Fletcher, in the matter of Secured Mortgage Management Limited v Pope

REASONS FOR JUDGMENT 1 William John Fletcher and Katherine Elizabeth Barnet (the "liquidators") are liquidators of Secured Mortgage Management Limited (in Liquidation) (the "company"). On 21 September 2012 a Deputy District Registrar issued a summons addressed to Michael Conrad Pope, requiring him to attend before the Federal Court at 10.00 am on 5 October 2012 to be examined on oath or affirmation concerning the examinable affairs of the company, and to produce a wide range of documents, largely relating to his own financial affairs. Pursuant to r 11.5 of the Federal Court (Corporations) Rules 2000 (Cth) (the "Rules"), a person served with such a summons may, within three days after service, apply to the Court for an order discharging the summons. Mr Pope makes such an application. 2 The liquidators are suing Mr Pope in the Supreme Court, seeking to enforce deeds of guarantee and indemnity given in favour of the company, to secure loans made to Mayaman Developments Pty Ltd and Dunes 33 Pty Ltd. The summons was issued pursuant to s 596B of the Corporations Act 2001(Cth) (the "Act") which provides: 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. 3 The summons has been issued pursuant to s 596B(b)(ii). The term "examinable affairs" in relation to a corporation is defined in s 9 of the Act to mean: (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). 4 Section 53 provides: For the purposes of the definition of "examinable affairs" in section 9 [and various other sections] the affairs of a body corporate include: (a) … property (whether held alone or jointly with any other person or persons and including property held as agent, bailee or trustee) … . 5 The word "property" is defined in s 9 to mean: any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action, and [various other provisions which are not presently relevant]. 6 Pursuant to s 9, liquidators are eligible applicants for the purposes of s 596B. 7 The liquidators seek to examine Mr Pope to ascertain whether it is in the commercial interests of the liquidation that they prosecute the Supreme Court proceedings, having regard to his capacity to meet any judgment given against him. Mr Pope seeks to set aside the order upon the following grounds: the liquidators commenced proceedings in the Supreme Court without previously having sought to examine him; the proposed examination and production of documents will permit the liquidators to determine any change in his personal position between July 2008 and the present time; he has incurred substantial legal costs in the course of the litigation, and has received tax invoices in connection with those costs, in respect of which invoices he wishes to claim legal professional privilege; the range of documentation prescribed in the order is too wide-ranging and extensive, and the time period over which it extends is too long; the liquidators seek to gain an unfair advantage in relation to the Supreme Court litigation by seeking information which will inform them as to his current personal financial capacity to continue to fund the proceedings, in the event that they are not settled at a proposed mediation; he challenges the validity of the deeds of guarantee and indemnity and asserts that they may have been discharged; and the case against him will be strenuously resisted. 8 In considering this lengthy list of complaints it is significant to keep in mind the substance of s 596B. The section authorizes the issue of a summons, on the application of a liquidator, if the Court is satisfied that the relevant person may be able to give information about examinable affairs of the corporation, including its property. In the Supreme Court proceedings the liquidators seek to recover amounts allegedly owed to the company under the guarantees. In other words, the proceedings are to enforce choses in action. 9 Mr Pope submits that the case requires the balancing of two competing public policies, namely: the statutory power pursuant to s 596B; and the policy at common law that a defendant's private affairs are not disclosable to the plaintiff in the course of a court action. 10 It is said that the company could not have obtained relief of the kind available pursuant to s 596B, and that such proposition should militate against the making of an order in favour of the liquidators. Section 596B expressly confers upon certain persons, including liquidators, an advantage which they would not otherwise have. It is no answer to the proposed exercise of the power conferred by s 596B that, absent the section, there would be no such power. 11 It is then said that the summons should be set aside because the liquidators' predominant purpose in seeking it was to obtain a forensic advantage in respect of the mediation, which advantage would not otherwise be available. To take advantage of the section for that purpose is said to be a misuse or abuse of power. It is said that the timing of the application is relevant in that it suggests that the summons was timed to assist in the mediation. 12 These submissions are really only repetitions of the submissions which I have already rejected. I cannot see that proposed use of information in the mediation militates against making the order, any more than would an intention to use such information in connection with the commencement and conduct of legal proceedings. As I shall demonstrate, the cases clearly establish that such a purpose is a permissible purpose for invoking the aid of s 596B. 13 It is said that the principal purpose of the power is to allow examination of any involvement in, or ability to provide information concerning the creation of the company, its managerial or other affairs, or issues of misconduct. Section 596B(1)(b)(i) relates to those matters, but s 596B(1)(b)(ii) relates to a much broader range of matters including, as I have said, the property of the corporation. It is said that as Mr Pope had no direct dealings with the company, the examination is simply to learn about his private affairs. That may be true but, to the extent that such matters concern the property of the company, the point has no substance. 