Re Octaviar Ltd (No 10)[2009] QSC 283

SUPREME COURT OF QUEENSLAND

1. On 31 July 2009 I set aside deeds of company arrangement for Octaviar Limited (“OL”) and Octaviar Administration Pty Ltd (“OA”).^[1]  I ordered that Mr Greig and Mr Harwood, who had been the administrators and subsequently the deed administrators for these companies, be appointed as provisional liquidators of OL and liquidators of OA, in each case until further order. 

2. The Public Trustee applies for an order that OL be wound up. There is no contest about that and for reasons which should appear from my recent judgment, the company will be ordered to be wound up. The Public Trustee seeks to have someone other than Mr Greig and Mr Harwood appointed as liquidators of OL and to have them replaced as liquidators of OA.

3. The Public Trustee’s position is supported by the Commissioner of Taxation. But it is resisted by Mr Greig and Mr Harwood as well as by the creditors to which I referred in my previous judgment as Wellington and PAC. There is also evidence of the views of other creditors on these questions, to which I will return.

4. Within this hearing, there have also been two applications made by Mr Greig and Mr Harwood.  In each administration, they apply for a direction approving their entering into a written agreement with the company I have previously described as Fortress.  Were that agreement to be approved, it would be relevant to the principal arguments as to whether they should remain in office.  But the Public Trustee argues that I should defer consideration of the approval or otherwise of the agreement, until other liquidators have had an opportunity to consider that matter. 

5. The proposed agreement concerns the payment of sums of $19,746,713.63 and $304,331.05 by OA to the receivers appointed by Fortress. The payments were made on, respectively, 23 December 2008 and 23 February 2009. The December payment was discussed in my recent judgment, where I referred to an argument for Fortress that the monies paid would be irrecoverable from Fortress because of s 451C of the Corporations Act 2001 (Cth).^[2]  It is the possibility that the payment might be irrecoverable for that reason or others which is at the heart of the Public Trustee’s principal argument that other persons should be appointed as liquidators.  The Public Trustee argues that there is a substantial prospect that Mr Greig and Mr Harwood could be in a position of conflict because of the potential for a claim against them personally for having made the payment, should the payment be irrecoverable from Fortress.  The same argument applies to the February payment. 

6. Much of the history has been discussed in previous judgments for these companies, but it is necessary to set out here the relevant events. On 13 September 2008, Mr Greig and Mr Harwood were appointed as administrators of OL.  Two days later, Fortress appointed receivers and managers to OL.  On 3 October 2008, Mr Greig and Mr Harwood were appointed as administrators of OA.  In that latter capacity, they were in receipt of two relevant demands.  One was from the Australian Taxation Office for compliance with its s 260-5 notice addressed to OA in relation to monies payable by OA to OL.  The second was from the receivers appointed by Fortress, for what I described in my previous judgment as the trust monies.  These were funds held by OA in an account with the Commonwealth Bank of Australia.  They were the balance of OL’s share of the proceeds of sale of a 65 per cent interest in the Stella Group.  These funds were held on trust by OA for OL.  No party has contended otherwise and Mr Greig and Mr Harwood received legal advice to that effect on about 5 December 2008. 

7. According to an affidavit of Mr Harwood:

“In light of the dispute as to entitlement to [the trust monies], the Commonwealth Bank of Australia (CBA) would not grant access to monies held in OA’s bank accounts without the consent of all parties asserting an entitlement to the Funds.  A significant amount of time was therefore spent on seeking to obtain the consent of the Receivers and the ATO to an arrangement pursuant to which Mr Greig and I as administrators could obtain access to OA’s monies to fund the administration.”

OL did not have a bank account.  The administrators’ predicament was that they were without funds, and the dispute as to the trust monies was effectively freezing all accounts of OA with the Commonwealth Bank.  It is not said that there was any dispute as to OA’s deposits with the bank apart from that in relation to the trust monies.  The trust monies were kept in a separate account with the bank.  In those circumstances, any arguable basis for the bank’s position in relation to OA’s considerable cash, apart from that in this trust account, is not apparent.  Fortress did not have a charge over the assets of OA and nor was the ATO entitled to OA’s cash, except if it was being paid to OL.

8. The administrators’ response was a proposal to “quarantine the full amounts claimed by the receivers and the ATO in separate interest bearing accounts pending clarification of the ownership and entitlement to [the trust monies]”, and failing some agreement about that, to seek a declaration to resolve the competing claims.

