Over the course of a 258 page decision, the Federal Court of Australia has, in Oztech Pty Ltd v Public Trustee of Queensland (No 15)  FCA 819, decided a case in favour of a corporate trustee in proceedings commenced by a noteholder. The proceedings were predicated on breaches of section 283DA(a) of the Corporations Act 2001 (Cth), equitable duties owed by trustees, as well as asserted breaches of fiduciary duty and unconscionable conduct, and engaging in fraudulent concealment.
In the course of coming to its decision, the Federal Court set out the scope of a debenture trustee’s duty under section 283DA of the Corporations Act. In short, debenture trustees have extensive monitoring obligations, but those obligations are not tantamount to those of auditors or the managers of the business affairs of the entities issuing the notes/debentures or the persons subscribing to those notes/debentures.
We focus in this Limelight on the Court’s decision in respect of section 283DA(a) and the equitable duties of trustees.
The Octaviar Group was comprised of a number of companies, engaged in the business of tourism, property funds management and financial services. The group’s holding company was Octaviar Limited. For simplicity, all entities within the Octaviar Group will be referred to as “Octaviar”.
From 2 November 2006 onwards, via some of its companies, (Octaviar), issued notes/debentures under prospectus to the public. The Public Trustee of Queensland (Public Trustee) was the debenture trustee under section 283AA of the Corporations Act pursuant to a trust deed.
The notes in question had a maturity date of 30 December 2011 (maturity date). Octaviar was required to maintain net assets of $280 million (net asset covenant), being a protective requirement to ensure that there were sufficient assets to repay the notes.
Oztech Pty Ltd was a subscriber to the notes.
Between 2 November 2006 and February 2007, $146.7 million in notes had been issued. On 23 February 2007, Octaviar issued a prospectus which offered further notes with a total face value of $160 million and with an ability to accept oversubscription up to a further $50 million.
Over the same period and following:
- Octaviar released reports and published ASX announcements that were positive and reflected a strong financial position; and
- the Public Trustee asked Price Waterhouse Coopers (PwC) to report to it as to the financial position of Octaviar and crucially, whether it would be able to pay the notes back by the maturity date. PwC responded with a number of reports, the first of which, indicated that there was no information to suggest that Octaviar would not be able to repay the notes by the maturity date.
However, as time progressed PwC reported that:
- the Public Trustee ought to obtain an increase of the net asset covenant from $280 million to $672 million. There was no power under any of the instruments that the Public Trustee was a party to that permitted it to require an increase of the net asset covenant;
- it was “unable, based on the information on hand, to form an opinion as to whether [Octaviar] will have the ability to meet scheduled debt repayments by the [maturity date], [and that accordingly], the Public Trustee should assess these risks against [its] own risk appetite…”
On 18 January 2008, Octaviar published an ASX announcement. That ASX announcement was received badly by the market and resulted in Octaviar’s share price falling from $3.18 to $0.99.
Octaviar went into liquidation later in 2008 with the effect that the holders of notes suffered significant losses.
As a noteholder, Oztech brought representative proceedings against the Public Trustee, alleging that the Public Trustee breached section 283DA of the Corporations Act and its equitable duties by failing to exercise reasonable diligence to ascertain whether the property of Octaviar would be sufficient to repay the amount deposited or lent when it became due. In essence, Oztech alleged that by about January 2008, the Public Trustee should have concluded that Octaviar was insolvent, demanded repayment of the notes and moved to wind-up Octaviar. It was alleged that, had the Public Trustee taken such steps, the significant losses would have been avoided.
Specifically, Oztech asserted that the Public Trustee failed to:
- have required Octaviar to submit management accounting reports on a monthly basis to enable the Public Trustee to monitor Octaviar’s financial position. It was not sufficient for the Public Trustee to rely only on quarterly accounts and published financial accounts (Information Request Duty); and
- retain PwC or another investigative accountant to prepare a more extensive report, following receipt of a report from PwC that suggested that PwC was not certain whether repayments on the notes could be made by the maturity date (Investigation Duty).
Sections 283DA(a) to (c) of the Corporations Act state:
The trustee of a trust deed entered into under section 283AA must:
(a) exercise reasonable diligence to ascertain whether the property of the borrower and of each guarantor that is or should be available (whether by way of security or otherwise) will be sufficient to repay the amount deposited or lent when it becomes due; and
(b) exercise reasonable diligence to ascertain whether the borrower or any guarantor has committed any breach of:
(i) the terms
of the debentures; or
(ii) the provisions of the trust deed or this Chapter; and
(c) do everything in its power to ensure that the borrower or a guarantor remedies any breach known to the trustee of:
(i) any term of
the debentures; or
(ii) provision of the trust deed or this Chapter;
unless the trustee is satisfied that the breach will not materially prejudice the debenture holders’ interests or any security for the debentures
The Federal Court found that the Public Trustee did not breach its statutory and equitable duties.
The Court found that pursuant to section 283DA(a) of the Corporations Act, the Public Trustee owed a duty to exercise reasonable diligence to ascertain whether the property of the borrower (i.e. the issuer of the debentures) and of each guarantor that is or should be available will be sufficient to repay the amount deposited or lent when it becomes due.
The Court observed that there was no authority on the application of section 283DA(a) and the parties had not submitted any authority on the provision. To this end, the Court considered itself uninstructed by authority, and set out the parameters of the statutory duty as follows:
- the duty cast on a trustee is forward-looking. This is signified by the provision’s use of the words “will be sufficient to repay the amount … when it becomes due”. The determination of sufficiency is to be made by reference to “property … that is or should be available” at that time;
- there is, in substance, only one inquiry. It concerns the present ascertainment of the sufficiency in value or amount of the property that “is or should be available” at the future time. The words “is or should be available” are to be read as a whole, with the modal “should” expressing no more than a present expectation of a future state of affairs;
- the duty is constant in the sense that it is ever-present. The duty requires diligence to be exercised by the trustee so long as the trustee remains in office;
- the constancy of the trustee’s duty is not tempered by the word “reasonable”. However, the word “reasonable” tempers the steps required, through the exercise of diligence, to achieve the object of ascertaining whether the property will or should be sufficient to repay the amount at the future time;
- what constitutes “reasonable diligence”will depend on the circumstances as they change and unfold over time. In this connection, what is “reasonable” will depend on how those circumstances present at the time they occur;
- section 283DA(a) requires an element of “active monitoring” or surveillance of financial position and performance. This “active monitoring” applies constantly over the period of the trusteeship. The requirement for active monitoring is assimilated into section 283DA(a) by virtue of the requirement to “ascertain” – not merely to inquire without satisfaction as to the outcome of the inquiry;
- “reasonable diligence to ascertain” requires a trustee to take into account the reporting regimes provided by the Corporations Act as well as those that might be imposed by the debentures or the trust deed. It must also take into account the announcements and disclosures required under, say, the disclosure obligations of the ASX Listing Rules where applicable. However, the trustee’s duty under s 283DA(a) “to ascertain” is not limited to such matters, and the extent of the inquiry to be made by a trustee is dependent on the circumstances;
- the requirement to “ascertain” is not designed to assimilate the trustee’s duty with that of a manager of the borrower’s and guarantor’s business affairs. The extent of the monitoring is a matter to be determined by reference to the circumstances of each case, but a trustee is not required to presumptively approach the material provided to it as being inaccurate or misleading;
- equally, the trustee is not to be cast in the role of an auditor of the borrower’s and guarantor’s businesses and affairs, but by the same token, the trustee “is to be more than a supine observer of events”;
- section 283DA(a) does not impose on the trustee the need to undertake measures that in terms of costs and difficulty, are not commensurate with the task at hand. But the trustee’s duty under s 283DA(a) is not curtailed by considerations of costs, difficulty or inconvenience when circumstances require the trustee to act in performance of the duty to exercise the required diligence; and
- the duty cast on the trustee by section 283DA is forward-looking in nature. Historical matters ought not to be the primary concern of a trustee, except to the extent that they assist in forming the forward-looking assessment.
Sections 283DA(b) and (c) also required that the Public Trustee to exercise reasonable diligence to ascertain whether the borrower or any guarantor has committed any breach of the terms of the debentures, the provisions of the trust deed or Chapter 2L of the Corporations Act and must do everything in its power to ensure that the borrower or guarantor remedies any breach that is known to it, unless it is satisfied that the breach will not materially prejudice the interests of debenture holders or any security for the debentures.
The standard of care required to discharge a trustee’s equitable duty to debenture/noteholders is the standard an ordinary prudent person of business would exercise in the conduct of a business as if it were his or her own, although the trustee’s duty to exercise reasonable care may be qualified by the terms of the trust instrument.
In assessing whether such a duty has been satisfied, a Court is to look at the position that would have appeared to the trustee, acting prudently, at the time of the alleged breach.
Where there are a range of possible courses a trustee can take, the mere choice of one course over another will not necessarily signal a breach of duty, even if the choice is later shown to be an error of judgment. In those cases, a breach of the duty of care will only arise when a trustee’s chosen course of action falls outside the range of possible choices which the trustee, acting reasonably, could have chosen at the relevant time.
The Court found that there was no breach of the Information Request Duty because there was no obligation on the Public Trustee to obtain any additional financial information. According to the Court, this was because:
- any financial information sought would not have assisted the Public Trustee in determining the capacity to repay the notes, given that any financial information the Public Trustee requested would have been 4 years out of the date by the time of the maturity date, and incapable of determining whether the notes could be repaid at that future time;
- the nature of Octaviar’s business was such that losses could accrue on a month to month basis. The reality of Octaviar’s business and the impact of it on the monthly accounts would not have assisted the Public Trustee to determine whether the notes would be repaid by the maturity date or whether Octaviar was insolvent;
- the publicly available information available about Octaviar’s financial position was positive, meaning that there was nothing to suggest that repayment of the notes by the maturity date was under threat or that Octaviar was insolvent; and
- there was no recommendation by PwC that the Public Trustee ought to obtain further financial information from Octaviar.
The Court equally considered that the Public Trustee did not have to undertake the Investigation Duty because at no point in time was there a single fact which indicated that Octaviar was in any financial distress or insolvent.
Although the Public Trustee successfully defended this claim, it is clear from this judgment that trustees’ duties under section 283DA of the Corporations Act and in equity are extensive and onerous.
It is insufficient that trustees approach their appointments as a box-ticking exercise. To this end, although the extensive nature of a trustee’s duties do not transform the trustee into an auditor or manager of the affairs of the debenture issuer, or require a trustee to presume that information provided to it is misleading or inaccurate, a trustee is obliged to actively monitor developments within its portfolio throughout the life of its appointment and act accordingly.
The precise nature of the extent of the “active monitoring” that is required will depend on the circumstances of each case, but ultimately, trustees should always approach the task of each appointment as though they were managing the interests and concerns of their own business affairs, assets and money.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.