Federal Court of Australia

Shangri-La Construction Pty Ltd v Hyatt, in the matter of GVE Hampton Pty Ltd (in liquidation) [2020] FCA 1577

ORDERS

THE COURT ORDERS THAT:

1.    The application to discharge the summonses for examination ordered to be issued by the Court on 18 December 2019 be refused.

2.    Within 14 days of the date of these orders, the parties file and serve minutes of proposed orders and short submissions (limited to 5 pages each) giving effect to these reasons concerning the scope of the examination summonses and as to costs.

3.    Liberty to apply.

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

REASONS FOR JUDGMENT

BEACH J:

1    The respondents in the principal proceeding (the examinees), who are the moving parties on the present application, have applied under r 11.5 of the Federal Court (Corporations) Rules 2000 (Cth) to discharge the summonses for examination issued pursuant to ss 596A and 596B of the Corporations Act 2001 (Cth) (the Act). Alternatively, they seek orders limiting the scope of the examinations and the documents to be produced by the examinees.

2    Let me explain some of the background.

3    Shangri-La Construction Pty Ltd (Shangri-La), the applicant in the principal proceeding, is a creditor of GVE Hampton Pty Ltd (in liquidation) (GVE Hampton). Shangri-La was engaged by GVE Hampton to construct apartments. Disputes arose between Shangri-La and GVE Hampton that resulted in Shangri-La obtaining a judgment against GVE Hampton in the County Court of Victoria for a sum of just under $200,000 (the judgment debt).

4    On 4 December 2017, GVE Hampton was placed in liquidation pursuant to a creditors’ voluntary winding up. Mr Peter Gountzos and Mr Michael Carrafa were appointed the joint and several liquidators.

5    Shangri-La sought to have the examinees examined under Div 1 of Pt 5.9 of the Act. For that purpose it took steps to become an “eligible applicant” under ss 596A and 596B.

6    On 30 May 2019, ASIC acceded to Shangri-La’s request to be granted “eligible applicant” status for the purposes of Div 1 of Pt 5.9, being authorised as contemplated by limb (e) of the definition of “eligible applicant” as set out in s 9 of the Act. Shangri-La did not fall within any of limbs (a) to (d) of “eligible applicant”.

7    On 18 December 2019, on the application of Shangri-La a Registrar of this Court made orders for the issuing of summonses for examination directed to Mr Vladislav Hyatt, Mr Eugene Krok and Mr Greg Krok pursuant to s 596A as directors or former directors of GVE Hampton (the director examinees), and directed to Ms Ada Khait, who is the mother of Mr Hyatt, pursuant to s 596B.

8    There have been considerable delays concerning the service of these summonses and the fixing of the time for the examinations; this has been due to the inconvenience caused by the present COVID-19 restrictions and also by the conduct of the examinees.

9    Nevertheless, the examinees have now applied to discharge the summonses. On that aspect I will grant Mr Eugene Krok, who is now out of time, an extension of time within which to bring his application. The other examinees are within time.

10    The examinees seek to discharge the summonses or have a permanent stay of the examinations on the basis that the summonses were sought and issued for a predominantly improper purpose and therefore amounted to an abuse of process. For the reasons that follow, I would reject that principal case.

11    The examinees’ fall-back position is to seek orders limiting the scope of the examinations or the documents to be produced. I will grant limited relief on that latter question but not the former.

12    I should begin with the statutory framework.

Statutory framework

13    Section 596A provides:

The Court is to summon a person for examination about a corporation’s examinable affairs if:

 (a)    an eligible applicant applies for the summons; and

(b)    the Court is satisfied that the person is an officer or provisional liquidator of the corporation or was such an officer or provisional liquidator during or after the 2 years ending:

(i)    if the corporation is under administration—on the section 513C day in relation to the administration; or

(ii)    if the corporation has executed a deed of company arrangement that has not yet terminated—on the section 513C day in relation to the administration that ended when the deed was executed; or

(iii)    if the corporation is being, or has been, wound up—when the winding up began; or

(iv)    otherwise—when the application is made.

14    The phrase “eligible applicant” is defined in s 9 to mean:

(a)    ASIC; or

(b)    a liquidator or provisional liquidator of the corporation; or

(c)    an administrator of the corporation; or

(d)    an administrator of a deed of company arrangement executed by the corporation; or

(e)    a person authorised in writing by ASIC to make:

(i)    applications under the Division of Part 5.9 in which the expression occurs; or

(ii)    such an application in relation to the corporation.

15    The phrase “examinable affairs” is defined to mean:

(a)    the promotion, formation, management, administration or winding up of the corporation; or

(b)    any other affairs of the corporation (including anything that is included in the corporation’s affairs because of section 53); or

(c)    the business affairs of a connected entity of the corporation, in so far as they are, or appear to be, relevant to the corporation or to anything that is included in the corporation’s examinable affairs because of paragraph (a) or (b).

16    Section 596B provides:

(1)    The Court may summon a person for examination about a corporation’s examinable affairs if:

(a)    an eligible applicant applies for the summons; and

(b)    the Court is satisfied that the person:

(i)    has taken part or been concerned in examinable affairs of the corporation and has been, or may have been, guilty of misconduct in relation to the corporation; or

(ii)    may be able to give information about examinable affairs of the corporation.

(2)    This section has effect subject to section 596A.

17    Section 596F provides:

(1)    Subject to section 597, the Court may at any time give one or more of the following:

(a)    a direction about the matters to be inquired into at an examination;

(b)    a direction about the procedure to be followed at an examination;

(c)    a direction about who may be present at an examination while it is being held in private;

(d)    a direction that a person be excluded from an examination, even while it is being held in public;

(e)    a direction about access to records of the examination;

(f)    a direction prohibiting publication or communication of information about the examination (including questions asked, and answers given, at the examination);

(g)    a direction that a document that relates to the examination and was created at the examination be destroyed.

(2)    The Court may give a direction under paragraph (1)(e), (f) or (g) in relation to all or part of an examination even if the examination, or that part, was held in public.

(3)    A person must not contravene a direction under subsection (1).

18    Further, s 597(5B) and (9) provide:

The Court may put, or allow to be put, to a person being examined such questions about the corporation or any of its examinable affairs as the Court thinks appropriate.

…

The Court may direct a person to produce, at an examination of that or any other person, books that are in the first-mentioned person’s possession and are relevant to matters to which the examination relates or will relate.

19    Before proceeding further, let me make four points concerning the legislative framework.

20    First, as concerns the director examinees, s 596A is expressed in mandatory terms if the relevant conditions have been satisfied. This may be contrasted with s 596B under which a summons for examination was issued to Ms Khait. Even if the relevant conditions have been satisfied, under s 596B the power to issue is a discretionary power; “may” is not merely to empower but reflects a discretion whether to issue. I need not discuss this distinction further as the case for Ms Khait did not advance separate discretionary reasons as to why the power under s 596B ought not to have been exercised. She advanced essentially the same arguments as the director examinees, who were the subject of the exercise of the s 596A power, concerning improper purpose, the scope of the examinations and the scope of the documents to be produced, although her arguments were tailored to the specific terms of the summons addressed to her. No additional discretionary ground was advanced by her as to why the s 596B power ought not to have been exercised.

21    Second, the authorisation by ASIC under limb (e) of the definition in s 9 of “eligible applicant” is not expressly as to the scope of any summons or examination. Rather, it is an authorisation concerning standing. The authorisation does not expressly limit the examinable affairs to be examined. Any such limitation is for the Court exercising the power under ss 596A or 596B to issue the summons. But of course the Court will consider, at the time it is asked to issue the summons, the authorisation and the purpose for which it was obtained in determining the scope of any summons for examination. I only raise this point because, putting to one side for the moment the improper purpose argument, the scope of any examination is to be informed and circumscribed by the terms of the summons actually issued, not by the prior authorisation concerning standing in and of itself.

22    Third, the expression “examinable affairs” is of very broad amplitude and can encompass the relevant company’s dealings with third parties including related entities or persons. I make this point because some of the examinees’ arguments concerning the scope of the examinations or the documents sought pay insufficient regard to this breadth.

23    Fourth, considerable powers are given to the Court on the return of the summons for examination to regulate under ss 596F and 597 how the examinations are to be conducted and the documents to be produced. I would say now that many of the points made by the examinees concerning the scope of the examinations or the documents to be produced are matters that can be raised with the Registrar at the time of the examinations. Nevertheless, now that the matter is before me it is convenient to deal with some of the points raised.

24    Let me now elaborate on the factual background, most of which is detailed in the s 596C affidavit and its annexures. I note that I directed this to be released to the examinees pursuant to s 596C(2).

Factual background

25    Since 8 December 2013, Mr Hyatt has been a director of GVE Hampton; he has also served as company secretary. During the period between 9 December 2013 and 21 August 2017, Mr Eugene Krok and Mr Greg Krok were directors of GVE Hampton with the former also serving as company secretary at times. The shareholders of GVE Hampton are companies associated with Mr Hyatt, Mr Eugene Krok and Mr Greg Krok.

26    On 26 October 2017, the County Court of Victoria entered judgment against GVE Hampton, which gave rise to the judgment debt that I have previously referred to.

27    On 4 December 2017, GVE Hampton went into liquidation on the basis of insolvency.

28    On 2 March 2018, one of the liquidators, Mr Gountzos, issued a statutory report that said that GVE Hampton’s liabilities totalled $3,753,783.00 and that its insolvency could be attributed to its contractual dispute with Shangri-La as well as its inability to meet its taxation liabilities. That report also identified GVE Small Pty Ltd (GVE Small) as a related entity and sundry debtor. Specifically, the report said that a review of GVE Hampton’s management accounts indicated that GVE Small was indebted to GVE Hampton in the amount of $5.2 million plus interest. There was evidence before me to suggest that GVE Small is related to GVE Hampton within the meaning of s 9 of the Act.

29    The statutory report issued by Mr Gountzos also said that:

(a)    the director of GVE Small was Mr Hyatt, who was also a director of GVE Hampton;

(b)    the records indicated that GVE Hampton and GVE Small entered into a loan agreement on 1 June 2017, pursuant to which GVE Hampton advanced funds in the amount of $5.2 million to GVE Small;

(c)    the liquidators had issued a demand upon GVE Small for the immediate repayment of the $5.2 million plus interest; and

(d)    as at the date of the report, no payment from GVE Small had been received.

30    Now more generally, Mr Gountzos expressed the view that based on his investigations, the following rights of action had been identified as examinable affairs:

31    With respect to these entities, it is to be noted that the evidence suggests that GVE Brighton Pty Ltd (GVE Brighton), A G Krok Developments Pty Ltd (A G Krok Developments), E Krok Developments Pty Ltd (E Krok Developments) and Hyatt Investments Pty Ltd (Hyatt Investments) are related to GVE Hampton within the meaning of s 9.

32    Further, with respect to such examinable affairs, Mr Gountzos expressed views that each of the transactions identified in the table above may have been to the detriment of GVE Hampton and for the benefit of the directors and related parties and that the directors may have also breached their duties under ss 180, 181 and 182 of the Act as a result of these transactions.

33    I should note that on the basis of these matters, Shangri-La applied for the summonses for examination in question before me to be issued so as to permit investigation as to whether GVE Hampton had any claims against Mr Hyatt, Mr Eugene Krok, Mr Greg Krok and Ms Khait for recovery of questionable director-related payments on the basis, inter-alia, that the relevant transactions may have been sham transactions, may have been made without proper consideration, may have been made to deprive GVE Hampton funds with which to settle its liabilities to creditors or may have been voidable under s 588FF of the Act as uncommercial transactions, unreasonable director-related transactions, or unfair preference payments. At the least that appeared on the material to be Shangri-La’s apparent purpose.

34    Now Mr Hyatt is a director and secretary of GVE Hampton, a director and secretary of GVE Small, the sole shareholder of GVE Small, the sole director and secretary of Hyatt Investments, being one of GVE Hampton’s three shareholders and GVE Brighton’s four shareholders, and a former director and secretary of GVE Brighton. Clearly, Mr Hyatt is related to GVE Hampton within the meaning of s 9.

35    I have already set out the examinable affairs identified by Mr Gountzos. In elaboration:

(a)    GVE Hampton may have unreasonably loaned $5.2 million to GVE Small between 1 June 2017 and 7 June 2017;

(b)    GVE Hampton may have unreasonably loaned $8,000.00 to GVE Brighton on 4 September 2017;

(c)    GVE Hampton may have unreasonably paid $43,437.00 to GVE Brighton on 1 June 2017; and

(d)    GVE Hampton may have unreasonably paid $398,672.00 to Hyatt Investments on 1 June 2017.

36    Given Mr Hyatt’s relationship with each of these entities, it is likely that he has information and documents relevant to these transactions and GVE Hampton’s examinable affairs generally. Accordingly, Shangri-La desires to examine Mr Hyatt in relation to GVE Hampton’s examinable affairs, whether each of the transactions identified in the above table may have been to the detriment of GVE Hampton and for the benefit of the directors and related parties, and whether the directors may have also breached their statutory duties as a result of these transactions.

37    Further, Mr Eugene Krok is the sole director and secretary of GVE Brighton, a director of E Krok Developments, being one of GVE Hampton’s three shareholders and GVE Brighton’s four shareholders, and a former director and secretary of GVE Hampton. Clearly, Mr Eugene Krok is related to GVE Hampton within the meaning of s 9.

38    I have already set out the examinable affairs identified by Mr Gountzos. In elaboration:

(a)    GVE Hampton may have unreasonably loaned $8,000.00 to GVE Brighton on 4 September 2017;

(b)    GVE Hampton may have unreasonably paid $43,437.00 to GVE Brighton on 1 June 2017; and

(c)    GVE Hampton may have unreasonably paid $671,345.00 to E Krok Developments on 1 June 2017.

39    Given Mr Eugene Krok’s relationship with each of these entities, it would seem that he may have information and documents relevant to these transactions and GVE Hampton’s examinable affairs generally. Accordingly, Shangri-La desires to examine Mr Eugene Krok in relation to GVE Hampton’s examinable affairs, whether each of the transactions identified in the above table may have been to the detriment of GVE Hampton and for the benefit of the directors and related parties and whether the directors may have also breached their statutory duties.

40    Further, Mr Greg Krok is the sole director of A G Krok Developments, a former director of GVE Hampton and a former director and secretary of GVE Brighton. Mr Greg Krok is related to GVE Hampton within the meaning of s 9.

41    I have already set out the examinable affairs identified by Mr Gountzos. In elaboration:

(a)    GVE Hampton may have unreasonably loaned $8,000.00 to GVE Brighton on 4 September 2017;

(b)    GVE Hampton may have unreasonably paid $43,437.00 to GVE Brighton on 1 June 2017; and

(c)    GVE Hampton may have unreasonably paid $539,000.00 to A G Krok Developments on 1 June 2017.

42    Given Mr Greg Krok’s relationship with each of these entities, he may have information and documents relevant to these transactions and GVE Hampton’s examinable affairs generally. Accordingly, Shangri-La desires to examine Mr Greg Krok in relation to GVE Hampton’s examinable affairs, whether each of the transactions identified in the above table may have been to the detriment of GVE Hampton and for the benefit of the directors and related parties and whether the directors may have also breached their statutory duties.

43    Finally, let me deal with Ms Khait who is the mother of Mr Hyatt, and accordingly is related to GVE Hampton within the meaning of s 9.

44    I have already set out the examinable affairs identified by Mr Gountzos. In elaboration, it is to be noted that GVE Hampton may have unreasonably paid $400,000.00 to Ms Khait on 31 July 2015.

45    Given Ms Khait’s receipt of these funds as well as her relationship with Mr Hyatt, there is evidence to suggest that she may have information and documents relevant to this transaction and GVE Hampton’s examinable affairs generally. Accordingly, Shangri-La desires to examine Ms Khait in relation to GVE Hampton’s examinable affairs.

46    I should also note again that unlike the director examinees, who fall under s 596A, Ms Khait is an examinee falling within the terms of s 596B.

47    Now as I have already said, Shangri-La has been authorised by ASIC as an “eligible applicant” to apply for summonses pursuant to ss 596A and 596B. But given that an improper purpose argument has been raised, it is appropriate to set out what was said by Shangri-La to ASIC to obtain the latter’s authorisation.

48    In a letter dated 29 March 2019 sent by Shangri-La’s solicitors to ASIC, it was said:

We hereby request, under section 9 of the Corporations Act 2001 (Cth) (Act), authorisation to make an application for the mandatory examination of the director of GVE Hampton Pty Ltd (In Liquidation), Mr Vladislav Hyatt, and its former directors (who ceased directorship on 21 August 2017), being Messrs. Eugene Krok and Greg Krok, pursuant to section 596A of the Act.

…

Our client requests this authorisation by reason of it being a creditor of GVE Hampton for the sum of $196,266.30 pursuant to a judgment debt arising out of the orders made by Judicial Registrar Burchell on 26 October 2017. We enclose a copy of the orders made by Judicial Registrar Burchell on 26 October 2017 for your reference. We note that GVE Hampton has additional creditors, including the Deputy Commissioner of Taxation, in respect of the sum of $2,700,000.00 not remitted in GST by GVE Hampton following the settlement of properties owned by it. There is no known conflict of interest applicable to this matter.

Our client seeks to examine Messrs. Hyatt, Krok and Krok primarily in relation to the advance of funds in the sum of $5,200,000.00 from GVE Hampton Pty Ltd (In Liquidation) to GVE Small Pty Ltd pursuant to a Loan Agreement entered into on or about I June 2017, and not disclosed to the liquidator in the RATA by the then director of the company Mr Vladislav Hyatt, who is also the director of GVE Small Pty Ltd. A copy of the Statutory Report by Liquidator dated 2 March 2018 disclosing the Loan Agreement and that it was not listed in the RATA is enclosed herewith. The relevant commentary is contained at page 4 of the report. This matter falls within the examinable affairs pursuant to part (b) of the definition of examinable affairs contained in section 9 of the Act, being the affairs of the corporation as defined in section 53(a) of the Act, and more particularly the transactions and dealings of the company.

