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[2009] VSC 663
procedural. The examination summonses issued on 14 August 2008 were permanently stayed as an abuse of process, and the costs of the application, including reserved costs, were ordered to be paid by Mr Milner.
The court found that the examinations were no longer being pursued mainly to investigate DW Marketing’s affairs. The 21 April 2009 letter tied a demand for payment, including costs and expenses, to whether the directors and accountant would face examinations. The evidence led the judge to find that the process was being used to create pressure and obtain a better settlement offer. The summonses were therefore permanently stayed, and the liquidator was ordered to pay the application costs.
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2,237 words · generated 29/09/2026
Leonard Milner, liquidator of DW Marketing Pty Ltd, applied for examination summonses against the company’s two directors, Jeffrey and Gary Doell, under s 596A of the Corporations Act 2001 (Cth), and against its accountant, Ross Clarke, under s 596B. The summonses were ordered on 18 August 2008. The examinations were due to commence on 8 October 2008, when the court also ordered that documents produced by the examinees be released to the liquidator ([1]–[2]).
2 cited instruments linked from this judgment.
The examinations were later adjourned by consent while settlement discussions took place. On 10 November 2008, the Master ordered that the examinations would lapse if they did not proceed within six months from the date documents were produced ([4]). Eight boxes of documents were handed to the liquidator’s representatives on 20 November 2008. Although the documents were not formally produced to the Court as the summonses required, the judge treated 20 November as the production date for the purposes of the order ([6]).
A central event was a letter dated 21 April 2009 from the liquidator’s solicitors. It rejected an $8,000 settlement offer and asserted that the directors might be liable under ss 588G and 588M for insolvent trading. It demanded $98,959.86, interest, and legal costs and expenses. It also said that the liquidator would proceed with the examinations if the matter did not settle ([10]–[12]). The judge later referred to the letter as dated 24 April at some points, but the evidence described it as the letter of 21 April ([22], [47]).
The examinees applied to stop the examinations, alleging that the examination process was being used to pressure them into paying money. The evidence included the letter, affidavits and cross-examination of the liquidator and his solicitor. The solicitor accepted that the demanded costs and expenses included the legal costs of the liquidation, including costs connected with the winding-up application. The liquidator said that he had not authorised all the letter’s wording before it was sent, but agreed with much of its substance and maintained that the examinations should proceed ([31]–[33]).
The court permanently stayed the summonses as an abuse of process and ordered the liquidator to pay the application costs, including reserved costs ([54]–[55]).
The governing question was not simply whether the liquidator had grounds to investigate the company. It was whether the predominant purpose for resuming the examinations remained one of the purposes for which the statutory examination process exists, or had become an improper purpose.
The judge stated that an abuse occurs when the applicant seeks a purpose foreign to the purpose for which the legislature provided the examination machinery. The party alleging abuse bears the onus, and must establish that the improper purpose was predominant ([42]). The judgment also drew on the principle that court process should not be used to impose collateral financial or other harm ([46], discussing Meteyard & Ors v Love & Ors).
The letter was important because it connected payment with the threatened examinations. It demanded not only a figure said to represent creditors’ claims, but also interest and costs and expenses. The solicitor’s evidence was that the latter included the whole legal costs of the liquidation. The judge considered that such costs would not have been recoverable against the directors in the contemplated insolvent-trading proceedings ([35], [47]). The letter also threatened to resume examinations that could involve matters with possible criminal consequences if the demand was not met ([49]).
The cross-examination reinforced the judge’s view of the letter’s purpose. The liquidator’s solicitor described the aim as drawing a higher offer from the directors and accepted that a director reading the letter could understand that payment would avoid the examinations. He also described the approach as not “play[ing] all your cards” in settlement negotiations ([32]). The liquidator accepted that the examinations and the pursuit of payment had been joined in the letter, although he sought to distinguish the wording from what he personally would have written ([31]).
On the whole evidence, the judge found the letter could not be interpreted as anything other than a threat to cause expense and inconvenience if the demand was not met. The examinations were then resumed, so the threatened consequence was not merely theoretical ([47]). The judge concluded that the predominant purpose was to use the examination procedure as a “negotiating tool” ([48]). That finding satisfied the examinees’ burden.
The judge also considered the scale of the external debt and the likely cost of examinations. The external creditors were said to be owed about $45,000, with Action Realty the major external creditor. The court found it difficult to justify the cost of the examinations by reference to the likely benefit of deciding whether to pursue an insolvent-trading claim, while acknowledging the public-interest dimension of examinations ([50]). The outcome, however, rested on the finding of improper predominant purpose, not merely on the amount in dispute or the cost-benefit comparison.
The judgment did not purport to create a new statutory test. It applied established principles about the purpose of examination procedures and the court’s ability to prevent abuse. At [42], the court stated that an examination is abusive where the applicant seeks a purpose foreign to the purpose for which the legislature provided the procedure. It also adopted the requirement that the alleged improper purpose must be predominant.
The judgment discussed several examples of the boundary between legitimate examination and abuse. In Re Excel Finance Corp Ltd; Worthley v England, the Full Court of the Federal Court had said that whether the process is abused depends on purpose rather than result, and that an examination’s usefulness as preparation for later cross-examination does not, by itself, establish abuse ([43]). In Re Qintex Group Management Services Pty Ltd, the Queensland Court of Appeal had recognised that examinations could become oppressive if their real purpose were to exert pressure through cost, inconvenience or embarrassment ([44]). The judgment also relied on Meteyard, which distinguished advancing a corporation’s legitimate purposes from using court process to inflict collateral harm ([46]).
