Ceramic Fuel Cells Limited (In Liq) v McGraw-Hill Financial, Inc

1. The interlocutory application dated 23 June 2016 is dismissed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

WIGNEY J: 1 The applicant in this representative proceeding, Ceramic Fuel Cells Limited, has applied for leave to issue and serve subpoenas on two foreign entities. One of those entities, Euroclear SA/NV Euroclear Bank, is an entity located in Belgium. The other, Clearstream Banking SA, is an entity located in Luxembourg. Ceramic's purpose in having the subpoenas issued and served is to obtain the names of persons and entities who are likely to be members of the class or group on whose behalf it has commenced the representative proceeding. The group members are persons who between 2006 and 2008 acquired interests in, and suffered loss as a result of, reliance upon the rating given to certain financial products known generally as Duke CDOs or Duke notes. Both Euroclear and the Clearstream are said to have acted as so-called "clearing houses" in respect of the issue of the Duke notes. As such, it is believed that they are likely to have documents which may identify the holders of the Duke notes during the relevant period. 2 This is, in fact, the second occasion on which Ceramic has attempted to obtain documents containing information which will assist it in identifying the group members. In March this year, the Court granted Ceramic leave to issue and serve a subpoena on an entity domiciled in the United States. That entity, US Bank National Association, was the current trustee of the Duke notes. In communications with Ceramic's lawyers, US Bank National Association had indicated its willingness to produce documents which might identify the holders of the Duke notes, but only if subpoenaed to do so. There was no indication that US Bank National Association would object to, or take issue with the enforceability of, a subpoena issued by an Australian court. A subpoena was in due course issued, and served in accordance with the Hague Convention. Unfortunately, however, US Bank National Association reneged on its apparent assurance that it would produce documents in answer to a subpoena. It advised Ceramic's lawyers that it considered that the subpoena was not enforceable in the United States, and that it would only comply with a subpoena issued by a United States court. 3 In the Court's reasons for granting leave to issue and serve the subpoena on US Bank National Association, detailed consideration was given to the Court's power to issue and grant leave to serve a subpoena on a foreign entity: Ceramic Fuel Cells Limited (In Liq) v McGraw-Hill Financial, Inc [2016] FCA 401 (Ceramic No 1). The reasons in Ceramic No 1 also discuss the relevant factual background, including the nature of the substantive representative proceeding and Ceramic's past endeavours to ascertain the identity of the group members. It is unnecessary to rehearse that factual background in these reasons. 4 In relation to the Court's power to issue a subpoena on a foreign entity, in Ceramic No 1 it was concluded that the Court has power pursuant to rules 10.44, 24.01 and 24.12 of the Federal Court Rules 2011 (Cth) to grant leave to issue and serve a subpoena on a foreign entity. It was also concluded that, in a representative proceeding, the Court has power pursuant to s 33ZF of the Federal Court of Australia Act 1976 (Cth) to issue a subpoena which is directed to identifying group members. 5 Central to the conclusion in Ceramic No 1 concerning the power to issue such a subpoena was the finding that considerations of international law and international comity did not require that either the relevant rules or s 33ZF of the Federal Court of Australia Act be read down so as to exclude entirely the power to issue and serve a subpoena on a foreign entity. In exercising its power to issue and grant leave to serve a subpoena on a foreign entity, however, the Court is required to consider whether such a subpoena might breach international law or international comity. The Court must also exercise care and restraint. The Court would be unlikely to issue and grant leave to serve a subpoena on a foreign entity in circumstances where that would involve a clear breach of international law or international comity. 6 Consideration was also given in Ceramic No 1 to another important discretionary factor in deciding whether to issue and grant leave to serve a subpoena on a foreign entity. That consideration was that the Court has no effective power to enforce such a subpoena. That consideration was not found to be a weighty factor in deciding whether to issue a subpoena to US Bank National Association given the assurance that had apparently been given in relation to compliance with the subpoena. Of course, the subsequent refusal by US Bank National Association to comply with the subpoena only serves to highlight the importance of giving close consideration to the evidence as to whether compliance with the subpoena is likely to be an issue. 