FEDERAL COURT OF AUSTRALIA

Kimberley Diamonds Ltd, in the matter of Kimberley Diamond Company Pty Ltd (in liq) [2016] FCA 1016

ORDERS

THE COURT ORDERS THAT:

1.    The summons for the examination of Sule Arnautovic dated 17 June 2016 and issued 20 July 2016 be permanently stayed.

2.    The order for production addressed to Sule Arnautovic dated 17 June 2016 be set aside.

3.    The plaintiff pay Sule Arnautovic’s costs of the amended interlocutory process dated 8 August 2016.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

GLEESON J:

1    By amended interlocutory process dated 8 August 2016, Mr Sule Arnautovic (“liquidator”) seeks an order that an examination summons requiring his attendance for examination pursuant to s 596A of the Corporations Act 2001 (Cth) (“Act”) be discharged, set aside or permanently stayed, on the basis that the examination summons is an abuse of process.

2    The examination summons was issued at the request of the plaintiff (“KDL”). KDL is the sole shareholder of KDC. It is not presently a creditor of KDC but is a defendant in Supreme Court proceedings commenced by the liquidator on 17 June 2016 for relief including an order pursuant to s 588FF of the Act for payment of monies to KDC in respect of an alleged unfair preference. If those proceedings are successful, KDL may become a creditor of KDC pursuant to s 588FI(3).

3    KDL’s stated purpose for the examination is to investigate the sales and marketing process undertaken in the liquidation of Kimberley Diamond Company Pty Ltd (in liquidation) (“KDC”) for the Ellendale diamond mine, including the mining lease, mine and processing plant.

4    The liquidator is one of two joint and several liquidators of KDC, appointed by a resolution of creditors of KDC pursuant to s 439C of the Act on 5 August 2015.

5    On 19 October 2015, the liquidators, under s 568 of the Act, issued a notice of disclaimer of onerous property in respect of KDC’s mining lease for the Ellendale diamond mine. The mine covers a 128 square kilometre area in the West Kimberley region, approximately 2,000 kilometres from Perth. The mine has historically been the world’s leading supplier of rare fancy yellow diamonds, producing almost 50% of the world’s supply, and was described by KDL as KDC’s “flagship asset”.

6    The notice of disclaimer was not challenged by KDL or anyone else under s 568B of the Act. However, KDL questioned the sales and marketing process for the mine and sought an explanation from the liquidators about the process that led to the disclaimer.

7    Being dissatisfied with the liquidators’ responses, KDL took steps to procure the examination summons. Section 596A of the Act provides, relevantly:

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 officer or provisional liquidator of the corporation or was such an officer or provisional liquidator during or after the 2 years ending:

…

(iii)    if the corporation is being, or has been, wound up – when the winding up began; or

(iv)    otherwise – when the application is made.

8    KDL applied to the Australian Securities and Investments Commission (“ASIC”) for “eligible applicant” status, and was granted that status pursuant to a decision made on 13 May 2016. Accordingly, KDL satisfied the requirement of s 596A(a). ASIC did not give reasons for its decision, and it was not suggested that ASIC was required to do so: cf Soper v Australian Securities & Investments Commission [2004] FCA 854; (2004) 207 ALR 509 at [35]; Saraceni v Australian Securities and Investments Commission [2013] FCAFC 42; (2013) 211 FCR 298 at [160].

9    The liquidator has not challenged ASIC’s decision to grant KDL eligible applicant status.

10    The “examinable affairs” of a corporation, also defined by s 9 of the Act, include the winding up of the corporation. See also s 53(d) of the Act.

11    As to s 596A(b), the liquidator is an “officer” of KDC, as defined by s 9 of the Act.

12    KDL submitted that the examination of a liquidator’s conduct in the course of a winding up is explicitly recognised at law, by reference to ss 9 and 596A of the Act and the following statement of Lander J in Evans v Wainter Pty Ltd [2005] FCAFC 114; (2005) 145 FCR 176 (“Evans”) at [72]:

… a liquidator, an administrator and an administrator of a deed of company arrangement can be both an eligible applicant and an examinable officer. There is nothing surprising about that. It may be that in a given case ASIC has a need to inquire into the conduct of the examinable affairs of a corporation during a liquidator’s administration. So also a liquidator might need to inquire into a corporation’s examinable affairs constituted by events which occurred whilst the corporation was under the control of an administrator. Section 596A is in the widest possible terms so that the relevant eligible applicant can inquire into the examinable affairs of the corporation. The eligible applicant need only establish that he or she has that status and that the person who is sought to be summoned is an examinable officer within the meaning of s 596A(2). The eligible applicant does not have to establish any reason for seeking an order to summon a person for examination.

13    The purpose of the examination was stated by KDL in its application to ASIC for eligible applicant status, as follows:

KDL has a single focus in seeking to examine the liquidators, and if eligible applicant status is granted, will undertake to not examine the liquidators beyond the parameters set out below.

The specific (and sole) area of interest is in the sales and marketing process (Sales Process) undertaken by the liquidators for the Ellendale mining lease, mine and processing plant (Mine). Our client is concerned about the conduct of the Appointees given that the Mine was a very valuable asset, but was disclaimed for nil value by the liquidators after a short and defective Sales Process. Our clients’ specific concerns with the Sales Process include the following, which we set out in further detail below:

•    Inadequacy of Sales Process: The duration of two months for the Sales Process was grossly inadequate given the uniqueness and international appeal of the Mine; and

•    Conduct of Sales Process: The conduct of the Sales Process itself was defective in a number of respects, including that much of the information integral to a due diligence process – relevant to an interested party forming a view on value so as to make an offer – appears to have been disposed of prior to the disclaimer of the Mine. In addition, our client has been informed by a third party who was involved in that process that no site visit was available to a potential purchaser, nor did the liquidators provide appropriate technical explanations or appropriate personnel to enable potential purchasers to make sense of the various technical documents and datasets. There is also a concern that appropriate professional advice was not obtained by the Liquidators in relation to the Sale Process.

