In the matter of Octaviar Limited (in liq); In the matter of Octaviar Administration Pty Limited (in liq)

[2015] NSWSC 1621

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of Octaviar Limited (in liq); In the matter of Octaviar Administration Pty Limited (in liq) [2015] NSWSC 1621
Hearing dates:	28 August 2015
Date of orders:	03 November 2015
Decision date:	03 November 2015
Before:	Brereton J
Decision:	In proceedings 2011/397200: judicial advice given; In proceedings 2012/89484: application stood over to a date to be fixed.
Catchwords:	CORPORATIONS – winding up – liquidators – special purpose liquidators – application for advice as to distribution of funds – funds advanced by general purpose liquidator to special purpose liquidator to fund litigation – where funds no longer required – whether funds should be returned to general purpose liquidator – whether general purpose liquidator disqualified to act as liquidator under (CTH) Corporations Act 2001, s 532(2)(c)(ii) – where no opposition to special purpose liquidator retaining funds – payment of funds under funding deed – whether deed terminated – effect of deed absent court’s approval under Corporations Act, s 477(2B) – where arguable that special purpose liquidator entitled to treat deed as terminated – whether special purpose liquidator justified in applying for expanded powers to represent Octaviar Ltd’s interests in respect of claim as creditor of Octaviar Administration – where pursuing appeal of liquidator’s rejection of proof of debt places liquidators in position of conflict – where special purpose liquidator strong candidate to pursue appeal. CORPORATIONS – winding up – liquidators – approval of funding deed entered into by liquidators under Corporations Act 2001, s 477(2B) – whether funding litigation of related company “necessary” for winding up affairs of company under s 477(2)(m) – where some nexus between litigation and benefit in winding up beyond mere commercial return required.
Legislation Cited:	(CTH) Corporations Act 2001, s 477(2), 477(2A), 477(2B), s 479(3), s 532(2) (NSW) Court Suppression and Non-Publication Orders Act 2010, s 7, s 8(1)
Cases Cited:	Alli v Premier Timber Co 1952 (1) SA 689 Barnet v Fortress Credit Corp (Australia) II Pty Ltd [2012] HCATrans 33 Daemar v Opeskin (1985) 10 ACLR 67 Dublin City Distillery Limited v Doherty [1914] AC 823 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 Fletcher and Barnet, in the matter of Octaviar Limited (receivers and managers appointed) (in liq) and Octaviar Administration Pty Ltd (in liq) (No 2) [2011] FCA 315 Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89; (2011) 85 ACSR 38 Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2015] NSWCA 85; (2015) 105 ACSR 581 Fortress Credit Corporation (Australia) II Pty Ltd v HIH Casualty [2002] NSWSC 1036 Lord Corporation Pty Ltd v Green (1991) 22 NSWLR 532, 541 Re Antard Pty Ltd; ex parte Cohen (1976) 2 ACLR 108 Re English & Scottish Marine Insurance Co (1870) 23 LT 685 Re HIH Insurance Limited [2004] NSWSC 5 Re Home Counties Life Insurance Co (1862) 6 LT 374 Re McGrath (as liquidators of HIH Insurance Ltd) [2009] NSWSC 1244 Re McGrath [2010] NSWSC 404; 78 ACSR 405 Re One.Tel Limited [2014] NSWSC 457; 99 ACSR 247 Re WA Holiday Resorts Ltd (in liq) [1961] WAR 152 Waisbrod v Potgeiter 1953 (4) SA 502 Wilde v Australian Trade Equipment Co Pty Ltd [1981] HCA 13; (1981) 145 CLR 590
Category:	Principal judgment
Parties:	In proceedings 2011/397200: William John Fletcher & Katherine Elizabeth Barnet (first plaintiffs) Octaviar Limited (Receivers & Managers Appointed) (in liq) (second plaintiff) Octaviar Administration Pty Ltd (in liq) (third plaintiff) David John Kerr (applicant)   In proceedings 2012/89484: William John Fletcher & Katherine Elizabeth Barnet (first plaintiffs) Octaviar Administration Pty Ltd (in liq) (second plaintiff)
Representation:	Counsel: B Walker SC w A Flecknoe-Brown (Adminrs) J C Sheahan QC w C A Wilkins (Mr Kerr / SPL) Solicitors: Thomson Geer (Mr Kerr) Henry Davis York (Mr Fletcher & Ms Barnet)
File Number(s):	2011/397200; 2012/89484

Judgment

1. HIS HONOUR: Octaviar Administration Pty Ltd (“OA”) and its ultimate holding company Octaviar Limited (“OCV”) are each subject to a court-ordered winding up by the court, and Mr Fletcher and Ms Barnett are their liquidators (“the liquidators”), having been appointed as such on or about 9 September 2009. In the course of the winding up of OCV, on 6 April 2010 they and OCV instituted proceedings in the Supreme Court of Queensland against Fortress Credit Corporation (Australia) II Pty Ltd (“Fortress”) (“the OCV/Fortress proceeding”) in respect of alleged voidable transactions. On 8 December 2011, following recognition that OA may also have claims against Fortress, which were perceived to be at least potentially inconsistent with OCV’s claims, Mr Kerr was appointed special purpose liquidator (“the SPL”) of OCV to prosecute the OCV/Fortress proceeding. The liquidators and OA also brought proceedings in the Supreme Court of Queensland against Fortress (“the OA/Fortress proceeding”), the claims in which overlapped but were more extensive than those in the OCV/Fortress proceeding.

