ESG Litigation – The availability of the Public Examination Power to pursue ESG Claims

By Dalitso Banda

14 March 2022

A recent decision by the High Court of Australia in Walton v ACN 004 410 833 Limited (formerly Arrium Limited) (in liquidation) [2022] HCA 3 (Walton) has significant implications for ESG litigation in Australia.

It is said that ESG goes to the heart of a company’s purpose, reputation, values and approach to risk management. Negative ESG events and/or negative ESG practices can significantly impact the value of a company’s shares and result in losses to shareholders.

In Walton, the High Court ruled that shareholders of a publicly listed company in administration can use the public examination process under section 596A of the Corporations Act 2001 (Cth) (the Act) to investigate and pursue potential class action claims against former directors, officers and advisers of a company in administration. Until the Walton decision, the conventional understanding of the public examination power under section 596A, was that it existed to aid in the process of external administration and was typically used in the interests of all creditors.

The decision is significant from an ESG perspective because shareholders of a distressed company that has experienced a major negative ESG event and/or negative ESG practices (e.g. greenwashing) can use the public examination power to investigate the affairs of a company to bring claims against former directors and advisors of companies.

To provide context, the case was as follows. Arrium was an ASX-listed steel and iron ore producer. In August 2014, Arrium published its 30 June 2014 financial results and in September 2014, it announced it would undertake a capital raising and provided its shareholders with an information memorandum relating to the capital raise. Between September and October 2014, Arrium raised $754 million in capital. The price of iron ore declined. In January 2015, Arrium announced the suspension or closure of one of its iron ore mines and in February 2015, Arrium acknowledged that its mining operations were undervalued in excess of $1 billion. The company was placed into administration in April 2016 and in June 2019, the administrators were appointed as liquidators.

Arrium’s shareholders who bought shares as a consequence of the 30 June 2014 financial results and information memorandum sought to investigate potential claims against former directors, auditors and the bank advising on the capital raising (Examinable Officers). The shareholders sought to investigate possible misleading or deceptive conduct arising out of the capital raise by using the public examination process under section 596A of the Act.

At first instance, the Supreme Court of New South Wales made orders allowing the shareholders to conduct a public examination of the Examinable Officers. The Court of Appeal set aside those orders on the basis the proposed public examination was not for the benefit of Arrium, its creditors, or its contributories but rather, the purpose of that examination was to pursue a “private” benefit for only a limited group of shareholders.

The High Court overturned the Court of Appeal’s decision and ruled that a subset of the shareholders of Arrium could use the public examination process under section 596A to investigate the affairs of Arrium even though their motivation was to pursue claims which would not benefit Arrium, its creditors, or its contributories.

This case is significant not just for insolvency practitioners but also for its ESG implications. It represents another avenue by which shareholders and other stakeholders can hold directors and advisors accountable for their conduct, by for example, making misleading and deceptive ESG related statements in their financial statements and disclosures to shareholders.

In recent times, shareholders have shown a determination to hold companies accountable for their ESG commitments and activities and that trend is only expected to rise in the coming years. For example, recently shareholders of the Commonwealth Bank of Australia (CBA) filed an application under section 274A of the Act and obtained (by consent) copies of CBA’s internal documents relating to its ESG policies and climate change commitments referred to in its 2021 Annual Report.

This case is another timely reminder of the capacity of existing laws in Australia to deal with and respond to ESG-related claims.

For more information on ESG Litigation, please contact Dalitso Banda.

For more information, please contact the authors:
Dalitso Banda | Principal

Disclaimer: The information published in this article is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.