Sent and Ors v Andrews [2002] VSCA 209

7. Bufalo Corporation Pty. Ltd. ("the company") carried on business as a builder and developer of dwelling houses and aged care facilities. The sole directors and shareholders of the company were Giovanni and Giuseppe Bufalo. Their father, Antonio Bufalo, participated in the management of the company.

10. Primelife Corporation Limited ("Primelife") carried on business as a developer

and operator of aged care facilities including retirement villages and special accommodation houses. The first-named appellant ("Sent") and the second-named appellant ("De Luca") were directors of Primelife. The third-named appellant ("Porter") was the secretary of Primelife.

14. In 1997 the company commenced to perform building work for Primelife and entered into arrangements with Primelife for the development and operation of aged care facilities. In mid-1999 the company and Primelife fell out and disputes arose as to the nature and terms of the transactions into which they had entered. The company contended that the parties entered into a joint venture agreement constituted by conversations between Antonio Bufalo and Sent. According to Bufalo, it was agreed that Primelife would finance the acquisition and development of sites as aged care facilities, the company would construct the facilities, and both parties would share equally in the ownership of the completed projects and the profits derived from conducting the businesses in the facilities. Bufalo says that a number of projects were undertaken pursuant to the agreement.

17. In May 1999 the company and Antonio, Giovanni and Giuseppe Bufalo commenced proceedings in the Supreme Court against Primelife, alleging that Primelife was in breach of the terms of the oral joint venture agreement. By its defence Primelife denied that any oral agreement such as the company alleged was made and contended that the relations between the parties were embodied in a number of written agreements made in December 1998, which set out in detail the rights and obligations of Primelife, the company and the Bufalo interests with respect to the acquisition and operation of a retirement home at Sale and a special accommodation house at Malvern. The company and the Bufalos replied that they had been induced to enter into the written agreements made in December 1998 by false representations made on behalf of Primelife that those agreements embodied the terms of the oral joint venture agreement. Primelife counterclaimed for relief pursuant to the written agreements.

20. In the course of the dealings between the company and Primelife, the latter lent the sum of $1,600,000 to Giovanni Bufalo. The repayment of the loan was guaranteed by the company, which granted a fixed and floating debenture over its assets to Primelife to secure all sums owing by the company to Primelife. On 10 August 2000 Primelife appointed a receiver and manager to the assets of the company pursuant to the debenture. The receiver remains in possession of the company's assets.

23. On 27 June 2001 the directors of the company appointed the respondent as administrator of the company. The respondent reported to the creditors of the company that it should be wound up as it was insolvent on a cash-flow basis. On 24 July 2001 the creditors resolved to wind up the company. The respondent was appointed as the liquidator. Antonio Bufalo was made bankrupt on 22 November 2001. A sequestration order has also been made against the estate of Giuseppe Bufalo.

26. The respondent made an ex parte application to the Supreme Court pursuant to the provisions of ss.596A and 596B of the Corporations Act 2001 ("the Act") to summon, inter alia, the appellants for examination as to the company's examinable affairs. On 8 November 2001 a judge of the Court ordered that the summonses sought by the company be issued.

29. The appellants applied under Rule 11.5 of the Corporations Law Rules for an order discharging the summonses and alternatively a direction pursuant to s.596F(1)(a) of the Act that the matters inquired into on their examination not include any issue that was the subject matter of the proceeding brought by the company. Other relief was sought to which it is unnecessary to refer. The application was heard by another judge of the Court and was refused. This appeal has been brought from the refusal of that application.

32. The orders for the examination of the appellants were made under s.596B of the Act, which provides that the Court may summon a person for examination as to a corporation's examinable affairs if the Court is satisfied that the person may be able to give information about those affairs. The examinable affairs of a body corporate include "transactions and dealings ... whether alone or jointly with any other person or persons ... of the body". See ss.9 and 53 of the Act.

