Australian Securities and Investments Commission v Merlin Diamonds Limited

Solicitor for the Provisional Liquidators of the Defendant: Norton Rose Fulbright Australia

Counsel for the Interested Parties: Mr S Bell

Solicitor for the Interested Parties: Ian B Mitchell & Associates

1 April 2020 In the "Date of hearing" row on the coversheet, "2, 3 September 2019" has been replaced with "10 March 2020"

BETWEEN: AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION Plaintiff AND: MERLIN DIAMONDS LIMITED (ACN 009 153 119) Defendant

JUDGE: O'Bryan j DATE OF ORDER: 31 march 2020

1. The defendant be wound up in insolvency pursuant to s 459B of the Corporations Act 2001 (Cth).
2. Salvatore Algeri and Timothy Norman, of Deloitte Financial Advisory Pty Ltd, 550 Bourke Street, Melbourne, Victoria 3000, be appointed joint and several liquidators of the defendant.
3. By 4pm on Thursday 2 April 2020, the plaintiff file and serve written submissions on the question of costs of the proceeding, including the interlocutory hearing on 2 and 3 September 2019, of no more than 5 pages.
4. By 4pm on Thursday 9 April 2020, the defendant and any person who was given leave to appear at the interlocutory hearing on 2 and 3 September 2019 or the final hearing on 10 March 2019 and who opposes the costs orders proposed by the plaintiff or seeks an additional costs order file and serve written submissions of no more than 5 pages.
5. The Court will determine the question of costs of the proceeding on the basis of the written submissions referred to in orders 3 and 4 unless any person that has filed a submission notifies the Court by 4pm on Tuesday 14 April 2020 that that person seeks an oral hearing, in which event the Court will convene a telephone or video hearing in accordance with Special Measures Information Note 1 issued by the Court (SMIN-1), or any further special measures issued by the Court which supersede SMIN-1. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Introduction 1 By an amended originating process filed on 19 December 2019, the plaintiff, the Australian Securities and Investments Commission (ASIC), seeks orders that the defendant company, Merlin Diamonds Limited (Merlin), be wound up and that Salvatore Algeri and Timothy Norman of Deloitte Financial Advisory Pty Ltd be appointed as joint and several liquidators to Merlin. The application is made pursuant to s 464 of the Corporations Act 2001 (Cth) (Act). 2 ASIC's application is primarily based upon the insolvency ground in s 459B of the Act, with an alternative basis being the just and equitable ground in s 461(1)(k) of the Act. 3 ASIC relies upon: (a) the affidavit of Brendan Francis Caridi sworn 22 November 2019 (Caridi Affidavit); (b) the affidavit of Tony Tsiavis sworn 22 November 2019 (Tsiavis Affidavit); (c) the affidavits of Timothy Bryce Norman sworn 3 December 2019 (First Norman Affidavit), 5 December 2019 (Second Norman Affidavit), 30 January 2020 (Third Norman Affidavit) and 3 March 2020 (Fourth Norman Affidavit); (d) the affidavit of Fiona Katheen Murray-Palmer affirmed 30 January 2020 (Murray-Palmer Affidavit); (e) the affidavit of Hoda Solaymani-Jamal affirmed 10 March 2020 (Solaymani-Jamal Affidavit); and (f) the report of Salvatore Algeri and Mr Norman of Deloitte Financial Advisory Pty Ltd (Provisional Liquidators) filed with the Court 1 November 2019 (PL Report), which is also exhibited to the Third Norman Affidavit. 4 Messrs Caridi and Tsiavis are employees of ASIC. Mr Norman is one of the provisional liquidators. Ms Murray-Palmer and Ms Solaymani-Jamal are solicitors employed by Norton Rose Fulbright Australia, solicitors for the provisional liquidators. 5 The application is opposed by 22 shareholders and 9 convertible noteholders, listed in the Schedule to the Amended Notice of Appearance filed on 9 March 2020 ('the Interested Parties'). The shareholders together hold approximately 676,000,000 fully paid shares in Merlin, representing approximately 20.5% of Merlin's issued share capital. The Interested Parties propose that, instead of winding up Merlin, an administrator should be appointed to provide an opportunity for a deed of company arrangement to be put forward and voted upon. In the alternative, the Interested Parties propose that Court should appoint Mr Adam Shepard as liquidator of Merlin instead of Messrs Algeri and Norman. 6 The Interested Parties rely upon: (a) an affidavit of Benjamin William Jarvis sworn 7 February 2020 (Jarvis Affidavit); (b) an affidavit of Maurice Julian Feilich sworn 7 February 2020 (Feilich Affidavit); and (c) affidavits of Ian Burnham Mitchell sworn 5 and 9 March 2020 (First and Second Mitchell Affidavits). 7 Mr Jarvis deposed that he is one of the principal beneficiaries of Cove Street Pty Limited (Cove Street) which is both a shareholder and convertible noteholder in Merlin (and one of the Interested Parties) and he is authorised in writing to represent Cove Street in these proceedings. He deposed that he has had a number of discussions with other shareholders and convertible noteholders in Merlin and particularly with those who comprise the Interested Parties, and that Cove Street has written authority to represent those shareholders. The written authorities were not adduced in evidence, but ASIC did not challenge Mr Jarvis' assertion to that effect. 8 Mr Jarvis also deposed that Mr Feilich is a stockbroker whose firm is called Sanlam Private Wealth. In his affidavit, Mr Feilich deposed that he has read Mr Jarvis' affidavit and agrees with the contents. He also deposed that he has been closely associated with Merlin over a number of years and has been instrumental in raising capital for Merlin; he consents to act as a director of Merlin and to assist Merlin to become and remain a viable and listed ASX company and also to assist ASIC and the provisional liquidator of Merlin to ensure compliance with the Act and otherwise as required in relation to the administration of Merlin. 9 Mr Mitchell is the solicitor for the Interested Parties. 10 Each of the affidavits referred to above were read at the hearing and none of the witnesses was required for cross-examination. 11 For the reasons that follow, I will make the orders sought by ASIC.

