| JUDGMENT No. ome Smal wonbebon CATCHWORDS CORPORATIONS - order authorising inspection of books PRACTICE AND PROCEDURE - application for order for security for costs s Law, s 319 No. NG 3400 of 1994 CARL GIBSON v OPALSEARCH PTY LIMITED and others MOORE J SYDNEY 23 NOVEMBER 1994 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION \s] hs td NOT. No. NG 3400 of 1994 ed BETWEEN: CARL GIBSON Applicant AND: OPALSPECTRUM PTY LIMITED First Respondent OPALSPECTRUM GROUP LIMITED Second Respondent VAN _BRUGGE HOLDINGS PTY LIMITED Third Respondent Moore J Sydney 23 November 1994 ORDER OF THE COURT THE COURT ORDERS THAT: 1. The application for an order under s319 of the Corporations Law be adjourned to enable the parties to bring in short minutes to give effect to the reasons for judgment. The application for an order to give security for costs be dismissed. The respondents pay one half of the applicant's costs of the two notices of motion. Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 3400 of 1994 ) GENERAL DIVISION ) BETWEEN: CARL GIBSON Applicant AND: OPALSPECTRUM PTY LIMITED First Respondent OPALSPECTRUM GROUP LIMITED 8econd Respondent VAN BRUGGE HOLDINGS PTY LIMITED Third Respondent JUDGE: Moore J PLACE: Sydney ATE: 23 November 1994 REASONS FOR JUDGMENT On 15 August 1994 an application ("the principal application") was filed on behalf of Mr Carl Gibson ("the applicant") alleging breaches on ss187(1) and 260 of the Corporations Law ("the Law") and s52 of the Trade Practice Act 1974 (Cth) ("TP Act"). The application was subsequently amended as was the statement of claim that accompanied it. While it is not entirely clear from the pleadings what is alleged and sought by way of relief, it appears to be that, in substance, the applicant seeks damages for wrongful dismissal, an order requiring Van Brugge Holdings Pty Ltd ("the third -2- respondent") to purchase 500,000 ordinary fully paid shares in Opal Spectrum Group Ltd ("the second respondent") and the appointment of a provisional liquidator to the second respondent. By motion filed on 10 October 1994 the applicant seeks an order under s319 of the Law authorising the inspection of the books of the respondents though a similar order was also sought in the principal application. The applicant later limited the order sought to books of the second respondent. By motion filed 13 October 1994, the respondents seek an order for security for costs in the principal application. This judgment deals with those two applications. Both the applicant and respondents relied on affidavit evidence filed in each of the applications though reference was made to affidavit evidence in the proceedings more generally. The facts were, for present purposes, generally uncontentious. The applicant had been employed by Opalsearch Pty Ltd ("the first respondent") under a service agreement dated 15 August 1989. He had earlier been engaged as a consultant assisting in the development of the business of the first respondent. The applicant was issued with 500,000 shares in the second respondent which is a holding company. The shares were issued as fully paid shares with a par value of fifty cents though they were not paid for by the applicant. The agreement provided that the price for the shares was repayable if the applicant's employment ceased though it is not entirely -3- clear how the acquisition of the shares was financed. The service agreement obliged the applicant to sign a deed granting an option exercisable by the third respondent to acquire the shares on, relevantly, one of two bases if the applicant's employment with the first respondent was terminated. They are recorded in the service agreement in the following way: "7.1(b) (i) af the Executive ceases to be employed by the Company at any time by reason of the Company's valid termination of this Agreement upon breach by the Executive, at the price of fifty cents (50c) per Share; (ii) wees (iii) uf, other than as provided in (i), the Executive ceases to be an employee of Opalsearch after 30 June 1992, at a price being the greater of the fair market value of the Shares as determined by the Board of Opalspectrum upon the advice of the auditors of that company or fifty cents (50c) per Share." There is no direct evidence that this deed was executed though the parties proceeded in these proceedings as if it had been. On 8 August 1994 the first applicant was summarily dismissed by the managing director of the first respondent. At the time he was dismissed he was given a copy of a memorandum of advice of a barrister which recounted allegations of crimin=1 conduct by the applicant = and allegations of conduct by the applicant inimical to the interests of the first respondent. Counsel advised that the applicant could be summarily dismissed. That the applicant engaged in such conduct appears to be the reason for his dismissal. The applicant was a director of the second respondent but was removed as a director at a meeting of the Board held after 8 August 1994. The applicant received