14    The liquidator did not suggest that KDL has any ulterior purpose for the examination. Mr Sexton SC, senior counsel for the liquidator, submitted that the Court can be satisfied that the purpose of the examination is to investigate apparent concerns that the liquidators of KDC may not have properly performed their primary obligation, being the liquidation of KDC’s assets.

15    The liquidator accepted that s 596A is sufficiently broad to permit an examination of the liquidator by KDL, as an eligible applicant, in relation to the proposed subject matter of the examination.

16    Even so, as Mr Sexton SC put it, the liquidator is in a special category compared with some of the other types of persons who may be summonsed for examination under s 596A. In particular, even a voluntary liquidator is treated “virtually as the delegate of the Court”: Re Biposo Pty Ltd; Condon v Rodgers (1995) 120 FLR 399 at 403. Mr Sexton SC noted that the Court has a supervisory function over the conduct of liquidators, including voluntary liquidators, typically exercised by an inquiry under s 536 of the Act. Further, courts are reluctant to interfere with decisions of liquidators involving the exercise of commercial judgment; courts refuse to allow liquidators to be the subject of proceedings without leave and they will not permit an inquiry under s 536 of the Act unless satisfied that there is a prima facie case.

17    Section 536 provides:

Supervision of liquidators

(1A)     In this section:

liquidator includes a provisional liquidator.

(1)    Where:

(a)    it appears to the Court or to ASIC that a liquidator has not faithfully performed or is not faithfully performing his or her duties or has not observed or is not observing:

(i)    a requirement of the Court; or

(ii)    a requirement of this Act, of the regulations or of the rules; or

(b)    a complaint is made to the Court or to ASIC by any person with respect to the conduct of a liquidator in connection with the performance of his or her duties;

the Court or ASIC, as the case may be, may inquire into the matter and, where the Court or ASIC so inquires, the Court may take such action as it thinks fit.

(2)    ASIC may report to the Court any matter that in its opinion is a misfeasance, neglect or omission on the part of the liquidator and the Court may order the liquidator to make good any loss that the estate of the company has sustained thereby and may make such other order or orders as it thinks fit.

(3)    The Court may at any time require a liquidator to answer any inquiry in relation to the winding up and may examine the liquidator or any other person on oath concerning the winding up and may direct an investigation to be made of the books of the liquidator.

18    In that context, Mr Sexton SC argued that the examination summons is an abuse of process because it places an unnecessary imposition on the liquidator when there is no realistic prospect of the examination having any practical utility. Mr Sexton SC noted that the categories of abuse of process are not closed: Batistatos v Roads and Traffic Authority of New South Wales [2006] HCA 27; (2006) 226 CLR 256 (“Batistatos”) at [9]. If it were necessary to place the abuse within a particular category, Mr Sexton SC submitted that the examination falls within the second of the three categories identified by McHugh J in Rogers v The Queen [1994] HCA 42; (1994) 181 CLR 251 at 286, namely the use of the Court’s procedures that is unjustifiably oppressive to a party.

Background to application

19    KDL is an ASX-listed diamond mining and exploration company which conducts mining and exploration operations in Australia, Botswana and Spain. KDC was a subsidiary of KDL until it was placed into voluntary administration on 1 July 2015.

20    In January 2013, KDL (then called Goodrich Resources Ltd) purchased KDC from Gem Diamonds Ltd for approximately $13.5 million. Following the purchase, Goodrich Resources Ltd changed its name to KDL to reflect its principal asset, being the Ellendale diamond mine.

21    On 1 July 2015, the liquidator, Mr Christopher Michael Williamson and Mr Trajan John Kukulovski were appointed as joint and several administrators of KDC, by resolution of the board of KDC pursuant to s 436A of the Act. In a report pursuant to s 439A(4) of the Act dated 28 July 2015 (“administrators’ report”), the administrators explained the reasons for their appointment as follows:

Subsequent to our appointment as Administrators, we were advised by KDL’s solicitor that the board of directors of KDL met on 26 May 2015 to consider the provision of further finance to KDC. The board resolved to provide further financial assistance to KDC, but only on the basis that security was taken. We were further advised that at the time of discussion by the KDL board in May 2015, it was not anticipated that KDC would cease its mining operation in the immediate term. This was consistent with expectations by KDL, in this regard, prior to the diamond auction on 24 June 2015, it was forecast that wholesale rough diamond prices for the diamonds to be offered for sale in June 2015 were (on average) in the vicinity of $143 per carat. Budgeting even on the basis of conservative (smaller) pricing, this demonstrated the continuing viability of KDC’s diamond mining operations.

