FEDERAL COURT OF AUSTRALIA

Sheahan v Scott in the Matter of Livingstone [2002] FCA 1297

BANKRUPTCY – summons for examination under Bankruptcy Act 1966 (Cth) s 81 – motion that summons for examination be discharged – whether ambit of proposed examination extends beyond that which is permitted by s 81 – whether proposed examination oppressive – whether examination for an improper purpose if undertaken to assist in determining whether worthwhile to bring a legal action against the person summonsed – consolidated statement of account filed in the Supreme Court of New South Wales - cost of obtaining legal representation for examinations - three previous examinations

Bankruptcy Act 1966 (Cth) ss 5, 81

Corporations Law s 596B

Corporations Act 2001 (Cth) s 596B

Grosvenor Hill (Queensland) Pty Ltd v Barber (1994) 48 FCR 301

Gerah Imports Pty Ltd v The Duke Group Ltd (in liq) (1994) 119 ALR 401

Boys v Quigley [2002] WASCA 99; 41 ACSR 499

Karounos v Official Trustee (1988) 19 FCR 330

Clark v Wood (1997) 78 FCR 356

Donnelly v Scott [2001] FCA 782

IN THE MATTER OF LIVINGSTONE

JOHN SHEAHAN v JOHN JOSEPH SCOTT AND JOHN JOSEPH SLATTERY

N 7294 OF 2001

BRANSON J

23 OCTOBER 2002

SYDNEY

SHEAHAN v SCOTT IN THE MATTER OF LIVINGSTONE

THE COURT ORDERS THAT:

1.                  The motion for an order that the summons issued to the first respondent pursuant to s 81 of the Bankruptcy Act 1966 (Cth) be set aside be dismissed.

2.                  The first respondent pay the applicant’s costs of the motion.

SHEAHAN v SCOTT IN THE MATTER OF LIVINGSTONE

REASONS FOR JUDGMENT

Introduction

1                     John Joseph Scott (“Mr Scott”) has moved the Court, pursuant to a notice of motion dated 17 September 2002, for an order that a summons issued pursuant to s 81 of the Bankruptcy Act 1966 (Cth) (“the Act”) requiring him to attend at the Court to be examined in relation to the examinable affairs of Kenneth Robert Livingstone (“Mr Livingstone”) be discharged.

2                     On 14 June 2001 Max Christopher Donnelly, the then trustee of the bankruptcy estate of Mr Livingstone, applied to the Registrar for the issue of summonses under s 81 of the Act.  Mr Scott was one of the persons in respect of whom the issue of a summons was then sought.  By order dated 25 September 2001 the Registrar ordered that John Sheahan (“Mr Sheahan”), who had replaced Max Christopher Donnelly as trustee of Mr Livingstone’s bankrupt estate, replace Max Christopher Donnelly as the applicant in this matter.

3                     Mr Scott has already been examined under a summons issued in this matter, or under an earlier summons issued in matter N 7208 of 2001 in the same bankruptcy, on three occasions.  He contends that he ought not to be required to attend to be further examined.

Statutory Provisions

4                     Section 81 relevantly provides:

“(1)     Where a person (in this section called the ‘relevant person’) becomes a bankrupt, … a Registrar may at any time (whether before or after the end of the bankruptcy), on the application of:

(a)               …;

(b)               the trustee of the relevant person’s estate; or

(c)                …;

summon … an examinable person in relation to the relevant person, for examination in relation to the bankruptcy.

(1A)     A summons to a person by … the Registrar under subsection (1) shall require the person to attend:

(a)               at a specified place and at a specified time on a specified day …; and

(b)               before … the Registrar …;

to be examined on oath under this section about the relevant person and the relevant person’s examinable affairs.

…

(3)               The … Registrar … may at any time adjourn the examination of a person under this section either to a fixed date or generally, or conclude the examination.

…

(10)           The … Registrar … may put, or allow to be put, to a person being examined under this section such questions about the relevant person or any of the relevant person’s examinable affairs as the … Registrar … thinks appropriate.

…

(14)           The … Registrar … may direct that the costs of a person, other than the relevant person, examined under this section shall be paid out of the estate of the relevant person.”

