In the recent case of Hodgkinson, in the matter of Kupang Resources Ltd (Subject to a Deed of Company Arrangement)1 the Federal Court dismissed an application by two examinees for security for costs (Application) associated with their compliance with a public examination summons and document production summons issued pursuant to section 596A and 597(9) of the Corporations Act 2001 (Cth) (the Act).
Mr Sage was appointed a director of Kupang Resources Ltd (Kupang) on 13 September 2010 and at the time of the Application, remained a director. He was also an executive director of Cape Lambert Resources Ltd (Cape Lambert) and held that position during the period in which documents were sought in a public examination and document production summons issued to Mr Sage (Sage Summons) and a document production summons issued to Cape Lambert (Cape Lambert Summons).
During that period, Mr Sage only maintained one email account, being the account he had in his capacity as a director of Cape Lambert. Consequently, the account contained emails that were not related to the affairs of Kupang, emails that contained legal advice obtained by Cape Lambert and emails seeking or recording legal advice that were sent or copied to Mr Sage.
On 9 September 2015, Mr Hodgkinson was appointed deed administrator of Kupang, having previously been appointed as its administrator. On 25 August 2017 the Court granted leave to Mr Hodgkinson as deed administrator to issue the Sage Summons and the Cape Lambert Summons (Summonses).
Following service of the Summonses, Mr Sage and Cape Lambert were granted numerous extensions of time to comply with the Summonses due to the volume of documents produced in keyword searches applied to the nominated email accounts for the date range specified in the Summonses. Mr Sage and Cape Lambert submitted that they had not complied with the Summonses due to an onerous de-duplication process being undertaken of the documents and the costs involved with compliance with the Summonses (in excess of $200,000).
Mr Sage and Cape Lambert brought the Application pursuant to section 56 of the Federal Court of Australia Act 1976 (Cth) (FCA Act), which provides that the Court or a Judge may order an applicant in a proceeding to give security for the payment of costs that may be awarded against him or her.
An examination summons is a proceeding for the purposes of section 56 of the FCA Act.2 The discretion exercised by this section is broad and is subject only to the limitation that it must be exercised judicially.3 The purpose of an order for security for costs is to ensure that a successful respondent to a claim will have a fund available within the jurisdiction of the Court against which the respondent, if successful in defence, can enforce a judgment for costs in the respondent’s favour.4
Public examinations provide a means by which an external administrator of a corporation can examine officers and any other person who may be able to provide information about the corporation’s examinable affairs under oath in court. The court may also direct a person to produce books that are relevant at the examination.5
Generally, a person who is required by law to come before a court and give evidence has an obligation as a citizen to comply and is not entitled to any compensation. However, a court may order payment of a person’s costs where the court is satisfied that a summons issued to a person under section 596A or 596B, or a requirement made of a person under s 597A, was obtained without reasonable cause6 or to prevent an order operating oppressively.7 In those circumstances the court may order that some or all of the costs incurred by the person because of the summons be paid by the applicant.
The court dismissed the Application and confirmed that the court will only make an order for security for costs of an examination summons or summons for production in exceptional circumstances or where a summons was issued without reasonable cause.
In his reasons, Markovic J held that the purpose of sections 596A, 596B and 597 of the Act are to aid those persons who have responsibility for the external administration of a corporation to carry out their duties.8 That purpose would be frustrated if an order for security for costs was made in relation the Sage Summons and the Cape Lambert Summons.9
Importantly, Markovic J also noted that if security for costs orders were easily obtained, they could be used as a tool in the armoury of an intended examinee or a person subject to a summons to avoid examination or production of material, in effect defeating the purpose of part 5.9 of the Act.10
The public examination process is an invaluable tool available to external administrators which may assist them to carry out investigations into the company over which they are appointed. Often external administrators may have limited funds and assets available to carry out their duties.
An external administrator may be deterred from undertaking any necessary investigations or examinations of officers of the company if compensation of examinees was available or if costs orders were easily obtained. Therefore, as a matter of public policy, a court will not make orders for security for the costs of complying with an examination or document summons unless there are exceptional circumstances that may warrant the making of such an order.
  FCA 1342.
 In the matter of Strarch International Limited (In Liquidation)  FCA 829 -.
 Commissioner of Taxation (Cth) v Vasiliades (2016) 344 ALR 558 .
 Ibid .
 Corporations Act 2001 (Cth) s 597(9).
 Ibid s 597B.
 Re Equiticorp Finance Ltd; Ex parte Brock (No 2) (1993) 27 NSWLR 391 [392-393].
 Palmer v Ayres (in their capacities as liquidators of Queensland Nickel Pty Ltd (in liq) (2017) 341 ALR 18 .
 Hodgkinson, in the matter of Kupang Resources Ltd (Subject to a Deed of Company Arrangement)  FCA 1342 .
 Ibid [65-66].