Flanders v Beatty; Re Brash Holdings Limited

Facts

1. In 2016, Martha Street Developments became the registered proprietor of the land in Bowral. The director of Martha Street Developments at the time was Shane Brown and the shareholders of the company were Shane and Tania Brown. Mortgages were registered over the property in favour of Strathleigh Investments and TCW to secure advances of, in Strathleigh's case, $3.96 million and, in TCW's case, $220,000. A development consent was obtained to construct seniors' housing on the Bowral land. Construction began.
2. In March 2018, Mr Woodgate was appointed as a voluntary administrator of Oneoz. Title searches conducted on the Bowral land at the time recorded that Martha Street Developments was the registered proprietor and Strathleigh Investments and TCW were mortgagees.
3. In April 2018, Mr Woodgate provided a report to creditors proposing a Deed of Company Arrangement (DOCA). Central to the proposed DOCA was an acknowledgement that Mr Brown owed Oneoz $1,190,974 and his promise to repay the moneys over 15 months, such payment to be secured by a guarantee from Martha Street Developments. The 15 months reflected the period of time envisaged to complete the development, sell the seniors' housing and provide Mr Brown with funds to repay the moneys owed to Oneoz. Mr Woodgate satisfied himself that Mr Brown and Martha Street Developments had the capacity to repay the loan to the company and that Martha Street Developments had sufficient assets to support the guarantee.
4. On 24 April 2018, Woodlands Markets Pty Limited was registered. Matthew Anstee was the sole officeholder and shareholder of that company. On 26 April 2018, Martha Street Developments is said to have been removed as trustee of The 63 Kangaloon Unit Trust and replaced by Woodlands Markets Pty Limited. The fact that Martha Street Developments was said to have held the Bowral land as trustee at all is a matter that was not then known to Mr Woodgate, if it was ever the case.
5. On 1 May 2018, the creditors of Oneoz approved entry into the DOCA. The only major creditor of Oneoz was the Australian Taxation Office, being then owed some $1.76 million. The Deed of Company Arrangement provided in clause 1.1: The Prescribed Provisions are included in this Deed except insofar as the Deed provides otherwise. The Prescribed Provisions are those set out in Schedule 8A of the Corporations Regulations 2001.
6. In clause 2, it was envisaged that the administrator would enter into a suite of documents including a Deed of Acknowledgment and Repayment of Debt, a Deed of Guarantee and a General Security Agreement. Clause 5 of the DOCA also provided: 5.1 Upon the execution of this Deed by the Company and the Administrator, the management of the Company will return to its director. 5.2 During the period of the operation of this Deed, the responsibility of the director for the time being of the Company for the day to day management, control, supervision and administration of the business of the Company and its affairs, will be subject always to the Administrator's right and entitlement, in his sole discretion, to exercise all or any of the powers conferred by this Deed or set out in the Prescribed Provisions to the exclusion of the powers of the Company or its directors.
7. Also on 18 May 2018, a Deed of Guarantee was entered into between Martha Street Developments as guarantor and Mr Brown and Oneoz. Mr Woodgate, in the events that have unfolded, is interested to know whether Oneoz should sue Martha Street Developments under the Deed of Guarantee pursuant to his right under clause 5.2 of the DOCA.
8. In June 2018, the shareholding of Martha Street Developments changed such that Mr Brown and Mr Anstee both became shareholders of 102 shares in the company, that being the total issued share capital. In December 2018, Mr Anstee lodged two caveats over the Bowral property, one for himself and the other on behalf of Woodlands Markets Pty Limited. In March 2019, Woodlands Markets Pty Limited and the trustee for The 63 Kangaloon Unit Trust granted a security interest over all present and after-acquired property to Babbl Pty Limited.
9. On 2 April 2019, Mr Anstee's solicitors wrote to Mr Woodgate effectively denying that Oneoz had any security interest in the Bowral land. Until this letter, Mr Woodgate was not aware that Martha Street Developments was said to have held the land as trustee. At no time during his term as administrator and then deed administrator did he ever receive information that would have led him to believe, or put him on enquiry to investigate further, that Martha Street Developments was the trustee of any trust. There followed a series of letters from Mr Woodgate to Mr Anstee's solicitor requesting documents, to which Mr Woodgate has had no satisfactory response, and expects to receive none.
10. On 2 June 2019, Mr Woodgate spoke to Mr Watson, who it will be recalled is the sole director of Strathleigh Investments and TCW, and was told that at the time that funds were advanced, "there was no mention by the borrower of a trust". It is certainly a curious state of affairs.
11. The administrator conducted a series of company searches and PPSR searches and, on 4 July 2019, issued a circular to creditors setting out the sequence of events just described. Mr Woodgate noted that, in November 2018, Mr Anstee had offered to acquire Mr Brown's shares in Martha Street Developments for $500,000 but "for reasons unknown to me, Mr Anstee revoked his offer to acquire Mr Brown's shares in Martha Street Developments." In light of the letter of 2 April 2019 from Mr Anstee's solicitor and what he had been told by Mr Watson, Mr Woodgate advised creditors that he intended to apply to the Court to hold a public examination of Mr Anstee and others pursuant to section 596A of the Corporations Act 2001 (Cth). Mr Woodgate explained that the DOCA may have been contravened, which might have the result that Mr Brown may not repay his loan and Martha Street Developments may not honour its guarantee. At page 5 of the circular to creditors, Mr Woodgate noted: Further to the commentary in section 3 of this report, I confirm an offer was made to Mr Brown to purchase his shares in Martha Street Developments for $500,000. I believe that although the offer was withdrawn, for the time being, the holding of a public examination will re-open negotiations. Mr Brown has agreed that the proceeds of share sale would be provided to the company immediately upon receipt. I am of the opinion that the expedient receipt of $500,000 provides timely certainty of partial repayment of Mr Brown's debt. This may also necessitate a variation to the DOCA.
12. From 23 to 26 July 2019, Mr Woodgate's office communicated with Mr Watson's solicitor seeking production of documents and was informed, in essence, that Mr Watson was not in a position to provide the information sought. On 30 July 2019, Strathleigh Investments and TCW issued notices of demand under their mortgages.
13. In August 2019, the administrator conducted further title searches, company searches, ABN Look-up searches and PPSR searches. On 8 August 2019, Mr Woodgate swore a confidential affidavit in support of an application under sections 566A and 596B of the Corporations Act for the issuance of examination summonses and orders for production. As part of that affidavit, having set out the sequence of events already described, Mr Woodgate deposed: In circumstances where: (a) the repayment dates on the mortgages granted by Strathleigh Investments Pty Ltd and TCW Pty Ltd have lapsed; (b) enforcement of the Strathleigh Investments and TCW Pty Ltd mortgages is imminent; (c) the deadline for Mr Brown and MSD to repay their loans to the Company is 18 August 2019; and (d) my efforts to properly investigate the allegations made by Mr Anstee that the Company has no security interest in the Kangaloon Road Property, I am obliged to take immediate action to investigate Mr Anstee's allegations so that I may establish whether or not the Company has a valid security interest in the Kangaloon Road Property and, if so, take such action as is in the interests of creditors to enforce that security interest in the event that the loans are not repaid to the Company by 18 August 2019.
14. On 15 August 2019, the Registrar issued the summonses and orders for production as sought by Mr Woodgate. It is this decision that the applicants now challenge.

