New South Wales Supreme Court CITATION : Valofo, In the matter of - Sheahan & Lock as Liq of Valofo Pty Ltd (in liq) [2010] NSWSC 1255 HEARING DATE(S) : 22 October 2010 JUDGMENT DATE : 22 October 2010 JURISDICTION : Equity Division Corporations List JUDGMENT OF : Palmer J EX TEMPORE JUDGMENT DATE : 22 October 2010 DECISION : Application dismissed. CATCHWORDS : CORPORATIONS – EXAMINATION – ABUSE OF PROCESS – whether issue and maintenance of examination summons was designed to coerce applicant into settling proceedings – whether examination summons should be set aside as abuse of process. LEGISLATION CITED : Corporations Act 2010 (Cth) – s 596B CATEGORY : Procedural and other rulings CASES CITED : Londish v Sheahan [2010] NSWSC 337 Williams v Spautz (1992) 174 CLR 509 PARTIES : John Sheahan & Ian Lock as Joint and Several Liquidators of Valofo Pty Ltd (in liq) (Plaintiffs/Respondents) Ross Edward Seller (Applicant) FILE NUMBER(S) : SC 2010/152694 COUNSEL : D. Sulan (Plaintiffs/Respondents) T.D. Castle (Sol) (Applicant) SOLICITORS : O'Neill Partners (Plaintiffs/Respondents) Atanaskovic Hartnell (Applicant) 2010/152694 Sheahan & Lock as Liq of Valofo Pty Ltd (in liq) JUDGMENT – Ex tempore 22 October, 2010 1 On 30 June 2010, the liquidators of Valofo Pty Limited procured the issue of a Summons to Mr Ross Seller under s 596B of the Corporations Act 2010 (Cth), to attend an examination on 25 August 2010 into the affairs of Valofo. 2 On 25 August 2010, Mr Seller's examination was adjourned in order to enable him to apply to set aside the Examination Summons. Mr Seller now moves to set aside the Summons on the ground that it is an abuse of process. He says that the liquidators' predominant purpose in issuing the Summons was, and is, to coerce him into accepting a settlement of litigation on terms dictated by the liquidators but not agreed by Mr Seller. 3 The relevant background to this application is set out in my judgment in earlier and different proceedings between some of the parties: Londish v Sheahan [2010] NSWSC 337. The parties to this application have requested that I hear it, notwithstanding my involvement in the earlier proceedings. 4 The relevant portions of my earlier judgment which give a background to this application are as follows: "10. Valofo is the sole unitholder of the Baltarna Trust which, in turn, is the sole unitholder of the Prime Index Lease Trust ("PILT"). PILT Nominees Limited is the trustee of PILT. The assets of PILT are a number of service stations which had been leased to Shell Petroleum. 11. Valofo is a wholly owned subsidiary of Londish Nominees Queensland Pty Ltd ("LNQ") which is, in turn, a wholly owned subsidiary of Vesudi Investments Pty Ltd ("Vesudi"). The shareholders of Vesudi are (omitting a minor shareholder of no consequence) three companies holding roughly one-third of the shareholding each, namely Tiffany Properties Pty Ltd ("Tiffany"), Argendram Pty Ltd ("Argendram") and Masalo Pty Ltd ("Masalo"). Argendram is controlled by Mr Peter Londish,Tiffany by Mr Sid Londish, and Masalo by Mr Bowman. 12. Mr Sid Londish and Mr Bowman, acting in concert through their companies, control Vesudi which, in turn, controls LNQ which, in turn, controls Valofo which, in turn, controls the Baltarna Trust, which is the sole beneficiary of PILT, which owns the service stations. 13. Mr Sid Londish and Mr Bowman say that PILT was established by the parties with the intention that, by the time the leases of the service stations to Shell expired, the mortgages on the properties would be fully paid out, the properties would be sold, the PILT trust would be wound up and the profits of the trust distributed to the Baltarna Trust which, in turn, would distribute 55% of the profits to its sole unitholder, Valofo, and 45% to interests associated with a Mr Crossman and a Mr Sellers, who were instrumental in setting up the investment scheme. The distribution of profits to entities controlled by Messrs Crossman and Sellers respectively was to be effected via the Baltarna Class Trust, which was to be a beneficiary of the Baltarna Trust. 14. It appears that by 2008 the mortgages on the service stations had been paid out. On 6 March 2008 Mr Seller, as appointor under the Baltarna Trust Deed, removed the Baltarna Class Trust as a beneficiary of the Baltarna Trust, leaving the whole of the beneficial interest in the Baltarna Trust assets in its sole unitholder, Valofo. 15. In May 2008 Mr Crossman commenced proceedings in this Court against PILT Nominees, the trustee of the Baltarna Trust, Baltarna Pty Ltd, and Mr Seller, claiming a declaration that the removal of the Baltarna Class Trust as a beneficiary of the Baltarna Trust was void and claiming orders for the removal of Baltarna as trustee of the Baltarna Trust and of PILT Nominees as trustee of PILT. 16. On 27 May 2008, Hamilton J granted interlocutory injunctions restraining PILT Nominees from dealing with the service stations. Notwithstanding this injunction, in June 2008 PILT Nominees borrowed $11.3M on the security of the service stations. The directors of PILT Nominees are Mr P. Londish and Mr Seller. Of the proceeds of the loan, about $5.3M was paid by PILT Nominees to Davlon Management ("Davlon"). Mr P. Londish is the sole director and beneficial shareholder of Davlon. 