We were further advised, by KDL’s solicitor that on 19 June 2015 there was a major (USD $100 million) bankruptcy in the diamond industry, causing market disruption. At the diamond auction that took place on 24 June 2015, pricing of only $105 per carat was achieved, representing a dramatic drop in the wholesale market price of rough diamonds and additionally a much smaller price per carat than what had been budgeted for. In addition approximately USD $600,000 worth of diamonds were withdrawn from the auction and not sold. Immediately following the completion of the auction, given the drop in wholesale diamond prices, KDL management undertook financial forecasting to determine whether it was viable to continue supporting KDC’s operations. After extrapolating prices achieved at the June 2015 auction into forecasts for KDC’s operations for the remainder of the 2015 calendar year, it became clear to KDL that conducting the mining operations was no longer financially viable and KDL determined to withdraw its financial support to KDC. Without KDL’s financial support, and given the state of the wholesale diamond market, KDC could no longer continue operating as it would become unable to meet its debts as and when they became due and payable. Accordingly, the proper course was for KDC’s directors to forthwith place the Company into Administration.

22    According to the administrators’ report, the administrators’ view was that a sale of KDC’s business was in the best interests of creditors. The report states that the administrators commenced a comprehensive marketing campaign immediately upon their appointment.

23    The administrators’ report notes that, in KDC’s financial statements, the company had accrued an amount of $28,321,553 in respect of rehabilitation of the mine. The administrators also set out the following material concerning the West Australian Mine Rehabilitation Fund:

From 1 July 2013, the Western Australian Government introduced a new fund to address the state’s unfunded liability for abandoned mine site rehabilitation. Most tenement holders under the WA [M]ining Act will be required to contribute to an annual levy, calculated as 1% of the estimate total mine closure cost.

On 8 July 2015, the Western Australian Government Department of Mines & Petroleum (“DMP”) confirmed that the Company was required to report disturbance data and contribute annually to the Mining Rehabilitation Fund (“MRF”). The MRF is a pooled fund contributed to by mining operators in WA to rehabilitate abandoned mines across the state.

The WA Government has advised the following in relation to the MRF:

•    Money in the fund will be used for rehabilitation where the tenement holder or operator fails to meet rehabilitation obligations and every other effort has been used to recover funds from the operator;

•    The introduction of the MRF does not absolve tenement holders/operators of their legal obligations to carry out rehabilitation works on a tenement;

•    The introduction of the MRF does not absolve tenement holders/operators of their legal obligations to carry out rehabilitation works on a tenement; and [sic]

•    The Company completed the 2014-2015 MRF report on time and has been issued with levy notices totalling $403,224 due by 9 October 2015.

We have sought legal advice on the nature of the MRF levy and we consider it to be a pre­appointment/provable debt.

We note there is also a liability provision in the balance sheet of the Company (as at 30 June 2015) in the amount of $28,321,553 for rehabilitation. This is the Company’s estimate of the rehabilitation cost, but the obligation is to rehabilitate whatever the cost is.

24    In a report to creditors dated 25 November 2015, the liquidators reported, relevantly:

3.2    Sale of Business Process & Auction

The sale of business process that we commenced as Administrators of the Company was ultimately unsuccessful. Whilst we received more than twenty (20) expressions of interest, all offers received were less beneficial to creditors overall than a sale of the Company’s plant and equipment separately.

In evaluating the commerciality of any sale of business, creditors are advised that we considered all offers on the basis of how that sale would benefit all creditors. In this regard, the estimated net benefit to all creditors was greater through conduct of an auction of all plant & equipment and we had our asset managers conduct an online auction on 10 & 11 September 2015. We note that the collective realisations from the auction of the plant & equipment exceeded the forced liquidation valuation of the assets. For further information in relation to the realisations from this auction are available in section 5.4 of this report.

3.3    Disclaimer of Ellendale Mine Site

Creditors are advised that delivery of all the assets to the successful purchasers was undertaken during the period 12 September 2015 to 9 October 2015. Following the completion of delivery, our staff and legal representatives met with the DMP to discuss the viability of the Mining Leases covering the Ellendale Mine Site. Creditors are advised that significant costs were being incurred with the ongoing occupation of the Ellendale Mine site by us as we were required to keep the mine site in care and maintenance.

As it seemed highly unlikely a sale of the tenements was possible and costs were still being incurred, on 19 October 2015, we issued a Notice of Disclaimer of Onerous Property in relation to Mining Lease covering the Ellendale Mine Site in accordance with Section 568 of the Act. This action was taken to avoid creditors bearing any further costs of the ongoing occupation of the Ellendale Mine Site. We further note that the validity of this Disclaimer was not challenged during the following fourteen (14) day period available to parties that may wish to challenge the Disclaimer.

25    A statement of position annexed to the report to creditors records a total deficiency to creditors of between $65,160,205 and $66,364,935 including a liability of $29,746,040 to the West Australian Department of Mines and Petroleum (“WADMP”). The report noted that no proof of debt had been received in relation to this liability, even though the Department were invited to lodge one.

26    By letter dated 10 December 2015, KDL’s lawyers, Henry Davis York, wrote to the lawyers for KDC’s liquidators, ERA Legal, about KDL’s concerns regarding the liquidators’ sale process and the disclaimer. The letter stated that the disclaimer had occurred after a two month period in circumstances where the Ellendale mine was a very valuable asset. The letter recorded that:

(1)    the former owners of the Ellendale mine had purchased the mine in 2007 for $300 million;

(2)    KDL purchased the mine in 2013 for $13.5 million; and

(3)    the audited half-yearly accounts as at December 2014, prepared by Ernst & Young, calculated the net present value of the mine at $40.1 million with a base case of $21.3 million.

27    The letter sought a written account of all steps taken by the liquidators to market for sale the Ellendale mine and assets associated with the mining operation. The letter stated that the account should address the following questions:

(1)    did the liquidators undertake a valuation of the Ellendale mine? (A copy of any such valuation was requested.)

