Public examinations under the Corporations Act 2001
January 31, 2013
Sections 596A and 596B of the Corporations Act 2001 (Cth) provide an eligible applicant with the power to summons company officers, or any parties with information pertaining to a failed company’s affairs, to be examined under oath in court. An eligible applicant, who can exercise this power, is a liquidator, provisional liquidator, voluntary administrator, administrator of a deed of company arrangement (‘DOCA’) or a person appointed by ASIC, including a creditor.
The power to publicly examine is sparingly employed, and is most often utilised to encourage recalcitrant or vague company officers to cooperate. However, it is one of the strongest weapons that can be wielded in the process of investigating a company’s demise and the most powerful exercise of this power is to obtain evidence that can be used in pursuing proceedings against directors for breach of fiduciary duties or insolvent trading, or against recipients of uncommercial or voidable transactions or preference payments.
Applications for the examination of officers or provisional liquidators of failed companies are made under s596A. Where an eligible applicant wishes to examine someone who has been involved with the affairs of the failed company, may be guilty of misconduct in respect of that company, or who may simply be able to give information about the affairs of the company, the application must be made pursuant to s596B
Application for summons for examination
An application for an examination under ss 596A or 596B is made by originating process or, where proceedings relating to the company are already on foot, by an interlocutory notice of motion. Although there is no requirement under the Corporations Act to file an affidavit in support of an application under either section, Rule 11.3 of the Supreme Court (Corporations) Rules 1999 imposes such a requirement.
The affidavit must identify the reason the examination is sought and, in the case of an application made under s596B, must explain why the proposed examinee should be examined – for example, the belief that he possesses pertinent information about the company. The affidavit in support is not served on the examinee and is a confidential document, not available for inspection by the examinee unless a court otherwise orders (s596C). Filing fees apply to both an originating process and an interlocutory application.
An application made by ASIC or by a liquidator can be made without notice to the proposed examinee, but, in such circumstances, the applicant has a duty to the court of full disclosure. Even where notice is given to the proposed examinee, he has no right to be heard on the application for the summons.
Provided the applicant is a liquidator, a provisional liquidator, an administrator, an administrator of a DOCA or a person authorised by ASIC and that the proposed examinee is a person who has been an officer of a company in the two years prior to that company entering administration, executing a DOCA, or being wound up in liquidation, the court must issue the summons pursuant to section s596A. There is no inherent discretion in the Court’s powers to refuse such an application.
However, applications made under s596B are discretionary. In deciding whether or not to issue the summons, the Court will give consideration to the purpose of the examination, the importance of the information being sought, whether the examination summons is vexatious or oppressive to the person who is to be examined, and any public interest concerns. In such circumstances, it is often a balancing exercise between the interests of the creditors and the interests of the proposed examinee.
In an application under s596B the court may refuse to issue the summons, or alternatively may grant the application with directions as to the conduct of the examination, including limits to the questions that may be asked or prohibitions on the publication of information obtained by examination. The summons may also require the examinee to produce books and records relating to the company’s affairs and in the examinee’s possession (s596D)
A summons that has been issued must be served on the proposed examinee no later than eight days before the date set for the examination. If the examinee objects to the summons, he has the right to apply to discharge it, but such an application must be made within three days of the summons being served. An affidavit must be filed in support setting out the grounds on which the discharge is sought, which will usually be that the examination is an abuse of process. Claims for abuse of process often allege that the summons is being used for an improper purpose or the office-holder seeks to utilise the examination process as a dress-rehearsal for cross-examination in advance of substantive proceedings against the examinee.
Written notice of the examination must be given to as many creditors as practicable to enable them to participate in the examination if they so choose.
Procedure of examination
Section 597 of the Corporations Act sets down the procedural requirements of the examination itself. The examination must be held in public except in special circumstances where, in the court’s opinion, it is preferable for it to be held in private. A record of the examination will usually be required to be taken.
The examinee may be asked any question about the company, its formation, management, administration or other affairs, as well as the business affairs of a connected entity so far as they are relevant to the failed company or to that company’s affairs. Although the scope of an examination can be extremely broad, the Court will prevent questions being asked of the examinee that are not relevant or appear to simply be a fishing expedition without a clear objective.
The examinee may be legally represented at his own expense. The examination will be presided over by a registrar who may interject with questions, but whose main role is to ensure the examination is properly conducted and the office-holder’s legal representative does not ask unfair or irrelevant questions of the examinee. As the examination progresses, the registrar may also give directions, as set out above, about the use of material obtained or about the ongoing conduct of the examination.
The inherent value of the examination process is that the examinee is compelled under oath or affirmation to answer all questions asked of him honestly and to the best of his ability, and the record that is taken of the examination can subsequently be used as evidence in legal proceedings against other parties, or against the examinee himself. The immunity provided by legal professional privilege applies to the examination process, but in the context of a public examination, a person is not excused from answering a question on the ground that it might incriminate him unless each answer is individually claimed to be privileged prior to answering (typically invoked by the examinee saying ‘privilege’ at the beginning of each answer). The reason the privilege against self-incrimination does not strictly apply to all answers is because of the often-limited scope of opportunity the liquidator has to seek the information available to him in an examination.
A warrant of arrest may be issued where an examinee fails to attend the examination, refuses to answer questions, fails to produce the summonsed documents or absconds in advance of the examination.
Use of the examination process
The examination summons is a weapon of investigation that is often under-utilised by office-holders. The main reason for a reluctance in using this process is the cost involved in doing so. Although the process of obtaining the summons for examination is relatively straightforward and inexpensive, counsel will usually be required to conduct the examination to maximum effect, and the actual process of questioning the examinee can be often be very time-consuming.
Nevertheless, the expense should not be a deterrent in utilising the procedure where a substantial benefit to creditors will be obtained. Where there is cause to believe that the examination process may assist asset recovery by pursuing proceedings against errant directors or recipients of uncommercial or voidable transactions, but evidence is limited and the office-holder is having difficulty in obtaining information, the use of the power should be seriously considered. In our recent experience, we have acted in an examination of three directors that occupied over a week of hearing time and cost in the range of $100,000. However, the evidence that was obtained from that process proved vital to proceedings the liquidator subsequently issued against one of the examined directors that led to a recovery of over $1 million for the benefit of creditors.
It is an inherently commercial decision as to whether the examination process should be utilised, and there are means by which the costs concerns of office-holders can be defrayed. For example, funding can be sought from a creditor, or a group of creditors, who are keen to see delinquent directors or unlawful beneficiaries of company funds brought to account. Alternatively, where a creditor wishes to pursue an examination, ASIC can authorise that creditor to act as the applicant for the summons.
Furthermore, as a cost-effective option, s597A allows a liquidator to apply to Court for a person examinable under ss596A or 596B to provide evidence by affidavit. This is often used as a precursor to an examination summons, but can be used as a more commercially viable alternative where information is sought on specific issues which can be effectively reduced to writing and where it is not anticipated, at least initially, that cross-examination will be required on the responses.
Authored by Nell McGill, Lawyer, Newcastle.
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