Shierson v Rastogi

An order for private examination under section 236 of the Insolvency Act 1986 remains discretionary, even where the proposed examinee is a present or former officer subject to the statutory duty of co-operation in section 235. The court must balance the office-holder’s reasonable need for information against any oppression, unreasonableness or lack of necessity. A tactical disadvantage in existing civil proceedings is relevant oppression; it is not excluded merely because the examinee was an officer.

An examination may properly be ordered where it is genuinely required to investigate the company’s affairs and recover its assets. A consequential benefit in related litigation does not make the purpose collateral. The court retains control over the examination and may prevent unfair questioning. The statutory protection against direct criminal use of compelled answers does not confer derivative-use immunity.

RBG Resources plc entered compulsory liquidation following its sudden collapse with a substantial estimated deficit. Its liquidators brought fraud proceedings against two former executive directors, Rastogi and Jain, alleging that purported trading transactions and receivables financing were fictitious. They then obtained an order from Laddie J under section 236 of the Insolvency Act 1986 for their private examination about the company’s assets and affairs.

The directors appealed. They contended that the order was oppressive because it would give the liquidators an unfair tactical advantage in the pending civil claim and might assist criminal or regulatory investigations. The central issue was how the section 236 discretion should be exercised where the proposed examinees were former officers and defendants in related civil proceedings.

1. Appeal dismissed unanimously. Peter Gibson LJ gave the leading judgment. Mance LJ agreed and added reasons. Hale LJ agreed.

2. Section 236 of the Insolvency Act 1986 confers a discretion which must be exercised by balancing the office-holder’s reasonable requirements against the need to avoid an order that is wholly unreasonable, unnecessary or oppressive. A director’s statutory duty to co-operate under section 235 is a powerful factor favouring examination. It does not remove the court’s discretion or render oppression irrelevant.

3. Laddie J had therefore overstated the effect of section 235. The judge was wrong to treat the tactical disadvantage arising from civil proceedings as a factor which, for an insider, had to be put aside. The Court of Appeal re-exercised the discretion afresh, applying the approach in Cloverbay Ltd v BCCI Ltd [1991] Ch 90 and Re British & Commonwealth plc [1993] AC 426.

4. It is oppressive, in the relevant technical sense, to require a civil defendant accused of serious wrongdoing to provide on oath answers which bear on the issues in the claim. That consideration may nevertheless be outweighed. The decisive distinction is between an examination sought to improve the liquidator’s position as litigant, which is impermissible, and one genuinely needed for the liquidation, which may incidentally assist litigation.

5. Here the liquidators sought information to reconstruct deficient records, understand the company’s trading, identify missing monies and collect assets. The directors were the company’s principal sources of information. The large deficit, urgency, missing and deleted records, and the absence of any timely alternative source of answers outweighed the litigation-related oppression. The examination was not sought for a collateral purpose.

6. The Court rejected the assumption that the examination would be unfairly conducted. The court controls permissible questioning under the Insolvency Rules 1986, and the trial judge controls any later use of answers. Section 433 of the Insolvency Act 1986 prevents direct criminal use of compelled statements, but does not create derivative-use immunity. The risk of investigative authorities obtaining transcripts carried little weight.

• Court of Appeal (Civil Division): Appeal dismissed in [2002] EWCA Civ 1624. The Court of Appeal upheld the section 236 examination order, but held that the judge had misstated the discretionary approach and re-exercised the discretion itself.
• High Court, Chancery Division, Companies Court: Laddie J ordered the examination of the former executive directors under section 236 of the Insolvency Act 1986. Permission to appeal was refused by the judge and granted by Peter Gibson LJ on paper.