Corporations Act - Application for inspection of breach of company - Turns on own facts

Seventh Defendant : Fearis Salter Power Shervington

Astor Chemicals Ltd v Synthetic Technology Ltd (1990) BCC Ch D 97

Lucy v Prescribing Biochemists Pty Ltd [2000] NSWSC 1137

1 MASTER SANDERSON: This is the plaintiff's application brought under the provisions of s 247A of the Corporations Act. The section is in the following terms:

"247A(1) [Court's power] On application by a member of a company or registered managed investment scheme, the Court may make an order:

(a) authorising the applicant to inspect books of the company or scheme; or

(b) authorising another person (whether a member or not) to inspect books of the company or scheme on the applicant's behalf.

The Court may only make the order if it is satisfied that the applicant is acting in good faith and that the inspection is to be made for a proper purpose.

247A(2) [Copies] A person authorised to inspect books may make copies of the books unless the Court orders otherwise.

247A(3) [Who may apply for order] A person who:

(a) is granted leave under section 237; or

(b) applies for leave under that section; or

(c) is eligible to apply for leave under that section;

may apply to the Court for an order under this section.

247A(4) [Order] On application, the Court may make an order authorising:

(a) the applicant to inspect books of the company; or

(b) another person to inspect books of the company on the applicant's behalf.

247A(5) [When the Court may make order] The Court may make the order only if it is satisfied that:

(a) the applicant is acting in good faith; and

(b) the inspection is to be made for a purpose connectred with:

(i) applying for leave under section 237; or

(ii) bringing or intervening in proceedings with leave under that section.

247A(6) [Copies] A person authorised to inspect books may make copies of the books unless the Court orders otherwise."

2 A plaintiff who seeks an order under s 247A must satisfy the Court that he falls within one of the subcategories of subs (3). In fact, the plaintiff has applied for leave to bring proceedings under s 237 and therefore satisfies the requirements of s 247A(3)(b). Because of the way that this application was argued, the terms of s 237 are of significance. The section reads as follows:

"237(1) [Seeking leave to proceed or intervene] A person referred to in paragraph 236(1)(a) may apply to the Court for leave to bring, or to intervene in, proceedings.

237(2) [When application must be granted] The Court must grant the application if it is satisfied that:

(a) it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and

(b) the applicant is acting in good faith; and

(c) it is in the best interests of the company that the applicant be granted leave; and

(d) if the applicant is applying for leave to bring proceedings - there is a serious question to be tried; and

(e) either:

(i) at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or

(ii) it is appropriate to grant leave even though subparagraph (i) is not satisfied.

237(3) [Presumption] A rebuttable presumption that granting leave is not in the best interests of the company arises if it is established that:

(a) the proceedings are:

(i) by the company against a third party; or

(ii) by a third party against the company; and

(i) not to bring the proceedings; or

(ii) not to defend the proceedings; or

(iii) to discontinue, settle or compromise the proceedings; and

(c) all of the directors who participated in that decision:

(i) acted in good faith for a proper purpose; and

(ii) did not have a material personal interest in the decision; and

(iii) informed themselves about the subject matter of the decision to the extent they reasonably believed to be appropriate; and

(iv) rationally believed that the decision was in the best interests of the company.

The director's belief that the decision was in the best interests of the company is a rational one unless the belief is one that no reasonable person in their position would hold.

(237(4) [Interpretation] For the purposes of subsection (3):

(a) a person is a third party if:

(i) the company is a public company and the person is not a related party of the company; or

(ii) the company is not a public company and the person would not be a related party of the company if the company were a public company; and

(b) proceedings by or against the company include any appeal from a decision made in proceedings by or against the company."

3 It is not in dispute that the plaintiff is a member of the seventh defendant and therefore satisfies the requirements of s 236(1)(a)(i) which in turn means that it is an eligible applicant under s 237(1). The seventh defendant has indicated it will resist the plaintiff's application under s 237 and that application has been held over pending determination of the plaintiff's application under s 247A. Clearly the plaintiff takes the view, not unreasonably, that it will have a far better prospect of satisfying the requirements of s 237 if it has the opportunity to inspect the books of the seventh defendant prior to arguing its application.

4 Prior to the hearing, counsel for both the plaintiff and the seventh defendant raised objections to certain parts of affidavits filed by the other party. I dealt with these objections at the commencement of the hearing and advised the parties that I would provide reasons for my decision in due course. It is appropriate if I deal with these issues at this stage.

5 The plaintiff relies upon an affidavit of Robert John Russell ("Russell"), a director and shareholder of the plaintiff, sworn 17 January 2002. Objection was taken to part of par 15, in particular the phrase at the beginning of the first sentence "in support of the Bid" and the phrase at the end of the second sentence being "in preparation for the Bid". Both of these phrases qualify evidence Russell is otherwise in a position to give. They both suggest motive, a matter about which Russell is not in a position to give evidence. They should therefore be struck out.

6 A similar objection was taken to par 24. On a similar basis, I struck out the phrase "In relation to Rumsey's role in the Bid" and allowed the remainder of the paragraph to stand.

7 Objection was taken to par 28, par 29 and par 36 of the affidavit. These three paragraphs were conceded by counsel for the plaintiff and were consequently struck out.

8 Objection was taken to par 46 and par 47 on the basis that they contained speculation and inadmissible hearsay. Before dealing with this particular objection I should say something generally about the way in which evidence is to be led in an application such as the present. In my view this application decides the rights of the parties and therefore the relief must be regarded as final rather than interlocutory: see Rossage v Rossage (1960) 1 WLR 249 per Hodson LJ at 251. It is true that the application under s 247A is brought to facilitate the application under s 237. It is also true that s 247A is, to use the words of counsel for the seventh defendant, "subservient to s 237". But that does not alter the fact that determination of the s 247A application finally resolves the question of whether or not the plaintiff is entitled to inspect the books of the seventh defendant. The situation is similar to a plaintiff who brings an application for pre-action discovery under O 26A r 4. In both cases what is to be determined by the application is whether or not a party has a right of inspection. An unsuccessful applicant in both cases is not precluded from taking further action, but that action stands separate and distinct from the application for inspection. That being the case, the relief sought must be regarded as final.

9 On that basis it is not open to a party making an application under s 247A to rely upon the provisions of O 37 r 6. That means the exception to the rule against hearsay evidence contained in r 6(2) would not apply. But that in turn does not necessarily mean that statements of information and belief are not admissible in an application such as this.

10 The starting point is to restate the rule against the admission of hearsay evidence. The classic statement found in Subramaniam v Public Prosecutor (1956) 1 WLR 965 is in the following terms (at 970):

"Evidence of a statement made to a witness by a person who is not himself called as a witness may or may not be hearsay. It is hearsay and inadmissible when the object of the evidence is to establish the truth of what is contained in the statement. It is not hearsay and is admissible when it is proposed to establish by the evidence, not the truth of the statement, but the fact that it was made."

11 The evidence in any case must be measured against what a party is seeking to establish. This point can be illustrated by reference to part of what is to be found in par 46 of Russell's affidavit:

"... I understand from my discussions with Wilde that Majestic has guaranteed the mining contractor's lease payments on the mining equipment previously used to mine alluvial deposits some or all of which is not required for the extraction of diamonds from kimberlite deposits and tailing dumps."

12 If that evidence was led for the purpose of establishing as a fact that Majestic had guaranteed the mining contractor's lease payments, then it would be clearly inadmissible. If, as here, it is led to establish what was said by the fourth defendant to Russell and Russell's understanding of the position, then it is admissible. For a plaintiff to succeed in an application brought under s 247A it must establish that it is acting in good faith and that the inspection is made for a proper purpose: see s 247A(1). The requirement of good faith necessarily involves an analysis of the plaintiff's motives for bringing the application. That in turn requires an understanding of the state of mind of the directors who are the moving force behind the plaintiff. Evidence which is directed at that question is clearly admissible. That is the basis upon which I declined to strike out the part of par 46 of Russell's affidavit quoted above.

13 However, the rest of par 46 and par 47 I did strike out. These parts of the affidavit offer Russell's opinion on certain matters. On that basis the evidence is inadmissible and was struck out.

14 Complaint was made of the third sentence of par 67 of Russell's affidavit. Counsel conceded that all the words after "options were" in that sentence ought be struck out and I ordered accordingly.

15 Objection was taken to par 79 of Russell's affidavit. That paragraph is said to be a summary of the reasons why the plaintiff is seeking an order both with respect to s 247A and s 237. Parts of the paragraph are submissions and ought not properly form part of an affidavit. Having said that, no purpose would be served by teasing out those parts of the affidavit and striking them out. As to the remainder of the paragraph, it deals with matters which motivated the application and goes to the question of bona fides. On that basis then I will allow the paragraph to stand.

16 The seventh defendant filed five affidavits in opposition to this application. The plaintiff objected to parts of four of these affidavits. In large measure the objections were that the paragraphs were irrelevant. All of the affidavits filed by the parties were intended to be used both in the s 247A application and the s 237 application. That being so, parts of the affidavit which were relevant to one application were not relevant to the other. That much was conceded by counsel for the plaintiff who was really concerned to highlight parts of the affidavits which were relevant to the present application. While acknowledging counsel's concerns it seemed to me unnecessary to strike out the offending paragraphs. They can simply be put to one side. However, there were a number of objections which, in my view, were properly made.

17 Turning first to the affidavit of Gerald Benjamin Ivory, sworn 22 March 2002, objection was taken to par 9. This paragraph sought to ascribe motives to Russell and the plaintiff for bringing these proceedings. The paragraph is nothing more than a statement of the deponent's belief as to the motives of the plaintiff and its officers and it should be struck out.

18 Complaint is made about par 20 and par 21 of the affidavit of the second defendant, sworn 22 March 2002. The first part of par 20 sets out the deponent's belief of the aims of the seventh defendant. As he is the chief executor officer of the seventh defendant, that part of the evidence is properly put by him. However, the last three lines of par 20 and all of par 21 impugn the motives of the plaintiff in bringing this application. These are matters of opinion and are not properly part of the evidence. All the words after "themselves" in the third-last line of par 20 and all of par 21 will be struck out.

19 Before dealing with the facts of the case it is appropriate to say something of the principles upon which an application such as this are to be determined. In Biala Pty Ltd v Mallina Holdings Ltd [1989] WAR 371, Rowland J dealt with an application brought under s 265B of the Companies (Western Australia) Code, a forerunner of the present s 247A. His Honour referred to a number of cases, including Re Augold NL (1987) 2 Qd R 297, Unity APA Ltd v Humes Ltd (No 2) (1987) BR 474, Quinlan v Vital Technology Australia Ltd (1987) 5 ACLC 389; Barrett Mines Ltd v Grants Patch Mining Ltd (1988) 1 Qd R 606 and Intercapital Holdings Ltd v MEH Ltd (1988) 13 ACLR 595. Based upon these decisions his Honour set out a number of principles governing the approach to the section (at 373). They are as follows:

"(a) The discretion conferred on the Court is a broad one, fettered only by the requirements that the member be 'acting in good faith' and that the 'inspection is to be for a proper purpose' (Augold at 309; 371).

(b) Whether or not a shareholder is acting in good faith and for a proper purpose are questions of fact to be determined according to the circumstances in each case (Humes at 479; 652).

(c) The Court must look at the purpose of the inspection in an objective sense and at the applicant's state of mind in a subjective sense (Augold at 309; 371).

(d) The onus is on the applicant to establish that he is acting in good faith and that the inspection is for a proper purpose. If the applicant is a substantial shareholder of long standing those facts in themselves may well be sufficient to discharge the onus (Quinlan at 393; Barrack per Ryan J and Intercapital at 601).

(e) The section clearly operates where the applicant member has some specific or personal right which could only be protected by the making of an order. Examples are where the member contemplates proceedings pursuant to s 320 of the Companies Code or proceedings within the exceptions to the rule in Foss v Harbottle [1843] EngR 478; [1843] 2 Hare 461 (Augold at 308-309; 370-371; Humes at 478-479; Barrack at 613; 636). Other examples are where the shareholder reasonably takes the view that a transaction could adversely affect his investment in the company and he seeks to investigate whether he should try to prevent the transaction being completed or, where the transaction has been completed, whether he or the company should seek damages or compensation for wrongful acts associated with the transaction (Intercapital at 601-602).

(f) The right of inspection with leave of the Court under the section should not be regarded as affecting the basic rule of company law that a shareholder ought not ordinarily have recourse to the courts to challenge a managerial decision made by or with the approval of its directors (Augold at 308-309; 370-371; Humes at 478-479; 651-652; Barrack at 613; 636).

(g) Since every shareholder has a right to apply under the section for an inspection order, it is no answer to an application that if an order is made the applicant may acquire information not available to other shareholders and thereby be in a more advantageous position than those shareholders (Humes at 480; 653).

(h) If the applicant's primary or dominant purpose is a proper purpose, it is not to the point that an inspection may be of benefit to the applicant for some other purpose (Humes at 480; 653; Barrack at 615-616; 638-639)."

20 (His Honour included a further par (i) which related particularly to s 265B of the Code. This principle, to do with who may inspect the books of the company, is not relevant when considering s 247A.)

