FEDERAL COURT OF AUSTRALIA

Commonwealth of Australia v Sheahan, in the matter of Markethaven Pty Ltd (subject to a deed of company arrangement) [2004] FCA 1301

COMMONWEALTH OF AUSTRALIA & ORS V JOHN SHEAHAN, IN THE MATTER OF MARKETHAVEN PTY LTD (SUBJECT TO A DEED OF COMPANY ARRANGEMENT)

N1105 OF 2004

EMMETT J

8 OCTOBER 2004

SYDNEY

IN THE MATTER OF MARKETHAVEN PTY LIMITED (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) ACN 010 914 324

THE COURT ORDERS THAT:

1.         The examination summonses and orders for production of documents issued pursuant to the orders made on 28 July 2004 be discharged.

2.         The Respondent pay all of the costs of the application for discharge reasonably incurred by the Applicants.

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

IN THE MATTER OF MARKETHAVEN PTY LIMITED (SUBJECT TO A DEED OF COMPANY ARRANGEMENT) ACN 010 914 324

REASONS FOR JUDGMENT

1                     The applicants seek the discharge of orders made by the Court under s 596B and s 597(9) of the Corporations Act 2001 (Cth).  Under s 596B, the Court may summon a person for examination about the examinable affairs of a corporation if, relevantly, the Court is satisfied that the person may be able to give information about such examinable affairs.  By the operation of s 9 of the Corporations Act, the term ‘examinable affairs’ has a wide meaning.  Section 597(9) provides that the Court may direct a person to produce at an examination books that are in that person’s possession and are relevant to matters to which the examination will relate.

2                     On 16 July 2004 Mr John Sheahan, as joint and several deed administrator of Markethaven Pty Ltd (‘Markethaven’), applied to the Court for orders under those provisions.  Mr Sheahan said that he wished to obtain further information regarding certain matters in order to determine whether Markethaven has a cause of action against the Commonwealth of Australia (‘the Commonwealth’), in the guise of the Therapeutic Goods Administration, a division of the Commonwealth Department of Health and Ageing (‘the Department’).  The putative cause of action is for breach of a duty owed to Markethaven to administer the Therapeutic Goods Act 1989 (Cth) (‘the TG Act’) according to its terms.  The potential breach of duty occurred when the Secretary of the Department suspended the manufacturing licence of Pan Pharmaceuticals Pty Ltd (‘Pan’) under the TG Act, imposed conditions on the registration and listing of therapeutic products of sponsors of therapeutic products manufactured by Pan and advised Markethaven, as a sponsor of therapeutic goods manufactured by Pan, to recall such products from the public. 

3                     On 28 July 2004, a Deputy Registrar of the Court (‘the Registrar’) made orders (‘the Challenged Orders’) for the issue of examination summonses to four individuals (‘the Examination Recipients’) and for nine other individuals (‘the Document Recipients’) to produce documents identified in schedules to the orders.  In addition, the Registrar made an order that the Therapeutic Goods Administration produce the documents identified in a further schedule.  That last order could only operate as an order that the Commonwealth produce the documents referred to in the relevant schedule. 

4                     On 27 August 2004, the Commonwealth, the Examination Recipients and the Document Recipients made an application for the discharge of the examination summonses issued to the Examination Recipients and for discharge of the orders for production of documents.  By that application, ancillary relief was also sought in the form of an order that the affidavits relied on by Mr Sheahan in his original application be provided to the applicants or their lawyers for inspection in relation to the conduct of the application and an order for the extension of time for the filing of the application. 

5                     The grounds upon which the Commonwealth and the Recipients rely may be summarised as follows:

• The application by Mr Sheahan was an abuse of process because, it is alleged, the principal or dominant purpose of Mr Sheahan in making it was to assist purposes of Mr James Selim, the principal of Pan.  The Commonwealth says that Mr Sheahan’s purpose was to obtain access to information that would assist Mr Selim in dealing with claims made against him by Pan and in dealing with possible criminal proceedings against him.
• The cause of action that Mr Sheahan seeks to pursue on behalf of Markethaven is doomed to failure and, accordingly, pursuit of examination of the Examination Recipients and the production of documents would be vexatious and an abuse of process.
• There was a want of full, frank and candid disclosure by Mr Sheahan to the Registrar as to:

(a)        the weakness of Markethaven’s putative cause of action;

(b)        the prior association between Mr Selim and Mr Sheahan.

THERAPEUTIC GOODS

6                     Under s 9A(1) of the TG Act, the Secretary must cause a register to be maintained, to be known as the Australian Register of Therapeutic Goods (‘the Register’).  The Register is to be maintained for the purpose of compiling information in relation to, and providing for evaluation of, therapeutic goods for use in humans.  Under s 9A(3) the Register is to contain three parts including, relevantly, one relating to goods to be known as ‘registered goods’ and one relating to goods to be known as ‘listed goods’.  Division 2 of Part 3-2 of the TG Act provides for the registration or listing of therapeutic goods.

7                     Section 20(1) of the TG Act, as in force at the relevant time, relevantly provided to the effect that a person was guilty of an offence if that person manufactured or supplied in Australia therapeutic goods for use in humans unless the goods were registered goods or listed goods in relation to that person.  Section 3(1) of the TG Act provides that registered goods means therapeutic goods included in the part of the Register for goods known as registered goods and that listed goods means therapeutic goods that are included in the part of the Register for goods known as listed goods. 

8                     Under s 3(1), a sponsor in relation to therapeutic goods is, relevantly, a person who, in Australia, arranges for another person to manufacture the goods, for supply, but does not include a person who manufactures the goods on behalf of another person, who, at the time of manufacture, is a resident of, or is carrying on business in, Australia. 

9                     Section 35(1) of the TG Act relevantly provides that a person must not at premises in Australia carry out a step in the manufacture of therapeutic goods for supply for use in humans unless the person is the holder of a licence that is in force that authorises the carrying out of that step in relation to the goods at those premises.  Section 37(1) sets out the prerequisites for an application for a licence.  Section 38(1) provides for the grant of a licence by the Secretary of the Department.

10                  The Secretary may take action to revoke a licence or cancel the registration or listing of therapeutic goods.  However, there is a distinction between different circumstances in which the Secretary may take action to revoke a licence or cancel the registration or listing of therapeutic goods.  On the one hand, where the Secretary considers, or it appears to the Secretary, that failure to take the relevant action would create an imminent risk of death, serious illness or serious injury, there is no requirement for procedural fairness.  Otherwise, the Act requires that an opportunity be afforded to the affected person to make submissions to the Secretary in relation to the proposed action. 

11                  Thus, under s 41(1) of the TG Act, the Secretary may revoke a licence or suspend a licence in the circumstances set out in that subsection.  Under s 41(2) where the Secretary proposes to revoke a licence or suspend a licence, the Secretary must, unless the Secretary considers that failure to revoke or suspend the licence immediately would create an imminent risk of death, serious illness or serious injury, inform the holder of the action that the Secretary proposes to take and give the holder an opportunity to make submissions to the Secretary in relation to the proposed action.

