AU, Insolvency

Public examinations and production orders – when are liquidators required to pay compliance costs?

Public examinations are a powerful process for a liquidator to explore the reasons for a company’s failure, identify any claims the liquidator or the company might have and assess recoverability prospects following any successful claim.

In a similar vein, liquidators might also obtain document production orders against natural persons and corporate entities. Such document production orders are often obtained in advance of examinations and can assist the liquidator in its investigations and preparation for the examinations.

The question of whether the respondent can recover from the liquidator its cost of complying with an examination summons and or order for production is often raised by liquidators, examinees and producing parties alike.

This article considers the circumstances in which costs are recoverable.

In summary, the question of recoverability of costs is not always clear-cut. The court will often consider whether the party claiming costs is an insider or outsider of the company in liquidation and whether awarding costs would avoid oppression or injustice to the examinee or producing party. Generally, insiders will not be awarded costs, whereas outsiders may be awarded some reasonable costs.

General principles

Why does the court award costs for compliance?

The court has an inherent power to award costs for complying with an examination summons or order to produce documents where it is in the interests of justice to do so. For example, where an examinee misses a day of work to attend an examination, it may be in the interests of justice for the court to award costs to compensate for this loss. This is also in line with the ordinary power of a court to order payment of reasonable loss or expense incurred in complying with a subpoena (which is analogous to an order for production).

Who may be awarded costs?

To determine who may be awarded costs, the court often makes the distinction between insiders and outsiders of the company in liquidation. Making this distinction, the relevant authorities cite the general duty of officers of the company to assist liquidators. The court is more likely to treat the costs of complying with an examination summons or order for production as unrecoverable if the party claiming costs is a company insider.

If a person is directly involved in the management of the company (ie directors, secretaries and employees), the court will typically consider them insiders. All other examinees, such as auditors, are considered to be outsiders (Re Equiticorp Finance Ltd; Ex parte Brock (No 2) (1992) 10 ACLC 382) (Brock No 2).

Can producing parties claim costs for complying with an order for production?

Provision has been made by courts for costs associated with producing documents, especially where the production order is directed at a company outsider (Re Equiticorp Finance Ltd; Ex parte Brock (1992) 6 ACSR 725). Such costs might include the costs of locating documents, printing and loss of time.

Importantly, it is not permissible for such costs to be claimed at an hourly rate that includes a profit component (Re IMF Pty Ltd [receiver and manager appointed] [in liquidation] [2018] VSC 317) (IMF). For example, where an accounting firm is issued an order for production, the firm cannot charge its usual hourly rate (including profit) to produce documents.

As outlined under general principles above, it is unlikely a court will find it in the interests of justice to make a costs order in favour of a company insider for the production of documents.

For both insiders and outsiders, there has been some suggestion in the case law that legal fees for advice about document privilege might be recoverable (Re Spedley Securities Ltd (in liq); Ex parte Australian National Industries Ltd (1991) 9 ACLC 492 at 495). This would include the lawyer’s time costs for reviewing a document to determine whether it is subject to legal privilege.

Whilst legal costs for determining whether a document is privileged might be recoverable, this does not extend to recovery of legal costs in respect of discovery or other legal advice (for example, where a lawyer searches for and reviews all documents to establish whether they are responsive to an order for production).

Liquidators who are faced with a claim for legal costs should scrutinise the lawyer’s time entries and have regard to whether privilege was in fact claimed over any documents and the quantity of such documents. This analysis will shed light on the legitimacy and proportionality of any legal fees claimed.

Can an examinee claim costs for attending an examination?

The general principle is that “a person required by law to come before a court and give evidence has an obligation as a citizen to comply and is not entitled to compensation” (Crosbie v McLachlan [2013 FCA 1101). However, a court might make an order that examinees be compensated for out-of-pocket costs for:

  1. Expenses incurred travelling to and from a public examination (for example, where a person needs to fly interstate)
  2. Expenses for sustenance whilst attending the examination
  3. Accommodation, where a person lives interstate
  4. Compensation where a person misses work to attend an examination
 

The court may make such a costs order where these expenses were incurred by a company outsider, and where it is in the interest of justice to do so. Such costs are not generally awarded to a company insider.

Can examinees claim legal costs in relation to the examination?

Though examinees are entitled to legal representation at the examination, s 597(16) of the Corporations Act 2001 (Cth) (Act) makes clear that the cost of legal representation is to be borne by the examinee. Furthermore, compensation does not extend to conferring with lawyers or receiving advice prior to the examination (Brock No 2 at [397]).

There is some suggestion in the case law that an examination that takes the character of litigation may mean an examinee will be justified in receiving costs for legal representation (IMF at [77]). For example, an examination may be characterised as litigation where there is a dispute as to legal professional privilege (Surpion Pty Ltd v M. R. Works Pty Ltd (Receivers and Managers Appointed) [2010] FCA 1262). In such circumstances, it is arguable that the lawyer’s costs of that satellite dispute may be recoverable against the liquidator (regardless of whether the examinee was an insider or outsider).

Costs in the absence of reasonable cause

Under s 597B of the Act, a court may order that some or all of the costs incurred by an examinee be paid by the liquidator if the court is satisfied that the summons was obtained without reasonable cause. For example, if the summons was obtained for an ulterior purpose without the scope of the examinable affairs of the company in liquidation.

When should costs be claimed?

Although each case is determined on an individual basis, compliance costs are typically decided at the conclusion of an examinee’s attendance (Fox Home Loans Pty Ltd (in liq) [2005] NSWSC 1050; Re Total Entity Pty Ltd (in liq) (2003) 47 ACSR 577). In fact, it is not typically appropriate for a standing order as to costs to be made by the court until after the examinations are complete (Re Southland Coal Pty Ltd (in liq) (2006) 58 ACSR 113).

Key takeaways

  1. Whether the examinee or producing party is an insider or outsider will strongly influence the likelihood of a court awarding costs in their favour
  2. The court has a wide discretion to make an order as to costs, and will consider whether doing so is in the interests of justice
  3. Legal costs are generally not recoverable by examinees or producing parties other than in relation to advice about privilege
  4. In assessing any time costs charged at hourly rates, the liquidator should ensure that any profit component has not been included
  5. A liquidator faced with any request for payment before the conclusion of any public examination may defer the question of costs to be dealt with at the conclusion of the examinations
  6. Noting that there is a wide discretion available to the court, it is always prudent for the liquidator and the examinee or producing party to negotiate an outcome as to costs privately
 

Further Information

For more information about public examinations, orders for production and costs, contact Trevor Withane:

Further Information

For more information about personal guarantees, banking litigation and dispute resolution contact Trevor Withane

Disclaimer

Ironbridge Legal’s communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication.