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[2004] FCA 1021
Federal Court of Australia
2004-08-06
Nicholson J
Original judgment source is linked above.
REASONS FOR JUDGMENT 1 These reasons should be read with those in proceeding W63 of 2004 (Woolfe v Australian Securities & Investments Commission [2004] FCA 1020) delivered contemporaneously. 2 There are three interlocutory applications before the Court. Each is brought pursuant to r 11.5 of the Federal Court (Corporations) Rules 2000. That rule applies if a person is served with an examination summons. It permits the proposed examinee to apply to the Court for an order discharging the summons. 3 On 4 March 2004 the District Registrar made an order that summonses for examination under s 596A of the Corporations Act 2001 (Cth) be issued to Peter Francis Malone ('Mr Malone') and Paul Dominic Evans ('Mr Evans'). He further ordered that a summons for examination under s 596B of the Corporations Act be issued to David Woolfe ('Mr Woolfe'). Each of the proposed examinees now seeks an order setting aside the summons for examination directed to him.
evidence and submissions for examinees woolfe and evans 4 The case for Mr Woolfe and Mr Evans turns firstly to the affidavit of Mr Barry Waller, a director of the plaintiff Wainter Pty Ltd ('Wainter'), for a description of the purpose of their intended examination. The affidavit states that the proposed examination concerns an agreement entered into between Wainter and New Tel Limited ('New Tel') in about November 2001. The background to the agreement appears from the evidence of Mr Waller as being as follows. Under a sale agreement made in April 2000 and subsequently varied on a number of occasions, Wainter sold its shares in its subsidiary company UDC Group Pty Ltd (later named E. Communications & Networks Ltd, now in liquidation) to Cable & Telecom Ltd ('C&T'). The consideration payable by C&T to Wainter under the sale agreement was cash of $5 million (as to which $1.5 million was payable at settlement and the balance within 12 months of settlement) and 35 million ordinary shares in C&T. 5 Mr Waller's affidavit states that, on 27 November 2001, before New Tel issued a formal bidder statement he had a telephone conversation with Mr Malone of New Tel and Mr Woolfe. The latter gave him to understand he had been a partner of Freehills from 23 June 2000. Mr Waller's evidence was that during the telephone call both Messrs Woolfe and Malone spoke to him. It is said in the affidavit that New Tel required Wainter to forego the debt owing by C&T under the sale agreement (referred to as being $3.6 million, which included $100 000 for interest) or otherwise New Tel would not proceed with the takeover of C&T. It was also said that in addition to the shares in New Tel that Wainter would receive in accordance with the takeover, New Tel would issue 2 million options in New Tel to Wainter if it proceeded with the agreement to forego the $3.6 million debt. A response was sought as a matter of urgency. 6 Later that day Mr Waller telephoned Mr Woolfe and said to him words to the effect that, based on what was said during the earlier telephone call, Wainter would agree to the request. Wainter subsequently assigned the debt to New Tel, and acquired the shares and options in New Tel in consideration of the C&T shares and options owned by Wainter. 7 On 10 December 2002 an administrator was appointed to New Tel. On 13 January 2003 liquidators were appointed as a result of a creditors' voluntary winding up. On 4 March 2003 an official liquidator of New Tel was appointed by a court order. 8 Mr Waller's evidence was that as a result of Wainter's agreement with New Tel, Wainter had suffered a significant loss. He said this was because, but for the agreement, it would have retained a substantial shareholding (and options) in C&T and entitlement to payment of the debt. He said that the combined worth of the interest in C&T and the debt would be in the millions of dollars, perhaps in the region of $60 million. He considered that the prospects of recovering all or any substantial amount of the loss from New Tel were minimal. Therefore he had instructed his solicitors to send a letter of demand to Freehills. 9 Mr Waller also attests that Wainter's primary purpose for seeking to examine Messrs Woolfe and Evans is to assist in recovering the loss Wainter has sustained by virtue of the agreement of 27 November 2001. He said Wainter intends to make use of the oral testimony and access to documents which will derive from the examinations to facilitate commencement of proceedings against Freehills. The essence of the complaint would be that the circumstances of the conversation on the above date and the representations alleged to have been made in it were misleading or deceptive, or likely to be misleading or deceptive. 10 Nevertheless, he also said that the possibility of being able to examine the examinees would benefit other creditors of New Tel. First, he said that this was because the liquidators could obtain access to the information deriving from the examinations which would facilitate investigations into New Tel's financial position and the possibility of action against New Tel directors such as Mr Malone for insolvent trading. Second, he said that if Wainter succeeded against Freehills and recovered all of its loss from Freehills or Freehills' insurers, Wainter would not need to seek recovery out of the liquidation of New Tel or from Mr Malone and his insurers. Third, he said that the end result of recovery by Wainter against Freehills will be to substantially increase the pool of funds available to other creditors of New Tel. 11 Mr Waller's affidavit annexes a letter of demand from the solicitors for Wainter to Freehills dated 28 April 2003 which articulates the claim against Freehills consistently with Mr Waller's evidence. 