FEDERAL COURT OF AUSTRALIA

Linker v Nilant [2003] FCA 1576

CORPORATIONS – application to discharge summons for examination pursuant to s 596B of Corporations Act 2001 (Cth) – where issue of examination summons by Court on basis of affidavit pursuant to s 596C of Corporations Act – where failure to disclose material matter in s 596C affidavit – duty of full and frank disclosure

Corporations Act (2001) Cth, ss 596B, 596C

Hong Kong Bank of Australia Ltd v Murphy (1992) 28 NSWLR 512 cited

Karounos v Official Trustee (1988) 19 FCR 330 cited

Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 applied

Re Excel Finance Corporation Ltd (Receiver and Manager Appointed); Worthley v England (1984) 52 FCR 69 applied

Re One Twenty Seven Corporation Pty Ltd (1985)13 ACLC 1,600 followed

Re Southern Equities Corporation Ltd (in liq) (1997) 25 ACSR 394 followed

IN THE MATTER OF CORETEL PTY LTD (ACN 092 922 417) (SUBJECT TO DEED OF COMPANY ARRANGEMENT); ALFRED BENJAMIN LINKER, ROBERT BENN BRESA, KYM WYKE EVANS AND WAYNE NEICH v CHARLES PHILIPPE LOUIS NILANT AND OREN ZOHAR as deed administrators of CORETEL PTY LTD (ACN 092 922 417) (Subject to Deed of Company Arrangement)

W 3021 of 2003

GYLES J

23 DECEMBER 2003

SYDNEY

IN THE MATTER OF CORETEL PTY LTD (ACN 092 922 417) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)

THE COURT ORDERS THAT:

1.          Order 1 of the orders of the Deputy District Registrar, dated 6 October 2003, be set aside.

2.          The Summons for Examination to Robert Benn Bresa, dated 30 October 2003, be discharged.

3.          The Summons for Examination to Alfred Benjamin Linker, dated 30 October 2003, be discharged.

4.          The Summons for Examination to Wayne Neich, dated 30 October 2003, be discharged.

5.          The Summons for Examination to Kym Wyke Evans, dated 30 October 2003, be discharged.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE MATTER OF CORETEL PTY LTD (ACN 092 922 417) (SUBJECT TO DEED OF COMPANY ARRANGEMENT)

REASONS FOR JUDGMENT

1                     On 6 October 2003 a Registrar of the Court ordered that a summons pursuant to s 596B of the Corporations Act 2001 (Cth)be issued to each of Robert Benn Bresa, Kym Wyke Evans, Wayne Neich and Alfred Benjamin Linker (the applicants) to attend and be examined about the examinable affairs of Coretel Pty Ltd (subject to Deed of Company Arrangement) (Coretel) and to produce certain books and records.  Each summons issued was dated 30 October 2003.  Each examinee has been connected with Nortel Networks Australia Pty Ltd (Nortel).  Each proposed examinee has brought an application pursuant to O 11.5 of the Federal Court (Corporations) Rules against Charles Philippe Louis Nilant and Oren Zohar, the deed administrators of Coretel pursuant to a Deed of Company Arrangement (the Administrators), seeking, inter alia, an order discharging the summons for examination or alternatively adjourning it until after the final determination of certain proceedings current in the Supreme Court of Western Australia.  Whilst the current applications are described as interlocutory, they are final in substance.

2                     On 2 and 3 December 2003, I heard an application to set aside a notice to the Administrators to produce certain documents including the affidavit relied upon in support of the application for the summonses for examination, pursuant to s 596C(2).  There was evidence that Nortel was the plaintiff in two sets of proceedings against, amongst others, Coretel and the Administrators, that were commenced in the Supreme Court of Western Australia in early December 2002.  The first was an application under s 445D(1) of the Corporations Act to set aside a Deed of Company Arrangement which had been executed pursuant to Div 10 of Pt 5.3A of the Corporations Act by Coretel, the Administrators and others on 21 November 2002.  The second, commenced on 10 December 2002, was a proceeding for conversion of certain equipment alleged to have been provided by Nortel to Coretel pursuant to an agreement between those companies relating to the supply of telecommunications equipment and services.

3                     There was a good deal of evidence as to the steps taken in preparation of those proceedings including orders for extensive discovery and the filing of a counterclaim by Coretel in the conversion proceedings on or about 15 October 2003 which alleged breaches of s 52 of the Trade Practices Act 1974 (Cth), common law negligence and breaches of contract arising out of the commercial dealings concerning the telecommunication equipment.  That evidence established a possible basis for concluding that the purpose of seeking the examinations was the obtaining of a forensic advantage not otherwise available in connection with the two Western Australian proceedings.  I therefore concluded that I should not set aside the notice to produce, but should inspect the documents the subject of the notice to produce to determine whether all or any of them should be made available to the applicants and, in particular, whether the affidavit upon which the order for issue of the summonses was made should be produced in accordance with the principles referred to in Re Excel Finance Corporation Ltd (Receiver and Manager Appointed); Worthley v England (1984) 52 FCR 69 at 93G–94C.  Having done so I then determined that it was appropriate that the affidavit by Oren Zohar in support be provided for inspection to the counsel and solicitors for the applicants on a confidential basis and so ordered.

4                     The evidence on the hearing has included the evidence which was before me on the hearing as to the notice to produce (namely an affidavit of the applicant Alfred Benjamin Linker and the voluminous documents exhibited to it) together with the affidavit of Oren Zohar of 31 July 2003 and the annexures to it which were the foundation of the application to issue the summonses.  That affidavit was tendered by the applicants without objection.

5                     The Administrators were appointed as joint and several administrators of Coretel pursuant to s 436A of the Corporations Act on 6 August 2002.  In their report to creditors pursuant to s 439A of the Corporations Act dated 23 August 2002 they said, inter alia:

‘2.8      In late 2000, Coretel entered into a supply agreement with Nortel Networks Australia Pty Ltd (“Nortel”) for establishment of the telecommunications network.  The first order for equipment was placed by Coretel in December 2000, following consideration and approval of a proposal presented by Nortel.  I am advised however that the supply agreement was not finalised and signed until 27 June 2001, as a result of matters which had arisen between the parties and delays in performance by Nortel.

2.9              I understand that pursuant to the agreement with Nortel, the equipment was to be supplied, installed and fully operational by approximately 15 January 2001.  However, the supply and installation of the required equipment by Nortel was not completed until April 2002, and the radio equipment which was central to the Company’s operations in the South West of Western Australia, which was finally delivered in March 2002, remains incomplete.

2.10          I have been advised by the Company’s director, Mr Tony Lucassen, and by its major stakeholder, Paladin, that due to the delays experienced, Coretel Communications was unable to achieve cash flow targets as previously predicted and Paladin was required to inject additional funds in June 2001, and also provide additional tranches of funds thereafter.  Coretel Communications was unable to obtain customers for lack of ability to service requirements, and incurred substantial “cash burn” in order to meet supply agreements with other carriers and facility providers and costs of staff (including redundancy) who had been lured in expectation of the scheduled roll out of the network.

2.11          Coretel is disputing payment of an amount claimed by the [sic] Nortel in relation to the supply of equipment and believes that it, in turn, has a strong counter-claim as a result of the delays referred to above.  Prior to my appointment, Nortel had commenced recovery action for the amount claimed by way of a Statutory Demand issued to Coretel.

2.12          Coretel did not wish to utilise its available resources by entering into protracted and potentially expensive litigation and is seeking, via the voluntary administration process, to reach a commercial settlement in relation to the consequences of delayed equipment deliveries.  If the matter is unable to be settled, the voluntary administrators have the ability, through the voluntary administration process, to seek litigation insurance funding to pursue the claim.  The claim is discussed in further detail in this report.

2.13          In addition, there was a need to resolve the debts incurred by Coretel and Coretel Communications, which had accumulated during the delay experienced in the start up.