9. On 9 December 2008, the administrators received advice from counsel in relation to the Fortress charge. Mr Harwood’s affidavit summarises that advice as follows:

“(i)the charge was valid on its face;

2. the operation and validity of the extension of Fortress’ security was not affected by section 266 of the Corporations Act 2001; and
3. based on an assumption that [OL] was insolvent in January 2008 (which, based on the preliminary view reached by Mr Greig and I at the time as to the likely insolvent date of [OL], was not correct), it was reasonably arguable that the extension of the security was an unfair preference and/or an uncommercial transaction which could be unwound by a liquidator.”

The advice from counsel is exhibited to Mr Harwood’s affidavit.  In relation to the second matter, that was the view of counsel although they said that the opposite view was arguable and that there was no authority on the question.  As to the third matter, counsel began their conclusions on that point by saying that it was “likely that the extension will be capable of challenge as an unfair preference”.

10. At this time, the second meeting of creditors for each company was due to be held on 17 December 2008.  At least in theory, there was a prospect that creditors would not approve a DOCA, and that each company would be wound up.  Indeed that was the recommendation of the administrators in the case of OA.  Nevertheless, the administrators endeavoured to reach an agreement with the ATO and Fortress ahead of the creditors’ meetings.

11. On 8 December 2008 the solicitors for the administrators wrote to the solicitors for Fortress, the receivers and the ATO. They proposed that the trust monies be paid by OA to OL, to be held by the receivers “until determination of the priority and validity of the competing claims by the receivers and managers and the Australian Taxation Office or other earlier agreement of the parties”. They further proposed that the amount of the ATO’s notice be held by OA in a separate account with the Commonwealth Bank “similarly pending the determination of the claims or other prior agreement” and that the balance of the funds held by OA with the bank be released to the administrators. On the same day the solicitors for Fortress and the receivers agreed to what was proposed in relation to the trust monies, and nominated an account to which the trust monies should be paid. That was in the name of “Octaviar Limited (Administrators Appointed) (Receivers and Managers Appointed)”.

12. The ATO did not accept the 8 December 2008 proposal. But nor did it object to the payment out of the trust monies. Instead, by a letter from the Australian Government Solicitor dated 15 December 2008, the administrators’ solicitors were advised that:

“Without prejudice to arguments he may make in any subsequent litigation, the Commissioner does not at this time wish to make any claim regarding the trust monies in the sum of $19,695,182.41 held by [OA] for [OL].  Accordingly, it is a matter for the administrators as to whether that sum is released to Fortress.”

13. The administrators then signed a letter dated 17 December 2008 addressed to the bank, referring to their appointment as administrators of OA, and advising that they wished to close the account in which the trust monies were held and to transfer its balance to an account of the receivers with a different bank. That letter was counter-signed by a solicitor for the ATO and by a representative of the receivers.  But it seems that it was not signed by the receivers and sent to the Commonwealth Bank until 22 December 2008.  The Commonwealth Bank paid out the trust monies as directed.  On 24 December 2008, Fortress directed the receivers to deposit the trust monies to an account of its own, which the receivers did on that day.

14. At the meetings of creditors on 17 December 2008, a solicitor acting for the Public Trustee informed the meeting that his client was concerned that the Fortress charge would be voidable in a liquidation of OL.  On the following day, in a hearing before me, counsel for the Public Trustee raised the same possibility, and said that the Public Trustee would apply to terminate the DOCAs resulting from the previous day’s meetings.  The Public Trustee also said that it would argue that the charge was void, as subsequently I held it to be.  Nevertheless, the administrators saw fit to pay the trust monies to the receivers on 22 December 2008.  They did so without reference to other creditors. 

15. In a recent affidavit, Mr Harwood says that he and Mr Greig paid the trust monies believing that the receivers had agreed that the funds would be held by them “pending determination of the dispute”. Their belief was that “any challenge [of the Public Trustee to the validity of the charge] did not affect [OL’s] ownership of the funds”, and that the funds would be in the hands of OL through the receivers. For the present, that evidence is not disputed by the Public Trustee.  However, the basis for their understanding is not so clear.  If they were aware of the concession in the letter from the Australian Government Solicitor of 15 December, it is not surprising that Fortress and the receivers took the view that the receivers were not bound to retain the funds. 

