The High Court of Australia's recent decision in Arrium has significantly expanded the purposes for which a Court may summon an officer of a corporation for examination by private parties about the corporation's examinable affairs. In particular, the decision is a big win for shareholders seeking to bring class actions, or otherwise bring claims against the officers of distressed and insolvent corporations, who can use this power to obtain information and documentation that will enable them to assess the prospects and potential recoveries such a claim may bring. It is foreseeable that the decision will result in an increase in public examinations being used as a tool by private parties – shareholders and creditors – seeking to initiate litigation relating to claims against the directors of companies in liquidation and/or other forms of insolvency proceedings.
In Australia, section 596A of the Corporations Act 2001 (Cth) (the Act) empowers "eligible applicants" to apply to the court for orders to examine a person about a corporation's affairs. The power is mandatory. If an application identifies a person falling within the classes of person specified in s 596A (for example, an officer of the company in the two years before external administration) the court must issue an examination summons. Those who were conferred the ability to use these "extraordinary" powers were historically limited, to reflect the encroachment on the common privileges of an individual summoned.
The recent decision of the High Court of Australia in Walton v ACN 004 410 833 Limited (formerly Arrium Limited) (In Liquidation)  HCA 3 has significantly expanded the purposes for which an eligible applicant may summon a person for examination.
The majority of the High Court (in a 3:2 decision) decided that in light of the changes made to the Act, the purposes for which the power can be used, are much broader than the earlier examination provisions, and specifically enabling the "extraordinary" power to be used for shareholders (and other individuals who may have suffered loss) to undertake examinations for the purpose of undertaking private litigation against former officers of the corporation. In doing so, there is no requirement that the examination relate to the external administration or be to the benefit of the company or the company's creditors.
Consequently, the decision represents an important win for promoters of shareholder class actions and creates the potential for increased litigation connected with corporate liquidations generally.
Pursuant to section 596A of the Act, it is mandatory for the court to make an order for the summons of a person for examination about a corporation's examinable affairs if:
- an "eligible applicant" applies for the summons; and
- the Court is satisfied that the person being summoned was an officer or provisional liquidator of the company within, in the case of restructuring, two years from the day on which the restructuring of the company began.
The section is typically used by insolvency practitioners to obtain information from the former officers of the company either to investigate potential misconduct by a company's directors and officers, or in order to commence appropriate proceedings for the benefit of the company, its creditors and shareholders (for example, to challenge antecedent transactions).
However, the scope of section 596A is broader than the typical use, and can also be used by the Australian corporate regulator, the Australian Securities and Investment Commission (ASIC), or other third parties who obtain authorisation from ASIC (such as the appellants in the Arrium case).
The Act defines "eligible applicant" as: (i) ASIC; (ii) a liquidator or provisional liquidator of the corporation; (iii) an administrator of the corporation or of a deed of company arrangement executed by the corporation; (iv) a restructuring practitioner for the corporation; or (v) a person authorised in writing by ASIC.
There is no limitation on who may be authorised by ASIC under (v), but the High Court acknowledges that ASIC would exercise discretion as to whom it would authorise in the public interest, and that it would be unlikely to do so to support an illegitimate, vexatious or oppressive examination being undertaken.
The term "examinable affairs" is a very broad concept, and refers to a number of matters, including:
- the promotion, formation, management, membership, control, business, trading, transactions and dealings of the company;
- in cases where the company is a trustee, matters concerned with the ascertainment of the identity, rights and entitlements of beneficiaries;
- the internal management of the company;
- any act or thing done in the administration, restructuring or winding up of the company;
- matters concerned with the ascertainment of the persons who are or have been financially interested in the success or failure of the company; and
- matters relating to or arising out of an audit.
The examination powers under the Act are significant and result in the denial of significant individual privileges (for example, the privilege in relation to self-incrimination is not available as a basis to refuse to answer questions in the examination). As a result, examination powers are considered "extraordinary" powers, and which the Courts have typically found to be limited in scope.
