James v Tomcat Hardchrome Engineering Pty Ltd [2018] FCA 847

FEDERAL COURT OF AUSTRALIA

James v Tomcat Hardchrome Engineering Pty Ltd [2018] FCA 847 File number(s): QUD 183 of 2018

Judge(s): GREENWOOD J

Date of judgment: 6 June 2018

Catchwords: CORPORATIONS – consideration of the disposition of the costs in relation to an application made under s 247A of the Corporations Act 2001 (Cth)

Legislation: Corporations Act 2001 (Cth), s 247A

Date of hearing: 19 April 2018

Date of last submissions: 11 May 2018

Registry: Queensland

Division: General Division

National Practice Area: Commercial and Corporations

Sub-area: Corporations and Corporate Insolvency

Category: Catchwords

Number of paragraphs: 51

Counsel for the Applicant: Mr S Malcolmson

Solicitor for the Applicant: McCarthy Durie Lawyers

Solicitor for the Respondent: Origen Legal

ORDERS QUD 183 of 2018

BETWEEN: SEAN MICHAEL JAMES Applicant

AND: TOMCAT HARDCHROME ENGINEERING PTY LTD ACN 102 545 648 Respondent

JUDGE: GREENWOOD J DATE OF ORDER: 6 JUNE 2018

THE COURT ORDERS THAT:

1. Pursuant to s 23 and s 37P of the Federal Court of Australia Act 1976 (Cth), rule 1.32 and rule 1.36 of the Federal Court Rules 2011, these orders and the reasons for judgment in support of these orders are made and published from Chambers. 2. The respondent pay the applicant's costs of and incidental to the application of 26 March 2018. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

GREENWOOD J: 1 These proceedings are concerned with the disposition of the costs in relation to an application under s 247A of the Corporations Act 2001 (Cth) (the "Act") by which the applicant, Mr Sean James, sought an order that the respondent, Tomcat Hardchrome Engineering Pty Ltd ("Tomcat"), provide electronic copies of its "books and records" comprising: (a) bank statements for the general bank account known as "Tomcat Hardchrome Engineering Pty Ltd, Westpac Bank Account, BSB 036 059, Account 442625" for the period from 1 July 2012 to 30 June 2016; (b) bank statements for the account known as "FlexiLoan account" for the period from 1 July 2012 to the present day; (c) general ledger entries [for Tomcat] from 1 July 2012 to 30 June 2016; (d) end of year financial statements for the financial years ending 30 June 2013, 30 June 2014, 30 June 2015 and 30 June 2016; (e) payroll records for the period 1 July 2012 to 30 June 2016. 2 The applicant also sought an order for costs. 3 On 19 April 2018, the Court ordered, with the consent of Tomcat, that clear and legible electronic copies of each those five classes of documents as sought, be provided to the applicant by 18 May 2018. 4 The applicant pressed its claim for an order that Tomcat pay the applicant's costs of and incidental to the application. The respondent resists the making of such an order. The respondent does not contend that the Court's power to make an order, conferred by s 43 of the Federal Court of Australia Act 1976 (Cth), is not engaged. Rather, it says that in the exercise of the discretion conferred by that section, no order ought to be made as to the costs of the application. 5 In order to address the contest on this issue, the Court ordered on 19 April 2018 that by 4 May 2018 the parties file any affidavit material upon which they would wish to rely and by 11 May 2018 they file any submissions on the question of costs. Apart from making the orders just described, the application was adjourned to enable the costs issue to be determined on the papers. These reasons are the reasons in support of the orders made today in disposition of the question of costs. 6 The applicant relies on the affidavit of Mr Michael Mapp, the solicitor for the applicant, affirmed on 3 May 2018. The respondent relies upon the affidavit of Mr Alan Doleman sworn on 3 May 2018. 7 Turning first to the affidavit of Mr Mapp, the background matters to which he refers are these. 8 The applicant is a former director and current shareholder of Tomcat. He was a director from 17 October 2002 until 7 December 2016. He holds 15 issued ordinary shares in Tomcat out of a total of 95 issued ordinary shares. Mr Doleman holds the other 80 issued ordinary shares. Thus, as to the ordinary shares, the applicant has a minority interest in Tomcat of 15.78% and Mr Doleman has an interest of 84.21%. Apart from these ordinary shares, the applicant holds, as trustee of the James Unit Trust, one issued extraordinary share in Tomcat. Mr Ian Wright holds one issued extraordinary share. 9 On 25 October 2017, Mr Geoffrey Edwards was the accountant acting for Tomcat. He conducts, or has an interest in, a company that provides accounting services under the name Edwards Irvine and Facius Pty Ltd. On 25 October 2017, Mr Edwards sent an email to the applicant advising that the sale of Tomcat's business had been "effected last week" although because he had not been involved in the "sale process", he could not be exact about the timing. He also said that the purchaser had taken control of "admin matters prior to the sale as part of the due diligence". He also said that he anticipated providing the applicant with the financial statements for Tomcat for the financial year ending 30 June 2017 and, it seems, part of the 2018 financial year, by November or early December 2017. 10 On 27 October 2017, Mr Mapp sent an email to Mr Doleman attaching a letter of that date from Mr Mapp by which he said that the applicant had requested to be provided (through Mr Mapp) with particular documentation. The documentation consisted of items at 4(a) to (k) of the letter all of which are related to the sale of what was said to be the "dominant trading activity of the company since 2002". The documents sought comprised the contract of sale, valuations, resolutions authorising the sale, asset schedules, assignments, mortgages released, leases between Tomcat and the buyer, inventory, balance sheets and other financial documents disclosed to the buyer, and a settlement statement showing the purchase price and the application of the settlement funds. 11 The letter also requested "up-to-date information" including: profit and loss statements for the financial years ending 30 June 2016, 30 June 2017 and, in part, 30 June 2018; current balance sheet; general ledger entries from 1 July 2016 to the present; Business Activity Statements lodged from 1 July 2016 to the present; and resolutions concerning declarations of dividend for the financial years ending 30 June 2016 and 30 June 2017. 12 Mr Mapp sought to be provided with the various documents by 3 November 2017. 13 On 2 November 2017, Mr Ryan Moss, a director of Origen Legal, the solicitor (and entity) acting for Mr Doleman and Tomcat responded advising that Mr Doleman was overseas; Mr Moss was seeking instructions from him to facilitate production "of as much information that is to hand in accordance with your client's request"; and advised that Tomcat's 2017 financial statements, including tax returns, would not be available until late December 2017. Mr Moss suggested that for the sake of convenience and with a view to minimising costs, provision of the documents be made in electronic pdf form by email or a file-sharing platform such as Dropbox or LawConnect. Mr Moss sought Mr Mapp's patience "as the information is collated". 