TGIF 18 February 2022 – High Court takes expanded approach to examination power

This week’s TGIF considers the recent High Court decision in Walton v ACN 004 410 833 Limited (formerly Arrium Limited) (in liquidation) [2022] HCA 3, which provides guidance on the range of potential purposes for which an examination of company officers may be legitimately pursued by ‘eligible applicants’.

Key Takeaways

• The historic limitation that examination powers be used for a predominant purpose that benefits the company, its creditors or contributories, is not present in section 596A of the Corporations Act 2001 (Cth) (the Act).
  
  
• Even where the motivation of the eligible applicants in conducting an examination is clearly for the purpose of investigating the merits of a potential class action, the use of the examination power will not necessarily constitute an abuse of process.
  
  
• An examiner is not disqualified as an eligible applicant merely because they are no longer a creditor of the company.
  
  
• There could be an increased risk that officers of a company under external administration may be subjected to compulsory examination on behalf of shareholders seeking to pursue class actions.

Background

The first respondent, formerly known as Arrium Limited (Arrium), was an ASX-listed steel producer with an iron mining operation. After publishing its results for FY 2014, Arrium announced a capital raising for the purposes of paying down debt, published an information memorandum in connection with that raising and by mid-October 2014, had raised A$754 million in capital.

In January 2015, due in part to a decline in the export price of iron ore, Arrium announced it would suspend or close its mining operation. Arrium acknowledged in its February 2015 half-yearly results that the value of its mining operations had reduced by approximately A$1.335 billion. Arrium entered into administration on 7 April 2016 and liquidators were appointed on 20 June 2019.

The applicants were shareholders of Arrium who sought to investigate Arrium's disclosures to the market prior to the 2014 capital raising, particularly in respect of the information memorandum provided to retail shareholders. The shareholders wrote to ASIC in 2018 seeking authorisation as an ‘eligible applicant’ within the meaning of section 597(5A)(b) of the Act, so that they could ask the Court to issue examination and production orders to former officers of Arrium.

The application expressed concern as to whether the published FY 2014 financial results and the information memorandum ‘adequately or fairly’ portrayed the reality of Arrium’s business.

On 15 May 2019, the Registrar in Equity made the examination and production orders as requested.

Procedural history

Arrium sought to have the examination and production orders stayed or set aside. That application was determined by Black J, who observed that the shareholders’ ‘predominant purpose 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’ by way of a class action. Despite this, Justice Black did not find that the examination would cause any abuse of process, as the shareholders sought to conduct examinations on matters which the liquidators could have examined themselves.

On appeal, the NSW Court of Appeal considered that the examination orders should not have been made because they were an abuse of process on the basis that they were sought for a private purpose that would benefit a limited group of shareholders. In reaching this conclusion, the Court of Appeal applied what was described as ‘clear authority’ drawn from Re Excel Finance Corp Ltd (Receiver and Manager Appointed); Worthley v England (1994) 52 FCR 69 (Re Excel).

 Re Excel considered former examination power under section 597, which has since been replaced with sections 596A and 596B. The Court of Appeal acknowledged this change and considered whether the scope of the power had been widened, also observing that this issue had been considered at the appellate level with inconsistent conclusions drawn.[1]

What did the High Court decide?

The shareholders appealed to the High Court which, by majority, allowed that appeal, deciding that there is no abuse of process in using the compulsory examination power under section 596A even though the primary purpose of the applicants was to investigate and pursue potential claims in their capacity as shareholders, the benefit of which would be for a limited number of shareholders of Arrium.

Majority

In a joint majority judgment, Edelman and Steward JJ held that an examination under section 596A is not an abuse of process if the predominant purpose necessarily involved enforcement of the law concerning the corporation in its public dealings. Their Honours’ rationale behind refusing to confine the application of section 596A to pursuing the interests of the company is also supported by their observation that the eligible applicant is under no requirement to show that the examination would achieve any specific result or outcome.

Applying New Zealand Steel (Australia) Pty Ltd v Burton (1994) 13 ACSR 610, their Honours agreed with the conclusion of Hayne J that the intention of the legislature, in respect of the examination powers, was to ensure that directors and those engaged in the management of companies could be held accountable. It was not necessary that the purpose also benefit the company. Their Honours ultimately concluded that a summons for examination would only be an abuse of process where the predominant purpose of the examination would ‘contradict or stultify’ the public interest in the external administration of the company.

Gageler J, in the majority, delivered a separate judgment which concluded that the legitimacy of the underlying purpose for conducting an examination under section 596A correlates to how closely that purpose relates to the examinable affairs of the company being wound up. His Honour emphasised that it was best to avoid mapping out the ‘metes and bounds’ of the potential legitimate purposes for which one might seek to leverage the examination powers. 

In Justice Gageler’s view, each application would need to be treated on a case-by-case basis, but an attempt to use the power for a purpose amounting to little more than a ‘fishing expedition’ would indicate a likely abuse of process.

Minority

In a joint dissenting judgment, Kiefel CJ and Keane J followed the traditional authority established in Re Excel, considering that the purpose of the examination ought be confined to facilitating investigations that benefit the company, its creditors and contributories.

Their Honours observed that legislative discourse around the replacement of the older section 597 displayed a desire to adopt a wider definition of ‘examinable affairs’, but was otherwise silent in respect of the breadth of the purposes for which an applicant may seek to conduct an examination. Their Honours concluded that this silence, relative to express consideration of other adjacent issues, implied a lack of legislative intention to expand the examination power under section 596A.

Comment

The High Court’s decision provides welcome clarity to the scope of the examination power and allows a relatively broad approach to the range of potential purposes for which an examination may be legitimately pursued. The traditional requirement that the purpose of the examination be for the benefit of the company, its creditors and contributories is no longer necessary.

This decision clearly bears significant implications for the potential exposure of public companies to securities class-action litigation as it broadens the purpose for which the examination powers under Part 5.9 of the Act might be applied. Plainly, this is an avenue by which shareholders, and their legal representatives and funders, might look to utilise to conduct more robust investigations into the merits of potential claims.

The power will remain available only to those who are eligible applicants under the Act and those who are able to obtain approval as ‘eligible applicants’ by ASIC. Moreover, the scope of any examination remains limited to the ‘examinable affairs’ of the company.