Probis Financial Services Pty Ltd (administrators appointed) v Kong

Federal Court of Australia|2024-05-27|Before: Mr P, Goodman J

The parties are to confer and provide to the Associate to Goodman J by 3 June 2024: (1) agreed orders, giving effect to these reasons for judgment; or (2) failing such agreement, competing orders and written submissions (not exceeding three (3) pages) in support thereof. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

A. Introduction and Background 1 The applicants - Probis Financial Services Pty Ltd (administrators appointed) and its administrators - seek leave to issue a subpoena to produce documents and to serve it in New Zealand. The proposed subpoena is addressed to the Proper Officer of Mars Cap Limited (interim liquidators appointed) (MCL) at an address in Auckland. 2 A general background to the present proceeding is set out in Probis Financial Services Pty Ltd (administrators appointed) v Kong [2023] FCA 1398. Since the publication of those reasons, pleadings have closed. The following matters, among others, are now common ground: (1) prior to 28 July 2023, Probis conducted a financial services business as an issuer of over-the-counter derivative financial products; (2) Mr Kong is and was the sole shareholder and director of MCL; (3) on or about 1 April 2020, MCL established a trading account in Probis's name denominated in United States Dollars (USD); (4) between about 9 April 2020 and about 22 February 2023, Probis made payments to MCL which, after deducting payments from MCL to Probis, totalled USD 100,009,812.45 (Probis to MCL payments); (5) between 9 April 2020 and 2 May 2023, MCL made transfers totalling USD 100,009,812.45 to third parties, namely PT Eternity Futures (PT) and City Credit Capital (Labuan) Limited (CCCL) (MCL to PT/CCCL payments); and (6) on 2 May 2023, Probis requested that MCL return to Probis the funds the subject of the Probis to MCL payments. 3 The applicants contend, inter alia, that: (1) the Probis to MCL payments were held by MCL on trust for Probis; (2) the terms of that trust permitted MCL to pay, transfer, apply or otherwise deal with those funds only upon receiving instructions from Probis to do so; (3) no such instructions were given by Probis to MCL and the MCL to PT/CCCL payments were made in breach of trust; and (4) Mr Kong is liable for MCL's breaches of trust. 4 Mr Kong contends, inter alia, that: (1) any trades by MCL on behalf of Probis were to be executed by another liquidity provider; (2) the funds provided by MCL to Probis needed to be provided to the other liquidity provider in advance, so that the other liquidity provider could execute trades promptly on receiving instructions to do so; (3) Probis knew or ought to have known that: (a) MCL did not execute trades on behalf of clients but paid funds to other liquidity providers, for the purposes of placing it in a position to carry out instructions by Probis to execute a trade or trades; (b) such other liquidity providers would only be in a position to carry out instructions from MCL to execute a trade if funds had been placed with those liquidity providers in advance; and (4) Probis, by continuing to trade with MCL and transferring money to it for the purposes of trades, impliedly authorised, agreed to, or approved MCL's payment of the funds onto liquidity providers, for the purposes of placing MCL in a position to carry out instructions by Probis to execute a trade or trades. 5 The application under consideration was filed on 19 April 2024, and is supported by an affidavit of Mr Jonathan O'Loughlin, the applicants' solicitor, made on the same day. Mr Kong relied upon an affidavit of his solicitor, Mr David Jenaway, made on 13 May 2024 which attached correspondence between the parties' solicitors concerning the proposed subpoena.