Our client’s application is for the benefit of GVE Hampton, its creditors and contributories and is not an abuse of process as the public examination is intended to focus on the advance of funds in the sum of $5,200,000.00 from GVE Hampton to GVE Small Pty Ltd on or about 1 June 2017, allowing in particular, the company’s creditors to ascertain:

   a)    the particulars of the advance of funds;

   b)    upon who’s instructions the funds were advanced; and

c)    whether the director/s turned their minds to their duties as directors in respect of the advance of the funds.

It is anticipated that, following the public examination of the director and former directors of GVE Hampton, court proceedings may commence against one or more of the officers of GVE Hampton, or its related entities, either in respect of breaches of director’s duties or in relation to the Loan Agreement detailed above.

49    In a further letter to ASIC on 2 April 2019 in response to a request for information, the solicitors wrote:

We respond to the 7 categories of information requested as follows:

l.    Please find the attached Proof of Debt Lodged with the Liquidator in respect of our client’s judgment debt.

2.    The reasons for our client’s proposed examination, including the persons proposed to be examined are set out in our letter to you dated 29 March 2019.

3.    The reasons why the proposed examination is in the interests of the company, its creditors or contributories are as follows:

a)    The Company - The Statutory Report by the Liquidator of the company discloses creditors of the company in the vicinity of $4,000,000.00 inclusive of its debt to our client. Information about the circumstances surrounding the advance of the sum of $5,200,000.00 in July 2017 is to the benefit of the company, as the potential recovery of that sum would serve to imbue the company with sufficient funds to meet its debts to all of its creditors; and

b)    The Creditors - The sum of $5,200,000.00 exceeds the sum total of the disclosed creditors claims against the company. Accordingly, the examination, which may lead to the disclosure of information leading to the recovery of the sum of $5,200,000.00, is to the potential benefit of all of the company’s creditors.

Our client relies on paragraphs 125 to 144 of His Honour Justice Lander’s judgment in Wainter Pty Ltd, and in particular the commentary and endorsement of the decision in Re Excel. The purpose of the examination is to benefit not only our client, but also the company and its other creditors.

4.    The proposed examination of the director, and former directors of the company is not an abuse of process as for the reasons outlined above. It is conducted in the interests of the company and for all of its creditors (including, amongst others, the Deputy Commissioner for Taxation). Our client’s interest in the examination does not go beyond seeking information in respect of the examinable affairs for the purposes of the potential recovery of the funds advanced by the company to a related entity, for the purposes of discovering misconduct on the part of the company's directors and the recovery of an amount in excess of the company's total debts, thereby benefiting both the company and its creditors.

Our client once again relies on paragraphs 125 to 144 of His Honour Justice Lander’s judgment in Wainter Pty Ltd, and in particular the consideration and endorsement of the decision in Re Excel. That our client’s examination may benefit our client in future litigation (or in determining whether or not to commence litigation) is not an abuse of process in circumstances where there is a benefit conferred on the Company and its other creditors, in addition to our client.

5.    Our client does not have any known conflict of interest in conducting a public examination of the director and former directors of the company in this matter.

6.    The potential for our client to commence proceedings against the officers or related entities is set out in our letter to you dated 29 March 2019.

7.    That the proposed matters to be raised in our client’s examination of the director and former directors of the company are examinable affairs is set out in our letter to you dated 29 March 2019.

50    In yet a further letter to ASIC dated 26 April 2019, the solicitors wrote:

In addition to our client’s request for authorisation pursuant to Section 596A of the Corporations Act 2001 (Cth) (Act) previously lodged with you, we are further instructed to request your authorisation to apply to the Court to examine Ms Ada Khait in respect of a potentially unreasonable director related payment in the sum of $400,000.00 from GVE Hampton Pty Ltd to Ms Ada Khait on or about 31 July 2015. Please find enclosed a letter and enclosures from Mr Gountzos, liquidator of GVE Hampton Pty Ltd, setting out the details of that potentially unreasonable director related payment. We note that the relevant transactions are set out in pages 1 and 2 of the document, and the supporting documents confirming the transactions are contained at pages 32-39 of the document.

This examination would be made pursuant to Section 596B of the Act.

51    On 30 May 2019, ASIC wrote to the solicitors in the following terms:

I refer to your previous correspondence seeking authorisation of your client, Shangri-La Construction Pty Ltd (ACN 130 534 2441) (Applicant), a creditor of the Company, as an ‘eligible applicant’ for the purposes of Division 1 of Part 5.9 of the Act in relation to the Company.

The Australian Securities and Investments Commission (ASIC) authorises the Applicant as an eligible applicant for the purposes of Division l of Part 5.9 of the Act in relation to the Company. The authorisation granted by ASIC ceases when the Company is no longer subject to any form of external administration and when all controllers of Company cease to act.

52    Now on their face, in my view these letters from Shangri-La’s solicitors to ASIC disclose a proper purpose.

53    But clearly, the summonses for examination that have been issued extend beyond the precise formulation of the examinable affairs set out in such letters. But that does not render the summonses defective, and nor does any disparity give rise to any probable inference that Shangri-La had any improper purpose. Moreover, it must be recalled that the Court in exercising its statutory powers under ss 596A and 596B determined the boundaries and content of the summonses to be issued, albeit on the application of Shangri-La. Further, there did not need to be a one to one correspondence between what was said to ASIC to obtain “eligible applicant” status and the terms of the summonses.

54    Let me now turn to Shangri-La’s principal arguments concerning, first, improper purpose, second, the extent of the proposed examinations and, third, the scope of the documents to be produced.

The discharge of the summonses

55    The examinees say that based on the material supplied to ASIC in support of its application for “eligible applicant” status, the s 596C affidavit and the breadth of documents sought to be produced by the examinees, it is apparent that Shangri-La seeks to conduct an examination into all of the affairs of GVE Hampton.

56    I would say now that even if that were to be so, this would not establish in and of itself that there was an improper purpose. But in any event their proposition is exaggerated.

57    Further, the examinees contend that the summonses should be set aside because Shangri-La is restricted to conducting an examination which relates only to its unsecured debt. Therefore, so it says, the examinations sought to be conducted by Shangri-La are beyond the allowed scope. In my view, the premise for this argument being this so-called restriction fails.

58    Further, the examinees say that the proposed examinations are not for the benefit of GVE Hampton, its creditors or contributories as a whole. I disagree. It is apparent that what is being inquired into could advantage the creditors as a whole.

