Oppression In Section 236 Examination Overview
Oppression in Section 236 examination is an article following the decision handed down by Chief Insolvency and Companies Court Judge Briggs in the matter of The Official Receiver v Deuss & Ors [2020] EWHC 3441 (Ch).
At the heart of this matter is the issue of oppression, to seek to ensure there is a level playing field in litigation. A seemingly imperfect balancing by the Court of rights of Directors as against the rights of liquidators (or other office-holders) in the event or instance of litigation. It is the right to avoid one party (in this instance the claimant or applicant) gaining an unfair advantage, that is how a director can avoid examination in a liquidation.
In general, it is often deemed unfair and oppressive if a Liquidator is able to examine a Director after having issued proceedings and extract information from him or her under the threat of potential imprisonment if they failed to cooperate.
Normally in litigation, a party can decide if they want to give evidence and subject themselves to cross-examination. The public examination regime at large here and also a similar regime of private examination in Section 236 of the Insolvency Act 1986, takes away that normal freedom that appears somewhat akin to the right to silence. In other words, as a Director in litigation pursued by an office-holder, it appears permissible for you to say nothing and force the liquidator to do all the running and prove the case against you. Having said that, it is worth bearing in mind if you do that, you may risk the Court drawing adverse inferences from such conduct. You may weaken your ‘defence’ materially if you do not answer the allegations put to you and deny the same with evidence.
What is fascinating about this judgment however is the Applicant was the Official Receiver (“OR”) whose mention appears largely confined to the introductory paragraph. Other than that, the judgment is nearly all about the Requesting Creditor who appears to have sought for the OR to obtain the Public Examination of the Respondents. In contrast to the OR, the Requesting Creditor is mentioned by name something like eighty times in the judgment.
The Requesting Creditor had issued proceedings against Mr Deuss, who was one of the Respondents. The following allegations were set out in the claim form in the substantive proceedings and appear undoubtedly serious. Perhaps it is in the light of that, how a director can avoid examination in a liquidation:
On 21 September 2020 the Company and Mr Hunt in his capacity as its liquidator (as joint claimants) issued their claim in the High Court against Mr Deuss for:
“damages or equitable compensation from the Second Defendant for breach of his fiduciary duty as a de facto and/or shadow director of the First Claimant in rendering the First Claimant liable to each of the companies listed in Schedule A hereto (“the MTIC Companies”) (and/or their liquidators) for dishonest assistance and/or under s213 of the Insolvency Act 1986 (“the Liability”) in causing or allowing the First Claimant to dishonestly assist the directors of the MTIC Companies to breach their fiduciary duty to act in the best interests of such companies by participating in MTIC fraud in 2004-2006 (inclusive), and in causing or allowing the First Claimant thereby to knowingly participate in the fraudulent trading of such companies and/or a contribution from the Second Defendant under the Civil Liability (Contribution) Act 1978 as being liable in respect of the same damage (being the Liability) as the First Claimant to the MTIC Companies.”
Oppression – How To Avoid Director Examination In A Liquidation
The application by the OR turned largely on the question of oppression ie. in balancing the rights of the parties and in seeking to ensure a level playing field in litigation.
Oppression Case Law
The case law on oppression was recited as follows which make two key points: 1) an order for examination is more likely to be oppressive than an order for the production of documents and 2) once a decision has been taken to issue substantive proceedings against a proposed examinee then oppression is likely to be a material issue:
Importantly for this case a public examination should not be oppressive. If the court finds that the contemplated examination is oppressive it should decline to make an order. The task for the court is to determine if oppression is likely: Re Pantmaenog Timber Co Ltd [2004] 1 AC 158 at [49] per Lord Millett.
