FEDERAL COURT OF AUSTRALIA

Hodgkinson, in the matter of Kupang Resources Ltd (Subject to Deed of Company Arrangement) [2017] FCA 1342

ORDERS

THE COURT ORDERS THAT:

1.    The applicants’ further amended interlocutory process dated 15 November 2017 be dismissed.

2.    The applicants pay the respondent’s costs of the further amended interlocutory process dated 15 November 2017.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

MARKOVIC J:

1    By amended interlocutory process Cape Lambert Resources Ltd (Cape Lambert) and Antony William Paul Sage applied for an order that the plaintiff, Damien Hodgkinson, in his capacity as deed administrator of Kupang Resources Ltd (Subject to Deed of Company Arrangement) (Kupang), give security for their costs of complying with, in the case of Cape Lambert, a summons issued pursuant to s 597(9) of the Corporations Act 2001 (Cth) (Corporations Act) (CL Summons) and, in the case of Mr Sage, “the Orders made on 15 September 2017 varying the Form 17 Summons for Examination dated 1 September 2017” (September Orders). The Form 17 Summons for Examination dated 1 September 2017 is a summons issued pursuant to ss 596A and 597(9) of the Corporations Act and served on Mr Sage (Sage Summons). In addition, a Form 61 Summons/Notice to Produce dated 1 September 2017 was issued pursuant to s 597(9) of the Corporations Act and served on Mr Sage (Sage Notice to Produce).

2    It is common ground that the same categories of documents are sought in the Sage Summons and the September Orders. The categories of documents sought in the CL summons, to the extent that it seeks the production of documents related to Mr Sage, are a subset of those sought in the Sage Summons and the September Orders.

3    The application came before me for urgent hearing in my capacity as commercial and corporations duty judge. The urgency arose because examinations are scheduled to commence before a registrar of the Court on 6 December 2017, with Mr Sage’s examination scheduled to take place on 8 December 2017.

4    On 16 November 2017 the Court made orders by consent granting leave to Cape Lambert and Mr Sage to further amend their amended interlocutory process and to reopen their case to adduce certain facts agreed between the parties. The amendments to the amended interlocutory process, set out in a further amended interlocutory process dated 15 September 2017, removed all reference to the September Orders with the effect that Mr Sage now seeks security for his costs of complying with the Sage Summons.

5    After considering the careful and detailed submissions of the parties I have decided that the application for security for costs should be dismissed. My reasons for reaching that conclusion follow.

background facts

6    There was a great deal of evidence before the Court. I summarise below the relevant facts.

7    Mr Sage was appointed a director of Kupang on 13 September 2010 and remains a director. He is also an executive director of Cape Lambert and held that position during the period in respect of which documents are sought in the Sage Summons, the September Orders and the CL Summons. During that period Mr Sage only maintained one email account, being the email account he had in his capacity as a director of Cape Lambert. That email account contains emails that are not related to the affairs of Kupang as well as emails that contain legal advice obtained by Cape Lambert and emails seeking or recording legal advice that were sent or copied to Mr Sage.

8    On 9 September 2015 Mr Hodgkinson was appointed deed administrator of Kupang, having previously been appointed as its administrator. The deed of company arrangement dated 9 September 2015 between Kupang, Mr Hodgkinson, in his capacity as administrator and in his capacity as deed administrator, and International Litigation Partners Pte Limited (ILP) (DOCA) provides in cl 4.1 for the deed administrator to have control of a deed fund which is to comprise a contribution from ILP of $45,000 plus the lesser of 5% of any Net Claim Recoveries, as that term is defined, and $50,000. Clause 14.4 of the DOCA provides that Mr Hodgkinson shall not be personally liable for any act, omission or matter relating to anything done or not done in his capacity as administrator of the DOCA and cl 16.5 provides that the deed administrator will not seek payment of his costs or remuneration from Pool 1 or Pool 2, as those terms are defined, of the deed fund.

9    On 14 December 2016 the Supreme Court of New South Wales granted leave to Mr Hodgkinson as deed administrator to transfer all of the shares in Kupang to ILP pursuant to the DOCA and ordered that the costs of the application be his costs in the course of the DOCA: see In the matter of Kupang Resources Limited (subject to Deed of Company Arrangement) (receivers and managers appointed) [2016] NSWSC 1895 (Kupang Resources).

10    On 25 August 2017 the Court granted leave to Mr Hodgkinson as deed administrator to issue the Sage Summons, the Sage Notice to Produce and the CL Summons, each of which required production of the documents sought therein on 13 September 2017. Those summonses were served on their respective addressees on 7 September 2017. On 13 September 2017 the Court ordered by consent that the Sage Summons, the Sage Notice to Produce and the CL Summons be stood over to 20 September 2017.

11    On 15 September 2017 the September Orders were served on Mr Sage. Counsel for Mr Hodgkinson informed the Court from the bar table that the September Orders came about because apparently there was a formal defect in the Sage Notice to Produce.

12    In the meantime, Cape Lambert and Mr Sage filed an application seeking an extension of the time in which they were required to produce documents pursuant to the Sage Summons, the Sage Notice to Produce and the CL Summons. While that application was dismissed, the evidence in support of the application indicated that it would take approximately six weeks for Cape Lambert and Mr Sage to comply with the Sage Summons, the Sage Notice to Produce and the CL Summons.

