Expansive Examination – High Court significantly expands public examination rights

In Walton & Anor v ACN 004 410 833 Limited (formerly Arrium Limited) (in liquidation),[1] the High Court considered whether a summons issued to examine a former director of Arrium Limited (Arrium) was an abuse of process in respect of section 596A of the Corporations Act 2001 (Cth) (Act). In doing so, it recharted a course of authorities in Australia on the issue.

Background

To recap, Arrium was a producer of iron ore and steel and was listed on the ASX. Between September and October 2014, Arrium raised $754 million in capital and provided its shareholders with an Information Memorandum which detailed its financial results for the year ending 30 June 2014.

In January 2015, Arrium announced the suspension or closure of one of its principal mining operations and subsequently posted a $1.335 billion impairment in the value of its mining operations.

In April 2016, Arrium was placed into administration and in June 2019, the administrators were appointed as liquidators of Arrium.

Supreme Court Decision

The current Appellants were shareholders of Arrium and in April 2018, successfully obtained approval from the Australia Securities and Investments Commissions (ASIC) for ‘eligible applicant’ status pursuant to the Act to make an application to summon an officer of the company to be examined regarding the company’s examinable affairs under section 596A.

The Appellants then obtained orders in May 2019 from a Registrar of the Supreme Court of New South Wales for a public examination summons to be issued to Mr Galbraith, a former director of Arrium and for the production of documents by Arrium’s auditor and a firm that advised on the capital raising. The purpose of the public examination of Mr Galbraith was to investigate and potentially pursue claims against the former officers and auditor in respect of the capital raising that occurred in 2014.

Arrium, Mr Galbraith and its auditor, sought to have the orders stayed or set aside. At first instance, Black J refused to set aside or stay the summons and held that the information provided by the Appellants to ASIC, “does tend to indicate that their predominant purposes 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“, and therefore, did not amount to an abuse of process.[2]

Court of Appeal Decision

Arrium successfully appealed the decision of Black J. The Court of Appeal set aside the orders for public examination and production of documents made by the Registrar on the basis that the predominant purpose of the examination was for a private purpose for the benefit of a limited group of persons who bought shares in Arrium and would not benefit Arrium or its creditors and as such, was an abuse of process.[3]

High Court Decision

Following the Court of Appeal’s decision, the Appellant shareholders obtained special leave to appeal to the High Court.

By majority (3:2), the High Court allowed the appeal. The issue on appeal to the High Court was whether there was an abuse of process under section 596A of the Act due to the Appellants’ predominant purpose for the public examination of Mr Galbraith being inconsistent with the scope and purposes of section 596A of the Act.

In the dissenting judgment, Kiefel CJ and Keane J held that the purpose of the power under section 596A was for external administration and that “general powers have always been framed largely by reference to that administration and never by reference to litigation by individuals for their benefit”.[4] They were concerned that if public examination were allowed for the broader purpose pursued by the Appellants, this would result in examinations being available in all manner of proceedings wholly unconnected with the external administration of the company. They considered that the Court of Appeal was correct to adhere to the settled approach which confined the scope and purpose of section 596A.

The majority of the High Court (Edelman and Steward JJ (joint reasons) and Gageler J (separate reasons)) considered that the previous authorities concerning section 596A were of limited assistance as a result of the expanded scope of the application of Part 5.9 of the Act. In particular, section 596A had expanded both the range of ‘eligible applicants’ and the scope of examinations.

In considering the previous authorities and in particular, Re Excel Finance Corporation Ltd; Worthley v England[5], Gageler J stated 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 appellant court. That is what needs to happen here”.[6]

The majority considered that the scope of the application, as well as the underlying purpose of section 596A had expanded, and further, that the purpose could not be confined by reference to benefit to the company, its creditors or its contributories or to the bringing of criminal regulatory proceedings in connection with the affairs of the company. Rather, examining an officer of a corporation for the purpose of pursuing a claim against the corporation in external administration or one of its officers or advisers for the enforcement of law can be a legitimate use of the power as it serves the wider purpose of “the administration or enforcement of the law concerning the public dealings of the corporation in external administration and its officers“.[7]

The High Court held that the summons was within the scope of section 596A as the proposed examination would be ‘about’ the examinable affairs of Arrium and it follows, that unless it was an abuse of process, the Registrar was obliged to issue the summons sought by the shareholders.[8]

Key takeaway

The decision by the High Court has already been welcomed by a number of parties including potential plaintiffs and litigation funders. The judgment recharts the previously settled approach as it allows for a significant expansion of the purpose for which a summons pursuant to section 596A of the Act can be issued. It is anticipated that a number of parties will utilise the expanded availability of the public examination process to investigate and pursue potential claims against an office holder or a third-party provider where the company is in external administration.

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Authored by:

Barbara-Ann Sim, Partner
Caitlin Milligan, Solicitor

[1] [2022] HCA 3

[2] In the matter of ACN 004 410 833 Ltd (formerly Arrium Ltd) (subject to a deed of company arrangement) [2019] NSWSC 1606 at [49] – [50].

[3] In the matter of ACN 004 410 833 Ltd (formerly Arrium Ltd) (subject to a deed of company arrangement) [2019] NSWSC 1606 at [140] – [141].

[4] Walton & Anor v ACN 004 410 833 LTD (formerly Arrium Limited) (in liquidation) [2022] HCA 3 at [77].

[5] Re Excel Finance Corporation Ltd; Worthley v England (1994) 52 FCR 69;

[6] Walton & Anor v ACN 004 410 833 LTD (formerly Arrium Limited) (in liquidation) [2022] HCA 3 at [124].

[7] Walton & Anor v ACN 004 410 833 LTD (formerly Arrium Limited) (in liquidation) [2022] HCA 3 at [143].

[8] Walton & Anor v ACN 004 410 833 LTD (formerly Arrium Limited) (in liquidation) [2022] HCA 3 at [193].