FEDERAL COURT OF AUSTRALIA

ThoughtWeb Systems Pty Limited v Loughnan (No. 2) [2006] FCA 432

CONTEMPT OF COURT – implied undertaking in relation to documents produced in proceedings – where respondents sought to use documents against applicant company in proposed winding up application – whether release from undertaking appropriate – whether special circumstances – whether winding up application an abuse of process.

Corporations Act 2001 (Cth) s 459

Federal Court Rules O 15 r 18

Harman v Secretary of State for the Home Department [1983] 1 AC 280, applied

EMI Resources Ltd v Spillane (1986) 1 WLR 967, cited

Re Addstone Pty Ltd (in liq); Ex parte Macks (1998) 30 ACSR 162, referred to

Moage Limited (in liq) v Jagelman (2002) 43 ACSR 173, applied

Esso Australia Resources Limited v Plowman (1995) 183 CLR 10, referred to

Halcon International Inc v Shell Transport & Trading Co. [1979] RPC 97, referred to

Minister for Education v Bailey (2000) 23 WAR 149, considered

Springfield Nominees Pty Limited v Bridgelands Securities Limited (1992) 38 FCR 217, applied

Australian Securities and Investment Commission v Marshall Bell Hawkins Limited [2003] FCA 833, referred to

Wilson Market Research Pty Ltd and the Corporations Law; Roy Morgan Research Centre Pty Ltd v Wilson Market Research Pty Ltd (1996) 39 NSWLR 311, applied

THOUGHTWEB SYSTEMS PTY LIMITED and THOUGHTWEB PTY LIMITED v ANTHONY MARK LOUGHNAN, DAVID JOHN MCFARLANE, AMIT RAMESH SULE, DALSIX PTY LIMITED, THOUGHTWEB FINANCIAL LIMITED, THOUGHTWEB LIMITED and JOHN SKINNER WILSON

NSD 1830 OF 2004

EDMONDS J

21 APRIL 2006

SYDNEY

THE COURT ORDERS THAT:

1.                  The first respondent’s motion be dismissed.

2.                  The first respondent pay the applicants’ costs of and incidental to the motion.

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

REASONS FOR JUDGMENT (NO. 2)

(ON NOTICE OF MOTION)

Edmonds J:

1                     This is a motion by notice dated 28 September 2005, and filed the same day, moved by the first respondent, Anthony Mark Loughnan (‘Mr Loughnan’), seeking orders –

‘1.        That all parties to these proceedings have leave of the Court to make use of the documents filed, served and/or produced in these proceedings that are referred to in the schedule hereto for any purpose connected with proceedings intended to be commenced in this Honourable Court by the first respondent for the winding up of the first applicant pursuant to sections 459A and/or 461(1)(k) of the Corporations Act 2001 (Cth).

2.         That the parties are to the extent referred to in Order 1 released from any implied undertaking to the Court to only use such documents for the purposes of these proceedings.

3.         Costs.

4.         Further or other orders.’

2                     There followed a schedule of documents to which use was sought:

‘1.        The following notices to produce and the documents produced in answer thereto:

(a)               Notice to Produce addressed to the First and Second Applicants dated 13 December 2004;

(b)               Notice to Produce addressed to the First and Second Applicants dated 15 December 2004;

(c)               Notice to Produce addressed to the First and Second Applicants dated 21 December 2004.

2.                  The documents produced by the Applicants pursuant to Order 1 of the orders made by Justice Gyles on 21 February 2005.

3.                  Affidavit of Anthony Mark Loughnan sworn 16 December 2004 and exhibit AML1.

4.                  Affidavit of David John McFarlane sworn 15 December 2004 and exhibit DJM1.

5.                  Affidavit of Amit Ramesh Sule sworn 15 December 2004 and exhibit ARS1.

6.                  Affidavit of Graham Christopher Oxland Murray sworn 8 December 2004 and exhibit GCOM1.

7.                  Statement of claim filed 11 February 2005.

8.                  Notice of motion filed on 24 February 2005 by the first, second, third and fourth respondents seeking security for costs.