13    On 20 September 2017 the Court made orders, among others, extending the time for compliance with the Sage Summons, the September Order and the CL Summons to 16 October 2017 and noted that Mr Hodgkinson would not press the Sage Notice to Produce.

14    On 26 September 2017 Squire Patton Boggs (SPB), the solicitors for the Mr Hodgkinson, sent a letter to Bennett + Co, the solicitors for Cape Lambert and Mr Sage, in which they made suggestions in relation to the way in which Cape Lambert and Mr Sage might search for documents in response to the summonses, including that they search by reference to certain keywords included in the letter.

15    There followed correspondence from Bennett + Co commencing on 27 September 2017, with further correspondence on 4, 6, 9 and 10 October 2017, in relation to the outcome of the searches based on Mr Hodgkinson’s suggested keywords applied to the nominated email accounts for the date range specified which rendered “many thousands of hits”.

16    By email dated 10 October 2017 SPB responded to Bennett + Co, noting that it appeared that the “high volume” of documents and emails lay with the use of the keyword descriptions “JV” and “Joint Venture” in respect of the emails of Mr Sage and another individual. SPB asked Bennett + Co to clarify whether Mr Sage was “aware of or [was] able to ascertain by use of keywords if there [were] any other projects, other than Kupang, that may be subject to a Joint Venture (JV) agreement” and, if that was the case, to “please advise the number of hits of documents/emails under Ref (3f) that don’t, on their face, relate to Kupang”. SPB expressed the view that if there were no joint venture agreements other than in respect of Kupang then the documents and emails generated by the keyword searches were likely to be relevant and were required for production.

17    On 11 October 2017 there was an exchange of correspondence between SPB and Bennett + Co. By their letter SPB noted a number of matters not relevant to the issue currently before the Court for determination but also inquired whether Cape Lambert and Mr Sage would “provide a commitment to the full production of documents either this week or before the Court at 10.15 am on 16 October 2017”. In their letter in response Bennett + Co said, among other things:

In the absence of hearing from Cape Lambert’s IT consultants as to the number of hits responsive to the reduced keywords we cannot provide ‘a commitment to the full production of documents’ you seek in the ultimate paragraph of your letter. Our clients are committed to attempting to provide full production of documents before 10.15am on 16 October 2017. If they cannot produce all of their documents at that stage it will only be by reason of the volume of documents responsive to the search. In those circumstances my clients will formally apply for an extension of time and put on evidence as to the magnitude of this task.

In this regard it is important to note that you have not responded as to whether or not your client has made sufficient provision to meet the costs of Cape Lambert (an independent party) responding to such a broad ranging summons for production of documents.

18    On 12 October 2017, under cover of a letter from Bennett + Co, Cape Lambert and Mr Sage produced to the Court a redacted and unredacted bundle of “board packs” described as “containing documents that are responsive to” the CL Summons, the Sage Summons and the September Orders. Those documents were provided to the Court “in partial compliance with” those summonses.

19    On 12 October 2017 SPB once again wrote to Bennett + Co concerning various issues relating to the summonses and requiring an update by 12.00 pm WST on 13 October 2017 as to Cape Lambert and Mr Sage’s “commitment to comply with full production of documents pursuant to orders for production returnable at 10.15am on 16 October 2017”.

20    On 12 October 2017 Melissa Chapman, the company secretary of Cape Lambert, requested Cape Lambert’s external IT providers to carry out a search of the data for emails responsive to “JV” and “Joint Venture” that also contained the word “Kupang”. The resulting number of hits for that search was significantly less than for the search for the keywords “JV” and “Joint Venture” alone.

21    On 16 October 2017 the proceeding was listed before the Court. There was an exchange between counsel for Mr Hodgkinson and the solicitor for Cape Lambert and Mr Sage about the production of documents pursuant to the CL Summons, the Sage Summons and the September Orders and whether the narrower search undertaken by Cape Lambert on the instruction of Ms Chapman was acceptable. Mr Hodgkinson’s position at that stage was that it was not. The issue was not resolved and the Court made orders extending the time for compliance with the CL Summons, the Sage Summons and the September Orders to 18 October 2017.

22    On 18 October 2017 the proceeding was once again listed before the Court. On that occasion the Court was informed by the solicitor appearing for Cape Lambert and Mr Sage of the volume of material that would need to be reviewed for production based on the material that was identified when Mr Sage’s emails were searched using the keywords identified by Mr Hodgkinson, the likely time it would take and an estimate of the cost. The CL Summons, the Sage Summons and the September Orders were adjourned to 20 October 2017 to allow the parties time to discuss the issues that had arisen.

23    Later on 18 October 2017 there was an exchange of correspondence between SPB and Bennett + Co. In their email, among other things, SPB said:

At first instance and reserving our client’s rights in respect of requiring full compliance with orders for production of documents upon your clients, we request that you provide us preliminarily with the email searches generated in respect of the Joint Venture (JV) agreement referred to at paragraph 8.2 of the Third Chapman Affidavit by no later than 1pm WST Thursday 19 October 2017 for our review.

The reference to the email searches described at paragraph 8.2 of the “Third Chapman Affidavit” was a reference to the narrower search carried out by Cape Lambert which rendered a smaller pool of documents (see [20] above).

