Re Octaviar Limited (No 1)[2008] QSC 216

SUPREME COURT OF QUEENSLAND 

[1] The Public Trustee of Queensland has applied to wind up four companies, which are Octaviar Limited and three of its subsidiaries, Octaviar Investment Notes Limited, Octaviar Investment Bonds Limited and Octaviar Financial Services Limited, in each case upon the insolvency ground.  The Octaviar Group was previously known as the MFS Group.

[2] It is conceded that the Public Trustee is a creditor of each of these companies save for Octaviar Financial Services Limited.  The Public Trustee must prove insolvency in each case but at least at present, there is no submission on behalf of any of the respondent companies that it is solvent, or that it is not proved to be insolvent.

[3] Until three days ago, when the hearing of these applications commenced, the substantial contest appeared to be whether the applications should be adjourned for a few weeks so that the Octaviar Group could pursue a proposal for compromises with what the evidence and arguments have referred to as its large creditors.  They include the holders of notes issued by Octaviar Investment Notes Limited which together have a face value of approximately $350 million.  The Public Trustee is the trustee for those noteholders appointed pursuant to s 283AA of the Corporations Act 2001 (Cth) and as such he has the right to enforce the borrower’s duty to repay:  see s 283AB.  Octaviar Limited and Octaviar Investment Bonds, and it is alleged also Octaviar Financial Services, have guaranteed the notes.

[4] Then on the commencement of this hearing, it emerged that most (in value) of the noteholders opposed the companies’ proposal and wished to have the companies wound up without delay.  Counsel for the respondents asked for the matter to be stood down so that the directors could provide instructions in the light of that fact.  Counsel for the Public Trustee then applied for an interim injunction to restrain the appointment of administrators.  I was persuaded to make that order, at first to expire that day, because of the potential impact of the appointment of administrators upon what would constitute the “relation-back day” if the companies were subsequently ordered to be wound up. 

[5] Before the hearing resumed on Tuesday afternoon, the directors of these four companies resolved that it was appropriate to appoint administrators.  In each case they resolved to appoint Mr Greig and Mr Harwood as administrators subject to their consent, and subject to the discharge or expiry of the injunction which I had granted.

[6] So the contest became, in effect, whether the companies should be allowed to appoint administrators with an adjournment of the applications for winding-up at least for some weeks to see what came from that regime, or whether the winding-up applications ought to be determined now, so that if the case for winding-up was made out, winding-up would be ordered.  There was substantial argument as to that question which I reserved on Wednesday evening until today.  I also extended the injunction until 4.00 pm today.

[7] It is necessary to say something of the background and of the various participants in this hearing.  Most of this comes from an affidavit sworn by Mr Anderson, who is the Secretary and Chief Financial Officer of Octaviar Limited and a director of each of its subsidiaries, including the other respondents here.

[8] The Group was founded in 1999 and Octaviar Limited was listed on the Australian Securities Exchange in January 2005.  By late 2007 it was in the top 100 companies listed on the ASX by market capitalisation.  Mr Anderson describes it as a diversified financial services and investment group.  Part of the Group’s operations involve funds management under which it manages a range of specialist funds from which it derives management fees, performance fees and transactional/acquisition fees.  As at December 2007 entities within the Group had more than $5 billion worth of assets under management.  The larger of these funds have included what is now called the premium income fund or “PIF”, and a fund involving a company registered in New Zealand called OPI Pacific Finance Limited or “PAC”.

[9] PIF is an unlisted fund for which the responsible entity is Wellington Investment Management Limited, which is also the responsible entity for certain other Octaviar funds.

[10] Each of Wellington and PAC has been given leave to appear and supports the argument for the respondent companies.  Wellington claims that on various bases it is a creditor to the extent of $197 million and PAC claims that it is a creditor to the extent of $300 million.

[11] Another party which was given leave to appear is Challenger Managed Investments Limited, which I will call “Challenger”.  It claims to be a creditor on various bases to the extent of $140 million.  Part of that is by its holding about $40 million worth of the notes under the trusteeship of the Public Trustee.  In broad terms Challenger supports the companies’ arguments here, although it is litigating against some members of the Group in proceedings scheduled to be heard next week in the Supreme Court of New South Wales.

[12] The Commissioner of Taxation was also given leave to appear, as a creditor to the extent of $56 million.  It now supports the Public Trustee’s arguments.

[13] The notes in respect of which the Public Trustee acts were issued between November 2006 and February 2007.  They were due for payment in 2011 but the Public Trustee claims that he has duly accelerated the repayment date so that they are now due and payable.  That is disputed by the companies.

[14] In May 2005 the Group established a tourism and travel division called the Stella Group.  In February 2008, 65 per cent of the Stella Group was sold to an outside investor and the Group retains a 35 per cent interest which is held beneficially by Octaviar Limited and a subsidiary, Octaviar Administration Pty Ltd.  That company acts effectively as the treasurer for the Group in that the substantial cash reserves of the Group are held by it.

