Walking the line: abuse of process in public examinations

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By Mark Wenn, Partner and Alex Myers, Senior Associate

It is uncontroversial that:

  1. contemplated or extant Court proceedings will not by themselves provide sufficient grounds to discharge a summons for examination issued under the Corporations Act 2001 (Cth) (the Act); and
  2. the public examination process provides very broad compulsive powers for liquidators (and other eligible applicants) to investigate the examinable affairs of corporations.

Of course, the Court may discharge a summons if it is shown that the examination is being conducted for an improper purpose, or if the examination is otherwise an abuse of process.

Re IPO Wealth Holdings No 2 Pty Ltd (in prov liq) & Ors [2021] VSC 821, a decision of the Supreme Court of Victoria, illustrates the high threshold that an examinee faces when seeking to establish an abuse of process or improper purpose on a liquidator’s part.

Background

In May 2020, receivers and managers were appointed to IPO Wealth Holdings Pty Ltd (Holdings) and 16 wholly owned subsidiaries (SPVs, and collectively, the IPO Wealth Group). In early July, the Court ordered that the receivers be appointed as provisional liquidators of the IPO Wealth Group. Winding up orders were made in September 2020.

The entities within the IPO Wealth Group were part of a larger corporate group known as the Mayfair 101 Group. Mr James Mawhinney was the sole director of each of the companies within the Mayfair 101 Group.

The liquidators’ investigations indicated that the IPO Wealth Group previously operated an unregistered managed investment scheme through a unit trust, the IPO Wealth Fund (Fund). As at the receivers’ appointment, Holdings owed more than $79 million to Vasco Trustees Limited (Vasco), an unrelated entity appointed as the trustee of the Fund. Vasco had loaned funds raised from investors to Holdings.

The Fund’s investments included debt or equity interests in numerous entities in Australia, the United Kingdom, the United States, Israel, India and Italy. Many entities the Fund invested in were start-ups, such that the liquidators could not easily determine the value of the interests.

Investigations also indicated that, before their appointment, Holdings and certain SPVs had transferred assets to entities incorporated in Australia, the United Kingdom, and the British Virgin Islands. One such entity was 101 Investments Limited (101 Investments), which was incorporated in the British Virgin Islands in January 2019. It appeared that Mr Mawhinney was associated with each of the entities in question.

The liquidators were involved in various proceedings concerning the Fund’s investments (Proceedings), including in relation to:

  1. the purported sale by of shares in a company called Accloud plc by one of the SPVs, which the liquidators commenced in January 2021 (Accloud Shares Proceeding);
  2. a payment by one of the SPVs exceeding $2.8 million in accordance with a convertible note agreement, which the liquidators commenced in May 2021 (Convertible Note Proceeding); and
  3. the treatment of certain payments involving 101 Investments that Holdings appeared to have made that were applied toward the purchase of shares in Paymate India – 101 Investments commenced the proceeding against Holdings and one of the SPVs in January 2021 in the British Virgin Islands (BVI Proceeding)

All parties had filed pleadings in the Accloud Shares Proceeding, the liquidators had filed them in the Convertible Note Proceeding, and the liquidators were actively participating in the BVI Proceeding, including by engaging a local law firm and objecting to the Court’s jurisdiction.

Examination proceedings

In later July 2020, the provisional liquidators obtained orders under section 596A of the Act that a summons for public examination be issued to Mr Mawhinney.

The liquidators examined Mr Mawhinney over seven days in total, on dates between August 2020 and April 2021. Aside from three initial dates in August 2020, all of the examinations were conducted following the commencement of at least one of the Proceedings.

In late July 2021, the liquidators applied to resume Mr Mawhinney’s examination for an eighth day. The Court ordered that the examination be resumed on 25 October 2021 (Resumption Order).

On 18 October 2021, Mr Mawhinney filed an interlocutory process, which sought orders that the Resumption Order and summons issued to him be discharged, and that any further examination be stayed.

Parties’ positions

One of the liquidators gave affidavit evidence that the resumed examination would canvas payments that Holdings made, which were the subject of the BVI Proceeding, and a holding of around 245,000 shares in a private company that various books the liquidators had obtained recorded as an asset of one of the SPVs (Proposed Issues).

The liquidators accepted that Mr Mawhinney had already been examined about the Proposed Issues, although they contended the prior examinations had not been extensive. The Proposed Issues were said to relate to significant potential recoveries in the liquidation of the IPO Wealth Group, such that the liquidators wished to conduct further examinations.

Finally, the liquidators gave evidence that they had no intention of examining Mr Mawhinney about the precise subject matter of any of the Proceedings. They also deposed that they did not intend to utilise the examination process as a dress rehearsal for cross-examination of Mr Mawhinney in any of the Proceedings.

