Re Pacific Biotechnologies Ltd
[2020] VSC 636
•30 September 2020
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS’ LIST
S ECI 2020 02122
IN THE MATTER of PACIFIC BIOTECHNOLOGIES LTD
(ADMINISTRATORS APPOINTED)
| PACREEF INVESTMENTS PTY LTD | Plaintiff |
| v | |
| STEVEN ARTHUR GLADMAN, RICHARD ALBARRAN AND DAVID ANTHONY ROSS AS ADMINISTRATORS OF PACIFIC BIOTECHNOLOGIES LTD (ADMINISTRATORS APPOINTED) AND PACIFIC BIOTECHNOLOGIES LTD (ADMINISTRATORS APPOINTED) | Defendants |
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JUDGE: | ROBSON J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 16 July 2020 |
DATE OF JUDGMENT: | 30 September 2020 |
CASE MAY BE CITED AS: | Re Pacific Biotechnologies Ltd |
MEDIUM NEUTRAL CITATION: | [2020] VSC 636 |
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CORPORATIONS – Deed of Company Arrangement – Challenge to appointment of administrators – Creditor requested information from the administrators under s 70-45 of the Insolvency Practice Schedule (Corporations) under Schedule 2 of the Corporations Act 2001 – Administrators refused the request – Application under regulation 2.2 of the Supreme Court (Corporations) Rules2013 that administrators provide the requested documents – Consideration of whether administrators ‘in good faith’ formed the relevant opinions required to refuse request – Application granted in part.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr C Salpigtidis | Fitzpatrick Legal |
| For the Defendants | Dr O Bigos SC and Mr A Oakes | Brown Wright Stein |
HIS HONOUR:
Introduction
Pacreef Investments Pty Ltd (Pacreef), a creditor of Pacific Biotechnologies Ltd (Administrators Appointed) (Pacific), alleges that Pacific’s administrators, namely Messrs Steven Gladman, Richard Albarran, and David Ross of Hall Chadwick (the administrators), are unfit to continue in their role. Relevantly, Pacreef alleges that the administrators previously acted for three secured creditors of Pacific, namely Galexer Pty Ltd, GTW Investments (Aust) Pty Ltd, and the Trustee for the Hub and Spokes Trust (the secured creditor group). Pacreef alleges that the administrators are not independent by reason of this prior relationship. Pacreef seeks to remove the administrators and set aside several decisions of the administrators made during the administration.
On 11 February 2020, Pacreef initiated a related proceeding in this court (00673 of 2020) (the redemption proceeding). In the redemption proceeding, Pacreef seeks to enforce an alleged agreement between itself, Pacific and GTW Investments (Aust) Pty Ltd (GTW). In brief, Pacreef alleges that it has issued a notice to Pacific under the agreement redeeming a number of shares, that the obligation to redeem is guaranteed by GTW, and that GTW has wrongly refused to meet the guarantee.
Pacreef alleges that it is a creditor of Pacific ranking equally with other unsecured creditors. Pacific, by its administrators, contends that if Pacreef is a creditor, then its claim is subordinated and ranks behind those of the other unsecured creditors.
Pacreef seeks the production of three categories of documents that relate to the administration of Pacific: (1) a file note of a conversation between Mr Gladman and GTW’s solicitors; (2) legal advice provided to Pacific by King & Wood Mallesons (KWM); and (3) a valuation report prepared for the administrators by Lonergan Edwards & Associates (Lonergan Edwards) and all related correspondence.
The administrators refused the request and have not produced the documents. Pacreef challenges the administrators’ decision. For the following reasons, I uphold the administrators’ decision with respect to categories (1) and (2) but not (3).
Background to the application
On 28 July 2017, Pacreef entered into agreements with Pacific and GTW. Under the terms of those agreements, Pacreef received a number of redeemable shares in Pacific which it alleges GTW guaranteed. In 2019, Pacreef claims to have issued to Pacific redemption notices for those shares. The effect of these purported notices and the terms of the agreements is the subject of the redemption proceeding.
