Sandhurst Trustees Ltd v Harvey

Case [2004] SASC 157

SUPREME COURT OF SOUTH AUSTRALIA

(Full Court)

SANDHURST TRUSTEES LIMITED v HARVEY & ORS

Judgment of The Full Court

(The Honourable Chief Justice Doyle, The Honourable Justice Perry and The Honourable Justice Bleby)

8 June 2004

CORPORATIONS - SUPERVISION, REGULATION AND CORRECTION - EXAMINATIONS - SCOPE OF EXAMINATION

Appeal from a decision of a Master - the respondents where subject of orders for examination and production of documents - orders were made at the request of the appellant, trustee for noteholders - Master made orders setting aside orders for examination and production of documents - whether cause of action maintained by the appellant sufficient to support orders for examination - whether examination orders where supportable under s 596B of the Corporations Act - whether the terms of the trust deed preclude the appellant from applying for examination orders - appeal allowed - application made by the respondents setting aside examination orders dismissed.

Corporations Act 2001 (Cth) Div.1 Part 5.9, s 596A, s 596B, s 596B(1)(b), s 597(4), s 597(13), s 597(14A), s 588M(3); Corporations Law Division 4 Part 7.12, s 1052, s 1054; Corporations Law s 1056, s 1056(1)(d), s 1056(1)(e), s 1056(1)(f), s 1056(6), s 1056(6)(a), s 1057; Fair Trading Act 1987 (SA), referred to.
Hong Kong Bank of Australia v Murphy (1992) 28 NSWLR 512; Worthley v England; Worthley v Australian Securities Commission (1994) 52 FCR 69; Flanders v Beatty (1995) 15 ACSR 324; Re Hugh J Roberts Pty Ltd [1970] 2 NSWR 582; Hamilton v Oades (1989) 166 CLR 486; Douglas-Brown v Furzer (1994) 13 ACSR 184; New Zealand Steel (Australia) Pty Ltd v Burton (1994) 13 ACSR 610; New Cap Reinsurance Corporation Holdings Limited and the Corporations Law [2001] NSWSC 835, discussed.
Re GPI Leisure Corporation Ltd (In liq) (1994) 53 FCR 365; Re Italo-Australian Centre (1999) 30 ACSR 388, considered.

SANDHURST TRUSTEES LIMITED v HARVEY & ORS
[2004] SASC 157

FULL COURT:       Doyle CJ, Perry and Bleby JJ

  1. DOYLE CJ       On 23 June 2003 orders were made under s 596B of the Corporations Act 2001, on application by Sandhurst Trustees Ltd (“Sandhurst”) for the examination of Ms Flower and Mr Harvey, and for the production by them of certain documents. Ms Flower and Mr Harvey are employees or members of the firm Deloitte Touche Tohmatsu (“Deloitte”), a firm of chartered accountants and auditors. An order was also made that Deloitte produce certain documents. For convenience, I will refer to Ms Flower, Mr Harvey and Deloitte as the examinees. The orders made were for their examination in respect of the examinable affairs of Normans Wines Limited (Receivers and Managers appointed) (in Liquidation) (“Normans”).

  2. The examinees applied for an order setting aside those orders.

  3. A Master made that order, on the grounds that Sandhurst was not authorised by the provisions of a trust deed, under which it acted, to apply for examination orders, or by implication, to proceed with the examination.

  4. Sandhurst has appealed against that decision.

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AGLC
Sandhurst Trustees Ltd v Harvey [2004] SASC 157
Case
[2004] SASC 157
Decision Date

CaseChat Overview and Summary

The appeal in Sandhurst Trustees Ltd v Harvey involved a dispute regarding the scope of the court's power under s 596B of the Corporations Act to order an examination. The appellant, Sandhurst Trustees Ltd, sought orders for examination and production of documents from the respondents, who were subject to the orders at the request of Sandhurst. The Master had previously set aside these orders, leading Sandhurst to appeal the decision. The primary legal issues were whether the appellant's cause of action was sufficient to support the examination orders, whether the orders were supportable under s 596B of the Corporations Act, and whether the terms of the trust deed precluded the appellant from applying for examination orders.

The court considered whether Sandhurst's application for examination orders constituted an abuse of process. It was noted that applications for examination orders are often brought for collateral purposes, such as assisting in the making of decisions about potential proceedings against a corporation. However, the court emphasized that a collateral purpose does not necessarily equate to an abuse of process. The authorities cited indicated that the purpose of an examination order need not be limited to benefiting the company or its creditors. Instead, the focus is on whether the application serves a legitimate object. In this case, the court found that Sandhurst's application was not an abuse of process and that the orders were necessary to assist in determining potential claims against Deloitte, the auditor of Normans.

The appeal was allowed, and the order by the Master setting aside the examination orders was set aside. The application by the respondents to set aside the orders was dismissed. The court's decision underscores the broad powers available under s 596B of the Corporations Act and the importance of considering the legitimate objectives of an application for examination orders. The final orders reflected the court's determination that the examination orders were necessary and appropriate in the context of the potential claims against Deloitte.

