In the matter of ACN 108 153 251 (formerly JFTA Limited) Pty Ltd; David Evans v Sule Arnautovic and anor

Judgment - EX TEMPORE 1HIS HONOUR: The respondents Sule Arnautovic and Roderick Mackay Sutherland were appointed voluntary administrators of the company ACN 108 153 251 Pty Limited, to which for the sake of convenience I shall refer by its former name JFTA Pty Limited, on 8 November 2011. JFTA went into voluntary liquidation in March 2012, whereupon Mr Arnautovic and Mr Sutherland became its liquidators. On 5 June 2013, the liquidators procured the issue by the Court of a summons for examination, pursuant to (Cth) Corporations Act 2001 s 596A, to the present applicant Mr David Evans, a director of JFTA. That summons was initially returnable on 19 August 2013, but on the application of the liquidators was adjourned to 21 November 2013, essentially because documents called for by a number of orders for production were produced only shortly before 19 August 2013. 2In or about October 2013, the liquidator commenced proceedings against a number of former creditors of JFTA, seeking to join them to a preference action. 3On 11 November 2013, Mr Evans received, belatedly, a letter from one of those creditors, namely the Australian Taxation Office, which informed him of the liquidators' preference proceedings against the ATO and indicated that the ATO would claim indemnity from Mr Evans in the sum of $1.1 million, pursuant to Corporations Act s 588FGA. Mr Evans' solicitor promptly notified the ATO's solicitor that the issue of solvency would be contested by Mr Evans. 4The preference proceedings stand adjourned to 9 December 2013. The ATO has indicated that it does not intend to oppose the application to join it. No application to join Mr Evans has yet been made, but it is highly probable that upon the ATO being joined it will bring a cross-claim against him for indemnity. 5Following receipt of the letter from the ATO Mr Evans' solicitor wrote to the liquidators' solicitors on 11 November at 10.52pm by email, relevantly as follows: I have now been contacted by the ATO who have indicated that the liquidators are seeking to join ATO to preference proceedings who in turn are joining my client seeking a right of indemnity. Our client will be defending on the basis of solvency of the company and as such we are concerned to ensure that the liquidator not undertake the examinations for the purposes of obtaining an unfair advantage in respect to the notified litigation. As such please confirm that the examinations will not trespass into the areas of the proposed preference claims. Secondly, I emailed Mr Simon Gallant today who previously acted for the liquidator and who indicated that the examinations will not also relate to the affairs of Treloar Group Pty Ltd which has subsequently been placed into liquidation and to Mr Gallant's allegation that there was subversion of the liquidator's charge covering the unpaid fees of the liquidator and Mr Gallant. Please confirm that the examination will not seek to traverse this aspect of the proposed litigation and further will be restraining to the examinable affairs of the company formerly known as JFTA Pty Ltd. To the extent you propose to examine on either of the above areas, I anticipate I will receive instructions to seek to limit or otherwise set aside the examination summons in which case it is unlikely the examination can proceed on 18 November 2013. As such, please let me have your urgent response to these issues. 6From that it will be seen that Mr Evans' solicitor sought confirmation that the examinations would not traverse the areas of the proposed preference claims, nor the alleged subversion of a charge held by the liquidator over the assets of Treloar Group Limited. 7It is necessary to say a little more about the second aspect. Treloar Group Pty Limited, which I shall call "Old Treloar", was a wholly owned subsidiary of JFTA. The liquidators, who through JFTA were entitled to the whole shareholding in Old Treloar, negotiated the sale of its assets and undertaking to ACN 155 770 451 Pty Limited, which subsequently changed its name to Treloar Group Pty Limited and which I shall call "New Treloar". In connection with that sale, the liquidators and JFTA in liquidation took a charge from New Treloar securing various obligations of New Treloar over assets of New Treloar. New Treloar went into liquidation on 8 October 2013. Meanwhile, another company, Treloar Group Trading Pty Limited, to which if necessary I shall refer as "Treloar Trading", was incorporated on 9 March 2012. It is alleged that it trades or traded from the same premises as New Treloar. Mr Evans is one of its directors and one of its shareholders, and it appears to have other common directors and shareholders with JFTA. 8The liquidators' solicitor responded on 13 November 2013, relevantly as follows: We anticipate that the examination will run for the full day and will touch on many aspects of the examinable affairs of the company formerly known as JFTA Pty Ltd, including those raised in your email. We do not agree with your suggestion that the examination of Mr Evans might have the purpose of obtaining an unfair advantage in respect of the litigation that is currently on foot. Accordingly, it may be necessary for you to bring the Notice of Motion as foreshadowed by you. 9By interlocutory process filed on 19 November 2013, Mr Evans seeks an order extending time for filing the interlocutory process to the date on which it was filed, and setting aside the examinations summons or otherwise limiting the scope of the examination to be conducted so as to exclude the issue of JFTA's solvency and of the operations of New Treloar or Treloar Trading. In short, it is said that the proposed examination is an abuse of process in endeavouring to enable a rehearsal of inevitable cross-examination of Mr Evans on the issue of solvency in the preference proceedings, and that it would exceed the scope of the examinable affairs of JFTA were it to cover the operations of New Treloar or Treloar Trading. 10The first question is whether it would be an abuse of process for the liquidator to conduct an examination of Mr Evans in the circumstances which covered or included in its scope the solvency or insolvency of JFTA prior to the appointment of voluntary administrators and the extent to which Mr Evans was aware of circumstances pertaining to JFTA's solvency at that time. 11The financial affairs and solvency of a corporation prior to its going into liquidation are manifestly within the scope of its examinable affairs. Indeed, they are ordinarily one of the central topics of any examination of directors of a corporation under section 596A. It could not be suggested that they were not part of its examinable affairs. 12The question in this case is not whether they are part of the company's examinable affairs, but whether - notwithstanding that they plainly are - it would be an abuse of process for the liquidator to conduct an examination that touches on them. In that respect, it is relevant that the liquidator has obviously had access to sufficient information to form a view about solvency to commence the preference proceedings. Moreover, the liquidator has procured from an expert a detailed report as to the solvency of JFTA, with a concluded opinion to the effect that it was insolvent at the relevant date. 13However, the fact that a liquidator has obtained sufficient information to decide to commence preference proceedings and a report in that respect does not necessarily mean that to endeavour to obtain further information on that question - which, for example, might assist in resisting defences of the creditors or might inform a decision as to whether or not to commence insolvent trading claims against Mr Evans - would be oppressive or an abuse of process. 14Many cases establish that the fact that litigation to which the subject matter of the examination is directed is already on foot is not of itself sufficient to make the examination an abuse of the Court's process: see, for example Re Hugh J Roberts Pty Ltd (in liq) and the Companies Act [1970] 2 NSWLR 582, 584; North Australian Territory Company v Goldsborough Mort and Co Ltd [1893] 2 Ch 381, 384; Spedley Security Ltd (in liq) v Bank of New Zealand (1990) 3 ACSR 366; Hamilton v Oades (1989) 166 CLR 486; Hong Kong Bank of Australia Ltd v Murphy (1992) 28 NSWLR 512, (1992) 8 ACSR 736; Spedley securities Ltd (in liq) v Bond Corp Holdings Limited (1990) 19 NSWLR 729; (1990) 1 ACSR 726; Boys v Quigley [2002] WASCA 99; (2002) 41 ACSR 499 (in which examination of auditors as to their personal financial status and their insurers was permitted, notwithstanding that action against them by the company was already on foot); Featherby (Administrator) of Calejac Pty Ltd, Re [2002] FCA 698 (in which examination was permitted notwithstanding that the creditor funding the liquidator had a potential claim against the proposed examinee); Madden as Official Liquidator of Aquanaut Constructions Pty Ltd (in liq) (2002) 20 ACLC 505; [2001] NSWSC 966; Southern Equities Corporation (in liq), Re Caboche v England (1997) 24 ASCR 582, 589 (in which it was held that a liquidator was entitled to use an examination for the purpose of assessing the prospects of success in the proceedings); cf Gerah Imports Pty Ltd v Duke Group Ltd (in liq) (1993) 12 ASCR 513, 520 (in which it was said that a Court would proceed with caution to ensure that it does not become a vehicle for oppression and a party to an abuse of process). 