No arguable case of non-disclosure of material matters
- The Examinees submitted, and I accept, that an applicant for an examination summons is obliged to make full and frank disclosure of all matters that may impact on the Court's decision whether to issue the summons, including matters that might lead the Court to refuse the application for the summons. If the applicant fails to disclose all matters bearing on the order sought, the Court may discharge the examination summons on the basis that it was obtained in circumstances where the Court was not apprised of a reason for the refusal of the order: Re Southern Equities Corporation Ltd (in liq) (1997) 25 ACSR 394 at 422-423 (Lander J, Cox and Bleby JJ agreeing). The Liquidators did not cavil with these propositions.
- As the Full Court of the Federal Court has observed, the very high standard is not applied in a vacuum and careful consideration must be given to the particular circumstances in which non-disclosure is said to have occurred: Sutherland v Pascoe; In the matter of Matrix Group Limited as trustee for the Matrix Group Unit Trust (in liq) ACN 061 549 371 (2013) 297 ALR 44; [2013] FCAFC 15 at [50]-[51] (Jagot, Griffiths and Farrell JJ).
- Relying on Hong Kong Bank of Australia Limited v Murphy (1992) 28 NSWLR 512 (Hong Kong Bank) at 518-519, the Examinees submitted that where there are current proceedings pending against a proposed examinee, it is necessary for the court determining an application for the issue of an examination summons to be alert to the possibility that a proposed examination might be used for an improper purpose.
- Relying on In the matter of Mendarma Pty Ltd (in liq) (2006) 24 ACLC 1611; [2006] NSWSC 1306 (Mendarma), the Examinees submitted that the pendency of the proceedings against the proposed examinee, the stage those proceedings have reached and the role that the liquidator applying for the summons has played or proposes to play in those proceedings are material matters to be considered in exercising the power to issue a summons under s 596B of the Corporations Act.
- Relying on Mendarma, In the matter of Coretel Pty Ltd; Linker v Nilant (2003) 48 ACSR 178 (Coretel) and In the matter of One Twenty Seven Corporation Pty Ltd (1995) 13 ACLC 1600 (One Twenty Seven), the Examinees submitted that (citations omitted):
"Where current proceedings against the proposed examinee are at an advanced stage, then an application for the issue of an examination summons would require careful scrutiny and, at 'the very least, there would need to be a clear explanation of precisely what information was sought to be obtained and for what purpose so that an informed judgment could be made as to whether the application accords with the principles explained in the authorities.' [citing Re Coretel at [21]]
The risk that a proposed examination might be used for an improper purpose will be greater if there will be a substantial overlap of the factual matters relevant to the claims in the existing proceedings against the proposed examinee and the matters to be canvassed in the proposed examination. In those circumstances there will be a risk that the examinations will provide the plaintiff in the existing proceedings with a forensic advantage in the conduct of those proceedings which is not obtainable in those proceedings. The issues raised against the proposed examinee in the existing proceedings should be described in the supporting affidavit filed by the liquidator so that the Registrar can ascertain what is the potential for or the risk of the transcript of the examination being used in a way which would advantage the plaintiff through a rehearsal of cross-examination in relation to the facts which will be in issue in those proceedings.
Where there will be a substantial overlap of the factual matters relevant to the separate proceedings and the examination, then whether the liquidator has given, or proposes to give, active support to the plaintiff in relation to the claims the plaintiff has brought against the proposed examinee, particularly if some of those claims would be for the company's benefit if they are successful, is a material matter for the Registrar to take into account in assessing the risk that the examination would be used otherwise than for its intended purposes. Similarly, whether the plaintiff, or creditors associated with the plaintiff, is funding the liquidator's examinations would be a material matter to be disclosed."
- The Examinees also submitted that, in addition to the disclosures made by the Liquidators as described at [49] above, the Liquidators were obliged to disclose:
1. the existence of the Li proceedings and the overlap of the factual matters relevant to some of the claims made in the Li Proceedings and the examinable affairs of the Company,
2. the substantial overlap between the matters to be examined in the public examinations and the issues in the Zheng proceedings;
3. the "very advanced stage" of the Zheng proceedings;
4. Mr Zheng's proposed amended statement of claim, Mr Marlas Zhu's objections to those amendments and the fact that Mr Zheng had requested that the Zheng proceedings be adjourned until after the Liquidators' public examinations rather than "comply[ing] with the order to go ahead with the amended statement of claim";
5. the role that the Liquidators had played, or proposed to play, in relation to the Zheng proceedings and the Liquidators' attitude to those proceedings;
6. whether there was any pressing reason why the public examinations should be held before the Zheng proceedings were concluded; and
7. whether Mr Zheng was funding the public examinations.
- It is convenient to review the authorities relied on by the Examinees, together with Walton v ACN 004 410 833 Limited (formerly Arrium Ltd) (in liq) [2022] HCA 3 (Walton), before addressing each of the specific matters that the Examinees contend the Liquidators were obliged to disclose and arguably failed to disclose.