On 28 February 2020, the secured creditor group engaged Hall Chadwick, chartered accountants, to produce an investigative accountant’s report on Pacific. Mr Gladman of Hall Chadwick prepared the report. While preparing the report, Mr Gladman was provided with a document referred to as a ‘situation analysis’, dated 6 February 2020. Pacreef does not know who provided Mr Gladman with the situation analysis. The situation analysis referred to legal advice provided to Pacific by KWM, advising that Pacreef’s shares were subordinated debts (the KWM advice). Pacreef alleges that Mr Gladman was also provided with a copy of the KWM advice itself. As mentioned above, the KWM advice is the second category of document sought by Pacreef.
On 4 March 2020, Mr Gladman had a telephone conversation with Mr Bill Spain, a solicitor for GTW. Mr Graeme Wood, director of GTW, had encouraged Mr Gladman and Mr Spain to meet. During the course of that conversation, Mr Gladman and Mr Spain discussed the redemption proceeding. Mr Gladman prepared a file note of his discussion with Mr Spain (the file note). As mentioned above, the file note is the first category of document sought by Pacreef.
On 13 March 2020, Pacific was placed in voluntary administration and the administrators were appointed as the administrators of Pacific.
On 17 March 2020, the administrators made a declaration of independence, relevant relationships and indemnities (DIRRI), as required by s 436DA of the Corporations Act 2001 (Cth). The declaration disclosed Mr Gladman’s conversation with Mr Spain on 4 March 2020. The declaration also disclosed that Mr Gladman had produced the investigative accountant’s report for the secured creditor group, and stated that at the time of the declaration Mr Gladman was owed more than $18,000 of outstanding fees for the report.
On 27 March 2020, the administrators engaged Lonergan Edwards, a specialist valuation firm, to value Pacific’s business and its shares in a subsidiary, PRF Holdco Pty Ltd (PRF Holdco). The valuation report was issued to the administrators on 22 April 2020. The administrators issued a report to creditors dated 20 April 2020 based on that valuation report. As mentioned above, the valuation report and all related correspondence is the third category of document sought by Pacreef.
On 16 April 2020, Pacific wrote to Pacreef alleging that Pacreef’s claims were subordinated debts within the meaning of s 563A of the Corporations Act. On 28 April 2020, a creditors meeting was held. Mr Gladman chaired the meeting. The meeting resolved inter alia to reject Pacreef’s proof of debt. The meeting also approved the execution of a deed of company arrangement (DOCA). The DOCA provided for the sale of Pacific’s shareholding in PRF Holdco to the secured creditor group.
On 8 May 2020, Pacreef commenced this proceeding by originating process. Pacreef sought the removal of the administrators and to set aside decisions made during the course of the administration which it alleged unfairly preferred the secured creditor group, on the grounds that the administrators were biased and had a conflict of interest.
On 15 May 2020, Pacreef sought an interlocutory order that the administrators be restrained from executing the DOCA. Pacreef also sought an order that the resolution of the creditors to approve the DOCA be set aside. That application came before me on 18 May 2020. I determined that the balance of convenience did not require that orders be made to restrain the execution of the DOCA. Accordingly, on 19 May 2020, the DOCA was executed. Under the terms of the DOCA, PRF Holdco was sold to the secured creditor group for some $1.8 million.
The requests for the documents
Pacreef first wrote to the administrators requesting production of the file note on 23 March 2020. Subsequently, in its originating process dated 8 May 2020, Pacreef sought production of eight categories of documents pursuant to the Insolvency Practice Schedule (Corporations) under Schedule 2 of the Corporations Act (Insolvency Practice Schedule), including the three categories of documents referred to above; that is, the file note, the KWM advice, and the Lonergan Edwards materials. In its interlocutory process of 15 May 2020, Pacreef reiterated its claim for production of the eight categories of documents without reference to the Insolvency Practice Schedule. At the hearing, Pacreef narrowed its application to production of the three categories of documents referred to above.
