McLean v DID Piling Pty Ltd

Case [2010] SASC 33

SUPREME COURT OF SOUTH AUSTRALIA

(Appeal from a Master: Civil)

MCLEAN v D.I.D. PILING PTY LTD

[2010] SASC 33

Judgment of The Honourable Justice Layton

19 February 2010

CORPORATIONS - MANAGEMENT AND ADMINISTRATION - INSPECTION OF OR ACCESS TO FINANCIAL RECORDS, REGISTERS, DOCUMENTS AND OTHER INFORMATION OF COMPANY

APPEAL AND NEW TRIAL - APPEAL - GENERAL PRINCIPLES - INTERFERENCE WITH DISCRETION OF COURT BELOW - IN GENERAL

Appeal against decision of a Master dismissing application pursuant to s 247A Corporations Act 2001 (Cth) for inspection of company documents - section 247A requires that an applicant bring application in "good faith" and for a "proper purpose" - appellant is shareholder in respondent company - appellant sought inspection of company documents - appellant claimed that the purpose for inspection of documents was to have shares valued for the purpose of sale - Master found that the dominant purpose for the application was not for valuation of shares but to gather evidence to support an oppression claim - Master found that the appellant was not acting in good faith.

Held: Appeal allowed - evidence does not reasonably support finding that appellant's dominant purpose was to initiate an oppression claim - appellant was acting in good faith and brought the application for a proper purpose.

Corporations Act 2001 (Cth) s 58AA, 247A, 233; Supreme Court Act 1935 (SA) s 50; Supreme Court Rules 1987 (SA) Rule 97; Supreme Court Rules 2006 (SA) Rule 286, 292, referred to.
George v Dowling (1992) 57 SASR 579; Mac Audio & Acoustical Consultants Pty Ltd (in liq) v Eddy [1999] SASC 443; House v The King (1936) 55 CLR 499, applied.
McLean v D.I.D. Piling Pty Ltd [2009] SASC 205; Beare v Light Regional Council [2008] SADC 72, not followed.
Fox v Percy (2003) 214 CLR 118; CSR Ltd v Della Maddalena (2006) 80 ALJR 458, discussed.
Beverage Bottlers (SA) Ltd (In Liq) v Abode Enterprises Pty Ltd [2009] SASC 272; Tinios v French Caledonia Travel Service Ltd (1994) 13 ACSR 658; Jewel River Pty Ltd v Captured Pty Ltd [2009] SADC 2; ADX Building Systems Pty v Adelaide Fibrous Plasterboard Linings Pty Ltd (In Liq) [2009] SADC 7; Manos v Maros (2007) 249 LSJS 67; FMV Stanke Holdings Pty Ltd v O’Meara (2007) 252 LSJS 87; Oxer v Astec Paints Australia Pty Ltd [2008] SASC 210, considered.

WORDS AND PHRASES CONSIDERED/DEFINED

"rehearing", "good faith", "proper purpose"

MCLEAN v D.I.D. PILING PTY LTD
[2010] SASC 33

Civil

  1. LAYTON J:          This is an appeal against a decision of a Master of the Supreme Court dismissing an application by the appellant for permission to inspect certain documents of the respondent company pursuant to s 247A of the Corporations Act 2001 (Cth) (“the Act”).

  2. The respondent is D.I.D. Piling Pty Ltd (“the Company”), which conducts the business of performing piling work for construction companies.  The appellant, Darrell McLean (“the appellant”), is a member of the Company, holding 245 ordinary…

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AGLC
McLean v DID Piling Pty Ltd [2010] SASC 33
Case
[2010] SASC 33
Decision Date

CaseChat Overview and Summary

In McLean v DID Piling Pty Ltd, the plaintiff, Darrell McLean, sought to inspect certain documents of the defendant, DID Piling Pty Ltd, under section 247A of the Corporations Act 2001. McLean, a former director and shareholder of the company, wanted to inspect financial records and documents to value his shares for potential sale. The defendant refused to provide the requested documents, prompting McLean to apply to the court for an inspection order. The Master dismissed McLean’s application, finding that he was not acting in good faith or for a proper purpose.

The central legal issues in this case were whether McLean's request for inspection was for a proper purpose under section 247A of the Corporations Act, and whether he was acting in good faith. Section 247A allows a shareholder to inspect company documents if they reasonably believe that the inspection is necessary for a proper purpose. A proper purpose can include matters such as valuing shares for sale. However, the court must also consider whether the applicant is acting in good faith, which involves an assessment of the applicant's honesty and candor.

The Court found that McLean's request for documents extended beyond the scope of what was necessary to value his shares, and he did not act in good faith. The Court was particularly concerned that McLean's requests seemed to be aimed at uncovering information to support a potential oppression claim, which only emerged after the inspection application was made. The Court concluded that McLean's actions did not align with the proper purpose contemplated by the statute and that he was not entirely candid in his motivations, which reflected adversely on his good faith.

The Court dismissed the appeal, upholding the Master's decision. The Court found no error in the Master's conclusion that McLean was not acting in good faith or for a proper purpose. Consequently, McLean's application for an inspection order was denied.

Orders

Orders of the court

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Background

Background to the litigation

This appears to be the first mention of an oppression claim in the evidence before the Court. There is no mention of an oppression claim prior to this in either the correspondence between the parties or in the correspondence between Marrone and Plummer. Indeed, this reference to oppression relates primarily to the recent share transaction; a transaction which took place some time after the appellant indicated his intention to initiate the s 247A application. Conclusion on the facts In my view, this recitation of the chronology of events reveals that, from the very commencement, the plaintiff was seeking information for the purposes of valuing shares. Initially, it was confined to precisely the matters contemplated by s 247A of the Act, which includes the financial statements, profit and loss accounts and balance sheets for relevant years. This was an appropriate and proper purpose pursuant to s 247A of the Act. Thereafter, the request for documentation increased, largely as a consequence of the response of the defendant and, in particular, to the disclosure of balance sheets and profit and loss accounts which showed a different treatment of certain items which called for further information. In addition, the Company indicated that the financial statements for the year ending 2008 were not available because it was necessary to consider back charges. This gave rise to further questioning of the basis upon which back charges were made and, in particular, what was called normalisation of the contracts in retrospect for three years. The very fact that it was sought to be done for three years may raise concern that this was not dealing with arms-length bodies, but was most likely to be involving individuals or bodies connected to the other directors of the Company. This retrospective unbundling of matters so that instead of items appearing as income, as they had in previous years, they were treated as debits to a company and therefore income to another body or company, would tend to raise accountancy eyebrows.[39][39] I refer to the arguments of the appellant’s counsel at Transcript, 4-11. This, in my view, rightfully led to a reasonably arguable line of enquiry for the purposes of valuing shares for either sale to the directors under article 27(a) of the Company’s constitution or, alternatively, sale privately under article 27(c). If these matters were not appropriately retrospectively debited or, alternatively, if they were going to continue to be debited into the future, this would radically affect the value of the shares for the purposes of either manner of sale. Subsequently, the refusal of the defendant to supply information then escalated the plaintiff’s approach, which led to the application being made. At the time when the application was made for inspection, there had not been any suggestion either expressly, or even inferentially, about taking an action as a minority shareholder. That issue only arose after the application pursuant to s 247A was taken out. Notwithstanding that, it was still proffered that the material was needed for a valuation of shares.

