In March 2019, Dr Oren Bigos and Laura Mills co-authored this article which looks at a recent case and the court’s discretion to issue summons for public examinations. This article was originally published in the March 2019 ARITA Journal and any copyright is owned by ARITA.
The exercise of the court’s discretion to summon a person for a public examination, requiring them to answer questions about a company’s examinable affairs, involves balancing the liquidator’s ability to discharge their duty to properly investigate the affairs of a company against ensuring justice to the examinee.
A recent example of this balancing exercise was illustrated in In the matter of Dalstonville Pty Ltd (in liquidation) and Don Leunig Pty Ltd (in liquidation) [2018] VSC 774 (Dalstonville), where an abuse of process for an improper purpose was not established by examinees despite an ongoing dispute between liquidators and a party related to the examinees.
Background of the application
In Dalstonville, the liquidators of Dalstonville Pty Ltd and Don Leunig Pty Ltd (the Companies) sought orders for the issuing of summonses to five examinees in connection with the examinable affairs of the Companies. The Supreme Court of Victoria issued summonses, pursuant to the discretion in s 596B of the Corporations Act 2001 (Cth) (Act), that required the examinees to attend for examination and to produce extensive documentation. The examinees sought to set aside the summonses, principally alleging improper purpose and an abuse of process.
The Companies had previously carried on a business selling and leasing forklifts and material handling equipment (Business). The proposed examinees were directors, officers or employees of a third company, Adapt‑A‑Lift Group Pty Ltd (AALG). AALG had acquired the Business pursuant to a complex sale transaction before the Companies entered administration and were subsequently wound up in insolvency.
A dispute remained between the Companies’ liquidators, the Companies’ receivers (appointed under the sale agreement to recover certain amounts from the Companies) and AALG regarding the sale of the business in relation to various adjustments to the purchase price and other payments (Dispute).
Examinees’ inspection of liquidators’ confidential affidavit
It is worth noting that the examinees successfully applied to inspect the liquidators’ confidential affidavit filed in support of their public examination applications pursuant to s 596C(2). Generally, such affidavits invariably contain confidential information that, if released, may put the examinees on notice of the matters upon which they may be examined and thus prejudice the examination process.
Here, a large portion of the affidavit dealt with historical matters which had already been the subject of extensive correspondence. The Court determined that it was unable to fairly and properly determine the substantive application to set aside the summonses without recourse to that affidavit and ordered, in accordance with the ‘justice of the case’, that the examinee’s solicitors be provided with a redacted copy ([77]).
Alleged abuse of process based on improper purpose
The examinees applied for the summonses to be set aside pursuant to Supreme Court (Corporations) Rules 2013 r 11.5. The principal challenge to the summonses concerned an alleged abuse of process on the basis that they were issued for an improper purpose.
The examinees argued that the predominant purpose of the public examinations was not to obtain information for the benefit of the Companies, their creditors or their contributories and therefore operated outside the public examination machinery in Part 5.9 of the Act. It was argued rather, that the predominant purpose was to impose a burdensome production process to inflict costs and cause inconvenience to AALG, its directors and employees in order to leverage a favourable settlement of the Dispute.
The examinees relied on a letter sent from the liquidators’ solicitors to the solicitors for AALG and the receivers, that (among other things) requested that certain ‘Required Actions’ (such as for the receivers to immediately retire as receivers of the Companies and for AALG to make payment of approximately $1.4 million) be undertaken in relation to settlement of the Dispute (Letter). The critical passages of the Letter are set out in the judgment (at [45]), which relevantly provides:
In the event that each of the Required Actions are not complied with to the satisfaction of the Liquidators by 12:00pm AEST on Friday 22 December 2017, the Liquidators intend to proceed with issuing the Summonses for Examination.
Purposes of the public examination process & abuse of process principles
The judgment provides (at [7] to [26]) a useful summary of the relevant legal principles underlying the public examination process. The key objective of that process is to allow a liquidator to obtain information in relation to the examinable affairs of a company in liquidation.
The court has inherent jurisdiction to stay an examination if it is an abuse of process. It is an abuse of the public examination procedure to seek to achieve some purpose foreign to that which the legislature intended, that is, ‘if the predominant purpose of the applicant seeking the order is not for the purpose of benefiting the corporation, its contributories or its creditors’.1
The examinee bears the ‘heavy’ onus of demonstrating that the liquidator’s predominant purpose of obtaining the examination summons is improper.2 Some examples of improper purposes in a public examination context were discussed (at [22] to [25]) which include to:
-exert pressure by inflicting costs, or causing undue inconvenience or embarrassment
-use the inconvenience and costs caused by the process to extract a higher offer in settlement of a claim
-use as a dress‑rehearsal for cross‑examination in a substantive proceeding, and
-allow a party to obtain a forensic advantage.
Abuse of process not established
The Court was not satisfied that the objective predominant purpose of the liquidators in seeking the public examinations was an improper one. The sale of the Business was a complex transaction which involved disputed matters and it was legitimate for the liquidators to seek to elicit information from the examinees concerning these unresolved issues.
There was evidence that the liquidators were motivated by a number of legitimate purposes consistent with the objects of the public examination provisions, including to:
-gather information relevant to the execution of the liquidators’ duties
-provide information to assist in identifying the Companies’ assets
-protect the interests of the creditors, and
-enable evidence and information to be obtained to support any action against the examinable officers or other persons in connection with the examinable affairs of the Companies.
‘Threat’ of public examinations in negotiations
Despite a predominant improper purpose not being established in this case, the Court commented that the Letter may be interpreted as conveying an ‘inappropriate threat’ to use public examination machinery (at [70]) and such correspondence was ‘unfortunate’ as it drew a link between the failure to meet the liquidators’ demands and the commencement of a public examination process (at [89]).
However, such correspondence should be considered in its full context and it was important not to place inordinate weight on one paragraph to necessarily warrant the inference of the public examinations were for a predominant improper purpose of seeking to put pressure on a party to resolve a commercial dispute.
The court distinguished this case from an extreme example of an improper purpose in DW Marketing Pty Ltd (in liquidation) [2009] VSC 663 (DW Marketing), where (at [47]) it was said that a letter ‘could not be interpreted as anything other than a threat to use the examinations provisions to cause, at the very least, expense and inconvenience to the examinees if the demand was not met.’
In Dalstonville, the public examination process was commenced almost eight months after the alleged ‘threat’ of public examination and there was no evidence of any settlement offers having been made. Further, the terms of the Letter were not as egregious as in DW Marketing (where there had been references to amounts that were not actually owing and to criminal liability). Significantly, the lawyer in DW Marketing actually admitted that the relevant letter was an attempt to draw a higher settlement offer from the examinees.
Balancing act
Setting aside public examination summonses on the ground of abuse of process requires a balancing act and remains a heavy burden to establish even when issued in the context of an ongoing dispute. Even so, liquidators should be wary to avoid ‘unfortunate’ correspondence that draws a link between the failure to meet the demands of a liquidator and the commencement of a public examination process which may be interpreted as a threat to use public examinations for an improper purpose.
1 Evans v Wainter (2005) 145 FCR 176, 200 [143]-[144] cited in Dalstonville [19]. 2 Accord Pacific Holdings Pty Ltd v Accord Pacific Land Pty Ltd (in liquidation) [2011] NSWSC 707 cited in Dalstonville [21].
*This article was originally published in the March 2019 ARITA Journal and any copyright is owned by ARITA.