Debt Recovery through Public Examination of Directors
3 September 2023 in Commercial Lawyers, Debt RecoveryWhen companies face financial turmoil and debts accumulate, it is not uncommon for directors to find themselves at the centre of attention. This article outlines the power of public examinations in examining directors or officers of companies regarding corporate affairs for the purpose debt recovery.
What is a public examination?
A public examination is a formal legal process used in corporate law to gather essential information about a company’s financial status, management decisions and potential misconduct. Typically initiated by external administrators, this process involves questioning company directors and individuals with knowledge of the company’s affairs under oath. The overwhelming majority of examinations take place in relation to corporate insolvencies.
Section 596A of the Corporations Act 2001 (Cth) allows “eligible applicants” to apply to the court to summon directors for a public examination. Eligible applicants include:
- Creditors
- Shareholders
- Liquidators
- Administrators
- Deed administrators
- Australian Securities & Investments Commission (ASIC)
- A person authorised by ASIC to make an application
The authority to conduct public examinations of directors under section 596A has historically been used by liquidators during the process of winding up a company. This authority is often used to gather information about the company’s affairs, ascertain details about the company’s assets, liabilities and any potential claims against its directors or advisors, seek company books and records from directors and question directors about any matter the Court thinks appropriate (section 597 Corporations Act 2001 (Cth)).
Expanded scope
A decision by the High Court in 2022 has significantly expanded the scope of public examinations. In the case of Walton & Anor v ACN 004 410 833 Limited (formerly Arrium Limited) (in liquidation) the High Court permitted shareholders to summon former directors for public examinations, marking a shift in the purpose of these examinations.
The High Court’s decision revealed that public examinations are not solely for the benefit of a company, its liquidators and creditors. They can also serve as tools for individuals, including shareholders, to advance personal claims against directors without being considered an abuse of process. This ruling reshapes the landscape of director examinations, making it clear that the enforcement of the Corporations Act 2001 (Cth) and the protection of shareholders and creditors are valid reasons to summon directors for examination.
While this ruling opens new avenues for examinations, it is important to note that ASIC’s approval is still required, where the applicant needs to demonstrate that the applicant is an eligible applicant, the examination serves the company’s interest and is not an abuse of the process. This step ensures that public examinations remain rooted in accountability.
It is also worth noting that the subjects of these examinations are not limited to directors alone. The scope extends to any person with knowledge of the company’s affairs, its management or the business affairs of connected entities. This flexibility allows external administrators or any eligible applicant to uncover critical information that might otherwise remain hidden.
Public examinations have proven to be invaluable tools for debt recovery and understanding a company’s financial history and circumstances. They facilitate the collection of information that might otherwise remain hidden, enabling insolvency practitioners and creditors to establish the facts about a company’s management, history and affairs.
How can BSM help?
Brander Smith McKnight’s lawyers can provide expert assistance in matters of public examinations and debt recovery involving company directors. Our lawyers can guide you through the complex process of initiating and navigating public examinations, ensuring compliance with relevant legal provisions and procedures. We can assess the proper purpose for examinations, prepare and file applications, represent you in court proceedings and provide strategic guidance during examinations.
