In the Matter of VMF Holdings Pty Ltd (Subject to Deed of Company Arrangement) Fong, Victor & Anor v Hamilton, William James & Anor as administrators of VMF Holdings Pty Ltd (Subject to Deed of Company Arrangement)
[1998] FCA 1078
•3 SEPTEMBER 1998
FEDERAL COURT OF AUSTRALIA
CORPORATIONS LAW – application for “review” of Registrar’s orders – order for public examinations – allegation that examination would constitute an abuse of process –mere possibility of gaining a forensic advantage in related proceedings not sufficient to demonstrate improper purpose –utility of examinations to creditors’ interests – jurisdiction assumed – relevance of ss 447A and 447E Corporations Law
Corporations Law, s 447A, 447E, 596A, 596B
IN THE MATTER OF VMF HOLDINGS PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
NG 3280 of 1997
MADGWICK J
SYDNEY
3 SEPTEMBER 1998
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NG 3280 of 1997
IN THE MATTER OF VMF HOLDINGS PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) ACN 061 983 971
BETWEEN:
VICTOR FONG
FIRST APPLICANTVMF HOLDINGS PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
SECOND APPLICANTAND:
WILLIAM JAMES HAMILTON AND PINO FIORENTINO IN THEIR CAPACITY AS JOINT DEED ADMINISTRATORS OF VMF HOLDINGS PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
RESPONDENTSJUDGE(S):
MADGWICK
DATE OF ORDER:
3 SEPTEMBER 1998
WHERE MADE:
SYDNEY
SHORT MINUTES OF ORDERS
BY CONSENT, THE COURT ORDERS THAT:
Order 13 of the Orders made by the Registrar on 13 April 1998 be amended to read: “Subject to any further order of the Court, the Administrators of the Deed of Company Arrangement executed by the Company be paid or retained out of the property of the company under their control pursuant to the Deed of Company Arrangement, their costs of this application and the examination.”
THE COURT FURTHER ORDERS THAT:
The Notice of Motion is dismissed.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NG 3280 of 1997
IN THE MATTER OF VMF HOLDINGS PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) ACN 061 983 971
BETWEEN:
VICTOR FONG
FIRST APPLICANTVMF HOLDINGS PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
SECOND APPLICANTAND:
WILLIAM JAMES HAMILTON AND PINO FIORENTINO IN THEIR CAPACITY AS JOINT DEED ADMINISTRATORS OF VMF HOLDINGS PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT)
RESPONDENTS
JUDGE(S):
MADGWICK J
DATE:
3 SEPTEMBER 1998
PLACE:
SYDNEY
REASONS FOR JUDGMENT
HIS HONOUR: By Notice of Motion the applicants seek to set aside orders made by a Registrar of this Court on 13 April 1998. The effect of those orders was that the first applicant, Mr Fong, and 26 other persons were to attend an examination in respect of the second applicant’s affairs, VMF Holdings Pty Ltd (“VMF”), pursuant to ss 596A and/or 596B of the Corporations Law. Mr Fong is the sole director of VMF. The applicants bring this Motion on the ground that those orders constitute an abuse of process, instigated by the respondents, who are the administrators of the Deed of Company Arrangement.
The relevant legislative provisions
Examinations of persons regarding the affairs of a company are dealt with under Part 5.9 of the Law. The main provisions are ss 596A and 596B:
“Section 596A Mandatory Examination
s596A The Court is to summon a person for examination about a corporation’s examinable affairs if:
(a) an eligible applicant applies for the summons; and(b)the Court is satisfied that the person is an examinable officer of the corporation or was such an officer during or after the 2 years ending:
(i)if the corporation is under administration – on the section 513C day in relation to the administration; or
(ii)if the corporation has executed a deed of company arrangement that has not yet been terminated – on the section 513C day in relation to the administration that ended when the deed was executed; or
(iii)if the corporation is being, or has been, wound up – when the winding up began; or
(iv)otherwise – when the application is made.