17. On 16 July 2009, by a resolution of the directors of Valofo, the company was placed in voluntary administration and Messrs Sheahan and Lock were appointed administrators. The directors of Valofo who passed the resolution were Mr Sid Londish and Mr Bowman. There is no doubt that Valofo was placed in administration in order that the administrators, with the benefit of litigation funding, could pursue Valofo's rights, through its unitholding in the Baltarna Trust, to attack the transactions with the service stations which had been effected by PILT Nominees and to secure distribution of the sale proceeds of the PILT assets ultimately to Valofo, and thence to their own companies. … 20. On 11 November 2009, PILT Nominees placed the service stations in the hands of real estate agents for sale. 21. On 26 November 2009 Mr Sid Londish and Mr Bowman, as sole directors of Valofo, resolved to place it in voluntary administration and appointed Messrs Sheahan and Lock. Again, there is no doubt that the purpose of the appointment was to enable the administrators, with the benefit of litigation funding, to pursue Valofo's rights to a distribution of the PILT assets and to attack the transactions effected by PILT Nominees." 5 On 8 December 2009, Valofo commenced proceedings 2009/029165 against Mr Seller, PILT, Baltarna and Mr Peter Londish seeking, inter alia, payment into court of the balance of net proceeds of sale of the properties held by PILT and orders restraining the Defendants from dealing with the assets of PILT and the Baltarna Trust. Directions hearings in those proceedings were stood over on a number of occasions earlier this year because Mr Peter Londish challenged the appointment of Mr Sheahan and Mr Lock as liquidators of Valofo. That challenge was heard by me and dismissed on 28 April 2010: see Londish v Sheahan (supra). 6 On the same day, the liquidators gave instructions to their solicitors to procure the issue of a Summons for the examination of Mr Seller relating to the affairs of Valofo. Mr Seller does not deny that he is capable of giving information to the liquidators concerning the affairs of Valofo. As I have mentioned, he was a director of PILT Nominees and of the trustee of the Baltarna Trust, Baltarna Pty Ltd, and he was intimately involved in the transactions which are called into question by the liquidators in the proceedings in aid of which the examination is sought. 7 On 7 May 2010, the solicitors for the defendants in the Valofo proceedings requested settlement discussions and the liquidators agreed. On 13 May 2010, the liquidators' solicitors wrote to Mr Seller's solicitors in the following terms: "Our clients are prepared to meet with Peter Londish and Ross Seller, and their respective legal representatives, with a view to resolving any and all claims that the Company and/or its liquidators may have against those parties or their related entities. In this regard we assume that all parties are intimately familiar with the affairs of PILT, Baltarna and Valofo, and that we do not therefore need to articulate the contemplated claims that our clients propose to investigate and, if appropriate, pursue. Suffice to say that our clients' starting position is that Valofo is entitled to at least $7.5 million, and that through the actions of one or more of PILT, Baltarna, Seller and Peter Londish those monies are not now readily available to the Company. In order to reach a global settlement of all matters, the Company will need to receive a substantial payment, which will then be applied by its liquidators in accordance with the provisions of the Corporations Act. Any settlement will necessarily deal with, inter alia, the following matters: 1. the debt of $419,222 owing to the Company by Feenix Investments Pty Ltd; 2. repayment of the $5.3/$5.5 million paid by PILT Nominees to Davlon Management Pty Ltd; 3. $3.34 million paid by PILT Nominees to Baltarna Pty Ltd, described as trustee commission; 4. the repayment of the ANZ facility of $4 million ($11.5 million less $7.5 million); 5. an account of the residual funds and assets held by PILT; 6. any alleged misappropriation of funds and breach of directors' duties; 7. an account of the distribution of the PILT ANZ facility of $11.5 million; 8. an account of the PILT NAB facility and any distribution therefrom; 9. any outstanding costs orders. Your clients would be aware that our clients are fully prepared to pursue the Company's entitlements through the Courts. Even a cursory investigation into our clients' track record would reveal their expertise in relation to this type of litigation and their prospects of success. Your clients should be under no illusion that this is a matter which will simply go away. However, our clients are cognisant of the fact that if they proceed with examinations, and any resultant litigation, they may be required to obtain external litigation funding which would necessarily result in a significant part of any ultimate recovery going to a funder. It is also inevitable that there will be significant professional costs incurred during the course of any investigation and subsequent litigation, all of which will result in an ultimately diminished return to the Company's stakeholders. Accordingly our clients believe that an opportunity exists now to resolve this matter for a significantly lower sum than if the matter is allowed to continue. We believe that this represents a genuine opportunity to your clients for an early resolution of all matters in dispute and look forward to meeting with a view to achieving such an outcome." 