VH-OZM and VH-OZN were on descent OCTA approaching Cowes. OZN was the leading and lower aircraft, and both pilots were aware of and communicating with each other and the pilot of OZM had OZN in sight ahead and below. Both pilots were communicating with Melbourne Centre. When the two aircraft were on descent, the controller that he had lost the mode C altitude readout for OZN.
As they approached Cowes, the pilot of OZM diverted his attention to some cockpit duties. Shortly afterwards, he heard the pilot of OZN give his Cowes position report and at that time OZM was still four miles from Cowes by GPS. When the pilot of OZM next sighted OZN, after passing Cowes, the two aircraft were at the same level and laterally separated by approximately 100 metres.