FEDERAL COURT OF AUSTRALIA
Vinciguerra v MG Corrosion Consultants Pty Ltd
[2007] FCA 503
CORPORATIONS – application to inspect company’s books – whether ‘acting in good faith and inspection for a proper purpose’ – whether an inspection should be ordered pursuant to s 247A of the Corporations Act.
Corporations Act 2001 (Cth), ss 232, 233, 236, 237, 247A, 247B
Acehill Investments Pty Ltd v Incitec Ltd [2002] SASC 344 cited
Barrack Mines Ltd v Grants Patch Mining Ltd (No 2) [1988] 1 Qd R 606 cited
Caveat Pty Ltd v Baillie & Ors [2002] WASC 83 followed
Chuen v Laredo Pty Ltd [2005] WASC 58 discussed
Intercapital Holdings Ltd v M.E.H. Ltd & Ors (1988) 6 ACLC 1068 applied
Knightswood Nominees Pty Ltd v Sherwin Pastoral Co Ltd (1989) 15 ACLR 151 cited
Re Humes Ltd (1987) 5 ACLC 64 cited
ALBERTO CESARIO VINCIGUERRA v MG CORROSION CONSULTANTS PTY LTD (ACN 084 715 177)
WAD322 OF 2006
GILMOUR J
5 APRIL 2007
PERTH
|
IN THE FEDERAL COURT OF AUSTRALIA |
|
|
WESTERN AUSTRALIADISTRICT REGISTRY |
WAD322 OF 2006 |
|
BETWEEN: |
ALBERTO CESARIO VINCIGUERRA Applicant
|
|
AND: |
MG CORROSION CONSULTANTS PTY LTD (ACN 084 715 177) Respondent
|
|
JUDGE: |
GILMOUR J |
|
DATE: |
5 APRIL 2007 |
|
PLACE: |
PERTH |
REASONS FOR JUDGMENT
1 The applicant both in his own right and, effectively, in a prospective representative capacity seeks orders firstly pursuant to s 247A of the Corporations Act 2001 (“the Act”) that he or another person on his behalf be permitted to inspect the books of the respondent and secondly pursuant to s 247B of the Act that the use to which the applicant may put the information obtained during any inspection of the books be limited in certain respects.
Statutory Framework
Section 247A
2 Section 247A of the Act provides:
247A(1) On application by a member of a company or registered managed investment scheme, the Court may make an order:
(a) authorising the applicant to inspect books of the company or scheme; or
(b) authorising another person (whether a member or not) to inspect books of the company or scheme 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.
247A(2) A person authorised to inspect books may make copies of the books unless the Court orders otherwise.
247A(3) 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.
247A(4) On application, the Court may make an order authorising:
(a) the applicant to inspect books of the company; or
(b) another person to inspect books of the company on the applicant's behalf.
247A(5) The Court may make the order only if it is satisfied that:
(a) the applicant is acting in good faith; and
(b) the inspection is to be made for a purpose connected with:
(i) applying for leave under section 237; or
(ii) bringing or intervening in proceedings with leave under that section.
247A(6) A person authorised to inspect books may make copies of the books unless the Court orders otherwise.
3 Accordingly the applicant brings the application firstly in his capacity as a member of the respondent under s 247A(1) and secondly pursuant to the provisions of s 247A(3) as a person who is eligible to apply for leave to bring proceedings in the name of the respondent under s 237 of the Act.
4 Pursuant to s 247A(1) the applicant seeks inspection of the books of the respondent in order to enable him firstly in his own right to consider and receive advice in relation to the possibility of commencing proceedings under ss 232 and 233 of the Act on the basis that the conduct of the respondent’s officers is oppressive or unfairly prejudicial to, or unfairly discriminatory against, the applicant as a member of the respondent, and secondly, if so advised, to commence and pursue such proceedings.
5 Pursuant to s 247A(3) orders for inspection are sought to enable the applicant to do likewise in relation to obtaining leave under s 237 to bring representative proceedings in the name of the respondent against Mr Malcolm Gilmour, the respondent’s sole director.
6 In order to bring an application under s 247A(3) of the Act it is sufficient if the applicant demonstrates that he is eligible to apply for leave under s 237 of the Act. Section 237 in turn provides that a person referred to in s 236(1)(a) may apply to the Court for leave to bring or to intervene in proceedings. Section 236(1)(a)(i) relevantly provides that a person may bring proceedings on behalf of a company, if the person is a member of the company.
7 The applicant, as a member of the respondent, satisfies the provisions of s 236(1)(a)(i) and is accordingly eligible to bring proceedings under s 237(1) of the Act. He is accordingly, by virtue of s 247A(3)(c) a person who may apply for orders under s 247A.
8 The Court may only make the orders sought under s 247A(1) if it is satisfied that the applicant is acting in good faith and that the inspection is to be made for a proper purpose. Similarly before orders may be made under s 247A(4) the Court, by virtue of s 247A(5)(a) and (b)(i) requires to be satisfied that the applicant is acting in good faith and that the inspection is to be made for a purpose connected with, relevantly, applying for leave under s 237.
Section 247c
9 Section 247C prohibits the person inspecting books on behalf of the applicant from disclosing information obtained during that inspection other than to ASIC or the applicant and by virtue of s 247C(3) an offence under s 247C(1) is an offence of strict liability.
10 The imposition of the statutory prohibition under s 247C does not extend to the applicant himself. However, the ancillary orders which the Court may make under s 247B can be tailored to ensure that the use to which the information is put by the applicant is clearly delineated.
Background
11 The applicant is considering commencing proceedings against the respondent pursuant to s 232 of the Corporations Act 2001 and/or applying for leave to commence and, subsequently, commencing proceedings in the name of the respondent against Mr Gilmour pursuant to ss 236 and 237 of the Corporations Act 2001. If the applicant, or a forensic accountant engaged by the applicant, is permitted to inspect the respondent’s books, the applicant will use the information to assist him in considering whether to commence one or both of those proceedings and, if one or both of those proceedings is commenced, to assist him in relation to those proceedings.
