FEDERAL COURT OF AUSTRALIA

Hardcastle v Advanced Mining Technologies Pty Ltd [2001] FCA 1846

CORPORATIONS – powers of directors – rights of access to company books – former director seeking access to company’s books for purpose of bring legal proceeding – purpose of inspection – whether legal proceeding must relate to director in capacity as director – whether director must specify specific categories of material

Corporations Act 2001 s 198F

PHILIP JULIAN HARDCASTLE v ADVANCED MINING TECHNOLOGIES PTY LTD & ORS

N 923 of 2001

EMMETT J

10 SEPTEMBER 2001

SYDNEY

THE COURT ORDERS THAT:

1.      Paragraphs 27 to 59 of the statement of claim be struck out.

2.      The applicant have leave to file an amended statement of claim and if necessary, an amended application, relating to any relief that he seeks in relation to the following instruments:

·         a deed of settlement dated of 2 July 1999 between the first respondent, the applicant and the second and third respondents (Annexure N to the affidavit of Hendrikus Theodorus Verhoef filed 23 August 2001);

·        a deed dated 3 August between the applicant, Geoffrey Stewart Turner as trustee of the Hardcastle Family Trust and Geoffrey Stewart Turner as liquidator of Hardcastle Investments Australia Pty Limited (Annexure P to the affidavit of Hendrikus Theodorus Verhoef filed 23 August 2001); and

·        terms of settlement dated 6 July 1999 in Family Court Proceedings PA 491 of 1996 (Annexure Q to the affidavit of Hendrikus Theodorus Verhoef filed 23 August 2001).

3.      Any such amended statement of claim and amended application be filed and served no later than 2 November 2001. 

4.      The motion filed 23 August 2001 be stood over insofar it relates to paragraph 126 of the statement of claim. 

5.      The motion filed 23 August 2001 be stood over for mention on 9 November 2001.

6.      One half of the costs of the notice of motion filed 23 August 2001 be the costs of the first, second and third respondents in the proceeding. 

7.      The motion filed 20 July 2001 be dismissed with costs.

8.      The proceedings be stood over for directions generally on 9 November 2001. 

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

REASONS FOR JUDGMENT

1                     On 12 June 2001 the applicant, Mr Philip Julian Hardcastle, commenced a proceeding in the Court against Advanced Mining Technologies Pty Limited, (“the Company”) and seven other respondents.  In the proceeding, Mr Hardcastle makes claims relating to alleged infringement of intellectual property rights that he claims in respect of property known as DDM Mecca, DDM Acoustic and DDM Mk II. 

2                     In addition, in the proceeding, Mr Hardcastle seeks an order that certain settlements entered into in July 1999 be declared vitiated and void.  In the statement of claim filed on 12 June 2001, Mr Hardcastle sets out a number of alternative bases upon which he claims that the settlements should be avoided.  They are as follows. 

·        Misrepresentation in contravention of s 52 of the Trade Practices Act 1974 and s 42 of the Fair Trading Act 1987;

·        undue influence;

·        compulsion in respect of investigations by the Australian Tax Office;

·        economic duress;

·        unequal bargaining positions;

·        harsh and unconscionable terms;

·        unfairness and unconscionable conduct;

·        fraud;

·        collusion;

·        attempt to pervert the course of justice in the Family Court of Australia;

·        breach of fiduciary duty;

·        breach of trust;

·        failure to act honestly as directors of the company;

·        abuse of position as directors of the company to gain advantage improperly;

·        failure to act honestly as director of the company; and

·        breach of contract.

3                     On 20 July 2001, Mr Hardcastle also filed a motion in the proceeding asking for orders, inter alia,that the Company comply with s 198F(2)(a) of the Corporations Law and that he be given leave to amend his statement of claim following inspection of books of the Company.  The matter first came before me for directions on 27 July 2001.  At that stage, counsel for the Company and some of the other respondents indicated that it was intended to take proceedings for summary dismissal of the proceeding on the basis of a deed of release. 