12                  Further, under s 30(1)(a) the Secretary may cancel the registration or listing of goods if it appears to the Secretary that failure to cancel the registration or listing would create an imminent risk of death, serious illness or serious injury.  Under s 30(2) the Secretary may cancel the registration or listing of goods in the circumstances set out in that subsection.  However, under s 30(3) where the Secretary proposes to cancel the registration or listing of goods under s 30(2), the Secretary must inform the person in relation to whom the goods are registered or listed that the Secretary proposes to cancel that registration or listing and give the person a reasonable opportunity to make submissions to the Secretary in relation to the proposed action. 

13                  The Complementary Medicines Evaluation Committee and the Medicines Evaluation Committee (‘the Evaluation Committees’) are established under the TG Act and the Therapeutic Goods Regulation 1990 (Cth).  The functions of the Committees include evaluating and reporting to the Secretary about certain medicines and the matters to be included in a report include a recommendation about whether or not medicines should remain on the Register.  The Secretary may be given scientific and policy advice about the registration or listing of medicines and the manufacture and supply of medicines.  Advice given may include an opinion about the safety, quality and efficacy of medicines.

MARKETHAVEN’S PUTATIVE CAUSE OF ACTION

14                  Up until the events about to be described, Pan was the holder of a licence granted by the Secretary pursuant to s 38(1) of the TG Act.  Markethaven was at relevant times the person in respect of whom therapeutic goods were registered or listed pursuant to Division 2 of Part 3-2 of the Act.  Markethaven arranged for Pan to manufacture those therapeutic goods for supply in Australia.  Accordingly, Markethaven was a sponsor of certain therapeutic goods manufactured by Pan. 

15                  Following several audits of Pan conducted on behalf of the Therapeutic Goods Administration, major critical manufacturing deficiencies were uncovered at Pan’s manufacturing premises.  To establish what impact or potential impact those deficiencies might have on products manufactured by Pan at those premises and the use of such products by consumers, the Therapeutic Goods Administration sought the advice of specialist external advisors.  For that purpose, an expert advisory group (‘the Advisory Group’) was convened.  The members of the Advisory Group were drawn from the Committees.  The members of the Advisory Group were regarded as having the most relevant expertise to assess the risks and consequences for consumers who might use therapeutic goods that were manufactured under the conditions uncovered by the audit. The role of the Advisory Group was to provide advice to the Secretary about the risks associated with the use of products manufactured by Pan under the conditions described in the audit report in respect of Pan’s manufacturing processes. 

16                  A meeting of the Advisory Group was held on 23 April 2003.  At the time of the meeting of the Advisory Group, no decision had been made about what regulatory action should be taken under the TG Act in relation to Pan arising out of the manufacturing deficiencies uncovered by the audit.

17                  The minutes of the meeting of the Advisory Group record the following:

‘1.        The multiple failures of GMP identified in the auditors’ report, in the opinion of the Expert Advisory Group, create risks of death, serious illness, and serious injury.

Specifically, issues identified included:

·        Misidentification (mix-up) of raw materials, especially herbal materials, which could lead to severe organ damage, including renal and hepatic damage;

·        Cross-contamination or substitution of ingredients due to inadequate operating procedures and poor compliance with existing procedures could lead to severe allergic reactions including anaphylaxis;

·        Microbiological contamination through poor raw material sourcing and handling, poor cleaning practices, and inadequate operating procedures, could lead to infections.

2.         The risk will increase over time.

3.         The risk could be realised at any time.

4.         Specific risks include:

·        Substitution of shark cartilage for bovine cartilage which could cause severe allergic reactions, including anaphylaxis, in fish-protein sensitive individuals;

·        Substitution of bovine cartilage for shark cartilage where the bovine cartilage has been sourced without any assurance that it is TSE-free, and the country of origin is unknown; and

·        Bovine colostrum obtained from non-approved suppliers where the raw material could be sourced from a TSE ‘at risk’ country, and where the source is unknown.

5.         The Group noted a number of products described in the auditors’ report for which there potentially could be safety concerns as a result of poor product quality.  These included vitamin A products, pancreatic enzyme products, multiple herbal products, several OTC medicines and a prescription medicine.

6.         The Group lacks confidence in the quality of any products manufactured by the company.  The Group advised that poor quality products have an increased risk of failure in both safety and efficacy.

7.         The Group recommended that the company should be subject to significant remediation.  The Group recommended that the company’s manufacturing licence should be suspended immediately for the protection of the community’s public health and safety.’

18                  On 28 April 2003, the Secretary, acting through a delegate, and without prior notice to Pan or Markethaven:

• suspended the licence of Pan under s 41 of the Act;
• imposed conditions on the registration and listing of therapeutic goods of sponsors of therapeutic goods manufactured by Pan, the effect of which was to prevent the further supply by, inter alia, Markethaven, of goods manufactured by Pan since 1 May 2002;
• advised Markethaven, as sponsor of therapeutic goods manufactured by Pan, that Markethaven should immediately invite voluntary recall of products manufactured by Pan after 1 May 2002.

19                  Mr Sheahan claims that he wishes to examine documents to be produced by the Commonwealth and the Document Recipients and to examine the Examination Recipients as to whether Markethaven has an action against the Commonwealth in relation to the action of the Secretary in suspending Pan’s licence, imposing conditions on registration or listing of therapeutic goods manufactured by Pan for Markethaven as sponsor or the voluntary recall of such goods.  Mr Sheahan contends that Markethaven may have an action on the basis that the law imposed a duty of care on the Secretary, enforceable at the instance of Markethaven, to take reasonable care so that Markethaven would not suffer economic loss from those actions. 

20                  Mr Sheahan says that two questions are raised specifically by the possibility of such a cause of action, namely, whether:

• a duty of care is owed by the Secretary to Markethaven, as a sponsor, for action taken under the TG Act;
• the Secretary owed a common law duty of care by reason of the voluntary recall.

21                  Mr Sheahan asserts that, in relation to the possibility of a duty of care being owed to Markethaven by the Secretary in the exercise of statutory powers, the following propositions are at least arguable:

• it was reasonably foreseeable that, if the Secretary failed to exercise care in making the decisions referred to above, that could cause substantial harm to Markethaven, namely the likely destruction of its business;
• the Department was in a position to exercise control over the risk of harm to Markethaven and, conversely, Markethaven was vulnerable to the Department in circumstances where Markethaven would suffer substantial loss if adverse action were taken under s 30 or s 41, one consequence being the probable likelihood that it would destroy Markethaven’s business;
• the actions of the Secretary involved the positive exercise of statutory powers to the detriment of Markethaven, as opposed to mere non-feasance and, accordingly, it may be easier to establish a relevant duty of care.

22                  Mr Sheahan further contends that:

• it is consistent with the scheme of the TG Act that the Secretary be required to act carefully in making a judgment as to whether failure to take relevant action would create an imminent risk of death, serious illness or serious injury;
• the TG Act gave the Secretary powers to exercise a significant and special measure of control over the safety of persons so as to oblige it to exercise its powers to avert danger or to bring the danger to the knowledge of the public but only in circumstances where that power is exercised reasonably, with a view to ensuring that a balance is brought to bear upon how the power is exercised;
• the Secretary owed a duty of care to Markethaven in respect of the voluntary recall because the status, powers and functions of the Secretary, and the Therapeutic Goods Administration, made it very likely that a sponsor such as Markethaven would rely upon advice given to it by the Secretary. 

PUBLIC INTEREST IMMUNITY

23                  One of the grounds on which the Commonwealth initially sought the discharge of the Challenged Orders was that compliance with them would be unduly onerous and would infringe public interest immunity in relation to documents that were the subject of the orders for production.  After preliminary skirmishes concerning the evidence in support of the Commonwealth’s claim, Mr Sheahan modified the description of documents that were required to be produced.  Further discussions between the parties resulted in the preparation of schedules of documents, the production of which was pressed by Mr Sheahan and in respect of which the Commonwealth made no claim of oppression or public interest immunity.  Accordingly, it is not necessary for me to rule on those questions.

24                  The Commonwealth also sought discharge of the examination summonses because of the possibility that questions that might be asked in the course of examination of the Examination Recipients might impinge upon public interest immunity.  However, that is not a basis for discharging the orders.  If, in the course of examination, questions are asked that might impinge upon public interest immunity, objection should be taken at that stage and, if the questions are pressed, the appropriate course would be to seek a ruling from the Court before pursuing that aspect of the examination.  The possibility of questions impinging upon public interest immunity is not a basis for setting aside the Challenged Orders.

25                  In that regard, the Court has been informed by counsel for Mr Sheahan that the counsel who would conduct any examination of the documents produced by the document recipients and would conduct the examination of the Examination Recipients has not advised or appeared for Mr Selim in relation to the matters described above.

OTHER ANCILLARY MATTERS

26                  In the course of the proceeding, several ancillary matters were raised upon which I gave rulings but for which I have not yet given reasons.  I indicated during the course of the hearing that I would give reasons in due course for the rulings that I have made; I shall now do so.

EXTENSION OF TIME

27                  Under Rule 11.5(2) of the Federal Court (Corporations) Rules 2000, a person served with an examination summons may, within three days after being served, apply to the Court for an order discharging the summons by filing:

• an interlocutory process; and

·        an affidavit stating the facts in support of the interlocutory process.

The interlocutory process and supporting affidavit are to be served as soon as practicable after filing on the person who applied for the examination.

28                  While it is clear that ordinarily an application for discharge must be made with considerable expedition, it is not disputed that the Court has a discretion to extend the time.  Nevertheless, extension should only be granted where there is a satisfactory explanation provided for delay and the delay has not caused prejudice of an irreparable nature.  The hearing of the application was expedited and, in the circumstances, no submissions were made on behalf Mr Sheahan that any prejudice was suffered by the lateness of the filing of the interlocutory process. 

29                  Most of the summonses issued pursuant to the Challenged Orders were served in the week beginning 9 August 2004.  However, it was not until 27 August 2004 that the current application was made.  Certain of the affidavits relied on in support of the application were not filed until some days after that date. 

30                  The Australian Government Solicitor received instructions from the Commonwealth, through the Therapeutic Goods Administration, on 16 August 2004.  Instructions were given not only on behalf of the Commonwealth but on behalf of officers of the Therapeutic Goods Administration and external advisers retained by the Therapeutic Goods Administration in relation to Pan. 

31                  The Australian Government Solicitor is restricted by the Judiciary Act 1903 (Cth) as to the persons for whom it may act.  On receipt of the instructions from the Commonwealth, the Australian Government Solicitor was required to instigate processes under s 55N of the Judiciary Act to seek approval to act for the external advisers.  Decision as to that matter required consideration, amongst other things, of whether there was any conflict or potential conflict of interest between the Commonwealth on the one hand and the individuals on the other.

32                  The Australian Government Solicitor wrote to Mr Sheahan’s solicitors on 17 August 2004 indicating that the Australian Government Solicitor had been retained to consider the examination summonses.  The Australian Government Solicitor wrote again on 18 August 2004 seeking information concerning the basis upon which the examination summonses had been issued.  Mr Sheahan’s solicitors responded on 19 August 2004 enquiring as to the identity of the persons for whom the Australian Government Solicitor acted.  A response was given on the same day.

33                  On 24 August 2004, Mr Sheahan’s solicitors indicated that he declined to provide to the Australian Government Solicitor copies of the affidavits filed in support of the application pursuant to which the Challenged Orders were made.  The letter also indicated that Mr Sheahan would not agree to any extension of time in relation to any application to discharge of the Challenged Orders.

34                  There were thirteen individuals, together with the Commonwealth, from whom instructions had to be taken by the Australian Government Solicitor.  External advisers were located at various universities in Sydney, Lismore and Wollongong and in a medical practice in Victoria.  As I have indicated, one of the orders was made against the Therapeutic Goods Administration, which is not a legal entity but is simply an emanation of the Commonwealth, being a division of the Department.

35                  The Challenged Orders provided for the production of documents on 8 September 2004 at the examination of one of the Examination Recipients, which was, at least nominally, to commence on that day.  The examination of the other Examination Recipients was fixed for 22 September 2004.

36                  The volume of documents that was called for by the schedules to the orders was very extensive.  The description of documents went beyond what would reasonably be required for the pursuit of the putative cause of action identified by Mr Sheahan.  Even on the basis of the more restricted schedules, a very considerable volume of paper would need to be produced.  The orders in the form in which they were made could not stand in any event. 

37                  In all the circumstances, there being no prejudice of any significance to Mr Sheahan by an extension of time, I consider that it would be appropriate to extend the time within which the interlocutory process and affidavit in support might be filed up to and including the respective dates on which they were in fact filed. 

NOTICES TO PRODUCE

38                  On 3 and 6 September 2004, notices to produce were served on Mr Sheahan by the Australian Government Solicitor.  Mr Sheahan objected to production of the documents described in the notices to produce.  However, since I considered that there was a legitimate forensic purpose for the Commonwealth in obtaining access to certain of those documents, I ruled that some of the documents described should be produced.  My reasons for so ruling are as follows. 

39                  On 28 November 2003, Mr Jason Bettles and Ms Susan Ruth Carter (‘the Original Administrators’) were appointed administrators of Markethaven by Mr Sid Sarantis, the only director of Markethaven.  In the report of the Original Administrators of 17 December 2003 (‘the Administrators’ Report’) it was stated that Mr Sarantis attributed Markethaven’s failure solely to the failure of Pan, as Markethaven’s major supplier of therapeutic goods.  The Administrators’ Report stated that Mr Sarantis believed that Markethaven has a claim against Pan in an amount of $3,485,450 but that, due to the liquidation of Pan, the recoveries would be in the vicinity of $100,000.  No mention was made of the possibility of a claim against the Commonwealth, in its guise as the Therapeutic Goods Administration. 

40                  Attached to the Administrators’ Report was a letter from Mr Sarantis outlining a proposal for a deed of company arrangement.  The proposal was that Mr Sarantis would arrange funding to substantiate Markethaven’s claim against Pan with all recoveries being paid to the Original Administrators for distribution to creditors.  The Administrators’ Report accompanied a notice convening a meeting of creditors of Markethaven for 29 December 2003.  On that day, the meeting was adjourned to 23 January 2004, when a resolution was passed that the proposal for a deed of company arrangement as detailed in the Administrators’ Report be accepted, with an amendment that Mr Sarantis not participate in a dividend until all other creditors claims had been paid in full.

41                  On 3 February 2004, a deed of company arrangement (‘the Original Deed’) was entered into between the Original Administrators and Markethaven.  By that instrument, Markethaven agreed to pay into a Fund, to be administered by the Original Administrators, the proceeds of any legal action to be taken on behalf of Markethaven against Pan. 

