von Bernstorff v Balamara Resources Limited

THE COURT NOTES THAT: 5. Order 1 above does not require multiple copies of identical documents to be produced. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

INTRODUCTION 1 The applicant, Philipp von Bernstorff, is one of four directors of the first respondent, Balamara Resources Limited. The second to fourth respondents, Derek Lenartowicz, Michael Anthony Hale and Jonathan Kwok Hung Leung respectively, are also directors of Balamara. By originating process filed on 3 July 2023, Mr von Bernstorff sought a Court order compelling the respondents to produce for inspection certain books and records of Balamara. 2 I heard the application in my capacity as Commercial & Corporations Duty Judge on 3 July 2023 and 4 July 2023. On 3 July, I granted Mr von Bernstorff leave to serve each of the respondents with the originating process by emailing it to addresses associated with them by 6.00pm (AEST) on 3 July 2023, and adjourned the substantive relief to 4 July 2023. On 4 July, I made orders that, inter alia, compelled the respondents to produce for inspection the books and records of Balamara sought by Mr von Bernstroff. These are my reasons for doing so. 3 The urgency attending this application arose in circumstances where Mr von Bernstorff believes that certain convertible notes issued by Balamara to Bright Agile Limited, a shareholder of Balamara, may imminently be converted to shares. Relevantly, Mr Kwok Hung Leung is a director of Bright. Mr von Bernstorff is concerned that he is effectively being locked out of decision making in relation to substantial issues with which the company is concerned, such that he is unable to fulfil his duties as a director. 4 Balamara has not appointed a company secretary since its former company secretary resigned on 10 February 2023. For that reason, this application has been brought by Mr von Bernstorff against the three other directors as well as the company itself. 5 The respondents were served in advance of the hearing on 4 July 2023, but did not appear.

EVIDENCE 6 Mr von Bernstorff relies on his own affidavit sworn 30 June 2023 and exhibit PVB-1 thereto, which was tendered during the hearing. In addition to company searches, exhibit PVB-1 contains email chains evidencing Mr von Bernstorff's repeated requests for documents from Mr Hale. In addition, a bundle of documents was tendered relating to service being effected on the respondents in accordance with the orders made on 3 July 2023.

BACKGROUND 7 In 2019, Mr von Bernstorff acquired, on behalf of the Vulpes Distressed Fund, shares in Balamara. At the time the investment was made, Balamara was in the course of establishing two coal mines in Poland. Balamara was at the stage of applying for a mining license from the Republic of Poland in respect of one of the mines, and working towards applying for an environmental license in respect of the second mine. 8 As events transpired, neither mine has been granted the requisite licenses. 9 On 18 December 2020, Vulpes acquired secured convertible notes in Balamara for US$1,108,000. During 2021, Vulpes and another related fund acquired additional secured convertible notes in Balamara. 10 On 25 January 2022, Mr von Bernstorff was appointed to Balamara's board of directors. 11 In June 2022, Balamara's board agreed to raise additional capital for Balamara to meet operating expenditure and invited the five largest shareholders to participate in pro-rata capital raising. Vulpes acquired additional shares by investing US$150,000 in Balamara. Mr von Bernstorff's evidence is that, to the best of his recollection, Bright also invested US$150,000 by way of acquiring convertible notes. Mr von Bernstorff says none of the other top five shareholders took up the convertible notes they were offered. 12 In May 2023, Mr von Bernstorff attended a board meeting via an online videoconferencing platform. Mr Lenartowicz, Mr Hale and Mr Kwok Hun Leung were in attendance. Mr von Bernstorff's evidence is that during this meeting he became aware that Mr Kwok Hung Leung asserted that Bright had provided additional working capital (presumably in return for equity or quasi-equity in Balamara) and that as a result Bright was at 19.9% dilution. Mr von Bernstorff had understood that Bright's holding was then 16% fully diluted. Prior to this meeting, Mr von Bernstorff says he was unaware that Bright had provided any further funds to Balamara, other than the capital raising which occurred in June 2022, in which Vulpes had also participated. 13 On 24 May 2023, Mr von Bernstorff emailed Mr Hale enquiring about the provision of working capital from Bright to Balamara, and in response Mr Hale referred to an "earlier agreement" with Bright. The next day, Mr von Bernstorff emailed Mr Hale seeking further information about a drawdown facility and whether the facility had board approval, but did not receive a response. Mr von Bernstorff made three additional email requests for the relevant information and Mr Hale replied on 29 May 2023, indicating that he was seeking further information from Mr Kwok Hung Leung in relation to Bright's alleged conversion of shares. No further information was forthcoming. On 1 June 2023, Mr von Bernstorff's former solicitors sent Mr Hale, purportedly in his capacity as company secretary of Balamara, a letter requesting access to the relevant books and records, and informing Mr Hale of Mr von Bernstorff's statutory right as a director to access such records under s 290 of the Corporations Act 2001 (Cth). No response was received. 14 On 2 June 2023, Mr von Bernstorff and Mr Hale exchanged emails in which Mr von Bernstorff sought acess to or a copy of the full share register for Balamara. 15 On 13 June 2023, Mr von Berstorff's former solicitors sent a further letter again requesting access to the relevant records and informing Mr Hale that Balamara, in not having at least one company secretary, was in breach of s 204A(2) of the Act. 16 By three conversion notices dated 19 June 2023, Vulpes and its related fund converted some of their convertible notes into shares in Balamara. 17 On 27 June 2023, Mr von Bernstorff says he first became aware that Bright was pressing to convert its, or some of its, convertible notes. 18 In addition to his concerns in relation to the arrangements in respect of the grant of equity or quasi-equity to Bright, Mr von Bernstorff is concerned about a proposed Arbitration that Balamara has foreshadowed commencing against the Republic of Poland. 19 The Arbitration arises from the failure of Balamara to secure the licenses it requires to operate the two coal mines in Poland. Balamara engaged Sidley Austin LLP, a law firm based in Switzerland, and SSW Pragimatic Solutions, from Poland, to act in the Arbitration proceeding. The evidence suggests that Siew Chee Yaw, described as "a Malaysian national" and the "sole owner" of Ample Skill Limited, Balamara's largest shareholder, has foreshadowed commencing a separate arbitration proceeding in relation to what appears to be substantially the same issues. Mr von Bernstorff's evidence is that "Yaw Chee Siew" is a director of Ample, and he understands that Yaw Chee Siew is a familial relation to Mr Kwok Hung Leung. I infer that references to Siew Chee Yaw and Yaw Chee Siew relate to the same person, and the different ordering of these names is likely due to a misunderstanding of non-Western naming conventions. Without intending any disrespect, I will refer to this person as Mr Yaw. 20 Mr von Bernstorff deposes to being aware that Mr Yaw has also retained Sidley Austin and SSW in respect of the separate foreshadowed arbitration by Mr Yaw. Mr von Bernstorff has raised concerns, supported by a legal opinion which he has provided to Balamara, about the inherent conflict in this arrangement. He has also sought but been refused access to the company's documents pertaining to the arbitration, including in respect of any memorandum of understanding between the company and Mr Yaw in relation to the proposed arbitrations. In the ensuing correspondence, Mr von Bernstorff has been informed that Sidley Austin is taking instructions from the Executive Chairman of the Company's Management Board. Mr von Bernstorff says that Balamara has a board of directors of whom he is a member and he is not aware of any Management Board. Mr von Bernstorff's legal advisers have been told that Balamara has instructed Sidley Austin not to respond to correspondence sent on behalf of Mr von Bernstorff. Mr von Bernstorff says to his knowledge these issues have not been addressed in any meeting of the board of directors.

