McEachern, in the matter of Gladstone Civil Pty Limited v Pleash [2014] FCA 1364 | Case summary

REASONS FOR JUDGMENT 1 Mr Michael Joseph McEachern (Mr McEachern) is the recipient of a summons issued by a registrar under s 596B of the Corporations Act 2001 (the Act). It is Mr McEachern's contention that the summons is oppressive and that he ought to be excused from complying with paragraph 3.3 thereof. Paragraph 3.3 of the summons is in these terms: 3. You are also required to produce to the Court on the date fixed for hearing, the following: … 3.3 evidence as to your financial position including but not limited to:- (a) personal tax returns for past seven (7) years; (b) copies of all personal bank statements; (c) documentary evidence of any assets owned; and (d) documentary evidence of any liabilities, including but not limited to copies of any loan agreements, credit card statements and facility agreements; and … 2 The liquidator's submissions, at least implicitly, acknowledged that there was a breadth of language in paragraph 3.3 which did indeed have about it an oppressive quality. The acknowledgement was implicit in the sense that it was accepted, prior to today's hearing, the liquidators, by their solicitors, had promoted a consensual amendment of paragraph 3.3 of the summons so that it read as follows: 3.3 evidence as to your financial position including but not limited to: (a) personal tax returns for the period 1 January 2010 to present (the Relevant Period); (b) copies of all personal bank statements issued during the Relevant Period; (c) documentary evidence of an assets owned legally or beneficially:- (1) that are over the value of $10,000 (not taking into account any monies owed with respect to same); (2) excluding assets that are considered non-divisible and falling with section 116(2) of the Bankruptcy Act 1966; during the Relevant Period. (d) documentary evidence of an liabilities over the value of $10,000, including but not limited to copies of any loan agreements, credit card statements and facility agreement. [sic] 3 This proposed consensual amendment of the summons drew a riposte from the solicitors acting for Mr McEachern in which an alternative form of consensual variation to paragraph 3.3 was proposed. That alternative was in these terms: 3.3 the following documents relating to your financial position that are in your possession: (a) personal tax returns for the financial years 2012-2013 and 2013-2014; (b) copies of bank statements from 1 January 2013 to present; (c) documentary evidence of any real property which you own; and (d) the following documents relating to your liabilities that are over the value of $50,000: (i) loan agreements; (ii) credit card statements; and (iii) facility agreements. 4 Section 596B of the Act provides: Discretionary examination (1) The Court may summon a person for examination about a corporation's examinable affairs if: (a) an eligible applicant applies for the summons; and (b) the Court is satisfied that the person: (i) has taken part or been concerned in examinable affairs of the corporation and has been, or may have been, guilty of misconduct in relation to the corporation; or (ii) may be able to give information about examinable affairs of the corporation. (2) This section has effect subject to section 596A. 5 The starting point in respect of any controversy concerning whether a summons issued pursuant to s 596B is oppressive is the Full Court's judgment in Grosvenor Hill (Qld) Pty Ltd v Barber (1994) 48 FCR 301. In that case, a summons had been issued so as to seek the production of indemnity insurance policies issued to valuers. Its purpose was to ascertain whether or not there was a good cause of action in negligence against those valuers and, if so, whether that judgment would be met. Against that background, the Full Court made the following observations at p 305[E]: In accordance with the settled course of authority, to which we will refer below, information with respect to the probability or otherwise of success in litigation contemplated by the corporation would be information with respect to the "examinable affairs" of the corporation in question. This information would be "relevant", that is to say, it would bear upon or be connected with, the question whether the corporation possessed a cause of action, that is, a chose in action, as its property. It is not, and could not be, seriously disputed that an inquiry as to the existence, and value, of any property that the corporation may possess would be a "relevant" inquiry for the purposes of s 597(9). A liquidator, when engaged in litigation on behalf of a company which is being wound up, or when contemplating instituting such litigation, is not in the same position as an ordinary litigant. The liquidator comes to the company as an officer of the court under a duty and responsibility to get in and maximise the assets of the company for distribution for the benefit of creditors. In the discharge of his or her duty and function, the liquidator comes to the company with limited or no knowledge of the company's assets, business and affairs. The liquidator is therefore in a position of disadvantage to make informed decisions of both a legal and a commercial nature necessary to carry out the winding up. The legislature has recognised this position of disadvantage and addressed the problem by the enacting of s 596B of the Law and its predecessors. The effect of the legislation is to place a liquidator in a privileged position to obtain information relevant to and necessary for the proper discharge of his or her statutory function. The seeking of information to make decisions as to whether or not litigation ought to be embarked upon or continued in itself is no more than "an exercise of his duties and fulfilment of his responsibilities as a liquidator" … . The courts have recognised since the introduction of statutory powers similar to that provided for in s 596B of the Law that the exercise of the power can involve tension between two important public interests. The first is the public interest in a liquidator