21 None of the parties to this application took issue with these basic principles. The real dispute centred around what was meant by the requirement that the plaintiff's application be made in good faith. This, too, was an issue in the Biala decision. His Honour at 397 adopted the test formulated by Booking J in Intercapital Holdings Ltd and expressed in this way (at 601):

"Whether a reasonable shareholder ... could take the view that his investment in the company may be adversely affected by the transaction ... and could take the view that he wished to investigate the question whether he should try to ... endeavour to cause legal proceedings to be taken whereby [the company] may in appropriate circumstances recover damages or compensation for wrongful acts."

22 His Honour went on to express the view that he had some difficulty with the idea of "a reasonable shareholder". His Honour said (at 379):

"Experience sitting in this Court indicates that many shareholders are completely disinterested in the conduct of the affairs of their companies and accept, without apparent demur, the most extraordinary conduct from some directors."

23 His Honour applied the reasonable shareholder test, suggesting that such a person was "one who does take an interest in the affairs of the company". With respect, that seems to me to be the proper test.

24 The argument between the plaintiff and the seventh defendant on this application revolved around the proper approach to the question of good faith in the context of the application. On behalf of the plaintiff it was submitted that as an application under s 247A was independent of any application under s 237 the test of good faith was to be determined without any consideration of the merits of any s 237 application. Counsel for the seventh defendant took a wider view. His submission was to the affect that the bona fides of the plaintiff could only be determined upon a consideration of all of the facts and that necessarily included facts which would be canvassed again on any s 237 application. In other words, counsel submitted that there was a considerable overlap between the sections. Counsel submitted that the approach adopted by the plaintiff was too restrictive and separated applications brought under each section in a way which was unfair and unrealistic.

25 On balance, I am satisfied that the approach adopted by counsel for the seventh defendant is preferable. Although s 237 and s 247A stand alone they are interrelated. An application might be made under s 237 without a party first seeking an order to inspect the companies books under s 247A. Equally, a party may apply under s 247A before issuing any proceedings under s 237 and after inspecting the books, may decide not to proceed further. Given the separate and distinct nature of the two sections, I think it is proper to approach an application under s 247A without regard to s 237. That may mean that matters that are canvassed on the s 247A application are dealt with again when and if an application is made under s 237. While that may be unfortunate and inconvenient, it is an inevitable consequence of the way the legislation is structured. In my view it would be unreasonable to limit the scope of a good faith enquiry under s 247A just because proceedings have already been issued under s 237.

26 Turning to the facts, the plaintiff's position can be put by summarising the evidence of Russell to be found in his affidavit sworn 17 January 2002. The plaintiff and associated interests hold just over four million shares in the seventh defendant. The seventh defendant was incorporated on 13 December 1990. Its then stated business objects were to locate, mine and sell alluvial diamonds. Russell notes that on 26 September 2001 the seventh defendant advised the Australian Stock Exchange that its principle object would change to sourcing diamonds from kimberlite deposits and tailings dumps.

27 The first, second and third defendants are presently directors of the seventh defendant. The second defendant is its managing director. He was appointed to that position on 12 July 2001. Prior to that date he was a consultant to the seventh defendant. The fourth, fifth and sixth defendants have been but are not now directors of the seventh defendant, their directorships in the case of the fourth and fifth defendant terminating on 12 July 2001 and in the case of the sixth defendant, on 29 November 2001.

28 Namakwa Diamonds Company NL ("NDC") is a diamond exploration and mining company with mining interests in Namaqualand on the south-west coast of South Africa. NDC floated on the Australian Stock Exchange on 15 March 2001. On that same day the seventh defendant made a takeover bid for NDC. The bid was hostile and it was rejected by the board of NDC. It referred the matter to the Corporations and Securities Panel ("the Panel"). The Panel made a determination on 15 May 2001 and found that the bidders statement was, in some respects, defective. It required the seventh defendant to issue a supplementary bidder's statement. This was done and posted to the offerees on 4 May 2001. In the event acceptances for the takeover offer did not meet the minimum acceptance level by the extended closing date and the bid lapsed.

29 Prior to making the takeover bid the seventh defendant had acquired approximately 17.8 per cent of the ordinary capital of NDC. After the failure of the takeover bid, these shares, it would seem, were superfluous to the seventh defendant's requirements. The seventh defendant proposed to NDC that NDC buy back these shares at a price of 23 cents per share. Agreement to this effect was reached between NDC and the seventh defendant in or about July 2001. The share buy-back proposal required approval by a special resolution of shareholders of NDC pursuant to s 257D of the Corporations Act. In or about August 2001 NDC commissioned Ernst & Young to prepare an independent report in connection with the proposed buy-back.