24    By their email dated 18 October 2017 Bennett + Co informed SPB that Cape Lambert and Mr Sage were proceeding to comply with the summonses as required by Mr Hodgkinson’s counsel at the hearing before the registrar earlier that day and that they would not provide “an additional disclosure of the email searches generated in respect of the matters referred to in paragraph 8.2 of Ms Chapman’s affidavit within the time specified (or at all)”. The email further stated, among other things:

In this regard, I indicated to the Court this morning that the download comprises in excess of 50 gigabytes. My initial estimate (which I will refine within the next 24 hours) is that an examination of these matters for relevance and legal professional privilege will take approximately 25 working days and my client will incur a cost in excess of $200,000.

The Court expects us to confer as to whether or not your client will provide my client with security for costs of that magnitude. Please let me have your response given the very limited amount of funding disclosed in the Deed of Company Arrangement whether your client will secure Cape Lambert’s anticipated costs.

25    Under cover of a letter dated 19 October 2017 sent by express post and email to the Court Bennett + Co, on behalf of Cape Lambert and Mr Sage, produced one CD and six DVDs which contained documents responding to the CL Summons, the Sage Summons and the September Orders based on “hits” of the keywords identified by Mr Hodgkinson. The DVDs contained intermingled privileged and non-privileged material and Bennett + Co requested that the DVDs not be made available for inspection to Mr Hodgkinson’s solicitors until further order.

26    By letter dated 19 October 2017 from SPB to Bennett + Co, SPB proposed a way forward, namely, that Cape Lambert and Mr Sage would “in the first instance, produce the documents that Ms Chapman contemplated would be produced in paragraph 9 of her third affidavit”. SPB understood those documents to be the documents referred to in the table in paragraph 6 of Ms Chapman’s affidavit save that, instead of producing all of the documents responding to a search of “JV” or “Joint Venture”, they would only produce those documents responding to “JV” or “Joint Venture” which also contained “Kupang”. SPB also said:

We would not otherwise call on the Court processes requiring your clients to produce documents until we have had a chance to review this first tranche of documents. It may be that once those documents are produced, the scope for further production can be narrowed. Obviously, this is not an ideal outcome as it means that some relevant, and potentially important, documents are not available to our client in his investigations of the company’s affairs for some time. However, it is a compromise that our client is willing to make in order to have timely production of at least some documents and to reduce your client’s costs.

27    The proceeding was next listed before the Court on 20 October 2017, at which time it was adjourned to 25 October 2017. On 23 October 2017 SPB sent a letter to Bennett + Co which included:

You will recall that in our last letter, and in the Court hearing on 20 October 2017, we indicated that our client proposed that your clients would, in the first instance, produce documents pursuant to the Sage Summons, Sage Order and Cape Lambert Summons to the extent that Ms Chapman contemplated documents would be produced in paragraph 9 of her third affidavit.

Our client has continued to seek ways to lessen the burden of production on your clients. Accordingly, over the weekend, we have received instructions to narrow the scope of your clients’ production even further.

Our client now proposes that, in the first instance, and reserving our clients rights in respect of full production pursuant to the Sage Summons, Sage Order and Cape Lambert Summons, our client would only call on production of documents to the extent that Ms Chapman contemplated would be produced in paragraph 9 of her third affidavit, and, only to the extent that such production was required pursuant to the Sage Summons or the Sage Order. That is, at least in the first instance, no production would be required in respect of the Cape Lambert Summons.

Once those documents are reviewed, our client would give consideration to whether to call on production of the Sage Summons or Sage Order to any further extent, or to call on production of the Cape Lambert Summons at all.

(original emphasis)

28    On 24 October 2017 Bennett + Co responded to SPB’s letter dated 23 October 2017 acknowledging the narrowed scope of production. In that letter Bennett + Co also noted that Cape Lambert had already produced documents to the Court by way of six DVDs and one CD and in doing so had incurred significant costs and disbursements and queried whether Mr Hodgkinson would meet Cape Lambert’s costs incurred to date.

29    On the same date SPB responded to Bennett + Co clarifying the documents that Mr Sage would be required to produce and noting that there would presumably be some overlap between the categories to be produced.

30    The proceeding was next before the Court on 25 October 2017. Although correspondence had been exchanged on the issue, as at 9 November 2017, the date of the hearing of this application, the parties had not agreed the orders to be made following that hearing.

31    According to Mr Skinner, a solicitor in the employ of Bennett + Co, who conducted a review of the emails from Mr Sage’s email account that responded to the “hits” for the keywords identified by Mr Hodgkinson, there are 5,797 emails in total. The emails that responded to the search were collated in 12 PST files, with one file for each keyword search. Those emails have been the subject of a de-duplication process within each PST file.

32    On 8 November 2017 Mr Skinner obtained an estimate from Law in Order to de-duplicate across the 12 PST files. As at the time of the hearing of the application, the de-duplication process across the 12 PST files had not been completed. The Court was later informed by the parties that following de-duplication across the 12 PST files the number of unique emails was 4,170. A solicitor in the employ of Bennett + Co had, as at 16 November 2017, already reviewed 179 of those emails, leaving 3,991 emails for review.

relevant legal principles

33    Section 56 of the Federal Court of Australia Act 1976 (Cth) (FCA Act) relevantly provides that the Court or a Judge may order an applicant in a proceeding in the Court to give security for the payment of costs that may be awarded against him or her and that the security shall be of such amount, and given at such time and in such manner and form, as the Court or Judge directs.

