Considering the scope of documents for production in an examination

29 October 2018

In the recent case of Pleash (Liquidator) v Tucker [2018] FCAFC 144, the Full Court of the Federal Court of Australia considered the scope of documents that could be sought by a liquidator in determining whether those documents were within the ‘examinable affairs of the company’.

The primary issue to be determined was whether the liquidators were entitled to request financial documents of a trust where the examinee had no proprietary interest in the trust assets, but the liquidator contended that those assets might be available to satisfy a prospective judgment debt. The examinee was a former director of Equititrust Limited (in liquidation) and the purpose of the examination was for the liquidators to ascertain whether any judgment obtained against the examinee might ultimately be recoverable from him.

In February 2012, administrators were appointed to Equititrust. Equititrust had a secured creditor owed approximately $11.5 million. That secured debt was assigned to MS Asia Debt Acquisition Limited (MS Asia) for approximately $2 million, who then appointed receivers and managers to recover the secured debt it had acquired. The receivership resulted in a recovery of approximately $16.5 million, of which approximately $13 million was paid to MS Asia. The liquidators allege that the examinee was involved in MS Asia’s acquisition of the secured debt and had an interest in the proceeds received by MS Asia.

Against that background, the liquidators sought to examine the former director and sought production of various documents. The examinee sought to set aside the examination summons and the orders for production on the basis that the examination was for an improper purpose and an abuse of process.

The documents excluded from production were, among others, the financial statements and income tax returns of various trustee companies of various discretionary trusts (of which the examinee had control), and recent bank statements for those trustee companies.

On appeal, the Full Court addressed three main issues:

  • Whether property must be owned by a prospective defendant to be relevant to a liquidator considering the potential recoverability of a judgment debt and therefore fall within the ‘examinable affairs of a company’;
  • Whether the liquidators could rely on a prospective tracing exercise to justify production of the excluded documents; and
  • Whether the liquidators could rely on the Bankruptcy Act as a justification for production of the documents.

The significance of this case is in the Full Court’s consideration of the first issue. The second issue was not an available ground on appeal as it had not been argued before the primary judge, but there was nothing to prevent a further application being made for production of the documents by the liquidator if it did so based on a potential tracing remedy. The third issue was not a sufficient reason to justify production of the excluded documents as it was too uncertain and there were too many variables in the liquidator’s argument to justify a reliance upon that Act.

In considering the first issue, the liquidators contended that as the examinee had control of the discretionary trusts and could determine which of the potential beneficiaries should receive the assets and income of the respective trusts, the fact that the examinee had that control was sufficient to justify production of the excluded documents as the examinee may choose to exercise his discretion to pay certain income of the trusts to himself as a beneficiary. This would influence the potential recoverability of any prospective claim against the examinee by the liquidators. Neither party contended that the examinee had an actual proprietary interest in income and capital of the trusts.

In rejecting the liquidator’s contention, the Full Court found that there was no proper basis to extend of the scope of ‘examinable affairs’ to a consideration of what assets outside a prospective defendant’s property might voluntarily be directed to payment of a prospective judgment debt. The Full Court confirmed that it is within the examinable affairs of a company to obtain documents and consider the ability of a prospective defendant to satisfy a judgment debt in the event that litigation is issued by a liquidator. However, there was no basis to extend that scope to include assets and income which might be available as opposed to property that would be available.

The liquidators sought to draw an analogy to its ability to obtain documents in relation to insurance policies of a prospective defendant to justify production of the financial statements of the trusts. However, the Court rejected that analogy on the basis that an insurer (albeit a third party) does not have a discretion as to whether a claim should be paid or not. In the case of a discretionary trust, the trustee has that discretion.

The Full Court found that in the absence of some binding agreement or commitment by a trustee or third party to make funds available, it is difficult to see how the excluded documents could properly assist a liquidator in assessing the ability of the prospective defendant to satisfy a judgment and therefore assist the liquidator in advising creditors of whether that litigation should be pursued.

The Full Court’s judgment serves as a timely reminder to liquidators to ensure that when considering the scope of documents sought in orders for production, careful consideration is given to ensure that the documents sought fall within the ‘examinable affairs of the company’.

This article was written by Adam Young, Partner.

Publication Editor: Grant Whatley, Partner.

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