TGIF 3 July 2020 – Federal Court provides guidance on tools for liquidators investigating potential claims

This week’s TGIF considers the recent Federal Court decision of Justice Derrington in Pitman v Park (Liquidator), in the matter of BAM Recycling Pty Ltd (in liq) [2020] FCA 887. 

Key takeaways

• It is now well established that a liquidator may apply for the Court to summon a person to attend at an examination and produce certain documents in order to determine:
  
  
  1. whether there is evidence available to support a claim by the company against the person; and
     
     
  2. the person’s ability to satisfy a potential judgement against them.
     
     
• Assuming the summons does not constitute an abuse of process, the liquidator need only show the “possibility of the existence” of a cause of action to enliven the Court’s power to issue a summons. 

Background

On 3 March 2020, a District Registrar of the Federal Court made orders pursuant to s 596B of the Corporations Act 2001 (Cth) (the Act) for the issuing of summonses in the liquidation of BAM Recycling Pty Ltd (the Company). 

One of those orders was that a summons for examination be issued to the Applicant requiring both his attendance at an examination and that he produce certain documents. The liquidator was seeking to investigate a potential claim against the Applicant, as well as the Applicant’s ability to satisfy any judgement obtained by the liquidator.

The Applicant, a solicitor who worked for a firm that had been engaged by the Company, was involved in matters relating to the sale of the Company’s assets to a related company for no apparent consideration, including:

• providing a draft business sale agreement to the Company’s accountants, at their request, on 22 August 2018 (i.e. two days prior to the date on which a winding up order was made against the Company); and
  
  
• providing a sale agreement to the liquidators on 21 November 2018, which was substantially in the same form as the draft referred to above, but which was dated 28 September 2017 (i.e. more than a year before the Applicant had sent the draft to the Company’s accountants). 

The liquidator submitted that the evidence of the Applicant’s conduct in assisting in arranging the sale of the business and in the subsequent apparent attempt to mislead the liquidator about it, raised the possibility that the Applicant may be liable as a person who was knowingly concerned in a contravention of the Corporations Act in relation to the wrongful disposition of the Company’s assets. 

After the summonses had been issued, the Applicant filed an application pursuant to r 11.5 of the Federal Court (Corporations) Rules 2000 and r 3.11 of the Federal Court Rules 2011 (Cth) seeking orders for the partial discharge of the Registrar’s orders and of the summons or, alternatively, for the summons to be varied to remove the Applicant’s obligation to provide documents relating to his personal financial position.

The liquidator opposed the partial discharge of the summons.

Issuing a summons

Section 596B of the Act provides that the Court may summon a person for examination about a corporation’s examinable affairs if:

1. an eligible applicant applies for the summons; and
   
   
2. the Court is satisfied that the person:

has taken part or been concerned in examinable affairs of the corporation and has been, or may have been, guilty of misconduct in relation to the corporation; or

may be able to give information about examinable affairs of the corporation.

A liquidator is an ‘eligible applicant’ within the meaning of the above.

Section 596D(2) provides that a summons may require the person to produce specified documents that are in their possession and relate to the corporation or any of its ’examinable affairs’.

What were the issues?

The issues to be resolved by the Court included:

• Whether the scope of requested documents went beyond the ‘examinable affairs’ of the Company; and
  
  
• Whether a liquidator has to establish the likelihood of the existence of a cause of action against a potential defendant to any threshold beyond the possibility that a cause of action may exist against that person. 

What did the Court decide?

Justice Derrington of the Federal Court concluded:

• the liquidator had established that the ’examinable affairs‘ of the Company included the issue of whether there existed a good cause of action against the Applicant and, by extension, the worth of the Applicant as a potential defendant was also within the scope of the examinable affairs; and
• on the evidence, the Applicant’s conduct raised the possibility of the existence of a cause of action by the Company against him. 

The Court therefore dismissed the Applicant’s application. 

Examinable affairs interpreted broadly

Justice Derrington reasoned that: 

• the expression ‘any of its examinable affairs’ is a phrase of wide connotation; and  
  
  
• the scope of the power only requires the existence of some connection between the documents and the company or any of its examinable affairs.  

Although the threshold for the enlivening of the power to issue a summons is low, it is to be exercised in a principled manner taking into account the objectives it is intended to achieve.

The Company’s disposition of its assets by their sale was ‘obviously’ within the scope of its examinable affairs.  

The investigation of a possible cause of action against the Applicant (i.e. proceedings against the Applicant) was information with respect to the ‘examinable affairs’ of the Company as it went to the existence and value of an asset of the Company (i.e. a cause of action).

Liquidator need only show possible existence of claim

The Court rejected the Applicant’s submission that the liquidator needed to establish that a potential cause of action existed against the Applicant which was not spurious, hypothetical, illusory or misconceived. 

The Court rejected that submission holding that the liquidator only needed to establish the existence of a possible cause of action. 

The Court noted that the purpose of public examinations is information-gathering and are often conducted at a stage where the liquidators are not fully informed of the affairs of the relevant company. His Honour considered that it would undermine the public examination process if a liquidator had to establish the likelihood of the existence of a cause of action beyond a cause of action being a possibility. 

Role as Trustee relevant to financial position

The Applicant argued that he should not be obliged to disclose documents which evidenced his financial interests in trusts on the basis that any such interests would not be available to meet any judgment which the liquidator might secure.  

Given that the liquidator was seeking financial information in relation to trusts of which the Applicant was trustee, the Court considered that the summonses were valid noting that the Applicant enjoyed rights of exoneration and an equitable lien in respect of the assets of those trusts which could be put towards satisfying any potential judgment. 

Comment

The Federal Court has made clear that the power to issue summons requiring the production of documents relating to the ‘examinable affairs’ of a company is a broad power.

Liquidators seeking information from potential defendants on summons need only show that a cause of action possibly exists (not that it probably exists).

Once a cause of action possibly exists, the financial status of the potential defendant will also fall within the scope of the court’s power.