New South Wales Supreme Court CITATION : Karasmanis v Weston & Anor; In the matter of Karl Suleman Enterprizes Pty Limited [2002] NSWSC 1001 FILE NUMBER(S) : SC 5415 of 2001 HEARING DATE(S) : 6 September 2002 JUDGMENT DATE : 23 September 2002 John Karasmanis PARTIES : Paul G Weston In the matter of Karl Suleman Enterprizes Pty Limited JUDGMENT OF : Registrar Michael Whitehead COUNSEL : Mr A Ivanstoff (applicant) Mr J E Thomson and Mr C D Wood (respondent) SOLICITORS : CATCHWORDS : witnesses expenses - corporations law examinations LEGISLATION CITED : Supreme Court Rules Part 37 rule 9 Corporations Rules 1.3 Re BPTC (in liq) (1992) 29 NSWLR 713 Re Kempal Pty Ltd (1989) 17 NSWLR 550 CASES CITED : Re Spedley Securities (in liq); ex p. Australian National Industries Ltd (1991) 4 ACSR 322 Ex Parte Merrett; Re ACN 072 081 111 (1997) 25 ACSR 146 Deposit & Investment Co Ltd (receivers appointed) v Peat Marwick Mitchell & Co (1996) 39 NSWLR 267 Re Equiticorp Finance Ltd; Ex parte Brock [No.2] (1992) NSWLR 391 DECISION : The applicant's ntoice of motion filed 3 July 2002 is dismissed.; The applicant pay the respondent's costs of the motion. - 3 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION Senior Deputy Registrar Whitehead 23 September 2002 5415 of 2002 Karasmanis v Weston & Anor; In the mater of Karl Suleman Enterprizes Pty Limited JUDGMENT 1 Registrar: This is a motion filed by John Karasmanis on 3 July 2002. The motion was heard on 6 September 2002. 2 The applicant seeks an order that the respondents pay him the sum of $5,759.42, or such other sum as the Court deems appropriate. The sum relates to his costs associated with the production of documents pursuant to an order for production issued by the Court at the request of the liquidator of Karl Suleman Enterprizes Pty Limited and Froggy Holdings Pty Limited. 3 Mr A Ivantsoff appeared for the applicant. Mr J E Thomson and Mr C D Wood appeared for the respondent. 4 The applicant read the affidavit of Gregory Hilton Artup sworn 3 July 2002. There was no objection to the affidavit. 5 The applicant also tendered a copy of part of the transcript of the examination of Mr Karasmanis. It is marked exhibit "A". 6 The respondent read the following affidavits: Robert Daniel Smithies sworn 18 July 2002. Sam Duggan sworn 6 September 2002 along with the exhibits thereto. 7 There was no objection to these affidavits 8 There was no evidence in reply. 9 The applicant moves the Court under Part 37 rule 9. 10 Rule 1.3 of the Corporations Rules provides in part: (1) Unless the Court otherwise orders, these Rules apply to a proceeding in the Court under the Corporations Law, or the ASIC Law, that is commenced on or after the commencement of these Rules. (2) The other rules of the Court apply, so far as they are relevant and not inconsistent with these Rules, to a proceeding in the Court under the Corporations Law, or the ASIC Law, that is commenced on or after the commencement of these Rules. 11 The Corporation Law Rules are silent on the issue of whether a recipient of an order for production of documents is entitled to expenses for the production of documents for the purpose of an examination. An examination under the Corporations Law is a proceeding in the Court (RE BPTC (In liq) (1992) 29 NSWLR 713 at 718B). I consider that the Rules of the Court are applicable in relation to this matter. 12 The applicant was served with a document entitled "Order for Production" and a Summons for Public Examination on 12 April 2002. Both documents were dated 11 April 2002. The Order for Production was returnable before the registrar on 24 April 2002. The Summons for Public examination was returnable on 30 April 2002. The Order for Production is customarily returnable prior to the examination date in order that the liquidator has time to inspect the documents prior to the examination. 13 The Order for Production is annexure "A" to the Artup affidavit. It is directed to: "John Karasmanis John Karasmanis & Associates Accountants 131-135 George Street Liverpool.2170" 14 The Order for Production was returnable in the Court's return of subpoena list on 24 April 2002. The return of subpoena list is held at 9.00AM on four mornings each week. This list is used for return of subpoena, notices to produce and Orders for Production such as in this matter. The form used by the Respondent in this matter is not a form 46 subpoena usually used in the Court. The applicant says that the Order is a subpoena. It is best described as a hybrid document. The respondent says that it is an order pursuant to Part 36 rule 12 (paragraph 6 of the Duggan affidavit). There is nothing on the face of the document served on the applicant that says it is served under a particular part of the Rules. 15 The usual form of summons requiring the attendance of persons for examination under the Corporations Act is Form 17 of the Corporations Law Forms. That form provides for attendance at the Court by the individual and the production of documents on the same day. It does not provide for the documents to be returnable at a time other than at the commencement of the examination. There is no other prescribed Corporations Law form that is applicable to production of documents prior to an examination. 16 The Artup affidavit deposes to an informal agreement between lawyers for the liquidator and the applicant that documents be forwarded to the solicitors for the liquidator (paragraph 13). The documents were produced to Coudert Brothers, Solicitors between 26 and 29 April 2002. 