On 20 September 2019, and following a successful ASIC application, the Federal Court of Australia ordered the appointment of provisional liquidators to ASX-listed Merlin Diamonds Limited (Merlin).

The application arose from ASIC’s concerns, which included:

• Merlin advancing, since 2012, substantial funds to Axis Consultants Pty Ltd (Axis), a related management services company, without shareholder approval and that $13,752,124 was owed by Axis to Merlin as at 30 June 2018;
• the advances to Axis having been used to fund private companies associated with Mr Joseph Gutnick, a current and former director of Merlin and Axis respectively, and provided no discernible benefit to Merlin;
• the advances to Axis appearing to be unreasonable, uncommercial and non-arm's length;
• no security for the advances to Axis having been provided by it or any third party;
• the advances to Axis having been fully impaired by Merlin in each financial year;
• Merlin’s auditors being unable to obtain sufficient appropriate evidence to be satisfied that Axis is likely to be able to repay the advances;
• Merlin receiving, in October 2016, $900,000 from Chabad Properties Pty Ltd (Chabad) for convertible notes and options issued by Merlin to Chabad—however, the ultimate source of the money paid by Chabad (of which Mr Gutnick is a former director) was, in fact, Merlin.
• Merlin’s audited accounts for the half-year ended 31 December 2018 (due 18 March 2019) having not been lodged with ASIC;
• the financial position of Merlin Diamonds as at 30 June 2018 raising questions over the company’s solvency; and
• Merlin having no company secretary since 8 January 2019.

Justice O’Bryan appointed Mr Salvatore Algeri and Mr Timothy Norman, of Deloitte Financial Advisory Pty Ltd, as joint and several provisional liquidators to Merlin. Justice O’Bryan also ordered, among other things, that the provisional liquidators shall, within 42 days, provide to the Court a report that includes:

• the identification of Merlin’s assets and liabilities;
• an opinion as to the solvency of Merlin, the value of its assets and whether it has kept proper financial records;
• an opinion as to whether Merlin has contravened any provision of the Corporations Act and whether there have been any suspected contraventions by Merlin’s current or former directors or officers;
• the likely return to creditors; and
• any other information necessary to enable the financial position of Merlin to be assessed.

The matter will be listed by the Court for a further hearing on a date to be fixed.

A copy of his Honour’s judgment can be downloaded here.

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

Background

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

A provisional liquidator is appointed by the court to preserve a company’s assets until a wind-up application is decided and to attend to any other matters as ordered. ASIC currently has before the Federal Court an application to wind up Merlin which will be determined at a later time.

Editor's note:

On 17 October 2019, the Federal Court made a number of orders including that the hearing of ASIC’s application for the appointment of a liquidator to Merlin be listed for hearing on 10 March 2020 for three days and a further case management hearing be listed for 31 January 2020. A copy of the Court’s orders can be downloaded here.

Editor's note 2:

On 14 November 2019, the Federal Court listed the matter for a directions hearing at 10:15am on 6 December 2019.

Editor's note 3:

On 17 December 2019, the Federal Court made a number of orders including that ASIC have leave to amend its originating process to have Merlin wound up on the additional ground of insolvency; that by 4pm on 21 January 2020 the Interested Parties who have sought leave to be heard in the proceeding file and serve a notice stating whether they oppose the wind up of Merlin; and if there is no opposition to the winding up of Merlin the matter be listed for final hearing on 4 February 2020. A copy of the Court’s orders can be downloaded here.

Editor's note 4:

On 31 January 2020, the Federal Court varied the orders made on 17 December 2019.  A copy of the Court’s orders can be downloaded here. ASIC's application for the appointment of a liquidator to Merlin is listed for hearing on 10 March 2020 (refer Editor's note above).

Editor's note 5:

ASIC's application for the appointment of a liquidator to Merlin was heard by the Federal Court on 10 March 2020. The Court reserved its decision.

Editor's note 6:

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.