High Court significantly expands the use of examination summonses

In a significant decision delivered on 16 February 2022, the High Court in Walton[1] overturned the NSW Court of Appeal’s decision to set aside an examination summons issued by Arrium’s shareholders to a former Arrium director.

The decision significantly expands the scope of the purposes for which examination summonses can be issued, by enabling eligible applicants such as shareholders to determine if they have a potential claim against company officers or advisers in relation to the examinable affairs of a company. Consequently, the decision represents an important win for promoters of shareholder class actions and creates the potential for increased litigation connected with corporate liquidations generally (including by special purpose liquidators supported by litigation funders).

Background

Under section 596A in Part 5.9 of the Corporations Act 2001 (Cth), on application by an eligible applicant, the court can summon an officer of a company under external administration to be examined about the corporation’s examinable affairs.

However, if such an application is made for a collateral or improper purpose foreign to the statutory purpose of examinations, the application will amount to an abuse of process.[2]

In 2018, shareholders of Arrium Limited (Arrium) obtained “eligible applicant” status from the Australian Securities and Investments Commission (ASIC) to make an application under Part 5.9 of the Act.

Supreme Court Decision

The Arrium shareholders applied to the Supreme Court of NSW for orders requiring a former Arrium director and its auditors to appear for examination and to produce documents to determine whether any claims could be brought against the company, its directors or its auditors in relation to misleading and deceptive conduct during a $754 million capital raising in 2014. A Registrar granted the examination summonses. Arrium, alongside the former director and auditors, sought to have the examination summonses stayed or set aside.

Justice Black refused to stay or set aside the summonses and found that while the shareholders’ predominant purpose in seeking the examination summonses was to investigate whether any claims could be brought against Arrium, its directors or auditors, this did not amount to an abuse of process.[3]

Court of Appeal Decision

Upon appeal by Arrium, the Court of Appeal dismissed the examination summonses, finding that the examination’s predominant purpose was for a private purpose to investigate and pursue a class action on behalf of a limited number of Arrium shareholders and not for a purpose which conferred a demonstrable benefit on the company, its creditors or its contributories, making the application an abuse of process.[4]

High Court Decision

The Arrium shareholders appealed the Court of Appeal's decision to the High Court.

The key question was whether (in accordance with longstanding practice) the purpose of s 596A examinations should be limited to examinations which confer a commercial or demonstrable benefit on the company, its creditors or its contributories.

In allowing the appeal and finding that the examination summonses were not an abuse of process, a 3:2 majority of the High Court held that the statutory purpose of s 596A (as expanded by the Corporate Law Reform Act 1992 (Cth)) is broader in focusing on administration or enforcement of the law concerning the public dealings of the corporation and its officers.[5] Consequently, the provision enables evidence and information to be obtained which would support the bringing of proceedings against company officers and advisers concerning the corporation’s examinable affairs.[6]

The Court regarded the question of whether a potential proceeding may benefit all or only some shareholders, creditors or contributories as irrelevant. Instead, the Court emphasised that the pursuit of claims to recover money lost due to corporate misconduct is in the public interest, as it protects shareholders, creditors and contributories and encourages compliance with the law. Examinations conducted for such a purpose will not constitute an abuse of process, unless the examination’s predominant purpose would somehow contradict or stultify the public interest in the external administration of the company.[7]

In addition, the majority noted that ASIC’s broad powers to pursue corporate misfeasance, including authorising aggrieved investors to investigate that misfeasance through the grant of “eligible applicant” status, supported the conclusion that such an examination would serve an important public function and would therefore not be an abuse of process.[8]

Importantly, the majority emphasised the court’s role in safeguarding the integrity of such examinations via appropriate directions, controlling which questions should be asked, and disallowing any examinations which are oppressive, vexatious or an abuse of process.[9]

Conclusion

The High Court’s decision in Walton represents a significant expansion of the purposes for which s 596A examinations summonses may be issued.

Such an expansion confirms the role of examinations as an additional component in the toolkit of promoters of shareholder class actions, as well as increasing the potential for appointments of special purpose liquidators supported by litigation funders.

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