12 The applicant is the holder of 30 of the 100 issued ordinary shares in the respondent. The remaining 70 shares are held by Sola-Kleen Pty Ltd (“Sola-Kleen”) the sole shareholder and director of which is Mr Malcolm Gilmour. He is also the sole director of the respondent to this application. Sola-Kleen operates the business of manufacturing and supplying solar hot water systems.
13 The applicant has held his shares in the respondent since July 2000 and between late 1998 and 29 July 2006 he was employed by the respondent and between July 2000 and April 2004 he was a director of the respondent. Prior to his employment by the respondent the applicant had worked in the chemical industry for approximately 30 years. During the period of the applicant’s employment by the respondent it carried on the business trading as M.G. Corrosion Consultants. Prior to that this business had been owned and operated by Sola-Kleen.
14 By about 2004 the applicant’s involvement in the business of the respondent was almost exclusively in relation to the process chemical division located in Kalgoorlie and which according to him had become its most profitable division with annual revenue of approximately $1.3-1.5 million by about 2004-2005. This was not disputed by the respondent.
15 In April 2004 the applicant resigned his directorship because he says that he was unhappy with the conduct of the respondent’s business and concerned about the potential for him as a director to incur liability. Mr Gilmour disputes this and says that he asked the applicant to resign on account of his overbearing and abusive behaviour towards members of the respondent’s staff and because he felt that the applicant was not acting in the best interests of the respondent. The applicant resigned his employment with the respondent on 29 July 2006. According to Mr Gilmour this was again at his request for substantially the same reasons as related to his resignation as a director. Accordingly, whichever be the actual reason for his resignation as a director, the relationship between the applicant and Mr Gilmour was to some degree soured by that time.
16 The applicant says that he has never had an opportunity to inspect the books of the respondent although he has been provided by Mr Gilmour with the following documents which were tendered in evidence before me:
· the respondent’s financial statements for the year ended 30 June 2005;
· the respondent’s balance sheets as of October 2005, January 2006 and 1 February 2006;
· the respondent’s tax returns for 2004 and 2005;
· the respondent’s management reports for May and August 2003, January and March to December 2004, January to December 2005 and January, February, April and May 2006; and
· the respondent’s sales (customer summary) for the period 1 October 2004 to 31 October 2004.
17 Mr Gilmour on the other hand asserts that the applicant received monthly management reports from the respondent including monthly and year-to-date profit and loss accounts with comparisons; budgets and profit and loss accounts for the prior year; the top ten clients of the respondent and the top ten suppliers of the respondent. He also asserts that in his capacity as a director of the respondent, the applicant received annual financial statements and also had access to the tax returns of the respondent. Ms Debra Stedman deposes to having provided copies of monthly reports to the applicant and says that she was present at meetings between 2001-2007 between Mr Gilmour and the applicant at which she witnessed Mr Gilmour handing copies of the respondent’s annual tax return and annual financial statements to the applicant.
18 Given the present untested evidence I cannot say precisely what documents were provided to the applicant. Importantly, however, even the documents which the respondent says the applicant was given do not, in any event, constitute the entirety of the “books” of the respondent: s 9 of the Act. The applicant is most interested to inspect the primary or source financial documents from which the financial statements, management reports and tax returns were produced. The respondent does not suggest that the applicant has been given access to any of these and is opposed to him having access to them.
19 The applicant said that on several occasions he told Mr Gilmour that the numbers in the respondent’s reports did not make sense and needed to be “justified” and that on at least one occasion he said that the “books were being cooked” which was met with an angry response from Mr Gilmour but did not result in any “justification” of the figures. Mr Gilmour agreed that the applicant had on at least one or two occasions claimed that financial information provided to him did not make sense to him and needed to be justified and that his response was an irritated one. He says that he was irritated because of what he considered to be the “reprehensible conduct” of the applicant. This conduct was, he said, that the applicant had at all times been provided with full and accurate records of the respondent’s financial and trading position, yet he was making serious and improper suggestions against him that he had not made sufficient disclosure or was otherwise dishonest and was not complying with his duties as a director when there was no basis for these allegations combined with what appeared to him to be the applicant’s inability to understand business and financial statements or some personal motive. Mr Gilmour does not say that he explained his reasons for his irritation to the applicant.
20 The respondent by its counsel submitted that these requests by the applicant were inadequately expressed. I do not agree. Mr Gilmour must have known what the applicant was asking but, abruptly, in effect, declined to do anything. It is no answer, in my view, for the respondent to suggest now, as he does, that the applicant could and should have asked for the same information either from internal or external accounting personnel.
21 The applicant has never been paid a dividend. The respondent concedes as much. The applicant considers from his knowledge and involvement with the respondent’s business that the respondent should have incurred small losses in the period 1998-2000, derived modest profit in the period 2001-2002 and derived significant profits in the period 2003-2006. He is at a loss to understand, therefore, why no dividends have been paid to him, alternatively why there are not significant retained profits in the respondent. In effect, his view is that the respondent has in the last several years been transformed into a company of significant value but that this is not reflected in the financial statements.
22 In September 2005 Mr Gilmour offered to sell his shares in the respondent to the applicant for $2 million. The offer was contained in a letter from Mr Gilmour dated 21 September 2005. The applicant did not accept this offer. The respondent does not deal with this offer in any of the affidavits, filed on its behalf.
23 In July 2006 at the time that the applicant resigned as an employee of the respondent Mr Gilmour orally offered to acquire the applicant’s shares for $200,000 on condition that he stayed out of the business for two years and help the respondent should it have any problems. I take the first part of this condition to mean that the applicant would not work or have any interest directly or indirectly in any business either the same or similar to that carried on by the respondent. The applicant did not accept this offer.
24 Mr Gilmour concedes that there were negotiations during which he told the applicant that he was prepared to pay him $200,000 subject to a restrictive covenant concerning his dealings in Kalgoorlie but that the applicant wanted $350,000 net of tax and with no clauses restraining him from approaching the respondent’s customers. He agrees that he was asked, in effect, as to where all the profits were and that his response to the applicant had been to the effect that he had access to the same books as himself.
