Stewart v Normandy NFM Ltd

STEWART V NORMANDY NFM LIMITED

[2000] SASC 344

1................ JUDGE BURLEY......... The plaintiff, who is a former director of the defendant, has, by this originating process, sought orders pursuant to Sections 198F(2) and 1303 of the Corporations Law for the inspection of the books of the defendant company. The relevant parts of Section 198F are as follows:

“A person who has ceased to be a director of a company may inspect the books of the company (including its financial records) at all reasonable times for the purposes of a legal proceeding:
(a).... [immaterial].
(b)... that the person proposes in good faith to bring; or
(c).... [immaterial].

This right continues for 7 years after the person ceased to be a director of the company.”

Section 1303 of the Law provides that the Court may compel compliance with provisions relating to the inspection of books.
The word “books” is defined in Section 9 of the Corporations Law. No argument has been advanced that the documents which the plaintiff wishes to inspect do not come within the definition. The documents which the plaintiff seeks to inspect are set out in the letter of 25 September 2000 from the plaintiff’s solicitor to the defendant, a copy of which is Exhibit “B” to the affidavit of the applicant sworn on 5 October 2000. They are as follows:-
“1.... All minutes of meetings of directors of Normandy NFM Limited since June 1993 to the present date, together with all board papers provided to the directors in respect of such meetings.
2...... All letters or memos made or received by the board and/or any of the directors of Normandy NFM Limited brought into existence since June 1993 to the present date relating to the:
(a)... interpretation of the significance of exploration results;
(b)... long term mine development plans; and
(c)... financial models for Tanami operations.
3...... All documents brought into existence since June 1993 relating to the acquisition by Normandy Mining Limited of shares in Normandy NFM Limited.
4...... All documents brought into existence since June 1993 relating to the assumption by Normandy Mining Limited or any of its associated or related entities of any company functions of Normandy NFM Limited including but not limited to:
(a)... administration;
(b)... exploration;
(c)... mine planning;
(d)... gold sales;
(e)... accounting;
(f).... cash management;
(g)... shareholder relations; and
(h)... share registry.
5...... All contracts entered into between Normandy NFM Limited and Normandy Mining Limited or any of its associated or related entities since June 1993 for any purpose including but not limited to:
(a)... administration;
(b)... exploration;
(c)... mine planning;
(d)... gold sales;
(e)... accounting;
(f).... cash management;
(g)... shareholder relations;
(h)... share registry;
(i).... Tanami joint venture; and
(j).... Tennant Creek joint venture.
6...... All disclosures of interest by directors of Normandy NFM Limited since June 1993 to the present date.”
It is common ground that the plaintiff ceased to be a director of the defendant on 20 October 1993. Consequently, the relevant seven year period expires at midnight on 20 October next.
The provision upon which the plaintiff relies came into effect on 13 March this year but the plaintiff did not lodge the originating process and his affidavit in support until 5 October 2000. The matter has been brought on for hearing as a matter of urgency to enable the plaintiff to obtain a determination prior to the expiry of the seven year period.
The application is supported by the affidavit of the plaintiff sworn on 5 October 2000. In his affidavit, the plaintiff refers to the letter of 25 September 2000. He then said:-
“... I wish to inspect the books of the Company for the purpose of a legal proceeding that I propose to bring concerning or related to the matters set out at points 1-5 of page 3 of annexure B hereto.”
That part of the letter is as follows:-
“Our client seeks access to the books of Normandy NFM Limited for the following reasons.
1...... To determine whether any, and if so, which directors of Normandy NFM Limited acted in breach of their duty:
(a)... to act honestly in the exercise of their powers and the discharge of their duties as directors by terminating the services of its managers and contracting those services to Normandy Mining Limited;
(b)... to act honestly in the exercise of their powers and the discharge of their duties as directors by allowing Normandy Mining Limited to assume management of its exploration in 1998;
(c)... to avoid a conflict of interest;
(d)... to disclose to the board information that is material to the decisions of Normandy NFM Limited;
(e)... of confidence to Normandy NFM Limited in disclosing information to Normandy Mining Limited;
such that Normandy NFM Limited should apply for a compensation order against one or more of its directors.

2.To determine whether the actions of Normandy NFM Limited in entering into contracts with Normandy Mining Limited since 1993 constituted a breach of the prohibition against the provision of financial benefits to related parties such that Normandy NFM Limited should apply for a compensation order against one or more of its directors.
3.To determine whether the directors of Normandy NFM Limited breached their duties to Normandy NFM Limited in entering into contracts with Normandy Mining Limited such that these contracts should be set aside and proceedings brought against Normandy Mining Limited for an account of profits.
4.To determine whether Normandy NFM Limited is accustomed to act in accordance with the instructions or wishes of Normandy Mining Limited such as to constitute Normandy Mining Limited a director of Normandy NFM Limited.
5.To determine whether the actions of Normandy Mining Limited in acquiring shares in Normandy NFM Limited since 1993 constituted insider trading such that Normandy NFM Limited should bring proceedings against Normandy Mining Limited under section 1005 of the Corporations Law.”