34    Although Cape Lambert and Mr Sage submitted that the power under s 56 of the FCA Act is sufficient for the purpose of their application, r 19.01(1) of the Federal Court Rules 2011 (Cth) provides that a respondent may apply to the Court for an order that an applicant give security for costs and for the manner, time and terms for the giving of the security; that the applicant’s proceeding be stayed until security is given; and that if the applicant fails to comply with the order to provide security within the time specified in the order, the proceeding be stayed or dismissed.

35    The issue of an examination summons is a proceeding for the purpose of s 56 of the FCA Act: see In the matter of Strarch International Limited (In Liquidation) [2005] FCA 829 (per Jacobson J) at [7]-[8]; Fiorentino v Irons (1997) 79 FCR 327 (per Foster J) at 330-331.

36    The principles governing the exercise of the Court’s discretion in making an order for security for costs were not in dispute. In Commissioner of Taxation (Cth) v Vasiliades (2016) 344 ALR 558; [2016] FCAFC 170 (Vasiliades) Kenny and Edelman JJ identified at [72] that the purpose of an order for security for costs “is to ensure that a successful respondent to a claim will have a fund available within the jurisdiction of the Court against which the respondent, if successful in defence, can enforce a judgment for costs in the respondent’s favour”. Their Honours noted that this purpose is “relevant to an exercise of discretion” and that “[t]he factors that the courts have over time recognised as relevant to an exercise of discretion are relevant because they bear on the purpose for which an order for security for costs is made”.

37    The discretion conferred by s 56 of the FCA Act is a broad one, subject only to the limitation that it must be exercised judicially: Vasiliades at[71].

38    In Concrete Mining Structures Pty Ltd v Cellcrete Australia Pty Ltd (No 2) [2016] FCA 360 Edelman J, after noting at [12] that the onus of proof rests upon the party seeking security, set out a summary of the factors to be considered by the Court in a security for costs application by reference to the decision in Hii v Federal Commissioner of Taxation (No 3) (2016) 238 FCR 304 (per Collier J) at [13] as follows:

… Those factors, and others which are often referred to, include:

(1)    the likelihood of the applicant being unable to pay the respondent’s costs;

(2)    the characteristics of the applicant including whether it is a corporation or a natural person, the wealth of the applicant, whether the applicant is a foreign resident and, if so, the assets held by the applicant in Australia;

(3)    whether any impecuniosity of the applicant was caused by the respondent’s conduct which is the subject of the claim, to the extent to which that can be assessed;

(4)    whether the application for security is oppressive;

(5)    whether the award of security would deny an impecunious applicant a right to litigate;

(6)    whether there are persons standing behind the applicant who are likely to benefit from the litigation;

(7)    whether the persons standing behind the applicant have offered any security or personal undertaking to be liable for the costs, and if so, the form of that security or undertaking;

(8)    whether the proceedings are in substance defensive in the sense of directly resisting proceedings already brought or seeking to halt the respondent’s self-help procedures so that the applicant is, in substance, forced to litigate;

(9)    whether the application for security had been brought promptly;

(10)    whether the applicant has any rights which it can exercise against assets of the respondent to satisfy an order for costs in its favour;

(11)    the strength and bona fides of the applicant’s case, although this will invariably only be determined in a provisional manner and in many cases will only be a broad brush impression of little weight; and

(12)    any factors relating to the public interest.

39    The parties were only able to take me to one case where a court had considered an application for security for costs of an examination summons issued pursuant to the Corporations Act: Godfrey as liquidator of Pobjie Agencies Pty Ltd (in liq) (2007) 61 ACSR 54; [2007] NSWSC 138 (Godfrey). There White J disposed of the application at [90]-[92] as follows:

90    The applicants were unable to point to any authority for the court to make an order for security for costs. It was submitted that the court had inherent jurisdiction to order such security. Whether that is so or not, there is no occasion to order security for costs.

91    The costs for which security was sought were costs to which it was said the applicants may become entitled pursuant to s 597B of the Corporations Act. That section provides that where the court is satisfied that a summons to a person under s 596B was obtained without reasonable cause, the court may order some or all of the costs incurred by the person because of the summons to be paid by the applicant for the summons or by any person who takes part in the examination.

92    On the material before me, there is no reason to think that the summons was obtained without reasonable cause. There is no realistic prospect of an order for costs being made under s 597B. In any event, even if there were, there is no reason to think that the liquidator, who would be liable to pay such costs, would be unable to do so.

40    Although the application before me was for an order for security for costs of production under, relevantly, the Sage Summons and not an application for an order that Mr Hodgkinson in fact pay those costs, the issue of when a party can obtain its costs of production was raised in argument.

41    Section 597B of the Corporations Act provides for the payment of a person’s costs where the Court is satisfied that a summons issued to a person under ss 596A or 596B, or a requirement made of a person under s 597A, was obtained without reasonable cause. In those circumstances the Court may order that some or all of the costs incurred by the person because of the summons or requirement be paid by, in any case, the applicant for the summons or requirement; or, in the case of a summons, any person who took part in the examination.

