A recent case in the NSW Court of Appeal clarifies the purpose, and limits, of a public examination summons
In the recent case, ACN 004 410 833 Ltd (formerly Arrium Limited) (in liq) v Michael Thomas Walton [2020] NSWCA 157 (Arrium v Walton), the NSW Court of Appeal examined the limits of the public examination summons and regime in the Corporations Act 2001 (Cth) (Act).
This case offers useful insight for liquidators who want to apply for a public examination summons, as well as directors and other recipients who may want to challenge a public examination summons.
What is a public examination summons?
The Act allows the Court to summon a person for examination about the affairs of a company which is under administration or has entered winding-up proceedings.
A public examination summons is a legal document issued by the Court at the request of an eligible person under the Act (usually a liquidator or ASIC, but could also be a receiver or creditor). It compels the named party to attend the Court and be formally examined about the affairs of the company. The summons will also usually require the production of documents. These documents could cover a wide range of issues the liquidator is exploring. For example, it might require the production of emails from the company’s accountant to a director to investigate what the director knew about the company’s solvency at various times (a matter usually investigated in insolvent trading claims).
Who can be summonsed?
The purpose of the examination summons is to discover or clarify information about the affairs of the company to assist the winding-up proceedings and benefit the creditors. The examination may be mandatory or discretionary.
s596A of the Act provides for mandatory examination where the person being summonsed:
- is an officer or provisional liquidator of the company; or
- was an officer or provisional liquidator during or after the two years immediately prior to:
- The company entering administration;
- If the company executed a Deed of Company Arrangement (DOCA), the day on which the company entered an administration that ended with the DOCA;
- If the company is being, or has been, wound up, the day on which the winding-up began; or
- When the application is made.
If the person falls into one of the categories above, the Court must issue the summons.
s596B of the Act provides for discretionary examination where the person being summonsed:
- has taken part or been concerned in examinable affairs of the company and has been, or may have been, guilty of misconduct in relation to the company; or
- may be able to give information about examinable affairs of the company.
Such persons might include managers of the company and external accountants. If the person falls into a category above, the Court has the discretion to issue the summons.
What are examinable affairs?
The ‘examinable affairs’ of company may include information relating to a wide range of matters, such as:
- The initial formation and management of the company;
- The ongoing operations of the company prior to its insolvency;
- The events leading up to the company’s insolvency, and the decisions made by the directors as a consequence of these events;
- The directors’ knowledge of the company’s solvency;
- The nature of the company’s property and any dealings with that property; or
- The relationship between creditors and directors, including but not limited to, any conflicts of interest.
What happened in Arrium v Walton?
In Arrium v Walton, a group of shareholders sought to use the examination process to determine whether a claim could be brought against Arrium; one of its directors, Mr Galbraith; or its auditors, KPMG; or UBS AG, in respect of Arrium’s 2014 capital raising.
The question before the Court was whether the purpose for which the public examination process was sought was outside the purpose for which these powers are conferred.
The Court concluded that the examination was sought for a private purpose and for the benefit of a limited group of persons. Drawing on the authority that the predominant purpose of a public examination should be to benefit the company, its creditors or its contributories, it found that the proposed examination was ‘foreign to the purpose for which the examination power is conferred’ and an abuse of process. The summons was set aside.
Background
The applicant was the former Arrium Ltd. Arrium was a significant producer of steel and iron ore. The company was placed into administration on 7 April 2016, and the administrators were appointed as liquidators on 20 June 2019.
This case concerned a $754 million capital raising undertaken in 2014. The timeline is as follows:
- In August 2014, Arrium published their end-of-year results.
- In September 2014, they announced a fully underwritten $754 million capital raising, stating that the proceeds would be used to pay down debt. Retail shareholders were given a one-for-one pro rata entitlement offer at 0.48c per share. This was said to be a discount of 26% to Arrium’s closing share price on 12 September 2014. The capital raising was completed on 14 October 2014.
