How far do liquidators’ powers to demand documents for public examinations extend? Which documents can they request and from whom can they request them?

In this week’s TGIF, we consider these questions in the context of the recent case of Re Cathro [2018] FCA 1138.

BACKGROUND

The company at the heart of this case was Lidcome Plastering Services Pty Ltd (Company). Mr Serge Golman was the sole director of the Company.

The Company had gone into liquidation. In an annual report prepared pursuant to s 508(3) of the Corporations Act 2001 (Cth) (Corporations Act), the liquidator stated that the Company’s books and records that he had received were inadequate to conduct detailed investigations. In particular, it was unclear who received $630,000 of the Company’s funds that had been paid by cheque.

The liquidator suspected phoenix activity had occurred. Evidence suggested that a new company, Lidcome Plastering Pty Ltd (New Lidcome Company), had effectively taken over the Company’s business.

THE ORDERS FOR PRODUCTION

The liquidator wished to conduct public examinations in relation to a number of people connected to the Company pursuant to Part 5.9 of the Corporations Act. Ahead of those examinations, the liquidator had sought to obtain documents he believed to be relevant to the Company’s “examinable affairs”.

Gleeson J noted that although the Corporations Act does not provide the Court with the power to order the production of documents ahead of a public examination,[1] the Federal Court Rules 2011 (Cth) allow the Court to make such an order.[2]

The liquidator had applied for production of documents relating to Mr Golman’s wife, Ms Victoria Golman. Although Ms Golman had no direct affiliation with the Company, she was a director of Glenvale Developments Pty Ltd (Glenvale), and was a former owner of all of Glenvale’s shares. Glenvale was the sole shareholder of New Lidcome Company. Ms Golman also owned four properties which were of interest to the liquidator.

The Company’s liquidator sought production of documents from Mr Golman, Mr Frank Bruzzano and a number of third party financial institutions, including the Commonwealth Bank of Australia and the National Australia Bank. The documents sought included copies of:

  • Income tax returns and notices of assessment in Ms Golman’s name and those submitted jointly with Mr Golman;
  • Financial statements of trustee companies, trusts and companies in which Ms Golman was a shareholder or director; and
  • Bank statements, loan statements and credit card statements in Ms Golman’s name and those held jointly with Mr Golman.

On 7 May 2018, the Federal Court granted the liquidator’s application for production. Ms Golman sought to have these orders set aside.

APPLICATION TO SET ASIDE THE ORDERS FOR PRODUCTION

The liquidator stated that the orders for production were necessary because the liquidator did not know how Ms Golman was able to purchase and finance the properties or make loan repayments with respect to those properties. The liquidator wanted to determine if any of the Company’s property had been transferred to her at an undervalue and whether any Company property was traceable into her assets. It was noted that the liquidator sought these documents because he believed that Ms Golman was a person the Company “may” have a “potential” claim against.

Ms Golman argued that the documents were outside the “examinable affairs” of the Company and therefore outside the scope of any investigation to be conducted by the liquidator. She said that liquidator had presupposed that transactions between her and the financial institutions were “examinable affairs”, pointing to the fact that the liquidator had not identified any specific transactions between the Company and Ms Golman as the subject of investigation.

LEGAL PRINCIPLES REGARDING THE PRODUCTION OF DOCUMENTS FOR PUBLIC EXAMINATIONS

The power to compel production is broad, but must not be exercised oppressively. The documents sought must be necessary for achieving the purpose of the examination under the Corporations Act.[3] It is not enough that the documents relate generally to the examinable affairs of the company.[4]

The Corporations Act states the examinable affairs of a company include determining people who are financially interested in the company.[5] This extends to determining which people may be potential defendants against the Company’s causes of action and their capacity to pay a judgment against them.[6]

DECISION OF THE COURT

Gleeson J concluded that it was appropriate for the liquidator to be granted production of the documents. Her Honour stated that the facts indicated that there was a reasonable basis to suspect an examination of Ms Golman’s affairs may reveal a cause of action against Ms Golman. Of relevance were:

  • The fact that the liquidator had not received a complete set of books and records;
  • Substantial sums had been withdrawn by cheque and it could not be identified who had received those funds;
  • Given that the Company was solely owned by Mr Golman, it would be reasonable to assume that some of the funds may have been transferred to his wife;
  • Mr Golman had no interest in any real property in New South Wales, whereas Ms Golman owned four properties; and
  • Ms Golman was the owner of shares in Glenvale, which had acquired the Company’s business for apparently no consideration.

The documents sought were relevant to determine whether any cause of action arose against Ms Golman. Gleeson J also stated that if a cause of action against Ms Golman was identified, it would be relevant to consider whether she would have the financial capacity to meet any judgment against her. Those matters formed part of the examinable affairs of the Company.

CONCLUDING REMARKS

A liquidator’s role is to salvage the assets of a company and investigate potential claims that the company may have. This role includes a power to demand documents from third parties relating to people who may not have an immediately obvious connection to the company. If it can be shown that the documents will assist in the investigation of potential claims the Company, those documents fall clearly within the scope of the liquidator’s powers.