Mr Mawhinney’s solicitors gave evidence that the liquidators were seeking to obtain an impermissible forensic advantage in the BVI Proceeding, apply undue pressure to Mr Mawhinney in relation to that proceeding generally, and utilise the examination as a dress rehearsal for cross examination of Mr Mawhinney.

The solicitors also deposed that the liquidators had extensively examined Mr Mawhinney regarding the Proposed Issues. One topic had been mentioned on 61 occasions across two days of examinations, a second topic had been mentioned 19 times across four days of examinations, and a third topic had been referred to 16 times in three days of examinations.

Lastly, Mr Mawhinney’s solicitors deposed to the exchange of extensive correspondence between them and the liquidators’ solicitors in relation to the Proposed Issues, and to the provision of a substantial volume of documents in relation to them. It was also said that the liquidators had not explained the basis upon which they had not and could not have examined Mr Mawhinney about the Proposed Issues on the seven previous occasions.

Court’s decision

The Court’s key findings were to the following effect:

  1. although it was accepted that an examination may be an abuse of process from the outset or become an abuse at a later stage:
    1. there was no shift in the onus of establishing that an examination constituted an abuse of process from the examinee to the liquidators, regardless of how long the examination had been on foot; and
    2. the examinee’s onus did not become lower as the length of the examination increased;
  2. inferences as to a liquidator’s purpose could be drawn, but the onus was on the examinee to establish this was appropriate;
  3. the appropriate length of any examination will vary in each case, and in relation to each examinee – the mere fact that there had been seven days of prior examinations did not of itself establish that further examinations were excessive, oppressive, or unnecessary;
  4. the length of the examination process had in part resulted from Mr Mawhinney’s conduct in the witness box (which included that he sometimes gave detailed answers that were not responsive to the questions asked);
  5. the IPO Wealth Group’s affairs were very complex – in these circumstances, it was appropriate to accept the liquidators’ submissions that there were further matters requiring examination that they had not had sufficient opportunity to explore so far, and that some matters had evolved as more information had been obtained;
  6. there were numerous issues with incomplete books and records, and Mr Mawhinney was at the centre of most if not all key transactions and companies – on those bases, a failure to seek information from other sources did not establish an improper purpose on the liquidators’ part;
  7. it was not accepted that the liquidators already had sufficient information regarding the Proposed Issues – Mr Mawhinney had taken a narrow approach to producing documents on some occasions, which necessitated further production orders;
  8. although Mr Mawhinney identified by number the occasions on which the Proposed Issues had been mentioned at previous examinations, he did not seek to explain how this established that the liquidators had enough information on those matters;
  9. notwithstanding that the liquidators had not specified precisely the matters they intended to question Mr Mawhinney about, there was nothing establishing that the liquidators had already raised every conceivable issue at the prior examinations – regardless, the liquidators were entitled to examine Mr Mawhinney without undue forewarning of the questions to be asked;
  10. the mere fact that an examination might involve issues the subject of an extant proceeding did not establish an improper purpose on the liquidators’ part, or that the examination was an abuse of process – in any event, Mr Mawhinney would have the opportunity to object to any questions during his examination that he saw as inappropriate;
  11. Mr Mawhinney had not demonstrated that the liquidators’ sworn evidence about the purpose of the resumed examination should not be accepted;
  12. although the examination might have assisted the liquidators to consider the merits of the BVI Proceeding, this alone did not establish the examination was an abuse of process, as it was not the predominant purpose of the examination; and
  13. despite making detailed submissions and extensive references to authorities, Mr Mawhinney had not identified specific instances or given examples of how the examination would be an abuse of process.

Accordingly, the Court refused to make the orders discharging the summons and the Resumption Order and/or staying any further examination.

Takeaway points

The examinee bears the onus of establishing that a liquidator (or other eligible applicant) has an improper purpose in conducting an examination, or that the examination is otherwise an abuse of process. The onus does not shift to the liquidator, and does not become easier for the examinee to discharge, merely because extensive examinations have already occurred.

The bar to establishing that a liquidator has an improper purpose in continuing an examination or that the continued examination is an abuse of process is high. Although the Court may be prepared to draw inferences as to a liquidator’s motive or purpose in conducting examinations, it will not do so lightly. The examinee must adduce specific evidence to justify any inferences he or she seeks be drawn.

The Court will not draw such inferences merely based on extensive prior examinations, or the existence of extant proceedings concerning matters that the examination may canvas. The examinee must identify precise examples of how and why a resumed examination would be an abuse of process.

The permissible length and extent of examinations must be individually assessed in each case, by reference to the complexity of the winding up, and there is no arbitrary time limit to the process. Long and extensive examinations are less likely to be improper in complex liquidations, and the fact that liquidators may be able to obtain information from sources besides a resumed examination will not on its own establish an abuse of process.

For further information, please do not hesitate to contact us.

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