In the matter of IMF Pty Ltd (receiver and manager appointed) (in liquidation)
[2018] VSC 317
•14 June 2018
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S CI 2018 00042
| IN THE MATTER of IMF PTY LTD (RECEIVER AND MANAGER APPOINTED) (IN LIQUIDATION) (ACN 075 604 027) | |
| KAREN LEANNE KELSON & CRAIG IVOR BOLWELL in their capacity as joint and several liquidators of IMF PTY LTD (RECEIVER AND MANAGER APPOINTED) (IN LIQUIDATION) (ACN 075 604 027) | Plaintiff |
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JUDGE: | Hetyey, JR |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 16 April 2018 |
DATE OF JUDGMENT: | 14 June 2018 |
CASE MAY BE CITED AS: | In the matter of IMF Pty Ltd (receiver and manager appointed) (in liquidation) |
MEDIUM NEUTRAL CITATION: | [2018] VSC 317 |
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CORPORATIONS – Corporations Act 2001 (Cth) – winding up – summonses for public examination issued under ss 596A and 596B – where substantive examinations did not ultimately proceed – inherent power of the Court to compensate examinees for costs and expenses in compliance with summons – claims for time spent by examinees locating documents – applications by examinees for costs of legal representation – general presumption against recovery of legal costs – whether there was litigation between examinees and liquidators such that ordinary costs rules apply.
CORPORATIONS – Corporations Act 2001 (Cth) – s 597B – whether summonses issued without reasonable cause – where substantive examinations did not ultimately proceed.
CORPORATIONS – Corporations Act 2001 (Cth) – s 596C(2) – confidential affidavit filed in support of application for issue of summonses – no formal application made by examinees to inspect affidavit – whether access should be granted for reason of procedural fairness.
PRACTICE AND PROCEDURE – Civil Procedure Act2010 (Vic) – whether public examination a “civil proceeding” under ss 3 and 4 – s 24 – whether liquidators in breach of overarching obligation to ensure legal and other costs incurred in public examination process were reasonable and proportionate.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr P Cawthorn QC with Ms C Gobbo | Maddocks |
| For the Examinees | Mr P Corbett QC | Squire Patton Boggs |
| Mark J Ord Lawyer and Consultant |
JUDICIAL REGISTRAR:
Introduction
A person summoned under Part 5.9 of the Corporations Act 2001 (Cth) (“the Corporations Act”) in relation to a company’s examinable affairs may, in certain circumstances, seek reimbursement of his/her costs and expenses. In this case, following the issue and subsequent adjournment of a number of summonses, the examination process did not proceed. Can the examinees now recover from the liquidators some or all of their costs and expenses in circumstances where no substantive examinations ever took place?
Background
IMF Pty Ltd (receiver and manager appointed) (in liquidation) (“the Company”) operated a finance and investment business. It was placed into liquidation by order of this Court on 16 October 2013. By originating process filed on 9 January 2018, the plaintiffs as liquidators of the Company sought orders for the issuing of summonses directed towards seven people in connection with the Company’s examinable affairs. Only three of the summonses are relevant for present purposes: a summons addressed to Mr Tod McGrouther (a former director of the Company) pursuant to s 596A of the Corporations Act and a summons addressed to each of Ms Vicki McGrouther and Mr Mark Ord (a solicitor) in accordance with s 596B of that legislation. Those summonses were issued by Gardiner AsJ on 17 January 2018. However, the examination process ‘never got off the ground’.
The summonses were initially made returnable for 30 January 2018 but difficulties arose in relation to the service of those documents on Mr and Ms McGrouther. Consequently, the liquidators sought an adjournment of the summonses until 16 February 2018. Orders were made on the papers to that effect. Following eventual service on those two examinees and immediately prior to the adjourned return date, the Melbourne lawyers initially acting for Mr and Ms McGrouther requested a further adjournment. On 16 February 2018, Gardiner AsJ again adjourned the summonses of Mr and Ms McGrouther to 9 March 2018 before Caporale JR. According to an affidavit sworn on 13 April 2018 by Ms Marelda Hibberd, solicitor for the liquidators, this adjournment was granted to enable Mr and Ms McGrouther time to search for and produce documents in answer to their respective summonses.
On the same day, orders were made for the liquidators to uplift, inspect and copy documents produced to the Court by Mr Ord, save for documents the subject of potential claims for legal professional privilege.
By leave of the Court, on 23 February 2018 Mr Ord filed an interlocutory process which sought relief to the following effect:
· an extension of time for bringing an application to dismiss his summons;
· an order that the obligation in his summons to produce an identified schedule of documents be discharged and/or set aside in its entirety on the grounds that it was unclear, oppressive and/or did not relate to the examinable affairs of the Company;
· alternatively, directions about the timing and extent of categories of documents sought to be produced under the summons;
· an extension of time for production to allow Mr Ord to assess any claims for legal professional privilege over documents answering the summons; and
· costs and such further orders as the Court deemed appropriate.
Mr Ord’s application was filed on his own behalf as a sole practitioner on 23 February 2018 and made returnable before Caporale JR on 16 March 2018.
In the meantime, on 13 February 2018, Mr and Ms McGrouther retained the Sydney firm Squire Patton Boggs (“SPB”) in place of the Melbourne lawyers who had been acting previously. The new Sydney lawyers then wrote to Maddocks, lawyers for the liquidators, on 26 February 2018 and indicated that Mr and Ms McGrouther would not be available to attend the further adjourned examination date of 9 March 2018 because they were out of the country at the time. In response, Maddocks suggested that, given the problems with examinee availability and issues with production of documents, the 9 March 2018 date be vacated and the examinations of Mr and Ms McGrouther should instead take place on 27 March 2018. Accordingly, on 14 March 2018, Caporale JR made consent orders allowing that further adjournment. The Judicial Registrar also adjourned Mr Ord’s examination and interlocutory process to the same day.