- On 7 April 2016, after heavy losses from 2015 onwards, Arrium entered administration.
- On 20 June 2019, the administrators were appointed liquidators.
What was the purpose of the summons?
The applicants in the primary hearing (who were the respondents in the current case) were shareholders of Arrium. They were concerned that the financial results published in 2014 did not ‘adequately or fairly’ reflect the state of Arrium’s business.
They wrote to ASIC in April 2018 seeking to be authorised as eligible applicants under s596A of the Act. This would allow them to apply for a summons requiring one of Arrium’s directors, Mr Galbraith, to appear before the Court for examination.
Their stated purpose was to determine whether there were any potential claims arising from any possible contraventions of the Act by Arrium’s directors or by the auditors, KPMG, in relation to the capital raising. They proposed that these claims might include:
- A claim against the company officers for misrepresentations made to the market of investors and potential investors in Arrium concerning the capital raising and financial position of Arrium in FY2014 and FY2015; and or
- A claim against the auditors for misleading and deceptive conduct and negligence in relation to the preparation and publishing of the financial report for the year ended 30 June 2014 and 31 December 2014.
The primary judgment of the lower Court
The primary judge found that the predominant purpose of the examination was to investigate and potentially pursue a personal claim in their capacity as shareholders. As a result, the application to set aside the summons was dismissed.
However, in coming to this decision, His Honour considered that ‘the information likely to be produced by the respondents’ examination, would also likely advance the interests of Arrium and its creditors, so far as it produces relevant information that supports further causes of action by Arrium.’
Arrium appealed the decision.
The judgment on appeal
On appeal, the Court noted that:
- The capital raising was used to pay down debt and as such benefited Arrium. The prospective litigation which the examination was designed to assist would not bring any commercial benefit to the company since it suffered no loss;
- The predominant purpose in seeking the examination summons was to investigate and pursue a potential claim in their capacity as shareholders against the directors or auditors of Arrium; and
- In considering whether there is an abuse of process, it is the subjective purpose of the respondents which is relevant: Re Excel at 89-91; Williams v Spautzat 526-526; 529-531. Although a secondary purpose was identified, namely that the examinations may confirm the existence or non-existence of causes of action which the liquidator had decided not to pursue, it was not one which formed any part of the respondents’ purpose.
The respondents’ argument was that since the liquidator could have examined the director/s about the same subject matter, the fact that the examination was intended by creditors to purely further their own purposes did not mean that the examination was an abuse of process.
This was rejected by the Court, which stated:
‘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.’
The Court set aside the summons to Mr Galbraith and dismissed the application for production of documents. The respondents were ordered to pay the cost of proceedings in both the lower Court and appeal.
How might the case affect liquidators and other applicants?
If you intend to apply for a summons, this case highlights how vital it is to define your purpose.
The Courts have not always been unanimous as to the scope of the public examination power. It has historically been taken to apply only to purposes which would assist a liquidator in the winding-up of a company or to support the bringing of criminal charges against the former officers of the company. That scope has been broadened in the context of cases where the examination has the potential to significantly benefit creditors. This often includes enabling the liquidator to determine whether potential litigation can be brought against various parties and the likelihood of any recoveries.
The case reaffirms that a summons brought for a private purpose is unlikely to be allowed even if there is a potential secondary benefit to the liquidator.
How might the case affect recipients of a summons?
If you have received a summons under the public examination regime, you must comply unless you apply to the relevant Court for the summons and or order for production of documents set aside. Time limits apply. The Court will only excuse you in very limited circumstances, including if you can show that:
- the summons is vexatious and designed to intimidate or bully you;
- the examination is a ‘dress rehearsal’ for future litigation against you; or
- the summons is an abuse of process.
The latter point is explored in this case. See our article on the NRL case which raised similar issues.
If you think that a summons has been procured for a private process or should not have otherwise been granted, it is important that you get timely legal advice as a matter of urgency.
Further Information
For more information about this case or for assistance in any aspect of insolvency, contact Trevor Withane: