Shareholders given the go ahead to use public examinations to investigate and pursue personal claims – Insolvency/Bankruptcy


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On 16 February 2022, the High Court of
Australia1 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.

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.

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