(2)    how did the liquidators come to the conclusion in a two month timeframe that it was unable to sell the Ellendale mine for value?

(3)    who did the liquidators approach in terms of their attempts to sell the Ellendale mine?

(4)    what steps did the liquidators take to market the Ellendale mine and obtain proper value for creditors of KDC?

28    Between February and April 2016, there was correspondence between Henry Davis York and ERA Legal about the sale process.

29    By letter dated 11 April 2016, Henry Davis York applied to ASIC for KDL to be granted eligible applicant status. KDL’s application was made on the basis that it is a contributory of KDC. As noted earlier, that status was granted by ASIC on 13 May 2016.

30    Attached to the 11 April 2016 letter was an information sheet prepared by the WADMP dated December 2015. The information sheet contains the following information concerning the Ellendale diamond mine:

The diamond resource that exists within M04/372 is of significant value to the State of Western Australia.

and

It should be noted that the site will not be fully rehabilitated or closed through the [Mining Rehabilitation Fund] as it remains a viable resource project.

31    Another attachment to the 11 April 2016 letter is a statutory declaration of Rodney Sainty, a director of KDL. The statutory declaration, made on 11 April 2016, states relevantly:

3.    On 15 February 2016. I contacted Dr Shuang Ren, an experienced geologist and former colleague in another company, who is now an independent consultant. Dr Ren had contacted me during the Ellendale sale process seeking further information about Ellendale for his evaluation of it as a potential purchase for a client. I know therefore that he would be able to describe the Liquidators’ sale process firsthand.

4.    As Dr Ren spoke, I recorded his comments by hand on a fresh A4 sheet of paper, quoting specific phrases that he used and emphasised. I later scanned and saved that sheet of paper in PDF form. A copy of that PDF appears as Annexure A to this statutory declaration.

5.    Dr Ren made the following specific comments in respect of the Liquidators’ sale process:

(a)    The Liquidator had prepared a brief introduction document and had set up an electronic data room containing technical data (the data room required a password to access). However, there was no additional explanation nor technical personnel available to help explain how the various documents within the data room were interrelated.

(b)    His recollection was that the Liquidator did not offer a site visit. and when one was requested, a site visit was unavailable.

(c)    The time period available to assess the project was “very tight”. From the time he was able to obtain the data from the Liquidator to when the bid was required to the Liquidator was “virtually only a couple of weeks”.

(d)    Given the above-described constraints, he found it “impossible to come up with a reasonably professional view” of the value of Ellendale in the time period required.

(e)    There was “no negotiation, no process” to the sale. Potential purchasers were expected to “just submit a bid”.

(f)    He finished his description with the statement: “As you can understand, given these constraints, we did not submit a bid”.

(g)    Lastly, he summarised his view of the Liquidator’s sale process as “A fire mortgage sale; a slash and burn exercise”.

32    The 11 April 2016 letter included the following statement:

It is KDL’s view that if properly marketed and sold the proceeds of the sale of the Mine may have met the claims of all of KDC’s creditors and resulted in a dividend to KDL as shareholder.

33    Before this Court, KDL did not seek to adduce evidence or otherwise explain the basis for its view, as expressed to ASIC.

34    By originating process dated 31 May 2016, KDL applied under ss 596A and 597(9) of the Act and r 30.34 of the Federal Court Rules 2011 to conduct a public examination of the liquidator and for an order for production of documents by the liquidator in relation to the examinable affairs of KDC.

35    On 20 July 2016, the Court issued the examination summons and the order for production.

36    KDL is prepared to fund the examination at no cost to KDC.

Consideration

Purpose of public examinations

37    In Hamilton v Oades [1989] HCA 21; (1989) 166 CLR 486 at 496, Mason CJ stated that a compulsory examination is designed to serve the following two important public purposes:

One is to enable the liquidator to gather information which will assist him in the winding up; that involves protecting the interests of creditors. The other is to enable evidence and information to be obtained to support the bringing of criminal charges in connection with the company’s affairs: Mortimer v. Brown. Sub-section [541](2)(a) and (b) [of the Companies (New South Wales) Code] emphasizes the high public importance of these purposes. The examination is designed to elicit, among other things, evidence and information relating to the question whether the witness “has been, or may have been, guilty of fraud, negligence, default, breach of trust, breach of duty or other misconduct in relation to” the corporation.

38    In Evans, Lander J (Ryan and Crennan JJ agreeing) expressed the view (at [116]) that the two purposes identified by Mason CJ are not necessarily the only purposes for which s 596B has been enacted. That observation may be taken to apply to s 596A. At [119], Lander J concluded that “[a]ny purpose that will benefit the company, its creditors, its members or the public generally will be within the contemplation of the section”.

Court’s power to grant relief

39    The Court has implied jurisdiction to stay an examination pursuant to a summons issued under s 596A which is an abuse of process: Carter v Gartner [2003] FCA 653; (2003) 130 FCR 99 at [27]. As Branson J observed:

It is important to note that the fact that the Court must issue a summons under s 596A if the criteria for issue are satisfied does not mean that a person against whom a summons is issued has no remedy if the predominant purpose of the applicant is an improper purpose.

40    Further, by r 11.5 of the Federal Court (Corporations) Rules 2000, a person served with an examination summons may apply to the Court for an order discharging the summons in accordance with that rule.

