In the matter of Octaviar Administration Pty Ltd (in liq)

1. [1]

   By Amended Interlocutory Process filed on 26 September 2017, the Plaintiffs, Mr William Fletcher and Ms Katherine Barnet, in their capacities as liquidators of Octaviar Limited (in liq) (“OL”) and as liquidators of Octaviar Administration Pty Ltd (in liq) (“OA”) seek directions under s 479(3) and/or s 511 of the Corporations Act 2001 (Cth) and in the Court’s inherent jurisdiction. Those directions are to the effect that Mr Fletcher and Ms Barnet, in their capacity as liquidators of OL (“GPLs”) are justified in entering into and performing their obligations under a deed described as the “OCV Settlement Sum Resolution Deed” (in an amended form) (“Resolution Deed”) and causing OL to enter into and perform its obligations under that deed; and that Mr Fletcher and Ms Barnet as liquidators of OA (“OA Liquidators”) are also justified in entering into and performing their obligations under the Resolution Deed and causing OA to enter into and perform its obligations under that deed. They also seek orders that the costs of the application be costs in the liquidation of each of OL and OA. By an Interlocutory Process filed on 10 August 2017, Mr David Kerr, as Special Purpose Liquidator of OL (“SPL”), seeks a corresponding direction under s 479(3) of the Corporations Act that he is justified in entering into and performing his obligations under the Resolution Deed and causing OL to enter into and perform its obligations under the deed and an order that the costs of the application be costs in the liquidation of OL.

2. [2]

   The two applications relate to the entry into the Resolution Deed by the OA Liquidators, representing the interests of OA, and the SPL, representing the interests of OL, and involve the question whether the respective liquidators were justified in reaching the compromise reflected in that deed. That question requires an assessment of the respective positions taken by the liquidators in relation to the issues resolved by the Resolution Deed and the reasonableness of the compromise reached between them.

3. [3]

   It will be convenient, first, to refer to the applicable legal principles in respect of a direction of this kind; second, to identify the background to the application, which is common to both liquidators; and third, to refer to the nature of the proposed compromise between the liquidators under the Resolution Deed and to the wider matters which support the entry into that deed.

The applicable legal principles

1. [4]

   This application is brought, in respect of OL, under s 479(3) of the Corporations Act so far as the winding up of OL was a winding up by the Court, and in respect of OA under s 511 of the Corporations Act so far as the winding up of OA was a creditors’ voluntary winding up. Subsection 479(3) provides that, in the case of a court-ordered winding up, a liquidator may apply to the Court for directions in relation to any particular matter arising under the winding up. Section 511 of the Corporations Act relevantly provides that, in a voluntary winding up, the Court may exercise all or any of the powers that it may exercise if the company were being wound up by the Court and, if satisfied that the determination of a question will be just and beneficial, may make such order on the application as it thinks just.

2. [5]

   Those sections were repealed by the Insolvency Law Reform Act 2016 (Cth). However, Mr Aspinall, who appears for the OA Liquidators and the GPLs of OL, and Mr Oakes who appears with Mr Wilkins for the SPL, both point out that these sections continue to apply where proceedings were brought under them before the commencement day of the new provisions introduced by the Insolvency Law Reform Act, namely 1 September 2017, by reason of s 1617 of the Corporations Act. That section is applicable in this case; see also Re Mackie Group Pty Ltd (in liq) (in its capacity as trustee of the Jupelina Unit Trust [2017] VSC 477 at [8]–[9]. So far as the OA Liquidators amended their application to rely on s 511 after 1 September 2017, I am satisfied that that course was also available by reason of the transitional provision in s 1617, where the proceedings and this interlocutory application were brought under the former Act in relation to the external administration (as defined) of OA and OL before the commencement day. If I am wrong in those views, then the directions which are sought could in any event be given under s 90-15 of the Insolvency Practice Schedule (Corporations), introduced by Schedule 2 of the Insolvency Law Reform Act, although the Resolution Deed refers to the former sections and not that section.

3. [6]

   Mr Oakes refers to the observation of Young J (as his Honour then was) in Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115 at 117 that the Court may give a direction to a liquidator, inter alia, in respect of “questions involving legal procedure (eg, whether a liquidator should settle curial proceedings, and if so, on what terms)”. Mr Oakes also submits, and I accept, that the Court may give a direction in connection with a proposed compromise, at least where there is an element of potential controversy or acrimony in respect of that compromise: Re One.Tel Ltd [2014] NSWSC 457; (2014) 99 ACSR 247 at [35]; Re Great Southern Managers Australia Ltd (in liq); Ex parte Jones, Weaver and Stewart [2014] WASC 312 at [61]; Re Octaviar Administration Pty Ltd (in liq) [2015] NSWSC 516; (2015) 107 ACSR 1 at [13]. Mr Oakes also submits, and I accept, that the history of the present proceedings indicates at least the prospect of controversy in respect of a settlement of this kind, although it must also be recognised that the notifications of this application to members of a committee of inspection and substantial creditors have not, to date, identified any opposition to the application.

