Solicitors:
Thomson Geer Lawyers (Applicant)
Henry Davis York (First and Third Plaintiffs)
File Number(s): SC 2011/397200
[2]
EX TEMPORE Judgment (REVISED)
On 31 July 2009 and 9 September 2009 respectively, Octaviar Administration Pty Ltd and Octaviar Limited were wound up by order of the Supreme Court of Queensland. The first plaintiffs, Mr William Fletcher and Ms Katherine Barnet, were on the latter date appointed liquidators of both companies.
Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2015] NSWSC 516 | Case summary | Zoe
In 2010 the first plaintiffs, as liquidators of Octaviar Limited, commenced proceedings against Fortress Credit Corporation (Australia) II Pty Ltd in the Supreme Court of Queensland.
On 3 April 2012, the first plaintiffs, as liquidators of Octaviar Administration, commenced a second set of proceedings against Fortress in the Supreme Court of Queensland.
In the meantime, on 8 December 2011, the applicant before me today, Mr David Kerr, was by order of this Court appointed Special Purpose Liquidator of Octaviar Limited for the purposes of pursuing "any claims available" to Octaviar Limited against Fortress.
Mr Kerr assumed day to day control of Octaviar Limited's proceedings in May 2012.
Both proceedings, that is to say the Octaviar Limited and the Octaviar Administration proceedings, are set down for hearing this coming Monday, 4 May 2015 before Applegarth J in the Supreme Court of Queensland. Seven weeks have been allocated for the hearing. Mr Kerr's advice is that the proceedings are likely to take a good deal longer than that and that there is a significant prospect of the proceedings having to be adjourned, part heard, after the current time allocated before Applegarth J and continued in 2016.
Orders have been made that the two proceedings be heard together and that evidence in one be evidence in the other.
On 26 April 2015 Mr Kerr received an offer from Fortress to settle the Octaviar Limited proceedings. Mr Kerr wishes to accept that offer and seeks this Court's direction, pursuant to s 479(3) of the Corporations Act 2001 (Cth), that he would be justified in accepting the offer. The offer is subject to a condition that such approval will be obtained by 9.00am on 4 May 2015, or such later time as Fortress may agree. The matter must thus be dealt with urgently.
No party appeared to oppose the application.
Ms Taylor, who appeared for the first and third plaintiffs, whilst not opposing the application, did make some submissions to which I will refer below.
I am persuaded that I should make the direction sought by Mr Kerr and I will set my reasons out briefly.
I have been greatly assisted by the succinct submissions I have received from Mr Oakes SC, who appeared with Mr Golledge for Mr Kerr, and from the comprehensive affidavit that Mr Kerr has sworn in support of the application. That material has enabled me immediately to determine this urgent application.
The principles governing the Court's approach to these applications were recently summarised by Brereton J in In the matter of One.Tel Limited [2014] NSWSC 457, particularly at [32] to [36] and [55] to [62]. While it is clear that the Court will not give directions under s 479(3) about matters of commercial judgment, it is appropriate to give directions as to whether a liquidator is justified in settling litigation, especially when the liquidation has been conducted in an acrimonious environment and where the "liquidator's proposed decision risks being subjected to criticism by a particular creditor or creditors as being unreasonable or made in bad faith": per Pritchard J in Re Great Southern Managers Australia Ltd (in liq) [2014] WASC 312 at [61] (her Honour was speaking of s 511 of the Corporations Act but her Honour's observations are apt to apply also to s 479(3)). See also the observations of Croft J in In the matter of Great Southern Managers Australia Limited (in liq) (Supreme Court (Vic), 17 December 2014, unrep).
In his affidavit sworn on 29 April 2015, Mr Kerr set out in great detail the background to, and the failure of, the Octaviar Group, as well as the claims made by Octaviar Limited and Octaviar Administration in the proceedings listed for hearing next week.
The total amount claimed by Octaviar Limited against Fortress is in the order of $35 million which, together with interest, amounts to a claim in the order of $50 million. The total amount claimed by Octaviar Administration against Fortress exceeds $200 million and, to a significant extent (around $20 million), duplicates that of Octaviar Limited (that is to say, it is in respect of the same transactions as are the subject of Octaviar Limited's claims).
It is not necessary to set out in detail the nature of the claims Octaviar Limited makes against Fortress in its proceedings. Broadly speaking, to adopt Mr Kerr's language in his affidavit, Octaviar Limited seeks relief under s 588F of the Corporations Act on the basis that:
1. what is described in the pleadings as the "Fortress Charge Extension" is voidable because it is an unfair preference, an uncommercial transaction, and an insolvent transaction of Octaviar Limited;
2. payments of $19,746,713.63 and $304,331.05 made by Octaviar Administration, when in administration, to Fortress in December 2008 and February 2009 respectively (which sums Octaviar Limited claims Octaviar Administration held in trust for it) were each an unfair preference and insolvent transaction of Octaviar Limited; and
3. a combination of one or more of the "Fortress Charge Extension" and what are described in the pleadings as the "Third Deed of Amendment", the "Funded Participation Agreement" and the "Participation Fee Repayment" was an unfair preference and insolvent transaction of Octaviar Limited.
