This week’s TGIF considers the decision of Kimberley Diamonds Ltd, in the matter of Kimberley Diamond Company Pty Ltd (in liq)  FCA 1016 in which the Court refused to allow the mandatory examination of a liquidator under s 596A.
In July 2015, administrators were appointed to a company which operated a diamond mine. A marketing campaign in respect of the mining operations of the company commenced shortly after the administrators’ appointment.
In their report to creditors, the administrators stated that it was their view that a sale of the business was in the best interests of creditors. They explained that diamond prices had dropped due to a major bankruptcy in the diamond industry which had caused market disruption. Further, the Western Australian government had recently introduced a levy which required the Company to pay a significant amount in respect of the levy.
In August 2015, the sale process was continuing and the creditors resolved that the company be placed into liquidation. The administrators were appointed as liquidators of the company. In November 2015, the liquidators reported that the sale campaign had been unsuccessful and, as significant costs were being incurred in connection with the ongoing occupation of the mine, they had issued a notice of disclaimer in relation to the mine. That disclaimer was not challenged.
Following the disclaimer, an examination summons pursuant to s 596A of the Corporations Act was issued at the request of the sole shareholder of the company. The summons required one of the liquidators to attend for examination. The shareholder’s stated purpose for the examination was to investigate the sales and marketing process undertaken in respect of the mine.
The liquidator challenged the summons on the basis that it was an abuse of process. He argued that the examination would place an unnecessary imposition on him in circumstances where there was no realistic prospect of the examination having any practical utility.
Justice Gleeson held that the examination summons was an abuse of process and ought to be stayed. His Honour was not satisfied that the examination would fulfil the purpose of s 596A and held that the examination, if permitted, would involve a substantial intrusion into the liquidation by examining the liquidator in the course of his conduct of that liquidation.
In coming to that decision, his Honour reviewed the relevant authorities and examined the special position of liquidators. His Honour held that:
Previous cases have stated that an examination under s 596A is designed to serve any purpose that will benefit the company, its creditors, its members or the public generally.
Liquidators are under no duty to obtain the best possible price for the company’s assets.
The investigation of the conduct of a liquidator is a supervisory function of the Court. The Court exercises that supervisory function by ensuring a liquidator uses their powers impartially and for a proper purpose.
The Court will not permit its officers to be sued by a creditor or have an inquiry made unless it is satisfied that there is some prima facie evidence of wrongdoing.
An examination of a liquidator should not be permitted to proceed unless there is reason to believe that the examination my fulfil the purpose of s 596A - being to benefit the company, its creditors, members or the public generally.
In this case, there was no positive evidence of the following:
a. Fraud, dishonesty or other misconduct;
b. Any conflict of interest or lack of impartiality in the conduct of the sales process;
c. The sales process having been conducted for any improper purpose;
d. Any particular flaw in the liquidators’ exercise of commercial judgment with respect to the disclaimer of the mine; or
e. That there may have been a more favourable outcome to the liquidation if the sales process had been conducted differently.
This case makes it clear that it is the Court’s role to supervise the conduct of liquidators and the Court will not permit creditors or shareholders to examine liquidators unless there is some actual evidence of wrongdoing.