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High Court confirms use of public examination powers to investigate potential class actions

By John Freund |

The High Court has ruled in favour of shareholders in Walton & Anor v ACN 004 410 833 Ltd (formerly Arrium Limited) (in liq) & Ors. In a 3:2 decision, the majority permitted former shareholders of Arrium Ltd to examine the insolvent company’s officers under s 596A of the Corporations Act 2001 (‘CA’) for the purpose of potentially bringing a class action against the company’s managers.

The Road Ahead

The High Court (3:2) decision is positive news for shareholder class actions as it confirms that “eligible applicants” can publicly examine corporate officers about a corporation’s affairs, to test the merits of a potential class action against the company. This is even if a liquidator does not intend to investigate or pursue claims against the officers of the company.

The approach adopted by the majority is a welcome step forward for corporate accountability in the midst of many attempts by the legislature to constrict the Australian class action landscape.

Procedural history

The applicants were shareholders in a former mining company, Arrium Ltd (‘Arrium’). The applicants bought shares in Arrium during a capital raising in 2014. Shortly thereafter, Arrium announced an impairment to the value of its business of over $1billion. Arrium was then placed into administration, and then finally liquidation.

Under s 596A CA, the Court is to summon a person for examination about a corporation’s ‘examinable affairs’ if an eligible applicant seeks the order, and the court is satisfied that the person subject to the order was an officer or liquidator of the corporation during the prescribed period.

With authorisation from ASIC, the applicants sought an order from the Supreme Court of New South Wales summoning a former director of Arrium for public examination. The applicants sought the order,  as they believed that they may have claims against the former directors and auditors of Arrium arising out of the capital raising and the company’s published financial results for the same period. The goal of the examination was to investigate whether pursuing these claims as a class action with other shareholders was viable.

The Supreme Court of New South Wales initially granted the order.  However, the Court of Appeal overturned the decision to allow the examination on the basis that it was an abuse of process, as the examination did not benefit Arrium, its creditors, or its contributories.

The issue to be determined by the High Court was whether the applicant’s purpose for seeking the order was an abuse of process. This involved considering whether the purpose of the application was consistent with the purpose of s 596A CA.

Was the Proposed Examination an abuse of process?

The majority (Justices Edelman, Steward and Gageler) allowed the appeal, finding that the application was not an abuse of process. The purpose for the application was held to be within the scope of s 596A CA.

In coming to this conclusion, the court considered section 596A CA to ascertain its purpose, which involved lengthy consideration of the preceding iterations of the statutory scheme for public examinations.

The High Court acknowledged that earlier laws insisted on public examinations being for the benefit of the company or its creditors, or for bringing criminal or regulatory proceedings in connection with the company. However, the High Court concluded that these requirements did not apply to bringing an application under s 596A CA because s 596A CA has no direct analogy with any former provision in the earlier companies’ legislation. Instead, the court held that s 596A has much broader requirements than the former laws on this issue.

This is because:

1.     section 596A CA is drafted differently, and applications under it require less supporting evidence than earlier companies’ legislation and other sections within the same part of the Corporations Act 2001;

2.      section 596A CA was intentionally drafted to have a broad application;

3.     section 596A was enacted in the public interest to facilitate the administration or enforcement of the law concerning a corporation and its officers in public dealings. Therefore, an application under this section will not be an abuse of process if it promotes compliance with the law.

On this basis, the High Court concluded that using a compulsory examination to test the merits of a potential class action for corporate misconduct coincides with the purpose of s 596A CA. The fact that the proposed class action would not benefit all of Arrium’s shareholders did not jeopardise the validity of the application, because s 596A CA is directed to enforcing the law, rather than benefitting the company in administration.

The judgment is available here: Walton v ACN 004 410 833 (formerly Arrium Ltd) (in liq) [2022] HCA 3, 16 February 2022.

About the Authors

Lillian Rizio specialises in managing large scale complex litigation, particularly with claims involving multiple parties. Lillian’s emphasis is on corporate disputes, class actions, professional negligence and insurance, across most Australian jurisdictions.

Lillian also has extensive experience advising clients in relation to right to information matters, in both federal and state jurisdictions

Julia Hegarty is a law clerk in the Dispute Resolution and Litigation team at Piper Alderman in Brisbane. She is currently studying a Bachelor of Commerce/Laws (Hons) at the University of Queensland. Julia has an interest in externally funded litigation and shareholder class actions.

For queries or comments in relation to this article please contact Kat Gieras, Litigation Group Project Coordinator | T: +61 7 3220 7765 | E:  kgieras@piperalderman.com.au

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Commercial Regulatory Issues

Rowles-Davies: Retrospective Provision in Litigation Funding Bill is ‘Fundamentally Flawed’

By John Freund |

In an article shared on LinkedIn, Nick Rowles-Davies, founder and CEO of Lexolent, makes the case against the retrospective aspect of the UK government’s Litigation Funding Agreements (Enforceability) Bill. Whilst acknowledging that many within the industry disagree with his position, Rowles-Davies argues that ‘the Bill should be prospective only and that the retrospective element is fundamentally flawed.’