Background 12 The proceeding was commenced by an originating process filed on 14 May 2019 by ASIC. At that time, ASIC sought an order that Merlin be wound up pursuant to ss 461(1)(e) and/or (k) of the Act. As an interim step, ASIC also sought the appointment of a provisional liquidator under s 472(2) of the Act. 13 The application to appoint a provisional liquidator was opposed by Merlin and a number of shareholders of Merlin who applied for leave to be heard on the application (which I granted) (Opposing Shareholders). The Opposing Shareholders were a different group of persons, and represented by different lawyers, to the Interested Parties to this application. There were 13 Opposing Shareholders and they held, in aggregate, approximately 11% of the issued shares in Merlin. 14 On 20 September 2019, I made orders appointing Messrs Algeri and Norman of Deloitte Financial Advisory Pty Ltd as joint and several provisional liquidators to Merlin pursuant to s 472(2) of the Act. My reasons for making that appointment are published at Australian Securities and Investments Commission v Merlin Diamonds Limited [2019] FCA 1546. In those reasons, I reached the following conclusions: [128] As noted earlier, before appointing a provisional liquidator pursuant to s 472(2) of the Act, the Court will need to be satisfied of two matters: the first is that a winding up application has been filed and there is a reasonable prospect that a winding up order will be made on the application; the second is that there is sufficient reason for intervention prior to the final hearing. For the following reasons, I am satisfied of both matters. Reasonable prospect that a winding up order will be made [129] The evidence adduced by ASIC on this application satisfies me that there is a reasonable prospect that a winding up order will be made on the hearing of ASIC's principal application. There are two reasons why such a prospect exists. First, ASIC has shown a strong prima facie case that Merlin is, or has until recently been, contravening various provisions of the Act. Second, the nature of those contraventions is such as to lead to a justifiable lack of confidence in the conduct and management of Merlin's affairs. [130] ASIC has established a strong prima facie case that Merlin is, or has until recently been, contravening various provisions of the Act. [131] First, Merlin had no company secretary from 8 January 2019 in contravention of s 204A(2) of the Act. At the hearing of this application, Senior Counsel for Merlin informed the Court that Mr Joseph Gutnick has now been appointed company secretary, although no evidence was adduced in relation to that appointment. The failure of Merlin to attend to that obligation of the law, despite being on notice of the contravention for a considerable period of time, indicates that Merlin does not appear to take its legal obligations seriously. To some extent, that concern is exacerbated by Merlin announcing to the Court during the hearing of this application that it has remedied the position without providing the Court with any evidence that that has in fact occurred. [132] Second, Merlin has failed to lodge its half yearly report for the period ending 31 December 2018 with ASIC in contravention of s 320 of the Act. At the hearing, Merlin made no submissions about that contravention. It expressed no contrition for the contravention. Nor did it adduce any evidence of steps being taken to remedy the contravention. As noted earlier, on 25 March 2019, the current auditors of Merlin, Grant Thornton, reported Merlin's contravention of s 320 to ASIC and advised ASIC that Grant Thornton had not been presented with any information from Merlin. [133] Third, the transactions associated with the issue of 900,000 convertible notes to Chabad on 30 June 2016 establishes a strong prima facie case that Merlin has contravened both s 208 and other provisions of the Act. It is highly likely that Chabad was a related party of Merlin within the meaning of s 228 of the Act at the relevant time because it was, at that time, an entity controlled by two of the directors of Merlin. As at 30 June 2016, both Mr Joseph Gutnick and Mr Mordechai Gutnick were directors of Chabad. Merlin gave a financial benefit to Chabad by issuing convertible notes to Chabad and, instead of requiring the face value of those notes to be paid by Chabad, Merlin loaned monies to Chabad through a series of round-robin transactions to enable Chabad to subscribe for those notes. The provision of finance, including through interposed entities, constitutes a financial benefit within the meaning of s 229 of the Act. There is no evidence that the giving of the financial benefit to Chabad was approved by the members of Merlin. The transactions constituting the financial benefit cannot be characterised as having been conducted on reasonable arm's length terms within the meaning of s 210 of the Act. Further, the round-robin transactions associated with the issue of convertible notes to Chabad have the appearance of uncommercial and dishonest transactions which may give rise to other contraventions of both the Act and other laws. [134] Fourth, ASIC has shown a prima facie case that Merlin has contravened s 208 of the Act by advancing loans to Axis in each of the financial years from 2012 to 2018. It is likely that Axis was at all relevant times a related party of Merlin within the meaning of s 228 of the Act because it was (and is) controlled by directors of Merlin. In the period in question, the only directors of Axis have been Mr Joseph Gutnick, Mr Mordechai Gutnick and Dr Tyrwhitt. The making of a loan is a financial benefit within the meaning of s 229 of the Act. There is no evidence that the loans were approved by the members of Merlin. In my view, it is very unlikely that the loans could be characterised as reasonable arm's length transactions. Until the loan agreement was entered into with Axis, the loans were not supported by any documentation. The loans are unsecured. There is no evidence that, prior to entry into the loan agreement with Axis, the loans had a specified repayment date. There was no apparent benefit to Merlin from the making of the loans. Despite the loans being fully impaired in the accounts from the 2014 financial year onwards, Merlin continued to advance further monies to Axis. [135] The contraventions of the Act referred to above create a justifiable lack of confidence in the conduct and management of Merlin's affairs. The most serious contraventions, involving the loans to Axis and the round-robin transactions associated with the issue of convertible notes to Chabad, strongly suggest that the current directors of Merlin have applied company monies for the benefit of entities related to Mr Joseph Gutnick and Mr Mordechai Gutnick. In my view, the transactions are not only likely to be in contravention of s 208 of the Act, but also constitute breaches of directors' duties. Merlin's current directors have permitted Merlin to advance funds totalling in excess of $13 million on uncommercial terms to a company related to the Gutnicks for no real benefit to Merlin in circumstances where the loans were being fully impaired in the same year in which they were advanced. [136] The contraventions referred to above also indicate the likelihood of harm to investors. Throughout the financial years from 2012 to 2018, Merlin generated losses and its operations were funded by raising debt and equity capital from the public. At least part of the capital raised has been diverted to Axis (more than $13 million as at 30 June 2018). The evidence shows that Axis has advanced loans to other entities associated with Mr Joseph Gutnick. The most concerning aspect is that more than $9 million has been loaned to Brocho, a private company controlled by the Gutnick family. [137] The foregoing constitutes evidence of serious mismanagement and repeated breaches of the Act. Unsurprisingly, ASIC has lost confidence in Merlin's compliance with the Act. [138] I do not accept the submission of Merlin and the Opposing Shareholders that the further undertaking offered to the Court by each of Mr Joseph Gutnick, Mr Mordechai Gutnick and Dr Tyrwhitt would prevent the Court from making an order for the winding up of Merlin at the final hearing of this matter. The mere fact that the board may resign does not preclude the Court from making a winding up order on the just and equitable ground. Even if the constitution of the board were altered, it may nevertheless be open to the Court to conclude that the affairs of Merlin have been brought to such a state that a winding up order is required. While that is ultimately a question for the final hearing in this matter, I am satisfied that there is presently a reasonable prospect of such an order being made. Sufficient reason for intervention [139] The evidence on this application also satisfies me that there is a sufficient reason to appoint a provisional liquidator prior to the final hearing. Indeed, I consider that there are multiple reasons for intervention. [140] First, the nature and extent of the potential contraventions of the Act referred to above are such that I consider that the affairs of the company have been conducted without due regard to legal obligations. I have no confidence that the affairs of Merlin are being carried on for the benefit of its shareholders. [141] Second, I consider that there is a need for an examination of the books and accounts of Merlin by someone independent of the company. The necessity is not only to investigate those contraventions of the Act identified by ASIC. It is also to protect Merlin's assets. There is a need for someone independent of the company to investigate the loans that have been made to Axis and the recoverability of those loans. In my view, that need is urgent. There can be no confidence that the current board will undertake the required actions given the directors' relationship to Axis. [142] Third, the financial position of Merlin and the likelihood of insolvency is a further reason for the appointment of a provisional liquidator. While the company is in "care and maintenance", it has ongoing costs and expenses. Merlin's quarterly report to the ASX for the quarter ended 30 June 2019 forecast cash outflows for the current quarter of $580,000. However, Merlin's cash balance at 30 June 2019 was only $5,000. Further, Merlin has negative working capital which means it has a deficiency of current assets from which to pay current liabilities. In those circumstances, I consider that the appointment of a provisional liquidator is required in the public interest. [143] I am not satisfied that the Undertakings given by Merlin and its directors avoids the need for the appointment of a provisional liquidator. The Undertakings are vague in their terms. The principal undertaking is "other than in the ordinary and proper course of business, to preserve the status quo of the affairs of Merlin". It is wholly unclear what business actions or decisions are permitted by that undertaking. Further, and more importantly, the evidence shows a need for intervention and action to protect the assets of Merlin prior to the final hearing. Preservation of the status quo in the affairs of Merlin, under the control of the current directors, is not appropriate in light of the serious concerns that exist as to their disregard of their legal obligations. [144] Finally, while I accept that the appointment of a provisional liquidator is an event of default under the Secured Note Deed entitling noteholders who hold two thirds of the notes by value to pass a resolution to exercise rights under the General Security Deed to appoint a receiver of the assets of Merlin, I do not consider that that is a reason not to appoint a provisional liquidator. As ASIC submitted, Merlin is already in default of its obligations under the Secured Note Deed. Under clause 9 of that Deed, events of default include insolvency events (which includes the appointment of a provisional liquidator or any step being taken to appoint a provisional liquidator) and the suspension of trading in Merlin shares on the ASX. Accordingly, events of default have already occurred in that steps have been taken to appoint a provisional liquidator and Merlin's shares have been suspended from trading. Noteholders are presently able to act on their security under the General Security Deed. Whether a two thirds majority of noteholders choose to appoint a receiver to the assets of Merlin will no doubt reflect their assessment of the prospects of recovery in that event, in comparison to awaiting the determination of ASIC's application for a winding up of the company. That decision may also be affected by any shares held by the noteholders and the perceived value of the shares. [145] At this point in time, it is a matter of speculation as to what steps, if any, shareholders or noteholders may take following the appointment of a provisional liquidator. There is always the prospect of discussions and negotiations between the shareholders, noteholders and ASIC as to the future governance of Merlin. It seems reasonably likely that if the present board of Merlin had resigned, or if shareholders had acted to replace the board, at an earlier point in time, ASIC may not have felt compelled to bring this proceeding. In the circumstances, the possibility, and I consider it to be no more than a possibility, that noteholders may act to appoint a receiver to the assets of Merlin is not a reason not to appoint a provisional liquidator. 15 Pursuant to the Court's orders, on 1 November 2019, the provisional liquidators filed a report setting out key findings from their investigations into the affairs of Merlin and their review of the company's books and records. The report, whilst necessarily preliminary in nature: (a) identified the assets and liabilities of Merlin; (b) provided an opinion on the solvency of Merlin; (c) provided an opinion on the value of the assets of Merlin; (d) provided an estimated likely return to creditors of Merlin; (e) provided additional information necessary to assess the financial position of Merlin; (f) provided an opinion as to whether Merlin had contravened any provisions of the Act; and (g) provided an opinion as to whether any current or former directors or officers of Merlin had contravened the Act. 16 In relation to solvency, the provisional liquidators expressed the opinion that, while their investigations into the solvency of Merlin were only preliminary at that stage, they had concluded that Merlin was insolvent as at the date of their appointment, on a cash flow basis, and may have been insolvent for a period of time prior to this. Based in part on the PL Report, ASIC amended its originating application on 19 December 2019 to seek the winding up of Merlin on the grounds of insolvency under s 459B, in addition to the grounds stated in ss 461(1)(e) and (k). 17 At the time of the appointment of the provisional liquidators, Merlin had four directors, being Mr Joseph Gutnick, Mr Mordechai Gutnick (Mr Joseph Gutnick's son), Dr David Tyrwhitt and Mr Henry Herzog (who is resident in the USA). Mr Joseph Gutnick had been appointed Merlin's company secretary on 27 August 2019, in circumstances where Merlin had had no company secretary since the resignation of Mr Peter Lee from that role on 8 January 2019. On 26 November 2019, Mr Joseph Gutnick and Mr Mordechai Gutnick resigned from their respective roles as directors and company secretary. Consequently, Merlin now has only two directors and, again, no company secretary. 18 ASIC's application for final relief was heard on 10 March 2020. The Opposing Shareholders did not seek to be heard. As noted earlier, the application was opposed by the Interested Parties.

