Re Octaviar Ltd (No 8)
[2009] QSC 202
•31 July 2009
SUPREME COURT OF QUEENSLAND
CITATION:
Re Octaviar Ltd (No 8) [2009] QSC 202
PARTIES:
THE PUBLIC TRUSTEE OF QUEENSLAND
(Applicant)
v
OCTAVIAR LTD (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) (RECEIVERS AND MANAGERS APPOINTED) ACN 107 863 436
FORTRESS CREDIT CORPORATION (AUSTRALIA) II PTY LTD AND S J PARBERY AND A M SIMS AS RECEIVERS AND MANAGERS OF OCTAVIAR LTD (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) (RECEIVERS AND MANAGERS APPOINTED) ACN 114 624 958
OPI PACIFIC FINANCE PTY LTD
OCTAVIAR INVESTMENT HOLDINGS NO. 3 PTY LTD and SUNLEISURE GROUP PTY LTD
COMMISSIONER OF TAXATION
WELLINGTON CAPITAL LTD AS RESPONSIBLE ENTITY OF THE PREMIUM INCOME FUND
CHALLENGER MANAGED INVESTMENTS LIMITED AS RESPONSIBLE ENTITY OF THE CHALLENGER HIGH YIELD FUND
(Respondents)
THE PUBLIC TRUSTEE OF QUEENSLAND
(Applicant)
v
OCTAVIAR ADMINISTRATION PTY LTD (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) ACN 101 069 390
FORTRESS CREDIT CORPORATION (AUSTRALIA) II PTY LTD AND S J PARBERY AND A M SIMS AS RECEIVERS AND MANAGERS OF OCTAVIAR LTD (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) (RECEIVERS AND MANAGERS APPOINTED) ACN 107 863 436
OPI PACIFIC FINANCE PTY LTD
OCTAVIAR INVESTMENT HOLDINGS NO. 3 PTY LTD and SUNLEISURE GROUP PTY LTD
COMMISSIONER OF TAXATION
WELLINGTON CAPITAL LTD AS RESPONSIBLE ENTITY OF THE PREMIUM INCOME FUND
CHALLENGER MANAGED INVESTMENTS LIMITED AS RESPONSIBLE ENTITY OF THE CHALLENGER HIGH YIELD FUND
(Respondents)
FORTRESS CORPORATION (AUSTRALIA) II PTY LIMITED ACN 114 624 958
(Applicant)
v
OCTAVIAR LIMITED (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) (RECEIVERS AND MANAGERS APPOINTED) ACN 107 863 436
JOHN LETHBRIDGE GREIG AND NICHOLAS HARWOOD IN THEIR CAPACITY AS DEED ADMINISTRATORS OF OCTAVIAR LIMITED (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) (RECEIVERS AND MANAGERS APPOINTED) ACN 107 863 436
(Respondents)
FILE NO/S:
BS 1848 of 2009
BS 1850 of 2009
BS 3650 of 2009DIVISION:
Trial Division
PROCEEDING:
Application
ORIGINATING COURT:
Supreme Court at Brisbane
DELIVERED ON:
31 July 2009
DELIVERED AT:
Brisbane
HEARING DATE:
5-8 May 2009, 11-13 May 2009
JUDGE:
McMurdo J
ORDER:
In BS 1848/09, it is ordered that:
1. Part 5.3A of the Corporations Act 2001 (Cth) operate in relation to Octaviar Limited (Administrators Appointed) (Receivers and Managers Appointed) so that s 446B and reg 5.3A.07 do not operate with any effect in relation to the company.
2. Pursuant to s 445D of the Corporations Act 2001 (Cth), the Deed of Company Arrangement between that company, Fortress Credit Corporation (Australia) II Pty Limited, John Lethbridge Greig and Nicholas Harwood, and Stephen James Parbery and Anthony Milton Sims be terminated.
3. John Lethbridge Greig and Nicholas Harwood be appointed as provisional liquidators until further order.
In BS 1850/09, it is ordered that:
1. Pursuant to s 445D of the Corporations Act 2001 (Cth), the Deed of Company Arrangement between Octaviar Administration Pty Limited (Administrators Appointed), and John Lethbridge Greig and Nicholas Harwood be terminated.
2. John Lethbridge Greig and Nicholas Harwood be appointed as liquidators until further order.
In BS 3650/09, it is ordered that the Application be dismissed.
CATCHWORDS:
CORPORATIONS – VOLUNTARY ADMINISTRATION – DEEDS OF COMPANY ARRANGEMENT – TERMINATION OF – where a deed of company arrangement has been executed – where the assets available for distribution are likely to be less under a deed administration than under a liquidation – where there is a reasonable prospect of recovering significant funds from preference claims and uncommercial transactions, but only in the event of liquidation – where the potential for a more timely realisation of assets under a deed administration is mitigated by the ability of liquidators to make interim distributions – whether the deed is contrary to the interests of the creditors as a whole – whether the deed is unfairly prejudicial to or unfairly discriminatory against one or more creditors – whether the deed should be terminated
TAXES AND DUTIES – INCOME TAX AND RELATED LEGISLATION – COLLECTION AND RECOVERY OF TAX – COLLECTION FROM PERSON OWING MONEY TO TAXPAYER – where a charge crystallised over assets of the company – where the Commissioner of Taxation issued a notice under s 260-5 of Sch 1 of the Taxation Administration Act 1953 (Cth) to the company after the crystallisation of the charge in respect of debts owed by the taxpayer – whether, and to what extent, the Commissioner of Taxation’s statutory charge is affected by the crystallisation of the charge
GUARANTEE AND INDEMNITY – CONSTRUCTION AND EFFECT – VARIANCE BETWEEN GUARANTEE AND PRINCIPAL OBLIGATION – where the guarantor had made part payments to the creditor in purported discharge of a debt owed by the debtor – whether the part payment affects the state of the account between the creditor and debtor
CORPORATIONS – VOLUNTARY ADMINISTRATION – DEEDS OF COMPANY ARRANGEMENT – TERMINATION OF – where the administrators had represented to creditors prior to the execution of a deed of company arrangement that a liquidation would yield between 4 and 10 cents in the dollar when the true range would instead be between 0.4 and 7 cents in the dollar – where the administrators had represented to creditors that, based on “current information”, it was “unlikely” that they would receive a “significant” recovery from realising the security to which rights they would be subrogated – where the administrators did not identify or describe the “current information” upon which the representation was made – where two years previously the securities had been independently valued at $48.5 million – whether this was misleading to creditors – whether this would reasonably be expected to have been material to creditors in deciding whether to vote in favour of the resolution that the company execute the proposed deed of company arrangement
CORPORATIONS – OFFICIAL MANAGEMENT – WINDING UP – WINDING UP BY COURT – GROUNDS FOR WINDING UP – INSOLVENCY – WHAT CONSTITUTES INSOLVENCY OR DEEMED INSOLVENCY – where the group needed $43 million to meet its commitments as at December 2011 – where there was evidence that the group was unlikely to raise the necessary capital to meet those commitments – where the group had formulated proposals to reach some accommodation with its large creditors – whether, and to what extent, it is permissible in determining a company’s solvency to have regard to the commercial reality that creditors will not always insist on payment in strict accordance with their terms of trade – whether, and to what extent, it is permissible to assess the company’s circumstances with the benefit of hindsight – whether there is a serious question to be tried as to the group’s insolvency
CORPORATIONS – VOLUNTARY ADMINISTRATION – DEEDS OF COMPANY ARRANGEMENT – TERMINATION OF – where the losses giving rise to the group’s financial situation were suffered in a relatively short period from when the group was in apparently good financial health – where s 455D(1)(g) of the Corporations Act 2001 (Cth) allows the Court to terminate a deed of company arrangement “for some other reason” – whether, and to what extent, it is appropriate to have regard to the public interest in liquidation in exercising the discretionary power to terminate
CORPORATIONS – VOLUNTARY ADMINISTRATION – TRANSITION TO CREDITORS’ VOLUNTARY WINDING UP – where s 447A of the Corporations Act 2001 (Cth) empowers the Court to make “such order as it thinks appropriate about how this Part is to operate in relation to a particular company” – where s 446B provides for regulations to be prescribed – whether the power under s 447A to make orders about “how this Part is to operate” includes not only the sections within the Part but also the regulations made under them
CORPORATIONS – CORPORATE FINANCE – CHARGES – REGISTRATION OF CHARGES – TIME OF REGISTRATION AND ITS EXTENSION – where s 266(3) of the Corporations Act 2001 (Cth) states that a charge is void against a liquidator, administrator or deed administrator unless a notice of variation is lodged under s 268 within a certain period – where a notice of variation was lodged only after the expiry of the period – where s 266(4) empowers the Court to extend the period for lodgement of the notice under
s 268 on certain grounds – whether the Court retains the power to extend time under s 266(4) despite the intervention of a winding up or administration, which has the effect under s 266(3) of rendering the charge voidCORPORATIONS – CORPORATE FINANCE – CHARGES – REGISTRATION OF CHARGES – TIME OF REGISTRATION AND ITS EXTENSION – where the chargee failed to give notice of a variation to its charge – whether ignorance or misunderstanding of the law may amount to “inadvertence” under s 266(4) of the Corporations Act 2001 (Cth)
CORPORATIONS – CORPORATE FINANCE – CHARGES – REGISTRATION OF CHARGES – TIME OF REGISTRATION AND ITS EXTENSION – where there would be some prejudice to the chargee if the extension were not granted – where the unsecured creditors would be much better off if the charge remains void – whether it is just and equitable to grant relief by way of an extension
CORPORATIONS – VOLUNTARY ADMINISTRATION – DEEDS OF COMPANY ARRANGEMENT – GENERALLY – where s 451C of the Corporations Act 2001 (Cth) states that a “transaction entered into … in good faith, by, or with the consent of, the administrator … (a) is valid and effectual for the purposes of this Act; and (b) is not liable to be set aside in a winding up of the company” – where the transaction entered into is already void against a liquidator – whether a transaction that is already void is “liable to be set aside in a winding up” – whether s 451C preserves or extinguishes the position under the general law
CORPORATIONS – CORPORATE FINANCE – CHARGES – REGISTRATION OF CHARGES – TIME OF REGISTRATION AND ITS EXTENSION – where a creditor seeks a condition that any extension of time granted to a chargee be without prejudice to its rights – where its rights are not prejudiced in any case – whether such a condition should nonetheless be imposed
Corporations Act 2001 (Cth), s 263, s 266, s 268, s 435,
s 435A, s 435C, s 439A, s 445D, s 445G, s 445H, s 446B,
s 447A, s 468, s 491, s 500, s 513A, s 513B, s 513C, s 588FB, s 588FC, s 588FD, s 588FE, s 588FFCorporations Regulations 2001 (Cth), reg 5.3A.07
Income Assessment Act 1936 (Cth), s 218
Taxation Administration Act 1953 (Cth), s 260-5, s 260-15, s 260-20
Mercantile Act 1867 (Qld), s 4
Allatech Pty Ltd v Construction Management Group Pty Ltd (2002) 167 FLR 324, applied
ANZ Executors & Trustee Company Ltd v Qintex Australia Ltd [1991] 2 Qd R 360, cited
Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485, applied
Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, cited
Bell Group Ltd (in liq) v Westpac Banking Corporation(No 9) [2008] WASC 239; (2008) 70 ACSR 1, considered
Bidald Consulting v Miles Special Builders (2006) 226 ALR 510, applied
Bovis Lend Lease Pty Ltd v Wily [2003] NSWSC 476; (2003) 45 ACSR 612, applied
Clyne v Deputy Commissioner of Taxation (1981) 150 CLR 1, considered
Commissioner of Taxation v Donnelly (1989) 25 FCR 432, considered
Commonwealth v Rocklea Spinning Mills Pty Ltd (2005) 145 FCR 220, applied
Craig Mostyn & Co Pty Ltd v Old Valley Pty Ltd [2004] FCA 1083; (2004) 139 FCR 477, distinguished
Cresvale Far East Ltd (in liq) v Cresvale Securities Ltd (2001) 37 ACSR 394, followed
David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353, cited
Davies v Humphreys (1840) 6 M & W 153, followed
Deputy Commissioner of Taxation v Lai Corporation Pty Ltd [1987] WAR 15, also reported as Norgard & Anor (Receivers and Managers of Lai Corporation Pty Ltd) & Ors v Deputy Commissioner of Taxation (1986) 86 ATC 4,947, considered
Elric Pty Ltd v Taylor (1988) 92 FLR 222, considered
Emanuel Management Pty Ltd & Ors v Foster’s Brewing Group Ltd (2003) 178 FLR 1; [2003] QSC 205, cited
Federal Commissioner of Taxation v Bruton Holdings Pty Ltd (in liq) (2008) 173 FCR 472, considered
Hewlett Packard Australia Pty Ltd v GE Capital Finance Pty Ltd (2003) 135 FCR 206, followed
Holderv Commissioners of Inland Revenue [1932] AC 624, considered
Jones v Dunkel (1959) 101 CLR 298, cited
Kirwin v Cresvale Far East Ltd (in liq) (2002) 44 ACSR 21, followed