17 The Order for Production does raise the issue of expenses. It says, inter alia: (i) you need not comply with this order for production: (A) unless reasonable expenses have been paid or tendered to you; 18 Part 37 rule 9 provides: "9. Where a person named is not a party and, in consequence of service of the subpoena, reasonably incurs expense or loss substantially exceeding any sum paid under rule 3, the Court may order that the party who requested the issue of the subpoena pay to the person named an amount in respect of the expense or loss." 19 The rule requires two tests to be satisfied. The first is that the applicant not be a party. The second is that the expense or loss must be substantially in excess of any sum paid under rule 3. The Court then has a discretion to order the party who issued the subpoena to pay an amount in respect of the loss or expense. Ultimately the party who bears the costs of the proceedings will bear that expense. 20 The first test is quite straight forward in this context. The applicant is clearly not a person who is identified as a party. If he had been listed in the ASIC search as a director or secretary he would probably have been named as a party to the examination. 21 Rule 3 refers to the payment of conduct money to the recipient of the subpoena. In this matter the Artup affidavit deposes to the sum of $25 being paid to the applicant when the Order for Production was served. The applicant claims the sum of $5,759.42. This is substantially in excess of the $25 tendered by the respondent. 22 I note that the Duggan affidavit annexes an affidavit of service of the Order for Production and the Summons for the examination. That affidavit deposes to $30 being tendered. In so far as it may be relevant I am inclined to accept the evidence of the process server. I also note that there is a conflict as to when the Order for Production was served. The Artup affidavit says that the applicant was served on 12 April 2002 and the process server says 15 April 2002. The Artup affidavit is probably based on information and belief, or instructions, and the process server is probably preferred if there is an issue. 23 The respondent says that this is not a matter to be dealt with under Part 37 rule 9 and that it is a matter for Part 36 rule 12. The effect of this argument, if correct, is that a different regime applies to the test of whether an applicant can recover costs for producing documents to the Court for the purposes of an examination. 24 Part 36 rule 12 complements the powers contained in Part 37 rule 6. This is clear from the wording of subrule (3), which provides: "(3) Subrules (1) and (2) apply whether or not the person required by the order to attend or produce any document or thing has been required to do so by subpoena." 25 In Re BPTC (in liq) (1992) 29 NSWLR 713 McLelland J held that the powers contained in Part 36 rule 12 permitted the issuing of an order for production of documents prior to an examination. 26 In Re Kempal Pty Limited (1989) 17 NSWLR 550 McLelland J said at 551: "It would be ordinarily unjust, if not oppressive, to require a person who had not been an officer of a company to attend for examination in relation to the affairs of that company without provision being made in respect of his or her reasonable expenses of such attendance where those expenses would be substantial,………..". 27 In that matter his Honour was considering the travel and accommodation costs of an officer or employee of a company which had had dealings with the company being investigated. His Honour was of the view that the appropriate way to deal with the matter was to make ancillary orders for the provision of payment of travel and accommodation costs. 28 In Re Spedley Securities Limited (in liq); ex p. Australian National Industries Limited (1991) 4 ACSR 322 Cohen J said at 327: "On the basis that the court has power to attach as a condition to an order under s 541 that costs or expenses of identifying or obtaining documents be paid, that should only be done where the circumstances are quite clear that the person who is the subject of the order is, in effect, a stranger to the conduct of the affairs of the company being investigated. It should also be established that it was necessary, for the purpose of complying with the order, that substantial costs or expenses were incurred or would be required to be incurred." 29 Earlier at page 326 his Honour said (when referring to Re Kempal): "It may well be that in appropriate circumstances the same principle should be applied where there is a requirement of the production of documents. If a person who was not an officer of the company or who was not closely involved in its affairs is served with an order for production of documents and faces substantial expense in obtaining those documents and bringing them to court then it may be that a similar condition should be imposed as we suggested in Re Kempal Pty Ltd to the effect that the order be amended so that the liquidator would be liable for all proper expenses shown to have been incurred for that purpose." 30 In Re Spedley his Honour found that the first test had not been established. 31 I was taken to Ex Parte Merrett; Re ACN 072 081 111 Pty Ltd (1997) 25 ACSR 146. Here Young J (as he then was) considered the setting aside of a summons for the public examination of the managing partner of a large accounting firm. At page 150 his Honour outlines the role of section 596B in the process of liquidation. There his Honour was dealing with the costs of an examinee being represented at the hearing and having an order made under section 597B. However, it does demonstrate the balancing act the Court must undertake when considering the interests of liquidators, creditors and the public. 