Merlin's current position 19 The evidence relied on by ASIC in support of its winding up application was materially the same as the evidence before me at the hearing of the application for the appointment of the provisional liquidators, save that the evidence was put into admissible form for a final (rather than interlocutory) hearing. That evidence was supplemented by the PL Report and other information that emerged from the investigations conducted by the provisional liquidators. 20 The Interested Parties did not contest any of the facts on which ASIC relied in support of its winding up application. Nor did the Interest Parties contest the conclusion that Merlin is presently insolvent. 21 On the basis of the evidence before me, including the PL Report, I make the findings referred to in my earlier reasons in Australian Securities and Investments Commission v Merlin Diamonds Limited [2019] FCA 1546, for the reasons there stated. Specifically, I find that Merlin has contravened, and is contravening, various provisions of the Act as follows: (a) First, Merlin had no company secretary from 8 January 2019 until 27 August 2019 in contravention of s 204A(2) of the Act. Mr Joseph Gutnick was appointed to that role on 27 August 2019, but then resigned on 26 November 2019. Accordingly, Merlin continues to have no company secretary. (b) Second, Merlin has failed to lodge any half-yearly report for the period ending 31 December 2018 (and later periods) with ASIC, in contravention of s 320 of the Act. (c) Third, Merlin has contravened s 208 of the Act by engaging in transactions involving the use of Merlin's own monies to fund the subscription by Chabad Properties Pty Ltd, a related party of Merlin, for convertible notes issued by Merlin in the amount of $900,000 on 30 June 2016. (d) Fourth, Merlin has contravened s 208 of the Act by advancing loans to Axis Consultants Pty Ltd in each of the financial years from 2012 to 2018, being a total amount outstanding as at 30 June 2018 of $13,752,125. Axis was at all relevant times a related party of Merlin within the meaning of s 228 of the Act because it was controlled by one or more of Merlin's directors: Mr Joseph Gutnick (a registered director of Merlin and Axis between 27 October 2008 and 7 July 2016); Mr Mordechai Gutnick (a registered director of Merlin since 7 July 2016 and Axis between 7 July 2016 and 5 August 2016 and since 18 October 2017); and Dr Tyrwhitt (a registered director of Merlin since 16 December 2011 and Axis between 1 January 1997 and 13 October 2017). 22 Since the resignations of Mr Joseph Gutnick and Mr Mordechai Gutnick as directors on 26 November 2019, Merlin is also now in contravention of s 201A of the Act in that it does not have a minimum of 3 directors and it does not have a minimum of 2 directors who are ordinarily resident in Australia. 23 In Australian Securities and Investments Commission v Merlin Diamonds Limited [2019] FCA 1546, I made the following findings at [18] - [26] with respect to Merlin's financial position on the basis of the evidence then before me: Current financial position [18] In each of the financial years ended 30 June 2009 to 30 June 2018, Merlin has reported a net loss. [19] The most recent annual report for Merlin is for the year ended 30 June 2018. In that financial year, Merlin recorded a loss of $15,238,431. Its balance sheet as at 30 June 2018 showed a deficiency in total equity of $7,116,628, comprising issued capital of $165,901,254, reserves of $622,160 and accumulated losses of $173,640,042. The balance sheet showed total assets of $5,374,921 which included current assets of $1,446,213 of which $531,289 was cash. The balance sheet recorded total liabilities of $12,491,549 of which current liabilities were $6,275,441. Hence, the balance sheet showed a deficiency in working capital (current assets less current liabilities) of $4,829,228. [20] The notes to the financial statements record the following: Going Concern The financial report has been prepared on the basis of going concern which contemplates continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business. The Company has incurred a loss of $15,238,432 in the year to 30 June 2018, had net cash operating outflows of $2,876,298 for the year ending 30 June 2018 and has negative working capital of $4,829,228 at 30 June 2018. In order to continue as a going concern, the Company will be required to raise further capital to meet its commitments, resume mining operations at commercial levels, and have the continued support of creditors. These conditions indicate a material uncertainty that may cast significant doubt about the Company's ability to continue as a going concern. (emphasis added) [21] The notes to the financial statements also state that the directors believe the going concern basis to be appropriate. The reason for that view was the success of Merlin in raising capital since the balance date and further commitments of capital that had been made. [22] Grant Thornton issued a qualified opinion in respect of Merlin's financial report for the year ended 30 June 2018. In respect of the financial report being prepared on a going concern basis, Grant Thornton noted the disclosure of the material uncertainty about the raising of further capital and stated that that may cast significant doubt about Merlin's ability to continue as a going concern and therefore Merlin may be unable to realise its assets and discharge its liabilities in the normal course of business and at the amount stated in the financial report. [23] Under s 320 of the Act, Merlin was required to lodge audited accounts for the half year ending 31 December 2018 by 18 March 2019. To date, those accounts have not been lodged and Merlin is in breach of its obligations under s 320. On 25 March 2019, Grant Thornton reported Merlin's contravention of s 320 of the Act to ASIC. Grant Thornton advised ASIC that it had not been presented with any information from Merlin. [24] On 30 April 2019, Merlin lodged a report for the quarter ended 31 March 2019 with the ASX. The report stated that Merlin's diamond mine had been put on care and maintenance and that Merlin would report a full update on activities in June 2019. [25] On 31 July 2019, Merlin lodged a report with the ASX for the quarter ended 30 June 2019. The report did not provide any update on Merlin's activities, contrary to the statement that had been made in the report for the quarter ended 31 March 2019. In respect of the previous 12 months, the report disclosed that: (a) cash held at the beginning of the period was $507,000; (b) cash outflows totalled $3,458,000; (c) cash inflows totalled $2,956,000 which included borrowings of $2,167,000 and proceeds from the issue of convertible notes of $800,000; and (d) cash at the end of the period was $5,000. [26] The report also stated that the estimated cash outflows for the following quarter would be $580,000. 24 In the PL Report, the provisional liquidators expressed the following opinions about Merlin's financial position as at the date of their appointment and as at the date of the report (1 November 2019): (a) As at the date of their appointment, the provisional liquidators considered that Merlin was insolvent for reasons that included the following: (i) Merlin had a negative net asset position from the 2017 financial year onwards (section 4.3.1); (ii) in the preceding four years, Merlin had made continual losses, and its working capital and quick asset ratios were below one (at section 4.3.2); (iii) cash at bank totalled $1,331 and the directors did not have any reliable prospects for obtaining additional funding (at section 4.3.3); and (iv) Merlin had outstanding employee entitlements in the amount of approximately $500,000 (and potentially, a further $800,000 if Merlin is liable to pay the amounts listed under 'Axis Employees' (at section 4.3.5 and 5.1.7). (b) Following the provisional liquidators' appointment, the following events occurred: (i) the ATO informed the Provisional Liquidators that Merlin had an outstanding Superannuation Guarantee Charge debt of $4,093.76 (at section 5.1.7); and (ii) the Western Australian Department of Mines, Industry, Regulation and Safety imposed fines totalling $300,000 on Merlin in respect of Merlin's failure to provide Unconditional Performance Bonds in relation to Mining Leases M80/526 and 80/532 (at section 2.5.5). 25 In relation to Merlin's net asset position, the provisional liquidators expressed the following opinions in the PL Report concerning the valuation of Merlin's mining tenements (at section 4.3.1): The Company does not include a valuation for its mining tenements on the balance sheet. However, our valuation (detailed in section 5.1.2) indicates it may be of sufficient value to increase the Company's net asset position above zero. The realisable value of any such asset is contingent upon market pricing of minerals and capital investments to return the tenements to operating order. Whilst the "balance sheet" test can be useful in assessing solvency, it is not determinative. That is because the law recognises that creditors are entitled to be paid when due, and if a company's assets are not readily realisable to permit payment of the Company's debts when due, the Company will not be solvent. Specifically, when determining solvency where the entity's main assets are mining tenements, the court has confirmed the correct test is a cash flow test (Queensland Phosphate Pty Ltd & Anor v Korda & Anor [2019]). This is due to the inability to sell mining tenements in a short timeframe and more importantly, if they were sold, the entity's business would cease, as it would have disposed of its core assets out of the ordinary course. As set out above at 2.5.5, there is also a risk that some of the tenements will be forfeited due to a failure to provide unconditional performance bonds as required under the Mining Act 1978 (WA) and to pay the penalty imposed on the Company due to that failure. 