New South Wales Court of Appeal CITATION : Pockett & Ors. v. Dean-Willcocks & Anor. [2004] NSWCA 192 HEARING DATE(S) : 8 June 2004 JUDGMENT DATE : 18 June 2004 JUDGMENT OF : Hodgson JA at 1; Tobias JA at 35; Bryson JA at 36 DECISION : Application for leave to appeal dismissed with costs. CATCHWORDS : CORPORATIONS - Voluntary administration - Summons for examination of employees of proposed defendant - Proposal for litigation funding - Whether proposed arrangement champertous - Whether summons for proper purpose. LEGISLATION CITED : Corporations Act 2001 (Cth) ss.596B, 596C Supreme Court (Corporations) Rule 1999, r.11.5 Emanuel Investments Pty. Ltd. (In Liq); Saint v. Macks [ 1999] SASC 265 Hong Kong Bank of Australia Ltd. v. Murphy (1992) NSWLR 512 CASES CITED : Leisure Developments (Queensland) Pty. Ltd., Re (2002) 41 ACSR 276 Movitor Pty. Limited, Re (1996) 19 ACSR 440 Trendtex Trading Corporation v. Credit Suisse [1982] AC 679 William Felton Pty. Limited, Re (1998) 28 ACSR 228 Tom Pockett - 1st claimant So Sochim - 2nd claimant Penny Winn - 3rd claimant Mark Kelly - 4th claimant PARTIES : Steven Bradley - 5th claimant Gerard Rohl - 6th claimant Dick Smith Electronics Pty. Ltd. - 7th claimant Intertan Australia Limited - 8th claimant Woolworths Limited - 9th claimant Ronald John Dean-Willcocks and Ian James Purchas - opponents FILE NUMBER(S) : CA 40279/04 COUNSEL : Mr. J.N. West QC with Mr. R. McHugh for claimants Mr. C.R.C. Newlinds SC with Ms. A. Seward for opponents SOLICITORS : Corrs Chambers Westgarth, Sydney for claimants Kemp Strang, Sydney for opponents LOWER COURT Supreme Court - Equity Division JURISDICTION : LOWER COURT SC6063/03 FILE NUMBER(S) : LOWER COURT Windeyer J JUDICIAL OFFICER : IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40279/04 SC 6063/03 HODGSON JA TOBIAS JA BRYSON JA Friday 18 June 2004 POCKETT & ORS. V. DEAN-WILLCOCKS & ANOR. Judgment 1 HODGSON JA: On 2 April 2004, Windeyer J dismissed with costs an interlocutory process filed by the claimants on 23 February 2004. The claimants seek leave to appeal from that decision. The application for leave has been argued on the basis that, if leave is granted, the appeal will be decided without further argument. CIRCUMSTANCES 2 The proceedings arise from the granting by the Registrar in the Equity Division of an examination summons and the issue of orders for production of documents in relation to a company called Etrend Pty. Limited (Etrend). That company had been in negotiation with interests associated with Woolworths Limited (Woolworths) for some time in relation to a proposed production of electronic gift cards. Those negotiations ended, and on 13 June 2003, Etrend was placed into voluntary administration pursuant to s.439A of the Corporations Act 2001 (Cth) (the Act), and the opponents were appointed as the company's voluntary administrators. 3 On 2 July 2003, the opponents issued a Report to Creditors of Etrend. The report referred to the directors' Report As To Affairs which showed assets having an estimated realisable value of $217,690.00, priority creditors of $67,356.00 and unsecured creditors of $1,009,475.00, including one director Brett Blundy allegedly owed $914,542.00. The report referred to a possible cause of action as follows: As noted in section 1 herein a possible action against Woolworths exists with respect to the Giftpos system. Prior to our appointment the directors had taken preliminary legal advice on same and we, likewise, have now received initial positive preliminary legal advice. We have not at this stage considered the likely quantum of claims however our investigations into the possibility of recovery from Woolworths in conjunction with directors and our solicitors continue. In the event we proceed with any action it is likely that we will hold public examinations of key parties with a view to better ascertaining the facts and then consider committing further Company funds or seeking litigation funding from creditors or litigation funders to pursue the matter. 4 On 26 October 2003, Etrend executed a Deed of Company Arrangement with the opponents. This deed contained a number of definitions, including the following definitions of "examination" and "litigation": "Examination" means the possible examination pursuant to Part 5.9 of the Corporations Act of, inter alia, Woolworths in respect of the subject matter of the Litigation, including preparatory investigation. "Litigation" means the likely proceedings by the Administrators and/or the Company as may be commenced against inter alia, Woolworths following further investigation and Examination. 5 Clause 12 of the deed was in the following terms: 12. LITIGATION 12.1 The Company and Directors undertake that the Administrators, as Administrators of this Deed, shall investigate and conduct the Examination and the Administrators may prosecute the Litigation subject to the Conditions and the provisions of this Deed. 12.2 The Directors shall do all things and provide all assistance as may be required of the Administrators, with respect to the Examination or the Litigation. 12.3 The parties intend that the Administrators will obtain Litigation Funding within three months of the date of this Deed, or such later date as the Administrators may absolutely determine, and in which event, subject to the provisions of this Deed: (a) the Administrators shall prosecute the Litigation, as may be commenced, in accordance with the rules, practice or orders of the relevant Court; and (b) the Directors shall use their best endeavours to assist the Administrators to pursue the Litigation. 12.4 In the event that, as a result of any investigation or the Examination, the Administrators obtain offers or proposals from more than one Funder, then the Administrators shall determine, in their absolute discretion, as to the appropriate Funder, and shall implement an arrangement with such Funder as may be determined by the Administrators. 12.5 For the avoidance of doubt, the Funder and the terms of the Litigation Funding shall be determined by the Administrators. 6 The primary judge commented as follows on this deed: The deed envisages that the proposed examination would be funded from the proceeds of the cash retained by the administrators and the proceeds of sale of the company assets (other than the chose in action against Woolworths) these forming the first two parts of the deed fund, as defined, and that after the examination has been conducted, and presumably depending upon the result of the examination, litigation funders will be approached to provide funding to enable the company to take action against Woolworths if it seems that such an action is justified. 7 During November 2003, the opponents entered into correspondence with Litigation Lending Services, a litigation funder, advising that it was likely that litigation funding would be required. 8 On 2 December 2003, the opponents (in their capacity as Deed Administrators of Etrend) obtained from the Registrar of the Equity Division a discretionary summons for public examination issued under s.596B of the Act in respect of the first to fifth defendants, who are employees of the ninth claimant Woolworths. On the same day, the opponents issued orders for production to each of the claimants. 9 On 23 February 2004, the claimants filed an interlocutory process, seeking orders that they have made available to them the materials relied on by the opponents and the Court in relation to the issue of the examination summons; that the summons be discharged; and that the orders for production be set aside. 10 On 23 March 2004, Windeyer J heard this interlocutory process. In the course of so doing, he extended the time for the claimants to comply with the orders for production, and he also granted the claimants access to the material relied on by the opponents to obtain the issue of the examination summons. 11 On 2 April 2004, the claimants produced documents pursuant to orders for production, but access was not granted to the opponents. On the same day, the primary judge dismissed the interlocutory process, but stayed proceedings on the examination summons. 12 The summons for leave to appeal from that decision was filed on 13 April 2004. The examination summons and access to the documents produced are stayed pending disposal of the leave application. STATUTORY PROVISIONS 13 Sections 596B and 596C of the Act are in the following terms: 596B(1) The Court may summon a person for examination about a corporation's examinable affairs if: (a) an eligible applicant applies for the summons; and (b) the Court is satisfied that the person: (i) has taken part or been concerned in examinable affairs of the corporation and has been, or may have been, guilty of misconduct in relation to the corporation; or (ii) may be able to give information about examinable affairs of the corporation. (2) This section has effect subject to section 596A. 596C(1) A person who applies under section 596B must file an affidavit that supports the application and complies with the rules. (2) The affidavit is not available for inspection except so far as the Court orders. 