Introduction – public examination
In Walton v ACN 004 410 833 Ltd (formerly Arrium Ltd) (in liq)[1] a High Court majority held that there is no abuse of process where an ‘eligible applicant’ obtains a summons for a public examination to examine an officer of a company in external administration about the company’s examinable affairs unless its predominate purpose contradicts the public interest in external administration. This decision reveals new opportunities to obtain evidence against corporate officers and effects a redistribution of risk between insurers and other stakeholders.
Context
Section 596A of the Corporations Act 2001 (Cth) imposes a duty on the court to summon an officer of a company for examination about the company’s examinable affairs upon the application of an eligible applicant.[2] An ‘eligible applicant’ includes a person authorised in writing to apply for such a summons by the Australian Securities and Investments Commission (ASIC).[3] ASIC has power to authorise a person to undertake enforcement functions similar to its own, or a creditor or contributory to pursue a claim against the company or its officers.[4] Section 596A however does not deprive the court of its capacity to prevent an abuse of the court’s process.[5]
Background
Arrium Ltd (Arrium) was a significant producer of steel and iron ore, its assets including the Southern Iron mining operation. Up to the time it was put into administration, Arrium was listed on the Australian Stock Exchange. In January 2015 after a fall in the export price of iron ore, Arrium announced that the Southern Iron mining operation would stop. In its following half yearly reports published in February 2015, Arrium recognised an impairment in the value of its mining operation in the sum of $1,335 million. It was placed into administration in April 2016 and in June 2019 the administrators were appointed liquidators.
In 2018 shareholders of Arrium obtained an ‘eligible applicant’ status from ASIC. The shareholders then applied to the Supreme Court for an examination summons for a former director of Arrium. The Registrar in Equity granted the summons. Arrium sought to have it set aside. Justice Black found in favour of the shareholders at first instance.
However, the Court of Appeal unanimously overturned his decision. It held that an examination summons sought for the predominant purpose of investigating a private claim and not for benefit of the company constituted an abuse of process. The High Court granted the shareholders special leave to appeal. The key question was whether an examination summons sought for a purpose other than to benefit the company amounts to an abuse of process.
The decision
The High Court began its reasons by observing that section 596A substantially differs from its legislative predecessors. In particular, section 596A had expanded the range of eligible applicants and forms of external administration, expanded the scope of ‘examinable affairs’, and had imposed a duty on the court to summon a person for examination.[6]
The court then went on to hold that where an applicant obtains an examination summons under section 596A there will not be an abuse of process unless the applicant’s predominant, or substantial, motive for seeking the examination contradicts the public interest in external administration of a company.[7] Legitimate purposes under section 596A were said to include ‘the enforcement of the Corporations Act, the promotion of compliance with that Act, and the protection of shareholders or creditors from corporate misconduct’.[8] And it was tentatively suggested the legitimacy of any purpose might lie in the nature and quality of connection between the purpose and the company’s examinable affairs.[9]
The court therefore determined that Arrium’s shareholders’ main purpose of obtaining evidence against officers of the company respecting potential corporate misconduct occurring during the course of company’s examinable affairs for a class action on behalf of some former shareholders was legitimate.[10]
Takeaways
A person who is not of a class of recognised eligible applicants (e.g. liquidators) and who wants to obtain an examination summons must first obtain an ‘eligible applicant’ status from ASIC. ASIC therefore operates as a gatekeeper.
The test for abuse of process is whether the public interest is obstructed, and not whether some benefit would be conferred to the company as a whole.
Shareholders and other stakeholders are now able to examine company officers without having to use more onerous pre-action discovery procedures.
Examination summonses might be available even where the inquiry has a more remote connection to the external administration of the company, so long as the summons could be said to be about a corporation’s examinable affairs.
If you need help applying for and conducting a public examination, contact our office and take advantage of our insolvency experience.
[1] [2022] HCA 3.
[2] Corporations Act 2001 (Cth) ss 9 (definition of ‘examinable affairs’ and ‘officer’), 53. See also Walton v ACN 004 410 833 Ltd (formerly Arrium Ltd) (in liq) [2022] HCA 3 [157]–[158] (Edelman and Steward JJ).
[3] Corporations Act 2001 (Cth) s 9 (definition of ‘eligible applicant’ para (e)(i)).
[4] Walton v ACN 004 410 833 Ltd (formerly Arrium Ltd) (in liq) [2022] HCA 3 [121]–[123] (Gageler J), [173] (Edelman and Steward JJ).
[5] Walton v ACN 004 410 833 Ltd (formerly Arrium Ltd) (in liq) [2022] HCA 3 [92] (Gageler J), [155] (Edelman and Steward JJ); see also [93], [112] (Gageler J), [130]–[134] (Edelman and Steward JJ) on abuse of process generally and [156], [191]–[192] (Edelman and Steward JJ) on controls available to prevent abuse of process.
[6] Walton v ACN 004 410 833 Ltd (formerly Arrium Ltd) (in liq) [2022] HCA 3 [114], [119]–[120] (Gageler J), [168] (Edelman and Steward JJ).
[7] Walton v ACN 004 410 833 Ltd (formerly Arrium Ltd) (in liq) [2022] HCA 3 [126] (Gageler J), [135], [170], [175] (Edelman and Steward JJ).
[8] Walton v ACN 004 410 833 Ltd (formerly Arrium Ltd) (in liq) [2022] HCA 3 [125] (Gageler J), [175] (Edelman and Steward JJ); see also [169]–[170] (Edelman and Steward JJ).
[9] Walton v ACN 004 410 833 Ltd (formerly Arrium Ltd) (in liq) [2022] HCA 3 [123], [125] (Gageler J); see also [137] (Edelman and Steward JJ).
[10] Walton v ACN 004 410 833 Ltd (formerly Arrium Ltd) (in liq) [2022] HCA 3 [95], [126] (Gageler J), [175], [190], [195] (Edelman and Steward JJ).