By Phoebe Langridge

14 March 2018

Last week’s news featured a story of a ‘David and Goliath’ battle in the Supreme Court of New South Wales. In short, the story concerned A2Z, a cleaning company who had only one client, McDonalds. A2Z’s contract with McDonalds had a two-year notice period in the event of termination.

Regardless of this clause, A2Z alleged that McDonalds terminated the cleaning contract with only one day’s notice, resulting in A2Z instituting proceedings against McDonalds for breach of contract. Before the proceeding could be determined A2Z went into liquidation. The decision to continue the proceeding then fell to the Liquidator, who, in order to assess the merit of continuing the proceeding, commenced a public examination.

What is the purpose of public examinations?

Public examinations are a useful tool, especially for liquidators, to investigate what claims may exist and their potential merit. As opposed to litigation, public examinations are inquisitorial in nature and allow a liquidator (or other ‘eligible applicants’ as defined in section 9 of the Corporations Act Cth (2001)) to investigate the ‘examinable affairs’ of a company by examining certain people who can provide information on the ‘examinable affairs’ of the company.

Who can be examined?

The Corporations Act (Cth) 2001 (the Act) provides for two different types of examinations, mandatory examinations and discretionary examinations. Mandatory examinations (under section 596A of the Act) are issued to ‘officers’ of the company, for example a director of the company. Provided the criteria of section 596A of the Act is met, the Court has no discretion and is required to issue the summons for examination.

In contrast, discretionary examinations (under section 596B of the Act) are broader, more far reaching and extend beyond ‘officers’ of the company. A discretionary examination can be issued to anyone who may be able to give information about the company’s ‘examinable affairs’. Unlike mandatory examinations, the Court has discretion and will need to be satisfied that the person:
(i) has taken part or been concerned in examinable affairs of the corporation and has been, or may have been, guilty of misconduct in relation to the corporation; or
(ii) may be able to give information about examinable affairs of the corporation.

Discretionary examinations may be issued to the company’s accountant, employees, solicitors, bookkeepers, business partners, creditors, or in the case of A2Z, various McDonalds’ employees who dealt with A2Z.

In A2Z’s case, the liquidator will now need to consider the information it gathered from the pubic examination to determine if there is merit in continuing the substantive proceeding commenced by A2Z against McDonalds prior to going into liquidation.

 

If you require insolvency advice or representation in relation to the public examination process, please do not hesitate to contact a member of our Litigation team.

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