- In Walton, the Australian Securities and Investments Commission (ASIC) had granted "eligible applicant" status to the appellants, who were shareholders of the company in liquidation. They wished to examine a former director of the company about its examinable affairs for the ultimate purpose of investigating and pursuing a potential class action on behalf of themselves and certain other shareholders against former officers and former advisers to the company. The appellants were not creditors of the company. The potential class action would benefit only themselves and class members (being shareholders of the company at the relevant time). The action would not benefit the company and would not benefit all of the company's shareholders. Nor did it involve any claim against the company. The issue was whether the appellants' application for an examination summons under s 596A of the Corporations Act was an abuse of process in the sense that it involved the use of the court's process for an improper purpose. [1]
- The majority of the High Court (Gageler, Edelman and Steward JJ) held that it was not an abuse of process, rejecting the contention that the ultimate purpose for which an examination may be conducted under s 596A of the Corporations Act was limited to benefitting the company under external administration or the general body of creditors or contributories, aiding those responsible for the administration in the performance of their duties, or aiding the commencement of criminal or regulatory proceedings in connection with the affairs of the company. [2]
- Gageler J said: [3]
"The legitimacy of any purpose to which the process of compulsory examination under Pt 5.9 of the Corporations Act might ultimately be put may well lie in the nature and quality of the connection between the purpose and the examinable affairs of the corporation that is in external administration. That said, I do not think it necessary or prudent to attempt to map out the metes and bounds of the legitimate purposes to which the process might ultimately be put in order to resolve the present appeal. Indeed, borrowing from another field of discourse, I doubt whether any court considering whether an application is or was an invocation of the process of compulsory examination for an illegitimate purpose can be expected to do more than to pronounce in a particular case that a specifically identified purpose is 'definitely extraneous to any objects the legislature could have had in view'."
- Speaking of legal processes generally, Edelman and Steward JJ framed the relevant question as being whether "the 'scope and purpose of the statute' will be contradicted or stultified" by the use of the legal process for the ultimate purpose sought to be achieved. Their Honours emphasised the importance of addressing that question on the basis of the facts and circumstances of each case, and the impossibility of charting the legitimacy of an infinite variety of purposes. [4]
- After referring to the potential shareholder class action contemplated by the appellants, Edelman and Steward JJ characterised the appellants' purpose in seeking the examination as including "the administration or enforcement of the law concerning the public dealings of the corporation in external administration and its officers". Their Honours held that this was a legitimate purpose under s 596A of the Corporations Act. [5]
- Edelman and Steward JJ were specifically addressing s 596A rather than s 596B of the Corporations Act. However, their Honours referred to New Zealand Steel (Australia) Pty Ltd v Burton (1994) 13 ACSR 610 (NZ Steel) as authority that the statutory purpose of s 596B was not limited to the interests of the company, its creditors or contributories. Edelman and Steward JJ stated that the same reasoning "must apply a fortiori to s 596A with its potentially wider purpose". [6]
- In Hong Kong Bank, the appellants contended that orders for examination under s 597 of the Corporations Law had been obtained for an improper purpose, namely pre-trial interrogation and discovery for the benefit of parties to pending litigation. The Supreme Court of New South Wales had made orders removing Burns Philp Trustee Co Ltd (Burns Philp) as trustee of several unit trusts and winding up the company. Messrs Murphy and Allen had been appointed as trustees of the unit trusts, replacing Burns Philp. Several proceedings had been commenced in the Supreme Court of Victoria, including proceedings that the new trustees had brought against Hong Kong Bank of Australia Ltd (HBA), Mercantile Mutual Life Insurance Co Ltd (MML) and Messrs Pitt and Fischer concerning the validity and effect of certain deeds of assignment of interests in mortgages from Burns Philp (as trustee of the unit trusts) to HBA and MML. The new trustees claimed that, in those and other matters, Burns Philp committed breaches of trust procured by HBA and MML and in which HBA and MML had participated and from which they sought to benefit. The proceedings also involved issues concerning the conduct of Messrs Pitt and Fischer as auditors of the units trusts.
- The Australian Securities Commission had authorised the new trustees to apply for orders under s 597 of the Corporations Law in relation to Burns Philp. On the application of the new trustees, a Registrar of the Supreme Court of New South Wales had ordered certain persons to attend and be examined and produce documents in relation to the affairs of Burns Philp. Those persons included two officers of HBA, an officer of MML and Messrs Pitt and Fischer, who were the appellants in the New South Wales Court of Appeal.
- Gleeson CJ, with whom Mahoney and Priestley JJA agreed, observed that applications for orders for examination are often made by liquidators in circumstances where there is intended or pending litigation. His Honour observed that, in considering the appropriateness of making the order, there is no relevant distinction between litigation that is current and continuing and litigation that is merely contemplated at the time the order is sought. Gleeson CJ cited with approval the following passages from the judgment of Street J (as his Honour then was) in Re Hugh J Roberts Pty Ltd [1970] 2 NSWR 582 at 585: [7]
"A liquidator needs information concerning his company just as much in connection with current or contemplated litigation as in connection with other aspects of its affairs. In using the statutory machinery of private examination he will in many cases be gathering evidence as an ordinary and legitimate use of this procedure …
In my judgment it is immaterial in basic substance whether the private examination is sought to be used by a liquidator to gather information in connection with proceedings he believes he might be able to bring, proceedings he contemplates bringing, proceedings he has decided to bring, and proceedings he has already brought. There is no presently relevant distinction in substance between gathering information referable to commencing proceedings and gather information relevant to continuing proceedings.
