Oztech Pty Ltd v Public Trustee of Queensland (No 15)
[2018] FCA 819
•4 June 2018
FEDERAL COURT OF AUSTRALIA
Oztech Pty Ltd v Public Trustee of Queensland (No 15) [2018] FCA 819
File number: NSD 937 of 2014 Judge: YATES J Date of judgment: 4 June 2018 Catchwords: CORPORATIONS – representative proceeding under Pt IVA of the Federal Court of Australia Act 1976 (Cth) – collapse of corporate group – debentures (notes) issued – trustee for debenture holders (noteholders) – whether trustee breached his duty under s 283DA(a) of the Corporations Act 2001 (Cth) to exercise reasonable diligence – discussion of the content of the duty – whether trustee breached his duty in equity to exercise reasonable care – whether trustee breached a fiduciary duty to act bona fide in the interests of the applicant and group members, and engaged in unconscionable conduct, by resigning as trustee – whether case on causation of damage established
EVIDENCE – tendency evidence – whether drawing inferences from proven facts as to the time when, in hypothetical circumstances, documents might or could have been created, infringes the tendency rule under s 97 of the Evidence Act 1995 (Cth)
Legislation: Corporations Act 2001 (Cth) ss 111AC, 111AI, 201, 283AD, 283BB, 283BE, 283BF, 283BI, 283CB, 283CC, 283DA, 283EA, 283EB, 283EC, 283F, 292, 299, 301, 302, 304, 307, 308, 309, 313, 318, 411, 436A, 588FE, 588FF, 674, Pts 2L.1, 2L.2, 2L.3, 2L.4, Ch 2L
Federal Court of Australia Act 1976 (Cth) Pt IVA
Evidence Act 1995 (NSW) ss 95, 97, 99
Limitation Act 1969 (NSW) s 55
Limitation of Actions Act 1974 (Qld) s 38
Public Trustee Act 1978 (Qld)
Trusts Act 1973 (Qld) s 22
Trusts Act 1976 (Qld) s 76
Trustee Act 1925 (NSW) s 85
Cases cited: Australian Competition and Consumer Commission v Leahy Petroleum Pty Ltd [2007] FCA 794; (2007) 160 FCR 321
Australian Securities Commission v AS Nominees Limited (1995) 62 FCR 504
Australian Securities and Investments Commission v Vines [2003] NSWSC; (2004) 48 ACSR 291
Breen v Williams [1996] HCA 57; (1996) 186 CLR 71
Danberg v Danberg [2001] NSWCA 87; (2001) 52 NSWLR 492
Elomar v R [2014] NSWCCA 303; (2014) 316 ALR 206
Elders Trustee & Executor Co Ltd v Higgins [1963] HCA 48; (1963) 113 CLR 426
Foreshaw v Higginson (1855) 20 Beav 485; 52 ER 690
Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; (2012) 200 FCR 296
Maguire v Makronis [1997] HCA 23; (1997) 188 CLR 449
Midland Bank Trust Co. Ltd v Hett, Stubbs & Kemp [1979] 1 Ch. 384
Oztech Pty Ltd v Public Trustee of Queensland (No 6) [2016] FCA 391
Oztech Pty Ltd v Public Trustee of Queensland (No 9) [2016] FCA 785
Oztech Pty Ltd v The Public Trustee of Queensland (No 13) [2016] FCA 1153
Oztech Pty Ltd v Public Trustee of Queensland (No 14) [2106] FCA 1162
Permanent Trustee Australia Ltd v Boulton (1994) 33 NSWLR 735
Trust Company (Nominees) Ltd v Angas Securities Ltd [2015] FCA 772; (2015) 107 ACSR 464
Austin RP and Black AJ, Austin and Black’s Annotations to the Corporations Act (LexisNexis, 2010)
Date of hearing: 27, 28, 29, 30 June, 1, 5 July, 5, 6, 7, 8, 9, 12, 13, 14, 15, 16, 19, 20, 21, 22, 23 September 2016; 13, 14, 15, 16, 17, 20 March 2017 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 987 Counsel for the Applicant: Mr RPL Lancaster SC with Mr CH Withers, Mr AM Hochroth and Mr RJ May Solicitor for the Applicant: Squire Patton Boggs Counsel for the Respondent: Mr W Sofronoff QC with Mr DB O’Sullivan QC, Mr MJ O’Meara, Mr JP O’Regan, Ms FY Lubett and Ms EL Hoiberg Solicitor for the Respondent: Clayton Utz ORDERS
NSD 937 of 2014 BETWEEN: OZTECH PTY LTD ACN 005 907 871
Applicant
AND: THE PUBLIC TRUSTEE OF QUEENSLAND
Respondent
JUDGE:
YATES J
DATE OF ORDER:
4 JUNE 2018
THE COURT ORDERS THAT:
1.The parties bring in draft orders giving effect to these reasons by 4.00 pm on 13 June 2018.
2.If agreement cannot be reached on the form of the orders, the parties jointly notify the Associate to Yates J of that fact, identifying the area(s) of disagreement.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
OVERVIEW
[1]
RELEVANT PROVISIONS OF THE CORPORATIONS ACT
[15]
RELEVANT PROVISIONS OF THE TRUST DEED AND THE TERMS OF ISSUE
[21]
THE EVIDENCE AND SUBMISSIONS
[31]
The applicant’s evidence
[31]
The respondent’s evidence
[61]
The documentary tenders
[85]
The submissions
[87]
THE EVENTS PRIOR TO 6 JULY 2007
[88]
The merger with S8: the issue of OIN notes
[88]
PwC 1
[94]
The further issue of OIN notes
[102]
The partial sale of Stella
[108]
PwC 2
[109]
The 17 May 2007 meeting
[122]
The Fortress facility
[129]
OL provides documents to PwC
[139]
The Public Trustee’s review of corporate trust files
[146]
PwC 3
[151]
Developments in relation to the partial sale of Stella
[157]
The Public Trustee’s intention to resign
[160]
The meeting with ASIC
[164]
The UBS facility
[166]
THE EVENTS FROM 6 JULY 2007 TO 18 JANUARY 2008
[170]
The Public Trustee resigns from the OIN Trust
[170]
OL’s market update
[189]
Amendments to the Fortress facility
[191]
OL’s 2007 Annual Report
[193]
The 4 October 2007 meeting
[203]
The decision not to send the suggested letter
[214]
Finding a replacement trustee
[226]
The decision not to sell Stella
[234]
Further amendments to the Fortress facility
[245]
OL’s quarterly reports
[248]
The Public Trustee monitors the Octaviar Group
[252]
OL’s announcements to the ASX in January 2008
[275]
THE EVENTS FOLLOWING 18 JANUARY 2008: AN OVERVIEW
[288]
BREACH OF STATUTORY AND EQUITABLE DUTIES: THE APPLICANT’S CASE
[299]
STATUTORY AND EQUITABLE DUTIES: RELEVANT PRINCIPLES
[318]
The duty to exercise reasonable diligence
[318]
The duty to exercise reasonable care
[342]
BREACH OF STATUTORY AND EQUITABLE DUTIES: ANALYSIS
[348]
Failure to act on the advice of 17 May 2007
[348]
The failure to seek information: OL’s business model
[365]
The findings of PwC 3
[389]
Other aspects of the pleaded case
[396]
Conclusion
[409]
FIDUCIARY DUTY AND UNCONSCIONABLE CONDUCT: THE APPLICANT’S CASE
[411]
FIDUCIARY DUTY AND UNCONSCIONABLE CONDUCT: ANALYSIS
[417]
FRAUDULENT CONCEALMENT: THE APPLICANT’S CASE
[454]
FRAUDULENT CONCEALMENT: ANALYSIS
[461]
CAUSATION: THE APPLICANT’S CASE
[463]
Introduction
[463]
Overview
[464]
The PIF transaction
[479]
Management accounts and cash flow forecasts
[484]
The first counterfactual
[492]
The second counterfactual
[498]
OL’s solvency
[535]
Events of Default
[546]
Calling in the notes
[552]
Subsequent events
[554]
CAUSATION: ANLAYSIS
[558]
Some general observations
[558]
The relationship between the applicant’s case on breach and its case on causation
[558]
The use of hindsight
[565]
The approach to considering causation: the Borrelli reports
[571]
Borrelli 1: Issues
[572]
The scope of the work required
[573]
The scope of the documents sought
[574]
The time to produce a report such as Borrelli 1
[586]
The conclusions reached and recommendations made
[588]
Mr Joseph’s response to Borrelli 1
[614]
Borrelli 1: Conclusion on issues
[619]
Borelli 2: Issues
[636]
The structure of Borrelli 2
[636]
Criticisms of Borrelli 2
[643]
The scale and scope of the recommended monitoring
[644]
What documents would have been produced?
[647]
How long would it take to produce the documents and a report?
[653]
Other criticisms
[661]
Borrelli 2: Conclusions on issues
[662]
The challenge to Mr Borrelli’s recommendation to wind up
[699]
Introduction
[699]
Solvency
[706]
Events of Default
[724]
The recommendation as at 31 January 2008
[736]
The challenge to Mr Borrelli’s recommendation to wind up: conclusions
[743]
Introduction
[743]
Solvency
[747]
Events of Default
[754]
The PIF transaction
[771]
Introduction
[771]
Further findings of fact
[773]
Would the PIF transaction have been identified and revealed in December 2007?
[795]
Tendency evidence?
[819]
Summary of findings and conclusions
[830]
Would the respondent, acting reasonably, have applied promptly to wind up OIN and the Guarantors in mid-February 2008, or by no later than 29 February 2008?
[854]
Introduction
[854]
Further findings of fact
[858]
Consideration and conclusion
[932]
Would an order for the winding up of OIN and the Guarantors have been made by 29 February 2008 or shortly thereafter?
[973]
DEFENCES
[983]
CONCLUSION AND DISPOSITION
[987]
YATES J:
OVERVIEW
This proceeding is a representative proceeding commenced under Pt IVA of the Federal Court of Australia Act 1976 (Cth) (the Federal Court Act). It arises out of the respondent’s role as the trustee for noteholders of unsecured notes (notes) issued by a company now called Octaviar Investment Notes Limited (in liquidation) (OIN). The notes are debentures for the purposes of Ch 2L of the Corporations Act 2001 (Cth)
(the Corporations Act).
The respondent is the Public Trustee of Queensland. The Public Trustee is a corporation sole constituted under the Public Trustee Act 1978 (Qld).
OIN is a company within the group of companies now called the Octaviar Group (or, the group). The holding company of the Octaviar Group is a company now called Octaviar Limited (receivers and managers appointed) (in liquidation) (OL).
On 2 November 2006, OIN, OL and the respondent entered into a trust deed in compliance with Pt 2L.1 of the Corporations Act. The trust deed included certain terms of issue in respect of the notes (the OIN Trust).
On 2 November 2006, OL also executed a deed poll in favour of the respondent and each noteholder by which it guaranteed OIN’s payment obligations under the notes.
On 1 December 2006, OIN, OL and the respondent entered into an amending deed to replace the terms of issue. Nothing turns on that change for the purposes of this proceeding. I will refer to the trust deed and the amending deed as the Trust Deed and the terms of issue under the amending deed as the Terms of Issue.
Each note was issued with a face value of $100 and a maturity date of 30 December 2011 (the maturity date). The notes were interest-bearing, with interest fixed at 8% per annum (later increased to 8.25%), payable semi-annually.