5                     Certain expressions contained in s 81 are defined in s 5 of the Act.  Relevantly s 5 provides:

“‘examinable affairs’, in relation to a person, means:

(a)               the person’s dealings, transactions, property and affairs; and

(b)               the financial affairs of an associated entity of the person, in so far as they are, or appear to be, relevant to the person or to any of his or her conduct, dealings, transactions, property and affairs.

            …

‘examinable person’, in relation to a person (in this definition called the ‘relevant person’), means:

(a)               …;

(b)               …;

(c)                in any case – a person who is believed to be indebted to the relevant person;

(d)               if a person, including:

(i)            a person who is an associated entity of the relevant person; or

(ii)          a person with whom an associated entity of the relevant person is or has been associated;

                        may be able to give information about the relevant person or any of the relevant person’s examinable affairs – that person; or

(e)                …”

Contentions of the Parties

6                     It appears to be common ground that Mr Sheahan wishes to examine Mr Scott to ascertain the extent of his assets both now and at the time of the making of an order in the Supreme Court of New South Wales (“the Supreme Court”) referred to below, and to ascertain whether he has disposed of any assets since the making of the Supreme Court order.  The purpose of the proposed examination is to determine whether it would be worthwhile, in a financial sense, for Mr Sheahan to prosecute a cause of action against Mr Scott.

7                     Mr Allen, counsel for Mr Scott, submitted that the summons should be set aside on three bases.  First, that the ambit of the intended examination extends beyond that which is permitted by s 81.  Secondly, that the proposed examination is oppressive in that it would allow Mr Scott to be examined as if he were himself a bankrupt.  Thirdly, that the proposed examination is oppressive because of the number of times that Mr Scott has been required to attend for examination and the total length of his previous examinations.  Reliance was placed on the cost to Mr Scott of obtaining legal representation for his examinations.

8                     Mr Dicker, counsel for Mr Sheahan, contended that the financial affairs of Mr Scott were a permissible topic of examination under s 81 of the Act on the basis, in effect, that Mr Sheahan had a legitimate interest in knowing if Mr Scott, or should he become a bankrupt, his estate, would be able to satisfy any judgment obtained against him by Mr Sheahan.  Mr Dicker placed particular reliance on authorities concerning the extent of the “examinable affairs” of a corporation for the purposes of s 596B of the Corporations Law and more recently the Corporation Act 2001 (Cth) (eg Grosvenor Hill (Queensland) Pty Ltd v Barber (1994) 48 FCR 301; Gerah Imports Pty Ltd v The Duke Group Ltd (in liq) (1994) 119 ALR 401; Boys v Quigley [2002] WASCA 99; 41 ACSR 499).

Consideration

9                     In Karounos v Official Trustee (1988) 19 FCR 330 the Full Court of this Court (Forster, Woodward and Spender JJ) acknowledged that s 81 of the Act was analogous to the provisions authorising examinations concerning company liquidations.  Their Honours at 335-336 set out a number of propositions relevant to the issue of summons under s 81 of the Act.  The propositions include (at 335):

“(1)     The power given by s 81 of the Act is an unusual and far-reaching one … and its use could easily become oppressive and vexatious if it is not approached responsibly by applicants for summonses, and controlled carefully by the Registrar and the court …

(2)               However the power is exercised in the interests of creditors, and those interests should not be defeated by an unduly technical or restrictive approach to the use of the power.  The procedure is basically designed to establish what assets the bankrupt had, what has happened to those assets, and whether action should be begun (or continued) to recover them …”  (citations omitted)

10                  In Clark v Wood (1997) 78 FCR 356 at 42 Finkelstein J noted that the Court has power to recall an order to allow an examination and that that power might be exercised if an examination is being conducted improperly (see also Boys v Quigley per Anderson J, with whom Wallwork and Murray JJ agreed at [25]).  It is the power identified by his Honour which, as it seems to me, Mr Scott invites the Court in this case to exercise.

11                  In my view it is plain, and I do not think that the contrary was suggested, that Mr Scott is an “examinable person” in relation to Mr Livingstone’s bankruptcy.  So much was apparently conceded before Allsop J when Mr Scott and Mr Slattery sought to adjourn generally the summons served on each of them under s 81 of the Act (see Donnelly v Scott [2001] FCA 782).

