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In Walton v ACN 004 410 833 Limited (formerly Arrium Limited) (in liquidation)  HCA 3, the High Court extended the purpose for which, and incidentally parties by whom, public examinations may be used. This decision will be welcomed by shareholders, litigation funders and class action promoters, who may be able to conduct detailed investigations of directors, officers and other third parties connected to failed companies before starting litigation.
The historically accepted view was that the power to undertake public examinations was limited to situations where the pursuit of examinations was for the ultimate benefit of the company or its creditors. As a result of corporate law reform in 1992, which purported to expand the scope of the public examination power, there has been some inconsistency about whether parties could utilise a public examination summons (PE summons) under s 596A of the Corporations Act 2001 (Cth) (Act) to pursue their own interests. The changes resulted in a line of authority which expanded the scope of the power, prioritising the public benefit in the enforcement of the Act more generally. That being said, there continues to be support for the old view even from intermediate appellate courts.
The appellants were shareholders of the first respondent, Arrium Limited (in liquidation). In 2014, Arrium published its end-of-year results, which were followed by a capital raising. The business subsequently experienced difficulties and entered administration in 2016, with liquidators appointed in 2019. In 2018 the appellants, after authorisation from ASIC as “eligible applicants”, applied to the Supreme Court of New South Wales for a summons for public examination of a former director of Arrium. A Registrar granted the summons.
At first instance, Arrium applied for a stay of the summons made by the Registrar, which was denied by the Supreme Court. Arrium then appealed to the Court of Appeal, which upheld the appeal and held that any public examination sought for the predominant purpose of pursuing private claims and not for the benefit of the company is an abuse of process. The Court held that any added public benefit in enforcement of the Act is merely ancillary to, and does not detract from, the true scope of the power, which is properly confined to the conferral of benefit on the corporation or its creditors. The matter was then appealed to the High Court.
The High Court, by a majority of 3:2, held that contrary to the judgment of the Court of Appeal and the submissions of the respondents, the Corporate Law Reform Act 1992 (Cth) had the effect of expanding the scope of the power in the previous legislation. These changes (embodied in s 596A) include:
- expanding the range of eligible applicants;
- expanding the scope of examinations by the broad definitions of “examinable affairs” and “affairs of a body corporate”; and
- removing he discretion of the court to grant the order summoning a person for examination.
As such, s 596A “is new and finds no direct analogy with any former provision in any earlier companies legislation”. The High Court also referred to clear evidence of parliamentary intent in the extrinsic materials to the effect that the process under s 596A is meant to be a mere “formality”, with the object of “cast[ing] a very broad net in defining the matters on which a person may be examined”.
The majority held that the authorities relied upon by the Court of Appeal to support the proposition that the appellant’s application for the public examination summons constituted an abuse of process because their “ultimate purpose … would not confer a benefit on the company or its creditors” is inapplicable in the present case. This is because these cases did not arise under Pt 5.9 of the Act in its current form, but under provisions in older legislation that were substantially narrower in scope than s 596A. At best, this analogous reasoning could only apply to s 596B (discretionary examination) because the legislation in those cases were the true predecessors to that provision.
The true statutory scope and purpose of s 596A, according to the majority, is “to address [by way of examination], the administration or enforcement of the law concerning the corporation and its officers in public dealings.” Therefore, it held a summons cannot be characterised as an abuse of process “unless the predominant purpose of the examination would contradict or stultify – in some way – th[e] public interest in the external administration of a company”, without reference to whether or not the summons is for benefit of the company or its creditors.
The majority also held that because ASIC is given broad powers to pursue corporate misfeasance, it is entitled to apply for a summons, or relevantly for the present purpose, authorise an “eligible applicant” to make an application for a summons under s 596A to pursue these various statutory duties. Such an application would not be an abuse of process even if the party seeking the summons has an ulterior motive, because the predominant immediate purpose (“the end which the litigant seeks to achieve and the means by which they do so”) would serve the public interest.
In dissent, the minority held that it was correct to “adhere to the settled understanding” of the purposes behind s 596A derived from the pre-1992 authorities. Contrary to the majority, the minority held that the context of s 596A was strongly suggestive of the traditional narrow purpose, which is that its purpose is to be used for the benefit of the corporation and relevant parties such as creditors and contributories, and that nothing in the wording of the 1992 Act nor its Explanatory Memorandum altered this understanding.
- The test for abuse of process has been altered and is concerned with whether the issuance of a summons would obstruct the public interest rather than whether it serves the interests of the corporationor its creditors
- There is a distinction between the “immediate purpose” (“means and ends”) and the “ultimate purpose” (“motive”) of an action. An abuse of process can only be said to have occurred if the former lies outside the scope of the statute, whereas the latter has no bearing on this decision
- By expanding the scope of s 596A, the decision will encourage many parties to make applications for “eligible applicant” status. These applicants will now be successful in obtaining such status, even if they have a vested interest
- The decision will be greatly welcomed by shareholders and class action promoters, and rightly so – this newfound ability to apply for a public examination summons will very likely be faster and more cost-effective than the onerous pre-action discovery processes in traditional litigation. Though it remains to be seen, this could lead to an increase in litigation
- As the minority observed, the “broader purpose” of s 596A arising as a result of this decision would mean that the “extraordinary” PE summons is now available “in all manner of proceedings, wholly unconnected with the external administration of a company or the interests of persons in its outcome” such as industrial disputes or even personal injuries claims in the workplace
- Lastly, this new, extremely high standard for abuse of process means that the only real obstacle to an issuance of PE summons is the conferral by ASIC the status of “eligible applicant”,effectively turning it into a gatekeeper figure. How it chooses to exercise this discretion remains to be seen, but ASIC might find itself a pawn in an onslaught of litigation
For more information about public examinations, litigation or insolvency generally, please contact:
Trevor Withane: firstname.lastname@example.org, tel +61 (0)418 717 001
Blackwattle Legal’s communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication.