Having lost $3.2 million lent to Mako Networks, Adam Banks failed in attempts to recover from directors: there was no liability for their representations about Mako’s potential future profitability and while directors did trade Mako whilst insolvent Mr Bank’s investment by that date was already lost.
Mako Networks Holdings Ltd was born out of the help desk at Telecom’s then new internet service provider: Xtra. Simon Gamble and Chris Massam from Telecom teamed up with Bill Farmer and his business: E-Force. Their genius was in devising a simplified and cheap procedure for updating network security, a potentially profitable area when businesses worldwide were adapting to internet connectivity. Telecom provided working capital for what became Mako Networks. Mako grew rapidly, expanding into the US market; too rapidly, eventually running out of cash. In 2015, Telecom pushed Mako into receivership, recovering $2.5 million out of $26.9 million owed.
Also out of pocket was Adam Banks, having lent Mako $3.2 million dollars in three separate transactions between 2011 and 2014. As an unsecured creditor, these funds were lost. He sued Mako directors.
Mr Banks argued Mako directors were in breach of the Securities Act offering investments to the public without first issuing a prospectus. Justice Moore ruled there was never any offer to the public. Mako did circulate a private placement memorandum. This was carefully worded, making it clear the target was ‘habitual investors.’ Mr Banks claim not to be a ‘habitual investor’ was prejudiced when forensic evidence identified he forged emails to disguise funds previously sent overseas for investment as supposedly being funding for a university research project.
Justice Moore ruled Mako directors were in breach of the Companies Act by continuing to trade when Mako was insolvent with no chance of recovery. This point arose in April 2014 when a proposed deal with US telco Sprint fell apart; a deal promising Mako potential revenue of $42 million over two years. Sprint refused to pre-pay; Mako had insufficient working capital to fund manufacture of the necessary hardware. Mr Banks could not claim damages because his loans were advanced before this date, Justice Moore ruled.
Fair Trading Act claims were also dismissed. Comments made to Mr Banks by Mako director Bill Farmer about Mako’s potential future profitability were honestly held opinion. They were not factual representations. Even if there were breaches of the Fair Trading Act, Justice Moore said, Mr Banks presented himself as a man who thoroughly researched business opportunities and would have advanced funds regardless of what Mr Farmer said.
Banks v. Farmer – High Court (28.07.21)
21.129