Re Bosun Pty Ltd (in liq); Makris v Sheahan

[2000] SASC 180

RE BOSUN PTY LTD (IN LIQUIDATION);
MAKRIS & ORS v SHEAHAN
[2000] SASC 180

Appeal from a Master

1. DEBELLE J. This is an appeal against an order for examination of a company director made by a Master pursuant to s 596A of the Corporations Law.

2. On 24 October 1990 this Court made an order winding up Bosun Pty Ltd (“Bosun”) and appointing Mr John Sheahan as liquidator.  The only directors of Bosun were Mr George Kotses and Mr Constantinos Makris.  From 20 November 1989 Makris and Kotses were both secretaries of the company.

3. On 23 June 1999, on the application of the liquidator, a Master of this Court made an order pursuant to s 596A of the Corporations Law that Makris be examined by this Court and summoned him to attend for examination on 14 July 1999.  The Master also ordered that documents be produced by a number of companies associated with Makris (“the associated companies”).  The associated companies were Shopping Centre Management Pty Ltd, Anpal Pty Ltd, Balgra Pty Ltd, Etiria (No 23) Pty Ltd, and the Adelaide Sharks Football Club Pty Ltd.  No prior order has been made in the administration of this liquidation for the examination of Makris.  The examination was ordered to be held on 14 July 1999.  On 13 July 1999 Makris and the associated companies applied to the Master for an order that the order for examination be permanently stayed as an abuse of process.  On 5 October the application was dismissed by the Master.  Makris and the associated companies now appeal against that order.  I refer to them all as “the appellants”.

4. The affidavit sworn by the liquidator in support of the application for orders for examination has, by order of the Master, been disclosed to Makris and Kotses.  In that affidavit the liquidator says that he wishes to institute proceedings in this Court against both Makris and Kotses seeking equitable compensation or damages for breach of fiduciary and statutory duties with respect to the loans made to them by Bosun Pty Ltd.  The liquidator has informed Makris that he will not use the order for examination for any purpose other than to examine Makris as to his means to satisfy any judgment which the liquidator might obtain against him.

5. The appeal is grounded on the fact that Makris is a discharged bankrupt.  After the winding up order had been made, Makris was on 22 June 1992 adjudicated bankrupt.  He was discharged from his bankruptcy on 31 March 1995.  The liquidator submitted a claim to the trustee in bankruptcy for the sum of $648,527 on account of monies owed by Makris for loans made to him by Bosun Pty Ltd.  The creditors of Makris accepted a composition of 0.024 cents in the dollar.  The liquidator recovered $171.08 from the composition.

6. The appellants had contended before the Master that the examination must be for an improper purpose and, therefore, an abuse of process. The appellants relied on s 153(2)(b) of the Bankruptcy Act 1966 and submitted that the only examinable affairs of Bosun Pty Ltd upon which the liquidator could examine Makris was a claim for debt incurred by means of fraud or a fraudulent breach of trust, or a debt for which Makris had obtained forbearance by fraud. It was submitted that, as the liquidator did not intend to examine with respect to such a claim, the orders for examination were for an improper purpose and, therefore, an abuse of process. On appeal, the appellants relied on the same argument and contended that the Master had erred in failing to find that the liquidator intended to examine for an improper purpose. This is the only issue on the appeal. The associated companies do not advance any other argument. Thus, it is common ground that, if the order is stayed on the application of Makris, the associated companies do not have to produce the documents. However, if this appeal fails and the examination of Makris proceeds, the associated companies will be required to attend and produce the documents.

7. Section 596A of the Corporations Law provides:

   “596A       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 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.”

Pursuant to s 9 of the Corporations Law, a liquidator is an eligible applicant and, as Makris was a director of Bosun Pty Ltd during the two years prior to the date of the order winding up the company, he is an examinable officer. Section 596A is a mandatory provision in the sense that the court must order the examination if the requirements of subsections (a) and (b) are satisfied. It is to be contrasted with s 596B which invests the court with the discretion to order an examination. Thus, the Master not only had jurisdiction to make the order but he was also required by s 596A to make it.

1. As already mentioned, the liquidator proposes to use the order for examination for no purpose other than to examine Makris as to his means to satisfy any judgment which the liquidator might obtain against him. I note, in passing, that the liquidator’s affidavit in support of the application for the examination has been made available to Makris. An examination for this purpose is an examination of the examinable affairs of a corporation. The definition of “examinable affairs” is wide: see s 9 and s 53 of the Corporations Law.  It is well settled that information with respect to the probability or otherwise of success in litigation contemplated by a corporation which is in liquidation is information with respect to the examinable affairs of the corporation.  It is sufficient to refer to Grosvenor Hill (Qld) Pty Ltd v Barber (1994) 48 FCR 301 at 305 – 306. The liquidator may enquire as to the worth of a potential defendant so as to be able to make a practicable assessment as to the likelihood of a return to the corporation of the fruits of any favourable judgment and the costs expended in obtaining it: see Grosvenor Hill (Qld) Pty Ltd v Barber (supra) at 307 – 312 for the statement of principle and the circumstances in which the power to order the examination will be exercised. See also Gerah Imports Pty Ltd v Duke Group Ltd (In Liq) (1993) 61 SASR 557. The power to obtain information from a defendant or potential defendant as to the ability of that person to satisfy any judgment which may be obtained in litigation instituted by the liquidator is to facilitate the realisation of the chose in action to the best advantage of the company and its creditors and, as such, is an examinable affair: see Grosvenor Hill (Qld) Pty Ltd v Barber at 311. The liquidator is, therefore, entitled to examine Makris on his capacity to satisfy any judgment the liquidator might obtain against him.

