Fox v Gadsden

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

1417/03 RICHARD JOHN FOX V GADSDEN PTY LTD & 4 ORS JUDGMENT (ex tempore; revised 12 August 2003) 1 HIS HONOUR: This is a proceeding for a director to be afforded inspection of books and financial records of the first defendant company, Gadsden Pty Limited. 2 The statutory entitlement of a director is set out in respect of books that are not financial records in s 198F of the Corporations Act, which provides that a director of a company may inspect those books at all reasonable times for the purpose of a legal proceeding, and a person authorised to inspect "books" may take copies. The section prohibits the company from refusing access. In relation to financial records, s 290 states that a director of a company has a right of access to financial records at all reasonable times. 3 The word "books" is defined very broadly in s 9 of the Act, that definition employing the word "document", which is also broadly defined. The words "financial records" are also defined, that definition, including such matters as invoices, documents of prime entry, and working papers, and documents needed to explain the methods by which financial statements are made up. 4 Although the originating process seeks access to books and financial records, the centre of attention at today's hearing was on documents which would, if anything, be financial records as opposed to books that are not financial records. 5 The proceeding began on 14 February, and today I granted leave to the plaintiff to discontinue. The only remaining issue is the question of costs. The plaintiff seeks an order that the second and third defendants (his co-directors) pay the plaintiff's costs and, conversely, those defendants seek an order that the plaintiff pay their costs. 6 Essentially, the plaintiff says it was necessary to bring the proceeding and to continue it until this time in order to secure compliance by the defendants with their statutory obligations, to which I have referred; and, in particular, in order to have the right of access conferred on him by s 290, properly vindicated. The defendants say that the bringing and maintaining of this proceeding was unnecessary, because they say that at all relevant times they have been willing to make available to the plaintiff whatever books and records and, in particular, financial records he might seek and specify. There are two questions to be considered with respect to costs - first, whether the commencement of the proceeding was justified and, secondly, whether it was justifiable for the plaintiff to continue with the proceeding up until the present time. 7 So far as the commencement of the proceeding is concerned, there is evidence that on 14 November 2002, there was a meeting attended by Mr Cooke and Mr Fox, and Mr Sakiris from the accountants, Economos & Co, at which it was agreed that Gadsden would "continue at the moment as is, and endeavour to do monthly reports". There is no evidence to indicate that any monthly reports were, in fact, prepared. 8 On 5 February 2003, Mr Hayter, the solicitor retained by the second defendant, wrote to his client providing advice about directors' duties. The letter noted that the second defendant was in dispute with the plaintiff and that the plaintiff had taken objection to the second defendant making payments to himself in reduction of money due to the second defendant in respect of a loan account with the company. It was noted that the plaintiff had indicated he wished to close down a number of jobs that the company were presently undertaking. Mr Hayter advised that, in the circumstances, the second defendant had not breached his duties, and he noted that the plaintiff owed a fiduciary duty to act in the company's interest, which would include completing any jobs presently being carried out and not to be competing for jobs and competing against the company. The letter advised if the plaintiff was to take certain action, he would be likely to be breaching his fiduciary duty. The letter observed that the plaintiff might be unaware of his obligations as a director and that it would be in everyone's interest for the plaintiff to obtain independent legal advice. The letter suggested that the business arrangement between the parties should be finalised in the most cost effective manner, and that the parties should act in such a manner as to minimise any risk that they might be sued by the company. 9 The letter was made available to the plaintiff, and there was a meeting of the directors of the company on 6 February 2003. There was some inconsistent evidence as to what happened at that meeting. The plaintiff said that at the meeting he raised concerns which were not satisfied by answers received from the second defendant. He said that the second defendant refused to supply him with copies of the supporting records for company accounts and refused to answer questions on where the funds from a Commonwealth Bank account had gone. I should say that on 5 February a letter had been received by the plaintiff, as a director of the company, from the Commonwealth Bank noting that the parties were in dispute and that the bank account of the company had been stopped. 10 The second defendant's evidence, which is corroborated by the evidence of his wife, the third defendant, was that the plaintiff provided a list of records that he required, whereupon the second defendant said, "This is a huge job. I need about a week or two to produce these because it is a huge job." He later said he would see what he could do, and offered access to the company's computer. 