Ariff v Fong [2006] NSWSC 1030 | Case summary

3560/06 STUART KARIM ARIFF & 9 ORS v IAN KIM SENG FONG JUDGMENT 1 I am dealing with two interlocutory processes, one filed on 24 July 2006 and the other on 31 July 2006. Since they cover the same ground, although in relation to different applicants, there is no need to distinguish between the interlocutory processes. 2 The applicants are persons upon whom have been served examination summons issued under Part 5.9 of the Corporations Act 2001 (Cth) or orders for the production of documents or both. The summonses and orders were issued on the application of Mr Fong, who is, in relation to certain companies, an "eligible applicant" for the purposes of Part 5.9 because of authority in writing given by Australian Securities and Investments Commission on 4 May 2006 as contemplated by paragraph (e) of the definition of "eligible applicant" in s.9. The companies are Carlovers Carwash Limited ("CCL"), Carlovers Carwash (Aust) Pty Limited ("CCA"), The Carwash Kings Pty Limited ("CK") and CarLovers (Maroochydore) Pty Limited ("CM"), each of which is subject to a deed of company arrangement. 3 The orders for which applications under the interlocutory processes are at this time pressed are orders that all applicants be given access to the affidavits in support of Mr Fong's application for the issue of the examination summonses directed to the deed administrator and former voluntary administrator (Mr Ariff) and present and past members of his staff (Ms Ariff, Ms Drysdale and Mr Sewerle). 4 Under s.596C(2), an affidavit of this kind "is not available for inspection except so far as the Court orders". Under rule 11.3(4) of the Supreme Court (Corporations) Rules 1999, the application for issue of an examination summons and the supporting affidavit must be filed in a sealed envelope marked in a particular way. Rule 11.3(7), excluding s.596C(2), says that the affidavit is not available for inspection by any person unless the court otherwise orders. 5 The principles relevant to an application for access to a s.596C affidavit are well settled. They emerge from a number of cases, including the recent decision of the Court of Appeal in Meteyard v Love (2005) 224 ALR 588. The principles are conveniently summarised in the judgment of Austin J in Re Southland Coal Pty Ltd (2006) 58 ACSR 113 at [104]: "I was referred to a number of cases in which courts have considered whether access to the affidavit should be granted: Re Excel Finance Corp Ltd; application of England (1994) 14 ACSR 407; Re Moage Ltd (in liq) (1997) 25 ACSR 53; Re Pegasus Gold Australia Pty Ltd [1999] NSWSC 954; Re Leisure Developments (Queensland) Pty Ltd (in liq) (2002) 41 ACSR 276; Re Allstate Explorations NL (2003) 46 ACSR 379; Fetzer v Irving (as liq of Mawson KLM Holdings Pty Ltd (in liq)) (2005) 52 ACSR 354. The principles upon which the court acts, in the exercise of its discretion under s 596C, are not in contention. As Basten JA said in Meteyard (at [141]), after citing Fetzer v Irving , "an applicant for disclosure of the affidavit will generally be able to obtain access to the affidavit if he or she can demonstrate an arguable case that the issue of the summons exceeded the power of the court under s 596B and that access to the affidavit is likely to assist in determining the correctness of the challenge". However, as the Full Federal Court pointed out in Re Excel Finance Corp (14 ACSR at 429), there are sound reasons why inspection, though prima facie to be allowed, should not be freely granted, "for so to do could afford an examinee information which could permit the examination process to be frustrated", and could disclose confidential information that should properly be withheld. Those matters do not arise in the present case, but here there are other considerations pointing against the grant of access." 6 The present applicants will not make out an entitlement to the relief they seek unless, in the words of Basten JA in Meteyard v Love (at [141]), they can "demonstrate an arguable case that the issue of the summons exceeded the power of the court under s.596B and that access to the affidavit is likely to assist in determining the correctness of the challenge". But even then, the court must be conscious of the possibility that an examination might nevertheless proceed and that access by an examinee to the affidavit may compromise that process. 7 It is thus clear that the existence of an arguable case of improper purpose or abuse of process on the part of the person who obtained the issue of the summonses and is proposing to conduct examinations is, as it were, the gateway to the s.596C affidavit. That focuses attention on the purposes that such examinations are intended to serve. On that, the following observations of Lander J (with whom Ryan and Crennan JJ generally concurred) in Re New Tel Ltd; Evans v Wainter Pty Ltd (2005) 54 ACSR 284 at p.323 are instructive: ""In my opinion, the following propositions relevant to these appeals emerge from the legislation and the authorities. 1. The power given to the Court to summon a person for examination is a coercive power. 2. The purpose of the power is to be gleaned from the legislation. 3. The following legitimate purposes emerge: 3.1 First, an examination is designed to serve the purpose of enabling an eligible applicant to gather information to assist the eligible applicant in the administration of the corporation. 3.2 Secondly, it assists the corporation's administrators to identify the corporation's assets, both tangible and intangible. It also allows the corporation's liabilities to be identified. 3.3 Thirdly, the purpose is to protect the interests of the corporation's creditors. 3.4 Fourthly, it serves the purpose of enabling evidence and information to be obtained to support the bringing of proceedings against examinable officers and other persons in connection with the examinable affairs of the corporation. 3.5 Fifthly, it assists in the regulation of corporations by providing a public forum for the examination of examinable officers of corporations. 4. If an eligible applicant applies for an order for the examination of a person for a purpose unconnected with the purposes authorised by the legislation that will be an abuse of process and the order, if obtained, will be set aside. 5. The procedure may not be used to allow a party to obtain a forensic advantage and, if it is, any order obtained will be set aside. 6. The procedure may not be used as a dress rehearsal for the cross-examination of a person in a pending or subsequent action. However, it is not improper to seek an order of the Court to summon a person for examination whilst litigation is pending against that person or entities connected with that person. 7. The question whether in any particular case the applicant has used the procedure abusively will depend upon the applicant's purpose in seeking the order and all of the surrounding circumstances. It will not be an abuse unless an offensive purpose is at least the predominant purpose. 8. It will be an offensive purpose if the application cannot be characterised as being for the benefit of the corporation, its contributories or creditors. 9. A creditor may, if first authorised by ASIC, apply to the Court for an order to summon for examination a person for the purpose of obtaining information in relation to a debt owed to the creditor if such an examination would be in the interests of the corporation or its creditors as a whole. 10. A creditor may not use the procedure for the purpose of obtaining a forensic advantage which would not have been available to the creditor if the corporation had not gone into administration." 8 Issues of this kind are most often addressed in a context where the person proposing to conduct examinations is a liquidator or similar official - in other words, someone whose role and functions are clear and whose purpose and motives in the matter of examinations may be expected to be shaped by the incidents of the role and functions. The position here is quite different. The person proposing to conduct the examinations is a person who, according to his affidavit of 24 August 2006, was appointed on 12 April 2005 by the "Berjaya Group" to "represent it in Australia in its dealings with Stuart Ariff". The "Berjaya Group" is described as consisting of Berjaya Group (Aust) Pty Limited (an Australian company), Berjaya Group (Cayman) Limited and Berjaya Group Berhad. Mr Fong also refers in that affidavit to his appointment by ASIC: "On 12 May 2006 the Australian Securities and Investments Commission appointed me as an eligible applicant, as referred to in Sections 9(e)(i) and 596B(1)(a) of the Corporations Act 2001 on behalf of [the Berjaya Group] for the purposes of conducting examinations into the affairs of [the four CarLovers companies]". 9 The force of "on behalf of" in this description is not explained. But the interest of the Berjaya Group in the affairs of the CarLovers companies is clear. It was described in my judgment of 2 September 2005 (Re CarLovers Carwash Ltd (2005) 54 ACSR 696): "[19] … Each of CCA, CK and CM is a wholly-owned subsidiary of CCL, in that CCL owns all shares in each of CCA and CM, while CCA owns all shares in CK. The shares in CCL are owned as to 57.75% by Berjaya (Aust) Pty Ltd and as to 39.11% by Berjaya (Cayman) Ltd. The report as to affairs relating to CCL shows total debts of some $8,106,000, of which about $7,258,000 is owed to the Berjaya companies. In the case of CCA, total debts are shown as $2,033,000 of which $2,031,000 is owed to CCL. In the case of CK, debts total $1,634,000 and CCL accounts for $1,595,000. In the case of CM there are debts of $180,000 of which $178,000 is owed to CCL.

