Re Rominvest Australia Pty Ltd (In Liq)
[2020] VSC 830
•16 December 2020
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2020 03628
| THOMAS CRANFIELD & ORS (according to the attached Schedule) | Applicants |
| v | |
| STEFANIA SPIRIDON | Respondent |
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JUDGE: | Irving JR |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 11 November 2020 |
DATE OF JUDGMENT: | 16 December 2020 |
CASE MAY BE CITED AS: | Re Rominvest Australia Pty Ltd (In Liq) |
MEDIUM NEUTRAL CITATION: | [2020] VSC 830 |
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CORPORATIONS – Corporations Act 2001 (Cth) – Summonses for public examination issued under s 596B – Application to discharge or vary summonses – Whether application for summonses made for improper predominant purpose – Whether summonses are an abuse of process – Where examinations sought by a person authorised by ASIC not a liquidator or administrator of the corporation – Whether categories of documents sought in summonses are oppressive – Application dismissed.
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APPEARANCES: | Counsel | Solicitors |
| For the Applicants | Mr S Hay QC with Ms N Papaleo | Summer Lawyers |
| For the Respondent | Mr C Young QC with Mr P Annabell | Ashurst |
JUDICIAL REGISTRAR:
The applicants[1] have each been summonsed to produce documents and for public examination pursuant to s 596B of the Corporations Act 2001 (Cth) (the Act). The subject of the public examination is the examinable affairs of Rominvest Australia Pty Ltd (ACN 600 859 032) (In Liquidation) (Rominvest). The Examinees seek to have their summonses discharged on the basis that they are abuses of process or, alternatively, that the summonses be reduced in scope.
[1]Mark Hutchins, Frank Hageali, Gino Tabila and Thomas Cranfield (each, an Examinee, collectively, the Examinees).
Rominvest was incorporated as a special purpose vehicle to develop and construct 12 residential units at 22 Wilma Avenue, Dandenong (the Dandenong Property). At the time of Rominvest’s incorporation Mr Spiridon, Stefania Spiridon’s husband, was one of its four directors and shareholders. In October 2015, Mr Spiridon died and Mrs Spiridon inherited his shares in Rominvest. She became a director of Rominvest in October 2015.
On 16 March 2018 Secured Lending 2 Pty Ltd (ACN 622 871 621) (Secured Lending) and Franquay Investments Pty Ltd (ACN 617 209 435) as trustee for the Franquay Trust (together, the Lenders) entered into an agreement (the Loan) to lend Rominvest $3,415,000.00 (the principal amount) for a term of six months. The purpose of the Loan was to refinance a loan from La Trobe Financial Services Pty Ltd in order to complete the development of the Dandenong Property.
The terms of the Loan agreement included that:
(a) the principal amount was subject to the Higher Rate of Interest of 6.00% per month unless the lenders notified the mortgagors otherwise (clause 5.3);
(b) any interest not paid when it fell due was capitalised immediately as Outstanding Interest and formed part of the Secured Money which was subject to the higher rate of interest of 6.00% per month (clause 5.11);
(c) fees were payable in accordance with Schedule B, including $186,630 at or before the Commencement Date, as well as a number of ongoing fees and fees relating to default (Schedule B); and
(d) Rominvest was required to engage CC Property Advisory Pty Ltd (CC Property Advisory) to oversee the finalisation of the construction of the Dandenong Property at an additional cost of $33,000 (Schedule A – Special Conditions).
The Loan was secured by a range of securities including a first ranking mortgage over the Dandenong Property, personal guarantees from Mrs Spiridon and the other directors, powers of attorney from Rominvest and its directors and a deed of family arrangement with Mrs Spiridon and her children relinquishing any claim to the assets of Mr Spiridon’s deceased estate.
Rominvest failed to repay the Loan by its original due date in September 2018.
On 30 October 2018 the Lenders, Rominvest and the guarantors entered into the first forbearance deed which varied the repayment date to 14 March 2019.
On or around 5 April 2019 the Lenders, Rominvest and the guarantors entered into a second forbearance deed further varying the repayment date to 14 June 2019.
A third forbearance deed was signed on 28 June 2019 varying the repayment date to 14 September 2019.
On 14 September 2019 the Lenders issued a default notice under the Loan.
Mrs Spiridon’s only asset is her family home. On 24 June 2020 Mrs Spiridon’s solicitors (Ashurst) wrote to the Lenders seeking their agreement not to take action to enforce the guarantee for a period of at least 8 weeks and stating that if her guarantee was enforced it would have the effect of making Mrs Spiridon homeless and bankrupt.
On 1 July 2020 the Lenders’ solicitors responded to Ashurst, reserving their right to enforce all security available to them in respect of the Loan and indicating that the Lenders would await the outcome of the sale of the Dandenong Property lots before assessing their position in relation to Mrs Spiridon’s guarantee. Ashurst replied on the same date, stating that, ‘[i]f a conciliatory path is not taken [by the Lenders] then we will be taking all steps available to protect [Mrs Spiridon’s] interests.’