[15] On 18 January 2008, Octaviar announced that it planned to separate the Stella businesses from the Group’s financial services business by a scheme of arrangement.  Immediately the price of Octaviar’s shares fell by more than two-thirds, and a few days later the shares were suspended and remain so.  Octaviar immediately engaged consultants, headed by Mr Korda of KordaMentha, to advise the Group in that circumstance and when there was what Mr Anderson describes as a severe shortage of cash within the Group.  As a result, steps were taken for the sale of that 65 per cent interest in the Stella Group.  The sale yielded proceeds of just over $400 million, of which about $190 million was used to repay a secured debt to Fortress Credit Corporation (Australia) II Pty Limited, which I will call “Fortress”.  It was also given leave to appear in the hearing involving Octaviar Limited, but it made no submission on the present questions.

[16] In Mr Anderson’s affidavit (sworn on 6 July 2008), he set out a table summarising the financial position of the Group as at 31 May last but taking into account transactions occurring in June 2008.  The total assets are there shown as about $590 million, which included cash of $169 million and the investment in the Stella Group shown at $215 million.  The total liabilities were $1,026 million resulting in net liabilities of $436 million.  In addition there were contingent liabilities totalling about $600 million.

[17] In that affidavit Mr Anderson said that:

“the Board and management of Octaviar have for some time recognised that for the group to continue as a going concern there must be an accommodation reached with the group’s large unsecured creditors such that an orderly realisation of the 35% interest in the Stella Group and other assets…can occur within the same time frame as the amounts owing to those creditors become due and payable (so that)…for this reason Octaviar has accepted, and accepts that there is little point in resisting winding-up orders unless it is able to satisfy its large creditors that reaching an accommodation with the group represents a better alternative for them.” 

For several months this is what the Group has been endeavouring to do: to reach an accommodation with the large creditors.  Apart from the large creditors, the Group has been paying unsecured creditors in full, its strategy being to reduce the number of creditors.  Throughout it has been advised by Mr Korda and his firm.  There are many other steps which the Group has taken in order to, as Mr Anderson described it, stabilise its case position, protect the value of its assets where possible and realise assets where appropriate, and to evaluate long term options 

[18] The Group developed a proposal for large creditors described by Mr Anderson as “a relatively simple standstill arrangement” under which large creditors would agree to take no recovery or enforcement proceedings for a standstill period and the Group would make some initial pro rata distribution to them from existing cash and continue to realise its assets “as and when appropriate (with) further distributions…as funds became available”.  This proposal was not accepted by some creditors for various reasons.  As a result the directors and KordaMentha worked on a revised proposal, which was still being developed at the date of Mr Anderson’s affidavit.  Under that proposal creditors, including the noteholders represented by the Public Trustee, were to be offered a choice between an immediate cash payment for the discharge or acquisition of the debt or agreeing to wait for an expected higher payment after the realisation of assets and in particular the interest in the Stella Group.  Under this proposal it was anticipated that between $120 and $130 million of the Group’s cash would be used for those who opted for the immediate cash payment.  More particularly it was proposed that noteholders and other creditors who wished to be paid immediately would receive 100 cents in the dollar, for the first $5,000 of the debt and 22.5 cents in the dollar thereafter.  It was anticipated that this would be less than the likely dividend from a liquidation of the Group, but that many noteholders might be attracted by the immediate payment.  At the same time the discharge of those debts, it was hoped, would improve the likely dividend to those who were prepared to wait and it was thought that their dividend would substantially exceed the likely dividend from a liquidation.

[19] Such a proposal has since been put to this group of large creditors, including the noteholders.  It was intended by the Group that the proposal would be considered by all creditors, including all the noteholders represented by the Public Trustee, prior to the scheduled hearing of the winding-up applications this week.  In his affidavit of 6 July, Mr Anderson said that by the dates for hearing of the winding-up applications (which on 20 June I had fixed as 9 and 10 September) he expected to be able to inform the court of the precise terms of the proposals submitted to creditors, the extent to which they had been accepted and of the timetable for their implementation.

[20] After those hearing dates were fixed, the Public Trustee sought to have them brought forward, and Chesterman J was persuaded to make them 24 and 25 July.  The stated concern of the Trustee was that there was a dissipation of assets, it was alleged, of the order of two to three million dollars a month and there was the possibility that assets would be sold at substantial losses.  There was also a stated concern as to the relation-back period.  But when these cases came before Chesterman J on 24 July, he was asked by the respondent companies and the other major creditors to adjourn the hearings to the dates originally fixed.  The purpose was to allow the noteholders to consider the proposal.  The adjournment was not opposed by the Public Trustee.  It seems that this was because it then appeared that he was about to be replaced by a new trustee, who would then call a meeting of the noteholders to consider the proposal.

