Take outs

• Directors and other individuals associated with a company in administration or liquidation can now be the subject of compulsory public examination by parties investigating a private claim.
• D&O insurers can expect an increase in claims for pre litigation examinations by class action lawyers.
• It will be more important than ever for those subject to a summons to have legal representation.

Summary

The power to compel a director or officer of a company in administration or liquidation to be publically examined under oath is part of the investigative powers of the controller of the company, and historically has been confined to examinations for the benefit of the company, its creditors or contributories.    

An examination is a significant incursion into an individual’s rights, including the privilege against self-incrimination and the principle that a party is entitled to know the case against them, before responding, neither of which can be relied on to refuse to answer questions in an examination.

The traditional view has been that it is an abuse of process for individuals, such as shareholders, to attempt to use public examinations for the purpose of investigating a private claim.

The High Court has, by the slimmest of majorities, rejected the traditional view and has broadened the category of parties who can compel a director or officer to be examined before litigation to include shareholders investigating a potential class action.  This has the potential to lead to greater exposure for directors and officers associated with a failed company.     

Background

Arrium was a steel and iron ore producer, listed on the ASX.   In September and October 2014, Arrium raised $754M in capital.  Shortly prior to announcing the capital raise, Arrium published its financial results for the year ended 30 June 2014.  In its half year results published in February 2015, Arrium recognised an impairment in the value of its mining operations in excess of $1 billion.  In April 2016, Arrium was placed into administration and in June 2019, liquidators were appointed.

In 2018, ASIC granted the appellants’ solicitors (who represented some shareholders of Arrium) the status of an ‘eligible applicant’, thereby entitling them to apply to the Court for a summons requiring an officer of Arrium to be examined.  Under s596A of the Corporations Act 2001 (Cth), the Court is obliged to issue a summons where an application is made by an eligible applicant (provided, relevantly, the person to be examined is or was an existing officer of the corporation under administration during a 2 year period specified in s596A).  In practical terms, there is no discretion on the court to refuse an application by eligible applicant.

Arrium sought to have a summons requiring a former director to appear for examination and produce documents, set aside on the ground it was an abuse of process.  At first instance, the Court declined to set aside the summons for a number of reasons, including that the information to be produced from the examination would also likely advance the interest of Arrium and its creditors.

The Court of Appeal agreed with Arrium and, following a number of decisions of intermediate appellate courts, concluded that the examination was for an improper purpose, not being for the benefit of Arrium or its creditors or contributories.

High Court judgment

It was not in issue that the examination was sought for a private purpose for the benefit of a limited group of persons, namely to investigate potential claims arising out of the capital raising against the former directors of Arrium and its auditors, as part of a potential class action. The sole issue was whether this was outside the purpose of the statutory regime and therefore an abuse of process.

The majority found it was not an abuse of process and is a permitted use of s596A.  In their Honour’s view, s596A represented a departure from the traditional approach.  The mischief to which it is directed includes the administration or enforcement of the law concerning the public dealings of the corporation and its officers and, the pursuit of claims via a class action is consistent with this wider purpose. 

The minority did not accept that s596A had a purpose beyond furthering the administration of the company.  Their Honours expressed concern about the implications if it has a broader purpose, for example, “there would be nothing to prevent a person seeking an examination in aid of an industrial dispute or an action for personal injuries arising in the workplace”.  In light of the majority decision, an examination for these broader purposes appears to arguably be available.

Implications

The decision equips class action lawyers, funders and other potential plaintiffs with an extraordinary power, not available via ordinary pre litigation processes.  We anticipate funders will use it to their advantage as part of their pre litigation investigations and/or for the purposes of negotiations.   

Insurers can expect an increase in claims under investigation costs extensions under D&O Policies where an insured entity is in administration or liquidation.

Further information / assistance regarding the issues raised in this article is available from the author, Celia Wright, Partner or your usual contact at Moray & Agnew.