The decision’s practical contribution is its application of those principles to a settlement demand that expressly linked payment with examinations. The court emphasised that even examinations properly founded when commenced could “deteriorate[] into an abuse” as the purpose changed ([48]). The judgment therefore treats abuse as capable of arising during the life of a process, rather than only at the time summonses are first issued.
The examination provisions still had legitimate functions. The judge recognised purposes including obtaining information relevant to possible criminal charges and civil claims, assessing whether claims should be brought, and informing the public about the affairs of failed companies ([51]–[52]). The decision did not remove or narrow those functions. Rather, it held that they could not justify using the examination machinery predominantly to put pressure on examinees to pay a demand.
The outcome was procedural and fact-specific: the summonses were stayed because of the purpose established on the evidence. The judgment does not say that a settlement discussion, a demand for payment, third-party funding, or the cost of an examination alone necessarily amounts to abuse.
At [42], the judgment states that abuse occurs where the applicant is pursuing “some purpose foreign to that which the legislature provided the examination machinery”. In plain English, the examination power must be used for its statutory function, not as a pressure device for an unrelated objective. The party alleging abuse must prove that the improper purpose was the main or predominant one.
At [47], the judge found that the letter and cross-examination evidence established that the predominant purpose was improper. The judge considered the demand and the threat of examinations together, rather than treating the letter as an isolated negotiation communication. The demanded costs and expenses mattered because the evidence showed they covered liquidation costs that would not have been recoverable from the directors in the contemplated claim.
At [48], the court described the examination process as being used as a “negotiating tool”. The judgment’s point is not that negotiations may never occur alongside an examination. It is that the examination process cannot predominantly be deployed to create expense and inconvenience to extract a counter-offer. The court also made clear that an initially proper examination may later become abusive if its purpose changes.
At [49], the judge described the effect of the letter as a threat of expense, inconvenience and exposure to questions involving possible criminal liability unless the examinees capitulated to the demand. This passage explains the particular seriousness the court attributed to the linkage between the demanded payment and the examination process.
At [50]–[52], the judgment acknowledged that examinations serve public and liquidation purposes. They can assist liquidators to investigate company affairs, assess possible claims and inform the public. Those observations explain why the court did not treat examinations as merely private litigation discovery. They do not, however, displace the requirement that the procedure be used for its proper purpose.
The decision is relevant where examination summonses are accompanied by communications that connect whether the examination proceeds with payment of a demand. In this case, the court relied on a specific letter demanding a stated amount, interest and costs and expenses, and stating that the examinations would proceed if the matter did not settle ([10]–[12], [46]–[49]).
The case also illustrates the significance of evidence about what the demanded sums include. Here, the solicitor’s evidence was that the claimed costs and expenses included the legal costs of the liquidation, including costs of the winding-up process. The judge considered those sums would not have been recoverable from the directors in the contemplated insolvent-trading proceedings ([32], [35], [47]). A lawyer assessing an analogous situation would likely examine the calculation and legal basis for each component of a demand, as well as how it is linked to the examination process.
The court considered evidence about the decision-makers’ understanding of the letter. The liquidator’s solicitor accepted that an examinee could understand payment as avoiding the examination; the liquidator agreed with much of the letter’s substance, despite disputing aspects of its authorisation ([31]–[33]). This shows why contemporaneous correspondence, instructions, funding arrangements and cross-examination evidence may matter to the predominant-purpose inquiry.
The judgment does not establish that every strongly worded demand, settlement proposal or examination following failed negotiations is abusive. It also does not establish that a creditor’s funding of liquidation work, without more, makes an examination improper. The court considered funding by Action Realty alongside the letter, the evidence about the purpose of seeking a higher offer, and the other circumstances ([53]). The focus remained the purpose for which the examination process was being used.
The judgment text supplied here contains no discussion of later decisions applying or distinguishing Re D W Marketing Pty Ltd. On that material alone, later judicial treatment cannot be stated. The judgment itself relies on earlier authorities, including New Zealand Steel (Australia) Pty Ltd v Burton, Williams v Spautz, Carter v Gartner, Re Excel Finance, Re Qintex, and Meteyard ([42]–[46]).
For research purposes, the decision’s own stated contribution should be kept distinct from any later development. Its holding is that the particular examinations had become abusive because the predominant purpose had shifted to using the process as leverage to obtain payment. The decision records that the summonses were permanently stayed, but supplies no subsequent appeal history or later citations. No claim about whether later courts have followed, limited or questioned it can be made from this judgment alone.
The judgment does not provide a general formula for identifying when robust settlement conduct becomes an improper use of examination powers. It makes a finding based on the combined evidence, including the letter’s terms, the sums demanded, the threatened examinations, and the cross-examination of the liquidator and his solicitor ([46]–[49]). The boundary in other factual settings remains dependent on evidence of purpose.
The court also did not determine the merits of any contemplated insolvent-trading claim. It referred to allegations under ss 588G and 588M in the correspondence and submissions, but the application before it concerned abuse of the examination process, not liability for the company’s debts ([10]–[13], [34]–[40]). Nor did the court decide the legal basis for every component of the demand as a separate claim. Its point was that the demand included costs and expenses that would not have been recoverable from the directors in the contemplated proceedings.