16. Mr Harwood says that it was on about 18 March 2009 that he was informed by Fortress that the trust monies had been paid to Fortress. On 24 March 2009, the solicitors for the administrators wrote to the solicitors for Fortress, saying that in consequence of my judgment given on 6 March 2009,^[3] they considered that the appropriate course was for the trust monies to be returned to OA and asking for confirmation that Fortress would do so.  There was no complaint in that letter that the monies had been wrongly paid by the receivers to Fortress.  On 20 April 2009, the administrators’ solicitors wrote in similar terms.  On 28 April 2009, the solicitors for Fortress replied saying that it would be premature to repay the trust monies for several reasons.  First, Fortress had filed its application for an extension of time under s 266(4).  Secondly, Fortress had appealed against my judgment of 6 March 2009.  Thirdly, it was said that there was no suggestion that if Fortress were ordered to repay the funds, “there is an apprehension that our client would be unable to comply with [that order]”.  In that respect, it was not asserted that Fortress would be able to so comply.  Fourthly, it was said that the payment made to Fortress could not be set aside because of s 451C and s 445H of the Corporations Act in the event of a winding up of the company.

17. Following my judgment of 31 July 2009, the solicitors for Mr Greig and Mr Harwood again wrote to the solicitors for Fortress.  In this letter of 7 August 2009 they proposed that the trust monies be paid into a trust account to be maintained by Fortress’ solicitors and held until the outcome of the appeal from my March judgment.  On 13 August 2009, the solicitors for Fortress rejected that proposal.  They pointed out that Fortress had until 28 August 2009 to file an appeal against my judgment refusing an extension of time under s 266(4).  Fortress filed that notice of appeal on 28 August.  The appeal against my March judgment was heard on 26 August and the decision is reserved. 

18. The Public Trustee has long made it clear that he would move for the appointment of someone other than Mr Greig and Mr Harwood as liquidators of these companies. He has also made clear his strong criticism of the payment out of the trust monies. But the solicitors for the Public Trustee were asked to set out each of the grounds on which the Public Trustee would make the present applications. They responded in a letter of 20 August 2009. The first matter raised in that letter was the payment of the trust monies to Fortress. The solicitors for the Public Trustee said that it would be argued that the payment may have resulted in a loss of the assets available to be distributed to the general body of creditors, because the charge was either void, as I held last March, or voidable by liquidators, but that Fortress had asserted a right to keep the funds because they were paid during the administration or in purported performance of the DOCAs. The letter advised that were that defence to succeed, Mr Greig and Mr Harwood would be liable to compensate the companies for the loss of these monies and reference was made to an expectation of their having professional indemnity insurance.  The letter also noted that the Public Trustee was unaware of what had happened to the monies in the hands of Fortress and that the solicitors for Mr Greig and Mr Harwood had confirmed that their clients did not know whether Fortress held assets in the jurisdiction sufficient to satisfy a judgment for the trust monies and interest.  It was said that liquidators of OA and OL would wish to urgently investigate these matters and to commence proceedings for the return of the funds from Fortress and that these liquidators would join, amongst others, Mr Greig and Mr Harwood in any recovery proceedings.   

19. On 24 August, the solicitors for Mr Greig and Mr Harwood advised that they would not agree to the Public Trustee’s application to remove them and would be preparing their evidence in response to it. Then, on 26 August, they made the agreement with Fortress for which they now seek approval.

20. It is unnecessary to set out in full the relevant terms of this proposed agreement. Clause 2 of this document provides that it is a condition precedent to the formation of the agreement that this court give a direction to the effect that Mr Greig and Mr Harwood would be justified in causing OL and OA to enter into and perform the agreement.  The agreement refers to the possible outcomes of the appeal heard on 26 August, any appeal from that to the High Court and any appeal to the Court of Appeal or to the High Court in relation to my judgment of 31 July 2009 in which I refused an extension of time under s 266(4).  According to this document in its original terms, the trust monies would be paid into an interest-bearing account, maintained jointly by OA and Fortress, to be held in escrow pending the outcome of the entirety of those appeals.  If the outcome were such that the charge was “invalid to secure the debt owed by [OL] to Fortress pursuant to the [YVE] Guarantee”, then the funds so held together with any accrued interest would be paid forthwith to OA.  In the event that Fortress were successful, such that its security was valid to secure that debt, then the funds and any accrued interest would be paid forthwith to Fortress.  Otherwise the funds would not be paid from the account except with the written instructions of both Fortress and the liquidators of OL and OA.  It would be a further term that OL and OA would release and discharge Fortress and the receivers from any claim to interest on the monies which had been paid to Fortress “at a rate other than that actually paid in respect of the Fortress Payment”, meaning the rate which Fortress had earned on these monies.  The evidence is that this rate was between three and four per cent.  It would be a further term that the agreement would, “except as expressly set out in this Agreement, be without prejudice to the rights of the parties to this Agreement”. 