26 Mr Norman deposed that the provisional liquidators have been unable to identify any discrete assets of Merlin that could be sold to raise funds in order to protect the assets of the company. 27 The evidence shows that, since the date of the PL Report, Merlin's financial position has not only not improved but has worsened. Mr Norman deposes in his fourth affidavit that: (a) based on the books and records of the company that are available to the provisional liquidators, as at 28 February 2020 the sum of creditor claims relating to Merlin is estimated as $12,446,935.67 and the approximate liquidation costs are $1,121,220.85; (b) Merlin continues to incur liabilities (including in relation to the maintenance of the Northern Territory mining tenements, which will fall due in the near future) which it does not have sufficient cash to pay; and (c) Merlin's Superannuation Guarantee Charge debt to the ATO has increased from $4,093.76 to $11,168.63. 28 The provisional liquidators also expressed the opinion that the books and records of Merlin have not been kept as required by s 286 of the Act (at sections 4.4 and 6.4.8). 29 It is necessary to say something further about the amounts lent by Merlin to Axis. As noted earlier, as at 30 June 2018, the loan amount totalled $13,752,125. However, the loan amount was not recorded as an asset in Merlin's balance sheet because, for each of the financial years from 2014 to 2018, Merlin's financial reports recorded an impairment provision for the entire amount of the loan and interest owing by Axis. The evidence suggests that it is unlikely that Axis will be able to repay the loan, if the monies owing were to be pursued. First, in response to a statutory notice to produce, Axis provided to ASIC a draft balance sheet of Axis as at 31 March 2019. The balance sheet records that, as at that date, Axis had negative equity of $17,813,839.28 made up of total liabilities of $28,372,360.61 and total assets of $10,558,521.33. The liabilities include the amount owing to Merlin, as well as substantial amounts owing to other entities. The assets primarily comprise amounts loaned by Axis to entities controlled by the Gutnick family (particularly Brocho Investments Pty Ltd). Second, on 11 November 2019, Axis made an offsetting claim against Merlin for alleged liabilities in excess of $4.5 million and, in addition, a claim for a reasonable contractual fee, alternatively a quantum meruit claim, in the amount of $2.34 million, totalling $6.84 million. Third, on 20 November 2019, Axis was wound up in insolvency and had a liquidator appointed to it. 30 In evidence was a letter dated 24 September 2013 signed by Mr Joseph Gutnick as director of Axis and addressed to the directors of Merlin. The letter contained a personal undertaking from Mr Gutnick in the following terms: In the event that Merlin Diamonds Limited requires repayment of the receivable amount owed by AXIS Consultants Pty Ltd of $6,511,675 at 30 June 2013 and AXIS does not have funding available, I will provide financial support to AXIS to enable repayment of the amount owed to Merlin Diamonds Limited. 31 The undertaking may provide an avenue for Merlin to recover some or all of the amount owing by Axis from Mr Joseph Gutnick personally, but the evidence is insufficient for any conclusions to be reached in that respect. 32 Section 95A of the Act states that "a person is solvent if and only if the person is able to pay all the person's debts, as and when they become due and payable", and that "a person who is not solvent is insolvent". The assessment of solvency focusses on cash flow and the company's liquidity in considering whether the company is able to meet its expenses and liabilities when payable: Australian Securities and Investments Commission v Plymin (No 1) [2003] VSC 123. While an excess of assets over liabilities will satisfy a balance sheet test, if the assets are not readily realisable so as to permit the payment of all debts as and when they fall due, the company will not be solvent: Crema Pty Ltd v Land Mark Property Development Pty Ltd [2006] VSC 338 at [141]. 33 In Powell v Fryer [2001] SASC 59, Olsson J (with whom Duggan and Williams JJ agreed), noted the following principles regarding insolvency (at [75]): (1) Whether or not a company is insolvent at a given point in time is a question of fact to be determined by the trial judge. Expert evidence may be of assistance, but it is not conclusive: Sandell v Porter (1966) 115 CLR 666 (Sandell). (2) The conclusion of insolvency must be derived from a proper consideration of the company's financial position, in its entirety, based on commercial reality. Generally speaking, it ought not to be drawn simply from evidence of a temporary lack of liquidity: Sandell; Pegulan Floor Coverings Pty Ltd v Carter (1997) 24 ACSR 651. Regard should be had not only to the company's cash resources immediately available, but also to moneys which it can procure by realisation by sale, or borrowing against the security of its assets, or otherwise reasonably raise from those associated with, or supportive of, it. It is the inability, utilising such resources as are available through the use of assets or which may otherwise realistically be raised to meet debts as they fall due which indicates insolvency: cf Sandell (at 670); Deputy Commissioner for Corporate Affairs v Caratti (1980) 5 ACLR 119; Flavel v Day (1984) 9 ACLR 502. (3) It is legitimate to take into account any indulgences extended to a company by its creditors as to trading terms: Calzaturificio Zenith Ply Ltd (In Liq) v NSW Leather & Trading Co Ply Ltd [1970] VR 605 at 609. However, absent a firm arrangement with all of its creditors for an extension of terms of trade, the court will usually apply the normal terms of trading when assessing solvency. ... (4) It is not appropriate to base an assessment on the prospect that the company might be able to trade profitably in the future, thereby restoring its financial position. The question is whether it, at the relevant time, is able to pay its debts as they become due - not whether it might be able to do so in the future, if given time to trade profitably: Sheahan v Hertz Australia Pty Ltd (1995) 16 ACSR 765 at 769. 34 In Queensland Phosphate v Korda (No 2) [2019] VSCA 215, the Victorian Court of Appeal discussed the principles concerning insolvency in a similar context to the present, involving a mining company the principal assets of which were mining tenements. The Court observed (at [99] - [100], citations omitted): [99] Whether a company is insolvent for the purposes of s 95A of the Corporations Act is a 'question of fact to be ascertained from a consideration of the company's financial position taken as a whole'. In considering the company's financial position as a whole, the court must have regard to commercial realities, which will be relevant in considering the resources available to the company to meet its liabilities as and when they fall due. Commercial realities include the nature of the company's business, the character of the debt and all of the circumstances present at the relevant time. [100] Commercial realities will also be relevant to consideration of whether the company can realise funds from its assets in order to pay its debts as and when they fall due and the time in which those assets can be realised. Whether an asset is realisable requires consideration of the timeframe in which the asset can be realised and produce cash. There is a temporal limit on whether an asset can be considered realisable which has been described as the realisation of assets 'within a relatively short time', 'within a reasonable time', 'relatively quickly', and 'in time to meet the indebtedness as the claims mature'. [101] In determining whether an asset is realisable, the nature of the business and the asset, in particular whether the asset is necessary for the continuation of the business, is a relevant consideration. An asset will not be realisable where it is necessary to the conduct of the business or where its sale, other than in the ordinary course of business, would deprive the company of any future as a going concern ('essential business asset principle')… 35 At [135] - [136], the Court affirmed the principle (referred to as the "essential business asset" principle) that, if assets such as mining tenements were necessary for the continuation of a company's business, they did not constitute realisable assets for the purposes of determining the company's solvency, referring to Rees v Bank of New South Wales (1964) 111 CLR 210, Re Timbatec Pty Ltd (1974) 1 NSWLR 613 and Switz Pty Ltd v Glowbind Pty Ltd [2000] NSWSC 222. 36 The evidence adduced by ASIC satisfies me that Merlin is insolvent. Although not determinative, I place considerable weight on the opinion expressed by the provisional liquidators in the PL Report, particularly in circumstances where those findings were not challenged or contradicted by other evidence: Australian Securities and Investments Commission v Radisson Maine Property Group (Aust) Pty Ltd [2004] NSWSC 949 at [50]. Every relevant financial indicator shows that Merlin is presently insolvent: it has incurred losses over the past few years; it has no income and significant expenses; it has amounts currently owing to creditors including liabilities to employees and the ATO; its working capital and quick asset ratios are less than one and it has negative net assets excluding the value of its mining tenements. The evidence referred to above shows that Merlin does not have available to it any realistic prospect of raising a sufficient amount of cash or readily realisable assets to meet its current outstanding liabilities. That conclusion was not contested by the Interested Parties.

