Bathurst CJ, Bell P, Leeming JA, Black J, Re Hugh J
Catchwords
[1998] HCA 6
Grosvenor Hill (Qld) Pty Ltd v Barber (1994) 48 FCR 301
(1994) 120 ALR 262
Hamilton v Oades (1989) 166 CLR 486
[1989] HCA 21
Hong Kong Bank of Australia Ltd v Murphy (1992) 28 NSWLR 512
Kimberley Diamonds Ltd v Arnautovic (2017) 252 FCR 244
[2017] FCAFC 91
Meteyard v Love (2005) 65 NSWLR 36
Source
Original judgment source is linked above.
Catchwords
[1998] HCA 6
Grosvenor Hill (Qld) Pty Ltd v Barber (1994) 48 FCR 301(1994) 120 ALR 262
Hamilton v Oades (1989) 166 CLR 486[1989] HCA 21
Hong Kong Bank of Australia Ltd v Murphy (1992) 28 NSWLR 512
Kimberley Diamonds Ltd v Arnautovic (2017) 252 FCR 244[2017] FCAFC 91
Meteyard v Love (2005) 65 NSWLR 36[2005] NSWCA 444
Palmer v Ayres (2017) 259 CLR 478[2017] HCA 5
Pilmer v Duke Group Ltd (In liq) (2001) 207 CLR 165Evans v Wainter Pty Ltd (2005) 145 FCR 176[2005] FCAFC 114
Re Silkstone and Dodsworth Coal and Iron Company (Limited)Whitworth's Case (1881) 50 LJ Ch 752
Sandhurst Trustees Ltd v Harvey (2004) 88 SASR 519[2004] SASC 157
Sir John Moore Gold Mining Co (1837) 37 LT 242
Williams v Spautz (1992) 174 CLR 509
Judgment (9 paragraphs)
[1]
Background
The applicant (formerly Arrium Ltd (in liq)) (Arrium) was a significant producer of steel and iron ore, its assets including the Southern Iron mining operation. Up to the time it was placed into administration, Arrium was listed on the Australian Stock Exchange (ASX).
On 15 September 2014 Arrium announced a fully underwritten $754 million capital raising. Retail shareholders were given a one for one pro rata entitlement offer, the offer price being 0.48c per share said to be a discount of 26 percent to Arrium's closing share price on 12 September 2014. It was stated in the announcement that the proceeds would be used to pay down debt.
As would be expected, an Information Memorandum was provided to shareholders in respect of the offer (the Equity Capital Raising Presentation). It provided information concerning the company, including a financial analysis and a business outlook and update with an earnings guidance.
In August 2014, shortly prior to the capital raising, Arrium published its results for the financial year ended 30 June 2014.
The capital raising was successfully completed by 14 October 2014.
In January 2015 after a decline in the export price of iron ore, Arrium announced that the Southern Iron mining operation would be suspended or closed. In its half yearly reports published on 18 February 2015, it recognised an impairment in the value of its mining operations in an amount of $1,335 million. It was placed into administration on 7 April 2016 and on 20 June 2019 the administrators were appointed liquidators.
The applicants for the examination orders, who are the respondents in these proceedings (the respondents), were shareholders of Arrium. On 5 April 2018 their solicitors wrote to the Australian Securities and Investments Commission (ASIC) advising that they acted for former members of Arrium and in particular the respondents. In that letter they sought that the respondents be given eligible applicant status within the meaning of s 597(5A)(b) of the Corporations Act. The letter referred to the capital raising and stated their clients' concern was whether the financial results for the financial year ended 30 June 2014 announced in August 2014 and the information supplied in respect of the capital raising did "not adequately or fairly" portray the "true state of Arrium's business". The letter summarised the result of the solicitors' investigation up to that time and stated that the respondents wished to participate in s 597 examinations of certain persons to determine whether any claims should be brought against Arrium, its directors or its auditor. The letter summarised the nature of the claims and purpose of the examinations contemplated in the following terms:
"(3) Losses to investors and potential claims
...
55 We believe that our clients or the company may have good grounds to consider that Arrium's Directors:
(a) contravened ss 588G, 674(2), 1041H, and/or 1041E of the Corporations Act; and/or
(b) contravened Rules 3.1, 4.3A, and 4.3D of the ASX listing rules.
56 In addition, we believe that our clients or the company may have good grounds to consider that KPMG:
(a) contravened s 1041H of the Corporations Act; and/or
(b) acted negligently in the performance of its audit function.
…
(b) Examinable affairs
59 The purpose of the examinations would be to investigate the potential for claims to be made on behalf of creditors or shareholders in Arrium related to the matters set out in section B above.
(c) Application for the benefit of Shareholders
60 Any information obtained through public examinations would assist all shareholders and persons with a valid claim, in considering whether to make a claim against Arrium's Directors, KPMG or anyone else. Further, the success of any such proceedings may lead to recovery from any insurance policy standing behind the Directors and KPMG. Such recovery would ensure that the pool of funds available to either the company or other shareholders would increase.
61 Accordingly, our clients, as shareholders in Arrium, make this application for authorisation to conduct the examinations described above."
The letter nominated proposed examinees, none of whom were the subject of the ultimate examination order.
The letter stated that "[t]he purpose of the examinations would be to investigate the potential for claims to be made on behalf of creditors or shareholders in Arrium" relating to the matters set out in the letter.
In a subsequent email from the solicitors for the respondents to ASIC it was stated that the persons in respect of whom examination orders were sought were persons who the administrators would not seek to examine themselves. It was also stated that the examinations would not be an abuse of process since the examinees would be officers of the company and its auditor, the examination would be in respect of the examinable affairs of the company and the application was made expressly for the benefit of shareholders and creditors of the company.
On 24 April 2018 ASIC authorised the respondents as eligible applicants in relation to Arrium.
By originating process filed on 6 May 2019 the respondents applied to the Court for orders under s 596A of the Corporations Act that a summons for examination be issued to Mr Colin Galbraith to appear for examination and produce certain documents. Mr Galbraith was a Director of Arrium until December 2015, chair of its Governance and Nominations Committee and a member of its Audit and Compliance Committee.
In addition, orders were sought under s 68 of the Civil Procedure Act and s 597(9) of the Corporations Act that Arrium, KPMG (the company's auditor), and UBS AG (who advised on the capital raising) produce certain documents.
The application was supported by an affidavit sworn by the respondents' solicitor, Ms Amanda Banton on 3 May 2019. She stated that the purpose of the application was "to obtain further information about potential claim(s) the Plaintiffs [the respondents] and shareholders may have arising out of the examinable affairs of Arrium". Her affidavit referred to potential claims arising out of the announcement of the capital raising, the Equity Capital Raising Presentation, certain representations in the financial reports for the year ended 30 June 2014 and in the half yearly report for the period ended 31 December 2014. In her affidavit she described the purpose of the application in the following terms:
"40. I anticipate that the examinations will assist with the investigation of any claim(s) to be made with a view to determining whether any such claim(s) have sufficient prospects of success to warrant pursuing the same in a court of competent jurisdiction. The potential claims which may arise out of matters set out above include, but are not limited to, the following:
a. A claim made by the Plaintiffs' 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;
b. A claim made by the Plaintiffs' 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.
41. I anticipate that the examination of Mr Galbraith will reveal important factual matters bearing upon whether the Company Officers of Arrium failed to adequately inform the market as to the financial position of Arrium in FY2014 and FY2015."
There was at one stage confidentiality orders in respect of Ms Banton's affidavit and in respect of the respondents' letter to ASIC of 5 April 2018. However, no objection was taken to the material being utilised before the primary judge or on the appeal and it was not suggested that any portion of this judgment should remain confidential.
On 15 May 2019 the Registrar in Equity made the examination and production orders sought by the respondents.
By interlocutory process dated 11 June 2019 Arrium sought to have the examination and production orders stayed or set aside. Prior to the hearing before the primary judge, KPMG and Mr Galbraith, although not themselves making a formal application, participated in the proceedings seeking similar orders. It was common ground at the hearing before the primary judge that if the examination summons was stayed or set aside, the orders for production should also be set aside.
The evidence on the application was summarised in an uncontroversial fashion in the primary judgment.
[2]
The primary judgment
In dealing with the evidence before him, the primary judge referred to the affidavit of Ms Caroline Goulden, the solicitor for Arrium, sworn on 11 June 2019. He noted that Ms Goulden referred to the 94 entities in the group that entered into separate deeds of company arrangements and the sale of the core Australian operating business. Ms Goulden stated that the group entities entered into what were described as "'transaction support' deeds of company arrangement" and referred to the process for submission of debts under those deeds. She stated (and it was not disputed) that a provision of the distribution deed had the effect that an "'Arrium Group Creditor" (as defined) would be taken to have abandoned all 'Claims' (as defined) and entitlements in the Arrium distribution fund which were not, relevantly, lodged with the deed administrators in accordance with that proof of debt process". He noted that Ms Goulden stated that the deed administrators did not receive a proof of debt from either of the respondents prior to the barring date in the deed.
The primary judge noted that Ms Goulden also referred to investigations carried out by the deed administrators. She stated that the September 2014 capital raising was not the subject of detailed investigation since the administrators (and the liquidators) "considered it unlikely that its circumstances gave rise to any cause of action which would potentially benefit the Arrium Group or its creditors". He referred to the evidence of Ms Goulden that the deed administrators and their legal representatives had conducted informal interviews with Mr Galbraith.
The primary judge referred to the evidence of Ms Goulden to the effect that the class action in which it was proposed the respondents be the lead plaintiffs would be of no benefit to Arrium or its creditors because there was nothing to indicate that Arrium or its creditors had suffered loss as a result of these matters. She also referred to the possibility that the joinder of Arrium in a class action would be detrimental to Arrium and its creditors. He said he did not need to address that matter where the respondents had made it clear in the course of the hearing that they would not seek to join Arrium in the class action. Although his Honour did not refer to it that does not necessarily mean that defendants in the class action would not seek to do so.
[3]
Legislation
Section 596A of the Corporations Act (the relevant section for present purposes) deals with mandatory examinations whilst s 596B deals with discretionary examinations. They are in the following terms:
"596A Mandatory examination
The Court is to summon a person for examination about a corporation's examinable affairs if:
(a) an eligible applicant applies for the summons; and
(b) the Court is satisfied that the person is an officer or provisional liquidator of the corporation or was such an officer or provisional liquidator during or after the 2 years ending:
(i) if the corporation is under administration--on the section 513C day in relation to the administration; or
(ii) if the corporation has executed a deed of company arrangement that has not yet terminated--on the section 513C day in relation to the administration that ended when the deed was executed; or
(iii) if the corporation is being, or has been, wound up--when the winding up began; or
(iv) otherwise--when the application is made.
596B Discretionary examination
(1) The Court may summon a person for examination about a corporation's examinable affairs if:
(a) an eligible applicant applies for the summons; and
(b) the Court is satisfied that the person:
(i) has taken part or been concerned in examinable affairs of the corporation and has been, or may have been, guilty of misconduct in relation to the corporation; or
(ii) may be able to give information about examinable affairs of the corporation.
(2) This section has effect subject to section 596A."
Eligible applicant is defined in s 9 in the following terms:
"eligible applicant, in relation to a corporation, means:
(a) ASIC; or
(b) a liquidator or provisional liquidator of the corporation; or
(c) an administrator of the corporation; or
(d) an administrator of a deed of company arrangement executed by the corporation; or
(e) a person authorised in writing by ASIC to make:
(i) applications under the Division of Part 5.9 in which the expression occurs; or
(ii) such an application in relation to the corporation."
Compulsory examinations of company directors and officers have a lengthy legislative history. It was summarised by Lander J in Evans v Wainter (at [44]-[97]) and what we have set out below is supplementary to that summary.
As was pointed out in Re Excel at 79, the provision owed its origins to the provisions in the Bankruptcy Act 1542, 34 & 35 Hen 8, c 4 providing for the examination of debtors. However, the first application to companies appears to have occurred in s 15 of the Joint Stock Companies Winding Up Act 1844, 7 & 8 Vict, c 111. It is unnecessary to set out the terms of the section but it conferred wide powers on the Court of Chancery to summon people who the court believed were capable of giving evidence concerning the commercial dealings or trading of the company and persons suspected of having property of the company in their possession, including debtors of the companies. The preamble to the Act, so far as relevant, was in the following terms:
"Whereas it is expedient to extend the Remedies of Creditors against the Property of such Joint Stock Companies or Bodies: as herein-after mentioned when unable to meet their pecuniary Engagements, and to facilitate, the winding up of their Concerns; and it may also be for the Benefit of the Public to make better Provision for Discovery of the Abuses that may have attended the Formation or Management of the Affairs of any such Companies or Bodies, and for ascertaining the Causes of their Failure".
[4]
The relevant authorities
As will be seen the respondents placed considerable reliance on the decision of this Court in Hong Kong Bank v Murphy. The proceedings were an appeal from a judgment of McLelland J in Re BPTC Ltd (in liq) (1992) 7 ACSR 539.
The proceedings involved an application to set aside an examination summons obtained by the new trustees of a number of trusts known as the Estate Mortgage trusts. The previous trustee, BPTC Ltd (in liq), had been removed as trustee by order of the Court.
The orders for examination were made against officers of Hong Kong Bank of Australia (HKBA) and Mercantile Mutual Life Insurance Co Ltd (MML). The orders were made in the context of litigation concerning assignments of interests in mortgages by BPTC, whilst it was trustee of the Estate Mortgage trusts, to HKBA and MML and the validity of a deed of priority. The new trustees alleged that BPTC entered into the deed of assignment and priority in breaches of trust, in which HKBA and MML participated, and from which they sought to take the benefit. The new trustees were seeking to recover money and other property from HKBA and MML.
It was submitted that the application for the summons was an abuse of process and the examination was sought for private purposes and sought pre-trial depositions that were not available to an ordinary litigant. McLelland J rejected the submission and made the following remarks at 544:
"It was submitted for the opponents that principles developed by the courts in relation to applications under s 597 and its predecessors by a liquidator or provisional liquidator should not be applied to an application by some other person who does not have the same 'public' status and function. In particular it was put that the new trustees have, or should have, no more significant status or function than that of private litigants seeking in the Victorian proceedings to advance the private interests of the beneficiaries under the trusts which they represent, and that there is no valid analogy between their position and that of a liquidator. I reject this contention. There are significant similarities between the position of the new trustees in the present case and the position of a liquidator. The new trustees were appointed as such by order of this court to protect the interests of investors in the Estate Mortgage trusts, of whom there are approximately 52,000 and who therefore may be taken to represent a very extensive section of the public. Claims have been made by the new trustees against BPTC for amounts in excess of $600m in respect of alleged breaches of trust by BPTC. The claims the subject of the Victorian proceedings involve the availability to the Estate Mortgage trusts of many millions of dollars in money or other property. The events giving rise to those claims are entirely outside the personal knowledge of the new trustees. The new trustees are bound to investigate those events in the interests and for the benefit of the Estate Mortgage unitholders. It has not been shown that the effective investigation of those matters by the new trustees for the ultimate benefit of the Estate Mortgage unitholders is any less a matter of 'public' concern and interest than would be the effective investigation by a liquidator of events from which claims against third parties have arisen or may arise, which the liquidator is in the course of pursuing or wishes to pursue for the ultimate benefit of creditors (or members) of the relevant corporation. Indeed, having regard to the widespread public holding of units in the Estate Mortgage trusts there may well be a far greater public interest component in the present case than there are in many liquidations. There are of course differences between the functions of a liquidator on the one hand and the new trustees on the other, just as there are differences between the functions of a liquidator and those of an official manager (also an eligible applicant under s 597), but so far as the investigation by the new trustees of transactions effected by a former trustee (BPTC) on the one hand, and the investigation by a liquidator of transactions effected by a corporation under the control of its former directors, on the other, are concerned, with a view in each case to recovery of money or other property for the benefit of unitholders or creditors (and members) as the case may be, the similarity is close. It hardly needs to be said that activities and transactions of a corporation in its capacity as trustee involve the management and administration of the corporation no less than activities and transactions on its own behalf: cf Re Indopal (1987) 12 ACLR 54; 5 ACLC 278."
[5]
a Arrium
Senior counsel for Arrium stated that "the primary question" was whether it was an abuse of process for shareholders of Arrium to obtain examination orders for the purpose of investigating and pursuing a class action against the directors and auditors where there is no suggestion it could produce any benefit to the company. He submitted that the benefit identified by the primary judge, namely that the examinations may confirm the existence or non-existence of causes of action which the liquidator had decided not to pursue, was not one which formed any part of the respondents' purpose.
He referred to the evidence of Ms Goulden which we have summarised at [21] above and the assessment by the liquidator that the circumstances of the capital raising would be unlikely to give rise to any cause of action which would potentially benefit Arrium or its creditors. As noted, it was common ground that the respondents were not creditors. He submitted that unless the liquidator's assessment could be shown to be wrong, "the mere theoretical possibility" that information might be produced that has that effect is "hardly a benefit in the liquidation".
Senior counsel referred to the submission made on behalf of the respondents in the Court below that the respondents stated purpose was to investigate potential causes of action against officers and auditors of the company in which the respondents were shareholders. He also referred to the respondents' submission in the Court below to the effect that it was common ground that the liquidators had not investigated the capital raising, agreeing that it was "a little bit of an overstatement" because Mr Galbraith had been informally interviewed. He noted the submission by the respondents both on the appeal and in the Court below that a potential benefit may be the recovery of the cost of the capital raising.
He submitted that purpose was not the purpose for which the examination summons was sought but rather that it was contended before, and accepted by the primary judge, that there might be "an incidental benefit to the company" of that nature.
Senior counsel for Arrium referred to the letter written by Ms Banton to ASIC to which we have referred at [8] above, particularly to paragraphs 60 and 61 of that letter, and to the contents of her affidavit to which we have referred at [15] above.
[6]
b KPMG
Counsel for KPMG encapsulated his submissions in four propositions. First the question for the primary judge was whether the respondents' "actual subjective relevantly predominant purpose in securing the examination summons was an improper one". Second, "an examination summons must be used for the purpose of securing a benefit for the company, its creditors or contributories" and "not for the purpose of securing a private benefit or advantage for the applicant".
His third proposition was that in undertaking the characterisation task, it may be relevant "whether a benefit to the company, its creditors or contributories would result from the achievement of the applicant's purpose" and "in that way … what appears to be a wholly private purpose can instead be characterised as being for the benefit of the company".
The fourth proposition was that for a purpose to be proper, it is "insufficient to observe merely that a benefit may result to the company, its creditors or contributories" incidentally from the conduct of the examination.
[7]
c The respondent
Senior counsel for the respondents referred to Marvin Manufacturers. He noted the submission made in that case in support of the application to set aside the summons was that it was an abuse of process if the sole or predominant purpose of the applicant was to advance private litigation. He submitted that Hayne J explained at 616 that the question was whether the coercive powers in s 596B were to be used for "a purpose foreign to the purposes for which those powers are conferred". He also referred to Hayne J's statement at 619 that whilst New Zealand Steel sought to hold the examination so that it might further its own interests, that is not to say that the examination is to be characterised as one to be conducted for "purely private purposes". He submitted that in those circumstances, the question was "whether the examination can properly be characterised as one that would advance an interest provided by the legislative framework". He submitted that if the examination can be seen to benefit the company, irrespective of the subjective purpose of the applicant, there is not an abuse of process.
He submitted that it followed from Marvin Manufacturers that where the liquidator could have examined 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. He submitted in the present case that the matters in respect of which the respondents sought to examine Mr Galbraith were matters on which he could have been examined by the liquidator. He submitted that there was no clear distinction in the authorities between purpose and outcome.
He submitted referring to Williams v Spautz (1992) 174 CLR 509; [1992] HCA 34 that one does not look purely at the subjective intention, but rather discern "the objective purpose" which "necessarily involves an enquiry into … the possible outcome of it".
Senior counsel for the applicant emphasised that ASIC had to authorise the examination. He submitted that once the ASIC threshold is past, the purpose of the person examining did not have any relevance at all. He stated that was because the matters the subject of the examination were matters that were proper for a liquidator to investigate. He submitted that counsel for KPMG's fourth proposition was inconsistent with what was said by Hayne J in Marvin Manufacturers.
[8]
Consideration
There are a number of matters that may be stated at the outset. First, no point was taken that ASIC's authorisation of the respondents as eligible applicants was obtained on the basis of a stated desire in the respondents' solicitors' letter of 5 April 2018 to examine specific nominated proposed examinees, none of whom were the subject of an examination summons (see [9] above), and that Mr Galbraith was not identified in that letter. There may be cases where the issue of an examination summons by an eligible applicant is open to challenge and apt to be set aside where it can be shown that the applicant is attempting to use examination summons in a way that differs from the basis put to ASIC in order to obtain eligible applicant status.
Secondly, the prospective litigation which the examination was designed to assist would not bring any commercial benefit to the company. The capital raising raised $754 million of which the better part, but not all, was used to pay down debt. Thus Arrium benefited from the capital raising. It is true that Arrium issued shares to those investors who participated in the capital raising but it suffered no loss as a consequence of doing so.
In Pilmer v Duke Group Ltd (In liq) (2001) 207 CLR 165; [2001] HCA 31 ('Pilmer'), shares were issued and allotted by the respondent in connection with the takeover of another company, Western United Ltd. The liquidator of the respondent instituted proceedings against the expert retained by it in connection with the takeover alleging that the expert negligently stated the price to be offered for the shares for Western United was "fair and reasonable". Its claimed loss included what was said to be a loss of $30.55 million for the value of the shares issued as a consequence of the takeover. The High Court held that the company suffered no loss on the issue of the shares. The majority pointed out at [18] that the relevant inquiry was not whether the shareholders suffered loss but whether the company itself had suffered loss as a result of the issue. They also stated at [20] that "[b]efore the shares were issued, they did not exist as an item of property whether of the company or anyone else" and it was "the act of issuing the shares and agreeing to allot them which created the relevant item of property - property which was never owned by the company". The majority reached the following conclusion:
"[64] The answer to that inquiry must be that Kia Ora outlaid cash and whatever may have been the administrative costs of issuing the shares. If a claim had been made, it may well be that some allowance would be made for the consequential effect on its capacity to raise other equity or debt finance. Otherwise, however, it gave up, or lost nothing by the issue of its shares."
[9]
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 30 July 2020
Parties
Applicant/Plaintiff:
ACN 004 410 833 Ltd (formerly Arrium Limited) (in liq)
Manufacturers (Aust) Pty Ltd; New Zealand Steel (Australia) Pty Ltd v Burton (1994) 13 ACSR 610
Re New Cap Re Insurance Corp Holdings Ltd [2001] NSWSC 835
Re New Tel Ltd (in liq); Evans v Wainter Pty Ltd (2005) 145 FCR 176; [2005] FCAFC 114
Re Silkstone and Dodsworth Coal and Iron Company (Limited); Whitworth's Case (1881) 50 LJ Ch 752
Sandhurst Trustees Ltd v Harvey (2004) 88 SASR 519; [2004] SASC 157
Sir John Moore Gold Mining Co (1837) 37 LT 242
Williams v Spautz (1992) 174 CLR 509; [1992] HCA 34
Texts Cited: Percy Spender and Gordon Wallace, Company Law and Practice (1937, The Law Book Co. of Australasia Ltd)
Category: Principal judgment
Parties: ACN 004 410 833 Ltd (formerly Arrium Limited) (in liq) (appellant)
Michael Thomas Walton (first respondent)
Anthony Bogan (second respondent)
KPMG (interested party)
Colin Galbraith (interested party)
Representation: Counsel:
M A Izzo SC with T E O'Brien (appellant)
M Henry SC with J Shepard (first and second respondents)
P Herzfeld with A Emmerson (KPMG)
P Jammy (Colin Galbraith)
Solicitors:
Arnold Bloch Leibler (appellant)
Banton Group (first and second respondents)
Ashurst Australia (KPMG)
Clyde and Co (Colin Galbraith)
File Number(s): 2019/382391
Publication restriction: Nil
Decision under appeal Court or tribunal: Supreme Court of New South Wales
Jurisdiction: Equity
Citation: [2019] NSWSC 1606; [2019] NSWSC 1708
Date of Decision: 19 November 2019
Before: Black J
File Number(s): 2019/141004 (002); 2019/141004 (004)
[This headnote is not to be read as part of the judgment]
The Court of Appeal has allowed an appeal from a decision of a judge of the Equity Division of the Supreme Court dismissing an application to set aside an order for examination made under s 596A of the Corporations Act 2001 (Cth) and production orders made under s 68 of the Civil Procedure Act 2005 (NSW) and s 597(9) of the Corporations Act whilst staying those orders in part.
