New South Wales Supreme Court CITATION : McNeill v Hearing & Balance [2007] NSWSC 942 This decision has been amended. Please see the end of the judgment for a list of the amendments. HEARING DATE(S) : 15 August 2007 JUDGMENT OF : Hammerschlag J EX TEMPORE JUDGMENT DATE : 15 August 2007 DECISION : Inspection of books and access to trustee's records ordered CATCHWORDS : CORPORATIONS – EQUITY – Application under s 247A of the Corporations Act 2001 (Cth) by shareholder in company trustee for order to inspect its books – Application by unitholder in unit trust of which company is trustee for access to its records – Suspicion that company sold business of trust at undervalue to entity associated with other shareholder beneficiaries – Application in good faith and for proper purpose – As beneficiary unitholder entitled to access trustee's records LEGISLATION CITED : Corporations Act 2001 (Cth) Companies Act 1899 Quinlan v Vital Technology Australia Limited (1987) 5 ACLR 389 Barrack Mines Ltd v Grants Patch Mining Ltd (1987) 12 ACLR 357 CASES CITED : Barrack Mines Ltd v Grants Patch Mining Ltd (No.2) [1988] 1 Qd R 606 Edman v Ross (1922) 22 SR (NSW) 351 Spellson v George (1987) 11 NSWLR 300 PARTIES : Celene McNeill & Or Hearing and Balance Centre Pty Ltd FILE NUMBER(S) : SC 1906/2007 COUNSEL : J. Stoljar with J.K. Taylor (Plaintiffs) M. O'Neill (Solicitor) (Defendant) SOLICITORS : TressCox Lawyers (Plaintiffs) NOT Lawyers (Defendant) - 8 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST HAMMERSCHLAG J 15 AUGUST 2007 1906/2007 CELENE McNEILL & OR –V- HEARING & BALANCE CENTRE PTY LTD EX TEMPORE JUDGMENT 1 HIS HONOUR: The first plaintiff, Ms Celene McNeill, is an audiologist. The second plaintiff company is under her control. 2 The second plaintiff, together with Kooniba Pty Limited, a company associated with a Ms Vanessa Baillie and Ms Sarah Marshall, are each unit holders in a trust known as the Hearing & Balance Centre Unit Trust ("the Trust"). 3 The Trust owned and operated an audiology practice which it sold in 2006. The practice was carried on by the plaintiff and Mesdames Baillie and Marshall. The plaintiff retired from it in 2003 and the other two continued. 4 The defendant ("the Trustee") is the trustee of the Trust. 5 The first plaintiff is a one third shareholder in the Trustee. 6 By Sale of Business Agreement dated 23 May 2006, the Trustee, as seller, in its capacity as trustee of the Trust sold the audiology practice business to Hearing & Balance Pty Limited, the trustee of a trust called the Hearing & Balance Unit Trust for a purchase price of $180,000 inclusive of GST. 7 The Trustee acted solely as trustee of the Trust. 8 It is not in dispute that the buyer is associated with Mesdames Bailey and Marshall. 9 By Amended Originating Process dated 15 August 2007, the first plaintiff seeks an order pursuant to s 247A(1) of the Corporations Act 2001 (Cth) ("the Act") authorising her to inspect the books of the Trustee. 10 The second plaintiff seeks an order to be supplied with, or have access to, copies of the books and records of the Trust. 11 As an alternative, the plaintiffs move for an order for preliminary discovery requiring the Trustee to discover all documents referring to or relating to the sale of the business including, but not limited, to all documents showing or tending to show how the purchase price of the business was calculated and documents referring or relating to the meeting of the directors of the Trustee of 28 July 2006 or any resolutions passed at that meeting. No submissions were made about that meeting. 12 I shall deal with each of the claims for relief in turn. 13 Section 247A(1)(b) of the Act provides that on application by a member of a company the Court may make an order authorising the applicant to inspect books of the company. 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. 14 An applicant who has a significant holding and who has been a shareholder for some considerable time will more easily discharge the burden of showing good faith than one who has recently acquired a token holding: Quinlan v Vital Technology Australia Limited (1987) 5 ACLC 389 at 393. 15 It is not suggested, nor could it be, that the first plaintiff is a token or recent shareholder in the Trustee. Indeed, it emerged from her cross-examination by Mr O'Neill, solicitor for the Trustee, that she was involved in the audiology enterprise operated by the Trust from its inception. 16 The first plaintiff sought inspection of the books of the Trustee and the second plaintiff access to the records of the Trust because of their concern that the business may have been sold for less than its true value. A sale on that basis, if it occurred, would be a breach of duty by the Trustee to her or to the second plaintiff in which its directors may have participated. 17 Pursuing a reasonable suspicion of breach of duty is a proper purpose for seeking an inspection of a company's records: see Barrack Mines Ltd v Grants Patch Mining Ltd (1987) 12 ACLR 357 affirmed Barrack Mines Ltd v Grants Patch Mining Ltd (No.2) [1988] 1 Qd R 606. 18 In 2004 and 2005, the Trustee obtained opinions on the valuation of the minority interest of the second plaintiff in the Trust. These included a "Valuation of Minority Interest Interim Report" by Michael Lane CA dated 11 August 2004; a comment on that report by an accountant, Mr Bob Bell of Vouris & Bell dated 15 October 2004; and a review of those valuations by Mr Geoffrey McDonald dated 12 April 2005. 19 It is not appropriate at this stage to say anything definitive about whether the suspicion of sale at an under-value is justified. However, the material indicates, and it was accepted by Mr O'Neill, that what occurred was that a valuation of a minority interest in the Trust of the second plaintiff was determined. Because of its minority status in closely controlled economic entity, a discount of 35 percent was applied to that interest. A further discount of 40 percent was applied in relation to marketability of units. The entire business (that is, not a minority interest) was then sold for a price approximating three times the value of a minority interest. The full purchase price so derived was $180,000, and one third of that amount was paid over to the second plaintiff as the value of its share of the business. 