Federal Court of Australia

Newman (Trustee), in the matter of Vlahos, a bankrupt v Shannon [2021] FCA 123

ORDERS

THE COURT DECLARES THAT:

1.    The applicant is justified in making discovery pursuant to the respondent’s request for discovery of the categories of documents set out in Schedule C of:

(a)    the documents within the Police Hard Drive (as defined in the affidavit of Philip Newman affirmed 3 September 2020);

(b)    the affidavits listed in Schedule B; and

(c)    the 77C Transaction Traces and 77A Transaction Traces (as defined in the affidavit of Philip Newman affirmed 3 September 2020).

THE COURT ORDERS THAT:

2.    The affidavits filed by the applicant in proceeding VID606/2020 be affidavits in this proceeding.

3.    The applicant is released from his Harman undertaking with respect to the affidavit of Dean Michael Shannon sworn on 11 September 2019 and filed in this proceeding and is permitted to use that affidavit for his purposes in the proceedings listed in Schedule A.

4.    Within 7 days, the applicant serve each deponent of the affidavits listed in Schedule B with a copy of these orders.

THE COURT ORDERS BY CONSENT THAT:

5.    Subject to paragraph 7, the applicant make discovery of documents responsive to the categories set out in Schedule C, including (without limitation) any such documents obtained by the applicant:

(a)    in other legal proceedings;

(b)    from the Police Hard Drive;

(c)    pursuant to notices issued under the Bankruptcy Act.

6.    The applicant is to provide electronic copies of the discovered documents pursuant to the discovery request in paragraph 7.

7.    By 19 April 2021, the parties are to confer as to:

(a)    a regime for electronic discovery, and

(b)    keywords for Law In Order to search the Police Hard Drive,

and notify the Associate of the Honourable Justice Davies as to whether agreement has been reached.

8.    The proceeding be listed for a further case management hearing on 7 May 2021.

9.    The applicant’s interlocutory application filed on 18 December 2020 is adjourned to a date to be fixed with liberty to apply.

10.    Costs reserved.

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

“Schedule A”

“Schedule B”

“Schedule C”

Categories of Discovery

No.    VID486 of 2019

Federal Court of Australia

District Registry: Victoria

Division: General

In the matter of:     William Stephen Vlahos, a bankrupt

Philip Newman as Trustee of the property of William Stephen Vlahos, a bankrupt

Applicant

Dean Michael Shannon

Respondent

1.    For the period of 23 February 2004 until 24 February 2014, all documents identifying the source of any deposits into the Vlahos Account.

2.    For the period of 23 February 2004 until 24 February 2014, all documents identifying the recipients of any payments made from the Vlahos Account, including but not limited to all statements, cheque images, transaction traces, deposit slip images, withdrawal and/or transfer authorisation images for the Vlahos Account.

3.    All documents which include an analysis by the applicant or others (including, without limitation, forensic accountants) relating to:

(a)    the source of deposits into the Vlahos Account at any time during the period of 23 February 2004 until 24 February 2014;

(b)    the recipients of payments out of the Vlahos account at any time during the period of 23 February 2004 until 24 February 2014;

(c)    the basis on which any of the above deposits into, or any of the above payments out of, the Vlahos Account were made.

4.    All source documents relied upon by the applicant or applicant’s staff in preparing the analysis of the Vlahos Account set out at pages 99-103 of the exhibit bundle to the Newman Affidavit, and any analysis otherwise referred to in paragraph 3 above.

5.    All documents created on or before 16 December 2013 stating, asserting, or alleging on behalf of a former member of the scheme terms (beyond the mere fact of investment) upon which the Bankrupt received, held or paid out funds provided to him for the purposes of, or purportedly for the purposes of, the scheme the subject of the proceedings.

6.    Correspondence received by the trustee (addressed to the trustee or any other person) from former members of the scheme (or from their solicitors or other agents), stating, asserting, or alleging terms (beyond the mere fact of investment) upon which the Bankrupt received, held or paid out funds provided to him for the purposes of, or purportedly for the purposes of, the scheme the subject of the proceedings. 

7.    Affidavits or pleadings filed in proceedings to which the trustee is a party stating, asserting or alleging on behalf of a former member of the scheme terms (beyond the mere fact of investment) upon which the Bankrupt received, held or paid out funds provided to him for the purposes of, or purportedly for the purposes of, the scheme the subject of the proceedings.

ORDERS

THE COURT ORDERS THAT:

1.    The affidavits filed by the applicant in proceeding VID606/2020 be affidavits in this proceeding.

2.    The applicant is released from his Harman undertaking with respect to the affidavit of Wesley Peter Belt affirmed on 10 July 2017 and filed in this proceeding and is permitted to use that affidavit for his purposes in the proceedings listed in Schedule A.