8 A meeting between the parties and their representatives took place on 28 May 2010. The possibility of a settlement of the liquidators' claims against Mr Seller was discussed. The liquidators said that they wished to have further information from Mr Seller about the borrowing by PILT of $11.5 million from ANZ Bank and about the transaction between PILT and Davlon. 9 On 2 June 2010, the liquidators sent a request to Mr Seller's solicitors seeking the provision of specified information. There was no response. 10 On 25 June, the liquidators' solicitors emailed Mr Seller's solicitors, enquiring whether Mr Seller was still interested in settlement discussions and enquiring further whether the solicitors had instructions to accept service of an Examination Summons to be issued to Mr Seller. The Examination Summons was in fact issued on 30 June 2010. 11 After some delay, Mr Seller's solicitors responded on 2 July to the request for information made on 2 June, but they provided only some of the information sought. 12 On 2 July the liquidators' solicitors sent to Mr Seller's solicitors a draft Deed of Settlement and release under cover of an email which made it quite clear that the liquidators' agreement to enter into the deed depended upon the provision by Mr Seller of the information which had been requested and the liquidators being satisfied by that information that the proposed compromise was acceptable. 13 On 22 July the parties and their solicitors attended a further meeting to discuss settlement. Further information was sought by the liquidators from Mr Seller as set out in an email from the solicitors sent later that day. 14 On 5 August Mr Seller provided certain information to the liquidators, but they regarded it as far from complete or satisfactory and they insisted on provision of all information requested. Mr T Castle, solicitor, who appears for Mr Seller, does not submit that the liquidators were not justified in insisting on receiving that information in order to enable them to determine whether to enter into a settlement with Mr Seller. 15 On 16 August Mr Seller's solicitors provided further information to the liquidators, but still it was not complete and the liquidators insisted upon all information requested being provided. 16 On 18 August the liquidators' solicitors sent the following letter to Mr Seller's solicitors: "We confirm that Mr Seller has not yet made available to us the books and records of PILT Nominees Pty Ltd, (and the PILT and Baltarna Trusts), as set out in our file note to you dated 22 July 2010. In relation to the proposed terms of the Settlement Deed, our understanding is that on the basis of the proposed deductions as advised by your client, a sale of the Property for $3.9 million (for example) would involve the following deductions: 1. National Australia Bank debt $1,975,176.81 2. Agents fees and commissions say $120,000.00 3. Payment to Radio Nominees Pty Ltd $219,000.00 4. Legal conveyancing costs $20,000.00 5. Chang, Pistilli & Simmons legal fees (estimate) $20,000.00 Total deductions $2,354,176.81 This would leave approximately $1.54 million available for Valofo. Obviously if the sale is for a price less than $3.9 million, the return to Valofo will reduce accordingly. This is not an acceptable outcome for Valofo. We note that at the conference with your client at our offices on 28 May 2010, a figure of $2 million was the sum advanced by Mr Seller as being the likely net outcome for the Company after the sale of the Property and a vesting of the remaining trust assets. Is PILT in possession or control of any other funds or assets other than the Davlon Management loans? We are instructed that if Mr Seller is not able to guarantee a net return to Valofo of $2.0 million from the sale of the Property, then the arrangements are not acceptable. The obvious source of any additional funds, is a return of a portion of the Trustee's fees and Manager's fees apparently paid from trust funds. We await your response to this letter, however we are instructed to: 1. proceed with Examination Proceedings listed for hearing on 25 August 2010; and 2. call upon the outstanding Orders for Production issued upon your clients at the production hearing of 24 August 2010." 17 On 23 August Mr Lock had a telephone conversation with Mr Seller which Mr Seller has recorded in a file note. Mr Lock complained of delay in settlement discussions and in the provision by Mr Seller of the information which the liquidators had requested. Mr Lock and Mr Seller discussed a figure which the liquidators might accept for a full release of their claims against Mr Seller. 18 Mr Seller said that he could not agree to an exact figure for settlement because the amount of the settlement figure depended upon what sale price was achieved for the only remaining asset of PILT. According to Mr Seller, Mr Lock responded: "We will come after you, you can put money in we know all about you and how you are being pursued by the ATO and Wickenby, we believe you have money overseas and we want to know all about that. Unless you give us a resolution and certainty that's what we will do as well as an application for vesting." 19 "Wickenby" is a reference to the code name of a well-publicised investigation by the Australian Taxation Office into alleged tax frauds said to involve Mr Seller, concerning transactions completely unrelated to Valofo and its affairs. 