Equititrust Limited (In Liq) (Receiver Appointed) (Receivers and Managers Appointed) v Equititrust Limited (In Liq) (Receiver Appointed) (Receivers and Managers Appointed) [2014] FCA 692

FEDERAL COURT OF AUSTRALIA

Equititrust Limited (In Liq) (Receiver Appointed) (Receivers and Managers Appointed) v Equititrust Limited (In Liq) (Receiver Appointed) (Receivers and Managers Appointed) [2014] FCA 692 Citation: Equititrust Limited (In Liq) (Receiver Appointed) (Receivers and Managers Appointed) v Equititrust Limited (In Liq) (Receiver Appointed) (Receivers and Managers Appointed) [2014] FCA 692

Parties: EQUITITRUST LIMITED (IN LIQUIDATION) (RECEIVER APPOINTED) (RECEIVERS AND MANAGERS APPOINTED) IN ITS CAPACITY AS RESPONSIBLE ENTITY OF THE EQUITITRUST INCOME FUND (ACN 061 383 944) v EQUITITRUST LIMITED (IN LIQUIDATION) (RECEIVER APPOINTED) (RECEIVERS AND MANAGERS APPOINTED) IN ITS OWN CAPACITY (ACN 061 383 944), MARK McIVOR, WAYNE McIVOR, THOMAS HANEY, KPMG (A FIRM) and PAUL STEER

File number: NSD 2028 of 2013

Judge: FOSTER J

Date of judgment: 27 June 2014

Catchwords: CORPORATIONS – whether the Court should set aside or stay indefinitely compulsory examinations under s 596B of the Corporations Act 2001 (Cth) of former auditors of a registered managed investment scheme in circumstances where the responsible entity of that scheme has already commenced a proceeding against those former auditors and others for damages and other relief

Legislation: Corporations Act 2001 (Cth), ss 596A, 596B, 601NF(2), 1101B(1) and 1325

Cases cited: Accord Pacific Holdings Pty Ltd v Accord Pacific Land Pty Ltd (In Liq) [2011] NSWSC 707 Evans v Wainter Pty Ltd (2005) 145 FCR 176 Hamilton v Oades (1989) 166 CLR 486 Karounos v Official Trustee (1988) 19 FCR 330 Meteyard v Love (2005) 65 NSWLR 36 Re Equiticorp Finance Ltd; Ex parte Brock (1992) 6 ACSR 725 Re Hugh J Roberts Pty Ltd (In Liq) [1970] 2 NSWR 582 Re LED (South Coast) Pty Ltd (2009) 76 NSWLR 428 Re New Tel Ltd (In Liq) (2005) 145 FCR 176 Re Trio Capital Ltd (In Liq) (2011) 6 BFRA 202 Southern Cross Petroleum Sales (SA) Pty Ltd (In Liq) v Hirsch (1998) 70 SASR 527

Date of hearing: 24 March 2014

Place: Sydney

Division: GENERAL DIVISION

Category: Catchwords

Number of paragraphs: 72

Counsel for the Applicant and for the liquidators of Equititrust Limited: Mr CRC Newlinds SC, Mr D Barnett

Solicitor for the Applicant and for the liquidators of Equititrust Limited: Piper Alderman

Counsel for the Fifth and Sixth Respondents: Dr AS Bell SC, Mr JA Arnott

Solicitor for the Fifth and Sixth Respondents: Allens

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 2028 of 2013

BETWEEN: EQUITITRUST LIMITED (IN LIQUIDATION) (RECEIVER APPOINTED) (RECEIVERS AND MANAGERS APPOINTED) IN ITS CAPACITY AS RESPONSIBLE ENTITY OF THE EQUITITRUST INCOME FUND (ACN 061 383 944)

Applicant

AND: EQUITITRUST LIMITED (IN LIQUIDATION) (RECEIVER APPOINTED) (RECEIVERS AND MANAGERS APPOINTED) IN ITS OWN CAPACITY (ACN 061 383 944)

First Respondent

MARK McIVOR

Second Respondent

WAYNE McIVOR

Third Respondent

THOMAS HANEY

Fourth Respondent

KPMG (A FIRM)

Fifth Respondent

PAUL STEER

Sixth Respondent

JUDGE: FOSTER J DATE OF ORDER: 27 JUNE 2014 WHERE MADE: SYDNEY

THE COURT ORDERS THAT:

1. The Interlocutory Application filed by the fifth and sixth respondents on 1 November 2013 be dismissed. 2. The fifth and sixth respondents pay the applicant's and its liquidators' costs of and incidental to the said Interlocutory Application. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 2028 of 2013

BETWEEN: EQUITITRUST LIMITED (IN LIQUIDATION) (RECEIVER APPOINTED) (RECEIVERS AND MANAGERS APPOINTED) IN ITS CAPACITY AS RESPONSIBLE ENTITY OF THE EQUITITRUST INCOME FUND (ACN 061 383 944)

Applicant

AND: EQUITITRUST LIMITED (IN LIQUIDATION) (RECEIVER APPOINTED) (RECEIVERS AND MANAGERS APPOINTED) IN ITS OWN CAPACITY (ACN 061 383 944)

First Respondent

MARK McIVOR

Second Respondent

WAYNE McIVOR

Third Respondent

THOMAS HANEY

Fourth Respondent

KPMG (A FIRM)