On 5 January 2007, the company now called Octaviar Administration Pty Ltd (in liquidation) (OA) and the company now called Octaviar Financial Services Limited (in liquidation) (OFS) entered into separate deeds poll guaranteeing OIN’s payment obligations under the notes (the Guarantee Deed Poll). By that time, each was a Material Subsidiary as defined in the Terms of Issue. On 7 February 2008, the company now called Octaviar Investment Bonds Limited (OIB) entered into a deed poll guaranteeing OIN’s payment obligations under the notes. Unless the context indicates otherwise, I will refer to OL, OA and OFS, and OIB in the period after 7 February 2008, as the Guarantors.
On 6 July 2007, the respondent gave notice to OL of his resignation as trustee but, as events transpired, no new trustee was appointed. Under s 283AD of the Corporations Act, an existing trustee of a debenture issue continues to act as the trustee until a new trustee is appointed and has taken office as trustee.
The applicant’s case, stated shortly, is that, by July 2007, the respondent had breached his duties to the noteholders by failing to take steps to ascertain and monitor the current and prospective financial position of OL and OIN, the respondent having received warnings in the first half of 2007 about the risks associated with the Octaviar Group. The applicant says that, as a consequence, the respondent was derelict in his duties to noteholders in the period from
6 July 2007 until about 18 January 2008, when OL’s share price fell sharply to $0.99 from the previous day’s trading of $3.18. The applicant says that if the respondent had not breached his duties, he would have appreciated that the Octaviar Group was insolvent by the end of January 2008 and would have issued an event of default notice, demanded repayment of the notes, and wound up OIN and the Guarantors (or at least, some of them, including OL) by 29 February 2008 or shortly thereafter. The applicant says that this would have reduced the losses suffered by the noteholders when the Octaviar Group collapsed and went into liquidation later in 2008, by which time the net assets of OL and OIN had been substantially diminished.
In submissions, the parties referred to OL and the Octaviar Group interchangeably. The same is true of the applicant’s pleading and of the evidence, whether given by witnesses or in documentary form. This is understandable given that OL’s business was conducted within the structure of, and by means of, the Octaviar Group. In an economic sense, OL and the Octaviar Group were, effectively, one and the same entity. The applicant’s pleading, and the parties’ submissions, on occasion, also treated OL as the borrower under the notes, rather than OIN. Once again, this appears to be a reflection of the fact that OL’s capital raisings for the business were conducted within the structure of the Octaviar Group so that, for example, OIN’s indebtedness in respect of the notes was effectively seen as OL’s indebtedness. Once again, the same is true of the evidence. I mention these matters because, in my summary and analysis of the evidence and the submissions in the following paragraphs of these reasons, I have endeavoured to remain faithful to the source material, whilst recognising that, for the sake of consistency and the observance of legal form, distinctions could have been, but were not always, made or maintained between entities within the Octaviar Group or between entities and the Octaviar Group itself. I do not think that this affects the comprehensibility of the evidence or of the parties’ respective cases or, indeed, of these reasons.
As at 25 February 2008, the applicant held 477 notes, it having acquired those notes in January 2007. The applicant says that it has suffered loss and damage by reason of the respondent’s alleged breaches of duty.
For the reasons which follow, I find that the respondent did not breach his statutory and equitable (including fiduciary) duties in the manner alleged by the applicant. I also find that the respondent did not engage in unconscionable conduct, as the applicant has alleged. For completeness, I have considered the applicant’s detailed case on causation. If, contrary to my findings, the respondent did breach his duties, I am not persuaded that, on the balance of probabilities, had he taken the actions pleaded and advanced by the applicant in evidence, the respondent would have formed the view by no later than the end of January 2008 that an Insolvency Event or an Event of Default under the Terms of Issue had occurred and was continuing, and demanded repayment of the notes at that time. Further, I am not persuaded, on the balance of probabilities, that, by mid-February 2008 or by no later than
29 February 2008, the respondent would have applied to wind up OIN and the Guarantors or that, had he so applied, winding up orders would have been made by 29 February 2008 or shortly thereafter, or that an administrator would have been appointed at that time.
The respondent has raised certain defences. Given the findings I have made, and the conclusions to which I have come on the applicant’s case on breach and causation, it is not necessary for me to consider those defences.
RELEVANT PROVISIONS OF THE CORPORATIONS ACT
Section 283BB of the Corporations Act specifies the general duties of a borrower, such as OIN:
The borrower must:
(a)carry on and conduct its business in a proper and efficient manner; and
(b) provide a copy of the trust deed to:
(i) a debenture holder; or
(ii) the trustee;
if they request a copy; and
(c) make all of its financial and other records available for inspection by:
(i) the trustee; or
(ii)an officer or employee of the trustee authorised by the trustee to carry out the inspection; or
(iii)a registered company auditor appointed by the trustee to carry out the inspection;
and give them any information, explanations or other assistance that they require about matters relating to those records.
Under s 283BE of the Corporations Act, the borrower has a duty to inform the trustee about the creation of security interests:
If the borrower creates a security interest, it must:
(a)give the trustee written details of the security interest within 21 days after it is created; and
(b)if the total amount to be advanced on the security of the security interest is indeterminate and the advances are not merged in a current account with bankers, trade creditors or anyone else--give the trustee written details of the amount of each advance within 7 days after it is made.
Under s 283BF, the borrower has a duty to give the trustee quarterly reports. The content of the quarterly reports is specified in s 283BF(4) of the Corporations Act:
The report for a quarter must include details of:
(a)any failure by the borrower and each guarantor to comply with the terms of the debentures or the provisions of the trust deed or this Chapter during the quarter; and
(b)any event that has happened during the quarter that has caused, or could cause, 1 or more of the following:
(i)any amount deposited or lent under the debentures to become immediately payable;
(ii) the debentures to become immediately enforceable;
(iii)any other right or remedy under the terms of the debenture or provisions of the trust deed to become immediately enforceable; and
(c)any circumstances that have occurred during the quarter that materially prejudice:
(i)the borrower, any of its subsidiaries, or any of the guarantors; or
(ii)any security interest included in or created by the debentures or the trust deed; and
(d)any substantial change in the nature of the business of the borrower, any of its subsidiaries, or any of the guarantors that has occurred during the quarter; and
(e) any of the following events that happened in the quarter:
(i) the appointment of a guarantor;
(ii)the cessation of liability of a guarantor body for the payment of the whole or part of the money for which it was liable under the guarantee;
(iii)a change of name of a guarantor (if this happens, the report must also disclose the guarantor's new name); and
(f)the net amount outstanding on any advances at the end of the quarter if the borrower has created a security interest where:
(i)the total amount to be advanced on the security of the security interest is indeterminate; and
(ii)the advances are merged in a current account with bankers, trade creditors or anyone else; and
(g)any other matters that may materially prejudice any security interests or other interests of the debenture holders.
Part 2L.3 of the Corporations Act specifies the duties of a guarantor. Under s 283CB of the Corporations Act, the general duties of a guarantor are specified as follows:
The guarantor must:
(a)carry on and conduct its business in a proper and efficient manner; and
(b)make all of its financial and other records available for inspection by:
(i)the trustee; or
(ii)an officer or employee of the trustee authorised by the trustee to carry out the inspection; or
(iii)a registered company auditor appointed by the trustee to carry out the inspection;
and give them any information, explanations or other assistance that they require about matters relating to those records.
Under s 283CC of the Corporations Act, the guarantor also has a duty to inform the trustee about the creation of security interests:
If the guarantor creates a security interest, it must:
(a)give the trustee written details of the security interest within 21 days after it is created; and
(b)if the total amount to be advanced on the security of the security interest is indeterminate, give the trustee written details of:
(i)the amount of each advance made within 7 days after it is made; or
(ii)where the advances are merged in a current account with bankers, trade creditors or anyone else--the net amount outstanding on the advances at the end of every 3 months.
Part 2L.4 of the Corporations Act specifies the duties of the trustee. One of those duties is to exercise reasonable diligence to ascertain whether the property of the borrower and of each guarantor that is or should be available (whether by way of security or otherwise) will be sufficient to repay the amount deposited or lent when it becomes due: s 283DA(a). The trustee must also exercise reasonable diligence to ascertain whether the borrower or any guarantor has committed any breach of the terms of the debentures, the provisions of the Trust Deed or Ch 2L of the Corporations Act and must do everything in its power to ensure that the borrower or guarantor remedies any breach that is known to the trustee, unless the trustee is satisfied that the breach will not materially prejudice the interests of debenture holders or any security for the debentures: ss 283DA(b) and (c). The trustee must also comply with any directions given to it at a debenture holders’ meeting which may be called by the borrower (s 283EA), the trustee itself (s 283EB) or the Court (s 283EC), save in exceptional circumstances: s 283DA(h).
RELEVANT PROVISIONS OF THE TRUST DEED AND THE TERMS OF ISSUE
The Trust Deed contains a number of provisions reflecting the duties of a borrower under Pt 2L.2 of the Corporations Act.
Clause 5.4 provides:
(a)The Company agrees to provide the Trustee such information as the Trustee reasonably requests about the Company and any of its Related Bodies Corporate to enable the Trustee to carry out its duties under this Deed and the Corporations Act.
(b)Where the information requested in Clause 5.4(a) relates to financial information, the Trustee may request the Company to provide an Auditor’s certificate stating that the Auditor has reviewed that financial information and acknowledges that based on the Auditor’s reasonable enquiries nothing has come to the Auditor’s attention which causes the Auditor to believe that the information provided to the Trustee is incorrect or incomplete.
Clause 6.1 provides:
The Company has been established for the sole purpose of issuing the Notes. The Company will carry on and conduct its business in a proper and efficient manner.
Clause 6.2 provides:
The Company will make available for inspection by the Trustee or any registered company auditor appointed by the Trustee the whole of the accounting or other records of the Company and will give to the Trustee such information as it requires with respect to all matters relating to the accounting or other records of the Company.
Clause 6.5 provides:
The Company covenants to:-
(a)perform each of the duties or obligations imposed on it by the Corporations Act including the obligations and duties imposed by Part 2L of the Corporations Act or any other statute from time to time and the ASX Listing Rules; and
(b)ensure that all information provided to the Trustee is true and correct and is not (by omission or otherwise) misleading.
Clause 6.6 provides:
The Company covenants to:-
(a)give to the Trustee any information which it may reasonably require for the purposes of this Deed or the Corporations Act;
(b)immediately advise the Trustee in writing of any default and particulars of such default by the Company under any encumbrance over all or any part of its assets or undertaking or the assets or undertakings of the Company;
(c)duly and punctually fulfil perform [sic] and comply with all the covenants, terms, conditions and obligations imposed upon it by or under this Deed, Chapter 2L of the Corporations Act or the Terms of Issue and notify the Trustee in writing immediately on becoming aware that any of those covenants terms [sic] conditions and obligations cannot be fulfilled or performed;
(d)not without the prior consent in writing of the Trustee make an application under section 411 of the Corporations Act;
(e)not pay any dividend while any interest on the Notes is overdue and unpaid or while any of the Notes is overdue and unpaid or while any of the Notes which have become payable or redeemable has not been paid or redeemed as a consequence of default by the Company;
(f)not without the prior consent in writing of the Trustee reduce or attempt to reduce the capital of the Company;
(g)execute and do all such assurances and things as are reasonably required for giving effect to this Deed and conferring the full benefit of this Deed upon Noteholders.
