The Federal Court of Australia in Cunningham (Trustee) v Gapes, in the matter of Gapes (Bankrupt) [2017] FCA 787 has found that the proceeds of a deceased person’s superannuation fund received by a bankrupt by way of a distribution from the deceased’s estate was after-acquired property of the bankrupt and so vested in the trustee of the bankrupt’s estate.

The bankrupt (“Bankrupt”) was a named executor and beneficiary of the will of his mother. After her death, in accordance with the terms of her will, the proceeds of her superannuation fund were distributed to her beneficiaries, one of whom was the Bankrupt. The Bankrupt’s share of the money was apparently paid directly to his wife (“Wife”). The trustee of the Bankrupt’s estate (“Trustee”) brought an application seeking declarations and orders that the money was after-acquired property vesting in the Trustee pursuant to the Bankruptcy Act 1966 (Cth) and that the Wife transfer the money to the Trustee. The Trustee subsequently brought an interlocutory application seeking summary judgment.

Relevant provisions

Section 58(1) of the Bankruptcy Act contains the general rule for the vesting of property when a debtor becomes bankrupt. It provides that the property of a bankrupt, not being after-acquired property, vests forthwith in the trustee, while after-acquired property of the bankrupt vests in the trustee as soon as it is acquired by, or devolves on, the bankrupt. Under s 58(6), “after-acquired property” is property that is acquired by, or devolves on, the bankrupt on or after the date of the bankruptcy, being property that is divisible amongst the creditors of the bankrupt.

Section 116(1) of the Bankruptcy Act identifies the property that is divisible amongst the bankrupt’s creditors. Relevantly, s 116(1)(a) provides that all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge, is property divisible amongst the creditors of the bankrupt.

However, s 116(2) limits the operation of s 116(1) by excluding certain property so that that property is not divisible amongst the bankrupt’s creditors. Section 116(2)(d)(iii) and (iv) relevantly provide that subsec (1) does not extend to the following property:

“(d) …

(iii) the interest of the bankrupt in

(A) a regulated superannuation fund (within the meaning of the Superannuation Industry (Supervision) Act 1993); …

…

(iv) a payment to the bankrupt from such a fund received on or after the date of the bankruptcy, if the payment is not a pension within the meaning of the Superannuation Industry (Supervision) Act 1993.”

The claims

The Trustee claimed that the money received by the Wife fell within s 116(1)(a) of the Bankruptcy Act and so was property divisible amongst the Bankrupt’s creditors, and vested in the Trustee pursuant to s 58(1). Collier J, who heard the summary judgment application, said (at [14]-[15]) that “devolve”, as used in ss 58 and 116(1), had the meaning of “to pass from a person dying to a person living” and that the money paid to the Wife had derived from the superannuation fund of the deceased and had apparently “devolved” on the Bankrupt from the deceased’s estate.

However, the Wife claimed that the payment of the money fell within s 116(2)(d)(iii) and (iv) of the Bankruptcy Act which excludes the operation of s 116(1)(a), and relied upon the Federal Court’s decision in Trustees of the Property of Morris (Bankrupt) v Morris (Bankrupt) [2016] FCA 846 (“Morris”) in support of this claim. It was also claimed on behalf of the Wife that the money had been received at a time when the Wife was unaware that the Bankrupt’s bankruptcy had been extended and that it had since been dispersed by the Wife.

It was not in dispute that the deceased’s superannuation fund was a regulated superannuation fund within the meaning of the Superannuation Industry (Supervision) Act 1993 (Cth) (“SIS Act”).

The decision

Collier J was satisfied that the outcome of the Trustee’s substantive application was a foregone conclusion and that the Trustee was entitled to an order for summary judgment. Her Honour’s reasons were as follows (at [19]-[28]):

• The superannuation funds of the deceased had been paid by the fund to the estate of the deceased and the money had then been paid to the Bankrupt in the course of the administration of the deceased’s estate. The fund had made no payments of any kind directly to either the Bankrupt or the Wife.
• Therefore, it could not be said that the money represented “the interest of the bankrupt in a regulated superannuation fund” within s 116(2)(d)(iii)(A), or “a payment to the bankrupt from such a fund” within s 116(2)(d)(iv). The term “such a fund” in s 116(2)(d)(iv) meant “a regulated superannuation fund” within the meaning of the SIS Act as set out in s 116(2)(d)(iii)(A). The evidence showed that the interest in the superannuation fund was that of the deceased, not the Bankrupt, and that there had been a payment from that superannuation fund to the deceased’s estate.
• That the money may have originally derived from a regulated superannuation fund in which the deceased had an interest did not mean that it bore that character by the time that it was paid to the Bankrupt in his capacity as a beneficiary of the estate. Otherwise, a bankrupt would be able to avoid property being made divisible to creditors so long as he or she could show that its genesis was from a third party superannuation fund, irrespective of how many hands such funds had passed through. The evidence showed that the Bankrupt had no interest in the deceased’s superannuation fund and that he was not a member of the fund. He had an interest in the residue of the deceased’s estate, and, accordingly, an interest in that part of the deceased’s estate which was moneys paid by the superannuation fund to the deceased’s estate. His only claim on those moneys was by reference to the deceased’s will and the bequest to him of a one-third share in her estate as a tenant in common with the other beneficiaries.
• The facts of the case were clearly distinguishable from those in Morris where the bankrupt person, the widowed spouse of a member of two regulated superannuation funds, had received payments made directly to her from the funds as a result of the exercise of the discretion by the trustees of those funds in her favour. There was no evidence in the present case that the regulated superannuation fund in which the deceased had an interest made any direct payments to the Bankrupt, or that there had been any exercise by the trustees of that fund in favour of the Bankrupt as distinct from the deceased estate of its member.
• It was irrelevant that the Wife allegedly had known nothing of the extension of the Bankrupt’s bankruptcy at the time the money was paid to her or that she had apparently dispersed the money.

The Supreme Court of New South Wales in Seven Network (Operations) Limited v Amber Harrison [2017] NSWSC 952 has ordered that the defendant in the proceedings pay indemnity costs because her conduct had been unreasonable, resulting in the incurring of unnecessary and significant legal costs by the plaintiffs. The decision, by Sackar J, serves as a timely reminder that civil litigation must be conducted responsibly and, at all times, with due regard to the risk of an unfavourable costs order being made in the event of a lack of success.

The proceedings concerned alleged breaches by the defendant of her contract of employment with the first plaintiff, and of a deed of release which the defendant had subsequently entered into with the plaintiffs. In particular, the plaintiffs alleged that the defendant had breached clauses of the deed of release which:

• imposed confidentiality and non-disclosure obligations on the defendant;
• imposed obligations on the defendant to return company property; and
• contained a release by the defendant discharging the plaintiffs from and against all claims she could have against them and providing that the plaintiffs could rely on the deed as a complete bar to any claims, to the extent permitted by law.

According to Sackar J (at [61]), the proceedings from the outset were “engulfed in a vitriolic atmosphere” and the allegations made by both sides, whether completely true or not, were often ”personal, scandalous, and sadly ripe for media and public consumption.”

A few days before the commencement of the final hearing of the proceedings, the defendant tweeted that she had made a realistic assessment of her case and was choosing not to run it. On the next day, she notified the Court that she had terminated her lawyer’s retainer and would not be attending the hearing in person on the date fixed for the commencement of the hearing.

The plaintiffs then sought, amongst other things, final injunctive relief restraining the defendant from breaching her obligations under the deed of release, an order that the defendant return all the plaintiffs’ property to them, declaratory relief reflecting the defendant’s breaches of the deed of release and employment contract, and costs on an indemnity basis. The defendant did not oppose the injunctive relief or the return of company property but opposed the declaratory relief and the indemnity costs order. She sought an order that each party bear its own costs.

Liability

On the question of liability, Sackar J found (at [46]-[48]) that the defendant had been bound by the terms of the deed of release at all times and had engaged in numerous breaches of the deed of release and employment contract. Those breaches, his Honour said, had been persistent and flagrant. His Honour further said that the allegations concerning the breaches had never been challenged by admissible evidence in the Court, although they had been the subject of a media campaign waged by the defendant. Accordingly, his Honour considered that it was appropriate to grant declaratory relief.

Costs

On the question of costs, Sackar J made the following observations (at [57]-[59]). References to the cases have been omitted.

• The Court’s discretion to determine by whom, to whom and to what extent costs were to be paid was recognised in s 98(1) of the Civil Procedure Act 2005 (NSW).
• The usual rule was that costs followed the event and were payable on an ordinary basis, as provided for by rr 42.1 and 42.2 of the Uniform Civil Procedure Rules 2005 (NSW).
• Given the Court’s largely unfettered discretion to award costs, the Court could depart from the usual rule, including making an order that each party bear its own costs or an order that costs be awarded on an indemnity basis.
• There were no exhaustive or determinative categories which justified a Court exercising its discretion in departing from the usual rule, the question always turning on whether the facts and circumstances of the particular case justified the making of an order for the payment of costs other than on a party and party basis.

His Honour then made a number of key points about the facts and circumstances of the proceedings which, in substance, were as follows (at [62]-[76]). References to the cases have been omitted.

