Section 261(3) of the Companies Act 1993 provides liquidators with extremely wide statutory powers to require various categories of people to handover documents and information of the company in liquidation.
These categories of people include present and past directors, shareholders, employees, lawyers and accountants, or any person having knowledge of the affairs of the company.
Liquidators’ are also empowered to require these persons to be examined on oath on any matter relating to the business, accounts or affairs of the company.
Some liquidators issue notices like confetti!
If you are required by a liquidator to attend an examination, it is not something that should be taken lightly.
Examinations can be relatively onerous on examinees. You cannot refuse to answer a question on the ground of self-incrimination; and there are hefty penalties and fines for non-compliance.
Accordingly, there is no right of silence!
Failure to comply with a liquidator’s notice of examination will often result in the liquidator seeking a court order under section 266 of the Act that you produce the documents/information sought. Costs are awarded against you if the liquidator is successful in obtaining the order.
Liquidators will often use their powers of examination to determine whether an examinee has committed any wrongs and to assess whether it is worth pursuing the examinee for, say, breach of director’s duties (if the examinee is a director/past director) or, to set aside payments received (if the examinee is a creditor of the company).
Examinations are sometimes window-dressed as a friendly plea for ‘help’ seeking your assistance to ‘help’ sort out matters with the failed company.
Prior to commencing the examination, liquidators will not let you know the full range of matters they intend to question you on; and will try to elicit ill-considered answers from you by asking unexpected questions. As the examinations are conducted under oath, any documents or information you give to the liquidator can and often will be used against you (and others) in subsequent court proceedings.
It is important to understand that liquidators’ right to obtain documents/information is not unfettered and that there are limits which apply. Some documents will fall plainly outside the liquidator’s reach. Some documents will not. We have been involved in hundreds of these examinations, on both sides of the table and we often see examinees unwittingly, and to their detriment, volunteer documents/information which the liquidator is not entitled to ask for.
The class of persons the examinee belongs to will affect which types of documents/information the liquidator will and will not be entitled to. For example, letters of advice provided by lawyers to directors of the company may be subject to privilege (and therefore not available to the liquidator) if the file was opened in the name of the director, and not in the name of the company. For directors and/or shareholders, there is a great deal more confusion surrounding which documents liquidators are entitled to request. There is a distinction between documents ‘of’ the company and documents ‘relating’ to the company. Which category examinees fall into will depend on the request of the liquidator and the specifics of any court order sought.
What is frequently overlooked is that any person who receives a liquidator’s notice of examination is entitled to legal representation. Examinations under s 261 of the Act are similar to court proceedings and can have serious consequences for the examinee if he or she is unaware of his or her legal rights. A competent lawyer will protect you by filtering the liquidator’s questions and requests to ensure they are within the scope of its powers and to make sure that the liquidator is not abusing their statutory powers.
Overall the key takeaways are:
- Liquidators have extremely wide powers to request various information from you.
- Liquidators often request from you information which they are not entitled to.
- It is very prudent to have legal representation if you receive a liquidators’ request for information.
- Unwitting disclosures of information can result in serious consequences.
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Brent is the Director of Norling Law. He has a wealth of experience in the District Court, High Court, Court of Appeal and Supreme Court. Brent is passionate about negotiating favourable outcomes for his clients and able to implement this in his daily negotiations.