Corporate Insolvency & Restructuring Forum 1 November 2006

Transcription

1 Corporate Insolvency & Restructuring Forum 1 November 2006 Public examinations - who can use them, when and for what? Philip Hopley, Senior Associate Georgia Price, Lawyer Allens Arthur Robinson Deutsche Bank Place Corner Hunter and Phillip Streets Sydney NSW 2000 Australia Tel Fax Copyright Allens Arthur Robinson 2006 gzps A v Page 1

2 1. Introduction The purpose of this paper is to provide a general outline of the public examination procedure provided for by Part 5.9 of the Corporations Act 2001 (Cth) (Corporations Act) and the Corporations Law Rules (the Rules). The paper will set out what a public examination is, who is entitled to apply to have a person publicly examined, in what circumstances and for what purpose. Some recent relevant cases of interest are also discussed, in particular the recent decision of the NSW Court of Appeal in Meteyard v Love. Legislative references in this paper are to the Corporations Act unless stated otherwise. 2. What is a public examination? 2.1 Outline Public examinations provide a means by which a liquidator, administrator or other eligible applicant can examine officers of a corporation and any other person who may be able to provide information about the corporation's "examinable affairs". The purpose of a public examination is to provide information that will either assist in the liquidation, administration or receivership, advance the prosecution or defence of a claim against the company or which may facilitate the bringing of criminal charges against individual directors. A person may be summoned for examination under s596a or s596b which provide for a mandatory and discretionary examinations, respectively. While public examinations are held before a court, it has been said that: "[the] proceedings are not in the nature of legal proceedings before a court; they are more in the nature of investigative procedures where the court has a presence for the purpose, basically, of seeing fair play between the persons interrogating and the persons being interrogated." 1 Only a natural person can be summoned for examination. 2 Another way in which a liquidator or other eligible applicant can gather information about a corporation's examinable affairs, possibly as a precursor to an examinations summons, is to apply to the court under s597a requesting that specific persons be required to provide information by way of affidavit. 2.2 Mandatory examinations: s596a Under s596a, the court is obliged to summon a person for examination about a corporation's "examinable affairs" if an "eligible applicant" (usually, but not always, the 1 Re Monadelphous Engineering Associates (NZ) Ltd (in liq); ex parte McDonald v Watson (1989) 7 ACLC 220 at Re Interchase Corp Ltd (in liq) (No 2) (1993) 120 ALR 143 at 150. gzps A v Page 2

3 liquidator) applies for the summons and the person to be summoned is an officer or provisional liquidator of the corporation at the time the application for a summons was made or was such an officer within a specified period 3. The section was amended in 2004 to remove the requirement that the person to be examined is an "examinable officer" of the corporation. 4 This will be discussed in more detail in section 3.4 below. The court has no discretion under this section. If the requirements of s596a are made out by the eligible applicant then the court must issue the summons. 5 However, this does not necessarily mean that a 'mandatory examination' must take place. The court will not permit an examination to be carried out, or continued, if a vexatious or improper purpose becomes evident prior to, or during, the course of the examination Discretionary examinations: s596b Under s596b, an "eligible applicant" may apply to the court to summon a person for examination about a corporation's "examinable affairs" if the court is satisfied that the person: has taken part, or been concerned in, the corporation's "examinable affairs" and has been, or may have been, guilty of misconduct in relation to the corporation; or may be able to provide information about a corporation's "examinable affairs". In exercising its discretion to order an examination under this section a court is likely to have regard to the following: 7 the expressed purpose of the examination; the importance of the information to the applicant; the seriousness of the matters to be inquired into; the use to which information obtained might be put; any possible advantage to the applicant that would not otherwise be available and any disadvantages to the examinee; whether the information required is peripheral such that attendance at the examination is oppressive; and the public interest in investigating the affairs of the company. 3 See section The previously used term "examinable officer" was removed in the interests of simplification and clarity in 2004: see the Explanatory Memorandum to the Corporate Law and Economic Reform (Audit Reform and Disclosure) Act 2004 (Cth), at paragraph [5.587]. 5 Flanders v Beatty (1995) 13 ACLC 529 at 539; Re Shepherds Producers Co-operative Ltd (2006) 24 ACLC Re Hugh J Roberts Pty Limited (in liq) (1970) 91 WN (NSW) Southern Cross Petroleum Sales (SA) Pty Ltd (in liq) v Hirsch (1998) 70 SASR 527. gzps A v Page 3

