Public examinations – getting to the truth

By Damien Davis MICM*

Damien Davis MICM

A public examination is a powerful tool which may significantly advance the prospects of recovery in formal insolvency appointments. Parties subject to a formal public examination process are required by a court of law to answer questions under oath, and/or provide much needed information and documentation to assist with investigations and recoveries being undertaken by Insolvency Practitioners and others. Public examinations are inherently inquisitorial in nature and the issues covered can be extremely broad in application. Likewise, the penalties for inadequate compliance with the requirements of being formally examined under oath can be quite severe.

Examinations in corporate winding ups or pursuant to other insolvency events are covered by Section 596A and 596B of the Corporations Act 2001 (Cth) (Corporations Act). Examinations in bankruptcy proceedings are covered in Section 81 of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act). Broadly speaking, public examinations conducted pursuant to each of these acts mirror each other in application and process. However, the outcomes – successful or otherwise – tend to vary significantly from case to case.

Who may apply for a Public Examination

The Corporations Act details that an “eligible applicant” who may apply for an examination includes: l ASIC; or l A liquidator or a provisional liquidator of a corporation; or l An administrator of a corporation or an administrator of a deed of company arrangement; or l A person authorised in writing by ASIC.

In addition, whilst Receivers of companies, company shareholders and trustees of unit trusts are not specifically listed as being eligible applicants under the Corporations Act, depending on the circumstances, they have all previously been held to be eligible applicants through case law.

Similarly, the application of prior case law suggests that creditors of a corporation may seek authorisation from ASIC to

“A public examination is a powerful tool which may significantly advance the prospects of recovery in formal insolvency appointments.”

be considered an eligible applicant for the purposes of applying for a public examination.

From a personal insolvency perspective through the Bankruptcy Act, a creditor with a provable claim in a bankrupt estate is automatically considered to be an eligible applicant.

The Public Examination application process

As part of the application process, the Liquidator or other eligible applicant will file an affidavit with the court outlining the background for the summons, as well as a copy of the draft summons.

The affidavit, including any supporting material is not available for public review unless otherwise ordered by a court.

Where the application relates to a person who is or was an officer of the corporation, during the two (2) years prior to the commencement of the winding up, then the summons is mandatory pursuant to Section 596A of the Corporations Act. That is to say, the court must issue the summons if it is satisfied that the necessary pre-requisites have been met.

Where the examinable person is not an officer (or former officer) of the corporation, a summons may be issued pursuant to Section 596B of the Corporations Act where the court is satisfied that the person has; l 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 l may be able to give information about examinable affairs of the corporation. The fact that proceedings are on foot against an examinee will not automatically prevent an examination from being issued, even where the examination touches on or explores issues to be covered in the existing proceedings.

The types of individuals ordinarily examined pursuant to Section 596B of the Corporations Act may include: the company’s accountants and auditors, the bank manager of the branch where the company’s bank accounts are kept, and others such as solicitors, insurers, directors’ spouses, and ➤

“Parties subject to a formal public examination process are required by a court of law to answer questions under oath, and/or provide much needed information and documentation...”

taxation officers. A person does not need to be a defendant or potential defendant in proceedings brought by or in relation to the corporation, in order to be summoned for examination.

A point to note is that examinations do not have to be directly beneficial to the company in external administration, its creditors or contributories as a whole. A claim which will benefit only some shareholders has been held by the High Court of Australia to be consistent with the public interest to allow an examination to proceed. Similarly, shareholders wanting to examine an officer for the purposes of pursuing a claim against those officers or advisers is a legitimate use of the power contained under Section 596A.

Production of Records Under the Public Examination Provisions

Section 596D of the Corporations Act provides that a summons issued under Section 596A or 596B may require a person to produce specified books that are in their possession and that relate to the corporation or any of its examinable affairs. This may include any account, deed, paper, writing or document, as well as any record of information, however compiled, recorded, or stored. Courts have determined that in the case of records to be provided by a solicitor, the court will adopt a practical approach, but that documents which would otherwise be subject to a claim for legal professional privilege may still be required to be produced for the purposes of an examination.

What are Examinable Affairs?

