Liq­uida­tors — exam­in­ing pre-exam­i­na­tion steps

In Brief

Exam­i­na­tions under sec­tions 596A and 596B of the Cor­po­ra­tions Act 2001 (Cth) are an impor­tant method for liq­uida­tors to assess the prospects of suc­cess and basis for bring­ing court pro­ceed­ings as part of the liq­ui­da­tion. How­ev­er, giv­en the cost and time involved in con­duct­ing an exam­i­na­tion, it is often pru­dent to con­sid­er whether oth­er steps such as issu­ing let­ters of demand and even serv­ing a State­ment of Claim with a view to pos­si­ble set­tle­ment of a claim, can and should be tak­en before pro­ceed­ing with an exam­i­na­tion. This in turn rais­es the issue of when tak­ing such steps could leave a sub­se­quent exam­i­na­tion sum­mons open to chal­lenge on the basis that the liq­uida­tor already knows enough about the case and there­fore the exam­i­na­tion is not being con­duct­ed for a prop­er purpose.

The short answer is that in con­sid­er­ing whether to set aside an exam­i­na­tion sum­mons, the deter­min­ing fac­tor will always be the pur­pose for which the exam­i­na­tion is actu­al­ly being con­duct­ed, rather than what, if any, action the liq­uida­tor has already tak­en in respect of the prospec­tive claim.

An illus­tra­tive exam­ple is the rel­a­tive­ly recent case of Equi­titrust Ltd (in liq) (rec apptd) (recs and mgrs apptd) v Equi­titrust Ltd (in liq) (rec apptd) (recs and mgrs apptd) [2014] FCA 692. In Equi­titrust Ltd the liq­uida­tors had com­menced pro­ceed­ings in respect of var­i­ous claims but had not yet served the orig­i­nat­ing appli­ca­tion and state­ment of claim on any par­ties. They had also issued exam­i­na­tion sum­mons­es to var­i­ous par­ties involved in the sub­stan­tive pro­ceed­ings, and the exam­i­na­tions were due to take place shortly.

The respon­dents to the pro­ceed­ings, who although not served with the orig­i­nat­ing appli­ca­tion and state­ment of claim had become aware of com­mence­ment of the pro­ceed­ings, applied to have the exam­i­na­tion sum­mons­es set aside or stayed on the basis that it would be an abuse of process for the exam­i­na­tions to occur while the pro­ceed­ings brought by the liq­uida­tors were on foot. This was because the exam­i­na­tions were like­ly to address alle­ga­tions made in the pro­ceed­ings and would there­fore arguably be used to obtain a tac­ti­cal foren­sic advan­tage in the proceedings.

Fos­ter, J ulti­mate­ly held that in the cir­cum­stances it was clear that the liq­uida­tors were in fact seek­ing to con­duct the exam­i­na­tions for a prop­er pur­pose, name­ly to reach a firm view regard­ing prospects of suc­cess in the pro­ceed­ings, to make a final deci­sion as to whether or not to actu­al­ly pur­sue the lit­i­ga­tion by effect­ing ser­vice, and to ascer­tain whether any amend­ments should be made to the State­ment of Claim. In find­ing that the exam­i­na­tions were for a prop­er pur­pose, the Judge did take into account the fact that it appeared that pro­ceed­ings were com­menced at the stage when they were because the liq­uida­tors were con­cerned about pos­si­ble expiry of the lim­i­ta­tion peri­od for pro­ceed­ings to be com­menced, and the fact that the liq­uida­tors had not yet pro­ceed­ed with serv­ing the State­ment of Claim. How­ev­er, he also made the impor­tant obser­va­tions that:

​“A liq­uida­tor is enti­tled to exam­ine the strength of a case, the exis­tence and strength of like­ly defences that may be avail­able to the defen­dants and also the defen­dants’ abil­i­ty to meet any judg­ment. These are all legit­i­mate pur­pos­es and the mere fact that a sub­stan­tive pro­ceed­ing has been com­menced does not pre­clude exam­i­na­tion on those legit­i­mate topics.”

and

”… there is a world of dif­fer­ence between a lit­i­gant being in pos­ses­sion of suf­fi­cient infor­ma­tion to jus­ti­fy fil­ing a plead­ing and a lit­i­gant being in pos­ses­sion of suf­fi­cient infor­ma­tion to allow his or her prospects of suc­cess to be ade­quate­ly assessed.” 

What this and ear­li­er deci­sions show, is that pre­lim­i­nary steps tak­en pri­or to an exam­i­na­tion will not pro­vide basis for an exam­i­na­tion sum­mons to be set aside as long as the exam­i­na­tion is indeed still being con­duct­ed for the pur­pose of obtain­ing fur­ther infor­ma­tion about the prospects and basis for a claim to be made against a par­ty. This is impor­tant giv­en that com­mer­cial­ly the most sen­si­ble approach will often be to seek to resolve a claim by tak­ing pre­lim­i­nary steps before decid­ing whether one or more exam­i­na­tions are nec­es­sary and justified.

Where care clear­ly needs to be tak­en is in respect of com­mence­ment of legal pro­ceed­ings. While cas­es such as Equi­titrust Ltd show that there will be cir­cum­stances, some­times at the very ear­ly stage of pro­ceed­ings, where an exam­i­na­tion in con­nec­tion with those pro­ceed­ings will still be for a prop­er pur­pose, there will also be many cir­cum­stances where bring­ing pro­ceed­ings and then seek­ing to con­duct an exam­i­na­tion will be a risky move. In par­tic­u­lar, seek­ing to do so where there is already com­pre­hen­sive infor­ma­tion avail­able to a liq­uida­tor regard­ing prospects of suc­cess, or the pro­ceed­ings have already pro­gressed to the stage of dis­cov­ery and evi­dence, is almost cer­tain­ly like­ly to lead to the exam­i­na­tion process being suc­cess­ful­ly chal­lenged. Ulti­mate­ly these are mat­ters that need to be care­ful­ly con­sid­ered at the rel­e­vant time.