Failure to launch: Liquidators fail to establish abuse of process in public examination summonses

Public examination can be a useful tool for parties in a liquidation to obtain information about matters relating to a company’s affairs. In the matter of Jewel of India Holdings Pty Ltd ACN 141 963 813 (in liquidation) [2022] NSWSC 356, the Court considered whether summonses for public examination, that were issued by the former owner of the business to the liquidators and former administrators of Jewel Holdings, constituted an abuse of process.

In particular, the New South Wales Supreme Court considered whether the examination would be a use of the Court’s processes for illegitimate purpose before ultimately dismissing the application for the summonses to be set aside.

Background

In 1997, Mr Matta established Jewel Holdings and associated companies (the Jewel Group) for the manufacture of ready-made meals. By 2019, the Jewel Group was in financial distress and as a result, CBA appointed Mr Dampney, Mr Gothard and Mr Parberry as joint and several voluntary administrators (the Administrators). At the date of the Adminstrators’ appointment the Jewel Group owed approximately $93 million to CBA.

The Administrators adopted a business-as-usual trading strategy, seeking sale of the Jewel Group business separately. The Administrators accepted an offer from B&J City Kitchen Pty Ltd (BJCK) for $35 million and entered an exclusivity period until 24 July 2019.

On 5 September 2019, the ACCC announced that it would oppose BJCK’s anticipated acquisition of the Jewel Group. This was on the basis that BJCK and the Jewel Group were the two largest manufacturers of chilled ready meals in Australia, and the acquisition would likely substantially lessen competition. Specifically, the Chairman of ACCC stated:

“Administrators also have a responsibility to ensure that a potential buyer notifies that ACCC at the earliest opportunity in these circumstances.”

The Administrators terminated the sale agreement with BJCK on 24 September 2019 and engaged in a second and third sale process, resulting in sale to Chef Fresh Pty Ltd (Chef Fresh) for $25.5 million.

Public examination

On 20 November 2020, Mr Matta’s lawyers wrote to ASIC and applied for ‘eligible applicant’ status for Mr Matta for the purpose of conducting examination of the Liquidators concerning:

2.1 the Administrators’ apparent failure to undertake appropriate steps in the sale of the business of Jewel Fine Foods, including Jewel Holdings;

2.2 the apparent sale, at undervalue, of the business; and

2.3 the Liquidators’ apparent failure to investigate and prosecute potential claims against [CBA],

with a view to determining whether any further steps ought to be taken against the Administrators or Liquidators.

On 15 July 2021, Mr Matta applied for summonses to be issued to the Administrators pursuant to s 596A of the Corporations Act 2001 (Cth) (Corporations Act), requiring them to attend Court to be examined about the examinable affairs of Jewel Holdings and to produce documents. These summonses were issued on 19 August 2021.

On 23 August 2021, the Administrators (henceforth referred to as the Applicants) applied to set aside the examination summonses and orders for production.

Applicable principles

Section 596A of the Corporations Act requires the Court to summon current or former officers of a corporation for examination about the corporation’s examinable affairs, if an eligible applicant applies for the summons and the Court is satisfied that the proposed examinee held office during the applicable time. The Court has no discretion to decline to issue an examination summons if the requirements of s 596A are satisfied, absent an abuse of process.

The court noted that there are no set rules establishing an abuse of process, but that abuses of process will generally include the use of the Court’s processes for illegitimate purpose, a use of the court’s processes that is unjustifiably oppressive to one of the parties, or the use of the court’s process in a manner that would bring the administration of justice into disrepute.

Were the summonses an abuse of process?

The Applicants submitted that the summonses were an abuse of process, that the Court’s power had been invoked for an illegitimate purpose, and the summonses and production orders were unjustifiably oppressive.

The Applicants submitted that the Respondents’ purpose of creating a “bargaining chip” to resolve Mr Matta’s personal liability to CBA and that, because the Respondents did not object or complain about the sale processes at the time, the concerns were not genuinely held.

The Court held that the Respondents were not obliged to raise complaints or concerns at the time, and that it is particularly so where there is no evidence that the Respondents had all information relating to the sale processes before the Administrators concluded the sale to Chef Fresh Pty Ltd. Specifically, Justice Williams stated that:

‘The Respondents’ concerns about the sale process are not speculative, far-fetched or misconceived… On the contrary… their concerns raise matters that are prima facie worthy of investigation including why the Administrators apparently did not anticipate potential opposition from the ACCC to the proposed sale to BJCK’.

The Applicants also submitted that the examinations lacked utility, given the Liquidators did not have funding to investigate or pursue potential claims against CBA if the examinations revealed it was necessary. Justice Williams rejected the submission, noting that examination may provide the basis of a claim to remove the Liquidators or appoint a special purpose liquidator. Alternatively, the Respondents may have a claim against the Liquidators for not pursuing potential claims against CBA at a time when they did have adequate funding.

Notably, Justice Williams detailed that ‘an applicant for an examination summons is not required to demonstrate a viable cause of action’, nor are they required to show that any potential cause of action against a proposed examinee would be the best course of action.

While not determinative, Justice Williams commented that it was difficult to reconcile the Applicants’ claim that the time and costs involved in attending a one-day public examination would be so oppressive as to constitute an abuse of process with the time and expense involved in the application to set aside the examination summons. The application included a two-day hearing and an attempt to pre-empt the outcome of the examinations by putting forth substantive evidence as to the substance of the Respondent’s complaints, the costs of which likely exceeded the costs of the examination itself.

Key takeaway

The Court held that the Applicants failed to establish that the examination summonses were an abuse of process and dismissed the application to discharge the summonses. The Court declined to determine whether the orders for production were unjustifiably oppressive, noting that further information was required and that it would be determined at a later date.

In considering whether a summons for public examination may be an abuse of process, it is not relevant whether a viable cause of action exists as the primary purpose of public examination under the Corporations Act is purely an information gathering exercise, and an examinee cannot avoid examination simply because examination may be inconvenient.

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Authored by:

Guy Edgecombe, Partner
Anna Fanelli, Associate