TGIF 13 March 2020: A professional foul: Supreme Court sets aside examination summonses issued to NRL officers

This week’s TGIF considers the recent case of In the matter of Newheadspace Pty Limited (in liq) [2020] NSWSC 173, where the Supreme Court of New South Wales set aside a liquidator’s examination summonses on the grounds of an abuse of process and failure to satisfy s 596B of the Corporations Act 2001 (Cth).  

What happened?

The sole director and shareholder (Director) of Newheadspace Pty Limited (Newheadspace), a self-described “life change strategist”, developed a program to help prepare professional sportspersons for their post-sport lives.  

In 2010, Newheadspace ran a pilot program for players from a National Rugby League Limited (NRL) sports club.  The program was later offered to the remaining clubs across the competition.  

Following the termination of the program in December 2014, the Director insisted on the payment of invoices issued in respect of the Newheadspace program and alleged that the NRL, by offering a similar program internally, stole her intellectual property.  

In 2017, the Director engaged a litigation funder who, in conjunction with a media adviser, issued a letter of demand to the NRL asserting a claim to damages of $2.5 to $3 million dollars.  Justice Rees described the allegations contained in the letter as “remarkable”.  

Newheadspace liquidation

After an unsuccessful meeting with the NRL in October 2017, the Director engaged a liquidator with a view to placing Newheadspace into voluntary liquidation. 

Two invoices were rendered to Newheadspace.  The first was an invoice for $55,000 from the litigation funder.  The second, issued by the Director herself, was for the sum of $487,500 for work conducted by the Director, covering a period in which Newheadspace declared no income and had ceased to trade.    

Summonses and present application

On 18 September 2018, the liquidator applied to the court to issue examination summonses to the NRL’s Senior NRL Welfare and Education Manager and CEO. 

In turn, the NRL applied to the Court to set aside the examination summonses issued by the liquidator on the basis that the voluntary liquidation of Newheadspace was a contrivance by the individuals standing behind the company and done to enable the issuance of public examination summons for the purpose of exerting pressure on the NRL to pay Newheadspace’s outstanding invoices.  

Findings

Abuse of process by the director

Rees J found that the individuals behind Newheadspace had contrived an ostensible insolvency by: 

• fabricating unpaid invoices;
• working with a litigation funder to draft a board paper expressing concern about the company’s inability to remain solvent; and 
• appointing a liquidator to utilise its power to issue examination summons to senior members of the NRL.    

Notwithstanding her Honour’s finding that the appointment of the liquidator was an abuse of process, Rees J was unwilling to terminate the winding up of Newheadspace.  

Abuse of process by the liquidator 

The Court looked at the power to issue the summonses by a liquidator conferred by s 596B(1)(b)(ii) of the Corporations Act 2001 (Cth) (Corporations Act) and confirmed the unfettered discretion granted to courts when determining whether to issue an examination summons under this provision.

Her Honour confirmed that, where a liquidator is not court-appointed, the Court has the ability to look “more deeply into the motive and purpose of the examination”.  To this end, evidence of a liquidator’s communications and dealings with others can be used to inform the Court of a liquidator’s predominant purpose.  

Her Honour restated four principles relevant to the facts at hand:

• that litigation against the examinees or their interests is contemplated, or on foot, at the time summonses are issued does not itself mean that the summonses are for an improper purpose;
• the fact that examinations are being conducted as a means by which to obtain litigation funding is not itself improper;
• a court need not be satisfied, before issuing a summons, of the merits of the prospective claim against the examinee; and
• it may be an abuse of process if the predominant purpose of the examinations is to exert pressure on the examinees to enter into a settlement.  

Her Honour was satisfied that the liquidator issued the summonses for an improper purpose, stating that the liquidator had “inherited the improper purpose of those who placed Newheadspace into liquidation”.  

The summonses were therefore set aside on that basis.  

Deficiencies in liquidator’s affidavit in support of the application

Her Honour also held that the liquidator’s affidavit in support of the application for the issue of examination summonses omitted key information and was, in some respects, inaccurate.  Her Honour set aside the summonses on this basis too.  

Takeaways

The outcome of this case is a cautionary tale for liquidators and, indeed, directors and litigation funders.  It underscores that, when a liquidator is not court-appointed, the court will readily scrutinise the liquidator’s decision to issue examination summonses, including by scrutinising any ulterior motive for placing the company into liquidation.    

The decision also confirms that:

• the Court has a broad discretion to set aside an examination summons issued by a liquidator under s 596B;
• the Court expects a liquidator to independently turn his or her mind to the elements of section 596B – a liquidator cannot simply inherit a preconceived improper purpose of the people behind a company; 
• any attempt to use examination summonses to strongarm proposed examinees into accepting a settlement will be viewed unfavourably by the Court; and
• care must be taken to accurately and fulsomely present the background to an application for examination summonses.