 2019.
There is no doubt that the Court has power to discharge the undertakings given by the parties as part of the interlocutory orders made on 15 April 2019. As the High Court observed in Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170 at 178 (Adam P Brown Male Fashions):
Just as an interlocutory injunction continues “until further order”, so must an interlocutory order based on an undertaking. A court must remain in control of its interlocutory orders. A further order will be appropriate whenever, inter alia, new facts come into existence or are discovered which render its enforcement unjust… Of course, the changed circumstances must be established by evidence…
As observed by Middleton J in H Lundbeck A/S v Commissioner of Patents [2019] FCA 535 at [14], the High Court in Adam P Brown Male Fashions was not setting out an exhaustive set of circumstances that must exist before a court may exercise its power to release a person from an undertaking. However, his Honour observed that normally there must be a sufficient basis to find material changed circumstances established by evidence and the overriding consideration will be whether the continuation of the undertaking would be unjust.
Cadmon relied on three changed circumstances:
(a)First, the claims proposed to be made by Squirrel in the proceeding are much broader than those initially foreshadowed to the Court on 11 April 2019. As a result, the premise on which Cadmon gave the undertaking, that the issues in dispute could be determined expeditiously, is no longer correct.
(b)Second, a factor that favoured the grant of interlocutory relief as at 11 April 2019, that Squirrel was party to a transaction that would enable it to raise sufficient funds to discharge its obligations under the Deed of Variation within a short period, no longer prevailed.
(c)Third, an application had recently been made to this Court to wind up Squirrel for failing to pay a statutory demand.
B.1 Change in scope of Squirrel’s claims
At the ex parte hearing on 11 April 2019, Squirrel relied on written and oral submissions. The legal basis for Squirrel’s claims were not stated with clarity. The written submissions referred to two alternative claims: the first being that the Deed of Variation is void; the second, stated in the alternative, being that the appointment of a receiver by Cadmon would not be in good faith. The claim that the Deed of Variation is void was not explained in the written submissions. The lack of good faith argument was developed to some extent. In oral submissions, the potential claims were not articulated with any clarity but ranged from lack of good faith through to potential claims of unconscionability and illegality on the part of Cadmon.
Following the ex parte hearing on 11 April 2019, the lawyers for Squirrel, MCLP, served the orders made by the Court and the first Linn affidavit on Cadmon. The next day, on 12 April 2019, Squirrel filed its originating application which was also served on Cadmon. On 14 April 2019, MCLP sent draft consent orders to the lawyers for Cadmon, ABL. The draft orders contained mutual undertakings by the parties, largely in the form that were ultimately given to the Court, and a timetable for the hearing of Squirrel’s claims in the proceeding on a final basis that contemplated a trial at the end of May 2019 on an estimate of 2-3 days.
By a responding letter dated 14 April 2019, ABL proposed variations to the proposed orders that accelerated the timetable to trial and stated that Cadmon would agree to give the proposed undertaking provided that the proceeding was heard and determined in an expeditious fashion (which, from Cadmon’s alternative orders, contemplated a final hearing in mid-May 2019 on an estimate of 1-2 days).
The Court made orders by consent on 15 April 2019 which timetabled the preparation of the case for final hearing through to 15 May 2019 and listed the matter for a further case management hearing on 22 May 2019.
The first of the orders made on 15 April 2019 required Squirrel to file and serve any further evidence and an outline of submissions relating to final relief by 25 April 2019. The further evidence and submissions were not filed until 29 April 2019. The submissions stated that Squirrel was applying to set aside the Deed of Settlement and the Deed of Variation and, in the alternative, it was seeking a declaration that it had not breached the Deed of Variation because the offers it had made to redeem the convertible notes were not enforceable. The submissions stated numerous bases for that relief including:
(a)that Cadmon had no authority to enter into the Deed of Settlement;
(b)that Cadmon had misled the noteholders in connection with redemption offers that were made to them by Squirrel pursuant to the Deed of Settlement;
(c)that Cadmon had misled Squirrel in connection with the entry into the Deed of Settlement;
(d)that there was no consideration flowing from the noteholders to Squirrel in respect of the redemption of the convertible notes;
(e)that Cadmon had no authority to enter into the Deed of Variation and Squirrel was misled as to Cadmon’s authority;
(f)that by negotiating and entering into the Deed of Variation with Squirrel, Cadmon took advantage of Squirrel’s disadvantage, thereby engaging in unconscionable conduct; and
(g)by enforcing the Deed of Variation, Cadmon would be acting in conflict of interest.
As noted earlier, on 2 May 2019 I ordered Squirrel to file a statement of claim by 24 May 2019 so that its claims could be understood with greater precision. Squirrel did so, but not until 30 May 2019. An amended statement of claim, correcting typographical errors, was filed on 7 June 2019. The allegations made in the statement of claim differ considerably to those contained in Squirrel’s submissions filed on 29 April 2019. In the statement of claim, Squirrel made 4 primary claims (which are considered in more detail in connection with Squirrel’s application for an interlocutory injunction):
(a)The first claim is that, in negotiating and entering into the Deed of Settlement, Cadmon took advantage of Squirrel’s special disadvantage and engaged in unconscionable conduct rendering the Deed of Settlement void.
