In the matter of Semantic Software Asia Pacific Limited [2021] NSWSC 785

In the matter of Semantic Software Asia Pacific Limited [2021] NSWSC 785 - NSWSC 2021 case summary — Zoe

Affidavit evidence

ASIC relies on the affidavit of Ms Di Stefano affirmed 23 June 2021 and a voluminous exhibit to that affidavit. That affidavit demonstrates that Semantic presently owes significant obligations to third parties, including employees and the lessor of a property it occupies, and has minimal funds in its own bank accounts. Minimal funds are also held in a bank account in the name of Mr Mount, who is the Second Defendant and Semantic's managing director, which he claims is held on Semantic's behalf and which appears to have been funded by the transfer of Semantic's funds to that account, apparently in an attempt to avoid creditor access to those funds if they were held in an account held in Semantic's name.
Ms Di Stefano refers to evidence given by Mr Mount and the Third Defendant, Mr Bradley, in compulsory examinations undertaken by ASIC, as to the extent of Semantic's liability under buy back guarantees which it has given to shareholders, which are estimated as at least $50 million, and to advertising it has undertaken in respect of the issues of shares, on websites maintained by it and on a third party website, which refer to its agreement to buy back shares if a price target is not reached by a particular date. There are also multiple references, in Semantic's promotional materials, to a guarantee that any shares purchased will be valued at specified prices on future dates, although those materials do not always identify any rights available to shareholders if that guarantee is not met. Ms Di Stefano also refers to evidence of transfers of funds by Semantic to Mr Mount's account, so that they are no longer held in Semantic's name, whether or not Mr Mount then applies them, as Semantic and he contended, to meet Semantic's expenses. I have also been taken to the form of a Subscription Deed with shareholders, which again emphasises the guarantees provided to shareholders as to the value of their shares on a particular date, and to email correspondence with shareholders which seeks to raise short-term funding, again by reference to what are described as "generous guarantees of return".
Semantic in turn relies on Mr Mount's affidavit in response to the application. His evidence is that Semantic has raised approximately AUD 19.7 million in equity funding by issuing shares to approximately 257 shareholders since 2008, and has applied those funds by developing two software platforms and obtaining multiple US patents. Mr Mount's evidence, consistent with evidence he appears to have given in his ASIC examination, is that Semantic has no trading income or funds to undertake business activities other than moneys obtained from shareholders by issuing shares. It might be added that those funds come from selling shares, or at least a significant amount of those funds come from selling shares, with buyback or price guarantees of the kind to which I have referred above.
Mr Mount in turn refers to what he described as "contingent assets" including Semantic's patent portfolio and software, but there appears to be no suggestion that those assets could be realised other than by a listing of Semantic on the US market or by an acquisition of Semantic by a US investor or US company. Mr Mount also refers to contingent liabilities, current assets and current liabilities. Mr Mount also refers in his evidence, and Mr Gupta (who appears for Semantic and Mr Mount) and Mr Bradley (who appears for himself) have also referred to the fact that investors are "sophisticated investors", at least for the purposes of s 708 of the Corporations Act. That does not, of course, prevent investors of that character being misled by the making of unqualified statements as to matters which require qualification or the failure to make appropriate risk disclosure.

[4]