…
A liquidator need not be diffident in using a private examination for its ordinary and legitimate purpose in the gathering of information. But he must not abuse this process. For instance an attempt, where litigation is either contemplated or commenced, to summon the prospective or existing defendant's probable witnesses and examine them simply for the purpose of destroying their credit would exceed the legitimate use of the process. Beyond stating this extreme instance, I consider it unsafe to generalize - very often the gathering of information quite properly involves testing the reliability or credit of the examinee from whom the information is being obtained."
- It was in the context of referring to potential abuses of process of the kind identified by Street J in the above passage that Gleeson CJ made the statement on which the Examinees rely heavily in the present case that "the fact that current proceedings are pending makes it necessary for the court to be alert to the possibility that a proposed application might be used for an improper purpose". [8] His Honour continued: [9]
"… there is no strict dichotomy between an advantage to be gained by an applicant for an examination order, such as a liquidator, in the capacity of a litigant, and a benefit that might flow to creditors or contributories, or members of the public, from the conduct of an examination. Whilst the court will not permit a liquidator, or other eligible person, to abuse its process by using an examination solely for the purpose of obtaining a forensic advantage not available from ordinary pre-trial procedures, such as discovery or inspection, on the other hand, the possibility that a forensic advantage will be gained does not mean that the making of an order will not advance a purpose intended to be secured by the legislation."
- In Hong Kong Bank, the new trustees were seeking to conduct the examinations in order to obtain information which may have assisted them in prosecuting causes of action in existing proceedings in the Supreme Court of Victoria, to determine if any of those causes of action should be abandoned and to determine if any other causes of action should be added. Gleeson CJ held that those purposes were legitimate purposes and that there was no reason to conclude that the conduct of the proposed examinations would transgress the limits referred to by Street J in Re Hugh J Roberts Pty Ltd. The appellants failed to establish an abuse of process. [10]
- Hong Kong Bank was referred to with approval by the majority of the High Court in Walton. In particular, Gageler J (at [111]) and Edelman and Steward JJ (at [180]) referred with approval to that part of Gleeson CJ's reasons for judgment extracted at [72] above. Gageler J referred to that part of Gleeson CJ's judgment in embracing the notion that an examination for the sole purpose of obtaining a forensic advantage would be an abuse of process. In the course of an extensive review of cases concerning the statutory predecessors to s 596A of the Corporations Act, Edelman and Steward JJ referred to Gleeson CJ's recognition in Hong Kong Bank that there is "no strict dichotomy" between an advantage to be gained by an applicant for an examination order (in their capacity as a litigant in pending or contemplated proceedings) and a benefit that might flow to creditors, contributories, or members of the public. Edelman and Steward JJ stated that the distinction between a "private purpose" for an examination and a purpose that benefits the company, its creditors or contributories "is not stable".
- As I have already mentioned, NZ Steel is another case that was cited with approval in Walton. Mr Burton was an officer of Marvin Manufacturers (Aust) Pty Ltd (MMA). New Zealand Steel (Australia) Pty Ltd (NZSA) was the plaintiff in pending proceedings against Mr Burton and two other defendants claiming sums due as debts incurred by MMA to NZSA at a time when MMA was allegedly insolvent. In the course of those proceedings, an application by NZSA for discovery from the defendants had been dismissed because NZSA's cause of action required it to prove the elements of a criminal offence before NZSA could succeed in its civil claim and the defendants were therefore excused from the obligation of discovering documents which may assist in the proof of that offence against them. The proceedings were ready for trial, or very close to being ready for trial. At a directions hearing, NZSA's solicitor had informed the Court that it would prefer to have the trial occur after the conduct of examinations because the evidence obtained at such examinations would be admissible in the trial.
- With authorisation from the Australian Securities Commission, NZSA applied for and obtained an order for the examination of Mr Burton and production of documents. Mr Burton applied to set aside the order on the basis that it was an abuse of process because the examination was sought:
1. solely or predominantly for the purpose of NZSA obtaining a forensic advantage not available to it in the pending proceedings;
2. as a rehearsal for NZSA's cross-examination of Mr Burton in those proceedings;
3. solely to aid those proceedings which were private proceedings with no demonstrable benefit to creditors of MMA; and
4. to circumvent the ruling made in those proceedings that had excused Mr Burton and the other defendants from discovery.
- Hayne J dismissed Mr Burton's application. After recording that NZSA's purpose for seeking the examination of Mr Burton was the promotion of NZSA's business and financial interests by obtaining information relevant to the pending proceedings, his Honour framed the issue in the following terms. [11]
"If, then, as I consider to be the case, the applicant for examination has obtained the order so that it might advance its own private interests, and in particular might advance its prosecution of an action then pending, is its application an abuse of process?"
- Hayne J observed that the question of abuse of process had arisen in several cases where litigation against the examinee at the suit of the applicant for examination was contemplated or pending. His Honour referred to Re Hugh J Roberts Pty Ltd as encapsulating the approach that had been adopted in Australia for some time. The relevant passage from Re Hugh J Roberts Pty Ltd was also referred to by Gleeson CJ in Hong Kong Bank and is extracted at [71] above. Hayne J then stated: [12]
"Thus the bare facts that there is other litigation to which the applicant for an order for examination and the proposed examinee are parties, and that the examination will touch on the matters the subject of that proceeding, does not mean that the examination is an abuse of process."