4 2.4 Information by affidavit Section 597A contains a procedure under which an "eligible applicant" can obtain information by way of affidavit from an "examinable officer" 8 of a corporation about the corporation's 'examinable affairs'. This procedure of obtaining information by way of affidavit has 2 advantages: if the information can be satisfactorily obtained by affidavit it avoids the costs of an examination; and it allows the applicant to obtain information from the proposed examinees or others in advance of the examinations. This information could assist in framing the scope of the examination. Under this section, not only can the officer be required to disclose information about the company's examinable affairs, but the order can also require the officer to provide information that would not be possible in an examination, such as making inquiries of persons or reviewing documents. 9 A person can be required to file an affidavit even if the person has been summoned for a mandatory or discretionary examination. 2.5 Public versus private examinations Examinations should be held in public except to the extent that the court considers it desirable because of 'special circumstances' 10, that it be held in private. A number of cases deal with the meaning of 'special circumstances'. It has been held that there must be "something abnormal about the particular case" and 'taken as a whole there must be something sufficiently different in this case from the ordinary case'. 11 The following factors do not constitute special circumstances: the fact that the examinee has also been charged with criminal offences relating to the company which is the subject of the examination; that there has been a large amount of publicity surrounding the matter; and that there is a reasonable expectation that the public examination will be reported in the newspapers. 12 The exercise of the court's discretion to convert a public examination to a private examination will usually only be partial, in that one or more of the persons named in the original order will be examined in private. Conversely, the court is also empowered to 8 The failure to remove the reference to "examinable officer" in s.597a appears to have been an oversight - this section should be read as referring to an "officer or provisional liquidator" who is susceptible to examination under s.596a: see the comments of Barrett J in Re Shepherds Producers Co-operative Ltd (2006) 24 ACLC 336 at [18]. 9 Re Modern Woodcraft Pty Limited (1997) 15 ACLC 1, Section 594(4). 11 Corporate Affairs Commission v Lombard Nash International Pty Limited (No 4) (1988) 6 ACLC 135 at Corporate Affairs Commission v Lombard Nash International Pty Limited (No 4), ibid. gzps A v Page 4

5 direct that evidence and documents resulting from a private examination be treated publicly, as if no order for a private examination had been made Court s power to give directions about examination The court has extensive powers under s596f to give directions on a variety of matters relating to the conduct of, and matters incidental to the examination including: (c) (d) (e) (f) (g) the matters to be inquired into at an examination; the procedure to be followed at an examination; who may be present at private examinations; the exclusion of a person from a public examination; access to records of the examination; prohibitions on the publication or communication of information about the examination; and the destruction of documents relating to, and created for, the purposes of the examination. It is an offence for a person to contravene a direction given by the court: s596f(3). The penalty for contravention is a maximum of 100 penalty units ($11,000) or imprisonment for 2 years Who can use a public examination? 3.1 Who is an "eligible applicant"? In the case of both mandatory and discretionary examinations, an 'eligible applicant' must apply to the court. An "eligible applicant" is defined in s9 to mean any of the following: (c) (d) (e) 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; ASIC; or a person authorised in writing by ASIC to make one or more applications in relation to the corporation. The list of persons who may be authorised by ASIC to make an application as an 'eligible applicant' is not limited. Authorisations by ASIC to the following persons have been sanctioned by the courts: a privately appointed receiver and manager; Re Lazar International Pty Limited (in liq) (1998) ACLC Schedule 3. gzps A v Page 5

6 a creditor; 16 trustees of a unit trust; 17 and a regulatory authority. 18 The considerations relevant to a grant of authorisation by ASIC and the types of persons who might be authorised have been outlined along the following lines: "The Commission, in determining whether to grant authorisation will consider the relationship which the person seeking authorisation has to the relevant corporation and the external management of that corporation which is in progress. Contributories and creditors would normally have the appropriate connection with the corporation although other factors relevant to a particular case may make the authorisation of such persons inappropriate. A receiver and manager might, as is conceded by the appellant also in an appropriate case, be authorised, that is to say given standing to apply to the court." 19 An ASIC decision to make an authorisation is not reviewable by the Administrative Appeals Tribunal but is subject to judicial review by the Federal Court under the Administrative Decisions (Judicial Review) Act 1977 (Cth). 20 In the recent decision of Sons of Gwalia Ltd v Margaretic 21 the Full Court of the Federal Court held that shareholders who acquired their shares on-market are entitled to be treated as creditors of the company. It is therefore possible to envisage shareholders applying to ASIC for the status of eligible applicant for the purpose of conducting a public examination, especially given the prospect of the wider availability of litigation funding following the High Court's recent decision in Fostif What are a corporation's "examinable affairs"? Both mandatory and discretionary examinations must relate to a corporation's "examinable affairs". This is defined in ss.9, 53 and 64B as meaning: the corporation's promotion, formation, management, administration or winding up; or any other affairs of the corporation (or related body corporate); or 15 Boys v Quigley (as receiver and manager of Geneva Finance Limited) (2002) 20 ACLC 1,323; 41 ACSR Re New Tel (in liq); Evans v Wainter Pty Ltd (2005) 221 ALR HongKong Bank of Australia Limited & Ors v Murphy & Ors (1992) 10 ACLC 1,573; 28 NSWLR 512 at 518-9; 8 ACSR Queensland Building Services Authority v ASC (1997) 15 ACLC Re Excel Finance Corp Limited; Worthley v England (1994) 52 FCRC 69 at Hong Kong Bank of Australia Ltd v Trimboli & Ors (1992) 10 ACLC 920; Mercantile Mutual Life Insurance Company & Anor v Australian Securities Commission & Ors (1993) 11 ACLC (2006) 226 ALR 42. Note that the High Court granted special leave to appeal from this decision and that a hearing of the appeal in the High Court took place earlier this year with judgment reserved. 22 Campbells Cash & Carry Pty Ltd v. Fostif Pty Ltd (2006) 229 ALR 58. gzps A v Page 6