30 On 2 October 2001 the seventh defendant received an advance copy of the Notice of General Meeting of NDC which included the report of the independent consultant. The consultants concluded that the buy-back price was fair but not reasonable. Based upon that report the directors of NDC recommended that the shareholders not approve the special resolution. The directors of the seventh defendant concluded that faced with the independent expert's report, there was no chance of the special resolution being approved. They decided not to wait. The seventh defendant's shareholding was sold on market for 11 cents per share. Russell makes the point that the price compares unfavourably with the 23 cents per share which was to be paid if the share buy-back proceeded.

31 I should note, for the sake of completeness, that appearing as annexure "RJR12" to the affidavit of Russell is a document entitled "Investor Information". Then in a section headed 'Frequently Asked Questions from the Sale of the 9 million Numakwa Diamonds Company NL ("NDC") shares on the 12 October 2001' ". This is a document which was posted on the seventh defendant's website and attempts to detail events surrounding the abortive share buy-back arrangement. Although the facts contained in the memorandum do not differ significantly with the facts set out by Russell in his affidavit, it is fair to say that there is a difference in emphasis between the two versions. Perhaps not surprisingly the version offered by the seventh defendant is benign, suggesting the directors acted in the best interests of the company and that there were no sinister overtones in the transaction. When assessing the evidence in this matter I have balanced Russell's version of events with what is said by the seventh defendant in that memorandum.

32 Of particular concern to Russell in relation to the takeover bid is the role of a company known as Rumsey Holdings Ltd ("Rumsey"). Quite what the relationship was between Rumsey, the fourth defendant, the second defendant and the seventh defendant is unclear. The Panel found that the second defendant was a substantial shareholder in Rumsey and its authorised representative in Australia. What is clear is that on 19 May 2001 Rumsey sold just over six million shares in NDC to an undisclosed purchaser. This purchaser announced that it would not accept the seventh defendant's bid for NDC. That effectively scuttled the proposed takeover. Russell has been unable to ascertain who is the controlling mind, and the shareholders, of Rumsey - it is a company registered in Jersey in the Channel Islands. None of the affidavits filed in opposition to the application deal with this issue.

33 The second matter raised by Russell has to do with what he described as "Majestic's change of strategic direction". As I have noted above, the seventh defendant's stated principal objectives when it was registered were to locate, mine and sell alluvial diamonds. This remained the company's stated position up until an announcement on 19 October 2001. That announcement made to the Australian Stock Exchange was to the effect that the seventh defendant was reducing dependence on alluvial diamonds and moving towards sourcing diamonds from kimberlite deposits. This change of strategic direction has meant that the seventh defendant abandoned two alluvial projects known as the Pniel Estate project and the Orange River project. With respect to the Pniel Estate project, the seventh defendant installed and commissioned a plant and made a number of optimistic announcements about the production from the project. The Orange River project was in an earlier state of development and it is not entirely clear from the evidence what work had been undertaken. Nonetheless, a considerable amount had been spent by the seventh defendant in assessing the project. With the abandonment of these two projects, Russell says that he believes the seventh defendant will incur significant losses. He also says (at par 47):

"It appears that the change in strategic direction of Majestic has principally been motivated by the losses suffered by Majestic as a result of its involvement in the agreement with Gateway referred to below; the failed bid for NDC; and the subsequent divestment of shares by Majestic, which has used the cash which would otherwise have been used for such projects as the Pniel Estate and Orange River mining projects, which have now been abandoned."

34 There is no direct evidence to support any of these claims. In other words, it is not clear from the evidence that the three matters referred to have resulted in a diminution of available cash which has in turn led to the abandonment of the two mining projects. But I would accept that it is at least arguable that this is what has occurred. I would put the position no higher than that.

35 The evidence of Russell in relation to the Gateway agreement can be summarised in this way. By agreement dated 11 August 2000, the seventh defendant agreed with Gateway Pacific Investments Ltd ("Gateway") that it would issue 6.6 million shares and 6.6 million share options and pay $100,000US to Gateway in return for Gateway involving the seventh defendant in several mining projects in South Africa and assisting the seventh defendant to set up mining operations in Angola. The issue of the shares and options pursuant to this agreement was subject to approval by shareholders at an annual general meeting of the seventh defendant held on 7 December 2000. The notice of that general meeting had attached to it an explanatory statement which gave some details about the Gateway agreement. In essence, the shares and options were to be issued when certain specified milestones were met. No detail was given about Gateway and it was certainly not suggested that the agreement itself was a related party transaction. The annual general meeting authorised the directors to issue the shares and options in line with the Gateway agreement.

