In ACN 004 410 833 Ltd (formerly Arrium Limited) (in liq) v Michael Thomas Walton & anor,[1] the New South Wales Court of Appeal considered the purpose for which public examination summons and production of documents can be ordered.

Drawing on authorities that the predominant purpose of a public examination should be for the benefit of a company, the Court of Appeal set aside the orders for public examination and production of documents.

Background

ACN 004 410 833 (formerly Arrium Limited) (in liquidation) (Arrium) was an ASX listed iron ore producer.

Shortly after publishing its financial results for 2014, Arrium completed a fully underwritten capital raising of $754 million in October 2014. The proceeds were used to pay down debt.

In January 2015 after a decline in export prices, Arrium announced the suspension or closure of its Southern Iron mining operation. In February 2015, Arrium recognised in its half yearly results a $1.335 billion impairment in the value of its mining operations.

In April 2016, Arrium entered administration and three years later, the administrators were appointed liquidators.

The Respondents (shareholders of Arrium on or after 19 August 2014 who had subsequently sold their shares), were also potential class action participants (the Respondents).

In April 2018, they successfully sought from ASIC ‘eligible applicant’ status within the meaning of section 597(5A)(b) of the Corporations Act 2001 (Cth) (Act). In support of this, the Respondents informed ASIC that they wished to participate in examinations to determine whether any claims arising out of breaches of the Act and relating to the capital raising should be brought, including claims against:

  • Arrium’s officers for 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/or
  • the auditors (KPMG) for misleading and deceptive conduct and negligence in relation to the preparation and publishing of the financial report for the year ended 30 June 2014 and 31 December 2014.

In May 2019, the Registrar in Equity ordered:

  • a public examination summons be issued to Mr Colin Galbraith who, whilst a former director of Arrium, was not a nominated examinee by the Respondents when they sought ‘eligible applicant’ status from ASIC; and
  • production of documents from Arrium, KPMG (Arrium’s auditor) and UBS AG (advisor on the capital raising).

By then, Arrium’s liquidators had already:

  • informally interviewed Mr Galbraith (whilst they were administrators);
  • conducted public examinations at which another eligible applicant had participated; and
  • made a reasoned decision that resources were better spent pursuing an insolvent trading claim rather than the Respondents’ claim associated with the capital raising.

As a result, Arrium sought to have the examination and production orders stayed or set aside. Its application was dismissed by the primary judge and Arrium sought leave to appeal.

Issue

The critical issue was whether the Respondents’ purpose of the examination is foreign to the purpose for which the Court has powers to order an examination and production of documents under sections 596A, 596B and 597 of the Act.

Decision at first instance

Justice Black considered the Respondents’ information supplied to ASIC when seeking ‘eligible applicant’ status indicated that the predominant purpose for the examination summons was to investigate, and pursue, a personal claim as shareholders against directors of Arrium or against its auditors.

His Honour found that the Registrar correctly ordered the examination of Mr Galbraith as he was a director at the relevant time and the Respondents were approved ‘eligible applicants’.[2] In such circumstances, the power to set aside such orders should only be exercised with caution in extreme cases and His Honour was not satisfied that Arrium had discharged the heavy onus of establishing that an examination of Mr Galbraith was an ‘abuse of process’.[3]

His Honour acknowledged that the authorities did not permit the use of the examination power for the predominant purpose of pursuing private claims, rather than claims that would benefit Arrium.

However and significantly, he concluded that the information likely to be produced as a result of the Respondents’ examination proceedings would also likely advance the interests of Arrium and the liquidators’ investigations.

In concluding that there was a potential incidental benefit to Arrium, His Honour upheld the orders for examination and production.

Court of Appeal

Significantly, the Court of Appeal held that the prospective litigation which the examination was designed to assist would not bring any commercial benefit to Arrium. The capital raising was used largely to pay down debt. Arrium benefitted as a result and suffered no loss in issuing shares to the investors who participated in the capital raising.

The Court noted that the subjective predominant purpose of the Respondents’ examination summons was to investigate and pursue a potential claim in their capacity as shareholders against the directors and auditors of Arrium.

After considering the history of the legislation and conflicting authorities, the Court identified and applied two unanimous decisions of the Full Court of the Federal Court on the issue. It held that there was ‘clear authority’ which confirmed it was an abuse of process to conduct examinations “if the predominant purpose of the applicant seeking the order is not for the purpose of benefitting the corporation, its contributories or its creditors“.[4]

The unanimous decision on appeal held that the Respondents’ examination served a private purpose – namely the benefit of a limited group who bought shares in Arrium at a particular time and irrespective of whether they still held their shares when administrators were appointed.

Therefore, the Court found that the Respondents’ subjective purpose did not align with the purpose for which the Court’s powers to order an examination and production of documents were conferred. This resulted in an abuse of process.[5] It did not matter that objectively, there could potentially have been an incidental benefit to Arrium.

Key takeaway

This decision clarifies that orders for examination and document production cannot be sought unless the predominant purpose benefits to the company, its contributors and creditors. Accordingly, if such orders are sought for a private purpose which may potentially result in a collateral and incidental benefit to the company, this will still be insufficient to prevent the orders being set aside as an abuse of process.

Further, those seeking ‘eligible applicant’ status from ASIC should also be careful to ensure that the grounds submitted to ASIC are consistent with the application to Court for examination and document production orders. Significant inconsistencies may suggest that the applicant is attempting to use the examination process for an improper purpose leaving the orders at risk of being challenged and set aside.