No One Expects the Liquidator’s Inquisition: A Director’s Guide to Public Examination

Table of contents:

The Liquidator’s Public Examination: Our Take

When companies become insolvent and go into Liquidation, Directors may find themselves called upon to explain what went wrong to the Liquidator. This will usually happen informally at first, but may progress to a formal Court-supervised process known as ‘Public Examination’. In this process, Directors and other relevant individuals are questioned under oath about company affairs and their own conduct. 

In this guide, we explain how Public Examination works, the rights that Directors have throughout the process and the obligations that they have during the process. 

What is a Liquidator’s Public Examination?

An Examination, in the context of corporate insolvency, is a court-ordered inquiry into the affairs of the company looking into how it was managed, what may have caused it to fail, how Directors behaved and where company assets have gone. It is often referred to as a Liquidator’s Examination as they are the individuals who most commonly use the process, but as we explain below, it can be used by a broad range of applicants. 

Liquidator Examination has its basis in two key sections of the Corporations Act 2001 (Cth) (henceforth,‘the Act)’: 

• Section 596A. This section requires the Court to examine certain people where an application has been made by an “eligible applicant”. The people who may be examined in this way are Officers (including Directors) and Provisional Liquidators, who were in their position within two years of the date of winding up. 
• Section 596B. This creates a discretionary power of the court to examine any person who has taken part in the examinable affairs of the corporation and may be guilty of misconduct, or who may be able to give information about the corporation’s examinable affairs. 

These sections are supported in their operation by section 597A setting out when the Court can require an affidavit be submitted. 

The individual is usually examined by the Liquidator in front of a Registrar. Note as a Court process, it is by default open to the public with journalists or even competitors able to attend. Of course, the Court can use its powers to close proceedings to the public where satisfied this is required (we discuss this matter in detail below). 

A Short History of the Examination Power

In The Scope and Effectiveness of Examinations Pursuant to Division 1 of Part 5.9 of the Corporations Law, Anne Paltridge, a former Australian Securities Commission solicitor gives a useful overview of the historical antecedents to the Liquidator’s Examination.

In short, the Liquidator’s examination power can be traced back to English law and the Joint-Stock Companies Winding Up Act of 1844. This first gave the Court the power to examine anyone capable of giving information about a company’s affairs. The main goal was to locate and recover assets for the benefit of creditors and contributories, while the exposure of Officer misconduct was secondary. A later English Act, the Companies (Winding-Up) Act 1890 introduced the role of the ‘Official Receiver’ who investigated and reported on the causes of failure and any suspected fraud. Examinations under the 1890 Act were used by the Official Receiver not simply to gather facts, but to test allegations of misconduct in open court.

These concepts were adopted into Australian Commonwealth legislation through the Uniform Companies Act 1961. Section 249 permitted private information-gathering examinations initiated by liquidators; section 250 authorised public examinations following a fraud report; and section 367A empowered the Corporate Affairs Commission (a state-based ancestor of ASIC) to examine suspected breaches of duty privately. 

In 1981, section 541 of the Companies Code unified these provisions into a single Examination regime. This new section shifted emphasis toward public hearings and compulsory testimony. These reforms are largely captured in modern Australia’s public-examination framework, combining asset recovery, information gathering, and the exposure of corporate misconduct into a single, court-supervised procedure.

Perhaps the most significant change in the Corporations Act 2001 (Cth) is the expansion in the range of ‘eligible applicants’ so that it is not solely a Liquidator-driven process any longer (this is discussed in detail below). 

What is the Purpose of the Liquidator Examination?

Liquidators generally conduct Examinations, as a fact-finding mission, but also sometimes to uncover Director misconduct. Given the broad remit of the examination power set out in the Act, the Liquidator can use the process to: 

• Trace company assets or transactions. Often the Liquidator is looking for what might be recovered as uncommercial transactions, unreasonable director-related transactions, or unfair preferences
• Question Directors on whether they have complied with their duties and/or allowed insolvent trading to occur
• Examine the conduct of professional advisors (for example, to review the conduct of potential phoenix operators). 

Usually, the Liquidator is required to pay for the Examination themselves and attempt to recover the costs in the eventual winding up. Where there are no assets left, cost recovery may still be available by applying to the Assetless Administration Fund. Sometimes there may be external litigation funders willing to fund this process as well. 

Because the Liquidator bears the cost of Examination themselves, this is usually something that is treated as a last resort; there is every incentive for Liquidators to try and get the information voluntarily. 

