So I'm very much
not saying this is what has happened (we don't know, and I want to be really clear that I am
not suggesting this has happened).
But I think, if I interpret your post correctly, that you raise an interesting point about the many alternative interpretations and possible events that could lead to a situation in which Directors and/or a Majority Shareholder felt they could no longer legally exercise control of a Malian subsidiary that may not be precisely "we had to pay money otherwise we forfeited control due to specific Malian law" which is how I think we've been generally interpreting the commentary.
So along similar lines of hypothesising all possible scenarios that could theoretically (but I'm
not saying did) happen, as an exercise in lifting our understanding of all possible scenarios that can arise generally in company/subsidiary relationships.
As has been discussed before, ensuring the solvency of trading subsidiaries is a general principle and responsibility of holding companies where controlled subsidiaries exist: indeed there are cases in the Australian and related case law in which a controlled subsidiary trading insolvent is sufficient to pierce the corporate veil of parent entity responsibility.
With thanks to a quick Google, this is a general summary of that kind of risk factor:
Interesting in this hypothetical musing is how important reliance on information is to how these cases are considered - who knows what when, and who should have known what when.
Naturally any Director overseeing a company, or a controlled subsidiary, that appears to be still trading but may be, or has the potential to become, insolvent is going to be highly concerned about ensuring trading ceases. Such a hypothetical Director would potentially also be worried about personal liability. It would probably be reasonable for a Director to resign in such a scenario if they felt they could not effectively direct a controlled subsidiary they believed to be insolvent, or at risk of becoming insolvent, into the relevant correct legal process.
Defences for a holding company in this hypothetical situation include reasonably believing the subsidiary was solvent, taking all reasonable steps to prevent insolvent trading by a subsidiary, and/or a "good reason" that prevents a Director from stopping an insolvent subsidiary trading.
So again I note we do not know enough about what has been happening in detail in our scenario.
What we do know is:
- The Board noted "The board of directors of Morila SA has been notified of Firefinch’s position regarding ongoing funding. Firefinch expects that Morila SA will enter a Malian insolvency process in the immediate term. Accordingly, Firefinch expects to write down its investment in the Morila Gold Project to nil." (3/11/22 Recapitalisation Update).
- The Board noted "There is present and real risk that Morila SA may be forced into insolvency now that FFX has ceased its funding. This decision rests with the CEO of Morila SA" (14/12/22 Letter to Shareholders)
- The Board noted "FFX has not received any financial or operational reports, or other pertinent information since funding of Morila SA ceased 3 November 2022" (14/2/23 Corporate Update)
- That "On 3 November 2022, the Company announced recapitalisation efforts would not proceed and that Firefinch Limited would no longer provide funding to its 80% owned Malian subsidiary, Morila SA. As a result of this decision and the subsequent actions of Morila SA management on the ground, it is the opinion of the Firefinch Board that Firefinch Limited lost control of Morila SA on this date" (2022 Annual Report).
- That also "As a direct result of the withdrawal of funding support, Firefinch Limited lost the ability to instruct the General Manager of Morila
SA under Malian Law. The subsequent actions of Morila SA management on the ground reflected this." (2022 Annual Report). - That FFX procured legal advice on Malian insolvency processes. Part of its Audit involved providing such legal advice to our Auditor who "Assessed legal advice obtained by Firefinch in relation to the powers and duties of the General Manager and the Malian insolvency process" (2022 Annual Report). The Auditor also informed their decision on agreeing there had been a loss of control for accounting purposes by "Consider[ing] board minutes and public announcements regarding personnel changes at both Firefinch and on the board of Morila SA".
- Lowe noted "When we walked away the decision was to cut ties completely and after a month the directors resigned from Morila SA Board" (AGM commentary as relayed on HC - assumed to be faithful and accurate). Does this mean the directors remained on the Board for a month, but either didn't receive any updates or didn't provide any said updates to FFX? Does this also imply that there was a decision to walk away rather than a forced loss of control event?
