In the matter of Mustang Marine Australia Services Pty Limited

HIS HONOUR: The applicants Mr Armstrong, Mr Lodge and Mr Watkins were, in the period of two years prior to the commencement of its winding-up, directors of the company Mustang Marine Australia Services Pty Limited, which went into voluntary administration on 19 March 2010. Although on 24 May 2010 the creditors resolved that the company enter into a deed of company arrangement, that deed was set aside by order of the Court on 10 December 2010, when orders were also made for the compulsory winding up of the company and appointing the respondent Mitchell Ball as its liquidator [In the matter of Mustang Marine Australia Services Pty Ltd (admin apptd) - Perpetual Trustee Company Ltd v Mustang Marine Australia Services Pty Ltd [2010] NSWSC 1429].

In the course of the proceedings for the setting aside of the deed of company arrangement, in which Perpetual Trustee Company Limited was the plaintiff, extensive discovery was had against the administrators. Perpetual agreed to fund an investigation of the company's affairs, which the liquidator has undertaken. On 28 May 2012, the liquidator obtained the leave of the Court under (Cth) Corporations Act 2001, s 477(2B), to enter into a funding arrangement [In the matter of Mustang Marine Australia Pty Limited [2012] NSWSC 620]. In support of that application, the liquidator swore an affidavit on 11 May 2012 in which he deposed to having reviewed extensive material and concluded that at no time during the period from incorporation to winding up were there reasonable grounds for a director of the company to expect that the company was solvent; that the first defendant Standard Bank Australia Limited was a de facto director of the company; and that Standard Bank and the directors of the company were liable for insolvent trading.

On 23 July 2012, the liquidator commenced proceedings against six defendants - including Standard Bank Australia Limited, the current applicants and Standard Bank PLC - relevantly for relief under Corporations Act, s 588M, against the directors in respect of insolvent trading, and also against Standard Bank on the footing that it was a shadow or de facto director. In support of that application, the liquidator swore an affidavit on 23 July 2012, based on what appears to have been a detailed investigation of the affairs of the company. He concluded, inter alia, that at all relevant times Standard Bank was either the holding company or acted as a de facto director of Mustang Marine; that Standard Bank and previous directors of the company were liable for contraventions of ss 588G and/or 588W; that during the period January 2008 to 19 March 2010 Standard Bank knew Mustang Marine was insolvent and allowed it to incur debts in the amount of $27 million; that while Standard Bank was a de facto director and holding company of Mustang Marine, it allowed Mustang Marine to incur unpaid liabilities of $28 million and had reasonable grounds to believe that Mustang Marine was insolvent when those liabilities were incurred; and that whilst each of the present applicants was a director of Mustang Marine, he allowed the company to incur certain liabilities - the precise quantum varies between them according to the period for which they were a director - and knew, or had reasonable grounds to believe, that Mustang Marine was insolvent when those liabilities were incurred.

On 24 January 2013, the liquidator issued a report to creditors, the practical effect of which is that the only outstanding matter in relation to the affairs of Mustang Marine is pursuit of the insolvent trading proceedings.

In the insolvent trading proceedings, the liquidator has filed a second further amended points of claim of some 29 pages, with attached particulars of some 65 pages, which include allegations that during the period 8 January 2008 to 19 March 2010 the company was insolvent and that Standard Bank Australia Limited was at all material times a shadow or de facto director of the company. The present status of the insolvent trading proceedings is that the pleadings have closed, such that the issues in dispute have been defined by those pleadings and particulars. The liquidator is now required to file the evidence upon which he relies in the proceedings, following which the defendants are required to serve any evidence upon which they wish to rely.

On 5 December 2013, the liquidator caused examination summonses to be issued to each of the present applicants. In support of the application for issue of the examination summonses - which were for mandatory examinations under Corporations Act, s 596A, each of the applicants being directors subject to mandatory and not discretionary examination - the liquidator filed an affidavit sworn 5 December 2013. By the present applications, the applicants apply to have the examination summonses directed to them discharged. In connection with this application, the liquidator has voluntarily disclosed to the applicants the affidavit filed in support of the examination summons.

The jurisdiction invoked by the present application was described by Basten J in Meteyard v Love (2005) 65 NSWLR 36; [2005] NSWCA 444 (at [44]-[45]), as follows:

It is at the outset noteworthy that while his Honour said that the statement of principle by Mullighan J in In the matter of Normans Wines Ltd (Receivers and Managers appointed) (in liq); Harvey v Burfield [2004] SASC 171 may be accepted, it was important to recognise that it “ran together” two separate considerations, and that there was danger in using the term "abuse of process".