APPLICABLE LEGAL PRINCIPLES 21 A director's right to inspect company records derives from the general law and is supplemented by a statutory right of access under the Act.

Statutory right of access 22 Section 290 of the Act confers a statutory right on a director of a company to access the financial records of the company: Director access Personal access (1) A director of a company, registered scheme or disclosing entity has a right of access to the financial records at all reasonable times. Court order for inspection on director's behalf (2) On application by a director, the Court may authorise a person to inspect the financial records on the director's behalf. (3) A person authorised to inspect records may make copies of the records unless the Court orders otherwise. (4) The Court may make any other orders it consider appropriate, including either or both of the following: (a) an order limiting the use that a person who inspects the records may make of information obtained during the inspection; (b) an order limiting the right of a person who inspects the records to make copies in accordance with subsection (3). 23 "Financial records" are widely defined in s 9 of the Act to include invoices, receipts, payment orders and vouchers, documents of prime entry and working papers needed to explain financial statements. 24 The obligation to keep financial records is imposed by s 286(1) of the Act which relevantly provides: Obligation to keep financial records (1) A company…must keep written financial records that: (a) correctly record and explain its transactions and financial position and performance; and (b) would enable true and fair financial statements to be prepared and audited. The obligation to keep financial records of transactions extends to transactions undertaken as trustee. Note: Section 9 defines financial records. 25 Compliance with s 290 may be compelled by recourse to s 1303 of the Act, which provides: Court may compel compliance If any person in contravention of this Act refuses to permit the inspection of any book or to supply a copy of any book, the Court may by order compel an immediate inspection of the book or order the copy to be supplied. 26 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: Fox v Gadsden Pty Ltd [2003] NSWSC 748 at [23]. It is not necessary for a director to itemise and request particular documents by a particular 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: Fox v Gadsden at [23]. 27 In Hawksford v Hawksford [2005] NSWSC 1316, Palmer J said: [7] The Applicant is clearly entitled to access and to inspect the records of the companies, but in a way that is reasonable in all of the circumstances, and also bearing in mind the context in which the access and inspection is being carried out. 28 The Court retains a discretion in relation to the grant of relief: Hammond v Quayeyeware Pty Ltd [2021] FCA 293 at [119], citing Re Geneva Finance Ltd; Quigley v Cook (1992) 7 WAR 496.

