Supreme Court Rejects Application to Set Aside Examination Order Due to Non-Disclosure

The court dismissed an application to set aside an examination order for a company in liquidation, finding no material overlap with existing proceedings. The examination order was not set aside due to non-disclosure of the existing proceedings.

Supreme Court New South Wales

Medium Neutral Citation: In the matter of Iconic Constructions Australia (NSW) [COMPANY] (in liquidation) [2020] NSWSC 834 Hearing dates: 29 June 2020 Date of orders: 29 June 2020 Decision date: 29 June 2020 Jurisdiction: Equity - Corporations List Before: Black J Decision: Application dismissed. Costs order made. Catchwords: CORPORATIONS – examinations relating to insolvency – whether examination orders should be set aside for non-disclosure. Cases Cited: - Hong Kong Bank of Australia Ltd v Murphy (1992) 28 NSWLR 512 at 518-519; (1992) 8 ACSR 736 - Re [COMPANY] (No 2) [2017] FCA 927 - [COMPANY] (in liq) [2006] NSWSC 1306; (2006) 24 ACLC 1611 - [COMPANY] (in liq) [2020] NSWSC 173 - Re Owston Nominees No 2 [COMPANY] (in liq) (recs and admins apptd) [2013] NSWSC 538; (2013) 94 ACSR 500 - [NAME] v [NAME], [COMPANY] as trustee for the [COMPANY] (in liq) (No 2) [2012] FCA 1361 Category: Procedural and other rulings Parties: [NAME] in his capacity as [NAME] of Iconic Constructions Australia (NSW) [COMPANY] (in liquidation) (Plaintiff/Respondent) [NAME] (Second Defendant) Representation: Counsel: [redacted] [NAME] (Second Defendant/Applicant)

Solicitors: [redacted] [NAME] (Second Defendant/Applicant) File Number(s): 2019/380685

Judgment – ex tempore (Revised 30 June 2020)

Nature of the application, background and affidavit evidence 1. By Interlocutory Process filed on 19 June 2020 the Applicant, [NAME] (who is sometimes referred to as [NAME]) applies to set aside an order for examination dated 6 December 2019, as amended on 24 June 2020. That examination is due to take place later this week. The application was brought late, by reason of difficulties in the service of [NAME], which ultimately culminated in orders for substituted service. No point was taken by [NAME], because of the circumstances in which service had been effected, that the application was outside time or required leave.

2. By way of background, the orders for examination were made on the application of [NAME] in his capacity as [NAME] ("[NAME]") of Iconic Constructions Australia (NSW) [COMPANY] (in liq) ("[NAME]"), which is a company that was associated with members of the El-[NAME] family, although there is an open issue as to the nature of [NAME]'s role, if any, in [NAME]. Other proceedings are also on foot in the Equity Division ("Equity Proceedings") between [NAME] and [COMPANY] as plaintiffs; and [NAME] (a [NAME] of [NAME]), and a company associated with her (the similarly named Iconic Constructions Australia [COMPANY] ("Iconic Australia")), which are shortly listed for hearing. The solicitor acting for [NAME], also acts for [NAME] Australia in the Equity Proceedings.

3. The application raises a narrow point, as to which the case law is clear, although there can always be difficulties of application of the relevant legal principles in a particular factual setting. [NAME], who appears for [NAME], contends that the examination should be set aside because [NAME] did not disclose the existence of the Equity Proceedings to the registrar who ordered the examination of [NAME], and points to the fact of those proceedings; the common representation of [NAME] on the one hand and [NAME] Australia on the other; the upcoming hearing of those proceedings; and a suggested overlap between the matters likely to be in issue in [NAME]'s examination and the Equity Proceedings. Ultimately, the last of those propositions that is the weakest, and its weakness undermines the weight that can be given to any of the others. 4. [NAME] also draws attention to other matters addressed in [NAME]'s affidavit, including [NAME]'s role in proposing that creditors approve the costs agreement between [NAME] and [NAME]' firm for the conduct of examinations, including the examination of [NAME]; evidence that [NAME] was the most substantial [NAME] of [NAME] by a significant margin; and the costs agreement dated 9 July 2019 between [NAME]' firm and [NAME]. [NAME] also draws attention to matters raised in the defence of the proceedings in the Equity Division. 5. [NAME] relies on the affidavit dated 18 June 2020 of his solicitor, [NAME]. [NAME] relies on two affidavits of [NAME] dated 11 May 2020 and 15 May 2020 which do not seem to me to be of substantial significance for the purposes of the application. He also relies on his affidavit dated 3 December 2019, which was read only as to the paragraphs which had been made available for review by [NAME]'s legal representatives. Those paragraphs disclosed that [NAME] had been advised by a [NAME] of [NAME] that its [NAME] work related to a contract with a third party where approximately $3.4 million was paid to [NAME]; that allegations had been made, implicitly by [NAME], that moneys received by [NAME] for that work may have been remitted to related entities; and that [NAME] is a cousin of a director of [NAME] and potentially had other roles in respect of that company. It appears [NAME]'s investigation is directed to cash withdrawals identified in a letter dated 20 May 2019 from [NAME]'s then solicitors to [NAME], which set out those withdrawals and demanded repayment of those amounts by [NAME]. Those amounts have not been repaid. It is common ground that the affidavit in support of the application for the examination of [NAME] did not disclose the existence of the Equity Proceedings to the registrar who made orders for that examination.