[21] But the proposed change of trustee came to nothing for reasons which it is unnecessary to discuss.  The Public Trustee convened a meeting of noteholders to be held on 19 August.  Octaviar Investment Notes convened a meeting of noteholders to be held on 3 September.  At the meeting of 19 August, a solicitor from Corrs Chambers Westgarth, acting for a group of noteholders, representing some 60 per cent by value and which I will call the majority note holder group, said that his clients wanted more time to consider Octaviar’s proposal and wished to take advice from an investigating accountant whom they had appointed with Octaviar’s consent.  It was resolved that the meeting be adjourned to 3 September so as to coincide with the meeting convened by Octaviar.

[22] Under the proposal, noteholders were to accept or reject the offer by 29 August, but Octaviar extended that to 30 September 2008.

[23] On 3 September, the majority note holder group again said that they wanted more time and it was resolved that the meetings (convened by the Public Trustee and Octaviar) be adjourned until 8 September, the day prior to the first day for hearing of these applications.

[24] On 8 September, the majority note holder group, again through a solicitor from Corrs Chambers Westgarth, moved for a further adjournment of the meetings.  Almost unanimously it was resolved that they be adjourned to 30 September.  These meetings, including that of 8 September, were chaired by the Public Trustee.  According to an affidavit by a solicitor for the companies, the solicitor for the majority noteholder group said at last Monday’s meeting that her clients needed yet more time to consider the proposal.

[25] However, it seems that overnight these noteholders decided to reject the proposal.  Just minutes prior to the commencement of the hearing, the respondent companies were served by the solicitors for the Public Trustee with an affidavit by a solicitor from Corrs Chambers Westgarth, saying that he acted for this group, which constituted about 68.4 per cent in value of the noteholders, and that each of them had considered the company’s proposal, rejected it and believed that the interests of all creditors would be best served by these companies being wound up without delay.

[26] It was this affidavit which caused the directors to resolve, as they did that morning, for the appointment of administrators.  It was not until last Tuesday that it was apparent that Octaviar’s proposal would be rejected by any of what I have described as the large creditors.  That proposal had required the approval of at least 75 per cent of noteholders.  For the Public Trustee it is now argued that the proposal, at least so far as noteholders are concerned, was flawed for legal reasons because a majority, even a 75 per cent majority, could not alter the terms upon which the notes were held, so that the proposal was always bound to fail.  It is unnecessary to determine that question but if the Public Trustee’s point is correct, it is unfortunate that it was not revealed before this week.

[27] Whilst conceding that the Group’s proposal, at least precisely in the same terms, cannot now be progressed, the companies argue that it is preferable in the interests of all creditors that some alternative arrangement be investigated and considered under the regime of an administration.  They point out that this would not, of course, preclude the subsequent winding-up of the companies.  For the Public Trustee it is argued that the companies should not be permitted to appoint administrators and that the applications for winding-up should now be determined.  In essence there are two arguments advanced by the Public Trustee.  The first is that the Public Trustee, it is argued, has a prima facie entitlement to orders for winding-up, and his applications ought not to be adjourned absent a finding, which it is said could not be made, that an adjournment and the appointment of administrators would be in the best interests of creditors.  Secondly, it is argued that there is a particular risk from the appointment of administrators now, in advance of orders for winding-up, because of the impact upon the operation of the voidable transaction provisions and in particular upon what would constitute the relation-back day.  It is convenient to go to that argument first.

[28] Each type of transaction within s 588FE is, according to that section, voidable if it occurred within a certain period ending on the relation-back day.  That term is defined by s 9 as follows:

“'relation-back day'”, in relation to a winding up of a company or Part 5.7 body, means:

(a)if, because of Division 1A of Part 5.6, the winding up is taken to have begun on the day when an order that the company or body be wound up was made – the day on which the application for the order was filed; or

(b)otherwise – the day on which the winding up is taken because of Division 1A of Part 5.6 to have begun.”

[29] Within Division 1A of Part 5.6, s 513A, s 513B and s 513C provide as follows:

“SECTION 513A

Winding up ordered by the Court

If the Court orders under section 233, 459A, 459B or 461 that a company be wound up, the winding up is taken to have begun or commenced:

(a)if, when the order was made, a winding up of the company was already in progress – when the last mentioned winding up is taken because of this Division to have begun or commenced; or

(b)if, immediately before the order was made, the company was under administration – on the section 513C day in relation to the administration; or

(c)if:

(i)when the order was made, a provisional liquidator of the company was acting; and

(ii) immediately before the provisional liquidator was appointed, the company was under administration;

on the section 513C  day in relation to the administration; or

(d) if, immediately before the order was made, a deed of company arrangement had been executed by the company and had not yet terminated – on the section 513C day in relation to the administration that ended when the deed was executed; or

(e) otherwise – on the day when the order was made.”