The purpose and existence of section 596A reflects an overarching public policy to facilitate the administration of a struggling company, recoup debts for creditors, and hold directors and officers who are responsible for misconduct or other breaches of statutory duty to account. The historical limit in scope and application of the examination powers reflects a hesitancy of courts to permit private parties to use such "extraordinary" examination powers in a parochial manner to benefit themselves in litigation. This limit reflects the public policy balance between a party's interests and the public interest in the proper administration of companies and is reflected in the decisions of the Court of Appeal and in the dissenting judgement in the High Court.
Despite the general inability of individual parties to make an application for the use of examination powers, creditors and contributories have been acknowledged as eligible applicants, when authorised by ASIC, and when good reason for making an application for examination powers by those individual creditors can be demonstrated. For example, if the use of examination powers can be shown to accrue a benefit to a company's creditors or contributories generally, this has historically been sufficient for examination powers to be conferred.
Background to the proceedings
The appellants were former shareholders of Arrium, a publicly listed Australian mining company that produced steel and iron ore. Arrium announced a capital raising exercise in 2014 which raised AU$754 million. In 2015, Arrium announced that its mining operations were to be suspended, and subsequently acknowledged that a significant reduction in the value of its operations would follow. In 2016, Arrium (and other companies within its group) entered administration.
In 2018, the former shareholders were granted status as "eligible applicants" by ASIC and successfully applied for orders in accordance with section 596A to examine a former director of Arrium and to require the production of certain documents. Similar orders were also sought, and awarded, against the auditor and the bank who advised on the capital raise. The targets sought to have the orders set aside.
In the set aside application, it was undisputed that the former shareholders sought to examine the director about the examinable affairs of Arrium. It was also undisputed that their ultimate purpose was to investigate whether a potential class action, on behalf of a particular class of Arrium shareholders against the former officers and advisers of Arrium, could be pursued. The foreshadowed class action would seek the recovery of losses suffered by shareholders as a consequence of the capital raise in 2014.
The primary judge declined to set aside the orders, but the New South Wales Court of Appeal disagreed and reversed that decision. It found that the former shareholders' examination application was for the predominant purpose of pursuing a "private" benefit to be enjoyed by only a limited class of shareholders. The examination powers would not confer a generalized benefit on Arrium, its creditors or its contributories. Consequently, the Court of Appeal decided that the examination served a purpose foreign to section 596A and was therefore an abuse of process.
The former shareholders appealed to the High Court of Australia (being the highest appellate jurisdiction in Australia).
Decision of the High Court of Australia
The majority of the High Court (3:2) found that the Court of Appeal's narrow interpretation of the purposes for permitting a section 596A examination was a decision made in error. The majority found that although it would be an abuse of process if the appellants' purpose was foreign to the purpose of 596A, this was not the case in these circumstances.
In determining whether the application for an examination was an abuse of process, the majority of the Court said that:
- the test to be applied was "whether the predominant means adopted and ends to be achieved by a litigant (in other words, the litigant's purpose) are consistent with the express or implied scope of the legal process"; and
- when the alleged abuse of process relates to a statutory process, an abuse of process will only be found if the litigant's ultimate purpose would contradict the scope and purpose of that statute. The existence of an ulterior motive is irrelevant if that motive is not inconsistent with the scope and purpose of the legislation.
Here, the purpose of the former shareholders' application was not in dispute. It was accepted that the appellants sought an examination order to investigate potential claims against the former directors and auditors of Arrium. It was further accepted that the shareholders had no claim against Arrium itself, that no claims could be brought by Arrium or its creditors against the directors (who had benefited from the capital raise) and that the potential claims could only be brought by a specific sub-class of Arrium shareholders.
The question that the High Court had to determine was whether such a purpose fell outside of the scope of the statutory purpose of section 596A.
Purpose of s 596A
In considering the purpose of section 596A, the High Court reviewed the legislative history of examination powers (both with respect to the Act and its predecessors), and considered the evolution of the criteria for obtaining an examination. In doing so, the court observed that section 596A "broke away from the general model" by significantly broadening the "eligible applicants" who may apply for an examination summons, expanding the scope of what constitutes the "examinable affairs" of the company and removing the Court's discretion to grant the orders summoning a person for examination.
