Supreme Court New South Wales Medium Neutral Citation: In the matter of MHM Australasia Pty Ltd (in Liquidation) [2018] NSWSC 739 Hearing dates: Tuesday, 30 January 2018 Date of orders: 30 January 2018 Decision date: 30 January 2018 Jurisdiction: Equity - Corporations List Before: Brereton J Decision: Held, on application by creditor pursuant to Corporations Act ss 486 and 511, that it is just to permit inspection of books in order to investigate reasonable suspicions and ascertain whether there is a viable claim against a director and an insurance policy which may respond to it. Catchwords: CORPORATIONS – Winding up – voluntary winding up – creditor's application for inspection of company books and documents – documents held by liquidator – where plaintiff has reasonable basis for suspecting that it may have substantial claim against director – where documents include D & O insurance policy – where creditor seeks to inspect books to investigate suspicion and evaluate claim – where insurance policy may respond to claim – held, just to permit inspection of company books. Legislation Cited: (CTH) Corporations Act 2001 ss 486, 511, 1550, 1617 (CTH) Corporations Regulations 2001 Part 10.25 (NSW) Companies (New South Wales) Code, s 387 (NSW) Law Reforms (Miscellaneous Provisions) Act 1946 s 6 Cases Cited: BPTC Limited, Re (1992) 7 ACSR 291 IACS Pty Limited v Australian Flower Exports Pty Ltd (1993) 10 ACSR 769 Lowden v Elliott Harvey Securities Ltd (No 2) [2016] FCA 740 MMC Pty Ltd, Re (1992) 6 ACSR 741 North Brazilian Sugar Factories. Re (1888)37 Ch D 83 Category: Procedural and other rulings Parties: State of New South Wales (P) Andrew James Barden (D1) Will Griffith (D2) Representation: Counsel: J Shepard (P) L M McCarthy (solicitor) (D) Solicitors: Norton Rose Fulbright (P) William James (D) File Number(s): 2017/265193 Judgment (EX TEMPORE) 1. On 31 August 2017 (being one day before, by operation of Part 10.25 of the (CTH) Corporations Regulations 2001 and (CTH) Corporations Act 2001 ss 1550 and 1617, s 511 was repealed), the plaintiff State of New South Wales ("the State") filed an originating process claiming relief by way of an order pursuant to s 511 that the defendants Andrew James Barnden and Will Griffiths, in their capacity as liquidators of the company MHM Australasia Pty Ltd, make available for inspection and copying by the plaintiff certain specified books of the company referred to in that originating process. Now before the Court is the plaintiff's amended originating process of 13 November 2017 which relies alternatively on s 70-45 of Schedule 2 – (the Insolvency Practice Schedule (Corporations) (IPS). However, it is common ground that, because of the date of institution of the proceedings, the former section continues to apply (by operation of Corporations Act 2001, ss 1550 and 1617). Even if it did not, s 70-45 of the IPS would provide an equivalent jurisdiction, so any argument as to which is the applicable source of jurisdiction is beside the point. 2. The State provides opportunities for registered training organisations (RTOs) to deliver vocational training to address the skills and workforce development needs of New South Wales. Formerly within the Department of Education and Communities (which from time to time was known as the Department of Education and Training and the Department of Education), and presently within the Department of Industry (sometimes known as the Department of Industries, Skills and Regional Development), Training Services New South Wales (or State Training Services) has been and is responsible for government-funded vocational education and training within New South Wales. 3. In order to deliver funded training in New South Wales, RTOs must be contracted under an approved providers list (APL). There are two programmes for delivery of training: the Apprenticeship and Traineeship Training Programme (ATTP), and the Strategic Skills Programme (SSP). 4. The company – which traded as the Australasian College Broadway – was registered as an RTO on 21 July 1999. Between November 2008 and January 2014, the State (via the Department of Education) entered into a number of APL contracts with the company. Under those contracts, the company could deliver funded training only pursuant to the terms of the relevant contract. Instalment payments were payable to the company for funded training, based on data being lodged by the company with the Department, at the commencement of training for a participant, at the midpoint of the training and upon completion of the training. At each of those points, an instalment was payable by the Department to the company. From time to time, the company submitted data to the Department to claim such payments, and between November 2009 and October 2012, the State paid a total of $4,287,495 as a result. 5. In late 2013, an allegation was made that the company may not have been entitled to receive payment in respect of a very large proportion of the claims which it had lodged. Following some preliminary investigations, the allegations were referred to the Independent Commission Against Corruption and to New South Wales Police, which have been investigating the matter since 2014. 6. In addition, the State caused its own inquiries to be made by contacting persons whom the company had identified as being training participants, in respect of whom claims for payment had been made, and questioning them as to their participation in such training. The results of those investigations suggest that a number of those in respect of whom payments were claimed had never enrolled in the college, or attended courses, or even knew the name of the college. It is apparent from the correspondence that the director of the company, which is now in liquidation, has a different view of these matters, and the Court is not, on this application, involved in deciding whether or not there is substance to the complaints. But at this stage, the material indicates at least that there is a reason for suspecting that there may have been false claims for payments from the State. 7. Voluntary administrators were appointed, pursuant to Corporations Act, s 436A, on 22 December 2016, and at the second meeting of creditors on 8 February 2017 the creditors resolved that the company be wound up and the defendants became its liquidators. The plaintiff claims to be a creditor in respect of overpayments in the way that I have described, and has lodged a proof of debt in the amount of $4,074,870 upon which the liquidators have not yet ruled. Inspection of documents (s 486 and s 511) 1. 13 Corporations Act, s 486, provides: The Court may make such order for inspection of the books of the company by creditors and contributories as the Court thinks just and any books in the possession of the company may be inspected by creditors or contributories accordingly, but not further or otherwise. 1. Section 486 appears in Division 3 of Part 5.4B, and applies in the context of a compulsory winding up, whether in insolvency or otherwise by the Court. There is no equivalent provision in Part 5.5 which deals with voluntary winding up. However, s 511 provides: The liquidator or any contributory or creditor may apply to the Court to exercise all or any of the powers that the Court might exercise if the company were being wound up by the Court and the Court, if satisfied that the exercise of the power will be just and beneficial may accede wholly or partially to any such application on such terms and conditions as it thinks fit or may make such other order on the application as it thinks just. 1. Accordingly, pursuant to s 511, if the Court considers that doing so will be just and beneficial, it may exercise in the context of this deemed creditors' voluntary winding up, the powers given under s 486 in respect of a compulsory winding up. 2. Originally, the view prevailed that it was outside the proper ambit of the predecessors of s 486 to use it to obtain evidence in support of actions by individual shareholders against the directors of a company in the course of being wound up for the reasons that the power was conferred for the purposes of the liquidation, and should be exercised only for the purpose of the winding up and for the benefit of those interested in the winding up. [1] However, this view has been said to be not "acceptable at the present day" [2] . 3. In IACS Pty Limited v Australian Flower Exports Pty Ltd (1993) 10 ACSR 769, Rowland J was inclined to the same view, observing that (at [774]): It could very well be to the benefit of the winding up, if a creditor could establish a claim against the directors of the company. 1. However His Honour refused to make an order, being of the view that the applicant had "merely deposed to his belief that in order for the plaintiff to succeed against the directors of the defendant it will be necessary to show that at the time the defendant incurred the debt there were reasonable grounds to expect that it would be unable to pay its debts as and when they fell due", which fell short of deposing to a belief that the debt was incurred when the company was insolvent, and in the absence of such a belief and the grounds for it, the application was merely a "fishing expedition", which ought not be permitted. 