• Litigation was not a game but a serious business with serious consequences for the parties, winners and losers, alike. It was rare that even a successful party recouped its legal expenses, whether or not indemnity costs were awarded.
• Every experienced litigator learned early in their career that costs consequences had always to be factored into the legal landscape of any litigation and this was even more so when the proceedings were heated and acrimonious as were the proceedings before the Court.
• The defendant’s decision to persist in running a case without any admissible evidence to rely upon reflected a real disregard for any adverse costs consequences that would follow from such conduct. She had had every opportunity at earlier stages of the proceedings to bring the proceedings to an end, including, after adverse interlocutory findings had been made against her, accepting a Calderbank letter in which the plaintiffs had made an offer of settlement. If that Calderbank letter had been accepted, she would not have borne the plaintiffs’ costs.
• Instead of making a “realistic assessment” of her case at an earlier stage, the defendant, who had been represented by highly skilled, competent and reputable lawyers, had chosen to file and maintain a cross-claim claiming that the plaintiffs had breached the deed of release, the employment contract and the adverse action provisions of the Fair Work Act 2009 (Cth), and to commence proceedings in the Federal Court of Australia claiming that the plaintiffs had contravened the Fair Work Act.
• The question of what evidence she was ever going to deploy must have been the subject of active and ongoing consideration and, whilst lawyers could assist in the drafting of documents, it was ultimately in the client’s hands to produce the factual materials to support the case. Yet the defendant had made no apparent attempt to substantiate the allegations and file evidence in genuine efforts to support her pleadings.
• Any experienced litigator would know serious costs consequences could flow from the lack of success in proceedings if allegations remained unsubstantiated, and it could be inferred that the defendant was informed of this by her lawyers and that her allegations were not substantiated by evidence because no such evidence existed.
• Furthermore, the defendant had freely entered into the deed of release with legal advice, and the obligations in that deed were not imposed upon her but were the subject of negotiation.
• It was a fundamental principle of the law that persons should be held to their contracts. With the defendant failing to honour the deed of release on numerous and repeated occasions, and persisting with her cross-claim, the plaintiffs had every entitlement to commence proceedings to protect their rights under the deed and to take the proceedings seriously given the reputational damage at stake, and had conducted the proceedings in an orthodox and proper fashion. Irrespective of the depth of their pockets, the plaintiffs would be significantly out of pocket following the proceedings – a position they would not have found themselves in had the defendant chosen to capitulate at an earlier time.
• The defendant’s financial position would not be factored into the determination of costs. The defendant’s assertion of impecuniosity as grounds for why costs orders should not be made against her was unsupported by any evidence in admissible form and, in any case, while parties’ financial positions could be relevant to the question of security for costs, in principle, the parties’ relative financial positions were not relevant to the question of whether each party should bear its own costs. No principle existed that the costs discretion would be exercised in such a way as to ensure that orders were not made against a party who was not in as good a position to bear the legal costs as the party in whose favour they were made.

Sackar J then considered the defendant’s claim that each party should bear its own costs and made the following points (at [79]-[83]). References to the cases have been omitted.

• The losing party was required to, and the Court had to be satisfied of, some “exceptional measure” to justify depriving a successful party of their costs. In the absence of any admissible evidence to rely on, the defendant had not satisfied the Court of any grounds for why she should not pay the costs of the plaintiffs, at least on an ordinary basis, as the unsuccessful party in the proceedings.
• The defendant’s failure to provide the Court with any evidence of circumstances that could justify the Court taking the exceptional measure of ordering each party to bear its own costs spoke to the weakness of her claim for such an order. Given that she had retained experienced and reputable lawyers up until shortly before the hearing, presumably the defendant was given proper advice on the costs consequences of a belated capitulation in proceedings which were hotly contested, and the need to devise a fall-back position regarding costs.

Accordingly, his Honour found that it was not appropriate to order each party to bear its own costs.

As to whether the defendant should be ordered to pay indemnity costs as sought by the plaintiffs, his Honour made the following points (at [84]-[88]). References to the cases have been omitted.

• The Court could also depart from the usual order for ordinary costs by awarding costs on an indemnity basis under s 98(1) of the Civil Procedure Act. Such departure was again only appropriate where there were special circumstances which justified the losing party being required to compensate the successful party for the legal costs incurred by reason of the proceedings.
• Most commonly, an award of indemnity costs would be appropriate where a party had maintained proceedings that they should have known had no real prospect of success. Other circumstances where such an award could be appropriate included where allegations had been made which should never have been made, or the proceedings were prolonged by groundless contentions.

His Honour then concluded (at [89]) that, in all the circumstances of the case, it was appropriate to order that the defendant pay the plaintiffs’ costs of the proceedings, including the defendant’s cross-claim, on an indemnity basis. This was because the defendant had decided to contest a claim and run a cross-claim mounted on allegations she could not substantiate, and had continued to run this case in the face of adverse interlocutory findings, settlement offers, and a complete absence of evidence. His Honour said that this conduct was unreasonable, resulting in the incurring of unnecessary and significant legal costs by the plaintiffs, and that the making of such an order was not, as had been claimed by the defendant, to punish her “for taking a stand’, but was rather necessary and appropriate to compensate the plaintiffs for the unreasonable costs incurred in the proceedings.

Introduction

The New South Wales Court of Appeal in Rolleston v Insurance Australia Ltd [2017] NSWCA 168 has upheld the decision of a judge at first instance to reject a valuation report concerning certain land as expert opinion. The judge had rejected the valuation report on the basis that it did not satisfy s 79 of the Evidence Act 1995 (NSW) and that, if it had satisfied that provision, he would have excluded it under s 135 of the Evidence Act.

Relevant provisions

Section 79 of the Evidence Act is an exception to the opinion rule contained in s 76 of the same Act which provides that evidence of an opinion is not admissible to prove the existence of a fact about the existence of which the opinion was expressed. Section 79 deals with expert opinion and provides that, if a person has specialised knowledge based on the person’s training, study or experience, the opinion rule does not apply to evidence of an opinion of that person that is wholly or substantially based on that knowledge.

Section 135 of the Evidence Act confers on the court a general discretion to exclude evidence. It provides that the court may refuse to admit evidence if its probative value is substantially outweighed by the danger that the evidence might be unfairly prejudicial to a party, might be misleading or confusing, or might cause or result in undue waste of time.

