FEDERAL COURT OF AUSTRALIA

London City Equities Limited v Penrice Soda Holdings Limited [2011] FCA 674

THE COURT ORDERS THAT:

1.    The parties confer and bring in short minutes to give effect to these reasons by no later than 24 June 2011. Those short minutes should also deal with the form of any ancillary orders and costs.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using Federal Law Search on the Court’s website.

REASONS FOR JUDGMENT

Introduction

1    This application is for the inspection of books of a company under s 247A of the Corporations Act 2001 (Cth) (“the Act”).

2    The plaintiff, London City Equities Limited (“LCE”), is a member of the defendant, Penrice Soda Holdings Limited (“Penrice”), and applies for authorisation to inspect certain categories of Penrice’s books under ss 247A(1) and 247A(3) of the Act.

3    LCE is a public company which is listed on the Australian Stock Exchange (“ASX”). It is an investment company which, since 1997, has focused its investment on Australian companies.

4    Penrice is an Australian public company listed on the ASX. Its principal business is in mining and chemical manufacture.

5    Beginning in mid May 2008, LCE invested directly and indirectly a total of approximately $7.6 million in shares in Penrice at a price per share ranging from $1.57 to $0.67. At a price of $0.37 per ordinary share as at December 2010, that investment was worth approximately $2.6 million. At $0.19 per share, a May 2011 figure, LCE states it has an unrealised loss of approximately $6.25 million. LCE currently holds approximately 8% of the issued share capital of Penrice.

6    In broad terms, the matters which LCE seeks to investigate concern three areas. The first LCE described as the non-disclosure or misleading disclosure of certain financial information and whether Penrice or one or more of the directors of Penrice was responsible. The second area of concern to LCE is whether in 2008 Penrice paid dividends other than from profits. The third area is whether Penrice funded the defence by two of the directors of their positions on the Board.

The legislation

7    Section 247A of the Act provides relevantly as follows:

247A     Order for inspection of books of company . . .

(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.

(2)     A person authorised to inspect books may make copies of the books unless the Court orders otherwise.

(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.

(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.

(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.

(6)    A person authorised to inspect books may make copies of the books unless the Court orders otherwise.

8    It was common ground that LCE is a member of Penrice and a person within s 247A(3).

The evidence

9    LCE relied on the affidavits of Peter Edward John Murray sworn 23 December 2010 and 18 May 2011 and the exhibit to the earlier affidavit. Mr Murray was cross-examined.

10    Penrice relied on the affidavit of Francesco Lupoi sworn 28 April 2011 and the exhibits to that affidavit; the affidavit of Guy Redvers Roberts sworn 28 April 2011 and the exhibits to that affidavit; and the affidavit of David Bruce Trebeck sworn 28 April 2011 and the exhibits to that affidavit. Mr Lupoi was cross-examined by videolink.

11    Certain objections were taken to parts of the affidavits and I ruled on those objections on the basis that this particular proceeding under s 247A was not interlocutory but final: see Yara Australia Pty Ltd v Burrup Holdings Limited (2010) 80 ACSR 641 at [108] and following.

12    Much of the affidavit material, although apparently controversial in the sense the deponents on one side contradicted the deponents on the other, was not referred to in submissions. This efficient course was taken by counsel because of the limited areas of true controversy on the present application, which centred on the categories of documents. I shall take the same course, particularly in light of the inappropriateness of the Court attempting to determine the substantive questions on an application under s 247A of the Act: see Intercapital Holdings Limited v MEH Limited (1988) 13 ACLR 595 per Brooking J, a decision under s 265B of the Companies (Victoria) Code. Further, the substantive questions are not confined by reference to some cause of action or legal wrong: Smartec Capital Pty Limited v Centro Properties Limited [2011] NSWSC 495 at [65] per Barrett J.

13    Similarly, although Mr Lupoi deposed to and was cross-examined on the practical difficulties of identifying the documents, much of what he said was, at a general level, self-evident. As will become clear, I do not base my conclusions on the details of the difficulties to which he deposed and on which he was cross-examined.

14    I accept that he was concerned at the extent of documents sought by LCE and the scale of the task that would be faced by Penrice if it were ordered to make the documents sought by LCE available and that, as the categories were framed, it would be a time consuming and expensive exercise.

15    I also find, as Mr Lupoi accepted in cross-examination, that no detailed work had been done on the extent of the necessary searches. For example, although he had asked the Chairman and the Managing Director whether they had any documents within the categories, Mr Lupoi did not ask the Chairman or Managing Director to look at their files and, I infer, they had not done so.

