In the decision Equititrust Limited (In Liq) (Receiver Appointed) (Receivers and Managers Appointed) in its capacity as responsible entity of the Equititrust Income Fund v Equititrust Limited (In Liq) (Receiver Appointed) (Receivers and Managers Appointed) in its own capacity [2014] FCA 692,the Federal Court of Australia considered an application to set aside or stay indefinitely liquidator examinations of former auditors under s596B of the Corporations Act 2001 (Cth).

The Court dismissed the application and held that the fact that the liquidators had already commenced proceedings against the auditors in respect of issues to be the subject of the examination did not mean that the examinations were for an improper purpose. A liquidator is entitled to examine the strength of a case, the existence and strength of likely defences and the defendants’ ability to meet any judgment.

BACKGROUND

In 2011, managed investment schemes conducted by Equititrust Limited (In Liquidation) (Receivers and Managers Appointed) as responsible entity (EQL) collapsed.

The liquidators of EQL sought and obtained orders to issue Summonses for Examination to the former auditors of the schemes under s597A and s597B of the Corporations Act. Before the examinations took place, EQL commenced proceedings against the auditors, alleging the auditors conducted their audit negligently and in breach of duties owed to the unit holders of schemes.

The auditors applied to set aside or stay the examinations on the basis that EQL would gain an unfair forensic advantage in the litigation based on the information that comes out of the examinations.

DECISION

Foster J found that despite the commencement of litigation and the fact that a detailed statement of claim had been filed, the substantive case still in its infancy and no firm views had been reached by the liquidator regarding the prospects of success. 

In those circumstances, he held that a liquidator is entitled to examine the strength of a case, the existence and strengths of likely defences that may be available to the defendants and also the defendants’ ability to meet any judgement.  

Foster J confirmed that it would be impermissible to use the examinations for the predominant purpose of conducting a dress rehearsal for cross-examination or to obtain material to attack a potential witness’s credit.  However, the auditors bore the onus of proving improper purpose and an inference of improper purpose could not be drawn from the relevant facts.

Foster J found that the liquidator has requested the examinations for legitimate purposes and the mere fact that a substantive proceeding has been commenced does not preclude examination on those legitimate topics.

COMMENT

This case endorses the observations made by Barrett J in Re LED (South Coast) Pty Ltd (2009) 76 NSWLR 428 and confirms that the fact that litigation has already been commenced will not automatically preclude an examination under s.596B of the Corporations Act from occurring, even though the topics for examination are matters in issue in the litigation. 

The position may be different if the litigation is well advanced and the liquidator has formed a firm view on prospects.