4. [7]

   I summarised the scope of the Court’s power to give directions under s 479(3) of the Corporations Act in Re MF Global Australia Ltd (in liq) [2012] NSWSC 994; (2012) 267 FLR 27 at [7] as follows:

5. [8]

   I also referred to the scope of the Court’s powers under s 511 of the Corporations Act in that decision and observed (at [8]) that:

6. [9]

   I also recognise that the Court’s powers to give judicial advice and give directions under these sections are intended to facilitate the performance of a liquidator’s functions and should be interpreted widely to give effect to that intention, and the Court may give such advice or give such a direction where it is advantageous to the liquidation to do so: Dean-Willcocks v Soluble Solution Hydroponics Pty Ltd (1997) 42 NSWLR 209 at 212; Handberg v MIG Property Services Pty Ltd [2010] VSC 336; (2010) 79 ACSR 373 at [7]; Re One.Tel Networks Holdings Pty Ltd [2001] NSWSC 1065; (2001) 40 ACSR 83; Re One.Tel Ltd [2014] NSWSC 457; (2014) 99 ACSR 247 at [32]; Re Octaviar Ltd (in liq) and Octaviar Administration Pty Ltd (in liq) [2017] NSWSC 1005. The directions sought in this case do not involve either the GPLs or the SPL seeking a direction as to the making of implementing of a business or commercial decision, which the Court will generally be reluctant to give.

7. [10]

   I am satisfied that this application involves questions of law and of the reasonableness of the GPLs’ and SPL’s conduct which warrant the giving of directions by the Court. The proposed entry into the Resolution Deed has a substantial element of compromise about it, as to which it will often be appropriate for the Court to give directions: Re One.Tel Ltd above per Brereton J at [35]. I also proceed on the basis that, as Brereton J noted in Re One.Tel Ltd above at [36], and I also noted in Re Octaviar Ltd (in liq) and Octaviar Administration Pty Ltd (in liq) above, the Court’s function in giving such a direction does not require it to reconsider all of the factors that the GPLs on the one hand and the SPL on the other have considered, but that:

Factual background and affidavit evidence

1. [11]

   By way of background, on 6 April 2010, the GPLs of OL commenced proceedings (“Fortress proceeding”) against Fortress Credit Corporation (Australia) (II) Pty Ltd (“Fortress”) in the Supreme Court of Queensland in respect of allegedly voidable transactions. The SPL was appointed as special purpose liquidator of OL in December 2011, when it was recognised that OA may also have claims against Fortress that could potentially be inconsistent with OL’s claims against Fortress. The proceedings brought by OA and OL and their respective liquidators against Fortress were to be heard together, with the evidence in one to be evidence in the other, and were set down to commence on 4 May 2015.

2. [12]

   The GPLs, the SPL, OA and OL entered into a Funding Deed (“Funding Deed”) in May 2012 in relation to the funding of the Fortress proceeding. By the Funding Deed, OA agreed to provide funding to the SPLs, on specified terms, to pursue proceedings brought by OL and its liquidators against Fortress. That Funding Deed is relatively complex and there is a potential contest, which I will address below, as to the application of several of its provisions between OA and the OA Liquidators on the one hand and OL and the SPL on the other, in the events that have occurred, that would be resolved by the Resolution Deed.

3. [13]

   Clause 6.1 of the Funding Deed relevantly provided that:

4. [14]

   Clause 7.1 of the Funding Deed relevantly dealt with reimbursement in the event of an “OCV Judgment” and provided that, subject to cl 9 of the Funding Deed (which dealt with payment issues):

5. [15]

   Clause 7.2 of the Funding Deed in turn dealt with the position in respect of joint judgments and provided that, subject to cll 7.3 and 9, in the event of an OCV Judgment (as defined), where there was also an OA Judgment (as defined) OL agreed to pay OA specified amounts, being X% of, inter alia, “OCV’s Legal Costs and Disbursements (as defined)” and of other specified amounts. That clause in turn provided that:

6. [16]

   Clause 7.3 of the Funding Deed in turn provided that, for the purposes of cl 7.2 and calculating X%, an “OCV Charge Judgment” would be treated as equivalent in value to 25% of the total value of the OCV Judgment Sum and the OA Judgment Sum. The term “OCV Charge Judgment” was in turn defined as an order for the relief claimed in paragraphs 1 or 2 of the Amended Statement of Claim.

7. [17]

   Clause 8.3 of the Funding Deed in turn provided that a settlement of the OCV Claim (defined as the relief claimed in the Amended Statement of Claim) or the OA Claim is to be treated as an OCV Judgment or OA Judgment respectively and the sum received by OL or the OL Liquidators or OA and the OA Liquidators are respectively treated as the OCV Judgment Sum and the OA Judgment Sum, as defined.

8. [18]

   Clause 10.3 provided for termination for breach of the Funding Deed if, relevantly, the OA Liquidators, OA or both is or are in material breach of any obligation under the Funding Deed or had repudiated the Funding Deed, subject to notice and failure to remedy the relevant breach. Clause 10.4(a)(iv) of the Funding Deed relevantly provided that:

9. [19]

   Several subsequent applications and appeals were brought in the Federal Court of Australia and this Court in respect of the OA Liquidators’ attempt to obtain Court approval for the Funding Deed. In the last of those appeals, by its judgment in Fortress Credit Corporation (Australia) II Pty Ltd v Fletcher [2015] NSWCA 85; (2015) 89 NSWLR 110; 105 ACSR 581, the Court of Appeal set aside orders that had previously been made at first instance approving the OA Liquidators’ entry into the Funding Deed under s 477(2B) of the Corporations Act, on the basis that the primary judge had not sufficiently analysed the question whether the entry into the Funding D was necessary for winding up the affairs of OA and distributing its property under s 477(2)(m) of the Corporations Act, and remitted that question for further hearing at first instance.