25 I am of the view that Mr Gilmour is mistaken in his recollection of the amount which the applicant wanted for his 30% shareholding. I am fortified in this view by the content of a letter written by the applicant to Mr Gilmour dated 3 August 2006 the terms of which I have set out here in full as they are relevant to this point and to other matters raised by the respondent’s counsel and to which I will turn in due course.
Attention: Mr. Malcolm Gilmour Managing Director
Dear Sir
Re: Termination as Shareholder
Further to our discussions on the above mentioned matter, I make the following points as an offer to cease my involvement with MG Corrosion Consultants (MGCC).
1. MGCC has not seen fit to adequately explain the matter of repayment of loans made to Sola-Kleen by A Vinciguerra and therefore the connection with dividend payments, to me, by MGCC.
2. Following comments made by you during our meeting in Kalgoorlie on Friday 28th July 2006 regarding the profits made by MGCC, a satisfactory explanation regarding the allocation of the profits, of the previous three years, has not been forthcoming.
3. The offer to allow the auditing of the MGCC books and accounts would not be seen as a requirement if accurate and reasonable details were made available to a company shareholder.
4. References to my intentions regarding any long term employment are not seen as relevant to any discussion regarding the termination of my involvement as a shareholder in MGCC.
5. The offer of $200,000 and my possible non-involvement in the chemical industry and as a consequence possible involvement with known customer base is rejected.
6. Consideration of the payment of $250,000 (after tax), on a non-conditional basis, will be made by me as compensation for points 1 and 2.
7. The payment of any compensation would be expected in 7 working days.
26 It can be seen then that the consideration requested by the applicant was $250,000 (after tax) and not $350,000 net of tax as deposed to by Mr Gilmour. Moreover, counsel for the respondent, at the hearing informed the Court that the figure of $250,000 contained in the letter of 3 August 2006 translated to a figure on his instructions of approximately $350,000 before tax.
27 Mr Gilmour responded to this letter by his own dated 11 August 2006 in which he rejected the applicant’s offer and foreshadowed a further response in due course.
28 By a letter dated 18 August 2006 the respondent’s solicitors wrote to the applicant and advised him that they had instructions from the respondent that the applicant had approached a Mr Jan Schlichthaerle the Managing Director of Mintech Chemical Industries Pty Ltd and had offered to sell the business of the respondent and its client lists to that company and that this was done without authority from the respondent. The letter then foreshadowed potential legal proceedings against the applicant by the respondent, including if necessary injunctive proceedings to restrain similar alleged conduct.
29 It is not necessary for the purposes of this application to determine whether or not there is substance to these allegations or any of them. An affidavit was sworn by Mr Schlichthaerle and filed on behalf of the respondent. However, most of the serious allegations made in that affidavit are denied by the applicant. These conflicts cannot be resolved in this proceeding. The respondent’s solicitor’s letter was responded to by a letter dated 30 August 2006 from the applicant’s solicitors. No action has been instituted by the respondent either for injunctive relief or final relief as threatened or otherwise.
30 The applicant’s solicitors wrote to the respondent’s solicitors by letter dated 8 September 2006 requesting that the respondent’s books be made available for inspection by the applicant or his agent within 7 days failing which proceedings under s 247A of the Act would be instituted. In reply the respondent’s solicitors by correspondence dated 14 September 2006 and 22 September 2006 declined to accede to that request on the basis that the applicant had failed to specify relevant transactions disclosing the improper diminishment of the respondent’s assets, setting out the nature of the proceedings which the applicant was considering commencing and identifying how the applicant believed that the inspection of the respondent’s books may advance the proceedings contemplated.
31 The several affidavits in this application, which, including annexures, amount to in excess of 750 pages, raise numerous issues which remain contentious between the parties. There was no cross-examination of any witness and the Court was unable to resolve those issues. However it was not necessary to do so. At the hearing of the application counsel for the applicant put his case squarely under a number of identified concerns and relied mainly upon the content of undisputed documentary evidence and what was deposed to in affidavits by deponents on behalf of the respondent.
32 Furthermore, counsel for the respondent, quite properly in my respectful view, conceded the accuracy and correctness (in an arithmetical sense) of the content of financial documents relied upon by the applicant in his affidavits and his counsel’s very detailed written submissions.
33 Accordingly the application was argued by reference to those concerns upon, in effect, a body of evidence which was not in dispute.
34 For its part the respondent, in the broad, submitted that these concerns, even if made out, should not occasion an exercise of the Court’s discretion in granting the orders sought because the applicant, in seeking these orders, was not acting in good faith and that inspection was not sought for a proper purpose. I now deal with these matters.
The applicant’s concerns
35 At the core of the application upon the affidavit material the concerns of the applicant may be summarised as follows:
(a) improper use of the respondent’s assets;
(b) the creation of parallel tax returns and financial statements by the respondent;
(c) the relationship between Mr Gilmour and each of the respondent and Sola-Kleen;
(d) absence of substantial retained profits by respondent where no dividends paid;
(e) internally inconsistent financial information; and
(f) the incorporation of MGCC Corrosion Consultants (WA) Pty Ltd on 20 September 2006.
36 Of course it may transpire, were inspection of the respondent’s books to occur, that these concerns will evaporate. As Brooking J said in Intercapital Holding Ltd at p 1074:
It may well be that there has been no impropriety or irregularity of any kind, that the directors of Chariah have acted properly and that the acquisition is a sound investment or, at all events, one made regularly and in the proper exercise of a discretion. It is not for me to determine these questions. I am, as I say, satisfied that there is a case for investigation.
37 I have approached this application in the same vein having regard of course to the questions of good faith, proper purpose and any discretionary factors.
38 I now deal with each of these concerns in turn. However each, with the exception of the last, is inextricably linked by two main factors: the financial relationship between the respondent and Sola-Kleen taken together with Mr Gilmour’s control of both and his 100% interest in Sola-Kleen. Accordingly I have viewed these concerns in combination upon determining whether I should grant the orders sought.