42                  On 30 March 2004 a further notice convening a meeting for 8 April 2004 was sent to the creditors of Markethaven.  The notice convening the meeting was accompanied by a letter dated 16 March 2004 from Mr Sheahan’s firm, Sheahan Lock Partners, to the Original Administrators relevantly saying:

‘Sheahan Lock Partners is of the view that Markethaven may have causes of action in addition to its potential claim against Pan Pharmaceuticals Ltd (In Liquidation) and that funding can be secured for the pursuit of same. 

I am aware that Markethaven is currently without funds to pursue investigations into whether any causes of action might exist other than against Pan Pharmaceuticals.  Accordingly, I would like to propose an amendment to Markethaven’s existing deed of company arrangement, as follows:

·        John Sheahan and Ian Lock of Sheahan Lock Partners be appointed as joint and several deed administrators of the company in place of the current deed administrators.

·        That the deed administrators be given specific powers to investigate whether causes of action exist against any parties in addition to Pan Pharmaceuticals.

·        That the deed administrators be given specific powers to apply for, and conduct, examinations of relevant individuals.

…

If you consider that the above proposal is in the best interests of Markethaven’s creditors, would you please convene a meeting of creditors accordingly, to consider and vote on an amendment to the existing deed of company arrangement, to incorporate the above proposal.

A proposed amended deed is attached.

…’

43                  Pursuant to a motion moved at the meeting by Mr Sarantis, a resolution was passed that the Original Deed be varied in accordance with the proposal set out in that letter.  On 21 April 2004, an amended deed of company arrangement was entered into pursuant to the resolution of 8 April 2004 (‘the Amended Deed’).  The parties to the Amended Deed were the Original Administrators, Markethaven, Mr Sarantis and Messrs Sheahan and Lock (‘the New Administrators’). 

44                  The Amended Deed was substantially similar to the Original Deed, except for the addition of clauses 19 to 22, the effect of which might be summarised as follows:

19.       The New Administrators were authorised by the creditors to investigate any potential causes of action of Markethaven against any person, by taking investigative steps that included the issue of examination summonses under the Corporations Act and the issue of orders for production.

20.       The New Administrators were to use reasonable endeavours to obtain funding of an amount sufficient to enable them to carry out investigations contemplated by clause 19 and, if such funding could be secured, were to accept such funding and carry out such investigations provided that the terms of the funding were consistent with the terms set out in clause 21.

21.       Any funding proposed would be acceptable if it included the following terms:

·        the advance should be non recourse to Markethaven and the New Administrators, except in accordance with clause 22;

·        the advance should be for an amount of at least $150,000;

·        the New Administrators were to appoint legal advisors.

22.       If any causes of action were identified by any funding party as a result of the investigations contemplated by clause 19, the funding party was to be entitled to require Markethaven and the New Administrators to assign such causes of action to it or its nominee.  In consideration of that assignment, any net proceeds of any proceeding issued in respect of the cause of action, after the payment of litigation expenses, were to be applied equally between Markethaven and the New Administrators, on the one hand, and the funding party on the other hand, on a dollar for dollar basis, until, if at all, the total amount so applied to Markethaven and the New Administrators was equal to $3 million; thereafter any continuing recovery was to be applied wholly and absolutely to the funding party for its entire use and benefit.

45                  On 7 April 2004, the liquidator of Pan commenced a proceeding in the Federal Court against Mr Selim claiming damages for breach of duties owed to Pan under s 180 of the Corporations Act and under a contract of employment between Pan and Mr Selim.  A statement of claim was filed in the proceeding on 14 May 2004 alleging detailed breaches of duty by Mr Selim in his capacity as a director and chief executive officer of Pan and as the majority shareholder of Pan.

46                  Accounts of Markethaven prepared by the Original Administrators were filed with the Australian Securities and Investment Commission on 23 April 2004.  Those accounts showed a receipt by the Original Administrators on 26 March 2004 of the sum of $1,000 from Mr Selim. 

47                  On the basis of that material, the Commonwealth, by its notices to produce, sought production of all documents within the possession, custody or control of Mr Sheahan or Markethaven concerning:

• the appointment of Mr Sheahan as an administrator of Markethaven;
• the payment on or about 6 March 2004 by Mr Selim to the Old Administrators of $1,000;
• any funding agreements entered into by Markethaven, as contemplated by clause 20 of the Amended Deed, with Mr Selim or any entity associated with Mr Selim or his wife.

48                  Having regard to the contention advanced on behalf of the Commonwealth and the other Recipients, that the principal or predominant purpose of Mr Sheahan in seeking the Challenged Orders was to afford assistance to Mr Selim, I considered that there was a legitimate forensic purpose for the Commonwealth in obtaining access to any such documents.  Having regard to the timing of the payment of $1,000, an inference could properly be drawn that the sum of $1,000 was paid by Mr Selim to fund the convening of the meeting of creditors that took place on 8 April 2004 at which the Amended Deed was approved.  An inference could also be drawn that there may be some connection between Mr Selim and Mr Sheahan and that the proposed examinations were to be funded by Mr Selim or persons associated with him. 

ACCESS TO AFFIDAVITS

49                  Those documents were produced and inspected by the legal representatives of the Commonwealth. The documents indicated that the inferences referred to above were justified.  They confirmed that the sum of $1,000 was in fact paid by Mr Selim in order to fund the cost of convening a further meeting of the creditors of Markethaven to approve the Amended Deed.  The documents, moreover, also disclosed a more intimate connection between Mr Selim and Mr Sheahan. 

50                  On 12 January 2004, Mr Sheahan sent an email to Mr Andrew Thorpe, a solicitor who was acting for Mr Selim.  The email relevantly said as follows:

‘On behalf of your client, Jim Selim, you have sought my assistance in acquiring (from Tony McGrath, Pan’s liquidator) Pan’s cause of action against the TGA.  Alternatively, you are contemplating bringing a shareholder action against the TGA.  You have also sought my assistance in securing litigation funding to assist with the prosecution of any such action(s). 

As requested, I set out herein my proposed terms of retainer, detailing the terms on which I propose I am retained by you.

…’

51                  On 14 January 2004, Mr Thorpe sent an email transmission to Mr Sheahan, relevantly saying as follows:

‘I have not been able to get instructions on your proposed retainer letter.  I will attend to that on my return to work on 27 January 2004.

In the interim, please note the following:

1.         There in fact is a company recently gone into liquidation which was involved in the therapeutic industry.  Jim knows the owner quite well and thinks that he could secure the company for a total of $200K, which is the amount needed to discharge all of the creditors, and pay the current owner a small amount.  This would enable an examination of the TGA and could be of crucial tactical significance.  Can you please approach the funding issue on the basis that the funder should make available sufficient funds to purchase the company (estimated $200K as above), and to fund the examinations (estimated further $200K).

2.         So far as timing is concerned, Jim is under considerable pressure from his shareholders and other people to institute some action against the TGA.  To alleviate that pressure, Jim would need to know by the end of February 2004 at the very latest, whether or not he has a commitment in place from a funder, and if that occurred, the aim would be to secure McGrath’s commitment (or not, as the case may be), to selling the Pan action against the TGA by the end of March at the very latest.

In the interim, the acquisition of the company in liquidation referred to above could proceed contemporaneously with negotiations as above.

