High Court Broadens Mandatory Examination Powers

5 March 2022 in Business Law, Debt Recovery

Overview

Section 596A of the Corporations Act 2001 (Cth) allows “eligible applicants” to apply to have an officer of a company in liquidation or administration summoned to the court for examination. During the examination, the summoned officer answers questions and provides information about a company’s “examinable affairs”. “Eligible Applicants” include persons authorised by ASIC to make applications under s596A (s9 Corporations Act 2001 (Cth)).

Recently In Walton v AVN 004 410 833 Limited (formerly Arrium Limited) (in liquidation) [2022] HCA 3 (Arrium), the High Court of Australia has broadened the purpose and access to orders for the examination of officers under s596A. In particular, the decision has confirmed that examinations under s596A can be undertaken for the purpose of pursuing claims against directors and officers of a company. Summons for examination under s5969A has traditionally been limited to examination for purposes which are of a benefit to the company, its creditors, or its contributories.

The High Court’s decision in Arrium is discussed in general terms below.

Context

Arrium was a mining company that entered into administration in 2016. Several of Arrium’s shareholders requested examination of a number of Arrium’s officers under s596A. When requesting authorisation from ASIC the shareholders explained that they received inadequate information about Arrium’s results for the FYE 30 June 2014. The shareholders also explained “that the examination would be made for the benefit of shareholders and creditors of the company”.

ASIC authorised the shareholders to make an application for examination under s596A. Following authorisation from ASIC, the shareholders obtained orders for examination of officers of the company under s596A from the Supreme Court of NSW.

Arrium successfully appealed the orders granted under s596A in the NSW Court of Appeal which denied the shareholder’s examination. This was because the Court of Appeal took the view that the examination was pursued for a private purpose rather than for a purpose which benefited the company, its creditor, or its contributories. The shareholders appealed the decision of the Court of Appeal to the High Court of Australia.

Decision

In Arrium, the main issue the High Court considered was whether examinations under s596A could only be ordered where such examinations would benefit the company, its contributories or creditors.

The High Court held, in a split decision, that the shareholders were entitled to the examination of Arrium’s officers under s596A. This is because the High Court decided that the purpose of examinations under s596A were for “the administration or enforcement of law concerning the corporations and its officers in public dealings” (Arrium at [170]). Accordingly, the court took the view that the examination of a company officers for the purpose of investigating a claim against a company or its officers was a legitimate use of s596A (Arrium at [190]). This is because such claims could consequently “protect shareholders and creditors and ensure compliance with the law” (Arrium at [190]).

In short, the shareholders in Arrium were deemed to have pursued examinations under s569A for a legitimate reason. The court explained that examinations for the purpose of investigating claims against a company in liquidation/administration could concurrently serve the higher purpose of s596A, that being the administration and enforcement of the law.

The majority also drew attention to the fact that the applicants that are authorised to apply for a summons for examination under s596A enable those applicants to “undertake enforcement functions similar to those conferred on ASIC” which is ultimately a function which serves the public interest (Arrium at [173]).

The court succinctly explained that a summons for examination under s596A will only be considered an abuse of process where it is for a predominate purpose that “would contradict or stulify the public interest in the external administration of a company”. (Arrium at [170]).

Further, the court clarified that the risk of examinations under s596A amounting to an abuse of process could be adequately managed by the court itself. The court stressed that a summons for examination should only be set aside as a last of resort where the orders are considered an abuse of process (Arrium at [191]).

The Minority

In Arrium, the minority of the High Court agreed with the decision of the NSW Court of Appeal. The minority reiterated that s596A only authorises the summons for examination for the benefit of the company, its creditors or contributories.

The Significance of the Decision

The High Court’s decision in Arrium has significant implications. This is because the broadened scope of s596A is likely to increase reliance on the provision as a means through which to investigate potential private claims against a company’s officers, directors, auditors and others. Additionally, the decision has clarified the use of s596A as a tool for law enforcement and administration.

The business lawyers at Brander Smith McKnight have experience with the legislation and recent changes. This is a very useful decision for anyone trying to recover money from a company, particularly an insolvent company. We are always happy to advise and assist you with this legal process.