Shareholders given the go ahead to use public examinations to investigate and pursue personal claims

Walton & Anor v ACN 004 410 833 Ltd (formerly Arrium Limited) (in liquidation) & Ors [2022] HCA 3

On 16 February 2022, the High Court of Australia[1] considered the purposes for which a court may, on the application of an eligible applicant, summons an officer or provisional liquidator of a corporation in external administration about the corporation’s examinable affairs pursuant to section 596A of the Corporations Act 2001 (Cth) (the Act).

The decision paves the way for public examinations under section 596A to be used to investigate the merits of personal claims by investors (allowing individuals to investigate the merits of a potential class action which would only benefit some shareholders).  The decision highlights that examinations are not an abuse of process simply because they do not benefit the company or the company’s creditors.

Factual Background

Arrium Limited (in liquidation) (Arrium) was a producer of iron ore and steel and was listed on the Australian Stock Exchange.  Between September and October 2014, Arrium raised AUD 754million in capital.  As part of that capital raising, Arrium provided an Information Memorandum and, shortly prior, it published its financial results for the financial year ending 30 June 2014.

In January 2015, following a decline in the export price of iron ore, Arrium announced that it would be suspending or closing one of its principal mining operations and, in its half-yearly results (published in February 2015), Arrium acknowledged a reduction in the value of its mining operations of AUD 1,335million.

Arrium was placed into administration in April 2016 and liquidators were appointed in June 2019.

Application for public examination

In 2018, Arrium’s shareholders sought (and obtained) authorisation from the Australian Securities and Investments Commission (ASIC) to be given status as “eligible applicants” pursuant to s 597(5A)(b) of the Act.  In a letter to ASIC, the shareholders explained that they should be given the status as “eligible applicants” noting their concern that Arrium’s results for the financial year ended 30 June 2014 and the information given for the capital raising did “not adequately or fairly” portray “the true state of Arrium’s business”

ASIC’s granting of the authorisation, enabled the shareholders to apply to the Supreme Court of New South Wales for an order that a summons be issued for the examination of Arrium’s former director, Colin Galbraith.

Procedural Timeline

Arrium applied for an order that the summons be stayed or set aside on the basis that it was an abuse of process to grant examination orders for the purpose of an investigation of the directors and auditors where there was no suggestion that it could produce any benefit to the company.  The Supreme Court denied the application.

The Supreme Court’s decision was subsequently overturned by the Court of Appeal who found that an examination, which was sought for the private purpose of benefiting a limited group of persons who had shares in Arrium and not for the benefit of the company is foreign to the purpose of the power of examination and is, therefore, an abuse of process.

The shareholders appealed to the High Court of Australia.

The High Court of Australia’s Decision

It is not contentious that, if the predominant purpose of the examination for which an application is made under section 596A or section 596B, is collateral or foreign to the statutory purpose of such an examination, the application will be an abuse of process.

The High Court cited a number of examples where an application for an examination summons was or could be an abuse of process because the applicant seeks a forensic advantage not otherwise available through interlocutory means.  These include:

  • an application brought by a liquidator for an examination for the purposes of rehearsing the cross-examination of a potentially hostile witness in pending litigation;
  • the cross-examination of a person to destroy their credit; or
  • an alternate means to obtain discovery when an order for discovery has otherwise been refused.

The High Court overturned the Court of Appeal with 3:2 majority ruling that the use of the compulsory examination power for the purpose of an investigation, irrespective of whether it is a benefit to the company, is not an abuse of process.

In reaching this decision, the majority focused on the statutory purpose of s 596A of the Act.  The High Court referred to the three main changes highlighted by the full court of the Supreme Court in Flanders v Beatty which resulted from the amendments made through the Corporate Law Reform Act 1992 (Cth). 

These changes, embodied in s 596A of the Act are firstly, an expansion in the range of eligible applicants, secondly, an expansion of the scope of examinations by the broad definitions of “examinable affairs” and “affairs of a body corporate” and thirdly, the removal of the court's discretion to grant the order summoning a person for examination.

The majority held that the expanded scope of application of s 596A also expanded its underlying purpose and concern.  Therefore, they held, that the purpose of s 596A cannot be confined to be for the benefit to the company, its creditors or its contributories but rather for the administration or enforcement of the law concerning the corporation and its officers in public dealings.

In light of the broader scope of the examination power in s 596A, the High Court held that the shareholders’ intended investigation into a company in external administration or its officers is not an abuse of process as the predominant purpose of such an investigation would be to serve the public interest in the external administration of the company.  Such a broad interpretation was irrespective of whether the investigation will be of a benefit to the company and whether the claim relates to all or only some of the company’s creditors or contributories. 

The minority, comprised of Kiefel CJ and Keane J, held that the appeal should be dismissed as s 596A should not be interpreted so broadly as to authorise an examination to facilitate the investigation of a claim which has a private purpose of benefitting a limited group of persons and is therefore irrelevant to the external administration of the company.  Their views adhered to the interpretation established by the earlier versions of the provision which confined the examination power to facilitating investigations for the benefit of the company, its creditors or its contributories.

Implications of the decision

The High Court has set a high bar for the test for abuse of process through its broad interpretation of the examination power under s 596A and summons for examination won’t necessarily be struck out for being an abuse of process simply because it does not benefit the company or the company’s creditors.

On one view, the decision could be seen as good news for former shareholders, litigation funders and class action promoters if it can enable them to conduct an investigation into failed companies and the company’s directors and officers before commencing litigation.  Such public examinations could be particularly beneficial where public information regarding the company is limited as it provides the opportunity to properly assess the merits of a potential claim before commencing costly representative proceedings or engaging in a potentially voluminous pre-action discovery processes.

However, it must be remembered that ASIC still needs to first authorise former shareholders as “eligible applicants”[2] before they can apply for a public examination order and the person to be examined must be an officer or provisional liquidator to whom the section applies.

Read other items in the Australian Insurance Brief - April 2022

Footnotes 

[1] Walton & Anor v ACN 004 410 833 Ltd (formerly Arrium Limited) (in liquidation) & Ors [2022] HCA 3.

[2] The High Court specifically noted that the authorisation given by ASIC merely provides standing to a person to bring proceedings but it is cannot inform the question of statutory purpose.