Background, affidavit evidence and other evidence of the Plaintiffs' purposes
By way of background, Mr Galbraith was a director of Arrium until December 2015 and was chairman of its governance and nominations committee and a member of its audit and compliance committee. Arrium was a significant producer of steel and iron ore, and was previously listed on the Australian Securities Exchange ("ASX"), and its assets included the Southern Iron mining operation. It published its FY 2014 results in August 2014, which included statements as to the then position in respect of its operations, in a period that the export iron ore price was declining; it announced a fully underwritten capital raising in September 2014, and provided certain information to the market at that point, when the export iron ore price had further dropped, and completed that capital raising on 14 October 2014; it announced in January 2015 that the Southern Iron mining operation would be suspended or closed, due to the substantial fall in iron ore prices, and published its half year financial results on 18 February 2015, recognising an impairment in the value of its mining operations. Arrium was subsequently placed in administration and, following complex deeds of company arrangement, has now passed into liquidation. The Plaintiffs, Messrs Walton and Bogan, identify certain matters for investigation arising from those matters.
Turning now to the affidavit evidence, Arrium relies on the affidavit dated 11 June 2019 of its solicitor, Ms Caroline Goulden. Ms Goulden referred to the nature of the business conducted by the "Arrium Group" before it was placed in voluntary administration in April 2016. She notes that 94 entities within the group entered into separate deeds of company arrangement in November 2016; the core Australian operating business was sold in August 2017; 48 of the 94 entities were placed in liquidation in December 2017 and 34 entities remain subject to deeds of company arrangement. Ms Goulden noted that one of those companies, AC Distribution Company Pty Ltd entered into a "distribution" deed of company arrangement in November 2016 (Ex A1, B.896), and 93 other group entities entered into materially identical "transaction support" deeds of company arrangement (Ex A1, B.703). Ms Goulden refers to the process for submission of proofs of debt under the transaction support deed of company arrangements and to a provision of the distribution deed of company arrangement which had effect that an "Arrium Group Creditor" (as defined) would be taken to have abandoned all "Claims" (as defined) and entitlements in the Arrium distribution fund which were not, relevantly, lodged with the deed administrators in accordance with that proof of debt process. Ms Goulden notes that the deed administrators did not receive a proof of debt from either of the Plaintiffs prior to the Bar Date (as defined).
Ms Goulden also sets out investigations undertaken by the deed administrators, including the collection of books and records of the Arrium Group and documents obtained from third parties, and refers to the conduct of numerous public examinations by the deed administrators. She notes (Goulden 11.6.19 [44]) that a September 2014 capital raising by Arrium, which the Plaintiffs seek to investigate, was not the subject of detailed examination in the deed administrators' public examinations, since they considered it unlikely that its circumstances gave rise to any cause of action which would potentially benefit the Arrium Group or its creditors. Ms Goulden also noted that, as well as conducting public examinations, the deed administrators and their legal representatives had conducted informal interviews with, inter alia, Mr Galbraith, who the Plaintiffs now seek to examine. Ms Goulden notes that another party designated as an eligible applicant by ASIC had participated in the public examinations conducted by the deed administrators and the Plaintiffs had foreshadowed the possibility of doing so but had not done so.
Ms Goulden refers (Goulden 11.6.19 [83]ff) to the Plaintiffs' role as proposed lead applicants in a shareholder class action and expresses the view, based on the deed administrators' investigations, the terms of the deed of company arrangements and the nature of the proposed class action, that it would be of no benefit to the Arrium Group or its creditors. She expresses that view on the basis that the Plaintiffs have no existing entitlements against the Arrium distribution fund, and because the former deed administrators, and now liquidators, do not consider that there would be any benefit from further investigation into the circumstances of the September 2014 capital raising or the preparation of Arrium's FY 2014 financial statements, because there was nothing to indicate that Arrium or its creditors had suffered loss as a result of those matters. Ms Goulden also addressed the possibility that the joinder of Arrium in a class action would be detrimental to Arrium and its creditors, although I need not address that matter where the Plaintiffs made clear in the course of the hearing that they would not seek to join Arrium in the class action. Ms Goulden also addressed the possibility that the insurer would respond to claims, but part of her evidence in that respect was not read. Ms Goulden also led evidence as to the costs of production under the orders for production originally issued to Arrium. I need not address that evidence, where the Plaintiffs rightly do not press those orders in that original form.
By a further affidavit dated 19 July 2019, Ms Goulden noted that Arrium was placed in liquidation on 20 June 2019, and the deed administrators were appointed as its liquidators, and that no proofs of debt had been lodged in the deed administration which described claims relating to the September 2014 capital raising, Arrium's FY 2014 or 1H 2015 financial statements, the Southern Iron mining operation or any claim based on alleged misrepresentations by any entity in the Arrium Group. Ms Goulden also referred to the making of a distribution to unsecured creditors of the Arrium Group and the liquidators' assessment that, even with recoveries from litigation, there would be no prospect of a surplus of assets in the liquidation such that any shareholder would receive a dividend. Ms Goulden also referred to the commencement of proceedings by the liquidators against certain former directors of Arrium and two of its subsidiaries in respect of insolvent trading. Ms Goulden also addressed the likely anticipated costs of production in accordance with the Plaintiffs' proposed "Interim Limited Disclosure", which is the narrower disclosure for which the Plaintiffs' now press. By a third affidavit dated 26 July 2019, Ms Goulden updated and increased her estimate of the costs of production within those categories.
Neither KPMG nor Mr Galbraith read evidence in the application. The Plaintiffs relied on the confidential affidavit dated 3 May 2019 of their solicitor, Ms Banton, on which they had relied in seeking the examination order and orders for production from a Registrar. I will refer to that affidavit only in relatively general terms. That affidavit refers to a series of matters said to have been disclosed by the Plaintiffs' investigations to date, which largely seem to be matters of Arrium's history and wider economic developments within the iron ore industry which would be within the public domain. Ms Banton referred to Arrium's September 2014 capital raising, to the financial reports issued by Arrium for FY 2014 and to Arrium's financial reports for the first half of FY 2015, and to a challenge which may potentially be made in respect of the content of those accounts. I will expand on the nature of that challenge below by reference to publicly available information, which was made available by the Plaintiffs or their solicitors to potential participants in the potential class action and was then placed by one of those participants on the internet, at least for a period.
Ms Banton identified the purpose of proposed examinations (although, in fact, only Mr Galbraith was then sought to be examined) as to investigate any claims to be made with a view to determining whether the claims have sufficient prospects of success to warrant pursuing them in a Court of competent jurisdiction, and identified those claims as a claim against company officers for misrepresentations concerning the September 2014 capital raising and financial position of Arrium in FY 2014 and FY 2015 and a claim against KPMG for misleading and deceptive conduct and negligence in relation to the preparation and publishing of Arrium's financial report for the year ended 30 June 2014 and 31 December 2014. I consider that I can refer to those matters in this judgment, where, as I noted above, the Plaintiffs made that information widely available to potential participants in the class action and it then became publicly available. Ms Banton also expressed the view that the examination of Mr Galbraith would reveal factual matters bearing upon whether Arrium's officers failed adequately to inform the market as to Arrium's financial position in FY 2014 and FY 2015 (Banton 3.5.19 [40]-[41]). Ms Banton's affidavit also addressed Mr Galbraith's role in Arrium and the basis on which orders for production were sought against UBS and KPMG and referred to a request for access to other documents which is not to be determined at this hearing.
