Actions & Recoveries
Creditors and shareholders of Sargon Capital Pty Ltd and its upstream financing entities may have actions against China Taiping, Ashurst Lawyers and McGrathNicol.
- The appointment of McGrathNicol as receivers and managers to Sargon resulted in the wholesale destruction of its value, which at China Taiping’s most recent valuation exceeded A$500m.
- China Taiping was exposed to large tranches of Sargon’s equity capital, acquired for a total of A$93.4m.
- No default was subsisting under the debt agreement as at the date of the appointment of Receivers. Interest had been paid through to 31 January 2020.
- The likely catastrophic consequences of a receivership appointment to Sargon and to China Taiping’s interests should have been within the contemplation of Ashurst, China Taiping’s legal advisers.
- Correspondence with Ashurst and McGrathNicol indicate that neither appeared to give appropriate regard to these consequences and the likely cross-defaults and regulatory impacts which would arise across the group and damage their client China Taiping.
- These cross-defaults, significant client exodus, elevated regulatory oversight, the destruction of goodwill, and ultimately the administration and fire sale of its subsidiaries resulted in negligible returns to China Taiping and third party creditors and a total loss to shareholders.
- Recoveries may be available, including through claims in contract and economic tort
Matters warranting investigation
In March 2020, Wexted Advisors (“Wexted”) were appointed voluntary administrators and subsequently as liquidators of Sargon to conduct investigations into the demise of the company.
Wexted’s Statutory Report indicates that it has been limited in its ability to conduct inquiries due to a lack of funds of the administration, being reliant on a A$50,000 indemnity provided by China Taiping which was exhausted prior to the date of the Administrators’ Report.
Following limited investigations, the following matters appear to warrant further inquiry by the shareholders and creditors of Sargon (whether by Wexted or otherwise).
(click to expand each of the headings below):
No defaults subsisted under the debt agreement
We have conducted an assessment of whether any defaults were subsisting at the time of the Receivership appointment. We note that various reports and correspondence suggest an interest default subsisting at the time. However, this was not the case. We note the following:
- On 13 December 2020, A$4.4m was paid from Sargon into an Ashurst trust account.
- The reason for the payment to China Taiping via Ashurst was to address Sargon’s recent awareness that the debt agreement had been syndicated, and China Taiping’s inability or unwillingness to confirm that no party to the syndication was from a sanctioned country;
- The payment is identified by Wexted in their Statutory Report.
- The sum related to three interest payments under the debt agreement pursuant to Sargon’s intention and China Taiping’s agreement to repay the outstanding debt component and transition to an equity-only investment structure.
- With the A$4.4m having been paid into Ashurst’s trust account, the debt agreement was paid up on interest until 31 January 2020 (with the next interest payment being due on 31 March 2020) and was otherwise in compliance with the balance of the terms in the Agreement.
However, given subsequent actions and correspondence between the parties, as well as accounts by Ashurst of an alleged interest default, it is not clear whether Ashurst accounted for the monies referred to above as having being paid by Sargon for the purposes of the debt agreement or in some other way. Ashurst’s allegations of an interest default on the date of receivership (29 January 2020) appears only to be possible if Ashurst applied some monies paid by Sargon into Ashurst’s trust account in a manner inconsistent with Ashurst’s representations to Sargon.
The application of monies in a lawyer’s trust for a purpose other than which they were provided is a serious allegation and requires further investigation.
Legal counsel Ashurst failed to acknowledge key correspondence
There were numerous discussions and negotiations ongoing in late 2019 between China Taiping and Sargon to which Ashurst was not party. Notwithstanding this, Ashurst instructed Sargon that all correspondence regarding China Taiping’s investment be sent to Ashurst and not China Taiping. Despite this, China Taiping continued to correspond directly with Sargon.
Following the above direction, Ashurst failed to acknowledge key correspondence sent to it by Sargon representatives intended to inform China Taiping of:
(a) progress on financing to facilitate early repayment of the debt component of their investment;
(b) the need for China Taiping’s cooperation on various consents required to give effect to such a transaction; and
(c) the existence of senior secured creditors in the Sargon group and resultant likely substantial losses which would be incurred by Taiping (due to their equity exposure) as a result of any potential hostile action against Sargon.
