In the matter of LKM Capital Limited (receivers and managers appointed) ACN 091 379 930 [2013] NSWSC 1744

Judgment (ex tempore) 1HIS HONOUR: By interlocutory process filed 2 October 2013, the applicants Sandhurst Trustees Limited and Kenneth Bruce McCaul apply for an order setting aside an order for production issued at the request of the plaintiff Charles Robert Hodges to Sandhurst Trustees Limited dated 20 September 2013; secondly, leave to inspect an affidavit filed in support of the applicant for the issue of an examination summons addressed to Kenneth Bruce McCaul dated 20 September 2013 and the order for production; thirdly, an extension of time in which to apply for an order discharging the examination summons; and finally, an order discharging the examination summons. 2The examination summons issued on 20 September 2013 addressed to Mr Ken McCaul summonses him under (Cth) Corporations Act 2001, s 596B, to attend for examination on 25 October 2013 about the examinable affairs of LKM Capital Limited (Receivers and Managers Appointed). Mr McCaul is a director of Sandhurst. The examination summons was issued at the suit of the plaintiff Charles Robert Hodges who was relevantly a creditor authorised by ASIC to apply for the issue of an examination summons. 3It may be relevant to observe that an examination summons had also been issued to one Mr Cootes, a director of LKM. 4The order for production also issued on 20 September 2013 and was addressed to the Proper officer, Sandhurst Trustees Limited, and required production by 4 October 2013 of the following documents: The documents or things you must produce are as follows: 1. All physical and computer files comprising internal reports, memoranda, filenotes, correspondence and emails of Sandhurst created during the Period evidencing, recording: a. any valuation, drawdown loan statement or event of default for each loan made by LKM Capital; b. the loan-to-value ration of each such loan; c. the financial condition, including the cash position, of LKM Capital; d. each management fee or dividend paid by LKM Capital; e. the acquisition by LKM Capital of Odyssey; and f. the acquisition by LKM Capital of the Financial Advisory Businesses. 2. All documents created during the Period evidencing or recording any policy of insurance issued to Sandhurst which may respond to any liability that Sandhurst, its directors, officers, employees or agents may have in respect of Sandhurst carrying out its duties and functions as trustee for the debenture holders of LKM Capital. 3. All documents created during the Period evidencing, recording or referring to any claim made upon Sandhurst or notified to any insurer under any policy of insurance in respect of Sandhurst carrying out its duties and functions as trustee for the debenture holders of LKM Capital. 4. All documents (including but not limited to manuals and quality control reports) created during and/ or applicable to the Period evidencing or recording any policy, standard, guideline, procedure or method to be followed or applied by Sandhurst, its officers, employees or agents in Sandhurst carrying out its duties and functions as trustee for the debenture holders of LKM Capital. 5. All documents created during and/ or applicable to the Period evidencing or recording any charge (registered and unregistered) granted by LKM Capital to secure its obligations to pay the debenture holders of LKM Capital. 5Mr McCaul, the examinee, is a former employee of Sandhurst. On 1 August 2008, Sandhurst appointed Brian de Silva and Andrew Cummins of BRI Ferrier as receivers and managers of LKM. 6Sandhurst is and has since 1 October 2001 been the trustee for debenture holders of LKM Capital Limited pursuant to a trust deed for debentures between LKM and Sandhurst dated 3 February 2000. Currently there are in excess of 1,100 debenture holders of LKM. Sandhurst is a secured creditor of LKM pursuant to a deed of charge dated 9 May 2000. 7The plaintiff, Mr Hodges, is the convenor of a group of approximately sixty-six holders of debentures in the LKM debenture scheme called the LKM Debenture Holders Action Group. Mr Hodges wishes to establish whether there are viable claims for compensation against Sandhurst under Corporations Act s 283F for breach of Sandhurst's duty as trustee referred to in s 283D(a). For that purpose, he has obtained funding from a litigation funder to conduct the examinations and, dependent on their outcome, potentially to fund legal proceedings against Sandhurst in the nature of a class action. This is subject to twenty per cent of the debenture holders joining in the funding agreement. 8However, such procedures have not yet been initiated and, as I understand the evidence, there is no intention to initiate them until the examinations have been conducted, enabling a judgment to be formed as to their viability. 9The applicants submit that the examination summons is an abuse of process in the sense that it is being used predominantly for an improper purpose, and seek access to the supporting affidavit in aid of that application. They submit further that the order for production should be set aside as oppressive. 10It is convenient to deal first with the application for an extension of time, which was not seriously in issue. 11As the applicant submits, the extension required amounts to four business days. The summons was still issued and served more than the eight days before its return date referred to in (NSW) Supreme Court (Corporations) Rules 1999, r 11.4. There does not appear to be, and there is certainly no claim of, any prejudice arising from such delay as has been involved and the respondent does not consent to but does not oppose the extension. 12I will, therefore, extend time for the bringing of the application as sought in the interlocutory process. 13The affidavits filed in support of the issue of an examination summons and order for production are, pursuant to Corporations Act s 596C(2), not available for inspection unless the Court otherwise orders. In order to persuade the Court to otherwise order, it is necessary for the examinee to establish an arguable case for the setting aside for discharge of the examination summons, and in addition that access to the affidavit is likely to assist in determining the correctness of that case: see Meteyard v Love [2005] NSWCA 444; (2005) 65 NSWLR 36 at 141, Ariff v Fong [2007] NSWLR 183, 63 ACSR 384 and Accord Pacific Holdings Pty Limited v Accord Pacific Land Limited [2011] NSWSC 1158 at [44]. 