In brief: In this case, the spotlight has moved on to liquidators, and it’s not being well received.

In a recent case, a liquidator claimed that a shareholder’s attempt to publicly examine him over a decision he made was an abuse of process. At first instance he was successful. However, this decision was overturned last week by the Federal Court in the matter of Kimberley Diamonds Ltd v Arnautovic [2017] FCAFC 91.

The application was made under section 596A of the Corporations Act 2001.

The facts

The facts of the case are as follows:

  • Kimberly Diamond Company Pty Limited was the owner of diamond mine located in the Kimberley region of Western Australia.
  • It was placed in voluntary administration and subsequently liquidation.
  • The liquidators disclaimed an interest in the mine, resulting in the mine reverting to the Western Australian Government.
  • The sole shareholder was unhappy with this decision and thought that the disclaimer may have followed an inadequate attempt by the liquidators to sell the mine.
  • The shareholder requested answers to a number of questions posed by the liquidator, but did not feel that an adequate response was provided.
  • The shareholder sought ASIC to authorise it to make an application for a summons to examine one of the liquidators (and produce documents), which ASIC complied with.

The Court had to determine whether the shareholder’s application to examine the liquidator was an abuse of process.

The arguments

The liquidator argued that:

  • The examination summons placed an unnecessary imposition on the liquidator in circumstances where there was no realistic prospect of the examination having any utility.
  • The summons for an examination should be discharged.

The shareholder argued:

  • The liquidator had not provided a substantive answer as to:
  • Whether he had undertaken a valuation of the mine; and
  • How he came to the conclusion in a two-month timeframe that he was not able to sell the mine.
  • It was in the interest of creditors and contributories for an investigation to be conducted, as it could support a claim against the liquidator. This is even if ultimately the investigation revealed that there was no cause of action against the liquidator.

The Court’s findings

At first instance the Court agreed with the liquidator.

The Full Federal Court disagreed with the original judgment and overturned the decision stating:

  • A liquidator is an eligible person to be examined in relation to the affairs of the corporation.
  • The scope of the summons was narrow and on a discreet topic and there was nothing to suggest it would be oppressive for the liquidator to respond.
  • The purpose of the examination fell within the permitted purposes – there was no suggestion of an ulterior purpose.

Some hope for liquidators

The Court outlined some instances where they may find that a summons for examination against a liquidator is an abuse of process. These include:

  • If the predominant purpose of the examination was to secure a private advantage, as opposed to a benefit for the company, its creditors or contributors; or
  • If the winding-up was in its very late stages and the examination was proposed to cover a very wide range of ill-defined topics, which could last weeks.

Lessons

The last thing a liquidator wants to do is spend time being examined by a disgruntled shareholder or creditor.

Although this case demonstrates that it is difficult to oppose an application for examination, it seems in this instance there was a perceived lack of transparency in the liquidator’s response to the shareholder. It may be that had there been more transparency regarding the sale process then the grounds for examination would have been diminished.

This case serves as a reminder to liquidators that they are not exempt from the public’s eye and emphasises the broad nature of public examinations to which they are not immune.

 

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