Sule Arnautovic in his capacity as liquidator of Think Systems Pty Limited [2006] NSWSC 787

New South Wales Supreme Court

CITATION : Sule Arnautovic in his capacity as liquidator of Think Systems Pty Limited [2006] NSWSC 787

HEARING DATE(S) : 24/07/06

JUDGMENT DATE : 8 August 2006

JURISDICTION : Equty Division Corporations List

JUDGMENT OF : Barrett J

DECISION : Application for access to s.596C affidavit dismissed

CATCHWORDS : CORPORATIONS - winding up - examinations by liquidator - application for access to s.596C affidavit - need to show arguable case in favour of setting aside of examination summons - no arguable case of abuse of process

LEGISLATION CITED : Corporations Act 2001 (Cth), Part 5.3A, ss.471B, 596C Supreme Court (Corporations) Rules 1999, rules 11.3(4), 11.3(7)

Meteyard v Love (2005) 224 ALR 588 CASES CITED : Re New Tel Ltd; Evans v Wainter Pty Ltd (2005) 54 ACSR 284 Re Southland Coal Pty Ltd [2006] NSWSC 184

PARTIES : Sule Arnautovic in his capaity as liquidator of Think Systems Pty Limited - Plaintiff John Elzink, Peter Mezaks, Giri Ramachandran, Paddy Hore and Telstra Corporation Limited - Applicants

FILE NUMBER(S) : SC 3310/06

COUNSEL : Mr I.M. Jackman - Plaintiff Mr J.R.J. Lockhart - Applicants

SOLICITORS : Makinson & d'Apice - Plaintiff Freehills - Applicants

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

BARRETT J

TUESDAY, 8 AUGUST 2006

3310/06 SULE ARNAUTOVIC IN HIS CAPACITY AS LIQUIDATOR OF THINK SYSTEMS PTY LIMITED JUDGMENT 1 By an amended interlocutory process filed in court on 24 July 2006, four individuals seek an order under s.596C(2) of the Corporations Act 2001 (Cth) permitting them to inspect the affidavit sworn in support of an application for the issue of examination summonses under s.596B in respect of those persons. There are other claims as well but they are not pressed at this point. 2 The examination summonses were issued on 29 June 2006 on the application of Mr Arnautovic, the liquidator of Think Systems Pty Limited ("Think"). He became the liquidator on 29 September 2005 under the form of creditors' voluntary winding up that follows on from voluntary administration under Part 5.3A. The administration had been imposed by Sojitz Australia Limited ("Sojitz"), a secured creditor of Think. 3 Where an "eligible applicant" (such as a liquidator) seeks to examine persons who are not officers of the company within the purview of s.596A, the eligible applicant must make application to the court under s.596B. The application must be supported by an affidavit which complies with the rules: see s.596C(1). Under s.596C(2), the affidavit "is not available for inspection except so far as the Court orders". Under rule 11.3(4) of the Supreme Court (Corporations) Rules 1999, the application and affidavit must be filed in a sealed envelope marked in a particular way. Rule 11.3(7), echoing s.596C(2), says that the affidavit is not available for inspection by any person unless the court otherwise orders. 4 The principles relevant to an application for access to a s.596C affidavit are well settled. They emerge from a number of cases, including the recent decision of the Court of Appeal in Meteyard v Love (2005) 224 ALR 588. The principles are conveniently summarised in the judgment of Austin J in Re Southland Coal Pty Ltd [2006] NSWSC 184 at [104]: "I was referred to a number of cases in which courts have considered whether access to the affidavit should be granted: Re Excel Finance Corp Ltd; application of England (1994) 14 ACSR 407; Re Moage Ltd (in liq) (1997) 25 ACSR 53; Re Pegasus Gold Australia Pty Ltd [1999] NSWSC 954; Re Leisure Developments (Queensland) Pty Ltd (in liq) (2002) 41 ACSR 276; Re Allstate Explorations NL (2003) 46 ACSR 379; Fetzer v Irving (as liq of Mawson KLM Holdings Pty Ltd (in liq)) (2005) 52 ACSR 354. The principles upon which the court acts, in the exercise of its discretion under s 596C, are not in contention. As Basten JA said in Meteyard (at [141]), after citing Fetzer v Irving , "an applicant for disclosure of the affidavit will generally be able to obtain access to the affidavit if he or she can demonstrate an arguable case that the issue of the summons exceeded the power of the court under s 596B and that access to the affidavit is likely to assist in determining the correctness of the challenge". However, as the Full Federal Court pointed out in Re Excel Finance Corp (14 ACSR at 429), there are sound reasons why inspection, though prima facie to be allowed, should not be freely granted, "for so to do could afford an examinee information which could permit the examination process to be frustrated", and could disclose confidential information that should properly be withheld. Those matters do not arise in the present case, but here there are other considerations pointing against the grant of access." 5 The present individual applicants will not make out an entitlement to the relief they seek unless, in the words of Basten JA in Meteyard v Love (at [141]), they can "demonstrate an arguable case that the issue of the summons exceeded the power of the court under s.596B and that access to the affidavit is likely to assist in determining the correctness of the challenge". But even then, the court must be conscious of the possibility that an examination might nevertheless proceed and that access by an examinee to the affidavit may compromise that process. 6 With these principles in mind, I turn to the present application. The four proposed examinees are all employees or former employees of Telstra Corporation Limited. I have not so far mentioned that that company has been served with an order for production of document made on the liquidator's application and that it too joins in the application under s.596C(2) for leave to inspect the s.596C(1) affidavit. 7 Litigation in the Federal Court of Australia is on foot between Telstra as plaintiff and the company and its liquidator as defendants. The litigation was commenced in March 2006. In those proceedings, Telstra appeals against the liquidator's rejection of a proof of debt lodged by Telstra in the winding up in respect of a claim of $8,670,613 (a separate proof for services rendered in the sum of $189,682 has been admitted). Telstra's claims quantified by it at more than $8 million are based on alleged misrepresentation and misleading and deceptive conduct by Think in a commercial context which, as the correspondence in evidence shows, is complex and involves, in addition to Telstra and Think, Sojitz Australia Limited and others. A detailed letter of demand was sent to Telstra by Sojitz in September 2005. It may be noted that Sojitz and Telstra are, as to value (or alleged value), the only creditors of Think of any consequence. 8 There is reference in the correspondence to the fact that the liquidator of Think is being funded by Sojitz, but not as to matters raised by Telstra concerning the validity or enforceability of the charges granted by Think to Sojitz. 9 In May 2006, the dispute grew when the solicitors for the liquidator wrote to Telstra alleging that a settlement agreement dated 22 February 2005 to which Think, Telstra and others were parties entailed a voidable transaction to the extent of more than $2 million within s.588FE. 10 The liquidator's report of 31 May 2006 outlines a further possible claim against Telstra, being a claim of some $6 million or $7 million for non-payment for equipment, goods and components. 11 It is accepted that the four individuals who have been served with examination summons were, as Telstra employees, involved in the dealings between Telstra and Think. Each of the individuals would most likely be a witness in not only the present proceedings concerning Telstra's proof of debt but also in any enlarged or further proceedings in relation to the alleged voidable transaction and Telstra's alleged non-payment for equipment, goods and components. 12 The applicants maintain that there is an arguable case for having the examination summonses set aside and that, for that reason, they must be given access to the affidavit. The allegation is one of abuse of process: that the examinations will be undertaken for a predominant purpose of gaining for the liquidator an unfair advantage in relation to litigation with Telstra, including by way of "dress rehearsal" for cross-examination of Telstra witnesses. The allegation is made by reference to principles conveniently summarised in the judgment of Lander J (with the general concurrence of Ryan and Crennan JJ) in Re New Tel Ltd; Evans v Wainter Pty Ltd (2005) 54 ACSR 284 at p.323: "In my opinion, the following propositions relevant to these appeals emerge from the legislation and the authorities. 1. The power given to the Court to summon a person for examination is a coercive power. 2. The purpose of the power is to be gleaned from the legislation. 3. The following legitimate purposes emerge: 3.1 First, an examination is designed to serve the purpose of enabling an eligible applicant to gather information to assist the eligible applicant in the administration of the corporation. 3.2 Secondly, it assists the corporation's administrators to identify the corporation's assets, both tangible and intangible. It also allows the corporation's liabilities to be identified. 3.3 Thirdly, the purpose is to protect the interests of the corporation's creditors. 3.4 Fourthly, it serves the purpose of enabling evidence and information to be obtained to support the bringing of proceedings against examinable officers and other persons in connection with the examinable affairs of the corporation. 3.5 Fifthly, it assists in the regulation of corporations by providing a public forum for the examination of examinable officers of corporations. 4. If an eligible applicant applies for an order for the examination of a person for a purpose unconnected with the purposes authorised by the legislation that will be an abuse of process and the order, if obtained, will be set aside. 5. The procedure may not be used to allow a party to obtain a forensic advantage and, if it is, any order obtained will be set aside. 6. The procedure may not be used as a dress rehearsal for the cross-examination of a person in a pending or subsequent action. However, it is not improper to seek an order of the Court to summon a person for examination whilst litigation is pending against that person or entities connected with that person. 7. The question whether in any particular case the applicant has used the procedure abusively will depend upon the applicant's purpose in seeking the order and all of the surrounding circumstances. It will not be an abuse unless an offensive purpose is at least the predominant purpose. 8. It will be an offensive purpose if the application cannot be characterised as being for the benefit of the corporation, its contributories or creditors. 9. A creditor may, if first authorised by ASIC, apply to the Court for an order to summon for examination a person for the purpose of obtaining information in relation to a debt owed to the creditor if such an examination would be in the interests of the corporation or its creditors as a whole. 10. A creditor may not use the procedure for the purpose of obtaining a forensic advantage which would not have been available to the creditor if the corporation had not gone into administration." 13 Having regard to these principles, the arguable case for having the examination summonses set aside is said by the applicants to arise from the following circumstances: 1. Because of the identity of the examinees, the roles they played and the descriptions of documents to be produced (see point 5 below), the subject matter of the proposed examinations is likely to be the same as the subject matter of the existing Federal Court proceedings and any enlargement or supplementation of them. 2. The liquidator did not seek to pursue examinations until some months after Telstra commenced the proceedings now extant. This was despite the fact that Telstra had first been put on notice of the general body of relevant claims by Sojitz in September 2005. 3. The liquidator did not suggest at any meeting of creditors or in any report to creditors that consideration was being given to examinations as a desirable or useful step to investigate relevant matters. 4. The past and present Telstra employees are required for examination but, it seems, neither Ms Field, the sole director of Think, nor her father (who, it appears, may have acted as some kind of shadow director) has been served with an examination summons. 5. Having regard to the categories of documents sought, the proposed examinations have no "focus". The categories are defined by reference to a period of more than three years (1 July 2002 to 22 August 2005) and begin with all documents relating to: