High Court endorses shareholders' ability to examine former directors

The High Court's recent decision in Walton v ACN 004 410 833 Limited (formerly Arrium Limited) (in liquidation) [2022] HCA 3 (Walton v Arrium) held that "eligible applicants" (in this case, shareholders of failed companies) were entitled to summon former officers of those companies for public examination pursuant to section 596A of the Corporations Act 2001 (Cth) (Corporations Act).

The majority of the High Court held that public examinations under section 596A conducted for the purpose of obtaining evidence and information to support the commencement of proceedings against a company, its officers or advisers (and which was not for the ultimate benefit of the company or its creditors) is not an abuse of process. With that said, the Court retains its overarching jurisdiction to refuse an application for public examination if it considers that it would amount to an abuse of process. The distinction between:

• (i) applications sought to gather information about a future claim; and
• (ii) applications which provide an unfair forensic advantage will no doubt need to be clarified in future decisions.

For reasons explained below, we consider the wider interpretation of section 596A in Walton v Arrium may provide class action plaintiff law firms and funders with a further 'tool in their toolbelt' in exploring the viability and substance of future claims.

Factual background of Walton v Arrium

The Plaintiffs were shareholders in the company formerly known as Arrium Limited (Arrium). Prior to entering administration in April 2016, Arrium was an Australian publicly listed company, focused primarily on the production of steel and iron ore.

In August 2014, Arrium published its results for the financial year ended 30 June 2014. Subsequent to this, Arrium announced a $754 million capital raising, which was completed in October 2014. In February 2015, Arrium published its half yearly results, announcing a reduction in the value of its mining operations by $1.355 billion. Arrium was subsequently placed into administration and, following complex deeds of company arrangement, was ultimately placed into liquidation.

It was in relation to the above events that the Plaintiffs wished to further investigate and examine Arrium's former officers.

In April 2018, the solicitors for Arrium's shareholders wrote to the Australian Securities and Investments Commission (ASIC) requesting "eligible applicant" status. An "eligible applicant" means, among other things, a person authorised by ASIC to make an application under part 5.9 of the Corporations Act (which includes applications for public examinations). Importantly, the letter to ASIC noted the following:

• (a) the shareholders were concerned that the financial information provided in 2014 didn't adequately portray the "true state of Arrium's business"; and
• (b) implied the possibility of derivative action on behalf of the company.

ASIC granted the shareholders "eligible applicant" status.

The shareholders then applied to the Supreme Court of New South Wales for orders that Colin Galbraith (a former director of Arrium), Arrium, KPMG (Arrium's auditor) and UBS (one of Arrium's banks) be issued with orders for production. Relevantly, the shareholders also sought orders that Mr Galbraith be summonsed for examination pursuant to section 596A of the Corporations Act. Section 596A permits an "eligible applicant" to make an application to the Court to summon a person for examination about a corporation's examinable affairs.

In May 2019, a Registrar of the Supreme Court of New South Wales made the examination and production orders. Arrium sought to have the orders stayed or set aside.

The Previous Judgments

At the hearing of the matter in the Supreme Court of New South Wales:

• the shareholders abandoned the prospect of any derivative action as alluded to in their letter to ASIC. Instead, the shareholders proposed a securities class action for loss and damage suffered by investors who bought securities in Arrium after the 2014 financial year results and capital raising; and
• Justice Black determined that the requirements in section 596A had been satisfied and there was no abuse of process.

Arrium appealed the decision of Justice Black. The New South Wales Court of Appeal (Court of Appeal) unanimously overturned Justice Black's decision. The Court of Appeal held that:

• the examination sought by the shareholders was "sought for a private purpose for the benefit of a limited group of persons who bought shares in Arrium at a particular time" rather than the for the ultimate benefit of the corporation, its contributories or its creditors; and
• the application amounted to an abuse of process as the private purpose was foreign to the purpose of section 596A.

Majority Decision of the High Court

The shareholders appealed to the High Court. In a 3:2 majority, the High Court overturned the Court of Appeal's decision, finding that it had erred in limiting the purposes for which an examination may be sought pursuant to section 596A of the Corporations Act.

Relevantly, the majority in the High Court found that:

• the purpose of section 596A is not confined to the benefits of the company, its creditors or its contributories. Rather, section 596A has an underlying public administration and compliance purpose, facilitating the administration or enforcement of the law concerning the public dealings of a company in external administration and its officers. As such, the pursuit of a claim for a group of Arrium's shareholders was a legitimate purpose; and
• the operation of section 596A enables an applicant to obtain a summons "as of right". As such, a Court has "no discretion to decline to issue a summons" if the criteria in section 596A is satisfied, unless an abuse of process is established.

While section 596A appears to be drafted in such a way that it is a guaranteed right, the majority noted that it could not be assumed that ASIC would enable vexatious or oppressive examinations and that, in any event, the Court retains the capacity to intercept such conduct.

Implications of the High Court's decision

The High Court's wider interpretation of section 596A likely increases the risk for a failed company's officers or advisors because:

• officers of failed companies will likely face a greater risk of being summonsed for public examination by an "eligible applicant";
• shareholders and class action promoters may utilise section 596A as an additional avenue to investigate the merits of a potential class action against failed companies, its officers or advisors, and seek to extract information relevant to the commencement of any action (including, for example, information about available insurance and values of assets); and
• officers and advisors may increasingly become subject to 'double' examination – once by a liquidator or administrator, and further by an "eligible applicant".

However, it must be remembered that the powers conferred by section 596A are only given to those who have been given "eligible applicant" status. Since ASIC must provide this authorisation, ASIC will therefore likely continue to serve as a gatekeeper in respect of applications under section 596A.

Moreover, the practical implications of the High Court's decision remains unclear in the short term. We expect Courts to provide greater guidance on the dichotomy between:

• (i) applications sought to gather information about a potential claim (which is not an abuse of process); and, for example,
• (ii) applications which seek to manipulate and/or sidestep the traditional evidence gathering procedures (which is an abuse of process).