New South Wales Supreme Court CITATION : United Rural Enterprises v Lopmand [2003] NSWSC 404 HEARING DATE(S) : 20 March 2003 JUDGMENT DATE : 20 March 2003 JURISDICTION: Equity JUDGMENT OF : Campbell J DECISION : Parties to bring in short minutes CATCHWORDS : PRACTICE AND PROCEDURE - re-opening of evidence when reasons for judgment delivered but judgment not entered - further argument when reasons for judgment delivered but judgment not entered - CORPORATIONS - inspection of books and records - proper purpose for inspection LEGISLATION CITED : Corporations Act CASES CITED : Knightswood Nominees Pty Ltd v Sherwin Pastoral Company Ltd (1988) 15 ACLR 151 Tinios v French Caledonia Travel Service Pty Ltd (1994) 12 ACLC 622 United Rural Enterprises Pty Limited (Plaintiff) PARTIES : Lopmand Pty Limited (First Defendant) Tracey John Lake (Second Defendant) FILE NUMBER(S) : SC 4039/99 COUNSEL : M Cashion SC; J White (Plaintiff) B DeBuse (Defendants) SOLICITORS : Kemp Strang (Plaintiff) McCooe Raves & Poole (Defendants) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION EQUITY LIST CAMPBELL J THURSDAY 20 MARCH 2003 4039/99 UNITED RURAL ENTERPRISES PTY LTD v LOPMAND PTY LTD & ORS JUDGMENT – Ex tempore 1 HIS HONOUR: The procedural background to today's application can only be understood by reference to my judgment in this matter on 11 March 2003. I will not repeat what I have there set out. 2 Today Lopmand makes application for the type of orders which it foreshadowed on 11 March 2003. The first application which is made is an application that there be leave to reopen its evidence for the purpose of adducing further evidence on whether there has been oppression. 3 The evidence which has already been adduced in this case shows that, for some years, interests associated with Mr Lindsay Owen have dealt with Painten as though it were fully under their control. 4 Those associated with Mr Lake have had no information about the company, or any say in its affairs. Further, it is already established in the case that the company has not paid dividends, although it has been cash flow positive for some time. 5 In the course of submissions I invited Mr DeBuse to identify the particular facts which he sought to prove, if leave to adduce further evidence were to be granted. I did not receive any answer to that invitation which persuaded me that there are facts which need to be established which would found any arguments which might be open to today's applicant. Accordingly, I decline to allow further evidence to be adduced. 6 The second application which is made is that leave be granted to further argue the question of whether there has been oppression. 7 Mr Cashion SC opposed the granting of that leave on the ground that, before any such leave was granted, it would be necessary for there to be an identification with precision of the respect or respects in which the judgment should be altered, and that I should be satisfied that there is a real prospect that the granting of the leave might result in some altering of the judgment. 8 I accept that it would be necessary for any application to further argue the matter to meet the criteria which Mr Cashion laid down. The further arguing of litigation after a judgment has been delivered is something which is seriously inimical to the orderly disposal of disputes by litigation. It is something which should be permitted only in unusual circumstances. 9 It seems to me, however, that here there are such unusual circumstances. The fact that I made the judgment that I delivered on 12 December 2002 on the basis of a fact about the share register of Painten, which both parties knew was incorrect, and which the plaintiff reopened to demonstrate was incorrect, takes this case well out of the usual run of procedures. It would be a denial of justice in a very fundamental sense to allow a judgment to stand which had been made on a basis which the court came to know was wrong, if that situation could be avoided. It seems to me that it can be avoided by granting leave to further argue the consequences of the true factual situation about who are the registered holders of shares in this company. 10 The basis upon which Mr DeBuse seeks to further argue the question of oppression is, it seems to me, clear enough. He says that Lopmand was really a member of Painten, that it had rights appropriate to a member of Painten, and yet it was not permitted to exercise those rights for years. He submits that, notwithstanding that there was an equitable mortgage over Lopmand's share in Painten, and that an equitable mortgagee of shares ordinarily is entitled to become registered, there might have been a basis upon which that registration could have been prevented, on the grounds of unclean hands of the mortgagee, if the mortgagee had sought to become registered at a time when it had been, previously, denying to Lopmand the rights which Lopmand actually had as a member of Painten. Further, Mr DeBuse submits that even if the mortgagee were to become registered, it still owes duties to the mortgagor, and would not be entitled to treat the mortgaged share as though it were completely its own property. 11 The respect or respects in which it is contended that the judgment ought to be changed are likewise, it seems to me, clear enough, namely, that the finding that there has been no oppression should be reversed. That is something which is explicitly articulated in the written submissions which Mr DeBuse has provided and served last week, where he says: "In the event that it was given leave then Lopmand seeks a declaration that there has been oppression but that the orders consequent on that declaration are determined subsequent to the declaration". 12 The argument that could be presented in favour of that conclusion is one which strikes me as having some prospect of success, sufficient to enable the fairly low threshold, of satisfying me that there is a "real prospect" of altering the judgment, to be crossed. 13 The respondents to today's motion were not in a situation to deal with the argument which would ensue if leave to further argue this question were to be granted. Consequently, the only order I shall make on this aspect of the matter is that the applicant be granted leave to further argue the question of whether there has been oppression. 14 The next application which is made today is for an order that Lopmand and Mr Lake be allowed to inspect, either personally or through their solicitors and legal advisers in these proceedings, or an accountant appointed by them, or organised by the court, the books and records of Painten. 15 There are two bases which are relied upon by Mr DeBuse to found the jurisdiction of the court to make an order. The first is s 247A(1) of the Corporations Act. Section 247A(1) says: "On application by a member of a company ... the Court may make an order: (a) authorising the applicant to inspect books of the company ... ; or (b) authorising another person (whether a member or not) to inspect books of the company ... On the applicant's behalf. The Court may only make the order if it is satisfied that the applicant is acting in good faith and that the inspection is to be made for a proper purpose." 16 The second basis on which Mr DeBuse relies is s 247A(3). It says: "A person who: (a) is granted leave under section 237; or (b) applies for leave under that section; or (c) is eligible to apply for leave under that section; may apply to the Court for an order under this section." 17 Concerning an application under s 247A(3) there is a limitation imposed by subsection 5, namely: "The Court may make the order only if it is satisfied that: (a) the applicant is acting in good faith; (b) the inspection is to be made for a purpose connected with: (i) applying for leave under section 237; or (ii) bringing or intervening in proceedings with leave under that section." 18 Section 237 is the section which permits a person referred to in s 236(1)(a) to apply to the court for leave to bring, or to intervene in, proceedings. The people referred to in s 236(1)(a) include a member, and a former member of the company. The type of proceedings which s 236 contemplate being brought are proceedings on behalf of a company. 19 In the present case, Lopmand is a member of Painten. There is evidence before me of a stamped transfer of the Lopmand share in Painten, which was provided by Lopmand pursuant to orders which I had earlier made in these proceedings. That transfer has not been registered. It is a fair inference that it is likely to be registered soon. Because it has not yet been registered, however, Lopmand, today, has standing under s 247A(1) to seek an order for inspection of books. 20 Lopmand contends that it is acting in good faith and for a proper purpose in seeking the order for inspection. There are three different purposes which Lopmand puts forward as the purposes for which it seeks inspection. The first of those purposes is the valuation of its share or equity of redemption. 21 There is authority, in Tinios v French Caledonia Travel Service Pty Ltd (1994) 12 ACLC 622, for it being a proper purpose for a shareholder to inspect the books if the shareholder wishes to ascertain the value of shares which he holds. 