Court finds Corporations Act requirements abrogates penalty privilege under an examination summons

Section 596A of the Corporations Act (Act) provides for the summoning of a person (officers and former officers) for examination about a company’s affairs when the company is, in summary terms, under administration, being restructured or wound up.

The persons who may make such an application include the Australian Securities and Investments Commission (ASIC) or a company’s liquidator, administrator or restructuring practitioner. The purpose of such examinations is to obtain information about the company’s assets and liabilities and explore any potential claims against the company’s directors.

The power is wide following the High Court decision of In Walton & Anor v ACN 004 410 833 Ltd (Formerly Arrium Limited) (In Liquidation) & Ors [2022] HCA 3, where the High Court allowed an application by shareholders to publicly examine the former directors of a company and expanded the category of persons who may, subject to ASIC approval, examine the directors of a company.

Conduct of an examination and the production of books

The recent decision of Deane, in the matter of MSB Capital Holdings Pty Ltd (in liq) [2023] FCA 919 (MSB Holdings) considered s. 597(d) of the Act.  S. 597 of the Act is as follows:

“A person who attends before the Court for examination must not… (d) without reasonable excuse, refuse or fail to produce books that the summons requires him or her to produce.”

Section 597 of the Act therefore, amongst other things, requires the production of “books” at the examination. Books under the Act is widely defined to include records and documents.

Penalty privilege

Penalty privilege is distinct from the more commonly referred to privilege against self-incrimination. The privilege against exposure to penalty operates to excuse a person from being compelled to answer any question, or produce any document, if the answer or the production would tend to expose that person to a penalty: Australian Securities and Investments Commission v Mining Projects Group Ltd (2007) 164 FCR 32.

In the MSB Holdings case, during an examination, a director refused to produce certain documents because producing those documents might expose him to being found liable for a penalty under the Act. This is commonly known as “penalty privilege” or the privilege against exposure to penalty.  The director’s position was that this was a reasonable excuse.

Background

At an examination before a Judicial Registrar, a director of MSB Holdings said he was entitled to refuse to produce certain documents as those documents would expose him to being found liable for a penalty under the Act. This position was opposed by the liquidators of MSB Holdings on the basis that s. 597 of the Act had “abrogated” (repealed) the right to rely on penalty privilege to refuse to produce documents. The Judicial Registrar referred the issue for judicial interpretation.

In contrast to section 597(12) of Act, which expressly states that a person is not excused from answering a question put in the examination on the ground that the answer might tend to incriminate the person or make them liable to a penalty, no such express abrogation in relation to incriminating books and records is included in section 597 of the Act. The Court was required to consider whether s. 597 of the Act impliedly abrogated penalty privilege in relation to books and records to be produced under an examinations summons in the absence of an express provision to that effect.

The decision

Following a detailed consideration of the history and law, the Court held that s. 597(7)(d) of the Act impliedly abrogates penalty privilege under a s. 596B summons and the director was required to produce books at the examination.

The rationale for the finding was as follows:

• Following a decision of Migration Agents Registration Authority v Frugtniet (2018) 259 FCR 219, the privilege is the “lesser penalty privilege” and the privilege against self-incrimination is the “greater privilege” and more “fundamental right”.
• Penalty privilege is not a substantive rule of law nor is it an important common law immunity such that it is not to be construed as having been abrogated in the absence of clear words or a necessary implication to that effect.
• It followed that the determination of whether the penalty privilege has been abrogated is a matter of construing the legislation.
• The only ability to avoid production of books under s.597(d) was a “reasonable excuse”;
• The case law did not support the proposition that a claim for penalty privilege was a reasonable excuse. It would defeat the purpose of the statutory scheme if a summoned person could resist compliance using this as a reasonable excuse and to find otherwise gives penalty privilege an importance that “contradicts or diminishes the operation of the Act and the achievement of its purposes”.
• A summons to produce documents is consistent with the purpose of the statutory scheme, being to e.g. enable a liquidator to investigate whether there has been misconduct in relation to the corporation.

Takeaway

The decision is an important clarification of the law in relation to examination summonses and will be welcomed by insolvency practitioners who conduct them for the purpose of exploring the conduct of relevant officers.

Unlike the privilege against self-incrimination, penalty privilege is not a fundamental right and officers, and former officers, need to understand their obligation to produce books related to the company in relation to which they are being examined, regardless of whether those documents could expose them to a penalty.