Home Insights TGIF 20 November 2020 – Creditors in driver’s seat: Federal Court clarifies scope of examinations by creditors
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TGIF 20 November 2020 – Creditors in driver’s seat: Federal Court clarifies scope of examinations by creditors

This week’s TGIF examines a recent Federal Court decision which considered an application to discharge summonses issued pursuant to sections 596A and 596B of the Corporations Act 2001 (Cth).

Key takeaways 

  • While the Court may consider the terms of a grant of ‘eligible applicant’ status to a creditor by ASIC, those terms do not necessarily limit the scope of summonses for examination issued by that authorised creditor.

  • An authorised creditor is not restricted to examining only in relation to their own debt.

  • An authorised creditor is not disqualified from seeking to issue summonses for mandatory examination under the Corporations Act 2001 (Cth)where they may have a private purpose for the examination, as long as that private purpose is not the dominant purpose. 

Background

Shangri-La Construction was engaged by GVE Hampton to construct apartments. Disputes between the parties resulted in Shangri-La obtaining judgment against GVE Hampton for a sum of around $200,000.

Within weeks, GVE Hampton was placed into liquidation and the judgement debt remained unpaid.

The statutory report issued by one of the liquidators identified a number of potential recovery actions and, in particular, a $5.2 million loan to a related entity (with a common director, Vladislav Hyatt) which remained unpaid.

After the report was issued, Shangri-La successfully sought ‘eligible applicant’ status from ASIC to serve summonses for examination under ss 596A and 596B of the Corporations Act 2001 (Cth) and orders were subsequently made for examination of Mr Hyatt, his mother and two other directors of GVE Hampton, Eugene and Greg Krok (the Examinees).

Each of the Examinees sought to have the summonses discharged or, alternatively, that the scope be limited and the categories of documents for production refined.

The primary argument

The Examinees’ primary argument was that the summonses were sought and issued for a predominantly improper purpose (i.e. for the benefit of future litigation by Shangri-La) and as a result, amounted to an abuse of process.

Dominant purpose 

The Examinees drew the Court’s attention to various demands by Shangri-La on the director examinees in relation to claims for which the directors and GVE Hampton would be jointly liable. In doing so, the Examinees contended that Shangri-La’s intention was to conduct the examinations for the purpose of obtaining evidence to pursue those claims, which would ultimately not be for the benefit of GVE Hampton or its creditors.

While the Court accepted that Shangri-La may conduct examinations for its own purposes, in an attempt to have the judgement debt paid, it would in the process try to find out what happened to GVE Hampton’s funds. So, the Court found that the examination would provide an obvious benefit to GVE Hampton, being the possible recovery of more than $5 million.

Scope of examinations by authorised creditor

First, the Court heard from the Examinees that the scope of the summonses issued by Shangri-La exceeded the scope of the examinable affairs set out in its letters to ASIC seeking ‘eligible applicant’ status. They argued that the summonses must therefore be defective.

Justice Beach rejected this argument, clarifying that while the Court may consider the nature of ASIC’s authorisation, and that the substance and limitation of a summons is a matter for the Court in exercising its powers under the sections 596A and 596B of the Act.

Second, Justice Beach accepted the Examinees’ submission that an authorised creditor, unlike ASIC or a liquidator, did not have overarching obligations to the corporation in liquidation or its creditors as a whole. However, his Honour rejected the Examinees’ conclusion that, as a result, Shangri-La could only conduct examinations in relation to matters relevant to its own debt.

His Honour reasoned that if the scope of the summons was limited to matters relating only to Shangri-La’s debt then it would be without purpose at all, since Shangri-La already has a judgement debt. Instead, his Honour found that Shangri-La’s legitimate purpose for conducting an examination into the general affairs of GVE Hampton was to detect whether money that ought to have been available to settle GVE Hampton’s debts had been redirected and could be recovered.

Comment

This decision is a helpful roadmap for creditors considering taking steps to become an ‘eligible applicant’ for the purpose of conducting examinations, which (if appropriate) can be a valuable course to recovery.

Once authorised, creditors are reminded that the court retains discretion in issuing summonses for examination under the Act. The dominant purpose for the conduct of those examinations must be to the benefit of the company in liquidation, its contributories and creditors. 


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Restructuring and Insolvency

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