Additionally, at the hearing Pacreef also sought a list of documents reviewed in the preparation of the investigative accountant’s report, including an unredacted version of the situation analysis.
The administrators have refused to produce the documents in categories (1) to (3). The administrators have not made a decision in relation to the list of documents reviewed in the preparation of the investigative accountant’s report but have indicated that my findings in relation to the documents in categories (1) to (3) will assist them in reaching a decision.
Applicable principles
The applicable principles for production of the documents are disputed by the parties. Pacreef’s originating process of 8 May 2020 identified the basis for the application as s 70-45 of the Insolvency Practice Schedule. No other basis was identified. On 22 June 2020, a directions hearing was held in the matter. At the directions hearing, I asked why Pacreef was not seeking discovery. Counsel for Pacreef confirmed in substance that production of the documents was sought under the Insolvency Practice Schedule, and conceded that Pacreef was not seeking general discovery.
Prior to the hearing, Pacreef filed an outline of submissions dated 10 July 2020 in support of its application. The outline did not identify any basis for the production of the documents. Subsequently, on 14 July 2020, the administrators filed written submissions opposing the production of the documents, responding on the basis that the application was made solely under the provisions of the Insolvency Practice Schedule.
On the day of the hearing on 16 July 2020, Pacreef filed reply submissions to the submissions of the administrators of 14 July 2020. Counsel for the administrators informed the court they had received the reply submissions half an hour before the hearing commenced.
In its written reply submissions, Pacreef noted that opposition to production by the administrators appeared to be based solely on s 70-45 of the Insolvency Practice Schedule. Pacreef submitted that although the originating process referred to the relevant section in the Insolvency Practice Schedule, the interlocutory process did not. Accordingly, Pacreef submitted that as there was a civil proceeding on foot, it relied on s 26 of the Civil Procedure Act 2010 (Vic) in addition to s 70-45 of the Insolvency Practice Schedule. Pacreef also submitted that the documents were capable of production on notice as requested, in accordance with the rules of the Supreme Court for the conduct of this proceeding.
In its primary submissions at the hearing, counsel for Pacreef did not address the basis upon which Pacreef was seeking production. As regards production of the file note and the KWM advice, its submissions primarily dealt with the existence or non-existence of privilege. In response, counsel for the administrators referred to the Insolvency Practice Schedule. Counsel for the administrators submitted that, in accordance with the good faith opinion test provided by r 70-15 of the Insolvency Practice Rules (Corporations) 2016 (Cth) (Insolvency Practice Rules), the administrators were not obliged to produce the requested documents. Counsel for Pacreef contested the administrators’ construction of r 70-15 of the Insolvency Practice Rules. Further, counsel for Pacreef submitted that s 26 of the Civil Procedure Act applied. Counsel for Pacreef did not make any submissions on how s 26 of the Civil Procedure Act would assist Pacreef’s application. Nor did counsel for Pacreef elaborate on the reference to the rules of the Supreme Court contained in its written reply submissions.
I did not hear any argument on how s 26 of the Civil Procedure Act should be applied in this case. Nor did I hear any argument by Pacreef on how the Supreme Court (General Civil Procedure) Rules 2015 (Vic) would assist. The Insolvency Practice Schedule makes specific provision for the obligations of administrators to produce documents in their possession to creditors of the company in administration. I heard no argument as to whether, in civil proceedings involving creditors of a company in administration, the obligations on administrators to produce documents go beyond those provided in the Insolvency Practice Schedule. In the absence of any such argument, I accept the administrators’ submission that this application should be dealt with solely under the Insolvency Practice Schedule.
Document production under the Insolvency Practice Schedule
The Insolvency Practice Schedule was introduced into the Corporations Act by the Insolvency Law Reform Act 2016 (Cth). The Insolvency Practice Schedule includes various mechanisms which allow for creditors of a corporation in administration to request documents from administrators.
