Oswal v Burrup Holdings Limited [2011] FCA 609 - access to company records

The matter of Oswal v Burrup Holdings Limited [2011] FCA 609 (Oswal) was a hearing in the Federal Court of Australia before Barker J. The applicant was a director of two companies which had receivers appointed, and that director wanted access to company records. The receivers opposed this.

Oswal is interesting because of the depth of the Court's consideration of the right of a director to access company documents. I have included a case summary below.

Barker J discussed the common law right of access between [6] and [13]. At [6] to [8] Barker J reviewed the position of a director seeking access to documents and whether the director needs to establish a 'need to know':

6. The parties accept that a director has a common law right to inspect documents of the company. In Geneva Finance Ltd; Quigley (Receiver and Manager Appointed) v Cook (1992) 7 WAR 496 (Geneva Finance), Owen J reviewed the authorities and confirmed that the right of a director to inspect books and records which relate to the affairs of the company is an incident of the office of the director and exists so that he or she may properly perform their duties as a director: see, for example, 507, summary point 2; Conway v Petronius Clothing Co Ltd [1978] 1 WLR 72; [1978] 1 All ER 185 (Conway), Slade J at 89-90, 201.
7. In Geneva Finance, Owen J also accepted that authority supported the view that a director may make inspection of such documents for such purposes personally or by an agent and may make copies of documents. As to inspection by an agent, Owen J at 504 and 505 relied on older authorities such as Edman v Ross (1922) 22 SR (NSW) 351 (Edman) as supporting the right of a director through an agent to exercise the inspection right.
8. In Geneva Finance, Owen J further accepted that the right of access to documents generally (as opposed to just accounting records) arises under the general law, but the Court has a residual discretion whether or not to order inspection: see 507, summary point 4. However, his Honour accepted that generally speaking a court will presume that a director intends to act in a way consistent with his or her duties and not to abuse the confidence reposed in him or her by using information for an improper purpose. In that sense, a director does not have to demonstrate “need to know” or furnish reasons before exercising the right of access to documents: Owen J at 507, summary point 6; see also Edman and Conway. I consider that his Honour’s statement of this principle in this regard may be considered generally consistent with the principle as stated in other authorities, such as Edman at 361, Fox v Gadsen (2003) ACSR 43 at [23], Berlei Hestia (NZ) Ltd v Fernyhough [1980] 2 NZLR 150; (1980) CLC 40-633 and Re Tai-Ao Aluminium (Australia) Pty Ltd v Cordukes [2004] FCA 1488; (2004) 51 ACSR 465 at 467. Accordingly, his Honour’s reference to “residual discretion” does not connote a discretion at large whereby the Court determines the appropriateness of the request for inspection.

At [9] to [10] Barker J considered the scenario where a receiver is appointed and the director is seeking to access the documents which are in the possession of the receiver. Barker J said that where a receiver is appointed, the receiver may be justified in refusing to allow the director access to the company records where to do so would impede the function of the receiver:

9. However, in Geneva Finance, Owen J also accepted, as I do, that where a receiver is in control of the company the receiver is entitled to possession of the books and records of the company by virtue of the proprietary interest of the appointor and the receiver has no legal entitlement to the documents; and that the entitlement to possession is purposive. It exists to enable the receiver to fulfil the role for which the receiver has been appointed, namely, to administer the company and realise the assets so as to repay or reduce the debt to the debenture holder. But the entitlement to possession is not necessarily exclusive: 513, summary points 5, 6 and 7.
10. In all of these circumstances, where a receiver is in possession of books and records the subject of inquiry, where inspection by a director is sought, is the role and function of the receiver rather than the identity of the residual duties which remain with the directors. The receiver will therefore be justified in refusing to grant access to the documents where to do so would impede the receiver in the proper exercise of his or her functions or will impinge prejudicially upon the position of the debenture holder by threatening or imperilling the assets which are subject to charge: Geneva Finance at 513-514, summary point 8.

