Liquidators, Winding-up and Public Examinations: Important NSW Supreme Court Decision Connects the Dots

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National Rugby League (NRL) was successful in setting aside a summons for public examination obtained by the liquidator of Newheadspace Pty Limited (Newheadspace). The Court also awarded NRL its costs. The Court found that the creditors’ voluntary winding-up of Newheadspace was an abuse of process, and that the summonses were obtained for an improper purpose.

NRL argued that the predominant purpose of the creditors’ voluntary winding-up was to exert pressure on NRL to settle its commercial dispute with Newheadspace. In a nutshell, the Court considered Newheadspace was placed into creditors’ voluntary winding-up so that the liquidator could conduct public examinations of NRL officers in the hope that the threat of publicity would pressure NRL into settling Newheadspace’s alleged claim.

The Court considered invoices issued to Newheadspace by Ms Culver, the sole director of Newheadspace, and a litigation funder were baseless and designed to legitimise the placing of Newheadspace into creditors’ voluntary winding-up.

This is an important case for liquidators, company directors and those who have been served with a summons for public examination.

Newheadspace Pty Limited (In Liq) [2020] NSWSC 173

Background

  • Jhanna Culver was the sole director and shareholder of Newheadspace. Newheadspace provided consultancy services assisting people in changing circumstances. In 2010, Newheadspace developed a program called ‘Extend the Dream’. This program was put in place to support sports professionals in retirement. The program was introduced to NRL and NRL used the program sporadically between 2011 and 2014.
  • In 2015, Ms Culver attempted to re-start the program with NRL, but she was informed that NRL had developed an in-house program for retiring NRL sports professionals.
  • On 4 July 2016, Ms Culver attempted to recover payment from NRL for the sum of $7,500. The chief executive officer of NRL, Mr Greenberg said that NRL was not legally liable to Newheadspace for the invoices but offered to settle all claims with Newheadspace on a without admission basis. This offer was not accepted by Ms Culver.
  • On 20 February 2017, Ms Culver engaged a litigation funder to fund a $3 million claim for unpaid invoices, breaches of fiduciary duties, contract, negligence, loss of opportunity and injuries allegedly sustained to Ms Culver’s mental health. This alleged claim later increased to $5 million.
  • In February 2018, Ms Culver formulated an action plan where she would liquidate Newheadspace with a view to public examination being conducted of NRL officers – a tool available to liquidators (and some others), and a process which would not be available to an ordinary litigant at such an early stage. The Court found that the action plan, created before the liquidator was approached or appointed “was solely directed towards public examinations of NRL officers”.
  • On 14 April 2018, the litigation funder issued an invoice to Newheadspace for $55,000. This invoice apparently related to the advice given to Ms Culver in relation to obtaining litigation funding for a prospective claim against NRL. In these proceedings, a subpoena was issued to the litigation funder and no documents were produced to support the invoice rendered. There was no evidence to suggest that there was a litigation funding agreement in place between Newheadspace and litigation funder.
  • Ms Culver also rendered to Newheadspace an invoice for $487,500, for work undertaken by Ms Culver. Ms Culver failed to evidence work alleged to have been performed.
  • On 18 April 2018, Ms Culver attended a meeting of members of Newheadspace. A special resolution was passed to wind-up the company. On 3 May 2018, the liquidator notified the creditors of Newheadspace of his appointment as liquidator.
  • On 20 September 2018, the liquidator of Newheadspace filed an Originating Process seeking the issue of summonses for examination under sections 596A and 596B of the Corporations Act 2001(Cth) (Corporations Act).

The approach of the Court was:

  1. To consider whether the placing of Newheadspace into creditors’ voluntary winding-up was an abuse of process; and
  2. Whether obtaining the summonses for public examination was for an improper purpose.

Was placing Newheadspace into creditors’ voluntary winding-up an abuse of process?

