In a recent decision,[1] the High Court allowed a summons to be issued for the examination of a former director of Arrium, notwithstanding that the purpose of the examination was for shareholders to investigate and pursue potential personal claims. This decision provides some welcome clarity to the law regarding the purposes for which an examination order can be made, and provides shareholders with an additional option in their pursuit of recoveries against alleged corporate malfeasors.
The appellants
The appellants were a group of shareholders of Arrium, who were authorised by the Australian Securities and Investments Commission to apply to the Supreme Court of New South Wales for an order that a summons be issued for the examination of a former director, pursuant to s 596A of the Corporations Act 2001 (Cth) (Corporations Act).
The appellants’ purpose in seeking the order was to investigate a potential class action by them in their capacity as shareholders, against Arrium’s former directors and auditors, in connection with a capital raising completed by Arrium in October 2014. The group of shareholders seeking the examination order were those who bought Arrium shares after the 2014 financial year results and capital raising, based on allegations of misrepresentations about Arrium’s financial position. The 2014 capital raising was completed shortly before Arrium announced the closure of one of its principal mining operations in January 2015. Arrium subsequently went into administration in 2016 followed by liquidation in 2019.
The proceedings
The order for the issuance of an examination summons was initially made by a Registrar in Equity. The Supreme Court declined to set aside the order.
On appeal, the Court of Appeal allowed Arrium’s appeal and discharged the examination order, on the grounds that the examination application was for an illegitimate purpose and thus an abuse of process, in circumstances where the class action (which was the ultimate purpose of seeking the examination) would not confer a demonstrable benefit on the company or its creditors or contributories as a whole. The appellant shareholders were a sub-set of the shareholders as a whole, confined to those who purchased their shares after the 2014 capital raising.
The High Court allowed the appellant shareholders’ appeal 3-2. Justices Edelman and Steward (in a joint judgment) and Gageler J (in a single judgment) were in the majority, with Kiefel CJ and Keane J dissenting.
The statutory purpose of s 596A
A central question on the appeal was determining the statutory purpose of an examination under s 596A of the Corporations Act. This was important because it was accepted by all parties that if the predominant purpose of the examination for which an application is made is foreign to the statutory purpose of such an examination, the application will amount to an abuse of process. It was therefore necessary for the Court to determine (a) the statutory purpose; and (b) whether the appellants’ purpose was foreign to that statutory purpose, making it an abuse of process.
The text of s 596A does not provide much assistance in determining the statutory purpose of the section. Accordingly, it was necessary for the Court to consider the historical context of s 596A, including its legislative history and case law, in each of the three separate judgments delivered by the Court.
In their joint majority judgment, Edelman and Steward JJ commented (at [169]) that the purpose of s 596A cannot be confined by reference to benefit to the company, its creditors, or its contributories. Indeed, their Honours (at [175]) considered legitimate purposes under s 596A to include the enforcement of the Corporations Act, the promotion of compliance with the Corporations Act and the protection of shareholders or creditors from corporate misconduct. Moreover, if an examination is sought for a substantial purpose that includes the public purpose of enforcement of the Corporations Act (including for the purpose of determining whether relief might be obtained in respect of potential corporate misconduct), that is not an illegitimate purpose (regardless of whatever ultimate purpose a litigant might have).
In his separate concurring judgment, Gageler J noted (at [123]) that the ultimate purpose for which a s 596A examination might be conducted is not limited to aiding the external administration of a company or to bringing criminal or regulatory proceedings in connection with its affairs. To impose such a limitation would “unduly constrain the outworking of the regulatory choices available to ASIC in the exercise of its authorisation function”.
No abuse of process
In light of the Court’s finding as to the statutory purpose of s 596A of the Corporations Act, it did not matter that the proposed class action (and thus the examination) would bring no commercial or demonstrable benefit to Arrium or its creditors. Moreover, the Court confirmed (at [195]) that it is a legitimate use of the power for shareholders who stand to benefit from a class action “to seek to test the merits of that class action with a compulsory examination”.
Dissenting judgment
Kiefel CJ and Keane J delivered a rare dissenting judgment, in which they dismissed the appeal. Their Honours found that s 596A is confined to examinations for the benefit of the external administration of a company, or for the benefit of the company or its creditors or contributories considered as a whole. They concluded that s 596A does not authorise an examination to facilitate the investigation or prosecution of a private claim being pursued exclusively for the benefit of other persons.
Effect of the judgment
We are currently in a legislative environment where Parliament is seeking to restrict and more heavily regulate shareholder class actions and their funders. The High Court’s judgment may provide shareholders with another tool in their arsenal for investigating the merits of claims before funders are required to commit to funding large amounts for class actions. However, given that ASIC needs to authorise shareholders to make an application under s 596A, the practical effect of the judgment is likely to be limited. This decision is unlikely to open the floodgates.
[1] Walton & Anor v ACN 004 410 833 Ltd (formerly Arrium Limited) in liquidation & Ors [2022] HCA 3.
