Sheahan (Trustee) v Scott, in the matter of Livingstone

Federal Court of Australia|2003-03-05|Before: Windeyer J, Hely J

REASONS FOR JUDGMENT 1 On 26 July 2001 John Sheahan ("the trustee") was appointed as trustee of the bankrupt estate of Kenneth Robert Livingstone ("the bankrupt"). 2 By Summons to Attend Examination filed on 10 September 2001, the second respondent ("Mr Slattery") was required to attend Court on 25, 26 and 27 September 2001 to be examined on oath under s 81 of the Bankruptcy Act 1966 (Cth) ("the Act") in relation to the examinable affairs of the bankrupt. A similar summons was filed on 10 September 2001, for the examination of the first respondent ("Mr Scott").

Background 3 The bankrupt was, at all relevant times, an accountant who received monies on behalf of his clients for investment. Those monies were placed into an account maintained by Mr Scott and Mr Slattery known as the Scott and Slattery clearing account, and then on-lent to Ophix Finance Corporation Pty Ltd ("Ophix"). Mr Scott and Mr Slattery were shareholders in, and directors of, Ophix. Ophix then lent the money on to others, or invested it. 4 A client of the bankrupt, Dr McMahon, instituted proceedings against the bankrupt, Mr Scott and Ophix in the Supreme Court of NSW in relation to monies given to the bankrupt for investment which were paid into the Scott and Slattery clearing account. Mr Slattery was not a party to those proceedings. The proceedings were heard before Windeyer J, who made orders for the taking of accounts to determine the balance due by Mr Scott and Ophix to the estate of the bankrupt. These proceedings are continuing in the Supreme Court.

The examination 5 The examination of Mr Slattery took place on 27 September 2001. The examination occupied most of the day. One of the matters which was the subject of examination was the operation of the Scott and Slattery clearing account. During the course of the examination Mr Slattery said that it was his understanding that the monies which the bankrupt deposited into the clearing account consisted of funds belonging to clients of the bankrupt, as well as the bankrupt's own funds. 6 On 27 September 2001 a Registrar of the Court before whom the examination was conducted ordered that the examination of Mr Slattery "be adjourned generally". Counsel for Mr Slattery did not oppose the making of an order to that effect. No directions were given by the Registrar as to the way in which the examination might be resumed, nor were any directions given to Mr Slattery as to his attendance at any resumed examination.

Subsequent events 7 On 13 December 2001 the trustee was appointed as trustee of the "Livingstone Trust" by order of the Supreme Court. The "Livingstone Trust" is a term used to describe monies received by the bankrupt as trustee from various persons for investment. 8 On 19 November 2002 the trustee instituted proceedings against Mr Slattery in the Supreme Court. The proceedings appear to have been instituted by the trustee in his capacity as the trustee of the Livingstone Trust, and in his capacity as trustee of the estate of the bankrupt. The apparent reason for the trustee suing in both capacities is that some of the monies deposited by the bankrupt into the Scott and Slattery clearing account may have been the bankrupt's own funds. 9 The claim in the Supreme Court proceedings is that Mr Slattery has refused to pay to the trustee the "true balance" of the funds deposited into the Scott and Slattery clearing account by the bankrupt.

The resumption of the examination 10 In November 2002 the solicitors for the trustee made arrangements with the Registry of the Court for the resumption of the examination on 26 February 2003. By letter dated 27 November 2002 the trustee's solicitors notified Mr Slattery's solicitors that the public examinations of Mr Scott and Mr Slattery "have been listed to continue on 26 February 2003 at 10.15 am". 11 By letter dated 30 January 2003 the solicitors for Mr Slattery expressed concern that a further examination of their client was proposed to be conducted when the Supreme Court proceedings between the trustee and Mr Slattery are on foot. The letter enquired as to the trustee's purpose in seeking to further examine Mr Slattery, and as to the subject matter of the proposed examination. 12 By letter dated 7 February 2003 the trustee's solicitors responded to this request for information. The letter included the following: "The purpose of the examination is for the trustee to ascertain the financial capacity of your client and any relevant changes thereto in order to assess the potential value of the cause of action against your client in the existing proceedings. Of particular concern to our client are a number of dispositions of property by and the subsequent winding up of Davwren Pty Ltd. Davwren was involved in a number of transactions with the members of the bankrupt's family which our client has been investigating." 13 The letter listed 16 categories of documents "that we require your client to produce insofar as they are in his possession, custody or power". The letter stated that if necessary, the trustee's solicitors will seek appropriate orders for production of the specified documents. The documents were said to relate to the issues quoted above in par [12], which were intended to be the subject of the resumed examination.

