Engel v National Biodiesel Ltd

Case [2015] FCA 1114

FEDERAL COURT OF AUSTRALIA

Engel v National Biodiesel Limited [2015] FCA 1114

Citation: Engel v National Biodiesel Limited [2015] FCA 1114
Parties: THORSTEN ENGEL v NATIONAL BIODIESEL LIMITED ACN 119 403 539
File number: NSD 890 of 2015
Judge: MARKOVIC J
Date of judgment: 22 October 2015
Catchwords: CORPORATIONS – members – inspection of books  – meaning of “books of the company” – whether copies of subsidiary’s records in the possession of parent company are “books of the company” – Corporations Act 2001 (Cth) ss 247A
Legislation: Corporations Act 2001 (Cth) ss 9, 247A, 247B, 247C, 431
Federal Court of Australia Act 1976 (Cth) s 43
Cases cited: Acehill Investments Pty Ltd v Incitec Ltd [2002] SASC 344
Areva NC (Australia) Pty Ltd v Summit Resources (Australia) Pty Ltd (No 2) [2008] WASC 10
Hanks v Admiralty Resources NL (2011) 85 ACSR 101
Hanks v Admiralty Resources NL (No 2) [2011] FCA 1464
Intercapital Holdings Ltd v MEH Ltd (1988) 13 ACLR 595
Knightswood Nominees Pty Ltd v Sherwin Pastoral Company Ltd (1989) 15 ACLR 151
London City Equities Ltd v Penrice Soda Holdings Ltd (2011) 84 ACSR 573
London City Equities Ltd v Penrice Soda Holdings Ltd (No 2) [2011] FCA 822
ObjectiVision Pty Ltd v Visionsearch Pty Ltd (No. 3) [2015] FCA 304
Re Claremont Petroleum NL (No 2) [1990] 2 Qd R 310
Re Style Ltd; Merim Pty Ltd v Style Ltd (2009) 255 ALR 63
Yara Australia Pty Ltd v Burrup Holdings Ltd (2010) 80 ACSR 641
Date of hearing: 8 October 2015
Place: Sydney
Division: GENERAL DIVISION
Category: Catchwords
Number of paragraphs: 57
Counsel for the Plaintiff: Mr J Hynes
Solicitor for the Plaintiff: William James
Counsel for the Defendant: Ms S Tame
Solicitor for the Defendant: Clamenz Lawyers

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

GENERAL DIVISION

NSD 890 of 2015
BETWEEN:

THORSTEN ENGEL
Plaintiff
AND:

NATIONAL BIODIESEL LIMITED ACN 119 403 539
Defendant

JUDGE:

MARKOVIC J

DATE OF ORDER:

22 OCTOBER 2015

WHERE MADE:

SYDNEY

THE COURT ORDERS THAT:

1.Pursuant to s 247A(1) of the Corporations Act 2001 (Cth):

(a)the plaintiff;

(b)the following employees of the solicitors for the plaintiff: Brendan Wyhoon, Michael Forrest, Kate Forrester, Monika Harrington, Michael Baltins, Natasha Busa and Mr Jack Hynes of counsel;

(c)Barry Jordan and Neil Gray, both of Deloitte, and any junior staff as required by them in respect of whom five (5) business days’ written notice is provided to the defendant’s solicitors; and

(d)such other persons as agreed between the parties in writing,

are authorised to inspect and make copies of the books of the defendant described in the Schedule to these Orders, with such books to be made available for inspection no later than 18 November 2015.

2.Subject to further order, the inspection authorised by Order 1:

(a)is permitted to take place from 10.00am on Wednesday, 18 November 2015 and continue during the hours of 10.00am to 4.00pm Sydney time on any business day; and

(b)is to be completed by…

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AGLC
Engel v National Biodiesel Ltd [2015] FCA 1114
Case
[2015] FCA 1114
Decision Date

CaseChat Overview and Summary

In the case of Engel v National Biodiesel Ltd, the Federal Court was asked to determine whether Mr Engel, a shareholder in National Biodiesel Ltd (NBL), was entitled to inspect certain company records under section 247A of the Corporations Act 2001 (Cth). Mr Engel sought to inspect the records to investigate specific transactions that he believed may have affected the value of his investment in NBL. The transactions in question involved loans, trademark transfers, and the sale of a subsidiary's business. NBL opposed Mr Engel's application on the basis that it would be an unreasonable burden and that Mr Engel had not demonstrated a proper purpose for the inspection.

The court needed to decide if Mr Engel was acting in good faith and for a proper purpose, which are prerequisites for granting an inspection order under section 247A. Additionally, the court had to determine the scope of the inspection, specifically whether the records in the possession of NBL’s parent company, which were copies of the subsidiary's records, qualified as "books of the company" under the Act. The court also considered whether Mr Engel should bear the costs associated with complying with the inspection order.

In its decision, the court found that Mr Engel had a genuine concern about the transactions and had demonstrated a proper purpose for seeking the inspection, which was to investigate whether to commence proceedings. The court held that requiring Mr Engel to pay the costs of compliance would be inconsistent with the purpose of section 247A, which is to enable access to company books for members with legitimate concerns. The court further clarified that the inspection should be limited to documents that are particularly relevant to Mr Engel’s concerns. Consequently, the court made orders permitting Mr Engel and specified others to inspect and copy certain documents, while also setting conditions on the use and disclosure of the information obtained. The defendant was directed to pay Mr Engel's costs of the application.

Orders

Orders of the court

1. Pursuant to s 247A(1) of the Corporations Act 2001 (Cth):

(a) the plaintiff;

(b) the following employees of the solicitors for the plaintiff: Brendan Wyhoon, Michael Forrest, Kate Forrester, Monika Harrington, Michael Baltins, Natasha Busa and Mr Jack Hynes of counsel;

(c) Barry Jordan and Neil Gray, both of Deloitte, and any junior staff as required by them in respect of whom five (5) business days’ written notice is provided to the defendant’s solicitors; and

(d) such other persons as agreed between the parties in writing,

are authorised to inspect and make copies of the books of the defendant described in the Schedule to these Orders, with such books to be made available for inspection no later than 18 November 2015.

2. Subject to further order, the inspection authorised by Order 1:

(a) is permitted to take place from 10.00am on Wednesday, 18 November 2015 and continue during the hours of 10.00am to 4.00pm Sydney time on any business day; and

(b) is to be completed by 4.00pm on Tuesday, 24 November 2015.

3. Until further order, the plaintiff must not communicate or disclose information obtained as a result of the inspection or copying of the books which he is authorised to inspect and make copies of pursuant to Order 1 of these Orders to any persons except:

(a) for the purpose of investigating and determining whether proceedings should be commenced by the plaintiff against the defendant or directors of the defendant (or both) and for prosecuting those proceedings; and

(b) for the purpose of investigating and determining whether an application for leave to bring proceedings in the name of the defendant against directors and officers (or former directors and officers) of the defendant should be commenced; and

(c) if it is decided to commence proceedings in the name of the defendant, for the purpose of seeking leave to commence such proceedings.

4. The plaintiff and other persons authorised to inspect and make copies of books of the defendant pursuant to Order 1 of these Orders must return to the defendant all copies made of the defendant’s books in the event proceedings contemplated by Order 3 of these Orders are not commenced within twelve (12) months of the date of these Orders, or at the conclusion of any such proceedings.

5. The defendant is to provide the plaintiff with a list of any books (as defined in s 9 of the Corporations Act 2001 (Cth)) which come within category 15 of the Schedule and which are subject to a claim for legal professional privilege.

6. Liberty is reserved to each party to apply, on three (3) business days’ notice, for further orders and directions, whether in relation to the implementation and conduct of the inspection authorised by this Order or otherwise.

7. The defendant to pay the plaintiff’s costs of this application.

SCHEDULE

In this Schedule, the following words have the below meanings:

Document means any record of information, including:

(a) anything on which there is writing ; or

(b) anything on which there are marks, figures, symbols or perforations having a meaning for persons qualified to interpret them; or

(c) anything from which sounds, images or writings can be reproduced with or without the aid of anything else; or

(d) a map, plan, drawing or photograph,

and any other material, data or information stored or recorded by mechanical or electronic means.

Period means 1 July 2010 to 1 July 2015.

(1) All documents comprising the entries in the “intercompany account” of the defendant referred to at page 32 of its 2011–2012 Financial Report.

(2) Any agreement executed by National Biofuels Group Pty Ltd ACN 118 986 726 (NBG) relating to the repayment by, or forgiveness of, any part of or all of the amount of $6,307,031 owed by NBG to NBL which is referred to on page 20 of NBL’s financial report for the year ended 30 June 2011 (NBG Loan).

(3) Any agreement executed by the defendant and NBG related to the transfer of the registered trademarks ‘Soybiodiesel’ and ‘Soydiesel’ (Trademarks) from NBG to the defendant.

(4) Any valuation concerning the Trademarks including but not limited to the valuation prepared by Moore Stephens Chartered Accountants.

(5) Any agreement executed by the defendant and National Biodiesel Distributors (Australia) Pty Limited ACN 167 655 138 (NBDA) recording the transfer, assignment or sale of the Trademarks from the defendant to NBDA.

(6) Any agreement executed by the defendant and NBDA related to the transfer of assets or employees of the defendant to NBDA, and entered into during the Period.

(7) Any agreement executed by the defendant, NBDA or any related entity of the defendant and JSKS Enterprises Pty Limited ACN 105 475 170 (JSKS) relating to the investment by JSKS in NBDA during the 2013–2014 financial year.

(8) Any agreement executed by the defendant, NBDA or any related entity of the defendant and JSKS relating to the investment by JSKS in NBDA which resulted in the total ownership of NBDA by JSKS.

(9) Any agreement executed by the defendant and JSKS relating to any share transfers by the defendant to JSKS in NBDA or any other entity.

(10) Any agreement recording or relating to Mr Seaton’s appointment to NBDA’s Board.

(11) Any loan agreement executed by Energreen Nutrition Australia Pty Limited ACN 089 953 560 (Energreen) and NBDA during the Period.

(12) Any agreement between NBDA and Petro National Pty Limited ACN 606 401 325 (Petro National) relating to the transfer of NBDA’s assets to Petro National.

(13) Any agreement executed by the defendant and JSKS in relation to the transfer of NBL’s assets to Petro National.

(14) All financial statements (within the meaning of section 9 of the Corporations Act 2001 (Cth)) of the defendant for the Period.

(15) Those parts of the defendant’s board minutes, board papers, agendas for board meetings and board packs which deal with or refer to one or more of the following topics in the Period:

(a) the NBG Loan;

(b) the valuation of the Trademarks;

(c) the transfer of the Trademarks from NBG to the defendant (1 July 2011 to 30 June 2015);

(d) any agreement referred to in paragraphs 6 to 13 above.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

