Fetzer v Irving (as liq of Mawson KLM Holdings Pty Ltd (in liq))

[2005] SASC 53

SUPREME COURT OF SOUTH AUSTRALIA

(Civil)

FETZER v IRVING AS LIQUIDATOR OF MAWSON KLM HOLDINGS PTY LTD (IN LIQUIDATION)

Judgment of The Honourable Justice Besanko

17 February 2005

CORPORATIONS - WINDING UP - LIQUIDATORS - RIGHTS AND POWERS

Respondent liquidator sought orders from Master allowing respondent to examine appellant as to the affairs of the company in liquidation pursuant to ss 596B and 596D of the Corporations Act 2001 - respondent's application supported by an affidavit - Master made the orders sought - appellant claimed respondent was motivated by an improper purpose - appellant sought access to affidavit relied upon by respondent - where appellant must demonstrate an arguable case that respondent was acting with an improper purpose before access to affidavit will be granted - Master refused to grant access to affidavit.

Appellant appealed from Master's order refusing access to affidavit - whether it is arguable that respondent was motivated by an improper purpose - where respondent was a plaintiff to an action against the company in liquidation - where that action had been instituted more than 3 years before examination orders were sought - where respondent had recently obtained funding from a third party for that action - whether respondent was acting at the behest of the litigation funder - whether that would constitute an improper purpose - whether it is arguable that respondent's purpose was to conduct a dress rehearsal for cross-examination of the appellant or to destroy the appellant's credit - appeal allowed and order for access to affidavit made.

Corporations Act 2001 (Cth) ss 596B, 596C, 596D, referred to.
Re Southern Equities Corporation Ltd (in liq); Bond & Anor v England (1997) 25 ACSR 394; Re Moage Ltd (in liq); Sheahan v Pitterino & Ors (1997) 77 FCR 81; Re Normans Wines Ltd (Receivers & Managers Appointed) (in liq); Harvey & Ors v Burfield & Anor (2004) 88 SASR 541; Re British & Commonwealth Holdings Plc (Nos 1 & 2) [1992] Ch 342, considered.

FETZER v IRVING AS LIQUIDATOR OF MAWSON KLM HOLDINGS PTY LTD (IN LIQUIDATION)
[2005] SASC 53

Appeal from a Master

1. BESANKO J:        This is an appeal from orders made by a Master of this Court.

2. Mr John Irving is the liquidator of Mawson KLM Holdings Pty Ltd (in liquidation) (“Mawson”).  On 18^th September 1997 Starmaker (No 51) Pty Ltd (“Starmaker”) made an application to this Court for an order that Mawson be wound up.  On 4^th November 1997 this Court made such an order and Mr Irving was appointed the liquidator of Mawson.  By application filed on 26^th March 2004, Mr Irving sought orders against Mr Hans Fetzer pursuant to ss 596B and 596D of the Corporations Act 2001.  Mr Fetzer is the sole director and a shareholder of Starmaker.  The application was supported by an affidavit of Mr Irving.  A Master of this Court heard the application ex parte on 14^th April 2004 and he made following orders (relevantly):

   “1. Hans Fetzer of 527 Anzac Highway, Glenelg North, South Australia 5045 be examined before the Court pursuant to s 596B of the Corporations Act 2001 as to the affairs of the company.

   2.     The person named in paragraph 1 hereof produce to the Court on Wednesday 5^th May 2004 at 10.10 am all relevant documents and records set out in the schedule annexed hereto, in his custody, power or control relating to the examinable affairs of the company.”

3. For convenience, I will refer to these orders as the examination orders although they include an order for the production of documents.

4. On 7^th September 2004 Mr Fetzer issued a Notice for Specific Directions seeking the following orders (relevantly):

   “A.    That Hans Fetzer and his legal advisors have access to the affidavit or affidavits relied upon by Mr John Irving in obtaining the issue of the summons for examination herein dated 14^th April 2004;

   B.    That the summons for examination and production of documents dated 14^th April 2004 of the applicant be discharged.”