[20] It is thus clear that CCL is by far the largest creditor of each of the other three companies and that the Berjaya companies account for approximately 90% of the debts of CCL. The deeds of company arrangement work on the basis that recoveries within each of CCA, CK and CM are fed into deed funds established under the CCL deed, one for employees and the other for other creditors, on the basis that all creditors of all companies will participate in the CCL funds, but with the Berjaya companies participating on a deferred basis that affords priority to other creditors. In these circumstances, the main focus of the present application is upon CCL." 10 It appears, therefore, that ASIC has seen fit to accord "eligible applicant" status to a person who, on the person's view of matters, is to act in the matter of examinations as the agent of the group which is the largest shareholder and creditor of the CarLovers Group. 11 Some other matters of background should be mentioned. During December 2003, Mr Ariff had delegated to representatives of Berjaya responsibilities given to him under the deeds of company arrangement but terminated the authority in February 2004 because of what he regarded as improper payments and failure to keep proper records. Mr Ariff deposes to a number of things done by Berjaya in an apparent attempt to enable the day-to-day responsibility for the companies to return to the directors. This is an issue which became associated with on-going moves by Mr Ariff to obtain approval of his remuneration by the committee of creditors. I quote from Mr Ariff's affidavit of 12 July 2006: "On a number of occasions since September 2004, representatives of the Berjaya Group have said words to me to the effect ' your fees will be approved if you return control of the company to us '. In that regard, I refer to: (a) a meeting at the Sydney office of my firm on 9 September 2004 at which words to that effect were said by Francis Lee of Berjaya. Now annexed to this affidavit and marked 'A' is a true copy of some contemporaneous handwritten notes of the meeting on 9 September 2004 made by John Sewerle, the General Manager of the Companies. Present at that meeting were John Sewerle, myself (SA) and Yazni Ariff from my firm (YA), Robbie Fong, a director of the Companies (RF) and Francis Lee (FL), Rickey Hiew (RH), Lee Teck Chuan (TC) and Derek Chin (DC) of Berjaya; (b) a dinner meeting on 18 November 2004 which was attended by Francis Lee, Rickey Hiew and Lee Teck Chuan of Berjaya and by Yazni Ariff and Kathleen Clark of my firm and myself at which I recall that I had a conversation with Francis Lee in words to the effect: F Lee: 'if you give me control back [which I understood to mean control of management of the Companies] I will approve your fees ' I recall that I did not respond directly to this statement in relation to the question of my fees but said words to the effect: Me: ' How do you propose to manage the Companies from Kuala Lumpur? The previous management representatives Berjaya put in place have not been successful' F Lee: ' would you consider the possibility of a new buyer managing the company ?' Me: ' well, to accommodate you, I will consider all of the options and look at the parties interested in buying Berjaya's shares '. Following my discussions with Mr Lee, I was not convinced that the Companies would be adequately managed if day-to-day management of the Companies was delegated to Berjaya or its nominee; and (c) a meeting on 26 April 2005 held at the Sydney office of my firm with Ian Fong, a representative of Berjaya. A copy of a letter from Berjaya to me dated 12 April 2005 by which Berjaya informed me of Ian Fong's appointment as the Berjaya Group's owner representative to oversee and manage all of its future ongoing interests in the Companies is now shown to me behind Tab 28 of Exhibit SKA-2. At the meeting with Mr Fong on 26 April 2005 (which was also attended by Yazni Ariff of my firm), Mr Fong said words to me to the effect: ' Your fees will be approved when Berjaya is back in control' A true copy of the contemporaneous file note made by Yazni Ariff of that meeting is now annexed to this affidavit and marked 'B'." 12 Berjaya has taken a close interest in not only Mr Ariff's remuneration but also disbursements made by him as deed administrator. In May 2005, Mr Hiew of Berjaya, in conversation with Mr Ariff, made reference to an alleged discrepancy of $87,000 in Mr Ariff's disbursements. Mr Hiew asked for source documents. Mr Ariff assured him all was in order. After a meeting of the committee of inspection on 14 October 2005, there was, according to a letter of that date from Berjaya's solicitor, Mr Fordyce, an arrangement under which Mr Ariff's staff were to provide to him copies of all invoices issued by Mr Ariff's firm since Mr Ariff's appointment in July 2003 and details of costs incurred in relation to certain matters. According to Mr Fordyce's letter, there was to be a meeting at Mr Ariff's office for inspection of the primary records of the companies during the whole of the voluntary administration and deed administration. 