Ashurst destroyed Sargon, wiped out Taiping’s investment.

I am still bombarded with questions about Sargon from investigative journalists, shareholders and creditors. I have been silent on this saga publicly for the last year while I’ve been working with many Sargon shareholders and creditors on the best route for recovery, and litigation is ongoing so I am somewhat limited in the scope of what I can say.

tl;dr: Ashurst destroyed Sargon and its clients prospects of recovery with its recommendation to appoint receivers in the circumstances, and then sealed their client’s fate by completely botching the execution.

The basic facts

For those who haven’t studied the statutory reports resulting from the administration of Sargon, it’s not a complex story. Here is what happened from my perspective as one of only a handful of people with complete knowledge of the financing structure in Australia and Hong Kong:

  1. Receivers were appointed by Ashurst (who were advising China Taiping – an investor in Sargon’s debt and equity) over Sargon on the 29 January 2020 “to get the company’s attention” (David Greenberg, Ashurst).
  2. Interest on the facility was paid up to and including 31 January 2020 (and therefore paid up on the date of receivership). Sargon was fully up to date on all salaries, contractors, rent/leases, superannuation, taxes, etc. and Sargon was not in any kind of financial distress.
  3. The facility with Taiping was not due to mature for another year or so.
  4. The facility was part of an overall strategic relationship with Taiping that was delivering significant value to Taiping’s expansion ambitions outside of China including laying the groundwork for significantly growing their insurance premiums and assets under management.
  5. Ashurst appointed receivers for what was stated by the receivers at the time as an “information-gathering exercise” and (while not mentioned by them to the company on their appointment) changed their story to be an appointment over a few weeks late interest. Ashurst subsequently said that an interest payment was missed on or around December 31st, 2019, meaning interest would have been approximately 29 days late on the date of receivership, in the least favourable interpretation of the facts. As explained here, the only way for this to be true mathematically is if Ashurst consciously misdirected funds paid into its trust account for a purpose other than instructed (as transit money). As mentioned above, interest was in fact paid up to 31 January 2020.
  6. Despite claiming they wanted to resolve the situation, Ashurst and Taiping refused to provide even the bare minimum of cooperation to prevent Sargon’s subsidiaries from being left no choice but to enter voluntary administration. Presented with this likelihood, Ashurst dismissed it offhand as an idle threat (apparently ignoring the cross-defaults they had caused to arise). They then presented roadblocks to the voluntary administrators (E&Y) pursuing recoveries for the benefit of creditors and shareholders at every opportunity. Ashurst’s conduct has and continues to guarantee a net zero recovery to Taiping.

The larger story

It is apparent to me that Taiping would not have appointed receivers if not for Ashurst’s advice and it quickly became obvious to me that appointing receivers would have disastrous outcomes for everybody involved, but most of all for Taiping. Despite multiple opportunities to fix it, Ashurst stubbornly forged ahead, losing hundreds of millions of dollars of their client’s money in the process. 

There have been reports that Ashurst felt that there had been a ‘lack of communication’ from the company. I find this ironic given Ashurst specifically instructed me not to communicate with their clients, and then themselves ignored my responses to key correspondence. In particular, James Marshall wrote to me directly, and I responded with a number of important clarifications. Neither James nor anyone else at Ashurst acknowledged my letter in the three weeks between my sending it and their appointing receivers in late January 2020. I can only assume James was on holiday and didn’t bother to check his inbox. Even aside from that update, their client was expecting Sargon’s half-year financial accounts by the end of that week, yet Ashurst pulled the trigger on appointing receivers on the Wednesday evening. In fact, Taiping’s Sargon board appointee along with the rest of the board was sent the accounts mere hours before McGrath Nicol notified Sargon of their surprise appointment. These 1HFY20 accounts demonstrated Sargon’s best performing half-year since inception.

