Tuesday 17 September 2019

Datalex considers legal action against former executives over dividend

Dermot Desmond pitches in for software firm's $10m funding bid

Financier: Dermot Desmond owns almost 30pc of the firm
Financier: Dermot Desmond owns almost 30pc of the firm
John Mulligan

John Mulligan

Datalex plans to raise a total of up to $10m (€9m) from investors including billionaire Dermot Desmond to keep the embattled travel software firm afloat after it posted a $50m loss for 2018.

It is also taking legal advice on whether it should take action against any former executives in relation to the 2018 dividend payment made by the group, it revealed in its long-awaited annual report published yesterday.

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The $4m used to pay the dividend was "unlawfully" provided by a subsidiary to the group, it said.

It is likely that Datalex - rocked by an accounting scandal this year when it emerged it had materially misstated its first-half results for 2018 after a huge over-run on costs - will seek to secure the additional funding by the end of the year.

Datalex saw chief executive Aidan Brogan and chairman Paschal Taggart resign earlier this year. Former Actavo boss Sean Corkery took over as chairman and interim chief executive.

Datalex also hired veteran accountant Niall O'Sullivan as its chief financial officer.

While, technically, there is no bar on the company initiating talks now with investors about providing additional equity, Datalex is almost certain to wait until its shares are relisted on Euronext. They have been suspended since May, so it will have to convince Euronext that the group now has appropriate financial controls and adequate governance in place before the shares can trade again. It still also has to publish its restated first-half accounts for 2018.

Billionaire financier Mr Desmond - Datalex's biggest shareholder - has agreed to participate in the fresh funding round. Earlier this year, he gave it a €10m lifeline that included debt and equity.

As part of the up to $10m funding Datalex needs, Mr Desmond will procure up to $5.5m, to enable the group to continue trading over the remainder of the current calendar year.

It is not known yet if that $5.5m in funding will take the form of a loan or other instrument.

Mr Desmond was already Datalex's biggest shareholder before he provided the €10m funding this year, and now owns just under 30pc of the software firm. The earlier funding included €4m in equity and a €6m loan from the financier.

The company said in its annual report that it is in a "tight financial position". It added that this week, a customer terminated its contract.

"The group strongly disputes the legality of this notice and confirms that it is engaged in discussions with the customer concerning resolution of this matter," it said.

It is not clear yet if Datalex will pursue former executives in relation to a $3.8m dividend paid by the company in 2018 to shareholders.

The dividend was paid on September 5 last year.

"To enable the dividend to be paid, Datalex plc received a dividend of $4m from its subsidiary, Datalex (Ireland) Limited on May 30, 2018," it noted in its annual report.

"Subsequent to the dividend payments, management identified that Datalex Ireland would not have had sufficient retained earnings to support the dividend payment to Datalex plc, had there been appropriate recording of revenue," it added.

"As such, the dividend payment by Datalex Ireland to Datalex plc of $4m was an unlawful distribution in contravention of the provisions of Section 117 of the Companies Act 2014."

The report added: "The group is considering with its legal advisers whether it would be in the best interests of the group and its stakeholders to take actions against former executives to recover value and will take such action if advised that it is appropriate."

But Datalex also warned that "any decision to take such action will require careful consideration, having regard to amongst other things, the chances of success and recovery, the likely form of proceedings and the collateral implications for any regulatory inquiries involving the group".

While the payment from Datalex Ireland to Datalex plc was unlawful, it is understood that the dividend payment by the plc to the shareholders was not. Auditor EY - appointed in 2017 - said that it would not seek reappointment as the statutory auditor.

George Deegan of EY said in the annual report that due to the significance of the matters raised in the report, the audit firm is "unable to form a view as to whether there are material misstatements in the directors' report".

"It is extremely disappointing that the auditors have been unable to express an opinion on the financial statements, primarily because of the breakdown in the internal controls," said Mr Corkery in the annual report.

EY said this week that it has notified the registrar of companies of its opinion that Datalex failed to keep adequate accounting records in 2018.

The auditor said the failure fell under sections 281 and 282 of the Companies Act 2014.

Failure to maintain proper books is regarded as a Category 2 offence under the Companies Act - and is potentially a criminal offence.

Datalex holds its AGM on September 17. Shareholder advisory firm ISS has recommended that Mr Desmond's representative on the board, John Bateson, not be re-elected by shareholders.

ISS said it does not consider Mr Bateson, who's chair of the firm's audit committee, to be an independent non-executive director.

Irish Independent

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