Liquidators — examining pre-examination steps
Examinations under sections 596A and 596B of the Corporations Act 2001 (Cth) are an important method for liquidators to assess the prospects of success and basis for bringing court proceedings as part of the liquidation. However, given the cost and time involved in conducting an examination, it is often prudent to consider whether other steps such as issuing letters of demand and even serving a Statement of Claim with a view to possible settlement of a claim, can and should be taken before proceeding with an examination. This in turn raises the issue of when taking such steps could leave a subsequent examination summons open to challenge on the basis that the liquidator already knows enough about the case and therefore the examination is not being conducted for a proper purpose.
The short answer is that in considering whether to set aside an examination summons, the determining factor will always be the purpose for which the examination is actually being conducted, rather than what, if any, action the liquidator has already taken in respect of the prospective claim.
An illustrative example is the relatively recent case of Equititrust Ltd (in liq) (rec apptd) (recs and mgrs apptd) v Equititrust Ltd (in liq) (rec apptd) (recs and mgrs apptd)  FCA 692. In Equititrust Ltd the liquidators had commenced proceedings in respect of various claims but had not yet served the originating application and statement of claim on any parties. They had also issued examination summonses to various parties involved in the substantive proceedings, and the examinations were due to take place shortly.
The respondents to the proceedings, who although not served with the originating application and statement of claim had become aware of commencement of the proceedings, applied to have the examination summonses set aside or stayed on the basis that it would be an abuse of process for the examinations to occur while the proceedings brought by the liquidators were on foot. This was because the examinations were likely to address allegations made in the proceedings and would therefore arguably be used to obtain a tactical forensic advantage in the proceedings.
Foster, J ultimately held that in the circumstances it was clear that the liquidators were in fact seeking to conduct the examinations for a proper purpose, namely to reach a firm view regarding prospects of success in the proceedings, to make a final decision as to whether or not to actually pursue the litigation by effecting service, and to ascertain whether any amendments should be made to the Statement of Claim. In finding that the examinations were for a proper purpose, the Judge did take into account the fact that it appeared that proceedings were commenced at the stage when they were because the liquidators were concerned about possible expiry of the limitation period for proceedings to be commenced, and the fact that the liquidators had not yet proceeded with serving the Statement of Claim. However, he also made the important observations that:
“A liquidator is entitled to examine the strength of a case, the existence and strength of likely defences that may be available to the defendants and also the defendants’ ability to meet any judgment. These are all legitimate purposes and the mere fact that a substantive proceeding has been commenced does not preclude examination on those legitimate topics.”
”… there is a world of difference between a litigant being in possession of sufficient information to justify filing a pleading and a litigant being in possession of sufficient information to allow his or her prospects of success to be adequately assessed.”
What this and earlier decisions show, is that preliminary steps taken prior to an examination will not provide basis for an examination summons to be set aside as long as the examination is indeed still being conducted for the purpose of obtaining further information about the prospects and basis for a claim to be made against a party. This is important given that commercially the most sensible approach will often be to seek to resolve a claim by taking preliminary steps before deciding whether one or more examinations are necessary and justified.
Where care clearly needs to be taken is in respect of commencement of legal proceedings. While cases such as Equititrust Ltd show that there will be circumstances, sometimes at the very early stage of proceedings, where an examination in connection with those proceedings will still be for a proper purpose, there will also be many circumstances where bringing proceedings and then seeking to conduct an examination will be a risky move. In particular, seeking to do so where there is already comprehensive information available to a liquidator regarding prospects of success, or the proceedings have already progressed to the stage of discovery and evidence, is almost certainly likely to lead to the examination process being successfully challenged. Ultimately these are matters that need to be carefully considered at the relevant time.