In Re Style, Goldberg J in dealing with the exercise of the Court’s discretion said at [71] that in granting an order for inspection under s 247A of the Act it is not appropriate to allow a “wholesale and general inspection”. The books to be inspected should be “books that bear on” and that are “particularly relevant to, the purpose for which the inspection is sought”. This approach was followed in assessing the relevance of categories for inspection by Robertson J in London City Equities Ltd v Penrice Soda Holdings Ltd (2011) 84 ACSR 573 at [47].FACTS Mr Engel raises particular transactions entered into by NBL or its subsidiary at the time, NBDA, which he is concerned may have impacted on the value of his investment in NBL and which warrant investigation. They are:(1)the status of a loan from NBL to National Biofuels Group Pty Limited (NBG), a shareholder in NBL, and the transfer of trademarks from NBG to the defendant including: the reason for their acquisition, the price at which they were acquired and their subsequent assignment to NBDA;(2)the establishment of NBDA and the subsequent transfer by NBL of its interest in NBDA;(3)the circumstances surrounding a loan to NBDA from Energreen Nutrition Australia Pty Ltd (Energreen);(4)the sale of NBDA’s distribution business to Petro National Pty Ltd (Petro National), a subsidiary of National Holdings Australia Limited (NHA). In his affidavits, Mr Engel sets out the facts of which he is aware which relate to these transactions. They can be summarised as follows:(1)on 1 June 2011, Mr Engel acquired 1 million shares in NBL for $1.2m. At the time of acquiring his shares, Mr Engel relied on an information memorandum issued by NBL in March 2011 for the issue of ordinary shares. That memorandum included the following:(a)a description of the business model which would combine the “vertical integration of a Soybean crushing plant alongside its own Biodiesel refinery”;(b)that NBL had the exclusive use of two trademarks owned by its major shareholder, NBG: Soybiodiesel and Soydiesel (the Trademarks); and(c)that NBL had secured, through a long term lease from the Port Kembla Port Corporation, industrial premises for its manufacturing complex; (2)at all relevant times NBG was the major shareholder in NBL holding approximately 88% of its issued shares;(3)NBL’s financial report for the year ending 30 June 2011 (FY11 Report) discloses NBG owed NBL $6,307,031 which was to be repaid once a subsidiary of NBG had completed a capital raising;(4)at that time, NBL continued to have exclusive use of the Trademarks;(5)according to NBL’s financial report for the year ending 30 June 2012 (FY12 Report), NBL acquired the Trademarks from NBG in that financial year for $7.6m. The FY12 Report states that the “value [of the Trademarks] has been determined based on a report issued by an independent valuer”;(6)in addition, the FY12 Report:(a)does not record the loan to NBG;(b)provides that NBL had non-current assets of $6,307,031 in 2011 and nil in 2012;(c)provides that NBL had non-current “Amounts owed by group companies” of $6,307,031 in 2011 and nil in 2012;(d)provides that “Loans to related parties” and “Receivables with group companies” were $6,348,738 in 2011 and are $31,987 in 2012; and(e)states that the transaction to acquire the Trademarks is “not reflected in the statement of cash flows as they were settled through the intercompany account”;(7)by about October 2013, the directors of NBL were Messrs Wheaton, Ian Armstrong, Kevin Hughes and James Henderson and Ms Gillian Smith and the directors of NBG were Messrs Armstrong and Henderson and Ms Smith;(8)by a notice to shareholders from NBL dated 7 March 2014, Mr Engel was notified of:(a)the establishment of a subsidiary, NBDA, to conduct the fuel importation, storage and distribution operations of the group;(b)the transfer to NBDA of certain assets and employees; (c)the execution of an agreement with Gary Donald Seaton to “strategically invest” in NBDA; and(d)the appointment of Mr Seaton to the NBDA board;(9)NBL owned 70% of the shares in NBDA. The remaining 30% of the shares were owned by JSKS Enterprises Pty Limited (JSKS Enterprises), a company of which Mr Seaton was and is the sole director and secretary;(10)on about 28 April 2014, pursuant to a deed of assignment bearing that date, the Trademarks were assigned by NBG to NBL and then by NBL to NBDA. It is appropriate to note at this point that Mr Wheaton’s evidence is that the failure by NBG to assign the Trademarks to NBL in 2012, when the relevant transaction between NBG and NBL took place, was an oversight;(11)the financial report of NBL for the year ending 30 June 2014 (FY14 Report) records that:(a)the Trademarks had a carrying value of $7.6m at the beginning of the year, impairment of intangibles was ($1,697,931) and that the “carrying amount at the end of the year” was $5,902,069;(b)$1.8m was received in relation to “proceeds from disposal of shares of subsidiary”;(c)$150,000 is owing by JSKS Enterprises to NBL;(d)proceeds “from related parties, net” are $3,665,759 and an “Amount owed to related parties” payable to “Energreen” is $3,665,759. The loan from Energreen was to fund a shipment of biodiesel in early 2014. Interest is payable at the rate of 10% per annum; (12)at the time of the loan from Energreen to NBDA, Mr Seaton was a director of NBDA and the sole director of Energreen;(13)on 12 June 2015, Petro National was registered. Its two directors are also directors of NBL;(14)according to a Form 484 Change to Company details for NBDA dated 19 June 2015 obtained by Mr Engel from ASIC:(a)on about 14 June 2015, NBL transferred its 14 million ordinary shares and 350,000 preference shares in NBDA to JSKS Enterprises;(b)JSKS Enterprises paid a total of $20m for its 20 million ordinary shares and a total of $500,000 for its 500,000 preference shares;(15)a current and historical organisational extract for NBDA dated 8 July 2015 shows that JSKS Enterprises owns 20 million ordinary shares but records that the total paid or taken to be paid for those shares is $6m;(16)until 15 June 2015, NBL, NBG and NBDA had common directors namely Messrs Wheaton and Armstrong;(17)on 3 July 2005, Mr Engel received a notice to shareholders of NBL and NHA which, among other things, notified that NBL had entered into an agreement with JSKS Enterprises to sell and assign NBDA’s “distribution business assets” to a subsidiary of NHA, Petro National.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

