Brown v Bennett [2001] NSWSC 458 | Case summary

1 HIS HONOUR: There are currently four sets of interlocutory applications before the court. Each seeks an order under section 596C(2) of the Corporations Law setting aside an order for examination and production of documents under s 596B of the Corporations Law. 2 The company Ezishop.Net Limited was incorporated as a proprietary company on 28 September 1998 and converted to an unlisted public company on 11 May 2000. It appointed the plaintiffs administrators on 5 October 2000. Each of these gentlemen became a liquidator under a creditors' voluntary liquidation on 1 November 2000 after a resolution of creditors under s 439C of the Corporations Law. 3 On 10 April 2001 and 11 April 2001 Senior Deputy Registrar Robinson made orders for the issue of summonses to certain directors of the company under s 596A of the Corporations Law, as well as for the four applicants under s 596B. She did so on the basis of two affidavits of one of the liquidators, Mr Sims. As far as I am aware she did not give any reasons for her decision. 4 The liquidators say that on 16 August 2000 there was a meeting of most of the shareholders of the company during which it was agreed to fund the company in a certain way, and that agreement became formalised under a document known as a share subscription agreement on 29 August 2000. 5 Under that agreement three of the present applicants seem to have agreed to subscribe to shares in the company and to make such subscriptions on the last days of the months of August 2000 through to January 2001. With some exceptions they did not do so. The liquidators indicate that they wish to sue three of those applicants because of their non-subscription. 6 Clauses 2.1, 2.7, 4.1, 9.1 and recitals A and B of the share subscription agreement are of relevance. 7 Recital A refers to people called "Subscribers" and "Lenders". Three of the present applicants are within the definition of subscribers. The recital notes that "The Subscriptions and Lenders have collectively committed to provide funding of $2,000,000 million to the Company, on the terms and conditions set out in this Agreement." 8 Recital B notes - why it is a recital I do not know - that each subscriber agrees to subscribe for the relevant shares set out in annexure 2 by the dates specified in annexure 2 and the company agrees to issue options. 9 Paragraph 2.1 provides that "Subscribers each agree to file with the Company a duly executed Application for Shares for the number of Shares set out in Annexure 2 by or on each applicable Subscription Date and to subscribe the Total Consideration by bank cheque for the Shares by or on that date." 10 Clause 2.7 provides that each subscriber and lender agrees that they are legally bound to subscribe for the shares and that if they fail to comply with those obligations the amount that they should have subscribed or lent will be a debt due to the company and immediately recoverable as such. 11 Clause 4.1 of the agreement notes that the company is to make an initial public offering immediately intending to raise $3 million with the aim of listing the company on the stock exchange in November 2000 and by no later than 30 June 2001. 12 Clause 9.1 is as follows: "This Agreement is the entire agreement of the parties about the subject matter of this Agreement and supersedes all other representations, negotiations, arrangements, understandings or agreements and all other communications. The Subscribers, Lenders and Guarantors have carried out their own due diligence on the Company and no party has entered into this Agreement relying on any representations made by or on behalf of the other, other than those expressly made in this Agreement." 13 The correspondence shows that the applicants say that there was a total failure of consideration as the company was at all times insolvent. It appears they are also saying there were representations made to them by the directors on 16 August which may have led to the execution of the agreement. 14 The liquidators say that they need to examine the applicants to ascertain the strength of the defences as to misrepresentation and generally, and also to see if the applicants have the wherewithal to meet the judgment. 15 The court is not in the happy situation of knowing what the liquidators claim. The agreement in hindsight is not a very well drawn document and one can see that there may be two or three possible claims by the liquidators. Depending on what those claims are, so will the defence be. It is obvious that there at least four defences available to any of the defendants who might be sued, only one of which, namely misrepresentation, would seem to involve any questions of fact. The other matters involve total failure of consideration, whether the agreement was conditional on all the subscribers making payments and frustration. I note that the drafter seems to have omitted the usual "joint and several clause" either by inadvertence or deliberately. 16 The misrepresentation defence would, prima facie, fail because of clause 9.1. However, it may well be that the liquidators fear that there will be a defence that clause 9.1 was a part of the agreement because of a misrepresentation, as well as the other parts of the agreement. However, if on its true construction the agreement cannot give rise to a liability on any of the proposed defendants, then whether or not that defendant may also have a claim that the agreement, if valid, would be set aside for misrepresentation is quite otiose. 17 There are seven actual applicants, Mr Stone, a solicitor, a partner in Messrs Bowring Stone who was at all times acting for at least two of the other applicants; B Marheine and his company CBM Mining Pty Limited; and Mr Hand and his company, Vermuemu Pty Limited. The other applicants are Tim Efkarpidis and his company Galnom (No 1) Pty Limited which claims to be the trustee of the Efkarpidis superannuation fund. 18 The interlocutory process by and on behalf of the applicants came before me last Monday. I first considered the application of Mr Stone. The only evidence on that application was Mr Stone's affidavit. The liquidators gave no evidence. One of the orders sought access to the liquidator's affidavit before Deputy Senior Registrar Robinson, which order was opposed. I assumed that the liquidators made a conscious decision not to tender any evidence. I then set aside the summonses against Mr Stone as I considered on the material presented by the applicant that it was an imposition to require a solicitor of this court to attend and wait in the court "from 10am on 12 June 2001 from day to day until excused by the Court" with only conduct money when he swore he had no documents other than privileged documents and would be able to give no information other than which was openly available. 19 Today the liquidators were represented by senior counsel as well. Mr Aldridge SC asked me to reopen the matter against Mr Stone. He wished to read the affidavits of Mr Sims, one of the liquidators which were tendered before Senior Deputy Registrar Robinson. Indeed, last Monday when the second application was called on, that of Mr Hand, these affidavits were in fact read in that application. 20 Mr Powell for Mr Stone objected. 21 I can see no ground for allowing the reopening. It was not suggested that counsel who appeared for the liquidators last week had overlooked anything. Applications made by liquidators, especially those which directly affect the rights of others, should be heard on material presented once and for all. 22 Indeed, the only additional material is that Mr Stone would be able to give a further independent account of what had happened at the meeting on 16 August. It would seem from the evidence before the Court there were present at the meeting two representatives of the solicitors who had drafted the share subscription agreement, the directors, and the four individual examinees. What Mr Stone had heard at that meeting would almost certainly not be the subject of legal professional privilege. Accordingly the fact that Mr Stone could give that material, and it may well affect the liquidators, would be a material matter. However, I could have been told that last week. Furthermore, the authority is that when one is a solicitor who can give evidence it is usually oppressive to require an expert to give material at a public examination free of charge without paying his proper fee: cf Brown v Bennett [2000] TLR 772. These factors reinforce my view that I should not reopen the matter. 23 I should note that where I left the matter last Monday was that I was part heard in Mr Hand's application and I stayed that application and the other two applications over to today. I heard the evidence this morning and then reserved my judgment until 2 o'clock. At 2 o'clock I suggested the way forward may be for the examinees to volunteer to give affidavits which would deal with what happened at the meeting and the ability of three of them to meet any judgment. After a short adjournment Mr Powell indicated that his clients would agree to that. 24 However, the liquidators declined, saying that the liquidators' personal view is that "We would like to see them in the witness box". No reason was given for why the liquidators have that personal view. No reason was given as to why citizens of this State should spend days waiting around the Equity Division registry just because persons who are appointed by the directors as administrators and later became voluntary liquidators, and who are not officers of the Court, have formed some personal view on undisclosed reasons why they should be inconvenienced. Instead, the submission of the liquidators is that people can be inconvenienced at their whim and provided they want to see someone in the witness box they are entitled to do so. Furthermore, the liquidators expect people to come to Court and spend their time at their whim without any prospect of ever being reimbursed for any of their attendance, except perhaps their train fare from Newcastle to the Court. 25 I do not consider I have power to set aside a s 596B summons merely because I consider that the procedure under s 597A is more appropriate. That is a matter for the liquidators. 26 However, the submission of Mr Aldridge SC is that the decisions of the superior courts to this allow these voluntary liquidators to make these demands. Unfortunately he is right. However, even these liquidators in my view cannot succeed against Mr Hand in any event as I will shortly indicate, and accordingly the summonses in his matter should be set aside. 27 I should give full reasons. 28 The predecessor of s 596B applied to both directors and non-directors. Section 596A now applies to directors, and s 596B only to outsiders who may be able to give information which will assist the liquidator. 29 Prima facie, the liquidators say that they are eligible persons, and that they have formed the opinion that people may be able to give information that will assist as to the winding up of a company, thus they are entitled to have such persons examined and to obtain an order from the Court accordingly. 30 A judge will set aside such orders if they are oppressive. They will be oppressive if they are an abuse of process, particularly if the liquidator has issued the summonses for an improper purpose. 31 There are a number of decisions, including some of my own, which say that one must be very careful to distinguish between situations where a listed public company is the subject of investigation where there is a very great public interest, and cases where smaller concerns have gone into liquidation where there is not quite the same public interest. Furthermore, one must distinguish between a situation where there is a fully independent liquidator who is acting as an officer of the court and a situation where there is a voluntary liquidator who is not an officer of the court and accordingly is not subject to the directions of the court as to the way he goes about his business; see Re Equiticorp Finance Limited; Ex parte Brock (1992) 6 ACSR 725, 728 to 730. 32 Furthermore, the 4th edition of McPherson The Law of Company Liquidation (LBC, Sydney, 1999) at pp 634 and following, makes it quite clear that there is a very great difference between the modern commercial position taken in the English authorities and the Australian authorities, the latter, in the view of the current editor, giving too much weight to the position of the liquidator and too little weight to other interests. 33 There is another commercial aspect to cases like these which seems to be considered equally irrelevant. If people who are asked to rescue companies in financial trouble find that they are likely to have to spend days answering hostile questions in a court, they won't offer help in the first place. 34 However, a clear message appears from comparing the decision of Santow J at first instance in Vagrand Pty Limited v Permanent Trustee Australia Limited (1995) 17 ACSR 386 and the way in which the views of Santow J, who echoed many of the sentiments I have just adverted to, were soundly reversed in the Court of Appeal, reported as Sherlock v Permanent Trustee Australia Limited (1996) 22 ACSR 16. The message is that single judges are to follow the traditional line that the opinions of liquidators who state that they have proper grounds for making inquiries are to be given almost overwhelming weight when deciding whether an examination should be ordered. 35 I consider that in this day and age one should require the liquidator, like most administrative authorities, to show that he had not taken into account irrelevant considerations, nor failed to take into account all relevant considerations. One of the relevant considerations that I would have thought that the liquidator would take into account is whether in the interests both of creditors and of the examinees it was more appropriate, especially of a person of particular credit such as a solicitor, to require an affidavit under section 597A of the Corporations Law rather than require personal examination. I do not know whether the liquidators ever considered that. I suspect they did not, in view of the statement that they had formed this personal view. 36 However, I do not think in the light of the message given to single judges by the Court of Appeal in Sherlock's case that I should set aside the summonses on that ground, especially as there was no cross examination of the liquidators. Indeed, what cross examination should be permitted of liquidators in this case is problematical in the light of the whole policy behind s 597B. I note the point however because Powell JA referred to it in Sherlock's case. 37 I have already set aside the summonses against Mr Stone and I indicated why I did not intend to revisit it. The case against Mr Hand seems to be one which, on the material before me, the liquidators could not possibly succeed even if there was a representation. The principal reason for this is that he was not by himself or his company required to make any financial provision until after the company had gone into administration and that by that stage s 437C had frustrated the contract. Accordingly, the representation, if any, made on 16 August would be completely otiose. 38 I am told that senior counsel has advised there is a good case against all. I have not been privy to that. I do not know what facts senior counsel was given. I could easily find on the balance of probabilities that senior counsel did not have enough facts for the liquidators by saying they need to know of those facts from these examinees before they could decide if they should proceed. 39 Accordingly, bowing to precedent, I dismiss the interlocutory process filed by Messrs Efkarpidis and Galnom (No 1) Pty Limited; and Brian Marheine and his company CBM Mining Pty Limited, and allow the appeal of Mr Hand and Vermuemu Pty Limited. 40 For practical reasons I will vacate the return date of the summonses requiring production of documents on 22 May 2001 and substitute instead 5 June 2001. 41 I order that the liquidators pay the costs of the interlocutory process filed by Mr Stone, by Mr Hand and Vermuemu Pty Limited. I order that Messrs Efkarpidis, Galnom (No 1) Pty Limited, Brian Marheine and CBM Mining Pty Limited, pay the costs of the liquidators of these summonses.

Brown v Bennett

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