20 Mr Lock denies that he made a statement to Mr Seller in the terms which Mr Seller alleges. Mr Lock says that he was well aware that "Wickenby" was irrelevant to an examination of Valofo's affairs and he says that he had instructed examining counsel not to refer to it. 21 Mr Lock admits that he referred to "Wickenby" in his conversation with Mr Seller, but he says that he did so in the course of telling Mr Seller that he knew that Mr Seller was involved in a large scale investigation by the ATO concerning funds kept overseas and he had taken into account difficulties which might be encountered in recovering the full amount of any judgment against Mr Seller in deciding whether it was worthwhile to pursue settlement discussions which could at least ensure receipt of a certain sum in the liquidation, even if that sum was smaller than the amount of a judgment, if the litigation had proceeded to its end. 22 I accept Mr Lock's evidence. First, it is inherently probable. Both Mr Lock, an experienced liquidator, and Mr Seller, who is a solicitor and a sophisticated tax adviser, must have known that the liquidators could not even have begun to raise "Wickenby" in Mr Seller's examination for the purpose only of embarrassing him publicly. The Registrar conducting the examination would have immediately stopped such a line of questioning as irrelevant and an abuse of process. A threat by Mr Lock to raise "Wickenby" in the examination would have been seen instantly by Mr Seller as utterly empty. 23 It is true that Mr Seller has not been cross examined in this application but that does not mean that I must accept his evidence without question. I am able to assess the inherent probability of Mr Seller's evidence, having regard to the other evidence in the case. 24 A second reason I accept Mr Lock's evidence is that, having regard to all of his evidence, both in chief and in cross examination, none of which has been shaken in cross examination, I accept him as a witness of credit who is doing his best to give a careful and correct account of what he recollects of his conversations with Mr Seller. 25 A third reason is that in any event, even if one accepts Mr Seller's account of the conversation, Mr Lock did not threaten to raise "Wickenby" in the examination as a means of embarrassing Mr Seller publicly. All Mr Lock said was that he knew about "Wickenby" and that Mr Seller had funds overseas, which he could utilise in a settlement or to meet a judgment. 26 Mr Castle, who has argued the case for Mr Seller most ably, submits that I should find as a fact that the liquidators procured the issue of the Examination Summons and maintained their intention to proceed with it for an improper purpose, so that the Examination Summons should be set aside as an abuse of the court's process. As I have earlier noted, that improper purpose is said to be to coerce Mr Seller into agreeing to terms of settlement with which he otherwise would not have agreed. 27 What is an improper purpose constituting an abuse of the Court's process is authoritatively discussed in Williams v Spautz (1992) 174 CLR 509. The relevant proposition is set out in the headnote as follows: "Proceedings are brought for an improper purpose and thus constitute an abuse of propose where the purpose of bringing them is not to prosecute them to a conclusion, but to use them as a means of obtaining some advantage for which they are not designed or some collateral advantage beyond what the law offers. An improper act by the party instituting the process is not an essential ingredient in the concept of abuse of process." 28 It is not in doubt in these proceedings that Mr Seller is capable of giving information relevant to the examinable affairs of Valofo. It is not in doubt that, if the liquidators of Valofo wish to continue with the proceedings which they have commenced, then the information which Mr Seller could give could be of material assistance in prosecuting that litigation. As I have said, it could not be submitted that the issue of the Examination Summons to Mr Seller is, on its face, an abuse of process because it could not achieve a legitimate purpose in the conduct of the litigation which the liquidators have commenced. 29 However, what is said is that the Court should find as a fact that the Summons was issued and, as it were, held like the sword of Damocles over Mr Seller's head by the liquidators in order to pressure him into agreeing to the terms of settlement which the liquidators sought to impose upon him. If such a purpose was found as a fact to be the purpose or the predominant purpose of the liquidators, then, even though the issue of the Summons in itself could be supportable as a legitimate exercise of the liquidators' power, the purpose for which that power was exercised would be so improper as to lead to the conclusion that the process was an abuse of process. 30 I am very far from satisfied that the liquidators' predominant intention in issuing and proceeding with the Examination Summons was to use the threat of the examination to procure Mr Seller's agreement to terms of settlement to which he otherwise would not have agreed. I accept that the liquidators had in mind that, while settlement negotiations could be pursued, they should also proceed with the litigation in the event that the settlement negotiations came to nothing. 