Re: Octaviar MFS Premium Income Fund PIF
This interesting reading is off the Allens Arthur Robinson website:::Focus: Mistakes and misdeeds: Setting aside the Octaviar DOCAs
1 September 2009
In brief: The Queensland Supreme Court recently set aside two deeds of company arrangement because they were not in the best interests of the company's creditors, and because misleading and incomplete information had been provided to the creditors at the time they voted on whether to approve the two deeds. Senior Associate Christopher Prestwich and Lawyer Ruth Greenwood report.
Background
The OA DOCA: Contrary to the creditors' interests?
Grounds for setting aside the OL DOCA
What you should be doing in light of the decision
How does it affect you?
When administrators are appointed to a company, a deed of company arrangement (DOCA) is one possible outcome that the creditors can agree to instead of a liquidation. DOCAs are straightforward to implement and are flexible in terms of the outcomes for which they can provide. Creditors would typically vote for a DOCA if it offers a better return than a winding up.
This case illustrates the broad powers that the court has to set aside a DOCA, even against the wishes of a majority of creditors. It also demonstrates that if the proponent of a DOCA wishes to limit the chances of it being set aside, it must ensure that the DOCA offers a better outcome for creditors than a liquidation. Administrators must also take care to ensure that creditors are provided with a proper analysis of the likely outcome of the DOCA as compared with a liquidation, and provide complete and correct information about matters which creditors should take into account when deciding whether or not to vote in favour of a DOCA as opposed to a liquidation.
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Background
Administrators were appointed to Octaviar Ltd (OL) and Octaviar Administration Pty Ltd (OA) in September 2008. A DOCA was proposed for each of those companies by a secured creditor of OL, Fortress Credit Corporation (Australia) II Pty Ltd (Fortress), which was a secured creditor by way of the operation of a charge over OL (the Fortress security). Fortress contended that each DOCA offered a better outcome for creditors than under a liquidation.
The administrators recommended that creditors vote in favour of the OL DOCA, but that they reject the OA DOCA and put OA into liquidation instead. At the second creditors' meeting, the required majority of creditors of both OL and OA voted in favour of the DOCAs which had been proposed by Fortress.
One of the creditors of OL, the Public Trustee of Queensland (the Public Trustee), subsequently brought an application seeking to have both of the DOCAs terminated under section 445D of the Corporations Act 2001 (Cth) (the Act). The Public Trustee contended that the DOCAs should be set aside because a liquidation would be in the best interests of creditors, would avoid unfairness to some creditors under the DOCAs and would be in the public interest generally.1
Earlier this year, the Supreme Court of Queensland held that the Fortress security was invalid but that decision has been appealed.
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The OA DOCA: Contrary to the creditors' interests?
Justice McMurdo held that the OA DOCA provided no benefit to the creditors of OA; rather, it was intended to 'facilitate' the OL DOCA. As such, its effect was very similar to a liquidation, save that certain claims which would be available to a liquidator would not be available in a DOCA.
The administrators had concluded that creditors should not vote in favour of the DOCA because it did not offer a better outcome than a liquidation. Even though the creditors had voted for the DOCA, Justice McMurdo held that the OA DOCA should be set aside under s445D(1)(f) of the Act on the ground that it was 'contrary to the interests of the creditors of the company as a whole'. Alternatively, Justice McMurdo held that even if the DOCA did 'facilitate' the OL DOCA and thus offer some benefit to creditors of OA who were also creditors of OL, then it should still be set aside – on the ground that it was unfairly prejudicial to those creditors of OA who were not also creditors of OL.
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Grounds for setting aside the OL DOCA
Contrary to the interests of creditors as a whole
The OL DOCA was premised on the validity of the Fortress security and provided for Fortress to receive more than it would receive if it were an unsecured creditor. Justice McMurdo found that the OL DOCA would subvert the usual operation of the law to the detriment of the creditors, and should be set aside as being contrary to creditors' interests. Given that the court's earlier decision to invalidate the Fortress security was on appeal, his Honour went on to consider the position of the OL DOCA even if the Fortress security was valid.
The main asset of OL was a distribution it expected to receive from OA. The administrators argued that the effect of the OL DOCA was that it would defeat a garnishee notice lodged by the Australian Tax Office (the ATO) against OA. The ATO garnishee notice had been issued to OA in the ATO's capacity as a creditor of OL. If the garnishee notice could be trumped, then the return to ordinary unsecured creditors would be improved.
Justice McMurdo concluded that the administrators' interpretation of the way the OL DOCA would operate was incorrect. In a liquidation, there would be a range of possible recoveries that a liquidator might make. Those claims would not be available under a DOCA and, accordingly, the OL DOCA would not put creditors in a better position than would a liquidation. The OL DOCA was set aside on that basis.
Misleading information and omission of information
Justice McMurdo found that there were a number of instances of misleading information that had been provided to creditors and omissions of material information that constituted grounds for the OL DOCA to be set aside. By way of example, creditors were not sufficiently informed of:
the possibility that the ATO's claim would rank ahead of creditors' claims;
an explanation of the terms of the proposed OL DOCA;
the entitlements of Fortress, the ATO and another company in the Octaviar group;
the potential recoveries under a loan facility that had been guaranteed by OL; and
whether the date of OL's insolvency was earlier than the date identified by the administrators, such that additional claims would be available to a liquidator.
Justice McMurdo found that each of these misleading statements or omissions meant that the creditors were not able to compare the outcome of the OL DOCA with a winding up.
Although a majority of creditors voted for the OL DOCA and a number of creditors still supported it at the hearing of the Public Trustee's application, Justice McMurdo held that this was of 'little significance' and that the grounds for setting aside the DOCA had been made out.
Justice McMurdo noted that regardless of whether the Fortress security is upheld as void on appeal, the misleading comparisons and the prejudicial effect of the OL DOCA mean that it should be terminated under s445D of the Act.
Public interest in the affairs of the Octaviar group being examined by a liquidator
The Public Trustee argued that there was a public interest in the affairs of the Octaviar group being examined by a liquidator. In particular, it argued that there were a substantial number of potentially voidable transactions that should be investigated by a liquidator.
Although Justice McMurdo found that the terms of the OL DOCA were not, on their face, offensive to commercial reality or, more broadly, to public policy, he noted that there is a public interest in the size of the corporate collapse and the fact that it has had an impact on many institutions and individual investors. His Honour commented that the public interest in a financial inquiry needed to be balanced against the unfairness to the creditors.
Ultimately, Justice McMurdo found that, on balance, s445D(1)(g) did provide another ground for termination of the OL DOCA because the size of the potential recoveries that may result from a liquidator's inquiry may be substantial and the liquidator's inquiries 'would lead to at least some of the persons responsible for some of the group's demise being brought to account'.
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What you should be doing in light of the decision
This decision highlights the fact that the court has broad-ranging powers to set aside a DOCA even against the wishes of a majority of creditors.
Proponents of a DOCA must ensure that it offers a better outcome to creditors than a liquidation – otherwise it is liable to be set aside. Proponents must also ensure that the DOCA is not unfairly prejudicial to a sub-class of creditors.
Administrators must exercise great care in preparing s439A reports to creditors and in determining whether to recommend a DOCA to creditors. Incorrect information in that report or the omission of material information are also grounds on which a court might subsequently set aside a DOCA.
Footnotes
Re Octaviar Ltd (No.8) [2009] QSC 202.
Published 1 September 2009