General law right of access 29 The principles derived from common law are important because the statutory right of access to books and records does not extend significantly beyond accounting records: Re Geneva Finance at 507. The general law right of access to documents is not limited to financial information and so has a broader ambit. 30 A director has a general law right to inspect documents of the company. The relevant principles were summarised in Re Geneva Finance at 507: 2. A director has a right of access to the books and records which relate to the affairs of the company. The right is an incident of the office of a director and exists so that he might properly perform his duties. 3. The right of access to documents generally (as opposed to accounting records) arises at common law and the court has a residual discretion whether or not to order inspection. … 5. The right of access to documents carries with it a right to take copies and a right to engage agents to carry out the inspection where skilled assistance is necessary and provided that the duties of confidentiality which the director owes will not be compromised. 6. … A director does not have to demonstrate a "need to know" or furnish reasons before exercising the right of access to documents. 31 These principles have been consistently applied in this Court: Oswal v Burrup Fertilisers Pty Ltd [2013] FCAFC 9; 295 ALR 708 at [77]. 32 Directors' duties to a company carry with them powers and discretions which the directors must exercise for the benefit of the company and for the purpose for which they were conferred, rather than for "some private advantage or purpose foreign to the power": Mills v Mills (1938) 60 CLR 150 at 185 (Dixon J); and Re Geneva Finance at 504. 33 The onus of establishing that a power or discretion has been used for an improper purpose lies on the person who asserts it: Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199 at 219 (Isaacs J). 34 A right of access to books of a company was recognised at common law prior to the introduction of statutory rights of inspection conferred on directors. In Burn v London & South Wales Coal Co (1890) 7 TLR 118, the Court held that a director had a right to inspect and take copies of company documents in the custody of the company's solicitors and that the right could be exercised at any time, and not only at formal meetings. Books and records are a prime, and sometimes the only, source of information as to the actions and state of affairs of a company. It follows that unless a director has access to these sources of information, they will be inhibited in the performance of their duties to the company: Re Geneva Finance at 504. 35 A right to access documents carries with it a right to take copies and a right to engage agents to carry out the inspection: Re Geneva Finance at 507, 515.

CONSIDERATION 36 Broadly, Mr von Bernstorff seeks access to: (a) specified categories of documents relating to any loan facility provided by Bright, a shareholder of Balamara, to Balamara; (b) documents concerning Bright's conversion of its convertible notes, including details of payments made in respect of its convertible notes and the details of the shares that have been, or will be, issued on conversion; and (c) documents concerning any proposed arbitration between Balamara and the Republic of Poland including but not limited to fee proposals, memorandum of advices between the Mr Lenartowicz, Mr Hale and Mr Kwok Hung Leung or any of them on the one part and Sidley Austin and/or SSW on the other part, in connection with that proposed arbitration; any board papers or minutes which refer to or record legal advice provided to Balamara; and any memorandum of understanding or agreement with Mr Yaw concerning any arbitration. 37 The documents to which Mr von Bernstorff seeks access, when viewed in the context of the business of the company and the way in which it is operated, are clearly documents that he, as a director, has a right to access under the general law as supplemented by ss 290 and 1303 of the Act. 38 I was satisfied that it was appropriate to exercise the discretion to grant relief substantially in the form sought for the following reasons. 39 In his evidence, Mr von Bernstorff puts forward a detailed account of why he requires access to the documents he has sought in order to discharge his duty as a director of Balamara. Without accessing these documents, Mr von Bernstorff says that he unable to determine: (1) if Balamara has been deprived of funds because equity or quasi-equity has been issued to Bright, with or without adequate consideration; (2) whether any facility or further funding provided by Bright was validly approved by Balamara's board, and if so, on what terms; and (3) whether Bright may imminently convert said notes into shares. 40 Mr von Bernstorff is further concerned that the manner in which the proposed arbitration is being conducted in apparent tandem with the proposed arbitration of Mr Yaw is not in the best interests of Balamara. He is concerned about who is providing instructions on behalf of Balamara in respect of the Arbitration and what instructions are being given. 41 Mr von Bernstorff has a right to access the documents he has identified. His attempts to secure access have been rebuffed. Mr von Bernstorff is not required to justify why he seeks access to the documents as a condition of exercising his right. That he has done so is relevant to whether the Court will grant relief to enforce the right that has been asserted. I am satisfied that all of the concerns that Mr von Bernstorff holds appear, on the evidence before me, to be valid and reflect genuine concerns he holds as a director. The documents to which he seeks access relate to the core of Balamara's interests and to its capital structure. 42 As a final matter, I note that in circumstances where Balamara does not have a person in the role of company secretary, it is appropriate that the orders be made against each of the respondents.

CONCLUSION 43 For these reasons, I made orders substantially in the form sought by Mr von Bernstorff. I certify that the preceding forty-three (43) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Cheeseman.

SCHEDULE OF PARTIES NSD 655 of 2023 Respondents Fourth Respondent: JONATHAN KWOK HUNG LEUNG