7 (c) insofar as they are, or appear to be, relevant to the corporation or its examinable affairs under paragraphs or, above, the business affairs of a "connected entity" of the corporation How have the courts interpreted the meaning of "examinable affairs" in practice? The courts have interpreted the wide statutory meaning of "examinable affairs" accordingly and it has been held to extend to: the affairs of the corporation prior to, and matters arising during, the external administration; 24 matters relating to the "property" of a corporation, such as: (i) (ii) the potential right to compensation for misfeasance of its officers, including its directors; the right of the corporation to be heard on whether a court should order compensation; and (iii) the general right of action for breach of directors' duties; 25 (c) (d) (e) matters such as the existence of circumstances that may give rise to a claim being made against a company (say, for breach of directors' duties) even though such a claim has not yet been made; 26 permitting the liquidator to use the examinations process to assess the prospects of success of litigation; 27 and the existence of an insurance policy which relates to the assets of the corporation; for example, the professional indemnity insurance arrangements of a company's auditors or directors and officers' cover Who may be examined under a mandatory examination? The court may summon an officer or provisional liquidator of the corporation. In summary, s9 defines officer of a corporation to mean: a director or secretary; or a person: (i) (ii) who makes decisions that affect the business of the corporation; with the capacity to affect significantly the corporation's financial standing; or 23 Such as where the financial viability of the corporation is bound up with the financial viability of another company. 24 Gerah Imports Pty Limited v Duke Group Limited (in liq) (1993) 61 SASR 557; 12 ACSR 513; 12 ACLC Lamb v Fixler & Ors (1994) 12 ACLC BPTC Limited (in liq) (No. 5) (1993) 10 ACR 756 at Grosvenor Hill (Qld) Pty Limited v Barber (1994) 48 FCR 301; 120 ALR 262; Morton v Joynson (1999) 31 ACSR 76; Clutha Limited (2000) 34 ACSR 685; Bosun Pty Limited (in liq) (2000) 34 ACSR Re BPTC Limited (in liq) (1994) 14 ACSR 460 at 462. gzps A v Page 7

8 (iii) in accordance with whose instructions or wishes the directors of the corporation are accustomed to act (excluding professional advisors); (c) a receiver, or receiver and manager, an administrator of the corporation or of a deed of company arrangement, a liquidator or trustee. As mentioned above, the scope of persons that may be examined by mandatory examination has changed from "examinable officer" to "officer or provisional liquidator of the corporation." This change, in substance, means that whereas previously only an "executive officer" of the corporation could be examined, now "officers", as currently defined in the Act, can be examined. Prior to the amendment to s596a in 2004, "executive officer," of a body corporate was defined in s9 of the Act as "a person who is concerned in, or takes part in, the management of the body (regardless of the person s designation and whether or not the person is a director of the body)." The amendment has therefore clarified the scope of persons who may be subject to a mandatory examination to clearly include both officers and shadow officers of a corporation. In response to the HIH Royal Commission, the federal government's Corporations and Markets Advisory Committee (CAMAC) has recommended that the statutory duties imposed on directors and officers be imposed on a wider body of individuals by reference to the functions they perform in the management of a company rather than by reason of their position. This is intended to cover persons who are "concerned in the management" of a corporation, which would include consultants and contractors. If enacted, the CAMAC proposals will likely lead to a wider class or persons who may be able to be summonsed on a mandatory basis under s596a. If the person was previously an officer or provisional liquidator, the court must be satisfied that the person held this position during a defined two year period. The two year period dates back to: (c) (d) if the corporation is under administration, from the 's513c day' (which is the date of the administrator's appointment, unless a winding up was already in progress in which case it will be the date the winding up is taken to have begun); if the corporation executed a deed of company arrangement that has not yet terminated, from the s513c day that applied to the administration; if the corporation is being, or has been wound up, the date of the winding up order; or otherwise, from the date of the application for the issue of examination summons. 3.5 Who is a relevant "person" for the purpose of a discretionary examination? Section 596B is directed at the issue of a summons to a person other than an officer or provisional liquidator of the corporation. The court is not to summon a person for an examination unless satisfied that: the person: (i) has taken part or been concerned in examinable affairs of the corporation; and gzps A v Page 8

9 (ii) has been, or may have been, guilty of misconduct in relation to the corporation; or the person may be able to give information about examinable affairs of the corporation. The categories of persons who may be examined under this section extend, but are not limited, to: spouses of directors, at least where a spouse has been an employee of the company and there is evidence to show that he or she has been involved in managing the company's affairs 29 ; auditors or former auditors of the corporation; 30 solicitors of former directors of the corporation; 31 and the officers of an insurance company who may be liable to be examined in order to determine whether a claim for indemnity relating to the corporation's assets will be granted or to explain the reasons for declining indemnity. 32 A certain degree of specification is required when referring to a proposed examinee. It has been held for instance that where a proposed examinee is a member of a firm such as a firm of accountants or solicitors, it is not sufficient simply to address the summons to the 'Managing Partner' of the firm 33. Similarly, a summons addressed to the 'Proper Officer' of a corporation will be invalid and liable to be set aside When may a public examination be used and what is the process for obtaining one? A public examination may be used at any time if the requirements of the Corporations Act have been met. In order to issue a summons for examination, the applicant must apply to the court by filing an originating process (if no proceedings in relation to the company are on foot) or by way of an interlocutory notice of motion (if proceedings have been commenced). The originating or interlocutory process seeking the issue of the examination summons must be accompanied by a supporting affidavit and a draft examination summons. 29 Morton v Joynson (1999) 17 ACLC Re Interchase Corp Ltd (in liq) (No 2) (1993) 47 FCR 253; Boys v Quigley (as receiver and manager of Geneva Finance Limited) (2002). 31 Aquanaut Constructions Pty Limited (In Liquidation) (2002) 20 ACLC Re Interchase Corporation Pty Ltd (1996) 139 ALR Re ACN Pty Limited; ex parte Merrett (1997) 15 ACLC 1, Re Interchase Corp Ltd (in liq) (No 2), ibid. gzps A v Page 9