- After referring extensively to Hong Kong Bank, Hayne J said: [13]
"There would be an abuse of process if the coercive powers of s 596B were to be invoked for a purpose foreign to the purposes for which those powers are conferred. As was pointed out in State of Victoria v Day Neilson Jenkins & John [1993] 2 VR 545, the conclusion that there has been an abuse of process does not depend upon the application of what was there described as 'some vague notion of fairness' in civil litigation ([1993] 2 VR 545-59). Thus it is not to the point to determine whether the creditor that has applied for an order for examination may (in its capacity as plaintiff in the pending action) obtain some advantage in the prosecution of its action which is an advantage not otherwise obtainable from the interlocutory processes available to it in the action. Nor am I called on to say whether obtaining any such advantage is 'fair' or 'unfair'. Such an approach would obscure the fundamental question which is whether the power is being used for a purpose foreign to the purpose for which it was given. If it is, then there is an abuse for that reason. If it is not, then no question of fairness arises; the legislature has permitted the step to be taken in such a case."
- Hayne J held that NZSA's application for the examination and production orders directed to Mr Burton had not been an abuse of process. No abuse lay in the fact that, by means of the orders, NZSA may obtain discovery of Mr Burton's documents when he had been excused from discovery in the pending proceedings. His Honour distinguished that scenario from cases in which the applicant for an examination order had obtained discovery in one proceeding and sought to amplify that discovery by obtaining further information on examination, thereby playing off the processes in the pending proceedings with the examination processes. [14]
- Hayne J also rejected the notion that the examination, which NZSA sought to conduct so that it might further its own interests, would be conducted for purely private purposes. Mr Burton was expected to be examined about alleged insolvent trading of a failed company (MMA) in which he had taken part in the management. The record of the examination would be available not only to NZSA but also to the Australian Securities Commission and any creditor of MMA. [15] His Honour considered that the purpose of an examination included the protection of shareholders, creditors and interested members of the public and that the evident intention of the legislation in its then current form was that "directors and those engaged in the management of companies should be held accountable and, in at least some cases, publicly accountable for their conduct". [16]
- In Walton, Gageler J referred to Hong Kong Bank and NZ Steel as demonstrating that: [17]
"… there was not under Part 5.9 of the Corporations Law any requirement for an examination sought by an eligible applicant to be for the purpose of benefiting the corporation or the general body of creditors or contributories. Nor can that, or any other, purposive requirement be discerned in the text or structure of Pt 5.9 of the Corporations Act."
- As I have already mentioned, Edelman and Steward JJ referred to NZ Steel as establishing that the statutory purpose of s 596B of the Corporations Act is not limited to the interests of the company, its creditors or contributories. Their Honours then referred in some detail to the facts and outcome in NZ Steel [18] before stating (citations omitted):
"[190] It follows that examining an officer of a company for the purpose of pursuing a claim against the company or one of its officers or advisers for the enforcement of the law can be an entirely legitimate use of the power conferred by s 596A. It should not matter whether the claim relates to all creditors or all contributories, or only a smaller group. Generally speaking, where a company is subject to external administration, each creditor and each shareholder wishes to recover their loss; the recompense they seek is money or an in specie distribution. No doubt some are more altruistic than others and may pursue a remedy directed at, or which includes, other creditors or shareholders being compensated. But the existence of such fine feelings is of no consequence to the court's application of s 596A. As conceded by the first respondent, the pursuit of a claim for the benefit of some shareholders can be as legitimate as a claim made for the benefit of all shareholders. In both cases, the recovery of money in respect of corporate misadventure serves the public interest by necessarily including a purpose to enforce the law. The making of such claims is a means of protecting shareholders and creditors and of ensuring compliance with the law. An examination made pursuant to s 596A for such a purpose is no abuse of process.
[191] It should also be emphasised that setting aside a summons for an improper purpose would be, in the usual case, inapt where the threat of abuse is capable of being addressed by the court in other ways. In the case of a summons issued pursuant to s 596A, the integrity of any examination should be capable of protection by the court through the making of appropriate directions and by the controlling of what questions might be asked. It would only be when these alternatives were unable adequately to address the threat of an abuse of process that a more 'draconian' remedy might be appropriate, such as the setting aside of the summons. Even then, the setting aside of a summons on the grounds that it is an abuse of process should be a measure of 'last resort'; such a remedy must be reserved for only the most exceptional or extreme cases."
- Edelman and Steward JJ applied the reasoning of Hayne J in NZ Steel to the circumstances in Walton in concluding that the examination summons issued under s 596A was not an abuse of process (citations omitted):
"[194] In New Zealand Steel, Hayne J said that, if a liquidator had been appointed to the company and had applied for an examination to determine if the company had traded whilst insolvent, with a view to recommending criminal proceedings to the ASC, 'it is clear that such an examination would [have been] for the purposes of the statute'. No different result, it was said, would have been justified if, instead, a creditor, pursuing 'ends which [were] private to and concern only it', had put such a liquidator 'in funds in order that the examination might be prosecuted'. Adopting the same reasoning here, if the liquidators had instead obtained a summons to examine a former Arrium director about the existence of possible misleading or deceptive conduct arising out of the capital raising, the legitimacy of pursuing such a course under s 596A could not have been questioned. As it happens, the director in question was 'informally interviewed' by the liquidators. Some shareholders now want the matter more thoroughly examined. To do so is not to pursue any purpose foreign to s 596A. A similar conclusion was reached applying similar reasoning by the primary judge. His Honour was, with respect, correct.
