FEDERAL COURT OF AUSTRALIA

Australian Competition and Consumer Commission v Advanced Medical Institute Pty Limited (Administrator Appointed) (No 3) [2011] FCA 348

THE COURT ORDERS THAT:

1.    Leave be given to the applicant under s. 440D of the Corporations Act 2001 (Cth) to continue this proceeding as against the first and second respondents.

2.    The first and second respondents file and serve their defence(s) to the applicant’s statement of claim, on or before 4 May 2011.

3.    The applicant be permitted to retain, until the conclusion of this proceeding (including any appeal therefrom) or further order, all materials in the applicant’s possession which were seized from the premises located at level 4, 80 William Street, East Sydney, New South Wales (AMI’s premises) pursuant to the search warrant issued on 15 February 2010 to Nicholas Steven Ellis, under s.154X of the Trade Practices Act 1974 (Cth) (the search warrant).

4.    All materials which were seized from AMI’s premises pursuant to the search warrant and which are in the possession of Baker & McKenzie Lawyers of level 27, AMP Centre, 50 Bridge Street Sydney, New South Wales, remain in their possession at that address until the conclusion of the proceedings (including any appeal therefrom) or further order.

5.    Until 30 May 2011 each of the first and second respondents keep confidential all information contained in the documents produced to them by the applicant pursuant to order 2 of the orders made on 4 February 2011.

6.    Until 30 May 2011 each of the third and fourth respondents keep confidential all information contained in the documents produced to them by the applicant pursuant to order 4 of the orders made on 4 February 2011.

7.    Until 30 May 2011 the fifth respondent keep confidential all information contained in the documents produced to him by the applicant pursuant to order 6 of the orders made on 4 February 2011.

8.    Costs of the applicant’s motion dated 23 March 2011 be reserved.

9.    The directions hearing be adjourned to 10:15am on 30 May 2011.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

1    The first and second respondents, who will be referred to as the respondents, operate a business providing medication and services for the treatment of male sexual dysfunction. The applicant, the Australian Competition and Consumer Commission (ACCC), alleges in the proceeding that the respondents acted unconscionably in contravention of s 51AB of the Trade Practices Act 1974 (Cth) (TPA) for reasons including:

1.    The respondents knowingly exploited their superior bargaining position as a provider of medical expertise and treatment to men who were vulnerable to them, and did so in order to extract sales from the men;

2.    The respondents used unfair tactics and undue pressure in seeking to sell their treatments to men; and

3.    The respondents bound patients to contracts for supply of treatments for periods far greater than patients could, or normally would, have acquired medication and treatment from general medical practitioners for the treatment of male sexual dysfunction.

2    On 22 December 2010, administrators were appointed to the respondents. The first meeting of creditors occurred on 6 January 2011. The time for convening the second meeting of creditors was extended by the Court to 10 May 2011.

MOTION FOR LEAVE TO PROCEED

3    On 23 March 2011, the ACCC filed a motion seeking leave to proceed against the respondents under s 440D(1)(b) of the Corporations Act 2001 (Cth) (the Act), which provides:

(1)    During the administration of a company, a proceeding in a court against the company or in relation to any of its property cannot be begun or proceeded with, except:

…

(b)    with the leave of the Court and in accordance with such terms (if any) as the Court imposes.

…

4    Such orders are rarely granted, because the role of administrators under the Act is intended to be short lived and limited. However, the grant of leave is discretionary and depends on the facts of the case.

5    A number of authorities have attempted to set out a shopping list of the factors which courts generally take into consideration in such applications. These lists are not intended to be mandatory, nor complete. However, their existence often provokes litigants to seek to fit their case within the shopping list cases, when their case would be more appropriately considered on its own facts. This is such a case. This proceeding has been brought by the ACCC in its role as regulator, in order to promote the public interest and protect the public from unconscionable conduct. It is obvious from the nature of its role that, in most cases, proceedings brought by the ACCC should be free from impediment and administered by the courts with a degree of expedition, which recognises the concern of the public in preventing conduct in contravention of the TPA.

