Featherby (Administrator) of Calejac Pty Ltd (Receivers Appointed) (Administrators Appointed) [2002] FCA 698

REASONS FOR JUDGMENT ON APPLICATION FOR REVIEW OF DECISION OF REGISTRAR AND DISCHARGE OF EXAMINATION SUMMONS 1 From September 1996 to about April 1997 Calejac Enterprises Pty Ltd carried on business as a wholesaler of sportswear trading under the name "Kappa Australia". Early in 1997 the business was taken over by its subsidiary, Calejac Pty Ltd ("Calejac"). Both companies were controlled by the family of Walter Aquino. He was the managing director and chief executive of Calejac. He and his wife, Anne Maria Aquino, were the directors. A company called Scottish Pacific Business Finance Pty Ltd ("Scottish Pacific") provided financial services to Calejac Enterprises during the time it operated as Kappa Australia and thereafter provided services to Calejac. 2 It appears from the evidence before the Court, which is not contested for present purposes, that Scottish Pacific and Calejac made a written agreement on 29 May 1997 under which Scottish Pacific agreed to provide a factoring facility to Calejac. By that agreement Scottish Pacific was to take assignments of debts owing to the company in consideration of an amount which it would pay to Calejac based on a formula contained in the agreement. In order to secure its obligations to Scottish Pacific under the Factoring Agreement, Calejac executed a charge in favour of Scottish Pacific on 29 May 1997. 3 Under an exclusive licence to distribute Kappa clothing in Australia, Calejac supplied products to retail outlets whose debts to it were assigned to Scottish Pacific. Pursuant to the agreement, Calejac was advanced funds by Scottish Pacific which is said currently to be owed about $960,000. On 7 March 2002, Scottish Pacific appointed Norman Mel Ashton and Jeffrey Laurence Herbert as joint and several receivers of Calejac's assets. On 5 April 2002, Glenn Robert Featherby and Mark David Reilly of Featherby Reilly Chartered Accountants were appointed by the company as joint and several Voluntary Administrators. 4 On 24 April 2002, the administrators made application under s 596B of the Corporations Act 2001 (Cth) for an order for the issue of summonses for examination to a number of persons including officers of Benchmark Debtor Finance Pty Ltd ("Benchmark"). They are Peter David Langham, the managing director and two employees, Mark Smith and Eileen Windsor. On 10 May 2002, the District Registrar made orders in the following terms: "1. Summonses for examination under section 596B of the Corporations Act be issued to the persons named in Schedule 1 to the Application in the form of the amended draft summonses filed on 9 May 2002 and addressed to those persons respectively. 2. Each of the summonses be returnable before a Registrar on a date and time to be fixed by the District Registrar. 3. The examinations be recorded in writing and the examinees do sign the written transcripts of their respective examinations. 4. The costs of this application be paid by Calejac Pty Ltd." On 17 May 2002, an application was filed on behalf of Messrs Langham, Smith and Windsor seeking a review of the decision of the Registrar and orders discharging the summonses for examination issued to them. 5 The application, to the Registrar, for the issue of the summonses was supported by affidavits sworn by Mark David Reilly, one of the administrators, on 24 April and 9 May. In his affidavit of 9 May Reilly exhibited affidavits sworn in proceedings in the Supreme Court of Western Australia by Norman Ashton one of the receivers of Calejac and Alan Thomas Graham a former director of Scottish Pacific. The affidavits which they swore in the Supreme Court were in support of an application for an interlocutory injunction to restrain a company called Our Family Pty Ltd ("Our Family") from interfering with Calejac's right to possession of certain goods. Our Family was a company which operated a number of the retail outlets for Kappa clothing throughout Australia which had been supplied with products by Calejac. Our Family was controlled by members of the Aquino family. Calejac was one of its shareholders. 6 In his affidavit of 24 April 2002 Reilly referred to the affidavits of Graham and Ashton in the Supreme Court and to conversations with them about Calejac's trading activities and its dealings and transactions with associated companies and with Benchmark. Based on those affidavits and conversations he stated his belief that Scottish Pacific had agreed to provide a factoring facility to Calejac and under that facility to take assignments of debts owing to Calejac and to pay Calejac an amount based on a formula. Calejac had granted a charge to Scottish Pacific. It held an exclusive licence to distribute Kappa clothing products in Australia, that being a licence held from Basics NV, a company incorporated in the Netherlands. Under the licence Calejac supplied Kappa products to various retail outlets. Their debts to Calejac were assigned to Scottish Pacific under the Factoring Agreement, Calejac was advanced funds by Scottish Pacific and Scottish Pacific was owed about $960,000 under that agreement. 