Saint v Macks No. Scgrg-95-1021 Judgment No. S264

EMANUEL INVESTMENTS PTY LTD (IN LIQUIDATION);
SAINT & ANOR V MACKS

[1999] SASC 264

JUDGE BURLEY. On 7 October 1998 I made orders pursuant to Section 596B of the Corporations Law (the Law) that Anthony John Saint and Anthony Francis Johnson be summonsed to attend before the Court to be examined in respect of the examinable affairs of Emanuel Investments Pty Ltd (In Liquidation) and to produce certain documents.
By applications respectively dated 20 October 1998 and 21 October 1998, Mr Johnson and Mr Saint have applied to set aside the orders for examination and for production of documentation. At the hearing of the two applications, Mr Hayes QC appeared for Mr Saint, Mr Beazley for Mr Johnson, and Mr M Rice for the liquidator.
It was not disputed that the purpose of the examination was to obtain by way of oral evidence and production of documents details of any relevant professional indemnity insurance held by the firms of which each of the examinees were respectively partners. The liquidator wished to obtain this information because other members of the respective firms had been joined in proceedings brought by the liquidator and the liquidator wished to make an assessment of the extent to which the legal practitioner defendants would be able to satisfy any judgment which the liquidator might obtain against them.
It was accepted by the examinees that there was abundant authority which enabled a liquidator to obtain such information where the liquidator was pursuing complicated and expensive litigation against individuals of limited resources: see, for example, Gerah Imports Pty Ltd v The Duke Group Ltd (In Liq) (1993) 12 ACSR 513 and (1994) 68 ALJR 196 at 198; Grosvenor Hill (Qld) Pty Ltd v Barber (1994) 12 ACSR 646 and Flanders v Beatty (1995) 16 ACSR 324. By obtaining such information, a liquidator is able to make an assessment as to whether or not litigation against such individuals ought to be continued which, in turn, protects the interests of creditors because inevitably the costs of the proceedings maintained by the liquidator would have to be paid for out of the company’s assets or by creditors who agree to indemnify or assist the liquidator in respect of the costs of the proceedings: Hamilton v Oades (1989) 166 CLR 486 at 497.
Mr Hayes contended that the examination orders ought to be set aside for the following reasons:
......... That there was a material non-disclosure on the application for the examination orders.
......... That the application for the examination orders constituted an abuse of process.
Mr Beazley contended that the discretion to set aside the orders ought to be exercised in favour of Mr Johnson because the confidentiality of the subject matter of the examinations should prevail whatever benefit (if any) might accrue to the liquidator.
The grounds of opposition to the examination orders advanced by Mr Hayes are centred upon the fact that the liquidator, in maintaining the proceedings against the legal practitioners and others, has obtained funding in respect of the costs of those proceedings independently of any assets of the company available to the liquidator and of any contribution by any of the creditors. It is common ground that none of the creditors of the company was prepared to indemnify the liquidator in respect of legal costs and that the liquidator is not otherwise using assets of the company to meet that liability, if, indeed, there are assets available for that purpose. The method of funding the Supreme Court actions has been approved by the Federal Court where the orders for winding up were originally made: see Re Addstone Pty Ltd (In Liquidation), unreported decision of Mansfield J, delivered on 8 December 1998.
It was submitted by Mr Hayes that there are two consequences of the entering into the funding scheme which require this Court, as a matter of the exercise of its discretion, to set aside the examination orders: first, the fact that the interests of the creditors and the assets of the company are not affected by the continuance of the Supreme Court proceedings against the legal practitioners and others because the liquidator is covered for costs by the funding scheme itself; and, second, one of the entities funding the costs in respect of the Supreme Court proceedings is an insurer who is also the professional indemnity insurer of the firms of solicitors of which both the examinees and the legal practitioners who have been sued are respectively members.
Mr Hayes informed me that Thomsons intended to take proceedings against the liquidator and the GIO Group (the company which is both a participant in the funding scheme and the professional indemnity insurer (in part) of the legal practitioners who have been sued) with a view to obtaining orders of the Court including an injunction restraining GIO Insurance Limited from participating in the funding scheme. A draft of the proposed statement of claim was provided to me during the course of the hearing. At the date of hearing, those proceedings had not been commenced, but it was submitted that at the very least, I should, on this application, stay the examination order until such time as Mr Saint and his proposed co-plaintiffs have the opportunity to obtain a final order precluding GIO Insurance Limited from participating in the funding scheme.