Improper use of the respondent’s assets
39 The applicant deposes at para 26 of his affidavit sworn 9 November 2006 that he is concerned that the assets of the respondent have been used to assist Sola-Kleen either by the respondent incurring expenses for the benefit of Sola-Kleen or by directly transferring assets of the respondent to Sola-Kleen by way of loans or otherwise. He exampled the former by reference to consultant’s fees and contract payments recorded as expenses in the respondent’s financial statements for the year ended 30 June 2005 totalling $154,521 and for the year ended 30 June 2004 totalling the sum of $184,226. He states that he does not know what these expenses relate to. Mr Gilmour in para 72 and 73 of his affidavit sworn 19 January 2007 deposes to those fees as being for services rendered by Sola-Kleen to the respondent namely for the use of premises of Sola-Kleen and the services of management and administration personnel of Sola-Kleen including himself and that these fees were disclosed to the applicant through the monthly management reports and the end-of-year financial statements. He asserts that they were calculated according to rates that the respondent was advised by its accountant Mr Tony Armenti as being lawful and appropriate to charge.
40 Mr Armenti’s affidavit asserts that the management fees are calculated by reference to a portion of the electricity, rates and taxes, rent, stationery, postage, wages, staff amenities, telephone and managing director fees that were paid by Sola-Kleen. However the applicant submits that the respondent’s statement of financial performance contained in its 2005 financial statements (both versions) records as expenses, postage, printing and stationery, rent on land and buildings, salaries – ordinary, staff amenities, staff training and telephone. Similar expenses are recorded in the respondent’s profit and loss statements contained in its management reports: see the electricity, postage, printing and stationery, rates, wages and salaries, staff training, staff amenities and telephone expenses recorded in the July 2005 through May 2006 profit and loss statement contained in the respondent’s May 2006 management report (page 443 of the applicant’s 9 November 2006 affidavit) in addition tothe management fees.
41 In his further affidavit of 13 February 2007 Mr Armenti deposes that there is no duplication of the respondent’s expenses in the 2005 financial statement or indeed any other financial statement of the respondent. He says that the direct expenses items such as rent, plant and equipment hire, postage, telephone and printing and stationery relate solely to expenses incurred through the use of the respondent’s staff, facilities and equipment including the Kalgoorlie office. Where the expenses relate solely to the use of Sole-Kleen’s premises, equipment and staff, they have been recorded as management fees. This explanation is also afforded by Mr Gilmour in his further affidavit sworn on 13 February 2007.
42 As to the latter namely the matter of loans he examples that by reference to a loan from Sola-Kleen in the sum of $220,156.05 recorded as a liability in the balance sheet contained in the respondent’s management report from May 2003. He asserts that the loan is recorded as being the sum of $256,596.63 in the balance sheet contained in the respondent’s management report from May 2005, but that no loan from Sola-Kleen is recorded in the respondent’s statement of financial position as at 30 June 2005. He states that he is not aware of why or when this loan was made or how it was repaid. He notes that the respondent’s total cash assets of $122,536.70 recorded in the balance sheet contained in the respondent’s management report for May 2005 is only $60,695.70 higher than the respondent’s total cash assets of $61,840 recorded in the respondent’s statement of financial position as at 30 June 2005 and that he cannot understand why Sola-Kleen, a company which he did not believe was trading profitably made a loan in excess of $200,000 to the respondent, a company, that was trading profitably.
43 As to this Mr Armenti the respondent’s external accountant says that the loan in the May 2003 management report actually represents management fees charged by Sola-Kleen to the respondent for the use of Sola-Kleen’s staff and premises and that Ms Stedman, an employee of the respondent, incorrectly entered the cumulative management fees as a debt of the respondent. Ms Stedman confirms this to have been the case.
44 Mr Armenti says he corrected this by adjusting the annual accounts for the year ending 2003 so that the “loan” was recorded as a management fee expense of $240,142. This he believes to be the “loan” queried by the applicant. Upon investigation that may, broadly, transpire to be so. However the “loan” queried by the applicant and deposed to by him was in the sum of $256,596.63. It is a different amount and the difference between the two figures was not explained by Mr Armenti. I would have expected him to have done so in order to underpin his belief that the two amounts were related.
45 In my view, these concerns warrant further investigation particularly as they both relate to management fees charged to the respondent by Sola-Kleen.
Creation of parallel sets of financial statements and tax returns
46 The applicant made extensive and detailed submissions by reference to the financial documents which are annexed to various of the affidavits filed in these proceedings to the effect that the respondent has engaged in the conduct of creating parallel sets of financial statements at least in respect of 2005 and tax returns at least in respect of 2004 and 2005. The financial statements and tax returns for those years provided to the applicant are in significant respects different to those produced in this proceeding by the respondent.
47 The statement of financial performance included within the 2005 financial statements annexed to Mr Armenti’s affidavit sworn 21 January 2007 (pages 41 and 42), records the respondent as having total expenses of $714,281 for the year ended 30 June 2004 and $948,291 for the year ended 30 June 2005, which resulted in the respondent making a loss of $1,501 for the year ended 30 June 2004 and a profit of $32,246 for the year ended 30 June 2005. The statement of financial performance contained in the 2005 financial statements annexed to the applicant’s 9 November 2006 affidavit (pages 58 and 59) records the respondent as having total expenses of $477,787 for the year ended 30 June 2004 and total expenses of $647,012 for the year ended 30 June 2005, resulting in the respondent making a profit of $234,993 for the year ended 30 June 2004 and a profit of $358,602 for the year ended 30 June 2005 – significantly different from the financial performance for the years ended 30 June 2004 and 2005 recorded in the financial statements annexed to Mr Armenti’s affidavit. The increase in expenses recorded in the Armenti financial statements, resulting in the lower profits recorded in the Armenti financial statements, appear to substantially result from the inclusion of an expense described as “Management Fees” in the sum of $236,494 for the year ended 30 June 2004 and $278,460 for the year ended 30 June 2005. Those Management Fees are not recorded in the 2005 financial statements annexed to the applicant’s 9 November 2006 affidavit. The 2004 tax returns (especially page 62 of Mr Armenti’s affidavit and page 82 of the applicant’s 9 November affidavit) and the 2005 tax returns (especially page 68 of Mr Armenti’s affidavit and 89 of the applicant’s 9 November 2006 affidavit) each record the respondent’s expenses and profits consistently with the 2005 financial statements contained within the same affidavit – i.e. the tax returns annexed to the applicant’s 9 November 2006 affidavit record the same expenses and profits as the 2005 financial statements annexed to the applicant’s 9 November 2006 affidavit and the tax returns annexed to Mr Armenti’s affidavit record the same expenses and profit as the 2005 financial statements annexed to Mr Armenti’s affidavit.