Power to seek orders for production

1. The first ground on which the applicants seek to set aside the orders for production is that, if the DOCA does not contain an express power to conduct a public examination of the examinable affairs or to conduct any investigation, then the administrator has no basis for seeking to have the Court issue orders for production under section 597(9) of the Corporations Act (that power being incidental to a proper issue of an examination summons), and the orders for production must be set aside.
2. There are three answers to this. First, clause 1.1 of the DOCA provided that the powers in schedule 8A to the Corporations Regulations 2001 (Cth) were included in the deed "except insofar as the Deed provides otherwise". Schedule 8A includes conferring powers on the administrator, in Item 2(j): to bring, prosecute and defend in the name and on behalf of the company or in the name of the administrator any actions, suits or proceedings; and, in Item 2(zg): to do anything else that is necessary or convenient for the purpose of administering this deed.
3. The DOCA contains no provisions which provide otherwise. The absence of a provision to conduct investigations for examinations is not providing otherwise: it is not providing at all. Accordingly, it seems to me that the DOCA, by incorporating Schedule 8A, does give the administrator power to conduct investigations and examinations if it is necessary or convenient for the purpose of administering the DOCA.
4. Second, reliance was placed on section 444C(2) of the Corporations Act, but that concerns the obligations of the administrator and others before a DOCA is entered into, not afterwards, which is the situation in which Mr Woodgate now finds himself.
5. Third, it was submitted that a decision of the Court of Appeal of the Supreme Court of Victoria in Flanders v Beatty; Re Brash Holdings Limited (1995) 16 ACSR 324; (1995) 13 ACLC 529 is authority in support of the applicant's submission. In that case, the DOCA did confer express powers on the administrator to conduct investigations and examinations. Ormiston J, with whom Tadgell and Harper JJ agreed, noted at ACSR 333; ACLC 537: … I would conclude that the legislature saw it as important that administrators should have wide powers to obtain information and conduct any necessary examination, in much the same way as those powers were and are still given to liquidators. However, the significance of granting these powers to administrators is that the object for which they ought properly to be used should comprehend anything which fairly may be expected to advance the course of an administration, and in particular, for present purposes, an administration under a deed of company arrangement. …
6. The applicants relied, in particular, on a passage at ACSR 335; ACLC 539: However, as to the extent of the powers of administrators of deeds of company arrangement to seek examination of examinable officers there can be no doubt. They have not only been added to the limited list of persons who may seek examination but they have also been added in circumstances where they have a right to obtain the issue of a summons for examination almost as of course under s 596A, without the need to satisfy the tests laid down in s 596B(1)(b), except in the circumstances and for the purposes there defined. Consequently the power given to such administrators is confined only by the need to show that they are acting in the performance of their duties under the deed and not for any extraneous purpose.
7. However, it does not seem to me that this portion of his Honour's judgment supports a conclusion that, unless the DOCA contains an express power to issue orders for production or conduct examinations, then an administrator is precluded from doing so. Even if it did, such a comment would have been obiter where the DOCA in that case contained such an express provision.

Lack of disclosure

1. The second basis on which the applicants seek to set aside the orders for production is that the confidential affidavit of Mr Woodgate did not disclose to a Registrar of this Court that the real purpose of the examination summonses was to re-start settlement negotiations with Mr Anstee and extract a renewed offer to purchase Mr Brown's shares in Martha Street Developments for $500,000. It is said, in reliance on Re Southern Equities Corporation Limited (In Liq) (1997) 25 ACSR 394 at 422-423, Re One Twenty Seven Corporation Pty Ltd (1995) 13 ACLC 1,600 at 1,602 and Hong Kong Bank of Australia Ltd v Murphy (1992) 28 NSWLR 512 at 520 per Gleeson CJ, with whom Mahoney and Priestley JJA agreed, that it is important that the applicant for the issue of orders for production and examination summonses make full and frank disclosure of all matters to the Court with complete candour. To these cases might be added the more recent decisions of Re Shepard (in his capacity as administrator of Hunter Bulk Materials Pty Ltd) (subject to a deed of company arrangement) (2011) 83 ACSR 436; [2011] NSWSC 467 (Ward J) In the matter of Owston Nominees No 2 Pty Ltd (in liq) (receivers and managers appointed) (2013) 94 ACSR 500; [2013] NSWSC 538 (Black J); Sutherland v Pascoe (2013) 297 ALR 44; [2013] FCAFC 15; Trevor; Re Bell Group NV (in liq) (No 2) (2017) 122 ACSR 418; [2017] FCA 927 (Jagot J).
2. Whilst the principle is undoubtedly correct, it does not seem to me that there is any disparity between Mr Woodgate's report to creditors and the confidential affidavit made to the Registrar. It is not a fair summary of the confidential affidavit or the report to creditors that the purpose of the examinations is simply strategic to re-open negotiations. Rather, Mr Woodgate explained, firstly to the creditors and then to the Registrar, that he wished to investigate the legitimacy of the transactions said to have extinguished the security on which the DOCA was based, which may have the result that if the transactions were found to be illegitimate then people may honour the obligations which they had previously agreed to perform. This ground fails.

Orders for production too broad

1. It is submitted that the orders for production issued are too broad, in particular, in that they seek a production of bank statements, correspondence, resolutions of Strathleigh Investments as the trustee of a superannuation fund, and Mr Watson's personal tax returns. The submission is not made on the basis of evidence that it would be oppressive to produce the documents, either in terms of the time or cost involved in doing so, but simply because it is said that the documents sought are not relevant to the administrator's stated purpose for seeking the same.
2. The permitted scope of orders for production in aid of public examinations has been usefully canvassed by Barrett J in Onefone Australia Pty Ltd v One.Tel Ltd [2007] NSWSC 1188 at [17]-[22], and if I may paraphrase: the power to require production of documents can only be exercised where production is required for the purpose of exercise of the power to conduct an examination; there must be a connection between the order for production and an examination; the Court must be able to see that the particular examinations will be assisted or facilitated by the production of the particular documents.
3. A key element underpinning the DOCA was the guarantee by Martha Street Developments and the fact that Martha Street Developments was then the beneficial owner of the Bowral land subject to registered mortgages to Strathleigh Investments and TCW. Oneoz's rights against Martha Street Developments, and the value of those rights, were likely of central importance to the creditors' decision to enter into the DOCA and remains critically important today. Mr Woodgate must now determine whether it is worth pursuing Oneoz's rights against Martha Street Developments. Mr Woodgate does not know, despite his efforts including requesting documents from Mr Watson, whether it is worth pursuing. Given the curious nature of the transactions as they have unfolded, it seems to me that the documents sought by the administrator may well assist or facilitate the examinations which he proposes to conduct. It seems to me that an administrator, in circumstances such as these, must be given some latitude to obtain documents to investigate what has gone on and what is the best way to proceed from here. It seems to me that Mr Woodgate is entitled to the documents sought.
4. In those circumstances I make the following orders: 1. Dismiss the interlocutory process filed on 3 September 2019. 2. Order the applicants to pay the respondent's costs of the interlocutory process. 3. Stand the matter over to 9.00 am on Wednesday 2 October 2019 in the Subpoena List.

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