obtaining necessary information to properly discharge the function of liquidator in the winding up of the company for the benefit of the creditors. The second is the right of the individual to privacy in regard to his or her affairs, documents and papers. … 6 Their Honours continued at p 306 to 307: The necessity to obtain relevant information in relation to litigation by or against a company being wound up is but one instance of the broad general purpose identified in the decisions cited above and numerous other decisions to like effect. Clearly, one purpose of an examination in relation to pending or contemplated litigation is to determine whether or not there is evidence available to support a claim brought by the company to recover property or damages, or conversely to defend a claim brought against the company, and the strength of that evidence. That such is a purpose falling within the power contained in s 596B of the Law was not challenged by Grosvenor; the whole weight of authority is against such a challenge in any event. The question is whether the Court is limited by the section to ordering an examination the purpose of which is to go no wider than to determine whether or not there are reasonable grounds, including evidence, to litigate a case to a successful judgment, or whether, the Court has power to order an examination, the purpose of which is to ascertain the likelihood of any judgment being satisfied; that is, whether it is a permitted purpose to inquire as to the worth of a potential defendant so as to be able to make a practical assessment as to the likelihood of a return to the company of the fruits of any favourable judgment and the necessary legal costs expended in obtaining it. Is the Court empowered under the section to order an examination or the production of documents to test the likelihood of the creditors in the winding up receiving a tangible benefit from the satisfaction of any judgment obtained and to enable the liquidator to determine whether it is prudent to commence or maintain litigation with knowledge as to the real likelihood of obtaining any tangible benefit beyond a mere judgment, including a judgment for costs, at the conclusion of the litigation? In our view, the Court has such a broad power. Additionally, it is a power of long standing. The Courts have always allowed a third party or a banker to be examined as to the financial affairs of a contributory including requiring the production of banker's books relating to any account which the contributory had with the bank. The purpose of such examination was to ascertain the worth of the contributory as a matter incidental to making a decision to pursue the contributory for the amount due by way of contribution … . The power was not limited to ordering the examination of persons whom it might be considered had particular knowledge of a contributory's financial affairs. It also included a power to order the examination of any person whose relationship with a contributory was such that money or property may pass into the hands of the contributory thereby creating an asset to satisfy any claim by the company in liquidation. … The Full Court further stated at p 311: In our view, the ambit of the power is sufficiently wide to enable information to be sought from a defendant or potential defendant as to the ability of that person to satisfy any reasonable judgment which may be obtained in litigation instituted by the liquidator. In that context it is within power to order production of relevant documents, including insurance policies, to ascertain whether or not the person has an enforceable right to indemnity from an insurer or other person. The obtaining of such information by the liquidator in the course of the winding up is to facilitate the realisation of the chose in action to the best advantage of the company and its creditors. Further, their Honours there stated: We stress that it is important to bear clearly in mind the difference between the ambit of the power and the circumstances in which the power will be exercised. The Court retains a discretion in appropriate cases to refuse to exercise the power or to make its exercise subject to stringent conditions. It is impossible in advance to lay down all of the relevant circumstances which will affect the exercise of a discretion to exercise the power or to subject it to limitations or conditions. … However, in the final analysis, it must be left to the Court in any particular instance, guided by the evident statutory purpose of the section, to determine whether or not the information is relevant to the liquidator for the purpose of performing his statutory duty and whether and in what manner any proposed examinee needs to be safeguarded beyond the ordinary safeguards of court control of the examination process from any oppressive exercise of the power. 7 Against that background of authority, it is instructive to have regard to certain associations between Mr McEachern and the company in liquidation which have prompted the liquidator to seek his examination. These are not necessarily exhaustive of what has prompted the liquidator. Included in the material before me is a series of emails passing between Mr McEachern and named individuals concerning the company now in liquidation or a related company. The investigations to date of the liquidators have disclosed that Mr McEachern became involved with the company in liquidation and related companies also in liquidation in or about 2010. 8 A company controlled by Mr McEachern, Nindaroo Investments Proprietary Limited, came as a result to take up shares in the company in liquidation and related companies. That taking up of shares appears to be related, so the investigations to date have disclosed, to an arrangement whereby some $3.5 million was injected indirectly for the benefit of the company in liquidation and related companies and, injected by stages. The liquidator's apprehension is that Mr McEachern may well have been, on and from some time in 2010, a shadow director of the company in liquidation. If not in 2010, that particular status may, on the evidence presently to hand, have been assumed by Mr McEachern on and from February 2012. 