[195] The furtherance of the appellants' purpose, in the sense of the means by which the appellants will achieve their end, will involve conducting the examination, which will probably take place in public and as to which ASIC may choose to take part, in which there will be consideration of issues concerning whether Arrium's officers engaged in misleading or deceptive conduct in the 2014 capital raising. Whilst the proposed class action, if successful, undoubtedly would not benefit all of Arrium's shareholders, it is a legitimate use of the power conferred by s 596A for those shareholders who stand to benefit to seek to test the merits of that class action with a compulsory examination by means that include the administration or enforcement of the law concerning the public dealings of the corporation in external administration and its officers. The exposure of any wrongdoing may well encourage greater compliance with the law. In that respect, the record of the examination will also be open for inspection, as well as for use in subsequent legal proceedings."
- In the present case, the Examinees' submissions relied extensively on Mendarma. In that case, the liquidators of Mendarma Pty Ltd had successfully applied for the issue of examination summonses under s 596B to Mr and Mrs King, who were directors of Denham Properties Pty Ltd. That company had entered into a loan agreement with Mendarma and its sole director, Mr Peters, as guarantor. At the time the summonses were issued to Mr and Mrs King, there were proceedings on foot in the Equity Division of this Court between Mr and Mrs King (as plaintiffs) and Mr and Mrs Peters (as defendants). Administrators had been appointed to Mendarma and that company subsequently went into liquidation. Notwithstanding those developments, Mr and Mrs Peters had filed a cross-claim in the proceedings against Mr and Mrs King, Denham Properties, the receivers and managers that Denham Properties (as mortgagee) had appointed to Mendarma's property pursuant to the loan agreement, and Mendarma.
- The cross-claim had been filed without the consent of the administrators or the leave of the Court. In addition to claims against Mendarma, it included claims that belonged to Mendarma and could not be made by the cross-claimants, Mr and Mrs Peters.
- The administration of Mendarma concluded with a resolution for winding up, following which Mr and Mrs Peters' cross-claim was stayed as against Mendarma pursuant to s 500(2) of the Corporations Act. Mr and Mrs Peters had not applied for leave to proceed with the claims against Mendarma. Notwithstanding the stay, Mendarma had filed a notice of appearance in the proceedings and appeared at a directions hearing.
- Mr and Mrs King and Denham Properties had responded to subpoenas and notices to produce issued by Mr and Mrs Peters. Orders had been made requiring the defendants to the cross-claim (including Mendarma) to file defences and give discovery.
- It was in that context that the Court had issued the examination summonses to Mr and Mrs King on the application of the liquidator. In his affidavit relied on in support of the application for the summonses, the liquidator had deposed that he was investigating a number of alleged uncommercial or insolvent transactions entered into by Mendarma with Denham Properties and that the information gathered at the proposed examinations would allow the liquidator to make a determination as to the likelihood of success of any action against Denham which may have caused dispositions of the assets of Mendarma. The liquidator had not disclosed the existence of the Equity Division proceedings.
- White J (as his Honour then was) rejected Mr and Mrs King's application to set aside the examination summonses as an abuse of process. [19] However, his Honour upheld Mr and Mrs King's application to set aside the summonses on the alternative ground of non-disclosure of all material matters in the liquidator's affidavit sworn in support of the application for the summonses. [20]
- By the time of the hearing of the application to set aside the summonses, Mr Peters had been made bankrupt and the cross-claim was prosecuted by Mrs Peters alone.
- White J referred to the heavy obligation on an applicant for an examination summons to make full and frank disclosure of all matters which may impact on the decision to issue the summons and Gleeson CJ's observation in Hong Kong Bank that "the fact that current proceedings are pending makes it necessary for the court to be alert to the possibility that a proposed application might be used for an improper purpose". [21] White J acknowledged that the claims purportedly brought by Mrs Peters in the pending Equity Division proceedings did not raise the same issues as those on which the liquidator wished to examine, but considered that there would be substantial overlap between the factual matters relevant to Mrs Peters' purported claims and the claims contemplated by the liquidator. [22] His Honour continued:
"[53] There is a risk that the examinations will provide Mrs Peters with a forensic advantage in the conduct of her proceedings which is not obtainable in those proceedings.
[54] The pendency of those proceedings, the stage they have reached, and the role the liquidator has played, or proposes to play, in those proceedings, are material matters for a Registrar to have considered in exercising the discretionary power conferred by s 596B of the Corporations Act to issue the examination summonses. Those matters were not disclosed in the supporting affidavit. Had the issues raised on behalf of the company by Mrs Peters been described in the supporting affidavit, the Registrar may well have wished to ascertain what was the potential for, or the risk of, the transcript of the examination being used in a way which would advantage Mrs Peters' claims in proceedings 5348 of 2005 through a rehearsal of cross-examination in relation to facts which will be in issue in those proceedings.
[55] The Registrar may, for example, have been prompted to enquire whether Mrs Peters, or creditors associated with Mr or Mrs Peters, were funding the liquidator's examinations. It was said for the liquidator that all that could have been disclosed was that the proceedings were pending; that no leave had been given to Mrs Peters to bring a claim on behalf of the company; and that the proceedings against Mendarma were presently stayed. However, more may have been required. The Registrar may have wished to know what attitude the liquidator had taken, and proposed to take, to the 2005 proceedings. If he had given, or proposed to give, active support to Mrs Peters in relation to the claims she has brought, some of which would be for the company's benefit if they are successful, then that would have been a material matter for the Registrar to take into account in assessing the risk that the examinations would be used otherwise than for their intended purposes.
[56] Counsel for the liquidator submitted that the fact that a director's interests may be advantaged by a liquidator's examination proceeding does not render the examination an abuse, provided it can be shown that some legitimate interest of the company and its creditors is being pursued (Re Normans Wines Ltd (in liq); ; Harvey v Burfield (2004) 49 ACSR 628; Re Laurie Cottier Productions Pty Ltd (in liq) (1992) 9 ACSR 513 ; (1992) 11 ACLC 178). I accept that principle. However, it does not follow from that principle that it would be legitimate for the examination to be allowed to be used to provide another party with an advantage in litigation that that party is conducting against the examinees, which is not available to ordinary litigants.
[57] Had the 2005 proceedings, and the issues raised in them, been raised in the supporting affidavit, the Registrar would also be expected to have considered the current status of those proceedings, and whether there was any pressing reason in connection with the conduct of the liquidation why the examinations should be held before those proceedings were concluded."
- White J concluded that the non-disclosures had been material to the decision of the Registrar to summons Mr and Mrs King for examination because the matters that had not been disclosed may have affected that decision. His Honour discharged the summonses for material non-disclosure, observing that a breach of an obligation of disclosure to the Court is a serious matter and that there was no basis to infer that the liquidator's non-disclosure in that case came about due to an error of judgment as to the materiality of the matters not disclosed. However, his Honour also noted that the discharge of the summonses on that basis was no bar to the liquidator making a fresh application supported by an affidavit disclosing all material matters. [23]
- The Examinees' submissions in the present case treated the matters that White J identified as material in Mendarma as if they constituted a checklist of matters that must be disclosed in any application for an examination summons where there are pending proceedings involving the examinee and/or involving factual matters that overlap with the factual matters likely to be addressed in the proposed examination. However, I do not read his Honour's judgment as going beyond the identification of the matters that were required to be disclosed in the particular circumstances of Mendarma. As I have referred to above, those circumstances included that the company in liquidation had filed an appearance in the pending proceedings, notwithstanding that those proceedings were stayed as against the company, and had participated in interlocutory hearings. That circumstance made it highly relevant to disclose to the Court not only the existence of the pending proceedings, but also the role that the liquidator had played and proposed to play in those proceedings. The other questions identified by White J at [54]-[57] flowed directly from the highly unusual circumstance that Mendarma had participated in the proceedings despite being in liquidation and had apparently raised no opposition to Mrs Peters' prosecuting claims that were claims of Mendarma.
- The Examinees' submissions placed heavy emphasis on White J's statement in paragraph [56] of his Honour's judgment extracted above at [92] that "it does not follow … that it would be legitimate for the examination to be allowed to be used to provide another party with an advantage in litigation that that party is conducting against the examinees, which is not available to ordinary litigants". Read in the context of his Honour's reasons as a whole, [24] it is clear that his Honour is referring in that sentence to the use of the examination process for the dominant purpose of providing such an advantage in other litigation, so that the examination is for a purpose unconnected with the purposes authorised by Part 5.9 of the Corporations Act. That is consistent with Gleeson CJ's statement in Hong Kong Bank that "the possibility that a forensic advantage will be gained does not mean that the making of an order will not advance the purpose intended to be secured by the legislation". [25] It is also consistent with Hayne J's statement in NZ Steel that "it is not to the point to determine whether the creditor that has applied for an order for examination may (in its capacity as plaintiff in the pending action) obtain some advantage in the prosecution of its action is which is an advantage not otherwise available from the interlocutory processes available to it in the action". [26]
- For completeness, I note that White J in Mendarma referred to Coretel and One Twenty Seven, on which the Examinees also relied. Those cases also turned on their own particular facts.
- Re Coretel was another case involving non-disclosure of relevant pending proceedings. In his affidavit relied on in support of an application under s 596B for the issue of examination summonses to persons connected with Noretel Networks Australia Pty Limited, the deed administrator of Coretel Pty Ltd had not disclosed the existence of pending proceedings between Coretel and Noretel Networks or the fact that orders had been made in those proceedings for extensive discovery. Moreover, the deed administrators' affidavit was positively misleading in that he deposed that he had been advised that Coretel may have a cause of action against Coretel and that he required further information for the purpose of assessing that potential cause of action, whereas the deed administrators had in fact already decided many months earlier to file a counterclaim against Noretel Networks in the pending proceedings in respect of that cause of action. The Court held that the existence of the pending proceedings, the discovery orders that had been made, the impending counterclaim by Coretel and certain litigation funding arrangements for those proceedings were material matters that should have been disclosed to the Court at the time of applying for the examination summonses. [27]
- In One Twenty Seven, an examination summons had been issued to a former receiver and manager of the company in liquidation on the basis that the liquidator of the company wished to investigate the receiver's compromise of certain litigation on behalf of the company. The liquidator had not disclosed when applying for the examination summons that the receiver had sought and obtained directions from the Federal Court of Australia that he was justified in entering into the compromise. [28]
- In the present case, the Examinees' submissions referred to at [60] above rested on general propositions that do not find support in the authorities and/or have no relevance to the facts of this particular case.
