The High Court expands the scope and purpose of s596A of the Corporations Act 2001 (Cth) – who can conduct a public examination
Case Study – Michael Thomas Walton & Anor v ACN 004 410 833 Ltd (formerly Arrium Ltd ) (in liq)  HCA 3
The High Court of Australia (HCA), in a majority decision, has held that the pursuit of a claim for the benefit of some shareholders may be as valid as a claim made for all shareholders.1 In each situation, the claim in respect of corporate misfeasance is in the public interest because it seeks to enforce the law and protect shareholders and creditors alike.2
The HCA considered that:
- The amendments effected to the power to conduct public examinations by the Corporate Law Reform Act expanded the scope of an application under s596A and also its underlying purpose and concern.
- It is unnecessary to identify a comprehensive list of the legitimate purposes to which a s596A application might be put.3 Each case will depend on its particular facts and circumstances.
- Further setting aside a summons for “abuse of process” should be a last resort, the preferred course would be to ensure “the integrity of the examination through the making of appropriate directions and by the controlling of what questions might be asked”.4
- The representative of a possible class action by a limited group of shareholders (Shareholders) of ACN 004 410 833 (formerly Arrium Ltd) (subject to a deed of company arrangement) (Arrium) was granted by a Supreme Court registrar orders for:
- production of documents from Arrium, KPMG, UBS and Mr Simon Galbraith, a former director of Arrium; and
- a summons for examination of Mr Galbraith.
- Prior to the grant of the above orders, the Shareholders wrote to ASIC seeking that the respondents be given eligible status within the meaning of s597(5A)(b) of the Corporations Act 2001 (Cth).
- The order was sought pursuant to s596A of the Corporations Act 2001(Cth) (Act) and was made by a Registrar in Equity.
- Arrium sought to have the order set aside on that basis that it was an abuse of process.
- At first instance, Black J considered that whilst the information given by the Shareholders to ASIC indicated that the predominant purpose in seeking an examination summons was to investigate, and pursue, a claim by the shareholders, in their personal capacity, against the directors of Arrium and/or its auditors, he was not satisfied that this amounted to an abuse of process.5
- The Court of Appeal found that the examination was an abuse of process for the following reasons:
- The litigation foreshadowed by the respondents in the application for examination would not provide any commercial benefit to Arrium. Arrium did not suffer any loss from the September 2014 capital raising – rather it benefited from it.6
- The proposed members of the class action did not include all contributories of Arrium nor did it include contributories who held shares at the time the administrators were appointed. That highlighted the “essentially private nature of the proposed claim”.7
- The Shareholders had advised ASIC and the Court at first instance that the “predominant purpose in seeking the issue of the examination summons was to investigate and pursue a potential claim in their capacity as shareholders against the directors or auditors or Arrium”.8 Whilst the shareholders submitted to ASIC that any recovery from the proposed litigation “would ensure that the pool of funds available to either the company or other shareholders would increase”9 that submission was not made to the Court at first instance. Rather the Shareholders made it clear that no derivative action was sought to be commenced.
- For the above reasons, the Court of Appeal held that “the predominant purpose was to pursue what we described as the essentially private nature of the proposed claim.”10 and therefore it did constitute an abuse of process.
- Gageler J (separately) and Edelman and Steward JJ (joint judgment) all held that the doctrine of abuse of process has been loosely divided into three categories:
- court’s procedures are used for an illegitimate purpose;11
- court’s processes are used in a manner that is unjustifiably oppressive to one of the parties; and12
“a category which might better be described as concerned with integrity of the court and not merely its processes, and which is sometimes described as concerned with bringing the administration of justice into disrepute.”13
- The respondents sought to argue that the Shareholders’ application for an order pursuant to s596A of the Act, summoning the third respondent for examination about the eligible affairs of Arrium was an abuse of process because it used the court’s procedures for an illegitimate purpose.
- Eldelman and Steward JJ drew a distinction between:
- a party’s immediate purpose – that is the end to be realised and the method of going about it; and
- a party’s ultimate purpose, being their motive.14
If the [immediate] object sought to be effected by the process is within the lawful scope of the process, it is a use of the process within the law, though it may be [for an ultimate purpose that is] malicious, or even fraudulent.15
- Edelman and Steward took the view that if the appellant’s immediate purpose was legitimate then it didn’t matter that their ultimate purpose may be.
- Gageler J, on the other hand, considered that the question before the Court was:
Whether, and if so how, the ultimate purpose of the appellants can be said to have been foreign to the process of compulsory examination for which provision is made in Pt 5.9 of the Corporations Act.
- Gageler J (separately) and Edelman and Steward JJ (joint judgment) all held that:
- The three primary changes effected by the Corporate Law Reform Act to Pt 5.9 were as follows:
- Expansion in the range of eligible applicants – corresponding to an expansion in the forms of external administration within the meaning of Chapter 5;
- Inclusion of the new and expansive definition of “examinable affairs”;
- Elimination of the need for an eligible applicant to apply for any exercise of discretion on the part of a court to obtain an order summoning for examination a person who is, or was during the period specified in s596A, an officer or provisional liquidator of the corporation in external administration.16
- The three primary changes effected by the Corporate Law Reform Act to Pt 5.9 were as follows:
- The majority concluded that the effect of these changes was to widen the scope of public examinations.
- Edelman and Steward JJ noted:
The statutory history, context, and terms of s596A, set out above demonstrate that a characterisation of the purpose of s596A at a higher level of generality than its terms should not be curtailed by “muffled echoes of old arguments” concerning its predecessors. In particular, the purpose of s596A cannot be confined by reference to benefit to the company, its creditors, or its contributories. As the scope of application of s596A 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. The only vestige that remains of the old approaches that might have confined the predecessors to s596A is the public aspect of the purpose of the power.17
- Edelman and Steward JJ went on to note that:
Legitimate purposes under s596 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 which might be expected to serve the public interest in ways such as these. Hence, regardless of whatever the ultimate purpose a litigant might have, a summons 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 s596A in the sense that it is inconsistent with the purposes of s596A. And the purpose of enforcement of the Corporations Act includes examination for the purposes of determining whether relief might be obtained in respect of potential corporate misconduct.18
- Gageler, on the other hand concluded:
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.19
For insolvency practitioners - the practical impact is that public examinations are no longer almost exclusively in the domain of an IP or ASIC, but it is clear other parties, perhaps with competing and not necessary aligned interests will have an opportunity to participate. Also means that time will be of the essence, particularly where there are limited pools of funds from which a recovery might be obtained.
For litigation funders – this decision broadens tools available to funders to investigate the merits and recoverability of a claim – it will inevitably result in an increase in the number and scope of public examinations in large corporate liquidation where class actions are costly and high risk.
1Michael Thomas Walton & Anor v ACN 004 410 833 Ltd (formerly Arrium Ltd) (in liq)  HCA 3 at 
2 Ibid at 
3 Ibid at  and 
4 Ibid at  
5 In the matter of ACN 004 410 833 Ltd (formerly Arrium Ltd) (subject to a deed of company arrangement)  NSWSC 1606 at 
6 ACN 004 410 833 (formerly Arrium Ltd) (in liq) v Michael Thomas Walton  NSWCA 157 at  to 
7 Ibid at 
8 Ibid at 
11 Michael Thomas Walton & Anor v ACN 004 410 833 Ltd (formerly Arrium Ltd ) (in liq)  HCA 3 at  and 
13 Ibid at  and 
14 Ibid at 
15 Dowling v Colonial Mutual Life Assurance Society Ltd (1915) 20 CLR 509 at 521, per Issacs J.
16 Ibid at 
17 Ibid at 
18 Ibid at 
19Ibid at