Fifth Respondent

PAUL STEER

Sixth Respondent

JUDGE: FOSTER J DATE: 27 JUNE 2014 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 In 2011, three managed investment schemes conducted by Equititrust Limited (In Liquidation) (Receivers and Managers Appointed) (ACN 061 383 944) (EQL) collapsed. These were the "Equititrust Income Fund" (EIF), the "Equititrust Premium Fund" (EPF) and the "Equititrust Priority Class Income Fund" (EPCIF). 2 As part of the fallout from those collapses, a receiver was appointed to the property of the EIF, voluntary administrators were appointed to EQL, receivers and managers were appointed to EQL and ultimately liquidators were appointed to EQL. 3 On 1 November 2012, the liquidators of EQL applied to the Queensland District Registrar of this Court for orders issuing Summonses for Examination to various individuals pursuant to s 596A and s 596B of the Corporations Act 2001 (Cth) (Corporations Act). The Registrar acceded to that application and issued a number of Examination Summonses in proceeding QUD 618 of 2012 (the Queensland proceeding). One recipient of an Examination Summons issued at this time was Paul Steer, who is, and, at all relevant times, was, a partner of KPMG, a well-known firm of Chartered Accountants. Subsequently, the Summons originally issued to Mr Steer was modified as a result of negotiations which took place between his lawyers and the liquidators of EQL and their lawyers. A Further Amended Examination Summons addressed to Mr Steer was issued by the Court on 21 March 2013 and served upon him shortly thereafter. Further negotiations about the form of that Summons then took place. Ultimately, the form of that Summons was finally settled by orders of the Court made on 29 May 2013. 4 In addition, on 28 October 2013, an Examination Summons was issued to each of Stephen Board and Ryan Maddock. Mr Board is, and, at all material times, was, a partner at KPMG. Mr Maddock was employed by KPMG at all relevant times. He no longer works there. 5 Throughout the relevant period, Messrs Steer and Board were qualified auditors. Mr Steer was the auditor responsible for the EIF's financial statement audits and of the audit of Equititrust's compliance with its formal compliance plans. Mr Board was the auditor responsible for the financial statement audits of Equititrust and of the AFSL compliance audits. Between January 2005 and November 2011, Mr Maddock was an accountant employed by KPMG who assisted both Mr Steer and Mr Board with some of the audit work for which they were responsible. In this paragraph, I have used "Equititrust" in the sense described in [10] below. 6 On 23 July 2013, Mr Steer produced to the Court a significant number of documents in answer to the Examination Summons (as finally modified). 7 None of Mr Steer, Mr Board or Mr Maddock has yet been examined pursuant to the Examination Summonses served upon them. 8 As at the date of the publication of these Reasons for Judgment, the Examination Summonses issued to Mr Steer, Mr Board and Mr Maddock, together with a number of other such Summonses, have been adjourned to 21 July 2014. All examinations are scheduled to take place in Brisbane. Five sitting days have been set aside by the Court for the conduct of the examinations (21–25 July 2014). I have been told that 14 persons are to be examined in those five days. 9 On 27 September 2013, this proceeding was commenced by the filing of an Originating Application and Statement of Claim. The Statement of Claim comprises 315 paragraphs spanning 142 pages. 10 The applicant in this proceeding is EQL in its capacity as the responsible entity of the EIF. This proceeding concerns only the EIF. In the Statement of Claim, the pleader uses the words "Equititrust" to refer to EQL in its capacity as the responsible entity of the EIF. I shall do the same in these Reasons for Judgment. 11 The respondents are EQL, in its own capacity (first respondent), three former directors of EQL (second to fourth respondents), KPMG (fifth respondent) and Paul Steer (sixth respondent). 12 As I have already mentioned, KPMG and Mr Steer (the KPMG respondents) had conducted various audits of Equititrust's activities for each of the years 2002 to 2010. In this proceeding, Equititrust alleges that they conducted most of those audits negligently and in breach of duties owed to the unit holders in the EIF. 28 September 2007 is pleaded as a significant date for the purpose of assessing loss. 13 On the same day as it commenced this proceeding, EQL in its capacity as the responsible entity of the EPF commenced a second proceeding in this Court (NSD 2025 of 2013). The respondents named in that proceeding are the same persons as are named as respondents in this proceeding. In proceeding NSD 2025 of 2013, the KPMG respondents are sued at common law for damages for negligence and for breach of contract, for equitable compensation, for damages for misleading and deceptive conduct and for compensation pursuant to s 1325(1) and s 1325(2) of the Corporations Act. It is alleged in that proceeding that KPMG and Mr Steer performed various audits of the EPF for the years 2007–2010 negligently and in breach of the various statutory provisions to which I have referred. 14 The Originating Application and Statement of Claim filed in this proceeding have not been served on any of the respondents. Nonetheless, the KPMG respondents became aware of the existence of both this proceeding and proceeding NSD 2025 of 2013 soon after the end of September 2013. 15 By Interlocutory Application filed in this proceeding on 1 November 2013 (the KPMG application), the KPMG respondents seek orders setting aside the Examination Summons served upon each of Mr Steer, Mr Board and Mr Maddock respectively or, alternatively, an order staying those Summonses indefinitely while this proceeding remains on foot. They also seek an order for costs and an order that EQL pay the costs of Messrs Steer, Board and Maddock arising from and occasioned by the Examination Summonses issued to those persons in the Queensland proceeding. 16 The KPMG application was first returned before me on 20 November 2013. 17 For reasons which need not now be explained, that application was adjourned on that occasion and was subsequently adjourned on two other occasions. It was heard by me on 24 March 2014. 18 Until very recently, the liquidators of EQL have been prepared to adjourn the Examination Summonses whilst ever the KPMG application remained on foot. That is no longer the case. 19 As submitted by the liquidators, there is a procedural irregularity with the course adopted by the KPMG respondents. The liquidators of EQL are not parties to this proceeding nor were they made respondents to the KPMG application. Neither Mr Board nor Mr Maddock are parties to this proceeding nor are they co-applicants or respondents in the KPMG application. The proper course was for the three examinees (Messrs Steer, Board and Maddock) to make application by Interlocutory Process in the Queensland proceeding for orders discharging or setting aside the Examination Summonses served upon them. The liquidators did not take any point about these irregularities. For that reason, I was prepared to hear and determine the KPMG application notwithstanding that it was not properly constituted. 20 The KPMG respondents contended that it would be an abuse of the process of the Court for any of Messrs Steer, Board or Maddock to be examined while this proceeding is on foot. They seek orders setting aside or staying the Summonses or, alternatively, case management orders restricting the scope and manner of the proposed examinations. The KPMG respondents argued that the examinations are intended to and are likely to address the allegations made against the KPMG respondents in this proceeding and will, therefore, be used for the purpose of obtaining a tactical forensic advantage through the pre-trial examination of potential witnesses in this proceeding. The KPMG respondents submitted that this purpose is an improper purpose. In this way, the central issue in the KPMG application was whether the KPMG respondents had established that the upcoming examinations were going to be conducted for an improper purpose rather than for legitimate purposes. 21 By these Reasons for Judgment, I determine the KPMG application.