- The first general proposition referred to in the submissions set out at [60] above is said to be applicable where there are current proceedings against a proposed examinee that are at an "advanced stage". In my view, the Zheng proceedings could not be said to be at an advanced stage. It is true that pleadings have been filed and evidence has been served, but there is no evidence that there has been any order for discovery and the proceedings have not been listed for hearing. It appears that the Li proceedings are at a similar stage.
- Even if the Zheng proceedings and/or the Li proceedings had reached an advanced stage, there is no authority to support the proposition that the Liquidators would therefore have been required to explain in their application for the examination summonses "precisely what information was sought to be obtained and for what purpose": above at [60].
- Gyles J considered that this was required in Coretel, in circumstances where the deed administrators had already decided to file cross-claims in the pending proceedings and orders for extensive discovery had been made in those proceedings.
- The facts of the present case are very different.
- First, the Zheng proceedings were disclosed and the pleadings, including the proposed amendments, were provided to the Court. The statement of claim pleaded that there had been an agreement to undertake the Development using a special purpose vehicle and that the Company had subsequently been incorporated in accordance with that agreement. That revealed that the Development constituted the whole, or substantially the whole, of the Company's trading activities. There was therefore a substantial overlap between the Company's examinable affairs and potential examination topics on the one hand, and the factual matters in the Zheng proceedings on the other hand.
- Second, there is no evidence to suggest that the Liquidators have decided to or are proposing to support a grant of leave under s 500(2) of the Corporations Act for Mr Zheng to continue his existing claims or any of his proposed amended claims against the Company or a grant of leave under ss 237 and 500(2) for Mr Zheng to prosecute any of his proposed amended claims for and on behalf of the Company. There is no reason to infer that the Liquidators would be likely to take the highly unusual course of supporting grants of leave that would result in the Company being both a plaintiff and a defendant in the Zheng proceedings, with Mr Zheng being responsible for the conduct of the Company's claims at the same time as pursuing his own claims against the Company.
- There is no evidence presently before the Court about whether the Liquidators disclosed the Li proceedings when applying for the examination summonses. As the Liquidators submitted, the Examinees' solicitor made no inquiries about this in the 18 February 2022 letter. The suggestion that the Liquidators should have made any disclosure about the Li proceedings was made for the first time in the Examinees' submissions. There is no evidence whether the Liquidators were aware of the Li proceedings at the time they applied for the examination summonses.
- The second general proposition referred to in the Examinees' submissions set out at [60] above erroneously characterises "the risk that the examinations will provide the plaintiff in the existing proceedings with a forensic advantage in the conduct of those proceedings which is not obtainable in those proceedings" as a risk of abuse of process: see Hong Kong Bank at 519F (set out at [72] above) and NZ Steel at 616 (set out at [79] above).
- The Examinees' third general proposition referred to at [60] above is that the s 596C affidavit should describe the issues raised against the examinee in the existing proceedings. That may be appropriate, convenient, or even necessary in some instances. However, neither authority nor principle supports the view that such a description is necessary in every case in order to disclose all material matters. As the Liquidators submitted, Sutherland v Pascoe [2013] FCAFC 15 at [51]-[52] is one example of a case in which relevant issues in the pending proceedings were adequately disclosed by the liquidator's affidavit exhibiting the pleadings in full. In coming to that conclusion, the Full Court of the Federal Court noted that the Registrar had determined the application for the examination summons on the papers and had had an opportunity to review the papers, including the affidavit and exhibits, before making a decision. In the present case, it is my opinion that the Liquidators' disclosure of the pleadings and proposed amended pleadings in the Zheng proceedings was adequate for the reasons explained at [100]-[106] above.
- In oral submissions, counsel for the Examinees confirmed that the fourth series of general propositions set out in their written submissions at [60] above amounts to a contention that, where there is a substantial overlap between factual matters relevant to the proposed examinations and factual matters relevant to existing proceedings, it will always be material for the liquidator applying for the examination summons to disclose whether the liquidator has given or proposes to give active support to the plaintiff in those separate proceedings. I reject that contention. If the liquidator has in fact supported or decided to support the existing proceedings, that is likely to be a material matter requiring disclosure. If the liquidator has already involved themselves in those proceedings (as in Mendarma), it is likely to be relevant for the liquidator to disclose what their attitude to and involvement in those proceedings is. However, a liquidator who has neither involved themselves in the proceedings nor determined to do so in the future is not required to disclose that fact to the Court when applying for an examination summons. As the Liquidators submitted, the obligation is to disclose all matters in existence that may impact on the Court's decision whether to issue the examination summons in all the circumstances of the specific case. Nothing that was said in Re Southern Equities Corporation obliges the liquidator to disclose the non-existence of matters that, if they did exist, would be material to the Court's decision.
- For the same reasons, I reject the contention that a liquidator must disclose whether the plaintiff in pending proceedings involving factual matters overlapping with the matters to be the subject of the proposed examinations is funding the proposed examinations. If such a funding arrangement is in place, that is likely to be a material matter that should be disclosed. However, the liquidator's obligation does not extend to disclosing the non-existence of a funding arrangement that would be material if it existed.
- I now turn to the specific matters set out at [61] above that the Examinees contend the Liquidators were required to disclose to the Court and arguably failed to disclose in this case.
- As to the first matter, the Company is not a party to the Li proceedings. Assuming that the Liquidators were aware of the Li proceedings and that issues raised in those proceedings may overlap with issues to be explored in the examinations, it is my opinion that these were not material matters that the Liquidators were required to disclose. The Examinees' submissions as to the materiality of these matters were premised on the erroneous proposition that there is a risk of abuse of process merely because a plaintiff in some other proceedings might obtain a forensic advantage not available to it in those proceedings by being able to observe or access the written record of the public examinations: see [107] above.
- As to the second matter, it is my opinion that in the circumstances of this case the disclosure of the pleadings in the Zheng proceedings was adequate disclosure of the overlap between matters likely to be examined in the public examinations and the issues in the Zheng proceedings: see [101] - [106] and [108].
- As to the third matter, I do not consider that the Zheng proceedings had reached a "very advanced stage": see [100] above. Even if they might be considered to have reached an advanced stage, that is not material in and of itself. In circumstances where there is no evidence to suggest that the Liquidators had played any role in those proceedings, which were stayed as against the Company, or that they were likely to do so in the future, this was not a case in which there was a risk that the examination was sought to be undertaken for the sole or dominant purpose of obtaining a forensic advantage for the Company or the Liquidators in the Zheng proceedings. Nor is there any basis for inferring a risk that the Liquidators' purpose in seeking to conduct the examinations was to confer such an advantage on Mr Zheng. The fact that Eakin McCaffery Cox were acting for both Mr Zheng and for the Liquidators does not give rise to such an inference in circumstances where Mr Ward was not cross-examined on his evidence that the Liquidators chose to engage that firm simply because "they had a good understanding and knowledge of the background to the Company": see [48] above. In any event, Eakin McCaffery Cox's role in acting for Zheng and for the Liquidators was disclosed to the Court.
- Nor does Mr Zheng's request to adjourn the proceedings until after the public examinations give rise to an inference that the Liquidators' purpose in seeking to conduct public examinations was to confer some forensic advantage on Mr Zheng. In the Examinees' submissions, much was made of the fact that Mr Zheng's request for the adjournment was made after Mr Marlas Zhu had objected to Mr Zheng's proposed amendments and a substantial redrafting exercise would be required to address those objections. Even assuming that this indicates that Mr Zheng wishes to make use of information that might be elicited in the public examinations for the purpose of that redrafting exercise, that does not constitute a risk of abuse of process as explained at [107] above and says nothing about the Liquidators' purpose in seeking to conduct the examinations. Mr Zheng's proposed amendments involved a significant expansion of the matters relied on as alleged breaches of directors' duties owed to the Company by Mr Marlas Zhu and Ms Nina Zhu, and those claims could only be maintained by Mr Zheng for and on behalf of the Company with the leave of the Court granted pursuant to s 237 of the Corporations Act. Mr Zheng could not seek leave to amend and leave under s 237 without also seeking leave to proceed on behalf of the Company (and to maintain his claims against the Company) under s 500(2) of the Corporations Act. Any attempt to redraft the proposed amendments would be wasted unless and until Mr Zheng obtained leave on all three fronts. For the reasons already referred to at [105], there is no basis for inferring that the Liquidators supported, or were contemplating supporting, any such applications for leave.
- The fourth matter that the Examinees submit was required to be disclosed is Mr Zheng's proposed amended statement of claim, Mr Marlas Zhu's objections to those amendments and the fact that Mr Zheng had requested that the Zheng proceedings be adjourned until after the Liquidators' public examinations. I have addressed that matter immediately above.
- The fifth matter that the Examinees submit was required to be disclosed is the role that the Liquidators had played, or proposed to play, in relation to the Zheng proceedings and the Liquidators' attitude to those proceedings. I have addressed that matter at [105] and [109] above.
- As to the sixth matter, I do not consider that the circumstances of the present case called for the Liquidators' application for the examination summonses to address whether there was any pressing reason why the public examinations should be held before the Zheng proceedings were concluded. The very different circumstances in Mendarma called for this to be addressed.
- The seventh matter that the Examinees submit was required to be disclosed is whether Mr Zheng was funding the public examinations. For the reasons explained at [110], any funding by Mr Zheng for the public examinations would be a material matter for disclosure. If no such funding arrangement exists, then there is nothing to disclose. Although the Liquidators submitted that Mr Zheng is not funding the proposed examinations, there was no direct evidence before the Court to that effect. However, the evidence provides no basis to infer that the examinations are to be funded by Mr Zheng. Specifically, for the reasons explained at [114] to [115] above, neither the role of Eakin McCaffery Cox nor Mr Zheng's request to adjourn the Zheng proceedings until after the public examinations provides a basis to draw such an inference.
- For all of these reasons, assuming (in favour of the Examinees) that each of the matters referred to above was not disclosed, they were not material to the Court's determination of the Liquidators' application under s 596B in all the circumstances of this case. The Examinees do not have an arguable case to discharge the examination summonses for material non-disclosure.