STEPHEN JAMES DUNCAN (PLAINTIFF) No. SCCIV-02-763
[2002] SASC 328
•27 September 2002
RE ACN 007 612 633 PTY LTD
(FORMERLY CEMENTAID SA PTY LTD) (NOW IN LIQUIDATION)
[2002] SASC 328
JUDGE BURLEY. The plaintiff is the liquidator of a company which I will refer to as Cementaid SA. He has applied for the following orders:
1An order for the examination of Michael John Aldred, a former director of Cementaid SA pursuant to Section 596A of the Corporations Act (the Act).
(An order for production of documents has also been sought.)
2An order for the examination of David Frederick White, the company accountant, pursuant to Section 596B of the Act.
An order for production of documents has been sought as follows:
“All files and documents of whatsoever kind relating to the affairs of ACN 007 612 633 Pty Ltd (formerly Cementaid SA Pty Ltd) (now in liquidation) (‘the company’) including all statutory records, minutes, and all registers, taxation files, taxation returns and all other accounting records and files of the company.”
3By application filed on 22 July 2002 an order that Neil Strawbridge produce to the Registry of this Honourable Court the documents set out in the schedule as follows:
“All files, memoranda, and documents of whatsoever kind contained in the file in the possession of the said Neil Strawbridge in the District Court at Adelaide litigation being Action No: 376 of 1997 where Comfort Engineering Pty Ltd (ACN 007 759 695) trading as Oasis Airconditioning was plaintiff and ACN 007 621 633 in liquidation formerly Cementaid SA Pty Ltd (‘the company’) was defendant.”
I shall deal with the application against Mr Strawbridge first. The application should have been directed to Minter Ellison, solicitors, the firm of which Mr Strawbridge is a partner. No point was taken that he was named personally. The application purports to have been made pursuant to Section 596B of the Act. As the liquidator did not wish to examine Mr Strawbridge, the appropriate section authorising the application is Section 597(9) of the Act which provides:
“The Court may direct a person to produce, at an examination of that or any other person, books that are in the first-mentioned person’s possession and are relevant to matters to which the examination relates or will relate.”
In order to obtain the order for production by Minter Ellison, the liquidator must satisfy the Court that the documents “are relevant to matters to which the examination relates or will relate”.
The relevant paragraphs of the liquidator’s affidavit sworn on 10 September 2002 are as follows:
“3On 11 December 2001 in my capacity as liquidator I prepared a report and in that report I noted that in August 1999 Aldred & Co, the holding company of the company withdrew its financial support and demanded repayment of its outstanding loan accounts. In reduction of the loan account owed to Aldred & Co Pty Ltd the assets and business of the company were valued and transferred to a related entity. The company’s assets were valued at approximately $200,000.00. The value of the assets were used to reduce the loan account owed to Aldred & Co. The assets were transferred to a new entity ‘Cement-Aid (SA&NT) Pty Ltd’ which continued to operate the same business at the same premises. It would appear to me that this transaction may involve a preferential payment to a creditor and accordingly, is void against me as liquidator. Now produced and shown to me exhibited hereto and marked with the letters ‘SJD2’ is a true copy of that report (‘the Liquidator’s Report’).
4As can be seen from page 5 of the Liquidator’s Report the current liabilities of the company in the financial years ending June 1998, June 1999, and June 2000 far exceeded the current assets in any of those years. Accordingly, it would appear prima facie that throughout the said periods the company was insolvent. In which case one would reasonably surmise that the company had been insolvent in at least some of the years preceding 1998.
5As appears in the Liquidator’s Report the company was able to continue to trade as a consequence of financial assistance provided to it by its holding company Aldred & Co Pty Ltd.
6In the period from December 1996 to the end of February 1997 the company incurred a debt (‘the debt’) with Comfort Engineering Pty Ltd (ACN 007 759 695) trading as Oasis Airconditioning (‘Oasis’).
7The transaction which gave rise to the debt became the subject of litigation in an action in the District Court at Adelaide being Action No: 376 of 1997 (‘the action’) where Oasis was plaintiff and the company, not then in liquidation, was defendant. The plaintiff was awarded damages against the defendant in the action, the particulars of which are contained in the judgment of His Honour Judge Herriman who handed down reasons for his decision on 13 March 2001 which were consequentially varied to those more particularly set out the quantum [sic] of the judgment.
8By reason of the combined operation of Sections 588G and 588M of the Corporations Act if any of the directors of the company knew or had reasonable grounds for suspecting that the company was insolvent at the time the debt was incurred, then those directors are liable to provide compensation in respect of the loss or the damage suffered by the creditor or creditors in relation to the debt.
9The documents, if any, which are likely to record evidence, or from which it can be inferred that a director knew or had reasonable grounds for suspecting that the company was insolvent are documents most likely to be in the possession of the company’s accountants or in the possession of the solicitors who acted for the company in the action. The firm of solicitors who acted for the company in the action were Minter Ellison Adelaide and the solicitor who had the care and conduct of the action on behalf of the company was Mr Neil Strawbridge.
10In addition to the matters affirmed to in paragraph 9 hereof, the solicitor’s file with respect to the action in the possession of Minter Ellison and is in all respects the property of the company and in respect of which I am, as liquidator of the company, entitled to possession.”
The file has not been provided to the liquidator. In his affidavit sworn on 3 September 2002, Mr MJ Aldred deposed:
“8I have been informed by Mr Strawbridge that requests have been made of him by Windevere Bellman (as opposed to Mr Duncan) seeking delivery of the files for the litigation between Oasis and ACN 007 612 633 Pty Ltd preceding its liquidation. Those files are the property of Aldred & Co Pty Ltd, and not of ACN 007 612 633 Pty Ltd, because Aldred & Co Pty Ltd paid the bills, rendered by Minter Ellison, for the carrying out of the work in respect of that litigation.”
On the affidavit material before me I cannot see that there is any connection between the solicitor’s file and the matters about which the liquidator seeks to examine both Mr Aldred and Mr White. The proceedings between Oasis and Cementaid SA were, as I understand it, for the recovery of damages by Oasis against the company. Those proceedings were successful. There is no evidence of a connection between the contents of that file and the subject matter of the proposed examinations. Consequently, an application for production of documents based on Section 597(9) of the Act cannot succeed.
As to the assertion by the liquidator that the file belongs to Cementaid SA and should, in any event, be produced, and the counter-assertion by Mr Aldred that the file belongs to Aldred and Co Pty Ltd because that company paid the legal fees relating to the proceedings, they are not matters which fall for decision on this application for production of documents made against Minter Ellison.
For the above reasons, the application for production of documents made against Minter Ellison will be refused.
I next turn to the application for orders relating to the examination of Mr Aldred. That application has been correctly made pursuant to Section 596A of the Act. In the circumstances of this application, once it has been established that Mr Aldred was a former director of Cementaid SA, the Court is required to make the appropriate order. Consequently, that order was made on 6 September 2002 when the various applications were called on for hearing.
I should mention that the proceedings giving rise to these applications were served upon the solicitors for the proposed examinees. In other words, the liquidator did not choose to pursue an ex parte application, at least insofar as the applications affecting Mr White and Minter Ellison were concerned. However, the application against Mr Aldred, notwithstanding the presence of counsel for Mr Aldred, effectively proceeded in an ex parte manner because I did not hear submissions from counsel for Mr Aldred on the question of whether or not the order for examination should be made. I took the view that it would be inappropriate to give leave to Mr Aldred to be heard on an application pursuant to Section 596A of the Act. If he wished to do so, it was open to him to apply to set aside such an examination order at the appropriate time.
In relation to the applications against Mr White and Minter Ellison, I granted leave to them to appear by counsel on the respective applications to give them the opportunity to put submissions as to why the orders sought should not be made. In other words, the application proceeded as an inter partes hearing at which both Mr White and Minter Ellison were represented by counsel, Mr Strawbridge.
I next turn to the application in relation to Mr White. The factual basis for the application is contained in the affidavit of the liquidator as set out earlier in these reasons. Mr Strawbridge relied upon the affidavit of Mr Aldred, which was to the effect that there had been extensive requests made by the liquidator of both Mr Aldred and Mr White for information to all of which there had been full response by them. It was submitted on behalf of Mr White that to order an examination as sought by the liquidator would be oppressive because of the previous co-operation afforded by Mr White in providing information to the liquidator as requested. On the question of production of documents by Mr White, it was submitted that the proposed order for production was too wide in its terms.
As to the width of the proposed order for production, I think that if the order is limited to the documents in the custody or possession of Mr White, it would not be oppressive if it were otherwise appropriate to make an order for examination.
