In the matter of Cardinal Group Pty Ltd (in liq) and Cardinal Project Services Pty Ltd (in liq) [2018] NSWSC 748

Background

1. On 1 February 2012, Cardinal Group Pty Ltd and Cardinal Project Services Pty Ltd (together, the companies) were both wound up pursuant to s 439C of the Corporations Act 2001 (Cth) and the plaintiffs, Mr Richard Stone and Mr Peter Marsden, became the liquidators of the companies pursuant to s 446A of the Corporations Act.
2. On 14 December 2017, the liquidators commenced a proceeding in the Federal Court of Australia seeking damages against Mr Ebeid and Mr Andrew Travers for alleged contravention of their duty as directors under s 588G of the Corporations Act to prevent the companies incurring debts whilst insolvent. In his affidavit, Mr Stone expressed the opinion that the insolvent trading claim against Mr Ebeid and Mr Travers was for a sum of at least $6 million.
3. Mr Stone deposed that the liquidators seek to examine Mr Ebeid and Ms Malan as to the financial capacity of Mr Ebeid to meet an adverse judgment, if he is unsuccessful in the Federal Court proceeding. Mr Stone also deposed that the examinees would not be examined about any other matter, including about any issues that may arise in the insolvent trading claim.
4. The question of Mr Ebeid's financial capacity to meet an adverse judgment arises in the following circumstances. Documents tendered in evidence by the liquidators indicate that Mr Ebeid and Ms Malan are the registered proprietors of a property located at Hillcrest Street, Mona Vale. Although the copy of the Certificate of Title describes them as joint tenants, the transfer dated 26 October 2015 describes them as "Tenants in Common in Equal Shares" and also refers to annexure "A" which states "Sam Ebeid and Elize Malan as tenants in common for one-half share and Elize Malan and Sam Ebeid as tenants in common for one-half share".
5. Also on 26 October 2015 Mr Ebeid and Ms Malan granted two mortgages to Shirley Eight Pty Ltd (Shirley Eight) as third party security. The first mortgage is expressed to secure a loan of $1,475,000 provided under a loan agreement dated 13 October 2015 between Setco Pty Ltd as trustee of the Ebeid Superannuation Fund as borrower, Mr Ebeid and Ms Malan as guarantor(s) and Shirley Eight as the mortgagee. The second mortgage is expressed to secure a loan of $1,475,000 provided under a loan agreement dated 13 October 2015 between Lawler Consulting Pty Ltd as trustee of the EM Superannuation Fund as borrower, Mr Ebeid and Ms Malan as guarantor(s) and Shirley Eight as mortgagee.
6. According to a search of the records of ASIC, Mr Ebeid and Ms Malan are both directors of Setco Pty Ltd and Lawler Consulting Pty Ltd. Mr Michael Ebeid, who signed both mortgages on behalf of Shirley Eight as sole director / secretary, is the brother of Mr Ebeid. In each case, the mortgages were lodged for registration by Lauries Lawyers. The transfer of the Mona Vale property seems to have been signed on behalf of Mr Ebeid and Ms Malan by Mr Campbell Mills, a solicitor in the employ of Spinks Eagle Lawyers.
7. Mr Stone deposed that the liquidators wished to investigate the circumstances of the purchase of the Mona Vale property and the effect of the mortgages so that they may consider if Mr Ebeid has any beneficial interest in the property and, if so, what is the value of his interest in the property. The liquidators seek to understand what assets of Mr Ebeid might be available to meet any judgment against him, to assist them to decide whether it is in the interests of creditors to incur further costs seeking to obtain judgment against Mr Ebeid in the Federal Court proceeding.
8. The status of the Federal Court proceeding is that Mr Ebeid has filed a defence; Mr Travers has not filed his defence in accordance with the Court directions; and the Court has ordered that mediation occur before a registrar of the Federal Court before 19 June 2018.

Submissions

1. Counsel for the applicants advanced three arguments in support of the application. The first is that, given the pending Federal Court proceeding, the Supreme Court is not the appropriate forum in which the liquidators should conduct public examinations pursuant to s 597 of the Corporations Act. It was contended that such examinations should be conducted in the Federal Court because that is the court in which the insolvent trading claim has been commenced, and that court would be better placed to assess whether the conduct of the examinations was oppressive.
2. The second is that the examinations would afford the liquidators a forensic advantage which would not otherwise be available to them in the Federal Court proceeding because the liquidators could not obtain discovery in those proceedings of documents relating to the capacity of Mr Ebeid to meet any adverse judgment against him.
3. The third argument is that once the liquidators determined to commence the Federal Court proceeding against Mr Ebeid, it was an impermissible use of the examination power pursuant to s 597 of the Corporations Act to seek to ascertain whether Mr Ebeid has the financial capacity to meet any adverse judgment.