9.                  Affidavit of Mark Stewart Tucker sworn 9 March 2005 and exhibit MST1.

10.              Letter dated 15 August 2005 from Dibbs Abbott Stillman to Norman Waterhouse.

11.              Applicants’ Outline of Submissions regarding security for costs dated 16 August 2005.

12.              Transcript of proceedings before Justice Edmonds on 16 August 2005.’

3                     The first applicant, ThoughtWeb Systems Pty Limited (‘ThoughtWeb Systems’), opposes the motion.

Evidence

4                     In support of the motion, counsel for Mr Loughnan read Mr Loughnan’s affidavit sworn 28 September 2005 and filed on the same day.  Mr Loughnan deposed that he intended to make an application for the winding up of ThoughtWeb Systems on grounds of insolvency and on just and equitable grounds.  A copy of a draft originating process that he intended to file in the proposed winding up proceedings was annexed to his affidavit.  He further deposed in the following terms:

‘3.        The ground of insolvency on which the winding up of the first applicant will be sought is based on financial records of the first applicant that have been produced in answer to various notices to produce that have been issued in these proceedings.  The allegation of insolvency is also based on admissions of impecuniosity made by the first applicant in connection with the first, second, third and fourth respondents’ motion for security for costs filed on 24 February 2005 and heard before Justice Edmonds on 16 August 2005 and 22 September 2005.

4.                  The just and equitable grounds on which winding up of the first applicant will be sought include the omission from the financial records and accounts of the first applicant of debts owed to me as a former employee of the first applicant.  I am owed approximately $131,181.83 in respect of unpaid salary, bonus, annual leave, long service leave, superannuation and employment expenses.  The component represented by salary, superannuation and employment expenses (being $99,687.35) does not appear to be recorded in the accounts of the first applicant produced to the court.

5.                  I am informed by the second respondent, and believe, that he is a former employee of the first applicant and is owed approximately $57,821.30 by the first applicant in respect of unpaid salary, bonus, leave entitlements and superannuation.  A component representing unpaid salary and superannuation does not appear to be recorded in the accounts of the first applicant produced to the court.

6.                  I am informed by the third respondent, and believe, that he is a former employee of the first applicant and is owed approximately $65,390.34 by the first applicant in respect of unpaid salary, bonus, leave entitlements and superannuation. 

7.                  I am informed by Mr Mark Volpato, and believe, that he is also a former employee of the first applicant and is owed by the first applicant the sum of $111,618.00 in respect of unpaid annual leave and long service leave.

8.                  I am informed by Mr Christopher Pope, and believe, that he is also a former employee of the first applicant and is owed the sum of $7,198.00 by the first applicant in respect of unpaid annual leave.’

The second to seventh respondents consented to the orders sought in the notice of motion.

5                     The second affidavit relied on by Mr Loughnan in support of his motion is that of Ian Alexander McKnight sworn 29 September 2005 and filed on 4 October 2005.  There were a number of exhibits to that affidavit, namely those numbered “IAM4” – “IAM15” inclusive described in par 2 of Mr McKnight’s affidavit in the following terms:

6                     It was common ground that the tender of these exhibits, “IAM4” – “IAM15”, was made solely for use on the hearing of the motion and I accepted their tender on that basis and that basis alone.

Analysis of Categories of Documents Sought to be Used

7                     Dealing with each of these categories of documents in turn:

(1)               “IAM4” to “ IAM7” – documents produced by the applicants in response to notices to produce.  It was accepted by counsel for Mr Loughnan that the implied undertaking – not to use any document produced for any purpose other than in relation to the litigation in which it is produced – prevented the use of these documents by Mr Loughnan in winding up proceedings against ThoughtWeb Systems without the leave of the Court.

(2)               “IAM8” – affidavit of Mr Loughnan sworn 16 December 2004 and Exhibit AML1 to that affidavit.  Counsel for Mr Loughnan suggested that it was not necessary to obtain the Court’s leave to use the affidavit in winding up proceedings against ThoughtWeb Systems because Mr Loughnan could always re-swear that affidavit from his own knowledge.  He was less certain about the documents in AML1 and invited counsel for ThoughtWeb Systems to indicate which documents, if any, in AML1 are subject to the implied undertaking.  Counsel for ThoughtWeb Systems was initially disinclined to participate in that task but on the second day of the hearing he said there was nothing in the documents comprising AML1 or DJM1 and ARS1 (as to which see (3) below) which would suggest they came from his side of the bar table, and on that basis he could not say that the use of those documents would infringe any implied undertaking.

