The Australian High Court has yesterday agreed that shareholders or creditors can be eligible to conduct compulsory examinations of former directors and officers of insolvent companies for the purpose of investigating claims against them (including class action claims). The High Court’s confirmation could materially increase the risks for directors and officers of failed corporations of being personally exposed to difficult and often arduous public examinations and material personal liability.
The decision will likely have profound implications for persons involved in failed companies as well as their insurers, auditors, and other advisers and materially adds to the arsenal of tools open to class action lawyers and funders.
Compulsory Examinations under the Corporations Act
Public examinations are provided for in ss 596A to 597B of the Corporations Act 2001 (Cth), and establish a means by which a liquidator, administrator or other ‘eligible applicant’ can examine, and seek documents from, officers of a corporation and any other person who may be able to provide information about the corporation's 'examinable affairs'.
An ‘eligible applicant’ includes any person authorised by ASIC to so act. ASIC’s decision to grant ‘eligible applicant’ status is an administrative decision, with limited rights of review. There are no express restrictions placed on those persons to whom ASIC may grant ‘eligible applicant’ status. In the past, ASIC has granted eligible applicant status to creditors, privately-appointed receivers/managers, trustees of a unit trust, regulatory authorities and shareholders.
A person may be summoned for examination by an eligible applicant under s 596A or s 596B, which provide for a 'mandatory examination' or 'discretionary examination' respectively. An examination involves the person being summoned to Court and questioned by lawyers as to the affairs of the company. The questions must be answered and answered truthfully.
The Arrium Decision
Arrium was an ASX listed steel and iron ore producer. Arrium raised $754 million in capital in late 2014, and entered voluntary administration in 2016. Some shareholders wanted to investigate Arrium's disclosures to the market about the state of its business prior to the capital raising, and sought "eligible applicant" status from ASIC to obtain examination and production orders to further their investigation. They were granted ‘eligible applicant’ status and subsequently obtained examination orders against a former director of Arrium under s 596A, and orders for production against Arrium and Arrium’s auditors and advisers on the capital raising.
Arrium challenged the examination orders in the Supreme Court of NSW but was unsuccessful in setting them aside. On appeal, the NSW Court of Appeal set aside the examination orders because they were sought for a private purpose for the benefit of a limited group of shareholders, would not benefit the company or its creditors, and were therefore an abuse of process.
In Arrium, the High Court had to consider whether s 596A is confined to examinations that confer a demonstrable or commercial benefit on the corporation or its creditors. A majority of the High Court (Edelman, Steward and Gageler JJ) overturned the decision of the NSW Court of Appeal, ruling that the shareholders were entitled to the examination orders under s 596A and that it was not an abuse of process for an eligible applicant to seek an examination predominantly for the purpose of pursuing private litigation against a third party.
The majority found that the purpose of s 596A was broader than simply enabling examinations to benefit the corporation, creditors or contributories; rather, it was “to address, by examinations of present or former corporate officers or provisional liquidators, the administration or enforcement of the law concerning the corporation and its officers in public dealings”: Arrium at . Examinations for the purpose of determining if relief might be obtained in respect of potential corporate misconduct, as sought by the Arrium shareholders, was held to fall within this purpose and could therefore not be an abuse of process.
Following the Arrium decision, it can be expected that shareholder litigants, and the law firms and litigation funders behind them, will use the public examination process to investigate potential claims against directors and officers of companies in administration or liquidation. Given the forensic power of a compulsory examination and its ability to uncover information that would otherwise not be available to class action claimants, it can be expected that the process will be much more frequently invoked by those seeking to explore claims. The information gathered could be deployed to mount claims against directors and officers but may also increase the likelihood of claims against third parties such as auditors, accountants, financiers and lawyers.