2. While there were significant assets in the liquidation of OA, there were insufficient assets in the liquidation of OCV to fund the conduct of the OCV/Fortress proceeding. For the purpose of funding those proceedings, in May 2012, OA (by the liquidators) entered into a funding deed (“the Fortress funding deed”) with the SPL, whereby OA agreed to fund the SPL to conduct the OCV/Fortress proceedings. The Fortress funding deed contained the following relevant provisions:

2.1 OCV’s Costs

OA agrees to pay:

(a)   OCV’s legal costs and disbursements; and

(b)   OCV’s liquidators’ fees.

3.1 SPL costs

Subject to clauses 3.2 to 3.5 of this Deed, OA agrees to pay:

(a)   the SPL legal costs and disbursements; and

(b)   the SPL fees.

…

3.3 Funding Notice

(a)   The SPL may give to the OA Liquidators a funding notice not more frequently than once in each calendar month for the SPL legal costs and disbursements and/or SPL fees.

(b)   A funding notice must:

(i)   identify the SPL budget to which the funding notice relates;

(ii)   set out in detail the amount, nature, source and calculation of the costs or expenses for which the SPL claims payment including the rates of time charges and the amount of time charged by the SPL, and the SPL lawyers;

(iii)   not claim an amount of costs or expenses not contemplated by the SPL budget;

(iv)   not claim an amount of a cost or expense the subject of another funding notice;

(v)    be signed by or on behalf of the SPL; and

(vi)   contain such other information as OA and/or the OA liquidators from time to time reasonably requires.

(c)   The SPL may revoke or amend a funding notice at any time save and except where funding has been provided to the SPL and OCV by OA thereunder.

(d)   OA and/or the OA liquidators may require the SPL to substantiate an amount claimed in a funding notice, including production of original invoices and time records.

…

3.5 Payment

(a)   OA must pay to either the SPL or the SPL lawyers, at the discretion of the OA liquidators, the amount claimed in a funding notice, within 28 days of receipt of the funding notice.

(b)   If the parties are in dispute about whether the nature of a cost or expense constitutes SPL legal costs and disbursements or SPL fees, or about the reasonableness of the quantum of a cost or expense or any other matter, OA must pay to the SPL the amount in dispute unless and to the extent the person determining the dispute pursuant to clause 3.4(b) above has already decided the dispute against the SPL. The SPL must account to OA by way of credit or refund for any amount paid by OA to the SPL under this provision which the person determining the dispute later decides, does not constitute SPL legal costs and disbursements or SPL fees, or is not reasonable in terms of the quantum. Monies received by the SPL from OA (which the OA liquidators indicate are in dispute) must be placed in a trust account (or similarly nominated account) pending a resolution of the dispute.

…

6.1 OCV’s Consideration

In consideration for OA’s agreement set out in this Deed, including to provide funding and other support on the terms set out in this Deed:

(a)   OCV hereby disposes of and assigns to OA 25% of the OCV judgment sum, which is to be paid in accordance with clause 9.2 below; and

(b)   OCV and the general liquidators release OA from its obligations under clauses 9.3 and 9.4 of the Litigation Funding Agreement and clause 2.1 of the Investigation Funding Agreement.

…

7.1 Reimbursement in the event of OCV Judgment

Subject to clause 9 of this Deed, in the event of an OCV judgment (in circumstances where there is no OA judgment), OCV agrees to reimburse OA for the following amounts paid by OA in accordance with this Deed:

(a)   OCV’s legal costs and disbursements;

(b)   OCV’s liquidators’ fees;

(c)   the common interest matters legal costs and disbursements;

(d)   the common interest matters fees

(e)   any amount paid by OA (and, the case of providing security, not recovered by OA) pursuant to clause 2.2 above; and

(f)   any GST for which OA or OA’s liquidators is or will become liable for arising out of or in any way associated with this Deed.

…

7.5 Reimbursement of SPL Costs

Irrespective of whether there is any OCV judgment or not, and subject to clause 9, OCV agrees to pay OA for the following amounts paid by OA in accordance with this Deed:

(a)   the SPL legal costs and disbursements;

(b)   the SPL fees; and

(c)   any GST for which OA or OA’s liquidators is or will become liable for arising out of (a) and (b) above.

…

9.2 Mechanics of Payment from OCV Judgment Sum

Upon resolution, the parties agree that the OCV judgment sum (if any) will be paid into a separate account and, upon clearance of funds, OCV will, subject to clause 10.4(a)(iv):

(a)   pay to OA from that account any money which OA is entitled to be reimbursed and to be paid pursuant to this Deed; and

(b)   remit to OA from that account OA’s share of the OCV judgment sum in accordance with clause 6.1(a) of this Deed.

…

10.1 Term of Deed

Subject to clause 10.2 the term of this Deed shall be until disposition of all payments to be made under this Deed.

…

10.3 Termination for breach

(a)   The SPL, OCV or both may terminate this deed if:

(i)   the OA liquidators, OA or both is or are in material breach of any obligation under this deed or the OA liquidators, OA or both has or have repudiated this Deed;

(ii)   the SPL, OCV or both has or have given 30 days notice in writing to OA and the OA liquidators specifying particulars of the material breach by the OA liquidators, OA or both or the repudiation by the OA liquidators, OA or both and requiring the material breach be remedied or the repudiation rectified within 30 days of notice being given; and

(iii) the material breach has not been remedied or the repudiation rectified within 30 days of notice being given.