(3)               “IAM9” and “IAM10” – affidavit of David John McFarlane sworn 15 December 2004 and Exhibit DJM1 to that affidavit and affidavit of Amit Ramesh Sule sworn 15 December 2004 and Exhibit ARS1 to that affidavit – counsel for Mr Loughnan pointed out that effectively all of the other respondents (other than Mr Loughnan) to the proceedings have indicated their consent to the use of the affidavits.  As to the documents comprising DJM1 and ARS1, the concession of counsel for ThoughtWeb Systems on the second day (see (2) above) seems to accept that none of these documents is subject to any implied undertaking proscribing their use for unrelated purposes.

(4)               “IAM11” – affidavit of Graham Christopher Oxland Murray sworn 8 December 2004 and Exhibit GCOM1 to that affidavit.  Counsel for ThoughtWeb Systems informed me that this affidavit was read in open court on 8 December 2005 albeit on an interlocutory application, and that in those circumstances one needed to bear in mind the provisions of O 15 r 18 of the Federal Court Rules:

‘Any order or undertaking, whether express or implied, not to use a document for any purpose other than those of the proceedings in which it is disclosed shall cease to apply to such a document after it has been read to or by the court or referred to, in open court, in such terms as to disclose its contents unless the court otherwise orders on the application of a party, or of a person to whom the document belongs.’

(5)               “IAM12” – notice of motion filed on 24 February 2005 by the first, second, third and fourth respondents seeking security for costs.  The pleadings it makes have been opened and it seems to be common ground that there is no implied undertaking attached to this document.

(6)               “IAM13” – affidavit of Mark Stewart Tucker sworn 9 March 2005 and Exhibit MST1.  Counsel for Mr Loughnan conceded that this affidavit had not been read and that neither it nor the report which is MST1 could be used by Mr Loughnan in proceedings to wind up ThoughtWeb Systems.

(7)               “IAM14” and “IAM15” – letter dated 15 August 2005 from Dibbs Abbott Stillman to Norman Waterhouse and applicants’ outline of submissions on security for costs dated 16 August 2005.  Counsel for Mr Loughnan indicated that he did not strongly press (whatever that means) the Court for leave to have recourse to “IAM14” and that he did not press for leave of the Court to have recourse to “IAM15”.

8                     In his written and oral submissions counsel for Mr Loughnan referred to a second affidavit of Mr Murray sworn on 11 October and filed on 14 October 2005.  He conceded it exhibited confidential documents namely, GCOM5, which were referred to in pars 2 to 8 and indicated that use of such documents was, to that extent, not sought.  He assumed the affidavit had been read on the occasion of an ex parte hearing on 14 October 2005 when I made certain restraining orders.  He then said:

‘I can indicate that I have looked at the documents, having given an undertaking as have my instructing solicitors.  Any right of access to that affidavit and to the materials, [in] particular GCOM5, would be upon the basis that that order restricting access and disclosure is not in any way varied nor the undertakings released by us seeking to use this affidavit.  To that extent, your Honour, I would be content to this affidavit only being utilised to the extent that it does not rely upon paragraphs 4 to 8 inclusive.  That may be the easiest way to deal with our use.’

9                     When queried on what he meant, he said:

‘I might rephrase it, your Honour.  I probably talk too much.  Paragraphs 4 to 8 detail the nature of certain matters that are set out – that gave rise to issues of confidentiality.  The affidavit has been read in the normal course.  We would say that we can use it in other proceedings, except that in respect of GCOM5, there is a confidentiality order and undertakings have been filed with the court, signed by myself and the legal representatives, to the extent that we wish to use this affidavit, I would be content, as would be my clients, or my client, Mr Loughnan, on this application.  And he is the only person who is actually seeking this leave, I should say, your Honour. … If the affidavit is used, it not be sought to be used in anyway to include anything in paragraphs 4 to 8 inclusive.’

