Ongoing legal action over the assets of failed medications management startup StrongRoom AI have led the company’s voluntary administrators to extend their control to the absolute limit.
A case management hearing due today has been moved to June 4, extending Federal Court-imposed asset freeze on four StrongRoom directors and the administrator, initiated by VC investor EVP.
A second creditor’s meeting in Sydney, a fortnight ago, chaired by administrator Todd Gammel of HLB Mann Judd, and attended by more than 40 creditors, lasted just six minutes and was adjourned until July 16, at the latest, amid a court application to approve the sale of StrongRoom.
Gammel had recommended liquidating the business ahead of the meeting, amid hopes that a sale could be finalised beforehand. It was not to be and the deal requires court approval.
“The Administrators have entered into a sale agreement that has certain confidentiality provisions and a condition that the Administrators receive a direction that they are justified in entering into and performing the transaction. As the application is currently before the court and to avoid any prejudice, the Chairperson advised that no comment in relation to the application would be made,” the May 13 creditor’s meeting minutes said.
“The Administrators were hopeful of issuing a further report to creditors and reconvening the meeting in a much shorter time frame.”
StrongRoom AI’s 64 creditors – 2 secured, 35 employees and 27 unsecured – are owed a collective $23.357 million. That includes $944,038 for the workers and $1.72 million to the secured creditors and $23.327 million to unsecured creditors – a large majority of that figure being VC investors..
Those figures, and previous scenarios outlined by Gammel suggest the business, valued at $70 million before its dramatic collapse, could be sold as an ongoing concern, could be sold for just a few million dollars.
The administrators estimated in a report ahead of the creditor’s meeting than in the best possible outcome would see secured creditors would receive 74 cents in the $1, and employees their full entitlements, while unsecured creditors, such as investors, will score around 14 cents in the $1, or potentially nothing.
Reasons to freeze
To recap, StrongRoom AI, announced it had raised $17 million in March. Sydney VC EVP led the round with $10.4 million. Just 10 days later, the VC launched legal action to recover its funds, and after 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 and Divesh Sanghvi.
Yesterday Justice Derrington published his reasons for granting the freezing order on March 31.
“EVP now says that it was ‘profoundly misled’ in relation to the Investment and, in particular, that the warranties given were ‘false, misleading or deceptive’ and may have been undergirded by ‘deliberate fraud’,” he wrote.
EVP alleges in court documents that StrongRoom AI CEO Max Mito admitted to fraud using fake revenue numbers, a claim Mito denies.
“It is a matter of common experience that the (alleged) misconduct of Messrs Mito and Durre is enough to enliven the risk that they may seek to dissipate any assets in their possession and/or control,” His Honour wrote, citing a previous case.
“It is also the case that Mr Bruce-Clark and Mr Sanghvi are implicated in the conduct of Messrs Mito and Durre and, on that basis, they too might be regarded as persons who would have some real motivation to put assets beyond the reach of creditors. In those circumstances, the risk of dissipation is tangible and favours the grant of the orders sought.”
Among the investor unsecured creditors, Artesian Venture Partners is owed $5.838 million; Boab AI, an Artesian subsidiary, $368,783; and InterValley Ventures $3.2 million; while the Victorian government’s Department of Jobs, Skills, Industry and Regions is owed $440,000 in grant funding.
Employees are owed between $1,700 and $64,000.
Wrapped up in the finances is the sale of Sanghvi’s company, Members Benefits Australia (MBA), in a deal worth between $9.8m and $10.5m, including $8.82m in cash.
Administrator Todd Gammel believes multiple aspects of that deal warrant further investigation, including a failure to record the debt and equity deal. The bulk of the EVP funding went to pay for MBA.
HLB Mann Judd says the payment couldn’t be made without raising additional funds and raises the issue of potential unfair preference payments – transactions that occur in the six months prior to a company being wound up – as well as uncommercial transactions, “including potential related party uncommercial transactions”.
“Our investigations to date have identified potential unfair preference transactions of $9.891m; however, there may be more identified as further investigations are undertaken, and the date of insolvency is proven to be earlier in a liquidation,” Gammel wrote to creditors earlier this month.
When StrongRoom announced its raise, the business c.$13 million in annualised revenue by the end of 2024.
Court documents put the revenue at around $1.7 million in the 12 months to January this year. EVP invested at a pre-money valuation above $50 million, believing at the time that the annual revenue was around $6.1 million.
The administrators found that StrongRoom AI’s combined net losses after tax since the 2020 financial year exceed $18.5 million and formed the view that the company may have become insolvent around October 28, 2024, when quarterly superannuation payments were due but not paid.
Another $800,000 in losses have occurred during the administration process.
The matter returns to court on June 4 in Sydney’s Federal Court.
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