We would need to put in a new liquidator as part of that arrangement.  Would you prefer not to be “upfront” in that company, having regard to your proposed retainer?’ [emphasis added]

52                  The reference in item 1 of that email transmission does not appear to be a reference to Markethaven.  Markethaven had not gone into liquidation and the evidence indicates that its total creditors were far in excess of $200,000.  Further, the sensitivity to Mr Sheahan’s not being ‘up front’ is significant, having regard to the fact that he had been retained by Mr Selim.  An inference is open that Mr Selim was interested in obtaining control of a company in the therapeutic goods industry in order to obtain the ‘crucial tactical advantage’ of conducting an examination of officers of the Therapeutic Goods Administration, but did not want it to be known that he was involved. 

53                  Mr Sheahan responded to Mr Thorpe’s email on the same day, relevantly saying as follows:

‘firstly, I do not consider it necessary to repay, in full, all creditors of this identified company.  I suspect that it will be possible to acquire control of same via a Deed of Company Arrangement for a much smaller sum, perhaps in the region of 20 cents in the dollar.  The Deed Administrator could then seek production of key nominated documents from, inter-alia, the TGA, various of its officers and the EAG members who received, considered and acted upon the draft TGA audit report into Pan.  Following production and review of such documentation a decision could then be made concerning whether, and which, S 596B/597 examinations should be undertaken by the Administrator’s counsel. …’

The email went on to refer to a concurrent approach to the liquidator of Pan to acquire an option over any cause of action against the Therapeutic Goods Administration and associated parties in relation to any losses caused by the recall decision.  Once again, the emphasis appears to be on obtaining information from the Therapeutic Goods Administration, irrespective of the entity through which an application might be pursued.  There was no suggestion of a cause of action by the company of which control was to be acquired.

54                  Mr Thorpe sent a further email communication to Mr Sheahan on 19 January 2004 relevantly saying:

‘1.        As regards the industry participant recently placed in liquidation, I have noted your comments.  My only point of difference is that I would prefer to be in a position to appoint our own liquidator or alternatively an administrator under a DOCA, for reasons which I can discuss with you in a meeting.

2.         Your comments in relation to acquiring the action from Pan are noted…

3.         The most sensitive issue for Jim is timing. …  Obviously, there is no point in time and effort being expended in endeavouring to secure funding if the time it takes to do so fails to meet Jim’s requirements.’

Significantly, at that stage, there was no suggestion of any involvement of Markethaven.  Markethaven was then subject to administration, although the Original Deed had not yet been entered into.  Indeed, the meeting to approve the Original Deed had not yet taken place.

55                  There is no evidence of any further communication concerning the company that was being discussed in these exchanges in January 2004.  The next communication in evidence was a communication in March 2004, by which time Markethaven appears to have come into consideration by Mr Sheahan, although Mr Sheahan offered no evidence as to how he came to be involved with Markethaven.

56                  In any event, on 2 March 2004, Mr Sheahan communicated with Mr Thorpe by email, relevantly saying:

‘…I would like to bounce some ideas off you re Pan prior to our meeting tomorrow.  These include:

1.         Discussions with potential funders in USA

2.         Discussions with Sid Sarantis of Markethaven

3.         Discussions with administrator of Markethaven

4.         Appointment of JS/IL as administrators of proposed Markethaven deed (whilst I did not initially see added value in this, my attitude has changed for a number of reasons)

5.         Class action v procurement of option ex McGrath

6.         Shareholder action

7.         Meetings with potential expert witnesses/advisors in UK and USA

…’

57                  A draft of the Amended Deed was in existence by early March 2004 since, on 12 March 2004, Mr Bettles sent an email communication to Mr Paul Dugan of Sheahan Lock Partners commenting on a draft of the Amended Deed.  After suggesting relatively technical amendments, Mr Bettles said:

‘I am waiting on Sid Sarantis to call me back about a point he is clarifying with John.  Once I receive that together with your advice on the above changes and $1,000 to cover the costs of convening and calling the meeting, which Sid has suggested he isn’t paying, then I will convene the necessary meeting.’

Mr Dugan forwarded that email to Mr Thorpe saying:

‘I will forward you a copy of my response and amended Deed shortly.  Can you please have Jim Selim facilitate the $1000 necessary to meet the costs of convening the meeting.  I presume this should formally come from Sid Sirantis as the proposer of the Deed.’

58                  The reluctance of Mr Sarantis, the principal of Markethaven, to fund the $1,000 necessary to convene a meeting of creditors to approve the Amended Deed is significant.  If he had been a moving party, one might have expected him to support the proposal to obtain funding for a proceeding that might lead to significant benefit for Markethaven.

59                  On 15 March 2004, Mr Nick Fryer, who was assisting Mr Sheahan, sent an email to Mr Thorpe saying:

‘John Sheahan and I have spoken today with Sid Sarantis in relation to a minor clarification of the terms of the proposed amended deed of company arrangement for Markethaven Pty Ltd.  I attach a copy of my email to Sid of a few moments ago.  The marked up amendment should be unexceptionable.  Please let me know if you have any comments in relation to the attached.

60                  On 17 March 2004, Mr Thorpe sent an email to Mr Fryer acknowledging the letter of 16 March 2004 and suggesting minor drafting amendments. The transmission finished as follows:

‘I have recommended that Mr Selim contact your firm in relation to the provision of the sum of $1,000.00 to cover the cost of convening the meeting.’

61                  In the meantime, Mr Sheahan had written his letter of 16 March 2004 to Mr Bettles proposing the Amended Deed.  The notice of meeting of 30 March 2004 was then sent to the creditors of Markethaven.

62                  On 12 August 2004, an Investigation Funding Deed was entered into between Markethaven Funding Company Pty Ltd (‘the Funding Company’), Markethaven and the New Administrators.  The Funding Company was formed on 25 June 2004.  Its only director is June Selim, Mr Selim’s wife and its address is that of Mr Selim.  The Investigation Funding Deed generally accords with clauses 19 to 22 of the Amended Deed, which had been entered into between Markethaven and Messrs Sheahan and Lock on 29 April 2004.

63                  Having regard to that material, I considered that there was at least an arguable case demonstrated by the Commonwealth that the dominant or principal purpose of Mr Sheahan in obtaining the Challenged Orders was to assist Mr Selim in relation to the affairs of Pan.  If that were the case, the Commonwealth would be entitled to the discharge of the Challenged Orders.  Accordingly, I directed that the affidavits relied on by Mr Sheahan in his application for the Challenged Orders be made available to the legal advisers of the Commonwealth on the basis that their contents remain confidential until further order.

USE OF THE AFFIDAVITS

64                  The Commonwealth seeks to rely on the affidavits sworn by Mr Sheahan in support of the Challenged Orders.  The Commonwealth contends that the affidavits should be treated as being before the Court on the hearing of this application to discharge the Challenged Orders.  On that basis, they are evidence of the extent of disclosure made by Mr Sheahan to the Registrar when applying ex parte for the Challenged Orders.

65                  However, if the affidavits are not otherwise taken to be before the Court, the Commonwealth seeks to tender them on the limited basis that they contain admissions, demonstrating that Mr Sheahan did not make full, frank and candid disclosure when he sought the Challenged Orders.  The Commonwealth asks for an order under s 136 of the Evidence Act (Cth) (‘the Evidence Act’) limiting the use to which the affidavits should be put, such that they should not be taken to be evidence of the truth of the assertions they contain. 

