Lei, in the matter of Tai-Ao Aluminium (Australia) Pty Ltd v Cordukes

REASONS FOR JUDGMENT 1 As Lord Greene said in In re Smith and Fawcett, Limited. [1942] Ch 304, and as many judges have since repeated, a director of a company is bound to exercise his powers and perform his duties (many of them being fiduciary duties) "bona fide in what [he] considers - not what a court may consider - is in the interests of the company …". More often than not, a director will not be able to honour this obligation without access to the company's books and records. For this reason the common law has established that a director has a right to inspect and make copies of company documents: Burn v The London and South Wales Coal Company and Risca Investment Company (1890) 7 TLR 118, 119. In Edman v Ross (1922) 22 SR (NSW) 351, 361 Street CJ in Eq put it this way: "The right to inspect documents and, if necessary, to take copies of them is essential to the proper performance of a director's duties, and, though I am not prepared to say that the Court may not restrain him in the exercise of this right if satisfied affirmatively that his intention was to abuse the confidence reposed in him and materially to injure the company, it is true nevertheless, that its exercise is, generally speaking, not a matter of discretion with the Court and he cannot be called upon to furnish his reasons before being allowed to exercise it. In the absence of clear proof to the contrary the Court must assume that he will exercise it for the benefit of his company." 2 In Australia, the common law right is supplemented by statute. Section 290(1) of the Corporations Act 2001 (Cth) provides that a "director of a company … has a right of access to the financial records at all reasonable times." What effect does this have? In Conway v Petronius Clothing Co Ltd [1978] 1 WLR 72, Slade J considered the effect of s 147 of the Companies Act 1948 (UK) which provides that the books of account of a company are to be kept at its registered office and "shall at all times be open to inspection by the directors". It was argued that s 147 conferred on directors a mandatory and unqualified statutory right to inspect the company's books of account. Slade J rejected this argument. He held (at 89) that s 147 "implicitly recognised the existence of [the] right of common law, [but] it conferred no new right; the purpose of that section and its predecessors was to impose criminal sanctions in the event of proper books of account not being kept or not being made available for inspection." I would not apply that decision to the Australian statute. The better view, so it seems to me, is that of Mahon J in Berlei Hestia (NZ) Ltd v Fernyhough [1980] 2 NZLR 150. Section 117 of the Companies Act (NZ) is similar to s 147 of the English statute. Mahon J held (at 163) that s 117 created a statutory right of inspection. Mahon J went on to say that the right was unqualified "but that where it is proved that a director is acting or is about to act in breach of his fiduciary duty to the company and intends to aid that process by inspecting the books, then his right to inspection disappears." He explained (at 164-165) that, speaking strictly, the right of access was not a "right" but a "power" to inspect corporate records as and when necessary. However, if the "power" was to be exercised for a corrupt purpose, Mahon J was of the view that such conduct "would be analogous to that proscribed in equity jurisdiction as being a fraud upon a power." 3 Until yesterday evening the plaintiff was a director of Tai-Ao Aluminium (Australia) Pty Ltd, which is a subsidiary of Tai-Ao Aluminium Group Limited, a company incorporated in Hong Kong. The plaintiff is also a substantial shareholder in the Hong Kong company; he holds approximately 34% of the issued capital. He has presented a petition to the High Court of the Hong Kong Special Administrative Region Court of First Instance praying that the Hong Kong company be wound up on the ground that "it is just and equitable that the Company should be wound up" or alternatively that "the affairs of the Company have been conducted in a manner unfairly prejudicial to the Petitioner." The petition is an aspect of a lengthy dispute between the Hong Kong company's shareholders which has now spilled over to Australia. 4 Although the plaintiff is a director of the Australian company, he has never exercised his right to inspect its books and records. Nor has he attended a directors' meeting. Nevertheless, on 31 October last (a Sunday) he went to the company's Melbourne office to inspect the company's books and records. He attended with an assistant and his son, who is a computer technician. The plaintiff was not able to inspect many records as most were at the company's Sydney office. So, on 4 November, he went to the Sydney office together with his assistant, his son and, this time, a solicitor. There they were met by Mr Cordukes, who is another director of the company. Mr Cordukes informed the plaintiff that he would not be given access to the company's records. He told the plaintiff that he would need a court order to obtain access. 5 The plaintiff took up the challenge and on the same day issued an application seeking orders for access and the right to make copies of the company's documents. The relief was sought under ss 198F and 290(1) of the Corporations Act. Section 198F provides, in substance, that a director or former director of a company may inspect the company's books (other than its financial records) for the purposes of a legal proceeding to which that person is a party or which that person proposes to bring. 