1O December 2020
Overview
The NSW Court of Appeal dismissed an application for a public examination by disgruntled investors investigating the potential for a class action as an abuse of process. The judgment in ACN 004 410 833 Ltd (formerly Arrium Limited) (in liq) v Michael Thomas Walton[1] (Arrium v Walton) offers a reminder of the limits of the examination powers conferred by the Corporations Act to inquire into the examinable affairs of a company. The case confirms that an examination may only be carried out for a predominant purpose that benefits the company (including its creditors and contributors). The court said that shareholders attempting to use such powers for a private purpose, in the absence of any clear and direct benefit to the company, is an abuse of process.
The shareholders have sought special leave to appeal to the High Court, although the matter has not yet been set down for hearing.
Background
In September 2014, Arrium announced a fully underwritten capital raising, which it stated would be used to pay down debt. The raising was announced shortly after Arrium published its end of year results in August 2014. The capital raising was completed on 14 October 2014. Part of the capital raising was that retail shareholders were offered a "one-for-one" proportional entitlement offer at a 26% discount to Arrium's closing share price the previous month.
Arrium's business suffered significant losses throughout 2015 and onwards, and it entered administration on 7 April 2016. On 20 June 2019, Arrium appointed liquidators.
The respondents in this proceeding (Arrium shareholders) claimed they were concerned that financial results published in 2014 by Arrium were not a fair or adequate reflection of Arrium's business at that time.
In April 2018, the respondents requested permission from ASIC to be authorised as "eligible applicants" within the meaning of s 597(5A)(b) of the Act. In their request to ASIC, the respondents stated that they wanted to examine certain individuals to determine whether a claim should be brought against Arrium, its directions or its auditors. Arrium's liquidators had examined some but not all of the directors.
This request was granted by ASIC and the respondents subsequently applied for an order that they could issue a summons for the examination of a particular director of Arrium who had not previously been examined by the liquidator. The respondents also sought an order that various documents be produced by Arrium, KPMG (Arrium's auditor) and UBS AG (who advised Arrium on its capital raising). On 15 May 2019, the orders the respondents sought were made by the NSW Supreme Court.
Primary decision
Arrium sought orders to have the examination and the production order set aside. The primary judge dismissed Arrium's application. His Honour determined that the summons granted to the respondents was not an abuse of process because the respondents intended to examine the director on matters which the liquidators could have examined him on. His Honour also considered that the "information likely to be produced by the respondents' examination would also likely advance the interests of Arrium and its creditors…"[2]
This was despite the Court's observation that the information which the respondents provided to ASIC indicated "that their predominant purpose in seeking the issue of the examination summons was to investigate, and pursue, a personal claim in their capacity as shareholders against directors of Arrium or against its auditors".[3]
Arrium subsequently appealed the decision to the New South Wales Court of Appeal.
Court of Appeal's decision
The primary question for the Court of Appeal was to decide the predominant purpose of the applicants in seeking to issue the summons for public examination. It was held that the applicant's predominant purpose was to investigate, and pursue, a potential class action claim in their capacity as shareholders.[4]
The Court of Appeal determined that the proposed examination, and the prospective class action, would not benefit Arrium or its creditors, because no benefit would accrue to them from the prosecution of that prospective action or from information being revealed during the examination. It therefore followed that the examination summons was an abuse of process.
The Court of Appeal also applied the reasoning from Re Excell and Williams v Spautzat which states that when determining whether there is an abuse of process, it is the "subjective purpose of the respondents… which is relevant".[5]
The respondents argued that the examination summons was valid because the liquidator could have examined all the directors about the same issues which they sought to examine, and the examination was intended to pursue the interests of creditors generally. The argument was unequivocally rejected by the Court of Appeal, which stated:[6]
"The examination is 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 at the time of the appointment of the administrators…such an examination is foreign to the purpose for which the examination power is conferred and there is an abuse of process."
Key take-aways
The case provides a useful determination for companies and insurers concerning the limits of pre-action investigations by investors or shareholders seeking to investigate the merits of pursuing a class action.
Potential class action plaintiffs are increasingly seeking to use pre-action investigation powers that are normally reserved for liquidators. This trend is likely to continue as the assessment processes of litigation funders mature and they require potential plaintiffs to conduct more rigorous investigations up front before funding is granted.
The NSW Court of Appeal's decision in Arrium v Walton shows a continued reluctance by the Courts to allow potential class action plaintiffs to use the public examination process to pursue private rights. The Federal Court recently adopted a similar approach in Ingrams Superannuation Fund v Ardent Leisure Limited [2020] FCA 1302 FCA 473.
Directors or officers who receive examination summonses, or other similar pre-action investigation orders, should always consider whether the power is being exercised by the correct party and for a proper purpose. If not, decisions such as Arrium v Walton may be relied on to have the examination summons set aside as an abuse of process.
The matter is currently waiting a hearing date for an application for special leave to the High Court. However, in the intervening period, the shareholders have filed their class action proceeding. It seems unlikely the High Court will grant special leave given that the shareholders can now investigate their claim through the usual interlocutory processes in the class action proceeding.
For further information, please contact:
Marcus O'Brien, Partner, Clyde & Co
marcus.obrien@clydeco.com
1. [2020] NSWCA 157.
2. Ibid.
3. Ibid, at [36].
4. Ibid, at [36], [129].
5. Ibid, at [130].
6. Ibid, at [141].
