Batistatos v Roads and Traffic Authority of New South Wales

Purpose of public examinations 37 In Hamilton v Oades [1989] HCA 21; (1989) 166 CLR 486 at 496, Mason CJ stated that a compulsory examination is designed to serve the following two important public purposes: One is to enable the liquidator to gather information which will assist him in the winding up; that involves protecting the interests of creditors. The other is to enable evidence and information to be obtained to support the bringing of criminal charges in connection with the company's affairs: Mortimer v. Brown. Sub-section 541(a) and (b) [of the Companies (New South Wales) Code] emphasizes the high public importance of these purposes. The examination is designed to elicit, among other things, evidence and information relating to the question whether the witness "has been, or may have been, guilty of fraud, negligence, default, breach of trust, breach of duty or other misconduct in relation to" the corporation. 38 In Evans, Lander J (Ryan and Crennan JJ agreeing) expressed the view (at [116]) that the two purposes identified by Mason CJ are not necessarily the only purposes for which s 596B has been enacted. That observation may be taken to apply to s 596A. At [119], Lander J concluded that "[a]ny purpose that will benefit the company, its creditors, its members or the public generally will be within the contemplation of the section".

Court's power to grant relief 39 The Court has implied jurisdiction to stay an examination pursuant to a summons issued under s 596A which is an abuse of process: Carter v Gartner [2003] FCA 653; (2003) 130 FCR 99 at [27]. As Branson J observed: It is important to note that the fact that the Court must issue a summons under s 596A if the criteria for issue are satisfied does not mean that a person against whom a summons is issued has no remedy if the predominant purpose of the applicant is an improper purpose. 40 Further, by r 11.5 of the Federal Court (Corporations) Rules 2000, a person served with an examination summons may apply to the Court for an order discharging the summons in accordance with that rule. 41 In Evans at [85], Lander J (Ryan and Crennan JJ agreeing) concluded that the Court can set aside an order made under s 596A if the Court is satisfied that the order was obtained for an improper purpose.

Abuse of process 42 In Batistatos, the plurality stated at [6]: In Walton v Gardiner, the majority, Mason CJ, Deane and Dawson JJ, accepted as correct the passage in Hunter in which Lord Diplock spoke of "the inherent power which any court of justice must possess to prevent misuse of its procedure in a way which, although not inconsistent with the literal application of its procedural rules, would nevertheless be manifestly unfair to a party to litigation before it, or would otherwise bring the administration of justice into disrepute among right-thinking people". His Lordship went on to describe as "very varied" the circumstances where "abuse of process" can arise. 43 The concept of abuse of process cannot be described exhaustively and is "not restricted to defined and closed categories" because, as Gaudron J explained in Ridgeway v The Queen [1995] HCA 66; (1995) 184 CLR 19 at 75, cited with apparent approval in Batistatos at [14]: … notions of justice and injustice, as well as other considerations that bear on public confidence in the administration of justice, must reflect contemporary values and, as well, take account of the circumstances of the case. That is not to say that the concept of 'abuse of process' is at large or, indeed, without meaning. As already indicated, it extends to proceedings that are instituted for an improper purpose and it is clear that it extends to proceedings that are 'seriously and unfairly burdensome, prejudicial or damaging' or 'productive of serious and unjustified trouble and harassment'. 44 Nevertheless, in Rogers v The Queen (1994) 181 CLR 251 at 286 and cited with apparent approval in Batistatos at [15], McHugh J said that generally an abuse of process falls within one of three categories: (1) invoking of a Court's processes for an illegitimate or collateral purpose; (2) where using the Court's procedures would be unjustifiably oppressive to a party; or (3) where using the Court's procedures would bring the administration of justice into disrepute.

Special position of liquidators 45 In Sydlow Pty Ltd (In Liq) v TG Kotselas Pty Ltd (1996) 65 FCR 234 at 238-239, Tamberlin J described the office of liquidator as follows: The office of a person appointed liquidator to a corporation does not fit any precise legal category or classification which defines the rights and liabilities attaching to that office. It is a hybrid composite with elements of fiduciary, trustee, agent, officer of the corporation and (in some instances) "officer" of the Court. Attached to those elements are the obligations along with the powers and discretions which apply to those roles. The liquidator's office is described in Loose on Liquidators (3rd ed, 1989), p 13 as: " ... a cross between a trustee and an agent or, alternatively, like the directors, whose powers terminate upon the commencement of a winding up, as a fiduciary agent of the company. Thus a liquidator must not only act bona fide and reasonably and exercise his powers for their proper purposes only but must also exercise reasonable care and skill in the performance of his duties. Failure to exercise the necessary degree of skill and care may inter alia deprive him of his costs. A liquidator is also under a fiduciary duty in respect of the assets of the company of which he is appointed. As such he should not purchase assets of the company. Similarly, a liquidator may be required to disgorge any secret profit made ... in consequence of ... his office as liquidator and transaction with an associate may be set aside ... The liquidator differs from the normal agent, however, in that he himself controls the actions of his principal, ie the company. Furthermore his duties as agent of the company are subject to his overriding statutory duties to apply the company's assets in paying creditors and to distribute any surplus amongst the members." 46 At 241, Tamberlin J continued: In Re Siromath Pty Ltd at 29 McLelland J said: "The control by the Court over the circumstances in which, and the extent to which, its own officers are to be subjected to personal pecuniary liability in respect of their activities in the course of the performance of their official duties falls clearly within the concept of the protection by the Court of its own processes ..." The Court, when administering the Law, is concerned to ensure that the winding up is implemented in a timely and efficient manner, so as to produce optimum results for all persons interested in the winding up. In order to achieve this result, the Court must protect the integrity of the winding up under its supervision and control, by taking appropriate steps to prevent any proceedings or conduct which will wrongfully impede that process. One way in which this can be carried out is to require the grant of leave by the Court in respect of an action against an official liquidator, so that the Court can satisfy itself that there is no wrongful interference with the process. Such interference may arise where, for example, proceedings are initiated or continued without any legal basis or prospect of success or for an improper or collateral purpose. This appears to be the principle which underlies the established requirement that leave is necessary in order to sanction proceedings against an official liquidator. 47 There is no duty upon a liquidator to obtain the best possible price for the company's assets. In Hausman v Smith [2006] NSWSC 682 at [10], Barrett J said relevantly: They, as fiduciaries and by statute, owe duties of care, diligence and good faith, among other duties. Administrators and liquidators are both "officers" within the s 9 definition and therefore not only subject to the duties arising under ss.180 and 181 but also entitled to the benefit of the business judgment rule in s.180(2). Proceeding in a prudent way in relation to sale of assets is an incident of those duties. But on no view of matters can the duties be said to include a duty to sell only at "the best possible price". Administrators and liquidators are entitled to take into account a wide range of considerations. 48 At [14], Barrett J quoted with approval, from the judgment of Young CJ in Eq in Naumovski v Parbery [2002] NSWSC 1097; (2002) 171 FLR 332, the following passage: [13] There is a considerable amount of learning to the effect that under the modern system of company liquidation, the Court rarely interferes with the exercise by liquidators of their statutory powers, and in particular, it does not interfere where the liquidator's decision is really one of commercial judgment. [14] In Leon v York-O-Matic Ltd [1966] 1 WLR 1450; [1966] 3 All ER 277, Plowman J considered it appropriate to apply the principles of bankruptcy law to company liquidations and held that the Court would not interfere with the sale by a liquidator unless he was acting in a manner in which no reasonable liquidator could act. His Lordship quoted the words of C E Harman J in Re A Debtor (No 400 of 1940) [1949] Ch 236, 241, that: "Administration in bankruptcy would be impossible if the trustee must answer at every step to the bankrupt for the exercise of his powers and discretions in the management and realisation of the property." He also quoted the words of Sir George Jessel MR in Re Peters; Ex parte Lloyd (1882) 47 LT 64, 65, where his Lordship said in a bankruptcy case: "The court will not interfere unless the trustee is doing that which is so utterly unreasonable and absurd that no reasonable man would so act." [15] In Re Mineral Securities Australia Ltd [1973] 2 NSWLR 207, 230-1, L W Street CJ in Eq discussed and applied these principles to the conduct of liquidations in this State. Both the York-O-Matic case and the Mineral Securities case have been followed on countless occasions by courts in this country in the last 30 years; see eg Yeomans v Walker (1986) 5 NSWLR 378 and UTSA Pty Ltd v Ultra Tune Australia Pty Ltd [1997] 1 VR 667. 49 However, as Mr Sulan (counsel for KDL) submitted, the liquidator is not immune from suit if the liquidators have failed to conduct a proper and reasonable sales campaign which has caused loss to KDC. 50 In Honest Remark Pty Ltd v Allstate Explorations NL [2006] NSWSC 735; (2006) 201 FLR 456 ("Honest Remark") at [98], Brereton J explained: … leave is required to bring an action against liquidators (McDonald v Dare; Sydlow Pty Limited (in liq) v TG Kotselas Pty Ltd; Mamone v Pantser; Re Siromath; Re Biposo). The purpose of this requirement is to prevent harassment of the court's officer and interference with the administration by unmeritorious claims. On an application for such leave, the court would require, at least, that a prima facie case be established (Re Siromath; Re Biposo). 51 At [62], his Honour held that there is no power to appoint a special purpose liquidator for the purpose of investigating the conduct of the original liquidator as such. At [98], his Honour concluded that Honest Remark's application "outflanked" the protection provided by the requirement for leave to bring an action against the liquidator. 52 His Honour noted (at [59]) that the investigation of the conduct of a liquidator qua liquidator is a supervisory function of the court. Brereton J continued: There are very good reasons why this is so. The investigation of the conduct of a liquidator qua liquidator is not part of the matters entrusted to a liquidator; it is a supervisory function of the court. The court does not readily embark on or permit inquiries into the conduct of liquidators, in the absence of conduct liable to attract sanctions or control for what might broadly be described as disciplinary reasons (Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434 at 438-439; Belvista Pty Ltd v Murphy (1993) 11 ACSR 628 at 630). As the cases referred to by Mullins J in McDonald v Dare show, courts protect their liquidators by refusing to allow them to be the subject of proceedings without leave. As Young J has said (in Re Biposo Pty Ltd; Condon v Rogers (1995) 120 FLR 399 at 403): The liquidator, even in a voluntary winding up, has very strong powers which have been given to him under the Corporations Law, virtually as the delegate of the court, or the delegate of the Australian Securities Commission, to see that fair play is done between the competing interests in a liquidation. Up until the bulk of the work became so heavy and, indeed, as is still the case in some other jurisdictions, the matters which under New South Wales law are entrusted to a liquidator were part of the functions of a court official. The court will be very jealous of its delegate exercising the powers that it is given. The court will take every precaution to make sure that those powers are used impartially and for a proper purpose. The corollary of this is that the court will not permit its officer to be sued by a creditor or have an inquiry made under s536 unless it is satisfied that there is a prima facie case; Re Siromath Pty Ltd (1991) 9 ACLC 1583 [(sic) 9 ACLC 1587] at 1590 [Re Siromath Pty Ltd (No 3) (1991) 25 NSWLR 25 at 28-29]. 53 At [61], his Honour expressed the view that an investigation by one of several liquidators into the conduct of another in the liquidation "does not involve carving out of the liquidation a part of the ordinary responsibilities of the liquidator. To the contrary, it involves circumventing the ordinary and proper procedures for supervision of liquidators, and the protections that attend them". At [62], his Honour expressed the view that an investigation into the conduct of the liquidator in the liquidation "is not part of the administration, and it cannot therefore be carved out of the administration and given to a special purpose liquidator". 