More correspondence from SPB to Maddocks ensued and dealt with, among other matters: potential applications by Mr and Ms McGrouther for security for costs of compliance with the summonses, the breadth of documents sought under the summonses, objections to Mr and Ms McGrouther personally attending Court to produce documents, a possible application to transfer the public examination proceeding to New South Wales and a demand that the summons addressed to Ms McGrouther be set aside.
In the event, the examinations and interlocutory hearing scheduled for 27 March 2018 did not proceed. In her affidavit, Ms Hibberd explained the circumstances surrounding the premature conclusion of the examination process in the following way:
The Liquidators were provided with an indemnity by the Australian Taxation Office (ATO) for the purpose of conducting the examinations (Indemnity). The terms of the Indemnity are confidential. At the time of obtaining the Orders on 17 January 2018 to have the Summonses issued, it had been expected that the Indemnity would be sufficient to cover the preparation and conduct of the examinations.
By 26 March 2018, the Indemnity had been exhausted. On that date I was informed by the Liquidators and believe that they were advised by the ATO that no further funding would be provided for the examinations.[1]
[1]Affidavit of Ms Marelda Hibberd (13 April 2018), [17] –[18].
Maddocks then separately wrote to SPB and Mr Ord to notify them that the liquidators did not intend to proceed with the examinations and would seek to have the summonses dismissed with costs reserved. Then, on 27 March 2018, Caporale JR dismissed each of the seven summonses issued in the matter, including those addressed to Mr McGrouther, Ms McGrouther and Mr Ord. Costs were reserved in respect of those particular examinees. Similarly, Mr Ord’s interlocutory process was dismissed and costs reserved. The Judicial Registrar further ordered that any application for costs by the relevant examinees would be listed for hearing on 16 April 2018 with any material in support of such application to be served no later than 9 April 2018.
On 9 April 2018, Mr and Ms McGrouther each filed an interlocutory process and supporting affidavit seeking payment of their costs incurred in respect of their summonses. Mr McGrouther claims a total sum of $117,182.82 for legal costs incurred and time spent by him in searching for documents. Ms McGrouther seeks reimbursement of $10,109 for legal costs she incurred as a result of her summons. Mr Ord also filed an affidavit in respect of his costs. He seeks payment of $29,754.43 for his time spent in connection with the summons, including time searching for and preparing documents, along with disbursements.
In broad terms, these examinees seek recovery of their costs and expenses on the following grounds:
· pursuant to the Court’s inherent power to order payment of costs and expenses;
· pursuant to s 597B of the Corporations Act on the basis the summonses were obtained without reasonable cause;
· by reason of a breach of the Civil Procedure Act 2010 (Cth) (“the Civil Procedure Act”).
Statutory provisions and legal principles
Relevant Corporations Act provisions
Section 597(16) of the Corporations Act, provides:
A person ordered to attend before the Court or another court for examination under this Division may, at his or her own expense, employ a solicitor, or a solicitor and counsel, and the solicitor or counsel, as the case may be, may put to the person such questions as the Court, or the other court, as the case may be, considers just for the purpose of enabling the person to explain or qualify any answers or evidence given by the person.
As Gardiner AsJ held in the matter of Willmott Forests Ltd receivers and managers appointed (in liquidation),[2] s 597(16) of the Corporations Act clearly and unambiguously provides that if an examinee wishes to retain legal representation at an examination, they do so at their own cost.
[2][2015] VSC 251 at [36].
Section 597B of the Corporations Act reads:
Costs of unnecessary examination or affidavit
Where the Court is satisfied that a summons to a person under section 596A or 596B, or a requirement made of a person under section 597A, was obtained without reasonable cause, the Court may order some or all of the costs incurred by the person because of the summons or requirement to be paid by:
(a) in any case--the applicant for the summons or requirement; or
(b)in the case of a summons--any person who took part in the examination.
Court’s inherent power to allow costs and expenses
Just as the Court has the power to require a person to give evidence or produce documents (whether by subpoena, summons or other compulsory process), it also has the corresponding right to impose conditions on the exercise of that power or to make ancillary orders to temper its effect.[3] This is to prevent the Court’s compulsory process operating in an oppressive or unjust manner[4] and to ensure that no unfairness is caused to witnesses who are otherwise satisfying a public duty.[5]
[3]Re Kempal Pty Ltd (receiver and manager appointed) (in liq) (1989) 17 NSWLR 550 at 551 (‘Re Kempal’); Re Equiticorp Finance Ltd; Ex parte Brock No 2 (1992) 27 NSWLR 391 (‘Equiticorp No 2’) at 396-397; Re Spedley Securities Ltd (in liq); Ex parte Australian National Industries (1990) 4 ACSR 322 at 327 and Surpion Pty Ltd v M.R. Works Pty Ltd (2010) 80 ACSR 635 at 638 (‘Surpion’).
[4]Re Kempal at 551; Re Equiticorp Finance; Ex parte Brock (1992) 6 ACSR 725 (‘Equiticorp No 1’).
[5]Surpion at 639.
For example, the Court may make ancillary orders to compensate a person for out of pocket expenses such as travelling, accommodation and missing work as a consequence of an examination.[6] The Court may also make orders to reimburse an examinee for the cost of searching for and gathering together the necessary documents called for by a summons.[7] Such reimbursement has usually not extended to costs incurred by examinees in conferring with their own staff, associates or legal advisers or in obtaining information from others that might be used as evidence in the examination.[8] Courts have also been reluctant to permit examinees to recover their costs of legal representation.[9]
[6]Equiticorp No 2 at 397; McVeigh v Brumley [2009] VSC 668 at [13]-[16].
