Public examination of directors allowed for investigating whether there are grounds to commence a class action: Walton v Arrium Ltd (in liq)

By Alicia Hill, Principal and Helena Swidron, Law Clerk

 

The High Court has found that shareholders can utilise the public examinations powers under section 596A of the Corporations Act 2001 (Cth) to examine directors for the purposes of investigating whether there is an ability to bring a class action against them for their conduct.

 

Background

Arrium (now known as ACN 004 410 833 Limited) produced iron ore and steel. Arrium was listed on the Australian Stock Exchange. However, in January 2015, the company announced that it would be closing one of its primary mining operations. Later in February 2015, the company exhibited $1,335 million reduction in the value of its mining operations. Eventually, following the decline in export prices of iron ore, Arrium was placed into administration and appointed liquidators in 2016.

The Corporations Act 2001 (Cth) (Act) contains provisions that provide various investigative-tools, one of which is public examinations. The Act enables ‘eligible applicants’ to make applications for public examinations.

The appellants of the case were shareholders of Arrium (Shareholders).

In 2018, the Shareholders applied to ASIC for ‘eligible applicant’ status to apply for examination under section 596A of the Act as they were concerned that misrepresentations had been made in Arrium’s 2014 financial records.

The Shareholders application claimed that the information regarding capital raising did not ‘adequately or fairly [portray the] true state of Arrium’s business’.[1] The findings and information discovered from the proposed examination were to be used by the Shareholders to commence a class action to claim loss and damage suffered by shareholders who invested after Arrium’s 2014 financial results were released.

In 2019, ASIC provided ‘eligible applicant’ status to the Shareholders, and in May 2019, the Shareholders applied to the Supreme Court of New South Wales under s 596A of the Act for a compulsory examination of a former director of Arrium.

At the hearing, the Shareholders conceded that they were not claiming against Arrium as creditors and that any recovery made by the Shareholders against third parties would not improve the position of Arrium’s other creditors.

Thus, the issue before the Supreme Court at first instance was whether the purpose of examinations is solely for claims that confer a direct benefit upon the company and its creditors, or whether the purpose could extent to the matter proposed by the Shareholders; a personal claim.

Arrium attempted to have the orders for examination set aside on the basis of the application being an abuse of process, being filed under an improper purpose.

Ultimately, Justice Black did not find that the application amounted to an abuse of process.[2] The Supreme Court made the order.

On appeal, the Court isolated the crucial issue as: ‘whether the purpose of the examination is foreign to the purpose for which the statutory power is conferred’.[3]

The Shareholders argued that section 596A of the Act did not require that a benefit to Arrium or its creditors be present and that the provision had a broader purpose of enabling information to be obtained to support the commencement of proceedings against Arrium’s officers and other related bodies.

The Shareholders attempted to analogise their examination purpose to that of a liquidator, submitting that the examination intended to pursue the interests of creditors generally.

However, the Court of Appeal rejected this argument as it did not find that public examinations could be used for the purpose of personal claims. Subsequently, the Shareholders sought an appeal to the High Court.

 

Issues and Decisions

The task faced by the High Court was to determine the legitimate purposes of examinations under section 596A. To determine such, the High Court considered the provision’s purpose and the historical development of the Act.

Justices Edelman and Steward held that the purpose of section 596A is to enforce the law regarding companies in external administration and their directors in public dealings. Their Honours also proposed that the application was not an abuse of process, and only would have been had the Shareholders directly attempted to impede or contradict public interest in the administration of Arrium.

Accordingly, the appeal was allowed as the majority found that it was legitimate to apply for an examination under section 596A for the purpose of investigating a potential class action.

This has contrasted the courts’ previously limited application of the section 596A power. Unlike the Court of Appeal, the High Court found that this power is broad and can apply for purposes that do not improve the interests of the corporation or its creditors.

 

Take-aways

Persons or bodies of ‘eligible applicant’ status are now able to use the tool of public examination for private and personal claims.

This decision has effectively raised the risk for directors and officers of companies in external administration through the clarification of the purpose of section 596A examinations and limiting the grounds to set aside such an application.

 

If you have any queries about any of the matters raised by this case, then please contact Alicia Hill on (03) 8540 0292 or alicia.hill@mst.com.au

[1] Walton v CAN 004 410 833 Limited (formerly Arrium Limited) (in liquidation) [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 [50].

[3] ACN 004 410 833 Ltd (formerly Arrium Ltd) (In liq) v Walton (2020) 383 ALR 298 at 330 [131].