Referring to Re Pantmaenog Timber Co Ltd in the notes to section 236 of the Act, the authors of Insolvency Legislation Annotations and Commentary 2021 (“Annotations”) explain [339]:
“the objective of examinations is to permit the liquidators to investigate the conduct of directors and others, where necessary…the power to examine may not, however, be used to conduct a fishing expedition“
Having stated that there is a discretion as to whether to make an order under section 236(2) the authors of Annotations state:
“there are some principles that must be considered by a court in arriving at its decision. Justice and fairness must demand that an order be made: BCCI (No 7) [1994] 4 All ER 876. The discretion is to be exercised judicially and following a careful balancing of the interests and factors involved, including taking into account the purpose of the examination power and whether the making of the order would be unreasonable unnecessary or oppressive: Re British & Commonwealth Holdings Plc [1993] AC 426.”
Mr Wright submits, relying on Shierson v Rastogi [2003] 1 WLR 586 that (i) an examination may be ordered even after proceedings have been issued against the examinee and (ii) oppressive questioning in the form of questions relating to the litigation is permissible. Factually, Shierson stands out as a case where litigation had been launched but there was a concession that the liquidators had acted in good faith and there was no collateral purpose. It is right to say that the court will lend weight, even substantial weight, to the position of the office holder in usual circumstances.
Picking up on the note in Annotations and in particular the reference to Re British & Commonwealth Holdings Plc, it is useful, for the purpose of this application, to consider, in brief, the Court of Appeal [1992] Ch 342 decision in that case. The guidance is to be found in the judgment of Ralph Gibson LJ at pp. 184; 370–372. He said (inter alia) that the:
“… exercise of the discretion involves the balancing of the requirements of the office-holders to obtain information against the possible oppression to the person from whom the information is sought.”
“The purpose of the power … may be used to discover facts and documents relating to specific claims against specific persons which the office-holder has in contemplation and it is in itself no bar that the office-holder may have commenced or may be about to commence proceedings against the proposed witness or someone connected with him.”
“Normally … the court should seek to assist the liquidator … in determining what are the reasonable requirements of the office-holder and whether an order should be made, great weight is to be given to the views of the office-holder …”
“… the case for making an order against an officer or former officer of the company will usually be stronger than it would against a third party because officers owe a fiduciary duty to the company and are under a statutory duty ( s. 235 of the Insolvency Act 1986 ) to assist the office-holder …”
Ralph Gibson LJ emphasised, that:
“As has been stated so many times, each case must depend on its own facts.’ (p. 189H; 378).
In the House of Lords, Lord Slynn of Hadley summed up the requisite approach as follows (at p. 984G):
“The protection for the person called upon to produce documents lies, thus, … in the fact that the applicant must satisfy the court that, after balancing all the relevant factors, there is a proper case for such an order to be made. The proper case is one where the liquidator reasonably requires to see the documents to carry out his functions and the production does not impose an unnecessary and unreasonable burden on the person required to produce them in the light of the administrator’s requirements.”
Oppression may take many forms. One such form was identified in Re Atlantic Computers [1998] BCC 200 at 208B-209A (again in the context of section 236 IA 86):
“The latter test was a rule of thumb under which relief under s. 236 would be withheld if office-holders had already commenced proceedings against, or definitely decided (mentally crossed the Rubicon) to proceed against, the proposed witness (typically for misfeasance, breach of fiduciary duty as a director, or so on). That rule of thumb has been disapproved for the reason mentioned by Sir Nicolas Browne-Wilkinson V-C in Re Cloverbay Ltd (No. 2) [1990] B.C.C. 414 at p. 419; [1991] Ch 90 at p. 101. But it still contains a germ of truth, as Hoffmann J said in Re Bishopsgate Investment Management (No. 2) [1994] B.C.C. 732 at p. 739. The germ of truth springs naturally from the purposes for which the statutory jurisdiction is intended, and from the need to avoid exercising it unreasonably or oppressively.
…
The decision of the Court of Appeal in Re North Australian Territory Co (1890) 45 ChD 87 is particularly illuminating. It supports Mr Clarke’s submission that the statutory jurisdiction is not to be used for giving a litigant (just because he is an officeholder) special advantages in ordinary litigation. Brightman J in Re Bletchley Boat Co Ltd [1974] 1 WLR 630 at p. 637 said that it was not to be used ‘to gain an advantage in the action … over and above the ordinary advantages available in an ordinary defendant and an ordinary plaintiff in litigation.’ Slade J said in Re Castle New Homes Ltd [1979] 1 WLR 1075 at p. 1091 that it was not to be used by an office-holder ‘to bolster up his case‘.”