By a second affidavit dated 28 June 2019, Ms Banton referred to correspondence concerning the applications made to discharge the examination summons and orders for production, which I need not further address. She also referred (Banton 28.6.19 [26(a)] to the purpose of the examination, indicating that:
"The potential claims being investigated and the purposes for which the Examination Summons and Orders for Production have been issued are to obtain further information about the potential claim(s) Arrium and the shareholders (including the plaintiffs) may have arising from the examinable affairs of Arrium."
Any claim initiated by the Plaintiffs, on behalf of Arrium, would be in the nature of a derivative action, which would require the Court's leave granted in its inherent jurisdiction rather than under s 237 of the Corporations Act, since Arrium is in liquidation. Mr Henry, with whom Ms Shepard appeared for the Plaintiffs, ultimately did not seek to rely on any prospect of a derivative action in support of the examination summons and orders for production. Ms Banton indicated that (contrary to other documents to which I refer below) the Plaintiffs now do not now seek to join Arrium to the proceedings or to obtain recovery against it.
The Plaintiffs relied on a further affidavit dated 8 July 2019 of another solicitor acting for them, Mr Zaki, which acknowledged that the Plaintiffs had abandoned any claim as unsecured subordinated creditors of Arrium and their acceptance that they had no right to any distribution under the deeds of company arrangement. Mr Zaki noted that the Plaintiffs also maintained that shareholders' rights had not been extinguished under the deeds of company arrangement. Mr Zaki responded to matters raised in Ms Goulden's evidence, and also raised the possibility of a claim conducted by the Plaintiffs on Arrium's behalf, presumably as a derivative action. As I noted above, Mr Henry did not rely on that possibility to support the examination summons and orders for production. Mr Zaki also set out the Plaintiffs' offer to receive "interim limited disclosure", which is now pressed as against Arrium in the application, and responded to Arrium's assessment of the costs of production. Mr Zaki noted the possibility that, after Mr Galbraith was examined and other material sought by the orders for production was reviewed, the Plaintiffs would determine whether further examinations were required.
By a further affidavit dated 12 August 2019, Ms Banton took issue with Ms Goulden's estimate of the costs of production on the basis of the proposed interim limited disclosure, and suggested that a narrower scope for keyword searches would reduce the likely costs of production.
There is also other evidence of the Plaintiffs' purposes in respect of the proposed examination of Mr Galbraith and the associated orders for production. I noted above that the Plaintiffs sought the examination orders and orders for production in their capacity as eligible applicants authorised by ASIC, within the meaning of ss 9 and 597(5A) of the Corporations Act. The Plaintiffs set out the purpose of the proposed examinations in their solicitor's letter dated 5 April 2018 to ASIC (Ex A1, B.1284), in support of their application for eligible applicant status. The Plaintiffs' solicitors there refer to a capital raising undertaken by Arrium in September 2014; to the closure, four months after the capital raising was completed, of one of Arrium's two main iron ore mines, the Southern Iron mining operation; and to the very substantial loss incurred by Arrium in FY 2015 before it was placed in voluntary administration. That letter identified, inter alia, matters said to arise from Arrium's announcement of its FY 2014 results to the ASX on 19 August 2014 and the capital raising announcement, capital raising presentations and retail entitlement offer booklet relating to the September 2014 capital raising. That letter also identified potential claims against KPMG, in its capacity as auditor of Arrium, in respect of Arrium's accounts for the 2014 and 2015 financial years. The letter identified potential examinees, but did not refer to Mr Galbraith, and the Plaintiffs have not (at least as yet) sought to examine the persons who were identified in that letter.
That letter identified the Plaintiffs' purpose of the examinations as "to investigate the potential for claims to be made on behalf of creditors or shareholders in Arrium" related to the specified matters, although it will emerge below that the Plaintiffs are not creditors of Arrium and could not have brought claims in that capacity. The Plaintiffs' solicitors also stated that:
"Any information obtained through public examinations would assist all shareholders and persons with a valid claim, in considering whether to make a claim against Arrium's Directors, KPMG or anyone else. Further, the success of any such proceedings may lead to recovery from any insurance policy standing behind the Directors and KPMG. Such recovery would ensure that the pool of funds is available to either the company or other shareholders would increase."
The last statement in that paragraph would only be correct if a derivative action were brought by the Plaintiffs on Arrium's behalf and led to recoveries by Arrium, since the Plaintiffs now accept that they have no claim against Arrium as creditors, and any recovery by them against third parties will not reduce any such claim or improve the position of other creditors. As I noted above, Mr Henry ultimately did not seek to rely on the prospect of a derivative action to support the examination of Mr Galbraith or the orders for production.
By email dated 17 April 2018, ASIC requested further information as to the application, including an explanation "why the proposed public examinations will not be an abuse of process" (Ex A1, B.1295). The Applicants' solicitors responded to that question as follows;
"The examinations that we would seek (to the extent that they are of witnesses who the Administrators won't seek to examine themselves) would not be an abuse of process since they will be of officers of the company and its auditor in respect of its examinable affairs. As explained in the Eligible Application Request, the application to ASIC is made expressly for the benefit of shareholders and creditors of the company." (Ex A1, B.1296)
As to the first of these propositions, I will note below that Arrium's liquidators have already conducted an informal interview of Mr Galbraith in lieu of an examination. The second requires the qualification noted above, that the Plaintiffs now accept they are not creditors of Arrium. ASIC then conferred eligible applicant status on the Plaintiffs for the purposes of Pt 5.9 Div 1 of the Act in relation to Arrium by letter dated 24 April 2018 (Ex A1, B.1360).
A significant amount of information concerning the Plaintiffs' proposed claims has also been made available to potential participants in the potential class action and, for a period, was placed on a website that is widely available to retail shareholders, albeit by one of those participants or potential participants rather than by the Plaintiffs or their solicitors (Ex A1, B.2362, B.2355). The information provided to potential participants in the potential class action referred to possible proceedings to recover losses incurred by investors who bought securities in Arrium after its FY 2014 results announcement and its September 2014 capital raising from certain directors and former auditors of Arrium. The Plaintiffs' solicitors there indicated that the claim was based on allegations of misrepresentations concerning the financial position of Arrium in the second half of 2014, the adoption of Arrium FY 2014 accounts and the September 2014 capital raising and also referred to an alleged failure by Arrium's auditors to identify the true position of Arrium in respect of the FY 2014 reporting documentation. That information identified a claim that the Plaintiffs and group members had suffered loss and damage by the purchase of Arrium shares at inflated prices in the relevant period and, in answer to a "F[requently] A[sked] Q[uestion]" as to the time period for the class action, indicated that "[t]he class action is currently concerned with recovering losses for shareholders on and after 19 August 2014".
A funding agreement with a third party funder in respect of the potential proceedings (Ex A1, B.1104) in turn identifies the range of potential defendants in a potential class action as including Arrium (although the Plaintiffs abandoned that position in submissions), Arrium's directors and officers from time to time, Arrium's auditors from time to time including KPMG, any underwriter of any Arrium capital raising including UBS and any other adviser to Arrium.