13 Also in October 2005, Berjaya took formal action under deeds of charge given by the CarLovers companies to require production of "all books and records of the above charger companies for inspection and copying by" persons nominated by Berjaya. This was followed up by a letter of 20 October 2005 from Mr Fordyce to Mr Ariff's solicitors (Clayton Utz) who, in a reply dated 21 October 2005, said that certain documents sought "are all records of Stuart Ariff Insolvency Administrators, and are not the books of any of the CarLovers Group of Companies. Accordingly, they are not available for inspection by your client". 14 On 24 October 2005, Berjaya representatives went to CarLovers' premises to inspect documents. They were first told that they could inspect and then told that they could not, the instruction apparently coming from an employee of Mr Ariff. 15 The debate between the solicitors continued in correspondence. In a letter of 28 October 2005 to Clayton Utz, Mr Fordyce referred to his clients "having been told that funds are taken out of the CarLovers accounts by your client on the basis of a simple one line disbursement invoices [sic]". Such a procedure, it was said, must entail retention of primary invoices relevant to each such disbursement invoice and, "[I]f this is not being done then there seem to be serious improprieties in the way the administrations are being conducted". 16 All this has happened in a context where Mr Ariff's remuneration has not been determined. The stand-off with Berjaya over that matter was mentioned in my judgment of 2 September 2005 - that is, a short time before the exchanges to which I have just referred and the attempts by Berjaya to obtain access to documents concerned with the financial aspects of Mr Ariff's stewardship. The gist of that judgment was that remuneration should be determined by the committees of inspection, failing which the creditors as a whole or the court should determine the matter. Given the reality that Berjaya would be in a position to carry the day (at least in a blocking sense) at any meeting of creditors, provision was made by order under s.447A for some special and streamlined procedures. 17 Some insight into the atmosphere may be gained from the solicitors' correspondence. Clayton Utz said they were bringing Mr Fordyce's conduct in a particular respect to the attention of the Law Society. Clayton Utz described the "tone" of a letter from Mr Fordyce as "unfortunate". There is a letter from Mr Fordyce referring to the prevailing situation as "a bizarre and totally unacceptable state of affairs". There is an allegation (strenuously denied) that Mr Fordyce said to Mr Ariff that if he did not return the CarLovers business to Berjaya (meaning, no doubt, to the directors), "I'll make sure you lose your registration". 18 Against this background, the applicants say there is an arguable case that the examination summonses are motivated by one or more of several purposes, each of which, it is said, is improper, viz, first, to exert improper pressure on Mr Ariff to accede to Berjaya's demand that he return control of the CarLovers companies to the directors; second, to threaten Mr Ariff with moves to have his registration as a liquidator revoked; third, to circumvent the judgment of 2 September 2005 by means of an unfair advantage through subjecting Mr Ariff and his staff to an onerous and broad ranging examination about his disbursements and remuneration; and, fourth, having regard to the breadth of the material production of which is sought, to oppress Mr Ariff in the conduct of his business by a diversion of time and resources and the imposition of expense (there was reference in submissions to 960,000 pages of documents). 19 Mr Fong, in resisting an order allowing the applicants access to the s.596C affidavit, says that the applicants' contention as to the existence of an arguable case of improper motive in pursuit of the examinations really boils down to two propositions: first, that Mr Fong is acting to embarrass Mr Ariff; and, second, that Mr Fong is pursuing Berjaya's commercial aim of having the companies returned to the directors and the deeds terminated without Mr Ariff's remuneration having been paid. To this, it is said, there are simple answers. Examinations of this kind, of themselves, do not involve any cause for embarrassment. They are part of the ordinary statutory machinery and, as Mr Coles QC said in his address, "Those for whom the truth holds no fears will not be embarrassed". He referred to observations of Mason CJ in Hamilton v Oades (1989) 166 CLR 486 at p.496. As for Mr Ariff's remuneration, Mr Coles submits simply that, whatever Berjaya may think or do, Mr Ariff has an undeniable right to be renumerated and the judgment of 2 September 2005 supplemented the ordinarily applicable means of quantification by adding the special and streamlined procedures to which I have already referred. 