16    Similarly, Mr Lupoi accepted that he had not done a catchword or keyword search of any of Penrice’s servers in the course of preparing his affidavit. He had made general inquiries with his IT manager of the sorts of processes that would have to be undertaken and it was likely that some of the older tapes would need to be aligned to the current version.

LCE’s stated concerns

17    In his 23 December 2010 affidavit, Mr Murray, Chief Operating Officer of LCE, identified LCE’s concerns with respect to Penrice.

18    At [56] of his 23 December 2010 affidavit Mr Murray deposed:

By letters dated 17 July 2009, 17 September 2009, 22 March 2010, 23 March 2010 and 16 April 2010, I identified certain concerns I hold about the conduct of the directors of Penrice. I have discussed those concerns with the other directors of London City and believe that they also hold the same concerns. The concerns include that:

(a)    during the period from 2008 to date, the directors of Penrice have caused or permitted Penrice to fail to properly and fully inform the market and London City about Penrice’s financial performance and financial standing, and have caused or permitted Penrice to make erroneous assertions about Penrice’s actual and anticipated performance, which have misled London City;

(b)    the directors of Penrice have acted in breach of duty in causing Penrice to incur expense in distributing information to its shareholders in order to influence the outcome of voting on the resolutions, to change the composition of the board of Penrice, put forward at the general meeting held on 27 July 2009; and

(c)    that the directors of Penrice acted in breach of their statutory duties by paying a dividend to shareholders in October 2008.

19    Mr Murray stated his belief that, other than the conduct in relation to the shareholders meeting, each of the matters may well have constituted a contravention of s 674 or s 1041H or both of the Act.

20    He said that LCE was considering bringing proceedings against one or more of the current or former directors of Penrice, and possibly against Penrice. LCE wished to bring proceedings against the directors instead of the company as proceedings against the company would harm LCE’s investment in Penrice. To decide whether to bring proceedings against the directors instead of Penrice Mr Murray said that he needed to ascertain whether LCE had a claim against the directors (and which directors) and whether the directors would be able to pay a judgment in favour of LCE. He said that he was concerned to know whether the directors were insured for a claim against them, and the amount and extent of cover they have.

21    Mr Murray said that LCE sought access to the identified books to investigate and decide whether to bring a claim against Penrice’s directors and, if LCE decided to bring that claim, to use the documents in pursuing the claim. LCE also sought access to the identified books to bring an application under ss 236 and 237 of the Act and, if it did so, to use the documents in pursuing that application or the ultimate proceedings.

22    At a greater level of detail, the areas of concern in relation to the matters in [56(a)] of Mr Murray’s affidavit were:

Misleading conduct/inadequate disclosure: performance before 31 December 2008

Loss for the six months to 31 December 2008

o    Hedge loss – December 2008

o    Superannuation defined benefits shortfall – December 2008

o    Disclosure of debt – December 2008

Misleading/inadequate disclosure: aggregates/schist/landfill

Misleading/inadequate disclosure: profit forecasts – 2009

Misleading/inadequate disclosure: profit forecasts – 2010

Misleading/inadequate disclosure: dividend forecast.

23    As to [56(b)] the particular concern was:

27 July 2009 Shareholder meeting.

24    As to [56(c)] the particular concern was:

Payment of 2008 Dividend.

25    Mr Murray also deposed to what he did not know. He said at [134-135]:

I believe that each of the matters I have referred to (other than the conduct in relation to the shareholders meeting) may well have constituted a contravention of section 674 or section 1041H, or both, of the Corporations Act 2001 (Cth). However, I do not know what the true position was in relation to the Superannuation Defined Benefits shortfall, the hedging loss and the debt increase prior to London City’s investment in Penrice’s shares in November 2008. I also do not know what Penrice’s directors knew about each of those matters at that time, or when they learnt about those matters. I also do not know the effect that the accounting treatment of schist and aggregates has had on Penrice’s financial position since about 2007. Finally, in relation to Penrice’s profit and dividend forecasts, I do not know what facts were known to the board of Penrice about Penrice’s likely profit or the likelihood of Penrice paying a dividend.

I believe that one or more of the directors of Penrice was likely to be involved in those contraventions. However, I do not know what each director knew about the Superannuation Defined Benefits shortfall, the hedging loss and the debt increase, the accounting treatment of schist and aggregates or about Penrice’s likely profit or the likelihood of Penrice paying a dividend.