6    At the same time, the Act provides for the administration of companies. A jurisprudence surrounding the nature of administration has developed which demonstrates that the purpose of administration is to resolve an immediate problem quickly and allow the future course of the company to be chartered in accordance with the wishes of the creditors. As counsel for the respondents, Mr Aldridge SC, correctly contended, the application in this case itself represents a collision between the aims of two separate areas of the law. Whilst s 440D(1) places a statutory freeze on litigation for the purpose of advancing the administration, the proper administration of the trade practices law would suggest that the proceeding brought by the ACCC should proceed despite the present form of control of the company.

THE SUBMISSIONS OF THE PARTIES

7    The Court has been assisted by very helpful written and oral submissions from the ACCC and the respondents. The ACCC submitted that the circumstances of this case warrant the grant of leave. It contended that the most important consideration is a strong public interest reason for allowing the litigation to proceed without undue delay. Were leave to proceed not granted, it is possible that the next step in the litigation could be delayed for three months or possibly more. The respondents operate 20 clinics in Australasia and service 150,000 clients. There are 154 employees involved in the business which has a turnover of $70 million per annum. The litigation seeks injunctions to prevent the alleged unconscionable practices continuing into the future. Whilst some of the practices have been altered by the administrators, most have not.

8    The ACCC then submitted that one of the usual reasons for refusing leave does not apply in this case. It contended that there is no substantial threat to the creditors if leave is granted, pointing to the fact that the respondents are trading and able to meet current expenses. Further, the ACCC has said it will not seek costs of a successful prosecution of this proceeding without the leave of the Court. The ACCC also submitted that the administrators have acknowledged that the resolution of the proceeding is vital for the future of the companies. The reason given by the respondents for the application to extend the convening period for the meeting of creditors a second time was to allow them to engage in without prejudice discussions with the ACCC, to seek to resolve the proceedings so the future of the companies could be free of the threat of the litigation.

9    The ACCC also submitted that the administration is being used as a device to thwart the proceedings. It pointed to the fact that the administrators were appointed the day after the commencement of the proceeding. The administration was instituted by Life Sciences Group Pty Ltd (LSG) which is owned by Advanced Medical Institute Incorporated, a US corporation. This corporation is the sole shareholder of the second respondent, which is, in turn, the sole shareholder of the first respondent. The third respondent, Jacov Vaisman, is a director of LSG. The ACCC referred to the fact that interests associated with Dr Vaisman control a majority in number and value of the creditors of both of the respondents.

10    The respondents highlighted a number of factors which militate against the granting of leave to proceed. Many of these factors were attempts to fit the case within the shopping lists proposed in earlier authorities. However, at the heart of the respondents’ case was the proposition that the nature of administration is temporary and it would be inconsistent with the nature of administration to allow the litigation to continue. This is reflected in the statutory presumption behind s 440D(1), that there will ordinarily be a freeze on proceedings. No doubt there is strength in this argument.

11    The respondents also submitted that the pace of the prosecution demonstrates there is no urgency in immediately proceeding with the litigation. The proceedings commenced on 21 December 2010. The investigation commenced in January 2009 and solicitors were instructed in September 2009. Thus, the respondents contended that a delay of a further three months or so was of no consequence. They then pointed to the fact that the administrators have responded to some aspects of the criticism of the ACCC by changing the refund policy of the respondents’ business.

12    Next, the respondents contended that the task of filing a defence was extremely complex. They contended that the 101 conversations referred to in the statement of claim were intended by the ACCC to suggest a mode of operation. In other words, the ACCC did not intend the case to be restricted to the 101 conversations referred to in the statement of claim. This, it was submitted, had the consequence that the respondents would need to examine a far larger number of conversations to determine whether the selected conversations were typical. The respondents referred to the thousands of documents which have been seized by the ACCC in the course of the prosecution and the need for the administrators to come to an understanding of the contents of these documents in order to fulfil the duty to provide a defence in accordance with the Federal Court Rules. The respondents submitted that the administrators have no personal knowledge of the events in question, having only been appointed in December 2010.

13    The respondents also made reference to the possibility of a number of interlocutory issues which might arise. It was submitted that the statement of claim would need to be further particularised in order to allow a proper defence to be drawn. It was also suggested that there may be a need for an application to strike out the statement of claim. The respondents contended that if the conversations were illegally recorded, in contravention of the Telecommunications (Interception and Access) Act 1979 (Cth), the consequence would be that the conversations could not be relied upon in any way, including in the statement of claim. As the conversations form the basis of the cause of action, such an argument would, it was contended, support an application for striking out the statement of claim.

