Liquidation Monopoly: Chance avoiding a public examination, risk going to jail
Insolvency: 21 May 2025
Author: Sam Merrylees & Isabella Cesta - Our People
A recent decision by Justice Stewart of the Federal Court of Australia in Shute (Liquidator), in the matter of Modliv Pty Ltd (in liq) [2025] FCA 224 (“Shute”) serves as an important reminder to individuals summonsed to give evidence and/or produce documents in Court in relation to the examinable affairs of a company that:
- summons must be taken seriously; and
- one should think twice before deciding to ignore one.
What are public examinations?
Public examinations are formal court proceedings conducted by an external administrator of a company in open court enabling them to further investigate the company’s “examinable affairs”. “Examinable affairs” broadly capture the management, operation and transactions of a company.
Once a company enters external administration, its liquidator (or similar appointee) can apply to Court pursuant to Part 5.9 of the Corporations Act 2001 (Cth) (“Act”) to summons (or, in other words, compel) certain individuals to:
- attend Court be examined on oath or affirmation; and/or
- to produce certain documents to Court,
regarding a company’s “examinable affairs”.
Who can be summonsed?
Current officers of a company (and former officers within two years prior to the company going into external administrator or similar) can be mandatorily summonsed pursuant to section 596A of the Act.
Other individuals, such as former employees, accountants, auditors, spouses and other relatives, can also be discretionarily summonsed pursuant to section 596B of the Act, if the Court is satisfied that the person has:
- taken part in;
- been concerned in; or
- may be able to give information about,
the examinable affairs of the company in question.
What happened in this case?
November 2024
The Federal Court made orders:
- issuing a mandatory summons for examination (“Summons”) to John Tkalec (“Director”), a director of Modliv (in liquidation) (“Company”); and
- requiring the production of certain documents relating to the Company pursuant to rule 30.34 of the Federal Court Rules 2001 (Cth) (“Rules”).
February 2025
Following delays with effecting service, the Company’s Liquidator arranged for a process server to personally serve the Director with the Summons at his registered residential address. This was accompanied with a letter from the Liquidator’s solicitors setting out the Court’s requirement for the Director to produce documents by 5 March 2025, and to attend Court for an examination on 18 March 2025.
When the process server attended the Director’s address, he encountered a male (being the Director himself) who denied knowing who the Director was. This was despite the process server having previously identified the Director via a photograph shown to him by the Director’s sister. The process server left the documents at the Director’s property.
March 2025
Given the above circumstances, on 5 March 2025 when the Director failed to attend Court and produce documents, the Liquidator subsequently applied for, and was granted by the Court, orders pursuant to rule 10.23 of the Rules that the Director be deemed to have been personally served with the Summons.
The Liquidator also caused the Summons to be communicated to the Director’s last known email address and mobile number.
Later on 18 March 2025, the Director failed to attend Court to be examined, and the Liquidator applied for the issue of an arrest warrant against the Director for failing to do so, pursuant to rule 11.10 of the Federal Court (Corporations) Rules 2000 (Cth) (“Corporations Rules”). This rule deals with default in relation to examinations, and provides that the Court can issue an arrest warrant if a person who has been summoned or ordered to attend a public examination fails to do so, or fails to continue attending until the examination ends, without reasonable cause.
In determining the Liquidator’s application for an arrest warrant, Justice Stewart noted that his authority to issue such a warrant depends on proof of the following matters, summarised by Justice Halley in Goyal, in the matter of Biotech Energy Pty Ltd (Receivers and Managers appointed) [2023] FCA 653 at [34]:
- the person has been summoned or ordered by the Court to attend for examination;
- they have failed to attend or failed to attend from day to day until the conclusion of the examination; and
- their failure to attend was without reasonable cause.
Justice Stewart’s decision
Justice Stewart was satisfied that the Director had been served with the Summons, and that all reasonable steps were taken by the Liquidator to ensure the Director had notice of his requirement to attend Court to be examined. His Honour also found there to be no “reasonable cause” for the Director’s failure to attend the examination on the evidence before him.
Having satisfied himself that the conditions for rule 11.10 of the Corporations Rules were met, his Honour then considered whether he ought to exercise the Court’s discretionary to make the order for an arrest warrant, and determined to do so given:
- no discretionary factors weighed against issuing the arrest warrant;
- issuing the warrant was necessary to uphold the integrity of the examination process in the context of the liquidation of the Company; and
- the Liquidator had taken all reasonable steps to secure the Director’s attendance for examination prior to resorting to the making of the application.
Legal costs
The Liquidator also sought costs orders against the Director for his costs thrown away by reason of the examination hearing delay and the warrant application. Whilst the Court accepted that it has the powers to award such costs, his Honour declined to do so and instead reserved costs, given the application was made on an ex parte basis, and the Director was not put on notice of any adverse costs orders to be sought against him.
Takeaways
The decision in Shute serves as a timely reminder for recipients of a summons for production and/or examination to take compliance with the summons seriously, and to seek legal advice as to their rights and responsibilities. If you’ve been summonsed for production or examination, and are unsure about what to do next, speak to a member of our experienced insolvency team on (03) 8600 6000.
Shute (Liquidator), in the matter of Modliv Pty Ltd (in liq) [2025] FCA 224
https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2025/2025fca0224