Darambazar v Kara Minerals Ltd

Facts 3 The plaintiff is a shareholder of Kara Minerals. 4 The plaintiff wishes to inspect the books and records of Kara Minerals for the purpose of further informing himself of the prospects of success of a cause of action against Craig McGuckin and Peter Youd, respectively, a director and former director of Kara Minerals. 5 The relevant documents comprise one or two standard archive boxes. 6 Kara Minerals is in voluntary liquidation, following the appointment of Mr Kimberley Wallman ("Mr Wallman") as voluntary liquidator of Kara Minerals, pursuant to s 495(1) of the Act, on 10 February 2014. Mr Wallman did not oppose the application. 7 The application was supported by an affidavit of the plaintiff made 12 February 2016 and an affidavit of his solicitor, Mr Tan, sworn 3 March 2016. 8 By deed of assignment dated February 2016, Kara Minerals assigned to the plaintiff, in consideration of the sum of $5,000, all claims that Kara Minerals has against its Board and/or directors. It is a condition precedent to the assignment that this Court makes an order for the inspection of the books of Kara Minerals by the plaintiff. 9 The plaintiff believes that Mr McGuckin and Mr Youd have breached their duties to Kara Minerals and caused Kara Minerals financial loss. The liquidator does not wish to pursue any action against those directors. 10 The plaintiff gave evidence of his belief that there is likely to be a good cause of action against Mr Youd and Mr McGuckin for breach of their duties as directors. His stated concerns are: (a) Mr Youd and Mr McGuckin arranged for Kara Minerals to abandon its mining activities in Mongolia because of investment uncertainty at the same time as they were promoting Mongolia as an excellent investment location in a separate company, Mongolian Resources Ltd, established by them; (b) Mr Youd and Mr McGuckin arranged for Kara Minerals to pay its management and associates significant fees during the time that projects were being investigated in Mongolia, even though nothing came of this work and no assets were acquired; (c) Mr Youd and Mr McGuckin arranged for Kara Minerals to pursue Philippines mining opportunities instead of opportunities available in Mongolia. The Philippines project was of a highly speculative and unusual nature, and should not have been proposed and adopted without detailed analysis and required evaluation; (d) Kara Minerals did not have enough ready funds to pursue the Philippines project even if all members were in agreement; and (e) Kara Minerals financial records as disclosed to the plaintiff are incomplete and do not document with any particularity where the company's funds went. 11 The plaintiff's concerns were based on the following allegations, about which the plaintiff gave evidence: Alleged conflict of interest - decision to curtail involvement in Mongolia (1) New shareholders invested in Kara Minerals on the basis that it intended to acquire tin and tungsten assets in Mongolia. About AUD$1.25m was invested in 14-26 March 2012. (2) About a year later, on 13 March 2013, a meeting of the board of directors was purportedly held in Western Australia. The plaintiff was a director at the time but was not in attendance. The board purportedly resolved that "all Mongolian spending and agreements be curtailed due to uncertainty relating to the foreign investment and mining laws and a lack of progress on the projects themselves". (3) At the time that this resolution was passed, Mr Youd and Mr McGuckin were also directors, executives and substantial shareholders of Mongolian Resources Ltd. A few months earlier, in December 2012, Mongolian Resources Ltd released a prospectus to raise money for mining in Mongolia. Page 5 of this prospectus states that "the directors believe the favourable geology, improving economy and developing mining industry, makes Mongolia an excellent investment location". (4) The plaintiff contends that Mr McGuckin and Mr Youd's decision for Kara Minerals to abandon investment in Mongolia because of investment uncertainty appears inconsistent with their promotion of Mongolia as an "excellent investment location". It gives rise to a perceived conflict of interest between their duties as directors of Kara Minerals and directors of Mongolian Resources Ltd. The plaintiff wrote to Mr McGuckin and Mr Youd making a number of complaints about the abandonment of the Mongolian operations. Mr Youd and Mr McGuckin paid excessive management fees for Mongolian investment (5) In the financial year ending 30 June 2012, Kara Minerals made a net loss amounting to $1,391,128. Notwithstanding this, over the same period Kara Minerals incurred $277,201 in accountancy and corporate fees and $258,167 in consultants' fees. Kara Mineral's net assets were $489,657. The plaintiff believes that administration expenses at the time were running at US$50,000 per month. (6) In late 2012, the plaintiff suggested to Mr Youd and Mr McGuckin that management not pay such high administration expenses. The plaintiff was not elected as a director at the next shareholders' meeting purportedly held on 14 May 2013. Pursuit of project in the Philippines (7) The Philippines project was of a highly speculative and unusual nature, and should not have been proposed and adopted without detailed analysis and required evaluation. This did not occur. Further, Kara Minerals did not have enough ready funds to pursue the Philippines project even if all members were in agreement. Lack of documentation (8) The Kara Mineral's financial records as disclosed are incomplete and do not document with any particularity where Kara Mineral's funds went. Pursuant to s 286 of the Corporations Act, it is an offence not to keep proper books and records of a company.

Legal Framework 12 Section 511 of the Act provides relevantly: (1) The liquidator, or any contributory or creditor, may apply to the Court: … (b) To exercise all or any of the powers that the Court might exercise if the company were being wound up by the Court. … (2) The Court, if satisfied that the determination of the question or the exercise of power would be just and beneficial, may accede wholly or partially to any such application on such terms and conditions as it thinks fit or may make such an order on the application as it thinks just. 13 Section 486 of the Act provides: The Court may make such order for inspection of the books of the company by creditors and contributories as the Court thinks just, and any books in the possession of the company may be inspected by creditors or contributories accordingly, but not further or otherwise. 14 If the Court makes an order under s 511(1)(b), s 486 may apply in a voluntary winding up: Criminale v TRN Security Services Pty Ltd (in liq) [2008] NSWSC 562 at [33]; WM Scollay & Co Ltd (in liq) v South Pacific Energy Trading Pty Ltd (in liq) (1996) 21 ACSR 42 at 43.

Consideration 15 The combined effect of ss 511 and 486 is that an order will be made for inspection of documents of a company in voluntary liquidation if three conditions are satisfied: (a) the person seeking inspection is a creditor or contributory and therefore entitled to make an application under ss 486 and 511; (b) in accordance with s 511, the Court considers it just and beneficial to apply s 486 in a voluntary liquidation; and (c) in accordance with s 486, the Court considers it just to make an order for inspection of the company's documents. 16 The plaintiff, as a contributory, has standing to make an application under s 511(1). 17 I am satisfied that the Court may permit access to a company's documents, even if the only purpose of the access is to facilitate an action by an individual contributory against a company's directors: Re BPTC Ltd (1992) 7 ACSR 291; Re MMC Pty Limited (in liq) (1992) 6 ACSR 741; Re William Lawrence (Globe Dyeworks) Pty Ltd (in liq); Textile Clothing & Footwear Union of Australia (Vic Branch) v Wight (1993) 12 ACSR 181; Re Excel Finance Corporation Ltd; Worthley v England (1994) 52 FCR 69 at 91-92; 124 ALR 281. 18 I am satisfied that the plaintiff has genuine and long held concerns that Mr McGuckin and Mr Youd have breached their duties to Kara Minerals. Where the liquidator has no objection to the plaintiff inspecting the documents and has assigned the relevant causes of action to the plaintiff, and there is only a relatively limited number of documents, it is just and beneficial to apply s 486 to this case, pursuant to s 511(1)(b), and make an order for inspection of the company's documents. I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.