Australia's corporate regulator is asking the Federal Court for approval to wind up Merlin Diamonds (ASX:MED), whose shares have been suspended from trading since October, after the watchdog kicked off a probe into a A$13 million-loan from the miner to a private company associated to the diamond producer's owner.
The Australian Securities and Investments Commission (ASIC) is also looking into whether the owner of Merlin, mining magnate Joseph Gutnick, breached his director's duties by advancing unsecured loans to the private firm, AXIS Consulting.
AXIS, whose Melbourne offices are located in the same building that is home to Merlin, has been integral to Gutnick's financial dealings. Many of his listed mining companies have contracted the firm to provide administrative, management and geological services.
ASIC has for months been probing how Merlin Diamonds has loaned A$13 million of investor money to a private company, AXIS Consultants, which has long been associated with the miner's chairman.The problem is that AXIS has proved unwilling or incapable of repaying the loans Gutnick's companies have provided it so far. Most of them have been written off as impairments and are, most likely, unrecoverable.
Gutnick was a long-standing director of AXIS until he filed for bankruptcy in 2016, but his ties with the consultancy were still strong at the time, as reported by The Sydney Morning Herald:
His eldest son, Mordechai Gutnick, and long-time business associate Peter Lee are present AXIS directors. Another loyal ally, David Tyrwhitt, who has worked with Mr Gutnick for more than 20 years, was an AXIS director until October 2017.
Mr Gutnick, his son, Mr Lee and Mr Tyrwhitt, the AXIS directors, have also all appeared as either directors or senior executives at publicly listed companies, including Merlin Diamonds, that have loaned AXIS money over the past six years.
In October, the Australian Stock Exchange (ASX) suspended Merlin's stock trading as the miner failed to submit its FY18 results by the bourse's deadline. Once the diamond producer logged its statements, the ASX decided to keep the trading halt "pending further queries".
Among the explanations requested, the exchange wanted to know why the millions loaned to AXIS were not treated as "payment for services" given the consultancy provided management services to Merlin for the year.
Merlin has said AXIS was "instrumental" in raising over A$60 million for the company since 2009, including bringing it back into diamond production."It is more beneficial for Merlin to treat the amount as a loan rather than payment for services," the company replied at the time, adding it saw the services provided by AXIS as "critical to its ongoing needs."
Merlin also said AXIS had been "instrumental" in raising over A$60 million for the company since 2009 and managing its affairs since that time, including bringing the miner back into diamond production, and more recently, the ongoing development of a diamond sales arm in Belgium.
ASIC's latest move against Joseph Gutnick and Merlin Diamonds comes as the body is under a relatively new leadership team, known for their aggressive problem-solving approach.
Merlin Diamonds has also been in arbitration in Western Australia and the Northern Territory with former contractors and employees who claim they are owed more than A$1.2 million.