Flanders v Beatty [2002] NSWSC 988 | Case summary

1 By an interlocutory process filed 4 October 2002 and heard by me on 14 October 2002, five applicants seek relief in relation to an examination summons and orders for production served on them on 11 September 2002 by Mr Woodgate in his capacity as liquidator of Chircan Holdings Pty Ltd and Mahiya Holdings Pty Ltd, each of which is in the course of being wound up by way of creditors' voluntary winding up in consequence of voluntary administration under Pt 5.3A of the Corporations Act 2001 (Cth). 2 The two companies carried on business in partnership. The examination summons is directed to Mr Davis, the sole director of each company. It has been issued pursuant to s.596A of the Corporations Act and requires Mr Davis to attend on 21 October 2002 to be examined on oath or affirmation about the examinable affairs of Chircan and Mahiya. The other applicants, AMBT Pty Ltd, Zieta No 62 Pty Ltd, Zieta No 63 Pty Ltd and Veltex Pty Ltd, have been served with orders for the production of documents made under Pt 36 r 12 of the Supreme Court Rules. These orders require the production of various documents to the court. 3 The liquidator's purpose in taking these investigative steps is related to proceedings commenced in November 2001 in which, as liquidator of each company, he seeks orders that Mr Davis pay to the companies more than $3 million by reference to alleged breaches by him of his statutory duty not to allow the company to trade while insolvent. The liquidator wishes to obtain information about Mr Davis's actual and potential financial resources and therefore his capacity to meet any judgment that may be obtained, as well as information relevant to positive defences on his part. The orders for the production of documents are said to be directed towards eliciting information relevant to these issues. 4 Mr Davis says that the examination summons should be set aside or the examination should be deferred because he has not been able to come to grips with relevant matters sufficiently to enable him to acquit himself satisfactorily at the examination. There have been two causes. First, shortage of funds has meant that he has not been able to obtain the legal help he needs in order to assemble and prepare his defence in the insolvent trading proceedings. He has been through some fifty boxes of documents at the liquidator's office and has identified ten boxes that will need to be reviewed by him in some greater detail for the preparation of his defence. 5 The second factor is personal strain that Mr Davis has been under in recent weeks following renewal of police searches for his mother who disappeared several years ago in circumstances giving rise to a suspicion that she was murdered. He explained in evidence that the case is still being investigated and that he finds the continuing contact with the police and the Director of Public Prosecutions' office very distressing and very debilitating, which seems to me entirely understandable. 6 Sympathetic as one must be about the circumstances pertaining to Mr Davis's mother, I do not think that they provide grounds on which the Court should set aside the examination summons, or order deferral of the examination. The case is distinguishable from one in which there is medical evidence that the person summoned is unfit to attend, in which event there might be a postponement. 7 Nor does what Mr Davis regards as lack of preparation on his part mean that the summons should be set aside or the examination deferred. Counsel for the liquidator acknowledged that, in connection with the application for discharge or variation of Mareva orders obtained by GE Capital that I heard with the present application, the liquidator received information that will enable him to narrow the scope of the examination. If the remaining areas are ones in which Mr Davis is not prepared, or has not yet pieced together all the records, he will no doubt answer questions accordingly in the best way he can and the liquidator will have to make do with whatever it is that Mr Davis can provide, subject always to the possibility of a further examination summons being sought at a later stage. 8 In this context I endorse the approach taken by Palmer J in Re Agriculture.com Pty Ltd [2001] NSWSC 628. The importance of the examination facility to liquidators is stressed in the cases. Very cogent reasons would be needed to set aside a summons directed to the person who was the sole director of the company at relevant times. No such reasons are shown here. 9 Mr Davis asks in the alternative that the scope of the examination be limited. That might be an appropriate course where there are reasons to think that the liquidator may seek to use the facility for extraneous purposes unrelated to those involving his obtaining a more fully informed appreciation of matters going to the due performance of his functions. As I shall explain in more detail when I deal with the orders for production, I do not think any such ulterior motive is suggested and I see no basis on which limitation should be imposed. 10 I turn now to the applications by all five applicants to set aside the orders for production directed to them, or alternatively to limit the scope of those orders. The orders for production were made under Pt 36 r 12 of the Supreme Court Rules. The first submission of Mr Svehla, who appeared for the applicants, is that, in light of the provisions of the Corporations Act as they now stand following the amendments made by the Corporate Law Reform Act 1992 with effect from 23 June 1993, Pt 36 r 12 is not available as a basis for requiring the production of documents in a case of this kind. That submission is based on the introduction into the legislation in June 1993 of s.596D which, in subs (2), says that an examination summons under s.596A or s.596B may require the person required to attend for examination to produce at the examination specified books that are in the person's possession and relate to the corporation concerned, or its examinable affairs. 11 Mr Svelha's argument is that the introduction of this specific and particular power of the court to include in an examination summons issued under s.596A or s.596B a requirement that the person summoned produce books at the examination should be regarded as a manifestation of an intention that the analogous power under Pt 36 r 12 is not to be used in such a case. Even if this argument is correct as regards the first applicant (a question to which I shall come presently), it does not assist the second, third, fourth and fifth applicants. Each of them is a company. Each is therefore incapable of being summoned under s.596A or s.596B. Only natural persons can be summoned under those sections. This is made clear by the nature of the obligation arising through the summons, that is, in the first place, an obligation to attend before the court at a specified time and place to be examined on oath about a particular corporation's examinable affairs: s.596D(1). 12 The provisions of s.597 reinforce the conclusion I have just stated. A person summoned must not, without reasonable excuse, fail or refuse to attend, fail or refuse to take an oath or make an affirmation, or fail or refuse to answer a question. A corporation is incapable of swearing an oath. It was so held by the English Court of Appeal in Pathe Freres Cinema Ltd v United Electric Theatres Ltd [1914] 3 KB 1253. Nor is a corporation capable of attending and being examined on oath. That was expressly held by the same court in Penn-Texas Corporation v Anstalt [1963] 1 All ER 258 and recognised by Stephen J in Smorgon v Australia and New Zealand Banking Group Ltd (1976) 134 CLR 475. A corporation can, however, be required to produce documents and, of course, officers of a corporation, as individuals, as distinct from the corporation itself, can attend and swear an oath. 13 The inapplicability of ss.596A and 596B to enable corporations to be summoned was expressly recognised in Re Interchase Corporation Ltd (No 2) (1993) 12 ACSR 405 in relation to the post June 1993 provisions and in Re Rothwells Ltd (No 2) (1989) 15 ACLR 168 in relation to predecessor provisions. 14 There is, to my mind, a clear contextual displacement here of the general rule under the Acts Interpretation Act 1901 (Cth), as applied by s 5C of the Corporations Act itself, that a reference to a person includes a reference to a corporation. It is not possible, in my judgment, to argue that the inclusion of s.596D(2) as an adjunct to ss.596A and 596B in the provisions introduced in June 1993 represents some form of displacement of Pt 36 r 12 and its traditional use in this area, at least so far as the several corporations are concerned. 15 A related submission is based on s.597(9). In the form it has taken since June 1993, that section empowers the court to direct a person to produce at the examination of that person or another person books that are in the possession of the first mentioned person. Section 597 (9) in its present form thus empowers the court to direct that Person A produce books at the examination of Person B, as well as permitting such a direction to Person B himself. A corporation, being capable of producing books through human intermediation, may thus become the subject of a s.597(9) direction in relation to the examination of a natural person. But I must say that I cannot glean from s.597(9), or anywhere else for that matter, any indication that it is intended to be the sole source of jurisdiction to compel the production of books relevant to an examination, or indeed that there is any reason of policy why it should be. The provision is facultative. Examinations of this kind are proceedings of the court. The Corporations Act obviously assumes that a whole range of provisions and procedures relevant to proceedings of the court will apply to an examination as to any other proceeding. I see no basis on which the Pt 36 r 12 procedure should be regarded as excluded. Indeed, it seems to me quite clear that the remarks of McLelland J in Re South Pacific Energy Trading Pty Ltd (1996) 40 NSWLR 264 about the continued and future use of Pt 36 r 12 in this context were made expressly by reference to the amended form of s.597(9) produced by the 1993 amendments. 16 Before June 1993 - that is, when s.597(9) permitted a direction to produce books addressed to the examinee only - it was expressly held by the same judge in Re Burns Philp Trustee Company Ltd (No 2) (1992) 8 ACSR 533 that Pt 36 r 12 was available to permit an order for production directed to the examinee and requiring production in advance of the examination. The expansion of s.597(9) effected in June 1993 cannot be regarded as somehow having cut across that in relation to either the examinee or the wider class of persons now contemplated. What was not previously a closed or exclusive code has not somehow acquired that status since June 1993. The availability of Pt 36 r 12 as a production mechanism ancillary to an examination summons was recognised as recently as March of this year by Austin J in Re Leisure Developments Pty Ltd (2002) 41 ACSR 276. The Northern Territory case of Islam v Duncan (1999) 152 FLR 397, on which Mr Svelha relied, is not of assistance, given the different rules of court in that jurisdiction. 17 My conclusion on this aspect is that there is nothing in the Corporations Act displacing the continued availability of Pt 36 r 12 for use in the way that it is being used by the liquidator in this case in respect of both Mr Davis and each of the four companies. 18 The next submission on behalf of all five applicants is that the orders for production should be set aside because they are oppressive. I readily accept that such an order must be kept within appropriate boundaries. Part 36 r 12 is, in terms, very broad. So far as a corporation is concerned, an order may be made requiring production: "to the Court or a judge or any officer of the Court, examiner, referee, arbitrator, or other person authorised to take evidence, on any trial, hearing or other occasion." The reference to "any trial, hearing or other occasion" makes it plain that there is some overriding requirement of relevance and that the power can only be exercised in such a way as to require production of documents which have some connection of logic and cogency with the issues which are to come under consideration at the particular trial, hearing or other occasion. In the whole of the context of the present case, those issues are delineated by the permitted scope of the s.596A examination of Mr Davis. 19 The examination summons addressed to Mr Davis was issued in proceedings 4120/02 upon an originating process filed on 20 August 2002. The examination is the only "trial, hearing or other occasion" which will result from that originating process. The orders for production sought by the same originating process must therefore be regarded as directed to the same "trial, hearing or other occasion", with the result that the orders must be referable to Chircan, Mahiya and their respective "examinable affairs", as defined by the Corporations Act, they being the subject matter of the examination. But the examination, it is to be noted, is an examination of the person who was the sole director of both companies and who, in that capacity, is alleged to have allowed them to trade while insolvent for a period going back to July 2000. That starting point or point of reference is identified in the statement of claim against Mr Davis which alleges insolvency of both companies as at 30 June 2000. 20 There are four applicant companies. Zieta No 62, Zieta No 63 and Veltex are intimately connected with Chircan and Mahiya. Veltex holds all the shares in Chircan. Zieta No 63 holds all the shares in Mahiya. A majority of the shares in Veltex are held by Zieta No 63 which is the trustee of at least two trusts of a family kind, one of which stands in a debtor/creditor relationship with both Veltex and Mr Davis who also holds 40 per cent of the shares in Veltex. The shares in Zieta No 63 are held 50/50 by Mr Davis and Mrs Davis. There are debts outstanding between Veltex and each of Chircan and Mahiya and also between those companies in partnership and a trust of which Zieta No 62 is the trustee. Furthermore, Veltex, Zieta No 62 and Zieta No 63 all became guarantors of obligations of Chircan and Mahiya, in company with Mr Davis and Mrs Davis. 21 The fourth company, AMBT, stands apart from the other three. Its shareholders and directors are two of Mr Davis's children. It was formed after the collapse of Chircan and Mahiya as the vehicle through which Mr Davis sought to re-establish himself in business. 22 The examination of Mr Davis will, as I have said, concentrate on his financial capacity and potential financial resources and his positive defences. One of those defences will be that he had reasonable grounds to expect and did expect that Chircan and Mahiya were solvent at relevant times. The facts concerning the financial relationships amongst Zieta No 62, Zieta No 63 and Veltex and the two subject companies, as well as Mr Davis's knowledge of those matters, will be relevant to that issue. The matters the liquidator seeks to cover in relation to Zieta No 62, Zieta No 63 and Veltex are relevant to Mr Davis's financial capacity and potential financial resources, particularly bearing in mind that it is potential as well as actual and immediate capacity that is involved and that debts, trust interests and other avenues for the obtaining of money that may exist are relevant, as are possibilities of recovery and avoidance which would arise in any bankruptcy of Mr Davis. Bearing in mind also that the companies other than AMBT are co-guarantors with Mr Davis, there are no doubt questions as to how any loss has been or will be borne among guarantors and the worth of any rights of contribution, indemnity and subrogation. 23 In the case of the more recently formed AMBT, the purpose of its formation was to facilitate Mr Davis's re-establishment in business. The possibility that he may have financial claims upon it must therefore be regarded as at least cogent. There is a rationale for the examination of points of contact between AMBT and Mr Davis. 