Re Octaviar Ltd (No 8)[2009] QSC 202

SUPREME COURT OF QUEENSLAND

TABLE OF CONTENTS

Introduction                                      [1]-[9]

The deed for Octaviar Administration                    [10]-[27]

Background to the deed for Octaviar Ltd                  [28]-[34]

The Funded Participation Agreement                    [35]-[39]

The ATO’s position                                 [40]-[53]

The deed for Octaviar Ltd                            [54]-65]

Arguments as to the effect of the deed for Octaviar Ltd        [66]-[74]

Part payment by a guarantor: effect                     [75]-[91]

Conclusions on the interpretation of the DOCA              [92]-[126]

Possible recoveries by a liquidator                       [127]-[177]

Avoiding the Fortress charge                         [127]-[142]

Other possible claims about Fortress                    [143]-[144]

Premium Income Fund and Wellington Capital Ltd           [145]-[158]

PAC                                          [159]-[167]

Directors of Octaviar companies                       [168]-[172]

Auditors                                        [173]-[175]

Potential recoveries – other points                      [176]-[177]

The public interest in a liquidation                      [178]-[182]

Orders on the Public Trustee’s applications                [183]-[192]

The Fortress application                              [193]-[222]

Conclusion on the Fortress application                    [223]

Introduction

1. The Public Trustee of Queensland, representing certain creditors, has applied to set aside under s 445D of the Corporations Act 2001 (Cth) (“the Act”), deeds of company arrangement for two companies: Octaviar Ltd (“OL”) and Octaviar Administration Pty Ltd (“OA”).  OL was the holding company of the Octaviar group, previously known as the MFS group, which failed in 2008.  Some companies within the group have been ordered to be wound up.  The Public Trustee wants to have these two companies wound up, arguing that for very many reasons, a liquidation would be in the best interests of creditors and would avoid what is said to be an unfairness to some creditors under the deeds of company arrangement.

2. The DOCA for OL is premised upon the validity of a charge granted by OL to Fortress Credit Corporation (Australia) II Pty Ltd (“Fortress”) in January 2008, under which Fortress has appointed receivers to all of its assets.  Apart from the possible exception of the Commissioner of Taxation, there are no others who claim to be secured creditors of OL and there are no secured creditors of OA.

3. OA acted as the treasury for the Octaviar group. Its principal asset is cash, which at the time of the administrator’s report^[1] last December, amounted to more than $121 million.  OA’s largest creditor is OL.  Accordingly, there is a large amount of cash which is to be paid by OA to OL, either under the OA DOCA, or upon its winding up if the DOCA is terminated.

4. Under the DOCA for OL, such payments from OA would be paid to the receivers and then to Fortress, which would distribute parts of those funds in different directions. The first $25 million or so would be paid to Fortress in part payment of the debt said to be secured by its charge and further receipts from OA would be dealt with in other ways which are also consistent only with Fortress holding a valid charge over the assets of OL.  If that charge is not valid against the deed’s administrators, an essential premise of the DOCA for OL would not exist and, subject to an argument for Fortress, the DOCA would have to be terminated.  Strictly speaking, that is not the position with the DOCA for OA.  But as I will discuss, that deed seems to have been agreed because it was seen as part of the proposal for the DOCA for OL.

5. Within these applications for termination of the DOCAs, I have already declared that the Fortress charge is void according to s 266(3) of the Act because notice of it had not been given as required by s 268(2).^[2]  I determined that question as a separate issue because it involved no substantial issue of fact and if the charge was void, as argued by the Public Trustee, the parties could have avoided the delay and expense involved in the full hearing of these applications.  As I noted in that judgment,^[3] Fortress did not then seek any extension of time to give notice of its charge under s 266(4), in the alternative to its argument that no notice under s 268 had been required.  Fortress has appealed against that judgment, but the appeal is yet to be heard.  Apparently no party has sought an expedited hearing of the appeal.  Fortress has now applied for an extension of time under s 266(4).  That application was heard together with these applications for the termination of the DOCAs.  Accordingly, there are three matters for determination:

• Should the OA DOCA be terminated?

• Should the OL DOCA be terminated?

• Should Fortress have an extension of time under s 266(4) so as to validate its charge?

6. The Public Trustee is supported in its applications, and in its opposition to the Fortress application, by the Commissioner of Taxation and another creditor, Challenger Managed Investments Limited.  On 10 September 2008, a notice was issued under s 260-5 of Sch 1 of the Taxation Administration Act 1953 (Cth) (“the TAA”) addressed to OA and in respect of all debts owed by OA to OL.  It was to secure payment of $58,092,713 (“the ATO debt”).  No party here disputes that the ATO debt is owing by OL.  But there are different contentions as to the effect of the s 260-5 notice.  The extent of recovery of the ATO debt will be affected by the validity or otherwise of the Fortress charge.  And on the Commissioner’s argument, it would be unfairly prejudiced by the operation of the DOCA for OL.

7. The respondents to the applications under s 445D, apart from the deeds’ administrators, are entities which are or claim to be substantial creditors of one or both of the companies.  With the exception of the Commissioner of Taxation and Challenger, those respondents oppose the applications to terminate the DOCAs and offer no opposition to the application by Fortress. 

8. It is not disputed that the Public Trustee is a creditor of OL. Accordingly, he has standing to apply for the termination of its deed.^[4]  The Public Trustee claims to be a creditor of OA.  The administrators disagree.  But they, and all other parties here, apparently accept that the Public Trustee has standing to apply for the termination of the deed for OA on the basis that he is an “interested person” within the meaning of s 445D(2)(c).  As will appear, the interest of the Public Trustee as a substantial creditor of OL makes him an interested person because of the potential impact of the DOCA for OA upon the amount of funds to be distributed to creditors of OL.^[5]

9. The Public Trustee suggests that it would be logical to determine first the Fortress application, because if that fails, then the essential premise of at least the DOCA for OL is lost. Nevertheless, it would still be necessary to resolve many of the issues within the s 445D applications because of the prospect that the Fortress charge might be held to be valid on appeal.  To determine the application by Fortress, it is necessary to assess the impact upon the creditors of OL of the order which it seeks, which in turn requires a discussion of the history and present position of OL, including the terms of its DOCA and related documents.  And Fortress argues that the DOCA for OL can stand if its charge remains void against the deeds’ administrators.  Therefore I will discuss first the applications to terminate the deeds.

The deed for Octaviar Administration

10. Each DOCA is dated 12 January 2009, and results from a meeting of creditors of the company on 17 December 2008.  Mr J L Greig and Mr N Harwood had been appointed as administrators of these companies^[6] and in each case they have become the deed administrators.

11. Clause 3.1 of the DOCA for OA establishes the Deed Fund, which is to be all of the property of the company and any proceeds of its sale. By cl 3.2 the Fund is to be distributed by the administrators as follows:

“(a)First, in payment of all the Administrators’ Remuneration and the Administration Liabilities;

(b)Second, in payment of any Employee Entitlements;

(c)Third, in payment of all other Creditors’ Claims on a pari passu basis; and

(d)Fourth, any surplus after payment of all claims under paragraphs (a) to (c) above in full, to be distributed to the Company’s members.”

By cl 3.5 the deed administrators may make interim distributions and by cl 3.6, they may make a distribution under one of the categories in cl 3.2 although a prior category has not been paid in full, if they have set aside an amount reasonably required to do so.

12. By cl 4.1, Subdivisions A, B, C and E of Division 6 of Part 5.6 of the Act (other than ss 553(1A) and 554F) and Corporations Regulations 5.6.39 to 5.6.57 will apply to all claims against the company made under the deed as if references to the “liquidator” were to the deed administrators, references to “winding up” and “wound up” were to administration pursuant to the deed, and references to the “relevant date” were to 3 October 2008.^[7]  Clause 9.1 provides that a creditor is deemed to have abandoned its claim if, prior to the declaration of a final dividend to creditors, the creditor fails to submit a formal proof of debt, or having submitted a proof which is rejected, fails to appeal to the Court against the rejection. 

13. Clause 14 provides that the deed shall not affect any rights of a secured creditor. But as already noted, there is no secured creditor of OA. Fortress is neither a secured nor an unsecured creditor of OA. The deed contains a reference to the Australian Tax Office as potentially a secured creditor because of its s 260-5 notice.  But that misconceives the effect of the ATO’s notice.  The Commissioner is neither a secured nor an unsecured creditor of this company.  It is OL which owes the ATO debt.

14. Each of these DOCAs was in substance that which had been proposed to creditors by Fortress. Although Fortress is not a creditor of OA, it represented to creditors of that company, in a document incorporated within the administrators’ report pursuant to s 439A, that its proposed DOCA for OA would provide:

“Facilitation of a deed of company arrangement proposal made in relation to OL, which will benefit creditors who have claims against both the company and OL”.^[8]

This proposal was not made conditional upon the creditors of OL accepting the DOCA proposed by Fortress for that company.  But the intended “facilitation” would appear to come from this term of the OA deed:

“15Release of Fortress and Receivers

15.1Other than to enforce the terms of this Deed or to take action in respect of any breach of this Deed, the Company, fully, forever, irrevocably and unconditionally:

(a)releases and discharges each of the Receivers and Fortress from any and all Released Claims that the Company ever had, now has or hereafter may have against any of them;

(b)agrees that each of the Receivers and Fortress may plead this Deed to bar any Released Claim or action (including any claim for costs) brought by the Company;

(c)covenants to never sue or assert any claim or cause of action against any of the Receivers or Fortress with respect to or on account of any Released Claim; and

(d)agrees to indemnify each of the Receivers and Fortress against any liability, loss or costs arising from a breach of clause 15.1(c).

15.2This clause 15 (Release of Fortress and Receivers) shall survive termination of this Deed.”

Fortress made no contribution to the funds of OA and there is no other mention of Fortress^[9] within this document.  This deed for OA did not expressly require that payments by OA to OL would be to Fortress or the receivers.  But as mentioned already, the intended path of funds from OA to its creditor OL was via the receivers and Fortress, and this cl 15 was apparently intended to protect their position.  In that sense it “facilitated” the deed for OL.  It provided no benefit to the creditors of OA or to the operation of its DOCA.

15. It can be seen then that the effect of the DOCA was in many respects identical to that of a liquidation. No creditor of OA was given any greater or lesser right in relation to the available assets than under a liquidation. However the available assets were likely to be less than under a liquidation, as the administrators explained in their report to creditors under s 439A.  For that reason, the administrators recommended to creditors that this company, OA, be wound up. 

16. In that report the administrators estimated that the return from a winding up would be between 15 cents and 4 cents in the dollar whereas the dividend from the DOCA proposed by Fortress would be between 10 cents and 4 cents.  As I will explain, the administrators’ estimate of 4 cents as the minimum dividend from a liquidation was too low, mainly because of their misconception of the effect of the ATO debt and the Commissioner’s s 260-5 notice on the position of OA.  But in any case, a liquidation was put to creditors as more beneficial because of the prospect of recovering between $9 million and $86.7 million from preference claims and uncommercial transactions.  The extent of that range was explained by the administrators’ doubts about the date by which the company had become insolvent.  The administrators regarded the Octaviar group as effectively one entity in discussing that question (as did the various arguments in these proceedings).  The difference between the amounts of potential recoveries was according to whether the company (and the group) was insolvent from 4 June 2008 or from as early as 4 February 2008.^[10]  The date of 4 June 2008 was that on which the Public Trustee filed its application to wind up OL.  The date of 4 February 2008 was that of the sale of 65 per cent of the group’s principal asset, which was an investment in the so-called Stella Group, most of which was then sold by OL but some of which was then sold by OA. 

17. In their s 439A report,^[11] the administrators wrote:

“From a balance sheet test point of view, OA has had a history of net asset deficiencies since June 2006.  OA’s net asset position deteriorated by $55m during the six months ended 31 December 2007 and then a further $409m during the six months ended 30 June 2008.  The major portion of this deterioration occurred between January and February 2008 at which time the sale of the 65% interest in Stella occurred.  OA’s major assets comprise cash and its investment in Stella. 

We consider therefore that the most likely point of insolvency on a balance sheet basis for OA is the point at which OA should have provided for a diminution in the carrying value of Stella.  This raises the issue of the potential timing for a write down in the carrying value of Stella and when this should have been foreseen…

We consider that upon the execution of the Stella sale agreement in January 2008 that a substantial and permanent diminution in the carrying value of Stella occurred.  The need for the urgent sale of Stella arose because debt facilities provided by Fortress were due to be repaid in February 2008…

As a consequence Stella was made available for sale immediately which concluded with [an unrelated party] acquiring a 65% interest in Stella for $400m.  This implied an enterprise value of approximately $1.52bn compared to the $2.46bn in 2007 when [that party] made its original approach…

This diminution of value, along with the value of other Octaviar Group assets at that time, resulted in total write downs of $1.14bn over the ensuing six months to August 2008.  Consequently, it appears that there were insufficient assets at that time with which to discharge the long term obligations of approximately $450m in notes and bonds.  The repayment of notes and bonds could only ever have been made from the cash funds in OA of approximately $200m and from the sale of the remaining 35% interest in Stella which had an indicative value of at best $215m given the enterprise value from the recent sale…”

The administrators concluded as follows:

“The issue of the date of insolvency of OA and the Octaviar Group will be the subject of further detailed investigations by a liquidator if appointed by creditors.

The above investigations would be continued by a liquidator to establish the date when the Group became insolvent, however, the Administrators’ preliminary view is that this may have occurred on 4 February 2008 but no later than 4 June 2008.”^[12]

18. The administrators’ report contained an estimated statement of OA’s position as at 31 August 2008, showing for various components of assets and liabilities the book value and both the highest and lowest estimates of realisable value.  The high estimate for available assets, after payment of priority creditors (employees’, administrators’ fees and liquidators’ fees) was $156.068 million, of which the principal asset was cash at bank of $121.777 million.  The low estimate for those assets was $79.379 million, of which the principal asset was cash at bank of $61.777 million.  The difference between the respective amounts for cash was wholly explained by the impact or otherwise of the ATO’s s 260-5 notice, for which the administrators had allowed $60 million.  The low estimate was upon the basis that the notice affected the balance sheet of OA, specifically by reducing the amount of its cash.  In these proceedings, there are issues as to the extent of the impact of the notice upon the rights of Fortress and other creditors of OL.  However, the notice attached to no more than any payment by OA to OL and it should have had no impact upon OA’s balance sheet.  Therefore, it was the figure of $121.777 million which was appropriate for OA’s cash.  As the report also explained, this was exclusive of an amount of $19.695 million, which was held at that date by OA on trust for OL (“the OA trust monies”).

19. It should have been clear then that the assets available as at 31 August 2008 were of the order of $150 million and that most of this was held already as cash.  In the event of a winding up, to this amount would be added from recoveries from preferences and uncommercial transactions, for which the range, as already mentioned, was $9 million to $86.7 million.

20. The ordinary unsecured creditors were estimated as between $1.635 billion to $2.157 billion. The principal contributors to this difference were the Public Trustee and Challenger, whose combined claims of nearly $460 million were included in one estimate but not in the other.  The amount owing by OA to OL was given but one estimate, which was its book value of $551.2 million.  OL is OA’s largest creditor.  Depending upon the extent of the creditors of OA, OL’s debt constitutes something between about one-fourth and one-third of the assets of OA available for distribution to creditors.  The most recent estimate of the administrators as to the dividend to OL from OA is contained in an affidavit of Mr Harwood sworn on 6 May 2009, where he says that were the DOCAs to stand, his “best calculation” is that OL will receive from OA a total of $72.089 million, which includes the OA trust monies.  The trust monies have now been paid by the administrators of OA to Fortress.  Accordingly, the present best estimate of the deed’s administrators is that there would be a balance of about $52.39 million which would be paid by OA to OL if the DOCA for OA were to stand. 

21. If the deed for OA were terminated, the distribution to OL could not be any less, and as the administrators told creditors, it would be likely to be more, because of what the administrators described in their report as the reasonable prospects of recovering from preferences and uncommercial transactions.

22. Whilst recommending that OA be wound up, the administrators at one point in their report said that the DOCA would have benefits to creditors from the “more timely realisation of assets” and from “minimum disturbance to key contractual relationships”. However, the report did not go on to explain those benefits. As to timing, because the regime under the DOCA for the assessment of claims by creditors was to be the same as that under a liquidation, there would appear to be no advantage in that respect. The only explanation for a liquidation taking longer would be the pursuit of voidable transaction claims. However, liquidators would be expected to make interim distributions pending the outcome of these recovery actions, and most of OA’s assets are already held as cash. The administrators ultimately recommended to creditors as follows:

“…[W]e do not believe that either of the DOCA proposals offer any significant benefits beyond the outcome that we would expect in a liquidation scenario.  The Fortress proposal does not indicate a greater return than would be available under a liquidation, nor does it indicate that a dividend would be received any earlier.”^[13] 

[emphasis added]

23. They continued:

“Two DOCAs have been proposed, however, we are of the opinion that the return to creditors is likely to be greater from the liquidation of OA due to the possible availability of significant insolvent transactions.

The DOCA approvals do not provide any outcomes that are not available in liquidation. 

The Fortress DOCA proposal requires OA to forgo its rights, if any, against Fortress and the Receivers and Managers of [OL].  We are uncertain of what those rights may be and have received preliminary legal advice only at this stage on this issue.

We therefore recommend that creditors do not vote in favour of a DOCA.”^[14]

24. That analysis of the administrators was logical and, in my view, correct. There was no advantage to the creditors of OA, as creditors, from the DOCA. The significant difference between the DOCA and a winding up was that the company lost the ability to recover as much as $86.7 million for which the prospects of recovery were assessed by the administrators as reasonable. In the present proceedings there was a considerable contest as to the date by which the Octaviar group was insolvent. Later in this judgment, I find that there is a serious case that the group was insolvent by 22 January 2008.  It must be inferred that some of those who voted in favour of the DOCA for OA either acted upon the representation by Fortress that its proposal would provide “facilitation” of the proposed deed for OL, or they had regard to considerations other than their interests as creditors of OA or OL.

25. The outcome is that I am satisfied that the deed for OA is contrary to the interests of creditors of OA as a whole, so that at least one ground for termination is established: s 445D(1)(f)(ii).  And if this DOCA in some way could be seen to benefit those who are creditors of both companies, because it would promote their interests as creditors of OL, the deed would be unfairly prejudicial to or discriminatory against creditors who were not also creditors of OL:  s 445D(1)(f)(i).  In any case, it could “facilitate” the DOCA for OL only if the deed’s administrators were not to act according to OA’s obligations in response to the ATO’s notice, as I will later discuss.

26. The case for termination is strengthened by the possible operation of cl 15 of the deed.  OA has paid the OA trust monies to Fortress in the belief that Fortress had in all respects a valid charge.  If that is not the case, then OA might have a right to recover those funds from Fortress or the receivers as monies paid under a mistake of law.^[15]  The effect of cl 15 could be to put paid to that claim.  Those funds, if recovered, would have to be paid to OL because OA held and would hold them as a trustee.  It is in the interest of creditors of OA that OA recovers this trust property and pays it to OL, so that the funds available to OA’s creditors are not depleted by a liability to OL. 

27. The deed should be terminated.

Background to the deed for Octaviar Ltd

28. Before going to the terms of the OL deed, it is necessary to discuss the respective positions of OL, Fortress, another member of the group named Octaviar Castle Pty Ltd (“Castle”) and the borrower of the Fortress loan guaranteed by OL, which is Young Village Estates Pty Ltd (“YVE”). 

29. In 2007 Fortress made two loans, each of which was guaranteed by OL. The first was to YVE, under a loan agreement dated 31 May 2007.  No security was then provided by OL to Fortress.  The second loan was to Castle, by a loan agreement of 1 June 2007.  In this case, OL’s liability as guarantor was secured.  The security was a fixed and floating charge granted on the same day.  On 22 January 2008 Fortress and OL agreed that the charge should also secure OL’s guarantee of the YVE loan.  I have held that the charge is void to the extent that it would secure that debt.^[16] 

30. The loan to Castle was referred to as a bridging loan of $250 million. It was repayable on 31 August 2007.  On about 17 August 2007 a Deed of Amendment was executed by Castle and OL by which the date for repayment was extended to 1 December 2007.  On 30 November 2007 a further Deed of Amendment was executed.  It required $100 million of the principal to be repaid that day with the balance to be repaid on 29 February 2008.  That $100 million was paid on 30 November 2007.  The source of the funds appears from a statement of claim filed in other proceedings which have been brought by Wellington Investment Management Limited.  It alleges that on 30 November 2007, when it was then a wholly owned subsidiary of OL, $130 million of its funds was transferred to OA, which paid $103 million to Fortress on the same date and the balance to other creditors of the Octaviar group.  The Public Trustee argues that there is at least a serious question as to whether this sum of $130 million was misappropriated as is alleged in that statement of claim, and that this provides a reason for winding up OL so that this might be investigated.  I discuss that below.  For the moment, however, the relevant matter is that only $100 million of the debt was repaid on what had been the due date for repayment of the whole loan. 

31. On 18 January 2008, OL announced that it proposed to separate the Stella business from the rest of the group’s business, which immediately resulted in the market price of OL’s shares falling by more than two-thirds and the proposal being at an end.  A few days later, trading of OL’s shares was suspended.  OL engaged consultants, KordaMentha, to advise the group as to what it should do.  The advice apparently given by KordaMentha to the board of OL, meeting on 22 January 2008, was that OL required $15 million of further cash over the next 60 days to meet its obligations.  By then there had been a proposal to purchase a 65 per cent interest in the Stella businesses at a price of $400 million.  KordaMentha advised that this sale could be agreed and completed to enable the sale price to be received prior to 29 February 2008.  This was the date for repayment of the remaining $150 million of the Castle loan.