Clause 7.2 provides:
The Guarantor covenants to:
(a)perform each of the duties or obligations imposed on it by the Corporations Act including the obligations and duties imposed by Part 2L of the Corporations Act or any other statute from time to time and the ASX Listing Rules; and
(b)ensure that all information provided to the Trustee is true and correct and is not (by omission or otherwise) misleading.
Clause 7.3 provides:
The Guarantor covenants to: –
(a) give to the Trustee any information which it may reasonably require for the purposes of this Deed or the Corporations Act;
(b)immediately advise the Trustee in writing of any default and particulars of such default by the Guarantor, the Company or a Related Body Corporate under any encumbrance over all or any part of its assets or undertaking or the assets or undertakings of the Guarantor, the Company or its Related Body Corporate;
(c)duly and punctually fulfil perform [sic] and comply with all the covenants, terms, conditions and obligations imposed upon it by or under this Deed, Chapter 2L of the Corporations Act, the Terms of Issue or the Guarantee Deed Poll and notify the Trustee in writing immediately on becoming aware that any of those covenants terms conditions [sic] and obligations cannot be fulfilled or performed;
(d)execute and do all such assurances and things that are reasonably required for giving effect to this Deed, the Terms of Issue and the Guarantee Deed Poll and conferring the full benefit of this Deed, the Terms of Issue and the Guarantee Deed Poll upon the Trustee or the Noteholders, as applicable.
Clauses 5.1 to 5.5 of the Terms of Issue empowered, and in some cases required, the respondent to take action against OIN should an Event of Default occur:
5.1 Restrictions on actions
(a)Subject to clause 5.3, at any time while an Event of Default subsists, the Trustee may (but is not obliged to) without further notice, take such action as it may think fit to enforce any of the provisions of the Trust Deed (including these Terms of Issue).
(b)The rights of the Trustee and each Noteholder to take action against the Issuer upon the occurrence of an Event of Default are subject to the express restrictions set out in the Trust Deed.
5.2 Consequences
If an Event of Default occurs and continues, the Trustee may, and if directed by the Noteholders pursuant to an Ordinary Resolution, the Trustee must, give notice to the Issuer declaring all the Notes to be due and payable on a specified date. If the Trustee gives such a notice then the Issuer must redeem all the Notes on the date specified in the notice. Each Note must be redeemed at its Face Value plus any Interest that has accrued from (and including) the preceding Interest Payment Date to (but excluding) the date specified in the notice.
5.3 Enforcement
At any time that the Notes have become due and payable in accordance with a notice given by the Trustee pursuant to clause 5.2, the Noteholders may by way of an Ordinary Resolution, subject to the restrictions set out in the Trust Deed, direct the Trustee to take such proceedings against the Issuer as the Trustee may think fit to enforce payment in respect of the Notes.
5.4 Trustee not bound to take action
The Trustee shall not in any event be bound to take any action referred to in clause 5.3 unless the Trustee shall have been so directed by the Noteholders pursuant to an Ordinary Resolution.
5.5 Noteholders’ right to take action
No Noteholder shall be entitled to proceed directly against the Issuer to enforce any right or remedy under or in respect of any Note unless the Noteholder is expressly permitted to do so under the Trust Deed.
Clause 15.2 of the Terms of Issue defined an Event of Default. An Event of Default occurred if, amongst other events:
·
OIN failed to perform or observe its obligations under the Terms of Issue or the Trust Deed, where the failure was either incapable of being remedied or continued for 30 days following service of a notice requiring the failure to be remedied
(sub-clause (b));
·any other indebtedness for borrowed money, any present or future guarantee for, or indemnity in respect of, any indebtedness for borrowed money of the Octaviar Group became due and payable prior to its stated maturity by reason of an event of default or any security given by the Octaviar Group for any indebtedness for borrowed money becoming enforceable by reason of default, and steps had been taken to enforce such security (sub-clause(c));
·an Insolvency Event (defined to include a body corporate becoming insolvent) occurred with respect to OL or OIN (sub-clause(e));
·OL failed to have consolidated net assets of at least $280 million at the end of each six monthly reporting period, which was not rectified within 30 days of notice being given (sub-clause (h)); and
·
a deed poll on substantially the same terms as that given by OL was not executed by a Material Subsidiary within 30 days of that entity becoming a Material Subsidiary
(a Material Subsidiary being defined as a wholly-owned subsidiary of OL with unsecured debt owed to a third party other than an entity within the Octaviar Group of greater than $10 million) (sub-clause (k)).
THE EVIDENCE AND SUBMISSIONS
The applicant’s evidence
The applicant’s case is based, substantially, on the expert reports of Philip Joseph and Cosimo Borrelli. It was structured around Mr Joseph as a proxy for the respondent and
Mr Borrelli as a proxy for an investigative accountant reporting to the respondent.
Mr Joseph is qualified as an expert in the work of corporate trustees. I reject the respondent’s submission that Mr Joseph possessed no expertise as a debenture trustee.
Mr Joseph made a number of reports. The reports are dated:
·8 April 2016 (Joseph 1);
·20 April 2016 (Joseph 2);
·22 April 2016 (Joseph 3); and
·1 July 2016 (Joseph 4).
Mr Borrelli is a Chartered Accountant and the Managing Director of Borrelli Walsh, a specialist insolvency, restructuring and forensic accounting firm. He is qualified as an investigative accountant. Mr Borrelli made a number of reports. The reports are dated:
·8 April 2016 (Borrelli 1);
·22 April 2016 (Borrelli 2); and
·27 June 2016 (Borrelli 3).
Mr Joseph’s reports and Mr Borrelli’s reports were admitted into evidence over objection: Oztech Pty Ltd v Public Trustee of Queensland (No 9) [2016] FCA 785 (Reasons 9).
In Joseph 1, Mr Joseph expressed opinions as to what steps the respondent, as the trustee for noteholders, should have taken in order to discharge his duties as trustee, including when those steps should have been taken.
Mr Joseph said that, at least by 17 May 2007, the respondent should have put in place a monitoring regime by which he (the respondent) received regular (monthly) information from OL. Further, after the respondent had received a high-level report from PricewaterhouseCoopers (PwC) in June 2007 to the effect that PwC was unable to form an opinion as to whether OL would have the ability to meet scheduled debt repayments at the maturity date (this report is referred to below as PwC 3), the respondent should have requested, or have PwC or another investigative accountant request, by July 2007, further information from OL to enable PwC or another investigative accountant to prepare a more extensive and thorough report which considered the business model and the financial position of OIN and the Guarantors; whether OIN or the Guarantors were insolvent; whether there had been breaches of the Trust Deed, the Terms of Issue, the Guarantee Deed Poll, or the Corporations Act (including whether there had been an Event of Default which would make the notes repayable); whether OIN or the Guarantors “will be able to repay the amounts owing” under the notes at the maturity date; and “what appropriate action” the trustee should take.
Mr Borrelli was asked to assume that he had been appointed as an investigative accountant by the respondent in July 2007. Borrelli 1 was tendered as the report that Mr Borrelli, as the investigative accountant, would have provided to the respondent at that time. Without descending to the detail of Borrelli 1, Mr Borrelli said that he would have requested copies of certain information and documents in relation to the Octaviar Group in order to facilitate his work as an investigative accountant. He said that, on the basis of the information that would have been provided to him at the relevant time, he could not have concluded that OIN and the Guarantors were insolvent in July 2007. He said, however, that, at that time, there was a risk of insolvency and that he would have recommended that the respondent request monthly information and documents, according to 18 specified categories, in relation to the financial and operational affairs of the Octaviar Group.
In Joseph 2, Mr Joseph expressed opinions as to what action the respondent should have taken in August 2007 as a result of receiving Borrelli 1. Mr Joseph said that, amongst other things, he would have followed the investigative accountant’s recommendations and engaged the investigative accountant on an ongoing basis to undertake the monitoring recommended in Borrelli 1.
Borrelli 2 was tendered as the report that Mr Borrelli, as the investigative accountant, would then have provided to the respondent. Borrelli advised on:
·the financial position of OIN and the Guarantors since August 2007;
·whether OIN or any of the Guarantors were insolvent;
·whether OIN and/or the Guarantors would be able to repay the amounts owing under the notes on the maturity date;
·whether there had been any breach of the Trust Deed, Terms of Issue, Guarantee Deed Poll and/or the Corporations Act, including whether an Event of Default had occurred; and
·the appropriate action he, as the investigative accountant, would have recommended the respondent to take in light of his findings.
Borrelli 2 made a number of recommendations, including that the respondent should:
·confirm with appropriate legal advisers that certain events described in Borrelli 2 were Events of Default, and that such events would permit the respondent to issue notices of demand enforcing his rights against OIN and the Guarantors; and
·consider the pursuit of other options and remedies to protect and preserve the interests of noteholders and creditors, including issuing statutory demands and, if necessary and appropriate, applying promptly to wind up OIN and the Guarantors.
In Joseph 3, Mr Joseph expressed opinions as to what action he would have taken in the periods August to October 2007, November 2007, December 2007 and January 2008 had he been trustee. These opinions purport to be based on the advice and recommendations in Borrelli 2.
Borrelli 3 was tendered to supplement and explain Borrelli 2. In Borrelli 3, Mr Borrelli explained, amongst other things:
·when he would have commenced monitoring the Octaviar Group, including meeting with relevant directors and officers;
·how the timing of his monitoring would have been adjusted in the course of his investigation, including when requesting documents and information; and
·the extent to which, during his investigation, he would have communicated with the respondent about the status of those investigations.
Joseph 4 was tendered to supplement and explain how Mr Joseph arrived at his opinions in Joseph 3 in light of Borrelli 2. In Joseph 4, Mr Joseph explained, amongst other things:
·the assumptions he adopted as to when he would have been provided with the information in Borrelli 2;
·the information in Borrelli 2 upon which he relied when expressing his opinions about the actions he would have taken and the time periods identified in Joseph 3; and
·whether the information in Borrelli 3 would have caused him to change the opinions he expressed in Joseph 3.
There was a substantial attack on the form of Borrelli 2 and Joseph 3, as explained in
Reasons 9. I will return to that particular attack in later paragraphs of these reasons.
In closing submissions, the respondent also attacked the form of Mr Joseph’s reports on the basis that Mr Joseph expressed views on what he personally would have done if acting in the role of trustee in relation to the OIN Trust, rather than expert opinions about what a trustee in the position of the respondent ought to have done in the circumstances by reference to the general practice of professionals undertaking that role at the relevant time. As put by Oliver J in Midland Bank Trust Co. Ltd v Hett, Stubbs & Kemp [1979] 1 Ch. 384 (Midland Bank) at 402:
The extent of the legal duty in any given situation must, I think, be a question of law for the court. Clearly if there is some practice in a particular profession, some accepted standard of conduct which is laid down by a professional institute or sanctioned by common usage, evidence of that can and ought to be received. But evidence which really amounts to no more than an expression of opinion by a particular practitioner of what he thinks that he would have done had he been placed, hypothetically and without the benefit of hindsight, in the position of the defendants, is of little assistance to the court …
In Permanent Trustee Australia Ltd v Boulton (1994) 33 NSWLR 735 at 738, Young J expressed the view that evidence of what the expert himself or herself would have done is inadmissible. In the present case, an objection as to admissibility along these lines was raised in written submissions on the voir dire concerning the admissibility of Mr Joseph’s reports but, as I recall it, not expressly pressed at the voir dire hearing itself. As events transpired, those reports were admitted, and the evidence given has been tested by cross-examination. Therefore, this particular objection really goes to the weight that I should now give to
Mr Joseph’s evidence.
The applicant supported Mr Joseph’s evidence by submitting that, in his reports, he was plainly giving evidence of what a trustee in the position of the respondent ought to have done, rather than his own idiosyncratic views of what he would have done. In my view, this is not at all clear. In Australian Securities and Investments Commission v Vines [2003] NSWSC 1095; (2004) 48 ACSR 291 at [32], Austin J remarked:
Of course, in some cases there will be a fine line between evidence by a professional of what a reasonably competent and careful professional would do in specified circumstances, and evidence of what the witness would do in those circumstances. But there is a significant conceptual difference, because evidence of what a reasonably competent and careful professional would do requires the witness to take an objective view, in circumstances where his or her own standard might be higher or lower than the objective standard.
Here, there are clear indications that Mr Joseph’s focus was what he, personally, would have done if placed in the position of the respondent. A number of critical passages in
Mr Joseph’s reports are expressed in the first person—what Mr Joseph would have done. Other passages are expressed more generally. As the applicant would have it, I should ignore this distinction in language in favour of assuming that at all times Mr Joseph was really speaking at a more general level. The applicant submitted that Mr Joseph had merely adopted “linguistic shorthand” to convey what a reasonably prudent trustee in the shoes of the respondent would do.
I do not think that I can sensibly read Mr Joseph’s reports in this way. I refer particularly, but not exhaustively, to paras 26, 29, 38, 42, 47, 54, 56 and 63 of Joseph 1. Further, para 3 of Joseph 1 makes clear that, in Joseph 2, Mr Joseph was intending to opine on what he would have done following receipt of the report which, in Joseph 1, Mr Joseph says he would have commissioned. I am left with the impression that, when using the first person in his reports, Mr Joseph was speaking of what he, personally, would have done and that, when speaking more generally, he was speaking of expectations according to his own standards rather than according to the common and accepted practices and usages of trustees for debenture holders—the assumption being that all prudent trustees acting in that capacity would have acted in precisely the same way that Mr Joseph believes he would have acted. This latter assumption is not one I am prepared to make. I am reinforced in this conclusion by the fact that, conspicuously, Mr Joseph’s reports do not contemplate even the possibility that a trustee in the position of the respondent in relation to the OIN Trust could have discharged his duties in other ways. I accept the respondent’s submission that, if the circumstances were such that, in the opinion of the expert, a trustee exercising due diligence and reasonable care could only discharge his duties in one particular way, that would have to be made plain and the reason for the conclusion explained. Mr Joseph’s evidence does not grapple with any such possibility.
For these reasons, I treat Mr Joseph’s reports with considerable caution, particularly when considering the question of whether the respondent breached his duty of due diligence and duty of care. I wish to make clear that this is not a criticism of Mr Joseph personally.
A similar criticism was made in relation to Mr Borrelli’s reports. At this point it should be appreciated that the present case is not concerned with alleged breaches of duty by an investigative accountant. It is concerned with alleged breaches of duty by a trustee for debenture holders. The significance of Mr Borrelli’s evidence lies in its deployment in the applicant’s case on causation of damage. Nonetheless, the respondent submitted that the same problem was inherent in this evidence. The respondent submitted that, while
Mr Borrelli was advanced as a simulacrum for an investigative accountant appointed by the respondent, his evidence was not directed to what an investigative accountant of ordinary competence would have done but, rather, what he (Mr Borrelli) would have done.
I accept that, in his reports, Mr Borrelli approached his task on this basis. Once again, this is not a criticism of Mr Borrelli personally. Indeed, far from it. In their letter of instructions to Mr Borrelli dated 6 April 2016 (in relation to the preparation of Borrelli 1), the applicant’s solicitors asked Mr Borrelli to prepare a report addressing particular topics, which included the following instruction:
(e)what appropriate action would you recommend that the Public Trustee of Queensland take in light of your findings …
It also included this instruction:
5Based on your study, training and experience as an investigative accountant, the information you have been provided and any other information you consider to be relevant (including documents, if any, that you would have requested from [OL] or any of its subsidiaries) please prepare a report in answer to paragraph 4 above.
I have no reason to doubt that Borrelli 1 was Mr Borrelli’s response directed to what he, personally, would have done and what he, personally, would have recommended, albeit based on his study, training and experience as an investigative accountant.
Similarly, the applicant’s solicitors’ letter of instructions to Mr Borrelli dated 7 April 2016 (in relation to the preparation of Borrelli 2), asked Mr Borrelli to prepare a report addressing particular topics, which included the following instruction:
(e)what appropriate action would you recommend that the Public Trustee of Queensland take in light of your findings …
It also included this instruction:
3Based on your study, training and experience as an investigative accountant, the information you have been provided and any other information you consider to be relevant please prepare a report in answer to paragraph 2 above.
Once again, I have no reason to doubt that Borrelli 2 was Mr Borrelli’s response directed to what he, personally, would have done and what he, personally, would have recommended.
Borrelli 3 was prepared on the same basis. The applicant’s solicitors’ letter of instructions to Mr Borrelli dated 24 June 2016 included these instructions:
1When, in your opinion, would you have commenced meeting and discussing with the relevant directors and officers of [the Octaviar Group] and monitoring the financial and operational affairs [of the] Group on (at least) a monthly basis?
2In what way, if any, do you consider that the timing of such meetings, discussion and/or monitoring would have been adjusted during the period until February 2008? What factors/events would have caused you to adjust the timing of any such meetings, discussion and/or monitoring?
3Insofar as monitoring includes requests for documents and information from [the Octaviar Group], to what extent if at all would your approach to such requests have adjusted during the course of your investigation and what if any factors or events would have caused you to adjust the timing of such requests? If your answer to this question differs depending on the categories or classes of documents (e.g., management accounts, communications with creditors, internal emails) that would have been requested, please so indicate.
4To what extent, if at all, would you have communicated with the PTQ about the status of your investigations, during the course of your investigation.
Therefore, I also treat Mr Borrelli’s reports with caution, particularly when considering the recommendations made notionally to Mr Joseph and, consequently, Mr Joseph’s response to those recommendations. Having made this observation, I acknowledge that there are other aspects of Mr Borrelli’s evidence where he did speak more broadly in respect of the role of an investigative accountant.
There is, however, a further significant and compounding difficulty with Mr Borrelli’s reports and evidence more generally. As I will come to elaborate, I am satisfied that Mr Borrelli’s own views were unavoidably influenced by hindsight based on his previous engagement by the liquidators of OL and OA.
The respondent’s evidence
In the respondent’s case, evidence was given by:
·Gregory Edward Klein;
·Craig Lawrence Dean;
·Francesco Graziano Prostamo;
·Ian Donald Cameron Kelly;
·Ian Richard Hall;
·Mark Steven Sammut;
·Gareth John Jenkins;
·William John Fletcher;
·Ann-Maree Margaret Dunning;
·Mark Korda; and
·Michael McCann.
Other than Mr Korda, each witness’s evidence in chief was given by affidavit. Each witness, other than Mr Sammut, Mr Fletcher and Ms Dunning, was cross-examined.
Mr Klein held the position of Public Trustee of Queensland from 1996 until his retirement on 30 January 2008. He was employed in the Public Trust Office (the PTO) for almost
50 years. He gave evidence concerning his recollection of the circumstances in which he, as the Public Trustee, resigned as trustee of the OIN Trust on 6 July 2007. The applicant submitted that, at times during cross-examination, Mr Klein sought to qualify or distance himself from his affidavit evidence. I think that, in some respects, this is true. Nonetheless, I accept Mr Klein as a reliable witness who sought to give his evidence to the best of his ability.
Mr Dean was the Business Support Manager within the Investment Services Branch of the PTO at the time relevant to this proceeding. He also acted as the Manager of Investment Services for short periods in the period 1 October 2006 to 30 December 2008, including in the periods 1 to 5 October 2007 and 7 January to 1 February 2008. He gave evidence concerning the responsibilities and activities of the Business Services team within the PTO.
As Business Support Manager, Mr Dean’s role was to manage the day to day operations of the PTO’s custodian and corporate trust matters. His responsibilities included ensuring that, for each trust with which the respondent was concerned, all legislative and administrative requirements were met and that the PTO’s “clients” provided the PTO with the information that it required. Mr Dean reported to Mr Prostamo (the Director Investment Services) through Anita Hicks, the Manager of Investment Services. He also came to report to
Mr Kelly (the Director Client Services) with respect to some matters.
Mr Dean gave evidence concerning his role in dealing with the OIN Trust.
Mr Prostamo was, as I have noted, the Director Investment Services at the time relevant to this proceeding. He reported directly to Mr Klein. In this role, Mr Prostamo was responsible for managing the investments side of the PTO’s operations. In the period 2006 to 2007, this responsibility covered funds management and the financial planning and management of the PTO’s corporate trusts and custodian investment schemes.
Mr Prostamo gave evidence concerning his role in the PTO with respect to the engagement of the respondent as trustee of the OIN Trust, and of the subsequent monitoring of the Trust.
The applicant criticised Mr Prostamo’s evidence as appearing to be rehearsed. I did not gain that impression when observing him during cross-examination. I consider him to be a reliable witness who gave his evidence to the best of his ability.
Mr Kelly, as I have noted, held the position of Director Client Services at the time relevant to this proceeding. The scope of his regular duties as Director Client Services included responsibility for managing the respondent’s functions relating to protective management, trusts (excluding those concerned with corporate fundraising), deceased estate administration and will-making. He was the third most senior person within the PTO after the Public Trustee and the Deputy Public Trustee. He was a member of the Executive Management Team and was appointed the Chairman of the Investments Committee on 29 June 2007.
Mr Kelly reported directly to Mr Klein until Mr Klein’s retirement in January 2008. He then reported to the Acting Public Trustee, Mr Wedge. He gave evidence concerning:
·the PTO’s review of corporate trustee and custodianship matters in about May 2007, including a review of the OIN Trust;
·the subsequent resignation by the respondent from his trusteeship of the OIN Trust on 6 July 2008; and
·the steps taken by the PTO in relation to the OIN Trust during the period following the respondent’s resignation.
The applicant submitted that Mr Kelly was a dishonest and unreliable witness. I reject that criticism. I had the benefit of observing Mr Kelly throughout the course of his
cross-examination. My impression was that he gave his evidence honestly and to the best of his ability. This is not to say that I accept all aspects of his evidence but, on the whole, I accept him as a reliable witness. I refer to specific aspects of Mr Kelly’s evidence in greater detail in later sections of these reasons.
Mr Hall is a partner in KPMG. In the period October 2006 to April 2008 (to which his evidence was directed), he was a partner in PwC, engaged in that firm’s Corporate Recovery and Restructuring group. He joined KPMG as a partner in March 2013, having retired as a partner in PwC in January 2010. In the interim period, Mr Hall was engaged in consulting work and sat on a number of company boards.