12 Also attached to the affidavit of Mr Waller is a copy of a letter dated 17 June 2003 from the solicitors for Wainter to the liquidators of New Tel at PriceWaterhouseCoopers. It sought for the liquidators to prepare an expert report as to the solvency or otherwise of New Tel as at 27 November 2001. For Messrs Woolfe and Evans it is submitted that it is difficult to see how that could possibly be in the interests of New Tel in liquidation or other shareholders and creditors to assist Wainter in suing it or Freehills. 13 Mr Waller's affidavit also attaches evidence that on 2 September 2003 the solicitors for Wainter put to the liquidators a revised proposal reflecting a suggestion from the liquidators that an examination under s 596A and s 596B of Corporations Act should be considered. The revised proposal was that the liquidators would examine the applicants, requiring production of documents by them. Additionally, the liquidators would waive any legal professional privilege in relation to Wainter in respect of communications between Freehills, Messrs Evans or Woolfe, or New Tel. Further it was proposed that the liquidators would engage Wainter's solicitors to conduct the examination and allow them to retain the transcript. Next, the liquidators were to provide a report to Wainter as to New Tel's solvency and financial prospects as at 27 November 2001. 14 By letter dated 14 October 2003 one of the liquidators replied 'after giving the matter considerable thought, I advise that unfortunately I am unable to assist you'. Although the solicitors for Wainter by letter of the same date requested reasons for this response, there is no evidence such were forthcoming. 15 The case for Messrs Woolfe and Evans also relies on an affidavit of Mr Mark Blundell sworn on 12 February 2004. Mr Blundell is a solicitor in the firm of solicitors for Wainter. It attaches a memorandum of a telephone conversation between Mr Blundell and Mr Priest (a director of the Sydney office of PriceWaterhouseCoopers), which is said to have occurred on 22 August 2003. The note recorded that Mr Priest considered that by November 2001 it may be that New Tel was getting close to 'hitting the wall'. It was recorded that he said it was not beyond the realms of possibility that New Tel was insolvent at that time but that may be 'pushing it a bit'. It was also recorded that his preliminary view was that documentary evidence of indication of insolvency dated back to November 2001 was unlikely to be there. 16 Mr Waller's affidavit also annexed a copy of a letter from Wainter's solicitors dated 5 January 2004 to Mr Malone being a letter of demand to him in respect of what was said to be a misleading or deceptive conduct. Also annexed is a copy of a letter dated 6 January 2004 from Wainter's solicitors to the Complaints Management at ASIC seeking the approval of ASIC to examine persons concerning the examinable affairs of New Tel; that is, to authorise Wainter to be an 'eligible applicant' for the purposes of making the necessary application pursuant to s 596A and s 596B of the Corporations Act. This letter is more fully described in the reasons given in proceeding W63 of 2004 under the heading 'Request and Supporting Documents'. 17 For the examinees Woolfe and Evans, it was said that par 6 of that letter confirmed that the sole purpose of the proposed examinations was to elicit evidence in relation to the causes of action alleged to have arisen out of the conversation on 27 November 2001. In relation to par 7, it was submitted that it shows that this matter is not an instance where a creditor has to step in to conduct examinations in relation to examinable affairs of a company because a liquidator is unwilling or unable to conduct those examinations. It is said that on this evidence it is illusory for it to be contended that the examinations of Messrs Woolfe and Evans would be or could be of interest to the contributories and other creditors. 18 In relation to par 13 of the letter, it is submitted that if an action is brought against Freehills only, Freehills would necessarily join New Tel and seek contribution or indemnity from it. Therefore, it is submitted, it cannot seriously be contended that there will be a benefit to New Tel (or its shareholders and creditors) in an action being able to proceed successfully against Freehills. 19 Based on this evidence it is submitted for the examinees, Messrs Woolfe and Evans, that the predominant purpose of Wainter's proposed examination is furtherance of the foreshadowed action against Freehills. It is said that Wainter's purpose is clearly to obtain a forensic advantage in relation to its proposed action against Freehills, and to obtain pre-trial discovery and depositions from a potential defendant. Therefore, it is said an abuse of process arises which the Court should control by discharging each of the summonses. 