Given the lack of acknowledgement, it is unclear if Ashurst passed this crucial information onto their client or gave it any substantial consideration prior to advising their client on the appointment of McGrathNicol as Receivers and Managers.
No proper demands were made in accordance with the facility documents
Ashurst correspondence was muddled and faulty, regularly confusing different entities and instruments.
Any demands made under those notices were substantively inconsistent with the notice provisions of the debt documents as well as being inconsistent with direct correspondence from China Taiping with Sargon.
This correspondence was further blurred by Ashurst’s ongoing legal services relationship with Sargon’s subsidiaries, the Sargon IPO investment bank syndicate, other prospective investors and Trimantium Insurance Partners Pty Ltd, all of which they had been appointed to advise.
McGrathNicol stated they were told their appointment was an “information-gathering exercise”.
McGrathNicol communicated to Sargon directors in the days immediately following their appointment that they “…were not aware of other secured creditors in the Sargon group”. McGrathNicol also noted that “…this is not a normal receivership appointment, we have been appointed to conduct an information gathering exercise”.
Supporting this view, McGrathNicol did not make any attempt to secure the offices or records of Sargon, or make any inquiries of management or directors until many days after they were appointed as Receivers and Managers.
Within days of McGrathNicol’s appointment, the corporate and financing structure of the Sargon group and the regulated nature of its operating subsidiaries caused Sargon’s subsidiaries to be put into voluntary administration.
Investigations are required to determine the purpose for which McGrathNicol was appointed and whether China Taiping’s legal advisers Ashurst provided China Taiping with full disclosure on the likely cross-defaults and regulatory repercussions that would occur across the group.
Ashurst stated the appointment was “to get the Company’s attention”
In the days following the Receivership appointment, Ashurst communicated to Sargon directors and their legal advisers that the appointment of McGrathNicol was “to get the Company’s attention”, and minimised the seriousness of the reputational and regulatory damage by stating “it’s not as though Administrators have been appointed”.
These statements indicate a degree of recklessness by Ashurst in their advice to China Taiping and the seriousness of the decision to appoint Receivers. Ashurst’s intention in advising China Taiping to make the appointment, and the steps leading up to it therefore requires significant attention.
The appointment of McGrathNicol minimised China Taiping’s own prospects of recovery
China Taiping’s exposure in early 2020 was as follows:
- A$93.4m equity or equity-linked exposure, and
- A$10m debt or debt-linked exposure.
Supporting this exposure, China Taiping held a significant parcel of security and other protections:
- China Taiping held copies of self-executing share transfer agreements and forms which would transfer the A$93.4 million (at cost) of shares held indirectly through its structures to itself. This would enable it to act directly under Sargon’s constitution as a major shareholder, and appoint and remove some directors, control certain subsidiaries, and direct many corporate actions. China Taiping had Sargon amend its constitution at the time of its original investment to enable this.
- Further, China Taiping indirectly owned TTIM through the TTHK Trust and had the ability to control the appointment of the trustee of their fund. This would enable China Taiping to effect more direct control over their own equity stakes, rather than relying on a third party trustee;
The relative benefit to China Taiping of first undertaking these steps (and the relative detriment to China Taiping of appointing Receivers and Managers) requires further investigation.
The potential conflicts inherent in the nature of the advice given also merits review (particularly noting Ashurst’s multiple appointments and engagements with and by Sargon in prior months).
Potential causes of action and recoveries
To ensure that investigations into the circumstances surrounding the external administration and subsequent winding up of Sargon Capital, Trimantium Investment Management, and Trimantium Capital Funds Management can be properly undertaken to completion, and recoveries explored and pursued for creditors and other stakeholders where appropriate, a Consortium is in discussions with Wexted Advisors relating to the investigation of these matters and potential assignment of any claims which may exist.
A preliminary view is that claims against China Taiping group may include:
- claims under various heads of economic tort;
- claims under the provisions of the facility documents (both contractual and in trust); and
- claims relating to the conduct of the Receivership and subsequent related matters such as the sale of various Sargon subsidiaries and the Public Examinations.
China Taiping may have defences available to it arising from its reliance on professional advisers and may seek to explore the potential liability, in negligence or otherwise, of both Ashurst and McGrathNicol accordingly.
Recoveries may also be available for related matters such as the potential mishandling of trust monies and conflicts of interest arising from Ashurst’s previous – and concurrent – engagements within the Sargon and Trimantium groups.