SECTION 513B

Voluntary winding up

Where a company resolves by special resolution that it be wound up voluntarily, the winding up is taken to have begun or commenced:

(a)if, when the resolution was passed, a winding up of the company was already in progress – when the last-mentioned winding up is taken because of this division to have begun or commenced; or

(b)if, immediately before the resolution was passed, the company was under administration – on the section 513C day in relation to the administration; or

(c) if, immediately before the resolution was passed, a deed of company arrangement had been executed by the company but had not yet terminated – on the section 513C day in relation to the administration that ended when the deed was executed; or

(d) if the resolution is taken to have been passed because at a meeting convened under section 445F, the company’s creditors:

(i)passed a resolution terminating a deed of company arrangement executed by the company; and

(ii) also resolved under section 445E that the company be wound up;

on the section 513C day in relation to the administration that ended when the deed was executed;

(e) otherwise – on the day on which the resolution was passed.

SECTION 513C

Section 513C day in relation to an administration under Part 5.3A

The section 513C day in relation to the administration of a company is:

(a)if, when the administration began, a winding up of the company was in progress – the day on which the winding up is taken because of this Division to have begun; or

(b)otherwise – the day on which the administration began.”

[30] It is common ground that the application of these provisions in the present context would be as follows.  If the companies were ordered to be wound up before the appointment of administrators, then the case would be within paragraph (e) of s 513A and thus within paragraph (a) of the definition of relation-back day, with the result that the relation-back day would be the day of the filing of the winding-up application.  In each case the application was filed on 4 June 2008.  Alternatively, if administrators were appointed before the companies were ordered to be wound up, and the companies were under administration “immediately before” the orders for their winding-up, they would be within paragraph (b) of s 513A and s 513C would be engaged.  In turn it would be paragraph (b) of s 513C which would apply, with the result that by Division 1A of Part 5.6 (specifically s 513A(b)), the winding-up of the companies would be taken to have begun on the day on which the administration began and the case would be within paragraph (b) of the definition of relation-back day.  The consequence would be that the relation-back day would be not 4 June 2008 but a day no earlier than today, a difference then of more than three months.  Similarly, if administrators were appointed and creditors subsequently resolved to wind-up under s 439C(c), then s 513B(b) and s 513C(b) would apply, with the same result.  For the Public Trustee it is argued, by reference to certain transactions, that there is more than a theoretical possibility that this difference of three months could be critical.

[31] The companies and at least some of its supporting creditors argue that there is no significant risk for the operation of the voidable transaction provisions in an administration preceding a winding-up.  They argue that it is possible for orders to be made which would avoid that impact upon the relation-back day so that it would be 4 June 2008 regardless of whether administration preceded liquidation.  Secondly, they argue that on the evidence, there is no demonstrated risk that this difference of about three months would matter.

[32] The result of these provisions, in cases such as the present where a winding-up could follow an administration, but upon an application filed before it, was rightly described by Austin J in Chief Commissioner of State Revenue v Rafferty’s Resort Management Pty Ltd (in liquidation) [2008] NSWSC 452; (2008) 66 ACSR 199 as anomalous and warranting legislative amendment.  The respondent companies argue that they are not seeking to take advantage of this anomaly and have offered to be subject to orders and to give undertakings which they say would avoid the Trustee’s difficulty, by ensuring that the relation-back day would be the date of filing of the applications for winding-up. 

[33] Any problem in this respect would come from the circumstance that the companies would be under administration “immediately before” they were wound up, and there is authority suggesting that the term “immediately before” could permit an interval between administration and liquidation.  In Chief Commissioner of State Revenue v Rafferty’s Resort Management, Austin J applied the obiter dicta of Emmett J in Commissioner of Taxation v Macquarie Health Ltd (1999) 17 ACLC 171, that the expression “immediately before” within s 513A(b) “would permit of there being some interval between administration ending and a winding-up order being made”, although as Austin J noted, it was unnecessary for Emmett J to decide how long an interval would be sufficient to preclude the operation of s 513A(b).  In StLeonards Property Pty Ltd v Ambridge Investments Pty Ltd (Admins Apptd) (2004) 210 ALR 265; (2004) 50 ACSR 443; [2004] NSWSC 851, Barrett J thought that the passage of a day between administration and liquidation would be sufficient.  Having found that the administration was commenced for the improper purpose of affecting the relation-back day, he ordered that the administration be terminated, and stood over the winding-up application to the following day, restraining in the interim the initiation of any further administration.  In Andreotti v Ausforest Ltd [2004] NSWSC 1229, Palmer J left open the question of whether the orders in St Leonards Property would be effective to avoid s 513A(b), but said that there was no point in making them in the case before him because there was no demonstrated need on the facts to do so.

