Banksia Securities Limited (Receivers and Managers Appointed)
[2013] VSC 416
•13 August 2013
| Send for Reporting | ||
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
CORPORATIONS LIST
S CI 2013 01315
| IN THE MATTER OF BANKSIA SECURITIES LIMITED (ABN 45 004 736 458) (RECEIVERS AND MANAGERS APPOINTED) | |
| ANTHONY GREGORY MCGRATH, JOSEPH DAVID HAYES, MATTHEW WAYNE CADDY AND ROBERT MICHAEL KIRMAN AS RECEIVERS AND MANAGERS OF BANKSIA SECURITIES LIMITED (ABN 45 004 736 458) (RECEIVERS AND MANAGERS APPOINTED) | Plaintiffs |
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JUDGE: | GARDINER AsJ | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 1 August 2013 Last submissions 9 August 2013 | |
DATE OF RULING: | 13 August 2013 | |
CASE MAY BE CITED AS: | Banksia Securities Limited (Receivers and Managers Appointed) | |
MEDIUM NEUTRAL CITATION: | [2013] VSC 416 | |
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CORPORATIONS – Examinations being conducted pursuant to Part 5.9 of the Corporations Act 2001 – Whether auditor of company required to produce copy of professional indemnity insurance policy where no proceedings on foot and no formal claim articulated against auditors in relation to conduct of audit – Whether insurance documentation “relates” to examinable the affairs of company within meaning of s 596D(2) of the Act.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr J Redwood | Ashurst |
| For the Defendant | Mr A McClelland | Brian Ward & Partners Pty Ltd |
HIS HONOUR:
On 25 June 2013, I ordered that a summons for the examination of Michael Hall be issued pursuant to s 596B of the Corporations Act2001 (Cth) (“the Act”) on the application of the plaintiffs, who are the joint and several receivers of Banksia Securities Limited (“Banksia”). As Rule 11.3 of the Supreme Court (Corporations) Rules 2003 provides, that application was made without notice to any person and the order was made ex parte. As well as being summonsed to attend to be examined, Mr Hall was also required to produce certain specified documents appearing in the schedule to the summons. The power to require such production of documents is contained in s 596D(2) of the Act.
Mr Hall now applies for orders setting aside paragraphs 1(i) to (k) of the summons, which require the production of certain documents, and an order vacating paragraph 3 of the order dated 25 June 2013 insofar as that order provides that the summons issued against Mr Hall require production of those documents. In the alternative, Mr Hall seeks an order under s 596F(1)(a) of the Act relieving him of his obligation to produce the documents referred to in paragraphs 1(i) to (k) of the summons.
Paragraphs 1(i) to (k) of the summons require Mr Hall to produce for the period January 2008 to 25 October 2008:
(a)all documents relating to the existence and terms of any insurance policy providing MB+M Business Solutions (“MB+M”) and its partners with cover in respect of any potential liability arising out of the affairs of Banksia Securities Limited;
(b)any document notifying any insurance company of potential liability arising out of the affairs of BSL;
(c)any response from any insurance company to that notification.
Rule 11.5(2) of the Rules requires that an application for discharge of an examination summons be made by filing an interlocutory process seeking an order discharging the summons and an affidavit stating the facts in support of the interlocutory process within three days after service of the summons on the person who has been summoned. This application is made out of time but the plaintiffs do not oppose an extension.
On 5 August 2013, in the course of the examination of other examinees, discussion ensued as to the necessity of the issue of an interlocutory process and an affidavit in support given that Mr Hall’s application essentially proceeds by way of submission. After hearing from counsel for both parties, I determined that the issue of an interlocutory process and an affidavit in support was not necessary.
I also enquired of junior counsel for the plaintiffs, Mr Redwood, as to whether the plaintiffs would object to providing Mr Hall’s legal representatives with a redacted version of the affidavit in support of the application by which the summons against Mr Hall was obtained. That affidavit is the third affidavit of one of the plaintiffs, Mr Hayes, sworn 24 June 2013. Mr Redwood indicated that the plaintiffs had no objection to provision of a redacted version of the affidavit for that purpose and that has been done. I also invited the parties to make further short written submissions in relation to the contents of that redacted affidavit and they have done so.
Omitting the formal passages of the redacted affidavit, Mr Hayes deposes as follows:
5.I make this affidavit in support of the following applications under the Corporations Act2001 (Cth) (Act):
(b)an application under sections 596B and 596D of the Act for summonses to be issued against the persons listed in paragraph 11.
…
11.I make this affidavit in support of an application under sections 596B and 596D of the Act for summonses to be issued against the following persons:
…
(c)Michael Hall of c/- MB+M Business Solutions (previously Maxwell Brown & Mountjoy), 23 Nixon Street, Shepparton, Victoria 3630; and
…
15.On 14 March 2013, a search of the records maintained by ASIC in respect of the Company was carried out. A copy of this historical extract of the records maintained by ASIC in relation to the Company was exhibited to my First Affidavit and marked “JH-3” (Extract).
16.The Extract discloses that Maxwell Brown & Mountjoy (MB+M Business Solutions’ predecessor) was appointed as the auditor of the Company from 27 September 1999 to 15 October 2008.
17.On behalf of MB+M Business Solutions, Mr Hall signed off on the Company’s Annual Report for FY2008.
[…]
18.Based on the Receivers’ review of the Company’s available books and records, from 1 October 2009 until 25 October 2012, Mr Hall was the Chairman of the Audit & Corporate Governance Committee (A&CGC) of the Company. The A&CGC was primarily responsible for monitoring and reviewing the effectiveness of the Company’s audit arrangements, financial reporting and risk management procedures.
19.The Receivers consider it is relevant to the examinable affairs of the Company to examine Mr Hall in relation to:
(a)the involvement, if any, of him or MB&M Business Solutions in the due diligence in connection with the amalgamation with SSI;
(b)the unqualified audit report signed by him on behalf of MB&M Business Solutions for FY2008; and
(c)communications between the A&CGC and RSD during the relevant period.
20.In relation to paragraph 19(b), it is noted that it would appear that the provisioning for some of the loans of the Company for FY2008 may have been materially inadequate.
Section 596B of the Act provides:
(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 the examinable affairs of the corporation.
Section 596D(2) provides:
(2)A summons to a person under s 596A or 596B may require the person to produce at the examination specified books:
(a)that are in the person’s possession; and
(b)relate to the corporation or to any of its examinable affairs.
Mr Hall is a member of the firm MB+M. Banksia has not issued proceedings against MB+M or Mr Hall to date, however, Mr Hayes’ affidavit contends that investigations are taking place in respect of the unqualified audit report signed by Mr Hall on behalf of MB+M for the financial year ended 30 June 2008 and, in particular, whether the provisioning for some of the loans by Banksia for that period may have been materially inadequate. These subjects have been touched on in the examinations conducted to date.
Unlike s 596A, which provides for a mandatory examination to be issued provided that certain specified matters are established, s 596B(1) requires that the Court be “satisfied” that the person “has taken part or been concerned in examinable affairs of the corporation” or “may be able to give information about examinable affairs of the corporation”. Section 596D(2) provides that the documents specified to be produced “relate” to the corporation or any of its examinable affairs.
In his submissions, Mr McClelland, counsel for Mr Hall, accepts that the “examinable affairs” of a corporation include the “property” of a corporation and that the existence and availability of insurance in respect of a chose in action of a corporation in question against a third party is capable of being characterised as one of the corporation’s examinable affairs. It is clear that a chose in action is property of the corporation and the existence and availability of insurance cover is relevant to the value of the chose in action. In Re Interchase Corporation Ltd,[1] Kiefel J stated:
There can be no doubt that, as outlined above, the “examinable affairs” of a corporation extend to its choses in action: see Grosvenor Hill at FCR 305 ALR 266. It would seem to follow that to seek information concerning the prospect of successfully litigating it to judgment is clearly enough “about” the corporation’s property. The information in one sense allows some estimation of the value of the chose and, as a result, assists the liquidators to decide whether to prosecute the action. Logically I cannot see why information about whether the judgment resulting has any worth, by reason that it will or will not likely be met by payment, is not also then “about” that property. And while it may also be said to be “about” the contract of insurance between insurer and insured, this does not prevent it from having the necessary connection with the company’s property and then coming within the scope of an examination under s 596B.
[1](1996) 68 FCR 481, 485.
Mr McClelland says that while this may be so, orders made requiring the production of documents relating to insurance policies pursuant to s 596B have been in the context of a proceeding having been issued by the corporation against an insured or a claim having been made against the corporation’s own insurer who has refused indemnity. Examples of these cases include Meteyard v Love,[2] which involved a claim made a corporation against its insurer that it denied liability under a policy, Re BPTC Ltd (in liq),[3] where proceedings were issued by a corporation against its directors who then issued third party notices to three firms of solicitors who were insured, Re Allstate ExplorationsNL,[4] where a corporation sued a defendant who was insured, Re Clutha Limited (in liq),[5] where a liquidator sued its former officers and the policy in question covered their liability. In Korda (Receiver and Manager), Re South Eastern Secured Investments Ltd (Receivers and Managers Appointed),[6] Finkelstein J considered and granted an application concerning access to insurance documentation where a corporation sued a firm of solicitors, and the relevant insurance policy related to their liability under the claim.[7]
[2](2005) 65 NSWLR 36 (‘Meteyard’).
