In the recent case of Walton v ACN 004 410 833 Ltd (formerly Arrium Ltd) (in liquidation),1 the High Court considered and provided important clarification in relation to the scope of the power to conduct public examinations under section 596A of the Corporations Act 2001 (Cth) (Act).
The case involved an application by a group of shareholders and former shareholders (Appellants) of the company formerly known as Arrium Ltd (Arrium) to conduct a public examination of a former director of Arrium (Director). The acknowledged purpose of the examination was to investigate potential shareholder claims against Arrium, its directors and/or its auditors in connection with potential misstatements in information released to the market by Arrium for a capital raising in 2014.
Arrium sought to set aside the examination summons on the grounds that the examination would not benefit Arrium or its creditors or contributories and would only provide a private benefit for the Appellants. Arrium failed at first instance, but succeeded in having the examination summons set aside by the NSW Court of Appeal. The Appellants then appealed to the High Court.
Arrium produced iron ore and steel and was listed on the Australian Stock Exchange. It was placed into administration in April 2016 and subsequently into liquidation in June 2019.
Between September and October 2014, Arrium carried out a $754 million capital raising. It released an information memorandum in connection with the capital raising shortly before publishing its financial results for the year ended 30 June 2014.
In April 2018, the Appellants wrote to ASIC requesting that the Appellants be given the status of eligible applicants for the purposes of section 596A of the Act.
Section 569A of the Act provides that a person who is an officer (or was an officer during a specified period) of a corporation under external administration may, on the application of an eligible person, be examined about the examinable affairs of the corporation. However, if such an application is made for a collateral or improper purpose that is foreign to the statutory purpose of section 596A examinations then the application will constitute an abuse of process.
The Appellants were concerned that Arrium’s published financial results for the year ended 30 June 2014 and the information memorandum ‘did not adequately or fairly’ portray the ‘true state of Arrium’s business’, and wanted to examine the Director to determine whether any claims could be brought against Arrium, its directors or its auditors in relation to this information.
ASIC granted the Appellants’ request to be given the status of 'eligible applicants', and the Appellants then applied for and obtained the issue of an examination summons against the Director under section 596A.
Arrium applied to have the examination summons set aside on the basis that the purposes for which the Appellants sought to examine the Director were foreign to the purpose of section 596A of the Act and that any such examination would therefore amount to an abuse of process.
Arrium was not successful at first instance, but the NSW Court of Appeal subsequently set aside the examination summons on the basis that:
The Appellants then appealed this decision to the High Court.
The issue before the High Court was whether the NSW Court of Appeal was correct to conclude that the Appellants’ application under section 596A of the Act was ‘an invocation of the process of compulsory examination for an illegitimate purpose’.
The bench was comprised of Chief Justice Kiefel and Justices Gageler, Keane, Edelman and Stewart. The appeal was allowed by a majority comprised of Edelman and Steward JJ (who wrote a joint judgment) and Gageler J (who wrote a single judgment). Kiefel CJ and Keane J wrote a joint dissenting judgment.
The Court’s reasons are comprehensive and understandably complex. However, in the interests of brevity, this article focusses on the key findings of the plurality.
Gageler J considered and analysed the substantial body of case law relating to applications for compulsory examinations under section 596A and its predecessors, before ultimately rejecting Arrium’s contention that an examination under section 596A of the Act could only be sought where the purpose of that examination was to:
Gageler J also rejected the argument that an examination under section 596A of the Act should only be ordered where it would be in the interests of the relevant corporation or the general body of its creditors or contributories. Gageler J noted that this would be inconsistent with the fact that the compulsory examination procedure in Pt 5.9 of the Act is available in all forms of external administration, including forms of external administration which give primacy to the interests of a more select group of creditors, such as a receivership.
His Honour also considered that it was important to note that ASIC has the power to authorise any person to be an ‘eligible applicant’ for the purposes of section 596A. His Honour characterised this power as forming part of ASIC’s arsenal for maintaining, facilitating and improving the performance of the financial system, and that to confine the scope of section 596A in the way argued by Arrium would be to unduly constrain ASIC’s powers in this regard.
Gageler J was satisfied that the Appellants’ proposed examination of the Director was not an abuse of process, and concluded by noting that it would not be prudent to attempt to delimit the legitimate purposes for which a compulsory examination under section 596A of the Act might be sought and ordered, and that there is a sufficient limitation in the requirement for there to be an adequate connection between the purpose of the proposed examination and the examinable affairs of the corporation.
As in Chief Justice Kiefel and Justice Keane’s dissenting judgment, Justices Edelman and Steward considered the circumstances in which section 596A of the Act came into being, and the evolution of its predecessors.
Unlike Kiefel CJ and Keane J, however, Edelman and Stewart JJ concluded that section 596A was an entirely new provision (and not just the progeny of earlier similar provisions) whose purpose was to facilitate the enforcement of the law as it relates to the conduct of corporations under external administration and their officers.
Their Honours considered that there is an important distinction to be drawn between a litigant’s immediate purpose in seeking to conduct a public examination, and their known, assumed or inferred ultimate purpose (being their underlying motive).
Edelman and Steward JJ considered that the doctrine of abuse of process is only concerned with the immediate purpose, and not with the ultimate purpose. As a result, if an applicant sought a public examination for a purpose (such as investigating the examinable affairs of the company) which falls within the lawful scope of the process, then this will not be an abuse of process, even if the applicant does in fact have some ultimate purpose that is malicious, or even fraudulent.
Their Honours held that:
The High Court’s decision substantially broadens the scope of the examination power under section 596A of the Act. Previously, the process was understood to only be available where:
Save for Gageler J’s observation that what constitutes a legitimate purpose under section 596A of the Act might be limited by the nature and quality of the connection between the relevant purpose and the examinable affairs of the corporation, it appears that where the purpose of an examination is to enforce the law (including as to civil rights), that examination will be taken to be for a proper purpose.
This in effect opens the door for section 596A examinations to be used to investigate potential shareholder class actions, and the implications of this should be carefully considered by creditors, shareholders and insolvency practitioners. If you have any questions about this important and complex decision, the Lavan team is here to help.