McLean v DID Piling Pty Ltd
[2010] SASC 33
•19 February 2010
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 33Civil
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”).
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 shares.
The application before the Master
On 18 May 2009, the appellant made an application in this Court under s 247A to inspect documents of the Company. That section provides a mechanism by which particular parties may inspect certain documents of a company. It relevantly states:
(1)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.
It can be seen therefore that an applicant must show that the application is made in good faith and for a proper purpose, before an order will be made authorising inspection.
The originating process which gave rise to this application sought an order authorising the persons named in Schedule 1 of that document (his accountant and his solicitor) to inspect the documents set out in a Schedule 2. Those schedules are set out as follows:
SCHEDULE 1
Person to Inspect Documents
1.Phillip Plummer of HLB Mann Judd of 82 Fullarton Road Norwood South Australia 5067, Chartered Accountant.
2.Rino Michael Marrone of Marrone & Co, Level 2, 195 Victoria Square Adelaide South Australia, Solicitor.
SCHEDULE 2
Documents to be Inspected
1.The financial statement for 2007-2008, which is inclusive of balance sheets and profit and loss statement.
2.The tax returns for financial years ending from 2005 to 2008 (both years inclusive).
3.A list of current company assets whether owned or leased and in the case of leased plant and equipment documents establishing equity.
4.A list of assets of any plant or equipment which was previously the property of DID Piling Pty Ltd and has been to date sold as from the 1st July 2006 and if so for what price and to whom or which company.
5.A current market valuation of any plant and equipment if any valuation exists.
6.All relevant documents to review all material transactions with any entity which any director or shareholder has a significant or controlling shareholding such as but not limited to:
(a)Rent of the property owned by the D.I.D. Unit Trust,
(b)Hire of equipment,
(c)Hire of labour,
(d)Sub-contract arrangements, and
(e)Wage records,
for the relevant financial years ending the 30th June 2005 to and including the financial [year] ending 30th June 2008.
7.Documents relating to the commercial dealings and financial information relating to a number of specific construction or piling contracts, hire of plant and equipment or plant purchase contracts involving D.I.D. Piling Pty Ltd, namely:
(a)The Lock 1 Upgrade & New Fish way contract of 2007,
(b) The purchase of 4 barges from John Holland in Newcastle and of 10 other barges (8 long and 2 short barges) from another entity in Newcastle in 2007,
(c) The Blanche Town [sic] contract regarding the purpose of pontoons in 2007,
(d) The Port River Express contract of 2006 and 2007,
(e) The Coffer Dam contract of 2007,
(f) The Bakewell St Underpass of 2006 and 2007,
(g) The Eastlink Melbourne contract of 2007,
(h) the Prominent Hill contract of 2007, and
(i) The Berth 7 Adelaide contract of 2007 and 2008.
In the affidavit material supporting the application, the appellant claimed that the proper purpose for which the appellant was making the application was to have his shares valued for the purpose of selling those shares.
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 Registration
The 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.
In his reasons for decision, the Master said that, while the purpose of valuing the shares may be an “equal purpose”,[1] the true primary purpose for pursuing the s 247A application was to gather information for the purpose of initiating an oppression claim under s 233.[2]
[1] McLean v D.I.D. Piling Pty Ltd [2009] SASC 205 (“McLean v D.I.D. Piling Pty Ltd”), [20].
[2] McLean v D.I.D. Piling Pty Ltd, [19]-[20].
The Master said that, notwithstanding that preparation for an oppression claim would not amount to an improper purpose of itself, the fact that the appellant made the application without admitting his true dominant purpose, displayed a lack of candour which suggested a want of bona fides.[3]
[3] McLean v D.I.D. Piling Pty Ltd, [18].
The grounds of appeal
The primary ground of appeal which was pursued in argument before me was that there was no basis for the Master’s finding that the plaintiff had not established that his primary or dominant purpose for seeking inspection was to obtain information for the purpose of valuing his shares as a precursor to their sale. Further, it was argued that the Master erred when he found that the “real purpose” for the plaintiff seeking inspection was to obtain information about certain back charges and the normalisation of particular contracts for the purpose of mounting an oppression claim under s 233 of the Act.
