Debt Recovery through Public Examination of Directors
3 September 2023 in Debt Recovery | 3 min read | skip to FAQsThis article outlines the power of public examinations in questioning directors or officers of companies regarding corporate affairs for the purpose of 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. It is typically initiated by external administrators and involves questioning company directors and individuals under oath who have knowledge of the company’s affairs. The overwhelming majority of examinations take place in relation to company 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 lawyers at BSM Sydney Lawyer are very familiar with the process of summoning directors for a public examination and can guide you through the process.
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 through High Court Decision in 2022
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 upheld the position that public examinations are not solely for the benefit of a company and its’ liquidators and creditors. In simple terms, it confirmed that public examinations 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. For more information on this ruling, please see our article on the Arrium decision
ASIC Approval is Required
While this ruling opens new avenues for examinations, it is important to note that ASIC’s approval is still required. The applicant needs to demonstrate that
- they are an ‘eligible applicant’,
- the examination serves the company’s interest and
- is not an abuse of the process.
Public Examination not limited to Directors for Debt Recovery
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.
The Role of Public Examinations in Debt Recovery
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 Sydney Lawyers assist you?
Brander Smith McKnight’s debt recovery lawyers can provide expert assistance in matters of public examinations and debt recovery involving company directors and any person with knowledge of the company’s affairs, its management or the business affairs of connected entities. Our highly experienced 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. The senior debt recovery lawyers at BSM lawyer Sydney offer a free 20 minute consultation to discuss your debt recovery options, including a public examination.
FAQs
What is the significance of the Supreme Court judgment in Arrium in 2022?
The Arrium decision has expanded the scope of mandatory examination powers enabling shareholders, to pursue directors and officers of a company for a legitimate reason, such as investigating claims against a company in administration. This can be a powerful tool for debt recovery.
BSM Lawyer Sydney can assist you in applying for a public examination for the purpose of debt recovery.
Can anyone request a Public Examination?
No. You must be an eligible person, which includes creditors, shareholders, liquidators, administrators, and ASIC.
Is ASIC permission required to request a Public Examination?
Yes. ASIC makes the decision to grant a public examination on the grounds that the applicant must be an eligible person, the examination must serve the companys’ interest and it be assessed by ASIC as not being an abuse of the process.
The debt recovery legal team at BSM Sydney Lawyers are experts in all forms of debt recovery and offer a free 20 minute consultation to assess your individual case.
BSM Lawyer Sydney is conveniently located at Sydney CBD, Sutherland, Parramatta, Shellharbour and Wollongong.
About the Author
Elizabeth DonoghueBachelor of Laws with First Class Honours I Bachelor of Business I Graduate Diploma of Legal Practice I Admitted to the Supreme Court of NSW & the High Court of Australia
View profileElizabeth has a Bachelor of Laws with First Class Honours and a Bachelor of Business from the University of Wollongong. She also holds a Graduate Diploma of Legal Practice from the College of Law and is admitted to the Supreme Court of NSW & the High Court of Australia. Elizabeth achieved outstanding results across both of her university degrees and was recognised with the Dean's Merit Award for academic excellence. Elizabeth is known for her passion for law, her strong organisational and communication skills, meticulous attention to detail and proactive approach to her work.
