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Creditor’s examination summons of a liquidator upheld

A creditor’s summons for the section 596A public examination of the liquidator about his sale of company property has been found not to be an abuse of process. The appeal court overruled the trial judge who had found that the examination was a “substantial intrusion into the liquidation”; and that the creditor’s wish to explore the liquidator’s sales process did not justify the exercise of the examination power: see the trial decision explained below.

The Full Federal Court said that while there could be cases where a s 596A examination of a liquidator could be an abuse, there was no evidence of that from the liquidator. The special position of liquidators does not support any inference that they are not be to open to examination by a creditor. The statutory scheme for examinations does not treat a liquidator differently to any other officer who might be subject to an examination.

The primary judge’s conclusion that the examination was not justified was wrong.  In contrast to s 536 of the Corporations Act, which requires a threshold justification, s 596A is mandatory.

Also, an examination does not need to be shown to reveal information to have “practical utility”. While the overarching purpose of such an examination must be to benefit the corporation, its creditors, members or the public generally, it does not necessarily follow that an examination summons is an abuse of process simply because the Court cannot be satisfied, on the evidence then available, that there is a reasonable prospect that the end result will be the disclosure of a viable claim against the examinee or another person. This ascribes an overly narrow meaning to the use of the section and it conflates the purpose of an examination summons with the possible outcome of the process. It remains the law however that a purpose of securing a benefit in litigation, not involving the company, could be an abuse.

See  Kimberley Diamonds Ltd v Arnautovic [2017] FCAFC 91.

Note that under the new insolvency laws, section 536 is being repealed and replaced by the Court’s supervisory powers in Division 90 of the Insolvency Practice Schedule (Corporations).

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In an unusual case, a disaffected defendant to preference proceedings – KDL – brought by a liquidator obtained ASIC approval for “eligible applicant” status in order to conduct an examination of the liquidator under s 596A(a) of the Corporations Act.  On the liquidator’s application, the Court set aside the summons.  In doing so, the Judge gives a useful analysis of the limited circumstances when a court will seek to interfere with the commercial decisions of a liquidator, or trustee, and of the status of a liquidator under insolvency law.  

The analysis

ASIC gave no reasons for its decision to give KDL its rights to apply for a summons, though it was not required to: Saraceni v ASIC [2013] FCAFC 42; (2013) 211 FCR 298. The purpose of the examination was said to be to challenge the adequacy of the liquidator’s sale process of a gold mine.

In challenging the summons, the liquidator did not suggest that KDL had any ulterior purpose for the examination; and he accepted that s 596A is sufficiently broad to permit the examination by KDL as an eligible applicant in relation to the proposed subject matter.

The basis of his challenge relied upon the court’s implied jurisdiction to stay an examination which is an abuse of process: Carter v Gartner [2003] FCA 653; (2003) 130 FCR 99; and upon r 11.5 of the Federal Court (Corporations) Rules 2000

Generally an abuse of process falls within one of three categories:

(1) invoking of a Court’s processes for an illegitimate or collateral purpose;

(2) where using the Court’s procedures would be unjustifiably oppressive to a party; or

(3) where using the Court’s procedures would bring the administration of justice into disrepute.

As general propositions, the Judge said that:

  • the court has special control over and responsibility for liquidators. In fact the functions of liquidators were originally part of the functions of a court official.
  • there is no duty upon a liquidator to obtain the best possible price for the company’s assets: Hausman v Smith [2006] NSWSC 682;
  • the court rarely interferes with the exercise by liquidators of their statutory powers, and in particular, it does not interfere where the liquidator’s decision is really one of commercial judgment.
  • the investigation of the conduct of a liquidator qua liquidator is a supervisory function of the court., under s 536. The court does not readily embark on or permit inquiries into the conduct of liquidators, in the absence of conduct liable to attract sanctions or control for what might broadly be described as disciplinary reasons.
  • The corollary of this is that the court will not permit its officer to be sued by a creditor or have an inquiry made under s 536 unless it is satisfied that there is a prima facie case.
  • The same applies to trustees in bankruptcy. Indeed there is no example of the use of the examination power in s 34 of the Bankruptcy Act to examine a trustee in bankruptcy.

Hence, the examination of the liquidator did not fulfil the purpose of s 596A to benefit the company, its creditors, members or the public generally. The summons involved a challenge to the integrity of the liquidation process. Such a challenge warranted 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 in circumstances where there was no suggestion of lack of good faith or breach of duty. No justification was made. Kimberley Diamonds Ltd, in the matter of Kimberley Diamond Company Pty Ltd (in liq) [2016] FCA 1016.

 

 

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