[2]
Whether the examination order in respect of Mr Galbraith should be set aside
Applicable principles
It will be helpful first to refer to the applicable principles in respect of the issue of, and setting aside of, a summons for examination, before turning to the parties' submissions. It was common ground between the parties that an applicant for an examination order under s 596A of the Act is required to satisfy two criteria, relevantly, that it is an "eligible applicant" and that the person to be examined was, during the specified period, an officer or provisional liquidator of the corporation and that, if those criteria were met, the Court must issue a summons. Both of those criteria were met in respect of the Plaintiffs' application for the issue of an examination order to Mr Galbraith, and the Registrar rightly issued that examination order on that basis. Mr Henry accepts that an examination order that satisfies the requirement of s 596A of the Act may nonetheless be discharged if it is found that the applicant for that order had an improper purpose in securing that order or if that order otherwise amounts to an abuse of process: Kimberley Diamonds Ltd v Arnautovic [2017] FCAFC 91; (2017) 252 FCR 244 at [30]. Mr Henry also submits, and I accept, that a power to set aside an examination order on the basis that it is an abuse of process should be exercised with caution and only in exceptional or extreme cases, by reference both to the case law as to abuse of process and, in this context, to Kimberley Diamonds Ltd v Arnautovic above at [33].
Both the Plaintiffs and Arrium place considerable weight on the decision of the Court of Appeal in Hong Kong Bank of Australia Ltd v Murphy (1992) 28 NSWLR 512, where the applicants sought to set aside orders for examination under s 597 of the then Corporations Law on the ground that they were obtained for an impermissible purpose, namely pre-trial interrogation and discovery for the benefit of parties to private litigation. Gleeson CJ (with whom Mahoney and Priestley JJA agreed) there referred to the nature of the pending litigation brought by the new trustees of the "Estate Mortgage trusts" against several parties, which sought to challenge certain deeds of assignment of interests in mortgages to those parties and the effect of a deed of priority. The Chief Justice also referred to observations of Street J in Re Hugh J Roberts Pty Ltd (in liq) [1970] 2 NSWR 582 at 585 that:
"A liquidator need not be diffident in using a private examination for its ordinary and legitimate purpose in the gathering of information. But he must not abuse this process. For instance an attempt, where litigation is either contemplated or commenced, to summon the prospective or existing defendant's probable witnesses and examine them simply for the purpose of destroying their credit would exceed the legitimate use of the process. Beyond stating this extreme instance, I consider it unsafe to generalize - very often the gathering of information quite properly involves testing the reliability or credit of the examinee from whom the information is being obtained."
Gleeson CJ observed (at 519) that:
"It is to be noted, however, as is implicit in the judgment of Street J, that there is no strict dichotomy between an advantage to be gained by an applicant for an examination order, such as a liquidator, in the capacity of a litigant, and a benefit that might flow to creditors, or contributories, or members of the public, from the conduct of an examination. Whilst the court will not permit a liquidator, or other eligible person, to abuse its process by using an examination solely for the purpose of obtaining a forensic advantage not available from ordinary pre-trial procedures, such as discovery or inspection, on the other hand, 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."
His Honour also there referred to an analogy in that case between the circumstances in which the proposed examinations would be held and those in which examinations were traditionally conducted by liquidators, where many members of the public were owed money as a consequence of the failure of the trust and observed(at 520) that:
"The new trustees are likely to be less than fully informed about the affairs of the trust, and seek to use the procedures of compulsory examination for the purpose of adding to their information."
Notwithstanding the vigorous submissions of Mr Wood and Ms Smith to the contrary, it seems to me that there is a degree of similarity between that case and this case, where Arrium was a large listed company; the Plaintiffs and many other shareholders will have suffered loss from their investment in it; and, on the face of it, the Plaintiffs seek to examine Mr Galbraith as to matters as to which the liquidators could properly have examined him, although the liquidators have made a reasoned decision that their resources are better directed to another claim.
In Re Excel Finance Corp Ltd (rec and mgr apptd); Worthley v England (1994) 52 FCR 69, the Full Court of the Federal Court referred to authority that it would be an abuse of the Court's process to obtain an examination summons "not for the benefit of the corporation, its contributories or creditors" but only for the benefit of the prescribed person to be used in other litigation. The Court referred to Re Laurie Cottier Productions Pty Ltd (in liq) (1992) 9 ACSR 513 and distinguished between the pursuit of private interests and interests for the benefit of a company, its creditors or contributories, in a passage subsequently approved by Ward J (as her Honour then was) in Re Affinity Capital Pty Ltd - Indrasith v Ku [2011] NSWSC 1158 at [36], as follows:
"… Waddell CJ in Eq in Re Laurie Cottier Productions Pty Ltd (In liq) [above] referred with approval to the comments of McLelland J in Re BPTC (supra). Again the context of the comments of Waddell CJ in Eq was very different to the present case. That was a case of an examination being conducted by a liquidator who was funded by a substantial creditor. The creditor had threatened proceedings against the examinee. The examinee was a director of the company in liquidation and the allegation was that he was a party as a director to incurring the creditor's debt when there were no reasonable grounds to expect that the company would be able to pay all its debts as and when they became due. It was, as his Honour observed necessary to distinguish, on the one hand, between the purpose of the creditor in funding the examination, its motives being to advance its own interests, and the purpose of the liquidator in conducting the examination, on the other. There was nothing to suggest that the liquidator was seeking to conduct the examination in the interests of the creditor funding the investigation rather than in the interests of other creditors or for the purpose of finding out the circumstances which led the company into its financial difficulties. As his Honour said, that was sufficient to dispose of the application to set aside the examination order."
The Court also observed (at 92-93) that there would be no objection to the use of the examination procedure on the application by a creditor whose purpose was to ensure that his or her debts were paid, where that creditor's interests were no different from the interests of all other creditors who shared rateably in the distributable assets of the company.
In Sandhurst Trustees Ltd v Harvey [2004] SASC 157; (2004) 88 SASR 519, the Court held that an examination had a proper purpose where it might expose misconduct by an audit firm that would be of legitimate interest to ASIC and provide evidence founding the basis of a claim, including by noteholders, against that audit firm. It seems to me that that rationale may be available here, although I also recognise and give weight to the fact that the liquidators have already formed the view that there is little prospect of a benefit to the company from a claim in respect of the capital raising or the relevant financial accounts, and they are instead pursuing insolvent trading proceedings, and that the Plaintiffs did not press a contention that the examinations could be justified as directed to a derivative action to be brought by them on Arrium's behalf.
Doyle CJ (with whom Perry and Bleby JJ agreed) also there observed (at [51]) that:
"The fact that a consequence of an examination order may be a forensic advantage to a particular class of creditors, or to a particular creditor, of the corporation, or to a particular person, does not of itself lead to the conclusion that the order was not made for a proper purpose. Nor does the fact that the order was made at the instance of that person or creditor. On the other hand, the power is not conferred with a view to its exercise solely to benefit an individual with a claim of some kind against the corporation in question, or with a claim arising out of its affairs. Nor, I consider, is it conferred to enable an applicant for an order to pursue an enquiry into a matter in relation to which the applicant has no legitimate interest."
That observation was subsequently approved in Re New Tel Ltd (in liq) Evans v Wainter Pty Ltd [2005] FCAFC 114; (2005) 145 FCR 176 at [219]. Not surprisingly, Mr Herzfeld, who appeared for KPMG, placed significant weight on the last sentence of that observation.
Both parties also addressed the observations of the Full Court of the Federal Court of Australia in New Tel Ltd (in liq), Re; Evans v Wainter Pty Ltd above, where the Full Court held that examinations to be conducted by a creditor did not amount to an abuse of process, although the creditor could not have taken that course if the company had not been placed in liquidation. The Full Court there held that the company and its creditors would benefit from examinations to be conducted by the creditor, where the successful outcome of proceedings by that creditor would reduce its claim against the company and increase distributions to other creditors accordingly. That cannot occur here, as I have noted above, because the Plaintiffs do not have any claims against Arrium. However, it does not follow that that is the only way in which a company, its creditors or contributories may benefit from the proposed examination.