36 Russell says at the next annual general meeting of the seventh respondent on 29 November 2001 the third defendant, in his capacity as a director of the seventh defendant advised the meeting that the mining project in Angola had been "put on hold". Russell, through his solicitor, asked a series of questions about whether the milestones had been achieved. These questions were taken on notice. Subsequently, by letter of 20 December 2001, solicitors for the seventh defendant advised Russell that a total of 5.45 million shares and 9.45 million options had been issued to Gateway in connection with the Gateway agreement. Quite why the 9.45 million options should have been issued to Gateway when the agreement anticipated the issue only of 6.6 million option is unexplained by the evidence.

37 By a convertible note deed dated 29 January 2001 between Kursk Ltd ("Kursk") as trustee and the seventh defendant, the seventh defendant issued a convertible note with a face value of $6 million. It was through this convertible note that funds were raised to pursue the alluvial mining projects such as Pniel Estate and Orange River. As a consequence of discussions between the fourth defendant and Russell, Russell understands that between one million and two million options in the seventh defendant were issued to Kursk as a fee for undertaking the role of trustee of the convertible note. Russell was concerned to ensure that there was no relationship between the directors of the seventh defendant and Kursk. A number of questions were put to the directors on this issue by the plaintiff's solicitor at an AGM of the seventh defendant. The directors declined to answer any questions. The convertible note shows Kursk with an address in the Channel Islands. A search undertaken in the Channel Islands has failed to find any trace of Kursk. It also appears not to be a company registered in Australia.

38 Russell also refers to nominations made by him to have himself and two associates elected to the board of the seventh defendant at a meeting held on 29 November 2001. Russell was advised that these nominations were not supported by major shareholders and they were eventually withdrawn. It is difficult to see how this matter is relevant to the present application, although it may indicate that Russell has no prospect of being appointed a director of the seventh defendant and consequently being entitled to inspect the books. The failure of Russell to achieve a place on the board was highlighted by counsel for the seventh respondent and was said to be a factor in determining whether the application was made in good faith. I will return to this issue later in these reasons.

39 On 12 December 2001 the seventh defendant issued 11,978,031 shares and 5,989,016 options. This issue raised $718,682. The shares were issued at 6 cents per share. The seventh defendant has not disclosed who the allottees of the shares and options were. By implication at least, Russell regards this transaction as suspicious. There is nothing in the evidence which provides any basis for that suspicion.

40 Finally, Russell details what he says is the seventh defendant's refusal to provide certain information on request. Essentially this relates to a transcript of the proceedings at the 2001 annual general meeting. At the meeting the chairman advised that a transcript would be made available to members on request. Russell requested a copy of the transcript. The seventh defendant's solicitors responded that on further reflection they had decided that it would be inappropriate to make such transcript available. It is not entirely clear why that refusal should be seen as sinister.

41 It is worth pausing at this stage to make two points. First, there is, in my view, nothing in the affidavit material of Russell which could, in and of itself, lead to a conclusion that the application was made other than in good faith. If, for instance, the seventh defendant was thriving with a buoyant share price and with a clear consistent corporate strategy, the mere fact of an application might suggest a lack of good faith. That is not to say that a small speculative mining stock which undergoes a change of strategic direction and suffers reverses from time to time, leaves itself open as a matter of course to a s 247A application. But the evidence produced by Russell suggests that a reasonable shareholder could take the view that his investment in the company has been adversely affected by certain transactions and that he might wish to investigate to see whether legal proceedings might be appropriate.

42 Secondly, there is nothing in the evidence to suggest that the application is being made for an improper purpose. That is to say, it could not be suggested on the evidence of Russell, that the plaintiff is attempting to pressure the board of the seventh defendant into finding a purchaser for its shares or that it is simply a disgruntled shareholder looking to make mischief.

43 Of course, to this point I have only considered the plaintiff's evidence. But I think it is as well at this point to clarify where the plaintiff stands.

44 In his written submissions counsel for the seventh defendant suggested five distinct matters which, when taken together, showed that the plaintiff had failed to establish the requisites of good faith and proper purpose. With respect to counsel, these matters were succinctly stated in his submissions and I can do no better than quote and deal with each proposition in turn.

"(a) any suggestion that the plaintiff has a genuine concern about the way the company's affairs were conducted under Mr Wilde's chairmanship (June 1999 to July 2001) is dispelled by the uncontroverted evidence that Dr Russell supported Mr Wilde, was concerned about his departure from the board, and never once, in the period of his chairmanship, complained about the stewardship of the company."

45 Accepting that the evidence establishes that Russell did in fact support the fourth defendant and was never critical of his chairmanship, that does not seem to me to cast doubt on the plaintiff's good faith. The evidence of Russell and the fourth defendant make it plain that the two men were close associates and that Russell did trust the fourth defendant's judgment. Although Russell does not address this question directly in his evidence, there is no reason why, on reflection, he could not have changed his mind about the conduct of the seventh defendant's affairs during the period when the fourth defendant was chairman. Such a change of heart could hardly be regarded as showing a lack of good faith. Nor does it suggest the present application is not for a proper purpose.

"(b) the plaintiff's motivation in making complaints against the new board is better explained by his failed attempts to join the new board, than by any concern that the new directors may have breached their duty to the company. In this regard:

(i) the plaintiff was obviously antipathetical to the new board from the outset, and was concerned with the replacement of Mr Wilde and Mr Bell;

(ii) Dr Russell was clearly slighted by the new board not recommending his appointment to the board, and in having to withdraw his board nominations at the AGM at the last minute;

(iii) the principal complaint seems to be that the new board proposes to source diamonds from kimberlite deposits rather than from alluvial production. That of course, is the kind of decision which is quintessentially a matter of business judgment, for the board and the board alone, to exercise. Moreover, according to the plaintiff's own evidence, the decision was based on poor results from commissioning. Nor does the plaintiff suggest, let alone adduce evidence to the effect, that kimberlite mining is or will be unprofitable."

46 Once again, I cannot see how any of these matters show a lack of good faith on the part of the plaintiff. It may be that Russell is concerned about his failed attempt to join the board and that he is antipathetical to the new board. It may be that Russell has doubts about the strategic direction of the board. But none of that, without more, could be translated into a finding that this application is not made in good faith.

"(c) the plaintiff rejected the company's open proposals that the plaintiff meet with directors of the plaintiff to discuss any issues the plaintiff may wish to raise, and that a senior counsel be appointed to investigate any potential claims."

47 Over a period of time, correspondence passed between the plaintiff's solicitors, the seventh defendant and their solicitors regarding the plaintiff's concerns about the running of the seventh defendant. Most of this correspondence dealt with matters raised by Russell in his affidavit and to which I have already referred. By letter dated 21 January 2002 the seventh defendant's solicitors wrote to the plaintiff's solicitors making certain suggestions as to how the plaintiff's concerns might be addressed. This letter appears as part of annexure "NHB1" to the affidavit of Nicholas Henry Brown sworn 22 March 2002 in opposition to the application. Relevantly, the letter reads as follows (page 50-51 of Brown's affidavit):

"In a further effort to convince your client that its proposed application under section 237 is misconceived, we are instructed to make the following open offer to address your client's concerns:

1. Our respective firms would jointly brief Senior Counsel to investigate the claims made by your client and advise whether in his opinion:

(a) there is a serious question to be tried in relation to all or any of those claims; and

(b) it is in Majestic's best interests that proceedings be brought in relation to any claims in respect of which there is found to be a serious question to be tried.

2. In assessing (b) above, Counsel would be instructed to have regard to all relevant factors, including the quantum of damages likely to be awarded compared to the cost to Majestic of bringing the proceedings.

3. The issues that Counsel would be instructed to investigate would be limited to the matters raised in your letter to us of 24 December 2001.

4. Majestic and your client would each have the opportunity to make written submissions to Counsel (with each side being given the opportunity to review the other's submissions to verify their factual accuracy), and Counsel would be given full access to the company's books and records in undertaking his investigation.

5. Regardless of the outcome, Counsel's fees would be borne by Majestic and your client in equal proportions."

48 Essentially what is said by the seventh defendant is that the failure of the plaintiff to accept this offer shows a lack of good faith. The plaintiff's response was to say that the difficulty with the offer is that the plaintiff would not be able to look at the seventh defendant's books before making its submissions. As counsel said, the plaintiff would be fighting with one hand tied behind its back. It would be in a far inferior position to the seventh defendant and would not, in all probability, be able to make any meaningful submissions to the independent counsel.

49 In my view there is much in what the plaintiff says. I certainly could not conclude that the failure to accept this offer from the seventh defendant shows a lack of good faith.

"(d) the plaintiff also rejected attempts by the company to define the scope of the documentary material which might be produced and the company's offer to permit investigation of certain classes of documents on the basis that the documents not be produced to Dr Russell himself. In this regard no legitimate purpose is served by the plaintiff seeking to insist on inspection by Dr Russell. If in truth, the nature of the proposed inspection is, effectively, a forensic investigation, Dr Russell will add nothing to the forensic team proposed by the plaintiff's solicitors of Mr Dundo (a partner in the corporate area), Mr Crabb (a litigation partner), Mr Hargreaves (senior litigation solicitor)."