48 The 2005 financial statements annexed to Mr Armenti’s affidavit are dated 17 January 2006 (page 53) and the 2005 financial statements annexed to the applicant’s 9 November 2006 affidavit are dated 14 February 2006 (page 74). Neither copy of those financial statements is signed by either Mr Gilmour or Mr Armenti. The 2004 tax return annexed to Mr Armenti’s affidavit records that it was signed by Mr Armenti and Mr Gilmour on 13 and 15 May 2005 respectively (page 65). The 2004 tax return annexed to the applicant’s 9 November 2006 affidavit is not dated but there is a stamp saying “Paid on 8 June 2005” (pages 81 and 85). The 2005 tax return annexed to Mr Armenti’s affidavit records that it was signed by Mr Armenti on 24 February 2006 and signed but not dated by Mr Gilmour (page 71). The 2005 tax return annexed to the applicant’s 9 November 2006 affidavit is not signed by Mr Gilmour or Mr Armenti but it does contain a facsimile header recording that it was sent on 17 February 2006 from facsimile number 9271 6136 (pages 87 and 92). 9271 6136 is the respondent’s facsimile number: page 455 of the applicant’s 9 November 2006 affidavit.
49 The difference between the parallel sets of financial statements and tax returns is that the set provided to the applicant did not record the payment of management fees. Those are the management fees that Mr Gilmour, Ms Stedman and Mr Armenti have sworn were appropriately charged by Sola-Kleen to the respondent for services provided by Sola-Kleen to the respondent which, it is asserted, were all fully disclosed in the accounts.
50 In a responsive affidavit sworn by Mr Armenti on 13 February 2007 he acknowledges in effect that parallel financial statements and tax returns were brought into existence by the respondent. His explanation is that the relevant financial statements and tax returns were prepared by him in a form for discussion and approval by Mr Gilmour and which showed what the respondent’s taxable income would be prior to deducting annual management fees charged by Sola-Kleen to the respondent and that the financial records annexed by him to his early affidavit of 21 January 2007 are the respondent’s finalised financial statements and tax returns adjusted to make account of those management fees. The further affidavit of Mr Gilmour sworn 13 February 2007 corroborates Mr Armenti’s evidence in relation to those financial records. He then seeks to explain the applicant’s concerns that the 2004 tax return in his possession is not dated but stamped “paid” “8 June 2005” (“ACV-10”). His explanation was that he erroneously stamped it as “paid” shortly after he received it as he was under the mistaken belief that there was tax to be paid and was going to cause payment until he found out as a result of his subsequent discussions with Mr Armenti that that version was still subject to further adjustments. He said that he saw no need to correct this error because the only people who would and did see the document were the applicant, Mr Armenti and himself. He said that none of the respondent’s other staff needed to either read or rely upon the document.
51 The applicant submits that these explanations, in effect, are inadequate and indeed actually add to his concerns as to the financial affairs of the respondent.
52 He submits that:
(a) despite Mr Armenti, Mr Gilmour and Mrs Debra Stedman having sworn affidavits deposing to the applicant being provided with true and accurate reports, the practice of preparing financial statements and tax returns (supposedly for discussion purposes only) which excluded the management fees was not disclosed;
(b) the 2005 financial statements and the 2004 and 2005 tax returns annexed to the applicant’s 9 November 2006 affidavit are not described, stamped or otherwise labelled as being for discussion purposes only or being drafts. Further, the respondent has not produced copies of any covering letters specifying that the 2005 financial statements and 2004 and 2005 tax returns were drafts prepared for discussion purposes only;
(c) Mr Armenti deposes, at paragraph 8, to finalising the respondent’s 2005 financial statements “by adjusting it to account for the management fees paid by the [respondent] for Sola-Kleen”. However, the financial statements which Mr Armenti swears to have finalised by way of adjusting them to account for the management fees (annexure “TA-1” to Mr Armenti’s affidavit sworn 21 January 2007) are dated 17 January 2006 (page 53 of that affidavit). The 2005 financial statements that Mr Armenti swears were prepared for discussion purposes only that excluded management fees (annexure “ACV-6” to the applicant’s affidavit sworn 9 November 2006 and annexure “AT-2” to Mr Armenti’s affidavit) are dated 14 February 2006 (page 74 of the applicant’s affidavit and page 49 of Mr Armenti’s affidavit). In other words, the version of the 2005 financial statements that Mr Armenti asserts was prepared for discussion purposes post-dates the supposedly finalised version; and
(d) Mr Gilmour deposes, at paragraph 14, to erroneously stamping the version of the respondent’s 2004 tax return that was supposedly prepared for discussion purposes only as “Paid” shortly after he received it under a mistaken belief that tax was to be paid and that he was going to cause payment until he found out, as the result of subsequent discussions with Mr Armenti, that that version was still subject to further adjustments. The version of the 2004 tax return that is stamped “Paid” is dated, in handwriting, “8/6/05” (page 81 of the applicant’s 9 November 2006 affidavit). However, the version of the 2004 tax return which included the management fees records that it was signed by Mr Armenti on 13 May 2005 and that it was signed by Mr Gilmour on 15 May 2005 (page 65 of Mr Armenti’s 21 January 2007 affidavit). Consequently, Mr Gilmour now swears to stamping the 2004 tax return supposedly prepared for discussion purposes only (which was supposedly still subject to adjustments) as “Paid” over 3 weeks after he had signed the supposedly finalised tax return.
53 I consider that each of these submissions has force. Whatever financial documents were given to the applicant these matters give rise to genuine concern on the part of the applicant: concerns which warrant further investigation. I would add that Mr Gilmour’s explanation as to stamping the 2004 tax return “paid” but, following discussions with Mr Armenti not in fact making payment contains a further unexplained matter: not only is the tax return marked paid, it contains in handwriting, presumably Mr Gilmour’s the number of the cheque “1194”.
Internal inconsistencies in respondent’s financial
information
54 The applicant submits that the financial information with which the applicant has been provided by Mr Gilmour and the respondent appears to be internally inconsistent and unreliable. Some of that information records the respondent as having made profits in a quantum similar to that estimated by the applicant but some of that information does not do so and, notwithstanding the matters deposed to at paras 14 and 22-25 of the applicant’s 9 November 2006 affidavit and the fact that no dividends have ever been paid, that information does not record the respondent as having any substantial net assets or retained profits.
55 In particular it is submitted by the applicant that:
(b) the most recent financial statement available to the applicant, the respondent’s balance sheet as at May 2006 contained in the respondent’s May 2006 Management Report (annexure “ACV-39” to the applicant’s 9 November 2006 affidavit at page 448), records the respondent’s net assets as the sum of $387,832.46 (greater than the respondent’s recorded total assets of $350,754.53);
(c) the May 2006 balance sheet also records retained earnings of $145,885.71 and current earnings of $301,850.91. Those current earnings appear to be the profits recorded for the period July 2005 through May 2006 (see pages 443 and 444 of the applicant’s 9 November 2006 affidavit). Consequently, that balance sheet appears to record the respondent as having derived total profits of $145,885.71 for the period October 1998 to June 2005. This cannot be reconciled with the applicant’s understanding of the affairs of the respondent formed through his own observations and the respondent’s failure to pay any dividends;
(d) the respondent’s balance sheet as at May 2006 is also irreconcilable with the respondent having recorded a net profit of $184,567.46 for the year ended 30 June 2005 in the profit and loss statement contained in the respondent’s Management Report for June 2005: annexure “ACV-29” (pages 325-326) of the applicant’s 9 November 2006 affidavit;
(e) the profit recorded in the June 2005 Management Report profit and loss statement differs (significantly) from the before tax profit of $358,602 for the same period recorded in both versions of the respondent’s statement of financial performance for the year ended 30 June 2005: annexure “ACV-6” (pages 58 and 59) to the applicant’s affidavit, and recorded in both versions of the respondent’s tax return which was lodged for that period: annexure “ACV-11” (page 89) to the applicant’s 9 November 2006 affidavit and pages 42 and 68 of Mr Armenti’s affidavit; and
(f) one version of the respondent’s statement of financial position as at 30 June 2005 contained in its financial statements for the year ended 30 June 2005 (annexure “ACV-6” (pages 60-63) to the applicant’s 9 November 2006 affidavit) records (at page 63) that the respondent had net liabilities of $34,488 (and accumulated losses of $34,588) as at 30 June 2004 and net liabilities of $7,750 (and accumulated losses of $7,850) as at 30 June 2005. The other version (page 46 of Mr Armenti’s affidavit) records net liabilities of $34,487 as at 30 June 2004 and net liabilities of $2,241 as at 30 June 2005. However:
· the respondent’s statement of financial performance for the year ended 30 June 2005 contained in the financial statements annexed to the applicant’s 9 November 2006 affidavit records (at page 59) that the respondent derived a profit from ordinary activities before income tax of $358,602 for the year ended 30 June 2005. Despite this, those same financial statements record that the respondent’s net liabilities (and accumulated losses) only decreased by the sum of $26,738 during the period 30 June 2004 to 30 June 2005;
· the respondent’s balance sheet as at 30 June 2004 contained in the respondent’s management report for June 2004 (annexure “ACV-18” to the applicant’s 9 November 2006 affidavit at page 187) records the respondent as having net assets of $265,164.51 as at June 2004 and retained earnings in the amount of negative $43,079.63 as at June 2004;
· the balance sheets that are contained in the respondent’s management reports that have been provided to the applicant, being May 2003 (page 186), August 2003 (page 117), January 2004 (page 129), March 2004 (page 143), May 2004 (page 172), June 2004 (page 187), July 2004 (page 197), August 2004 (page 209), September 2004 (page 221), October 2004 (page 232), November 2004 (page 245), January 2005 (page 258), February 2005 (page 272), March 2005 (page 286), April 2005 (page 301), May 2005 (page 315) and May 2006 (page 448), all record the respondent as having net assets of between $138,207.91 and $514,219.58; and
· the respondent’s balance sheet contained in its June 2004 Management report (page 187) records the respondent as having net assets of $265,164.51 as at June 2004, the same time that both versions of the respondent’s statement of financial position contained in its 2005 financial statements recorded it as having net liabilities of $34,488.
56 The respondent does not by evidence or submission deal with these concerns. I consider that they are concerns which warrant further investigation.
Absence of substantial retained profits by respondent where no dividends paid
57 The applicant deposes at para 22 of his affidavit sworn on 9 November 2006 that to his knowledge the Kalgoorlie arm of the respondent has been making a gross profit of between approximately $600,000 and $800,000 per annum for several years and further that in the period 2003-2006 it should have derived significant profits. Mr Gilmour acknowledges that the respondent has never paid a dividend to the applicant. He does not however deal with the question of the level of profitability deposed to by the applicant. In those circumstances I am prepared for present purposes to accept that there is real substance to the figures and the periods deposed to by the applicant in para 22 of his affidavit. On this issue I note that in para 39 of his affidavit Mr Gilmour deposes that he estimates the value of the respondent’s sales to KCGM to be about $800,000 per annum or 40-50% of the respondent’s turnover. Mr Gilmour at para 40 of his affidavit states that it was inappropriate during the period that it was building its business before it could pay dividend it had to pay off its liabilities. It is not clear what he means by “the period that it was building its business” nor what are the liabilities to which he refers. In response to the applicant’s affidavit at para 23 where he deposes to his concern that there should be significant retained profits and net assets, Mr Gilmour said that throughout his time as a director of the respondent the applicant received comprehensive monthly financial reports up until his resignation as a director and even beyond that time. That is no answer to the applicant’s concerns in this respect. Indeed as I have already found Mr Gilmour agrees that the applicant did on at least one or two occasions claim that the financial information provided to him did not make sense to him and needed to be justified which produced on Mr Gilmour’s part an irritated response. He went on to explain that the reasons for his irritation was that he was being improperly accused of dishonesty by the applicant, and that in any event it was always open to the applicant to seek clarification from the company’s bookkeeper Ms Stedman or from the respondent’s accountant Mr Armenti or from his own accountant. However, the fact was that the applicant was seeking clarification from Mr Gilmour and was met simply with an irritated response. The fact that he might have taken up his concerns with others is not to the point.