B. Legal Framework 6 Rule 24.01 of the Federal Court Rules 2011 (Cth) provides that a subpoena may be issued only with the leave of the Court. Section 31 of the Trans-Tasman Proceedings Act 2010 (Cth) (TTP Act) provides in so far as is presently relevant: 31 Subpoenas not to be served in New Zealand without leave (1) If the proceeding is in an Australian court, the subpoena must not be served in New Zealand without the leave of the court. ... (3) Without limiting the matters that the court may take into account in deciding whether to give leave under subsection (1) or (2), the court must take into account: (a) the significance of the evidence to be given, or the document or thing to be produced, by the person named; and (b) whether the evidence, document or thing could be obtained by other means without significantly greater expense, and with less inconvenience to the person named. ... (emphasis in original) 7 Thus, s 31(1) of the TTP Act requires that leave of the court be obtained to serve the proposed subpoena in New Zealand and s 31(3) of that Act requires the Court to take into account, when exercising its discretion to grant such leave, the significance of the documents to be produced; and whether those documents could be obtained by other means without significantly greater expense, and with less inconvenience to the person named in the proposed subpoena. In Rauland Australia Pty Ltd v Law [2020] FCA 516 at [25] to [27], Stewart J made the following observations concerning s 31(3) of the TTP Act: 25 In relation to the test under the TTP Act, as has been observed, s 31(3)(a) does not provide any particular test except that the significance of the evidence to be given or the document or thing to be produced must be considered: Comeskey v New South Wales Bar Association [2015] NSWSC 12 at [15]; and Labruyere v Parsons Brinckerhoff Australia Pty Ltd (No 3) [2019] NSWSC 79 at [9]. 26 The Court must also be satisfied under s 31(3)(b) of the TTP Act that the documents could not be obtained by other means without significantly greater expense, and with less inconvenience to the subpoena recipient. This requires consideration of whether the subpoena recipient needs to be compelled to provide the documents: Labruyere at [11]. 27 The result is that the test for leave to serve a subpoena in New Zealand is more exacting than the test for leave to issue a subpoena. To start, there must be apparent relevance of the documents sought to be caught by the subpoena to the issues in the proceeding. In addition, the documents must be sufficiently significant to justify the expense and inconvenience likely to be caused by service of the subpoena. Greater expense and inconvenience would require greater significance of the documents in order to justify leave being granted. Moreover, if there is a less expensive and less inconvenient way of obtaining the documents, then leave might be refused on that basis. (emphasis in original) 8 Both for the purposes of s 31(3)(a) of the TTP Act and in the exercise of the discretion to grant leave more generally, the extent to which the proposed subpoena has a legitimate forensic purpose is a central consideration. In this regard, in Wong v Sklavos; Satchell v Sklavos [2014] FCAFC 120; (2014) 319 ALR 378 the Full Court of this Court (Jacobson, White and Gleeson JJ) explained at 381 to 382 ([12]): ... The party issuing a subpoena bears the onus of demonstrating that the subpoena has a legitimate forensic purpose in relation to the issues in the proceedings: Santos Ltd v Pipelines Authority (SA) (1996) 66 SASR 38 at 52. A subpoena may be set aside if it requires the production of documents which do not have apparent relevance to the issues arising on the pleadings: Trade Practice Commission v Arnotts Ltd (No 2) (1989) 21 FCR 306; 88 ALR 90; Campaign Master (UK) Ltd v Forty Two International Pty Ltd (No 4) (2010) 269 ALR 76; [2010] FCA 398 at [39]-[40]; McHugh v Australian Jockey Club Ltd (No 2) [2011] FCA 724 at [13]; McIlwain v Ramsey Food Packaging Pty Ltd (2005) 221 ALR 785;[2005] FCA 1233 at [35]; Dorajay Pty Ltd v Aristocrat Leisure Ltd [2005] FCA 558 at [17]. Other cases have used different terminology, but with essentially the same effect, for example, by requiring that, viewed realistically, the documents sought have a bearing on an issue which is not unreal, fanciful or speculative (R v Barton (1981) 2 NSWLR 414 at 420), or that the material sought is reasonably likely to add in some way to the relevant evidence in the case (Spencer Motors Pty Ltd v LNC Industries Ltd (1982) 2 NSWLR 921 at 927), or that it be "on the cards" that the documents sought will materially assist the party at whose request the subpoena has been issued: Allister v R (1984) 154 CLR 404 at 414; 51 ALR 480 at 481; Tamawood Ltd v Habitare Developments Pty Ltd [2009] FCA 364 at [13] and [35]-[38]. 9 In Seven Network (Operations) Ltd v Fairfax Media Publications Pty Ltd [2023] FCAFC 185, Wheelahan, Anderson and Jackman JJ referred to that passage, and then added (at [37]): There is an ambiguity in that passage as to whether the words towards the beginning of the last sentence "essentially the same effect" are intended to mean that the three sets of terminology in the last sentence are all to the same effect, or whether those examples of terminology are to the same effect as the earlier concepts referred to, namely "a legitimate forensic purpose" and "apparent relevance". In our view, the latter interpretation is to be preferred. There is clearly a material difference between saying, on the one hand, that the documents sought have a bearing on an issue which is not unreal, fanciful or speculative or that the material sought is reasonably likely to add in some way to the relevant evidence in the case, and, on the other hand, that the documents sought will materially assist the party at whose request the subpoena has been issued. The first two of those expressions do not require that the documents sought will materially assist the party requesting that the subpoena be issued, and are neutral on that question. In our view, the passage indicates that the fundamental principle is that the party issuing a subpoena must demonstrate that the subpoena has a legitimate forensic purpose, and that it may be set aside if it is cast in terms which require the production of documents which do not have apparent relevance to the issues in the case. (emphasis added) 10 Their Honours then referred, with approval, to the reasoning of the Court of Appeal of the Supreme Court of New South Wales in Secretary of the Department of Planning, Industry and Environment v Blacktown City Council [2021] NSWCA 145. At [38], their Honours stated: That principle is consistent with the reasoning of the NSW Court of Appeal in Secretary of the Department of Planning, Industry and Environment v Blacktown City Council, which provides authority for the following propositions: (a) the language of "tests" should be eschewed; whether a subpoena should be set aside depends on whether it involves an abuse of process, and it will be an abuse of process if it is not issued for a legitimate forensic purpose: Bell P at [60]-[61], with whom McCallum JA agreed at [98]; (b) it is not necessary to show that the documents subpoenaed will or will be likely to assist the case of the party that has issued the subpoena: Bell P at [57]-[58], Brereton JA at [86] and [96], McCallum JA at [98] and [100]; (c) it is sufficient to show that the subpoena can plausibly be seen to relate to an issue or issues in the proceedings or to cast light on such an issue, and the subpoena is not in other respects too vague or oppressive: Bell P at [57], McCallum JA at [98] and [100]; (d) put differently, it is sufficient to show that there is a reasonable basis for supposing that the material called for would likely add, in the end, in some way or another, to the relevant evidence in the case: Brereton JA at [89], with whom McCallum JA agreed at [100]; and (e) it is sufficient to show that the documents sought are apparently relevant in the sense that it can be seen that the documents sought to be produced by way of subpoena will materially assist on an identified issue or that there is a reasonable basis beyond speculation that it is likely that the documents subpoenaed will so assist: Bell P at [65], with whom McCallum JA agreed at [98]. ... 11 It was common ground that the applicants bore the onus of satisfying the Court that leave should be given.

C.1 Significance of the documents sought in the proposed subpoena 12 Rule 34.66 requires that an application for leave to serve a subpoena in New Zealand be accompanied by an affidavit stating briefly and specifically, inter alia, the nature and significance of the documents to be produced. Mr O'Loughlin deposed that the documents sought in the proposed subpoena are significant to this proceeding because they are relevant to: (1) whether payments were in fact made by MCL to PT, and if so when those payments were made; (2) how any such payments were recorded or accounted for by MCL, PT and CCCL; (3) whether MCL had entered into agreements with PT and CCCL as to the "Payments" described in paragraph 1 of the proposed subpoena, or other financial services; and (4) what Mr Kong or MCL communicated with other parties by email in respect of such payments or agreements. 13 Mr Kong challenges directly paragraphs 1, 3, 4 and 5 of the proposed subpoena; and indirectly paragraphs 2 and 6 of the proposed subpoena. The indirect challenge arises from the use of a defined term, "Payments", in paragraph 1 which is carried over into paragraphs 2 and 6.

C.1.1 Paragraph 1 14 Paragraph 1 of the proposed subpoena seeks the following documents: Any bank statements or banking records issued to Mars Cap which record any of the following during the Relevant Period: a. payments from Probis to Mars Cap; b. payments from Mars Cap to Probis; c. payments from Mars Cap to either of PT or CCCL; d. payments from either of PT or CCCL to Mars Cap, (together, the Payments). 15 I am satisfied that documents sought in sub-paragraphs 1(a) and (b) are of sufficient significance to the proceeding because the manner in which the receipt of the Probis to MCL payments was recorded may throw light upon the existence (or non-existence) of a trust relationship, and upon Mr Kong's knowledge of such. However, I am not satisfied that the expression "payments" in these sub-paragraphs should operate upon all payments between Probis and MCL, as the significance of the recording of payments other than the Probis to MCL payments is not apparent. 16 I am satisfied that documents sought in sub-paragraph 1(c) are of sufficient significance to the proceeding because the manner in which the MCL to PT/CCCL payments were recorded by MCL may throw light on whether the funds transferred were subject to a trust in favour of Probis; and more generally as to the nature of the relationship between MCL and PT/CCCL; and upon Mr Kong's knowledge of such. However, I am not satisfied that the expression "payments" in this sub-paragraph should operate upon all payments from MCL to PT/CCCL, as the significance of the recording of payments other than the MCL to PT/CCCL payments is not apparent. 17 I am not satisfied that the documents sought in sub-paragraph 1(d) are of sufficient significance to the proceeding. No such payments have been pleaded or particularised and Mr O'Loughlin's affidavit does not address such payments. 18 The "Relevant Period" is defined generally in the proposed subpoena as meaning "the period from 20 March 2019 until 18 April 2024, inclusive". Counsel for Mr Kong objected generally to the breadth of this time period. For the purposes of paragraph 1, the appropriate time period is informed by the fact that, as noted above, it is common ground that the Probis to MCL payments and the MCL to PT/CCCL payments were all made between 9 April 2020 and 2 May 2023. I see no basis for the "Relevant Period" in so far as it applies to paragraph 1 to commence earlier than 9 April 2020, when it is unlikely that any bank statement or banking record issued to MCL recording any of the relevant payments would have existed prior to the first payment. However, the end date for this period should allow for the existence of such records created after 2 May 2023, but should not extend until 18 April 2024. The end date should, as senior counsel for the applicants acknowledged, be the date on which the proceeding was commenced, namely 13 September 2023. 19 Thus, leave should be granted with respect to sub-paragraphs 1(a) to (c), on the basis that: (1) the "payments" are limited in sub-paragraphs 1(a) and (b) to the Probis to MCL payments and are limited in sub-paragraph 1(c) to the MCL to PT/CCCL payments; and (2) the "Relevant Period" is limited to the period from 9 April 2020 to 13 September 2023. Leave should not be given with respect to sub-paragraph 1(d).

C.1.2 Paragraph 3 20 Paragraph 3 of the proposed subpoena seeks the following documents: Any yearly or half-yearly financial statements, including audited financial statements, of Mars Cap in respect of any part or all of the Relevant Period. 21 I am satisfied that the financial statements may be expected to throw light upon the extent to which MCL held (and did not hold) funds on trust for others including the applicants (and Mr Kong's knowledge thereof) and that this is a matter of significance to this proceeding. 22 Counsel for Mr Kong submitted that this paragraph would require the opening up of MCL's books over the "Relevant Period" and would necessarily involve the disclosure of a wide range of information that does not form part of the subject matter of the dispute. I do not accept this submission as: (1) paragraph 3 calls only for yearly and half-yearly financial statements and these statements should be readily capable of production without disclosure of other books and records of MCL; and (2) although I accept that there are likely to be parts of those financial statements of little to no relevance to the proceeding, that is not a basis upon which to refuse leave when those statements may contain relevant material. 23 For the purposes of this paragraph the expression "Relevant Period" should have the same meaning as for paragraph 1.