10. [20]

    After the Court of Appeal delivered its judgment on 8 April 2015, the OA Liquidators informed the SPL that they did not consider themselves to be in a position to cause OA to make further advances to the SPL under the Funding Deed, but provided a further $1.5 million to the SPL. That amount was not sufficient for the SPL to fund the continued conduct of the Fortress proceeding or his exposure to adverse costs orders in the proceedings.

11. [21]

    The Fortress proceeding was then settled in about April 2015. By the terms of settlement between the SPL and Fortress, Fortress agreed to pay OL the amount of $12.35 million; agreed that its charge over the assets and undertaking of OL did not secure payment of OL’s liability to Fortress under a guarantee of the liability of another entity; and agreed that the parties to the proceedings would bear their own costs. The settlement also provided that OA would pay certain amounts to Fortress, which would assign to OA the debt due to Fortress from OL and the security that Fortress held for that debt. By his judgment delivered on 30 April 2015 ([2015] NSWSC 516; (2015) 107 ACSR 1), Stevenson J made a direction under s 479(3) of the Corporations Act that the SPL was justified in settling the Fortress proceeding on those terms.

12. [22]

    By a further judgment delivered on 3 November 2015 ([2015] NSWSC 1621; (2015) 110 ACSR 72), Brereton J made orders that the SPL would be justified in terminating or purporting to terminate the Funding Deed and taking certain other steps. In paragraph 26 of that judgment, Brereton J observed that:

13. [23]

    The SPL terminated, or purported to terminate, the Funding Deed on 4 November 2015 (Kerr 25.10.16 [8(a)]; Ex SPL-2, tab 1, p 14). By letter dated 19 November 2015, the OA Liquidators did not accept that termination and denied that OL had any claim for damages in respect of its settlement of the Fortress proceeding consequent upon any breach by OA of the Funding Deed (Kerr 25.10.16 [8(b)(ii)]; Ex SPL-2, tab 1, p 14).

14. [24]

    By a further judgment delivered on 2 February 2016 ([2016] NSWSC 16), Brereton J determined that he should not give directions under s 479(3) of the Corporations Act that had the effect of retrospectively ratifying steps previously taken by the OA Liquidators, and held that the OA Liquidators would be justified in proceeding on the basis that they had validly entered into the Funding Deed and that deed was valid, effective and binding on OA, notwithstanding the Court of Appeal’s judgments and that OA was entitled to receive payments under cll 7.2–7.3 and 7.5 of the Funding Deed. The OA Liquidators have expressly proceeded in this application on that basis, although they propose to compromise several issues as between OA and OL in determining the amount payable under the Resolution Deed.

15. [25]

    Between November 2015 and July 2016, the OA Liquidators and the SPL sought to resolve several claims that OA and OL had against each other, the resolution of which was ultimately documented by the Resolution Deed. Recital E of the Resolution Deed records that:

16. [26]

    Clause 3 of the Resolution Deed in turn requires OL to pay OA a specified amount within a specified period after satisfaction of the conditions precedent contained in cl 2, which include, relevantly, the SPL, the GPLs of OL and the OA Liquidators obtaining the direction sought in these proceedings, unless the SPL, the GPLs of OL or the OA Liquidators waive that condition so far as it applied to them. Clause 4 in turn provides mutual releases as between OA and OL, although a provision releasing the liquidators from personal liability was not pressed in the amended Resolution Deed.

17. [27]

    The OA Liquidators rely on several affidavits, primarily of Mr Fletcher, who is one of the OA Liquidators. Mr Fletcher’s first affidavit dated 30 June 2017 refers to the history of the Fortress proceeding; the subsequent appointment of the SPL as special purpose liquidator of OL when, as I noted above, it was recognised that OA may also have claims against Fortress that could possibly be inconsistent with OL’s claims against Fortress; the entry into the Funding Deed in May 2012; the settlement of the Fortress proceeding in April 2015; the directions that were previously made by this Court in respect of aspects of the position taken by the liquidators in respect of the Funding Deed; and the communications between the OA Liquidators and the SPL which have led to the resolution documented by the Resolution Deed.

18. [28]

    By a second affidavit dated 20 September 2017, Mr Fletcher expressed his view that it was in OA’s interests to enter into the Resolution Deed as:

19. [29]

    By a third affidavit dated 25 September 2017, Mr Fletcher clarified that the GPLs had not sought approval from a committee of inspection of OL to enter into the Resolution Deed, on the basis that any such approval would be obtained by the SPL of OL. The SPL has in fact not sought such approval. The SPL in turn submits that there is no utility in his approaching OL’s committee of inspection for guidance about whether it is appropriate for him to enter into the Resolution Deed, given commonality of creditors between OL and OA and a suggested possibility of conflict of interest as a result, although members of OL’s committee of inspection have been notified of this application.

20. [30]

    By a further affidavit dated 18 October 2017, Mr Fletcher referred to an amendment to the Resolution Deed that was made following questions raised on the first day of the hearing of this matter, to remove releases in favour of the liquidators’ personally that had been included in an earlier proposed Resolution Deed. Mr Fletcher’s evidence was also that, on 17 October 2017, the committee of inspection of OA approved the OA Liquidators’ and OA entering into the amended Resolution Deed.