…

10.4 In the event of termination

(a)   If this Deed is terminated pursuant to clause 10.2 or 10.3(a) of this Deed:

(i)   OA remains liable to pay OCV’s legal costs and disbursements, OCV’s liquidators’ fees, the SPL legal costs and disbursements, the SPL fees and the common interest matters legal costs incurred up to and including the date of termination of this Deed;

(ii)   OA remains liable under the indemnity in clause 2.2 of this Deed in respect of the period up to the date of termination of this Deed;

(iii)   OA will remain entitled to receive payments pursuant to clauses 7.1 and 7.5; and

(iv)   in the event that OA is reimbursed all amounts paid by OA pursuant to clause 2.2 above within 60 days of termination, and is released from any other liability under clause 2.2 above, then the disposition and assignment referred to in clause 6.1(a) above will be terminated and the 25% share of the OCV judgment sum shall be deemed to be reassigned to OCV and the SPL, and OA will not be entitled to any payment pursuant to clause 9.2(b) above.

3. Potentially, and as in fact transpired, the agreement contained in the Fortress funding deed was, for the purposes of (CTH) Corporations Act 2001, s 477(2B), one in respect of which the term of the agreement might end, or obligations under which might be discharged by performance, more than three months after it was entered into. It was not expressed, as is often the case, to be subject to and conditional upon the court’s approval under s 477(2B).

4. In respect of OCV, the SPL applied for and obtained such approval; that approval was and remains uncontroversial and requires no further consideration.

5. In respect of OA, the liquidators also applied for approval under Corporations Act, s 477(2B), and a direction under Corporations Act, s 479(3), to the effect that they were justified in entering into the Fortress funding deed. Such orders were made by a judge of the Federal Court of Australia on 23 February 2011. [1] However, on 25 July 2011, a Full Court of the Federal Court granted Fortress leave to appeal from those orders and allowed the appeal, remitting the application for further consideration. [2] An application for special leave to appeal was refused by the High Court. [3]

   1. 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; Fletcher and Barnet, in the matter of Octaviar Limited (receivers and managers appointed) (in liq) and Octaviar Administration Pty Ltd (in liq) (No 2) [2011] FCA 315 (Stone J).

   2. Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2011] FCAFC 89; (2011) 85 ACSR 38.

   3. Barnet v Fortress Credit Corp (Australia) II Pty Ltd [2012] HCATrans 33.

6. The liquidators thereafter obtained leave to discontinue the proceedings for approval in the Federal Court, and subsequently applied to this court for similar relief. On 30 March 2012, Hammerschlag J gave an approval under s 477(2B) and direction under s 479(3), and it was consequent upon his Honour’s orders that the funding deed was executed in May 2012.

7. By March 2015, OA had, pursuant to the funding deed, advanced $3,407,819.00 to the SPL to fund the OCV/Fortress proceeding, which was set down to be heard, concurrently with the OA/Fortress proceeding, to commence on 4 May 2015 for seven weeks. On 20 March and 7 April 2015, the SPL gave two funding notices under the funding deed, requiring provision of the sums of approximately $236,000 and $367,000 respectively. Those notices were not complied with by OA.

8. On 8 April 2015, following a hearing on 4 December 2014, the Court of Appeal delivered a judgment granting leave to Fortress to appeal from the orders of Hammerschlag J, and allowing Fortress’s appeal. [4] The Court of Appeal set aside those orders and remitted the application for further consideration. I refer to the Court of Appeal’s reasons later.

   4. Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2015] NSWCA 85; (2015) 105 ACSR 581.

9. In the light of that judgment, the liquidators informed the SPL that they did not at that stage consider themselves to be in a position to make any further advances under the Fortress funding deed until they had obtained a further approval for which they intended to apply, but given the imminence of the hearing of the proceedings in the Queensland Supreme Court, in their capacity as general purpose liquidators of OCV they provided a further $1.5 million to the SPL. However the SPL considered that amount to be inadequate to cover his exposure in the OCV/Fortress proceeding, and he explored alternative funding solutions. None materialised, and on 26 April 2015, subject to a s 479(3) direction that he was justified in doing so, he accepted an offer of settlement of those proceedings. Stevenson J made the s 479(3) direction on 30 April 2015.

10. Some understanding of the claims in the OCV/Fortress proceeding is relevant. On 31 May 2007, OCV had guaranteed (but without granting any security) the obligations of Young Village Estates Pty Ltd (“YVE”) under a $53.5 million loan facility provided to YVE by Fortress (“the YVE Guarantee”). Then on 1 June 2007, OCV guaranteed the obligations of Octaviar Castle Pty Ltd (“Castle”) under a $250 million loan facility provided by Fortress (“the Castle Guarantee”). The Castle Guarantee was secured by a charge over the assets and undertaking of OCV (“the Fortress Charge”). On or about 24 January 2008, Castle, Fortress and OCV executed an acknowledgement that the YVE Guarantee was a “Transaction Document” for the purposes of the Castle facility – the effect of which was that OCV’s previously unsecured obligations under the YVE Guarantee became secured by the Fortress Charge (“the Fortress Charge Extension”). On 18 February 2008, the Castle Facility was increased to $200 million and made repayable on 31 March 2008. On 29 February 2008, Fortress was repaid almost $190 million, including a $15,000,000 “Participation Fee”. In the OCV/Fortress proceeding, OCV claimed relief under Corporations Act, s 588FF, on the basis that the Fortress Charge Extension was voidable as an unfair preference or an uncommercial transaction and an insolvent transaction; and that other payments made to Fortress in December 2008 of $19,746,713 and in February 2009 of $304,331 pursuant to the Fortress Charge Extension, and the Participation Fee repayment of $15,000,000, were unfair preferences and voidable transactions. The total amount claimed was $35 million approximately.