35. Orders for the issue of summonses for examinations will be set aside if they are oppressive, unfair or an abuse of the process of the court. Where an examination relates to proposed or current litigation, in general terms the question is "whether the examination is genuinely for the information of the liquidator to aid him in considering whether there is a cause of action upon which he will proceed; and the court will be alive to the possibility of oppression where the application is merely to advance the action, whether actual or proposed."[3] The strength or weakness of the claim of a company in liquidation against a third party concerns the examinable affairs of the company.[4] Gathering information may involve testing and assessing the credibility of the witnesses who provide the information.[5] The liquidator is not entitled, however, to conduct a dress rehearsal of the cross-examination in an action or to seek to damage the opposing party's case by attacking the credibility of that party's witnesses.[6]

38. The appellants contended that in seeking to examine them the respondent was not acting in the interests of the company but was carrying out the objective of the Bufalo interests to set aside the securities held by Primelife. The trial judge disposed of this contention saying:

"I reject the submission that the liquidator's claimed purpose was not his true purpose. I also reject as totally unsubstantiated the submission that in expressing his purpose the liquidator was influenced - meaning, I think, to act unfairly - by persons ultimately funding the liquidator."

42. According to the appellants' counsel, that conclusion was incorrect. They submit that the facts established before the trial judge showed that the respondent's predominant purpose was improper in that he was not simply investigating the strength of the company's case in order to determine whether it was in the company's interests to pursue it. They said that was so either because the respondent was acting at the behest of the Bufalos or because the examinations would operate oppressively.

45. The respondent was appointed as a result of a creditors' voluntary winding up pursuant to s.439C of the Act rather than as a result of a winding up ordered by the Court. Counsel for the appellants relied upon the following statement by Young, C.J. in Eq. in Re Ezishop.net Ltd. (In Liq.)[7]. His Honour said:

"There are a number of decisions, including some of my own, which say that one must be very careful to distinguish between situations where a listed public company is the subject of investigation where there is a very great public interest, and cases where smaller concerns have gone into liquidation where there is not quite the same public interest. Furthermore, one must distinguish between a situation where there is a fully independent liquidator who is acting as an officer of the court and a situation where there is a voluntary liquidator who is not an officer of the court and accordingly is not subject to the directions of the court as to the way he goes about his business ..."

49. This statement should be read together with the following passage in his Honour's reasons, where he said:

"However, a clear message appears from comparing the decision of Santow, J. at first instance in Vagrand Pty. Ltd. v. Permanent Trustee Australia Ltd. (In Liq.) (1995) 17 A.C.S.R. 386 and the way in which the views of Santow, J., who echoed many of the sentiments I have just adverted to, were soundly reversed in the Court of Appeal, reported as Sherlock v. Permanent Trustee Australia Ltd. (1996) 22 A.C.S.R. 16. The message is that single judges are to follow the traditional line that the opinions of liquidators who state that they have proper grounds for making inquiries are to be given almost overwhelming weight when deciding whether an examination should be ordered."

For my part I would not proceed upon the basis that a liquidator appointed in a voluntary liquidation to wind up a small company is more likely to misuse his powers than a liquidator of a large public company appointed by a court. All liquidators, whether or not they are officers of the Court, are legally obliged to act honestly and exercise the powers of their office for the purposes for which they are conferred and not for a collateral purpose (s.181 of the Act), and all liquidators are subject to the supervision of the Court (s.536 of the Act.).

54. Counsel for the appellants put forward a number of circumstances from which, they contended, it was to be inferred that the respondent was the cat's paw of the Bufalos. There are no significant unsecured creditors of the company apart from the Bufalos. The respondent's counsel conceded as much. Accordingly, the proceedings brought by the company can effectively avail only the Bufalos. All the assets of the company are held by the receiver and are insufficient to satisfy the debts due to Primelife. Persons associated with the Bufalos played prominent roles at the meeting of creditors which resolved to wind up the company. Although the respondent will not divulge the source of the funds he is employing in pursuing the examinees, there is evidence that part, if not the whole, of the funds sustaining the respondent was contributed by Antonio Bufalo and his son-in-law. One of the respondent's staff has assisted members of the Bufalo family to defend actions for possession of property brought by the receiver appointed by Primelife. The respondent at a meeting of creditors appeared somewhat hostile to Primelife and the receiver.

