Watters, in the matter of Kagua Pty Ltd (in liq) v Kagua Pty Ltd

Federal Court of Australia|2020-03-04|Before: Yates J

The claims for relief under prayers 6 and 7 of the interlocutory process dated 20 February 2020 be dismissed.
The applicants (named in the interlocutory process) pay the costs of Marcus Jon Watters (as liquidator of Kagua Pty Ltd (in liquidation)) of and incidental to those claims. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

YATES J: INTRODUCTION 1 On 23 January 2020, a Registrar of the Court made orders granting leave to the plaintiff, who is the liquidator of Kagua Pty Ltd (in liquidation), to file and serve summonses for examination and summonses for the production of documents, under Pt 5.9 of the Corporations Act 2001 (Cth) (the Act). The Registrar also made orders pursuant to r 30.34 of the Federal Court Rules 2011 (Cth) for the production of documents. 2 By an interlocutory process dated 20 February 2020 (the interlocutory process), the applicants (who have or will be served with a summons for examination and summons for production, or who have been served with an order for production) seek a review of the Registrar's decision, as well as orders setting aside or varying the "Orders for Production", and extending time for compliance. It is not clear whether it is intended that relief setting aside or varying the summonses for production are intended to be covered by the reference in the interlocutory process to "Orders for Production". In these reasons, it is convenient to refer to both as orders for production. 3 The applicants also seek directions for the conduct of the examinations, in particular providing for the examinations to be held in private or to be dealt with in such a way as to limit the disclosure of certain information which might be obtained as a result of the examinations. 4 To explain, there is currently a proceeding in the Supreme Court of New South Wales between the eighth applicant, Transtar Linehaul Pty Ltd (Transtar) and the Chief Commissioner of State Revenue for New South Wales (CCOSR) concerning unpaid payroll tax. The CCOSR assessed Transtar as jointly and severally liable with Kagua for payroll tax on the basis that Kagua and Transtar formed a "group" for payroll tax purposes. As the applicants put it, this liability is based on the various connections or roles that the late Ronald Wesley Searle is said to have had with both companies, including as an alleged "de facto" or "shadow" director of Kagua. The applicants say that the validity of the CCOSR's assertions concerning the late Mr Searle's connections and roles with Kagua are challenged by Transtar and are critical issues to be determined by the Supreme Court. The applicants argue that, if the Supreme Court upholds the CCOSR's assessment then the CCOSR will presumably seek to recover the payroll tax debt in full from Transtar. Every dollar Transtar pays to reduce that debt will be a dollar less that Kagua must pay to the CCOSR. The applicants say that it is, therefore, in the interests of the CCOSR (as a creditor of Kagua) and Kagua (as a debtor of the CCOSR) to "shift" the payroll tax liability from Kagua to Transtar, and it is in the interests of Transtar to prevent that from happening. For this reason, the applicants say, the liquidator and Transtar have opposing interests when it comes to the ultimate outcome of the Supreme Court proceedings. They argue that the liquidator appears to be actively assisting the CCOSR in that regard. The liquidator disputes that assertion. 5 The interlocutory process also seeks an order directing the liquidator to serve a copy of the affidavit made pursuant to s 596C of the Act in support of the summonses for examination and orders for production, or relevant parts of it, on the applicants. Section 596C(2) of the Act provides that such an affidavit is not available for inspection, except so far as the Court orders. 6 The question whether this relief should be granted has been heard by me as a separate question. In these reasons I will, for convenience, refer to the evidence filed in support of the summonses for examination and orders for production as the liquidator's affidavit. 7 The applicants argue that they require access to the liquidator's affidavit to enable "proper engagement on the issues" - meaning, the issues that will arise in seeking the other relief claimed in the interlocutory process. In this connection, the applicants have identified two broad issues: the scope and meaning of the orders for production; and a potential abuse of process. Before dealing with those issues, I will touch on the principles to be applied in the present application.

Relevant principles 8 In Trevor, in the matter of Bell Group NV (in liq) [2016] FCA 851; 116 ACSR 294, I discussed the relevant principles which inform the exercise of the discretion to permit access to an affidavit that has been made pursuant to s 596C of the Act. It will be sufficient for the purposes of the present case to repeat some of that discussion: 137 The relevant principles which inform the exercise of the discretion to permit access are discussed in a number of cases. The applicants submit that, when an arguable case is demonstrated, the Court will normally exercise its discretion to grant access to the affidavit. At a very high level of generality, that may be so. But the correct approach is more nuanced than the applicants' submission indicates. 138 In Re Excel Finance Corporation Ltd (Receiver and Manager Appointed); Worthley v England (1994) 52 FCR 69; [1994] FCA 551 (Re Excel), the Full Court, at 93-94, observed that the discretion to grant access would normally be granted in favour of the applicant where there is material before the Court from which it appears that the applicant has an arguable case to which the affidavit is relevant. Further, their Honours made clear that access to the affidavit should be granted "where the justice of the case so requires". Their Honours were at pains to stress that it did not follow from this that the Court would permit every examinee or potential examinee to have such access. Indeed, their Honours emphasised that access should not be freely granted. They cautioned against access where an examinee may be given information that might frustrate the purposes of the examination. They also said that confidential information might need to be withheld. 139 Consistently with this approach, Lander J in Simionato at 63-64, said that, in order to obtain access, it is not enough for the applicant to show an arguable case. His Honour said that the applicant is required to show that he or she will be unfairly prejudiced in the consideration and disposal of the application if access is not granted. 140 In the same vein, Mansfield J in Re Moage Limited (In Liquidation); Sheahan v Pitterino (1997) 77 FCR 81; [1997] FCA 719 at 95 said: … The fundamental judgment is based upon what the justice of the case in the particular circumstances demands. In making that determination, regard will need to be had to the content of the affidavit, so that where appropriate the purpose of the examination is not frustrated or confidential information or potentially significant information which might if released impinge upon an effective examination is not inappropriately released. If there are no particular considerations arising from the affidavit or its terms, or from the material referred to, then provided that the applicant for the release of the affidavit presents "an arguable case" or some sensible grounds for maintaining the application, to which the affidavit is relevant, then generally the discretion will be exercised in favour of that applicant. …

The scope and meaning of the orders for production 9 The applicants contend that the orders for production are excessively broad and confusing on their face. They contend that the orders for production served on the first applicant, an incorporated legal practice, are oppressive because most, if not all, of the documents will be privileged and the documents that are sought from the first applicant are the same as the documents sought from the other applicants, who are the first applicant's clients. 10 They raise a related issue whether the liquidator's affidavit has given proper disclosure concerning the likelihood of the first applicant asserting privilege over a substantial number of documents required for production, and the utility of an order against the first applicant when the same documents are required from the first applicant's clients. 11 The orders for production are expressed in common form. They call for the production of "all books, records, files and documents (paper and electronic)" of the addressee, with respect to "the examinable affairs" of Kagua, but limited to certain categories of documents with certain date ranges, specified in a table. 12 At the hearing of the present question, the applicants argued that the conditioning of the orders for production by reference to "the examinable affairs" of Kagua introduces considerable uncertainty as to their scope because, the "examinable affairs" of Kagua are unknown to the applicants, but would be revealed by the liquidator's affidavit. 13 The various issues that the applicants have raised with respect to the scope and meaning of the orders for production, leading to the relief claimed in the interlocutory process, are not before me for determination. The liquidator has indicated that he regards much of what the applicants have raised as contestable. Nonetheless, and importantly so far as the present question is concerned, the liquidator's solicitors wrote to the first applicant (and through the first applicant to all the applicants) on 19 February 2020, stating: Scope for production We consider that the scope for production of documents, pursuant to the orders of production and summons for production issued to your respective clients, is appropriate. Our client denies your allegations that the production required is oppressive or a fishing expedition. However, to assist your clients in understanding the limits of the scope, we provide the following further particulars of the "examinable affairs" of Kagua insofar as it relates to the scope for production in respect of Schedules B, C, D and E noted in your letter: 1. the solvency of Kagua; 2. the appointment of Kagua as trustee of the R.W Searle Family Trust (the Trust) 3. the affairs of Kagua while it traded in the capacity as trustee of the Trust, including details of debts incurred in such capacity; 4. any removal of Kagua as trustee of the Trust; 5. any appointment of Henley Investment Services Pty Ltd as the new trustee of the Trust; 6. the transfer of 100 fully paid shares in the capital of Edgely Pty Ltd from Kagua to Henley Investment Services Pty Ltd on or about 9 February 2016; 7. details of the assets of the Trust and their value, which Kagua may hold a right of indemnity over as former trustee; 8. the involvement of Ronald Searle in the management of Kagua, following his resignation as a director of Kagua on or about 20 December 2008 through to the day of Kagua's liquidation; 9. the assets available in the deceased estate of Ronald Searle, where Kagua or our client may have recovery actions against such estate; and 10. the commercial relationship and arrangements that may have been in place between Kagua and Transtar Linehaul Pty Ltd, what the terms of those agreements were. In that regard, our client understands that Kagua provided labour hire services to Transtar Linehaul Pty Ltd and Kagua has been left with significant debts, including unpaid superannuation entitlements and payroll liabilities owing to the Qld and NSW Offices of State Revenue. 14 Further, on 24 February 2020, the liquidator's solicitors wrote to the first applicant offering to expressly limit the orders for production to the particular topics set out in the earlier letter of 19 February 2020. They also advised that the liquidator would agree to extend the time for producing documents (in the case of the first applicant, to 25 March 2020) and stated that the liquidator would not require the first applicant to produce documents already produced by the third to eighth applicants. 15 The applicants argue that the "unverified ex post facto assertions" in the letter of 19 February 2020 do not obviate the need for access to the liquidator's affidavit. I disagree. It is plain that the liquidator has disclosed what he regards the "examinable affairs" of Kagua to be. There is no reason to go behind what the liquidator has identified as the "examinable affairs" of Kagua for the purposes of refining the scope of the documents to be produced. In light of that disclosure, I can see no proper reason why, at this point in time, access is required to the liquidator's affidavit in order to enable the applicants to advance the relief they seek based on the scope and meaning of the orders for production, or in respect of their claims of oppression. They will not be unfairly prejudiced in the consideration and disposal of their application for relief if access to the affidavit is refused. 16 In relation to the foreshadowed arguments about deficiencies in the liquidator's affidavit by reason of non-disclosure, I see no reason why access to the affidavit is required in order to enable the applicants to advance their contentions on that score. The Court can review the liquidator's affidavit for itself to see whether or not the asserted relevant disclosures were made. The applicants are not inhibited in any way from making such submissions as they wish concerning the consequences of non-disclosure, if there has been non-disclosure.

Potential abuse of process 17 The applicants contend that some of the topics of examination (as revealed by the letter of 19 February 2020), and the corresponding parts of the orders for production, are, potentially, abuses of process because they may well be designed to confirm, or even unwittingly confer, a forensic benefit on a creditor (namely, the CCOSR) in the pending Supreme Court proceeding. 18 In advancing this contention, the applicants submitted that there is evidence that the liquidator has been actively assisting the CCOSR - a contention which, as I have said, the liquidator disputes. The liquidator says that he has only dealt with the CCOSR in accordance with his duties to the CCOSR as a creditor in the liquidation of Kagua, particularly having regard to clause 70 - 45 of the Insolvency Practice Schedule (Corporations) (Schedule 2 to the Act). 19 The applicants argue that the pending litigation between Transtar and the CCOSR is significant for two reasons. First, it created an obligation on the liquidator to specifically disclose the existence of the proceedings in the liquidator's affidavit and to state the potential effects that the examinations might have on that litigation. Secondly, assuming the liquidator was ignorant of the pending litigation or the issues arising in it, the risk of the CCOSR obtaining an "illegitimate forensic advantage from the examinations" was nevertheless real and a sufficient reason for the Court to invoke its powers to control the examinations and access to the documents produced by requiring the examinations to be held in private in whole or in part and by requiring the transcripts of the examinations to be confidential in whole or in part. 20 The liquidator has made it perfectly clear that the commercial relationship and arrangements that may have been in place between Kagua and Transtar will be the subject of the examinations. He has specifically referred to the fact that Kagua has been left with significant unpaid payroll liabilities owing to the New South Wales and Queensland revenue authorities. In light of that disclosure, I see no reason why the applicants need access to the liquidator's affidavit in order to advance their case for directions in relation to the conduct of the examinations. The applicants have sufficient information to have "proper engagement" on this question. They will not be unfairly prejudiced in the consideration and disposal of their application for the directions they seek in relation to the conduct of the examinations.

Conclusion and disposition 21 The applicants have not made out a sufficient case for access to the liquidator's affidavit. For this reason, their application based on prayers 6 and 7 of the interlocutory process will be dismissed, with costs. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.

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