Guvera ‘limped’ towards IPO, court hears, as former finance chief defends decision to keep trading

The former finance chief of music streaming firm Guvera had concerns over its solvency when he first joined the company but put his faith in chief executive Darren Herft to raise capital ahead of a planned – but ultimately doomed – public listing, a court heard.

Ken Hostland, who became Guvera chief financial officer in January 2016, said directors looked towards Herft and trusted his ability to raise funds through his private equity firm AMMA in the early months of 2016.

But the faith came amid tough market conditions described by Herft as “one of the toughest fund raising environments I’ve known”.

Hostland took the stand on a third day of the public examination into Guvera’s collapse.

The action, instigated by liquidators Deloitte, is exploring the circumstances behind the demise of Guvera, which left shareholders $180m out of pocket, and whether Guvera had traded while insolvent.

Deloitte barrister Ben Katekar again painted a picture of a company desperately short of cash, creditors chasing almost $30m and hoped-for capital failing to materialise.

He told Sydney’s Federal Court that Guvera found itself in an “acutely embarrassed financial position” and “limping towards an IPO” which the company was banking on to succeed in order to pay its escalating debts.

So fragile had Guvera’s position become that Herft told one creditor they would be better off waiting for the IPO, warning they would only get “5c in the dollar” if the company was wound up beforehand.

Hostland, who was questioned for almost five hours, said his role did not extend to oversight of Guvera’s capital raising efforts, but said Herft’s experience and historical success in raising capital gave him no reason to question that investment would be found.

He told the court he began familiarising himself with the company in December 2015, and read the accounts for the year ending June 2015 which showed a loss of $80m.

“Did you have concerns over the solvency of Guvera?” Katekar asked.

“Yes”, Hostland responded.

He later told the court the directors had faith in Herft, and that of Craig Dunstan, Guvera’s lead manageer of the IPO at DH Flinders, to source additional funding and remain a going concern.

“The directors who had worked at the company for a long period of time were confident that the ability to continue to raise capital was something AMMA was capable of doing,” Hostland said.

The court heard that by the end of March only $10m of funding had been secured, while creditor debts had ballooned to $28.4m. With a cash burn of $5m per month, and an $80m loss in the nine months to March 31, Katekar said it was a “bleak” picture with Guvera “going backwards”.

Amid a difficult capital raising environment, Hostland was asked to cut costs in the early part of 2016, which included reducing the number of countries where Guvera operated from 20 to between six and eight.

Questioned on the IPO and its chances of success, Hostland said Guvera’s due diligence committee would not have signed off the prospectus had it not expected the listing to succeed.

Katekar suggested that with the company in such a perilous financial position, the board had nothing to lose by lodging the prospectus. He put it to Hostland that lodging a prospectus and thinking it was going to be successful were “two different things”.

“That’s a view,” Hostland responded.

He added: “I believe the due diligence committee proceeded forward because we felt it was still very possible to be successful and raise the funds that were required.”

Hostland then changed the word “possible” to “probable” and, after further questioning, added: “I believed it was going to be successful on the basis I was comfortable with the process that we had gone through, the due diligence we had gone through, and the expectation that the capital raising….was going to be successful enough to raise those funds.”

Katekar pressed the CFO on whether directors doubted the success of the IPO and, given the amount of debt, losses and difficulty of the capital raising environment, whether Guvera could continue as a going concern.

Hostland said such questions would need to be addressed to the directors.

He told the court the issues were raised regularly in board meetings but he said he could not recall specific details of conversations.

“It was a standing item to go through and make a decision that the company was a going concern,” he said. “A big part of that was the capital we were expecting to get through an IPO was going to get the company through to be able to pay off all its creditors.”

Katekar asked Hostland whether he had formed his own view as to the solvency of the company.

“I placed a lot of reliance on the ability of the capital raising and continued funding through AMMA,” he said.

The hearing will resume on April 6.


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