9 The interest, then, of the liquidators in Mr McEachern is two-fold. Firstly, he asserts an interest in a person who may become the recipient of a judgment as a result of proceedings against him by the liquidators. The other asserted interest is that of a person who may, at least on and from February 2012, be a de facto director of the company in liquidation. 10 Section 596B authorises the summoning of a person but not the oppressive summoning of a person. It is to be remembered that a summons has coercive qualities and that non-compliance, without reasonable excuse, may subject its recipient to penal consequences. 11 The content of a summons is governed by s 596D. There is a need in a summons for specificity. As to what that entails, the authorities concerned are helpfully collected by Davies J in her then capacity as a judge of the Supreme Court of Victoria, in Re Bill Express Ltd (in liq) (2010) 238 FLR 329 (Bill Express). In Bill Express at [31], and after surveying authority, Davis J observed: Where something must be "specified", it must be stated clearly and precisely. The need for clarity and precision in the identification of documents that must be produced under compulsion is readily understood where there are consequences for non-compliance with an obligation to produce documents. The requirement provides a safeguard for the protection of the examinee. I respectfully agree with that statement. 12 In the circumstances of that particular case, the language of a summons which included but is not limited to specified categories of documents was held not to be oppressive in relation to a production requirement. That turned, very much, as these cases so often do, on the evidence before the Court as to the likely knowledge of the recipient of the summons of the affairs of the corporation concerned. That in Bill Express such a formulation was not regarded as oppressive is a case specific outcome rather than a general endorsement of that form of wording in a summons. 13 An example the other way in terms of oppression is offered by Re Bernstein Pty Ltd (No 2) [2007] FCA 48. The summons there sought production in the following terms: 2. All documents, which are in your possession or control, including but not limited to letters, memoranda, notes, invoices, statements or schedules, whether in electronic or hardcopy format, relating to or otherwise concerning your personal financial position from December 2001 to the present, including but not limited to: 2.1 taxation returns; 2.2 contracts of employment; 2.3 share certificates; 2.4 bank account statements; 2.5 title deeds; 2.6 mortgages; 2.7 certificates of registration; and 2.8 superannuation returns of you personally, any trust of which you are a beneficiary, trustee or settlor, or of any private company of which you are a shareholder or member. 3. For the purpose of paragraph 2 above, 'personal financial position' includes, but is not limited to, details of: 3.1 income received; 3.2 legal or equitable interests in chattels, including motor vehicles, boats, furniture, jewellery, whitegoods and the like; 3.3 legal or equitable interests in real property; 3.4 cash in bank accounts; 3.5 investment portfolios (including but not limited to share portfolios, managed investment funds, property trusts) in which any interest is held whatsoever; 3.6 liabilities or debts, including but not limited to credit cards, mortgages and loan facilities, including any such facility relating to either real property or chattels. 4. All documents which are in your possession or control, including but not limited to letters, memoranda, notes, invoices or schedules, whether in electronic or hardcopy format, relating to all transfers of any interests in real property or chattels, whether legal or equitable, taking place in the period from December 2001 to the present. 14 The liquidator in that case promoted a monetary limit modification and a further modification in terms of deleting the words "whether legal or equitable" and substituting "any trust of which the named person is a beneficiary/trustee or settlor or of any private company of which the named person is a shareholder or member". Mansfield J's view was that even so amended, the paragraphs quoted were far too wide and clearly oppressive. That was because they covered too greater time period with no reason identified as to why documents relating to that period could inform the liquidator as to the recipient of the summonses present capacity to meet any judgment. His Honour was not taken with the restriction to assets of more than $5,000 or transactions of that same value. That was because, even modified in that way, the summons would cover primary records such as notes or invoices as well as secondary records, such as financial statements. It would cover, so his Honour noted, written accounts received in respect of a house, if either owned or rented, such as water or electricity bills. 15 Fletcher, in the matter of Secured Mortgage Management Limited v Pope [2013] FCA 1449 is another example of a challenge to a summons on the basis of oppression. In that case, so it proved in the course of submissions, what Dowsett J described at [23], as: The only focused basis of objection appears to be the suggestion that the summons should require production of a more limited range of documents, in particular that [the recipient] should not have to produce documents created in 2008. As to this, his Honour observed: …, to fix a period by relation to the point at which the companies went into liquidation seems entirely appropriate. 16 Here, the liquidators have not sought to procure a summons which has the date of liquidation as the focus. That is, as I understand it, because of the twofold interest which I have mentioned. Even allowing for a twofold interest, there does need to be some understandable connection between the recipient of the summons and the examinable affairs of the company if that is to be relied upon in addition to an ability to satisfy a judgment. 