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Public Examinations Under The Bankruptcy Act And Corporations Act: A Practical Overview Print E-mail

article_bankruptcy-corporations_340w.jpgBy Paul McQuade QC and James Green

In the last paper delivered pursuant to the Bar Association’s CPD program,1 the importance of the liquidator’s role in the recovery assets of an insolvent company was stressed. This paper aims to build upon that presentation by exploring the chief mechanism by which liquidators (and other practitioners dealing with companies under external administration or trustees in a personal bankruptcy) are able to obtain information about the transactions which they may wish to unwind.

In particular, this seminar will consider the statutory provisions and processes governing public examinations under the Corporations Act 2001 (Cth) and the Bankruptcy Act 1966 (Cth). The seminar will:

a. summarise how to apply for a public examination;

b. provide an overview of the procedure for conducting an examination; and

c. identify practical tips to enhance the effectiveness of public examinations, and to avoid common pitfalls.

The purpose of the seminar is to provide an overview of the subject from a practical perspective. Further material on the subject may found in McPhersons Law of Company Liquidation2 (McPhersons) and in Australian Bankruptcy Law & Practice3 for which texts the authors are grateful.

Corporations Act – relevant provisions

Public examinations under the Corporations Act provide an important mechanism by which liquidators may obtain information about matters regarding a company’s affairs and management. The public examination provisions are set out in Part 5.9 of Chapter 5 of the Corporations Act. The key provisions are ss 595A and 596B, the terms of which are set out in Annexure A to this paper.

The provisions have their historical origin in s 15 of the Joint Stock Companies Act 1844 (UK). The purpose of public examination provisions was summarised (in the English context) by Buckley J in Re Rolls Razor Ltd as follows:4

The powers conferred by s 268 [of the Companies Act 1948 (UK)] are powers directed to enabling the Court to help a liquidator to discover the truth of the circumstances connected with the affairs of the company, information of trading, dealings and so forth, in order that the liquidator may be able, as effectively as possible and, I think, with as little expense as possible, to complete his function as liquidator, to put the affairs of the company in order and to carry out the liquidation in all its various aspects, including of course, the getting in of any assets of the company available in the liquidation.

To similar effect, Mason JC stated in Hamilton v Oades:5

There are the two important public purposes that the examination is designed to serve. One is to enable the liquidator to gather information which will assist him in the winding up; that involves protecting the interests of creditors. The other is to enable evidence and information to be obtained to support the bringing of criminal charges in connexion with the company’s affairs…

McPhersons identifies several other, more specific purposes of the public examination regime under the Corporations Act:6

a.  first, the regime allows a liquidator to obtain evidence and information to support the possible initiation of criminal charges against people who were involved with or dealt with the company;

b.  second, the regime allows the liquidator (and others in certain circumstances, as discussed further below) to determine whether any substantive civil claims can or should be made against examinees; and

c.  third, the regime assists with informing the public as to the affairs of failed companies.7

As will be set out further below, ascertaining the purpose of public examination provisions is important as it assists with determining whether a particular use of the provisions amounts to an abuse of process.

The powers conferred under the public examination provisions are extremely broad and (unusually for common law systems) are inquisitorial in nature.8 Courts must be careful to ensure that a proposed examinee is not unfairly disadvantaged due to the nature of this broad power. In Re ACN 072 081 111 Pty Ltd9 Young J stated:10

It is to be remembered that, whilst sections such as s 596B play a very important role in the process of liquidators administering companies in the public interest, the liquidator and the public interest are not the only matters which need to be considered. It is often a considerable inconvenience, if not more, for a person to be forced, under penalty of law, to devote time to searching out papers, to attending a public hearing, to be cross-examined by adverse counsel, and under s 597 to have to pay any solicitor and counsel whom he has to represent him out of his own pocket. […]

When there is such a burden put on the examinee, the court must be careful to consider the rights of both parties. It must be careful not to fetter a liquidator who is seeking to administer an insolvent company in the public interest on the one hand and, on the other hand, must be careful to see that persons to whom summonses are directed are not oppressed by the procedure.