10 Ordinarily, liquidators and ASIC are permitted to make the application without notice to the proposed examinees. Notice must be given in respect of applications to issue examination summons by all other applicants. 4.1 Affidavit in support In the case of mandatory examinations, there is no express requirement in s596a that the application for the summons be accompanied by a supporting affidavit. This is in contrast to the express requirement of a supporting affidavit for applications for discretionary examinations. 35 However, in the case of mandatory examinations, in NSW court rules impose this requirement. 36 The originating or interlocutory process seeking the issue of the examination summons must be accompanied by a supporting affidavit and accompanied by a draft examination summons. There is no requirement that the supporting affidavit be served on the proposed examinee. The same requirements apply, and are specified in s596c, with regard to discretionary examinations. The affidavit should contain all the facts and material that are relevant to the court's decision of whether or not to grant an examination order. The affidavit must support the implicit assumption that the discretionary examination is being sought for a proper purpose. A proposed examinee has no right to be heard on the application. 37 However, court rules enable the recipient of any examination order to apply within a specified period to have an examination summons discharged. Applicants bear a heavy onus of disclosure due to the fact that the proposed examinee has no right to be heard on the application. The applicant must disclose any matter which might lead the court to refuse the application itself. 38 It should also be noted that if the applicant obtains a summons without reasonable cause, the court may order the applicant to pay the costs of the person summoned: s597b. A review of the case law suggests that such an order is not made frequently. Commentators have noted that "although [s597b] appears reasonable, this safeguard is in practice valueless because all that is required is that the liquidator believes that the examinee may have relevant information" (emphasis in the original)." 39 The usual course is for the issue of appropriate reimbursement, if any, to be looked at after the examination process has been completed. At that point, a proper assessment of the whole of the circumstances can be made against the criteria in s597b. There is no general right to expenses and there should be no general expectation on the part of the examinee to their expenses Section 596C. 36 Rule 11.3 of the Supreme Court (Corporations) Rules 1999 (the Rules). 37 Gerah Imports Pty Limited v Duke Group Limited (in liq) (1993), ibid. 38 Re Southern Equities Corporation Limited (in liq); Bond v England (1997) 25 ACSR 394; 15 ACLC 1, Parker, "Liquidator's Examinations" (1993) 10 Aust Bar Rev 25 at 49. See Signature Resorts Pty Ltd v DHD Constructions Pty Ltd (1996) 18 ACSR 627 for a case where examinees were denied costs. 40 Re Total Entity Pty Ltd (2003) 47 ACSR 577; Fox Home Loans Pty Ltd; D'Angelo [2005] NSWSC gzps A v Page 10

11 Section 596C(2) and Rule 11.3(7) state that an affidavit under that section is not available for inspection except so far as the court orders. Access to the affidavit will only generally be granted if the applicant can demonstrate an arguable case that the issue of the summons exceeded the power of the court under s596b and that access to the affidavit is likely to assist in determining the correctness of the challenge The contents of a summons Section 596D(1) states that a summons is to require the person to attend before the court to be examined on oath about the corporation's examinable affairs at a specified place, time and day that is reasonable in the circumstances. A person who is summoned must not, without reasonable excuse, fail to attend as required by the summons or until the conclusion of the examination: s597(6). 4.3 Issuing the examination summons Where the required elements for the issuing of a summons under ss596a or 596B are satisfied, the summons is formally issued by the Court Registrar or other appropriate court officer. Following the issue of a summons for examination, the applicant must give notice of the examination to as many of the corporation s creditors as is reasonably practicable. Notice must also be given to each eligible applicant in relation to the corporation (other than the person who applied for the summons) and if that person was authorised by ASIC notice need not be given to ASIC: s596e. Under Rule 11.4 an examination summons issued by the court must be personally served on the person who is to be examined at least eight days before the date fixed for the examination (unless the court orders otherwise ). The Corporations Act and the Rules do not require an examinee to be provided with conduct money. However, two New South Wales cases suggest that the failure to provide conduct money would make the service of the summons oppressive, and therefore liable to be set aside upon the application of the examinee What may a public examination be used for? 5.1 The legitimate purpose of examinations As already noted, the purpose of the public examination system is to allow the liquidator or other eligible applicant to make the corporation's officers and those persons who fall within s596b accountable to them since they are obliged to act in the interests of the corporation Meteyard v Love (2005) 65 NSWLR 36 at Spedley Securities Limited (in liquidation) v Bank of New Zealand (199) 3 ACSR 366 at 370; ex parte Australian National Industries Limited (1991) 4 ACSR 322 at 325 to 326; Re Kempal Pty Limited (1989) 17 NSWLR Re New Tel Ltd (in liq); Evans v Wainter Pty Ltd (2005) 221 ALR 331 at 370. gzps A v Page 11

