McDougall v On Q Group Ltd
[2007] VSC 184
•5 June 2007
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
No. 2017 of 2007
F. 6083
| ON Q GROUP LIMITED ACN 009 104 330 | Plaintiff |
| v. | |
| PETER McDOUGALL -and- KINARRA PTY LTD (ACN 004 986 252) | First Defendant Second Defendant |
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JUDGE: | HARGRAVE J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 11 May 2007 | |
DATE OF JUDGMENT: | 5 June 2007 | |
CASE MAY BE CITED AS: | McDougall v On Q Group Ltd | |
MEDIUM NEUTRAL CITATION: | [2007] VSC 184 | |
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Corporations – Director’s power to inspect financial records – Whether other persons should be authorised to inspect on director’s behalf – Corporations Act 2001 (Cth) s. 290.
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APPEARANCES: | Counsel | Solicitors |
| For the Applicant Peter McDougall | Mr L Glick QC | Francis V Gallichio |
| For the Respondent | Mr M Wyles | Foster Harris |
HIS HONOUR:
I. Introduction
The plaintiff, On Q Group Limited (“the company”), is a publicly listed company. Its directors comprise the first defendant Peter McDougall, Ian Christiansen, Harold Christiansen and Julian Little.
This proceeding concerns a dispute between Mr McDougall and the company as to the amount of money (if any) owing by him to the company. The directors, other than Mr McDougall, have caused the company to issue this proceeding against Mr McDougall, alleging that he owes the company $2,615,102.64 pursuant to the provisions of a loan agreement dated 16 October 2005. A claim for this amount is also made against the second defendant, Kinarra Pty Ltd, a company associated with Mr McDougall.
No defence or counterclaim has been filed. However, it is apparent that Mr McDougall will deny any indebtedness and will counterclaim for an amount which he says, having regard to all dealings between him and the company, is due to him from the company on a balance of account.
Following service of the writ on Mr McDougall, a summons was filed in the proceeding on his behalf seeking:
(1)An order pursuant to s. 1303 of the Corporations Act 2001 (Cth) compelling the company to produce certain financial records of the company to Mr McDougall for immediate inspection.
(2)Pursuant to sub-ss. 290(2) and 290(3) of the Corporations Act, orders authorising a firm of accountants and a nominated individual to inspect those financial records on Mr McDougall’s behalf and to make copies of those documents.
No objection was taken by the company to the use of a summons in the proceeding, rather than an originating motion, to seek this relief.
II. Applicable law
Mr McDougall’s application for inspection relates to certain specified “financial records” of the company. The “financial records” of a company are defined in s. 9 of the Corporations Act in the following terms:
financial records includes:
(a)invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers; and
(b) documents of prime entry; and
(c) working papers and other documents needed to explain:
(i)the methods by which financial statements are made up; and
(ii)adjustments to be made in preparing financial statements.
Section 290 of the Corporations Act provides:
Director access
Personal access
(1)A director of a company, registered scheme or disclosing entity has a right of access to the financial records at all reasonable times.
Court order for inspection on director's behalf
(2)On application by a director, the Court may authorise a person to inspect the financial records on the director's behalf.
(3)A person authorised to inspect records may make copies of the records unless the Court orders otherwise.
(4)The Court may make any other orders it consider appropriate, including either or both of the following:
(a)an order limiting the use that a person who inspects the records may make of information obtained during the inspection;
(b)an order limiting the right of a person who inspects the records to make copies in accordance with subsection (3).
The right of access which a director enjoys under sub-s. 290(1) is reflective of a director’s common law right of access. For so long as a director remains in office, the right to access is limited only by the power of the Court to restrain access where the company proves that the director intends to exercise the right of access “to abuse the confidence reposed in him and materially … injure the company”,[1] “to act in breach of his fiduciary duty to the company”[2] or in circumstances where there is “clear proof that a misuse of power is involved (the onus of which lies on those asserting it).”[3]
[1]Edman v Ross (1922) 22 SR (NSW) 351, 361.