14 The Supreme Court (Corporations) Rules 1999 contain the following provision concerning discharge of examination summons: 11.5 Discharge of examination summons (1) This rule applies if a person is served with an examination summons. (2) Within 3 days after the person is served with the examination summons, the person may apply to the Court for an order discharging the summons by filing: (a) an interlocutory process seeking an order discharging the summons, and (b) an affidavit stating the facts in support of the interlocutory process. (3) As soon as practicable after filing the interlocutory process seeking the order and the supporting affidavit, the person must serve a copy of the interlocutory process and the supporting affidavit on: (a) the person who applied for the examination, and (b) unless that person is the Commission or a person authorised by the Commission - the Commission. DECISION OF PRIMARY JUDGE 15 Before the primary judge, the claimants argued that the purpose of the examination was to obtain evidence to place before a funder with a view to entering into a champertous arrangement with the funder. It was submitted that this was an improper purpose, and reliance was placed on Trendtex Trading Corporation v. Credit Suisse [1982] AC 679 and Emanuel Investments Pty. Limited (In Liq); Saint v. Macks [1999] SASC 264. 16 The primary judge held that there were exceptions to the general principle with made champertous agreements unlawful, particularly in cases of insolvency: see Re William Felton Pty. Limited (1998) 28 ACSR 228, Re Movitor Pty. Limited (1996) 19 ACSR 440. He held that it was not shown the contemplated funding agreement would be unlawful in this case. He distinguished Emanuel on the basis that, in that case, the purpose of the examination was to obtain information about insurance which the defendants to the proposed litigation may have had; whereas here, there was the basis for a claim against the Woolworths interests, and the administrators were justified in seeking information to assess the strength of that claim. 17 The primary judge also rejected submissions concerning the exercise of discretion, in particular that the examination would give the administrators an unfair forensic advantage; that the litigation was in the interests of just one creditor, Mr. Blundy; that the examinees were not directors or officers or employees of Etrend; and that the deed administrators were not officers of the Court. PROPOSED GROUNDS OF APPEAL 18 The claimants seek leave to appeal on the following grounds: 1 His Honour erred: (a) in failing to find that the examinations and the orders for production are in furtherance of an arrangement which is champertous; (b) in holding that because the opponents had been appointed deed adminsitrators (sic) to Etrend Pty Limited ("Etrend") clause 12.3 was not void as an agreement to traffic in litigation contrary to the rule of public policy identified by the House of Lords in Trendtex Trading Corporation v Credit Suisse [1982] AC 679, 694-695 because the Adminsitrators (sic) have a proper interest in conducting the examinations; (c) in failing to hold that the examination orders were sought by the opponents to facilitate the object embodied in clause 12.3, which is to procure litigation funding, having first examined the applicants about the likely proceedings against Woolworths; (d) in finding that the purpose of the examinations was to assess the strength of the claim against Woolworths [para 8] and only then to approach funders to provide the funding to institute action against Woolworths [para 6]; (e) in failing to hold that such an arrangement is contrary to public policy; and (f) in failing to hold that the Court should not lend its processes to such an arrangement. 2 His Honour erred: (a) in failing to find that the predominant purpose of the examinations and orders for production is to obtain information to place before a third party litigation funder, and (b) in failing to hold that such a purpose is collateral and improper. 3 The Court's exercise of discretion miscarried in that: (a) the Court mistook the facts, being the matters stated at grounds 1(a) and 2(a) above and grounds 4 and 5 below; (b) the Court acted on wrong principles, being the matters stated at grounds 1(e) and (f) and 2(b) above; (c) the Court's exercise of discretion was manifestly unreasonable and unjust in all the circumstances; (d) the Court failed to consider, or alternatively failed to give any weight to, or alternatively failed to give sufficient weight to the following relevant matters: (i) The express purpose of the examinations is to benefit a third party funder; (ii) The examination will give an unfair forensic advantage to Etrend and the Deed Administrators; (iii) The fact that the Administrators have access to all the information of Etrend and its directors such that the Administrators are under no disadvantage which would justify the use of coercive powers of examination and production; (iv) The litigation is largely in the interests of a particular director, the largest creditor; (v) The examinees are employees of the Woolworths interests, not directors or officers of Etrend; (vi) The fact that the matters likely to be the subject of the examinations are remote from the examinable corporate affairs of Etrend itself; and (vii) The deed administrators are not officers of the Court. 4 His Honour erred in finding that the purpose of the examinations is for the Administrators to assess the strength of Etrend's claim against Woolworths and that there is no collateral purpose to the examinations. 