Green light to director to make a meal out of liquidators?
In the matter of Jewel of India Holdings Pty Ltd  NSWSC 356 (30 March 2022)
Williams J dismissed an application by liquidators to set aside examination summonses that had been issued to them pursuant to s 596A of the Corporations Act 2001.
Liquidators and administrators should be alive to the possibility that they may be subject to examinations about company affairs. It is a high bar to set aside such summonses. But the Court retains control over the questions that might be asked during an examination to guard against abuse.
The Jewel Group of nine companies manufactured ready‑made meals. It was founded by Mr M and his wife. Mr M was a director of each of the companies.
In early 2019, the Jewel Group defaulted on bank loans. In April 2019, the bank appointed administrators to each company in the Jewel Group, pursuant to s 436C of the Act.
The administrators sought to sell the Jewel Group business. They exchanged a contract for sale with another of Australia’s largest manufacturer of ready-made meals. That contract was terminated after the ACCC announced that it would oppose the acquisition on the basis that it was likely to substantially lessen competition. Eventually, a third sale attempt was successful.
The administrators issued a report to creditors advising that funds from the sale could pay down the approximately $88 million owed to the bank, but any returns to creditors would be dependent on recoveries.
The second meeting of creditors resolved to place the Jewel Group into liquidation. The administrators were appointed as liquidators.
In July 2020, the liquidators demanded that Mr M and his wife repay $8.1 million in personal loans to the Jewel Group and demanded an explanation as to significant transactions totalling over $70 million that appeared to be personal transactions recorded as liabilities in Jewel Group accounts. The liquidators also demanded explanations as to several other matters, including the incurring of liabilities whilst the Jewel Group was insolvent.
Meanwhile, another company “Avia”, who was the trustee of Mr M’s family trust claimed to be entitled to the proceeds of sale of certain properties sold by the bank when it enforced its securities.
In November 2020, Mr M and his related entity, Avia, successfully applied to ASIC for “eligible applicant” status for the purpose of conducting examinations against the liquidators relating to the sale process of the business, the apparent sale at undervalue of the business and the liquidators' apparent failure to investigate and prosecute potential claims against the bank.
A Registrar of the Court duly issued s 596A summonses to the liquidators, accompanied by production orders, upon the application of Mr M and Avia.
The liquidators applied to set aside the summonses and production orders on the basis that they were an abuse of process. The liquidators contended that Mr M and Avia sought to examine, not for legitimate purposes, but to exert leverage over the liquidators given their ongoing investigations and potential claims against Mr M.
Williams J observed that current and former administrators and liquidators are in no different position than any other current or former officer liable to be summoned for examination under s 596A.
Her Honour also observed that it was not necessary for an applicant for a summons to demonstrate that the proposed examinations will be of utility in demonstrating a viable cause of action – an examination is merely an information gathering process.
Her Honour found that some of Mr M and Avia’s concerns about the matters on which they sought to examine were not speculative, far-fetched or misconceived. Their alleged motivation in conducting the examinations was not to the point.
Her Honour also dismissed the liquidators’ concerns that the examinations would be oppressive because they would have less time to perform their roles in the liquidation. Her Honour declined to set aside the summonses and stood over the question of whether the production orders should be set aside until the parties had a chance to negotiate their scope.