At the commencement of the letter of 25 September 2000, the plaintiff’s solicitor said:-
“Prior to, and subsequent to, our client ceasing to be a director he has had a number of concerns regarding the relationship between Normandy NFM Limited [the defendant] and Normandy Mining Limited and the impact this has had, and continues to have, on the operations of Normandy NFM Limited. Two particular concerns relate to:
·.. Issues arising out of the fact that at material times since 1993 the board of Normandy NFM Limited has largely comprised executives of Normandy Mining Limited and its associated companies.

·.. The proximity between Normandy Mining Limited acquiring further shares in Normandy NFM Limited and announcements made by Normandy Mining Limited to the Australian Stock Exchange in relation to Normandy NFM Limited.”

It is apparent from the passage just quoted and paragraphs 1 to 5 at page 3 of the letter that the plaintiff, in support of this application, relies upon a number of assumptions of fact, none of which has been proved on this application. They are:-
·.. That at material times since 1993 the defendant’s Board has largely comprised executives of Normandy Mining Limited (‘Mining’) and its associated companies.
·.. The timing of the acquisition by Mining of further shares in the defendant and announcements made by Mining to the Stock Exchange in relation to the defendant.
·.. The determination of the services of the defendant’s managers and contracting those services to Mining.
·.. The assumption by Mining of the management of the defendant’s exploration in 1998.
·.. That contracts have been entered into between the defendant and Mining since 1993.
·.. That Mining has acquired shares in the defendant since 1993.

