Application for Examination Opposed by Respondents
Appellants were shareholders of the corporation in liquidation. The appellants applied to the Supreme Court of New South Wales for mandatory examination of persons about examinable affairs of corporation. Arrium sought to have the orders stayed or set aside. The Court assessed whether appellants' purpose was foreign to the purpose of s 596A of Corporations Act 2001 (Cth).
Facts:
The first respondent ("Arrium") was a producer of iron ore and steel and was listed on the Australian Stock Exchange, between September and October 2014 it raised $754 million in capital. It provided an Information Memorandum in connection with the capital raising and shortly prior to that action it published its financial results for the year ended 30 June 2014. In its half‑yearly results published in February 2015 the company acknowledged a reduction in the value of its mining operations of $1,335 million.
In January 2015, it had announced that it would be suspending or closing one of its principal mining operations. The announcement followed a decline in the export price of iron ore. The company was placed into administration in April 2016 and in June 2019 liquidators were appointed.
In April 2018 the solicitors of the appellants, who were shareholders of Arrium, wrote to the Australian Securities and Investments Commission ("ASIC") requesting that the appellants be given the status of an "eligible applicant".
The appellants applied to the Supreme Court of New South Wales for orders that the third respondent, a former director of Arrium, appear for examination and produce documents. Orders were also sought for the second respondent (the auditor) and the bank who advised on the capital raising to produce certain documents. A Registrar in Equity made the orders. Arrium sought to have the orders stayed or set aside.
The second respondent and the third respondent took part in those proceedings and sought similar orders. Black J ordered that the examination summons be stayed on condition that Arrium file an application for leave to appeal within a specific period. Arrium did so. The Court of Appeal (Bathurst CJ, Bell P and Leeming JA) granted leave to appeal, allowed the appeal, discharged the orders for examination made by the Registrar and made other orders.
The appellants' solicitors gave as the reason their clients should be given the status of eligible applicants their clients' concern that the results for the financial year ended 30 June 2014 and the information given in respect of the capital raising did "not adequately or fairly" portray the "true state of Arrium's business". They advised that they would seek an order for examination in order to determine whether any claims might be brought against the company, its directors or its auditor. In subsequent communications they said that the examinations would be made for the benefit of shareholders and creditors of the company. The appellants abandoned any suggestion that their purpose was to investigate the possibility of a derivative action.
What was proposed was a class action for loss and damage suffered by investors who bought securities in the company after its 2014 financial year results and the 2014 capital raising, based on allegations of misrepresentations about its financial position at the relevant times. Black J was not satisfied that the application amounted to an abuse of process
Issues:
I. Whether or not the appellants' purpose is foreign to the purpose of s 596A of Corporations Act 2001 (Cth).
II. Whether or not the examination is an abuse of process.
Applicable law:
Corporations Act 2001 (Cth), s 596A - provides that an "eligible applicant" may apply to the Court for a summons to be directed to a person who is an officer of a corporation or was an officer of a corporation in a specified period relating to the administration or winding up of the corporation, to be examined about the corporation's "examinable affairs".
Corporations Act 2001 (Cth), s 9 - provides that such a person may apply to the Court for a summons to be directed to a person who is an officer of a corporation or was an officer of a corporation in a specified period relating to the administration or winding up of the corporation, to be examined about the corporation's "examinable affairs".
National Companies and Securities Commission Act 1979 (Cth) - provided that the scheme was overseen by the National Companies and Securities Commission ("the NCSC"), which was established in 1980.
In the matter of ACN 004 410 833 Ltd (formerly Arrium Ltd) (subject to a deed of company arrangement) [2019] NSWSC 1708. - where Black J ordered that the examination summons be stayed on condition that Arrium file an application for leave to appeal within a specific period.
ACN 004 410 833 Ltd (formerly Arrium Ltd) (In liq) v Walton [2020] NSWCA 157 - where the Court of Appeal (Bathurst CJ, Bell P and Leeming JA) granted leave to appeal, allowed the appeal, discharged the orders for examination made by the Registrar and made other orders.
Re Excel Finance Corporation Ltd (Receiver and Manager Appointed); Worthley v England (1994) 52 FCR 69 - where the examination was sought for a private purpose for the benefit of a limited group of persons who bought shares in Arrium at a particular time irrespective of whether they held their shares when administrators were appointed, not for a purpose which conferred a demonstrable benefit on the company or its creditors or all of its contributories.
Hong Kong Bank of Australia Ltd v Murphy (1992) 28 NSWLR 512 - provides that there can be no doubt that if the predominant purpose of the examination for which an application is made under s 596A, or s 596B, is collateral or foreign to the statutory purpose of such an examination, the application will amount to an abuse of process.
Re Auto Import Co (Australia) Ltd [1924] NSWStRp 69 - provides that an application brought by a liquidator for an examination for the purpose of rehearsing the cross‑examination of a potentially hostile witness in pending litigation would likely be an abuse of process.
In re Imperial Continental Water Corporation[1886] UKLawRpCh 176 - provides that a shareholder, who held a mortgage on calls that might be made of other shareholders of a particular company, brought proceedings to enforce the mortgage, to have any deficiency made good by the directors and to have an agreement, by which his shares were to be cancelled and his name removed from the register and the list of contributories, enforced.
New Zealand Steel (Australia) Pty Ltd v Burton (1994) 13 ACSR 610 - reflects the statutory context in which the power to summon a person for examination is given and the purpose for which the powers were conferred
Highstoke Pty Ltd v Hayes Knight GTO Pty Ltd [2007] FCA 13 - provides that the court has the power to summon and examine persons who were thought to be able to give information about the property and past transactions of the company.
In re Gold Company [1879] UKLawRpCh 216 - provides that another purpose of s 115 was thus to bring the practice in a company's winding up in line with that in bankruptcy, which was established to enable trustees in bankruptcy to find out facts before they brought an action in order to avoid the expense of an unsuccessful action.
Cavendish Bentinck v Fenn [1887] UKLawRpAC 24 - provides that an applicant under s 165 was usually required to show some benefit, in the form of an improvement to the pool of assets to be distributed to the applicant, which would be gained from the making of the order.
Re Csidei; Ex parte Andrew [1979] FCA 87 - provides that the purposes of the inquisitorial power conferred by bankruptcy and company legislation were regarded as much the same.
Re Rolls Razor Ltd [1968] 3 All ER 698 - provides that the purpose of s 268 of the 1948 Act was said to be to assist the liquidator "to discover the truth of the circumstances connected with the affairs of the company, information of trading, dealings, and so forth" and to enable the liquidator with as little expense as possible and with much expedition to put the affairs of the company in order and to carry out the liquidation.
Rees v Kratzmann [1965] HCA 49 - where in a passage to which the appellants referred in their submissions, his Honour described the purpose of the bankruptcy statute as being "to secure a full and complete examination and disclosure of the facts relating to the bankruptcy in the interests of the public".
Flanders v Beatty [1995] VICSC 73 - where the Full Court of the Supreme Court of Victoria did not state what any new purposes of Pt 5.9 are, but held it would be for the court to rule on any oppressive or foreign purposes in any particular application.
Analysis:
ASIC is empowered to pursue corporate misfeasance by itself bringing proceedings for orders which include declarations of contravention, pecuniary penalty orders and compensation orders. But ASIC is not obliged to limit its vision of what can be done to maintain, facilitate and improve the performance of the financial system to what it might achieve in proceedings that it might bring.
Having regard to the range of functions and powers with which it is invested, ASIC can take the view that the confident and informed participation of investors and consumers in the financial system would be promoted by authorising investors or consumers who might have suffered loss through corporate misfeasance to investigate that misfeasance through the public process for which Pt 5.9 provides with a view to them pursuing recovery of their losses by bringing civil proceedings of their own either under the ordinary processes of a court or under class action regimes like that in Pt IVA of the Federal Court of Australia Act 1976 (Cth), inserted shortly before the enactment of the Corporate Law Reform Act.
The attempt by the first respondent to limit the ultimate purpose for which a compulsory examination might be conducted as being either to aid those responsible for the external administration of a corporation in the performance of their duties or to bring criminal or regulatory proceedings in connection with the affairs of the corporation finds no anchor in the text or structure of s 596A or s 596B or of Pt 5.9.
To impose such a limitation would unduly constrain the outworking of the regulatory choices available to ASIC in the exercise of its authorisation function. Where the legal process is statutory, if the purpose of the litigant is consistent with the scope of the legislation then it will not usually matter whether the litigant has some ulterior motive. After the identification of the litigant's predominant means and ends, the question that is "implicit in, indeed at the very heart of, that process" is to ask whether the "scope and purpose of the statute" will be contradicted or stultified
Conclusion:
The Court allowed the appeal. The Court set aside orders 3, 4 and 5 made by the Court of Appeal of the Supreme Court of New South Wales on 30 July 2020 and, in their place, order that the appeal be dismissed with costs. The first and second respondents pay the appellants' costs of and incidental to the appeal, including the application for special leave to appeal.