Lewis (as liq of Doran Constructions Pty Ltd (in liq)) v Doran [2005] NSWCA 243; (2005) 219 ALR 555, considered
McColl’s Wholesale Pty Ltd v State Bank of New South Wales [1984] 3 NSWLR 365, applied
Macquarie Health Corp Limited v Commissioner of Taxation (1999) 96 FCR 238, applied
Mahoney v McManus (1981) 180 CLR 370, considered
Milverton Group Ltd v Warner World Ltd [1995] 2 EGLR 28, considered
MS Fashions Ltd v Bank of Credit and Commerce International SA (in liq) [1993] Ch 425, considered
Re A Company [1986] BCLC 261, cited
Re Adnot Pty Ltd (1982) 7 ACLR 212; (1982) 1 ACLC 307, cited
Re Barrow Borough Transport Ltd [1990] Ch 227, cited
Re Data Homes Pty Ltd [1972] NSWLR 22, cited
Re Hawkins decd [1972] 1 Ch 714, followed
Re Joplin Brewery Company Ltd [1902] 1 Ch 79, cited
Re Octaviar Ltd (No 1) [2008] QSC 216, considered
Re Octaviar Ltd (No 7) [2009] QSC 37, considered
Re Oriental Commercial Bank; ex parte European Bank [1871] 7 Ch App 99, distinguished
Re RHD Power Services Pty Ltd (1991) 3 ACSR 261; 9 ACLC 27, cited
Re Sass [1896] 2 QB 12, distinguished
Re Telexcriptor Syndicate Ltd [1903] 2 Ch 174, cited
Registrar General v Gill (Unreported, NSW Court of Appeal, 16 August 1994, BC9402892), followed
Romain v Scuba TV Ltd [1997] QB 887, cited
Sandell v Porter (1966) 115 CLR 666, cited
Sanwa Australia Finance Ltd v Ground-Breakers Pty Ltd (in liq) [1991] 2 Qd R 456, considered
Seabird Corporation v Sherlock (1990) 2 ACSR 111, distinguished
Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation (2001) 53 NSWLR 213, cited
Stotter v Equiticorp Australia Ltd (in liq) [2002] 2 NZLR 686, considered
Tricontinental Corporation Ltd v Federal Commissioner of Taxation [1988] 1 Qd R 474, considered
Ulster Bank Ltd v Lambe [1966] N.I. 161, disapproved
Westminster Bank Executor and Trustee Co (Channel Islands) Ltd v National Bank of Greece S.A. [1970] 1 QB 256, cited
Westpac Banking Corporation v Gollin & Co. Ltd [1988] VR 397, distinguished
Zuks v Jackson MacDonald (a firm) (1996) 132 FLR 317, cited
COUNSEL:
W Sofronoff QC SG, with G A Thompson SC, D O’Sullivan and D Pyle, for the Public Trustee of Queensland
B O’Donnell QC, with D Clothier, for the administrators of Octaviar Ltd (subject to a Deed of Company Arrangement) (Receivers and Managers appointed) ACN 107 863 436 and Octaviar Administration Pty Ltd (subject to a Deed of Company Arrangement) ACN 101 069 390
A J H Morris QC, with C Jennings, for OPI Pacific Finance Pty Ltd
P O’Shea SC, with M Luchich, for Fortress Credit Corporation (Australia) II Pty Ltd and S J Parbery and A M Sims as Receivers and Managers of Octaviar Ltd (subject to a Deed of Company Arrangement) (Receivers and Managers appointed) ACN 107 863 436
P Hoser (sol) for Octaviar Investment Holdings No 3 Pty Ltd and Sunleisure Group Pty Ltd
R M Derrington SC, with P Bickford, for the Commissioner of Taxation
P P McQuade for Wellington Capital Ltd as responsible entity of the Premium Income Fund
M D Martin for Challenger Managed Investments Limited as responsible entity for the Challenger High Yield Fund
SOLICITORS:
Clayton Utz for the Public Trustee of Queensland
Blake Dawson for the administrators of Octaviar Ltd (subject to a Deed of Company Arrangement) (Receivers and Managers appointed) ACN 107 863 436 and Octaviar Administration Pty Ltd (subject to a Deed of Company Arrangement) ACN 101 069 390
Russell and Company for OPI Pacific Finance Pty Ltd
Hopgood Ganim (Brisbane) acting as Town Agent for Baker & McKenzie (Melbourne) for Fortress Credit Corporation (Australia) II Pty Ltd and S J Parbery and A M Sims as Receivers and Managers of Octaviar Ltd (subject to a Deed of Company Arrangement) (Receivers and Managers appointed) ACN 107 863 436
Freehills for Octaviar Investment Holdings No 3 Pty Ltd, and Sunleisure Group Pty Ltd
Australian Government Solicitor for the Commissioner of Taxation
McCullough Robertson for Wellington Capital Ltd as responsible entity of the Premium Income Fund
Allens Arthur Robinson for Challenger Managed Investments Limited as responsible entity for the Challenger High Yield Fund
TABLE OF CONTENTS
Introduction[1]-[9]
The deed for Octaviar Administration[10]-[27]
Background to the deed for Octaviar Ltd[28]-[34]
The Funded Participation Agreement[35]-[39]
The ATO’s position[40]-[53]
The deed for Octaviar Ltd[54]-65]
Arguments as to the effect of the deed for Octaviar Ltd[66]-[74]
Part payment by a guarantor: effect[75]-[91]
Conclusions on the interpretation of the DOCA[92]-[126]
Possible recoveries by a liquidator[127]-[177]
Avoiding the Fortress charge[127]-[142]
Other possible claims about Fortress[143]-[144]
Premium Income Fund and Wellington Capital Ltd[145]-[158]
PAC[159]-[167]
Directors of Octaviar companies[168]-[172]
Auditors[173]-[175]
Potential recoveries – other points[176]-[177]
The public interest in a liquidation[178]-[182]
Orders on the Public Trustee’s applications[183]-[192]
The Fortress application[193]-[222]
Conclusion on the Fortress application[223]
Introduction
[1] The Public Trustee of Queensland, representing certain creditors, has applied to set aside under s 445D of the Corporations Act 2001 (Cth) (“the Act”), deeds of company arrangement for two companies: Octaviar Ltd (“OL”) and Octaviar Administration Pty Ltd (“OA”). OL was the holding company of the Octaviar group, previously known as the MFS group, which failed in 2008. Some companies within the group have been ordered to be wound up. The Public Trustee wants to have these two companies wound up, arguing that for very many reasons, a liquidation would be in the best interests of creditors and would avoid what is said to be an unfairness to some creditors under the deeds of company arrangement.
[2] The DOCA for OL is premised upon the validity of a charge granted by OL to Fortress Credit Corporation (Australia) II Pty Ltd (“Fortress”) in January 2008, under which Fortress has appointed receivers to all of its assets. Apart from the possible exception of the Commissioner of Taxation, there are no others who claim to be secured creditors of OL and there are no secured creditors of OA.
[3] OA acted as the treasury for the Octaviar group. Its principal asset is cash, which at the time of the administrator’s report[1] last December, amounted to more than $121 million. OA’s largest creditor is OL. Accordingly, there is a large amount of cash which is to be paid by OA to OL, either under the OA DOCA, or upon its winding up if the DOCA is terminated.
[1]Under s 439A of the Act.
[4] Under the DOCA for OL, such payments from OA would be paid to the receivers and then to Fortress, which would distribute parts of those funds in different directions. The first $25 million or so would be paid to Fortress in part payment of the debt said to be secured by its charge and further receipts from OA would be dealt with in other ways which are also consistent only with Fortress holding a valid charge over the assets of OL. If that charge is not valid against the deed’s administrators, an essential premise of the DOCA for OL would not exist and, subject to an argument for Fortress, the DOCA would have to be terminated. Strictly speaking, that is not the position with the DOCA for OA. But as I will discuss, that deed seems to have been agreed because it was seen as part of the proposal for the DOCA for OL.
[5] Within these applications for termination of the DOCAs, I have already declared that the Fortress charge is void according to s 266(3) of the Act because notice of it had not been given as required by s 268(2).[2] I determined that question as a separate issue because it involved no substantial issue of fact and if the charge was void, as argued by the Public Trustee, the parties could have avoided the delay and expense involved in the full hearing of these applications. As I noted in that judgment,[3] Fortress did not then seek any extension of time to give notice of its charge under s 266(4), in the alternative to its argument that no notice under s 268 had been required. Fortress has appealed against that judgment, but the appeal is yet to be heard. Apparently no party has sought an expedited hearing of the appeal. Fortress has now applied for an extension of time under s 266(4). That application was heard together with these applications for the termination of the DOCAs. Accordingly, there are three matters for determination:
[2]Re Octaviar Ltd (No 7) [2009] QSC 37.
[3]Re Octaviar Ltd (No 7) [2009] QSC 37 at [43].
· Should the OA DOCA be terminated?
· Should the OL DOCA be terminated?
· Should Fortress have an extension of time under s 266(4) so as to validate its charge?
[6] The Public Trustee is supported in its applications, and in its opposition to the Fortress application, by the Commissioner of Taxation and another creditor, Challenger Managed Investments Limited. On 10 September 2008, a notice was issued under s 260-5 of Sch 1 of the Taxation Administration Act 1953 (Cth) (“the TAA”) addressed to OA and in respect of all debts owed by OA to OL. It was to secure payment of $58,092,713 (“the ATO debt”). No party here disputes that the ATO debt is owing by OL. But there are different contentions as to the effect of the s 260-5 notice. The extent of recovery of the ATO debt will be affected by the validity or otherwise of the Fortress charge. And on the Commissioner’s argument, it would be unfairly prejudiced by the operation of the DOCA for OL.
[7] The respondents to the applications under s 445D, apart from the deeds’ administrators, are entities which are or claim to be substantial creditors of one or both of the companies. With the exception of the Commissioner of Taxation and Challenger, those respondents oppose the applications to terminate the DOCAs and offer no opposition to the application by Fortress.
[8] It is not disputed that the Public Trustee is a creditor of OL. Accordingly, he has standing to apply for the termination of its deed.[4] The Public Trustee claims to be a creditor of OA. The administrators disagree. But they, and all other parties here, apparently accept that the Public Trustee has standing to apply for the termination of the deed for OA on the basis that he is an “interested person” within the meaning of s 445D(2)(c). As will appear, the interest of the Public Trustee as a substantial creditor of OL makes him an interested person because of the potential impact of the DOCA for OA upon the amount of funds to be distributed to creditors of OL.[5]
[4]s 445D(2)(a).
[5]Commonwealth v Rocklea Spinning Mills Pty Ltd (2005) 145 FCR 220, 227; Allatech Pty Ltd v Construction Management Group Pty Ltd (2002) 167 FLR 324, 328.
[9] The Public Trustee suggests that it would be logical to determine first the Fortress application, because if that fails, then the essential premise of at least the DOCA for OL is lost. Nevertheless, it would still be necessary to resolve many of the issues within the s 445D applications because of the prospect that the Fortress charge might be held to be valid on appeal. To determine the application by Fortress, it is necessary to assess the impact upon the creditors of OL of the order which it seeks, which in turn requires a discussion of the history and present position of OL, including the terms of its DOCA and related documents. And Fortress argues that the DOCA for OL can stand if its charge remains void against the deeds’ administrators. Therefore I will discuss first the applications to terminate the deeds.
The deed for Octaviar Administration
[10] Each DOCA is dated 12 January 2009, and results from a meeting of creditors of the company on 17 December 2008. Mr J L Greig and Mr N Harwood had been appointed as administrators of these companies[6] and in each case they have become the deed administrators.
[6]By the directors of OL on 13 September 2008 and by the directors of OA on 3 October 2008.
[11] Clause 3.1 of the DOCA for OA establishes the Deed Fund, which is to be all of the property of the company and any proceeds of its sale. By cl 3.2 the Fund is to be distributed by the administrators as follows:
“(a)First, in payment of all the Administrators’ Remuneration and the Administration Liabilities;
(b)Second, in payment of any Employee Entitlements;
(c)Third, in payment of all other Creditors’ Claims on a pari passu basis; and
(d)Fourth, any surplus after payment of all claims under paragraphs (a) to (c) above in full, to be distributed to the Company’s members.”
