McVeigh v Brumley
[2009] VSC 668
•16 October 2009
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
S CI 2009 5070
IN THE MATTER OF MEDICI INSTITUTE PTY LTD (IN LIQUIDATION)
| DEAN ROYSTON McVEIGH (in his capacity as liquidator of Medici Institute Pty Ltd (in liquidation) | Plaintiff |
| v | |
| DONALD BRUMLEY & anor | Defendants |
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ASSOCIATE JUSTICE: | GARDINER AsJ |
WHERE HELD: | Melbourne |
DATES OF HEARING: | 3, 15 April, 9 June, 9 July 2009 |
DATE OF JUDGMENT: | 16 October 2009 |
CASE MAY BE CITED AS: | Medici Institute Pty Ltd; McVeigh v Brumley and anor |
MEDIUM NEUTRAL CITATION: | [2009] VSC 668 |
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CORPORATIONS – Winding up – public examination of person in connection with the examinable affairs of company in liquidation – Summons issued pursuant to s 596B of the Corporations Act 2001 (Cth) – Whether expenses connected with attendance at examination are recoverable – Difference between “insiders” and “outsiders” on the issue of recoverability of expenses - Categories of expenses recoverable.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr T.J. McLean | Septimus Jones & Lee |
| For the first Defendant | Mr C.H. Truong | Scott Freeman |
HIS HONOUR:
Donald Brumley was required to attend before the Court to be examined about the examinable affairs of Medici Institute Pty Ltd pursuant to s 597 of the Corporations Act2001 (Cth) (“the Act”) by a summons issued pursuant to s 596B of the Act on 20 March 2009. The summons also required Mr Brumley to produce eight separate categories of documents which were described in the schedule to the summons.
The summons was initially returnable on 3 April 2009, which occasion was scheduled for the production of documents. The documents were not produced on that date, and the summons was adjourned to 15 April 2009. On that occasion, Mr Brumley did not attend Court but was represented by Counsel. Certain documents were produced to the Court and the examination was adjourned to 9 June 2009. The examination proceeded on 9 June 2009 but did not conclude and was adjourned until 9 July 2009.
At the conclusion of the examination, counsel for Mr Brumley, Mr Truong, made application for Mr Brumley’s costs and expenses in complying with the summons, including the production of documents, preparation before the examination, attendance at the examination as well as other expenses such as copying of documents. Normally, the costs and expenses of an examinee would be the subject of agreement between the legal practitioners appearing on behalf of a liquidator and the examinee but this did not occur in this case.
One aspect that Counsel did agree on was that when fixing an hourly rate for Mr Brumley’s time, I should have reference to Appendix B to the Supreme Court (General Civil Procedure) Rules 2005.[1] Item 1 of that appendix prescribes an hourly rate for witness attendance of professional persons as being between $157 and $313. Mr Brumley is the senior partner of the firm Ernest & Young and I agree with Mr Truong’s submission that when applying that scale, I should fix Mr Brumley’s hourly rate at the maximum rate prescribed.
[1]Witness Expenses and Interpreters Allowances.
The parties disagree on what items Mr Brumley is entitled to recover on an application of the relevant case law. I shall review that case law before turning to each item claimed.
In Re Kempal Pty. Ltd.(receiver and manager appointed, in liq.) (1989) 7 ACLC 1,180 McLelland J considered the case of an examinee who was a Victorian resident and who had sought to be excused from attending an examination in New South Wales unless a sum sufficient to meet his reasonable expenses for travel and accommodation was paid to him in advance. The examination was conducted under a legislative precursor to s 597 of the Act, s 541 of the Companies (New South Wales) Code (1981). The examinee was associated with another company which had dealings with the company the subject of the examination. The examinee was considered to be an “outsider” to the company in liquidation. McLelland J stated, at page 1182:
It would ordinarily be unjust, if not oppressive, to require a person who had not been an officer of a company to attend for examination in relation to the affairs of that company without provision being made in respect of his or her reasonable expenses of such attendance where those expenses would be substantial, as they would undoubtedly be in the case of a person who was required to travel from Melbourne and obtain overnight accommodation in Sydney. The case of an examinee who had been an officer of the company concerned may give rise to different considerations and in such a case much may depend on the particular circumstances both of the company and of that person, and I do not wish to say anything which would be construed as laying down some general rule in the case such as that. But that is not the present case, and in the present case there is nothing in the circumstances before the Court which would operate to prevent injustice arising from the absence of provision for expenses.
