Members of companies are entitled to various rights. One question that commonly arises is in regards to their rights to inspect the “company books”. In this insight, we look at the ambit of this question and under what circumstances a member is entitled to access and inspect the company’s books, including financial statements, records of information and the company register.
Does a member have a right to inspect the company’s books?
Members do not have an automatic right of access to the company’s books, however, in accordance with section 247A of the Corporations Act 2001 (Cth), a member may apply to the Court for an order to inspect the company’s books and, in certain circumstances, the Court will make such order.
Section 247A(1) states that:
“(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.”
Section 247A(1) therefore empowers the Court to make an order authorising a member, or another person on the member’s behalf, to inspect the “books of the company” if the Court is satisfied that the member is acting in “good faith” and that the inspection is for a “proper purpose”.
“books of the company”
Although “books of the company” is not defined specifically in the context of section 247A, section 9 outlines a wide definition of “books”, which includes:
“(a) a register; and
(b) any other record of information; and
(c) financial reports or financial records…”
In the case of Engel v National Biodiesel Limited  FCA 1114 (Engel), the Federal Court considered the definition of “books of the company” in the context of an application made under section 247A.
Mr Engel, a shareholder of National Biodiesel Limited (NBL), applied to the Court to access certain documents after NBL refused his direct request for documents.
Mr Engel wanted to review what he believed to be a series of related party transactions between NBL, its subsidiary, its major shareholder and various other related parties out of concern that assets had been disposed of from NBL as an outcome of these transactions, therefore diminishing his investment.
In Engel, the Court found “of the company” to mean property of the company. Further, the Court emphasised that applications under section 247A should only be for documents relevant to the purpose of the application. On this basis, the books sought to be inspected in accordance with an application under section 247A should be properly identified and, unless relevant to the purpose of the application, a Court is unlikely to make an order granting an applicant general or unfettered access to all of the books of the company.
Further on this point, in the judgment of Goldberg J in Re Style Limited  FCA 314, of which has been followed by a number of other judges, it was stated that:
“In granting an order for inspection under s 247A it is not appropriate to allow a wholesale and general inspection of … [the company’s] … books. This would cause unnecessary disruption to the company. In any event the books to be inspected should be books that bear on, and be particularly relevant to, the purpose for which the inspection is sought.”
“good faith” and “proper purpose”
An applicant must prove a genuine case for investigation of the concerns it has as a member for the Court to make an order in accordance with section 247A allowing the members to inspect the company’s books. An applicant’s absolute intention to sue the company (including in accordance with section 247A(5)) is not a necessary element.
The case of Mesa Minerals Limited v Mighty River International Ltd  FCAFC 16 (Mesa Minerals) contemplates the scope of section 247A.
In Mesa Minerals, a shareholder (Mighty River) of Mesa Minerals Limited (MML) applied to the Court for an order that its director and solicitors be permitted to inspect certain books and records of MML, which it said were relevant to protecting its rights and interests as a shareholder in MML. This was in light of concerns that MML had been allowing third parties to use an asset to which it had exclusive rights, without receiving any benefit from those third parties.
MML argued that the request for inspection was not made in good faith and for a proper purpose, essentially on the basis that it did not accept Mighty River’s stated reasons for requiring access to the books and records to be genuine.
Although the Court always has discretion to grant or refuse an application under section 247A, Mesa Minerals sets out a number of useful principles relevant to the “good faith” and “proper purpose” requirement to be considered by the Court in section 247A applications including:
(a) (Composite Requirement) The requirement that an application to inspect the books of a company be made in good faith and for a proper purpose does not impose two distinct and separate requirements (the requirements are a composite notion). The reference to good faith reinforces the requirement of proper purpose, and to act in good faith and inspect company books for a proper purpose means to act and inspect for a “bona fide proper purpose”.
(b) (Objective Test) The requirements of good faith and proper purpose must be proved objectively, rather than relying on the subjective belief of the applicant.
(c) (Connection to Rights) The requirement that an application be for a “proper purpose” means that the application must be for a purpose connected with the proper exercise of member rights and exercised by a person in their capacity as a member and not, for example, solely as a litigant in proceedings against the company.
(d) (Onus of Proof) The onus of proof to establish good faith and proper purpose falls on the applicant member.
(e) (Hostile Applicants) Applicants do not necessarily lack a proper purpose merely because they are hostile to other directors.
(f) (Incidental Benefit) Provided that the applicant’s primary or dominant purpose is a proper one, it is not necessarily relevant that an inspection might benefit the applicant for some other purpose.
(g) (Suspected Breach of Directors’ Duty) A member seeking to investigating a reasonable suspicion of breach of duty by a director is a proper purpose.
(h) (Evidence Against Directors) It is not necessary that the applicant member have sufficient evidence to bring or make out an action against the directors, but rather it is enough that the issue(s) raised by the applicant member is “substantive and not fanciful”, and not “artificial, specious or contrived”.
From a practical standpoint, any member applying for an order to a company’s books under section 247A will need to:
(a) identify the specific documents, or categories of documents, sought; and
(b) substantiate why access to inspect those documents or categories of documents should be granted.
Conversely, a company wishing to resist an application under section 247A needs to substantiate why the member should not be allowed access to inspect such documents or categories of documents.
Ancillary Orders Limiting the Use of Inspected Books
Section 247B vests the Court with a wide discretion to make orders ancillary to the primary section 247A inspection order in that it states:
“If the Court makes an order under section 247A, the Court may make any other orders it considers appropriate, including either or both of the following:
(a) an order limiting the use that a person who inspects books may make of information obtained during the inspection;
(b) an order limiting the right of a person who inspects books to make copies in….”
Application of Section 247B
On the basis of section 247B, such ancillary orders may include an order that limits:
(a) the use that the applicant may make of information obtained during the inspection; or
(b) the rights of the applicant to make copies of documents inspected.
Austin J in ENT v Sunraysia  NSWSC 270 set out the following principles relevant to the application of section 247B:
(a) (Fear of Improper Purpose) While section 247B empowers the Court to make a limitation order, such an order should not be made as a matter of course just because the company fears that information sought for a proper primary purpose might also be used in an improper way.
(b) (Incidental Benefit) The mere fact that an inspection may benefit the applicant for some other purpose is not sufficient to warrant a limiting order.
Notwithstanding section 247B, it is useful to note, in the context of an order made under section 247A allowing a member to inspect a company’s books, that:
(a) section 247A(6) allows an authorised person to make copies unless the Court orders otherwise;
(b) section 247C(1) provides that a person who inspects the books on behalf of an applicant in accordance with section 247A must not disclose information obtained during the inspection; and
(c) section 247C(2) provides that the inspector must not disclose the documents discovered to anyone other than ASIC or the applicant.
Birchgrove Legal is a boutique Sydney law firm at the cutting edge of innovative approaches to serving clients across its practice areas and industry sectors. Get in touch with one of our authors to discuss your needs further.