The Corporations Act 2001 (Cth) (Act) contains expansive powers for persons to conduct public examinations. These are special coercive powers to question relevant persons, in Court and under oath, as to the “examinable affairs” of the relevant company.
The High Court has recently determined, by a slim 3:2 majority in Walton & Anor v ACN 004 410 833 Ltd (Formerly Arrium Limited) (in Liquidation) & Ors  HCA 3, that the use of those powers will be legitimate where the examination confers a benefit on some, but not all, of the company’s stakeholders (such as creditors and shareholders).
This decision leaves the door open for persons aggrieved by corporate misconduct to use the powers within the Corporations Act to examine those responsible for a corporation’s failure. A more elaborate explanation of the Court’s reasoning is set out below.
When will a purpose be legitimate for invoking the examination power?
Fundamentally, the question posed by the invocation of the examination power is whether the ultimate purpose is “foreign to the nature of the process in question”.
The examination power gives three legitimate purposes:
- Enforcement of the Act (including the statutory duties owed by directors).
- Promotion of compliance with the Act; and
- Protection of shareholders and creditors from corporate misconduct.
If an applicant’s purpose is consistent with any of the above, then that purpose is legitimate insofar as it serves the public interest. If the applicant has an “ulterior motive” that is of no moment if the above test is satisfied. For this reason, the High Court was reluctant to define a perimeter to legitimate purpose, with such exercise described as “a fool’s errand” to result in “an almost infinite variety of purposes”.
The leading judgments of Justices Edelman and Steward concluded that:
“examining an officer of a company for the purpose of pursuing a claim against the company or one of its officers or advisers for the enforcement of the law can be an entirely legitimate use of the [examination] power. It should not matter whether the claim relates to all creditors or all contributories, or only a smaller group…
No doubt some are more altruistic than others and may pursue a remedy directed at, or which includes, other creditors or shareholders being compensated. But the existence of such fine feelings is of no consequence to the court’s application of [the examination power]. As conceded by the first respondent, the pursuit of a claim for the benefit of some shareholders can be as legitimate as a claim made for the benefit of all shareholders. In both cases, the recovery of money in respect of corporate misadventure serves the public interest by necessarily including a purpose to enforce the law. The making of such claims is a means of protecting shareholders and creditors and of ensuring compliance with the law. An examination made… for [this] purpose is no abuse of process.”
A public examination before the commencement of a formal legal proceeding can be a relatively inexpensive and worthwhile first step for litigants seeking to recover their losses arising from corporate misadventure. If you would like to consider such an approach, please reach out to Aaron McDonald at firstname.lastname@example.org