Harvey v Sandhurst Trustees Limited No. Scciv-02-1364

[2003] SASC 370

IN THE MATTER OF NORMANS WINES LTD (RECEIVERS AND MANAGERS APPOINTED) (IN LIQUIDATION)

HARVEY AND ORS V SANDHURST TRUSTEES LIMITED

[2003] SASC 370

1. JUDGE BURLEY.             On 23 June 2003 orders were made on an ex parte application by Sandhurst Trustees Ltd (Sandhurst) for the examination of Catherine Gae Flower, Stephen Thomas Harvey and for the production of documents by Deloitte Touche Tohmatsu (Deloitte).  By application dated 26 June 2003 the examinees and Deloitte, to whom I shall refer collectively as “the applicants”, respectively applied for orders setting aside the examination orders and the orders for production.  These reasons relate to those applications.

2. It is common ground that on 18 June 2003 ASIC authorised Sandhurst to make application under Division 1 Part 5.9 of the Corporations Act 2001 (the Act) in relation to Normans Wines Ltd (Receivers and Managers Appointed) (In Liquidation) which I shall refer to as “the company”.

3. Prior to going into liquidation the company was engaged in the production of bulk and bottled wine.  It owned vineyards in South Australia and Victoria and wineries at Monash Victoria, and Clarendon, South Australia, and a bottling plant at Northcote in Victoria.  For a number of years prior to the liquidation of the company, Deloitte audited the company’s accounts and those of its controlled entities. 

4. In September 2002, Sandhurst commenced an action in this Court against Deloitte seeking declaratory and other relief.  It is Action No 1337 of 2002.  I shall refer to it as “the action”.  It is apparent from the statement of claim that Sandhurst alleges that Deloitte owed various duties to it arising at common law and by virtue of the Corporations Law and the provisions of the Fair Trading Act 1987. Sandhurst alleges that it suffered loss and damage as a result of various breaches of duty on the part of Deloitte. Apparently Sandhurst seek to recover from Deloitte the sum of $12 million which is an amount equivalent to funds raised by the company pursuant to a convertible unsecured notes issue pursuant to a prospectus dated 12 July 1999. Sandhurst, by trust deed dated 1 July 1999, was appointed trustee in respect of the convertible notes issue. By the deed, Sandhurst agreed to perform the obligations under the trust deed for the benefit of the holders of the convertible unsecured notes. The action commenced by Sandhurst against Deloitte was issued in September 2002 as a protective measure because the period of limitation applicable to the proceedings was about to expire. The summons has not been served. Sandhurst has not completed its investigations in relation to the prosecution of the action. It will not serve the summons prior to deciding whether it should continue with the action and it wishes to complete the examinations and to obtain the production of documents the subject of the applications before me prior to making a final decision.

5. In addition to seeking orders setting aside the examination and production orders, the applicants seek liberty to inspect the affidavit of Mr O’Brien filed on 20 June 2003 and the affidavit of Mr Soriano filed on 19 June 2003, those two affidavits being the affidavits relied upon by Sandhurst when making application for the examination and production orders. Those affidavits are not available for inspection unless an order is made by the Court pursuant to Section 596C(2) of the Corporations Act 2001. I shall refer to them as “the confidential affidavits”.

6. As I understand it, the applicants assert that Sandhurst has acted for an improper purpose in seeking the examinations and production of documents and that Sandhurst failed to make full and frank disclosure to the Court of all matters relating to the exercise of the Court’s discretion when dealing with an application for examination and production orders.  That being the case, before an order for inspection may be made, the applicants must demonstrate that they have an arguable case in respect of these two matters and that the confidential affidavits are relevant to that arguable case: cf Harvey and Ors v Burfield and Smith, an unreported decision of Besanko J delivered on 19 June 2003, Judgment No [2003] SASC 192 and the cases referred to at paragraph 16 of that judgment.

7. I have not read the confidential affidavits because that approach was taken by Besanko J in Harvey and Ors v Burfield and Smith and by Branson J in Carter and Ors v Gartner (2003) 46 ACSR 264.