11. Although the OA/Fortress proceeding was significantly more extensive (the total claim being in excess of $210 million, including the whole of the repayment of $190 million made in February 2008), it included the three payments impugned in the OCV/Fortress proceeding.

12. The substance of the settlement of the OCV/Fortress proceedings was that Fortress would pay OCV $12.35 million; the Fortress Charge Extension would be set aside so that the Fortress charge would no longer secure the YVE Guarantee, but would otherwise remain unaffected; the freezing order would be discharged and the proceeding otherwise dismissed. As a result of that settlement, the SPL holds funds of $10.47 million, being the balance of the settlement moneys received from Fortress, and the further $1.5 million received from the general purpose liquidators. However, Fortress remained a secured creditor of OCV pursuant to the Fortress Charge Extension, although no longer in respect of the liability covered by the YVE Guarantee.

13. Subsequently, the liquidators of OA settled the OA/Fortress claim, upon terms that included agreement by Fortress to assign to OA the debt due to Fortress from OCV and the security Fortress held for that debt.

14. Before the Court are two applications. The first is an application by the SPL for directions under Corporations Act, s 479(3), as to how he should distribute the two funds which remain in his control as SPL; as to whether he would be justified in terminating the funding deed (or in treating it as having already been terminated) on the basis of material breach or repudiation; and whether he would be justified in applying to expand his powers as SPL to enable him to represent OCV’s interests in respect of its claim to be a creditor of OA, including by appealing the decision of the liquidators of OA to reject OCV’s proof of debt dated 11 April 2011 for approximately $514 million. The second is the remitted hearing of the application by the liquidators of OA for approval of the funding deed pursuant to s 477(2B). [5]

    5. The liquidators did not ultimately press the application for a direction under s 479(3); it is doubtful that such a direction could have been given after the deed had already been entered into: cf Re One.Tel Limited [2014] NSWSC 457; 99 ACSR 247 at [55]-[63].

15. Underlying the SPL’s application are a number of complex and difficult questions, in particular concerning whether the SPL is entitled to terminate the funding deed for material breach or repudiation, and whether the general purpose liquidators have become disqualified from continuing to act as such as a result of the terms of settlement between Octaviar Administration and Fortress. However, it became apparent that neither party wished the Court to determine those matters as a contested issue on a final basis. Rather, what was sought was a direction that the SPL was justified for the time being in adopting the positions, first, that he was entitled to terminate the funding deed and secondly, that the general purpose liquidators were disqualified, and in dealing with the funds on that basis pro tem, without deciding their final destination except to the extent that it was beyond controversy.

The $1.5 million provided by the general purpose liquidators

16. As has been mentioned, after the decision of the Court of Appeal, the general purpose liquidators advanced $1.5 million to the SPL to fund the OCV/Fortress litigation. As those proceedings were ultimately settled, that fund was not utilised and remains in the possession of the SPL. It is not in dispute that it represents property of OCV. The issue is whether it should be retained by the SPL or returned to the general purpose liquidators.

17. The issue arises because the general purpose liquidators of OCV are, in their capacity as liquidators of OA, “officers” of OA, and it appears possible, although it is not entirely clear, that the settlement of the OA/Fortress proceedings involves OA taking an assignment from Fortress of security held by Fortress over the assets of OCV. If so, the liquidators qua liquidators of OA may thus have become officers of a “secured party” of OCV, so as arguably to be disqualified from acting as liquidators of OCV by operation of Corporations Act, s 532(2)(c)(ii).

18. The evidence does not permit resolution of the factual question whether the liquidators of OA have taken an assignment of security so that OA has become a secured party in relation to OCV, and the parties do not presently seek its resolution. But assuming that there has been such an assignment, it is by no means clear that s 532(2)(c) operates to disqualify a liquidator who becomes a secured party by reason of a post-appointment event – as distinct from operating upon the state of affairs at the time of appointment. [6] Again, I am not asked, and it is unnecessary at this stage, to resolve that question. It suffices to accept that there is a presently unresolved and not insignificant possibility that the general purpose liquidators may be disqualified from continuing to act as liquidators of OCV.

    6. See Re Antard Pty Ltd; ex parte Cohen (1976) 2 ACLR 108, 111 (Harris J); cf Re McGrath [2010] NSWSC 404; 78 ACSR 405, 419-420.

19. On the one hand, it seems to me that payment to them of the $1.5 million would involve no significant risk as, if it transpires that they are indeed disqualified, they would have to account for it to their replacement. On the other, there appears to be no identifiable risk or detriment in the SPL retaining the fund for the time being. The general purpose liquidators do not oppose his doing so. In those circumstances, the SPL is justified in retaining that fund for the time being.