[34] The respondent companies argue that what they say is the theoretical risk from this difference in the relation-back day can be avoided by any of three ways.  Each involves the making of orders under or purportedly under s 447A(1), which provides that the court may make such order as it thinks appropriate about how Part 5.3A is to operate in relation to a particular company.

[35] The first is that it could be ordered that as regards each of the companies, should it be placed into administration, s 439C would operate as if it did not include paragraph (c).  With that order, undertakings are offered by the respondent companies and their directors as follows:

(1) to appoint an administrator or administrators to the company pursuant to s 436A of the Corporations Act forthwith;

(2) in the event that such administration ends otherwise than upon a deed of company arrangement being executed by both the company and the deed’s administrator:

(a) not to seek any further adjournment of the present application for winding up by the Public Trustee beyond the day on which that application is next listed for hearing; and

(b) to consent to an order for the winding-up of the company upon that application.

Under this course, the administration would either lead to a DOCA or would come to an end under s 439C(b), in which case the winding-up application could be re-listed and after some interval, the winding-up order would be made.  In that event further orders could be made, as were made in StLeonards Property, with a view to preserving the position for however long is necessary to ensure that the company was not under administration “immediately before” the order for its winding-up.

[36] The second suggestion is that, again pursuant to s 447A, the court could order that s 446A was not to apply.  Consequently, any purported resolution by creditors to wind-up the company could have no effect and the company would have to be wound up by the court.  Again, those undertakings are offered.

[37] Thirdly, the respondents accepted the suggestion of counsel for PAC who offered a more complicated set of orders.  The effect of this proposal would be to re-word many of the provisions of Part 5.3A by having the administration deemed to commence, not on the appointment of administrators (s 435C(1)(a)) but on 4 June 2008.  There would then be further orders that for any of the provisions within Part 5.3A for which the point of commencement of an administration is relevant, those provisions operate by reference not to the (deemed) commencement date of 4 June, but by reference to the date of appointment of the administrators.  This would effectively preserve the operation of Part 5.3A, despite deeming the administration to have begun on 4 June.

[38] Although the respondent companies and their directors are prepared to give the same undertakings in conjunction with orders under this third suggestion, the respondents submit that the preferable course is the first or second of these proposals.  I would not be prepared to make orders under this third proposal, at least because I am not persuaded that in terms of s 447A, they would be orders about how Part 5.3A is to operate.  Rather, this set of orders is designed to preserve in all respects the operation of Part 5.3A, and its proper characterisation is that it would be an order of about how provisions outside Part 5.3A were to operate.  As I see it, this proposal suffers from the same difficulties as those identified by Austin J in Chief Commissioner of State Revenue v Rafferty’s Resort Management in the proposals in that case which he discussed at [28] to [30].

[39] However, the first and second suggestions are in a different category.  I accept that there is a power under s 447A(1) to make such orders.  I do not understand the contrary to be argued for the Public Trustee.  Rather, it was argued that it was preferable not to create the risk that orders of these kinds might be set aside subsequently on the application of some interested person who is not involved in the present hearing. But as to that there was no particular interest which was identified.

[40] Further, the Public Trustee and the Commission of Taxation argue that I should not make orders which might interfere with rights which have accrued, for which counsel cited Australasian Memory Pty Limited v Brien (2000) 200 CLR 270 at 283-284.  That argument seemed to be directed to the third suggestion, the fictional backdating of the commencement of the administration, than to the first or second proposals.  Under those proposals the orders would have a prospective effect with no apparent impact upon any accrued rights.

[41] At the very end of the hearing on Wednesday, counsel for the Commissioner of Taxation tendered a notice said to have been served under s 260-5 of Schedule 1 of the Taxation Administration Act 1953 (Cth). It was served on Octaviar Administration Pty Ltd on 10 September 2008.  The intended effect of the service of the notice is the creation of a statutory charge over any debts then or becoming due by Octaviar Administration Pty Ltd to Octaviar Limited.  The Commissioner’s concern is that under the third of those suggestions, the backdating of the commencement of the administration would result in a subsequent winding-up being deemed to have commenced on 4 June 2008, with the consequence that the Commissioner’s charge would become a disposition of property made after the commencement of the winding-up and void by s 468.  But under the first or second suggestions, there is no impact upon the date of commencement of the winding-up:  it would still be the day on which the order is made and s 468 could not apply to this charge.

[42] In my conclusion the first of the suggestions, the making of an order affecting the operation of s 439C(c), coupled with the undertakings which are offered, is the best of these three proposals and would provide an effective and proper means of avoiding the problem of the relation-back day.  It was submitted for the Public Trustee that it was a significant matter to deprive the creditors of the power to vote for the winding-up of the company under s 439C(c).  But in this context, especially having regard to the undertakings, they would be able to resolve to bring about a liquidation by resolving to terminate the administration pursuant to s 439C(b). 