(b)The second claim is that, in communicating with noteholders about Squirrel’s redemption offer, Cadmon failed to advise noteholders of various matters and thereby breached an implied term of the Deed of Settlement, or alternatively Cadmon engaged in misleading and deceptive conduct, which breaches caused Squirrel loss and damage (being the total amount it promised to pay to noteholders).
(c)The third claim is that, in negotiating and entering into the Deed of Variation, Cadmon took advantage of Squirrel’s special disadvantage and engaged in unconscionable conduct rendering the Deed of Variation void.
(d)The fourth claim is that any exercise of the power to appoint a receiver under the Deed of Variation would be capricious and not in good faith because the inevitable result of an appointment would be that Squirrel Superannuation would forfeit its AFSL, its business would become worthless and noteholders would not receive any funds, entitling Squirrel to an order restraining the appointment of a receiver. Squirrel also alleges that Cadmon does not have authority to appoint a receiver under the Deed of Variation, with the result that Squirrel is entitled to an order restraining the appointment.
Cadmon contended that there has been a change in circumstances since it gave the undertaking on 15 April 2019 because of the expansion of Squirrel’s case, which raises numerous new legal and factual issues. Cadmon argued that it gave the undertaking on the basis that the proceeding would be heard and determined in or about May 2019 or as soon thereafter as could be accommodated by the Court. However, it is now apparent that the trial is likely to take significantly longer than two days and may require a number of additional witnesses and will require the determination of numerous legal and factual issues.
It is clear that the claims raised by Squirrel in this proceeding cannot be determined by the Court in the timeframe originally contemplated by the parties. In my view, a final hearing on the issues raised by the statement of claim will require several months of preparation. I have some doubt as to whether the timetable originally contemplated by the parties for the trial of the proceeding was in any sense realistic. Nevertheless, the evidence shows that the parties agreed to the mutual undertakings on the basis that the proceeding could be determined on a final basis in a relatively short period of time. The premise for the giving of those undertakings, which was a mutual premise, has been shown to be incorrect. I consider it to be a changed circumstance. I will return to the question whether it would be unjust to keep Cadmon to its undertaking below.
B.2 The ISL Heads of Agreement
In its written and oral submissions to the Court on the ex parte application on 11 April 2019, Squirrel referred to and relied upon a Heads of Agreement entered into between Squirrel and Integer Securities Limited (ISL) on 4 April 2019. Squirrel informed the Court that the agreement would enable Squirrel to pay all monies due to Cadmon pursuant to the Deed of Variation, including interest, by 15 June 2019. Squirrel also informed the Court that it was entitled to enforce the agreement as against ISL. Squirrel relied on those asserted facts on the question of the balance of convenience.
A copy of the Heads of Agreement was exhibited to the first affidavit of Mr Linn. The Heads of Agreement was an agreement by which ISL agreed to purchase 100% of the shares in Squirrel for a purchase price that, ostensibly, would enable Squirrel to repay the amounts owing to noteholders pursuant to the Deed of Variation. The mechanism by which that would occur was not clearly stated in the Heads of Agreement; in that respect, I observe that the Agreement provided for an acquisition of shares in Squirrel which would not, in the ordinary course, put Squirrel into funds to be able to repay noteholders. Regardless of that difficulty, completion of the acquisition was conditional on a number of conditions precedent including that Cadmon and the noteholders agreed to vary the repayment date of the notes to 15 June 2019 and to stay the enforcement of any rights that they might have pursuant to the Deed of Variation and associated security. The Heads of Agreement provided that if those conditions were not satisfied or waived by 14 April 2019 (or such later date as may be agreed), the Heads of Agreement would be at an end.
Cadmon and the noteholders did not agree to vary the repayment date of the notes to 15 June 2019 or to stay the enforcement of the Deed of Variation and associated security. In his evidence given on the ex parte application, Mr Linn stated that he had received confirmation from ISL that they would waive the condition precedent concerning Cadmon so long as a court order was made restraining Cadmon and the noteholders from exercising their rights pursuant to Deed of Variation and associated security.
From 15 April 2019, ABL sent numerous requests to MCLP seeking updated information concerning the ISL transaction. Squirrel remained silent about the status of the ISL transaction until Mr Linn filed a third affidavit on 2 June 2019 prior to the interlocutory hearing. At the interlocutory hearing on 3 June 2019, Counsel for Squirrel informed the Court that the ISL transaction was not going to proceed in its previous form, if at all. Counsel for Squirrel also conceded that that was a change of circumstances since the hearing of the original interlocutory application by Beach J. In my view, the concession was rightly made. At the original ex parte hearing, significant reliance was placed upon the existence of the ISL transaction as providing a reason for the Court to restrain the appointment of a receiver. That circumstance no longer prevails. Indeed, it seems likely that that circumstance has not prevailed for a considerable period of time, but no disclosure about that was made by Squirrel until the filing of Mr Linn’s affidavit on 2 June 2019. In my view, the failure of the ISL transaction provides a further basis for the Court to exercise its power to release Cadmon from its undertaking.