One line of argument sought to be made before me was that the Master erred in finding that, notwithstanding that an oppression claim can be a proper purpose for a s 247A application, the appellant’s failure to disclose this as the true purpose of the application showed a lack of bona fides. It was submitted that an inference of a lack of bona fides cannot be drawn from a failure of the applicant to depose to the true dominant purpose. For the reasons that follow, it is not necessary to determine that argument in order to dispose of the matter. I therefore simply refer to the argument for completeness.
Nature of appeal
An appeal to a single judge of this Court from a Master is governed by s 50(2) of the Supreme Court Act 1935 (SA), which states:
(2)An appeal against a judgment of a master lies, if the rules so provide, to the Full Court and otherwise to the court constituted of a single judge.
The scope of such appeals is regulated by Rule 286 of the Supreme Court Rules 2006 (SA) (the “2006 Rules”).[4] That rule states:
[4] At the time of hearing this appeal the relevant rule was contained in Rule 292, however the two rules are in the same terms: see Supreme Court Rules 2006 (SA) Amendment No 10.
286—Hearing of Appeal
(1)An appeal is to be by way of rehearing (unless the law under which the appeal is brought provides to the contrary).
(2)Subject to any limitation on its powers arising apart from these rules, the Court may determine an appeal as the justice of the case requires despite the failure of parties to the appeal to raise relevant grounds of appeal, or to state grounds of appeal appropriately, in the notice of appeal.
(3)Subject to any limitation on its powers arising apart from these rules, the Court may—
(a) draw inferences of fact from evidence taken at the original hearing and, in its discretion, hear further evidence on a question of fact;
(b) amend or set aside the judgment subject to the appeal and give any judgment that the justice of the case requires;
(c) remit the case or part of the case for rehearing or reconsideration;
(d) make orders for the costs of the appeal.
Accordingly, the appeal is to be by way of rehearing. This Court is therefore obliged to conduct a real review of the decision and of the Master’s reasons.[5] As Kirby J (with whom Gleeson CJ agreed) said in CSR Ltd v Della Maddalena:[6]
[T]he appellate court is obliged to conduct a thorough examination of the record and a real rehearing. It is not confined to reconsideration of the record in order to correct errors of law, although that will certainly be encompassed in such an appeal. It is required to consider suggested errors of fact-finding. Experience teaches that many errors of this kind arise at first instance, more perhaps than errors of law. Having concluded a rehearing as so described, the appellate court is obliged to “give the judgment which in its opinion ought to have been given in the first instance”. This involves, where, as here, there is no jury, conducting a thorough review of the primary judge's reasons and engaging in the tasks of “weighing conflicting evidence and drawing ... inferences and conclusions”.
[Footnotes omitted.]
[5] Fox v Percy (2003) 214 CLR 118, 126-7[25].
[6] (2006) 80 ALJR 458, 465 [16].
Counsel for the appellant submitted that, because Rule 286 provides for appeal by rehearing, the appellant is not required to show any error on behalf of the Master, in order for me to re-exercise the discretion. Counsel invited me to approve of the reasoning of Judge Tilmouth in Beare v Light Regional Council,[7] where the equivalent District Court Rule (which is in identical terms to Rule 286) was considered. Judge Tilmouth said (at [23]):
The extremely wide and unqualified discretions vested in the court, together with the breadth of the language used, are suggestive of the power of complete rehearing at large, on the merits. This is particularly evident in the unqualified statutory remit to “determine an appeal as the justice of the case requires” going beyond the issues raised by the parties, the power to “give any judgment that the justice of the case requires” and by the omission of the equivalent to the former [equivalent rule under the 1987 Rules]. Rule 292 also confers a very wide range of dispositive powers indeed.
[7] [2008] SADC 72.
Judge Tilmouth later concluded (at [25]):
The clearly expressed purpose of the 2006 Rules is that a Judge is to exercise an independent judgment, which the judge should not hesitate to give effect to where there are persuasive reasons for departing from the decision of a Master. Accordingly, it is not necessary to identify error before a Judge is entitled to interfere. The court in this situation proceeds on the basis of the record and the material before the Master, and such fresh evidence as it may exceptionally admit.
[Reference omitted and emphasis added.]
This reasoning has not received acceptance in other decisions of the District Court.[8] Indeed, the reasoning appears to be inconsistent with the treatment of Rule 97 of the former Supreme Court Rules 1987 (SA) (the “1987 Rules”) by Mulligan J in George v Dowling.[9] Similarly, it seems to be inconsistent with the approach taken by Wicks J in Mac Audio & Acoustical Consultants Pty Ltd (in liq) v Eddy,[10] when his Honour said of the 1987 Rules (at [6]):
This appeal is by way of re-hearing and not by way of re-hearing de novo: SCR 97.17. An appellate court is required to make an independent assessment of the material that was before the learned Magistrate and may draw any inferences from the facts which may be appropriate: Warren v Coombes (1979) 142 CLR 531. An appellate court, hearing an appeal is not, however, entitled to substitute its own discretion for that of the Magistrate in the court below unless an error in the exercise of discretion can be detected: Mullett v Gabriel (1989) 52 SASR 330 at p333. For this purpose there will be such an error where matters which should have been taken into account were not taken into account or where matters which should not have been taken into account were taken into account.
[8] See eg Jewel River Pty Ltd v Captured Pty Ltd [2009] SADC 2, [25]-[32]; ADX Building Systems Pty v Adelaide Fibrous Plasterboard Linings Pty Ltd (In Liq) [2009] SADC 7, [47].
[9] (1992) 57 SASR 579, 582.
[10] [1999] SASC 443.
In addition, several recent decisions of the Full Court of this court have required a court to find error before exercising the discretion afresh.[11] Accordingly, counsel’s submission should not be accepted. Instead it is appropriate to follow the well known rules in House v The King,[12] which case sets out the circumstances in which an appellate court would disturb an exercise of discretion. In that case the High Court[13] said (at 504-5):
The manner in which an appeal against an exercise of discretion should be determined is governed by established principles. It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred.
[11] Manos v Maros (2007) 249 LSJS 67, 77 [50]; FMV Stanke Holdings Pty Ltd v O’Meara (2007) 252 LSJS 87, 111 [141]; Oxer v Astec Paints Australia Pty Ltd [2008] SASC 210, [33]; Beverage Bottlers (SA) Ltd (In Liq) v Abode Enterprises Pty Ltd [2009] SASC 272, [114].
[12] (1936) 55 CLR 499.
[13] Dixon, Evatt and McTiernan JJ.
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.
On 10 October 2007, Plummer sent an email to the Company’s accountants (“Koster”), in the following terms:[18]
We have been instructed by Mr Darrell McLean to value the shares in the above company.
Would you please provide the following:
a) Copy of Memorandum & Articles of the company.
b) Financial statements for the years ended 30th June 2004 through to 30th June 2007.
c) Detailed profit and loss and trading statements for the relevant periods.
[Emphasis added.]
[18] DRM 14.
Following further correspondence requesting financial records, Koster sent a letter to the appellant on 24 December 2007 stating that the records were not ready and adding:[19]
I have been instructed by the director of DID Piling Pty Ltd (Domenic Vieceli) that the financial statements for 2007 cannot be completed due to the finalisation of back charges – which you are aware of.
I suggest that you contact the director to determine when final invoices for back charges will be complete so I can finalised [sic] 2007 accounts.
[19] DRM15.
This is the first mention of “back charges” in the correspondence. These back charges are relevant because they represented for the Judge on the application the true factual matter which the appellant sought to discover through the s 247 process as indicated (at [19]):
The real purpose of the plaintiff at the present time appears to be to obtain information about the back charges and the “normalisation” of the contracts between the defendant and York so that he can decide on the relative advantages and disadvantages of pursuing an oppression action compared with the Article 27(a) process.
In early 2008, the appellant instructed solicitors, Marrone & Co (“Marrone”) to act on his behalf in the negotiations with the Company. On 12 February 2008, Marrone sent a letter to the Company, which relevantly said:[20]
[The Company’s accountant has] provided a copy of all statements and accounts for all financial years other than the 2006-2007 financial year. Our client requires the financial statement, profit and loss statement and trading statement of the company for the 2006-2007 financial year to ascertain the market value of the shares of the company. Our client is entitled to those documents pursuant to the Corporations Act. ...