2. The court has an inherent jurisdiction to stay proceedings which are an abuse of process: Williams v Spautz (1992) 174 CLR 509 at 518. It is an abuse of process to use the machinery of the court and the remedies of law to obtain a result for which they are not intended or to obtain some collateral advantage beyond that which legal process normally allows: Varawa v Howard Smith Co Ltd (1911) 13 CLR 35; In re Majory [1955] Ch 600; Williams v Spautz (supra) at 522 – 523. As Isaacs J observed in Varawa v Howard Smith Co Ltd at 91, an abuse of process means that the process is employed for some purpose other than the attainment of the claim in the action. There is a body of Australian jurisprudence as to what constitutes an abuse of process in relation to examinations ordered pursuant to s 596A and s 596B. The test is whether the person seeking the order for the examination has the purpose of obtaining an forensic advantage which is not otherwise available: Hongkong Bank of Australia Ltd v Murphy (1992) 28 NSWLR 512 per Gleeson CJ at 519; Re Excel Finance Corporation Ltd (1994) 52 FCR 69 at 89 – 93; and Simionato v Macks (1996) 19 ACSR 34 at 60 – 61.

3. Mr Conti QC, who appeared for the appellants, contended that the effect of the discharge of Makris from bankruptcy was to release him from all debts and liabilities provable in his bankruptcy. He added that, if the liquidator intends to bring an action for fraud or a fraudulent breach of trust, the action is bound to fail. As Makris was not liable to any claim, he said, it was an abuse of process now to examine him as to his capacity to satisfy any judgment. To examine this submission it is necessary to consider s 82 and s 153 of the Bankruptcy Act 1966 and the nature of the intended action by the liquidator.

4. Section 82 lists debts provable in bankruptcy.  Section 82(2) excludes from debts provable in bankruptcy demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust.  The liquidator contends that although his intended action might appear to be for a breach of fiduciary duty and therefore a breach of trust (J N Taylor Holdings Ltd (In Liq) v Bond (No 10) (1992) 166 LSJS 152), it is in fact a claim for fraudulent breach of trust and thus actionable by reason of s 153 of the Bankruptcy Act.

5. Section 153 of the Bankruptcy Act prescribes the effects of a discharge. Subsection (1) provides that the discharge releases a bankrupt from all debts provable in bankruptcy. If the liquidator’s claim falls within s 82(2), it is a provable debt and Makris is released from that debt by virtue of s 153(1). However, s 153(2)(b) provides that the discharge does not release a bankrupt from a debt incurred by means of fraud or a fraudulent breach of trust to which he or she was a party or a debt for which he or she has attained forbearance by fraud. The liquidator contended that his claim falls within s 153(2)(b) and therefore may be maintained against Makris. Mr Conti QC for Makris contended that the application for the order for examination constitutes an abuse of process because the liquidator will not be able to establish that Makris has been guilty of fraud or a fraudulent breach of trust and so will not be able to avoid the release by reason of Makris’ discharge from bankruptcy.

6. The liquidator’s claim concerns the loans made to Makris by Bosun.  As at 30 June 1985, the issued share capital of Bosun comprised 8,000 partly paid shares with a value of $1 each.  Those shares were held non-beneficially as to 4,000 by Barguest Pty Ltd and as to the remaining 4,000 shares by Comlaw Enterprises Pty Ltd.  Comlaw Enterprises Pty Ltd is a company associated with Kotses and it was trustee of a discretionary family trust.  At all material times, Kotses was a director of Comlaw Enterprises Pty Ltd and beneficially held one fully paid share in the company.  Barguest Pty Ltd was a company which was associated with Makris and it was trustee of a discretionary family trust.  At all material times, Makris was a director of the company and held one fully paid share in it.

7. In the period 1 May 1983 to 15 August 1990, substantial loans were made to both Kotses and Makris.  It is sufficient, for present purposes, to refer only to the loans made to Makris.  The loans made to Makris in the period 1 May 1983 to 15 August 1990 total $669,324.01.  As already mentioned, the liquidator submitted a claim against the bankrupt estate of Makris in the sum of $648,527 on account of monies owing by Makris to Bosun by way of these loans.  A very small dividend totalling $171.08 was recovered by the liquidator.  The liquidator proposes to institute proceedings in this Court against both Makris and Kotses seeking equitable compensation or damages for breach of fiduciary and statutory duties with respect to the respective loan accounts.