59    Further, the examinees say that Shangri-La, in its s 596C affidavit and in the material supplied to ASIC in support of its application for “eligible applicant” status, advised that it sought to conduct examinations in relation to the dissipation of GVE Hampton’s assets and the non-payment of its creditors, in particular in relation to a loan transaction for $5.2 million between GVE Hampton and GVE Small. This was so that proceedings could be commenced against one or more officers of GVE Hampton or its related entities either in respect of breaches of directors’ duties or in relation to the relevant loan agreement. But assume all that to be so. That does not disclose any improper purpose.

60    The examinees made particular reference to Re New Tel Ltd (in liq); Evans v Wainter Pty Ltd (2005) 145 FCR 176 and an observation made by Lander J at [252] including his ninth point being:

…

9.     A creditor may, if first authorised by ASIC, apply to the Court for an order to summon for examination a person for the purpose of obtaining information in relation to a debt owed to the creditor if such an examination would be in the interests of the corporation or its creditors as a whole.

…

61    The examinees said that although gathering information in relation to the general affairs of GVE Hampton would be a permissible use of the powers if the examination were being conducted by the liquidators, Re New Tel made it clear that such a broad-ranging examination could not be conducted by a creditor. I disagree. In my view the examinees have misconstrued what Lander J said in particular and the authorities generally.

62    The examinees stressed the reference in Lander J’s ninth point that the examination must be “for the purpose of obtaining information in relation to a debt owed to the creditor”. So, it was said that a creditor conducting an examination did not merely stand in the shoes of the liquidator, or any other class of persons set out in limbs (a) to (d) in the definition of “eligible applicant”, who would have the power and obligation to investigate all relevant matters relating to a company’s affairs. Instead, so the examinees contended, a creditor granted “eligible applicant” status was limited to examining in relation to matters relevant to that creditor’s debt. That proposition is incorrect and I will dispose of it later. For the moment, let me continue with the examinees’ arguments.

63    The examinees asserted that the reason for such a limitation stemmed from the fact that an authorised creditor, unlike ASIC itself, a liquidator or administrator, did not have any overarching responsibility to the corporation or its creditors. A liquidator conducting an examination was doing so in an authorised capacity as an officer of the court and subject to the court’s supervision. Such a liquidator had duties and obligations in discharging the office of liquidator. Similar considerations applied to an administrator. And in so far as ASIC was concerned, it was a statutory body governed by legislative instruments which governed the conduct of any examination it conducted. But a creditor authorised by ASIC was not subject to any such similar regulation, apart from the court’s usual powers to regulate the conduct of the examination itself. Now I do not doubt the general accuracy of many of these propositions, but the conclusion that the examinees seek to draw from them is misconceived.

64    Generally, so the examinees said, a creditor had no role in the overall administration of the corporation and should not therefore be in a position to conduct an examination as if they were the liquidator or administrator. The premise is correct, but the conclusion is over-blown and in its generality is inaccurate.

65    Alternatively, the examinees said that in any event a further restriction on a creditor identified by Lander J was that an examination by a creditor was not only limited to issues regarding its debt, but the examination had to be in the interests of the corporation or its creditors as a whole. That is to say, the examination in relation to the creditor’s debt could only validly be conducted if it would grant an overall likely benefit to the corporation or creditors as a whole. As to that last proposition, this is a little more accurate.

66    Further, the examinees pointed to the recent decision of the NSW Court of Appeal in ACN 004 410 833 Ltd (formerly Arrium Limited) (in liq) v Michael Thomas Walton [2020] NSWCA 157 at [65] to [92]. The examinees said that the private purpose referred to in Arrium Limited (at [141]) was a purpose which did not benefit the corporation, contributories or creditors as a whole. That may be so. But it is not my case.

67    Further, the examinees say that in the present circumstances, the examinations proposed to be conducted by Shangri-La could only benefit GVE Hampton, its contributories or creditors as a whole if they identified a potential source of funds available in the winding-up which would not otherwise be available or disclosed, including perhaps establishing a claim which Shangri-La could bring against the officers or agents of GVE Hampton which would reduce GVE Hampton’s indebtedness to Shangri-La whilst not diminishing the pool of funds available in the winding-up. The examinees said that it was necessary for Shangri-La to identify a claim that would result in an identified potential benefit, such as a claim that could be brought against the examinees personally to satisfy Shangri-La’s debt which did not result in a commensurate liability against GVE Hampton. But on any view the first limb of what I have just identified at the start of this paragraph is easily satisfied on a prima facie basis on the current material.

68    Further, the examinees say that even if Shangri-La’s foreshadowed s 197 claim against the directors was somehow successful, both GVE Hampton and the directors would be jointly liable, meaning that if the directors paid any sum they would be entitled to prove in the winding-up for that sum. Accordingly, such a foreshadowed claim would not, ultimately, be for the benefit of GVE Hampton or its creditors. This is to be contrasted with, say, the position in New Zealand Steel (Australia) Pty Ltd v Burton (1994) 13 ACSR 610 where s 592(5) of the Corporations Law provided that if the director of the company paid the debt, the company was not rendered liable to that person. In such a case, recovery from the director would have paid the debt owed to the creditor from a source of funds outside the pool available to unsecured creditors and would not have introduced a new corresponding claim on that pool by the director. But I would say now that the s 197 claim question is a red herring.

69    Irrespective of any s 197 claim that Shangri-La may have, the fact is that the examinations will involve potential claims that GVE Hampton itself may have against third parties and recoveries that will enhance the position for creditors as a whole. That is a permissible and sound purpose for the examinations, even at the behest of Shangri-La.

70    Further, the fact that Shangri-La sent letters of demand to the director examinees asserting only such claims does nothing to undermine the propriety of Shangri-La’s broader purpose motivating the issuing of the summonses for examination.

71    Now more generally, the examinees say that Shangri-La is not able to identify a claim which would benefit GVE Hampton, its contributories or creditors as a whole. Therefore Shangri-La’s stated predominant purpose for the examinations was not a permissible purpose. Accordingly, it says that the proposed examinations are an abuse of process. But in my view the foundation for these conclusions fails.

72    Further, the examinees say that regardless of Shangri-La’s stated purpose for seeking to conduct the examinations, the following material supports an inference that the true predominant purpose of Shangri-La was to gather evidence to support claims by Shangri-La against the examinees personally.