The settlement proceeds

20. Under the funding deed, 25% of the amount recovered from Fortress is payable to OA. On the other hand, if the funding deed has been terminated for failure to remedy a material breach, clause 10.4(a), set out above, applies. This raises the question of the status of the funding deed in the light of the Court of Appeal’s judgment. The possibilities include, at least:

1. That the deed was terminated (by frustration) when the s 477(2B) approval was set aside on 8 April 2015;

2. That it was terminated for failure of a condition when the s 477(2B) approval was set aside; and

3. That notwithstanding the order of the Court of Appeal, the funding deed remained enforceable and effective.

21. If the funding deed was terminated by frustration or for failure of a condition, then OA is not entitled to a share of the settlement sum (though it may be entitled to restitution of the amount it has advanced). On the other hand, if the funding deed remained enforceable, then OA’s failure to pay the amounts required under the funding notices is apparently a material breach, failure to remedy which would justify termination.

22. Corporations Act, s 477(2A) and s 477(2B), operate as a constraint on the powers of a liquidator as such. That is, qua liquidator, the liquidator is not entitled or empowered to bind the company to agreements of the kind described in those provisions without the requisite approval; the grant of approval completes the liquidator’s power. [7]

    7. Re HIH Insurance Limited [2004] NSWSC 5 at [15].

23. Although it is well-established that such approval can be given retrospectively, and there are cases that suggest that an agreement entered into without approval may, at least in some circumstances, be conditionally valid pending the requisite approval,[8] it seems to me very difficult to view the liquidators’ act in entering into the agreement as somehow conditionally valid, except where the contract can be interpreted to so provide – such as where it is expressly conditional on the requisite approval being granted. One reason why it cannot be treated as conditionally valid is that an application for approval might never be made, so that it can hardly be said that it is conditionally valid until the court declines to give approval.

    8. Lord Corporation Pty Ltd v Green (1991) 22 NSWLR 532, 541; HIH Casualty [2002] NSWSC 1036, [8]-[9].

24. The prevailing, though not the only, view appears to be that absent the requisite approval, the liquidator’s act is not binding as between the liquidator and the company, but the circumstance that it is not so binding does not affect third parties – that is to say, the other contracting party – which cannot object that approval has not been obtained. [9] The corollary would appear to be that, as against the third party, the liquidator could not refuse to perform on the basis that approval had not been obtained – unless the contract was conditional upon approval. If, as seems distinctly arguable, absence of approval is relevant only to the liquidators’ position vis-a-vis the company – in this case, OA – and not to the existence of rights as between the SPL and the liquidators of OA personally, then it is at least arguable that the SPL was entitled to terminate – if he has not already done so by conduct – though there is an available contrary argument. And if the absence of approval under s 477(2B) is cured by a retrospective approval, the same position will, at least arguably, obtain.

    9. See Re Home Counties Life Insurance Co (1862) 6 LT 374; Re English & Scottish Marine Insurance Co (1870) 23 LT 685; Alli v Premier Timber Co 1952 (1) SA 689; Dublin City Distillery Limited v Doherty [1914] AC 823; Waisbrod v Potgeiter 1953 (4) SA 502, 507; Re WA Holiday Resorts Ltd (in liq) [1961] WAR 152; Daemar v Opeskin (1985) 10 ACLR 67.

25. A further reason for thinking that the Fortress Funding Deed remained on foot and binding on OA despite the decision of the Court of Appeal is that there was a valid approval under s 477(2B) in effect at the time the deed was entered into, and there is high authority for the proposition that an act performed under the authority and in reliance on an order of a court remains valid and effective notwithstanding that the order is later set aside on appeal, even where the original order was made ex parte.[10]

    10. Wilde v Australian Trade Equipment Co Pty Ltd (1981) 145 CLR 590 per Stephen, Murphy, Aickin and Wilson JJ; Gibbs J dissenting.

26. The SPL has senior counsel’s advice that it is strongly arguable that the deed is not enforceable in the light of the Court of Appeal’s decision, but alternatively that if it was, it has been repudiated. The SPL wishes to adopt the position that he is entitled to terminate it, if he has not already done so by conduct. That position is, for the reasons I have given, an arguable one. The benefits of that position for the administration of OCV include that it would avoid the obligation to pay 25% of the settlement proceeds to OA, and it would found a potential claim for damages for breach of the funding deed (the damages being the discount which OCV was compelled to accept in the OCV/Fortress proceedings on account of its inability to fund them to finality), which could be set off against any indebtedness of OCV to OA. The detriment risked to OCV by the SPL adopting that position appears to be negligible.

27. Accordingly, the SPL would be justified in adopting, for the time being, the position that he has terminated, or is entitled to terminate, the funding deed.

Expansion of SPL’s powers

28. In April 2011, receivers and managers of OCV lodged in the winding up of OA a proof of debt for $514 million. The liquidators of OA rejected that proof in April 2014, from which rejection the receivers and managers of OCV appealed in September 2014. In May 2015, as part of the settlement of the OA/Fortress proceedings, that appeal was discontinued, but on the footing that it could be renewed on behalf of OCV. No fresh appeal has yet been instituted. It is plain enough that, in respect of any such appeal, the liquidators would be in a position of conflict – as liquidators of the appellant OCV prosecuting the appeal, and as liquidators of the respondent OA opposing it.

29. The powers of the SPL do not presently extend beyond the conduct of the OCV/Fortress litigation. The SPL is, as the liquidators acknowledge, fairly obviously, a strong candidate for appointment to conduct any such appeal, should it become necessary. All that is presently sought by the SPL is a direction that he would be justified in making an application for such an extension of his powers.

30. On the other hand, a large creditor, and the liquidators, have asked that he defer doing so, in order to enable the prospect of a resolution without further litigation to be explored. The SPL has agreed to wait for 30 days before making any such application. Subject to that restriction, he is justified in applying for an extension of his powers. In the meantime, it is appropriate that he be appointed to represent the interests of OCV in the contemplated negotiations.

Approval of the Fortress Funding Deed

31. Section 477(2A) and s 477(2B) reserve for court sanction the exercise of a liquidator’s powers in two categories: the first is compromises of debts greater than $100,000, and the second is contracts which may extend over three months. Approval is required in the latter case mainly because of the potential impact of such a contract on the duration and expedition of the liquidation. In considering an application for approval under these provisions, the role of the court is to grant or deny approval to the liquidator’s proposal, not to reconsider every issue considered by the liquidator, nor to develop some alternative proposal which might seem preferable. [11] In the context of s 477(2B), the main consideration is the impact of the agreement on the duration of the liquidation and whether that is reasonable in the interests of the administration of the winding up. [12]

    11. Re One.Tel Limited at [26].

    12. Re One.Tel Limited at [30].

32. However, in this case, both in the Full Federal Court and in the Court of Appeal, the ground on which the primary judge’s approval was overturned was that the primary judge should not have been satisfied that the underlying power (in this case, in s 477(2)(m)) existed. This involves that before granting such approval, the Court must be satisfied that the underlying power to enter into the agreement otherwise (but for the restriction imposed by s 477(2B)) exists.

33. Here, the only relevant power is that in s 477(2)(m), which provides that a liquidator may “do all such things as are necessary for winding up the affairs of the company and distributing its property”. The essence of the Court of Appeal’s judgment was that before the Court could exercise the power under s 477(2B) to approve a liquidator’s agreement, it first had to be satisfied that the liquidator had power to make the relevant agreement; that in this case that power depended on s 477(2)(m); and that the primary judge had not undertaken a sufficient analysis of the impact of the OCV/Fortress proceeding on the interests of OA to enable a view to be formed that funding such a proceeding was “necessary” in the relevant sense. The Court of Appeal accepted that in this context, the word “necessary” is widely construed, and may extend to funding litigation by a related company, but not merely for the commercial return: some nexus with benefit to the winding up is required. [13] The Court of Appeal held that the primary judge had not undertaken the requisite analysis to be satisfied that the funding agreement was “necessary” in the relevant sense, as it appeared that the proceedings against Fortress could produce only a “binary” outcome, in that any success by OCV in the OCV/Fortress proceedings would be at the expense of OA in the OA/Fortress proceedings.

    13. Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2015] NSWCA 85; (2015) 105 ACSR 581 at [126]-[127], [13]; Re McGrath (as liquidators of HIH Insurance Ltd) [2009] NSWSC 1244 at [25]-[26].

34. Most applications concerning funding agreements come before the court where the liquidator is seeking funding to bring proceedings on behalf of the company in liquidation, and the benefit or potential benefit for the company in liquidation is usually obvious enough. It is different where, as here, the liquidators propose to offer funding to a related company. Again, where the related company is a subsidiary, the benefit may be clear enough, but it is not so clear where, as here, the related company is a holding company of the company offering funding. Given that two previous ex parte hearings of an application under s 477(2B) in respect of the funding deed have been the subject of successful appeals, and in the light of the Court of Appeal’s reasons, close consideration of the question is necessary on this third application. However, that consideration takes place in the context that the outcomes of the OCV/Fortress and the OA/Fortress proceedings are now known, although other uncertainties remain.

35. The liquidators submit that, whatever the position was before Hammerschlag J and the Court of Appeal, it can now be seen that the funding of the OCV/Fortress proceedings was beneficial for the winding up of OA, quite apart from the commercial return on the funding.

36. First, it was said that the ultimate outcome of the settlement of the OCV/Fortress and OA/Fortress proceedings demonstrates benefit to the administrations viewed together from the prosecution of both proceedings. The financial modelling undertaken by the liquidators suggests that the combined effect of the OCV/Fortress and OA/Fortress proceedings has been an enhancement of the estate of the two Octaviar companies by in the order of $50 million, at the expense of Fortress. However, the relevant question is whether funding the OCV/Fortress proceedings was for the benefit of the winding up of OA, not OCV; and the circumstance that there are many common creditors - so that it may be of relatively little consequence to them which of the two companies succeeds against Fortress – does not change that.

37. A number of calculations were deployed to demonstrate increased benefits to OA and its creditors as a result of the overall settlement with Fortress of both proceedings. However, those calculations appear to demonstrate that the benefit appears to have been primarily to OCV, and the increased benefit to OA’s creditors is derived only by reason of (1) the commercial return from the funding deed – that is, the (actual or potential) return of the moneys advanced by way of funding, and a 25% share in the proceeds of settlement – rather than from success in the proceedings; and (2) the withdrawal of Fortress as a secured creditor of various entities in the group. As already explained, the commercial return on a funding agreement has been held insufficient to qualify such an agreement as “necessary”; and Fortress’s withdrawal as a secured creditor was achieved through the OA/Fortress litigation, not through the OCV/Fortress litigation. Thus it is not apparent that the outcome of the OCV/Fortress litigation has delivered relevant benefits to OA.

