Shareholders as interrogators: public examination of former directors by shareholders in pursuit of a class action

By Scott Sharry, Matt Edwards and Anand Shah
03 Mar 2022
Former shareholders of liquidated companies are eligible to obtain a summons to publicly examine the company's directors, even if the purpose is to support a class action for the benefit of only some creditors.

The Court's scope to summon a company director for a public examination has been significantly expanded by the High Court.

Mandatory examinations – a company's interest

Section 596A of the Corporations Act 2001 (Cth) allows an eligible applicant to apply to court for orders summonsing a director to attend court to be publicly examined in relation to the company's affairs.

An "eligible applicant" is defined to include a liquidator, administrator or deed administrator, ASIC or a person authorised by ASIC to make an application. The power to publicly examine directors pursuant to s.596A is traditionally used by liquidators when winding up a company.  They will often use the power to obtain information relevant to the company's affairs in the period leading up to their appointment and to obtain information as to the company's assets and liabilities as well as any potential claims against the company's directors or advisers.

A court has the power to set aside a public examination summons where it believes the examination is for an improper purpose and is an abuse of the court's process. An application for a public examination summons will not be an abuse of process where the examination is necessary to advance the company's interest, which will encompass anything that would aid the recovery of monies for the benefit of persons that have an interest in the corporation – primarily the company's creditors and contributories. 

The High Court's decision on mandatory examinations 3

In Walton & Anor v ACN 004 410 833 Ltd (Formerly Arrium Limited) (In Liquidation) & Ors [2022] HCA 3, the High Court allowed an application by shareholders for a summons to publicly examine the former directors of a company.

The liquidated company, formerly known Arrium Limited (Arrium), had completed a capital raising prior to its liquidation in 2019. For the purposes of that capital raising, the appellants were provided with an Information Memorandum. The appellants believed that they may have claims against the former directors and auditors of Arrium in relation to the accuracy of the information in the Information Memorandum and the contents of Arrium's 2014 financial accounts, current as at the date of the capital raising. As such, with approval from ASIC, the appellants applied to the courts for public examination summonses of the former directors.

The Court of Appeal did not allow the application as it considered that granting the summons would result in an abuse of process. That court found that the claims that the appellants wished to investigate were personal, and failed to demonstrate a commercial benefit to the company as the examination was only sought for the purpose of private litigation.

The High Court overturned the Court of Appeal's decision and permitted a public examination to be conducted. In its decision, the majority held that the examination of a director does not need to be confined to the interests of the company or its creditors and contributories, and that a public examination for the purpose of advancing the shareholders' personal claim against the directors was not an abuse of process.

What has changed?

This decision marks a significant change in the breadth of examining powers. It is now clear that the examination powers conferred by the Corporations Act to inquire into the examinable affairs of a company are not only for the benefit of a company, its liquidators, its contributors and its creditors. A person can now apply for the examination of a director for a private or personal purpose, and such purpose will not be considered an abuse of process, despite offering no benefit to a company so long as the examination can be said to be for "the enforcement of the Corporations Act, the promotion of compliance with the Act, and the protection of shareholders or creditors from corporate misconduct".

It must be noted however that, in order to authorise a person as being an eligible applicant, ASIC currently requires that the applicant provide details of why the examination is for the company's benefit, its creditors or contributories and why it is not an abuse of process. As such, obtaining authorisation from ASIC may still be a hurdle for some who want to obtain an examination summons from the court, but the rigidity of this position moving forward is relatively unclear.

What this means going forward

The decision expands the category of persons who may (with ASIC's approval) examine the directors of a company in external administration.  This creates the potential for the examination process to be used as a tool to investigate the prospects of claims that may be made against directors or others associated with the company by third parties. As was the intention in this case, the information obtained may then be used to support recovery proceedings, including representative proceedings against directors and advisors. As a consequence of this decision, we expect that the examination process will be used more frequently by parties other than liquidators who are otherwise outside of an external administration process to investigate and then prosecute claims.  

The key takeaways are:

  • The scope to publicly examine company directors has widened;
  • The investigation of a private claim against a company is sufficient to compel a director to be summoned for a public examination;
  • ASIC approval is still required for applicants wanting to apply for a public examination order; and
  • Company directors and former directors are now at greater risk of having to attend public examinations.

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