His Honour ordered payment to the examinee of a sum to meet his reasonable travelling and accommodation expenses incurred by his attendance at the examination.
In Re Equiticorp Finance Ltd; Ex parte Brock (1992) (“Brock No. 1”),[2] Young J considered the issue what expenses were recoverable by an auditor of a company which was in liquidation. An examination summons had been issued pursuant to s 597 of the Corporations Law. At page 730, his Honour referred with approval to the decision of McLelland J in Re Kempal.
[2]6 ACSR 725.
Young J also referred to the decision of Re Spiraflite Ltd,[3] where the liquidator wished to examine the company’s auditor, an independent chartered accountant:
“The auditor urged the court that it should not approach the matter in the same way as an application against a director. [In Spiraflite] Megarry J rejected this approach. His Lordship said [counsel for the plaintiff] “also sought to make a distinction between what he called ‘insiders’ and ‘outsiders’, and said that if litigation by a liquidator is contemplated, the court is more inclined to make an order under the section against an insider than against an outsider. He defined ‘insiders’ as being the directors, secretary and employees of the company: and that all others, even if they were technically officers of the company (such as auditors), were outsiders. He admitted he could cite no authority either for his distinction or for his definitions, and he was able to put forward little in the way of reasoning to support either. I see little merit in the argument, which seems closely tailored to the facts of this case. Of course, it may well be in many cases the directors and those from whom the liquidator most needs information, and who are best able to give it; but there may well be many cases in which vital information is in the hands of others. The language of the sections suggest no such distinction … What seems to me to matter more than status in the company is the information that a person whether ‘insider’ or ‘outsider’ is believed to possess.
Accordingly, while one does not make the division of examinees into insiders and outsiders for the purpose of working out whether a person is amenable to an order, that factor is one of the matters one takes into account when doing the balancing exercise and when one is thinking of conditions to impose in order to minimise any oppressiveness.”
[3][1979] 1 WLR 1096.
The examination provisions were recast subsequent to the Brock cases. Under the Act, ss 596A and 596B provide for a demarcation between officers of a company (who can be the subject of mandatory examinations under s 596A) and those persons who are not but who, inter alia, “may be able to give information about the examinable affairs of the company” (who can be the subject of a discretionary examination by a summons issued under s 596B, as Mr Brumley was in this case).
Nonetheless, the discussion in Brock No. 1 is appropriate for consideration in deciding who is an “insider” and who is an “outsider” in relation to a company. At page 733, the discussion turned to the subject of the costs of the auditor in meeting the summons. Young J stated:
The only matter involved in this motion is what should be done with respect to the cost to the auditors of assembling the information and attending on the hearing. The affidavit tendered on behalf of the auditors suggests that it will be necessary for extensive photocopying to take place of voluminous documents which would cost thousands of dollars. There would then need to be searches for an identification of material and reading through the material to ensure that confidential details of other clients outside the scope of the enquiry were excised and to ensure that all relevant documents had been produced. The evidence suggests that this would involve a partner for 10 hours, managers for 45 hours and an assistant for 30 hours which at $350 an hour for a partner and lesser rates for other persons, would amount to some $16,525. If one adds to that $2,500 for photocopying, one gets $19,000. The auditors suggest that this $19,000 should not be borne by them.
Mr Conte relies on Re Kempal supra, and says that where the examinee is not a person involved in the management of the company then an order should be made to ensure he is not out of pocket by complying with the liquidator’s demand.
No cases were cited to McLelland J during Kempal’s case. His Honour concluded that the provisions of what is now s 597(3) of the Corporations Law that the court may attach such conditions to the operation of an order under the section as it may consider necessary to prevent the order operating in an oppressive or unjust fashion. There may have been cases dealing with application for costs under earlier versions of section 597. In general the view appears to be taken but the witness, at least if he is not directly concerned in the management of the company, is entitled to the costs of attendance at the examination and in gathering together the documents, but not costs for his own legal representation; see eg Re Appleton, French & Scrafton Ltd [1905] 1 Ch 749; Re Morton Joinery Pty Ltd [1975] Qd R121 and Re Kusmenko (1976) 14 ALR 673.
However, the costs claimed by the auditors appear to me to include a margin of profit. The material before does not satisfy me that $350 an hour for a partner’s time is a proper measure for the actual loss occurred (sic) by the partner having to obey the court’s orders.