5. Mr Fetzer filed three affidavits in support of his Notice for Specific Directions.  On 8^th September 2004, Mr Fetzer’s application came on for hearing before the Master who had made the examination orders in favour of the liquidator, and after hearing submissions the Master said:

   “I am not satisfied that an arguable case has been demonstrated which would show that the purpose of the examination and the purpose of the production is improper in any way.  I realise that there is a funding agreement and that the decision to apply for examination is pretty well around the time that the funder became involved but on the papers before me I cannot see any link which might suggest the improper purpose argued.”

6. The Master said that he declined the whole application and Mr Fetzer appeals against that order.

7. It is not clear whether the Master was refusing the entire application made by the appellant or only that part of the application which sought an order that the appellant have access to the affidavit or affidavits relied upon by the liquidator in obtaining the examination orders.  Counsel for the appellant told me without objection from counsel for the liquidator that the submissions before the Master were confined to that part of the application seeking an order for access to the affidavit or affidavits.  However, on the face of it, the Master has dismissed the application.  For reasons which I will set out, I think the Master erred in refusing to make an order that the appellant have access to the affidavit and therefore it is not necessary for me to consider what order would have been appropriate had I upheld the Master’s decision to refuse access to the affidavit.

8. The appellant appeals on the ground that the Master erred in holding that there was no arguable case that the purpose of the liquidator in seeking the examination orders was improper.

   The facts

9. As I have said, the appellant is the sole director and a shareholder of Starmaker.  There is and has been legal action between Mawson and Starmaker.  The appellant asserts that Starmaker is a creditor of Mawson by reason of a judgment given in an action in this Court (action number 2227 of 1996).  Mawson was the plaintiff, and Starmaker and the Registrar-General of South Australia were the defendants, and the judgment in favour of Starmaker was in the sum of $32,508.30. 

10. Starmaker is a defendant to another action in this Court in which Mr Irving, as liquidator, and Mawson are plaintiffs.  The action is action number 883 of 2000 and it was commenced on 15^th September 2000 (“the action”).  That action has not yet come to trial. 

11. On 31^st March 2004 a meeting of the creditors of Mawson was held.  The minutes of the meeting were filed with the Australian Securities and Investments Commission and they were part of the evidence before the Master.  They show that the liquidator chaired the meeting and that he tabled various documents at the meeting including a document described in the minutes as “Litigation Funding Agreement offered to the company by a specialist litigation funder”.  A creditor of Mawson is shown as asking what the prospects of recovery were in relation to the action.  The minutes show that the liquidator said that in his view “the prospects for recovery were good now that an independent litigation funder has agreed to fund the proceedings”.  The minutes show that the liquidator advised the meeting that he had previously sought an indemnity from creditors to fund the action against Starmaker, and that as no offer for funding had been forthcoming from creditors he had sought alternative funding from a specialist litigation funding organisation.  The minutes show that the liquidator gave a brief summary of the litigation funding proposal and advised creditors that without an agreement on the issue the action could not proceed and there would be no funds available for distribution to the unsecured creditors.  A motion was carried at the meeting that the liquidator be authorised to enter into the proposed litigation funding arrangement as tabled at the meeting.  Under the heading “Strategy for Litigation” the minutes show that the liquidator led a discussion with creditors present as to the strategy with respect to the proposed litigation ie., the action.  The liquidator advised the meeting that a public examination of the director of Starmaker would be undertaken at the earliest opportunity.  In fact, the application for the examination orders had been filed on 26^th March 2004 which was five days before the meeting.

12. The appellant asserts that Starmaker did not receive notice of the meeting of creditors of Mawson held on 31^st March 2004.

13. The appellant asserts that the predominant purpose of the proposed examination is, or at least appears to be, to benefit a third party being a unidentified specialist litigation funding organisation and to assist a third party, namely that organisation, in determining whether or not to fund or continue to fund the action and/or to determine the prospects for recovery of such third party in respect of costs which have been funded or agreed to be funded by such third party in respect of the action.