26    As to the 27 July 2009 shareholders’ meeting Mr Murray deposed at [133] that:

To decide whether London City should apply for leave to bring derivative proceedings in Penrice’s name against the relevant directors and to bring that application, London City needs to know the nature and the quantum of costs, in relation to the meeting, that were paid for by Penrice. London City also needs to review relevant communications with shareholders and a transcript of the shareholder meeting.

The categories

27    The list of categories was attached to the originating process and was as follows:

1.    All financial and management accounts for Penrice for the periods from 1 July 2005 to date.

2.    All documents relating to Penrice’s interest rate and exchange rate hedging arrangements during the period from 1 July 2007 to date.

3.    All Penrice board minutes and board packs relating to board meetings held during the period from 1 July 2005 to date.

4.    All documents recording communications between representatives of Penrice and Penrice’s accountants and auditors during the period from 1 July 2005 to date.

5.    All documents containing dealings with or communications with National Australia Bank Limited and/or Westpac Banking Corporation with respect to the payment of, or any proposed payment of, a dividend by Penrice for the financial year ending 30 June 2010.

6.    All documents created or received during the period from 1 July 2005 to date which record communications relating to any market disclosures that ought be made with respect to any matter going to Penrice’s financial performance or standing.

7.    All advice obtained by Penrice (or any representative of Penrice) in relation to market disclosures with respect to any matter going to Penrice’s financial performance or standing or with respect to the proper accounting treatments of any matter during the period from 1 July 2005 to date.

8.    All documents referring or relating to the accounting treatment of aggregates, schist (Landfill), hedging liabilities and superannuation liabilities created or received during the period from 1 July 2005 to date.

9.    All records of sales of aggregates and/or schist (Landfill) and all agreements for the sale of aggregates and/or schists from 1 July 2005 to date.

10.    All documents referring to expenses incurred by the company (either directly or through indemnification of any officer) in relation to the general meeting held on 27 July 2009 (July 2009 Meeting).

11.    All documents (including terms of reference) relating to the creation of a sub-committee which had as its stated purpose, the management of the process of convening the July 2009 Meeting (Sub-Committee).

12.    All records of meetings of the Sub-Committee.

13.    All documents considered or reviewed by the Sub-Committee.

14.    All documents recording communications created or received by Penrice, or representative of Penrice, referring or relating to the July 2009 Meeting.

15.    All documents recording, referring or relating to Penrice’s Directors and Officers insurance policies for the periods from 1 July 2008.

LCE submitted that the expression “to date” should be read as meaning, approximately, 30 June 2010.

Legal principles

28    Leaving aside the question of Directors and Officers insurance policies (to which I will return) there was little or no dispute between the parties as to the relevant legal principles.

29    In Intercapital Holdings Limited (above), Brooking J said that on such an application the Court could not determine the substantive questions and should not attempt to do so. His Honour also referred to a test on the question of good faith and proper purpose as to whether a reasonable shareholder in the company could take the view that his investment in that company may be adversely affected by the transaction in question and wish to investigate whether he should take steps with a view to protecting, directly or indirectly, his investment. His Honour said it may well be that there had been no impropriety or irregularity of any kind, that the directors of the company had acted properly and that the acquisition was a sound investment, or, at all events, one made regularly and in the proper exercise of a discretion. His Honour held that there was a “case for investigation”.

30    I was also referred to the decision of Debelle J in Acehill Investments Pty Ltd v Incitec Ltd [2002] SASC 344.

31    Next is the decision of the Full Court of the Supreme Court of Western Australia in Majestic Resources NL v Caveat Pty Ltd [2004] WASCA 201. In that case Templeman J, with whom Malcolm CJ and Wheeler J agreed, held the Court had the power to limit the scope of any inspection ordered under s 247A. Templeman J said:

The exercise of the discretion required the Court to consider not only whether it was appropriate to make an order for inspection but also to consider which of the books of the company should be made available for that purpose.

32    In Vinciguerra v MG Corrosion Consultants Pty Ltd (2007) 61 ACSR 583. Gilmour J followed what Brooking J had said in Intercapital Holdings, in relation to the questions of good faith, proper purpose and any discretionary factors.

33    In Re Style Limited (2009) 255 ALR 63, Goldberg J at [60] adopted the summary propositions set out by Debelle J in Acehill Investments. Goldberg J also adopted the expression used by Brooking J in Intercapital Holdings in holding that there was a “case for investigation”.

