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Getting to the heart of the matter: Examinations under Section 596A & 596B of the Corporations Act

Caseflash 07 July 2014

The Federal Court’s recent decision in Equititrust Limited (In Liq) (Rec Appointed) v Equititrust Limited (In Liq) (Rec Appointed) [2014] FCA 692 has confirmed a liquidator’s ability to issue examination summonses under the Corporations Act (Act) where substantive proceedings are already on foot and the examinees are potential witnesses in those substantive proceedings.

In this case the potential witnesses (Respondents) argued that examinations brought under the Act in such circumstances would be an abuse of process and should be set aside. Foster J disagreed, finding that if the liquidator’s actions are consistent with a legitimate purpose the Court will not interfere to set aside the examination summonses whilst substantive proceedings are on foot. But what exactly constitutes a ‘legitimate purpose?’

Facts

In 2011 three managed investment schemes operated by Equititrust Limited collapsed, with one of these schemes, EQL, having receivers and managers, and subsequently liquidators, appointed. In November 2012, the liquidators applied to the Court for the issue of Examination Summonses to the Respondents under s 596A and s 596B of the Act. The majority of the Respondents were auditors of EQL and members of a large accounting firm. The Respondents contended that it would be an abuse of process for them to be examined while separate proceedings were on foot in which they were named respondents and liable to be cross examined. The liquidator submitted that the examinations should proceed for the following reasons:

  • It is a legitimate purpose of the examination process to enable evidence and information to be obtained to support the bringing of proceedings against examinable officers and persons in connection with the examinable affairs of the company;
  • There is no abuse of process unless an offensive purpose is the predominant purpose of the examination – the onus is on those seeking to establish improper purpose to make it out;
  • It is not improper for examinations to occur whilst litigation is pending against the examinee and other persons; and
  • If the predominant purpose is to carry out a dress-rehearsal for cross-examination, to destroy the credit of potential witnesses or obtain forensic advantages not otherwise available, the purpose is an improper one, but this was not the case here.

Decision

In finding for the liquidators, Foster J found that the Respondents failed to establish that the predominant purpose for conducting the examinations was improper. Citing Barrett J in Re LED (South Coast) Pty Ltd (2009) 76 NSWLR 428, his Honour held that a liquidator acts properly in seeking to:

  1. test the validity of their case and its prospects;
  2. investigate other possible causes of action; and
  3. demonstrate a viable case to attract a potential litigation funder.

Foster J held that, while the liquidators and their advisors had views about the prospects of the proceedings, they wished to test those views through the examination process which is clearly legitimate. The mere fact a substantive proceeding had been commenced did not preclude or diminish a liquidator’s entitlement to examine the strength of that case. Also of importance was the fact that the substantive proceedings were not very far advanced - pleadings had not closed and evidence had not been served.

This case serves as a reminder for liquidators who may, upon instigating proceedings, seek to uncover more information and test the strength of their case through the examination process. Far from having to elect between the two, examinations and substantive proceedings may be commenced and carried on concurrently as long as a liquidator is acting for a proper purpose and not merely carrying out a dress-rehearsal for the substantive proceedings.


Kirsten Farmer, Partner
Sydney

Guy Moloney, Senior Associate
Sydney

Julian Whealing, Solicitor
Sydney

Caseflash 07 July 2014
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