2.14          As a result of the above matters, Mr Tony Lucassen placed the Company into voluntary administration on 6 August 2002.  The subsidiary, Coretel Communications, was also placed into voluntary administration by Mr Lucassen on 6 August 2002 for the same reasons.  Mr Lucassen has provided me with a statement (previously prepared by Paladin for press release) setting out the reasons for the Company’s predicament.

            …

3.11     On 14 May 2002, Nortel issued a statutory demand against Coretel for payment of an amount of $411,831.00 being outstanding charges in relation to the supply of the equipment mentioned above.  Prior to my appointment, Coretel Communications filed an application to have that Demand set aside, and I have subsequently agreed to discontinue the action by that company on technical grounds.  Given that Coretel was placed into voluntary administration, the winding up action by Nortel is stayed by virtue of the provisions of the Act.

3.12          As mentioned above, Coretel is disputing payment of the amount claimed by Nortel in relation to the supply of equipment. Further, on the basis of the delays and difficulties experienced with Nortel, it appears that Coretel and/or Coretel Communications may have a significant counter claim against Nortel.  Coretel’s solicitors have indicated that a claim for damages, which is likely to be substantial, has good prospects.

3.13          I have spoken with representatives of Nortel who have strongly refuted any basis of claim Coretel may have against Nortel, yet have indicated that they may be prepared to consider accepting from the company a proposal for partial repayment of the $411,000 claimed.  In the meantime, I have proceeded with applications for litigation funding, as Coretel does not presently have the funds required to pursue the action.  As at the date of this report, I have not received a definitive response from the potential funders in relation to the action however I note that the matter has been referred to Queens Counsel for advice as to the merits of the claim.  I anticipate a response to the applications within the next two to three weeks.’

            ‘(b)      Winding Up of the Company

…

            Placing the Company into liquidation may, in my view, adversely affect the amount achievable for Coretel Communications’ telecommunications infrastructure given the Nortel matter, as the moratorium available under the voluntary administration will cease upon the Company being placed into liquidation and thus may allow Nortel to recover the equipment delivered in order to minimise its loss.  Therefore, I do not believe that it is in creditors’ best interests to place the Company into liquidation at the forthcoming meeting.

            (c)        Termination of the Administration

As noted above, should creditors resolve that the administration be terminated, the Company will be placed in a similar position to that existing prior to our appointment as Administrators.

Should the Company revert to Mr Lucassen, he would resume control of the assets and be able to deal with them as he deems appropriate.  Further, Nortel will be able to proceed with its action against Coretel, whilst the Company is not in a position to fund the defence and counter-claim against Nortel.  In addition, the Company is insolvent, as there are a number of outstanding creditors’ claims which the Company has been unable to pay as it has not had sufficient funds available.  Accordingly, I believe that the alternative of terminating the administration is not in creditors’ best interests.’

6                     The ‘Administrators’ Report Concerning the Affairs of the Company Pursuant to Section 439A of the Corporations Act 2001’ dated 24 October 2002 included:

‘Litigation Funders

1.7              The background of the potential claim against Nortel Networks Australia Pty Ltd (“Nortel”) was discussed in detail in my last report to creditors.

1.8              As advised in that report, shortly after my appointment I spoke with representatives of Nortel who strongly refuted any basis of claim the Coretel Group may have against Nortel.

1.9              Following my appointment, I proceeded with applications for litigation funding, as the Company did not have the funds required to pursue the action.  I am pleased to advise that after significant effort in terms of collating necessary information and substantiating evidence concerning the potential claim against Nortel, I have today received an indicative offer of funding from Dexta Corporation Ltd (“Dexta”) to pursue an action against Nortel for damages arising out of the matters referred to in my last report.

1.10          Whilst the final quantum of the claim is yet to be determined, the indicative offer has been made on the basis of a conservative estimate which substantially exceeds the amount of the debt claimed by Nortel.