14 It is then said that a public examination is intended to act as a deterrent, and that any information derived in the course of the examination will be available to members of the public. I do not accept that a public examination pursuant to s 596B(1)(b)(ii) has anything to do with deterrence. It is much more about obtaining relevant information for the purposes of the liquidation. As to the question of public access to information, if the consequence of the application of s 596B is that information is available to the public, I cannot see that such availability has any particular relevance for present purposes. In any event, if Mr Pope wants to keep any information out of the public domain, he should make an appropriate application. To this point he seems not to have done so. 15 Mr Pope then submits that the summons should be varied so as to confine the production of documents to Mr Pope's current or future financial position, and not extend to documents produced in mid-2008. The guarantees were given in 2006 and 2007. The companies went into liquidation in 2008. In the circumstances I see nothing oppressive about seeking the production of documents dating from the middle of 2008. 16 It is submitted that the information sought must be for the purpose of inquiring into the examinable affairs of the company, and that it is an abuse of process to use the provision to seek an order which is not for the benefit of the company, its contributories or creditors. As I understand it the purpose in seeking the information is to determine the likelihood or otherwise of Mr Pope's being be able to satisfy any judgment for the very large amounts of money the repayment of which he has guaranteed. Such use is clearly for the benefit of the company, its contributories or creditors. For one thing, it will assist the liquidators to avoid the risk of expending large amounts of money on the Supreme Court proceedings without any prospect of deriving a proportionate benefit from such expenditure. 17 It is then said that it is a "common sense deduction" that Mr Pope is most unlikely to be of sufficient substance to meet such a substantial judgment. In other words, Mr Pope wants the liquidators to discontinue the proceedings on the basis that they should conclude, without reference to any evidence, that he will be unable to meet any judgment. There is no merit in this submission. 18 In Grosvenor Hill (Queensland) Pty Ltd v Barber and Another (1994) 120 ALR 262, a summons had been issued pursuant to s 596B for the production of indemnity insurance policies issued to valuers. The purpose was to ascertain whether or not there was a good cause of action in negligence against the valuers and if so, whether the judgment would be met. The Full Court (Beaumont, Spender and Cooper JJ) said at 266-267: In accordance with the settled course of authority, to which we will refer below, information with respect to the probability or otherwise of success in litigation contemplated by the corporation would be information with respect to the "examinable affairs" of the corporation in question. This information would be "relevant", that is to say, it would bear upon or be connected with, the question whether the corporation possessed a cause of action, that is, a chose in action, as its property. It is not, and could not be, seriously disputed that an inquiry as to the existence, and value, of any property that the corporation may possess would be a "relevant" inquiry for the purposes of s 597(9). A liquidator, when engaged in litigation on behalf of a company which is being wound up, or when contemplating instituting such litigation, is not in the same position as an ordinary litigant. The liquidator comes to the company as an officer of the court under a duty and responsibility to get in and maximise the assets of the company for distribution for the benefit of creditors. In the discharge of his or her duty and function, the liquidator comes to the company with limited or no knowledge of the company's assets, business and affairs. The liquidator is therefore in a position of disadvantage to make informed decisions of both a legal and a commercial nature necessary to carry out the winding up. The legislature has recognised this position of disadvantage and addressed the problem by the enacting of s 596B of the Law and its predecessors. The effect of the legislation is to place a liquidator in a privileged position to obtain information relevant to and necessary for the proper discharge of his or her statutory function. The seeking of information to make decisions as to whether or not litigation ought to be embarked upon or continued in itself is no more than "an exercise of his duties and fulfilment of his responsibilities as a liquidator" … . The courts have recognised since the introduction of statutory powers similar to that provided for in s 596B of the Law that the exercise of the power can involve tension between two important public interests. The first is the public interest in a liquidator obtaining necessary information to properly discharge the function of liquidator in the winding up of the company for the benefit of the creditors. The second is the right of the individual to privacy in regard to his or her affairs, documents and papers. … 19 At 267-268 their Honours continued: The necessity to obtain relevant information in relation to litigation by or against a company being wound up is but one instance of the broad general purposes identified in the decisions cited above and numerous other decisions to like effect. Clearly, one purpose of an examination in relation to pending or contemplated litigation is to determine whether or not there is evidence available to support a claim brought by the company to recover property or damages, or conversely to defend a claim brought against the company, and the strength of that evidence. That such is a purpose falling within the power contained in s 596B of the Law was not challenged by Grosvenor; the whole weight of authority is against such a challenge in any event. The question is whether the court is limited by the section to ordering an examination the purpose of which is to go no wider than to determine whether or not there are reasonable grounds, including evidence, to litigate a case to a successful judgment, or whether, the court has power to order an examination, the purpose of which is to ascertain the likelihood of any judgment being satisfied; that is, whether it is a permitted purpose to inquire as to the worth of a potential defendant so as to be able to make a practical assessment as to the likelihood of a return to the company of the fruits of any favourable judgment and the necessary legal costs expended in obtaining it. Is the court empowered under the section to order an examination or the production of documents to test the likelihood of the creditors in the winding up receiving tangible benefit from the satisfaction of any judgment obtained and to enable the liquidator to determine whether it is prudent to commence or