The client instructed Samuel Okoronkwo Jr. in relation to potential claims arising from the collapse and subsequent administration of a technology company specialising in the development of innovative musical instruments and related technology.
The client was one of a group of original seed investors who invested approximately £1.5 million into the company during its early stages. The client had introduced a group of international investors who provided funding to assist with the development and commercialisation of the company’s products.
The company had been founded by an individual who developed a specialist electronic musical instrument with a unique interface capable of reproducing and manipulating sounds from traditional musical instruments. Following the initial investment, the company underwent further fundraising rounds involving venture capital investors and corporate investors.
The client’s position was that during the course of subsequent investment rounds, the original shareholders were pressured into signing revised shareholder documentation which significantly reduced their existing rights. The client alleged that these changes included granting extensive powers of attorney and authority to act on behalf of the original investors, resulting in reduced shareholder oversight and control.
The client explained that following these changes, corporate governance deteriorated significantly. The client alleged that the company failed to hold annual general meetings, financial accounts were produced late and original investors were not kept adequately informed regarding the company’s activities, financial position or strategic decisions.
The client alleged that the company’s affairs were effectively controlled by a small number of individuals, despite the appointment of directors nominated by venture capital investors and corporate shareholders. The client’s position was that these directors failed to properly discharge their fiduciary duties and failed to prevent the company being managed in a manner which ultimately resulted in administration.
The company subsequently entered administration in September 2021. Following the administration, a new company was established which acquired the assets of the company, including valuable intellectual property relating to one of its key products. The client alleged that the former CEO became involved with the new company as a director and shareholder and that the transfer of assets to the new entity raised concerns regarding potential wrongdoing.
The client sought advice regarding potential civil fraud claims against various individuals and entities, including the former CEO, the administrators and former directors appointed by investment companies and corporate shareholders.
The principal issue was whether there were grounds to pursue claims for civil fraud, breach of fiduciary duties and/or mismanagement against the former directors and other parties involved in the company’s affairs.
Counsel considered the allegations that the company had been improperly managed and whether there was evidence demonstrating that directors failed to act in the best interests of the company and its shareholders. A key issue was whether the directors appointed by external investors had failed to properly monitor the company’s activities or intervene when concerns arose regarding governance and financial management.
Counsel also considered allegations concerning potential misuse of company funds, including acquisitions made by the company during its growth period. The client raised concerns regarding the purchase of various companies and the lack of transparency regarding the amounts paid for those acquisitions compared with the eventual sale values achieved during the administration process.
A further issue concerned the circumstances surrounding the administration and subsequent sale of company assets to a new entity. Counsel considered whether there were grounds to challenge the transfer of assets, including intellectual property, and whether the transaction represented an undervalue sale or an improper extraction of value from the company.
Counsel also considered the allegations concerning the involvement of the former CEO and connected individuals, including whether there had been any personal benefit obtained at the expense of shareholders or creditors.
A further issue concerned the evidential basis required to support any claim. The client explained that significant evidence was likely to be contained within the company’s records, including board minutes, financial documents, invoices, acquisition records and communications between directors and investors. Counsel considered the importance of obtaining disclosure of these documents in order to properly assess the merits of any proceedings.
Counsel advised that any claim would require careful preparation and a detailed review of the company’s records before proceedings could be issued. Counsel explained that allegations of fraud and breach of fiduciary duty require substantial evidence and that the client would need to establish a clear connection between the alleged wrongdoing and the losses suffered by the investors.
Counsel advised that the first stage would be to obtain and review relevant company documentation, including board papers, shareholder communications, financial records, acquisition documents and records relating to the administration and sale of assets. Counsel advised that these documents would be essential in identifying whether there had been any improper transactions or failures by directors to comply with their legal obligations.
In relation to the former directors, Counsel advised that potential claims could arise if it could be demonstrated that they failed to exercise proper oversight, failed to protect the interests of shareholders or allowed the company to be managed in a manner which caused unnecessary loss.
Counsel advised that the circumstances surrounding the administration and transfer of assets to the new company would require particular scrutiny. Counsel explained that consideration would need to be given to whether the sale of assets, including intellectual property, was conducted at an appropriate value and whether any parties connected with the transaction obtained an improper benefit.
Counsel further advised that any allegations against the administrators would require evidence demonstrating that they acted improperly, negligently or outside their duties when carrying out the administration process. Counsel advised that the conduct of the administrators would need to be assessed separately from the actions of the former management team.
Counsel advised that, given the potential complexity and value of the claim, litigation funding may need to be considered if the matter proceeded. Counsel explained that any proposed claim would need to be structured carefully to ensure that it was capable of attracting third-party funding and that the evidence supporting the allegations was sufficiently strong.
Counsel advised that an aggressive litigation strategy could be considered, including seeking disclosure of relevant company records and applying appropriate pressure through correspondence. However, Counsel advised that any public statements or publicity campaigns should be approached cautiously to avoid creating additional legal risks.
Counsel recommended that the immediate next steps should be to gather all available evidence, identify the key transactions and decisions requiring investigation, and prepare a detailed chronology of events. Counsel advised that once the documentary evidence had been reviewed, advice could be provided on the merits of issuing proceedings and the appropriate defendants to pursue.
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