A review of the Court of Appeal’s recent decision in ACN 004 410 833 Ltd (formerly Arrium Limited) (in liq) v Michael Thomas Walton  NSWCA 157
What are public examinations of a corporation?
Public examinations are a method under the Corporations Act 2001 (‘Act’) by which a liquidator, administrator or other eligible applicant can examine persons about a corporation’s “examinable affairs” before a Court. “Examinable affairs” of a corporation include:
- the promotion, formation, management, administration or winding up of a corporation; or
- any other affairs of the corporation; or
- the business affairs of a connected entity to the corporation.
The Act provides for two types of examinations:
- Mandatory examination under section 596A of the Act – the Court is to summon a person for examination about a corporation’s examinable affairs if:
a) an eligible applicant applies for the summons; and
b) the Court is satisfied that the person is or was an officer of or provisional liquidator of the corporation during or after the 2 years ending:
i. the date on which the administration (or winding up) of the corporation began;
ii. if the corporation executed a deed of company arrangement that has not yet terminated, the date on which the corporation’s administration began that ended when the deed was executed; or
iii. when the application for the summons is made.
2. Discretionary examination under section 596B of the Act – the Court may summon a person for examination about a corporation’s examinable affairs if:
a) an eligible applicant applies for the summons; and
b) the Court is satisfied that the person has:
i. taken part or been concerned in examinable affairs of the corporation and has been, or may have been, guilty of misconduct in relation to the corporation; or
ii. may be able to give information about examinable affairs of the corporation.
The purpose of public examinations
As the name suggests, public examinations are held in public unless there are special circumstances for them to be held in private.
The power given to the Court to summon a person for public examination is coercive in nature. The purpose of a public examination is crucial for the Court to determine if an application for a public examination should be granted or set aside. Proper purposes for the use of public examinations include:
- gathering information to assist in the winding up of a corporation;
- gathering information to identify if a person has been guilty of an offence or misconduct in relation to the corporation and to assist in prosecuting those offences through litigation; and
- assisting in regulating corporations in the public forum.
The decision in ACN 004 410 833 Ltd (formerly Arrium Limited) (in liq) v Michael Thomas Walton  NSWCA 157 (‘Arrium v Walton’)
On 30 July 2020, the NSW Court of Appeal handed down a judgment in Arrium v Walton, which explores the scope of the public examination summons and regime under the Act.
Arrium was a significant producer of steel and iron ore listed on the Australian Stock Exchange.
In August 2014, Arrium published its results for the 2014 financial year.
In September 2014, Arrium announced a fully underwritten $754 million capital raising, the proceeds of which would be used to pay down debt. The capital raising was completed by 14 October 2014.
In February 2015, Arrium recognised a significant reduction in the value of its mining operations after a decline in the export price of iron ore. This caused Arrium financial distress and ultimately led to it being placed into external administration on 7 April 2016.
In April 2018, the respondents (certain shareholders of Arrium) sought from ASIC “eligible applicant” status under the Act. Their reasons included that they were concerned that Arrium’s 2014 financial year results and the information supplied for the capital raising did not “adequately or fairly” portray the “true state of Arrium’s business”. ASIC agreed with the shareholders and authorised them as eligible applicants.
On 6 May 2019, the shareholders applied to the Supreme Court of NSW for orders for mandatory examination under s596A of the Act to be issued to a director of Arrium, and for orders under s 68 of the Civil Procedure Act 2005 (NSW)to be issued to Arrium’s auditor and advisor for production of certain documents.
The shareholders identified the purpose of the examination as being to investigate potential claims to be made on behalf of creditors or shareholders of Arrium against the directors or its auditors for:
a) misrepresentations made to the market of investors and potential investors in Arrium concerning the capital raising and financial position of Arrium in the 2014 and 2015 financial years; and
b) misleading and deceptive conduct and negligence in relation to the preparation and publishing of the 2014 financial report.
Judgement at first instance
On 15 May 2019, the Supreme Court of NSW made the examination and production orders sought by the shareholders. While Arrium sought to have those orders stayed or set aside, the primary judge dismissed the application.
Arrium then brought an appeal of this decision to the NSW Court of Appeal.
Judgement on appeal
The main issue on appeal was whether the public examination was an abuse of process. In this regard, the central question was whether the examination was sought for an improper purpose.
- The Court of Appeal granted leave and allowed Arrium’s appeal on the basis that the examination sought was “foreign to the purpose for which the examination power is conferred and there is an abuse of process”. In doing so, the Court of Appeal noted that: When determining if a public examination is an abuse of process, the subjective purpose of the applicant (that is the result intended to be achieved) is relevant.
- The authority of Re Excel Finance Corp Ltd (Receiver and Manager Appt); Worthley v England (1994) 52 FCR 69, confirms that “an application for the predominant purpose of advancing the cause of the applicants against third parties and not for the benefit of the corporation, its contributories or creditors is a use of the provision for a purpose foreign to the power and an abuse of process”.
- The prospective litigation which the examination was designed to assist would not bring any commercial benefit to Arrium. Arrium suffered no loss as a result of the capital raising. In fact, Arrium benefitted from the capital raising as it raised $754 million, most of which was used to pay down debt.
- The examination was sought for private purposes for the benefit of a limited group of people who bought shares in Arrium at a particular point in time irrespective of whether they held their shares at the time of the appointment of the administrators.
If you wish to make an application for examination under the Act, it is vital to define its predominant purpose and show a demonstrable benefit to the corporation in question, its creditors or contributories.
If you are the recipient of a summons for examination under the Act, you may be able to apply for such an examination to be set aside, among other things, on the basis that the summons is for a purpose foreign to the power under the Act and is an abuse of process.
Contact Lionheart Lawyers if you require assistance with an examination.