Background

The valuation report was tendered as evidence in proceedings brought by an insured person against an insurer. The insured had been the owner of property on which a residential building was being constructed when a fire broke out and caused substantial damage to the building. The property had been insured against fire for an agreed sum of $4.2 million with the insurer but the insurer had refused the insured’s claim under the policy on various grounds. The insured had sold the property in its damaged state and then brought proceedings against the insurer in the Supreme Court of New South Wales seeking loss and damage arising from the fire damage to the property that had adversely affected its market value. He claimed an amount of around $3.4 million, representing the difference between what he asserted would have been the value of the property on the date of its sale if the fire damage had been fully rectified, said to be $7.5 million, and the amount realised by him when he sold the property in its damaged state on that date, being $4,068,000.

Valuation report

The valuation report was the only evidence relating to the value of the property adduced by the insured. The valuation report, amongst other things:

• set out the valuer’s instructions which were to give his opinion as to what the market value of the property would have been as at the date of sale, on the assumption that the fire damage to the property had been fully rectified prior to that time;
• indicated that a series of sales had been inspected, a selection of which was set out, and then described seven properties in the same area as the subject property that had been sold in the period of about 16 months leading up to the date of sale of the subject property for prices ranging from $5.25 million to $11.06 million;
• indicated that a “direct comparison approach” had been adopted which involved comparing the subject property with sales of “other relatively comparable properties”, making adjustments for points of difference, having regard to various factors;
• explained that variation in the values of the seven properties reflected various characteristics such as location, land size, views and the like and said that the most comparable properties were four of the seven properties which were then described and which ranged in value between $6.7 million and $11.06 million;
• stated that the most comparable sales ranged in value between $6.7 million and $9.25 million, referring to three of the four properties;
• expressed the view that Property 1 was “broadly comparable overall”, Property 2 was “superior overall”, Property 3 was “inferior overall”, and Property 4 was “far superior overall”;
• concluded that, on a direct comparison basis, the sales evidence supported a valuation assessment for the subject property of $7.5 million; and
• stated that the market value of the subject property, assuming that the fire damage had been fully rectified prior to sale, was $7.5 million.

Decision at first instance

At first instance, the trial judge made the following points in relation to the valuation report:

• There was no identified reasoning to show how the sales data identified by the valuer supported the figure of $7.5 million.
• There was a substantial amount of work to be done to finish the construction and bring the building on the subject property into a state where it would be fit for sale but there was nothing in the valuation report which showed why the subject property was considered to be worth more, in its incomplete state, than Property 1 which had been sold for $7.35 million some five months earlier and which was identified as being “broadly comparable”.
• No data had been provided to support an assertion made by the valuer in relation to some of the properties that “local residential market having improved post this transaction”.
• The valuation report did not show that the conclusion expressed by the valuer was based on, or the result of, the application of his specialised knowledge to the facts stated in the valuation report.

Accordingly, the trial judge rejected the valuation report on the basis that it did not satisfy s 79 of the Evidence Act. His Honour then went on to say that, in any event, if the valuation report had satisfied s 79, he would have excluded it under s135 of the Evidence Act because it would have been wholly unfair to the insurer to expect it to elucidate the valuer’s reasoning process in the course of cross-examination and then to challenge that process without the opportunity to reflect on it.

In the result, the trial judge found that the insurer was liable under the policy and awarded the insured the amount of $991,946 together with interest. The amount of $991,946 was the cost of the rectification of the fire damage to the building which had been agreed upon by the parties for the purpose of the proceedings.

The insured appealed to the Court of Appeal on the basis that the trial judge had erred in rejecting the valuation report.

Decision on appeal

The Court of Appeal dismissed the appeal.

Emmett AJA (Beazley P and Meagher JA agreeing) summarized the relevant principles in relation to s 79 of the Evidence Act as follows (at [32]-[34]). References to the cases have been omitted.

• The requirement in s 79 that the opinion be based on specialised knowledge would normally be satisfied by the person who expresses the opinion demonstrating the reasoning process by which the opinion was reached, provided that it exposes the author’s reasoning in a way that shows that the opinion is based on particular specialised knowledge.
• Evidence not satisfying this might be inadmissible as being irrelevant; as not complying with s 79; or on discretionary grounds under s 135.
• Before s 79 will be satisfied, the evidence must explain how the field of specialised knowledge in which the person is expert applies to the facts assumed or observed so as to produce the opinion expressed. If that matter is not made explicit, the court cannot be sure whether the opinion is based wholly or substantially on the specialised knowledge of the person and so the evidence will be, strictly speaking, not admissible.
• The requirement that the opinion be based wholly or substantially on specialised knowledge is an explicit precondition of admissibility and must be established by the party tendering the evidence in examination-in-chief either during the trial or on the voir dire. As s 79 requires the opinion to be wholly or substantially based on the person’s specialised knowledge, the person’s opinion should be confined to this. Otherwise, the person may invest the “opinion” with a spurious appearance of authority, with the result that legitimate processes of fact finding may be subverted.

