All clear: Funder free to use documents produced in examination - Insolvency/Bankruptcy

This week's TGIF considers the decision of LCM Operations Pty Ltd, in the matter of 316 Group Pty Ltd (In Liquidation) [2021] FCA 324, in which the Federal Court provided guidance on the use of documents obtained under examination and production orders.

Key Takeaways

Liquidators are not exempt from the Harman undertaking and must not use documents produced in response to an examination summons for a collateral or ulterior purpose.
The use of such documents in the liquidation (including in subsequent proceedings) is not a collateral or ulterior purpose.
Parity of reasoning suggests the same principles apply to an 'eligible applicant' (such as a litigation funder) if their own purpose could confer a benefit to the company or its creditors.

What happened?

On 14 August 2019, a liquidator sold claims available to him to a litigation funder for $10,000, plus a 15% share in the proceeds of any subsequent recovery.

Once creditors approved the arrangement, and the funder was authorised by ASIC as an 'eligible applicant', orders were sought for the issue of summonses and orders for production. The affidavit in support of that application cited the funder's purpose in conducting examinations was to investigate the quantum and prospects of a debt claim against Rabah Enterprises Pty Ltd (Rabah). The documents produced in that examination revealed a claim against Rabah for a debt in the sum of $14.8 million.

Proceedings were then commenced by the funder to recover that debt and reliance was placed on documents it obtained through the examination process.

Rabah asserted, via correspondence, that the funder was not allowed to rely on that material due to the Harman obligation, which operates so that a document produced to a court cannot be used "for any purpose other than that for which it was given".

While the funder rejected that notion, it sought leave to be excused from the undertaking or, in the event leave was not required, a declaration to that effect.

Key issues

The key issues before the Court were:

whether leave was required by the funder to use the documents; and
if leave was required, whether it should be granted.

The decision

Justice Steward reviewed a number of previous cases which considered liquidators' use of documents produced under production orders. Those cases provided authority for the following propositions:

a liquidator is not exempt from the Harman undertaking and must not use documents produced in response to a summons for a collateral or ulterior purpose; and
the use of such documents in the liquidation (by commencing proceedings against a third party, for example) is not a collateral or ulterior purpose as it is part of the process of getting in the assets in the liquidation.

His Honour also observed that in a recent Federal Court case,¹ the court had commented these same principles might by analogy apply to 'eligible applicants' as there would be little utility in, having authorised examinations, forbidding the use of information or documents obtained through that process in subsequent proceedings.

Leaving that question to one side, his Honour considered this case was best decided on its own facts, with reference to the purpose for which the documents were produced and the purpose for which it was intended they be used in the Supreme Court proceedings. On review, the Court was satisfied the purpose was the same (to bring in the assets of the company) and, in such circumstances, leave was not required.

In reaching this conclusion, his Honour rejected submissions from Rabah that the funder was pursuing a 'private purpose' and the use of the documents was not associated with the liquidation or for the benefit of creditors.

His Honour's view was that this contention was irrelevant to a determination of whether the documents could be used by the funder noting, in any event, the evidence made clear the claim involved "a mixed purpose, being in part satisfaction of [the funder's] own interests and in part the interests of the company and its creditors".

As a result, the declaration sought by the funder was made and Rabah ordered to pay costs.

Comment

This case provides clear guidance to insolvency practitioners, their advisers and litigation funders that the use of documents obtained through an examination can be used in subsequent proceedings, without leave from the operation of the Harman undertaking.

While each case will turn on its facts, what will prove crucial is whether the intended use of the documents is within the purpose for which they were acquired and, in the case of "eligible applicants", whether such purpose could confer a benefit to the company.

Footnote

¹Re Endeavour Securities (Australia) Ltd (in liq) [2020] FCA 1773

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.