8. In my view, the underlying basis for such an approach is that, initially, on an application to set aside examination of production orders, the Court does not review the exercise of the discretion undertaken by the Court at the time the examination and production orders were made by reference to the affidavits relied upon by the liquidator or, in this case, by the trustee.  Initially, that may occur later if access to the confidential affidavits is given.  Applications such as those before me are dealt with on the basis that the examinee or person ordered to produce documents is given the opportunity to put submissions as to alleged lack of proper purpose or alleged failure to make full disclosure.  If an arguable case is made out that there has not been full disclosure or that the examination orders have been obtained for an inappropriate purpose, the Court may give access to the confidential affidavits to the applicants.  The Court will also permit the applicants, once they have had access to the confidential affidavits, to put further submissions with a view to convincing the Court that they are entitled to orders setting aside the examination and production orders.

9. If, however, the Court is persuaded by the applicants that in any event the examination and production orders should be set aside, it would not be necessary for the Court to make an order permitting inspection of the confidential affidavits.

10. It is convenient now to turn to the structure of the arguments advanced by the applicants.  In broad terms, the arguments may be characterised in two ways: first, those arguments which do not rely upon access to the confidential affidavits; and, second, those arguments that are dependent upon access to the confidential affidavits.

11. The first category of argument advanced by the applicants was to the effect that Sandhurst has no power or authority to prosecute the action against Deloitte, nor does it have either the power or authority to apply for examination orders or orders for the production of documents.  If the applicants are able to demonstrate, once and for all (as opposed to arguably), that either or both of these contentions are correct, I accept that they are entitled to orders setting aside the examination and production orders.  If Sandhurst does not have power or authority to prosecute the action against Deloitte, there is no warrant for the examination or production orders because they are based on the desire of Sandhurst to gain information relevant to the question of whether or not the summons will be served on Deloitte.  Even if Sandhurst does have power to prosecute those proceedings, if it has no power to apply for examination and production orders, it follows that the applicants are entitled to an order setting aside the examination and production orders.

12. Mr Whitington QC, counsel for the applicants, contended that, on a proper reading of the trust deed, Sandhurst had no power to prosecute the action against Deloitte, nor did it have power to apply for examination and production orders under the provisions of the Act.

13. Clause 8 of the trust deed, a copy of which is Exhibit 8 to Mr Cudmore’s affidavit of 26 June 2003, deals with events of default and action that may be taken by the trustee.  Clause 8.1.3 provides that the winding up of the company is an event of default.  Clause 8.2 of the deed is as follows:

    “8.2Action upon an Event of Default

    8.2.1Upon the occurrence of an Event of Default, the Trustee on behalf of Noteholders may only take action as set out in this Clause 8.2.  However, nothing in this Clause 8.2 prevents the Trustee from taking any action permitted by Clause 8.4 or 8.5 or bringing proceedings or taking any other action from time to time to recover moneys owing to it.

    8.2.2The Trustee will be entitled where an Event of Default has occurred:

    8.2.2.1to commence proceedings for the winding up of the Company or take such other action relating to enforcement of payment of Moneys Owing to Noteholders (including without limitation issuing Redemption Notices requiring the Company to redeem the Convertible Notes) but the proceeds of any such enforcement action must be dealt with in accordance with Clause 8.6; and

    8.2.2.2to prove in any Liquidation of the Company (irrespective of when that Liquidation is commenced) subject to this Deed, and in particular to the provisions set out in Clause 8.6.”

14. Clause 8.4 of the deed is as follows:

    “8.4Permitted Actions by Trustee

    Nothing in this Deed shall exclude, limit, defer or otherwise prejudicially affect:

    8.4.1.the right of the Trustee to seek directions from a court pursuant to section 1057 of the Corporations Law or to take any other proceedings seeking the directions or guidance of any court, tribunal or other authority as to the performance of its functions and duties pursuant to this Deed;

    8.4.2any proceedings taken by the Trustee and/or any Noteholder at any time seeking a judgment or order declaratory of the rights or obligations of any Noteholder or any of the parties to this Deed;

    8.4.3the right to take proceedings in respect of any breach or threatened breach of, or to compel or enforce performance of, any of the covenants, undertakings and obligations of the Company hereunder other than in relation to the payment of Convertible Note Obligations prior to the Company entering Liquidation;

    8.4.4the right to take proceedings under the Constitution; or

    8.4.5the right to take proceedings for the Liquidation of the Company for failure to redeem a Convertible Note, in any circumstances where the Conditions or this Deed specifically give that power to the Trustee.”

15. It seems to me that it is at least arguable that the proceedings brought by the trustee against Deloitte are authorised by Clause 8.4.2.  In addition Clause 8.2.1 specifically states that the ability to take proceedings contemplated in Clause 8.4 is not prevented by the restriction imposed in Clause 8.2.1.  Because it is arguable that Sandhurst has the relevant power or authority, this aspect of the applicants’ application must fail.  In other words, I do not think that the applicants have established that on any view of the proper construction of Clause 8.2 and Clause 8.4 of the trust deed, Sandhurst is precluded from prosecuting the action against Deloitte.

16. Clause 8.4.2 enables the trustee to take proceedings “seeking a judgment or order declaratory of the rights or obligations of ... any of the parties” to the deed. In the action against Deloitte, it might be argued that Clauses 8.2 and 8.4 do not authorise proceedings taken against third parties, namely Deloitte, but that is an argument which should only be determined in the substantive proceedings themselves rather than on an interlocutory application such as this.  It has always been open to Deloitte to file a notice of address for service and seek orders for dismissal, even though it has not been served with the summons.  It is for this reason that I have deliberately dealt with this aspect of the applicants’ argument by reference to whether or not Sandhurst has an arguable case that it has the power or authority under the deed to prosecute the action against Deloitte.

17. For these reasons I have concluded that the applicants have failed to establish a ground for setting aside the examination and production orders based on the contention that Sandhurst does not have the power or authority to prosecute the other Supreme Court proceedings against Deloitte.

18. I turn now to the question of whether or not Sandhurst has the power or authority to make applications for examination and production orders under the provisions of the Act.  When dealing with this contention on the part of the applicants, I think it appropriate to decide on the material before me, one way or the other, whether this point is made out.  For example, it would not be sufficient for Sandhurst to demonstrate that it was at least arguable that it had the power and authority to seek orders for examination and production.  If it is to defend its position, it must demonstrate that there is no substance in the argument of the applicants that Sandhurst lacks the relevant power and authority.  Similarly, the applicants must make their point with a view to obtaining a final decision.  These are matters which naturally fall for determination on an application such as this.  The determination by the Court, one way or the other, only affects the parties in relation to the applicants’ three applications.  The determination that Sandhurst does or does not have power to make application for examination and production orders does not affect the question of whether or not other proceedings, whether actual or contemplated, were or would be valid or invalid. 

19. Clauses 8.2 and 8.4, set out above, are the relevant provisions of the deed which determine this question.  I accept the applicants’ submission that if the power or authority to seek examination and production orders is excluded by the deed, the fact that ASIC appointed Sandhurst an eligible applicant, does not of itself confer upon Sandhurst the necessary power or authority.

20. Clause 8.2.1 operates as a limitation on the powers of the trustee to take proceedings.  The sub-clauses of 8.2.1 specify some of the proceedings that may be taken.  In addition, Clause 8.2.1 by its own terms does not preclude the trustee from taking proceedings of the type referred to in Clause 8.4.

21. The limitation is imposed in respect of an event of default which means an event of default in respect of the trust deed as defined in Clause 8.1.  I take the effect of Clause 8.2 to be that the actions which may be taken by the trustee in the event of a default are those which are specifically preserved in Clause 8.2 or in Clause 8.4.  Other powers in Clause 8.2 are referred to but they are not material to this discussion.