32 I was taken to Ex Parte Merrett; Re ACN 072 081 111 Pty Ltd (1997) 25 ACSR 146. Here Young J (as he then was) considered the setting aside of a summons for the public examination of the managing partner of a large accounting firm. At page 150 his Honour outlines the role of section 596B in the process of liquidation. There his Honour was dealing with the costs of an examinee being represented at the hearing and having an order made under section 597B. However, it does demonstrate the balancing act the Court must undertake when considering the interests of liquidators, creditors and the public. 33 In Re Equiticorp Finance Limited; Ex parte Brock [No 2] (1992) 27 NSWLR 391 Young J (as he then was) dealt with the issue the costs of an examinee preparing for the examination. That seems to be distinguishable because it deals with an examination and not an order for production. 34 The respondent argues that the applicant was not a stranger to the conduct of the affairs of these companies and therefore does not qualify to be reimbursed for his expenses as this was a notice to produce issued pursuant to Part 36 rule 12. The respondent argues that the burden is on the applicant to establish that he is a stranger to the company. I consider that this is correct. 35 The respondent made a formal application to the registrar to have this order for production issued. This distinguishes it somewhat from a subpoena, which is issued by the registry almost as a matter of course (unless the applicant is unrepresented). The document served on the applicant is not a subpoena. If a recipient is served with a subpoena, legal advice would in the normal course alert the recipient to the obligations thereto. A competent legal adviser would also be aware that a summons to a person who is not an officer of a company would only be issued if section 596B of the Corporations Act can be satisfied. 36 The evidence that the respondent in supporting the allegation that the applicant is not a stranger to the conduct of the affairs of these companies is as follows: 37 Exhibit SJD3 to the Duggan affidavit annexes a schedule of payments to the applicant by Karl Suleman Enterprizes, which the applicant identifies at paragraph 9 in the affidavit. The payments total $624,700, including some $100,000 alleged to be gifts to the applicant, over a period of 9 months in 2001/02. 38 Exhibit SJD4 to the Duggan affidavit annexes a letter dated 28 May 2001 from the applicant's business to Froggy Holdings Pty Limited (the seventh defendant). It outlines the writers understanding of the terms of engagement of Karasmanis Business Services Group as consultants to the seventh defendant. 39 Exhibit SJD5 annexes a further letter dated 28 May 2001, which sets out the terms of payment of fees to the applicant and a number of tasks requiring immediate attention. 40 Exhibit SJD6 annexes a letter from the applicant to Personnel at Froggy Holdings Pty Limited announcing the appointment of the applicant as "Accountant and Business Services Consultant" to Froggy Holdings. This letter is on the applicant's letterhead and is countersigned by the Managing Director of Froggy Holdings, Mr Suleman. 41 Exhibit SJD7 annexes a number of tax invoices of fees due to the applicant from Froggy Holdings. The largest invoice is for the sum of $330,000 and is dated 22 October 2001. The detail of work done is listed on one and a half pages. 42 Exhibit SJD8 annexes an affidavit of the applicant sworn on 13 September 2001. The document appears to be in proceedings in the Court, however there is no matter number on the affidavit. Froggy Holdings is the plaintiff. The first paragraph of the affidavit says: "1. I am the Group Manager for the plaintiff." 43 The applicant's Exhibit "A" is an extract of the evidence given by the applicant at the examination. There the applicant denies that he should be described as a de facto chief executive of Froggy Holdings. 44 Considering all of these matters it is clear that the applicant must have done an enormous amount of work for Froggy Holdings. He has certainly billed Froggy Holdings for large amounts of work. 45 The ASIC search, which forms SJD1 to the Duggan affidavit, does not disclose that the applicant was an officer of the company. 46 In Re Spedley Cohen J was dealing with orders for production directed to secretaries of several companies. The companies being directed to produce documents and the companies being investigated were related by directors and financial transactions. 47 Here I consider that the applicant and the companies being investigated are similarly related. The documents sought by the order for production are mostly those of the companies being investigated. The applicant appears on the evidence to be so closely related to the affairs of the companies that he could not be described as a stranger to the conduct of the affairs of the companies. 48 On the test laid down in Re Spedley I cannot allow the applicant the expenses he seeks. 49 Although I am not required to decide this issue, I note that there was no challenge to the quantum of expenses claimed by the applicant. I am satisfied that the quantum of expenses was incurred. 50 The respondent has been successful and should have its costs. Orders 1. The applicant's notice of motion filed 3 July 2002 is dismissed. 2. The applicant pay the respondent's costs of the motion. I certify that this and the preceding 9 pages are my reasons for decision M D Whitehead Last Modified: 01/30/2003 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.