10                  In his written outline of submissions, Mr Loughnan wrote:

‘[12]   A Notice to Produce has been served upon the first Applicant in relation to the affidavit of Mr Murray sworn 11 October 2005, which is intended to be called upon at 10.15 am on 26 October 2005.  To that extent subject to leave of the court to the documents produced they [sic] are intended to be also the subject of the Notice of Motion filed on 28 September 2005.’

Counsel for Mr Loughnan called on the notice to produce but immediately withdrew the call – which he explained by reference to not giving his opponent an opportunity to make an application.  Whatever be the reason, as the call was withdrawn, nothing was produced and no documents are to be the subject of the notice of motion filed on 18 September 2005 that are not set out in the schedule to that notice.  In the circumstances, for the purposes of the motion, I do not propose to further consider Mr Murray’s affidavit of 11 October 2005 nor, subject to what is said in [29] and [30] infra, the annexures and exhibits thereto.

Source and Scope of Relevant principles

11                  In his written and oral submissions, counsel for ThoughtWeb Systems took me to the source and scope of the relevant principles of the implied undertaking attaching to documents which are disclosed under procedures of the Court for the discovery of documents, namely, that such documents are not to be used for any purpose otherwise than in relation to the proceedings in which they are disclosed.  The same principles apply to documents produced under compulsion where, in the New South Wales Supreme Court at least, the relevant form under which the documents are produced contains an express undertaking in those terms. 

12                  Counsel for ThoughtWeb Systems referred me to what Lord Diplock said in Harman v Secretary of State for the Home Department [1983] 1 AC 280 at 300:

‘The use of discovery involves an inroad, in the interests of achieving justice, upon the right of the individual to keep his own documents to himself; it is an inroad that calls for safeguards against abuse, and these the English legal system provides, in its own distinctive fashion, through its rules about abuse of process and contempt of court.’

Later, in a passage which has subsequently been cited, e.g., see EMI Resources Ltd v Spillane (1986) 1 WLR 967 at 972, his Lordship said (at 304 – 305):

‘… An order for production of documents to a solicitor on behalf of a party to civil ligation is made upon the implied undertaking given by the solicitor personally to the court (of which he is an officer) that he himself will not use or allow the documents or copies of them to be used for any collateral or ulterior purpose of his own, his client or anyone else; and any breach of that implied undertaking is a contempt of court by the solicitor himself.  Save as respects the gravity of the contempt no distinction is to be drawn between those documents which have and those which have not been admitted in evidence; to make use for some collateral or ulterior purpose of the special advantage obtained by having possession of copies of any of an adverse party’s documents obtained upon discovery is, in my view, a contempt of court.’

13                  Of course, the effect of O 15 r 18 of the Federal Court Rules is to abrogate this rule in the case of a document which has been read or referred to in open court in such terms as to disclose its contents, although it may be accepted that this particular rule has its own problems of construction.

14                  In Re Addstone Pty Ltd (in liq); Ex parte Macks (1998) 30 ACSR 162, Mansfield J, after referring to what Lord Diplock had said in Harman in the first extract in [12] above, said (at 166):

‘The duty which is therefore placed upon the recipient of documents procured in the course of discovery arises because, absent the proceedings, there is no entitlement to those documents.  They are private.  They need not necessarily contain confidential or commercially sensitive material to have that quality.  It exists because of the nature of the documents, and the circumstances in which they came to be released to the other party, and not necessarily because of their contents.’

15                  The public policy underlying the principle was also considered by Lord Hoffmann in Taylor v Director of the Serious Fraud Office [1999] 2 AC 177 at 210 in the following terms:

‘I am not sure that it is right to treat the implied undertaking in civil proceedings merely as an inducement to a litigant to disclose documents which he might otherwise have been inclined to conceal.  I think that it is more a matter of justice and fairness, to ensure that his privacy and confidentiality are not invaded more than is absolutely necessary for the purposes of justice.’