4                     Accordingly, on that day I stood over Mr Hardcastle’s motion for hearing today.  I gave the respondents leave to file a motion for summary dismissal, returnable today.  I also made other orders not presently relevant.  Pursuant to that leave, the Company and the second and third respondents filed their notice of motion seeking orders that the proceeding, insofar as it relates to those respondents, be stayed or dismissed or, alternatively, that the statement of claim be struck out.

5                     The motion also sought an order that the Company be relieved from its duty imposed by s 198F(4) of the Corporations Law.  The basis for the summary dismissal application is said to be the execution of deeds of release by Mr Hardcastle.  In the course of argument in relation to the motions, it became apparent that it would be inappropriate to dismiss the proceedings summarily, since the proceeding raised the question of the effect of the deeds of release. 

6                     Mr Hardcastle accepts that if he is bound by the deeds of release, then the substantive claims that he makes in paragraphs 1 to 26 of his statement of claim would be barred.  Paragraphs 27 to 59 of his statement of claim deal with the matters upon which he says his entitlement to a declaration that the deeds of release are vitiated and void arises.  It would normally be inappropriate to dispose of a proceeding summarily on the basis of a deed of release, unless it is clear that the deed of release constitutes an answer to the whole of the proceeding.

7                     The alternative course would be for a respondent to plead the deed of release as an answer to the whole of the claim.  It might then be appropriate for the question of the effect of the deed of release to be determined separately from and prior to all other issues pursuant to Order 29 of the Federal Court Rules. 

8                     If there were then a question as to whether or not a release was binding on an applicant, it would be appropriate for the relevant matters to be pleaded by the applicant by way of reply.  All of the issues raised by the reply would then be capable of being dealt with separately.  I therefore indicated that I did not consider that it was appropriate for the matter to proceed further as an application for summary dismissal in the light of the matters alleged in paragraphs 27 to 59 of the statement of claim.

9                     Counsel for the Company then indicated that he wished to move to strike out the statement of claim pursuant to the alternative prayer for relief in his notice of motion on the basis that the statement of claim discloses no reasonable cause of action, has a tendency to cause prejudice, embarrassment and delay in the proceeding and is otherwise an abuse of process of the Court.  Counsel for the Company accepted that, apart from the release, his complaint is one about the pleading.

10                  While I did not give leave on the last occasion for a notice of motion to be filed dealing with pleading matters, no leave was required and the motion was served in good time on Mr Hardcastle.  I do not understand him to contend that he is not in a position to deal with the pleading question today.  However, before embarking on a review of the pleading question, Mr Hardcastle indicated that he wished to have his motion heard, since the result of that motion may have some consequences so far as any application for leave to amend might be concerned. 

11                  Accordingly, I embarked on a hearing of Mr Hardcastle’s motion of 20 July 2001.  The relief claimed in that motion is based on s 198F of the Corporations Law.  It may be, since the motion was filed after the commencement of the Corporations Act 2001 (“the 2001 Act”), it is the 2001 Act upon which reliance should be placed.  At present, however, the distinction is immaterial, since the language of each statute is the same.  Section 198F relevantly provides as follows:

“(2)      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)        to which the person is the party, or

(b)        that the person proposes in good faith to bring, or

(c)        that the person has reason to believe will be brought against them [sic]

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

(3)       A person authorised to inspect books under this section for the purposes of a legal proceeding may make copies of the books for the purposes of those proceedings.

(4)       A company must allow a person to exercise their rights to inspect or take copies of the books under this section.

(5)       This section does not limit any right of access to company books that a person has apart from this section.”

12                  Mr Hardcastle in essence relies on s 1303 of the 2001 Act, which provides as follows:

“If any person in contravention of this Act refuses to permit the inspection of any book or to supply a copy of any book, the Court may by order compel an immediate inspection of the book or order the copy to be supplied.”

The motion proceeded on the basis that failure to comply with s 198F justified the intervention by the Court under s 1303. 

13                  On 31 May 2001 Mr Hardcastle apparently requested access to inspect the financial records of the Company.  The request was addressed to the solicitors presently acting for the Company.  On the same day, those solicitors replied, saying that the request would be passed on to the Company.  On the following day, Mr Hardcastle sent another facsimile communication to the solicitors, saying that he wished to inspect the financial records of the Company as soon as possible.  He also said that he required the use of a photocopier whilst inspecting the records.  He set out the terms of s 198F(1), (2), (3), (4). 

