Further findings of fact
858 On 29 January 2008, Mr Hall sent an email to Mr Kelly setting out possible questions for Mr Kelly to raise with OL's management following OL's share price collapse:
Dear Ian
Further to our conversation I have set out some considerations you may wish to give with respect to an approach and possible questions for management, when considering the current situation with [OL].
Short term focus
what is the likely sale price for Stella?
how is the residual cash going to be used to reduce debt (under various scenarios)?
what is the attitude of the other lenders/What are their rights in regards to demanding early repayment (as only the Fortress debt appears to be due in 2008)
does the sale of Stella trigger an early repayment of the Notes?
where do the Noteholders sit in priority to the other banks/creditors?
(security analysis)
details of any covenants breached
Medium term focus
what will the business model look like post sale of Stella?
will this business model be suitable? what are the key drivers of success/sensitivities
has the financial services business been damaged by the negative publicity? what is the likely impact?
what safeguards are in place to protect value
In the absence of any sensible forecasts, these are probably some of the medium term issues that management should be in a position to discuss in broad terms. They might give the you [sic] a flavour for whether the Notes are likely to have any value post the restructuring of [OL].
As we indicated in our earlier reports projections for the repayment of the notes in 2011 are going to be difficult to assess especially given the nature of the business which relies on future acquisition and sale transactions. Further the answers to some of the questions above will have a significant impact on the ability of [OL] to repay the Noteholders in 2011. Hence the suggested focus is to ascertain if they will survive this current crises [sic] before considering if they can repay the Notes in 2011.
Please give me a call to discuss it further.
Regards
859 Further, on 31 January 2008, PwC provided the respondent with PwC 4, which set out a list of possible future steps for the respondent's consideration. This included seeking answers to a number of questions from OIN and OL to ascertain whether they had complied with, and would be able to comply with, their obligations in respect of the notes. PwC also advised the respondent to seek legal advice to understand, amongst other things, the legal options open to the respondent to enforce his rights and to seek information and co-operation from OL.
860 On 4 February 2008, following consultation within the PTO, the respondent engaged his present solicitors, who were on the respondent's panel of legal advisers. On 14, 20 and 21 February 2008, the respondent's solicitors wrote to OIN and OL seeking information as to the financial standing of OIN, OL and any Material Subsidiaries.
861 On 13 February 2008, in the context of considering whether to extend the Fortress facility on the terms then proposed, OL's directors recorded their conclusion, and resolved that as the company was solvent and able to pay its debts as and when they became due and payable, the facility should be extended.
862 On 19 February 2008, Mr Kelly and the respondent's solicitors met with Mr Korda. At that meeting, Mr Korda advised that the sale of Stella was contingent on a declaration of solvency, which OL's directors were happy to give. In this connection, the Stella share sale agreement contained warranties by OL that no petition or other process for winding-up or dissolution had been presented or threatened in writing against it and that, so far as it was aware, there were no circumstances justifying a petition or other process. OL had also warranted that it was able to pay its debts as and when they fell due. The respondent did not have a copy of the share sale agreement at this time. He was reliant on what Mr Korda had said in that regard. The respondent's solicitors were only given a copy of the share sale agreement by OL's solicitors on 18 March 2008.
863 Also at this meeting, and somewhat paradoxically, Mr Korda advised that, in the absence of a "standstill agreement" with creditors, which would include the respondent on behalf of the noteholders, OL would probably be insolvent, even though the group was meeting its day to day operational expenses. As the respondent's solicitors' letter to the respondent on 20 February 2008 suggests, Mr Korda's standstill proposal, as it might affect the respondent and the noteholders, was somewhat undeveloped. Nonetheless, it appeared to involve the noteholders agreeing to vary the maturity date to keep it "flexible" (either by bringing it forward or postponing it), foregoing interest for a period, and receiving repayments of capital on a staged basis. In response, the respondent's solicitors advised the respondent to seek further information from OL; to provide them (the solicitors) with instructions to meet with the major noteholders in respect of Mr Korda's "proposal"; and to engage Mr Hall to advise on the information that would be necessary to allow due diligence to be conducted in relation to that "proposal".
864 On 20 February 2008, 333 Capital provided Mr Kelly with a "cash flow waterfall" and a "strategic review". The "cash flow waterfall" was an outline of the (realisable) asset position of the Octaviar Group. The main assets were the Stella sale proceeds and the value of the residual 35% interest in Stella. The "cash flow waterfall" identified the "Net Cash Flow Before Long Term Creditors" as $984.9 million. The "strategic review" was a high level document directed to summarising key information as to the position of the group, and future plans.
865 On 26 and 27 February 2008, OIN and OL responded to the respondent's solicitors' requests by providing some information. The respondent's solicitors did not consider the responses to be satisfactory. In their view, a number of answers were non-responsive to the questions that had been asked, and other answers were "simply inadequate". Further, in their view, the answers given were inconsistent.