Orders

Orders of the court

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Background

Background to the litigation

The appeal raises questions as to the scope of the court’s power under s 596B of the Corporations Act to order an examination, and as to the application of that provision in the particular circumstances of the case. I defer a more precise statement of the issues until I have outlined the circumstances of the case.Facts Normans was a wine maker and bottler of wine. Deloitte was its auditor. In 1999 Normans proposed to invite members of the public to subscribe for convertible unsecured notes, and to issue a prospectus in connection with that invitation. By s 1052 of the Corporations Law that meant that Normans had to appoint a trustee for holders of those notes, pursuant to a trust deed that met the requirements of s 1054 of the Corporations Law. The duties of such a trustee are set out in s 1056 of the Corporations Law. Putting it very generally, the duties of the trustee are to protect the interests of debenture holders. In the present case, that meant the interests of persons who subscribed for the unsecured convertible notes. Normans entered into a deed with Sandhurst, described as a “Convertible Note Trust Deed” (“the deed”). The deed was made on 1 July 1999. It is intended to satisfy the requirements of the Corporations Law. The deed provides that Normans may issue convertible notes in accordance with and subject to the deed from time to time: clause 3.1. Normans offered convertible unsecured notes to the public on 5 August 1999, accompanied by a prospectus dated 12 July 1999. Members of the public subscribed for the notes, paying $12 million in all. Normans went into liquidation in 2001. There appears to be no prospect of the note holders recovering all of the money owed to them. The noteholders represent about 40 per cent by value of Normans’ creditors. In September 2002 Sandhurst instituted proceedings in this court against Deloitte. Sandhurst filed a detailed Statement of Claim. The proceedings have not yet been served on Deloitte. The proceedings were issued to avoid the expiry of a limitation period. The Statement of Claim is lengthy. I will do my best to summarise it. Sandhurst alleges that Normans engaged Deloitte to audit Normans’ accounts, to audit financial statements and reports required of Normans under the deed, and to express an opinion for the purposes of the prospectus referred to above as to whether anything had come to Deloitte’s attention that would indicate that any events subsequent to the most recent financial report were not properly disclosed in the draft prospectus, and whether anything had come to Deloitte’s attention that would indicate that Normans did not have “adequate forecast cash flows” to meet its interest obligations. Sandhurst alleges that Deloitte owed a duty of care to Sandhurst, as trustee of the deed, because Deloitte knew that as trustee Sandhurst would have to and would rely on Deloittes in the performance of Deloitte’s audit function, and in the provision of the reports and opinions referred to. Then Sandhurst alleges that due to errors and omissions and failures by Deloitte, there were errors in the audited accounts, and that Deloitte was in breach of its duties by providing unqualified audit opinions and by failing to report matters that required comment in relation to the prospectus, with the result that the prospectus was misleading. Sandhurst alleges that in consequence of Deloitte’s breaches of engagement and in consequence of Deloitte’s breach of duty, Sandhurst “did not take steps to prevent the issue of the convertible unsecured notes.” Sandhurst also alleges that for the same reasons it did not exercise its powers under the deed, without stating what it would have done had the breaches of duty not occurred. It alleges that in consequence of those breaches, “Sandhurst and thereby the noteholders have suffered loss and damage being the entirety of the funds subscribed for the convertible unsecured note issue being $12,000,000.00”.

Evidence

Evidence Before The Court

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Decision

Reasons for decision

DOYLE CJ PERRY J BLEBY J
The only remaining issue is the submission that Sandhurst was guilty of material non disclosure when it applied for the examination orders. As to that, I agree with the reasons given by the Master for rejecting that submission. There is nothing I wish to add to those submissions, other than to say that I see no reason why there should not be co-operation between the liquidator of Normans and Sandhurst, in relation to the possibility of a breach by Deloitte of duties owed by it to Normans or to Sandhurst or to the noteholders, with a view to a possible claim against Deloitte. Co-operation of this kind, within limits, is not a reason to refuse to make an examination order, unless it appeared that the making of an order on application by Sandhurst is likely to cause Deloitte to suffer unnecessary inconvenience or expense, or to be subjected to unnecessary examination. That is a matter that can be dealt with when the examination takes place. If Deloitte contends that it is unnecessary or unreasonable for it to submit to examination at the instance of Sandhurst, as a result of action taken by the liquidator, that can be dealt with in light of the actual circumstances, rather than in an anticipatory fashion and at large.Conclusion For those reasons I would allow the appeal, set aside the order by the Master that the examination orders and orders for the issue of an examination summons and for the production of documents be set aside, and substitute an order dismissing the application made by the examinees for the setting aside of those orders. I agree that the appeal should be allowed, for the reasons given by Doyle CJ. I would add some further observations. Invariably, applications for examination orders pursuant to s 596A or s 596B of the Corporations Act 2001, are brought in order to obtain an order which, it is thought, will assist in the making of decisions by the applicant as to other action which may be taken concerning the corporation. Commonly, but not always, that action may be the commencement of proceedings against the corporation, or the continuation of such proceedings already in train. In that sense, the institution of proceedings seeking an order under either section will always be for a collateral purpose. But to use that description does not mean that the proceedings will necessarily constitute an abuse of process. In this context, “collateral purpose” cannot be equated with “abuse of process”. There is much discussion in the cases as to what may or may not be a legitimate object to which an application for such an order may properly be directed. It is clear from the authorities referred to by Doyle CJ that it is no longer a requirement that the application be directed towards benefiting the company or corporation as a whole, whatever that phrase may mean; see the dictum of Ormiston J, with whom Tadgell and Harper JJ agreed, in Flanders v Beatty and Anor:[1]“Now the powers given under s 596A to s 597B are clearly so wide and so easily exercised by ‘eligible applicants’ (cf s 596A) that the purposes to be served by examinations ought not be limited by reference to the benefit of the company or its creditors or contributories.” (emphasis added)[1] (1995) 16 ACSR 324 at 335.

Ratio Decidendi

Legal Principle Established

Established by: DOYLE CJ, PERRY J, BLEBY J

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