(Emphasis added)

Bankruptcy Act

Section 81 of the Bankruptcy Act (the terms of which are also set out in Annexure A) provides equivalent machinery for public examinations in the context of personal insolvency. Similarly to the procedure under the Corporations Act, the purpose of the public examination procedure under the Bankruptcy Act is to allow information to be obtained about the bankrupt’s property and to gather information regarding any possible offences committed by the bankrupt.11

The public examination procedure under the Bankruptcy Act is also inquisitorial in nature and broad in scope. In Karounos v Official Trustee12 the Full Federal Court stated:

The power given by s 81 of the Act is an unusual and far-reaching one (Re North Australian Territory Company (1890) 45 Ch D 87 at 93; Ex parte Willey (1883) 23 Ch D 118 at 128) and its use could easily become oppressive and vexatious if it is not approached responsibly by applicants for summonses, and controlled carefully by the Registrar and the court: see Re Price (No 3) (1948) 14 ABC 137 at 139-140.

…However the power is exercised in the interests of creditors, and those interests should not be defeated by an unduly technical or restrictive approach to the use of the power. The procedure is basically designed to establish what assets the bankrupt had, what has happened to those assets, and whether action should be begun (or continued) to recover them: see Re Price (No 4) (1948) 14 ABC 142 at 144; Re Andrews (1958) 18 ABC 181 at 184; Re Poulson [1976] 1 WLR 1023 at 1032; [1976] 2 All ER 1020 at 1029.

(Emphasis added).

It is important for courts to avoid examinations in personal insolvency matters occasioning unnecessary mischief or hardship.13

Who may apply?

Corporations Act – Application for Summons

An application for a public examination must be made by an “eligible applicant”, which is defined in s 9 of the Corporations Act to mean:

a. ASIC,

b. a liquidator or provisional liquidator or a corporation;

c. an administrator of a corporation or an administrator of a deed of company arrangement executed by the corporation (DOCA); or

d. a person authorised in writing by ASIC.

It should be recalled that the public examination procedure is not limited to winding up (although it is most often invoked in liquidations). In Hong Kong Bank of Australia Ltd v Murphy14 Gleeson CJ stated, in the context of s 597:15

As appears from its place in the legislative scheme, and from its terms, whilst s 597 has an important role to play in relation to companies that are being wound up, and liquidators or provisional liquidators will be amongst those who most commonly take advantage of its provisions, the operation of the section is by no means confined to liquidators. The statutory context of “external administration”, in which s 597 has its place, throws light on the purposes for which the power to order examinations (or to authorise persons to apply for examination orders) is conferred. Those purposes include the protection of shareholders and creditors and of interested members of the public. They are not, however, confined to the need for such protection in the case of winding up. Winding up is only one form of external administration. The scope of s 597 is wider.

(Emphasis added).

His Honour went on to hold that s 597 could not be characterised as a law “with respect to winding up” for the purposes of what was formerly s 601 of the Corporations Law.

Creditors are not expressly listed as persons falling within the category of an “eligible applicant” for the purposes of requesting a summons for public examination. Nevertheless, there is nothing in principle preventing ASIC from authorising a creditor in writing to be an “eligible applicant” in an appropriate case. Indeed, the power to authorise a person to bring an application for a public examination is not circumscribed, as the following cases indicate:16

a. receivers were authorised as an “eligible applicant” in Worthley v England; Ex parte Excel Finance Corp Ltd;17

b. trustees of a unit trust were authorised as an “eligible applicant” in Hong Kong Bank of Australia Ltd v Murphy;18

c. creditors of a company engaged in legal action against proposed examinees were authorised as an “eligible applicant” in New Zealand Steel (Aust) Pty Ltd v Burton19 and Evans v Wainter Pty Ltd;20 and

d. a building regulation company was considered to be an appropriate person for authorisation as an “eligible applicant” in Queensland Building Services Authority v Australian Securities Commission.21

In Worthley v England, Ex parte Excel Finance Corp Ltd22 Gummow, Hill and Cooper JJ stated (considering s 597 of the Corporations Law):23

As we have already noted, the grant of authorisation under subs (1) does no more than confer standing upon the person authorised to make an application. That being the case, reference to the subject matter, scope and purpose of subs (1) leads to the conclusion that the decision-maker, in determining whether to authorise a particular person to make applications in relation to a particular corporation, will be required only to consider the relationship which that person has to the external administration and in a particular case the appropriateness of that person being given standing to apply to the Court under subs (2).