The applicable principles 1. With this background, I turn briefly to the relevant law, before returning to [NAME]'s submissions. Section 596A of the Corporations Act 2001 (Cth) provides for a mandatory examination and s 596B provides for a discretionary examination, in respect of certain persons, about a corporation's examinable affairs. The examination in issue in this case relies on s 596B of the Act, as an amendment made by consent to the summons for examination directed to [NAME] made clear.

2. In [NAME] v [NAME], [COMPANY] as trustee for the [COMPANY] (in liq) (No 2) [2012] FCA 1361, Jacobson J observed that there is a heavy obligation on a person applying for an examination summons to make full and frank disclosure of all materials which may impact upon the decision to summons a person for examination about a corporation's examinable affairs. His Honour there observed that the obligation is one of "frankness and candour to bring to the court's attention all material including that which might lead the court to refuse the application". His Honour there noted that the question for a court, in dealing with the application to set aside the examination summons, was whether matters not disclosed were "material" to the decision of the registrar to issue the summonses, and not whether the summons would have been issued in any event.

3. The significance to the issues was emphasised by the decision of White J in [COMPANY] (in liq) [2006] NSWSC 1306; (2006) 24 ACLC 1611. In that case, proceedings were on foot between parties associated with Mendarma and another entity and liquidators applied for examinations, without disclosing the existence of those other proceedings. White J there found that there had been a material non-disclosure and a risk that the examination would be used for an improper purpose, where the transcript of the examination could be used to give a forensic advantage to the other party in the other proceedings, which would not have been obtainable in those proceedings, and that the non-disclosure of those proceedings was sufficient basis to set aside the examination, while reserving [NAME]'s ability to seek a further examination order with full disclosure.

4. These principles were again emphasised by Jagot J in Re [COMPANY] (No 2) [2017] FCA 927 at [50], where her Honour noted that the fact that current proceedings were pending will make it necessary for the court to be alert to the possibility that a proposed application might be used for an improper purpose, referring to the decision in Hong Kong Bank of Australia Ltd v Murphy (1992) 28 NSWLR 512 at 518-519; (1992) 8 ACSR 736, and that the existence of those proceedings may need to be disclosed to allow a registrar to make an informed decision as to whether to issue an examination summons. It is implicit in her Honour's observations, and it was plainly the case in Re [COMPANY] (No 2) above, that they are directed to the position where there is a connection between the proposed subject matter of the examination and the other proceedings, or an overlap between them, so as to raise the risk that the examination might be used for an improper purpose or might give an advantage to a party in the other proceedings. [NAME] also refers, helpfully and uncontroversially, to other authorities that set out the circumstances in which an examination summons can be set aside for non-disclosure, including my decision in Re Owston Nominees No 2 [COMPANY] (in liq) (recs and admins apptd) [2013] NSWSC 538; (2013) 94 ACSR 500 and the recent decision of Rees J in [COMPANY] (in liq) [2020] NSWSC 173 at [144]-[145].

Determination 1. The difficulty that emerged for [NAME]'s application to set aside the examination summons, particularly as [NAME] sought to identify the suggested overlap between [NAME]'s examination and the Equity Proceedings, is that it is impossible to identify any real overlap between the two, other than at a level of the widest generality.

