Krok v Shangri-La Construction Pty Ltd

Federal Court of Australia (Full Court)|2022-03-11|Before: Goodman JJ

The application for leave to appeal is dismissed.
The applicants are to pay the respondent's costs of that application, as agreed or assessed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

introduction 1 The applicants seek leave to appeal from a decision of the primary judge refusing their application to stay, as an abuse of process, examinations authorised under ss 596A and 596B of the Corporations Act 2001 (Cth). For the reasons set out below, leave to appeal is refused.

Liquidators' Report 5 On or about 2 March 2018, the liquidators lodged a statutory report (Liquidators' Report) with the Australian Securities and Investment Commission (ASIC). The liquidators reported that: (1) they had identified unsecured creditors of the Company, with potential claims in the order of $3.75 million; (2) the Company had an estimated deficiency in assets in the order of $3.65 million; (3) the liquidators had issued a demand upon GVE Small Pty Ltd, a company of which the second applicant was a director, for the repayment of a transfer of $5.2 million made to it by the Company on 1 June 2017; (4) the second applicant had not disclosed the existence of this payment in the Report As to Affairs that he had provided to the liquidators; (5) the liquidators' preliminary investigations indicated potential breaches by the first to third applicants of their duties as directors of the Company; and (6) the liquidators were continuing to investigate potential breaches of directors' duties and whether the Company had entered into any voidable transactions (Pt 5.7B, Div 2 of the Act). 6 On or about 6 March 2018, the respondent lodged a formal proof of debt with the liquidators.

The issue of the examination summonses and the application for orders for their discharge 7 On or about 29 March 2019, the respondent applied to ASIC for written authorisation to apply for the issue of summonses under ss 596A and 596B of the Act. On 30 May 2019, ASIC provided written authorisation to the respondent, with the consequence that the respondent became an "eligible applicant" as defined in s 9 of the Act. 8 In or about July 2019, the respondent, as an "eligible applicant", applied to this Court for orders for the issue of summonses for examination directed to the first to third applicants pursuant to s 596A of the Act and to the fourth applicant pursuant to s 596B of the Act. That application was supported by an affidavit of Mr Darren Noble, solicitor for the respondent in which Mr Noble: referred to the Liquidators' Report; provided details of publicly available information as to the relationship between the Company and various recipients of transfers of monies from the Company; outlined potential causes of action available to the Company for the recovery of the monies transferred; identified that the applicants were persons likely to have information relevant to those potential causes of action; and expressed his belief that the issue of the examination summonses "would benefit [the Company] and its creditors in that information regarding its examinable affairs may ultimately lead to recovery in the liquidation, which, in that case, would imbue [the Company] with sufficient funds to satisfy its debts". 9 On 18 December 2019, a Registrar of this Court made orders for the issue of the examination summonses. 10 On 7 August 2020, the applicants applied for orders discharging the summonses. That application was refused on 30 October 2020, by Beach J: Shangri-La Construction Pty Ltd v Hyatt, in the matter of GVE Hampton Pty Ltd (in liquidation) [2020] FCA 1577.

Victorian Supreme Court proceeding 11 On 1 December 2020, the liquidators commenced a proceeding in the Supreme Court of Victoria against each of the applicants and others who are alleged to be associated with one or more of the first to third applicants (Supreme Court proceeding). In that proceeding, the liquidators filed a Statement of Claim dated 8 February 2021 which describes a series of payments made by the Company to the applicants and the other defendants. The alleged payments total $7,804,017.25 and comprise: (1) the payment of $5.2 million referred to at paragraph 5(3) above; (2) payments of $100,000 in June 2015 and $398,672 in June 2017 (a total of $498,672) made by the Company to the second applicant; (3) payments of $200,000 in September 2015 and $539,000 in June 2017 (a total of $739,000) made by the Company to Resling Pty Ltd, a company of which the third applicant and his wife were the shareholders and directors; (4) a payment of $400,000 on 23 May 2017 made by the Company to Ms Lanster, the sister of the second applicant and daughter of the fourth applicant; (5) payments of $200,000 on 16 September 2015 and $671,345.25 on 1 June 2017 (a total of $871,345.25) made by the Company to Olicorp Pty Ltd, a company of which the first applicant was the sole director and in which the first applicant controlled all the shares via an intermediate company of which he was the sole director and shareholder; and (6) payments of $1,563 in October 2016, $42,000 in June 2016 and, $43,437 in June 2017 and $8,000 in September 2017 (a total of $95,000) made by the Company to GVE Brighton Pty Ltd, a company of which the first and second applicants were directors and of which the shareholders were companies associated with each of the first, second and third applicants. 12 Each of these payments is alleged to be voidable as an unreasonable director-related transaction and an insolvent transaction of the Company. 13 The first, second and third applicants are alleged to have caused, authorised or permitted the Company to make each of the payments, or alternatively, to have failed to prevent the Company from making them and to have done so in contravention of their duties as directors of the Company. 14 Some but not all of the payments are alleged to give rise to causes of action in contract, restitution, or for the recovery of an unfair preference. 15 The liquidator seeks to recover $7,804,017.25 allegedly paid by the Company to the applicants and their associates from each of the first, second and third applicants; $400,000 from the fourth applicant in respect of the payment to Ms Lanster; and various other amounts from the other defendants.