Rowles-Davies summarizes his extensive article into the following key points:

  1. ‘The starting point for any consideration of the Bill must be firstly to correct the various inaccurate Supporting Documents (to the Bill) such that the law as it stands, and has always stood, is properly reflected. 
  2. The Government has put forward no credible justification to support the retrospective provision in the Bill.
  3. When considered under the true set of facts, this legislation appears to be incompatible with the ECHR. 
  4. The justification for the Bill’s prospective elements and its (arguably unprecedented) retrospective aspect must be considered separately. The Supporting Documents grossly misrepresent the position. Save for pure value transfers from previously funded parties to existing funders, what the Bill properly seeks to achieve can be accomplished through prospective only legislation. 
  5. If retrospectivity survives, it is likely that the matter will come before the courts quickly thereafter in relation to the ECHR.’

Rowles-Davies argues in the article that ‘the Supporting Documents to the LFA Bill provide absolutely no evidence of legal precedent to support the retrospective aspect of the Bill.” He goes on to say that not only is this bill ‘unprecedented’, but it also fails to provide ‘credible “public interest” justification for the retrospective aspect.’ 

In the conclusion of the article, Rowles-Davies calls on both chambers of Parliament to ‘take proper time to explore the foundation upon which the Bill rests and then test its contents after it has been repaired.’ Furthermore, he argues that ‘the positioning of the Bill is disrespectful to a busy Parliament tasked with addressing far more pressing global, social, and public interest matters.’

Commercial Regulatory Issues

Bills Targeting Litigation Finance Disclosure and Foreign Funders Make Progress in Louisiana

By John Freund |

Reporting by Bloomberg Law covers the campaign to introduce new rules governing litigation funding in the state of Louisiana, with proponents of the legislation sensing an opportunity to make progress since the state elected a new governor, Jeff Landry. The two bills making their way through the Legislature are: HB336, which would create a Litigation Financing Disclosure Act, and SB355, which would enact ‘transparency and limitations on foreign third-party litigation funding’. 

In an interview with Bloomberg, Representative Emily Chenevert ,who brought HB336, explained that the turnover in elected representatives provided a fresh opportunity, saying: “The appetite was there already within the legislature and so now it’s like, let’s attempt this and let’s see with a new House and some new senators what could happen.” Dai Wai Chin Feman, managing director at funder Parabellum Capital, spoke out in opposition to Chenevert’s bill but said that SB355 was “acceptable to our industry.”

HB336 would require any party in a civil action to disclose the existence of a litigation financing agreement, whilst redacting the financial details of the agreement, and would make all financing arrangements ‘permissible subjects of discovery’. The bill also prohibits funders from controlling or making any decisions in the proceedings, stating that ‘The right to make these decisions remains solely with the plaintiff and the plaintiff's attorney in the civil proceeding.’

SB355 requires any foreign litigation funder involved in a civil action in Louisiana to disclose its details to the state’s attorney general (AG), and to provide the AG with a copy of the funding agreement. Similarly to HB336, this bill would prohibit the foreign funder from controlling the legal action in any way and also prohibits the funder from being ‘assigned rights in a civil action for which the litigation funder has provided funding’.

HB336 has been approved by the state House and was referred to the Senate Judiciary Committee, whilst SB355 has cleared the majority of procedural hurdles and now awaits a vote by the House.

Commercial

Stonward’s Demarco: Funding Market Trending Towards Consolidation and Specialization

By John Freund |

In an interview with Leaders League, Guido Demarco, head of legal assets at Stonward, discusses the current state of the litigation funding market. The interview explores recent trends affecting funders, the nuances of the Spanish funding market, and Stonward’s own approach to legal strategy and market specialization.

Beginning with an overview of the global litigation funding industry, Demarco highlights the move towards consolidation, with funders specializing in specific legal sub-sectors or markets. Demarco says that this approach allows funders “to leverage expertise in particular legal domains or jurisdictions, enhancing their ability to assess and manage risks effectively.” He goes on to explain that the cost burden of case origination and due diligence, along with the need for specialized experts for each legal area, means that consolidation allows funders to maximise capital efficiency and scale their operations.

Focusing on the Spanish market, Demarco describes the country as a “promising hub” for litigation finance, pointing to the jurisdiction’s “sophisticated legal market” and its position as “a double gateway to the broader Latin American continent and the EU market.” Referencing his earlier explanation of the trend towards consolidation, Demarco argues that this has benefitted Spain as the market continues to attract specialist funders who can build an on-the-ground footprint in the market. As for Stonward’s exclusive focus on the Spanish funding market, Demarco says that this strategy has allowed the business “to develop an in-depth understanding of local legal intricacies, enabling the team to navigate the unique challenges and opportunities presented by Spanish procedural law.”