2. In submissions, [NAME] emphasised that the Equity Proceedings involved [NAME] and an associated company as [NAME] Australia as Defendants, and the latter are represented by [NAME] as I have noted above. In the Equity Proceedings, [NAME] alleges that a joint venture existed between him and his corporate group on the one hand and Iconic Australia on the other, and that a decision was made to purchase a particular property which, at a point in time, appears to have adjoined the business address for [NAME]. [NAME] there also makes allegations as to loan transactions between the relevant parties which do not include [NAME]. [NAME] submits that the matters in issue in dispute in the Equity Proceedings include the alleged joint venture between [NAME] and [NAME]; the funding of the property that was purchased, and the relevant loans and [NAME]'s conduct of a business styled "Iconic" in the relevant property. I recognise that, at a high level of generality, [NAME] is present in the Equity Proceedings, [NAME] is present, and [NAME] is on the periphery as an entity that used an adjacent property address as its business address for a period, and appears to be a member of the group known as the [COMPANY], to which reference is made in the Equity Proceedings. The suggested overlap with the proposed examination does not go beyond that.

3. This raises the question whether there is sufficient overlap between the subject matter of [NAME]'s examination and the Equity Proceedings that a failure to disclose the latter, in the application for the examination order, amounted to a material non-disclosure, or a non-disclosure of a material matter. I have recognised above that this is not a question whether the same order would have been made had that matters been disclosed, but whether they were material for disclosure at all. I am ultimately satisfied that the existence of the Equity Proceedings was not material, and not a matter that was required to be disclosed to the registrar.

4. As [NAME]'s letter of demand and the relevant paragraphs of the affidavit make clear, [NAME]'s examination of [NAME] is directed to investigating the withdrawal of monies in cash from [NAME] and the role of [NAME] in the management of [NAME]. [NAME] of [NAME] has a plain interest, in respect of all creditors, in determining where [NAME]'s money has gone, and in particular, whether it has gone to [NAME] in significant cash transactions in circumstances that he may or may not have had an involvement in the management of [NAME]. There seems to me to be no realistic possibility that [NAME] would or could conduct a roving inquiry as to the business affairs of other entities in issue in the Equity Proceedings in order to investigate that matter, and it makes no difference in that regard that the same solicitors act for [NAME] in the examination and a [NAME] in the Equity Proceedings. There is here no realistic prospect of overlap, at any level that can give rise to a material matter to be disclosed, between the examination and the Equity Proceedings.

5. Where there is no real prospect of overlap, the fact that litigation existed between a [NAME] of [NAME] and [NAME] is not, in itself, a matter which was material for disclosure, since it could have had no impact upon the registrar's decision whether to issue the examination summons, where it is [NAME] not the [NAME] who is conducting the examination. The fact of common representation also does not seem to me to be a material matter, on its own or in combination with other matters, where common representation between a [NAME] and a [NAME] has become, rightly or wrongly, increasingly common and increasingly permitted by the courts over the years. The existence of the Equity Proceedings might well have been material, had there been a real prospect of overlap between them and the examinations, or had the affairs of [NAME] been an issue in the Equity Proceedings or the affairs of the companies in issue in the Equity Proceedings a significant issue in the examinations. But that is not the case.

6. It may well be that [NAME] might, as a matter of more abundant caution, have preferably disclosed the existence of the Equity Proceedings in applying for a [NAME]'s examination of [NAME], not least because that would have avoided the prospect that an application of this kind would be brought. However, I am not satisfied that these matters were material so as to require disclosure, and where they were not material to require disclosure, the non-disclosure of them does not provide a basis to set aside the examination of [NAME].

Costs 1. Turning now to the question of costs, [NAME] rightly pointed out that [NAME] had obtained a degree of success, albeit by way of compromise between the parties, in respect of access to the affidavit in support of the examination. [NAME] responded, also correctly, that that was not by way of capitulation on [NAME]'s part. It seems to me that there should be no order as to the costs of the application for access to [NAME]'s affidavit in support of the examination summons.

2. On that basis, two forms of cost order could have been made, namely an order that [NAME] pay the costs of the application to set aside the examination of summons, excluding the costs of the application for access to that affidavit, or an order for the costs of today. The former would have involved costs, for both parties, in undertaking a segregation exercise and [NAME] has, it seems to me sensibly in the circumstances, favoured the latter. [NAME] supports that approach, so far as it will likely avoid the waste of costs in that segregation exercise, without resulting in [NAME] bearing liability for costs that he should not bear.

Orders 1. For these reasons, I make the following orders: 1 The Interlocutory Process dated 18 June 2020 and filed 19 June 2020 by [NAME] is dismissed. 2 [NAME] pay the costs of the hearing today in respect of the application to set aside the examination summons.

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