20 Accepting that embarrassment may be a natural by-product of the statutory scheme and that Mr Ariff's right to be remunerated is secure (although quantification is still necessary), one may leave those two matters to one side in the search for motives and purposes in relation to the examinations. What remains? It is clear that there has been friction for a long time on the subject of Mr Ariff's handing management of the CarLovers companies back to their directors (that is, effectively, the Berjaya interests) and that Berjaya has played a part in events leading to a situation where Mr Ariff's remuneration has not been quantified. The correspondence shows an apprehension on Berjaya's part that Mr Ariff has acted in an inappropriate way in relation to recording and accounting for "disbursements", as distinct from remuneration. The situations in question appear to be those already mentioned where Mr Ariff, as deed administrator, orders goods or services from some supplier who then invoices him and he, in turn, invoices the relevant CarLovers companies. The correspondence, as understood on Berjaya's side, raises a concern that the supplier's invoice (which no doubt gives some detail of the goods or services, the basis of costing and the total price) is regarded by Mr Ariff as a document belonging to his professional practice rather than the relevant CarLovers company; and that all he regards as belonging to (and being available for inspection within) the CarLovers company is a "one-line invoice" rendered by his accountancy practice to the CarLovers company. Berjaya perceives that Mr Ariff does not want the full versions of the invoices to be seen by Berjaya. 21 An unusual feature of this case, as I have said, is that the person proposing to conduct examinations is an agent of the group which owns about 97% of the shares in the holding company of the CarLovers Group and is owed about 90% of the indebtedness owing by the CarLovers companies. Also unusual is the circumstance that the persons to be examined are the deed administrator, members of the staff and a member of the committee of inspection. The focus of the major shareholder and creditor is, clearly enough, an aspect or aspects of the conduct of the companies' affairs since the advent of the Part 5.3A administration which was replaced by the regime of the deed of company arrangement but under the same administrator. 22 The purpose upon which the major shareholder and creditor appears to have embarked is one scrutiny of the administrator's financial management with particular reference to the matter of disbursements and accounting for them. Mr Ariff has not been forthcoming on requests to sight financial records. An originally receptive attitude (or what was understood by Berjaya's solicitor to be such) changed. It is, on the evidence before me, understandable that Berjaya became concerned about Mr Ariff's apparent unwillingness to allow company records to be viewed when he had at first been receptive to the idea. The "one-line invoice" approach, if in fact adopted, is of such a nature as to give rise to legitimate concern. 23 Against that, there is the perception on Mr Ariff's part that Berjaya's inquiries into his formal stewardship are part of what he regards as a campaign to force him to hand the companies back to their directors and, to that end, to starve him of remuneration - although, as I have said, I can see nothing that would prevent his pursuing the remuneration matter through the avenues identified by the 2 September 2005 judgment. I accept Mr Coles' submissions on these aspects. 24 My overall assessment is that the applicants have not at this point shown an arguable case in support of the proposition that any of the allegedly improper purposes that have been suggested has represented the motive for Mr Fong to embark on the examination process on Berjaya's behalf. The main thesis to the effect that pressure is being exerted by Berjaya to force handing back of the companies to the directors - with approval of Mr Ariff's remuneration by Berjaya as a "carrot" in that respect - breaks down to a large extent when it is remembered that the orders of 2 September 2005 facilitate determination of remuneration by the court if the other avenues fail. Nor does it seem correct to say that the conducting of examinations somehow circumvents those orders. As for the supposed threat to procure cancellation of Mr Ariff's registration (as to which there is a major factual question in dispute), it is not at all clear how the threat would or could be carried out, with or without the examinations. And if the desire to prevent the examinations occurring were the product of some desire to avoid inquiry into matters relevant to that (and I have no evidence that it is), that of itself would be a matter for concern. As for the alleged purpose of diverting time and resources through oppressive demands, that, it seems to me, goes to the possibility of orders limiting the demands rather than indicating improper purpose. 25 The evidence about disbursements and their treatment, coupled with the evidence of the apparent about-face on a co-operative approach to inspection of records relevant to that matter, operates to consolidate a conclusion of lack of arguable case of improper purpose. 26 The two interlocutory processes are therefore dismissed with costs. **********

Ariff v Fong

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Judgment (12 paragraphs)

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