TGIF 18 March 2022 – Court reaffirms disclosure obligations for examination summons

This week’s TGIF considers the recent decision of In the matter of PIC Lindfield 19 Pty Ltd (in liq) [2022] NSWSC 271, in which former directors of the company in liquidation failed to set aside summonses for public examination on the basis of alleged non-disclosure by the liquidators.

Key Takeaways

• The mere fact that public examinations may provide an advantage to parties engaged in proceedings against an examinee does not give rise to additional disclosure obligations.
  
  
• It remains an abuse of process to examine a person with the dominant purpose of providing a forensic advantage to a party in proceedings against the examinee.
  
  
• Following the High Court’s decision earlier this year in Walton v ACN 004 410 833 Limited (formerly Arrium Ltd) (in liq) [2022] HCA 3 (Walton), it is evident that Australian courts will construe the power to compel public examinations widely.

What happened?

The company in liquidation, PIC Lindfield 19 Pty Ltd (Lindfield), was established to undertake a property development. Its primary investor was Mr Zheng, who owned 70% of the shares in Lindfield but was not a director.

Following the completion of the proposed development, Lindfield reinvested the revenue into a subsequent development against the wishes of Zheng. Zheng commenced proceedings against Lindfield and its officers alleging breach of fiduciary duties, statutory directors’ duties and breach of contract (Zheng Proceeding).

Lindfield went into voluntary liquidation on 8 October 2021, causing Zheng’s claims against the company to be stayed but not his claims against the directors.

Summonses to attend a public examination were issued to each of Lindfield’s former directors in January and February 2022. Following this, Zheng’s solicitors (who were, at that time, also acting for the liquidators) applied to adjourn the Zheng Proceeding (which was at this stage only stayed in respect of Lindfield) until the completion of the public examinations.

The examinees’ application

The examinees applied for orders discharging their summonses on the basis that the liquidators failed to disclose matters relevant to the Court’s decision to issue examination summonses. In particular, while the liquidators disclosed the existence of the Zheng Proceeding and provided the pleadings to the Court, they had not disclosed:

• the substantial overlap between the issues in the Zheng Proceeding and the subject matter of the examinations;
  
  
• the ‘advanced stage’ of the Zheng Proceeding, with all lay and expert evidence having been filed;
  
  
• the fact that the same set of solicitors acted for the liquidators as well as for Zheng in the Zheng Proceeding;
  
  
• the fact that Zheng had requested an adjournment until after the examinations;
  
  
• the role that the liquidators had played in relation to the Zheng Proceeding; and
  
  
• whether Zheng was funding the public examinations.

Alternatively, they sought orders that all the examinations be held in private and/or that no written record of the examinations be prepared.

The examinees highlighted the fact that there is a strict obligation on an applicant for an examination summons to make full and frank disclosure of all matters that may impact the Court’s decision to issue a summons.

They submitted that where there are proceedings pending against a proposed examinee, the Court must consider the possibility that the examination could be used for an improper purpose, namely to gain an advantage in proceedings against the examinee.

The decision

Williams J dismissed the examinees’ application, finding that there was no relevant non-disclosure by the liquidators.

Her Honour noted the High Court’s recent decision in Walton (which was the subject of a recent TGIF article) in which the majority held that shareholders of the company in liquidation could examine a former director for the primary purpose of pursuing a potential class action. In separate judgments, the majority held that the permissible purpose of a public examination was not limited to the interests of the company, its creditors or contributories.

The examinees in this instance relied heavily on the decision of In the matter of Mendarma Pty Ltd (in liq) (2006) 24 ACLC 1611 (Mendarma) where a summons was set aside on the basis of non-disclosure of material matters because there was a risk that the examinations would provide a forensic advantage to another party in proceedings against the examinee.

In distinguishing this case from Mendarma, Williams J noted that there is no checklist of matters that must be disclosed if there are pending proceedings involving the examinee or involving factual matters that overlap with matters likely to be addressed in the examination. Rather, matters to be disclosed are dependent on the particular facts of the pending proceedings.

It is clear that examination for the dominant purpose of providing a forensic advantage in another proceeding would be improper, however, the mere potential for an advantage to be gained is not improper or disclosable.

Her Honour considered that the examinees failed to provide authority to support the alleged non-disclosed matters and that in these particular circumstances, the disclosure of the existence of the Zheng Proceeding and the provision of the pleadings to court was sufficient.

Examinations to be held in public

Examinations under Part 5.9 of the Corporations Act 2001 (Cth) (the Act) will be held in public unless the examinees can establish a ‘special circumstance’ requiring private examinations. The examinees in this case submitted that, if the examinations were public, Zheng will have access to information that will give him a forensic advantage in his proceedings against Linfield’s former directors.

Williams J accepted the risk of such an advantage arising following a public examination, but found that the advantage would be very limited. The private interest of the examinees in avoiding this risk was not sufficient to outweigh the public interest in holding the Linfield directors accountable for the failure of the company.

Comment

Along with the decisions in Walton and Shangri-La Construction Pty Ltd v Hyatt, in the matter of GVE Hampton Pty Ltd (in liquidation) (No 2) [2021] FCA 1048, this decision reaffirms that courts will take an expansive approach to a liquidator’s power to compel examinations under section 596B of the Act.

In particular, the risk that public examinations could provide an advantage in pending proceedings against an examinee does not create onerous disclosure obligations. However, at least in circumstances where liquidators have the same legal representation as the party in the pending proceeding, they would be well advised to disclose the existence of that proceeding and provide copies of the pleadings to the Court.

Finally, this decision shows that the disclosure required under section 596B is dependent on the particular circumstances of every case, and cannot be approached as a checklist.