Octaviar liquidators to try different tactic to sue creditor

THE liquidators of the failed property finance group Octaviar will return to the Federal Court this week to explore how to fund a proposed lawsuit after the High Court refused them special leave to appeal a victory by the creditor they want to sue, Fortress Credit Corporation.

THE liquidators of the failed property finance group Octaviar will return to the Federal Court this week to explore how to fund a proposed lawsuit after the High Court refused them special leave to appeal a victory by the creditor they want to sue, Fortress Credit Corporation.

At a special leave hearing on Friday, Justices Bill Gummow and Ken Hayne said they could see no prospect of success by the liquidators, Katherine Barnet and William Fletcher of accounting firm Bentleys Australia, if the High Court were to review the funding arrangement.

Ms Barnet and Mr Fletcher want to recover money paid by Octaviar to Fortress in the six months before Octaviar's $2.2 billion collapse in 2008. In March 2011 they obtained a $40 million freezing order against Fortress in the Queensland Supreme Court, pending the outcome of the lawsuit.

Fortress is linked to a financier listed on the New York Stock Exchange, Fortress Investment Group LLC, and in 2007 made two loans that were guaranteed by Octaviar. It is claiming $71 million as a secured creditor.

Early last year, the liquidators gained Federal Court approval for a litigation funding agreement under which a subsidiary company, Octaviar Administration, would fund the parent company's case against Fortress in return for a share of any proceeds.

The parent company has creditors claiming $2.2 billion and only nominal assets. Octaviar Administration holds cash of $121 million.

About 70 per cent of Octaviar Administration's creditors are also creditors of Octaviar Ltd. Justice Margaret Stone approved the funding agreement at a hearing where Fortress was not represented.

Fortress challenged her ruling and in July 2011 three appeal judges overturned the agreement and sent the matter back to Justice Stone for "further consideration", which was put on hold pending the High Court ruling. A directions hearing is scheduled for Thursday.

Fortress's barrister, Noel Hutley, SC, wrote in his High Court submission that his client was affected by the agreement because Octaviar Ltd's main asset was a $551 million debt owed by Octaviar Administration.

If Fortress's charge over Octaviar Ltd's assets was valid, the debt from the subsidiary was "charged in favour of Fortress", Mr Hutley said.

Both High Court judges raised this point on Friday with Bernard Coles, QC, the barrister for Ms Barnet and Mr Fletcher. Mr Coles said the debt was not "earmarked" for Fortress and there was a "myriad of possibilities" on the level of dividend the parent company might ultimately pay its creditors. Fortress "has no interest in the affairs of the funder company", he said.

Mr Coles wrote in his submissions that the Full Federal Court's ruling against his clients in July 2011, which he described as allowing Fortress to "interfere" in concluded court proceedings, was likely to cause substantial delays.

The decision created uncertainty about Fortress's rights to become involved in future court applications by the liquidators "in the context of ongoing and contentious litigation", he said.

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