Mandatory Examinations under Section 596A: Engaging the Judicial Power of the Commonwealth and a “Matter” in the Constitutional Sense

Section 596A of the Australian Corporations Act 2001 (Cth) provides a mechanism for an “eligible applicant” (usually an administrator, liquidator, or the Australian Securities and Investment Commission) to examine current or former officers or provisional liquidators of a corporation in regards to that corporation’s examinable affairs.  This power, along with the discretionary examination power in s 596B, is a powerful tool to aid liquidators in the performance of their statutory functions and powers, including investigating and locating the assets of the corporation and any rights or obligations that may be realisable.  There are analogous provisions in the insolvency regimes of most developed insolvency jurisdictions.  The constitutionality of s 596A was recently unsuccessfully challenged in two proceedings heard together before the High Court of Australia, Palmer v Ayres and Ferguson v Ayers.

A s 596A examination is conducted under the supervision and control of the court.  The examinee must not make false or misleading statements or refuse to answer questions, but may claim the privilege against self-incrimination before giving an answer, thereby protecting him or herself from the use of that answer against him/her in criminal or penalty proceedings.  The signed written record of the examination may otherwise be used as evidence against the examinee in any legal proceedings.

The plaintiffs in Palmer v Ayres and Ferguson v Ayers were former directors of Queensland Nickel Pty Ltd (“QN”), including Australian mining magnate turned Federal Member of Parliament, Clive Palmer.  QN was wound up in insolvency by the Federal Court of Australia, with Special Purpose Liquidators also subsequently appointed (“the SPLs”).  The SPLs obtained from the Federal Court orders for examination of Palmer and Ferguson pursuant to s 596A.  Palmer and Ferguson each filed a writ of summons in the High Court, alleging that s 596A was invalid as contrary to Chapter III of the Constitution in that it confers non-judicial power on federal courts and in any event does not constitute a “matter” as required by the Constitution, because a s 596A examination is an inquisitorial or investigative exercise.

The Court unanimously upheld the constitutionality of s 596A.

• The majority focused on the concept of a “matter”, and held that a matter can exist even though a right, duty or liability has not been, and may never be, established; only a claim is necessary (at [27]). The s 596A power is forward-looking: it is a procedure that gives the liquidator the right to seek to establish, and then enforce, a potential right to relief against those with liabilities to the corporation, including alleged wrongdoers (at [30]-31]).  Furthermore, the making of a summons order by a court decides and declares the rights and obligations of the eligible applicant and the examinee in respect of the examination (at [33]-[34]).
• The majority also held that in exercising the s 596A power, the court is not involved in a fact-gathering exercise or investigative function divorced from a controversy, but is engaging in a procedure directed at the future exercise of judicial power, in aid of anticipated adversarial proceedings, analogous to other pre-trial procedures (at [36]).
• Furthermore, the majority said that, whilst a purely historical review of judicial power is not an appropriate measure to determine whether a power is constitutionally valid, nonetheless the s 596A power did have historically analogous roots. In particular, the power is analogous to the old discovery procedures (now called Norwich Pharmacal Orders) in which a Court provides disclosure of documents prior to initiation of a claim (at [38]).  Similarly, the s 596A power creates a system of discovery and the examinee’s involvement in the examinable affairs of the corporation warrants the statutory intrusion upon the examinee’s privacy (at [40]).
• Gageler J, writing separately, placed a greater emphasis on the historical nature of the judicial power, but stressed that one must have regard to the “systemic values” on which the framers drew in construing the judicial power of the Commonwealth instead of simply focusing on a historical snapshot (at [69]).  Gageler J surveyed analogous judicial powers to s 596A, both historical and contemporary (at [76]-[90] and [95]-[98]), and found that s 596A does not go beyond the judicial power so defined (at [99]-[101]).