Relevant principles

1. Given the intended scope of the subject matter of the proposed examinations, it is not necessary to refer in any detail to the applicable principles. Both parties accepted the summary by Barrett J in Wily re LED (South Coast) Pty Ltd (2009) 76 NSWLR 248; [2009] NSWSC 946 at [36] of the criteria to be applied upon an application such as the present, adopting the remarks of Lander J in Re New Tel Ltd (in liq) (2005) 145 FCR 176 at [252]: 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.
2. The examinable affairs of the company include information as to the worth of a potential defendant or a defendant in proceedings, such as an insolvent trading claim against a director of the company. As Basten JA explained in Meteyard v Love (in their capacity as recs and mgrs of Southland Coal Pty Ltd (in liq)) (2005) 65 NSWLR 36; [2005] NSWCA 444 at [47], such material falls within the proper field of examinable affairs described by Street J in Re Hugh J Roberts Pty Ltd (in liq) [1970] 2 NSWR 582 at 584, quoted with approval by the Full Court of the Federal Court in Grosvenor Hill (Qld) Pty Ltd v Barber (1994) 48 FCR 301 at 309: The liquidator is given by the statute this special authority to proceed by way of private examination to obtain information which he needs for the due winding up of the company, the affairs of which he has the responsibility of administering.
3. See also Equititrust Ltd (in liq) (recs and mgrs. apptd) v Equititrust Ltd (in liq) (recs and mgrs. apptd) (2014) FCA 692; [2014] 13 ABC (NS) 191 at [68(c)] (Foster J).

Decision

1. Insofar as the examination order is directed to Mr Ebeid, s 596A provides for "mandatory examination", the Court being obliged to issue a summons if specified preconditions are engaged, including the satisfaction of the court that the person sought to be examined is an "officer" of the corporation during a specified time period. The term "officer" is defined in s 9 to include a director. Plainly, Mr Ebeid answers that description.
2. Section 596B(1) provides for "discretionary examination". The Court may summons a person for examination about a corporation's examinable affairs if specified pre-conditions are engaged, including satisfaction that the person may be able to give information about examinable affairs of the corporation. Plainly, Ms Malan and the two firms of solicitors answer that description. Counsel for Mr Ebeid and Ms Malan did not suggest to the contrary.
3. The applicants' first argument (inappropriate forum) is misconceived. That the liquidators have commenced a proceeding in the Federal Court does not preclude them from applying to conduct public examinations in the Supreme Court. The courts having power to summons persons to attend for examination, whether a mandatory examination under s 596A or a discretionary examination under s 596B, are those courts answering the description of "Court" as defined in the Corporations Act. The expression "Court" has the meaning given by s 58AA of the Corporations Act and includes, among others, the Federal Court and the Supreme Court of a state or territory: s 58AA(1).
4. There is nothing improper in the liquidators' obtaining examination orders in this Court, having commenced a proceeding in another court. This Court is just as well placed as any other Court exercising jurisdiction under s 597 of the Corporations Act to control the conduct of examinations, including restricting the scope of permissible questions, if necessary, given the pending proceedings in the Federal Court.
5. One further matter should be mentioned. The liquidators pointed out that they had previously conducted examinations in this Court in 2014 pursuant to s 597 of the Corporations Act. The current examinations, which are a successor to those earlier examinations, have been commenced in the same proceeding in this Court. There is nothing untoward in the liquidators' choice of forum with respect to the examinations now proposed to be undertaken.
6. The applicants' second and third arguments are inconsistent with authority. Although initially submitting to the contrary, counsel for the applicants ultimately accepted that the liquidators, as an eligible applicant under s 596A or 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: Meteyard v Love at [44]; Equititrust Ltd at [68(c)].
7. I am not persuaded that the examinations have been sought by the liquidators for a purpose not contemplated by the Corporations Act. I accept the unchallenged evidence of Mr Stone that the liquidators seek to use the process of examination to discover information that will assist the liquidators in the performance of their duties as liquidator.
8. Plainly, it is in the interest of the beneficial winding up of the companies that the liquidators obtain relevant information as to the financial capacity of Mr Ebeid to meet any adverse judgment, in the context of deciding whether it is in the interest of creditors to incur further legal costs and to seek to obtain judgment against Mr Ebeid in the Federal Court proceeding. Given the estimated size of the claim, it can be expected that those costs would be significant.
9. Insofar as the applicants' counsel made an oral application during the hearing alternatively for a direction restricting the scope of the examination, I am not persuaded that such a direction is either necessary or appropriate at this stage. Mr Stone has deposed as to the intended limited scope of the proposed examinations. It may be expected that the liquidators will not depart from their stated position. If that were to occur, then nothing in this judgment would foreclose a future application by the applicants.
10. Given that the application has failed on the merits, no purpose would be served in dispensing with the rules, or extending time for the application by Ms Malan.

Orders

1. The appropriate order is that the amended notice of motion filed on 21 May 2018 be dismissed.
2. As to costs, counsel for the liquidators indicated that if the application was dismissed the liquidators would seek a special costs order. The parties indicated that they were content for that question to be addressed in written submissions and dealt with on the papers. Directions to that effect will be made.
3. Accordingly, the Court orders: 1. The amended notice of motion filed on 21 May 2018 be dismissed. 2. Direct that the respondents file and serve short written submissions (not exceeding three pages) on the question of costs and any supporting affidavits within seven days, and the applicants file and serve any short written submissions in response (not exceeding three pages) and any supporting affidavits within seven days thereafter. 3. Direct that the question of costs be determined on the papers.

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: 24 May 2018