Accordingly, there is authoritative support for Mr Wright’s proposition that an examination may proceed despite proceedings being issued against the target examinee. The court needs to be astute, however, to distinguish between those cases where the examination is for the purpose of enabling liquidators to carry out their duties and those where the discerned purpose is to obtain an unfair advantage in the litigation: Daltel v Makki [2005] 1 BCLC 594
There is no dispute that an oral examination is much more likely to be oppressive, than an order for the production of documents: Re Cloverbay [1991] Ch 90, 103C-E. An application for examination may be premature if documents have not been requested in advance.
Oppression is even more likely where the examinee was not an officer of the company in liquidation. In Re Westmead Consultants Ltd [2002] 1 BCLC 384 HHJ Weeks QC sitting as a Judge of the Chancery Division neatly explained:
“It is oppressive to the outsider because he is hauled into court under threat of imprisonment or arrest if he is not compliant and there he has to answer questions about his conduct on oath and under compulsion. That, in my judgment, is plainly oppression.”
Public Examination Request – Oppression in Section 236 examination
The suggestion is that although the Requesting Creditor was not the Applicant, the burden of proof was with the Requesting Creditor to justify the application for public examination.
This is not an easy concept to grasp given the duty of public examination is a mandatory one and although the creditor requested it, they are not actually the Applicant. Nevertheless, the Court may have trained its sights on the fact that the Requesting Creditor was a Liquidator and had this to say about the matter:
Although not foreshadowed in skeleton arguments an issue arose in submissions regarding the burden of proof. Mr Smith argued that the burden of proof lies with Mr Hunt to demonstrate a need whereas Mr Wright, relying on the mandatory language of section 133 of the Act, argued that the burden of proof lies with Mr Deuss to demonstrate why an examination should not be made. Mr Hunt has made the application for a public examination and asserted in his evidence that it is necessary for the purpose of fulfilling his functions as liquidator in this liquidation. As he has made the assertion, he should prove that there is such a requirement. This is usually not a difficult burden to discharge since a liquidator’s functions are predominately enshrined in statute as are the obligations of a company’s officers. It would be contrary to the principle of fairness for a liquidator to ask the OR to apply for a public examination without providing any reasons; and unfair on the respondent if he had no knowledge of the reasons for the public examination or understanding of why it was necessary for the functions of the liquidator. It would be contrary to the overriding objective which requires parties to be on an equal footing where possible. If there is such a requirement it is for Mr Deuss to demonstrate that notwithstanding the need for a public examination, it would, in all the circumstances, be oppressive to make an order. The requirement for an examination to have utility is the same side of the same coin, showing that the purpose for the examination is necessary for fulling an office-holder’s functions.
Conclusion – Oppression in Section 236 examination
The Court rejected the application and said:
Mr Hunt has reason to state that he has made every effort to obtain documents belonging to Company and is justified in seeking to understand the history of the Company. However, this is an unusual liquidation where Mr Hunt has issued proceedings against the target examinee claiming a contribution to losses in excess of £415m on the basis of dishonesty and fraudulent trading. He has sought to justify a public examination on 6 specific grounds. It is accepted that in relation to each of those grounds Mr Hunt has not asked Mr Deuss directly about the issue or asked for delivery up of a specific document. Unless it is proven that Mr Deuss was a de facto director or shadow director he was not an officer of the Company. As matters stand, he was an outsider during the Company’s life. In my judgment, in these circumstances, for Mr Deuss to be hauled into court under threat of imprisonment or arrest if he is not compliant, to answer questions about his conduct on oath and under compulsion, is plainly oppressive.
If I am wrong about oppression then in my judgment there is no useful purpose for a public examination based on the evidence provided and there is a real risk that the “consequential questions” said to be necessary will improve Mr Hunt’s position in the litigation.
Disclaimer: Oppression in Section 236 examination is an article that is not legal advice and not to be relied upon as such. No liability is accepted for any reliance placed upon it.
