Octet Finance Pty Ltd v Macgregor is a useful warning for directors, CFOs, restructuring advisers and insolvency practitioners involved in distressed trading.
The case arose from the collapse of Mrs Mac’s, which relied on Octet’s unsecured trade finance facility while pursuing a restructuring process. Octet alleged it was led to believe the process would result in recapitalisation and repayment. Instead, the business was sold by way of asset sale, the company entered liquidation, and Octet was left unpaid.
Octet sued the CFO and directors for misleading or deceptive conduct. The Court entered limited judgment against the CFO only and dismissed the claims against all other defendants, including the directors and the CEO.
Key takeaways
- Misleading silence can arise where a failure to correcta statement that was initially accurate later has a ‘tendency to lead into error’ during a restructuring process.
- A CFO’s statements will not necessarily be treated as representing the directors’ personal views or liability.
- Even where misleading conduct is established, proving causation and loss remains difficult.
Key facts
Octet provided Mrs Mac’s with an unsecured revolving trade finance facility. The facility was important to Mrs Mac’s liquidity because it allowed suppliers to be paid while repayment to Octet was deferred.
By 2022, Mrs Mac’s was in serious financial difficulty. Its directors obtained safe harbour advice and pursued a transaction process known as Project Gateway. That process was broad enough to include a recapitalisation, equity investment or asset sale.
Octet’s key dealings were not with the directors directly, but with the CFO, Mr Markwart. Following media reporting about Mrs Mac’s search for a “white knight”, Octet placed the facility on stop and sought further information. Mr Markwart communicated with Octet about the restructuring. Octet alleged that those communications conveyed that Mrs Mac’s was likely to be recapitalised and that Octet would be repaid.
The difficulty was that, as the process developed, an asset sale became the likely outcome. While Westpac, as secured creditor, was repaid from the sale proceeds, the transaction left Octet unpaid as an unsecured creditor. Octet therefore alleged that the CFO and directors should have corrected the earlier impression created by the recapitalisation messaging.
Misleading restructuring communications
The Court found that Mr Markwart represented to Octet that there was a high degree of confidence that the restructuring process would result in repayment of the facility. However, the representation was not held to be misleading at the time it was made because Mr Markwart had a reasonable basis for that view. The fact that Project Gateway also contemplated a possible asset sale did not make the recapitalisation message false.
That position changed once Mr Markwart became aware that the Pie Face asset sale had become the likely outcome. His continued silence was subsequently held to be misleading because the earlier understanding had not been corrected. Importantly, silence will not always amount to misleading conduct in a commercial context. However, the Court held that Mr Markwart’s silence had “a tendency to lead into error” because he had previously given clear assurances about recapitalisation prospects, Octet had no other way of obtaining information about the asset sale, and Mr Markwart knew Octet would continue relying on the earlier understanding unless he corrected it.
Insolvency practitioners should understand that, in a distressed restructuring context, a statement that was accurate when made may later become misleading if the maker’s subsequent failure to correct it has ‘a tendency to lead into error’.
Agency and personal exposure
Octet argued that the directors should also be liable for Mr Markwart’s misleading conduct, on the basis that he was acting as their personal agent when he communicated with Octet in connection with Project Gateway and the safe harbour process.
The Court rejected both express and implied agency arguments. Express agency failed because the board minutes recorded no appointment, the relevant witnesses denied any such arrangement, and no document supported it.
The implied agency argument also failed. Implied agency requires objective evidence of mutual consent between principal and agent, which may be inferred from conduct undertaken in the principal’s interest or with principal’s knowledge and approval. However, the Court held that the safe harbour process was directed toward improving the company’s position, rather than protecting the directors personally. This made it difficult to characterise Mr Markwart’s conduct as undertaken in the directors’ interests as principals. The Court also considered it significant that Mr Markwart continued performing his ordinary CFO functions, including managing cashflow, dealing with creditors and reporting to the board, without any new authority or role being conferred on him during Project Gateway.
That said, practitioners should not treat the decision as excluding the possibility of directors being personally liable through agency principles in future cases. The Court’s reasoning was fact specific. A different result may follow if directors approve the exact communication, instruct management to make it, or allow correspondence to convey the personal views of the board.
Causation and loss
Octet sought compensation for the entire outstanding balance of the facility (approximately $4 million), arguing that the misleading conduct caused that loss. Its case was that if Mr Markwart had corrected Octet’s understanding after becoming fully aware of the Pie Face transaction on 22 September, Octet would have immediately stopped the facility, demanded repayment, and negotiated with Westpac or Mrs Mac’s to secure full repayment before the transaction completed.
The Court rejected that argument because: First, Mrs Mac’s had no ability to repay the facility without assistance and stopping the facility would very likely have tipped the company into immediate external administration, leaving Octet no better off. Secondly, Octet did not prove that Westpac would have agreed to fund repayment or enter into a tripartite arrangement. Westpac was fully secured and could simply have appointed receivers to sell the assets to Pie Face without regard to unsecured creditors. Thirdly, even if such an arrangement had been reached, any payment or security Octet received would likely have constituted an unfair preference under the Corporations Act 2001 (Cth) and could later have been clawed back.
The only loss the Court attributed to the misleading conduct was $75,558.92, being the difference between the facility balance on 22 September (when Mr Markwart became fully aware of the Pie Face transaction, after which his silence became misleading) and the final balance at liquidation. However, applying the proportionate liability regime, the Court assessed Mr Markwart’s share of responsibility at 50% and entered judgment in the sum of $37,779.46.
A practical lesson for insolvency practitioners is that proving causation and loss remains difficult even where misleading conduct is established. The Court required Octet to prove not only that it had been misled, but also that earlier intervention would probably have produced a better commercial outcome. The decision therefore highlights the importance of identifying financial distress indicators and reassessing unsecured exposure at an early stage, rather than relying solely on management assurances during a restructuring process.
Further Information
For further information about restructuring communications, creditor exposure in distressed trading, agency risk, misleading or deceptive conduct claims, and insolvency-related disputes, please contact the author of this article.