14    Then the respondents provided evidence of the anticipated cost involved in the drawing of a defence and the necessary investigations upon which the defence would depend. An affidavit of Antony Paul Riordan, a solicitor for the respondents, sworn on 1 April 2011, deposed to the need for a three month investigation, at a cost of $380,000. His affidavit also went into some detail about the creditors of the respondents. The picture emerged that there are amounts owed to priority creditors, involving around $1.5 million owed to employees, $2.5 million owed to the Australian Tax Office, and around $10.5 million owed to unsecured creditors. The cost involved in requiring the respondents to file a defence would disadvantage some creditors, and this was a reason why leave should be refused. It was also submitted that to require the administrators to file a defence would divert their energy from the other onerous tasks of the administration.

15    In oral submissions, the respondents crystallised some of the difficulties which may arise if the administrators are forced to file a defence. In particular, it was submitted that they will be taking steps, for which they will not have the ultimate responsibility, but rather, others in due course will be bound by the efforts which they take.

16    In his affidavit, Mr Riordan said that Mr Hancock, one of the administrators, held the view that the administration was not in consequence or in any way related to the bringing of the proceeding, rather it arose from financial difficulties faced by the group.

17    Finally, it was submitted by the respondents that the ACCC had not established a prima facie case. Again, this is a reference to one of the elements in the often repeated shopping list in previous authorities.

18    The ACCC provided a further response to some of the respondents’ submissions. It contended that the task of preparing a defence was not as large as the respondents sought to portray. The legal representatives of the respondents were already familiar with the material relevant to the case. The administrators have been required to become familiar with the material in order to operate the business. The third respondent, Dr Vaisman, has filed a defence. He is likely to be the major source of information for the respondents’ defence, having been in charge of the operation of the business. The ACCC also contended that the respondents’ analysis of the requirements for filing a defence portrayed a misunderstanding of the case. It was not necessary for the respondents to examine every single conversation which occurred between clients and the respondents. The ACCC case is concerned with the 101 transcripts of those conversations and all but nine of the transcripts have been provided.

19    The ACCC said that the possible strikeout application was without foundation. The material held by the ACCC demonstrates that the client in each conversation consented to the recording of the conversation. In any event, the ACCC contended that the regularity or otherwise of this evidence can be dealt with in pleadings.

CONSIDERATION

20    It is necessary to extract the matters which are most significant for the exercise of the Court’s discretion pursuant to s 440D(1)(b). There is a strong public interest in stopping unconscionable trading as soon as possible and advancing the consideration of allegations of such conduct without significant delay. This is an element which distinguishes the present case from cases involving debts or civil claims, which have been the ordinary area of discourse for applications pursuant to s 440D(1)(b). In this case, the proceedings were commenced on 21 December 2010. The administrators have known of the proceedings from the beginning of their appointment. They have been required to become familiar with the operations in order to continue to conduct the business and engage in the negotiations with the ACCC.

21    The administrators have acknowledged that a resolution of these proceedings is vital to the future of the companies. Much of the work which they have done will be relevant to their preparation of a defence. I accept that the preparation of a defence is a substantial task in this case. However, I do not accept that it needs to take three months. A reasonable time to allow is 30 days, which places the period for preparation of the defence within the period of the administration.

22    I accept that the cost of formulating a defence will be substantial, but I do not accept that it would amount to the claimed figure of $380,000. That figure reflects an investigation which goes beyond the requirements which I regard as necessary to formulate a defence. The impact of the cost of the respondent advancing their case, compared with the value of the creditors of the business, is not significant. It is not significant enough to outweigh the importance of proceeding with litigation aimed to vindicate the public interest.

23    The primary impact of an order granting leave would be on the lawyers for the respondents. Their task would be specific. The argument that to grant leave would divert the attention of the administrators is reduced in the circumstances of this case.

24    It is for those reasons that leave should be granted to the ACCC to proceed against the respondents.

Associate:

Dated:    11 April 2011