Not just ticking the boxes: The Court’s inherent jurisdiction to review the issue of a 596A Summons

Articles, Restructuring + Insolvency

In the recent decision of Gleeson J in The matter of Kimberley Diamond Company  Pty Ltd (in liq) [2016] FCA 10016, ERA Legal successfully obtained orders in the Federal Court of Australia setting aside an Order for Production and permanently staying an Examination Summons issued to one of its liquidator clients after an attempt by the holding company of the  relevant company in liquidation (also a former creditor) (Creditor) each of which were found to be an abuse of process.

The Creditor sought orders pursuant to section 596A of the Corporations Act 2001 (Cth.) (the Act) for the mandatory examination of the liquidator who, pursuant to section 9 of the Act is an officer of the relevant corporation and therefore compellable for a mandatory public examination pursuant to 596A.

The Creditor, not being one of the persons described in section 596A as an eligible applicant, was required to apply for that status to ASIC.  ASIC ultimately granted eligible applicant status to the applicant and, all of the ostensible requirements of 596A having been satisfied, the Court was bound to issue the Summons for Examination on the Creditor’s application.

The stated purpose of the Creditor’s proposed examination was to investigate the sales process undertaken by the liquidator with respect to one of the major assets of the company in liquidation.

The Court made a number of observations with respect to the examination of the liquidator and the Court’s inherent predisposition to be protective of its officers. In essence, whilst the issue of the mandatory Summons for Examination pursuant to 596A of the Corporations Act is something that the Court will ordinarily not look behind, the Court is nevertheless empowered to control its own processes and even where all of the relevant criteria for the issue of a Summons for Examination pursuant to section 596A have been satisfied, this does not preclude the Court from considering whether the issue of the Summons for Examination has the effect of abusing the Court’s processes.

Ultimately the Court found that the Summons for Examination should not be permitted to proceed unless there was reason to believe that the examination would fulfill the purpose of 596A being to benefit the company, its Creditors, members or the public generally.

Such a conclusion was based on the role of the Court in protecting the integrity of the winding up, and in ensuring that the winding up is conducted in a timely and efficient manner. Having considered the matter in detail, the Court found that there had been no positive evidence of any matter which would tend to indicate that there was any practical utility in conducting the examination, which the Court indicated would involve a substantial intrusion into the liquidation by examining the liquidator in the course of his conduct of it, and accordingly the Summons for Examination constituted an abuse of process and should be permanently stayed.

It is clear from the judgment of Gleeson J that the Court will be extremely jealous to protect the integrity of its officers and processes and that simply because the box ticking exercise involved in enlivening the Court’s jurisdiction to issue a mandatory Summons for Examination under 596A has been dutifully satisfied, it does not mean that the Court in certain circumstances will not exercise its power to look behind the issue of the Summons and form a conclusion that the Summons for Examination comprises an abuse of process.

 

 

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