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Restructuring & Insolvency

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Focus: Examinees out of the loop

27 May 2013

In brief: A recent decision of the Full Court of the Federal Court confirms that the Australian and Securities Investments Commission may authorise receivers as eligible to apply for examination summonses without giving the potential examinee an opportunity to be heard. Partner Philip Blaxill (view CV) and Law Graduate Katherine Glossop report.

How does it affect you?

  • The Australian Securities and Investments Commission (ASIC) can, without having to involve any potential examinee in the process, authorise receivers and managers as eligible to apply to the court for examination summonses.
  • Directors, or other potential examinees, cannot challenge ASIC's decision on the basis that they were not given the opportunity to be heard on the question of the authorisation, or that ASIC failed to take into account relevant considerations.
  • This decision confirms that directors and officers summonsed under the mandatory examination provisions are likely only to be able to avoid being examined if they can establish the examination process is an abuse of process.

Background

Mr Saraceni was a director of three companies to which receivers and managers were appointed in early 2011. The receivers applied to ASIC for examination summonses, which ASIC authorised. 

Only eligible applicants have standing to apply to the court for examination summonses under Part 5.9 of the Corporations Act 2001 (Cth) (the Act). Eligible applicants are ASIC, liquidators, administrators, deed administrators or a person authorised by ASIC.

The court made orders for the issue of examination summonses to Mr Saraceni under the mandatory examination provisions (section 596A of the Act).

Mr Saraceni applied to the Supreme Court of Western Australia to discharge the examination summonses. That application included a challenge to the constitutional validity of s596A of the Act. The Court of Appeal of Western Australia found against Mr Saraceni on the constitutional point and there remain a number of grounds that are yet to be determined by the Supreme Court.

Mr Saraceni also applied to the Federal Court, alleging that ASIC had denied him procedural fairness by not giving him notice of the application by the receivers, or an opportunity to be heard on the question of whether the receivers should be granted the status as eligible applicants. He also contended that the appointment of the receivers as eligible applicants was an improper exercise of power, as ASIC had failed to take into account relevant considerations.

At first instance, the court ordered summary dismissal of Mr Saraceni's application, on the basis that it had no reasonable prospects of success.

He appealed that decision.

The decision

As to procedural fairness, the Full Court applied the established principle that whether a statutory power requires an obligation of procedural fairness is determined by a process of statutory construction. In this case, the relevant section of the Act did not contain an express condition requiring procedural fairness. Accordingly, the court considered the position at common law, which provides that not every administrative decision attracts the common law duty to act fairly. Natural justice only applies to those administrative decisions that can affect the interests of a person in a direct and immediate way.

The court identified that the making of examination orders by persons not specifically granted standing by the Act, such as receivers, is a two-stage process. First, ASIC authorises standing; and then, following an application made by a person with standing, the court will issue the summons. The court held that the first stage does not require ASIC to afford natural justice to a potential examinee. This stage is only concerned with the standing of the applicant receiver, which, by its very nature, does not sufficiently affect the interests of a potential examinee. The eligible applicant may decide not to apply for a summons at all or, alternatively, may only seek a summons in relation to some of the potentially examinable persons.

The court went on to confirm an earlier decision that held that even the issue of an examination summons may not have an adverse impact on all potential examinees, given that the examination is designed to enable the liquidator to gather information about the affairs of the company.

As to the failure to take account of relevant considerations, the court held that a potential examinee would not be expected to provide any information to ASIC about the questions ASIC was required to consider. ASIC is required to consider the relationship the applicant has with the corporation and, possibly, with the person who may be examined. The court agreed with earlier decisions, in deciding that, ordinarily, the challenge to the issue of an examination summons on the ground of improper purpose will not arise as part of ASIC's considerations. Rather, such a challenge will take place in relation to the orders of the court.

The court also identified the impracticality of the regime that Mr Saraceni proposed.

Comment

This case confirms that ASIC has the power to grant receivers and managers standing to commence the examination process, and there is no obligation to notify potential examinees of its decision or involve them in the process of making that decision.

In the context of a mandatory examination of directors and officers under s596A of the Act, the options available for opposing an examination seem to be limited to seeking to stay the examination orders on the basis that the application is an abuse of the court's process.

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