14I am for present purposes content to accept that there is a sufficient arguable case for the setting aside of the examination summons to surmount the first limb of the test. 15As to whether the access to the affidavit would assist in relation to the issue, there is no significant factual dispute as to the purpose for which the examination summons was issued. In the factual context provided by the evidence its purpose is tolerably clear, and whilst there may be different ways of characterising it, the facts from which that purpose is to be inferred are not in dispute. It does not seem to me that access to the affidavit would assist in relevantly further illuminating the purpose of its issue, and I decline to grant that access. 16I turn then to the question of abuse of process, in respect of which the essential test is whether the examination summons procedure is being used in this case for a predominant purpose which is improper. In Affinity Capital Pty Limited [2011] NSWSC 1158, Justice Ward, as her Honour then was, observed at [41]: In a case where the liquidator is conducting examinations funded by a creditor then the distinction to be drawn is between the purpose of the creditor funding the examination, its motives being to advance it own interests, and the purpose of the liquidator in conducting the examination on the other. Where it is the creditor conducting (albeit through legal representatives) the examination such a distinction becomes meaningless. The purposes of the creditor and the person conducting the examination are one and the same and the question must be what is the predominant purpose (if there be more than one). 17At [51] her Honour said that the prevailing authority appears to be that there is to be a differentiation between examinations conducted for the benefit of the creditors generally and an examination conducted by an individual creditor for its benefit alone, at least in circumstances where there are full or proposed proceedings by that individual creditor. At [65], her Honour identified a dichotomy of proper and improper purposes in the following terms: 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. 18However, if it be thought that in referring in the first class of case as "opposed" to a claim brought "in the name of the company or its liquidator", defined a dichotomy such that, claims not brought in the name of the company or liquidator would be presumptively beyond the proper scope of an examination, that would unduly confine the scope of an examination. 19This follows from the judgment of the Full Federal Court in NewTel Limited [2005] FCAFC 114; (2005) 54 ACSR 284, in which the proposed proceedings to be brought by the relevant creditor was described as "to assist in recovering the respondent's losses through commencing proceedings in the Federal Court or the Supreme Court of Western Australia against legal advisers." It is clear that those proceedings were to be brought in the name and for the benefit of the creditor, and not by the liquidator or in the name or for the benefit of the company. But it was said that there would be some benefit to the company, through the liquidator being able to access information derived from the examination which would facilitate investigations into its decision and the possibility of other action for the benefit of the company, and in addition because if the creditor succeeded against the legal advisers it would then not seek recovery from the liquidation, so that the pool of funds available for other creditors might be larger than otherwise. 20Lander J observed (at 257) that the respondent wished to use the information that it would gain by conducting an examination in an action which, if successful, would compensate it for the loss it suffered, and would also increase the pool of funds available to other creditors. His Honour concluded that because the company stood to benefit from any action brought by the respondent against the legal advisers, it could not be said that the application was an abuse of process. 21Nonetheless, it seems to me that the benefit in that case to the company was indirect, tangential and far from the predominant purpose of the examination. I think the real explanation of his Honour's judgment is that the purpose of the examination, as distinct from the purpose of the ultimate litigation, was to gain information from which all creditors could benefit. 22To my mind the fact that, as in the present case, a particular mode of recovery is already contemplated, does not deprive the examination of the purpose of gaining information as to whether Sandhurst has breached its duties as trustee and whether there are viable causes of action against it by which the creditors of LKM may obtain compensation for their losses. As I have foreshadowed, it is important not to treat the ultimate proceeding - in this case the proposed class action - as the same thing as the purpose of the examination. The analogy is with collateral abuse of process, in which the fact that a favourable outcome of legal proceedings for a plaintiff might produce results beyond the scope of the litigation which the plaintiff wishes to achieve, does not mean that the proceedings must be characterised as having the purpose of achieving that ulterior end. Thus, as has been held, the fact that prosecuting a person for bankruptcy would result in that person losing an office, a result desired by the plaintiff, does not mean that the prosecution of the proceedings is improper so long as they are being prosecuted bona fide for the remedy sought. 23In this case, it seems to me that the obtaining of information about whether the trustee has breached its duty and whether there are viable causes of action against it are clearly and squarely within the examinable affairs of the company, and a matter, objectively speaking, of great interest to all the debenture holders. If that were not enough, the fact that all the debenture holders have the opportunity to participate in the class action if they wish to do so, adds to the colour of this examination as one not for the private purpose of a single litigant but for the benefit of creditors generally. The examination for that purpose would serve the purpose of protecting the interest of creditors generally and obtaining evidence to support proceedings against persons in connection with the examinable affairs of the company. The examination would be in the interests of debenture holders as a whole, whether or not all of them ultimately choose to participate in any subsequent class action. 