Liquidators’ examinations – a sea apart; legislative drafting – “a huge amount of material to wade through before they take a single step”

The decision of the High Court of Australia in Walton v Arrium [by majority (3-2)] adopting a broad interpretation of the examination power under s 596A of the Corporations Act is consistent with views of the 2015 New Zealand Court of Appeal in Finnigan v Ellis[1] that Australian courts have readily allowed examinations to proceed beyond the scope of their purpose.  The examination provisions in the matters before the respective courts were not the same but they share a common bankruptcy heritage with English law.

The particular issue on which the NZ Court of Appeal took exception back in 2015 was in relation to the Australian courts’ accepting that the power to examine allowed an inquiry into the “judgment worthiness” of a defendant to a liquidator’s claim, requiring production of the defendant’s personal tax returns, personal bank statements, and statements of assets and liabilities.

The Court held that the examination power under NZ law does not authorise the obtaining of an examinee’s private information for the purposes of ascertaining whether they can meet any money judgment that may be obtained against them. The phrase “any matter relating to the … affairs of the company” in s 266 of the NZ Companies Act 1993 was limited to information about the company’s management, accounts and the handling of its business affairs (including its assets and liabilities).[2]

In contrast, in Australia, as the NZ Court of Appeal said, the discretion is seemingly always exercised in favour of liquidators, though it noted one decision that contemplated oppression in the extent of the personal documents sought.[3]  NZ had generally adopted English case law as to the nature and extent of examinations and the need to balance the tensions between the rights of the liquidator and the creditors, and the rights of the examinee.

“(S)uch tensions have not led to the same level of restraint in Australia as there has been in England and in New Zealand.  …

Despite the legislation of both countries being essentially similar, the exercise of the discretion in each has been remarkably different. We prefer an approach which first determines whether our law authorises the examination that is sought here, and so we have approached the matter as a question of jurisdiction. We are satisfied that this approach provides greater legal and commercial certainty and is consistent with the way we read statutes in New Zealand”.

Both the NZ Court of Appeal and the two judges dissenting in Walton v Arrium – Kiefel CJ and Keane J – had regard to the origins of examinations and their purposes under bankruptcy law.

Class actions

As to the use of Walton v Arrium to allow examinations in relation to class actions, irrespective of the benefit to the creditors, the NZ Law Commission is presently in the midst of a review of class actions and litigation funding.[4]   It would not be likely to confront the question of the extension of the examination power decided in Arrium, save perhaps as an indicator of the scene in Australia.  It has already commented on what it sees as a polarisation of views on class actions in Australia, its proffered explanations for this being that this polarisation comes from the development of ‘a separate plaintiff bar and defendant bar’ in Australia, in contrast to New Zealand; and what it saw as “the collegial nature of the legal community in Aotearoa New Zealand”.

See NZ’s measured review of class actions and litigation funding, noting Australia’s ‘polarised’ debate | Murrays Legal

Other NZ input

New Zealand judges have been similarly helpful in other aspects of Australian insolvency law.  The decision of the Full Federal Court in Badenoch Integrated Logging v Bryant agreed with the New Zealand Court of Appeal’s view in Timberworld v Levin about the “peak indebtedness rule” which the Full Court in effect repealed.  Special leave to the High Court of Australia having been sought, the High Court may need to have regard to the position taken in New Zealand.

Then there is the High Court of Australia decision in Foots on the provability of costs orders; and no doubt other issues.  See Peak indebtedness and other insolvency law views from New Zealand | Murrays Legal

As I have commented before, New Zealand case law often provides a useful external oversight of Australian case law, unconstrained as NZ courts are by Australian court hierarchy and precedent. New Zealand courts also often draw on Australian case law, given the comparable laws in many areas.

But while laws might be comparable, and in fact NZ has adopted aspects of our voluntary administration and voidable transaction law, its courts do not accept Australia’s glosses on the plain words of the borrowed section, the peak indebtedness rule being one example, a rule said to be applied by Australian courts “on the ground that it is settled law, without analysing its relationship to the legislation”.

Statute law and legislative drafting

As to the statute law itself, at the second reading of the NZ Companies Bill 1993, which introduced major changes to insolvency law comparable to those introduced in Australia at that time, misgivings were expressed “relating to harmonisation with Australian commercial law”.[5]

Certainly as to the legislative processes generally, and as to the Corporations Act in particular:

“the Australians have their hands full trying to untangle this matter. They have their federal legal system, their state legal systems, and a huge amount of material to wade through before they take a single step”.

And as to legislative drafting:

 “I congratulate our local law draftsmen, as in New Zealand we manage to produce statutes that occupy 1 page to every 5, 6, 7, or 10 pages produced by the Australian draftsmen. From that point of view, and from the inquiries I have made, which ranged right up to staff in the Attorney-General’s office, the Australians actually acknowledge the quality of what we have been doing in New Zealand, and they are reasonably relaxed about the progress we have been making. …. and in so far as harmonisation with Australian law is concerned we are able to contribute something worthwhile to our Australian neighbours. That is the way it should be”.

Whether New Zealand wanted to take much back from Australia was not mentioned.

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[1] [2017] NZCA 488; [2018] 2 NZLR 123

[2] Applied in Fatupaito v Stewart [2021] NZHC 1679

[3] In the matter of Bernsteen Pty Ltd & Anor (No 2) [2007] FCA 48

[4] As to litigation funding, the NSW Court of Appeal decision was relied upon in LCM Operations, as to a finding that a liquidator’s documents could be used by a litigation funder that had purchased the liquidator’s right of action in its pursuit of the claim.  See Use of liquidator’s examination documents in litigation assigned to funders — Re LCM Operations Pty Ltd; 316 Group Pty Ltd (in liq) (2021) 21(5&6) INSLB 70, Justin Ward and Marcel Fernandes. The High Court’s decision may give further support to that finding.

[5] Historical Hansard – New Zealand Parliament (www.parliament.nz)

2 Responses

  1. Well said Michael. Conversely, Section 95A is well drafted but the Courts have somehow been persuaded to call the solvency test “primarily a cash flow test”. That is not what the Section says. It is not in keeping with the historical common law, and it is not logical.

    The Section, common law and logic all say the test is a balance sheet test first (i.e. can all debts be paid?) and only if that question is answered in the positive, does the next question arise – can those debts be paid on time.

    It must have been some really clever barrister to divert the Courts down the “primarily a cash flow test” slippery (and expensive for the economy) slope.

    1. Yes, that is a big topic and if we were to start again, what would be the best test? Or should the fact of insolvency not be the relevant trigger? [as it is now for winding up, voidable recoveries, insolvent trading etc]. It seems a rather tedious and expensive process. And aren’t there balance sheets and balance sheets?! And is NZ’s 239C any better?
      Thanks for your thoughts.

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