Thursday, April 12, 2012

One.Tel - yet another failure

Today the NSW Court of Appeal rejected an appeal by the Special Purpose Liquidator of One.Tel against the dismissal of proceedings brought against the Packer and Murdoch empires:  Weston in Capacity as Special Purpose Liquidator of One.Tel Ltd (in liquidation) v Publishing and Broadcasting Ltd [2012] NSWCA 79.
The background may be shortly stated.  The proceedings arise out of the announcement and subsequent cancellation by One.Tel of a $132 million renounceable rights issue, which was to be underwritten by PBL and News, and was announced on 17 May 2001.  On 29 May 201, however, the board of One.Tel resolved not to proceed with the renounceable rights issue, and instead to appoint administrators.  One.Tel went into liquidation in July 2001.  In December 2003 a Special Purpose Liquidator was appointed to consider whether any rights of action existed in relation to the cancellation of the renounceable rights issue and whether proceedings should be instituted against any person. 
On 25 May 2007 proceedings were commenced by filing a statement of claim naming inter alia PBL, News, James Packer and Lachlan Murdoch as defendants.  The statement of claim had to be serve within 6 months or it would become stale, unless the Court extended the time for service.  Six applications for an extension of time were sought and granted by the Supreme Court.  These applications were made ex parte without hearing from the defendants, and the extensions were granted on the understanding that once the statement of claim was served it would be open to the defendants to challenge those extensions. 
The supposed purpose of the delay in serving the statement of claim was to enable the SPL to take into account whatever decision was made by Austin J in civil penalty proceedings arising out of the collapse of One.Tel.  That decision (ASIC v Rich [2009] NSWSC 1229) was not handed down until 18 November 2009. Austin J’s decision was a spectacular failure for ASIC and, understandably, made the SPL and potential litigation funders somewhat nervous.  Nevertheless, funding arrangements were made and the SPL presumably received advice that notwithstanding ASIC’s failure, the claim against the Packer and Murdoch empires remained viable.
The statement of claim was finally served on 23 August 2010.  Predictably, the defendants challenged the extensions granted and Ward J discharged the fifth and sixth extensions of time, with the result that the statement of claim was stale at the time it was served, and the proceedings were accordingly dismissed, and the appeal against that decision, unsuccessful.
The decision of the SPL not to serve the statement of claim, ultimately, resulted in the creditors of One.Tel losing a potential asset said by the SPL to be worth $132 million plus interest since 2001 (a total of approximately $260 million).
A notable feature of the decision is the extent of the criticism of the SPL’s conduct (albeit much of the criticism was muted or understated, and often implicit rather than explicit).   The criticisms of the SPL’s conduct include the following:
  • The SPL made a conscious decision not to provide the defendants with details of the allegations made in the statement of claim (see [26] to [28] of the judgment) and insisted that the claim be kept “confidential”: see [27], [28] and [172]).  Quite why the SPL thought that was a good idea is not clear.  But of course it backfired badly because the defendants were later able to complain, and did complain, about a statement of claim containing very serious allegations having been withheld from them (apparently only for tactical reasons) for many years.
  • The SPL neglected to ask the defendants, after he had rejected the defendants’ offer to delay the proceedings in return for foregoing public examinations, whether they remained willing to delay the proceedings until after delivery of judgment in ASIC v Rich: see at [148]. 
  • It is not clear what, if anything, the SPL did between April 2009 and September 2009 to secure funding.  Certainly there is no evidence of the SPL moving diligently during that period: see at [112] and [132].
  • It appears that the SPL did not enter into the ultimate funding agreement until shortly before 14 May 2010 (nearly six months after the fifth extension was granted).  Again there is no evidence of the SPL moving diligently during that period:  see at [125].
  • The SPL (at the behest it appears of the litigation funder) engaged fresh lawyers which further delayed service of the statement of claim: see at [183].
  • The delays in relation to litigation funding were difficult to justify because in essence they involved an attempt by the SPL to secure a gilt-edged funding package to cater for a “catastrophic” cost scenario ($40 million), a figure that was was arrived at by little more than a highly dubious “back of the envelope calculation”: see at [187].  In that regard the SPL failed to pay sufficient regard to “the importance of litigation being pursued with reasonable speed and diligence”: see at [195].
  • In effect the SPL abdicated control of the time at which the originating process would be served to litigation funders: see at [195].
  • The SPL failed to pay sufficient regard to the prejudice that he was causing to the defendants and the risk that the claim (said by him to be worth upwards of $260 million) might be lost completely if the defendants, once served, applied to the Court to discharge the orders extending the time for service of the statement of claim: see at [195].

The creditors have, by the SPL’s conduct, lost the benefit of the proceeds of the litigation.  The SPL has also spent upwards of $13 million in pursuing the claim to the dead-end it has reached, and faces a liability to the defendants for their costs of the original application to dismiss the proceedings and the costs in the Court of Appeal.
The offer of $17 million made by the defendants in 2009 now looks decidedly less derisory. 
[NB: My gratitude to a colleague (who wishes to remain nameless, but who some will know has a fondness for Sunbears and Kakapos) for his substantial contribution to the above analysis]

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