Lander J (Ryan and Crennan JJ concurring) there referred (at [118]) to two purposes of the relevant statutory provisions, being, "to enable the public to know how corporations are being managed" and "to achieve the deterrent effect of a public examination", and referred (at [143]) to Re Excel Finance Corp Ltd (rec and mgr apptd); Worthley v England above as authority that "it is an abuse of process to use the Pt 5.9 procedure if the predominant purpose of the applicant seeking the order is not for the purpose of benefiting the corporation, its contributories or its creditors." His Honour also observed (at [144]) that:
"If the party seeking the examination summons is doing so for any number of purposes, which do not include the purpose of benefiting the corporation, then that would amount to an abuse. On the other hand, if the party seeking the examination summons has as one purpose the achievement of a benefit to that party but has also a further purpose which is for the benefit of the corporation then the use of the Pt 5.9 procedure will not be an abuse of process."
Counsel submitted, in this application, that the quoted observation may give too little weight to the question of the nature of the applicant's predominant purpose.
His Honour also observed (at [245] and [247]) that the procedures in Pt 5.9 of the Act are intended to "aid persons who have responsibility of the external administration of the company in carrying out their duties", and that those persons "are entitled only to seek an order for an examination summons where the purpose of the examination is … for the benefit of the corporation, its creditors or its contributories". Mr Wood submits, and I accept, that the reference to benefiting the corporation, its contributories or its creditors does not refer to the private or personal benefit of individual contributories or creditors. Mr Wood submits that the conduct of examinations by individual creditors or contributories who contemplate litigation against a third party may be for the benefit of the company if it would promote the protection, conservation or recovery of the assets available to be distributed in the administration, or may provide the external administrator with relevant information concerning the circumstances of and reasons for the failure of the corporation. I accept that those are at least proper purposes of such an examination, although I would not read them as necessarily the only proper purposes of such an examination.
His Honour also noted (at [248]) that ASIC is only entitled to authorise a person as an eligible applicant if "that person's purpose in seeking an examination summons is for the benefit of the corporation, its contributories or its creditors". His Honour also set out (at [252]) a helpful, and often cited, summary of matters relevant to the examination power as follows:
"1. The power given to the court to summon a person for examination is a coercive power.
2. The purpose of the power is to be gleaned from the legislation.
3. The following legitimate purposes emerge:
3.1 First, an examination is designed to serve the purpose of enabling an eligible applicant to gather information to assist the eligible applicant in the administration of the corporation.
3.2 Second, it assists the corporation's administrators to identify the corporation's assets, both tangible and intangible. It also allows the corporation's liabilities to be identified.
3.3 Third, the purpose is to protect the interests of the corporation's creditors.
3.4 Fourth, it serves the purpose of enabling evidence and information to be obtained to support the bringing of proceedings against examinable officers and other persons in connection with the examinable affairs of the corporation.
3.5 Fifth, it assists in the regulation of corporations by providing a public forum for the examination of examinable officers of corporations.
4. If an eligible applicant applies for an order for the examination of a person for a purpose unconnected with the purposes authorised by the legislation that will be an abuse of process and the order, if obtained, will be set aside.
5. The procedure may not be used to allow a party to obtain a forensic advantage and, if it is, any order obtained will be set aside.
6. The procedure may not be used as a dress rehearsal for the cross-examination of a person in a pending or subsequent action. However, it is not improper to seek an order of the Court to summon a person for examination whilst litigation is pending against that person or entities connected with that person.
7. The question whether in any particular case the applicant has used the procedure abusively will depend upon the applicant's purpose in seeking the order and all of the surrounding circumstances. It will not be an abuse unless an offensive purpose is at least the predominant purpose.
8. It will be an offensive purpose if the application cannot be characterised as being for the benefit of the corporation, its contributories or creditors.
9. A creditor may, if first authorised by ASIC, apply to the Court for an order to summon for examination a person for the purpose of obtaining information in relation to a debt owed to the creditor if such an examination would be in the interests of the corporation or its creditors as a whole.
10. A creditor may not use the procedure for the purpose of obtaining a forensic advantage which would not have been available to the creditor if the corporation had not gone into administration."
That analysis was approved by Barrett J in Wily Re LED (South Coast) Pty Ltd above at [36] and by Gleeson JA in Re Cardinal Group Pty Ltd (in liq) [2018] NSWSC 748 at [15].
In Re Affinity Capital Pty Ltd - Indrasith v Ku above, Ward J (as her Honour then was) reviewed the applicable principles in determining that examination summonses and orders for production in respect of two defendants should be set aside and summonses and orders for production in relation to two other defendants should be limited in scope. Her Honour referred (at [36]ff) to Re Excel Finance Corp Ltd (rec and mgr apptd); Worthley v England above and to a submission that a private interest was there being pursued, namely a personal damages claim against directors or shadow directors, which was not in the interests of the corporation, its contributories and creditors, and approved the observations in that case to which I referred above. Her Honour also noted (at [41]) that, where a creditor rather than a liquidator is to conduct the examination, the question must be what is the predominant purpose of that creditor in conducting the examination and (at [48]) that:
"It seems to me that what is contemplated in this regard is that the creditor cannot use the procedure in order to obtain a forensic advantage in private or personal litigation that the creditor might seek to bring outside of the liquidation (as opposed to seeking to use the procedure in order to obtain evidence or information of the kind that the liquidator, in whose shoes the creditor might be said in effect to be standing at least for the purposes of the present examinations, might use to consider what causes of action would be available to the company in liquidation). If so understood, then it would follow on naturally from proposition 9, being the requirement that such examination be in the interests of the corporation or its creditors as a whole."
Her Honour's reference there to "proposition 9" is to the observation of Lander J in Re New Tel Ltd (in liq) Evans v Wainter Pty Ltd above which I have quoted in paragraph 32 above.
Ward J also there identified the relevance of the question whether the predominant purpose of the examinations was to garner evidence for intended proceedings in a personal capacity intended to be brought outside the liquidation. Her Honour observed (at [65]) that:
"If the predominant purpose of Dr Indrasith in seeking the issue of the examination summonses was to pursue a personal claim (against the company or its directors) as opposed to facilitating the gathering of information in order to enable a claim to be brought in the name of the company or its liquidator in an attempt to pursue recovery for all creditors (from which Dr Indrasith would or may indirectly benefit), then I am of the view that there would be no doubt on the authorities that this would be an improper purpose and the examination summonses should be set aside. If the predominant purpose is the latter, then the fact that Dr Indrasith may obtain a collateral advantage in obtaining information that he could potentially use in a personal proceeding against the directors would not render use of the examination summons procedure an abuse of process."
Mr Henry also places considerable weight on the observations of the Full Court of the Federal Court in Kimberley Diamonds Ltd v Arnautovic above, where the sole shareholder of a company, as an authorised applicant, sought to examine the company's liquidator as to the sales process adopted in respect of a mine. Mr Henry submits, and I accept, that that case is authority (at [97]-[99]) that the applicant for an examination summons need not demonstrate that the possible results of the examination justify the issue of the summons to an officer of the corporation, or that there is any "realistic prospect" that the examination will reveal conduct capable of supporting a claim and therefore have "practical utility". I did not understand Arrium, and the other applicants, to contest the issue of the examination summons to Mr Galbraith on that basis, or to contend that an examination could not, for example, reveal information that will advance the Plaintiffs' position in respect of any claim against Arrium's directors or KPMG. It seems to me that Arrium's challenge to the examination order has a different character, in contending that the advantage that the Plaintiffs may obtain in advancing their personal claims is not an advantage which may properly be obtained by the exercise of the examination power.