12 A public examination has the following recognised legitimate purposes: (c) (d) (e) it enables an eligible applicant to gather information to assist it in the administration of the corporation; it assists the corporation's administrators to identify its tangible and intangible assets as well as its liabilities; it protects the interests of the corporation's creditors; it enables the obtaining of evidence and information to support the bringing of civil or criminal proceedings against persons in connection with the examinable affairs of the corporation; and it assists in the regulation of corporations as a whole by providing a public forum in which the examinations may take place. 44 It follows that a court will regard the use of the examination powers for a purpose which is not expressly or impliedly authorised by the legislation as an abuse of process. 5.2 When will an examination constitute an abuse of process? The principles relevant to the identification of an abuse of process were recently summarised in the decision of the Full Court of the Federal Court in Re New Tel Ltd; Evans v Wainter Pty Ltd in June Lander J (Crennan and Ryan JJ agreeing) set out the following examples: (c) (d) an application to examine a purpose which is unconnected with the purposes authorised by the legislation (see 5.1-(e), above); where a party obtains, or may obtain, a forensic advantage as a result of the examination; where the examinations procedure is used as a dress-rehearsal for the crossexamination of a person in a pending or subsequent proceedings; or where the application cannot be characterised as being for the benefit of the corporation, its contributories or creditors. 5.3 Obtaining a forensic advantage It is a legitimate use of the power by an external administrator to obtain information which might assist in the conduct of litigation. An applicant will be deemed to procure a forensic advantage where a summons is sought to be used for the sole purpose of obtaining an advantage which is not available from normal pre-trial procedures. Examples include seeking to obtain the discovery of 44 Re New Tel Ltd (in liq); Evans v Wainter Pty Ltd, ibid; HongKong Bank of Australia Limited v Murphy (1992) 28 NSWLR 512 at 518-9; 8 ACSR 736; 10 ACLC 1,573; Gerah Imports Pty Limited v Duke Group Limited (in liq), ibid. 45 Ibid. gzps A v Page 12

13 documents after a discovery order has been refused or to obtain answers to interrogatories where leave to administer interrogatories has been refused. 46 A summons will not be refused simply because the applicant will gain an incidental forensic advantage. 47 The courts recognise that a liquidator is under a disability in gathering reliable information about the company and therefore needs to use the examinations process to gather information even though the liquidator may obtain an forensic advantage as a result. 48 For example, a liquidator may apply for an examination to increase or protect the assets available in the winding up even if this will also assist a creditor to pursue the creditor's own interests and the creditor funds the liquidator's examinations. 49 Similarly, an application by an unsecured creditor for examinations summonses with the purpose of identifying the company's assets may also be permitted as being indirectly for the benefit of all other unsecured creditors. For example, it may ascertain which assets are available to unsecured creditors following payment of the secured creditors Using an examination as a dress rehearsal for other proceedings The inference that an examination is intended be used as a dress rehearsal of crossexamination of a proposed examinee is more likely to be drawn if, at the time of the application, the other proceedings are ready, or almost ready, for trial. 51 It is not improper for a person to be summonsed for examination where litigation is already pending in relation to that person or entities connected to that person. 52 However, examining probable witnesses in the litigation simply to destroy their credibility will be regarded as an abuse. 53 A public examination, or individual questions at the examination, will constitute an abuse of process if the questioning will interfere with the administration of justice in another proceeding. 54 The fact that matters likely to be examined in the course of the examination might overlap with matters likely to be considered in criminal proceedings against the examinee does not mean that the order for examination has to be set aside. As a practical matter it should be noted that any attempt to rehearse cross-examination may ultimately backfire on the examiner since the proposed examinee will be alerted to the questions to be expected in the later proceedings New Zealand Steel (Aust) Pty Ltd v Burton (1994) 13 ACSR 610 at Hong Kong Bank of Australia Limited v Murphy (1992) 28 NSWLR 512 at 518-9; 8 ACSR 736; 10 ACLC 1,573; Gerah Imports Pty Limited v Duke Group Limited (in liq). 48 Adler v Qintex Group Management Services Pty Limited (in liq) (1996) 22 ACSR Re Laurie Cottier Productions Pty Ltd (1992) 9 ACSR Ford's Principles of Corporations Law [ ]. 51 Fetzer v Irving (2005) 91 SASR Re New Tel Ltd (in liq); Evans v Wainter Pty Ltd, ibid; Sule Arnautovic (liq) of Think Systems Pty Ltd [2006] NSWSC Re Hugh J Roberts Pty Limited (lin liquidation) and The Companies Act [1970] 2 NSWLR 582 at Spedley Securities Limited (in liquidation) v Bank of New Zealand (1990), ibid. gzps A v Page 13