The Relevant Facts 22 On 13 April 2011, Piper Alderman announced publicly that the firm was investigating potential claims by EIF unit holders against the directors of EQL for breaches of the statutory and fiduciary duties owed by them to EQL and that the firm had secured in principle funding from a litigation funder for that purpose. 23 On 8 August 2011, Piper Alderman announced that the class action against EQL and its directors which had been foreshadowed by the firm in April 2011 would go ahead. 24 On 11 November 2011, Piper Alderman sent a letter of demand to EQL and to certain of its then current and former directors and officers in which that firm specified in considerable detail the breaches of duty which would be alleged in the foreshadowed class action should an appropriate compromise not be reached before suit. In that letter, Piper Alderman alleged that the named parties had breached their duties in relation to the management of the EIF, including by: (a) Allowing excessive borrowings; (b) Paying the interest warranty fee in an amount which was grossly disproportionate to the benefit received by unit holders; (c) Lending money for construction loans secured against the ongoing improved value of property, rather than against its unimproved value; and (d) Issuing financial reports which were misleading in that those reports had stated that EQL had undertaken credit assessment of prospective borrowers, obtained independent valuations and maintained loan to value ratios not exceeding 80%, when none of those statements was true. 25 In its letter dated 11 November 2011, Piper Alderman also informed the recipients of that letter that a litigation funder, International Litigation Partners No 1 Limited, had agreed to fund representative proceedings against EQL and against the persons named in the letter of demand. In the letter of demand, Piper Alderman set out the substance of the causes of action which would be relied upon in the class action which was in prospect at that time. Piper Alderman also made clear who the likely respondents in that class action would be. As at 11 November 2011, Piper Alderman had not suggested that the auditors would be sued in that class action. 26 On 23 November 2011, the Supreme Court of Queensland appointed David Whyte as receiver of the property of the EIF pursuant to s 601NF(2) and s 1101B(1) of the Corporations Act. 27 On 13 February 2012, Piper Alderman announced on its website that it was currently finalising the pleadings to commence a class action against EQL and several of its directors. It said that court documents were expected to be filed in the coming weeks. The announcement was intended to promote the class action amongst disaffected unit holders. 28 On 15 February 2012, the directors of EQL appointed Richard Albarran, Blair Pleash and Glen Oldham of Hall Chadwick, Chartered Accountants, as Voluntary Administrators of EQL pursuant to the relevant provisions of the Corporations Act. 29 On 16 February 2012, Receivers and Managers were appointed to EQL By National Australia Bank Limited. 30 On 29 February 2012, the receiver of the EIF obtained further orders from the Supreme Court of Queensland authorising him to realise the property of the EIF and to wind it up in accordance with its constitution. 31 On 20 April 2012, Messrs Albarran, Pleash and Oldham were appointed as liquidators of EQL by resolution of its creditors. 32 In a Report to Unit Holders of the EIF dated 26 July 2012, Mr Whyte said that he had been asked by Piper Alderman to include an update to investors in relation to the current status of the proposed class action. In that Report, Mr Whyte made clear that the update which he had agreed to include had been prepared by Piper Alderman and that he intended to make no comment in respect of it. The update included by Mr Whyte in his Report mentioned that the proposed class action would be brought against EQL, against some of the directors of EQL and against the auditors of the EIF. The update recorded that Piper Alderman expected that the claim would be filed soon after 26 July 2012. This was the first indication from anyone that KPMG might be sued in the Piper Alderman class action. 33 On 23 November 2012, upon the application of the liquidators of EQL, the Queensland District Registrar of this Court issued to Mr Steer an Examination Summons pursuant to s 596B of the Corporations Act. The Registrar required Mr Steer to produce documents to the Court on 22 January 2013 and to attend at the Court to be examined on 4 February 2013. 34 At the same time, Examination Summonses were issued to certain former directors of EQL. 35 On 30 January 2013, the Examinations Summonses served upon Mr Steer and others were adjourned to 23 July 2013. 36 In his Report to Investors dated 4 February 2013, Mr Pleash, on behalf of the liquidators, informed investors that public examinations of certain former officers of EQL and its associated entities and of Mr Steer would be conducted in July 2013. He said that the liquidators anticipated that those public examinations would assist in the formulation and/or development of potential claims. He also stated that the liquidation was currently unfunded and that he was in negotiations with a litigation funder. 