VID 561 of 2019
Date of judgment:
National Practice Area:
Commercial and Corporations
Corporations and Corporate Insolvency
Number of paragraphs:
Solicitor for the Plaintiff:
Hall & Wilcox
Counsel for the Second, Third and Fourth Defendants:
Mr CT Moller
Solicitor for the Second, Third and Fourth Defendants:
ANOU PTY LTD (ACN 080 707 017)
GREGORY WILLIAM MCPHERSON (and another named in the Schedule)
DATE OF ORDER:
THE COURT ORDERS THAT:
1. Pursuant to s 247A(1) of the Corporations Act 2001 (Cth), the plaintiff and its legal and accounting advisers are authorised to inspect the “books” (as that term is defined in s 9 of the Corporations Act) of the first defendant, such inspection to take place on or after 22 July 2019.
2. The first defendant, by its officers and employees, must make the books of the first defendant available for inspection and copying, in accordance with paragraph 1 of these orders at:
(a) 117 Wellington Street, St Kilda, Victoria;
(b) 219 Albion Street, Brunswick, Victoria; or
(c) 106 Albert Street, East Brunswick, Victoria,
on reasonable notice and for a reasonable period of time between the hours of 9.00 am and 5.00 pm.
3. Subject to further order or the consent of the second, third and fourth defendants:
(a) the plaintiff and its legal and accounting advisers are to keep the information obtained during the inspection confidential;
(b) the plaintiff must not use the information obtained during the inspection for any purpose other than the conduct of this proceeding;
(c) the inspection under paragraph 1 of these orders may only be conducted by Kamal Somaia and/or Dhanush Ganglani of the plaintiff, personnel from Hall Chadwick, and personnel from Hall & Wilcox.
4. By 4.00 pm on 6 September 2019, the plaintiff file and serve a concise statement.
5. By 4.00 pm on 26 September 2019, the second, third and fourth defendants file a concise response.
6. The proceeding be referred to mediation, to be conducted by a Registrar of the Court, to be completed by 25 October 2019.
7. The proceeding be listed for a case management hearing at 9.30 am on 8 November 2019.
8. There be liberty to apply.
9. Costs be reserved.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
1 The issue to be determined is whether an order should be made, pursuant to s 247A(1) of the Corporations Act 2001 (Cth), that the plaintiff, Simba Global Pty Ltd (Simba) and its legal and accounting advisers are authorised to inspect the books of the first defendant, IFOTA Pty Ltd (IFOTA).
2 The context in which the issue arises is as follows. This proceeding was commenced recently by Simba. It seeks relief on the basis of the allegedly oppressive conduct of the affairs of IFOTA. Simba holds 25% of the ordinary shares in IFOTA. The second defendant, Anou Pty Ltd (Anou) holds 70% of the ordinary shares in IFOTA. The third defendant, Gregory McPherson is a director of IFOTA, appointed by Anou. The fourth defendant, Anou Khanijou is a director of IFOTA, appointed by Anou. Ms Khanijou is also the sole director and company secretary of Anou. The remaining 5% of the shares in IFOTA are held by Maxwell Scales.
3 Simba sits at the apex of a corporate group that is the largest commercial textiles supplier in the southern hemisphere, operating in Australia, New Zealand, USA, Singapore, China, Chile and India. Its primary product lines are commercial linen, towels and medical textiles.
4 IFOTA deals exclusively in clothing apparel, including manufacturing, distribution and resale. Its primary trading brand is City Collection – an apparel business with a particular focus on the corporate uniform market.
5 At the first case management hearing in the proceeding, which took place last Friday, Simba sought an order pursuant to s 247A that Simba and its legal and accounting advisers are authorised to inspect the books of IFOTA. IFOTA was not itself represented at the hearing. The second, third and fourth defendants were represented and opposed the application. In circumstances where Simba had only provided one day’s notice that it would be seeking such an order, I adjourned the hearing of the application to Wednesday, 25 June 2019 and made orders for Simba to file and serve an affidavit in support of its application and for the second, third and fourth defendants to file any affidavit in response. Affidavits were filed in accordance with these orders.