16                  More recently, in Moage Limited (in liq) v Jagelman (2002) 43 ACSR 173, Gzell J stated at [10]:

‘It is the duty of a party to civil litigation who, in the course of discovery has obtained possession of copies of documents belonging to the other party, to refrain from using the advantage enjoyed by virtue of such possession for some collateral or ulterior purpose not reasonably necessary for the proper conduct of the action: Home Office v Harman [1983] 1 AC 280 at 302; [1982] 1 All ER 532 at 536.  As Lee J points out in Bailey v Australian Broadcasting Corp [1995] 1 Qd R 476 at 484 while the basis of a party’s obligation to limit the use of discovered documents is expressed in terms of an implied undertaking to the court, its underlying rationale can be traced to broader notions of public policy.  In Riddickv Thames Board Mills Ltd [1977] QB 881 at 895; [1977] 3 All ER 677 at 687 Lord Denning MR noted that the reason for compelling discovery lies in the public interest in discovering the truth so that justice may be done between the parties.  That public interest is to be put into the scales against the public interest in preserving privacy and protecting confidential information.  The balance comes down in the ordinary way in favour of the public interest of discovering the truth that is in making full disclosure.  The implied undertaking extends beyond documents produced on discovery to other court documents: see eg Ainsworth v Hanrahan (1991) 25 NSWLR 155 at 166-8, 169-70.  The undertaking has been held to apply to witness statements and affidavits: Central Queensland Cement Pty Ltd v Hardy [1989] 2 Qd R 509].’

17                  His Honour also stated that the undertaking was particularly strong when the information was provided pursuant to a court order or other compulsory process (at 176).  In this context he cited with approval the observations of Hobhouse J in Prudential Assurance Co Limited v Fountain Page Limited [1991] 3 All ER 878 at 886.

18                  It is now well established that the release or modification of the implied undertaking will not be lightly given.  In Esso Australia Resources Limited v Plowman (1995) 183 CLR 10 at 37, Brennan J stated:

‘That dispensing power is not freely exercised, but it will be exercised when special circumstances appear.  In the Federal Court, special circumstances have been held to exist where “there is a special feature of the case which affords a reason for modifying or releasing the undertaking and [the feature] is not usually present.”  It is unnecessary to consider whether the dispensing power should be so broadly defined.  It is relevant to note only that the obligation enforceable as an undertaking to the Court in the case of a curial order is not unqualified.’

19                  In Halcon International Inc v Shell Transport & Trading Co. [1979] RPC 97, Whitford J stated (at 109 – 110) that:

‘However, these authorities to my mind, lead to this conclusion, that the use of a document disclosed in a proceeding in some other context, or even in another proceeding between the same parties in the same jurisdiction, is an abuse of process unless there are very strong grounds for making an exception to the general rule.  It does, I think, emerge that some overriding public interest might be a good example, but not the mere furtherance of some private interest even where that private interest arises directly out of or is brought to light as a result of the discovery made.’

20                  These authorities were considered exhaustively by the Full Court of the Supreme Court of Western Australia in Minister for Education v Bailey (2000) 23 WAR 149; [2000] WASCA 377.  At [20], Steytler J, with whom Parker J concurred, stated:

‘More recently, in Prudential Assurance Co Limited v Fountain Page Limited [1991] 1 WLR 756 at 775, Hobhouse J, while acknowledging that the Court has the power wholly or partially to release the recipient of discovered documents from the duty, or undertakings, and to permit use to be made of the documents, said that circumstances under which the relaxation would be allowed without the consent of the serving party were “hard to visualise, particularly where there was any risk that the statement might be used directly or indirectly to the prejudice of the serving party” subject to any overriding principle of public policy.’

21                  Steytler J then turned to consider a number of Australian authorities.  One of those was Holpitt Pty Limited v Varimu Pty Limited (1991) 29 FCR 576 where, at 578, Burchett J stated:

‘As far as the expression “special circumstances” is concerned, it is an expression which is liable to be misunderstood unless care is taken to ask and answer the question, special in relation to what?  “Special” is one of those words which derive almost all their meaning from the context … if all that is required is that, among the great number of cases in the court in which documents have been discovered, this one must evince some special feature which affords a reason for releasing or modifying the undertaking, there will be no difficulty.  Circumstances in which there is a legitimate reason why documents discovered in one proceeding should be made available in another will, viewed in this way, be rare.  In the ordinary course, the ordinary rule should apply, there being no special circumstance to suggest otherwise.’