[7]Equiticorp No 1 at 734, Equiticorp No 2 at 397 and Surpion at 638.
[8]Equiticorp No 2 at 397 and Surpion at 639.
[9]Re Appleton, French & Scrafton Ltd [1905] 1 Ch 749 (‘Re Appleton’); Re Moreton Joinery Pty Ltd [1975] Qd R 121 (‘Re Moreton’); Re Kusmenko (1976) 14 ALR 673 (‘Re Kusmenko’) and EquiticorpNo 2; Re Radicle Projects Pty Ltd (in liq) (2013) 217 FCR 211 (‘Re Radicle’).
However, in Surpion, Finkelstein J recognised certain limited circumstances in which payment of the costs of legal representation could be justified. One such circumstance arises when the examination ‘may be properly characterised as “litigation” between the liquidator and the examinee.’[10] The ‘litigation exception’ articulated by Finkelstein J in Surpion has since been applied or approved in later cases[11] and it is relied upon by the examinees here.
[10]Surpion at 638 per Finkelstein J referring to the earlier English decisions of Re Lutscher; Ex parte Waddell (1877) LR 6 Ch D 328 and Re Appleton.
[11]Re Radicle at 216 (Gordon J) and Re Willmott Forests Ltd, Carson and Crosbie (Liquidators) [2015] VSC 251 at [18].
Civil Procedure Act
As previously mentioned, the examinees also invoke the Civil Procedure Act in support of their claim for costs and expenses. That legislation provides for ‘an overarching purpose in relation to the conduct of civil proceedings to facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute.’[12] The Court ‘is directed to give effect to the overarching purpose in the exercise of any of its powers, or in the interpretation of those powers,’ regardless of whether those powers are part of the Court’s inherent, implied or statutory jurisdiction or derived from common law or the rules and practices of the Court.[13] A party, or legal practitioner for a party, to a ‘civil proceeding’ is, in turn, required to comply with certain overarching obligations set out in Part 2.3 of the legislation.[14]
[12]Civil Procedure Act 2010 (Vic) s 1(1)(c). See also s 7 of the Civil Procedure Act which further articulates this overarching purpose.
[13]Ibid s 8.
[14]Ibid s 10.
Section 4 of the Civil Procedure Act confirms its application to ‘all civil proceedings’, save for proceedings arising under certain excluded legislation (none of which are presently relevant). Section 3 of the Civil Procedure Act, in turn, defines ‘civil proceeding’ to mean ‘any proceeding in a court other than a criminal proceeding or quasi-criminal proceeding.’ The overarching obligations apply to the conduct of any aspect of a civil proceeding, including an interlocutory application.[15] One of the overarching obligations parties and their lawyers are bound to observe is found in s 24 of the legislation.
[15]Ibid s 11.
Section 24 of the Civil Procedure Act provides:
Overarching obligation to ensure costs are reasonable and proportionate
A person to whom the overarching obligations apply must use reasonable endeavours to ensure that legal costs and other costs incurred in connection with the civil proceeding are reasonable and proportionate to—
(a) the complexity or importance of the issues in dispute; and
(b) the amount in dispute.
In Yara Australia Pty Ltd v Oswal; Carson v Oswal; ANZ Banking Group Ltd v Oswal; Apache Fertilisers Pty Ltd v Oswal,[16] the Court of Appeal held that:
[s]ection 24 adopts a flexible test. There is plainly no costs matrix or formula that can be applied in determining whether the parties have met their obligations. Rather, the court must weigh the legal costs expended against the complexity and importance of the issues and the amount in dispute, in order to determine whether the parties used reasonable endeavours to ensure those costs were proportionate.[17]
[16](2013) 41 VR 302 (‘Yara Australia’).
[17]Ibid 307.
In this way, the Civil Procedure Act ‘is designed to protect litigants from incurring excessive costs, but it is also designed to protect against the inappropriate use of the courts as a public resource.’[18]
[18]Ibid 314.
Section 28 of the Civil Procedure Act is in the following terms:
Court may take contravention of overarching obligations into account
(1)In exercising any power in relation to a civil proceeding, a court may take into account any contravention of the overarching obligations.
(2)Without limiting subsection (1), in exercising its discretion as to costs, a court may take into account any contravention of the overarching obligations.
Finally, s 29 of that legislation relevantly states as follows:
Court may make certain orders
(1)If a court is satisfied that, on the balance of probabilities, a person has contravened any overarching obligation, the court may make any order it considers appropriate in the interests of justice including, but not limited to—
(a)an order that the person pay some or all of the legal costs or other costs or expenses of any person arising from the contravention of the overarching obligation
….
(c)an order that the person compensate any person for any financial loss or other loss which was materially contributed to by the contravention of the overarching obligation…
…
(f)any other order that the court considers to be in the interests of any person who has been prejudicially affected by the contravention of the overarching obligations.
(2) An order under this section may be made—
(a) on the application of—
(i) any party to the civil proceeding; or
(ii)any other person who, in the opinion of the court, has a sufficient interest in the proceeding; or
(b) on the court's own motion.
(3) This section does not limit any other power of a court to make any order, including any order as to costs.”
Access to confidential affidavit
Before considering each of the examinees’ claims, it is appropriate to deal with one short procedural matter.
In resisting these applications, the liquidators sought to rely on the confidential affidavit of Karen Leanne Kelson sworn 8 January 2018 as an explanation of the proper basis upon which each of the summonses were issued.
The liquidators say the examinees are not entitled to inspect the affidavit for the purpose of these applications. The examinees, however, argue that it would be procedurally unfair for reliance to be placed on Ms Kelson's affidavit in circumstances where they are not permitted to see it and to put on responding material.
