Re: Bosun Pty Ltd (in Liqn); Kotses v Sheahan No. Scgrg-90-2215

[2000] SASC 348

RE:  BOSUN PTY LTD (IN LIQUIDATION) (ACN 008 006 399)
KOTSES v SHEAHAN
[2000] SASC 348

Appeal from a Master

1................ MARTIN J......... The appellant appeals against a decision of a Master refusing an application to discharge an order that the appellant be examined pursuant to s 596A of the Corporations Law.

1. The appellant and Mr Constantinos Makris were the only directors of Bosun Pty Ltd (“Bosun”).  From 20 November 1999 they were both secretaries of Bosun.  On 24 October 1990 this Court made an order winding up Bosun.  The respondent was appointed liquidator. 

2. On 19 May 1992 a sequestration order was made against the appellant.  In August 1992 the respondent, as liquidator of Bosun, filed a proof of debt in the bankruptcy of the appellant for $421 827.  In essence the claim was based upon loans made by Bosun to the appellant.  A sequestration order was also made against Mr Makris in 1992 and the liquidator filed a proof of debt in the bankruptcy of Mr Makris for $648 527.  That claim was similarly based upon loans made by Bosun to Mr Makris.  The respondent received two dividend payments of $843.65 and $885.84 in the bankruptcy of the appellant.  Both the appellant and Mr Makris were discharged from bankruptcy in 1995.

3. In July 1996, the respondent applied to examine the appellant pursuant to s 596A of the Corporations Law. An order was made to that effect on 4 July, 1996.  The appellant was also ordered to produce a number of documents.  The examination concerned matters not relevant to the examination the respondent now seeks to conduct.

4. Minutes of a number of meetings of the Committee Of Inspection with respect to the administration of Bosun were tendered.  Those minutes disclose that the possibility of legal action against the appellant and Mr Makris was the subject of discussion from at least September 1998.  The minutes of 22 February 1999 record the following:

   “•............... Proposed legal action v former directors of Bosun Pty Ltd (In Liquidation). 

   The Chairman indicated that the liquidator’s claim in this matter would be issued within a fortnight and that he intended to apply for summary judgment.  The Chairman led a discussion in relation to this claim and answered all questions.”

5. The Chairman of the meeting was Mr Coope.  The minutes record an apology from the respondent and that Mr Coope introduced himself as the respondent’s partner. 

6. On 28 May 1999 the respondent sought an order for a further examination of the appellant.  The order was granted on 23 June 1999.  It is the order of 23 June 1999 that has, in effect, led to this appeal.

7. The application of 28 May 1999 was also an application to examine Mr Makris.  In support of the application for the examination of both persons, the respondent filed an affidavit dated 26 May, 1999.  Annexed to the affidavit was a schedule of advances made by Bosun to both the appellant and Mr Makris.  The affidavit referred to the bankruptcy of each person and to the dividends received by the respondent.  After identifying the losses sustained because the dividends were substantially less than the amounts owed by the appellant and Mr Makris, the respondent stated:

   “35............ I have been advised by Grope Hamilton (“Grope Hamilton”) who are the solicitors acting for me in relation to this aspect of the Bosun administration that Makris and Kotses owed certain fiduciary and statutory duties to Bosun by virtue of their holding offices as directors of Bosun.

   36.I intend to institute proceedings in this Honourable Court against Makris and Kotses seeking equitable compensation or damages for breach of fiduciary and statutory duty with respect to the directors’ loan accounts (“the proposed proceedings”).

   37............. I accordingly wish to examine both Makris and Kotses in relation to:

   37.1.......... All matters relating to the existence and conduct of the directors’ loan accounts;  and

   37.2Their respective ability to meet any judgment which I may obtain in the proposed proceedings.”

8. The respondent also dealt with the delay between the proving of debts in the bankruptcies and the making of the application for examination.  As mentioned, both the appellant and Mr Makris were discharged from their bankruptcies in 1995.  The respondent stated as follows:

   “54............ For some time after their discharges from bankruptcy no consideration was given to proceeding against them as they did not appear to have the means to meet any substantial judgment. 

   55.Initial, limited consideration was given to the possibility of a claim against Makris and Kotses in the latter part of 1996. 