C.1.3 Paragraph 4 24 Paragraph 4 of the proposed subpoena seeks the following documents: Any rebate statements issued during the Relevant Period by: a. CCCL to Mars Cap; or b. PT to Mars Cap. 25 I am not satisfied that leave should be given with respect to this paragraph as: (1) Mr O'Loughlin's affidavit did not address the significance of rebate statements issued by CCCL or PT to MCL (save perhaps for the general assertion that these documents are significant because they are relevant to whether MCL had entered into agreements with PT and CCCL as to the payments made by MCL to PT and CCCL or other financial services); (2) the significance of the rebate statements is also not apparent from the pleadings; (3) the Court was not directed to any evidence on this application or in the proceeding generally which addressed the significances of the rebate statements; (4) the high point of the applicants' case concerning this paragraph was bare assertions in correspondence that there is an industry practice pursuant to which CCCL and PT may have issued rebate statements to MCL, indicating the trades that had been placed, the payments that had been received and any rebates on those payments credited to MCL. It was submitted that this may throw light upon the arrangements between MCL on the one hand and CCCL or PT on the other. However, such light is likely to be, at best, indirect; and (5) the arrangements between MCL and CCCL or PT are expressly the subject of paragraph 5, to which I now turn.

C.1.4 Paragraph 5 26 Paragraph 5 of the proposed subpoena seeks the following documents: Any agreements entered into during the Relevant Period between Mars Cap, on the one hand, and CCCL or PT, on the other, in relation to any of the following: a. the Payments; b. financial services; c. liquidity provider services; d. the provision of, or repayment of, loans; e. custodial or trustee services; f. financial products including but not limited to securities, foreign exchange products and contracts for difference (the Agreements). (emphasis in original) 27 As noted above, Mr O'Loughlin deposes that the documents sought by the proposed subpoena (relevantly, I infer, those sought by paragraph 5) are significant because they are relevant to whether MCL had entered into agreements with PT and CCCL as to the "Payments" described in paragraph 1, or as to other financial services. 28 The respondent takes no issue with this paragraph to the extent that: (1) it contains sub-paragraph (a) - subject to the limitations concerning "Payments" discussed above with respect to paragraph 1; (2) it contains sub-paragraph (c); and (3) the "Relevant Period" ends before May 2023. 29 The applicants' evidence and submissions did not seek to justify this paragraph beyond sub paragraphs (a) and (c) and the applicants' senior counsel accepted that the "Relevant Period" should not extend beyond the date on which this proceeding was commenced. 30 I am satisfied that paragraph 5 may result in the production of documents of sufficient significance to this proceeding only to the extent of sub-paragraphs 5(a) and (c). No modification to the wording of the paragraph 1 definition of "Payments" is appropriate in circumstances where the agreements may not be limited to particular payments. That is, sub-paragraph 5(a) should operate upon the definition of "Payments" as it appears in the proposed subpoena. 31 For the purposes of this paragraph, the "Relevant Period" should commence on 20 March 2019 (when MCL was incorporated) and end on 13 September 2023 (when the proceeding was commenced).

C.1.5 Consequential changes to paragraphs 2 and 6 32 As noted above, paragraphs 2 and 6 of the proposed subpoena were not the subject of direct challenge by Mr Kong. However, each of those paragraphs uses the expression "Payments" (as defined in paragraph 1) and the rulings concerning that expression as deployed in paragraph 1 should apply equally to that expression where deployed in paragraphs 2 and 6. 33 The expression "Agreements" which appears in paragraph 6 will be affected by the changes to that expression required by my ruling on paragraph 5.

C.2 The availability of other more efficient and cheaper means of obtaining the documents sought 34 The Court must also consider whether the documents sought by the proposed subpoena could be obtained by other means without significantly greater expense, and with less inconvenience to the person named in the proposed subpoena: s 31(3)(b) of the TPP Act. 35 The evidence in Mr O'Loughlin's affidavit establishes that: (1) an employee of his firm provided to the liquidators of MCL a draft of the proposed subpoena and asked whether the liquidators would produce the documents sought informally; and (2) solicitors acting for the liquidators responded indicating that the liquidators could not produce the information sought without a subpoena requiring them to do so. 36 Thus, a subpoena is necessary and the documents are not able to be obtained in a more efficient or cheaper manner.

D. CONCLUSION 37 For the reasons set out above, leave should be given with respect to parts only of the proposed subpoena. I will make orders requiring the parties to confer with a view to agreeing a form of orders to give effect to these reasons for judgment, including costs. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Goodman.

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