37 In a further Report to Investors dated 28 February 2013, Mr Pleash, on behalf of the liquidators, said: The Hall Chadwick Audit Team has conducted a preliminary review into the audit conducted by KPMG based on the Company's records. This review will be finalised following the production of records by KPMG in accordance with the notice to produce served upon them by my solicitors. It is anticipated that the review will also assist in formulating a line of questioning for the public examinations; It is anticipated that the Public Examinations will assist in formulating and/or developing any potential claims. 38 At the same time, Piper Alderman continued to make statements to the investors (via Mr Whyte) that the class action which had been previously foreshadowed was still going ahead and that, as at 28 February 2013, Piper Alderman was liaising with the liquidators in order to "collectively undertake" public examinations of the former directors and auditors of the EIF. 39 After conducting negotiations with KPMG's lawyers, the liquidators served a Further Amended Examination Summons dated 21 March 2013 upon Mr Steer. The changes to the prior versions of that document were designed to make more specific the categories of documents required to be produced for the upcoming public examinations. 40 On 2 April 2013, Mr Steer filed an Interlocutory Application in the Queensland proceeding in which he sought an order discharging the Further Amended Examination Summons dated 21 March 2013 to the extent that it required the production of documents beyond those which, as at that date, Mr Steer was prepared to produce. 41 On 29 May 2013, orders were made disposing of Mr Steer's Interlocutory Application. Most of those orders were agreed although a Judge (Logan J) was required to rule on one disputed matter. The liquidators relied upon a Written Submission dated 29 May 2013 at the hearing held on that day before Logan J. On 29 May 2013, Logan J also adjourned Mr Steer's examination to a date to be fixed. 42 By 12 June 2013, the liquidators had received certain records held by ASIC. It is not clear what records were sent to the liquidators by ASIC at this time. 43 In his Report to Investors dated 22 July 2013, Mr Pleash, on behalf of the liquidators, informed investors that the public examinations which were scheduled to be conducted in the period 23–26 July 2013 would be adjourned to a date to be fixed. He also informed investors that the liquidators had now reached agreement with KPMG in relation to the production of certain records. He then said: Litigation Funding Deed I have recommenced my negotiations with Piper Alderman in relation to progressing the draft litigation funding deed; The Liquidators' amendments to the draft funding deed proposed by Piper Alderman have been provided to them for their comments and review; Once a Deed is in an acceptable form, it will be put to the creditors or the Committee of Inspection or the Court for approval. 44 On 23 July 2013, Mr Steer produced documents to the Court in Brisbane in answer to the Examination Summons finalised on 29 May 2013. On that day, his examination was adjourned to the period 16–18 September 2013 and 8 October 2013. 45 In his Report to Investors dated 21 August 2013, Mr Pleash, on behalf of the liquidators, informed the investors that the public examinations scheduled to commence on 23 July 2013 had been adjourned to 16–18 September 2013 and 8 October 2013. He also indicated that he expected to agree on the terms of a funding deed with Piper Alderman in the near future. 46 In a Report to Creditors of EQL dated 22 August 2013, Mr Pleash, on behalf of the liquidators, gave a detailed report as to the current position in the liquidation of EQL. At pp 11–12 of that Report, Mr Pleash said: 4.1 Claim against the former auditor – KPMG Creditors may be aware that prior to the appointment of Administrators, KPMG were the auditors of the Company. KPMG recommended an impairment of various loans of the Company and the Funds for which the Company was the RE in the amount of $167,510,994 as at 30 June 2011. According to the Australian Accounting Standards Board ("AASB") 136, an impairment loss is the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount. It has been suggested that the loans should have been impaired earlier in order to avoid the provision of information to investors which may have been misleading or deceptive. As a result, KPMG may not have performed their duties in a proper manner and in accordance with the terms of their engagement. Based on such information, I conducted preliminary investigations into the audit evidence and the conduct of the audit as a whole (i.e. not limited to the abovementioned impairment) in order to determine the adequacy of the audit process. I understand Piper Alderman is also actively investigating this claim for the benefit of unit holders. The reasons for conducting these investigations were as follows: 1. To assist in establishing a claim against KPMG for a breach of contract (as discussed earlier in this section); 2. The potential to change the treatment of the payments to the unit holders (i.e. the payments may be considered return on capital rather than income, i.e. interest). If applicable, unit holders may have been in a position to amend their tax returns and potentially receive a refund from the ATO. The investigations of my staff concluded that at the time of the payments being made to unit holders, the payments were not treated as consisting of, or including, a return to [sic] capital. Furthermore, the Constitution provides that any decision made in relation to distribute income or capital to the unit holders is final. As such, there is no scope to go back and re-cast the accounts to treat the income returned as a return of capital. In the process of investigating this issue, my staff reviewed various files, including, but not limited to the following: • The Company's audit files for 2006–2011; • The Company's AFSL files for 2006–2011; • Financial information and documents for 2006–2011; • Documentation relating to the independence of the auditors; • Various work papers, notes, file notes, verification documents, impairment documents, assessment of compliance. Creditors are advised that staff members within the Hall Chadwick Audit team utilised the books and records of the Company in order to review the conduct of KPMG's audit and provide a preliminary report based on their findings. A summary of the tasks conducted by the Hall Chadwick Audit team are [sic] as follows: • Reviewing and analysing the financial statements for the years ended 30 June 2008, 30 June 2009, 30 June 2010 and 30 June 2011 in order to understand and identify potential issues in relation to possible audit deficiencies; • Identifying relevant information from 15 storage boxes of documentation held by my office in order to make a preliminary assessment of expected documents which ought to have been inspected and documented in the KPMG audit files; • Reviewing an external hard drive containing electronically imaged data from the Company's server (approximately 1 terabyte in size) in order to identify any information which may be relevant to assess the adequacy of audit procedures undertaken by KPMG; • Reviewing and identifying specific areas of interest to request information from KPMG. Furthermore, my staff continued to liaise with the Hall Chadwick Audit team in order to formulate a list of documents for the purposes of the examination summons and subsequent amended summonses to be issued to KPMG. Following an exchange of correspondence between Thomsons Lawyers and KPMG's legal representatives, KPMG have made an application to set aside the examination summons which was heard on Wednesday, 29 May 2013. Thomsons Lawyers acted on our behalf in respect of the proceedings with Mr. Craig Wilkins of Counsel. I note that at this hearing an agreement was reached between the parties as to which documents would be produced by KPMG. A summary of the documents to be provided includes: • A copy of the audit files (including the audit files relating to the Australian Financial Services License) from the financial years ended 30 June 2005 onwards; • A copy of any letters of engagement and retainer agreements between KPMG and Equititrust since KPMG's appointment as auditor of Equititrust in or about 2001. Furthermore, the Liquidators are provided with the liberty to issue a further notice for further documents should the need arise. The date for the production of these records has been determined to be 23 July 2013. 4.2 Public Examinations On 7 November 2012 I sought an order pursuant to Section 596A and Section 596B of the Act for the Court to issue examination summonses to the individuals listed below. The table below is a summary of the individuals the Liquidators are examining and the claims in respect of which they may be able to provide information: 47 Mr Steer was named in the table referred to in s 4.2 as one of the persons who had been served with an Examination Summons. 48 In the same Report to Creditors, (at p 13), Mr Pleash indicated that the purpose of the examination of Mr Steer was to "… explore the claim against KPMG as discussed in Section 4.1 above". 49 In s 4.3 of the same Report, Mr Pleash informed creditors that he was continuing to negotiate with the prospective litigation funder and with Piper Alderman in respect of a litigation funding deed. 50 As I have already mentioned, this proceeding was commenced on 27 September 2013. That is just a little over one month after the Report to Creditors of EQL dated 22 August 2013 was circulated among EQL's creditors. 51 On 9 October 2013, the liquidators retained Piper Alderman to act as their solicitors in relation to the foreshadowed examinations of Mr Steer and others. 52 In a further Report to Investors dated 9 October 2013, Mr Pleash, on behalf of the liquidators, informed investors that all of the public examinations in respect of the collapse of the EIF had been adjourned to the period 11–14 November 2013. In the same Report, Mr Pleash informed investors that the present proceeding had been commenced. He named the respondents in this proceeding in his Report. He also informed investors that the liquidators and others had agreed on the terms of a Litigation Funding Deed and had made an urgent application to the Supreme Court of New South Wales for an order approving the liquidators entering into that Deed. Mr Pleash said that the Court had approved the liquidators entering into the Deed on the basis that he provide to the Court a copy of an Advice from Counsel as to the prospects of success of the claim. He said that the matter would again be listed before the Court on 21 October 2013. 53 The evidence before me did not make clear whether or not Piper Alderman ever commenced a class action against EQL on behalf of disaffected unit holders in the EIF.

Consideration 54 In their submissions made in support of their application, the KPMG respondents submitted that the Statement of Claim filed in this proceeding was a lengthy and detailed document which contained specific and apparently well considered allegations against all of the respondents, including the KPMG respondents. They said that it was clearly the product of a substantial amount of work and had reached such a stage of development that a responsible partner of Piper Alderman had felt able to certify the pleading in accordance with the rules of Court. The KPMG respondents emphasised that, in order to secure an order from the Supreme Court of New South Wales authorising the liquidators of EQL to enter into a Litigation Funding Deed, an advice from Counsel as to prospects had been obtained and must have been of sufficient firmness to satisfy the Supreme Court that the Litigation Funding Deed ought to be entered into. 55 These submissions advanced on behalf of the KPMG respondents are correct, as far as they go. However, it must be borne in mind that there is a world of difference between a litigant being in possession of sufficient information to justify filing a pleading and a litigant being in possession of sufficient information to allow his or her prospects of success to be adequately assessed.

The Relevant Legal Principles 56 The KPMG respondents made lengthy submissions as to the principles which should guide the determination of their application and supported those submissions with many references to authorities. At the end of the day, however, as submitted on behalf of the liquidators of EQL, there was little real dispute between the parties as to the correct principles to be applied. 57 The KPMG respondents submitted that: (a) In considering whether to permit a liquidator to conduct an examination, the Court ought to have regard to such matters as the expressed purpose of the examination, the importance of the information to the liquidator, the seriousness of the matters to be inquired into, the use to which the information obtained at the examination might be put, the possibility of an advantage accruing for the benefit of the liquidator which he or she would not otherwise enjoy, the concomitant disadvantage to the prospective examinee, the availability of the information from other sources and the cost to the prospective examinee in attending for examination (Southern Cross Petroleum Sales (SA) Pty Ltd (In Liq) v Hirsch (1998) 70 SASR 527 at 536 per Lander J). In many cases, the abusive or oppressive character of an Examination Summons is not revealed until after the Summons has been issued (Meteyard v Love (2005) 65 NSWLR 36 at 40–41 [9] per Santow JA). The power given by s 596B of the Corporations Act is an unusual and far-reaching one and its use could easily become oppressive and vexatious if it is not approached responsibly by applicants for Summonses and controlled carefully by the Court (Karounos v Official Trustee (1988) 19 FCR 330 at 335 per Forster, Woodward and Spender JJ); (b) Particular care should be taken when the proposed examinee is an outsider to the management of the corporation, as the proposed examinees are in this case, being the former auditor and his staff (Re Equiticorp Finance Ltd; Ex parte Brock (1992) 6 ACSR 725 at 730–731 per Young J); (c) The Court has the power to set aside an Examination Summons if the examination will be oppressive and unfair, if the examination is sought for an improper purpose or motive or if allowing the examination to occur will constitute an abuse of process (Hamilton v Oades (1989) 166 CLR 486 at 498–499 per Mason CJ); (d) The mere fact that a substantive proceeding has been commenced before the examinations are conducted does not necessarily and automatically make it impermissible for a liquidator to obtain an order issuing an Examination Summons or to conduct an examination pursuant to s 596B (Re Hugh J Roberts Pty Ltd (In Liq) [1970] 2 NSWR 582 at 585.35–40 per Street J; Karounos v Official Trustee at 336). If the predominant purpose of the liquidator's pursuing an examination is to gain an unfair forensic advantage in the substantive proceeding, the Court will set aside the Examination Summons and prevent the liquidator from conducting the examination; and (e) The commencement of a substantive proceeding requires the Court to assess the liquidator's purpose with greater caution. 58 Senior Counsel for the applicant and for the liquidators of EQL submitted that: The principles governing the setting aside or stay of Examination Summonses are well established. There has been either a shift in emphasis or a clarification of those principles in recent times. The current position relevantly may be summarised as follows (relying upon Re LED (South Coast) Pty Ltd (2009) 76 NSWLR 428 at 435–436 [36] per Barrett J where his Honour quoted with approval a passage from the judgment of Lander J in Re New Tel Ltd (In Liq) (2005) 145 FCR 176 at 216 [252]; (i) It is a legitimate purpose of the examination process to enable "evidence and information to be obtained to support the bringing of proceedings against examinable officers and other persons in connection with the examinable affairs of the corporation"; (ii) There is no abuse unless an offensive purpose is the predominant purpose. Those who allege improper purpose bear a heavy onus of establishing that purpose (Accord Pacific Holdings Pty Ltd v Accord Pacific Land Pty Ltd (In Liq) [2011] NSWSC 707 at [138]); (iii) It is not improper for examinations to occur whilst litigation is pending against the examinee and other persons; and (iv) However, it is improper if the predominant purpose is to carry out a dress rehearsal for cross-examination, to destroy the credit of potential witnesses or to obtain forensic advantages not otherwise legitimately available. 