While the power to conduct Public Examinations is wide-reaching, it should be noted that it is still subject to limits: Most importantly,  it should not be used for an improper purpose or in an abuse of power. For example, it is impermissible for the Liquidator to use the process as a plain fishing expedition: That is, without any clear suspicion and simply to see if there are any matters that may be of interest. We discuss the purposes of Examination in further detail below. 

How Does Examination Differ from Voluntary Disclosure?

Directors should note that if voluntarily asked to talk to the Liquidator, or answer questions, their responses are of legal importance. Any statements made informally could later appear in formal proceedings, so it may be worth getting legal advice before doing so. 

It is also worth noting that there is no immunity to criminal or civil penalty proceedings when saying something in an informal discussion. This means that the Liquidator can use Director admissions directly in building a case against a Director or reporting them to ASIC. 

How Does a Liquidator Carry Out an Examination? 

The Examination usually occurs after initial investigations, i.e., once the Liquidator has had a chance to review the books and records. Where they see missing assets, inconsistent accounting or dodgy-looking transactions, they may feel applying for an Examination is in order. 

The application must be made in writing. If the application pertains to Examination under section 596B, it must be accompanied by an affidavit (596C) making out the case for that person to be examined. 

Note, this affidavit is, by default, not open for inspection by the Director or anyone other than the Court (section 596C(2)). This is so the Director does not know precisely what they are to be questioned about, allowing the Examination to proceed freely. The Director can only see this affidavit by court order, with an arguable case that the examination summons has been made for an improper purpose or as an abuse of process. 

Once the Liquidator has made their application, they must give written notice of the Examination to as many creditors as reasonably practicable and to each eligible applicant (See section 596E). 

It is also worth noting that people who are not the subject of the Examination Summons, may be required to produce books or records (section 597(7)). 

During the proceedings, the Director can be asked questions by both the Liquidator (or their legal representative) and the presiding Registrar. The Registrar will generally ask procedural questions only, and is there to ensure that the process is conducted in a fair manner. 

What Can the Examiner’s Questioning Cover? A Director’s Personal Assets?

The Examination can cover the company’s ‘examinable affairs’ which, under section 597(5B), includes: 

• The company’s property and transactions
• Their dealings with “connected entities”. This includes corporations, natural persons, partnerships and trusts
• Actions taken by Directors and Officers before a resolution of insolvency was made
• Any transfers of assets or payments out of the company. 

If the examination summons is considered to go beyond this scope, the Court can set it aside. It can also order deletion from the summons of the request for documents that go beyond the scope of ‘examinable affairs’, or are otherwise oppressive. 

As most insolvent companies in Australia will be small-to-medium sized enterprises, the pot for potential recovery is always likely to be small. This means Liquidators are often interested in whether they can make claims against a Director’s personal assets. 

Given the breadth of section 597(5B), as set out above, it is clear that, as a connected party, an Examination can look at the affairs of the Director personally. This could include questions about personal guarantees, a Director’s loan account and any dispositions to the Director as the company moved towards insolvency. 

It is also worth noting that the Director cannot pre-empt this by routing payments through a trust, spouse or other individual: These would all be ‘connected parties’ and their affairs potentially subject to Examination.

Who, Besides Liquidators, Can Initiate a Public Examination?

As mentioned at the start of the article, we usually only talk about Liquidators in the context of Examinations. However, section 596A of the Act makes a broad range of individuals “eligible applicants” including ASIC, Provisional Liquidators, all External Administrators and anyone “authorised by ASIC”. 

In this section, we discuss how this last category, individuals “authorised by ASIC” and how it was recently interpreted in the High Court decision in Walton v ACN 004 410 833 Limited (formerly Arrium Limited) (in liquidation) [2022] HCA 3 (Walton). 

According to Walton, even creditors and shareholders (i.e., ‘Members’), if authorised by ASIC, can initiate an Examination. If a creditor or shareholder wishes to apply under this section, they need to first approach ASIC for written authorisation. ASIC then assesses whether the proposed examination would serve a proper public purpose, such as promoting compliance with the Act, uncovering corporate misconduct, or protecting investors. Only after ASIC grants that authorisation does the applicant become an eligible applicant, allowing the Court to issue a compulsory Examination summons.

ASIC is essentially there to stop abuse of process. Understandably, when a company is insolvent creditors and shareholders are often pursuing multiple litigation avenues against Directors, the ‘ASIC barrier’ is intended to stop misuse of the process by shareholders and creditors. 

What Was Decided in Walton?

Walton concerned the collapse of Arrium Limited, a large steel and mining company placed into administration in 2016 and subsequently wound up. In 2014, a group of shareholders had purchased shares during a raising of share capital, the value of those shares were soon impaired, and Voluntary Administration and Liquidation followed soon after. The shareholders wished to examine a former Director of the company to support potential class action litigation around the propriety of the share raising and associated financial reporting at the time. 