2. Of course the notion of a fishing expedition is one which is usually invoked in the context of the law of subpoenas. Nonetheless, it may well be that an applicant who could show no more than a wish to trawl through the documents of a company in liquidation for the purposes of seeing whether it could find any potential claim against the directors would not succeed in an application under s 486. However, as it seems to me, there is nothing in s 486 which confines the circumstances in which an order can be made to one in which the applicant believes, and believes on reasonable grounds, that it has a valid and/or viable cause of action. The touchstone for the exercise of the power in s 486 is that the Court thinks the order "just" in the circumstances. This approach to the section accords with that adopted by Edelman J, when a judge of the Federal Court of Australia, in Lowden v Elliott Harvey Securities Ltd (No 2) [2016] FCA 740, in which his Honour observed that the function of s 486 in relation to creditors or contributors (at [10]): is to create a general mechanism by which they can inspect the company books because they have a legitimate interest in the company affairs. Simply because the section might overlap with discovery concerns does not mean restrictions upon discovery should apply to an application under s 486. 1. His Honour acknowledged that the purpose for which the order was sought was a relevant consideration, [3] but also observed that the notion of "direct relevance" was not a condition imposed by s 486, which had no relevance requirement at all – although the extent of relevance could be a factor to be taken into account in considering whether an order should be made in the interests of justice. [4] Notably, in connection with references to a "fishing expedition" in earlier cases, including IACS, [5] his Honour said at ([15]): [6] I would prefer to express the factor to be considered 'in the interests of justice' (or 'as the court thinks just') as simply being the degree of relevance of the documents. The less obviously relevant the documents, the less likely the interests of justice will favour an order under s 486. 1. Given that this is not a subpoena, and that the law relating to discovery and subpoenas should not be slavishly applied in this context, there is no requirement for an applicant to depose to any particular state of belief in order to obtain relief. What is important is that it be possible to point to facts which show a legitimate interest in accessing the documents in question. The documents to be inspected 1. Ultimately, the order sought by the amended originating process refers to three categories of documents. The first is a number of boxes, which are listed in a schedule which has been developed in correspondence between the parties. The second is a 1.4 terabyte hard drive, also identified and discussed in correspondence between the parties. The third is the company's current or most recently expired directors and officers (D & O) insurance policy. 2. The liquidators neither consented to nor opposed the order in respect of the first and second categories, but opposed an order in relation to the third. Notice of the application was given to the company's sole director, who at first indicated an intention to intervene in opposition to the application, but ultimately did not do so. 3. The schedule listing the boxes of documents has been agreed between the parties as a convenient way of facilitating compliance by the liquidators with any order that might be made. The original application specified classes of documents – being records required to be kept by the company under the APL contracts concerning enrolment forms, fees charged to a training participant, documents establishing fee exemption status, training programmes or plans for each participant, and attendance records of participants, and financial and other records of the company at the time of the relevant events. Because extracting those documents so described would have required considerable effort, it was considered more efficient and economical simply to identify those boxes in which relevant documents were held, notwithstanding there were likely to be some additional irrelevant documents in some of those boxes. This is a sensible and pragmatic course. There is no objection to making an order in that form, where the parties are content with it, that some irrelevant documents might be captured. It is just and beneficial to make orders in that form, given the time and cost efficiencies that will be achieved as a result. 4. The liquidators opposed an order in respect of the company's D & O policy. They asserted that insufficient evidence had been adduced to support any order permitting inspection of that policy, essentially because no witness had deposed to a belief that a claim against the director existed, but only that a claim may exist. 5. The facts to which I have already referred indicate at least, that there is a basis for a reasonable suspicion that moneys were obtained by the company through false claims which, if made, must have been made by the director. 6. Obviously enough, what the applicant here seeks is to ascertain is whether there is available insurance cover, so that proceedings against the director would be worthwhile. In Re BPTC Limited, [7] the applicants wished to investigate the extent of insurance cover of which the company may have the benefit in respect of claims which they were contemplating bringing for breaches of trust, in order to assist their assessment of the prospects of ultimate recovery in proceedings against the company, and also in proceedings directly against the insurers pursuant to (then) s 6 of the (NSW) Law Reform (Miscellaneous) Provisions) Act 1946. The liquidators opposed the application, arguing that the applicants sought to obtain for themselves – and to the potential detriment of the other creditors who may have claims – the benefit of activities carried out by the liquidators at substantial expense to the funds of the company and the general body of creditors. But as the judge explained, there was on the other hand, considerable potential benefit to the general body of creditors of BPTC if the main burden of future costs in any proceedings against insurers was borne by those who would directly benefit from any recovery from the insurers, namely those with claims. His Honour said, "I do not regard such advantage as the new trustees may incidentally gain from the inspection and other litigation between them and BPTC as a sufficient reason to deny the inspection sought" [8] . 7. His Honour added: [9] I do not regard such advantage as the new trustees may incidentally gain from the inspection, in other litigation between them and BPTC, as a sufficient reason to deny the inspection sought. 1. Observing that the facilitation of proceedings by individual creditors under s 6 would fall within the scope of (then) (NSW) Companies (New South Wales) Code, s 387, his Honour concluded: [10] In all the circumstances, it seems to me to be just that there may be an order for inspection by the new trustees of the documents 1. Accordingly, not only is it the case that, as the plaintiff submitted, production of insurance policies has been ordered on applications for leave to proceed against companies in liquidation, inspection has also been ordered under the predecessor of s 486, for reasons closely analogous to those for which such inspection is sought here. 2. The liquidators argued that this would somehow advantage the plaintiff as against the other creditors, or prejudice the other creditors. Just how this is so is not at all apparent. At the very highest it is speculative and unsupported by the slightest evidence. Being unsatisfied that it gives the plaintiff any such advantage, this argument provides reason for declining to make the order sought. Conclusion 1. The purpose of s 486 was, on the one hand, to reserve to the Court the power to decide whether creditors and contributories should be permitted to inspect the books of the company which pass into the liquidator's control, but on the other hand to provide a mechanism by which they could do so if it were just. 2. Here, the plaintiff has a reasonable basis for suspecting that it may have a very substantial claim against a director arising out of the director's conduct of the affairs of the company. It is plainly just that the State be permitted to inspect the company's books, in order to investigate those suspicions and evaluate whether it has a viable claim and, if so, whether there is an insurance policy that may answer it. And that is more especially so when it appears that no detriment is occasioned to the company or any other creditor by that course, and the plaintiff undertakes to pay the cost of the exercise. 3. The Court therefore: 1. Orders that pursuant to Corporations Act, ss 511(1)(b) and 486, the defendant make available for inspection and copying by the plaintiff: 1. the boxes of documents listed in schedule A forming annexure N to the affidavit of James Clinton Higby sworn 23 January 2018; 2. the 1.4 terabyte hard drive referred to in the letter dated 30 October 2017 from Mr James Higby on behalf of the plaintiff to Mr Leonard McCarthy of William James on behalf of the defendant, forming tab 6 of exhibit JCH 2 being PX02 herein; and 3. the company's current or most recently expired directors and officers insurance policy. 1. Notes the undertaking by the plaintiff to the defendants to pay the defendant's reasonable costs of responding to the plaintiff's application and complying with these orders. ********** Endnotes 1. Re North Brazilian Sugar Factories (1888) 37 Ch D 83. 2. McLelland J as the later Chief Judge in Equity as he then was in Re BPTC Limited (1992) 7 ACSR 291 at [292]; his Honour's view was shared by Senior Master Mahoney in the Supreme Court of Victoria in Re MMC Pty Ltd (1992) 6 ACSR 741. 3. Lowden v Elliott Harvey Securities Ltd (No 2) [2016] FCA 740 at [11]. 4. [2016] FCA 740 at [13]. 5. (1993) 10 ACSR 769. 6. [2016] FCA 740 at [15]. 7. (1992) 7 ACSR 291. 8. (1992) 7 ACSR 291 at [295]. 9. (1992) 7 ACSR 291 at [295]. 10. Ibid. 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 May 2018