Investors in the failed Gold Coast finance group Octaviar are challenging a decision throwing out their class action, which alleged the Public Trustee of Queensland deserved some of the blame for their massive losses.
The investors, represented by law firm Squire Patton Boggs, filed a notice of appeal with the Federal Court on Wednesday, arguing that Justice David Yates erred in finding that the Trustee did not breach its duties when it failed to follow the advice of PricewaterhouseCoopers to keep Octaviar Group, formerly known as MFS, on a short leash.
Octaviar went into administration in September 2008 owing creditors more than $2.5 billion. Multiple lawsuits followed, including an enforcement action by the Australian Securities and Investments Commission, which alleged five former executives breached their duty of care to investors.
The current class action, dismissed on June 4, alleged Queensland’s Public Trustee breached his duty under the Corporations Act to exercise reasonable diligence in overseeing Octaviar Group after receiving warnings about its financial health in early 2007. The action also alleges the Trustee engaged in unconscionable conduct.
While Judge Yates agreed that the Trustee’s duty to noteholders was “a constant one” and that the duty of reasonable diligence required “active monitoring”, he ruled that the Trustee was not bound to act on PwC’s advice in May 2007 that “it may be prudent to have [Octaviar] submit management accounting reports on a monthly basis to enable the trustee to monitor cashflows, asset backing and profitability”.
“The evidence indicates that [PwC’s] advice concerning monthly management accounting reports was no more than a suggestion that was raised but not pursued,” the judge ruled.
Even if the Trustee — at the time, Gregory Edward Klein — had breached his duties, the judge said, he was not persuaded that he would have realised that Octaviar was insolvent and demanded repayment of notes by the end of January 2008 and wound up the company by the end of February of that year.
The judge also dismissed the investors’ argument that Octaviar was effectively without supervision by the Public Trustee by late 2007.
In their appeal, the noteholders argue that Judge Yates was wrong to find that the “debate” over whether the Trustee ought to have followed PwC’s advice could be “put aside”. He also erred in ruling that obtaining monthly management accounts from Octaviar wouldn’t necessarily have been more informative than the steps taken by the Trustee.
“These matters were not supported by the evidence and in any event were irrelevant to the question of whether the Public Trustee had breached his duty to exercise reasonable diligence and reasonable care in failing to follow the 17 May PwC advice,” the notice of appeal says.
The judge was also wrong in failing to find that had Klein not breached his duties as Trustee he would not have sought to resign in July 2007, it says.
PTQ is represented by Clayton Utz.
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