Public examination summons set aside

In ACN 004 410 833 Ltd (formerly Arrium Limited) (in liq) v Michael Thomas Walton [2020] NSWCA 157, the Liquidators of Arrium successfully applied to the NSW Court of Appeal to set aside a public examination summons on the basis that it was an abuse of process because the summons was not obtained for the predominant purpose of benefitting the corporation, its creditors or its contributories.

Background

Arrium Limited (Arrium) was an ASX listed iron ore producer.  In April of 2018, a group of former shareholders of Arrium (Shareholders) wrote to ASIC seeking ‘eligible applicant’ status pursuant to s 597(5A)(b) of the Corporations Act.1  This entitled the Shareholders to publicly examine Arrium’s officers about its examinable affairs pursuant to s 596A of the Corporations Act. Relevantly, the Shareholders’ request to ASIC was predicated on the examinations being of ultimate benefit to Arrium’s creditors, including because the Liquidators would not seek to examine the relevant parties or pursue certain causes of action which could produce damages flowing to creditors.

The purpose of the examination according to the Shareholders, was to:

… investigate the potential for claims to be made on behalf of creditors or shareholders in Arrium' in circumstances where it was doubtful that Arrium’s financial results announced shortly before the capital raising 'adequately or fairly' portrayed the 'true state of Arrium’s business'.

ASIC granted the Shareholders ‘eligible applicant’ status and they subsequently, applied to the NSW Supreme Court to publicly examine a director of Arrium and to compel the production of documents.

Application to set aside the summons - dismissed

The primary judge concluded that:

  • the Shareholders position “does tend to indicate that their predominant purpose in seeking the issue of the examination summons was to investigate, and pursue, a personal claim in their capacity as shareholders against directors of Arrium or against its auditors;”
  • the information likely to be produced by the Shareholders’ examination would also likely advance the interests of Arrium and its creditors; and
  • he was not satisfied that Arrium had “discharged the heavy onus of establishing that the examination of a director would be an abuse of process”.

In those circumstances, the primary judge dismissed the Liquidators’ application to set aside the summons.

Appeal to set aside the summons - unanimously allowed and set asid

On appeal, the Liquidators’ position was that:

  • the primary question was whether it was an abuse of process for shareholders of Arrium to obtain examination orders for the purpose of investigating and pursuing a class action against the Arrium’s directors and auditors where there was no suggestion it could produce any benefit to Arrium (thus directly contradicting the Shareholders’ claims that some benefit to Arrium would arise if the examination proceeded);
  • the fact that the predominant purpose of the Shareholders concerned a personal claim should have been determinative of the existence of an abuse of process; and
  • the mere fact that the examination may have produced an ancillary benefit did not save it from being an abuse of process, emphasising that it is the purpose, not the result, which matters.

Importantly, the Liquidators referred to an announcement of the class action which stated that:

  • persons entitled to participate were shareholders who purchased shares on or after 19 August 2014 - the proposed class did not include all contributories of Arrium; and
  • participants could include those persons who had purchased shares after 19 August 2014 but subsequently sold their shares – which would include persons who were not contributories at the time the company went into administration.

These matters highlighted the private nature of the proposed claim by the Shareholders.

The Shareholders submitted that what was to be looked at was not the subjective purpose of the examination but the result intended to be achieved.

Critically, the Court of Appeal found at [125] that:

The critical question in the present case is whether the purpose of the examination is foreign to the purpose for which those powers were conferred …

In this case, the examination was sought:2

for a private purpose for the benefit of a limited group of persons who bought shares in Arrium at a particular time irrespective of whether they held their shares at the time of the appointment of the administrators. In our opinion, such an examination is foreign to the purpose for which the examination power is conferred and there is an abuse of process.

Lavan comment

Lavan has previously published an article discussing the setting aside of a public examination summons in which applicants unsuccessfully argued an abuse of process.  Click here to view the article. 

This is an important decision clarifying the basis on which a public examination summons can be set aside where an abuse of process has occurred.  The matter clearly sets out the position that it is not sufficient that the predominant purpose of the summons be for a private purpose and any argument that a benefit to the company flows, which is a mere hypothetical or incidental benefit, will not alter this position.