866 Notwithstanding the respondent's solicitors' view as to the unsatisfactory nature of OL's responses, the following matters impressed themselves on Mr Jenkins, who had responsibility for the matter within the firm.
867 First, in its responses, OL said:
There was only one secured debt (the Fortress facility).
There were no defaults under any facilities and no monies had become due and payable.
There were no breaches of the Trust Deed, Terms of Issue or Chapter 2L of the Corporations Act, and no covenants or conditions that could not be performed.
OL did not believe that any event had occurred since the last quarterly report which could cause the notes to become immediately due, constitute an Event of Default, give rise to rights or remedies, or materially prejudice noteholders.
868 Secondly, the answers given by Mr Anderson as Chief Financial Officer on behalf of OL had been copied by him to members of 333 Capital and Freehills (then acting for OL). Mr Jenkins gave this evidence in relation to the significance of this circumstance:
I can recall that we were told by David Anderson that the relevant companies (in particular OIN) were not in default under any facilities or under the notes terms and noting he had copied the Group's professional advisers. I took this as indicating that those advisers had been involved in formulating the answers. That suggested to me that they were credible answers because, whilst sometimes a distressed debtor may not be entirely frank, my expectation of fellow professionals (lawyers and accountants) was that they would not knowingly mislead me.
869 At this time, Mr Kelly was concerned that Stella had been sold at an undervalue. He raised this concern with Mr Megson (a solicitor within the office of the Official Solicitor to the respondent) and inquired as to the "possibility of urgently appointing a liquidator to prevent the sale proceeding". Mr Megson warned Mr Kelly about the dangers for the respondent if an application were to be brought and it was later found that the sale had not been at an undervalue as Mr Kelly had feared. Mr Megson advised Mr Kelly that if OL suffered loss as a result of the respondent's actions, then it may have recourse against the respondent.
870 Relatedly, Mr Jenkins gave evidence that, at this time, he was concerned about "precipitous steps" that might cause the partial sale of Stella to "fall over". In his affidavit, he said:
69 …At this point, the Octaviar Group was taking advice from reputable professional advisors and had embarked on the sale of part of the Stella Group in order to generate cash to pay its creditors and meet operating costs. Whilst the PTQ had some concerns as to the Octaviar Group's financial state, my view at the time was there was no justification at this point for taking steps that might further harm the company's financial position unless they were necessary and considered and in the best interests of noteholders.
70 Whilst I had not seen the Share Sale Agreement at this time, my experience told me that insolvency of the ultimate vendor entity during the due diligence period or just prior to completion may trigger default clauses or provide "get out" options for the buyer. If that occurred and the contract fell over, unless a sale on equal terms could be negotiated, the PTQ might face damages claims for loss of the sale. I did not want the PTQ exposed to the consequences of such an outcome which might have included damages claims for many millions of dollars if the contract collapsed. ...
871 On 27 February 2008, the respondent's solicitors wrote to OL demanding that the requested information be provided. They also sought an undertaking (to be provided by no later than 4.00 pm on 28 February 2008) that the sale of any assets by companies within the Octaviar Group, including the proceeds of sale of Stella, be held in a dedicated "Asset Realisation Account" until such time as a proposal for the disposition of the funds could be formulated and agreed to by the creditors of the Octaviar Group, or an administrator appointed. As events transpired, this undertaking was not given.
872 At this time, Mr Jenkins was endeavouring to come to an understanding whether the noteholders would be better off under the kind of proposal advanced by Mr Korda. In order to reach that understanding, he had to understand what the likely position would be absent acceptance of such a proposal. In short, he was endeavouring to determine and value the respondent's current rights. One of the difficulties was the complex nature of the Octaviar Group. Mr Jenkins explained the position as follows:
55. The structure of the Group involved over 130 subsidiaries and its assets were held in each of those companies. The Octaviar Group business involved acquiring assets and using special purpose companies to hold them. There were intercompany loans created as a consequence of that activity. The issue being confronted at this point by the PTQ and the major note holders from my perspective was the need to understand the complexities of the intercompany position in order to be able to compare it to any proposal that might be put. This is because the intercompany position would dictate what funds might become available to note holders free of other claims in a winding up. The reason this was an issue for me was that this comparison would determine what step was in the best interest of the note holders. That is, winding up or work out.
56. In my experience, when a creditor of a company has distressed debt and the company may be insolvent, the default position is not to simply wind up the debtor company. What normally occurs is that there is a conversation with the debtor about why the debt is distressed and whether the situation is salvageable either entirely or in part. Once that information is available, the creditor is able to consult its own interests and consider the options it has. Therefore, my view at the time was that we needed, first, information to enable a winding up scenario to be worked through in order to predict outcomes for the note holders and, second, a detailed alternative proposal to be put by OL and Mark Korda to enable a meaningful comparison. Obtaining that information became my focus at that time.
873 Mr Jenkins was also focused on determining whether a trigger for a notice of default existed and what the "guarantee position" would be if a default was triggered.
874 I should also record that, at around this time, Deutsche Bank - a major noteholder - and other major noteholders were, separately, seeking their own legal advice and interacting with the Octaviar Group through 333 Capital and Mr Korda.
875 Having not been provided with what the respondent's solicitors regarded to be adequate responses to the requests for information that had been made, and on instructions from the respondent, counsel were briefed on Friday 29 February 2008 to advise on the respondent's obligations and the steps he should take to enforce his rights to obtain information from OIN and OL. For this purpose, the solicitors drafted an originating application to be filed in the Supreme Court of Queensland seeking declaratory relief that OIN and OL had breached the Trust Deed by failing to provide information to the respondent. The draft originating application also sought injunctive relief, including an order that an affidavit be filed certifying OIN's and OL's net assets and an order that, save for the payment of secured creditors and transaction expenses, the sale proceeds of Stella and of any other asset sold at that time be held in an "Asset Realisation Account" on certain terms.
876 Also on 29 February 2008, Mr Korda informed Mr Kelly that the sale of Stella would complete on that day and that OL's directors had signed a certificate of solvency. Mr Korda also informed Mr Kelly that a meeting of the Octaviar Group's five largest creditors would be called in the ensuing week to discuss a "proposal".
877 On 3 March 2008 - the following Monday - counsel who had been briefed (Mr Sofronoff QC and Mr O'Sullivan) advised that:
the briefed material showed justifiable concerns about the solvency of OL, although much of the material had the status of information, not admissible evidence;
the time had come for the respondent to exercise his powers of inspection;
the respondent should appoint an auditor to OL and OL should be informed that its "financial and other records" were to be inspected;
a request should be made of OL to allow the auditor to enter its property for the purposes of inspection;
upon consideration, an application to the Supreme Court of Queensland should not be made at that time, but in the event of undue delay (on the part of OL) urgent injunctive relief should be considered.
878 On 3 March 2008, Mr Hall prepared a list of "priority material" to be inspected. This was to assist the auditor.
879 On 4 March 2008, the respondent appointed Robert Roach of PwC to act as auditor. The respondent's solicitors also wrote to OL informing it that Mr Roach would be attending to inspect documents the following day. The letter identified the records and information that were required for inspection under the following categories:
the sale of Stella;
board papers, financial papers and correspondence;
assets and cash flow; and
details of liabilities.
880 Mr Anderson responded on behalf of OL. He sought to delay the inspection until 7 March 2008. He considered the allowed time period for production to be unreasonable. The respondent's solicitors sent an email to Mr Anderson, rejecting his contention.
881 On 5 March 2008, Mr Roach and a Mr Taylor (a consultant at PwC), together with Mr Hall and Mr Kelly, attended OL's premises in Southport, Queensland to inspect the documents sought. As events transpired, the inspection did not proceed. Mr Anderson informed those attending that his staff were working on compiling the documents and that Mr Roach should return the following Friday, 7 March 2008. Mr Anderson was quizzed on a number of matters. He confirmed that a certificate of solvency had been given in relation to the completion of the sale of Stella and reiterated his own view that OL was solvent.
882 On 7 March 2008, OL produced certain documents. Following inspection, the respondent's solicitors formed the view that the production was inadequate. Further, from the information provided, the respondent's solicitors came to the realisation that this information was inconsistent with earlier answers given by OL in respect of the respondent's requests, and revealed apparent errors in some of those answers.
883 Mr Hall and his team within PwC also considered the documents, which included the "cash flow waterfall" prepared by 333 Capital. Mr Hall gave evidence in the present proceeding to the effect that, on the information then provided by OL, it was not possible for him to come to a view whether OL and OIN were solvent or insolvent.
884 On Saturday 8 March 2008, the respondent's solicitors sent an email to Mr Anderson, stating (amongst other things) that the respondent's requests for information and documents had not been fully addressed and that some of the responses that had been given were evasive. The email concluded by stating that, unless certain documents and information were provided by 2.00 pm on Monday 10 March 2008, the respondent had given instructions that proceedings were to be commenced seeking orders (amongst other orders) that the information be produced.
885 On 10 March 2008, the respondent's solicitors received a letter from Freehills. In that letter, Freehills said that:
their clients had expressed a willingness to provide information;
there had been a number of requests for information;
the foreshadowed proceedings would be "a waste of time and money" and an abuse of process in the circumstances;
it would be "regrettable" if any proceedings issued by the respondent led to a "loss of goodwill" between the respondent and the noteholders, which was "essential to ensuring that the most favourable outcome for all stakeholders in [OL]…is achieved".