14                  On 5 June 2001 the solicitors replied to Mr Hardcastle saying relevantly as follows:

“We refer to your request to inspect the financial records of our client pursuant to section 198F of the Corporations Law.  You entered into a full release of all claims against our client. That release is binding upon you.  This has been clearly set out in previous correspondence.

………………………

Our client is clearly of the view that there is no legitimate reason for you to have access to its records.  We are instructed that the legal proceeding which you propose to bring is not brought in good faith as you have stated you are on a mission to destroy the directors of [the Company] and [the Company].  Our client, therefore, will not be providing access.”

15                  On 5 June 2001 Mr Hardcastle again sent a facsimile to the solicitors saying that their letter was wrong “in almost its entirety”.  The letter said that Mr Hardcastle saw no point in arguing the law with the solicitors as they obviously “do not wish to comply with the law”.  The solicitors responded on 8 June confirming that the Company's position was as set out in their facsimile of 5 June 2001.

16                  On 12 June 2001, after serving the statement of claim in this proceeding, Mr Hardcastle sent another facsimile to the solicitors relevantly saying:

“According to Corporations Law 98F(2)(a) [sic] I am entitled to access all financial records of [the Company].

I again request access to all the financial records of the company. 

I note your letter of 8 June refusing such access. 

I have made a formal complaint to ASIC to prosecute this breach. 

There are no grounds for such refusal, the law is clear.”

17                  On 13 June 2001 the solicitors responded saying that they were in the process of obtaining counsel’s advice on the matter.  On 29 June 2001 Mr Hardcastle sent another facsimile to the solicitors saying relevantly:

“An unreasonable amount of time has now passed without communication from you re this matter. 

Am I to assume that you have not yet received counsel's advice? 

I cannot understand how a simple requirement of law can take you such an amount of time to consider. 

198F(2)(a) is quite clear on the fact and states “a company shall not refuse”.”

18                  On 2 July 2001 the solicitors indicated to Mr Hardcastle that they were hoping to receive advice from counsel by 9 July 2001.  On 16 July the solicitors sent a facsimile to Mr Hardcastle referring to the request for access to financial records and saying “would you please identify the financial records you wish to access”. 

19                  Mr Hardcastle responded on 17 July 2001 saying as follows:

“I note you asked me to identify the financial records relating to my long standing request under 198F(2)(a).  I have previously advised you of my rights as defined under the Corporations Law and below have attached the formal definition as per the Corporations Laws.”

Mr Hardcastle then set out the definition of books from the Corporations Law as follows:

“books includes:

(a)       a register;

(b)       any other record of information;

(c)        financial reports or financial records however compiled, recorded or stored; and

(d)       a document.”

It is significant, in my view, that at no time has Mr Hardcastle endeavoured to identify any specific book by reference to any proceeding that he wishes to bring, or has brought, against the Company. 

20                  According to the Explanatory Memorandum circulated by the authority of the Treasurer in connection with the Corporate Law Economic Reform Bill, pursuant to which s 198F was inserted into the Corporations Law, the proposed section was designed to ensure that directors and former directors would have sufficient legally enforceable rights of access to company documents.  The Memorandum refers to principles of the common law under which a director has a right of access to all company information necessary to enable the director to discharge his or her fiduciary or statutory obligations.  It recorded that, under such principles, such information may only be used by the director for the purposes of the Company.  Thus, if a director is being sued by the Company for an alleged breach of duty owed to the Company, it would be difficult for the director to demonstrate that access to the documents perhaps crucial to the director’s defence would be for the purposes of the Company.  The memorandum suggested that that could particularly be a problem for retired directors.

21                  Paragraph 6.108 and 109 of the Memorandum then went on to say as follows:

“Proposed section 198F will allow current and retired directors a legally enforceable right of access at all reasonable times to the books of the company in which they are or were a director…  The right of access is to continue for a period of 7 years after a person ceases to be a director of the company…

6.109:  The right of inspection … is limited to where the director requires access for the purposes of a legal proceeding to which the director is a party or proposes in good faith to bring or has a reasonable belief will be brought against them [sic].”