32. The fall in OL’s share price constituted an event of default under the Castle loan. On 21 January 2008, Fortress wrote to Castle (copied to OL) that it waived its rights in respect of that event until 4 February 2008.  On the next day, 22 January 2008, Fortress wrote to Castle and OL requiring each company to agree that the YVE guarantee would become secured according to the deed of the charge held by Fortress for the Castle guarantee.  On 24 January 2008 the letter was countersigned on behalf of Castle and OL.  Then on 4 February 2008, the proposal for the sale of a 65 per cent interest in the Stella business was accepted, and a contract of sale was signed. 

33. By a Deed of Amendment dated simply “February 2008”, the Castle facility was again varied.  The amount of the facility was increased from $150 million to $200 million.  The additional $50 million was for what an internal Fortress memorandum^[17] referred to as “working capital payments” ($20 million), overdue interest and fees and interest falling due on 29 February 2008 ($6.1 million), anticipated interest for March 2008 ($1.6 million), new fees for this variation ($7 million) and a sum of $15 million for what was described as “participation in Fortress loan to Young Village Estates”.  The date for repayment of the Castle facility was extended from 29 February 2008 to the earliest of 31 March 2008, the date of settlement of the Stella sale agreement or the date of termination of that agreement.  It appears that the agreement for this further finance was made no earlier than about mid February 2008.  The further funds were advanced by 18 February 2008.^[18]  There is nothing to suggest that some indication of this amendment to the facility, and in particular of the provision of further funds, was provided by Fortress in January 2008 when it required that the YVE guarantee become a secured debt. 

34. On 29 February 2008, the sale of the interest in the Stella business was completed. The Castle loan was fully repaid from the proceeds of sale on that date. Thereafter OL was liable to Fortress only as a guarantor of the YVE facility.

The Funded Participation Agreement

35. That $15 million “participation” fee became the subject of an agreement dated 18 February 2008 between Fortress and Castle, entitled “Funded Participation Agreement”.

36. The expressed purpose of this agreement was to set out the terms upon which Fortress had agreed to grant “a funded participation…of a portion of its exposure under the Participation Documents”, which were defined as the YVE Facility Agreement, each security and guarantee in relation to that facility and each “Transaction Document”. The effect of the agreement of 22 January 2008 had been to make the YVE facility a Transaction Document for relevant purposes.  The apparent purpose was to give Castle a right to participate in the proceeds of recoveries under the YVE facility.

37. Clause 2.1 obliged Castle, as the so-called Participant, to pay to Fortress the Participant’s Commitment, which was defined to mean $15 million. As mentioned already, that was paid from the $50 million advanced by Fortress.

38. The return to Castle for this investment was according to clauses 2.2 and 2.3:

“Payments by Fortress to the Participant

2.2Subject to compliance by the Participant with its obligations under clause 2.1 and to clause 2.5, Fortress agrees to pay the Participant an amount equal to, and (subject to clause 4.3) in the same currency as, the Participant’s Commitment from any amount of principal received or recovered (including by way of set-off) by Fortress and its assignees in respect of amounts owing under a Participation Document after amounts of principal due to Fortress under or in connection with the Participation Documents up to an amount equal to the Fortress Exposure have been paid, discharged or performed in full.  No amount of principal shall be paid by Fortress to the Participant where there is any reasonable possibility that any money received or recovered by Fortress or any settlement, conveyance, transfer or other transaction made in satisfaction of or in connection with amounts due under the Participation Documents must be repaid or may be avoided under any law.

2.3In addition to amounts payable under clause 2.2 above, Fortress agrees to pay to the Participant, any interest or other amount, fee or cost paid or payable by a Transaction Party (other than principal) in respect of the period from and including the Commencement Date proportionate to the Participant’s Percentage of such amounts payable to Fortress and its assignees under the Participation Documents.”

The term “Fortress Exposure” was defined to mean the Facility Limit less the Participant’s Commitment ($15 million).  The Facility Limit was defined to have the same meaning as in the YVE loan agreement, where it was defined to mean $53.5 million as reduced or cancelled under that agreement.  Accordingly, the Fortress Exposure was no more than $38.5 million.  Thus in cl 2.2 of this Funded Participation Agreement, it was agreed that the last $15 million of what was recovered from YVE or its guarantors would be paid to Castle.  In that wayCastle was allowed to “participate” in Fortress’ recovery of the YVE debt.  The right to participate in interest and other amounts payable under the YVE facility was provided by cl 2.3.  Castle was to be paid the Participant’s Percentage of such amounts which were paid or payable by a party to a Participation Document.^[19]  The Participant’s Percentage was defined to mean the proportion borne by the sum of $15 million to the Facility Limit ($53.5 million).  By cl 2.5, the obligation of Fortress to Castle was limited to such sums as Fortress recovered.

39. The Funded Participation Agreement is ultimately for the benefit of OL, because Castle is a wholly owned subsidiary of OL and has effectively no creditors.  According to Mr Harwood’s evidence,^[20] the potential receipt via Castle from the Funded Participation Agreement is $19.5 million.  This would be made up of $15 million to be paid under cl 2.2 and the balance as Castle’s share of interest and other amounts under cl 2.3. 

The ATO’s position

40. In an affidavit sworn by Mr Harwood on 26 February 2009, he described what he saw as an advantage of the DOCA over a liquidation of OL, which was in relation to the effect of the ATO’s s 260-5 notice.  According to Mr Harwood’s affidavit, if the DOCAs were terminated, that notice would be “likely to have priority in respect of the payment of the dividend from OA to [OL]”, and would thereby divert funds from the pool for unsecured creditors of OL.  Before going to the terms of the DOCA, it is convenient to discuss the effect under the TAA of the ATO’s notice.

41. Section 260-5 of Sch 1 of the TAA relevantly provides as follows:

“260-5Commissioner may collect amounts from third party

Amount recoverable under this Subdivision

(1)This Subdivision applies if any of the following amounts (the debt) is payable to the Commonwealth by an entity (the debtor) (whether or not the debt has become due and payable):

(a)an amount of a tax-related liability;…

Commissioner may give notice to an entity

(2)The Commissioner may give a written notice to an entity (the third party) under this section if the third party owes or may later owe money to the debtor.

Third party regarded as owing money in these circumstances

(3)The third party is taken to owe money (the available money) to the debtor if a third party:

(a)is an entity by whom the money is due or accruing to the debtor; or

(b)holds the money for or on account of the debtor; or

(c)holds the money on account of some other entity for payment to the debtor; or

(d)has authority from some other entity to pay the money to the debtor.

The third party is so taken to owe the money to the debtor even if:

(e)the money is not due, or is not so held, or payable under the authority, unless a condition is fulfilled; and

(f)the condition has not been fulfilled.

How much is payable under the notice

(4)A notice under this section must:

(a)require the third party to pay to the Commissioner the lesser of, or a specified amount not exceeding the lesser of:

(i)the debt; or

(ii)the available money; or

(b)if there will be amounts of the available money from time to time – require the third party to pay to the Commissioner a specified amount, or a specified percentage, of each amount of the available money, until the debt is satisfied.

When amount must be paid

(5)The notice must require the third party to pay an amount under paragraph (4)(a), or each amount under paragraph (4)(b):

(a)immediately after; or

(b)at or within a specified time after; or

the amount of the available money concerned becomes an amount owing to the debtor.

Debtor must be notified

(6)The Commissioner must send a copy of the notice to the debtor.”

Section 260-15 of Sch 1 of the TAA provides that an amount which a third party (in this case OA) pays to the Commissioner under Subdivision 260-A is taken to have been authorised by the debtor (OL in this case) and any other person who is entitled to all or part of the amount and the third party is indemnified for making the payment.  By s 260-20 it is an offence to fail to comply with such a notice, and a person convicted of that offence may be ordered to pay to the Commissioner all or part of the amount referred to in the notice.

42. In Macquarie Health Corp Limited v Commissioner of Taxation^[21] the Full Court of the Federal Court (Hill, Sackville and Finn JJ) summarised the effect of notices given under the like terms of what was then s 218 of the Income Tax Assessment Act 1936 (Cth):

“[80]Once it is accepted that Donnelly^[22] should be followed, subject to further arguments as to the effect of the Taxpayer’s winding up, certain conclusions follow:

(i)The service of the s 218 notices on the Debtors created an interest in the nature of a statutory charge over any debts then due by the Debtors to the Taxpayer.  The charge was created notwithstanding that the amounts due to the Taxpayer were not payable until a future date.

(ii)The Notices were also effective to create a statutory charge over any debts coming into existence (whether or not payable immediately) after the date of service, but before commencement of the winding-up.

(iii)To the extent the Commissioner was entitled to a statutory charge over debts due by the Debtors to the Taxpayer, s 471C of the Corporations Law preserves the Commissioner’s right to realise or enforce the charge notwithstanding the winding-up of the Taxpayer.

(iv)The Liquidator cannot invoke s 474(1) of the Corporations Law to take control of debts subject to the statutory charge in favour of the Commissioner.”

43. The ATO notice was served on 10 September 2008. In these proceedings at least, there is no challenge to the validity of the notice.^[23]  But there is a question of whether the impact of the notice is affected by the Fortress charge (assuming it to be valid), and if so to what extent.  The Fortress charge had become a fixed charge by the time of the ATO’s notice, because it had automatically crystallised upon OL’s becoming insolvent or upon the filing of the winding up application on 4 June 2008.^[24] 

44. In Deputy Commissioner of Taxation v Lai Corporation Pty Ltd,^[25] the Full Court of the Supreme Court of Western Australia considered the effect of a notice given under a similar provision in the Sales Tax Assessment Act (No 1) 1930 (Cth),^[26] having regard to a floating charge granted by the taxpayer which had crystallised after the notice had been given.  It was held that the existence of the floating charge did not put paid to the operation of the notice in requiring the debtor to pay the Commissioner, and if the monies were so paid, the Commissioner would hold them free of the floating charge.  Their Honours said that the position would have been different had the charge crystallised prior to the service of the notice.  Burt CJ was of that view for two reasons.  The first was that once the charge became fixed, the Commissioner would receive the payment subject to that security, a conclusion which he said was implicit in the reasons of Mason J in Clyne v Deputy Commissioner of Taxation.^[27]  Alternatively, the same result would follow “by saying that to the extent of the security the debt although due is not payable to the taxpayer”.^[28] 

45. The position of a fixed charge in relation to a notice under the same provision was considered by the Full Court of this Court in Tricontinental Corporation Ltd v Federal Commissioner of Taxation.^[29]  As in Lai Corporation, because the notice had been given prior to the crystallisation of the charge, the Full Court concluded that the operation of the notice was unaffected by it.  But in relation to a fixed charge, Connolly J said:^[30]

“Whether in a case in which a charge, which, as in this case, is expressed to be a floating charge, has crystallised, that fact would be sufficient to defeat a notice under s 218 of the Income Tax Assessment Act is, I think, not free from difficulty.  In form at least, the money is still due or accruing to the taxpayer.  The debenture holder enforces his rights by appointing a receiver who would demand and recover the debt in the name of the taxpayer.  If the analogy with forms of execution such as garnishment be appropriate, then it might well be right to say that s 218 can only operate on the taxpayer’s beneficial interest in the moneys.  A more direct approach is to say that once a floating charge has crystallised, moneys the subject of the charge are no longer in reality owing to the taxpayer but to the chargee.”

Connolly J considered that it was the second approach which was supported by the judgment of Mason J in Clyne,^[31]with which I respectfully agree.  In Clyne, Mason J, in discussing whether “due” in s 218 meant “due and payable”, said:

“[I]f “due” does not mean ‘due and payable” then the Commissioner by giving a s. 218 notice can require payment of a debt owing to the taxpayer which, but for the notice, would not become payable to him by reason of the supervening rights of a secured creditor, e.g. the crystallization of a floating charge before the debt becomes payable.”^[32]

In Tricontinental Shepherdson J agreed with Connolly J.  Williams J also agreed, but in a separate judgment, he apparently accepted the first approach of Burt CJ, saying:

“…the Commissioner is entitled to intercept moneys from persons who were debtors of the taxpayer and who received notices prior to crystallisation of the charge, but…the Commissioner would take debts subject to the security if it crystallised prior to the time of service of the notices.”^[33]

46. In Elric Pty Ltd v Taylor,^[34] again a case concerning a s 218 notice, Thomas J had to consider the effect of a charge which had crystallised prior to the notice.  He granted an injunction to restrain a payment to the Commissioner according to the notice, upon the basis that the monies the subject of the charge were not owing to the taxpayer but to the chargee.^[35]

47. These cases were recently considered by the Full Court of the Federal Court in Federal Commissioner of Taxation v Bruton Holdings Pty Ltd (in liq),^[36] where the ultimate question was whether notices under s 260-5 were void as an “attachment” under s 500 of the Act.  Applying Commissioner of Taxation v Donnelly, the Court held they were not an attachment.  Special leave to appeal that judgment has been granted, but, it would seem, upon the “attachment” question.   That question does not arise in the present case.  Were OL to be ordered to be wound up, the notice here would predate the commencement of the winding up, so that the notice would not be void as an attachment put in force after the commencement of the winding up under the similar terms of s 468(4).

48. That second approach put forward by Burt CJ in Lai Corporation, and adopted by Thomas J in Elric, is supported by subsequent authority.^[37]  As was observed in Bruton Holdings, under the first approach, the Commissioner would be entitled to payment of the debt but would hold the proceeds subject to the fixed charge, whereas the second approach would deprive the Commissioner of the right to receive payment at all.^[38]  If the first approach were applied here, OA would have to pay to the Commissioner an amount up to the amount of the notice, but (again assuming the validity of the Fortress charge) the Commissioner would then have to pay to Fortress the amount which its charge secured because the beneficial ownership of the funds would be in Fortress.  Under the second approach, the notice would not require OA to pay to the Commissioner whilst Fortress was entitled to the funds for payment of what was secured by its charge.  Either way, the result, at least absent the impact of the DOCA for OL, would be a payment or payments to Fortress or its receivers.

49. Any surplus funds, that is, funds not to go in payment of the Fortress debt, would not have to be paid by OA to Fortress or to the receivers, on either of the two approaches. Under the first approach, the Commissioner would be entitled to payment but would hold the proceeds for Fortress only subject to the extent that the funds were to pay what its charge secured. Under the second approach, the debt would not be owing to the taxpayer, as Burt CJ put it, only “to the extent of the security”. In Elric Pty Ltd v Taylor, Thomas J noted that in that case, there was no question of the monies being sufficient to exceed the secured debt so as to leave a surplus payable to the taxpayer,^[39] thereby indicating that surplus monies would have been treated differently. 

50. In summary, the notice does not defeat the operation of the Fortress charge (if otherwise valid) and is ultimately effective only to the extent that monies to be paid by OA would not have to be paid to Fortress in payment or part payment of its debt.

51. Accordingly, if the funds to come from OA to OL were, say, $80 million, and the Fortress debt secured by the charge were $60 million, the position in a winding up of OL would be that nothing from OA would go to the benefit of unsecured creditors of OL, except via Castle. After Fortress received its $60 million, the ATO would be entitled to the remaining $20 million. However, on Fortress’ receipt of the money, cl 2.2 of the Funded Participation Agreement would oblige Fortress to pay $15 million and by cl 2.3 a further sum (now apparently about $4.5 million).  As I have mentioned, the administrators’ best estimate of the likely payments from OA to OL, even under the DOCA for OA, is $72 million.  The most recent evidence of the Fortress debt^[40] is that as at the end of April last it was about $62.5 million, which apparently did not allow for the OA trust monies which were paid to Fortress in January 2009.  Further interest accruing on the Fortress debt would diminish the balance to be paid to the ATO.  But some of that further interest would be for the benefit of unsecured creditors of OL, because it would be passed on to Castle and then back to OL.

52. If the Fortress charge is void against a liquidator, then the Commissioner would be entitled to the whole of the ATO debt and the balance of the money from OA would go to the pool for unsecured creditors (including Fortress). But of itself that would not provide Fortress with sufficient funds to require it to pass on any repaid principal to Castle. 

53. The consideration of the DOCA proposed by Fortress should have been made with an understanding of these respective entitlements of Fortress, Castle and the ATO. It was necessary for the administrators to explain them to creditors, so that a winding up and the DOCA could be compared. And the creditors also needed an explanation of the terms of the proposed DOCA. As will appear, the proposed DOCA could not be easily explained and the deed later prepared and executed is not easily interpreted.

The deed for Octaviar Ltd

54. The meetings of creditors took place on 17 December 2008. There was then no draft of the deed which had been provided by the administrators to creditors. The effect of a DOCA proposal by Fortress was described in the administrators’ s 439A report, and there was some discussion of that at the meeting.  The DOCA, dated 12 January 2009, is between OL, the administrators, Fortress and the receivers appointed by it.  Recital C of the deed expresses its purposes in words which are simply copied from s 435A of the Act.  As for the suggested purpose of maximising the chances of the company continuing in existence, the administrators had not carried on the company’s business from the time of their appointment on 13 September 2008 and there was no prospect that the company would be able to resume trading.

55. The critical provisions of the DOCA are those which provide for the disposition of whatever was to be paid by OA to OL. Such money is described in the deed as the OA Receivable, which is defined to mean:

“…any and all moneys that are from time to time:

(a)payable by OA to the Company in respect of book debts owed to the Company; and

(b)held by OA on trust or otherwise on behalf of the Company…”

As noted already, the monies referred to in that paragraph (b), which I have called the OA trust monies, have now been paid.  They were paid by the administrators to the receivers appointed by Fortress on 23 December 2008 and then passed on to Fortress prior to the execution of the DOCA.  The amount paid was approximately $19.5 million.  The administrators saw fit to make that payment although in a hearing on 18 December 2008, in which the administrators were represented, counsel for the Public Trustee said that their client would apply to terminate the DOCA as soon as it was executed and that it would argue that the Fortress charge was void.

56. Clause 4.1 of the DOCA provides for the receipt and disbursement of the OA Receivable as follows:

“4.The OA Receivable

Dealing with the OA Receivable

4.1As and when the OA Receivable (or portions thereof) is received by the Company from OA, the OA Receivable will be dealt with in the following order and manner:

(a)The OA Receivable shall be applied by the Receivers in payment to Fortress of the Fortress Debt.

(b)Moneys received by Fortress from time to time on account of the OA Receivable shall be applied as follows:

(i)First, in payment to Fortress of Fortress Expenses and Fortress Interest;

(ii)Second, by depositing $25,000,000.00 into an account operated by Fortress, as a payment by the Company under the Guarantee;

(iii)Third (to the extent of any surplus after payment of the amounts required by sub-paragraphs (i) and (ii) above in full), by paying the Company PA Amount to the Company;

(iv)Fourth (to the extent of any surplus after payment of the amounts required by sub-paragraphs (i) to (iii) above in full) by paying the Octaviar Castle Amount to Octaviar Castle; and

(v)Fifth (to the extent of any surplus after payment of the amounts required by sub-paragraphs (i) to (iv) above in full), by paying the balance to the Company.”

57. This clause begins with the premise that all of the OA Receivable will be paid to the receivers. The DOCA for OA does not oblige OA to pay to the receivers, but that is no doubt what Fortress and the administrators have in mind. That involves an assumption that the Fortress charge is not void and a further assumption that none of the OA Receivable would be paid to the Commissioner in response to the s 260-5 notice.  According to my earlier judgment, that first assumption is wrong.  So too is the second assumption, because OA would be entitled to make payment to the receivers only to satisfy, in whole or in part, the debt was secured by the charge.  Any surplus would have to be paid to the Commissioner.

58. According to cl 4.1(a), the OA Receivable is to be applied by the receivers “in payment to Fortress of the Fortress debt”. As other provisions of the DOCA confirm,^[41] cl 4.1(b) provides for disbursements by Fortress, the implication being that the receivers would immediately pass any of the OA Receivable on to Fortress.

59. The first of those disbursements would be under cl 4.1(b)(i). The Fortress Interest is defined as the interest on the sum of $25,000,000 (or any portion thereof outstanding from time to time) for the period commencing on 13 September 2008^[42] and ending on the payment of that sum under cl 4.1(b)(ii).  The Fortress Expenses are defined to mean all expenses recoverable by Fortress pursuant to OL’s guarantee, incurred up to the date of payment of the sum contemplated by cl 4.1(b)(i).  According to a so-called Transaction Outline, a document prepared by Fortress which became Schedule 1 of the DOCA, the Fortress Expenses and Fortress Interest were estimated to amount to $500,000.

60. Next would be the payment under cl 4.1(b)(ii), being a deposit of $25 million into an account operated by Fortress “as a payment by the Company under the Guarantee”. Accordingly, the disbursements to be made under paras (i) and (ii) of cl 4.1(b) would total about $25.5 million after which para (iii) would become relevant. Paragraph (iii) requires the disbursement of the OA Receivable in payment of the so-called Company PA Amount. This is a payment according to a written agreement between OL and Fortress, also dated 12 January 2008, which is annexed to the DOCA and called “Participation Agreement”. In the DOCA, the Company PA Amount is defined to mean:

“…a payment made pursuant to clause 2…of the [Participation Agreement] in an amount equal to:

(a)Fortress Debt;

minus

(b)$25,000,000.00 plus Fortress Expenses plus Fortress Interest;

minus

(c)Octaviar Castle Amount.”