886 Mr Jenkins gave this evidence in respect of Freehills' letter:
The letter accords with my general recollection that Octaviar at that time maintained that it was acting in compliance with its obligations. The suggestion of the loss of goodwill of the note holders is consistent with my recollection that pressure was being brought to bear on the PTQ by Octaviar and its advisors (Freehills and 333 Capital/Korda Mentha) that the PTQ was out of step with the view of the majority of its note holders and was acting un-commercially and potentially to their detriment.
887 Nonetheless, on 11 March 2008, the respondent commenced proceedings in the Supreme Court of Queensland against OIN and OL seeking "access to records" and the provision of certain "information, explanations and assistance" (that is, the QSC Information proceeding). It was in this context that Mr Kelly made the affidavit on which the applicant relies in relation to its case on breach of fiduciary duty and unconscionable conduct.
888 Mr Hall provided an affidavit in the QSC Information proceeding in which he deposed that the material produced by OL on 7 March 2008 was not adequate for him to reach a concluded view as to the solvency of OL or OIN, although the fact that certain information had not been produced raised concerns regarding the solvency of those companies.
889 On 14 March 2008, the Queensland Supreme Court made orders that OIN and OL progressively provide the respondent's solicitors with access to certain categories of documents. The Queensland Supreme Court also ordered that, by 5.00 pm on 17 March 2008, OIN and OL provide a statement signed on behalf of OIN's and OL's directors as to "whether or not, in their opinion, there are reasonable grounds to currently believe that [OIN and OL] will be able to pay their debts as and when they become due and payable".
890 OIN and OL progressively provided documents.
891 On 16 March 2008, Freehills provided written advice to the directors of OIN and OL on the principles for assessing whether a company is able to pay its debts as and when they become due and payable. As part of that advice, Freehills recorded their instructions that the Octaviar Group had only been served with two statutory demands (which had been complied with before the demands expired) and that OIN had not been served with any statutory demand or any other demand purporting to accelerate its liabilities to any person. Freehills also recorded their instructions that the Octaviar Group proposed to negotiate a standstill arrangement with the group's five major unsecured creditors, including the respondent, which would provide a moratorium of creditors' claims while the group realised its businesses and assets in an orderly manner.
892 On 17 March 2008, the statement of solvency was provided by OIN's and OL's directors. The statement recorded that the directors of OL and the directors of OIN were of the opinion that there were reasonable grounds to believe, at that date, that OL and OIN "will be able to pay their debts as and when they become due and payable".
893 On 18 March 2008, OL sent the respondent a draft standstill agreement.
894 On 18 March 2008, the respondent's solicitors engaged PwC (Mr Hall) to review certain documents provided by OIN and OL and to express an opinion on, amongst other things, whether the documents were sufficient for OIN's and OL's directors to provide the solvency statement that had been given. PwC were also to review a valuation that OL had provided for its residual (35%) holding in Stella and to comment on whether the valuation appeared reasonable. In the ensuing period, further information was sent by the respondent's solicitors to PwC for these purposes.
895 Also on 18 March 2008, it came to Mr Jenkins' attention that, on 13 March 2008, Challenger had commenced proceedings against OL and OIB in the Supreme Court of New South Wales seeking declarations that a Bondholder Trigger Event had occurred. In those proceedings, Challenger also sought an inquiry as to which of OL's subsidiaries answered the description "Material Subsidiary", and an order requiring OL to procure each such subsidiary to enter into a guarantee in favour of Challenger.
896 On 31 March 2008, Mr Hall sought to clarify the scope of work that PwC was required to undertake under their engagement on 18 March 2008. In an email sent that day to the respondent's solicitors and to Mr Kelly, he said:
As you are aware the [Octaviar Group] is a complex web of inter related entities and it is not possible to provide an in depth analysis of its solvency position. Our comments therefore are necessarily limited to the documentation provided as part of the legal proceedings brought by The Public Trustee in its capacity as trustee of [OIN] noteholders.
897 In evidence, Mr Hall confirmed that this was his view of the position at the time.
898 On 2 April 2008, PwC provided a draft report - PwC 5 - to the respondent and the respondent's solicitors. By that time, PwC's instructions had been modified. PwC were no longer required to express an opinion about whether the documents that had been provided by OL were sufficient for OIN's and OL's directors to provide the solvency statement they had given. PwC 5 included findings that the methodology that had been employed for an indicative valuation of Stella appeared reasonable and that, applying a discount for the fact that OL did not have a controlling interest, PwC's estimate of OL's 35% stake was in the range of $170.1 to $220.2 million. It does not appear that PwC 5 progressed beyond the draft stage.
899 Mr Jenkins gave evidence that, at this time, the respondent and his advisers were still trying to understand the solvency position of the Octaviar Group, including how funds would flow through the group in the event of a winding up. He also gave evidence that none of the noteholders was pushing the respondent to call in the notes or to seek a winding up of any OL entity at this time. Throughout this period, Freehills continued to provide the respondent's solicitors with information in relation to the Octaviar Group and developments affecting the group.
