CONSIDERATION
87 The question that arises is whether Ms Chen has established that she is acting in good faith and has a proper purpose in seeking the inspection. The proper purpose must be a primary purpose and must be established in relation to each category of document sought.
88 Ms Chen submitted that she had three concerns as a minority shareholder.
89 First, there has been a material lack of information shared by Ms Xuan as the sole director (and majority shareholder) and that lack of current information about the business activities of Ginza Beauty, relevant to the valuation of Ms Chen's shareholding, means she is not in a position to fairly seek to sell her shares based on the fair value to be attributed to them.
90 Secondly, there has been inconsistent information concerning the need for further capital investment, the undisclosed incorporation of a company with a similar name and the apparent misuse of Ginza Beauty's trading get up which has led Ms Chen to believe that there is a risk that Ms Xuan may have misused her position as the sole director and controller of Ginza Beauty to divert commercial benefits away from Ginza Beauty and its shareholders to Lumiere Cosmetic Pty Ltd, possibly in breach of her directors' duties owed to Ginza Beauty and with the real risk of a material and adverse effect on the value of her shares in Ginza Beauty.
91 Thirdly, because of the apparent operation of a competing beauty salon which, to date, Ginza Beauty has shown no interest in restraining from using the Lumière Cosmetic get up, there is a real risk that Ginza Beauty will take no action given Ms Xuan is its controlling mind.
92 Ms Chen submitted that, as a shareholder of a private company, she has real and justified concerns affecting her investment, each of her concerns are bona fide and, objectively viewed, reasonably held. Ms Chen contended that she seeks the books in the schedule to understand the conduct of Ginza Beauty, as well as to gain access to information to fairly value her shares. Ms Chen submitted that if she obtained access to the books in the schedule she would use them for at least one of the following purposes:
(1) to properly value her shareholding in Ginza Beauty and seek orders buying out her shareholding for fair, undiluted value;
(2) to further investigate whether Ms Xuan has acted in breach of her directors' duties to Ginza Beauty, so as to consider bringing a potential derivative action by Ginza Beauty which, on present information, seems unlikely to be pursued by current management;
(3) to consider a potential oppression proceeding, if she is unable to be bought out for fair value; and/or
(4) to bring a proceeding for the winding up of Ginza Beauty on just and equitable grounds.
93 Ginza Beauty submitted that Ms Chen's case failed at the threshold question of proper purpose.
94 Ms Chen's subjective purpose in seeking the documents in the schedule is as set out above. As the Full Court observed in Enares at [42] "seeking inspection of documents in order to ascertain whether there has been a breach of a directors' duty or whether oppressive conduct has been engaged in, is self-evidently within the scope of a proper purpose". However, Ms Chen must establish that she is pursuing the stated purpose in good faith. In doing so Ms Chen must establish a reasonable basis or foundation for the purposes for which she asserts she seeks inspection. Put another way, she must establish a "case for investigation". In ascertaining whether that is so there must be a "more granular analysis" of whether there is an objective basis or foundation for Ms Chen's concerns.
95 I will address each of Ms Chen's stated concerns and purposes for inspection in turn.
96 The first concern and purpose for her inspection raised by Ms Chen is that she is unable to ascertain a fair value for her shares given the information vacuum. However, there is no evidence before me, beyond Ms Chen's mere assertion, to objectively establish that to be the case. Financial information was provided to Ms Chen prior to commencement of this proceeding. Ms Chen raised concerns as to its adequacy which Ms Xuan attempted to address. In addition after commencement of the proceeding and, indeed, right up to the second day of hearing, further financial information was provided by Ginza Beauty to Ms Chen.
97 Mr Yang, Ms Chen's accountant, reviewed the first tranche of documents provided by Ginza Beauty in August 2021 for the purpose of explaining its financial situation to Ms Chen. He gave evidence to the effect that he would require further documents, beyond those provided at that time, in order to do so. However, Mr Yang is not a valuation expert and he was not asked to attempt to value Ms Chen's shares in Ginza Beauty nor to comment on whether the documents provided were sufficient for that purpose and, if not, what further documents were required. Mr Yang's analysis was to be a precursor to any decision by Ms Chen to obtain a valuation.
98 Similarly, Mr Mullins was not asked to undertake a valuation of Ms Chen's shares in Ginza Beauty or to assess the adequacy of the documents provided for that purpose or to identify the types of documents that may be needed for such a valuation. He was asked to assess the documents provided by Ginza Beauty, to identify any inconsistency in them and to consider the categories of documents sought in the schedule and whether they were required to assess Ginza Beauty's financial status.
99 In support of her concerns about the valuation of her shares, Ms Chen referred to the conversation between Mr Chen and Ms Xuan on 19 November 2021 (see [49] above) where Ms Xuan deposed that "COVID [had] significantly affected [Ginza Beauty]" and the subsequent offer made by Ms Xuan on 25 November 2021 (see [51] above) to buy out Ms Chen's shares for $200,000 lower than her husband's offer. Ms Chen submitted that this underscores the relevance and need for current financial information some 12 months later so that she can fairly value her shares. She contended that obtaining the financial and other related books as sought, in order to value her investment, is plainly a proper purpose. Ms Chen submitted that: while she has not asked a valuer to attempt a valuation with the documents disclosed, the factual evidence shows that valuation of her shares is an issue in play between the parties; and, given Mr Mullins is a valuer, his evidence that the documents produced to date are not sufficient is "enough and sufficient" for a proper basis to be established for the making of an order under s 247A of the Corporations Act.
100 That there was a disagreement about the value of Ms Chen's shares as part of a commercial negotiation as at November 2021 does not underscore the relevance and need for the books and records sought. There is no evidence of any further discussion of negotiation or of an impasse reached because of a lack of information permitting valuation. Insofar as Mr Mullins' evidence on this topic is concerned, I refer to my observation above (see [98] above). Mr Mullins has simply not considered the sufficiency of the documents provided to date for the purposes of carrying out a valuation.
101 In those circumstances I am not satisfied that Ms Chen has established a proper purpose in seeking the documents in the schedule in order to undertake a valuation of her shares in Ginza Beauty. Beyond her mere assertion of an intent to do so there is no objective evidence to support either a reason for her doing so or that she has taken any steps to secure a valuation including by obtaining an understanding of the documents required to obtain such a valuation and whether those sought in the schedule would assist in that purpose.
102 Ms Chen's second concern and stated purpose for access to the documents in the schedule is because she has perceived that there has been inconsistent information about the need for further capital investment, the undisclosed incorporation of Lumiere Cosmetic Pty Ltd and because of the apparent misuse of Ginza Beauty's trading get up. As a result of these things Ms Chen believes that there is a risk that Ms Xuan may have misused her position as the sole director of Ginza Beauty to divert commercial benefits away from it and its shareholders to Lumiere Cosmetic Pty Ltd. She seeks the documents in the schedule in order to further investigate whether Ms Xuan has breached her directors' duties and to consider whether to bring a derivative action on behalf of Ginza Beauty.
103 Ms Chen's suspicion in relation to misuse of Ms Xuan's position as a director appears, for the most part, to be based on the fact that Ms Xuan is a shareholder, director and secretary of Lumiere Cosmetic Pty Ltd. When asked about the proposed derivative action to be taken on behalf of Ginza Beauty against Ms Xuan, Ms Chen agreed that she did not know of any facts based on which she thought that Ms Xuan had done anything wrong. In other words the possibility of a derivative action seems to be purely speculative based only the existence of Lumiere Cosmetic Pty Ltd and no other supporting facts. True it is that Ms Xuan did not disclose the existence of Lumiere Cosmetic Pty Ltd, which has the same name as the business carried on by Ginza Beauty. However, Ms Xuan's unchallenged evidence was that she incorporated Lumiere Cosmetic Pty Ltd to hold intellectual property as part of a corporate restructure which was not implemented and that it has never traded.
104 In addition, in their letter dated 10 November 2021 to AHD, Yingke Law stated (as written):
In conjunction with our instructions that the employees the Company at the Lumière Cosmetic Clinic (at Shop 2, Ground Floor/389 Sussex St, Haymarket NSW 2000) may have been working in other competitors of beauty salons that are within the control of Ms Xuan, we have basis to suspect that Ms Xuan has been utilising her position and resources as the sole director and controller of the business to gain commercial benefits for the shareholders other than the Company's.
105 There was no evidence before me to support this assertion nor was it put to Ms Xuan in cross-examination. In their letter in response dated 2 February 2022 AHD stated that:
In relation to the issue of employees working at competing business, we are instructed that the director is only aware of 1 former employee (who has since left the business), who is working in a cosmetic business and is based in the Fairfield area. We're instructed that this employee has maintained a good relationship with the Company and who has historically provided a number of business referrals to the economic benefit of the Company. The Company is not concerned about any unfair competition regarding that particular employee however it would assist our consideration of any relevant advice to be provided to the Company that your client substantiate any allegation of breach of duty with more evidence than an ASIC search of another company, and identify what, if any, is her knowledge of any of the alleged conduct.
106 There was no evidence of any further correspondence between the parties in relation to this issue. AHD's letter quite clearly states that Ms Xuan is only aware of one former employee who works in a salon located in a different area of Sydney. There is no evidence that Ms Xuan has any interest in that or any other competing business.