The “examinable affairs” of a corporation include: l Details of the promotion, formation, management,

administration or winding up of a corporation; or l Any other affairs of the corporation; or l The business affairs of a connected entity to a corporation. The courts have held that the following matters encompass the examinable affairs of a company: l Information regarding a company’s rights in legal actions; l Information with respect to whether litigation initiated or contemplated by a Liquidator is likely to be successful; l Information with respect to whether a judgement resulting from a Liquidator’s action has any worth; and l Information regarding the affairs or documents of a third party, including (but not limited to) the company’s former solicitors, former accountants and insurers. A public examination can also be used to determine whether a party will have sufficient assets to meet any successful claim. This is immensely important as being able to get information about a potential defendant’s personal assets and liabilities can greatly assist with determining recoverability prospects against the defendant.

The broad and powerful approach adopted in Australia to public examinations is not replicated in other international jurisdictions such as New Zealand or the United Kingdom. For instance, the New Zealand courts have declined to allow a public examination to be used to determine the financial capacity of a defendant to pay a judgment.

Examinations have been used by eligible applicants to achieve the following; l To go behind efforts to use the

Family Law provisions to dispose of assets held by examinees that would otherwise be available to unsecured creditors; l To determine the quantum of debtors in the liquidation of a construction company, including identifying offsetting claims held by debtors. In one particular case, the Liquidator examined the company’s project managers in relation to construction debtors, ultimately resulting in the recovery of debtors in excess of $1million which would not have otherwise been recovered; l To investigate the sale of a business prior to the liquidation of a company, including obtaining copies of valuations conducted by the parties to determine whether the sale occurred at or under market value; and l To access books and records otherwise denied to the

Liquidator as part of a disclose agreement or sale of business contract. An examination will generally be held before either a Registrar of the Federal Court or a Magistrate.

“A public examination can also be used to determine whether a party will have sufficient assets to meet any successful claim.”

Information obtained from Public Examinations

Examinees are required to answer questions presented in examinations while under oath and in open court. An examinee will not be excused from answering questions on the grounds that the answer may incriminate them or make them liable to penalty.

Credit managers and other

entities who have an interest in the outcome of the examination should feel encouraged to attend. There are no restrictions on who can attend an examination and details of the time and place of the examination will be issued by the Liquidator to all creditors of the corporation.

A typical examination can, in some instances, be a very eyeopening process for attendees, as examinees will frequently reveal information they would not otherwise disclose (without the threat of contempt of court hanging over them), such as thought processes and/or discussions with third parties that have not been documented.

Funding a Public Examination

Creditors (and sometimes litigation funders) may fund the Liquidator with respect to the costs and expenses associated with conducting public examinations and other investigations into the affairs of the company. Creditor funding may enable the Liquidator to determine whether the company has viable, commercial claims to pursue against parties, where information gained from a public examination will enable the Liquidator to formulate causes of action against the parties, such as directors or the corporation’s former auditor.

Where a public examination achieves a clear formulation of causes of action, the Liquidator may then be in a better position to negotiate a favourable litigation funding agreement with an external litigation funder with which to pursue those actions.

Section 564 of the Corporations Act provides that where recoveries have been made as a result of an indemnity provided to the Liquidator by creditors, a court may make orders it deems just with respect to the distribution of property so recovered including giving the indemnifying creditor an advantage in consideration for the risks assumed pursuant to the indemnities.

The approach to be adopted by the court will vary depending on the circumstances and on the amount advanced by the funder in question. In some instances, where the sums advanced have been modest, the courts have apportioned a percentage of the amount recovered as a priority payment to the funding creditor, with the balance being distributed pari passu (i.e. equally) to creditors in accordance with the provisions of the Corporations Act.

However, where funding has been significant and accompanied by complex factual and legal disputes, the courts have distributed significantly more of the amount recovered to funding creditors, in recognition of the risks taken by them in funding the proceedings. In some cases, this has been up to 100% of recoveries made by the Liquidator.

*Damien Davis MICM Associate Director Vincents vincents.com.au

“Creditors (and sometimes litigation funders) may fund the Liquidator with respect to the costs and expenses associated with conducting public examinations and other investigations into the affairs of the company.”