7 Reilly further deposed that he wished to investigate, through public examination, various matters including the following: 1. Possible "double factoring" by Calejac, ie factoring to Benchmark of debts already assigned to Scottish Pacific. 2. Various breaches by Calejac of the Factoring Agreement. He stated his belief that there may be grounds for recommending that the company be wound up in order that a preference action be commenced against Benchmark in respect of various payments made to Benchmark by the company. In support of the issue of summonses against Langham, Smith and Windsor, he said that they had various dealings with Our Family and related companies as well as various retail outlets whose debts were factored to Scottish Pacific and/or Benchmark. 8 In his affidavit of 9 May 2002, Mr Reilly exhibited the affidavits of Graham and Ashton in the Supreme Court proceedings. In Graham's affidavit he referred to conversations he had with Nigel Thayer, the credit officer of Scottish Pacific in its Perth office on 28 February 2002 in which Thayer referred to numerous complaints made by licensees in relation to dealings with Calejac. One of the complaints was that statements had been received from Scottish Pacific by licensees with respect to sums already billed as Calejac invoices from Benchmark where all or part of those sums had been paid to Benchmark. Other irregularities identified by Graham concerned stock returned to Calejac by licensees which was not credited and invoices being sent to licensees and subsequently factored by Scottish Pacific for which stock had not been received. 9 Graham also became concerned when he found out that Calejac had retained a business consulting firm called Geers & Pusey Partners to review its operations. That firm sent letters to licensees essentially to prompt those of them who were slow paying. Graham said this was a matter of concern to him because the letter pertained to debts assigned to Scottish Pacific under the Factoring Agreement and threatened legal action by Calejac to recover those debts. This was prohibited by the Factoring Agreement. No other party was entitled to approach debtors in respect of the debts once assigned. A further concern was that the Kappa stores run by Our Family were stores which Scottish Pacific had been led to believe were run by totally independent licensees. It was on that basis that Scottish Pacific had agreed to factor the debts. 10 An affidavit was sworn by Peter Langham in support of his application and that of Smith and Windsor to have the Registrar's decision reviewed and the examination summonses discharged. He said in his affidavit that on 2 May 2002 he attended the second meeting of creditors of Calejac convened by the administrators. At that meeting a Report of the Administrators was tabled indicating that they would not make a determination of the administration and that no proposal for a Deed of Company Administration was envisaged. In March 2002, the solicitors for Benchmark had received two requests and a demand from Phillips Fox on behalf of Scottish Pacific and the receiver of the company for documentation relating to it and associated companies. On 3 April 2002, Benchmark's solicitors received a demand from Phillips Fox, the solicitors for Scottish Pacific, to cease collecting certain debts by 5 April 2002 and to provide a detailed accounting of funds and an undertaking to pay certain collections to Scottish Pacific. On 19 April 2002, Benchmark's solicitors wrote to those of Scottish Pacific asserting that no basis for a claim against Benchmark had been disclosed and that Benchmark would not accede to Scottish Pacific's demands. Langham said that at no stage has the administrator sought from him or from Benchmark any of the information or documents referred to in the summonses directed to him. 11 Langham previously worked for Scottish Pacific. In April 1998 almost a year after he had ceased that employment, he received a demand under threat of litigation, from Phillips Fox on behalf of Scottish Pacific, to provide undertakings with regard to soliciting staff and customers. The undertakings were not given and no action was taken by Scottish Pacific. Benchmark competes directly with Scottish Pacific in the business of debtor finance. It is commercially a very competitive business and in Langham's opinion information relating to Benchmark's systems, documents and procedures is commercially sensitive. 