Pacreef relies on s 70-45 of the Insolvency Practice Schedule. Subsection 70-45(1) provides:
(1) A creditor may request the external administrator of a company to:
(a)give information; or
(b)provide a report; or
(c)produce a document;
to the creditor.
Where such a request is made, sub-s 70-45(2) provides:
(2) The external administrator must comply with the request unless:
(a)the information, report or document is not relevant to the external administration of the company; or
(b)the external administrator would breach his or her duties in relation to the external administration of the company if the external administrator complied with the request; or
(c)it is otherwise not reasonable for the external administrators to comply with the request.
The reference to a request being ‘otherwise not reasonable’ is to be read in light of sub‑s 70-45(3), which provides that the circumstances in which it is or is not reasonable to comply with a request are to be prescribed by regulations, namely the Insolvency Practice Rules.
Sub-rule 70-15(2) of the Insolvency Practice Rules prescribes those circumstances. It provides:
(2)It is not reasonable for an external administrator of a company to comply with a request to give information, provide a report or produce a document to a creditor if the external administrator, acting in good faith, is of the opinion that:
(a)complying with the request would substantially prejudice the interests of one or more creditors or a third party and that prejudice outweighs the benefits of complying with the request; or
(b)the information, report or document would be privileged from production in legal proceedings on the ground of legal professional privilege; or
(c)disclosure of the information, report or document would found an action by a person for breach of confidence.
Section 70-90 of the Insolvency Practice Schedule provides that a creditor who has made a request for material may apply to the court for an order that the external administrator provide all or part of the requested material, and confers a discretion on the court to make such an order. In Re 1st Fleet Pty Ltd (in liq) (1st Fleet), Black J held that the discretion should be exercised with regard to the purpose of s 70-45 of the Insolvency Practice Schedule and r 70-15 of the Insolvency Practice Rules, which is to require the production of documents where an appropriate request has been made and it has not been established that the request would be unreasonable within the meaning of those sections.[1]
[1][2019] NSWSC 6, [27].
In both 1st Fleet and Re Secatore; Bob Jane Corporation Pty Ltd v Last Lap Pty Ltd (in liq) (Secatore),[2] the explanatory memorandum to the Insolvency Law Reform Act was taken into account to identify the purposes of the relevant statutory provisions.[3] Relevantly, the explanatory memorandum notes that the Insolvency Practice Schedule is concerned to reduce ‘information asymmetry’ and assist creditors in ‘assessing the quality of insolvency services provided.’[4]
[2](2020) 144 ACSR 648.
[3][2019] NSWSC 6, [22]–[23]; (2020) 144 ACSR 648, 658 [42], 661 [52].
[4]Explanatory Memorandum, Insolvency Law Reform Bill 2015 (Cth), 165 [6.12].
In 1st Fleet, Black J held that r 70-15(2) of the Insolvency Practice Rules provides a complete statement of the circumstances in which it is or is not reasonable for an external administrator of a company to comply with a request.[5]
[5][2019] NSWSC 6, [24].
In Secatore, Anderson J adopted Black J’s finding that r 70-15(2) of the Insolvency Practice Rules is exhaustive.[6] His Honour held that the onus is on the external administrator to prove that it is ‘not reasonable’ to comply with a request under s 70-45 of the Insolvency Practice Schedule.[7] In so doing, Anderson J noted that the external administrator is ‘optimally placed’ to make a determination as to the reasonableness of a request for documents.[8]
[6](2020) 144 ACSR 648, 659 [45].
[7]Ibid [44].
[8]Ibid.
Pacreef submits that Anderson J went beyond a consideration of the opinion of the administrator, and took into account whether the circumstances referred to in r 70-15 did or did not exist.[9] I accept that the administrator must establish that he or she was acting in good faith in holding one or other of the prescribed opinions. I do not accept, as was submitted by Pacreef, that it is the court’s function in applying r 70-15(2)(b) to determine whether there is in fact privilege, and if so whether it has been waived.