24For these reasons, the case is very far removed from the illustration given in Worthley v England; Re Excel Finance Corp Ltd; Worthley v ASC (1994) 14 ACSR 407 and cited by Ward J in Affinity Capital Pty Limited at 38, namely: For example, it would be an abuse of process for a creditor approved by the Commission for the purposes of s 597(1) to obtain an examination summons to conduct an examination for the purpose of obtaining evidence in proceedings which the creditor proposed to bring against the examinee for defamation. That would be a purpose completely foreign to the power of examination which is ultimately in aid of the company itself and not the personal advantage of the person seeking to conduct the examination. 25The example was described as one in which the cause of action for defamation would bear no relationship or connection with the examinee's involvement in the examinable affairs of the company. This case is, as I say, far removed from that. Accordingly, I am quite unsatisfied that the examination procedure in this case is an abuse of process. 26I turn then to the application to set aside the order for production. In this respect, the test is that an order for production is oppressive if it is not required for the purposes and within the scope of the particular examination to be conducted. It is sufficient for present purposes to note that the particular examination to be conducted may be expected to include questions as to whether there have been breaches of Sandhurst's duty as trustee under Corporations Act, s 283D(a). 27The applicant submitted that there were two aspects of the order for production which separately or together made it oppressive. The first was by reference to the period to which the order for production related, being approximately six years from 30 June 2002 to 1 August 2008, upon which date the receivers were appointed. The applicant submitted that it was difficult to see how events six years previously in relation to LKM's loans, its financial position, or the acquisition of a particular business could assist in relation to any potential cause of action. But it is to be borne in mind that the debenture scheme in question commenced on 1 October 2001. 28The plaintiff has since agreed to limit the period in respect of some paragraphs of the order for production. Documents within the period so limited, if not documents from as early as 30 June 2002, may well cast light on or reveal contraventions of some of the duties of the trustee during that period that might well have contributed to the creditors' ultimate loss. In the context where the duties include maintaining appropriate loan value ratios and the like, it is clear that documents virtually throughout the existence of the scheme could cast light on alleged breaches of duty. 29The second respect referred to by the applicant was that category 1 seeks documents "evidencing, recording or referring to" a number of sub- categories, and objection was taken to use of the words "referring to". In the past, courts have sometimes frowned on the use of the words "relating to" in this context, because that requires a subjective judgment to be made by the recipient as to whether a document does or does not relate to some other subject matter. But the concept of "referring to" involves no such judgment. It is not difficult to see how Sandhurst might not possess some of the primary documents referred to in the sub-categories, but might possess documents that refer to such documents and, as I think emerged in the course of argument, the existence of documents "referring to" the primary documents might well give rise to relevant questions on the examination. 30Thirdly, objection was taken to categories 2 and 3, which called for documents relating to the existence of relevant insurance policies and claims made under them. It is well established that the existence of insurance policies in respect of potential defendants is within the scope of a company's "examinable affairs", because they may cast light on the viability of pursuing certain claims. Once that is accepted, and once it is also accepted that it is not an improper use of the procedure in this case for a creditor to seek to ascertain the viability of claims against a third party, it must follow that category 2 is within the legitimate scope of inquiry. 31As to category 3, if it be the case that Sandhurst had notified its insurer of a relevant event, that would be relevant to establishing whether there was a viable cause of action, and if there had been other claims on the policy such as to reduce the sum insured available, that would be relevant to the viability of the plaintiff's contemplated claims. In those circumstances, I do not see that either categories 2 or 3 are other than relevant. 32Finally, oppression in this context is a multifactorial concept. It involves the interrelationship of the relevance of the documents sought, the breadth of the requirement to produce documents and the time available. Once it is established or accepted that the documents sought are relevant and not merely marginally so, that Sandhurst will not be required to recreate documents or electronic records, and that the cost of production appears to be in the order of something not much in excess of $10,000, which Sandhurst might be entitled to claim from the plaintiff in any event, it cannot be said that this order for production is oppressive. 33Accordingly, I order that the period of time for the applicant to apply for an order discharging the examination summons under r 11.5(2) of the Corporations Rules be extended to 3 October 2013. I order that the interlocutory process be otherwise dismissed with costs. 34I extend time for compliance with the order for production to 20 November 2013. I vacate the examinations appointed for 25 October 2013. I grant leave to the plaintiff to approach the Corporations Registrar for an alternative date for the examinations. I grant leave to amend the return date on the examination summons in accordance with the date appointed by the Registrar.