1.11          As the offer has only just been received, I have not had the opportunity to review the terms in detail however further information will be provided at the creditors’ meeting.  I note that the two proposals for a Deed of Company Arrangement which are discussed below, provide that the Deed Administrators shall have absolute discretion in relation to entry into the policy in any event.’

7                     The Administrators recommended entry into a Deed of Company Arrangement on a basis put forward by a company Avanti Group International Pty Ltd.  A feature of that proposal was as follows:

‘AGI Proposal

Voluntary Administrators’ Fees totalling $45,000 plus GST are to be paid (the quantum being subject to approval by creditors at the forthcoming meeting) as follows:

(i)                 $30,000 incurred in respect of the Nortel matter is to be deferred and paid from proceeds of the litigation against Nortel.  In the event that the claim against Nortel does not produce net proceeds of at least $30,000, any shortfall is to be paid by way of additional payments from AGI.

(ii)               $15,000 in respect of the balance of fees is to be paid in accordance with paragraph 2.2(vii) above.

Deed Administrators’ Fees totalling $10,000 plus GST are to be in accordance with paragraph 2.2(vii) above.’

8                     The minutes of the reconvened second meeting of creditors held on 1 November 2002 included the following:

‘The Chairman then referred to matters dealt with in the Report concerning a proposed legal action against Nortel and the offer of funding which had been received from Dexta Corporation Ltd (“Dexta”).  He advised that CH had requested that a copy of the funding agreement be provided to all creditors to enable creditors to make an informed decision in respect of the options available to them.  Mr Buckley advised that CH’s request had been declined on issues of privilege, particularly as Nortel was the party against whom proceedings were to be instituted.

…

Mr Buckley then outlined the principal features of the Dexta offer, and noted that the insurer would be entitled to receive between 25% - 35% of the gross proceeds received from the litigation as well as reimbursement of the Administrators’ legal and other costs which had been progressively funded under the policy.  The range of entitlement was related to the timing of a conclusion of the matter by way of litigation and/or settlement.  The policy also provided for the Administrators to be indemnified against any adverse costs order in the event that the action was unsuccessful.

It was further noted that under the AGI proposal, the Deed Administrators are permitted to enter into the funding agreement with Dexta at their absolute discretion.  In addition, it was proposed, with the consent of AGI, to amend the proposal for a DOCA to provide for a committee of inspection to assist the Deed Administrators in respect of the matter if required.

Representatives of AGI at the meeting advised that they were amenable to the variation proposed.’

9                     The Deed of Company Arrangement was executed on 21 November 2002 and included the following clauses:

‘7.5      The Administrators shall have conduct of any litigation of the Nortel Dispute to the exclusion of the Company’s Officers, and shall have power to do all things necessary or desirable to pursue or settle that litigation or the Nortel Dispute itself.’

‘14       Payment of Litigation Indemnity Amount

14.1          Payment of the Administrators’ Remuneration of $30,000 plus GST incurred in relation to the Nortel Dispute shall be deferred and paid to the Administrators out of any moneys recovered in litigation or settlement of the Nortel Dispute, provided that in the event the litigation or settlement of the Nortel Dispute does not yield net proceeds of at least $33,000 by 22 March 2004, AGI will pay the Litigation Indemnity Amount in 2 equal instalments on 22 March 2004 and 22 April 2004.’

‘24       Litigation Cost Insurance Policy

24.1     The Administrators are authorised in their absolute discretion, to execute any litigation cost insurance policy which may be offered by Dexta in respect of a proposed action against Nortel, and to assign or sell a percentage of the proceeds of the cause of action to Dexta under the terms of the policy.’

‘Litigation Indemnity Amount means, in any case where litigation or settlement of the Nortel Dispute fails to yield a net amount of $33,000 to the Company by 22 March 2004, any difference between $33,000 and the lesser amount of funds received by the Administrators as a result of litigation or settlement of the Nortel Dispute as of 22 March 2004.