Whether the summons for examination should be set aside 14 By Notice of Motion filed on 25 February 2003, Mr Slattery sought an order that the summons to Attend Examination filed on 10 September 2001 be discharged. An affidavit by Mr Slattery's solicitor filed in support of the motion included the following: "7. I am concerned that the further examination of my client listed for 26 February 2003 may prejudice his rights to a fair hearing in the Supreme Court proceedings and is calculated by the applicant to obtain an unfair forensic advantage in such proceedings." 15 Counsel for Mr Slattery submitted that the Court ought to discharge his examination in the interests of justice because: (a) the applicant is attempting to use his "bankruptcy" powers to assist in his separate capacity as trustee of the "Livingstone Trust"; (b) no explanation has been offered to the Court to explain the significant delay (in excess of 1 year) of the applicant in further applying to examine Mr Slattery; (c) the Supreme Court proceedings face significant difficulties, and are the subject of a Notice of Motion for summary dismissal; (d) no explanation has been offered to the Court to explain why this issue was not covered in the earlier examination; and (e) the earlier examination included a number of questions which were inappropriate. 16 These grounds were enlarged during the course of oral argument to include the following: (f) the existing Summons to Attend Examination is spent. Mr Slattery cannot be required to attend for further examination unless a fresh summons is issued; and (g) the private financial affairs of Mr Slattery and his companies are not within the expression "the examinable affairs" of the bankrupt.

Is the summons spent? 17 Mr Slattery is an examinable person in relation to the bankrupt. He falls within pars (c) and (d) of the definition of "examinable person". Order 77 rules 33 and 34 require an application for an examinable person to be summoned for examination to be accompanied by a supporting affidavit. The affidavit must state whether the applicant is a creditor who has a debt provable in the bankruptcy, or the trustee of the bankrupt's estate, or the Official Receiver (r 34(2)(a)). It must also state the facts relied on by the applicant to establish that the person to be summoned is an examinable person (r 34(2)(b)). If the summons is to require an examinable person to produce books at the examination, then r 34(2)(c) must be complied with. 18 There is nothing in the Federal Court Rules which requires disclosure of the areas of enquiry intended to be covered at the examination, nor is there any provision in the prescribed form of summons for inclusion of that information. By force of s 81(1A) and 81(10) of the Act, the permissible scope of an examination is asking appropriate questions about the bankrupt, or the bankrupt's examinable affairs. 19 Section 81(3) of the Act provides, relevantly, that the Registrar may at any time adjourn the examination of a person under s 81 either to a fixed date, or generally, or conclude the examination. 20 Neither the Act, nor the Federal Court Rules contain any provision with respect to the manner in which an examination which has been adjourned generally may be resumed. Prior to its repeal in 1990 Rule 129C of the Bankruptcy Rules provided: "129C Where an examination under section 81 of the act is adjourned otherwise than to the next sitting day, the applicant shall give to the person being examined and to any person who has been represented, or who has participated in person, at the examination notice in writing of the place, date and time fixed for the resumption of the examination." 21 I am informed by the Federal Court Registry that it is common for examinations to be adjourned generally. If an examination is to be resumed, the normal practice is for the trustee to be notified of the date and time at which this is to occur, it being the responsibility of the trustee to give appropriate notification to the examinee. 22 The summons required Mr Slattery to attend Court on specified dates, and he complied with the summons in that respect. In that sense, the summons is spent, but that does not necessarily lead to the conclusion that there are no extant obligations on Mr Slattery in relation to attendance for examination. 23 The order made by the Registrar was that Mr Slattery's examination be adjourned generally. It is necessarily implicit in such an order that the examination may be resumed at a later date, and if this is to occur, that appropriate notification will be given to the examinee. 24 There is nothing in the Act or the Rules which requires that it must be the Court which gives that notification, as opposed to the trustee, and there are sound practical reasons why it is more appropriate for this to be done by the trustee. The trustee is more likely to have information as to the examinee's current whereabouts than the Court, and the Court does not ordinarily involve itself in service of its process. If the examinee fails to attend on the resumed date, and a warrant for his arrest is sought, the Court may have to adjudicate upon the sufficiency of the notification given to the examinee. The Court would be placed in a potentially difficult position if it was the Court which had given the notification, rather than the trustee. 25 It may be that s 264(1A) and s 264B(1)(b) of the Act have no relevant operation where a summons is adjourned generally, and a date later appointed for the continuation of the examination. This is not something which I need to decide. Even if it be assumed that these sections do not apply, that does not mean that Mr Slattery can only be required to attend a resumed examination by the issue of a fresh summons. Where an examination has been adjourned generally, if the examinee failed to attend a resumed examination after appropriate notification, then questions of contempt of the Court may arise. For these reasons, I reject the submission made by counsel for Mr Slattery, Mr Coles QC, that Mr Slattery cannot be required to attend for further examination without the issue of a fresh summons. 26 It is neither necessary nor appropriate for me to consider whether if Mr Slattery fails to attend a resumed examination, after appropriate notification, he would be in contempt in the particular circumstances of the case. 27 It was common ground that the "requirement" for production of specified books made in the letter of 7 February 2003, was no more than an invitation which Mr Slattery was free to accept or reject. It did not have, and could not have, any coercive effect: see s 81(1B) and 81(11A).

The "examinable affairs" of the bankrupt 28 The examination is for a proper purpose if it relates to the bankrupt's "examinable affairs". The "examinable affairs" of the bankrupt include his property and affairs, as well as the financial affairs of any person associated with the bankrupt, insofar as they are or appear to be relevant to the bankrupt, or his property or affairs. 29 The bankrupt's property includes any chose in action vested in him at the time that the sequestration order was made against his estate. Mr Slattery is an "associated entity" of the bankrupt by reason of the dealings between Mr Slattery and the bankrupt with respect to the Scott and Slattery clearing account. 30 Mr Slattery's financial affairs are relevant to the bankrupt's property, inasmuch as they bear upon the likelihood of the trustee being able to recover from Mr Slattery any judgment awarded in favour of the trustee in the Supreme Court proceedings. 31 Information as to Mr Slattery's financial affairs and position is likely to assist the trustee in deciding whether to continue with the Supreme Court proceedings against Mr Slattery and in determining the level of effort and expenditure which it would be reasonable to incur in so doing. 32 This issue was considered by Branson J in Sheahan v Scott, in the matter of Livingstone [2002] FCA 1297. That was an application by Mr Scott to discharge the summons issued for his examination. Her Honour concluded that reliance by the trustee on the summons for the purpose of establishing whether Mr Scott has sufficient funds to meet any judgment or pay any debt would not be to use the summons for an improper purpose. I respectfully agree with her Honour's conclusion and reasoning process. 33 Mr Coles submitted that the judgment of Branson J is wrong and should not be followed, but he never satisfactorily explained why this is so. He did submit that the definition of "affairs of a body corporate" in s 53 of the Corporations Act 2001 (Cth) is wider than the bankruptcy notion of "examinable affairs", but he accepted that it is the inclusion of "property" in the definition of "affairs of a body corporate" which justifies an inquiry as to the worth of a potential defendant against whom the company may have a claim. 34 Nor did Mr Coles explain how I could conclude that the decision of Branson J is obviously wrong, bearing in mind that in Sheahan (Trustee) v Scott, in the matter of Livingstone [2002] FCA 1440Gyles J refused leave to appeal from the decision of Branson J, because the judgment was not attended by sufficient doubt to warrant it being reconsidered by the Full Court. 35 It does not follow that all of the topics suggested by the 16 categories of documents referred to in the letter of 7 February 2003 are within the legitimate scope of the examination. They will only fall within the permitted scope of the examination if they are germane to Mr Slattery's financial affairs and his ability to meet the trustee's claim. The conduct of an examination under s 81 is subject to the scrutiny and control of the Registrar. The Registrar may decline to allow questions if they are of peripheral relevance only.

Acting in aid of the Livingstone Trust 36 Counsel for the trustee, Mr Dicker, accepted that it would be improper for the trustee to use his bankruptcy powers of examination for the benefit of another estate of which he is trustee by virtue of an order of the Supreme Court. 37 That raises a factual question as to whether the trustee is activated by an improper purpose. The Supreme Court proceedings have been brought by the trustee both as trustee of the bankrupt estate, and as trustee of the Livingstone Trust. There is some evidence that the bankrupt's own funds, as well as trust funds, were paid into the Scott and Slattery clearing account. If this is so then the prosecution of those proceedings may benefit the bankrupt's estate. 38 It is not to be assumed that the trustee is acting unfairly or for an improper purpose: see Donnelly v Scott [2001] FCA 782 at par 22; Karounos v Official Trustee [1988] 19 FCR 330 at 336 (point 12). There is no evidence before me which would justify an inference that the trustee is acting otherwise than for the benefit of the estate of the bankrupt.

An unfair forensic advantage with respect to the Supreme Court proceedings? 39 The area to be covered by the examination is quite different from the area covered by the Supreme Court proceedings. The issue in those proceedings is what amount, if any, is owed by Mr Slattery to Mr Sheahan in his capacity as trustee in bankruptcy and as trustee of the Livingstone Trust. The intended subject matter of the examination in these proceedings is the financial ability of Mr Slattery to meet any judgment which may be obtained against him. 40 There is no evidence to sustain the concern expressed by Mr Slattery's solicitor (see par 14 above) that the further examination may prejudice Mr Slattery's rights to a fair hearing in the Supreme Court proceedings.

General oppression 41 Mr Scott was required to attend for examination on four occasions. Branson J recognised that repeated examinations may constitute an abuse of process. The examination conducted of Mr Slattery on 27 September 2001 touched on some matters which may bear upon Mr Slattery's financial position (eg control of overseas bank accounts), but my attention has not been drawn to any concentrated questioning on that subject matter. In any event, the correspondence included in Exhibit A asserts a concern on the part of the trustee that Mr Slattery is in the process of disposing of his assets in the face of the current litigation. 42 The examination on 27 September 2001 occupied most of the day. The examination commenced at 10.09 am and concluded at 3.11 pm. Whilst Mr Slattery complains of a failure to reconvene the examination sooner, no information is given as to unfairness accruing to him by reason of the lapse of time. In any event the correspondence tendered by Mr Coles QC (Exhibit A) indicates that at least a reason for the resumption of the examination is a perception on the part of the trustee of the recent disposal of assets by Mr Slattery. 43 There is no onus on the trustee to demonstrate that the matter sought to be covered at the resumed examination could not have been covered on 27 September 2001. The onus is on Mr Slattery to demonstrate abuse of process, and he has not discharged that onus. 44 Whilst it is said that the Supreme Court proceedings face significant difficulties, there has been no demonstration of what those difficulties are, and no showing that the proceedings are likely to fail. All that is said is that Mr Slattery was not joined as a party to the proceedings before Windeyer J. That is true, but the plaintiff in those proceedings was Dr McMahon: McMahon v Livingstone & Ors [2001] NSWSC 55. 45 The applicant contends that on a number of occasions during the September 2001 examination, the examiner impermissibly examined Mr Slattery on a number of issues. Three examples are given: "(a) see the examination of Mr Slattery as to who paid the legal fees of Church & Grace at page 189 of the examination transcript; (b) see the examination of Mr Slattery as to the moral obligations owed by Mr Slattery to Mr Scott at page 190 of the examination transcript; (c) see the examination of Mr Slattery as to the moral obligations owed by Mr Slattery to 'Ophix' at page 202 of the examination transcript." 46 The relevance of the questions given by way of an example is not apparent to me, but Mr Slattery was represented by counsel who did not object to any of these questions. The fact that three irrelevant questions were asked in an examination without objection provides an insufficient foundation for a contention that resumption of the examination is oppressive.

Conclusion 47 The application is dismissed with costs. I certify that the preceding forty-seven (47) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hely.

Counsel for the Applicant: Mr Dicker, Mrs Ryan

Counsel for the Second Respondent: Mr Coles QC, Mr Stack

Date of Hearing: 25 February 2003

Bankruptcy Act 1966(Cth)s 81, 81(1A), 81(1B), 81(3), 81(10), 81

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