Introduction
The Full Court of the Federal Court of Australia in Kimberley Diamonds Ltd v Arnautovic [2017] FCAFC 91 has rejected a claim by a liquidator of a company that an examination summons issued under s 596A of the Corporations Act 2001 (Cth) (“CA”) to examine him about the examinable affairs of the company was an abuse of process. In rejecting the claim, the Full Court provided clarification on the statutory scheme concerning examination summonses in Pt 5.9 of the CA.
Relevant provisions
Part 5.9 of Ch 5 of the CA contains miscellaneous provisions concerning external administration, including the winding up of corporations. Division 1 of Pt 5.9 deals with the examination of persons about a corporation’s examinable affairs and relevantly includes the following provisions:
- s 596A which deals with mandatory examinations – when the Court is to summon a person for examination about a corporation’s “examinable affairs” (defined in s 9 of the CA and expanded upon in s 53 of the CA);
- s 596B which deals with discretionary examinations – when the Court may summon a person for examination about a corporation’s examinable affairs;
- s 596C which provides that a person who applies under s 596B must file an affidavit that supports the application and complies with the rules;
- s 596D which deals with the contents of the summons and provides, amongst other things, that a summons under s 596A or s 596B may require the examinee to produce at the examination specified books in the examinee’s possession;
- s 596F which enables the Court to give directions about certain things relating to an examination;
- s 597 which provides, amongst other things, that the Court may put, or allow to be put, to a person being examined such questions about the corporation or any of its examinable affairs as the Court thinks appropriate, and may direct a person to produce books in their possession which are relevant to matters to which the examination relates; and
- s 597B which empowers the Court, where satisfied that a s 596A or s 596B summons was obtained without reasonable cause, to order some or all of the costs incurred by the examinee to be paid by the applicant or any person who took part in the examination.
Division 11 of the Federal Court (Corporations) Rules 2000 (Cth) contains rules in relation to examinations and orders under Pt 5.9 of the CA, including rules about how to make an application for an examination summons under s 596A or s 596B and how to apply for a discharge of such a summons.
Background
A company operating a diamond mine in Western Australia had been placed into liquidation. The liquidators had disclaimed their interest in the mine, with the result that the mine had reverted to the Western Australian Government. The company’s sole shareholder, concerned that the disclaimer of the mine might have followed an inadequate and defective attempt by the liquidators to sell the mine, sought answers to various questions about the liquidators’ sales process. The shareholder was not satisfied by the answers provided by the liquidators and requested ASIC to authorise it to make an application under s 596A of the CA for a summons to examine a named liquidator. ASIC authorised the shareholder as an eligible applicant and the shareholder then applied for an examination summons, as well as an order for production of documents at the examination under s 597 of the CA. A Registrar of the Federal Court issued the summons and order for production.
The liquidator to be examined applied to the Court for an order that the summons be discharged on the basis that it was an abuse of process. The judge at first instance found in his favour and ordered that the summons be permanently stayed and that the order for production be set aside. The shareholder appealed to the Full Federal Court.
Full Federal Court
The statutory scheme
The Full Federal Court (Foster, Wigney and Markovic JJ) made the following points concerning the statutory scheme in Pt 5.9 (at [19]-[29]). References to the cases have been omitted.
- An applicant for a s 596A summons was required to satisfy two criteria: first, that the applicant was an “eligible applicant” (defined in s 9 of the CA); and second, that the person to be examined was, during the specified period, an officer or provisional liquidator of the corporation. If those two criteria were satisfied, the Court was required to issue a summons. There was no discretion.
- Therefore, it was not necessary for the eligible applicant for a s 596A summons to establish any particular reason for seeking the summons or to demonstrate that the examination would have practical utility or be likely to achieve any particular result or outcome or be in any sense desirable or efficacious. While r 11.3(3) of the Federal Court (Corporations) Rules required that the applicant for a s 596A summons file an affidavit in support of the application, the affidavit only needed to address the two express criteria in s 596A. The relative ease with which a s 596A summons could be obtained appeared to have been expressly intended by the legislature.
- An applicant for a s 596B summons was also required to satisfy two criteria. The first was, relevantly, the same as the first criterion in respect of a s 596A summons while the second required the applicant to satisfy the Court that the person to be examined was either a person who had taken part or been concerned in the examinable affairs of the corporation and had been, or might have been, guilty of misconduct in relation to the corporation, or was a person who might be able to give information about the examinable affairs of the corporation. This point of distinction between s 596A and s 596B was important. Under s 596A, the applicant did not have to demonstrate, and the Court was not required to inquire into whether, the person who had been involved in the examinable affairs of the corporation might have been guilty of misconduct, or would be able to give information about the examinable affairs of the corporation.
- In the case of a s 596B summons, even if the Court was satisfied that the two criteria were made out, the Court was not required to issue the summons because it retained a discretion whether or not to do so. It could, therefore, refuse to exercise the discretion if it was not satisfied, for example, that the examination was sufficiently justified, or would have any practical utility.
- A liquidator could be an eligible applicant for a s 596A summons. Equally, a liquidator could also be an examinee in a s 596A summons. This was because a liquidator was an “officer” of a corporation as defined in s 9 of the CA.
- The examinable affairs of the corporation about which the examinee could be questioned, included acts done by or on behalf of the corporation, or to or in relation to the corporation or its business or property, when the corporation was being wound up.
- It followed, therefore, that the statutory scheme specifically envisaged that a s 596A summons might be issued in respect of a liquidator of a corporation, and that the liquidator could be examined about acts done by the liquidator on behalf of the corporation, as well as acts done by the liquidator in relation to the corporation’s business or property, in the course of the winding up of the corporation. There appeared to be nothing in the statutory scheme itself to suggest that liquidators were in some different or privileged position insofar as they might be examinees in a s 596A summons.
- Once a summons was issued, the Court controlled the conduct of the examination. It could effectively limit the length and scope of the examination, and even bring the examination to an end, if it considered it to be wasteful or unnecessary. In those circumstances, the Court could also order the applicant for the summons to pay some or all of the costs of the examination.
Abuse of process
As for the relevant principles concerning abuse of process, the Full Federal Court made the following points (at [30]-[33] see also [84]). References to the cases have been omitted.
- While an applicant for a s 596A summons was required only to satisfy the two express criteria to obtain the issue of the summons, the summons could be discharged if the applicant was found to have had an improper purpose in obtaining it, or if the summons and resulting examination were otherwise found to amount to an abuse of process. Rule 11.5 of the Federal Court (Corporations) Rules (discharge of an examination summons) provided a procedure which could be used in circumstances where it was alleged that the summons was an abuse of process.
- The Court, like all superior courts, had an inherent jurisdiction to prevent misuse of its processes and procedures, and the classes of case which could amount to abuse of process were not closed although they usually fell within one of a number of established categories.
- The power to permanently stay proceedings on the ground that they were an abuse of process was one which should be exercised with caution and only in the most exceptional or extreme case.
- The party alleging that there was an abuse of process had the onus of satisfying the Court of the abuse of process and this onus was a “heavy one”.
The Full Federal Court also made the point (at [83]) that an application to discharge an examination summons was anchored in legal principle and, likewise, the Court’s power to discharge such a summons regularly issued under s 596A was not at large. The applicant was required to demonstrate some legal basis for discharging the summons and in the case before the Court the principle that was invoked was abuse of process.
Findings
The Court made findings as follows:
- There was no evidence of an improper or illegitimate purpose on behalf of the shareholder. Rather, the evidence indicated that the shareholder’s purpose in examining the liquidator was to obtain information concerning the sales process of the mine, and to determine from the information so obtained whether any cause of action might exist against the liquidator and others, as a result of any flaws or defects in the sales process. Such a purpose was not foreign to the examination power in s 596A (at [85]-[86]).
