Supreme Court New South Wales Medium Neutral Citation: In the matter of Belinda International Pty Ltd (Subject to Deed of Company Arrangement) ACN 055 392 777 (No 2) [2011] NSWSC 1420 Hearing dates: 21 November 2011 Decision date: 25 November 2011 Jurisdiction: Equity Division - Corporations List Before: Ball J Decision: (1) The subpoena to produce issued on 24 October 2011 to Jacqueline Yencken be set aside; (2) The subpoena to produce issued on 26 October 2011 to RBK Partners Pty Ltd be set aside; (3) The plaintiff pay the first defendant's costs of the amended interlocutory process filed on 11 November 2011. Catchwords: PROCEDURE - civil - subpoena - application to set aside - subpoenaed material not relevant to pleaded case Legislation Cited: Corporations Act 2001 (Cth) Cases Cited: In the matter of Belinda International Pty Ltd (Subject to Deed of Company Arrangement) ACN 055 392 777 [2011] NSWSC 1283 Portal Software International Pty Ltd v Bodsworth [2005] NSWSC 1115 Category: Procedural and other rulings Parties: Gordon Devin (Plaintiff) Belinda International Pty Ltd (Subject to Deed of Company Arrangement) ACN 055 392 777 (First Defendant) Adam Shepard in his capacity as Deed Administrator of Belinda International Pty Ltd (Subject to Deed of Company Arrangement) ACN 055 392 777 (Second Defendant) Adam Farnsworth in his capacity as Deed Administrator of Belinda International Pty Ltd (Subject to Deed of Company Arrangement) ACN 055 392 777 (Third Defendant) Representation: Mr D R Sulan (Plaintiff) Mr M Rosenblatt (First Defendant) Watson Mangioni Lawyers (Plaintiff) Somerset Ryckmans (First Defendant) File Number(s): 2011/311585 Judgment 1By amended interlocutory process filed on 11 November 2011, Belinda International Pty Ltd, which is subject to a deed of company arrangement entered into on 26 September 2011 ( DOCA ), seeks to set aside subpoenas addressed to Ms Jacqueline Yencken and RBK Partners Pty Ltd. Ms Yencken has provided funding to Belinda following the entry into the DOCA. RBK Partners are Belinda's external accountants. 2Some of the background to this matter is set out in the judgment I delivered on 1 November 2011 ([2011] NSWSC 1283). It is not necessary to repeat all that background here except to say that by his originating process the plaintiff, Mr Devin, seeks an order under s 445D of the Corporations Act 2001 (Cth) ( the Act ) that the DOCA be terminated or, alternatively, an order pursuant to s 445G of the Act that the DOCA be declared void. 3The creditors of the company have been divided into two pools. Under the terms of the DOCA, creditors falling within pool A are expected to receive 100 cents in the dollar and creditors falling within pool B are expected to receive 5 cents in the dollar. Mr Devlin is a pool B creditor. The principal source of funding for the DOCA is the ongoing trading of Belinda. 4On 19 September 2011, shortly before the second creditors' meeting, AR Management Pty Limited ( ARM ) lodged an expression of interest for Belinda's assets with the administrators and, on 20 September 2011, made an offer to acquire Belinda's assets on certain terms. ARM, through one of its subsidiaries, is a competitor of Belinda. It is also funding the current proceedings brought by Mr Devlin. The amount offered by ARM was $2,353,895.00. If an agreement had been entered into for the sale of Belinda's assets to ARM in accordance with that offer, the expectation was that pool A creditors would receive 100 cents in the dollar and pool B creditors would receive approximately 15 cents in the dollar. The chairperson of the second creditors meeting at which the DOCA was approved recommended that the meeting be adjourned in order to permit further consideration to be given to ARM's proposal and time for the administrators to prepare a supplementary report to creditors concerning that offer. However, that resolution failed and a majority of the creditors voted in favour of accepting the DOCA. 5Mr Devin seeks termination of the DOCA or a declaration that it is void on various grounds. Only one of them is relevant to the current application. That ground is that the report provided to creditors by the administrators pursuant to s 439A(4) of the Act was "false or misleading or alternatively, omitted matters which were material to creditors in passing a resolution for the company to execute a DOCA within the meaning of s 445D of the Act" (points of claim, para 24). The points of claim give particulars of that allegation. However, on 18 November 2011, Clayton Utz, the solicitors for Mr Devin, gave notice of a proposal to amend the particulars so that they read: (a) the information did not contain a comparison of the return to creditors between the DOCA and ARM's offer. (b) the information did not include the value of ARM's offer to the Company. (c) the information did not set out, or did not adequately set out, the administrators' opinion of the likelihood of the Company meeting it's obligations under the DOCA. 6Mr Rosenblatt, who appeared for Belinda, submitted that the current application should be decided by reference to the particulars as they existed at the time the subpoenas were served. I do not accept that submission. The particulars contained in Clayton Utz's letter dated 18 November 2011 do not change Mr Devlin's case radically. In my opinion, Mr Devlin should be permitted to advance the case raised by the amended particulars. There would be no utility in setting aside the current subpoenas on the basis that the documents sought were not relevant to the case particularised in the current points of claim if the documents are relevant to the case raised by the revised particulars so as to justify the service of new subpoenas in similar terms to those now under challenge. 7Both subpoenas are in substantially the same terms. Paragraphs 1 to 4 seek documents recording or referring to any proposal or agreement by which Belinda would sell any of its assets or raise any funding (whether in the form of equities or loans) between 1 April 2011 and 24 October 2011 (in the case of Ms Yencken) and 1 April 2011 to 26 October 2011 (in the case of RBK Partners). Paragraph 5 of the subpoenas seek financial statements of Belinda "including without limitation" balance sheets, profit and loss statements, budget and forecasts and management accounts. The subpoena addressed to RBK Partners is limited to financial statements for the year ending 30 June 2011. The subpoena addressed to Ms Yencken does not identify a particular date or range, although Clayton Utz have made it clear that Mr Devlin only seeks documents for the financial year ending 30 June 2011. In addition, Clayton Utz have offered to limit both subpoenas by deleting the words "including without limitation", so that all that is sought is balance sheets, profit and loss statements, budget and forecasts and management accounts. 8It should be added that it is not suggested either by RBK Partners or Ms Yencken that the subpoenas are oppressive. Indeed, as I have said, the application to set aside the subpoenas has been filed by Belinda. Belinda seeks to do so on four grounds. Those grounds are that the subpoenas do not seek relevant documents, they are fishing, they amount to discovery and they seek commercially sensitive documents which makes it oppressive for the court to require their production, particularly having regard to the other objections to the subpoenas. 9In my opinion, both subpoenas should be set aside. 10It is now accepted that lack of relevance is a ground for setting aside a subpoena: Portal Software International Pty Ltd v Bodsworth [2005] NSWSC 1115 at [20]-[22] per Brereton J, referring, in particular, to Hatton v Attorney-General of the Commonwealth of Australia (2000) 158 FLR 31. I am not satisfied that the material sought by the subpoenas is relevant to the way in which Mr Devlin puts his case. Mr Devlin's case is that the recommendation contained in the report to creditors was misleading or inadequate because it did not seek to compare the position the creditors would have been in if ARM's offer had been accepted with the position under the DOCA and, in particular, did not consider sufficiently the likelihood that Belinda would be able to generate or raise sufficient cash to meet its obligations under the DOCA. In support of that claim, Mr Devlin places particular emphasis on the following passage contained in the report to creditors: "The director has prepared budgets and cash flow projections which support the Company's ability to meet the contributions to the deed fund. I make the following comments in respect to the forecasts: (i) Based on historical performance income and expenses appear in order. (ii) The business structure has been rationalised; (iii) If the proposed deed of company arrangement is accepted by creditors it is likely a significant cash injection will be made available by an investor. The forecast without an investor still support the obligations under the proposed deed of company arrangement. (iv) Based on historical figures, unless there is a further significant downturn in the retail sector, prima facie the forecasts support the Company's ability to finance the proposed deed obligations." 11Mr Sulan, who appeared for Mr Devlin, made three submissions in relation to this passage. First, he submitted that Mr Devlin is entitled to test the propositions made in this passage and, in doing so, to test whether the information relied on by the administrators is consistent with the information Belinda has provided to Ms Yencken and its accountants in order to determine whether the conclusions reached by the administrators had a proper foundation. Second, he submitted that under s 445D of the Act it was necessary for the plaintiff to establish that the information said to be false or misleading or the information said to have been omitted from the report was material to creditors and the documents sought in the subpoenas were relevant to the materiality of the information that was omitted from the administrators' report. Third, he submitted that the plaintiff was placed in a difficult position because he had no means of knowing whether the material on which the administrators relied was misleading or not and that Mr Devlin should be entitled to investigate that question. 12I do not accept these submissions. Mr Devlin's complaint is about the adequacy of the material contained in the administrators' report and the adequacy of the investigations conducted by the administrators as described in the report. There is no suggestion in the points of claim or the amended particulars that the material given by the company to the administrators which formed the basis of their recommendation was itself misleading. For example, it is not suggested that the "historical performance income" to which the administrators refer was misstated; and if that allegation were to be made it ought to be properly particularised. The question whether any omission in the report was or could reasonably be regarded as material to creditors depends on the information available to the administrators and the adequacy and significance of that material to the conclusions the administrators reached. Consequently, Mr Devlin is entitled to investigate what material the administrators had and to investigate whether that information was adequate to justify the conclusion that the administrators expressed. But I do not think that he is entitled to investigate whether the information relied on by the administrators was itself false or misleading absent a specific allegation to that effect. The onus is on Mr Devlin to identify the material that he says is false or misleading. Having done so, he is entitled to seek evidence that supports that allegation. However, he is not entitled to make the allegation without any basis and, in the absence of the allegation, he is not entitled to look for evidence that might support an allegation that could be made. That, it seems to me, amounts to fishing. 13Mr Sulan also placed emphasis on what he said was an inconsistency between the passage quoted above from the administrators' report and the following statement made in a letter dated 31 October 2011 written by Ms Yencken's solicitors. In that letter, the solicitors say: Subsequent to its creditors resolving that Belinda International executed the Deed of Company Arrangement the subject of these proceedings, interests associated with my client made a substantial investment: funds have been provided for the working capital requirements of Belinda International and a commitment has been made for further investment. Mr Sulan submitted that this statement was or may be inconsistent with the statement in the administrators' report that "The forecast without an investor still support the obligations under the proposed deed of company arrangement." 14In my opinion, however, there is no inconsistency. The fact that Ms Yencken provided working capital does not establish that working capital was necessary in order to enable Belinda to meet its obligations under the DOCA. Of course, that leaves open the question whether the administrators had a sufficient basis for making that statement and whether that basis was sufficiently disclosed in the DOCA. However, the answers to those questions do not depend on the material sought in the subpoenas. 15The orders of the court are that: (1)The subpoena to produce issued on 24 October 2011 to Jacqueline Yencken be set aside; (2)The subpoena to produce issued on 26 October 2011 to RBK Partners Pty Ltd be set aside; (3)The plaintiff pay the first defendant's costs of the amended interlocutory process filed on 11 November 2011. ********** 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. Decision last updated: 25 November 2011