59 The liquidators then made specific submissions by reference to the decision of Barrett J in Re LED. The liquidators took issue with a suggestion made on behalf of the KPMG respondents that a liquidator cannot investigate and examine as to the strengths or weaknesses of a corporation's case against a proposed examinee or other person. The liquidators submitted that the true position is that which was identified by White J in Re Trio Capital Ltd (In Liq) (2011) 6 BFRA 202 at 207 [23], where his Honour said of the relevant passage in Meteyard: Basten JA went on to say that if the examination process were used for the purpose of causing inconvenience, embarrassment or inflicting costs, that would be an abuse of the process of the court and that the other examples may be understood as not seeking to obtain information about a company's examinable affairs (at [45]). His Honour said that such proceedings would be improper because the purpose would be foreign to the statutory purpose for which the power was conferred. Read in the light of para [45] I do not understand his Honour to be saying that an examination under s 596B cannot legitimately involve investigation into the strength or weakness of a corporation's case against an examinee or of the opponent's case in relation to the dispute. It is well established that examinations can be conducted to investigate the existence and strength of potential causes of action, including potential causes of action against the examinees, provided that the examination is not used as a dress-rehearsal for cross-examination or to destroy the credit of potential witnesses or to obtain forensic advantages not obtainable in ordinary court proceedings. 60 In Re LED, the liquidator gave evidence that he had formed a preliminary view that there were good prospects of success and that the purposes of the examination which he wished to conduct were to: (a) Test the value of his preliminary view on prospects; (b) Demonstrate a sufficiently viable case to attract a funder; and (c) Investigate recovery possibilities unconnected with the proceeding. 61 At 436–437 [37]–[38], after quoting from the judgment of Lander J in Evans v Wainter Pty Ltd (2005) 145 FCR 176 at 216 [252], Barrett J said: The liquidators say quite candidly that they wish to conduct examinations of the examinees for three reasons, first, to test their preliminary view that the Commercial List claims have good prospects of success (and, as Mr Wily put it, to obtain more information about the aspects he considers to be less promising), second, because demonstration of a sufficiently viable case through material obtained from such examinations is, in essence, a prerequisite to any positive decision by the potential litigation funder to provide financial assistance and, third, in order to investigate recovery possibilities unconnected with the Commercial List proceedings. None of these purposes is an objectionable purpose. In particular, neither of the first two purposes is objectionable. The desire to test the preliminary view about the viability of the litigation is within Lander J's paragraph 3.4. The purpose of creating a forum for the obtaining of information relevant to a litigation funder's decision whether to extend financial support stands in the same light. Mr Newlinds referred, in that last connection, to two decided cases to which I now turn. 62 At 437–438 [41]–[47], Barrett J continued: It is clear from the cases mentioned that a purpose of gathering information properly required by a party deciding whether to fund litigation to be pursued by a liquidator for the benefit of creditors is not of itself an improper purpose. It is a purpose clearly and sufficiently related to the due performance of the liquidator's functions. In cases of this kind, however, the inquiry is as to predominant purpose. A clearly impermissible purpose is that of conducting a dress rehearsal for cross-examination or seeking to assemble material in order to attack a potential witness's credit. Dr Bell submitted that, in the circumstances of this case where the examinees will most likely be witnesses in the Commercial List proceedings, an impermissible purpose of that kind must be taken to be the predominant purpose of the liquidators. I do not accept that submission. The Commercial List proceedings are at an early stage. The summons has been filed and served, although it appears that service was effected after one extension of time for service had been obtained and in circumstances where it may have been thought that a further extension would be impossible or difficult to obtain. No defence has been filed. Issues have not be delineated. The evidence on which the LED companies will rely has not been served – indeed may not have been fully assembled. The situation is, in my view, one in which the desire of the liquidators and the potential funder to obtain further information about prospects of success has an objectively valid basis to it. The early stage reached in the litigation, as thus described, undermines the theory that the liquidators will, through the examinations, seek to embark on a dress rehearsal for cross-examination. In Fetzer v Irving (above), where an inference of such a purpose was held to be open, the action had "progressed a considerable way along the path to trial" and discovery had been had. In the whole of the circumstances before me, I cannot find that the liquidators' predominant purpose is an impermissible purpose of seeking a forensic advantage in the embryonic litigation. Their predominant purpose is, rather, to put themselves into a position from which they can make a final decision whether to pursue the litigation they have inherited and the active carriage of which has been realistically available to them for only about three months, coupled with the purpose of putting a potential funder into an informed position from which it can make a decision whether to make finance available. These are quite legitimate purposes for undertaking s 596B examinations, as is the liquidators' third purpose mentioned at paragraph [37] above. The examinees have not established a basis for the making of an order discharging the examination summonses. Dr Bell submitted that, if the summonses were not discharged, there should be a direction under s 596F(1)(a) limiting the matters that may be inquired into at the examinations. The direction would be in terms that precluded examination on matters relevant to the Commercial List proceedings. For reasons stated in relation to the main question, no such direction should be made. 63 I find the observations made by Barrett J in Re LED to be most helpful and to be a fair synopsis of the relevant principles. I propose to follow the observations of Barrett J which I have extracted at [61]–[62] above.