Pursuant to s 596C(2) of the Corporations Act, an affidavit filed in support of the application for the issue of a summons is ‘not available for inspection except so far as the Court orders.’ This is because the affidavit will invariably contain confidential information in order to persuade the Court to exercise its discretion to issue the summons. Such confidential information may include the areas of inquiry likely to be covered at the examination and its release may frustrate the examination process.[19]
[19]Re Excel Finance Corp Ltd; application of England (1994) 14 ACSR 407 at 429.
No application was made by the examinees under s 562C(2) to inspect the affidavit of Ms Kelson prior to the hearing of these applications. When pressed, counsel for the examinees confirmed that no such application was made orally at the hearing either.
In my view, given the clear mandatory language of s 596C(2), Ms Kelson's affidavit ought not be inspected by the examinees in the absence of an application and formal order under that section. The examinees would need to demonstrate that one of the usual grounds of challenge to the examination, such as abuse of process or improper purpose,[20] is arguable and that the affidavit is relevant to making out that ground.[21] However, it is not enough for the examinees to simply cite a form of procedural unfairness or disadvantage as a reason for access to be granted. While such an argument might be relevant to the exercise of the Court's discretion under s 596C(2), it does not constitute an independent basis to permit the release of a confidential affidavit filed in support of the issue of summonses for examination.
[20]Ariff and Ors v Fong [2007] NSWCA 183 at [11].
[21]Re Moage (in liquidation) (1997) 25 ACSR 53 at 69.
In any event, having regard to the content of the affidavit (which is dealt with further below), I am not convinced that its provision would assist the examinees in the making of their applications for costs and expenses.
I now turn to the respective claims for costs and expenses made by each of the examinees.
Claims by Mr Ord
As previously mentioned, Mr Ord seeks payment of $29,754.43 for his costs in connection with the summons. This includes $18,827.50 for his time calculated at $420 per hour plus GST and $10,926.93 in respect of disbursements, the majority of which relate to counsel’s fees.
In his affidavit of 9 April 2018, Mr Ord summarises each of the tasks he undertook in compliance with his summons, in preparing his interlocutory process and in conferring with counsel. Significant time was spent by Mr Ord searching for, retrieving and collating documents in answer to the extensive categories set out in the summons. Time was also spent identifying documents the subject of likely claims for legal professional privilege by other examinees and third parties (‘privileged documents’). Two lever-arch folders of privileged documents were produced by Mr Ord to the Court. An accompanying index briefly described each of the privileged documents and the purported holder of the privilege.
Court’s inherent power to allow costs and expenses
Having regard to the authorities already discussed,[22] I am prepared to substantially allow Mr Ord’s claim for time spent in compliance with the summons. This includes time spent collating and indexing the privileged documents. It also includes some time spent by Mr Ord corresponding with Maddocks about the scope of the summons and how long he needed to comply with it. Mr Ord should be compensated as a professional person for the time he has spent away from his legal practice undertaking these tasks. He should also be reimbursed for some of his out of pocket expenses and disbursements such as transport, photocopying and part of the filing fee for his interlocutory process.
[22]See Equiticorp No 1 at 734, Equiticorp No 2 at 397 and Surpion at 638.
However, it is not appropriate to allow Mr Ord’s time associated with conferring with his barrister in undertaking this work.[23] The engagement of counsel was unnecessary for the purpose of collating documents in answer to the summons and quarantining the privileged documents. As Mr Ord is an experienced legal practitioner, he was more than capable of undertaking such tasks without the assistance of counsel.
[23]Equiticorp No 2 at 397 and Surpion at 639.
In addition, some of the time spent by Mr Ord went beyond simply complying with his summons. It will be recalled that, among other things, Mr Ord sought to dismiss his summons or to set aside any requirement to produce documents. The time spent by Mr Ord pursuing this course is not compensable pursuant to the authorities already discussed.
Further, I can see no reason to depart from the general rule that an examinee should not be allowed his or her costs of legal representation.[24]
[24]Re Appleton; Re Moreton; ReKusmenko; Equiticorp No 2; Re Radicle.
For Mr Ord to recover his legal costs, he needs to satisfy the Court that the dispute with the liquidators over his summons assumed the character of ‘litigation’ and that the ordinary cost rules should apply.[25]
[25]Re Lutscher at 331, Re Appleton at 756, Surpion at 638 and Re Radicle at 216.
In Surpion, there was a dispute between a liquidator and a third party in relation to whether certain documents produced by an examinee were capable of being withheld on the basis of legal professional privilege. Numerous directions and orders were made by the Court to manage the dispute over approximately two years. The hearing of the privilege dispute occupied around four days before me in my previous capacity as a Registrar of the Federal Court of Australia. Numerous rulings on the privileged status of the documents were made. On a review of my order that the third party pay 60 per cent of the liquidator’s costs incurred in respect of the privilege dispute, Finkelstein J held that ‘the true character of what had occurred was a dispute inter partes’ so that the ordinary costs rules should apply.[26]
[26]Surpion at 640.
Similarly, in Re Radicle, there was an extensive dispute between liquidators and two examinees about legal professional privilege. Orders were made to facilitate its determination and a number of hearing days were allocated to the contest. However, after two days of hearing, the liquidators abandoned their ongoing objection to the privilege claims. Justice Gordon confirmed that the privilege dispute had taken the character of litigation, but resolved to let costs lie where they fell on the basis that each party was partly responsible for the delay and expense incurred in the resolution of the dispute.[27]
[27]Re Radicle at 217 – 218.
None of the features and complexity found in the Surpion and Re Radicle cases are evident here. Mr Ord’s interlocutory process was never determined or even heard by the Court. The documents he identified as privileged were not the subject of any contest. No orders were ever made to set aside the summons or remove the requirement to produce documents. There was simply no dispute which assumed the character of litigation and therefore the Court's jurisdiction in relation to costs is not enlivened. On that basis, Mr Ord cannot recover his legal costs.