38. Secondly, it was submitted that concurrent prosecution of both proceedings “increased options in terms of allocation of costs”, but it is not apparent how that provided any actual or potential benefit to OA.

39. Thirdly, it was put that prosecution of the OCV/Fortress proceeding meant that the liquidators were freed from the risk of having to seek new freezing orders (in the OA/Fortress proceedings) if the OCV/Fortress proceedings lapsed. I accept that there was some benefit for OA in that respect, but the cost of an application for freezing orders in the OA/Fortress proceeding would have been but a fraction of the costs of funding the OCV/Fortress proceeding. The net potential benefit in this respect, relative to the investment, was not such as to make entry into the agreement “necessary” for the winding up of OA in the relevant sense.

40. Fourthly, it was said that after the settlement of the OCV/Fortress proceeding, the OA/Fortress proceeding could continue without a “binary” outcome. But that misses the point. Once again, the relevant question is whether there was benefit for OA in the prosecution of the OCV/Fortress proceeding. At least arguably, settlement in OCV’s favour of its proceeding detracted from what OA may have recovered in its claim, because of “double-recovery” issues, as OA’s claim encompassed everything that was claimed by OCV.

41. Fifthly, it was submitted that while “pooling” was not feasible so long as Fortress remained a secured creditor, the combined proceedings have produced the position that that pooling may now be possible. Just how this will benefit OA’s creditors is not clear, and Fortress’s withdrawal as a secured creditor was achieved through the OA/Fortress litigation, not through the OCV/Fortress litigation.

42. Thus unless OA is a creditor of OCV, it is not apparent how the prosecution of the OCV/Fortress proceeding offered such relevant benefit for OA to qualify it as “necessary” in the relevant sense.

43. If OA is a creditor of OCV, then OA might benefit from the outcome in the OCV/Fortress proceedings, as it may be anticipated that an enhancement of the assets and/or reduction of the liabilities of OCV will flow through to benefit its creditors. However, while at present OCV is a creditor of OA, the ultimate balance of accounts between the two companies remains quite unclear: prosecution of OCV’s appeal from the rejection of its proof of debt may ultimately result in OA ceasing to be a net creditor. Thus, to the extent that OA has an interest in OCV’s success against Fortress because of its position as a creditor, that question remains open and unresolved, although the status quo is that OA is a creditor, and that is a not unimportant starting point.

44. Moreover, if any outcome in favour of OCV was at the expense of OA, the net result is negative for OA, because as an unsecured creditor it receives only a pro-rata dividend in OCV’s distributable assets. Prima facie, the subject matter of OCV’s claim against Fortress was entirely encompassed by OA’s claim. No doubt both could not have succeeded because of ‘double-recovery’ considerations. To the extent that OCV’s succeeded, the quantum of OA’s potential recovery was reduced.

45. If, pursuant to the settlement of the OA/Fortress proceeding, OA takes an assignment of OCV’s indebtedness to Fortress and the charge that secures it, and the charge catches the proceeds of the OCV/Fortress settlement, then OA as a secured creditor of OCV would have a priority claim to the whole proceeds of the settlement (not just a dividend), and on that scenario there would be benefit for OA in the outcome of the OCV/Fortress proceedings, even though that outcome was probably not one that could have been obtained by court order in the proceedings. That would show, albeit retrospectively, that it was beneficial for OA to fund the OCV/Fortress proceeding, because as a secured creditor of OCV, OA would have a clear and undiluted interest in any enhancement of the security. However, it appears quite uncertain whether the liquidators of OA propose to accept an assignment of the charge from Fortress: they depose that they are still considering whether or not to do so (at least partly because of the risk that doing so may result in their becoming disqualified from acting as liquidators of OCV, as discussed above), and their financial modelling of the benefits of the Fortress settlement proceeds on the basis that OA does not take up the securities previously held by Fortress. Moreover, it seems unlikely that the settlement proceeds would be caught by the charge, as if they were that would have rendered the benefit to OCV of its settlement with Fortress illusory.

31. Thus in terms of benefit for OA, the existence of actual or potential benefit appears to depend on whether OA is a creditor of OCV; insofar as its status as a creditor depends on its proved debt, there is a reasonable basis for supposing that it is a creditor, but that remains uncertain and even if sustained it would entitle OA only to a dividend which would be a net negative result if, as seems likely, any success of OCV was at the expense of OA; insofar as its status as a creditor depends on the assignment of the Fortress debt and security, it appears doubtful that OA will in fact take such an assignment, and any benefit would depend on the settlement proceeds being caught by the security, which seems unlikely.

32. Accordingly, unless OA takes an assignment of the Fortress Charge, and that charge catches the proceeds of the OCV/Fortress settlement, I am unpersuaded that, even retrospectively, it can be said that there was such benefit for OA in the OCV/Fortress proceedings that their funding by OA was “necessary” in the relevant sense for the winding up of the affairs of OA.