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

“Schedule A”

REASONS FOR JUDGMENT

DAVIES J:

Introduction

1    Philip Newman (trustee) is the trustee of the property of the bankrupt estate of William Stephen Vlahos (the bankrupt). According to investigations conducted by the trustee, the bankrupt had, prior to his bankruptcy, conducted a gambling scheme known as “the Edge” pursuant to which he collected funds from scheme members, some of whom formed syndicates and sub-syndicates, for the purported purpose of pooling the funds and using them to gamble on horse races. It is the trustee’s view that the gambling scheme was a “Ponzi” scheme, that the bankrupt falsely reported scheme wagering to members by overstating or fabricating the bets placed, the odds obtained and the profits made, and that he used funds contributed by new scheme members to give returns to other scheme members, to pay for his living expenses and as a source of funds for certain companies controlled by him. The trustee has initiated a number of actions to recover payments that the bankrupt made to scheme members as voidable transactions under s 120 of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act), alleging against individual members of the gambling scheme (investors) that returns paid to them were undervalued transactions to the extent by which they exceeded the contributions of that investor to the scheme. Proceeding VID 486 of 2019 against Mr Dean Michael Shannon (Shannon proceeding) is one such action and there are several others currently on foot or which have been resolved. The resolved proceedings include VID 372 of 2017 against Mr Wesley Belt (Belt proceeding). Defences taken by some respondents, including by Mr Shannon, include claims that the funds paid to them by the bankrupt were held on trust by the bankrupt and not paid from funds to which he was beneficially entitled, and were thus not property of the bankrupt to which s 120 of the Bankruptcy Act applies. The defences raise issues of equitable tracing and identification of the sources of money paid back to investors. There are also proceedings in this Court and in the Federal Circuit Court (FCC) brought by some investors to whom the trustee had notices under s 139ZQ of the Bankruptcy Act issued, seeking to have those notices set aside. Mr Shannon is the recipient of such a notice and has filed a cross-claim in the Shannon proceeding seeking to have it set aside. I refer to the s 120 proceedings and the s 139ZQ proceedings together as the investor proceedings.

Release from the Harman undertaking – Shannon and Belt proceedings

2    The trustee and former co-trustee issued a creditors’ report on 17 December 2014 identifying the source of a portion of a total of $155,335,123.21 of deposits into an account controlled by the bankrupt. The source of $80,769,052.19 of deposits was classified by the trustee and former co-trustee as “unknown”. The trustee has deposed that the affidavit of Mr Shannon dated 11 September 2020 filed in the Shannon proceeding (Shannon affidavit) and the affidavit of Mr Belt dated 10 July 2017 filed in the Belt proceeding (Belt affidavit) each contain information of which he was previously unaware and which would assist him in updating the analysis contained in the creditors’ report. By separate interlocutory applications filed on 18 December 2020 in each of the Shannon and Belt proceedings, the trustee has applied to be released from the Harman undertaking in respect of the Shannon affidavit and Belt affidavit for the purpose of using those affidavits to update the analysis of the source of deposits into the bankrupt’s account and for the purposes of the investor proceedings.

3    There may be a question as to whether the Harman undertaking applies to the affidavits filed by Mr Shannon and Mr Belt, given that they did not file their affidavits under compulsion but rather as part of the evidence upon which they would rely in defending the claims against them: see the analysis and authorities referred to in Leagou Pty Limited v Commissioner of Taxation [2020] FCA 1162 by White J at [19]–[27]. However, as this issue was not the subject of submissions and the parties proceeded on the basis that the trustee does require the release from the undertaking, I will proceed on that basis.

4    In my view, it is appropriate to release the trustee from the Harman undertaking in respect of both affidavits for the purpose of using those affidavits to update the trustee’s analysis of the bankrupt’s affairs and for the purposes of the investor proceedings. First, the affidavits contain material that is relevant to the administration of the estate of the bankrupt of which the trustee was previously unaware. Secondly, the affidavits contain information of relevance to matters in the other investor proceedings in which the trustee has made similar voidable transaction claims to recover payments which the bankrupt made to scheme members, and which have a commonality of issues. Thirdly, neither Mr Shannon nor Mr Belt have objected to the release from the Harman undertaking.

Discovery of affidavits of other litigants – Shannon proceeding

5    As well as Mr Shannon and Mr Belt having sworn/affirmed and filed affidavits in the proceedings against them, other litigants in a number of the investor proceedings have also sworn/affirmed and filed affidavits. On 1 May 2020, Mr Shannon requested the trustee to discover certain categories of documents, including all documents evidencing, and/or analysis of, the source of deposits to the bank account operated by the bankrupt and all documents identifying the recipients of any payments from that account. The trustee is of the view that the affidavits of the litigants in the other investor proceedings are discoverable pursuant to the request for discovery. However, because he is subject to the Harman undertaking that those affidavits not be used for purposes other than the proceeding in which they were filed, the trustee seeks, out of an abundance of caution, judicial advice by way of his interlocutory application of 18 December 2020 filed in the Shannon proceeding that he is justified in providing discovery of those affidavits pursuant to the discovery request. The affidavits in question and the proceedings in which they were filed were listed at Schedule B to the interlocutory application.