The Full Court there accepted (at [101]) that:
"There could be little doubt that an examination summons can be discharged or stayed as an abuse of process if it is found that the eligible applicant's predominant purpose in obtaining the examination summons was to secure a private benefit or advantage, as opposed to a benefit for the company, its creditors or contributories: Evans v Wainter at [247]. Thus, for example, if an eligible applicant obtained an examination summons for the purpose of securing a benefit for itself in other litigation, not involving the company, that purpose would be "offensive", such that the summons could be stayed as an abuse: Evans v Wainter at [140], [143] and [252] (proposition 8). Such a summons could not be of any benefit to the company, its members or creditors. It is worth pausing, at this juncture, to note again that Mr Arnautovic did not allege, nor did the primary judge find, that KDL's purpose in obtaining the summons was to secure a private benefit, or was otherwise offensive or illegitimate, in the sense of being foreign to the purpose of s 596A."
The Full Court also observed (at [103]-[104]) that:
"It would be entirely proper for an eligible applicant to apply for and obtain an examination summons under s 596A for the purpose of obtaining information concerning legitimate issues, or to obtain answers to legitimate questions, which relate to the management of the company, including while it is in the process of being wound up. That would be the case even if, at that stage, the information that was available to the eligible applicant was not such that it could be said that the applicant had an arguable case, or that the examination was likely to reveal conduct capable of supporting a claim. The obtaining of answers to otherwise unanswered questions, or the quelling of a perceived controversy concerning the management of a company can, in a broad sense, be regarded as amounting to a benefit to the company, its creditors or contributories, and as therefore fulfilling a purpose of s 596A. An examination that achieves nothing more than that may still reasonably be regarded as having some practical utility. It would not necessarily be an abuse of process.
The position may be different if the examinee is able to demonstrate that the controversy, or the perceived controversy, or the unanswered questions, do not genuinely relate to or arise from the examinable affairs of the company, or are otherwise speculative, far-fetched or misconceived. In such circumstances, it could well be concluded that the examination was an abuse of process. The use of the examination process for such a purpose could rightly be found to be vexatious or oppressive and to bring the administration of justice into disrepute. The "heavy" onus of demonstrating this rests on the party seeking to stay the summons. As explained in more detail below, the evidence adduced by Mr Arnautovic was not capable of discharging this heavy onus."
It seems to me that those observations are directed to the position where the applicant has a predominant purpose that is a proper purpose, since the Court made those observations immediately after it found that there was no allegation or finding at first instance that the examination in that case was directed to securing a private benefit or was otherwise foreign to the purposes of s 596A of the Act.
Submissions
Turning now to the parties' submissions, Mr Wood submits that the statutory purpose of s 596A of the Corporations Act is to facilitate the various forms of external administration contemplated by Ch 5 of the Act. He submits that the Plaintiffs sought the examination order in respect of Mr Galbraith and the orders for production for the predominant purpose of investigating actions available to them or other shareholders against Arrium's former auditors, directors and/or advisers arising out of the September 2014 capital raising and Arrium's FY 2015 and 1H 2015 financial statements. There may be little real dispute as to that matter, although there is plainly a real dispute as to whether that purpose would be an improper purpose in this context. Mr Wood submits that Ms Banton's confidential affidavit dated 3 May 2019 indicates that the examinations are directed to the pursuit of potential claims by the Plaintiffs and shareholders (as distinct from by Arrium) arising out of the capital raising and the financial reports, against the Company's officers or auditors. I have referred to Ms Banton's evidence in that respect above. Mr Wood also relies on the information provided by the Plaintiffs to ASIC in support of their application for authorisation as eligible applicants, the information provided to potential participants in the class action and placed on the internet about the potential claims, and the terms of the funding agreement, to which I have referred above.
Mr Wood also submits that the Plaintiffs' purpose is an improper purpose, because it is a wholly private purpose, on the basis that neither the examination nor the proposed actions have any prospect of benefiting Arrium or its creditors or otherwise facilitating the external administration of the Arrium Group. Mr Wood points out that, as I have noted above, the Plaintiffs are not creditors and it is common ground that they abandoned any claims against Arrium by not lodging proofs of debt under the deeds of company arrangement. There also appears to be no contest that there is no prospect of a surplus in the liquidation and that shareholders could not hope to receive a dividend, so there is no prospect that success in any proceedings brought by the Plaintiffs would increase the dividend payable to other shareholders by reducing their claims. Mr Wood submits that the Plaintiffs' claims have no capacity to benefit Arrium or its creditors, because the Plaintiffs are not creditors and a recovery on their part will not assist other creditors; the liquidators have conducted their own examinations and an interview of Mr Galbraith and do not require further information from him; and, to the extent that the Plaintiffs contemplate claims against former directors of Arrium, and those claims were successful, they would potentially reduce the amount of insurance cover available to the directors in respect of the insolvent trading claims brought by the liquidators. I accept there is a possibility of such a reduction, but whether that will in fact occur depends on details of the relevant claims and policy cover that were not addressed by the evidence.
Mr Wood also identified, in opening submissions, matters which he contended the Plaintiffs had not disclosed to the Registrar. I am not persuaded that any such non-disclosure was established, if that contention was pressed, since the Plaintiffs were open as to the underlying purpose of the examination and other relevant matters in that affidavit. It is not necessary to deal with Mr Wood's criticism of justifications later developed by the Plaintiffs, in respect of a potential derivative action or other possible claims by Arrium, where Mr Henry did not rely on those matters to support the examination of Mr Galbraith or the orders for production.
KPMG broadly adopted Arrium's submissions that the examination of Mr Galbraith was sought for an improper purpose. In oral submissions, Mr Herzfeld submitted uncontroversially, that the Court would follow the decisions in Sandhurst Trustees Ltd v Harvey above, as approved in Re New Tel Ltd (in liq) Evans v Wainter Pty Ltd above, and submitted that the Court of Appeal's decision in Hong Kong Bank of Australia Ltd v Murphy above was not contrary to those decisions. He submitted that the Plaintiffs' application to examine Mr Galbraith was directed to gaining a private benefit in their proposed proceedings against Arrium, in a way that did not benefit Arrium as a whole or its creditors (T40) and that their claim would compete with the claims brought by the liquidators for the benefit of all creditors (T41).
In oral submissions, Mr Jammy, who appeared for Mr Galbraith, adopted aspects of the submissions made by Arrium and KPMG, and otherwise did not make separate submissions in support of the application to set aside Mr Galbraith's examination. He indicated that he did not seek to challenge that part of the summons for that examination that required the production of documents by Mr Galbraith, if that summons was not otherwise set aside.
Mr Henry responds, and I accept, that the onus of satisfying the Court that there is an abuse of process such that the orders for examination and production should be set aside rests upon Arrium and KPMG and that that onus is a demanding one: Re Affinity Capital Pty Ltd - Indrasith v Ku above at [66]-[68]. Mr Henry responds that the matters the subject of the examination summons and orders for production canvass possible breaches of duty owed by Arrium's directors and KPMG to Arrium and so are of potential benefit to Arrium, its creditors and the public. Mr Henry submits, in particular, that one purpose of the examination power is to permit discovery of abuses that may have attended the management of the affairs of a company in liquidation: Hamilton v Oades (1989) 166 CLR 486 per Mason CJ at 496; Re Excel Finance Corp Ltd (rec and mgr apptd); Worthley v England above; see also Re New Tel Ltd (in liq) Evans v Wainter Pty Ltd above at [116]. While I accept that the examination power has such a purpose, the authorities to which I have referred above indicate that that does not authorise the use of that power for the predominant purpose of pursuing private claims of creditors or contributories, as distinct from a claim that has the requisite benefit for Arrium, its creditors or contributories in the relevant sense.