34    At [71], dealing with the exercise of the Court’s discretion, Goldberg J said

In granting an order for inspection under s 247A it is not appropriate to allow a wholesale and general inspection of Style’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. Merim has sought inspection of specific categories.

I shall follow this approach to assessing the relevance of the categories.

35    I return to this decision below, in relation to category 15 and insurance policies.

36    In Praetorin Pty Ltd v TZ Limited (2009) 76 ACSR 236 Barrett J dismissed an application under s 247A holding that an applicant under that section must do more than show dissatisfaction or disagreement with management decisions. The requirement of good faith and proper purposes carries with it a need for the applicant to show a “case for investigation as regards past or future wrongful or other undesirable conduct”. His Honour followed Intercapital Holdings and Knightswood Nominees Pty Ltd v Sherwin Pastoral Co Ltd (1989) 15 ACLR 151 per Brooking J. Barrett J held that none of the “concerns” in relation to the management of the company or the conduct of its directors established a “case for investigation”.

37    More recently in Smartec Capital (above) at [65] Barrett J accepted as clearly correct that the criterion expressed by the words "in good faith" and "for a proper purpose" were not confined by reference to some cause of action or legal wrong and were, on their face, at large. His Honour followed Bryson AJ in Rowland v Meudon Pty Ltd (2008) 220 FLR 362 who in turn followed the decision of the Full Court of the Supreme Court of Queensland in Re Claremont Petroleum NL [1990] 2 Qd R 31, a judgment given by Connolly J.

38    Because, in my opinion, those judgments most clearly state the nature of the statutory rights conferred by s 247A I set out the relevant part of the judgment of Bryson AJ, omitting page references, at [35]:

In Re Claremont Petroleum NL the Full Court of the Supreme Court of Queensland in a judgment given by Connolly J upheld an order made by McPherson J under s 265B of the Companies (Queensland) Code (Qld) giving a shareholder leave to inspect books and records relating to nominated transactions. Connolly J surveyed the antecedent common law and decisions and the operation of s 265B in a manner and in terms which command respect and should in my opinion be applied to an application under s 247A. In my opinion this decision authoritatively established that

1.     The legislation should not be treated as doing no more than stating or clarifying the principles of the common law on the subject. The cases at common law should not be regarded as stating conditions for making an order, as the legislation has made the discretion wider and uncontrolled.

2.     It is a relevant consideration that there is a specific dispute rather than general dissatisfaction with management. However the judgment of Connolly J. as a whole shows that an application should not necessarily be refused because it is grounded on general dissatisfaction with management.

3.     It is a relevant consideration that the applicant is personally interested, and so also are the extent and value of his interest.

4.     It is not necessary that the applicant's interest be separate and distinct from that of the general body of members. The confinement of the common law remedy to specific disputes or questions in which the party applying was interested, and related restrictions, was the perceived mischief which the legislation remedied. The remedy chosen was to give a broad unfettered discretion to the court.

Consideration

39    In relation to what has been referred to as the jurisdictional question, that is the good faith and proper purpose requirement, subject to one matter considered more fully below, I accept that the application is brought in good faith and for a proper purpose. Mr Murray deposed that LCE is considering bringing proceedings against one or more of the current or former directors of Penrice and possibly against Penrice. He also said that LCE has applied for access to certain of Penrice’s books, listed in the schedule to its Application, so that it can investigate whether its concerns identified in his affidavit are well founded and, if so, to decide whether to itself commence proceedings against Penrice’s directors and officers or Penrice or to seek leave under ss 236 and 237 of the Act to bring proceedings on behalf of Penrice.

40    I take into account that, predominantly, the concerns were articulated in correspondence contemporaneous with the events of which complaint is made and that LCE attempted in that correspondence to obtain access to some of Penrice’s books.

41    I also take into account that Mr Murray was not cross examined on his statements of purpose or on the correspondence to which I have referred.

42    Thus, although there is some reference in Penrice’s affidavit material to the question of collateral purpose, in my view no such purpose is established in the sense that the collateral purposes there referred to are not established as either substantial purposes or dominant purposes.

43    The single matter I referred to above, which was the real basis on which LCE’s good faith and proper purpose was put in issue by Penrice, was that it could be inferred from the breadth of the subject matter of the categories and also from the periods of time referred to in many of the categories that LCE did not have the good faith or proper purpose referred to in s 247A of the Act.

