Topp v Imagine Un Limited

CATCHWORDS : CORPORATIONS - application to set aside examination summonses issued at request of voluntary administrator - no question of principle

LEGISLATION CITED : Corporations Act 2001 (Cth) Corporate Law Reform Act 1992 (Cth)

Flanders v Beatty (1995) 16 ACSR 324 CASES CITED : Re Euro Star Pty Limited (in liq) [2004] NSWSC 462 Friedrich v Herald & Weekly Times Ltd (1989) 1 ACSR 277

Alan Godfrey Topp PARTIES : v Imagine Un Limited Pty Ltd

COUNSEL : Examinees: G Lucarelli Administrator: A A Henskens

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST

3322/09 Alan Godfrey Topp v Imagine Un Limited Pty Ltd JUDGMENT 1 HIS HONOUR: These are applications to set aside examination summonses issued by the administrator of Imagine Un Limited (administrator appointed) ("the company"). 2 The plaintiff, who obtained summonses for the examination of the applicants, was appointed administrator on 29 April 2009. 3 The first meeting of creditors was held on 11 May 2009. 4 On 26 May 2009 the plaintiff reported to creditors pursuant to s 439A of the Corporations Act 2001 (Cth). 5 The second meeting of creditors was convened for 3 June 2009 and has been adjourned to a date to be appointed. The last date upon which the adjourned meeting of creditors can be held is 6 August 2009. 6 These examination summonses were issued on 22 and 23 June. On 2 July the applicants applied to set the examination summonses aside. 7 The first applicant, Mr Malcolm Beville, was a director of the company from November 2006 until 27 October 2008. He was summoned for examination pursuant to s 596A. The other applicant, Mr John Beville, has been summoned pursuant to s 596B. 8 The summonses are challenged on the basis that they are being pursued by the administrator for a purpose foreign to the purpose for which an administrator can exercise his or her powers. The relevant powers of the administrator were said to be the power and obligation to report to creditors pursuant to s 439A(4) and the power to recommend whether it would be in the creditors' interests to execute a deed of company arrangement, or for the administration to end, or for the company to be wound up. 9 The administrator has provided his report to creditors. The applicants submit that it is clear that the only outcome of the administration will be that the company be wound up. The administrator's report discloses that the company is clearly insolvent. The administrator would not recommend that the administration end and control of the company be returned to the directors. The applicants contend that there is no prospect of that occurring. They also say that there is no prospect of the company executing a deed of company arrangement. Alternatively, they say that no deed of company arrangement was in prospect when the applications for the examination summonses were issued, or is presently in prospect. 10 In his report to creditors of 26 May 2009 the plaintiff reported that a deed of company arrangement had not been proposed for consideration by creditors. That was a statement of the position as it obtained on 26 May 2009. 11 In Flanders v Beatty (1995) 16 ACSR 324 Ormiston J, (with whom Tadgell and Harper JJ agreed), noted (at 332-333) that the amendments to the Corporations Law made by the Corporate Law Reform Act 1992 expanded the class of persons who were defined as eligible applicants who could apply for the issue of examination summonses. 12 His Honour said (at 333): " I would conclude that the legislature saw it as important that administrators should have wide powers to obtain information and conduct any necessary examination, much the same way as those powers were and are still given to liquidators. However, the significance of granting these powers to administrators is that the object to which they ought properly be used should comprehend anything which fairly may be expected to advance the course of administration ... "

13 It was submitted for the applicants that in this case the examination summonses have not been used to advance the course of the administration. At one point the applicants contended that the administrator was motivated by a collateral and improper purpose, but that contention was not persisted in in the course of final submissions. 14 Until about March 2009 the company was listed on the Australian Stock Exchange. The administrator says that its status of having had its shares listed for quotation on the Exchange is itself a potentially valuable thing and that it might be possible for what he called the shell of the company to be realised for the benefit of creditors. 15 The administrator reported to creditors on 26 May 2009 that the company had no assets which were likely to realise any value and had liabilities of in excess of $5.7 million. Its creditors include a secured creditor called Bluscan Investments Pty Limited, a company associated with the applicants. Bluscan is the holder of a charge. The Supreme Court of Victoria extended the time for registration of the charge, but did so subject to the rider that liberty be reserved to the company or any liquidator, administrator, deed administrator or creditor of the company to apply to discharge or vary the order extending the time for registration of the charge if inter alia an administrator of the company were appointed within six months of 30 October 2008. 16 In the event, an administrator was appointed within that period. There is evidence that a creditor has already instituted proceedings to discharge the order granting the extension of time for lodging the charge. Among the topics the administrator wishes to investigate in the examination are matters relevant to the likely prospects of success of an action to challenge that charge. That is obviously material to any return which unsecured creditors might receive if a source of funds for unsecured creditors is any recoveries the company might make from causes of action which it might have against third parties. 17 In his report to creditors the administrator referred to a letter dated 30 September 2008 signed by the three directors of the company. The letter included a statement that the directors and the "Director's related entities" confirmed their "continued pledged financial support to meet any shortfall in the [company's] funding that cannot be otherwise met by the company's existing or planned capital raising and/or funding arrangements". 18 The administrator identified as an issue whether the directors or entities related to them have any liability to the company or its subsidiaries as a result of agreeing to provide financial support for the company. He reported to creditors that he had received preliminary legal advice in relation to this issue and having considered that advice was of the view that an examination or detailed witness statements, or possibly both, were needed to determine any available action and the prospects of success of such an action. 19 The administrator reported on 26 May to having received funding from creditors to conduct an examination. He identified the purpose of the examination as being as follows: " 1. Obtain information on the matters raised in this Report to be able to gain preliminary legal advice on whether the company (and its subsidiaries) have any available actions for recovery of damages. 2. Confirm the prospects of success of an action to have the extension of time for registration of Bluscan's charge set aside. 3. Following from the advice in 1 and 2 above proceed to advise creditors on the best course of action. 4. Following from points 1 and 2 above seeking to determine whether creditors and/or a litigation funder are interested in proceeding to and [sic] action. 5. Following from all the above points whether the Company should proceed to liquidation, whether a DCA can be formulated. A DCA may also include a creditor's trust which is a mechanism of placing assets including a recoverable action into a trust with the company's creditors to allow the company shell to be hand [sic] back to its shareholders. "