12 In reply to this affidavit, Reilly swore a further affidavit dated 22 May 2002. He said Scottish Pacific had agreed to indemnify the administrators in respect of their reasonable costs and expenses and any adverse costs orders associated with the examinations in the Federal Court. He instructed Phillips Fox to apply for orders to examine officers of Benchmark. He was aware that that company also acted for Scottish Pacific. He had taken advice as to whether there was a conflict of interest. He had concluded that the interests of creditors and others apart from Scottish Pacific would be advanced or at least might be favourably served by the conduct of the examinations. He said Scottish Pacific is concerned to recover as much as it can of the amount owing to it by Calejac and/or Calejac's debtors under the Factoring Agreement, the amount outstanding being in excess of $900,000. This sum or such of it as might be recovered would form part of the general pool of funds available for creditors. Scottish Pacific has not yet decided whether to commence legal proceedings against Benchmark. He said Scottish Pacific was keen for the examinations to proceed in order that it might be informed as to: 1. The prospects of success of any unfair preference or uncommercial transaction proceedings against Benchmark (or any other claims that might arise from the examinations). 2. Whether information provided during the examinations of Benchmark officers might be relevant to the prospects of success of any claim by Scottish Pacific against Benchmark. 3. In the event that examination of Benchmark officers discloses sufficient evidence for unfair preference, uncommercial transaction or other proceedings, Scottish Pacific will give consideration to funding either the administrator or, if one is appointed, the liquidator in such proceedings, and may apply under s 564 of the Corporations Act to give Scottish Pacific priority in respect of money recovered in such proceedings. Reilly said that all the costs of the examinations are to be funded by Scottish Pacific. There is no adverse impact on the creditors of the company in allowing the examinations to occur and the possibility of a benefit. 13 In Reilly's opinion he thinks it more likely than not that Calejac will be placed into liquidation. In the present case given the complexity of the issues involved and on the basis of the documents and information referred to in his affidavits, Reilly was of the opinion that the best means of obtaining relevant information concerning the examinable affairs of the company was by the proposed examinations. Statutory Framework 14 Section 596B of the Corporations Act provides: "596B(1) The Court may summon a person for examination about a corporation's examinable affairs if: (a) an eligible applicant applies for the summons; and (b) the Court is satisfied that the person: (i) has taken part or been concerned in examinable affairs of the corporation and has been, or may have been, guilty of misconduct in relation to the corporation; or (ii) may be able to give information about examinable affairs of the corporation." 15 The term "examinable affairs" is defined in s 9 of the Act thus: "examinable affairs, in relation to a corporation means: (a) the promotion, formation, management, administration or winding up of the corporation; or (b) any other affairs of the corporation (including anything that is included in the corporation's affairs because of section 53); or (c) the business affairs of a connected entity of the corporation, in so far as they are, or appear to be, relevant to the corporation or to anything that is included in the corporation's examinable affairs because of paragraph (a) or (b)." 16 The present application is brought pursuant to r 11.5 of the Corporations Law Rules 2000 which provides: "11.5(1) This rule applies if a person is served with an examination summons. 11.5(2) Within 3 days after the person is served with the examination summons, the person may apply to the Court for an order discharging the summons by filing: (a) an interlocutory process seeking an order discharging the summons; and (b) an affidavit stating the facts in support of the interlocutory process. 11.5(3) As soon as practicable after filing the interlocutory process seeking the order and the supporting affidavit, the person must serve a copy of the interlocutory process and the supporting affidavit on: (a) the person who applied for the examination; and (b) unless that person is the Commission or a person authorised by the Commission - the Commission." The application also relies upon r 16.1 of the Corporations Law Rules and, in particular, r 16.1(2) which provides: "16.1(2) A decision, direction or act of a Registrar made, given or done under these Rules, may be reviewed by the Court or a Judge." The Contentions 17 The crux of the argument advanced for the officers of Benchmark is that the purpose of the proposed examination is not a purpose legitimately within the administration. The critical issues into which the administrators wish to inquire by use of the examination procedure are: 1. Possible "double factoring" by Calejac. 