Fortress seeks to defend the Octaviar Limited proceedings on various bases, one of which is that Octaviar Limited was not insolvent at the relevant time. Mr Kerr describes that issue as being the "most significant" issue in the case and one which has occasioned the marshalling of a vast body of evidence.
Mr Kerr describes, I accept accurately, the Octaviar Limited proceedings as an "enormous undertaking". In his affidavit, he says that there have been more than 22,000 documents disclosed by the parties and that a subpoena to a third party has returned more than 68,000 documents. The insolvency report for Octaviar Limited, prepared by an independent expert, is some 837 pages in length. There have been two supplementary reports and a reply report to Fortress's expert's report which together amount to 615 pages. The trial brief to Queens Counsel briefed for Octaviar Limited runs to more than 260 volumes of material.
Mr Kerr says that there is a prospect that if Octaviar Administration is successful against Fortress, because of the overlapping nature of its and Octaviar Limited's claims, a significant part of the relief sought by Octaviar Limited would denied. I will return to this below.
Mr Kerr has placed before me, on a confidential basis, advice he has received as to Octaviar Limited's prospects of success in this matter. I will refer later to what Mr Kerr says about that advice in his evidence.
Until recently, Octaviar Administration funded Mr Kerr's conduct of the Octaviar Limited proceedings under a document called "Fortress Funding Deed" ("the Funding Agreement") dated 17 May 2012.
The first plaintiffs, as liqidators of Octaviar Administration, successfully brought an application to the Federal Court of Australia under s 477(2B) of the Corporations Act for approval to enter an earlier funding agreement. However, the Full Court of the Federal Court set aside that order and remitted the matter for further hearing by the primary judge: Fletcher and Barnet, in the matter of Octaviar Limited (Receivers and Managers Appointed) (in liq) and Octaviar Administration Pty Ltd (in liq) [2011] FCA 132; Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89.
Thereafter, the first plaintiffs, as liquidators of Octaviar Administration, brought proceedings in this Court seeking an order pursuant to s 477(2B) of the Corporations Act approving the entry by them into the Funding Agreement. On 30 March 2012, Hammerschlag J made the order sought: In the matter of Octaviar Limited (Receivers and Managers Appointed) (in liq) and Octaviar Administration Pty Ltd (in liq) [2012] NSWSC 299.
By judgment delivered on 8 April 2015 (that is, a little under four weeks before the commencement of the Queensland proceedings) the Court of Appeal, comprising the Chief Justice, the President and Macfarlan, Meagher and Barrett JJA set aside that approval and remitted the matter to Hammerschlag J for further hearing: Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher & Barnet [2015] NSWCA 85.
No hearing date is yet allocated for the hearing of the remitter. Mr Kerr apprehends that there can be no certainty about the outcome of the remitter. The history of this litigation suggests a real prospect of further appeal, were the liquidators of Octaviar Administration to be successful on the remitter.
The result is that Mr Kerr, as Special Purpose Liquidator of Octaviar Limited, has, for all practical purposes, no funding under the Funding Agreement and does not have sufficient funding to prosecute the hearing in Queensland. Although the decision of the Court of Appeal does not have the effect of setting the Funding Agreement to nought, the first plaintiffs, as general purpose liquidators of Octaviar Administation, have informed Mr Kerr that they consider the effect of the Court of Appeal's decision is that Octaviar Administration is unable to provide any further indemnity to Mr Kerr for his personal exposure to an adverse costs order or any further cash funding for the trial at this stage. The first plaintiffs have deposited $1.5 million into Mr Kerr's Special Purpose Liquidator account to assist with trial preparation and trial costs. Mr Kerr's opinion is, however, that this sum is materially insufficient for the work ahead.
Mr Kerr has tried to secure alternative funding and has set out in his affidavit the detail of those endeavours. However, they have been to no avail.
In those circumstances, Mr Kerr wishes to accept Fortress's offer. The offer is for a payment from Fortress to Octaviar Limited of $12.35 million inclusive of costs and an agreement by Fortress that certain monies owing by Octaviar Limited to Fortress are no longer secured by a charge held by Fortress; i.e. they will become unsecured monies.
If the offer is accepted, the outcome for unsecured creditors of Octaviar Limited ranges from something in the order of $1 million to something in the order of $4 million, but may very well be less depending on various factors not necessary for me to set out here.
In his affidavit, Mr Kerr has set out in detail his reasons for accepting Fortress's offer.
First, Mr Kerr, as Special Purpose Liquidator of Octaviar Limited, faces the prospect of going into a seven week (at least) trial unfunded for all practical purposes, and with no indemnity for any adverse costs order. And in circumstances where his prospects are not without considerable risk. In that regard, Mr Kerr said:
"The Offer is less than I would have hoped to achieve with my prospects stated as they are, even in the most recent advice from [counsel] (though my expectations were considerably revised following receipt of that advice). However, I do not believe the Offer to be disproportionate to my prospects. The latest advice identifies considerable risk."