22. In my view, the applications for examination and production orders have been taken after and because of an event of default, namely the liquidation of the company. Consequently, Clause 8.2 operates to limit the powers of the trustee. I can find nothing in Clause 8.2 which permits Sandhurst to apply for examination and production orders. I consider that the reference in Clause 8.4.1 seeking “directions from a court pursuant to section 1057 of the Corporations Law” or any other similar proceedings, supports the argument that any right that Sandhurst may otherwise have had to bring such proceedings, whether as an appointed eligible applicant or otherwise, has been excluded by Clause 8.2.1 where it provides that “[u]pon the occurrence of an Event of Default, the Trustee on behalf of Noteholders may only take action as set out in this Clause 8.2”.

23. Mr Whitington likened the position of the trustee pursuant to the provisions of the trust deed to that of an agent.  I think that comparison is apposite to this aspect of the applicants’ case.  The trustee, as agent for the noteholders, is limited to the authority conferred upon it as agent and if, by the trust deed, it is not authorised to take proceedings for examination and production orders, once that becomes known to the Court, the examination and production orders should be set aside.

24. For these reasons, I consider that the applications of the applicants for orders setting aside the examination orders and summonses and the orders for production of documents should be granted.

25. I have been able to arrive at this conclusion without determining whether or not the applicants are entitled to inspect the confidential affidavits.  Consequently, it is not strictly necessary for me to proceed to a determination of that aspect of the matter.  However, in case there is an appeal, I think I should briefly state my conclusions in relation to the question of whether or not the applicants should have access to the confidential affidavits.  As I have stated earlier, if the applicants are to be successful in relation to this aspect of the application, they must show that arguably there has been a material non-disclosure or that the examinations are to be conducted for an improper purpose and that the confidential affidavits relate to those questions.  The Court must be satisfied “that the applicant is not pursuing the application without good cause or without good reason, and in particular is not doing so purely in the hope that, by procuring the release of the affidavit, some evidentiary foundation for the allegation will be made out”: cf Re Moage Ltd (In Liq) (1997) 25 ACSR 53 at 67 per Mansfield J.

26. As to the question of non-disclosure, it was pointed out by Lander J (with whom the other members of the Court agreed) in Re Southern Equities Corporation Ltd (In Liquidation); Bond and Anor v England (1997) 25 ACSR 394, that an applicant for an examination order must disclose all matters material to the exercise of the Court’s discretion. Material to be disclosed must not be confined to evidence which supports the application. Any other matter, even if it is adverse, which might affect the exercise of the discretion to grant or withhold an examination order, must be disclosed (at 428).

27. The first alleged material non-disclosure related to six archive boxes of audit papers voluntarily delivered by Deloitte to solicitors who were then acting for both the liquidator and Sandhurst.  That matter was considered by Besanko J in Harvey and Ors v Burfield and Smith when his Honour dealt with the question of the fact that the liquidators and Sandhurst had the same solicitors and audit documents were delivered to those solicitors by Deloitte at the request of the liquidator.  His Honour concluded that it was not open to the liquidator to disclose that documentation to Sandhurst because of the implied undertaking which arises when documents are produced that the recipient will only use them for the purposes for which the production is sought.  His Honour concluded that there had been no conscious breach of that implied undertaking and that, consequently, even if those matters had been brought to the attention of the Court at the time that the examination and production orders were made, it did not constitute a material non-disclosure.  Nothing has been put before me by the applicants which requires a different conclusion on these applications.

28. It also follows that, to the extent that the applicants now complain that an order for production of documents should not have been made in respect of any of them because Sandhurst through the liquidator has already had access to the documents is without substance.  It is clear from the judgment of Besanko J that care has been taken by the past and present legal advisers of Sandhurst not to participate in a breach of the complied undertaking given by the liquidator upon receipt of the documents from Deloitte.  This means, for all practical purposes, that Sandhurst has not had access to the documentation for the purposes of informing itself as to the commencement and continued prosecution of the other Supreme Court proceedings.

29. The applicants also asserted that Sandhurst failed to disclose that, at the time of the application, one set of solicitors was acting for both the liquidator and Sandhurst, that there was an arrangement between the liquidator and Sandhurst which should have been disclosed to the Court and that one of the purposes of the examination and production orders was to carry out investigations in relation to the proceedings pursued by Sandhurst.  In my view, these matters are no more than unsubstantiated assertions which fall far short of establishing that there is an arguable basis for the contention that there has been a material non-disclosure.  Not only are the assertions unsubstantiated but no cogent submission has been advanced as to why, if there had been such non-disclosures, they were also material non-disclosures in the sense that they related to matters which may have affected the exercise of the Court’s discretion when the orders were made on 23 June 2003.  For these brief reasons I have concluded that the applicants have failed to establish an arguable case that there has been a material non-disclosure.

1. The final point to be considered is the contention of the applicants that an arguable case has been made out that the examinations and production of documents have been obtained for an improper purpose in the sense that the proceedings brought by Sandhurst against Deloitte were not for the benefit of the corporation, its contributories or creditors.  Reliance was placed upon the decision of Re Excel Finance Corporation Ltd (Receiver and Manager Appointed); Worthley v England (1994) 52 FCR 69. The point was considered by Besanko J in Harvey and Ors v Burfield and Smith.  On the application before him, he had to deal with the contention that the liquidator brought the examination for the purposes of furthering the interest of Sandhurst in prosecuting its claim against Deloitte which, it was argued, could not be said to further the interests of the company, its creditors or contributories.  The same point arises for determination on this application except that it is to be viewed from the perspective of the applicants’ submission that an examination relating to the proceedings brought by Sandhurst against Deloitte could not be said to be within the purview of the provisions in the Act relating to examination and production of documents.

2. Besanko J was referred to Re Excel and to other cases, including Flanders v Beatty and Anor (1995) 16 ACSR 324. In that case Ormiston J said (at 335):

   “Now the powers given under s 596A to 597B are clearly so wide and so easily exercised by ‘eligible applicants’ (cf s 596A) that the purposes to be served by examinations ought not be limited by reference to the benefit of the company or its creditors or contributories.  The objects to be served by the issue of an examination summons and the making of orders for examination should be discerned only by reference to the statutory provisions which invest those powers.  If those powers are being used for oppressive purposes or to serve ends entirely outside the scope of the sections, such as to gather evidence for libel proceedings, then the court will intervene to prevent the examination.”

3. Besanko J said in Harvey and Ors v Burfield and Smith (at 17 [49]):

   “... a purpose (of the liquidator) of advancing the interests of a creditor of the company who has instituted proceedings against the proposed examinees is not an improper purpose if there is a basis for concluding that advancing the interests of the creditor will also advance the interests of the company, its other creditors or contributories.”

4. Applying that approach to this case it may be said that if an examination conducted by a creditor advances the position of the creditor by a legitimate means in relation to proceedings which have been brought or are contemplated by the creditor (which, if successful, has the prospect of bettering the position of the creditors and contributories of the company), such a purpose is not an improper purpose.

5. In my view, that is the situation in this case.  If Sandhurst’s proceedings are successful against Deloitte, the noteholders will be paid out to the extent of the recovery by Sandhurst.  That would clearly benefit the other creditors.  The fact that there is a possibility that Deloitte might claim to be subrogated to the position of the noteholders and lodge a proof of debt accordingly may detract from the overall benefit to the company, its creditors and contributories, but that does not, in my view, preclude Sandhurst from conducting examinations because the position is somewhat hypothetical.  In any event, there is the potential for those creditors who are noteholders to recover more than any dividend that the liquidator may be able to pay.

6. For these reasons I consider that the applicants have failed to make out an arguable case that the examinations were being conducted by Sandhurst for an improper purpose.

7. Because I have concluded that Sandhurst had no power to apply for examination and production orders and has no power to conduct the examinations consequent upon those orders, the orders for examination of Ms Flower and Mr Harvey will be set aside.  In addition there will be orders setting aside the summonses issued consequent upon the orders for examination and the orders for production of documents by each of the three applicants.