8. The liquidator has reconstructed the loan account.  The reconstruction shows that loans were made very frequently to Makris, at times on a daily basis.  Many of the loans were made to pay what, on the face, are personal accounts.  Interest has not been charged and the level of repayments is low.  On 9 September 1986 the accountant for the company wrote to Makris and Kotses concerning the financial status of Bosun.  The letter enclosed the draft accounts for the year ended 30 June 1986.  The accountant drew attention to a number of matters including the drawings on the loan accounts which, he said, were not consistent with the profits being earned. The consequence was that the payments were being funded, not out of profits earned by Bosun, but by Bosun’s banks, creditors and finance companies.  At that time the loan account to Makris stood at $92,000.  Notwithstanding the warning, loans to Makris continued.  By 1 July 1987 they had increased to about $200,000 and continued to escalate to reach a sum in excess of $600,000 by March 1990.

9. On occasions, the arguments of counsel on this appeal were more appropriate to an application by a defendant for summary judgment under Rule 25.04 of the Supreme Court Rules on the ground that the liquidator could not succeed on any possible view of the facts or the law: see Rule 25.04 and General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125. I do not think that is a suitable means by which to approach the question whether this application for an order for examination is an abuse of process. One reason for that conclusion is that there is no statement of claim or any defence or affidavit by the defendant showing why the plaintiff’s claim cannot succeed. It is not, therefore, possible to determine the prospects of success of the action. Furthermore, the time for examining the prospects of success of the action is on an application under Rule 25.04 when a statement of claim has been filed and there is a defence or affidavit in answer to the plaintiff’s affidavit and an affidavit showing why the plaintiff’s claim cannot succeed.

10. Where a liquidator is entitled to an order under s 596A of the Corporations Law, the duty of the court is limited to satisfying itself that the liquidator is not seeking to obtain a forensic advantage not otherwise available. As Makris was a director of Bosun at all relevant times and within the period prescribed by s 596A, the liquidator is entitled to an order for examination and, for the reasons already given, is entitled to examine Makris as to his capacity to satisfy a judgment. The liquidator intends to bring an action and therefore has a legitimate purpose for making the application for an order granting the application for examination. However, if the liquidator had no cause of action against Makris, there would be no justification for permitting him to examine Makris. It would be an unauthorised enquiry into his personal affairs yielding nothing of benefit to the creditors of Bosun. Given that, after the order winding up Bosun had been made, Makris has been declared bankrupt and discharged from that bankruptcy, it is necessary for the liquidator to satisfy the court that he intends to institute proceedings, that there is a cause of action available, and that there are facts which might support that claim. In other words, the liquidator must be able to show that the action is not plainly untenable. I immediately acknowledge that the line is becoming blurred between such a test and the tests applied by courts when determining an application to strike out a statement of claim on the ground that it discloses no reasonable cause of action or an application by a defendant for summary judgment. A glance at the reasons of Barwick CJ in General Steel Industries Inc v Commissioner for Railways (NSW) (supra) at 129 sufficiently demonstrates that fact. I seek, albeit inadequately, to formulate some kind of lesser standard. So long as the court can be satisfied that the liquidator intends to institute proceedings and can point to a reasonable cause of action, the examination will not be for an improper purpose.

11. The liquidator has identified a cause of action which, if proved, would entitle the liquidator to recover damages from Makris, notwithstanding that he has been released from bankruptcy. It cannot be said that the liquidator cannot in any respect bring himself within s 153(2)(b). Fraud has a wide denotation in equity, reflecting the fact that Courts of Chancery are courts of conscience acting in personam.  Cases such as Keech v Sandford (1726) Sel Cas T King 61, 25 ER 223; Nocton v Lord Ashburton [1914] AC 932; and Boardman v Phipps [1967] 2 AC 46 are examples of what might be regarded as “technical” frauds: see the discussion in Meagher, Gummow and Lehane (3rd edition) paras 1201 – 1210.  The pursuit of interest in conflict with a duty arising from a fiduciary relationship may give rise to a “technical” fraud.  Fraud in this context must be given a broad interpretation by recognising that, in equity, that which is unconscionable might constitute fraud.  As was observed by Mahony J in Maxwell v Chitick (unreported, NSW Court of Appeal, 23 August 1994):

    “The term ‘fraud’ in the bankruptcy provisions in this regard has been given a broad interpretation.”

See also Barewa Oil & Mining N L (In Liq) v Isim Mineral DevelopmentPty Ltd (1982) 59 FLR 451 at 459 – 460; on appeal [1982] WAR 311. On an application of this kind it is not necessary to determine whether fraud in s 153(2)(b) means fraud in the common law sense or has the wider meaning in equity: cf. [1982] WAR per Burt CJ at 312 – 313.

1. Makris continued to borrow money from Bosun despite the clear warning given by the company’s accountant.  Depending on the facts as found, his conduct might constitute a fraudulent breach of trust.  The liquidator seeks to prove that Makris was pursuing his own interests to an extraordinary degree at a cost to the company and its creditors and in breach of his duty to both.  Before embarking upon the litigation he wishes to know whether it will be of any profit to the creditors of the company to do so.  I am satisfied that the application to examine Makris has not been made for an improper purpose and is not an abuse of process.

2. For these reasons, I dismiss the appeal.