6    A party’s Harman undertaking will ordinarily yield to the party’s obligation to make discovery. In Esso Australia Resources Limited v Plowman [1995] HCA 19; 183 CLR 10 (Esso), Mason CJ (with whom Dawson and McHugh JJ agreed) stated at 33:

It would be inequitable if a party were compelled by court process to produce private documents for the purposes of the litigation yet be exposed to publication of them for other purposes. No doubt the implied obligation must yield to inconsistent statutory provisions and to the requirements of curial process in other litigation, eg discovery and inspection, but that circumstance is not a reason for denying the existence of the implied obligation.

Nonetheless, the fact that a document is affected by the undertaking is relevant to the question of whether an order for its discovery should be made.

7    I am of the view that the trustee is justified in producing the affidavits in question pursuant to the request for discovery in the Shannon proceeding, if such affidavits properly come within the terms of the discovery request (about which I express no view). First, there is a commonality of issues in all these proceedings and secondly, the categories of documents sought by Mr Shannon are plainly directly relevant to the issues in his proceeding. Each of the deponents to those affidavits was given notice of the trustee’s application. The trustee’s solicitor, Mr Kenneth Chai, deposed to his communications with those deponents:

(a)    Mr Boris Janezic, the applicant in FCC proceeding MLG 315 of 2020, objects to the disclosure of his affidavit filed in that proceeding on the basis that the trustee needed to be released from his Harman undertaking in respect of that affidavit by the FCC;

(b)    Mr Sam Davidson, the applicant in FCC proceeding MLG 319 of 2020, adopted the objections set out by Mr Janezic;

(c)    Mr Alex Ragogna, the applicant in proceeding VID 63 of 2020 before this Court, did not oppose the trustee disclosing his affidavit in the Shannon proceeding by way of discovery;

(d)    Ms Trudi Baker (proceeding VID 365 of 2020), Mr Shane Jenkins (proceedings VID 275 of 2019 and VID 164 of 2020), Mr Stephen McWilliam and Ms Vicki McWilliam (proceedings VID 277 of 2019 and VID 69 of 2020), and Ms Marita Martin (proceeding VID 70 of 2020) (Logie-Smith Lanyon deponents), who shared common legal representation, were concerned to ensure that the discovery of their affidavits was limited to matters relating to the deposit and withdrawal of moneys from the gambling scheme operated by the bankrupt, and that any other private information (including expenditure and bank details) would be redacted; and

(e)    the balance of the deponents either informed the trustee’s solicitors that they neither consented to nor opposed the discovery of their affidavits, or they did not respond substantively to the trustee’s solicitors’ notification of the application.

8    The response to the objections raised by Mr Janezic and Mr Davidson is that the Harman undertaking will yield to the curial process in other litigation: Esso at 33 per Mason CJ (with whom Dawson and McHugh JJ agreed). As to the concerns raised by the Logie-Smith Lanyon deponents, if their affidavits are relevant to the categories of disclosure in the Shannon proceedings – which, as stated above, are plainly directly relevant to the issues in that proceeding – then, absent a court order permitting redaction, there is no legal basis upon which the trustee is required or permitted to redact irrelevant private information of the deponents. The Logie-Smith Lanyon deponents did not seek to be heard on this matter at the hearing. Moreover, as submitted by counsel for Mr Shannon, Mr Shannon will be bound by the Harman undertaking in respect of affidavits disclosed to him by the trustee by way of discovery.

ORDERS

9    Orders will be made in each of the Shannon and Belt proceedings releasing the trustee from the Harman undertaking in respect of the Shannon affidavit and Belt affidavit, respectively. The trustee sought an order that the Belt proceeding be reinstated to facilitate the making of such an order, however this procedural step is not required. I will also make an order in the Shannon proceeding that the trustee is justified in discovering the affidavits filed in other proceedings and listed in Schedule B to the trustee’s interlocutory application of 18 December 2020, as well as an order that the deponents to those affidavits be served with a copy of the orders.

10    The balance of the orders sought in the interlocutory application filed in the Shannon proceeding are the subject of agreement between the parties. The parties provided a revised form of order following the hearing on 2 February 2021 incorporating changes agreed during and subsequent to the hearing and the balance of the orders will be made in substantially that form. At the request of the parties to the Shannon proceeding, the interlocutory application filed on 18 December 2020 will be adjourned to a date to be fixed so that the trustee may seek further orders under that application in relation to any future affidavits which may be filed in current or future investor proceedings.

Associate:

Dated:    24 February 2021