On 16 February 2022 the HCA delivered a significant decision in Walton & Anor v ACN 004 410 833 Ltd (Formerly Arrium Limited) (In Liquidation) & Ors (HCA 2022) expanding the scope in which an examination summons can be issued to an officer of a corporation in external administration about its examinable affairs pursuant to s596A of the Corporations Act 2001 (the Act).

Key Takeaways

• By a 3:2 majority, the HCA held that shareholders seeking examination of a company officer to determine whether a claim might be brought against the corporation in administration or its officers for the purpose of enforcing the law is a legitimate purpose, even if that claim is for the benefit of only some of a company’s shareholders.
• The decision departs from a long line of authority which limited the purpose to examine to that which benefited the company, its creditors or contributories and is an important win for eligible applicants who may have a personal claim against the corporation, or its former officers and advisors.
• The HCA’s broad interpretation of s596A opens the doors to prospective litigants who intend to seek recourse for a personal right of recovery for corporate wrongdoings and want to use public examinations as a way to decide whether to pursue that proceeding.

Section 596A

Section 596A of the Act confers power on the Court to summon a person for examination about a corporation’s examinable affairs if:

1. an ‘eligible applicant’ applies for the issue of that summons (which includes a person authorised in writing by ASIC to make the relevant application); and
2. the proposed examinee is, or was, an officer or provisional liquidator of the corporation.

If these two criteria are met the Court must issue the summons. However, if it is found that the applicant has an improper purpose in seeking the order, or if the order otherwise amounts to an abuse of process, then the summons may be set aside.¹

Brief Facts

Arrium Limited (Arrium) was a public listed mining company. In 2014 Arrium published an Information Memorandum, including information about its financial records, as part of a capital raising exercise. Subsequently, the value of Arrium’s mining operations decreased and in April 2016 Arrium was placed into administration. In June 2019 liquidators were appointed.

The appellants were a group of former shareholders whom had invested in Arrium as a result of the capital raising.

Following Arrium’s liquidation, the appellants sought from ASIC, and were granted, written authority to apply to the NSWSC for an order under s596A of the Act to examine a former director of Arrium and its auditor. The purpose of the examination was to investigate alleged misrepresentations contained in the Information Memorandum about Arrium’s financial status. The shareholders acknowledged that the result of those investigations could lead to them bringing a class-action against Arrium’s former director and auditors.

A Registrar of the NSWSC granted the summons. Arrium applied to a Judge of the NSWSC to have the summons stayed or set aside as an abuse of process and the summons was stayed on condition that Arrium file an application for leave to appeal. Arrium successfully appealed to the NSWCA who found that the predominant purpose of the summons for examination was not to confer a commercial benefit on Arrium, its creditors or contributories, but to investigate and pursue a private benefit for a limited group of shareholders. It was therefore issued for a purpose foreign to the statutory purpose conferred by s596A and the orders for examination were discharged.

The HCA overturned the NSWCA’s decision.

Judgment

The HCA’s decision rested on the statutory purposes of an examination under s596A and whether the applicants’ predominant purpose was inconsistent with the express or implied scope of the Court’s powers under s596A. If so, it was an abuse of process and should not be allowed.

The HCA considered the statutory context and the history of the provisions concerning the powers to examine and determined that past decisions made in relation to s596A’s predecessors were of limited assistance in determining the scope and purpose of the current s596A.

In their joint judgment, Edelman and Steward JJ held that the statutory purpose of s596A has widened from what was historically confined by reference to the benefit to the company, its creditors or its contributories. The purpose and concern of s596A has broadened over time and

‘that expanded concern is with the administration or enforcement of the law concerning public dealings of the corporation in external administration and its officers. The only vestige that remains of the old approach to the purpose that might have confined the predecessors to s596A is the public aspect of the purpose of the power’ at [169].

The Court concluded that the prevailing purpose of s596A was to address the administration of a corporation or the enforcement of the law concerning the corporation and its officers in public dealings, including the identification and prosecution of any corporate misfeasance. Further, that issuing a summons for the purpose of enforcing or ensuring compliance with the Act and protecting shareholders and/or creditors from corporate misconduct is a means of enforcing the law and serves the public interest. The underlying purpose of the applicants’ summons was therefore legitimate.

Implications

• The scope to seek examination of a former officer of a company has substantially widened.
• Eligible persons may undertake a public examination as a form of preliminary discovery to help with a personal claim so long as it serves the public interest of law enforcement and compliance with the law concerning the public dealings of the corporation and its officers.
• Public examinations do not have to be directly beneficial to the company in administration, its creditors or contributories. A claim for the benefit of some shareholders is consistent with the public interest in the proper external administration of a company.

¹ Kimberley Diamonds Ltd v Arnautovic (FCAFC 2017); (2017) 252 FCR 244 at [30]