Re: Wellington Premium Income Fund
Hello ..
Seamisty,
Can you try to explain the part that Fortress took in MFS?
And why the court re-classed Fortress as an unsecured creditor?
It is great to have this forum open again.
I regard myself as a lay, mug investor so don't take any of this as true and correct.
Can you try to explain the part that Fortress took in MFS?
Fortress is one creditors that lent money to the Octaviar thicket of companies. Including the likes of PIF investors, OCV shareholders, PTQ's note holders, OPI Pacific, NAB and Challenger.
It seems to me that Fortress was one of, if not the last, big bundles of cash OCV could get their hands on. After that, OCV had to resort to more desparate measures like raid PIF. Fortress were demanding their money back. Other probably too, including the ATO. Finally, instead of going into voluntary administration, King and Peacock went to the market and asked for another $550M to recapitalise, price crashed and ASX trade was permanently suspended on 23 Jan 08.
And why the court re-classed Fortress as an unsecured creditor?
Octaviar guaranteed (by an instrument dated 25 May 2007) a loan agreement (dated 31 May 2007) whereby Fortress lent money to Young Village Estates Pty Ltd (YVE). Octaviar/YVE DIDN't provide security to Fortress. Lets call this the OCV/YVE loan.
The next day (1 June 2007) Octaviar (through a subsidiary called Castle) entered into a "cash advance facility" agreement with Fortress for borrowing up to $250m. This time Octaviar/Castle provided security. Lets call this the OCV/Castle loan. The limit for the OCV/Castle loan was reduced from $250m to $100m some time in late 2007 and at least prior to 22 January 2008.
The OCV/Castle loan was repaid in full on or about 29 February 2008.
The OCV/Castle loan has an ambitious clause (clause 2.1) in it that, given the flap the decision has caused amongst lawyers, appears to be common in the industry. This clause allowed Fortress to get Octaviar to agree that the security from the OCV/Castle loan now applies to the OCV/YVE loan. Octaviar and Fortress agreed to this on 22 Jan 08 which was AFTER the share price plunged and a day before ASX halted trade. Lets call this the Post Crash Agreement.
McMurdo held that the Post Crash agreement was legit. But is voided for other reasons - a notice wasn't lodged.
Say you lend a $100M to a company knowing that it has 3 other unsecured creditors and one
secured creditor that have also each chipped in a $100M. If the company goes belly up, you know that the secured creditor is going to get all his $ back and you'd split the rest 4 ways with the other 3 unsecured creditors. Now say the secured creditor gets his $100M back but also agrees with the company that one of the other 3 unsecured $100M loans is now covered by the secured $100M loan agreement. There's now $100M less for you to share with the other 2 remaining unsecured creditors. This is pretty much well what happened with OCV.
As an unsecured creditor you'd think it only fair that you should at least be told that one of the other unsecured $100M parcels was now secured.
The Corporations Act requires that a notice of a "variation" that "has the effect of increasing the amount of debt or increasing the liabilities" be lodged within 45 days.
Fortress, with the behemoth Deloitte falling into line behind them, went to court believing that the 22Jan08 Post Crash Agreement couldn't be regarded as a variation because they didn't change a word of the OCV/Castle agreement and didn't increase the $ amount.
Sensibly, McMuordo rejected this legal mischief stating "That is unlikely to have been an intended consequence of the scheme of registration of charges prescribed by Chapter 2K." It's a pretty straight forward decision with McMurdo going back to first 'principles' in para [33] "whatever the form of the transaction, the owner of the property retains an equity of redemption to have the property restored to him when the liability has been discharged".
So for my example above, Fortress, Deloitte and cohorts believed that the creditor could have their $100K secured debt (i.e. 1/5th) stretched to cover the whole $200K in two $100K mouthfulls (i.e. 2/5ths) without having to file a notice.
McMurdo disagreed with Fortress, Deloitte and cohorts. Seeing that such a notice hadn't been lodged in time (not even 45 days after Deloitte took over let alone from the date it was signed) and that OCV is now in administration, the 22 January 2008 Post Crash Agreement is void and the OCV/YVE loan
remains unsecured.
So it looks like the court and legislators are doing their job. It's the lawyers and administrators that aren't doing their jobs very well. Deloitte sounds like they were tripping themselves up over the issue during the proceedings. See para [35] "The administrators’ argument appears to accept that this would represent an increase in the liabilities secured by the charge in the relevant sense, if it came from a variation in the terms of the charge."
Fortress were wrong. Deloitte were wrong. And the legal militia aren't happy because they have to advise their pay masters to repair the armaments at their masters expense, armaments that the militia were paid to design, build and maintain in the first place. IMLO