61. The next disbursement would be that in paragraph (iv) of cl 4.1(b), which is the Octaviar Castle Amount. This is defined to mean all amounts payable by Fortress to Castle pursuant to clauses 2.2 and 2.3 of the Funded Participation Agreement.

62. As discussed already, the Funded Participation Agreement requires Fortress to pass on to Castle any principal paid under the YVE facility (including by OL as a guarantor) once Fortress has been repaid the “Fortress Exposure”, which could be no more than $38.5 million.^[43]  And it requires Fortress to pass on Castle’s share^[44] of interest and other amounts paid under the YVE facility.  The Company PA Amount would be effectively money received from OA in excess of $25.5 million but which would not have to be passed on to Castle. 

63. Some further terms of the DOCA for OL are as follows:

“4.2Notwithstanding anything to the contrary in this Deed:

(a)Fortress’ obligation to make the payments referred to in clause 4.1 (Dealing with the OA Receivable) shall in all circumstances be limited to the portions of OA Receivable received from time to time by Fortress (acting by itself or by its Receivers).  Fortress shall not have any obligation or liability to make the payments referred to in clause 4.1 (Dealing with the OA Receivable) from any other source of funds; and

(b)payment to Fortress of the OA Receivable in accordance with clause 4.1 (Dealing with the OA Receivable) shall not in any way diminish, reduce or otherwise affect any obligations of YVE to Fortress, and any rights that Fortress has against YVE, including but not limited to the amount of any debt owed to Fortress by YVE.

Dealing with the Octaviar Castle Amount

4.3The Deed Administrators must, upon payment to Octaviar Castle of the Octaviar Castle Amount, cause that amount (or the maximum portion of that amount permitted by law) to be paid by Octaviar Castle to the Company by whatever means are available to Octaviar Castle and the Company, including but not limited to by way of dividend on the Company’s shares in Octaviar Castle or repayment of then existing indebtedness of Octaviar Castle to Octaviar.

Release from Charge of Deed Fund Contributions

4.4On and from the respective times of their payment by Fortress in accordance with clause 4.1 (Dealing with the OA Receivable):

(a)each of the Deed Fund Contributions [defined as the payments contemplated by paragraphs (iii), (iv) and (v) of cl 4.1(b) of the deed] shall be deemed to have been released by Fortress and the Receivers from the Charge; and

(b)Fortress must take all necessary steps to effect that release, including but not limited to the lodgement with the Australian Securities & Investments Commission, in accordance with the Corporations Act and Corporations Regulations, of a duly completed “Form 312” in respect of each Deed Fund Contribution.

…

Paramountcy of clause 4

4.7In the event of any inconsistency with any other provision of this Deed, this clause 4 (The OA Receivable) is paramount.

5.Deed Fund

Establishing the Deed Fund

5.1Subject to clause 5.3 and clause 16 (Secured Creditors), the Deed Fund shall comprise all of the Property of the Company and any proceeds from the sale of the Property of the Company.

5.2Subject always to clause 4 (The OA Receivable), the Deed Fund includes (but is not limited to) the Deed Fund Contributions.

5.3Without limiting clause 16 (Secured Creditors), the Deed Fund does not include the OA Receivable.

Distributing the Deed Fund

5.4The Deed Fund shall be distributed by the Deed Administrators in the following order and manner:

(a)First, in payment of the Winding Up Petition Costs;

(b)Second, in payment of all the Administrators’ Remuneration and the Administration Liabilities;

(c)Third, in payment of any Employee Entitlements;

(d)Fourth, in payment of all other Creditors’ Claims on a pari passu basis; and

(e)Fifth, any surplus after payment of the Winding Up Petition Costs and all Claims under paragraphs (b) to (d) above in full, to be distributed to the Company’s members.

5.5Insofar as the amount of the Deed Fund is insufficient to pay the Claims making up the Employee Entitlements or the Creditors in full pursuant to this clause, then in each case, the Deed Fund shall be distributed pro rata amongst the Claims making up the Employee Entitlements or the Creditors (as the case may be).

5.6The Deed Administrators will distribute the Deed Fund at such times and in such amounts as it is appropriate and feasible to do so.

5.7The Deed Administrators may make interim distributions.

5.8The Deed Administrators may make a distribution under one of the categories in clause 5.4 (Distributing the Deed Fund) even though a prior category has not been paid in full, if the Deed Administrators have set aside an amount which they consider is reasonably likely to be needed to pay any prior category in full.

5.9Notwithstanding any other provision of this Deed, the Deed Administrators may withhold some or all of the Deed Fund from distribution if they have made a claim under their Indemnity in clause 13 (Administrators’ Indemnity and Lien), or reasonably apprehend that they will need to make such a claim.

6Making of Claims

6.1Subdivisions A, B, C and E of Division 6 of Part 5.6 of the Corporations Act (other than sections 553(1A) and 554F) and Corporations Regulations 5.6.39 to 5.6.57 will apply to all Claims against the Company made under this Deed as if references to the “liquidator” were references to the Deed Administrators, references to “winding up” and “wound up” were references to administration pursuant to this Deed, and references to the “relevant date” were to the Relevant Date.

7Discharge of Claims

7.1The Creditors must accept their entitlements under this Deed in full satisfaction and complete discharge of all debts or any Claim which they have or claim to have against the Company as at the Relevant Date and each of them will, if called up to do so, execute and deliver to the Company such forms of release of any such Claim as the Deed Administrators require.”

64. The so-called Participation Agreement is referred to in the DOCA as the Company PA. The DOCA recites that:

“The Company PA is intended to provide the Company [OL] with the benefit of security granted by YVE to Fortress for debts that are also secured by the Guarantee [OL’s guarantee of the YVE facility] in circumstances where it is not expected that the Company will become entitled to be subrogated to that security for some time.”

65. Clauses 2.2 and 2.3 of the Participation Agreement provide as follows:

2.2Subject to the terms of this Agreement:

(a)after payment to Fortress of the Initial OA Receivable Payment, Fortress agrees to pay the Participant an amount up to the Company PA Amount from the OA Receivable; and

(b)after:

(i)an amount equal to:

Fortress Amount;

minus

Initial OA Receivable Payment,

has been paid to Fortress in full; and

(ii)receipt by Fortress of the Initial OA Receivable Payment,

Fortress agrees to pay the Participant any of the remaining Realisation Proceeds, proceeds from the Security or proceeds from the Charge up to the total of the Fortress Amount.

2.3No amount shall be paid by Fortress to the Participant where there is any reasonable possibility that any money received or recovered by Fortress or any settlement, conveyance, transfer or other transaction made in satisfaction of or in connection with amounts due under the Participation Document will be either required to be repaid or avoided under any law.”

The Initial OA Receivable payment is defined to mean, in effect, the payments under paragraphs (i) and (ii) of cl 4.1(b).  The Company PA Amount takes its meaning from the DOCA.

Arguments as to the effect of the deed for Octaviar Ltd

66. The Public Trustee argues that this DOCA permits Fortress to recover in fact more than the YVE debt. So assuming the YVE debt to be $60 million, it is argued that Fortress might recover $75 million by reason of the DOCA. The argument begins at the Funded Participation Agreement under which $15 million was paid to Fortress. Of course that had been lent by Fortress, but that advance, together with the balance of the Castle facility, was repaid on 29 February 2008.  So at least prior to the DOCA, the position was that Fortress was obliged to pay Castle according to the Funded Participation Agreement.  The Public Trustee argues that cl 4.1(b)(iv) allows Fortress to use OL’s money, rather than its money, to discharge its obligations to Castle. 

67. It is said to be the use of OL’s money on the basis of an argument that such part of the monies which are received from OA, at least which is not within paras (i) and (ii) of cl 4.1(b), would not reduce either the YVE debt, or if it be different, OL’s debt to Fortress.  The argument points to cl 4.2(b), which provides that payment to Fortress of the OA Receivable in accordance with cl 4.1 is not in any way to diminish, reduce or otherwise affect the obligations of YVE to Fortress, including but not limited to the amount of any debt to Fortress which is owed by YVE.  Accordingly, it is submitted, the monies used to pay Castle, not having been applied in reduction of the YVE debt, must be the funds of OL, and that creditors of OL are worse off, because OL’s funds, rather than Fortress’ funds, are being used to meet Fortress’ obligation to Castle.  And because the YVE debt would be unaffected, it would be open to Fortress to pursue YVE’s assets to recover its debt, whilst at the same time having the benefit of the monies used to pay Castle. 

68. The administrators argue otherwise. Upon their interpretation of the DOCA, as soon as anything received from OA by the receivers is paid by them to Fortress, the obligation of OL under its guarantee is commensurately reduced. This argument has support from cl 4.1(a), which provides that the OA Receivable shall be applied by the Receivers in payment to Fortress of the Fortress Debt.  The Fortress Debt is defined to mean any and all moneys owed by OL to Fortress.  And that would accord with the position absent the DOCA, so the question is whether that is displaced by the DOCA.  Clause 4.1(b)(ii), in providing for the payment of $25,000,000 to an account operated by Fortress, specifies that this would be a payment by the Company under the Guarantee.  This specification does not appear in paras (iii), (iv) and (v), thereby providing an indication that in those cases, the state of the account between Fortress and OL would not be affected.  But as to that, the administrators submit that those words in para (ii) should be regarded as mere surplusage. 

69. The administrators’ submissions are also supported by the Participation Agreement, annexed to the DOCA. Recital B of that agreement provides:

“Clause 4 of the DOCA contemplates that, following payment by [OL] to Fortress of the OA Receivable (in reduction of the debt due by [OL] to Fortress) the Company PA Amount will be paid by Fortress to [OL].” [emphasis added]

70. Clause 4.4 of the DOCA provides that on and from the respective times of their payment by Fortress in accordance with cl 4.1, each of the Deed Fund Contributions (defined to mean each of the payments contemplated by (iii), (iv) and (v)) should be deemed to have been released by Fortress and the receivers from the Fortress charge. But apparently that was intended to make it clear that amounts which under cl 4.1(b) had been paid to OL, or in the case of the Castle amount, monies which ultimately had been passed on to OL by a distribution under cl 4.1(b)(iv), would not be subject to the Fortress charge in the hands of the deed’s administrators. 

71. Fortress has yet a different interpretation of the DOCA. According to its written submissions, the impact of the receipt of funds from OA would depend upon whether there is one “immediate payment” of the entirety of the OL debt to Fortress, or whether money is paid “in stages”. An immediate payment of the whole YVE debt by OL would discharge OL’s obligations under the guarantee. It is said that this would not discharge YVE’s obligations to Fortress but rather that OL would be subrogated to the rights of Fortress, not only to its securities but effectively as the assignee of an ongoing debt owed by YVE. But if monies were paid in stages, Fortress submits that the aggregate of the money disbursed under (i), (ii) and (iv) of cl 4.1(b) would constitute money paid by OL. As to the Company PA Amount (cl 4.1(b)(iii)), it argues that:

“…that money cannot be regarded as paid by OL to Fortress for the purposes of subrogation.  Accordingly, until that amount is recovered from YVE the whole of the debt has not been paid.”

That distinction between an immediate payment of the entire debt from the OA Receivable, and a payment in stages, is not expressed within the DOCA and this particular interpretation cannot be accepted.

72. The Public Trustee’s argument emphasises cl 4.2(b), and says that this means that the amount of the debt owed to Fortress is unaffected by its receipts under cl 4.1.  It is simply that Fortress is agreeing to release those amounts from its charge. 

73. That would be a surprising consequence for the payments in paragraphs (i) and (ii). As to those in (i), it is difficult to see that the intention is that those obligations in relation to interest and expenses would not be discharged upon payment to Fortress of the necessary amounts. And as for the $25 million, in the case of that use of the OA Receivable there is the express provision within paragraph (ii) that this would constitute “a payment by the Company under the Guarantee”. But as I have said the same cannot be said for the OA Receivable in so far as it would be put towards any of the purposes in (iii), (iv) and (v). 

74. This argument of the Public Trustee, that the application of at least some of the funds under cl 4.1(b) would not reduce OL’s indebtedness to Fortress, is important in many ways. It is relevant to the Public Trustee’s case about the use of OL’s money to discharge the obligations of Fortress (to Castle), which would seem to be correct if OL is not to be given credit for the monies to be disbursed under paragraph (iv). It is relevant in assessing the effect of disbursements under cl 4.1(b) upon the amount which Fortress must receive before OL could be subrogated to its securities from YVE. If, for example, receipts beyond the amounts in paragraphs (i) and (ii) are not to be credited for that purpose, the effect of the DOCA would be that OL would be less likely to reach the point of subrogation than if the funds which would be applied under those remaining paragraphs of cl 4.1(b) were credited in OL’s favour, as the equivalent amounts would be credited under a liquidation.  Thirdly, there is the ATO’s notice.  If the monies the subject of any or all of paragraphs (iii), (iv) and (v) are not to be credited against the debt secured by the Fortress charge, then OA’s basis for not paying those monies to the Commissioner would not be apparent.  And if these arguments might lead to further litigation in the purported operation of the DOCA, that in itself might add to the case for terminating it.

Part payment by a guarantor: effect

75. Fortress and the administrators argue that cl 4.2(b) simply reflects what is said to be the legal position absent a specific agreement between the creditor, the principal debtor and the surety, which is that a payment by the surety does not affect the state of the account between the creditor and the principal debtor. So it is said that cl 4.2(b) provides no indication of the effect of the DOCA upon the state of the account between Fortress and OL. This proposition, which is that the indebtedness of the principal debtor is unaffected by payments by the surety, has some support in the authorities. But there is authority directly against it, and in my view it is wrong. I go first to the cases relied upon to support the proposition. 

76. Fortress first relies upon the dicta of Brennan J in Mahoney v McManus.^[45]  The plaintiff’s claim there was for contribution from a co-guarantor.  When creditors demanded payment from the company which was the principal debtor, the plaintiff made a payment to the company which it paid on to the creditors.  The plaintiff said that his payment was as a guarantor and that he was entitled to contribution.  The defendant said that the plaintiff’s payment was a loan by him to the company and that it was the company as the principal debtor which had paid the creditors.  On that basis the liability of both guarantors would have been discharged by the company’s payment of its debt, and the plaintiff would have had no entitlement to contribution from his co-guarantor.  An appeal from the Full Court of this Court was allowed by a majority,^[46] upon the basis that the plaintiff’s payment, in fact, had been made under his guarantee.  In his dissenting judgment, Brennan J stated some general propositions as follows:

“A valid payment by a principal debtor of his debt extinguishes the liability to the creditor of both the principal debtor and of his sureties, for the payment discharges the debt upon which the obligations of suretyship depend.  When the debt is thus discharged there is no liability resting on the principal debtor to indemnify his sureties.

Conversely, there can be no payment to a creditor in discharge of a surety’s liability unless the liability of the principal debtor is undischarged.  Subject to any countervailing contract, the principal debtor must indemnify the surety for what he pays; the surety becomes entitled to the benefit of the creditor’s securities against the principal debtor and the surety, on offering the creditor a proper indemnity, may sue the debtor in the creditor’s name.  A payment to a creditor cannot at once discharge the principal debtor’s liability to the creditor and leave that liability on foot; it cannot at once extinguish the principal debtor’s liability to his surety, and oblige the principal debtor to indemnify the surety for what he has paid.  A payment to a creditor may discharge the principal debtor’s liability and thereby extinguish the surety’s liability, or it may discharge the surety’s liability and thereby oblige the principal debtor to indemnify the surety.  It cannot do both.”^[47]

The comments which are now relied upon were unnecessary to his Honour’s conclusion because, regardless of whether the principal debt is affected by a payment by the guarantor, the distinction between a payment by the guarantor and a payment by the principal debtor, for the purposes of a claim for contribution from a co-guarantor, was not in question.  It was unnecessary to consider whether a guarantor’s payment affected the state of the account between the creditor and the principal debtor.  The question there was one of fact and the report notes that no authorities were cited in the argument.^[48]

77. In a case from Northern Ireland, Ulster Bank Ltd v Lambe,^[49] a bank received part payment from a surety and sued the principal debtor for the whole debt, without giving credit for that payment.  The claim was upheld.  Lowry J said:

“Payment by the guarantor, as such, is something different from payment by the debtor, since it preserves to the guarantor his ultimate right of reimbursement by the creditor if sufficient money is eventually recovered from the principal debtor.  There appears to be no sound reason why a guarantor should retain this right if he pays the creditor after, and lose it if he pays before, the principal debtor’s bankruptcy.  If a guarantor decides to make payment on behalf of the debtor or to give to the debtor money in order that he may pay it to the creditor himself, then he can bring about a situation where the debt is reduced by the amount of the payment.  The guarantor in such a case will not have paid on foot of the guarantee or acquired any right of ultimate reimbursement in respect of the money paid.  But that is not this case.

It is a question of construction whether the entire debt is guaranteed subject to a limit, or only a part of the debt.  The true principle is that where the entire debt is guaranteed, with or without a limit, the creditor can sue the principal debtor, or claim in his bankruptcy, for the full amount of the debt, despite any payments on foot of a guarantee, whether they are made before or after the principal debtor’s bankruptcy, provided those payment in the aggregate fall short of the full amount of the debt.  The benefit to the guarantor is that money recovered in excess of the full amount of the debt is held in trust for him.  The rights of other creditors of the principal debtor are not infringed, since the bank was at all times entitled to rank equally with other unsecured creditors in the principal debtor’s bankruptcy, and has independently of this right contracted to receive from the guarantor payment to supplement the dividend on the entire debt.  If the entire debt is discharged, the creditor has no further interest, and the guarantor stands in his shoes.  If the principal debtor remains solvent, the question of justice among his creditors does not arise.”^[50]

The references to the position in the event of the bankruptcy of the principal debtor show that Lowry J reasoned by analogy with the creditor’s rights in that context.  As the following cases demonstrate, it is well established that in the event of the bankruptcy or winding up of the principal debtor, the creditor is entitled to prove for the whole of the debt without giving credit for payments by the guarantor, as long as the whole debt has not been discharged.  That is a rule in relation to proving in insolvency, which is designed to preclude double proof in respect of the same debt:  Re Oriental Commercial Bank; ex parte European Bank.^[51]

78. The rule against double proof where there have been part payments by a guarantor was applied in Re Sass.^[52]  But importantly for present purposes, Vaughan Williams J reasoned from the premise that a part payment by the guarantor could not affect the creditor’s right to sue for the original debt:

“I think that the common law right of the bank here was to sue the debtor for the whole amount that was due from him to them, irrespective of the sum which was paid by the surety, unless that sum amounted to 20s in the pound…In my judgment the surety here became a surety for the whole of the debt.  It is true that his liability was to be limited; but still, notwithstanding that, his suretyship was in respect of the whole debt, and he, having paid only a part of that debt, has in my judgment no right of proof in preference or priority to the bank to whom he became guarantor.”^[53]

79. This rule in relation to proofs of debt is explained in Goode on Legal Problems of Credit and Security (4^th ed, 2008) as follows:

“It is a well settled principle of equity that until the creditor has received payment of the guaranteed debt in full the surety cannot prove in the insolvent debtor’s state for a sum paid by him to the creditor, the reason being that he has, expressly or by implication, undertaken to be responsible for the full sum guaranteed, including whatever remains due to the creditor after receipt of dividends by him out of the bankrupt’s estate, and thus has no equity to prove for his right of reimbursement in competition with the creditor.  If the creditor were required to give credit for a pre-bankruptcy part payment by the surety, neither of them could prove for the amount of such payment and the general body of creditors would thus be unjustly enriched.  Similarly, sums received by the creditor before the bankruptcy from the realisation of security furnished by the surety are not deductible in computing the amount for which he can prove.  A fortiori credit need not be given for sums received after bankruptcy and before proof, still less that are receipts after proof.”^[54] [emphasis added]

80. In Westpac Banking Corporation v Gollin & Co Ltd,^[55] Tadgell J extensively analysed the authorities on this part of the rule against double proof, and applied Re Sass and Ulster Bank Ltd v Lambe.  But I do not understand his Honour to have considered the present question.  The same comment applies to Seabird Corporation v Sherlock,^[56] which was cited by the administrators on this argument.  Fortress cited a passage from the judgment of Owen J in Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9).^[57]  But in this passage, what was being discussed was a question of fact of the kind in Mahoney v McManus and the discussion is not relevant to the present question.

81. Counsel for Fortress properly referred to reasoning to the contrary by Fisher J in the High Court of New Zealand in Stotter v Equiticorp Australia Ltd (in liq).^[58]   Fisher J concluded that a creditor cannot prove for the original sum owed without giving allowance for pre-liquidation payments.  He reasoned from the premise that, insolvency aside, a creditor who had already recovered part of the debt from a surety could not bring an action against the principal debtor for the full amount of the original debt.  Fisher J regarded that premise as uncontroversial, citing two relatively recent judgments of the Court of Appeal in England. 

82. The first is MS Fashions Ltd v Bank of Credit and Commerce International SA (in liq).^[59]  The case concerned an insolvency administration, but the insolvent party was the creditor bank.  The repayment of its loan to a company was guaranteed by the company’s directors, who were also account holders and thereby creditors of the bank.  The question was whether the credit balances of their accounts could be set off against the company’s liability to the bank in the bank’s liquidation.  In the course of deciding that question Dillon LJ observed that something which constituted a payment by the guarantor would necessarily be “set against the liability of the principal debtor”, and that:

“A creditor cannot sue the principal debtor for an amount of the debt which the creditor has already received from a guarantor.”^[60]

Nolan and Steyn LJJ agreed.  No authority was cited by Dillon LJ, and it would seem that the proposition was not thought to be in doubt.