21. On the next day, 27 August, Mr Greig and Mr Harwood sent a circular to all unsecured creditors, providing them with what they described as an update on the administrations and asking them to complete and return a form in which they were to express their preference for or against Mr Greig and Mr Harwood remaining in office. In this document, creditors were informed that:

“At the time of issuing this circular an agreement which requires Court approval has been reached to ensure the $19.5m together with all accrued interest is held in a separate account under the joint control of the Provisional Liquidators and Fortress.  The funds will be secured pending the outcome of the appeal(s) in relation to the validity of the Fortress charge.”

In another part of this document, creditors were told something of the Public Trustee’s argument that they would be in a position of conflict in relation to the payment of the trust monies.  It was there said:

“As you will read in section 3.2, these funds will be deposited into a segregated account (pursuant to the obligations of the Receivers appointed by Fortress when the funds were paid to them), subject to order of the Court under our joint control, pending the determination of the Fortress position as secured or unsecured creditor.  The Court order is required pursuant to s 477(2)(B) of the Act because the agreement to hold these funds in the segregated account with Fortress may last longer than three months.”

That last passage involved a misstatement of the effect of the proposed agreement.  The funds would not be held “pending the determination of the Fortress position as secured or unsecured creditor”.  Rather they would be held pending the outcome of what might be described as the s 266 issues.  They would not be held pending the determination of any claim for their return upon the basis that the charge was voidable rather than void. 

22. During the present hearing, Mr Greig and Mr Harwood and Fortress agreed to vary these terms (if the agreement were approved by the court) to meet a concern I raised about its possible effect upon any right to avoid the charge in the event that the appeals were resolved in Fortress’ favour. An amended version of the proposed agreement, dated 7 September, has been signed on behalf of Fortress and Mr Greig and Mr Harwood representing the companies.  One amendment now specifically provides that the agreement would be without prejudice to any rights of a liquidator of the companies against Fortress under Part 5.7B of the Corporations Act.  Another amendment, foreshadowed during the hearing on 4 September, was to provide a period of 14 days from the conclusion of the relevant appeals, if the outcome was in favour of Fortress, before the funds in escrow would be paid to Fortress, so as to provide time for an application to be made to restrain that payment if the charge was then avoided.  The amended document provides that the payment is to be made to the successful party in the appeals, whether it be Fortress or the companies, within 14 days.  As the escrow account would be operated only upon the written instructions of both Fortress and the companies, the result would be that there would be some time within which to make such an application.  

23. These are the circumstances, then, in which the Public Trustee argues that Mr Greig and Mr Harwood could be placed in a position of conflict between their duties as liquidators and their interest in avoiding proceedings against them personally for paying out the trust monies.  On this ground even if considered alone, he argues that cause is shown under s 473(1) for the removal of Mr Greig and Mr Harwood as liquidators of OA.  The same is said for their removal if s 503 applies.  It is unnecessary for the Public Trustee to prove that they are unfit for the office for there to be “cause shown” in terms of s 473.  In Apple Computer Australia Pty Ltd v Wily,^[4] Barrett J said:

“‘[C]ause shown’ is a broad concept concerned not so much with a search for particular instances of wrong or inappropriate conduct (although a particular event of that kind may be sufficient) but with a more general enquiry into what is for the benefit of the administration and the body of persons interested in it, as well as the maintenance of confidence in the integrity, objectivity and impartiality of that administration.”

A liquidator ought to be replaced where his or her personal interest conflicts, or may conflict, with the liquidator’s duty to act exclusively in the interest of creditors:  City & Suburban Pty Ltd v Smith (as liq of Conpac (Aust) Pty Ltd (in liq))^[5] per Merkel J.  The Full Court of the Supreme Court of Victoria said in Re National Safety Council of Australia, Victorian Division that:

“It is of the greatest importance that there should be no possibility of criticism attaching to one of the court’s own officers on the ground of conflict of interest and duty.”^[6]

Thomas J (as he then was) said in Re Club Superstores (in liq)^[7] that there must be some “realistic prospect of embarrassment or a serious possibility of conflict in [a liquidator’s] continuing to act … before a dismissal is required”, but that “once a realistic possibility of conflict arises, it is not possible to wait and see [and that i]t is necessary in the interests of efficiency and of avoiding disquiet that an order be made.”