B.3 The winding up application
On 17 May 2019, DCF Asset Management Pty Ltd (DCF) filed an application in this Court under s 459P of the Corporations Act 2001 (Cth) (Corporations Act) to wind up Squirrel for failing to comply with a statutory demand. The statutory demand was dated 16 April 2019 and was for two amounts of $275,000, totalling $550,000 in aggregate. The debts claimed to be owing were transaction fees allegedly agreed to be paid by Squirrel to DCF pursuant to two mandate agreements entered into between Squirrel and DCF on 29 June 2018 and 2 August 2018 respectively.
It appears from the evidence that the statutory demand for payment of the transaction fees was served on Squirrel on either 16 or 17 April 2019. Under s 459G of the Corporations Act, a company may apply to the Court to set aside the demand within 21 days after the demand is served. Although Squirrel contends that there is a genuine dispute with respect to DCF’s claim, Squirrel did not make an application under s 459G to set aside the demand within the prescribed period, which has resulted in DCF applying to wind up Squirrel.
Squirrel did not inform Cadmon of the receipt of the statutory demand; nor did it inform Cadmon of the winding up application. In her affidavit of 24 May 2019, Ms Ward gave evidence that ABL first became aware of the winding up application by conducting a search of the Commonwealth Courts portal. In his affidavit dated 2 June 2019, Mr Linn gives ambiguous evidence about his knowledge of the winding up application. He refers to the “discovery of a statutory demand issued by DCF Asset Management Pty Ltd which was missed whilst I was in Melbourne”, but provides no evidence as to the date on which Squirrel received and became aware of the statutory demand or the winding up application to which it relates, nor any explanation as to why their existence was not disclosed to Cadmon.
The statutory demand and the winding up application both post-date the ex parte hearing on 11 April 2019 and the giving of the undertaking on 15 April 2019. In my view, the winding up application is a material change in circumstances affecting the position of Cadmon and the noteholders whom it represents as creditors of Squirrel. Mr Murdock gave evidence of his confidence that the winding up application would be resolved and dismissed. Mr Murdock referred to without prejudice negotiations occurring with DCF. If they were unsuccessful, Mr Murdock said that Squirrel would pay DCF the amount it claims under protest and then commence a separate proceeding to recover that amount from DCF. Mr Murdock gave evidence that Squirrel had secured a $550,000 facility from Fifo Capital for that purpose.
In my view, Mr Murdock’s evidence does not provide any justification for Squirrel failing to inform Cadmon of the winding up application and does not alter the fact that the winding up application is a material change in circumstances affecting the position of Cadmon. The evidence shows that Fifo Capital (being the trading name of Antra Group Pty Ltd) is a secured creditor of Squirrel. Accordingly, Squirrel’s proposal to borrow funds from Fifo Capital in order to pay the amount claimed by DCF will have the effect of increasing its liability to a prior secured creditor, which disadvantages the position of Cadmon and the noteholders.
B.4 Is the continuation of the Cadmon undertaking unjust?
As noted earlier, the overriding consideration is whether there has been a material change in circumstances since the Cadmon undertaking was given that renders the continuation of the undertaking unjust. In my view, the continuation would be unjust for the following reasons.
First, the effect of the undertaking is highly prejudicial to the commercial position of Cadmon and the noteholders it represents. They have a claim for payment of approximately $4.2 million plus interest and hold security for that claim, but cannot act on that security while the undertaking is in place. It is commercially understandable that Cadmon agreed to give an undertaking not to enforce its security on the assumption that Squirrel’s claims could be determined expeditiously. That agreement avoided the need for a costly and time consuming interlocutory hearing and enabled the parties to prepare for a final hearing which each party assumed could occur within a matter of weeks. It is unfortunate, but the assumption on which the parties acted has been shown to be unrealistic. It is clear that the claims now made by Squirrel cannot be determined on a final basis within the period of time originally contemplated by the parties. As noted earlier, the assumption on which the parties acted may always have been unrealistic. Nevertheless, there is no reason to doubt the bona fides with which Cadmon gave the undertaking in an effort to resolve the proceeding on a final basis as expeditiously as possible. In my view, given the changed scope of Squirrel’s claims and the likely timeframe to a final hearing, it would be unjust to hold Cadmon to its undertaking provided that Squirrel’s interests can be appropriately protected by allowing it to make its case for an interlocutory injunction.
Second, the financial circumstances of Squirrel have changed since the undertaking was given. It is now clear that the ISL transaction will not proceed and there is no present likelihood that Squirrel will be able to raise the monies claimed to be due by Cadmon from ISL. Further, the winding up application that has been brought by DCF causes prejudice to Cadmon’s position, acting for the noteholders, as creditors of Squirrel.
Third, Squirrel has not identified any prejudice that it would suffer by reason of the undertaking being discharged and being required to make out its case for an interlocutory injunction. There was no evidence that Squirrel, in reliance on the undertaking, had taken actions that would cause it prejudice if the undertaking were to be discharged. The giving of the undertaking on 15 April 2019 avoided the time and cost of an interlocutory hearing at that point in time. Accordingly, the release of the undertaking and the hearing of Squirrel’s application for an interlocutory injunction will not cause any wasted costs.