20 Having regard to what was done, and the prima facie problem which arises with it, given that not a minority interest but the entirety of the business was sold by the Trustee to an entity associated with its directors for a price reached by multiplying a discounted minority interest by three, I have no difficulty in concluding that the first plaintiff is acting in good faith and that the inspection is sought for a proper purpose. 21 The Trustee submitted that an order for inspection should be refused for three reasons: firstly, because this is not a suit for sale at an undervalue; secondly, because the plaintiffs have enough information to make a decision whether they should pursue a claim of sale of undervalue; and thirdly, because they have the means, including via a relationship which the first plaintiff has with her personal accountant Miss Gosper, who was until 2003 the accountant for the audiology business. 22 None of these submissions find favour with the Court. 23 Section 247A(1) of the Act requires an applicant to be acting in good faith and the inspection to be sought for a proper purpose. There is no principle which stands in the way of such an applicant on the basis that it may have had enough information at an earlier point in time to make a decision on a course it may wish to take. 24 It is also not the law, in my view, that because an applicant may have the means of obtaining information elsewhere, it is not acting in good faith, or seeking inspection otherwise than for a proper purpose. 25 The fact that an applicant may or may not have the means via a relationship with a previous accountant to obtain information is not a good reason why inspection should not be afforded it. 26 In any event, and even were that to be the law, the evidentiary material discloses, in my view, that the information so far provided is inadequate. 27 The valuation material provided goes back to 2004. The business was sold in 2006. Financial statements dated 30 June 2006 have been provided. The relevant material is on a single page. It contains a statement of current assets consisting of cash of $3 and receivables at $190,888, with total current liabilities totalling $190,888, so that the net equity reflected in those accounts is $3. 28 The notes to those financial statements inform the reader that the company acts solely as trustee of the Trust and that any liabilities have been incurred on behalf of the Trust in the company's capacity as corporate trustee. They go on to say that the assets of the Trust which lie behind the right of indemnity are not directly available to meet any liability of the company acting in its own right. The assets of the Trust are sufficient to discharge all the liabilities of the Trust in 2006 and 2005. 29 The information provided says nothing of the trading, results or anything else concerned with the operation and performance of the business which has been sold. 30 Accordingly it follows, in my view, that even if the precepts put by Mr O'Neill were to be accepted I do not consider that the Trustee has in either capacity provided the plaintiff with information which could reasonable be said to satisfy a shareholder in the position of the second plaintiff. 31 Reliance was placed by the Trustee on the decision of Street CJ in Eq, as he then was, in Edman v Ross (1922) 22 SR (NSW) 351 dealing with the rights of a shareholder in a company under the Companies Act 1899 to investigate the company's affairs. His Honour at 358 held that a shareholder of a company registered under that Act, apart from any right conferred upon the shareholders under its Articles of Association, is not entitled as of right to investigate the company's affairs. His right is merely the common law right of a member of a corporation to inspect its documents and that the authorities establish that it must be shown that inspection is necessary with respect to some specific dispute or question in which the party applying is interested, and that it is only then granted to such extent as may be necessary for the particular occasion. 32 His Honour was not dealing with a statutory provision in the nature of s 247A of the Act but with the common law. The decision does not assist the Trustee. 33 It follows, in my view, that there should be an order that the first plaintiff be entitled to inspect the books and records of the Trustee and to take copies thereof. 34 The second leg of the application is by the second plaintiff, as a beneficiary of the Trust to have access and copies of the books and records of the Trust. 35 A person who is one of the potential objects of the exercise of a discretionary power of appointment in respect of a trust fund, has the right to seek, and obtain, from the trustee of that trust fund, information concerning the trustee's management of that trust fund. The exercise of such right does not depend upon it being alleged that the trustee of that trust fund has, in the course of his or her management of that trust fund, been guilty of fraud or other breach of trust: Spellson v George (1987) 11 NSWLR 300 at 315 per Powell J. The second plaintiff is such a person. 36 The trustee is obliged not only to keep proper accounts and allow a cestui que trust to inspect them, but he or she must also, on demand, give a cestui que trust information and explanations as to the investment of, and dealings with, the trust property: Spellson v George at 316. 37 The Trustee had the discretion and power under the Trust Deed to distribute any part of the capital of the trust fund and it did so by distributing the proceeds of sale of the business to the unit holders. 38 No basis has been put as to why the second plaintiff should not be entitled to access to the records of the Trust, and, accordingly, I propose to order that it have such access. 39 The third application was for preliminary discovery. Having regard to the orders I propose to make, the third leg of the application becomes otiose and it is refused. 40 The parties are to bring in short minutes reflecting the orders I have made. 41 The defendant is to pay the cost of this application. ********** 31/08/2007 - Correction to counsel for plaintiff J. Stoljar - Paragraph(s) cover page 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.