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Guvera collapse

company collapse

Investors, auditors, and taxmen are among creditors still pursuing almost $40 million from collapsed music streaming service Guvera, which once hoped to become Australia’s next tech “unicorn”.  The ongoing disputes and continued information coming to light in the Guvera collapse and professional negligence demonstrate the importance of obtaining financial and investment advice from licensed and authorised professionals.

Introduction: Guvera collapse

Guvera was established in 2008 by Claes Loberg, and Darren Herft assisted in acquiring $180 million over four years as the pair endeavoured to commercialise the service.

Following a failed attempt to list Guvera on the Australian Stock Exchange (ASX), the company collapsed.

Guvera submitted an initial prospectus to the Australian Securities and Investment Commission (ASIC) in May 2016 and submitted a replacement prospectus in June.  The stock market operator subsequently rejected the replacement.   Guvera hoped to list on the ASX in 2016 with a $1.3 billion valuation, busting the symbolic unicorn valuation of $1 billion.

Following public criticism from prominent members of the tech start-up community, including Atlassian co-founder Mike Cannon-Brookes and Blackbird Ventures founder Niki Scevak, the ASX took the unusual move of blocking the public listing.

Guvera lost $81 million in 2016 with only $1.2 million in revenue.  On 27 June 2016, Guvera Australia and Guv Services, two companies directed by Herf, were placed into administration and later liquidated.

Darren Herft had an annual salary of $264,000, while his founding partner Claes Loberg’s salary was $300,000.  Substantial salaries for a company operating in the red.  What’s more, private equity business AMMA (which facilitated investments) was paid $22.5 million for the fundraising, at a commission rate of 12%.    Darren Herft was the sole director of AMMA.

In April 2019, administrators Tony Cant and Renée Di Carlo of Romanis Cant were appointed after Guvera’s British subsidiary staff successfully shifted their debt to the parent entity.  Others exposed by Guvera’s administration include Steve Porch, the former director of a company that provided loans to Guvera and is owed $17.8 million.  Porch’s company is a secured creditor.

Unsecured creditors are owed a total of almost $20 million, including  $9.5 million claimed by Tree Pot.  Tree Pot has security over one subsidiary, Guvera IP, and its shareholders are Kate and Eve Kantor, relatives of media mogul Rupert Murdoch.

EY Entrepreneur of the Year Australia awarded Guvera co-founder Claes Loberg its Queensland technology entrepreneur award in 2011.  EY had audited the music streamer, and as a result, it is now owed $718,000.  Arnold Bloch Leibler, listed as the legal adviser in Guvera’s prospectus, was owed $1.8m.

The ATO claimed $1.97 million.  The ATO representative peppered the meeting with questions about the music streamer’s failure and assets during a meeting.  Guvera’s significant assets were intellectual property and patents.

ASIC bans former Director following Guvera collapse

In 2019, the Australian Securities and Investments Commission (ASIC) banned Darren Herft, the former CEO of Guvera, from managing corporations for two years.  He was a director of seven failed companies.

The seven failed companies were:

  • Guvera Australia Pty Ltd (In Liquidation)
  • Guvera Operations Pty Ltd (In Liquidation)
  • Guv Services Pty Ltd (In Liquidation)
  • Professional IPO Management Pty Ltd (Deregistered) 
  • KwikTV Australia Services Pty Ltd (In Liquidation)
  • The Product People (International) Pty Limited (In Liquidation)
  • WWP Accounting Group Pty Ltd (Deregistered)

Mr Herft’s disqualification took effect on 19 December 2019 and will continue until 18 December 2021.  In deciding to disqualify Mr Herft, the ASIC delegate relied on reports lodged by the liquidators of the failed companies.

Section 206F of the Corporations Act permits ASIC to disqualify a person from managing corporations for up to five years if, within seven years, the person was an officer of two or more companies and winded up those companies.  In addition, a liquidator provides a report to ASIC about its inability to pay its debts.

In deciding to disqualify Mr Herft, ASIC relied on supplementary reports lodged by the liquidators of Guvera Australia, Guv Services, and KwikTV.  ASIC also provided Funding from the Assetless Administration Fund to the liquidator of KwikTV to assist in preparing a supplementary report.

Accountant class action litigation

For Amma, a critical investment source were clients of accountants.  Amma claimed that hundreds of firms were their associates and that accountants could “add an exclusive private equity brand to their existing offering with the peace of mind that all licensing, advice and risk fall under the Amma brand”.

It raked in accountants’ endorsements, such as that from Oculus Fenton, and some accountants – not all – took rewards, as well.