6 The matter came on for hearing on 26 June 2019. Simba provided a slightly revised form of proposed orders. The orders Simba seeks in relation to access to the books of IFOTA are as follows:
1. Pursuant to section 247A(1) of the Corporations Act 2001 (Cth), the Plaintiff and its legal and accounting advisers are authorised to inspect the ‘books’ (as that term is defined in section 9 of the Corporations Act 2001 (Cth)) of the First Defendant.
2. The First Defendant, by its officers and employees, must make the books of the First Defendant available for inspection and copying in accordance with order 1 at
(a) 117 Wellington Street, St Kilda, Victoria;
(b) 219 Albion Street, Brunswick, Victoria; or
(c) 106 Albert Street, East Brunswick, Victoria
on reasonable notice and for a reasonable period of time between the hours of 9:00am and 5:00pm.
7 At the hearing on 26 June 2019, IFOTA was, again, not represented. The second, third and fourth defendants were represented and opposed the application. However, subject to certain qualifications, they did not oppose an order requiring IFOTA to provide Simba with access to the documents that it had sought in a letter dated 10 May 2019 (referred to later in these reasons).
8 In support of the application, Simba relies on two affidavits of Kamal Somaia (a director of IFOTA, appointed by Simba), one dated 24 May 2019, and the other dated 24 June 2019. In opposition to the application, the second, third and fourth defendants rely on an affidavit of Mr McPherson dated 24 June 2019.
9 Section 247A of the Corporations Act relevantly provides as follows:
(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.
(2) A person authorised to inspect books may make copies of the books unless the Court orders otherwise.
10 There is no real dispute between the parties as to the applicable principles. These are helpfully set out in Mesa Minerals Ltd v Mighty River International Ltd (2016) 241 FCR 241 (Mesa Minerals) at  per Katzmann J (with whom Siopis J and Gilmour J agreed).
11 The background facts are set out in the affidavits. I do not propose to set out all the relevant background facts, but note the following matters.
12 IFOTA was incorporated on 8 May 2017 and operates as a manufacturer, distributor and retailer of clothing and other apparel. On or about 9 August 2018, IFOTA, Anou, Simba and Mr Scales entered into a shareholders agreement (the Shareholders Agreement). The Shareholders Agreement contains a non-competition clause (cl 9). As part of a clause dealing with general matters (cl 15), it is provided that “[e]ach Shareholder and Director may inspect the Company’s books and records on reasonable notice to the Company and may take such copies as the Shareholder or Director requires” (cl 15.10(e)).
13 At all relevant times, Mr McPherson has been a director, chief financial officer and company secretary of IFOTA. Mr McPherson and Ms Khanijou have exclusive responsibility for the day-to-day management of the operations of IFOTA.
14 Mr Somaia states in his first affidavit that from around February 2019, relations between Anou, Mr McPherson and Ms Khanijou on the one hand, and Mr Scales, Simba and Mr Somaia on the other hand, started to deteriorate. Simba is concerned that there is a lack of transparency regarding the business operations and financial dealings of IFOTA.
15 In February 2019, Simba and Mr Scales engaged Hall Chadwick to undertake a third party financial review of IFOTA to inform themselves of the financial position of IFOTA. In February and March 2019, Simba, Hall Chadwick and Mr Somaia sought documents from IFOTA and documents were provided by IFOTA.
16 On 10 May 2019, Hall Chadwick provided a preliminary report to Simba and Mr Scales (the HC Report). On the same date, Simba’s lawyers, Hall & Wilcox, provided a copy of the HC Report to IFOTA. In the covering letter, Hall & Wilcox, on behalf of Simba, sought access to certain categories of documents to address matters raised in the HC Report. IFOTA has not provided a response to the letter dated 10 May 2019 and has not provided the documents sought in that letter. Mr McPherson states in his affidavit that he and Ms Khanijou had several concerns regarding the requests for information and documents in the letter, and that they were awaiting legal advice about these concerns when this proceeding was commenced.
17 In his second affidavit, Mr Somaia states that the purpose of seeking inspection of the books of IFOTA is “to enable Simba to ascertain the true financial position of IFOTA and details of the prior transactions by IFOTA that have given rise to that financial position”. Mr Somaia also states that he anticipates that attaining an understanding of IFOTA’s financial position and the transactions of IFOTA relevant to that position will enable Simba to consider in an informed way:
(a) the presently unexplained irregularities in the management of IFOTA referred to in the HC Report;
(b) the circumstances surrounding related-party transactions; and
(c) whether the third and fourth defendants have breached their duties to IFOTA.