42    In addition, the courts have recognised the ability to make an award of costs to the recipient of an examination summons issued under the Corporations Act in circumstances beyond those prescribed by that Act. In Re Equiticorp Finance Ltd; Ex parte Brock (1992) 6 ACSR 725 (Equiticorp) Young J had before him two notices of motion in relation to an order for examination issued under s 597 of the Corporations Law to a former auditor. In the course of his reasons, his Honour considered “what should be done with respect to the cost to the auditors of assembling the information and attending on the hearing”: at 733. The evidence before Young J suggested that it would “be necessary for extensive photocopying to take place of voluminous documents which would cost thousands of dollars” and that there would “need to be searches for an identification of material and reading through the material to ensure that confidential details of other clients outside the scope of the enquiry were excised and to ensure that all relevant documents had been produced”. At 733-734 his Honour said:

Mr Conti relies on Re Kempal, supra, and says that where the examinee is not a person involved with the management of the company then an order should be made to ensure that he is not out of pocket by complying with the liquidator’s demand.

No cases were cited to McClelland J during Kempal’s case. His Honour concluded that the provisions of what is now s 597(3) of the Corporations Law that the court may attach such conditions to the operation of an order under the section as it may consider necessary to prevent the order operating in an oppressive or unjust fashion. There have been cases dealing with application for costs under earlier versions of s 597. In general the view appears to be taken that the witness, at least if he is not directly concerned in the management of the company, is entitled to the costs of attendance at the examination and in gathering together the documents, but not costs for his own legal representation; see eg Re Appleton, French & Scrafton Ltd [1905] 1 Ch 749; Re Moreton Joinery Pty Ltd [1975] Qd R 121 and Re Kusmenko (1976) 14 ALR 673.

43    In Re Equiticorp Finance Ltd; Ex parte Brock (No 2) (1993) 27 NSWLR 391 the former auditor of the company, who was subject to an order pursuant to s 597 of the Corporations Law, sought an order that he was entitled to be compensated for the time spent on preparation for the examination, including conferences with his staff and familiarisation with documents. At 392 Young J identified four ways in which a person may suffer financial loss in connection with litigation, including loss caused by having to spend time in searching for documents or preparing to go into the witness box and be examined. His Honour said at 392-393:

Of course, the present proceedings are not civil litigation within the court, nor are they proceedings in which a subpoena has been issued. The proceedings are under s 597 of the Corporations Law which, like its predecessor s 541 of the Companies (New South Wales) Code, makes no special provision for the expenses of an examinee. However, in Kempal’s case, McLelland J said that subs (3) necessarily includes a power to make appropriate orders for expenses to prevent the order for examination operating oppressively (vide also subs (5)). His Honour said:

It would ordinarily be unjust, if not oppressive, to require a person who had not been an officer of a company to attend for examination in relation to the affairs of that company without provision being made in respect of his or her reasonable expenses of such attendance where those expenses would be substantial, as they would undoubtedly be in the case of a person who was required to travel from Melbourne and obtain overnight accommodation in Sydney. The case of an examinee who had been an officer of the company concerned may give rise to different considerations and in such a case much may depend on the particular circumstances both of the company and of that person, and I do not wish to say anything which would be construed as laying down some general rule in a case such as that. But that is not the present case, and in the present case there is nothing in the circumstances before the Court which would operate to prevent injustice arising from the absence of provision for expenses.

44    At 396-397 Young J said:

In my view, the general principle is that a person who is required by law to come before a court and give evidence has an obligation as a citizen to comply, and is not entitled to any compensation at all. … However, it is possible for the court to make a condition of an order for examination under s 597 of the Corporations Law to make an order for expenses, if justice so requires. As far as I can see, no case exists where expenses have been allowed outside the third of the situations I outlined at the commencement of these reasons; that is a case where the witness is out of pocket for travelling, accommodation and through missing work in attending the examination. I think it would be reasonable in the appropriate case and, indeed, I have already done it in this case, to allow compensation for searching for documents but it seems to me that the public interest generally is against making provision for a witness to confer at the liquidator’s expense with his or her staff or associates, or with solicitors and counsel, or otherwise obtaining information from others which might be used in his or her evidence on the examination.

45    Surpion Pty Ltd v M R Works Pty Ltd (recs and mgrs apptd) (2010) 80 ACSR 635; [2010] FCA 1262 (Surpion) concerned a review of a decision of a registrar who had made an order for payment of 60% of a liquidator’s costs incurred in an inquiry into whether documents produced by the examinee, a solicitor in the firm that had acted for the companies before they were wound up, at an examination conducted under s 596B of the Corporations Act were privileged.

46    In considering the issue before him Finklestein J summarised the effect of the cases where examinees had made application for their costs at [16] as follows:

The remaining cases that deal with cost orders concern applications for costs by examinees. The effect of the cases may be summarised as follows:

(A)    It is unjust to require a person to attend and give evidence or produce documents without making adequate provision for his/her costs of coming to and from the place of examination together with the costs of his/her sustenance while required to remain there: see Bank of New South Wales v Withers (1981) 35 ALR 21 at 37, a subpoena case.

(B)    The power to summon a person to be examined confers the right to impose conditions or make ancillary orders: Re Kempal Pty Ltd (in liq) (1989) 17 NSWLR 550 at 551; Re Spedley Securities Ltd (in liq); Ex parte Australian National Industries Ltd (1991) 4 ACSR 322 at 327.

(C)    This right to impose conditions and the power to make ancillary orders enables the issuing court to ensure that an examinee be paid his/her reasonable costs of attending the examination. In some cases the examinee can also be compensated for searching for the documents (if any) which he/she is required to produce: Re Equiticorp Finance Ltd; Ex parte Brock (1992) 6 ACSR 725 at 734 (Re Equiticorp Finance) and the cases cited therein.

(D)    The power cannot be exercised to cover an examinee’s consultation with lawyers to prepare for the examination: Re Equiticorp Finance Ltd; Ex parte Brock (No 2) (1992) 27 NSWLR 391 at 397; 7 ACSR 13 at 18.

(E)    Generally the power is not available for the examinee to obtain the costs of legal representation: Re Moreton Joinery Pty Ltd [1975] Qd R 121 at 122; Re Equiticorp Finance at 734. But, in limited circumstances, (for example when the examination may properly be characterised as “litigation” between the liquidator and the examinee, payment of the costs of representation of the examinee may be justified: Re Lutscher; Ex parte Waddell (1877) 6 Ch D 328 at 331 (Re Lutscher); Re Appleton French & Scrafton Ltd [1905] 1 Ch 749 at 755-6.

(F)    In some cases it has been suggested that a distinction should be drawn between examinees who were officers of the company (insiders) and third parties (outsiders) and that a costs order should generally only be made in favour of outsiders: Re Equiticorp Finance at 734. In Re Imobridge Pty Ltd (in liq) [1999] 1 Qd R 38 at 52, Lee J doubted whether insiders should be treated any differently from outsiders. I think there is no principled reason for the distinction.

(G)    Sometimes it is best to await the conclusion of the examination when all the relevant circumstances will be known before exercising the power: Re Total Entity Pty Ltd (2003) 47 ACSR 577; [2003] NSWSC 924 at [27]; Re Fox Home Loans Pty Ltd (in liq) [2005] NSWSC 1050 at [4].

47    In Crosbie v McLachlan (2013) 217 FCR 211 (Crosbie) the applicants, who were the liquidators, sought review of two costs orders made by a registrar of the Court requiring them to pay legal costs incurred by the recipients of summonses issued pursuant to s 596B of the Corporations Act in relation to a dispute about legal professional privilege claimed over some of the documents required to be produced under the summonses. One of the orders made by the registrar was that the liquidators should pay the legal costs incurred by the respondents in relation to their application for payment of costs and expenses associated with compliance with the summonses for examination. In relation to that order Gordon J said at [27]:

A person required by law to come before a court and give evidence has an obligation as a citizen to comply and is not entitled to compensation: Re Equiticorp at 396-397. However, it is possible for the Court to make a condition of an order for examination under s 597 of the Act to make an order for expenses, if justice requires. The circumstances where such an order may be made are limited to out-of-pocket expenses for travelling, accommodation and through missing work in attending the examination: Re Equiticorp at 397. There may be circumstances where it is appropriate to allow compensation for searching for documents: Re Equiticorp at 397. However, where a witness is compelled to attend under s 597 of the Act, compensation does not generally extend to costs incurred in a witness conferring with his or her staff or associates or with his or her legal advisers or otherwise obtaining information from others that might be used in evidence in the examination: Re Equiticorp at 397.

consideration

48    Cape Lambert and Mr Sage submitted that they are entitled to an order for security for their costs of production of documents. They submitted that in the present case the factors relevant to the grant of security are:

(1)    the likelihood of Mr Hodgkinson being unable to pay their costs;

(2)    the characteristics of Mr Hodgkinson;

(3)    whether there are persons standing behind Mr Hodgkinson who are likely to benefit from the litigation;

(4)    whether the persons standing behind Mr Hodgkinson have offered any security or personal undertaking to be liable for the costs and, if so, the form of that security or undertaking; and

(5)    any factors relating to the public interest.

49    Cape Lambert and Mr Sage submitted that in the present case:

(1)    Mr Hodgkinson issued the summonses as deed administrator of Kupang, a company with no tangible assets other than $90,000 in the deed fund, of which, at most, $50,000 is available to the deed administrator to satisfy his costs;

(2)    it can be inferred from the decision in Kupang Resources that Mr Hodgkinson has incurred costs in the preparation of and attendance by counsel and his instructors in that hearing that would deplete those funds;

(3)    Bennett + Co have asked SPB on multiple occasions whether it has funds in trust adequate to cover costs of compliance with the summonses to produce and no answer has been provided;

(4)    Bennett + Co have asked SPB whether they consider that Mr Hodgkinson will be personally liable for any costs of compliance with the summonses. If he is not liable then Cape Lambert and Mr Sage only have recourse to the assets of Kupang, which, they submitted, are insufficient; and, if he is liable, SPB have not confirmed whether Mr Hodgkinson has the means to cover a costs order. Cape Lambert and Mr Sage noted that it does not appear to be settled whether or not Mr Hodgkinson will be personally liable for their costs if a costs order is made, referring to the authorities on the issue.