73    First, by a letter dated 15 December 2017 sent from Shangri-La’s solicitors to the director examinees, Shangri-La contended that the directors were personally liable pursuant to s 197 for the sum of $150,000 relating to the balance of retention money said to have been held by GVE Hampton on trust for Shangri-La. The examinees say that the nature of the demand demonstrates the intent of Shangri-La to pursue the directors personally. But this point goes nowhere as I have indicated. There is a broader and legitimate purpose disclosed on the material. Now much was made of the various demands made to the directors which in terms were limited to s 197. Of course, such limitations were understandable if one was considering a creditor such as Shangri-La making claims directly against the directors. But as I have said, that did not limit the purpose for why the examinations were being sought or their scope, which also involved looking at claims that GVE Hampton or its liquidators might have against the relevant persons or entities, including the directors.

74    Second, the examinees say that it is also relevant that Shangri-La did not inform the liquidators that it was seeking approval from ASIC, or that it had sought and obtained orders for the issuing of summonses pursuant to ss 596A and 596B. Further, Shangri-La did not offer to fund the liquidators to conduct the examinations. So, it is said that Shangri-La must have determined that it wanted to pursue the examinations itself. All of this is said to suggest an improper purpose. But I do not see how.

75    Third, the examinees took me to a selection of various contemporaneous financial records in evidence in order to put a different complexion on some of the relevant transactions that were said to be suspect by the liquidators and Shangri-La. It was said that this material showed that the transactions were not uncommercial transactions.

76    For my part, it was difficult to know what to make of some of these documents. Even if some suggested that particular transactions may not have been uncommercial, that did not entail that the transactions were not voidable preferences, particularly those which involved the discharge of a prior indebtedness; and in any event, whether there was prior indebtedness was questionable.

77    I will not linger on such analysis or any doubts concerning the timing of these transactions or the entities that were involved. But these doubts perhaps explain why the summonses for examination were sought and issued in the first place.

78    Further, whatever may have been said in prior demands to relevant persons or entities or descriptions given to ASIC referring to uncommercial transactions, the fact is that the investigation of voidable preferences was also in the frame as a legitimate purpose for seeking the examinations.

79    Generally speaking, and as I have made apparent, I would reject the examinees’ submissions.

80    The liquidators of GVE Hampton have identified a series of examinable transactions relating to GVE Hampton, most notably a loan of $5.2 million to GVE Small.

81    As I have said, GVE Small is a company related to GVE Hampton. Its director and secretary is Mr Hyatt, who is a director of GVE Hampton and one of the examinees. There is material to suggest that Mr Hyatt caused GVE Small and GVE Hampton to enter into a loan agreement on 1 July 2017 pursuant to which GVE Hampton transferred $5.2 million to GVE Small, which GVE Small was liable to repay with interest by 1 July 2020. It has failed to do so. The whereabouts of the $5.2 million is currently unknown.

82    Further, there is material to suggest that other questionable director related payments have been made amounting to at least a further $2,051,000.

83    Moreover, there is reason to believe that the examinees have documents relating to these and other suspect transactions.

84    On the material available to me it seems clear that the dominant purpose of Shangri-La is to examine the examinees with a view towards recouping funds to allow both the satisfaction of the judgment debt and to benefit GVE Hampton and its creditors as a whole.

85    The examinations could reasonably lead to, inter-alia, two benefits.

86    First, there is a potential benefit to Shangri-La. The return to GVE Hampton of either the $5.2 million “loan” or the further $2 million in unreasonable director related payments will make it substantially more likely that the judgment debt will be satisfied.

87    Second, more generally there is a potentially significant benefit to GVE Hampton, its contributories and creditors. A return to it of either the $5.2 million “loan” or the further $2 million in unreasonable director related payments will make it substantially more likely that GVE Hampton can satisfy more generally its liabilities.

88    Let me now set out what I would distil from the authorities in contrast with how the examinees have interpreted them.

89    First, as Gummow, Hill and Cooper JJ in Re Excel Finance Corporation Ltd (Receiver and Manager Appointed); Worthy v England (1994) 52 FCR 69 at 93 make plain, the dominant purpose in terms of the result intended to be achieved for obtaining an examination summons must be to benefit the corporation, its contributories or creditors. But as is plain, within that broader purpose or as a separate subsidiary purpose, a creditor may by the use of the examination procedure have the purpose to ensure that its debt was repaid by having transactions investigated that may ultimately be recoverable by a liquidator of the corporation, which funds could then be distributed to creditors.

90    But by contrast, and as was said in Re Excel at 91:

But it may be quite a different question where proceedings contemplated or instituted are not proceedings to be brought by the company, but proceedings brought by some other party for the advantage of that party rather than the company. For example, it would be an abuse of process for a creditor approved by the Commission for the purposes of s 597(1) to obtain an examination summons to conduct an examination for the purpose of obtaining evidence in proceedings which the creditor proposed to bring against the examinee for defamation. That would be a purpose completely foreign to the power of examination which is ultimately in aid of the company itself and not the personal advantage of the person seeking to conduct the examination.

91    These propositions were applied by Lander J in Re New Tel (at [119], [143], [247], [248] and [249] at point 8). They have also been confirmed in Kimberley Diamonds Ltd v Arnautovic (2017) 252 FCR 244 at [101] per Foster, Wigney and Markovic JJ.

92    Further, Arrium Limited applied these principles at [137] to [141] per Bathurst CJ, Bell P and Leeming JA.

93    Second, the fact that a creditor may have a private purpose for the examinations is not disqualifying so long as that private purpose is not the dominant purpose (see Re New Tel at [144]).

94    Further, in Arrium Limited at [140] and [141] it was said:

It follows that there are two unanimous decisions of the Full Court of the Federal Court which state that an examination, the predominant purpose of which is not to benefit the corporation, its creditors or its contributories, is an abuse of process. None of the other cases to which we have referred have stated that Re Excel was incorrectly decided. Furthermore, they can all be reconciled on the basis that even if the examination was brought by an eligible applicant for its own purpose, that will not be foreign to the purpose for which the power was conferred if it can be shown that fulfilment of the purpose could confer a demonstrable benefit on the company or its creditors (and possibly on all of its contributories).