…

Nortel Dispute means the dispute between the Company and Coretel Communications Pty Ltd (ACN 092 922 417) (administrators appointed) on the one hand and Nortel on the other hand arising out of agreements for the supply of goods and services.’

10                  By letter of 21 July 2003 the solicitors for the Administrators advised the solicitor for Nortel in the conversion proceedings as follows:

‘Pleadings

As regards the filing of Coretel’s defence and counterclaim, and the filing of the second defendants’ amended defence, we are in the process of finalising those documents and (but for one matter, to which I shall return below) should be in a position to file them within a matter of days.

One impediment to doing so, however, is that your client’s statement of claim does not plead delivery of the Equipment, Software, and Rental Equipment (as those terms are used in the statement of claim) to Coretel.  To the extent that Nortel is claiming delivery up and conversion damages, it would seem to be absolutely essential for Nortel to plead that Coretel was given possession of the items in question at a particular time.  This has not been done.  Please let me know whether you intend to amend Nortel’s statement of claim accordingly.’

11                  By letter of 25 August 2003 the solicitors for the Administrators advised the solicitors for Nortel as follows:

‘In relation to the proposed amendments to your client’s claim in Supreme Court Action CIV 2696 of 2002, we confirm that our client consents to the amendments you have proposed in your fax, namely, the addition of paragraphs 9A and 18A.  Please serve us with a copy of the amended pleading as soon as possible.

We are currently finalising Coretel’s defence and counterclaim to take account of the amendments to the Statement of Claim and we will file and serve the document as soon as possible.’

12                  Consent orders were made by Justice Pullin of the Western Australian Supreme Court on 30 September 2003 giving leave to file a further amended statement of claim as had been foreshadowed.  The first defendant’s defence and counterclaim was prepared and dated September 2003 but was actually filed and served on or about 15 October 2003.

13                  The application for the issue of the examination summons had been filed on 8 September 2003 based upon the affidavit of 31 July.  The hearing took place and the order was made on 6 October 2003.

14                  The affidavit of Zohar dealt with the appointment of the Administrators, summarised what was said to be the result of the investigations into the company’s records and affairs (which dealt primarily with the arrangements between Coretel and Nortel) and then under the heading ‘Potential causes of action’ went on:

‘13       On the basis of my investigations into the Company’s books, records, and affairs, I believe that the Company’s (and by extension Cortelcom’s) present financial position is a direct result of:

13.1          Nortel’s failure to deliver the components for the Company’s initial network within the originally specified timeframe, or within any amended timeframe that Nortel and the Company may have agreed to; and

13.2          the fact that many of the components were, once delivered, inadequate for the uses to which they were to be put, incomplete, or malfunctioning, so that considerable time and expenditure was required on the Company’s part before its network could be commissioned and its customers could be connected.

14        I am advised by my solicitors, and I verily believe, that:

14.1     there may be a cause of action available to the Company against Nortel in relation to these matters; and

14.2     further information in relation to the matters set out in summary form in paragraphs 12.1 to 12.59 above is needed in order to allow me to assess and (if appropriate) pursue that cause of action against Nortel;

14.3     the matters set out in summary form in paragraphs 12.1 to 12.59 above are examinable affairs of the Company within the meaning given to that term in the Corporations Act.

            I therefore wish to examine the Examinees pursuant to section 596B of the Corporations Act.

15        I verily believe that the Examinees may be possessed of either the necessary information, or documents and records, which would allow me to further my investigations into the Company’s potential cause of action against Nortel.  My reasons for holding this belief are set out in relation to each Examinee in the following paragraphs (with reference to the matters set out in paragraphs 12.1 to 12.59 above).’ (emphasis added)

The balance of the affidavit explained the involvement of each of the proposed examinees.

15                  It will be seen that there is no mention in that affidavit of the existence of either of the Western Australian proceedings, of the interlocutory steps which had been taken in either of them, of the impending counterclaim to be filed in one of those proceedings against Nortel, of the litigation funding arrangements or of the link between the administration and the litigation disclosed in the reports to creditors by the Administrators.

16                  The first submission on behalf of the applicants, the proposed examinees, is that each examination summons should be discharged because of the failure to disclose material matters in the affidavit in support of the application pursuant to s 596C of the Corporations Act.

17                  The principle was explained by Lander J in Re Southern Equities Corporation Ltd (in liq) (1997) 25 ACSR 394 at 422–423 (in a passage agreed in by the other members of the Court) as follows:

‘An application for an examination summons is made ex parte.  Consequently there is a heavy obligation upon the person applying for the examination summons to make full and frank disclosure of all matters which may impact upon the decision to summon a person for examination about a corporations [sic] examinable affairs.

There can be no doubt, in my opinion, that a person who makes an application of this kind is under an obligation to bring all facts and material to the court’s attention which might bear upon the order to be made. The applicant has no lesser obligation than that imposed upon a party seeking an injunction ex parte.  Indeed, in my opinion, the obligation for frankness and candour is even greater in an application of this kind.  That is because, unlike on the return of an interlocutory injunction obtained ex parte, on the return of an examination summons the material supporting the application is not ordinarily made available to the proposed examinee.

Because the proposed examinee, ordinarily, is not privy to the information or material which was used to support the application for the examination summons, the person applying for the examination summons has the very highest obligation relating to frankness and candour and any breach of that obligation, in my opinion, ought to be viewed very seriously by the court.

The obligation is to provide to the court all material which might impact upon the order sought, including all material which might lead the court to refuse the application.  The applicant must act in the place of the proposed examinee and therefore draw to the attention of the court anything which might lead the court to refuse the application.

If an applicant fails to provide all of the information bearing upon the order sought, in my opinion, that might be sufficient ground to set aside the order, because the order will have been obtained in circumstances where the court has not been apprised of a reason or reasons for the refusal of the order.’

18                  The same principle was applied by Brownie J in Re One Twenty Seven Corporation Pty Ltd (1985)13 ACLC 1,600 at 1,602.  (See also Hong Kong Bank of Australia Ltd v Murphy (1992) 28 NSWLR 512 per Gleeson CJ at 520.)

19                  In my opinion the matters which were not disclosed were clearly material (and may have been critical) to the decision to be made as to whether the purpose in seeking the examinations was the obtaining of a forensic advantage not otherwise available in connection with the Western Australian proceedings (Karounos v Official Trustee (1988) 19 FCR 330 at 335–336; Hong Kong Bank of Australia Ltd v Murphy at 519; Re Excel Finance Corporation Ltd (Receiver and Manager Appointed) at 90–91).  Further, that which was not disclosed made paragraph 14 of the affidavit positively misleading.  For example, it was clear by 6 October 2003 that a decision had been made to file a counterclaim against Nortel raising the very issues discussed in the affidavit.  Indeed, it is plain that that had been the intention of the Administrators for many months.

20                  Even if strict compliance with s 596C is not a condition precedent to the exercise of the s 596B power (as to which I say nothing, cf Re Southern Equities at 429), in my opinion the failure to adequately disclose the true situation here is such as to require that each of the examination summonses be discharged (Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355).  It is not suggested that the material which was omitted from the s 596C affidavit was disclosed or known to the Registrar prior to the orders being made by means other than the s 596C affidavit (cf Re Southern Equities at 425–428).

21                  The authorities to which I have referred show that this is no barrier to a fresh application made upon proper material.  All I need say is that any such application would require careful scrutiny in view of the advanced stage of the litigation in the Western Australian Supreme Court and the processes of that Court which are available to the Administrators.  At the very least there would need to be a clear explanation of precisely what information was sought to be obtained and for what purpose so that an informed judgment could be made as to whether the application accords with the principles explained in the authorities to which I have referred. 

22                  In each case, the order for the issue of the summons for examination will be set aside and the summons for examination discharged.  I will hear the parties as to the appropriate orders for costs.

Associate:

Dated:              23 December 2003