50    Cape Lambert and Mr Sage further submitted that, in the exercise of the Court’s discretion by reference to the factors identified by them, it is relevant that there is an international litigation funder based outside Australia “standing behind” the proceeding and likely to benefit from it. They submitted that there does not appear to be an indemnity of Mr Hodgkinson by ILP under the DOCA for costs of the kind for which Cape Lambert and Mr Sage seek security.

51    It was common ground between the parties that a subsidiary issue in the application for security was the question of whether Cape Lambert and Mr Sage would be entitled to their costs of the summonses to produce documents. It was also common ground between the parties that the issue of Cape Lambert and Mr Sage’s entitlement to costs would not be determined on a final basis on this application. Cape Lambert and Mr Sage submitted that the Court would only need to determine whether there was the potential for them to obtain a costs order in relation to the summonses for production and that Mr Hodgkinson would have to establish that they would never, on the state of the law, be entitled to get those costs in order for that to be a factor weighing on the discretion to award security for costs.

52    In relation to the entitlement to a costs order on the summonses Cape Lambert and Mr Sage submitted that it would be appropriate to make an order compensating them for their costs of searching for and reviewing documents because:

(1)    the power under s 597(9) extends only to permitting production of “books” that “are relevant to matters to which the examination relates or will relate” and the material responding to the keywords identified by Mr Hodgkinson includes material that is not relevant and material that is subject to a claim for legal professional privilege. The significant costs of identifying and removing that material should be borne by Mr Hodgkinson;

(2)    Mr Hodgkinson cannot rely upon the “insider”/”outsider” distinction, even assuming it remains good law, which Cape Lambert and Mr Sage submitted was not the case. They contended that no such distinction was drawn in Crosbie and that Finkelstein J rejected the application of such a distinction in Surpion. Cape Lambert and Mr Sage submitted that in Medici Institute Pty Ltd; McVeigh v Brumley [2009] VSC 668 Gardiner AsJ made an order in favour of an examinee for costs including “reviewing documents for scope of potential privilege and arranging documents to be copied” without deciding whether Mr Brumley was an “insider” or “outsider”, although stating a prima facie view that “he appears to be an outsider”: at [19]; and

(3)    if the submission referred to in the preceding subparagraph were not accepted then the costs to be incurred are those of an outsider because the documents being produced are in fact documents of Cape Lambert. Cape Lambert and Mr Sage submitted that:

(a)    they produced the documents on 19 October 2017 before SPB indicated that Mr Hodgkinson would only seek production from Mr Sage and that that attempt came too late;

(b)    in any event, there is only one corpus of documents produced by both of them;

(c)    the documents were in Cape Lambert’s possession and contain documents that are privileged, the benefit of which is held by Cape Lambert;

(d)    the documents also contain documents irrelevant to the summonses, which are again Cape Lambert’s records; and

(e)    the Court should prefer substance over form. The documents are those of Cape Lambert and the costs of protecting Cape Lambert’s privilege and removing material outside the power of the summonses to compel production should be borne by Mr Hodgkinson.

53    Mr Hodgkinson accepted that he had not put on any evidence about his assets; that there was no evidence that would allow the Court to be persuaded that he had the benefit of an indemnity from someone with sufficient assets such that the Court would be satisfied that he would be made whole by that person; and that, although on the evidence he would have recourse to the assets of Kupang to pay a costs order if one were made, the evidence about the assets of Kupang does not reveal liquid assets that could be used to readily and properly pay a costs order. Two things follow from those concessions: first, they remove the need to determine, in the context of this application, who would be liable to pay should a costs order be made; and, secondly, the application for security for costs should proceed on the assumption that if an order for costs were made then it would not be paid.

54    Cape Lambert and Mr Sage submitted that, given the assumption that, if made, a costs order would not be satisfied, the Court’s discretion to order security was enlivened and the Court would embark on a consideration of the factors relevant to the exercise of its discretion. So much can be accepted but, when the factors relevant to the exercise of the discretion are considered in this case, the result is that I would decline to exercise my discretion to make an order for security for Cape Lambert’s or Mr Sage’s costs of production under the summonses.

55    Insofar as Cape Lambert is concerned, it is common ground that Mr Hodgkinson does not presently intend to call upon the CL Summons. There could be no prospect of Cape Lambert obtaining a costs order in its favour in respect of Mr Sage’s obligation to comply with the Sage Summons. That Mr Sage only maintained one email account, which is his email account maintained by his employer, Cape Lambert, is not to the point. If Mr Hodgkinson had only issued one summons for production directed to Mr Sage then Cape Lambert would not be entitled to a costs order in respect of production pursuant to that summons, notwithstanding that the relevant documents were held in an email account maintained by Cape Lambert.

56    The fact that production of documents was made to the Court prior to Mr Hodgkinson electing not to call on the CL Summons does not change that outcome. Cape Lambert and Mr Sage provided one CD and six DVDs to the Court but with the reservation that no access should be granted to Mr Hodgkinson without further order because privileged and non-privileged material was intermingled. In my opinion that does not amount to production for the purpose of the CL Summons, which can be the only summons for which Cape Lambert could seek its costs.

