Who can use documents obtained in public examinations and when?

In LCM Operations Pty Ltd, in the matter of 316 Group Pty Ltd (In Liquidation) [2021] FCA 324, the Federal Court considered whether a third party who has been assigned a company’s claim by a liquidator breached the Harman undertaking with respect to documents obtained through public examinations.

What happened?

• 316 Group Pty Ltd (316) was placed into liquidation. Whilst the Liquidator had identified some potential claims, the Liquidator was unable to fund public examinations to explore those claims.
• 316, the Liquidator and LCM Operations Pty Ltd (LCM) entered into an agreement whereby the Liquidator and 316 sold ‘absolutely’ any claim which 316 or the Liquidator had, or may have had, against Rabah Enterprises Pty Ltd (Rabah) amongst others. Essentially, 316 assigned its claims to LCM and LCM would pay a certain amount to the Liquidator and 316 for the claims, in addition to 15% of the aggregate value recovered by LCM under those claims.
• Such an assignment is permitted by section 100-5 of the Insolvency Practice Schedule and the creditors of 316 resolved that 316 and the Liquidator were authorised to enter into that agreement pursuant to section 477(2B) of the Corporations Act 2001 (Cth) (the Act).
• LCM subsequently applied for and successfully obtained ‘eligible applicant’ status under sections 596A and 596B of the Act for the issue of public examination summonses, together with orders for production of documents (the Production Orders).
• LCM then applied to Court for issue of those summonses and orders for production of documents pursuant to sections 596D(2) and 597(9) of the Act (the PE Proceedings). Documents produced in response to those orders related to LCM’s claim against Rabah.
• Subsequently LCM commenced proceedings in the Supreme Court against Rabah for debt owed by Rabah to 316 (but assigned to LCM) seeking recovery of $14.8million (the Rabah Recovery Proceedings).
• Rabah challenged LCM’s ability to rely on documents produced pursuant to the Production Orders, claiming that LCM and its solicitors had breached the Harman undertaking by using the documents obtained through the PE Proceedings in the Rabah Recovery Proceedings.

LCM sought leave (insofar as it was required) for a declaration to be excused from the Harman undertaking.

The Harman undertaking

Often described as an ‘implied undertaking’, the Harman undertaking provides that:

“Where one party to litigation is compelled, either by reason of a rule of court, or by reason of a specific order of the court, or otherwise, to disclose documents or information, the party obtaining the disclosure cannot, without the leave of the court, use it for any purpose other than that for which it was given unless it is received into evidence.”[1]

Fundamentally, it is an obligation that a party cannot use documents or information for a collateral or ulterior purpose. Only the Court may release a party from the undertaking.[2]

Could LCM rely on the documents produced? Did LCM require the Court’s leave?

It was readily accepted that the Harman undertaking applied to the documents produced in the PE Proceedings.

Justice Stewart considered that the ‘real question’ was whether LCM required leave to use the documents in the Rabah Recovery Proceedings and if so, whether such leave ought to be granted. Citing Re Southern Equities Corporation Ltd (in liq); Bond & Caboche v England,[3] Justice Stewart noted that:

• the Harman undertaking applies to a liquidator regarding documents produced in response to an examination summons. Put another way, a liquidator does not enjoy a special position with respect to the Harman undertaking;
• the use of documents in the liquidation is not a collateral or ulterior purpose; and
• consequently, a liquidator is entitled to use documents produced in response to an examination summons in proceedings to get in and realise the assets of the company commenced by a liquidator without the Court’s leave.

His Honour considered that it was not relevant for him to determine whether an ‘eligible applicant’ (like LCM) was in the same position as a liquidator. Rather, the question was best determined by reference to the implied undertaking having regard to the facts of the matter before him.

Here, LCM commenced the PE Proceedings for the purpose of investigating 316’s potential claims (which had been assigned to LCM) against Rabah. That was the very claim which LCM now sought to pursue in the Supreme Court proceedings. Accordingly, there was no ulterior purpose and as such, leave was not required.

Were the Production Orders an abuse of process?

Rabah also argued that the public examinations were an abuse of process because the orders for production were for the ‘private purpose’ of LCM (unlike a liquidator who undertakes such examinations for the benefit of creditors).

This argument was swiftly rejected by Justice Stewart, particularly in circumstances where:

• the creditors of 316 retained a 15% interest in any recovery of money owing by Rabah;
• the liquidator had been unable to fund the examinations directly and the assignment of the claim to LCM afforded the liquidator an opportunity to pursue recovery on behalf of creditors; and
• the creditors had authorised the assignment.

His Honour was satisfied that there was a ‘mixed purpose’, comprising (a) LCM’s self-interest and (b) demonstrable benefit to the liquidator, the interests of 316 and its creditors.

Accordingly, a declaration was made that LCM was entitled to use the documents in the Rabah Recovery Proceedings.

Key takeaway

• A liquidator is entitled to use documents produced in response to an examination summons, without the Court’s leave, in proceedings to get in and realise the assets of the company commenced by a liquidator.
• Where a liquidator has assigned the company’s claim to a third party, that assignee will not breach the Harman undertaking where documents obtained through public examinations are used for the purpose for which they were obtained.

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Authored by:
Susan Forrest, Partner
Tahlia O’Connor, Senior Associate

[1] Hearne v Street [2008] HCA 36; 235 CLR 125 at [96] per Hayne, Heyden and Crennan JJ described the principle contained in Harman v Secretary of State for Home Department [1983] 1 AC 208.

[2] Hearne v Street [2008] HCA 36; 235 CLR 125 at [107]-[108].

[3] (1997) 25 ASCR 394.