By cl 3.5 the deed administrators may make interim distributions and by cl 3.6, they may make a distribution under one of the categories in cl 3.2 although a prior category has not been paid in full, if they have set aside an amount reasonably required to do so.
[12] By cl 4.1, Subdivisions A, B, C and E of Division 6 of Part 5.6 of the Act (other than ss 553(1A) and 554F) and Corporations Regulations 5.6.39 to 5.6.57 will apply to all claims against the company made under the deed as if references to the “liquidator” were to the deed administrators, references to “winding up” and “wound up” were to administration pursuant to the deed, and references to the “relevant date” were to 3 October 2008.[7] Clause 9.1 provides that a creditor is deemed to have abandoned its claim if, prior to the declaration of a final dividend to creditors, the creditor fails to submit a formal proof of debt, or having submitted a proof which is rejected, fails to appeal to the Court against the rejection.
[7]The date on which the company was placed into voluntary administration.
[13] Clause 14 provides that the deed shall not affect any rights of a secured creditor. But as already noted, there is no secured creditor of OA. Fortress is neither a secured nor an unsecured creditor of OA. The deed contains a reference to the Australian Tax Office as potentially a secured creditor because of its
s 260-5 notice. But that misconceives the effect of the ATO’s notice. The Commissioner is neither a secured nor an unsecured creditor of this company. It is OL which owes the ATO debt.
[14] Each of these DOCAs was in substance that which had been proposed to creditors by Fortress. Although Fortress is not a creditor of OA, it represented to creditors of that company, in a document incorporated within the administrators’ report pursuant to s 439A, that its proposed DOCA for OA would provide:
“Facilitation of a deed of company arrangement proposal made in relation to OL, which will benefit creditors who have claims against both the company and OL”.[8]
[8]At page 68.
This proposal was not made conditional upon the creditors of OL accepting the DOCA proposed by Fortress for that company. But the intended “facilitation” would appear to come from this term of the OA deed:
“15 Release of Fortress and Receivers
15.1 Other than to enforce the terms of this Deed or to take action in respect of any breach of this Deed, the Company, fully, forever, irrevocably and unconditionally:
(a)releases and discharges each of the Receivers and Fortress from any and all Released Claims that the Company ever had, now has or hereafter may have against any of them;
(b)agrees that each of the Receivers and Fortress may plead this Deed to bar any Released Claim or action (including any claim for costs) brought by the Company;
(c)covenants to never sue or assert any claim or cause of action against any of the Receivers or Fortress with respect to or on account of any Released Claim; and
(d)agrees to indemnify each of the Receivers and Fortress against any liability, loss or costs arising from a breach of clause 15.1(c).
15.2 This clause 15 (Release of Fortress and Receivers) shall survive termination of this Deed.”
Fortress made no contribution to the funds of OA and there is no other mention of Fortress[9] within this document. This deed for OA did not expressly require that payments by OA to OL would be to Fortress or the receivers. But as mentioned already, the intended path of funds from OA to its creditor OL was via the receivers and Fortress, and this cl 15 was apparently intended to protect their position. In that sense it “facilitated” the deed for OL. It provided no benefit to the creditors of OA or to the operation of its DOCA.
[9]Apart from in the definitions provisions.
[15] It can be seen then that the effect of the DOCA was in many respects identical to that of a liquidation. No creditor of OA was given any greater or lesser right in relation to the available assets than under a liquidation. However the available assets were likely to be less than under a liquidation, as the administrators explained in their report to creditors under s 439A. For that reason, the administrators recommended to creditors that this company, OA, be wound up.
[16] In that report the administrators estimated that the return from a winding up would be between 15 cents and 4 cents in the dollar whereas the dividend from the DOCA proposed by Fortress would be between 10 cents and 4 cents. As I will explain, the administrators’ estimate of 4 cents as the minimum dividend from a liquidation was too low, mainly because of their misconception of the effect of the ATO debt and the Commissioner’s s 260-5 notice on the position of OA. But in any case, a liquidation was put to creditors as more beneficial because of the prospect of recovering between $9 million and $86.7 million from preference claims and uncommercial transactions. The extent of that range was explained by the administrators’ doubts about the date by which the company had become insolvent. The administrators regarded the Octaviar group as effectively one entity in discussing that question (as did the various arguments in these proceedings). The difference between the amounts of potential recoveries was according to whether the company (and the group) was insolvent from 4 June 2008 or from as early as 4 February 2008.[10] The date of 4 June 2008 was that on which the Public Trustee filed its application to wind up OL. The date of 4 February 2008 was that of the sale of 65 per cent of the group’s principal asset, which was an investment in the so-called Stella Group, most of which was then sold by OL but some of which was then sold by OA.
[10]Some references in the administrators’ reports to an earlier date of 22 January 2008 were corrected by an addendum sent to creditors prior to the meetings.
[17] In their s 439A report,[11] the administrators wrote:
[11]At pages 22-3.
“From a balance sheet test point of view, OA has had a history
of net asset deficiencies since June 2006. OA’s net asset
position deteriorated by $55m during the six months ended
31 December 2007 and then a further $409m during the six months ended 30 June 2008. The major portion of this deterioration occurred between January and February 2008 at which time the sale of the 65% interest in Stella occurred. OA’s major assets comprise cash and its investment in Stella.
We consider therefore that the most likely point of insolvency on a balance sheet basis for OA is the point at which OA should have provided for a diminution in the carrying value of Stella. This raises the issue of the potential timing for a write down in the carrying value of Stella and when this should have been foreseen…
We consider that upon the execution of the Stella sale agreement in January 2008 that a substantial and permanent diminution in the carrying value of Stella occurred. The need for the urgent sale of Stella arose because debt facilities provided by Fortress were due to be repaid in February 2008…
As a consequence Stella was made available for sale immediately which concluded with [an unrelated party] acquiring a 65% interest in Stella for $400m. This implied an enterprise value of approximately $1.52bn compared to the $2.46bn in 2007 when [that party] made its original approach…
This diminution of value, along with the value of other Octaviar Group assets at that time, resulted in total write downs of $1.14bn over the ensuing six months to August 2008. Consequently, it appears that there were insufficient assets at that time with which to discharge the long term obligations of approximately $450m in notes and bonds. The repayment of notes and bonds could only ever have been made from the cash funds in OA of approximately $200m and from the sale of the remaining 35% interest in Stella which had an indicative value of at best $215m given the enterprise value from the recent sale…”
The administrators concluded as follows:
“The issue of the date of insolvency of OA and the Octaviar Group will be the subject of further detailed investigations by a liquidator if appointed by creditors.
The above investigations would be continued by a liquidator to establish the date when the Group became insolvent, however, the Administrators’ preliminary view is that this may have occurred on 4 February 2008 but no later than 4 June 2008.”[12]
[12]At page 25.
[18] The administrators’ report contained an estimated statement of OA’s position as at 31 August 2008, showing for various components of assets and liabilities the book value and both the highest and lowest estimates of realisable value. The high estimate for available assets, after payment of priority creditors (employees’, administrators’ fees and liquidators’ fees) was $156.068 million, of which the principal asset was cash at bank of $121.777 million. The low estimate for those assets was $79.379 million, of which the principal asset was cash at bank of $61.777 million. The difference between the respective amounts for cash was wholly explained by the impact or otherwise of the ATO’s
s 260-5 notice, for which the administrators had allowed $60 million. The low estimate was upon the basis that the notice affected the balance sheet of OA, specifically by reducing the amount of its cash. In these proceedings, there are issues as to the extent of the impact of the notice upon the rights of Fortress and other creditors of OL. However, the notice attached to no more than any payment by OA to OL and it should have had no impact upon OA’s balance sheet. Therefore, it was the figure of $121.777 million which was appropriate for OA’s cash. As the report also explained, this was exclusive of an amount of $19.695 million, which was held at that date by OA on trust for OL (“the OA trust monies”).
[19] It should have been clear then that the assets available as at 31 August 2008 were of the order of $150 million and that most of this was held already as cash. In the event of a winding up, to this amount would be added from recoveries from preferences and uncommercial transactions, for which the range, as already mentioned, was $9 million to $86.7 million.
[20] The ordinary unsecured creditors were estimated as between $1.635 billion to $2.157 billion. The principal contributors to this difference were the Public Trustee and Challenger, whose combined claims of nearly $460 million were included in one estimate but not in the other. The amount owing by OA to OL was given but one estimate, which was its book value of $551.2 million. OL is OA’s largest creditor. Depending upon the extent of the creditors of OA, OL’s debt constitutes something between about one-fourth and one-third of the assets of OA available for distribution to creditors. The most recent estimate of the administrators as to the dividend to OL from OA is contained in an affidavit of Mr Harwood sworn on 6 May 2009, where he says that were the DOCAs to stand, his “best calculation” is that OL will receive from OA a total of $72.089 million, which includes the OA trust monies. The trust monies have now been paid by the administrators of OA to Fortress. Accordingly, the present best estimate of the deed’s administrators is that there would be a balance of about $52.39 million which would be paid by OA to OL if the DOCA for OA were to stand.
[21] If the deed for OA were terminated, the distribution to OL could not be any less, and as the administrators told creditors, it would be likely to be more, because of what the administrators described in their report as the reasonable prospects of recovering from preferences and uncommercial transactions.
[22] Whilst recommending that OA be wound up, the administrators at one point in their report said that the DOCA would have benefits to creditors from the “more timely realisation of assets” and from “minimum disturbance to key contractual relationships”. However, the report did not go on to explain those benefits. As to timing, because the regime under the DOCA for the assessment of claims by creditors was to be the same as that under a liquidation, there would appear to be no advantage in that respect. The only explanation for a liquidation taking longer would be the pursuit of voidable transaction claims. However, liquidators would be expected to make interim distributions pending the outcome of these recovery actions, and most of OA’s assets are already held as cash. The administrators ultimately recommended to creditors as follows:
“…[W]e do not believe that either of the DOCA proposals offer any significant benefits beyond the outcome that we would expect in a liquidation scenario. The Fortress proposal does not indicate a greater return than would be available under a liquidation, nor does it indicate that a dividend would be received any earlier.”[13]
[13]At page 38.
[emphasis added]
[23] They continued:
“Two DOCAs have been proposed, however, we are of the opinion that the return to creditors is likely to be greater from the liquidation of OA due to the possible availability of significant insolvent transactions.
The DOCA approvals do not provide any outcomes that are not available in liquidation.
The Fortress DOCA proposal requires OA to forgo its rights, if any, against Fortress and the Receivers and Managers of [OL]. We are uncertain of what those rights may be and have received preliminary legal advice only at this stage on this issue.
We therefore recommend that creditors do not vote in favour of a DOCA.” [14]
[14]At page 39.
[24] That analysis of the administrators was logical and, in my view, correct. There was no advantage to the creditors of OA, as creditors, from the DOCA. The significant difference between the DOCA and a winding up was that the company lost the ability to recover as much as $86.7 million for which the prospects of recovery were assessed by the administrators as reasonable. In the present proceedings there was a considerable contest as to the date by which the Octaviar group was insolvent. Later in this judgment, I find that there is a serious case that the group was insolvent by 22 January 2008. It must be inferred that some of those who voted in favour of the DOCA for OA either acted upon the representation by Fortress that its proposal would provide “facilitation” of the proposed deed for OL, or they had regard to considerations other than their interests as creditors of OA or OL.
[25] The outcome is that I am satisfied that the deed for OA is contrary to the interests of creditors of OA as a whole, so that at least one ground for termination is established: s 445D(1)(f)(ii). And if this DOCA in some way could be seen to benefit those who are creditors of both companies, because it would promote their interests as creditors of OL, the deed would be unfairly prejudicial to or discriminatory against creditors who were not also creditors of OL: s 445D(1)(f)(i). In any case, it could “facilitate” the DOCA for OL only if the deed’s administrators were not to act according to OA’s obligations in response to the ATO’s notice, as I will later discuss.
[26] The case for termination is strengthened by the possible operation of cl 15 of the deed. OA has paid the OA trust monies to Fortress in the belief that Fortress had in all respects a valid charge. If that is not the case, then OA might have a right to recover those funds from Fortress or the receivers as monies paid under a mistake of law.[15] The effect of cl 15 could be to put paid to that claim. Those funds, if recovered, would have to be paid to OL because OA held and would hold them as a trustee. It is in the interest of creditors of OA that OA recovers this trust property and pays it to OL, so that the funds available to OA’s creditors are not depleted by a liability to OL.
[15]David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353.
[27] The deed should be terminated.