Reversing a decision of the Supreme Court, the New South Wales Court of Appeal found that such an Examination was not permitted, as such an Examination was not “to the benefit” of Arrium or its creditors, and was instead for a purely private purpose of a select group of shareholders. The question for the High Court was, does this involve an illegitimate purpose or an abuse of process?

The Court held that the shareholders’ purpose, investigating potential misconduct to assess a class action, was not improper. The Court found that section 596A is intentionally broad in scope and does not, as prior versions of this power did in earlier legislation, restrict the purpose of examinations to ones that benefit the company and its creditors. 

In a practical sense this means, for directors, the likelihood of being summonsed has increased, even when the liquidator is not actively pursuing claims. 

What Obligations do Directors have in Public Examinations?

The main requirements for Directors are to: 

1. Appear at the Examination. Once summonsed, Directors must appear on the scheduled day and time and continue to do so until it is over. Failure to appear can lead to a warrant for arrest or potential contempt proceedings. Any legitimate reasons for non-attendance should be advanced beforehand to get an adjournment
2. Produce the Books. This means that the Director must provide all matters set out in the summons, including accounting records and ledgers, bank statements, invoices, and receipts. It also includes any board minutes or correspondence, and any relevant legal documents (e.g., loan agreements, contracts or trust deeds).
3. Assist the Liquidator. As well as their duty to respond to the questions put to them in the Examination, directly and truthfully, it is worth bearing in mind that the general obligations of Directors to Liquidators still apply. Under section 530A of the Act, the director has an obligation to continue to assist the liquidator including delivering records, explaining entries and identifying assets.

What Rights Do Directors Have During Examination?

In addition to their duties outlined above, Directors also have various rights that apply during examination. 

The Right Against Self-Incrimination

As mentioned above, there is no blanket or automatic right to refuse to answer questions on the grounds that it may incriminate. Nevertheless, if the Director believes a response may incriminate them, they can ‘claim privilege’, identifying that the answer may incriminate them. If the Liquidator still requires an answer, then the Director must provide it, but it cannot be used in proceedings for criminal or civil penalty. 

There are three important things to note here: 

• Their answers can be used against them in civil proceedings by the liquidator, ASIC, or another party, if those proceedings (e.g., for insolvent trading) are for purely compensatory damages, and not in pursuit of a penalty. 
• The wording of this section means there is no “derivative use” immunity. This means that the Liquidator, ASIC, or anyone else can use those answers, indirectly, as a prompt to investigate further and find independent evidence of Director wrongdoing. 
• Answers are given under oath or affirmation, and under section 597(7), Directors must not make a statement that is false or misleading in a material particular, and can be punished for doing so. 

In a liquidator’s public examination, examinees often preface answers with the word “privilege” to preserve their right against criminal self‑incrimination. This practice signals to the court and the liquidator that the witness is asserting a privilege and does not intend to waive it by answering. 

Legal Professional Privilege

When a Director consults a lawyer prior to the Examination, legal professional privilege applies to those discussions. This means that the Director does not have to produce documents outlining legal advice they personally received, or answer questions about what their lawyer told them. 

Note, the usual restriction on legal privilege applies: There is no privilege in respect of communications that further a criminal or fraudulent purpose. 

Note also, any disputed claim of privilege will usually be considered in a separate hearing. 

Representation

The Director has a right to be represented by a lawyer, if they wish. They also have a right to obtain a transcript of proceedings. The Registrar will also be likely to direct the examinee to read the transcript and sign it to ensure that errors in the transcript can be corrected promptly. 

Who Bears the Cost of Examination?

As mentioned, the Liquidator (or whoever else is applying) will bear the cost of the application itself. Ordinarily, the Director or other Examinee will bear their own costs of appearing, including preparing records, obtaining advice, and attending the Examination. This reflects the general obligations of Directors to assist Liquidators with the winding up process. 

However, there are two ways in which the Court may make an exception to this: 

• Under section 597B of the Act, the Court can order that the applicant (i.e., the Liquidator) bear the costs of the Director or any other person ordered to appear where the summons or any order under it was  “without reasonable cause”. 
• Appealing to the inherent jurisdiction to order compensation or cost reimbursement for the cost of complying with a court order, where it is in the “interests of justice” to do so. 

An important distinction has been made in case law between ‘insiders’ and ‘outsiders’ when it comes to cost recovery. ‘Insiders’ are Directors, Officers, and Company Management and employees. ‘Outsiders’ are anyone who is not an insider including business advisors, consultants, external accountants and auditors. 