107 The only other matter raised is Ms Chen's perception that there has been inconsistent information about the need for further capital investment in Ginza Beauty. No explanation was provided about the nature of the inconsistency. In any event, the evidence about the request for further capital investment is clear. In summary: Ms Xuan raised the requirement for a capital investment on 17 August 2021 to cover expansion costs of Ginza Beauty's business, including renovation costs for level 2, 389 Sussex Street; at Ms Chen's request Ginza Beauty provided financial information to assist Ms Chen in making her decision about whether to make any further investment and there was an exchange of correspondence between Mr Yang and Mr Ye about the documents provided; on 8 October 2021 at the Second Shareholders Meeting a resolution for the issue of 1,000 new shares to existing shareholders by application on a pro rata basis to raise $250,000 was discussed; subsequently the Notice of Offer was sent to Ms Chen inviting her to subscribe for 111 of the 1,000 new shares to be issued by Ginza Beauty at $250 per share (or a total of $27,750); and Ms Chen did not take up that offer.
108 I am not satisfied that Ms Chen has established a proper purpose insofar as she contends that Ms Xuan may have breached her duties owed as a director to Ginza Beauty either because of the provision of inconsistent information in relation to the need for a further capital investment or because of the registration of Lumiere Cosmetic Pty Ltd.
109 Ms Chen's third stated purpose for inspection of the books and records in the schedule is to consider a potential oppression proceeding. This seems to arise from the dilution of Ms Chen's shares which followed from Ms Chen failing to accept the Notice of Offer and to invest in the capital raising. Given that Ms Chen was offered and is entitled to 111 shares at $250 per share, the value of the dilution in her shareholding is known.
110 Further, as Ginza Beauty submitted, three years of financial records were provided in August 2021 well before the deadline for the response to the Notice of Offer. Ms Chen's subjective belief that the information provided at that time was insufficient to make a decision whether to invest does not mean that there was oppressive conduct and Ms Chen did not adduce any expert evidence to the effect that the information provided at the time was insufficient to make a reasonable decision about whether she should invest. The evidence led is that the information was insufficient for Mr Yang to provide a report on the financial status of Ginza Beauty as he was unable to verify some of the reports from source material. Mr Mullins' evidence identified inconsistencies in the information provided and whether the documents sought in the schedule were necessary to provide a report on the financial status and/or performance of Ginza Beauty.
111 In any event, to the extent that by the schedule Ms Chen seeks the inspection of documents dated after the Notice of Offer, those documents cannot be relevant to the decision to invest in October 2021 and thus to an oppression suit based on the events leading up to the Notice of Offer. There is, as Ginza Beauty submitted, simply no rational connection between such documents and a proposed oppression proceeding based on the Notice of Offer and the investment decision.
112 Once again, I am not satisfied that Ms Chen has established a proper purpose insofar as she contends that she wishes to inspect the documents in the schedule because she is considering the possibility of an oppression suit.
113 The final purpose is to consider whether to bring an application to wind up Ginza Beauty on the just and equitable ground. Ms Chen gave no evidence about why the documents sought in the schedule were required for this purpose or about the basis on which such an application would be brought, having regard to the events which have passed, and how the documents in the schedule relate to it. But assuming that relief of this nature would be sought as part of either a derivative action or an oppression suit, my comments above apply equally.
114 It follows from the matters set out above that I am not satisfied that Ms Chen has established a proper purpose by reference to any of the matters of concern and reasons for inspection of the documents in the schedule that she raises. She has not established a reasonable basis or foundation for the purposes for which she asserts she seeks inspection of the additional documents. As set out above, the proper purpose must be established in respect of each category of documents sought. Ginza Beauty's submission, which I accept, is that the correct test is whether there is a proper purpose for the additional disclosures sought and not whether there is a proper purpose to "inspect the books at large".
115 For those reasons I would dismiss the application. However, noting that the Court has a residual discretion under s 247A of the Corporations Act, even if I am wrong in my conclusion that Ms Chen has not established the composite preconditions specified in s 247A of the Act, I would not make the orders sought by her.
116 In Enares at [49]-[50] the Full Court said the following about the residual discretion:
49 The parties did not dispute that once the court is relevantly satisfied that the applicant is acting in good faith and that the inspection is to be made for a proper purpose, the discretion in s 247A is enlivened. Nor was it contested that the touchstone of the exercise of that discretion is what the company ought to tell its shareholder. …
…
50 In the absence of any detailed submissions as to the nature of the residual discretion in s 247A, as opposed to the formation of the state of satisfaction that the applicant is acting in good faith and that inspection is to be made for a proper purpose, it is not appropriate to consider the question further. However, the structure of the section might suggest that once the required degree of satisfaction is reached the discretion to refuse the order might be constrained by that fact. It might be said that the discretion is one to be exercised in all the circumstances of the case, and that the applicant's satisfaction of the requirements of the subjective jurisdictional fact of s 247A is likely to be a not insignificant part of those circumstances.
117 Having regard to all of the circumstances of this case, a powerful factor against exercise of the discretion is that, as set out at [54]-[55] above, Ginza Beauty has made substantial disclosure to Ms Chen, comprising not only financial statements but also individual ledger entries for all accounts between July 2018 to July 2021, for bank statements and employment information for shareholder employees. While some of the material was only provided after commencement of the proceeding, that is a matter that ultimately would, in my view only, go to costs.