In investigating the affairs of a company, one of the processes available to a liquidator is to conduct a public examination. This usually involves a liquidator or eligible creditor (“Examiner”) briefing a barrister or solicitor to summon the directors and other company officers or any other person with information relevant to the failed company’s affairs for public examination in open court.
Most commonly, an Examiner’s objective in conducting a public examination is to identify any potential claims against third parties for recovery of funds for the benefit of creditors.
In a public examination, the examinee is compelled to answer all questions honestly and to the best of their ability. The public examination is recorded and is able to be used to secure evidence in subsequent legal proceedings. A transcript of the proceedings must be signed by the examinee.
Directors as officers of the Company
Accordingly, a director can be summoned under section 596A of the Act if the court is satisfied that the person is an officer of the corporation or was such an officer during or after the 2 years ending:
- if the corporation is under administration- the day in relation to the administration; or
- if the corporation has executed a deed of company arrangement that has not yet terminated- the day in relation to the administration that ended when the deed was executed; or
- if the corporation is being, or has been, wound up- when the winding up began; or
Anyone who is summoned to attend a public examination MUST attend and failure to do so, without reasonable cause, can result in their arrest and imprisonment.
In addition to being summoned, the Court may direct a director to produce, at the examination, books and records including electronic records (emails, spreadsheets etc.) that are in their possession and are relevant to the matters which the examination related or may relate to.
What should you expect at a public examination?
A public examination is presided over by a Registrar who, in essence, plays the role of a referee to ensure that the examination is properly conducted and that unfair and irrelevant questions are not asked of the examinee. The Registrar will also make orders as to the evidence obtained and the ongoing conduct of the examination. This will include an order that the questions put to a person and the answers given by the examinee at an examination to be recorded in writing and will require him or her to sign that written record.
Section 597 of the Act sets down the important requirements for a public examination. First, and most crucial, the examination is required to be held in public except unless the Court considers, by reason of special circumstances, it is desirable to hold the examination in private. Secondly, a public examination is to allow an eligible applicant to examine an individual about the examinable affairs of the failed company. In that regard, the Court may allow to be put to a person being examined such questions about the corporation or any of its examinable affairs as the Court thinks appropriate.
Although it appears that the scope of an examination can be broad, the Court will prevent questions being asked of the examinee if the questions are not relevant to the examinable affairs of the failed company or if it appears that the Examiner is on a fishing expedition without a clear objective or relation to the examinable affairs of the company.
What are the examinable affairs of the company?
Section 9 of the Act defines “examinable affairs” to mean:
- the promotion, formation, management, administration or winding up of the corporation; or
- any other affairs of the corporation, including anything that is included in the corporation’s affairs because of section 53 of the Act; or
- the business affairs of a connected entity of the corporation, in so far as they are, or appear to be, relevant to the corporation or to anything that is included in the corporation’s examinable affairs because of paragraph (a) or (b).
These broad categories allow the Examiner to ask questions relating to the affairs regarding the failed company’s business, transactions, dealings, property, finances, audit of those finances, internal management, ownership, control, creditors and other persons having a financial interest in the company.
The courts have found that the definition of “examinable affairs” also includes, but is not limited to:
- matters such as the existence of circumstances that may give rise to a claim being made against a company (say, for breach of directors’ duties) even though such a claim has not yet been made;
- permitting the Examiner to use the examinations process to assess the prospects of success of litigation; and
Information about your personal assets is not protected
In addition to questioning an examinee about the examinable affairs of the company, the Examiner may also question the examinee about their personal assets.
Officers of the corporation who have been summoned under the Corporations Act to attend a public examination have been subjected to questions regarding their personal assets. Although questions regarding personal assets can be a real concern for an examinee, this line of questioning is within the ambit of the Examiner’s powers and will be allowed by the Court.
In the case of Re Interchase Corp the Court held that a liquidator can examine on the financial position of potential defendants to an action brought by a liquidator or potential contributories or indemnifier to ascertain the value to creditors of any judgment against them personally. To that end, if a director is to be summoned to an examination and there is a reasonable basis for asserting that there is a potential claim by the company or liquidator against the director, then the director may be examined about their personal assets.
The Examiner may be of the opinion that the director may be liable for a claim and as such may question the director about his/her personal assets to ascertain whether it will be in the interest of the creditors to bring a claim against the director personally.
