The Federal Court has recently confirmed that liquidators are able to assign their rights to examine people and to obtain the production of documents.
Liquidators may now find that there is greater interest from litigation funders to purchase potential claims that have not been fully investigated.
- In in the matter of 316 Group Pty Ltd, the liquidator assigned his rights to sue to a litigation funder.
- Under the assignment arrangement, the liquidator was entitled to receive 15% of the funder’s recoveries.
- The funder then sought and obtained ASIC’s authorisation to apply to the Court for the issuing of examination summonses and for related orders for production as an ‘eligible applicant’.
- On the application to issue the summonses, the funder disclosed that the examinations were to investigate potential claims available in respect of debts that were due and owing to the company and assigned to it.
- Orders were made by the Court for the issuing of the examination summonses and for the production of documents.
- In subsequent proceedings for the recovery an assigned debt, the funder sought to rely on the documents produced under those orders.
- The respondent opposed the use of the documents on the basis that the funder was seeking to use them for a purpose other than for which they were given (known as the Harman principle).
- The Court held that, on the facts of the case, the funder did not require leave of the Court to use the documents in the debt recovery proceedings, as the predominant purpose of the orders for production was to investigate the very claim that the funder was seeking to prosecute. Importantly, under the assignment arrangement, the liquidator had an interest in the outcome of the funder’s debt recovery proceedings.
Examination summonses and related orders for production
Under sections 596A and 596B for the Corporations Act, liquidators are authorised to apply to court to examine persons in connection with the affairs of companies being wound-up.
Sections 596D and 597(9) of the Corporations Act provide that an examination summons may require the person being examined to also produce books and records in their possession. Typically, a liquidator will be granted leave to uplift, inspect and copy those documents.
The courts have recognised that liquidators may use transcripts of examinations, as well as documents produced to the court, to prosecute claims for the benefit of the company.
The Insolvency Law Reform Act 2016, however, gave liquidators the right to assign any ‘right to sue’ conferred on them under the Corporations Act.
While it was a clear that the reforms gave liquidators the right to assign claims, such as insolvent trading claims against directors, it was not clear whether the ‘right to sue’, included rights to examine persons in connection with the affairs of the company being wound-up.
It would appear from the orders made in the matter of 316 Group Pty Ltd, that the ‘right to sue’ does include rights to examine persons in connection with the affairs of the company being wound-up.
Did the litigation funder need the Court’s leave to use the documents?
It is well established that a liquidator is entitled to use information or documents produced in an examination for the purpose of subsequent proceedings to realise assets of the company in liquidation, without the leave of the court.
The issue in this case, however, was whether these principles applied in the circumstances where the liquidator had assigned his examination rights to the funder.
Impact of the Harman obligation
Given that the documents had been compulsorily produced through a court process, the Court observed it was ‘uncontroversial’ that the Harman principles applied in the circumstances.
The Harman principles were described by the High Court in Hearne v Street  HCA 36, in the following terms:
Where one party to litigation is compelled, either by reason of a rule of court, or by reason of a specific order of the court, or otherwise, to disclose documents or information, the party obtaining the disclosure cannot, without the leave of the court, use it for any purpose other than that for which it was given …
The Court’s decision
The Court held that the funder did not require leave of the Court to use the documents in the debt recovery proceedings because:
- the funder had expressly disclosed the purpose of the examinations as being to investigate the assigned claims, including claims for the recovery of debts due to it
- it was uncontroversial that the predominant purpose of the examinations was to investigate the very claim that the funder was seeking to prosecute in the debt recovery proceedings.
Therefore, in accordance with the Harman principle, the purpose for which the documents were sought to be used in the debt recovery proceedings was the very purpose for which they were acquired.
Abuse of process or private purpose?
The respondent also argued that the examinations were in pursuit of a private purpose or an abuse of process by the funder. This was on the basis that the funder was not in the same position as a liquidator who uses such documents for purposes associated with the liquidation of the company and for the benefit of creditors.
In considering this issue, the Court noted the following general principles:
- The power of examination under the Corporations Act is to be for the aid of the company itself and not the personal advantage of the person seeking to conduct the examination.
- As such, it will be an abuse of process if the predominant purpose of the examination procedure is not for the purpose of benefiting the corporation, its contributories or its creditors.
The Court rejected the respondent’s argument on two grounds.
First, the liquidator (and hence the company and its creditors) retained a 15% interest in the claim that the funder was pursuing. On the face of the claim, this amounted to a value of $2.2 million.
On this basis, the Court held that there was ‘clearly a mixed purpose, being in part satisfaction of [the funder’s] own interests and in part the interests of the company and its creditors’.
Second, the Court held that, given the intended use of the documents was within the purpose for which they were acquired, and that leave was not required for the funder to use them, considerations as to ulterior purposes for the examination were not relevant.
Implications of the decision
Liquidators routinely have claims available to them that require further investigation.
Without funding, those investigations are often never undertaken.
With funders now being able to take an assignment of a liquidator’s powers of examination, we expect they will be more willing to purchase claims early on the winding-up of a company. However, the terms of the assignment will need to be carefully considered.