14. A solicitor for the appellant has sworn two affidavits.  In the first affidavit he sets out the steps which have been taken in the action.  It is not necessary for me to set out the details; it is sufficient for me to say that the action has progressed a considerable way along the path to trial.  The solicitor also refers to the discovery made by Starmaker in the action.  It is said that all documents relevant to the action have been discovered by Starmaker.  He also exhibits the correspondence which has passed between the solicitors for the liquidator and the solicitors for the appellant since the examination orders were made.  In that correspondence the appellant asks for a copy of the affidavit of the liquidator filed with the application and asserts that the request for documents is oppressive.  The appellant also requests a copy of the litigation funding agreement and details of the notice given of the meeting of creditors held on 31^st March 2004 which he asserts was not given to Starmaker.  In the correspondence, the liquidator’s solicitors assert that the appellant is not entitled to see the liquidator’s affidavit and that the order for the production of documents is not oppressive.  The litigation funding agreement was not provided to the appellant. 

15. In his second affidavit, the solicitor for the appellant refers to various minutes of meetings of the creditors of Mawson since 1998.  It is not necessary for me to set out the details.

16. The appeal from the Master’s orders came before me on 3^rd November 2004.  At that time the litigation funding agreement had not been given to the appellant.  After 3^rd November 2004 the liquidator decided to provide the litigation funding agreement to the appellant.  A copy was also sent to my chambers.  I called the appeal back on and heard further submissions on the appeal on 18^th November 2004.  The appellant opposed the tender of the litigation funding agreement and the respondent did not press the tender.

    Issues on the appeal

17. The appellant submits that the Master erred in not finding an arguable case of improper purpose on the part of the liquidator and that he should have made an order giving the appellant leave to inspect the liquidator’s affidavit.

18. The appellant asserts that proper notice of the meeting of creditors of Mawson held on 31^st March 2004 was not given to Starmaker.  On the appeal, I was told that the appellant challenged the resolutions of the meeting of creditors on the ground that proper notice of the meeting was not given to Starmaker and on the ground that it had been found that two or more of those present at the meeting were not creditors of the company.  On 15^th October 2004 the same Master who had made the examination orders set aside the resolutions passed at the meeting of creditors held on 31^st March 2004 and found that the notice given of the meeting of creditors did not come to the attention of Starmaker.  I was told that that decision is the subject of an appeal by the liquidator.

19. The liquidator provided a copy of the litigation funding agreement to the appellant in November 2004 and the precise reasons why it was provided at that point and not earlier are unclear.

20. The appellant submits that the liquidator is using the examination to assist him in the action.  At the same time he submits that the true purpose of the examination is to benefit or assist a third party, namely, the entity providing the funding.  He submits that the real purpose of the examination is to satisfy a requirement of the entity providing the funds for the litigation.  The appellant submits that there is an arguable case of improper purpose namely, that the liquidator is acting at the behest of the entity providing the funding.  He points to a number of facts in support of that assertion and prominent among those facts is the fact that as far as the action is concerned, the liquidator had not previously seen a need to conduct an examination of the appellant.  He states that the liquidator decided to proceed against Starmaker on 12^th May 1998 and the proceedings were instituted on 15^th September 2000.  A final directions hearing in the action was first listed on 12^th September 2002.  The application for the examination orders was not made until 26^th March 2004.  The liquidator had not previously seen the need to examine the appellant, and it is submitted by the appellant that when regard is had to the stage which the action had reached at the time of the application it is clear that the liquidator did not consider an examination was necessary in order to decide whether or not to proceed with the action.  In addition to these matters, the appellant also points to the fact that proper notice of the meeting of creditors held on 31^st March 2004 was not given to Starmaker and to the fact that until recently the liquidator had refused to provide a copy of the litigation funding agreement to Starmaker.

21. There was also a suggestion by the appellant that it was arguable there had been a material non-disclosure by the liquidator in relation to the application.  There is no evidence in support of such a suggestion and I reject it.  The appellant’s appeal stands or falls on whether it is arguable that the liquidator had an improper purpose.

22. The liquidator submits that there is no evidence of an improper purpose on his part.  He submits that it may well be inferred that he has sought assistance in terms of funding the litigation but he submits that that is not an improper purpose.

23. Section 596C of the Corporations Act 2001 provides as follows:

    “(1)A person who applies under s 596B must file an affidavit that supports the application and complies with the rules.

    (2)The affidavit is not available for inspection except so far as the Court orders.”

24. There are a large number of cases on the examination provisions in Part 5.9 of the Corporations Act 2001, or the equivalent sections in earlier companies legislation.  However, for the purposes of this appeal it is sufficient to refer to the following decisions: Re Southern Equities Corporation Ltd (in liq); Bond & Anor v England (1997) 25 ACSR 394 per Lander J (with whom Cox and Bleby JJ agreed) at 422, 430-433; Re Moage Ltd (in liq); Sheahan v Pitterino & Ors (1997) 77 FCR 81; Re Normans Wines Ltd (Receivers & Managers Appointed) (in liq);Harvey & Ors v Burfield & Anor (2004) 88 SASR 541. I do not propose to discuss these cases in detail. The principles are well known even if they do on occasion give rise to difficulties in terms of their application.

25. It is the liquidator’s purpose in seeking the examination orders which is relevant. If the liquidator’s predominant purpose in seeking the orders was to conduct a dress rehearsal for the cross-examination of the appellant or to destroy his credit then that is an improper purpose. In terms of whether access to the liquidator’s affidavit should be ordered, the question is whether it is arguable at this stage that that was the liquidator’s predominant purpose. The appellant put the submission that it was, but that was not put as his primary submission. The appellant’s primary submission was that it was arguable that the liquidator simply acted at the direction of the person providing the funds for the litigation and that that was an improper purpose. Put in those terms, I do not think that the submission is correct. A liquidator may without any impropriety enter into a litigation funding agreement and under that agreement he may be asked, or even directed, to conduct an examination under Part 5.9 of the Corporations Act 2001.  He may not otherwise be able to pursue the action for the benefit of the company’s creditors.  Those facts of themselves do not amount to an improper purpose on the part of the liquidator.

26. In my opinion, this case turns on what inferences are open as to the liquidator’s purpose.

27. I make two preliminary observations.  First, it must be remembered that at this stage all the appellant need show is that it is arguable that the liquidator had an improper purpose and that there are no discretionary reasons why access to the liquidator’s affidavit should be refused.  The test of whether a point is arguable can be elusive and difficult to apply.  I agree with what Mansfield J said about the expression “arguable case” in Re Moage Ltd (in liq); Sheahan v Pitterino & Ors (supra) (at 95) when he said it was not, as he put it, a refined term of art, and he said refinements of degrees of arguability are unnecessary. I also agree with the comments of Nourse LJ in Re British & Commonwealth Holdings Plc (Nos 1 & 2) [1992] Ch 342 (at 355) as follows:

    “In my judgment inspection of the statement should prima facie be allowed where the court is of the opinion that it will or may be unable fairly and properly to dispose of the application if part of the evidence is withheld from the person against whom the order is sought. It will then be for the office holder to satisfy the court that confidentiality in whole or in part is nevertheless appropriate.”

28. It is important to remember that that is the basis of the test that the applicant must show an arguable case. 

29. Secondly, the line between a purpose of ascertaining prospects of success in an action and a predominant purpose of conducting a dress rehearsal for cross-examination or destroying a witness’s credit will sometimes be difficult to draw.  The fact that an action is on foot does not necessarily mean that the liquidator’s predominant purpose is to conduct a dress rehearsal for cross-examination or to destroy an examinee’s credit.

30. The inference is certainly open that the liquidator did not have an improper purpose.  It may be that being provided with funds meant that he was able to adopt a course (ie., to examine the appellant) which he always wished to do but could not afford.  He may simply have sought the orders for the purpose of assessing with greater accuracy the plaintiffs’ prospects of success in the action.  However, I think other inferences leading to a conclusion of improper purpose are arguable and that that is sufficient to justify an order that the liquidator’s affidavit be disclosed to the appellant.  For reasons I will give in a moment, an inference is arguable that the liquidator’s predominant purpose in seeking the orders was to conduct a dress rehearsal for cross-examination or destroy the credit of the appellant. I will call this the first improper purpose.  Perhaps an inference is also open that the liquidator simply accepted a direction from the financier and that the financier’s predominant purpose was to conduct a dress rehearsal for cross-examination or destroy the appellant’s credit, although it must be said that the evidence in support of this improper purpose is weaker.  I will call this the second improper purpose.  An inference that the liquidator in effect abdicated his responsibilities will not be drawn lightly.

1. I think that the inference that the liquidator had the first improper purpose is arguable for the reasons which follow.  There are a number of matters which suggest that the liquidator did not seek the examination orders in order to better ascertain the plaintiffs’ prospects of success in the action.  The action was a substantial one and it had reached the stage that it was ready or almost ready for trial.  Someone on the plaintiffs’ side must have incurred substantial costs before March 2004 and I think would only have done so on the basis that they believed that there were good prospects of success in the action.  When on 31^st March 2004 the liquidator advised the creditors that there were good prospects of recovery he made no mention of the merits of the claim but conditioned his opinion on the fact that “an independent litigation funder has agreed to fund the proceedings”.  Furthermore, the reference to the examination of the appellant in the context of a discussion about strategy with respect to the proposed litigation suggests the examination orders were not sought for the purposes of better ascertaining the plaintiffs’ prospects of success in the action.  Indeed that last point may be accorded somewhat greater weight in terms of the appellant’s case that the liquidator was motivated by the first improper purpose.

2. I make it clear that I am not at this stage making a finding of improper purpose.  The only question is whether it is arguable (in the relevant sense) that the liquidator was motivated by an improper purpose.

3. The appellant referred to two other matters which he submitted supported the inference that the liquidator was motivated by an improper purpose.  First, he referred to the fact that Starmaker had not received proper notice of the creditors meeting held on 31^st March 2004.  It was never made clear how that supported the precise inference the appellant identified.  In any event, I have little information before me about the circumstances of the meeting and the notice given of the meeting.  That issue is the subject of another action in this Court about which I was told very little.  I draw no inference from the notice given or not given to the appellant of the creditors meeting held on 31^st March 2004.  Secondly, the appellant asked me to draw an adverse inference from the liquidator’s refusal before November 2004 to give the appellant a copy of the litigation funding agreement.  Again, it is not clear why I should draw the particular inference the appellant identifies, nor were the circumstances of the withholding of the agreement or its eventual provision in November 2004 explored in the evidence or argument.  I draw no inference from the fact that the agreement was not provided before November 2004.

4. I have considered whether I should draw any inference adverse to the appellant from the fact that the appellant opposed the tender of the litigation funding agreement when the liquidator sought to tender the agreement on 18^th November 2004.  I do not think that I should.  The application to tender came very late in the piece.  As I have said, there was some, but no detailed, explanation as to why it was coming forward at that late stage and by itself the agreement is not necessarily conclusive.

5. I think it is sufficiently arguable that the liquidator was motivated by an improper purpose to justify an order that his affidavit be disclosed to the appellant.  I do not think there are any discretionary reasons why I should not make such an order.

   Conclusion

6. The appeal must be allowed and an order made that the liquidator’s affidavit sworn in support of the application for the examination orders be disclosed to the appellant.  I will hear the parties as to the precise form of the order and any other orders.