By Georgina King a Senior Associate of Matthews Folbigg, in our Insolvency, Restructuring and Debt Recovery Group.
When will a liquidator be the subject of a public examination?
On its face a liquidator is fair game for public examination under section 596A of the Corporations Act 2001 (Cth)(Act). They are officers of the Company to which they are appointed, and section 596A provides for mandatory examination of a company’s officers if a request is made by an eligible applicant. And even under section 596B they clearly have (or should have) information about the examinable affairs of the company – so how could the liquidator resist a summons?
The recent case of Kimberley Diamonds Ltd, in the matter of Kimberley Diamond Company Pty Ltd (in liq) [2016] FCA 1016 shows there are nevertheless limits the Court will place on attempts to examine a liquidator.
In this Federal Court case, a summons for examination of the liquidator and production of documents had been issued pursuant to sections 596A and 597(9) of the Act at the request of a company (KDL) which was the sole shareholder of the company in liquidation (KDC). Prior to having the summons issued, KDL, in the normal course, applied successfully to ASIC to be an eligible applicant, as required by section 596A.
What KDL really wanted (apparently) were some answers from the liquidator regarding the sales process undertaken in respect of KDC’s diamond mine and processing plant, which resulted in the disclaimer of the mining lease by the liquidator as onerous property under section 568 of the Act. KDL said it was concerned that the sale process was short, and allegedly defective.
KDL also happened to be a defendant in Supreme Court proceedings brought by the liquidator and KDC seeking to recover an unfair preference. The liquidator did not suggest that the examination was for any ulterior purpose. Nevertheless the liquidator applied to set aside or stay the examination summons on the basis that that it was an abuse of process.
In reaching her decision regarding the application, Justice Gleeson, considered in detail the nature of the role and responsibilities of liquidators, and the role of the Court in protecting liquidators and the integrity and efficiency of a winding up. Her Honour noted that liquidators can only be sued with leave of the Court, and that for an inquiry to be conducted into a liquidator’s conduct under section 536 of the Act, proper grounds need to be established. Gleeson J considered that a similar approach should be adopted when considering a section 596A application concerning examination of a liquidator. Her Honour found that even though the language of section 596A is in the “widest possible terms” the Court is not prevented from “examining the purpose of the examination, and its possible results” and staying the examination if those matters do not justify examination of the liquidator (at [63]).
Her Honour held that an examination of a liquidator pursuant to section 596A should not be permitted unless there is reason to believe it may benefit the company, its creditors, members or members of the public generally (at [62]).
In the present matter, her Honour noted that (at [64]):
“The examination summons involves a challenge to the integrity of the liquidation process in relation to KDC. Such a challenge warrants justification, to avoid intrusion into the regular administration of the liquidation (which has not concluded) and to prevent the liquidator from being required to account on oath for the exercise of discretions and commercial judgments if there is no suggestion of lack of good faith or breach of duty.”
The Court noted the absence of any positive evidence of fraud, dishonesty, misconduct or lack of bona fides on the part of the liquidators, or any conflict of interest, lack of impartiality, or improper purpose, or even any particular flaw in the liquidators’ exercise of commercial judgment.
Her Honour concluded that KDL’s “desire to explore the circumstances of the sale process, which it considers to have been defective” did not justify exercise of section 596A where this would involve a substantial intrusion into the liquidation by examining the liquidator in the course of his conduct of that liquidation. Justice Gleeson then ordered that the examination of the liquidator be permanently stayed and the order for production of documents set aside.
The decision demonstrates that although section 596A is a mandatory power, the Court will protect liquidators from being examined unless the circumstances demonstrate a proper factual basis and purpose for an examination which will benefit creditors, members, the company or the public generally.
Read the full judgment here(link is external)
If you would like more information or advice in relation to insolvency, restructuring or debt recovery law, contact Georgina King on (02) 9806 7485 or georginak@matthewsfolbigg.com.au, or a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:
Jeffrey Brown on (02) 9806 7446 or jeffreyb@matthewsfolbigg.com.au
Stephen Mullette on (02) 9806 7459 or stephenm@matthewsfolbigg.com.au