11 It seems to me, on balance, that the second and third defendants' account of this conversation is more likely than not to be the correct account. I say this because it is supported by the handwritten minute taken at that meeting, which is a minute signed by, amongst others, the plaintiff. Paragraph M of the handwritten minute noted "RJF (presumably the plaintiff) requested a list of documents", which on perusal appears to be a substantial list. 12 Counsel for the plaintiff submitted that no collation was required, but it seems to me self-evident that to extract those books and records from the records as a whole required some activity of that kind. Counsel also emphasised other entries handwritten in the minutes, namely "agreed" or "4 x agreed", and noted that there was nothing against item M. That strikes me as understandable because item M merely recorded a request by the plaintiff and not any action to be taken. 13 It is also relevant that item Q in the handwritten minutes is to the effect that an account be fully audited and that the company should continue to operate under strict supervision by all directors, and that all funds owing would be distributed according to entitlements of each director when they decide to finish the arrangements. The word "agreed" appears adjacent to that item. There is a final sentence emphasised by counsel for the plaintiff, which seems to me to have really no significance. It appears to record a proposal to delay a decision on appointment of a voluntary administrator. The significance of item Q is that it records an agreement by the parties that there would be some auditing process in respect of the accounts. 14 That appears to have been the state of the affairs when the plaintiff decided to take action on 14 February. Was the commencement of the proceeding justified in those circumstances? In my view, if the matter were judged as at 14 February, the answer would be "no". The position at that time was that there had been agreement of the disputing parties that a process of auditing be embarked upon, which obviously could not have been completed in less than two weeks. At the meeting on 6 February, the plaintiff's request for information had been noted but, in my view, it would be unreasonable for any party to have requested such extensive information to have been prepared and made available between 6 and 14 February. There was no letter of demand for production of the documents or for access for inspection to the company's books or financial records generally. Instead, the proceeding was commenced without further warning. 15 What happened later, however, must be taken into account when considering the question of costs. Although it seems to me that the commencement of the proceeding on 14 February was not justified in terms of the circumstances previously occurring, it became evident subsequently that the second and third defendants misapprehended the plaintiff's statutory right. Under s 290 of the Corporations Act, reinforced by the general law, a director's right to access of corporate information is an unqualified right of access to the whole of the company's financial records. The only qualification is that the access is to be granted at reasonable times. It is open to the director to authorise someone to inspect the financial records on the director's behalf and to arrange that copies be made. 16 What seems to have happened in this case is that the second and third defendants set about, through correspondence between their solicitor and the plaintiff's solicitor, to make arrangements for inspection at the office of the accountants Economos & Co; and also, concurrently, and particularly later in the correspondence, to seek to identify the particular documents sought to be inspected, in order to assess whether they could be made available. There was no blanket refusal to provide access to the documents of the company but, in my view, if one puts together all the relevant correspondence, the defendants have frustrated the plaintiff's attempts to exercise his right to have access to the financial records. 17 It is not appropriate, in a judgment confined to the question of costs, to go through correspondence letter by letter to make good the propositions I have just stated. I was taken to the correspondence in the course of argument and I have considered it as best I can. What emerges, however, is that the arrangements for inspection which involved delivery of the documents to Economos & Co were inadequate in at least two respects. In the first place, according to the evidence of an accountant engaged on behalf of the plaintiff, Mr Acharrie, the documents that were produced in the office of Economos & Co were substantially fewer documents than the documents that were ultimately produced to this Court. Moreover, according to Mr Acharrie, there were unexplained or disputed invoices totalling, as at 25 July 2003, that is to say nearly six months after the commencement of the proceeding, $234,927.29. 18 Secondly, documents were was produced by Economos & Co (and to the Court) which became Exhibit P4. Exhibit P4 comprises a large bundle of invoices. In his oral evidence today, the second defendant explained that they were his personal invoices relating to expenses he or his own private company incurred, which were paid for by the company Gadsden. The accounting process to reflect this was that the particulars of the invoices were entered into the company's MYOB accounting system and the payments were debited to the second defendant's loan account. Other evidence indicates that the loan account was probably substantially in credit, though it is unnecessary for me to make that finding in the present context. 