The present case does not fall into that category. The examination is sought for a private purpose for the benefit of a limited group of persons who bought shares in Arrium at a particular time irrespective of whether they held their shares at the time of the appointment of the administrators. In our opinion, such an examination is foreign to the purpose for which the examination power is conferred and there is an abuse of process.

95    What was said at [140] is the situation before me. The eligible applicant, Shangri-La, will conduct an examination for its own purposes trying to find out what happened to GVE Hampton’s funds with a view towards getting the judgment debt paid. Yet the fulfilment of that purpose could confer a demonstrable benefit to GVE Hampton or its creditors, which in this case would be the recovery of possibly more than $5 million. It is therefore not foreign to the purpose for which the power was conferred.

96    Third, in my view the examinees are confused in their reference to the ninth point of Lander J at [252] in Re New Tel. By saying that a legitimate purpose for a creditor was “the purpose of obtaining information in relation to a debt owed to the creditor”, he was not purporting to be exhaustive of the legitimate purposes that a creditor could have in seeking the issue of summonses for examination. Here, of course, Shangri-La does not have such a purpose as it already has the judgment debt. It is clear from Lander J’s reasons that he was not making an “only if” statement.

97    Fourth, in Re New Tel, Lander J commented on the limits on the purposes for which a creditor might use the examination procedure (at [144]):

If the party seeking the examination summons is doing so for any number of purposes, which do not include the purpose of benefiting the corporation, then that would amount to an abuse. On the other hand, if the party seeking the examination summons has as one purpose the achievement of a benefit to that party but has also a further purpose which is for the benefit of the corporation then the use of the Pt 5.9 procedure will not be an abuse of process.

98    The examinees’ arguments in general fail to acknowledge that it is both in Shangri-La’s interest and GVE Hampton’s and the creditors’ interests to conduct the examinations. The examinations seek, in essence, to find out if money that should be available to settle GVE Hampton’s debts has been siphoned off. That is in the interests of Shangri-La, because such funds may then be available to pay the judgment debt. It is also in the interests of the other creditors because the funds unearthed during the examinations will not be restricted to the amount claimed by Shangri-La. The examinees will be examined about more than $7 million missing from GVE Hampton.

99    I can put it no better than Re Excel at 93:

…there could be no objection to the use of the examination procedure on application by a creditor whose purpose was to ensure that his or her debt was paid. After all, if the creditor were unsecured the interests of that creditor are no different from the interests of all other creditors who share rateably in the distributable assets of the company. Even in a case where the creditor was a secured creditor, the fact that the purpose of the examination was to aid the ultimate recovery of the secured debt, by, for example, the ascertaining of the existence of assets, would operate to the benefit of the company by ensuring that it paid out the secured creditors and that there was then revealed what other assets (if any) were available for distribution to unsecured creditors.

100    For the foregoing reasons, the examinees’ case on improper purpose fails. Shangri-La’s motivating, abiding or most influential purpose was a legitimate purpose.

The extent of the proposed examinations

101    The examinees say that if the summonses for examination are not to be set aside or stayed, nevertheless it is still appropriate to make orders limiting the matters to be examined upon to those relating only to the circumstances surrounding Shangri-La’s debt.

102    Now my power, indeed the Registrar’s power, to limit the scope of the examinations is provided for under s 596F(1)(a). In Lamb (in his capacity as Liquidator of Redcastle Estate Pty Ltd) v Mentha [2010] FCA 695, Goldberg J said (at [33]):

Pursuant to s 596F(1) of the Act, the Court may “at any time” give a direction “about the matters to be inquired into at examination”. I propose to give a direction that the examination of Messrs Korda and Ryan be limited to any negotiations in which they or either of them were involved in negotiating the purchase price of the property with the purchaser of the property or any person on its behalf, and the impact the associated sale of the Denim Business or any other business of the companies within the Bradmill Undare Group had on the fixing of the purchase price of the property.

103    The examinees say that if I am not persuaded that the true dominant purpose of the examinations amounts to grounds to set aside the summonses for examination, then nonetheless Shangri-La should be limited to conducting an examination in relation to its own debt, rather than being allowed to stand in the shoes of the liquidator and conduct an examination at large. But I disagree. In my view, to suggest such a limitation is misconceived for the reasons that I have already indicated on the purpose question. Shangri-La is entitled to examine on matters falling within the terms of the summonses.

104    If the summonses for examination have been sought and issued for a proper purpose, as in my view they were, then there is no such limitation of the type that the examinees have contended for.

105    Further, the examinees contend that the grounds and material on which Shangri-La persuaded ASIC to grant it “eligible applicant” status are different from the way Shangri-La is now seeking to conduct the examinations. But so be it. As I have already indicated, the scope of the examinations is not confined to the four corners of the material or basis put to ASIC. Any such disparity may be permitted in the questioning. After all, ASIC’s authorisation was an administrative decision concerning the grant of “eligible applicant” status. It did not in terms confine the boundaries of the examinations themselves. But of course, if it is clear that questions are not being asked for a proper purpose, which proper purpose would be to further the interests of GVE Hampton, its contributories or creditors including Shangri-La, then the Registrar may at the time of the examinations limit or disallow the questioning if it is solely collateral to the proper purposes for which the summonses were issued.

106    For these reasons, I will not give any express directions to the Registrar limiting the scope of any questioning.

The scope of the documents to be produced

107    The examinees say that the documents sought in the summonses for examination are very broad, and that this is vexatious and oppressive. But there is no evidence before me of any such oppression which has been adduced by the examinees. I will put the oppression point to one side.

108    The following objections have been raised by the examinees concerning the scope of the documents sought.

109    First, the examinees complain that in relation to each person or entity named in the summonses, there is a sub-paragraph (j) appearing in various numbered categories seeking documents relating to payments made to or received from:

j.    any other person or entity that is related to the above companies within the meaning of section 9 of the Corporations Act 2011

110    In my view such a description requires the examinee to make a judgment call as to whether any person or entity falls within the scope of the sub-paragraph and is inappropriate in breadth and lacks precision. Moreover, it seems to be a catch all given the other specific entities referred to. I will put a notional red pen through it wherever it occurs in any of the summonses.

