What are public examinations?
Liquidators who are appointed to a company have broad powers to investigate the affairs of the business. One of the key powers they have is to question current or former directors (or other officers) of a company, publicly in court, about the affairs of the company. This is known as a public examination.
It’s important to note that it is not only liquidators who have this power – any ‘eligible applicant’ may apply for a public examination order, including the Australian Securities and Investments Commission (ASIC) or a person authorised by it in writing, a voluntary administrator of the company or the administrator of a deed of company arrangement entered into by the company.
The purpose of public examinations is to allow liquidators or other eligible applicants to ascertain information and establish facts about the affairs of the company, including its management, transaction history and operations. For liquidators, this allows them to explore reasons for the company’s failure, identify any claims they or the company might have against persons involved with the company and/or assess prospects of any claims and recoverability associated with such claims.
There are two types of examinations that a liquidator can apply for:
- Mandatory examinations: Liquidators have a mandatory right to examine current or former directors and secretaries of a company under section 596A of the Corporations Act 2001 (Cth). Provided the Court is satisfied that the person a liquidator seeks to examine is or has been an officer or provisional liquidator of the company within the 2 years prior to the date beginning of the liquidation or administration (as applicable), the Court must summon that person to be examined. The circumstances in which the Court can refuse to issue a summons for examination are limited – the summons must be issued for the benefit of the company, its creditors, its members and the general public and it must not be issued if it is apparent that doing so would be an abuse of process.
- Discretionary examinations: Liquidators can also apply under section 596B of the Corporations Act 2001 (Cth) to examine a person even if they are not an ‘officer’ (that is, a director or secretary) of the company. They can do so if that person is in a position to give information about the examinable affairs of the company. Unlike mandatory examinations, the Court has discretion under section 596B to decide whether to issue a summons for examinations. In order to issue the summons, the Court must be satisfied that the person the liquidator seeks to examine has taken part in the ‘examinable affairs’ of the company and has been, or may have been guilt of misconduct in relation to the company, or may otherwise be able to give information about the ‘examinable affairs’ of the company.
What happens when the Court issues a summons for examination?
Assuming the liquidator is able to demonstrate that a person is or was a director or provisional liquidator during the relevant times and must be examined under section 596A of the Corporations Act 2001 (Cth) or that the Court should exercise its discretion to order that another person be examined under section 596B of the Corporations Act 2001 (Cth), the Court will issue a summons for examination to that person. The summons will provide a date and time on which the examinee is required to appear in Court for examination.
A person who is examined is required to answer questions that the Court directs the person to answer unless they have a reasonable excuse for not answering. A person cannot refuse to answer a question on the basis that doing so might incriminate them or make them liable for a penalty. However, if answering a question has the effect of incriminating them or making them liable for a penalty, their answer will not be admissible in evidence in a criminal or other proceeding under section 597(12A) of the Corporations Act 2001 (Cth). Therefore, liquidators rely on such answers to later prosecute the examinee. For this reason, examinees are often directed to respond to each question with the word ‘privilege’ before giving an answer.
As part of the application, liquidators will often request the Court also issue document production orders requiring the examinee to produce documents to the Court in connection with their involvement in the examinable affairs of the company. The production orders are usually made prior to the examinations in order to assist the liquidator in its preparation for questioning at the examinations.
What are the ‘examinable affairs’ of the company?
On the day of examination, the liquidators (via their legal counsel) will question the examinee about the examinable affairs of the company. Because the nature of the examination is inquisitorial, the term ‘examinable affairs’ is given a broad construction. It is defined in section 9 of the Corporations Act 2001 (Cth) as being:
- the promotion, formation, management, administration, restructuring or winding up of the corporation; or
- any other affairs of the corporation (including anything that is included in the corporation’s affairs because of section 53); or
- the business affairs of a body corporate that is or has been related to the corporation or an entity that is or has been connected with the corporation, in so far as those business affairs are, or appear to be, relevant to the corporation or to anything that is included in the corporation’s examinable affairs because of (a) or (b) above.
This definition is very broad and so examinable affairs can be taken to include issues relating to:
- the operations and management decisions of the company;
- the assets and liabilities of the company, including how the property of the company was dealt with and any dispositions of assets;
- events preceding the insolvency of the company;
- actions taken or not taken by the directors and/or management relating to the performance of the company and in response to the financial distress of the company;
- whether the directors were aware of the solvency of the company; and
- any conflicts of interest or other relationships between the company’s creditors and the examinee.
Questions that are put to directors which fall outside of the scope of the examinable affairs may be objected to during the examination. However, the scope of the examinable affairs is quite broad and it will be for the presiding registrar to determine whether the question ought to be answered.
Can I get a summons for publication examination and production order set aside?
While the examination process is an important tool for liquidators to obtain information that might not otherwise be available to them, the Courts recognise that public examinations should only be conducted for a proper purpose.
Where a director is served with a summons, they may apply within 3 days to have it set aside. In deciding whether to set aside a summons for examination, the Court will consider whether the examinee is oppressed or unfairly disadvantaged by the summons. The Court will only set aside a summons in limited circumstances, including where it can be shown that the summons is an abuse of process.
An examination will be an abuse of process if the liquidator is seeking to obtain a forensic advantage that it is not otherwise able to obtain, the questions being asked are not relevant, the person applying for the examination is doing so for an improper purpose (e.g. for a private purpose which benefits only a limited group of creditors) or where the examination is vexatious or oppressive to the examinee.
Can I reduce the scope of the production order issued to me?
Where complying with a production order would be overly burdensome or onerous, an examinee might seek to limit the scope of the documents they are required to produce to the Court. They might seek to do this by consent with the liquidator or in conjunction with an application to set aside the summons for examination. With the latter, the examinee is again required to demonstrate that requiring production of the disputed categories of document is for an improper purpose or is an abuse of process.
What should I do if I have been served with an examination for summons?
If you are served with a summons for examination, you should seek immediate legal advice. Strict time limits apply for an application to set aside a summons. If there is scope to set aside a summons, you should look to make an urgent application to the Court to do so. Even if you are not able to dispute a summons, you should retain a lawyer to act for you in respect of the examination process, including the production of documents and appearing in Court for the examination.
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