Public examinations for private purposes: High Court ruling in Walton & Anor v ACN 004 410 833 Ltd

Walton & Anor v ACN 004 410 833 Ltd (Formerly Arrium Limited) (In Liquidation) & Ors [2022] HCA 3

Public examinations are a commonplace mechanism for discovery by liquidators, administrators or other eligible applicants in Court proceedings under the Corporations Act 2001 (Cth) (Act).

This week, the High Court of Australia clarified the permissible purposes for which public examinations can be used in its judgment in Walton v ACN 004 410 833 Limited (formerly Arrium Limited) (in liquidation) [2022] HCA 3 (Walton decision).  

By majority, the High Court determined that the summons in question was not issued for a purpose that was an abuse of process. Rather, the High Court reasoned that examining an officer of a corporation for the purpose of pursuing a claim against the corporation in external administration, or one of its officers or advisors, for the enforcement of the law can be a legitimate use of the power conferred by section 596A of the Act, irrespective of whether it is in the interests of the corporation or whether the claim relates to all or only some of the corporation’s creditors or contributories. 

The Walton decision establishes a precedent for public examinations under section 596A of the Act to be used to investigate the merits of personal claims, not just for purposes which confer benefits directly on the concerned company or its creditors. In doing so, the Walton decision distinguished between abuses of process and the permissible purposes for public examinations under the Act.

In this bulletin, we provide a summary of the factual background and proceedings, as well as some key take-aways from the Walton decision.

Factual background

The company in question, Arrium, was listed on the ASX and was a producer of iron ore and steel. Following a decline in the export value of iron ore and subsequent financial distress, Arrium entered external administration on 7 April 2016.

In April 2018, some of the shareholders of Arrium sought approval from ASIC for “eligible applicant” status under the Act to apply for examinations under section 596A of the Act. One of the reasons provided by the shareholders was concern about misrepresentations in Arrium’s 2014 financial records.

This concern gave rise to an intention by the appellant shareholders to conduct a proposed class action for loss and damage suffered by investors who bought securities in the company after its 2014 financial year results. 

The intended use of information discovered by the appellant shareholders as a result of their examination summons was to conduct “a proceeding in which they and a class of shareholders will claim, against certain directors and auditors of Arrium, damages for alleged misrepresentations made concerning the financial position of the company.” [20]

On 6 May 2019, the shareholders applied to the Supreme Court of New South Wales for an order for a mandatory examination under section 596A of the Act against a former director of Arrium after ASIC provided authorisation for them to do so. That order was made by the Supreme Court on 15 May 2019.

At the hearing in the Supreme Court before Black J, the appellant shareholders conceded that “any recovery by them against third parties would not improve the position of the company’s other creditors” [5] (emphasis added). Herein lies the distinction between the purpose of examinations for claims which confer a direct benefit on the company and its creditors, as opposed to claims such as that proposed by the appellant shareholders (in other words, unrelated claims).

Statutory provisions

Section 596A of the Act states that the Court will grant a summons for a public examination of a person about a corporation’s examinable affairs if an “eligible applicant” applies and the Court is satisfied that:

  • The examinee is or was an officer or provisional liquidator of the corporation at prescribed times.

Section 9 defines “eligible applicant” to include:

  • ASIC; or

  • a liquidator or provisional liquidator of the corporation; or

  • an administrator of the corporation; or

  • an administrator of a deed of company arrangement executed by the corporation; or

  • a restructuring practitioner for the corporation; or

  • a restructuring practitioner for a restructuring plan made by the corporation; or

  • a person authorised in writing by ASIC to make:

    • applications under the Division of Part 5.9 in which the expression occurs; or

    • such an application in relation to the corporation.

On its face, section 596A of the Act does not expressly require the purpose of examinations to be confined to those which would confer a benefit directly on the corporation or its creditors. Therein lies the statutory interpretation exercise undertaken by the High Court in the Walton decision.

Supreme Court’s primary decision

During the Supreme Court of New South Wales proceedings, the shareholders applied for an order to issue a summons for the examination of a particular director of Arrium, who had not previously been examined by the liquidator.

In response, Arrium sought orders to have the examination and the production order set aside on the basis that the summons was an abuse of process. The primary judge, Black J dismissed Arrium's application. His Honour Black J determined that the summons was not an abuse of process because the shareholders intended to examine the director on matters which the liquidators could have examined him on, irrespective of the purpose for which the information would be used. His Honour stated that "information likely to be produced by the … examination would also likely advance the interests of Arrium and its creditors…"[2]

Court of Appeal decision

Arrium appealed Black J’s Supreme Court decision to the Court of Appeal.

In deliberating Arrium’s appeal, the Court of Appeal resolved that the proposed examination would not benefit Arrium or its creditors. As such, the examination summons was found by the Court of Appeal to be an abuse of process.

The shareholders argued that the examination summons was valid because the liquidator could have examined all the directors about the same issues which they sought to examine, and the examination was intended to pursue the interests of creditors generally. The argument was unequivocally rejected by the Court of Appeal, which stated:[6]

"The examination is sought for a private purpose for the benefit of a limited group of persons who bought shares in Arrium at a particular time irrespective of whether they held their shares at the time of the appointment of the administrators...such an examination is foreign to the purpose for which the examination power is conferred and there is an abuse of process."

In light of the Court of Appeal’s decision, the shareholders sought special leave to appeal to the High Court.

High Court’s decision

The “central question” in the High Court appeal was to determine the statutory purpose(s) that examinations under section 596A can legitimately be used for.

The majority of the High Court found that the purpose and concern of section 596A is not confined to the interests of the corporation, its creditors or its contributories or the bringing of criminal or regulatory proceedings in connection with the affairs of the corporation. Further, the High Court found that the shareholders’ proposed summons was “about” the examinable affairs of Arrium for the purposes of section 596A because the summons concerned the potential for Arrium’s shareholders “to recover their losses from the former directors of Arrium or its former auditors or both.” 

Hence, the shareholders’ proposed summons, although it contemplated a personal claim available to the shareholders which would not benefit all of Arrium’s creditors, was found by the High Court to satisfy the purposes of section 596A and therefore was not an abuse of court process. 

The High Court helpfully distinguished the appellant shareholders’ proposed summons from other examples of abuses of process, which include:

  • An application brought by a liquidator for an examination for the purpose of rehearsing the cross-examination of a potentially hostile witness in pending litigation

  • cross-examination of a person to destroy their credit and to obtain de facto discovery when an order for discovery has been refused.

Because the shareholders’ summons contemplated matters “about” Arrium, the High Court stated that “It follows that, unless it was an abuse of process, the Registrar was obliged to issue the summons sought, as she did.

Key takeaways  

What does the Walton decision mean for public examinations?

  • Eligible persons, including anyone authorised by ASIC, may use public examinations under the Act as a discovery application in respect of personal claims against third parties;

  • Public examination summonses are not necessarily confined to causes of action that directly benefit the subject company or all of its creditors;

  • Examinees will now have limited grounds to set aside an examination summons and can no longer argue that claims outside the direct purview of the company or its creditors constitute an abuse of process;

  • The net has been widened for potential purposes and recipients of public examination summonses under section 596A, increasing the power of this process as an investigative tool.

If you have questions on public examinations or insolvency generally, Gavin Stuart, David de Mestre and Gabriella Porcu from Bartier Perry’s commercial dispute resolution and advisory team are experienced and available to help.  

Authors: Gavin Stuart, David de Mestre & Gabriella Porcu