Background to the deed for Octaviar Ltd
[28] Before going to the terms of the OL deed, it is necessary to discuss the respective positions of OL, Fortress, another member of the group named Octaviar Castle Pty Ltd (“Castle”) and the borrower of the Fortress loan guaranteed by OL, which is Young Village Estates Pty Ltd (“YVE”).
[29] In 2007 Fortress made two loans, each of which was guaranteed by OL. The first was to YVE, under a loan agreement dated 31 May 2007. No security was then provided by OL to Fortress. The second loan was to Castle, by a loan agreement of 1 June 2007. In this case, OL’s liability as guarantor was secured. The security was a fixed and floating charge granted on the same day. On 22 January 2008 Fortress and OL agreed that the charge should also secure OL’s guarantee of the YVE loan. I have held that the charge is void to the extent that it would secure that debt.[16]
[16]Re Octaviar Ltd (No 7) [2009] QSC 37.
[30] The loan to Castle was referred to as a bridging loan of $250 million. It was repayable on 31 August 2007. On about 17 August 2007 a Deed of Amendment was executed by Castle and OL by which the date for repayment was extended to 1 December 2007. On 30 November 2007 a further Deed of Amendment was executed. It required $100 million of the principal to be repaid that day with the balance to be repaid on 29 February 2008. That $100 million was paid on 30 November 2007. The source of the funds appears from a statement of claim filed in other proceedings which have been brought by Wellington Investment Management Limited. It alleges that on 30 November 2007, when it was then a wholly owned subsidiary of OL, $130 million of its funds was transferred to OA, which paid $103 million to Fortress on the same date and the balance to other creditors of the Octaviar group. The Public Trustee argues that there is at least a serious question as to whether this sum of $130 million was misappropriated as is alleged in that statement of claim, and that this provides a reason for winding up OL so that this might be investigated. I discuss that below. For the moment, however, the relevant matter is that only $100 million of the debt was repaid on what had been the due date for repayment of the whole loan.
[31] On 18 January 2008, OL announced that it proposed to separate the Stella business from the rest of the group’s business, which immediately resulted in the market price of OL’s shares falling by more than two-thirds and the proposal being at an end. A few days later, trading of OL’s shares was suspended. OL engaged consultants, KordaMentha, to advise the group as to what it should do. The advice apparently given by KordaMentha to the board of OL, meeting on 22 January 2008, was that OL required $15 million of further cash over the next 60 days to meet its obligations. By then there had been a proposal to purchase a 65 per cent interest in the Stella businesses at a price of $400 million. KordaMentha advised that this sale could be agreed and completed to enable the sale price to be received prior to 29 February 2008. This was the date for repayment of the remaining $150 million of the Castle loan.
[32] The fall in OL’s share price constituted an event of default under the Castle loan. On 21 January 2008, Fortress wrote to Castle (copied to OL) that it waived its rights in respect of that event until 4 February 2008. On the next day, 22 January 2008, Fortress wrote to Castle and OL requiring each company to agree that the YVE guarantee would become secured according to the deed of the charge held by Fortress for the Castle guarantee. On 24 January 2008 the letter was countersigned on behalf of Castle and OL. Then on 4 February 2008, the proposal for the sale of a 65 per cent interest in the Stella business was accepted, and a contract of sale was signed.
[33] By a Deed of Amendment dated simply “February 2008”, the Castle facility was again varied. The amount of the facility was increased from $150 million to $200 million. The additional $50 million was for what an internal Fortress memorandum[17] referred to as “working capital payments” ($20 million), overdue interest and fees and interest falling due on 29 February 2008 ($6.1 million), anticipated interest for March 2008 ($1.6 million), new fees for this variation ($7 million) and a sum of $15 million for what was described as “participation in Fortress loan to Young Village Estates”. The date for repayment of the Castle facility was extended from 29 February 2008 to the earliest of 31 March 2008, the date of settlement of the Stella sale agreement or the date of termination of that agreement. It appears that the agreement for this further finance was made no earlier than about mid February 2008. The further funds were advanced by 18 February 2008.[18] There is nothing to suggest that some indication of this amendment to the facility, and in particular of the provision of further funds, was provided by Fortress in January 2008 when it required that the YVE guarantee become a secured debt.
[17]Exhibit 199 dated 12 February 2008.
[18]According to paragraph [87] of an affidavit of Mr M Kwei filed 5 May 2009.
[34] On 29 February 2008, the sale of the interest in the Stella business was completed. The Castle loan was fully repaid from the proceeds of sale on that date. Thereafter OL was liable to Fortress only as a guarantor of the YVE facility.
The Funded Participation Agreement
[35] That $15 million “participation” fee became the subject of an agreement dated 18 February 2008 between Fortress and Castle, entitled “Funded Participation Agreement”.
[36] The expressed purpose of this agreement was to set out the terms upon which Fortress had agreed to grant “a funded participation…of a portion of its exposure under the Participation Documents”, which were defined as the YVE Facility Agreement, each security and guarantee in relation to that facility and each “Transaction Document”. The effect of the agreement of 22 January 2008 had been to make the YVE facility a Transaction Document for relevant purposes. The apparent purpose was to give Castle a right to participate in the proceeds of recoveries under the YVE facility.
[37] Clause 2.1 obliged Castle, as the so-called Participant, to pay to Fortress the Participant’s Commitment, which was defined to mean $15 million. As mentioned already, that was paid from the $50 million advanced by Fortress.
[38] The return to Castle for this investment was according to clauses 2.2 and 2.3:
“Payments by Fortress to the Participant
2.2Subject to compliance by the Participant with its obligations under clause 2.1 and to clause 2.5, Fortress agrees to pay the Participant an amount equal to, and (subject to clause 4.3) in the same currency as, the Participant’s Commitment from any amount of principal received or recovered (including by way of set-off) by Fortress and its assignees in respect of amounts owing under a Participation Document after amounts of principal due to Fortress under or in connection with the Participation Documents up to an amount equal to the Fortress Exposure have been paid, discharged or performed in full. No amount of principal shall be paid by Fortress to the Participant where there is any reasonable possibility that any money received or recovered by Fortress or any settlement, conveyance, transfer or other transaction made in satisfaction of or in connection with amounts due under the Participation Documents must be repaid or may be avoided under any law.
2.3In addition to amounts payable under clause 2.2 above, Fortress agrees to pay to the Participant, any interest or other amount, fee or cost paid or payable by a Transaction Party (other than principal) in respect of the period from and including the Commencement Date proportionate to the Participant’s Percentage of such amounts payable to Fortress and its assignees under the Participation Documents.”
The term “Fortress Exposure” was defined to mean the Facility Limit less the Participant’s Commitment ($15 million). The Facility Limit was defined to have the same meaning as in the YVE loan agreement, where it was defined to mean $53.5 million as reduced or cancelled under that agreement. Accordingly, the Fortress Exposure was no more than $38.5 million. Thus in cl 2.2 of this Funded Participation Agreement, it was agreed that the last $15 million of what was recovered from YVE or its guarantors would be paid to Castle. In that way Castle was allowed to “participate” in Fortress’ recovery of the YVE debt. The right to participate in interest and other amounts payable under the YVE facility was provided by cl 2.3. Castle was to be paid the Participant’s Percentage of such amounts which were paid or payable by a party to a Participation Document.[19] The Participant’s Percentage was defined to mean the proportion borne by the sum of $15 million to the Facility Limit ($53.5 million). By cl 2.5, the obligation of Fortress to Castle was limited to such sums as Fortress recovered.
[19]Transaction Party was defined to mean a Party to a Participation Document (cl 1.2).
[39] The Funded Participation Agreement is ultimately for the benefit of OL, because Castle is a wholly owned subsidiary of OL and has effectively no creditors. According to Mr Harwood’s evidence,[20] the potential receipt via Castle from the Funded Participation Agreement is $19.5 million. This would be made up of $15 million to be paid under cl 2.2 and the balance as Castle’s share of interest and other amounts under cl 2.3.
[20]Exhibit NH-2 to his affidavit of 6 May 2009 and Exhibit 201.
The ATO’s position
[40] In an affidavit sworn by Mr Harwood on 26 February 2009, he described what he saw as an advantage of the DOCA over a liquidation of OL, which was in relation to the effect of the ATO’s s 260-5 notice. According to Mr Harwood’s affidavit, if the DOCAs were terminated, that notice would be “likely to have priority in respect of the payment of the dividend from OA to [OL]”, and would thereby divert funds from the pool for unsecured creditors of OL. Before going to the terms of the DOCA, it is convenient to discuss the effect under the TAA of the ATO’s notice.
[41] Section 260-5 of Sch 1 of the TAA relevantly provides as follows:
“260-5 Commissioner may collect amounts from third party
Amount recoverable under this Subdivision
(1)This Subdivision applies if any of the following amounts (the debt) is payable to the Commonwealth by an entity (the debtor) (whether or not the debt has become due and payable):
(a) an amount of a tax-related liability;…
Commissioner may give notice to an entity
(2)The Commissioner may give a written notice to an entity (the third party) under this section if the third party owes or may later owe money to the debtor.
Third party regarded as owing money in these circumstances
(3)The third party is taken to owe money (the available money) to the debtor if a third party:
(a)is an entity by whom the money is due or accruing to the debtor; or
(b)holds the money for or on account of the debtor; or
(c)holds the money on account of some other entity for payment to the debtor; or
(d)has authority from some other entity to pay the money to the debtor.
The third party is so taken to owe the money to the debtor even if:
(e)the money is not due, or is not so held, or payable under the authority, unless a condition is fulfilled; and
(f)the condition has not been fulfilled.
How much is payable under the notice
(4) A notice under this section must:
(a)require the third party to pay to the Commissioner the lesser of, or a specified amount not exceeding the lesser of:
(i) the debt; or
(ii) the available money; or
(b)if there will be amounts of the available money from time to time – require the third party to pay to the Commissioner a specified amount, or a specified percentage, of each amount of the available money, until the debt is satisfied.
When amount must be paid
(5)The notice must require the third party to pay an amount under paragraph (4)(a), or each amount under paragraph (4)(b):
(a) immediately after; or
(b) at or within a specified time after; or
the amount of the available money concerned becomes an amount owing to the debtor.
Debtor must be notified
(6)The Commissioner must send a copy of the notice to the debtor.”
Section 260-15 of Sch 1 of the TAA provides that an amount which a third party (in this case OA) pays to the Commissioner under Subdivision 260-A is taken to have been authorised by the debtor (OL in this case) and any other person who is entitled to all or part of the amount and the third party is indemnified for making the payment. By s 260-20 it is an offence to fail to comply with such a notice, and a person convicted of that offence may be ordered to pay to the Commissioner all or part of the amount referred to in the notice.
[42] In Macquarie Health Corp Limited v Commissioner of Taxation[21] the Full Court of the Federal Court (Hill, Sackville and Finn JJ) summarised the effect of notices given under the like terms of what was then s 218 of the Income Tax Assessment Act 1936 (Cth):
[21](1999) 96 FCR 238 at 258-9.
“[80]Once it is accepted that Donnelly[22] should be followed, subject to further arguments as to the effect of the Taxpayer’s winding up, certain conclusions follow:
[22]Commissioner of Taxation v Donnelly (1989) 25 FCR 432.
(i)The service of the s 218 notices on the Debtors created an interest in the nature of a statutory charge over any debts then due by the Debtors to the Taxpayer. The charge was created notwithstanding that the amounts due to the Taxpayer were not payable until a future date.
(ii)The Notices were also effective to create a statutory charge over any debts coming into existence (whether or not payable immediately) after the date of service, but before commencement of the winding-up.
(iii)To the extent the Commissioner was entitled to a statutory charge over debts due by the Debtors to the Taxpayer, s 471C of the Corporations Law preserves the Commissioner’s right to realise or enforce the charge notwithstanding the winding-up of the Taxpayer.
(iv)The Liquidator cannot invoke s 474(1) of the Corporations Law to take control of debts subject to the statutory charge in favour of the Commissioner.”
[43] The ATO notice was served on 10 September 2008. In these proceedings at least, there is no challenge to the validity of the notice.[23] But there is a question of whether the impact of the notice is affected by the Fortress charge (assuming it to be valid), and if so to what extent. The Fortress charge had become a fixed charge by the time of the ATO’s notice, because it had automatically crystallised upon OL’s becoming insolvent or upon the filing of the winding up application on 4 June 2008.[24]
[23]A witness called by the Public Trustee, Mr Colwell, suggested that a liquidator of OL would wish to seek an “administrative review” of the Commissioner’s decision to issue the notice when the company was clearly insolvent but no one suggests that the Commissioner would be inclined or bound to give up any rights from the giving of the notice.
[24]Each of which was a so-called Insolvency Event within the meaning of cl 2.6(a) of the YVE Facility Agreement, incorporated into the Fortress charge by cl 1.2.
[44] In Deputy Commissioner of Taxation v Lai Corporation Pty Ltd,[25] the Full Court of the Supreme Court of Western Australia considered the effect of a notice given under a similar provision in the Sales Tax Assessment Act(No 1) 1930 (Cth),[26] having regard to a floating charge granted by the taxpayer which had crystallised after the notice had been given. It was held that the existence of the floating charge did not put paid to the operation of the notice in requiring the debtor to pay the Commissioner, and if the monies were so paid, the Commissioner would hold them free of the floating charge. Their Honours said that the position would have been different had the charge crystallised prior to the service of the notice. Burt CJ was of that view for two reasons. The first was that once the charge became fixed, the Commissioner would receive the payment subject to that security, a conclusion which he said was implicit in the reasons of Mason J in Clyne v Deputy Commissioner of Taxation.[27] Alternatively, the same result would follow “by saying that to the extent of the security the debt although due is not payable to the taxpayer”.[28]
[25][1987] WAR 15, also reported as Norgard & Anor (Receivers and Managers of Lai Corporation Pty Ltd) & Ors v Deputy Commissioner of Taxation (1986) 86 ATC 4,947.
[26]Section 38.
[27](1981) 150 CLR 1 at 16 and 23.
[28][1987] WAR 15 at 23.
[45] The position of a fixed charge in relation to a notice under the same provision was considered by the Full Court of this Court in Tricontinental Corporation Ltd v Federal Commissioner of Taxation.[29] As in Lai Corporation, because the notice had been given prior to the crystallisation of the charge, the Full Court concluded that the operation of the notice was unaffected by it. But in relation to a fixed charge, Connolly J said:[30]
[29][1988] 1 Qd R 474.
[30][1988] 1 Qd R 474 at 481.
“Whether in a case in which a charge, which, as in this case, is expressed to be a floating charge, has crystallised, that fact would be sufficient to defeat a notice under s 218 of the Income Tax Assessment Act is, I think, not free from difficulty. In form at least, the money is still due or accruing to the taxpayer. The debenture holder enforces his rights by appointing a receiver who would demand and recover the debt in the name of the taxpayer. If the analogy with forms of execution such as garnishment be appropriate, then it might well be right to say that s 218 can only operate on the taxpayer’s beneficial interest in the moneys. A more direct approach is to say that once a floating charge has crystallised, moneys the subject of the charge are no longer in reality owing to the taxpayer but to the chargee.”
Connolly J considered that it was the second approach which was supported by the judgment of Mason J in Clyne,[31] with which I respectfully agree. In Clyne, Mason J, in discussing whether “due” in s 218 meant “due and payable”, said:
[31][1988] 1 Qd R 474 at 481-2.
“[I]f “due” does not mean ‘due and payable” then the Commissioner by giving a s. 218 notice can require payment of a debt owing to the taxpayer which, but for the notice, would not become payable to him by reason of the supervening rights of a secured creditor, e.g. the crystallization of a floating charge before the debt becomes payable.”[32]
[32](1981) 150 CLR 1 at 16.
In Tricontinental Shepherdson J agreed with Connolly J. Williams J also agreed, but in a separate judgment, he apparently accepted the first approach of Burt CJ, saying:
“…the Commissioner is entitled to intercept moneys from persons who were debtors of the taxpayer and who received notices prior to crystallisation of the charge, but…the Commissioner would take debts subject to the security if it crystallised prior to the time of service of the notices.”[33]
[33][1988] 1 Qd R 474 at 485.
[46] In Elric Pty Ltd v Taylor,[34] again a case concerning a s 218 notice, Thomas J had to consider the effect of a charge which had crystallised prior to the notice. He granted an injunction to restrain a payment to the Commissioner according to the notice, upon the basis that the monies the subject of the charge were not owing to the taxpayer but to the chargee.[35]
[34](1988) 92 FLR 222.
[35](1988) 92 FLR 222 at 225.
[47] These cases were recently considered by the Full Court of the Federal Court in Federal Commissioner of Taxation v Bruton Holdings Pty Ltd (in liq),[36] where the ultimate question was whether notices under s 260-5 were void as an “attachment” under s 500 of the Act. Applying Commissioner of Taxation v Donnelly, the Court held they were not an attachment. Special leave to appeal that judgment has been granted, but, it would seem, upon the “attachment” question. That question does not arise in the present case. Were OL to be ordered to be wound up, the notice here would predate the commencement of the winding up, so that the notice would not be void as an attachment put in force after the commencement of the winding up under the similar terms of s 468(4).
[36](2008) 173 FCR 472 at 482-5.
[48] That second approach put forward by Burt CJ in Lai Corporation, and adopted by Thomas J in Elric, is supported by subsequent authority.[37] As was observed in Bruton Holdings, under the first approach, the Commissioner would be entitled to payment of the debt but would hold the proceeds subject to the fixed charge, whereas the second approach would deprive the Commissioner of the right to receive payment at all.[38] If the first approach were applied here, OA would have to pay to the Commissioner an amount up to the amount of the notice, but (again assuming the validity of the Fortress charge) the Commissioner would then have to pay to Fortress the amount which its charge secured because the beneficial ownership of the funds would be in Fortress. Under the second approach, the notice would not require OA to pay to the Commissioner whilst Fortress was entitled to the funds for payment of what was secured by its charge. Either way, the result, at least absent the impact of the DOCA for OL, would be a payment or payments to Fortress or its receivers.
[37]Zuks v Jackson MacDonald (a firm) (1996) 132 FLR 317.
[38](2008) 173 FCR 472 at 485.
[49] Any surplus funds, that is, funds not to go in payment of the Fortress debt, would not have to be paid by OA to Fortress or to the receivers, on either of the two approaches. Under the first approach, the Commissioner would be entitled to payment but would hold the proceeds for Fortress only subject to the extent that the funds were to pay what its charge secured. Under the second approach, the debt would not be owing to the taxpayer, as Burt CJ put it, only “to the extent of the security”. In ElricPty Ltd v Taylor, Thomas J noted that in that case, there was no question of the monies being sufficient to exceed the secured debt so as to leave a surplus payable to the taxpayer,[39] thereby indicating that surplus monies would have been treated differently.
[39](1988) 92 FLR 222 at 225.
[50] In summary, the notice does not defeat the operation of the Fortress charge (if otherwise valid) and is ultimately effective only to the extent that monies to be paid by OA would not have to be paid to Fortress in payment or part payment of its debt.
[51] Accordingly, if the funds to come from OA to OL were, say, $80 million, and the Fortress debt secured by the charge were $60 million, the position in a winding up of OL would be that nothing from OA would go to the benefit of unsecured creditors of OL, except via Castle. After Fortress received its $60 million, the ATO would be entitled to the remaining $20 million. However, on Fortress’ receipt of the money, cl 2.2 of the Funded Participation Agreement would oblige Fortress to pay $15 million and by cl 2.3 a further sum (now apparently about $4.5 million). As I have mentioned, the administrators’ best estimate of the likely payments from OA to OL, even under the DOCA for OA, is $72 million. The most recent evidence of the Fortress debt[40] is that as at the end of April last it was about $62.5 million, which apparently did not allow for the OA trust monies which were paid to Fortress in January 2009. Further interest accruing on the Fortress debt would diminish the balance to be paid to the ATO. But some of that further interest would be for the benefit of unsecured creditors of OL, because it would be passed on to Castle and then back to OL.
[40]Affidavit of Mr Kwei sworn 5 May 2009.
[52] If the Fortress charge is void against a liquidator, then the Commissioner would be entitled to the whole of the ATO debt and the balance of the money from OA would go to the pool for unsecured creditors (including Fortress). But of itself that would not provide Fortress with sufficient funds to require it to pass on any repaid principal to Castle.
[53] The consideration of the DOCA proposed by Fortress should have been made with an understanding of these respective entitlements of Fortress, Castle and the ATO. It was necessary for the administrators to explain them to creditors, so that a winding up and the DOCA could be compared. And the creditors also needed an explanation of the terms of the proposed DOCA. As will appear, the proposed DOCA could not be easily explained and the deed later prepared and executed is not easily interpreted.
The deed for Octaviar Ltd
[54] The meetings of creditors took place on 17 December 2008. There was then no draft of the deed which had been provided by the administrators to creditors. The effect of a DOCA proposal by Fortress was described in the administrators’ s 439A report, and there was some discussion of that at the meeting. The DOCA, dated 12 January 2009, is between OL, the administrators, Fortress and the receivers appointed by it. Recital C of the deed expresses its purposes in words which are simply copied from s 435A of the Act. As for the suggested purpose of maximising the chances of the company continuing in existence, the administrators had not carried on the company’s business from the time of their appointment on 13 September 2008 and there was no prospect that the company would be able to resume trading.
[55] The critical provisions of the DOCA are those which provide for the disposition of whatever was to be paid by OA to OL. Such money is described in the deed as the OA Receivable, which is defined to mean:
“…any and all moneys that are from time to time:
(a)payable by OA to the Company in respect of book debts owed to the Company; and
(b)held by OA on trust or otherwise on behalf of the Company…”
As noted already, the monies referred to in that paragraph (b), which I have called the OA trust monies, have now been paid. They were paid by the administrators to the receivers appointed by Fortress on 23 December 2008 and then passed on to Fortress prior to the execution of the DOCA. The amount paid was approximately $19.5 million. The administrators saw fit to make that payment although in a hearing on 18 December 2008, in which the administrators were represented, counsel for the Public Trustee said that their client would apply to terminate the DOCA as soon as it was executed and that it would argue that the Fortress charge was void.
[56] Clause 4.1 of the DOCA provides for the receipt and disbursement of the OA Receivable as follows:
“4. The OA Receivable
Dealing with the OA Receivable
4.1As and when the OA Receivable (or portions thereof) is received by the Company from OA, the OA Receivable will be dealt with in the following order and manner:
(a)The OA Receivable shall be applied by the Receivers in payment to Fortress of the Fortress Debt.
(b)Moneys received by Fortress from time to time on account of the OA Receivable shall be applied as follows:
(i)First, in payment to Fortress of Fortress Expenses and Fortress Interest;
(ii)Second, by depositing $25,000,000.00 into an account operated by Fortress, as a payment by the Company under the Guarantee;
(iii)Third (to the extent of any surplus after payment of the amounts required by sub-paragraphs (i) and (ii) above in full), by paying the Company PA Amount to the Company;
(iv)Fourth (to the extent of any surplus after payment of the amounts required by sub-paragraphs (i) to (iii) above in full) by paying the Octaviar Castle Amount to Octaviar Castle; and
(v)Fifth (to the extent of any surplus after payment of the amounts required by
sub-paragraphs (i) to (iv) above in full), by paying the balance to the Company.”
[57] This clause begins with the premise that all of the OA Receivable will be paid to the receivers. The DOCA for OA does not oblige OA to pay to the receivers, but that is no doubt what Fortress and the administrators have in mind. That involves an assumption that the Fortress charge is not void and a further assumption that none of the OA Receivable would be paid to the Commissioner in response to the s 260-5 notice. According to my earlier judgment, that first assumption is wrong. So too is the second assumption, because OA would be entitled to make payment to the receivers only to satisfy, in whole or in part, the debt was secured by the charge. Any surplus would have to be paid to the Commissioner.
[58] According to cl 4.1(a), the OA Receivable is to be applied by the receivers “in payment to Fortress of the Fortress debt”. As other provisions of the DOCA confirm,[41] cl 4.1(b) provides for disbursements by Fortress, the implication being that the receivers would immediately pass any of the OA Receivable on to Fortress.
[41]For example, cl 4.2 set out below.
[59] The first of those disbursements would be under cl 4.1(b)(i). The Fortress Interest is defined as the interest on the sum of $25,000,000 (or any portion thereof outstanding from time to time) for the period commencing on 13 September 2008[42] and ending on the payment of that sum under cl 4.1(b)(ii). The Fortress Expenses are defined to mean all expenses recoverable by Fortress pursuant to OL’s guarantee, incurred up to the date of payment of the sum contemplated by cl 4.1(b)(i). According to a so-called Transaction Outline, a document prepared by Fortress which became Schedule 1 of the DOCA, the Fortress Expenses and Fortress Interest were estimated to amount to $500,000.
[42]The day OL went into voluntary administration.