Section 597B application
In the alternative, Mr Ord maintains that he ought to recover his legal costs on the basis that his summons was issued without reasonable cause within the meaning of s 597B of the Corporations Act.
A finding under s 597B is usually taken after the examination has concluded.[28] Neither counsel for Mr Ord or the liquidators could identify a case in which s 597B had been invoked without substantive examinations having taken place. This is, after all, an unusual case. However, nothing in the language of the provision suggests that it can only be engaged at the conclusion of the examination process. I am therefore prepared to consider the application of s 597B in the present circumstances.
[28]In the matter of Southland Coal Pty Ltd (receivers and managers appointed) (in liquidation) [2006] NSWSC 184 at [101] Austin J citing Barrett J in Re Total Entity Pty Ltd (in liq) (2003) 47 ACSR 577.
Counsel for Mr Ord submits that the scope of the summons was clearly oppressive as it sought the production of documents over a period of more than 14 years in respect of numerous companies and entities. It is further submitted that because the summons was oppressive, it was issued without reasonable cause.[29] It is also said that the liquidators have not adequately explained why they abandoned the examination process at short notice.
[29]See Merrett; Ex parte; Re ACN 072 081 111 Pty Ltd (1997) 24 ACSR 146.
I am not satisfied there is an absence of reasonable cause for the obtaining of Mr Ord’s summons. I have read the 8 January 2018 affidavit of Ms Kelson (one of the liquidators). In so doing, I have necessarily rejected the submission of counsel for Mr Ord that if the examinees are to be denied the affidavit, the Court cannot rely upon it. No authority was cited for that submission. Further, to deny the Court the ability to review the affidavit would place an unnecessary and impracticable constraint on the Court’s task under s 597B.
Alluding generally to the contents of Ms Kelson’s affidavit and being necessarily oblique, the affidavit deals with the following matters:
· the relatively large size of the liquidation, with total creditor claims in excess of $62.6 million, including $25 million claimed by the Australian Taxation Office and over $35 million claimed by secured creditors;
· the nature and complexity of secured creditor claims and the circumstances of the appointment of a receiver and manager to the Company;
· the Company’s status as beneficiary of various related party trusts and the question of the Company’s entitlement to trust income over more than a decade;
· related party creditors of the Company;
· the assets of the Company, including loans made to related companies.
On a fair reading of the affidavit, I am satisfied that a reasonable cause for the summons existed at the time of its issue.
This is despite the breadth and scope of the categories of documents sought. Whilst Mr Ord’s application to set aside or narrow the summons was never ultimately determined, it may be that, with the benefit of hindsight, the summons ought to have been refined. However, it is neither appropriate nor necessary for the Court to speculate as to the outcome of Mr Ord’s application. Those matters were simply overtaken by events.
The relevant superseding events are appropriately detailed in Ms Hibberd’s affidavit of 13 April 2018. It cannot be said that the liquidators have capriciously changed their minds about the merit of pursuing the examination process. However, it is a matter of regret that their funding could not extend to see the process through. It may well be that the nature and extent of correspondence engaged in by the relevant examinees, along with the number of resulting adjournments, contributed to this outcome, although I make no findings in this regard.
It follows that Mr Ord’s application for costs under s 597B must also fail.
Civil Procedure Act claim
The last element of Mr Ord’s application for costs and expenses invokes the Civil Procedure Act. A remedial costs order is sought under s 29 of that legislation on the basis that the liquidators have breached the overarching obligation in s 24 to ensure that legal and other costs incurred in connection with the public examination process were reasonable and proportionate. In particular, it is said that the schedule of documents sought in Mr Ord’s summons was unnecessarily wide and oppressive and that there was no attempt by the liquidators to act in a proportionate manner having regard to the Company’s examinable affairs. The written submissions relied upon by Mr Ord also appear to suggest that the liquidators’ initial funding may have contributed to this failure to act proportionately.
I am prepared to accept, and counsel for the liquidators have conceded, that a public examination is a ‘civil proceeding’ for the purposes of ss 3 and 4 of the Civil Procedure Act. This is notwithstanding that a public examination does not constitute traditional inter partes litigation. It would then follow that the liquidators are parties to the civil proceeding and are therefore obliged to comply with the overarching obligations contained in Part 2.3 of the legislation, including s 24.
Further, whilst Mr Ord is not a party to a civil proceeding, it would appear that, as an examinee subjected to the Court’s compulsory process, he has standing to bring an application under s 29 of the Civil Procedure Act for a remedial order on the basis that he is a ‘person who, in the opinion of the court, has a sufficient interest in the proceeding.’[30]
[30]Civil Procedure Act 2010 (Vic) s 29(2)(a)(ii).
However, there is difficulty in the practical application of s 24 to a public examination under Part 5.9 of the Corporations Act. The language of s 24 makes clear that the obligation to ensure costs are reasonable and proportionate is to be assessed by reference to the ‘complexity or importance of the issues in dispute’ and ‘the amount in dispute.’ The question then arises: what was the relevant dispute in this case?
The issuing of a summons for examination cannot itself constitute a dispute. That is because a public examination is not concerned with the adjudication of legal rights between parties to litigation.[31] Instead, it is a compulsory, investigative procedure in which the Court takes on a supervisory role.[32] The object of the process is to allow a liquidator or other eligible applicant to procure information in relation to the examinable affairs of the company in liquidation.[33] As Lander J explained in Re Southern Cross, this information gathering exercise serves a number of distinct public purposes:
The first purpose relates to the winding up generally, and the protection of the interests of creditors. It may be used to protect the interests of creditors by assisting in the recovery of assets of the corporation for distribution to the creditors.