41    In Evans at [85], Lander J (Ryan and Crennan JJ agreeing) concluded that the Court can set aside an order made under s 596A if the Court is satisfied that the order was obtained for an improper purpose.

Abuse of process

42    In Batistatos, the plurality stated at [6]:

In Walton v Gardiner, the majority, Mason CJ, Deane and Dawson JJ, accepted as correct the passage in Hunter in which Lord Diplock spoke of “the inherent power which any court of justice must possess to prevent misuse of its procedure in a way which, although not inconsistent with the literal application of its procedural rules, would nevertheless be manifestly unfair to a party to litigation before it, or would otherwise bring the administration of justice into disrepute among right-thinking people”. His Lordship went on to describe as “very varied” the circumstances where “abuse of process” can arise.

43    The concept of abuse of process cannot be described exhaustively and is “not restricted to defined and closed categories” because, as Gaudron J explained in Ridgeway v The Queen [1995] HCA 66; (1995) 184 CLR 19 at 75, cited with apparent approval in Batistatos at [14]:

… notions of justice and injustice, as well as other considerations that bear on public confidence in the administration of justice, must reflect contemporary values and, as well, take account of the circumstances of the case. That is not to say that the concept of ‘abuse of process’ is at large or, indeed, without meaning. As already indicated, it extends to proceedings that are instituted for an improper purpose and it is clear that it extends to proceedings that are ‘seriously and unfairly burdensome, prejudicial or damaging’ or ‘productive of serious and unjustified trouble and harassment’.

44    Nevertheless, in Rogers v The Queen (1994) 181 CLR 251 at 286 and cited with apparent approval in Batistatos at [15], McHugh J said that generally an abuse of process falls within one of three categories:

(1)    invoking of a Court’s processes for an illegitimate or collateral purpose;

(2)    where using the Court’s procedures would be unjustifiably oppressive to a party; or

(3)    where using the Court’s procedures would bring the administration of justice into disrepute.

Special position of liquidators

45    In Sydlow Pty Ltd (In Liq) v TG Kotselas Pty Ltd (1996) 65 FCR 234 at 238-239, Tamberlin J described the office of liquidator as follows:

The office of a person appointed liquidator to a corporation does not fit any precise legal category or classification which defines the rights and liabilities attaching to that office. It is a hybrid composite with elements of fiduciary, trustee, agent, officer of the corporation and (in some instances) “officer” of the Court. Attached to those elements are the obligations along with the powers and discretions which apply to those roles. The liquidator’s office is described in Loose on Liquidators (3rd ed, 1989), p 13 as:

“ ... a cross between a trustee and an agent or, alternatively, like the directors, whose powers terminate upon the commencement of a winding up, as a fiduciary agent of the company. Thus a liquidator must not only act bona fide and reasonably and exercise his powers for their proper purposes only but must also exercise reasonable care and skill in the performance of his duties. Failure to exercise the necessary degree of skill and care may inter alia deprive him of his costs.

A liquidator is also under a fiduciary duty in respect of the assets of the company of which he is appointed. As such he should not purchase assets of the company. Similarly, a liquidator may be required to disgorge any secret profit made ... in consequence of ... his office as liquidator and transaction with an associate may be set aside ...

The liquidator differs from the normal agent, however, in that he himself controls the actions of his principal, ie the company. Furthermore his duties as agent of the company are subject to his overriding statutory duties to apply the company’s assets in paying creditors and to distribute any surplus amongst the members.”

46    At 241, Tamberlin J continued:

In Re Siromath Pty Ltd at 29 McLelland J said:

“The control by the Court over the circumstances in which, and the extent to which, its own officers are to be subjected to personal pecuniary liability in respect of their activities in the course of the performance of their official duties falls clearly within the concept of the protection by the Court of its own processes ...”

The Court, when administering the Law, is concerned to ensure that the winding up is implemented in a timely and efficient manner, so as to produce optimum results for all persons interested in the winding up. In order to achieve this result, the Court must protect the integrity of the winding up under its supervision and control, by taking appropriate steps to prevent any proceedings or conduct which will wrongfully impede that process. One way in which this can be carried out is to require the grant of leave by the Court in respect of an action against an official liquidator, so that the Court can satisfy itself that there is no wrongful interference with the process. Such interference may arise where, for example, proceedings are initiated or continued without any legal basis or prospect of success or for an improper or collateral purpose. This appears to be the principle which underlies the established requirement that leave is necessary in order to sanction proceedings against an official liquidator.

47    There is no duty upon a liquidator to obtain the best possible price for the company’s assets. In Hausman v Smith [2006] NSWSC 682 at [10], Barrett J said relevantly:

They, as fiduciaries and by statute, owe duties of care, diligence and good faith, among other duties. Administrators and liquidators are both “officers” within the s 9 definition and therefore not only subject to the duties arising under ss.180 and 181 but also entitled to the benefit of the business judgment rule in s.180(2). Proceeding in a prudent way in relation to sale of assets is an incident of those duties. But on no view of matters can the duties be said to include a duty to sell only at “the best possible price”. Administrators and liquidators are entitled to take into account a wide range of considerations.

48    At [14], Barrett J quoted with approval, from the judgment of Young CJ in Eq in Naumovski v Parbery [2002] NSWSC 1097; (2002) 171 FLR 332, the following passage:

[13]    There is a considerable amount of learning to the effect that under the modern system of company liquidation, the Court rarely interferes with the exercise by liquidators of their statutory powers, and in particular, it does not interfere where the liquidator’s decision is really one of commercial judgment.