21. [31]

    The OA Liquidators also relied on an affidavit of Mr John Whittle, an Associate Director with their firm, dated 17 October 2017. Mr Whittle referred to notification of this application given to OA’s creditors. The creditors to which notification was given together had claims against OA in excess of $1 billion, which amounted to 99% of admitted unsecured claims, although further claims of nearly $570 million have been made in OA’s liquidation that are yet to be adjudicated, including a claim by OL in an amount exceeding $514 million. Mr Whittle also referred to correspondence with major OA creditors in respect of that notification. Mr Whittle’s affidavit also listed creditors with smaller claims, to which notification of the application had not been given, which represent a small proportion of the claims in the liquidation.

22. [32]

    By a further affidavit dated 19 October 2017, Mr Whittle referred to a position previously asserted by the SPL in the course of negotiations toward the Resolution Deed, that OA had obtained a “Judgment Sum” (as defined in the Funding Deed) by the assignment of a charge from Fortress which had a face value of $7,900,000 in its settlement with Fortress. Mr Whittle’s evidence was that he considered the assignment of the Fortress charge to OA had benefit, so far as the Funding Deed contemplated that costs would be apportioned between the parties according to the benefits obtained under the settlements; and he also noted that the Fortress charge had real value so far as it could attach to funds held in two other companies in liquidation or could provide a reduction in the dividend payable by OA to OL in respect of OL’s proof of debt in OA’s liquidation. Mr Whittle also noted that the OA Liquidators had allowed value to this matter in negotiating the Resolution Deed, as part of a series of compromises by which OA also obtained concessions from the SPL in achieving the overall settlement reflected in the Resolution Deed. Mr Whittle also referred to two associated entities, Octaviar Finance Pty Ltd and Octaviar Lit Pty Ltd, to which notice of this application had not been given, for the good reason that they had been deregistered and were no longer legal entities.

23. [33]

    The OA Liquidators also rely on Mr Whittle’s further affidavit dated 27 October 2017, which sets out his involvement in negotiations with the SPL as to OA’s claim under the Funding Deed. Mr Whittle refers to the basis on which he recommended to the OA Liquidators that they accept the SPL’s submission that the Funding Deed, notwithstanding its strict terms, contemplated that costs be apportioned equitably based on the respective benefits obtained by OL and OA on a settlement. Mr Whittle refers to the basis on which he formed the view, which seems to me to have been reasonable, that a dispute as to issues of contractual interpretation as to that matter would have been lengthy and costly, and would not have been to the benefit of OA’s creditors. Mr Whittle also refers to the basis on which he approached the issue, which he considered to be connected, whether cl 7.3 of the Funding Deed should apply, and to his assessment that the meaning and operation of that clause were not clear in the relevant circumstances, and that there was benefit to OA in not pressing a claim under that clause, where that would promote an overall agreement with the SPL on the apportionment of costs between OL and OA. Mr Whittle also outlined the basis on which he recommended that the OA Liquidators agree a value of the OA Judgment which reflected the SPL’s position, both because the difference in positions was not significant, and because that was one of the compromises that were of value to OA in achieving a final settlement. Mr Whittle also set out his reasoning in respect of the issue whether the costs paid by OA in relation to approval applications under s 477(2B) of the Corporations Act and appeals, in respect of the litigation funding agreement between OA and OL, were reasonable and whether OA should agree to apportionment of those costs between OA and OL; whether all of the “common costs” claimed by OA under the Funding Deed, including costs in respect of expert reports on solvency, were reasonable and claimable against OL; and whether a compromise should be made in respect of OL’s suggested claim for damages in respect of the Funding Deed.

24. [34]

    Mr Whittle’s evidence was, in summary, that:

25. [35]

    By his further affidavit dated 27 October 2017, Mr Fletcher refers to Mr Whittle’s affidavits of 17, 19 and 27 October 2017 and to information provided to him by Mr Whittle that informed the strategy for the OA Liquidators’ negotiations with the SPL. Mr Fletcher confirms his belief that the proposed settlement with the SPL was fair and reasonable and that he agreed to enter into the Resolution Deed on that basis.

26. [36]

    The SPL, Mr Kerr, relied on his affidavit dated 29 April 2015, which was read in his previous application for a direction under s 479 of the Corporations Act that he was justified in settling the proceedings brought by OL against Fortress on specified terms. Mr Kerr there referred to the background to and failure of the Octaviar Group, the claims made and steps taken in the proceedings brought by OL against Fortress, his assessment of the prospects of those proceedings and the proceedings also brought by OA against Fortress. Mr Kerr noted the overlap in the two proceedings, such that, if OA was successful against Fortress in respect of a claim for proceeds from a challenged transaction, then OL would not succeed because Fortress would not be obliged to disgorge the same money twice. Mr Kerr also referred to the scale of the OL proceedings, including the volume of documents involved, and noted the complexities in the proof of OL’s insolvency in those proceedings, which depended upon detailed expert reports and the proof of several future liabilities, to establish that OL would not be able to meet its immediate future liabilities. Mr Kerr also set out the circumstances surrounding the entry into the Funding Deed and to the several applications and appeals relating to the approval of that deed and to attempts that he had made, without success, to secure alternative funding to that provided by OA. Mr Kerr’s affidavit also referred to the negotiations with Fortress that led to the settlement with Fortress and to Mr Kerr’s assessment of the merits of the settlement. The SPL also tendered, as a Confidential Exhibit to that affidavit, several opinions of Counsel that the SPL and OL had obtained in respect of the Fortress proceeding.