14 5.5 Other cases where abuse has been considered Where an applicant has multiple purposes, some proper and some improper, it seems that there will generally be no abuse of power. 56 The fact that litigation may be funded on the condition that an examination take place does not necessarily show that an examination is sought for an improper purpose. 57 An applicant is not prohibited from obtaining or conducting an examination by reason of having previously examined the proposed examinee since the circumstances may call for ongoing monitoring Production of books and documents The production of books may be required under the summons in accordance with s596d, at the direction of the court under s597(9) or under the wider ancillary powers contained in the court rules (which in NSW are contained in s.68 Civil Procedure Act 2005 (NSW)) (CPA). Under s596d the application for summons must specify the books that are to be produced: s596d(3). The term 'books' is widely defined in s9 of the Act and includes documents, registers, financial records and any other record of information. Section 597(9) allows the court to direct the person to produce, at an examination of that person or any other person, books that are in the first mentioned person's possession and are relevant to matters about which the examination relates or will relate. An order under s597(9) or s.68 CPA is not limited to natural persons and so a corporation may be the subject of an order to produce documents. 59 The recipient of the court direction for production of books need not be the examinee and such a direction may be served on a third party who is in possession of the relevant books. Accordingly, orders for production of books relevant to the examinable affairs of a company may typically be served on the company's accountants, advisers and solicitors. The statutory power to order the production of books requires that those books be produced at the time of the actual examination (subject possibly to a direction otherwise under the provisions of s569f). This is obviously not ideal for examiners who will wish to obtain documents as soon as possible and well in advance of an examination. Under the ancillary powers in the court rules, applications can be made to require the documents to be produced at any time before the examination date. 55 Ford's Principles of Corporations Law [ ] 56 HongKong Bank of Australia Limited v Murphy, ibid. 57 Fetzer v Irving, ibid. 58 Jagelman v Sheahan (as liq) of Moage Limited (2002) 41 ACSR 487; NSWSC Re Interchase Corporation Ltd (in liq) (1994) 12 ACLC 97. gzps A v Page 14

15 5.7 Access to documents produced An examining party should be prima facie permitted access to all documents required to be produced for the purposes of the examination. 60 The court's power under s596f(1) to give a direction about access to records of the examination is a broad power and may provide parties other than an examining party with access to documents. This power extends, in appropriate circumstances, to documents produced prior to or at the examination and also incorporates the transcript of the examination. The onus rests on a producing party who seeks to have access denied or restricted to satisfy the court that such a restriction should be imposed. The courts have stated that there are two bases on which access to documents obtained at or for the purposes of examination might be granted: if disclosure of the documents would assist the winding up by increasing, protecting or preserving the company's assets; and if disclosure will facilitate the prosecution of civil or criminal proceedings, including civil proceedings by creditors, where those proceedings bear upon the circumstances of the company's collapse. 61 Questions relating to conditions of access to documents produced should be dealt with at the appropriate time by the Registrar before whom the examination is to be held. 62 A solicitor who obtains documents as a result of a court order is subject to the usual implied undertaking not to use them for purposes other than for the proceedings in which the order was made (regardless of whether the documents are privileged) Application to discharge the summons A person served with an examination summons may apply to the court for an order discharging the summons: Rule The application must be filed within 3 days of the service of the summons and an affidavit in support of the application must also be filed stating the facts in support of the application. The application to discharge the summons and the supporting affidavit must be served on the person who applied for the examination: Rule 11.5(3). On the hearing of the application to discharge the summons, the considerations relevant to whether an order for summons should be issued, will also be relevant to whether the summons should be discharged. In other words, the court will need to consider questions such as whether there is an 'eligible applicant', whether the questions proposed to be 60 Re BPTC Ltd (in liq) (No 4) (1993) 11 ACLC New Cap Reinsurance Corporation Holding Ltd [2001] NSWSC 835; Re Eurostar Pty Ltd (in liq) (Receivers and Managers appointed) and Ors [2003] NSWSC Re BPTC Ltd (in liq) (No 4), ibid. 63 Bell Group Ltd (in liq) v Westpac Banking Corporation (1998) 86 FCR 215. gzps A v Page 15

16 asked relate to the 'examinable affairs' of the company, and whether the examination would be oppressive or an abuse of process. Unless the court otherwise orders, the person who applied for the examination is not required to disclose the contents of the affidavit in support of the application for the issue of the summons to an examinee who applies to discharge the summons. Where, however, the applicant for the examination will suffer no prejudice if the affidavit is disclosed and procedural fairness requires that the other side be permitted to see the affidavit in order to formulate a proper response to it the court will be inclined to order that it be available for inspection. The decision on whether to consent to disclosure of the affidavit must be made on a case by case basis. 5.9 Legal representation An examinee is entitled, at his or her own expense, to be represented by a solicitor or counsel and the solicitor or counsel may put to the examinee such questions as the court considers just for the purpose of explaining or qualifying answers or evidence given by the examinee: s597(16). The legal representative has the right to object to any question that amounts to an abuse of process, to advise his or her client of the right to claim privilege, and to object to unnecessarily aggressive questioning Involvement of others in examination Section 597(5A) states that ASIC or any other eligible applicant may take part in the examination, and for that purpose may be represented by a lawyer or by an agent authorised in writing for that purpose. Consequently, once one eligible applicant has applied for an examination summons, and the summons has been issued, ASIC or any other eligible applicant may take part in the examination, and therefore may put questions to an examinee and request access to documents produced Questioning While the examination of a person must relate to the examinable affairs of a corporation, the court may put, or allow any other person entitled to take part in the examination to put, such questions about the corporation and its examinable affairs as the court thinks appropriate. The scope of questions therefore that may be put to an examinee is potentially very wide Transcript Under s597(13) the court may order that the questions put to a person and the answers given by him or her at an examination be recorded in writing and may require him or her to sign that written record (s597(13) Record). Once signed, the s597(13) Record may be used in evidence in any legal proceedings against the person: s597(14). Such use is however subject to s597(12a) which relates to gzps A v Page 16

