Court endorses liquidator's summons to receiver - Lamb (in his capacity as Liquidator of Redcastle Estate Pty Ltd) v Mentha [2010] FCA 695

Background

Recently, in Lamb (in his capacity as Liquidator of Redcastle Estate Pty Ltd) v Mentha [2010] FCA 695, the Federal Court dismissed an application by Mark Mentha, the former receiver of a company in liquidation, to have summonses that had been issued to him and two of his colleagues pursuant to section 596B of the Corporations Act 2001 (Cth) (Act), set aside on grounds that they were an abuse of process.

Facts

In February 2001, Mentha was appointed as receiver and manager of Redcastle Estate Pty Ltd (Redcastle).

On 25 June 2002, Mentha on behalf of the Redcastle entered into a contract of sale to sell some commercial property (Property) owned by Redcastle for $7 million.

On 26 April 2007, as a result of resolutions passed by its members and creditors, Redcastle was wound up and the plaintiff, Mr Lamb, was appointed as its liquidator.

On 29 April 2008 the liquidator, for and on behalf of Redcastle, commenced a proceeding in the Supreme Court of Victoria against Mr Mentha claiming that he had sold the Property to the purchaser at an undervalue and had breached his duties under sections 180, 181 and 420A of the Act, thereby causing loss and damage to Redcastle.

In April 2008, Mr Mentha was served with a summons issued pursuant to s 596A of the Act which required him to attend the Supreme Court of Victoria for examination and to produce a number of documents. Mr Mentha was examined by the liquidator in relation to the examinable affairs of Redcastle on 19 May and 11 June 2008 before the Supreme Court.  In particular, he was examined in relation to the steps he undertook in relation to the valuation, marketing and sale of the Property.

In the course of his examination, Mr Mentha said that on or around 24 April 2002 he did not have any further involvement in negotiations in relation to the sale and purchase of the Property.  He said, in substance, that he was not involved in the details of the sale of the Property and that that part of the transaction was undertaken by Messrs Korda and Ryan.

Accordingly, on 17 March 2010, the liquidator made an application, pursuant to section 596B of the Act to order that Messrs Korda and Ryan be summonsed to appear for examination in relation to Redcastle’s examinable affairs.  The liquidator also sought orders from the Court that each of the examinees produce documents relating to the valuation, marketing, realisation and sale of the Property.

In June 2010, Messrs Mentha, Korda and Ryan made an application for, amongst other things, orders that the summonses be set aside on grounds that they had been issued for an improper purpose and therefore constituted an abuse of process.

Decision

In dismissing the application, Goldberg J recited the relevant principles to be applied in applications of this kind, namely that:

• in order to set aside an order for examination it must be established that the improper purpose alleged is at least the predominant purpose for the examination¹;
  
  
• it is not an improper purpose to seek an order for examination while litigation is pending against the person, the subject of the summons or entities connected with that person²; and
  
  
• if the party seeking the examination summons is doing so for 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 procedure in section 596B will not be an abuse of process.

In the circumstances of the case, His Honour determined that:

• the predominant purpose for seeking the examinations fell within the ambit of proper purposes, and, in substance the liquidator sought to 'fill in the gap which was exposed in [Mr Mentha’s] examination'.  That is, the summonses issued to Messrs Korda and Ryan were directed towards bridging the information gap that existed in relation to the valuation, marketing and sale of the Property;
  
  
• the proposed examinations might have the effect of assisting the liquidator in evaluating the relative strength or weakness of Mr Mentha’s case but that purpose was not improper, and, even if it was considered to be improper it was not the predominant purpose;
  
  
• Mr Mentha’s concern that the examinations may be used as an occasion for a dress rehearsal of Messrs Korda and Ryan’s evidence in the Supreme Court proceedings could be mitigated by limiting the substance of the examinations to the specific subject matter referred to in the liquidator’s supporting affidavit; and
  
  
• he would exercise his power under section 596F(1) of the Act and direct that the examinations be limited to any negotiations which related to the purchase price of Redcastle’s property with its purchaser, or any person on its behalf, and the impact that the sale had on the fixing of the purchase price of Redcastle’s property.

Comment

The decision reaffirms the Court’s willingness to construe the provisions of section 596B liberally, so as to enable liquidators of a company (and by analogy voluntary administrators of a company) to utilise the section’s coercive powers to progress their investigations into the affairs of a company.

The critical factor in any application to set aside a summons issued pursuant to section 596B is whether the proposed examination has been initiated for a purpose of benefiting the company to which the examination relates.  If they do, then it would seem that the Courts’ prevailing attitude is that it does not matter that in permitting the examination the eligible applicant will obtain a forensic advantage against the proposed examinee in pending or foreshadowed proceedings.

For further information please contact:

Alison Robertson, Partner on 08 9288 6872 / alison.robertson@lavanlegal.com.au; or
Wayne Zappia, Senior Associate on 08 9288 6931 / wayne.zappia@lavanlegal.com.au