24. It is common ground that OA and OL should have the same liquidators, and that if it is in the interests of one liquidation that the incumbents should not continue, the same would follow for the other liquidation.

25. In response, the present liquidators make, in effect, two submissions. The first is that there is no serious case that they breached any duty as administrators in paying the trust monies to the receivers. Secondly, they say that the result of the agreement for which they seek approval would be to remove the prospect of any conflict.

26. It is convenient to deal first with that second submission. If the outcome of the appeals concerning s 266 is in favour of OL, according to the agreement the trust monies would be paid from escrow to OA.  In that event, the Public Trustee suggests that there could still be an argument from Fortress, based upon s 451C, that Fortress should have the monies.  In my recent judgment, I said that it was far from clear that s 451C would preclude a liquidator of OL from recovering these funds if the charge were void against the liquidator.^[8]  With the benefit of this agreement, OL would be in a stronger position.  I do not see any serious prospect that if this agreement took effect, the trust monies would go back to Fortress if the ultimate outcome on the s 266 questions were in favour of OL. 

27. However, if the ultimate outcome on these questions were in favour of Fortress, the monies which would be held in escrow under the proposed agreement would have to be paid to Fortress within 14 days. OL could apply for an interlocutory injunction to prevent that payment, upon the basis that it has a serious case to avoid the charge under s 588FE. OL would also argue that it had a case to avoid the charge under the general law.^[9]  But at that point the argument of Fortress in reliance upon s 451C would be more formidable.  And if an interlocutory injunction were granted, still the final outcome could be in favour of Fortress because of s 451C.  The risk of this conflict of duty and interest comes from the risk of that circumstance: that is, where the charge is not void but voidable; and where the chargee, notwithstanding the charge being avoided, has a defence to a claim for repayment of the trust monies.  That eventuality appears to have been overlooked by the present liquidators in their argument and in their recent report to creditors.  And it may have been overlooked by them when the trust monies were paid by them in December 2008.  

28. In that event, there would be a loss from their payment. The question then is whether there would be a case to be investigated as to whether they should have made the payment in the circumstances which then prevailed, and in particular without it being clear that the receivers were not to pass the monies on to Fortress. If there were such a case to be investigated, obviously the investigation could not be conducted by Mr Greig and Mr Harwood. But the conflict of duty and interest in that context would extend further than the duty to investigate the recovery, by some means, of the value of the trust monies. For many reasons quite apart from the Fortress charge, the liquidators would have a duty to investigate the solvency or otherwise of OL at 22 January 2008 and earlier.  If OL was not insolvent on 22 January 2008, that would at least weaken an argument that the company was worse off for having paid away the trust monies, and lessen the prospect of a claim against Mr Greig and Mr Harwood.  One aspect of this position of conflict then would be the tension between the liquidators’ duty to investigate the date of the insolvency of the company and their interest in an outcome of that investigation which would detract from the prospect of a claim against them.

29. I return then to the argument that there could be no serious case to be investigated concerning the payment of the trust monies. The submissions for Mr Greig and Mr Harwood emphasise that the payment was made in these circumstances:

• Each of the ATO and Fortress was demanding funds from OA;

• The Commonwealth Bank was refusing access to any monies in OA’s bank accounts without the consent of all parties then asserting an entitlement to the funds, so that the then administrators were without funds;

• The trust monies were clearly that:  monies held by OA on trust for OL and the administrators had legal advice to that effect;

• The administrators had advice that the better view was that the Fortress charge was not void;

• The result of the administrators’ own investigations had led them to the preliminary view, as expressed in their report to creditors under s 439A, that it was unlikely that OL had been insolvent on 22 January 2008;

• The receivers agreed to the payment to them and the ATO raised no objection to that payment, resulting in other funds of OA being made available by the Commonwealth Bank;

• The creditors of each of OA and OL resolved that the companies should execute deeds of company arrangement;

• The making of the payment was not inconsistent with the proposed deeds for the purposes of s 444C (a matter upon which another view might be taken but which need not be discussed here);

• The administrators believed that the money would be held by the receivers and not passed on to Fortress;

• Since becoming aware of the payment to Fortress, the administrators have been endeavouring to secure repayment of the money.

30. That last circumstance is unimportant for present purposes, because the principal complaint is that the payment should not have been made. The other circumstances, considered together, would certainly be relevant when assessing a potential case against Mr Greig and Mr Harwood.  In particular the predicament caused by the stance taken by the Commonwealth Bank would be a significant consideration.  Nevertheless there are other circumstances which would have to be considered in assessing whether it was reasonable to have made the payment as they did.