As I have mentioned, I have been taken to the advice actually given to Mr Kerr. It is not, however, necessary for me to set out any more than those remarks by Mr Kerr.
Second, by accepting the offer:
1. Octaviar Limited will be relieved of the burden of further costs, and the potential exposure to an adverse costs order, associated with a significant trial and possible, indeed likely, appeals;
2. a significant secured liability, which the parties describe as the "YVE Debt", presently exceeding $25 million, will be converted to an unsecured liability;
3. the first plaintiffs, as general purpose liquidators of Octaviar Limited, will be relieved from any exposure in respect to an undertaking as to damages they have given in the Queensland proceedings as a price for obtaining a freezing order against Fortress.
Third, Mr Kerr has bettered former offers made by Fortress. In view of the Court of Appeal decision, Mr Kerr was hardly negotiating from a position of strength. The current offer is approximately $3.25 million more than the starting point in recent negotiations and $1.35 million more than the highest cash offer Fortress made following an unsuccessful mediation at a time when Mr Kerr was fully funded.
Fourth, if the offer is accepted, Octaviar Limited will receive the cash payment of $12.35 million regardless of the outcome of Octaviar Administration's proceedings (which will proceed next week). As I have said, Mr Kerr's opinion is that because of the overlapping nature of Octaviar Limited's and Octaviar Administration's claims against Fortress, there is a prospect that, if Octaviar Administration is successful, Octaviar Limited will receive no monetary benefit, even if it makes out its case against Fortress.
Fifth, although the return to unsecured creditors is likely to be modest (if anything at all), Octaviar Administration claims to be a creditor of Octaviar Limited. If it receives all of the proceeds of the settlement under the Funding Agreement, the position would be not unlike that which would obtain by reason of s 564 of the Corporations Act. Octaviar Limited and Octaviar Administration share many common creditors. Given the overlap of significant creditors, the same significant creditors of Octaviar Limited will benefit (albeit indirectly) through the settlement proceeds being received by Octaviar Administration.
In those circumstances, I am comfortably satisfied that Mr Kerr's decision to accept the offer is proper and reasonable.
I also accept the submission of Mr Oakes and Mr Golledge that "special circumstances", over and above mere commercial considerations, exist in this litigation such as to justify me giving Mr Kerr the direction he seeks.
In addition to the matters I have set out above, I have had regard to what Mr Oakes and Mr Golledge described as "the huge history of litigation by parties dissatisfied with outcomes at various stages" in the Octaviar Group liquidation. I am told the litigation has included challenges to the entry by Octaviar Limited and Octaviar Administration into Deeds of Company Arrangement, the removal of the original general purpose liquidators of both companies, challenges to High Court level of extensions of time for commencement of preference actions, and the two challenges to intermediate appellate courts of the funding agreements to which I have referred.
My attention has also been drawn to a letter of 17 April 2015 received by Mr Kerr on behalf of one creditor (which is included in a confidential exhibit) which suggests that there may be controversy about Mr Kerr's decision to accept Fortress's offer; although yesterday the solicitor for that creditor said that the creditor does not oppose Mr Kerr accepting Fortress's offer.
I have mentioned that Ms Taylor made submissions on behalf of the first and third plaintiffs. Ms Taylor informed me that the first and third plaintiffs do not oppose the making of the direction sought by Mr Kerr.
Ms Taylor, however, pointed out that the Funding Agreement is, as a matter of contract, still on foot and submitted that it may well be that the remitter from the Court of Appeal will be determined in the near future and that such doubt as may now exist as to the availability of funds to Mr Kerr under the Funding Agreement will be thereby clarified. That may be. However, I consider there to be substance to Mr Kerr's apprehension that any disposition of the remitter favourably to the interests of Octaviar Administration and Octaviar Limited is very likely to be challenged by Fortress, leaving Mr Kerr's position in the same precarious state that now exists.
Ms Taylor also submitted that I should consider Mr Kerr's application only in the context of the merits of the offer from Fortress. However, Ms Taylor told me that the first and third plaintiffs do not wish to suggest that it would be unreasonable for Mr Kerr to accept the offer.
In those circumstances, I make the direction in paragraph (1) of Mr Kerr's interlocutory process of 27 April 2015 and order (2) of that interlocutory process.
I make the usual order for the return of exhibits and, in particular, I return the confidential exhibit.
I order that these orders be taken out forthwith.
As I mentioned before, I will circulate these reasons before publishing them and invite submissions as to whether there is any part of them that the parties consider ought not to be published.
[3]
Amendments
06 May 2015 - Plaintiff's solicitor details correct on coversheet.
Addition of words "by order of this Court" at [4].
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Decision last updated: 06 May 2015
Parties
Applicant/Plaintiff:
Fortress Credit Corporation (Australia) II Pty Ltd