- Lowe also noted "We don't have control of the Morila SA board, we only have 1 member on the board and get sporadic information" (AGM commentary as relayed on HC - assumed to be faithful and accurate).
- Despite the decision to "cut ties completely", Fraser noted "we are continuing to work closely with the subsidiary company and local authorities to investigate options to mitigate the impact on the mine workers and the local community". (16/11/22 Chairman's Letter to Shareholders)
- That "The decision to no longer provide funding to Morila SA gives rise to a risk of contingent liabilities which, in the event of an adverse
outcome, has the potential to impact the Group’s ability to remain a going concern." and that while the Board believes "that any potential legal action by Morila SA Creditors attempting to hold Firefinch Limited liable for its outstanding debts is highly unlikely to succeed", and noting they "are not aware of any legal action against Firefinch Limited, the Board or its Directors at the date of this report", in the Auditor's view "there is a material uncertainty that may cast significant doubt on the entity's ability to continue as a going concern." (2022 Annual Report) - That the Board noted "The Morila Gold Mine is continuing to operate" (14/2/23 Corporate Update)
- The Board noted "FFX recently became aware that the Court reached a decision to open a “preventive procedure” in respect of Morila SA. ... This preventive procedure is open to a debtor (ie: Morila SA) who, without being in a state of cessation of payments, can justify serious financial or economic difficulties. The main purpose of such procedure is to safeguard companies in financial or economic difficulty and to clear its liabilities before any cessation of payments." (14/2/23 Corporate Update)
- The Board noted "As previously reported, the Company is continuing to liaise with Morila SA and local authorities regarding the possible mitigation on the impact of FFX’s decision to cease funding the Morila Gold Mine, on the mine workers and the local community." but also that "FFX does not fund, or provides advice to Morila SA" (14/2/23 Corporate Update)
Looking at those statements:
- It seems to me that in November 2022 FFX expected Morila SA would proceed with insolvency processes as a result of FFX discontinuing funding, and that it had sought legal advice on Malian insolvency processes.
- This suggests to me a reasonable expectation that FFX felt Morila SA's solvency depended, or at least probably substantially depended, on continued financial contributions from FFX, and that with these contributions ceasing it was probable Morila SA would be insolvent.
- It was on this basis of a belief that Morila SA would likely proceed with insolvency processes that FFX wrote down its Morila SA holdings to nil, and that in the absence of subsequent financial or operating reports it has held this viewpoint.
- I note the contributions that FFX believed Morila SA would most likely be dependent upon for solvency were contributions FFX believes it was not obligated to make. I wonder whether Morila SA Directors expected such contributions to continue to be forthcoming and if so what the basis for this expectation was.
- That there was a decision by FFX to "cut ties completely", implying to me that this was not necessarily an automatic result of the decision to cease funding. That is, the loss of control arose, at least in part, by an active decision to "cut ties". This is perhaps to a degree supported by the Auditor reviewing appointments and resignations. On the other hand we have the statement in the 2022 Annual Report "As a direct result of the withdrawal of funding support, Firefinch Limited lost the ability to instruct the General Manager of Morila SA under Malian Law". I am unclear on how to make sense of all of these elements together without further information.
- That despite this decision, there is still a Director on the Morila SA Board whom FFX have a relationship with (a former FFX employee and current LLL employee) whom is providing some limited updates, but despite this FFX have been unable to obtain reports from the company they remain the majority shareholder of.
- That FFX is not providing advice to Morila SA, but is still working with it to get outcomes for the community.
- That a potential motivation for these efforts is the concern of legal action - action that has not happened, and that the Board consider highly unlikely to be successful, but that remains a noted risk.
- I note given the declared position that FFX has not been able to obtain information from Morila SA, that we do not know for certain that Morila SA is insolvent without FFX funding, just that FFX expected they may (would likely?) be so without further funding, and that FFX have expressed that they been unable to obtain any further information since. With that noted, the more recent updates have been that Morila SA has still been operating, but has entered a preventative procedure - a legal procedure taken before insolvency. It is also unclear to me why this procedure wasn't explored before a decision to "cut ties"