Lawyers do not normally cause loss, they usually come in afterwards to help stem it. In this case, however, James Marshall and David Greenberg turned a substantively performing financing arrangement between Sargon and Taiping’s entities generating millions a year of cash flow to Taiping on A$100+ million of invested funds (mostly equity-linked) to zero. By evidently failing to make any basic inquiries into their own client’s loan facilities and equity structures, they inadvertently destroyed their own client’s assets.

In all likelihood, they could have avoided this if they’d made a genuine attempt to understand the investment structure. Sargon was a guarantor of the facility, but the actual borrower was Trimantium Taiping Investment Management (now known as Trimantium Investment Management, which was also placed into receivership by Ashurst). Despite the borrowing entity bearing their own client’s name, to this day, they still haven’t enquired as to the beneficiaries of the fund it was set up to manage. In fact, the entities and the investments in it were Taiping’s own assets. Effectively, Ashurst appointed receivers over their own client’s investment vehicle. If their concern was with me being a director, they could have simply replaced me under the constitution.

As a result, Ashurst destroyed the very investments their client appointed them to advise on, along with Sargon as a whole.

In trying to determine why and how this happened, I have to refer to comments made to on the day of appointment; McGrath Nicol said that they had accepted the appointment, having been referred by Ashurst, “before they had a chance to get their feet under the table“ (Shaun Fraser, McGrath Nicol). They went on to say that “this is not a normal receivership appointment, we have been appointed to conduct an information gathering exercise” (Shaun Fraser, McGrath Nicol).

Sargon was in the business of owning regulated financial services businesses and trustee companies, in an industry where trust and stability are paramount, with those subsidiaries subject to a variety of regulatory capital requirements. It also had a variety of secured financing arrangements at the subsidiary level that – as is the norm in corporate finance – would cross-default upon an upstream receivership appointment.

These were all facts known to their client, who had a representative on Sargon’s board, and were facts that should have been obvious to professional insolvency lawyers. Yet, disturbingly, McGrath Nicol also indicated that in starting their “information-gathering exercise”, they weren’t aware of any other secured creditors in the Sargon group (senior to Taiping). Appointing receivers to gather information is the commercial equivalent of setting your house on fire to clean the carpet. Appointing receivers in ignorance of information already available to you is arson. 

Even if information gathering wasn’t the true purpose, and Taiping wanted to secure their investment at any cost and/or commit some form of hostile takeover, any competent lawyer in Ashurst’s shoes would have realised that receivership was the worst option available to Taiping in the circumstances. Alternatives included taking control of a significant holding in Sargon’s equity without business interruption.

Taiping was in possession of documents that would enable it to have taken control of Sargon, and then managed it to their liking (some options being: to have repaid their loan over time from Sargon’s positive operating cash-flow; to have sold assets; to have taken their equity upside; or have secured their principal exposure and entered the market as an insurer and asset manager and harvested a huge return). More restrained but similarly effective approaches also existed, which would have been obvious to Ashurst had they properly done any due diligence over the entities and contracts they were pursuing.

To top it all off, Ashurst executed the receivership appointment so haphazardly that they only locked down A$0.7 million of Sargon’s cash and left A$20 million+ outside of their appointment scope. A competent strategy would have locked down closer to A$22 million simultaneous to their appointment. If Ashurst had taken the time to read Sargon’s December 2019 half financial report when their client received it earlier that afternoon (or Sargon’s FY19 financial report), they would have realised this.

Further, Ashurst have created a significant liability for their client because of how much other loss was caused to third parties (including Westpac and OneVue) by the reckless and improper appointment. I understand actions are already being explored by various stakeholders in both Australia and Hong Kong. Sargon had its biggest ever financial half to December 2019 and was 10 times bigger than when Taiping originally invested only two years earlier so Ashurst are going to struggle to argue that company mismanagement or other post-hoc conveniences caused it to fail.