18 In my view, Simba has established that it is acting in good faith and that the inspection is to be made for a proper purpose in the sense explained in Mesa Minerals at . I consider this to be established by Mr Somaia’s second affidavit. It is apparent that Simba has concerns regarding the transparency of the business operations and financial dealings of IFOTA. To this end, Simba (and Mr Scales) engaged Hall Chadwick to prepare the HC Report. This raised a number of matters that Simba wishes to address, prompting the request for documents in the 10 May 2019 letter. As noted above, IFOTA has not provided the documents sought in that letter.
19 If and to the extent that the second, third and fourth defendants contest that the application has been made in good faith and for a proper purpose on the basis that Simba is a potential competitor of IFOTA (see Mr McPherson’s affidavit at -), I do not accept this contention. The material does not establish any likelihood of competition and, as noted above, the Shareholders Agreement contains a non-competition clause. In any event, as discussed above, the evidence in Mr Somaia’s second affidavit establishes that the application is made in good faith and for a proper purpose.
20 It is submitted on behalf of the second, third and fourth defendants that, in terms of proper purpose, the boundaries are drawn by the HC Report and thus, access should only be given to the documents sought in the 10 May 2019 letter. I do not accept this submission. The letter set out a request for documents based on the HC Report. However, the documents were not provided. In these circumstances, I consider it open to Simba to make a more general application for access to documents, and that it should not be constrained by its previous request.
21 As noted in Mesa Minerals at , pursuing a reasonable suspicion of breach of duty is a proper purpose. Consistently with this, one of the matters that Simba wishes to examine is whether the third and fourth defendants have breached their duties to IFOTA.
22 While the second, third and fourth defendants oppose the application, they are willing to provide the documents (or categories of documents) sought in the 10 May 2019 letter, subject to the qualifications set out in Mr McPherson’s affidavit at -. The second, third and fourth defendants contend that an order for inspection of the books of IFOTA would be unduly burdensome and disruptive for the reasons set out in Mr McPherson’s affidavit at -. (Although it is stated in  that Simba had not paid an invoice for copy documents, counsel for the second, third and fourth defendants accepted at the hearing that this was incorrect.)
23 In my view, notwithstanding the submissions advanced on behalf of the second, third and fourth defendants, it is appropriate in the circumstances to make an order for inspection of the books of IFOTA. As indicated above, the application is made in good faith and for a proper purpose. The context includes the Shareholders Agreement, which contains a clause conferring a right of access to the documents. I note the practical concerns that have been raised by the second, third and fourth defendants. There is a degree of speculation about these concerns. I note that IFOTA is not a large company and that it has not been trading for a long time. It seems to me that if the parties approach the inspection in a sensible and cooperative way, these concerns will largely be addressed. In any event, if difficulties arise, the parties can approach the Court.
24 As discussed at the hearing, I propose to make a number of adjustments and additions to Simba’s proposed orders. I propose to order that, subject to further order or the consent of the second, third and fourth defendants:
(a) Simba and its legal and accounting advisers are to keep the information obtained during the inspection confidential;
(b) Simba must not use the information obtained during the inspection for any purpose other than the conduct of this proceeding; and
(c) the inspection may only be conducted by Mr Somaia and/or Dhanush Ganglani of Simba, personnel from Hall Chadwick, and personnel from Hall & Wilcox.
25 These proposed adjustments and additions arose from submissions made on behalf of the second, third and fourth defendants. Simba did not oppose the making of these orders. It was common ground that the Court has power to make such orders under s 247B of the Corporations Act. I note that the Corporations Act, in s 247C(1), provides that a person who inspects books on behalf of an applicant under s 247A must not disclose information obtained during the inspection.
26 Also, in relation to timing, Simba indicated, in response to a concern raised by the second, third and fourth defendants, that it was content for the inspection to take place on or after 22 July 2019.
27 I will also make case management orders as discussed during the hearing. I will hear from the parties on costs. [Discussion then ensued.]
VID 561 of 2019
ANOU SWARAJ KHANIJOU