ASIC's case for a winding up order 37 As noted earlier, ASIC applies for the winding up of Merlin primarily on the ground of insolvency pursuant to s 459B of the Act. In the alternative, ASIC relied on the just and equitable ground in s 461(1)(k) of the Act. 38 I accept ASIC's submission that, where a company is insolvent, a court will only decline to order a winding up for compelling reasons: Khoury v Rosemist Holdings Pty Ltd [1999] FCA 458 at [65]; TS Recoveries Pty Ltd v Sea-Slip Marinas (Aust) Pty Ltd [2007] NSWSC 1410 at [118]. For the reasons explained below in connection with the contentions of the Interested Parties, I do not consider that there are compelling reasons not to order a winding up. 39 While ASIC's application is principally made on the ground of insolvency, in my view ASIC's alternative ground, and particularly the facts underpinning that ground, are also relevant to the question whether a winding up order should be made despite the opposition of the Interested Parties. In Australian Securities and Investments Commission v Activesuper Pty Ltd (No 2) [2013] FCA 234, Gordon J summarised many of the principles that are applicable to the just and equitable ground for a winding up order (at [19]-[24]): [19] In the present case, the appointment of a provisional liquidator is sought where the winding up is sought on the just and equitable ground under s 461(1)(k) of the Act. There is no dispute that ASIC has standing to bring an application to wind up a company on the statutory just and equitable ground: ss 462(2) and 464 of the Act. The classes of conduct which justify the winding up of a company on the just and equitable ground are not closed, and each application will depend upon the circumstances of the particular case: Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at 374 and 376-379; Australian Securities and Investment Commission v Kingsley Brown Properties Pty Ltd [2005] VSC 506 at [95]-[97]; Nilant v RL & KW Nominees Pty Ltd [2007] WASC 105 at [117]. Nevertheless, it is possible to discern some guiding principles from the authorities. [20] It has long been established that a company may be wound up where there is "a justifiable lack of confidence in the conduct and management of the company's affairs" and thus a risk to the public interest that warrants protection: Loch v John Blackwood Ltd [1924] AC 783 at 788. In Australian Securities and Investments Commission v ABC Fund Managers (2001) 39 ACSR 443 at [119], Warren J (as her Honour then was) set out three "general fundamental principles": First, there needs to be a lack of confidence in the conduct and management of the affairs of the company … Second, in these types of circumstances it needs to be demonstrated that there is a risk to the public interest that warrants protection. Third, there is a reluctance on the part of the courts to wind up a solvent company. (Citation omitted.) [21] In relation to the first, a lack of confidence may arise where, "after examining the entire conduct of the affairs of the company" the Court cannot have confidence in "the propensity of the controllers to comply with obligations, including the keeping of books, records and documents, and looking after the affairs of the company": Galanopoulos v Moustafa [2010] VSC 380 at [32]; see also Australian Securities Commission v AS Nominees Limited (1995) 62 FCR 504 at 532-3; ABC Fund Managers at [117]-[118]; Australian Securities and Investments Commission v International Unity Insurance Pty Ltd (2004) 22 ACLC 1416 at [135]-[139]. … [23] In relation to the second, a risk to the public interest may take several forms. For example, a winding up order may be necessary to ensure investor protection or where a company has not carried on its business candidly and in a straightforward manner with the public: International Unity Insurance at [138]; see also Australian Securities and Investments Commission v Finchley Central Funds Management Ltd [2009] FCA 1110 at [3]. Alternatively, it might be justified in order to prevent and condemn repeated breaches of the law: Kingsley Brown Properties at [96]; see also AS Nominees at 527; Australian Securities and Investments Commission v Chase Capital Management Pty Ltd (2001) 36 ACSR 778 at 793. Again, there is an overlap between matters which would pose a risk to the public interest for the purpose of s 461(1)(k) and which are relevant to the appointment of a provisional liquidator. [24] In relation to the third, it has been said that "a stronger case might be required where the company was prosperous, or at least solvent": Kingsley Brown Properties at [96]. Solvency, however, is not a bar to the appointment of a liquidator on the just and equitable ground, particularly where there have been serious and ongoing breaches of the Act: ABC Fund Managers at [124]-[130]. 40 On the evidence before the Court, I have found that Merlin has contravened, and is contravening, many provisions of the Act. The most serious contraventions concern the related party transactions with Axis and Chabad. There is no evidence that any of the then directors of Merlin sought to prevent the transactions occurring. The transactions represent a serious failure of governance of the company. 41 Perhaps of equal seriousness is Merlin's failure to lodge any half-yearly report for the period ending 31 December 2018 and later periods. The provisional liquidators have also reported serious failings in the keeping of Merlin's accounts, and expressed the opinion that Merlin is in contravention of s 286 of the Act. Those failings create a significant impediment to the company continuing in existence because of the difficulties associated with the creation and completion of the accounts of the company. 42 The difficulties associated with the historical and ongoing governance and management of Merlin are not overcome by the recent resignations of Mr Joseph Gutnick and Mr Mordechai Gutnick as directors. First, the company is now in breach of s 201A of the Act. Second, there can be no confidence in the remaining directors. Dr Tyrwhitt and Mr Herzog have been directors throughout the period in which Merlin has engaged in conduct in contravention of the Act referred to earlier, and have either approved those transactions or failed to prevent them. Neither of those directors gave evidence at the hearing and have not taken any part in the proceeding. The evidence of the provisional liquidators indicates that neither of them have assisted the provisional liquidators in their task of investigating the affairs of Merlin. 43 In my opinion, the affairs of Merlin have been brought to such an unsatisfactory state that it is just and equitable for the company to be wound up. There is a justifiable lack of confidence in the conduct and management of the company's affairs and thus a risk to the public interest that warrants protection. For the reasons discussed below, the proposals advanced by the Interested Parties do not have sufficient certainty to allay those concerns. 44 Overall, I am satisfied that ASIC has established a strong case for a winding up order to be made.