(Emphasis added).

The source of ASIC’s power to authorise persons is a matter of some debate.24 On one view, ASIC’s power to authorise a person does not arise from the Act but from the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). The main significance of the difference of opinion rests in whether ASIC’s exercise of its powers to grant authorisation in writing is able to be reviewed by the AAT. Because the powers of ASIC are not within the scope of the AAT’s reviewable decisions, any challenge would instead need to be made under the Administrative Decisions (Judicial Review) Act 1977 (Cth) if the source of ASIC’s powers was in fact to be found in the ASIC Act.

Bankruptcy Act

Under the Bankruptcy Act, an application for a public examination may be made by:

a. the trustee in bankruptcy;

b. the Official Receiver; or

c. a creditor who has a debt provable in the bankruptcy.

Unlike the procedure under the Corporations Act, there is no provision for ASIC, or any other regulatory body, to authorise a broader scope of persons who may apply for a public examination. The fact that creditors are expressly included as a person who may apply for an examination, however, means that on one view at least, the express examination provisions under the Bankruptcy Act are broader than those under the Corporations Act.

Process of applying for a summons for public examination

Corporations Act

Before a public examination may proceed, an applicant (usually a liquidator) must obtain a court order summonsing the examinee under either ss 596A or 596B.

Section 596C(1) of the Act provides that an application for a summons must be accompanied by an affidavit which supports the application and which complies with the Federal Court (Corporations) Rules 2000. Relevantly, r 11.3(3) provides that an application:

a. must be made by filing an interlocutory or originating process;

b. may be made without notice to any person (although subsections (5) and (6) require notice to be given to ASIC and to the liquidator of a corporation);

c. must be accompanied by a draft summons; and

d. must be placed (along with the supporting affidavit) in a sealed envelope marked “Application and supporting affidavit for issue of summons for examination under section [596A or 596B] of the Corporations Act 2001” or (if filed electronically) be accompanied by a statement setting out the words in the above quotation.

Section 596C(2) provides that the supporting affidavit is not to be available for inspection unless the court otherwise orders.

In Highstoke Pty Ltd v Hayes Knight GTO Pty Ltd25 French J stated (albeit in obiter) that a construction of s 596A which allowed a public examination in relation to a company which was not in external administration would be to:

…confer on the Court a power which is not capable of characterisation as judicial and which, in its present application, is not incidental to the exercise of judicial power. To that extent, s 596A would exceed the legislative power of the Commonwealth.

Accordingly, the fact of a company being in external administration appears to be an additional requirement for a summons to be issued under ss 596A or 596B.

Where an application is made under s 596A, the court must order the summons to be issued. In Carter v Garner; Re Gartner Wines Pty Ltd Branson J stated:26

It is important to note that the fact that the court must issue a summons under s 596A if the criteria for issue are satisfied does not mean that a person against whom a summons is issued has no remedy if the predominant purpose of the applicant is an improper purpose. Australian superior courts have jurisdiction, ordinarily described as inherent jurisdiction but in the case of this court better described as implied jurisdiction, to stay proceedings which are an abuse of process (Williams v Spautz (1992) 174 CLR 509 per Mason CJ, Dawson, Toohey and McHugh JJ at 518). This jurisdiction may be invoked in an appropriate case to stay an examination pursuant to a summons issued under s 596A (Re Bosun Pty Ltd (in liq); Makris v Sheahan at [9]; Hill v Smithfield Service Centre Pty Ltd (in liq) at [52]). Further r 11.5 of the Rules authorises a person served with an examination summons, within three days of service, to apply to the court for an order discharging the summons.

(Emphasis added).