57    I turn then to consider Mr Sage’s position. Leaving aside Godfrey, there are no cases in which an application for security for costs of summonses for examination or production has been considered. That may be because, as is my opinion, it would be a rare occasion on which a court would make such an order.

58    There have been instances where a party has obtained its costs of production of documents in connection with a summons for production issued pursuant to the equivalent of s 597 of the Corporations Act as the cases set out at [42] to [47] above demonstrate. But those instances are not commonplace, a matter that is relevant to the consideration of the strength of Mr Sage’s case and for present purposes equates to his ability to obtain a costs order, a factor that goes to the exercise of the discretion.

59    Without determining the issue, it seems to me that on the basis of the material presently available Mr Sage’s prospects of obtaining an order for his costs of production are low. That does not mean that Mr Sage cannot apply for such an order, nor by my comments do I wish to foreclose on his prospects of obtaining such an order. But, as Mr Hodgkinson submitted, examinees do not obtain their costs of complying with summonses as a matter of course. So much is evident from the limited bases available for recovery of such costs under the Corporations Act or on the basis of the decided cases. In Surpion Finkelstein J observed at [12] that, apart from s 597B, courts have found that “there is power to make a costs order, at least in limited circumstances” and, at [16], that in some cases an examinee may be compensated for “searching for the documents”. In Crosbie Gordon J said that “[t]here may be circumstances where it is appropriate to allow compensation for searching for documents”: at [27].

60    It is difficult to see how justice would require an order to be made to meet Mr Sage’s costs of production. The fact that the initial keywords provided by Mr Hodgkinson caught a larger set of potentially relevant documents than the more refined keywords ultimately agreed does not make this case unusual. The parties have negotiated such that the scope of production has been limited. There is nothing unusual in the approach taken. Nor does the fact that the sole shareholder and a secured creditor of Kupang is a foreign company who is a litigation funder mean that justice would require that an order be made for payment of Mr Sage’s costs of production.

61    The fact that Mr Sage is a director of Kupang was also raised as a factor relevant to considering the likelihood of his obtaining a costs order. In Equiticorp the order that was made for costs of searches for and identification of relevant papers was made in favour of the auditors of the company who were not “insiders” in that they were “not directly concerned in the management of the company”: Equiticorp at 734. In Surpion Finkelstein J said, without giving reasons, that he could see no principled reason for the distinction between “insiders” and “outsiders”.

62    While I do not need to resolve the issue, it seems to me, with respect, that there may be reasons why an insider would be treated differently. A director is not a stranger to a company and is involved in and responsible for the company’s affairs. In that capacity he or she is likely to have information about the examinable affairs of a company. There is power in the Corporations Act to examine an officer of a company, a matter about which a person taking on a role of officer of a company ought to be aware. In contrast to other persons who may have information about the examinable affairs of a company, no discretion lies with the Court when an application is made by an eligible applicant to issue a summons for examination to an officer. An officer is in a position of knowledge about a company’s examinable affairs, most likely beyond that knowledge of an outsider, and takes on the role of officer knowing that he or she may at some stage be required for examination.

63    I do not accept that, if it is good law, the “insider”/“outsider” distinction does not apply in this case. Cape Lambert and Mr Sage are not one and the same. There is no evidence that at the time Mr Hodgkinson issued the summonses he knew that there was only one corpus of documents. I would infer that the two summonses were issued in the expectation that each of Cape Lambert and Mr Sage had documents falling within some or all of the categories sought. The documents are not necessarily those of Cape Lambert. There is no evidence before me on which that conclusion could be drawn. The fact that Mr Sage only had one email account does not necessarily lead to that conclusion.

64    Finally, of significance in the context of this application are the relevant public policy considerations. In my opinion they weigh heavily against the making of an order for security for costs. As Mr Hodgkinson submitted, the purpose of Pt 5.9 of the Corporations Act, which includes Div 1 titled “Examining a person about a corporation”, is to aid persons who have responsibility for the external administration of a corporation in carrying out their duties: see Palmer v Ayres (in their capacities as liquidators of Queensland Nickel Pty Ltd (in liq) (2017) 341 ALR 18; [2017] HCA 5 at [98] (per Gageler J). That purpose could be frustrated if orders for security for costs were regularly made in relation to examination summonses.

65    It will not be unusual for an external administrator to have only limited funds and assets available to carry out his or her duties. An order requiring an external administrator to provide security for the costs of an examination summons or summons for production could prevent the external administrator from carrying out examinations which he or she might otherwise believe are necessary to discharge his or her obligations to investigate the examinable affairs of a company. If such an order were easily obtained it could be used as a tool in the armoury of an intended examinee or a person subject to a summons for production to avoid examination or production of material.

66    It must be that only in an exceptional case would an order for security for costs of an examination summons or summons for production be made so as not to defeat the purpose of Pt 5.9 of the Corporations Act. That this is so is apparent from the lack of decided cases in which such an order has been considered, let alone made, by a court.

conclusion

67    Given the conclusion I have reached in relation to whether an order for security for costs should be made it is not necessary for me to address the evidence or submissions in relation to the quantum of any order. I will make an order dismissing Cape Lambert’s and Mr Sage’s further amended interlocutory process dated 15 November 2017 and order that Cape Lambert and Mr Sage pay the Mr Hodgkinson’s costs of that interlocutory process.

Associate:

Dated:    17 November 2017