[43] I turn to the arguments as to whether this difference of three months in the relation-back day could be significant.  For each of these points it should be noted that it was not argued that there was some serious case to be tried that the transaction was voidable:  the effect of the submission for the Public Trustee was that there was more than a theoretical possibility that it was a voidable transaction and that it is something which a liquidator would wish to investigate. 

[44] The first matter concerns the so called Support Mechanism which was a transaction entered into between PIF and Octaviar Limited on 23 June 2006.  Octaviar earned fees from PIF and by this agreement Octaviar agreed in certain circumstances to provide financial support to the fund by payments to its responsible entity.  On 26 February 2008, Wellington, as the responsible entity, called upon Octaviar to pay $50 million pursuant to this instrument.  Octaviar has not paid, but accepts that $50 million is payable.  The Public Trustee argues that there is the potential for this transaction of June 2006 to be avoided pursuant to s 588FE(3).  It is also suggested that the demand of 26 February 2008 would be an act done for the purpose of giving effect to the transaction and otherwise within the definition of “insolvent transaction” in s 588FC, with the potential for the operation of a six month relation-back period under s 588FE(2).  So only if the relation-back day becomes 4 June 2008, would the June 2006 transaction be within the two year period under s 588FE(3), and the demand of 26 February 2008 be within the six month period in s 588FE(2). 

[45] It appears that when this submission was made it was the first that those on the respondents’ side had heard of a suggestion that this might be a voidable transaction.  But more generally, they say it is the first that they have heard of the suggestion that Octaviar Limited may have been insolvent as early as June 2006.  For the Support Mechanism to be avoided, it would have to be shown that the company was insolvent at the time it entered into the agreement or became insolvent as a result of it.  It was suggested that there was some indication of insolvency from the fact that later in 2006 and in early 2007, the Group borrowed heavily such as by issuing these Notes.  But at least at present, that is no indication of insolvency in 2006 and the Public Trustee’s suggestion involves mere speculation.  Ultimately the submission for the Trustee went no higher than that a liquidator would be interested to enquire about the solvency of Octaviar in mid-2006, and that something might emerge.  As to the call made in February 2008, it is difficult to see that it could constitute an uncommercial transaction, but if so it is comfortably within a two year period on any alternative.

[46] The next matter concerns a transaction involving PAC, and a deed dated 24 July 2006 between it and Octaviar Limited.  Under that deed, referred to in some of the evidence as “the Put Option”, Octaviar agreed to take certain assets at certain prices in particular circumstances, by which it would effectively bear the burden of a fall in the value of those assets.  The stated consideration was a fee of one per cent per annum on the average aggregate book value of all assets.  According to Mr Anderson’s affidavit, Octaviar has advice to the effect that it may be obliged to pay an amount of about $400 million for these assets (a loan book) which is said to be worth about $100 million.  On 13 March 2008, Octaviar agreed to make a payment to PAC of $20 million as an advance payment under the then proposed standstill arrangement and that payment was made on 14 March.  The Public Trustee argues that there is a prospect that a liquidator would wish to impugn the transaction of 24 July 2006.  But again this would require the proof of insolvency at the time of that transaction or as a result of it.  Alternatively, the transactions of 13 and 14 March 2008 were within any two year period, and if it be relevant, are just within the period of six months which ends today.

[47] The next matter involves Fortress.  Octaviar and Fortress entered into a loan agreement on 1 June 2007 and on the same day Octaviar gave a charge which was stated to secure, amongst other things, any liabilities under what were called “transaction documents”, some of which were those identified, but which were defined to include also any documents which were later agreed by the parties to be within that description.  On 22 January 2008, the parties agreed that for the purposes of this charge, a certain liability of Octaviar under an earlier guarantee would become a transaction document.  It was suggested that the letter of 22 January 2008 could be a voidable preference, for which the relation-back period would be six months so that it would fall outside such a period if the relation-back day was no earlier than today.  As to this, the respondents argue that there is little likelihood of Fortress demanding payment of monies secured by that charge.  There is evidence that Fortress holds a charge over other property, and in particular real estate, securing some of the debts secured by this charge of 1 June 2007, and that it is likely that the debt could be paid from a sale of that property.  However, it is conceded that, depending upon the current value of those assets, there could be a shortfall, which Fortress could recover from Octaviar, of the order of $12.8 million.  This charge also secures a debt of Octaviar Pacific Investment Pty Ltd.  There is evidence, including an assessment by KordaMentha, of the ability of that company to repay its debt to Fortress, which is to the effect that Octaviar will not bear the burden of this debt.

[48] Thus at present there is a risk that if the relation-back day is not 4 June 2008, there could be a loss of the order of $12.8 million.  Of course that risk would have to be weighed against other considerations and although the amount is large, it is comparatively small in the context of this Group.

[49] There was also some expressed concern involving Challenger.  It claims that it is entitled to be given guarantees by Octaviar Administration Pty Ltd and Octaviar Financial Services Pty Ltd to secure the obligations of Octaviar Investment Bonds Ltd.  Octaviar denies that Challenger is entitled to those guarantees but has been prepared to consider giving them as a means of disposing of Challenger’s litigation to be heard next week.  But the guarantees have not yet been given and the solicitor for the companies swears that there is no intention that they will be given prior to the appointment of administrators or liquidators.  It is difficult to see here what the concern is, as to any relation-back day.

[50] They were the matters identified when this relation-back issue was argued on Tuesday.  But then in purported reply at the end of Wednesday’s hearing, counsel for the Public Trustee raised the possibility of other transactions which could be affected.  The argument refers to payments totalling about $90 million which were made by Octaviar Administration Pty Ltd in the three months from 29 February 2008.  It is said that some of that three month period falls within the so called “zone of risk”, where the change in the relation-back day makes a difference.  (On the worst case some two weeks would be in that category).  It is submitted that it is likely that much of this money went, not to creditors of Octaviar Administration, but to other entities in the Group and that it may have been paid in discharge of liabilities of the parent company, for which the payments would be potentially preferences.  And it is said that the court does not know what happened in January or December and whether there were not preferences within that time.

[51] I accept the possibility that some preferential payments were made in what is described as the zone of risk.  It is difficult to assess the probability of this, and the likely amount involved, partly because unfortunately the point was not raised by the Public Trustee prior to this hearing, or indeed during the hearing until the very end when there was no time for the companies to make any substantial response.  They provided a written submission about it yesterday but it is understandable that there has not been time to formulate a proper answer as to the facts.  So I am left with the impression that in this category, there is some prospect that a different relation-back day would make a difference.

[52] In summary, the Public Trustee’s argument does not point to a particularly strong chance that creditors would be affected by a relation-back day of today rather than 4 June 2008.  But accepting as I do that there is some risk, it is appropriate to make an order under s 447A as I have discussed.  With that order and undertakings, the matters raised by the Public Trustee do not demonstrate that overall there is a serious risk of this kind by an administration preceding a liquidation.

[53] I turn then to the more general question of whether the applications for winding-up should be adjourned to permit the administrations to go forward for at least some relatively short period to see what happens.  Had the companies not been restrained from appointing administrators, this question would now be considered according to s 440A(2), which provides that the court is to adjourn the hearing of an application for an order to wind-up a company if the company is under administration and the court is satisfied that it is in the interests of the company’s creditors for the company to continue under administration rather than be wound up.  Section 440A does not apply at the moment but only because of the present injunction which should now be discharged because of my conclusions on the relation-back point.

[54] Accepting that s 440A(2) is relevant in this way, the Public Trustee has argued against an adjournment saying that the court could not be satisfied that the interests of creditors favour an administration.  In this argument, particular reliance was placed upon what was said by McPherson JA, with the concurrence of Pincus and Davies JJA, in Creevey & Anor v Deputy Commissioner of Taxation (1996) 18 ACSR 456.  His Honour there said:

“In order to satisfy the court of the matter referred to in s 440A(2) of the Corporations Law, one would expect that there would have to be some persuasive evidence to enable it to be seen that there were assets which, if realised under one form of administration rather than the other, would produce a larger dividend, or at least an accelerated dividend for the creditors.”

In that case, it was noted that there was “practically no evidence that the company (had) any assets whatsoever” so that there was no evidentiary basis for the finding which the subsection required.  It was argued that in the present case there was a similar lack of evidence.  It was said that there is no particular proposal identified as that which would be put to creditors by administrators and nor is there evidence as to the likely dividend from an administration as against the likely dividend from a liquidation.

[55] There are two matters to be noted about that passage from Creevey.  The first is that read in context, it is referring to the absence of evidence of any assets whatsoever.  Secondly, it is not possible to read this passage as a statement of some principle that in every case, for a court to be satisfied in terms of s 440A(2), there must be some detailed comparison of the dividends from one regime or the other.  It will often be the case where not enough is known about what is likely to come from one or both regimes for that comparison to be made at this stage.  As McDougall J said in SGB Raffia v Gammacon (No 2) [2007] NSWSC 1510, McPherson JA in Creevey

“was not purporting to reframe the statutory test but, rather, to state its application firstly in the case before the court and secondly by reference to more general considerations.”