[3](1994) 14 ACSR 460 (‘Re BPTC’).
[4](2003) 46 ACSR 379.
[5](2003) NSWSC 235.
[6](2010) 191 FCR 63.
[7]See also Gerah Imports Pty Ltd v The Duke Group Ltd (in liq) (1994) 119 ALR 401, where Dawson J considered an application for special leave to appeal from the Full Court of the Supreme Court of South Australia (see discussion at page 404).
The distinction that Mr McClelland makes in this case is that the Court cannot on the present state of material be “satisfied” that a chose in action exists against Mr Hall or his firm MB+M. No proceedings against them have been issued, nor has a claim been articulated against either of them. He states that the theoretical possibility that, at some indeterminate point in time, and based on facts yet to be identified, an as yet unidentified claim might be made against Mr Hall or MB+M Business Solutions is not a sufficient basis for the Court to be “satisfied” that there is in existence “property” of the corporation to which the insurance policy might relate. In those circumstances, he says the summons should be set aside.
Alternatively, Mr McClelland submits that if the documents do constitute information about examinable affairs of Banksia for the purpose of s 596B of the Act, the Court ought to relieve Mr Hall from his obligation to produce those documents pursuant to s 596F(1)(a) of the Act. He cites the decision of McLelland CJ in equity in Re BPTC as authority for the proposition that while a particular matter may be an examinable affair of a corporation, this does not necessarily leave the Court without a discretion as to whether to accede to an application by an eligible applicant for a summons:
Information relating to the extent and availability of insurance cover held by professional firms at any particular time is likely to be highly sensitive and legitimately confidential. The court should not lightly override the privacy interests involved in information of that kind.[8]
[8](1994) 14 ACSR 460, 463.
Mr McClelland submits that where no proceedings have been issued and no claim has been made, there is not a sufficient basis for the receiver to be permitted to range over the insurance policies for purposes that have yet to be clearly explained.
In supplementary submissions filed on behalf of Mr Hall on 8 August, it is said that s 596B should not be construed in a way that allows untrammelled jurisdiction to examine persons and require production of documents on the basis that the receivers are entitled to “investigate” potential causes of action or to require production of insurance policies of third parties as part of the investigation of potential choses in action. It is submitted that the only basis on which a third party insurance policy would form part of the examinable affairs of the company is if that insurance policy relates to the value of an actual or potential chose in action of the company. It is said that at the very least, this would require an applicant to identify what that potential chose in action is; not in purely hypothetical and general terms, but in terms sufficient to enable the Court to be “satisfied” that the insurance documents are relevant to the value of that chose in action. If this is not done, it is submitted, the Court cannot be “satisfied”. It is said that the affidavit of Mr Hayes is striking as to its absence of any evidence or even assertion that there is, or might be, a claim against Mr Hall.
In the alternative, it is submitted that the Court ought to make an order under s 596F(1)(a) of the Act relieving Mr Hall of his obligation to produce the documents because, having regard to paragraphs 19 and 20 of the affidavit of Mr Hayes, there is not sufficient reason to override his legitimate expectation that his confidential insurance documents will not be produced to third parties without good reason and the affidavit of Mr Hayes does not furnish that reason.
In his submissions, Mr Redwood contends that the receivers are investigating possible claims against MB+M in respect of possible understatement of provisioning in the financial of Banksia for the financial year ended 2008. He states that the receivers are also concerned to investigate the related matter of whether MB+M failed to identify a possible breach by Banksia of the borrowing limitations imposed on it by the trust deed. He submits that the fact that the receivers are still investigating a potential claim against MB+M for professional negligence but have not yet brought such a claim is entirely orthodox, and that the investigation of such potential claims is one of the central purposes of Part 5.9 examinations.
Mr Redwood further referred to the decision of Re Interchase Corporation Ltd (no. 2)[9] where the liquidators were concerned to ascertain whether they had a case in negligence and/or breach of contract against the valuers and to gather evidence and information for the purpose of any such action that would ultimately be pursued. The Court held that the question of whether the company had a good claim against the third party valuer was clearly part of the examinable affairs of the company. The Court also held that documents throwing light on the extent and nature of any professional indemnity insurance against any negligent performance by the third party valuer was relevant information forming part of the examinable affairs of the company. In that case, like the cases of Meteyard and Re BPTC above, proceedings had already been issued against the valuers, although the writ had lapsed. At 415, Drummond J stated:
The question whether a company in liquidation has a good claim in fact and law against a third party, such as a valuer who has prepared a valuation on which the company may have relied to its detriment, is a matter that clearly, in my view, forms part of the affairs of the company. For the liquidator to be able to examine an expert on a s 596B summons for the purpose of gathering information and evidence to see if the company has a good cause of action in damages against the expert is of little practical value if a liquidator cannot also examine the expert as to his ability to satisfy a judgment that the company may be able to recover against him. The dicta in Re Laurie Cottier Productions and in Re Indopal to which I have referred in my view support the proposition that the ascertainment of the value that a claim the company may have against another is part of the affairs of the company. I would therefore hold that documents throwing light on the extent to which each of Grosvenor Hill, Mr Richardson and Mr Waghorn have professional indemnity insurance against any liability they may be under to Interchase in respect of the negligent performance of the valuations here in question is part of the “examinable affairs” of Interchase, in that such documents relate to an issue in the winding up of Interchase.
[9](1993) 12 ACSR 405.
It appears that Drummond J did not in his reasons regard it as appropriate to determine the probable existence of a potential claim before considering whether it was appropriate to require the production of the professional indemnity documentation. That is to say, it appears that once it was determined that the conduct of the audit was an examinable affair, the production of the insurance documentation followed as a matter of course. He treated it as a singular process.
The decision of Drummond J went on appeal to the Full Court of the Federal Court.[10] In the appeal it was argued by the valuer that the policies in question did not fall within the language of s 597(9) (the provision dealing with directions to produce documents in the course of an examination) because they were not “relevant” to matters to which the examination related or would relate, that is to say, the examinable affairs of Interchase. The decision is a convenient survey of the general principles applicable and it is appropriate to set them out in these reasons. At page 266 the Full Court stated:
[10]Reported as Grosvenor Hill (Queensland) Pty Ltd v Barber and anor (1994) 120 ALR 262 (‘Grosvenor Hill’).
A liquidator, when engaged in a litigation on behalf of a company which is being wound up, or when contemplating instituting such litigation, is not in the same position as an ordinary litigant. The liquidator comes to the company as an officer of the court under a duty and responsibility to get in and maximise the assets of the company for distribution for the benefit of creditors. In the discharge of his or her duty and function, the liquidator comes to the company with limited or no knowledge of the company’s assets, business and affairs. The liquidator is therefore in a position of disadvantage to make informed decisions both of a legal and a commercial nature necessary to carry out the winding up.
The legislature has recognised this position of disadvantage and addressed the problem by the enacting of s 596B of the Law and its predecessor. The effect of the legislation is to place a liquidator in a privileged position to obtain information relevant to and necessary for the proper discharge of his or her statutory function. The seeking of information to make decisions as to whether or not litigation ought to be embarked upon or continued in itself is no more than “an exercise of his duties and fulfilment of his responsibilities as liquidator”: per Bryson J in Lombard Nash International Pty Ltd v Berentsen (1990) 8 ACLC 1213 at 1217.
The courts have recognised since the introduction of statutory powers similar to that provided in s 596B of the Law that the exercise of the power can involve tension between two important public interests. The first is the public interest in a liquidator obtaining necessary information to properly discharge the function of liquidator in the winding up of the company for the benefit of the creditors. The second is the right of the individual to privacy in regard to his or her affairs, documents and papers. In Re Spedley Securities Limited; Ex parte Potts (1998) ACLC 673 at 675 Young J said:
The court must always appreciate when an application is made to it under that subsection that two important public interests need to be balanced: viz (1) ensuring that the liquidator, in the interest of the creditors and the public, is able to collect all necessary information to carry out his public responsibility; and (2) an interest in justice to the witness: see Hamilton v Oades (1989) 166 CLR 486 at 496; 85 ALR 1 at 7.
[…]
The necessity to obtain relevant information in relation to litigation by or against a company being wound up is but one instance of the broad general purposes identified in the decisions cited above and numerous other decisions to like effect. Clearly, one purpose of an examination in relation to pending or contemplated litigation is to determine whether or not there is evidence available to support a claim brought by the company to recover property or damages, or conversely to defend a claim brought against the company, and the strength of that evidence. That such is a purpose falling within the power contained in s 596B of the Law was not challenged by Grosvenor; the whole weight of authority is against such a challenge in any event.
The question is whether the court is limited by the section to ordering an examination the purpose of which is to go no wider than to determine whether or not there are reasonable grounds, including evidence, to litigate a case to a successful judgment, or whether, the court has power to order an examination, the purpose of which is to ascertain the likelihood of any judgment being satisfied; that is, whether it is a permitted purpose to inquire as to the worth of a potential defendant so as to be able to make a practical assessment as to the likelihood of a return to the company of the fruits of any favourable judgment and the necessary legal costs expended in obtaining it. Is the court empowered under the section to order an examination or the production of documents to test the likelihood of the creditors in the winding up receiving a tangible benefit from the satisfaction of any judgment obtained and to enable the liquidator to determine whether it is prudent to commence or maintain litigation with knowledge as to the real likelihood of obtaining any tangible benefit beyond a mere judgment, including a judgment for costs, at the conclusion of the litigation?
In our view, the court has such a broad power. Additionally, it is a power of long standing.
At page 273 the Court stated:
In our view, the order was not beyond power. It was open to the primary judge to conclude that the terms of an insurance cover were “relevant” for the purposes of s 597(9) in that they could provide information which was connected with the property of Interchase, that is to say, information which could reasonably be expected to throw light on the question of the actual worth of the alleged cause of action against Grosvenor.
In their supplementary submissions of 7 August 2013, the receivers submit, first, that the decision whether to bring a claim is an important purpose of examinations and in that regard is informed by two considerations: first, an assessment of the underlying strength of the potential cause of action; secondly, the commercial worth of that cause of action. It is said that the notion that the second consideration cannot be investigated by the receivers until a claim in fact has been commenced is illogical and not supported by the reasoning in the cases to which reference has been made. To so conclude, it is said, would effectively be to say that in order for the receivers to satisfy themselves that it is worthwhile bringing and maintaining the claim, by knowing the practical recoverability through insurance, the receivers have to first formally commence proceedings.
It is said by the plaintiffs that it is clear from the supporting affidavit as well as the evidence heard already in these examinations that the receivers are properly investigating a potential claim against MB+M in respect of under provisioning in the accounts of Banksia during the period in which they were the auditors for Banksia. This includes, inter alia, the adequacy of the provisioning in respect of the One Spencer Street loan that was transferred from Banksia to the parent entity during the period when MB+M was the auditor. It is said that the proper basis for the investigation of a claim against MB+M arises from: (a) the fact of MB+M being auditor; and (b) the receivers’ belief of possible under provisioning in the accounts audited by MB+M. Finally, it is said that Mr Hall will be examined shortly in the examinations, whether or not the contract of his insurance is made available before that date. If the Court were to conclude that the material presently before the Court was insufficient to justify the production of the insurance policy before Mr Hall’s examination, then the receivers would expect to make the submission at the conclusion of the examination, or by supplementary affidavit shortly after that examination, that the matters traversed in that examination amply justified the production of the contract of insurance.
The resolution of Mr Hall’s application essentially involves a consideration of whether the documents which are required to be produced under the summons “relate” to the examinable affairs of Banksia. In my view, there can be no doubt that Mr Hall, as the auditor of Banksia for the year in question, has taken part or been concerned in the examinable affairs of Banksia, and that in addition he may be able to give information about its examinable affairs. As such, I consider that there was clearly jurisdiction to issue a summons for a discretionary examination of him pursuant to s 596B. I also consider the documents that are the subject of this application “relate” to the examinable affairs of Banksia, within the meaning of that expression as it appears in s 596D(2). I do not consider that the fact that a formal claim or demand has not been made or articulated results in the requirement to produce being premature. The process is designed to enable an investigation to be conducted. As was pointed out by the Full Court in Grosvenor Hill, liquidators and other insolvency practitioners conducting the examinations are not in the same position as ordinary litigants and the process is designed to redress this. I consider that the receivers should be entitled to embark on the examination of Mr Hall armed with all the relevant documentation that relates to his involvement in the examinable affairs of Banksia. That investigation involves a consideration of the conduct of the audit and, if the information gained at the examination is such as to warrant a claim being made in respect of the conduct of the audit, and a proceeding is commenced against Mr Hall which is successful, whether such judgment will be met.
As the Full Court of the Federal Court observed in Grosvenor Hill, the scheme of the examination provisions is designed to allow investigations to be conducted about, inter alia, the company’s property, including its choses in action. Part of that process involves obtaining information that enables the recoverability of any such chose in action to be assessed. The documents for which production is sought, in my view, “relate” to the examinable affairs of Banksia in that the existence and level of insurance cover can be ascertained. I do not consider that when the application for the summons is made it requires an actual claim to be described and articulated. The receivers have offered to keep the insurance details confidential and this may go some way to assuaging Mr Hall’s concerns about producing the subject documents.
Mr Hall’s application is dismissed. I will hear the parties on the form of orders to be made.
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