After Paul Ryan negotiated down the debt payable following his Signum Holdings default on a convertible note repayment owed John Penno’s investment company, Okuaroa Holdings, Signum then again defaulted. Associate judge Paulsen said to describe the relationship between Penno and Ryan as ‘fraught’ and ‘strained’ understates the position.
In the High Court, Signum claimed its 2022 agreement for deferred payment of $500,000 on a rescheduled $1.5 million debt was unenforceable because of undue influence.
Signum Holdings Ltd specialised in digital technology enabling product tracing through supply chains. Mr Ryan was the driving force behind operations.
The High Court was told Mr Penno’s family investment company Okuora Holdings Ltd made a small equity investment in Signum back in 2019. His spouse, Maury Leyland Penno, was then appointed a Signum director.
Signum was still short of cash. Within a year, three directors had resigned, leaving Ms Penno on a board lacking a quorum. Okuora made a further investment, providing capital in the form of a convertible note issue. Mr Ryan returned to the board.
By early 2022, Signum was in serious financial trouble. It was insolvent, unable to refinance the convertible note issue. Mr Ryan again resigned as a director and advised he was working out his notice as CEO.
With multiple director resignations, Ms Penno was left as sole director on the board, again leaving the board without a quorum.
Okuora put Signum into receivership.
Three months into the receivership, a workout was agreed: Mr Ryan would purchase the convertible note for a discounted price of $1.5 million; Okuora would end its receivership; Mr Ryan would assume control of Signum. Of the $1.5 million payable to Okuora, $500,000 was to come from Signum, payable in twelve months.
A legal complication was that Ms Penno was at time of the workout sole director of Signum. On her own she could not commit Signum to the workout. She signed, with the condition that Signum shareholders needed to ratify her decision. Mr Ryan rounded up the votes. Approval was given.
Twelve months later, with Signum unable to pay the promised $500,000 balance due, Mr Ryan alleged the debt was not enforceable; at the time shareholders were asked to vote, Ms Penno had failed to disclose an email sent by Mr Penno to a major Signum customer. Mr Ryan said this email was ‘vindictive,’ prejudicing future commercial relations between Signum and its customer. Ms Penno’s failure to disclose her spouse’s email showed a lack of candour on her part as director, amounting to undue influence affecting shareholders’ votes, he claimed.
Judge Paulsen said the refinancing could not be viewed as an example of the Pennos as the stronger party victimising Signum as a debtor. All involved were experienced business people. Detailed negotiations took place through lawyers. There was a six week gap between the time Mr Ryan resumed control of Signum and shareholder approval given to the workout. Mr Ryan had ample time through this period both to communicate with shareholders and to clarify the situation with existing customers, Judge Paulsen observed.
Evidence was given that Mr Ryan and his consortium of investors who through the workout agreement regained control of Signum from Okuora at a cost to them of one million dollars, in turn on-sold a one-third share of this investment shortly afterwards for $1.2 million.
Signum Holdings Ltd v. Okuora Holdings Ltd – High Court (1.11.23)
24.004
Post judgment update: One week after Signum was ruled liable to pay the disputed $500,000, the company was put into liquidation insolvent.