22 Mr Cashion SC submits that that case is distinguishable, because in Tinios there was evidence that the shareholder wished to sell his shares, that there was an article which set out a procedure for the exercise of pre-emptive rights between shareholders, and that part of that procedure required a shareholder to be able to nominate a value for his shares. Mr Cashion SC says that there is no such immediacy of needing to know a value of shares in the present case. 23 In my view, the very fact that the judgment which I gave on 12 December last says that there is a substantial debt owed by Lopmand, and that it is secured on that share, creates a quite obvious commercial need to know whether there is any actual equity remaining to Lopmand in that share. It would be quite impossible for Lopmand to make any informed judgment about how to deal with its rights in the company, as I have found them to be, if it does not have a view about the value of the share. In my view, that is a proper purpose. There is no basis for believing that the application is not one which is made in good faith. In saying that, I am not trying to dissent from the view which has been expressed in Knightswood Nominees Pty Ltd v Sherwin Pastoral Company Ltd (1988) 15 ACLR 151 that the test of "in good faith and for a proper purpose" is a composite expression, rather than two separate expressions. 24 A second purpose which Lopmand puts forward is that it wants to be informed concerning the conduct of the company for the period in which it has not been informed of the events, meetings and other information in relation to the company. Lopmand says that even as a mortgagor, it would be entitled to know the use (or misuse, anything done which may devalue it) of the security it has provided. Lopmand says it may also be entitled to know what benefits it or its mortgagee should have or would have received. Lopmand says that in the particular circumstances of this case it should also be able to discover what if anything Lindsay Owen Holdings Pty Ltd has agreed to in general meeting and whether or not this was in the interest of Lindsay Owen Holdings as opposed to Lopmand. 25 It is not clear whether, in fact, Lindsay Owen Holdings Pty Ltd has done anything in relation to this share. It is true that Lindsay Owen Holdings Pty Ltd is shown in the ASIC records (incorrectly) as being the registered owner of one share in the company. There is no evidence that it has done anything, however, in actual operation of the affairs of the company. 26 I am not at present persuaded that the investigation of the rights as between mortgagor and mortgagee is a proper purpose, within s 247A. It seems to me that when s 247A(1) talks about a proper purpose, it talks about a proper purpose connected with matters relating to the proper administration of the company, or the rights the applicant has as a member of the company. Of course, there will be interaction between the proper administration of the affairs of the company, and the exercise of rights as between mortgagor and mortgagee, but it seems to me that when the focus of an enquiry is to enquire whether the mortgagee has acted in a way it is entitled to, that is something which is probably beyond the type of investigation the court should allow under s 247A (1). 27 The third purpose which Lopmand puts forward for an inspection is that it wants to investigate the conduct of the directors in relation to; (a) the existence and implementation of a dividend policy; and (b) the use, whereabouts and commercial benefit of the company of the profit and cash flow obtained by the company in the period November 2000 to present. 28 On the material before me, I am not persuaded that there is anything to investigate concerning the existence and implementation of a dividend policy. On the material before me, there have been no dividends. Whether that is a matter of policy, rather than a matter of making individual decisions on a year by year basis, is not, it seems to me, a matter which I am presently persuaded provides a basis for inspection. 29 The question of the use, whereabouts and commercial benefit to the company of the profit and cash flow obtained by the company in the period November 2000 to present is something which bears upon the value of the shares. Likewise, if it were to be the case that directors had engaged in some sort of breach of director's duties, one can say, in the abstract, that the company might be entitled to damages in consequence, and that those damages could affect of the value of a share in the company. 30 However, at present, there is no material before me which justifies any conclusion that there is a subject to enquire into, concerning whether the directors have engaged in a breach of duty. It may be that the investigation of the value of the shares reveals such matters, or it might not; it is purely a matter of speculation at the moment. I would, therefore, not be prepared to make any order for inspection for this third purpose, as an independent purpose to the valuation of the share or equity of redemption. 31 One of the bases on which Mr Cashion SC opposed the making of an order was that it was wrong to say that a member has a right to information about all the affairs of the company. It is true that, in many corporations, the affairs of the company are committed to the directors to administer and the shareholders have limited rights of participation and information conferred upon them by the constitution of the company. However, s 247A itself creates a potential ground for exception to that circumstance. It confers on members of the company a right, conditional upon satisfying the court that it is appropriate, for the members to obtain more information than the constitution of the company allows them. 32 Mr Cashion SC also submits that it would not be right, as a matter of discretion, to allow Lopmand the benefit of an order under s 247 when it is probably only going to be a matter of days before Lopmand ceases to be a member. 