The applicant (formerly Arrium Ltd (in liq)) (Arrium) was a significant producer of steel and iron ore, its assets including the Southern Iron mining operation. Up to the time it was placed into administration, Arrium was listed on the Australian Stock Exchange. In September 2014 Arrium announced a fully underwritten $754 million capital raising. It was stated that the proceeds would be used to pay down debt. Retail shareholders were provided with an Information Memorandum (the Equity Capital Raising Presentation) in respect of a one for one pro rata entitlement offer.
In August 2014, shortly prior to the capital raising, Arrium published its results for the financial year ended 30 June 2014. The capital raising was completed by 14 October 2014. In January 2015 Arrium announced the suspension or closure of the Southern Iron mining operation and in its half yearly results published in February 2015, it recognised a $1,335 million impairment in the value of its mining operations. Arrium was placed into administration on 7 April 2016. On 20 June 2019 the administrators were appointed liquidators.
The applicants for the examination orders, who are the respondents in these proceedings, were shareholders of Arrium. On 5 April 2018 their solicitors wrote to the Australian Securities and Investments Commission seeking that the respondents be given eligible applicant status within the meaning of s 597(5A)(b) of the Corporations Act. The letter stated their clients' concern was whether the financial results for the financial year ended 30 June 2014 announced in August 2014 and the information supplied in respect of the capital raising did "not adequately or fairly" portray the "true state of Arrium's business". The letter stated that the respondents wished to participate in s 597 examinations of certain persons to determine whether any claims should be brought against Arrium, its directors or its auditor. ASIC authorised the respondents as eligible applicants in April 2018.
By originating process the respondents applied for orders under s 596A of the Corporations Act that a summons for examination be issued to Mr Colin Galbraith to appear for examination and produce certain documents. Mr Galbraith was a Director of Arrium until December 2015, chair of its Governance and Nominations Committee and a member of its Audit and Compliance Committee. In addition, orders were sought under s 68 of the Civil Procedure Act and s 597(9) of the Corporations Act that Arrium, KPMG (the company's auditor), and UBS AG (who advised on the capital raising) produce certain documents.
On 15 May 2019 the Registrar in Equity made the examination and production orders sought by the respondents. Arrium sought to have the examination and production orders stayed or set aside. The primary judge dismissed the application by Arrium to set aside the summons.
The main issue on appeal was whether the purpose for which the examination was sought was foreign to the purpose for which powers to order an examination and production of documents were conferred.
(i) The examination was 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 would be for a purpose foreign to the purpose for which the examination power is conferred and there is an abuse of process: [122]-[142] (The Court)
Re Excel Finance Corp Ltd (Receiver and Manager Appt); Worthley v England (1994) 52 FCR 69; Re New Tel Ltd (in liq); Evans v Wainter Pty Ltd (2005) 145 FCR 176; [2005] FCAFC 114 followed.
Pilmer v Duke Group Ltd (In liq) (2001) 207 CLR 165; [2001] HCA 31; Hong Kong Bank of Australia Ltd v Murphy (1992) 28 NSWLR 512; Re Marvin Manufacturers (Aust) Pty Ltd; New Zealand Steel (Australia) Pty Ltd v Burton (1994) 13 ACSR 610; Hamilton v Oades (1989) 166 CLR 486; [1989] HCA 21; Boys v Quigley (2002) 26 WAR 454; [2002] WASCA 99; Flanders v Beatty (1995) 16 ACSR 324; Sandhurst Trustees Ltd v Harvey (2004) 88 SASR 519; [2004] SASC 157 considered.
Williams v Spautz (1992) 174 CLR 509; [1992] HCA 34 referred to.
The primary judge noted that in a subsequent affidavit filed by Ms Goulden dated 19 July 2019 she referred to the making of a distribution to unsecured creditors of Arrium and the liquidator's assessment that, even with recoveries from litigation, there would be no prospects of surplus assets in the liquidation such that any shareholder would receive a dividend. He noted that Ms Goulden also referred to the commencement of proceedings by the liquidators against certain former directors of Arrium and two of its subsidiaries in respect of insolvent trading.
The primary judge referred to the affidavit of Ms Banton of 3 May 2019 to which we have referred above and her subsequent affidavit of 28 June 2019 in which she suggested that the examination summons and orders for production were issued "to obtain further information about the potential claim(s) Arrium and its shareholders … may have arising from the examinable affairs of Arrium". The primary judge noted that any claim instituted by the respondents, on behalf of Arrium, would be in the nature of a derivative action. He noted that counsel for the respondents ultimately did not seek to rely on any prospect of a derivative action in support of the examination summons and orders for production. He noted that Ms Banton indicated that the respondents did not seek to join Arrium in the proceedings or to obtain recovery against it.
The primary judge also referred to the affidavit of Mr Masi Zaki, a solicitor assisting Ms Banton, in which she acknowledged that the respondents had abandoned any claim as unsecured subordinated creditors of Arrium and accepted they had no right to any distribution under the deeds of company arrangement.
The primary judge referred to the letter from the respondents' solicitors to ASIC of 5 April 2018 to which we have referred above and in particular to what was set out in paragraph 61 of that letter. He stated that the last statement in that paragraph would only be correct if a derivative action brought by the respondents on Arrium's behalf led to recoveries by Arrium as the respondents accepted that they had no claim against Arrium as creditors, and any recovery by them against third parties would not reduce any such claim or improve the position of other creditors. He noted that ultimately the respondents did not seek to rely on the possibility of a derivative action.
The primary judge also referred to the email from the respondents' solicitors to ASIC of 17 April 2018. He stated that to the extent that it was contended in that email that the examinations would not be an abuse of process because the proposed examinees had not been examined by the administrators, Arrium's liquidator had already conducted an informal interview of Mr Galbraith in lieu of the examination.
The primary judge also referred to information made available to potential participants in the class action in a website established for that purpose. He noted that the information provided referred to possible proceedings against certain directors and auditors of Arrium to recover losses incurred by investors who bought securities in Arrium after its financial year 2014 results announcement and its September 2014 capital raising. He noted that it was indicated that the claim was based on allegations of misrepresentations concerning the financial position of Arrium in the second half of 2014, the adoption of the financial year 2014 accounts and the September 2014 capital raising and also referred to an alleged failure by Arrium's auditors to identify the true position of Arrium in respect of the financial year 2014 reporting documentation. He noted that a funding agreement with the third party funder identified a range of potential defendants in a potential class action.
The primary judge noted that the criteria for the issue of an examination summons, namely that the respondents were eligible applicants and the persons to be examined were, during the specified period, officers of the corporation had been established, and thus the Registrar was correct in making the examination order. He noted however that the examination order may nonetheless be discharged if it is found that the applicant for the order had an improper purpose in securing that order or if that order otherwise amounts to an abuse of process. He said that the power to set aside an order on that basis "should be exercised with caution and only in exceptional or extreme cases".
The primary judge referred to statements by the Full Court of the Federal Court in Re Excel Finance Corp Ltd (Receiver and Manager Appt); Worthley v England (1994) 52 FCR 69 (Re Excel) to the effect that it would be an abuse of the Court's process to obtain an examination summons "not for the benefit of the corporation, its contributories or creditors", but only for the benefit of the prescribed person to be used in other litigation. He also referred to Sandhurst Trustees Ltd v Harvey (2004) 88 SASR 519; [2004] SASC 157 (Sandhurst Trustees) where he stated the Court held an examination had a proper purpose where it might expose misconduct by an audit firm that would be of legitimate interest to ASIC and provide evidence founding the basis of a claim, including by noteholders, against that audit firm. The primary judge stated that it seemed to him that that rationale may be available in the present case, although he recognised and gave weight to the fact that liquidators had already formed the view there was little prospect of benefit to the company from a claim in respect of the capital raising or the relevant financial accounts.
The primary judge noted that the Full Court of the Federal Court of Australian in Re New Tel Ltd (in liq); Evans v Wainter Pty Ltd (2005) 145 FCR 176; [2005] FCAFC 114 (Evans v Wainter) held that examinations to be conducted by a creditor did not amount to an abuse of process, although the creditor could not have taken that course had the company not been placed in liquidation. He stated the Full Court there held that the company and its creditors would benefit from examinations to be conducted by the creditor as the successful outcome of proceedings by that creditor would reduce its claim against the company and increase distributions to other creditors accordingly. He noted that could not occur in the present case because the respondents did not have any claim against Arrium.
The primary judge referred to the comments by Lander J in Evans v Wainter at [245] and [247] to the effect that the examination proceedings are intended "to aid persons who have the responsibility of the external administration of the company in carrying out their duties" and that those persons "are entitled only to seek an order for an examination summons where the purpose of the examination is … for the benefit of the corporation, its creditors or its contributories". He accepted the submission that the reference to benefitting the corporation, its creditors or contributories, does not refer to the private or personal benefit of individual contributories or creditors.
His Honour accepted the submission by senior counsel for the respondents that the decision of the Full Court of the Federal Court in Kimberley Diamonds Ltd v Arnautovic (2017) 252 FCR 244; [2017] FCAFC 91 ('Kimberley Diamonds') was authority for the proposition that "the applicant for an examination summons need not demonstrate that the possible results of the examination justify the issue of the summons or that there is any 'realistic prospect' that the examination will reveal conduct capable of supporting a claim and therefore have 'practical utility'".
In dealing with the submissions of the respondents, the primary judge stated he accepted that the onus of satisfying the Court there was an abuse of process such that the orders for examination and production should be set aside rests upon Arrium and KPMG and that the onus is "a demanding one". He also accepted the matters the subject of the examination canvassed possible breaches of duty owed by Arrium's directors and KPMG to Arrium and so are of potential benefit to Arrium, its creditors and the public. He accepted that one purpose of the examination power is to permit discovery of abuses that may have attended the management of the affairs of a company in liquidation but stated that the authorities to which he referred indicated that that "does not authorise the use of that power for the predominant purpose of pursuing private claims of creditors or contributories, as distinct from a claim that has the requisite benefit for Arrium, its creditors or contributories in the relevant sense".
The primary judge also noted the submission that the examinations might disclose a basis for the company to recover its costs of the capital raising. He said that is no doubt a possibility but it seemed to him that the evidence did not suggest that it formed any part of the plaintiffs' (respondents') purpose in conducting the examinations.
The primary judge concluded that the information provided by the respondents' legal representatives to ASIC "does tend to indicate that their predominant purpose in seeking the issue of the examination summons was to investigate, and pursue, a personal claim in their capacity as shareholders against directors of Arrium or against its auditors". However, he stated that he was not satisfied that Arrium had "discharged the heavy onus of establishing that the examination of Mr Galbraith would be an abuse of process". He said that it seemed to him that there was "a degree of similarity" between the circumstances in Hong Kong Bank of Australia Ltd v Murphy (1992) 28 NSWLR 512 ('Hong Kong Bank v Murphy') and the present case, where Arrium was a large listed company, the plaintiffs and many other shareholders had likely suffered loss from their investment in it, and, on the face of it, the respondents seek to examine Mr Galbraith on matters which the liquidators could properly have examined him, although the liquidators made a reasoned decision that their resources were better directed to the insolvent trading claim. He stated 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. or does not do so and therefore supports the liquidators' present assessment that their insolvent trading claims are more likely to benefit Arrium and its creditors than the claims that the respondents seek to investigate.
In those circumstances, the primary judge dismissed the application to set aside the summons.
It will be noted that both purposes of the legislation expressed in that preamble were consistent with what were described as the legislative objectives of such an examination by Hayne J in Re Marvin Manufacturers (Aust) Pty Ltd; New Zealand Steel (Australia) Pty Ltd v Burton (1994) 13 ACSR 610 ('Marvin Manufacturers') at 619.
As was pointed out by Lockhart J in Re Compass Airlines Pty Ltd (1992) 35 FCR 447 at 452 equivalent provisions were introduced into ss 115 and 117 of the Companies Act 1862, 25 & 26 Vict, c 89 . Equivalent provisions were introduced into NSW by the Companies Act 1874 (NSW) and the Companies Act 1899 (NSW).
As Lockhart J pointed out public examinations were introduced into the United Kingdom by s 8 of the Companies (Winding Up) Act 1890, 53 & 54 Vict, c 63 which provided for public examinations of promoters, directors and other officers of a company on the official receiver's application if the company was being wound up by the court but such an examination could not take place unless the official receiver had in a further report named that person as one who had committed fraud in the activities of the company since its incorporation. Equivalent provisions were introduced in subsequent manifestations of the legislation in this State and other States. Thus ss 253 and 254 of the Companies Act 1936 (NSW) were in the following terms:
"253 Power to summon persons suspected of having property of company
(1) The court may, at any time after the appointment of a provisional liquidator or the making of a winding-up order, summon before it any officer of the company or person known or suspected to have in his possession any property of the company or supposed to be indebted to the company, or any person whom the court deems capable of giving information concerning the promotion, formation, trade, dealings, affairs, or property of the company.
(2) The court may examine him on oath concerning those matters, either by word of mouth or on written interrogatories, and may reduce his answers to writing and require him to sign them.
(3) The court may require him to produce any books and papers in his custody or power relating to the company, but, where he claims any lien on books or papers produced by him, the production shall be without prejudice to that lien, and the court shall have jurisdiction in the winding up to determine all questions relating to that lien.
(4) If any person so summoned, after being tendered a reasonable sum for his expenses, refuses to come before the court at the time appointed not having a lawful impediment (made known to the court at the time of its sitting, and allowed by it), the court may cause him to be apprehended and brought before the court for examination."
"254 Power to order public examination of promoters, directors, etc.
(1) Where an order has been made for winding up a company by the court, and the liquidator has made a further report under this Act stating that in his opinion a fraud has been committed or any material fact concealed by any person in the promotion or formation of the company, or by any director or other officer of the company in relation to the company since its formation, the court may, after consideration of the report, direct that that person, director or officer shall attend before the court on a day appointed by the court for that purpose, and be publicly examined as to the promotion or formation or the conduct of the business of the company, or as to his conduct and dealings as director or officer thereof.
(2) The liquidator shall take part in the examination, and for that purpose may, if specially authorised by the court in that behalf, do so by solicitor or counsel.
(3) Any creditor or contributory may also take part in the examination either personally or by solicitor or counsel.
(4) The court may put or allow to be put such questions to the person examined as the court thinks fit.
(5) The person examined shall be examined on oath, and shall answer all such questions as the court puts or allows to be put to him.
(6) A person ordered to be examined under this section shall, at his own cost, before his examination, be furnished with a copy of the liquidator's report, and may at his own cost employ a solicitor with or without counsel, who shall be at liberty to put to him such questions as the court deems just for the purpose of enabling him to explain or qualify any answers given by him:
Provided that, if any such person applies to the court to be exculpated from any charges made or suggested against him, the liquidator shall appear on the hearing of the application, and call the attention of the court to any matters which appear to the liquidator to be relevant, and if the court, after hearing any evidence given or witnesses called by the liquidator, grants the application, the court may allow the applicant such costs as in its discretion it thinks fit.
(7) Notes of the examination shall be taken down in writing, and shall be read over to or by, and signed by, the person examined, and may thereafter, unless the court otherwise orders, be used in evidence against him, and be open to the inspection of any creditor or contributory at all reasonable times.
(8) The court may, if it thinks fit, adjourn the examination from time to time.
(9) On the hearing of any such application the liquidator may himself give evidence or call witnesses.
(10) An examination under this section may, if the court so directs, and subject to general rules, be held before the Master in Equity or other officer of the court, and the powers of the court under this section may be exercised by the person before whom the examination is held".
It can be seen that the precondition for the making of an order was either that a provisional liquidator had been appointed or the company had been wound up. There was no provision in the legislation indicating who may apply for the issue of a summons under s 253. However, it had been held that an application may be made by a liquidator, a creditor or a contributory: Re Gold Co (1879) 12 ChD 77; Re Silkstone and Dodsworth Coal and Iron Company (Limited); Whitworth's Case (1881) 50 LJ Ch 752; Sir John Moore Gold Mining Co (1837) 37 LT 242; Percy Spender and Gordon Wallace, Company Law and Practice (1937, The Law Book Co. of Australasia Ltd) at 414.
The successor provision for private examinations in the Companies Act 1961 (NSW) s 249 was wider in its terms compared with its predecessor as on its face it was not limited to a company in liquidation or one in the course of being wound up. Section 249(1) was in the following terms:
"249 Power to summon persons connected with company
(1) The Court may summon before it any officer of the company or person known or suspected to have in his possession any property of the company or supposed to be indebted to the company, or any person whom the Court deems capable of giving information concerning the promotion, formation, trade, dealings, affairs or property of the company."
The power to order public examinations was contained in s 250 of the 1961 Act subject to the same conditions as those contained in its predecessor, s 254 of the 1936 Act.
Sections 249 and 250 remained in that part of the Act dealing with winding-up.
Once again, the 1961 Act did not identify those persons who were entitled to seek an examination.
The limitation on the use of these provisions and their purpose was considered by Street J (as his Honour then was) in Re Hugh J Roberts Pty Ltd (in liq) [1970] 2 NSWR 582. In two well-known passages his Honour made the following remarks at 583 and 585:
"The power of ordering a private examination under a provision such as s 249 is of long standing in companies legislation. A discretion is given to the Court to make an order for a private examination. Ordinarily the examination is sought by the liquidator and is granted by the Court where the circumstances render it just and beneficial for the purposes of the winding-up to make available this opportunity for compulsory private examination (Re Metropolitan Bank (1880), 15 Ch D 139, at p 142, per James and Bramwell LJJ). The basic principle underlying the making of such an order is encompassed within this general proposition. There are, however, cases in which what might appear superficially to be an attempt to exercise the power for the purpose of the winding-up has been demonstrated, in point of fact, to represent an abuse of the process of the Court. If it should appear that the machinery of a private examination is being used for a vexatious or oppressive purpose, then it would amount to an abuse of the process of the Court, and the procedure would be withheld by the Court from the party seeking to invoke it. The position will be the same whether the vexation or oppression appear at the time the application is first made for the holding of a private examination or at any subsequent point of time. The Court will find no difficulty in moulding an order appropriate to prevent any abuse of its process.
…
A liquidator needs information concerning his company just as much in connexion with current or contemplated litigation as in connexion with other aspects of its affairs. In using the statutory machinery of private examination he will in many cases be gathering evidence as an ordinary and legitimate use of this procedure. Those conversant with advising liquidators on contemplated litigation customarily observe the ritual of warning the liquidator not to commence the proceedings until all the necessary private examinations have been held. The purpose of such warnings is to avoid any risk of the very objection which has been taken in the application now before the Court. This ritual is distasteful to counsel and solicitors, but nevertheless they quite properly feel that prudence requires its observance. I describe it as distasteful because it has about it an air of non-disclosure. I see no reason in principle to justify liquidators being thus placed in a position of having almost, as it were, to dissemble regarding their future intentions lest the Court deny them the right to use the statutory machinery of private examination.
In my judgment it is immaterial in basic substance whether the private examination is sought to be used by a liquidator to gather information in connexion with proceedings he believes he might be able to bring, proceedings he contemplates bringing, proceedings he has decided to bring, and proceedings he has already brought. There is no presently relevant distinction in substance between gathering information referable to commencing proceedings and gathering information referable to continuing proceedings. There may be more risk of or opportunity for the examination being vexatious or oppressive after proceedings have been commenced (cf. Re North Australian Territory Co, and Heiron's Case). Also an abuse of process may be more readily exposed once proceedings are already on foot. But this is surely not to the point, as vexation or oppression will not be tolerated no matter when the examination is held." (citations omitted)
The examination provisions were significantly amended by s 541 of the Companies (NSW) Code. Unlike its predecessors, the provision did not appear in that part of the Act relating to winding-up. While there was no equivalent provision to s 596A of the present legislation, s 541 was the immediate predecessor to s 596B. So far as relevant it provided as follows:
"541 Examination of persons concerned with corporations
(1) In this section, a reference, in relation to a corporation, to a prescribed person, shall be construed as a reference to an official manager, liquidator or provisional liquidator of the corporation or to any other person authorized by the Commission to make applications under this section or to make an application under this section in relation to that corporation.
(2) Where it appears to the Commission or to a prescribed person that -
(a) a person who has taken part or been concerned in the promotion, formation, management, administration or winding up of, or has otherwise taken part or been concerned in affairs of, a corporation has been, or may have been, guilty of fraud, negligence, default, breach of trust, breach of duty or other misconduct in relation to that corporation; or
(b) a person may be capable of giving information in relation to the promotion, formation, management, administration or winding up of, or otherwise in relation to affairs of, a corporation,
the Commission or prescribed person may apply to the Court for an order under this section in relation to the person.
(3) Where an application is made under sub-section (2) in relation to a person, the Court may, if it thinks fit, order that the person attend before the Court on a day and at a time to be fixed by the Court to be examined on oath or affirmation on any matters relating to the promotion, formation, management, administration or winding up of, or otherwise relating to affairs of, the corporation concerned.
(4) An examination under this section shall be held in public except to such extent (if any) as the Court considers that, by reason of special circumstances, it is desirable to hold the examination in private."
Two things may be noted. First, the legislation for the first time specified the persons who were entitled to apply for an order for examination. The right to apply was conferred on the Commission itself, a person authorised by the Commission to make an application and an official manager as well as a liquidator or a provisional liquidator. It did not include creditors or contributories (subject to them being authorised by the Commission) and except as otherwise ordered provided that the examinations were to be held in public.
In Hamilton v Oades (1989) 166 CLR 486; [1989] HCA 21 Mason CJ emphasised the public purpose served by the provision and said at 496-497:
"There are the two important public purposes that the examination is designed to serve. One is to enable the liquidator to gather information which will assist him in the winding up; that involves protecting the interests of creditors. The other is to enable evidence and information to be obtained to support the bringing of criminal charges in connexion with the company's affairs: Mortimer v Brown (1970) 122 CLR at 496, 499. Subsection (2)(a) and (b) emphasises the high public importance of these purposes. The examination is designed to elicit, among other things, evidence and information relating to the question whether the witness 'has been, or may have been, guilty of fraud, negligence, default, breach of trust, breach of duty or other misconduct in relation to' the corporation."
Mason CJ further stated at 497:
The cases in which a court has stayed an examination on the grounds now claimed when charges have not been laid are rare. The very purpose of the section is to create a system of discovery, which may cause defences to be disclosed, for the purpose of bringing charges. The section gives to the liquidator rights not possessed by an ordinary litigant: John Arnold (1979) 23 SASR at p 232. In these circumstances it must be accepted that the section applies equally to proceedings which the liquidator 'might be able to bring, proceedings he contemplates bringing, proceedings he has decided to bring, and proceedings he has already brought': Re Hugh J Roberts Pty Ltd (1970) 91 WN (NSW) 537 at 541; Re Norman Baker Pty Ltd; Ex parte Hillman [1982] WAR 349 at 351-352; Re Nalanda Pty Ltd [1983] 1 Qd R 269 at 271. To adopt the language of Kitto J in Mortimer v Brown (1970) 122 CLR at p 496, to hold otherwise 'would render the provision relatively valueless in the very cases which call most loudly for investigation'."
Mason CJ noted that the Court had not thereby abrogated its "inherent power" to control the proceedings. He said at 498:
"The court retains its power to give directions and to restrain questions in cases where the examination is being conducted for an improper purpose or constitutes an abuse of process: s 541(5). Thus if a liquidator were to conduct an examination directed to compel the examinee to disclose defences or to give pre-trial discovery, or to establish guilt, this examination may be restrained as an abuse of process: Hugh J Roberts (1970) 91 WN (NSW) at 541; Huston v Costigan (1982) 45 ALR 559 at 563; Re Gordon (1988) 18 FCR 366."