66                  Mr Sheahan maintains that the affidavits are of no assistance in proving the case that the predominant or principal purpose of Mr Sheahan was to assist Mr Selim in helping to defend the case brought by the liquidator of Pan or to defend any possible criminal action.  Mr Sheahan says that the Commonwealth has not made out a case for limiting the use to which the affidavits can be put if they are to be tendered.  More specifically, he says that it is inappropriate to limit the use to which the affidavits may be put in circumstances where they are tendered in support of a serious allegation of impropriety against Mr Sheahan.

67                  The affidavits are on the file in which the application for discharge of the Challenged Orders has been brought.  I consider that it is open to the Court to have regard to the affidavits in order to determine the extent of disclosure made by Mr Sheahan to the Court when applying for the Challenged Orders.  That does not involve the tender or the reading of the affidavits.  Accordingly, no question of an order under s 136 of the Evidence Act or of cross-examination arises. 

68                  Mr Sheahan contends, in any event, that, to the extent that the affidavits are before the Court on the hearing of this application, it is appropriate to maintain confidentiality, particularly in relation to certain paragraphs, which contain details of the potential lines of examination of the Examination Recipients.  Mr Sheahan says that any such examination should not be compromised by advance disclosure to the Examination Recipients of the lines of examination.   

69                  The paragraphs of the affidavit in question are those that appear under the following headings:

• The Factual Basis of Cause of Action
• Examinable Affairs
• Examinations

The material that appears under those heads is of no specific relevance to the issues presently before the Court.  Accordingly, it is appropriate to direct that the contents of the material under those headings (being pars 26 to 36 inclusive of the affidavit of 14 July 2004) not be disclosed by the legal advisers of the Commonwealth to any other person.  The balance of the affidavits, other than Mr Sheahan’s description of the potential cause of action of Markethaven against the Therapeutic Goods Administration, is material in the public domain. 

70                  Annexed to Mr Sheahan’s affidavit of 14 July 2004 was a substantial bundle of documents.  Those documents included copies of:

• the Original Report;
• the Amended Deed;

·        the minutes of the meeting of the Expert Advisory Group held on 23 April 2003.

No specific mention was made of the fact that the decisions of the Secretary of the Department were based on the conclusion that there was a risk of death, serious illness or serious injury if action was not taken.  The documents do not refer specifically to that as the basis for the action taken by the Secretary about which complaint is potentially made by Markethaven. 

71                  I consider that, to the extent that it is relevant, the Court may have regard to the contents of the affidavits for the purposes of determining the matters that were disclosed to the Registrar.  That does not involve treating the affidavits as evidence of the truth or otherwise of the statements made in them.  Thus, if it be relevant, it is clear from the terms of the affidavits that no mention was made of:

(a)        recent decisions of the High Court bearing on the putative cause of action, such as Sullivan v Moody (2001) 207 CLR 562 and Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540;

(b)        any association between Mr Selim and Mr Sheahan.

WEAKNESS OF THE PUTATIVE CAUSE OF ACTION

72                  The Commonwealth contends that any putative cause of action that might be available to Markethaven is doomed to failure.  It says that any such duty of care as is contended for by Mr Sheahan is incompatible with the duty owed by the Secretary under the TG Act to take action in the public interest where it appears that failure to act would create an imminent risk of death, serious illness or serious injury. 

73                  A statutory body may come under a common law duty of care in relation to both the exercise and the failure to exercise its powers and functions.  However, liability will arise in negligence in relation to the failure to exercise a power or function only if there is, in the circumstances, a duty to act.  What is in question is a duty called into existence by the common law by reason that the relationship between the statutory body and some member or members of the public is such as to give rise to a duty to take some positive step or steps to avoid a foreseeable risk of harm to the person or persons concerned.  In the case of discretionary powers vested in a statutory body, the statute pursuant to which the body is created and invested with powers operates in the milieu of the common law.  The common law applies to such  body unless excluded. 

74                  Common law duties are excluded if the performance by a statutory body of its functions in accordance with any such duties would involve some breach of statutory duty or the exercise of powers that the statutory body does not possess.  Further, legislation establishing a statutory body may exclude the operation of the common law in relation to that body’s exercise or failure to exercise some or all of its powers or functions.  Even if the legislation does not do so in terms, the nature or purpose of the powers and functions conferred, or some of them, might be such as to give rise to an inference that it was intended that the common law should be excluded in whole or in part.  As a matter of implication, legislation may reveal an intention to exclude the common law in relation to the exercise or non exercise of a particular power – Crimmins v Stevedoring Committee (1999) 200 CLR 1 (‘Crimmins’) at [25]-[27].

75                  The following questions may arise in determining whether a statutory authority owed a common law duty of care and breached that duty:

(1)        Was it reasonably foreseeable that an act or omission of the authority would result in injury to the claimant?

(2)        Did the authority have the power to protect a specific class, including the claimant, from a risk of harm, by reason of the authority’s statutory or assumed obligations?

(3)        Was the claimant vulnerable in the sense that the claimant could not reasonably be expected to safeguard itself adequately from harm?

(4)        Did the authority know, or ought the authority to have known, of the risk of harm to the specific class including the claimant if it did not exercise its powers?

(5)        Would such a duty impose liability with respect to the authority’s exercise of core policy-making or quasi-legislative functions?

(6)        Are there any other supervening reasons in policy to deny the existence of a duty of care?

If the first four questions are answered in the affirmative and the last two in the negative, it would ordinarily be correct in principle to impose a duty of care on the statutory authority – see Crimmins at [93]-[94].

76                  The coexistence of knowledge of a risk of harm and power to avert or to minimise that harm does not, without more, give rise to a duty of care at common law.  The totality of the relationship between the parties is the proper basis upon which a duty of care may be recognised.  Otherwise, any recipient of statutory powers to licence, supervise or compel conduct in a given field, would, upon gaining foresight of some relevant risk, owe a duty of care to those ultimately threatened by the risk to act to prevent or minimise it.  However, the common law should be particularly hesitant to recognise such a duty where the relevant authority is empowered to regulate conduct relating to or impacting on a risk-laden field of endeavour that is populated by self interested commercial actors who themselves possess some power to avert those risks.  The existence, or otherwise, of a common law duty of care allegedly owed by a statutory authority turns on a close examination of the terms, scope and purpose of the relevant statutory regime – Graham Barclay Oysters Pty Ltd v Ryan at [145]-[146]. 

77                  A duty should not be found to be owed by a statutory authority if that duty would not be compatible with other duties owed by a statutory authority.  The circumstance that a statutory authority owes a duty of care to a third party, or is subject to statutory obligations that constrain the manner in which powers or discretions may be exercised, does not of itself rule out the possibility that a duty of care is owed to a claimant.  People may be subject to a number of duties, at least provided that they are not irreconcilable.  However, if a suggested duty of care would give rise to inconsistent obligations, that would ordinarily be a reason for denying that the duty exists.  Thus, when public authorities, or their officers, are charged with the responsibility of conducting investigations, or exercising powers, in the public interest, or in the interests of a specified class of persons, the law would not ordinarily subject them to a duty to have regard to the interests of another class of persons where that would impose upon them conflicting claims or obligations – Sullivan v Moody at [55] and [60].