900 The respondent's evidence is rich in detail on these and other matters at the time. It is not necessary for me to set out that detail. It is sufficient for me to move forward to 28 April 2008, when OL issued its financial report for the Octaviar Group for the first half of the 2008 financial year. The report recorded that the group had made a loss of approximately $221.5 million for the period but had net assets of approximately $1.223 billion. However, this figure was based on a valuation of Stella prior to its partial sale in February that year. It did not take account of Stella's implied value as a result of that sale.
901 The directors expressed their opinion that there were reasonable grounds to believe that OL would be able to pay its debts as and when they became due and payable. But, the Directors' Declaration contained the following reservation:
The Directors note however that due to events occurring subsequent to balance date…there is material uncertainty as to the Company continuing as a going concern. Specifically the Group will need to reach an accommodation with its large unsecured creditors to remain a going concern…
902 The auditors, KPMG, issued the following disclaimer:
As a result of the multiple significant uncertainties set out above we are unable to form a conclusion on the appropriateness of the going concern basis used in the preparation of the interim financial report. We therefore are unable to and do not form a conclusion as to whether the interim financial report of Octaviar Limited is in accordance with the Corporations Act 2001 including:
(a) giving a true and fair view of the Group's financial position as at 31 December 2007 and of its performance for the half year ended on that date; and
(b) complying with Australian Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001.
903 Mr Jenkins considered this report to be a "game changer". His evidence was that the report would enable the respondent to argue that OIN and the Guarantors were insolvent, and therefore open the way for the respondent to apply for winding up. He said, however, that the question remained whether winding up OIN and the Guarantors would have been the optimal outcome for the noteholders.
904 On 3 May 2008, Mr Sofronoff QC and Mr O'Sullivan were briefed to advise whether there had been an Event of Default under the Trust Deed and Terms of Issue and, if so, whether the default was sufficient to enable the respondent to call in the notes.
905 On 8 May 2008, Mr Jenkins approached Mr Hall about whether he was in a position to provide an affidavit deposing to the insolvency of OIN and the Guarantors. Mr Hall was not prepared to give such an affidavit, principally (it would seem) because the "cash flow waterfalls" prepared by 333 Capital indicated that the Octaviar Group was meeting its day to day costs, and long term debts were not then due.
906 On the same day, Mr Sofronoff QC and Mr O'Sullivan provided their joint opinion, which was that an Event of Default had occurred justifying the respondent calling in the notes and, simultaneously, applying to wind up OL and OIN on the ground of insolvency. In this connection they advised that, on the available evidence - in particular the qualification provided by the directors in the half-yearly report; the auditor's disclaimer; and counsels' own analysis of the financial report taking into account the sale value of Stella - OL was unable to meet debts to very large creditors, which were due and payable from time to time over the following two to three years, from assets OL currently owned or from other sources that might come into existence within the relevant time frame. They concluded that the Octaviar Group did not have net assets of $1.223 billion (as reported), or "anything like that sum". They noted that the respondent was not minded to recommend to noteholders that an accommodation be reached with OL or to permit OL and 333 Capital to continue to undertake what was, in substance, a liquidation of the Octaviar Group under the supervision of its board of directors. In the circumstances, counsel concluded that OL was "profoundly insolvent" in the absence of a credible proposal to get it out of its present state of insolvency. They recommended, nonetheless, that the respondent retain an appropriate expert to review their interpretation of the accounting materials that had been briefed.
907 On 17 May 2008, Professor Gray provided a report to the effect that OL and OIN were insolvent.
908 On 23 May 2008, the respondent served a notice of default on OIN. The notice was based on the insolvency of OIN and OL, giving rise to an Insolvency Event and, hence, an Event of Default. It was also based on OIN providing misleading information to the respondent in response to his requests for information on 14 and 21 February 2008 (specifically, Mr Anderson's responses on 26 and 27 February 2008) and by providing the statement of solvency on 17 March 2008. The notice demanded that, on 5 June 2008, OIN redeem the notes for their face value with interest payable up to and including 4 June 2008. This demand was not met.
909 Consequently, on 4 June 2008, the respondent commenced separate proceedings in the Supreme Court of Queensland to wind up OL, OIN, OFS and OIB. The applications were supported by an affidavit made by Mr Wedge who, by that time, was acting as Public Trustee.
910 The following day, 5 June 2008, Freehills sent a letter to the respondent's solicitors, which stated (amongst other things):
Although we have yet to review in detail the material said to support the applications, we expressed to you yesterday our clients' immediate concern at the terms of paragraph 28 of the affidavit of Mr Wedge. That paragraph suggests that the Public Trustee has formed a firm intention not to consider any standstill proposal from Octaviar whatsoever. If this is correct:
• it is a matter which, far from demonstrating compliance with the duties of a trustee, might be thought to indicate an abdication of responsibility and a fettering of the Public Trustee's duty to consider which of the available alternatives might best serve the interests of those for whom he is trustee; and
• it indicates that the Public Trustee is taking a position which we understand to be contrary to that favoured by a number (and the majority in value) of the Noteholders whose interests it is supposed to represent.