no notice of this meeting. On 11 August 1994 the status of the second respondent changed from that of unlisted public company to that of exempt proprietary company. I consider firstly the application under s319 of the Law which provides: "319(1) Where: (a) a member of a company applies to the Court for an order authorising a registered company auditor, or a duly qualified legal practitioner, acting on behalf of the member to inspect books of the company; and (b) the Court is satisfied that the member is acting in good faith and that the inspection is to be made for a proper purpose; the Court may: (¢) make an order authorising a registered company auditor, or a duly qualified legal practitioner, acting on behalf of the member, at such time, as is specified in the order, to inspect, and to make copies of, or take extracts from, specified books of the company; and (a) make such other order or orders (if any) as it thinks fit including, without limiting the generality of the foregoing, an order relating to the use that may be made of the information disclosed to the member by the registered company auditor or the duly qualified legal practitioner as a result of the inspection. (2) The right of a member of a company to apply for an order under subsection (1) in addition to and not in derogation of any right in relation to the inspection of books of a company that a member of a company has under any other law." -5 - The original order sought under s319(1) was that the applicant's representatives, Messrs P.W. Parbury, solicitor, and G.J. McNicoll, accountant, be authorised to inspect all books, as defined in s5(1) of the Law, of the respondents. That order was refined and ultimately what is sought, as I understood the character of the documents described by counsel for the applicant, is an order authorising the inspection of the following books of the second respondent: (i) documents evidencing any changes to the memorandum and articles of association of the second respondent that have not been lodged with the Australian Securities Commission; (ii) detailed profit and loss accounts and trial balances for the last three years; (iii) minutes of meetings of directors and shareholders since 1 January 1985; (iv) any valuation reports made in the last four years concerning the value of the assets of or shares in the second respondent; (v) any document evidencing the transfer of shares in the second respondent including the share register and any completed share transfers in the custody or control of the second respondent; (vi) Board minutes evidencing any non-arms length transactions and transactions with related entities in the last three years (excluding stock purchases in the ordinary course of business) ; (vii) any document detailing any abnormal or extraordinary transaction referred to in the second respondent's profit and loss account for the last three years; (viii) any register of the assets of the second respondent; (ix) any report or written advice leading to the restructuring of the second respondent in 1994 and documents supporting that report or advice. -6- The order sought was amended to substitute Mr 0. Houston for Mr McNicoll. The grounds upon which the order authorising inspection is sought are twofold. The first is that the documents include documents necessary to determine the value of the shares of the second respondent, and alterations that might have occurred and may occur to their value. The second is to inspect documents that might indicate whether those conducting the affairs of the company have done so in a way that enlivens the provisions of s260 of the Law. It was also put more generally that the inspection was necessary to protect the financial interests of the applicant. The respondents submit that the application is a fishing expedition arising from and relating to the _ principal application, some of the documents are confidential (see (ii) above), some of the documents may be inspected as of right (see (v) above - share register), some of the documents do not exist (see iv above) and the identification of some of the documents involve an evaluation by an officer or employee of the company as to whether they meet the general description of the documents sought (see (vi) above). The respondents also submit that in so far as the documents were sought to enable the value of the shares to be ascertained, it has not been established that they will. Moreover if they do it would only be necessary for them to be to be inspected by an accountant. In any event and generally, no undertaking was given or order -7- proposed that would ensure the confidentiality of any documents inspected. The power of the Court to make an order under s319 is conditioned on the Court being satisfied that the applicant is acting in good faith and the inspection is to be made for a proper purpose. Some of the relevant general principles to be considered when determining the application can be gleaned from a number of comparatively recent cases to which I was