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) [2022] HCA 3

Overview

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

Facts

• 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.

Judicial History

• 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.

Majority Decision

• 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 majority concluded that the effect of these changes was to widen the scope of public examinations.

¹Michael Thomas Walton & Anor v ACN 004 410 833 Ltd (formerly Arrium Ltd) (in liq) [2022] HCA 3 at [190]
² Ibid at [190]
³ Ibid at [125] and [137]
⁴ Ibid at [191] [1]
⁵ In the matter of ACN  004 410 833 Ltd (formerly Arrium Ltd) (subject to a deed of company arrangement) [2019] NSWSC 1606 at [50]
⁶ ACN 004 410 833 (formerly Arrium Ltd) (in liq) v Michael Thomas Walton [2020] NSWCA 157 at [123] to [127]
⁷ Ibid at [128]
⁸ Ibid at [129]
⁹ Ibid
¹⁰ Ibid
¹¹ Michael Thomas Walton & Anor v ACN 004 410 833 Ltd (formerly Arrium Ltd ) (in liq) [2022] HCA 3 at [93] and [130]
¹² Ibid
¹³ Ibid at [93] and [130]
¹⁴ Ibid at [132]
¹⁵ Dowling v Colonial Mutual Life Assurance Society Ltd (1915) 20 CLR 509 at 521, per Issacs J.
¹⁶ Ibid at [168]
¹⁷ Ibid at [169]
¹⁸ Ibid at [175]
¹⁹Ibid at [126]