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. A surer scale would appear to be the court scale of allowances to witness in Sch G to the rules under which accountants are entitled to a maximum of $160 per day plus out-of-pockets. Non-professional persons would receive a lower rate.
…In my view the auditors are entitled to be paid for their out-of-pockets in a reasonable search for material and in attending but not at the same rate as they would charge for new work.
I note that during closing addresses counsel for the liquidator offered to photostat the papers which the auditors produced so as to minimise costs. The offer was not accepted on the basis that work would have to be done in perusing these papers and blanking out matters which were sensitive to other parties before photostating. I am not convinced that this is necessary. Probably the truth is that it is necessary only in a relatively small number of cases. It would seem to me that generally the procedure of the liquidator being given the papers to photostat at his own expense would be a preferable one to adopt, though with the documents in the class I have mentioned, the auditors may need to deal with the documents and charge the photocopying and expense for looking for the documents at a cost in due course (emphasis added).
His Honour encouraged the parties to come to an arrangement in accordance with the spirit of his reasons.
It appears that the parties were not able to come to an agreement in this regard and in the subsequent decision of Re Equiticorp Finance Ltd; Ex parte Brock (No. 2) (“Brock No. 2”)[4] his Honour considered the matter further. The auditor the subject of the examination sought an order that he was entitled to be compensated for the time spent on preparation for the examination, including conferences with his staff, familiarisation with documents, costs of briefing by solicitors and costs of conferring with counsel. The liquidator submitted that compensation for such expenses was not allowable. At page 18 his Honour stated:
In my view, the general principle is that a person is required by law to come before court and give evidence as an obligation as a citizen to comply, and is not entitled to any compensation at all… However, it is possible for the court to make a condition of an order for examination under section 597 of the Corporations Law to make an order for expenses, if justice so requires. As far as I can see, no case exits where expenses have been allowed outside the third of the situations I outlined at the commencement of these reasons; that is a case where the witness is out of pocket for travelling, accommodation and through missing work in attending the examination. I would think it would be reasonable in the appropriate case and, indeed, I have already done it in this case, to allow compensation for searching for documents but it seems to me that the public interest generally is against making a provision for a witness to confer at the liquidator’s expense with his or her staff or associates, or with solicitors and counsel, or otherwise obtaining information from others which might be used in his or her evidence on the examination.
Accordingly, I think that the appropriate direction is that when making her report as to what are reasonable costs and allowances for the examinee, the referee should allow no sum at all for the examinee conferring with subordinates, employees or solicitor and counsel, or otherwise in time spent familiarising himself with documents in order to prepare for his examination”(emphasis added).
[4](1992) 7 ACSR 13.
The Brock decisions were followed by Austin J in Re Southland Cole Pty Ltd (recs and mgrs apptd (in liq)).[5]
[5](2006) 58 ACSR 113.
The rationale for maintaining the demarcation between “insiders” and “outsiders” in the context of compensation of an examinee’s costs is not explained. It may have its basis in the notion that an “insider” of an insolvent company is in some way culpable for the company’s predicament and the remaining assets of the company should not be applied to meeting such person’s expenses. An “outsider” is perhaps something of an innocent party and should not be out of pocket for expenses incurred in complying with a summons. Section 530A of the Act requires each officer of a company that is in liquidation to assist and cooperate with the liquidator in the winding up. Whatever the reason, the division in this regard has been maintained in the case law.
It seems the following can be distilled from the above authorities:
i.If the examinee is not directly concerned in the management of the company, he or she is entitled to the cost of attendance at the examination and in gathering together the documents, but not costs for his legal representation (Brock No. 1 at 734)[6].
ii.An examinee is not entitled to be awarded an hourly rate which includes a profit margin. A more appropriate scale is that applying to allowances to witnesses in the Court rules (Brock No. 1 at 734).
iii.Examinees who are not concerned with the management of the company are entitled to be paid for their out of pockets in a reasonable search for material and in attending the examination (Brock No. 1 at 734).
iv.Generally, the preferable procedure in regard to documents is that the liquidators should be given the documents to copy at their own expense although examinees may need to deal with the documents and charge photocopying and expenses for looking at the documents at cost (Brock No.1 at 734).
v.As to the question of who is a company “insider” or “outsider”, insiders are characterised as being the directors, secretary and employees of the company and all others, even if they are technically officers of the company, such as auditors, are outsiders (Brock No.1 at 730; Re Spiraflite Ltd [1979] 1 WLR 1096).
vi.It would be unjust to require a person who had not been an officer of the company to attend for examination without provision being made in respect of their reasonable expenses for such attendance where those expenses would be substantial (Re Kempal at 1182).
vii.It would reasonable in the appropriate case to allow compensation for searching for documents, but the public interest is against making provision for a witness to confer with their staff or associates or with solicitors and Counsel or otherwise obtaining information from others which might be used in their evidence on the examination (Brock No. 2 at 18).
viii.No allowance should be made for the examinee familiarising themselves with documents in order to prepare for the examination (Brock No. 2 at 18).
[6]See also Re Spedley Securities Ltd (1991) 9 ACLC 492 at 495 where it is suggested, relying on the Federal Court decision of Fuelxpress Limited v L.M.Ericsson Pty Ltd (1987) 75 ALR 284, in relation to costs of compliance with a subpoena, that an examinee may recover legal fees for advice on privilege issues incurred in complying with an order for production of documents.
Mr McLean, Counsel for the liquidator, submitted that Mr Brumley should be classified as an insider for the purposes of considering whether it was appropriate that he be awarded costs of the type allowed in the Brock cases. Mr Brumley was the subject of a summons for a discretionary examination under s 596B of the Act, that is, he was said to be a person who may be able to give information about the examinable affairs of the company.
The definition of “officer” in section 9 of the Act provides an exclusion for the circumstance where a person, who might otherwise be regarded as an officer, provides advice “in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors of the corporation”. In the present case, one of the purposes of conducting the examination was to enable the liquidator to assemble material in regard to the issue of whether Mr Brumley was a shadow director of the company and whether he crossed the line in that regard. There was the added factor that an entity associated with him was a shareholder in the subject company but in the authorities referred to above, shareholders per se are not classified as insiders.
My role in this examination is not to ultimately determine that question but rather to supervise the conduct of the examination to ensure procedural fairness and compliance with the examination procedures. Mr Truong contends that his client had no such position in the company but rather was an advisor to it. I do not consider that it is appropriate to express a view one way or another in this regard save that, prima facie, in the context of this application for expenses, he appears to be an outsider. To go further has the potential to embarrass another court which is required to consider the question.
Mr Truong has prepared a table of the claim for costs. In the course of submissions Mr Truong properly conceded after argument that certain categories were not claimable on an application of the relevant case law. That table, annotated with the amount I will allow to Mr Brumley, is as follows:
Date (2009) Description Time Amount claimed Allow 20 March Considering subpoena, arranging and considering file list, liaising with archives for recovery of files .5 hours @ $313 = $156.50 .25 hours at $313.00 per hour is $78.25 26 – 28 March Reviewing documents for scope of potential privilege and arranging documents to be copied 4 hours @ $313 = 1, 252 $1252 (on the basis that this involved identification of documents in order to comply with the summons) 31 March Identifying, locating, reviewing and arranging printing of electronic documents 1 hr @ $313 313.00 .5 hours at $313.00 = $156.50 6 & 7 March Reviewing documents retrieved from archives for scope and potential privilege and arranging for documents to be copied 4 hours @ 313 = $1,252 2 hours at $313.00 = $626.00 4 – 8 June Reviewing documents in preparation for examination 6 hours @$313 = $1,878 No allowance 9 June Attend examination 5 hours @ $313 = $1,565 5 hours at $313.00 = $156.50 12 June Reviewing independence policy and arranging copying and production 5 hr @ $313.00 = $1,565 No allowance 1 April Copying CCH At cost $635.01 $635.01[7] Copying-Lit support At cost $309.65 $309.65 3 April Cost of counsel (Jeremy Geale) $350 No allowance 8 July Reviewing documents No allowance 9 July Attending examination 3 hours @ $313 $919 $919 Total $4,132. 91 [7]While not the preferable course, which was that the liquidators copy the documents after production, I consider that it was reasonable and prudent for Mr Brumley to copy the documents before he produced them. They were business records of his firm which he had professional obligations to secure and it was appropriate to copy them in the event that the originals were lost. They were copied at cost with no profit margin.
In the circumstances I will order that the Plaintiff pay Mr Brumley’s expenses fixed in the sum of $4,132.91.
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