Lamb (in his capacity as Liquidator of Redcastle Estate Pty Ltd) v Mentha

REASONS FOR JUDGMENT 1 On 17 March 2010 the plaintiff, the liquidator of Redcastle Estate Pty Ltd, filed an application pursuant to s 596B of the Corporations Act 2001 (Cth) ("the Act") in which he sought an order that Mark Korda, Mark Ryan and Colin De Lutis be summonsed to appear before the Court to be examined on oath or affirmation in relation to the examinable affairs of Redcastle Estate Pty Ltd (In Liquidation) ("the Company"). The plaintiff also sought an order that each person produce to the Court prior to the examination documents relating to the valuation, marketing, realisation and sale of the property owned by the Company known as 341 Francis Street, Yarraville. 2 A Registrar of the Court issued the summonses and each of the three persons was summonsed to attend before the Court to be examined on oath or affirmation about the examinable affairs of the Company. 3 On 10 June 2010, Mr Mentha ("the defendant"), Mark Korda and Mark Ryan, by way of interlocutory process, sought orders that the summonses for the examination of Mark Korda and Mark Ryan be discharged and that the affidavit in support of the application for the issue of the summonses, affirmed by Robert Daniel Oxley be made available for inspection by the defendant. 4 The circumstances giving rise to the application that Messrs Korda and Ryan be examined in relation to the examinable affairs of the Company can be shortly stated. 5 The Company was part of the Bradmill Undare Group of companies. In February 2001 the defendant was appointed by Australia and New Zealand Banking Group Limited ("ANZ Bank") as receiver and manager of the Company and other companies in the Bradmill Undare Group. Each of the companies in the Bradmill Undare Group had entered into cross deeds of covenant in favour of the ANZ Bank. At the time of the appointment of the defendant, the Company was the registered proprietor of the property situated at 341 Francis Street, Yarraville on which the Bradmill Undare Group conducted three businesses including a denim design and production spinning business ("the Denim Business") operated by Bradmill Textiles Pty Ltd. 6 On 28 April 2002 Bradmill Textiles Pty Ltd as vendor, the defendant as receiver and manager of the Company, DLF Retail Pty Ltd as purchaser of the business and DLF Properties Pty Ltd as purchaser of the property, entered into an agreement for the sale of, inter alia, the Denim Business to DLF Retail Pty Ltd for $9,433,000 and whereby the defendant would procure the Company to sell the property to DLF Properties Pty Ltd for $7 million. The sale of the business was conditional upon the property being sold for $7 million. 7 On 25 June 2002 the defendant, on behalf of the Company entered into a contract of sale to sell the property to Denim Connection Pty Ltd for $7 million. 8 On 26 April 2007 as a result of resolutions passed by its members and creditors, the Company was wound up and the plaintiff, Mr Lamb, was appointed as its liquidator. 9 On 29 April 2008 the Company commenced a proceeding in the Supreme Court of Victoria against the defendant claiming that he had sold the property to the purchaser at an undervalue and had thereby breached his duties under s 180, 181 and 420A of the Act, thereby causing loss and damage to the Company. 10 In April 2008 the defendant was served with a summons issued pursuant to s 596A of the Act in which he was required to attend the Supreme Court of Victoria for examination and to produce a number of documents. The defendant was examined by the liquidator in relation to the examinable affairs of the Company on 19 May and 11 June 2008 respectively before the Supreme Court. In particular he was examined in relation to the steps he undertook in relation to the valuation, marketing and sale of the property and the apportionment of the sale price between the Company and its related companies. 11 In the course of the examination the defendant said that on or around 24 April 2002 he did not have any further involvement in negotiations in relation to the sale and purchase of the property. He said, in substance, that he was not involved in the details of the sale of the property and that that part of the transaction was undertaken by Messrs Korda and Ryan. He also said that he understood that some adjustments were made in relation to the purchase price for the sale of the assets other than the property. The documents which he produced pursuant to the summons disclosed that the purchaser of those assets received various credits against the purchase price of the assets. 