Section 596B Discretionary Examination
596B(1) [Grounds for discretionary examination] The Court may summon a person for examination about a corporation’s examinable affairs if:
(a) an eligible applicant applies for the summons; and
(b) the Court is satisfied that the person:(i)has taken part or been concerned in examinable affairs of the corporation and has been,. or may have been, guilty of misconduct in relation to the corporation; or
(ii)may be able to give information about examinable affairs of the corporation.
596B(2) [Sec 596A] This section has effect subject to section 596A.”
The “examinable affairs” of a corporation are defined in s 9 to mean:
“(a)the promotion, formation, management, administration or winding up of a corporation; or
(b)any other affairs of the corporation (including anything that is included in the corporation’s affairs because of section 53); or
(c)the business affairs of a connected entity of the corporation, in so far as they are, or appear to be, relevant to the corporation or to anything that us included in the corporation’s examinable affairs because of paragraph (a) or (b).”
An examination is to be held in public unless, in special circumstances, the Court considers it more appropriate that the examination be held in camera: s 597(4). The failure to attend an examination or the refusal to give evidence under oath or affirmation is an offence: s 597(6),(7), Sch 3. A person may not refuse to answer a question during an examination on the ground that the answer might tend to incriminate him or herself, but that evidence may not be used against the person in criminal proceedings or in proceedings for the imposition of a penalty under the Law: s 597(12),(12A). If, after an examination has taken place, the Court is satisfied that a person was summoned without reasonable cause, the Court may order costs in favour of the examinee: s 597B.
Factual Background
On 18 July 1997 the respondents to the application, Messrs Hamilton and Fiorentino, were appointed as voluntary administrators of VMF (“the administrators”). On 19 August 1997 a Deed of Company Arrangement was executed between VMF and its creditors. Its effect was that, by enabling the company to trade until the end of a lengthy nominated period, the preferred creditors would recover 100% of their admitted debts, whilst other creditors would recover one cent in the dollar. A Deed of Funding was also executed between Mr Fong and the administrators, whereby an “administration fund” was established for the purposes of securing payment to those creditors.
A dispute arose between Mr Fong and the administrators as to whether the administrator’s fees were to be paid from the administration fund. It appears that, although the Deed of Company Arrangement provided for the payment of administration fees and expenses in the list of priority creditors, the Deed of Funding did not expressly provide that those fees and expenses would be paid from the administration fund. The administrators claim that Mr Fong had orally agreed to pay those fees from the realisation of assets which were subject to a charge which Mr Fong had obtained, by subrogation from the State Bank of New South Wales. It is alleged that, under that oral agreement, the administrators were entitled to recover those assets and then refund any moneys to Mr Fong after the administration fees had been paid.
On 11 September the administrators sought to negotiate a new Deed of Funding which would expressly provide for the payment of the administration fees from the administration fund. The deed proposed that, subject to the agreement of the company’s creditors, there would be “a mutual release whereby no action will be taken in respect of any claim which there may be relating to Breach of Fiduciary Duty by [Mr Fong] as a director arising out of the Stannone Pty Ltd transactions”, in consideration of Mr Fong agreeing to the new deed. The “Stannone transactions” related to dealings with another company (“Stannone”) operated by Mr Fong, whereby VMF had lent money to Mr Fong to pay out personal guarantees of debts owing by Stannone.
Negotiations between the parties broke down. On 21 November the administrators recommended to the company’s creditors that a meeting be convened with a view to terminating the Deed of Company Arrangement and to resolve that the company be wound up. It is relevant to note that the administrators would automatically be appointed as the liquidators ( s 446A), and thereby their fees would take priority over other creditors (s 556). On 3 December 1997 Mr Fong brought proceedings in this Court to restrain the administrators from conducting that creditor’s meeting. An injunction was then granted by Hill J, by consent, until the determination of the substantive proceedings in September this year.
Subsequent proceedings were commenced by the administrators in the Equity Division of the Supreme Court of New South Wales on 20 February 1998. These have since been transferred to this Court. The administrators allege by such proceedings (among other things) various breaches by Mr Fong of his duties as a director arising out of the Stannone dealings, and of the terms of the alleged agreement between Mr Fong and the administrators for the payment of the administration fees. Those proceedings are currently also before Hill J for determination. The matter was listed for hearing before his Honour on 7 April when Mr Fong apparently produced some documentation relevant to the Stannone dealings in support of his defence. His Honour adjourned the hearing until 3 September to enable the administrators to consider that material.
On 13 April the administrators appeared before the Registrar seeking the summons of Mr Fong and the 26 other persons earlier mentioned for the purpose of conducting an examination into the affairs of the company. Various documents were exhibited by Mr Fiorentino to the Registrar in support of the summons. The Registrar subsequently made the orders sought. Thereby an examination was ordered to take place over a five day period in July. The applicants seek a review of those orders.
Standing to commence and maintain the proceedings
A threshold question is whether the applicants have standing to bring this application. Order 71 rule 81(6) of the Federal Court Rules (“the Rules”), which concerns the issue of summons pursuant to ss 596A and 596B, provides:
“A person served with a summons may apply to discharge the summons by filing, within 3 days of service of the summons:
(a)a notice of motion in the proceedings in which the summons was issued, seeking an order that the summons be discharged; and
(b)an affidavit setting out the material facts and matters relied on by the person seeking to discharge the summons.”(emphasis added)
The administrators say that Mr Fong has no standing to make an application to set aside the entirety of the Registrar’s orders, but only those in respect of his own examination. The administrators also deny that the second applicant, VMF, has standing to make such an application, as the company, not being a natural person, cannot itself be subject to examination. In the result, it was not necessary for me to determine that question. I was asked to deal with this matter urgently, shortly before the dates fixed for oral examination of various persons summoned. I proceeded on the assumption that, one way or another, the Court would have jurisdiction to look at the merits of the application. I concluded, on the merits, that there should be no interference with what the Registrar had ordered, and reserved my reasons for this decision. These present observations are those reasons. Assuming that the applicants have, or by amendment of the initiating process, could have standing to bring this application, in my opinion, the application must nevertheless fail.
Claim of Abuse of Process
The administrators elected to disclose the contents of Mr Fiorentino’s affidavit put before the Registrar to the applicant’s legal advisors on condition that they not disclose the material therein to their client. This condition was accepted.
The applicants argued this application on the basis that there were various matters which would have been relevant to the Registrar’s decision which were not disclosed in Mr Fiorentino’s affidavit. Mr Fong relied upon an advice prepared by the administrators’ solicitors, which apparently was not before the Registrar, which recommended that the administrators undertake the examinations before the commencement of any proceedings. The applicants argued that, in the context of that advice, it was an abuse of the Court’s process for the administrators to seek the examinations once proceedings had been commenced. It was further submitted that there was nothing to be gained from the examinations that could not be discovered by the administrators using the ordinary preliminary processes, including discovery and interrogatories. The Court was asked to draw the inference, in the context of the advice, that the administrators were simply seeking to gain some forensic advantage. Such an advantage, it was submitted, would be improper, given the serious nature of the allegations against Mr Fong.
The applicants also argued that there was no benefit to be gained by the creditors from the examinations and thus there was no real utility in undertaking the examinations, other than to benefit the administrators.