The Present Case 64 Senior Counsel for the KPMG respondents referred to a Written Submission prepared on behalf of the liquidators in May 2013 which was deployed at the hearing before Logan J on 29 May 2013. In that Written Submission, Counsel who then appeared for the liquidators set out a number of reasons for seeking to examine Mr Steer. 65 It was then submitted on behalf of the KPMG respondents that, in light of the substantial and detailed allegations made in the Statement of Claim in this proceeding, the purposes stated by the liquidators in May 2013 as the purposes for examining Mr Steer "had evaporated". The KPMG respondents submitted that the overwhelming inference which I should draw now is that the examinations are to be conducted for the purpose of examining potential witnesses in the present proceeding in order to gain an impermissible forensic advantage in this proceeding, that purpose being a purpose foreign to the purposes for which the power to seek examinations is conferred. Senior Counsel for the KPMG respondents went on to submit that I should be satisfied that the liquidators had now concluded that viable causes of action exist against EQL and its directors and also against the KPMG respondents. It was then submitted that I should infer that the liquidators no longer had any genuine need to gather further information. 66 As an alternative solution to the problem which the KPMG respondents submitted existed in the present case, submissions were made as to ways and means of curtailing the manner and scope of the proposed examinations. For reasons which I shall shortly explain, I need not traverse those submissions. 67 Senior Counsel for the liquidators submitted that: (a) It was not incumbent upon his clients to adduce evidence in the KPMG application. The liquidators have not made available the s 596C affidavit nor have the KPMG respondents sought access to it. The onus is on the KPMG respondents to establish that the liquidators intend to conduct the proposed examinations of Messrs Steer, Board and Maddock for an improper purpose; (b) The applicants have asked the Court to draw an inference that the liquidators' predominant purpose is to examine potential witnesses in this proceeding in order to gain an improper forensic advantage. The facts upon which they have asked the Court to come to that conclusion boil down to: (i) The present proceeding has been commenced. The Statement of Claim is lengthy and detailed and is clearly the product of a substantial amount of work; (ii) The partner of Piper Alderman who certified the pleading must feel confident enough about the claim to have certified it; (iii) Advice from Counsel has been obtained on prospects; (iv) The proposed KPMG examinees are "outsiders", being persons involved in the audits of the EIF and Equititrust conducted by KPMG; (v) The liquidators' solicitors have been involved generally in the issues in the proceedings for a substantial period of time, including when they acted on behalf of the EIF unit holders; (vi) The liquidators have had access to a significant volume of material from about early 2013, have concluded the investigation or information gathering stage and have issued a detailed report which includes allegations formulated against KPMG; and (vii) A litigation funding agreement has been negotiated and entered into. (c) Even if all of the above facts are accepted, those facts do not support the inference contended for and do not provide a basis for setting aside or staying the Summonses. 68 In my judgment, the facts relied upon by the KPMG respondents as supporting an inference that the predominant purpose for conducting the examinations is an improper one do not support such an inference. My reasons for coming to this view may be shortly stated as follows: (a) The Summons served upon Mr Steer was issued long before the present proceeding was commenced. He was the person on behalf of KPMG who was required to produce most of the documents produced on behalf of that firm for the purposes of the upcoming examinations. But for the many adjournments of his examination occasioned by, at least in part, the actions of his lawyers, he would have been examined before this proceeding was commenced. (b) The Originating Application and Statement of Claim filed in this proceeding have not yet been served on any respondents. That circumstance tends to suggest that, whilst the liquidators and their advisors have views about their prospects in the proceeding, they wish to test those views further through the examination process. This is clearly a legitimate purpose. In addition, in August 2013, there was an exchange of correspondence between the solicitors for the liquidators and the solicitors for the KPMG respondents in which the solicitors for the liquidators raised the possibility that, as a condition of further adjourning Mr Steer's examination, the parties should come to some agreement by which the limitation period referable to the proposed causes of action against the KPMG respondents might be extended. In that correspondence, it was made reasonably clear that there was concern on the part of the liquidators that the relevant limitation period might soon expire. The solicitors for the KPMG respondents declined to provide any consent to extend the limitation period. It is no part of my function at the moment to determine whether or not the liquidators' concerns about the limitation period were soundly based. However, I note that the pleader who drafted the Statement of Claim which has been filed in this proceeding does put some store in the proposition that the applicant's loss was first suffered on or about 28 September 2007. In my judgment, there is considerable force in the liquidators' submission that I should infer that the present proceeding was commenced when it was in order to preserve a limitation period and that the liquidators and their advisors wish to test prospects, to make any appropriate amendments to the current Statement of Claim which may be necessary or desirable and to make a final decision whether or not actually to pursue the litigation by effecting service. (c) A liquidator is entitled to examine the strength of a case, the existence and strength of likely defences that may be available to the defendants and also the defendants' ability to meet any judgment. These are all legitimate purposes and the mere fact that a substantive proceeding has been commenced does not preclude examination on those legitimate topics. (d) Messrs Steer, Board and Maddock may well be able to give evidence which assists the causes of action brought against the other respondents. (e) The earlier role of Piper Alderman in acting for some unit holders is neither here nor there. (f) The liquidators are not confined to documents which have already been produced. The mere fact that they have documents from KPMG, ASIC and possibly other sources does not prevent them from proceeding with the proposed examinations or using the documents which they have in their possession at those examinations. (g) The fact that a litigation funder has agreed to provide funding leads to no inference of improper purpose. In any event, the terms upon which that funding is to be provided are not before me. 69 The liquidators submitted that, notwithstanding the appearance of considerable work having been done, the substantive case was still very much in its infancy. I agree with that submission. A close examination of the relevant facts suggests that no firm views have been reached by the liquidators or their advisors as to the applicant's prospects of success in this proceeding. The liquidators are entitled to pursue the foreshadowed examinations for a number of purposes, all of which are legitimate.

Conclusions 70 For all of the above reasons, I have come to the view that the KPMG respondents have failed to make out a case for setting aside or staying any of the Examination Summonses served upon Messrs Steer, Board and Maddock. For the same reasons, I am satisfied that there is no occasion for the Court, at this stage, to step in and control or case manage those Examinations in advance of their being held by making pre-emptive orders as to the way in which those Examinations should be conducted or as to the topics which might be addressed during those Examinations. 71 Costs should follow the event. 72 There will be orders accordingly. I certify that the preceding seventy-two (72) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Foster.

Associate: Dated: 27 June 2014