27. [37]

    The SPL also relies on his further affidavit dated 12 August 2015, filed in support of a further application for directions under s 479 of the Corporations Act in respect of, inter alia, how he should distribute funds which he held as SPL of OL and whether he would be justified in terminating the Funding Deed between OL and OA. The SPL relied on Mr Kerr’s further affidavit dated 11 December 2015 which referred to correspondence between the SPL and the GPLs after the date of Brereton J’s judgment delivered on 3 November 2015 ([2015] NSWSC 1621) to which I referred above.

28. [38]

    The SPL also relied on his further affidavit dated 25 October 2016, sworn in support of this application, which referred to the agreement reached between the SPL and the OA Liquidators in respect of the balance of the settlement fund and documented in the Resolution Deed. That affidavit summarised the communications that had led to that agreement and set out the SPL’s reasons for believing that the Resolution Deed represented a fair distribution of the settlement amount, as follows:

29. [39]

    By a further affidavit dated 26 September 2017, Mr Kerr dealt with notification of this application to creditors on the committee of inspection of OL, which overlap with the creditors represented on the committee of inspection of OA, other than the Australian Taxation Office which is not on OA’s committee of inspection and the Public Trustee of Queensland and Asset Resolution Limited which are not on OL’s committee of inspection but remain on OA’s committee of inspection. The SPL also relied on an affidavit of his solicitor, Mr Shaw, dated 25 September 2017 which identified the extent of objections in the OL proceedings as to the admissibility of OL’s expert insolvency evidence, and observed that those proceedings were settled without those objections being determined. Mr Kerr also relied on his eighth affidavit dated 18 October 2017 which referred to the debts claimed by the several major creditors of OL represented on the committee of inspection, the debts claimed by two former members of OL’s committee of inspection, the Public Trustee of Queensland and Asset Resolution Limited, and to further correspondence with those major creditors as to the hearing of this application. That affidavit also referred to the agreement reached between the SPL and the OA Liquidators that the releases contained in cl 4 of the Resolution Deed should be amended to remove releases of claims against the liquidators personally.

30. [40]

    By his ninth affidavit dated 26 October 2017, Mr Kerr explained his approach and reasoning in agreeing with the OA Liquidators to settlement on the terms provided by the Resolution Deed. Mr Kerr elaborated on the issues which arose in respect of expert insolvency evidence prepared in OL’s claim, and his concern as to aspects of that evidence, and as to issues as to the possible inadmissibility of that evidence. Mr Kerr also expanded on the possible basis for a claim for damages against OA in respect of the discontinuance of funding of the proceedings brought by OL, after the Court of Appeal delivered its decision, and shortly before the scheduled trial of the proceedings brought against Fortress. Mr Kerr in turn indicated that he approached negotiations with the OA Liquidators on the basis that there were two possible extreme results, one of which would require OL to pay substantial amounts to OA, amounting to the whole of the amount received by OL under its settlement with Fortress, and the other of which would allow OL to retain the entirety of that settlement. Mr Kerr indicated that, sensibly enough, he approached the negotiations on the basis that OL could seek compensation, by way of reduction on OA’s entitlements under the Funding Deed, to reflect the issues identified by OL, and particularly the concerns as to the form of the insolvency evidence prepared in the Fortress proceeding and the discontinuance of funding to OL. Mr Kerr noted that he took legal advice as to an acceptable settlement to OL in respect of the claims between the parties, and that the settlement proposed by the OA Liquidators was within the range of the advice that he had received and one that he considered would be commercially justified to avoid further litigation between the two estates which would dilute the funds available to creditors of the two estates, particularly in respect of common creditors to those estates. Mr Kerr also refers to the analysis which he undertook to confirm the adequacy of the proposed settlement.

31. [41]

    I also directed the OA Liquidators and the SPL to prepare a table indicating their respective positions in respect of the issues addressed by the Resolution Deed and the nature of the compromise they had reached as to that issue. The OA Liquidators complied with that direction. The SPL’s solicitors advised that:

32. [42]

    The SPL also addressed his approach to settlement in his ninth affidavit to which I referred above. That approach differed, to some extent, from that of the OA Liquidators, so far as he took issue with particular aspects of the OA Liquidators’ claim in negotiations with the OA Liquidators, but his assessment of the proposed settlement was largely based on an assessment of the overall outcome rather than on an issue by issue basis. There seems to me to be nothing unreasonable in that approach.