15Reference has been made in the course of argument to the judgment of White J in Trio Capital Ltd (In Liquidation) [2011] NSWSC 1483, in which his Honour considered a submission that it was not legitimate to use the examination process to determine the strength or weakness of a case that Trio Capital might have. A submission was also made that it would not be permissible to use the examinations to conduct a dress rehearsal of cross-examination or to obtain a forensic advantage in contemplated proceedings that would not be available in them. It is a matter of distinction between that case and the present that there were then no existing proceedings on foot. On the other hand, there are not now any existing proceedings on foot against Mr Evans. White J referred to the following passage in the judgment of Basten JA in Meteyard v Love [2005] NSWCA 444; (2005) 65 NSWLR 36: 44. There is, in addition, an established line of authority to the effect that an eligible applicant under s 596B may examine a potential defendant, or an existing defendant, in relation to proposed or actual litigation, in order to determine whether the defendant has sufficient assets to meet an adverse judgment, if unsuccessful in the litigation. On the other hand, the authorities draw a line between those possible topics of inquiry and use of the examination process to determine the strength or weakness of the corporation's case, or its opponent's case, in relation to the dispute. In the recent decision of the Full Court of the Supreme Court of South Australia, In the matter of Normans Wines Ltd (Receivers and Managers appointed) (in liq); Harvey v Burfield [2004] SASC 171. Mullighan J quoted without criticism, the following statement of the trial judge at [42]: 'The authorities establish that an improper purpose includes a purpose of using the examination as a dress rehearsal for cross-examination, or for the purpose of destroying the credibility of the examinees or witnesses who might be called for the examinee in substantive proceedings, or for the predominant purpose of obtaining a forensic advantage not available from ordinary pre-trial procedures, or simply to cause undue inconvenience or embarrassment to the examinee or to inflict costs'. 16That passage reinforces that an examination under s 596B could legitimately extend to the subject matter not only of proposed but of actual pending litigation in order to determine whether the defendant has sufficient assets to meet an adverse judgment. There is no reason to adopt any different approach to one under s 596A, except perhaps that the Court would be less ready to confine an examination under s 596A. Moreover, while it was suggested that there was a line between that topic and use of the examination process to determine the strength or weakness of the case in relation to the dispute, White J observed (at [23]) that Basten JA was not to be taken as saying that an examination could not legitimately involve investigation into the strength or weakness of a corporations case against an examinee or of the opponent's case, adding: It is well established that examinations can be conducted to investigate the existence an strength of potential causes of action including potential causes of action against the examinees provided that the examination is not used as a dress rehearsal for cross-examination or to destroy the credit of potential witnesses or to obtain forensic advantages not obtainable in ordinary Court proceedings. 17Nor does every forensic advantage render an examination an abuse of process: it has been observed that the mere fact that an examination gives the liquidator an advantage in private liquidation does not render the examination an abuse of process, as the very purpose of the examination process is a type of discovery. 18It seems to me that it cannot be said on the evidence before me that examination of Mr Evans on questions pertaining to the solvency of JFTA would be an abuse of process. Indeed, it is just to examine such matters that the power of examination is conferred. The mere fact that preference proceedings are on foot, notwithstanding that it is highly likely that Mr Evans will become a party to them and may well be cross-examined in them, does not alter this. 19If, as the authorities indicate, the examination were used in a way which became effectively a dress rehearsal of the cross-examination, then a different situation would arise, but the mere fact that it is intended to cover territory that would also be covered in the preference claim does not have that effect. If the examination were to begin to take on the nature of a rehearsal of the cross-examination, that is something that the Registrar presiding at the examination can control. 20So far as the second aspect - the Trelour issue - is concerned, in that respect the question is whether what was described in the correspondence as the alleged subversion of the charge given by New Treloar, and what is described in the interlocutory process as the operations of New Treloar or Treloar Trading, is outside the examinable affairs of JFTA. 21In Corporations Act, s 9 examinable affairs is defined as follows: "examinable affairs" , in relation to a corporation means: (a) the promotion, formation, management, administration or winding up of the corporation; or (b) any other affairs of the corporation (including anything that is included in the corporation's affairs because of section 53); or (c) the business affairs of a connected entity of the corporation, in so far as they are, or appear to be, relevant to the corporation or to anything that is included in the corporation's examinable affairs because of paragraph (a) or (b). 