2. Breaches by Calejac of the Factoring Agreement. It is submitted for the Benchmark officers that instead of commencing proceedings against Benchmark as threatened, Scottish Pacific seeks to use the administrators and the summons process to have them examined on the very matters which are the subject of Scottish Pacific's own potential claim against Benchmark. If Scottish Pacific were able to identify double factoring this would not lead to the flow of any money to Calejac. The subject of the examination, it was said, is Scottish Pacific's own claim and not Calejac's claim. The next logical step for Calejac is for it to be wound up. Counsel for Benchmark argued that the only reason this has not occurred is because, at the instigation of Scottish Pacific, a public examination is being pursued so that Scottish Pacific can gather what it wants for the purpose of proceedings against Benchmark. The examination process was said to be "just a stalking horse, an improper purpose, a wrong use of the extensive powers otherwise accorded to the administrator". 18 On the other hand it was submitted on behalf of the administrators that the affidavits in support of the application for the examination summonses to issue make clear that: (a) The administrator has a legitimate purpose, in relation to possible claims for unfair preferences or uncommercial transactions which claims will or may benefit all creditors of the company. (b) Scottish Pacific as the funding creditor, could also benefit from such claims as a creditor and as a preferred creditor pursuant to orders under s 564 of the Corporations Act. (c) Scottish Pacific may have other claims against Benchmark and others but the possibility of such claims is not and has not been shown to be the predominant purpose of the administrators' examinations. 19 Elaborating on these submissions orally, counsel for the administrators submitted that what their examination sets out to ascertain is whether there are subsisting obligations by Calejac to Benchmark, namely whether goods were properly assigned to Benchmark such that the Benchmark factoring agreement obligations were triggered. It is important for the determination of the obligations of Calejac both as to Benchmark and as to Scottish Pacific to ascertain what the legal relationship is with Benchmark and what obligations there would be, if any, to Benchmark in relation to its claims. Asked how an inquiry into the possibility of breaches by Calejac of its Factoring Agreement with Scottish Pacific advanced the conduct of the administration absent demands from Scottish Pacific, counsel said it may have a bearing on the extent to which there are obligations, if any, owed to Benchmark because ultimately the intervention of Benchmark in the relationships in that fashion may interfere with contractual relationships between Calejac and Scottish Pacific. Conclusion 20 While the nature of the evidence put before the Court does not allow the formation of concluded views about any of the substantive matters in contention between Calejac, Scottish Pacific and Benchmark, it is clear that there is sufficient material before the administrators to warrant their further inquiry into dealings between Calejac and Benchmark. In my opinion, the proposed examination is legitimate. It goes to the question of Calejac's liabilities to Scottish Pacific under its Factoring Agreement and of any obligations it may have arising out of breaches of that agreement. It also goes to the question whether there are obligations to Benchmark. Even accepting that the purpose of Scottish Pacific in funding the examination is to advance its own possible cause against Benchmark, there are, in my opinion, potential collateral benefits to the administration and the summonses should issue. The fact that a creditor, in pursuit of its own financial interests, may fund an examination is not a reason for refusing the issue of summonses provided the examination has the potential to also serve the purposes of the administration and/or may potentially yield information of benefit to other creditors generally. 21 For the preceding reasons the application for review of the decision of the Registrar and for discharge of the examination summonses will be dismissed. I certify that the preceding twenty one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French.