The judgment notes that examinations had not lapsed under the Master’s order because the resumption occurred within six months of the document production date ([21], [29]). That procedural finding resolved a separate issue, but it did not determine what would happen under differently worded orders or where the date of production or resumption was disputed.
Finally, the court recognised a public-interest purpose in examinations while finding no such purpose had been in the liquidator’s mind in this instance ([50]–[53]). The judgment does not specify how that public interest should be weighed in every case where an examination has both legitimate investigative value and an alleged collateral purpose. Its answer was confined to the evidence before it and the finding that the improper purpose was predominant.
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CORPORATIONS - Examination of directors and other persons associated with company pursuant to section 596A and 596B of the Corporations Act 2001 - Application to set aside summonses by reason of abuse of process of examination procedure - Application granted.
1 On 18 August 2008, Master Efthim, as he then was, on the application of the plaintiff, Leonard Milner, who is the liquidator of DW Marketing Pty Ltd (in liquidation) ("DW Marketing"), ordered that summonses be issued for the examination of Jeffrey Michael Doell and Gary Doell pursuant to section 596A of the Corporations Act 2001 (Cth) ("the Act") and that a summons be issued for the examination of Ross Clarke pursuant to section 596B of the Act. Messrs Doell were directors of DW Marketing and Mr Clarke was its accountant. Master Efthim ordered that the examinations commence on 8 October 2008.
2 On 8 October 2008, Master Efthim ordered that the documents produced to the Court by the examinees be released to Mr Milner. The Master also ordered that the examinations be adjourned to 10 November 2008.
3 In an affidavit of Paul Philipus Jacobus Buitendag sworn 18 June 2009 Mr Buitendag, who is an employed solicitor at Cornwall Stodart, the solicitors for Mr Milner, deposes to the events surrounding the appearance on 8 October 2008. In paragraph 12 he states that at the hearing the Master indicated that the parties should work together to produce all the documents required under the summonses and make attempts at reaching an amicable settlement. Some emphasis was put on this at the hearing but I would take this statement to be nothing more than a parting comment expressed to litigants at the conclusion of a directions or interlocutory hearing. The examination was adjourned to 10 November 2008.
4 Mr Buitendag deposes that, because of discussions which were taking place between the lawyers for Mr Milner and the examinee, it was agreed by consent to adjourn the examination due to be conducted on 10 November 2008 to a date to be fixed. Paragraph 2 of the order of Master Efthim of 10 November 2008 provides:
"Should the examinations not proceed within six months from the date of production of documents, the examination will lapse."
5 I note that the Master did not order, as is often the case in situations where an examination has, at least for the time being, finished, that if the examination was not resumed within six months that it would be deemed to be concluded (as distinct from being regarded as having lapsed).
6 Subsequently, a number of boxes of financial records and information and other material were provided to the liquidator's representatives by Mr Clarke at his offices on 20 November 2008. It is not said why those documents were not produced to the Court and then released to the liquidator's solicitors as the procedure for production of documents under compulsion requires, but for the purposes of the current application I consider 20 November 2008 to be the "date of production of documents" in the context of paragraph 2 of Master Efthim's order of 10 November 2008. The effect of this is that the examinations, if not "resumed" by 20 May 2009, would "lapse".
7 In his affidavit sworn 8 May 2009, Mr Buitendag deposes that settlement negotiations, which had been conducted by the parties over some months, had broken down. Mr Buitendag sought an order that the Court grant the liquidator leave to proceed with the examinations. In my view, the examinations "proceeded" when Cornwall Stodart approached the Court by filing the affidavit material in that regard on 8 May 2009. Although the examinations could, in my view, have properly been resumed by consultation with the court as to an appropriate date and provision of formal written notice to each of the examinees without the necessity of the issue of fresh summonses, the solicitors for the liquidator sought and obtained an order from Associate Justice Efthim for the issue of new summonses on 8 May 2009. The summonses are in very similar form to the 18 August 2008 summonses.
The examinees' application by interlocutory process filed 12 June 2009
8 On 12 June 2009, the examinees made application by interlocutory process seeking a number of grounds of relief. The application was supported by affidavits of Jeffrey Doell and Mr Clarke, both sworn 19 June 2009 and Howard David Bear, sworn 12 June 2009.
9 In his affidavit of 12 June 2009, Mr Bear, who is the solicitor for the examinees, deposes to the events giving rise to the examinees' current application. He states that the examinees met with Mr Milner in the second half of 2007 and handed over what Mr Bear describes as questionnaires which had been completed by the examinees. Mr Bear states that aside from this, Messrs Doell had received no direct communication of any kind from Mr Milner, his staff or his solicitors, save for being served with summonses for their examination returnable on 10 November 2008 and 15 June 2009 and the discussions which occurred at Court on 10 November 2008 concerning the documents sought in the summonses.
10 Mr Bear exhibits a copy of a letter that he received from Cornwall Stodart on 21 April 2009 (the affidavit of Mr Bear incorrectly describes this as the letter of 24 April 2009). The letter was apparently written by Mr Buitendag. The letter commences with the following statement:
"Our client do [sic] not accept the Director's offer of $8,000 in settlement of the claim of $98,959.86, interest on behalf of creditors claims ('the debt') as well as legal and liquidator's fees and expenses. . . .
It seems that the Directors contravened section 588G, read with section 588M of the Act and the Liquidator may recover the debt from the directors personally due to the Directors failure to ensure or prevent the company from incurring and the debt and/or continuing to trade whilst insolvent. . . ."