24 Questions permitted at an examination are, under s.597(5B), questions "about the corporation or any of its examinable affairs". The expression "examinable affairs" is defined by s.9. Paragraph (b) of that definition refers to "any other affairs of the corporation", the "other" referring back to and amplifying the paragraph (a) references to "promotion, formation, management, administration or winding up". "Affairs", according to the s.9 definition, has in the present context a meaning affected by s.53. The latter section, by means of ten separate paragraphs, refers to certain matters that "affairs" includes. There is no exhaustive or exclusive meaning of "affairs" and it cannot be said that a particular thing falls outside a company's "affairs" just because it cannot be clearly sheeted home to one of the paragraphs of s.53. 25 The breadth of the concept of "examinable affairs" is emphasised in a number of cases. Reference may be made to the decision of the Full Court of the Supreme Court of South Australia in Gerah Imports Pty Ltd v The Duke Group Ltd (1993) 12 ACSR 513 where the subject is examined in some detail; also the subsequent stay application in the High Court where the broad nature of the defined term was confirmed: (1994) 68 ALJR 196. A similar message emerges from the decision of the Victorian Court of Appeal in Flanders v Beatty (1995) 16 ACSR 324. On the particular subject of inquiry into the worth or viability of causes of action, reference may be made to Re Interchase Corporation Ltd (No 2) (above) and to the subsequent appeal, reported as Grosvenor Hill (Qld) Pty Ltd v Barber (1994) 12 ACSR 646. 26 The only confining factor is propriety of purpose and a relationship with the "examinable affairs" of Chircan and Mahiya. For the orders for production involving the four companies to be sustained it is not necessary that the "affairs" of those companies be shown to form part of the "examinable affairs" of Chircan or Mahiya. To the extent that a contrary submission was made on behalf of the applicants, I do not accept it. Dealings, relationships and other intersections between those companies and Chircan or Mahiya or both are sufficient. Those contacts are part of the "examinable affairs" of Chircan and Mahiya in their own right. An order for production has also been served on the National Australia Bank. No one suggests that this is based on the proposition that the "affairs" of that bank are somehow part of the "examinable affairs" of Chircan or Mahiya. Rather, dealings of or relating to Chircan and Mahiya and involving the bank are part of the "examinable affairs" of those companies themselves. 27 In the light of all this, I am not at all persuaded that the documents sought from the four applicant companies do not relate to the examinable affairs of Chircan and Mahiya and to Mr Davis's examination in relation to them. Defences to the insolvent trading claim and the actual and potential financial resources of Mr Davis are part of the examinable affairs of Chircan and Mahiya. It follows that I do not think that the orders under Pt 36 r 12 requiring the production of documents lack the requisite connection with the "trial, hearing or other occasion" represented by the examination of Mr Davis. 28 As to the submission that the orders are in any event oppressive because of the width of the categories of documents sought, I can only say that it has not been shown that any undue hardship will be suffered by assembling those documents. It is to be remembered, of course, that production is production to the court. The importance and implications of that are discussed in the judgment of Young J in Re Clutha Ltd (2000) 34 ACSR 685 where the analogy with a subpoena is highlighted. That case involved production under s.597(9) but its message applies equally to production in obedience to an order under Pt 36 r 12. 29 I come finally to two additional submissions that were included in the written submissions I received from Mr Svehla in chambers late yesterday. The first is that, because Chircan and Mahiya carried on business in partnership, all matters within the "examinable affairs" definition are effectively examinable affairs of the partnership, not of either company. This cannot be so. There is no statutory concept of examinable affairs in relation to a partnership, added to which each partner must be regarded as having been a participant in the partnership business in the fullest sense. The considerations which, in Woodgate v Davis (2002) 42 ACSR 286, led me to reject the notion that the partnership somehow came between each company and the operation of relevant Corporations Act provisions lead to the same conclusion here. 30 The second submission is that, if the liquidator wishes to examine Mr Davis about financial affairs of any of the four applicant companies, he should seek the issue of a s.596B summons in respect of the particular company. I must confess that I cannot see how that would be done. Mr Woodgate is the liquidator of each of Chircan and Mahiya. He has no status in relation to any of the other four companies. I do not understand how he would be regarded as an "eligible applicant" in relation to any such company so as to have standing to apply for the issue of a summons requiring Mr Davis, or anyone else, to attend for examination about the examinable affairs of that company. 31 In conclusion, therefore, I merely say that I am not satisfied that any ground has been shown for setting aside or restricting either the examination summons or any of the orders for production. The interlocutory process filed on 4 October 2002 is therefore dismissed with costs. **********

Flanders v Beatty

At a glance

Court

Decision date

Before

Source

Judgment (7 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (5)

Cited By (2)