As well as protecting the interests of creditors the information is also gathered to determine whether any person who has taken part or been concerned in the examinable affairs of the corporation may have been guilty of misconduct in relation to the corporation. The power is clearly available to the eligible applicant so that information may be obtained to determine whether any person has been guilty of misconduct in relation to the corporation, and for the purpose of bringing proceedings (whether civil or criminal) against that person: Hamilton v Oades (1989) 166 CLR 486.
The third purpose for which the legislation exists is for the public interest in assisting the regulation of corporations. The legislation acts to remind those who act as examinable officers of the corporation, or who deal with a corporation, that they are at risk that if any of the circumstances giving rise to an application by an eligible applicant arise, they may be called upon to be publicly examined about their conduct in relation to the corporation. It is in the public interest that those who act as examinable officers of corporations and those who take part or are concerned in the examinable affairs of a corporation are obliged to impart their knowledge of the affairs of the corporation in the event that the corporation becomes subject to administration or winding up. In that sense the legislation serves the public interest as well as the private interest of creditors.[34]
[31]Re Westgate Wool Co Pty Ltd (in liq) (2006) 60 ACSR 570 at 574 (Debelle J).
[32]Re Monadelphous Engineerings Associates (NZ) Ltd (in liq); ex parte McDonald v Watson (1989) 7 ACLC 220 at 223 (Northrop J).
[33]In the matter ofMoage Pty ltd (in liq); John Sheahan v Robert Pitterino & Ors (1997) 77 FCR 81; Re Southern Cross Petroleum Sales Pty Ltd (in liq) v Hirsch (1998) 70 SASR 527 (‘Re Southern Cross’) at 534 (Lander J); Douglas-Brown v Furzer (1994) 11 WAR 400 at 406.
[34] ReSouthern Cross at 534.
Even though the examination summons cannot properly be regarded as a dispute for the purposes of s 29 of the Civil Procedure Act, the matters arising from Mr Ord’s interlocutory process filed on 23 February 2018 might. It is then necessary to consider whether the liquidators failed to use reasonable endeavours to ensure that the costs of that dispute were reasonable and proportionate, having regard to its complexity and importance and the amount in dispute.
There is evidence that Mr Ord wrote to Maddocks on 5 February 2018 seeking confirmation of whether the liquidators intended to examine him, raising issues of legal professional privilege and seeking greater specificity in relation to the documents sought under the summons. Maddocks responded by letter dated 7 February 2018 which addressed the question of Mr Ord’s connection to the examinable affairs of the Company, noting that he had previously acted for the Company, related parties, secured creditors and the Company’s receiver. The letter also invited Mr Ord to raise any particular queries or comments about the categories of documents listed in the schedule to his summons. In his affidavit of 9 April 2018, Mr Ord indicates that following the filing of his interlocutory process, on 2 March 2018 he received an email from his counsel confirming that Maddocks were ‘working on a revised schedule.’ His letter to Maddocks dated 9 March 2018 referred to conversations between counsel about the possibility of narrowing the summons and asserted that ‘[s]hould a revised Schedule not withdraw or significantly narrow the categories of documents to be produced then this letter shall be relied upon in relation to the costs of the Interlocutory Process already filed in these proceedings.’ Maddocks responded with a letter dated 13 March 2018 and marked ‘without prejudice’ which enclosed a revised schedule to the summons.
The liquidators submitted that this letter and the revised schedule should be excluded from evidence pursuant to s 131(1)(a) of the Evidence Act 2008 (Vic) on the basis that it was a communication made between persons who were attempting to negotiate a settlement of their dispute. However, I am not satisfied that the settlement negotiations exclusion applies because the letter is plainly relevant to the question of determining liability for costs.[35]
[35]Evidence Act 2008 (Vic) s 131(2)(h). See also Gilberg v Maritime Super Pty Ltd (No 2) [2009] NSWCA 394 and Alexander v Australian Community Pharmacy Authority (No 2) [2010] FCA 467.
Considering the correspondence between the liquidators and Mr Ord in its entirety, it is clear that the liquidators had properly sought to deal with Mr Ord’s concerns about the summons by narrowing the scope of documents sought.[36] Further, I do not believe any inference can be drawn that the initial funding by the Australian Taxation Office meant the liquidators were any less inclined to comply with their obligations under s 24. That is simply not borne out on the evidence before me.
[36]According to his affidavit of 9 April 2018, Mr Ord then set about compiling documents to produce in response to the revised schedule. However, those further documents were not ultimately produced as a result of liquidators being unable to proceed with the public examinations.
The conduct of the liquidators for the purposes of assessing their compliance with s 24 should also be considered in light of:
· the important public policy reasons for the public examination procedure, as explained by Lander J in Re Southern Cross and set out above;
· the duty of the liquidators to investigate the affairs of the Company;[37] and
· the nature and complexity of the liquidation itself, as is apparent from the affidavit of Ms Kelson which is discussed in general terms above.
[37]See Re Spedley Securities Ltd; Ex parte Potts & Gardiner (1990) 2 ACSR 152 at 154 (Young J); Re Chevron Furnishers Pty Ltd (in liq) (No 2) [1995] 1 Qd R 125 at 130 (Fitzgerald P, Pincus JA and Williams J); Thomson Reuters, McPherson’s Law of Company Liquidation (5th ed), vol 1 (at Update 89) 8.500.
All of these factors are important to an understanding of ‘the complexity or importance of the issues in dispute’[38] with Mr Ord.
[38]Civil Procedure Act2010 (Vic) s 24.
Having regard to the above, I am not satisfied on the balance of probabilities that the liquidators have breached the overarching obligation under s 24 of the Civil Procedure Act.