The nature of the proposed compromise

1. [43]

   The first issue addressed by the compromise reflected in the Resolution Deed was the proportion of the claimed amount that should be recovered by OA pursuant to cll 7.1 or 7.2 of the Funding Deed, to which I have referred above. The OA Liquidators advanced the position that OA could potentially recover all of the funding provided by OA under cl 7.1 of the Funding Deed, depending on whether there was an “OA Judgment” for the purposes of that Deed; that the value of the “OA Judgment Sum” (as defined) could be nil or $5.55 million (if the amount paid by OA to Fortress was deducted) or $7.9 million, reflecting the potential “value” to OA of the assignment of the Fortress charge to OA. The OA Liquidators also contended that cl 7.3 should be disregarded despite there being an “OCV Charge Judgment” (as defined). The SPLs took the position (as least as understood by the OA Liquidators) that cl 7.2 applied and the OA Judgment Sum was $7.9 million and did not take a position as to cl 7.3 of the Funding Deed.

2. [44]

   It seems to me that the issues in respect of the application of cll 7.1–7.3 of the Funding Deed were plainly open to argument. As Mr Aspinall points out, it was arguable that there was no “OA Judgment” because the settlement achieved by OA with Fortress did not bring about the relief claimed in paragraphs 1–8 of the OA Claim and that cl 7.1 applied so far as only OL had achieved a settlement of that kind. On that basis, OA would be entitled to full reimbursement of specified amounts under that clause. However, Mr Aspinall rightly recognises the availability of an alternative argument that the definition of “OA Judgment”, combined with cl 8.3 of the Funding Deed, meant that a recovery of something of value from Fortress, including the assignment of the relevant debts, gave rise to an “OA Judgment”. It does not seem to me to be necessary to determine which argument is correct, where both were arguable and the costs of determination of that issue in contested proceedings, combined with the determination of other contested issues, would be to the disadvantage of the common creditors of OL and OA, which would in effect fund both sides of the argument, but also any creditors of only one of the companies so far as amounts otherwise available for distribution to them would be dissipated in litigation without any clear prospect that either company was more likely than the other to benefit from the outcome.

3. [45]

   The next issue which Mr Aspinall identifies is the possibility that “X%” under cl 7.2 might be zero, on the basis that OA received no amounts referable to the claims made in paragraphs 1–8 of the OA Claim; or an intermediate amount, reflecting the value of the debts assigned by Fortress to OA less the amount paid by OA to Fortress; or, a higher percentage, reflecting the amount of the debt assigned by Fortress to OA. It also appears that there is a difference between the OA Liquidators and the SPL as to the basis of the calculation of the total amount payable by OL to OA under cll 7.2, 7.3 and 7.5 of the Funding Deed, although it is not necessary to address the differences in that calculation, where the SPL’s position is that he agrees with the quantum of that calculation, on the basis of his calculation of that amount, although he does not agree with the way in which the OA Liquidators have made that calculation.

4. [46]

   The OA Liquidators have compromised that issue in the Resolution Deed by treating the OA Judgment Sum as $7.9 million, being the nominal value of the debt assigned to OA by Fortress, and that result decreases the percentage constituted by X% and thereby reduces the amount recovered by OA. That approach is, however, more favourable to OA than an approach where cl 7.3 applied, on the basis that an “OCV Charge Judgment” existed. The figure agreed between the OA Liquidators and the SPL was an intermediate figure in the range of possible figures, in circumstances that the application of the clauses in the relevant circumstances raised complex issues. It is not also necessary for me to determine which analysis was correct, where it seems to me that the alternative analyses were arguable, and that there was a significant benefit in compromise as to the issue.

5. [47]

   In summary, the Resolution Deed proceeds on the basis that cl 7.2 applies, the “OA Judgment Sum” is taken to be $7.9 million, cl 7.3 is disregarded and “X%”, for the purposes of cl 7.1 of the Funding Deed is 61% (Fletcher 30.6.17, Annexure K, p 100; Annexure Q, pp 114–115; Annexure R, p 119; Fletcher 20.9.17, [2(a)(i)], [2(a)(iv)]; Whittle 17.10.17, [4]–[5]). For the reasons noted above, that approach seems to me to be a reasonable compromise, taken in the context of the overall compromise of all issues.

6. [48]

   The second issue addressed by the compromise reflected in the Resolution Deed was whether OA should be able to claim the full amount of the costs of the applications under s 477(2B) of the Corporations Act for approval of the Funding Deed and the appeals. There was also an issue between the OA Liquidators and the SPLs as to the quantum of costs that would be recoverable under cl 7.2 of the Funding Deed and whether those costs were “reasonable” for the purposes of the relevant definition. The SPL contended (as the OA Liquidators understood his position) that a substantial percentage of the costs involved reflected Fortress’ challenge to the OA liquidators’ power to enter the Funding Deed and contended that a duplicate invoice should not be charged for. The opening amount claimed was reduced, in the course of negotiation. In compromising this issue, the OA Liquidators took the position that the costs of approval of the Funding Deed and appeals fell within the terms of the Funding Deed, but accepted, to some extent, that the appeals involved a challenge to the OA Liquidators’ powers and that some compromise on this issue was justified. They also accepted, uncontroversially, that the duplicated invoice was not chargeable under the Funding Deed.

7. [49]

   Mr Aspinall points out that, although the relevant clause would arguably allow the OA Liquidators to recover the full costs of approval of the Funding Deed, and the subsequent appeals from that approval, the OA Liquidators have discounted that claim to 50% of the costs up to the time of the initial approval and 25% of the costs thereafter. It may be that the OA Liquidators had the stronger argument, so far as the terms of the Funding Deed were concerned in respect of this issue, although an argument would have been available to the SPL that, even if the relevant costs fell within the terms of the clause, they were not “reasonable” costs in all the circumstances.

