High Court debates whether examining former directors of company in liquidation is legitimate

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Proposed shareholder class action – Company in liquidation – Application by proposed lead plaintiff to publicly examine former officer of company under external administration examination powers – Whether pursuit of examination in those circumstances, for private purpose with no perceived benefit to company, is legitimate or would constitute abuse of process.

The appellants (plaintiffs at first instance) are former shareholders of Arrium Ltd (Arrium), who are investigating potential class actions on behalf of Arrium shareholders against various parties (including Arrium’s directors and its auditor, KPMG) following the collapse of the Arrium group (including, in particular, relating to a capital raising undertaken in September 2014, shortly prior to the closure of one of Arrium’s significant mining operations). As Arrium is now in external administration, the power to conduct public examinations, contained in Part 5.9, Div 1 of the Corporations Act 2001 (Cth), is available. However, that power can only be exercised by the Australian Securities and Investments Commission (ASIC), or by the external administrators of Arrium, unless ASIC grants permission for other persons to exercise that power as an ‘eligible applicant’. The appellants therefore applied to ASIC for, and were granted by ASIC, permission to exercise the examination power contained in Part 5.9, Div 1 to enable them to conduct examinations for the purpose of investigating the feasibility of any proposed class action(s). Having obtained that permission, the appellants then applied for and obtained from the Court:

• a summons for the examination of a former director of Arrium (Mr Colin Galbraith); and

• orders for production of documents by Mr Galbraith, by Arrium, and by others.

Arrium applied for the examination summons and the orders for production to be set aside. Subsequently, Mr Galbraith himself applied for the examination summons to be set aside.

The external administrators of Arrium had already conducted extensive public examinations themselves, albeit they did not touch on the September 2014 capital raising (because the administrators did not consider that Arrium itself would have any cause(s) of action arising out of the capital raising), nor did they involve Mr Galbraith (who instead was informally interviewed by the external administrators). It was submitted that the appellants’ purpose in conducting the proposed public examination of Mr Galbraith (and potentially others) was solely to further their own private interests, which was repugnant to the purposes of Part 5.9, Div 1, as the proposed examination would not in any way benefit the conduct of the external administration (and, indeed, could well be detrimental to it).

At first instance, Black J concluded (albeit with “considerable hesitation”) that the public examination of Mr Galbraith ought be allowed to proceed (Re ACN 004 410 833 Ltd (formerly Arrium Ltd) (subject to deed of company arrangement) [2019] NSWSC 1606; [2019] NSWSC 1708). On appeal, the Court of Appeal overturned the primary judge’s decision, and set aside the examination summons directed to Mr Galbraith and the associated orders for production of documents. It did so on the basis, in substance, that the proposed examination was being conducted entirely for a private purpose, with no demonstrable benefit for the company, its creditors or its contributories as a whole, and was therefore an abuse of process (ACN 004 410 833 Ltd (formerly Arrium Ltd) (in liq) v Walton (2020) 383 ALR 298; [2020] NSWCA 157).

The appellants sought, and were granted, special leave to appeal to the High Court. The High Court, by majority (Gageler J, Edelman and Steward JJ; Kiefel CJ and Keane J dissenting) allowed the appeal and restored the primary judge’s orders, thereby permitting the examination to proceed.

Justice Gageler held that, having regard to:

• the broad definition in the Corporations Act 2001 (Cth) of a company’s ‘examinable affairs’ which may be the subject of an examination; and

• the fact that the appellants’ proposed examination, even though for private purposes, would clearly be about the first respondent’s ‘examinable affairs’,

the proposed examination was within the statutory purpose (and that earlier cases, decided under different statutory regimes, which required that the examination be for the purposes of furthering the winding up in some way, were of limited utility in light of the now expanded regime). His Honour said (footnotes omitted):

[118] … there was not under Pt 5.9 of the Corporations Law any requirement for an examination sought by an eligible applicant to be for the purpose of benefiting the corporation or the general body of creditors or contributories. Nor can that, or any other, purposive requirement be discerned in the text or structure of Pt 5.9 of the Corporations Act…

[122] Under Pt 9.4B of the Corporations Act, ASIC is empowered to pursue corporate misfeasance by itself bringing proceedings for orders which include declarations of contravention, pecuniary penalty orders and compensation orders. But ASIC is not obliged to limit its vision of what can be done to maintain, facilitate and improve the performance of the financial system to what it might achieve in proceedings that it might bring. Having regard to the range of functions and powers with which it is invested, ASIC can take the view that the confident and informed participation of investors and consumers in the financial system would be promoted by authorising investors or consumers who might have suffered loss through corporate misfeasance to investigate that misfeasance through the public process for which Pt 5.9 provides with a view to them pursuing recovery of their losses by bringing civil proceedings of their own either under the ordinary processes of a court or under class action regimes like that in Pt IVA of the Federal Court of Australia Act 1976 (Cth), inserted shortly before the enactment of the Corporate Law Reform Act. The Australian Law Reform Commission noted in 2018 that class actions "frequently perform a public function by being employed to vindicate broader statutory policies"…