On such an application, the applicants for discharge of the examination summons bear the onus of demonstrating that the summons has been issued for an improper purpose. The liquidator bears no onus. As to this, see also Sherlock v Permanent Trustee Australia Limited (1996) 22 ACSR 16, in which it was held that a trial judge was wrong to draw the inference that a liquidator's purpose was not a legitimate one from the failure of the liquidator to provide any evidence at all of his purpose. However, in the present case, the liquidator has, in his affidavit of 5 December 2013, given some evidence of his purpose. That said, the purposes for which an examination is conducted are to be ascertained, not only from the avowed purpose of the liquidator, but also by inference from the circumstances and context in which it is to take place, and the nature of the proceeding that it is.

In this case, the liquidator deposed, and in his cross-examination substantially adhered, to the following purposes:

To that he added that he desired to ascertain whether the directors would be able to satisfy a compensation order if one were made. (However, for practical purposes, little turns on this, as such an examination would be very limited in scope and would not, I think, achieve the main purpose or object of the liquidator). The liquidator elaborated that he wished to ascertain the directors' views as to whether Standard Bank was a shadow director, the basis on which they said (as they do in their defences) that the company was solvent and, also, that the directors might give answers not favourable to their cases.

Of course, a liquidator conducting an examination is not confined in the conduct of the examination to any particular purposes or matters raised in the affidavit relied on to procure the issue of the summons. Generally speaking, the examination is at large, as long as it is confined to the examinable affairs of the corporation.

In the context in which these summonses were issued - that is to say, when all that remains in the liquidation of substance appears to be the insolvent trading proceedings, and the pleadings in those proceedings have closed but the evidence not yet adduced - the inescapable inference is that the examinations are intended to obtain information for use in and in connection with the insolvent trading proceedings. Such information may include evidence in the form of admissions, which may be tendered against the directors in the liquidator's case; information which leads to further lines of inquiry; information which improves the ability of the liquidator to make a judgment as to the commercial viability of the proceedings and the strengths and weaknesses of his case in them; and, generally, information to advance the prosecution of the liquidator's cases in those proceedings, or to assist the liquidator in obtaining the best commercial result in them.

Essentially, the applicants argued that it was apparent from the liquidator's affidavit in the s 477(2B) application, and his affidavit of 23 July 2012, that he already had a firm and concluded opinion. Indeed, the word "determination" was used and, at least to some extent, acceded to in the course of cross-examination, as to crucial matters in connection with the proceedings.

It cannot really be doubted that the liquidator has a firm and concluded opinion on most if not all the relevant issues in the proceedings, including that the company was insolvent and that the directors did not have reasonable grounds for believing otherwise. But there is all the difference in the world between the liquidator having a strong, firm and concluded opinion, or even having in his mind determined those matters, on the one hand, and proving those matters to a court on the other. The liquidator's opinion, except in so far as an expert opinion of insolvency might be admissible on those issues, would ordinarily not even be relevant to the court's consideration. On the other hand, what could be proved - particularly, what could be proved out of the mouths of the directors of the company - of course, would be admissible.

The applicants submit that, in effect, the liquidator is endeavouring to reverse the ordinary course of proceedings where the liquidator would be required to put on his evidence first, and then the defendants, if they wish to do so, put on theirs. Even if that were so, that begs the question, what is the purpose that underlies such endeavour. It seems to me that, realistically, it can only be so that the liquidator knows what the case is that he will have to meet, is better positioned to form a judgment as to the relative strength of the cases, avoids surprise in the course of the litigation, and/or is able to adduce evidence of the directors as admissions in his own case if unfavourable to them. Ultimately, the question is whether this falls within the category of "a forensic advantage not available to the other litigant", of the type that the cases suggest a liquidator is not permitted to use an examination of this kind to gain. As this kind of application has become quite commonplace, it is worth exploring some of the history that has led to the adoption of this phrase and what its meaning really is.

A useful starting place is the judgment of Lander J in Evans v Wainter Pty Ltd (2005) 145 FCR 176, where his Honour summarised the applicable principles as follows (at [252]).

Ryan and Crennan JJ concurred with his Honour.

I have already referred to the observations of Basten J in Meteyard v Love.

Each of those judgments refers to the proposition that 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. However, it is manifestly clear that the mere fact that an examination will give a liquidator a forensic advantage in pending or contemplated litigation does not render the examination an abuse of process.