For those reasons, the interests of justice are best served by releasing both parties from their undertakings and hearing Squirrel’s application for an interlocutory injunction.
C. SQUIRREL’S APPLICATION FOR AN INTERLOCUTORY INJUNCTION
As I will relieve Cadmon of its undertaking, it is necessary to determine Squirrel’s application dated 6 May 2019 for an interlocutory order restraining Cadmon, until the hearing and determination of the proceeding, from seeking to enforce any power granted to it in the Deed of Settlement and the Deed of Variation.
The test for an interlocutory injunction was stated by the High Court in Australian Broadcasting Corporation v O’Neill (2006) 227 CLR 57 per Gleeson CJ and Crennan J at [19] and Gummow and Hayne JJ at [65]-[72]. There are two principal questions. The first is whether the plaintiff has made out a prima facie case in the sense that, if the evidence remains as it is, there is a probability that at the trial of the action the plaintiff will be entitled to relief. The second is whether the inconvenience or injury which the plaintiff would be likely to suffer were an injunction refused outweighs or is outweighed by the injury which the defendant would suffer were an injunction granted. The Court explained that the phrase “prima facie case” does not mean that the plaintiff must show that it is more probable than not that at trial it would succeed. It is enough that the plaintiff shows a sufficient likelihood of success to justify, in the circumstances, the preservation of the status quo pending the trial. The requisite strength of the probability of ultimate success depends upon the nature of the rights asserted and the practical consequences likely to flow from the interlocutory order sought.
C.1 Prima facie case
C.1.1 Overview of statement of claim
Squirrel’s case is stated in an amended statement of claim. As summarised earlier, there are 4 primary claims. The claims relate to different events at different points in time which occurred sequentially.
The first claim concerns the entry into the Deed of Settlement on or about 19 October 2018. Squirrel alleges that Cadmon’s demand, reflected in the Deed of Settlement, that Squirrel make a redemption offer to all noteholders was unconscionable in breach of s 21 of the Australian Consumer Law (ACL), ss 12CA and 12CB of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) and the unwritten law. Squirrel seeks a declaration that the relevant provisions of the Deed of Settlement are void.
The second claim concerns the actions taken pursuant to the Deed of Settlement. The Deed of Settlement required Squirrel to make redemption offers to the noteholders. Squirrel alleges that the Deed of Settlement contained an implied term that, when communicating with noteholders about the redemption offer, Cadmon would advise noteholders of various matters relating to the dispute between Squirrel and Cadmon. Squirrel alleges that Cadmon failed to do so in breach of the implied term. Squirrel further alleges that, had Cadmon advised noteholders of those matters, the noteholders would not have accepted the redemption offer and Squirrel would not be obligated to pay them the redemption amount. Squirrel alleges that, as a consequence, Cadmon’s breach of the implied term has caused Squirrel to suffer loss and damage, being the redemption amount payable to the noteholders. Squirrel made an alternative claim that Cadmon’s failure to advise the noteholders of the various matters constituted misleading and deceptive conduct in breach of s 18 of the ACL, ss 12DA and 12DB of the ASIC Act and the unwritten law. Squirrel made the same claim for damages as a consequence of the alleged breaches.
The third claim concerns the entry into the Deed of Variation. Squirrel alleges that Cadmon took unconscionable advantage of Squirrel’s disadvantage in demanding that Squirrel enter into the Deed of Variation, thereby contravening s 21 of the ACL, ss 12CA and 12CB of the ASIC Act and the unwritten law. Squirrel seeks a declaration that the Deed of Variation is void by reason of Cadmon’s breaches.
The fourth claim concerns the future exercise by Cadmon of the power to appoint a receiver to Squirrel following Squirrel’s default under the Deed of Variation. Squirrel alleges that there is an implied term of the Deed of Variation that such power must be exercised in good faith and not arbitrarily or capriciously. Squirrel alleges that if a receiver is appointed to it, it will forfeit its AFSL, it will lose all of its customers, its business will be worthless and the noteholders will not receive any funds. In those circumstances, Squirrel alleges that the exercise of a power by Cadmon to appoint a receiver is capricious and not in good faith. I interpolate that Squirrel’s allegation must be understood as referring to Squirrel’s wholly owned subsidiary, Squirrel Superannuation, forfeiting its AFSL and losing its customers, as the evidence shows that that company holds the AFSL and conducts the operating business. I will proceed on the basis that the statement of claim will be amended in due course to correct that error. Squirrel also alleges that Cadmon does not have the authority or approval from all of the noteholders to exercise the power to appoint a receiver. Squirrel seeks an order restraining Cadmon from appointing a receiver.
The claims made by Squirrel in the amended statement of claim fall to be considered in light of the evidence adduced at the interlocutory hearing. As each claim concerns sequential events, it is convenient to consider the evidence relating to each claim in turn.
C.1.2 First claim: the Deed of Settlement is unconscionable
The first claim made by Squirrel concerns the entry into the Deed of Settlement on 19 October 2018. The relevant events commence in about February 2018. The evidence adduced at the interlocutory hearing establishes the following facts.