83. The second is Milverton Group Ltd v Warner World Ltd.^[61]  This involved a lease under which there were some six persons liable to pay the rent and observe the covenants.  They were the former tenants and their guarantors and the present tenant and its guarantors.  The plaintiff’s claim was against the original tenant for an amount of rent, which was disputed on the basis that some of the guarantors had made part payments for which the plaintiff had not given credit.  The plaintiff argued that no payment by a guarantor could extinguish the liability of a tenant to pay rent.  The guarantors had made part payments in exchange for deeds of release from the obligations under their respective guarantees.  But Hoffmann LJ did not consider the fact of those releases to be significant and said:

“I do not accept that because the payments were in consideration of release, they did not operate to discharge any of the obligations under the lease.  Payment for release and payment to discharge obligations under the lease are not mutually exclusive.  In return for granting a release, the landlord accepted performance in part.  And to avoid any problems over whether payment of a debt already due was good consideration, the release was given by deed.  This was, in my judgment, the effect of the deeds of release in this case.  But I would go further.  For the purpose of deciding whether money owed by more than one person has been paid, I do not think that it is possible for the creditor and one of the debtors to characterise a payment in return for a release as anything other than a part performance of the obligation.  If this were possible, a creditor could pick off his debtors one by one and recover in total more than the whole debt.  For the payment to count as part discharge of the common obligation, it is sufficient for the payment to be referable to the guarantee.”^[62]

That was followed by another Court of Appeal in Romain v Scuba TV Ltd.^[63]

84. In Goode on Legal Problems of Credit and Security,^[64] the Milverton Group decision is explained as a case where there was a common obligation, rather than a case where the guarantor’s obligation is distinct from and collateral to the obligation of the principal debtor.  But that does not seem to have mattered in the court’s concluding that the general proposition which then appeared in Woodfall’s Law of Landlord and Tenant which was that “no payment by a guarantor could extinguish the liability of the tenant to pay rent”, was wrong.^[65]

85. In Holder v Commissioners of Inland Revenue,^[66] the question was whether a guarantor which paid the creditor bank an amount which was calculated by reference to the customer’s liability for interest as well as principal, was entitled to a deduction according to the terms of a tax statute “as an interest payment…on an advance from a bank”.  The unanimous view in the House of Lords was that the guarantor was not entitled to the deduction.  Lord Thankerton said that the guarantors had not paid interest on an advance by the bank, but a sum due under their guarantee, and what a guarantor paid was not interest to the creditor, but a payment which made good the loss of that interest.^[67]  Discussing that speech in In re Hawkins decd,^[68] Megarry J said:

“[This] view, put broadly, is that what the guarantor pays is not interest but a debt due under his guarantee.  The payment discharges the primary obligation to pay interest, but the fact that it discharges that obligation does not alter the fact that payment is made not as a payment of interest due under the primary obligation, but as a payment due under the secondary obligation of guarantee.” [emphasis added]

In Holder, Lord Atkin said:

“My Lords, I understand that the majority of your Lordships are of opinion that the guarantor in such a case cannot be said to have paid the interest within the meaning of the section.  I confess to feeling doubts on this point, for there can be no doubt, I think, that as the result of the sum of money paid by the guarantor, the interest due from the principal debtor was in fact paid, as that if the principal debtor was sued he could support a plea of payment.  Similarly, it might, I think, be said that if a guarantor of rent pays under the guarantee he pays the rent – not, it is true, his rent, but the rent of the tenant.  No one would, I think, doubt that payment by a guarantor made within the stipulated time would defeat a forfeiture for non-payment of rent.  But one has to construe the words used in a particular case, and if your Lordships have come to the conclusion that the words of the section do not give the guarantor the relief that is given to the principal debtor, I do not dissent.”^[69] [emphasis added]

Lord Denning MR applied that in Westminster Bank Executor and Trustee Co (Channel Islands) Ltd v National Bank of Greece S.A.^[70]  It was also applied by Megarry J in Inre Hawkins decd.^[71]

86. In Holder and these subsequent cases, it was not suggested that the guarantor’s payment would make no impact upon the account between the creditor and the principal debtor.  Rather the question was whether the guarantor’s payment could be characterised as a payment of interest for certain purposes.  On the presently relevant point, in Holder there was no different view from that of Lord Atkin, that there was “no doubt … that if the principal debtor was sued he could support a plea of payment”.

87. In the submissions for the administrators, it was urged that the state of the account between Fortress and YVE must remain unaffected by part payments by OL, for otherwise the recovery from YVE through the securities granted by it could be prejudiced.^[72]  That appears to result from an incorrect view of the respective rights and obligations of Fortress, YVE and OL, and in particular of OL’s entitlement to the remedies of indemnity and subrogation.  Indeed the existence of those remedies, at least in part, is explained by the impact of a guarantor’s payment upon the position between the creditor and the principal debtor.  In Registrar General v Gill,^[73] Gleeson CJ and Priestley JA (with whom Mahoney JA agreed) said that:

“The equitable principles relating to subrogation aim to adjust the interests of three parties, such as a creditor, a debtor and an insurer or surety, in such a way as to avoid the unconscionable result of double recovery by the creditor or inequitable discharge of the liability of the debtor.”

88. A guarantor has a right to be subrogated to the creditor’s securities granted by the principal debtor if and when the guarantor has discharged the secured debt in full. But those securities become available to the guarantor, not as an assignee of what had been the principal debt, but in order to aid in the enforcement of the guarantor’s right to be indemnified by the principal debtor. This explains why the guarantor, upon being subrogated to the benefit of a security given by the principal debtor, may not become entitled to the benefit of all covenants given by the debtor in favour of the creditor. As Powell J explained in McColl’s Wholesale Pty Ltd v State Bank of New South Wales:

“However, although by virtue of the doctrine of subrogation, a surety may become entitled to the benefit of any security given by the principal debtor, he does not, so it seems to me, necessarily obtain the benefit of all the covenants on the part of the principal creditor which may be contained in the instrument conferring the security.  That this should be so is due to the fact that the ultimate purpose of subrogation is not to put the surety in the identical position in which the creditor formerly stood, but to enable the surety to enforce his right to an indemnity by resort to the securities formerly held by the creditor:  see, for example, Orakpo v Manson Investments Ltd [1977] 1WLR 347 at 358; [1977] 1 All ER 666 at 676 per Buckley LJ.  If any demonstration of this be needed, it is readily provided by the fact that, although, as I have earlier recorded, the court will usually allow interest in respect of moneys paid by a surety pursuant to his guarantee, it is by no means automatic that interest will be allowed at the rate provided for in the contract between the creditor and the principal debtor…”^[74]

In Meagher, Gummow and Lehane’s Equity Doctrines and Remedies (4^th ed, 2002), the remedy of subrogation is explained by reference to the guarantor’s right to indemnity as follows:

“It is the debtor’s obligation to indemnify the surety against any loss he incurs upon the guarantee and therefore it is against conscience for the debtor to go free from the rights of the creditor against him upon payment by the surety; in this sense the subrogation of the surety to the rights of the creditor is based upon ‘natural justice’:  Yonge v Reynell (1852) 9 Hare 809 at 818-19; 68 ER 744 at 748-9 per Sir George Turner VC.”^[75]

In Andrews and Millett’s Law of Guarantees (5^th ed, 2008) the authors note that the right of indemnity was founded on the old form of action of indebitatus assumpsit for recovery of money paid to the use of another, so that an essential condition for this right to indemnity is that the guarantor’s payment must have discharged a liability of the principal.^[76]

89. A part payment of the creditor’s secured debt does not entitle the guarantor to be subrogated to any extent to the creditor’s securities. But a part payment does entitle the guarantor to an indemnity by the principal debtor in that amount. In Davies v Humphreys,^[77] Parke B said:

“It is clear that each sum which the plaintiff, the surety, paid, was paid in ease of the principal and ought to have been paid in the first instance by him, and that the plaintiff had a right of action against him the instant he paid it for so much money paid to his use.  However convenient it might be to limit the number of actions in respect of one suretyship, there is no rule of law which requires the surety to pay the whole debt before he can call for reimbursement.”

In McColl’s Wholesale Pty Ltd v State Bank of New South Wales, Powell J recognised that a part payment would entitle the guarantor to an indemnity to that extent, although upon the liquidation of the principal debtor, the rule against double proof would preclude a proof by the guarantor for that amount.  He said:

“Prima facie, the surety’s right to an indemnity is converted into a right to prove in the winding up.  However, because of the rule against double proof in the winding up of insolvent companies (see Oriental Commercial Bank; Ex parte European Bank (1871) LR 7 Ch App 99) the surety cannot prove in the winding up in respect of any amount which he has paid pursuant to his guarantee unless the creditor’s debt has been paid in full, or, in the case of a guarantee of part of the debt – as opposed to a limited guarantee (see Re Sass; Ex parte National Provincial Bank of England Ltd [1896] 2 QB 12) – the surety has paid to the creditor the full amount for which he is liable: Re Sass; Ex parte National Provincial Bank of England Ltd.”^[78]

That passage illustrates the point already discussed, which is that the cases concerned with the rule against double proof are not authority for the proposition for which Fortress and the administrators contend.

90. The argument for Fortress and administrators seems to be that the right to subrogation could not be enjoyed by the guarantor if the consequence of its payment to the creditor was to make the principal no longer a debtor. That misunderstands the basis for the equitable right of subrogation. Because the purpose of subrogation is not to effect an assignment of the debt from the creditor to the guarantor, but to enable the guarantor to enforce his right to indemnity by resort to the securities formerly held by the creditor, it is not the case that the right to subrogation would be lost if the guarantor’s payment discharged the debt which had been owed by the principal. Rather, it is the benefit thereby derived by the debtor from the guarantor’s payment which entitles the guarantor to be indemnified by the debtor in the amount of any payment and to be subrogated to the creditor’s securities if the secured debt is paid in full. Similarly, the argument misunderstands the statutory right of subrogation contained in provisions such as s 4 of the Mercantile Act 1867 (Qld), by which the guarantor is entitled to all securities held by the creditor

“whether such judgment specialty or other security shall or shall not be deemed at law to have been satisfied by the payment of the debt…”. 

91. The submission that a guarantor’s payments do not reduce the principal debt would have a practical consequence which, of itself, should make it more difficult to accept. The consequence would be for the accrual of interest, especially in the not infrequent case such as this, where default rates of interest apply. Fortress has already been paid by OL already the amount of the OA trust monies, representing what was then about one-third of the outstanding principal and interest. If that part payment did not affect the state of the account between YVE and Fortress, interest (and at the default rate) would be compounding on the entire $60 million or so, including on that amount of the OA trust monies of nearly $20 million. The same would apply to the proposed payment of $25 million under cl 4.1(b)(ii) of the DOCA.  The notion that a creditor could receive payments from a guarantor amounting to most of the outstanding principal and interest, but yet enjoy the accrual of interest as if those payments had not been made, strongly indicates that the argument is incorrect.  Moreover, it would follow that a guarantor’s right to the subrogation would be prejudiced by the compounding of interest, without regard to the guarantor’s part payments, increasing the amount which would have to be paid to fully discharge the secured debt.  A guarantor’s liability is to pay to the creditor what the debtor should have paid.  The amount for which a guarantor could be liable should correspond to the liability of the debtor.  That includes the debtor’s liability for interest.  To say that there is an account between the creditor and the guarantor which is distinct from that between the creditor and the principal debtor, with interest accruing on different amounts and at different rates, is inconsistent with the nature of a guarantee.

Conclusions on the interpretation of the DOCA

92. I return then to the DOCA, and to cl 4.2(b). In my conclusion, the argument that cl 4.2(b) simply reflects what would otherwise be the result of a guarantor’s part payment should be rejected.  Part payments by OL as YVE’s guarantor would reduce YVE’s indebtedness to Fortress.  It would be open to YVE to agree otherwise.  But YVE is not a party to the DOCA.  Absent the concurrence of YVE, the application of monies under cl 4.1 could have the intended consequence of not affecting the amount of the principal debt only if that did not constitute a payment by OL in partial discharge of its guarantee. 

93. In relation to the $25 million under cl 4.1(b)(ii), the DOCA expressly provides that this will constitute a payment by OL under the guarantee. In that instance, I would accept that the application of the OA Receivable would constitute a part payment by OL under it guarantee. It follows that the $25 million would be deducted from the debt owed by YVE to Fortress. The same would apply to the payments under cl 4.1(b)(i), which are payments required to be paid by YVE, and, failing that, by OL under its guarantee.  However, the same cannot be said about the application of monies in paragraphs (iii), (iv) and (v).  To give effect to the intention expressed in cl 4.2(b), it is necessary to treat them as not involving money which has been paid under the guarantee.  In the case of funds within paragraphs (iii) and (v), that is hardly surprising because the funds are to be paid to OL.  Similarly, in the case of the application of funds under (iv), the evident intent is that this should not constitute a part payment by OL under its guarantee because, as the DOCA provides in cl 4.3, the funds are to be paid for the benefit of OL (through Castle).

94. If the funds used under cl 4.1(b)(iv) do not affect the debt owed by OL (either upon receipt by Fortress or payment to Castle under paragraph (iv)), the Public Trustee is correct in submitting that the DOCA enables Fortress to discharge its obligations under the Funded Participation Agreement by using the funds of OL rather than its own money. The operation of the DOCA in that way was not explained to creditors.  The s 439A report did not refer to the use of any part of the OA Receivable for Castle.  At the creditors’ meeting the payment to Castle was discussed but not with the benefit of a draft of the DOCA.

95. There is a further reason for not giving to the words in cl 4.1(a) the effect suggested by the administrators.  Because the amount of the payment in cl 4.1(b)(iii) (the so-called Company PA Amount) is defined as the Fortress debt less (effectively) the amounts in paragraphs (i), (ii) and (iv), it follows that funds to be paid by Fortress under cl 4.1(b)(v) could not be a payment in discharge of the Fortress debt.  By the time cl 4.1(b)(v) was engaged, the Fortress debt would have been paid in full.  It is nonsensical to say that Fortress’ receipt of such funds as would be applied under paragraph (v) would be “in payment to Fortress of the Fortress Debt” according to cl 4.1(a).  This is another indication that, read as a whole, the DOCA does not result in a reduction of the debt secured by the Fortress charge whenever any funds are paid according to cl 4.1(a).

96. In my conclusion, upon the proper interpretation of the deed, only that part of the OA Receivable which is the subject of paragraphs (i) and (ii) is to be credited against the debt secured by the Fortress charge. The effect of the DOCA upon the balance of the OA Receivable is to release that money from the charge, whilst leaving unaffected the amount of the debt which is said to be secured by it. 

97. This is consistent with the explanation of the DOCA proposed by Fortress which was contained in the s 439A report,^[79] as follows:

“If Fortress’ security is determined to rank ahead of the ATO’s claim, then the following arrangements shall apply:

• When funds are available, Fortress will receive a net payment of $25,000,000 plus unpaid costs for the resolution of priorities with the ATO and accrued interest on those amounts.  For all amounts recovered by Fortress from the Company’s assets, Fortress will grant to the Company a corresponding sub-participation in the YVE Facility.
• The balance of the OA Receivable after payment to Fortress will be released from Fortress’ Charge and an amount equal to the full amount of the Fortress Debt less the amount payable to Fortress pursuant to the above paragraph (estimated in Annexure A at $49.2MM) will be available for equal distribution to the Company’s Unsecured Creditors (including the ATO).

…

• All realisations from assets of the Company not subject to the Notice (i.e. all assets other than the OA Receivable) will be distributed first to Fortress, and then equally amongst the Unsecured Creditors (including the ATO).”

In a footnote to that first dot point, this was said:

“This will improve the Company’s rights against YVE from being only an unsecured creditor of YVE to being able to enjoy the benefits of Fortress’ security for the YVE Facility, which would not otherwise be available to the Company.  The Company will receive distributions from realisation of the YVE Security after the unpaid balance of Fortress’ participation in the YVE Facility are [sic] repaid.” [emphasis added]

So according to that explanation, the DOCA would free up $49.2 million of expected OA Receivable of $74.3 million^[80] which would be at least the amount for the Fortress Debt as estimated in that annexure.^[81]   It was explained that although the OA Receivable would be as much as the Fortress debt, most of that debt would be unpaid by the application of the OA Receivable so that Fortress could have recourse as chargee to the remaining assets.

98. The operation of the DOCA in that way, could have been attractive to creditors. The apparent result would be that funds which would have been taken by Fortress under its charge would be freed up for the benefit of unsecured creditors, leaving Fortress to recover its debt from other sources, and in particular from the YVE securities. However, one complication, which was not explained to creditors, was the ATO’s notice.

99. As discussed above,^[82] the s 260-5 notice is effective to the extent that monies to be paid by OA would not have to be paid to Fortress in payment or part payment of the debt secured by its charge.  Fortress has agreed that only the amounts within paragraphs (i) and (ii) will be applied in payment of the secured debt and that the balance of the OA Receivable will be freed from the charge. 

100. According to cl 4.4 of the DOCA, there will be a deemed release on and from the respective times of the payments by Fortress in accordance with cl 4.1. It is submitted for Fortress and the administrators that the entirety of the OA Receivable will be subject to the charge at the time that any of it is paid to the receivers, so that the funds will then be outside the reach of the s 260-5 notice.  However, once Fortress is paid the amounts within paragraphs (i) and (ii), what it is to receive under cl 4.1 would be subject to express trusts according to cl 4.1(b).  Fortress has agreed that it will not be beneficially entitled to those funds, but that it shall hold them subject to an obligation to pay them in the particular ways prescribed by paragraphs (iii), (iv) and (v).^[83]  There is no condition which must be fulfilled after its receipt of those funds before it will be so obliged.  Nor does the DOCA qualify Fortress’ obligations under those paragraphs by, for example, permitting Fortress to retain all or some of the funds for its costs or something else to which it is otherwise entitled under its charge.  Instead it would have no choice but to immediately apply the funds according to those paragraphs.  The question then is whether OA would be entitled to pay such funds to the receivers or Fortress rather than to pay them according to the s 260-5 notice. 

101. Those circumstances make the present case distinguishable from those discussed above, where a fixed charge was said to prevail against the Commissioner on one or both of the bases described by Burt CJ in Lai Corporation.  It is argued that the whole of OL’s property, including the OA Receivable, is subject to the Fortress fixed charge.  Fortress’ entitlement to the property, according to its charge, is to apply any property of OL to effect the repayment of its debt or any other sum secured by the charge.  That right is now qualified by the DOCA.  The monies, upon receipt, would not be monies to which Fortress is beneficially entitled.  And prior to their receipt, the asset constituted by the debt owed by OA to OL (once the amounts in (i) and (ii) are discharged) would not be property to which Fortress is beneficially entitled.  For example, it would not be open to Fortress to assign or otherwise deal with the OA Receivable once the amounts in paragraphs (i) and (ii) have been paid.  This is because Fortress has agreed that any right which it has to collect the debt owing to OL is a right which is to be exercised for the benefit of OL.  The notion underlying the arguments for Fortress and the administrators, and the DOCA itself, is that money which at law is owing to the taxpayer (OL), and to which the taxpayer is also beneficially entitled (by the DOCA), can be said to be money which is not owed to the taxpayer for the purposes of s 260-C.  That is supported by neither authority nor the words of the statute.

102. In this respect there might be thought to be a distinction between the payments to be made under paragraphs (iii) and (v) and that under (iv). In relation to the use of the funds to pay the Octaviar Castle Amount, it might be thought that the funds would remain in the beneficial ownership of Fortress until their payment under paragraph (iv) because they would be used to discharge a pre-existing obligation of Fortress. However, no payment can or must be made under paragraph (iv) until there has been the payment required by paragraph (iii). Whilst funds for a payment under (iii) are to be intercepted by the ATO’s notice, paragraph (iv) could not be engaged. But further, the funds which would have to be paid to Castle under (iv) would not reduce the secured debt, and so in their case also, the funds are not the property of Fortress according to its rights as chargee. Rather, Fortress must apply them under the DOCA for the expressed purpose of benefiting OL. That cannot preclude the operation of s 260-C. 

103. In my conclusion the payments by OA, once paragraphs (i) and (ii) have been satisfied, would have to be paid to the Commissioner. Were the administrators or the liquidators of OA to pay any of the OA Receivable to the Commissioner the money would have to be passed on to the receivers or Fortress only to the extent that the money would be applied under paragraphs (i) and (ii). And except to that extent, OA would be obliged to pay the OA Receivable to the Commissioner.

104. Of course cl 4.1 applies to funds once they have been paid to the receivers.  The TAA does not specify what the proprietary rights or remedies of the Commissioner are, if any, in relation to funds which should have been paid under a s 260-5 notice but which have been  wrongly paid to the taxpayer.  Notwithstanding the existence of what has been described as a statutory charge over the debt due to the taxpayer, it is not yet established that such a charge would extend to funds received by the taxpayer in discharge of the debt.  Accordingly, if and when money is received under cl 4.1(a) of this DOCA, there might be no impediment from the TAA to its disposition according to cl 4.1(b).  If so, it could be said that the DOCA for OL does not require anything to be done in contravention of the TAA.  And as the administrators point out, the DOCA for OA does not require any of the OA Receivable to be paid to the receivers (although its cl 15 has no purpose if that is not to occur). 