Mr Henry also placed significant weight on the decision at first instance in Re BPTC Ltd (in liq) (1992) 7 ACSR 291; 10 ACLC 271 and the decision in Hong Kong Bank of Australia Ltd v Murphy which I have addressed above. Mr Wood responds that the decision in Re BPTC Ltd (in liq) above was concerned with the power to permit inspection of a company's books and records under s 387 of the Companies (NSW) Code and not to the examinations power, and was not authority that that power would be available in respect of an action by individual shareholders which had no potential benefit for the company or its creditors. He points out that, in that case, there was no issue that the creditors of BPTC Ltd would not benefit from any success of unitholders against third parties, and the real question was whether the examination was directed to obtaining an improper forensic advantage in litigation, and submits that case is also not authority that the examination power can be used to advance a predominant private purpose for shareholders.
Mr Henry also submits that, even if it were found that the Plaintiffs' predominant purpose was to pursue claims for the benefit of the shareholders arising out of any impropriety, misconduct or breach of duty by Arrium's directors or KPMG, then that purpose is not improper because the exposure of misrepresentations to the market or negligence by directors or others, with duties to the company, involved in a substantial capital raising was self-evidently in the public interest. Mr Henry submits that an argument that such an examination is solely for the Plaintiffs' private benefit is analogous to that put and rejected by the Court of Appeal in Hong Kong Bank of Australia Ltd v Murphy above. Mr Henry also submits that Arrium's submissions are in error, in focusing on the potential outcomes of the examination rather than the purposes for which they are conducted. Mr Henry also submits, by reference to observations of the Full Court in Kimberley Diamonds Ltd v Arnautovic above, that the obtaining of answers to otherwise unanswered questions can, in a broad sense, be regarded as amounting to a benefit to the company, its creditors or contributories. Mr Henry also raised, in submissions, the possibility that the examinations conducted by the Plaintiffs might disclose a basis for the company to recover its costs of the capital raising (T48). That is, no doubt, a possibility, but it seems to me that the evidence does not suggest that it formed any part of the Plaintiffs' purpose in conducting the examinations.
In oral submissions, Mr Henry submitted that the Plaintiffs' stated purpose was to investigate potential causes of action against officers and auditors of Arrium in connection with the September 2014 capital raising and the accounts for the financial year ended 30 June 2014 and the half-year ended 31 December 2015; that was a proper purpose for the examination; that the examinations may expose breaches of duty by officers or auditors of Arrium, which may be actionable by Arrium; whether such breaches were exposed and what would flow from them was currently unknown; and it was common ground that the liquidators had not, or at least had not substantially, investigated that capital raising (T47). Mr Henry also submitted that the Court would not conclude, on the evidence, that no possible benefit to Arrium or its creditors could accrue on Mr Galbraith's examination and, in particular, Arrium may have a claim in respect of the costs of the capital raising, although he fairly accepted that he could not submit that the Plaintiffs' objective purpose was to investigate a claim for the benefit of the company against the auditors (T48-49). Mr Henry submitted that a proper purpose was to be served by the examination of exposing allegedly unlawful conduct in the period prior to Arrium's entry into external administration (T49).
Mr Henry also indicated, in oral submissions, that the Plaintiffs contend that their purpose can be a proper purpose if it advances Arrium's interests in respect of an investigation of possible claims, even without any possibility of economic benefit to Arrium or its creditors, and even if the bringing of the claim would be to the economic disadvantage of Arrium or its creditors (T52). It is not necessary to determine that question in order to decide this application, where the matters which might arise from the Plaintiffs' examination of Mr Galbraith and the economic impact of any subsequent claims upon Arrium is presently uncertain. Mr Henry also submits that it is not open to Arrium to establish that the examination will be of no utility, before embarking upon the investigation contemplated by it; that Arrium's submission in that regard is inconsistent with the decision of the Full Court in Kimberley Diamonds Ltd v Arnautovic above; and that it is sufficient for the Plaintiffs to establish that the examination seeks to expose or provide answers to what occurred and why in respect of the capital raising, and that that is a proper purpose, where the capital raising was within the scope of Arrium's examinable affairs (T58).
In submissions in reply, Mr Wood submitted that Arrium did not contest the Plaintiffs' contention that examinations may be conducted for the purpose of facilitating actions by individual creditors but submitted that proposition did not extend to the position where the examination was for a private purpose of the creditors.
It seems to me that the information provided by the Plaintiffs' legal representatives to ASIC in support of their application for authorisation and Ms Banton's affidavit does tend to indicate that their predominant purpose in seeking the issue of the examination summons was to investigate, and pursue, a personal claim in their capacity as shareholders against directors of Arrium or against its auditors. It seems to me that little or no weight should be given to the prospect of the Plaintiffs pursing a claim as a derivative action on Arrium's behalf, where that prospect was only faintly raised in the Plaintiffs' later affidavit evidence, in response to the challenge to their identified purpose; there is no evidence that the Plaintiffs have undertaken any serious examination of the difficulties of Arrium recovering damages in respect of the matters as to which a derivative claim might be brought; and, in any event, Mr Henry does not now seek to support the examination or the orders for production by reference to a derivative claim. However, it seems to me that Arrium's attack on the examination summons tended towards setting up a false dichotomy between the Plaintiffs' identified purposes and a proper purpose of gathering information to enable a claim to be brought in the name of Arrium. There are, of course, other potentially proper purposes, including the Plaintiffs gathering information that may benefit Arrium, its creditors and contributories generally - including potentially by confirming the liquidators' assessment of which other claims should not be pursued by Arrium - where the Plaintiffs anticipate that doing so will at the same time advance their claims as shareholders.
Determination
With considerable hesitation, I am not satisfied that Arrium (or Mr Galbraith, so far as he adopted its submissions) has discharged the heavy onus of establishing that an examination of Mr Galbraith would be an abuse of process. The requirements for an examination of Mr Galbraith under s 596A of the Act are satisfied, and no abuse of process arises from him now being examined by the Plaintiffs where he was not previously examined (but informally interviewed) by the liquidators and there is no evidence that the Plaintiffs' legal representatives had the opportunity to participate in that informal interview. As I noted above, it seems to me that there is a degree of similarity between the circumstances in Hong Kong Bank of Australia Ltd v Murphy above and in this case, where Arrium was a large listed company; the Plaintiffs and many other shareholders have likely suffered loss from their investment in it; and, on the face of it, the Plaintiffs seek to examine Mr Galbraith as to matters as to which the liquidators could properly have examined him, although the liquidators have made a reasoned decision that their resources are better directed to the insolvent trading claim. The information likely to be produced by the Plaintiffs' examination of Mr Galbraith would also likely advance the interests of Arrium and its creditors, so far as it either produces additional relevant information that supports further causes of action by Arrium, or does not do so and therefore supports the liquidators' present assessment that their insolvent trading claims are more likely to benefit Arrium and its creditors than the claims which the Plaintiffs seek to investigate. Although I recognise that Ms Banton's evidence focussed on the use of that information to advance the Plaintiffs' prospective claims as shareholders, it seems to me that a proper purpose of first obtaining that information was necessarily implicit in that approach.
