Public examinations: a weapon for liquidators

Public examinations provide a powerful tool for liquidators to obtain information and establish facts about matters regarding a company’s affairs, history and management.

The key provisions are set out in Sections 596A and 596B of the Corporations Act 2001 (Cth) (Act) and provide liquidators with the power to examine company officers or other parties, which have been involved with the affairs of the company.

Types of Examination

There are two different types of examinations a liquidator can apply for, being:

1. Mandatory examinations under section 596A of the Act; or
2. Discretionary examinations under section 596B of the Act.

Generally, liquidators have a right to examine current or former officers or provisional liquidators of a company in relation to that company’s examinable affairs under the mandatory examination provisions. If the liquidator meets the requirements under these provisions, then the court has no discretion and must issue the summons for examination. A mandatory examination must, however, be issued to serve any purpose that will benefit the company, its creditors, its members or the public generally.[1] In any case, the court will not permit the examination to proceed if it is evident that it is an abuse of process to do so.

On the other hand, discretionary examinations provide a mechanism for liquidators to examine a person, beyond an “officer” of the company, if that person is able to give information in relation to the company’s examinable affairs. The court has wide discretion to issue a summons under the discretionary examination provisions, and must be satisfied that the person:

1. has taken part or been concerned in examinable affairs of the corporation and has been, or may have been, guilty of misconduct in relation to the corporation; or
2. may be able to give information about examinable affairs of the corporation.[2]

An application for a discretionary examination should be accompanied by an affidavit in support of the application.[3] The affidavit should identify the reason the examination is sought and why the proposed examinee should be examined. The affidavit in support can be filed as a confidential affidavit that is not available for inspection by the proposed examinee unless the court orders otherwise.[4]

Questioning

An examination is generally an inquisitorial or investigative exercise and therefore the scope of questioning can be potentially broad. Although the examination must relate to the company’s examinable affairs, the examiner may be permitted by the Court to ask questions about the company and its examinable affairs as it see’s fit.

Questions in relation to the company’s “examinable affairs” may include:

1. the promotion, formation, management, administration or winding up of the corporation; or
2. any other affairs of the corporation (including anything that is included in the corporation’s affairs because of section 53); or
3. the business affairs of a connected entity of the corporation, in so far as they are, or appear to be, relevant to the corporation or to anything that is included in the corporation’s examinable affairs because of paragraph (1) or (2).[5]

An examinee generally cannot refuse to answer questions even if it may incriminate the person or make them liable to a penalty. The purpose of this rule is due to the fact that in some cases public examination is the only way a liquidator may be able to obtain information about the events leading to the failure of the company.

However, an examinee may claim privilege over some answers. In this case, a liquidator cannot use these answers as evidence to prosecute the examinee.[6]

A Balancing Act

The Courts have identified that examinations are an important tool for liquidators to gather information which would not generally be available. However, the provisions confer broad powers on liquidators and it is important that liquidators ensure that examinations are conducted for a proper purpose, particularly considering the powers provided under section 596B of the Act. If the examinations are being conducted for an improper purpose, it may be considered an abuse of process and the examinee may be able to apply to the Court to have the orders for examination set aside. Rule 11.5(2) of the Federal Court (Corporations) Rules 2000 allows a person served with an examination summons, within 3 days, to make an application to the Court for it to be set aside.[7]

In deciding whether the orders for examination should be set aside, the Courts will ensure that an examinee is not oppressed by the procedure or unfairly disadvantaged.

In the matter of Queensland Nickel Pty Ltd (In Liq) v Parbery, in his capacity as Liquidator of Queensland Nickel Pty Ltd (In Liq) [2016] FCA 1048 ((Queensland Nickel) the court considered an application to set aside aspects of the examination summons on several bases, including an application that it was unconstitutional. It was found that the power conferred under the mandatory and discretionary provisions make it clear that the examination process falls under the direct supervision of the Court to ensure the process is not abused or conducted oppressively.[8] This was also examined in Saraceni v Jones [2012] WASCA 59; [2012] HCA 38, which was confirmed in Queensland Nickel. The conferral of the power for examinations was not regarded to be unconstitutional and the examination summons in this case were not set aside.

It is important to note that to set aside an examination summons, an applicant must clearly demonstrate that the examinations are not for a proper purpose. Therefore, liquidators should ensure that there are reasonable grounds for the belief the person they wish to examine may be capable of giving information about the company’s affairs or may be guilty of misconduct. liquidators should be cautious when considering the parties it wishes to examine and be mindful to ensure the rights of the party are not oppressed by the procedure.

How can we help you

If you are a liquidator seeking advice on examinations or have any questions please contact us on 02 8239 9600 or email contact@jhklegal.com.au to discuss how we may be able to assist you.

Written by Kristina Ghobar,
Associate

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[1] Kimberley Diamonds Ltd, in the matter of Kimberley Diamond Company Pty Ltd (in liq) [2016] FCA 1016

[2] Section 596B(1)(b) of the Act.

[3] Section 596C of the Act.

[4] Section 596C of the Act.

[5] Section 9 of the Act.

[6] Section 597(12A) of the Act.

[7] Rule 11.5(2) of the Federal Court (Corporations) Rules 2000.

[8] Queensland Nickel Pty Ltd (In Liq) v Parbery, in his capacity as Liquidator of Queensland Nickel Pty Ltd (In Liq) [2016] FCA 1048 at 44