Associate Justice Gardiner undertook a detailed examination of a liquidator’s powers under part 5.9 of the Corporations Act, in particular section 596D(2), in Banksia Securities Limited (Receivers and Managers Appointed) [2013] VSC 416 .

FACTS

On 25 June Gardiner AsJ ordered a summons for the examination of Michael Hall (“Hall”) under section 596B of the Corporations Act (The “Act”) by the plaintiff, the joint and several receivers of Banksia Securities Limited (“Banksia”) [1].  Hall applied for orders to set aside the summons in so far as it related to the production of documents [11].

Hall is a member of the the firm MB+M.  The plaintiffs are investigating an unqualified audit report for the 2008 financial year which he signed, on behalf of MB+M and whether the provisioning for some of the loans was materially inadequate.  At the time of the application no proceedings had been issued against MB+M or Hall [10].

Hall’s submissions

Hall objected on the following bases:

1. while he accepted that an examinable affair of a company includes the property and that the existence of insurance in respect of a chose in action against a third party is capable of being an examinable affair however stated that the Court can not be satisfied, as it is required to be under section 596B(1)(b) of the Act that a chose in action exists against Hall or MB+M because no proceedings have been issued or no claim as been articulated against either party [14].
2. even if the documents constituted information about examinable affairs where no proceedings have been issued and no claim made there is no sufficient basis for the receiver to range over the insurance policy for unexplained purposes and produced to third parties the court should exercise its discretion under section 596F(1) of the Act [15] – [16] & [18].
3. section 596B should not be construed in a way to allow untrammelled jurisdiction to investigate.  At minimum the applicant needs to identify what the potential chose in action is in terms sufficient to enable the court to be satisfied that the insurance documents sought are relevant to the value of the chose in action [17].

Plaintiff’s submissions

The plaintiff contended that:

1. the fact the receivers are still investigating a potential claim against MB+M for professional negligence but have not brought an action is entirely orthodox and that the investigation of a potential claim is the central purpose of Part 5.9 examinations [19]
2. there was support from an application of this nature from Interchase Corporation Ltd (no 2) where the court held that documents throwing light on the extent and nature of any professional indemnity insurance against any negligent performance by a third party (in this case a valuer) was relevant information forming party of the examinable affairs of company [20]
3. the decision as to whether to bring a claim is an important purpose of examinations which would permit an assessment of the strenght a claim and the worth of prosecuting it [23]

DECISION

His Honour stated that it is clear that a chose in action is property of the corporation and the existence and availability of insurance cover is relevant to the value of the chose in action [12].

At [22] his Honour relied on the principles set out in Re Interchase Corporation Ltd (No 2) that:

1. A liquidator, when engaged in a litigation on behalf of a company which is being wound up, or when contemplating instituting such litigation, is not in the same position as an ordinary litigant but with limited or no knowledge of the company’s assets, business and affairs and therefore is in a position of disadvantage to make informed decisions;
2. the effect of section 596B is to place a liquidator in a privileged position to obtain information relevant to and necessary for the proper discharge of his or her statutory function.
3. one purpose of an examination in relation to pending or contemplated litigation is to determine whether or not there is evidence available to support a claim brought by the company to recover property or damages, or conversely to defend a claim brought against the company, and the strength of that evidence.
4. the court has the broad power to to order an examination or the production of documents to test the likelihood of the creditors in the winding up receiving a tangible benefit from the satisfaction of any judgment obtained and to enable the liquidator to determine whether it is prudent to commence or maintain litigation with knowledge as to the real likelihood of obtaining any tangible benefit beyond a mere judgment, including a judgment for costs, at the conclusion of the litigation.
5. it is relevant to examine regarding the terms of an insurance cover because it could provide information which could throw light on the question of the actual worth of an alleged cause of action.

At [25] Gardiner AsJ found that:

1. Hall as aduitor for Banksia in the year in question had been involved in its examinable affairs. As such there was jurisdiction to bring issue the summons.
2. the fact that a formal claim or demand has not been made renders the requirement to be produce as premature;
3. the receivers should be entitled to embark on an examination of Hall.

His Honour noted, at [26], that:

the scheme of the examination provisions is designed to allow investigations to be conducted about, inter alia, the company’s property, including its choses in action. Part of that process involves obtaining information that enables the recoverability of any such chose in action to be assessed. The documents for which production is sought, in my view, “relate” to the examinable affairs of Banksia in that the existence and level of insurance cover can be ascertained. I do not consider that when the application for the summons is made it requires an actual claim to be described and articulated. The receivers have offered to keep the insurance details confidential and this may go some way to assuaging Mr Hall’s concerns about producing the subject documents.

ISSUE

The reasoning of Gardiner AsJ is orthodox.  The application was based on quite courageous grounds.  Highly technical and contrary to the broad interpretation given to the powers of liquidators to conduct public examinations.  It is a very useful summation of the relevant principles.