   56............. In April 1997 I obtained a preliminary opinion from Grope Hamilton that an action for equitable compensation and/or damages for breach of fiduciary and/or statutory duty, being for unliquidated damages, survives bankruptcy. 

   57.Consideration of whether to institute proceedings and to seriously investigate the viability of recovering judgment against Makris and Kotses has awaited the progress of various claims in the administration of Bosun.”

9. The respondent’s statement in the affidavit that he intended to institute proceedings against the appellant and Mr Makris confirmed that the respondent had already made a decision to institute proceedings.  The making of such a decision is also reflected in the minutes of the meeting of Committee of Inspection held 22 February 1999 to which I have already referred. 

10. The application of 28 May 1999 also sought an order for the examination of Mr John Noolan who had been an external chartered accountant for Bosun.  The application was granted and Mr Noolan was examined on 3 August 1999.  According to an affidavit sworn by a solicitor acting for the appellant, most of the questions asked of Mr Noolan related to the loan accounts of the appellant and Mr Makris.

11. Before turning to the decision of the Master and the arguments on the appeal, it is convenient to refer to proceedings that were taken by Mr Makris. He also sought an order that his examination be permanently stayed as an abuse of process. That application was dismissed by a Master and Mr Makris appealed. On 23 June 2000 the appeal was dismissed by Debelle J ([2000] SASC 180). An application was made to the Full Court for leave to appeal and, after consideration of the application in private in accordance with the Supreme Court Rules, on 11 October 2000 that application was refused ([2000] SASC 335).

12. As Debelle J pointed out, s 596A of the Corporations Law is a mandatory provision in the sense that the Court must order the examination if the requirements of two sub-sections of s 596A are satisfied. Those requirements are satisfied. However, the Court has an inherent jurisdiction to stay proceedings which are an abuse of process. Debelle J identified the relevant principles in the following passage of his judgment:

9................ “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.”

1. The appellant submitted that the respondent is abusing the processes of the Court by pursuing a claim that is doomed to failure.  In essence it was said that as the respondent has already proved in the bankruptcy of the appellant in connection with the loan accounts and has received a dividend as a consequence of that claim, and as the appellant on his discharge from bankruptcy was released from all debts and liabilities provable in the bankruptcy, there is no basis upon which the respondent can now pursue such a claim against the appellant.  While s 153 of the Bankruptcy Act provides that a discharge does not release a bankrupt from a debt incurred by means of fraud or a fraudulent breach of trust, it was submitted that there is no evidence before the Court that the respondent is pursuing a claim for a debt incurred by means of such fraud or fraudulent breach of trust.  Counsel contended that the proceedings described by the respondent as “seeking equitable compensation or damages for breach of fiduciary and statutory duty with respect to directors’ loan accounts” amounted to a claim that was provable in a bankruptcy and not a claim for a debt incurred by means of fraud or fraudulent breach of trust. 

2. The same submission was made to Debelle J by counsel for Mr Makris.  It was rejected.  I agree with his Honour’s reasons for rejecting the submission.  Those reasons were approved by the Full Court and are equally applicable to the submissions of the appellant.  As the Full Court observed, it cannot be said “that the cause of action foreshadowed by the liquidator is so self-evidently untenable as to give rise to the inference that the order for examination is sought for an improper purpose.”  In addition, although the respondent has not used the word “fraud”, in my opinion it is a reasonable inference that any case mounted by the respondent against the appellant will be based upon such an allegation.

3. The issue of delay was also raised by the appellant.  This issue does not appear to have been argued by Mr Makris before Debelle J.  I have already referred to the relevant paragraphs in the affidavit of the respondent which addressed the reasons for the delay.  As the Master observed, some of the delay was due to the bankruptcy of the appellant and the financial aftermath of that bankruptcy.  The Master correctly addressed the question of prejudice and noted that the appellant has not deposed to any specific prejudice such as loss of memory or loss of access to documents.

4. Counsel for the appellant relied upon a number of well-known High Court authorities in which there is clear recognition that courts may stay proceedings for the purpose of preventing injustice to a party caused by undue delay (Jago v The District Court of New South Wales (1989) 168 CLR 23 and Walton v Gardiner (1993) 177 CLR 378). It must be remembered, however, that the various statements found in numerous authorities concerning the effect of delay have been in the context of proceedings which had as their purpose the determination of the rights of parties or which directly affected those rights. An examination by a liquidator is in a different category. Counsel was unable to identify any case in which an examination such as that under consideration has been stayed by reason of delay. That is not to say that exceptional circumstances might not exist where, by reason of delay, a court might be satisfied that an examination would be so oppressive or unfair as to amount to an abuse of process. Before a court could reach such a conclusion, evidence would be required from which the appropriate inference could be drawn. In the context of the proposed examination of the appellant, the delay of up to eight or nine years, while undesirable, in itself does not establish the existence of such unfairness or oppression as to lead to a reasonable inference that the examination would amount to an abuse of the processes of the Court.

5. In conjunction with the complaint about delay, the appellant criticised the respondent for not placing before the Court all the relevant information in the discharge of the respondent’s duty to make full and frank disclosure at the time of the ex parte application for the order of examination.  It was submitted that the respondent did not discharge his duty in this regard because he did not inform the Master hearing the initial application that he had earlier decided to institute the proceedings.  It was argued that such a decision was evident in the minutes of 22 February 1999 to which I have referred. 

6. On the application to set aside the order for examination, the Master was satisfied that the non-disclosure was not of such a serious nature as to cause him to reach the view that the different Master who heard the original application would have declined to make the order if he had known of the minutes of 22 February 1999.

7. In my opinion, there is no basis for drawing any sinister inference from the failure of the respondent to inform the Master hearing the original application of the minutes of February 1999 or of the existence of a decision at that time to institute proceedings.  Paragraph 36 of the respondent’s affidavit to which I have referred plainly stated that the respondent intended to institute proceedings.  This is not a case in which the liquidator, having made a decision to institute proceedings, attempted to mislead the Court upon the application for examination by stating either directly or by implication that a decision to institute proceedings had not yet been made.  In these circumstances, in my opinion the failure to disclose the contents of the minutes or the existence of the decision in February 1999 does not support a conclusion that the liquidator is attempting to use the examination for an improper purpose. 

8. Counsel for the appellant placed particular emphasis on the failure of the respondent to inform the court on the original application of an intention formed in February 1999 to apply for summary judgment.  The argument proceeded that if the respondent had all the material that he needed to apply for summary judgment, it follows that the substantial purpose of the proposed examination is to gain a forensic advantage.  I do not agree.  There are many reasons why the respondent may have thought that he was in a position to apply for summary judgment and why he has subsequently changed his mind.  In my opinion there is no substance in this point.

9. The existence of a decision to institute proceedings against the appellant brings into consideration a point of distinction between the situation of the appellant and the facts relating to Mr Makris which were before Debelle J.  As mentioned, the original application was an application common to both the appellant and Mr Makris.  In his affidavit in support of the application, the respondent said he wished to examine both persons as to all matters relating to the existence and conduct of the directors’ loan accounts and in relation to their respective abilities to meet any judgment which the respondent might obtain.  However, in connection with the examination of Mr Makris, the respondent eventually abandoned his application to examine Mr Makris in connection with all matters relating to the existence and conduct of the loan account.  He advised Mr Makris that he would not use the order for examination for any purpose other than to examine Mr Makris as to his means to satisfy any judgment which the liquidator might obtain against him.  No such undertaking has been given to the appellant.  No explanation has been forthcoming as to why the proposed examination of the appellant would not be limited to his capacity to satisfy a judgment.

10. The fact that the respondent proposes to limit the examination of Mr Makris in a manner which does not apply to the examination of the appellant does not support a conclusion that the application for the examination has been made for an improper purpose.  It would be inappropriate for me to speculate as to why the distinction has been drawn.  Similarly, the fact that the respondent has decided to institute proceedings does not lead to an inference that the respondent seeks to examine the appellant for an improper purpose.

11. I am unable to conclude from any of the material that the substantial reason for seeking the order is that the respondent wishes to gain a forensic advantage in the proposed proceedings or that in some other way the respondent is seeking the examination for an improper purpose.  The appeal is dismissed.