Before proceeding to deal with the grounds of opposition advanced by the examinees, it is necessary to recount the background facts to the applications. In March 1998 the Emanuel Group of Companies and the liquidator brought proceedings against 16 legal practitioners who practised under the name “Thomsons Barristers and Solicitors” and against Thomson Simmons Holdings Pty Ltd in this Court (Action No 409 of 1998). They also brought an additional action (Action No 410 of 1998) against 4 legal practitioners who practised under the name “Johnson Winter and Slattery”. In Re Addstone Pty Ltd (In Liquidation) Mansfield J referred to the Supreme Court actions as follows (at 7):-
“As the respective statements of claim in the Supreme Court actions show, the allegations in each are in essentially the same terms. The background to the allegations in the Supreme Court actions is set out in some detail in my reasons of 9 June 1998 in the earlier matter. Thomsons and Johnson Winter & Slattery are alleged to have been variously involved in an arrangement progressively made in the period November 1994 to March 1995, to resolve a dispute which had by then developed between the Emanuel Group of Companies on the one hand and the EFG Group, effectively its financiers, on the other hand. The scheme involved, according to the allegations, an acknowledgment by the Emanuel Group of Companies of indebtedness to the EFG Group, the transfer of its assets to the EFG Group, and in exchange the execution on 17 March 1998 of a Deed of Forebearance and Release and separately on the same date a deed whereunder certain additional payments were made to interests associated with directors of the Emanuel Group of Companies to defeat or interfere with the rights of the creditors of the Emanuel Group of Companies. It is alleged that the arrangement overall effectively put the interests of the EFG Group ahead of the creditors generally of the Emanuel Group of Companies, and at the same time the Emanuele family effectively advanced its own interests improperly. Those issues overlap with, but are more confined than, the causes of action against EFG and others previously the subject of my order of 9 June 1998. It is alleged that the implementation of that overall arrangement included a consent judgment in favour of EFG for about $182,000,000 to reflect an alleged debt, and to the execution of the Deed of Forebearance and Release and other documents on 17 March 1995. On that date, certain monies were paid totalling some $6,000,000. The alleged roles of Thomsons and Johnson Winter and Slattery are detailed in the Supreme Court actions. It is alleged, in particular, that persons associated with the Emanuel Group of Companies committed breaches of fiduciary and statutory duties by their directors with the support of Thomsons and Johnson Winter and Slattery. It is also alleged that those creditors were in breach of their duty of care owed by virtue of their professional relationship with the Emanuel Group of Companies. Consequently, it is alleged that the Emanuel Group of Companies is entitled as against Thomsons and against Johnson Winter and Slattery to recover by way of damages the amounts paid under the Deed of Forebearance and Release dated 17 March 1998 and other monies. Those payments include $3.3 million paid to Simionato Holdings Pty Ltd (In Liquidation), $700,000 to Johnson Winter and Slattery, $400,000 to Thomsons, and certain other payments. In respect of the money paid direct to the respective solicitors, it is also alleged that each payment constitutes a voidable transaction by virtue of s 588FB, and an unfair preference by virtue of ss 588FA and 588FE of the Law and is recoverable under s 588FF of the Law.”
In March 1998 the liquidator commenced negotiations with the Chief Professional Indemnity Underwriter of GIO, Mr Fletcher, for the purposes of obtaining funding for the Supreme Court actions. In August 1998 the liquidator applied to the Federal Court for approval of the funding arrangement. In Re Addstone Pty Ltd (In Liquidation) Mansfield J described the funding arrangement as follows (at 8):-
“The Funding Arrangement comprises the following documents:
A...... Loan Facility Agreement;
B...... Deed of Charge/Insurance Policy;
C...... Solicitor/Client Agreement; and
D...... Agency Agreement.
The Funding Arrangement can briefly be described as follows: The loan facility is to be provided by a bank to pay the applicant’s expenses and his legal expenses incurred in conducting the Supreme Court actions. Under the Insurance Policy, an insurer will insure the repayment of that loan facility in the event that the Supreme Court actions are unsuccessful. The insurer will charge a premium, which depending upon the way in which the Supreme Court actions ultimately proceed, will be either 30 or 35 per cent of the net recoveries made in those actions, subject to certain adjustments, which for present purposes, are not of moment. There is no obligation under the Funding Arrangement to transfer or assign the causes of action. What is being assigned is, in effect, part of the proceeds of the Supreme Court actions.