I note, for completeness, that it does not follow from this finding that the Court would or should order, on the Plaintiffs' application, an examination under s 596A of the Act of any person who was in fact previously examined by the liquidators, where the evidence is that the Plaintiffs had the opportunity to participate in that examination and did not do so. It may well constitute an abuse of process for the Plaintiffs to seek to put such a person to a second examination, not supported by the liquidators, in that situation. It also does not follow that the Court would or should order, on the Plaintiffs' application, any future examination under s 596B of the Act of any person who is not an officer of Arrium, since the case for such an examination may well be weakened if Arrium, its liquidators and its creditors in fact derive no useful further information from Mr Galbraith's examination, and such an examination may well likely constitute an abuse of process if the Plaintiffs could have participated, but chose not to participate, in any early examination by the liquidators of that person. I have formed, and express, no concluded views as to those questions, which will initially be a matter for a Registrar in dealing with any application for such an examination, and possibly a matter for a further hearing if an application is then brought to set aside any decision of a Registrar in that respect. I assume that the Plaintiffs will bring this judgment to the attention of any Registrar or judge dealing with such an application.
[3]
Whether production by Arrium should be ordered
The original order for production issued to Arrium was extraordinarily broad, extending to a range of documents which had no conceivable relationship with any examination of Mr Galbraith. Mr Henry rightly did not seek to be heard in support of that order in that form. By agreement between the Plaintiffs and Arrium, that order for production was set aside; the Plaintiffs are now to be treated as seeking production by Arrium of documents within much narrower categories; and Arrium does not contest that those documents should be produced, if the examination of Mr Galbraith is not set aside on other grounds, but contends that security for costs should be ordered for the costs of production within the narrower categories.
Mr Wood relied on r 42.21 of the Uniform Civil Procedure Rules and the Court's inherent powers in support of an order for security for costs of production of documents by Arrium. It seems to me that, even if those powers were not available, the Court could condition any order for production upon the provision of security for costs in an appropriate case. Mr Wood submitted that the production of the narrower categories of documents now sought by the Plaintiffs would still involve substantial costs, because of the manner in which books and records of the Arrium Group had been extracted and stored.
Mr Henry responds that r 42.21 of the Uniform Civil Procedure Rules is not available to Arrium to support an order for security for costs, because it provides for a defendant to apply for security for costs and Arrium is not a defendant. Little turns on that point, where Mr Henry fairly accepts that the Court has an inherent power to order security for costs. Mr Henry also refers to the observations of Young J in Morris v Hanley [2000] NSWSC 957 at [10]-[24], relating to the origins of that inherent power and its application in the 19th and early 20th century. His Honour also there pointed (at [18]) to the significance of the "basic question of whether it would be vexatious to allow the proceedings to continue without security". That approach would focus attention here on the question whether it would be vexatious to order Arrium's liquidators to incur the costs of document production for the benefit of certain of its shareholders, and to the potential detriment of its creditors, without being secured for the costs of doing so. Mr Henry also fairly accepted, in oral submissions, that the Court could make an order for production on condition, and that the Plaintiffs accepted that Arrium and other persons served with orders for production were entitled to their reasonable costs of production (T61).
Mr Henry draws attention to, and I have had regard to, the observations of Markovic J in Hodgkinson, in the matter of Kupang Resources Ltd (subject to deed of company arrangement) [2017] FCA 1342; (2017) 125 ACSR 301 at [64]-[66], where her Honour declined to order security for costs against an external administrator who was conducting an examination, having regard to the public policy of the relevant provisions in assisting persons who have responsibility for the external administration of a company in carrying out their duties. I would have taken the same approach, had an order for production been issued on the application of the liquidators or external administrators. It seems to me that that public policy is not applicable where an order for production is sought on the application of a shareholder, albeit one who has been designated as an eligible applicant for the purposes of the relevant proceedings, rather than an external administrator. Mr Henry fairly accepted that that decision could potentially support an order for security for costs, so far as a liquidator with limited funds is here the recipient of an order for production, rather than the party who caused that order to issue.
Mr Henry also submits that it has not been demonstrated that there is any risk that the reasonable costs of production would not be paid by the Plaintiffs (T61). That submission, however, does not address the fact that the liquidators, and creditors, would be required to fund the searches for and production of such documents, potentially for a considerable period, until such costs could be determined and collected from the Plaintiffs or their litigation funder. Mr Henry also submits (T62) that the evidence did not allow the Court to make any accurate or reliable estimate of costs at this stage, having regard to the different views taken by Ms Goulden and Ms Banton in that respect.
It seems to me that it is not possible to determine the amount of security for costs that should be ordered on the evidence as it stands, where two experienced solicitors, who were not cross-examined, take radically different views as to the likely scope and costs of searches which have not yet been performed. However, it does not follow that Arrium, its liquidators or creditors should be required to fund the cost of the searches which the Plaintiffs seek to have made, including for the period between the making of the searches and a subsequent costs recovery. The Court has, on occasion, addressed difficulties of that kind arising from disclosure orders by making an order that the person seeking disclosure pay the costs of providing it. The case for such an order here is reinforced by the policy reflected in s 545 of the Act, to which Mr Wood refers, although he fairly accepts that it is not applicable in its terms since the liquidators have funds in hand that could be diverted from other uses to funding the disclosure sought by the Plaintiffs.
My tentative view is that I should make an order for disclosure by Arrium in the narrower form now sought by the Plaintiffs, with the express qualification that the liquidators are not required to undertake any work or incur any costs to comply with it unless funded in advance by the Plaintiffs for the costs of that work, in stages if necessary. That approach will allow the Plaintiffs the opportunity to fund the liquidators for disclosure to the extent they wish to, and allow the liquidators to cease such work when that funding is exhausted. It will be a matter for the Plaintiffs whether to maintain or increase their present offer of a nominal amount by way of such funding made at the hearing, having regard to their assessment of the risk that it would not be sufficient to allow the documents they seek to be identified or produced. I will, however, allow the parties a further opportunity to be heard as to that approach, to the extent that it was not specifically addressed at the hearing.
[4]
Order for production to KPMG
Mr Herzfeld adopted aspects of Arrium's outline of submissions in respect of the orders for production sought by the Plaintiffs. Relevantly, Mr Wood had submitted (in dealing with issues that were resolved by a consent order setting aside the original order for production issued to Arrium) that the power to compel the production of documents is ancillary to the issue of an examination order and cannot require the production of documents independently of the examination of a particular individual: Re BPTC Ltd (in liq) (No 5) (in liq) (1993) 10 ACSR 756 at 762; Re Leisure Developments (Qld) Pty Ltd (in liq) (2002) 41 ACSR 276 at [25]; Onefone Australia Pty Ltd v One.Tel Ltd [2007] NSWSC 1188 at [22]. Mr Wood had also submitted that the order for production should be set aside where the documents sought exceed the legitimate requirements of the examination of Mr Galbraith about relevant matters. Mr Herzfeld also submitted that the orders for production directed to KPMG required production of documents that could not usefully be the subject of any examination of Mr Galbraith, and that extended well beyond the focus of the proposed examination on the September 2014 capital raising and FY 2014 and 1H 2015 financial statements.