Dawson J stated at 510 that "[w]hilst the discretion conferred upon the court to control proceedings under s 541 is to be exercised within the limits indicated by the nature and purpose of the examination for which the section provides, it may never the less be a safeguard against the use of the section in an oppressive or unjust way" (citations omitted). Toohey J was also of the opinion that there was sufficient power within s 541 itself to control examinations so as to protect an examinee against oppression or injustice.
Following the commencement of the Corporations Law (Cth), which was enacted by the Corporations Act 1989 (Cth) and took effect in NSW by force of s 7 of the Corporations (NSW) Act 1990, s 541 of the Companies (NSW) Code was replaced by s 597 of the Corporations Law. The section was in substantially the same form as s 541 of the Companies (NSW) Code.
The Corporate Law Reform Act 1992 (Cth) repealed s 597(1), (2) and (3) and inserted ss 596A, 596B, 596C, 596D, 596E, 596F.
The Corporate Law Reform Act also amended section 9 of the Corporations Law to insert a definition of eligible applicant. An eligible applicant was defined to mean ASIC, a liquidator or provisional liquidator of the corporation, an administrator of the corporation, an administrator of a deed of company arrangement executed by the corporation or a person authorised by ASIC to make such an application in relation to the corporation.
The sections, subject to an amendment which is immaterial for present purposes, were in the same form as the current provisions.
The Attorney General's Explanatory Memorandum in relation to ss 596A and 596B made the following remarks concerning the introduction of the section:
"Proposed section 596A - Mandatory examination
1152. A significant difference between the personal bankruptcy and company insolvency examination provisions is that, in bankruptcy, the trustee is entitled to examine the bankrupt without first having to obtain a court order. By contrast, in the winding up of an insolvent company, the liquidator must obtain a court order for an examination under subsection 597(2) of the Corporation Law.
1153. The Harmer Report suggested that the formalities and expense involved in obtaining a court order may be a deterrent to the use of the procedure, and was of the view it would be consistent with the duty on directors of an insolvent company to assist the liquidator in the winding up if the right to examine such a person could be exercised as conveniently and inexpensively as in bankruptcy. It thus recommended that:
There be provision for the examination without court order of any person who is acting or who has within 2 years immediately before the commencement of the winding up acted in the capacity of a director, secretary, executive officer, administrator, receiver or liquidator of a company that is being wound up in insolvency. (The term used to describe such persons in the proposed amendments is 'examinable officers', which is to be defined in section 9.)
A liquidator should have express power to require production of documents either from the examinee (the documents might in that case be required in the summons for examination) or by way of an order for production of documents directed to third parties who may have possession of documents relevant to the examination at the time of issue of the summons for such an examination.
1154. Proposed section 596A will provide that the Court is to summon a person for examination about a corporation's examinable affairs where application for the summons is made by an 'eligible applicant' (to be defined in section 9 to mean the ASC, a liquidator or provisional liquidator, an administrator of a corporation, an administrator of deed of company arrangement, or a person authorised by the ASC) and the person is or was, within the previous 2 years, an 'examinable officer' (also to be defined in section 9) of the corporation.
1155. The intention is that the Court will issue the summons where it is satisfied that the person's connection with the company is such that the person is an examinable officer, without the need to inquire further into such matters as whether that person has taken part or been concerned in the examinable affairs of the corporation, been guilty of misconduct in relation to the corporation or is able to give information about examinable affairs of the corporation. It is envisaged that the issue of a summons in such circumstances will be a formality, and that the respective Court rules may provide for execution of the function by a Registrar or equivalent official, where appropriate.
Proposed section 596B - Discretionary examination
1156. This section will implement the Harmer Report's recommendation that where a person is not within the category of 'examinable office[r]' but may, nonetheless, be able to provide information relating to the affairs of the company, the requirement for an order for examination should be retained.
1157. Proposed subsection (1) will provide for the issue of a summons to a person (other than an 'examinable officer'), at the discretion of the Court, in circumstances where the application for a summons is made by an 'eligible applicant' (to be defined in section 9) and the Court is satisfied that the person has taken part in, or may be able to give information about the 'examinable affairs' (also to be defined in section 9) of the corporation. These requirements will largely replicate existing paragraphs 597(2)(a) and (b), which will be omitted by paragraph 117(a).
1158. Proposed subsection (2) provides that this section will have effect subject to proposed section 596A."
Brennan CJ and Toohey J in Gould v Brown (1998) 193 CLR 346; [1998] HCA 6 stated at [36] that "the powers available under ss 596A and 596B of the Corporations Law may be exercised to order and conduct examinations otherwise than in the course and for the purposes of a winding up".
Section 596 of the Corporations Law was considered in Grosvenor Hill (Qld) Pty Ltd v Barber (1994) 48 FCR 301; (1994) 120 ALR 262. The Full Court stated at 306 that s 596B of the Corporations Law and its predecessors were intended by the legislature to address the problem of the liquidator being in a position of disadvantage as "the liquidator comes to the company with limited or no knowledge of the company's assets, business and affairs". The Full Court stated at 306 that
"The courts have recognised since the introduction of statutory powers similar to that provided for in s 596B of the Law that the exercise of the power can involve tension between two important public interests. The first is the public interest in a liquidator obtaining necessary information to properly discharge the function of liquidator in the winding up of the company for the benefit of the creditors. The second is the right of the individual to privacy in regard to his or her affairs, documents and papers."
The Full Court further stated at 308 that "the language of s 596B of the Law, having regard to the definition of 'examinable affairs' in s 9 of the Law, has a broader operation than s 115 of the Companies Act 1862 and the later Australian versions of it".
The decision was affirmed on appeal. Gleeson CJ, with whom the other members of the Court agreed, made the following remarks concerning the ambit of the then s 597 of the Corporations Law at 519-520 referring to the judgment of Street J in Re Hugh J Roberts Pty Ltd (in liq):
"It is to be noted, however, as is implicit in the judgment of Street J, that there is no strict dichotomy between an advantage to be gained by an applicant for an examination order, such as a liquidator, in the capacity of a litigant, and a benefit that might flow to creditors, or contributories, or members of the public, from the conduct of an examination. Whilst the court will not permit a liquidator, or other eligible person, to abuse its process by using an examination solely for the purpose of obtaining a forensic advantage not available from ordinary pre-trial procedures, such as discovery or inspection, on the other hand, the possibility that a forensic advantage will be gained does not mean that the making of an order will not advance a purpose intended to be secured by the legislation.
It is unnecessary for the purposes of this case to explore the outer limits of the purposes of s 597. As McLelland J pointed out, the proposed examinations are to be held in circumstances closely analogous to those for which examinations have traditionally been conducted by liquidators. The relevant corporation is Burns Philp, and it carried on a business of a trustee for investors. It was removed as trustee, new trustees were appointed in its place, and it subsequently went into liquidation. A very large number of members of the public are owed money as a consequence of the financial failure of the trust. The new trustees are likely to be less than fully informed about the affairs of the trust, and seek to use the procedures of compulsory examination for the purpose of adding to their information."
In dealing with the question of whether s 597 was a law with respect to winding-up, Gleeson CJ made the following comments as to the extent of its operation at 521:
"As appears from its place in the legislative scheme, and from its terms, whilst s 597 has an important role to play in relation to companies that are being wound up, and liquidators or provisional liquidators will be amongst those who most commonly take advantage of its provisions, the operation of the section is by no means confined to liquidators. The statutory context of 'external administration', in which s 597 has its place, throws light on the purposes for which the power to order examinations (or to authorise persons to apply for examinations orders) is conferred. Those purposes include the protection of shareholders and creditors and of interested members of the public. They are not, however, confined to the need for such protection in the case of winding up. Winding up is only one form of external administration. The scope of s 597 is wider."
In Marvin Manufacturers Hayne J, sitting as a judge of the Supreme Court of Victoria, adopted a similar approach to the width of s 596B as Gleeson CJ had in respect of s 597. He made the following remark at 616:
"It is clear then, that no longer are the examination provisions of the companies legislation to be regarded as restricted to cases in which the company has been wound up and it therefore follows that the provisions are not to be read as now limited to cases in which the examination will be for the purposes of a winding up and the benefit of those interested in that winding up. Indeed it was held in Hong Kong Bank that s 597 of the Corporations Law could not be characterised as a 'law with respect to winding-up' within the meaning of s 601 of the law".
After citing the passage from the judgment of Gleeson CJ in Hong Kong Bank v Murphy to which we have referred at [70] above, his Honour went on to make the following comments concerning the question of abuse of process at 616:
"There would be an abuse of process if the coercive powers of s 596B were to be invoked for a purpose foreign to the purposes for which those powers are conferred. As was pointed out in State of Victoria v Day Neilson Jenkins & John [1993] 2 VR 545, the conclusion that there has been an abuse of process does not depend upon the application of what was there described as 'some vague notion of 'fairness'' in civil litigation ([1993] 2 VR 545-59). Thus it is not to the point to determine whether the creditor that has applied for an order for examination may (in its capacity as plaintiff in the pending action) obtain some advantage in the prosecution of its action which is an advantage not otherwise obtainable from the interlocutory processes available to it in the action. Nor am I called on to say whether obtaining any such advantage is 'fair' or 'unfair'. Such an approach would obscure the fundamental question which is whether the power is being used for a purpose foreign to that purpose for which it was given. If it is, then there is an abuse for that reason."
In dealing with the purpose of the section, his Honour made the following remarks on which considerable reliance was placed by the respondents in these proceedings at 619:
"New Zealand Steel seeks to hold the examination so that it might further its own interests, but that is not to say that the examination is properly to be characterized (as Burton submitted) as one that would be conducted for purely private purposes.
It is alleged that Burton took part in the management of a company that has now failed (failed at least to the extent that a receiver and manager has been appointed and the company has ceased to trade). New Zealand Steel has alleged that that company traded while insolvent. It is alleged that that trading occurred over a significant period of time - from July 1990 to April 1991. If the examination proceeds, it may be expected that Burton will be examined about matters touching that trading. The record of his examination is to be open for inspection, without fee, not only to New Zealand Steel but also to any creditor of MMA (s 597(14A)). The ASC may, if it chooses, participate in the examination and it too may have access to the record of that examination. It is not to be supposed that MMA dealt only with New Zealand Steel during this period of 9 or 10 months and it follows then that an examination of whether the company was insolvent during this time and of who participated [in] its management will reveal matters that touch not only New Zealand Steel but also other creditors of MMA and the Commission in its role as regulator. Thus while New Zealand Steel may pursue the examination for its own ends - ends which are private to and concern only it - the examination will be of matters of concern to others affected by the failure of this company.
If a liquidator had been appointed to MMA and had sought examination for the stated purpose of exploring whether directors and those concerned in the management of the company had traded whilst insolvent and had done so with a view to recommending to the ASC that criminal proceedings be brought against those persons, it is clear that such an examination would be for the purposes of the statute and would not be stayed: Hamilton v Oades, supra. If the liquidator had no sufficient funds to prosecute such an application and New Zealand Steel chose to put the liquidator in funds in order that the examination might be prosecuted, again, the examination would not be stayed: Re Laurie Cottier Productions Pty Ltd (1992) 9 ACSR 513; (1993) 11 ACLC 178.
No different result would obtain if, in these examples I have given, instead of a liquidator making the application, MMA's receiver and manager were to make it: see Re Excel Finance Corp Ltd, supra."
As will be seen from the passage of the judgment of Hayne J to which we have referred, the applicant for the examination summons was a creditor of the company and claimed that the debt due to it had been incurred whilst the company was insolvent. The insolvent trading provisions which existed at the time (s 592 of the Corporations Law) made the directors (subject to certain exceptions) and the company jointly and severally liable for the debt. Thus recovery by the applicant from the directors would have the effect of reducing the debt owed by the company to it.
Marvin Manufacturers was decided before the decision of the Full Court of the Federal Court in Re Excel. In Re Excel the receiver and manager of Excel appointed by the trustee for debenture holders requested authorisation to make an application for an examination summons under s 597 of the Corporations Law. He stated that his predominant purpose was to ascertain the existence of company assets for the benefit of his appointer. The authorisation was granted, a summons was issued, and the appellant sought to have it set aside. Between the time of the making of the application to set aside the summons and the time it was originally determined, the trustee and the debenture holders had commenced proceedings asserting that the applicant, who was the auditor of the company, breached the duty owed to them (not to the company) and that a breach of that duty caused the debenture holders to appoint a receiver later than it would otherwise have done as a result of which the debenture holders suffered loss.
The Full Court of the Federal Court allowed the appeal on the basis that the principal purpose of the respondent in making the application had not been "completely explored" and remitted the matter to a judge of the Court to deal with the issue. In reaching that conclusion, the Court made the following remarks at 81-82 and 91:
"Before considering the state of authorities on whether a particular application to the Court for an examination summons will constitute an abuse of process, it is useful to recall the underlying basis of that doctrine as expounded by the High Court of Australia in Dowling v Colonial Mutual Life Assurance Society Limited (1915) 20 CLR 509. It will be recalled that that case concerned an allegation made in the context of bankruptcy legislation that a creditor's petition in bankruptcy was an abuse of the process of the Court because the motive of the creditor was to ascertain, by examination, the identity of persons who had instigated the debtor to publish, or had provided him with means of publishing, defamatory matter concerning the creditor. Isaacs J, in that case, drew a distinction from the case law between the use of a process, which his Honour defined as (at 524):
'... to obtain by its means the very object for which it is designed by law ... notwithstanding there is a desire to use the sequestration afterwards for a certain purpose'
and the abuse of the process, a distinction based upon what had been said in the Privy Council in King v Henderson [1898] AC 720. An abuse of process would have occurred in that case, his Honour suggested, if it had been shown that the Society had simply threatened Mr Dowling that unless he did what they had no right to demand from him, namely the giving up of certain names, they would proceed to sequestration and they had done so. An abuse of process would not exist unless the remedy sought was unsuitable and would enable the person obtaining it fraudulently to defeat the rights of others. It is clear from subsequent cases, for example, Williams v Spautz (1992) 174 CLR 509 at 525, that it is not now necessary that fraud be shown.
It is apparent that the question whether there is, in a particular case, an abuse of process will be a question which will depend upon the purpose of the applicant seeking the order of the court and the circumstances of the case. For an abuse to be found it will be necessary that the offensive purpose be, at the least, the predominant purpose: see Burns Philp & Co Ltd v Murphy (supra) at 732 and Williams v Spautz (supra) at 529.
…
Whether there will be, in a particular case, a use of the process or an abuse of it will depend upon purpose rather than result. The consequence of an examination may well be that the examiner has conducted a 'dress rehearsal' of cross-examination which may take place in a subsequent trial. The fact that the trial has commenced, or is contemplated, may throw light upon the purpose. But merely because other proceedings had been commenced or are contemplated would not involve, of itself, an abuse of process. This follows having regard to the nature of the investigative process which could throw light on the question, inter alia, whether there was evidence which would warrant a liquidator, for example, proceeding against an examinee. But it may be quite a different question where proceedings contemplated or instituted are not proceedings to be brought by the company, but proceedings brought by some other party for the advantage of that party rather than the company. For example, it would be an abuse of process for a creditor approved by the Commission for the purposes of s 597(1) to obtain an examination summons to conduct an examination for the purpose of obtaining evidence in proceedings which the creditor proposed to bring against the examinee for defamation. That would be a purpose completely foreign to the power of examination which is ultimately in aid of the company itself and not the personal advantage of the person seeking to conduct the examination."
In dealing with Re BPTC Ltd, the Court described the context in which that case was decided as "somewhat special and quite outside the present". They described the litigation in the case before them in the following terms at 93:
"The present litigation in which the Trustee for debenture holders and the debenture holders themselves are engaged is somewhat different. It alleges a loss to debenture holders as a result of the acts of Mr Worthley and claims that they are entitled to recover damages in respect of that loss. Success in these proceedings would not necessarily free the corporation from the obligation to pay the Trustee for debenture holders. The difficulties of a court framing an order which would require the debenture holders, if successful, to repay Mr Worthley the amount of any dividend which became payable to them are made apparent in the judgment of Meagher and Handley JJA in Demetrios v Gikas Dry Cleaning Industries Pty Ltd (1991) 22 NSWLR 561. However, as that judgment points out, in contrast to the position at common law, equitable compensation can be awarded on terms that satisfaction of the award of damages will bring about an equitable assignment for the benefit of the judgment debtor of other rights of recovery vested in the judgment creditor.
This notwithstanding, we are of the view that the use of the power to obtain an examination summons for the principal purpose of furthering the cause of the applicant for the summons or, as in this case, appointor of the applicant in litigation against third parties, not for the benefit of the corporation, its contributories or creditors (other than in the most indirect way) is a use of the power for a purpose foreign to that power and thus an abuse of the power. Such a purpose would provide to the examiner the opportunity for pre-trial depositions which would not be available in the litigation."
Re Excel unlike Marvin Manufacturers was decided under the provisions of s 597 rather than s 596B. In Douglas-Brown v Furzer (1994) 11 WAR 400 the Full Court of the Supreme Court of Western Australia concluded that s 597 and its successors had expanded the right to an examination beyond which was anticipated by its predecessor s 541 of the Companies (Western Australia) Code. Malcolm CJ, with whom Ipp and Anderson JJ agreed, made the following remarks at 408:
"In my opinion, the provisions of ss 596A, 596B and 597 now put liquidators and individual creditors on the same footing in so far as an examination is concerned. The court retains its power to prevent injustice because it retains its power to give directions and restrain questions where the examination is being conducted for an improper purpose or constitutes an abuse of powers. The examination itself must be approached with caution, but, as Rogers CJ Comm Div held in Spedley Securities Ltd (In liq) v Bond Corporation Holdings Ltd (1990) 19 NSWLR 729, a liquidator who has commenced proceedings was entitled to examine potential witnesses under s 541 of the Companies Code. The mere fact that this was an advantage not enjoyed by other litigants was not a basis for finding injustice or abuse of process: see also Re Spedley Securities Ltd (In liq) (1990) 9 ACLC 124 at 131, per Cohen J."
It should be noted that although ASIC is empowered to authorise a creditor to conduct an examination, creditors are not one of the specified persons in the definition of eligible applicant.
A similar conclusion was reached by the Full Court of the Supreme Court of Victoria in Flanders v Beatty (1995) 16 ACSR 324 per Ormiston J at 331 and 333, Tadgell and Harper JJ agreeing. Ormiston J stated the effect of the extension of the provisions in the following terms at 335:
"Nevertheless it is unnecessary to doubt the opinion expressed in Worthley's case that under the unamended provisions of s 597 it was necessary to show that the proposed examination was for the benefit of the corporation, its contributories or its creditors. What is clear, however, is that the scope of the examination provisions was greatly expanded by the 1992 amendments. Though I would doubt that the former section was intended to be constrained by any need to ensure that an examination was for the company's benefit in the sense of keeping the company alive by paying out its creditors, it was part of a scheme derived from liquidators' examinations. Liquidators, it is accepted, owe certain duties to the company, whatever be the outcome of the winding up: cf Commissioner for Corporate Affairs v PW Harvey [1980] VR 669 at 691-2 and 695 and the cases there cited.
Now the powers given under s 596A to 597B are clearly so wide and so easily exercised by 'eligible applicants' (cf s 596A) that the purposes to be served by examinations ought not be limited by reference to the benefit or the company or its creditors or contributories. The objects to be served by the issue of an examination summons and the making of orders for examination should be discerned only by reference to the statutory provisions which invest those powers. If those powers are being used for oppressive purposes or to serve ends entirely outside the scope of the sections, such as to gather evidence for libel proceedings, then the court will intervene to prevent the examination. As to the precise ambit of the power of the commission to authorise applications under the new sections, it is unnecessary to express any further opinion."
Boys v Quigley (2002) 26 WAR 454; [2002] WASCA 99 involved an application by the receivers of an insolvent company (Geneva Finance Ltd) to examine former partners of the auditors of the company as to their assets for the purpose of assessing their capacity to meet any judgments in proceedings that had been instituted against them by Geneva claiming damages for negligence in respect of an audit. The applicants appealed against a refusal to set aside the examination summons.
Anderson J, with whom Wallwork J agreed, noted at [20] that "[i]t is of benefit to the receiver and manager in the discharge of his duties to know what amount is likely to be recovered" in the action. He rejected the submission by senior counsel for the auditors that because the respondent was a receiver rather than the liquidator, the public interest considerations in making an order were "not as pressing". In rejecting that submission, he made the following remarks:
"[24] This is a case in which the company has, by its receiver and manager, started major litigation against its former auditors for breach of their duty. The debenture holders naturally wish to know whether it is worthwhile proceeding with the action, having regard for the appellants' present insurance arrangements and general financial resources. The respondent became an eligible applicant in his capacity as the receiver and manager of Geneva. That is, he was authorised by ASIC to apply for examination summonses under s 596B because he was appointed the receiver and manager of Geneva. The Court must therefore approach the exercise of its discretion on the basis that the powers of examination sought to be exercised by the respondent in this case will 'advance a purpose intended to be secured by the legislation': Hongkong Bank of Australia Ltd v Murphy (1992) 28 NSWLR 512 per Gleeson CJ at 519.
[25] Of course, if the Court saw that the process of the examination was being used vexatiously, or oppressively, or for some private purpose entirely outside the scope of the section, it might either decline to make the order in the first place, or discharge the summonses as abuses of the process of the court: Flanders v Beatty (supra), especially per Ormiston J at 335; Re Hugh J Roberts Pty Ltd (In Liq) (1970) 91 WN (NSW) 537 per Street J at 539; New Zealand Steel (Aust) Pty Ltd v Burton (1994) 13 ACSR 610 per Hayne J at 613 - 614. For example, an exercise of the examination power in order to assist a third party to bring defamation proceedings may well be an abuse of process: Re Excel Finance Corporation Ltd; Worthley v England (1994) 52 FCR 69 at 91. However, once it is accepted that seeking information to enable a receiver and manager to decide whether to continue to attempt to realise an asset of the company in the form of a chose in action is a legitimate purpose of the power conferred by s 596B, it seems impossible to say that an exercise of the power by a receiver and manager is an abuse of process."
Sandhurst Trustees concerned an application to set aside an examination summons obtained by the trustee for the whole of the convertible notes in a company, Normans Wines Ltd. The trustee instituted proceedings against the company's auditors of whom the respondent was an employee alleging breach of duty in providing unqualified audit reports. An appeal was allowed from orders setting aside the summons.
It was submitted on behalf of the respondent that the power conferred by s 596B was "not able to be exercised for the sole or predominant purpose of assisting a single creditor or class of creditors" there being "no benefit" to the corporation Normans Wines. Doyle CJ at [32] accepted what was said in Flanders v Beatty, stating that the statutory provisions were "wider in their reach than their predecessors". In that context, his Honour made the following remarks:
"[46] There is a further point to be made. In Worthley I consider that the Full Court, in the passages cited, was distinguishing between an examination the main purpose of which was simply to improve the prospects of success in litigation of a particular creditor or class of creditors, and an examination which also had the purpose or some prospect of, benefiting the corporation, its creditors or contributories in some way. Also in Worthley the court was not concerned with the possible exposure of misconduct.
…
[51] The fact that a consequence of an examination order may be a forensic advantage to a particular class of creditors, or to a particular creditor, of the corporation, or to a particular person, does not of itself lead to the conclusion that the order was not made for a proper purpose. Nor does the fact that the order was made at the instance of that person or creditor. On the other hand, the power is not conferred with a view to its exercise solely to benefit an individual with a claim of some kind against the corporation in question, or with a claim arising out of its affairs. Nor, I consider, is it conferred to enable an applicant for an order to pursue an enquiry into a matter in relation to which the applicant has no legitimate interest.
…
[53] I consider that the above proportions are not in conflict with the observations of the Full Court in Worthley, on which Mr Wells put particular reliance. Those observations must equally be understood in their context. In that case the Federal Court, in the context of a liquidation, said no more than that advancing the interests of a particular creditor, or creditors of a particular class, in circumstances where that would give rise to no advantage or benefit to the liquidation of the corporation in question, was not a sufficient reason for the making of an order, and for that reason the examinee should be given access to the affidavits filed on the application for the examination order, before the court decided whether the order was properly made."
His Honour concluded that the examinations were for a proper purpose in the following terms:
"[54] I consider that the examination of the examinees, with a view to determining whether they or Deloitte were in breach of their professional duty to Normans, is an examination for a purpose contemplated by s 596B.
[55] First, such an examination might expose misconduct by Deloitte, or by members of that firm, which would be of legitimate interest to ASIC or to those responsible for the regulation of the auditing profession. Sandhurst as trustee has a legitimate interest in exposing such misconduct, if it occurred, if that misconduct caused or enabled Normans to breach its covenants, that in turn causing loss to the noteholders.
[56] Secondly, the examination might provide evidence pointing to a possible claim by Normans against Deloitte for breach of duty, or to a possible claim by Sandhurst (subject to what I say later about its claim and the effect of the deed) against Deloitte or to a possible claim by the noteholders against Deloitte. A successful claim by Normans might enhance the prospect of the noteholders recovering a payment from Normans. A claim by Sandhurst or by the noteholders, if successful, might reduce the claims against Normans, by recompensing Sandhurst or the noteholders for their loss. It is not obvious that Deloitte would be subrogated to the rights of Sandhurst or the noteholders against Normans, nor is it necessary to decide that question. It suffices to say that if the examination produced information that supported a claim by Normans, Sandhurst or the noteholders against Deloitte, that is something that might be in the interest of the creditors and contributories of Normans."
The Full Court of the Federal Court again considered the question in Evans v Wainter Pty Ltd. The respondent company had sought and obtained orders under s 596A and s 596B of the Corporations Act to examine the directors of a company, New Tel Ltd (in liq) and a firm of solicitors in respect of misleading and deceptive conduct arising from representations said to have been made in respect of a transaction between it and New Tel. It should be noted that the respondent had also filed a proof of debt with the liquidator of New Tel claiming the amount the subject of the proposed proceedings.
Lander J, who delivered the principal judgment of the Court, extensively reviewed the history of the legislation and the authorities. He stated at [119] that "[a]ny purpose that will benefit the company, its creditors, its members or the public generally will be within the contemplation of the section". However, subsequently he made the following remarks:
"[139] It cannot be overlooked that Re Excel was concerned with access to information. It did not decide any more than in the circumstances of the case the proposed examinee should be entitled to have access to the affidavit filed in support of the Receiver's application for the order and should be entitled to issue subpoenas to obtain further information.
[140] However, that said, the Court did decide that it would be an abuse of the Court's processes, by misusing the power to obtain an examination summons, if the summons were obtained not for the benefit of the corporation, its contributories or creditors but only for the benefit of the prescribed person to be used in other litigation.
…
[143] In my opinion, Re Excel stands for the proposition that it is an abuse of process to use the Part 5.9 procedure if the predominant purpose of the applicant seeking the order is not for the purpose of benefiting the corporation, its contributories or its creditors.
[144] If the party seeking the examination summons is doing so for any number of purposes, which do not include the purpose of benefiting the corporation, then that would amount to an abuse. On the other hand, if the party seeking the examination summons has as one purpose the achievement of a benefit to that party but has also a further purpose which is for the benefit of the corporation then the use of the Part 5.9 procedure will not be an abuse of process."
In dealing with s 596A and s 596B, he expressed a view at [206] contrary to that expressed in Flanders v Beatty and Sandhurst Trustees that the statutory provisions were no wider than their predecessors except to the narrow extent by including 'business affairs' in 'examinable affairs'. However, he agreed at [220] with that portion of the judgment of Doyle CJ in Sandhurst Trustees at [51] which we have set out at [84] above. He subsequently stated at [244] that he agreed with the passages from the judgment of Hayne J in Marvin Manufacturers to which we have referred at [71]-[72] above. However, he expressly approved at [234] the comments of Santow J in Re New Cap Re Insurance Corp Holdings Ltd [2001] NSWSC 835 to the effect that "[t]o interpret s 596A and s 596B as allowing the examination procedure to be used for the purpose of obtaining a forensic advantage, and for that purpose only, would not fulfil the statutory objective" (at [237]). He ultimately expressed his conclusion in the following terms:
"[245] In my opinion, the procedure in Part 5.9 of the Law and the Act is to aid persons who have the responsibility of the external administration of the company in carrying out their duties.
[246] Those persons who have the responsibility of external administration owe duties to the creditors and the contributories, and to the corporation which they are then managing.
[247] In my opinion, they are entitled only to seek an order for an examination summons where the purpose of the examination is, as was stated in Re Excel, for the benefit of the corporation, its creditors or its contributories.
[248] So also ASIC is only entitled to authorise a person as an eligible applicant if that person's purpose in seeking an examination summons is for the benefit of the corporation, its contributories or its creditors.
[249] Otherwise, every corporation would be at risk of having its examinable officers or its officers or other witnesses examined to the possible detriment of the corporation. For example, a person claiming damages for a tort against a corporation could be authorised by ASIC as an eligible applicant and apply for an examination summons for the purpose of examining the corporation's examinable officers under s 596A or its officers under s 596B to provide evidence in support of the action in tort.
[250] Whilst I agree that the question of what is a proper purpose must be determined by reference to the legislation itself because it is the legislation which gives the power to issue a summons for an examination and the carrying out of an examination, the power cannot be used for a collateral or ulterior purpose. It must be used for a purpose expressly or implicitly authorised by the legislation itself.
[251] The purpose of Part 5.9 of the Act is not to disadvantage corporations but to make the corporation's examinable officers and other persons within the contemplation of s 596B accountable to those who are obliged to act in the interests of the corporation.
[252] In my opinion, the following propositions relevant to these appeals emerge from the legislation and the authorities.
1. The power given to the Court to summon a person for examination is a coercive power.
2. The purpose of the power is to be gleaned from the legislation.
3. The following legitimate purposes emerge:
3.1 First, an examination is designed to serve the purpose of enabling an eligible applicant to gather information to assist the eligible applicant in the administration of the corporation.
3.2 Secondly, it assists the corporation's administrators to identify the corporation's assets, both tangible and intangible. It also allows the corporation's liabilities to be identified.
3.3 Thirdly, the purpose is to protect the interests of the corporation's creditors.
3.4 Fourthly, it serves the purpose of enabling evidence and information to be obtained to support the bringing of proceedings against examinable officers and other persons in connection with the examinable affairs of the corporation.
3.5 Fifthly, it assists in the regulation of corporations by providing a public forum for the examination of examinable officers of corporations.
4. If an eligible applicant applies for an order for the examination of a person for a purpose unconnected with the purposes authorised by the legislation that will be an abuse of process and the order, if obtained, will be set aside.
5. The procedure may not be used to allow a party to obtain a forensic advantage and, if it is, any order obtained will be set aside.
6. The procedure may not be used as a dress rehearsal for the cross-examination of a person in a pending or subsequent action. However, it is not improper to seek an order of the Court to summon a person for examination whilst litigation is pending against that person or entities connected with that person.
7. The question whether in any particular case the applicant has used the procedure abusively will depend upon the applicant's purpose in seeking the order and all of the surrounding circumstances. It will not be an abuse unless an offensive purpose is at least the predominant purpose.
8. It will be an offensive purpose if the application cannot be characterised as being for the benefit of the corporation, its contributories or creditors.
9. A creditor may, if first authorised by ASIC, apply to the Court for an order to summon for examination a person for the purpose of obtaining information in relation to a debt owed to the creditor if such an examination would be in the interests of the corporation or its creditors as a whole.
10. A creditor may not use the procedure for the purpose of obtaining a forensic advantage which would not have been available to the creditor if the corporation had not gone into administration."
Ryan J and Crennan J agreed with the reasons of Lander J, save to the extent that they reserved the further consideration whether what was said in Flanders v Beatty and Sandhurst Trustees concerning the width of the sections was correct.
In Meteyard v Love (2005) 65 NSWLR 36; [2005] NSWCA 444 Santow JA cited with approval at [7] the passage from the judgment of Lander J at [245]-[251] which we have set out at [88] above.
In Kimberley Diamonds the Full Court of the Federal Court following Evans v Wainter stated the principles in the following terms:
"[101] There could be little doubt that an examination summons can be discharged or stayed as an abuse of process if it is found that the eligible applicant's predominant purpose in obtaining the examination summons was to secure a private benefit or advantage, as opposed to a benefit for the company, its creditors or contributories: Evans v Wainter at [247]. Thus, for example, if an eligible applicant obtained an examination summons for the purpose of securing a benefit for itself in other litigation, not involving the company, that purpose would be 'offensive', such that the summons could be stayed as an abuse: Evans v Wainter at [140], [143] and [252] (proposition 8). Such a summons could not be of any benefit to the company, its members or creditors. It is worth pausing, at this juncture, to note again that Mr Arnautovic did not allege, nor did the primary judge find, that KDL's purpose in obtaining the summons was to secure a private benefit, or was otherwise offensive or illegitimate, in the sense of being foreign to the purpose of s 596A."
Although as the respondents pointed out, it was stated in that case at [103] that "[t]he obtaining of answers to otherwise unanswered questions, or the quelling of a perceived controversy concerning the management of a company can, in a broad sense, be regarded as amounting to a benefit to the company, its creditors or contributories, and as therefore fulfilling a purpose of s 596A". That does not seem to me to extend to an examination in aid of a private purpose where there was no discernible benefit to the corporation or to its creditors.
Senior counsel for Arrium also referred to what he described as "the key findings" of the primary judge to which we have referred at [36] above. He noted the finding that the respondents' "predominant purpose … was to investigate, and pursue, a personal claim in their capacity as shareholders against directors of Arrium or against its auditors". He submitted that should have been determinative.
He referred to the statement by the primary judge that the question of whether or not Arrium had any claim arising out of the capital raising may have been clearer as a result of the examinations. He stated that was "just identifying the theoretical possibility that there might be such a purpose".
Senior counsel for Arrium submitted that the primary judge in effect concluded that although the respondents had a private interest in advancing their claims as shareholders, a by-product was that information may be obtained which may or may not show that Arrium or the liquidator had a cause of action. He submitted that was not the purpose of the examination and "the mere fact" than an examination may produce a benefit "does not save it from being an abuse of process", emphasising that it is the purpose, not the result which matters.
He submitted that the decision of the Full Court in Re Excel was of particular importance first because it was the only intermediate Court of Appeal decision where proceedings were brought by a person other than the company which did not produce a benefit to the company. He also submitted that it had been approved by the High Court in Palmer v Ayres (2017) 259 CLR 478; [2017] HCA 5. He noted the statement of the Full Court at 89 that the question of abuse will depend upon the purpose of the applicant in seeking the order and for an abuse to be found it was necessary that the offensive purpose be the predominant purpose.
He also referred to the Full Court's comments in Re Excel at 91 that whether there will be an abuse of process "will depend upon purpose rather than result". He submitted that demonstrated the error made by the primary judge who he said focused on the "beneficial result, which was no part of the purpose". He also referred to the Full Court's comment at 91 that "merely because other proceedings had been commenced or are contemplated would not involve, of itself, an abuse of process" and that "[t]his follows having regard to the nature of the investigative process which could throw light on the question, inter alia, whether there was evidence which would warrant a liquidator, for example, proceeding against an examinee". He also noted the Full Court's comment that "it may be quite a different question where proceedings contemplated or instituted are not proceedings to be brought by the company, but proceedings brought by some other party for the advantage of that party rather than the company". He noted that the Full Court rejected the proposition that what was said by them was inconsistent with the decision of McLelland J in Re BPTC Ltd and on appeal in Hong Kong Bank v Murphy. He also referred to what he described as "the key statement of principle" to which we have referred at [77] above.
Senior counsel for Arrium submitted that that statement of principle applies directly in the present case as the predominant purpose of the respondents was to further their own interests in litigation against third parties which was not for the benefit of the company, its contributories or its creditors.
He submitted that the respondent was incorrect in submitting that the examination was for a proper purpose on the basis that the subject matter related to matters on which the liquidators could properly examine, pointing to the fact that in Re Excel the receiver was contemplating bringing actions in the name of the corporation to recover assets as a result of the breaches of duty. He submitted that showed that whilst there could be "an incidental benefit to the company", it would not matter if the purpose was improper.
Senior counsel for Arrium also referred to the decision in Hong Kong Bank v Murphy. He referred to the statements by Gleeson CJ at 519 which we have set out at [69] above, submitting that what the Chief Justice was saying was not that there was "no strict dichotomy" between pursuing a forensic advantage and a purpose which benefits the company, but rather if the purpose was proper, it did not matter that a forensic advantage would be obtained.
He also referred to Evans v Wainter submitting that Lander J at [139]-[144] and [247] affirmed that Re Excel was correctly decided.
He also referred to that passage from the judgment of Kimberley Diamonds to which we referred at [91] above which he submitted was consistent with what was said in Re Excel.
He submitted that the subsequent statement in that case at [103] that "[i]t would be entirely proper for an eligible applicant to apply for and obtain an examination summons under s 596A for the purpose of obtaining information concerning legitimate issues" even if it could not be said that "the examination was likely to reveal conduct capable of supporting a claim" was made in answer to a submission that an examination can be stayed as an abuse of process simply because the Court is not satisfied that the examination will reveal wrongdoing on the part of the examinee.
He also referred to the statement by Doyle CJ in Sandhurst Trustees at [53] which we have set out at [84] above. He submitted that in that passage, Doyle CJ mischaracterised what occurred in Re Excel for two reasons. First, it misstates what he described as "the critical passage" at 93 (see [77] above) which focussed "not on the objective question of whether an advantage or benefit exists but rather on whether the purpose is to procure an advantage or benefit for the corporation, as opposed to a private purpose", second, that it could not be accepted that Re Excel was a case "where there was no possibility of [an] advantage or benefit to the corporation from the examination going forward".
In relation to Marvin Manufacturers, senior counsel for Arrium, referring to his written submissions, noted that it was decided before the Full Court decision in Re Excel and that it was important to note that the potential cause of action, if successful, would have reduced the debt owed to New Zealand Steel.
In relation to ground 3 of the grounds of appeal, senior counsel for Arrium referred to the fact that the liquidator had determined that there was no claim in respect of the costs of the capital raising.
Senior counsel for the respondent noted that Ms Goulden conceded that the 2014 capital raising was not the subject of detailed examination in the public examination. He also referred to the evidence of Ms Zaki who said she had inspected the public examination transcript which had only one reference to the capital raising being in the context of financing options available in January 2016.
He also referred to the suspected breaches by the directors of their obligations to Arrium alleged by Ms Banton in paragraphs 55 and 56 of her letter to ASIC of 5 April 2018 (see [8] above). He said they involved possible claims by Arrium. He accepted that the only loss that could be identified was the cost of the capital raising. He referred to the Equity Capital Raising Presentation which stated that $732 million of the net proceeds would be used to pay down debt which left a balance of $22 million which he submitted suggested that "the cost of the capital raising would not have been insubstantial".
In relation to Hong Kong Bank v Murphy, senior counsel for the respondent stated that Gleeson CJ did not rely on the proposition that success by the new trustees would not reduce the liability of the old trustees to creditors. He noted that Gleeson CJ rather referred at 516 to the new trustees proceeding in order to recover benefits improperly taken by the third parties. He also referred to the reference at 520 to the primary judge's finding that the purpose of the new trustees was to conduct the examinations "to obtain information which may assist them in prosecuting [their] causes of action, … to determine if any of those causes of action should be abandoned, and to determine if any other causes of action should be added" and Gleeson CJ's statement that these purposes were "legitimate purposes". He stated the summons was justified on the basis that the shareholders' loss arose as a result of misconduct of the company in liquidation.
In the present case, the position is even clearer. Arrium received consideration for the issue of the shares which, in the present case, was alleged to be well in excess of their value to the shareholders. It not only suffered no loss on the issue of the shares, but on that hypothesis, benefited financially from the transaction. Absent any suggestion that it would be liable to shareholders who acquired shares on the basis of representations in the Equity Capital Raising Presentation, it could not be said that Arrium suffered any loss. There is no such suggestion of any such claim.
Although the High Court in Pilmer left open the possibility of the recovery of administrative costs, whatever were the costs of the capital raising, they were more than offset by the $754 million received by the company as a result of the transaction.
The primary judge seemed to accept that it was a possibility that the examinations might disclose a basis for Arrium to recover its costs of the capital raising (see [35] above) or produce relevant information that may suggest further causes of action. With the greatest respect to his Honour, the cost of the capital raising was far less than the funds received and it was speculation to suggest that other causes of action may arise.
The third matter is this. The announcement of the class action by the solicitors for the respondent stated that persons entitled to participate were shareholders who purchased shares on or after 19 August 2014. The proposed class did not include all contributories of Arrium. Further the questionnaire attached to the announcement made it clear that participants could include those persons who had purchased shares after 19 August 2014 but subsequently sold their shares. Thus it would include persons who were not contributories at the time the company went into administration. These matters highlight what might be described as the essentially private nature of the proposed claim.
Fourthly, his Honour was correct in concluding that the information provided by the respondents' legal representatives to ASIC tended to suggest that the predominant purpose in seeking the issue of the examination summons was to investigate and pursue a potential claim in their capacity as shareholders against the directors or auditors or Arrium (see [36] above). Although the respondents' letter of 5 April 2018 to ASIC stated that any recovery from the proposed litigation "would ensure that the pool of funds available to either the company or other shareholders would increase" (see [8] above) that was not suggested in Ms Banton's affidavit of 3 May 2019 and the respondents quite properly made it clear at the hearing before the primary judge that a derivative action was not contemplated (see [24] above). In those circumstances, the predominant purpose was to pursue what we described as the essentially private nature of the proposed claim.
The respondents submitted that what was to be looked at was not the subjective purpose of the examination but the result intended to be achieved. It may be accepted that purpose in this context means the result intended to be achieved but it is the subjective purpose of the respondents (that is the result intended by them to be achieved) which is relevant to the question of whether there is an abuse of process: see Re Excel at 89-91 (cited in part at [76] above); Williams v Spautz at 526-526; 529-531.
The critical question in the present case is whether the purpose of the examination is foreign to the purpose for which those powers were conferred (see the passages from Hong Kong Bank v Murphy and Re Marvin Manufacturers cited at [70] and [72] above).
As can be seen from the review of the authorities, there has not been unanimity amongst courts as to the scope of the power. At least up to the time of s 541 of the Companies (NSW) Code, the power to order an examination appeared in that part of the legislation directed specifically to winding-up. Notwithstanding the fact that s 541 did not appear in that part of the legislation dealing with winding-up, it was generally accepted that the purpose of the power was limited to assisting the liquidator in the winding-up of a corporation or to support the bringing of criminal charges against the former officers of the corporation: see the passages from Hamilton v Oades cited at [53]-[54] above: c/f Hong Kong Bank v Murphy at 518.
It is true that subsequent cases, particularly Hong Kong Bank v Murphy and Marvin Manufacturers, expressed the scope of the power more broadly. However, the remarks made by Gleeson CJ and Hayne J in those cases must be considered in the context in which they were made. Hong Kong Bank v Murphy concerned claims against the former trustee, BPTC, in excess of $600 million which had been made on behalf of unit holders in the Estate Mortgage trusts. Monies recovered by the new trustees from parties who participated in the breaches of trust would be available to meet the claims of unit holders and at least satisfy in part claims against the former trustee. At first instance, McLelland J stated that there were "significant similarities between the position of the new trustees and that of a liquidator (see [68] above) whilst Gleeson CJ in the passage cited at [69] above made the same comment.
Marvin Manufacturers concerned a proposed examination for the purpose of obtaining information to support a potential claim against a former director under the insolvent trading provisions in s 592 of the Corporations Law. As we pointed out, subject to defences, the effect of s 592 was to render the company and persons who were directors or took part in the management of the company at the time the debt was incurred jointly and severally liable. Further s 592(5) provided that if the director or person who took part in the management of the company paid the debt, the company was not rendered liable to that person.
It can thus be seen that the proposed litigation directly concerned a debt for which the company was liable and which, if recovered by the applicant, would lessen than the overall indebtedness of the company and thus be to its benefit.
It is correct that Gleeson CJ and Hayne J in the passages which we have cited emphasised what might be said to be the public benefit in exposing conduct which may affect other creditors or go to the protection of shareholders, creditors and interested members of the public. This is consistent with what was said by Mason CJ in Hamilton v Oades that one purpose was to support the laying of criminal charges. We do not think their Honours were stating that any private examination would be within the scope of the power merely because the examination might reveal matters demonstrating such conduct if that was not the purpose of the examination and no benefit to the company could be identified.
Each of Hong Kong Bank v Murphy and Marvin Manufacturers were decided before the decision of the Full Court in Re Excel. The passage from Re Excel (which we have cited at [76] above) is clear authority for the proposition that an application for the predominant purpose of advancing the cause of the applicant in litigation against third parties and not for the benefit of the corporation, its contributories or its creditors is a use of the provision for a purpose foreign to the power.
It is true that in Boys v Quigley, Flanders v Beatty and Sandhurst Trustees the view was expressed that the 1992 amendments expanded the scope of the power and that Lander J reached a contrary view in Evans v Wainter. It is unnecessary to decide which is correct. Boys v Quigley was an application by a receiver in aid of potential proceedings on behalf of debenture holders. Any success in such proceedings would reduce the indebtedness of the company to the debenture holders and thus be to its benefit. Flanders v Beatty concerned an application by administrators of a deed of company arrangement, persons expressly designated in s 9 of the Corporations Law as eligible applicants to assist in seeking to investigate the worth of a claim expressly assigned to them under the deed. Sandhurst Trustees concerned a summons issued by the trustee for the holders of convertible notes. Doyle CJ stated at [56] that a successful claim by the trustee for the noteholders might reduce the claims against the company. In each case there was an identified potential benefit to the company or its creditors.
In Evans v Wainter, although Lander J expressed his agreement with the remarks of Hayne J in Marvin Manufacturers, he expressly stated at [143] and [247] that Re Excel established that it is an abuse of process to use the procedure "if the predominant purpose of the applicant seeking the order is not for the purpose of benefitting the corporation, its contributories or its creditors". Ryan and Crennan JJ agreed with Lander J on this point.
It follows that there are two unanimous decisions of the Full Court of the Federal Court which state that an examination, the predominant purpose of which is not to benefit the corporation, its creditors or its contributories, is an abuse of process. None of the other cases to which we have referred have stated that Re Excel was incorrectly decided. Furthermore, they can all be reconciled on the basis that even if the examination was brought by an eligible applicant for its own purpose, that will not be foreign to the purpose for which the power was conferred if it can be shown that fulfilment of the purpose could confer a demonstrable benefit on the company or its creditors (and possibly on all of its contributories).
The present case does not fall into that category. 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. In our opinion, such an examination is foreign to the purpose for which the examination power is conferred and there is an abuse of process.
It follows that the order for the examination summons and the orders for production under s 68 of the Civil Procedure Act should be set aside.
In the result, we would make the following orders:
1. Grant the applicant leave to appeal.
2. Direct the applicant within 14 days to file a notice of appeal in the form of the draft notice of appeal contained in Tab 6 of the White Folder filed in the proceedings.
3. Allow the appeal.
4. Set aside the orders made by Black J on 2 December 2019 save for Orders 1-3 and 16-17 and in lieu make the following orders:
1. The orders made by the Registrar on 15 May 2019 be discharged.
2. The plaintiffs' (respondents') application made on 31 October 2019 pursuant to s 68 of the Civil Procedure Act 2005 (NSW) for the production of documents by the appellant and KPMG be dismissed.
3. The respondents pay the appellant's costs of the proceedings in the Court below.
1. The respondents pay the appellant's costs of the appeal and have a certificate under the Suitors Fund Act 1951 (NSW) if eligible.