I do not think that an application for inspection of a company’s books under s 247A of the Act is analogous to an application for preliminary discovery. Such an application can only be made by a member of a company or a registered managed investment scheme or a person entitled to bring proceedings in the name of the company under s 236 of the Act that is, someone who has an interest in and/or is connected to the company. Applications for preliminary discovery can be made by any party, including strangers to a respondent. The Act does not contemplate that the applicant for inspection will be required to pay the company’s costs of compliance with any orders that are made. Had the legislature wished to impose that burden on the applicant it could have done so: see for example ss 249F(1), 252D(1), 139(1)(b) and 173(3)(b) of the Act. It seems to me that to require a successful applicant to pay the costs of compliance with an order made under s 247A would be inconsistent with the purpose of the section which is to enable access and inspection by a member of a company to its books, provided that the member meets the threshold requirements of the section. I do not propose to make an order requiring Mr Engel to pay NBL’s costs of compliance with the orders for inspection.CONCLUSION I will make orders pursuant to s 247A(1) in accordance with these reasons.

Ratio Decidendi

Legal Principle Established

It was submitted on behalf of NBL that Mr Engel’s concerns need to be considered in the context of NBL’s operating environment at the time. In particular, the July 2015 notice to shareholders included in Exhibit TE1 to Mr Engel’s affidavit sworn 28 July 2015 included the following statement:We previously reported that NBDA had an extremely difficult trading period during the financial year to date and will record significant losses for the year. The Federal Government changes to fuel excise and the Cleaner Fuels Grants Scheme were introduced 1 July 2015. The policy changes have made the importation of biodiesel unviable and have made the previous business model of NBDA unsustainable.That is, NBL was operating in a changing environment to which it had to react. The transactions complained of took place in that context.CONSIDERATIONGood faith and proper purpose The terms of s 247A(1) of the Act specify that the Court can only make an order for inspection if it is satisfied that the applicant, in this case Mr Engel, is acting in good faith and for a proper purpose. Counsel for the defendant conceded in oral submissions that purpose was not in issue between the parties. Notwithstanding the attitude of the defendant, before orders can be made under s 247A(1), the Court must still reach a level of satisfaction about the good faith and proper purpose requirements. I am satisfied on the evidence that Mr Engel has a genuine concern about the transactions he has described in his evidence. The facts disclose that those transactions are largely between related companies with common directors at relevant points in time and appear to have had the effect of moving assets out of NBL. Mr Engel deposes to his specific concerns about the transactions he has identified. Mr Engel has demonstrated that there is a case for investigation into those transactions. Mr Engel’s ultimate concern is that the transactions which he would like to further investigate have had the effect of diluting the equity of NBL and thus his shareholding in the company. It is apparent that Mr Engel’s primary purpose in seeking inspection is to investigate the circumstances surrounding the transactions so that he can determine whether he should commence proceedings. I am satisfied that Mr Engel has established that he is acting in good faith and for a proper purpose in seeking inspection of the documents in the Schedule. I turn now to consider those categories of the Schedule which are in dispute.Category 2 Category 2 seeks any agreement executed by NBG relating to the repayment by, or forgiveness of, any loans during the Period which were made by NBL to NBG. The Period is from 1 July 2010 to 1 July 2015. Counsel for Mr Engel submits that Mr Engel should be entitled to any agreement that records the repayment or forgiveness of a loan from NBL to NBG because Mr Engel does not know how the repayment or forgiveness of the loan to NBG recorded in the FY11 Report occurred. That is there may be more than one agreement, document or other record evidencing a repayment or forgiveness of a part of the loan rather than a single document.