David Gerber
Partner •
Sydney
Examinations under the Corporations Act to assess the merits of a class action: does your D&O insurance cover the cost?
Whether a D&O policy will cover a company officer against the costs of an examination under section 596A will depend on the policy wording.
The High Court's decision in Walton v ACN 004 410 833 Limited (formerly Arrium Limited) (in liquidation) [2022] HCA 3 (Walton) will strengthen the arsenal available to plaintiffs and plaintiff law firms investigating potential claims against the officers of a company in administration. For organisations that purchase directors' and officers' liability (D&O) insurance, it may be timely to review the cover it provides against the legal costs associated with an examination of its officers' conduct.
Section 596A of the Corporations Act 2001 (Cth) provides for the compulsory examination of officers of a company under external administration. Such examinations take place pursuant to a summons issued by the Court, on the application of an "eligible applicant", which includes any person approved for this purpose by the Australian Securities and Investments Commission (ASIC).
In Walton, by 3:2 majority, the High Court held that the power to order examinations under section 596A can be used to test the merits of a potential class action against the company's former officers or advisers, including where the alleged group members do not include the company, its creditors or contributories as a whole, but only a selection of the company's shareholders.
Insured persons under D&O insurance policies may wish to consider whether their policies will cover the costs of preparing for and attending such an examination, which may or may not be an investigation into the affairs of the company, as opposed to an investigation into the conduct of the company's officers.
The High Court's decision in Arrium
In April 2016 Arrium Limited was placed into administration and the administrators were subsequently appointed as liquidators. In April 2018, certain shareholders of Arrium wrote to ASIC requesting that they be granted the status of "eligible applicants", to enable them to apply to the Court under section 596A to "summon a person for examination about a corporation's examinable affairs". The purpose of the examination was to investigate the merits of a potential class action against former advisers and officers of Arrium in relation to the October 2014 capital raising.
The shareholders obtained orders under section 596A requiring a former director of Arrium (the third respondent in the High Court appeal) to appear for examination and produce documents.
The issue before the High Court was whether the shareholders' application for an order for examination was made for an illegitimate purpose and was therefore an abuse of process. Justices Edelman and Steward held that section 596A is concerned with "the administration or enforcement of the law concerning the public dealings of the corporation in external administration and its officers". They reasoned that the legitimate purposes for an application under section 596A "include the enforcement of the Corporations Act, the promotion of compliance with that Act, and the protection of shareholders or creditors from corporate misconduct. An examination conducted for a purpose that included investigating the possible existence of misconduct on the part of a company's officers might be expected to serve the public interest in ways such as these". Justices Edelman and Steward, and Justice Gageler in a separate judgment, ultimately concluded that the appellants' aim to gather information for potential class action proceedings against former company officers and advisers was not an illegitimate purpose, despite there being no benefit to Arrium or its creditors.
Will your D&O policy cover the cost of an investigation under section 596A into the conduct of company officers?
Walton opens up a potentially significant information-gathering avenue for aggrieved shareholders of companies in external administration to assess the merits of a potential class action against company officers or advisers.
Whether a D&O policy will cover a company officer against the costs of an examination under section 596A will depend on the policy wording. Slight differences in wording can have significant consequences in terms of the scope for an insurer to argue that the policy does not respond to particular costs.
While the intent of most D&O policies is to cover legal costs incurred for preparation and attendance at examinations such as those under section 596A, the actual scope of indemnity against such costs can come down to the detail set out in the policy's definition of, say, "Investigation" or "Investigation Costs". There is no standard form of words used for this part of the cover under a D&O policy, and there is no doubt that some wordings are drafted with less clarity than others.
Generally speaking, D&O cover for legal costs is an area where disputes can easily arise as to the rights and obligations of insurer and insured. Issues in the drafting often lie at the heart of these disputes, or create the opportunity for the parties to adopt and defend opposing interpretations. If your organisation's D&O policy is due to be renewed in the near future, it may be time to review the wording that governs the cover for legal costs incurred to prepare for and attend a statutory examination.
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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.