A recent decision of the majority of the High Court of Australia confirmed an expanded interpretation of the permitted purposes for which an “eligible applicant” may apply to summon an officer of a corporation for examination about the examinable affairs under s 596A of the Corporations Act 2001 (Cth) (Corporations Act).
As we discuss further below, this decision will create some new opportunities and have important consequences for a number of stakeholders in external administrations, including directors and officers, insolvency practitioners, shareholders, litigation funders and class action participants.
In Walton v ACN 004 410 833 Limited (formerly Arrium Limited) (In Liquidation) [2022] HCA 3, the High Court by a 3:2 majority decision held that the examination of an officer of a company, by an eligible applicant who was a shareholder of the company, for the purpose of investigating potential claims against the company or its officers was a permitted and legitimate purpose of the examination power under s 596A of the Corporations Act.
The majority of the High Court determined that it was not necessary for any such claim to relate to the prior external administration of the company or to benefit the company or the company’s creditors. This decision, which was founded on interpreting s 596A of the Corporations Act to have a ‘wider purpose’ than its predecessors, represents a significant departure from the narrower interpretation imposed by the New South Wales Court of Appeal.
Background
The proceedings arose as a result of the collapse of the Arrium group of companies in 2016.
The first respondent (Arrium) was a producer of iron ore and steel and was listed on the Australian Stock Exchange. Between September and October 2014 it raised $754 million in capital.
Following the capital raising, the company published financial results acknowledging a significant reduction in the value of its mining operations and confirming that it would be suspending or closing certain operations. Subsequently, in April 2016, the company, together with a number of other companies in the group, was placed into administration. Liquidators were appointed in June 2019.
In 2018, the appellants were granted “eligible applicant” status by the Australian Securities and Investments Commission (ASIC) thereby authorising them to make an application under s 596A of the Corporations Act. Section 596A entitles an eligible applicant to apply to the Court for a summons to be directed to a person who is an officer of a corporation to be examined about the corporation's "examinable affairs".
The appellants subsequently applied to the Supreme Court of New South Wales for orders that a former director of Arrium appear for examination and produce documents. Orders were also obtained in respect of the production of documents against Arrium’s auditor and the bank who advised on the capital raising.
The decision
There was no dispute between the parties that the appellants’ immediate purpose was to examine the former Arrium director about the examinable affairs of the company. There was also no dispute that the appellants' ultimate purpose in conducting the examination was to investigate and pursue a potential class action against former officers and advisers of Arrium in respect of the capital raising on behalf of a limited class of former shareholders of the company and not for the benefit of the insolvent estate.
Indeed, the High Court noted that the claim had no connection with the winding up of the company and that it would have no benefit to those engaged in the external administration, to the company or to its creditors as a whole.
In determining the validity of the application, the High Court accepted that if the predominant purpose of an examination for which an application is made under s 596A, or s 596B, is collateral or foreign to the statutory purpose of such an examination, the application will amount to an abuse of process.
Accordingly, the central question on the appeal was: what is the statutory purpose or purposes of the examination for which s 596A provides? It was then necessary to determine whether the appellants’ objective of investigating and pursing a potential class action was within those permitted purposes.
Part 5.9 of the Corporations Act contains the provisions concerning public examinations, including, but not limited to s 596A. As widely recognised, and noted by the High Court, the examination powers within Part 5.9 are “extraordinary” in that the powers are intended for wider, public purposes and provide for a form of discovery, including in respect of the denial of certain privileges such as that against self-incrimination, not available to an ordinary litigant.
In considering the statutory purpose of s 596A, the High Court examined the long legislative history behind the current formulation of the examination powers in Part 5.9 of the Corporations Act. In considering these predecessor provisions, the High Court acknowledged that the purpose and/or purposes for which the power to examine a person for examination was conferred may change over time and has in fact significantly widened since the introduction of the examination power.
Kiefel CJ and Keane J in their minority dissenting judgment took a traditional view and emphasised that the principal purpose for the power is for external administration. They went on to state that the “general powers have always been framed largely by reference to that administration and never by reference to litigation by individuals for their benefit”.