20 In relation to the notion of an advantage to New Tel being present in an action against Freehills, it is submitted for the same two examinees that two advantages are contended for by Wainter. The first is that if Wainter succeeds in its action against Freehills it will not or would not proceed against New Tel. It is said that this is misconceived because Wainter has given no binding undertaking not to proceed against New Tel. Additionally and consistently with a submission made earlier above, it is said to be obvious that if the action was brought against Freehills, it would necessarily seek to join New Tel seeking indemnity and contribution. The second way the advantage or benefit is put is that an examination as to the solvency of New Tel as at 27 November 2001 would assist the liquidators in respect of claims of possible insolvent trading by directors. As to this second contention, the examinees Woolfe and Evans say that Wainter's sole focus was on 27 November 2001 when it may be that other dates could be of greater interest to the liquidators, and thereby creditors and contributories as a whole. Further, there was nothing to suggest Mr Evans could be of any assistance on this issue. Additionally, the evidence of alleged insolvency at the date claimed was, in any event, said to be 'rather thin'. 21 Additionally, it is submitted for those two examinees that it is apparent from the evidence of the attitude of the liquidators that they are not interested in the examinations proposed by Wainter and have refused to assist Wainter in that regard. It is submitted that this is consistent with what was said by Mason CJ in Hamilton v Oades (1989) 166 CLR 486 at 497, which should be understood as indicating that great weight must be given to the fact that Wainter's proposed examination was not considered by the liquidators to properly advance the interests of New Tel creditors and contributories. 22 Finally, it is submitted that as a matter of law if the predominant purpose of an eligible applicant seeking to conduct an examination is not a proper one, an abuse of process occurs and the examination should be stayed. Reliance is placed principally upon Re Excel Finance Corporation Limited (Receiver and Manager Appointed): Worthley v England (1994) 52 FCR 69 and other authorities, to which reference will be made below. 23 The application to discharge the examination summonses is also supported by an affidavit of Mr Woolfe in which he denies that either Freehills or himself is indebted to Wainter in the amount claimed and that he resigned from Freehills on 26 September 2003 to take up a position with a new employer. 24 Mr Woolfe asserts that the summons is oppressive in its application and scope. He states that he was a partner of Freehills. He was appointed a director of New Tel on 27 September 1996 and resigned on 16 August 2001. He states that he performed no legal work for New Tel from before 1996 to after 2001 and has no familiarity with the great majority of files held by Freehills relating to New Tel. He said that the job of gathering, sorting and making available New Tel related documents held by Freehills is burdensome because each must be considered in respect of both relevance and privilege.
evidence and submissions in relation to mr malone 25 In his affidavit Mr Malone denies the allegations and claim made by Wainter. He states that he believes that, based on his consideration of the demand in the summons, the only purpose for which Wainter has issued the summons is to 'fish' for evidence to support the allegations made in the demand and therefore to further its alleged cause of action against himself, Mr Woolfe and Freehills. Further, he states that he believes that Wainter has not used the power for the purpose of benefiting New Tel or New Tel's contributories or creditors. 26 In submissions on behalf of Mr Malone it is asserted that an examination under s 596A of the Corporations Act, whether sought by a liquidator or any other eligible applicant, must be predominantly for a purpose which accords with the fundamental legislative purposes of those provisions. It is said those purposes are to provide the liquidator with additional powers to enable the liquidator to gather the information required to wind up the company in the interests of its creditors. Accordingly it is submitted that the Court may set aside an order for examination if the predominant purpose for obtaining the examination summons is not for the benefit of the company, but rather to gain a forensic advantage not otherwise available to the applicant or to further the applicant's cause in litigation: see Re Spedley Securities Ltd (in liq); Spedley Securities Ltd (in liq) v Bank of New Zealand (1990) 3 ACSR 366 at 374-375; Re Excel Finance at 93 and Re Gartner Wines Pty Ltd (Receivers and Managers Appointed); Carter v Gartner (2003) 46 ACSR 264 at 282. See also Hong Kong Bank of Australia v Murphy (1992) 28 NSWLR 512 at 519. 27 The submissions state that although the authorities recognise that a collateral advantage may be acquired by a third party by virtue of the examination and that, of itself, will not render improper the purpose for which the examination summons was obtained (see Hong Kong Bank of Australia at 519), the attainment of that collateral advantage must not be the principal purpose for which the examination summons was obtained: see Re Gartner Wines at 282 referring to Re Excel Finance at 93. 28 It is submitted that Wainter's predominant and perhaps sole purpose in obtaining the examination summonses is to further its cause of action against Freehills. Further, it is said that the benefit to the creditors of New Tel, which Wainter asserts, is misconceived and is at best most indirect. The scope of the examination in relation to the production of documents for a period some nine months prior to the date about which it asserts an interest (27 November 2001) is also said to be oppressive. Hence, it is said that the summons against Mr Malone is improper and an abuse of the process of the Court.