maintain litigation with knowledge as to the real likelihood of obtaining any tangible benefit beyond a mere judgment, including a judgment for costs, at the conclusion of the litigation? In our view, the court has such a broad power. Additionally, it is a power of long standing. The courts have always allowed a third party or a banker to be examined as to the financial affairs of a contributory including requiring the production of banker's books relating to any account which the contributory had with the bank. The purpose of such examination was to ascertain the worth of the contributory as a matter incidental to making a decision to pursue the contributory for the amount due by way of contribution … . The power was not limited to ordering the examination of persons whom it might be considered had particular knowledge of a contributory's financial affairs. It also included a power to order the examination of any person whose relationship with a contributory was such that money or property may pass into the hands of the contributory thereby creating an asset to satisfy any claim by the company in liquidation. … 20 At p 272 their Honours said: In our view, the ambit of the power is sufficiently wide to enable information to be sought from a defendant or potential defendant as to the ability of that person to satisfy any reasonable judgment which may be obtained in litigation instituted by the liquidator. In that context it is within power to order production of relevant documents, including insurance policies, to ascertain whether or not the person has an enforceable right to indemnity from an insurer or other person. The obtaining of such information by the liquidator in the course of the winding up is to facilitate the realisation of the chose in action to the best advantage of the company and its creditors. 21 Their Honours continued: We stress that it is important to bear clearly in mind the difference between the ambit of the power and the circumstances in which the power will be exercised. The court retains a discretion in appropriate cases to refuse to exercise the power or to make its exercise subject to stringent conditions. It is impossible in advance to lay down all of the relevant circumstances which will affect the exercise of a discretion to exercise the power or to subject it to limitations or conditions. … However, in the final analysis, it must be left to the court in any particular instance, guided by the evident statutory purpose of the section, to determine whether or not the information is relevant to the liquidator for the purpose of performing his statutory duty and whether and in what manner any proposed examinee needs to be safeguarded beyond the ordinary safeguards of court control of the examination process from any oppressive exercise of the power. 22 Mr Pope's submissions are based upon a number of propositions, all of which are inconsistent with the judgment in Grosvenor. Those propositions include: that the liquidators should be in no better position than the company in the conduct of litigation in so far as concerns reliance upon the power conferred by s 596B; that the power should be exercised in connection with any investigation of the examinee's involvement in, or ability to provide information in connection with the company's creation, its managerial or other affairs and issues of misconduct; that the power is not intended to be exercised in order to obtain information concerning the private affairs of the examinee; that the availability of a public examination is intended to act as a deterrent; that it is not in the best interests of the company, its contributories or its creditors for the liquidators to be able to assess the commercial appropriateness of taking legal proceedings; and that the liquidators should simply assume that a relevant person against whom proceedings have been commenced, or are to be commenced will not be able to satisfy a substantial judgment, and that therefore it is not necessary or desirable that they have recourse to s 596B in order to assess such capacity. 23 The only focussed basis of objection appears to be the suggestion that the summons should require production of a more limited range of documents, in particular that Mr Pope should not have to produce documents created in 2008. As I have said, to fix a period by relation to the point at which the companies went into liquidation seems entirely appropriate. I note that in the event that Mr Pope is put to any expense without reasonable cause, he will have recourse pursuant to s 597B. 24 To some extent Mr Pope's solicitor sought to invoke the merits of Mr Pope's case in the Supreme Court proceedings as in some way militating against the exercise of the power conferred by s 596B. However I see no reason to suspect that the liquidators' case lacks arguable merit. 25 In oral submissions the solicitor for Mr Pope stressed the need to balance the liquidators' interest in any examination, and in having access to the documents against Mr Pope's right to keep the documents private. In this case, the balancing exercise must have regard to the fact that, at least on the liquidators' case, Mr Pope undertook very substantial obligations to the company. He does not simply deny that such obligations were undertaken. His defence is much more complex. It does not seem to me that the desire to maintain privacy, alone and of itself, will generally be an answer to an application under s 596B where the potential benefit to a liquidator is clear and substantial, as it is in the present case. 26 The liquidators have offered to co-operate in identifying any possible reduction in the ambit of the documentary disclosure sought. They remain willing to do so. 27 Had Mr Pope sought to identify particular categories of documents (other than by date) to the production of which he wished to object then I would, of course, have considered any submission which he might have made. As to legal professional privilege, that question may be dealt with when and if it arises. 28 In form Mr Pope asks that I set aside the order of the Deputy District Registrar. I proceed upon the basis that I must determine whether the summons should have been issued, and whether it should otherwise stand. In effect, I am rehearing the application. Having regard to the matters to which I have referred I consider that the order was correctly made. In considering the matter afresh, I would make a similar order. 29 For the reasons which I have given Mr Pope's application must be dismissed. I shall hear submissions as to costs. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dowsett.