[60] Next would be the payment under cl 4.1(b)(ii), being a deposit of $25 million into an account operated by Fortress “as a payment by the Company under the Guarantee”. Accordingly, the disbursements to be made under paras (i) and (ii) of cl 4.1(b) would total about $25.5 million after which para (iii) would become relevant. Paragraph (iii) requires the disbursement of the OA Receivable in payment of the so-called Company PA Amount. This is a payment according to a written agreement between OL and Fortress, also dated 12 January 2008, which is annexed to the DOCA and called “Participation Agreement”. In the DOCA, the Company PA Amount is defined to mean:
“…a payment made pursuant to clause 2…of the [Participation Agreement] in an amount equal to:
(a) Fortress Debt;
minus
(b)$25,000,000.00 plus Fortress Expenses plus Fortress Interest;
minus
(c) Octaviar Castle Amount.”
[61] The next disbursement would be that in paragraph (iv) of cl 4.1(b), which is the Octaviar Castle Amount. This is defined to mean all amounts payable by Fortress to Castle pursuant to clauses 2.2 and 2.3 of the Funded Participation Agreement.
[62] As discussed already, the Funded Participation Agreement requires Fortress to pass on to Castle any principal paid under the YVE facility (including by OL as a guarantor) once Fortress has been repaid the “Fortress Exposure”, which could be no more than $38.5 million.[43] And it requires Fortress to pass on Castle’s share[44] of interest and other amounts paid under the YVE facility. The Company PA Amount would be effectively money received from OA in excess of $25.5 million but which would not have to be passed on to Castle.
[43]$53.5 million less $15 million.
[44]i.e. 15/53.5 or about 28 per cent.
[63] Some further terms of the DOCA for OL are as follows:
“4.2 Notwithstanding anything to the contrary in this Deed:
(a)Fortress’ obligation to make the payments referred to in clause 4.1 (Dealing with the OA Receivable) shall in all circumstances be limited to the portions of OA Receivable received from time to time by Fortress (acting by itself or by its Receivers). Fortress shall not have any obligation or liability to make the payments referred to in clause 4.1 (Dealing with the OA Receivable) from any other source of funds; and
(b)payment to Fortress of the OA Receivable in accordance with clause 4.1 (Dealing with the OA Receivable) shall not in any way diminish, reduce or otherwise affect any obligations of YVE to Fortress, and any rights that Fortress has against YVE, including but not limited to the amount of any debt owed to Fortress by YVE.
Dealing with the Octaviar Castle Amount
4.3The Deed Administrators must, upon payment to Octaviar Castle of the Octaviar Castle Amount, cause that amount (or the maximum portion of that amount permitted by law) to be paid by Octaviar Castle to the Company by whatever means are available to Octaviar Castle and the Company, including but not limited to by way of dividend on the Company’s shares in Octaviar Castle or repayment of then existing indebtedness of Octaviar Castle to Octaviar.
Release from Charge of Deed Fund Contributions
4.4On and from the respective times of their payment by Fortress in accordance with clause 4.1 (Dealing with the OA Receivable):
(a)each of the Deed Fund Contributions [defined as the payments contemplated by paragraphs (iii), (iv) and (v) of cl 4.1(b) of the deed] shall be deemed to have been released by Fortress and the Receivers from the Charge; and
(b)Fortress must take all necessary steps to effect that release, including but not limited to the lodgement with the Australian Securities & Investments Commission, in accordance with the Corporations Act and Corporations Regulations, of a duly completed “Form 312” in respect of each Deed Fund Contribution.
…
Paramountcy of clause 4
4.7In the event of any inconsistency with any other provision of this Deed, this clause 4 (The OA Receivable) is paramount.
5.Deed Fund
Establishing the Deed Fund
5.1Subject to clause 5.3 and clause 16 (Secured Creditors), the Deed Fund shall comprise all of the Property of the Company and any proceeds from the sale of the Property of the Company.
5.2Subject always to clause 4 (The OA Receivable), the Deed Fund includes (but is not limited to) the Deed Fund Contributions.
5.3Without limiting clause 16 (Secured Creditors), the Deed Fund does not include the OA Receivable.
Distributing the Deed Fund
5.4The Deed Fund shall be distributed by the Deed Administrators in the following order and manner:
(a)First, in payment of the Winding Up Petition Costs;
(b)Second, in payment of all the Administrators’ Remuneration and the Administration Liabilities;
(c)Third, in payment of any Employee Entitlements;
(d)Fourth, in payment of all other Creditors’ Claims on a pari passu basis; and
(e)Fifth, any surplus after payment of the Winding Up Petition Costs and all Claims under paragraphs (b) to (d) above in full, to be distributed to the Company’s members.
5.5Insofar as the amount of the Deed Fund is insufficient to pay the Claims making up the Employee Entitlements or the Creditors in full pursuant to this clause, then in each case, the Deed Fund shall be distributed pro rata amongst the Claims making up the Employee Entitlements or the Creditors (as the case may be).
5.6The Deed Administrators will distribute the Deed Fund at such times and in such amounts as it is appropriate and feasible to do so.
5.7The Deed Administrators may make interim distributions.
5.8The Deed Administrators may make a distribution under one of the categories in clause 5.4 (Distributing the Deed Fund) even though a prior category has not been paid in full, if the Deed Administrators have set aside an amount which they consider is reasonably likely to be needed to pay any prior category in full.
5.9Notwithstanding any other provision of this Deed, the Deed Administrators may withhold some or all of the Deed Fund from distribution if they have made a claim under their Indemnity in clause 13 (Administrators’ Indemnity and Lien), or reasonably apprehend that they will need to make such a claim.
6Making of Claims
6.1Subdivisions A, B, C and E of Division 6 of Part 5.6 of the Corporations Act (other than sections 553(1A) and 554F) and Corporations Regulations 5.6.39 to 5.6.57 will apply to all Claims against the Company made under this Deed as if references to the “liquidator” were references to the Deed Administrators, references to “winding up” and “wound up” were references to administration pursuant to this Deed, and references to the “relevant date” were to the Relevant Date.
7Discharge of Claims
7.1The Creditors must accept their entitlements under this Deed in full satisfaction and complete discharge of all debts or any Claim which they have or claim to have against the Company as at the Relevant Date and each of them will, if called up to do so, execute and deliver to the Company such forms of release of any such Claim as the Deed Administrators require.”
[64] The so-called Participation Agreement is referred to in the DOCA as the Company PA. The DOCA recites that:
“The Company PA is intended to provide the Company [OL] with the benefit of security granted by YVE to Fortress for debts that are also secured by the Guarantee [OL’s guarantee of the YVE facility] in circumstances where it is not expected that the Company will become entitled to be subrogated to that security for some time.”
[65] Clauses 2.2 and 2.3 of the Participation Agreement provide as follows:
2.2 Subject to the terms of this Agreement:
(a)after payment to Fortress of the Initial OA Receivable Payment, Fortress agrees to pay the Participant an amount up to the Company PA Amount from the OA Receivable; and
(b) after:
(i) an amount equal to:
Fortress Amount;
minus
Initial OA Receivable Payment,
has been paid to Fortress in full; and
(ii)receipt by Fortress of the Initial OA Receivable Payment,
Fortress agrees to pay the Participant any of the remaining Realisation Proceeds, proceeds from the Security or proceeds from the Charge up to the total of the Fortress Amount.
2.3No amount shall be paid by Fortress to the Participant where there is any reasonable possibility that any money received or recovered by Fortress or any settlement, conveyance, transfer or other transaction made in satisfaction of or in connection with amounts due under the Participation Document will be either required to be repaid or avoided under any law.”
The Initial OA Receivable payment is defined to mean, in effect, the payments under paragraphs (i) and (ii) of cl 4.1(b). The Company PA Amount takes its meaning from the DOCA.
Arguments as to the effect of the deed for Octaviar Ltd
[66] The Public Trustee argues that this DOCA permits Fortress to recover in fact more than the YVE debt. So assuming the YVE debt to be $60 million, it is argued that Fortress might recover $75 million by reason of the DOCA. The argument begins at the Funded Participation Agreement under which $15 million was paid to Fortress. Of course that had been lent by Fortress, but that advance, together with the balance of the Castle facility, was repaid on 29 February 2008. So at least prior to the DOCA, the position was that Fortress was obliged to pay Castle according to the Funded Participation Agreement. The Public Trustee argues that cl 4.1(b)(iv) allows Fortress to use OL’s money, rather than its money, to discharge its obligations to Castle.
“Part 5.3A … is to operate in relation to [the company] so that reg 5.3A.07 does not operate with any effect in relation to the company.”[115]
[114]Re Octaviar Limited (No 1) [2008] QSC 216.
[115](2006) 226 ALR 510 at 569.
Accordingly, it will be ordered that the deed of company arrangement between Octaviar Limited (Administrators Appointed) (Receivers and Managers Appointed), Fortress Credit Corporation (Australia) II Pty Limited, John Lethbridge Greig and Nicholas Harwood, and Stephen James Parbery and Anthony Milton Sims be terminated. It will be further ordered that Part 5.3A of the Corporations Act 2001 (Cth) is to operate in relation to that company so that s 446B and reg 5.3A.07 do not operate with any effect in relation to the company.
Fortress submitted that any order for termination of the DOCA should be stayed to enable it to be appealed. However, counsel for Fortress did not explain why the appeal would be futile absent a stay. If an appeal were allowed, the order for termination of the DOCA would be set aside, as would consequential orders for the provisional liquidation and liquidation of the company. Counsel for Fortress suggested that the position was not so clear in relation to the Participation Agreement. It provides that it will automatically terminate in the event of termination of the DOCA. If the termination of the DOCA is set aside on appeal, the position would seem to be that the Participation Agreement would stand. If not, it was not explained why a further agreement to the same effect could not be made.
As yet there is no application to wind up OA. The Public Trustee’s concern is that the relation-back day should become the day on which the administrators were appointed, which was 3 October 2008. Again that is desirable and no party makes a submission that there should not be orders to that end. The administrators submit that the combined effect of s 513B(c) and s 513C(b) would be that upon termination of the DOCA for OA, the deemed voluntary winding up is taken to have commenced on the date the administrators were appointed, so that no order as to the operation of Part 5.3A is required. Section 513B(c) applies where “immediately before the resolution was passed, a deed of company arrangement had been executed by the company but had not yet terminated”. According to reg 5.3A.07, the resolution is deemed to have been passed when the court makes the order terminating the DOCA. The result would appear to be that, as the administrators suggest, the deemed voluntary winding up would be deemed to have commenced on 3 October 2008, and that would be the relation-back day.
If the Public Trustee’s submission is accepted, and an order is made preventing the operation of reg 5.3A.07, the position would seem to be as follows. The company would be wound up by the court upon an application which is yet to be filed. The commencement of the winding up would be according to s 513A(e). Paragraph (a) would not apply because a winding up would not be in progress when the order is made. Paragraph (b) of s 513A would not because the company had ceased to be under administration when the DOCA was executed: s 435C(1), s 435C(2)(a). Paragraph (c) of s 513A would not apply because, assuming that the provisional liquidator is first appointed as the Public Trustee seeks, the company would not have been under administration immediately before that appointment. Paragraph (d) of s 513A would not apply because immediately before the winding up order (as distinct from the appointment of a provisional liquidator) it would not have been the case that a DOCA had been executed but “had not yet terminated”. Accordingly, the winding up would be deemed to have commenced on the day when the winding up order was made with the result that the relation-back day would
be the day on which the application for that order was filed. Section 9 defines “relation-back day” as follows:
“relation-back day, in relation to a winding up of a company or Part 5.7 body, means:
(a)if, because of Division 1A of Part 5.6, the winding up is taken to have begun on the day when an order that the company or body be wound up was made – the day on which the application for the order was filed; or
(b)otherwise – the day on which the winding up is taken because of Division 1A of Part 5.6 to have begun.”
Accordingly, the objective of a relation-back day of 3 October 2008 would be served by the order sought by the administrators rather than that sought by the Public Trustee. It will be ordered that the deed of company arrangement made between Octaviar Administration Pty Limited (Administrators Appointed) and John Lethbridge Greig and Nicholas Harwood be terminated. It will be further ordered that Mr Greig and Mr Harwood be appointed liquidators of the company until further order.
In the case of OL, it is necessary to appoint provisional liquidators. The Public Trustee seeks to have the administrators appointed as provisional liquidators until a hearing of the winding up application or his application to appoint other provisional liquidators. The administrators submit that it is more appropriate that they be appointed simply until further order, with which I agree. Accordingly, it will be ordered that John Lethbridge Greig and Nicholas Harwood be appointed provisionally as liquidators until further order.
I will hear the parties as to what further orders or directions should be made in the light of these reasons.
The Fortress application
Fortress seeks an order pursuant to s 266(4) of the Act for an extension of time within which to lodge the notice of variation which I have held was required by s 268(2). It makes an alternative application for an extension of time to lodge a notice of a charge, which, it suggests, was also required according to that judgment. But that was not my conclusion. What was required was a notice of variation of the charge.[116]
[116]Re Octaviar Ltd (No 7) [2009] QSC 37 at [35]-[36].
Section 266 of the Act relevantly provides as follows:
“Certain charges void against liquidator or administrator
(1) Where:
(a)an order is made, or a resolution is passed, for the winding up of a company; or
(b)an administrator of a company is appointed under section 436A, 436B or 436C; or
(ba)a company executes a deed of company arrangement;
a registrable charge on property of the company is void as a security on that property as against the liquidator, the administrator of the company, or the deed’s administrator, as the case may be, unless:
(c)a notice in respect of the charge was lodged under section 263 or 264, as the case requires:
(i) within the relevant period; or
(ii) at least 6 months before the critical day; or
(d)in relation to a charge other than a charge to which subsection 263(3) applies – the period within which a notice in respect of the charge (other than a notice under section 268) is required to be lodged, being the period specified in the relevant section or that period as extended by the Court under subsection (4), has not ended at the start of the critical day and the notice is lodged before the end of that period; or
(e)in relation to a charge to which subsection 263(3) applies – the period of 45 days after the chargee becomes aware that the registrable body has been registered as a company under Part 5B.1, or registered under Part 5B.2, has not ended at the start of the critical day and the notice is lodged before the end of that period; or
(f)in relation to a charge to which section 264 applies –the period of 45 days after the chargee becomes aware that the property charged has been acquired by a company has not ended at the start of the critical day and the notice is lodged before the end of that period.
(2)The reference in paragraph (1)(c) to the relevant period is to be construed as a reference to:
(a)in relation to a charge to which subsection 263(1) applies – the period of 45 days specified in that subsection, or that period as extended by the Court under subsection (4) of this section; or
(b)in relation to a charge to which subsection 263(3) applies – the period of 45 days after the chargee becomes aware that the registrable body has been registered as a company under Part 5B.1 or registered under Part 5B.2; or
(c)in relation to a charge to which section 264 applies – the period of 45 days after the chargee becomes aware that the property has been acquired by a company.
(3)Where, after there has been a variation in the terms of a registrable charge on property of a company having the effect of increasing the amount of the debt or increasing the liabilities (whether present or prospective) secured by the charge:
(a)an order is made, or a resolution is passed, for the winding up of the company; or
(b)an administrator of a company is appointed under section 436A, 436B or 436C; or
(ba)a company executes a deed of company arrangement;
the registrable charge is void as a security on that property to the extent that it secures the amount of the increase in that debt or liability unless:
(c)a notice in respect of the variation was lodged under section 268:
(i)within the period of 45 days specified in subsection 268(2) or that period as extended by the Court under subsection (4) of this section; or
(ii)not later than 6 months before the critical day; or
(d)the period of 45 days specified in subsection 268(2), or that period as extended by the Court under subsection (4) of this section, has not ended at the start of the critical day and the notice is lodged before the end of that period.
(4)The Court, if it is satisfied that the failure to lodge a notice in respect of a charge, or in respect of a variation in the terms of a charge, as required by any provision of this Part:
(a)was accidental or due to inadvertence or some other sufficient cause; or
(b)is not of a nature to prejudice the position of creditors or shareholders;
or that on other grounds it is just and equitable to grant relief, may, on the application of the company or any person interested and on such terms and conditions as seem to the Court just and expedient, by order, extend the period for such further period as is specified in the order.
…
(8)In this section:
critical day, in relation to a company, means:
(a)if the company is being wound up – the day when the winding up began; or
(b)if the company is under administration – the section 513C day in relation to the administration; or
(c)if the company has executed a deed of company arrangement – the section 513C day in relation to the administration that ended when the deed was executed.”
According to my previous judgment, the present position is that the charge, in so far as it would secure the YVE guarantee, is void against the deed’s administrators for the same reason for which it was void against the administrators from the time of their appointment on 13 September 2008, and unless time is extended, for which it would be void against a liquidator of OL. No notice was lodged until 2 April 2009, which is the date to which Fortress applies to extend time.
The Public Trustee submits that upon the proper construction of s 266, there is by now no power to extend the period: once s 266(3) was engaged by the appointment of the administrators, the charge became void (to the extent of the YVE guarantee) and it could not be revived by an extension of time under s 266(4). That question was considered by the Full Court of the Federal Court in Hewlett Packard Australia Pty Ltd v GE Capital Finance Pty Ltd,[117] where each judge was of the opinion that, absent prior authority, the appointment of an administrator would put paid to the power to extend time under this provision. In that case, the chargee had failed to give notice of the charge itself within the period of 45 days specified in s 263(1) through inadvertence. A notice was belatedly lodged prior to the appointment of administrators. Subsequently the chargee applied to extend the period specified by s 263(1). But the reasoning is equally applicable to a failure to comply with s 268 and to where the period is to be extended beyond the date of the event by which the charge became void. The principal judgment was given by Allsop J (as he then was) who undertook what Whitlam J in the same case rightly described as a masterly analysis of the development of the relevant law. Allsop J and, in a separate judgment, Branson J, held that but for authority, s 266 should be construed as putting an end to the court’s power to extend time once there was the intervention of a winding up or administration, but that having regard to that authority, a power to extend time should be recognised.[118] Whitlam J construed the section in the same way but held that there was no power, concluding that contrary authority was clearly wrong. He said:[119]
[117](2003) 135 FCR 206.
[118](2003) 135 FCR 206 at 258 (Allsop J) and 216 (Branson J).
[119](2003) 135 FCR 206 at 213-214.
“[7]In my opinion, the reasons given by Allsop J for his preferred view of the proper construction of s 266(4) are utterly convincing. No intermediate appellate court has ever considered and rejected such a thoroughly presented and careful analysis. So far as voidness under s 266(1) and (3) is concerned, it is clear that an order made under s 266(4) is prophylactic, not curative. Any terms and conditions upon which such an order is made, such as the so-called “usual proviso” would be directed to that end. The reach of s 266(1) and (3) is reflected in the protection afforded the rights of third parties in s 266(6).
[8]I decline to be influenced by the fact that the provision here under consideration has not been fundamentally altered in subsequent re-enactments of the Australian companies statute. I think, with respect, that there is a good degree of unreality in any suggestion that mere re-enactment necessarily reflects Parliament’s approbation of what might be to company law cognoscenti a generally accepted line of judicial authority. Of course, I do not mean to deny the proper role of legal history in explaining statutory language (see, for example, Conway v The Queen (2002) 209 CLR 203 at 207 et seq), but, in the construction of a statute, the text must be accorded primacy. Here the grammar and syntax of s 266 show quite clearly when an order may be made under s 266(4).”
The judgment of Whitlam J has considerable force. But I am not convinced that Branson and Allsop JJ were plainly wrong to hold that having regard to authority on similar provisions existing at the time of the enactment of this statute, s 266 should be construed as giving the court power notwithstanding the intervention of an administration.[120] Accordingly, the present application must be considered.
[120]Australian Securities Commission v Marlborough Gold Mines Ltd (1993) 177 CLR 485 at 492.
In Sanwa Australia Finance Ltd v Ground-Breakers Pty Ltd (in liq),[121] the Full Court of this Court considered the discretionary power under the predecessor of s 266(4), which was the relevantly equivalent s 205(3) of the Companies (Queensland) Code. The application to extend time was made after the company went into liquidation. It was assumed in the arguments and in the judgments that there was a power to extend time. It was held that an omission to give notice of the charge because of an ignorance or misunderstanding of the law may amount to inadvertence. There is no challenge to that proposition. Nor is there any challenge to the evidence for Fortress that the notice was not lodged because it was not considered legally necessary. Accordingly, Fortress has established the ground referred to in s 266(4)(a).
[121][1991] 2 Qd R 456.
Fortress argues that it has also established the ground referred to in s 266(4)(b), which is that its failure to lodge the notice was not of a nature to prejudice the position of creditors or shareholders. I accept its submission that there is no evidence that any unsecured creditor extended credit or lent monies to OL after searching the records maintained by ASIC. It is further argued that had a notice been lodged, it would have been immaterial to any creditor who did search those records, because the charge already secured a maximum prospective liability of $750 million. That may be so, although a creditor may well have been concerned about the charging of OL’s property to secure quite a different obligation for no further advance and at the very time of OL’s spectacular demise on the Australian Stock Exchange. But these are matters of speculation. I accept that it is relevant for the exercise of the discretion under s 266(4) that in this case there is no evidence of prejudice of that kind.
The issue then is whether it is just and equitable to grant relief by way of an extension. As Kelly SPJ said in the principal judgment in Sanwa Australia Finance,[122] the prejudice just referred to is not the only relevant prejudice to be considered. What must now be considered is the prejudice to creditors if the order is made, and the prejudice to Fortress if it is not.
[122][1991] 2 Qd R 456 at 462.
As to the prejudice to Fortress, the Public Trustee argues that there is none, because it should be inferred that the YVE assets are sufficiently valuable to enable Fortress to recover in full from YVE without recourse to the OL charge. This inference should be drawn because Fortress has not led any evidence as to the present value of the YVE securities. However, the rule in Jones v Dunkel[123] is not to be used to fill a gap in the evidence, but only to draw more readily any inference fairly open from other evidence.[124] As discussed, there is evidence that the YVE assets were worth about $48 million in December 2006, and this was communicated to creditors, by the administrators in their s 439A report, as apparently intended to indicate that there was then a substantial value in the YVE securities. Whilst I infer that the YVE securities have a substantial value, the inference is not open that they are now worth so much that the Fortress charge does not matter.[125] The present application and Fortress’ participation overall in proposing the DOCAs demonstrate that Fortress apprehends that the YVE securities will not be sufficient to see it paid in full. Accordingly, I accept that there would be prejudice to Fortress were it not granted an extension of time. I am unable to find the extent of that prejudice.
[123](1959) 101 CLR 298.
[124](1959) 101 CLR 298 at 308, 312 and 320-1.
[125]The Fortress debt now being in the order of $62 million.
I turn now to the prejudice to creditors. Because I have concluded that the DOCA for OL should be terminated, even if the charge is or is to be made valid, it is necessary to consider the prejudice to creditors under a liquidation. Absent an extension of time, the charge, insofar as it would secure the YVE guarantee, would be void against the liquidators.[126]
[126]Section 266(3)(a).
Fortress argues that if no extension is granted, unsecured creditors will not benefit because to the extent that Fortress is required to return money or forgo benefits, any benefit will accrue to the ATO. That is said to be based upon evidence given by Mr Harwood.[127] There is no basis in that evidence, however, for the submission. Mr Harwood compared a liquidation and a valid Fortress charge with a liquidation and the charge being void. Under the former, he estimated $19.5 million for unsecured creditors. This was the amount which would come to them via Castle. Under that assessment Fortress and then the ATO would take an estimated OA Receivable (through the liquidation of OA) of $81.82 million, to which was added the OA trust monies. That assessment does not bring into account the prospect of recovery from subrogation to the YVE securities. Under his second scenario, a liquidation with the Fortress charge being void, the estimated surplus for unsecured creditors was about $43 million. This assumed the same OA Receivable and the recovery of the OA trust monies from Fortress, and the payment from the OA Receivable of the entire ATO debt. In that event creditors would not have the benefit of anything via Castle (unless Fortress was able to recover from the YVE securities at least $38.5 million). Accordingly, on Mr Harwood’s analysis, unsecured creditors would be much better off if the Fortress charge remains void, unless it is assumed that under the scenario where the charge is valid, the right to be subrogated to the YVE securities would be worth at least about $23 million. But Fortress has offered no evidence as to the value of the YVE securities.
[127]His affidavit sworn 6 May 2009.
If the charge is void against liquidators of OL, then could the amount of the
OA trust monies be recovered by them from Fortress (as Mr Harwood’s comparison assumes)? That payment by Fortress to OL would appear to be outside the ATO’s notice. Accordingly, unsecured creditors would have at least the benefit of those funds ($19.7 million) even if, for some reason, the balance of the OA Receivable would be exhausted by the ATO’s notice. Section 445H of the Act provides that the termination of a deed of company arrangement does not affect the previous operation of the deed. However, this payment was made before the deed was executed. It was not made pursuant to the deed for OL or for OA. Nor does the deed for OL refer to that payment as having been made. It may be accepted that the administrators and Fortress intended that the payment should be credited against the sums referred to in cl 4.1(b)(i) and (ii) of the deed for OL. The deed does not so provide however: according to its terms, it does not “operate” to give credit for that payment. As discussed earlier,[128] cl 1.1 the deed defines the term OA Receivable in a prospective sense. At the date of the deed, there was no amount held on trust on behalf of OL and the amounts payable by OA to OL did not include these funds which had been paid. In the same way, cl 4.1 is expressed prospectively, i.e. it refers to monies to be received by OL from OA and monies to be applied by the receivers. It does not refer to monies already received.[128]At [108].