As we have seen quite often, directors may be held personally liable for the breaches of a failed company. It is a fundamental duty as the director of a company to ensure that the company does not trade while it is insolvent. If a company is found to have been trading whilst insolvent, you, as the company director, may be personally liable for the debts incurred by the company at the time when the company itself was unable to pay those debts. Further, you may be found to have been acting illegally and in breach of the civil and criminal provisions of the Act.
Under the Act, a company is considered insolvent if it cannot pay its debts as and when they become due and payable. As the director of a company, to determine whether a company is trading while insolvent, it is important to assess:
- the cash flow of the company. You will need to determine whether the company’s anticipated current and future cash flow will be sufficient to enable it to pay its current and future debts as and when they fall due and payable; and
- the financial position of the company in terms of the assets and debts it has as a whole. You will need to question, among other things, whether the company can liquidate sufficient assets to pay debts as and when the fall due.
It is also important to note that you, as the director of the company, can become personally liable for the loss suffered by the company, if that loss was as a result of you having breached your director duties.
Not formally appointed as a director?
Section 9 of the Act provides that a director of a company or other body includes a person who acts in the position of a director. This person is commonly referred to as a “de facto” or “shadow” director. Such a director is someone who effectively acts as a director but is not formally appointed or recognised as a director.
The Full Federal Court in Grimaldi v Chameleon Mining NL (No 2) held that the company’s accountant was a de facto director as he performed functions that would properly be expected to be performed by a director. As a result, Grimaldi was held liable for various breaches and for damages. This case provides useful indicia to help determine whether an individual may be considered a “de facto” or “shadow” director including:
- A person may be a director even without any purported appointment of that person to that position at any time;
- That in some degree at least the person concerned, though not appointed a director, has been “doing the work of a director” in that company. Or to put the matter more fully, the person concerned, though not a director de jure, has been acting in a role (or roles) within the company and performing functions one would reasonably expect to have been performed by a director of that company given its circumstances;
- Whether they suffice in the circumstances to constitute the person a director for the Corporations Act’s purposes will often be a question of degree having regard to “the nature of the functions or powers which are exercised and the extent of their exercise”;
- There is no reason why the relationship of a person with a company may not evolve over time into that of de facto director. It also may be the case that the person only performs the role and functions that constitute him or her a director for a limited period of time;
- Whether a person has acted in the position of a director is a question of substance and not simply of how that person has been denominated in, or by, the company. Whether or not he or she will be a director will turn on the nature and extent of the functions to be performed (both in and beyond the consultancy) and on the constraints imposed thereon.
- A person’s power or influence over the directors of a company may provide the capacity to secure as of course compliance with his or her wishes or instructions for “shadow” director purposes.
- Was the work done, work for a director of that company?
It is important to remember that if you are summoned to be examined you are required to attend and will be compelled to answer questions under oath or affirmation. Your examination could last anywhere between a few hours to a couple of days. This can be tiring and stressful. Remember, you are being scouted by an Examiner attempting to do what they can to obtain the best recovery for the creditors of the failed company. The Examiner will ask as many questions as they deem appropriate to ensure that all relevant information is obtained from you. Further, you should be aware that the court is able to adjourn an examination from time to time requiring you to attend the examination again at a later date.
When being questioned, it is common for examinees to forget or not recall certain answers to questions being asked. This may be due to many reasons such as many years having passed since the certain events being examined took place. To that end, it is important that, as an examinee, you remember the following simple tips whilst being examined:
- PRIVILEGE. It is open to an examinee to say the word “privilege” before every answer. Some examinees may wish to claim privilege over some answers and not others. However, to ensure you don’t forget and to get into the habit of saying “privilege” we recommend you do so before every answer. This means your answers cannot be used against you in future proceedings.
- HONESTY. Remember an examinee is under oath. Only answer the question and answer it as truthfully as you can and to the best of your ability. If you do not remember, do not speculate or attempt to answer the question. An honest “I can’t recall” or “I don’t remember” will suffice.
- REPEAT. If you get lost in the question or do not understand the question be sure to ask the Examiner to repeat the question or break the question down into multiple questions.
- READ. If you are provided with a document by the examiner, ensure that you take your time to read the document. Do not feel pressured to rush it. The Court and the Examiner will allow you the time to read the document.
- SHORT. Only answer the question. If a yes or no answer is sufficient to answer the question, then a yes or no answer is all you need.
This information is provided as a guide only and is not intended to constitute advice whether legal or professional. You should obtain appropriate advice concerning your particular circumstances.