Accordingly, they held that the NSW Court of Appeal was right to adhere to the settled understanding that the purposes which inform s 596A confine its application so that “it does not authorise an examination to facilitate the investigation or prosecution of a claim that has nothing to do with the external administration of the company and which is being pursued exclusively for the benefit of persons other than the company, or its creditors or contributories considered as a whole”.
This dissenting position was in stark contrast to the position adopted by the majority of the High Court, which was comprised of Edelman and Steward JJ (joint reasons) and Gageler J (issuing separate reasons).
The majority of the High Court found that the authorities concerning predecessor provisions of s 596A were of limited assistance due to the expanded scope of the application of Part 5.9 of the Corporations Act. In particular, Gageler J distinguished Re Excel Finance Corporation Ltd (Receiver and Manager Appointed); Worthley v England (1994) 52 FCR 69, which had been treated by the NSW Court of Appeal as authority for the proposition that “an application for the predominant purpose of advancing the cause of the applicant in litigation against third parties and not for the benefit of the corporation, its contributories or its creditors is a use of the provision for a purpose foreign to the power”, on the basis that it did not concern Part 5.9.
Gageler J went on to note that “a consequence of the approach is that it occasionally falls to this Court on appeal from an intermediate appellate court to rechart a course of decision-making incorrectly set by another intermediate appellate court. That is what needs to happen here”.
Similarly, Edelman and Steward JJ, commented that a “characterisation of the purpose of s 596A at a higher level of generality than its terms should not be curtailed by “muffled echoes of old arguments” concerning its predecessors”.
The majority held that as the scope of application of s 596A expanded, so did its underlying purpose and concern. The majority considered that the purpose of s 596A could not be confined by reference to benefit to the company, its creditors, or its contributories. Instead, they formulated a ‘wider purpose’ that is concerned with “the administration or enforcement of the law concerning the public dealings of the corporation in external administration and its officers”.
Edelman and Steward JJ held that there was not any requirement for an examination to be for the purpose of benefiting the corporation or the general body of creditors or contributories. Accordingly, they rejected the traditional narrow interpretation of s 596A that the ultimate purpose must be to either aid those responsible for the external administration in the performance of their duties or to bring criminal or regulatory proceedings in connection with the affairs of the company.
They said that “legitimate purposes under s 596A therefore includes the enforcement of the Act, the promotion of compliance with that Act, and the protection of shareholders or creditors from corporate misconduct”. So investigating the possible existence of misconduct on the part of the company’s officers would serve public interest. Similarly, examinations in support of determining whether relief might be available in respect of this misconduct would also be consistent with the purpose of s 596A.
Accordingly, the the appellants' ultimate purpose of enabling evidence and information to be obtained to support the bringing of proceedings against officers and other persons in connection with the examinable affairs of Arrium was legitimate. It was consistent with the administration or enforcement of the law concerning the public dealings of the corporation in external administration and its officers. Finally, whether or not the claim relates to all creditors or all contributories, or only a smaller group, was not determinative of whether it fell within a permitted purpose.
Importance of the decision
The judgment, which was handed down this week, has already received media attention and will be warmly welcomed by litigation funders, class action participants and potential plaintiffs.
The potential to utilise the public examination process to investigate and pursue claims against directors, officers, advisers and professional service providers to companies in external administration is very significant. While this is not an entirely new position (the ability to conduct examinations through a liquidator has never been in doubt), the High Court’s decision has the potential to expand the direct availability and use of examination powers.
The decision of the High Court also arguably expands the tools available to shareholders to seek to hold directors, officers, companies and third party professional advisers to account.
Compulsive examination powers are extraordinary in nature and provide a very efficient and effective mechanism for obtaining relevant information and documentation compared to say pre-action discovery procedures. Accordingly, it is likely that potential claimants will in the future seek to utilise the examination process more often.
While it may be expected that there will be an increase in the number of applications made by eligible applicants, the High Court also took the opportunity to refer to the existing safeguards within the legislation to ensure applications were made with a proper purpose. Specifically, the requirement for ASIC to refrain from granting eligible applicant status to a person making an illegitimate, vexatious or oppressive application and the powers provided to the Court to ensure there is no abuse of process.