22                  After reviewing that case and others, Steytler J stated at [28]:

‘It is against this background that the courts have concluded that the implied undertaking or obligation will only be waived or relaxed when special circumstances are present.  While I would not, with great respect, have thought that circumstances of that kind would be quite so hard to visualise as Hobhouse J expressed them to be in Prudential Assurance, the fact remains that it will ordinarily be no easy matter to secure the court’s indulgence.’

23                  That conclusion is, with respect, a corollary of the proposition that a court will not release or modify the implied undertaking save in special circumstances and where the release or modification will not occasion injustice to the person providing the documents or information in question: see Crest Homes plc v Marks [ 1987] AC 829at 860 per Lord Oliver and the authorities referred to by Gzell J in Moage at [15].

24                  In Springfield Nominees Pty Limited v Bridgelands Securities Limited (1992) 38 FCR 217,Wilcox J explained what is meant by the term ‘special circumstances’ in these terms (at 225):

‘For “special circumstances” to exist it is enough that there is a special feature of the case which affords a reason for modifying or releasing the undertaking and is not usually present.  The matter then becomes one of the proper exercise of the court’s discretion, many factors being relevant.  It is neither possible nor desirable to propound an exhaustive list of those factors.  But plainly they include the nature of the document, the circumstances under which it came into existence, the attitude of the author of the document and any prejudice the author may sustain, whether the document pre-existed litigation or was created for that purpose and therefore expected to enter the public domain, the nature of the information in the document (in particular whether it contains personal data or commercially sensitive information), the circumstances in which the document came into the hands of the applicant for leave and, perhaps most important of all, the likely contribution of the document to achieving justice in the second proceeding.’

25                  The conclusion referred to in [22] supra also informs the obligation of a party applying for a modification or release of the undertaking to specify the documents in respect of which the modification or release is sought. In Australian Securities and Investment Commission v Marshall Bell Hawkins Limited [2003] FCA 833 at [13],Merkel J stated in this regard:

‘The requirements of specificity in respect of the documents to be used and the purpose for which they are to be used is appropriate because the implied undertaking should only be modified or released to the extent that it is in the interests of the administration of justice or in the public interest to do so: see Springfield Nominees at 225 and Moage Ltd (in liq) v Jagelman (2002) 43 ACSR 173 at 176.  Thus, the modification or release should be no greater than is necessary or appropriate to meet the interests of the administration of justice or the public interest.  Further, in determining whether to exercise its discretion to grant the modification or release sought, it will usually be necessary for the Court to identify with precision the documents to be released and the purpose of that release.’

26                  Counsel for Mr Loughnan indicated that he did not cavil with the principles as set out above.

Mr Loughnan’s Case

27                  Counsel for Mr Loughnan put his case in the following way:

‘As a matter of public policy, it is inappropriate and [contrary to] commercial morality for an insolvent company to continue to trade – to be allowed to continue to trade and incur liabilities – and that is what establishes the special [circumstances] of our application.’

28                  But when pressed, counsel for Mr Loughnan responded that the special circumstances which should lead the Court to allow documents that have been the subject of these and collateral proceedings to be used in other proceedings are the fact that the company (ThoughtWeb Systems) is not trading and the fact that its financial statements as at 28 February 2005 disclose a financial situation where its current liabilities exceed its current assets.

29                  The submission which lies at the heart of Mr Loughnan’s case is that he is an undisputed creditor of ThoughtWeb Systems for $3,200.  That his standing as an undisputed actual creditor, not just a contingent or prospective creditor, for that amount is not in issue; so much flows, it is submitted, from the acknowledgement of such a debt in the financial statements of ThoughtWeb Systems as at 28 February 2005 which was voluntarily put before the Court through Mr Murray on behalf of ThoughtWeb Systems.  According to this submission, the only reason leave for the use of documents (to which an implied undertaking against such use may be attached) is sought, is not to prove Mr Loughnan’s standing as a creditor, but to prove the view he has formed, namely, that ThoughtWeb Systems is insolvent.

