Hong Bank of Australia Ltd v Murphy

Supreme Court of NSW|2001-06-05|Before: Santow J

INTRODUCTION 1 Liquidators examinations, following the 1993 amendments to the Corporations Law, have expanded in scope and frequency to become an everyday event. They are a crucial part of the liquidator's armoury in ascertaining what the liquidator amongst others needs to know about a failed corporation's "examinable affairs". (So too with ASIC and post 1993, Administrators). What the liquidator needs to know is what may assist him in fulfilling his duty first to creditors and then to contributories. That duty is to pursue the beneficial winding-up of the company and to maximise the recoveries that can be achieved. Frequently the resources the liquidator has to begin with are limited and require early cheap gains, selectively chosen, from quick and fruitful avenues of recovery. What avenues are fruitful depend first upon the liquidator's informed sense of where such recoveries may lie. Then upon the skill of the liquidator in pursuing those possibilities in the way best calculated to use scarce resources to best effect. Early recoveries from successful claims can then fund the more difficult ones. Those possibilities of recovery may include the successful prosecution of litigation to recover monies for the company, once compulsory examination shows such claims to be tenable. Equally a compulsory examination may lead to the abandonment of fruitless claims. 2 So the liquidator has a vital need for early, accurate information and leads. Hence the liquidators' wide-ranging examination powers. They are now mandatory in relation to officers of the company (s596A of the Corporations Law). Though optional for others (s569B) the Court's discretion is likely to favour such examinations where they are genuinely directed to fulfilling the liquidator's duty as I have described it. That may justifiably burden busy professional people who have had an involvement in the failed company's affairs. This is so, even if that involvement be limited to being able to give useful information about those affairs to the liquidator. 3 When complaint is made about the liquidator thereby gaining a forensic advantage, two things must be emphasised. First, that forensic advantage is a consequence of the legislature's conferment of these compulsory examination powers, in the intended interests both of creditors and contributories of failed companies. Second, early information may not only lead to pursuit of fruitful claims. It may also lead to the sensible abandonment of less fruitful ones, for the liquidator is operating with scarce resources. The liquidator has a duty to the court as well as to creditors not to abuse these wide powers. 4 The present challenge comes from three groups who are sought to be compulsorily examined. I have described them as the first, second and third group of applicants respectively. The first group of applicants are directors or others connected with the defendant company in the earlier litigation launched by the liquidator (see Chronology quoted below). The second group are two partners of Ernst & Young who were involved in relevant negotiations the subject of the liquidator's litigation. The third group were three Victorian doctors involved in the relevant negotiations (pertaining to the acquisition of a radiology business). The company in liquidation is called Global Medical Imaging Management Limited ("Global"). It went into liquidation following an earlier period of administration. Mr Holzman was the administrator/liquidator who was followed by the present liquidator Mr Andrew Hugh Jenner Wily. It is Mr Wily who wants to carry out the examinations of the three groups, who oppose the examinations as an abuse of process. 5 The three groups of applicants thus comprise persons associated in various ways either directly or professionally with the negotiations by Global for the purchase of a medical radiology imaging business owned by Victorian Imaging Group Partnership ("VIG"). The intermediation which led initially to those negotiations came through the defendant in the liquidator's proceedings Australian Mezzanine Investments Pty Limited ("AMIL"). 6 The negotiations were with a group of Victorian doctors in partnership. Those negotiations were terminated by that partnership via AMIL. Further discussions then took place without Global but still involving Ernst & Young two of whose partners being included amongst those the subject of the liquidator's examination now under challenge. 7 The termination of those negotiations has led to a Statement of Claim being brought by Global against AMIL. In very broad terms, the Statement of Claim alleges that the termination involved breach of contract, misuse of confidential information, breach of s52 of the Trade Practices Act and breach of fiduciary duties; see affidavit of Mr Wily dated 1 February 2001, Annexure A. 8 It is suggested that each of the applicants are in a position to assist the liquidator in pursuing the liquidator's stated purpose. That purpose the liquidator articulated in a letter from his solicitor dated 1 June 2001 written in similar terms to each group of applicants (A2X6) from which I quote: "We note that each of the persons for whom you act alleges that the Liquidator has engaged in an abuse of process in obtaining the examination orders and in seeking to conduct the examinations. We are instructed that the allegation is unfounded. The Liquidator is seeking to obtain information which will assist him in prosecuting causes of action currently pleaded in the proceedings which he has commenced against Australian Mezzanine Investments Limited, to determine if any of these causes of action should be abandoned and to determine whether any other causes of action should be added. These purposes are ones, which are entirely proper and have been so regarded by the Courts."