54 In considering s 447E of the Act, which applies to administrators and is relevantly similar to s 536, Brereton J noted (at [79]) that the Court's jurisdiction under that section: … requires satisfaction of the court that the administrator has managed or is managing the company's business property or affairs in a way that is prejudicial to the interests of some or all of the creditors or members, or has done or proposes to do an act or omission that is or will be prejudicial to such interests. It is insufficient that the conduct might be prejudicial; establishment of the ground for exercise of power under s 447E requires proof of conduct or proposed conduct that is or would be prejudicial - not that might be prejudicial. 55 At [82], his Honour continued: … demonstration of prejudice requires a comparison between the actual position of the creditors or members, and their hypothetical position assuming that the relevant prejudicial conduct does not occur (cf Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34 at 48; (1996) 22 ACSR 169, 186). In this case, that means a comparison of their position if there be no investigation, with that if there be an investigation. While it is conceivable that an investigation would establish that Honest Remark's concerns are well-founded, and even that there are prospects of obtaining substantial compensation, that is at this stage, and will at the final hearing remain, speculative; there is and will then be the alternative prospect that an investigation would result in the expenditure of further assets and resources of Allstate, for no productive benefit. The pleading does not assert, and Honest Remark does not undertake to prove at the final hearing, that creditors and/or members would be better off were an investigation to take place. In my opinion, Honest Remark's case, taken at its highest, by expressly eschewing any requirement to prove that the position of creditors and/or members would be better as a result of an investigation, must fail to establish prejudice within s 447E. Accordingly, taking Honest Remark's case at its highest, it does not allege facts capable of sustaining prejudice for the purposes of s 447E. 56 Brereton J considered the alternative position that is, that there was power to appoint a special purpose liquidator. At [94], matters which he identified as relevant to the question of discretion were "the inconsistency of such an order with the attitudes which courts take to actions against insolvency administrators" and the inconsistency with "the restraint with which the courts permit actions against liquidators and trustees in bankruptcy". At [95], his Honour said: [T]o grant such relief, when there are other statutory remedies apt for the circumstances, would circumvent the safeguards that the law and the legislature have put in place in respect of proceedings against liquidators and administrators. The Corporations Act provides orthodox remedies for the present circumstances: to inspect company documents (s 247A), to bring a derivative action (s 236), to appeal from the administrator's decision (s 1321), and to seek an order regulating or remedying prejudicial acts or omissions of the administrator (s 447E). 57 In Eighty Second Agenda v Handberg [2014] VSC 665; (2014) 32 ACLC 14-081 at [29] to [30], Croft J expressed the view that the requirement for leave to bring an action against liquidators probably extends to a voluntary liquidator in order to discourage litigation against liquidators and to allow for the timely and efficient resolution of the liquidation process. 58 In Re Joe & Joe Developments Pty Ltd [2014] NSWSC 1444, Black J emphasised that s 447E "does not contemplate that the Court will enter into the field of commercial decision-making undertaken by an administrator or remake business and commercial decisions of an administrator, even if those decisions have a legal element or legal context", and the notion of what is or would be prejudicial in that section "must be set against the background of the Act and the sorts of considerations which have time and again been identified by the courts about the care with which interference with business decisions especially of people such as liquidators and administrators should be made": Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (No 3) [1998] HCA 30; (1998) 195 CLR 1 at [53]-[54]; Naumoski v Parbery [2002] NSWSC 1097; (2002) 171 FLR 332 at [13]-[15]; Re Pan Pharmaceuticals Ltd (admins apptd); Selim v McGrath [2003] FCA 855; (2003) 47 ACSR 139 at [50]-[51].