Emmett AJA made the following comments about the valuation report (at [22]-[24]):

• Although the valuer considered Property 4, which was sold for $11.06 million two months before the date of sale of the subject property to be one of the four most comparable properties, he did not explain why it was not within his assessed range which was given as $6.7 million to $9.25 million.
• The valuer failed to explain why the four properties selected were considered “most comparable” whereas the three other properties that he had investigated were not regarded as comparable.
• The valuer gave no explanation by reference to the criteria adopted by him as to why the subject property was inferior or superior to the seven properties he had investigated.
• In relation to four of the seven properties, the valuer had included the comment “local residential market having improved post this transaction” but had not explained what he had meant by this or how that fact was taken into consideration, if at all, in forming his opinion as to the value of the property.

Emmett AJA then concluded (at 35]) that there had been no error on the part of the trial judge in rejecting the tender of the valuation report. His Honour said that the valuation report did not demonstrate how the opinion expressed by the valuer was based on his specialised knowledge as there was nothing in the report to explain how the sales of the four most comparable properties for prices of $7.35 million, $9.25 million, $6.7 million and $11.06 million had led to his conclusion that the property would be likely to have a value of $7.5 million as at the date of its sale, on the assumption that the fire damage had been rectified.

His Honour went on to say (at [36]-[39]) that, in any event, had the Court concluded that the valuation report should not have been rejected, there would have been little utility in returning the matter to the trial judge to enable the valuer to be cross-examined on behalf of the insurer. This was because the valuation report contained no material that supported a conclusion that there was a difference between the price that might have been realised for the property had the fire damage been rectified in full, on the one hand, and the price realised for the property, on an arms-length sale, plus the cost of that rectification, on the other hand. His Honour said that, in the absence of any such material, it seemed highly likely that the difference between the value that the property would have had, had the rectification been carried out, and the value that it had without carrying out the rectification would have been the cost of rectification. Thus, as the property had been sold for $4,068,000 in its fire damaged state and it was agreed that the cost of rectification was $991,946, it was likely that the value of the property at the date of sale with the damage rectified was about $5 million. His Honour said that in these circumstances, whatever the valuer might say in cross-examination would be unlikely to throw any light on the question of why the difference between the value before rectification and the value after rectification would not simply be the cost of rectification.

Additional observations

Meagher JA made some additional observations, with which Beazley P agreed. Those observations were as follows (at [4]-[6]):

• The valuer had adopted the comparable sales method which could involve deriving, from the comparable sales, measures of value for particular characteristics and applying those measures to the property being valued, and the making of adjustments to comparable sale prices to take account of differences in those characteristics as between the comparable sale properties and the property being valued.
• While these and other analyses carried out by the valuer would involve estimate, inference and other judgments that were probably not going to be precise, the valuer was still required to set out the process by which this method had been followed.
• It was not sufficient, as had happened in the case before the Court, for the valuer to identify in “fairly general terms” the similarities and differences between the comparable sale properties and the subject property, and then to express an opinion as to the value of the subject property. The valuer had to explain, in a way which demonstrated the application of the methodology adopted by him and specialised knowledge, how the comparable sales justified the conclusion reached as to value.

Introduction

The Full Court of the Federal Court of Australia in Australian Securities and Investments Commission, in the matter of Whitebox Trading Pty Ltd v Whitebox Trading Pty Ltd [2017] FCAFC 100 has held that Ch 2 of the Criminal Code (which is the Schedule to the Criminal Code Act 1995 (Cth)) has no application to proceedings brought for a breach of a civil provision, including a civil penalty provision, under the Corporations Act 2001 (Cth) (“CA”) and, therefore, has no application to s 1041A or s 1041B(1) of the CA when made the subject of such proceedings.

Background

ASIC had commenced proceedings in the Federal Court seeking relief against the defendants based on alleged breaches of ss 1041A and 1041B of the CA. These provisions prohibit market manipulation, and false trading and market rigging respectively and an alleged breach of either provision may result in:

• criminal proceedings, by reason of s 1311 of the CA which makes a failure to comply with the provisions an offence and by the balance of Pt 9.4 of the CA which contains detailed provisions dealing with offences including s 1308A which provides that, subject to the CA, Ch 2 of the Criminal Code applies to all offences against the CA;
• civil proceedings, by reason of s 1317E of the CA which makes the provisions civil penalty provisions and by the balance of Pt 9.4B of the CA which deals with the civil consequences of contravening civil penalty provisions.

Sections 1317M, 1317N and 1317P of the CA recognise that, in some circumstances, both criminal and civil proceedings may take place for substantially the same conduct.

In the case in question, there was no allegation made by ASIC that the defendants had committed a criminal offence. Only civil proceedings were on foot, with ASIC seeking relief which included declarations of contravention under s 1317E and pecuniary penalties flowing from such declarations under s 1317G(1A). However, there was some uncertainty as to what ASIC needed to prove in the case because a judge of an earlier Full Federal Court in Gore v Australian Securities and Investments Commission [2017] FCAFC 13; (2017) 341 ALR 189 (“Gore”) had made obiter observations and conclusions to the effect that Ch 2 of the Criminal Code applied to civil proceedings brought in relation to allegations of being an accessory to breaches of s 727(1) and (2) of the CA. These observations and conclusions had been endorsed by the other two members of the Full Court.