Quantification of Mr Ord’s entitlement to reimbursement
Whilst I have rejected Mr Ord’s arguments that he should be paid his legal costs, I have substantially allowed his claim for time spent in compliance with the summons. This includes time spent by Mr Ord collating and indexing the privileged documents and corresponding with Maddocks about the scope of the summons and the time for compliance with it. He should also be compensated for some of his out of pocket expenses and disbursements such as transport, photocopying and part of the filing fee for his interlocutory process.
At the hearing, counsel for Mr Ord urged the Court to fix any entitlement of his client to be reimbursed his costs and expenses. Conversely, counsel for the liquidators submitted that any costs and expenses ordered should be referred to the Costs Court for the purpose of taxation in default of agreement.
Because I have not ordered the payment of legal costs, there are no costs to refer to taxation. As I have allowed the payment of some of Mr Ord’s expenses, I propose to fix those expenses now. That was the approach adopted by Gardiner AsJ in Re Medici Institute Pty Ltd.[39] It also seems to be the approach most consistent with the Court’s obligation under s 8 of the Civil Procedure Act to give effect to the overarching purpose set out in s 7 of that legislation, namely to ‘facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute’ in the assessment process.
[39] [2009] VSC 668 (‘Re Medici’).
I have already explained that, consistent with the authorities, I will not allow Mr Ord to be reimbursed for:
· time spent conferring with his barrister; or
· work undertaken which went beyond simply complying with his summons ie: time spent seeking to dismiss his summons and to set aside any requirement to produce documents.
I have closely reviewed all the items claimed by Mr Ord in his affidavit of 9 April 2018 and excluded any time referable to the disallowed expenses mentioned above. In some cases, I have reduced certain items which partially relate to these disallowed expenses, for example Mr Ord’s interlocutory process. In the event, I have allowed 37 hours of the total 44.3 hours claimed by Mr Ord.
As Young J explained in Equiticorp No 1, a witness who is examined ‘is not entitled to treat the exercise as if it was another retainer in which not only would his bill cover overheads but also would include a profit margin.’[40] For that reason, the Court’s usual approach with respect to witness expenses should be adopted.[41] Appendix B of Schedule 3 to the Victorian Supreme Court (General Civil Procedure) Rules 2015 permits ‘professional persons’ to recover their witness expenses by reference to an hourly rate of between $277 to $552.80, fixed at the sum of $3,315.60 per day. Mr Ord, as a lawyer and sole practitioner, has claimed an hourly rate of $420 plus GST (or $462 inclusive of GST). It is within the range contemplated by Appendix B of Schedule 3 and I consider it to be appropriate. Regardless of whether the 37 hours of time I have allowed is simply multiplied by this hourly rate or Mr Ord is permitted a fixed sum of $3,315.60 per day, the outcome is largely the same. I will fix Mr Ord’s claim for time spent in connection with his summons at $17,100.
[40]Equiticorp No 1 at 734.
[41]Ibid and Re Medici at [4] and [16(ii)].
As to the disbursements claimed by Mr Ord, consistent with my earlier rulings, counsel fees will be disallowed and the filing fee for his interlocutory process reduced given it went beyond mere compliance with the summons. The GST component of various incidental costs (such as taxis and photocopying) will also be removed. This is because the Court was informed at the hearing that Mr Ord is registered for GST purposes and presumably able to claim an input tax credit.[42] His disbursements are allowed at $775.
[42]See Merringtons Pty Ltd v Luxottica Retail Pty Ltd& Anor [2006] VSC 525 and the cases which have since applied it such as Gagner Pty Ltd trading as Indochine Cafe v Canturi Corporation Pty Ltd (2009) 262 ALR 691 and Fulton Hogan Construction Pty Ltd v Grenadier Manufacturing Pty Ltd (in liq) [2012] VSC 358, (in the context of the assessment of damages) and Re F Basile & Associates Pty Ltd(in liq) [2016] VSC 690 (in the context of a liquidator’s remuneration claim).
It follows that Mr Ord’s claim for expenses be fixed for the total sum of $17,875.
Claims by Mr McGrouther and Ms McGrouther
Claims for legal costs
Mr and Ms McGrouther essentially put forward the same arguments made by Mr Ord in support of their application for costs and expenses.
As previously mentioned, Mr McGrouther claims $117,182.82 for his costs and expenses. This includes $88,032.82 in respect of legal costs and $29,150 (inclusive of GST) for his time. Ms McGrouther seeks $10,109 for her legal costs.
Both Mr McGrouther and Ms McGrouther rely on affidavits sworn by their lawyer, Ms Susan Goodman, dated 9 April 2018. Each of the affidavits set out in detail the nature of the work undertaken by SPB and other legal advisers in connection with the respective summonses directed to Mr and Ms McGrouther.
I have already referred to the substance of correspondence sent by SPB to Maddocks in relation to the summonses and the examinations generally. That correspondence referred to, among other things, applications for security for costs, the scope of the summonses, objections to Mr and Ms McGrouther personally attending Court to produce documents, a potential application to transfer the matter to New South Wales and a demand that the summons addressed to Ms McGrouther be set aside.
None of these matters were pursued by way of an interlocutory process. No orders were ever made to set aside the summonses or to relieve the examinees of their obligation to produce documents. No documents were ever ultimately produced by either examinee and no formal claim was ever made in relation to the documents identified by Mr Ord as being privileged. In short, there was no dispute which took the character of litigation and, accordingly, there is no basis to depart from the general rule that an examinee should not be allowed his or her costs of legal representation.[43] It follows that neither Mr or Ms McGrouther should be permitted to recover their legal costs on the basis of the Court's inherent jurisdiction.
[43]Re Appleton; Re Moreton; Re Kusmenko; Equiticorp No 2; Re Radicle.