However, the purpose of our letter is to ask that the statements requested be provided to us within the next 7 days. The purpose for the documents is to enable our client to give effect to the provisions of the company’s constitution relating to the transfer of shares and to provide the other shareholders, being yourself [Vieceli] and Mr Ian Tarbotton, with the pre-emptive right to purchase and thereby gain full ownership of the company. Having regard to past events it seems that that objective should be genuinely considered by all parties as well as a resolution of all other issues and disputes in order to avoid litigation.
[Emphasis added.]
[20] DRM17.
The Company responded to that letter on 18 February 2008, assuring the appellant that the 2006-2007 financial year statements were being finalised and that they would be sent to the appellant in due course. The last paragraph of that letter reads:[21]
We note that the financial statements are required to value Mr McLean’s shareholding in the company. We will also undertake a valuation of the assets in the DID Piling Property Trust to finalise the commercial arrangements with Mr McLean[.]
[21] DRM17.
On 21 February 2008, Marrone sent another letter to the Company requesting the relevant financial statements. In this letter Marrone made several enquiries about the back charges:[22]
We have been provided with a copy of [the Company accountant]’s letter of the 24th December 2007. With respect our client is not aware what the “back charges” relate to at all. Secondly, as the company operates on an accrual system please explain why there is any need to finalise “back charges”. Why amend the financial statements for 2006-2007?
Our client will expect to receive the financial statements by no later than the 29th February 2008. and [sic] also requires details of the “back charges” referred to.
[22] DRM17.
The Company responded on 27 February asserting that the back charges were “lawful” and occurred with the knowledge of the appellant.[23] Marrone replied on 28 February 2008, denying that the appellant was aware of what the back charges related to and seeking further information.[24]
[23] DRM17.
[24] DRM17.
Details of the back charges were supplied to the appellant in April 2008.[25] They amount to about $1.2 million and consist largely of salaries payable to Tarbotton and Vieceli as well as delayed charges by York and other retrospective charges.[26]
[25] Affidavit DRM [37].
[26] DRM 18.
On 7 August 2008, Marrone sent a letter to Plummer regarding the ongoing attempt to obtain documents from the Company.[27] This document was not before the Master but was admitted as evidence on appeal with no objection from counsel for the respondent.[28] It was a relevant part of the chronology and was before Plummer at the time of his reply of 19 August 2008 and later communications. The letter said:
We are instructed to proceed with the task of valuing the shares issued by DID Piling Pty Ltd (“the company”) and if necessary to seek production of such documents, both financial and otherwise, from the company to enable you to inspect such documents as you may require for the purposes of determining the value of issued shares.
There are some construction work contracts where the tender price by the company was reduced affecting the profit margin of the company. Do you need to investigate these matters?
Can you please advise what documents or groups of documents of DID Piling Pty Ltd that you will need to inspect and consider for the purposes of determining the value of that company’s shares.
We are seeking an expert report from you which report may be used for legal proceedings should it be necessary to institute legal proceedings with respect to the valuation of the company’s shares.
[Emphasis added.]
[27] Exhibit A1.
[28] Transcript, 3.
The letter went on to set out the matters that must be explained to a person who is to prepare an expert report, including the relevant practice directions and court rules as well as a copy of the District Court Expert Witness Guidelines.
Plummer replied on 19 August 2008 setting out the relevant documents that would be needed to perform the valuation.[29] In that letter, Plummer made two relevant comments. First, he said:
You have instructed us to undertake a valuation of the shares of DID Piling Pty Ltd (the Company).
[29] DRM 19.
Secondly, he said:
We understand that the valuation may be used for legal proceedings and confirm that we are conversant with Practice Direction 5.4 and Form 160 of the District Court of South Australia.
[Emphasis added.]
The Master attached some weight to the latter of these statements.[30] He said that the reference to “legal proceedings” necessarily must refer to an action under s 233 of the Act and not to any proceedings about sale of the shares. After quoting the latter statement the Master added (at [14]):
(Legal proceedings would only be likely if the plaintiff elected to institute an oppression action).
[30] McLean v D.I.D. Piling Pty Ltd, [14].