[9]Pacreef cites Re Secatore; Bob Jane Corporation Pty Ltd v Last Lap Pty Ltd (in liq) (2020) 144 ACSR 648, 660 [46]–[50].
The term ‘good faith’ is not defined in the Insolvency Practice Schedule or the Corporations Act. I was not referred to any case law on the meaning of the phrase ‘acting in good faith’ in r 70-15 of the Insolvency Practice Rules.
In my opinion, for an administrator to discharge the onus placed on the administrator by r 70‑15 to establish that he or she has acted in good faith, the administrator should establish that his or her opinion was based upon a reasonable basis.
In sum, in considering a request for document production under the Insolvency Practice Schedule, the administrators must establish that it is ‘not reasonable’ to comply with the request. In order to do so, the administrators must establish that they, acting in good faith, held any of the opinions in r 70-15(2) of the Insolvency Practice Rules.
The file note
In his affidavit of 8 July 2020, Mr Gladman deposed that during the conversation of 4 March 2020, Mr Spain disclosed to him legal advice which Mr Spain had given GTW about the redemption proceeding. Accordingly, Mr Gladman deposed that he did not provide the file note to Pacreef as he was of the opinion that the document would be privileged from production in legal proceedings on the ground of legal professional privilege.
Mr Gladman’s opinion reflects the language of r 70-15(2)(b). Mr Gladman deposed that he is of that opinion because the file note related to a confidential communication between Mr Gladman and Mr Spain made for the dominant purpose of Mr Spain’s provision of legal services in relation to the redemption proceeding; and because the file note disclosed the content of confidential legal advice from Mr Spain to GTW that was communicated to Mr Gladman. The phrasing of Mr Gladman’s affidavit closely reflects the language of ss 118 and 119 of the Evidence Act 2008 (Vic).
Section 118 of the Evidence Act provides:
Evidence is not to be adduced if, on objection by a client, the court finds that adducing the evidence would result in disclosure of—
(a)a confidential communication made between the client and a lawyer; or
(b)a confidential communication made between 2 or more lawyers acting for the client; or
(c) the contents of a confidential document (whether delivered or not) prepared by the client, lawyer or another person—
for the dominant purpose of the lawyer, or one or more of the lawyers, providing legal advice to the client.
Section 119 of the Evidence Act provides:
Evidence is not to be adduced if, on objection by a client, the court finds that adducing the evidence would result in the disclosure of—
(a)a confidential communication between the client and another person, or between a lawyer acting for the client and another person, that was made; or
(b)the contents of a confidential document (whether delivered or not) that was prepared—
for the dominant purpose of the client being provided with professional legal services relating to an Australian or overseas proceeding (including the proceeding before the court), or an anticipated or pending Australian or overseas proceeding, in which the client is or may be, or was or might have been, a party.
Relevantly, s 122(5)(a)(i) of the Evidence Act provides that privilege in legal advice will not be waived where the substance of that legal advice is disclosed in the course of making a confidential communication or in the course of preparing a confidential document.
The administrators submit that Mr Gladman’s good faith opinion is a sufficient basis for refusing production of the documents. The administrators submit that Mr Gladman has not been challenged on his holding of the opinion that the file note and its contents are privileged. Indeed, Pacreef’s submissions appear to be directed at the existence or non-existence of privilege.
Pacreef submits that the file note is not privileged as there was no evidence that the conversation between Mr Gladman and Mr Spain was confidential. It submits that in circumstances where Mr Gladman was retained by the secured creditor group, Mr Spain would have known that any legal advice he disclosed to Mr Gladman would also be disclosed to the secured creditor group as a whole. In support of its contention, Pacreef submits that Mr Spain had previously been informed that Mr Gladman acted for the secured creditor group in an email from Mr Wood dated 3 March 2020. Pacreef submits that Mr Gladman billed the secured creditor group for his time spent in the conversation. It further submits that Mr Gladman would be bound to provide the file note at the request of any of the secured creditor group entities, and that this is inconsistent with maintenance of privilege over the file note.
In response, the administrators submit that Pacreef has adduced no evidence to establish that the contents of the file note have been shared with anyone else, or that Mr Gladman had been given permission by Mr Spain or GTW to share the contents of the file note with anyone else.
As discussed above, I do not accept that it is the court’s function in applying r 70-15 to determine whether privilege exists. Nonetheless, Pacreef’s submissions raise matters relevant to the court’s assessment of whether Mr Gladman, in good faith, formed the required opinion.
The issue of privilege which Mr Gladman was required to consider in coming to his opinion raised a difficult issue of law. Accordingly, in my opinion, for an administrator with no legal training to hold an opinion in good faith about what the law of privilege requires, the administrator must establish reliance on some reasonable basis for coming to the legal opinion he or she is required to form. Without being exhaustive, that basis could include taking legal advice, or establishing that the administrator instructed himself or herself on the relevant legal principles.
Mr Gladman has not deposed to taking any legal advice from a solicitor. However, as discussed above, the grounds that Mr Gladman gives for his opinion that the file note would be privileged reflect the wording in ss 118 and 119 of the Evidence Act. I infer, therefore, that Mr Gladman either took legal advice on, or informed himself of, the statutory tests as to privilege.
Pacreef did not seek to cross-examine Mr Gladman on his evidence. Pacreef did not lead evidence to suggest that Mr Gladman did not hold in good faith the opinion to which he deposed. Furthermore, I do not accept Pacreef’s submission that the fact that Mr Gladman was acting for the secured creditor group is inconsistent with the conversation being confidential. It is not apparent why information received by a person in the course of preparing a report should be treated as thereby disclosed to the audience of that report. Pacreef has not established that the substance of the advice ultimately entered the report.
I am satisfied that Mr Gladman, acting in good faith, formed the opinion that the file note would be privileged from production in legal proceedings on the ground of legal professional privilege.
Accordingly, I find that it was not reasonable for Mr Gladman to comply with the request for production of the file note under s 70-45 of the Insolvency Practice Schedule.
The KWM advice
In his affidavit of 8 July 2020, Mr Gladman deposed that he has not produced a copy of the KWM advice to Pacreef as he is of the opinion that it would be privileged from production in legal proceedings on the ground of legal professional privilege.
As above, Mr Gladman’s opinion reflects the phrasing of r 70-15(2)(b) of the Insolvency Practice Rules. Mr Gladman deposed that he based his opinion on the ground that the KWM advice is a confidential communication between KWM and Pacific for the dominant purpose of KWM providing legal advice to Pacific, its client. The phrasing of Mr Gladman’s reasoning reflects the language of s 118 of the Evidence Act. As discussed above, as Mr Gladman’s reasoning reflects the relevant test in the legislation, I infer that he took legal advice on the issue or instructed himself on the relevant legal tests.
The administrators submit that Mr Gladman’s good faith opinion is a sufficient basis for refusing production of the documents, and that Mr Gladman has not been challenged on his holding of the opinion.
Pacreef’s submissions were directed at whether privilege in fact existed. Its submissions raise matters relevant to the court’s assessment of whether Mr Gladman, in good faith, formed the required opinion.
Pacreef did not dispute that the KWM advice was, at least at the point of creation, subject to privilege. However, Pacreef submits that any privilege attaching to the advice has been waived insofar as Mr Gladman, a third party, was provided with either the situation analysis or the KWM advice itself in the course of preparing the investigative accountant’s report. Pacreef also submits that privilege has been waived as a reference to the KWM advice was included in the investigative accountant’s report. Relevantly, the investigative accountant’s report states that:
The situation analysis dated 6 February 2020 records that King Wood Malleson Lawyers [sic] have advised that in a liquidation of Pacific Bio the Class A and B convertible shares would be a subordinated claim, postponed until all other debts payable by, and claims against, the company are satisfied.
Pacreef also submits that privilege has been waived as a reference to the KWM advice was included in a report to creditors. Relevantly, that report to creditors states:
I have sought legal advice with respect to the nature of this claim, which has advised that [Pacreef’s] “redemption share” components (and associated interest) is a subordinate claim in accordance with Section 563A of the Act.
The administrators submit that Pacreef has not adduced evidence to establish that, prior to his appointment as administrator, Mr Gladman was provided with anything more than the situation analysis. Relevantly, they submit the situation analysis contains only the conclusion of the KWM advice. They also submit that the investigative accountant’s report only refers to the conclusion of the KWM advice. The administrators refer the court to Banksia Securities Ltd v The Trust Company.[10] In that case, Sifris J held that:
Merely exposing the ultimate recommendation or conclusion of legal advice falls short of disclosing the substantive reasoning contained therein and consequently cannot be said to be sufficient disclosure or conduct inconsistent with maintaining privilege over the remainder of the advice.[11]
[10][2017] VSC 583.
[11]Ibid [31].
I accept the administrators’ submissions. The only evidence of disclosure before me are the sections from the investigative accountant’s report and the report to creditors extracted above. Both extracts refer to a conclusion that certain shares were subordinated claims. In neither document is there discussion of the reasoning that led to the conclusion. No evidence has been led by Pacreef to support an inference that the situation analysis records anything more than the conclusion subsequently cited in the investigative accountant’s report, or that the KWM advice itself was provided to Mr Gladman prior to his appointment as administrator.
I am satisfied that Mr Gladman, acting in good faith, formed the opinion that the KWM advice would be privileged from production in legal proceedings on the ground of legal professional privilege. As discussed above, I find that Mr Gladman has established reliance on some reasonable basis for coming to the legal opinion which he was required to form.
Accordingly, I find that it was not reasonable for Mr Gladman to comply with the request for production of the KWM advice under s 70-45 of the Insolvency Practice Schedule.
However, at the hearing, Pacreef noted that it had been provided earlier that day with a redacted version of the situation analysis. Counsel for Pacreef suggested that the redactions may relate to the KWM advice. Regrettably, neither the redacted nor unredacted versions of the situation analysis have been put before the court. In those circumstances, I cannot determine whether the situation analysis discloses more than the conclusion of the KWM advice.
The Lonergan Edwards materials
In his affidavit of 8 July 2020, Mr Gladman deposed that he did not produce the Lonergan Edwards report prior to the execution of the DOCA on the ground that to do so ‘would have substantially prejudiced the Company’s bargaining position in any potential sale of the Company’s business and shares in PRF Holdco.’
Mr Gladman deposed that following the execution of the DOCA, he declined to produce the Lonergan Edwards report as he formed the opinion that production would substantially prejudice the interests of PRF Holdco and its purchaser, and that that prejudice outweighs the benefits of complying with the request. This opinion reflects the language of r 70-15(2)(a) of the Insolvency Practice Rules.
Mr Gladman deposed that he based his opinion on the following grounds:
(i)the valuation report sets out confidential information as to the finances of PRF Holdco, a third party entity to which the administrators have not been appointed;
(ii)the valuation report discloses the terms of trade between PRF Holdco and its only supplier, and this information is commercially sensitive;
(iii)the valuation report discloses breaches of agreements between PRF Holdco and Commonwealth Bank of Australia (CBA) that may prejudice PRF Holdco’s position with CBA;
(iv)the valuation report discloses details of PRF Holdco’s main customer; and
(v)the valuation report would not be of utility to Pacreef, as the DOCA has already been executed and accordingly the assets which it values have already been sold.
Mr Gladman also deposed that the correspondence between Lonergan Edwards and the administrators contained elements of the confidential information as to PRF Holdco’s finances referred to above. Accordingly, Mr Gladman deposed that he has also formed the opinion that producing the correspondence would substantially prejudice the interests of PRF Holdco.