applicable law 29 As appears from the submissions previously set out the principal question raised by these applications, so far as it concerns the law relating to improper purpose of such summonses, is whether the law is as expressed in Re Excel Finance or whether it has changed as a result of the introduction of s 596A and s 596B. I have been referred to the chain of decisions, both of full courts and single judges, on s 596A and s 596B and their predecessor sections. Initially I embarked upon a statement of the law particularly as enunciated by various full courts. However at the end of doing so I came to the decision of the Full Court of the Supreme Court of South Australia in Sandhurst Trustees Ltd v Harvey (2004) 206 ALR 594. In that decision Doyle CJ, with whom Perry and Bleby JJ agreed, gave reasons for allowing an appeal against a decision by a Master of the Supreme Court setting aside orders obtained by a debenture trustee for examination of two employees or members of the auditor of a company in liquidation. In doing so his Honour reviewed the cases to which I have been referred. Perry J also added some observations of his own on the issue of improper purpose. In my view, no point would be served by me seeking to recreate what has been done in the reasons for judgment in that Full Court decision in setting out the law relating to the scope of the discretion conferred by s 596B and the purposes which it authorises. I do not seek to distinguish in that respect the purpose authorised by s 596A nor was any argument put that I should do so. 30 With respect, I rely particularly on pars [29]-[53] of the reasons of Doyle CJ and pars [88]-[97] in the observations of Perry J. The effect of the decision is to make it clear that the discretion conferred by s 596B: '…is to be exercised to enable inquiry to be made into the examinable affairs of a corporation, with a view to exposing misconduct (which might attract civil or criminal sanctions, or possibly action by a body such as a professional regulator) or which might provide information that will advance (in a broad sense) the external administration of the corporation in question.' (per Doyle CJ at 605, at [50]) He continued at [51]: '[51] The fact that a consequence of an examination order may be a forensic advantage to a particular class of creditors, or to a particular creditor, of the corporation, or to a particular person, does not of itself lead to the conclusion that the order was not made for a proper purpose. Nor does the fact that the order was made at the instance of that person or creditor. On the other hand, the power is not conferred with a view to its exercise solely to benefit an individual with a claim of some kind against the corporation in question, or with a claim arising out of its affairs. Nor, I consider, is it conferred to enable an applicant for an order to pursue an inquiry into a matter in relation to which the applicant has no legitimate interest.' 31 It is clear from the reasoning of Doyle CJ in relation to the authorities identified in preceding paragraphs that he and the court approved and applied the judgment of Ormiston J in Flanders v Beatty (1995) 13 ACLC 529, particularly in relation to what was there said concerning the expansion of the examination provisions by the amendments made to them in 1992 with the introduction of ss 596A-597B, from which the objects to be served by the issue of an examination summons are to be discerned. Doyle CJ (at [52]) also expressed his agreement with the observation by Santow J in Re New Cap Reinsurance Corp Holdings Ltd; Gibbons [2001] NSWSC 835 at [15] that a creditor's action against a third party must at least have the potential either to assist the liquidation (in the sense of the winding up for creditors as a whole) or serve the wider statutory purpose of investigating and potentially prosecuting (civilly or criminally) those who have contributed to the circumstances that have led to that corporate collapse. 32 In his observations Perry J stated that it was clear from the authorities referred to by Doyle CJ that it is no longer a requirement that the application be directed towards benefiting the corporation as a whole: at [91]. He said (at [97]) that although the discretion of the court to refuse an application on the ground that it would amount to an abuse of process remains, it will not amount to an abuse of process simply to demonstrate that the application is brought by a single creditor to pursue his or her own ends. 33 In Sandhurst Doyle CJ identified three areas where the examination would be for a purpose contemplated by s 596B. The first was that the examination might expose misconduct by the auditor or by members of that firm which would be of legitimate interest to ASIC or to those responsible for the regulation of the auditing profession. Second, the examination might provide evidence pointing to a possible claim by Normans (the company in liquidation) against Deloitte Touche Tohumatsu (Normans' auditors) for breach of duty, a possible claim by Sandhurst (the trustee of convertible notes issued by Normans) against Deloitte, or a possible claim by the note holders against Deloitte. He said at least the information disclosed by the examination would enable Sandhurst to advise the note holders whether Sandhurst should proceed with its action as it is, reshape it or abandon it, or whether Sandhurst should recommend that the note holders bring their own action against Deloitte, or take other action to protect their investment. Third, he said the orders might result in the disclosure of information of general relevance and assistance to the liquidator of Normans. As the examination orders might result in the obtaining of information of legitimate interest to ASIC, to the regulators of the auditing profession and to the liquidator of Normans, his Honour considered that they were for a purpose contemplated by s 596B. The fact that they might also produce information that assisted Sandhurst was additional. 34 I propose to apply the law as enunciated in Sandhurst by the Full Court.