22Connected entity is defined as follows: "connected entity" , in relation to a corporation, means: (a) a body corporate that is, or has been, related to the corporation; or (b) an entity that is, or has been, connected (as defined by section 64B) with the corporation. 23That definition is elaborated by s 64B which provides as follows: Body corporate (1) A body corporate is connected with a corporation if, and only if, the corporation: (a) can control, or influence materially, the body's activities or internal affairs; or (b) is a member of the body; or (c) is in a position to cast, or to control the casting of, a vote at a general meeting of the body; or (d) has power to dispose of, or to exercise control over the disposal of, a share in the body; or (e) is financially interested in the body's success or failure or apparent success or failure; or (f) is owed a debt by the body; or (g) is engaged by the body under a contract for services; or (h) acts as agent for the body in any transaction or dealing. 24The definition of examinable affairs is elaborated by s 53, which relevantly provides as follows: (a) the promotion, formation, membership, control, business, trading, transactions and dealings (whether alone or jointly with any other person or persons and including transactions and dealings as agent, bailee or trustee), property (whether held alone or jointly with any other person or persons and including property held as agent, bailee or trustee), liabilities (including liabilities owed jointly with any other person or persons and liabilities as trustee), profits and other income, receipts, losses, outgoings and expenditure of the body; and ... (d) any act or thing done (including any contract made and any transaction entered into) by or on behalf of the body, or to or in relation to the body or its business or property, at a time when: (i) a receiver, or a receiver and manager, is in possession of, or has control over, property of the body; or (ii) the body is under administration; or (iia) a deed of company arrangement executed by the body has not yet terminated; or (iii) a compromise or arrangement made between the body and any other person or persons is being administered; or (iv) the body is being wound up; and, without limiting the generality of the foregoing, any conduct of such a receiver or such a receiver and manager, of an administrator of the body, of an administrator of such a deed of company arrangement, of a person administering such a compromise or arrangement or of a liquidator or provisional liquidator of the body; and 25In this respect, the line of enquiry that the liquidators wish to investigate is what has become of, or what dealings have taken place with, assets of New Treloar said to have been subject to a charge in favour of JFTA. If, as appears clear enough, JFTA held a charge over assets of New Treloar, then prima facie it has a security interest in those assets. The recovery or realisation of any such interest for the period of time of the creditors is plainly within the company's examinable affairs. 26The dealings with property in which it had a security interest would fall within the definition in s 53(d)(iv) referred to above. Even without that express definition, and bearing in mind that not only s 53(d) but also paragraph (a) of the definition of examinable affairs makes clear that those affairs include dealings and transactions with property of the company after it has been wound up or while it is being wound up, it follows that what has happened to property in which the company had or claims to have a security interest are within its examinable affairs. 27In short, if the liquidator's contention is ultimately sustained, the liquidator may be able to trace assets the subject of the charge into the hands of Treloar Trading or elsewhere, and perhaps realise them for the benefit of the creditors of JFTA. Whether that can ever be proved and established is entirely another matter, but that is not the question here. The question here is whether the investigation of those matters is within JFTA's examinable affairs. In my judgment, it plainly is. 28Accordingly, both grounds upon which it is contended that the examination summons is an abuse of process fail, and I will dismiss the interlocutory process with costs. I will record, however, that had it been necessary I would have extended time for filing the interlocutory process, on the basis that the matters which arguably triggered the requirement to make the application arose only on or after 11 November this year. 29The Court orders that the interlocutory process filed 19 November 2013 be dismissed with costs assessed in the sum of $7,500. the Court grants leave to the liquidator to approach the registrar to obtain a further appointment for the examination.