12 In the Supreme Court proceeding a statement of claim was delivered on 6 October 2009 in which it was alleged that: (a) at the time of the sale of the property it had a market value of not less than $13,200,000; (b) the defendant failed to take adequate steps to achieve a price reflecting the market value for the property; (c) the defendant breached the duties he owed as receiver and manager of the property of the Company to take reasonable care to sell the property for not less than its market value and that he failed to discharge his duties as an officer of the Company. 13 In his defence filed 5 November 2009 the defendant denied that he had breached any duties he owed to the Company or in relation to his role as receiver and manager of the property of the Company. 14 In particular, in his defence, the defendant alleged that: (a) on or around 27 April 2002, through his staff, he had further discussions with Mr De Lutis with a view to finalising the sale of the Denim Business to the De Lutis Group; (b) in those discussions Mr De Lutis confirmed to the defendant (through his staff) that the De Lutis Group was only interested in purchasing the Denim Business together with the property and that it would not purchase the Denim Business without the property. 15 The affidavit in support of the application for the issue of the summonses to attend for examination to Messrs Korda, Ryan and De Lutis was affirmed by the solicitor for the plaintiff. 16 Paragraphs 22 to 26 of that affidavit were in the following terms: "22. Based on the documents which the Defendant produced pursuant to the Summons for Examination, it appears that the Purchaser received various credits against the purchase price of the Associated Sale including: (a) an allowance or provision for obsolete or unsaleable stock - $903,861; (b) a credit in respect of the Bradmill Textiles Pty Ltd's employee leave entitlements - $9,957,050; (c) a rental credit amount - $1,667,000; and (d) an Off‑Set Deferred Property Amount - $1,333,000. 23. It is unclear why these credits were given to the Purchaser, and the effect they had on the price paid for the Land and the business is also not apparent. 24. As the Defendant was not involved in the negotiations with the Purchaser after 24 April 2002, he is not in a position to clarify: (a) how the parties to the Contract of Sale negotiated the purchase price of the Land; and (b) what impact the Associated Sale had on the fixing of the purchase price of the Land. 25. I believe that, for the Plaintiff to understand the facts and circumstances which the parties took into account in the negotiation for the sale of the Land, it is necessary to examine Mark Korda, Mark Ryan and De Lutis. 26. The factors which influenced Mr Korda and Mr Ryan in agreeing the terms of the sale of the Land go directly to the merits of the Plaintiff's case against the Defendant. The Plaintiff wishes to explore those matters by examining Mr Korda, Mr Ryan and De Lutis who I understand were the individuals directly involved in the negotiations, with a view to gaining a clearer view of the merits of the case and the Defendant's defence. In short, the purpose of the examination is to assist the Plaintiff in determining whether to continue with the Proceeding and in his assessment of the respective merits for the purposes of settling the matter at mediation." 17 The defendant submitted that the summonses to Mr Korda and Mr Ryan should be set aside on two bases: (a) the proper inference to be drawn from the evidence was that the predominant purpose of the liquidator in applying for the issue of the summonses was an improper purpose. The liquidator put the characterisation of the improper purpose in a number of different ways. He submitted that the purpose was to obtain a forensic advantage in the Supreme Court proceeding, to enforce cooperation from the defendant's witnesses in a situation where the defendant did not have a similar coercive remedy against the liquidator's witnesses, to conduct a dress rehearsal of the cross‑examination of Mr Korda and Mr Ryan who will be witnesses in the Supreme Court proceeding, to examine them for the purpose of seeking to destroy their credibility, to ascertain whether Mr Korda and Mr Ryan are convincing in their evidence in answer to the Company's case in the Supreme Court, whether there are any matters that will be relied upon by the defendant in his defence which the liquidator can plan to counter and to gain an outline of the evidence they will produce in the Supreme Court proceeding; and (b) the liquidator did not make proper or full disclosure in the affidavit in support of the application for the summonses. 