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“Don’t let perfect be the enemy of the good”: Court approves pragmatism in liquidators entering into Deed of Settlement

30 April 2021
Guy Edgecombe, Partner, Brisbane

In Re Octaviar Ltd,[1] the Supreme Court of Queensland has given a recent example of a settlement considered too ‘good’ to approve, even while noting its failure to achieve perfection. Where a settlement will significantly progress two very lengthy liquidations and save value for creditors by avoiding further costs and delay, the Court is prepared to approve the settlement regardless of the existence of other outstanding issues not dealt with by the settlement.

Background

Octaviar Ltd (Octaviar) was the holding company of the Octaviar group. Octaviar Administration Pty Ltd (Octaviar Admin) performed the treasury function for the group. The same liquidators were appointed to both companies, but during intra-group litigation a special-purpose liquidator was appointed to Octaviar.

Unresolved in the liquidations of both companies were:

    1. the companies’ inter-company debt position;
    2. taxation matters, which were before the Court; and
    3. matters concerning an intra-group proof of debt.

A conditional deed of settlement was entered into which would resolve the first two issues. More than 95% of each company’s creditors, who were the same entities (albeit in differing proportions) supported or did not oppose the Deed.

The liquidators sought directions under section 90-15 of the Insolvency Practice Schedule that they were justified in entering into the Deed.

Judgment

The Court first observed that:

    1. the power under section 90-15 is broad;
    2. it must be directed towards matters of law not commercial decisions; and
    3. if exercised to approve a liquidator’s action exonerates the liquidator from personal liability in regard to that action.

Because of this exoneration, the Court must be satisfied that the liquidator’s decision is a proper one.

The Court then reviewed the debt and taxation issues, noting that they were very complicated and likely to require significant time and costs to be litigated to a final resolution.

Because of the need to ensure that the liquidators’ decision was proper, the Court analysed the liquidators’ stated reasons for entering into the Deed in detail, determining that in each case the course of reasoning was proper.

Adopting the good in preference to the perfect

In evaluating the Deed, the Court noted that “no one can presently be sure that that the settlement reflects the outcome which would follow from a final and correct determination of all the factual and legal disputes concerning the subject matters of the settlement”.[2]

However, the Court observed that in the context of the case, “the lesson to be drawn is 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’”.[3]

In that regard the Court noted that the Deed would resolve some very significant issues in the liquidations, avoiding considerable expense and delay. The vast majority of creditors, who were common between the companies, supported the Deed. Both sets of liquidators, on careful consideration and having obtained appropriate legal advice, had formed the view that they were justified in entering into the settlement deed. The Court agreed and made directions that the liquidators were justified in entering into the Deed.

Key takeaway

The Court is prepared to accept the considered opinion of liquidators, appropriately informed by legal advice and taking into account appropriate commercial considerations, that it is in the interests of the creditors for large claims to be compromised to avoid significant delay and expense.

This is particularly the case where the litigation is between companies whose creditors are common.

 

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Authored by:

Guy Edgecombe, Partner
Craig Melrose, Associate

 

 


[1] [2020] QSC 353.

[2] Ibid at [64].

[3] Ibid at [66].

This update does not constitute legal advice and should not be relied upon as such. It is intended only to provide a summary and general overview on matters of interest and it is not intended to be comprehensive. You should seek legal or other professional advice before acting or relying on any of the content.

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