As stated earlier, Squirrel is a public unlisted company that has developed and markets cloud-based SMSF administration software and services. At all relevant times, Squirrel’s directors have been Damien Stewart Linn, Stuart Iain Adamson and Steven Anthony Fornasaro. Its issued share capital comprises 169,479,002 ordinary shares with paid up capital of approximately $5.8 million. The evidence concerning the financial position of Squirrel at the interlocutory hearing was far from complete. The audited financial statements for Squirrel Superannuation for the financial year (FY) ended 30 June 2018 disclose a loss of approximately $115,000 and net assets of approximately $710,000. An investor presentation prepared for Squirrel in about March 2018 shows losses of approximately $185,000 in FY2015, $1.9 million in FY2016 and $2.6 million in FY2017, with accumulated losses in the period July to January 2018 of approximately $1.4 million. I infer that those figures are presented on a consolidated basis.
Also as stated earlier, Cadmon provides corporate advisory services and capital to companies that are either listed or preparing to list on the ASX. At all relevant times, the Managing Director of Cadmon was Cameron Low. The Legal Director was Lily Zhang.
In or about February 2018, Squirrel engaged Bletchley Park Capital (Bletchley) to assist it with raising capital through an issue of shares in Squirrel. The relevant contact at Bletchley was George Gabriel. Squirrel worked with Bletchley to prepare an investor presentation for that purpose and a data room was established containing information about Squirrel for the benefit of potential investors. A number of drafts of the investor presentation were exchanged between Squirrel and Bletchley, the final version of which was included in the data room. Although Mr Linn’s affidavits were far from clear in many respects, it appears that the version of the investor presentation that was included in the Squirrel data room was titled “Pre-IPO Capital Raising Squirrel SMSF – Working capital balance for expected revenue growth” (Squirrel investor presentation).
The Squirrel investor presentation contained information concerning Squirrel’s existing SMSF business and its desire to raise capital and ultimately conduct an IPO. The presentation stated that Squirrel wished to raise $4 million by way of a pre-IPO capital raising, to be followed by an IPO capital raising targeted for the third quarter of the 2018 calendar year. From the pre-IPO capital raising, $2 million would be expended on customer acquisition marketing costs, approximately $900,000 would be used as general working capital, approximately $850,000 would retire existing debt and the balance would be used to cover the capital raising costs. The presentation also disclosed Squirrel’s intention to commence a new business offering residential property loans to existing Squirrel SMSF customers and indicated that Squirrel proposed to launch the property loan program by 1 July 2018. Appendix C to the presentation provided further information concerning the proposed property loan program and disclosed that Squirrel wished to undertake a further capital raising of $5 million in a single equity tranche to support the proposed property loan program.
Mr Linn gave evidence that Bletchley introduced Squirrel to Cadmon. In his first affidavit, Mr Linn stated that the introduction occurred in February 2018. However, in his second affidavit, he stated that he had first met with Cadmon on 13 March 2018. Following the establishment of the Squirrel data room in mid-March 2018, Bletchley arranged access to the data room for various persons including Cameron Low and Douglas Loh. As noted earlier, Mr Low was the Managing Director of Cadmon. The evidence indicates that Mr Loh represented some of the investor clients of Cadmon who ultimately invested in the convertible notes issued by Squirrel. Mr Loh played a significant role with Cadmon in conducting due diligence on Squirrel and performing the capital raising mandate.
Mr Linn says that the data room contained the Squirrel investor presentation. Although the evidence is unclear, I infer that that is likely. In any event, the evidence shows that at some point Bletchley provided the Squirrel investor presentation to Cadmon and Cadmon used it to produce its own version to present to potential investors in Squirrel’s convertible notes. Mr Linn also says that the data room contained another document titled “SMSF Property Lending Portfolio” which disclosed Squirrel’s intention to enter into debt facilities through which it would offer property loans and to undertake a $5 million capital raising to provide equity for the proposed property loan program. The data access log for the data room shows that Mr Loh reviewed that document. In short, the evidence suggests that it is likely that, in March 2018, Cadmon (and Mr Loh) were aware of Squirrel’s plans with respect to the property loan program, including Squirrel’s intention to raise $5 million in equity to support the program. This intention ultimately became the principal source of dispute between Squirrel and Cadmon which resulted in the Deed of Settlement.
On 9 April 2018, Squirrel and Cadmon entered into the pre-IPO mandate. Under the mandate, Squirrel exclusively engaged Cadmon to act as sole lead manager in respect of:
(a)a pre-IPO capital raising in the form of a convertible note issue to raise a minimum of $2 million within 10 business days of the date of the agreement (tranche 1) and a further $2 million to be raised by 29 June 2018 (tranche 2); and
(b)a proposed IPO and listing on the ASX within 14 months of the completion of the pre‑IPO capital raising.
The mandate stated that the exact timing and structure of the proposed IPO and listing on the ASX would be determined by mutual agreement, business performance and market conditions.
In consideration for the services to be provided by Cadmon under the mandate, Squirrel agreed to pay fees to Cadmon as follows:
(a)for the pre-IPO capital raising, a management fee of 2% of the gross proceeds, a selling fee of 2% of the gross proceeds and an option over 4% of the fully diluted equity of the company; and
(b)for the IPO, a management fee of 3% of the gross proceeds, a selling fee of 3% of the gross proceeds and an additional 1% underwriting fee if an underwriter was engaged for the IPO.