44    I do not draw that inference in the present case. Although I find that many of the categories both as to subject matter and date are too widely drawn and that some of the categories are not sustainable at all, in my opinion the deficiencies in the categories are not such as to found lack of good faith and proper purpose.

45    The second general observation I make is that on an application such as the present, which concerns in large part the position of directors and what they knew, I see little scope for the application of the “general rule” expressed in earlier decisions such as Acehill Investments (above) at [29]. There Debelle J said that, as a general rule, inspection would be confined to, say, the results of decisions of directors rather than all the documents such as board papers leading to decisions. Debelle J was of course stating only a general rule and one which his Honour departed from on the facts of that case.

46    I agree with Barker J in Yara Australia (above) at [122] where his Honour said:

The respondents argue that the procedure under s 247A is not intended to be a process as wide ranging as the process of discovery of documents, so that as a general rule inspection will be confined to, say, the results of decisions of directors, rather than all documents such as board papers leading to decisions, and refer to Re Claremont Petroleum NL (No 2) [1990] 2 Qd R 310 at 314 in this regard. In my view, while this might be generally so, in my view the facts of each case will finally dictate what documents might be appropriately accessed under this provision.

47    I turn now to the question of categories, applying the approach taken by Goldberg J in Re Style (above) at [71], that is, that the books to be inspected are those that bear on, and are particularly relevant to, the purpose for which the inspection is sought.

Categories 1 to 9 in relation to the market disclosure case

48    The first five concerns articulated by Mr Murray fall within this category. The market disclosure case involves, if there is merit in it, bringing proceedings against Penrice’s directors or Penrice under ss 674(2), 674(2A) or 1041H of the Act.

49    I discount the references in Mr Murray’s cross-examination to the issue of whether the bank covenants ruled out any payment of a dividend if the company had to comply with certain gearing ratios. This was not a matter articulated in his affidavit evidence and, in my view, it is not a matter which attracts the exercise of my discretion in relation to the dates to which the relevant categories refer.

50    The time periods should be those which Mr Murray accepted in cross-examination being:

    the hedging loss – 1 May 2008 to 1 March 2009;

    the superannuation defined benefits shortfall – 1 June 2007 to 1 March 2009;

    the disclosure of debt - 1 July 2008 to 1 March 2009;

    the accounting treatment of aggregates/schist/landfill – 1 June 2006 to 30 June 2010;

    2009 profit forecasts – 1 October 2008 to 31 October 2009;

    2010 profit forecasts – 1 July 2009 to 31 October 2010;

    dividend forecasts – 1 July 2009 to 31 October 2010.

I do not accept, particularly in the absence of any re-examination of Mr Murray, that I should proceed on the basis that what Mr Murray said in cross-examination as to dates was in part self-evidently wrong, as submitted by counsel for LCE. On the contrary, Mr Murray took time to answer questions in a considered way. He was a careful witness. I accept what he said.

Category 1     All financial and management accounts for Penrice for the periods from 1 July 2005 to date.

51    The parties agreed that, subject to the question of the relevant period, this category should be limited to “profit and loss statements, cash flow statements and balance sheets” instead of “All financial and management accounts”.

52    In my opinion, in light of Mr Murray’s evidence, the period should be no longer than from 1 July 2006 to 30 June 2010.

Category 2    All documents relating to Penrice’s interest rate and exchange rate hedging arrangements during the period from 1 July 2007 to date.

53    In relation to the hedging case, the relevant period, consistent with Mr Murray’s evidence, should be from 1 May 2008 to 1 March 2009.

54    I am also not persuaded that LCE should have an order in the terms in which this category is presently expressed as being “all documents relating to” the specified arrangements. The category should have the words “all documents relating to” omitted.

Category 3    All Penrice board minutes and board packs relating to board meetings held during the period from 1 July 2005 to date.

55    In my view, this category needs to be substantially reframed both with reference to the subject matter and, in respect of each subject matter, the relevant date.

56    I also see no reason why the words “relating to” should continue to be used and a narrower expression such as “dealing with” the particular subject matters should be used.

57    The relevant subjects are those identified at [22] of these reasons.

Category 4    All documents recording communications between representatives of Penrice and Penrice’s accountants and auditors during the period from 1 July 2005 to date.

58    As with category 3, this category needs to be broken up into subparagraphs by reference to the particular matters and, for each particular matter, the relevant dates.