9 The factual context is sufficiently stated in the agreed chronology which later follows. It mentions that one of the two claimed debts of Global (some $280,000) is, on the Applicants' case, discharged by an agreement to capitalise it, so laying the basis for the Applicants' contention that Global was never insolvent. That argument proceeds on the basis that apart from post-administration debts, there were only two putative creditors, Mr Alter for just over $4,000 and the supposedly discharged debt of $280,000 as against current assets of $20,000. This, says the Applicants, distinguishes this liquidation which should never have occurred from the conventional ones and should lead to the conclusion that the examinations are therefore an abuse of process. The liquidator's response is, correctly, that with post administration debts, the only asset of Global ($20,000) is overwhelmed by debt, so that Global is indubitably now insolvent. That leaves the liquidator to recover what he can by the current litigation. 10 I set out the agreed chronology below. "CHRONOLOGY Date Event 18 November 1994 Global incorporated; Mr Stuart Grant Smith appointed a director; shareholder 3 July 1996 Global's directors resolve to convert Zimrho loan into fully-paid $1 ordinary shares 31 July 1996 Global's accounts for the period 18 November 1994 to 31 March 1996 signed by directors. July 1996 Correspondence between Zimrho, Global and Coopers & Lybrand concerning conversation of Zimrho loan to Global to shares and Zimrho and Global's approval of that arrangement January - March 1997 Negotiations for purchase of VIG business; undertaken by Global in concert with AMIL. Liquidator asserted contract between Global and AMIL pursuant to which would acquire business of VIG (VIG being vendor of business) being the business of Victorian Imaging Group. Further asserted AMIL repudiated that contract and arranged for purchase of VIG business to exclusion of Global. Proceedings against AMIL (2194/2000) were commenced in April 2000 so alleging. Ernst & Young advised VIG in connection with sale of business activities. The only parties to the litigation were Global and AMIL. The Statement of Claim containing claims based upon breach of contract, misuse of confidential information, s52 of the Trade Practices Act and breach of fiduciary duties; see Statement of Claim annexed to affidavit of Mr Staropoulos. 18 August 1997 Liquidator appointed to Zimrho by Court November 1999 Global's accounts for financial years subsequent to 31 March 1997 prepared and signed by directors July 1999 Global de-registered 17 December 1999 Global reinstated to register 9 March 2000 Global's name changed from Minotaur Funds Ltd to Global Medical Imaging Management Ltd 10/11 March 2000 Manfred Holzman appointed as a voluntary administrator. At date of administration, Mr Smith shown as a director and via Roxanne Investments had 25,001 shares out of 75,005, he holding one other share. There were two other groups of shareholders, one the Blythe interests, and the other the McGrath interests. All three were represented on the Board (AX1). 17 March 2000 First creditors' meeting of Global 5 April 2000 Second creditors' meeting of Global at which creditors resolve to wind up the company. Manfred Holzman resigned as voluntary administrator and is appointed liquidator 20 April 2000 Statement of claim in Global v AMIL (2194 of 2000) filed but not served 22 December 2000 Creditors' meeting of Global. Manfred Holzman resigns as liquidator and is replaced by Andrew Wily 2 February 2001 596B summonses issued to Joseph Skrzynski and Su-Ming Wong 26 February 2001 Application to set aside Skrzynski and Wong summonses (unsuccessful) 26-27 February 2001 Public examination of Joseph Skrzynski 27 February 2001 Public examination of Su-Ming Wong 10 April 2001 First 596B summons issued to William Ferris 10 April 2001 First Part 36 Rule 12 Order for Production to AMIL 18 April 2001 Statement of claim in 2194 of 2000 served on AMIL 18 April 2001 First 596B summons to Mr Ferris served 23 April 2001 Application to discharge first Ferris summons filed (returnable 11 May 2001) 30 April 2001 Second 596B summons to William Ferris issued 30 April 2001 Second Part 36 Rule 12 Order for Production to AMIL 4 May 2001 Application to set aside second Order for Production to AMIL filed (returnable 11 May 2001) 8 May 2001 Application to stay further examination under Skrzynski and Wong summonses filed (returnable 17 May 2001) 30 May 2001 Application to discharge Riley summons filed"

ISSUES TO RESOLVE 11 The applicants contend that:

(a) the liquidator has engaged in an abuse of process in obtaining the examination orders and in seeking to conduct the examinations;

(b) that abuse of process is said to follow from the fact that when the administrator was originally appointed Global was not insolvent by reason of the fact that a debt of around $280,000 was incorrectly treated as still outstanding to Minotaur Investments Pty Limited, connected with the one-third shareholder in Global, Mr Stuart Grant Smith rather than, as the applicants say was the fact, discharged by the issue of shares (which was agreed to take place though it appears never took place) to another associated company Zimrho Investment Pty Limited, the true creditor according to that contention; and

(b) that abuse stems also from the liquidator's pursuit of information not for his stated purpose but rather peripheral to that purpose ("the peripherality ground") so as to lead to the inference that the liquidator's dominant purpose is to obtain a forensic advantage rather than pursue what might otherwise be a legitimate purpose of prosecuting causes of action against AMIL and determining whether any should be abandoned or added;

The applicants put in the alternative that, as a matter of discretion, I should disallow the examination, not being mandatory under s596B of the Corporations Law . 12 The position is well established in Australia that a liquidator may, without abuse of process have the purpose which this liquidator says was his purpose, provided that purpose is a genuine one not subordinated to the purpose of seeking forensic advantage. That is, to seek information to prosecute causes of action for potential recovery, to determine if any of these causes of action should be abandoned and to determine whether any other causes of action should be added. That such a purpose may be associated with the purpose of obtaining forensic advantage in the litigation, does not vitiate the first purpose, so long as that associated purpose of forensic advantage is not the dominant purpose. See generally the discussion in McPherson "The Law of Company Liquidation" (LBC, 1999) by Andrew Keay at 639-40 where that latitude to the liquidator is contrasted to the balancing exercise undertaken by the English courts between the interests of the examinee and the interests of creditors represented by the liquidator. The fact that proceedings have been commenced by the liquidator is a valid basis for a liquidator to employ the resources that s596B affords of gathering information, as Gleeson CJ explained in Hong Bank of Australia Ltd v Murphy (1992) 28 NSWLR 512 at 517-519. 13 Moreover the onus is on the applicant who seeks to set aside the examination summons to prove that the liquidator is engaged in an abuse of process; Powell JA with whom Mahoney and Meagher JJA agreed in Sherlock v Permanent Trustee Australia Ltd (1996) 22 ACSR 16 at 20. That the onus is a heavy one is born out by the fact that the applicants must show that the pursuit of forensic advantage was the dominant purpose of the liquidator. I am not so satisfied and consider that this onus has not been discharged. 14 When one turns to the evident purpose of the present litigation, it clearly has the potentiality if successful to augment Global's assets not only for creditors but also for all contributories. Contributories would include Zimrho if entitled to an allotment of shares and discharge of the debt for $280,000 claimed to be owed to it by the Applicants, a proposition which the liquidator was not in a position to dispute. 15 Moreover if the examination demonstrates that the litigation has insufficient prospects of success or that additional particular claims should not be pursued, this will conserve the liquidator's litigious resources. That must assist the beneficial winding up and the maximising of recoveries. 16 I do not consider that the possibility that the company was solvent at the time the administrator was appointed should deter what would otherwise be the liquidator's entitlement. It had only $20,000 in current assets at the time of the administration. Even were the approximately $280,000 found not now to be owing (though the shares could only now be issued with leave of the Court), the fact remains that the company is now insolvent. It has indebtedness not only of some $4,000 as existed at the time of the administration in favour of the liquidator's solicitor Mr Alter but also there is indebtedness owed to this liquidator and his predecessor. There is no suggestion of any conspiracy between this liquidator and Mr Smith, who the applicants contend was involved in the transactions which led to the $280,000 not being discharged in the manner contemplated. 17 Thus it follows that even accepting the applicant's contention about the true status of the $280,000, this is an insolvent company. There is no material difference between an insolvent private company and a public one when it comes to the principles applicable to compulsory examination. If in truth there is some impropriety capable of being established in relation to the original appointment of the administrator (and I make no finding one way or the other on that) then that would be a matter properly to be brought to ASIC's attention and investigated by this liquidator within the reasonable limits of his resources and priorities. 18 I note that this liquidator has committed to make some investigations of that, in relation to the $280,000 and the circumstances surrounding its apparent transmogrification. He does so within the scope of his available resources and having regard to the likelihood of its benefiting creditors. 19 I turn finally to what I have called the peripherality ground. It is that the subject matter of the examinations so far as concern the second and third group of applicants could not assist the stated purpose of the liquidator. It is contended that materials relied upon for the issue of the summonses fail to disclose a sufficient connection between the Applicants and the subject matter of the Statement of Claim. The result is said to demonstrate an abuse of process or, in the alternative, at the least to invoke the Court's discretion not to allow the examinations. 20 I do not consider that ground succeeds either. It is clear enough that Ernst & Young through the two partners concerned, are capable of providing information that bears upon the question whether there was some impropriety or other remediable wrong arising from the termination of the negotiations with Global and the substituted negotiations with AMIL excluding Global. 21 That said, I would expect that there should be a proportionality in the time required of busy professional partners who have no direct interest in these matters beyond their professional association. In particular I would not expect that the examination would be permitted by the Registrar to stray into peripheral matters, were that attempted. I should add that there is nothing before me to indicate that that would occur. 22 For similar reasons I consider the third group of applicants, being the doctors closely involved in the negotiations, likewise capable of providing information to assist the liquidator in his stated purpose.

CONCLUSION 23 The three applications fail so that the examinations must be permitted to proceed and associated Notice to Produce must be met and likewise orders for production, assuming in each case they are of appropriate scope.

COSTS 24 Costs should follow the event such that the liquidator should be entitled to his costs of the proceedings before me, to be assessed forthwith.

Last Modified: 06/12/2001 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.

CITATION : Re Global Medical Imaging Management Limited (in liq) [2001] NSWSC 481 revised - 8/06/2001 CURRENT JURISDICTION: Equity FILE NUMBER(S) : SC 1289/01 HEARING DATE(S) : 04/06/01, 05/06/01 JUDGMENT DATE : 5 June 2001

At a glance

Court

Decision date

Before

Source

Judgment (10 paragraphs)

Parties

Cases Cited (2)

Cited By (3)