[2]Berlei Hestia (NZ) Ltd v Fernyhough [1980] 2 NZLR 150, 163; Re Tai-Ao Aluminium (Australia) Pty Ltd; Lei v Cordukes (2004) 51 ACSR 465, [1]-[2].
[3]Re Geneva Finance Ltd; Quigley v Cook (1992) 7 ACSR 415, 426.
It is clear that the onus of proof of a possible misuse of documents by a director lies upon the company seeking to resist the director exercising a right of access.[4] This onus was readily recognised by counsel for the company. He submitted that, in the special circumstances of this case, the company had satisfied the onus. In support of this submission, reliance was placed upon the statement by Mulligan J, as a member of the Full Court of the Supreme Court of South Australia in South Australia v Barrett[5] that:
It is well recognised that a director of a corporation has the right to inspect documents of the corporation in the interests of the corporation. However, it is clear, in my view, that the right is restricted to directors acting in that capacity and for the purposes of the corporation as distinct from private or personal reasons.[6]
[4]Ibid.
[5](1995) 64 SASR 73.
[6]Ibid, 82 (emphasis added).
It was submitted that the circumstances of this case involve Mr McDougall in seeking to exercise his right of inspection for private or personal reasons, and not so that he may exercise his duties as a director in the interests of the company. This submission requires a consideration of the facts of this case.
II. Facts
In August 2005, the board of directors of the company (including Mr McDougall) resolved to appoint McGrath Nichol, accountants, to conduct a review of related party transactions between Mr McDougall, and entities associated with him, and the company.
In October 2005, McGrath Nichol reported to the board of directors. In that report, McGrath Nichol made a number of recommendations, including the need to reverse some related party dealings, to obtain legal advice, to cease making certain payments to Mr McDougall, to conduct further investigations and to reconcile the state of accounts between Mr McDougall, and companies associated with him, and the company.
As a result of the McGrath Nichol review, and the need to complete the company’s audited accounts for the financial year ended 30 June 2005, the company entered into a “Deed of Rescission, Termination and Release” with Mr McDougall, entities related to Mr McDougall and certain subsidiaries of the company. Under this Deed, certain transactions, between the company or its subsidiaries and Mr McDougall or entities associated with him, were rescinded ab initio. Further, the parties initialled a schedule titled “Reconciliation and agreed balance of Peter McDougall loan account” which, after taking into account the transactions requiring rescission ab initio and other matters, specified that Mr McDougall owed the company an agreed final balance as at 30 June 2005 of $3,724,969.03. The schedule stated that this reconciliation was “Subject to adjustment if the Auditors determine that it is a different amount.” Mr McDougall places great weight upon this qualification. He said in evidence that he told the other directors, at the time of signing the Deed and the loan agreement to which I will refer next, that he did not accept the reconciliation and that he required independent verification of it and, if required, adjustment.
Also on 16 October 2005, the company and Mr McDougall executed a loan agreement. Under the loan agreement, the parties agreed that the company had lent the reconciled amount of $3,724,969.03 to Mr McDougall and Mr McDougall agreed to repay this amount to the company. The loan has been repaid in part. In this proceeding, the company seeks to recover the balance from Mr McDougall.
Next, at the request of the auditors, Mr McDougall signed a letter dated 3 November 2005 addressed to the auditors in which he stated:
1.As at 30 June 2005 [the company] was owed $3,724,969 by Peter McDougall and Peter McDougall related entities.
2.Peter McDougall and Peter McDougall related entities hereby confirm that on 15 October 2005 a loan agreement has been effected in respect of $3,724,969…
In cross-examination, Mr McDougall explained this letter. He said that he protested when he was asked to sign the letter, and said to the auditor:
I told him in very careful terms that I had reason to believe that the numbers were suspect but that I had no evidence that I could produce at the time because I’d been denied access to the original records of the company, to the source and application of the funds which I’d been seeking for two years.
