Quite often, the only way that an administrator or liquidator can properly determine a company’s affairs is by conducting examinations under sections 596A and 596B of the Corporations Act 2001 (Cth.) (“the Act”). This is not controversial; you obtain a summons for examination and serve it on your witness.

But what happens when your witness demands to be paid for that examination?

Some assume that because the witness has already been summoned, you do not need to pay them anything to ensure their attendance. That assumption is not quite correct.

The witness is entitled to reasonable expenses

Justice Young of the Supreme Court of NSW found that reasonable expenses were payable to the witness in Equiticorp Finance Ltd, Re; Ex parte Brock (1992) 6 ACSR 725 (“Equiticorp No 1”) at 734:

…[T]he witness, at least if he is not directly concerned in the management of the company, is entitled to the costs of attendance at the examination and in gathering together the documents, but not costs for his own legal representation; see eg Re Appleton, French & Scrafton Ltd [1905] 1 Ch 749; Re Moreton Joinery Pty Ltd [1975] Qd R 121 and Re Kusmenko (1976) 14 ALR 673.

His Honour also referred to the earlier judgment of Justice McLelland (also of the Supreme Court of NSW) in Re Kempal Pty Ltd (1989) 17 NSWLR 550 (“Kempal”). In that case, the witness was required to travel from Melbourne to Sydney and obtain overnight accommodation. Justice McLelland explained that it would be unjust to force this witness to attend the examination without paying their travel and accommodation expenses.

So how much do you pay a witness?

As with many things, determining what to pay a witness is a case of determining what is “reasonable” in the circumstances.

Justice Lee of the Supreme Court of Qld provided useful guidance in In the Matter of Imobridge Pty Ltd (in liq) [1999] 1 Qd R 38, where he helpfully summarised that a witness would probably be entitled to:

1. Reasonable travelling expenses from their residence to the examination;
2. Meals and sustenance during travel;
3. The reasonable costs of accommodation if the distances require; and
4. Meals during the stay.

Justice Lee also mentioned the “time involved during which [the witness] was away [from work]”, but did not address whether this was compensable in that particular case because the witness had not claimed it.

But they want me to pay them for their missed wages!

Frequently in the context of public examinations, witnesses will request not only that their travel and other ancillary out of pockets be paid for, but also that they be paid their ordinary salary or wages for the work that they have been required to miss to attend the examination. It is often queried whether witnesses have any entitlement to compensation for missed work.

The question was addressed directly by Justice Young in Re Equiticorp Finance Ltd; Ex Parte Brock (No 2) (1992) 7 ACSR 13 (“Equiticorp No 2”), where his Honour stated that a witness would be entitled to compensation for “missing work in attending the examination”.

As for how much a witness is entitled to charge for their time, we must go back to Justice Young’s original decision in Equiticorp No 1 at 734:

A witness who is examined is not entitled to treat the exercise as if it was another retainer in which not only would his bill cover overheads but also would include a profit margin. A surer scale would appear to be the court scale of allowances to witnesses in Sch G…

In that case, the witness had claimed $350 per hour for his time. It is clear that His Honour was particularly unimpressed with this claim. Instead, he ordered that the witness would be entitled to just $160 per day in accordance with Schedule G of the Supreme Court Rules 1970 (NSW). So much for partners of large professional services firms asking for their hourly rate!

What happens if you don’t pay?

A prudent administrator or liquidator will negotiate expenses with a witness prior to the examination; this not only ensures both parties are satisfied as to the quantum, but also encourages the witness to co-operate by ensuring they are not out of pocket.

If the expenses cannot be agreed upon, then the court retains the power to make a costs order. The consensus appears to be that the costs order should be made at the end of the examination, as the court will have a better idea of the costs incurred at that stage. See for example Re Southland Coal Pty Ltd (rec & mgrs apptd) (in liq) (2006) 58 ACSR 113; Re Total Entity Pty Ltd (in liq) (2003) 47 ACSR 577; Re Kassem (as liquidators of Clarecastle Pty Ltd) [2011] NSWSC 490.

There is, however, authority which suggests that the costs order should ‘attach’ to the summons, and should therefore be made prior to the examination: Re Kempal Pty Ltd (1989) 17 NSWLR 550. It is therefore possible that a court may decide that a witness should not compelled to attend until their expenses have been paid.

Regardless of which view is taken, the authorities are united in one thing – the court will not look kindly upon an administrator or liquidator who unreasonably refuses to pay expenses. If you fail to pay a witness’ expenses, you are not only risking that they will not attend the examination, but you are also risking a costs order against you for any attempts to compel them.

In summary, a witness who is summoned for examination can claim their expenses. There are considerable risks in refusing to agree pay them.

The best approach is to negotiate with your witnesses prior to the examination date and pay them their reasonable travel and meal expenses plus an amount for their time off work, if they require it. If you do that, you are giving the witness what they are legally entitled to, and streamlining the entire examination process.