59    The category should also avoid the term “representatives of Penrice”. In my view the relevant expression would be “communications between Penrice and Penrice’s accountants and auditors”. I understood counsel for LCE to accept this.

Category 5    All documents containing dealings with or communications with National Australia Bank Limited and/or Westpac Banking Corporation with respect to the payment of, or any proposed payment of, a dividend by Penrice for the financial year ending 30 June 2010.

60    This category is no longer contentious and I would grant access to that category of documents as framed.

Category 6    All documents created or received during the period from 1 July 2005 to date which record communications relating to any market disclosures that ought be made with respect to any matter going to Penrice’s financial performance or standing.

61    In my view this category should be reframed or recast in subparagraphs dealing with the specific elements of the market disclosure case and the dates relevant to each such subparagraph.

62    I would not make an order including the expression “any matter going to Penrice’s financial performance or standing”.

63    I would also not make an order that included the expression “relating to any market disclosures that ought to be made with respect to any matter …”. The category or subparagraphs need to identify the market disclosures in question. What market disclosures ought to be made is too indefinite in this context.

Category 7    All advice obtained by Penrice (or any representative of Penrice) in relation to market disclosures with respect to any matter going to Penrice’s financial performance or standing or with respect to the proper accounting treatments of any matter during the period from 1 July 2005 to date.

64    My conclusions in relation to category 7 are the same as for category 6. Further, the words “any representative of Penrice” suffer from the same vice identified in relation to category 4 above.

Category 8    All documents referring or relating to the accounting treatment of aggregates, schist (Landfill), hedging liabilities and superannuation liabilities created or received during the period from 1 July 2005 to date.

65    This category should be broken up into subparagraphs dealing with each issue separately, that is, each of the aggregates/schists; hedging liabilities; and superannuation liabilities. In relation to each, the more specific dates should be used.

66    More generally the category should not include the expression “referring or relating to” the accounting treatment. A more specific term such as “evidencing” or “showing” should be used.

67    I also note in relation to this category that the term “superannuation liabilities” should be revisited since, I assume, it was intended to refer to the superannuation defined benefits shortfall.

Category 9    All records of sales of aggregates and/or schist (Landfill) and all agreements for the sale of aggregates and/or schists from 1 July 2005 to date.

68    I am not persuaded that this category is relevant even if the dates were narrowed.

69    Mr Murray deposed to the accounting treatment of aggregates and schist being of concern to him.

70    In my view, the documents relevant to this topic would be included in the other categories, particularly categories 4 and 8.

Dividend payment 2008

71    I turn next to the payment of a dividend in 2008. LCE states it is concerned that Penrice did not have any profits from which it could lawfully pay that dividend. At the time, s 254T of the Act provided that a dividend may only be paid out of profits of the company.

72    Mr Murray said that Penrice’s books for the period from 1 July 2007 to October 2008 would allow LCE to investigate whether Penrice has a claim against its directors for breach of duty in relation to the 2008 dividend, and also the likely amount of that claim.

73    According to Mr Murray, one issue was whether most of the superannuation defined benefit shortfall of $2.95 million reported at December 2008 should have been brought to account as a loss in the year to 30 June 2008. Mr Murray also deposed to his belief that some of the hedging losses should have been accounted for by that time.

74    On Mr Murray’s calculation, including superannuation defined benefit shortfall, available profits were $1,781,000 but the dividend was $2,260,000. This was disregarding hedging losses.

75    As to the hedging losses, Mr Murray stated his view that the hedging losses alone exceeded all of the net income for the half year to 31 December 2008, on the basis that some of the hedging losses should have been accounted for by that time.

76    Mr Murray referred to a further reason that he was concerned that the dividend could not be paid: Penrice’s 30 June 2008 accounts showed accumulated losses of $3,141,000 at 30 June 2008.

77    The question is whether particular categories considered above should have their beginning or end dates altered to include this case for investigation, being the payment of the 2008 dividend, where the relevant period is from 1 July 2007 to October 2008.

78    It is not clear to which categories the payment of the 2008 dividend case is to be referred but I consider categories 1, 2, 3, 4 and 8 are potentially relevant. Categories 6, 7, and 9 to 15 are plainly not presently relevant.

79    Category 1 would have already a time period longer than the relevant period for the case concerning payment of the 2008 dividend.

80    In my opinion, category 2 is not relevant to the 2008 dividend case as articulated which concerns the accounting treatment of the hedging losses.

81    The reframing of categories 3 and 4 should include the topic of the availability of profits to meet the 2008 dividend payment for the period from 1 July 2007 to 31 October 2008.

82    Category 8 would have already a time period longer than the relevant period for the payment of the 2008 dividend case for investigation.

Categories 10-14

1.    10.     All documents referring to expenses incurred by the company (either directly or through indemnification of any officer) in relation to the general meeting held on 27 July 2009 (July 2009 Meeting).

11.    All documents (including terms of reference) relating to the creation of a sub-committee which had as its stated purpose, the management of the process of convening the July 2009 Meeting (Sub-Committee).

12.    All records of meetings of the Sub-Committee.

13.    All documents considered or reviewed by the Sub-Committee.

14.    All documents recording communications created or received by Penrice, or representatives of Penrice, or referring or relating to the July 2009 Meeting.

83    These categories go to the third class of concern or case for investigation described by LCE as being in relation to the apparent funding by Penrice of the existing directors’ position with respect to the 27 July 2009 shareholders’ meeting.

84    Mr Murray stated his belief at [132] that on the basis of the documents that he has referred to the Penrice directors actively sought to persuade shareholders to reject LCE’s proposal to replace two of the then Penrice directors without a fair and balanced consideration of the two potential directors. Mr Murray stated his belief that that conduct, “at least to the extent it has involved cost to Penrice” constituted a breach of duty by the directors of Penrice.

85    LCE submitted that causing the company to fund the defence of the position of the directors is a breach of duty: Advance Bank Australia Limited v FAI Insurances Limited (1987) 9 NSWLR 464; Carr v Resource Equities Limited (2010) 275 ALR 366.

86    Penrice submitted that the nature and quantum of costs in relation to the meeting that were paid for by Penrice and relevant communications with shareholders and a transcript of the shareholders meeting went well beyond what is necessary.

87    In late May 2009 LCE formally requested the directors of Penrice to call and arrange to hold a general meeting of shareholders of Penrice. The specific resolution to be considered was for the election of Mr Peter Murray and Mr Glenn Turner as directors and the removal of Mr John Heard and Mr David Trebeck as directors, effective immediately on the passing of the resolution.

88    On 27 May 2009 Penrice announced to the ASX that in the opinion of the directors, one Board seat would provide LCE with appropriate representation given its current shareholding (9.6%). It was also stated that Penrice had established a committee of non-executive directors, comprising three people to manage the process of convening the general meeting.

89    There was a letter to shareholders from Penrice dated 3 June 2009 from the chairman of the sub-committee. That letter stated the directors’ opposition to the LCE proposals.

90    A notice of general meeting and explanatory memorandum was issued by Penrice on 16 June 2009 in relation to the general meeting to be held on 27 July 2009. It was there said that the sub-committee had considered a number of matters in the course of reaching its recommendations to shareholders and strongly and unanimously recommended that shareholders should reject the LCE proposals to “change your board and vote against all resolutions relating to directors”. Five matters were then articulated.

91    On the same day, 16 June 2009, Penrice issued a media release summarising the 16 June 2009 notice and explanatory memorandum.

92    On 22 June 2009 LCE issued a “statement by requisitioning shareholders regarding the forthcoming shareholder meeting of Penrice Soda Holdings Limited”.

93    By an announcement dated 8 July 2009 to the ASX Penrice released a comprehensive “Market Update and letter to shareholders, advising significant increases in group revenue and underlying profit for the 2008-09 financial year and further improvement has been forecast for 2009-10”. It included a number of positive statements about the company’s performance.

94    On the same date there was a letter to shareholders attaching the Market Update. There was also an Open Briefing by Mr Roberts on 8 July 2009 in which Mr Lupoi also participated.

95    Penrice sent a further letter to the shareholders dated 10 July 2009. It concerned proxy forms. It also set out over some pages “additional information” in respect of what was said in the LCE statement.

96    By letter dated 15 July 2009 LCE sought answers to 25 questions said to relate to Penrice’s estimated results for 2009 and other material released in the previous weeks Market Update. This request was not acceded to. Question 25 concerned whether Penrice had engaged a proxy solicitation company to canvass support for the resolutions relating to the position of the existing directors on the Board. LCE said these and similar costs could not be borne by the company and must be borne by those directors seeking to maintain their position on the Board and asked for confirmation that Penrice was not paying for the applicable costs of the two incoming directors. Mr Heard responded that the directors were aware of their legal obligations concerning costs of the meeting.