105. However, the DOCA for OL is premised upon the whole of the OA Receivable being paid to the receivers.  Once the amounts the subject of (i) and (ii) have been paid, further payments cannot occur until the ATO debt has been paid.  The ATO debt is about $58 million.  Therefore nothing can be distributed under cl 4.1(b)(iii) until OA has paid about $83.5 million.^[84]  The best estimate of the administrators is that the OA Receivable will amount to about $72 million under the DOCA for OA.  Under a liquidation of OA, the amount should be more but it may or may not be as much as $83.5 million.  If the maximum potential amount for preferences were recovered in a liquidation of OA, the administrators have said that the OA Receivable would amount to $100.82 million.^[85]  Therefore the possibilities range from nothing being available for distribution under cl 4.1(b)(iii) to about $17 million being available.  On the most optimistic view, there would be little or nothing remaining for a payment to Castle.

106. From an affidavit sworn by one of the administrators, Mr Harwood, on 26 February 2009, it appears that there was a perceived advantage for creditors from this DOCA in what was thought to be its impact upon the s 260-5 notice.  That affidavit was read in the March hearing of the question of the validity of the Fortress charge.  Apparently in order to provide a discretionary reason for not deciding that point then, the administrators tendered this affidavit which sought to explain how the unsecured creditors would be better off if the charge were valid, because of the way in which the charge was used in the DOCA to steer the OA Receivable around the ATO’s notice.  Mr Harwood there said:

“As and when the OA Receivable is received from OA by [OL] it is paid first to Fortress.  Upon payment to Fortress, the OA Receivable is no longer an asset of [OL].  Accordingly, from that time, no asset is caught by the section 260-5 notice.”

He went on to say that the fund for distribution to unsecured creditors of OL would not be caught by the notice, but were the DOCA to be terminated, the notice was “likely to have priority in respect of the payment of the dividend from OA to [OL]”.  Consistently with this affidavit, counsel for the administrators in the present hearing submitted that the entirety of the OA Receivable could be paid to the receivers, even to the extent that it exceeded the Fortress debt, because the OA Receivable constituted a chose in action which was the property the subject of the fixed charge.  All of this gives the impression that it was thought that the DOCA was advantageous because through the co-operation of Fortress, monies otherwise subject to the notice could be passed through the receivers for the benefit of unsecured creditors.  I have concluded that this is incorrect.

107. It does not matter that the Commissioner abstained from voting at each of the meetings of creditors. That does not permit payment to be made to the receivers if that is precluded by the TAA. 

108. The OA trust monies have been paid already, and were paid prior to the execution of the DOCAs. The Commissioner consented to that payment. However, if the Fortress charge is not void, Fortress was beneficially entitled to those monies because they were received in part payment of the debt secured by its charge. Because they were paid prior to the execution of the DOCA, they appear not to be monies within cl 4.1 of the DOCA, which is in prospective terms.  It governs the disposition of the OA Receivable “as and when the OA Receivable is received”.  The OA Receivable is defined to mean all monies from time to time payable by OA to OL and held by OA on trust or otherwise on behalf of OL.  Money already paid by the date of the DOCA would not be within the OA Receivable and would not be subject to the DOCA.  That matter does not seem to have been considered by the administrators when they paid the OA trust monies. 

109. Fortress says that the DOCA should be understood as effectively including the OA trust monies within the definition of OA Receivable, even though they were paid prior to the DOCA.  Fortress would agree to treat the OA trust monies as part of the monies the subject of paragraphs (i) and (ii) of cl 4.1(b).  If the DOCA for OL is not to be terminated, this irregularity in the timing of the payment of the OA trust monies could be overcome by some instrument in which Fortress made appropriate acknowledgements and agreements to give effect to what it says was the intent.  Alternatively, the DOCA could be ordered to be amended under s 447A.  But in any case, the payment of the OA trust monies did not involve a contravention of the TAA because those monies went in part payment of the secured debt. 

110. The creditors were misinformed as to the effect of the ATO’s notice. A draft deed had not been provided to them. But they were told that an amount equal to the Fortress debt less, in effect, the $25.5 million was to be available for unsecured creditors “including the ATO”.^[86]  They were told the distributions from the OA Receivable “thereafter” (i.e. after distribution of amounts equalling the amount of the Fortress debt) would be paid “according to the priorities to be determined between the ATO and Unsecured Creditors”.  The administrators adverted to the possibility that the ATO might rank ahead of both Fortress and unsecured creditors,^[87] in which event it would be paid first and Fortress would receive the balance of the OA Receivable until it was paid in full.  But what was not explained was the question of the ATO’s entitlement to be paid effectively the sum which, according to the DOCA, would go to unsecured creditors if the Fortress charge ranked ahead of the ATO’s claim.  Nor was this explained in the creditors’ meeting.  Instead the creditors were told that the benefit of the DOCA would be effectively what became the Company PA Amount, the payment to be made under cl 4.1(b)(iii).

111. For the administrators it was submitted that there was another basis for saying that the right of subrogation would not be enjoyed, which is that even after repayment of the principal debt and outstanding interest, the charge would secure “the continuing nature of the obligations” under the YVE facility agreement and OL’s guarantee. The argument said that an example would be “ongoing costs incurred by Fortress, such as the costs of any attempts to realise securities given by YVE, legal costs incurred by Fortress, etc”. Accepting that the charge would secure all monies owing under the YVE facility agreement, nevertheless it cannot be thought that the life of the charge was infinite.  I do not accept the assertion within the written submissions for the administrators that “it might take a considerable period of time until these matters were finalised, such that a right of subrogation could arise”, particularly when it is unsupported by evidence from the administrators themselves that “these matters” would have that result.

112. It follows that the DOCA for OL should be terminated, at least because it cannot provide the benefit to unsecured creditors of OL which was intended according to the terms of the DOCA and according to what creditors were told by the administrators and Fortress. It will not provide the funds necessary for a payment under cl 4.1(b)(iv).  It may not provide the funds necessary for a payment under cl 4.1(b)(iii).  And if it did so, that could only be after the recovery of funds from preference actions in the winding up of OA, which does not provide the speed and certainty of payment by which the Fortress proposal was promoted to creditors.  The fact that a majority of creditors voted for the DOCA, and on the evidence here still support it, is of little significance if it would be unlawful for OA to pay the funds which would be required to provide the intended benefits of the DOCA.  The information given to creditors as to those benefits was thereby misleading and omitted information about the company’s financial circumstances which can reasonably be expected to have been material to creditors.  Grounds for termination of the DOCA under s 445D(1)(b) and (c) or, alternatively, s 445D(1)(g), are established.

113. If OL is wound up, and if the Fortress charge is not void against or voidable by a liquidator, about $62 million of the OA Receivable (i.e. about a further $42 million) would go to Fortress in full discharge of its debt and the balance would go to the ATO.  OL’s creditors would then have $19.5 million through Castle^[88] (more than the maximum $17 million through the OL DOCA) and the YVE securities.  If the charge is void or voidable, the creditors would have the OA Receivable, less the ATO debt, which Mr Harwood estimated would provide about $43 million to creditors.^[89]  Accordingly, the DOCA is contrary to the interests of creditors as a whole:  s 445D(1)(f)(ii).

114. At this point I should say something of what creditors were told about the prospects of paying out Fortress from the OA Receivable.  In the report to creditors, they were told in a footnote which I have set out above at [97] that the YVE securities would not be available to OL other than through the proposed Company PA Amount.  They were also told that it was “possible that under a subrogation right involving the Fortress facility, Octaviar Castle could receive additional funds”, a reference to the Funded Participation Agreement.  That this was “possible” indicated that at least $38.5 million of the principal might be recovered by Fortress, because at that point the remaining principal would be recovered by Fortress for the benefit of Castle.  But again it indicated that it was unlikely that the entire debt would be repaid.  However, in that part of the report which described the DOCA proposed by Fortress^[90] there was included a “Summary of Anticipated Initial Return to Major Creditors of the Company”, which was apparently prepared by Fortress and its receivers.^[91]  Within that summary was a comparison of a number of scenarios involving the proposed DOCA or a liquidation.  A note to that comparison was as follows:

“3.All scenarios are based on the assumption that payments are not made until Dec-10, whereby the Fortress Debt increased to $74.2m including applicable default interest rates.”

The scenarios also assumed that the OA Receivable would be $74.3m (including $19.7m as the OA trust monies).  According to this analysis, the Fortress debt could be repaid in full from the OA Receivable.  And that was upon the premise that no payment was made until December 2010.  That estimate of $74.2 million appears to be consistent with the evidence of Mr Kwei for Fortress that the debt at the end of April last was about $62.5 million, an estimate which cannot have allowed for the repayment by the OA trust monies.

115. Mr Kwei explained the difference between the proof of debt lodged by Fortress last September for $38.2 million and the amended proof lodged on 15 December 2008 for about $59.5 million as being mostly attributable (as to $21.5 million) to effectively Castle’s interest.  Mr Kwei said that he prepared the first proof by including only “the amount representing the Fortress exposure under the Funded Participation Agreement”.  Accordingly the debt was about $59.5 million last December, and could not have risen to $62.4 million by April this year if credit had been given for the $19.7 million paid in January.  The failure to credit that amount is apparently explained by an approach, consistent with the Fortress argument discussed above, that a part payment by OL would not affect the state of the account between Fortress and YVE. 

116. As already noted,^[92] Mr Harwood’s best estimate of the OA Receivable (including the OA trust monies) was of the order of $72 million.  That is upon the basis of the DOCA for OA not being terminated.  In the circumstances, it is difficult to see how Fortress could not be paid in full from the OA Receivable.  Mr Harwood’s estimate does not include funds which might be recovered by a liquidator of OA, but considering that OA’s funds are mostly held already in cash, there appears to be no prospect of a significant delay in payment of the balance of the OA Receivable.  Further interest would accrue on the Fortress debt only on a balance which allowed for part payments.  In addition, the Funded Participation Agreement would effectively accelerate the repayment of the Fortress debt, because once $38.5 million of the principal has been repaid, the balance would be passed on to Castle and back to OL so that it could be used to make a further payment.  And nearly 30 per cent of the further interest would be passed on to Castle.

117. At the meeting of creditors, there were comments made by representatives of Fortress and the receivers to the effect that interest would continue to accrue on the Fortress debt at such a rate that OL could not hope to pay out the Fortress debt in full. Perhaps those comments were made upon the premise that the calculation of interest would not take account of part payments. Be that as it may, such comments would seem to have been quite wrong, and indeed were inconsistent with what had been written by Fortress and the receivers for inclusion in the report to creditors.

118. If I am wrong in concluding that the s 260-5 notice would apply to the OA Receivable once $25.5 million had been paid, the position would be as follows.  The unsecured creditors would have the benefit of the so-called Company PA Amount.  But because that would not result in a part payment of the YVE debt, they would be no further advanced towards the point when they would be subrogated to the YVE securities.  As matters presently appear, the Company PA Amount would be unlikely to be much more than $17 million.  The Octaviar Castle amount is likely to be between $19 million and $20 million.  Subtracting that amount, together with $25.5 million, from the estimated debt of $62 million would leave about $17 million.  Next Fortress would have to apply the OA Receivable to the Octaviar Castle Amount.  That payment ought to lead to funds coming back to OL, but in that respect, no differently than would occur absent the DOCA.  But the amount of Fortess debt would be unchanged by that payment, and (so again) the creditors of OL would be no closer to having the benefit of the YVE securities.  By the time of payment of the Octaviar Castle Amount under cl 4.1(b)(iv), enough would have been received from OA to have paid the entire debt to Fortress.  Because of the DOCA however, OL would be at least $40 million^[93] short of that mark.  Of course creditors would have the benefit of the Company PA Amount, which is said to represent some participation in the YVE securities.  But this would be effectively in lieu of the YVE securities.  If the YVE securities were worth very little, or much less than the Company PA Amount, the creditors of OL could be considered better off with the receipt of the Company PA Amount.  The difficulty here is that little is known of the value of the YVE securities.  The Participation Agreement suggests that they have some real as distinct from negligible value.  But creditors were told very little about the value of the YVE securities, and curiously Fortress and the administrators provided no evidence of it.

119. On page 42 of the s 439A report, the administrators identified what they said was the “key benefit [of] the Fortress DOCA” which they valued at $15 million. This was a reference to the Company PA Amount. The administrators there wrote:

“We consider the key benefit to the Fortress DOCA to be the $15m that they will not seek to recover from [OL] under the DOCA.  Otherwise the DOCA does not appear to offer any significant benefits above the likely return that would be available in a liquidation.  Fortress has advised that if a liquidation eventuates they would be demanding repayment of their full debt, currently estimated at $38.5m.  Therefore you need to consider the likelihood of achieving a return of $15m plus from voidable transactions that would not be available in a DOCA.  In our estimate for possible preference claim recoveries are two large payments totalling $26m that occurred in March 2008.  The actual date of insolvency is subjective and could be subject to the determination of the Court if the claim were disputed.  As highlighted in this report our estimate for the date of insolvency is between 4 February 2008 and 4 June 2008.  Consequently the risk exists that pursuing the 2 preference claims referred to above, may not succeed.  If that scenario were to eventuate, creditors would have been better off under the DOCA.”

120. On page 38 of their report, the administrators wrote that the liquidation of OL would yield for unsecured creditors 10 cents in the dollar on “the high outcome scenario” and four cents in the dollar on the “low outcome scenario”.  On page 39 of the report, within two tables on that page, they represented that the range would be from seven cents to zero.  By an addendum to their report dated 15 December 2008, the administrators sought to correct those figures.  They there wrote that the high outcome scenario would produce a return of seven cents, not 10 cents in the dollar.  They also told creditors that the low outcome scenario would result not in four cents in the dollar, but in 0.4 of a cent in the dollar.  The calculation of that estimate can be understood from the statement of OL’s position set out on page 34 of the report.  From that it appears that the amounts to be received via Castle were not included.  Nor was anything included for the YVE securities.  Those omissions can reasonably be expected to have been material to creditors.^[94] 

121. In an annexure to the report the amount to be made available to creditors by the DOCA was represented as $49.2 million.  This included the amount to be received back through Castle.  But this did not explain the fact that the Castle amount would come back to creditors also under a liquidation.

122. But at the end of that document of 15 December 2008 appeared this:

“[This] is provided as additional commentary that may further assist creditors with their considerations. 

Based on current information it is unlikely that [OL] and ultimately the unsecured creditors would receive a significant recovery from YVE under the Fortress subrogation rights.  This formed a part of our assessment of the Fortress DOCA and contributed to our recommendation of that DOCA proposal.”

The “current information” was not identified or described.  Nor, as I have said, was it the subject of evidence.  This was a remarkable omission on the part of the administrators.  Suppose the YVE assets are worth $40 million.  The effect of the DOCA would then be disadvantageous for creditors, even if they would have the benefit of the Company PA Amount (say $17 million) because they would not have the right to recover $40 million from the YVE assets as they would under a liquidation.  Just what the administrators meant by “significant” does not appear.  The statement was uninformative and is likely to have been misleading.  This is strongly indicated by what appeared within Appendix G to the s 439A report, which described the Fortress DOCA approval (and which was apparently written by Fortress), where there was a section under the heading “Assets Available” which included this:

“15.4.2The proposed sub-participation agreement is intended to permit:

a)Fortress to realize to the fullest extent possible all of recoveries from the Mortgage Securities (last independently valued by CBRE at $48.5m in December 2006).

b)pass through the excess recoveries from realizations of Mortgage Securities to the Company’s unsecured creditors.

c)To the extent that Fortress has recourse to deed fund assets to repay the Fortress Debt, unsecured creditors of the Company will receive a corresponding interest in recoveries from the Mortgage Securities.”

The reference to “Mortgage Securities” was to the YVE securities.  Whilst a value as at December 2008 for these securities was not ventured, it was thought appropriate to tell creditors there that the assets had been worth $48.5 million two years earlier and to represent that they were worth at least sufficient to enable Fortress to “pass through…excess recoveries from realizations” from those securities.  On the same page this was written:

“15.4.3It is believed that this approach to recoveries is in the best interests of the Company’s unsecured creditors.  Those recoveries made under the Mortgage Securities would not otherwise be possible if Fortress instead took recourse to the guarantee and Charge provided to it by the Company as security for the Fortress Debt.  This is because the principles of equitable subrogation will not operate in the Company’s favour until all of the Fortress Debt has been repaid by the Company.”

Again, this represented that the YVE securities had a substantial value, making it difficult to understand or to accept the correctness of the reference in the addendum to the unlikelihood of a “significant” recovery from YVE.

123. So quite apart from what creditors were told and what they should have been told about the consequences of the ATO’s notice for the efficacy of the DOCA, the creditors were given an incomplete and misleading picture. The unusual and beneficial operation of Castle’s agreement was not explained. And perhaps more importantly still, the creditors were not given a proper explanation of the likelihood, if not certainty, of the entire Fortress debt being paid from the OA Receivable in the event of a liquidation, together with a comparison of the DOCA with a liquidation which brought into account the recourse which OL would have to the YVE assets. On what was represented in Appendix G of the administrators’ report, those assets had a substantial value. It was not said, for example, that their value had fallen so far from $48.5 million two years earlier that they would not be worth more than the proposed Company PA Amount. It was not explained to the creditors that the practical effect of the DOCA would be to put subrogation beyond the reach of OL in exchange for what, on the face of Appendix G, was likely to be the much lower return of the Company PA Amount. Instead the comparison which was put to the creditors was between the receipt of the Company PA Amount and the forgoing of the prospects of recovering possible preferences totalling $26 million. That comparison was misleading and can reasonably be expected to have been material to creditors.

124. Lastly, let it be assumed that the distribution of the Octaviar Castle amount under cl 4.1(b)(iv) would reduce the indebtedness of OL, but that the distribution of the Company PA Amount would not do so, as Fortress argued.  On that premise and on the further premise that, contrary to my conclusion, the Company PA Amount could be paid notwithstanding the ATO notice, in one respect there would be an advantage for creditors from the DOCA because the Company PA Amount would represent an earlier collection of funds than by recourse to the YVE securities.  But how much earlier would that be?  The creditors were not informed of the identity and value of the YVE assets.  And again the subrogation of OL to the YVE securities would be delayed under the DOCA and the likely, if not certain, subrogation under a liquidation was not revealed.  Nor were the YVE assets brought into account in the comparison of a liquidation with the proposed DOCA.

125. For these reasons at least, assuming that the Fortress charge is not void, the DOCA for OL should be terminated. The Public Trustee presented a broader case for termination, based on the prospect of a liquidator avoiding transactions and recovering preferences. On each of the arguments, I was not asked to find that a liquidator would succeed, but rather that there was a serious case to be investigated. Those considerations are not essential to my conclusion to terminate the DOCA. Nevertheless those arguments should be considered. They strengthen the case for termination of the DOCA. 

126. Before going to those arguments, it is necessary to say something about the submission for Fortress that if its charge is void as against the deed administrators and is not to be restored by an extension of time, nevertheless the DOCA should stand. It is said that the creditors were informed of the challenge to the validity of the charge and they were entitled to make a commercial judgment to accept the compromise offered by Fortress as to the benefit of the OA Receivable. The first difficulty with that submission is that the terms of the DOCA are expressly premised upon the existence of a charge which, according to my judgment, is void against the deed’s administrators. It is necessary to refer only to clauses 4.1 and 4.2. The agreement within the DOCA is to permit Fortress and the receivers appointed by it to deal with the OA Receivable upon the premise that Fortress has a valid charge. The deed’s administrators have so agreed; yet by s 263 the charge is void as against them. Further, the creditors were told in the s 439A report^[95] that the administrators had concluded that there was no variation of the terms of the charge so that no notification should have been made to ASIC.  That was misleading if my conclusion about that matter was correct.  Beyond those matters, of course, what I have said for the termination of the DOCA upon the basis that the charge is not void under s 266(3) would still apply if it is void.

Possible recoveries by a liquidator

Avoiding the Fortress charge

127. The Public Trustee argues that there are good prospects that a liquidator would avoid the Fortress charge on the basis that it was an insolvent transaction: s 588FE(2).  The Public Trustee led detailed evidence to the effect that the company was probably insolvent by that date.  It is pointed out that the Octaviar entities signed the relevant letter from Fortress on 24 January 2008 so that it would be the relevant date for assessing OL’s solvency. 

128. The Public Trustee led evidence from Professor Gray, a Professor of Finance at the University of Queensland.  He has written several reports on the subject of the group’s solvency, the most recent of which is dated 3 April 2009.  His approach was to begin with the group’s cash balance on the relevant date and then to “track” all cash inflows and outflows on a monthly basis through until the end of the calendar year 2011, which was the maturity date for the payment of the listed note holders represented by the Public Trustee.  In his most recent report he assessed the solvency of the group as a whole, rather than company by company.  This is consistent with the group’s own internal accounts and forecasts, and in particular its so-called cash flow waterfall statements.  It is also consistent with the administrators’ approach to the question of insolvency within their s 439A reports.

129. In his most recent report, Professor Gray assessed the group’s solvency or otherwise as at four different times: 1 May, 4 February and 22 January 2008 and prior to 22 January 2008.  Most relevant is his opinion as to the position at 22 January 2008.  The solvency of the group depended upon the value of its 65 per cent interest in the Stella Group which was then proposed to be sold.  It was sold under a contract made on 4 February 2008.  At least once that contract had been made, the position, in Professor Gray’s view, was that it was very difficult for the group to obtain any form of further capital from debt or equity markets.  That was in the context of a need for cash in the order of $43 million to meet its commitments as at December 2011.  Looking at the group’s position as at 22 January 2008, he said that the one respect in which the expected need for cash might have differed was according to what might have been obtained for the Stella Group.  He noted that on 20 January 2008, Octaviar had received an offer for the purchase of the 65 per cent interest in “Stella”, which it accepted by the contract of sale of 4 February.  He noted also that the minutes of a board meeting of the directors of OL of 22 January 2008 recorded that this offer, if accepted, could provide a completed sale prior to 29 February 2008 when the Fortress debt was then due to be repaid.  In Professor Gray’s view, this made it very likely that the offer would be accepted, so that the position as at that date was effectively the same as it was on and from the signing of the contract for the sale on 4 February.  He observed that there was very limited time for alternative purchasers to conduct the due diligence which might have resulted in a sale within the same period but at a higher price.  At this time, although Fortress had persuaded OL to give a charge to support its guarantee of the YVE facility, Fortress had not agreed to an extension of the date for repayment of the Castle facility.  Accordingly, Professor Gray concluded that on 22 January 2008, the value of the Stella interest was the price for which it was sold a fortnight later and that there was no material difference between the position of the group on that date and its position after the making of the Stella contract.  Once the Stella asset was valued according to that sale price, it was unlikely that the group could have raised the necessary capital to meet its commitments as at the end of 2011, and it was thereby insolvent.

130. As already discussed, in their s 439A reports, the administrators said that the group may have been insolvent as from the date of the Stella contract. Professor Gray’s evidence provides a logical basis for concluding that the position was no different as at 22 or 24 January 2008.

131. It is submitted for the Public Trustee that Professor Gray’s evidence was not challenged or contradicted. I accept that it was uncontradicted, but the evidence was certainly challenged. For example, it was suggested that the group might have borrowed against the remaining 35 per cent of Stella as security, although it would appear that at least on one view, the group was prohibited from using the interest in Stella to secure debts other than debts of Stella itself. 

132. It was also suggested that Professor Gray’s reasoning was flawed because he had not considered the possibility of the group reaching a compromise with its larger creditors. For much of 2008, the group endeavoured to reach some accommodation with its large creditors and it formulated proposals in that respect which I discussed in a previous judgment.^[96]  Against that, the Public Trustee argued that solvency is to be determined on the footing that debts are payable on their contractual dates, absent a binding agreement to vary those dates or an estoppel against the creditor.  The Public Trustee refers to what was said by Palmer J in Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation:

“…it is proper to have regard to the commercial reality that, in normal circumstances, creditors will not always insist on payment strictly in accordance with their terms of trade but that does not result in the company thereby having a cash or credit resource which can be taken into account in determining solvency.”^[97]

That was applied by Chesterman J in Emanuel Management Pty Ltd & Ors v Foster’s Brewing Group Ltd.^[98]But the point here goes further than the fact that creditors will not always insist upon payment according to their contracts.  It is said that there was a possibility of an agreed compromise, and whilst that possibility existed, the group could not have been insolvent.

133. A company’s solvency at a date which has passed is not to be assessed simply by its then assets and liabilities but also according to what has been described in several cases, as Palmer J did in the above passage, as commercial reality.  Accordingly, consideration can also be given to the availability of funds from borrowings which would be secured against the assets of third parties, or even unsecured borrowings.^[99]  In effect it is submitted here that the commercial reality was that there was a prospect of a compromise which would have the result that the debts as compromised could be paid as and when they fell due.  On the Public Trustee’s argument, the amounts and dates of the payment of a company’s debts should be regarded as fixed.  That cannot be accepted as a principle. 

134. The case that the group was insolvent is not that there were debts already due on 22 January 2008 which could not then be paid.  It is that debts would not be able to be paid when the due date for payment was reached.  That exercise in prediction involves some uncertainty and speculation.  But it is a question to be answered upon the balance of probabilities:  as at 24 January 2008, was it more probable than not that the group was unable to pay its debts as they became due?  The possibility of an alteration to the amount of a debt or to the due date for its payment is relevant to that question.  But a mere theoretical possibility of a compromise of that kind would not preclude a finding of insolvency, for otherwise such a finding, to be based upon an inability to pay debts not yet due, could almost never be made.  On the other hand, the circumstances at the relevant date might be such that to overlook an imminent compromise would be to ignore the “commercial reality” of the company’s position.  I respectfully adopt what was said by Owen J in Bell Group Ltd (In liq) v Westpac Banking Corporation (No. 9):

“Insolvency is to be judged by a proper consideration of the company’s financial position, in its entirety, based on commercial reality.  It is not to be found or inferred simply from evidence of a temporary lack of liquidity.  Nor should it be assessed as if the company had to keep cash reserves sufficient to meet all outstanding indebtedness, however distant the date of payment might be in the fullness of time.  But nor can directors rely on some faint hope that help is at hand and that all will be well.”^[100]

135. The assessment of a company’s solvency must be made by reference to the facts and circumstances which were known or ought to have been known at 24 January 2008. In Lewis v Doran,^[101] Giles JA (with whom Hodgson and McColl JJA agreed) held that the circumstances must be considered without the intrusion of hindsight.  Referring to that judgment, Owen J in Bell Group said:

“[1115]In my opinion, Giles JA’s reference in Lewis v Doran to an assessment made ‘without the intrusion of hindsight’ means that, when determining the company’s ability to pay, it must be done according to the circumstances or state of affairs which were known or ‘knowable’ at the time.  In other words, if an event or fact was either not in existence or was not properly knowable, it is impossible that anyone would have or should have considered it.  That fact, therefore, cannot be relevant to an assessment of a company’s ability to pay.  Giles JA at [95] gives an example (on the inflow side) of ‘a hopelessly insolvent person who wins the lottery’, and at [103] (on the liabilities side) of an ‘unexpected later discovery of a liability’.

[1116]In my view, a court can take into account facts available in hindsight (that is, after the determinative date of solvency) if the facts help determine which version of conflicting accounts as to the state of affairs is the more likely.  The fact that an event actually took place might weigh in favour of the alleged expectation as being a commercial reality.  But that fact alone is not determinative.  It is one only of a host of matters that may intrude into the decision-making process.”^[102]

136. As at 24 January 2008, there was no proposal which had been put to creditors and nor had any proposal been formulated. There was a theoretical possibility of a compromise. If it is legitimate to consider the fact that subsequently, and no earlier than April 2008, such a proposal was formulated and put to creditors and that it was not immediately rejected by them, it would also be necessary to consider that ultimately the proposal came to nothing. On a fuller factual examination, perhaps a different view might be reached. But it is sufficient to say that for the purposes of the present proceedings, if there was nothing more than a theoretical prospect of an agreement by the major creditors to compromise their debts, that does not put paid to a case that OL was then insolvent.

137. The relevant question then is whether the Public Trustee has established that there is at least a serious question to be tried that OL was insolvent on 22 January 2008. Even on the basis of Professor Gray’s evidence alone, there is such a serious case. Beyond that, a discussion of the circumstances of the group as they would appear from the evidence in these proceedings would add nothing of present significance.

138. Later in this judgment, when considering the application by Fortress for an extension of time to give notice of the variation of its charge, I find that Fortress has not proved that it had no reason to suspect that OL was insolvent when the charge was varied. Accordingly, there would be a serious case for avoiding the charge, if it is otherwise valid, on the basis of its being an insolvent transaction: s 588FE(2). 

139. The Public Trustee argues that the charge is likely to be void also under the general law on the basis that OL’s directors lacked the power to charge the assets in favour of Fortress to secure the YVE guarantee, in circumstances where OL was insolvent or at least approaching insolvency and where there was no benefit to OL from the transaction: ANZ Executors & Trustee Company Ltd v Qintex Australia Ltd.^[103]  It is suggested that the directors who caused OL to agree to this variation of the charge acted in breach of their duties as directors, and that Fortress knew it.  It is unnecessary to consider these submissions in the present proceedings, given what I have said about a serious case for avoiding the charge as an insolvent transaction.

140. I have described the matter in that way, a serious case to be tried, because for the most part that is the way in which the Public Trustee realistically argued this part of his case. In some respects the arguments for the Public Trustee seemed to go further, and to seek a finding that in fact the group was then insolvent. However, in the points of claim for the Public Trustee,^[104] it was pleaded that the companies were probably insolvent, so that the charge may be voidable as an insolvent transaction.  It is a case of this nature which the respondents had to meet.  It would be wrong to conclude now, because the respondents have not challenged the evidence about insolvency as fully as would be expected in a hearing to avoid the charge as an insolvent transaction, that the company was insolvent. It is relevant to consider circumstances where there is a serious case for the recovery of assets in a liquidation, because it can be relevant to the interests of creditors as a whole^[105] that the DOCA would deprive creditors of “investigations that may have clarified the viability of such claims, and also … deprived them of the prospect of recovery” as Austin J said in Bovis Lend Lease Pty Ltd v Wily.^[106]

141. There is also evidence which would warrant an investigation by liquidators of the company’s solvency prior to 22 January 2008. In particular there is the case pleaded by Wellington Investment Management Ltd (“WIM”) arising out of what it says was the misappropriation of funds of $130 million in November 2007.^[107]  As discussed, the Castle facility was due for repayment in full on 1 December 2007.  Fortress, Castle and OL agreed to an amendment of the facility on 30 November 2007, providing Castle with an extension until 29 February 2008 for the payment of $150 million but requiring it to pay $100 million on that day.  According to the management accounts for OL for October and November 2007, OL did not have that $100 million.  WIM alleges in its proceedings that as trustee of a managed investment scheme called the Premium Income Fund (“PIF”), it had obtained a facility from the Royal Bank of Scotland.  That facility permitted it to draw down up to $200 million, but only for the purposes of that trust.  At that time WIM was a wholly owned subsidiary of OL.  Potential investors in the PIF had been given a disclosure statement which represented that the fund would not lend money or invest in entities of which OL was the majority shareholder.  Mr Craig White was a director of WIM and was also Deputy CEO of OL.  Mr David Anderson was also a director of Wellington Investment Management and was at the same time Chief Financial Officer for OL.  WIM further alleges that on 28 November 2007, Mr White caused $150 million to be drawn from its facility with the Royal Bank of Scotland and, on 30 November 2007, caused it to transfer $130 million to OA.  It is alleged that OA then paid $103 million to Fortress on the same day.  On those facts, the funds belonged to the PIF and should not have been lent to or invested with OA or any other Octaviar company. 

142. It is further alleged that at the same time, those controlling the PIF purported to purchase units in another fund of which WIM was also the responsible entity. But no money was paid to that other fund, and the suggestion is that this was a guise to conceal the misappropriation of the $130 million paid to OA.  Were that case to be established, the facts would strongly support a conclusion that the group was insolvent by 30 November 2007, because if directors of OL had to resort to a misappropriation of the assets of the PIF, it could be inferred that OL was unable to pay Fortress by any lawful means.  The same applies to the balance of the $130 million, which in those other proceedings, is alleged to have been paid to other creditors of the Octaviar group, including margin lenders and solicitors.  All of this provides a case which a liquidator of OL would wish to investigate, as relevant at least to the question of the solvency of the group at the end of November 2007.  If the relation-back date in the liquidation of OL is to be the date of filing of the winding up application (4 June 2008), it could be beneficial to prove the company was insolvent by 30 November 2007.

Other possible claims about Fortress

143. The Public Trustee argues that liquidators of OL would wish to investigate the interest and charges payable to Fortress in consequence of the variations to the Castle facility agreed on 30 November 2007 and on about 15 February 2008, to assess whether they were extortionate so as to engage s 588FD of the Act. The variation of November 2007 extended the time for repayment of $150 million of the $250 million which was due on 1 December.  In consideration for this extension, OL was required to pay $1.5 million as a so-called “Extension Fee” and extra interest over the three months of the extension totalling $4.5 million.  It is submitted that this was an extortionate amount of interest when added to that already payable and when considered together with the extension fee, in circumstances where the loan was secured by a charge over all of OA’s assets which were more than sufficient to meet its repayment.  I accept that a liquidator would wish to investigate that question, although there is not an obviously strong case. 

144. In the February 2008 transaction, a further $50 million was lent, of which at least $7 million was kept by Fortress as fees for this further advance and variation of the Castle facility.  Again I accept that a liquidator would wish to investigate whether they represented extortionate charges for the purposes of s 588FD.  I would prefer not to express a view as to whether, as the Public Trustee suggested, the $15 million paid to Fortress by Castle constituted an extortionate charge for the purpose of that provision.  That point was not the subject of substantial argument.  However, they would be matters for investigation by a liquidator of Castle, because the loan was to that company.

Premium Income Fund and Wellington Capital Ltd

145. WIM was the responsible entity for the PIF from September 2004 until 20 March 2009.  It was originally named MFS Investment Management Ltd.  On 28 March 2008 it was renamed Octaviar Investment Management Ltd and on 12 June 2008 it was renamed Wellington Investment Management Ltd.  It was replaced as the responsible entity for the PIF by Wellington Capital Ltd on 20 March 2009.  Wellington Capital is a respondent to the present applications.

146. On 23 June 2006, a written agreement was made between WIM (which was called the “Trustee”) and OL (which was called “MFS”).  The agreement was entitled “MFS Support Mechanism”.  Broadly speaking, it obliged OL to pay to WIM up to $50 million in order to make good shortfalls in the distributions from the PIF which unit holders had been led to expect and to meet expenses or capital losses of the fund.  Clause 8 of the agreement provided as follows:

“8.TERM

8.1The parties agree that this Deed is to remain in force provided that the Trustee or a Related Entity remains the responsible entity of the Fund.

8.2In the event that the Trustee retires, resigns or is removed as responsible entity of the Fund and is not replaced by a Related Entity (‘End Date’), MFS will be entitled by notice in writing to terminate this Deed effective immediately.

8.3Where MFS terminates in accordance with clause 8.2 then:

(a)MFS’s obligations under this Deed ceases immediately with effect from the date nominated by MFS being a date no earlier than the End Date; and

(b)any money paid by MFS under this Deed remains the property of the Fund and MFS has no claim for the repayment of that money.”

147. On 26 February 2008, there was a demand by WIM for payment of $50 million under this agreement.  Nothing was then paid and WIM claims to be a creditor of OL in that amount. 

148. Until June 2008 all of the shares in WIM were owned by MFS Property Pty Ltd, later renamed Octaviar Property Pty Ltd. The shares in that company are held by Octaviar Financial Services Pty Ltd which is now in liquidation. The deed’s administrators for OL are its liquidators. 

149. On 8 May 2008 Octaviar Property granted a call option to Wellington Capital to purchase the shares in WIM. On 9 June 2008 Wellington Capital exercised that option and on 13 June 2008, a share sale agreement was signed in the terms for which the option had provided. The shares in WIM were then transferred to Wellington Capital. The agreed price was the total of $100, four times the net profit (if any) of WIM for the next 12 months and the value of net tangible assets of WIM. 

150. Prior to exercising the option, Wellington Capital insisted upon an amendment to the MFS Support Mechanism, specifically by deleting cl 8.2 and replacing it with this:

“In the event that the Trustee retires, resigns or is removed as responsible entity of the Fund and is not replaced by a Related Entity or Wellington Capital Ltd ACN 114 248 458 (‘End Date’), MFS will be entitled by notice in writing to terminate this Deed effectively immediately.”

Wellington Capital says that it would not have exercised the option had that amendment not been agreed.  The apparent intention was to allow Wellington Capital Ltd to become the Trustee and to have the benefit of the MFS Support Mechanism.  There was no agreement, it seems, between Wellington Capital and OL to that effect.  And because the $50 million maximum had already been demanded by WIM, there was apparently no scope for a further demand if the demand of February 2008 was valid and it was paid.

151. The chairperson and principal of Wellington Capital is Ms Hutson. She was chairperson of a company called S8 Limited which was acquired by OL in about December 2006.  The major shareholder in S8 Limited had been Mr Christopher Scott.  Ms Hutson was an advisor to Mr Scott.  Upon the acquisition of the shares in S8 Limited by OL, Mr Scott became a large shareholder in OL, and in about April 2008 he became one of its directors.  The Public Trustee alleges that Ms Hutson provided advice to the board of OL and became aware of confidential information “relating to its financial circumstances”.  On 2 May 2008 Ms Hutson and two other directors of Wellington Capital became directors of WIM and the existing directors resigned.  This was prior to the execution of the call option deed in relation to the shares in WIM.  I have referred to the terms of the sale of those shares.  But the call option deed also contained an agreement by Octaviar Property to pay a “management fee” of $750,000 to Wellington Capital and a covenant by Octaviar Property to ensure that WIM maintained net tangible assets of at least $5 million.  There is evidence that WIM then held cash of $5 million, and the Public Trustee says that a liquidator would wish to investigate what happened to that cash. 

152. The Public Trustee submits that out of these dealings there are several matters which a liquidator of OL would wish to investigate. The first is whether the MFS Support Mechanism might be set aside, on the basis that OL’s directors acted in breach of their fiduciary duties by causing OL to enter into the agreement when its liability was assumed for no consideration and where the agreement was contrary to the interests of OL as a whole.  At present the argument goes no higher than a suggestion that a liquidator would wish to investigate such a case.  I accept that a liquidator would wish to do so.  On the present evidence the merits of that case cannot be reliably assessed. 

153. Another suggested basis for avoiding the alleged liability for $50 million is that the MFS Support Mechanism was “uncommercial” within the meaning of s 588FB(1) of the Act, because the liability was assumed for no consideration, and because the demand for payment made on 26 February 2008 was an act done “for the purpose of giving effect to the transaction” within the meaning of s 588FC(a)(ii) of the Act.  Because OL was then insolvent, it is argued that any liability which arose on 26 February 2008 was pursuant to an insolvent transaction and could be set aside pursuant to s 588FF(1)(e), (h) and (j) of the Act.

154. The administrators considered the MFS Support Mechanism and formed the preliminary view that it provided some benefit for OL, in that it assisted the business of WIM by allowing it to earn more management fees, and WIM’s profits were ultimately for the benefit of OL. Ms Hutson suggests that it also increased the “profile” of the Octaviar group, assisting it overall to raise equity and debt. The agreement itself recites an acknowledgement by OL that it had received valuable consideration from the trustee. But that consideration is not apparent. I am persuaded that a liquidator of OL would wish to assess whether there is a case for setting aside this transaction in 2006 although, to an extent, the administrators have already looked at it. Beyond that it is impossible to assess on the present evidence whether the claim could be made out.

155. The Public Trustee submits that a liquidator would wish to investigate the circumstances surrounding the amendment to the MFS Support Mechanism in May 2008.  Had that amendment not been made, then upon Wellington Capital becoming the responsible entity for the PIF in March 2009, cl 8.2 of the MFS Support Mechanism would have entitled OL to terminate that agreement.  That would not have mattered had OL been liable already for $50 million by reason of the demand made in February 2008.  If, as Wellington Capital says, it would not have exercised the option to buy the shares in WIM absent this amendment, then OL would have remained exposed to a demand under the MFS Support Mechanism (putting to one side the demand already made), especially if a receiver had been appointed to WIM.  On a proper investigation, it might become clear that it was reasonable for OL to agree to the amendment given that predicament.  Nevertheless a liquidator would wish to investigate the circumstances of the amendment.  A liquidator would also wish to investigate whether OL could be liable to Wellington Capital under the MFS Support Mechanism as amended, and whether there have been changes in the structure of the PIF since June 2008 which might provide some basis for OL’s avoiding liability under that agreement. 

156. The Public Trustee also suggests that there is a case to be investigated that there was an unfair preference by the transfer of “beneficial ownership of $5 million in cash to Wellington Capital Ltd or an entity controlled by it”.  The evidence for this submission is a net realisable value statement of the Octaviar group as at 31 May 2008.  There is evidence there that $5.05 million had been held by WIM.  The likely explanation of this document representing that the cash was no longer available to the group is that the cash was held by WIM, which ceased to be a member of the group upon the acquisition of its shares by Wellington Capital.  Perhaps a liquidator would wish to investigate this, but on the present evidence, a liquidator would not be obliged to do so, one reason being that if there has been a loss, it was not a payment by or the appropriation of property of OL or OA (as distinct from WIM). 

157. Then the Public Trustee says that the terms of the sale of the shares in WIM should be investigated, because they were adverse to the interests of the seller by the price being dependent upon the future earnings of WIM. The sale agreement and the call option from which it arose were apparently negotiated at arm’s length and the Octaviar side had its own legal advice. On the face of it, the terms as to price do not seem to be so unusual. The Public Trustee did not press its pleaded case that there was some wrongdoing on the part of Wellington Capital by its causing WIM not to charge fees for managing the PIF, thereby resulting in there being no profit within the 12 months from the sale.  I am not satisfied that the liquidator would wish to investigate the terms of the share sale agreement.

158. The final point in relation to Wellington Capital was not pleaded, but it arises from evidence given by Ms Hutson that Wellington Capital had received something of the order of $3 million from the Octaviar group in respect of services provided in relation to the PIF between May and August 2008.  I accept that a liquidator would wish to investigate such a payment as a potential preference. 

PAC

159. On 24 July 2006 OL executed a deed of agreement with OPI Pacific Finance Limited (“PAC”). That was then a company called MFS Pacific Finance Limited and a member of the Octaviar group. OL and that company had common directors. The deed recited that PAC was an issuer of debt securities to the public in New Zealand and used funds thereby raised to make loans to third parties and other investments.  It recited that OL had agreed to grant to PAC a put option in relation to PAC’s assets, pursuant to which OL could be required to purchase or take an assignment of any asset on the terms set out in that agreement.

160. PAC was entitled to exercise the put option in respect of an asset where it was a loan in default for three months or more or, if it was not a loan, where its current market value was less than the price which PAC had paid for it. The price to be paid for a loan was the amount of principal together with any interest and other amount which was due and unpaid. The price to be paid for another asset was the book value to PAC by reference to its most recent financial statements. 

161. The contingent obligations of OL under this deed were extensive. On 15 September 2008 PAC purported to exercise the put option for certain assets and demanded a price made up of about AUD 426 million and a further NZD 42.5 million.  On 4 December 2008 and 4 February 2009, PAC purported to further exercise the put option in relation to other assets for which it claimed about another AUD2.7 million.  PAC had ceased to be a member of the Octaviar group in 2007.

162. The Public Trustee submits that a liquidator would wish to investigate this deed of 2006, in the circumstances where the two companies had common directors and the deed has resulted in such a large alleged liability of OL. That submission is based upon evidence of Mr Colwell, who is presently the liquidator of some other companies within the Octaviar group.^[108]  He said that the transaction “arouses suspicion” in those circumstances. 

163. PAC says that there is no basis for that suspicion. The evidence of its sole director, Mr Maywald, is that the 2006 deed provided substantial benefits to OL directly under that deed and also indirectly through OA.  The deed provides for a fee for OL, calculated at one per cent of the average aggregate book value of the assets of PAC. From July 2005, PAC paid OL such fees totalling about $8 million.  OA and PAC made an agreement, also dated 24 July 2006, entitled “Management Agreement”, whereby OA managed PAC’s investment activities in Australia until the beginning of 2008.  OA earnt fees through the operation of that agreement, and the terms of its Put Option with OL enabled PAC to raise capital which would then be managed by OA under the Management Agreement.  Accordingly, it is said that there is no case to be investigated that this put option was an uncommercial transaction.  The Public Trustee’s case is that this was an uncommercial transaction, and that PAC’s purported exercises of the put option were acts done for the purpose of giving effect to the transaction at a time when OL was insolvent. 

164. In the cross-examination of Professor Gray, who was called by the Public Trustee, it was suggested by counsel for PAC that the Put Option was an ordinary commercial transaction, because it was an incident of a transaction which:

“involved, in substance, the sale of a significant amount of deferred debt…with a put option entitling the purchaser to require Octaviar to repurchase that debt”. 

Professor Gray agreed that in itself that was not “an unusual structure for improving liquidity in a company which has limited [liquidity]”.  Professor Gray said that when he had “looked at the transaction involving PAC”, there was nothing about it which struck him as being unusual or suspicious.  But he added that:

“the main focus of that transaction for my reports was the ultimate liability in relation to the put option and the amount of cash that would be required to discharge it”.

He agreed that the disposition of a loan portfolio in July 2006 to PAC would have been a “sensible thing to do…to generate cash” and that “a put option element to such a transaction … [was] not unusual”.  However, the details of a sale of a loan portfolio to PAC are not apparent from the evidence.

165. On the present evidence, I could not exclude the prospect that this put option could be demonstrated to be an uncommercial transaction. On the other hand, the evidence does not present a prima facie case that it was uncommercial. The present question is whether a liquidator of OL might wish to investigate the circumstances of the transaction. Having regard to the large amount involved, and to the fact that the companies had common directors, in my view a liquidator would wish to investigate that matter. How far a liquidator would proceed, and at what cost to the liquidation, are different questions. The same comments apply to the suggestion that the put option could be set aside on the basis of breaches of fiduciary duties owed by the common directors.

166. On about 21 May 2008, OA paid $20 million to PAC.  According to Mr Maywald, this payment was made

“to enable PAC to negotiate a moratorium on payments to PAC’s stockholders until 30 June 2011, with a view to PAC placing itself in a position where it was able to negotiate an accommodation with the Octaviar group.”

He says that those funds were passed on to PAC’s secured debenture stockholders, numbering about 10,000, and that there is no possibility of recovery of that sum from PAC because its secured liabilities far exceed its assets.

167. The payment was made at a time when it was at least very likely that OA was insolvent and prima facie it would be recoverable by a liquidator.  If the position with PAC is as dire as Mr Maywald says, the question which obviously arises is whether the directors of OA should have caused that payment to be made.  I accept the argument of the Public Trustee that the liquidator would wish to investigate a claim not only against PAC for this amount, but also against the directors in that respect, and potentially against the directors of PAC as parties knowingly involved in the breach by OA’s directors of their duties to the company.  It is not fanciful to suppose that the directors have insurance.

Directors of Octaviar companies

168. The Public Trustee submits that there are potential claims against directors which a liquidator would investigate. I have mentioned already the payment of $20 million to PAC in May 2008.  The other potential claims are said to be as follows.

169. The first is the responsibility of the directors of OL and OA for causing it to incur liabilities to PIF in the amount of $147 million, according to the claim by WIM in those other proceedings concerning the alleged misappropriation from the PIF.  A consideration of that matter would have to allow for the fact that if those allegations by WIM are established, OL had the benefit of the money of the PIF in order to make payments to Fortress and other creditors of one or more members of the group, so that its loss overall may not be apparent.  Nevertheless, OL and OA could be worse off to some extent by reason of the conduct which is alleged by WIM.  I accept that there is a case to be investigated against the directors in relation to that transaction.  That would also be investigated because, as already discussed, it is relevant to the solvency or otherwise of the group as at November 2007.

170. Secondly, the conduct of the directors in causing OL to enter into the put option with PAC in 2006 is a matter which a liquidator would investigate, as part of the liquidator’s investigation of whether that transaction was at all in the interests of OL and whether it was an uncommercial transaction. The same applies to OL’s agreement with WIM in 2006 for the MFS Support Mechanism. 

171. It is also suggested that a liquidator would investigate the responsibility of the directors for:

“significant loans and investments made by PAC that are now irrecoverable that were made to and in members of the Octaviar group, at a time when PAC was controlled by Octaviar, and the directors of Octaviar had substantial shareholdings in it.”

The value of the loans and investments which PAC has purported to transfer to OL is unknown.  But it may be reasonably supposed that they are worth very much less than the amount demanded by PAC for them.  It may be the case that there are particular transactions which, having regard to their apparent circumstances and to the amount involved, would warrant some specific investigation by the liquidators of the directors’ performance.  At present I am unable to say that the liquidators would investigate transactions of that kind.  Of course that is not to say that the liquidators should not do so depending upon what is presented to them, the resources available to them and to other considerations.

172. OA has received a claim for damages from PAC in an amount of $412 milllion to $462 million for an alleged breach of its Management Agreement.  A liquidator of OA would obviously consider that claim.  I am unable to say whether a liquidator would have to investigate the decision by OL’s directors to cause OA to enter into that agreement.

Auditors

173. The Public Trustee says that a liquidator would investigate whether the auditors breached a duty or duties of care in relation to the consolidated financial statements of the group for the year ending 30 June 2007, in circumstances where it is said that assets were materially overstated and contingent liabilities materially understated: in particular in relation to the PAC Put Option and the MFS Support Mechanism, as well as OL’s liabilities as a guarantor. And it is said that the auditors’ consideration of Octaviar’s capacity to repay Fortress the bridging loan of $250 million by 31 August 2007 would also be investigated.  The Public Trustee also argues that a liquidator would consider whether the auditors breached duties of care owed to members and creditors of the Octaviar group in relation to their audit of the consolidated financial statements of the group for the six months ending 31 December 2007, especially having regard to what is alleged by WIM in its proceedings.

174. The purpose of these investigations would be to assess the prospects of recovering damages from the auditors upon the basis that the companies and unsecured creditors are worse off for having continued to trade rather than being placed under external administration well prior to September 2008. 

175. In a corporate collapse of this size, it is reasonable to suppose that a liquidator would be interested in the performance of the auditors. To some extent then, a liquidator would be likely to consider that subject. But beyond that, the present evidence does not enable any finding to be made as to what would be the likely extent of such an investigation, let alone what might be its outcome. Again the extent of that investigation would depend upon many circumstances including the information available to the liquidator and the resources available. 

Potential recoveries – other points

176. Two further points should be noted as to potential recoveries under a liquidation. The first is that the full investigation and prosecution of such claims undoubtedly would be time consuming and expensive. It was strongly argued for PAC that there would be no funds for a liquidator to pursue those matters so that these potential claims are of no significance. That ignores the prospect of litigation funding, the availability of which was colourfully described by Mr Colwell, speaking of his wider practice as a liquidator, when he said that litigation funders were presently “all over us like a rash”. It is not to be expected that a liquidator would deplete the available funds for unsecured creditors by extensive investigations and litigation. 

177. Secondly, it can be seen from the above discussion that most of the votes in support of the DOCAs were by parties having an interest in avoiding an inquiry by a liquidator: Fortress, Wellington Capital Ltd and PAC.  That does not mean that their views as creditors are to be disregarded.  But it detracts from the arguments for the DOCAs that a majority of creditors has made a commercial decision as to what is in the interests of creditors as creditors.

The public interest in a liquidation

178. The Public Trustee argues that the deeds ought to be set aside pursuant to s 445D(1)(g) because there is a public interest in the affairs of the Octaviar group being examined by a liquidator.  The submission refers to a number of subjects for that examination, most of which have already been discussed, particularly involving the PIF and PAC.  It refers to the extent of losses which will be suffered by unsecured creditors and shareholders and the relatively short period between when the group was apparently in good financial health at the end of 2007 until it reached its present position. 

179. In Emanuele v Australian Securities Commission^[109] the Full Court of the Federal Court (Spender, von Doussa and Hill JJ) said that the power of the court under s 445D (and that under s 445G) is a discretionary power to be exercised having regard both to the interests of the creditors as a whole and to the public interest, and that an analogy may be drawn between this and the power to refuse a stay of a winding-up order.  As to that power, the court cited the judgment of Mason JA (as he then was) in Re Data Homes Pty Ltd,^[110] where his Honour said that the court has a duty also to have regard to whether the order would be “conducive or detrimental to commercial morality and the interests of the public at large”.^[111] 

180. In Bidald Consulting v Miles Special Builders,^[112] Campbell J in the Supreme Court of New South Wales, referring to that case and others, said:

“[290]For a director to avoid public examination about the affairs of the corporation, and the possibility of the type of clawback litigation which is possible in a winding up, by making a payment to creditors, can also be a factor in favour of termination:  cf Paton v Campbell Capital Ltd at 32.  It is in a relevant sense “detrimental to commercial morality” to dispense with the opportunity which the winding up law provides for the investigation of the affairs of a failed company:  Re Data Homes Pty Ltd (in liq) [1972] 2 NSWLR 22 at 26 Emanuele v Australian Securities Commission at FCR 69; ALR 520; ACSR 15.

[291]How much weight is given to the fact that the affairs of the company will not be investigated depends upon whether there are circumstances which suggest that investigation is called for.  Sometimes, the fact that only a small dividend will be paid to creditors is itself such a circumstance:  Lancaster v NZI Capital Corporation Ltd (Sheppard J, Federal Court of Australia, 3 September 1991 unreported, but quoted and approved in Paton v Campbell Capital Ltd at 32).  Sometimes, the fact that it appears that there may be prospects of preference or uncommercial transaction or insolvent trading recoveries can be such a circumstance.  In the present case, it is clear that only a small dividend will be paid to creditors, if any dividend at all.  There is some basis for believing that insolvent trading recoveries might be possible, but the evidence concerning that topic is fairly slight, and any actual recoveries would depend on a liquidator obtaining the funding to sue.”

I respectfully adopt those observations.  Relating them to the present case, the dividend to creditors here would be, on any view, small and it can now be said that there are prospects of preference or uncommercial transaction or insolvent trading recoveries.  On the other hand, for the most part the evidence concerning those matters is at present slight and actual recoveries would depend upon obtaining the funding to sue.

181. But in this case two further observations may be made. The first is that the terms of the DOCA for OL are not, on their face, offensive to commercial reality or, more broadly, to public policy. Secondly, although the size of this corporate collapse, and the extent of its impact upon very many institutions and individual investors, is a matter of legitimate public interest, that needs to be balanced against the unfairness to those creditors who are not in any way responsible for this collapse in using what little remains for them to conduct a wide ranging and expensive inquiry for the financial education of the public. However, given the size of the possible recoveries, it is likely that a liquidator’s investigation, of some or all of these transactions would be financed by investors in the outcomes of litigation which might follow. 

182. Overall, the termination of the DOCAs would be beneficial also for the fact that it would permit some investigation of transactions and conduct which could lead to at least some of the persons responsible for some of the group’s demise being brought to account. The public interest is therefore a consideration in favour of terminating the deeds.

Orders on the Public Trustee’s applications

183. I have concluded that each DOCA should be terminated. I have considered the submission for PAC that in that event, the appropriate course is to give creditors an opportunity to pursue an alternative deed of company arrangement. I have decided that this would not be appropriate. The first reason is that no alternative proposal has arisen in the evidence or in the arguments. Secondly, it is difficult to see that any alternative proposal would be consistent with the Fortress charge being void, and the question of its voidness might be the subject of consideration beyond the forthcoming appeal to the Court of Appeal.  Thirdly, assuming that the charge is void, the essence of this deed was to adopt a flawed approach to avoiding the operation of the ATO’s notice, and there is no suggestion of how that might have been achieved consistently with what I have concluded to have been the legal position.  Fourthly, there is the passage of time which must be considered.  Last September I was asked to wind up OL but was persuaded to provide creditors with the opportunity of reaching an appropriate arrangement.  If the company is to be wound up it is desirable that this occur without further delay.  In this context it is relevant to note when the company opposed a winding up last September, the proposal was to pursue a more orderly realisation of assets through an administration that would be likely to yield a higher price for the remaining 35 per cent interest in the Stella Group.  But in their report to creditors last December, the administrators gave the remaining interest in Stella effectively no value and no one now suggests otherwise.

184. The Public Trustee is concerned to have the relation-back day in the winding up of OL as the date of filing of its winding up application, 4 June 2008. Accordingly, it seeks an order under s 447A that s 446B and reg 5.3A.07 not apply.  Section 446B(1) provides that the regulations may prescribe cases where a company under administration or which has executed a DOCA (even if it has been terminated) is taken to have passed a special resolution under s 491 that the company be wound up voluntarily.  By reg 5.3A.07, a company that has executed a DOCA is taken to have passed a special resolution that it be wound up voluntarily if the court makes an order under s 445D terminating the DOCA.  In that event the company is taken to have passed the special resolution at the time of the court’s order.^[113]  That would engage s 513B(c), which prescribes when such a winding up is taken to have begun or commenced, on the basis that this would be a case where immediately before the deemed resolution for winding up was passed, a DOCA “had been executed by the company but had not yet terminated”.  If so, then the date of deemed commencement of the winding up would be the s 513C day in relation to the administration that ended when the deed was executed, which would be 12 September 2008.

185. An order should be made with the result that the relation-back day would be the date of the filing of the Public Trustee’s winding up application. The reasons for that were explained in my judgment given last September.^[114]  The administrators agree that it is important to make orders with that effect, and support the particular orders in that respect which are sought by the Public Trustee.  Fortress submitted that there was some doubt as to whether an order could be made under s 447A which affected the way in which a regulation made under Part 5.3A was to operate.  However, in my view s 447A permits the court to make these orders.  The operation of Part 5.3A includes its operation through regulations made under Part 5.3A.  Regulation 5.3A.07 operates by the operation of s 446B.  Put another way, the reference to “how this Part is to operate” in s 447A(1) is a reference to the sections within Part 5.3A and regulations made under them.  In Bidald v Miles, Campbell J terminated a deed and ordered that:

“Part 5.3A … is to operate in relation to [the company] so that reg 5.3A.07 does not operate with any effect in relation to the company.”^[115]

186. Accordingly, it will be ordered that the deed of company arrangement between Octaviar Limited (Administrators Appointed) (Receivers and Managers Appointed), Fortress Credit Corporation (Australia) II Pty Limited, John Lethbridge Greig and Nicholas Harwood, and Stephen James Parbery and Anthony Milton Sims be terminated. It will be further ordered that Part 5.3A of the Corporations Act 2001 (Cth) is to operate in relation to that company so that s 446B and reg 5.3A.07 do not operate with any effect in relation to the company.

187. Fortress submitted that any order for termination of the DOCA should be stayed to enable it to be appealed. However, counsel for Fortress did not explain why the appeal would be futile absent a stay. If an appeal were allowed, the order for termination of the DOCA would be set aside, as would consequential orders for the provisional liquidation and liquidation of the company. Counsel for Fortress suggested that the position was not so clear in relation to the Participation Agreement. It provides that it will automatically terminate in the event of termination of the DOCA. If the termination of the DOCA is set aside on appeal, the position would seem to be that the Participation Agreement would stand. If not, it was not explained why a further agreement to the same effect could not be made. 

188. As yet there is no application to wind up OA. The Public Trustee’s concern is that the relation-back day should become the day on which the administrators were appointed, which was 3 October 2008. Again that is desirable and no party makes a submission that there should not be orders to that end. The administrators submit that the combined effect of s 513B(c) and s 513C(b) would be that upon termination of the DOCA for OA, the deemed voluntary winding up is taken to have commenced on the date the administrators were appointed, so that no order as to the operation of Part 5.3A is required.  Section 513B(c) applies where “immediately before the resolution was passed, a deed of company arrangement had been executed by the company but had not yet terminated”.  According to reg 5.3A.07, the resolution is deemed to have been passed when the court makes the order terminating the DOCA.  The result would appear to be that, as the administrators suggest, the deemed voluntary winding up would be deemed to have commenced on 3 October 2008, and that would be the relation-back day. 

189. If the Public Trustee’s submission is accepted, and an order is made preventing the operation of reg 5.3A.07, the position would seem to be as follows. The company would be wound up by the court upon an application which is yet to be filed. The commencement of the winding up would be according to s 513A(e). Paragraph (a) would not apply because a winding up would not be in progress when the order is made.  Paragraph (b) of s 513A would not because the company had ceased to be under administration when the DOCA was executed: s 435C(1), s 435C(2)(a).  Paragraph (c) of s 513A would not apply because, assuming that the provisional liquidator is first appointed as the Public Trustee seeks, the company would not have been under administration immediately before that appointment.  Paragraph (d) of s 513A would not apply because immediately before the winding up order (as distinct from the appointment of a provisional liquidator) it would not have been the case that a DOCA had been executed but “had not yet terminated”.  Accordingly, the winding up would be deemed to have commenced on the day when the winding up order was made with the result that the relation-back day would be the day on which the application for that order was filed.  Section 9 defines “relation-back day” 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.”

190. Accordingly, the objective of a relation-back day of 3 October 2008 would be served by the order sought by the administrators rather than that sought by the Public Trustee. It will be ordered that the deed of company arrangement made between Octaviar Administration Pty Limited (Administrators Appointed) and John Lethbridge Greig and Nicholas Harwood be terminated.  It will be further ordered that Mr Greig and Mr Harwood be appointed liquidators of the company until further order.

191. In the case of OL, it is necessary to appoint provisional liquidators. The Public Trustee seeks to have the administrators appointed as provisional liquidators until a hearing of the winding up application or his application to appoint other provisional liquidators.  The administrators submit that it is more appropriate that they be appointed simply until further order, with which I agree.  Accordingly, it will be ordered that John Lethbridge Greig and Nicholas Harwood be appointed provisionally as liquidators until further order. 

192. I will hear the parties as to what further orders or directions should be made in the light of these reasons.

The Fortress application

193. Fortress seeks an order pursuant to s 266(4) of the Act for an extension of time within which to lodge the notice of variation which I have held was required by s 268(2).  It makes an alternative application for an extension of time to lodge a notice of a charge, which, it suggests, was also required according to that judgment.  But that was not my conclusion.  What was required was a notice of variation of the charge.^[116]

194. Section 266 of the Act relevantly provides as follows:

“Certain charges void against liquidator or administrator

(1)Where:

(a)an order is made, or a resolution is passed, for the winding up of a company; or

(b)an administrator of a company is appointed under section 436A, 436B or 436C; or

(ba)a company executes a deed of company arrangement;

a registrable charge on property of the company is void as a security on that property as against the liquidator, the administrator of the company, or the deed’s administrator, as the case may be, unless:

(c)a notice in respect of the charge was lodged under section 263 or 264, as the case requires:

(i)within the relevant period; or

(ii)at least 6 months before the critical day; or

(d)in relation to a charge other than a charge to which subsection 263(3) applies – the period within which a notice in respect of the charge (other than a notice under section 268) is required to be lodged, being the period specified in the relevant section or that period as extended by the Court under subsection (4), has not ended at the start of the critical day and the notice is lodged before the end of that period; or

(e)in relation to a charge to which subsection 263(3) applies – the period of 45 days after the chargee becomes aware that the registrable body has been registered as a company under Part 5B.1, or registered under Part 5B.2, has not ended at the start of the critical day and the notice is lodged before the end of that period; or

(f)in relation to a charge to which section 264 applies –the period of 45 days after the chargee becomes aware that the property charged has been acquired by a company has not ended at the start of the critical day and the notice is lodged before the end of that period.

(2)The reference in paragraph (1)(c) to the relevant period is to be construed as a reference to:

(a)in relation to a charge to which subsection 263(1) applies – the period of 45 days specified in that subsection, or that period as extended by the Court under subsection (4) of this section; or

(b)in relation to a charge to which subsection 263(3) applies – the period of 45 days after the chargee becomes aware that the registrable body has been registered as a company under Part 5B.1 or registered under Part 5B.2; or

(c)in relation to a charge to which section 264 applies – the period of 45 days after the chargee becomes aware that the property has been acquired by a company.

(3)Where, after there has been a variation in the terms of a registrable charge on property of a company having the effect of increasing the amount of the debt or increasing the liabilities (whether present or prospective) secured by the charge:

(a)an order is made, or a resolution is passed, for the winding up of the company; or

(b)an administrator of a company is appointed under section 436A, 436B or 436C; or

(ba)a company executes a deed of company arrangement;

the registrable charge is void as a security on that property to the extent that it secures the amount of the increase in that debt or liability unless:

(c)a notice in respect of the variation was lodged under section 268:

(i)within the period of 45 days specified in subsection 268(2) or that period as extended by the Court under subsection (4) of this section; or

(ii)not later than 6 months before the critical day; or

(d)the period of 45 days specified in subsection 268(2), or that period as extended by the Court under subsection (4) of this section, has not ended at the start of the critical day and the notice is lodged before the end of that period.