Following Re Equiticorp Finance Ltd; Ex parte Brock (No 2) (1992) 10 ACLC 382 (‘Brock 2’), it has become common for the Court to more readily award the costs of Examination when an ‘outsider’ is examined. In McVeigh v Brumley [2009] VSC 668, Associate Justice Gardiner  summarised the position as follows: 

• An Examinee who is not directly involved in the management of the company is entitled to the costs of attendance and gathering documents
• There is no similar entitlement to the costs for legal representation, nor is the Examinee entitled to their usual hourly rate or any rate that includes a profit margin
• There is no allowance of costs for consulting a solicitor, or familiarising oneself with the documents and preparing for examination. The emphasis is on ‘out of pocket’ expenses. 

A consequence of this insider/outsider distinction is that the Examiner should be careful in preparing their application and affidavit in who and what they request if they want to avoid paying substantial costs. 

Are Examinations Always Public?

They are usually called Public Examinations for a reason: Section 597(4) is clear that, unless by reason of “special circumstances” it is desirable that proceedings be made private, Examinations are to be held in public.

We have already mentioned that the Court might order that certain aspects of the Examination be held in private, such as any consideration as to whether legal privilege applies to documents. Similarly we discussed the possibility that certain aspects could be made confidential for reasons of commercial secrecy. 

In recent case law there has been a recognition that modern insolvencies frequently intersect with parallel civil or criminal investigations, and this might, in some cases, be grounds for an Examination to be held in private: The rationale being that publication of matters that come up in the Examination could prejudice a future jury. 

For example, in the infamous Plutus Payroll case, an Examination was held in private in light of the rapidly impending prosecution of the Directors. More recently in Bazzo v Kirman [2020] WASCA 43 the Western Australia Court of Appeal addressed the issue.

In that case, a sole Director of an insolvent company was being investigated by the ATO and other entities, and the Court accepted that there was a real likelihood that the Examinee could face charges. 

The Court found that the possibility or even likelihood of future prosecution is not, in itself, enough to be “special circumstances” that would override the default position that Examinations are public. This was not as it was in the case of Plutus Payroll, where the prosecution was about to commence a month after the Examination. 

Furthermore, the Court emphasised that the presiding officer (i.e., the Registrar) has a broad power to give directions in the course of the Examination to deal with any improper questioning. 

How to Prepare for the Examination

Once the Director has received their summons, it is crucial that they prepare carefully for the Examination. It is worth bearing in mind that any unhelpfulness from the Director (both in producing required documents and in answering questions at the Examination) may well encourage more rigorous investigation from the Liquidator. 

It is also worth bearing in mind that, as ‘fishing expeditions’ are not permitted, and the Liquidator has to fund the process themselves, receiving the summons should alert the Director that Liquidator has serious concerns. 

We recommend following the steps below. 

Engage an insolvency solicitor early

Examination is a court proceeding, and consulting counsel is just as important as in any civil or criminal proceeding. It is therefore important to retain an experienced insolvency lawyer as soon as the Director receives the summons (and preferably earlier). They can:

• Review the scope of the summons and negotiate over requests that are too broad. For example, if the summons requires production of documents about purely personal matters that are not “examinable affairs”, this could be struck out.
• Assess whether a request should be made for parts of the Examination to be kept confidential. 
• Assess whether there are any grounds for inspecting the affidavit from the Examiner that accompanied their application. This will likely shed light on what the Director will be asked about (and for that reason, inspection will usually be denied)
• Identify potential privilege issues and prepare responses accordingly. For example, if documents requested include legal advice there may be an open question whether this advice was to the Director personally (and therefore privilege can be claimed) or the company (in which case, the Liquidator, having taken over the company, may hold this privilege).
• Brief the Director on the likely direction of questioning and strategies for responding clearly. For example, a solicitor will advise on which topics may potentially incriminate the Director and advise them on how to claim privilege in response. 
• Assist the Director in the Examination by appearing as their representative (permitted under section 597(16)).
  

Notify D&O Insurer

Directors should immediately contact their  Directors and Officers (D&O) insurer and broker. Public examinations often fall within the “investigation” or “inquiry” coverage of D&O policies, which can cover legal representation costs. Failing to notify promptly might jeopardise cover.

Note, following Walton above, it may become more common for Directors to be examined by shareholders in preparation for litigation. This may have an impact on coverage, so wording needs to be checked carefully. 

Directors should provide the insurer with a copy of the summons and ask if the examination qualifies as a “Claim” or “Inquiry” under the policy wording.