31. First there is the fact that the payment was made without at least a clear agreement by the receivers that they would not pass it on to Fortress absent the consent of OL and OA through their deed administrators or liquidators, as the case may be. On 8 December 2008, the administrators had put a proposal to Fortress, the receivers and the ATO. On the same day, Fortress and the receivers agreed to that proposal. As to the trust monies, that involved an agreement by the receivers to hold them

“until determination of the priority and validity of the competing claims by the receivers and managers and the Australian Taxation Office or other earlier agreement of the parties”.

32. However, the ATO did not agree to the proposal of 8 December 2008. Instead, on 15 December, it agreed to the trust monies being paid to Fortress without prejudice to any claim the Commissioner might make in subsequent litigation.  The receivers would have had a strong argument that they were not bound in terms of the letter of 8 December, either because all of the parties to that proposed agreement had not so agreed, or because the ATO had subsequently agreed that the monies could be paid to Fortress.  Accepting for present purposes that Mr Greig and Mr Harwood believed that the receivers would not be free to pass on the monies to Fortress, there is at least a case to be investigated as to whether they should have held that belief.  Perhaps they had legal advice to that effect.  But as matters presently appear, they allowed the monies to be paid to the receivers without a clear agreement by the receivers not to pass them on to Fortress.  That payment would arguably attract the operation of s 451C in the event that OL were wound up.  Although creditors had by then approved a DOCA for OL, in the hearing before me on 18 December 2008, counsel for the Public Trustee had made it clear that their client would apply to terminate the DOCAs.

33. Any assessment of the administrators’ conduct would have to be made with an awareness of the benefit of hindsight. But as to the predicament caused by the stance of the Commonwealth Bank, it is unclear why some application for declaratory relief could not have been made in order to gain access to the bank accounts of OA other than the separate account in which the trust monies were held. The upper limits of the amount of the trust monies and the amount of the ATO’s notice were uncontroversial. OA had much more on deposit with the Commonwealth Bank than was required to satisfy those claims in aggregate. The basis for a proprietary claim by ATO or Fortress against the money in any account of OA with the bank, apart from Fortress’ claim (through OL) to the account in which the trust monies were kept, is not apparent. Therefore one matter which would be investigated is why the administrators did not bring proceedings against Fortress, the ATO and the bank to establish, according to what were likely to have been uncontroversial facts, OA’s entitlement to the monies in its accounts other than this trust account.

34. Another matter presently unknown is the basis for the liquidators’ opinion in their s 439A report, repeated within their written submissions here, that upon the basis of their investigations to December 2008, they thought the likely position of OL was that it was solvent on 22 January 2008.  They could not have been expected to have conducted a thorough examination of that question by the time at which they had to report to creditors.  But it was one thing to say that the company may have been solvent as at that date.  It was another to express the opinion that it was probably solvent.  The basis for that opinion would need to be investigated.  It may be the case that Mr Greig and Mr Harwood dismissed the prospect that the charge could be a voidable transaction because they held this opinion about the company’s solvency, and in turn that is why they paid away the trust monies without an agreement as to the eventuality that the charge would be avoided by a liquidator. 

35. The result is that if Fortress were to succeed on the s 266 questions, there would be a real prospect that the trust monies would have been lost notwithstanding the voidability of the charge, and that the legal responsibility of Mr Greig and Mr Harwood for that loss would be a proper matter for investigation within this liquidation.  Accordingly, there is a real prospect that Mr Greig and Mr Harwood would find themselves in a position of serious conflict between their duties and their personal interests.  But the prospect of that conflict arising makes their appointment, or continuing appointment, as liquidators disadvantageous to the winding up of these companies.  It is not appropriate to await the outcome of the s 266 questions.  The preferable course is to appoint persons who do not have the same potential disability in acting as liquidators.

36. Counsel for Wellington and counsel for PAC each suggested that to meet this potential conflict, the court could leave Mr Greig and Mr Harwood as liquidators but appoint other persons as liquidators to consider the questions for which Mr Greig and Mr Harwood would have a conflict.  One difficulty with that proposal is in defining the ambit of those questions.  As already discussed, the question of insolvency is obviously relevant in many ways and not only in relation to the Fortress charge.  It would be undesirable for there to be, in effect, parallel investigations by different liquidators of the solvency of OL.  Not only would that be an unnecessary duplication of resources, it could also be unfair to others who would be forced to participate in that process of investigation if it had to be undertaken twice.  And there would be the prospect of inconsistent outcomes.  Moreover the additional cost of two teams of liquidators could well cancel out the savings in costs which would come from keeping the incumbents in office. 