30                  In my view, this central submission is flawed.  Whatever the legal consequences that attach to disclosure of a liability in a company’s financial accounts, and arguably it is no more than an acknowledgement that such a claim is made by the putative creditor, it says absolutely nothing about whether or not the claim is disputed.  Every day companies are issued with income tax assessments with the amount of tax assessed being disclosed, correctly in my view, as a liability in the financial accounts from the time of assessment.  But this says nothing about whether or not the liability is disputed.  As counsel for ThoughtWeb Systems submitted:

‘Now, one thing is amply clear from this litigation, your Honour, that Mr Loughnan’s claim is disputed.’

31                  So much was effectively acknowledged by counsel for Mr Loughnan in eschewing reliance on alternative remedies for his client to recover his allegedly undisputed debt of $3,200, such as a statutory demand under s 459E of the Corporations Act 2001 (Cth) because, as he conceded, of the vagaries of disputation or offsetting claims leading to the real potentiality of the demand being set aside (see ss 459G, 459H and 459J of the Corporations Act).

32                  Thus it is submitted by counsel for ThoughtWeb Systems that Mr Loughnan has a threshold problem – that even if he were granted leave to use the documents he seeks to rely on to prove the insolvency of ThoughtWeb Systems, the Court would be reluctant to hear the matter where there is a disputed debt involved.  In this regard, I was referred to what was said by Santow J in Wilson Market Research Pty Ltd and the Corporations Law; Roy Morgan Research Centre Pty Ltd v Wilson Market Research Pty Ltd (1996) 39 NSWLR 311, first at [3] at 317, 318:

‘3.        Section 459P of the Corporations Law … provides that amongst those with standing to apply to have a company wound up are its creditors, even if they be prospective or contingent creditors.  Indeed all the predecessors of s 459P, here and in the United Kingdom, similarly so provided.  This followed the recommendations to the Board of Trade of the United Kingdom Amendment Committee of 1908: see at par below.  By virtue of s 459P, such an applicant is required to establish a debt, in order to have standing to bring the winding up proceedings.  However, where there is a bona fide dispute of substance as to the existence of the debt, it cannot be said that the claimant is a creditor who has the right to bring proceedings.  Thus Ungoed-Thomas J said, in Mann v Goldstein [1968] 1 WLR 1091 at 1098-1099, in a frequently quoted passage:

“… I would prefer to rest the jurisdiction directly on the comparatively simple propositions that a creditor’s petition can only be presented by a creditor, that the winding-up jurisdiction is not for the purpose of deciding a disputed debt (that is, disputed on substantial and not insubstantial grounds) since, until a creditor is established as a creditor he is not entitled to present the petition and has no locus standi in the Companies Court; and that, therefore, to invoke the winding-up jurisdiction when the debt is disputed (that is, on substantial grounds) or after it has become clear that it is so disputed is an abuse of process of the court.”’

And then at [10] and [11] at 319, 320:

‘10.      In CVC Investments Pty Ltd v P & T Aviation Pty Ltd (1989) 18 NSWLR 295, however, Cohen J came to a different conclusion.  He did so in a case of some complexity.  It appears that the winding up applications were made on the basis of presumed insolvency. However, the question of actual insolvency was also considered (at 299 and 303), though without concluding there was a situation of actual insolvency.  Thus his statements of principle were not limited to a context where the only basis of the plaintiff’s application was presumed insolvency, though actual insolvency was not found.  His Honour concluded (at 302) (agreeing with Smart J in Ron Pritchard Pty Ltd v Horwitz Grahame Pty Ltd (1988) 6 ACLC 258) that:

“The authorities seem almost unanimously to agree that where a claimed debt is bona fide disputed on substantial grounds and there is no basis for regarding the claimant as a contingent or prospective creditor then that claimant has no standing to bring proceedings to wind up the company, and if he does so the bringing of those proceedings is an abuse of process.  The fact that there is a ground for winding up in existence does not give that claimant any greater standing.”

His Honour said (at 302) that he did not regard the decision of McPherson J in National Mutual Life Association of Australasia Ltd v Oasis Developments, upon which Young J relied, as establishing that where there is a bona fide dispute as to the whole of the debt and this dispute is based on substantial grounds, then the petitioner can still proceed with the status of a creditor.