... Under the Loan Facility Agreement the bank is to make available to the applicant and to the Emanuel Group of Companies a loan facility, up to a specified sum, together with a guarantee facility in relation to the Supreme Court actions. The loan facility is also to be used to pay an insurance premium for the Insurance Policy as well as the applicant’s legal and related expenses in the conduct of the Supreme Court actions which are payable under the Solicitor/Client Agreement, any legal costs which the applicant personally is ordered to pay, any legal costs which the Emanuel Group of Companies is ordered to pay into Court as security for costs, and the applicant’s remuneration and expenses in the conduct of the Supreme Court actions. ...
The Insurance Policy is between an insurer and the applicant. It insures the applicant and the Emanuel Group of Companies, and the bank nominated in the Loan Facility Agreement, in relation to the obligations under the Loan Facility Agreement. It also insures the bank in relation to the obligations of the applicant and the Emanuel Group of Companies towards it. It also insures the applicant and the Emanuel Group of Companies against liability for legal and related expenses under the Solicitor/Client Agreement in the event that there are such expenses that are not discharged when the loan agreement comes to an end, and also against any personal liability for costs in the Supreme Court proceedings which are not discharged when the loan agreement comes to an end. The premium is the percentage of the net recovery in the Supreme Court actions referred to above. ...
The Insurance Policy specifically provides that the applicant and the Emanuel Group of Companies must obtain the approval of the insurer in relation to critical decisions concerning the conduct of the proceedings: applying for a trial date, briefing counsel on trial, settling or discontinuing the Supreme Court actions, or appealing against any final judgment. There is also an obligation to provide certain information to the insurer in the course of conducting those proceedings.”
It is clear that if the funding arrangement had not been approved by Mansfield J, the plaintiff would not have been in a position to continue the Supreme Court actions.
I turn to a consideration of Mr Hayes’ submission that the examination orders should be set aside because, on the application by the liquidator for those orders, he failed to disclose adequately or at all in relation to the funding scheme the fact that the insurer who participated in the funding scheme was also the professional indemnity insurer of the legal practitioner defendants.
The duty to make full disclosure to the Court on an application for an examination order was considered by Lander J in Re Southern Equities Corporation Ltd (In Liquidation); Bond & Another v England (1997) 25 ACSR 394. His Honour said (at 422-423):-
“An application for an examination summons is made ex parte. Consequently there is a heavy obligation upon a person applying for the examination summons to make full and frank disclosure of all matters which may impact upon the decision to summon a person for examination about a corporation’s examinable affairs.
There can be no doubt, in my opinion, that a person who makes an application of this kind is under an obligation to bring all facts and material to the Court’s attention which might bear upon the order to be made. The applicant has no lesser obligation than that imposed upon a party seeking an injunction ex parte. Indeed, in my opinion, the obligation for frankness and candour is even greater in an application of this kind. That is because, unlike on the return of an interlocutory injunction obtained ex parte, on the return of an examination summons the material supporting the application is not ordinarily made available to the proposed examinee.
Because the proposed examinee, ordinarily, is not privy to the information or material which was used to support the application for the examination summons, the person applying for the examination summons has the very highest obligation relating to frankness and candour and any breach of that obligation, in my opinion, ought to be viewed very seriously by the Court.
The obligation is to provide to the Court all material which might impact upon the order sought, including all material which might lead the Court to refuse the application. The applicant must act in the place of the proposed examinee and therefore draw to the attention of the Court anything which might lead the Court to refuse the application.
If an applicant fails to provide all of the information bearing upon the order sought, in my opinion, that might be sufficient ground to set aside the order, because the order will have been obtained in circumstances where the Court has not been apprised of a reason or reasons for the refusal of the order.”
It is clear that before the application for an examination order was made, the liquidator was aware that the insurer participating in the costs funding arrangement was also one of the professional indemnity insurers of the legal practitioner defendants. There had been correspondence between the liquidator’s solicitors and the solicitors for the Thomson defendants in which reference was made to the conflict of interest which arose where the insurer was both supporting the litigation brought by the liquidator and liable to indemnify the legal practitioner defendants.