78                  In some instances, a statutory regime may itself, in express terms or by necessary implication, exclude the concurrent operation of a duty at common law.  For example, where the statutory scheme that forms the background to the activities of a statutory authority is a scheme for the protection of children, it would be inconsistent with the proper and effective discharge of the responsibilities imposed under the scheme that the authority should be subjected to a legal duty to take care to protect persons who were suspected of being the sources of harm to children – Sullivan v Moody at [62]. 

79                  Those considerations suggest that the putative cause of action of Markethaven asserted by Mr Sheahan may have some difficulties in its way.  However, unless the putative cause of action is so plainly or clearly untenable that it could only be an abuse of process or frivolous to pursue it, Mr Sheahan should not be prevented from investigating the possibility of mounting such a claim– see, for example, Makris v Sheahan [2000] SASC 335.  It must be remembered that there is no pleading asserting the cause of action.  Further investigation and enquiry may be necessary before a pleading could be formulated.  I am not persuaded that the putative cause of action asserted by Mr Sheahan is so plainly and clearly untenable that the further investigation of it would be an abuse of process or frivolous or vexatious. 

ALLEGED IMPROPER PURPOSE

80                  The Commonwealth contends that the material referred to above, gives rise to an inference that Mr Sheahan’s predominant or principal purpose was to obtain information for the benefit of Mr Selim.  The Commonwealth says that, in the absence of any evidence from Mr Sheahan to explain the discussions that took place in January 2004 and how Mr Sheahan came to be involved with Markethaven, the inference is the more easily drawn on the basis that any evidence that he might give would not assist his case – see Jones v Dunkel (1959) 101 CLR 298. 

81                  There are several factors in the present case that suggest that the position of Mr Sheahan might be other than that of a disinterested administrator.  The relationship between Mr Selim and Mr Sheahan, prior to Mr Sheahan’s appointment as administrator of Markethaven, requires his motives and purposes to be examined with greater scrutiny than might otherwise be the case.  His decision to give no further evidence by way of explaining his position, after I concluded that there was at least an arguable case that his predominant or principal purpose in seeking the Challenged Orders was to benefit Mr Selim, is significant.

82                  The subject matter of the proposed examinations and the relevance of the documents to be produced are closely connected with Mr Selim.  For some time the liquidator of Pan had threatened proceedings against Mr Selim in relation to the collapse of Pan.  In addition, possible criminal proceedings have been foreshadowed against Mr Selim.  An additional matter in the balance is the difficulty that might face the case against the Commonwealth that Mr Sheahan wants to mount on behalf of Markethaven.

83                  It may be that the Investigation Funding Deed may not be out of the ordinary, although there was no evidence as to that matter one way or the other.  It was not entered into until after the Challenged Orders were made.  However, Mr Sheahan has chosen not to furnish the Court with any evidence concerning the negotiation and execution of the instrument.  Having regard to the apparent prior association between Mr Selim and Mr Sheahan, an inference is available that the terms of the Investigation Funding Deed were being negotiated at about the time when the application was being made to the Registrar. 

84                  The Investigation Funding Deed recites that:

• the New Administrators’ preliminary investigations have identified possible legal claims available to Markethaven against the Therapeutic Goods Administration and related parties;
• the New Administrators wish to investigate such claims and to undertake examinations pursuant to s 596B of the Corporations Act;
• Markethaven does not have sufficient funds to meet the costs of the proposed further investigations;
• The Funding Company has agreed to fund the costs and expenses of further investigations, including conducting examinations pursuant to s 596B of the Corporations Act.

85                  Under clause 3.2 of the Investigation Funding Deed, the Funding Company agrees to pay $270,000 to the New Administrators to be applied in relation to costs and expenses incurred in relation to the investigations to be carried out by them, including any examinations to be conducted pursuant to s 596B of the Corporations Act and the production of documents under s 597 of the Corporations Act.  The New Administrators agree to carry out those investigations.

86                  Under clause 4.1, the Funding Company is to be entitled to full details of all information relating to the investigations as it shall reasonably require.  In particular the New Administrators are to provide the Funding Company with:

• a copy of each examination summons and a copy of every order for production;
• full details of any challenges issued in relation to such documents;
• a copy of the transcript of the examination of any person and a copy of any document admitted into evidence referred to in the transcript.

In addition, under clause 4.2, the New Administrators are required to make available for inspection by the Funding Company copies of any of the information in relation to the investigations reasonably required by it.  Subject to any claim for legal professional privilege, the New Administrators are also required to deliver copies of documents to the Funding Company.  However, under clauses 4.3 and 4.4, those obligations are to be subject to any requirements as to confidentiality or non-disclosure imposed by law, including any order of a court, and the Funding Company agrees to keep confidential all information provided to it pursuant to those provisions.

87                  By clause 6, Markethaven and the New Administrators grant to the Funding Company an option to require any causes of action against the Therapeutic Goods Administration and related parties to be assigned.  If the option is exercised, the consideration for the assignment is to be $1 plus 50 per cent of all moneys received by way of judgment, settlement sum or otherwise in respect of the cause of action, less legal costs in connection with the action, up to a maximum of $3 million.  Following exercise of the option, an obligation is to be imposed upon the assignee to take all reasonable steps to prosecute and realise the cause of action and to pay all costs relating to prosecution or realisation of the cause of action.  Markethaven agrees to allow the assignee to prosecute and realise the cause of action in its name. 

88                  It is significant that the Funding Company may be furnished with all of the material that might be disclosed by reason of the examination, subject, of course, to any appropriate orders that might be made by the Court.  Having regard to the apparent connection between Mr Selim and the Funding Company, it is likely that Mr Selim could derive some benefit from the information that might become available as a consequence of the proposed examinations, having regard also to the civil and criminal proceedings threatened against him.

89                  I am mindful of the onus that the Commonwealth bears in making such serious allegations as it makes against Mr Sheahan.  That is to say, the Court should be clearly satisfied, on the preponderance of probability, that Mr Sheahan’s principal or predominant purpose was as alleged on behalf of the Commonwealth – see Briginshaw v Briginshaw (1938) 60 CLR 336 at 362-3.

90                  There is no reference, in the affidavits relied on in the ex parte application, to the association that appears to have existed between Mr Sheahan and Mr Selim since January 2004.  Mr Sheahan has offered no evidence as to the exchanges that took place in January 2004 concerning ‘the crucial tactical significance’ of examining the Therapeutic Goods Administration.  Those exchanges took place in relation to a company other than Markethaven, thus indicating that the object of examining the Therapeutic Goods Administration was the principal and predominant motive behind the discussion, not the pursuit of a cause of action for recovery of damages on behalf of Markethaven.

91                  The communications between Messrs Sheahan and Thorpe in January 2004 contemplated the pursuit of an examination of officers of the Therapeutic Goods Administration and the members of the Advisory Group in parallel with a claim on behalf of Pan against the Therapeutic Goods Administration.  Mr Sheahan was apparently approached on behalf of Mr Selim for his assistance in obtaining funding either to acquire Pan’s cause of action against the Therapeutic Goods Administration or to conduct a derivative action on behalf of the shareholders of Pan against the Therapeutic Goods Administration.  At that stage, Mr Selim was, according to his solicitor, ‘under considerable pressure’ to institute some action against the Therapeutic Goods Administration. 

