No harm, no foul - Understanding the Harman undertaking

In the case of Re LCM Operations Pty Ltd, 316 Group Pty Ltd (in liq) [2021] FCA 324 the Federal Court considered the question of whether a litigation funder (LCM) could use documents obtained in public examinations in proceedings against a debtor of the company in liquidation.

The debtor claimed that LCM was prevented from using the documents in this way by the Harman undertaking, and that LCM’s use of the public examination process was an abuse of process.

Background

316 Group Pty Ltd (the Company) was placed into liquidation on 10 May 2017.  The liquidator of the Company (Liquidator) identified potential claims against a number of parties including a company named Rabah Enterprises Pty Ltd (Rabah) but did not have sufficient funds to conduct public examinations to investigate these claims.

The Liquidator, the Company and LCM subsequently entered into an assignment deed dated 14 August 2019 (Deed) pursuant to which the Liquidator and the Company sold and assigned the potential claims including the claim against Rabah to LCM in return for $10,000 plus 15% of the net proceeds of the claims.

The creditors of the Company approved entry into the Deed on 12 September 2019.

LCM then applied to ASIC for standing as an “eligible applicant” to pursue examination summonses and production orders to investigate claims in relation to debts due and owing to the Company “most likely from Rabah”.  The application disclosed that the relevant claims had been assigned to LCM pursuant to the Deed.

ASIC authorised LCM as an eligible applicant for the purposes of Div 1 of Pt 5.9 of the Corporations Act 2001 (Cth) (Act) on 4 December 2019.

Between December 2019 and August 2020, LCM applied to the Federal Court for and obtained examination summonses and document production orders in relation to the proposed claim against Rabah.  As part of these proceedings, LCM was granted leave by the Court to uplift, inspect and copy the documents produced to the Court under the summonses and related document production orders.

On 9 September 2020, LCM commenced proceedings against Rabah in the NSW Supreme Court for a debt in the sum of $14.8 million and relied upon the documents obtained by LCM from the public examinations.

Rabah opposed the use of those documents in the NSW Supreme Court proceedings on the basis that:

• pursuant to the Harman undertaking, LCM cannot use the documents obtained in the examinations for use in the NSW proceedings as this was not the purpose for which the documents were produced; and
• in addition, the public examinations by LCM were in any event an abuse of process as they were conducted for the private interests of LCM.

LCM then applied to the Federal Court for leave to use the documents in the NSW proceedings.

The decision

As to the Harman undertaking point, Stewart J noted the following:

• the Harman undertaking is an implied undertaking that binds parties who obtain documents via a compulsory court process and prevents them from using those documents for a different purpose to that for which they were produced;
• the Harman undertaking can only be released with the leave of the court;
• documents produced under an examination summons or related production order are clearly subject to the Harman undertaking;
• however, there is clearly no impediment on a liquidator using documents produced for a public examination in subsequent proceedings to get in and realise assets of the company, as this is consistent with the purpose of document production in relation to public examinations; and
• in this case, LCM was an eligible applicant and conducted the examinations for the stated purpose of investigating the claim against Rabah.  As a result, the use of the documents in the claim against Rabah is the very same purpose for which they were obtained in the examinations.

Stewart J therefore concluded that leave was not required, and LCM was entitled to use the documents in the NSW proceedings.

As to the abuse of process point, Stewart J noted that:

• the public examinations were not conducted for a purely private process, as the Liquidator and the Company held a 15% interest in the claim against Rabah which, based on the value of the claim, was a substantial interest;
• as a result, the examinations had a mixed purpose, being LCM’s own interests as well as the interests of the Company and its creditors;
• the authorities have confirmed that so long as part of the process is for the demonstrable benefit of the company in question then the use of the Part 5.9 procedure will not be an abuse of process; and
• in any event, Rabah never challenged the issue of the examination summonses or the production orders, and the relevant orders exist in fact and have legal effect unless and until set aside.  

Lavan comment

This case is a useful reminder about the operation of the Harman undertaking and the limits for purposes on which parties can use documents obtained in court proceedings.  However, it also dispels any doubt about whether a liquidator or a properly authorised eligible applicant can use documents obtained in a public examination to pursue the claim being investigated in the examination.

If you have any questions about the Harman undertaking or the use of documents obtained in public examinations, the experienced Lavan team is here to help.