Examination of liquidator – legitimate or abuse of process?

Liquidators can rest assured that courts are reluctant to interfere in their commercial judgments or permit liquidators to be personally exposed to mandatory examinations under s596A Corporations Act 2001 (Cth) (Act).

In Kimberley Diamonds Limited, in the matter of Kimberley Diamond Company Pty Limited (In Liq) [2016] FCA 1016 (Kimberley Diamonds), the Federal Court ordered a stay of an examination summons, issued under section s596A of the Act to examine a liquidator about the sale of a business, as an abuse of process.

Background

Administrators appointed to Kimberley Diamond Company (KDC), a subsidiary of Kimberley Diamonds Limited (KDL), commenced a campaign for the sale of a diamond mining business operated by KDC. That campaign was unsuccessful, resulting in KDC being put into liquidation and the disclaimer of KDC’s mining lease by the liquidators under s568 of the Act.

Examination summons

On the basis of KDL’s suspicion that the liquidators of KDC had not properly performed their duties in both their conduct of the sales and marketing process and their disclaimer of the mining lease, KDL (as sole shareholder of KDC) applied under ss596A and 597(7) of the Act and rule 30.34 of the Federal Court Rules 2011 (Cth) to conduct a public examination of the liquidators, and for an order for production of documents.

Liquidator challenge

Whilst accepting that s596A is sufficiently broad to allow an examination of a liquidator, the liquidators challenged the summons as an abuse of process. The liquidators’ challenge comprised the following limbs:

1. a liquidator is in a special category of examinees, in particular given that a liquidator is treated “virtually as the delegate of the Court” (Re Biposo Pty Limited; Condon v Rodgers (1995) 120 FLR 399 at 403; Kimberley Diamonds at [16]) whose commercial judgments courts are reluctant to interrogate; and
2. the examination summons would have no practical utility whilst placing an unnecessary imposition on the liquidators.

What constitutes an abuse of process?

Gleeson J noted the categories for abuse of process are not closed but fall generally within three categories, namely that the use of the Court’s procedures would be:

1. for an illegitimate or collateral purpose;
2. unjustifiably oppressive to a party; or
3. bringing the administration of justice into disrepute (Rogers v The Queen (1994) 181 CLR 251 at 286; Kimberley Diamonds at [44]).

Decision

Gleeson J summarised the key principles regarding the special nature of a liquidator’s office as a fiduciary, officer of the company and an officer of the Court, and the established requirement for the court’s leave before allowing a liquidator to be the subject of proceedings (including an inquiry under s536 of the Act, which enables the court to examine a liquidator about the conduct of a winding up). Her Honour also referred to numerous authorities for the principles that, first, a liquidator owes no duty to obtain the best possible price for the company’s assets and, secondly, the court will not interfere with a liquidator’s commercial judgments in the absence of any evidence of a lack of good faith or a breach of duty.

Consequently, her Honour held that given the examination summons represented a challenge to the integrity of the liquidation of KDC, it was necessary for KDL to provide justification for that challenge, namely, evidence that the examination would fulfill the purpose of s596A by benefiting the company, its creditors or members, or the public generally (Kimberley Diamonds at [62]-[64]).

In this regard, her Honour noted there was no evidence of the following matters:

1. fraud, dishonesty or other misconduct or lack of bona fides regarding the sale;
2. any conflict of interest or lack of impartiality affecting the liquidators’ conduct of the sale process;
3. any inconsistency between the manner in which the sale process was conducted and the proper discharge of the liquidators’ functions (for example, any improper purpose);
4. any flaw in the liquidators’ exercise of commercial judgment in connection with the disclaimer of the diamond mining lease; and/or
5. the possibility of a different outcome, more favourable to the liquidation, if the liquidators had conducted the sale process differently. 

Given those circumstances, her Honour was not satisfied that KDL had met the evidentiary threshold required to demonstrate the necessity for or practical utility of a mandatory examination of the liquidators, which would involve a substantial intrusion into the conduct of the liquidation. Consequently, her Honour held that the examination summons was an abuse of process and ought to be stayed.  

Take away

The decision in Kimberley Diamonds serves as a reassurance to liquidators that the courts remain reluctant to either interfere in liquidators’ commercial judgments or permit liquidators to be personally exposed to mandatory examinations under s596A. Such intrusions into the conduct of a liquidation will only be permitted where there is significant and cogent evidence of impropriety, misconduct or manifest unreasonableness on the part of the liquidator.