For one couple investing in Guvera, the accountants told them a family trust was tax effective for distributing any profits.  So, they proceeded with an investment.  The couple questioned Amma, saying their dealings involved transferring $100,000 for Guvera rather than advice.  The accountants signed share-subscription agreements on Oculus’s trustee for the couple trustees for their newly created family trust.

The couple claimed they were not given critical financial documents relating to Guvera and were told they were general “retail” investors rather than “sophisticated” investors, who legally do not need specific financial documentation.

A sophisticated investor has a gross income of at least $250,000 or net assets of $2.5 million.    Such people are “more likely to be able to evaluate offers of securities … without needing the protection of a regulated disclosure document”, according to ASIC guidelines.

Accountants were advising some clients, who are not sophisticated, to set up a company trust.  The person running the trust, possibly the accountant, meets the “sophisticated investor requirements” and invests in shares on the original client’s behalf.

The private equity firm and accounting firms associated with failed Australian start-up Guvera face potential class action brought by the investors who lost money on Guvera.  Usually, it’s a licensed financial adviser proposing products for investment.  Accountants without such a licence are not permitted to provide such advice.  It is estimated that approximately 3,000 investors invested in Guvera Ltd on the advice of accountants.

Subsequently, the class action pursuit for compensation from accountants is fizzling out after years of litigation.  The accountancy argues the class action has dragged it through an expensive lawsuit and wrongly accused of giving advice.

ASIC, suspicious that accounting corporate structures were used to avoid restrictions protecting general investors, did not take any punitive action.  Accounting associations also cannot demonstrate any punishments of members.

ASIC’s investigation delineated a technical probe focused on Amma, Guvera and Kwickie and whether the structures satisfied Corporations Act requirements in fundraising, not if the structures themselves were illegal.    The investigation concluded that there was insufficient evidence to establish any fundraising breaches by the three companies.

The source said ASIC privately forwarded concerns about accountants to their associations for any disciplinary action. But none of the associations can provide evidence of any action against members.    Chartered Accountants said it had conducted investigations, but the outcomes were confidential.

Ultimately, Guvera’s $180 million collapse appeared to trigger many recriminations but few actual penalties.  Most prominent was ASIC’s two-year ban on managing corporations for Guvera’s chief executive Darren Herft, partly for improperly using the group’s structure “for his gain”.  That ban finished at the end of last year.

Liability and negligence

Accountants may only give you financial advice on investments if they hold an Australian Financial Services (AFS) licence or they are an authorised representative of an AFS licence holder.  ASIC’s financial advisers register can tell you where a financial adviser has been employed, their training, qualifications, memberships of professional bodies and what products they may advise on.

Three of the most critical areas for professional accountants covered by the Corporations Act 2001 (the Act) and the Corporations Regulations 2001 (the Regulations) relate to business, superannuation and taxation advice.

The Act sets out those situations when licensing is required.  Members should understand the following essential sections of the Act to decide whether their circumstances require them to be licensed.  If all of the following sections apply, section 911A of the Corporations Act requires a person to hold an AFS Licence:

  • the item is a Financial Product;
  • you are providing a Financial Service concerning that product (e.g. providing advice or dealing in the Financial Product); and
  • you are carrying on a Financial Services Business

On 1 July 2016, the accountants’ exemption previously set out in Regulation 7.1.29A was repealed.    Accountants are now required to hold an AFS licence (or operate under another entity’s AFS Licence) if they provide establishment or wind-up advice.  The same applies if they deal or arrange to deal in an interest in an SMSF or provide financial advice or dealing services concerning certain financial products.

Negligence

There are numerous circumstances in which an accountant may have been negligent.  Some examples of negligence are providing incorrect advice, incorrectly assessing tax liability, making accounting errors, failing to identify tax exemptions, or providing information and advice based on their interest.

Claiming accountant negligence

To succeed in suing an accountant for negligence, a person must prove three things:

  1. The accountant owed a duty of care,
  2. They didn’t do their job following professional standards, and
  3. The person suffered a resulting financial loss

Duty of care

The Accounting Professional & Ethical Standards Board governs Australian Accountants and asserts that all member accountants must abide by the fundamental principles of maintaining professional competence and due care.

They must act ethically and professionally per your best interests.  In addition, your accountant’s advice needs to comply with the standards of their professional peers and to a standard expected by the law.

Vogue Advisory Group – protecting our clients’ investments

If you are unsure whether you have obtained unauthorised advice or require financial or investment advice, please contact us, and one of our licensed Financial Advisors can assist you.

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