Opposition from the Interested Parties 45 The Interested Parties contend that the Court should refuse ASIC's application, and terminate the appointment of the provisional liquidators, so that an administrator can be appointed to Merlin. In the alternative, the Interested Parties contend that the Court should appoint Mr Adam Shepard as liquidator of Merlin instead of Messrs Algeri and Norman. I will address each of the contentions in turn. 46 As noted earlier, the Interested Parties relied on affidavits of Mr Jarvis, Mr Feilich and Mr Mitchell. None of those witnesses was cross-examined.

Appointment of administrator 47 The Interested Parties submitted that the Court should decline to make a winding up order, and should terminate the appointment of the provisional liquidators, so that one of the Interested Parties who is now a secured creditor of Merlin, Jetan Pty Ltd (Jetan), could appoint an administrator of the company under s 436C(1) of the Act. By virtue of s 436C(2), Jetan cannot appoint an administrator while a liquidator or provisional liquidator is appointed. In support of the submission, Jetan gave a written undertaking to the Court that, if the Court declines to make a winding up order and terminates the appointment of the provisional liquidators, it would execute all necessary documents to cause Mr Adam Shepard to be appointed administrator of Merlin pursuant to s 436C(1). 48 The Interested Parties submitted that the appointment of an administrator is equivalent to the appointment of a liquidator in the sense that the administrator would take control of the assets of the company and be able to protect the position of shareholders and creditors, pursuant to the powers conferred by s 437A of the Act. The administrator is required by s 438A to investigate the company's affairs. Ultimately, the administrator is required to convene a meeting of creditors at which, in accordance with s 439C, the creditors may resolve that the company execute a deed of company arrangement, or that the administration should end, or that the company be wound up. The Interested Parties submitted that, if an administrator were appointed and a deed of company arrangement proposed, there would be an increased potential for creditors of Merlin to receive a greater return and for shareholders to recover value on their investment. For reasons developed below, I place little weight on that submission. The Interested Parties acknowledged that, as at the date of the hearing, they did not have a proposal that could be put to the creditors of Merlin. They submitted that that was understandable in circumstances where they did not have sufficient information about the affairs of Merlin to develop a firm proposal. That may be the case, but it only serves to confirm that it is not possible to assess whether the appointment of an administrator would increase the potential for creditors of Merlin to receive a greater return and for shareholders to recover value on their investment. It is a matter of speculation only. 49 The Interested Parties also acknowledged that, under s 436B(1), a liquidator or provisional liquidator may appoint an administrator. However, they submitted that, on 14 February 2020 they had written to the provisional liquidators inviting them to appoint Mr Adam Shepard as administrator. The Interested Parties submitted that they had not had a response to that invitation. I place no weight on that submission because it misrepresents the course of correspondence between the provisional liquidators and the Interested Parties. In that respect, I note the following: (a) The provisional liquidators were appointed on 20 September 2020. (b) On 23 January 2020, shortly after the Interested Parties had filed their notice of appearance in this proceeding, the provisional liquidators wrote to the solicitor for the Interested Parties, Mr Mitchell, asking for details of the proposed deed of company arrangement including who was the proponent, what were the terms, what was the source of funding, whether there were conditions and whether the proposal would result in a better outcome for creditors and shareholders. (c) On 29 January 2020, Mr Mitchell replied stating that the proponents were likely to be Cove Street and Mr Feilich but that neither the terms nor funding of the proposed arrangement had been finalised as at the time of writing. (d) On 7 February 2020, the Interested Parties filed the affidavits sworn by Mr Jarvis and Mr Feilich. Those affidavits are considered further below. For present purposes, it is sufficient to observe that the evidence showed that the terms and funding of the proposed arrangement remained uncertain at that time (and remained so at that the date of the hearing). (e) Further correspondence occurred between the provisional liquidators and Mr Mitchell on 12 February 2020 which is not necessary to detail. (f) On 14 February 2020, the provisional liquidators sent an email to Mr Mitchell providing a breakdown of the current position of the creditors of Merlin, showing the amount owing to creditors was estimated to be approximately $12.5 million. The email also advised that the provisional liquidators' costs were approximately $1.08 million. The provisional liquidators observed that, based on some very rough calculations and preliminary consideration, it was not clear to them that the proposed arrangement referred to in Mr Jarvis' affidavit would be capable of responsible recommendation to creditors. Nevertheless, the email concluded by stating that the provisional liquidators would wait to hear further from the Interested Parties as to the proposed arrangement. (g) It was in response to that email that Mr Mitchell sent his letter dated 14 February 2020. The letter stated as follows: Creditors and shareholders of Merlin Diamonds Limited should have the opportunity to decide what should happen with the company as opposed to a provisional liquidator. The appointment of an Administrator will protect creditors' and shareholders' interests and give them the opportunity to pursue a path other than liquidation. Should creditors not agree with any Deed of Company Arrangement proposed then the company could then be placed in Liquidation. We invite your clients to appoint Mr Adam Shepard as Administrator. In that way creditors for the company can determine their own course of action, looking after their own interests, as opposed to having it imposed on them by the provisional liquidators or a liquidator. 50 Mr Mitchell's letter did not propose an arrangement or advance the consideration of an arrangement by the provisional liquidators. It simply asserted that the provisional liquidators should appoint Mr Shepard as administrator. In light of the correspondence that had occurred and the tone of the letter, Mr Mitchell's letter of 14 February 2020 did not warrant a response from the provisional liquidators. 51 An undercurrent of the submissions of the Interested Parties was that the provisional liquidators had shown themselves to be unwilling to contemplate the appointment of an administrator to Merlin. I reject that suggestion. The evidence shows that the provisional liquidators are open to appoint an administrator, but will not do so unless satisfied that there is a credible proposal for a deed of company arrangement to be put to creditors. Ms Solaymani-Jamal also deposed that she was instructed by Mr Norman that, if he and Mr Algeri were appointed as liquidators of Merlin, they intended to undertake a process to explore either an orderly sale of the assets of the business or a recapitalisation of the business and that, if either of those processes were to yield a result which would likely be served by the appointment of administrators, then they would consider that. That evidence was not objected to or challenged and I accept it. It is consistent with the correspondence between the provisional liquidators and Mr Mitchell on behalf of the interested parties. The evidence filed on behalf of the Interested Parties has not satisfied the provisional liquidators that, to date, there is a credible proposal to be put to creditors. In those circumstances, and given the insolvency of Merlin, the provisional liquidators consider that the interests of creditors and shareholders are best protected by proceeding to a liquidation of Merlin. For the reasons discussed below, I consider that the position adopted by the provisional liquidators is correct. 52 ASIC maintains its application for a liquidation of Merlin. In response to the submissions of the Interested Parties, ASIC makes two primary submissions. First, ASIC submitted that it is uncertain whether Jetan is an entity that is entitled to appoint an administrator of Merlin under s 436C(1) of the Act. Second, ASIC submitted that the funding of any deed of company arrangement to be proposed by the Interested Parties, as outlined in Jarvis Affidavit, is uncertain, speculative and conditional. I will address each of those submissions in turn.

The interests held by Jetan 53 Under s 436C(1), a person entitled to enforce a security interest in the whole, or substantially the whole, of a company's property may by writing appoint an administrator of the company if the security interest has become and is still enforceable. ASIC contends that the evidence does not establish that Jetan is such a person. 54 On the day before the hearing, 9 March 2020, Mr Mitchell swore an affidavit exhibiting a series of documents, including a Deed of Assignment and Assumption purportedly entered into on that day between Riverfort Global Opportunities PCC Ltd (Riverfort) (formerly Cuart Investments PCC Ltd (Cuart)), a company incorporated in Gibraltar, as assignor and Jetan as assignee. Pursuant to that Deed, Riverfort, as owner of 500,000 convertible securities in Merlin (having a par value of A$1 per security), agreed to sell the convertible securities to Jetan, and Jetan agreed to purchase the convertible securities, together with all rights attached to them. The rights included security for the convertible securities, which comprised a general security agreement executed by Merlin (which I will refer to as the first general security agreement), a guarantee by Merlin's subsidiary, Merlin Operations Pty Ltd (Merlin Operations), a general security agreement executed by Merlin Operations in support of the guarantee (which I will refer to as the second general security agreement) and a pledge by Edensor Holdings Pty Ltd (Edensor) of over 30 million shares in Merlin. Mr Mitchell's affidavit also exhibited the underlying convertible securities agreement between Merlin as issuer and Riverfort (then named Cuart), and the first general security agreement, the guarantee from Merlin Operations, the second general security agreement and the pledge by Edensor. Most of the documents were undated, although the first general security agreement bore the date 30 August 2018. Mr Mitchell gave no evidence about the documents and therefore the documents were not proved in any formal way; however, ASIC made no evidentiary objection to the tender of the documents. 55 Mr Mitchell deposed that he is informed by the solicitor for Riverfort that there is no existing certificate in respect of the monies owed by Merlin to Riverfort under the general security agreement (I infer that Mr Mitchell intended to refer to the convertible securities agreement, which is secured by the general security agreement) but that the indebtedness of Merlin to Riverfort is presently in the sum of $474,604. ASIC objected to that evidence on the ground of hearsay. However, the PL Report, which was tendered by ASIC, also states that the indebtedness of Merlin to Riverfort (named as Cuart in the PL Report) is presently in the sum of $474,604 (at section 5.1.6). Based on that evidence, I will proceed on the basis that that amount is owing by Merlin to Riverfort under the convertible securities agreement. 56 ASIC disputed that Merlin was a party to the first general security agreement. The reason for the dispute was that, on the page of the document that identified the parties, the name "Merlin Operations Pty Ltd" appeared rather than "Merlin Diamonds Ltd". However, I am satisfied that that is an error and Merlin is a party to the first general security agreement. The following textual and circumstantial matters demonstrate that Merlin is the intended contracting party: (a) the convertible securities, which are secured by the first general security agreement, were issued by Merlin pursuant to a convertible securities agreement which identifies Merlin as the issuer and Merlin Operations as the guarantor and contemplates a general security agreement over the assets of Merlin and Merlin Operations; (b) there exists a guarantee executed by Merlin Operations, as well as the second general security agreement executed by Merlin Operations as contemplated by the convertible securities agreement; (c) as to textual matters within the first general security agreement itself, I note that: (i) Merlin is identified as the contracting party on the cover sheet for the agreement, in schedule 2 (which identifies the parties for the purposes of giving notices) and in the execution clause; and (ii) Merlin is also indirectly identified as the contracting party because the "Grantor" of the security is identified as a party to the convertible securities agreement, which is Merlin. 57 Under the first general security agreement, Merlin charges and grants a security interest in the "Secured Property" which is defined as the whole of the undertaking, property and assets of Merlin. The Interested Parties tendered a search of the Personal Property Securities Register (PPSR) which showed that Cuart Investments PCC Ltd's security interest under the first general security agreement was registered on 5 September 2018. 58 The Deed of Assignment and Assumption between Riverfort and Jetan required Jetan to make a part payment for the convertible securities of $180,000 within 5 business days, whereupon Riverfort would transfer to Jetan the financing statements relating to the security interest it has registered on the PPSR. The Interested Parties tendered a transaction statement from the Commonwealth Bank which purported to show the transfer of that amount by Jetan to the "Murcia Pestell Hillard Trust Account" with a reference "MED Riverfort" made on 9 March 2020. There was no evidence concerning that account, but counsel for the Interested Parties stated that he was instructed that it was a solicitor's trust account and asked the Court to draw the inference that the payment related to the Deed of Assignment and Assumption because of the amount transferred, the date of the transfer and the reference. This was another unsatisfactory aspect of the evidence adduced on behalf of the Interested Parties. Nevertheless, I will proceed on the basis that the part payment was made by Jetan on 9 March 2020 as required by the Deed. 59 The Deed of Assignment and Assumption between Riverfort and Jetan required Jetan to pay the balance owing ($294,604) 18 months after the date of the Deed and, if that was done, Riverfort would accept a discounted payment of 80% of that amount. The Deed also gives Jetan the option of, at any time prior to the due date for the balance, to elect not to pay the balance whereupon Jetan must transfer back to Riverfort 50% of the convertible securities. 60 Despite the unsatisfactory quality of the evidence adduced by the Interested Parties, I proceed on the basis that Jetan is now a person entitled to appoint an administrator of Merlin under s 436C(1) of the Act.

The proposed deed of company arrangement 61 Mr Jarvis deposed that he is the proprietor of Six Degrees Group Holdings Pty Limited (Six Degrees), which he established in 2006 and which has extensive experience representing small capital resource companies and providing them with access to capital through the firm's extensive network of stockbrokers. In late 2016, Mr Jarvis introduced Perth-based wealth manager Triple C Consulting to Merlin, which in early 2017 raised over $5,500,000 for Merlin. 62 Mr Jarvis deposed that he and Mr Feilich sought the appointment of an administrator to Merlin with a view to preparing and presenting to creditors a deed of company arrangement involving a new board of directors, capital restructure, recapitalisation of Merlin and ultimate relisting on ASX to preserve and restore as much value as possible for the minority shareholders and creditors. As noted earlier, Mr Feilich is a stockbroker whose firm is called Sanlam Private Wealth. 63 In support of that proposal, Mr Jarvis exhibited letters of support from Triple C Consulting, 708 Capital, Empire Capital Partners, Sanlam Private Wealth and Jetan Pty Limited. As already noted, in early 2017, Triple C Consulting raised over $5,500,000 for Merlin. In 2017 and 2018, Mr Feilich and his firm Sanlam Private Wealth raised over $2,000,000 in convertible notes for Merlin. The letters of support exhibited to Mr Jarvis' affidavit did not constitute legally binding commitments. They were general in nature and were conditional: (a) The letter from Triple C Consulting stated that its support is conditional on the funds raised being used to advance exploration and development of the Merlin diamond mine in the Northern Territory; the funds being deployed appropriately; proper security measures being put in place for the mined diamonds so as to protect the shareholders' investment; participation in the capital raising would be subject to market conditions and Merlin having an appropriate valuation, experienced leadership and a clear development plan. The letter did not indicate the level of financial support available. (b) The letter from 708 Capital stated that its support is conditional on the funds raised being used to advance exploration and development of the Merlin diamond mine in the Northern Territory; it has the capacity to raise A$500,000 - A$1,000,000 on the basis that the funds would be deployed appropriately; other conditions included that a new expertise and leadership team is appointed to the company and that suitable budgets and plans are put in place. (c) The letter from Empire Capital Partners stated that its support is conditional on the funds raised being used to advance exploration and development of the Merlin diamond mine in the Northern Territory; it has the capacity to raise A$1,000,000 to A$5,000,000 on the basis that the funds would be deployed appropriately; other conditions included Merlin having an appropriate business valuation, market conditions are conducive of a mining operation, the employment of an appropriate and experienced leadership team and the formation of a suitable development plan. (d) The letter from Sanlam Private Wealth stated that if a deed of company arrangement was executed, Sanlam is willing to provide fund-raising support of $2,000,000 to Merlin on a best endeavours basis but also subject to the presentation of a proper works program that is executed by experienced and technically qualified personnel that have extensive understanding of diamond exploration and mining. The letter concluded with the disclaimer that it is not at an underwriting commitment and did not constitute an offer or agreement to underwrite the capital raising in any form. (e) The letter from Jetan Pty Limited was sparsely worded. It stated that Jetan is prepared to underwrite the funding of a proposed deed of company arrangement, or alternate scheme, to the value of A$500,000 on the basis that a return for shareholders and note holders can be realised. 64 Mr Jarvis deposed that, with the information presently available to him, he believes that an arrangement as set out below was achievable, dependent upon the final claimable amounts in the categories set out below: (a) secured creditors - 100% cash; (b) priority creditors (unrelated only) - 100% cash; (c) noteholders - an extension of time for maturity as to 50%, conversion to shares now as to 25% and cash as to 25%; (d) mining licence fees, royalties, tax and ASIC and ASX and Registry fees - 100% cash; (e) related party creditors - a royalty only subject to strict proofs of debt; (f) other unsecured creditors - 20 cents in the dollar. 65 Mr Jarvis deposed that a meaningful offer based on the above formula could be achieved with a capital raising of $6 million, allowing for some working capital for Merlin. 66 Mr Jarvis also deposed that his proposal contemplated the appointment of new directors, being himself, Mr Feilich and Mr Steve Formica. Mr Jarvis exhibited consents to act from those directors. Mr Jarvis deposed that the new directors would address the key concerns of the ASX and would support ASIC to address breaches of the Act and remove former officers of Merlin found to have been in breach and to provide such information as ASIC may require to assist in that endeavour. 67 I accept ASIC's submission that Mr Jarvis' evidence is uncertain, speculative and conditional. Given the general and conditional nature of the letters of support, I place little weight on that evidence. It is apparent that none of the entities that have provided a letter of support is willing to provide a firm commitment of financial support. Further, none of the letters refer to Mr Jarvis' proposals for payments to and compromises with creditors, and there is no evidence that they have considered and support such a proposal. It is also apparent that the Interested Parties are not in a position to secure the appointment of new directors to the board of Merlin, as they hold only 20.5% of the issued shares. While I accept that the Interested Parties wish to explore, and have an interest in exploring, whether a deed of company arrangement could be formulated, I am not satisfied that there is a likelihood, should I decide not to make a winding up order and an administrator is appointed to Merlin, that they will be in a position to propose a deed of company arrangement. 68 As noted earlier, the Interested Parties submitted that they are not yet in a position to formulate a firm proposal to be put to the creditors of Merlin because they did not have sufficient information about the affairs of Merlin. In that respect, the Interested Parties referred to the fact that the liabilities of Merlin referred to in the PL Report require further investigation. There is some force in the submission of the Interested Parties; however, I consider that the submission militates against the course proposed by the Interested Parties. The evidence before me establishes that: the financial records of Merlin have not been properly kept; the extent of the liabilities of Merlin require further investigation; a number of transactions entered into by Merlin were entered into in contravention of the Act and may be liable to be set aside; and other transactions may also require investigation for legal compliance. In those circumstances, the interests of creditors and shareholders are likely to be best protected by the appointment of a liquidator who is able to conduct a full investigation into such matters. 69 An important consideration is that the appointment of a liquidator to Merlin does not foreclose the possibility that an administrator is subsequently appointed. Pursuant to s 436B(1), a liquidator is empowered to make such an appointment. If the Interested Parties are able to formulate a firm and credible proposal for a deed of company arrangement, that can be put to the liquidators with the request for the appointment of an administrator. I have no reason to doubt that Messrs Algeri and Norman, if appointed liquidators, would give proper consideration to such a proposal and assess whether it has a reasonable prospect of being approved by creditors. 70 I accept ASIC's submissions that, having regard to Merlin's insolvency and its state of affairs at the time of the appointment of the provisional liquidators, the appointment of liquidators to Merlin is necessary to protect Merlin's shareholders and creditors and to ensure, in the public interest, that an independent expert and officer of the Court continues to investigate Merlin's affairs, and to take whatever action is appropriate to redress any breaches of the Act by the directors (current and past). I do not consider that the evidence and submissions of the Interested Parties provide a compelling reason not to make a winding up order.