Fortress argues that if its charge is invalid against a liquidator, it could not be required to repay the OA trust monies because of what it says would be the effect of s 451C which provides as follows:
“451CA payment made, transaction entered into, or any other act or thing done, in good faith, by, or with the consent of, the administrator of a company under administration:
(a)is valid and effectual for the purposes of this Act; and
(b)is not liable to be set aside in a winding up of the company.”
Assuming that the payment by OA, through its then administrators, of the OA trust monies was a payment by OL, it is far from clear that s 451C would preclude a liquidator of OL from recovering these funds where Fortress’ only claim to them would be under a charge which is void against the liquidator. In that context, the liquidator would not have to act to “set aside” the payments. The liquidator would not have to impugn the payment or transaction; rather OL would be seeking to recover property to which Fortress would have no entitlement which could prevail over the interest of OL. Further, s 451C would not appear to prevent a common law claim by OA, for money paid under a mistake. The payment by OA would not have to be “set aside in the winding up” of OA for that claim to be upheld. Section 451C does not affect a cause of action arising under the general law: Cresvale Far East Ltd (in liq) v Cresvale Securities Ltd[129] per Austin J, and on appeal sub nom Kirwin v Cresvale Far East Ltd (in liq)[130] per Giles JA. If OA recovered from Fortress, the funds for unsecured creditors would be increased, despite the ATO’s notice, because it would not exhaust the amount to come from OA to OL.
[129](2001) 37 ACSR 394 at 438, 439.
[130](2002) 44 ACSR 21 at 58-59.
In summary the voidness of the charge is likely to deny creditors the benefit of payments through Castle and recourse to the YVE securities. But it would result in the OA trust monies being available to them, together with the balance of the OA Receivable after payment to the ATO. Overall, the position would appear to be the unsurprising one that unsecured creditors would be better off if the charge were void. The onus is upon Fortress to establish that an order for extension should be made, and Fortress has not established an absence of prejudice to unsecured creditors from the order which it seeks.
I have concluded that the DOCA for each company should be terminated, whether or not the charge is void. Accordingly, it would not be beneficial to extend time so as to provide creditors with what they may have understood were the benefits of the OL deed.
I respectfully adopt the analysis of Allsop J in Hewlett Packard Australia Pty Ltd v GE Capital Finance Pty Ltd as to the principles to be applied in exercising the discretion under s 266(4). Referring to some of the cases in which it has been held that an extension should be granted in the case of a company in liquidation only in “exceptional circumstances” (of which Sanwa Australia Finance Ltd v Ground-Breakers Pty Ltd (in liq)[131] is one), Allsop J said that, properly understood, they do not engraft an impermissible limitation or implication onto s 266(4).[132] And the events of the appointment of administrators or the execution of a DOCA, whilst not creating statutory rights in creditors identical to those crystallised upon a winding up, require the discretion to be exercised in a way analogous to that under a winding up, if reconstruction is unlikely and “insolvency looms”.[133] Branson J said that the requirement for “exceptional circumstances” is for “circumstances sufficient to render it just and equitable to grant relief notwithstanding that the grant of relief will defeat rights of unsecured creditors.”[134] Her Honour said:
“If an application for an extension of time within which to lodge notice of a charge is made where one of the events referred to in s 266(1)(a), (b) or (ba) has occurred, the starting position is that the security is void. The fact that the legislature has provided for this starting position where one of the events referred to in s 266(1)(a), (b) or (ba) has occurred reflects, as it seems to me, recognition that each of those events requires a person external to the company to take control of the assets of the company. Those assets must be able to be identified by that person with certainty. However, since s 266(1) has no relevant operation in respect of solvent companies, the provision for voidness also reflects, as it seems to me, the critical interest of unsecured creditors in the assets of an insolvent or potentially insolvent company. Any grant of relief under s 266(4) will either immediately impact on the crystallised rights of unsecured creditors in those assets or impact on the administration of the company or of the deed of company arrangement in a way that is likely to be adverse to unsecured creditors. A determination that it is just and equitable to grant relief in such circumstances will require the identification of factors of sufficient significance to outweigh the adverse impact on unsecured creditors of the grant of relief.”[135]
Again, I respectfully agree.
[131][1991] 2 Qd R 456 at 466 per Kelly SPJ.
[132](2003) 135 FCR 206 at 265.
[133](2003) 135 FCR 206 at 267 applying what was said by Millett J in Re Barrow Borough Transport Ltd [1990] Ch 227 at 235-6.
[134](2003) 135 FCR 206 at 217.
[135](2003) 135 FCR 206 at 218.
In Hewlett Packard, the Full Court upheld an order extending time, notwithstanding the intervention of a voluntary administration, because of the important consideration there that the assets of the company “reflected, in significant part, the accommodation provided [by the chargee], which would not have been provided without security”.[136] Where that circumstance exists, it will undoubtedly be an important and sometimes critical consideration in assessing whether it is just and equitable to extend time. In Craig Mostyn & Co Pty Ltd v Old Valley Pty Ltd,[137] French J (as he then was) said that unsecured creditors would receive a windfall if an extension were not granted, because the company had received a substantial benefit from the loan made on the basis of the charge.
[136](2003) 135 FCR 206 at 269.
[137](2004) 139 FCR 477 at 491-2.
But that is not the present case. There was no further advance in return for the charge being varied to secure the YVE guarantee. All that was given was a forbearance for a period of days in relation to OL’s deemed default under the Castle facility. That facility was repaid in full in the following month. The repayment included the further advance of $50 million made in mid to late February. And as discussed above, only $20 million of that was used for working capital. Most was used for fees paid to Fortress and for the so-called investment by Castle under the Funded Participation Agreement. Whether that further advance of $50 million was beneficial overall for OL and the group, it has been repaid, and it is not demonstrated that the present financial position of OL is such that the unsecured creditors would receive a windfall if the extension is not granted.
Fortress submits that it is just and equitable to grant the extension simply because of its mistaken understanding of s 268. It is said that its view about s 268 was common amongst many of those practising in this field. That may or may not be so, because the evidence used to support this submission suggests that some may not have understood the reasoning in my judgment and the limited extent of its operation. Be that as it may, the fact that the “inadvertence” could be reasonably explained would not put paid to the importance of the considerations which I have discussed. It does not make it just and equitable that the unsecured creditors should lose the benefit of their present position.
In Sanwa Australia Finance Ltd v Ground-Breakers Pty Ltd(in liq), it was considered relevant that the chargee had “no reason to have any concern with the solvency” of the chargor when entering into the relevant transactions.[138] Again, that is not shown to be the case here.
[138][1991] 2 Qd R 456 at 566.
The witnesses from Fortress say that they were concerned about YVE’s performance and were looking for further security for that loan. If so, nevertheless the collapse of OL’s share price could hardly have been insignificant. The contemporaneous documents indicate their concern about the Octaviar group’s solvency.
The background to this was the series of necessary extensions of the Castle facility, which was originally a short term bridging loan, during the second half of 2007. When the share price collapsed on 18 January 2008, Fortress participated in a meeting between Octaviar’s Chief Executive, Mr King, analysts and investors. Mr Kwei reported to others within Fortress, in an email of 18 January, that at that meeting:
“Questions [to Mr King] about Fortress’ $150MM facility were also not answered clearly. Questions about methods of repayment, a level of refinance risk, and the details of the lender were glossed over. While our position is a matter of public record (via ASIC (SEC equivalent) information), many market participants were unaware of this and Fortress was not named today.”
On the following day, Mr Kwei emailed Mr Kelleher of Fortress, and wrote that:
“More detail on the following would be good:-
-the cash drain of MFS Pacific [another company in the group which was also a guarantor of the YVE facility]
That’s my main concern for any short-term solvency issues…”
On 21 January, Mr Kwei emailed Mr Kelleher as follows:
“…Next time you speak to Craig [White from OL], you need to confirm with him if they are going to run out of cash:
a)In early Dec, [OL] took $30MM in an HFA rights issue. They sold this yesterday for $15MM.
b)PIF redemptions are probably under significant strain. At Jun-07, FUM [funds under management] was $880MM, at Nov-07 it was $780MM and [OL] has provided a $50MM guarantee which can be called on for liquidity. PIF usually have a high cash holding, but not sure if they have had a strong run on redemptions.”
In that second paragraph Mr Kwei was referring to the likelihood that a demand would be made under the MFS Support Mechanism for the maximum amount of $50 million.
On 22 January, Mr Kwei emailed Mr Kelleher and another from Fortress as follows:
“[OL] share holdings. Share values halved from $180MM to $93MM. This includes $39MM in HFA shares not directly owned by [OL]…which we have security over.
At Nov there were approx $97MM in margin loans. How far do you want us to dig on this? Should we get David Anderson [of OL] to provide a complete update?”
Mr Kelleher’s reply to Mr Kwei, which is dated 22 January but may have been sent on the following day, was as follows:
“Yikes – doesn’t sound too compelling for any additional advances from us. Why did I think it was 52mm loans on 110mm shares??? Anyway would have produced the same result I guess.
I think we ask them for a specific cash flow/debt update. Let’s wait to see what happens tomorrow among the carnage, get everything signed that we need, then place the request…”
Mr Kwei replied to Mr Kelleher:
“When you speak to Craig [White]…check about the debt. All the papers say [OL] has $250MM debt, with $150MM due March and $100MM due in 2011. There was no charge against the company so it’s not secured at the parent level. I have assumed it is a mistake by the press. But I still don’t know how they paid us the $100MM in Nov.”
That last reference, of course, was to the payment to Fortress on 30 November 2007, which WIM alleges was made with misappropriated funds.
At this stage the document by which the YVE guarantee was to become secured by the Fortress charge had not been signed by OL. It was signed on 24 January. The contemporaneous documents also show that Fortress was pressing for it to be signed as a matter of urgency.
The argument of the Public Trustee relies upon documents evidencing the reaction within Fortress to the cash flow which was provided to it. However, as is submitted for Fortress, it appears that the cash flow was received on 24 January but after OL had signed the letter by which its YVE guarantee became secured.
From those emails, it is apparent that Fortress was concerned that the Octaviar group might “run out of cash”, and Mr Kelleher’s “yikes” email shows its concern about providing any additional advance. The position of the group, as it appeared to Fortress, made it difficult to see how Fortress had been repaid part of its loan in 2007. The Fortress strategy seems to have been to have OL sign the document to make the YVE guarantee secured as soon as possible, and then to consider what to do about the Castle facility with the benefit of information as to the group’s debt and cash flow. All of this, of course, was against the circumstance of what had happened to the listed shares in OL. So whilst originally Fortress might have been intending to make the YVE guarantee secured mainly because of YVE’s position, by the relevant time Fortress was apparently concerned about whether the group would have sufficient cash to pay its debts falling due in the short term, and Fortress was undecided about whether it would lend what was required. On the present evidence, it is far from demonstrated that Fortress had “no reason to have any concern with the solvency” of OL.
The Commissioner of Taxation submits that any order for an extension of time should be subject to a so-called Joplin[139] condition, i.e. that the extension be without prejudice to the rights acquired by the Commissioner upon giving the
s 260-5 notice. I would not be persuaded that this would be appropriate. When the notice was given, the Fortress charge had crystallised and the Commissioner’s rights were therefore subject to those of Fortress. The appointment of administrators and subsequently the execution of the DOCA have each in turn engaged s 266. But the interest which the Commissioner seeks to protect is not as an unsecured creditor under an administration, the DOCA or a liquidation. It is an interest which exists notwithstanding the occurrence of an event which has engaged or will engage s 266. The relevant prejudice is to creditors in the operation of the DOCA, or as I have now held, in a liquidation. Although s 266(3) describes the charge as “void as a security”, and does not use the words “as against the liquidator, the administrator of the company, or the deed’s administrator, as the case may be” which are used in s 266(1), it is clear that s 266(3) should be understood in the same way. Nor can the Commissioner claim that the ATO debt results from the failure by Fortress to lodge a notice of variation of the charge.[139]Re Joplin Brewery Company Ltd [1902] 1 Ch 79 at 81.
Conclusion on the Fortress application
Fortress has failed to prove that in the circumstance where there is at least a substantial chance that creditors would be worse off if the charge is valid, it is just and equitable that creditors should have their interests displaced by an order for extension. The application by Fortress will be dismissed.
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