Payments by the fourth applicant to the respondent 16 In February and March 2021, the fourth applicant deposited various amounts into the respondent's bank account, representing the total of the County Court judgment plus interest. The total amount paid is consistent with the formal proof of debt provided by the respondent to the liquidators. The respondent has not returned any part of the amounts deposited. The respondent did not and does not accept that it ceased to be a creditor of the Company by reason of those deposits.

the proceeding below 17 On 10 February 2021, the applicants commenced the proceeding below seeking a declaration that the respondent was no longer a creditor of the Company and orders permanently staying the examinations. 18 The essence of the applicants' argument before the primary judge was that: the respondent's claim on the Company had been paid; there was no benefit to the respondent in conducting the examination; the liquidators had not requested that the respondent conduct the examinations and had made no statement that they wished to obtain any further information and had not in any other way approved the examinations occurring; the liquidator had commenced the Supreme Court proceeding and the Court should infer from those matters that the respondent's predominant purpose in continuing with the examinations was to cause expense and inconvenience to the applicants as examinees. 19 The primary judge refused the applicants' application. The reasoning of the primary judge in his Judgment may be summarised as follows: (1) the respondent was at all relevant times an eligible applicant for the purposes of ss 596A and 596B by dint of ASIC's written authorisation, regardless of whether it was a creditor of the Company (J[19]); (2) the Court has an inherent jurisdiction to stay an examination if it is an abuse of process (J[25]); (3) an abuse of the public examination machinery will occur where an applicant for an examination summons is seeking to achieve some purpose foreign to that which the legislature intended (J[25]); (4) the applicants bore the onus of demonstrating that the predominant purpose of the respondent in conducting the examinations was improper and that evidentiary onus is a heavy one (J[26]); (5) there was simply no persuasive evidence (and certainly not evidence satisfying the heavy evidentiary onus on the applicants), to show that the continuation of the examinations was an abuse of process (J[30]); and (6) the primary judge was not prepared to infer that the respondent was seeking to conduct the examinations to cause expense and inconvenience to the applicants as examinees (J[24], [31]). 20 At J[31]-[34] the primary judge stated: 31 I do not accept that I should draw the inference that the examinees ask me to draw as set out in their submissions at [24] above. These matters may go to indicate the motivation for Shangri-La to continue with the examinations. Yet a remaining relevant and legitimate purpose of these examinations is to protect the interests of all creditors. Each of the matters relied upon by the examinees (individually and cumulatively) do not suggest that Shangri-La has the predominant purpose of just inflicting costs, or causing inconvenience or embarrassment to the examinees. We can speculate as to motive, but this is to be distinguished from purpose. 32 I do not see the existence of the recent Supreme Court proceedings as in themselves a reason to stay the examination, although the matters examined upon may impact on this litigation. There is no evidence of oppression, or abuse, in relation to that proceeding, to indicate a basis for considering an improper purpose on Shangri-La's part. Further, the recent Supreme Court proceedings may not proceed to a hearing or judgment, and so there may be some utility in the examinations continuing to their appropriate conclusion. 33 Then, there is no evidence the examinees have any financial or resource difficulties in the conduct of the examination, so as to treat them as vulnerable financially to substantial harm. There is no evidence of Shangri-La having a purpose of taking advantage of any such vulnerability in any event. 34 I am persuaded that Shangri-La's abiding or most influential purpose is a legitimate purpose as it was when it commenced the examinations even though it may no longer be a creditor. (emphasis in the primary judgment)