However, notwithstanding his expressed concerns, Mr McDougall signed the letter because he had no “concrete evidence to the contrary”.
A letter from Mr McDougall to the auditors in similar terms was prepared by the auditors and signed by Mr McDougall in connection with the audit of the company’s accounts for the half year ended 31 December 2005. Mr McDougall gave evidence in cross-examination that, in connection with this letter, he made similar statements to the auditor to those he made about the 3 November 2005 letter.
Immediately following the execution of the loan agreement in October 2005, Mr McDougall commenced seeking to exercise his right of access to the financial records of the company. By letter dated 26 October 2005, Mr McDougall sought access to the electronic version of certain financial records of the company, together with information as to the passwords restricting access to the files. Mr McDougall was provided with the financial records requested, in electronic form, but was not given the passwords.
Thereafter, Mr McDougall sought further access to the financial records of the company and its subsidiaries. Mr McDougall has sworn that he required this information “to enable me to verify not only the outstanding balance of my loan account, but also the accuracy of On Q’s financial statements generally.” Mr McDougall was provided with some of the financial records, but not others. In particular, he was not provided with any of the source documents requested by him.
Correspondence continued into 2006. In an email dated 31 January 2006 from Mr McDougall to Harold Christiansen, Mr McDougall wrote:
Dear Hal,
Further to our conversation last Thursday, I am keen to resolve the matter relating to the correct accounting of the loan account so that as agreed – if the company owes me money it will arrange to pay and if I owe the company money I will arrange to pay.
As directors we have relied on the accounts supplied to us by the Company. It is very important that we as directors get a detailed accounting of the transactions that have been processed so that we can work together to reach agreement.
Although I have made numerous requests for the source material, or copies thereof, this information has still not been provided and was not available at the critical time for signing [the company’s] accounts and Audit. All parties recognised that the amounts adopted in the reconciliation and agreed balance of Peter McDougall loan account were not reconciled or agreed at all but were subject to adjustment if the auditors determine that it is a different amount.
As I have advised you, I’ve engaged an experienced accountant to examine all of the transactions including monies advanced and repaid and the documentation pertaining there to and he requires the following information that we do not have. Furthermore a detailed listing is required for taxation purposes.
The quickest way of tidying up the outstanding calculations is I believe to have the company supply me with the information set out below. I will refer it to the accountant to review which will I expect, reduce the areas of disagreement on which I will come back to you. Then we can jointly as the Public Company Board and my separate interests refer the matter to the auditor for his determination as the Deed of Release contemplated.
Further Mr McDougall swore in his affidavit:
I have serious concerns for the way in which On Q is conducting its affairs and, in particular, the way in which it is accounting for its financial transactions. I honestly believe that some of On Q’s accounts disclose irregularities. As a director of On Q, I have duties to ensure that accounting irregularities are identified, financial records are corrected, and steps are taken to ensure that inappropriate practices are eliminated. This is in the interests of the company. To fulfil my obligations, I require unfettered access to the company’s financial records. Because I am not an expert accountant, I require the assistance of experienced professional accounting advisors to assist me in the process of accessing and reviewing complicated accounting transactions from source accounting documents contained in both hard copy and electronic versions.
Mr McDougall was cross-examined on his affidavit. In re-examination he referred to a particular transaction which is of concern to him. In summary, there was a capital raising in or about 2004 by Bill Express Ltd, which is a related entity of the company. In the prospectus for this capital raising, it was specified that $10 million was being raised for the company. Mr McDougall is concerned that this $10 million has not been properly accounted for by the company. In order to consider whether or not his concerns are well founded, he seeks access to the bank statements for all accounts operated by the company, and its subsidiaries or controlled entities, for the period 1 July 2004 to 30 June 2006.