8. [50]

   The compromise of this issue reflected in the Resolution Deed was that OA and OL should share the initial approval costs in 50:50 proportions and should share the appeal costs in 75:25 proportions and that the duplicate invoice was not charged for (Fletcher 30.6.17, Annexure Q, pp 115; Annexure R, p 117–118; Fletcher 20.9.17 [2(a)(ii)]). It seems to me that the compromise of the issue was again properly made, where the costs of a contest of that issue would be likely wasted, and the compromise as to that issue was part of a wider compromise of all issues which was also advantageous in avoiding wasted costs.

9. [51]

   The third issue addressed by the compromise reflected in the Resolution Deed was whether OA should discount the costs of expert reports obtained for the purposes of the Fortress proceeding that might otherwise be recoverable against OL under the Funding Deed. The SPL contended (as the OA Liquidators understood his position) that the SPL did not see one of the expert reports and that OL should not be required to fund that report and that there were significant issues as to the admissibility of the reports and that further costs were incurred in attempting to overcome those issues. The OA Liquidators responded that the costs of obtaining those reports fell within the recoverable costs under the Funding Deed but accepted that the SPL did not see one of those reports, and recognised the SPL’s claim that there were issues as to the admissibility of a second expert report and that further costs were incurred by OL in respect of supplementary work to address that issue.

10. [52]

    It seems to me that there would have been real difficulties in determining the dispute as to the admissibility of the expert report that was objected to by Fortress and criticised by the SPL, in circumstances that that question had not been determined in the proceedings, and that supports the modest compromise which was made by the OA Liquidators in respect of the amount claimed to be recoverable in respect of the expert reports. The compromise of this issue reflected in the Resolution Deed was that OA did not seek to recover costs from OL for the report that was not made available to the SPL and that OL was allowed a discount on the total claim in the amount which the SPL claimed to have spent in remediating issues as to the admissibility of the expert evidence (Fletcher 30.6.17, Annexure O, p 110; Annexure P, p 112; Annexure Q, p 115; Annexure R, p 118; Fletcher 20.9.17 [2(a)(iii)]). That compromise seems to me to be justified in the relevant circumstances.

11. [53]

    The fourth issue addressed by the compromise reflected in the Resolution Deed was whether OA should pursue a claim for 25% of the “OCV Judgment Sum” (as defined) against OA pursuant to cl 6.2 of the Funding Deed, and an associated question as to the manner in which OA and OL should deal with a potential damages claim by OL against OA in respect of an alleged breach of contract arising from OA’s failure to advance further funds under the Funding Deed following the Court of Appeal’s judgment.

12. [54]

    The SPL contended (as the OA Liquidators understood his position) that OA and its liquidators had breached the Funding Deed and that placed OL in a precarious position with difficulties in prosecuting its claim in the Fortress proceeding, which led to a worse outcome than it would have achieved if it was fully funded and that, under cl 10.4(a)(iv) of the Funding Deed, OL was not liable to pay the specified 25% of the “OCV Judgment Sum” as defined to OA (Fletcher 30.6.17, Annexure G, p 92; Annexure I, p 95; Annexure K, p 99). The OA Liquidators denied that alleged breach and contended that, even if there was a breach (which they did not admit) then OL obtained no worse an outcome than it otherwise would have in the Fortress proceeding, but also accepted that a compromise of this issue was warranted, including by reason of Brereton J’s judgment of 2 February 2016.

13. [55]

    The OA Liquidators conceded in the Resolution Deed that OA would not claim a 25% share of the OCV Judgment Sum (as defined) under cl 6.1(a) of the Funding Deed. Mr Aspinall submits that concession was justified, although the OA Liquidators had not accepted the SPL’s claim that the Funding Deed had been terminated, where Brereton J had advised the SPL that he was justified in adopting, for the time being, the position that he had terminated or was entitled to terminate the Funding Deed for breach by OA. Mr Aspinall also refers to the view expressed by Brereton J, in paragraph [12] of his judgment of 2 February 2016, that it was “very likely” that advice would have been given to the OA Liquidators, had it been sought, that they would have been justified in acting on the basis that the Funding Deed remained valid, effective and binding, notwithstanding the Court of Appeal’s decision. Mr Aspinall rightly recognises that an application for directions did not finally determine those issues. Nonetheless, Brereton J’s observations plainly gave reason for the OA Liquidators to be concerned as to the ultimate outcome of a dispute as to whether the Funding Deed had been validly terminated by the SPL for breach. Mr Aspinall points out, and I accept, that if the SPL had effectively terminated the Funding Deed for breach, then it was also arguable that OA was not entitled to the amount otherwise payable under cl 6.1(a) of the Funding Deed.

