Challenges continue to stack up for Hipgnosis Songs Fund (SONG ) as it has been formally served notice on legal proceedings, which it does not have insurance to cover, while the new board looks to distance itself from Merck Mercuriadis. 

In a stock exchange notice on Thursday the board said the liquidators of Hipgnosis Music Limited, Mercuriadis’ failed investment company set up prior to his song royalty investment trust, had served notice on SONG, the investment adviser and  Mercuriadis.

The liquidators allege Mercuriadis’ breached his fiduciary duty and SONG unlawfully assisted him in this diversion.

Mr Mercuriadis, the investment adviser and SONG deny such claims and intend to vigorously defend them. Concerningly, SONG is not insured as to the costs of dealing with this claim.

The statement said the issue was first flagged in the company’s annual report issued in July, where, on page 100, it  said it had been named as defendants in a claim form issued in the High Court.

Peel Hunt’s Markuz Jaffe said the fact that the initial disclosure of the potential claim was buried on page 100 ‘says a lot’, and it is likely another unhelpful uncertainty hanging over a strategy under pressure.

The trust is fast becoming an untouchable entity as one of the big four accounting firms, its current auditor PwC, has said it will not take part in SONG’s tender process for the 31 March 2024 audit. 

The new auditor will be unveiled in due course.

The stock exchange notice also revealed the board has turned the volume up a notch on Mercuriadis by appointing independent advisers to conduct due diligence on the portfolio of music royalty assets as it considers its future.

In a stock exchange notice new chair Robert Naylor and non-executive director Sylvia Coleman said that over the period the trust’s investment adviser Hipgnosis Song Management would put forward alternative terms for its own future investment advisory arrangements.

‘Completion of this due diligence will provide a strong knowledge base from which the board will commence a process of identifying and bringing forward alternative proposals for the future of the company,’ they wrote. 

Jaffe said it will be ‘interesting to see what, if any, amended terms to the investment advisory agreement can be achieved by the board and if this will be influenced by any information discovered during the due diligence process the board are seeking to initiate.’

The shares fell 1.4% to 71.88p in early trading, a 52% discount to net asset value.