57. In order to establish the foregoing circumstances, the appellants relied in part upon evidence of the respondent's conduct at a meeting of creditors of the company, held after the making of the decision from which this appeal is brought, together with a large number of documents, which were not before the judge below, some dealing with matters resulting from the creditors' meeting and others revealed by an inspection by the appellants' solicitor of the records kept by the respondent pursuant to the provisions of s.531 of the Act. This Court has power under Rule 64.15(3) to receive the further evidence. As the appeal has not been brought after a trial on the merits[8] and the evidence concerns events that have occurred since the decision below or has come to light since that decision, I would receive the evidence.

60. Even with the benefit of the new evidence, I am not minded to draw from the matters advanced by the appellants the inference that the respondent has no interest as liquidator in the examination of the appellants. In my opinion, the trial judge was correct in dismissing the contention that the respondent, in seeking to examine the appellants, was simply carrying out the wishes of the Bufalos.

63. The liquidator's duty is to get in the company's assets in order to pay its creditors. The duty remains the same even if the Bufalos are the only unsecured creditors. The facts that the creditors are small in number and appear to be funding the respondent do not themselves lead to the conclusion that the respondent is acting for an ulterior purpose and not bona fide for the benefit of the creditors as creditors. The improper purpose which could lead to the discharge of the summonses is that of the respondent, not those who may be financing him.[9] A liquidator may properly examine witnesses for the purpose of determining a company's prospects of success in existing proceedings, and the propriety of his actions is not affected by the motives of those who support him and stand to benefit from the proceedings. In the present case, the circumstances relied upon by the appellants disclose a keen interest and material support on the part of the Bufalos in and for the respondent's efforts to examine the appellants, an interest and support apparently due to the material benefit they would derive from the litigation if it were successful. I do not, however, regard those circumstances as disclosing that the respondent is under the control of the Bufalos. The documents which were inspected pursuant to s.531 of the Act indicate that the respondent appears inclined to take a favourable view of the position of the Bufalos where that is at odds with the position of Primelife. In my view the respondent's stance is no more than a natural reaction to the adversarial position in which he has been placed by the litigation and his regard for the interests of unsecured creditors and contributories.

66. The fact that litigation has commenced has been said to be a circumstance requiring greater caution before an examination is ordered.[10] That is generally because the fact that litigation has commenced means that the liquidator has decided to sue and is not seeking information to enable him to make that decision. In the present case, the fact that the proceeding was on foot when the examinations were sought does not mean that the respondent had already resolved to sue, for the proceeding was not brought by the respondent. The existence of the proceeding, however, required the exercise of caution in that the examination of potential witnesses might be oppressive and the forensic advantage it conferred on the liquidator invited scrutiny of his purpose in seeking the examinations.

69. There remains the contention that the respondent does not need to examine the appellants in order to determine the company's prospects of success in the action, and the examinations are likely to result in the oppression of the examinees. The trial judge noted the contention. He said:

"Then it was said that the liquidator could assess the merits of the case without a public examination. In other words the public examination process was unnecessary. It is apparently meant that I should conclude that the examinations were sought for an improper purpose."

His Honour did not in terms dispose of the contention, although he did state later in his reasons, referring to the procedures of discovery and interrogation, that "I am not satisfied ... that the liquidator now has, or could have had, sufficient information if he took what I've stated to be proper steps and inquiries." In my view, in reaching that conclusion, his Honour erred.

74. In Grosvenor Hill (Qld) Pty. Ltd. v. Barber[11] the Full Court of the Federal Court said:

"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."[12]

78. The respondent is not in that position. He has a wealth of information as to the company's case. The Bufalos have sworn affidavits in support of the company's claim in the proceeding in which they have set out their version of the events. The liquidator's solicitors have conducted interviews with the Bufalos to obtain outlines of their evidence. The case will turn largely upon whether the Court accepts the oral evidence of Antonio Bufalo or Sent. Primelife's defence discloses that Primelife denies that it entered into an oral joint venture agreement with the company; its position is that the only agreements between the parties were the written agreements executed in December 1998.

81. Accordingly, the respondent needs no further information to mount the company's case, and the battle lines between the parties have been clearly drawn. While the issue is the respondent's purpose and not the result which will ensue from the examination[13], the result may found an inference as to the respondent's purpose.[14] I would infer from the known facts that the principal benefit, which the respondent intends to gain from the examinations, is to conduct a rehearsal of the cross-examination of the appellants so as to be in a better position to meet Primelife's case. Another possible consequence of ascertaining how Primelife's witnesses cope with cross-examination with respect to the conversations alleged by Antonio Bufalo is that the respondent will be better able to evaluate the company's prospects of success in the proceedings. If an order for the examination of a witness under the Act can only be discharged if it is established that the sole purpose of the liquidator is an improper purpose, it cannot be concluded that the summonses in this case should be discharged, for there is more than one inference as to the respondent's purpose to be drawn from the effect which the examinations will have.

84. There are cases in which it has been said that an examination will only be refused if the liquidator's sole purpose is beyond those for which the power has been conferred.[15] In other cases, however, it has been said that it is sufficient if the predominant purpose of the liquidator is improper.[16] In Williams v. Spautz[17] Mason, C.J., Dawson, Toohey and McHugh, JJ. said:

"It has been suggested that the criterion for abuse of process is whether the improper purpose is the sole purpose of the moving party. However, in more recent times it has been said, in our view, correctly, that the predominant purpose is the criterion."

In my opinion, the same test of predominant purpose should be applied in the present case.

89. In my view, the inference to be drawn from the known facts is that the respondent's predominant purpose is to conduct a dress rehearsal of the cross-examination of the appellants in the proceeding. The testimony of Sent and Antonio Bufalo lies at the heart of the proceeding. Having regard to the information as to the company's case that is now in the possession of the respondent, questioning the appellants cannot advance the respondent's knowledge of the proceeding other than

by revealing whether the appellants are convincing in their evidence in answer to the company's case and whether there are any matters which will be relied on by the appellants in the proceeding and which the company can plan to counter. The affidavits sworn in support of the application for the order that the appellants be summoned do not disclose that the respondent cannot obtain sufficient information as to any of the issues in the proceeding from the sources already available to him. The respondent has access to all the information that the company could have obtained. He labours under no disadvantage because he came to the company ignorant of its history. In those circumstances, I am of the opinion that the examinations were sought for a purpose not contemplated by the Act. Although the credibility of the appellants may be a matter which the respondent would wish to weigh in determining whether to prosecute the litigation, in my view that benefit is relatively insignificant when compared with the forensic advantage of a full rehearsal of a vital part of the proceeding.

93. The affidavits relied upon by the judge who ordered the summonses to be issued do not disclose that the respondent desires to examine De Luca or Porter as to any matters apart from the proceedings. The affidavits do reveal that the respondent desires to examine Sent in respect of matters apart from the issues in the proceedings, namely, trading in the shares of Primelife and the nature of two payments made to a company apparently controlled by Sent. Those matters are of relatively minor importance and, in my view, do not affect the conclusion that the respondent's predominant purpose in examining the appellants is to obtain the forensic advantage of a rehearsal of the cross-examination of the principal witnesses for Primelife.

96. For the foregoing reasons I would allow the appeal and make an order discharging the summonses issued for the examination of the appellants.