referred. They are: (a) whether there exists good faith and proper purpose is a question of fact and the applicant bears the onus of establishing them: see Biala Pty Ltd and anor v Mallina Holdings Ltd (1989) 7 ACLC 894; (b) while it has been suggested that the applicant must have some special interest of his own in inspecting documents which is different from the interests of the general body of members: see Biala, supra and Grants Patch Mining Ltd y Barrack Mines Ltd (1988) 6 ACLC 101, the interest can be common to other members: see Re Claremont Petroleum N.L. (1990) 8 ACLC 56 and the better view is that nature of the interest should not be viewed as limited and need only be related to a proper purpose: Re Claremont Petroleum N.L. (1990) 8 ACLC 196 at 198; (c) an order will not ordinarily be made if the applicant simply challenges the manner in which the company is managed though the position might be otherwise if oppressive conduct against the applicant is alleged: see Claremont, supra at 196; (a) the protection of an investment in a company may be a proper purpose: see Claremont, supra at 198; (e) the procedure of obtaining an order for inspection is not intended to be a form of or substitute for inspection of documents after discovery on affidavit or answers to interrogatories in pending litigation: see Re Claremont Petroleum N.L. (No. 2) (1990) 8 ACLC 548 though the existence of litigation is no bar to an order in a proper case: Re Humes Ltd (1987) 5 ACLC 64; (f) in many circumstances an applicant should not be able to - 8 - obtain inspection of documents disclosing the decisions of directors or reports or records leading to those decisions though there will be cases where documents might be inspected that manifest the results of these decisions particularly of they may have affected the value of the assetts of the company: see Re Claremont (No. 2), supra at 552; (g) the confidential nature of the information in the books is not a sufficient reason to deny access: Re Humes, supra at 70-71. In expressing the following conclusions, I am doing so only for the purpose of dealing with the application under s319 by reference to the limited material before the Court. I am satisfied that the applicant is acting in good faith in seeking access to books to ascertain what the value of the shares might now be and whether the value has altered in the recent past or might alter in the immediate future. As a purpose it is a proper one. The applicant's employment with the first respondent was at a senior level and the allotment of shares in the second respondent was likely to have been a significant element in his overall remuneration. The value of the shares and factors that might have recently or might in the immediate future, affect their value are matters of legitimate concern to hin. I do not accept, as the respondents submit, that the question of their value only becomes relevant if clause 7.1(b)(iii) of the service agreement, or a deed reflecting its terms, is rendered effective because the c.cmination was fou.uuw not to be valid. The validity of the termination does not depend upon the consideration of its validity by a court. Events affecting their value are of present relevance to the applicant. I do not view the fact that some of the documents sought to be -9- inspected might be inspected as of right or do not exist as relevant in deciding whether an order for inspection should be made on this matter though if all the documents were of this character, it may bear upon the bona fides of the application. In my view, an order should be made authorising inspection of the documents identified in pars(ii), (iv), (v), (vii), (viii) and (ix) set out earlier in this judgment. I am satisfied those documents may bear upon the value of the shares. That there is a proper purpose relating to apprehended oppression is less clearly made out. However, the applicant was removed as a director without notice of the meeting at which it occurred which is, at least prima facie, an irregularity in the management of the second respondent though a recent one. Further, the character of the second applicant altered several days after the termination. I consider the applicant is entitled to have an understanding of what has eccurred in the management of the company' since his termination which preceded, by days, his removal as a director. That is a proper purpose and the application is made, in this respect, bona fide. It is from this time that there appears to me to be a basis upon which he might reasonably entertain concerns about the management of the second respondent as it relates to his interests as a shareholder and director: see s260(5) (b). I will therefore make an order authorising inspection of documents referred to in pars(i) and (iii) but only as to -10- meetings held on or after 8 August 1994. I reserve to the respondents liberty to seek to have that order limited so as to preclude inspection of any minutes of the Board of directors that relate directly to this litigation. I will make no order, at this stage, authorising inspection of documents referred to in (vi) as I presently am unsure what this comprehends as would also, I would anticipate, those who were required to provide the documents for inspection. I am not presently satisfied that an order should be made permitting inspection of any minutes of meetings prior to 8 August 1994. The respondents raised a question about the need for the applicant's solicitor, Mr Parbury, to inspect the books in addition to Mr Houston who is a registered company auditor. The reference to "a registered company auditor, or a duly qualified legal practitioner" in s319(1)(c) should be read conjunctively: see Re Humes, supra and there may be a need, in my view, for Mr Parbury to consider the legal effect of an inspected document. The respondents also raised a question about' the confidential nature of some of the material sought to be inspected. The confidentiality of the material is, to an extent, protected by s320 of the Law which prohibits disclosure by those who will undertake the inspection of information acquired during the inspection other than to, relevantly, the applicant. Curiously s320 does not, at least -i1l1- expressly, limit the use that might be made of the information by the applicant if it is given to him in the way contemplated by s320. The respondents are concerned that confidential commercial information might be revealed as a result of the inspection and I propose to make the order permitting the inspection conditional upon the applicant providing to the respondents an undertaking as to confidentiality acceptable to them or, in the absence of their agreement to a form of undertaking, an undertaking acceptable to the Court. The application for security for costs is made on the basis that the applicant is impecunious and the applicant's claim, properly understood, is only for three months salary for notice which he was not given. The respondents submit that the applicant's claim for relief under s260 of the Law and s52 of the TP Act are brought to sustain in this Court the claim for the three month's salary. They further submit it is a matter that should be litigated in the Local Court and not this Court and as a result of the proceedings being brought in this Court, the respondents costs will be greater. The mere impecuniosity of the applicant is not a ground for ordering that security be given: see Barton v Minister for Foreign Affairs (1984) 54 ALR 586 at 592 and James v Australian and New Zealand Banking Group Limited (1985) 9 FCR 442. As to the character of the litigation, the claim under s52 of the TP Act is only reflected in the originating process in the order sought based on alleged breach of that section. - 12 - The statement of claim does not plead the breach of the section. However I am not satisfied, as the respondents imply, that the claim under s260 of the Law is without substance. The conduct of the directors of the second respondent in removing the applicant as a director without notice to him of the meeting at which this occurred, indicates that the allegation of a breach of s260 may prove to he one of substance. While there was no evidence of the present value of the shares in the second respondent, their value at par is $250,000. They are shares in a holding company of a company whose business appears to be a prosperous and expanding one. The enforcement of any rights that arise under the service agreement or any deed executed pursuant to it which concern the applicant's shareholding in the second respondent, may prove to be litigation of some substance. I am not satisfied that the respondents' characterisation of the principal application is correct and I am not satisfied they have made out a case for an order for security for costs. I dismiss that application. I will make orders authorising inspection of the books in the manner I earlier discussed. As to the costs of these applications, the respondents have failed in one and substantially failed in the other. However it was necessary for the hearing of the application under s319 to be adjourned -13- to enable the applicant to identify with some particularity the books that were sought to be inspected and the identity of the accountant who would undertake the inspection. It was reasonable for the respondents to have resisted the order in the terms in which it was originally framed. This should be reflected in any order I make as to costs. The respondents should pay one half of the applicant's costs of the two motions. I certify that this and the preceding twelve (12) pages are a true copy of the Reasons for Judgment herein of his Honour Justice Moore. U 2 -onlom_— \V LUA Associate: < — Date: : 23 November 1994 Counsel for the Applicant Mr L. Tyndall Solicitor for the Applicant: Philip Parbury & Associates, Solicitors Counsel for the Respondents: Mr M. Aldridge Solicitor for the Respondents: John de Mestre & Co, Solicitors Date of hearing: 4 & 10 November 1994 Date of judgment: 23 November 1994