Another investigative tool available to insolvency practitioners.
When an insolvency practitioner (IP) is appointed over an insolvent entity, they have important duties to perform including the collection of books and records and investigating the examinable affairs of the entity.
When the entity’s books and records are not fully available the IP is limited in their investigations. Where an IP suspects voidable transactions or other claims are available against directors or related parties, they can apply to court to require certain persons to appear for a public examination (PE) and to produce certain documents.
Legislative framework
Section 596A of the Corporations Act 2001 provides for the mandatory examination of an officer of a corporation about its examinable affairs where an eligible applicant applies for summons. An eligible applicant[1] is defined as:
- The Australian Securities and Investments Commission (ASIC), or a person it authorises in writing.
- a liquidator or provisional liquidator of the corporation.
- an administrator of the corporation.
- an administrator of a Deed of Company Arrangement executed by the corporation.
Section 596B of the Corporations Act provides for the discretionary examination of a person about a corporation’s examinable affairs. Under this section the court must be satisfied the person:
- has taken part or been concerned in the corporation’s examinable affairs and has/may have been guilty of misconduct in relation to the corporation
- may be able to give information about corporation’s examinable affairs.
Section 81 of the Bankruptcy Act 1966 provides a comparable framework for a PE in personal insolvency administrations.
The process
The court may give directions about the examination[2] which is to be held in public. ASIC and any other eligible applicant may participate in the examination.[3]
A person who is examined is obliged to answer questions that the court directs the person to answer unless they have a reasonable excuse. [4] However, a person is not excused from answering a question on the ground that it might incriminate them or make them liable to a penalty.[5] But if it might have either of those effects, they are protected from it being admissible in evidence (criminal proceeding or other penalty proceeding) under section 597(12A) of the Corporations Act. Ordinarily examinees will respond to each question with the word “privilege” before giving their answer.
A person summoned may, in certain circumstances, seek reimbursement of their costs and expenses e.g. travel. However, expenses incurred in conferring with their staff, associates, or legal advisers or in obtaining information from others that might be used as evidence in the examination are generally not reimbursable.
The courts have determined that reimbursement can apply even where an examination did not ultimately proceed. [6]
Recent court decisions
The Federal Court has refused to stay examinations, where a third party was the eligible applicant who sought certain examinees be examined under the Corporations Act.[7] In that case the liquidators had brought recovery proceedings without requiring examinations.
The Federal Court has also considered the appropriate scope and form of orders requiring solicitors to produce documents in public examination proceedings and confirmed the Court will adopt a practical approach.[8] In that case the Court ordered (under rule 30.34 of the Federal Court Rules) a person to produce documents in a PE proceeding despite where those documents may be subject to a claim for legal professional privilege.
The High Court handed down a decision regarding the purposes for which a court may summon an officer of a corporation for examination under section 596A of the Corporations Act.[9] In that case the High Court, by majority (3:2), found that the Court of Appeal erred in limiting the purposes for which a PE may be sought. The High Court determined that shareholders wanting to examine an officer for the purpose of pursuing a claim against those officers or advisers was a legitimate use of the power conferred by section 596A of the Corporations Act.
Conclusion
As IP’s we are often faced with the dilemma of how to further our investigations into the affairs of an insolvent entity and the past conduct of its officers. The PE process is a useful tool available to IP’s that can lead to significant recoveries in an administration for the benefit of creditors.
Worrells has a deep understanding of the PE process. Please contact your local Worrells principal for any queries on the process.
Related article: Public examinations during COVID-19 lockdown
[1] section 9 of the Corporations Act
[2] section 596F of the Corporations Act
[3] section 597(5A) of the Corporations Act
[4] section 597(7)(b) of the Corporations Act
[5] section 597(12) of the Corporations Act
[6] In the matter of IMF Pty Ltd (receiver and manager appointed) (in liquidation) [2018] VSC 317
[7] Shangri-La Construction Pty Ltd v Hyatt, in the matter of GVE Hampton Pty Ltd (in liquidation) (No 2) [2021] FCA 1048
[8] Re Digital Infrastructure Pty Ltd (in liq) [2021] FCA 1274
[9] Walton v ACN 004 410 833 Limited (formerly Arrium Limited) (In Liquidation) [2022] HCA 3