On 16 February 2022, the High Court allowed an appeal from a judgment of the Court of Appeal of the Supreme Court of New South Wales regarding the decision in ACN 004 410 833 Ltd (formerly Arrium Ltd) (In Liq) v Walton [2020] NSWSC 157.
The appeal in Walton & Anor v ACN 004 410 883 Ltd (Formerly Arrium Ltd) (In Liq) & ORS [2022] HCA 3 (Walton) concerned the purposes for which a court may, on the application of an eligible applicant, summon an officer or provisional liquidator of a corporation in external administration for examination about the corporation’s examinable affairs pursuant to section 596A of the Corporations Act 2001 (Cth).
The majority of the High Court held that the power of examination had broadened as a result of legislative amendments over time.
The decision has far reaching implications for directors and officers of failed companies who may, for example, be examined about their examinable affairs by shareholders even if the liquidator has declined to examine the company directors or officers.
Facts
Arrium Limited (Arrium) was an ASX-listed company and a producer of iron ore and steel. In October 2014, Arrium completed a capital raising and by January 2015, Arrium had closed one of its principal mining operations. By April 2016, the company was placed into administration and in June 2019, liquidators were appointed.1
The shareholders of Arrium (appellants) claimed that the information published by Arrium in respect of the capital raising did “not adequately or fairly” reflect the “true state of Arrrium’s business” and sought to make a claim against the company, its directors or auditor.2
The appellants applied to the Australian Securities and Investments Commission (ASIC) and were granted the status of ‘eligible applicant’ for the purposes of section 596A of the Act, allowing them to apply for a court order to examine Arrium’s officers.
The critical issue for determination was whether the purpose of the examination was foreign to the purpose of the statutory power under section 596A. This is because the examination was sought for a private purpose for the benefit of a limited group of shareholders in Arrium, being shareholders who bought shares at a particular time, and not for the benefit of Arrium or its creditors or contributories.
Previous judgments
The Supreme Court of New South Wales granted the order. Black J considered that the predominant purpose of the application was to investigate, and pursue, a claim against the directors or auditors of Arrium in the appellants’ capacity as shareholders of Arrium rather than as creditors. Black J was not satisfied that such an application amounted to an abuse of process.3
The Court of Appeal held that the purpose of the examination is foreign to the purpose for which the statutory power under section 596A is conferred. The Court of Appeal held that such an examination would be an abuse of process and allowed the appeal.4
The shareholders of Arrium appealed to the High Court, arguing that the statutory purpose of section 596A does not require a benefit to accrue to Arrium, its contributories or its creditors but that the statutory purpose of that section is broader.
High Court decision
In a decision of the majority of 3 judges to 2, the High Court allowed the appeal, set aside the orders made in the Court of Appeal and paved the way for the appellants to examine Arrium’s officers.
Gaegler J (one of the majority judges) emphasised that a number of the authorities relied upon by the Court of Appeal predated the current form of the Act.5
Edelman and Steward JJ in their separate judgment similarly suggested that earlier decisions imported a limited interpretation of the examination power based on previous legislation into the current section 596A.6
They also held that it should not matter whether the claim relates to only a select group of creditors and/or contributories and that the recovery of money by a group of shareholders serves the public interest by necessarily comprising a purpose of enforcing the law. Therefore, an examination made pursuant to section 596A for such a purpose is not an abuse of process.7
Key Takeaways
The Arrium decision opens the way for class action plaintiffs who are eligible applicants to use section 596A to examine directors, officers and third parties for the purpose of their investigations where the company is placed in external administration.
The effect of the decision must be read as being subject to the requirement to satisfy ASIC that the class action plaintiffs are “eligible applicants”. Even then, any examination will remain subject to the court’s supervisory powers to ensure that they relate to the company’s examinable affairs.
The decision will likely be welcomed by class action plaintiffs but not by directors, officers or third parties who now face increased risk of mandatory examination where a company is placed in external administration.
This article was written by Jonathan Kramersh, Partner, Josh Hanegbi, Law Graduate and Thaivini Sathiyaseelan, Law Graduate.
1Walton & Anor v ACN 004 410 883 Ltd (Formerly Arrium Limited)(In Liquidation) & ORS [2022] HCA 3 (Walton), [1].
2Ibid, [4].
3Re ACN 004 410 833 Ltd (formerly Arrium Ltd) (subject to a deed of company arrangement) [2019] NSWSC 1606, [49]-[50].
4ACN 004 410 833 Ltd (formerly Arrium Ltd) (In liq) v Walton (2020) 383 ALR 298, [140]-[141].
5Walton (n 1) [99]-[105].
6Ibid [184].
7Ibid [190].
