The approach of the courts to public examinations conducted by liquidators has in recent times arguably tended towards granting increasing liberty to liquidators in the scope of their examinations. Recently, Amanda Banton and her team have acted for liquidators in Equititrust Limited (in Liq) (Receiver Appointed) (Receivers and Managers Appointed) v Equititrust Limited (in Liq) (Receiver Appointed) (Receivers and Managers Appointed) [2014] FCA 692 and the subsequent appeal, where examinees have sought to reverse the trend.

In Equititrust Limited (in Liq) (Receiver Appointed) (Receivers and Managers Appointed) v Equititrust Limited (in Liq) (Receiver Appointed) (Receivers and Managers Appointed) [2014] FCA 692, examinees seeking to set aside examination summonses alleged that an examination would be an abuse due, in part, to proceedings already being on foot. Although they were unsuccessful in the first instance and were refused leave to appeal, the examinees have foreshadowed challenging the decision again. If successful, they may alter the legal landscape in which liquidators may issue examination summonses.

Examinees seeking to set aside examination summonses bear a heavy burden of proving that an examination is an abuse of process and that the dominant purpose of it is impermissible. Applications to set aside examination summonses are known to be rarely granted as the courts have recognised that liquidators are in a position of disadvantage as they come to the company with limited to no knowledge about the company.

The legitimate purposes for which liquidators can conduct examinations include gathering information to assist in the company’s administration, identifying the company’s assets, protecting the interests of creditors and enabling evidence or other information which may support potential proceedings to be obtained.

Improper purposes for an examination include seeking to obtain a forensic advantage not normally available in litigation, conducting a dress rehearsal of cross-examination, or conducting the examination for a purpose other than the benefit of the corporation, its contributories or creditors – i.e. a purpose unconnected with the authorised legislative purposes.  However, it has been accepted that there is no abuse unless the offensive purpose is the predominant purpose.

Background

In 2011, a number of managed investment schemes managed by the Gold Coast based Equititrust Limited (Equititrust) collapsed and liquidators have since been appointed to the company. In 2012 and 2013 the liquidators applied to the Federal Court for the issue of examination summonses to persons including current and former partners and employees of KPMG, who were the auditors of the company and of the Equititrust Income Fund (EIF) (the KPMG examinees).

Two sets of proceedings were commenced in the Federal Court by Equititrust in September 2013, with KPMG being a respondent in both proceedings. In November 2013, KPMG filed an interlocutory application to set aside the examination summonses served on the KPMG examinees.

The rationale for KPMG’s interlocutory application was that the examination of the KPMG examinees would be an abuse of process. KPMG alleged the examination was for an improper purpose because the examinations would be likely to address the allegations made against KPMG and the liquidators would therefore gain a forensic advantage. Some of the factors which KPMG submitted the court should consider in making such an inference were that:

  • The statement of claim in one set of proceedings was lengthy and detailed and substantial work had been carried out to get to that stage.
  • The liquidators had access to a significant amount of material from about early 2013.
  • The liquidators had been authorised by the Supreme Court to enter into a litigation funding deed and advice from Counsel about the prospects had been obtained (which presumably satisfied the Supreme Court that the claims had sufficiently good prospects).

What was unique in this case was that KPMG did not seek access to the section 596C affidavit of the liquidator in support of the application for the issue of the examination summonses. Normally, the liquidator’s evidence as to the purpose for the examination is given weight by the court. However in this case, KPMG instead asked the court to draw an inference of improper purpose and abuse of process from the facts available to it without hearing from the liquidator.

The liquidators submitted that the facts relied on by KPMG were insufficient to justify the inference of improper purpose argued for by KPMG. Rather, the liquidators argued the inferences which could be made on the facts meant that the liquidator may still hold preliminary views they wish to test. The liquidators also submitted that since the proceedings were at such an early stage, it was difficult to see how there could be a potential dress rehearsal of cross-examination.

The decision at first instance

On 27 June 2014, Justice Foster dismissed KPMG’s interlocutory application. Justice Foster found that the facts relied on by KPMG did not support an inference that the examination would be predominantly for an improper purpose. Justice Foster noted the non-service of proceedings and the possibility that the proceeding had been filed to protect a limitations period could suggest that the liquidators may wish to test their views through examination – which is a proper purpose. He also pointed to the fact that the proceedings were still in their infancy. His Honour did not accept that entry into a litigation funding agreement by the liquidators provided a basis for inferring that the liquidators had an improper purpose in conducting the examinations.

The application for leave to appeal

KPMG sought leave to appeal against Justice Foster’s decision and pointed particularly to the express concession that a purpose of the liquidators was to examine the KPMG examinees about the allegations in the statement of claim. KPMG argued that this constituted an impermissible dress-rehearsal of cross-examination. On 8 August 2014 their application for leave to appeal was dismissed by Justice Jacobson sitting alone in the Federal Court. Justice Jacobson has not yet delivered written reasons. In court, legal counsel for KPMG indicated that their client may further appeal the decision to the High Court.

Conclusion

Justice Jacobson’s reluctance to interfere with Justice Foster’s decision in the first instance may indicate that the courts will continue to support the latitude given to liquidators in the conduct of examinations. Should KPMG be successful in any further appeal, the status quo of legal authority regarding liquidator’s examinations will be disrupted. This will have ramifications for any liquidator who seeks to commence examinations whilst proceedings are already underway, even where those proceedings are only in their infancy.