The pre-IPO mandate included, as clause 12, the following provision (errors in original):
On and from the date of this letter, until the Engagement is terminated as defined in clause 11 is completed (the Exclusivity Period), the Company [Squirrel] must not without Cadmon’s written consent:
(a)sell, offer to sell, or commence negotiations with a view to selling:
•any asset or business conducted by the Company or a related body corporate of the Company; or
•any shares in the Company or a related body corporate of the Company
(b)issue, offer to issue or commence negotiations with a view to issuing any shares in the Company or any of its related body corporates; or
(c)subject to Cadmon’s prior written consent, provide any information concerning the Company or its related body corporates to any prospective purchaser or investor.
The agreed term sheet for the issue of the convertible notes contained the following terms:
(a)the notes would be unsecured;
(b)save in the event of specified events of default or insolvency, the notes were not redeemable and would only be converted into equity on the terms specified in the term sheet;
(c)the notes would be convertible into fully paid ordinary shares in Squirrel, or another company in substitution if Squirrel and the other company entered into a transaction that resulted in the other company being listed on the ASX (referred to in the term sheet as an “Alternative Transaction”) on the happening of the following events:
(i)if Squirrel was listed on the ASX within 14 months after the date of the term sheet, the notes would convert into ordinary shares in Squirrel at a conversion price equivalent to the lower of (A) a 20% discount on the issue price of shares offered through the IPO and (B) $16 million divided by the total number of issued shares on a fully diluted as-converted basis;
(ii)if Squirrel undertook an Alternative Transaction with another company and the shares in that other company were listed on the ASX within 14 months after the date of the term sheet, the notes would convert into ordinary shares in the other company at a conversion price equivalent to a 20% discount on the issue price of the shares in the other company offered through an IPO or, if no shares were offered, the average trading price of those shares in the 30 days immediately preceding the announcement of the Alternative Transaction; or
(iii)if neither (i) nor (ii) occurred, the notes would convert into ordinary shares in Squirrel at a conversion price equivalent to the lower of (A) a 20% discount on Squirrel’s next capital raising and (B) $16 million divided by the total number of issued shares on a fully diluted as-converted basis.
(d)If Squirrel’s shares were listed on the ASX, or an Alternative Transaction proceeded which resulted in a listing of shares, within 14 months after the date of the term sheet, no interest would be payable on the convertible notes. However, if that did not occur, Squirrel would pay 10% interest per annum on the principal amount of the convertible notes, applied retrospectively from the date of issue of the notes.
(e)If a specified event of default or insolvency occurred prior to conversion, the noteholder would be entitled to demand immediate redemption of the notes.
On 10 April 2018, Mr Linn sent an email to Mr Low, Mr Loh and Mr Gabriel which, in part, discussed the draft prospectus for, and the timing of, the proposed IPO. Mr Linn stated that Squirrel had engaged lawyers in November 2017 to establish a due diligence committee which had been meeting monthly since that time to prepare the company for listing on the ASX. As to the timing of the IPO, Mr Linn stated that there needed to be a discussion between Cadmon and Squirrel once the pre-IPO capital raising had been completed, but that Mr Linn was “quite keen on launching the offer around the time the AFR Fast 100 List comes out this year”. Ms Ward gave evidence that the AFR Fast 100 List comes out in October or November each year.
Cadmon completed tranche 1 of the pre-IPO capital raising on 3 May 2018. A total of 36 investors subscribed for the convertible notes issued by Squirrel, raising $2 million. Ms Ward gave evidence that she was informed by Ms Zhang that the noteholders were clients of Cadmon.
On 7 May 2018, Mr Loh sent an email to Mr Linn enclosing a copy of a presentation concerning Squirrel that Cadmon had prepared for the purposes of the pre-IPO capital raising. The presentation was very similar in format and content to the Squirrel investor presentation (and shared the same title “Pre-IPO Capital Raising | Squirrel SMSF – Working capital balance for expected revenue growth”). On the Cadmon version, Cadmon was identified as lead manager. There was one principal difference between the Squirrel investor presentation and the Cadmon version. In the Cadmon version, in Appendix C (which described the proposed property loan program), the page which described the proposed capital raising of $5 million to provide equity to support the property loan program had been removed. In her evidence, Ms Ward of ABL stated that Ms Zhang had informed her that Appendix C of the Squirrel investor presentation had been removed from the Cadmon version because Cadmon had understood that it had been agreed between the parties that any funding for the property loan program would be provided post-IPO. Both Ms Ward and Ms Zhang are mistaken about the removal of Appendix C: Appendix C had not been removed but the page describing the proposed capital raising to fund the property loan program had been removed. Nevertheless, Ms Ward’s evidence provides an explanation of the removal of that page.
Mr Loh’s email of 7 May 2018 also attached a summary of the terms and conditions of the convertible notes. The summary contained an indicative timeline for the IPO which contemplated a prospectus being lodged with ASIC in September 2018, the IPO offer opening in October 2018 and Squirrel shares being traded on the ASX in November 2018. The document noted that the timeline might push out to early 2019 due to the holiday periods. I observe that that timeline was consistent with the Squirrel investor presentation.