111    Second, in relation to documents sought in category 1 from the director examinees relating to GVE Hampton, the examinees complain that paragraph 9 is too broad in that it seeks any and all correspondence between past or present company officers and members. Breadth per se is no proper objection. I reject this point.

112    Third, in relation to any documents sought for the purpose of assessing the ability of GVE Hampton to meet any claim brought against it, the examinees say that any such claim can only be brought by the liquidators and it is not competent for Shangri-La to examine or seek production of documents on those matters. I disagree for the reasons that I have previously indicated.

113    Fourth, in relation to documents sought in categories 2, 3 and 4 from Mr Hyatt and in categories 2 and 3 from Messrs Krok relating to GVE Brighton and the relevant corporate vehicles for the respective director examinees, being GVE Small and Hyatt Investments with respect to Mr Hyatt, E Krok Developments with respect to Mr Eugene Krok and A G Krok Developments with respect to Mr Greg Krok, the examinees make the following complaints.

114    They say that the documents sought, in so far as they are relevant to the examinable affairs of GVE Hampton, will be caught by category 1 of each of the summonses and therefore such categories are duplicative. But so be it. That is not a meaningful objection.

115    Further, they say that in so far as any documents are not captured in category 1, such documents relate to the examinable affairs of related entities, not GVE Hampton, and are not amenable to production in an examination relating to GVE Hampton’s affairs. I disagree. Such documents are relevant as there is evidence that these related entities have directly or indirectly dealt with GVE Hampton or received its funds; this does fall within examinable affairs. But if production is established as going beyond this, the Registrar can deal with any justified limitations.

116    Further, they say that in so far as the documents sought relate to the financial position of the related entities, presumably for the purposes of assessing the ability of the related entities to meet any claim brought against them by the liquidator, such documents are not within the examinable affairs of GVE Hampton. I disagree.

117    Further, they say that if the documents are sought from any related entity solely to assess the ability of the related entity to meet any claim that may be brought against it by Shangri-La, then that is not a permissible use of the examination procedure. I tend to agree. But I am not satisfied that that is presently the case.

118    Fifth, in relation to documents sought relating to the named examinee, being category 5 in respect of Mr Hyatt, category 4 in respect of Messrs Krok, and the only category of documents in respect of Ms Khait, they make the following complaints. They say that paragraph 1 seeks all bank statements showing transactions between the examinee and the entities named in paragraph 5. But they say that only transactions with GVE Hampton form part of the examinable affairs of GVE Hampton. I agree. I would make a similar point in respect of paragraph 6, which should relevantly be limited to all agreements personally entered into by the examinees concerning payments made to or received by GVE Hampton. Further, they say that paragraph 2 seeks documents relating to personal or familial assets back to 1 January 2016 in respect of the director examinees and 1 June 2015 in respect of Ms Khait. They say that such documents are not relevant to the examinable affairs of GVE Hampton. If the purpose is to ascertain the ability of the examinee to satisfy any claim, the purpose is objectionable. I disagree. Such documents are relevant to assessing the value of any claim that GVE Hampton may have against the relevant examinee.

119    Sixth, the examinees make the point that the only disclosed potential claim by GVE Hampton against Ms Khait is an uncommercial director-related transaction which relates to the repayment of a loan by GVE Hampton to Ms Khait. The examinees say that that is not a matter on which Shangri-La would be entitled to conduct an examination. I disagree. Shangri-La is entitled to conduct an examination as it is relevant to a claim that GVE Hampton may have against Ms Khait.

120    Seventh, in category 1, paragraph 3 of Mr Hyatt’s summons there is reference to “including affidavits or other statements”. I see no difficulty with this or similar phrases elsewhere in other places in the summonses. This is potentially relevant and probative material.

121    Eighth, in category 1, paragraph 4 of Mr Hyatt’s summons complaint was made of the balance of the phrase “including drafts…”. This is broad, but that is no substantive objection. I see no difficulty with this or similar phrases elsewhere in any of the summonses.

122    Ninth, complaint was made as to the phrase “relating to” wherever it appears. Again these are words of broad ambit. But the summonses are not defective for this reason alone.

123    Tenth, complaint was made concerning category 1, paragraph 8 of Mr Hyatt’s summons relating to tax affairs. But it seems to me that this is relevant material that may throw light on some of the suspect transactions in question in terms of how they were dealt with or represented for tax purposes. I would extrapolate this comment more broadly to other like categories.

124    Eleventh, category 1, paragraph 10 of Mr Hyatt’s summons is too broad. I will treat it as tied back to agreements with the entities and persons referred to in paragraph 6 of category 1. A similar point applies to the other summonses.

125    Twelfth, paragraph 4 of categories 2, 3 and 4 of the summons issued to Mr Hyatt, contains too many entities. For category 2, paragraph 4, I will only allow paragraph 4(e) in terms of transactions between GVE Small and GVE Hampton. I would say the same for category 3, paragraph 4. It should be limited to paragraph 4(e). A similar point can be made concerning category 4, paragraph 4. It should be limited to paragraph 4(e). I would make the same points with respect to paragraph 4 of each of categories 2 and 3 of the summonses issued to Messrs Krok. I would make a similar point concerning paragraph 5 of the final category of the summonses issued to the director examinees. It should be limited to paragraph 5(d).

126    Thirteenth, in various paragraphs of categories 2, 3, 4 and, in respect of Mr Hyatt, also category 5, I will strike out the word “evidencing” wherever it appears. The examinees ought not to be required to make such an assessment.

127    Fourteenth, in paragraph 2 of the final category in each summons, I see no difficulty with the words “or familial”.

128    Generally, all of the above points carry across to all three summonses directed to the director examinees.

129    As to the summons addressed to Ms Khait, as I have mentioned I would strike out “evidencing” wherever it appears, and limit paragraph 5 to paragraph 5(d) to pick up transactions between Ms Khait and GVE Hampton. Otherwise that summons is unobjectionable.

Conclusion

130    In summary, I will not discharge the summonses for examination or make any orders limiting the scope of the examinations.

131    As to the scope of the summonses in terms of the documents required to be produced, the parties should file minutes of proposed orders to reflect my reasons.

Associate:

Dated:    30 October 2020

SCHEDULE OF PARTIES