At [11], Barker J considered the situation where there appears that the director is seeking to access the documents so as to misuse his or her power:

11. I also accept that there is a further general principle at play in relation to a director’s application to inspect, which is recognised by the authorities referred to above and that is that it may be refused where there is clear proof of a misuse of power, the onus being on those who assert it: for example, Geneva Finance, at 513, summary point 3. While Owen J, in Geneva Finance at 513, stated this principle of misuse of power in relation to a pre-receivership situation, it plainly has general application. His Honour mentioned the pre-receivership situation in order, on the facts of that case, to accentuate the changed position when a company falls into receivership. His Honour was there merely emphasising that there is a no “need to know” principle conditioning the general or common law access right prior to the appointment of a receiver, subject to the misuse of power disqualification. However, an attempt to exercise the general law right of access after the appointment of a receiver is no less subject to that qualification. It is just that there is an additional principle operating once a receiver is appointed and that arises from the pre-eminent responsibility of the receiver to realise the assets on behalf of the appointor.

Barker J then went on to consider the statutory right of the director to access the books of the company in s 198F of the Corporations Act 2001 (Cth). s 198F provides as follows:

(1) A director of a company may inspect the books of the company (other than its financial records) at all reasonable times for the purposes of a legal proceeding:
(a) to which the person is a party; or
(b) that the person proposes in good faith to bring; or
(c) that the person has reason to believe will be brought against them.

'Books' is defined in s 9 of the Corporations Act 2001 (Cth) as follows:

(a) a register; and
(b) any other record of information; and
(c) financial reports or financial records, however compiled, recorded or stored; and
(d) a document;

Barker J considered that s 198F does not empower the Court to make orders about inspection, however the Court may do so pursuant to s 1303 of the Corporations Act 2001 (Cth). s1303 provides as follows: 'If any person in contravention of this Act refuses to permit the inspection of any book or to supply a copy of any book, the Court may by order compel an immediate inspection of the book or order the copy to be supplied.' Barker J considered at [17] that the Court has a discretion whether or not to grant or withhold a compliance order:

16. Section 198F does not by its terms empower the Court to make orders about inspection. Rather, it is a provision which creates a statutory right of inspection in a director in the circumstances described in s 198F(1). The Court is however, pursuant to s 1303 of the Corporations Act, empowered to compel compliance with the provision. If any person in contravention of the Corporations Act refuses to permit the inspection of any book or to supply a copy of any book the Court may by order compel an immediate inspection or order a copy to be supplied. In the circumstances of this case, the applicant contends there has been contravention through the failure or neglect of BFPL to permit inspection under the statutory right and now seeks an order for inspection.
17. In my view, because the Court is empowered to order compliance under s 1303, the Court may be considered to have something in the nature of a discretion to grant or withhold a compliance order. Ordinarily one would expect that where contravention is made out the Court would grant the inspection that has been requested. However, the Court is not by the terms of s 1303 obliged automatically to compel compliance, and it may be that, in the circumstances of a particular case, good reasons are advanced as to why the Court should withhold an order. For example, it seems to me that it may be considered relevant to the question whether or not a compliance order should be made, that the request for discovery is unduly onerous, or that the company should not be expected to bear the cost of the large inspection exercise, or that the party requesting inspection already has the documents, or that, as a matter of convenience, the documents are about to be supplied to the person in some other way which makes the need for a compliance order unnecessary or redundant. These may be suggested as examples of how, in particular circumstances, a court might decline to grant a compliance order under s 1303 even though contravention of the Act is demonstrated in a particular case. Of course, the examples suggested are not intended to be exhaustive.

Barker J considered that the language of s 198F does not allow a director to obtain inspection by an agent (at [23] to [25]). Barker J came to this conclusion by contrasting the terms of s 198F with s290 Corporations Act 2001 (Cth). Barker J said that the difference in wording was intentional.

23. BFPL opposes orders being made under s 198F in the terms sought by the applicant because, amongst other things, there is no power for the Court to authorise a person, other than a director himself or herself, to conduct the inspection. It contends that the insertion of s 198F into the Corporations Act was intended to do no more than ameliorate difficulties faced by directors under the general law to obtain access to company books and records, in order to defend themselves against actions for breach of duty by the company. This was necessary because under the general law rule it is difficult to show that the exercise of the right for such purposes is to enable the director to perform his or her duties as director for the benefit of the company, as the common law rule requires: see Stern v Sekers [2010] NSWSC 59 at [254]- [255]; Australian Corporation Law Principles and Practice: [3.2.0055].
24. While it may be suggested, as Slade J did in Conway in respect of an earlier English statutory inspection provision, that the statutory right of a director to inspect books under provisions such as s 198F and s 290 is intended to reflect the breadth of the common law right of inspection, and so s 198F should be liberally construed to permit an inspection by a person on behalf of the director, in my view s 198F creates a separate and distinct statutory right (as does s 290(2) and s 421) of inspection in respect of the documents mentioned, to be construed according to its terms. These terms, in my view, do not permit inspection by an agent. I observe it would have been the easiest thing for the Parliament to have inserted in s 198F a provision such as s 290(2) but it chose not to do so.
25. Consequently, in my view, the proper construction of s 198F, taking into account its express terms, the terms of s 290(2) and the background to the provision contended for by BFPL, which I accept, is that a director has a personal right of inspection and the Court does not have the power to authorise inspection of the books under that provision by another person on behalf of a director.

Barker J then considered (at [26] to [37]) the right of access of a director to the company's 'financial records' under s 290 Corporations Act 2001 (Cth). s 290 provides as follows:

Personal access
(1) A director of a company, registered scheme or disclosing entity has a right of access to the financial records at all reasonable times.

Court order for inspection on director’s behalf
(2) On application by a director, the Court may authorise a person to inspect the financial records on the director’s behalf.
(3) A person authorised to inspect records may make copies of the records unless the Court orders otherwise.
(4) The Court may make any other orders it consider appropriate, including either or both of the following:
(a) an order limiting the use that a person who inspects the records may make of information obtained during the inspection;
(b) an order limiting the right of a person who inspects the records to make copies in accordance with subsection (3).

The term 'financial records' is widely defined in s9 of the Corporations Act 2001 (Cth) as follows:

(a) invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers; and
(b) documents of prime entry; and
(c) working papers and other documents needed to explain:

(i) the methods by which financial statements are made up; and
(ii) adjustments to be made in preparing financial statements.

Barker J, contrasting the provision on access to 'books' in s 198F, said that the Court can allow inspection of the 'financial records' of a company by an agent of the director (at [30]). Barker J said that the same considerations for enforcing compliance under s 1303 apply to s 290 as for s 198F (at [28] to [32]):

28. I have observed above that s 290, like s 198F, creates a statutory right of inspection of the documents mentioned which is separate and distinct from the general law, to be construed according to its terms.
29. Section 290(1) establishes the statutory right of a director to access financial records of company at all reasonable times.
30. Unlike s 198F, s 290 by (2) empowers the Court to make an order concerning the inspection of financial records on behalf of the director by another person.
31. If this statutory right to inspect is denied then, as in the case of contravention of s 198F, a director may seek a compliance order pursuant to s 1303. Similarly, as explained above in relation to s 198F, the power of the Court to grant a compliance order necessarily comprehends the power to withhold such an order and this in turn raises the possibility that, for good reasons, a compliance order may be declined in the circumstances of a given case.
32. Similarly, inspection may be ordered on terms or conditions if the circumstances require it.

Barker J then sets out the discretionary nature of s 290 and s 1303 at [36] and [37] and says that the Court has power to limit inspection by an agent taking into account 'the nature of records and the potential for misuse, particularly of confidential of private information':

36. I do not accept that the applicant bears anything in the nature of an “onus” when seeking to enforce the statutory right to inspect financial records under s 290(1). However, it is clear enough that the Court has something of a discretion as to whether or not an order should be made under s 290(2), as I have indicated above. This is because the Court “may” authorise a person to inspect on a director’s behalf.
37. Additionally, it is not obliged to order compliance merely because contravention is shown. A judicial discretion to withhold the remedy is not removed by s 1303. There is no statutory right to an inspection by an agent that is for the Court to order. Additionally, under s 290(4) the Court is empowered to make any other order it considers appropriate including limiting the use that a person who inspects the record may make of information obtained during inspection and limiting the right of a person who inspects to make copies. Section 290(2) and s 290(4) suggest that the Court is intended to have the power generally to control inspection where it is proposed that it be conducted by an agent of a director, taking into account the nature of records and the potential for misuse, particularly of confidential or private information.

Barker J's decision in Oswal makes it clear that a director has a right of access to documents which is capable of being enforced by the Court, but the grant of access is subject to the discretion and control of the Court. If the Court detects potential for misuse of information or the request for access is somehow onerous, then the Court may limit inspection.

Further, a director seeking access to books or financial records for inspection must take care to ascertain whether the director wants to inspect the documents personally , or if the director wants an agent (e.g. solicitor or forensic accountant) to inspect the documents. Only the director can inspect 'books' of the company apart from 'financial records', whereas the director can appoint an agent to inspect the 'financial records'.