11 The letter contends that the evidence currently available suggested that the company became insolvent "on or about March 2007". The company was lessee of showroom premises at Fountain Gate shopping Centre at Narre Warren which it subleased to a partnership which was the franchisee of a retail business. The rent was collected from the sub-tenant and remitted to the lessor, Action Realty Australia Pty Ltd ("Action Realty"). In March 2007 the partnership ceased trading and went into an insolvency administration. After this, rent was not remitted by DW Marketing to Action Realty under the lease. It is said that by 7 June 2007, when it was served with Action Realty's statutory demand, the directors were aware that DW Marketing would not meet its debts. Despite this, the company continued to trade until it was wound up on 21 August 2007. The letter accuses the directors of breach of the duties imposed on them under Part 2D.1 of the Act by reason that they had failed to ensure that the company complied with the lease with Action Realty, failed to ensure that the company paid its debts as and when they fell due and failed to keep accurate books and records.
"...We hold firm instructions from the Liquidator to proceed with the examination to investigate the above topics and claim the debt and legal costs and expenses from the Directors should the matter not settle.
The Liquidator will settle upon payment of the debt and legal costs and expenses to be taxed and/or agreed.
Please confirm by close of business 28 April 2009 if your clients is [sic] prepared to settle this matter failing which we will proceed with the examination and thereafter commence with proceedings to recover the debt and legal costs and expenses.
13 Mr Bear deposes that the debts mentioned in the letter were allegedly incurred pursuant to a lease between Action Realty as lessor and the company as lessee by a lease executed on or about 1 December 2004. Mr Bear observes in respect of the threat of an insolvent trading claim that he was not able to understand how rent falling due in 2007 under a lease executed in 2004 could give rise to a liability under sections 588G or 588M of the Act if the lessee did not become insolvent for over two years after the execution of the lease. I assume that this is a reference to the reasoning in Russell Halpern Nominees v Martin (1986) 4 ACLC 393 at 397, which deals with insolvent trading in the context of leases more particularly when the relevant debt is incurred in such circumstances.
14 Mr Bear, in paragraph 15 of his affidavit deposes to two matters that he has been informed of by Mr Clarke. Mr Clarke relates, in a discussion with Mr Buitendag when dealing with inspection of documents, that:
"...[h]is client was an Arab sheik with very long pockets to fund a continuing action against Mr Clarke's client."
15 Mr Bear deposes that on 20 November 2008, Mr Aquilina and Mr Buitendag attended Mr Clarke's office and Mr Clarke handed over eight boxes of documents which came within the description of those sought in the schedule to the summonses for examination. Mr Aquilina and Mr Buitendag then took the documents away. The examinees agree with the statements of Mr Buitendag in this regard but, again, it is not explained why the documents were not produced to the Court as the summonses required.
16 Mr Bear's affidavit culminates in the observation that the solicitors for the liquidator, Cornwall Stodart, were the same solicitors who acted for the applicant creditor who obtained the winding up order against DW Marketing. The winding up application was based on non compliance with a statutory demand by Action Realty of $40,157.48. It appears from other evidence that this is the only external debt of any significance owing by DW Marketing. The statutory demand identifies the debt as rent owing under a sub-lease of showroom premises at Narre-Warren for the period ending 1 May 2007. I note that the 21 April letter contends that on the evidence available DW Marketing became insolvent some two months before, in March 2007.
17 On 18 June 2009, Mr Buitendag and Mr Milner swore affidavits in opposition to the examinees' application by interlocutory process. Mr Buitendag deposes that in mid to late February, he spoke with Mr Bear who indicated that his clients were prepared to settle "our client's claim" for $8,000. This was rejected. He states in paragraph 24:
"Having considered the settlement offer proposed by the examinees, the Liquidator's instructions were confirmed in our letter to Mahonys dated 21 April 2009."
18 I have extracted what I consider to be the significant segments of that letter above.
19 In this affidavit, Mr Buitendag does not further address the context or the contents of the 21 April 2009 letter. He refers to service of the fresh summonses. Mr Clarke was served on 5 June 2009 as was Gary Doell. Jeffrey Doell was served on 7 June 2009 and affidavits of service have been filed in this regard. The summonses were returnable on 15 June 2009.
20 Mr Barber, counsel for the examinees, sought to criticise the circumstances of the timing of service, submitting that it was calculated to cause inconvenience to the examinees. Rule 11.4 of the Supreme Court (Corporations) Rules 2003 ("the rules") provides that an examination summons must be served at least eight days before the date fixed for the examination. While Jeffrey Doell's summons was served after the rules require, I do not consider that there is any evidence to support Mr Barber's proposition. In any event, because of the interlocutory application which has ensued and the period taken to hear it because of the availability of Court time and counsel, any prejudice or inconvenience has been overtaken.
21 As I have observed above, production of the documents, although not being formally to the Court as the summonses issued under sections 596A and 596B of the Act require, was occurring as late as 20 November 2008. On a practical interpretation of Master Efthim's orders, the process of resumption of the examinations took place by the approach to the Court, the filing of the affidavit of Mr Buitendag and the orders made to resume the examination on 8 May 2009, i.e. before the examinations would be deemed to have lapsed twelve days later.
22 In paragraph 49 of his affidavit, Mr Buitendag objects to the exhibition by Mr Bear of the 21 April 2009 letter. I reject this. The letter which is a central focus of the present application could not in my view be regarded as without prejudice; its terms contains no offer to settle, rather require complete capitulation to the liquidator's demands.
23 Further in the affidavit, Mr Buitendag denies that he said that one of the creditors is an Arab sheik but he does admit to saying that "one such creditor had the financial backing of an Arab sheik".
24 Mr Milner also swore an affidavit on 18 June 2009. In paragraph 10, he states that:
"The 21 April 2009 letter cannot be considered an abuse of process, but rather, it is in line with my obligations as a liquidator as described in this, my affidavit."
25 I shall return to the evidence of Mr Milner and Mr Buitendag below when I come to consider the cross-examination conducted of them on behalf of the examinees.
26 The examinees filed several affidavits in reply to the liquidator's affidavits. Each of the examinees swore an affidavit on 19 June 2009 as did Mr Bear but I do not consider that they are of central relevance to the issue which has ultimately required my consideration.
27 In an affidavit of Lisa Danielle Rees sworn 19 June 2009, Ms Rees exhibits a letter received by Gary Doell from Cornwall Stodart on 9 May 2007. That letter notes that Cornwall Stodart acts on behalf of Action Realty and demands payment of the amount which was ultimately the subject of the statutory demand, $40,157.48. The final paragraph of that letter states:
"In the event that the tenant is placed in liquidation, our client instructs us that it is prepared to either fund the liquidator to bring an insolvent trading claim against the directors or, alternatively, will institute its own insolvent trading claim against the directors."
28 On 15 June 2009, the summonses for examination and the examinees' interlocutory process which had been filed on 12 June 2009 were returnable before the Court. I gave directions for the filing and service of affidavit material and written submissions and adjourned the hearing of the interlocutory process and the summonses for examination to 23 June 2009. During the period of the adjournment, the affidavit material described above was filed and served. Mr Milner and Mr Buitendag were both given notices to attend for cross-examination.
29 When the hearing of this matter resumed on 23 June 2009, Mr Barber sought to file an amended interlocutory process and no objection was taken to that course. There was discussion about whether the examinations had lapsed by reason of the effluxion of six months from the date of production of documents. As I have indicated above, I consider that, as late as 20 November 2008, documents were still being produced by the examinees, albeit informally, and I consider that the resumption of the examination by the approach to the Court on 10 May 2009 was within time.
30 Dr Trichardt, counsel for Mr Milner did not press the contention that the interlocutory process filed on 12 June 2009 was out of time by application of rule 11.5 of the rules, which requires that any application to set aside the summonses be made within three days after being served with the summonses. Dr Trichardt formally withdrew the 5 June 2009 summonses and contended that the examinations were constituted by the resumption of the August 2008 summonses. Because of the unavailability of Mr Buitendag and Mr Milner for cross examination, the hearing was adjourned.
31 On 23 July 2009, the matter returned to Court. The liquidator and Mr Buitendag were cross-examined on their affidavits. Mr Barber cross-examined Mr Milner on the 21 April 2009 letter. In cross-examination, his evidence was as follows:
(i) he did not read the letter before it was sent;
(ii) he had read the letter before he swore his affidavit of 18 June 2009;
(iii) asked as to the figure of $98,959.86 mentioned in the letter and as to whether it was the total of the debts in the administration, he replied, "No, I think it's inaccurate. They total around $100,000 but that does not include costs. And of that $100,000 about $40,000 represents a debt due to an associated company";
(iv) the real total of the external creditors would probably be in the order of $45,000;
(v) as to the reference in the letter to section 590 of the Act and whether he understood a breach of that section was a criminal offence, he agreed;
(vi) when asked whether Part 2D.1 of the Act [the provisions which deal with insolvent trading] include not only civil penalty provisions but also criminal provisions, he stated that he was not aware of that but accepted this to be the case.
(vii) when asked about the letter, his evidence was as follows:
"HIS HONOUR: It is a letter from your solicitors?...Well, I understand that but I did not read it or authorise it before it left on 21 April. It's a matter of their opinion, not mine.
HIS HONOUR: Did you not provide the instructions for the preparation of that letter?...Well, I didn't give the instructions to waffle on and give two pages of opinion about the Corporations Law, and I don't understand why you are cross-examining me about that.
HIS HONOUR: Because it is a letter from your solicitors and counsel is entitled to ask you questions about it because there is an underlying presumption that you authorised what is contained within the letter. But you say that is not the case?...With the greatest respect, your Honour, I didn't authorise the opinions expressed in this letter. Even though I may agree with most of them. And it strikes me as farcical that I am sitting here answering questions about something . . .
HIS HONOUR: Well, perhaps I will decide whether it is farcical or not?...Well, okay, well . . .
HIS HONOUR: I remind you that you are an officer of the Court and to respect this process?...I do respect this process absolutely.
HIS HONOUR: Your demeanour is not suggestive of that?...Well, that's my demeanour.
HIS HONOUR: Listen to the questions very carefully and answer them?... I will."
(viii) when questioned as to paragraph 10 of his affidavit, which is extracted above, whereby he states that the letter cannot be considered an abuse of process:
"Do you still hold to that view expressed in paragraph 10, Mr Milner?...Absolutely.