97    After further correspondence, LCE’s resolutions were defeated at the meeting on 27 July 2009.

98    In my opinion this factual basis demonstrates that categories 11 to 14 are insufficiently relevant as being too broad and I would not make orders in those terms.

99    As to category 10, I accept that there is a sufficient basis for access to books evidencing expenditure by Penrice for the purpose of supporting the position of the two directors. However, category 10 goes well beyond that matter. It is to be recalled as well that the position of the two directors was not the only subject matter of the general meeting. The expression “referring to” is too broad, as is the word “expenses”. The relevant period should be 1 May 2009 to 31 August 2009.

Category 15 – All documents recording, referring or relating to Penrice’s Directors and Officers insurance policies for the periods from 1 July 2008.

100    In Re Style Limited (above) dealing with the scope of the order for inspection Goldberg J specifically considered whether or not there should be inspection of documents relating to directors and officers insurance policies.

101    Goldberg J at [81] and [82] relied on the fact that Merim knew of the existence of a policy of insurance and the amount of the premium estimated by Style to be payable under it. What Merim did not know was the extent of the cover granted under the policy and whether it was current. It seems to be for that reason Goldberg J considered it was appropriate, as a matter of the exercise of discretion to order that Style produce for inspection any directors and officers insurance policies currently held by it. Goldberg J said the cover granted under any such policies would be relevant to the decisions to be made by Merim, after inspection of the other documents in respect of which an order would be made, whether to apply for leave under s 237 of the Act to bring a proceeding on behalf of Style in its name against any directors or officers of Style.

102    In Snelgrove v Great Southern Managers Australia Ltd (in liq) (receiver and manager appointed) [2010] WASC 51, Le Miere J gave detailed consideration to the position of insurance policies. At [67]-[68] his Honour said;

It is a proper purpose to inspect the company’s books for the purpose of investigating whether there are good grounds for seeking to bring a derivative action or a personal action against the company. The purpose of the plaintiffs in seeking access to the relevant insurance policies is to assist them in considering the economic viability of pursuing their proposed action against the company. That is a proper purpose.

. . . The nature and extent of the company’s insurance cover is not in itself a matter in dispute in the action which the plaintiffs are contemplating commencing against the company. However that is not a condition for the exercise of the power under s 247A. The disclosure of the existence and extent of the relevant insurance cover is likely to assist the plaintiffs in determining whether or not to commence or proceed with the proposed action. If the company does not have insurance which covers the plaintiffs’ claims or the quantum of the cover is such that it is likely to be substantially exhausted in legal costs then the plaintiffs may well not proceed with the proposed action. That would prevent the resources of the parties and public resources being wasted. The thrust of the approach to litigation enshrined in the case management rules of this court and other superior courts in Australia is to avoid waste of time and cost and to ensure as far as possible proportionate and economical litigation. It is an appropriate exercise of the discretion of the court to make an order granting access to the plaintiffs to the company’s relevant insurance policies.

103    Penrice submitted that as a matter of discretion production should be limited to documents concerning the investigation of the facts potentially in issue and not merely to the financial position of potential defendants: there was a difference of substance between documents relevant to whether or not an applicant has a cause of action and documents which go only to whether or not, in practical or commercial terms, a cause of action is worth pursuing. The defendant also submitted that the decisions in Re Style Limited and Snelgrove did not pay any or sufficient regard to competing considerations, including confidentiality and the possible “magnet” effect of a plaintiff having access to insurance policies of the present description.

104    I understand the force of the points but unless I am persuaded that the approach of Goldberg J and Le Miere J is clearly wrong I should follow it: see Hicks v Minister for Immigration & Multicultural and Indigenous Affairs [2003] FCA 757 per French J at [76] and Cooper v Commissioner of Taxation (2004) 139 FCR 205 per Lander J at [46]. See also, in relation to national legislation, Australian Securities Commission v Marlborough Gold Mines Limited (1993) 177 CLR 485 at 492 referred to in Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 at [135]. I am not so persuaded.

105    Category 15 is however too broad in its terms. The category should be limited to Penrice’s directors and officers insurance policies for the period from 1 July 2008 to the present date.

Orders

106    I direct the parties to confer and to bring in short minutes to give effect to these reasons by no later than 24 June 2011. Those short minutes should also deal with the form of any ancillary orders and costs. My provisional view is that each party should bear its own costs.

Associate:

Dated:    17 June 2011