whether examination orders properly made 35 I now propose to address the matters raised in the affidavit of Mr Waller to support the view expressed by him, and carried forward in submissions, that an examination conducted by Wainter has the potential to benefit New Tel and its creditors. In doing so it is not necessary, in accordance with the law as enunciated in Sandhurst, to address the question whether Wainter's predominant purpose for seeking to conduct the examinations was to further its litigation. That will not be the determinative test. 36 The first submission for Wainter was that there would be benefit to the other creditors of New Tel because if the examinations were conducted the liquidators could obtain access to the information deriving from the examinations, which would facilitate investigations into New Tel's financial position and the possibility of action against New Tel directors such as Mr Malone for insolvent trading. Expressed another way, it is said that an examination as to the solvency of New Tel as at 27 November 2001 would assist the liquidators in respect of claims of possible insolvent trading by directors. That possibility is open. Whether in fact it has any substance will depend entirely upon the content of the examinations. It cannot now be ruled out. It could raise conduct not only of interest to the liquidators but also 'of legitimate interest to ASIC': Sandhurst at [55]. 37 The second submission for Wainter was that if it succeeded against Freehills and recovered all its loss from Freehills or Freehills' insurers, Wainter would not need to seek recovery out of the liquidation of New Tel or from Mr Malone and his insurers. In other words, the end result of recovery by Wainter against Freehills would be to substantially increase the pool of funds available to the other creditors of New Tel. As has been seen, this has elicited the response on behalf of the proposed examinees that the assertion does not take account of the real possibility that Freehills will seek to join New Tel in the proceedings by Wainter and seek from New Tel indemnity or contribution. Further, it is said that Wainter has given no binding undertaking not to proceed against New Tel. Even accepting the submissions for the proposed examinees, it cannot presently be concluded that if Wainter fully recovered from Freehills or its insurers there will not be an advantage to New Tel and its creditors. 38 I therefore find that the examination of the proposed examinees, with a view to determining whether New Tel was solvent as at 27 November 2001 and related issues, has the possibility of assisting the liquidators of New Tel and ASIC. In the event it provided to Wainter the evidence upon which to successfully bring an action against Freehills or its insurers, it might or, more probably, would assist the other creditors of New Tel should Wainter fully recover its alleged losses against the proposed defendants. 39 Therefore I find that each of the examinations to which the summonses relate are within the purpose contemplated by s 596A (in the case of Mr Malone and Mr Evans) and s 596B (in the case of Mr Woolfe).
conclusion 40 For the above reasons the three interlocutory applications to discharge the examination summonses should be refused. However, the issue raised in the applications in relation to provision of documents (for which no onus was made out that would alone support any of the applications on the grounds of oppression) will be listed for as an issue for subsequent directions. I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice RD Nicholson.
Counsel for the Plaintiff: Mr JC Giles
Solicitor for the Plaintiff: Solomon Brothers
Counsel for Messrs Woolfe and Evans: Mr GR Donaldson
Counsel for Mr Malone: Ms JA Routley
Solicitor for Mr Malone: Cocks Macnish (until 6 July 2004)
Date of Hearing: 26 March 2004
Date of Last Written Submissions: 28 July 2004
Date of Judgment: 6 August 2004
Excel Finance Corporation Limited (Receiver and Manager Appointed), Re: Worthley
England
(1994) 52 FCR 69
(1989) 166 CLR 486
(1992) 28 NSWLR 512
(2004) 206 ALR 594