14 On 10 November 2017, Mr Mapp sent a letter to Mr Moss by which he confirmed that electronic transmission of the documents was acceptable and by which he asked for an estimated date of delivery of the documents at point 4(a) to (k) (the documents related to the sale of Tomcat's business) and the other "up-to-date information" described at point 5(a) to (e) of the letter of 27 October 2017. Mr Mapp sought the provision of the material by 17 November 2017. 15 On 20 November 2017, Mr Moss sent an email to Mr Mapp advising that documents in his "client's possession for the time being" had been uploaded to a Dropbox folder with a shared link. Mr Moss said that he was continuing to liaise with Tomcat's accountants and previous employees to "marshal together any other documents relevant to the sale". Those documents would then be added to the folder. Mr Moss also said that Mr Doleman "remains overseas". Nevertheless, Mr Moss said that he was "continuing to facilitate production of as much information that is to hand". He requested further patience as the information was collated. 16 On 21 December 2017, Mr Mapp received an email from Mr Moss forwarding an email from Mr Edwards to Mr Moss of the same date attaching "the draft taxation return and accounts for [Tomcat]". Mr Edwards said that he could not provide the "absolute finals at this stage as I'm awaiting the FINAL settlement statement for the sale". As to the interim accounts to 31 December 2017, Mr Edwards said this: It needs to be noted that in order to measure the true net asset position of the Coy. we need to complete the interim accounts to 31/12/17 as the settlement took place in September, as part of the sale proceeds [approx. $1m] was used to extinguish debt. 17 Mr Mapp says that a "tranche" of the requested documents was disclosed on 20 November 2017 and some further documents were disclosed on 21 December 2017. However, he says that many of the essential documents had not been provided by this time. On 22 December 2017, Mr Mapp sent a letter to Mr Moss referring to the earlier exchanges and contended that some documents had been disclosed but others had not. He pressed for disclosure of the executed sale contract; the final settlement statements; the relevant resolutions; information in relation to mortgages; details of balance sheets and financial documents disclosed to the buyer; profit and loss summaries for the 2017 financial year and part of the 2018 financial year; information concerning disbursement of the settlement monies; current balance sheet; all general ledger entries from 1 July 2016; and the dividend declaration resolutions as earlier sought. 18 He also sought copies of all bank statements issued for accounts controlled by Tomcat, since 1 July 2016, and payroll records since 1 July 2016. The information was sought by 19 January 2018. 19 On 25 January 2018, Mr Moss sent an email to Mr Mapp saying that "further documents have been added to the dropbox substantially addressing the matters" set out in Mr Mapp's letter of 22 December 2017. Mr Moss also said that he would respond further to Mr Mapp early in the following week with more detail. 20 Mr Mapp says that on 11 January 2018 there was further disclosure of a small number of documents uploaded to the Dropbox facility. Mr Mapp says that he had a conversation with Mr Moss on 22 January 2018 in which he observed that the key documents which were yet to be disclosed were Tomcat's general ledger entries from 1 July 2016; Tomcat's bank statements from 1 July 2016 and information relating to the application of the proceeds of sale of Tomcat's business. Mr Mapp says that Mr Moss reiterated that Mr Doleman was currently overseas and that there had been some difficulty in obtaining instructions from him. Mr Mapp also says that Mr Moss conceded that he expected that Mr Edwards would be capable of producing the requested documentation within a reasonable time. 21 Mr Mapp says this at para 21 of his affidavit: On 26 January 2018, a further bundle of documents was disclosed. The bundle of documents substantially included the requested documents, including the items which were discussed in the telephone conversation of 22 January 2018. However, a key bank statement, being the statement for October 2017 which reflected the transactions occurring subsequent to the sale of the business, had not been disclosed due to an error in naming the electronic files. The actual bank statement for October 2017 was uploaded on 7 February 2018. 22 Mr Mapp says that after obtaining electronic copies of all of the documents sought in the period between 27 October 2017 and 7 February 2018, the applicant reviewed the disclosed documents. As a result of that review, the applicant contends that there are a number of irregularities which are said to support his concern about the use of Tomcat's funds. Those concerns have been particularised in an affidavit of the applicant sworn on 26 March 2018. No part of these proceedings involves determining any question in relation to those concerns. They are either well-held or they are not. 23 All of these matters are background matters which lead to Mr Mapp's letter to Mr Moss of 16 February 2018. In that letter, Mr Mapp details the irregularities asserted by the applicant arising out of the applicant's review of documents uploaded to the Dropbox folder. The contended irregularities are the matters which led to the request to inspect the books and records of Tomcat set out at para 21 of the letter. It is not necessary to set out the content of the contended irregularities. It is sufficient to say that eight items of concern are set out in the letter as reflected at para 30 of the applicant's affidavit of 26 March 2018. They are all serious matters. The contended irregularities were said to suggest a use of Tomcat's capital to the detriment of the company and the minority shareholders. 24 At para 21 of Mr Mapp's letter, he seeks disclosure to the applicant of Tomcat's financial documents described at para 21(a) to (e) in the terms reflected in the originating application and the order ultimately made on 19 April 2018 as set out at [1] of these reasons. At para 21(f), Mr Mapp also sought copies of Tomcat's tax returns for the financial years ending 30 June 2013 to 30 June 2016. 