If asked to provide information to a liquidator, the safest course may be to provide it under oath under section 261 of the Companies Act 1993 because the High Court has found that immunity will apply to such statements.
We look at the decision.
In EBR Holdings Limited (in liquidation) v McLaren Guise Associates Limited the liquidators for EBR Holdings sued an accountant for losses caused by allegedly false statements made by the accountant:
- in an affidavit in a summary judgment proceeding, and
- on oath in an examination by liquidators under section 261 of the Companies Act.
The company in liquidation said that those statements were false, and made with an intention to mislead. The accountant said that, even if that was right, the claim should be struck out. Witnesses are immune from civil suit.
The Court had to decide whether the common law rule that protects witnesses in civil proceedings from being sued in relation to evidential statements or witness testimony extended to statements made by the accountant in the course of his examination by the liquidators.
The Court considered two avenues through which witness immunity might apply to statements made in an examination under section 261:
- if the examination was sufficiently connected to the summary judgment civil proceeding; and
- if witness immunity could be extended to liquidator examinations because of the Court-like nature of the examination power under section 261.
Justice Brewer dismissed the first argument, saying that the examination was not sufficiently connected to the summary judgment proceeding and the protection only applied to testimony in Court in order to protect the Court process from being hindered by the threat of potential litigation. His Honour’s view was that this rationale did not extend to statements made by witnesses outside of Court and that witnesses who choose to restate evidence out of Court so do so at their own risk. However, he found for the second argument.
Section 261(3)(c) provides liquidators with wide powers to require several categories of people (including accountants) to be examined on oath by a liquidator or by a barrister or solicitor acting for the liquidator on any matter relating to the business, accounts or affairs of the company.
These examinations can be relatively onerous on examinees. For example, section 267 of the Act provides that a person cannot refuse to answer a question in the course of being examined under section 261 on the ground of self-incrimination.
Justice Brewer found that, although not strictly a Court proceeding, an examination under section 261 was “analogous to a Court proceeding” for a number reasons, including:
- the examinees are compelled under oath and will be subject to criminal penalties for non-compliance
- the compulsion has been considered to be a detention for the purposes of the New Zealand Bill of Rights Act 1990
- the examinees are entitled to legal representation
- legal professional privilege may apply in respect of the information being provided if the documents are not the company’s own documents, and
- the Court can supervise the process and has a role to play in preventing abuses of process.
The Judge recognised the need to balance two of the uses of liquidators’ powers under section 261 - one; to encourage people to offer frank and independent information, without the threat of a law suit, and two; to allow liquidators to use the examination to determine whether there have been any civil or criminal wrongs committed against the company (for example, misconduct by directors).
Ultimately the Court held that the same policy reasons underlying the common law principle of witness immunity in civil proceedings also applied to persons being examined under section 261. On that basis the Court extended witness immunity to liquidators’ examinations under section 261 of the Companies Act.
Liquidators are free to use evidence obtained in an examination
Importantly, nothing in this ruling stops a liquidator from producing and using in Court evidence obtained in a section 261 examination. The statements made in an examination can be used as evidence in any proceeding, they just cannot form the basis of a claim that the making of the statement under oath itself constitutes a civil wrong (for example, because it was a defamatory statement, a breach of the Fair Trading Act 1986, or a negligent misstatement).
This judgment is not about the admissibility of evidence obtained in an examination in subsequent Court proceedings. It is about whether legal liability can arise from the making of the statement itself.
Chapman Tripp comments
If a liquidator is asking you to provide information, providing that information under oath in a section 261 examination may be a safer option legally as it will protect you from suit.
This is will be especially important if you are going to provide information that criticises the conduct of other parties related to the company or that the liquidators may be able to use to pursue others (for example directors).
Our thanks to Nupur Upadhyay for writing this Brief Counsel. For further information please contact the lawyers featured.