The intention of the legislature was that an application under s 596A would be a “formality” provided that the court was satisfied of the necessary prerequisites.27 The Explanatory Memoranda to the 1992 Corporate Law Reform Bill 1992 provides:28

1155. The intention is that the Court will issue the summons where it is satisfied that the person’s connection with the company is such that the person is an examinable officer, without the need to inquire further into such matters as whether that person has taken part or been concerned in the examinable affairs of the corporation, been guilty of misconduct in relation to the corporation or is able to give information about examinable affairs of the corporation. It is envisaged that the issue of a summons in such circumstances will be a formality, and that the respective Court rules may provide for execution of the function by a Registrar or equivalent official, where appropriate.

(Emphasis added).

While applications under 596A must be brought against either an officer29 or provisional liquidator, an application under s 596B may be brought against a much wider class of persons.

Under s 596B a person may be examined if that person:

a. has “taken part” or “been concerned” in the examinable affairs of the company; and

b. “has been” or “may have been” guilty of misconduct in relation to the company; or

c. may be able to give information concerning the examinable affairs of the company.

Section 9 of the Act defines “misconduct” to include fraud, negligence, default, breach of trust and breach of duty. A person does not need to be a defendant or potential defendant in proceedings brought by or in relation to the company in order to have been involved in misconduct.30 An applicant relying upon the proposed examinee falling within the categories set out in s 596B must provide reasonable grounds for the belief that the examinee has either been guilty of misconduct or may be able to give information concerning the examinable affairs of the company:31

It seems to me that a reasonable construction of the section requires that an applicant should furnish to the court some reasonable ground for his belief that the respondent may have been guilty of misconduct, or may be capable of giving information, as the case may be.

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Footnotes

  1. B Porter and B Reading, “Voidable Transactions under Division 2 Part 5.7A Corporations Act”.
  2. 2016, Thomson Reuters.
  3. By P McQuade and M Gronow, (2016, Thomson Reuters, 6th ed).
  4. [1968] 3 All ER 698 at 700.
  5. (1989) 166 CLR 486 at 496.
  6. McPhersons, above n 2 at [15.570].
  7. See also Corporate Affairs Commission (NSW) v Lombard Nash International Pty Ltd (No 4) (1987) 12 ACLR 475 per Young J.
  8. See Re Metropolitan Bank (1880) LR 15 Ch D 139 at 142; Ex parte Willey; Re Wright (1886) LR 23 Ch D 118 at 129; R v Zion [1986] VR 609 at 614; Rees v Kratzmann (1965) 114 CLR 63.
  9. (1997) 140 FLR 412.
  10. at 416.
  11. See Re Gordon (1988) 80 ALR 289.
  12. (1988)19 FCR 330 at 335–6 per Forster, Woodward and Spender JJ.
  13. Australian Bankruptcy Law & Practice , a bove n 3 , at [81.0.35].
  14. (1992) 28 NSWLR 512.
  15. at 521.
  16. See McPhersons, above n 2 , at [15.520], and the cases cited therein.
  17. (1994) 52 FCR 69.
  18. (1992) 28 NSWLR 512.
  19. (1994) 13 ACSR 610.
  20. (2005) 145 FCR 176.
  21. (1997) FCR 29.
  22. (1994) 52 FCR 69.
  23. at 86F.
  24. McPhersons, above n 2 , at [15.520].
  25. (2007) 156 FCR 501; [2007] FCA 13.
  26. (2003) 130 FCR 99; [2003] FCA 653 at [27].
  27. McPhersons, above n 2 , at [15.510] citing the Explanatory Memoranda to the Corporate Law Reform Bill 1992 at [1155].
  28. at [1155].
  29. Defined in s 9 of the Act to mean a director, secretary, de facto director, receiver (or receiver and manager), an administrator (or administrator of a DOCA), a liquidator or trustee administering a compromise or arrangement.
  30. Re Clutha Ltd (in liq) [2003] NSWSC 235 at [8] per Gzell J.
  31. Re Hall Auditorium Pty Ltd (in liq) (1984) 68 FLR 473.

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