Fruit of the poisoned tree – examination summonses fatally tainted by improper purposes

Articles Written by Pravin Aathreya (Partner), Macsen Nunn (Associate)

In a recent decision in the Supreme Court of NSW[1], Rees J set aside a liquidator’s bid to publicly examine two senior officers of the National Rugby League (NRL), finding that examination summonses issued by the liquidator were an abuse of process and the entire liquidation process was a contrivance in order to exert commercial pressure on the NRL.[2]

This decision is an important reminder to liquidators to exercise their independent and professional judgment in considering the appropriateness of their conduct, especially in relation to convening examinations.

Key takeaways

This case emphasises the importance of liquidators maintaining their independence from their appointors and exercising their own professional judgment in critically evaluating the merits and utility of investigations in discharging their statutory duties. Failure to do so gives rise to the risk that a court will impute to the liquidator (by reason of his/her abdication of that decision-making responsibility) the improper motives of other parties.

Background                       

Jhanna Culver was the director and sole shareholder of Newheadspace Pty Ltd, which developed a program called ‘Extend the Dream’ to assist professional sportspeople in preparing for life after sport. Between 2011 and 2014, the program was used intermittently by the NRL, after which the program was not continued. In 2015, the director attempted to reignite her business relationship with the NRL but was informed that the NRL had developed their own in-house program which accommodated retiring NRL players. On 4 July 2016, the director approached NRL in an attempt to obtain payment of three outstanding invoices in the amount of $7,500. A subsequent commercial offer by the NRL to resolve the dispute was not accepted by the director.

In February 2017, the director engaged a litigation funder to fund a proposed $3 million claim against the NRL for damages, breaches of fiduciary duty, contract, negligence, loss of opportunity and alleged injuries to the director’s mental health.

Contriving an insolvency

By February 2018, the claim against the NRL was valued by the director at $5 million. Also at that time, the director drafted an ‘Action Plan’ for the liquidation of Newheadspace for the sole purpose of publicly examining the NRL’s officers. That Action Plan first required that available dates be arranged for the public examination, then to appoint a liquidator (following the creation of a state of insolvency by the issue of invoices to Newheadspace by the director and the litigation funder) to procure the issue of examination summonses.[3] The Court inferred it was likely that the director had provided the liquidator with a copy of the Action Plan.[4] The Court also found that the liquidator did not investigate the veracity of the invoices issued.[5]

On 18 April 2018, Newheadspace appointed the liquidator. The basis for the liquidation of Newheadspace were two invoices, one from the litigation funder worth $55,000 and the other from the director herself worth $487,500 for work performed. In September 2018, examination summonses were issued to the NRL. The NRL applied to set aside the examination summonses, claiming that Newheadspace had been placed into liquidation for the purpose of seeking examination summonses in order to pressure the NRL to settle its commercial dispute.

The Court found that the invoices upon which Newheadspace’s liquidation was based had no proper basis, making the liquidation itself a contrivance designed to procure the issue of examination summonses to senior officers of the NRL as a means of persuading the NRL to pay a substantial sum in order to avoid adverse media or public attention.[6] Consequently, the Court held that Mr Needham’s appointment as liquidator constituted an abuse of process.[7]

Improper purpose

The NRL contended that the Court’s finding that the liquidator’s appointment constituted an abuse of process was in itself a sufficient basis for setting aside the examination summonses, without any need to impugn the liquidator’s purpose in obtaining the summonses.[8] The Court disagreed, finding that it was necessary to focus on the predominant purpose of the liquidator in obtaining the examination summonses in order to determine whether that purpose was improper.[9]

In this regard, the Court concluded that the liquidator had not turned his own mind to whether the elements of s 596B of the Act were satisfied or whether the summonses were issued for a proper purpose.[10] Instead, the liquidator had left those decisions to the director, the litigation funder and the legal representatives engaged prior to his appointment.[11]  In this way, the liquidator had inherited the improper purposes of the parties who had inappropriately placed Newheadspace into liquidation.[12]

 


 

[1] In the matter of Newheadspace Pty Ltd (in liq) [2020] NSWSC 173.

[2] Ibid, [2].

[3] Ibid, [38]-[48].

[4] Ibid, [44]. 

[5] Ibid, [121]-[122].

[6] Ibid, [80], [81].

[7] Ibid, [83].

[8] Ibid, [83], [84].

[9] Ibid, [110].

[10] Ibid, [125].

[11] Ibid.

[12] Ibid.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

Related insights Read more insight

Section 588FDA: indirect benefits to directors risk voiding a mortgage transaction

A recent Federal Court decision provides a useful distillation of the key principles that apply to unreasonable director-related transactions under s 588FDA of the Corporations Act.

More
Voidable transactions: act within the statutory time limit

A Federal Court decision, handed down on Friday, is a blunt reminder that the statutory limitation period in section 588FF(3) of the Corporations Act 2001 (Cth) needs to be adhered to strictly, and...

More
Liquidator's remuneration vs employee creditors: who gets priority to circulating assets?

In this decision, the Court of Appeal of the Supreme Court of NSW considered the interplay between the priority regimes under ss 556 and 561 of the Corporations Act 2001 (Cth) (Act) in resolving a...

More