Hipgnosis Songs (SONG ) is seeking an indemnity from fund manager Merck Mercuriadis and his firm Hipgnosis Song Management from any liability from the lawsuit launched by liquidators of his former company Hipgnosis Music Limited.

In a statement SONG’s board said it had recently appointed Kastle Solicitors to independently review the High Court claim by Quantuma, liquidator of Hipgnosis Music Limited, alleging an unlawful diversion of a business opportunity by Mercuriadis, HSM and Hipgnosis Songs.

The move follows weekend reports about the case that the company told shareholders about on 23 November and in its 2023 annual report in July.

The Sunday Times reported that Afram Gergeo, a music industry executive jailed in 2021 for fraud against a pension fund in Malta, and Aeon Manahan, a British R&B and hip-hop artist, met in Los Angeles in 2014 to discuss the idea for a Guernsey-listed music fund four years before SONG floated on the London Stock Exchange.

They planned to raise £50m through a bond issue and hired City advisory firms, drew up a prospectus and signed up consultants, including Nile Rodgers, the record producer, guitarist and Chic co-founder who sits on HSM’s advisory board.

However, the bond issue never went ahead and the claim on behalf of investors in Hipgnosis Music Limited says that in November 2017, Mercuriadis filed notice to withdraw the prospectus and the following month, unknown to Gergeo and Manahan, applied to wind up the company.

Quantuma alleges that Mercuriadis breached his duties as a director to Hipgnosis Music Limited  by replicating the brand and business model for his own business. It also alleges that he breached the Perjury Act and/or the Insolvency Act by making misleading statements during the insolvency process.

Mercurisadis, HSM and SONG have denied wrongdoing and intend to fight the claims.

SONG’s statement comes amid increasing tension between Mercuriadis and the fund’s new board, which is conducting a strategic review after a shareholder revolt last October and is believed by analysts to be considering if it can dismiss HSM for breach of contract. Last week Mercuriadis stepped down as HSM chief executive to become chairman.

On Wednesday shareholders will vote on the board’s proposal to pay potential bidders up to £20m in due diligence costs to counteract the option Mercuriadis and HSM have to match any offer for the royalties fund within six months of the termination of their management contract.

In early trading SONG shares slipped 1% to 64.6p, having closed last week at a 54% discount below net asset value.