Show and tell? When do shareholders have the right to inspect the books of a company?

Khullar Family Investments Pty Ltd (KFI) filed an originating process in the Supreme Court seeking an order under section 247A of the Corporations Act 2001 (Cth) (Act) to authorize the inspection of certain books of The Artificial Intellect Group Pty Ltd (AIG). 

KFI sought to examine a wide range of company documents including financial statements, employment records, minutes, agreements, and other documents.  The basis for KFI’s application was to investigate whether KFI had a claim against AGI relating to a share issue and to the appointment of a director.

The court used its discretion and dismissed KFI’s application.

Key details

Section 247A(1) of the Act allows a member of a company or registered scheme to apply to the court to make an order for inspection only if the applicant is acting in good faith and the inspection is for a proper purpose, as long as the applicant has been granted leave under section 237 of the Act.

The court has the discretion to decide whether to grant the order even if the applicant meets the criteria of acting in good faith and for a proper purpose.

Some of the relevant principles to determine whether an application is being made in good faith and for a proper are as follows:

1. “Good faith” and for “a proper purpose” are not two distinct requirements.
2. "Proper purpose" means a purpose connected with the proper exercise of the rights of a shareholder as shareholder and not, for example, as a litigant in proceedings against the company or as a bidder under a takeover scheme.
3. An applicant who has a significant holding and who has been a shareholder for ''some considerable time" will more easily discharge the onus than one who has recently acquired a token holding.
4. It is enough that the issue raised by the applicant is "substantive and not “fanciful", not "artificial, specious or contrived".
5. Pursuing a reasonable suspicion of breach of duty is a proper purpose.
6. As long as the applicant's primary or dominant purpose is a proper one, an inspection might benefit the applicant for some other purpose.
7. Applicants do not necessarily lack a proper purpose merely because they are hostile to other directors.
8. The procedure under s 247A is not intended to be as wide-ranging as discovery.
9. The Court has a residual discretion whether to order inspection.

Takeaway points

Leave under section 237 of the Act is granted if the applicant can identify the cause of action which the company is said to have against a prospective defendant.  Instead, KFI sought to access AIG’s books to investigate whether KFI had a claim against AIG in relation to the validity of the share issue and the appointment of a director.  On this basis, the court stated that KFI approached this matter from entirely the wrong perspective as the purpose of section 247A is instead to determine whether AIG has a claim against any party. 

If KFI believed there was an improper or inappropriate issue of shares by AIF, KFI could take proceedings to unwind the share issue, but this is not a matter which justifies an order being made under section 247A.

The court ultimately exercised its discretion on the basis that KFI was a 0.03% shareholder in AIG.  Allowing a party with such a small shareholding to undertake a 'free ranging' enquiry would be at odds with established principles. 

Lavan comment

This case is an example of the court’s approach when deciding whether to authorize the inspection of certain books under the Corporations Act and highlights the issues that the court will take into consideration when exercising its discretion to order an inspection, and on what terms.

An order for inspection of books under section 247A of the Act must be done in good faith and for a proper purpose, and is not intended to allow a shareholder to gain access to company records to investigate a claim that the shareholder may have against the company.