Mandatory Examinations

Secrets Exposed: How the Corporations Act May Force You to Reveal Company Information

It may surprise you to know that, under Section 596A of the Corporations Act 2001 (Cth) (‘the Act’), a person can be ordered (i.e. summoned) to attend Court, and if required, can be compelled by a Court to give answers about certain details related to a corporation. This is known as a “mandatory examination” or sometimes called a “compulsory examination”.

This article examines how recent case law has changed the regulatory landscape when it comes to these mandatory (or “compulsory”) examinations under the Act.

Potential Implications

A person who has been summoned and attends before a Court for an examination under Section 569A must not, without reasonable excuse, refuse or fail to answer a question that the Court directs him or her to answer. This also includes being compelled to provide documents relevant to the examinable affairs of the company that the person has in their possession or control.

While the answers given or documents produced by a person in this context are not admissible as evidence against that person in a criminal proceeding or a proceeding where a penalty is being imposed, the answers are admissible evidence in civil proceedings, and could be used by some other third-party against the person who made the statements, or to otherwise bolster a person’s position if pursuing the company in civil proceedings. It can be a very useful, and alternatively, invasive, tool for a persons involved in the corporate industry to know about.

Who can Request that a Mandatory Examination Take Place?

Under Section 569A(a) of the Act, an “eligible applicant” must first apply to the Court for a summons of a person. An “eligible applicant” generally includes:

The Australian Securities Investment Commission (‘ASIC’);
Liquidators (including provisional liquidators);
Administrators;
Restructuring practitioners; or
Persons authorized in writing by ASIC to make such an application.

However, in the case of Thomas & Anor v ACN 004 410 833 Limited (Formerly Arrium Limited) (In Liquidation) & Ors [2022] HCA 3 (‘Arrium’), the High Court of Australia allowed shareholders of a company in liquidation (who were authorised by ASIC to make the application) to examine a former director and seek documents as they investigate launching a class action.

In Arrium, the mandatory examination procedure under Section 569A was effectively used by the shareholders to build their case against the examinee before issuing proceedings (potentially avoiding risk on adverse cost liabilities). This was even where the mandatory examination was conducted for the private benefit of the shareholders and was of no or little benefit to the Liquidator or the creditors of the company in question.

It is foreseeable where parties who have mutual interests in a corporate collapse, they might seek to obtain ASIC approval to apply to utilise such mandatory examination procedures.

What Case Law Says – Past and Present

Historically, the approach taken was that only insolvency practitioners could apply conduct these examinations, which included liquidators and administrators as well as ASIC. It historically did not include other parties who may have had some interest in the affairs of the now insolvent company. The mechanism of conducting a mandatory examination (in both the current Act and its predecessor legislation) permitted these insolvency practitioners to investigate potential causes of action that could be brought for the benefit of the company and its creditors against officers of the insolvent company.

However, since the Arrium decision, this is no longer the case.

The Arrium Case

At first instance, the shareholders in Arrium applied to ASIC for eligible applicant status in April 2018, which ASIC granted. They then sought orders under Section 596A of the Act from the New South Wales Supreme Court to examine a director, a banker, and Arrium’s auditors. Arrium, the bank, and the auditors challenged these orders. The NSW Court of Appeal set aside the orders, ruling they were sought for personal gain, and not for the company’s or creditors’ benefit. The shareholders eventually appealed to the High Court.

Generally, a mandatory or compulsory examination order can be challenged if it is for an improper or abusive purpose, such as gaining an evidential advantage which wouldn’t be otherwise available or destroying a witness’ credibility. The Court may intervene if such abuse is proven.

In Arrium, the purpose of the examination was to establish grounds for a class action against Arrium’s auditors and directors for misleading capital-raising documents. This would have benefitted only the shareholders personally.

The question for the High Court was whether the examination order was for an improper or illegitimate purpose, since it wouldn’t benefit the company or its creditors.

The Decision

By a 3:2 majority, the High Court determined that the orders should not have been set aside, allowing the mandatory examinations to proceed. The Court found that there was nothing in Part 5.9A of the Act that restricted the purpose of such examinations, especially given the broad definition of “examinable affairs” and the range of applicants ASIC could authorize to make applications for such orders.

The mandatory examinations aimed to support proceedings against Arrium’s officers and auditors related to its examinable affairs. The majority held that a summons with a substantial public purpose, including enforcing the Act’s legislative intention, aligned with Section 596A’s purposes. The summons sought to investigate potential claims regarding Arrium’s 2014 capital raising, falling within Arrium’s examinable affairs.

If you require legal advice regarding either making a mandatory examination application, or alternatively if you are served with one, please contact Peter Charatsis, Brenton Priestley or Jonathan Khoury for more information.

The above is general in nature and is not intended to, and does not, constitute professional advice.