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Refusal to conduct examination of a liquidator

in Business Law by Michael Harris on

Kimberley Diamonds Ltd, in the matter of Kimberley Diamond Company Pty Ltd (in liq) [2016] FCA 1016

A recent decision of the Federal Court of Australia upheld an application by a liquidator to set aside a summons to be examined under section 596A of the Corporations Act 2001 (Act).

BACKGROUND

In May 2015 the board of Kimberley Diamond Company Pty Ltd (in liq) (company) forecast that the wholesale price of diamonds would be $143 per carat. In June 2015 the forecast price dropped to $105 per carat. In addition, the Western Australian government imposed a significant levy on the company.

In July 2015, the company entered into voluntary administration. The administrators advised creditors of the above developments and commenced a campaign to sell the mining operations of the company.

In August 2015, while the campaign was still under way, the creditors resolved that the company be placed into liquidation. The administrators were appointed as liquidators of the company.

In November 2015, the liquidators reported that the campaign had been unsuccessful. The liquidators issued a notice of disclaimer under section 568 of the Act. That disclaimer was not challenged.

PROCEEDINGS

The liquidators were pursuing the repayment of unfair preferences from the sole shareholder in the company, Kimberley Diamonds Ltd (shareholder).

The shareholder issued a summons pursuant to section 596A of the Act to examine the liquidator. The shareholders stated purpose was to investigate the campaign undertaken by the liquidator.

The liquidator challenged the summons on the basis that it was an abuse of process. He argued that the examination would place an unnecessary imposition on the liquidation, where there was no realistic prospect of the examination having any practical utility.

CONSIDERATION

His Honour cited with approval the following passage on the role of a liquidator:

Administrators and liquidators are both “officers” within the s 9 definition and therefore subject to the duties arising under ss. 180 and 181, but also entitled to the benefit of the business judgment rule under s.180.(2). Proceeding in a prudent way in relation to the sale of assets is an incident of those duties. But on no view of matters can the duties be said to include a duty to sell at “the best possible price”. Administrators and liquidators are entitled to take into account a wide range of considerations. [i]

His Honour concluded that:

1.    An examination under s 596A is to serve any purpose that will benefit the company, its creditors, its members or the public generally.

2.    There is no duty upon a liquidator to obtain the best possible price for the company’s assets.

3.    The investigation of the conduct of a liquidator is a supervisory function of the Court. The Court exercises that power by ensuring liquidators use their powers impartially and for a proper purpose.

4.    The Court will not permit a liquidator to be sued by a creditor or have an inquiry made unless it is satisfied that there is prima facie evidence of wrongdoing.

5.    A mandatory examination of a liquidator should not be permitted unless there is reason to believe that the examination may fulfil the purpose of s 596A; namely to benefit the company, its creditors, members or the public generally.

6.    In this case, there was no positive evidence of:

(a)      fraud, dishonesty or other misconduct;

(b)      any conflict of interest or lack of impartiality in the conduct of the sales process;

(c)      the campaign having been conducted in a manner inconsistent with the liquidator’s functions e.g. for any improper purpose;

(d)      any particular flaw in the liquidators' exercise of commercial judgment with respect to the disclaimer; or

(e)      that there may have been a different outcome more favourable to the liquidation if the liquidators had conducted the campaign differently.

DECISION

The examination summons was an abuse of process and ought to be stayed. The examination would fulfil the purpose of section 596A. The examination, if permitted, would involve a substantial intrusion into the conduct of the liquidation.

CONCLUSION

The Court will not permit creditors or shareholders to examine liquidators unless there is some actual evidence of wrongdoing.


[i] Hausman v Smith [2006] NSWSC 682 at [10], Barret J.

 

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