As I have said, Mr McDougall was not provided with all of the information which he sought. In his affidavit in support of his application, he swore that by February 2006:
I was concerned not merely about the issue of my loan account, but also with the broader issue of the need for me, as a director of On Q, to perform my functions as a director, and the need to inspect the books and records of On Q in order to discharge those functions.
On 22 March 2006, Ian Christiansen wrote to the directors of the company and their legal advisors about a range of issues concerning Peter McDougall and related entities. Mr Christiansen concluded his email in the following terms:
In view of all of the above matters, as Chief Executive of Bill Express Limited, and as a Director and company secretary of On Q Group Limited, I instruct that documents that are of a financial nature or include market sensitive information NOT be provided to Peter McDougall … until these matters are researched or resolved, or there is a specific board resolution overriding this instruction.
Since March 2006, Mr McDougall has been repeatedly refused access to the financial records of the company or its subsidiaries.
Mr McDougall engaged Ernst & Young, accountants, to assist him in gaining access to the financial records of the company. By letter dated 14 March 2007 from Ernst & Young to Harold Christiansen, as chairman of the company, Ernst & Young informed the company that they acted for Mr McDougall and had been engaged by him to inspect the books and records of the company and its subsidiaries under s. 290 of the Corporations Act. As pointed out in argument, that letter fails to appreciate the distinction between a director’s right of personal access and the right of a director to apply to the Court for an order authorising another person to have access on his behalf, as provided for in sub-s. 290(2).
In their letter, Ernst & Young provided “an indicative listing of the initial types of information we require copies of”. Nine categories of documents were specified. It is these nine categories of documents which form the subject of Mr McDougall’s application for personal access by him and for an order authorising access by accountants nominated by him. The nine categories of documents are as follows:
1.Annual Financial Statements for On Q (or former names) for the 2000 to 2006 financial years.
2.Annual Financial Statements for all subsidiaries and entities controlled by On Q for the 2000 to 2006 financial years.
3.On Q consolidation workpapers for the 2000 to 2006 financial years showing pre consolidation balances per entity, eliminations by entity and post consolidation balances with explanations of consolidation eliminations.
4.Trial Balances as at 30 June (or alternate financial year end) for the 2000 to 2006 financial years for On Q and all subsidiaries and entities controlled by On Q.
5.General ledgers for the 2000 to 2006 financial years for On Q and all subsidiaries and entities controlled by On Q for the 2000 to 2006 financial years including all balance date adjustments reflected in annual Financial Statements.
6.All invoices to and from Peter McDougall and/or the following entities for the 2000 to 2006 financial years:
Mr Peter McDougall
Aloe Vera of Australia Pty Ltd
Auldwood Pty Ltd
Australian Fresh Juices Pty Ltd
Blooms of Melbourne Pty Ltd
Brentwood Fruit Juices Pty Ltd
Dugal McDougall Motorsport Pty Ltd
Kinarra Pty Ltd
Murray Park Farm Pty Ltd
Tocumwal Cordials Pty Ltd7.Bank statements for all bank accounts operated by On Q (or former names) for the period from 1 July 2004 to 30 June 2006.
8.Bank statements for all bank accounts operated by subsidiaries or entities controlled by On Q for the period from 1 July 2004 to 30 June 2006.
9.Management Letters from On Q auditors for each of the 2000 to 2006 financial years.
By letter dated 30 March 2007 from the company’s solicitors to Ernst & Young and the solicitors for Mr McDougall, the company’s solicitors drew attention to the fact that Mr McDougall did not have an unqualified right to appoint accountants to inspect documents on his behalf and that an application under sub-s. 290(2) was required for this purpose. Further, the company’s solicitors expressed concern that Mr McDougall was seeking to exercise his personal inspection power for an improper purpose and concluded:
Hence, our client in these circumstances is not willing to permit the requested inspection, whether exercised personally or whether sought from the Court.
