Walton v ACN 004 410 833 Limited (formerly Arrium Limited) (in liquidation)  HCA 3 (16 February 2022).
A 3-2 majority of the High Court decided that the conduct of compulsory examinations under s596A of the Corporations Act, by shareholders to investigate whether they have a claim against third parties, such as a company’s former directors, would be permissible and not an abuse of process.
This case might herald a new avenue for potential claimants to conduct pre-action investigations, especially class-action claimants with funding, but as we explain below, its potential impact should not be overstated.
Iron ore and steel producer, Arrium Limited – after publishing its 2014 results – announced that it would undertake a capital raising. Shareholders were provided with an Information Memorandum. By October, $754 million had been raised.
But in early 2015, Arrium announced the closure of its Southern Iron operation and recognised an operational shortfall of over $1.3 billion. Arrium was placed into administration in 2016, and into liquidation in 2019.
Some of Arrium’s shareholders, believed that they had potential claims against Arrium’s former directors and its auditors, KPMG, in relation to the accuracy of the 2014 results and the Information Memorandum.
ASIC agreed to grant the shareholders the status of “eligible applicants”, which under the Corporations Act 2001 (the Act) is defined to mean persons authorised by ASIC to make an application under Part 5.9 of the Act.
Under s 596A (appearing in Part 5.9) such “eligible applicant” may apply to the Court for a summons to examine a company’s current or former officers about the corporation's “examinable affairs”.
A Registrar in the NSW Supreme Court made orders allowing the shareholders to examine one of Arrium’s former directors under s 596A. Arrium sought to set aside those orders, arguing that they were an abuse of process.
Black J in the Supreme Court dismissed Arrium’s challenge. The Court of Appeal (Bathurst CJ, Bell P and Leeming JA) overturned that decision and upheld Arrium’s challenge. The High Court, by a 3‑2 majority, allowed the further appeal by the shareholders.
The shareholders met the necessary criteria under s596A to apply for a summons to examine a former director. So how could their application be an abuse of process?
The necessary criteria met by the shareholders was that:
they were “eligible applicants”;
the person they sought to examine was one specified in s 596A, that is, a former officer of Arrium;
the summons was indeed about the corporations “examinable affairs”;
the summons complied with the procedural form in s 596D of the Act; and
the company in question, Arrium, was subject to some form of external administration for the purposes of Ch 5 of the Corporations Act.
However, the shareholders accepted that the examinations they sought to conduct were not connected to Arrium’s winding-up and would not benefit Arrium, or its general body of creditors. Rather, they sought to examine third parties, with a view to potentially commencing proceedings against those third parties.
The High Court defined the issue as whether the shareholders’ “predominant” or “ultimate” purpose in seeking the summons to examine the former director was foreign to the purpose of s 596A. If it was, then it would be an abuse of process.
The majority – being Gageler J writing alone, and Edelman and Stewart JJ writing together –recognised that the examination power in s 596A is broader than previous powers to examine company officers.
Section 596A was inserted into the then Corporations Law in 1992 along with s 596B. Section 596B retained what was previously a court’s discretionary power to issue a summons for examination. Section 596A, on the other hand, introduced a mandatory examination power, that is, where a court must issue the summons if the necessary criteria is met.
Arrium relied on authorities which said that using the examination power for the purposes of applicants looking to advance a case against third parties and not for the benefit of the company, its creditors or contributories, would be a use that was foreign to the purpose of the power.
However, the majority observed that those authorities were decided prior to the introduction of s 596A. When s 596A was introduced, there was also an expansion in the range of eligible applicants who could apply for an examination summons, to include ASIC and persons authorised by ASIC.
An examination by ASIC for the purpose of bringing criminal or regulatory proceedings in connection with the affairs of the company would not necessarily aid an external administration or be for the benefit of the company.
Gageler J concluded (at ) that nothing in the text or structure of ss 596A or 596B limited the use of those powers so as to exclude examinations by shareholders to investigate a basis for civil proceedings.
Edelman and Stewart JJ concluded (at  and ) that legitimate purposes under s 596A included enforcement of the Act and the protection of shareholders and creditors from corporate misconduct – that could extend to the pursuit of a claim by only some shareholders, even if not all shareholders, because such pursuit would include a purpose to enforce the law and so serve the public interest.
In dissent, Kiefel CJ and Keane J writing together, would have followed previous authorities which considered the predecessors to ss 596A or 596B. They said (at ) that if compulsory examinations could be used for the purpose contended by the shareholders, one would have expected some mention of this purpose in the explanatory memorandum introducing s 596A or the Harmer Report that preceded the 1992 amendments.
So where does this leave us?
Kiefel CJ and Keane J said that there would now be nothing to prevent a person seeking an examination in aid of an industrial dispute or an action for personal injuries arising in the workplace.
That might be true in theory. Gageler J, on the other hand, thought it better not to map out the “metes and bounds” of the legitimate purposes for which an examination summons may be issued.
The practical impact of this High Court decision is not to be overstated.
As Edelman and Steward JJ said (at ): “It is not to be assumed or expected that ASIC might authorise a person to make an illegitimate, vexatious or oppressive examination of a company officer”. Their Honours also said that a court retains powers to prevent abuse may making appropriate directions and controlling the questions that may be asked.
Their Honours observed that s 597B permits a court to order an applicant to pay the costs of an examinee where it is satisfied that the relevant summons has been "obtained without reasonable cause".