In Sandhurst Trustees Limited v Harvey (2004) 49 ACSR 422, Doyle CJ said (at [51]):

In Simionato & Farrugia v Macks & Macks (1996) 19 ACSR 34, Lander J said (at [61]):

In Hong Kong Bank v Murphy, to which his Honour referred, Gleeson CJ, after referring to Re Hugh J Roberts Pty Ltd (in liq) (1969) 91 WN (NSW) 537, to which I shall come, said:

The cases make tolerably clear that in the context of references to forensic advantages not available to the ordinary litigant, the conduct of an examination purely for the purpose of destroying the examinee's credit or rehearsing the cross-examination in substantive proceedings is an impermissible purpose. But save for some cases in which an examination has been sought to be used in a manner inconsistent with orders for discovery already made in the substantive proceedings, the concept does not appear to be broader than that. In particular, the concept of a forensic advantage not available to the ordinary litigant does not include or extend to using the process of examination as a means of discovery to obtain admissions which may provide a case to answer in contemplated or pending proceedings, or to fortify a liquidator's case in those proceedings.

The starting point for that conclusion is probably Massey v Allen (1878) 9 Ch D 164 in which, in the context of an examination summons issued after proceedings had been commenced by the liquidator against Allen, it was argued that the liquidator was not entitled to ask any question arising out of the pending action and had no more rights to further discovery than any plaintiff had and could not ask for further evidence. Hall VC rejected that argument, saying (at 169):

Next, in In re Metropolitan Bank; Heiron's Case (1880) 15 Ch D 139, a voluntary liquidator had brought an action on behalf of the company against an officer of the company and exhibited interrogatories which had been fully answered by the officer. In that case - which, might at first sight be thought to support a more constrained approach - it was held that the liquidator should not be entitled to examine the defendant. James LJ said (at 142):

The 115th section referred to was a precursor of s 596A. That case was subsequently explained, as I shall in due course show, on the basis that it was really a case of election: the liquidator had elected to use the discovery and interrogatory procedures available in the substantive litigation and, having done so, ought not be permitted retrospectively to obtain further discovery by way of the examination process.

A not dissimilar result was reached in In re North Australian Territory Company (1890) 45 Ch D 87. There, the liquidator brought an action against another company and obtained an order for discovery in that action but the Court refused to order the production of documents, or the examination of the company's secretary on interrogatories, on the ground that at the present stage of the action, before a defence had been filed, discovery was premature. The liquidator then issued an examination summons and, upon the secretary refusing to answer questions relating to the matters in issue in the litigation, the Court held that as the liquidator had shown no reason for seeking the discovery except to assist him in the action and thereby to evade the order of the judge postponing discovery in the action, the witness was justified in refusing to answer the question. That, it might be thought, was a very clear case of abuse of process, because the judge in the substantive proceedings had held that discovery would be premature, and the liquidator sought to evade that ruling by the examination summons. Cotton LJ said (at 92):

Bowen LJ and Fry LJ, in separate judgments, agreed with Cotton LJ.

In later proceedings, concerning the same liquidation, North Australian Territory Co v Goldsborough Mort and Co (1893) 2 Ch 381, however, Lord Esher MR said (at 384):

In New South Wales, the issues were considered in Re John Booth and Co Limited (1902) 2 SR (NSW) Eq 138. Mr Street, as the later Sir Phillip Street CJ then was, argued that the examination, which was of directors who were also plaintiffs in a suit against the company in liquidation, was brought not for the purpose of winding up the company, but of finding out what the directors' evidence in the suit was. He argued that the Court could allow any such questions to be put as could be put on interrogatories. That argument was rejected by Walker J, who said that while it was not the right of an official liquidator to conduct an examination when and how he chooses, because he can be controlled by the Court, the persons to be examined in this case were the directors of the company and consequently were, as far as the company was concerned, in a fiduciary position, and the knowledge that they had as to the affairs of the company ought to be at the disposal of any person who has an interest in the company in liquidation and who is represented now by the official liquidator:

In Re Auto Import Company Australia Limited (1925) 25 SR (NSW) 52, Maughan AJ held that on an examination:

This case appears to have been the origin of the references to rehearsals of cross-examination. His Honour referred to the Re North Australian Territory Company case and to Massey v Allen, and said:

Having observed that the liquidator was "quite in the dark as to whether he ought to defend this action at all - as to whether he has a defence or as to whether he ought to recognise [the plaintiff's] claim", his Honour said:

35 His Honour then added the caveat that the liquidator was not entitled to have a dress rehearsal of the cross-examination in the action, pointing out that the master would no doubt "exercise his discretion properly with regards to each particular question".

In Re A Debtor [1958] 1 WLR 283, Jenkins LJ in the Court of Appeal distinguished Re North Australian Territory Company on the basis that in that case the examination summons procedure had been used for the ulterior purpose of obtaining in the action against the very person whose examination was sought, an advantage in a manner of discovery which had been denied to the liquidator in the action, which was a very good example of an abuse of process.