Given what I’ve observed, my view is that Ashurst thought they had a naive client which they could take advantage of, and have led them down the garden path on various, often self-contradictory, wild goose chases. So far, the only winners in all this have been Ashurst and (to a lesser extent) McGrath Nicol, through their sizeable fee harvests. 

Ashurst and McGrath Nicol then failed to manage the relationship with Ernst & Young (E&Y, the administrators of Sargon’s subsidiaries resulting from Ashurst’s botched appointment), and as a result E&Y was forced to walk away from at least 64 expressions of interest to acquire the assets of Sargon (leaving these bidders perplexed as to why they couldn’t access the data room and why there wasn’t a market-driven sale process).

It appears that Ashurst advised Taiping to not support the E&Y administration (where Taiping was in a position to assist with very short term professional indemnity insurance required for ongoing licencing compliance) which meant that E&Y was unable to conduct a proper bidding process. In administration, creditors should have received 100 cents in every dollar based on how much the value of the assets exceeded the value of the debts. Instead, EY had no choice but to accept cents in the dollar. The assets were sold for A$29.6 million, which included the group’s cash on hand – meaning the enterprise value obtained was around A$15 million, before millions of costs in the Federal Court of Australia.

Further, Ashurst’s incompetence has resulted in Taiping only having a tenuous claim to those proceeds.

By my estimate, China Taiping has, to date, lost at least A$100m, plus costs, as a direct result of the course of action Ashurst advised them to pursue. This figure doesn’t include any (now destroyed) upside on their equity exposure – which could have been realised as quickly as April 2020.

Beyond this, they’ve also burned the Taiping brand in Australia and China Taiping would struggle to enter the market now given how rightfully cautious APRA (and prospective domestic partners) would be. Not to mention their potential litigation exposure to everyone else harmed by the actions Ashurst advised they take.

Based on my assessment of how utterly negligent Ashurst’s advice has been to Taiping all along, I am now of the view that one of Taiping’s best courses of recovery for this mess is now against Ashurst itself.

It’s likely that a professional malpractice suit brought by Taiping against Ashurst could recover at least A$100 million of completely avoidable loss.

Ashurst will no doubt justify their conduct by saying they were just following their client’s instructions. At the end of the day, their client relied upon their supposed expertise with Australian insolvency and followed their advice to appoint receivers. Lawyers should not be absolved of their professional duties, or shielded from financial consequences when they failed to consider critical information (whether by design or incompetence) and steered their client down a fee-lucrative but inferior path causing wholesale destruction of value. To those with first-hand knowledge of the facts, there’s no credible scenario where Taiping would have gone down this path if they were competently advised. 

To add insult to injury, it seems that a good amount of this bad advice was given over the Australian summer holidays by Ashurst consultant David Greenberg, while Partner James Marshall was on holidays. How David Greenberg was allowed to cause so much damage unchecked, particularly when the file was supposedly under the responsibility of Ashurst’s global co-head of its Restructuring and Special Situations Group, James Marshall, is a question every lawyer and client of Ashurst will have to ask.

There is also the matter of the fact that Ashurst was acting for Sargon and Trimantium immediately prior to their acting for Taiping (and, I have to presume, continued on acting for them afterwards, considering they never wrote to Sargon or Trimantium identifying their conflicting appointments and resigning from their prior engagements).

Somewhat optimistically, Ashurst’s accounts payable team actually sent me a statement and invoice follow-up from work for Trimantium in mid/late 2019 after their insolvency team had just destroyed Sargon in the first weeks of 2020. Suffice to say that, realising their misstep, they haven’t followed me up since. As far as I’m aware, Ashurst continued to work for Sargon’s subsidiaries before, during and after receivership. Conflicts and ethics aside, it isn’t good business development practice to put your clients into receivership.

It truly takes a unique combination of unethical behaviour and incompetence to accept conflicting client appointments and then lose both clients everything.

Stay tuned.

Additional information for creditors and shareholders of Sargon and Trimantium investment vehicles available here.