31 The fact that a party to litigation takes a step in prosecuting that litigation while settlement discussions are continuing does not, in itself, constitute an abuse of process even though taking that step has the effect of putting some pressure on the other side to come to agreement or else join battle in Court. Settlement discussions during the course of litigation is commonplace in litigious life. Mr Seller must have been aware of that commonplace by reason of his own professional experience. 32 I accept the liquidators' evidence that they were not persuaded that Mr Seller was entirely serious in the conduct of settlement negotiations by reason of his delay in providing the information which they sought. It took a letter from the liquidators' solicitors, enquiring as to whether Mr Seller was still serious about negotiation and a statement that an Examination Summons was about to be issued to provoke any response from Mr Seller through his solicitors. Although Mr Seller seeks to characterise that letter as a threat, in my opinion it is no more than a reminder that the settlement negotiations should proceed satisfactorily or else the parties should simply get on with the litigation. 33 Mr Castle urges that a liquidator, who has in his armoury of litigious weapons the process of examination, is in a special position distinct from that of other litigants. He says that how an examination is used or whether it is used against a defendant in proceedings brought by a liquidator can impact upon the process of settlement discussions and that a liquidator should be extremely careful in the way that he or she proceeds with examinations when a settlement discussion is in progress. 34 I do not accept that liquidators are under any special constraints in the way they conduct their litigation in terms of use of the examination process. It is certainly true that the examination process is a benefit accorded to liquidators which is not enjoyed by other litigants, but that benefit is conferred by statute because of the special difficulty in which liquidators are placed in investigating a company's affairs and deciding whether claims against third parties should be brought. Liquidators have no direct knowledge of a company's affairs by reason of their own involvement as officers of the company. They are given the examination process as a means of finding out information, particularly information which may assist in prosecuting claims against third parties. 35 It seems to me that whether or not liquidators have abused the process of an Examination Summons depends upon the same considerations as to whether they have abused any other litigious process which they might have commenced in the course of a liquidation: is the liquidator using the process, whatever it is, for a purpose for which it was not intended or designed or does the liquidator propose not to carry that process to its conclusion, but simply to use it as a means of coercion or to achieve a collateral purpose? 36 In the circumstances of this case I am, as I have said, not at all persuaded that the liquidators' purpose was to coerce Mr Seller into agreeing to terms to which he otherwise would not have agreed. It seems to me that all of the communications between the parties, including the telephone conversation between Mr Lock and Mr Seller on 23 August, shows that all the liquidators were doing was to say to Mr Seller that, unless he provided the information sought promptly and unless the settlement discussions proceeded satisfactorily, they would not delay any further and would simply press ahead with their litigation against him, employing, in that process, the legitimate means of investigation afforded by the Examination Summons. 37 For those reasons, I am not satisfied that the liquidators have been guilty of any abuse of process as alleged. The application is dismissed. 38 The liquidators seek costs of and incidental to this application on the indemnity basis. They point to some correspondence in which they offered to compromise this application on the basis that the interlocutory process of Mr Seller would be dismissed with each party to pay its own costs. I do not think that that circumstance requires the imposition of an indemnity costs order against Mr Seller. 39 Mr Seller's case was properly arguable and, indeed, it has been well argued by Mr Castle. Mr Seller was justified in proceeding on the basis that he wished the Court to determine his application on the merits. Having failed, Mr Seller will now have to bear the liquidators' costs of and incidental to the application on the party/party basis. 40 Those costs should include not only any costs of appearances in relation to this application on days prior to today, including the costs of the oral application for adjournment of the Examination Summons made to Barrett J on 25 August 2010, but they should also include any costs of and incidental to the examination of Mr Seller thrown away by reason of the successful adjournment application. 41 What amounts are included in costs thrown away will be for the costs assessor to determine. I do not attempt now to resolve any issues which may arise as to whether any particular element of costs thrown away is properly included in the costs order. 42 Therefore, the order of the Court as to costs is that Mr Seller will pay the liquidators' costs of and incidental to this application, including costs thrown away by reason of the adjournment of the examination on 25 August. – oOo – 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.