13 March 2020
This week’s TGIF considers the recent case of In the matter of Newheadspace Pty Limited (in liq)  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).
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”.
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.
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.
Abuse of process by the director
Rees J found that the individuals behind Newheadspace had contrived an ostensible insolvency by:
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:
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.
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 content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.