33. However, as explained above, there is a strongly arguable case, founded on Wilde v Australian Trade Equipment Co, that the liquidators had the requisite power when they entered into the deed, which approval was beyond recall once they did so, and it may be prudent for the liquidators to obtain judicial advice to that effect.

Conclusion

49. My conclusions may therefore be summarised as follows.

50. In circumstances where there is a not insignificant possibility that the general purpose liquidators of OCV may be disqualified from continuing to act, and on the one hand repayment to them of the $1.5 million advanced by them to the special purpose liquidator would involve no significant risk, but on the other, there appears to be no identifiable risk or detriment in the SPL retaining the fund for the time being, and the general purpose liquidators do not oppose his doing so, the SPL is justified in retaining that fund for the time being.

51. It is at least arguable that validity and enforceability of the Fortress Funding Deed as between OA and OCV was unaffected by the decision of the Court of Appeal, because the question of such approval is relevant only as between the liquidator and the company and not as against third parties, and also because, on the authority of Wilde v Australian Trade Equipment Co, the approval was beyond recall once the liquidators had acted on it. There are considerable potential benefit and negligible detriment for OCV in the SPL adopting the position that he is entitled to terminate, or has terminated the Fortress Funding Deed for breach. The SPL would be justified in adopting, for the time being, the position that he has terminated, or is entitled to terminate, the funding deed.

52. The SPL would be justified in applying for an extension of his powers to enable him to prosecute an appeal from the rejection of OCV’s proof of debt in the OA winding up, after the expiration of 30 days. In the meantime, it is appropriate that he be appointed to represent the interests of OCV in the contemplated negotiations pertaining to that proof of debt.

53. Unless OA takes an assignment of the Fortress Charge, and that charge catches the proceeds of the OCV/Fortress settlement, I am unpersuaded that, even retrospectively, it can be said that there was such benefit for OA in the OCV/Fortress proceedings that their funding by OA was “necessary” in the relevant sense for the winding up of the affairs of OA. However, as already explained, there is a strongly arguable case, founded on Wilde v Australian Trade Equipment Co, that the liquidators had the requisite power when they entered into the deed, which approval was beyond recall once they did so, and it may be prudent for the liquidators to obtain judicial advice or declaratory relief to that effect.

Orders

54. In proceedings 2011/397200, the Court orders that:

1. Pursuant to Corporations Act, s 479(3), the applicant David John Kerr would be justified in:

1. purporting to terminate the Fortress funding deed dated May 2012 (or treating that deed as having already been terminated by him);

2. applying, after 1 December 2015, to expand his powers as the special purpose liquidator of Octaviar Limited so as to empower him to represent Octaviar Limited’s interests in respect of its claims to be a creditor of Octaviar Administration Pty Limited and to appeal the decision of the first plaintiffs William John Fletcher and Katherine Elizabeth Barnet as liquidators of Octaviar Administration Pty Limited to reject Octaviar Limited’s proof of debt dated 11 April 2011 for approximately $514 million;

3. dealing with the funds which remain in his control as special purpose liquidator of Octaviar Limited by:

1. making any payments due to Octaviar Administration Pty Limited pursuant to clause 10.4(a) of the Fortress funding agreement;

2. preserving 25% of $12.35 million pending agreement between the parties or the making of an order as to how it is to be distributed;

3. otherwise retaining any funds in his hand for the purposes of his role as special purpose liquidator.

2. The applicant as special purpose liquidator of Octaviar Limited is further empowered to represent exclusively the interests of Octaviar Limited in any negotiation before 1 December 2015 attempting to resolve Octaviar Limited’s claims to be a creditor of Octaviar Administration Pty Limited, otherwise than by appealing the decision of the first plaintiffs as liquidators of the third plaintiff rejecting the second plaintiff’s proof of debt.

3. The costs of this application be costs in the liquidation of the second plaintiff.

4. Pursuant to (NSW) Court Suppression and Non-Publication Orders Act 2010, s 7, upon the ground referred to in s 8(1)(a) of that Act being that such order is necessary to prevent prejudice to the administration of justice, the publication or other disclosure of exhibits DJK2 and DJK4 to Mr Kerr’s affidavits sworn 29 April 2015 and 12 August 2015, and the applicant’s written submissions herein, is prohibited. This order applies throughout the Commonwealth of Australia and until the date upon which Octaviar Limited is deregistered.

55. In proceedings 2012/89484 the Court orders that:

1. Pursuant to Court Suppression and Non-Publication Orders Act 2010, s 7, upon the ground referred to in s 8(1)(a) of that Act being that such order is necessary to prevent prejudice to the administration of justice, the publication or other disclosure of the evidence given in these proceedings comprised in exhibit WJF to the affidavit of William John Fletcher sworn and filed 28 August 2015, is prohibited. This order applies throughout the Commonwealth of Australia and until the date upon which the second plaintiff is deregistered.

2. The application of the first plaintiffs for approval pursuant to Corporations Act, s 477(2)(b), to enter into the agreement between them, the second plaintiff, Octaviar Limited, and the liquidators of Octaviar Limited made on 17 May 2012 (“Fortress funding deed”), notwithstanding that the term of the agreement may end or obligations of a party to the agreement may according to its terms be discharged by performance more than three months after the agreement was entered into, be stood over to a date to be fixed.

3. The costs of this application be costs in the liquidation of the second plaintiff.

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Endnotes