Hong Kong Bank v Murphy

8 IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

3135/99 IN THE MATTER OF PEGASUS GOLD AUSTRALIA PTY LIMITED (Subject to deed of company arrangement) AND THE CORPORATIONS LAW - PETER IVAN FELIX GEROFF AND GREGORY MICHAEL MOLONEY as Deed Administrators of PEGASUS GOLD AUSTRALIA PTY LIMITED (subject to deed of company arrangement) - Applications of Artis-Smith & Ors

JUDGMENT OUTLINE 1 The applicants by notice of motion seek the Court's leave pursuant to section 596C of the Corporations Law to inspect and copy the affidavit filed by the Administrators in support of an application for the issue of examination summonses under section 596B of the Corporations Law. The applicants also sought in the notice of motion orders that the summonses for examination be set aside or alternatively that the court directs the examinations to be limited to certain issues. However it was decided at the beginning of the case that the only issue for the court to determine at this stage is access to the affidavit. BACKGROUND/FACTS 2 Peter Geroff and Gregory Moloney are the deed administrators of Pegasus Gold Australia Pty Ltd (PGA). In late 1997 PGA commenced proceedings in the Supreme Court of the Northern Territory against Bateman Project Engineering Pty Ltd, Kinhill Pacific Pty Ltd and Kilborn Engineering Pacific Pt Ltd (collectively known as BKK). The proceedings were later transferred to the Federal Court. In those proceedings PGA claims from BKK loss and damage of approximately $340 million for breach of contract, misleading and deceptive conduct and negligence with regard to an expansion project at the Mt Todd Gold Mine in the Northern Territory. 3 In July 1999, the Deed Administrators successfully applied to this Court for Examination Summonses pursuant to section 596B of the Corporations Law to require the attendance of the applicants for examination about the examinable affairs of PGA. The Administrators also obtained under Supreme Court Rules Pt 36 r12 an order for production of documents relating to PGA's right of action against BKK in the Federal Court Proceedings and the capacity of BKK to meet any judgment obtained against it by PGA in those proceedings. These applications for examination summonses were accompanied by a supporting affidavit of the Administrators as required by section 596C, and it is this affidavit which is the subject of this notice of motion. The applicants are Bateman Project Engineering Pty Limited, Kilborn Engineering Pacific Pty Ltd, Kinhill Pacific Pty Ltd and Messrs. Artis-Smith, Kinnaird, Pickle, Harris and Stott, these latter persons being either directors of one of the defendant companies in the Federal Court proceedings or persons involved with the project at a reasonably senior level. ISSUES 4 The question to be determined in this case is whether the applicants should be given leave pursuant to section 596C of the Corporations Law to inspect and copy the affidavit of the Administrators. 5 Section 596C is as follows: 596C(1) A person who applies under section 596B must file an affidavit that supports the application and complies with the rules.

596C(2) The affidavit is not available for inspection except so far as the Court orders. 6 The court has a discretion to order disclosure of the affidavit to the applicants and should do so where the justice of the case so requires - Re British and Commonwealth Holdings Plc (Nos 1 and 2) [1992] Ch 342 at 345. However the authorities make it quite clear that it is not in every case that the affidavit will be made available for inspection, as that would make s596C(2) purposeless: See Simionato v Macks (1996) 19 ACSR 34 at 69. 7 In particular an applicant will not be permitted access to enable him or her to "fish" for a case, there must be material before the court from which it is clear that the applicant has an arguable case to which the material is or may be relevant - Worthley v England (1994) 52 FCR 69 at 94. More recently this was applied in Re Southern Equities Corporation Ltd (in liq); Bond and Another v England (1997) 25 ACSR 394 with Lander J stating at 422: The authorities are clear that there is no right, on the part of an examinee, to access to the material lodged in support of the application for the examination summons. It is clear enough that while the court has a discretion to allow an examinee to inspect an affidavit supporting the application, which discretion should be exercised in favour of the examinee where the justice of the case so requires, there must be some evidence before the court from which it may be inferred that the examinee has an arguable case and that the affidavit material is relevant to that arguable case. 8 Therefore the onus is on the applicants to show an arguable case, meaning that the court must be satisfied to an appropriate level of satisfaction that they are not pursuing the application without good cause or good reason - Nourse LJ in Re British and Commonwealth Holdings [1992] 1 Ch 342 at 355. There is further guidance as to what an arguable case should relate to in Re Southern Equities Corporation Ltd (in liq); Bond and Another v England at 432-3, namely that the applicants must demonstrate an arguable case that the examination summonses have been obtained for an improper purpose and that purpose being the predominant purpose of the administrator's application for examination. 9 In Re Moage Ltd (in liq) (1997) 25 ACSR 53 Mansfield J commented on the threshold of the applicants having an arguable case as he said at 67: I think it is both inappropriate and sterile for the purposes of the present applications to seek to attribute some scientific exactitude to the degree of satisfaction of "an arguable case" which needs to be made out by the applicant. In my view it involves no more than that the court requires to be satisfied to an appropriate level of satisfaction that the applicant is not pursuing the application without good cause or without good reason, and in particular is not doing so purely in the hope that, by procuring the release of the affidavit, some evidentiary foundation for the allegation will be made out. In other words, if the applicant is merely 'fishing' for a case, then no reason for exercising the discretion in its favour will exist; if it presents material from which it is shown that it has passed the threshold beyond fishing, and has an arguable case based on that material, then the discretion may be exercised in its favour. 10 Although this may seem to be a slightly lower threshold than that expressed in Worthley v England and followed in Re Southern Equities, the applicants still have to present to the court good reasons for disclosure of the affidavit. I agree that a lot of the discussion is a little sterile. In simple terms, unless there is evidence from which an inference can be drawn that the applicant for disclosure has an arguable case as to improper obtaining of the summons then access should not be allowed. 11 It is now necessary to consider whether the applicants have made out an arguable case to which the affidavit is relevant. The applicants submitted that the Deed Administrators may be acting for an improper purpose as the examination would be a trial run or dress rehearsal of the pending federal court proceedings, giving the administrators the opportunity of trying to destroy the credit of the BKK witnesses. They also argued that the actions of the Administrators are oppressive to BKK as they are distracting them and their advisers from preparing for the Federal Court proceedings, particularly in the voluminous nature of the documents required for production, which will interrupt the agreed protocol for discovery in the Federal Court action. 12 The Administrators submit that they were acting for a proper purpose in their application for summonses made pursuant to section 596B of the Corporations Law, which is as follows: s596B (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. 13 The administrator is clearly an "eligible applicant" as the definition in section 9 states that an eligible applicant includes "an administrator of a deed of company arrangement executed by the corporation". The administrators submit that there is no basis to suggest that their purpose is not to find out a) the extent to which BKK could satisfy a judgment debt; and b) assess the claim that PGA has against BKK and its likelihood of success. These come within the definition of "examinable affairs" under section 53(a). These purposes as stated by the administrators are clearly proper purposes for such an application to be made. In Re Moage Ltd Mansfield J at 64 stated that it is established clearly by authority that it is a legitimate use of that power by a liquidator to obtain information which might assist in the conduct of litigation.

he then went on to give examples of the specific purpose such as it may be sought to identify the nature and extent of evidence available to support a claim in proposed or actual proceedings and to determine the probability or otherwise of success in those proposed or actual proceedings; 14 The applicants argued that in this particular case the examination would give PGA or the Administrators an advantage in the pending Federal Court proceedings, thus making their purposes improper. However it was held by Gleeson CJ in Hong Kong Bank v Murphy (1992) 28 NSWLR 512 at 519 that "the possibility that a forensic advantage will be gained does not mean that the making of an order will not advance a purpose intended to be secured by the legislation.", and that it is entirely proper for the Deed Administrators to obtain information which may assist them in prosecuting causes of action - Hong Kong Bank v Murphy at 520. In Re Hugh J Roberts Pty Ltd (in liq) and Companies Act [1970] 2 NSWLR 582 at 584 Street J found that the mere fact that questions might be asked of an examinee directly involving a matter currently being litigated between the company and the examinee does not render it an abuse of process. More recently in Re Southern Equities Corporation (in liq); Caboche v England (1997) 24 ACSR 582 at 589 Debelle J held that an examination process can be used for the purpose of assessing the prospects of success and determining whether the pending action should be continued. Therefore it is not an improper purpose to undertake an examination whilst other proceedings are pending. 15 The other argument of the applicants is that there is or may be a case the administrators purpose is improper and an abuse of process because of the voluminous nature of the documents to be produced, and the disruption this would have on discovery in the Federal Court action for which a protocol has been established. That does not in any way suggest an arguable case which would justify an exercise of discretion authorising access to the affidavit.

16 It is important to recognise that it is not necessary at the present moment to decide on whether the summons should be set aside. However, the court looks at the persons summoned and the documents ordered to be produced to see whether this might indicate some improper purpose. I have not yet considered, except in a general way, the desirability of conducting the examinations by directing that they be limited in the first instance to matters relevant to the financial position of the defendant companies. 17 I have been reluctant to enter the debate on s596C(2) as much as I have. Discretionary decisions are just that, as long as the discretion is exercised in accordance with law and accepted principles. The principle is that the applicant for disclosure must show an arguable case that the summons ought not to have been obtained. That has not been shown. The application for access should be dismissed.

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