Evidence

Evidence Before The Court

Accordingly, it is necessary that the appellant identify an error by the Master of the kind described in House v The King before any appeal should be allowed.Evidence An important aspect of this appeal is the evidence which was both before the Master and before me on appeal. This requires a quite detailed description of the chronology of documentation and the events which provide the context of the application. The Company was incorporated on 15 December 2003. The appellant was an original shareholder and sole director of the Company, holding 24.5% of the shares (initially through his company BDS Contracting Pty Ltd (“BDS”) and subsequently in his own right). The other shareholders were an entity controlled by Ian Tarbotton (“Tarbotton”), which held 51% of the shares and an entity controlled by Dominic Vieceli (“Vieceli”), which held 24.5% of the shares. The majority of the work conducted by the Company was conducted as subcontractor for York, of which Tarbotton and Vieceli were employees. In 2004, the appellant was replaced as director of the Company by Tarbotton, but continued to work for the Company as a construction manager (again, initially through his company BDS and subsequently in his own right). In September 2007, the appellant was injured at work and was unable to continue in his employment as construction manager. The appellant initiated a Workers Compensation Claim which was initially disputed by the Company but was subsequently admitted. The appellant’s entitlement to WorkCover payments was confirmed by the Workers Compensation Tribunal on 10 July 2008. Later in September, the appellant says that he spoke with Vieceli, who, inter alia, suggested that the appellant should consider selling his shares.[14] Vieceli denies making this suggestion. In any event, it seems that the appellant considered this to be the appropriate course and on 26 September 2007 he instructed an accountant, Phillip Plummer of HLB Mann Judd (“Plummer”), to conduct a valuation of the shares.[15][14] Affidavit of Darrell McLean dated 18 May 2009 (“Aff DM”), [32].[15] Aff DM, [32]-[33], also Exhibit to Affidavit of Darrell McLean dated 18 May 2009 (“DRM”) 13 and DRM 14. On 26 September 2007, the appellant sent an email to Tarbotton and Vieceli advising that he had accepted what he perceived to be Vieceli’s advice to sell his shares and was to have the shares valued for that purpose.[16] The email said in part:I have also given some thought to the other comment that was made & Dom may be right so I have decided to engage an accountant to value the Company with the view of what the value is of the shares. The accountant name is Phil Plummer from HBL Mann Judd Stephens. I have given Phil the contact number of [the Company’s accountant] & asked him to talk to him direct.[16] DRM 13. Tarbotton replied to this by email saying, relevantly:[17]In respect to the comment you made about [Vieceli] and the valuation of your shares, this is incorrect as I have spoken to [Vieceli] and he denies that he told you to get a valuation.As you have engaged an accountant, that is solely up to you. Any costs relating to this will be borne by yourself, including the costs of [the Company’s accountant].[17] DRM 13.

Decision

Reasons for decision

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Ratio Decidendi

Legal Principle Established

Sale of shares in the Company is regulated by the Company’s constitution. Specifically, article 27 of the Company’s Articles of Association provides for a right of first purchase to existing shareholders. It states:27 Right to Refuse RegistrationThe Board may refuse to register a transfer of shares in the Company for any reason. The Board must refuse to register a transfer of shares in the Company unless the following provisions have been followed:(a) Any member wishing to transfer any shares in the Company must first give written notice to the Board that the member wishes to effect such transfer. Such notice constitutes the Board the member’s agent for the sale of such shares at a price to be agreed upon between the member giving notice and the Board or, in the case of difference, at a price determined by an independent chartered accountant appointed by the Board.(b) The Board is not bound to offer the shares to the existing members of the Company but may determine to whom such shares are to be offered and is entitled, if it so desires, to have the directors take up such shares themselves in any proportions agreed upon. In the event of disagreement as to such proportions then the decision of the chairman of the Board is final and binding and if there is no chairman then such shares are to be offered to the directors equally.(c) If the whole of the shares to be transferred are not sold under the foregoing provisions of this clause, the member wishing to transfer the shares is entitled to transfer such shares to a person or persons of their choosing. At the time of initiating the application, the article 27 process had not (and apparently still has not) been initiated by the appellant. On 10 July 2009 the Master dismissed the application on the ground that the appellant was not acting in good faith for a proper purpose in making the application. The Master observed that the documents which were sought to be inspected in Schedule 2 of the application related to “normalisation” of certain of the Company’s contracts, as well as transactions which were referred to by the parties as “back charges”. Essentially these back charges are transactions which first appear in the financial records of the Company in the 2006/2007 financial year and which purport to charge around $1.2 million retrospectively against the Company. The appellant has indicated that he believes that many of these transactions were entered into with a related company called York Civil Pty Ltd (“York”). The Master did not accept that the appellant’s dominant purpose for bringing the application was to value the shares. On this issue the Master concluded (at [18]):I accept the contention of the defendant’s counsel that overall on the balance of probabilities this evidence is not consistent with the plaintiff primarily wanting the further documents for a valuation of his shares for their sale under Article 27(a). If the plaintiff had locked himself into the Article 27(a) process by giving notice of his wish to transfer his shares under that article, it is likely that his purpose would be found to have been to provide a proper foundation for negotiations for an agreed price for the shares. However, unlike the situation in Tinios v French Caledonia Travel Service Ltd [1994] FCA 1154; (1994) 13 ACSR 658 it is not necessary under Article 27(a) to state a price in the request for the transfer of the shares. The plaintiff is leaving his options open at this stage whether to proceed under Article 27(a) or by an oppression action. He has not been entirely candid about that in a number of the pieces of evidence set out above. This reflects adversely on his bona fides.