20 The administrator also reported to creditors that creditors might wish to delay their decision by voting to adjourn the meeting for up to 45 business days. That is what has happened. His reason for doing this was: " I make this comment because of the matters raised in the Report and particularly my comments regarding the possible value of the Company's listing on the Australian Securities Exchange, which would be lost if the Company were wound up. I am also conscious that whilst the actions available to the Company which are the subject of the proposed public examination will still be available if the Company is wound up, the results of those examinations and any recommendations that can be made as a result may affect creditor's decision, in the event that a proposal for a Deed of Company Arrangement is made based on realising the value of the Company's listing on the Australian Securities Exchange. "

21 In his affidavit filed pursuant to s 596C, the administrator deposed that his purpose in conducting examinations was: " (a) obtaining information on matters raised in my report in order to seek preliminary legal advice on whether the company and its subsidiaries have any available actions for recovery of damages (b) confirming the prospect of success of an action to have the extension of time for registration of the Bluscan charge to be set aside (c) proceeding to advise creditors on the best course of action (d) seeking to determine whether either creditors or a litigation funder are interested to proceeding to fund any action, and (e) considering whether the company should proceed to liquidation or whether a deed of company arrangement can be formulated "

22 I accept that evidence. In my view the purposes to which the administrator deposed are proper purposes which may fairly be expected to advance the course of the administration. 23 Although the administrator has provided a report to creditors as contemplated by s 439A(4) it can be expected that he will provide a further report to creditors prior to the resumption of the adjourned meeting. The Act does not specifically provide for such a further report, but it would nonetheless be a proper function of the administrator to provide such a report. Indeed, one would expect from the provision permitting the second meeting of creditors to be adjourned for up to 45 days, that in that period further information in relation to the affairs of the company would be obtained, or further negotiations would take place in relation to a proposed deed of company arrangement, and that creditors would need to be informed of those matters by the administrator prior to the resumption. 24 It seems to me that one of the functions of the administrator is to provide both the report as to the company's business and affairs contemplated by s 439(4)(a) and any updating report which might be required for an adjourned meeting. The examinations are proposed to obtain information about the affairs and business of the company and its potential causes of action and fall within the performance of that function. 25 It is also a function of the administrator to seek to facilitate the implementation of any proposal for the company to execute a deed of company arrangement if to do so would be in the interests of creditors. In his report to creditors and in his affidavit the administrator foreshadows the possibility of ascertaining whether creditors or a litigation funder would be prepared to fund proceedings which might realise assets for the company and formulate a deed of company arrangement by which any actions available to the company might be assigned to a deed administrator and possibly assigned to a creditor's trust to "allow the company shell to be handed back to its shareholders". 26 The administrator also contemplates the possibility that the "company shell" might be realised for a valuable sum in this way. The fact that no particular deed of company arrangement has been identified or proposed does not mean that the administrator cannot use all the means available to him to seek to facilitate any such proposal for the benefit of creditors. He believes that there is a reasonable prospect of someone putting forward a proposal for a deed of company arrangement before the resumed meeting of creditors and any information which he obtains from the examination about the strength of any potential cause of action involving the applicants, or companies associated with them, would be material to the creditors deciding how to proceed. 27 In weighing up the alternatives of a liquidation and the execution of a deed of company arrangement, if a proposal for the latter is forthcoming, the creditors will need to consider the value of any claims which would only be available on a winding-up, in particular any claim against a director for compensation for insolvent trading. In his report to creditors of 26 May 2009 the administrator thought it was unlikely that there would be any substantial claim in that respect. He said that he did not intend to continue investigating any action for insolvent trading unless further information became available which altered his opinion. The reasons the administrator gave for being of the view that there was unlikely to be such a claim might be thought to require further assessment in the light of evidence he gave as to the time at which certain debts were incurred, and also in the light of evidence which the applicants gave to the effect that neither they nor any "Beville group entity" ever made any commitment to provide on-going funding to the company. To assess any such claim and available defences to that claim the administrator, it seems to me, is entitled to explore that issue. 28 For these reasons I refuse the applications to set aside the examination summonses. 29 An alternative claim was made by the applicants as a fall back position, that an order should be made under s 596F(1)(f) prohibiting publication or communication of information provided by the applicants in the examination including, as I understand it, by production of documents as to their assets and liabilities or otherwise as to their financial position. It was submitted that the information should not be made generally available to the public. The affairs of the company have had media coverage and Mr John Beville at least is a director of a number of companies which own, operate and develop shopping centres. The public disclosure of that information, it is said, might cause collateral prejudice, although nothing specific was adduced by way of evidence or submissions as to any damage which might be caused to either applicant if a direction prohibiting publication of such information was not made. 30 In Re Euro Star Pty Limited (in liq) [2004] NSWSC 462, Campbell J, as his Honour then was, said (at 12): " [12] When the power to give a direction under s 596F(1)(f) is expressly made subject to s 597, that is a clear indication that the purpose underlying s 597 can be taken into account in making a decision whether to give a direction under s 596F(1)(f). However, the decision whether to give a direction under s 596F(1)(f) depends on all the circumstances, of which the existence or otherwise of 'special circumstances' is just one. " 31 Section 597(4) provides that an examination is to be held in public, except to such extent, if any, as the court considers that by reason of special circumstances it is desirable to hold the examination in private.