92                  There is no indication as to whether any possible claim by or on behalf of Pan against the Therapeutic Goods Administration has been pursued.  It may be that the attention of the liquidator of Pan has been directed towards Mr Selim rather than the Therapeutic Goods Administration.  Of course, while that is not a matter about which Mr Sheahan could be expected to have detailed information, it is a matter about which Mr Sheahan was consulted. 

93                  So far as the evidence goes, there was a lull in activity from the end of January 2004 until early March 2004, when Mr Sheahan mentioned Markethaven in his email to Mr Thorpe of 2 March 2004.  At that stage, the pursuit of an action by or on behalf of Pan was still under consideration but, again, in parallel with possible involvement with Markethaven.  Thus, in the email of 2 March 2004, there is reference to ‘class action’ as against ‘procurement of option’, suggesting either a derivative action or the acquisition of the cause of action from the liquidator of Pan.

94                  Absent the communications with Mr Thorpe, there may be no reason to conclude that Mr Sheahan’s purpose in seeking the Challenged Orders was other than the furtherance of the interests of Markethaven in pursuing a possible cause of action that involved no risk in terms of costs either to Markethaven or to Mr Sheahan, as one of the New Administrators.  Absent those communications, there may be no reason to doubt that the Investigation Funding Deed was other than a commercial arrangement entered into for the benefit of Markethaven and its creditors. 

95                  Mr Selim’s motives and Mr Thorpe’s motives are, of course, not in issue.  The issue is whether Mr Sheahan’s principal or predominant purpose was to pursue a possible recovery on behalf of Markethaven or whether it was to assist Mr Selim in some way to obtain information that may benefit him in relation to possible proceedings against him concerning his involvement with Pan. 

96                  It may well be open to me to conclude that any evidence that Mr Sheahan would have given would not have assisted in rebutting the inferences that are open on the material before me that Mr Sheahan’s principal or predominant purpose was to assist Mr Selim in some way to obtain information that may benefit him in relation to possible proceedings against him concerning his involvement with Pan.  It would follow that a finding should be made that that was his principal or predominant purpose and the Challenged Orders should be discharged on that ground. 

97                  However, having regard to the serious nature of the allegations made against Mr Sheahan, I propose to deal with the application for discharge on the other ground raised by the Commonwealth.  That is to say, while adverse inferences can be drawn against Mr Sheahan on the basis of the material before me, I prefer to decide the question on the ground of failure of full, frank and candid disclosure.  That may lead to the same immediate result but may afford Mr Sheahan the opportunity of explaining his position, if he wishes to do so in any fresh application that he may be advised to make. 

NON DISCLOSURE

98                  The Commonwealth complains that, in the affidavits relied on in support of the Challenged Orders, Mr Sheahan did not make full disclosure of:

• the hurdles in the way of the putative cause of action constituted by Sullivan v Moody and Graham Barclay Oysters Pty Ltd v Ryan, having regard to the fact that powers were exercised on behalf of the Secretary pursuant to s 30(1)(a) and s 41(1)(a) of the TG Act on the basis that there was a risk of death, serious illness or serious injury if the powers were not exercised;
• the involvement of Mr Selim in the arrangements relating to the proposed application for the Challenged Orders and the fact that the proposed examination of the Examination Recipients and of the documents to be produced by the Document Recipients was inextricably tied up with Mr Selim’s involvement in the affairs of Pan.

99                  More particularly, there was no disclosure of Mr Selim’s involvement:

• as the provider of $1,000 for the costs of convening the meeting to approve the Amended Deed;
• in the funding of the proposed examinations;
• as a moving force behind Mr Sheahan’s appointment as one of the New Administrators, including the terms of his retainer, which predated Mr Sheahan’s appointment.

100               In an application to the Court for the making of orders ex parte in the nature of the Challenged Orders, a person in the position of Mr Sheahan is under a duty of full, frank and candid disclosure to the Court.  While such a duty would not normally extend to providing the Court with a detailed analysis of relevant decisions of the High Court that might stand in the way of success of the putative cause of action to be pursued by the proposed examinations, I consider Mr Sheahan was under an obligation to disclose to the Court the full circumstances concerning his involvement with Markethaven and the fact that that involvement was initiated by Mr Selim, who was inextricably involved in the matters that were to be the subject of the examinations. 

101               It may be that the circumstances in which Mr Sheahan became involved and the extent of his involvement are consistent with a perfectly proper purpose in pursuing the application that resulted in the Challenged Orders.  However, as I have indicated above, there are matters that give rise to inferences to the contrary and cause me considerable disquiet.  I consider that it was incumbent upon Mr Sheahan to disclose to the Registrar the full circumstances of his involvement, whatever they were, and that his failure to do so was a breach of the duty of full, frank and candid disclosure that was placed upon him in the circumstances. 

102               Ultimately, it is a matter for the Court, in the exercise of its discretion, whether to make orders in the nature of the Challenged Orders.  That is to say, subject to the discretion being exercised judicially, there is no absolute entitlement to orders in the nature of the Challenged Orders even if there were no impropriety of purpose.  Even if Mr Sheahan’s predominant or principal purpose was not to benefit Mr Selim, it may have been an important purpose.  Having regard to the involvement of Mr Selim, the possible difficulties in the way of the putative cause of action propounded by Mr Sheahan on behalf of Markethaven take on a greater significance.  In the context of the possible involvement of Mr Selim in the promotion and funding of the proposed examinations, it was incumbent on Mr Sheahan, in making full, frank and candid disclosure, to outline to the Registrar the possible difficulties with the putative cause of action in the context.  He failed to do so. 

CONCLUSION

103               I have already indicated that the Challenged Orders could not stand in the form in which they were made.  That is to say, orders could only be supported on the basis that the documents to be produced by the Commonwealth would be as described in the amended schedules agreed by the parties.  Accordingly, the orders for production addressed to the Document Recipients and to the Commonwealth should be discharged in any event. 

104               However, I consider that none of the Challenged Orders should stand, having regard to the want of full, frank and candid disclosure by Mr Sheahan.  The discharge of the examination summonses and orders for production would not, however, necessarily preclude a fresh application.  In any such fresh application, the precise relationship between Mr Sheahan and Mr Selim and the circumstances in which Mr Sheahan came to be involved with Markethaven, together with possible difficulties with the putative cause of action, would have to be disclosed in full, to enable the Court to make an informed decision as to how the discretion should be exercised. 

COSTS

105               I have concluded that the application for discharge should succeed on the ground of a want of full, frank and candid disclosure when the application for them was made to the Registrar.  As a consequence, the Commonwealth is entitled to its costs of making the application for discharge.  However, the Commonwealth seeks costs on an indemnity basis.

106               Mr Sheahan and those acting for him on the ex parte application failed in their duty to the Court.  They were under an obligation of full, frank and candid disclosure of all the circumstances that might be relevant to the exercise of discretion by the Court.  It is possible that, had there been full, frank and candid disclosure, the Challenged Orders would not have been made.  Even if they would have been made upon full, frank and candid disclosure, the present application would have been quite unnecessary.  In the circumstances it is appropriate that Mr Sheahan pay all costs reasonably incurred by the Commonwealth in the application for discharge. 

Associate:

Dated:              8 October 2004