12                  Further, as is mentioned above, Mr Scott has attended for examination under s 81 of the Act.  He has admitted on examination that he is indebted to Mr Livingstone and has been ordered by the Registrar to pay sums totalling $342,517.12 to Mr Sheahan.  His evidence is that he has complied with the order to pay that sum to Mr Sheahan.

13                  Mr Sheahan apparently apprehends that further amounts might be recoverable from Mr Scott for the benefit of Mr Livingstone’s bankrupt estate.  As the reasons for judgment of Allsop J in Donnelly v Scott reveal, an order has been made in the Supreme Court for the taking of accounts to determine the balance due by Mr Scott and a company called Ophix Finance Corporation Pty Limited to the estate of Mr Livingstone.  Mr Scott’s evidence on the present application is that he has filed a consolidated statement of account in the Supreme Court showing a significant balance in his favour.  However, the process of taking the account has not been completed.  The trustee of Mr Livingstone’s estate is a defendant in the Supreme Court proceedings.  In that capacity Mr Sheahan has an interest in knowing whether it is likely to be cost-effective from the point of view of Mr Livingstone’s bankrupt estate for the consolidated statement of account filed by Mr Scott to be challenged.

14                  It was argued on behalf of Mr Scott that examination of Mr Scott for the purpose of establishing whether he has sufficient funds to meet any judgment or pay any debt would be impermissible under s 81 of the Act.  That is, that reliance on the summons for that purpose would be to use the summons for an improper purpose.

15                  The examination will be for a proper purpose if it relates to Mr Livingstone’s examinable affairs (s 81(1A)).  Mr Livingstone’s examinable affairs include the financial affairs of an associated entity of Mr Livingstone in so far as they appear to be relevant to any of Mr Livingstone’s property (see [13] above).  An “entity” within the meaning of the Act is defined by s 5 to include a natural person.  Mr Scott will be an “associated entity” of Mr Livingstone if he “is, or has been, associated with” Mr Livingstone (see definition of “associated entity” in s 5 of the Act).  The admitted nature of the proceedings in the Supreme Court referred to above make it plain that Mr Scott has been associated with Mr Livingstone.

16                  It thus becomes necessary to determine whether Mr Scott’s financial affairs appear to be relevant to any of Mr Livingstone’s property.  Mr Livingstone’s property includes any chose in action vested in him at the time that the sequestration order was made against his estate.  Prima facie it would appear that Mr Scott’s financial affairs are relevant to any chose in action against Mr Scott capable of leading to financial recovery which is now an asset of Mr Livingstone’s bankrupt estate.  Information as to Mr Scott’s financial affairs is likely to assist Mr Sheahan in deciding whether to attempt to realise the chose in action and, if an attempt be made, in determining the level of expenditure which it would be reasonable to incur in so doing.

17                  The authorities provide support for this prima facie view.  In Gerah Imports Pty Ltd v The Duke Group Ltd (in liq) at 404 Dawson J, in the context of the analogous provisions of the Corporations Law, concluded that there was no error in the conclusion that the “examinable affairs” of a company extended not only to rights of action, if any, of the company against the examinee but extended also to their extent and value.  In Grosvenor Hill (Queensland) Pty Ltd v Barber at 307 the Full Court concluded, again in the context of the Corporations Law, that it was a permitted purpose of an examination to:

“inquire as to the worth of a potential defendant so as to be able to make a practical assessment as to the likelihood of a return to the company of the fruits of any favourable judgment and the necessary legal costs expended in obtaining it.”

18                  A similar view was taken of the ambit of s 596B of the Corporations Act 2001 (Cth) by the Supreme Court of Western Australia in Boys v Quigley.  In each of the above cases it would seem that the court concluded that the questioning in issue would relate to the “examinable affairs” of the company because of its relevance to the property of the company.

19                  The Supreme Court proceeding referred to above, and the order of the Court made therein, suggest strongly in favour of a chose in action against Mr Scott being an asset in the bankrupt estate of Mr Livingstone.  I conclude that reliance by Mr Sheahan on the summons for the purpose of establishing whether Mr Scott has sufficient funds to meet any judgment or pay any debt would not be to use the summons for an improper purpose.

20                  Nor do I consider that the proposed examination of Mr Scott for the above purpose would necessarily be oppressive in that it would allow Mr Scott to be examined as if he were himself a bankrupt.  The relevant question is not whether the proposed examination would allow Mr Scott to be examined as if he were a bankrupt but whether the proposed examination relates to Mr Livingstone’s “examinable affairs”.

21                  Of course, an examination of Mr Scott in respect of Mr Livingstone’s “examinable affairs” could be conducted in an oppressive way.  I consider below whether the proposed examination is oppressive because of the number of times that Mr Scott has been required to attend for examination.  I also consider below whether the proposed examination is oppressive or otherwise improper because it concerns a matter which has arisen in the Supreme Court proceeding, namely the extent of Mr Scott’s assets.  However, any issue as to whether a particular question or line of questioning in an examination is appropriate is a matter upon which the Registrar may be asked to rule in the course of the examination (s 81(10)).  The present motion is not an appropriate vehicle for the obtaining of a ruling of that kind.

22                  As is mentioned above Mr Scott has already been examined under the summons on three occasions.  Nothing has been placed before me which suggest that Mr Sheahan has been motivated by any improper purpose in requiring Mr Scott to attend again for examination.  The limited evidence before me indicates that considerable complexity attends the administration of Mr Livingstone’s bankrupt estate.  In the absence of evidence suggesting to the contrary, I consider it appropriate to assume that it would not have been compatible with the efficient administration of the estate for Mr Scott to be examined on all issues on which Mr Sheahan desired to examine him on the one occasion.

23                  Nor is there any evidence to suggest that the previous examinations or the proposed examination, either alone or cumulatively, constitute an abuse of process.  Repeated demands that an individual attend for examination, or unduly lengthy examination, under s 81 could constitute harassment and amount to an abuse of process but the evidence before me is insufficient to establish that this is such a case.  Similarly, use of the public examination process in circumstances in which the objectives of the examiner could be equally well achieved by a private request for the provision of information or documentation could constitute an abuse of process.  Again the evidence before me does not go so far.  Mr Sheahan must, however, remain mindful of the need to approach the unusual power given by s 81 of the Act responsibly.  If demands that Mr Scott attend for examination continue to be made, a time is likely to arise when, absent evidence that a particular demand is reasonable in all of the circumstances, that demand will prima facie constitute an abuse of process.

24                  Mr Scott is understandably concerned about the cost of his legal representation at repeated examinations.  While the costs likely to be incurred by an examinee required to attend for repeated examinations are not irrelevant to the issue of whether the use of a s 81 summons constitutes an abuse of process, it will rarely, if ever, be the case that a summons would be set aside on the ground of costs alone.  I am not satisfied in this case that Mr Scott’s costs, either alone or taken together with the other factors upon which he relies, constitute a ground upon which the summons should be set aside.  If, at the end of the day, the Registrar is satisfied that it is appropriate to do so, the Registrar has the power to order that Mr Scott’s costs of the examination be paid out of the estate of Mr Livingstone.  The present motion is not, and was not suggested to be, an appropriate vehicle for the obtaining of an order as to Mr Scott’s legal costs.

25                  Mr Allen placed weight upon the fact that Mr Scott has been ordered to and has filed an affidavit as to his assets in the Supreme Court proceeding.  Mr Dicker’s response was that Mr Sheahan wishes to examine Mr Scott pursuant to s 81 to establish the level of legal and other costs, if any, which it would be in the interest of the creditors of Mr Livingstone’s estate for him to incur to challenge the evidence of Mr Scott, and the consolidated account filed by Mr Scott, in the Supreme Court proceeding.  Having regard to the authorities referred to in [8] above I conclude that it is not inappropriate for Mr Sheahan to examine Mr Scott as to his present financial affairs even though the same or a closely related issue may be ventilated in the Supreme Court.  I adopt the observations of Allsop J in Donnelly v Scott at [12] – [21] in this regard.

conclusion

26                  In my view, the motion should be dismissed with costs.

Associate:

Dated:              23 October 2002