Mr Hall’s background and experience is in insolvency, a field in which he has practised for more than 30 years. He is a Chartered Accountant and registered liquidator. His work in insolvency has been predominately in the area of corporate restructuring. Apart from acting in a formal capacity as liquidator, administrator or receiver and manager, a major aspect of his work has been the undertaking of business reviews, in the role of an investigative accountant, mainly for banks and other security holders.
Mr Hall gave evidence concerning his role of advising the respondent through a number of reports prepared by PwC, which I discuss in later paragraphs of these reasons. The applicant accepted Mr Hall as a witness who provided straightforward and candid answers in his
cross-examination. That was also my impression.
Mr Sammut is a partner in Clayton Utz, the respondent’s solicitors. He shares responsibility for the carriage of this matter on behalf of the respondent. Mr Sammut’s evidence was limited to completing the chain of evidence in relation to Mr McCann’s expert evidence (see below) and dealing with other procedural matters.
Mr Jenkins is a partner in Clayton Utz who had responsibility for providing advice to the respondent in connection with the OIN Trust during the period 11 February 2008 to
4 June 2008. He provided a substantial affidavit dealing with:
·the period up to 4 June 2008 when the respondent filed winding up applications seeking the liquidation of OL, OIN, OIB and OFS;
·the period after the commencement of the winding up proceedings up to 24 July 2008 when certain undertakings were given by those companies; and
·the period to September 2008, when administrators were appointed to the companies.
Mr Fletcher is one of the court-appointed liquidators for OA and OL. He was appointed on
9 September 2009. He gave evidence concerning the engagement of Mr Borrelli to prepare a solvency report in relation to OA and OL for use in litigation in proceedings commenced in the Supreme Court of Queensland. I discuss this report—which I have called the Fortress Report—in later sections of these reasons. His appointment is ongoing.
Ms Dunning is a Legal Technology Services Manager in Clayton Utz. She gave evidence concerning the electronic storage and management of documents produced under subpoenas to Clayton Utz.
Mr Korda is a partner in KordaMentha. He is a Chartered Accountant and registered liquidator with expertise in corporate insolvency. He is a director of 333 Capital Pty Ltd
(333 Capital), an advisory arm of KordaMentha. 333 Capital was engaged by OL on about 22 January 2008 to provide advice to OL on a range of matters including:
·a detailed review of the company’s cash flow forecasts;
·the management of liquidity issues;
·advice on restructuring options available to OL and related entities; and
·“other matters”, as and when required.
Mr Korda gave evidence concerning the advice provided to OL upon 333 Capital’s review of the Octaviar Group. The applicant remarked that 333 Capital is currently involved in proceedings in the Supreme Court of Queensland that have been brought against it by the liquidators of OIN and OIB arising out of advice given to the directors of OL between
22 January 2008 and 15 July 2008. The applicant submitted that, in cross-examination,
Mr Korda accepted that he had a strong financial interest in justifying and defending the correctness of the advice he had given to OL in 2008. The applicant submitted that I should approach Mr Korda’s evidence with that fact in mind.
I note that Mr Korda did not provide an affidavit in support of the respondent’s case and that his evidence was given under subpoena. My observation of him when giving his evidence was that he was truthful. I accept him as a reliable witness.
The respondent also led evidence from Michael McCann. Mr McCann is a partner of Grant Thornton Australia and is a specialist in restructuring. He is qualified as an investigative accountant and is the responding expert to Mr Borrelli. The applicant criticised Mr McCann and submitted that I should find that he saw his role as an advocate rather than to provide assistance to the Court in an impartial fashion. I reject that criticism. Certainly, Mr McCann advanced views that were clearly supportive of the respondent’s case. These views were directed to engaging with views expressed by Mr Borrelli, whose own views were clearly supportive of the applicant’s case.
Mr Borrelli and Mr McCann prepared a joint report detailing the matters on which they disagreed (the Joint Report). The Joint Report is extensive (240 pages). It is apparent from the size of the Joint Report that there was little agreement between them. Mr Borrelli and
Mr McCann gave evidence concurrently by reference to the Joint Report. Each was subsequently cross-examined.
The respondent also sought to lead evidence from Philip David Anthon in response to Mr Joseph’s evidence. I rejected the tender of a report prepared by Mr Anthon as well as an affidavit made by him: Oztech Pty Ltd v The Public Trustee of Queensland (No 13) [2016] FCA 1153.
The documentary tenders
For completeness, I record that the evidence included:
·a core bundle of documents (50 volumes);
·an opening bundle of documents (24 volumes); and
·a cross-examination bundle of documents (8 volumes).
Although there was a degree of duplication between the various bundles, it will be appreciated that the documentary tender was significant.
The submissions
Each party relied on extensive written submissions. In total, the submissions amounted to approximately 1,000 pages. These were supplemented by oral argument over 6 days. I have not felt it necessary to either detail or discuss every submission that was made. Some submissions were truly peripheral to the cardinal elements of the parties’ respective cases.
THE EVENTS PRIOR TO 6 JULY 2007
The merger with S8: the issue of OIN notes
At the time when the respondent became trustee, OL was a diversified financial services and investment company with activities in funds management, investment, structured finance and tourism. OL was listed on the Australian Securities Exchange (ASX) and was included in the S&P/ASX 200 Index. It had a market capitalisation of approximately $950 million.
As I have noted, OL’s business was conducted within the structure of, and by means of, the Octaviar Group. Within that structure, OA acted as the treasury company. It was a party to nearly all intercompany transactions within the group. OFS was the original holding company of the group. However, following the listing of OL in
January 2005, OFS’s principal activity was the holding of investments in its immediate subsidiaries. These subsidiaries managed funds in listed and unlisted investment vehicles in the finance, property, equity and investment sectors and held investments in listed and unlisted securities.
On 4 September 2006, OL and another company, S8 Limited (S8), announced a proposal to merge. At that time, S8 was an integrated travel services business operating in the tourism, travel and leisure sectors, marketing holiday accommodation and travel products and services. OL’s business included a division called the Stella Resorts Group (Stella) which had numerous resorts under management in Australia and New Zealand.
As part of the merger, OL made an off-market takeover offer for certain convertible notes that S8 had issued (the S8 notes). OL offered alternative consideration for the S8 notes. Holders of the S8 notes could elect to receive, for each note, 1.05 MFS Securities (each MFS Security comprising one note to be issued by OIN and 14 warrants, which were options over OL’s unissued shares) plus a cash payment equal to the accrued but unpaid interest on the
S8 notes (the non-scrip offer). Alternatively, holders of the S8 notes could convert their notes and accept a separate share offer by OL (the scrip-offer).
OIN was incorporated for the purpose of issuing the notes under the non-scrip offer. At that time, it was originally contemplated that the note issue under the non-scrip offer would be for an amount up to $75 million. However, by 31 October 2006, the amount of the proposed issue had increased to $136.6 million.
It appears that, by the time the MFS Securities came to be issued, the notes and the warrants were stapled. Clause 3.1 of the Terms of Issue provided that if a noteholder exercised the warrants to which a note had been stapled, OIN would redeem the note for its face value and apply the redemption amount in payment of the exercise price of the stapled warrants.
OIN was to pay any excess over the exercise price to the noteholder.
PwC 1
For the purpose of considering whether he would undertake the role of trustee of the OIN Trust, the respondent engaged PwC to report on various matters, including on “significant risks and sensitivities” and whether, based on the information available to PwC (within the scope of their engagement), OL would be in a position to meet the future repayment obligations under the notes at the maturity date. I should note here that the respondent had acted as trustee for other notes and debentures issued by OL.
In a report dated 31 October 2006 (PwC 1), PwC noted that OL had not provided any forecast information, but brokers had estimated that the combined EBITDA for S8 and OL could be $313 million by 2011. PwC advised that future events are inherently uncertain and that the respondent should consider broker estimates, particularly in later years, in that context. PwC noted that OL had a track record of buying and selling businesses and that this was considered (at least by OL’s directors and some brokers) as OL’s core business activity. PwC noted that, in the event of cash flow issues (which were not envisaged based on broker consensus estimates), there may be scope for the sale of businesses to generate cash flow.
Prior to the merger, OL had estimated that, as at 30 June 2006, it had net current assets of $27.7 million and net tangible assets of $82.5 million. However, based on the proforma balance sheets that had been prepared for the merger, PwC noted that the merged entity would have negative net current assets of $(284.9) million and negative net tangible assets of $(324.2) million, based on the non-scrip offer. Nevertheless, the merged entity would have net assets of over $1 billion. Even on the basis of a 100% acceptance of the scrip offer, the proforma balance sheet for the merged entity as at 30 June 2006 showed negative current assets and negative net tangible assets although, once again, the net assets of the merged entity would be over $1 billion. In this connection, PwC said:
Negative net current assets and net tangible assets is not a new issue for you, as this is consistent with S8 prior to the Merger. This reflects the nature of some of the businesses within the Merged Group’s portfolio and the acquisitive strategies of both businesses.
The statement that “negative net current assets and net tangible assets” were not a “new issue” appears to be a reference to the fact that, quite separately, the respondent was also acting as trustee for the S8 notes. PwC said that the negative net tangible asset position of the proposed merged entity highlighted that the key issue for the respondent, as trustee for the OIN noteholders, was whether EBITDA for the merged entity would be maintainable over the period for which the notes were to be on issue. As Mr Hall explained in cross-examination, cash flow for OL was a very significant consideration because if it did not have the assets to raise additional money, it needed cash flow to cover its commitments. Earnings are a key indicator of cash flow. PwC noted that OL relied heavily on increasing property and asset prices, and that a downturn could impact the earning capacity of the company, particularly if assets needed to be sold to fund cash flows. PwC also noted that there was an inherent risk surrounding OL’s acquisition strategy and its ability to identify and integrate acquisitions successfully. PwC noted that interest rate rises were another factor that would reduce OL’s profit line, increase the likelihood of loan defaults and affect the demand for property. PwC said that OL’s structured finance business, which was conducted in the non-bank lending segment of the real estate market, involved a higher risk than standard bank lending, with the consequence that losses could be incurred by OL as a result of that higher risk.
Nevertheless, PwC said that OL had informed it that, as a fund manager and investment bank, it had access to a variety of cash creation resources (such as issuing similar notes, issuing convertible notes, obtaining bank finance, selling assets/businesses or raising capital) which it intended to use in combination, to generate cash.
PwC concluded that there was no indication that OL and OIN would not be able to repay the notes at the maturity date.
Mr Prostamo gave evidence that, based on PwC 1, he considered OL to have had significant net assets at that time and was in a sound financial position. He said that OL had significant capital backing, which was unusual compared to the respondent’s other corporate trust clients, and that OL’s balance sheet was also much stronger. He said that, at that time, OL looked to be financially viable following the merger and that, on the basis of PwC 1, he was satisfied that OL would be able to repay the notes when they fell due.
As I have noted, on 2 November 2006, OIN, OL and the respondent entered into the
Trust Deed for the OIN Trust.
The further issue of OIN notes
By the end of February 2007, OIN had issued notes with a total face value of over
$146.7 million.
Earlier, on 17 January 2007, OL had advised the respondent that it proposed to issue, through OIN, further notes with a total face value of $150 million, with the ability to accept oversubscriptions up to a further $30 million. OIN was entitled to do this under clause 6.2 of the Terms of Issue. As events transpired, the size of the proposed offer increased.
