Wood v Heard No. Scciv-00-106

WOOD v HEARD
[2001] SASC 121
Appeal from a Master: Civil
GRAY J.
Introduction

On 13 November 2000, an ex parte order for the examination of Peter Laurence Wood ("Mr Wood") was made by a Master of this court. The order was obtained by a Deed Administrator[1], Andrew James Heard, pursuant to s 596A of the Corporations Law ("the Law"). Mr Wood applied to set aside or stay the order. The Master refused Mr Wood's application. Mr Wood now appeals against the Master’s decision.
[1] Joint Administrators were appointed. They became Joint Deed Administrators. Throughout these reasons the Administrators and Deed Administrators are referred to as Mr Heard unless the context requires to the contrary.
The Master gave ex tempore reasons:
“I am not going to ... discharge the order for examination nor grant a stay on grounds of abuse of process.
...
It is argued that a material non disclosure in the affidavit material is
evident and that I should discharge the order for that reason. At first glance I thought that to be right but on reflection I doubt such would be a proper order. In a nutshell, Wood informed the Administrator’s of an intention to sell at ‘acceptable commercial rates’. The response was favourable, but on my interpretation, guarded. True such is not spelt out in the affidavit itself but one finds the Administrator’s subsequent reasons for their now stance spelt out in the exhibits. It is generally preferable for such to be contained in the affidavit proper but, as I say, on reflection, I do not hold there to have been a material non-disclosure in this case. I wonder too whether the Administrators were bound to go into any great detail in light of the provisions of Section 596A of the Corporations Law. It is a mandatory provision and no affidavit under the Section is required. Contrast that position with Section 596B. However our Rule 11.3 requires an affidavit ‘stating the facts in support of the process’.
In light of the mandatory nature of 596A I would have thought that affidavit could be properly confined to the essential facts, namely reference to the status of the applicant. Similarly, reference to the status of the person sought to be examined and finally to the term of office within the meaning of the section. In my view a very much more limited affidavit than that required when Section 596B is under consideration.
Whatever, I see no grounds to discharge the order.
I see no grounds for a finding of abuse of process. The parties are simply at loggerheads with a threat of action bringing the question of alleged conflict to a head. At this time I can make no educated assessment of whether or not a conflict exists.”
The Issues on Appeal
Mr Wood submitted that the examination order should be set aside as Mr Heard had engaged in an abuse of process, had acted despite a conflict of interest and had failed to fully disclose relevant material to the court.
The Corporations Law - Adequacy of Disclosure
Section 596A provides:
"Mandatory examination
The Court is to 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 is an examinable officer of the corporation or was such an officer during or after the 2 years ending:
(i)if the corporation is under administration - on the section 513C day in relation to the administration; or
(ii)if the corporation has executed a deed of company arrangement that has not yet terminated on the section 513C day in relation to the administration that ended when the deed was executed; or
(iii)if the corporation is being, or has been, wound up - when the winding up began; or
(iv)otherwise - when the application is made.”
Section 596A was considered in Flanders vBeatty and Another[2]. Ormiston J said at (332):
"... it may be said that the principal change effected by these amended provisions is that an 'eligible applicant' now may obtain as of right an order for the issue of a summons for the examination of any 'examinable officer' (widely defined) of a corporation who is shown to have held office within two years of the commencement of the administration or winding up: s 596A."
[2] (1995) 16 ACSR 324
It is common ground that Mr Heard was an eligible applicant and that Mr Wood was an examinable officer. Accordingly, Mr Heard was entitled to an order as of right. No discretion arose. Entitlement to an order is established by affidavit[3]. There is no need for anything to be addressed in that affidavit other than status.
[3] Rule 47 Supreme Court (Corporations) Rules 1993 (SA)
The obligation of an administrator to act bona fide is well established. There must be a legitimate purpose for the proposed examination. An administrator must not engage in an abuse of process. As was said in Flanders at (333):
"What then is the purpose to be served by giving power to administrators under deeds to apply to examine ‘examinable officers’? In my opinion that purpose, shortly, is to enable the prompt and effective carrying out of the scheme contained in a deed of company administration. Any proper inquiry into the ‘examinable affairs’ of the corporation which will fairly conduce to that end may be effected by an examination sought by such an administrator. On the other hand, if the examination be sought for private purposes, oppressively or for any purpose not genuinely related to the administration, then a person adversely affected can complain to the court that the relevant power is being used for purposes foreign to those for which it is conferred. But, bearing in mind the variety of company arrangements which are now permitted under the Law, an examination intended to assist the enforcement of the rights or claims of relatively few persons affected by an arrangement may nevertheless be proper and appropriate. The legislature, it would seem, has acknowledged the benefits that deeds of this kind can provide to both companies and creditors and has therefore given explicit power to administrators to apply for examinations upon the same basis as liquidators have applied in the past, but with the added benefits of the new procedures laid down in the 1992 amendments."