7 The Court ultimately granted leave to issue and serve the subpoena on US Bank National Association having regard to a number of particular facts and circumstances. It is unnecessary to repeat those facts and circumstances here. The question that arises in the present application is essentially whether the facts and circumstances relating to the proposed Euroclear and Clearstream subpoena differ in any material respect from those considered in the context of the US Bank National Association subpoena. Would the issue and service of the subpoenas in question give rise to real issues of international law or international comity? Is the effective inability of the Court to enforce compliance with the subpoenas likely to be an issue in respect of subpoenas served on entities in Belgium and Luxembourg? 8 There does not appear to be any reason to doubt that both Euroclear and Clearstream may have documents that may assist in identifying persons who acquired an interest in the Duke notes during the relevant period. Exactly what those documents are likely to be, and exactly what they might reveal, is somewhat less clear. The nature of the Duke notes and the terms of their issue are matters of some complexity. So too is the involvement of Euroclear and Clearstream. In the almost 300 page Information Memorandum relating to the issue of the Duke notes, Euroclear and Clearstream are first referred to on page 99 under the heading "Clearing Systems" in the following terms: Beneficial interests in each Global Security will be shown on, and transfers thereof will be effected only through, records maintained by Euroclear Bank S.A./N.V. ("Euroclear") and its direct and Indirect Participants, including Clearstream, Luxembourg. Transfers between members of, or Participants in, Euroclear (each a "Participant") and Clearstream Banking, Luxembourg S.A. ("Clearstream, Luxembourg") will be effected in the ordinary way in accordance with their respective rules and operating procedures. See "Settlement and Clearing". 9 At Page 207 of the Information Memorandum, under the heading "Settlement and Clearing", the following is stated: Global Securities Investors may hold their interests in a Global Security directly through Euroclear or Clearstream, Luxembourg, if they are Participants in such systems, or indirectly through organizations [sic] which are Participants in such systems. Euroclear and Clearstream, Luxembourg will hold interests in Global Securities on behalf of their Participants through customers' securities accounts in their respective names on the books of their respective depositaries. So long as the depository for a Global Security, or its nominee, is the registered holder of such Global Security, such depository or such nominee, as the case may be, will be considered the absolute owner or holder of such Global Security for all purposes under the Indenture and Participants as well as any other persons on whose behalf Participants may act (including Euroclear and Clearstream, Luxembourg and account holders and Participants therein) will have no rights under the related Global Security, the Indenture or the Subordinated Note Issuing and Paying Agency Agreement. Owners of beneficial interests in a Global Security will not be considered to be the owners or holders of the related Offered Security, any Secured Note or Combination Note under the Indenture or any Subordinated Note under the Subordinated Note Issuing and Paying Agency Agreement. In addition, no beneficial owner of an interest in a Global Security will be able to exchange or transfer that interest, except in accordance with the applicable procedures of the depository and Euroclear or Clearstream, Luxembourg (in addition to those under the Indenture or the or the [sic] Subordinated Note Issuing and Paying Agency Agreement (as the case may be)), in each case to the extent applicable (the "Applicable Procedures"). 10 The reference to "Global Security" in these parts of the Information Memorandum is explained in an earlier part of the Information Memorandum which deals with the "form" of the securities in question. Classes of the Duke notes that were sold outside the United States to persons that were not US citizens were to be represented by "global notes" called Global Securities. Fortunately, it is unnecessary for present purposes to fully comprehend what this all means. It is perhaps sufficient to observe that whatever documents may be held by Euroclear and Clearstream in relation the Duke notes or transactions concerning them, they are unlikely to comprise a straightforward list of persons who acquired interests in the Duke notes. Rather, they are likely to include documents recording the details of the accounts of customers of Euroclear and Clearstream that traded Duke notes during the relevant period. Those customers would not necessarily be the beneficial owners of interests in the Duke notes. 11 As they did prior to seeking leave to issue the subpoena to US Bank National Association, Ceramic's lawyers contacted both Euroclear and Clearstream to ascertain what relevant documents they might hold and what their response would be to a subpoena issued by the Court requiring them to produce documents. The responses of both Euroclear and Clearstream to those inquires are important. They reveal potentially significant issues relating to compliance with the proposed subpoenas.