58 Mr Gilmour denies at para 55 of his affidavit that he ever said to the applicant that the respondent had made $400,000 per annum in profits. The fact however is that in September 2003 Mr Gilmour offered to sell his shares in the respondent to the applicant for $2 million. The offer is contained in a letter from Mr Gilmour to the applicant dated 21 September 2005. The applicant deposes at para 24 of the affidavit sworn on 9 November 2006 that the letter was dated 21 September 2003. However I take this to be a typographical error as the copy of the letter annexed (“ACV-41”) is dated 21 September 2005. That offer puts a value, from Mr Gilmour’s perspective, on the shares of the company as a whole at approximately $2.85 million and by extension, the value of the applicant’s holding at approximately $857,000. Mr Gilmour does not deal with this issue in his responsive affidavit.
59 Given the levels of profitability which have not been denied by the respondent taken together with the value placed upon the company shares by the applicant as evidenced by his offer of 21 September 2005 to sell his 70% shareholding in the company to the applicant for $2 million it is on its face surprising that no dividends have been paid alternatively that there are not significant retained profits or assets reflecting that level of profitability in the company. In my opinion, this is a legitimate concern on the part of the applicant and warrants investigation.
The relationship between Mr Gilmour and each of the respondent and sola-kleen
60 This relationship is central to the applicant’s concerns that Mr Gilmour controls both companies. There is a financial relationship between the companies that in certain identified respects, as I have found, warrants further investigation to address the applicant’s reasonable concerns.
The incorporation of MGCC Corrosion Consultants (WA) Pty Ltd
61 Mr Gilmour deposes in his affidavit sworn 13 February 2007 that this new company was incorporated as a safeguard against the possibility of the applicant or an associate of his incorporating a company with a similar name to the respondent. It is an unusual explanation. However, without more, I have not taken this into account in my reasons.
Good faith and proper purpose
62 Section 247A(1) expresses a composite notion of good faith and a proper purpose: Barrack Mines Ltd v Grants Patch Mining Ltd (No 2) [1988] 1 Qd R 606 and Knightswood Nominees Pty Ltd v Sherwin Pastoral Co Ltd (1989) 15 ACLR 151. By extension, in my opinion, this is also the position in respect of the requirement of good faith and proper purpose contained within s 247A(5). See Chuen v Laredo Pty Ltd [2005] WASC 58 at [59].
63 The right to apply under s 247A(1) confined as it is to members means that the applicant’s purpose must be reasonably related to his or her status as a member: Knightswood Nominees Pty Ltd v Sherwin Pastoral Co Ltd (1989) 15 ACLR 151. I am satisfied that the applicant’s purpose is proper in that respect.
64 It operates where the applicant seeks to protect some specific or personal right by the making of the order: Acehill Investments Pty Ltd v Incitec Ltd [2002] SASC 344 at [29] per Debelle J. In Intercapital Holdings Ltd v M.E.H. Ltd & Ors (1988) 6 ACLC 1068 Brooking J in the Victorian Supreme Court was concerned with, relevantly, an application for an inspection of books of a company pursuant to s 265B of the then Companies (Victoria) Code. That statutory provision is substantially in the same terms as s 247A(1) of the Act. His Honour (at 1,074) considered as relevant to the questions of whether the applicant was acting in good faith and for a proper purpose that a reasonable shareholder in a company couldtake the view that his investment in that company may be adversely affected by a particular transaction and could take the view that he wished to investigate the question whether he should endeavour to cause legal proceedings to be taken whereby he or the company may in appropriate circumstances recover damages or compensation for wrongful acts associated with the transaction. In this case, although not dealing with one transaction but a number of transactions involving questions or concerns as to proper accounting in the respondent’s books, the applicant is doing the very same. Access to the respondent’s books will assist his investigation of concerns which may result in proceedings in his own right and/or in the name of the respondent.
65 Where orders for inspection are sought under the regime found within s 247A(3)-(6), this will require, in my opinion, a consideration of the bases relied upon or to be relied upon in any foreshadowed application pursuant to s 237 of the Act. Accordingly, I respectfully agree, with the view expressed by Master Sanderson in Caveat Pty Ltd v Baillie & Ors [2002] WASC 83 at [24]-[25]. This approach was adopted by Commissioner Siopis SC, as he then was, in Chuen v Laredo Pty Ltd & Ors [2005] WASC 58 at [59].
66 The factual matrix replied upon by the applicant under each head of application is essentially the same. Accordingly my findings on the issues of good faith and proper purpose relate to both equally.
67 The respondent contends that the applicant is not acting in good faith and his application for inspection of the books is not for a proper purpose. He contends, in effect, that the predominant purpose of the applicant is to induce the respondent or Mr Gilmour into buying his 30% shareholding at a better price than discussed thus far and places particular reliance upon the content of the applicant’s letter dated 3 August 2006 which is set out above. Further he says it is a predominant purpose of the applicant to disrupt the respondent’s business and points to the evidence of Ms Michelle Christine Dalton in this respect. Ms Dalton deposes to a telephone call she says she had with the applicant in approximately April or May 2006 when the applicant allegedly said to her that he was really looking forward to destroying the respondent company.
68 The respondent as evidence of bad faith says that there is no explanation as to why the applicant did not seek to obtain more complete sets of documents over the years or to enquire into the alleged irregularities prior to bringing the application. He asserts that the applicant is guilty of such delay in bringing this application that an inference of bad faith arises. He submits that the applicant has not tendered any report by an accountant as to his concerns in relation to the financial information and that this evidences lack of good faith. Finally he says that another purpose of the applicant is to pre-empt legal proceedings by the respondent against him.
