Banton Group successful in High Court: shareholders of companies in external administration able to conduct public examinations of directors and officers.
The High Court of Australia today delivered a seminal judgment in favour of Banton Group’s clients, Michael Walton and Anthony Bogan. A majority of the High Court (per Edelman, Steward and Gageler JJ) held that Banton Group’s clients, shareholders in collapsed mining giant Arrium, were entitled under section 596A of the Corporations Act 2001 (Cth) to publicly examine former directors of the company. The decision overturns a ruling by the NSW Court of Appeal, which had earlier found the proposed examination of former Arrium directors by shareholders would be an abuse of process.
The decision has major implications for the accountability of directors of a publicly listed company to their shareholders.
The decision is Walton & Anor v ACN 004 410 833 Ltd (formerly Arrium Limited) (In Liquidation) & Ors [2022] HCA 3.
The Primary Proceedings
Banton Group acts for Mr Walton and Mr Bogan in representative proceedings filed in the Victorian Supreme Court in August 2020 (Arrium Class Action). The Arrium Class Action alleges Arrium’s former directors and auditor KPMG made misleading or deceptive statements in the company’s financial reports about its compliance with Australian accounting standards and failed to disclose material impairments in the company’s assets.
In October 2014, Arrium completed a $750 million capital raising, having published its 2014 financial results and provided shareholders with an Information Memorandum for that purpose. In January 2015, Arrium announced the suspension or closure of one of its principal mining operations and wrote down its assets by $1.3 billion. In April 2016, Arrium was placed into administration and, in June 2019, liquidators were appointed.
After Arrium went into administration, the Australian Securities and Investments Commission allowed the shareholders to apply for an examination under s 596A of the Corporations Act. Banton Group, on behalf of its clients, issued a summons to the former Arrium directors which was initially allowed, but subsequently set aside by the NSW Court of Appeal, who found the “private nature” of the shareholders’ claims rendered the proposed examinations an abuse of process.
Banton Group appealed this decision to the High Court.
The High Court Decision
The High Court’s majority decision found that the examination summons issued by shareholders, was not issued for a purpose that was an abuse of process.
In a summary of the judgment, the High Court said:
“In deciding whether the use of a court process authorised by statute is an abuse of process, the question is whether the litigant’s predominant purpose is inconsistent with the scope and purpose of the statutory process. The purpose and concern of s 596A is not confined to the interests of the corporation, its creditors, or its contributories, or to the bringing of criminal or regulatory proceedings in connection with the affairs of the corporation. Examining an officer of a corporation for the purpose of pursuing a claim against the corporation in external administration or one of its officers or advisers for the enforcement of the law can be a legitimate use of the power conferred by s 596A, irrespective of whether it is in the interests of the corporation or whether the claim relates to all or only some of the corporation’s creditors or contributories. The summons was therefore not issued for a purpose that was an abuse of process.”
Significance
This is a landmark decision in respect of the High Court’s interpretation of the Corporations Act that ensures that the statutory powers which enable ASIC to authorise the public examination of directors and officers of a public company may extend to anyone authorised by ASIC as an “Eligible Applicant” without reference to whether the company or its creditors will benefit.
Amanda Banton, Managing Partner, said: “Banton Group are pleased with the outcome. The majority of the High Court correctly determined that the limitation imposed by the Court of Appeal had unduly constrained the operation of section 596A. Had our clients not appealed, many of those who suffer losses from corporate failure would continue to be deprived of the power to examine and, in that way, to understand the causes of the failure and to identify potential recovery avenues.”
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