14. [56]

    The compromise also involves the release of a possible claim for damages by OL against OA, for the alleged breach of the Funding Deed when OA did not continue funding for the Fortress proceeding, after the delivery of the Court of Appeal’s judgment. Mr Aspinall refers to paragraph 18 of the judgment delivered by Brereton J on 2 February 2016 where his Honour observed that:

15. [57]

    Both Mr Aspinall and Mr Oakes recognise that OL had a potential claim for a loss of opportunity to obtain a more advantageous settlement from Fortress, or a better result at a contested hearing, if it had not lost its funding for the conduct of the proceedings in this way. Both Mr Aspinall and Mr Oakes also submit, and I accept, that there would have been substantial practical difficulties, and substantial costs, involved in the pursuit of a claim by OL against OA on this basis, where the question whether Fortress would have offered a more favourable settlement would have been both highly uncertain and difficult to establish without Fortress’ cooperation, and the proof of the outcome of contested proceedings would have involved much of the complexity, and possibly much of the cost, of the pursuit of the Fortress proceeding. The ultimate recovery on such a claim would potentially also have been significantly discounted for the risk involved in recovery in complex proceedings.

16. [58]

    Mr Oakes also submits that the SPL’s decision not to pursue any claim for damages against OA for repudiating the Funding Deed is properly made where a claim for damages against OA for those matters would be protracted, expensive and may fail and the SPL has negotiated appropriate concessions from OA under the Resolution Deed. Mr Oakes points to the elements of a claim for lost commercial opportunity, on the basis identified by the High Court in Sellars v Adelaide Petroleum NL [1994] HCA 4; (1994) 179 CLR 332 at 355, but also recognises the conceptual and practical complexities in establishing such a case, in respect of the outcome of the proceedings against Fortress that will now never proceed to trial or be determined, particularly where Fortress had objected to the admission of the expert evidence on which the SPL relied and the Court had not ruled on that objection before the proceedings were settled. Mr Oakes also submits, and I accept, that any claim for damages by the SPL would be both difficult and expensive to pursue, since it would involve much of the complexity and scale which would have been involved in the pursuit of the substantive proceedings against Fortress.

17. [59]

    Mr Oakes also identifies an advantage to OL in the settlement in that, although OA and its liquidators do not accept that the SPL validly terminated the Funding Deed, OA has foregone any entitlement it may arguably have had to receive a 25% share of the OCV Judgment Sum under cl 6.1(a) of the Funding Deed under the terms of the Resolution Deed. Mr Oakes submits, and I accept, that the surrender of OA’s claim to that amount (in excess of $3 million) is of benefit to OL, although that benefit should be discounted to take account of the risk of the argument that the Funding Deed had been validly terminated by the SPL and of the cost to creditors of a contested determination of that question.

18. [60]

    In summary, the compromise of these issues reflected in the Resolution Deed was that OL released OA from any claim in respect of breach of the Funding Deed and OA compromised on other areas such as the costs of the approval under the Funding Deed and the associated appeals, the issue and costs of the independent expert reports, and its claim under cl 6.2 of the Funding Deed (Fletcher 30.6.17, Annexure H, p 93; Annexure J, p 97; Annexure K, p 100; Annexure Q, pp 115–116; Fletcher 20.9.17 [2(b)]). It seems to me that the uncertainties involved in a claim for damages by OL against OA, and the costs involved in pursuing it, were such that the SPL was justified in not pressing it, given the benefits that OL obtains in other aspects of the Resolution Deed. Because that claim also involved real risk for OA, then the OA Liquidators were also justified in offering several of the concessions to which I have referred above, not only so far as they were justified in their own terms, but also as part of a wider compromise that would avoid the risk of a claim brought by OL against OA on this basis, and the waste of costs for creditors, particularly common creditors of OL and OA, in the pursuit and defence of such a claim. I am satisfied that the position adopted by the OA Liquidators and the SPL in respect of these matters was justifiable, in itself and also in combination with the other issues addressed by the compromise reflected in the Resolution Deed.

19. [61]

    More generally, Mr Aspinall submits, and I accept, that the Resolution Deed represents a more cost effective resolution of the various competing claims of the SPL and the GPLs than would contested proceedings between them. In oral submissions, Mr Aspinall also emphasised that the settlement which had been reached between the SPLs and the OA Liquidators was “holistic” in character and that the compromises reached reflected a compromise of a range of complex issues, which sought to avoid a difficult and time-consuming and expensive investigation and, by extension, a contest between the companies and their liquidators (T25). As Mr Aspinall noted, the settlement therefore has benefits to OA and OL and their creditors as a whole, beyond those which exist in the treatment of particular aspects of it. Mr Aspinall also pointed out that the proposed settlement should be approached on the basis that both the OA Liquidators and the SPL are experienced liquidators, who are familiar with the affairs of the relevant companies, where these liquidations have continued for a substantial period, and the SPL is also a court-appointed liquidator who represents the interests of SPL and its creditors to the extent that the GPLs of OL and the OA Liquidators would or may have been conflicted in dealing with issues as between those companies. Mr Oakes also submits, and I accept, that at least to the extent that the two estates substantially share common creditors, litigation between them would be both wasteful and detrimental to those creditors.

20. [62]

    It does not seem to me that any aspect of the compromise made by the Resolution Deed is unreasonable as a matter of substance, and the compromise as a whole has significant benefits for OA and OL and their respective creditors. I also note that OA’s committee of inspection has approved the entry into the Resolution Deed by the OA Liquidators, although, as I noted above, no such approval was sought by the SPL from OL’s committee of inspection. For these reasons, I am satisfied that directions should be given that Mr Fletcher and Ms Barnet as general purpose liquidators of OA and OL are justified in entering into and performing their obligations under the Resolution Deed and that Mr Kerr as special purpose liquidator of OL is similarly justified in entering into and performing his obligations under that deed.