6 The application was returnable at 2.00 pm on Friday, 5 November. When it was called on, Mr Hargrave QC said that the defendants wished to oppose the application but needed time to file affidavits. He told me that the ground of opposition was that the plaintiff was not seeking inspection for a legitimate purpose (ie for a purpose associated with the affairs of the company) but for some ulterior motive which included causing the company harm. I adjourned the application until yesterday so that the defendants could put on evidence to support the allegation. 7 Before the hearing resumed, the defendants filed several affidavits. The affidavits disclosed two important things. Clause 18.1 of the Constitution provides that "[t]he directors or the company may by resolution remove a director from office, and may by resolution appoint another eligible person as a director instead." The effect of this clause is to displace s 203C, which provides that in the case of a proprietary company only the members may remove a director. Section 203C may be displaced by a company's Constitution by reason of s 135(2). The second fact was that there was to be a directors' meeting at 7.00 pm yesterday, where the directors would consider whether the plaintiff should be removed from office. It was clear that this resolution would be carried as the plaintiff had no supporters on the board. 8 As it was apparent that the plaintiff would only remain in office for a few hours, I informed Mr McEvoy that I was not disposed to make any order giving the plaintiff access to the company's records, as no useful purpose would be served by such an order. Even if the plaintiff originally had a legitimate reason for gaining access to the company records he was no longer in a position where he could, in a practical sense, perform any duties of office. Accordingly he no longer had any need for inspection. 9 This left outstanding the plaintiff's application under s 198F. The evidence in support of that application was scant, and simply insufficient to enable any order to be made. At the very least the plaintiff was required to explain why an inspection of the books of the company was necessary for the purposes of some legal proceeding to which he was a party or which he intended to bring. No such explanation was proffered. In the circumstances Mr McEvoy sought leave to withdraw the claim rather than it being dismissed. This course was not opposed, and leave was granted accordingly. 10 Finally, I must deal with costs. Although the plaintiff lost the case, he nevertheless asked for an order for his costs. Moreover, he asked for those costs to be taxed on a solicitor/client basis. I was not in a position immediately to deal with this unusual application without consulting the cases. I was aware of the existence of old authorities, such as Marsh v Patten (1868) 8 SCR (NSW) 227, to the effect that the court had no power to order an unsuccessful plaintiff to be paid his costs. I did recall, however, that there were cases to a different effect. It turns out that most of them have been collected and considered by the Appeal Division of the Supreme Court of Victoria in Verna Trading Pty Ltd v New India Assurance Co. Ltd [1991] 1 VR 129. In that case, by majority, the Appeal Division held that in exceptional circumstances a successful defendant might be ordered to pay the unsuccessful plaintiff's costs. Sachs LJ mentioned some of the circumstances in which such an order might be made in Knight v Clifton [1971] Ch 700, 718. They include those rare cases where the defendant's conduct has "brought about the proceeding" or "caused its continuance" or where the defendants "escapes the normal consequences of his blameworthy conduct by reason of some unexpected matter which he knew but which the plaintiff could not know". In other words, the order will only be made in a strong and exceptional case. 11 I think this is such a case. The plaintiff had a right of inspection which was denied to him by the defendants. I accept that the defendants were given short notice in which to consider the plaintiff's claim. Nevertheless they should have known that the plaintiff was entitled to look at the company's documents. Even if they did not know they soon had the benefit of legal advice and did not change their attitude. Further, the only basis upon which the defendants sought to challenge the plaintiff's right of inspection was that he would make improper use of information which he would obtain. It was for this reason that the defendants sought an adjournment. However, they did not use the adjournment to gather evidence to prove their case but to convene a meeting which would ensure the plaintiff's removal from office and thereby deny him his common law and statutory right. On no view of the matter have the defendants established, from the plaintiff's words or conduct, that he intended to use the information for some improper purpose. Perhaps the evidence establishes a suspicion in that regard. But suspicion is not enough in this type of case. In the end the plaintiff's claim was only defeated by his impending removal from office. In all other respects the defendants acted wrongly and, in my opinion, should pay for their wrongdoing. The only punishment I can impose is to require them to pay the plaintiff's costs. In the circumstances it is not appropriate to go further and have those costs taxed on a special basis. I certify that the preceding eleven (11) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.