By letter dated 31 March 2007, Mr McDougall’s solicitors wrote to the company’s solicitors concerning the dispute under the loan agreement. In that letter, on instructions from Mr McDougall, his solicitors referred to his “serious concerns about the company’s extraordinary and irregular accounting practices” and continued:
Our client has a good faith belief that some of the Company’s accounts disclose irregularities of the most serious kind. The fact that our client believes that some of these irregularities were created to disadvantage him, is not the sole issue: Mr McDougall has a duty to ensure that serious accounting irregularities and those responsible for them are identified, accounts are corrected, and steps are taken to ensure that this conduct is not repeated.
Resolution of Issues
The above factual summary discloses a dispute between the directors of a public corporation on a number of grounds. The dispute is not limited to the claims against Mr McDougall under the loan agreement. In all the circumstances, the company has not satisfied the onus upon it to establish that Mr McDougall requires access to the nine categories of financial records specified in the Ernst & Young letter for a purpose involving a breach by him of his fiduciary duties to the company or otherwise so as to misuse his power as a director. Further, the company has not satisfied me that Mr McDougall requires access for private or personal reasons only. I am of this view for the following reasons.
First, the mere fact that a director requires access to company documents to defend a claim by the company against the director does not, by itself, establish that the director requires access for an impermissible private purpose. In this case, it is just as much in the company’s interests, as it is in Mr McDougall’s personal interests, that the dispute concerning his indebtedness to the company is resolved, on proper grounds, as soon as possible.
Second, although he was not required to do so, Mr McDougall has provided some reasons for his request to have access to the financial records of the company. It is impossible for me to resolve, on an application such as this, whether the concerns expressed by Mr McDougall are soundly based or not. However, it does not matter. A director of a public company has expressed concerns about the integrity of the accounts and accounting practices of the company. Having regard to his shareholding, Mr McDougall is likely to remain a director of the company for the foreseeable future. No good reason has been shown as to why he should be denied access to the nine categories of documents referred to in the Ernst & Young letter or, indeed, to any of the financial records of the company.
I will order that the company provide Mr McDougall with unfettered personal access to all of the financial records of the company.
The question remains as to whether the Court should authorise persons acting on behalf of Mr McDougall to inspect the financial records on his behalf and, if so, whether the Court should make orders limiting the use which those persons may make of the information obtained during the inspection, or as to the ability of those persons to make copies.
Mr McDougall has sworn that he requires the assistance of accounting experts to help him understand the company’s financial records. He was not cross-examined about this. Mr McDougall seeks to have a named firm of accountants, perhaps, having regard to cost, not Ernst & Young, inspect the documents on his behalf, together with Craig Levin. The evidence is that Mr Levin is a professional consultant with “excellent accounting skills and a longstanding knowledge of On Q’s business and affairs”. If Mr Levin is authorised to inspect the nine categories of financial records specified in the Ernst & Young letter, together with a firm of accountants, Mr McDougall believes that his costs of having the financial records analysed will be significantly reduced.
I have no reason to doubt that Mr McDougall requires expert accounting assistance. Having regard to the heated nature of the boardroom dispute, it is, in my view, preferable that he has that assistance, so that future allegations made by him are more likely to be soundly based. In stating this, I express no view as to whether or not the present allegations made by him are soundly based. Further, it has not been demonstrated by the company why Mr Levin should not be permitted to inspect the specified financial records on Mr McDougall’s behalf. That inspection will be subject to orders limiting the use which Mr Levin, and any other accountant authorised to inspect, may make of the documents or their contents.
No good reason has been demonstrated which requires that the Court limit the ability of persons authorised on behalf of Mr McDougall to inspect the documents to make copies of them. The orders limiting use of the documents and their contents will be sufficient to protect the interests of the company.
I will hear the parties as to the precise form of orders to be made, in particular, as to the nature of appropriate restrictions to be ordered under sub-s. 290(4) of the Corporations Act.
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