Appointment of Mr Shepard as liquidator 71 The Interested Parties submitted that, if the Court decided to make a winding up order, the Court should appoint Mr Adam Shepard as liquidator of Merlin instead of the provisional liquidators, Messrs Algeri and Norman. They advanced three primary reasons for Mr Shepard's appointment instead of the provisional liquidators: (a) No creditor or shareholder made the application to appoint the provisional liquidators to Merlin and there is no evidence that any creditor or any shareholder supports the appointment of the current provisional liquidators to be liquidators (and the Interested Parties do not). (b) The provisional liquidators have not shown any inclination to appoint an administrator. (c) The provisional liquidators estimate their costs (including legal costs) as at 28 February 2020 to be $1,121,220.85. These are significant sums and should be reviewed by a person representing Merlin such as Mr Shepard. 72 The relevant principles relating to the appointment of liquidators were set out by Barrett J in Workers Compensation Nominal Insurer v Denny Earthmoving & Bulk Haulage Pty Ltd [2008] NSWSC 1167 at [10], [11] and [12]: 10. Three guiding principles come into play here. First, liquidators must be independent and have the appearance of independence so that the Court must judge, in the words of Santow J in Advance Housing Pty Ltd v Newcastle Classic Development Pty Ltd (1994) 14 ACSR 230: ... whether there would be a reasonable apprehension by any creditor of lack of impartiality on the liquidator's part in the circumstances, by reason of prior association with the Company or those associated with it, including creditors or indeed any other circumstances. 11. Second, there is the matter referred to by Hodgson J in Unifor Office Systems Australia Pty Ltd v Brewer Partnership Pty Ltd [1999] NSWSC 137: This Court, in winding up proceedings, has acted on a general principle that liquidators should not be chosen by the directors or other principals of the Company. It is considered to be in the interests of creditors that someone entirely independent undertake that role. … 12. Third, there is the obvious point that, all other things being equal, the court will select an option that is likely to involve less cost. 73 Those principles have been applied by this Court: see for example Deputy Commissioner of Taxation, in the matter of W.D. Hall Pty Ltd v W.D. Hall Pty Ltd [2017] FCA 767 at [5]; Frisken, in the matter of Avant Garde Investments Pty Ltd v Cheema [2020] FCA 98 at [10]. 74 In an analogous context, in Network Exchange Pty Ltd v MIG International Communications Pty Ltd (1994) 13 ACSR 544, Hayne J (as his Honour then was) stated (at 550) that "an order [for removal of administrators] should be made only if it is demonstrated that such an order would be for the better conduct of the administration". His Honour went on to say that it is not enough to show, for example, "that a majority in value of creditors, but not a majority in number, want the administrator removed". 75 In support of the appointment of the provisional liquidators as liquidators of Merlin, ASIC submitted that: (a) At the time of their appointment, the provisional liquidators were relevantly independent and had the appearance of such independence and that nothing has changed in that regard. (b) The Interested Parties have failed to identify any conduct by the provisional liquidators giving rise to a reasonable apprehension that the provisional liquidators, if appointed as the liquidators, might not be impartial. (c) The provisional liquidators have not shown a disinclination to appoint an administrator. They have invited the Interested Parties to put forward a proposal for a deed of company arrangement, but the Interested Parties have not to date done so. (d) The Provisional Liquidators have already conducted substantial work and investigations. The appointment of Mr Shepard would inevitably lead to a duplication of work, and thereby costs for that work, already performed by the provisional liquidators. (e) The costs structure of Mr Shepard is not materially different to that of the provisional liquidators and the appointment of Mr Shepard is not necessary to supervise the provisional liquidators' costs given the provisional liquidators' costs remain subject to the supervision of the Court. 76 I accept ASIC's submissions. The Interested Parties have failed to establish any basis for the Court to choose to appoint Mr Shepard as liquidator instead of Messrs Algeri and Norman. Further, the appointment of Mr Shepard at this stage would inevitably result in a duplication of costs, to the detriment of creditors and shareholders.

Conclusion 77 In conclusion, the evidence and submissions of the Interested Parties have not persuaded me that the Court should refrain from making a winding up order and should terminate the appointment of the provisional liquidators. Given Merlin's insolvency and its state of affairs at the time of the appointment of the provisional liquidators, in my view a winding up order should be made. That does not foreclose the possibility of an administrator being appointed in the future. The liquidators may do so pursuant to the power given in s 436B of the Act. To date, the Interested Parties have not put forward a firm proposal for consideration by the provisional liquidators. The ability to put forward a firm proposal for consideration by the liquidators will remain. 78 Nor am I persuaded that Mr Shepard should be appointed as liquidator rather than Messrs Algeri and Norman. I am not satisfied that there is any reason to do so; to the contrary, there is reason not to do so to avoid wasted costs and loss of knowledge gained to date in the administration of Merlin's affairs. 79 I will therefore make orders for Merlin to be wound up in insolvency pursuant to s 459B of the Act and for Messrs Algeri and Norman to be appointed joint and several liquidators of the defendant. 80 As to the costs of the proceeding, ASIC was successful on both its interlocutory application and this application for final relief and should have its costs. The opposing parties on the interlocutory application and this application for final relief were unsuccessful. Nevertheless, the parties sought an opportunity to make further submissions on the question of the costs of the proceeding, including the interlocutory hearing on 2 and 3 September 2019, following my determination of the primary issues. I will therefore make orders for the filing of submissions on the question of costs by the parties and any person who was given leave to appear at the interlocutory hearing on 2 and 3 September 2019 or the final hearing on 10 March 2019. I will determine the question of costs on the papers unless any person that has filed a submission notifies the Court that they seek an oral hearing, in which event I will convene a telephone or video hearing in accordance with Special Measures Information Note 1 issued by the Court (SMIN-1), or any further special measures issued by the Court which supersede SMIN-1. I certify that the preceding eighty (80) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice O'Bryan.

SCHEDULE VID 505 of 2019 Interested Persons First Interested Person COVE STREET PTY LTD Second Interested Person CLAYMORE VENTURES LIMITED Third Interested Person VICTOR LORUSSO Fourth Interested Person ANNA LORUSSO Fifth Interested Person FILMRIM PTY LTD Sixth Interested Person RONALD BOWEN Seventh Interested Person KAREN BOWEN Eighth Interested Person KATRINA FOURRO Ninth Interested Person KERRY WILLIAM JOHN HARRIS Tenth Interested Person THE TRUSTEE FOR THE DIG DEEP SUPER FUND ABN 25 717 697 769 Eleventh Interested Person HARNBURY PTY LTD Twelfth Interested Person HUSH HUSH PTY LTD Thirteenth Interested Person RONALD JAMES GOODLAD Fourteenth Interested Person DEBORAH KENNY Fifteenth Interested Person MYOORA PTY LTD Sixteenth Interested Person FLUID INVESTMENTS PTY LTD Seventeenth Interested Person LAMBRECHT INVESTMENT TRUST ABN 74 149 801 368 Eighteenth Interested Person VINCE ZANGARI Nineteenth Interested Person ROBERT CAMERON GALBRAITH Twentieth Interested Person JULIE ALYWARD Twenty-first Interested Person DARYL OATES Twenty-second Interested Person HARSHELL INVESTMENTS PTY LTD Twenty-third Interested Person JOLUK INVESTMENTS PTY LTD Twenty-fourth Interested Person EXCHANGE MINERALS LTD Twenty-fifth Interested Person JETAN PTY LTD Twenty-sixth Interested Person TYCHE INVESTMENTS PTY LTD Twenty-seventh Interested Person DORIC WEALTH PTY LTD Twenty-eighth Interested Person BEN ASHER FEILICH Twenty-ninth Interested Person NOTEGRIN PTY LTD Thirtieth Interested Person SGI PTY LTD Thirty-first Interested Person DEBO PTY LTD Thirty-second Interested Person WS FUND PTY LTD Thirty-third Interested Person HOFFMAN SUPERANNUATION FUND ABN 26 954 119 246 Thirty-fourth Interested Person WESTGLADE PTY LTD Thirty-fifth Interested Person BLOOMGOLD RESOURCES PTY LTD Thirty-sixth Interested Person FLOURISH SUPER PTY LTD Thirty-seventh Interested Person MICHAEL SHIRLEY