[14]    In Leon v York-O-Matic Ltd [1966] 1 WLR 1450; [1966] 3 All ER 277, Plowman J considered it appropriate to apply the principles of bankruptcy law to company liquidations and held that the Court would not interfere with the sale by a liquidator unless he was acting in a manner in which no reasonable liquidator could act. His Lordship quoted the words of C E Harman J in Re A Debtor (No 400 of 1940) [1949] Ch 236, 241, that:

“Administration in bankruptcy would be impossible if the trustee must answer at every step to the bankrupt for the exercise of his powers and discretions in the management and realisation of the property.”

He also quoted the words of Sir George Jessel MR in Re Peters; Ex parte Lloyd (1882) 47 LT 64, 65, where his Lordship said in a bankruptcy case:

“The court will not interfere unless the trustee is doing that which is so utterly unreasonable and absurd that no reasonable man would so act.”

[15]    In Re Mineral Securities Australia Ltd [1973] 2 NSWLR 207, 230-1, L W Street CJ in Eq discussed and applied these principles to the conduct of liquidations in this State. Both the York-O-Matic case and the Mineral Securities case have been followed on countless occasions by courts in this country in the last 30 years; see eg Yeomans v Walker (1986) 5 NSWLR 378 and UTSA Pty Ltd v Ultra Tune Australia Pty Ltd [1997] 1 VR 667.

49    However, as Mr Sulan (counsel for KDL) submitted, the liquidator is not immune from suit if the liquidators have failed to conduct a proper and reasonable sales campaign which has caused loss to KDC.

50    In Honest Remark Pty Ltd v Allstate Explorations NL [2006] NSWSC 735; (2006) 201 FLR 456 (“Honest Remark”) at [98], Brereton J explained:

… leave is required to bring an action against liquidators (McDonald v Dare; Sydlow Pty Limited (in liq) v TG Kotselas Pty Ltd; Mamone v Pantser; Re Siromath; Re Biposo). The purpose of this requirement is to prevent harassment of the court’s officer and interference with the administration by unmeritorious claims. On an application for such leave, the court would require, at least, that a prima facie case be established (Re Siromath; Re Biposo).

51    At [62], his Honour held that there is no power to appoint a special purpose liquidator for the purpose of investigating the conduct of the original liquidator as such. At [98], his Honour concluded that Honest Remark’s application “outflanked” the protection provided by the requirement for leave to bring an action against the liquidator.

52    His Honour noted (at [59]) that the investigation of the conduct of a liquidator qua liquidator is a supervisory function of the court. Brereton J continued:

There are very good reasons why this is so. The investigation of the conduct of a liquidator qua liquidator is not part of the matters entrusted to a liquidator; it is a supervisory function of the court. The court does not readily embark on or permit inquiries into the conduct of liquidators, in the absence of conduct liable to attract sanctions or control for what might broadly be described as disciplinary reasons (Northbourne Developments Pty Ltd v Reiby Chambers Pty Ltd (1989) 19 NSWLR 434 at 438-439; Belvista Pty Ltd v Murphy (1993) 11 ACSR 628 at 630). As the cases referred to by Mullins J in McDonald v Dare show, courts protect their liquidators by refusing to allow them to be the subject of proceedings without leave. As Young J has said (in Re Biposo Pty Ltd; Condon v Rogers (1995) 120 FLR 399 at 403):

The liquidator, even in a voluntary winding up, has very strong powers which have been given to him under the Corporations Law, virtually as the delegate of the court, or the delegate of the Australian Securities Commission, to see that fair play is done between the competing interests in a liquidation. Up until the bulk of the work became so heavy and, indeed, as is still the case in some other jurisdictions, the matters which under New South Wales law are entrusted to a liquidator were part of the functions of a court official.

The court will be very jealous of its delegate exercising the powers that it is given. The court will take every precaution to make sure that those powers are used impartially and for a proper purpose. The corollary of this is that the court will not permit its officer to be sued by a creditor or have an inquiry made under s536 unless it is satisfied that there is a prima facie case; Re Siromath Pty Ltd (1991) 9 ACLC 1583 [(sic) 9 ACLC 1587] at 1590 [Re Siromath Pty Ltd (No 3) (1991) 25 NSWLR 25 at 28-29].

53    At [61], his Honour expressed the view that an investigation by one of several liquidators into the conduct of another in the liquidation “does not involve carving out of the liquidation a part of the ordinary responsibilities of the liquidator. To the contrary, it involves circumventing the ordinary and proper procedures for supervision of liquidators, and the protections that attend them”. At [62], his Honour expressed the view that an investigation into the conduct of the liquidator in the liquidation “is not part of the administration, and it cannot therefore be carved out of the administration and given to a special purpose liquidator”.

54    In considering s 447E of the Act, which applies to administrators and is relevantly similar to s 536, Brereton J noted (at [79]) that the Court’s jurisdiction under that section:

… requires satisfaction of the court that the administrator has managed or is managing the company’s business property or affairs in a way that is prejudicial to the interests of some or all of the creditors or members, or has done or proposes to do an act or omission that is or will be prejudicial to such interests. It is insufficient that the conduct might be prejudicial; establishment of the ground for exercise of power under s 447E requires proof of conduct or proposed conduct that is or would be prejudicial – not that might be prejudicial.