As ASIC had been successful in the relevant aspects of Gore, it had not applied for special leave to appeal to the High Court of Australia which would have enabled clarification of the law, and the other party in Gore had not sought special leave either (see ASIC’s media release 17-192MR dated 21 June 2017). Accordingly, the method by which ASIC sought to obtain clarification was to have a question arising in the current proceedings be heard separately from any other questions. That separate question, as subsequently slightly modified, was as follows:

In proceedings brought for the imposition of a civil penalty for a contravention of s 1041A or s 1041B of the CA is Ch 2 of the Criminal Code engaged, subject to any contrary indication in the CA as to any specific provision thereof?

The Chief Justice of the Federal Court ordered that the separate question be heard by a Full Court and that ASIC arrange for solicitors and appropriate senior counsel to act as amicus curiae and contradictor because the defendants did not wish to take an active role in the determination of the separate question.

Decision

The Full Federal Court (Allsop CJ, Middleton and Bromwich JJ) considered what ASIC would need to prove in civil proceedings concerning ss 1041A and 1041B if Gore was found to be correct and Ch 2 of the Criminal Code was to apply to those proceedings (at [8]-[10]). This included looking at the differences between federal criminal proceedings, ordinary civil proceedings and civil penalty proceedings (at [11]-[14]). The Full Court then made the following points (at [15]-16]):

• A mental element being required to be established could be the difference between proceedings being viable or not.
• In criminal proceedings, not being able to prove a necessary state of mind beyond reasonable doubt was not just a significant reason for acquittal, but a significant reason for criminal proceedings not being commenced or maintained in the first place.
• If a similar requirement to prove criminal fault elements was to apply to civil penalty proceedings, this would have an important impact on the decision whether to commence criminal proceedings or civil penalty proceedings, not least by narrowing the difference between these two types of proceedings.
• The answer given to the separate question, accordingly, would affect significant public interests because of the constraints that this could place on regulators successfully enforcing, and being seen to enforce, statutory prohibitions, especially by way of civil penalty proceedings, and would also likely to have importance for other forms of civil proceedings collateral to and arising out of an alleged breach of a civil penalty provision.
• Therefore, the separate question raised an issue of fundamental importance not just for the hearing of the current civil proceedings before the Court, but also for the operation of Pt 9.4B of the CA which went well beyond cases concerning only ss 1041A and 1041B and included the operation of the regime of collateral civil consequences for breaching civil penalty provisions elsewhere in Pt 9.4B.

The Full Court then carried out a textual analysis of the key provisions of the CA for the purposes of the separate question and concluded that, upon a textual basis, Ch 2 of the Criminal Code had no application to the proceedings (at [27]-[36]).

However, because the issue was important not just to all civil proceedings for a pecuniary penalty, but also to any civil ancillary relief based on statutory norms of the kind created by ss 1041A and 1041B(1), the Full Court also undertook a detailed contextual analysis which included the legislative history of those provisions. The Full Court then found that contextual and historical legislative considerations supported the textual conclusion that Ch 2 of the Criminal Code had no application (at [37]-[71]).

The Full Court then concluded as follows (at [72]):

• In the case of those norms which are listed as civil penalty provisions in s 1317E(1) of the CA, proof to the civil standard of a failure to comply with the norm on the balance of probabilities is sufficient to establish a breach. That leaves for determination at the hearing what is required to be established based on the text of the individual norm provision, including as to any mental element.
• In the case of those norms in the CA which are made offences, either by express language within the norm provision (for example, s 184 which provides that directors of a corporation and certain others commit offences if they engage in certain specified activities), or by virtue of the operation of s 1311 to create an offence based on the norm (for example, ss 1041A and 1041B(1)), criminal proceedings may ensue, in which case Pt 9.4 applies, and by virtue of s 1308A, Ch 2 of the Criminal Code applies to such offences and to proceedings for such offences, but no further.

Accordingly, the Full Court held that the answer to the separate question was in the negative and that Gore was wrong on this issue (at [7] and [73]).

Introduction

The Full Court of the Federal Court of Australia in Kimberley Diamonds Ltd v Arnautovic [2017] FCAFC 91 has rejected a claim by a liquidator of a company that an examination summons issued under s 596A of the Corporations Act 2001 (Cth) (“CA”) to examine him about the examinable affairs of the company was an abuse of process.  In rejecting the claim, the Full Court provided clarification on the statutory scheme concerning examination summonses in Pt 5.9 of the CA.

Relevant provisions

Part 5.9 of Ch 5 of the CA contains miscellaneous provisions concerning external administration, including the winding up of corporations. Division 1 of Pt 5.9 deals with the examination of persons about a corporation’s examinable affairs and relevantly includes the following provisions:

• s 596A which deals with mandatory examinations – when the Court is to summon a person for examination about a corporation’s “examinable affairs” (defined in s 9 of the CA and expanded upon in s 53 of the CA);
• s 596B which deals with discretionary examinations – when the Court may summon a person for examination about a corporation’s examinable affairs;
• s 596C which provides that a person who applies under s 596B must file an affidavit that supports the application and complies with the rules;
• s 596D which deals with the contents of the summons and provides, amongst other things, that a summons under s 596A or s 596B may require the examinee to produce at the examination specified books in the examinee’s possession;
• s 596F which enables the Court to give directions about certain things relating to an examination;
• s 597 which provides, amongst other things, that 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, and may direct a person to produce books in their possession which are relevant to matters to which the examination relates; and
• s 597B which empowers the Court, where satisfied that a s 596A or s 596B summons was obtained without reasonable cause, to order some or all of the costs incurred by the examinee to be paid by the applicant or any person who took part in the examination.

Division 11 of the Federal Court (Corporations) Rules 2000 (Cth) contains rules in relation to examinations and orders under Pt 5.9 of the CA, including rules about how to make an application for an examination summons under s 596A or s 596B and how to apply for a discharge of such a summons.

Background

A company operating a diamond mine in Western Australia had been placed into liquidation. The liquidators had disclaimed their interest in the mine, with the result that the mine had reverted to the Western Australian Government. The company’s sole shareholder, concerned that the disclaimer of the mine might have followed an inadequate and defective attempt by the liquidators to sell the mine, sought answers to various questions about the liquidators’ sales process. The shareholder was not satisfied by the answers provided by the liquidators and requested ASIC to authorise it to make an application under s 596A of the CA for a summons to examine a named liquidator. ASIC authorised the shareholder as an eligible applicant and the shareholder then applied for an examination summons, as well as an order for production of documents at the examination under s 597 of the CA. A Registrar of the Federal Court issued the summons and order for production.

The liquidator to be examined applied to the Court for an order that the summons be discharged on the basis that it was an abuse of process. The judge at first instance found in his favour and ordered that the summons be permanently stayed and that the order for production be set aside. The shareholder appealed to the Full Federal Court.

Full Federal Court

The statutory scheme

The Full Federal Court (Foster, Wigney and Markovic JJ) made the following points concerning the statutory scheme in Pt 5.9 (at [19]-[29]). References to the cases have been omitted.

• An applicant for a s 596A summons was required to satisfy two criteria: first, that the applicant was an “eligible applicant” (defined in s 9 of the CA); and second, that the person to be examined was, during the specified period, an officer or provisional liquidator of the corporation. If those two criteria were satisfied, the Court was required to issue a summons. There was no discretion.
• Therefore, it was not necessary for the eligible applicant for a s 596A summons to establish any particular reason for seeking the summons or to demonstrate that the examination would have practical utility or be likely to achieve any particular result or outcome or be in any sense desirable or efficacious. While r 11.3(3) of the Federal Court (Corporations) Rules required that the applicant for a s 596A summons file an affidavit in support of the application, the affidavit only needed to address the two express criteria in s 596A. The relative ease with which a s 596A summons could be obtained appeared to have been expressly intended by the legislature.
• An applicant for a s 596B summons was also required to satisfy two criteria. The first was, relevantly, the same as the first criterion in respect of a s 596A summons while the second required the applicant to satisfy the Court that the person to be examined was either a person who had taken part or been concerned in the examinable affairs of the corporation and had been, or might have been, guilty of misconduct in relation to the corporation, or was a person who might be able to give information about the examinable affairs of the corporation. This point of distinction between s 596A and s 596B was important. Under s 596A, the applicant did not have to demonstrate, and the Court was not required to inquire into whether, the person who had been involved in the examinable affairs of the corporation might have been guilty of misconduct, or would be able to give information about the examinable affairs of the corporation.
• In the case of a s 596B summons, even if the Court was satisfied that the two criteria were made out, the Court was not required to issue the summons because it retained a discretion whether or not to do so. It could, therefore, refuse to exercise the discretion if it was not satisfied, for example, that the examination was sufficiently justified, or would have any practical utility.
• A liquidator could be an eligible applicant for a s 596A summons. Equally, a liquidator could also be an examinee in a s 596A summons. This was because a liquidator was an “officer” of a corporation as defined in s 9 of the CA.
• The examinable affairs of the corporation about which the examinee could be questioned, included acts done by or on behalf of the corporation, or to or in relation to the corporation or its business or property, when the corporation was being wound up.
• It followed, therefore, that the statutory scheme specifically envisaged that a s 596A summons might be issued in respect of a liquidator of a corporation, and that the liquidator could be examined about acts done by the liquidator on behalf of the corporation, as well as acts done by the liquidator in relation to the corporation’s business or property, in the course of the winding up of the corporation. There appeared to be nothing in the statutory scheme itself to suggest that liquidators were in some different or privileged position insofar as they might be examinees in a s 596A summons.
• Once a summons was issued, the Court controlled the conduct of the examination. It could effectively limit the length and scope of the examination, and even bring the examination to an end, if it considered it to be wasteful or unnecessary. In those circumstances, the Court could also order the applicant for the summons to pay some or all of the costs of the examination.

Abuse of process

As for the relevant principles concerning abuse of process, the Full Federal Court made the following points (at [30]-[33] see also [84]). References to the cases have been omitted.

• While an applicant for a s 596A summons was required only to satisfy the two express criteria to obtain the issue of the summons, the summons could be discharged if the applicant was found to have had an improper purpose in obtaining it, or if the summons and resulting examination were otherwise found to amount to an abuse of process. Rule 11.5 of the Federal Court (Corporations) Rules (discharge of an examination summons) provided a procedure which could be used in circumstances where it was alleged that the summons was an abuse of process.
• The Court, like all superior courts, had an inherent jurisdiction to prevent misuse of its processes and procedures, and the classes of case which could amount to abuse of process were not closed although they usually fell within one of a number of established categories.
• The power to permanently stay proceedings on the ground that they were an abuse of process was one which should be exercised with caution and only in the most exceptional or extreme case.
• The party alleging that there was an abuse of process had the onus of satisfying the Court of the abuse of process and this onus was a “heavy one”.

The Full Federal Court also made the point (at [83]) that an application to discharge an examination summons was anchored in legal principle and, likewise, the Court’s power to discharge such a summons regularly issued under s 596A was not at large. The applicant was required to demonstrate some legal basis for discharging the summons and in the case before the Court the principle that was invoked was abuse of process.

Findings

The Court made findings as follows:

• There was no evidence of an improper or illegitimate purpose on behalf of the shareholder. Rather, the evidence indicated that the shareholder’s purpose in examining the liquidator was to obtain information concerning the sales process of the mine, and to determine from the information so obtained whether any cause of action might exist against the liquidator and others, as a result of any flaws or defects in the sales process. Such a purpose was not foreign to the examination power in s 596A (at [85]-[86]).
• The trial judge had found that the examination amounted to a substantial intrusion into the liquidation. In making this finding, the trial judge appeared to have assumed that the examination of any liquidator while conducting a liquidation would necessarily involve a substantial intrusion into the liquidation. This assumption appeared to have been based on the authorities concerning the special position of liquidators, particularly the authorities concerning other statutory powers that permitted inquiries into the conduct of liquidators, such as the now repealed s 536 of the CA. However, there were important differences between ss 596A and 536 and, given those important differences, the authorities concerning s 536 and similar provisions did not provide any real support for a presumption that an examination of a liquidator pursuant to a s 596A summons would necessarily involve a substantial intrusion into the liquidation, or would otherwise be unfairly burdensome or oppressive, such that it might constitute an abuse of process. Furthermore, while there could be cases where examination of a liquidator under s 596A could constitute an abuse of process, this was not such a case. The evidence before the trial judge did not support a finding that the examination of the liquidator in fact involved a substantial intrusion into the liquidation of the company such as to constitute the sort of oppression or unfairness which could amount to an abuse of process. This was because:
  • the shareholder had undertaken to limit the examination to a fairly narrow topic – the sales process of the mine;
  • there was nothing to suggest that the examination would be lengthy or result in the liquidator being significantly diverted from his task of winding up the company;
  • the process would not be costly to the liquidator because the shareholder had undertaken to fund the examination; and
  • in any event, the Court could limit or end the examination if necessary and order the shareholder to pay the liquidator’s costs (at [87]-[94]).
• The trial judge had also found that the shareholder’s desire to explore the circumstances of the sales process did not justify the exercise of the examination power under s 596A. This was problematic for the following reasons (at [95]-[111]):
  • The trial judge’s requirement that there be “justification” for the examination was again derived primarily from the authorities concerning s 536 and similar provisions of the CA. These authorities, however, did not support the broad proposition that the examination of a liquidator pursuant to s 596A should be stayed if the possible results of the examination did not justify the examination. Furthermore, the authorities in relation to other materially different statutory provisions did not provide a sound basis for reading an additional criterion or limitation into s 596A when the proposed examinee was a liquidator.
  • The reasoning of the trial judge appeared to be based on the assumption that the purpose of s 596A, being to benefit the company, its creditors, members or the public, could only be satisfied if there was “reason to believe” or a “realistic prospect” that the examination would reveal conduct capable of supporting a claim and therefore have “practical utility”. This assumption was not supported by the terms of s 596A or by the statutory scheme for examinations and ignored the fact that a s 596A summons was essentially an information gathering process.
  • The trial judge had reversed the onus of proof and had effectively required the shareholder to justify the practical utility of examining the liquidator and to do so by pointing to evidence that demonstrated that there was a “reason to believe” or a “reasonable prospect” that there was an available action against the liquidator. The trial judge had effectively required the shareholder to lead evidence concerning the very matters that the shareholder had wanted to ascertain from the examination. The relevant question in the case was whether the examination was an abuse of process and the burden of proving an abuse of process remained with the liquidator at all times. The shareholder did not bear the onus, evidential or legal, of justifying the examination, or demonstrating a reasonably arguable case against the liquidator that might be advanced by the examination. It was contrary to the statutory scheme to require an eligible applicant to justify the examination by pointing to evidence which effectively demonstrated an arguable case, in defence of a claim that a s 596A examination should be stayed as an abuse of process. The examination in question was a mandatory examination under s 596A and not a discretionary examination under s 596B.
  • Having regard to the statutory scheme and the nature of the particular process under challenge, and having regard to the relevant principles concerning abuse of process, it could not be concluded that the liquidator had discharged the heavy onus required to prove an abuse of process.

Accordingly, the Full Federal Court concluded that the trial judge had erred in principle in permanently staying the examination summons and setting aside the order for production, and allowed the shareholder’s appeal.