I observe at this point that the Master’s inference regarding the reference to “legal proceedings” being an oppression claim seems unlikely given that the documents provided to Plummer related to the District Court and an oppression claim cannot be brought in the District Court.[31] It seems further unlikely, having the benefit of the Marrone letter of 7 August 2008 (above at [40]) which the Master did not, which shows that the legal proceedings referred to are “legal proceedings with respect to the valuation of the company’s shares”. Whilst it is not clear what precise proceedings were in the mind of Marrone with respect to the valuation of the shares, it is highly unlikely that this was a reference to an oppression action.
[31] Section 233 of the Corporations Act 2001 (Cth) refers to “the Court” which is defined in s 58AA.
The next relevant document is a letter from Marrone to the Company of 25 August 2008 communicating the relevant further documentation that was requested by Plummer.[32] The letter said:
Our client has engaged Mr Phil Plummer of HLB Mann Judd, Chartered Accountants, to value the shares of DID Piling Pty Ltd (“DID”). Whilst the financial statements provide some assistance they are on their own insufficient.
In order for the valuation to be undertaken properly, our client, as a shareholder of DID, requests you to make the following documents available for inspection by both Mr Plummer and the writer for the purposes of determining the value of the shares of DID, which undertaking will require legal advice[.]
[32] DRM 20.
The letter then set out the relevant documents that were sought.
What followed was a series of correspondence in which the appellant sought to have documents provided by the Company, which generally denied any obligation to do so. Throughout this correspondence, the parties both appear to presume that the purpose of seeking the documents is to allow Plummer to conduct a valuation of the shares. In particular Marrone says, in a letter of 17 December 2008:[33]
The purpose why our client engaged Mr Plummer of Mann Judd was to value the company in order to determine the value of the shares. Mr Plummer still requires the promised financial records to properly value the company’s shares. Your client has been most uncooperative to date and your client’s refusal conveyed in your letter is disappointing as our client was seeking to avoid litigation. That is now inevitable.
[33] DRM 24.
The litigation to which Marrone refers is presumably the application which is the subject of this appeal. This is confirmed by Marrone’s letter of 22 January 2009 where he foreshadows the intention of the appellant to make an application under s 247A.[34] This is, of course, the first time that Marrone indicates what the appellant considers to be his ‘proper purpose’ for initiating the application. He says:
It has been held that a proper purpose includes where the constitution of the company contains a pre-emption provision and inspection sought to assist a shareholder to obtain an opinion on the value of this shareholder.
[34] DRM 24.
The Company did not directly dispute that this is the purpose of the application at this stage but said, by letter of 25 February 2009:[35]
You have mentioned that the purpose for which your client wants additional company information is for the purposes of determining a value of your client’s shares. I understand the valuation is required so your client can provide notice to sell his shares. Can you please confirm that if additional information is made to your client, that it will seek to obtain a valuation and provide a transfer notice to the other shareholders. In the absence of you confirming this, my client will presume that your client’s threat to make an application is not for a “proper purpose”.
[35] DRM 24.
Further documentation was requested by Marrone, by letter of 7 April 2009. This documentation related to a series of transactions made by the Company. He said:[36]
The above documents and information is required by Mr Plummer for the purpose of properly valuing the shares.
[36] DRM 24.
This appears to be a valid and accurate indication of the purpose of seeking this further documentation. Previously, on 24 March 2009, Plummer had sent a letter to Marrone explaining that further documents need to be obtained in order to understand the back charges and normalisation of contracts.[37] Plummer’s language is indicative of the relevance that the appellant’s solicitor and accountant attached to the uncertainties of the financial records such as the back charges and normalisation. He said:
[37] DRM 23.
We have been provided with the financial statements for the relevant years except the year ended 30 June 2008.
This information is the basis of the valuation but does not include some matters such as current market valuations of plant and equipment.
The next step is to “normalise” the trading results. This can only be done by reviewing all material transactions with any entity or person who is not at arms length to ensure the transactions are on a commercial basis.
To this end it is difficult to be too specific as there could be a number of transactions which fall in this category with any entity with which any director or shareholder has a significant shareholding.
The construction industry is one in which it is common for major projects to be entered into in individual companies. The type of transaction which we believe may need review include:-
· Rent of property.
· Hire of Equipment.
· Hire of Labour.
· Sub-contract arrangements.
· Wages records.
We believe that it would be prudent to request that the company (DID) provide details of all major transactions.
It is clear from this letter that, even at this very late stage prior to initiating the s 247A application (and when the application was clearly contemplated), the importance of enquiring into the rectitude of company transactions was for the purpose of valuation of the shares.
In the weeks that followed, two ancillary events occurred. First, on 27 April 2009 the Company sent a letter to the appellant informing him that his employment with the Company had terminated and that his last day of employment would be 25 May 2009.[38]
[38] DRM 12.
Secondly, the Company made an offer to its current shareholders to take up additional shares in the Company. Both Tarbotton and Vieceli took up this offer. The appellant did not take up this offer. The effect was that the appellant’s proportion of shareholding was reduced to around 1%. It seems that the appellant disputes the validity of this transaction.
There were two additional letters before the Master that were sent after the initiation of the s 247A application. First was a letter of 26 June 2009 from Marrone to the Company, which stated:
Our client has requested information and documents from your client to value the shares which your client still refuses to provide. Indeed our client has been forced to institute proceedings under section 247A of the Corporations Act in order to obtain the relevant information and documentation to obtain a valuation and counsel’s advice.
We regard your client’s actions as not being in accordance with the Constitution and of no effect. Our client will take such legal action as he may be advised by counsel.
Secondly, there is a letter of 1 July 2009 from Marrone stating:
We again invite your client to provide our client with the documents identified in Schedule 2 to the originating process (“the requested documents”) to enable our client to obtain counsel’s advice on the matter and to obtain a valuation of the company shares by his chartered accountant.
Our client is also taking advice as to whether your client’s conduct to date, including its most recent conduct of issuing the shares, constitutes an oppression on a minority shareholder. Our client reserves all his rights with respect to the issue of the additional new shares and the attempt by the Board to sell his shares.
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.
It may be the case that there may be an oppression claim or indeed some other claim against the Company or its director. However, this does not diminish the fact that the appellant’s dominant purpose for seeking documentation from the Company was, from the very beginning, and remained at the time of application, to conduct a valuation of the shares for the purpose of sale.
The Master gave some weight to the fact that the appellant had not yet provided notice of intention to sell under article 27(a) of the Company’s constitution.[40] That provision, as I have set it out above, provides for a mechanism of valuation by an independent accountant. The Master said that the appellant’s decision to attain his own valuation necessarily suggested a desire to circumvent the article 27(a) procedure by initiating an oppression action. However that doesn’t necessarily follow. Article 27(a) allows the Board and the outgoing member to agree a price for the shares and thereby avoid a binding independent valuation. Alternatively, although the Board in this case has indicated an intention to buy, if sale under article 27(a) does not proceed, article 27(c) allows the member to proceed to private sale. In all of those circumstances, it is perfectly reasonable for the member to obtain a valuation themselves, even prior to providing notice under article 27.
[40] McLean v D.I.D. Piling Pty Ltd, [7]-[10].
I conclude on the evidence that the Judge erred in his reasoning and conclusions. There was no sound reasonable basis for the Judge finding as he did that the true dominant purpose of the application was in respect of taking potential minority shareholder action. On the contrary, on the material, there was nothing to suggest that this was a proper inference. Although not determinative of the matter, it is also to be noted that there was no cross-examination of the plaintiff on the assertion of purpose deposed to in the affidavit. There could not be, and nor was there, suggestion of a lack of candour, or lack of truthfulness by the plaintiff in the deposition.
Having found that the Master has erred in his approach to the discretion, it is necessary to exercise the discretion afresh. Having regard to the discussion above, there is no doubt that the appellant satisfies the elements of s 247A. The appellant has brought the application in good faith and for the proper purpose of valuing his shares for the purpose of sale. I would therefore allow the appeal and make an order pursuant to s 247A that the appellant or his representative may inspect the books of the Company.
Orders
I indicated to the parties at the hearing that, if I were to allow the appeal, it may be that the scope of documents, of which inspection is sought, set out in Schedule 2 of the application is not appropriate. Indeed counsel for the appellant conceded that there may need to be some changes to the terminology of the order sought.[41] Accordingly, it is necessary that I hear the parties further as to the precise orders that should be made.
[41] Transcript 61-63.
I order:
1Appeal allowed.
2I will hear the parties further as to the terms of an order under s 247A of the Corporations Act 2001 (Cth).
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