This week’s TGIF examines the recent High Court decision in Walton v ACN 004 410 833 Limited (formerly Arrium Limited) (in liquidation)  HCA 3, which provides guidance on the range of potential purposes for which a review of company executives may be legitimately pursued by “eligible candidates”.
Key points to remember
- The historical limitation that review powers must be used for a predominant purpose that benefits the company, its creditors or contributors, is not present in Section 596A of the Companies Act 2001 (Cth) (the Act).
- Even where the motivation of eligible applicants to conduct a review is clearly to investigate the merits of a potential class action, the use of the review power will not necessarily constitute an abuse of process.
- An examiner is not disqualified as an eligible candidate simply because he is no longer a creditor of the company.
- There could be an increased risk that the officers of an externally administered company will be subject to compulsory questioning on behalf of shareholders wishing to bring class action lawsuits.
The first respondent, formerly known as Arrium Limited (Arrium), was an ASX-listed steel producer with an iron mining operation. After publishing its results for the 2014 financial year, Arrium announced a capital raising to repay debt, published an information note in connection with this raising and by mid-October 2014, had raised 754 million Australian dollars in capital.
In January 2015, partly due to a drop in the export price of iron ore, Arrium announced that it would suspend or close its mining operations. Arrium acknowledged in its February 2015 half-year results that the value of its mining operations had declined by approximately A$1.335 billion. Arrium entered administration on April 7, 2016 and liquidators were appointed on June 20, 2019.
The petitioners were Arrium shareholders who sought to investigate Arrium’s disclosures to the market prior to the 2014 capital increase, including with respect to the circular provided to retail shareholders. The shareholders wrote to ASIC in 2018 requesting clearance as an “eligible candidate” within the meaning of section 597(5A)(b) of the act, so that they could ask the court to issue orders review and production to former Arrium executives.
The request expressed concerns about whether the reported financial results for fiscal year 2014 and the information memorandum “adequately or fairly” portray the reality of Arrium’s business.
On May 15, 2019, the Equity Registrar issued the Orders for Review and Production as requested.
History of the procedure
Arrium applied to have the review and production orders stayed or rescinded. This request was determined by Black J, who observed that “the shareholders’ primary purpose in seeking the issuance of the subpoena was to investigate and pursue a personal action in their capacity as shareholders against the directors of Arrium or against its auditors” in the process of a class action. Despite this, Justice Black did not find that the review would result in an abuse of process, as the shareholders sought to conduct interrogations on matters that the liquidators could have examined themselves.
On appeal, the New South Wales Court of Appeal held that the review orders should not have been made as they constituted an abuse of process on the grounds that they were sought for a private purpose which would benefit a limited group of shareholders. In coming to this conclusion, the Court of Appeal applied what has been described as “clear authority” drawn from Re Excel Finance Corp Ltd (appointed receiver and manager); Worthley v England (1994) 52 FCR 69 (Re-Excel).
Re Excel reviewed the old review power under Section 597, which has since been replaced by Sections 596A and 596B. The Court of Appeal recognized this change and considered whether the scope of the power had been expanded, also observing that this issue had been considered at the appellate level with conflicting conclusions drawn.1
What did the High Court decide?
The shareholders appealed to the High Court which, by a majority, allowed the appeal, ruling that there was no abuse of process in the use of the mandatory review power under s. 596A, even though the plaintiffs’ primary purpose was to investigate and pursue potential shareholder claims, the benefit of which would be reserved for a limited number of Arrium shareholders.
In a joint majority judgment, Justices Edelman and Steward held that an examination under Section 596A is not an abuse of process if the predominant purpose necessarily involved the enforcement of the law relating to the corporation in its public relations. Their Honors’ rationale behind refusing to limit the application of Section 596A to the pursuit of societal interests is also supported by their observation that the eligible candidate is not required to demonstrate that the examination would achieve a specific outcome or outcome.
To apply New Zealand Steel (Australia) Pty Ltd v Burton (1994) 13 ACSR 610, Their Honors agreed with Justice Hayne’s conclusion that Parliament’s intent with respect to powers of review was to ensure that directors and persons engaged in management companies can be held liable. It was not necessary that the object also benefit the company. Their Honors ultimately concluded that a subpoena would only constitute an abuse of process if the overriding purpose of the questioning “contradicted or stifled” the public interest in the company’s external administration.
Judge Gageler, by majority, delivered a separate judgment finding that the legitimacy of the underlying purpose of conducting a review under s. matters subject to review by the company being wound up. Her Honor has pointed out that it is best to avoid drawing the “boundaries” of potential legitimate purposes for which the review powers might be sought.
In Justice Gageler’s view, each claim should be dealt with on a case-by-case basis, but an attempt to use the power for purposes amounting to little more than a “fishing expedition” would indicate a likely abuse of process.
In a joint dissenting judgment, Kiefel CJ and Keane J followed the traditional authority established in Re-Excelconsidering that the purpose of the examination should be limited to facilitating investigations for the benefit of the company, its creditors and contributors.
Their Honors observed that the legislative discourse surrounding the replacement of former Section 597 displayed a desire to adopt a broader definition of “reviewable matters”, but was otherwise silent on the scope of the purposes. for which an applicant may seek to conduct a review. . Their Honors concluded that this silence, relating to the explicit examination of other adjacent questions, implied a lack of legislative intention to extend the power of examination under section 596A.
The High Court’s decision brings welcome clarity to the scope of the review power and allows for a relatively broad approach to the range of potential purposes for which a review may legitimately be pursued. The traditional requirement that the purpose of the review be for the benefit of the corporation, its creditors and contributors is no longer necessary.
This decision clearly has significant implications for the potential exposure of public companies to securities class actions, as it broadens the subject matter to which the review powers in Part 5.9 of the Act could be applied. Clearly, this is an avenue through which shareholders, as well as their legal representatives and funders, could consider using to further investigate the merits of potential claims.
The power will remain available only to those who are eligible applicants under the law and those who are able to obtain approval as “eligible applicants” by ASIC. Further, the scope of any review remains limited to the “reviewable business” of the company.
1 See, for example, Flanders against Beatty (1995) 16 ACSR 324 and Boys vs. Quigley (2002) 26 WAR 454 each of which finds a broader scope, for Re New Tel Ltd (cash); Evans v Waterr Pty Ltd (2005) 145 FCR 176 which followed the restrictive application in Re-Excel.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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