Another judgment has been handed down in the ongoing dispute between the MFS/Octaviar liquidators and Fortress Credit Corporation (Australia) II Pty Ltd (Fortress). In this latest decision, the NSW Court of Appeal has confirmed that a creditor can attack a litigation funding agreement entered by a liquidator.
The relevant facts were as follows:
- Octaviar Administration Pty Ltd (OA) held over $110 million in cash. Octaviar Ltd (OL), which was OA's ultimate holding company, had limited cash reserves.
- OA and OL both wanted to bring proceedings against Fortress, so OA agreed to fund OL's proceedings.
- Fortress was also a creditor of OL, and held a fixed charge over OL's assets.
The liquidators applied under s477(2B) of the Corporations Act 2001 (Cth) for approval of the funding agreement between OL and OA. Approval was initially given, but Fortress appealed that approval.
The Supreme Court initially dismissed Fortress' appeal, holding it was not an 'aggrieved or sufficiently interested' party and was not entitled to be heard.
On appeal, however, the NSW Court of Appeal held:
- Fortress had a sufficient interest in any debt owed by OL to OA to bring the appeal, because of the potential for that debt to diminish the value of OL’s debt to Fortress.
- Whilst a liquidator's power under s477(2)(m) to do anything 'necessary' for the winding up should be interpreted broadly, it does not extend to litigation funding which is purely for a commercial return.
- The court will generally not question a liquidator's commercial judgment, but approval under s477(2B) should not be a mere rubber stamping process; a case for the exercise of the power must be shown.
- The primary judge was bound to undertake an analysis of the extent to which OA and OL could succeed with their claims against Fortress, and the potential practical benefit to OA in entering the funding agreement. As this was not done, the primary judge's discretion miscarried and the matter was remitted back to him for further consideration.
Whether or not the funding agreement is ultimately upheld, the dispute nonetheless serves as a reminder that litigation funding agreements need to be carefully considered by insolvency practitioners.
The full decision is available here.
The attack on the funding agreement has already significantly affected the liquidation of the MFS/Octaviar group, even though the primary judge has not yet reconsidered the validity of the agreement.
The special purpose liquidator of Octaviar Limited recently applied to the Supreme Court for a direction under s479(3) of the Corporations Act that he was 'justified in accepting' a settlement offer made by Fortress Credit Corporation (Australia) II Pty Ltd.
In coming to its decision, the court noted that:
No party appeared to oppose the application.
As a result of the Court of Appeal decision, the special purpose liquidator has, for all practical purposes, no funding under the funding agreement. This is largely because the general purpose liquidators of Octaviar Administration had informed the special purpose liquidator that they were unable to provide any further indemnity to him following the Court of Appeal decision.
The special purpose liquidator had still improved upon earlier offers made by Fortress, despite the fact that he was 'hardly negotiating from a position of strength'.
The court granted the application and directed that the special purpose liquidator would be justified in accepting the settlement offer. The full decision in Re Octaviar Administration Pty Ltd (in liq)  NSWSC 516 is available.