[126] Suffice it for the purpose of the present case to conclude that the appellants did not seek to examine the third respondent for a purpose foreign to the nature of the process of compulsory examination for which Pt 5.9 of the Corporations Act provides by reason only that the result which the appellants intended to achieve would bring no commercial or demonstrable benefit to the first respondent or its creditors. The appellants' ultimate purpose of enabling evidence and information to be obtained to support the bringing of proceedings against officers and other persons in connection with the examinable affairs of the first respondent was not illegitimate.

Justices Edelman and Steward likewise held that the purpose of the proposed examination was not foreign to the statutory purposes of the examinations regime, which they considered is much broader than its predecessors. Their Honours said (footnotes omitted):

[143] … It cannot be doubted that the appellants' class action, if brought, would include claims arising from the participation of the appellants in the capital raising, and thus as shareholders of Arrium, as the appellants were only able to participate in the capital raising by virtue of already being shareholders. These matters demonstrate that the appellants' purpose in seeking the examination included the administration or enforcement of the law concerning the public dealings of the corporation in external administration and its officers…

[169] … the purpose of s 596A cannot be confined by reference to benefit to the company, its creditors, or its contributories. As the scope of application of s 596A expanded, so did its underlying purpose and concern. That expanded concern is with the administration or enforcement of the law concerning the public dealings of the corporation in external administration and its officers…

[175] Legitimate purposes under s 596A therefore include the enforcement of the Corporations Act, the promotion of compliance with that Act, and the protection of shareholders or creditors from corporate misconduct. An examination conducted for a purpose that included investigating the possible existence of misconduct on the part of a company's officers might be expected to serve the public interest in ways such as these. Hence, 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, whether by ASIC or another eligible applicant, is not a summons sought for a purpose foreign to s 596A in the sense that it is inconsistent with the purposes of s 596A. And the purpose of enforcement of the Corporations Act includes examination for the purpose of determining whether relief might be obtained in respect of potential corporate misconduct…

[190] It follows that examining an officer of a company for the purpose of pursuing a claim against the company or one of its officers or advisers for the enforcement of the law can be an entirely legitimate use of the power conferred by s 596A. It should not matter whether the claim relates to all creditors or all contributories, or only a smaller group. Generally speaking, where a company is subject to external administration, each creditor and each shareholder wishes to recover their loss; the recompense they seek is money or an in specie distribution. No doubt some are more altruistic than others and may pursue a remedy directed at, or which includes, other creditors or shareholders being compensated. But the existence of such fine feelings is of no consequence to the court's application of s 596A. As conceded by the first respondent, the pursuit of a claim for the benefit of some shareholders can be as legitimate as a claim made for the benefit of all shareholders. In both cases, the recovery of money in respect of corporate misadventure serves the public interest by necessarily including a purpose to enforce the law. The making of such claims is a means of protecting shareholders and creditors and of ensuring compliance with the law. An examination made pursuant to s 596A for such a purpose is no abuse of process…

[195] … Whilst the proposed class action, if successful, undoubtedly would not benefit all of Arrium's shareholders, it is a legitimate use of the power conferred by s 596A for those shareholders who stand to benefit to seek to test the merits of that class action with a compulsory examination by means that include the administration or enforcement of the law concerning the public dealings of the corporation in external administration and its officers. The exposure of any wrongdoing may well encourage greater compliance with the law.

As noted above, Kiefel CJ and Keane J dissented. They traced the history of the examination provisions dating back to the nineteenth century, and held that, whilst the form of the provisions had changed and expanded over time, their underlying purpose had not, and that the use of those powers to conduct an examination for an entirely private purpose, in circumstances where there would be no demonstrable benefit to the company, its creditors or its contributories as a whole arising out of the examination, was foreign to the statutory purpose and therefore an abuse of process.

Walton v ACN 004 410 833 Ltd (formerly Arrium Ltd) (in liq) [2022] HCA 3

High Court of Australia, Kiefel CJ, Gageler, Keane, Edelman and Steward JJ,
16 February 2022

Appellants’ Solicitors: Banton Group;
Respondents’ Solicitors: Arnold Bloch Leibler / Ashurst;
Appellants’ Funder: N/A

Austlii Link: Available here

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