ASIC has applied to the Federal Court of Australia to wind up ASX-listed public company Merlin Diamonds Limited (ACN 009 153 119) (Merlin Diamonds) and for the appointment of provisional liquidators to report to the court pending hearing of its application for final relief.

The application arises from ASIC’s concerns which include:

• since 2012, Merlin Diamonds has advanced substantial funds to Axis Consultants Pty Ltd (Axis), a related management services company, without shareholder approval ($13,752,124 owing as at 30 June 2018) (Loans);
• the Loans have been used to fund private companies associated with Mr Joseph Gutnick (a current and former director of Merlin Diamonds and Axis respectively) and provide no discernible benefit to Merlin Diamonds;
• the terms of the Loans appear to be unreasonable, uncommercial and non-arm's length. No security for the Loans has been provided by Axis or any third party and the Loans are being fully provisioned (impairment provision) each financial year;
• the Merlin Diamonds auditors have been unable to obtain sufficient appropriate audit evidence to be satisfied that Axis is likely to be able to repay the Loans;
• in October 2016 Merlin Diamonds received $900,000 from Chabad Properties Pty Ltd (Chabad) for convertible notes and options issued to Chabad. The ultimate source of the $900,000 paid by Chabad, through a series of transactions involving related companies, was Merlin Diamonds. Mr Gutnick is a former director of Chabad;
• audited accounts of Merlin Diamonds for the half-year ended 31 December 2018 (due 18 March 2019) have not been lodged with ASIC, a contravention of s320 of the Corporations Act;
• the financial position of Merlin Diamonds as at 30 June 2018 raises concerns over the company’s solvency;
• there has been no company secretary of Merlin Diamonds since 8 January 2019, a contravention of s204A(2) of the Corporations Act; and 
• corporate governance of Merlin Diamonds falls far short of the standard expected of an ASX-listed public company.

ASIC seeks from the Court:

• the appointment of Mr Salvatore Algeri and Mr Timothy Norman, of Deloitte Financial Advisory Pty Ltd as joint and several provisional      liquidators of the company; and
• orders requiring the provisional liquidators to provide a detailed report to the Court that sets out, among other things:
• the way in which Merlin Diamonds has made the Loans;
• the recoverability of the Loans from Axis;
• the $900,000 transaction involving Chabad; and
• the financial position of Merlin Diamonds
• for the Court’s consideration at a later date, orders to wind up the company and appointing Mr Algeri and Mr Norman as liquidators.

ASIC’s application will be heard in the Federal Court of Australia at Melbourne on a date to be fixed.

ASIC’s investigation into the affairs of Merlin Diamonds is continuing.

Background

Merlin Diamonds, a Melbourne-based company listed on ASX, engages in the exploration and development of diamond mining projects. Its flagship project is the Merlin diamond mine in the Northern Territory. 

Merlin Diamond’s shares have been suspended from trading since 1 October 2018. Merlin Diamonds has 3.3 billion ordinary shares issued, and last traded at $0.006 per share – resulting in a market capitalisation of approximately $20 million.

Editor's note:

The matter was listed for the first case management hearing on 4 June 2019 in the Federal Court, Melbourne.

Editor's note 2:

On 4 June 2019, the Federal Court ordered that the hearing of ASIC’s interlocutory application for the appointment of a provisional liquidator be listed for hearing on 2 September 2019 along with making other orders, including for the filing of any applications by interested parties. The Court made those orders upon the giving of undertakings by the directors of Merlin Diamonds to  preserve the status quo of the company and refrain from making loans to certain entities.

A copy of the Court’s orders can be downloaded here.

Editor's note 3:

ASIC’s application for the appointment of a provisional liquidator was
heard by the Federal Court on 2 & 3 September 2019. The Court reserved its decision.

Editor's note 4:

On 16 March 2020, the ASX announced that Merlin Diamonds has been removed from the ASX Official List by the ASX with effect from the commencement of trading on 16 March 2020.