25 Mr Mapp sought disclosure of all of the documents at para 21 by 16 March 2016. He also said that if disclosure was not provided by that date, the applicant would commence proceedings for an order under s 247A of the Act. Mr Mapp also said that in the event that an application is made to the Court, the applicant would seek an order for costs and in doing so he would rely upon the letter of 16 February 2018. 26 On 22 March 2018, Mr Moss responded to the letter of 16 February 2018. 27 In the response, Mr Moss suggested that since Mr James had been able to identify contended irregularities of some substance, he must have already formed a view that a cause of action subsisted and thus the Court's discretion ought not to be invoked under s 247A of the Act. He also suggested that as Mr James had been a director of Tomcat from 2002 to 2016 and had been employed in a senior management role for some years, he would have acquired "considerable knowledge of the affairs of the company", being affairs related to the documents sought by him. 28 Thus, it was said, recourse to s 247A was not appropriate. 29 Mr Moss also said that Tomcat's tax returns for the financial years ending 30 June 2013, 30 June 2014, 30 June 2015 and 30 June 2016 had been uploaded to the Dropbox folder; that Mr Edwards and Tomcat's book-keeper was no longer engaged by Tomcat and "accordingly, the provision of documents to Dropbox will no longer be possible for the time being as [Mr Doleman] is currently, overseas"; that Tomcat's financial records remained at its previous place of business, 251 Beringarra Avenue, Malaga, Western Australia; and that "[s]hould [Mr James] require any further information, I am instructed that it is open for [Mr James] to attend that address and access the information himself" [emphasis added]. 30 Thus, it seems that Mr Moss had been able to take instructions from Mr Doleman at least to the extent of being instructed to suggest that Mr James of 14 Constance Street, Victoria Point, Queensland, might like to go to 251 Beringarra Avenue, Malaga, Western Australia and seek access to the documents he had asked for at para 21 of the letter of 16 February 2018. 31 The originating application was filed on 26 March 2018. A sealed copy of it together with the affidavit of Mr James also filed on 26 March 2018 was sent to Mr Moss on 5 April 2018. A notice of appearance was entered by Origen Legal which is in an odd form. The application came on before the Court for a Case Management Conference on 16 April 2018. Mr Moss suggested that the respondent intended to consent to the orders sought by Mr James, except as to the question of costs. 32 On 19 April 2018, the Court made orders as earlier described. 33 In effect, Mr James says that he has been put to legal expense in seeking to achieve that which he did achieve and he seeks a restitutionary order for the costs of and incidental to doing so, on the usual basis. He says that the respondent could have made plain its willingness to provide the information sought by para 21 of the letter of 16 February 2018 but chose to respond in the way earlier described. He says that, in substance, the respondent resisted production in any timely way and did not respond to the letter of 16 February 2018 until 22 March 2018 in any event. 34 Mr Doleman has also put on an affidavit in support of his position that no order as to costs ought to be made. Mr Doleman says this. 35 Mr Doleman says that Tomcat, in September 2017, entered into a contract with Gateway Equipment Parts & Services Pty Ltd ("Gateway") by which Tomcat sold to Gateway "substantially all of its undertaking and assets, namely the business known as 'Tomcat Hardchrome Engineering' ('the Business') [and] settlement of the sale was 'effected on or around 17 October 2017". 36 Mr Doleman says that to the best of his knowledge and belief all of the respondent's records in respect of its "previous business operations" are currently located at the previous place of business at 251 Beringarra Avenue, Malaga, Western Australia. He says that while the respondent operated the business from around October 2002 to October 2017, the respondent employed a full-time book-keeper and administration officer who was "responsible for all of the financial and other record management of the respondent" and who was "the only person who had the knowledge of the business records, their whereabouts, and any practical ability to access them". Of course, the true position is that the directors of the company are responsible for the financial management and, ultimately, the record management of the company, not the employed book-keeper. 37 Mr Doleman says that the applicant was a director of the respondent from October 2002 until December 2016 and Mr Doleman believes that the applicant was fully aware, or ought to have been fully aware, of "this fact", that is, the fact that the employed full-time book-keeper and administration officer was responsible for all of the financial and other record management of the company. 38 Mr Doleman says that he is the sole director of the respondent and has been from January 2017 until now which, of course, includes the period of the sale to Gateway on or about September 2017 and from the time of settlement on 17 October 2017 to now. 39 Mr Doleman says that at the time of settlement on or about 17 October 2017, the respondent's book-keeper's employment ceased with the respondent. 