Before a crisis arises, the policy should be reviewed with the broker or legal adviser to confirm whether Examination-related costs are included. 

Preserve and Collect Records

The Director must not delay gathering all records listed in the summons. Commonly requested materials include:

• Financial ledgers, general journals, and trial balances.
• Bank statements, cheque butts, and remittance records.
• Business Activity Statements (BAS), PAYG summaries, and superannuation reports.
• Board packs, meeting minutes, and internal emails.
• Loan agreements, related-party transactions, and guarantees.
• Asset disposal records and trust/SPV documents.
• Intercompany or joint-venture agreements.
  

Note also that, following Walton, it may be that Examinations start requesting a broader range of documents. For example, it may be that shareholders seek information on any insurance policies held by the company in order to assess the viability of litigation (i.e., the likelihood of getting a pay out). For example, in Pearce, in the matter of Bandiera Holdings Pty Ltd (Receiver Appointed) (in liquidation) v Bandiera Holdings Pty Ltd [2022] FCA 876, the Federal Court considered whether 596B of the Act could cover the existence of a professional indemnity insurance policy. In that case, the potential Examinees were business advisors to the company in liquidation. 

The Court rejected the argument that such matters could be refused for reasons of commercial sensitivity; Where necessary, the Court can order that the details of the policy be kept confidential. 

For an in-depth discussion of requesting insurance information in this context, see “Liquidators’ Public Examinations – Access to Insurance Information” by Adam Pomerenke and Bryan Horrigan.

Prepare a Timeline 

Directors should work with their lawyer to create a concise chronology of key events leading up to insolvency: This includes cash-flow crises, major contracts, asset sales, dispositions to directors, or when professional advice was sought. This will help the Director to stay consistent and confident under questioning and reduces the risk of misleading the Court. 

It is often useful for Directors to identify “solvency inflection points”, such as when the company began missing payments or lost key clients. Liquidators may test Directors’ awareness of insolvency at those times in order to consider any potential claw-back of assets from the Director as an unreasonable director-related disposition or uncommercial transaction. 

5. Establish a Privilege Protocol

Directors should set up a protocol for dealing with privileged documents. Before producing anything, Directors should have the lawyer:

• Review and pre-mark documents that contain legal advice.
• Prepare a privilege log listing documents withheld on that basis. Note that where the document mixes legal and general business matters, privilege may not apply.
• Train the Director on how to assert self-incrimination or penalty privilege verbally during questioning to all questions asked.

How to Give Evidence on the Day

Public examinations are formal, and transcripts can later be used in court proceedings, therefore, it must be taken seriously. We recommend that all Examinees proceed as follows:

Answer Truthfully and Directly

Always tell the truth. Lying under oath or affirmation is perjury and can carry criminal penalties.

Keep answers short, factual, and confined to the question asked. Do not volunteer extra detail or speculate (e.g. “I think it might have been…”). If you genuinely don’t recall, say so. Do not guess and if your memory isn’t strong enough to answer positively you could answer: “I don’t remember”.

Claim Privilege Where Appropriate

If a question could incriminate you or expose you to penalties, state clearly:

“I claim privilege against self-incrimination (or penalty) in respect of that question.”

Where you have representation, counsel can then intervene to clarify the claim. If the Registrar directs you to answer regardless, immunity against civil or criminal penalty under section 597(12) will apply.

If you fail to claim privilege before answering, you lose that protection. 

Protect Legal Professional Privilege

Do not reveal the content of legal advice or discussions with your lawyer. If asked about them, say:

“That involves legal advice I received. I claim legal professional privilege.”

Where you have a lawyer, let your lawyer address the issue on your behalf.

Handling Documents

Produce only what the summons requires. Bring an indexed bundle, and mark any privileged documents clearly. If you assert a lien, state it on record but still hand over the materials for inspection.

Taking Breaks and Conferring with Counsel

You may request short breaks to confer privately with your lawyer,  for example, before answering a complex or privilege-sensitive question. This is normal and reasonable.

The Liquidator’s Public Examination: Our Take

Public Examination is a powerful tool available to External Administrators (though usually used by Liquidators) to gather information relating to a company’s insolvency, and to investigate any wrongdoing from Directors. Given that Examinations are now clearly within the scope of shareholder and creditor application, it is important that any Director is prepared for the possibility of an Examination. 

In the ordinary case, Directors should seek to avoid an Examination by seeking legal advice upon the appointment of a Liquidator, and being compliant with legal obligations to the Liquidator such as submitting a ROCAP and providing books and records of the company in liquidation.