It is apparent from the correspondence exhibited to Mr Aldred’s affidavit, in particular a letter dated 16 November 2001 from the liquidator to Aldred and Co Pty Ltd, that the liquidator may take proceedings against Aldred and Co Pty Ltd because the transaction referred to in that letter may constitute an insolvent transaction between Cementaid SA and a related entity.
It is common ground that Cementaid SA was the wholly owned subsidiary of Aldred and Co Pty Ltd and that consequently that company is a related entity of Cementaid SA. Section 588FE(4) of the Act provides for a four year relation back period.
The relevant parts of the letter are as follows:
“My investigations have revealed that the following payment was made by the company to you within the 4 year period prior to the date of my appointment as Official Liquidator.
Date Amount 31 August 1999
$
205,554.09Total 205,554.09 The books and records of the Company indicate that the payment was effected by a transfer of assets and business from the Company to Aldred & Co Pty Ltd.
Sections 588FA, 588FC, and 588FE of the Corporations Law (‘the Law’) deem all payments made by a company within the abovementioned period to be voidable, if at the time of making each payment the company was insolvent, and if those payments have the effect of giving the creditor a preference, priority or advantage over other creditors.
In my opinion the company was insolvent at the time of the abovementioned payment. Furthermore, I am of the opinion that the payment resulted in a preference, priority or advantage being given to you over other creditors whose debts remain outstanding.
In these circumstances I request that you forward a cheque to this office, made payable to ‘ACN 007 612 633 Pty Ltd (In Liquidation)’ in the sum of $205,554.09, being the total amount received by you.”
Mr Michael Aldred replied to the liquidator by letter dated 5 December 2001 as follows:
“I have received your letter dated 16th November, 2001.
I have spoken to my accountant, who is well versed in the affairs of the above company. My accountant tells me that the company was not insolvent as of 31st August, 1999. Accordingly, the transaction was not an insolvent transaction within the meaning of the Corporations Law, and accordingly, not voidable under section 588FE(4), as alleged by you.
If you do not agree with my accountant’s advice, perhaps you could tell me why.”
It is apparent from that letter that Aldred and Co Pty Ltd have relied upon the accountant, Mr White, for advice as to whether or not the company was insolvent at the relevant time.
Further correspondence exhibited to Mr Aldred’s affidavit sets out information supplied by Mr Michael Aldred in relation to the transaction referred to in the liquidator’s letter of 16 November 2001. In particular, a letter from Mr Michael Aldred to the liquidator of 17 September 2001 sets out his answers to four questions that have been put by the liquidator relating to the transaction.
It is clear from the volume of the material annexed to Mr Aldred’s affidavit that there has been considerable correspondence between the liquidator and Mr Aldred whereby information and documentation has been provided to the liquidator.
It is with that factual background in mind that I turn to a consideration of the cases.
It is trite law that a liquidator may conduct an examination in order to seek information relevant to whether or not litigation ought to be undertaken: Lombard Nash International Pty Ltd v Berentsen (1990) 3 ACSR 343; Grosvenor Hill (Qld) Pty Ltd v Barber and Another (1994) 120 ALR 262.
If the examination process is used for a vexatious or oppressive purpose amounting to an abuse of process of the Court an order will be refused: Re Hugh J Roberts Pty Ltd (In Liquidation) and the Companies Act [1970] 2 NSWR 582. The question which arises on this case is whether or not it would be oppressive to require Mr White to attend for examination in the context where there had already been an exchange of documentation and information from relevant sources in relation to the matters that concern the liquidator.
It has not been contended that Mr White is not a person who may be able to give information about the examinable affairs of the corporation. Nor has it been contended that the examination which the liquidator wishes to conduct is about other than the examinable affairs of the company.
Essential to the proceedings which the liquidator may bring against Aldred and Co Pty Ltd is the question of whether or not the company was at the time of the relevant transaction insolvent. Insolvency is a complex matter. The company documentation which the liquidator has obtained to date indicates that the company was insolvent at the relevant time. There is a bald assertion to the contrary by Mr Aldred apparently based on advice received from Mr White. It is a legitimate part of the examination process that a liquidator endeavour to ascertain facts which may constitute a defence to any proceedings which are contemplated by the liquidator. In my view, the proposed examination of Mr White falls squarely within this category. I do not consider that the provision of documentation and information by Mr Aldred to date is such that, to require the examination of the company’s accountant would be oppressive or constitute an abuse of process.
For these reasons I consider that an order for examination and an order for production of documents should be made in respect of Mr White.
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