McDougall J there referred to what was said by Campbell J in Deputy Commissioner of Taxation v Bradley Keeling Management Pty Ltd (2003) 44 ACSR 377 at 380 in a passage which I respectfully adopt:

“[18]Ultimately what the court needs to do is to be persuaded.  The amount of proof which can result in persuasion, differs with the circumstances in which litigation comes before the court.  It is common enough, in applications under s 440A, for an administrator to need to seek an adjournment very soon after his or her appointment, at a time when he or she knows very little about the affairs of the company.  In that sort of situation, comparatively little material might be needed to justify a short adjournment.  As time goes on, however, and the occasion that there has been for the collecting of evidence increases, so the amount of material which might need to be put before the court before it is persuaded, will increase.”

[56] The Public Trustee’s case has been strongly argued but I do not understand it to go so far as to suggest that the intended appointment of administrators is for some improper purpose.  In my view, the appointment of administrators was not unexpected, once it became clear that the proposal put to the large creditors would not receive unanimous acceptance.  .

[57] It was argued that the companies have had effectively all year to formulate some proper proposal as an alternative to liquidation and have failed to do so.  Further, the terms of the proposed variation to the rights of noteholders are attacked as unfair to noteholders and likely to have provided little prospect of a substantial recovery.  There is presently evidence for each side of the argument as to whether creditors would have been better served by a liquidation than by a proposal of the kind which was being considered until this week.  I cannot resolve now which of those views is correct.  But that is not to say that I could not be satisfied now that at least for the short term, the interests of creditors are not best served by the companies being given, for a limited time, the opportunity of a regime of administration. 

[58] In the circumstances of this case, it is wrong to see the position as simply the absence of any proposal which could be pursued by administrators.  What has happened is that a great deal has been done to further the proposal which was put to the large creditors and until this week there were grounds for the companies to believe that their proposal or some variation of it might be accepted.  The considerable work which has been done, including advice which has been provided by the companies by Mr Korda and his firm, could no doubt be put to some use by administrators.

[59] At one point it appeared to be argued for the Public Trustee that at a meeting of creditors within an administration, the nature of the claims by Wellington and PAC would be likely to result in those claims being discounted heavily for the purposes of voting, so that the Public Trustee voting for the noteholders and the Commissioner of Taxation would be able to defeat any proposal.  I would expect, however, that they would each consider the particular proposal which is put rather than deciding against any proposal now.

[60] It was submitted that the companies could be wound up now, and that if appropriate, they could be subsequently taken out of liquidation and placed under administration.  That seems to be beside the point which is whether at present, it is preferable to allow the companies some opportunity through the appointment of administrators.

[61] The companies have submitted that the applications for winding-up should be adjourned “with an indication that the court will not expect them to be restored so long as the administrations were proceeding with appropriate diligence”.  If they are to be adjourned, it is preferable that at this stage at least, they be adjourned to a fixed date but with leave to re-list them at an earlier date on appropriate notice.  This would not be to indicate the date beyond which the administrations could not continue.  It would reflect the fact that I am satisfied that least for that relatively short period, and absent some particular new circumstance arising, that the interests of creditors would be better served by an administration.  On the adjourned date, that question under s 440A(2) would have to be revisited.

[62] Overall I am not persuaded that there is any serious risk of disadvantage to the creditors from this course.  And this course has the support of all of the large creditors save for the Public Trustee representing the noteholders and the Commissioner of Taxation.  On the face of things, most in value of the unsecured creditors favour the appointment of administrators.  That is not determinative but it is important.  Further there is substantial evidence for the respondents that a liquidation would involve the sale of assets at a considerable undervalue.  Ultimately such a sale may become necessary but I am satisfied that in the short term, by which I mean a period of the order of six weeks, the interest of creditors favour the appointment of administrators and an adjournment of the winding-up applications.

[63] In each application, upon the undertaking of the respondent company and its directors:

(1) to appoint an administrator or administrators to the company pursuant to s 436A of the Corporations Act forthwith;

(2) in the event that such administration ends otherwise than upon a deed of company arrangement being executed by both the company and the deed’s administrator:

(a) not to seek any further adjournment of the present application for winding up by the Public Trustee beyond the day on which that application is next listed for hearing; and

(b) to consent to an order for the winding-up of the company upon that application

I intended to order pursuant to s 447A that until further order, in relation to the company, s 439C will operate as if it did not include paragraph (c).  I intended to further order that the application for winding-up, filed on 4 June 2008, be adjourned to 24 October 2008, or such earlier date as the court fixes.

[64] When I indicated that these would be my orders and asked counsel for the companies and their directors whether those undertakings were given, I was then asked by counsel for the Public Trustee not to make those orders but to stand the matter down, which I did.  The Public Trustee seeks to maintain the status quo until Monday morning so that he can consult at least some noteholders.  I am persuaded to permit that so that I will not make the orders today which are indicated by the previous paragraph, but instead will make the orders appearing on the cover page of this judgment.