Most of these cases were reviewed by Street J, as Sir Laurence Street CJ then was, in Re Hugh J Roberts Proprietary Limited (in liquidation) [1970] 2 NSWLR 582. His Honour observed that in In re Metropolitan Bank; Heiron's Case, the liquidator was regarded in effect as having made an election to proceed to the machinery of ordering inter parte's interrogatories. His Honour said (at 540D) that there was ample authority to the effect that the liquidator's power to proceed by way of a private examination was available notwithstanding that the litigation to which the subject matter of the private examination may be directed, is already current.

His Honour referred to the similar practice in bankruptcy and cited two judgments - Ex Parte Davies [1891] 8 Morrison 168, 171, and Price, Re; Ex parte Commercial Banking Co of Sydney Ltd (No 3) (1948) 14 ABC 137, 140 – in which it had been said that it was no answer that an action was pending by the official receiver or trustee against the witness he proposed to examine. His Honour acknowledged (at 542) that it would exceed the legitimate use of the process where litigation is contemplated or commenced to summons the defendant's probable witnesses and examine them quite simply for the purpose of destroying their credit.

His Honour disassociated himself (at 542D) with observations made by Maughan AJ in Re Auto Import Company that fishing questions would be inappropriate, holding that in an examination, questions of a fishing nature were often entirely appropriate. His Honour also cited the observation of Walker J in Re John Booth & Company Limited to which I have referred.

His Honour's judgment has been seminal in this area and subsequently cited in appellate courts with approval on many occasions. Instances of this include Hong Kong Bank of Australia v Murphy (1992) 8 ACSR 736 (at 740-741) and Sherlock & Vagrand Pty Ltd (in liq) v Permanent Trustee Australia Ltd (1996) 22 ACSR 16 (at 42).

In Re Rothwell Limited (No 2) (1989) 15 ACLR 168, Nicholson J observed (at 181) that the discretion (as it then was) to issue an examination summons may be exercised whether the liquidator seeks 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. His Honour observed - as did the Court of Appeal in Hong Kong Bank v Murphy - that Australian authorities had not followed English authorities which held that if the evidence showed the liquidator had already commenced litigation or definitely decided to do so, the Court's predisposition would be to refuse an immediate order for examination, unless the liquidator could show special grounds to the contrary:

In Douglas Brown v Furzer (1994) 13 ACSR 184, the Full Court of the Supreme Court of Western Australia (constituted by Malcolm CJ, Ipp and Anderson JJ) was concerned with a situation in which the liquidator had sought orders requiring a Court to summons for examination an employee of the company. Malcolm CJ said (at 191):

His Honour then referred to the judgment of Mason CJ in Hamilton v Oades, and added:

This line of authority, I think, culminates in another Queensland decision, Adler v Qintex Group Management Services Pty Limited (1996) 22 ACSR 446 (a joint judgment of McPherson, Pincus and Derrington JJ). Their Honours said (at 448-449):

In my view, those authorities establish that the concept of an examination summons being an abuse of process if used to procure a forensic advantage not available to the ordinary litigant does not extend to using the process as a means of discovery to obtain evidence and admissions which may raise a case to answer or prove the liquidator's case in contemplated or pending proceedings. It may be that if restrictions have been placed on discovery in the substantive proceedings, to seek to circumvent those restrictions would be an abuse of process. Such was the case in the North Australian Territory Company case, to which I have referred.

It might also be that if the examination is sought to be conducted at a very late stage in the proceedings, such that it would interfere with the examinee’s preparation for trial, or after all the examinee’s evidence was on, so that it was manifestly a rehearsal of the cross-examination, that it would then be an abuse of process. But, as here, where the liquidator's evidence, let alone the director's evidence, has not yet been served, this case does not approach that.

The cases to which I have referred illustrate that if the examination is used for the predominant purpose of undermining the credit of the examinee or by way of rehearsal for cross-examination, it will then constitute an abuse of process. There may be exceptional circumstances in which a judgment that an examination is to be used for that purpose can be made in advance, on an application to set aside the examination summons. However, as Maughan AJ pointed out in the case to which I have referred, those issues will usually better be addressed and controlled by the judicial officer presiding at the examination, who can judge, question by question, whether the procedure is being inappropriately used for one of those purposes.

It certainly cannot be said on the material before this Court at this stage, that this examination will be used for such a process.

In my judgment, the applicants have failed to establish that the examination summonses here have been issued or will be used for an improper purpose in the relevant sense.

I order that the interlocutory process be dismissed with costs.