69 I am not persuaded by any of these submissions. The letter from the applicant dated 3 August 2006 is an open letter and does not in my opinion amount to an improper threat express or implied that unless Mr Gilmour make an increased offer for the applicant’s shares then the present proceedings would be brought, if by that it is meant that these proceedings would be brought improperly in the sense that they were without foundation or where the predominant purpose was to extract such an increased offer. The fact that the applicant would have been prepared to accept $250,000 net after tax even without obtaining the explanations and the information which he had hitherto wanted does not mean that bringing this present application, his offer having been rejected, that there is no substance to it and in particular that it lacks good faith and a proper purpose. It is commonplace in a commercial context for parties in dispute to put forward a proposal for settlement failing acceptance of which legal proceedings are foreshadowed.
70 The applicant has no recollection of saying to Ms Dalton that he was looking forward to destroying the respondent. Even if I were to accept Ms Dalton’s evidence I would not regard that as sufficient evidence that this application has as its predominant purpose the disruption of the respondent’s business. There is clearly hostility between the applicant and Mr Gilmour. This of itself does not necessarily lead to a finding of lack of good faith and in this case I do not do so: Re Humes Ltd (1987) 5 ACLC 64 at [70].
71 Nor am I persuaded that the applicant has been guilty of such delay as to evidence bad faith. The applicant had sought justification of certain financial information which, as a shareholder of longstanding, seriously concerned him. The respondent through Mr Gilmour brusquely refused to assist him. Shortly after leaving the employ of the respondent, after offers and counter-offers relating to the sale firstly of Mr Gilmour’s shareholding and then the applicant’s shareholding, formal demands for access to the respondent’s books for inspection was made by the applicant’s solicitors. Those requests proved futile and led shortly thereafter, as foreshadowed, to this application.
72 I do not consider that anything turns on the failure of the applicant to tender expert accounting evidence. As I indicated earlier the respondent through its counsel conceded that the figures relied upon by the applicant in its affidavits and written submissions were accurate. It does not require an accountant, in my view, for it to be discerned that there are serious concerns raised by the matters complained of in respect of the financial statements and tax returns to which the applicant points.
73 Nor do I find that the proceedings constituted an attempt to pre-empt the legal proceedings by the respondent as against the applicant. The respondent first threatened the applicant with legal proceedings on 18 August 2006, some ten months after the alleged events said to give rise to the threat of such proceedings, and again on 24 November 2006. As the applicant deposes those threats have not been carried into effect.
74 The respondent’s counsel placed considerable emphasis upon the decision of Chuen v Laredo Pty Ltd [2005] WASC 58. His submission was that there was a striking resemblance between the facts of that case and the present in that it involved a disgruntled shareholder seeking to induce a better offer for his shares [41] by a threat that should such an offer not be received then an application for inspection of the company’s books would be made under s 247A of the Act; it involved management fees being paid by the respondent company to a related company; the level of directors’ fees were in question; a loan had been written off; there was a level of hostility between the applicant and one of the directors of the respondent company; questions were raised concerning the financial statements of the respondent.
75 In that case the applicant in 2005 brought an application relevantly under s 247A of the Act in which he raised various questions concerning the accounts of the three respondent companies for the years 1993 to 1999. The facts in that case were complex and the result turned upon particular findings made by Commissioner Siopis SC as his Honour then was. Included in those findings were that the applicant failed to depose specifically as to the nature of the potential action against the respondents under s 236 of the Act; that the applicant failed to advise the accountant who swore an affidavit on his behalf in support of his application as to the full extent of his knowledge of matters which he was seeking to investigate and indeed was content for an affidavit to be sworn by the accountant deposing to the need to investigate a matter as to which the applicant was already familiar; that the applicant failed to complain about the particular transactions which he was by his application seeking to investigate at the time of the transactions in question or within a reasonable time thereafter; several of the matters which the applicant sought to investigate occurred as much as seven years prior to the application; that at the time those transactions occurred the applicant was a director of the respondent; that many of the transactions were so old as likely to be statute barred in respect of any proposed proceedings in relation to them; that a considerable delay was involved in that a majority of matters in respect of which the applicant by its application sought inspection had been the subject of enquiries made by the applicant almost five years prior to the application with no explanation as to the reasons for delay; that the intention of the applicant in threatening to bring his application was to induce an acceptance of his offer to sell his shares by linking the threat of continuing his agitation to obtain inspection of the respondents’ documents to his offer to sell his shares.
76 For these reasons amongst others Commissioner Siopis SC held that the applicant was not acting in good faith and that the inspection of the respondents’ books was not for a purpose connected with applying for leave under s 237 of the Act, that is to say it was not for a proper purpose.
77 Whilst there are superficial similarities between that case and the present, they are, in my opinion, no more than that. That case turned largely on its own facts and for that reason is not of assistance to the resolution of the application before me.
78 Viewing the evidence as a whole I am not persuaded by the submissions of the respondent upon these issues and I am satisfied for the purposes of s 247A(1) of the Act that the applicant has demonstrated that he is acting in good faith and that inspection is to be made for a proper purpose and that in respect to the application governed by s 247A(3)-(6) of the Act that the applicant is also acting in good faith and that inspection is to be made for a purpose connected with applying for leave under s 237 of the Act; or bringing proceedings with leave under that section.
79 The applicant has adduced evidence which condescends in considerable detail to his concerns which if made good upon an inspection of the respondent’s books would inform either proceedings contemplated at the instance of the applicant in his own right under ss 232 and 234 of the Act and/or representative proceedings under ss 236 and 237 of the Act.
Conclusion
80 It follows that, in my opinion, orders for inspection of the respondent’s books should be made. I will hear counsel as to the precise terms of those orders and the question of costs.
|
I certify that the preceding eighty (80) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gilmour. |
Associate:
Dated: 5 April 2007
|
Counsel for the Applicant: |
Mr D H Solomon |
|
Solicitors for the Applicant: |
Solomon Brothers |
|
Counsel for the Respondent: |
Mr A C H Quahe |
|
Solicitors for the Respondent: |
Wojtowicz Kelly Legal |
|
Date of Hearing: |
15 February 2007 |
|
Date of Judgment: |
5 April 2007 |
