Nobody Expects The Inquisition: High Court Of Australia Opens The Door To Extraordinary Public Examination Powers To Potential Class Action Plaintiffs And Beyond

• Published date: 19 April 2022
• Law Firm: Herbert Smith Freehills
• Author: Mr Paul Ap'thy, Mark Clifton, Quentin Digby, Christine Tran, James Kirkpatrick, Brock Gunthorpe and Hannah Fraenkel

In its recent decision in Walton v ACN 004 410 833 Limited (formerly Arrium Limited) (in liquidation) [2022] HCA 3 (Walton), the High Court of Australia held, in a split decision, that the mandatory public examination power contained in section 596A of the Corporations Act 2001 (Cth) (the Act) could be used by eligible applicants to examine directors and other officers of a company in external administration, including senior management, external administrators and trustees, about the company's affairs for the broad purposes of enforcing and promoting compliance with the Act and investigating potential claims of corporate misconduct.

In doing so, the High Court departed from a long line of authority that had held that the public examination powers are extraordinary in nature and that their use should be limited to furthering the interests of a company in external administration or its creditors and contributories as a whole, or bringing criminal or regulatory proceedings against the company.

Public examinations are a powerful inquisitorial tool and the extension of their availability provides new opportunities to shareholders and others with claims involving the affairs of companies in external administration (and by extension, class action promoters and litigation funders). Conversely, the decision brings increased risks to directors and other officers, insolvency practitioners, insurers, auditors and other advisors to distressed companies.

It also remains to be seen how Australian Securities and Investments Commission (ASIC) and the courts will manage applications by third parties in circumstances where this may prejudice current or future examinations by external administrators and the external administration generally.

As with most doctrinal shifts, it will take some time for examinations relying on Walton to work their way through the system. However, the decision may have pushed the pendulum too far in terms of the burden on ASIC and court resources, and the extraordinary empowerment of eligible applicants to abrogate the typical legislative protections of examinees for private purposes, with only a modest connection to the public interest. If so, legislative reform may be necessary to clarify the position.

Public examinations

The public examination powers contained in sections 596A and 596B of the Act provide an avenue for 'eligible applicants' to summon directors, other officers, provisional liquidators and other persons who may hold relevant information about a company in external administration to court and examine them about the 'examinable affairs' of the company.

An 'eligible applicant' means:

• ASIC;
• an external administrator including an administrator, deed administrator, liquidator or a small business restructuring practitioner appointed under Part 5.3B of the Act; or
• a person authorised in writing by ASIC.

The definition of an officer extends beyond a director and covers:

• a director or secretary of the company;
• a person who makes decisions that affect the whole, or a substantial part, of the business of the corporation or who has the capacity to affect significantly the company's financial standing or in accordance with whose instructions or wishes the directors of the corporation are accustomed to act;
• an external administrator of the company including a receiver administrator, deed administrator, liquidator or a small business restructuring practitioner appointed under Part 5.3B of the Act or
• a trustee or other person administering a compromise or arrangement made between the corporation and someone else.

The 'examinable affairs' of a company are defined broadly and include:

• the promotion, formation, management, administration restructuring or winding up of the company;
• any other affairs of the company (including the membership control, business, trading, transactions and dealings, property liabilities, profits and other income, receipts, losses, outgoings and expenditure of the company); and
• the affairs of a related or connected entity to the company insofar as they are relevant to the company or its examinable affairs.

Both the majority and minority in Walton confirmed that it remains the case that the company whose examinable affairs are to be examined must be subject to some form of external administration.¹ The majority held that this was supported by the context of section 596A being contained in Chapter 5 of the Act (a chapter that addresses the various ways that a company may be externally administered) and the legislative history of the provisions which, "lie deep in corporate insolvency law nourished by the development of the examination powers in respect of bankrupt individuals."²

Section 596A provides for the examination of existing directors and other officers or provisional liquidators of companies in external administration, or those who were officers or provisional liquidators during or following the two years prior to the company entering external administration. Where an examination summons is validly applied for under section 596A (and is not an abuse of process) the court must summon the person for examination.

Section 596B provides for the examination of other persons who may be able to give information about the examinable affairs of the company and persons who may have been guilty of misconduct in relation to the company. An application under section 596B must be accompanied by a supporting affidavit and the court has a discretion as to whether to summon the person for examination.

A summons under either sections 596A or 596B may also require the person summonsed to produce documents at the examination that are in the person's possession and relate to the company or its examinable affairs. This is an important component of the public examination powers.

The courts have also made clear that it would be entirely proper for an eligible applicant to apply for and obtain an examination summons under section 596A for the purpose of obtaining information concerning legitimate issues or legitimate questions relating to the management of the company, including by an external administrator while the company is subject to external administration.³

Public examinations vs discovery

The public examination powers under sections 596A and 596B, and their predecessors, have been described by the courts as extraordinary and special powers of an investigative and inquisitorial kind intended for wide, public purposes, and a form of discovery not available to the ordinary litigant.⁴ In relation to a predecessor examination provision, the High Court noted that it represented a prevailing of the higher public interest in requiring full disclosure by a person over personal freedoms.⁵

Public examinations differ from the standard civil litigation discovery processes in several key ways:

• The examination process is typically faster and more cost-effective than formal discovery.
• The examination process can occur before the commencement of proceedings and, unlike preliminary discovery, without any need to demonstrate to the court a potential entitlement to a claim for relief.⁶
• The examination is held in open court unless special circumstances (as determined by the court) apply in which case the court can order that the examination be run privately. The court can also make orders excluding specific individuals from public examinations or permitting the attendance of specific individuals at private examinations.
• Sections 596A and 596B permit a judicially supervised intrusion upon the examinee's rights to preserve the confidentiality of books and records in their control and their right to silence.⁷
• An examinee is not excused from answering a question put to them at an examination on the ground that the answer might incriminate them or make them liable for a penalty. However, where privilege is claimed in advance by the examinee,⁸ the answer cannot be used in evidence against the examinee in criminal or penalty proceedings.
• A public examination is not considered examination-in-chief or cross-examination and the rules of evidence do not necessarily apply.⁹
• The court has extensive powers to give directions as to the conduct and procedure of the examination, including the prohibition of the publication or communication of information about the examination or that a document created at the examination be destroyed.

Decision in Walton

Background

The appellants in Walton were two long-term shareholders of Arrium Limited. Arrium was a major producer of iron ore and steel and was listed on the Australian Stock Exchange. It undertook a A$754 million capital raising in October 2014. By early 2015, following a steep decline in the export price of iron ore, Arrium announced major reductions in the value of its mining operations in its 2015 half-yearly results and announced the closure of one of its major mining...