Position of trustees in bankruptcy 59 In Hall v Poolman [2009] NSWCA 64; (2009) 75 NSWLR 99, the Court of Appeal referred to the development of case law with respect to supervision of liquidators by reference to the parallel case law arising in the courts' supervision of trustees in bankruptcy. At [73], their Honours referred to the following passage from Re Gault; Gault v Law (1981) 57 FLR 165 at 173 concerning an inquiry under s 179 of the Bankruptcy Act 1966 (Cth) ("Bankruptcy Act"): [T]he court should be loath to order an inquiry unless it considers that on the evidence before it there are substantial grounds for believing that the trustee erred in his administration. If the court considers that an inquiry is unlikely to reveal misconduct it should not make an order and put the respondent and possibly the creditors to the expense and trouble involved. It should also be borne in mind that a debtor applicant may have other remedies to pursue, for example, in an action for breach of trust. 60 At [76], their Honours referred to the following statement of French J (as his Honour then was) in Macchia v Nilant [2001] FCA 7; (2001) 110 FCR 101 at [50]: Section 179 operates in aid of the Court's supervision of trustees who are its officers. That operation, however, is subject to restraint against undue interference and to discretionary considerations including the practical benefit likely to be derived from the conduct of any inquiry. Like s 178, it may be invoked by a bankrupt after discharge and in part for the same reason, namely that the trustee's powers continue in the various ways referred to by Merkel J at first instance in Cheesman. It may also be the case that the trustee should be held to account for conduct in the administration of the estate which has affected the bankrupt in some way. As is the case with s 178, it is not a vehicle for pressing claims for common law damages under the general law. That is a matter for a court of appropriate jurisdiction. In addition the court will also have in such cases the discretion to determine the utility of an inquiry and its likely outcomes. For "although the court is given a broad discretion under s 179 of the Act, that discretion must be exercised in the interests of the orderly administration of the bankrupt's estate" - Re Challen (a Bankrupt); Ex parte Brown v Bendeich (unreported, Federal Court, Beaumont J, No QB 1548 of 1993, 23 April 1996) cited with approval by Merkel J in Cheesman at first instance, at 114. 61 The parties did not refer to any example of the use of the examination power in s 34 of the Bankruptcy Act to examine a trustee in bankruptcy.

Does the examination require justification? 62 The case law set out above supports a conclusion that the mandatory examination of the liquidator should not be permitted to proceed unless there is reason to believe that the examination may fulfil the purpose of s 596A being to benefit the company, its creditors, members or the public generally. That conclusion is based upon the role of the Court in protecting the integrity of the winding up, and in ensuring that the winding up is conducted in a timely and efficient manner. The conclusion is consistent with the requirements for the grant of leave to commence proceedings against a liquidator and for grounds to commence an inquiry under s 536. 63 Accepting that the language of s 596A is in the "widest possible terms", it does not prevent the Court from examining the purpose of the examination, and its possible results, with a view to staying the examination summonses if those matters do not justify the mandatory examination of the liquidator in this case. The undoubted existence of an express power to do precisely what KDC seeks to do (as Mr Sulan put it) does not compel a conclusion that the Court should not examine whether its exercise can be justified, as appears from Batistatos at [6], set out at paragraph [42] above. 64 On behalf of KDL, Mr Sulan submitted that an application under s 536 is of a different character from a mandatory examination under s 596A. In particular, he noted that s 536 confers a power to affect rights, by an order requiring the liquidator to "make good any loss" or to "make such further or other orders as the court sees fit". Thus, the "safeguards" provided in the context of a s 536 application are unnecessary in the context of an examination. I am not convinced that this conclusion follows from the stated premises. The examination summons involves a challenge to the integrity of the liquidation process in relation to KDC. Such a challenge warrants justification, to avoid intrusion into the regular administration of the liquidation (which has not concluded) and to prevent the liquidator from being required to account on oath for the exercise of discretions and commercial judgments if there is no suggestion of lack of good faith or breach of duty. 65 Mr Sulan argued that the purpose of s 596A is exploratory. In this case, he submitted, the purpose is to gather information and to find out whether the sale process has miscarried in the way that (he argued) it appears to have, and whether or not that leads to potential actions. Mr Sulan argued that the available facts are suggestive of a defective sales process and liquidators' responses to KDL's reasonable requests for information about the process were inadequate. 66 The particular facts relied upon by Mr Sulan were: (1) the apparent absence of any form of valuation obtained by the liquidators for the mine; (2) the sale process was completed within a two month period which, in the opinion of KDL, was insufficient for the process to be conducted adequately; (3) There is real doubt whether or not proper information was ever available to any interested purchaser; (4) an apparent failure to advertise the sale of the mine internationally; (5) the statements by the West Australian government to the effect that the mine was a an asset of "significant value to the State of Western Australia" and a "viable resource project"; and (6) the absence of information about which experts were retained to advise on the sale process. 67 Mr Sulan contended that the Court is not in a position to determine that the examination lacks a realistic prospect of having any practical utility. In particular, he argued, the Court is unable to reach any conclusion about the value of the mine. 68 Mr Sulan argued that, if conduct is revealed which may support a claim, then it is plainly in the interests of the creditors and contributories for that conduct to be revealed. Uncovering facts which may support such a claim through the examination would fulfil two of the commonly cited purposes of the examination power, namely: (1) the protection of the interests of the corporation's creditors; and (2) 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: see Evans at [252]. 69 On the other hand, Mr Sulan properly acknowledged the prospect that the examination might reveal no conduct capable of supporting a claim. 70 In this case, there is presently no positive evidence of any of the following: (1) fraud, dishonesty or other misconduct, or any lack of bona fides on the part of the liquidators in connection with the sale process; (2) any conflict of interest or lack of impartiality affecting the liquidators' conduct of the sale process; (3) the sale process having been conducted in a manner which was inconsistent with the proper discharge of the liquidators' functions. For example, there is no evidence of any improper purpose on the part of the liquidators in the manner of their conduct of the sale process; (4) any particular flaw in the liquidators' exercise of commercial judgment in connection with the disclaimer of the mine; or (5) that there may have been a different outcome, more favourable to the liquidation, if the liquidators had conducted the sale process differently. 71 The statements made by the WADMP do not provide substantial support to KDL's position in the absence of any explanation of the basis for the views expressed in such general terms. 72 Nor does Mr Sainty's statutory declaration provide sufficient justification for the examination. There is no evidence that Dr Ren's unnamed client might have purchased the mine for a price exceeding the price obtained by the liquidators for the mining assets. In particular, the statutory declaration says nothing about the position of Dr Ren's client in relation to the known rehabilitation obligation which KDC had quantified at over $28 million. Without addressing that issue, which must have been known at the time that the application to ASIC was made, Dr Ren's criticisms of the sale process have little, if any, weight. 73 The facts relied upon by KDL do not address the evidence that significant costs were being incurred by the liquidation as a result of the ongoing occupation of the Ellendale mine site, which was a matter plainly relevant to the liquidators' decision to disclaim the mine. 74 In those circumstances, I am not satisfied that the material relied upon by KDL provides reason to believe that the mandatory examination of the liquidator may provide a benefit to the company, its creditors, its members or the public generally. There is currently no realistic prospect that the examination will have any practical utility. KDL's desire to explore the circumstances of the sale process, which it considers to have been defective, does not justify the exercise of the s 596A power which, in this case, involves a substantial intrusion into the liquidation by examining the liquidator in the course of his conduct of that liquidation. The examination summons is therefore an abuse of process and should be stayed. It follows that the order for production of documents, which was made in aid of the examination summons, should be set aside. 75 Costs should follow the event. I certify that the preceding seventy-five (75) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.