Investment company Mahogany Capital in administration

The directors of listed investment company Mahogany Capital has been forced to place the company in voluntary administration after its funds were depleted by legal action relating to the collapse of US investment bank Lehman Brothers.

Mahogany, a special purpose company that aims to help investors access alternative asset classes, raised $125 million from retail investors via issues by Grange Securities, a subsidiary of Lehman Brothers.

The money raised was then invested in notes issued by British company Saphir Finance. When Lehman Brothers entered Chapter 11 bankruptcy, payments from Saphir to Mahogany and its noteholders ceased. Perpetual Trustees, then launched legal action against Sahipr’s trustees on behalf of Mahogany’s noteholders.

Mahogany disputes its requirement to fund the litigation by Perpetual. But on October 7, Perpetual removed $1.5 million from Mahogany’s bank accounts to help fund the legal action.

Now Mahogany’s money has run out.

“The removal of these monies left Mahogany with limited funds,” the directors said in a statement.

“As the litigation relating to the Lehman Brothers bankruptcy and its consequences is now almost certain to continue well into 2010 in both the UK and the USA, Mahogany will no longer be able to function in the best interests of noteholders until these actions are finalised.”

Christopher Hill and Marcus Ayers of insolvency firm PBB are now in control of the company and will begin investigating the removal of the money from Mahogany’s accounts by Perpetual.

Mahogany’s board says if the money was returned, Mahogany could come out of administration until the collateral underwriting the Saphir notes was sold and returned to Mahogany noteholders.

However, Ayers says the removal of the funds is one issue, but the larger issue is whether the noteholders can recover any money from the legal action.

While Perpetual has won two court victories in favour of the noteholders accessing the collateral underwriting Saphir’s notes, this is being challenged by a Lehman Brothers subsidiary. 

Perpetual Corporate Trust Group Executive, Chris Green, said in a statement that Mahogany’s insolvency would not affect its attempts to recover money on behalf of noteholders.

“Mahogany’s decision to appoint an administrator is a matter for the Directors and will not influence Perpetual’s legal action to recover noteholder investments nor the amount or timing of any future payments to noteholders,” Green said. 

“The outcome for noteholders remains dependent on Perpetual’s actions on their behalf through the UK legal system and that remains our number one priority.”

The first meeting of creditors will be held in Sydney on December 24.