18 In support of his submission that there had not been full disclosure, the defendant submitted that the liquidator was aware that Messrs Korda and Ryan would be called as witnesses in the Supreme Court proceeding by the defendant and that that matter was not discussed in the affidavit in support of the application. I do not regard that matter as a significant non‑disclosure. It is true that the affidavit did not disclose that the defendant had said in an affidavit in support of an application for security for costs in the Supreme Court proceeding that he would be calling a number of witnesses including Messrs Korda and Ryan. However, it is clear from paragraph 20 of the affidavit in support of the application that Messrs Korda and Ryan either would be witnesses for the defendant in the Supreme Court proceeding or that their evidence was relevant to that proceeding. 19 The defendant also submitted that there was no new element in the defence which had been filed in the Supreme Court proceeding which was not known to the liquidator at the time of the examination of the defendant in June 2009. That may be so, but the subject‑matter in respect of which the examinations of Messrs Korda and Ryan are now sought was not the subject of examination of the defendant. As is stated in the affidavit in support, the defendant was not involved in the negotiations with the purchaser of the property after 24 April 2002. The liquidator now wishes to clarify how the parties to the contract of sale negotiated the purchase price of the property and what impact the associated sale of the business assets had on the fixing of the purchase price of the property. 20 As I noted earlier, the defendant's principal submission is that I should infer that the predominant purpose for which the liquidator wishes to undertake the examinations is to obtain an improper forensic advantage because he wants to obtain information for the purposes of the Supreme Court proceeding. 21 I accept the submission of the defendant that the liquidator has delayed for some considerable time in applying for the order for the examinations but I do not consider that that delay, either alone or in conjunction with the other matters upon which the defendant relies leads me to draw an inference that the examinations are sought for an improper purpose. 22 I accept for the purposes of the defendant's submissions that his defence was known to the liquidator around June 2008 but the filing of the defence crystallised the issues which would be raised by the defendant in the Supreme Court proceeding. In particular, the negotiations in relation to the purchase of the property after 24 April 2002 are matters which the liquidator has been unable to take up with the defendant. 23 The defendant also submitted that there should have been disclosed in the affidavit in support of the application for the summonses that there had not yet been discovery in the Supreme Court proceeding. I reject that submission. I do not consider that that was a matter which needed to be disclosed in the affidavit in support. 24 In order to set aside an order for examination it must be established that the improper purpose alleged is at least the predominant purpose for the examination: Re Excel Finance Corporation Ltd (Receiver and Manager Appointed); Worthley v England (1994) 52 FCR 69 at 89. 25 In Evans v Wainter Pty Ltd (2005) 145 FCR 176, Lander J, with whom Ryan and Crennan JJ agreed, said at 200: "143 In my opinion, Re Excel stands for the proposition 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. 144 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." 26 I adopt with respect, and apply, the propositions at 216 and 217 set out by Lander J which his Honour said emerged from the legislation and the authorities. 27 In the present application the defendant relies significantly on the fact that the Supreme Court litigation against him is pending and that, in substance, the improper purpose which should be inferred is that the liquidator wishes to have a dress rehearsal for the evidence that Messrs Korda and Ryan might give if called at the trial. I do not accept that submission. 28 The liquidator is seeking to examine Messrs Korda and Ryan on a limited aspect of their involvement in the sale process. In particular, examination of that limited aspect was not a matter which was available to them in the defendant's examination in the Supreme Court because he was not involved in the negotiations. 