THE APPLICATION FOR LEAVE TO APPEAL 21 On 29 September 2021, the applicants filed an application for leave to appeal. In their application for leave to appeal the applicants set out the following grounds of application (and proposed grounds of appeal): 1. The Primary Judge erred in exercising his discretion to permit the Examinations to continue by: (a) finding that the examination was to protect the interest of all creditors without identifying what interests all creditors had; (b) finding that the existence of the Supreme Court proceedings were (sic) not a reason to stay the examination; (c) finding that notwithstanding the Respondent may no longer be a creditor, it had a legitimate purpose in continuing the examinations without identifying what that purpose was; (d) giving insufficient weight to the creditor status of the Respondent; and (e) giving insufficient weight to the liquidators (sic) position with respect to the examinations. 2. The Primary Judge erred in law by taking into account irrelevant considerations being whether proceeding with the Examinations would cause the Examinees financial or resource difficulties. 3. The Primary Judge erred in law in failing to consider the status of the Respondent in the liquidation at all, or alternatively, sufficiently. 22 Following dialogue with the Court during the hearing of the application as to whether the primary judge had in fact exercised a discretion as opposed to simply finding that the applicants had not proven that the respondent's predominant purpose in continuing with the examinations was an improper purpose, the applicants reframed their grounds of application as being those set out in sub-paragraphs 1(a) to (e) free from the reference in the chapeau of paragraph 1 to the exercise of discretion. The applicants also withdrew any reliance upon grounds 2 and 3. 23 The question whether leave to appeal should be granted turns principally upon whether: (1) the orders of the primary judge are attended by sufficient doubt that reconsideration on appeal is warranted; and (2) substantial injustice would result if leave were refused: Décor Corporation Pty Ltd v Dart Industries Inc [1991] FCA 844; (1991) 33 FCR 397. 24 The primary judge's statement of the legal principles is uncontroversial and is not challenged on this application for leave to appeal. We note that the proposition that an abuse of process will occur where an applicant for an examination summons has a predominant purpose foreign to that which the legislature intended has recently been confirmed by the High Court of Australia in Walton v ACN 004 410 833 Limited (formerly Arrium Limited) (in liquidation) [2022] HCA 3 at [19] (per Kiefel CJ and Keane J), [97] (per Gageler J), and [129], [131], [135] and [170] per Edelman and Steward JJ. 25 The focus of the applicants' challenge is the primary judge's finding that the applicants had not discharged the heavy evidentiary onus of demonstrating that the respondent's predominant purpose was an improper purpose, namely to cause expense and inconvenience to the applicants as examinees. 26 The primary judge was not prepared to find that the suggested improper purpose existed. There was no direct evidence of its existence. Whilst, as the applicants submitted, it is not to be expected that the respondent would have confessed to the existence of the suggested improper purpose, the onus is upon the applicants. 27 We see no error in the primary judge declining to draw the inference sought by the applicants. We also see no error in the reasoning set out at J[31] to [34]. Further, even if the suggested improper purpose were to be found to exist, it would be necessary for the applicants to also prove that such a purpose was predominant over the purpose identified by the primary judge at J[31], in circumstances where the applicants accepted in their submissions on this application that the primary judge correctly identified the latter purpose. 28 There is no other matter, including those raised in the proposed grounds of appeal, which suggests that the decision that the applicants had failed to prove that the respondent had a predominant purpose of causing expense and inconvenience to the applicants as examinees is attended by doubt sufficient to warrant reconsideration. 29 The application for leave to appeal should be dismissed with costs. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justices Markovic and Goodman.

DERRINGTON J: 30 I have read the reasons of Markovic and Goodman JJ. I agree that the applicants have established no basis on which leave should be granted to appeal from the primary judge's decision and I agree with the orders proposed by their Honours. I certify that the preceding one (1) numbered paragraph is a true copy of the Reasons for Judgment of the Honourable Justice Derrington.

SCHEDULE OF PARTIES VID 532 of 2021 Applicants Fourth Applicant: ADA KHAIT

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