FEDERAL COURT OF AUSTRALIA
Style Limited, in the matter of; Merim Pty Ltd v Style Limited [2009] FCA 314
CORPORATIONS – section 247A – application to inspect the books of a company – good faith and proper purpose – dual purposes – dominant purpose – access to director and officer insurance policies
Corporations Act 2001 (Cth): ss 237, 247A
Federal Court Rules: O 15A r 6Acehill Investments Pty Ltd v Incitec Ltd [2002] SASC 344, followed
Re Augold NL [1987] 2 Qd R 297, followed
Cescastle Pty Ltd v Renak Holdings Ltd (1991) 6 ACSR 115, followed
Knightswood Nominees Pty Ltd v Sherwin Pastoral Company Ltd (1989) 15 ACLR 151, followed
Intercapital Holdings Ltd v MEH Ltd (1988) 13 ACLR 595, cited
Czerwinski v Syrena Royal Pty Ltd (No 1) (2000) 34 ACSR 245, followed
Unity APA Ltd v Humes Ltd (No 2) [1987] VR 474, followed
Gerah Imports Pty Ltd v Duke Group Ltd (In Liq) (1993) 61 SASR 557, considered
Grosvenor Hill (Queensland) Pty Ltd v Barber (1994) 48 FCR 301, considered
Hamilton v Oades (1989) 166 CLR 486, cited
Re Spedley Securities Ltd (In Liq); Ex parte Potts (1990) 8 ACLC 673, citedMERIM PTY LTD (ACN 004 986 181) v STYLE LIMITED (ACN 009 248 720)
VID 662 of 2008
GOLDBERG J
2 APRIL 2009
MELBOURNE
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VID 662 of 2008
IN THE MATTER OF STYLE LIMITED (ACN 009 248 720)
BETWEEN: MERIM PTY LTD (ACN 004 986 181)
Plaintiff
AND: STYLE LIMITED (ACN 009 248 720)
Defendant
JUDGE:
GOLDBERG J
DATE OF ORDER:
2 APRIL 2009
WHERE MADE:
MELBOURNE
THE COURT ORDERS THAT:
1.Pursuant to s 247A of the Corporations Act 2001 (Cth) Mr Peter Yunghanns, a director of the plaintiff, Mr Sean O’Brien, the Company Secretary of the plaintiff, Mr Stephen Sawer of DLA Phillips Fox and Mr Kevin Slomoi of GMK Centric Accountants, are authorised on the plaintiff’s behalf to inspect and make copies of those books of the defendant which are specified in Schedule A to this order.
2.The said Peter Yunghanns, Mr Sean O’Brien, Mr Stephen Sawer and Mr Kevin Slomoi shall only use the information they obtain during such inspection:
(a)for the purpose of considering whether proceedings in the name of the defendant should be commenced against directors and officers or former directors and officers of the defendant and, if it is decided to commence such proceedings;
(b)for the purpose of seeking leave to commence such proceedings and prosecuting such proceedings.
3.The defendant pay the plaintiff’s costs of and incidental to the application including reserved costs.
4.Liberty is reserved to each party to apply for further orders and directions whether in relation to the implementation and conduct of the inspection authorised by this order or otherwise.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules
The text of entered orders can be located using eSearch on…
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- Case
- [2009] FCA 314
- Decision Date
CaseChat Overview and Summary
The primary legal issue was whether Merim had satisfied the court that it was acting in good faith and that the inspection was for a proper purpose. The court considered Merim's affidavits detailing specific concerns about misrepresentations made by Style Ltd's directors and officers. These concerns included alleged breaches of statutory duties, misleading market announcements, and failure to disclose critical information about the company's financial health and business operations.
The court found that Merim had demonstrated a sufficient case for investigation into the specific allegations outlined in Mr Yunghanns' affidavits. The court concluded that an inspection order should be granted to allow Merim's nominated representatives to inspect the relevant documents under strict confidentiality conditions. The order limited the inspection to documents directly related to the concerns raised, excluding categories that did not meet the threshold for investigation. The court also ordered Style Ltd to pay Merim's costs associated with the application.
In summary, the court granted Merim's application for an inspection order, emphasizing the importance of ensuring that the inspection was conducted for a proper purpose and in good faith. The order permitted the inspection of specified documents to evaluate the potential for derivative action against Style Ltd's directors and officers based on the allegations of misrepresentation and misconduct.
Orders
Orders of the court
1. Pursuant to s 247A of the Corporations Act 2001 (Cth) Mr Peter Yunghanns, a director of the plaintiff, Mr Sean O’Brien, the Company Secretary of the plaintiff, Mr Stephen Sawer of DLA Phillips Fox and Mr Kevin Slomoi of GMK Centric Accountants, are authorised on the plaintiff’s behalf to inspect and make copies of those books of the defendant which are specified in Schedule A to this order.
2. The said Peter Yunghanns, Mr Sean O’Brien, Mr Stephen Sawer and Mr Kevin Slomoi shall only use the information they obtain during such inspection:
(a) for the purpose of considering whether proceedings in the name of the defendant should be commenced against directors and officers or former directors and officers of the defendant and, if it is decided to commence such proceedings;
(b) for the purpose of seeking leave to commence such proceedings and prosecuting such proceedings.
3. The defendant pay the plaintiff’s costs of and incidental to the application including reserved costs.
4. Liberty is reserved to each party to apply for further orders and directions whether in relation to the implementation and conduct of the inspection authorised by this order or otherwise.
Note:
Background
Background to the litigation
Full text does not contain this section.
Evidence
Evidence Before The Court
Full text does not contain this section.
Decision
Reasons for decision
Ratio Decidendi
Legal Principle Established
Established by: GOLDBERG J
This threshold issue is therefore resolved not on the basis of any learning in relation to the effect and consequence of consent orders or the doctrine of estoppel but rather on the basis that a procedural short cut agreed to by the parties was taken and adopted by Finkelstein J which did not work out. The result was that the principal issue whether an order should be made under s 247A had to be argued and determined.CONSIDERATION Before making an order pursuant to s 247A(1) I must be satisfied that Merim is acting in good faith and that the inspection is to be made for a proper purpose.MERIM’S PURPOSE The evidence in support of the application is found in affidavits sworn by Mr Yunghanns. He was not cross‑examined on those affidavits. In his first affidavit Mr Yunghanns said: “I am concerned that certain of the directors and officers of the defendant may have, over the period ended 30 June 2008, misrepresented the position of the defendant to members, not only in terms of projected earnings, but also the application of funds, particularly the proceeds of the convertible note issue made in July 2007. I am also concerned that the defendant is or may become insolvent. …The announcements made by the defendant over the year ended 30 June 2008 have, I believe, been seriously misleading, especially those in the first 7 months of the year. For that purpose, I wish to inspect the books of the company to consider whether action in the name of the defendant should be commenced against officers or former officers.”Mr Yunghanns said that there was no substantive response to the request contained in his email of 4 July 2008. Senior counsel for Merim developed Mr Yunghanns’ concerns further during the course of the hearing. He identified the following potential derivative action claims that Merim would investigate through an inspection of Style’s books:1.A potential claim against the directors for breach of statutory duties owed to the company to exercise reasonable care, good faith, not to profit for themselves and not to cause detriment to the Company (under ss 180, 181 and 182 of the Act) on the basis that:a.they raised funds by unsecured notes to acquire a bamboo plantation when in fact the company obtained only an annual leasehold interest;b.they made announcements to the market that the convertible notes would be used to acquire the bamboo plantation;c.they failed to disclose to the shareholders, market and note holders the true or actual agreement entered into regarding the leasehold of the plantation;d.they failed to discharge their obligations of continuous disclosure to the market by revealing that an annual lease had been taken rather than the acquisition of a substantial interest in the plantation;e.they announced in November 2007 that the company had entered into an agreement for a term of 50 years with a right to purchase industrial land for a future factory;f.the price or rent payable under the agreement was never disclosed but was clearly not $10 000 000 but instead was an annual rent of $700 000 or more;g.they released a market update on 24 September 2007 which forecast revenue and financial earnings of $60 – $80 million with $14 – 20 million EBITDA when they arguably had no reasonable basis to do so;h.at the time of that and previous announcements they had yet to put in place the production facilities necessary to meet production capable of generating such revenue;i.on 31 January 2008 they made revised forecasts for revenue when they had no reasonable basis to do so;j.by 30 April 2008 revenue was in fact only $3.18 and EBITDA was a loss of $1.8 million;k.on 24 September 2007 the company announced that new production machinery would be commissioned to start production in the first week of October when there was no reasonable basis for doing so because only one consignment of the machinery purchased from Germany had been processed through customs;l.notwithstanding those delays there was no modification to the forecasts to revenue or profit made in September 2007 even when by November 2007 and December 2007 further delays in installation and commissioning the machinery were apparent;m.the forecasts made in July 2007 and September 2007 assumed a production rate and capacity of trading stock that was not physically achievable from the company’s contemplated new production capabilities;n.on 8 August 2007 the company announced a contract for a minimum revenue of $80 million over thee years yet at the time of entering into that agreement it had not yet secured or acquired the plantation, and it did not have any production capacity to meet that obligation;o.on 24 September 2007 the Chairman of the company sold options to the value of $4.15 million at a time when:·there was no concluded agreement in respect of the Wanzai Plantation;·the profit and revenue forecasts would need to be or ought to have been corrected;·the new production capacity was unachievable;·these facts had not been disclosed to the market;·all monies raised by the unsecured notes had been consumed despite only $796 000 spent on annual rental for the Plantation; ·cash revenues had been depleted.and thereby obtained a profit for himself;p.On 27 September 2007 the directors announced that they had received a preliminary approach from a private equity firm (hence suggesting the company was an attractive financial target) yet made no subsequent or further announcement as to the outcome of that inquiry or whether the inquiry was pursued for the benefit of shareholders and the company as a whole;q.On 31 October 2007 the directors disclosed in the form 4C quarterly report ending 30 September 2007 that in fact $3.048 million had been spent on acquiring the balance of a 50% interest in Anji Ya Feng Bamboo Products Limited which was funds presumably obtained from the secured notes but was not a use of those funds for either acquisition of the bamboo plantation or working capital;r.A further $1.2 million was used for the same purpose (acquisition of the 50% interest in Anji Ya Feng in the quarterly reports for the quarter ending 31 December 2007);s.The directors failed to provide updated forecasts or guidance to the market between January and July 2008 in circumstances where the directors well knew that the previous forecasts were wrong or unachievable and/or funds obtained for the purpose of acquiring the plantation had been used for other purposes;t.The directors issued proceedings to recover a debt (which they disclosed as an asset) and settled that claim without any explanation or announcement creating a liability of $650 000;u.The directors caused announcements to be made (including to the ASX) that the manufacturing factory acquired in May 2005 was operational when in fact it was not;v.Further they announced that the Company had production capabilities it did not have;w.At a time when the Company was trading at a loss (September 2008) and faced current liabilities due 30 June 2009 of $10 million and faced supply issues due to the failure of the plantation, it agreed to:·Enter into an extended distribution agreement for a further term of three years when the existing term was not due to expire until 15 July 2009 and the company had announced on 27 September 2007 that it had been unable to meet its obligations to the distributor under the existing agreement; ·Issue 14,127,104 shares in the company without a prospectus at a price exceeding the then market trading price to a company associated with the major supplier.x.At a time when the solvency of the company has been raised as an issue by an aggrieved shareholder, the chairman agreed to exercise options which fell due to be exercised in January 2009;y.Having foreshadowed the possibility of an underwriter supporting the realisation of options falling due in January 2009 no underwriter was forthcoming; andz.The company has been unable to file audited accounts despite assurances that it would and trading in its shares has been suspended.2.The following other causes of action may arise from the matters set out in par 1 above:·Misleading and deceptive conduct in contravention of s 1041H of the Corporations Act 2001·False and misleading statements in relation to financial products in contravention of s 1041E; ·Insolvent trading.3The company may be entitled to bring an action against the directors for the following relief:·To disgorge any profit obtained from breach of duty;·To compensate the company for losses caused by breach of duty;·For declarations that they indemnify the company in respect of any claims made against the company arising from their breach of duty or misconduct (eg to satisfy the convertible notes when they fall due and/or any claims by aggrieved shareholders); and·Equitable compensation.