29 It is clear from Evans v Wainter (supra) at 217 that it is not an improper purpose to seek an order for examination while litigation is pending against the person the subject of the summons or entities connected with that person. In McCann (in his capacity as liquidator of Australvic Property Management Pty Ltd (In Liq) v Mason [2009] FCA 44 Finkelstein J said at pars [5] and [6]: 5 The relevant legal principles are not in doubt. An examination summons will be discharged if it is oppressive, unfair, an abuse of process or has been issued for an improper purpose: Sent v Andrews (2002) 6 VR 317, 320; Re Southland Coal Pty Ltd (2005) 189 FLR 297, 303. An examination summons will not be oppressive, unfair, an abuse of process or improper merely because there is on foot litigation between a liquidator (or the company in liquidation) and the proposed examinee. Thus, in Sent at 320, Buchanan JA said: "Where an examination relates to proposed or current litigation, in general terms the question is 'whether the examination is genuinely for the information of the liquidator to aid him in considering whether there is a cause of action upon which he will proceed …" In Re Southland Coal at 302‑303, Young CJ in Eq said: "It is clear that it is no basic objection to the issue of an examination summons on the ground of oppression that the liquidator may ascertain the strength of the case of a person with whom the company is involved in litigation". 6 On the other hand, a liquidator is "not entitled to conduct a dress rehearsal of the cross-examination in an action or to seek to damage the opposing parties case by attacking the credibility of that party's witness": Sent at 320; see also Re Hugh J Roberts Pty Ltd (1970) 91 WN (NSW) 537. In Hamilton v Oades (1989) 166 CLR 486, 498, Mason CJ put it this way: "[I]f a liquidator were to conduct an examination directed to compel the examinee to disclose defences or to give pre-trial discovery, or to establish guilt, this examination may be restrained as an abuse of process". It is not, however, enough that "there is a chance that this will occur": Re Southland Coal at 303." 30 The defendant said it was not a proper purpose to test the defence of the other side or to use the examination process to determine the strength or weakness of the opponent's case. However, it is accepted that it is not improper to seek an order for examination while litigation is pending. In the present case I do not consider that the predominant purpose for seeking to examine Messrs Korda and Ryan falls within the improper purposes for which the defendant contends. In substance, the liquidator is seeking to fill in the gap which was exposed in the defendant's examination, namely the negotiations in relation to the sale of the property carried out by Messrs Korda and Ryan in which the defendant did not participate. An examination of that matter may have a consequent result that it will assist the liquidator to evaluate the strength or weakness of the defendant's case. That may even be a subsidiary purpose for which the liquidator seeks the examinations and he may also want to use the result of the examinations to determine whether he should continue with, or try to settle, the proceeding. I do not consider that such a purpose is an improper purpose having regard to the authorities to which I have referred. But even if it is, it is not the predominant purpose. 31 The defendant challenged the purpose for the examination relied upon by the liquidator. Counsel for the liquidator submitted that the purpose of the examination was to find out what negotiations took place in relation to the sale of the property and the business. Counsel for the defendant referred to a letter from the liquidator's solicitors to the defendant's solicitors on 26 May 2010 in which it was stated that the liquidator intended to use the examination to determine if any of the causes of action already pleaded should be abandoned and to determine whether any other causes of action should be added. If, indeed, that be the purpose for the examination, it is not an improper purpose. 32 I can understand the concern of the defendant and Messrs Korda and Ryan that the examinations of Messrs Korda and Ryan may be used as an occasion for a dress rehearsal of their evidence in the Supreme Court proceeding. However, I consider that such concern can be mitigated if the examination is limited to the specific subject‑matter referred to in the affidavit in support. 33 Pursuant to s 596F(1) of the Act, the Court may "at any time" give a direction "about the matters to be inquired into at examination". I propose to give a direction that the examination of Messrs Korda and Ryan be limited to any negotiations in which they or either of them were involved in negotiating the purchase price of the property with the purchaser of the property or any person on its behalf, and the impact the associated sale of the Denim Business or any other business of the companies within the Bradmill Undare Group had on the fixing of the purchase price of the property. 34 Subject to the direction to which I have referred, I propose to order that the interlocutory application filed on 10 June 2010 on behalf of the defendant and Messrs Korda and Ryan be dismissed with costs. I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Goldberg.