101. After careful consideration of the material before the Court, including the

confidential affidavits, concerning which I have a similar view to that expressed by Buchanan, J.A. in his judgment, I agree that for the reasons advanced by him this appeal should be allowed and the order proposed by his Honour be made.

[2] It was conceded that, because of the course the proceedings took below, we could have regard to those affidavits.

[3] Re Nalanda Pty. Ltd. (In Liq.) (1983) 1 A.C.L.C. 1000 at 1002 per Derrington, J.

[4] Grosvenor Hill (Qld) Pty. Ltd. v. Barber [1994] FCA 921; (1994) 120 A.L.R. 262 at 265 per Beaumont, Spender and Cooper, JJ.

[5] Re Hugh J. Roberts Pty. Ltd. (In Liq.) [1970] 2 N.S.W.L.R. 582 at 585 per Street, J.

[6] Re Franks; Ex parte Gittins [1892] 1 Q.B. 646 at 648 per Vaughan Williams J.; Re Auto Import Company (Australia) Ltd. (1924) 25 S.R.N.S.W. 52 at 56; Re Qintex Group Management Services Pty. Ltd. (In Liq.) [1997] 2 Qd.R. 91 at 95 per McPherson, J.A., Pincus, J.A. and Derrington, J.; Re Hugh J. Roberts Pty. Ltd. (In Liq.) above at 584 per Street, J.; Re Westmex Ltd. (In Liq.) (1995) 13 A.C.L.C. 1070 at 1085 per Santow, J.; Re Spedley Securities Ltd. (In Liq.) (1990) 2 A.C.S.R. 152 at 154 per Young, J.; Re Rothwells Ltd. (1989) 15 A.C.L.R. 168 at 181 per Nicholson, J.

[7] [2001] NSWSC 458; (2001) 162 F.L.R. 124 at 128.

[8] Martin v. Abbott Australasia Pty. Ltd. [1981] 2 N.S.W.L.R. 430 at 436-7 per Hunt, J.; Christie v. Baker [1996] VicRp 89; [1996] 2 V.R. 582 at 609-10 per Charles, J.A.

[9] Cf. Douglas & Brown v. Furzer (1994) 13 A.C.S.R. 184 at 190 per Malcolm, C.J.

[10] Spedley v. Bank of New Zealand (1990) 3 A.C.S.R. 366 at 372-3 per Cohen, J.; Re Rothwells Ltd. above at 181 per Nicholson, J. In a number of English cases the courts were inclined to refuse to order examinations where litigation had commenced unless the liquidator could show special grounds. See Re Bletchley Boat Co. Ltd. (In Liq.) [1974] 1 W.L.R. 630; Re Castle New Homes Ltd. [1979] 1 W.L.R. 1075. Cf. Cloverbay Ltd. v. Bank of Credit and Commerce International SA [1991] Ch. 90.

[12] See also Re Qintex Group Management Services Pty. Ltd. (In Liq.) above at 94-5 per McPherson, J.A., Pincus, J.A. and Derrington, J.

[13] See Cloverbay Ltd. v. Bank of Credit and Commerce International S.A. [1991] Ch. 90 at 102 per Brown-Wilkinson, V.C.

[14] Re Westmex Ltd above at 1089 per Santow, J.

[15] See, for example, Hong Kong Bank of Australia Ltd. v. Murphy (1992) 28 N.S.W.L.R. 512 at 519 per Gleeson, C.J.

[16] See, for example, Re Excel Finance Corporation Ltd. (1994) 52 F.C.R. 69 at 89 per Gummow, Hill and Cooper, JJ.; Re Southern Equities Corporation Ltd. (In Liq.) (1997) 25 A.C.S.R. 394 at 432-3 per Lander, J.; Re Global Medical Imaging Management Ltd. (In Liq.) unreported, 5 June 2001, Supreme Court of N.S.W. per Santow, J. at [13].

[17] [1992] HCA 34; (1992) 174 C.L.R. 509 at 529.