22                  Mr Hardcastle says that, since he has commenced this proceeding in the Federal Court, he now requires to inspect all of the books of the Company for the purposes of that legal proceeding.  He contends that his right to inspect is not limited in any way and that, once there is a legal proceeding to which he is a party, he is entitled to inspect all of the books of the Company for the purposes of that proceeding. 

23                  There appear to me to be two possible restrictions on the right of inspection that is conferred by s 198F(2).  The first is clear: inspection must be for the purposes of a legal proceeding.  The legal proceeding must be one to which the person requesting access is a party, one that the person proposes to bring in good faith or one that the person has reason to believe will be brought against him or her.  That requires that the purpose for inspection of specific books be identified. 

24                  That does not mean to say that specific documents need to be identified by the former director.  A former director would not necessarily remember every piece of paper that a Company had.  However, in my view, the section requires that a person seeking to inspect books must identify at least specific categories or classes of books, which have some bearing on the relevant legal proceeding.  There may be a question as to whether or not the former director is required to identify precisely how the relevant books are relevant or material to that proceeding.  There must, however, be some indication of the nature of the books sought and the bearing that the books have on the proceeding in question. 

25                  A second possible limitation on the operation of s 188F(2) is that the proceeding must be a proceeding to which the former director is a party or believes might be brought against him or her or which he or she proposes to bring in his or her capacity as a director of the company.  It would be curious if a person who, fortuitously, happened to have been a director of a company in the past would be entitled to access to books of the company that might be material to proceedings brought by that former director or which might be brought against the former director in a capacity totally unconnected with the capacity of the former director as a director.  I do not express any firm or final view on that question at this stage because it does not arise in the application before me.  Section 1303 authorises intervention by the Court where a person in contravention of the law refuses to permit inspection.

26                  For the reasons I have just indicated, I do not consider that the mere fact that a proceeding has been commenced entitles a former director to inspect all of the books of a company.  The solicitors, in their letter of 16 July, invited Mr Hardcastle to identify the financial records that he wished to inspect.  He declined to do so.  In the circumstances, I do not consider that the Company has refused, in contravention of the Law, to permit inspection.  Accordingly, I consider that the notice of motion should be dismissed.

27                  Having acceded to Mr Hardcastle’s request to hear his motion of 20 July 2001, I have heard further argument for and against the orders sought by the first, second and third respondents in their notice of motion filed 23 August 2001.  At this stage the argument has been limited to paragraphs 27 to 59 of the statement of claim.  All of these paragraphs are directed to the question of whether or not settlement arrangements entered into in July 1999 are binding on Mr Hardcastle.  In the course of argument I have been through the paragraphs in detail, indicating to Mr Hardcastle the general nature of the deficiencies that appear to me to exist in relation to those paragraphs of the pleading.  Some of the allegations appear to lead nowhere, some of the allegations are not clear and some of the allegations lack particularity.

28                  There does, however, appear to be some basis for suspecting that there may be a pleadable cause of action amongst the allegations.  There may be some basis for pleading that the settlement arrangements entered into in July 1999 were void or voidable by reason of contravention of Part 5 of the Trade Practices Act 1974 or because of deceit, economic duress or unconscionable conduct.

29                  It therefore seems to me to be appropriate that I strike out paragraphs 27 to 59 of the statement of claim.  However, I will give Mr Hardcastle leave to file an amended statement of claim and, if he requires to do so, an amended application, relating to any relief which he seeks in relation to the instruments which are annexures to the affidavit of Hendrikus Theodorus Verhoef filed on 23 August 2001, being:

·         a deed of settlement dated of 2 July 1999 between the Company, Mr Hardcastle and the second and third respondents (Annexure N);

·        a deed dated 3 August between the applicant, Geoffrey Stewart Turner as trustee of the Hardcastle Family Trust and Geoffrey Stewart Turner as liquidator of Hardcastle Investments Australia Pty Limited (Annexure P); and

·        terms of settlement dated 6 July 1999 in Family Court Proceedings PA 491 of 1996 (Annexure Q). 

Associate:

Dated:              21 January 2002