This week's TGIF considers the decision of
Kimberley Diamonds Ltd, in the matter of Kimberley Diamond
Company Pty Ltd (in liq)  FCA 1016 in which the Court
refused to allow the mandatory examination of a liquidator under s
In July 2015, administrators were appointed to a company which
operated a diamond mine. A marketing campaign in respect of the
mining operations of the company commenced shortly after the
In their report to creditors, the administrators stated that it
was their view that a sale of the business was in the best
interests of creditors. They explained that diamond prices had
dropped due to a major bankruptcy in the diamond industry which had
caused market disruption. Further, the Western Australian
government had recently introduced a levy which required the
Company to pay a significant amount in respect of the levy.
In August 2015, the sale process was continuing and the
creditors resolved that the company be placed into liquidation. The
administrators were appointed as liquidators of the company. In
November 2015, the liquidators reported that the sale campaign had
been unsuccessful and, as significant costs were being incurred in
connection with the ongoing occupation of the mine, they had issued
a notice of disclaimer in relation to the mine. That disclaimer was
Following the disclaimer, an examination summons pursuant to s
596A of the Corporations Act was issued at the request of
the sole shareholder of the company. The summons required one of
the liquidators to attend for examination. The shareholder's
stated purpose for the examination was to investigate the sales and
marketing process undertaken in respect of the mine.
The liquidator challenged the summons on the basis that it was
an abuse of process. He argued that the examination would place an
unnecessary imposition on him in circumstances where there was no
realistic prospect of the examination having any practical
Justice Gleeson held that the examination summons was an abuse
of process and ought to be stayed. His Honour was not satisfied
that the examination would fulfil the purpose of s 596A and held
that the examination, if permitted, would involve a substantial
intrusion into the liquidation by examining the liquidator in the
course of his conduct of that liquidation.
In coming to that decision, his Honour reviewed the relevant
authorities and examined the special position of liquidators. His
Honour held that:
Previous cases have stated that an examination under s 596A is
designed to serve any purpose that will benefit the company, its
creditors, its members or the public generally.
Liquidators are under no duty to obtain the best possible price
for the company's assets.
The investigation of the conduct of a liquidator is a
supervisory function of the Court. The Court exercises that
supervisory function by ensuring a liquidator uses their powers
impartially and for a proper purpose.
The Court will not permit its officers to be sued by a creditor
or have an inquiry made unless it is satisfied that there is some
prima facie evidence of wrongdoing.
An examination of a liquidator should not be permitted to
proceed unless there is reason to believe that the examination my
fulfil the purpose of s 596A - being to benefit the company, its
creditors, members or the public generally.
In this case, there was no positive evidence of the
Fraud, dishonesty or other misconduct;
Any conflict of interest or lack of impartiality in the conduct
of the sales process;
The sales process having been conducted for any improper
Any particular flaw in the liquidators' exercise of
commercial judgment with respect to the disclaimer of the mine;
That there may have been a more favourable outcome to the
liquidation if the sales process had been conducted
This case makes it clear that it is the Court's role to
supervise the conduct of liquidators and the Court will not permit
creditors or shareholders to examine liquidators unless there is
some actual evidence of wrongdoing.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The article considers protection afforded to directors by section 440J during administration, in light of this decision.
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