As I understand it, the essence of the plaintiff’s argument is that, on an application such as this, it is not necessary to prove the facts upon which the applicant relies in proposing in good faith to bring the relevant legal proceeding. It was argued that the plaintiff needs only to prove that he is a former director of the defendant, that the relevant seven year period has not expired, that in good faith he proposes to bring a legal proceeding and that inspection of the books was for the purposes of that legal proceeding. I do not consider that the wording of the section should be so construed. It is for the plaintiff to establish the factual background to the application. This may not be done by unsubstantiated assertions.
The Court is required to determine whether or not the plaintiff’s proposal to bring proceedings is advanced in good faith.
Contrary to the plaintiff’s submission, it is not a matter of the defendant disclosing want of good faith. The onus is upon the plaintiff to establish that he proposes in good faith to bring the relevant proceedings.
In addition, the ability to inspect the books of the company is limited to the purposes of the proposed legal proceeding. Unless and until the plaintiff adduces sufficient evidence as to the basis upon which he advances the proposal to bring proceedings and which set out the nature of the proposed proceedings, the Court cannot make a finding as to the existence of good faith nor can a determination be made as to whether or not the inspection of the company’s books is for the purposes of the legal proceeding referred to.
In stating that it is necessary for the plaintiff to adduce evidence of the matters just referred to, I do not suggest that the evidence be limited to facts known to the plaintiff of his own knowledge. For example, he may have formed a belief having read a newspaper article in relation to the conduct of the defendant. The belief so formed may form part of the process of attributing good faith to the plaintiff.
In the letter of 25 September 2000, the five paragraphs set out at pages 3 and 4 of these reasons commence with the phrase “to determine whether”. It is difficult to see how the plaintiff can propose in good faith to bring proceedings when at the same time the reason for his requesting inspection of the company’s books is to determine whether any wrongful acts, breach of duty or conflicts of interest and such like have arisen. When the reason for the application is so phrased, I think the Court must exercise great caution in determining whether or not the plaintiff proposes in good faith to bring the relevant proceedings. I do not mean to suggest that if there is no finding of good faith then the conclusion must be that the plaintiff is acting in bad faith. It could equally be that the plaintiff is acting in a misguided manner or acting under a misapprehension as to the effect of Section 198F(2).
In this matter there is no direct or indirect evidence which enables me to form a view one way or the other as to whether or not the proposal to bring the legal proceeding is made in good faith by the plaintiff. For that reason alone the application should fail. However, in deference to the arguments advanced by both counsel, I propose to deal with the major points raised by them.
It was submitted by Mr Robertson, counsel for the plaintiff, that the phrase “for the purposes of a legal proceeding” refers only to the question of whether or not there is a right to inspect. In other words, the phrase did not limit the extent of the right of inspection. I do not accept this view. In my view, a fair reading of Section 198F(2) means that the right to inspect is limited to books of the company material to the legal proceeding that the applicant proposes in good faith to bring. I can see no useful purpose being served by construing the sub-section to mean that all of the books of the company may be inspected irrespective of the nature of the legal proceedings to be brought.
It was submitted by Mr Besanko QC, counsel for the defendant, that Section 198F(2)(b) only applies to proceedings that the former director proposes to bring in his own right. This submission was put to counter the plaintiff’s assertion that he was entitled to an order for inspection in respect of proceedings which were to be brought in the defendant’s name as outlined in the letter of 25 September 2000. Mr Besanko submitted that this followed from the natural and ordinary meaning of the words of the sub-section and that such a construction became even more evident when recourse was had to the provisions of Section 247A of the Law.
That section permits a member of a company to inspect the books of the company if the Court is satisfied that the applicant is acting in good faith and that the inspection is to be made for a proper purpose. Section 247A(3) provides:-
“A person who:
(a).... is granted leave under section 237; or
(b)... applies for leave under that section; or
(c).... is eligible to apply for leave under that section;
may apply to the Court for an order under this section.”
It is clear that the plaintiff is a person who comes within the meaning of Section 247A(3) of the Law. Section 236 of the Law enables former directors of a company to bring proceedings in the name of the company if the Court grants leave to do so. Section 237 of the Law sets out the means by which and the basis upon which an application for leave may be made. The plaintiff accepts that in relation to the proceedings which he proposes to bring, he must first obtain the leave of the Court to do so because the proposed proceedings will be brought in the name of the defendant. It is common ground that he is eligible to apply for the leave of the Court. That eligibility also brings him within Section 247A(3)(c) of the Law.
Mr Robertson argued that even if the proposed action to be brought in the name of the defendant was not a proceeding within the meaning of Section 198F(2), the application for a grant of leave under Section 237 of the Law was such a legal proceeding because it was brought in the plaintiff’s capacity as a former director of the defendant. Mr Besanko contended in reply that this was not the stated basis in the letter of 25 September 2000, but I think that Mr Robertson’s response adequately dealt with this contention. He said that it was at least implicit in the letter of 25 September 2000 that an application would have to be made under Section 237 of the Law because there is no other means by which the plaintiff could cause such proceedings to be brought.
Whatever might have been the intention of the plaintiff as at 25 September 2000 when the letter was written by his solicitors requesting inspection of the books of the company, it is, in any event, necessary to examine what effect Section 247A(3) of the Law has upon the plaintiff’s application.
I have come to the view that the proceeding which the plaintiff intends to bring must be one that he brings in his own name or, more accurately, does not include a proceeding which he intends to bring in the name of the company. This follows from the structure of Section 247A of the Law, sub-section (3) of which provides for an applicant for leave under Section 237 of the Law. This means that the plaintiff’s application cannot succeed because the proposed proceedings are not those contemplated by Section 198F(2) of the Law. Such a construction overcomes the difficulty that might otherwise apply if the application for inspection proceeded pursuant to Section 198F(2). If, as in this case, the proposed proceeding is one in the name of the company, the Court could not assume that the plaintiff would necessarily get leave under Section 237 of the Law. The Court would probably have to embark upon an examination of whether or not such leave was likely to be granted. All of this is obviated by following the provisions of Section 247A(3) of the Law.
I turn now to a consideration of the breadth of the order sought as it relates to the proceedings which the plaintiff proposes to bring. It can be seen from the letter of 25 September 2000 that the request is comprehensive, requiring inspection of documents since 1993 of a wide ranging variety and subject matter. It is apparent from the affidavit of Ms Carr sworn on 12 October 2000, that if the defendant is required to provide inspection of the documentation sought, a substantial amount of work will need to be done. That in itself is no reason to preclude an order from being made. If the plaintiff’s application justifies extensive inspection, the fact that a considerable amount of work will be required of the defendant does not preclude the order from being made.
In this case, because of the paucity of the facts deposed to by the plaintiff, I have no means of determining the appropriateness of the order sought. There is no evidence as to the materiality of the documentation sought to the proceedings which the plaintiff intends to bring. To some extent, the required evidence would be similar to the evidence given on an application for further and better discovery. The evidence should go to the existence of the documentation sought and why it is material to the matters which are likely to be in issue in the proposed proceedings. The lack of the required evidence means that the plaintiff has failed to establish an essential part of the application. For that additional reason the application must fail.
For the above reasons, the plaintiff’s application is refused.

[2000] SASC 344

19 October 2000