Mr Linn gave evidence that he was “in disbelief” about the contents of the Cadmon version of the Squirrel investor presentation and raised his concerns with Mr Loh at a breakfast meeting on 8 May 2018. The two concerns purportedly raised by Mr Linn were that the Cadmon version of the Squirrel investor presentation did not refer to additional capital being raised as an equity tranche for the property loan program and the timeline for the IPO. Mr Linn’s evidence is unsupported by any contemporaneous records and is difficult to reconcile with the immediately following events. On 10 May 2018, Mr Low sent an email to Mr Linn, copied to Mr Loh (amongst others), attaching a proposed mandate for the IPO (signed by Mr Low) and stating that (i) the existing pre-IPO mandate would continue to apply to tranche 2 of the pre-IPO capital raising and (ii) Cadmon would raise approximately $10 million through an IPO with shares being listed on the ASX by the end of 2018. The attached mandate also referred to the IPO occurring by the end of 2018. Mr Linn provided comments on the IPO mandate the following day on 11 May 2018 and raised no objection to the proposed listing by the end of 2018.
On 11 May 2018, the Board of Squirrel resolved to approve the mandate for Cadmon to act as lead manager for the IPO and the IPO mandate was countersigned by Squirrel. The mandate stated that Cadmon would act as sole lead manager in respect of a proposed IPO for Squirrel to be listed on the ASX by the end of 2018 to raise approximately $10 million. However, the mandate stated that the exact timing and structure of the transaction would be determined by mutual agreement, business performance and market conditions and the transaction was subject to completion of due diligence. Cadmon’s role was to manage the IPO, including coordinating the IPO timetable and to provide advice and recommendations with respect to the structure of the IPO, pricing and marketing. Various fees were payable to Cadmon including a management fee of 4% of the gross proceeds, a selling fee of 2% of the gross proceeds and various other benefits. The mandate also included clause 12 which was in similar terms to clause 12 of the pre-IPO mandate. Clause 12 provided as follows:
On and from the date of this letter, until the Engagement is terminated as defined in clause 11 is completed (the Exclusivity Period), the Company [Squirrel] must not without Cadmon’s written consent:
(a)sell, offer to sell, or commence negotiations with a view to selling:
•any asset or business conducted by the Company or a related body corporate of the Company; or
•any shares in the Company or a related body corporate of the Company
(b)issue, offer to issue or commence negotiations with a view to issuing any shares in the Company or any of its related body corporates; or
(c)subject to Cadmon’s prior written consent, provide any information concerning the Company or its related body corporates to any prospective purchaser or investor.
An IPO planning meeting was held on 31 May 2018 attended by Mr Linn, Mr Low, Ms Zhang and Mr Loh. The unsigned minutes of the meeting record that an “IPO team was to be appointed as soon as practicable to commence the IPO process with Squirrel to list in October 2018”. Various tasks relating to the IPO were allocated. The minutes also record that the aim was for the first draft of the prospectus to be completed by the end of June 2018. The minutes also refer to the proposed property loan program and record that it was proposed to commence in one month’s time via a special purpose vehicle (SPV), but noted that it was unlikely there would be any activity until mid-September 2018. The minutes also recorded that the “SPV proposes to fund 1.5% of the loan book at 800bp/BBSW” and that “Damien confirmed that there was currently no commitment by Squirrel to fund the 1.5% and it was agreed that Squirrel would not fund the 1.5% pre-IPO”. The minutes then record the following three action items:
•[Damien] to engage third parties to fund the 1.5%;
•[Damien] to provide Lily with copy of the agreement with UOB to confirm no funding commitments had been given by Squirrel; and
•[Lily] to draft waiver letter excluding the loan book funding from Cadmon’s mandate with Squirrel.
The references to Damien are references to Mr Damien Linn and the references to Lily are references to Ms Lily Zhang. It is common ground that Cadmon did not provide Squirrel with a waiver of clause 12 of the pre-IPO mandate or the IPO mandate with respect to Squirrel raising capital for the property loan program.
In his evidence, Mr Linn’s version of events is that it was understood by the parties that the IPO would follow the launch of the property loan program so that the initial earnings from the property loan program could be reflected in the IPO prospectus. Squirrel’s statement of claim alleges that, at the meeting on 31 May 2018, Cadmon agreed that it would waive clause 12 of the Cadmon mandates in respect of the proposed capital raising for the property loan program. In contrast, Ms Ward gave evidence that she was informed by Ms Zhang that Mr Linn never provided Cadmon with the confirmation, referred to in the minutes, that Squirrel had not incurred funding commitments and therefore did not issue the waiver letter. As noted earlier, Squirrel’s pursuit of funding for the property loan program ultimately became the principal source of dispute between the parties.
On the state of the evidence before me on this interlocutory application, it is not possible to resolve the competing interpretations of what was contemplated or agreed between the parties with respect to funding for the property loan program as at 31 May 2018. Nor is it necessary to do so. It is sufficient to note that the unsigned minutes record various assurances by Squirrel that it had not made any commitment to fund the property loan program and would not do so pre-IPO, which is consistent with Cadmon’s evidence. At the highest, the minutes indicate an undertaking by Cadmon to draft a waiver letter, but do not establish a promise by Cadmon to grant the waiver.