Mr Prostamo gave evidence that he was not happy about the proposed new issue. His understanding at the time that the Trust Deed was executed was that OL would not issue further notes without first obtaining the respondent’s consent.
Mr Klein gave evidence that he was annoyed at (what he described as) the disrespect shown by OL in not consulting with the PTO before taking this step.
On 17 February 2007, OL published its interim financial report for the half year ended 31 December 2006. The report was audited by KPMG who gave an unqualified opinion that the report gave a true and fair view of OL’s financial position as at 31 December 2006. The consolidated interim balance sheet showed net assets in excess of $1.1 billion. Current assets were shown as including “Assets classified as held for sale” in an amount exceeding
$2.1 billion. These assets included Stella and certain other assets in the tourism, hotels and leisure segment of OL’s business (including assets acquired as part of the S8 merger) which OL said it had acquired with a view to subsequent disposal. The interim financial report expressed the expectation that the sale of these assets would be completed within 12 months.
On 23 February 2007, OL and OIN issued a prospectus which offered notes with a total face value of $160 million and with an ability to accept oversubscriptions up to a further
$50 million. The offer was made to institutional investors and Professional and Sophisticated Investors (as defined in the prospectus). The notes were stapled with warrants granting options to subscribe for shares in OL. The notes were offered with the same maturity date as the notes that had been issued in connection with the non-scrip offer for the S8 notes.
The prospectus explained the nature of the business conducted by the Octaviar Group. For example:
MFS is a diversified financial services and investment group, with total assets of approximately $2.5 billion and net assets of approximately $1.1 billion.
MFS is acquisitive by nature and often seeks to acquire strategic assets and businesses with the intention of combining them or developing them for subsequent divestment or undertaking other transactions which enhance the value of those investments.
The prospectus noted that, on 19 February 2007, OL had announced that it had commenced a process to achieve a partial sale of Stella, and other assets, in the first half of 2007—although, this sale would only proceed if the directors believed that the sale would be in the best interests of OL’s shareholders. The prospectus said that the partial sale was being undertaken to maintain OL’s focus as a funds management and investment vehicle and that the funds to be received from any sale were expected to be used to fund future acquisitions and to repay debt. The prospectus noted that OL expected that its earnings and dividends would be maintained following the sale, although investors were told that there was a risk that earnings and dividends may decrease depending on how, and how quickly, funds received as a result of the sale could be reinvested.
The partial sale of Stella
By 2 February 2007, OL’s Finance and Investment Committee had devised a strategy to sell its “tourism business” for around $2.5 billion, which would include the reacquisition of a 50% interest in that business for a non-cash consideration. It was considered that this strategy would free up around $2 billion to repay debt and provided working capital of about
$1.2 billion. It was considered that a sale at $2.5 billion would result in a profit to OL of about $500 million. The consequence of such a sale, as noted in PwC 2 (discussed below), was that OL would have lower operating cash flows to cover interest and principal repayments that might fall due in respect of the notes. This risk was also noted in the prospectus issued on 23 February 2007 in relation to the further offer of notes.
PwC 2
On 9 March 2007, the respondent engaged PwC to provide an “addendum” to PwC 1. The respondent asked PwC to review the interim financial report to determine OL’s ability to repay the notes at the maturity date. The respondent also sought PwC’s advice on whether the existing minimum net asset cover of $280 million which OL was required to maintain under the Terms of Issue should be revised, in light of the intended further borrowing under the prospectus.
On 20 March 2007, PwC provided a report (PwC 2) containing the following findings.
First, brokers had estimated that OL’s EBITDA could be $397 million by 2010, which was $84 million higher than the expectation recorded in PwC 1. This suggested to PwC that the risk to noteholders had not increased. However, PwC said that it was unclear how the brokers had considered OL’s operations following sale of the assets “held for sale”.
Secondly, the interim balance sheet recorded net current assets of $835 million and net tangible assets as $1,075 million. PwC said that this improvement was “misleading” because material assets that were non-current in nature (significantly, Stella) had been classified within current assets as “held for sale”. Material intangible assets had also been included within that category. PwC noted that this treatment in the balance sheet assumed that these assets would convert to cash in the near term. The effect of this reclassification also meant that the balance sheet as at 31 December 2006 could not be compared with the proforma balance sheet used for PwC 1. Plainly, the purpose of these observations was to alert the respondent that the improvement in the Octaviar Group’s net asset position should be understood in its proper context.
Thirdly, if OL did dispose of assets “held for sale” and distribute the proceeds to shareholders, then OL would have negative net tangible assets. PwC said that the respondent was “somewhat protected” because of the minimum net asset backing of $280 million which OL was required under the Terms of Issue to maintain at the end of each six monthly reporting period.
Fourthly, the majority of OL’s revenue to date had been associated with the assets “held for sale”. Following disposal of these assets, OL would have lower operating cash flows to cover the interest and principal repayments that would fall due under the notes. PwC said that publicly available information was not sufficient to develop illustrative cash flows for the OL business excluding these assets. PwC emphasised that the respondent should consider requesting further analysis and explanations from OL. In cross-examination, Mr Hall addressed the significance of this finding:
Well … the risk is [if] you take the main asset that’s generating most of the revenue out of the business, then you need to understand … what they are planning on doing with the money, and … how that impacts on the ongoing business.
In this passage, Mr Hall’s reference to “the main asset” was to Stella.
Fifthly, PwC noted that the most significant protection for noteholders was the requirement that OL maintain net assets exceeding $280 million. PwC advised that, given the increase in the face value of the notes from $150 million (then on issue) to approximately $360 million, the respondent should obtain an increase of the net asset backing covenant to $672 million. PwC advised that, in line with that increase, the respondent should make further inquiries as to how OL intended to utilise the funds to be obtained from the asset sales it had announced.
I pause here to note that, under the Trust Deed and Terms of Issue, the respondent could not require OL to increase the net asset backing covenant. This is a matter of considerable significance because it meant that the net asset backing covenant provided limited protection for the noteholders in circumstances where OIN was entitled to issue further notes.
Mr Prostamo gave evidence that, although PwC had described the interim balance sheet as “misleading”, he considered OL’s overall net asset position to be “still healthy”, with net assets of over $1.1 billion. He said that, from a balance sheet prospective, he considered OL’s financial position to be “good”. OL’s net current assets had increased since PwC 1. He said that his overall impression, based on PwC 2, was that there was some more work that needed to be done in relation to cash flows, but that OL was in a “solid net asset position”. He said that, for him, OL’s net asset backing of over $1 billion provided a level of comfort.
On 29 March 2007, the respondent informed OL that he had engaged PwC to conduct an annual review in order to fulfil his role as trustee. The description “annual” appears to be a misnomer. The review was a follow-up to PwC 2. The respondent asked OL to provide cash flow forecasts “for 12 months”, including in respect of businesses that had recently been acquired.
I pause to note that, by the end of March 2007, OIN had issued notes with a total face value of over $348.6 million. In cross-examination, Mr Kelly accepted that the net asset backing covenant provided insufficient protection for the noteholders.
On 11 May 2007, OL provided PwC with a cash flow statement for the Octaviar Group. It projected yearly cash flows up to the 2012 financial year. It did not factor in any cash outflow for payment of the notes on the maturity date because OL said that it expected that noteholders would “convert the notes” (presumably, exercise the warrants to which the notes were stapled) rather than “seek capital redemption”. On 16 May 2007, Mr Hall forwarded the cash flow to Mr Prostamo.
The 17 May 2007 meeting
On 17 May 2007, Mr Prostamo met with Mr Hall. At the meeting, Mr Prostamo instructed Mr Hall to obtain and review the assumptions and details of the high level cash flow statement that OL had provided. In a contemporaneous email sent to Mr Kelly and others, Mr Prostamo noted that the value of the notes on issue was approximately $360 million. He said that “we require a close examination of the business”. He also said:
The nature of [OL] is that they are continually buying and selling assets. Ian Hall advised, that it may be prudent to have [OL] submit management accounting reports on a monthly basis to enable the trustee to monitor cashflows, asset backing and profitability.
[Emphasis added.]
Mr Prostamo considered this advice but formed the view that the audited accounts for the period ending 30 June 2007 would provide a better indication of OL’s financial position.
Mr Prostamo gave evidence that, as the audited accounts would be available “within a couple of months”, he decided that the better course was to wait and review them.
In his evidence, Mr Hall said that he was unable to recall the meeting of 17 May 2007 or the advice recorded in the email quoted above. He said that, at the time of this meeting, he was aware that the end of the financial year was approaching and that OL’s audited accounts for financial year ending 30 June 2007 would be available shortly thereafter. He also gave evidence that he was aware that those audited accounts would be more reliable than monthly management accounting reports. He said that he could not recall whether he discussed that view with Mr Prostamo at the meeting.
In cross-examination, Mr Kelly said that he did not remember seeing the email, although he did not doubt that the email would have come to his email box or that it was on the PTO’s file. He also said that, if he had read the email at the time, “I would have done something about it”. By this I understood Mr Kelly to mean that he would have followed up that matter by giving attention to the question of whether monthly management accounts should be obtained. Mr Kelly accepted that, as events transpired, he did not do anything about the email. However, this confirmed in his mind that, for whatever reason, he had not read the email at the time.
The applicant submitted that it is implausible that Mr Kelly did not read the email at the time it was sent or, at the latest by 1 June 2007, when he reviewed the OIN Trust file maintained by the Business Services team within the PTO: see below. The applicant submitted that
Mr Kelly’s resistance to accepting in cross-examination that he had read the email was untruthful. I do not accept that Mr Kelly was untruthful in the evidence he gave on this matter.
The applicant sought to discount this evidence by submitting that Mr Korda’s primary concern was in relation to the appointment of a liquidator or administrator to the Stella entities rather than to the Octaviar entities, which ultimately owned Stella. The applicant submitted that Mr Korda accepted that the appointment of a liquidator to the Octaviar entities would have had a much lower level of “contagion” effect on the Stella entities.
The applicant also relied on Mr Korda’s acceptance that public awareness that a company is in trading difficulties also has a “contagion” effect, albeit to a different degree. The applicant submitted that, by February 2008, there was public awareness that the Octaviar Group was in difficulties because of OL’s share price collapse on 18 January 2008 and that, even in late January 2008, one television station had mistakenly reported that KordaMentha had been appointed as liquidators of OL.
These submissions do not countervail against my acceptance that commencing and pursuing winding up proceedings against OIN and the Guarantors while the sale of Stella was in progress and remained to be completed could have caused significant damage to the Octaviar Group along the lines I have discussed. I am satisfied that the hypothetical investigative accountant would have considered these possibilities and, in all likelihood, brought them to the attention of the respondent. If he or she had not done so, I am satisfied that, in all likelihood, the respondent’s solicitors would have done so. They would also have advised the respondent of the risk that he could be held personally responsible for the loss that might be caused in this regard. Indeed, Mr Megson gave advice along these lines to Mr Kelly when he (Mr Kelly) expressed his concern that the sale to Global Voyager might have been at an undervalue. Mr Jenkins’ evidence makes clear his view at the time that there was no justification for interfering with the sale of Stella and thereby undertaking the risk of causing further harm to the Octaviar Group’s financial position. This view has not been shown to have been in error or unjustified.
The applicant submitted that it cannot be inferred that a sale of Stella by a liquidator or administrator would have realised materially less for creditors than the sale which eventually took place, which was at a distressed price in any event. That may be so. But I am satisfied that, in the counterfactual world, the risk of a more disadvantageous outcome would have been real and appreciated by the investigative accountant, or at least the respondent’s legal advisers.
The applicant further submitted that concerns about the potential impact of a liquidation or administration on the sale value of Stella would need to have been balanced against the advantages of liquidation or administration at that time, in particular the potential for a liquidator or administrator to investigate the PIF transaction. This submission is answered by the fact that I am not persuaded that, either at mid-February 2008 or 29 February 2008, an investigative accountant would have known that the PIF transaction needed to be investigated. From the evidence I have recounted above, it seems that, even within OL and WIM, the matter only came to a head in about late March 2008, when their investigations commenced. Further, it seems that RBS’s assessment of the PIF loan portfolio only took place in about February 2008, leading to the Draft Vendor Due Diligence report dated 27 February 2008, referred to in Borrelli 2. There is nothing in the evidence to suggest that this report would have been in the hands of the investigative accountant by 29 February 2008.
More generally, throughout February 2008, the respondent’s advisers were themselves endeavouring to come to an understanding of the advantages of liquidation (if there was a proper basis for applying to wind up OIN and the Guarantors) and were not able to come to an informed view on the matter. I am not persuaded that, in the counterfactual world, the investigative accountant would have been in a substantially different position or would have held a materially different view.
Indeed, knowing of the risks involved in interfering with the completion of the Stella sale, I am not persuaded that, in the counterfactual world, the respondent, acting reasonably, would have applied to wind up OIN and the Guarantors until after the sale was completed (that is, until after 29 February 2008), even if, contrary to the findings I have made above, he had considered there to be a sound basis for commencing winding up proceedings in mid-February 2008 or by 29 February 2008. This finding, alone, is fatal to the applicant’s case on causation because it means that winding up orders would not have been made on or by
29 February 2008 before completion of the sale, or shortly thereafter (see further in that regard below).Fourthly, on 19 February 2008, OL, through Mr Korda, had raised its “standstill” proposal. I am satisfied that this would have been discussed with the investigative accountant, as it was with the respondent’s advisers at the time. Like the respondent’s advisers at the time, the investigative accountant would have wanted more information to come to an informed understanding as to whether the proposal would yield a better outcome for noteholders than a possible liquidation of OIN and the Guarantors. Such an understanding would not have been formed by mid-February 2008 or by no later than 29 February 2008 or, indeed, in the immediately succeeding period.
Mr Korda gave evidence that it was his view in late January/early February 2008 that there was a prospect of OL reaching an accommodation with the group’s creditors. The applicant disputed the correctness of this view. It relied on, amongst other things, Challenger’s conduct in late January 2008. I have dealt with that particular matter at [538] above and rejected the applicant’s submission that an inference should be drawn that there was no meaningful prospect of Challenger agreeing to a standstill or compromise at that time. Moreover, the evidence makes perfectly plain that Challenger wanted to pursue its consideration of a standstill or compromise with OL even in the face of the respondent’s commencement of the winding up proceedings.
It is convenient at this point to deal with oral evidence given by Mr Borrelli when he was asked about his recommendation concerning the winding up of OIN and the Guarantors. He said:
MR BORRELLI: I think that recommendation would really have two aims. One is to protect PTQs position as a creditor of MFS or MIN. Really two – twofold. One is if you’re expecting – two reasons for that. (1) is if you are expecting other creditors to move, then there’s no sense in PTQ not moving. It should take the same steps to protect its position, but also there are – there’s at least one transaction that may warrant a closer look if the company is wound up, or it may actually be a reason to pursue a winding up, which was the PIF transaction. And then you would start thinking about time limits in relation to back dates.
So I think it would be important to draw a line in the sand by moving – by moving on with a winding up petition at that stage. (2), and perhaps more practically at that point in time, if this group of companies isn’t seeing its state of affairs for what it is, or is trying to avoid them, or is not working on a credible restructuring proposal as an alternative to a winding up by this stage, then you will need something like a winding up petition in order to focus their attention where it should be focused.
It can be seen that Mr Borrelli considered that a recommendation for winding up would have had two aims. The first would have been to protect the position of noteholders because of steps taken by other creditors, and to investigate transactions (specifically the PIF transaction) with a view to securing a relation back date. The second was to focus the attention of the Octaviar Group on pursuing a credible restructuring proposal.
Later, he made clear that, in making his recommendations, he had not “dismissed a restructuring”. In this connection he said:
… I think my point is that, by the end of – or in January, and even up until the end of January, we’ve seen nothing about a restructuring proposal. Sure, we’ve appointed 333 Capital and that would indicate that some work – well, you would hope that some work is being undertaken in respect of a restructuring proposal.
But as at the end of January there isn’t a hint or a … or anything else of a restructuring proposal and that’s something that a winding up petition or a statutory demand or depending which route PTQ decides to go, will focus – will focus their – their attention. Now, whether PTQ then proceeds with that course – with that course of action is entirely a matter for PTQ. And the directors have it well within their ability to sit down with PTQ and say, “Hey guys, this is what we’re doing. This is what we expect to happen in the coming weeks. This is what we expect the restructuring proposal to look like. This is where the resources are going to come from it.”
And if PTQ is convinced it has the ability, it would … that petition all, more realistically, enter into some standstill arrangement. …
The respondent submitted that Mr Borrelli’s view that a winding up application would focus the Octaviar Group’s attention to “where it should be focused”, and that such an application could be withdrawn, was “a very different recommendation” to the one made in Borrelli 2. He submitted that Mr Borrelli’s oral evidence marked a shift from his position in Borrelli 2 to one where a winding up application would be used to focus the Octaviar Group’s attention on, and to expedite, a restructuring plan. The respondent submitted that this evidence showed that, as at mid-February 2008, winding up was not the inevitable outcome (as the applicant argued) and that Mr Borrelli’s acceptance of this fact was fatal to the applicant’s case that a winding up order would have been made by 29 February 2008.
The respondent also submitted that it was fanciful to suggest that, at this time, a winding up application was needed to focus OL’s attention to developing a restructuring proposal. After all, that was one of the reasons why OL engaged 333 Capital in January 2008.
The respondent submitted further that he would have been ill-advised to bring winding up proceedings against OIN and the Guarantors with a view to withdrawing them, if appropriate. In this connection, Mr McCann said:
… On the point of withdrawing the winding up application I think the milk is spilt, as it were, by then. Withdrawing the application cannot undo the damage which would be done in terms of sale transactions or the response of directors who may, in the face of it, appoint voluntary administrators or take some other form of action. So I don’t think that a withdrawal could be considered as a lever that you can relax and say, “Well, now we’ve got your attention, we will pull back from winding you up and ready for action.” The damage is done. So that decision to file a wind up is a very serious decision requiring substantial consideration in circumstances such as this and knowing that its effect is largely irrevocable.
I do not find Mr Borrelli’s reasoning (quoted at [955] above) to be persuasive on this question.
As to Mr Borrelli’s first reason, the respondent could only commence winding up proceedings if there was a proper basis for doing so. He could not commence those proceedings simply out of a desire to protect the interests of the noteholders or as a means to investigate transactions. In any event, on my findings, there were no transactions which, at that time, would have come to the investigative accountant’s attention as transactions that needed to be investigated by a liquidator or other external controller. I observe that, even when, in his affidavit filed in the winding up proceedings, Mr Anderson revealed the proceedings commenced by WIM in relation to the PIF transaction, noteholders and other creditors continued to press for an adjournment of the winding up proceedings to allow them time to consider OL’s revised proposal. Finally, as I discuss below, on the evidence before me, other creditors were not “moving” as Mr Borrelli suggested—at least not in the sense of taking legal proceedings against OL and group companies to enforce their claims.
As to Mr Borrelli’s second reason, OL’s attention to developing a restructuring proposal or “work out”, such as its initial “standstill” proposal, did not need to be “focused” at this time. The evidence shows that OL had been giving active consideration to such a proposal and, by mid-February 2008, was raising it with the major creditors.
Further, I accept that the respondent would have been ill-advised to bring winding up proceedings against OIN and the Guarantors without the genuine purpose of pursuing them to final relief. As Mr McCann said, commencing such proceedings is a serious matter. In fairness to Mr Borrelli, I do not think that he was intending to suggest otherwise. However, the point is that bringing such proceedings for an ulterior purpose would be an abuse of process. Such proceedings, if improperly or unjustifiably commenced, could cause significant damage to the party against whom they are commenced. I am satisfied that the respondent’s legal advisers would have informed the respondent of that fact, if he had not already been aware of it.
Apart from these matters, I accept the respondent’s submission that Mr Borrelli’s oral evidence on this question marks a shift in the recommendation given in Borrelli 2. His evidence does not support the applicant’s case that, by 29 February 2008 or shortly thereafter, winding up orders would have been made against OIN and the Guarantors. Mr Borrelli’s oral evidence in this connection recognises that, in the counterfactual world, outcomes other than winding up were equally possible as at that date.
Before leaving the question addressed in this section of the reasons, there are further matters I should address.
The first matter is the applicant’s reliance on:
·
the Octaviar Group’s debt position as at 31 January 2008, based on Mr Borrelli’s analysis in Borrelli 2 (a matter which is disputed in the evidence), including
Mr Borrelli’s evidence about claims made by creditors; and
·Mr Borrelli’s evidence that, as at mid-February 2008, there was a very large disparity between the estimated value of assets available to the Octaviar Group and its liabilities (a proposition as at mid-February 2008 that was not established on the evidence and was disputed by Mr McCann); a lack of “sustainable” funding available to continue operations (a proposition as at mid-February 2008 that was not established on the evidence but which is now known); the lack of a viable restructuring proposal or an indication that one would be forthcoming (a fact that is contrary to the evidence, although OL’s proposals were not ultimately accepted); the lack of substantial assets or business upon which to base a restructuring (a proposition as at mid-February 2008 that was not established on the evidence and was disputed by Mr McCann); concerns regarding the ability and integrity of the Octaviar Group’s management (a proposition as at mid-February 2008 that was not established on the evidence); and the need to investigate the PIF transaction (a proposition as at mid-February 2008 that was not established on the evidence),
as reasons why an investigative accountant would have recommended in mid-February 2008 that OIN and the Guarantors be wound up.
As the evidence makes clear, no creditor in the real world took that step. This casts doubt on the validity of the demands which had been made at that time and remained unsatisfied, or indicates that such creditors, like the respondent, were unsure of the solvency of companies in the Octaviar Group, or considered that it was not commercially rational, at that time, to actively pursue recovery against those companies by winding up proceedings. Not even the Deputy Commissioner of Taxation as at mid-February 2008 (or, indeed, as at
29 February 2008) took that step to enforce OL’s tax liabilities for the year ended 30 June 2007. He only took preparatory steps in that regard when he served a creditor’s statutory demand on 17 June 2008. Whatever their reasons may have been, the fact that other creditors did not take the step which, in its case on causation, the applicant says the respondent should have taken and would have taken, supports the contrary conclusion to which I have come.
The second matter is the applicant’s reliance on the respondent’s pleading of the
QSC Directors statement of claim in the QSC Directors proceeding in which the respondent alleged that, had he called in the notes and had the demand not been satisfied, he would have applied to have OIN and the Guarantors wound up, with the consequence that winding up orders would have been made by no later than 16 January 2008. I have already noted some difficulties with that pleading: not all the pleaded deficiencies concerning the quarterly reports would likely have led to the respondent calling for early repayment of the notes, and the case on causation pleaded in the QSC Directors statement of claim cannot be sustained because it relies on alleged failures in February 2008 as grounding the making of winding up orders on either 1 December 2007 or 16 January 2008.
I make the following additional observations in this connection. The allegations made in the QSC Directors statement of claim are just that. What is more, they are allegations made about hypothetical events and include conclusions based on these events. The applicant would have me take all these allegations as admissions of fact binding on the respondent in the present proceeding. I hold significant reservation that these allegations are, in substance, admissions of fact. But, whatever their status might be, they are simply part of the evidential fabric of the case. They cannot rule the day, particularly when it is evident on the face of the QSC Directors statement of claim that the pleaded conclusions (the respondent would have obtained winding up orders on 1 December 2007 or 16 January 2008) are based on fallacious reasoning contained in the pleading itself. Further, these pleaded conclusions do not accord with my own view as to what would have been known, based on all the evidence before me. I am not bound to act on admissions—if, in this case, the relevant allegations in the QSC Directors statement of claim be admissions—when I doubt their correctness: Danberg v Danberg [2001] NSWCA 87; (2001) 52 NSWLR 492 at [160]; Australian Competition and Consumer Commission v Leahy Petroleum Pty Ltd [2007] FCA 794; (2007) 160 FCR 321 at [49].
The third matter is that, although in Borrelli 2 Mr Borrelli recognised that the recommendations he would have made would have been considered by the respondent with the benefit of legal advice, the applicant’s evidence is silent on the legal advice that would have been given. However, I do have evidence of the advice that the respondent’s solicitors were giving him at the time. As reflected in my discussion above, I have no reason to think that, in the counterfactual world, the nature and content of the legal advice that would have been given would have differed substantially from the advice that the respondent’s solicitors actually gave at the time.
The fourth matter concerns Mr Joseph’s evidence on this question. In Joseph 3, Mr Joseph opined that, that had he been acting as the trustee of the OIN Trust, and had he obtained Borrelli 2, he would have followed Mr Borrelli’s recommendations, including his recommendation to wind up OL (I take Mr Joseph to mean OIN and the Guarantors) in February 2008. However, nowhere does Mr Joseph give attention to the fact that, at this crucial time, completion of the partial sale of Stella was pending and a standstill proposal was on the table for consideration. I do not accept that it would have been reasonable for the respondent to arrive at a decision to apply to wind up OIN and the Guarantors in
mid-February 2008 or by no later than 29 February 2008 without giving earnest consideration to each of these matters and how they might affect the interests of the noteholders.
Would an order for the winding up of OIN and the Guarantors have been made by 29 February 2008 or shortly thereafter?
The applicant’s case on causation is ultimately directed to establishing that, but for the respondent’s alleged breaches of duty, orders winding up OIN and the Guarantors would have been made no later than 29 February 2008, the date on which the sale of Stella was completed or, alternatively, shortly thereafter. Although this finding is fundamental to the applicant’s case on causation, it can now be dealt with relatively briefly.
My consideration of this question proceeds on the assumption that, contrary to the findings I have made in the preceding section of these reasons, the respondent, acting reasonably, would have applied in mid-February 2008 or after the completion of the sale of Stella on
29 February 2008 to wind up OIN and the Guarantors. This means that, in doing so, he would have concluded, on reasonable grounds, that he had a sound and proper basis to take that step on the information available to him at that time, including through the investigative accountant. It also means that, on reasonable grounds, he would have discounted the risk that his actions might jeopardise completion of the partial sale of Stella (if steps were taken in mid-February 2008) and that he had reached the conclusion, once again on reasonable grounds, that winding up was in the best interests of noteholders, notwithstanding the standstill proposal that OL had advanced at the time.
Assuming that winding up proceedings against OIN and the Guarantors would have been commenced on 15 February 2008, it is fanciful to think that winding up orders would have been made by 29 February 2008 or shortly thereafter. It is even more fanciful to think that winding up orders would have been made on or shortly after 29 February 2008 if those proceedings had been commenced by no later than 29 February 2008: see the particulars to para 91 of the FASOC read with para 87.1. Even though, on the assumptions made in the previous paragraph, the respondent would have concluded, on reasonable grounds, that he had a sound and proper basis for bringing those proceedings, I am not persuaded that OIN and the Guarantors would have shared that position. Indeed, far from it. Based on the Octaviar Group’s response when the respondent did commence winding up proceedings on
4 June 2008, the likelihood is that OIN and the Guarantors would have vigorously opposed any proceedings commenced either in mid-February 2008 or by no later than
29 February 2008. At this time, OL was asserting that the Octaviar Group was solvent. It was also advancing, through 333 Capital, its standstill proposal and discussing that proposal with all the major creditors, not just the respondent, in an attempt to work out the group’s financial difficulties.
The applicant has not adduced evidence as to when the winding up applications, if filed on
15 February 2008 or by 29 February 2008, would have been returned in the Supreme Court of Queensland. When the respondent filed his winding up applications on 4 June 2008, his solicitors sought to have the matters returned as quickly as possible. They contacted one of the two Commercial List judges at the time, who gave them a first return date of
20 June 2008, just over two weeks after filing. The relative urgency of the proceedings in mid-February 2008 or as at 29 February 2008 would not have been greater than in June 2008. Using the actual winding up proceedings as a guide, the likelihood is that, if the proceedings had been filed on 15 February 2008, they would have been given a first return date after
29 February 2008. Obviously, if such proceedings had been filed after 15 February 2008, the first return date would have been later again.
Even if an earlier return date could and would have been obtained, I do not accept that a final hearing would have been held at that time. As the proceedings would have been contested, directions would have been made on the first return date to bring the matter into readiness for hearing as contested applications. A reasonable period of time would have been allowed for OIN and the Guarantors to file evidence. This would have been measured in weeks, not days, given the size and complexity of the Octaviar Group and the fact that solvency would have been in issue.
The proceedings actually commenced by the respondent were initially allocated final hearing dates in September 2008, but the respondent’s solicitors were subsequently able to secure earlier dates of 24 and 25 July 2008, just over a month after the first return date of
20 June 2008. This indicates that, had winding up proceedings been filed on
15 February 2008, and had all other things been equal, it is not likely that a final hearing would have been before late March or early April 2008. Once again, the obvious conclusion is that if the proceedings had been filed after 15 February 2008, the likely final hearing would have been even later than late March or early April 2008.
None of this takes into account the attitude of the major noteholders. As the evidence reveals, when the winding up proceedings actually commenced by the respondent came on for hearing on 24 and 25 July 2008, the major noteholders wanted them to be adjourned so that OL’s revised proposal could be considered within a timeframe they considered to be reasonable and appropriate in the circumstances. As I have noted, this was even with the knowledge, obtained through Mr Anderson’s affidavit, that proceedings had been commenced in relation to the PIF transaction. The applicant sought to discount this fact by submitting that the proceedings in question “did not concern the fraud of OL officers in misappropriating PIF funds”. I am not persuaded, however, that this characterisation of the PIF transaction (if it be a correct characterisation) was a matter known as at 29 February 2008 or in the immediately succeeding period. What was known was the fact that the proceedings involved allegations that the transactions were unapproved related party transactions. One would have thought that creditors of the Octaviar Group would have seen those allegations as reflecting adversely on the group’s financial position and the competence and reliability of its management.
In all the circumstances, it seems reasonable to conclude that, had winding up proceedings been commenced against OIN and the Guarantors in mid-February 2008 or even by no later than 29 February 2008, the major noteholders would have exhibited a similar attitude to the adjournment of a final hearing listed in late March or early April 2008 (or even later) as they did in July 2008—namely, that further time was required to consider the prospect that the Octaviar Group could work out its financial difficulties by a suitable proposal to creditors. Ultimately, however, I do not need to dwell on that matter because, on any view, it is plain beyond reasonable argument that winding up orders would not have been obtained by
29 February 2008 or shortly thereafter.
There is a final aspect to this question. As I have recorded earlier in these reasons, the applicant argued that, in the face of a winding up application, OL’s directors would, themselves, have moved to appoint an administrator under s 436A of the Corporations Act by 29 February 2008 or shortly thereafter. The applicant submitted that this scenario was “perhaps most likely”.
I do not accept that submission. It is not supported by the evidence. The effect of
Mr Korda’s evidence was that, if winding up applications had been filed at this time, he would not have recommended that OL appoint administrators. Rather, he would have recommended that discussions be had with creditors to persuade them that it would be much better for the creditors and other stakeholders of the Octaviar Group that the group be allowed to sort out its financial problems by realising assets in the ordinary course of business. This evidence is supported by the events that actually happened. As at mid-February 2008, OL was engaging with the group’s major creditors, including the respondent and the major noteholders, with a view to persuading them to accept the standstill proposal. When the respondent did file the winding up applications in June 2008, the defendant companies did not move immediately to appoint administrators. Their immediate response was to resist the winding up applications. The companies filed affidavits by Mr Anderson and Mr Korda which argued that the creditors would be better off accepting OL’s revised proposal (which was then being formulated) rather than proceeding to wind up the companies. The major creditors, including the major noteholders, were persuaded that time should be given to allow the revised proposal to be fully formulated and then considered by them. It was only in September 2008 that OL’s directors resolved to appoint administrators. This was some three months after the respondent filed the winding up applications, and when OL must have realised, as events had then unfolded, that its revised proposal would not be accepted.
DEFENCES
The respondent has raised three defences:
·he relied upon the auditors of OL and OIN, information supplied by OL and OIN, and information and advice provided by PwC, as he was entitled to do under the Trust Deed, and is not liable for loss or damage occasioned by such reliance;
·he relied on the fact that the auditors of OL and OIN had not advised him of any matters that may be materially prejudicial to the noteholders, as they were obliged to do under s 313 of the Corporations Act; and
·he acted honestly and reasonably and ought to be excused from liability under s 76 of the Trusts Act 1976 (Qld) or s 85 of the Trustee Act 1925 (NSW).
I do not propose to determine these defences for two reasons.
First, on the findings I have made, the respondent did not breach his duties as alleged, and the applicant’s case on causation fails in any event, for the multiple reasons I have discussed. Therefore, it is unnecessary for me to embark on a consideration of each defence. Indeed, to do so would be a work of supererogation.
Secondly, the defences only arise for consideration if my findings and conclusions on the applicant’s case on breach and causation are in error. If error is demonstrated, leading to different conclusions on breach and causation, then the defences will need to be considered in light of the findings of the Full Court, as then expressed.
CONCLUSION AND DISPOSITION
The applicant’s case on breach and causation fails, with the result that the proceeding should be dismissed. I can see no reason why costs should not follow the event. However, there might be complexities of which I am unaware that mean that the making of final orders might not be as straightforward as I apprehend. In the circumstances, I will leave it to the parties to bring in agreed orders giving effect to my reasons. This should be done by 4.00 pm on 13 June 2018. If agreement cannot be reached, the parties should send a joint communication to my Associate outlining where the disagreement lies. I will then determine what course should be adopted.
I certify that the preceding nine hundred and eighty-seven (987) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates. Associate:
Dated: 4 June 2018
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