We are confident that you would agree that it would be a very real concern not only to our client but also to noteholders if the Public Trustee placed itself in a position where it would not consider entering into a standstill agreement even in circumstances where such an agreement was likely to lead to a better outcome and recovery for Noteholders.
911 The letter referred to the potential harm to all creditors (including the noteholders) should the Octaviar Group be "pushed" into liquidation. The letter argued that the respondent's applications were "counter-productive in terms of achieving the optimum outcome for [the respondent] and other creditors of the group". In this connection, the letter argued:
As you and your client have been made repeatedly aware, if all the Octaviar group's large creditors' debts were to become immediately payable, the group presently has insufficient funds to be able to pay those debts. The very fact of service of your client's winding up applications is likely to cause Challenger to be able to accelerate the date for payment of its $100 million Bonds debt, as it will be an Event of Default under those Bonds if the winding up applications against Octaviar Ltd and Octaviar Investment Bonds Ltd are not dismissed or withdrawn within 7 days.
Based solely on an assessment of the group's current creditors and the present value of its assets there would be a significant shortfall as regards creditors if the group were to go into liquidation at this time - a shortfall of at least $400 million.
912 The letter urged the respondent to accept that creditors would be significantly better off under a standstill than a liquidation.
913 The letter then turned to discuss the views of noteholders. These passages are important because they advance the proposition that, in seeking the winding up of the companies, the respondent was out of step with the major noteholders:
As you are aware, Mark Korda of 333 Capital, on behalf of Octaviar, has had a number of discussions with Deutsche Bank. As your client is also aware, Deutsche Bank is one of the largest holders of Notes. In addition, Deutsche Bank, we understand, has over time liaised with a number of other large Noteholders who, between them, hold well in excess of 50% by value of all the Notes.
The writer spoke to David Maynard, a Director of Deutsche Bank after receipt of your client's winding up applications. Mr Maynard reiterated that Deutsche Bank remains receptive to a commercial arrangement between the Octaviar group and its creditors which will deliver to those creditors greater value than a liquidation of the group.
In addition, recent discussions with Challenger lead the Octaviar group to believe that Challenger - which is not only the holder of unlisted Bonds, but also holder of approximately $42 million of Notes - is also coming to recognise that the advantages of a standstill agreement may deliver a better outcome for creditors than a liquidation of the group.
While you indicated that the Public Trustee had consulted with Noteholders our clients are concerned at the apparent divergence between the views of those large Noteholders relayed to us (as described above) and the view of the Public Trustee as set out in paragraph 28 of Mr Wedge's affidavit.
Deutsche Bank and those with whom we understand it to have been liaising, and Challenger are all sophisticated commercial organisations which can be assumed to be capable of assessing what is likely to be in their best commercial interests in terms of maximising their recovery. If those organisations are prepared to explore the possibility of entry into a standstill agreement, it would be unfortunate if your client closed itself to such a possibility or if it expressed views which might be interpreted as foreclosing such a possibility.
If the views of those Noteholders have been accurately relayed to our client, then it is also a matter of concern to understand how and why it is that the Public Trustee has formed a view which is so different from that apparently held by the holders of so large a proportion of the Notes, and how, in view of the matters we have a listed above, the Public Trustee will justify to those Noteholders the lower return which they will obtain on a liquidation of the group than would be available under a negotiated standstill arrangement.
We also note that none of the group's other large creditors has indicated an unwillingness to consider a standstill. Moreover, in one case - OPI Pacific finance, whose debt is second in value only to your client's - the trustee for noteholders has expressly sought and obtained agreement to a moratorium for a period to enable the negotiation of a standstill with Octaviar.
In the circumstances, we invite your client to consider whether it wishes to proceed to file the affidavit of Mr Wedge in its current form. In particular, we would invite your client to reconsider whether paragraph 28 accurately represents Mr Wedge's position. If it does, we would be grateful to receive written confirmation that while that may be his present position, he does not intend by the statement in paragraph 28 to rule out the possibility of entertaining a revised proposal for a standstill if and when one is formally put to him, (though we note, for the record, that Mr Wedge has to date declined to enter into any dialogue with us or our clients).
We also invite you to inform us as to whether the position expressed in paragraph 28 of Mr Wedge's affidavit is said by the Public Trustee to reflect the view of the major Noteholders by either number or value, as this is a matter which is relevant to our clients' approach to the winding up applications, a matter on which they may seek to adduce evidence or cross-examine, and one which will be a relevant factor to be considered by the Court.
914 On 6 June 2008, the respondent issued the following information memorandum to the noteholders:
The Public Trustee of Queensland, on 4 June 2008, applied to the Supreme Court of Queensland for an Order that Octaviar Ltd, Octaviar Investment Notes Limited, Octaviar Investment Bonds Limited and Octaviar Financial Services Limited be wound-up and a liquidator appointed.
The Trustee has exercised his discretion on behalf of noteholders and considers their interests to be of central importance. The Trustee has acted after careful examination and advice. The Trustee's assessment is that the half yearly accounts reveal some concerns and in particular, the sales of assets which involved large write-downs in book value.
The Trustee is also concerned about the outflow of cash from the group that has seen a reduction in the net proceeds of the sale of the Stella interest.
The Trustees is of the view that the time has come for the group's affairs to be under the control of an independent liquidator whose first duty is to the creditors and for this process to be supervised by the Court.
Should you require any further information please contact the Trustee's legal advisors …
915 On 6 July 2008, Mr Anderson made an affidavit which was filed in the winding up proceedings. In that affidavit, he gave an overview of the Octaviar Group and its operations; the events following the share price collapse on 18 January 2008, including the steps taken to stabilise the group's position; and the group's current financial position. In his affidavit, Mr Anderson conveyed the view of the board and management of OL (said to be consistent with the advice given by Mr Korda) that a liquidation of the Octaviar Group was likely to deliver a less favourable outcome for creditors and shareholders. Four reasons were advanced:
a liquidation was likely to be value-destructive of the group's assets;
the level of claims in a liquidation was likely to be greater;
the costs of liquidation would be substantial, especially if there were to be (as Mr Anderson believed) substantial litigation; and
there would be a substantial time cost to creditors because any dividend was likely to be delayed.
916 The affidavit elaborated on these reasons. Mr Anderson also referred to the fact that the Octaviar Group had paid its small creditors whilst, at the same time, seeking to treat major creditors equitably. In this connection, Mr Anderson referred to the standstill proposal that had been floated with large creditors under which:
the creditors would forego further interest and agree to take no recovery or enforcement proceedings for the period of the standstill;
the group would make an initial pro rata distribution of the cash it had among the participating creditors; and
the group, under the supervision of 333 Capital, would continue to realise its assets as and when appropriate, with further distributions made when funds became available.
917 Mr Anderson said that as a result of various issues raised by creditors in respect of this proposal, 333 Capital was developing a revised proposal under which creditors would be offered a choice between:
an immediate cash payment in return for cancellation/acquisition of their debts;
retaining a longer-term exposure to the Octaviar Group; or
some combination of these features.
918 Mr Anderson elaborated on why it was in the interests of creditors to agree to such a proposal. He concluded the affidavit by stating that, by the time of the hearing appointed for the winding up applications (9 and 10 September 2008) he expected that he would be able to inform the Supreme Court of the precise terms of the proposal(s); the extent to which the proposal(s) had been accepted; and the timetable for implementing the proposal(s).
919 I record for later reference that Mr Anderson's affidavit also drew attention to the fact that on 24 June 2008, Wellington Investment Management Limited (formerly MFS IM, the responsible entity of PIF) (WIM) had commenced proceedings in the Supreme Court of Queensland against OL, OA and OPI Pacific Finance Limited seeking compensation in relation to the investments which had been made as part of the PIF transaction. In those proceedings, it was alleged that the office-holders of WIM had breached their obligations to exercise reasonable care and diligence in relation to the investments and to act in the best interests of PIF and had failed to ensure that WIM complied with the Corporations Act and its constitution. The proceeding also included allegations that the transactions were unapproved related party transactions. The commencement of this proceeding was the culmination of investigations conducted over some months by OL and WIM, which commenced in late March 2008.
920 A revised proposal was forwarded by OIN to the noteholders on 17 July 2008. It involved the noteholders agreeing to amend the Terms of Issue so that it would provide for the noteholders to receive a cash payment in exchange for cancellation of their notes or to remain as a noteholder on amended terms.
921 In the meantime, on 18 July 2008, the respondent's solicitors obtained earlier hearing dates for the winding up applications (24 and 25 July 2008). This was met with resistance by the defendant companies.
922 Further, on 21 July 2008, the solicitors for Challenger (who also held notes under the OIN Trust with a face value of $41.48 million, representing approximately 11.89% of the notes on issue) wrote to the respondent's solicitors, stating (amongst other things):
We note from releases to the Australian Stock Exchange that your client has brought an application for Octaviar Limited to be wound up in Insolvency. That application was due to be heard in September 2008. We are instructed that application will now be heard by the Supreme Court of Queensland on 24 and 25 July 2008. We note that your client has not formally asked the Noteholders whether they believe that winding up Octaviar Limited will be in the best interest of Noteholders, and as discussed below, Noteholders have recently been presented with an alternative to winding up, which they need to further consider and which may result in a better financial outcome for the Noteholders.
We are instructed that Challenger, along with the other Noteholders, recently received an offer from Octaviar Investment Notes Limited in respect of a proposed amendment to the terms of the Notes (the Offer). The Offer would enable Noteholders to either accept a cash payment or remain as a Noteholder on the amended terms. It is an offer which our client is giving careful consideration, and which we expect other Noteholders are also giving careful consideration. It is also an offer which our client will require some time to evaluate. The Offer is open for acceptance by Noteholders until 11 August 2008.
If your client is successful in the application for Octaviar Limited to be wound prior to the Noteholders having an opportunity to consider the merits of the Offer, your client will be depriving the Noteholders of the opportunity to give the Offer appropriate consideration. In Challenger's view, it would be more appropriate for your client's application to be heard a reasonable period of time after 11 August 2008. By that time, it would be apparent whether or not the Noteholders are minded to accept the Offer made by Octaviar Investment Notes Limited. Accordingly, Challenger requests that the Public Trustee of Queensland:
1. seek to adjourn the winding up application until a reasonable period of time after 11 August 2008 in order that it can be established whether or not the Noteholders wish to accept the Offer; and
2. prior to proceeding with any application to wind up Octaviar Limited, formally ascertain the views of the Noteholders (by calling a meeting of Noteholders as provided for by clause 19 of the Trust Deed) as to whether or not the Noteholders wish the Public Trustee of Queensland to press the winding up application.
In the event that your client is not willing to accede to these requests, which our client considers to be in the best interests of all Noteholders, we request that this letter be drawn to the attention of the Court during the course of the winding up application commencing on 24 July 2008.
923 The solicitors for Challenger sent a further letter to the respondent's solicitors on 21 July 2008. In their second letter, they repeated Challenger's position that the noteholders should be afforded an opportunity to weigh up the alternatives of accepting OIN's revised proposal or supporting the winding up applications. They expressed the view that the liquidation analysis in OIN's revised proposal appeared to be overly optimistic and that, by pressing on with the winding up applications, the respondent would not be protecting the interests of noteholders. The letter concluded by stating that, if the respondent proceeded with the winding up applications, Challenger would suffer serious financial harm, for which it reserved its right to seek compensation from the respondent.
924 Mr Jenkins gave evidence that, in the period up to 24 July 2008, the respondent was alone in pressing for the winding up applications to be heard at that time, apart from some support from the Australian Taxation Office which had served a statutory demand on 17 June 2008. Mr Jenkins said that all other major creditors (including major noteholders) opposed the winding up applications proceeding because they needed more time to consider the revised proposal.
925 On 23 July 2008, Mr Korda made an affidavit which was filed in the winding up proceedings and in which he disagreed with a number of aspects of Professor Gray's solvency analysis.
926 When the winding up applications were called on for hearing on 24 July 2008, a number of major creditors sought and obtained leave to appear. However, in the immediately preceding period, the respondent was informed that a replacement trustee had been found - Trust Company Fiduciary Services Limited (TCFS). TCFS said that it would only accept the appointment if the winding up applications were either dismissed or adjourned. It said that, if appointed as trustee, it would call a meeting of noteholders for the purpose of considering a resolution which expressed their wish that the companies not be wound up.
927 By that time, the respondent had come to the view that he would consent to an adjournment of the winding up applications given the creditor (including noteholder) opposition that had been expressed (and, I infer, would have been expressed by the creditors appearing on 24 July 2008), and the fact that TCFS had indicated that it wished to pursue a different strategy. In consequence, the winding up applications were adjourned, but on the basis that certain undertakings were provided.
928 Ultimately, TCFS did not take up the appointment as trustee of the OIN Trust.
929 The winding up applications came back to the Supreme Court on 9 September 2008. One group of noteholders who appeared at that time expressed their non-acceptance of the revised proposal and their desire that the winding up applications proceed without delay. In light of that fact, the defendant companies asked that the applications stand down for a brief period. The respondent was concerned that, if that happened, the companies would thereupon resolve to appoint administrators, which might affect the determination of the relation back date. He immediately sought, and was granted, an interim injunction restraining the companies from appointing administrators. In fact, the companies did resolve to appoint administrators, but subject to the interim injunction being dissolved.
930 On 12 September 2008, the Supreme Court made orders preserving the relation back date referable to the winding up applications that had been filed on 4 June 2008. This assuaged the respondent's concerns. The interim injunction was then dissolved, with the consequence that the appointment of the administrators took effect.
931 Ultimately, the administrations were terminated after the respondent obtained orders in the QSC DOCA proceeding (see [540] above) setting aside the deed of company arrangement that had been proposed by Fortress. On 18 December 2008, liquidators were appointed to OIN and OIB. On 31 August 2009, liquidators were appointed to OL and OA.