50 The application under s 237 and s 247A was issued on 11 January 2002. On 19 February 2002 the seventh defendant's solicitors wrote to the plaintiff's solicitors putting a proposal which would obviate the need for the s 247A application. It said (pages 66-67 of Brown's affidavit):

"Our client believes that the proposal set out below goes beyond any order your client would obtain if successful in its section 247A application. Apart from a saving in costs, the other benefit which our client considers will be achieved by making the documents available to you is that it will assist in illustrating that your client's allegations are without foundation."

51 The letter then goes on to specify two particular classes of documents which would be made available for inspection. These were the non-privileged documents related to the takeover bid for NDC and the subsequent divestiture of its NDC shareholding. Paragraph 2 of the proposal states the documents relating to the ownership of Rumsey, the beneficial ownership of Kursk and the beneficiaries under the Gateway agreement are not in its possession or under its control. The letter then referred to the Pniel Estate project and the Orange River project and commented that it was unclear what documents were sought and suggested in any event such documents would not be available for inspection. The letter then specified the individuals from the plaintiff's solicitors who might inspect these documents. No mention was made of Russell.

52 The plaintiff's solicitors responded by letter dated 25 February 2002 (pages 70-71 of Brown's affidavit). They sought to have Russell included as an individual who would be permitted to inspect the documents. It is now said that in inquiring that Russell have access to the documents, the plaintiff is shown not to be acting in good faith.

53 I cannot accept that proposition. Russell is the moving hand of the plaintiff. While he may have no specialised knowledge of diamond mining, he has responsibility for the decisions made by the plaintiff. It is he who bears the ultimate responsibility for determining whether or not the plaintiff will take action. That being the case, it seems to me that there is no good reason why Russell should not be permitted to view these documents. Certainly the plaintiff insisting that Russell be allowed inspection could not, in my view, show a lack of good faith on the part of the plaintiff.

"(e) the plaintiff's avowed motive that it proposes to seek redress on behalf of the company is inconsistent with its indication that it seeks to divest its interest in the company. Also, it does not appear that the plaintiff has attempted to garner any support for his action from other shareholders of the company, which one would have expected he would have done if he was concerned about the position of the company as a whole."

54 With respect, neither of these two matters seem to me to show a lack of good faith. It may be that the plaintiff is attempting to sell its shares in the seventh defendant but there is no reason why it cannot take that course and, in and of itself, that cannot demonstrate a lack of good faith. The fact that the plaintiff has not attempted to garner shareholder support is of no significance. The right provided by s 247A is a right which rests with the plaintiff. It is not dependent on something in the nature of a class action.

55 During the course of his submissions counsel for the plaintiff produced document titled "List of Documents Sought by the Plaintiff Pursuant to Section 247A of the Corporations Act." This list is extensive and covers a wide range of documents, many of which have not been mentioned in the correspondence. Counsel for the seventh defendant submitted that the sheer width of the list was itself an indication of a lack of good faith. It was said that to seek production of such a wide range of documents was evidence that the plaintiff was fishing.

56 Perhaps surprisingly, s 247A does not give to the Court the power to limit what books of the company are to be available for inspection if an application is successful. Section 247A(1)(a) allows the Court to make an order authorising the applicant to inspect "books of the company". The definition of "books" in s 9 is said to include (but presumably not limited to) "any ... record of information" and "financial reports or financial records, however compiled, recorded or stored" and documents. Section 247B of the Act covers ancillary orders and allows the Court to limit the use that a person who inspects the books may make of the information obtained during the inspection and limiting the right of a person who inspects the books to make copies. But there is no express power to limit the books that may be inspected. This stands in contrast to the provisions of s 265B of the Corporations (Western Australia) Code. Under s 265B(1)(c) the Court could authorise inspection of "such of the books of the company as are specified in the order". The fact that that provision has been removed suggests that the legislature intended that once an order was made for inspection of the books it should be open-ended.

57 Because the list of documents was produced by counsel for the plaintiff only during the course of his submissions, I reserved to counsel for the seventh defendant the right, if I made an order authorising inspection of the books, to make submissions as to the extent of that order. I will, of course, afford counsel that opportunity. However, I am by no means convinced that I have power to limit the scope of the inspection. That being the case, I cannot see that the fact that the plaintiff seeks access to a wide range of books as being a factor which could show a lack of good faith.

58 In summary then I am satisfied that this application is brought in good faith and for a proper purpose. Accordingly I will make an order allowing inspection under s 247A. In line with my advice to counsel I will hear further submissions as to the form of the order that should be made and as to costs.