40 Mr Doleman says that between November 2017 and February 2018, Tomcat responded to requests from the applicant's solicitor for various records relating to the business and the financial affairs of the company itself. Mr Doleman says that records were provided in electronic format to the Dropbox folder, as earlier described. He says that at the time of the requests, he was overseas in the Philippines and he was fortunate enough to have the assistance of the previous book-keeper to facilitate the preparation of those documents notwithstanding that she was no longer employed by Tomcat. He says that since that time, and up to the date of the swearing of his affidavit on 3 May 2018, he has remained in the Philippines and has not been able to access any of Tomcat's records or to procure anyone else to do so on Tomcat's behalf. He says that he believes that by 7 February 2018 all documents the subject of any request made prior to the filing of the application on 26 March 2018 had been uploaded to the Dropbox folder. 41 Mr Doleman says that at the time that Mr Moss received Mr Mapp's letter of 16 February 2018, Mr Doleman was in the Philippines and had no access to the requested documents. He also says that, around that time, he was advised by his accountants that they would no longer act for the respondent, and he was also told by the book-keeper that she would no longer provide any further assistance with the applicant's continued request for documents. Mr Doleman says that, under the circumstances, he had no way or means of either accessing or producing the requested documents. He says that he had no-one else to whom he could delegate the task. 42 Mr Doleman says that around 22 March 2018, he instructed his solicitor to respond to certain allegations made in the letter of 16 February 2018 from Mr Mapp on behalf of the applicant. 43 The response speaks for itself and has already been described earlier in these reasons. 44 Mr Doleman says that because he had no way or means of either accessing or producing the requested documents, his intention was to try and accommodate the applicant's request by making arrangements to either attend, or have someone on his behalf attend, at 251 Beringarra Avenue, Malaga, Western Australia where the documents are kept. 45 Mr Doleman says that he has "an ongoing relationship with Gateway and its directors, so I anticipated their cooperation to facilitate this endeavour". 46 Mr Doleman says that as far as he understands the position, there was no response to Mr Moss's letter of 22 March 2018 and thus he believes that the application commenced on 26 March 2018 "was done so precipitously and prematurely". 47 Mr Doleman says that he believes that the applicant was provided, in electronic format, with all documents he had requested and when the provision of documents to the Dropbox folder became practically impossible, the applicant was "permitted and encouraged [to] access all or any of them by attending at the Company's previous place of business 251 Beringarra Ave, Malaga WA". Mr Doleman says that the applicant has not been denied access to the company's books or records at any point of time. He also says that rather than take genuine steps to resolve the matters giving rise to the application, the applicant simply commenced the application prematurely. He also says that the need for the application "would have been obviated if the Applicant had taken proper and genuine steps to resolve the matters giving rise to this action after their receipt of our letter of 22 March 2018". 48 Written submissions have been filed by the applicant and the respondent. I have considered those submissions. It is not necessary to recite in these reasons the contested positions. 49 I am satisfied that a proper exercise of the discretion involves making an order that the respondents pay the costs of the applicant of and incidental to the application. 50 Mr Doleman has been the sole director of the company since December 2016 or, in substance, January 2017. He was the sole director when the company sold substantially all of its undertaking and assets comprising the business, to Gateway. He was the person with the duties and responsibilities of a director in terms of governance of the management of the company's documents. He says that he has an ongoing relationship with Gateway and its directors and that he has an expectation that he will be able to secure their cooperation. The applicant had been seeking particular documents for some time and a range of those documents were made available through the mechanism of the Dropbox folder. However, on 16 February 2018, the applicant's solicitor raised a series of matters of substance and importance resulting in a request for the production of particular documents at para 21 of that letter. A request, not a demand, was made for the disclosure of the documents by 16 March 2018 which provided the respondent and Mr Doleman with a month to provide the documents and secure the cooperation of Gateway and its directors (to the extent that it was necessary). The solicitor acting for Tomcat and Mr Doleman responded on 22 March 2018 and essentially raised doubts about the efficacy of recourse to s 247A of the Act in any event and suggested that the applicant might like to go to 251 Beringarra Avenue, Malaga, Western Australia, himself and seek out the documents for himself. No particular detail was given about who he might contact, who the cooperative directors of Gateway were, and other such matters. The letter of 22 March 2018 makes it plain that neither Tomcat nor Mr Doleman were particularly interested in any further participation in seeking to address the applicant's requests for the particularised documents. 51 The applicant's solicitor made it plain that in the absence of disclosure, the applicant would seek an order from the Court. The applicant did not file the application precipitously or prematurely. Quite quickly after the filing of the application through the mechanism of the first directions hearing, Tomcat responded by saying that the company would consent to the orders. They did so on 19 April 2018 in precisely the terms sought. The applicant was put to the burden of incurring legal costs which so easily could have been avoided. The applicant ought to have a measure of restitution in the form of an order for costs of and incidental to the application on the usual basis and I so order. I certify that the preceding fifty-one (51) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood.