High Court expands rights of compulsory examination

The High Court of Australia has allowed shareholders of a company in liquidation to examine a former director and seek documents as they investigate launching a class action.

The decision – Thomas & Anor v ACN 004 410 833 Limited (Formerly Arrium Limited) (In Liquidation) & Ors [2022] HCA 3 – is significant as it expands the categories of persons who can seek to conduct a compulsory examination under the Corporations Act 2001.

The most significant impacts are:

It establishes that so long as a party authorised by ASIC to apply for the orders – the eligible applicant – is seeking to conduct the examinations to inquire into the examinable affairs of the Company, it does not matter that it is for their private benefit and that no benefit accrues to the Liquidator or the creditors of the Company. It is not an abuse of process for that reason;

It provides such potential claimants, and their litigation funders with an extremely powerful tool of investigation to enable them to establish the merits of such actions and potentially the mechanism of how any damages are recovered. Once summoned, the party in question must:

• Attend to be examined on oath;
• Answer questions put even if they may incriminate themselves by doing so;
• Produce documents relevant to the examinable affairs of the company that are in their possession or control. This includes insurance details and assets and liabilities of the examinee and associated parties.

The signed transcript of such examinations is admissible in evidence against that person in civil proceedings. That transcript can also be made available for inspection to a wide range of other persons with an interest in the affairs of the company.

It permits such examinations to be carried out without it being done through the auspices of a Liquidator or other form of insolvency practitioner. Clearly that will save a lot of money in terms of the fees of the Liquidator, but would still require the resources of a well funded party to conduct such examinations. It also overcomes cases where the Liquidation is without funds, which is commonly the case, and the Liquidator requires substantial upfront funding for the purpose of such a claim. It also gives the prospective claimant more control of the process;

It enables a party to build their case against the examinee before issuing proceedings and being at risk on adverse costs liabilities;

It is likely to lead to an increased number of cases where parties who have an interest in a corporate collapse, seek to obtain ASIC approval to apply for such orders.

Background

Arrium shareholders had sought orders for examination under s 596A of the Corporations Act 2001 with a view to investigating a class action against former officers of the Company and others involved in the Initial Public Offering of the Company.

Arrium had listed on the ASX in 2014 and operated steelworks primarily in NSW and SA until it collapsed in spectacular circumstances in April 2016 with the appointment of Administrators. It eventually went into Liquidation in June 2019. It had raised $754 million in capital in September and October 2014, but in the half yearly results published in February 2015, it reduced the value of its mining operations by $1,335 million.

The Appellants in the High Court were investigating the basis of a potential class action in their capacity as shareholders of Arrium alleging that they had suffered loss by acquiring shares and for this purpose were investigating the basis of a potential claim against various parties, particularly Arrium’s directors and auditors.

The Corporations Act and predecessor legislation have for many years allowed certain persons to apply to the Court for orders to conduct examinations of company officers and other parties such as advisers as to the ”examinable affairs” of the relevant company, most commonly while in Liquidation. Typically these examinations have been conducted by Liquidators.

”Examinable Affairs” is a broadly defined term and includes the investigation of potential causes of action that can be brought for the benefit of the Company and its creditors against those officers and others. Such examinations are a standard tool of investigation typically available to Liquidators. Used correctly they are a very powerful tool to assist a company the subject of an insolvency administration to investigate potential legal proceedings that can be brought, by the Company.

The presumption is that such examinations are held in public unless special circumstances apply in which case they can be held in private. Examinations of company officers and others in the context of high profile company collapses are regularly the subject of reporting in the national and financial press and other media.

The right to apply to examine is expressly confined to Liquidators and other aligned forms of insolvency practitioners such as an Administrator, but the Corporations Act does allow ASIC, on the application of a party, to grant the status to that party of becoming an ”eligible applicant” for the purpose of applying to a Court for an examination order. Commonly this has been used by Receivers of a company to apply for such orders.

But for many years, the common position is that it is only insolvency practitioners who conduct these examinations, not other parties who may have some interest in the affairs of the now insolvent company.

The Case

In the case the subject of the judgement, the shareholders in April 2018 had applied to ASIC to be granted the status of eligible applicant, and ASIC had done so. The shareholders then applied to the New South Wales Supreme Court for orders under s 596A of the Corporations Act that the director and others (including a banker and the auditors of Arrium) be examined. These orders were in turn challenged by Arrium, as did the relevant bank and the firm of auditors.

The matter was appealed to the NSW Court of Appeal where the examination orders were set aside. This was on the basis that the orders granted in favour of the shareholders were foreign to the purpose for such orders being made because the orders were sought for the purpose of benefiting a limited group of person who bought shares in Arrium at a particular time, irrespective of whether they were shareholders at the time Arrium went into administration. They were not sought for a purpose which conferred a demonstrable benefit on the company or its creditors or all of its shareholders.

The shareholders then appealed to the High Court.

There are various grounds upon which a person summoned to appear can seek to challenge the order for examination, one of the most common being that the examination is being conducted for an improper purpose and is otherwise an abuse of purpose. Typically this is regarded as a purpose which is collateral or foreign to the statutory purpose of such an examination. Similarly if some forensic advantage is obtained through an examination such as rehearsal of cross examination in another case, the destruction of the credit of the witness or accessing documents not otherwise available in the normal course of a case, this will also constitute an abuse of process. If an abuse of process is established, then the Court will intervene and set aside the examination order.

In this case, the clear purpose of the examination was to establish a basis on which the shareholders could claim damages in a class action against the auditors of Arrium and its directors as a result of the misleading capital raising documents.  It could have no benefit for the creditors of the Company and was one made by the shareholders only in their personal capacity.

The issue to be determined by the Court was whether in these circumstances the application to obtain the examination order was for an illegitimate purpose because ultimately if the order was fulfilled, there could be no demonstrable benefit to the company or its creditors.

What the High Court decided

By a 3:2 majority, the High Court determined that the orders ought not be set aside and that the examinations should be allowed to proceed. There was nothing in the wording of Part 5.9A of the Corporations Act which confined the purpose of such an examination, particularly in the context of the very broad definition of ”examinable affairs” and the scope of persons who ASIC could authorise to make the application for the orders, which confined the purpose of an examination to being solely for the benefit of the Company in liquidation or its creditors.

Here the examination orders were obtained by persons authorised by ASIC to make the application for the purpose of supporting the prosecution of proceedings against officers and other persons including the auditors of Arrium in connection with the examinable affairs of Arrium. As two of the majority said, regardless of whatever ultimate purpose a litigant might have, a summons that is sought for a substantial purpose that includes the public purpose of enforcement of the Corporations Act, is not a summons sought for a purpose foreign to or inconsistent with the purposes of s 596A.

The summons for examination obtained by the shareholders in the case, was to investigate the merits of a potential claim which related to the conduct of parties involved with the capital raising conducted in 2014 including company officers and advisers such as auditors, investment bankers and lawyers. The majority held that this clearly fell within the scope of the examinable affairs of Arrium.

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