Counsel for Mr Wood drew attention to Re Southern Equities Corporation Ltd (In Liq); Bond and Anor v England[4]. This case concerned the requirements of disclosure in an application for an order pursuant to s 596B. Attention was drawn to Lander J's observations[5] of the need to fully disclose all material circumstances in an affidavit supporting an application for an examination order pursuant to s 596B. It was submitted that the reasoning was directly applicable to the s 596A application. The remarks of Lander J were directed towards an applicant’s obligation to make full disclosure when seeking an ex parte discretionary order.
[4] (1997) 25 ACSR 394
[5] (1997) 25 ACSR 394 at 422 - 427
Section 596B provides:
"Discretionary Examination
(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."
Sections 596A and B are materially different. Section 569B requires the court to form a level of satisfaction sufficient to lead to an exercise of discretion. Section 596A as earlier observed does not involve the exercise of any discretion. The reasoning in Southern Equities Corporation Ltd does not assist Mr Wood’s argument.
The Factual Background
The following history is contained in Mr Heard’s affidavit and exhibits filed in support of the ex parte application.
The principal activities of Tasmanian Sandstone Pty Ltd (“the Company”) were to quarry, cut and sell sandstone. The Company operated from a property it owns in Buckland, Tasmania. The Company also quarried from another Buckland property. The Company's assets included plant and equipment, land and buildings, finished goods, reserves of sandstone, debtors and cash in the bank.
Following the appointment of Mr Heard, the Company ceased trading. It occasionally completed minor work.
On 25 February 2000, Mr Heard circulated a report to creditors pursuant to Section 439A(4) of the Law. The creditors were advised that the directors of the Company had proposed a Deed of Company Arrangement ("DOCA"). It was proposed that a Mr Calabrese purchase the Company's land and buildings, plant and equipment, stock (with the exception of two sandstone blocks), debtors and work in progress. Mr Calabrese offered to pay $200,000.00 for the assets. He offered to take an assignment of certain debts and hire purchase agreements. The creditors were provided with a table summarising the potential dividend to unsecured creditors in a liquidation as compared to the potential dividend to unsecured creditors from a voluntary administration. This summary indicated that a DOCA provided a better return than a liquidation.
The second meeting of the creditors of the Company was held on 3 March 2000. The creditors were advised that there were pre-conditions to the DOCA. Those pre-conditions concerned a proposed sale of effectively the Company’s entire operations.[6] The creditors resolved that the Company execute the DOCA in the terms recommended.
[6] The DOCA - Clause 4.1.1
On 4 April 2000, Mr Heard circulated a further report. Creditors were advised that an Asset Sale Agreement had not been executed or settled by 24 March 2000. The DOCA could not be put into effect. The report indicated that both Mr Calabrese and Dunn Stone Industries Pty Ltd had put forward proposals to vary the DOCA.
On 11 April 2000 a meeting of creditors was convened to consider the proposals and whether the DOCA could be varied. The creditors voted in favour of the Calabrese proposal. They resolved to vary the DOCA accordingly. As amended the DOCA provided that the Asset Sale Agreement with Mr Calabrese was to be “executed and settled by no later than one calendar month after the passing of the resolution”. This court approved the variation to the DOCA.
Correspondence was exchanged between Mr Heard’s advisers and Mr Wood’s advisers.
On 11 May 2000 Mr Wood wrote to Mr Heard advising that the Company proposed to resume selling sandstone. The letter contained the following:
“My solicitor, Mr Graham Dart, informs me that as directors of Tasmanian Sandstone Pty Ltd I can resume operations at the quarry and sell stone at acceptable commercial rates. As this would be beneficial to all creditors I would like a signed fax response from PPB indicating you do not object to goods being freighted from the quarry and that as Director of Tasmanian Sandstone I do have legal rights to carry on business.
Your response is required by close of business today.”
The following day solicitors for Mr Heard wrote in response:
"If you now propose to operate the Company’s business, our clients require that stone sold by you should be paid for prior to the stone leaving the Company’s premises. This is necessary to ensure that the assets of the Company are not diminished pending the sale of the assets. Further, that prior to dispatch of any stone from the Company’s premises, it will be necessary for Mr Barry Roberts to authorise the dispatch in writing.
Please confirm that these terms are acceptable to you.”
On 14 May 2000 Mr Wood entered into an agreement on behalf of the Company for the sale of all its acceptable quarried sandstone to Dunn Stone Industries Pty Ltd. The contract price was for the sum of $50,860.00 ("the Dunn Agreement"). Mr Heard considered this proposed sale to be in breach of the Asset Sale Agreement.
In the ensuing days correspondence continued to be exchanged. Mr Wood continued to assert that he was acting in accordance with Mr Heard's letter of 12 May 2000. Mr Heard asserted that the Company could continue to operate its business in the ordinary course, but not so as to interfere with the Calabrese transaction. On 18 May 2000 the Company's position was reiterated by letter to Mr Heard’s advisors in the following terms:
"The Company entered into a contract with Dunn Stone Industry on 16 May 2000 to sell certain sandstone to it. The contract relates only to a portion of the Company stock, not all of the stock as stated in your letter of 17 May.
The Company entered into the contract pursuant to permission to sell stone granted by your clients. The terms on which our clients were entitled to sell stone is contained in a letter from Piper Alderman to Mr Wood dated 12 May 2000. Your clients consented to the selling of stone subject to that stone being paid for prior to leaving the Company's premises. Further, they required the caretaker to authorise despatch of stone for the purpose of keeping a proper record of what was removed from the site.
Based on the consent of your clients a contract was entered into with Dunn Stone Industries. You will see that it is a term of the agreement that Dunn Stone Industries make payment for the stone prior to it being removed from the Company's premises."
Mr Wood and the Company refused to execute the Asset Sale Agreement until the Dunn agreement was performed. Mr Heard refused to allow the Dunn agreement to be performed.
On 30 May 2000 the creditors of the Company met. It was resolved that the DOCA be amended. If the Asset Sale Agreement with the Calabrese interests did not settle by 31 May 2000 the amendment required that the DOCA must be terminated and the Company would go into liquidation.
The Asset Sale Agreement was not completed until 19 June 2000.
The following exhibits were attached to Mr Heards' affidavit:
-       letter of 16 May 2000 from Cosoff Cudmore and Partners to Piper Alderman;
-       letter of 17 May 2000 from Piper Alderman to Cosoff Cudmore and Partners;
-       letter of 18 May 2000 from Cosoff Cudmore and Partners to Piper Alderman;
-       letter of 19 May 2000 from Piper Alderman to Cosoff Cudmore and Partners;
-       letter of 19 May 2000 from Dunn to Prentice Parbery Barilla;
-       facsimile transmission of 19 May 2000 from Piper Alderman to Dunn; and
-       facsimile transmission of 23 May 2000 from Dunn to Piper Alderman.
Deliberate Withholdings of Material
Mr Wood complained that there had been no disclosure in the text of the affidavit of the contents of the correspondence of 11 and 12 May 2000. It was said that Mr Wood had acted with Mr Heard’s concurrence in dealing with Dunn Stone Industries Pty Ltd. This gave rise to a conflict on the part of Mr Heard. That conflict made it inappropriate for an order to be made permitting Mr Heard to examine Mr Wood.
Counsel for the appellant, alleged that Mr Heard had deliberately failed to make reference in his affidavit to Mr Wood's assertion that Mr Heard had concurred with Mr Wood's conduct. This was said to be a deliberate deception.
Mr Heard was given the opportunity of answering the allegations by affidavit. I permitted cross-examination over objection. Following cross-examination Mr Wood withdrew the allegation.
I reject Mr Wood's submission that there had been inadequate disclosure. Mr Heard’s affidavit and exhibits are to be read together. The assertions of Mr Wood about ongoing trading and Mr Heard's suggested concurrence are clearly set out in the exhibited letter of 18 May 2000. The letter of 12 May 2000 is referred to directly. The exhibited correspondence adequately summarises Mr Wood's assertions about the dispute.
Improper Purpose
It was submitted by Counsel for Mr Wood that Mr Heard's sole purpose in seeking an examination order was to examine Mr Wood about a cause of action belonging to the Company. This was a purpose not genuinely related to Mr Heard's proper duties or functions. In the circumstances, it was said that the application was an abuse of process.
In Flanders at (333) Ormiston J said:
"In my opinion, whatever has been said in the past as to the scope of compulsory examinations must be qualified by these significant changes in the relevant provisions, at least to the extent necessary to comprehend their effect. As these amendments form part of the Corporate Law Reform Act 1992, which introduced Pt 5.3A of the aw, I would conclude that the legislature saw it as important that administrators should have wide powers to obtain information and conduct any necessary examination, in much the same way as those powers were and are still given to liquidators. However, the significance of granting these powers to administrators is that the object for which they ought properly to be used should comprehend anything which fairly may be expected to advance the course of an administration, and in particular, for present purposes, an administration under a deed of company arrangement."
Mr Heard's affidavit identified reasons for the examination as follows:
"-In causing the Company to enter into the Dunn Agreement, Wood effectively frustrated the ability of the Company to complete the Asset Sale Agreement. This resulted in the Company incurring substantial costs, in terms of time spent by the Deed Administrators and by my solicitors in enforcing the terms of the DOCA and setting aside the Dunn Agreement so as to enable the Asset Sale Agreement to be completed. In turn, this has diminished the funds available under the DOCA to pay a dividend to the creditors of the Company, so that the creditors will receive a significantly reduced dividend.
-Piper Alderman have advised me that the Company may have causes of action available to it against Wood and Dunn to recover the losses which it has sustained. These causes of action include claims under Sections 181 and 192 of the Corporations Law, claims under the principle in Barnes-v-Addy and at common law for inducing a breach of contract and conspiracy.
-I seek orders to examine Peter Laurence Wood, a director of the Company, and John Gerard Dunn, a director of Dunn in respect of these matters. ...”
Mr Heard negotiated and supervised the sale of the Company's assets. He believed that Mr Wood was in breach of his duty to the Company. It was said that Mr Wood sought to dispose of Company assets in a manner that would frustrate the Calabrese sale. Mr Wood did this by purporting to sell the Company's major product to the Dunn interests. The attempted sale failed. In ensuring that the Dunn agreement did not take effect, and that the Calabrese transaction was completed, the administration was put to delay and expense.
Mr Heard alleges that the delay and expense reduced the return to creditors. Reliance was placed on Mr Heard's affidavit as establishing the basis for these beliefs.
The terms of the DOCA include the following:
“5.     Fund
The Company’s property available to the Administrators to pay Creditors excepting the Secured Creditors, Directors and related entities comprises:-
5.1    The Deed Administrator’s cash funds remaining in the Administrators account after the payment of the Voluntary Administrators and Deed Administrators trading expenses, remuneration, retention of title claims and expenses.
5.2    The payment of $200,000.00 from the Company arising from the Completion of the Asset Sale Agreement.
5.3    Two blocks of sandstone.
6.     Distribution of the Fund
6.1The Deed Administrators will apply moneys in the Fund in the following manner and order of priority:
6.1.1first, any amounts owed to the Administrators in payment of any amounts which they may be entitled to claim against the Company pursuant to this Deed and the Law in accordance with the order of priority specified in Section 556 of the Corporations Law;
6.1.2second, any amounts owed to the Deed Administrators in payment of any amounts which they may be entitled to claim against the Company pursuant to this Deed and the Corporations Law in accordance with the order of priority specified in Section 556 of the Corporations Law;
6.1.3third, in payment of the Preferred Unsecured Creditors claims in accordance with the order of priority specified in S556 of the Corporations Law;
6.1.4fourth, a payment to the ‘A’ Class Unsecured Creditors of $10,400.00 and the said unsecured creditors will receive an amount pari passu of that portion of the Fund;
6.1.5fifth, the payment of the ‘B’ Class Unsecured Creditor’s account together with two blocks of sandstone;
6.1.6sixth, an amount such that the unsecured creditors receive pari passu that proportion of the Fund to a maximum of fifty cents in the dollar
6.1.7last, as to any balance remaining, in the Fund to the Company.
6.2Save as provided by this Deed, the Fund shall be realized at such times and in such manner as the Deed Administrators determine in their absolute discretion from time to time, and the timing of any dividend distribution shall be at the absolute discretion of the Deed Administrators and subject to sufficient moneys being available for distribution from the Fund (as to which the Deed Administrators’ opinion will be conclusive).”
Greater administration expense is likely to lead to a reduced return to creditors.

Mr Wood submitted that any cause of action lay with the Company. It was said that in any event, the Company had suffered no loss and that Mr Heard had no legitimate interest in pursuing the proposed examination.
I reject Mr Wood’s submission. The proposed examination relates to the affairs of the Company, the subject of the DOCA. The matters sought to be examined may advance the course of the administration and ultimately the extent of any return to creditors.
Having reviewed the correspondence, I am not satisfied that any knowing acquiescence or concurrence by the administrators in Mr Wood's proposed activities has been established. It is my view that the material identified is capable of establishing that Mr Wood failed to disclose important facts to Mr Heard.
I do not consider that it has been established that any conflict of interest has arisen.
The examination will take place before a Master of the court. If it is suggested that Mr Heard is going beyond matters of proper enquiry objection may be taken. If the objection is well based the Master may disallow the questioning. If further material establishes that Mr Heard should not conduct the examination, appropriate orders can be made.
This appeal is dismissed.
JUDGMENT CITATIONS AS THEY APPEAR IN THE JUDGMENT.
1Joint Administrators were appointed. They became Joint Deed Administrators. Throughout these reasons the Administrators and Deed Administrators are referred to as Mr Heard unless the context requires to the contrary.
2 (1995) 16 ACSR 324
3 Rule 47 Supreme Court (Corporations) Rules 1993 (SA)
4 (1997) 25 ACSR 394
5 (1997) 25 ACSR 394 at 422-427
6 The DOCA - Clause 4.1.1

[2001] SASC 121

20 April 2001