The insurer’s position was that any conflict could be adequately dealt with by the erection of a “Chinese wall” so that information available to the insurer in its capacity as professional indemnity insurer, did not come to the attention of the insurer in its capacity as the insurer of the cross-funding scheme arrangement. It was also said that GIO as one of the professional indemnity insurers would abide by the decisions taken by the other insurers in relation to the conduct of the legal proceedings so as to minimise the chance of information being disclosed to GIO in its capacity as the insurer of the costs funding arrangement. From the correspondence between the parties during 1998, it appears that the Thomson defendants may have been satisfied with the putting in place of the appropriate “Chinese wall”. Prior to 8 December 1998, when Mansfield J approved the funding arrangement, they made no mention before him of the complaints raised before me.
On the hearing of those applications, Mr Hayes did not accept those proposed arrangements as being sufficient. In addition, he argued that GIO was in breach of the duty of utmost good faith as referred to in Section 13 of the Insurance Contracts Act 1984 (Cth). As a result, the Thomson defendants intended to take action in this Court against the GIO Group as referred to earlier in these reasons.
It was submitted by Mr Rice, counsel for the liquidator, that Mr Saint could not now be heard to complain that the funding arrangement was tainted with the alleged conflict of interest and breach of duty relied upon by Mr Saint because the Thomson defendants were represented on the application before Mansfield J for approval of the funding arrangement in respect of the proceedings against the Thomson defendants and no submission was put to Mansfield J by the Thomson defendants that the scheme should not be approved because of the alleged conflict of interest and breach of duty. I think there is some substance to this submission. It is true that his Honour only permitted the Thomson defendants to be heard on the application for the approval of the funding arrangement in their capacity as creditors as opposed to their capacity as defendants in the Supreme Court action, but the fact is that the Thomson defendants sought to be heard on the application before Mansfield J in both capacities, yet no submission relating to conflict of interest or breach of duty insofar as GIO was concerned was put by them. In my view, the failure of the Thomson defendants to raise these matters before Mansfield J must preclude Mr Saint from relying upon an alleged material non-disclosure because the proper time to raise such an argument was before Mansfield J. Their failure to do so, in my view, takes the materiality out of the non-disclosure.
The second ground relied upon by Mr Saint consists of the submission that the application for the examination order constituted an abuse of process because, it was asserted, there is no need for the liquidator to obtain information about whether or not and, if so, to what extent the Thomson defendants were covered by professional indemnity insurance. It was submitted that the examination of Mr Saint would not produce any benefit to the creditors or have the effect of enabling the liquidator to make decisions as to the best way in which to realise the assets under his control. This was so, it was argued, because it was not in doubt that the liquidator would continue the Supreme Court proceedings against the legal practitioner defendants because he had a funding arrangement in place which enabled him to prosecute those actions to their conclusion. The only benefit that could then be said to arise was one to GIO and, it was contended, an examination for such a purpose was not contemplated by the case law.
It is clear that the statutory powers for examination may not be used for purposes foreign to those for which the power is conferred: Flanders v Beatty (1995) 16 ACSR 324 and Re Excel; Worthley v England (1994) 52 FCR 69. If the power to conduct examinations is used for vexatious or oppressive purposes it amounts to an abuse of the process of the Court: Re Hugh J Roberts Pty Ltd [1970] 2 NSWLR 582. Where the examination procedure is used to assist a third party, that may constitute an abuse of the Court’s powers: Re Excel; Worthley v England (supra).

As I have mentioned earlier, it has been accepted by all parties that the examinable affairs of the company include investigation as to whether or not and, if so, to what extent the defendants to proceedings brought by the liquidator have a right of indemnity by way of insurance cover in respect of any liability established by the liquidator against such defendants: Gerah Imports Pty Ltd v The Duke Group (supra). In extending the concept of examinable affairs to embrace such matters, the Court recognises that the liquidator should not unnecessarily put at risk company assets or creditors’ funds in lengthy litigation against individuals of limited resources.
In light of these principles I think there is some substance to Mr Saint’s submission that the application for examination orders have been brought by the liquidator for a purpose not recognised by the law.
The assets under the control of the liquidator remain unaffected by the proposed examination except in the sense that the action against the legal practitioner defendants constitutes a chose in action which is property forming part of the liquidator’s administration. There are no creditors’ funds supporting the litigation. In these circumstances there does not appear to be a factual basis which supports the examination order against either Mr Saint or Mr Johnson and for that reason alone they should be set aside. But even if I am wrong in that view, I think the approach taken by Mr Johnson to the setting aside of the examination order made against him is an appropriate course to take in relation to both examinees.
Mr Beazley, on behalf of Mr Johnson, referred to Hamilton v Oades (supra) at 497 where it was said that the examination process fulfilled an important public purpose, namely, to enable the liquidator to gather information to assist in the winding up and protect the interests of creditors. He next submitted that the Court would take into account considerations of privacy and confidentiality and that these considerations may be sufficient to deny the making of orders for production of insurance policies. He relied upon Kelly v Murphy (1993) 12 ACSR 365, Re BPTC Ltd (In Liq) (1994) 14 ACSR 460 and Re GPI Leisure Corporation Limited (1994) 15 ACSR 282.
It seems to me when the principles expressed in those cases are applied to this case, that I am required to take account of the confidential and private nature of the professional indemnity insurance in existence between the legal practitioner defendants and GIO.
The confidentiality factor needs to be looked at in light of what the liquidator says is the purpose of the examinations of both Mr Saint and Mr Johnson. If the examinations are permitted to proceed, the examinees will be required to produce at the examinations all relevant documentation and to answer questions in relation thereto. It is difficult to see how this will be of use to the liquidator in relation to his administration given that he is funded in respect of the litigation against the legal practitioner defendants.
Mr Rice, for the liquidator, referred to the decision of Gleeson J in Hong Kong Bank of Australia Ltd & Ors v Murphy & Ors (1992) 28 NSWLR 512, where his Honour cited with approval the following passage from the judgment of Street J in Re Hugh J Roberts Pty Ltd [1970] 2 NSWR 582 (at 585):
“A liquidator needs information concerning his company just as much in connection with current or contemplated litigation as in connection with other aspects of its affairs. In using the statutory machinery of private examination he will in many cases be gathering evidence as an ordinary and legitimate use of this procedure. ...
In my judgment it is immaterial in basic substance whether the private examination is sought to be used by a liquidator to gather information in connection with proceedings he believes he might be able to bring, proceedings he contemplates bringing, proceedings he has decided to bring, and proceedings he has already brought. There is no presently relevant distinction in substance between gathering information referable to commencing proceedings and gathering information referable to continuing proceedings.”
As I understand Mr Rice’s submission, he relied upon that passage and the statements of principle in other cases to support the proposition that the purpose of the examination was paramount and that if the examination had other results beyond the stated purpose, that was not sufficient to support the setting aside of the examination order. That may well be a correct statement of principle but it is difficult to see how it applies to this case. It does not answer the question as to whether or not the purpose of the examination orders fulfils a legitimate need in relation to the liquidator’s administration. If the liquidator needs it for his own purposes, it is not apparent to me why, in the interests of the creditors, he needs the information. If he needs the information so that he can in turn pass it on to the insurer of the funding scheme, that purpose, as I have said, is not one contemplated by the cases. Nor do I think that the concept of “examinable affairs” should be extended to include such a requirement.
Mr Rice also submitted that the continuance of the litigation against the legal practitioners was in the interests of the creditors and that, in some way, lent legitimacy to the purposes to be served by the examinations. I cannot agree with this submission. There is no doubt that the continuation of the litigation is of vital concern to the creditors and to the liquidator’s administration as a whole, but nothing has been put to me to suggest that, if these examinations are not permitted to be pursued, the litigation will be abandoned. Indeed, the evidence is to the contrary given that the liquidator has an approved funding arrangement in operation.
Even if it is assumed that the liquidator would legitimately benefit from the examinations, the benefit, whatever it might be, cannot, in my view, require the examinees to produce the relevant documentation and be examined thereon because of the confidential nature of the subject matter of the proposed examination. In other words, considerations of privacy and confidentiality outweigh whatever otherwise legitimate purpose might be served by proceeding with the examinations.
For these reasons I consider that the examination orders ought to be set aside.
In arriving at the above conclusion I have not overlooked Mr Hayes’ submissions relating to the alleged breach of the utmost good faith said to arise from the fact that GIO is both the insurer of the funding scheme and the insurer of the legal practitioner defendants. It was submitted that, at the very least, I should stay the examination orders until such time as the Thomsons defendants were able to obtain a permanent injunction restraining the liquidator from proceeding with the Supreme Court action against those defendants. Because I have come to the conclusion that the examination orders ought otherwise to be discharged, I do not need to determine that point and I specifically refrain from doing so.

[1999] SASC 264

24 June 1999