The majority of the court held that the statutory history, context and terms of section 596A demonstrated that a characterisation of the purpose of the section, at a higher level of generality than its terms, should not be curtailed by "muffled echoes of old arguments" concerning its predecessors. In particular, its purpose could not be confined by reference to the existence of a benefit to the company, its creditors or its contributories. The authorities concerning earlier provisions were therefore of limited assistance in interpreting section 596A. As the scope of application of section 596A expanded, so too did its underlying purpose and concern. Its purpose was therefore:
"to address, by examinations of present or former corporate officers or provisional liquidators, the administration or enforcement of the law concerning the public dealings of the corporation in external administration and its officers."
In making its finding, the Court referred to the shareholders' submission that ASIC (or persons authorised by ASIC) were empowered by section 596A to apply for a summons in the furtherance of ASIC's statutory duties, which may ultimately confer no benefit on a company, its creditors or its contributories.
ASIC is Australia's integrated corporate, markets, financial services and consumer credit regulator, which is under a statutory duty to, amongst other things (a) maintain, facilitate and improve the performance of the financial system and the entities within the system (b) promote the confident and informed participation of investors and consumers in the financial system and (c) enforce and give effect to relevant laws, including the Act. Consequently, it followed that the legitimate purposes of section 596A included:
- the enforcement of the Act;
- the promotion of compliance with the Act; and
- the protection of shareholders or creditors from corporate misconduct.
Accordingly, the existence of a private benefit does not exclude the potential for there to also be a legitimate purpose. A summons for examination will not be an abuse of process unless the predominant purpose of the examination would contradict the public interest in the external administration of a company:
An examination conducted for a purpose that included investigating the possible existence of misconduct on the part of a company's officers might be expected to serve the public interest in ways such as these. Hence, regardless of whatever ultimate purpose a litigant might have, a summons that is sought for a substantial purpose that includes the public purpose of enforcement of the Corporations Act, whether by ASIC or another eligible applicant, is not a summons sought for a purpose foreign to s 596A in the sense that it is inconsistent with the purposes of s 596A. And the purpose of enforcement of the Corporations Act includes examination for the purpose of determining whether relief might be obtained in respect of potential corporate misconduct. [emphasis added]
The "draconian" remedy of setting aside a summons for an improper purpose would usually be inappropriate where the threat of an abuse of process could appropriately be managed by the court through the making of appropriate directions and controlling what questions might be asked. The setting aside of the summons should be seen as a "last resort" and "reserved only for the most exceptional or extreme cases".
The High Court concluded that the shareholders' application to examine a former officer for the purpose of pursuing a claim against Arrium's officers or advisers was a purpose consistent with the enforcement of the law, and thus was a legitimate use of the power conferred by section 596A. It followed that it was not an abuse of process. Furthermore, the pursuit of a claim for the benefit of some shareholders can be just as legitimate as a claim made for all shareholders. In both cases, money recovered from corporate misadventures and the associated encouragement of compliance serves the public interest of enforcement of, and compliance with, the Act.
Implications of this decision
This decision significantly broadens the purposes for which an examination may legitimately be brought pursuant to section 596A of the Act. Importantly, it confers a significant power that may be used by individual parties – creditors and shareholders alike – who may have claims against insolvent companies or their directors to obtain information that would enable them to assess the prospects of, and likely recoveries from, those claims. This will enhance the potential for those parties to identify sufficient information to be able to bring claims, and obtain funding to do so.
The decision may therefore lead to an increase in applications to ASIC from parties seeking to use the examination power to gather information about possible individual claims. It may also result in a greater willingness from ASIC to authorise examinations consistent with the High Court decision.
However, the impact of the decision is not without limitations. The role of ASIC in authorising eligible applicants will not be exercised without a consideration of the basis upon which the examination is to be undertaken. The Court will also use its extensive case management powers to manage the examinations and ensure that the questions are restricted to the "examinable affairs" of the corporation.
However, at the very least, the decision will enhance the investigative powers available to shareholders and creditors in obtaining information that will enable them to assess potential claims (which at least for shareholders are likely to be brought as class actions).
The decision may also be of interest to shareholders and creditors in other jurisdictions. The examination power under section 596A is not limited to Australian companies, and accordingly, there may be the potential for examinations to be undertaken in connection with cross-border proceedings involving an Australian main or ancillary insolvency case.
The authors gratefully acknowledge the assistance of Nathan Giacci, a lawyer in the Perth financial restructuring and insolvency group, for his assistance in preparing this article.