37. The cost of changing liquidators is significant, but so too is the amount potentially in question from the payment out of the trust monies. And although Mr Greig and Mr Harwood have been in office in various capacities for nearly a year, they have only been provisional liquidators of OL and liquidators of OA since my judgment of 31 July.  The cost of changing liquidators could be greater if the change were postponed pending the outcome of the s 266 appeals.  Despite the cost to be incurred now, it is preferable at the commencement of these liquidations to appoint persons in respect of whom such a conflict could not arise.

38. The majority (in value) of creditors, as expressed in response to the recent circular, support the appointment of Mr Greig and Mr Harwood.  Their views are relevant but not determinative.  That is all the more so for the fact that they do not have a complete picture of the various possible outcomes, and of the eventuality in which there would be the conflict of duty and interest which I have discussed.

39. In my conclusion, the potential conflict in relation to the trust monies is of itself a sufficient reason for appointing someone other than Mr Greig and Mr Harwood as liquidators. It is unnecessary then to conclusively assess the further arguments of the Public Trustee.  One of those arguments involved a criticism of an agreement made by Mr Greig and Mr Harwood for the sale of the remaining 35 per cent interest in the Stella Group.  That agreement was made on 30 June 2009.  The buyer paid $3.2m and abandoned its proceedings in which it had sought more than $625m against OL and another member of the group for damages for breach of warranty in relation to last year’s sale of the 65 per cent interest.  The Public Trustee contends that this damages claim was obviously overstated.  Nevertheless it was conceded that quite possibly the claim was still validly made to the extent of something of the order of $200m.  Within these present applications, where an immediate decision is required as to who should be the liquidators, it would be impracticable and unfair to attempt an assessment of whether there is a serious case that a higher price should have been obtained for the 35 per cent interest.  The Public Trustee’s argument was said to be more a criticism of the process by which Mr Greig and Mr Harwood reached that agreement, in that they had done so too quickly and without proper reference to the major creditors.  But again that would have to be considered against some assessment of the relative benefit of the offer which was put to them by the purchaser.  Upon what I could fairly determine absent such an inquiry, the sale of this remaining Stella interest could not be said to warrant their removal.

40. The Public Trustee also made a number of complaints about the performance of Mr Greig and Mr Harwood to date, which together, it was argued, constituted a basis for a lack of confidence in their future performance.  It is unnecessary to discuss each of those complaints, given my conclusion as to the trust monies.  Some of these complaints repeat the Public Trustee’s submissions on that matter.  Some others relate to Mr Greig and Mr Harwood’s adopting what I held was an incorrect view of the DOCA proposal by Fortress, and in turn the DOCA which was executed.  But as my previous judgment indicates, the DOCA was not a model of clarity, and those criticisms by the Public Trustee are of relatively little force. 

41. A more substantial criticism is in relation to what creditors had been told as to the value of the YVE assets. In an addendum to the s 439A report, the then administrators had said that:

“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.”

In his recent affidavits sworn for the present applications, Mr Harwood says that they had then made enquiries of the management of OL and OA as to the value of the YVE assets, and that they had been informed by Mr Anderson of the companies that he thought the YVE assets were worth about $20m, but that this was not “documented or verifiable”.  He also says that $20m would not have been sufficient to have provided value to OL’s creditors under the operation of the DOCA.  But what was said in the addendum to the s 439A report was apparently in respect of the alternative to the proposed DOCA, which was a winding up of OL.  The statement in that addendum is still unexplained.  They were either unable to express an opinion on the value of the YVE assets in a winding up of OL or, if Mr Anderson’s statement were to be given any weight, a value approaching $20m would have been a “significant recovery”.

42. The result is that other persons will be appointed to wind up each of the companies. As noted, there is no suggestion that Mr Greig and Mr Harwood could continue in one liquidation if not in the other. And as discussed in my previous judgment, there could be the prospect of proceedings by OA to recover (if necessary) the trust monies, as well as proceedings by OL.^[10]

43. The next question is who should be appointed. Two of the persons proposed by the Public Trustee are Mr Moloney and Mr Colwell of Ferrier Hodgson. There is an affidavit from Ms Hutson of Wellington objecting to their appointment on the basis that Ferrier Hodgson were consulted by the Public Trustee and the note holders it represents to advise, in particular, as to the proposal which the directors of OL were putting to major creditors in 2008. It is suggested that they might feel constrained or influenced by some prior advice given, or at least they may be perceived to be so. It is also suggested they might be compromised in considering a proof of debt or claim lodged by the Public Trustee in the administration of OA. Some of this was argued, unsuccessfully, last December when Mr Moloney and Mr Colwell (together with another from Ferrier Hodgson) were appointed as liquidators of Octaviar Investment Notes Limited and Octaviar Investment Bonds Limited.^[11]

44. Mr Colwell gave evidence in the proceedings to terminate the deeds. He did so with some knowledge of OL from acting as liquidator of those companies and also as an experienced liquidator speaking about the practice of liquidators and about what a liquidator would wish to investigate. There is nothing in his evidence which would suggest now that he should not be appointed. The fact that he gave evidence for one side of the case does not mean that he was not an independent witness or would not be an independent liquidator.

45. The Public Trustee offers alternative appointees to whom no party seems to object. They include Mr Fletcher and Ms Barnet who were proposed by Wellington as special liquidators. For that reason, they will be appointed rather than the alternatives. It is preferable that they be appointed to avoid any suggestion of partiality, although that is not to suggest any criticism by me of Mr Moloney and Mr Colwell. Their appointment to other companies last year was different because it was strongly supported by the creditors of those companies.

46. The remaining question is whether the proposed agreement between Fortress and the companies should be approved. In some respects at least, the agreement is beneficial, because it would secure the equivalent of the trust monies pending the outcome of the appeals on the s 266 questions.  And the ability of Fortress to meet a judgment in that amount is not demonstrated, although nor is it demonstrated that Fortress could not do so.  As I have said, it would seem to put paid to any argument based upon s 451C if the charge is void. 

47. However, the proposed agreement has been reached in circumstances which detract from the weight of the opinion of Mr Greig and Mr Harwood that it is beneficial.  It was signed on the eve of the circular to creditors, and in the week prior to the present hearing, when Mr Greig and Mr Harwood were on notice that the principal argument for their removal was that they had paid away the trust monies.  The apparent haste with which it was prepared explains why, as signed on 26 August, it did not clearly preserve the right to avoid the charge nor provide the opportunity for OL to move for an injunction to restrain the payment of the escrow funds to Fortress in the event that the outcome of the appeals is against OL. 

48. There is a further aspect which does not appear to have been considered, which concerns interest. Consistently with my previous judgment, the receipt of the trust monies by Fortress would have constituted a part payment of the YVE facility, having an impact upon the accrual of interest under that facility at relatively high rates. The proposed agreement would provide for a release by OL and OA “from any claim to interest on the Fortress Payment at a rate other than that actually paid in respect of the Fortress Payment”. What appears not to have been considered is the impact of that agreement upon the account overall between OL and Fortress, insofar as it relates to the interest accruing on that sum over a period of nearly nine months.  It may be that there is no disadvantage to OL in this respect.  Or it may be that any disadvantage is outweighed by the advantages of this agreement.  But those are questions for consideration by an entirely independent liquidator.  The proposed agreement contains a condition precedent to its formation that the court give a direction that Mr Greig and Mr Harwood would be justified in causing the companies to enter into the agreement and to perform it.  But as they are to be replaced, that direction should not be given.  Nor would it be appropriate that they be directed to enter into the agreement on behalf of the companies and then be immediately removed as liquidators. 

49. Fortress has imposed what is described as a sunset clause: an interim arrangement which will keep the offer of this agreement open until tomorrow, 10 September. I was told by counsel for Mr Greig and Mr Harwood that if further time were necessary if I reserved my decision in these matters beyond that date, then Fortress could be prevailed upon to extend that time. I do not know whether Fortress would renew the offer of this agreement if it is not approved now, and given the replacement of Mr Greig and Mr Harwood. That is a contingency to be considered. Nevertheless I am not persuaded to give the direction to Mr Greig and Mr Harwood which is sought.  It would be unusual indeed to advise liquidators who are about to be removed that they should enter into an agreement on behalf of the companies which other liquidators, free of the burden of these present applications and the allegations made within them, might not consider to be appropriate.  The applications by Mr Greig and Mr Harwood must be dismissed.  Of course it will be open to the new liquidators to consider this matter, and, if Fortress agrees, to make a like application for approval.