33 That is not a factor which I place great weight on. Lopmand has been denied information to which it was entitled over many years, and has been shut out from participation in the affairs of the company over those years, notwithstanding that it has in fact been a member. It seems to me to be an appropriate exercise of the court's discretion to use an order under s 247A as a means of remedying its disadvantaged position as a result of deficient recognition of its right to participate in this fashion, notwithstanding that its locus standi to obtain such an order under s 247A (1) might disappear in a few days. 34 A second basis on which Mr Cashion SC opposed the making of an order was that, though Lopmand was present on the register of the company, it was contrary to the wishes of "the beneficial owner" on the Lopmand Painten share to have an inspection of this kind take place. It is, it seems to me, an oversimplification to say that the mortgagee is "the beneficial owner" of the share. Rather, the mortgagee has certain rights in equity relating to the share, such as enable the share to be used as security for the debt which is owed to the mortgagee, but the mortgagor has other rights, in equity, in the share. These include whatever beneficial interest there might be in the share after satisfaction of the debt which is owed to the mortgagee. At present, it is not possible to tell whether there will be any equity in this share for Lopmand. Neither, however, is it possible to say that there will be no equity in this share for Lopmand. In those circumstances, it is not possible to say, unequivocally, that the mortgagee is "the beneficial owner" of the share. 35 A final basis upon which Mr Cashion SC opposed the making of an order was that one of the purposes of the application was to get a belated discovery in this present suit, or perhaps a discovery before suit for another suit. 36 I am not persuaded those are purposes of the application. I have already refused leave to reopen, so the application can hardly, as it will turn out, result in the providing of a belated discovery for the purpose of this suit. It is sufficient, it seems to me, that there is a legitimate commercial purpose for Lopmand to wish to know the value of such rights as it has in the share that the inspection of the books and records should be granted. 37 Because I have only been satisfied that one of the purposes put forward by Lopmand is a proper purpose, it seems to me that I should not make an order which permits inspection of books in a completely unfettered way. Rather, the inspection should be for the purpose which I have found to be a proper one. 38 While s 247A talks about inspection of the "books", the expression "books" is given a broad meaning by s 9 of the Corporations Act, and it is that broad meaning which needs to be carried into any order. 39 When I have decided to allow inspection under s 247A(1) there is no need to give separate consideration to whether inspection could also be allowed under s 247(3), given that I see no basis on which Lopmand would be granted a wider ranging inspection under s 247(3) than I would allow under s 247(1). (Discussion re costs) 40 Mr DeBuse applies for an order for the costs of the motion. He submits that his client has been substantially successful. It is correct that he has succeeded in two of the three applications which he made today, namely for leave to further argue the question of oppression, and for an order for inspection. The applicant has, however, failed in its attempt to obtain leave to reopen the evidence. 41 Mr Cashion SC submits that the appropriate order is that there be no order as to costs. He submits that this is so partly because the respondent had succeeded in resisting one of the applications made. Another basis is that he says that the only reason why there was any need to come back to court at all was because the register of members was not tendered at the original hearing. 42 It seems to me that there is some force in each of these contentions. Mr DeBuse says that in the last few weeks it would have been possible for the respondent to consent to the orders which were sought today, and granted today, but that it decided not to do so. 43 It seems to me that while that is true, the fact that a fundamental source of this problem is that the registered was not tendered in the first instance cannot be overlooked. I make no order as to the costs of the motion. I direct the parties to bring in short minutes of order. ********** Last Modified: 05/15/2003 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.