Mr Henry did not seek to defend some of the categories of documents sought against KPMG and sought to reformulate others or defend them only in part. In oral submissions, he indicated that the extension to "other services" could be removed in paragraphs 2 and 3 of the order for production directed to KPMG; he did not seek to be heard in respect of paragraphs 4 and 5; he raised a possible carve out for "other engagements" in paragraph 6 of that order for production; he did not seek to be heard as to paragraph 7; he sought to support paragraph 8, but again excluding the words "other engagements"; he supported paragraphs 11 and 12 and did not seek to be heard as to paragraphs 9, 10 and 13 (T63).
It seems to me that, as Mr Herzfeld pointed out, a number of categories of the order for production issued to KPMG also plainly had no conceivable relationship with the proposed examination of Mr Galbraith. For example, that order for production sought, in paragraph 1, all documents evidencing or recording policies or procedures in force during the Relevant Period (as defined) with respect to client acceptance, client retention and the conduct of audits by KPMG. The term "Relevant Period" was defined as the period from 1 July 2013 to 17 February 2016, which extended prior to and for nearly a year after the period which the Plaintiffs seek to investigate. That category had no apparent connection with any potential examination of Mr Galbraith, who has no professional relationship with KPMG and could not sensibly be examined as to the content or adequacy of KPMG's client acceptance, client retention or audit policies or procedures.
Paragraph 2 of that order for production extended to all documents coming into existence in the Relevant Period recording communications between KPMG and Arrium (including any officer, employee or agent of Arrium) concerning Arrium's engagement of KPMG for audit services. That paragraph was not limited to documents which could sensibly be the subject of any examination of Mr Galbraith, and plainly amounted to an attempt to obtain documents to investigate some wider claim against KPMG, which had little connection with the examination of Mr Galbraith. Paragraph 3 extended to all communications between KPMG and Arrium (including any officer, employee or agent of Arrium) "concerning, relating to or touching upon" any audit, review or other services provided by KPMG to Arrium. That paragraph, in effect, required production of every such communication during the relevant period, however trivial, and again went well beyond what could be relevant to any potential examination of Mr Galbraith. It also went well beyond the scope of KPMG's audit of Arrium, extending to any "other services" provided by KPMG. Paragraphs 4-12 of the order for production had similar difficulties of scope and lack of relevance to Mr Galbraith's examination. Paragraph 13, extending to documents evidencing or recording any professional indemnity or other insurance policy or policies issued to KPMG relating to the relevant period had no conceivable relationship with an examination of Mr Galbraith, and was equally obviously an attempt to obtain information which may be relevant to assessing the prospects of potential future proceedings against KPMG.
The order for production to KPMG should be set aside in its entirety. The application for the order for production of this width, with its limited connection with Mr Galbraith's examination, plainly involved an abuse of process, and Mr Henry's attempt to limit it in submissions, only after it was challenged, was far too late to avoid that result. The Court should not permit an applicant to bring an ex parte application for orders for production that substantially overreaches the proper scope of the associated examination and then seek to save that order by abandoning large parts of it only after it is challenged. The public interest is better served by simply setting aside that order, if an applicant makes no genuine attempt to limit it to a proper scope when it is sought.
I note, for completeness, that KPMG did not contend that the order for production against it should be set aside on the ground that it was oppressive, but purportedly reserved its right to contest the breadth of certain categories subsequently. I would not have entertained such a subsequent contest, had the order for production not now been set aside, where KPMG has had the opportunity to raise the relevant matters in this application. KPMG also sought to reserve its right to seek security for the costs of production subsequently, contingent on the outcome of the present application. I would also not have entertained a subsequent application by KPMG for security for costs, where KPMG had the opportunity to address that matter in this application.
[5]
Order for production to UBS
UBS did not seek to set aside the order for production directed to it, and Arrium did not address any submissions as to that order for production. On its face, that order for production seems to me to go beyond the scope of any documents that could properly be sought for the purposes of an examination of Mr Galbraith extending, for example, to all documents recording meetings or discussions between UBS and any representative of Arrium in the Relevant Period regarding specified matters. I will hear the parties as to whether that order for production should be set aside on the Court's own motion, in order to preserve the integrity of the Court's processes.
[6]
Orders
I direct the parties to bring in agreed short minutes of order to give effect to this judgment, including as to costs, within 7 days; or, if there is no agreement between them, their respective short minutes of order and short submissions as to the differences between them, indicating whether an oral hearing is requested as to the matters noted in paragraphs [58] and [65] above.
[7]
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.
Decision last updated: 20 November 2019
By Originating Process filed on 6 May 2019, the Plaintiffs applied, before a Registrar of the Court, for an order under s 596A of the Corporations Act 2001 (Cth) that a summons for examination be issued to Mr Colin Galbraith. Section 596A of the Act relevantly provides that the Court will summon a person for examination about a corporation's examinable affairs if an "eligible applicant" applies for the issue of that summons and the proposed examinee is, relevantly, or was an officer of the corporation. The term "eligible applicant" includes a person authorised in writing by the Australian Securities and Investments Commission ("ASIC") to make the relevant application under Pt 5.9 Div 1 of the Corporations Act, and the Plaintiffs sought this and other orders in their capacity as eligible applicants authorised by ASIC for that purpose. The Plaintiffs also sought an order that Mr Galbraith produce documents specified in a schedule annexed to the Summons and sought orders under s 68 of the Civil Procedure Act 2005 (NSW) and s 597(9) of the Corporations Act for production directed to ACN 004 410 833 Limited (formerly Arrium Limited) (subject to deed of company arrangement) ("Arrium"), KPMG and UBS AG ("UBS"). On 15 May 2019, a Registrar issued a summons for examination and orders for production to Mr Galbraith and also issued orders for production to Arrium, KPMG and UBS in the form sought by the Plaintiffs.
By Interlocutory Process filed on 11 June 2019, Arrium applied for an order that the Registrar's orders be discharged or stayed under r 49.19 of the Uniform Civil Procedure Rules 2005 (NSW) or in the Court's inherent jurisdiction. It is common ground that rule is available to support an application to set aside an examination summons, and that the Court will make the relevant decision whether the examination summons should be issued afresh, but having regard to the basis on which the Registrar's decision was made and the material placed before the Court on the application for review: Wily Re LED (South Coast) Pty Ltd [2009] NSWSC 946 at [26]. Alternatively, Arrium sought security in a substantial amount for the costs of the production of documents that it had then been ordered to produce. KPMG has not itself brought an application to set aside the order for production issued to it, although it was heard by leave as an interested party under r 2.13 of the Supreme Court (Corporations) Rules 1999 (NSW), and both KPMG and the Plaintiffs made submissions on the basis that whether the order for production issued to KPMG should be set aside was raised by Arrium's application.
The Plaintiffs initially contended that Arrium and KPMG did not have standing to have the examination summons set aside, on the basis that they were not the subject of the examination summons. I do not understand that submission to be actively pressed, where Mr Galbraith now seeks to have the examination set aside. In any event, it seems to me that Arrium and KPMG would have had standing to seek to set aside at least the orders for production directed to them, advancing any criticisms of the examination order directed to Mr Galbraith in support of that application.
By a further Interlocutory Process filed on 8 August 2019, after the Plaintiffs took issue with Arrium's standing to bring this application, Mr Galbraith applied for, and was granted, an extension of time in which to seek to discharge the examination summons issued to him and sought an order that that examination summons be discharged under r 11.5 of the Supreme Court (Corporations) Rules. Mr Galbraith did not advance separate submissions as to that matter and adopted parts of Arrium's and KPMG's submissions. Mr Galbraith did not seek to set aside the order for production issued to him unless the orders for his examination were set aside.