The administrators submit that Mr Gladman’s good faith opinion is a sufficient basis for refusing production of the documents. The administrators submit that Mr Gladman has not been challenged as to his holding of the opinion that the prejudice occasioned by producing the report would outweigh the benefits. Again, Pacreef did not direct its submissions to Mr Gladman’s opinion.
Pacreef submits that any prejudice caused by the disclosure of confidential information in the Lonergan Edwards materials can be overcome through a Harman undertaking. Additionally, Pacreef offered to provide formal undertakings as to confidentiality if required. Further, Pacreef submits that some of the administrators’ concerns as to prejudice are misplaced, insofar as Pacreef is already aware of the identity of PRF Holdco’s main supplier and customer.
The administrators submit that the use of a Harman undertaking would not be an appropriate manner of circumventing the opinion of the administrator under r 70-15 of the Insolvency Practice Rules. They submit that the onus is on Pacreef to establish the benefit they seek from the disclosure and that Pacreef has not done so. They also submit that Pacreef should articulate the allegations in relation to which it seeks the Lonergan Edwards materials in points of claim. Further, the administrators note that the conclusion of the valuation report has already been provided to Pacreef in the report to the creditors referred to above.
I acknowledge that Mr Gladman may have formed the opinion that production of the Lonergan Edwards materials would substantially prejudice PRF Holdco’s interests. However, Pacreef has offered to undertake to the court to use those documents solely for the purposes of this proceeding. Pacreef is also privy to a substantial portion of that confidential information. I am satisfied that if an undertaking were in place, the prejudice to PRF Holdco would be minimal. I am not satisfied that Mr Gladman has established his opinion was based on a reasonable basis. In those circumstances, I am not satisfied that Mr Gladman has established he acted in good faith in finding that the prejudice occasioned by the disclosure of the valuation report would outweigh the benefits.
I reject the administrators’ submission that Pacreef would need to articulate formal points of claim in order to make an appropriate request under s 70-45 of the Insolvency Practice Schedule. All that s 70-45 requires is that the documents sought be relevant to the external administration, which the Lonergan Edwards materials plainly are.
I acknowledge that Mr Gladman is required to balance the prejudice occasioned by a disclosure with the benefits. However, Pacreef alleges that the sale of PRF Holdco has taken place at significant undervalue. Pacreef’s concern provides a basis upon which the valuation report would be of benefit to Pacreef. Further, as the explanatory memorandum to the Insolvency Law Reform Act indicates,[12] the provision of information relating to the administration is in itself a relevant benefit, insofar as it assists creditors to better assess the quality of insolvency services. When these benefits are weighed against the minimal prejudice which disclosure would cause to the interests of PRF Holdco, I am satisfied that Mr Gladman has not made out that it was not reasonable to provide the documents.
[12]Explanatory Memorandum, Insolvency Law Reform Bill 2015 (Cth),165 [6.12].
I find that it was reasonable for Mr Gladman to comply with the request for production of the Lonergan Edwards materials under s 70-45 of the Insolvency Practice Schedule. I am not satisfied that Mr Gladman, acting in good faith, can maintain the opinion that production of the Lonergan Edwards materials would substantially prejudice the interests of one or more creditors or a third party and that the prejudice would outweigh the benefits of complying with the request.
Conclusion
For the reasons above, I find that it was not reasonable within the meaning of r 70-15 of the Insolvency Practice Rules for the administrators to comply with Pacreef’s request pursuant to s 70-45 of the Insolvency Practice Schedule for production of the file note and the KWM advice. I find that it is reasonable for the administrators to comply with Pacreef’s request pursuant to s 70-45 of the Insolvency Practice Schedule for the production of the valuation report.
I will make orders for production of the valuation report under s 70-90 of the Insolvency Practice Schedule.
This application was made on a narrow basis. Pacreef expressed concern that an order for discovery would require the entire administration file to be discovered. However, I note that limited or specific discovery is available under order 29 of the Supreme Court (General Civil Procedure) Rules.
Orders for discovery and production and inspection of the documents remain open to the parties upon further application.
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