55    At [82], his Honour continued:

… demonstration of prejudice requires a comparison between the actual position of the creditors or members, and their hypothetical position assuming that the relevant prejudicial conduct does not occur (cf Lam Soon Australia Pty Ltd v Molit (No 55) Pty Ltd (1996) 70 FCR 34 at 48; (1996) 22 ACSR 169, 186). In this case, that means a comparison of their position if there be no investigation, with that if there be an investigation. While it is conceivable that an investigation would establish that Honest Remark’s concerns are well-founded, and even that there are prospects of obtaining substantial compensation, that is at this stage, and will at the final hearing remain, speculative; there is and will then be the alternative prospect that an investigation would result in the expenditure of further assets and resources of Allstate, for no productive benefit. The pleading does not assert, and Honest Remark does not undertake to prove at the final hearing, that creditors and/or members would be better off were an investigation to take place. In my opinion, Honest Remark’s case, taken at its highest, by expressly eschewing any requirement to prove that the position of creditors and/or members would be better as a result of an investigation, must fail to establish prejudice within s 447E. Accordingly, taking Honest Remark’s case at its highest, it does not allege facts capable of sustaining prejudice for the purposes of s 447E.

56    Brereton J considered the alternative position that is, that there was power to appoint a special purpose liquidator. At [94], matters which he identified as relevant to the question of discretion were “the inconsistency of such an order with the attitudes which courts take to actions against insolvency administrators” and the inconsistency with “the restraint with which the courts permit actions against liquidators and trustees in bankruptcy”. At [95], his Honour said:

[T]o grant such relief, when there are other statutory remedies apt for the circumstances, would circumvent the safeguards that the law and the legislature have put in place in respect of proceedings against liquidators and administrators. The Corporations Act provides orthodox remedies for the present circumstances: to inspect company documents (s 247A), to bring a derivative action (s 236), to appeal from the administrator’s decision (s 1321), and to seek an order regulating or remedying prejudicial acts or omissions of the administrator (s 447E).

57    In Eighty Second Agenda v Handberg [2014] VSC 665; (2014) 32 ACLC 14-081 at [29] to [30], Croft J expressed the view that the requirement for leave to bring an action against liquidators probably extends to a voluntary liquidator in order to discourage litigation against liquidators and to allow for the timely and efficient resolution of the liquidation process.

58    In Re Joe & Joe Developments Pty Ltd [2014] NSWSC 1444, Black J emphasised that s 447E “does not contemplate that the Court will enter into the field of commercial decision-making undertaken by an administrator or remake business and commercial decisions of an administrator, even if those decisions have a legal element or legal context”, and the notion of what is or would be prejudicial in that section “must be set against the background of the Act and the sorts of considerations which have time and again been identified by the courts about the care with which interference with business decisions especially of people such as liquidators and administrators should be made”: Patrick Stevedores Operations No 2 Pty Ltd v Maritime Union of Australia (No 3) [1998] HCA 30; (1998) 195 CLR 1 at [53]-[54]; Naumoski v Parbery [2002] NSWSC 1097; (2002) 171 FLR 332 at [13]-[15]; Re Pan Pharmaceuticals Ltd (admins apptd); Selim v McGrath [2003] FCA 855; (2003) 47 ACSR 139 at [50]-[51].

Position of trustees in bankruptcy

59    In Hall v Poolman [2009] NSWCA 64; (2009) 75 NSWLR 99, the Court of Appeal referred to the development of case law with respect to supervision of liquidators by reference to the parallel case law arising in the courts’ supervision of trustees in bankruptcy. At [73], their Honours referred to the following passage from Re Gault; Gault v Law (1981) 57 FLR 165 at 173 concerning an inquiry under s 179 of the Bankruptcy Act 1966 (Cth) (“Bankruptcy Act”):

[T]he court should be loath to order an inquiry unless it considers that on the evidence before it there are substantial grounds for believing that the trustee erred in his administration. If the court considers that an inquiry is unlikely to reveal misconduct it should not make an order and put the respondent and possibly the creditors to the expense and trouble involved. It should also be borne in mind that a debtor applicant may have other remedies to pursue, for example, in an action for breach of trust.

60    At [76], their Honours referred to the following statement of French J (as his Honour then was) in Macchia v Nilant [2001] FCA 7; (2001) 110 FCR 101 at [50]:

Section 179 operates in aid of the Court’s supervision of trustees who are its officers. That operation, however, is subject to restraint against undue interference and to discretionary considerations including the practical benefit likely to be derived from the conduct of any inquiry. Like s 178, it may be invoked by a bankrupt after discharge and in part for the same reason, namely that the trustee’s powers continue in the various ways referred to by Merkel J at first instance in Cheesman. It may also be the case that the trustee should be held to account for conduct in the administration of the estate which has affected the bankrupt in some way. As is the case with s 178, it is not a vehicle for pressing claims for common law damages under the general law. That is a matter for a court of appropriate jurisdiction. In addition the court will also have in such cases the discretion to determine the utility of an inquiry and its likely outcomes. For “although the court is given a broad discretion under s 179 of the Act, that discretion must be exercised in the interests of the orderly administration of the bankrupt’s estate” – Re Challen (a Bankrupt); Ex parte Brown v Bendeich (unreported, Federal Court, Beaumont J, No QB 1548 of 1993, 23 April 1996) cited with approval by Merkel J in Cheesman at first instance, at 114.

61    The parties did not refer to any example of the use of the examination power in s 34 of the Bankruptcy Act to examine a trustee in bankruptcy.

Does the examination require justification?

62    The case law set out above supports a conclusion that the mandatory examination of the liquidator should not be permitted to proceed unless there is reason to believe that the examination may fulfil the purpose of s 596A being to benefit the company, its creditors, members or the public generally. That conclusion is based upon the role of the Court in protecting the integrity of the winding up, and in ensuring that the winding up is conducted in a timely and efficient manner. The conclusion is consistent with the requirements for the grant of leave to commence proceedings against a liquidator and for grounds to commence an inquiry under s 536.

63    Accepting that the language of s 596A is in the “widest possible terms”, it does not prevent the Court from examining the purpose of the examination, and its possible results, with a view to staying the examination summonses if those matters do not justify the mandatory examination of the liquidator in this case. The undoubted existence of an express power to do precisely what KDC seeks to do (as Mr Sulan put it) does not compel a conclusion that the Court should not examine whether its exercise can be justified, as appears from Batistatos at [6], set out at paragraph [42] above.

64    On behalf of KDL, Mr Sulan submitted that an application under s 536 is of a different character from a mandatory examination under s 596A. In particular, he noted that s 536 confers a power to affect rights, by an order requiring the liquidator to “make good any loss” or to “make such further or other orders as the court sees fit”. Thus, the “safeguards” provided in the context of a s 536 application are unnecessary in the context of an examination. I am not convinced that this conclusion follows from the stated premises. The examination summons involves a challenge to the integrity of the liquidation process in relation to KDC. Such a challenge warrants justification, to avoid intrusion into the regular administration of the liquidation (which has not concluded) and to prevent the liquidator from being required to account on oath for the exercise of discretions and commercial judgments if there is no suggestion of lack of good faith or breach of duty.

65    Mr Sulan argued that the purpose of s 596A is exploratory. In this case, he submitted, the purpose is to gather information and to find out whether the sale process has miscarried in the way that (he argued) it appears to have, and whether or not that leads to potential actions. Mr Sulan argued that the available facts are suggestive of a defective sales process and liquidators’ responses to KDL’s reasonable requests for information about the process were inadequate.

66    The particular facts relied upon by Mr Sulan were:

(1)    the apparent absence of any form of valuation obtained by the liquidators for the mine;

(2)    the sale process was completed within a two month period which, in the opinion of KDL, was insufficient for the process to be conducted adequately;

(3)    There is real doubt whether or not proper information was ever available to any interested purchaser;

(4)    an apparent failure to advertise the sale of the mine internationally;

(5)    the statements by the West Australian government to the effect that the mine was a an asset of “significant value to the State of Western Australia” and a “viable resource project”; and

(6)    the absence of information about which experts were retained to advise on the sale process.

67    Mr Sulan contended that the Court is not in a position to determine that the examination lacks a realistic prospect of having any practical utility. In particular, he argued, the Court is unable to reach any conclusion about the value of the mine.

68    Mr Sulan argued that, if conduct is revealed which may support a claim, then it is plainly in the interests of the creditors and contributories for that conduct to be revealed. Uncovering facts which may support such a claim through the examination would fulfil two of the commonly cited purposes of the examination power, namely:

(1)    the protection of the interests of the corporation’s creditors; and

(2)    enabling evidence and information to be obtained to support the bringing of proceedings against examinable officers and other persons in connection with the examinable affairs of the corporation: see Evans at [252].

69    On the other hand, Mr Sulan properly acknowledged the prospect that the examination might reveal no conduct capable of supporting a claim.

70    In this case, there is presently no positive evidence of any of the following:

(1)    fraud, dishonesty or other misconduct, or any lack of bona fides on the part of the liquidators in connection with the sale process;

(2)    any conflict of interest or lack of impartiality affecting the liquidators’ conduct of the sale process;

(3)    the sale process having been conducted in a manner which was inconsistent with the proper discharge of the liquidators’ functions. For example, there is no evidence of any improper purpose on the part of the liquidators in the manner of their conduct of the sale process;

(4)    any particular flaw in the liquidators’ exercise of commercial judgment in connection with the disclaimer of the mine; or

(5)    that there may have been a different outcome, more favourable to the liquidation, if the liquidators had conducted the sale process differently.

71    The statements made by the WADMP do not provide substantial support to KDL’s position in the absence of any explanation of the basis for the views expressed in such general terms.

72    Nor does Mr Sainty’s statutory declaration provide sufficient justification for the examination. There is no evidence that Dr Ren’s unnamed client might have purchased the mine for a price exceeding the price obtained by the liquidators for the mining assets. In particular, the statutory declaration says nothing about the position of Dr Ren’s client in relation to the known rehabilitation obligation which KDC had quantified at over $28 million. Without addressing that issue, which must have been known at the time that the application to ASIC was made, Dr Ren’s criticisms of the sale process have little, if any, weight.

73    The facts relied upon by KDL do not address the evidence that significant costs were being incurred by the liquidation as a result of the ongoing occupation of the Ellendale mine site, which was a matter plainly relevant to the liquidators’ decision to disclaim the mine.

74    In those circumstances, I am not satisfied that the material relied upon by KDL provides reason to believe that the mandatory examination of the liquidator may provide a benefit to the company, its creditors, its members or the public generally. There is currently no realistic prospect that the examination will have any practical utility. KDL’s desire to explore the circumstances of the sale process, which it considers to have been defective, does not justify the exercise of the s 596A power which, in this case, involves a substantial intrusion into the liquidation by examining the liquidator in the course of his conduct of that liquidation. The examination summons is therefore an abuse of process and should be stayed. It follows that the order for production of documents, which was made in aid of the examination summons, should be set aside.

75    Costs should follow the event.

Associate:

Dated:    16 September 2016