In a recent decision, the Federal Court of Australia considered when a summons for examination can require the production of any professional indemnity insurance policy against which the company might have a claim, even in circumstances where the examinee asserts that any potential claims against it were weak[1]. Useful further guidance was also provided about when an examinee may recover costs of compliance with a summons.

Key takeaways

• Liquidators only need to produce sufficient evidence to demonstrate the possibility of a cause of action against a third party in order to support a summons for examination. It is a relatively low bar to obtain an examination summons and it is not necessary to prove that the company has a good cause of action against an examinee.
• Commercial sensitivity of documents without more is not a ground to refuse issuing a summons. Confidentiality concerns may be addressed by appropriate undertakings that allow a liquidator to use the material and give the examinee some comfort.
• The Court may make orders to reimburse an examinee for the costs of searching for and producing documents to comply with a summons. However, the scope of the costs that can be claimed is generally limited.
• For an examinee to claim costs of compliance with a summons, it must produce clear and precise evidence as to the nature of the work undertaken and the time involved. Internal work-in-progress documents may not be sufficient.

Background

The Liquidators of Bandiera Holdings Pty Ltd (Company) obtained an examination summons under s 596B of the Corporations Act 2001 (Cth) requiring HLB Mann Judd (SE Qld) Pty Ltd (HLB Mann Judd), an advisory firm, to produce documents relating to any advice given to the Company, and its director, concerning a business purchase by the Company.

HLB Mann Judd substantially complied with the summons, but sought to set aside the requirement to produce any professional indemnity insurance policy held. Specifically, HLB Mann Judd argued that:

1. The summons was not issued for a proper purpose and was a ‘fishing exercise’ (Ground 1), and,
2. As any potential claims against it were weak, the Court should exercise its discretion to refuse the production of those documents given their confidential and sensitive nature (Ground 2).

HLB Mann Judd also sought orders that it be paid its costs for complying with the summons. HLB Mann Judd produced 207 documents within 24 categories referred to in the summons and initially claimed that it took 42.2 hours to identify and locate the documents. Using the usual hourly charge out rates of the relevant employees, HLB Mann Judd claimed that the costs incurred were $11,810 plus GST.

Decision

Ground 1

The Court accepted that the advice provided by HLB Mann Judd was relevant to the examinable affairs of the Company, as was the existence and value of any potential claims which the Company may have against HLB Mann Judd. It also accepted that there was sufficiently close connection between alleged misconduct of the director and that advice to justify an investigation into whether HLB Mann Judd was involved in the director’s alleged breaches. In view of this, the Liquidators had established a possible claim or cause of action might exist against HLB Mann Judd which justified the production of any relevant insurance.

The Court emphasised that it is not its role when considering issuing an examination summons to discern whether a company has a good cause of action against the examinee, and that the application ought not become mini trials of the examinees’ potential liability.

Ground 2

The Court rejected HLB Mann Judd’s submission that the circumstances raised by the Liquidators were not sufficiently strong to warrant the exercise of the Court’s discretion requiring it to produce its policy of insurance at the time, and that production could be reconsidered if some stronger case were to be shown to exist in the future.

The Court reiterated that HLB Mann Judd had a sufficiently close connection to the Company and the director in relation to the impugned transaction. The Court accepted that it may be that no claim is ever established, but as the evidence raised a real and genuine possibility that a claim might exist any policy of insurance should be produced as it would be valuable to the Liquidators in determining whether to investigate further.

Any concerns about commercial confidentiality of the insurance policies was sufficiently mitigated by the Liquidators giving an undertaking that any policy produced would only be accessed by the Liquidators, the solicitors and counsel of the Liquidators, any actual or proposed litigation funders of the Liquidators (if confidentiality undertakings were given), any judicial officers, and their administrative staff.

Costs of producing documents

The Court refused to make orders for HLB Mann Judd’s costs at this stage as it did not have sufficient evidence before it to justify that the time and costs claimed by HLB Mann Judd, and there was a possibility more documents would be required to be produced in the future.

Of the actual incurred costs of $11,810 plus GST, HLB Mann Judd claimed $4,050 plus GST in costs from the Liquidators. HLB Mann Judd supported its claim within internal work-in-progress documents, which only broadly provided evidence of HLB Mann Judd’s claimed costs.

Cases confirm that an examinee cannot claim costs for:

• Familiarising themselves with the documents

• Conferring with their staff, associates or legal advisors

• Obtaining information from others that might be used as evidence in the examination, or

• An hourly rate which includes a profit margin.

Ultimately, the Court accepted the Liquidators’ submission that the Court did not have before it the evidence that justified the number of hours claimed by HLB Mann Judd. To obtain orders for its costs, it would have been necessary for HLB Mann Judd to produce more precise and clear evidence as to the actual amount of work undertaken, including what work was undertaken and the circumstances in which it was done. The Court was not prepared to accept internal work-in-progress documents as sufficient evidence.

Nonetheless, the Court accepted that a further application for costs may be made by HLB Mann Judd in the future.

Conclusion

It is common for examinees to object to the production of insurance policies, particularly where those policies often impose extensive confidentiality undertakings on the insured. The Bandiera Holdings decision confirms that insurance policies should be produced in public examinations notwithstanding confidentiality objections. For liquidators, offering appropriate confidentiality undertakings in response to objections is a practical way of obtaining documents, minimising Court applications and improving their position on costs of any such applications.

This case also demonstrates that liquidators only need to demonstrate the possibility of a cause of action against a third party in order to support a summons for examination in relation to relevant documents such as insurance policies. Public examinations are investigations and not mini trials of any potential claims against an examinee.

For an examinee to claim costs of compliance with a summons, having regard to the general principles set out above, it must produce clear and precise evidence as to the amount of work undertaken and the time it took to complete such work, noting that not all expenses incurred are claimable.

[1] Pearce, in the matter of Bandiera Holdings Pty Ltd (Receiver Appointed) (in liquidation) v Bandiera Holdings Pty Ltd [2022] FCA 876