So although you may not have authorised the letter before it was sent, you have ratified it since?...No, my only point in relation to the letter is that the fact that it's expressing opinions. That's the only point I am trying to make. If someone was asking me to write such a letter, I may well express it somewhat different, that's my only point about that letter. But in terms of most of what it says, I do agree with its contents
And, Mr Milner, further down the second page of the letter, do you see after the bullet points it says:
'We hold firm instructions from the liquidator to proceed with the examination to investigate the above topics and claim the debt and legal costs and expenses from the director should not matter not settle.'
...The first half of that sentence is absolutely correct. The second half is not authorised by me."
(ix) Mr Milner states that he thought that the letter was written as a negotiating tactic and that is the way it should have been viewed.
(x) Mr Milner sought to distance himself from the notion of entitlement to claim the debt, legal costs and expenses, saying:
"I think because the conjoining of the examination with proceeding further with action to collect the debt is not appropriate."
(xi) Mr Milner, in response to a question as to whether the affidavit expresses an opinion about the letter, replies:
"Yes, it does. And the substance of the letter I entirely agree with. Most of what is said in that letter was absolutely accurate. But the conjoining of those two issues is not the way I would have worded it. Clearly the way to settle this matter would have been to make an offer of settlement, which would be dealt with in the normal way.
The amount of $98,959.86 plus interest plus legal costs and expenses had been paid at the time of this letter, would that have enabled you to pay creditors a 100 per cent dividend in the dollar?
Presumably, if the internal creditors stood aside, that's a possibility.
Well, where does the claim at $98,959.86 come from if it doesn't include the internal creditor?...I don't know. As I said to you, I didn't do the arithmetic and that figure is incorrect. But I can also assure you had they offered $98,000 it would have been accepted.
Do you know whether Cornwall Stodart's bills are paid by you or are they paid direct by Action Realty?...They have been paid direct by Action Realty, as I understand it. And these are bills for legal expenses.
32 Mr Buitendag was cross-examined on his affidavit. In cross-examination, he stated as follows:
"It sounded a bit low, we should try and write a strongly-worded letter to enforce payment of all creditors' claims. I also had a discussion with Mr Nehme and mentioned the offer to him as well, seeing that he was funding the litigation." [Mr Nehme is a representative of Action Realty].
"We hold firm instructions from the liquidator to proceed with the examination to investigate the above topics and claim the debt and legal costs and expenses from the director should the matter not settle."
He stated that by reason of his discussions with Mr Aquilina, he had those instructions.
"Well, you don't play all your cards if you want to settle."
33 Mr Buitendag did not seek to retreat from the terms of his letter and indicated that he considered he had instructions to write it on behalf of the liquidator. He appeared to take the view that it was part of a legitimate bargaining process to threaten the resumption of the examinations unless the amount of $98,959.86 with interest and legal costs and expenses were paid.
34 On 27 October 2009 the hearing continued. The examinees sought an order that they have liberty to inspect the affidavits filed in support of the application for the issue of the summonses filed on 14 August 2008 and 5 June 2009. After obtaining instructions, Dr Trichardt, consented to that application. Accordingly, I ordered pursuant to rule 11.3.07 of the rules that the affidavits of Mr Milner, sworn 11 August 2008 and Mr Buitendag, sworn 8 May 2009, be made available for inspection by counsel for the examinees. Thus, the balance of the relief sought in the application became one for a stay of the summonses directed against the examinees by reason that they were an abuse of process.
35 Mr Barber submitted that on the evidence the external creditors are owed a sum in the order of $45,000 and that the conduct of the examinations could not, having regard to the cost of holding them, be justified on any commercial basis. In his oral submissions, Mr Barber emphasised that the abuse of the examination process was exposed by the letter of 21 April 2009. That letter made a demand for $98,000 plus interest plus costs and expenses. Mr Buitendag had stated as observed above that such costs were the costs of the whole administration. These costs could never have been recovered from the directors under any insolvent trading proceedings as they were not "debts" incurred by the company prior to the winding up order yet the threat was made that the examinations would proceed if the demand was not met. The demands were not met and the examinations have indeed proceeded.
36 Mr Barber submitted that the conduct sought to be impeached amounted to extortion. He stated that the letter alleged criminal conduct, threatened to investigate it and demanded payment of an amount that no one has since been able to justify, as well as costs and expenses. Those costs were not occasioned by the alleged breach, could not be a liability visited on the directors and could not be recovered in any subsequent action. In addition, there was a threat to examine the directors in respect of possible criminal conduct if the demand was not met. He described the liquidator's attitude as betraying animosity to the directors and reminded the Court that Mr Milner twice described the process actuated by the interlocutory process as "farcical".
37 In his written outline of submissions dated 22 June 2009, Mr Barber outlined several communications between the liquidator's representatives and the examinees with a view to extracting payment from them. They consisted of a telephone conversation in October 2008 between Mr Buitendag and Mr Clarke (where reference was made to the Arab sheik), the meeting on 20 November 2008 in which a settlement offer was invited, a telephone conversation on 15 December 2008 between Mr Buitendag and Mr Clarke in which Mr Buitendag said that Mr Clarke's clients should make an offer because the matter had "become a nuisance" and, finally, the letter of 21 April 2009.
(a) makes an allegation of breach of section 590 of the Act by the directors. This section deals with general delinquency on the part of officers or employees of a company which was in liquidation and is an absolute liability offence.
(b) makes allegations of breach of section 588G of the Act by the directors (which provision deals with insolvent trading) without specifying the debts in question except to say that they arose under a lease with Action Realty. Mr Barber submitted that that lease was entered into years before it is suggested that the company became insolvent.
(c) makes unspecified allegations of breaches of directors' duties, including the duties imposed under Part 2D.1 of the Act.
(d) the letter states that:
"The liquidator will settle upon payment of the debt and legal costs and expenses to be taxed and/or agreed."
"We will proceed with the examination and thereafter commence with proceedings to recover the debt and legal costs and expenses."
39 Mr Barber submitted that the letter demonstrates that the liquidator's predominant purpose in pursuing the examinations was to extract a payment from the directors by causing them nuisance, inconvenience and legal costs and that the failure to meet such demand would expose the directors to examination about possible criminal matters.
40 Mr Barber says that this is an improper purpose by reason that:
(a) the demand is based on a claim for debts alleged to arise under a lease that was entered into some years before the company became insolvent and, as such, are not recoverable under section 588G (see Russell Halpern Nominees v Martin (1986) 4 ACLC 939);
(b) the demand includes a claim for payment of the liquidator's fees and legal costs that are not occasioned by the alleged breach of section 588G of the Act; and
(c) causing the directors nuisance, inconvenience and legal costs in an attempt to persuade them to pay money which is not a purpose within the scope and intent of sections 596A and 596B of the Act.
41 Dr Trichardt submitted that the 21 April 2009 should be read as a whole, that the liquidator, in resuming the examinations, was merely carrying out his duties and that the letter should not be interpreted as a threat.
42 An abuse of process of the examination provisions will occur where the applicant for the examination summons is seeking to achieve some purpose foreign to that which the legislature provided the examination machinery: New Zealand Steel (Australia)Pty Ltd v Burton.[1] The onus of satisfying the Court that there is an abuse of process is on the party alleging it and that party must establish that the improper purpose is the predominant one: Williams v Spautz .[2]
43. In Carter v Gartner [2003] FCA 653; 130 FCR 99, Branson J dealt with an application that the issue of an examination summons was an abuse of process, given that the applicants were represented by the same solicitors as had acted for a mortgagee bank and that the examination might be expected to become a fishing expedition. At paragraph 27 of the judgment, Branson J observed:
_"It is important to note that the fact that the Court must issue a summons under s596A if the criteria for issue are satisfied does not mean that a person against whom a summons is issued has no remedy if the predominant purpose of the applicant is an improper purpose. Australian superior courts have jurisdiction, ordinarily described as inherent jurisdiction but in the case of this Court better described as implied jurisdiction, to stay proceedings which are an abuse of process (_Williams v Spautz _[1992] HCA 34; (1992) 174 CLR 509 per Mason CJ, Dawson, Toohey and McHugh JJ at 518). This jurisdiction may be invoked in an appropriate case to stay an examination pursuant to a summons issued under s596A (_Re Bosun Pty Ltd (in liq); Makris v Sheahan at [9]; Hill v Smithfield Service Centre Pty Ltd (in liq) at [52])."
43 In Re Excel Finance Corp Ltd; Worthley v England,[3] the Full Court of the Federal Court (Gummow, Hill and Cooper JJ) stated at 91:
"Whether there will be, in a particular case, a use of the process or an abuse of it will depend upon purpose rather than result. The consequence of an examination may well be that the examiner has conducted a ``dress rehearsal'' of cross-examination which may take place in a subsequent trial."
"For all that, there may be some cases in which it can be seen that liquidators are acting improperly in seeking to examine someone under the provisions of the Corporations Law_. Examinations under the statute are capable of being or becoming oppressive if their real purpose is simply to exert pressure by inflicting costs, or causing undue inconvenience or embarrassment to the defendant. There may also be other ways in which they can operate harshly. Conducting a dress-rehearsal of cross- examination may conceivably be another instance, although in practice it probably serves mainly to alert a witness to the questions he may expect to be asked at trial and so enable him to anticipate them."_
46. The decision of the Court of Appeal of the Supreme Court of New South Wales (Beasley, Santow and Basten JJA) in Meteyard & Ors v Love & Ors [2005] NSWCA 444; (2005) 56 ACSR 487 was one in which the alleged abuse was that the liquidator was obtaining an unfair advantage in litigation. At paragraph 45, the Court stated:
"This statement of principle may be accepted, but it runs together two separate considerations. The last category of examples, namely, causing inconvenience or embarrassment or inflicting costs, might be described as an abuse of the process of the court. Whatever the cause of action or statutory basis for the proceedings, use of the court's processes to inflict financial or other collateral harm will always be improper: see Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509. . .
The other examples given may be understood as seeking to advance the legitimate purposes of the corporation, but not as obtaining information about its examinable affairs. Such proceedings would be improper because the purpose is foreign to the statutory purpose for which the power was conferred. . .
That is not to say that an examination may be undertaken in a manner which is vexatious, oppressive or abusive. As Hayne J noted in an earlier passage (at 614) . . . 'Vexation or oppression will not be tolerated no matter when the examination is held.'"
45 The observations of Spender J in In the matter of Cousins and ors. trading as Active Construction Services; Cousins and others trading as Active Constuctions v Clout BC 9806176 are apposite to this case. That matter involved an application to set aside summonses under section 81 of the Bankruptcy Act 1966. Spender J stated at pp7-8:
"In my opinion there is a very significant disparity between the utility of the orders issued to the four persons that I have indicated and the results that would be likely to be achieved by their public examination on the one hand , and the cost and inconvenience to them and the Clough Group on the other. Such an examination is likely to be time consuming and costly, and those costs would not be recoverable in the action. I am of the view that the examinations have been sought to bring commercial pressure to bear on Clough engineering to come up with a higher offer than what they have been prepared thus far to make.