32 No special circumstances are identified which would make it desirable to hold the examination in private. Nor is that the alternative relief sought. Nonetheless, the question remains whether taking into account the absence of such special circumstances, and that the examinations will generally proceed in public, a direction prohibiting publication of that type of information should be made. 33 In Re Euro Star Pty Limited Campbell J also referred to one of the rationales for holding examinations in public (see [13]), namely: " The privilege of incorporation is given on terms that, if the company collapses, its affairs can be examined, and that examination will ordinarily be in public. In at least some instances, publicity of information given in examinations can cause information which was otherwise not available to be brought to the attention of those investigating the circumstances of the corporate collapse. "

34 In Friedrich v Herald & Weekly Times Ltd (1989) 1 ACSR 277, the Appeal Division of the Supreme Court of Victoria observed (at 288) that the statutory requirement that the examination be held in public, except in special circumstances, showed that the legislature had determined that: " ... the ordinary form of examination shall be in public and that implicitly, by reason of that preference, it has seen that form of examination as beneficial to the commercial and general community. "

35 The court said that the court must approach the issue of making orders of prohibiting publication of those proceedings with that policy in mind. 36 In my view there is not sufficient reason to depart from the policy that the examinations be held in public and that information obtained in the examination be publicly available. Whilst that might be a source of embarrassment for the applicants, that is not itself a sufficient reason for making the order prohibiting publication as sought. No particular prejudice is demonstrated which might otherwise warrant making an order under s 596F(1)(f). I will hear counsel on the precise form of orders to be made. 37 On 3 July 2009, Austin J made orders in relation to orders for production made on 23 June 2009 directed to the applicants. His Honour stayed those orders. It was common ground that the reason for the stay of those orders was so the parties could await the outcome of the present application. It will be necessary to deal with that stay.

38 Mr Lucarelli for the applicants requests that I make it clear that in refusing to give the direction presently sought under s 596F(1)(f), I do not intend to fetter the exercise by the Registrar or other judicial officer of a discretion to give directions under s 596F about the examination as might subsequently be sought. 39 I would not expect a fresh application for the same direction to be made to a registrar on the basis of the same materials as are relied upon before me. But if there were a change in circumstances which might arise from information provided at the examination orally, or by way of production of documents, then the registrar or other judicial officer would be required to consider any direction which might be sought on the basis of the materials then to hand. If there were a relevant change in circumstances then the present refusal of the application would not be a bar to the registrar entertaining such an application for directions under the section. 40 I have heard argument on the question of costs. The administrator is entitled to his costs of the application to set aside the examination summonses. 41 The issues concerning the orders for production were resolved consensually and there should be no orders as to costs in relation to the application to set aside the orders for production. The attendance before Austin J on 3 July 2009 was necessary partly to deal with the application concerning the production of documents and partly to obtain an extension of time for the filing of the interlocutory processes. I think there should be no order as to costs in relation to the hearing before his Honour. 42 I order that the claims for relief in paragraphs 7, 10 and 11 of each interlocutory process be dismissed. 43 I order that the applicants pay the plaintiff's costs in respect of the claims for relief in paragraphs 7, 10 and 11 of each interlocutory process and that otherwise there be no order as to costs of each interlocutory process. 44 I order that the stay of the orders for production contained in order 5 made by Austin J on 3 July 2009 be discharged. 45 I stand the orders for production over to the Registrar's subpoena list on 9 July 2009 at 9am. 46 Exhibits may be returned after 28 days.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.