Asset preservation orders under s 1323 of the Act

Mr Robertson, who appears for ASIC, draws attention to the circumstances in which the Court can make orders under s 1323 of the Corporations Act. I have summarised the applicable principles in Re Courtenay House Capital Trading Group Ltd (in liq) (2018) 133 ACSR 451; [2018] NSWSC 1918 and need not repeat them here. I am satisfied that the requirements for interim relief by way of asset preservation orders under s 1323 of the Act are satisfied, although Semantic's realisable assets may in truth be minimal, where Semantic appears to accept that the value its US patents could only be realised by a US listing or its acquisition by a Us entity. ASIC is presently conducting an investigation so the requirement under s 1323(1)(a) of the Act is satisfied. It seems to me that Semantic's shareholders plainly have claims, at least under s 1041E or s 1041H of the Act for misleading and deceptive conduct in respect of the issue of shares subject to guarantees, where the material provided to shareholders does not disclose that Semantic has minimal assets available at any point in time to meet those guarantees, or that moneys are transferred out of Semantic's bank account to Mr Mount so as to frustrate claims that may be brought against that account by creditors by way of garnishee orders or otherwise; and, on one view, also does not disclose that Semantic's ability to meet those guarantees is contingent upon it achieving a US listing or an acquisition by a US entity. While Semantic may be confident of its ability to achieve that listing or acquisition, and may or may not have a basis for that confidence, it is strongly arguable that it does not have the capacity to meet the guarantees unless and until it achieves that result, and the guarantees are most likely to be called upon, because the requisite price is not reached, in the circumstance where it has not in fact achieved that result. To put it another way, it is strongly arguable that the guarantees would not have value in the circumstances that they are most likely to be called upon.
It seems to me that, in these circumstances, there is a real basis for shareholder claims against Semantic for damages or compensation, and, although Semantic's assets available to meet such claims may be already minimal, interim relief is warranted to avoid their being further eroded pending the hearing of ASIC's application to appoint a provisional liquidator to Sematic. For that reason, it seems to me that an order is properly made under s 1323 of the Act, on the basis that it is necessary and desirable to do so for the purpose of protecting the interests of shareholders who have claims against Semantic. I The orders sought by ASIC under s 1323 of the Act (as amended in the course of submissions) are of a modest character, so far as they preserve Semantic's ability to incur liabilities and deal with or dispose of its assets, provided that it give at least two written days' notice to ASIC before doing so, and also preserve its ability to pay or otherwise incur liability for costs reasonably incurred in the proceedings.

[5]

Interim injunctive relief under s 1324 of the Act

ASIC also seeks interim injunctive relief, under s 1324 of the Corporations Act, to restrain Semantic receiving or soliciting funds by way of the issue of shares or otherwise, or advertising, promoting or marketing activities. I bear in mind the submission made by Mr Gupta that the making of that order will itself bring about Semantic's insolvency, so far as he submits that Semantic depends on equity funding to fund its business activities. That, however, is a double-edged sword, because it emphasises the fragility of the relevant guarantees, Semantic will be insolvent and cannot meet them without continuing to offer new shares to new investors. I am not persuaded by the proposition that interim relief should not be granted so as to restrain Semantic's fundraising in the context of its offers of guarantees, which it strongly arguable that it does not have the capacity to meet, now or if they are called upon, because it would be insolvent if it were not permitted to do so.
I have considered whether such an order should be limited to restrain further raising or soliciting of funds, by way of shares, or advertising, promoting or marketing activities on the basis of guarantees offered by Semantic, rather than restraining that conduct generally. I have concluded that that course is not practicable, because the material to which I have referred above emphasises that Semantic's offer of guarantees has been repeatedly emphasised by Semantic in seeking to raise funds from investors, and seeking to represent to investors that the risk attached to other investments does not attach to this investment. It does not seem to me that it is presently possible to separate Semantic's equity fundraising activity from the offer of the guarantees that it has made in support of that fundraising, and the Defendants do not indicate any practical way in which that could be done.
It seems to me that there is a strongly arguable case that Semantic has engaged, is engaging, and is proposing to continue to engage in conduct that constitutes at least a contravention of s 1041E or s 1041H of the Act, so far as it does not adequately disclose the risk attached to the guarantees that it offers to shareholders, or the fact that they would not be met if it cannot achieve a US listing or an acquisition by a US entity, and the associated risk attached to its shares if those guarantees cannot be met. It seems to me that, in those circumstances, the risk to persons who are not presently exposed to that risk by that investment, but become exposed to that risk by taking up new shares in Semantic, should be given greater weight than the risk to Semantic from granting the injunctive relief sought, even if it brings about its insolvency. To put it another way, the Court should not be dissuaded from granting interim injunctive relief to restrain continuing misleading or deceptive conduct by the fact that the party engaging in it does not have the financial capacity to continue in business if not permitted to continue to mislead.
For these reasons, I will make orders 1 to 4 in the short minutes of order proposed by ASIC. I propose to list the matter for hearing in respect of the appointment of a provisional liquidator on the only day that is readily available for that listing, namely, 21 July 2021, before me.

At a glance

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Judgment (6 paragraphs)

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