19 In my opinion, once a company, in circumstances such as the present, pays the personal account of a director, the company's financial records ought to include either the original invoice or at least a copy of it, so there is a proper source document available for auditing purposes, if necessary. The definition of "financial records" should be read having regard to s 286 of the Act, which requires the company to keep written financial records in such a fashion as to ensure that this occurs. It would not be adequate for the company to enter particulars of an invoice into its MYOB accounting system and then destroy the invoice. It is equally not adequate for the company to "borrow" the document of a director for the purpose of making payment on it, entering up the particulars in the accounting system, and then to return it without keeping any proper record. In all of the circumstances, my view is that the invoices which are now Exhibit P4 fall within the definition of "financial records" for the purposes of s 290 of the Act and the plaintiff had a statutory right of access to them. 20 A principal point made on behalf of the defendants was that they, having made documents available for inspection of Economos & Co, and having heard allegations that the documents made available were incomplete, then endeavoured, through correspondence by their solicitor, to have the plaintiff specify the ways in which what had been made available was incomplete so that a response could then be made. Without going through chapter and verse in the correspondence, let me say I was persuaded that such offers were made and at least, on some occasions, no reply (or, at any rate, no director's reply) was given to the offers. 21 What happened was the accountants engaged by the plaintiff prepared a spreadsheet, which was referred to in the course of argument as Annexure A (being Annexure A to Mr Prowse's affidavit of 3 July 2003). Then the second defendant produced a response, which was referred to as Annexure B, in which he provided comments on the deficiencies said to have been discovered on behalf of the plaintiff, in some cases specifying "invoice files", meaning it would be necessary for him to check invoice files before being satisfied of the true position. Then finally, the accountants for the plaintiff produced Annexure C, which was a form of reply to Annexure B. 22 Annexures A and C go some way towards meeting the defendants' contention that nothing done by the plaintiff amounted to a reply to their request that deficiencies be identified so that they could be responded to. But, it seems to me, the assessment of the correspondence must now be undertaken in the light of what has emerged at the final hearing. It has become evident at the hearing today, as I have said, that the plaintiff has been given access to something substantially less than the full financial records of the company. The fact that, as counsel for the plaintiff conceded, the invoices produced today were not matters in respect of which further information was specifically required in Annexures A or C is, in my view, somewhat beside the point. 23 It would be difficult for the Court to over-emphasise the importance of the director's statutory law rights of access to corporate information. They are the foundation of the system of corporate governments as it exists in Australia today. Directors cannot be expected to carry out any of their substantial responsibilities, including their fiduciary duties and their duties to attend to the solvency of the company and its general management, unless they can be sure of having full and unfettered access to the documents of the company. It is not appropriate for their fellow directors to offer to provide the requesting director with particular documents if that director requests those documents by name. What should happen, when documents are demanded by a director, is that the gate is opened wide and the director has full and unfettered access at all reasonable times. 24 During the course of this matter, since the proceeding was commenced on 14 February, that imperative has at times not been respected. What has been afforded to the plaintiff is less than the access to which he was entitled, in the ways I have described. The issue ought not to have been one where there should be any negotiation, but rather the plaintiff should been given full, free and immediate access. 25 I have said it was not justifiable for the plaintiff to commence this proceeding, looking at the matter from the perspective of 14 February. But when one looks at the whole train of the events, it seems to me the inevitable conclusion is that the matter would not have reached the stage it reached today, when further documents were supplied, if the proceeding had not been commenced. It would be over-refined, so far as costs are concerned, to make an order which might have reflected a degree of prematurity as to the commencement of the proceeding when, in my view, the proceeding has been proven to be justified. 26 My conclusion, therefore, is that I should direct the second and third defendants to pay the plaintiff's costs of the proceeding. I direct that the exhibits be returned to the persons producing them.

Last Modified: 08/18/2003 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.