http://www.goldcoast.com.au/article/2009/03/14/59195_gold-coast-b...

http://www.goldcoast.com.au/article/2009/03/14/59195_gold-coast-business.html


"Taxman breaks MFS fortress
Nick Nichols, business editor

March 14th, 2009

SLOPPY bookwork by Fortress Capital could cost creditors to the failed MFS empire dearly.

A decision handed down by Justice Philip McMurdo in the Queensland Supreme Court earlier this month paves the way for the Australian Taxation Office to claim a $58 million tax debt owed by Octaviar (formerly MFS).

The move effectively will cut the planned distributions to Octaviar's unsecured creditors -- owed about $1 billion -- from 4c in the dollar to about 1.4c in the dollar.

The Supreme Court decision also has opened a can of worms for commercial lawyers who have issued warnings to staff to tighten up their practices regarding financing arrangement for their clients.

The court hearing was instigated by Octaviar creditor, the Public Trustee of Queensland, acting on behalf of 560 noteholders who are owed $350 million.

The PTQ last year put a halt to a deed of company arrangement being proposed by Octaviar and is still pursuing a liquidation of the former financial services giant.

The PTQ challenged the validity of Fortress Capital's status as a secured creditor in relation to $53 million that Fortress had forwarded to Octaviar in June, 2007.

The funds were used by the then MFS to finance the purchase of several retirement homes from its subsidiary MFS Diversified (now GEO Property Group).

At the time, the external management of the retirement homes was causing MFS some angst and the company decided to take them off the MFS Diversified balance sheet through a sale to a newly set up MFS subsidiary, Young Village Estates.

Justice McMurdo decided the $53 million loan to Young Village Estates did not amount to a secured charge as it initially was forwarded by Fortress on a guarantee by MFS.

But, on January 22 last year, additional funds were loaned by Fortress.

These funds were secured against MFS assets and it was this security on which Fortress had been relying on the court to rule in its favour.

But Justice McMurdo said Fortress had failed to lodge a variation to the original charge within the prescribed 45 days, so he ruled in favour of the Public Trustee and declared the original charge was not secured against Octaviar's current assets.

"This decision has caused some concern among the legal fraternity," said one legal expert, who declined to be named.

He said several law firms had since moved to firm up lending agreements for clients as a result.

Fortress Capital is expected to appeal against the decision, with the fight possibly ending up in the High Court.

Meanwhile, the legal ructions are only delaying further Octaviar's ultimate fate.

The company's remaining creditors have all agreed to a deed of company arrangement as the way forward to recover debts.

Further delays are likely to continue to whittle down returns for creditors, who were offered 22c in the dollar almost a year ago.

Although the Public Trustee's application to wind up Octaviar has been adjourned to May 11, it is likely that this will be postponed until all legal avenues by Fortress have been exhausted."