As previously mentioned, Mr and Ms McGrouther also ground their claims for legal costs in s 597B of the Corporations Act and the Civil Procedure Act.
For the same reasons set out in relation to Mr Ord's s 597B application, I am satisfied that a reasonable cause for the summonses addressed to each of Mr McGrouther and Ms McGrouther existed at the time of their issue. Further, aside from a complaint that the summonses were unnecessarily broad and oppressive, nothing has been alleged by either examinee to challenge their underlying bases.
Similarly, the applications for remedial cost orders under s 29 for an alleged breach of s 24 of the Civil Procedure Act fail for the same reasons that Mr Ord's application did. In addition, in contrast to the position of Mr Ord, no interlocutory applications were filed by Mr McGrouther or Ms McGrouther so as to constitute a dispute for the purpose of s 24. It may be that the extensive correspondence between those examinees and the liquidators represented such a dispute. However, when that correspondence is viewed as a whole, including ‘without prejudice’ letters dated 13 March 2018 sent by Maddocks to SPB which should be admitted into evidence on the question of costs,[44] it is apparent that the liquidators had properly sought to deal with concerns raised about the summonses by narrowing their scope.
[44]Evidence Act 2008 (Vic) s 131(2)(h).
As previously discussed earlier in these reasons, it is important that the conduct of the liquidators for the purposes of assessing compliance with s 24 should also be considered in light of the important public policy reasons for the public examination procedure,[45] the duty of the liquidators to investigate the affairs of the Company[46] and the nature and complexity of the liquidation itself. These matters all go to ‘the complexity or importance of [any] issues in dispute’ with Mr McGrouther and Ms McGrouther.
[45]ReSouthern Cross at 534.
[46]See Re Chevron Furnishers Pty Ltd (in liq) (No 2) [1995] 1 Qd R 125 at 130 (Fitzgerald P, Pincus JA and Williams J); Thomson Reuters, McPherson’s Law of Company Liquidation (5th ed), vol 1 (at Update 89) 8.500.
I am not ultimately satisfied on the balance of probabilities that the liquidators breached the overarching obligation in s 24 to ensure that legal and other costs incurred in connection with the public examination of Mr and Ms McGrouther were reasonable and proportionate.
However, had I come to different conclusions in relation to the claims of Mr and Ms McGrouther for their legal costs (either pursuant to the Court's inherent jurisdiction, s 597B of the Corporations Act or the Civil Procedure Act), the actual costs claimed by those examinees would likely have been significantly reduced. Mr McGrouther's costs, in particular, are extraordinarily high given that lawyers were engaged for approximately three months, no substantive application was ever filed, he never attended Court and no documents were ever produced.
Time spent by Mr McGrouther in compliance with his summons
I turn now to Mr McGrouther's claim to be reimbursed for the time he spent dealing with his summons for examination. The 53 hours spent by Mr McGrouther were recorded in a ‘time diary’ comprising half a page and found in an exhibit to the 9 April 2018 affidavit of Ms Goodman.[47]
[47]Exhibit SG-1 to the affidavit of Ms Susan Goodman (9 April 2018).
In her affidavit, Ms Goodman also deposes to the following matters by way of information and belief:
Mr McGrouther works as a Corporate Adviser and his hourly rate is $500. During the 53 hours that Mr McGrouther spent preparing to comply with the Summons, he was unable to carry out his usual duties. Therefore, Mr McGrouther seeks reimbursement of $29,150 (GST inclusive) for the equivalent of lost wages.
In my view, this evidence is deficient in a number of material respects. Firstly, in contrast to the quality of evidence furnished by Mr Ord, Mr McGrouther provides little detail about the type of tasks he engaged in when complying with the summons. The half page ‘time diary’ simply refers to the following generic descriptions of the work apparently undertaken: ‘reviewing Summons and Schedule to Summons,’ ‘reviewing revised Summons and Schedule to Summons’ and ‘collecting information.’ There is no explanation of how Mr McGrouther set about locating and assembling documents in answer to the summons or why he needed to spend 13 hours reviewing the schedule and the revised schedule.
Secondly, and more importantly, it is unclear how Mr McGrouther has incurred actual financial loss as a consequence of the time he spent responding to his summons. The evidence is ambiguous as to whether Mr McGrouther is an employee or an independent contractor. If he is an employee, then his employer (who is not identified) might be the proper party to seek reimbursement for lost wages or ‘the equivalent of lost wages.’ If it is suggested that Mr McGrouther had wages withheld by his employer, that may be a legal matter between him and his employer. Alternatively, if it is suggested he is a contractor, he would need to properly demonstrate that he has forfeited paid work to perform tasks in connection with his summons. He has not done so.
It follows that Mr McGrouther’s claim to be reimbursed for the time he spent dealing with the summons cannot succeed.
In light of my rulings, it is unnecessary to consider whether, as part of a balancing exercise to minimise any oppressive effect of the summons, Mr McGrouther, as a director, was an ‘insider’[48] and should be denied his costs and expenses on that basis. It is also unnecessary to consider whether the distinction between ‘insiders’ and ‘outsiders’ remains a valid one.[49]
[48]Equiticorp No 1 at 730 (Young J).
[49]There a number of cases where the utility of this distinction has been doubted. For example, see: Re Spiraflite Ltd [1979] 1 WLR 1096 at 1101 (Megarry J), Re Imobridge Pty Ltd (in liq) [1999] 1 Qd R 38 at 52 (Lee J) and Surpion at 639 (Finkelstein J).
Conclusion
Having regard to the above, the interlocutory processes filed by each of Mr McGrouther and Ms McGrouther on 13 April 2018 should be dismissed. Mr Ord’s application for expenses will be fixed in the total sum of $17,875 but his application is otherwise dismissed.
Orders will follow accordingly.
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