17 the use of self-incriminating evidence. It should also be noted that the s597(13) Record extends to documents referred to, and thus incorporated into, the transcript. 64 An application for access to the transcript must be made by both examinees and nonexaminees and the court will not grant access if an applicant's grounds for access are tenuous, attenuated or of insufficient substance. 65 The transcript is open to inspection without fee by: (c) the person who applied for examination; an officer of the corporation; or a creditor of the corporation. Anyone else can inspect the transcript on payment of the prescribed fee: s597(14a). It has recently been held that the court is not, despite its powers to make directions in s 596F(1), permitted to deny proposed examinees access to the s597(13) Record of examinations already conducted. The right of access to transcripts, however, is limited to the s597(13) Record and does not extend the ordinary court transcript of the examination. It is necessary to seek leave from the court to obtain that transcript. 66 From a practical point of view, if liquidator ensures that no s597(13) Record is created, he or she can make it more difficult for future examinees to gain access to the record of an examination, by requiring that they apply to the court for access to the court transcript Privilege Legal professional privilege It is now well-established that the immunity provided by legal professional privilege applies to the examinations process under s In the context of examination proceedings in New South Wales this refers to the protection given by Part 3.10 of the Evidence Act 1995 (NSW) (Evidence Act) which includes the privilege in respect of legal advice, litigation and evidence of settlement negotiations in ss.118, 119 and 131 of the Evidence Act, respectively. 68 The privilege is of course subject to the usual rules regarding the scope of privilege, waiver and loss. 69 Self-incrimination privilege In the context of a public examination, s597(12) provides that a person is not excused from answering a question put to him or her at an examination on the ground that the answer 64 Re New Cap Reinsurance Corp Holdings Ltd, ibid. 65 Re Spersea Pty Ltd (No 2) (1991) 9 ACLC 1, Re Strarch International Ltd [2005] NSWSC Re Compass Airlines Pty Ltd (1992) 35 FCR 447 at 459,464; Daniels Corporation International Pty Ltd v ACCC (2002) 213 CLR 543 at 553[11]. 68 s.79 Judiciary Act 1903 (Cth); Part 1.9 Uniform Civil Procedure Rules (formerly Part 36 rule 13 Supreme Court Rules (NSW)). 69 Re Doran Constructions Pty Limited (in liquidation), ibid; ss Evidence Act 1995 (NSW). gzps A v Page 17

18 might tend to incriminate him or her or make him or her liable to a penalty. The policy behind the curtailment of the rule against self-incrimination is that, in some circumstances, the public examination is the only source of information for a liquidator in relation to events leading to the failure of the company. However, under s597(12a), where a person claims a self-incrimination privilege before answering a question, the answer is not admissible in evidence against the person in a criminal proceeding or a proceeding for the imposition of a penalty. Consequently, examinees, particularly those whose conduct is or may have been criminal, are advised to preface the answer to every question by claiming that the answer to the question may tend to incriminate him or her. Typically, this is done by saying "privilege" at the beginning of each answer. gzps A v Page 18

19 Recent cases of interest 6. Meteyard and others v Love and others (in their capacity as recs and mgrs of Southland Coal Pty Ltd (in liq)) (2005) 65 NSWLR 36 - NSW Court of Appeal 6.1 The facts In December 2003, a coal mine at Southland Colliery in the Hunter Valley spontaneously combusted, causing catastrophic damage. The mine was jointly owned by Southland Coal Pty Ltd and a separate company, Thiess Southland Pty Ltd. The mine was closed and voluntary administrators were appointed to Southland Coal and other related group companies while the lenders appointed Ferrier Hodgson as receivers and managers. The Southland Coal group companies went into liquidation in July Southland Coal and Thiess Southland's main asset (to which the lenders' charge attached) was an industrial special risks insurance policy issued by QBE and both insureds duly made claims under it. In the normal way, QBE retained loss adjusters, mining experts and solicitors to investigate the cause of the incident and the claims made. The focus of the insurer's investigations centred on whether certain exclusion clauses in the policy applied and whether there had been any non-disclosures or misrepresentations by the insureds. In order to decide whether to commence proceedings against QBE for indemnity under the policy, the receivers and managers, as eligible applicants, arranged for examination summonses to be issued under s.598b Corporations Act 2001 (Cth) in January 2005 to a number of persons associated with QBE, the loss adjusters and the mining experts (the QBE parties). The summonses also included an order for the production of documents under the wider ancillary powers of Part 36 rule 12 of the Supreme Court Rules (NSW). 70 The order for production included documents concerning the QBE parties' investigations into, and assessment of, the claims and whether the policy responded to them as well as other communications with third parties. 6.2 The first instance decision of the NSW Supreme Court The QBE parties applied to the court to set aside the summonses on the grounds they were oppressive and an abuse of process, principally because they would allow the receivers to obtain a "backdoor" method of pre-trial discovery and rehearse their crossexamination of QBE's witnesses. It was also argued that the documents sought to be obtained were protected by legal professional privilege. At first instance, 71 Young CJ declined to set aside the summonses, holding that they were neither oppressive nor an abuse of process and upheld the orders for production. In 70 Since repealed and replaced by the equivalent provisions of s.68 Civil Procedure Act 2005 (NSW). 71 Re Southland Coal Pty Ltd (2005) 189 FLR 297. gzps A v Page 19

20 reaching his decision Young CJ was obliged to consider whether the internal affairs of an insurance company, and those of its loss adjusters and mining experts retained to investigate claims, were part of the "examinable affairs" of the corporation he held that they were. In relation to the privilege argument, Young CJ held that, while claims for privilege over individual documents could be made and ruled on in due course, it was not the case that privilege would apply generally to all of the documents sought to be produced. The protection given to legal advice privilege in s.118 Evidence Act 1995 (NSW) (Evidence Act) was held not to apply to the documents prepared by the loss adjusters or mining experts at the request of QBE's lawyers. This was because the solicitors had commissioned the reports themselves, rather than on the explicit instructions of QBE, and had asked that the reports be sent to the solicitors so that they could advise QBE. 72 The QBE parties appealed. 6.3 The decision of the NSW Court of Appeal The Court of Appeal delivered its judgment in December Basten JA (Beazley and Santow JJA agreeing) again upheld the examination summonses but set aside the orders for production. The significance of the Court of Appeal's judgment to those involved in the examinations process is threefold in that it: clarified the limits of the power to examine an insurance company and its agents about a corporation's "examinable affairs"; widened the scope of the statutory legal advice privilege protection in New South Wales to include documents prepared by independent experts who are not expressly retained by a client; and confirmed the correct procedure to be adopted when seeking orders for the production of documents for use in examinations where it is likely that claims for privilege will be made. the limits of the power to examine an insurance company and its agents The Court of Appeal confirmed that the existing authorities support the proposition that the "examinable affairs" of a corporation includes: (i) (ii) (iii) the existence of any insurance policy which relates to the assets of the corporation; the terms and conditions of such a policy; where a claim has been made, the decision of the insurer with respect to the claim; and 72 Young CJ at (2005) 189 FLR 297 [67], [68], [75] and [77]. Although not explicitly stated in his judgment, Young CJ's reasoning appears to explain why an agency relationship could not be established as required by s.118. In any event, Young CJ expressly restricted his comments on privilege to the issue of whether the summonses were an abuse of process and left it for the Registrar conducting the examinations to make a final determination on the application of s.118 privilege in due course. gzps A v Page 20

21 (iv) the potential value of the claim (where this has yet to be determined). 73 Where an application for an examination summons is made under the discretionary grounds in s.596b, the applicant is required to satisfy the court, among other things, that the proposed examinee can give "information about the examinable affairs of the corporation". 74 What do the words "information about" mean? The Court of Appeal suggested that they mean there must be a factual basis for a court to be reasonably satisfied that a proposed examinee has information concerning the corporations' examinable affairs which is not known to the eligible applicant. However, it stated that this phrase should not be read so broadly so as to include any information which may affect the value of a corporations' assets. As a result, the Court of Appeal concluded that the internal affairs of another corporation or person will not fall within the "examinable affairs" of the subject corporation simply because they have the potential to affect the value of the assets of that corporation. 75 In this case, that meant that where the insurer had made a decision on the claims, the internal assessment of information obtained by the loss adjusters and experts and communicated to the insurer (which the receivers sought production of) went beyond the scope of an "examinable affair" and thus amounted to an abuse of process. This was so even though the results of the internal assessments could clearly be relevant to the ultimate decision taken by the insurer, which was properly an "examinable affair". legal advice privilege and independent expert's reports The Court of Appeal began by confirming what is now the well-established position that the immunity provided by legal professional privilege applies to the examinations process under s In the context of examination proceedings in New South Wales this refers to the protection given by Part 3.10 of the Evidence Act to legal advice and litigation advice privilege under ss.118 and 119 of the Evidence Act, respectively. 77 The issue here was whether Young CJ had erred in holding that legal advice privilege in s.118 did not apply to the reports prepared by the independent loss adjusters and mining experts in response to a request from the lawyers and not from QBE. The Court of Appeal held that he had and found that the loss adjusters and experts should, as a matter of commercial reality, be inferred to be the agents of QBE because QBE was ultimately responsible for paying their fees. Legal 73 Basten JA at (2005) 65 NSWLR 36 at 46 [36]. 74 Section 596B(1)(ii). 75 Basten JA at (2005) 65 NSWLR 36 at 47 [42]. 76 Re Compass Airlines Pty Ltd (1992) 35 FCR 447 at 459,464; Daniels Corporation International Pty Ltd v ACCC (2002) 213 CLR 543 at 553[11]. 77 s.79 Judiciary Act 1903 (Cth); Part 1.9 Uniform Civil Procedure Rules (formerly Part 36 rule 13 Supreme Court Rules (NSW)). gzps A v Page 21