Importantly, Cohen J goes on to say (at 303) that:

“… if it is established that the petitioner or plaintiff has or would have no standing to obtain a winding up order then there is no justification for proceedings being commenced or continued.  If the company is insolvent then it is a matter for a creditor, established as such, or one of the other persons designated under s 383 of the Code, to bring the matter to the court.  It is necessary for the court to make a careful scrutiny of the evidence in order to establish the genuineness of the alleged dispute and the substance of the defence or cross-claim.  If there is a likelihood that the debt may be owing even in part then the question of the solvency of the company may become relevant in the consideration of the court’s discretion.”

11.       … I prefer the view of Cohen J in CVC Investments.  I therefore conclude that an applicant to wind up a company claiming standing as a creditor but who fails to establish that standing, thereby commits an abuse of process of the court, which is not avoided by demonstrating that the company is actually insolvent.  The court only has to consider the question of solvency after the initial threshold of standing has been passed.  Before that, it is irrelevant.

Both in later considering the threshold of standing, and in presently making that choice between conflicting authorities, a powerful factor remains the importance of not giving the trigger for the potentially fatal step of winding up to someone who is unable with sufficient certainty to establish that status of a creditor.  As illustrated here, the mere application to wind up can have devastating commercial consequences, reinforcing the need for not making an exception for general insolvency without warrant from the words of the statute.  There is the ever-present danger of an unqualified claimant using the winding up procedure as a threat to force concessions from the company concerning a claimed debt.  Such a result is quite contrary to the fundamental basis of bankruptcy legislation.  This basis denies preference to one creditor over another, a fortiori where the first may not have that status of creditor in reality.  The public interest in bringing insolvent companies to winding up can be pursued by others, in particular the Australian Securities Commission: see s 459P(l)(f) (and note also s 459P(1)(g)).  The legislature’s proper concern with premature triggering is reinforced by the fact that where a contingent or prospective creditor applies, as compared to an ordinary creditor, the application requires leave of the court and that in turn requires a prima facie case of insolvency (s 459P(2) and (3)).’

33                  On the evidence before me, I am not satisfied that Mr Loughnan has standing as a creditor of ThoughtWeb Systems sufficient to bring proceedings to wind it up or, if he does have such standing, that that standing would survive disputation on the part of ThoughtWeb Systems.

34                  If that be right then his case that he needs the use of the documents for which leave is sought to prove that ThoughtWeb Systems is insolvent has a hollow ring about it.  Even if that be wrong, I am not persuaded that the documents, in respect of which leave is sought to use in winding up proceedings against ThoughtWeb Systems, are likely to contribute to achieve justice in such proceedings, ‘… perhaps [the] most important of all [of the special circumstances to be considered]’: Wilcox J in Springfield Nominees, supra, at 225.

35                  There are no other special circumstances, or at least none which have been identified, which would warrant a grant of leave.  There are, however, other reasons which impel one to a conclusion as to why leave should not be granted:

1.                  The documents “IAM4” to “IAM7” were produced in response to the compulsory processes of the Court; the maintenance of any implied undertaking is all the more stronger in such circumstances: Moage, supra, at 176 per Gzell J.

2.                  The claim of public interest or policy, [27] supra, is fully answered by what Santow J said in Wilson Marketing Research, supra, at [11]:

‘The public interest in bringing insolvent companies to winding up can be pursued by others, in particular, the Australian Securities Commission: sees 459P(1)(f) (and note also s 459P (1)(g)).’

3.                  The alternative remedies available to Mr Loughnan to recover his debt other than by recourse to a winding up of ThoughtWeb Systems cannot be ignored.

36                  In the circumstances, the motion must be dismissed.

37                  While it forms no part of the reasons underlying my conclusion on the issues raised by the motion, at the time of the hearing I formed the preliminary view that the motion was brought as a strategy which, if it succeeded by having ThoughtWeb Systems wound-up, would enable Mr Loughnan to exert greater influence over the ultimate outcome of the mainstream proceedings by way of settlement, compromise or otherwise than he could possibly exert by recourse to the means otherwise available to him.  Because I initially thought this might impact on my conclusion, I decided to put consideration of the motion to one side and revisit it at a later date.  I have to say that this has not helped; I have not changed the preliminary view I formed at the time of the hearing although, as my conclusion in no way depends on this preliminary view, the delay it has occasioned is to be regretted.

Associate:

Dated:         21 April 2006