On 14 July 2020 Rominvest went into liquidation. Robert Smith and Matthew Caddy were appointed liquidators.
On 4 September 2020 Ashurst wrote to ASIC seeking authorisation to conduct public examinations into the examinable affairs of Rominvest. On 10 September 2020, following confirmation that the liquidators were aware of and did not oppose Mrs Spiridon’s request, ASIC authorised Mrs Spiridon as an ‘eligible applicant’ for the purposes of div 1 of pt 5.9 of the Act in relation to Rominvest.
The Examinees assert that Mrs Spiridon’s “predominant purpose in bringing the application for the examination summonses is to gather information that will enable her to resist the proceeding [to enforce her guarantee] that is about to be commenced against her. That is an offensive purpose and the examination summonses should be set aside as a result.”
The Examinees also assert that the present form of the summonses is oppressive.
The basis of that oppression, according to the Examinees, is that:
(a) the categories of documents sought in the issued summonses are not confined by reference to the potential claims identified in the affidavit filed in support of the application for the summonses; and
(b) on their current terms the summonses would require production of in excess of 10,000 pages of documents which would need to be reviewed for potential privilege claims.
For the reasons set out below the Examinee’s application must be dismissed.
Legislative Framework
Section 596B of the Act provides:
(1)The Court may summon a person for examination about a corporation's examinable affairs if:
(a) an eligible applicant applies for the summons; and
(b) the Court is satisfied that the person:
(i)has taken part or been concerned in examinable affairs of the corporation and has been, or may have been, guilty of misconduct in relation to the corporation; or
(ii)may be able to give information about examinable affairs of the corporation.
(2) This section has effect subject to section 596A.
Section 9 defines an eligible applicant to mean:
(a) ASIC; or
(b) a liquidator or provisional liquidator of the corporation; or
(c) an administrator of the corporation; or
(d)an administrator of a deed of company arrangement executed by the corporation; or
(e) a person authorised in writing by ASIC to make:
(i)applications under the Division of Part 5.9 in which the expression occurs; or
(ii) such an application in relation to the corporation.
The Act widely defines a company’s examinable affairs, in relation to a corporation, as:
(a)the promotion, formation, management, administration or winding up of the corporation; or
(b)any other affairs of the corporation (including anything that is included in the corporation's affairs because of section 53); or
(c)the business affairs of a connected entity of the corporation, in so far as they are, or appear to be, relevant to the corporation or to anything that is included in the corporation's examinable affairs because of paragraph (a) or (b).[2]
[2]Corporations Act 2001 (Cth) (‘the Act’), s 9.
An application for a summons under s 596B of the Act must be accompanied by an affidavit in support of the application. That affidavit is not available for inspection except so far as the Court orders.[3] In this instance Ashurst has voluntarily supplied the Examinees with:
[3]Ibid s 596C.
(a) a copy of the affidavit of Michael Sloan sworn 15 September 2020 filed in support of Mrs Spiridon’s application for the examination summonses;
(b) a copy of Ashurst’s letter to ASIC dated 4 September 2020 seeking authorisation for Mrs Spiridon to conduct public examinations into the examinable affairs of Rominvest; and
(c) a copy of the Liquidators’ letter dated 9 September 2020 to Mrs Spiridon confirming the Liquidators’ non-objection to her authorisation application to ASIC.
Relevant principles
The parties agree that Mrs Spiridon stands to benefit if the examinations reveal information that leads, through further legal action by Rominvest’s liquidators, to the Loan being set aside. The real question before the Court is whether Mrs Spiridon’s predominant purpose in issuing the summonses is to have her personal guarantee set aside and, if so, whether this is foreign to the purpose for which the legislative power was conferred.
The Examinees bear the heavy onus of satisfying the court that the summonses are an abuse of process.[4]
[4]Accord Pacific Holdings Pty Ltd v Accord Pacific Land Pty Ltd (in liq) [2011] NSWSC 707, [138] (Ward J).
In Shangri-La Construction Pty Ltd v Hyatt, in the matter of GVE Hampton Pty Ltd (in liquidation) (‘Shangri-La’), Beach J made the following observations:
[T]he authorisation by ASIC under limb (e) of the definition in s 9 of “eligible applicant” is not expressly as to the scope of any summons or examination. Rather, it is an authorisation concerning standing. The authorisation does not expressly limit the examinable affairs to be examined. Any such limitation is for the Court exercising its powers under ss 596A or 596B to issue the summons. But of course the Court will consider, at the time it is asked to issue the summons, the authorisation and the purpose for which it was obtained in determining the scope of any summons for examination….[T]he scope of any examination is to be informed and circumscribed by the terms of the summons actually issued, not by the prior authorisation concerning standing in and of itself.
[T]he expression “examinable affairs” is of very broad amplitude and can encompass the relevant company’s dealings with third parties including related entities or persons.[5]
[5][2020] FCA 1577, [21]-[22].
It is unnecessary here to repeat the legislative history of the current public examination provisions in the Act. That history is well set out in other judgments.[6]
[6]See, eg, Re New Tel (in liq); Evans v Wainter Pty Ltd (‘Evans v Wainter’) (2005) 145 FCR 176; ACN 004 410 833 Ltd (formerly Arrium Ltd) (in liq) v Walton (2020) 383 ALR 298 (‘Arrium’).
The authorities relevant to when a summons issued under Pt 5.9 of the Act will be an abuse of process are well known. In Evans v Wainter, Lander J (delivering the Full Court’s reasons) explained:
Re Excel Finance Corporation Ltd; Application of England (1994) 52 FCR 69; 124 ALR 281; 14 ACSR 407; 34 ALD 85 stands for the proposition that it is an abuse of process to use the Pt 5.9 procedure if the predominant purpose of the applicant seeking the order is not for the purpose of benefitting the corporation, its contributories or its creditors.
If the party seeking the examination summons is doing so for any number of purposes, which do not include the purpose of benefitting the corporation, then that would amount to an abuse. On the other hand, if the party seeking the examination summons has as one purpose the achievement of a benefit to that party but has also a further purpose which is for the benefit of the corporation then the use of the Part 5.9 procedure will not be an abuse of process.[7]
[7]Evans v Wainter 200 [143]-[144].
Lander J went on to explain:
…the question of what is a proper purpose must be determined by reference to the legislation itself because it is the legislation which gives the power to issue a summons for an examination and the carrying out of an examination, the power cannot be used for a collateral or ulterior purpose. It must be used for a purpose expressly or implicitly authorised by the legislation itself.[8]
[8]Ibid 216 [250].
Lander J then distilled a number of propositions emerging from his examination of the legislation and authorities, including:
2. The purpose of the power [to summon a person for examination] is to be gleaned from the legislation.
3. The following legitimate purposes emerge:
3.1 First, an examination is designed to serve the purpose of enabling an eligible applicant to gather information to assist the eligible applicant in the administration of the corporation.
3.2 Secondly, it assists the corporation’s administrators to identify the corporation’s assets, both tangible and intangible. It also allows the corporation’s liabilities to be identified.
3.3 Thirdly, the purpose is to protect the interests of the corporation’s creditors.
3.4 Fourthly, it serves the purpose of enabling evidence and information to be obtained to support the bringing of proceedings against examinable officers and other persons in connection with the examinable affairs of the corporation.
3.5 Fifthly, it assists in the regulation of corporations by providing a public forum for the examination of examinable officers of corporations.[9]
[9]Ibid 216–217 [252].
4. If an eligible applicant applies for an order for the examination of a person for a purpose unconnected with the purposes authorised by the legislation that will be an abuse of process and the order, if obtained, will be set aside.
5. The procedure may not be used to allow a party to obtain a forensic advantage and, if it is, any order obtained will be set aside.
6. The procedure may not be used as a dress rehearsal for the cross-examination of a person in a pending or subsequent action. However, it is not improper to seek an order of the Court to summon a person for examination whilst litigation is pending against that person or entities connected with that person.
7. The question whether in any particular case the applicant has used the procedure abusively will depend upon the applicant’s purpose in seeking the order and all of the surrounding circumstances. It will not be an abuse unless the offensive purpose is at least the predominant purpose.
8 It will be an offensive purpose if the application cannot be characterised as being for the benefit of the corporation, its contributories or creditors.
The predominant purpose is objective in nature.[10] Purpose in this context means the result intended to be achieved by the applicant for the summons which is relevant to whether there is an abuse of process.[11] In Accord Pacific, Ward J explained:
It is clear that as to the objective purpose, it has to be the predominant purpose and that the mere fact that there may be a collateral advantage or by-product from the course sought to be adopted that works in the examiner’s favour is not sufficient.[12]
[10]Accord Pacific Holdings Pty Ltd v Accord Pacific Land Pty Ltd (in liq) [2011] NSWSC 707 (‘Accord Pacific’), [123] (Ward J); Williams v Spautz (1992) 174 CLR 509, 529; Re Calder Park Promotions Pty Ltd (in liq) [2015] VSC 285, [43] (Gardiner AsJ).
[11]Arrium 330 [130].
[12]Accord Pacific [123].
In Kimberley Diamonds, the Full Court stated that:
… if an eligible applicant obtained an examination summons for the purpose of securing a benefit for itself in other litigation, not involving the company, that purpose would be ‘offensive’, such that the summons could be stayed as an abuse: Evans v Wainter at [140], [143] and [252] (proposition 8). Such a summons could not be of any benefit to the company, its members or creditors.[13]
[13]Kimberley Diamonds Ltd v Arnautovic (2017) 252 FCR 244, 263 [101] (‘Kimberley Diamonds’).
