TGIF 18 December 2020 – Good can be better than perfect: Supreme Court advises Octaviar liquidators on proposed settlement

This week’s TGIF considers the most recent case involving the Octaviar group of companies where the Supreme Court gave judicial advice to liquidators of related companies within the Octaviar group regarding a proposed settlement.

Key takeaways 

• Before giving judicial advice to a liquidator (which has the effect of exonerating a liquidator from personal liability for breach of duty), the Court must be positively persuaded of the propriety of the liquidator’s proposed course of action on which the Court’s blessing is sought.
  
  
• Where a liquidator is seeking judicial advice on a proposed settlement of litigation, the Court will generally be assisted by Counsel’s advice in relation to the propriety of the proposed settlement, as well as evidence which reveals the liquidator’s chain of reasoning.
  
  
• While it will generally not be possible to predict whether a proposed settlement reflects the outcome that would be achieved if the litigation was progressed to finality, a liquidator may be justified in settling litigation so as to avoid the time and cost associated with trying to achieve the notional ‘perfection’ that comes with a final Court determination. 

Octaviar Limited (Octaviar) was the holding company of a group of companies that undertook activities in a broad range of areas, including managed investment funds.  

Octaviar Administration Pty Ltd (Octaviar Admin) performed the treasury function for the group, recording payments made and received in inter-company loan accounts.

General purposes liquidators were appointed to Octaviar and Octaviar Admin in September 2009 (GPLs).

A special purpose liquidator was subsequently appointed to Octaviar in December 2011 (SPL). The role of the SPL included representing Octaviar’s interests in relation to the inter-company debt position as between Octaviar and Octaviar Admin.

The liquidations of Octaviar and Octaviar Admin were complex and there were three significant issues which had not been resolved, being:

• the inter-company debt position between Octaviar and Octaviar Admin;
  
  
• the resolution of a tax dispute involving Octaviar, Octaviar Admin and the Commissioner of Taxation; and
  
  
• the determination of appeals against the GPLs decision to reject certain proofs of debt in the winding up of Octaviar.

The GPLs, SPL, Octaviar, Octaviar Admin and the Commissioner of Taxation executed a conditional settlement deed in June 2020 which would, when unconditional, resolve the first two of the above three issues.  

The last remaining condition precedent to be satisfied was that the Court make orders to the effect that the GPLs and the SPL were justified in entering into the settlement deed.

Applicable test

Section 90-15 of the Insolvency Practice Schedule provides that the Court may make such orders as it thinks fit in relation to the external administration of a company on its own initiative or on application under s 90-20.

The effect of an order made under this section is to sanction a course of conduct on the part of the liquidator, such that the liquidator may adopt the course free from the risk of personal liability for breach of duty.

The Court observed that:

• its power should be interpreted widely, consistent with the purpose of the giving of advice, which is to facilitate the performance of the liquidator’s functions; and
  
  
• the Court may give directions that provide guidance on matters of law and the reasonableness of a contemplated exercise of discretion, but will not usually give guidance on a wholly business or commercial decision.

The Court also emphasised that there is a need for the Court to be positively persuaded of the propriety of the course for which the liquidator seeks the Court’s sanction, before the Court will give the liquidator the protection of its sanction. This was the critical issue that the Court considered in this case.

What did the Court decide?

The Court was positively persuaded that the decisions were, in all the circumstances, proper decisions for the GPLs and the SPL to take, as:

• the GPLs and SPL tendered legal advice from appropriately experienced Senior and Junior Counsel as to the propriety of the proposed settlement and the GPLs also produced financial modelling of the potential returns to creditors based on the settlement deed coming into force; and
  
  
• the GPLs and SPL tendered evidence which demonstrated that they had each given careful consideration to the cost, delay and risk of litigating all the issues to finality.

It was also significant that a large majority of the companies’ creditors supported the settlement with the Court observing that creditors are often the best judges of their own interests.

Although the settlement would not finally resolve all outstanding issues in the liquidation of the two companies, the Court did not consider this to be an impediment to giving the judicial advice sought given that entry into the settlement deed would finally resolve very significant issues in the liquidations.

Further, the cost and delay associated with further litigation could not be justified in circumstances where the end result would be moving funds between Octaviar and Octaviar Admin, and where the creditors of those companies were largely composed of the same entities (albeit in different proportions).

Takeaway 

The Court adopted the aphorism ‘Don’t let perfect be the enemy of the good’ in commenting that sometimes the proper performance of a liquidator’s duty will involve a decision not to expend the time and money involved in trying to achieve notional ‘perfection’.

While no one could be sure that the settlement reflected the outcome that would follow from a trial, litigating the matters to finality would “undoubtedly lead to very much more expense and delay and little overall advantage to the creditors”.

The Court was satisfied that the decisions of the GPLs and SPL to enter into the settlement deeds were, in all the circumstances, proper. If a Court is not able to be positively persuaded of the propriety of a proposed course of conduct on the available materials, it is bound to withhold its approval from the liquidator, who will then be in a position of needing to either obtain further materials and re-apply for advice or proceed without the protection of the Court’s sanction.