In deciding this question, the Court needed to be satisfied that the company was placed into liquidation predominantly for an improper purpose. In this case, that improper purpose was to appoint a liquidator who could obtain summonses to examine NRL officers as a means of persuading NRL to settle Newheadspace’s claim in order to avoid adverse media attention.

In considering whether there was an improper purpose, Ms Culver was found to have contrived an apparent insolvency by creating invoices and drafting a board paper concerning Newheadspace’s inability to pay those invoices. This resulted in the desired appointment of a voluntary liquidator for the predominant purpose of conducting public examinations against NRL officers.

The Court went on to say that the power to appoint a liquidator is not to threaten the process of instituting public examinations nor is it to persuade someone to settle claims. Thus, the Court held that the appointment the liquidator was an abuse of process.

What was the consequence of the abuse of process?

As the Court found that the appointment of the liquidator was an abuse of process, the next issue before the Court was whether the creditor’s voluntary winding-up could be terminated.

The Court noted that Ms Culver could be disqualified from invoking the power inherent in a creditors’ voluntary winding-up, namely the appointment of a voluntary liquidator. This would have the effect of terminating the voluntary winding-up.

However, the Court concluded that a termination of the voluntary liquidation of Newheadspace would reinstate Ms Culver as the sole director of the company, and for this reason alone the Court did not terminate the winding-up.

Were the summonses for public examination obtained for an improper purpose?

Under s596B of the Corporations Act the Court has the discretion to summons a person for public examination about the examinable affairs of the company.

The Court can set aside an examination summons if it finds that the liquidator obtained the summons for an improper purpose. It is the liquidator’s purpose which is relevant.

While the Court noted that a public examination can be used to investigate claims which the company in liquidation might have against third parties, it found that the predominant purpose of issuing the summons was to exert pressure on NRL to settle alleged claims. The summonses were therefore set aside.

In coming to this conclusion, the Court gave weight to the fact that the liquidator had not himself obtained or reviewed the relevant books and records of the company, had not sought copies of the outstanding invoices alleged to be payable by NRL, nor had he sought copies of the invoices which were said to have given rise to the insolvency situation – namely the invoices rendered by Ms Culver and the litigation funder. Moreover, the Court found that the liquidator had left the task of reviewing the documents for the application for the examination summons to Ms Culver and her advisers.

Fundamentally, the Court found that the liquidator had not turned his mind to satisfying himself that the elements in s596B of the Corporations Act for the issue of the summons were satisfied.

Our thoughts

Liquidators, and such others who are able to apply for examination summonses, should carefully satisfy themselves that there is a proper basis for obtaining the summons. In doing so, the prospective applicant should be careful to avoid being directed by shareholders, creditors or former directors and exercise independent judgment. Of course, it is proper to speak to and hear the concerns of interested parties, but liquidators should avoid even the perception of being the puppet of those parties.

Examination summonses can be used to:

  1. Enable the applicant to gather information to assist it in the administration of the corporation
  2. Assist the corporation’s administrators to identify the corporation’s assets and liabilities
  3. Protect the interests of the creditors
  4. Obtain evidence and information to support the issuing of claims. But, the public examination cannot be used as a dress rehearsal for cross-examination in a later claim

The liquidator’s affidavit in support of the summons should be carefully crafted, and observe the requirement to give full and frank disclosure. That is, it should disclose points which might lead the Court not to granting the summons. In this case, the Court noted that the liquidator failed to give full and frank disclosure of a number of matters including that Newheadspace had been threatening NRL with adverse public attention.

If you have been served with a summons for examination, it is important that you seek legal advice and consider carefully whether the summons for examination has been issued for an improper purpose. If you think that the summons has been issued for an improper purpose, you can take steps to have it set aside but you should act quickly.

Contact us to find out more about liquidators, winding up and public examinations.

Further information

For more information about public examinations, please contact:
Trevor Withane: trevor.withane@blackwattlelegal.com.au, tel +61 (0)418 717 001

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