46 I do not regard the communications prior to the 21 April letter as being particularly remarkable in the context of robust negotiations but the letter of 21 April 2009 is in my view another matter altogether. The issue for consideration is whether the letter of 21 April 2009, by making a demand for payment of a specified sum together with interest, costs and expenses coupled with the threat that if such demand was not met, the examinations would be resumed and the directors would be examined about various matters including those going to possible criminal liability, is an abuse of the process of the examinations provisions. It seems clear that the letter was written with the authority of the liquidator. While Mr Milner expressed discontent with some aspects of the letter, he agreed with its substance. It was written by his solicitors with the approval of his manager.
47 In my view, the letter could not be interpreted as anything other than a threat to use the examinations provisions to cause, at the very least, expense and inconvenience to the examinees if the demand was not met. Indeed, the threat was carried out as the examinations were resumed. The demand was for sums which would never have been recoverable against the directors for such matters as the liquidator's legal costs of the liquidation and "expenses". I am satisfied that the examinees have discharged the onus upon them to establish that the predominant purpose of resuming the examinations as betrayed by the 24 April 2009 letter and the evidence given by Messrs Milner and Buitendag in cross examination. That purpose was an improper one which amounted to an abuse of process.
48 The examination provisions of the Act afford considerable privileges and advantages to liquidators and the Court should, in my view, closely supervise their conduct. That, presumably, is the very reason that they are conducted before a court. The process involves considerable judicial resources. Aside from the terms of the 24 April letter, the indignant demeanour of Mr Milner and the attitude of Mr Buitendag in the witness box revealed no great reservations about threatening a resumption of the examinations in order to extract a counter offer from the directors; I consider that that the predominant purpose for the resumption of the examinations was to use the process as a "negotiating tool" and, as such, it was being abused. However properly founded when they were commenced in August 2008, the examinations deteriorated into an abuse of the examination provisions.
49 A survey of the cases dealing with abuse of process in the context of examinations reveals that the principal mischief being considered is that of unfair advantage being afforded in current or proposed litigation. In my view, the letter of 21 April 2009 and the evidence of Messrs Buitendag and Milner in cross examination exposes a more serious abuse. The effect of it is to threaten expense, inconvenience and exposure to questions involving possible criminal liability unless there is complete capitulation to the demand.
50 Another factor which I have considered in determining this matter is what might be regarded as the relatively small sum owing to DW Marketing's biggest external creditor Action Realty. If one considers the cost of proceeding with the examinations with the benefit which is likely to ensue to the liquidator in determining whether or not to proceed with the insolvent trading claim, in my view it is hard to justify such expense. The quantum of the claim is in the mid range of the jurisdiction of the Magistrates Court. I recognise that there is a strong public interest element in conducting examinations. In Rolls Razor Limited[6] Buckley J stated in regard to the English equivalent of ss 596A and 596B:
The powers conferred by s.268 of the Company's Act 1948 are powers directed to enabling the Court to help a liquidator to discover the truth of the circumstances connected with the affairs of the company, information of trading, dealings and so forth, in order that the liquidator may be able, as effectively as possible, and, I think, with as little expense as possible, to complete his function as liquidator, to put the affairs of the company in order and to carry out the liquidation in all its various aspects including, of course, the getting in of any assets of the company available in the liquidation."
51 In Hamilton v Odes,[7] it was considered that the specific purposes of conducting examinations are, first, the provisions are designed to enable the liquidator to obtain evidence and information to support the possible initiation of criminal charges against people who were involved with or dealt with the company; secondly, to enable the liquidator and others to ascertain whether any substantial civil claims can or should be mounted against such people, whether the proposed defendants will be able to meet any judgment obtained, or whether defences against such proceedings brought against the company can be invoked; the third purpose is that the provisions permitting examinations exist to inform the public of the affairs of failed companies.
52 In Corporate Affairs Commission (NSW) v Lombards International Pty Limited (No. 4),[8] Young J said that:
The ultimate purpose of such examinations is to inform the public about the affairs of the company and, in this way, a public examination under the Corporations Act 2001 serves the same function as the reports that are public upon completion of a special investigation."[9]
53 I do not consider that in this instance the liquidator and had in mind as a purpose for the resumption of the examinations a public interest consideration. The evidence reveals that the major external creditor Action Realty Pty Ltd was funding the legal costs of the exercise and the liquidator and his solicitors were deferring to its views when considering what step to take next. The solicitors for the liquidator, when acting for Action Realty prior to the winding up order were already expressing an intention to bring insolvent trading proceedings in their letter of 9 May 2007.
54 I will make orders that the summonses filed 14 August 2008 directed to Gary Doell, Jeffrey Michael Doell and Ross Simon Clarke be permanently stayed as an abuse of the process of the Court.
55 The costs of this application, including reserved costs, are to be paid by Mr Milner.
[3] (1994) 52 FCR 69 at 91.
[6] (1968) 3 All English Reports, 698 at 700.
[9] See generally McPherson's Law of Company Liquidation, Vol 1 at para 15.570.
(1992) 174 CLR 509
(1994) 52 FCR 69
(1989) 166 CLR 486
The examination summonses issued on 14 August 2008 were permanently stayed as an abuse of process, and the costs of the application, including reserved costs, were ordered to be paid by Mr Milner.