Failure to quote chapter and verse

Friday, 01 December 2000


    Can former directors obtain access to company books?

    Directors have fought hard to have access to company books introduced into the Corporations Law section 198F. Under this section a former director is allowed to inspect the books of a company if this is reasonable in the context of a legal proceeding that may be run against the director. This right has to be exercised within seven years after the person has ceased to be a director. Now, in the case of Stewart v Normandy NSM Ltd ((2000) 18 ACLC Page 1050) in the South Australian Supreme Court, Burley J has ruled that a former director should not be allowed to examine the books of a company where the director in that case wanted to bring proceedings rather than to defend proceedings brought against him because the claim was not properly formulated. The facts are taken from the CCH Company Law Reports. The former director chose to bring proceedings, not in his own name, but in the name of the company against certain persons. As indicated earlier, section 198F had been introduced to provide directors who might be sued after they had left the company with the ability to obtain access to the books and records to enable an adequate defence. The court rejected the application.

    The court held that the fundamental downfall in the director's application was the failure to establish the factual background to this particular case. The director argued that this was irrelevant. All that he needed to show was that as a former director (within the seven year period that the provision operates for), if he was acting in good faith and proposed to bring legal proceedings, he was entitled to inspect the books so that he could ensure that the legal proceedings were properly grounded. Burley J rejected that application. He indicated that unless the director could establish that the legal proceedings were genuine, the court would not be satisfied the director was acting in good faith. In this case there were assertions but little evidence beyond that. The director argued that it was unnecessary to establish these issues. The court may have been concerned that the litigation was no more than a fishing expedition. The court felt that it should exercise extreme caution in allowing the books of the company to be examined so as to enable a person to ascertain whether the application could be genuinely brought. What the court wanted was a bit more "meat" in the assertion before it allowed the books to be examined. This appears consistent with the obligations in the statute to show that the director was acting in good faith when seeking inspection.

    In addition to denying the claim by the applicant on the merits, Burley J also held that it was not possible for the action to be brought in the name of the company – the litigation and the action should be brought in the name of the director. He also indicated that, although he would not oppose a comprehensive order for inspection – that is to examine a large number of the books etc of the company, it was important for the applicant to be as precise as possible in indicating the type of documents that were likely to be examined. It will be interesting to see how much further this litigation goes.


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