On 15 June 2018, Mr Loh attended Squirrel’s office and met with Mr Linn, Mr Murdock and Squirrel staff. Mr Linn gave evidence that, at that meeting, Mr Loh pressed for an IPO in around September 2018 and Mr Linn had responded that that proposed timeline was absurd. A contemporaneous email sent by Ms Zhang to Mr Low gave a different version of events. The email stated that Ms Zhang had spoken with Linn, Murdock and Loh by telephone while Mr Loh was at Squirrel’s office. Ms Zhang said that, during that telephone call, they had discussed the timing of the IPO in October or November 2018 as compared with March or April 2019 and that, currently, they were still aiming for an October or November 2018 listing.
Cadmon completed the second tranche of the pre-IPO capital raising on 28 June 2018. In that tranche, convertible notes were issued by Squirrel to 42 investors, raising a further $2 million from which $88,000 was paid to Cadmon for fees due under the pre-IPO mandate. Again, the evidence indicates that the noteholders were clients of Cadmon.
On 5 July 2018, Mr Linn sent an email to Mark Jones at Dinimus Capital (DCF) marking up revisions to a proposed facility term sheet. Under the facility, DCF would make various secured loan facilities available to Squirrel. Tranche 1 was a facility of $15 million, tranche 2 was a facility of $20 million and tranche 3 was a facility of $50 million. The term sheet stipulated that tranche 1 was to be used to fund working capital ($3 million), to fund the launch and establishment costs of the proposed property loan program through a SPV, Squirrel Capital ($2 million), and to subscribe for equity and mezzanine notes for the purposes of the property loan program ($10 million). Tranche 2 was to subscribe for equity and mezzanine notes in Squirrel Capital for the property loan program. Tranche 3 was for a contemplated acquisition called “Project Dorothy”. Under the term sheet, DCF would receive a 3 year call option to be issued 5% of Squirrel’s ordinary shares.
On 5 July 2018 about an hour after Mr Linn sent the email to Mr Jones noted above, Mr Linn sent an email to Mr Low, Ms Zhang and Mr Loh (amongst others) advising them that the property loan program was nearing the final stages of completion and that Squirrel had achieved formal and final approval for the borrowing facilities for the program. Mr Linn described them as “huge outcomes”. The email also stated that Mr Linn considered that it was not possible to achieve a calendar 2018 ASX listing and that he proposed a listing by the end of May 2019. The email did not disclose the call option granted to DCF.
On 9 July 2018, Mr Loh replied to Mr Linn, congratulating him on getting the required approvals for the property loan program but expressing reservations about the impact that the program would have on Squirrel’s financial returns for FY19 and requesting financial projections.
On 16 July 2018, Ms Zhang sent an email to Mr Linn (amongst others) stating that the two tranches of the pre-IPO capital raising had closed and provided a link to a dropbox folder containing the convertible note agreements between Squirrel and each of the noteholders.
On 2 August 2018, Mr Howell of DCF sent Mr Linn further draft documents in respect of the DCF facility, including a mandate agreement, term sheet and heads of agreement. Under the draft mandate, DCF would provide a facility to Squirrel for the purposes of working capital, an investment into the property loan program and the proposed Project Dorothy acquisition. Various fees were proposed to be paid to DCF. The draft term sheet proposed the grant of a 3 year call option in favour of DCF to be issued 5% of Squirrel’s ordinary shares.
At about this time, the commercial relationship between Squirrel and Cadmon broke down. The evidence adduced by Squirrel does not include an executed copy of the final DCF facility agreement. However, I infer that an agreement was entered into at some stage because it was central to the dispute between Squirrel and Cadmon and it is also the basis for DCF’s extant winding up application against Squirrel, referred to earlier.
On 6 August 2018, Mr Low sent a letter to the Board of Squirrel. The letter was headed “without prejudice” but neither party objected to the letter being adduced in evidence. The letter said that Cadmon had become aware that Squirrel was currently undertaking steps to raise additional capital in the form of equity and debt from various third parties, including DCF, without Cadmon’s involvement or consent. The letter asserted that Squirrel was acting in breach of clause 12 of each of the pre-IPO mandate and the IPO mandate. The letter also asserted numerous other breaches of the Cadmon mandates, including:
(a)the funds raised through the pre-IPO capital raising had not been deployed as required by the mandate: Squirrel had used the funds to set up a UK office without consulting Cadmon;
(b)financial information provided to Cadmon in the Squirrel investor presentation and the data room did not align with the audited financial accounts of Squirrel for FY17;
(c)Cadmon had learned that, in early 2018, legal proceedings had been issued against Squirrel regarding an alleged breach of a loan and option agreement which remained current but Cadmon had not been informed of the dispute; and
(d)Cadmon had learned that certain shareholders of Squirrel who had participated in a previous capital raising intended to take legal action against Squirrel for misleading and deceptive conduct by Squirrel and its directors but Cadmon had not been advised of that threat.
I certify that the preceding one hundred and fifty (150) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice O'Bryan. Associate:
Dated: 28 June 2019
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