17 In my view, a connection that is, on the material to hand, rational is one which commences on 1 January 2012. It appears that it is on and from early in that year that Mr McEachern came to have active involvement in what one might term the minutiae of corporate decision making in the company under liquidation. 18 There were other objections taken to the proposed revised wording of the summons promoted by the liquidators. The word "evidence" was said not to accord with the language of the statute, and to require a value judgment as to what or wasn't evidence. It is always a fraught step to depart from the language of the statute in such a radical way. 19 Another objection was to the exclusion of documents that "are considered non-divisible and falling within section 116(2) of the Bankruptcy Act 1966". That exclusion entails the making of a judgment concerning a matter of law. I can well understand how, in correspondence between solicitors and in respect of the recipient of a summons who have the benefit of legal advice, there was a particular benign intention on the part of the liquidators not to put the recipient to the burden of having to disclose information concerning assets which could never become the subject of an insolvency recovery consequential upon a judgment against the recipient of the summons. So I do not doubt that the exclusion was promoted in good faith as between solicitors. It is just that, the point having been taken, it does entail the making of a judgment concerning a matter of law by the recipient of the summons. And that is not a judgment that the recipient of a summons ought to be required to make. 20 That same point was taken in relation to the requirement to produce documentary evidence of assets owned "legally or beneficially". There is an evaluation entailed in respect of a matter of law with respect to beneficial ownership. It is probably an evaluation which a person required to produce documents concerning assets owned would have to make in any event. With respect to beneficial ownership as opposed to legal ownership, there is a question of law entailed in that for the recipient of a summons. A recipient who failed in the face of a summons, requiring documentary evidence as to assets owned, to produce documents concerning assets beneficially owned, especially a recipient with the benefit of legal advice, may well find him or herself in a difficult position as to being able to provide a reasonable excuse for failure to comply. Nonetheless, the point having been taken, it does appear to me that the summons is oppressive in overtly requiring such a legal evaluative judgment. 21 A liquidator is entitled under s 596B to engage in what might be termed a fishing exercise, so long as that exercise can be seen to fall within the terms of s 596B(b) as to the recipient of a summons. In my view, whilst the wording of paragraph 3.3 of the summons is in terms oppressive, there is an amendment which ought to be granted to the liquidators, albeit not as wide as that promoted via their solicitors, and albeit not as narrow as that promoted in response by Mr McEachern's solicitors. The order that I propose, therefore, to make, is one which directs the amendment of paragraph 3.3 of the summons in these terms: 3.3 Books, documents and records as to your financial position for the period 1 January 2012 to the present (the relevant period), as follows: (a) personal tax returns for the relevant period; (b) copies of all personal bank statements in respect of the relevant period; (c) documents evidencing all assets over the value of $10,000, not taking into account moneys owed with respect to the same, during the relevant period; (d) documents evidencing liabilities over the value of $10,000 and, in particular, copies of any loan agreements, credit card statements and financial facility agreements relating thereto. There will be a need, consequentially, to extend the time for compliance as to which I will hear submissions. 22 Taking into account the matters raised in exhibit 2 (the correspondence from the solicitors concerned) and also the phenomenon of the likely disruption to the ability of the solicitors readily to obtain the files concerned and other disruption which may occur in terms of the discharge of its professional obligations by virtue of the G20 Conference event in Brisbane next week, I am of the view that the summons ought to be made returnable on Tuesday, 18 November 2014 in each instance. I therefore direct that the summons be returnable on that date at 9.30am.

Costs 23 The summons as initially cast was far too wide. There was an endeavour, quite properly, by correspondence between solicitors to narrow the scope of that. That correspondence materially concluded on 31 October. There was a pressing of an application until this morning for the summons to be set aside. In the end, that evolved to an application for it to be amended. The liquidators' alternative paragraph 3.1 did not entirely survive scrutiny. 24 Nonetheless, the liquidators, in my view, did enjoy a substantial degree of success in the defence of the summons. For all that, the summons, as issued, put Mr McEachern to the expense of obtaining legal advice in respect of whether it was oppressive. In my view, Mr McEachern should have his costs of and incidental to the application to set aside the summons up to and including 31 October 2014. But no further. The reason for that is neither side, in my view, enjoyed such a degree of forensic success in respect of the prosecution of the application as to warrant an order for costs following any particular event. In other words, the summons has not been set aside. What was pressed for the liquidators was not completely successful. But, neither was paragraph 3.3 in an amended form struck out. Costs after 31 October should, in my view, lie where they fall. I certify that the preceding twenty-four (24) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Logan.

McEachern, in the matter of Gladstone Civil Pty Limited v Pleash

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