In the recent decision of Semantic Software Asia Pacific  NSWSC 785, the Supreme Court of New South Wales considered an application made by ASIC to freeze the assets of a particular company. The decision highlights the Court’s power to make immediate orders about the operation of companies.
ASIC put evidence before the Court showing the company had significant debts and minimal funds.
The company’s sole source of money was that it attracted shareholders by offering price guarantees to incoming shareholders – incoming shareholders would have their shares repurchased if they did not reach a specific price. Noting the company’s parlous financial position, it did not have the cash to make good on the buyback guarantees if they were called upon.
The company owned a patent portfolio and software, whose value not be realised without listing on the US stock market or being bought by a US entity.
Noting this, and despite the company’s existing assets being minimal, the Court agreed with ASIC and considered immediate freezing orders were needed to avoid the company’s assets being further eroded. The Court took this approach even though making the orders would prevent the company from conducting further fundraising activities, severing its source of funds and rendering it insolvent.
The company’s conduct in fundraising without disclosing (i) its inadequate assets to fund guarantees or (ii) the need for a US buyer to realise its assets were false and misleading. The Court was not persuaded that it should restrain itself from making a freezing order when that would allow the company to continue to mislead, even if the outcome of that misleading conduct was the only source of income for the company.
The freezing orders ASIC was after, were granted.
This is a sobering lesson on the importance of solvency when operating a company and the power of the Courts to intervene in a company’s affairs.
**Assisted by: James d’Apice**
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