In Sandhurst Trustees Ltd v Harvey, the Court stated:
the fact that a consequence of an examination order may be a forensic advantage to a particular class of creditors, or to a particular creditor, of the corporation, or to a particular person, does not itself lead to the conclusion that the order was not made for a proper purpose. Nor does the fact that the order was made at the instance of that person or creditor. On the other hand the power is not conferred with a view to its exercise solely to benefit an individual with a claim of some kind against the corporation in question, or with a claim arising out of its affairs. Nor… is it conferred to enable an applicant for an order to pursue an enquiry into a matter in relation to which the applicant has no legitimate interest.[14]
[14](2004) 88 SASR 519, 531 [51] (‘Sandhurst Trustees’).
In Arrium, the Supreme Court of New South Wales Court of Appeal stated that:
…even if the examination was brought by an eligible applicant for its own purpose, that will not be foreign to the purpose for which the power was conferred if it can be shown that fulfilment of the purpose could confer a demonstrable benefit on the company or its creditors (and possibly on all its contributories).[15]
[15]Arrium 332 [140].
The ASIC authorisation application
In determining Mrs Spiridon’s predominant purpose in seeking the examinations,
it is instructive to consider Ashurst’s letter to ASIC seeking authorisation. Ashurst’s letter sets out the background to the Loan including its “key terms” and the fact that the Lenders had issued a default notice. Ashurst estimated the outstanding amount owing under the Loan to be in excess of $10,000,000.
Ashurst then set out the outcome of their preliminary investigations into the business, property and affairs of Rominvest in the following terms:
We have uncovered the following which is of note:
(a)The terms of the loan …. show that the fees and charges (before accounting for any associated with an event of default) totalled at least $530,000 or roughly 15.5% of the principal amount. The effective ordinary interest rate on the loan was 26.82% per annum, and the effective default interest rate was 101.22% per annum. On its face, the interest and the charges may independently and collectively be considered to be extortionate.
(b)There is no visibility in relation to the referral or brokerage arrangements between Loan Market and the Lenders.
(c)There are a number of interrelationships between Secured Lending, Franquay Investments and CC Property Advisory as follows:
(i)Mr Frank Hageali is the sole director, company secretary and shareholder of Franquay Investments. He is also the managing partner, a director and shareholder of CC Property Advisory. Additionally, Mr Hageali is employed by Secured Lending as a director (which we understand is a title rather than a statutory corporate position),
(ii)Mr Hageali's business partner in CC Property Advisory, Mr Thomas Cranfield, is a director and shareholder in that entity. Additionally, he is employed by Secured Lending as an associate director (which we understand is a title rather than a statutory corporate position),
(iii)CC Property Advisory describes itself as "aligned with The Cor Cordis Group" on its website. In addition, Secured Lending is affiliated with Cor Cordis Pty Ltd (ACN 097 893 153) (Cor Cordis) by virtue of its shareholders (that are all ultimately controlled by directors and shareholders of Cor Cordis, and/or their spouses) and its directors (Mr Mark Hutchins and Mr Daniel Juratowitch), who are both directors and shareholders of Cor Cordis.
(d)It is unclear whether transparency was afforded to Rominvest regarding the effective interest rates and the fees and charges associated with the loan, and the necessity (or lack thereof) of the additional security obtained by the Lenders in the form of the personal guarantees and the Deed of Family Arrangement.
(e)It is also unclear whether the full nature of the relationship between CC Property Advisory and the Lenders was disclosed to Rominvest at the time of negotiating the loan.
The above was brought to the attention of the Liquidators. After careful consideration, the Liquidators have elected not to pursue the public examinations that this letter is regarding, in light of concerns over the sufficiency of Rominvest's assets to satisfy their costs.
We have formed the view that there are certain matters that might amount to, inter alia, significant breaches of the Corporations Act and the ASIC Act which ought to be investigated further. This has led our client to seek the authorisation to conduct the public examinations, in absence of the Liquidators doing so.
Ashurst continue by setting out the following information about the relevant Examinees:
Name
Role
Reasoning
Frank Hageali
Managing partner, a director and shareholder of CC Property Advisory.
Sole director, company secretary and shareholder of Franquay Investments.
Director (a title rather than a statutory corporate position) of Secured Lending.
Mr Hageali is the sole controlling mind of Franquay Investments, one of the controlling minds of CC Property Advisory and a senior member of the Secured Lending staff, and would be well-placed to provide insight into the interrelationship between the three entities generally, and specifically in regard to the loan.
Thomas Cranfield
Partner, director and shareholder of CC Property Advisory.
Associate director (a title rather than a statutory corporate position) of Secured Lending.
Mr Cranfield is one of the controlling minds of CC Property Advisory and a senior member of the Secured Lending staff, and would be well-placed to provide insight into the interrelationship between the Lenders and CC Property Advisory generally, and specifically in regard to the loan.
Gino Tabila
Associate director (a title rather than a statutory corporate position) of Secured Lending.
Mr Tabila was heavily involved in the negotiations between the Lenders and Rominvest, and would therefore be well-placed to provide insights into the application of Secured Lending's policies and procedures to the loan.
Mark Hutchins
Company secretary and a director of Secured Lending.
Registered liquidator
Mr Hutchins is one of the controlling minds of Secured Lending, and this in combination with his specific expertise as a registered liquidator position him to provide insight into the policies and procedures relating to the determination of interest, charges and brokerage fees and commissions on loans advanced by Secured Lending. He would also be familiar with the interrelationship between Secured Lending, Franquay Investments and CC Property Advisory, including the framework by which Secured Lending decides to engage CC Property Advisory and the basis of the relationship between the three entities. Mr Hutchins would also be familiar with the compliance (or otherwise) of Secured Lending with its regulatory obligations on both institution-wide and transaction-specific level.
Ashurst then go on to identify the following potential causes of action relevant to the Examinees:
At this early stage, we are of the view that there is a basis to investigate the above individuals in relation to the following claims held by Rominvest and/or its Liquidators:
(a)the loan terms, such as the number and amount of the charges and the interest rate, are collectively and individually unusual and extortionate. For example, by our calculations, when all of the default charges and fees are included and the default interest rate is applied, the total amount owing in relation to the initial loan has tripled over the period of two years and is now approximately $10,340,459.40. A reasonable person in Rominvest's position is unlikely to have entered the loan agreement with such circumstances in mind. There may be a claim against the Lenders that the loan is an uncommercial transaction and therefore voidable pursuant to section 588FD of the Corporations Act;
(b)…
(c)The lack of transparency [that] was afforded to Rominvest during the course of negotiating the refinance (including the requirement for additional security) may give rise to claims that the Lenders engaged in misleading and deceptive conduct as contemplated in sections 12DA or 12DF of the ASIC Act, and/or section 1041H of the Corporations Act; and
(d)For similar reasons to those detailed above, information about the Lenders dealings with Mrs Spiridon and her children, particularly in relation to the negotiation and execution of the Deed of Family Arrangement, may uncover information that lead to potential claims against the Lenders of unconscionable conduct in trade and commerce under section 12CB of the ASIC.
Under the heading “ASIC Requirements”, Ashurst addressed ASIC’s specific criteria required of all applicants for authorisation:
Are the examinations in the interest of Rominvest and its creditors?
Based on the decision in Re Excel Finance Corporation Ltd (Receiver and Manager Appointed); Worthley v England (1994) 52 FCR 69 (Re Excel Finance) we consider the examinations to be in the best interests of Rominvest and its creditors for the following reasons:
(a)the purpose of the examinations is to gather financial and other information which is relevant to the examinable affairs of Rominvest, to potentially form the basis of claims by Rominvest and/or the Liquidators. These claims may result in limiting or otherwise extinguishing a significant secured debt (approximately $10 million) that is alleged to be owed by Rominvest to the Lenders;
(b)all of Rominvest's creditors have an interest in the examinable affairs of Rominvest being further investigated and these investigations occurring in public; and
(c)the work undertaken by both Ashurst and counsel with regard to the proposed examinations is on a pro bona basis, and would not accumulate as a liability against Rominvest (and therefore does not prejudice the interests of Rominvest's creditors).
Is there a conflict of interest?
Based on Re Excel Finance, it is our view that there is no conflict of interest for our client in conducting the examinations for the following reasons:
(a) although our client is not a creditor of Rominvest, her purpose in bringing these examinations (as set out in 2.l(a)) is aligned with the interests of Rominvest and its creditors;
(a) as a former director of Rominvest, our client is bound by a number of statutory duties to assist the Liquidators in the winding up process, and is cognisant of her obligations in that regard. As Ashurst acts for Ms Spiridon on a pro bona basis, it affords her with the freedom to pursue the examinations in circumstances where it would otherwise financially burden the Liquidators;
(b) none of the potential conflict situations examined by Gummow, Hill and Cooper JJ in Re Excel Finance are present in these circumstances (see …. below); and
(c) the examinations are for a legitimate purpose (see below).
Are the legitimate purposes as to holding an examination as stated in Re New Tel Ltd (in liq); Evans & Anor v Wainter Pty Ltd (2005) 221 ALR 331 at para 252 satisfied?
We consider the legitimate purposes are satisfied. In this regard, we make the following five observations:
(a)First, an examination is designed to serve the purpose of enabling an eligible applicant to gather information to assist the eligible applicant progress the winding up of Rominvest. The information gathered as part of the proposed examinations may assist the Liquidators in taking steps to make financial recoveries for the benefit of Rominvest and its creditors.
(b)Second, it assists Rominvest for our client to gather further information that aids the accurate identification of the company's assets (both tangible and intangible) and liabilities, and to settle such liabilities where possible.
(c)Third, the purpose of an examination is to protect the interests of the creditors of the company. The sole purpose of seeking the examinations is to protect the interests of Rominvest's creditors by seeking to uncover information regarding the refinance. This information has the potential to form the basis of a claim against the Lenders that the loan is an uncommercial transaction and therefore voidable.
(d)Fourth, it serves the purpose of enabling evidence and information to be obtained to support the bringing of proceedings against examinable officers and other persons in connection with the examinable affairs of Rominvest. Evidence sought by [Mrs Spiridon] in the examinations will be used solely for the purpose of informing and supporting Rominvest and/or the Liquidators in potentially pursuing financial recoveries.
(e)Fifth, public examination assists in the regulation of corporations by providing a public forum for the examination of examinable officers of corporations. The conduct of the proposed examinees is potentially of interest to corporate regulators. A public forum such as the proposed examinations enables such conduct to come to the attention of the regulators.
Are there matters personal to Mrs Spiridon or relationships between Mrs Spiridon and proposed examinees ASIC should consider based on the decision of Ryan v ASIC [2007] FCA 59?
Notwithstanding Mrs Spiridon is a former director of Rominvest, Ms Spiridon has had very limited dealings with some of the proposed examinees. At the time Rominvest refinanced with Secured Lending, Mrs Spiridon was a 56 year old widow who did not speak English as her native language and did not consider herself fluent in English (either in writing or verbally).
To the extent Mrs Spiridon had any dealings with the proposed examinees, these dealings were on a strictly arms' length and usually via an advisor (such as Loan Markets). They do not amount to any form of personal relationship or personal matter that needs to be drawn to the attention of ASIC.
As noted in section 1.1, Mrs Spiridon is a party to a number of arrangements which provided additional security to the Lenders with regard to the loan. The circumstances of these arrangements are, amongst other things, some of the examinable affairs of Rominvest that the proposed examinations are concerned with. However, in our view, our client's interests align squarely with the creditors of Rominvest such that this interest does not reflect any sort of conflict.
Is the examination being used for a collateral purpose as described in Ryan v ASIC [2007] FCA 59 and Re New Tel Ltd (in liq); Evans & Anor v Wainter Pty Ltd (2005) 221 ALR 331?
As mentioned above, the purpose of the proposed examinations is to uncover information about the examinable affairs of Rominvest, which may form the basis of claims by the Liquidators that might result in financial recoveries. Most notably, the information obtained via the examinations may result in a successful claim by Rominvest that the loan was an uncommercial transaction and therefore voidable. As a result, the Lenders will not have a provable claim as secured creditors in the liquidation.
If this is the case then it is possible that all unsecured creditors will be paid in full and there may even be a return to the shareholders.
The examinable affairs including a number of potential breaches of the Corporations Act and the ASIC Act, and if proven, might return a substantial sum to Rominvest for the distribution to its creditors in its winding up. To the extent that the need for litigation should arise and be consistent with the Liquidators' duties, such litigation may be contemplated in the future.
The submissions on improper purpose
The Examinees argue that Mrs Spiridon’s real interest is to have her personal guarantee either set aside or not enforced and that any stated interest in Rominvest’s potential causes of action against the Lenders is secondary in nature. Further they argue that because Mrs Spiridon’s interest in Rominvest is secondary, her predominant purpose in seeking the examinations must be personal and therefore an abuse of process.
The Examinees advance four points to support their contention.
First, the Examinees say that the application to ASIC was made by a guarantor who will be the defendant in the Lenders’ claim calling on her guarantee. This, say the Examinees, is to be contrasted to the more usual applications to ASIC brought by receivers.
Second, the Examinees say that there is an insufficient connection between the examinations and the alleged benefit to the corporation, its contributories or its creditors. The Examinees say that this compels the conclusion that the examination would be used for the benefit of the corporation, its contributories or its creditors ‘in the most indirect way’ as described in Re Excel Finance Corp Ltd (rec & mgr apptd); Worthley v England (1994) 52 FCR 69. In this regard the Examinees rely on statements contained in the affidavit filed in support of the application for the examination summonses including the following:
We are looking to see not only if there are potential causes of action with respect to the Loan, but also whether the Lenders have breached other legislative and regulatory obligations. This will be informative to the Liquidators, and consistent with their obligations to report such breaches to ASIC. In these circumstances, there may well be breaches of the Corporations Act, ASIC Act and other legislative and regulatory instruments. This matter may reveal broader, systemic breaches by these entities because of the arrangements between the Lenders and CC Property Advisors, and the commission and fee structure used.
Third, the Examinees point to the Mrs Spiridon’s submissions that she stands to benefit from the proposed examinations:
‘… it is a legitimate purpose to order these examinations to enable evidence and information to be obtained in support of a potential proceeding against examinable officers and other persons in relation to the affairs of the corporation, and that if that is the primary purpose of the examination, the fact that there may also be a benefit to creditors or contributories like Mrs Spiridon from the primary purpose of the examination is not a reason not to order the examinations’.
Fourth, the Examinees say that the liquidators have conducted investigations and reported to creditors that there are no potential proceedings against examinable officers and other persons in relation to the affairs of Rominvest and that the liquidators have elected not to pursue the examinations because they are inadequately funded. This, the Examinees submit, compels the conclusion that, notwithstanding Mrs Spiridon’s identification of potential causes of action to ASIC, no such potential proceedings exists.
Mrs Spiridon says that the Court should reject the Examinees’ contention that her predominant purpose is to obtain information to defend proceedings by the Lenders against her as guarantor. Mrs Spiridon says that, at the time of seeking the summonses, she was unaware of whether the Lenders intended to enforce the guarantee. In addition Mrs Spiridon says that the Examinees have not identified any information which she may obtain through the public examination which is solely of benefit to her in resisting a claim under the guarantee.
In support of her contentions Mrs Spiridon points to correspondence from the Lender’s legal representatives dated 20 July 2020 to the effect that the Lenders had not called upon Mrs Spiridon’s guarantee and would assess their position in relation to the guarantee only after the sale of the Dandenong Property. Mrs Spiridon says that she only became aware that the Lenders intended to enforce the guarantee through a statement to that effect in an affidavit filed by the Examinees in support of their application to have the summonses set aside.
Analysis
In her application to ASIC to become an eligible person, Mrs Spiridon identified four potential causes of action:
(a) that the loan contravened the unfair loan provision in s 588FD of the Act (which would entitle Rominvest to avoid the loan);
(b) that the loan contravened the uncommercial dealing provision in s 588FB of the Act (which would also entitle Rominvest to avoid the loan);
(c) that the loan agreement was entered into in reliance on misleading or deceptive conduct by the Lenders (which may lead to an award of damages in favour of Rominvest or to an order setting the loan agreement aside); and
(d) a claim in negligence against CC Property Advisory (which may also lead to an award of damages in favour of Rominvest).
An exploration of each of these potential causes of action would be of direct benefit to Rominvest and to Mrs Spiridon. If Rominvest is successful in having the Loan set aside its liabilities will be substantially reduced with a consequential increase in the return to creditors. Mrs Spiridon, as a guarantor, has a personal interest in ensuring that the Lenders do not call upon the guarantee. One means of achieving this goal is for the loan to be set aside. In this sense, her interests align with the interests of Rominvest and are dependent on Rominvest’s success in having the loan set aside.
I am not satisfied that Mrs Spiridon’s status as a guarantor indicates an improper purpose particularly where the guarantors’ interests align with the interests of Rominvest. As Mrs Spiridon submitted, the examinees have not identified any information sought by Mrs Spiridon which would be to her sole benefit of the guarantors. The fact that the examinations are sought by a guarantor and not the liquidator or a receiver is, however, a reason for the Court to exercise vigilance and care in the conduct of the examination.[16]
[16]Hong Kong Bank of Australia v Murphy (1992) 28 NSWLR 512, 519.
Similarly, that Mrs Spiridon drew the Court’s attention to the fact that the proposed examination would likely also be of benefit to her does not compel a finding that the examination is sought for an illegitimate purpose. This is simply a consequence of the obligation of full and frank disclosure on a party seeking examination summonses. Mrs Spiridon’s potential benefit is aligned with and dependent on the benefit to Rominvest from the examinations.
The Examinees say that the illegitimate purpose can be inferred because Mrs Spiridon is a guarantor and knows that the enforcement of her guarantee is imminent.
At the time the examination summonses were sought the Lenders were equivocal about whether they would seek to enforce Mrs Spiridon’s guarantee. True, the Lenders had refused Mrs Spiridon’s invitation to confirm that they would not enforce her guarantee, but they did so in terms that made clear that the Lenders would not make a decision about enforcement until after the sale of the Dandenong Property.
This weighs against the contention that Mrs Spiridon’s predominant purpose in seeking the examination is to obtain information to defend the enforcement proceeding. The fact that the Lenders have subsequently confirmed their intention to enforce the guarantee does not alter Mrs Spiridon’s predominant purpose in seeking the examination.
If the only purpose identified by Mrs Spiridon for seeking the examinations was to identify the Lenders’ possible breach of legislative or regulatory obligations so as to assist the liquidator to meet its obligation to report such breaches to ASIC, I would be more sympathetic to the Examinees’ submission that such an examination would benefit Rominvest, its contributories and creditors in only the most indirect way. However, as discussed above, Mrs Spiridon has identified four potential causes of action as her basis for seeking to examine the Examinees. Those causes of action could result in limiting or even extinguishing a significant secured debt owed by Rominvest. Public examinations that inform Rominvest’s liquidators’ consideration of those potential causes of action must be of benefit to Rominvest and its creditors. The benefit to Mrs Spiridon as guarantor is dependent on the benefit to Rominvest.
I am not convinced that I should place substantial weight on the fact that the liquidators’ investigations as communicated to creditors in their Statutory Report did not identify any viable voidable transactions. The liquidators’ Statutory Report also states that its investigations into any unfair loans are ongoing and that it intends to attend the examinations to observe and “consider whether any information is relevant to our evaluation of a potential unfair loan action”. The fact that the liquidators have insufficient funds to pursue the examinations in their own right does not mean that litigation funding may not be secured should relevant information come to light through the examinations.
Finally, in oral argument the Examinees contended that, in determining Mrs Spiridon’s purpose in seeking the examinations, the Court should ask itself whether Mrs Spiridon would be issuing the summonses if she were not a guarantor under the Loan. The Examinees argue that if the answer to this question is yes, it reveals that Mrs Spiridon’s ‘true purpose’ is personal and not for the benefit of Rominvest or its creditors. In my view this is not a productive submission and is likely to obscure the test laid down in the authorities cited above. The authorities recognise that creditors may have a personal motivation for seeking examinations and that will not be determinative of an improper purpose, particularly where there will also be benefit to Rominvest.
The scope of the summonses
The Examinees argue that, in their present form, the summonses are oppressive and should be confined. The Examinees say that the current terms of the summonses would return over 10,000 pages of documents which would need to be reviewed for potential privilege claims by both the Examinees and their solicitors before they could be produced to the Court.
The Examinees point out that, in the affidavit filed by Mrs Spiridon in support of its application for the summonses, the categories of documents sought were confined by reference to the potential claims of an unfair loan, uncommercial transaction, unconscionable conduct or misleading and deceptive conduct. This contrasts with the terms of the summonses issued to the Examinees which, the Examinees point out, are not so confined. I would note here that it is not unusual for summonses for production of documents not to indicate the potential causes of action that are sought to be explored by an examiner.
The unduly broad nature of the terms of the summonses is illustrated, the Examinees contend, through the following (non-exhaustive) examples:
(a)Paragraph 10 requires the production of any file notes, documents or other records maintained by staff, directors or shareholders of Secured Lending, Franquay Investments or CC Property Advisory regarding Rominvest, the Loan, arrangements between either or both of the lenders and Loan Market or arrangements between either or both of the Lenders and CC Property Advisory. That category is exceptionally broad. It is not confined by reference to date. Apart from the loose ‘arrangements’, it is not confined by reference to topics;
(b)The categories of documents ‘relating to the lending services of the Lenders’ are not confined by date, and they are not confined by topic; and
(c)There is no explanation in the [Plaintiff’s affidavit in support of its application for the summonses] for the categories seeking production of debt collection policies, hardship and postponement policies, financial claims scheme or “Anti-Money Laundering policies”. The allegations made by the Guarantor concern allegedly excessive rates of interest, misleading and deceptive conduct, unconscionable conduct and negligence. No factual basis to these categories has been set out, and their relationship to those potential claims is unclear. There is reference to the Lenders ‘requiring’ the family of the Guarantor to enter into a deed of family arrangement, but no particular conduct complained of.
Mrs Spiridon submits that categories 10 and 11 seek documents relevant to the core issue the subject of Mrs Spiridon’s summonses and that production of 967 documents using a document production database is not oppressive.
In his affidavit affirmed on 9 November 2020 Mr Hutchins says that Secured Lending has searched its business records and identified all of its files that contain documents potentially responsive to the summonses served on the Examinees. In relation to the documents sought in category 10, Mr Hutchins says that Secured Lending has no documents to produce other than in relation to the Loan where it has identified 450 emails and 517 documents, totalling approximately 8200 pages. In relation to the categories of documents relating to the lending services of the Lenders, Mr Hutchins states that Secured Lending has identified one operations manual, one disclosure statement and one document relevant to its anti-money laundering policies.
The operations manual includes material on Secured Lending’s debt collection policies but Secured Lending has not identified any documents responsive to the category of ‘any hardship and postponement policies’.
While not confined by date or topic the documents sought in category 10 relate to the Loan and the arrangements between the Lenders, the broker and CC Property Advisory. In my view these are themselves confined subjects and I note that in relation to the arrangements between the Lenders, the broker and CC Property Advisory, Secured Lending has no documents to produce.
On the basis of the information before the Court I am not satisfied that the Examinees’ requirement to analyse the documents for potential privilege and other claims is oppressive. In reaching this view I have had regard to the fairly limited number of documents involved and the fact that the category that has returned the most potential documents is central to the causes of action sought to be explored by Mrs Spiridon.
Conclusion
For the reasons outlined above the Examinees summons dated 14 October 2020 is dismissed. I will order that the Examinees pay Mrs Spiridon’s costs on a standard basis.
SCHEDULE OF PARTIES
| S ECI 2020 03628 | |
| BETWEEN: | |
| THOMAS CRANFIELD | First Applicant |
| FRANK HAGEALI | Second Applicant |
| MARK HUTCHINS | Third Applicant |
| GINO TABILA | Fourth Applicant |
| - v- | |
| STEFANIA SPIRIDON | Respondent |
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