- The trial judge had found that the examination amounted to a substantial intrusion into the liquidation. In making this finding, the trial judge appeared to have assumed that the examination of any liquidator while conducting a liquidation would necessarily involve a substantial intrusion into the liquidation. This assumption appeared to have been based on the authorities concerning the special position of liquidators, particularly the authorities concerning other statutory powers that permitted inquiries into the conduct of liquidators, such as the now repealed s 536 of the CA. However, there were important differences between ss 596A and 536 and, given those important differences, the authorities concerning s 536 and similar provisions did not provide any real support for a presumption that an examination of a liquidator pursuant to a s 596A summons would necessarily involve a substantial intrusion into the liquidation, or would otherwise be unfairly burdensome or oppressive, such that it might constitute an abuse of process. Furthermore, while there could be cases where examination of a liquidator under s 596A could constitute an abuse of process, this was not such a case. The evidence before the trial judge did not support a finding that the examination of the liquidator in fact involved a substantial intrusion into the liquidation of the company such as to constitute the sort of oppression or unfairness which could amount to an abuse of process. This was because:
- the shareholder had undertaken to limit the examination to a fairly narrow topic – the sales process of the mine;
- there was nothing to suggest that the examination would be lengthy or result in the liquidator being significantly diverted from his task of winding up the company;
- the process would not be costly to the liquidator because the shareholder had undertaken to fund the examination; and
- in any event, the Court could limit or end the examination if necessary and order the shareholder to pay the liquidator’s costs (at [87]-[94]).
- The trial judge had also found that the shareholder’s desire to explore the circumstances of the sales process did not justify the exercise of the examination power under s 596A. This was problematic for the following reasons (at [95]-[111]):
- The trial judge’s requirement that there be “justification” for the examination was again derived primarily from the authorities concerning s 536 and similar provisions of the CA. These authorities, however, did not support the broad proposition that the examination of a liquidator pursuant to s 596A should be stayed if the possible results of the examination did not justify the examination. Furthermore, the authorities in relation to other materially different statutory provisions did not provide a sound basis for reading an additional criterion or limitation into s 596A when the proposed examinee was a liquidator.
- The reasoning of the trial judge appeared to be based on the assumption that the purpose of s 596A, being to benefit the company, its creditors, members or the public, could only be satisfied if there was “reason to believe” or a “realistic prospect” that the examination would reveal conduct capable of supporting a claim and therefore have “practical utility”. This assumption was not supported by the terms of s 596A or by the statutory scheme for examinations and ignored the fact that a s 596A summons was essentially an information gathering process.
- The trial judge had reversed the onus of proof and had effectively required the shareholder to justify the practical utility of examining the liquidator and to do so by pointing to evidence that demonstrated that there was a “reason to believe” or a “reasonable prospect” that there was an available action against the liquidator. The trial judge had effectively required the shareholder to lead evidence concerning the very matters that the shareholder had wanted to ascertain from the examination. The relevant question in the case was whether the examination was an abuse of process and the burden of proving an abuse of process remained with the liquidator at all times. The shareholder did not bear the onus, evidential or legal, of justifying the examination, or demonstrating a reasonably arguable case against the liquidator that might be advanced by the examination. It was contrary to the statutory scheme to require an eligible applicant to justify the examination by pointing to evidence which effectively demonstrated an arguable case, in defence of a claim that a s 596A examination should be stayed as an abuse of process. The examination in question was a mandatory examination under s 596A and not a discretionary examination under s 596B.
- Having regard to the statutory scheme and the nature of the particular process under challenge, and having regard to the relevant principles concerning abuse of process, it could not be concluded that the liquidator had discharged the heavy onus required to prove an abuse of process.
Accordingly, the Full Federal Court concluded that the trial judge had erred in principle in permanently staying the examination summons and setting aside the order for production, and allowed the shareholder’s appeal.
