Confidentiality upheld for the benefit of liquidators

Fletcher and Barnet, in the matter of Octaviar Limited (Receivers and Managers Appointed) (In Liq) and Octaviar Administration Pty Ltd (In Liq) (No 3) [2011] FCA 494.

Background

In previous insolvency emails¹ we have addressed various decisions involving Octaviar Limited (Receivers and Managers Appointed) (in liquidation) (OCV), most recently, the High Court’s decision which clarified that, by virtue of a pre-agreed mechanism, designation of a new document as a ‘Transaction Document’, or an increase of liability under an ‘all moneys’ security, do not constitute variations required to be registered under the Chapter 2K regime.

Fortress Credit Corporation (Australia) II Pty Ltd (Fortress) was the secured creditor to whom OCV had granted a fixed and floating charge in those cases.

In February 2011, Justice Stone for the Federal Court approved the entry by the liquidators of OCV and a related entity, Octaviar Administration Pty Ltd (in liq) (OA) (Liquidators) into a funding agreement (pursuant to section 477(2B) of the Corporations Act 2001 (Cth) (CA)), to allow OCV to obtain and OA to provide, funding to pursue claims against Fortress arising out of allegedly voidable transactions (Funding Arrangement).

Prior to seeking the Court’s approval for the Funding Arrangement, the liquidators obtained a report from a Mr Williams (a chartered accountant with extensive experience in forensic accounting and litigation support). Mr Williams was given confidential details of OCV’s alleged claims against Fortress and was asked for his opinion on various matters, including whether it was in the interests of the creditors who stood to receive distributions in the respective companies’ windings up for OA and OCV to enter into and proceed with the Funding Arrangement.

Mr Williams concluded that it was in the interests of the creditors of both OA and OCV (other than Fortress) that the latter pursue its claims and the former provide funding.

Having obtained Mr Williams’ report and sought the Court’s approval for the Funding Arrangement, the Liquidators then sought and obtained a confidentiality order (Confidentiality Order) in favour of Mr Williams’ report, pursuant to section 50 of the Federal Court of Australia Act 1976 (Cth) (FCA), which provides that:

The Court may… make such order forbidding or restricting the publication of particular evidence, or the name of a party or witness, as appears to the Court to be necessary in order to prevent prejudice to the administration of justice or the security of the Commonwealth (emphasis added).

These proceedings

Fortress then applied for a variation or discharge of the Confidentiality Order. It argued that it had not been a party to the proceedings which ultimately resulted in the Confidentiality Order being granted, and that having applied for leave against (among other things), the judgment approving the Funding Agreement, its solicitors and counsel (but not the company itself) should have access to the report.

In dismissing Fortress’ application, the Court found that there had not been any material change of circumstances since his earlier decision, and further that it could be prejudicial to the administration of justice to force the Liquidators to disclose sensitive matters (such as the assumptions made by Mr Williams in forming the view that the litigation against Fortress was likely to succeed and on which bases in particular) in the context of pending litigation.

Lavan comment

In affirming his earlier decision to grant the Confidentiality Order, His Honour made the following observation:

In the winding up of a company, liquidators are charged with extensive responsibilities …These responsibilities and their proper discharge have implications that go well beyond the interests of debtors, creditors and members of the company and extend to the regulation of corporations and their role in the economy of the society.

With the above in mind, and in light of this decision, it appears reasonable for liquidators to take an assertive approach towards the ‘administration of justice’ test with a view to preserving the confidentiality associated with advice obtained for the purpose of determining whether to commence litigation against secured creditors or other third parties.

Moreover, this case provides another reminder to liquidators that section 477(2B) of the CA can assist liquidators looking to enter into funding arrangements in corporate group collapses, particularly given the Court’s recent preparedness to approve such arrangements on new and inventive terms² and to preserve the information prepared to justify such an arrangement.

For further information please contact partner Alison Robertson on (08) 9288 6872 / alison.robertson@lavan.com.au or senior associate Dan Butler on (08) 9288 6714 / dan.butler@lavan.com.au.