The applicants conceded, rightly, that it cannot be said that the examinations would be an abuse of process simply because related proceedings are on foot. Nor does it necessarily follow that, because the administrator might gain a forensic advantage by conducting the examinations, the orders should not have been made: Hong Kong Bank of Australia Ltd v Murphy (1992) 28 NSWLR 512 at 519. In many cases, an administrator or liquidator will justifiably and properly require an examination for the purposes of gathering information or evidence, whether or not that information or evidence could be obtained using other legal processes: see, for example, Re Hugh J Roberts Pty Ltd (1970) 2 NSWR 582. The Court must be satisfied that the purpose of the examinations is so improper as to constitute an abuse of process. Whether or not the alleged improper purpose (in this case, to gain a forensic advantage) must be the “sole” or “dominant” purpose of the examinations, the onus of proof is a high one: see Williams v Spautz (1992) 174 CLR 509 at 529.
It was submitted for the administrators that they had not been able to thoroughly investigate the Stannone transactions, which are the subject of the examinations, at the time the amendments to the Deed of Funding were proposed. They were then concerned about ensuring that payment of their fees would be available if they undertook further work. It was Mr Fong, they contend, who alleged some misfeasance in relation to that proposal, and that was the circumstance which led the administrators to seek the advice from their solicitors now relied on by Mr Fong. Mr Fong had then commenced the proceedings seeking an injunction to prevent the proposed creditor’s meeting being held, and this alerted the administrators to the possibility that there might be some matters of concern regarding Mr Fong’s dealings. In light of those circumstances, the administrators submitted, there was nothing untoward about seeking to conduct the examinations after the proceedings were commenced, or, as it appears on the face of matters, contrary to the advice of their solicitors.
The administrators also submitted that the examinations are necessary, among other things, so that they may be in a better position to inform the creditors about the company’s affairs, and to consider whether it would be worthwhile to continue with the proceedings. Furthermore, it was said, the examinations would provide the administrators with an opportunity to examine and consider the highly relevant material which had been belatedly produced by Mr Fong at the hearing on 7 April.
The substantive issues in the proceedings are not for determination here, and I do not intend, of course, that any of my remarks should be interpreted as bearing on those issues. However, in my view, the administrator’s position in regard to the examinations was neither unreasonable or unjustified in the circumstances. The applicants failed to persuade me that there was anything forensically improper about the administrator’s claims, or their motives for conducting the examinations. Considering the matter in light of the whole of the material put before me, I do not believe that the Registrar would or should have declined to make the orders that she did if she had had before her the material now before me. I am not satisfied that the administrators have behaved with any forensic impropriety in instituting the processes of the proposed examination. If there is any advantage to them arising from those examinations in the forthcoming proceedings before Hill J, that was not the sole or dominant purpose of their seeking those examinations. There is no abuse of the Court’s process involved.
The utility of the examinations
The question of the utility, in the interests of the company's creditors, was also raised. It was said that such would be the cost of the examinations that their cost would outweigh or very nearly outweigh any benefit to creditors that might be achieved. This was said to show, along with other matters, that the administrators were preferring their own interests, in performing extra work for which payment would be made, to those of the creditors. Alternatively, assuming good faith, it was said that, objectively, the game was not worth the candle and the administrators' approach could be seen to be mistaken.
The administrators undertook, admittedly at a late point, to cap their fees. The allegation of impropriety, which would require particularly cogent proof (Briginshaw v Briginshaw (1938) 60 CLR 336), was not made out. Even as to the more neutral way of putting the case, it was not clearly shown that the projected (capped) costs were such in relation to possible benefits, that the examinations should not be undertaken. The Court cannot sit in the administrators' chair. In any case, the matter need not be decided at the present stage: ss 447A and 447E would enable a later cure by the Court if the management of a company's affairs by an administrator should turn out to be in a manner prejudicial to the creditors' interests.
I certify that this and the preceding seven (7) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Madgwick
Associate:
Dated: 3 September 1998
Counsel for the Applicant: J Johnson Solicitor for the Applicant: Nash O'Neill Tomko Lawyers Counsel for the Respondent: J Svehla Solicitor for the Respondent: Baker and McKenzie Date of Hearing: 18 June 1998 Date of Judgment: 3 September 1998
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