5 His Honour erred in failing to find: (a) that the Administrators have access to all the information of Etrend and its directors such that the Administrators are under no disadvantage which would justify the use of coercive powers of examination and production; (b) that the litigation is largely in the interests of a particular director, the largest creditor; and (c) that he (sic) matters likely to be the subject of the examinations are remote from the examinable corporate affairs of Etrend itself. 6 His Honour erred in declining to grant to the Appellants orders under Supreme Court (Corporations) Rules Rule 11.5 discharging the summonses issued under section 596B of the Corporations Act to each of the first through sixth Appellants. 7 His Honour erred in declining to grant to the Appellants orders setting aside the Orders for Production issued pursuant to Part 36 rule 12 of the Supreme Court Rules issued to each of the first through ninth Appellants and any of Douglas Carlson, Ken Douglas, Bill (William) Wavish and Rob Edgar. SUBMISSIONS 19 Mr. West QC for the claimants made three broad submissions. 20 First, he submitted that the orders had been sought and obtained pursuant to a champertous arrangement between the scheme administrators and the company, because, under the terms of the deed, the administrators were bound to make an agreement with litigation funders that would be champertous. Even though it was possible that the circumstances could be such, and the terms of the funding arrangement could be such, that the funding arrangement would not be unlawful, it was not shown that this would be so in this case; and the Court should not lend its aid to what was prima facie a champertous arrangement. Statutory provisions authorising an administrator or liquidator to dispose of company property, including causes of action, were insufficient to overcome the problem, because it was still necessary to determine whether a particular sale was a proper and bona fide exercise of that power: see Movitor. The primary judge was in error in dealing with this question, because he did not qualify his statements to the effect that the arrangement would be proper without the necessary qualification "so long as the power is exercised bona fide". 21 Second, Mr. West submitted that the purpose of the proposed examination was not the purpose of assessment by the administrators of the merits of the cause of action, but to obtain information for the proposed litigation funder; and this was an improper purpose. 22 Third, Mr. West submitted that the Court's discretion as to whether to issue the summons, and to permit the summons to remain, miscarried. There were very powerful considerations against issuing a summons in this case, and a case in favour of issuing the summons was not made out. The persons to be examined were not employees or officers of the company, but of an arm's-length third party. It was necessary for the Court to be careful to ensure that the rights of such persons are not trampled on without justification. 23 In this case, Mr. West submitted, there was no material showing what information the administrators lacked and what information they needed to assess the merits of the cause of action. The administrators had the benefit of covenants obliging directors to assist with the cause of action, and they had letters and emails setting out representations on which it was said the company relied. In general terms, the company and the administrators had the same information that the company would have had if it had not gone into administration. Mr. West submitted that the purpose that could be discerned was to obtain a forensic advantage. Although the gaining of a forensic advantage could be the consequence of an examination obtained for a legitimate purpose, as shown by Hong Kong Bank of Australia Limited v. Murphy (1992) 28 NSWLR 512, it was still necessary that there be this legitimate purpose, which was not shown in this case. 24 Certainly, Mr. West submitted, the primary judge had not appropriately addressed the matters going to the exercise of the Court's discretion. DECISION 25 In my opinion, there is no substance in the first two submissions. 26 As regards the first submission, it is clear that litigation funding of an administrator of an insolvent company can be provided in such a way as to be lawful; and indeed, it appears that it will be lawful unless the administrator disposes of a cause of action otherwise than in bona fide exercise of the power to dispose of the property of the company. In my opinion, it should not be assumed that the administrators in this case would, in performance of the terms of the deed, enter into an unlawful agreement; and in my opinion, there was no need for the administrators to prove to the Court at this stage what the terms of any funding agreement would be. 27 On the second point, the primary judge found that the administrators had the purpose of getting information as to the strength of the cause of action, and certainly he did not find that their predominant purpose was to provide information to a proposed litigation funder. No basis is shown to suggest that those findings were in error. The purpose of getting information as to the strength of the cause of action would be a proper purpose. The circumstance that the administrators may also have proposed to submit this information to a litigation funder could not make their purpose improper, or make the obtaining of the examination summons an abuse of process. 28 On the third matter, the primary judge's reasons addressed to the exercise of discretion were brief. However, he did find that the purpose of the examination was to assess the strength of the company's claim against the Woolworths interests, and that no collateral purpose had been shown; and in circumstances where those findings had been made, the other factors referred to by the primary judge did not carry such weight as to require detailed consideration. 29 Particular submissions were advanced to the effect that the material put to the Registrar, and put before the primary judge once access to that material had been obtained, did not show what information the administrators lacked, particularly where they had written records concerning alleged representations, the co-operation of directors, and in general terms all the information that the company would have had if it was not in administration. 30 In my opinion, the affidavit relied on before the Registrar sufficiently showed that the administrators considered that information was lacking as to a number of relevant matters, including the reasons why Woolworths withdrew from the negotiations (which could be relevant to reasonable grounds under the Trade Practices Act, and to possible claims by the company based on estoppel or breach of contract); to what extent, if any, Woolworths disputed the making of representations; and the potential quantum of damages. The administrator who made that affidavit was not cross-examined in relation to those matters; and the only submission concerning them that was made was as follows: Until the Administrators identify the information which they seek and articulate their need for that information, it is difficult for the court to assess the weight to be given to this factor in the exercise of its discretion. 31 The lack of cross-examination is at least partly due to the procedure adopted in these cases. Under s.596C of the Act, the material on the basis of which the summons is initially issued is not available for inspection except so far as the Court orders; and r.11.5 of the Supreme Court (Corporations) Rules 1999 makes it clear that the interlocutory process seeking the discharge of the summons must be supported by an affidavit stating the facts in support of the interlocutory process. Not only does it appear not necessary for the administrator or liquidator who obtained the issue of the summons to read the affidavit relied on to obtain the summons at the hearing of an application to discharge such a summons, but it also appears that the person applying to discharge the summons must show a prima facie case before a discretion will be exercised by the Court in favour of giving the applicant access to that material: see Re Leisure Developments (Queensland) Pty. Limited (2002) 41 ACSR 276 at [32]-[46]. I am inclined to think that, if access is granted, it would be open to persons applying for an order discharging the summons to apply to the Court to be permitted to cross-examine the deponent of the relevant affidavit, but I would not consider the absence of such an application in this case as precluding the submission made before the primary judge or the submission made to this Court. 32 However, in the absence of that cross-examination and in the absence of evidence to the contrary, in my opinion the affidavit relied on by the administrators did sufficiently disclose the nature of the information which the administrators considered they lacked and which the administrators wished to obtain through the summons. CONCLUSION 33 Because of the careful submissions advanced on behalf of the claimants, I have entered into some discussion of the grounds sought to be advanced. However, this is an application for leave to appeal from an interlocutory and discretionary decision, and in my opinion no sufficient ground has been made out to justify the granting of leave to appeal. 34 For those reasons, in my opinion the application for leave to appeal should be dismissed with costs. 35 TOBIAS JA: I agree with Hodgson JA. 36 BRYSON JA: I agree with Hodgson JA. ********** Last Modified: 06/18/2004 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.