EVP has added 20 more defendants, including earlier VC investors – taking the total to 32 – in its legal action to recover $10.4 million invested in StrongRoom AI.
EVP has a freezing order over the company’s assets and during a case management hearing on Wednesday added the company’s other early investors, including Artesian Ventures, Boab AI (an Artesian subsidiary), InterValley, Cape and Kalytix ventures, as well as relatives of cofounder Max Mito and several other individuals.
The Sydney venture capital firm was also back in the Federal Court this week in a seperate legal battle against the company and administrators HLB Mann Judd, successfully seeking court-ordered endorsement for the right to vote on the future of the business at a critical creditor’s meeting on June 5.
Lawyers for both EVP and HLB Mann Judd were debating the issue, including whether the VC received shares and had a right to vote at the creditor’s meeting. The administrator’s legal team posited that if EVP was not issued with the shares it purchased, the administrators intend to admit the $10.4 million claim, but mark it “objected to” amid three possible options that put the VC at the back of the line.
The Federal Court gave EVP a win.
“The analysis conducted by the administrators reveals that, depending on what occurs in the administration, there may well be a surplus available to EVP, even if EVP’s claims are subordinated and even if EVP does not have a proprietary claim,” Justice Moore wrote.
“The modelling indicates that whether there is such a surplus may depend upon decisions taken at the second creditors’ meeting, including whether to enter into a proposed deed of company arrangement. In those circumstances, EVP has a sufficient interest in the matters to be decided at the creditors’ meeting to justify… that it be permitted to vote in its capacity as a creditor.”
StrongRoom was founded in Melbourne 2017. Its software streamlines medication tracking, dosage management, and patient adherence.
Creditors met in Sydney this week to vote on whether the business is sold for $4.3 million under a deed of company arrangement (DoCA) to a consortium that included InterValley Ventures and the founders – that attempt to buy back the farm is opposed by administrator Todd Gammel, the Victorian government and EVP – or a $3 million deal to another buyer, Brisbane pharmacy entrepreneur Joe Zhou.
Gammel recommended the sale over the DOCA saying potential recoveries via liquidation claims, would provide a better return to StrongRoom Technology (SRT) creditors.
“Why the Administrators have serious concerns regarding the DOCA being able to complete in an orderly and timely way, is that the DOCA Proposal contemplates the transfer of SRT’s assets and business. However, those assets are subject to the freezing orders held by EVP and the security interests of third parties who do not consent to the transaction,” Gammel wrote in his final creditors report a week ago.
“Even if the transaction were to be able to occur, it is likely that any proceeds of the DOCA would be required to be held pending and subject to the outcome of the proceedings commenced by EVP. Those proceedings could take 1 to 2 years. That would mean all creditors would not receive any benefit from the DOCA Proposal for at least that amount of time and further costs incurred would erode returns. By contrast, the Asset Sale would occur very quickly and deal permanently and efficiently with EVP’s proprietary claim.”
Liquidation ahead
Creditors voted to liquidate StrongRoom, with a likely sale to Zhou, amid additional last-minute machinations during the meeting, with InterValley changing tack to offer a rival bid.
The issues at stake for EVP go beyond where it sits in the queue of creditors. A sale to Zhou could see them recoup around 10% of their investment, while secured creditors and employees are paid their full entitlements. Zhou already owns most of the medications management startup’s debts.
Competing claims have seen both EVP and HLB Mann Judd head to court to try and clarify their positions, with mixed success.
EVP has been funding the ongoing operation of StrongRoom during its administration that saw the VC strike interdependent agreement with the administrators that permits a sale with the freezing orders discharged to allow it to occur. That also involved compromising their claim as well any claim for the VA Risk Advance Fee being an amount equal to 30% of the gross consideration for any sale.
But EVP’s freezing order remains the ace up their legal sleeve in their ongoing bid to claw back their $10.4m investment and it also leaves the door open for ongoing investigation and litigation against StrongRoom, its investors and directors.
StrongRoom AI’s creditors, including 2 secured, 35 employees and 27 unsecured – are owed up to $27 million. Unsecured creditors – mostly its VC investors are owed up to $25 million.
StrongRoom announced a $17 million raise in March, led by EVP at a $70 million valuation. Just 10 days later, the VC launched legal action to recover its funds, and StrongRoom’s board placed the company in voluntary administration,
EVP applied to freeze the company’s assets, along with several defendants, including the administrator, cofounders Max Mito and Christopher Durre, as well as fellow directors Peter Bruce-Clark, from fellow investor Kalytix and Divesh Sanghvi.
EVP says that it was ‘profoundly misled’ about the investment and the warranties given by the founders were ‘false, misleading or deceptive’ and may involve ‘deliberate fraud’.
EVP alleges in court documents that StrongRoom AI CEO Max Mito admitted to fraud using fake revenue numbers, a claim Mito denies.
EVP filed its statement of claim late on Thursday and the first 12 defendants have until August 4 to file a defence before the matter returns to Federal Court on August 21.
Meanwhile, administrator Todd Gammel is hoping to finalise a buyer in the coming days. In his 32-page final report ahead of the meeting, he estimated that the realisable value of the company’s assets at somewhere between $9 million and $9m. The administration period will cost around $1 million in total, including $700,000 for HLB Mann Judd, with liquidation costing another $250,000.
When StrongRoom announced its raise, the business claimed it had around $13 million in annualised revenue by the end of 2024.
But court documents put the revenue at around $1.7 million in the 12 months to January this year. EVP had believed the annual revenue was around $6.1 million.
Insolvent trading
The administrators found that StrongRoom AI’s combined net losses after tax since the 2020 financial year exceed $18.5 million – and sat at around $800,000 a month – and formed the view that the company may have become insolvent in late October 2024.
An insolvent trading claim would result in creditors being owed $3.4 million.
HLB Mann Judd’s final report outlines a litany of issues with the company’s financial actions, including unfair preference payments worth $9.89 million (“there may be more”) unreasonable director-related transactions, potentially uncommercial transactions and the failure to paid around $2 million to shareholders from the EVP investment.
“From the records provided to date, the accounting process does not appear to have been accurately implemented to manage the revenue accounting accurately,”Gammel wrote.
Also under scrutiny is the acquisition of loyalty program, Members Benefits Australia (MBA), from Divesh Sanghvi, a StrongRoom director and defendant in the EVP case.
MBA was acquired before EVP’s investment, in August 2024, in a transaction that involved related parties and created a material vendor finance loan position, although it was not listed as one in the StrongRoom accounts.
The deal was worth between $9.8m and $10.5m, including $8.82m in cash.
“There are number of aspects of this transaction including the use of funds from recent capital raises to retire some of the vendor finance debt that will be subject to detailed review and consideration, then potential further investigations,” Gammel wrote in his report.
What’s clear in this dispute is that more lawyers will be employed to sift through the wreckage of StrongRoom than the startup ever employed.
A case management hearing is listed for August 21 after the first 12 respondents have filed their defences to EVP’s statement of claim.
EVP and HLB Mann Judd were contacted for comment but did not respond.
Daily startup news and insights, delivered to your inbox.