(4)The Court, if it is satisfied that the failure to lodge a notice in respect of a charge, or in respect of a variation in the terms of a charge, as required by any provision of this Part:

(a)was accidental or due to inadvertence or some other sufficient cause; or

(b)is not of a nature to prejudice the position of creditors or shareholders;

or that on other grounds it is just and equitable to grant relief, may, on the application of the company or any person interested and on such terms and conditions as seem to the Court just and expedient, by order, extend the period for such further period as is specified in the order.

…

(8)In this section:

critical day, in relation to a company, means:

(a)if the company is being wound up – the day when the winding up began; or

(b)if the company is under administration – the section 513C day in relation to the administration; or

(c)if the company has executed a deed of company arrangement – the section 513C day in relation to the administration that ended when the deed was executed.”

195. According to my previous judgment, the present position is that the charge, in so far as it would secure the YVE guarantee, is void against the deed’s administrators for the same reason for which it was void against the administrators from the time of their appointment on 13 September 2008, and unless time is extended, for which it would be void against a liquidator of OL. No notice was lodged until 2 April 2009, which is the date to which Fortress applies to extend time.

196. The Public Trustee submits that upon the proper construction of s 266, there is by now no power to extend the period: once s 266(3) was engaged by the appointment of the administrators, the charge became void (to the extent of the YVE guarantee) and it could not be revived by an extension of time under s 266(4). That question was considered by the Full Court of the Federal Court in Hewlett Packard Australia Pty Ltd v GE Capital Finance Pty Ltd,^[117] where each judge was of the opinion that, absent prior authority, the appointment of an administrator would put paid to the power to extend time under this provision.  In that case, the chargee had failed to give notice of the charge itself within the period of 45 days specified in s 263(1) through inadvertence.  A notice was belatedly lodged prior to the appointment of administrators.  Subsequently the chargee applied to extend the period specified by s 263(1).  But the reasoning is equally applicable to a failure to comply with s 268 and to where the period is to be extended beyond the date of the event by which the charge became void.  The principal judgment was given by Allsop J (as he then was) who undertook what Whitlam J in the same case rightly described as a masterly analysis of the development of the relevant law.  Allsop J and, in a separate judgment, Branson J, held that but for authority, s 266 should be construed as putting an end to the court’s power to extend time once there was the intervention of a winding up or administration, but that having regard to that authority, a power to extend time should be recognised.^[118]  Whitlam J construed the section in the same way but held that there was no power, concluding that contrary authority was clearly wrong.  He said:^[119]

“[7]In my opinion, the reasons given by Allsop J for his preferred view of the proper construction of s 266(4) are utterly convincing.  No intermediate appellate court has ever considered and rejected such a thoroughly presented and careful analysis.  So far as voidness under s 266(1) and (3) is concerned, it is clear that an order made under s 266(4) is prophylactic, not curative.  Any terms and conditions upon which such an order is made, such as the so-called “usual proviso” would be directed to that end.  The reach of s 266(1) and (3) is reflected in the protection afforded the rights of third parties in s 266(6).

[8]I decline to be influenced by the fact that the provision here under consideration has not been fundamentally altered in subsequent re-enactments of the Australian companies statute.  I think, with respect, that there is a good degree of unreality in any suggestion that mere re-enactment necessarily reflects Parliament’s approbation of what might be to company law cognoscenti a generally accepted line of judicial authority.  Of course, I do not mean to deny the proper role of legal history in explaining statutory language (see, for example, Conway v The Queen (2002) 209 CLR 203 at 207 et seq), but, in the construction of a statute, the text must be accorded primacy.  Here the grammar and syntax of s 266 show quite clearly when an order may be made under s 266(4).”

197. The judgment of Whitlam J has considerable force. But I am not convinced that Branson and Allsop JJ were plainly wrong to hold that having regard to authority on similar provisions existing at the time of the enactment of this statute, s 266 should be construed as giving the court power notwithstanding the intervention of an administration.^[120]  Accordingly, the present application must be considered.

198. In Sanwa Australia Finance Ltd v Ground-Breakers Pty Ltd (in liq),^[121] the Full Court of this Court considered the discretionary power under the predecessor of s 266(4), which was the relevantly equivalent s 205(3) of the Companies (Queensland) Code.  The application to extend time was made after the company went into liquidation.  It was assumed in the arguments and in the judgments that there was a power to extend time.  It was held that an omission to give notice of the charge because of an ignorance or misunderstanding of the law may amount to inadvertence.  There is no challenge to that proposition.  Nor is there any challenge to the evidence for Fortress that the notice was not lodged because it was not considered legally necessary.  Accordingly, Fortress has established the ground referred to in s 266(4)(a). 

199. Fortress argues that it has also established the ground referred to in s 266(4)(b), which is that its failure to lodge the notice was not of a nature to prejudice the position of creditors or shareholders. I accept its submission that there is no evidence that any unsecured creditor extended credit or lent monies to OL after searching the records maintained by ASIC. It is further argued that had a notice been lodged, it would have been immaterial to any creditor who did search those records, because the charge already secured a maximum prospective liability of $750 million. That may be so, although a creditor may well have been concerned about the charging of OL’s property to secure quite a different obligation for no further advance and at the very time of OL’s spectacular demise on the Australian Stock Exchange. But these are matters of speculation. I accept that it is relevant for the exercise of the discretion under s 266(4) that in this case there is no evidence of prejudice of that kind.

200. The issue then is whether it is just and equitable to grant relief by way of an extension. As Kelly SPJ said in the principal judgment in Sanwa Australia Finance,^[122] the prejudice just referred to is not the only relevant prejudice to be considered.  What must now be considered is the prejudice to creditors if the order is made, and the prejudice to Fortress if it is not.

201. As to the prejudice to Fortress, the Public Trustee argues that there is none, because it should be inferred that the YVE assets are sufficiently valuable to enable Fortress to recover in full from YVE without recourse to the OL charge. This inference should be drawn because Fortress has not led any evidence as to the present value of the YVE securities. However, the rule in Jones v Dunkel^[123] is not to be used to fill a gap in the evidence, but only to draw more readily any inference fairly open from other evidence.^[124]  As discussed, there is evidence that the YVE assets were worth about $48 million in December 2006, and this was communicated to creditors, by the administrators in their s 439A report, as apparently intended to indicate that there was then a substantial value in the YVE securities.  Whilst I infer that the YVE securities have a substantial value, the inference is not open that they are now worth so much that the Fortress charge does not matter.^[125]  The present application and Fortress’ participation overall in proposing the DOCAs demonstrate that Fortress apprehends that the YVE securities will not be sufficient to see it paid in full.  Accordingly, I accept that there would be prejudice to Fortress were it not granted an extension of time.  I am unable to find the extent of that prejudice.

202. I turn now to the prejudice to creditors. Because I have concluded that the DOCA for OL should be terminated, even if the charge is or is to be made valid, it is necessary to consider the prejudice to creditors under a liquidation. Absent an extension of time, the charge, insofar as it would secure the YVE guarantee, would be void against the liquidators.^[126]

203. Fortress argues that if no extension is granted, unsecured creditors will not benefit because to the extent that Fortress is required to return money or forgo benefits, any benefit will accrue to the ATO. That is said to be based upon evidence given by Mr Harwood.^[127]  There is no basis in that evidence, however, for the submission.  Mr Harwood compared a liquidation and a valid Fortress charge with a liquidation and the charge being void.  Under the former, he estimated $19.5 million for unsecured creditors.  This was the amount which would come to them via Castle.  Under that assessment Fortress and then the ATO would take an estimated OA Receivable (through the liquidation of OA) of $81.82 million, to which was added the OA trust monies.  That assessment does not bring into account the prospect of recovery from subrogation to the YVE securities.  Under his second scenario, a liquidation with the Fortress charge being void, the estimated surplus for unsecured creditors was about $43 million.  This assumed the same OA Receivable and the recovery of the OA trust monies from Fortress, and the payment from the OA Receivable of the entire ATO debt.  In that event creditors would not have the benefit of anything via Castle (unless Fortress was able to recover from the YVE securities at least $38.5 million).  Accordingly, on Mr Harwood’s analysis, unsecured creditors would be much better off if the Fortress charge remains void, unless it is assumed that under the scenario where the charge is valid, the right to be subrogated to the YVE securities would be worth at least about $23 million.  But Fortress has offered no evidence as to the value of the YVE securities. 

204. If the charge is void against liquidators of OL, then could the amount of the OA trust monies be recovered by them from Fortress (as Mr Harwood’s comparison assumes)?  That payment by Fortress to OL would appear to be outside the ATO’s notice.  Accordingly, unsecured creditors would have at least the benefit of those funds ($19.7 million) even if, for some reason, the balance of the OA Receivable would be exhausted by the ATO’s notice.  Section 445H of the Act provides that the termination of a deed of company arrangement does not affect the previous operation of the deed.  However, this payment was made before the deed was executed.  It was not made pursuant to the deed for OL or for OA.  Nor does the deed for OL refer to that payment as having been made.  It may be accepted that the administrators and Fortress intended that the payment should be credited against the sums referred to in cl 4.1(b)(i) and (ii) of the deed for OL.  The deed does not so provide however:  according to its terms, it does not “operate” to give credit for that payment.  As discussed earlier,^[128]  cl 1.1 the deed defines the term OA Receivable in a prospective sense.  At the date of the deed, there was no amount held on trust on behalf of OL and the amounts payable by OA to OL did not include these funds which had been paid.  In the same way, cl 4.1 is expressed prospectively, i.e. it refers to monies to be received by OL from OA and monies to be applied by the receivers.  It does not refer to monies already received. 

205. Fortress argues that if its charge is invalid against a liquidator, it could not be required to repay the OA trust monies because of what it says would be the effect of s 451C which provides as follows:

“451CA payment made, transaction entered into, or any other act or thing done, in good faith, by, or with the consent of, the administrator of a company under administration:

(a)is valid and effectual for the purposes of this Act; and

(b)is not liable to be set aside in a winding up of the company.”

Assuming that the payment by OA, through its then administrators, of the OA trust monies was a payment by OL, it is far from clear that s 451C would preclude a liquidator of OL from recovering these funds where Fortress’ only claim to them would be under a charge which is void against the liquidator.  In that context, the liquidator would not have to act to “set aside” the payments.  The liquidator would not have to impugn the payment or transaction; rather OL would be seeking to recover property to which Fortress would have no entitlement which could prevail over the interest of OL.  Further, s 451C would not appear to prevent a common law claim by OA, for money paid under a mistake.  The payment by OA would not have to be “set aside in the winding up” of OA for that claim to be upheld.  Section 451C does not affect a cause of action arising under the general law:  Cresvale Far East Ltd (in liq) v Cresvale Securities Ltd^[129]  per Austin J, and on appeal sub nom Kirwin v Cresvale Far East Ltd (in liq)^[130] per Giles JA.  If OA recovered from Fortress, the funds for unsecured creditors would be increased, despite the ATO’s notice, because it would not exhaust the amount to come from OA to OL.

206. In summary the voidness of the charge is likely to deny creditors the benefit of payments through Castle and recourse to the YVE securities. But it would result in the OA trust monies being available to them, together with the balance of the OA Receivable after payment to the ATO.  Overall, the position would appear to be the unsurprising one that unsecured creditors would be better off if the charge were void.  The onus is upon Fortress to establish that an order for extension should be made, and Fortress has not established an absence of prejudice to unsecured creditors from the order which it seeks.

207. I have concluded that the DOCA for each company should be terminated, whether or not the charge is void. Accordingly, it would not be beneficial to extend time so as to provide creditors with what they may have understood were the benefits of the OL deed. 

208. I respectfully adopt the analysis of Allsop J in Hewlett Packard Australia Pty Ltd v GE Capital Finance Pty Ltd as to the principles to be applied in exercising the discretion under s 266(4).  Referring to some of the cases in which it has been held that an extension should be granted in the case of a company in liquidation only in “exceptional circumstances” (of which Sanwa Australia Finance Ltd v Ground-Breakers Pty Ltd (in liq)^[131] is one), Allsop J said that, properly understood, they do not engraft an impermissible limitation or implication onto s 266(4).^[132]  And the events of the appointment of administrators or the execution of a DOCA, whilst not creating statutory rights in creditors identical to those crystallised upon a winding up, require the discretion to be exercised in a way analogous to that under a winding up, if reconstruction is unlikely and “insolvency looms”.^[133]  Branson J said that the requirement for “exceptional circumstances” is for “circumstances sufficient to render it just and equitable to grant relief notwithstanding that the grant of relief will defeat rights of unsecured creditors.”^[134]  Her Honour said:

“If an application for an extension of time within which to lodge notice of a charge is made where one of the events referred to in s 266(1)(a), (b) or (ba) has occurred, the starting position is that the security is void.  The fact that the legislature has provided for this starting position where one of the events referred to in s 266(1)(a), (b) or (ba) has occurred reflects, as it seems to me, recognition that each of those events requires a person external to the company to take control of the assets of the company.  Those assets must be able to be identified by that person with certainty.  However, since s 266(1) has no relevant operation in respect of solvent companies, the provision for voidness also reflects, as it seems to me, the critical interest of unsecured creditors in the assets of an insolvent or potentially insolvent company.  Any grant of relief under s 266(4) will either immediately impact on the crystallised rights of unsecured creditors in those assets or impact on the administration of the company or of the deed of company arrangement in a way that is likely to be adverse to unsecured creditors.  A determination that it is just and equitable to grant relief in such circumstances will require the identification of factors of sufficient significance to outweigh the adverse impact on unsecured creditors of the grant of relief.”^[135]

Again, I respectfully agree.

209. In Hewlett Packard, the Full Court upheld an order extending time, notwithstanding the intervention of a voluntary administration, because of the important consideration there that the assets of the company “reflected, in significant part, the accommodation provided [by the chargee], which would not have been provided without security”.^[136]  Where that circumstance exists, it will undoubtedly be an important and sometimes critical consideration in assessing whether it is just and equitable to extend time.  In Craig Mostyn & Co Pty Ltd v Old Valley Pty Ltd,^[137] French J (as he then was) said that unsecured creditors would receive a windfall if an extension were not granted, because the company had received a substantial benefit from the loan made on the basis of the charge. 

210. But that is not the present case. There was no further advance in return for the charge being varied to secure the YVE guarantee. All that was given was a forbearance for a period of days in relation to OL’s deemed default under the Castle facility. That facility was repaid in full in the following month. The repayment included the further advance of $50 million made in mid to late February.  And as discussed above, only $20 million of that was used for working capital.  Most was used for fees paid to Fortress and for the so-called investment by Castle under the Funded Participation Agreement.  Whether that further advance of $50 million was beneficial overall for OL and the group, it has been repaid, and it is not demonstrated that the present financial position of OL is such that the unsecured creditors would receive a windfall if the extension is not granted.

211. Fortress submits that it is just and equitable to grant the extension simply because of its mistaken understanding of s 268.  It is said that its view about s 268 was common amongst many of those practising in this field.  That may or may not be so, because the evidence used to support this submission suggests that some may not have understood the reasoning in my judgment and the limited extent of its operation.  Be that as it may, the fact that the “inadvertence” could be reasonably explained would not put paid to the importance of the considerations which I have discussed.  It does not make it just and equitable that the unsecured creditors should lose the benefit of their present position.

212. In Sanwa Australia Finance Ltd v Ground-Breakers Pty Ltd (in liq), it was considered relevant that the chargee had “no reason to have any concern with the solvency” of the chargor when entering into the relevant transactions.^[138]  Again, that is not shown to be the case here. 

213. The witnesses from Fortress say that they were concerned about YVE’s performance and were looking for further security for that loan. If so, nevertheless the collapse of OL’s share price could hardly have been insignificant. The contemporaneous documents indicate their concern about the Octaviar group’s solvency. 

214. The background to this was the series of necessary extensions of the Castle facility, which was originally a short term bridging loan, during the second half of 2007. When the share price collapsed on 18 January 2008, Fortress participated in a meeting between Octaviar’s Chief Executive, Mr King, analysts and investors.  Mr Kwei reported to others within Fortress, in an email of 18 January, that at that meeting:

“Questions [to Mr King] about Fortress’ $150MM facility were also not answered clearly.  Questions about methods of repayment, a level of refinance risk, and the details of the lender were glossed over.  While our position is a matter of public record (via ASIC (SEC equivalent) information), many market participants were unaware of this and Fortress was not named today.”

On the following day, Mr Kwei emailed Mr Kelleher of Fortress, and wrote that:

“More detail on the following would be good:-

-the cash drain of MFS Pacific [another company in the group which was also a guarantor of the YVE facility]

That’s my main concern for any short-term solvency issues…”

215. On 21 January, Mr Kwei emailed Mr Kelleher as follows:

“…Next time you speak to Craig [White from OL], you need to confirm with him if they are going to run out of cash:

a)In early Dec, [OL] took $30MM in an HFA rights issue.  They sold this yesterday for $15MM.

b)PIF redemptions are probably under significant strain.  At Jun-07, FUM [funds under management] was $880MM, at Nov-07 it was $780MM and [OL] has provided a $50MM guarantee which can be called on for liquidity.  PIF usually have a high cash holding, but not sure if they have had a strong run on redemptions.”

In that second paragraph Mr Kwei was referring to the likelihood that a demand would be made under the MFS Support Mechanism for the maximum amount of $50 million.

216. On 22 January, Mr Kwei emailed Mr Kelleher and another from Fortress as follows:

“[OL] share holdings.  Share values halved from $180MM to $93MM.  This includes $39MM in HFA shares not directly owned by [OL]…which we have security over.

At Nov there were approx $97MM in margin loans.  How far do you want us to dig on this?  Should we get David Anderson [of OL] to provide a complete update?”

217. Mr Kelleher’s reply to Mr Kwei, which is dated 22 January but may have been sent on the following day, was as follows:

“Yikes – doesn’t sound too compelling for any additional advances from us.  Why did I think it was 52mm loans on 110mm shares???  Anyway would have produced the same result I guess.

I think we ask them for a specific cash flow/debt update.  Let’s wait to see what happens tomorrow among the carnage, get everything signed that we need, then place the request…”

218. Mr Kwei replied to Mr Kelleher:

“When you speak to Craig [White]…check about the debt.  All the papers say [OL] has $250MM debt, with $150MM due March and $100MM due in 2011.  There was no charge against the company so it’s not secured at the parent level.  I have assumed it is a mistake by the press.  But I still don’t know how they paid us the $100MM in Nov.”

That last reference, of course, was to the payment to Fortress on 30 November 2007, which WIM alleges was made with misappropriated funds.

219. At this stage the document by which the YVE guarantee was to become secured by the Fortress charge had not been signed by OL. It was signed on 24 January.  The contemporaneous documents also show that Fortress was pressing for it to be signed as a matter of urgency. 

220. The argument of the Public Trustee relies upon documents evidencing the reaction within Fortress to the cash flow which was provided to it. However, as is submitted for Fortress, it appears that the cash flow was received on 24 January but after OL had signed the letter by which its YVE guarantee became secured. 

221. From those emails, it is apparent that Fortress was concerned that the Octaviar group might “run out of cash”, and Mr Kelleher’s “yikes” email shows its concern about providing any additional advance.  The position of the group, as it appeared to Fortress, made it difficult to see how Fortress had been repaid part of its loan in 2007.  The Fortress strategy seems to have been to have OL sign the document to make the YVE guarantee secured as soon as possible, and then to consider what to do about the Castle facility with the benefit of information as to the group’s debt and cash flow.  All of this, of course, was against the circumstance of what had happened to the listed shares in OL.  So whilst originally Fortress might have been intending to make the YVE guarantee secured mainly because of YVE’s position, by the relevant time Fortress was apparently concerned about whether the group would have sufficient cash to pay its debts falling due in the short term, and Fortress was undecided about whether it would lend what was required.  On the present evidence, it is far from demonstrated that Fortress had “no reason to have any concern with the solvency” of OL. 

222. The Commissioner of Taxation submits that any order for an extension of time should be subject to a so-called Joplin^[139] condition, i.e. that the extension be without prejudice to the rights acquired by the Commissioner upon giving the s 260-5 notice.  I would not be persuaded that this would be appropriate.  When the notice was given, the Fortress charge had crystallised and the Commissioner’s rights were therefore subject to those of Fortress.  The appointment of administrators and subsequently the execution of the DOCA have each in turn engaged s 266.  But the interest which the Commissioner seeks to protect is not as an unsecured creditor under an administration, the DOCA or a liquidation.  It is an interest which exists notwithstanding the occurrence of an event which has engaged or will engage s 266.  The relevant prejudice is to creditors in the operation of the DOCA, or as I have now held, in a liquidation.  Although s 266(3) describes the charge as “void as a security”, and does not use the words “as against the liquidator, the administrator of the company, or the deed’s administrator, as the case may be” which are used in s 266(1), it is clear that s 266(3) should be understood in the same way.  Nor can the Commissioner claim that the ATO debt results from the failure by Fortress to lodge a notice of variation of the charge.

Conclusion on the Fortress application

223. Fortress has failed to prove that in the circumstance where there is at least a substantial chance that creditors would be worse off if the charge is valid, it is just and equitable that creditors should have their interests displaced by an order for extension. The application by Fortress will be dismissed.