The role of director comes with both statutory and common law fiduciary obligations which can result in a director being personally liable for debts incurred after the point in time when a company cannot pay its debts as and when they fall due.[1] A director has an absolute right to access the books so that they can discharge their various duties. Withholding access is often the first sign of some oppressive conduct. A case that considered the statutory right to access the books pursuant to section section 198F Corporations Act 2001(Cth) is the case of Oswal v Burrup Holdings Limited [2011] FCA 609 (Oswal). In Oswal, the Federal Court of Australia considered a director’s right to access company documents after the entity was placed into receivership and the Court’s powers to direct and limit such inspection.
Summary of the facts in the Oswal case
In Oswal, the Applicant was a director of two (2) companies which both had receivers appointed and wanted to access the company records. The receivers opposed this request. Barker J at [8] discussed the common law right of access and whether the director had to establish a “need to know” reason for accessing the books.
Barker J considered the statutory right of the director to access company books per section 198F Corporations Act 2001 (Cth) (Act). Section 198F of the Act states that the director of a company, or person who was a director within the past seven (7) years, may inspect and make copies of the company books at all reasonable times for the purposes of a legal proceeding:
- to which the director is a party;
- that the director proposes in good faith to bring; or
- that the director has reason to believe will be brought against them.
Barker J also considered the effect of section 290 of the Act, which gives directors a right to access company financial records. Unlike section 198F, section 290 empowers the Court to make an order concerning inspection of the books. Section 1303 of the Act was also considered, which allows a director to seek a compliance order from the Court in relation to inspecting company books.
The director was granted a limited right of access to specific classes of documents, conditional upon him filing a written undertaking. The undertaking contained a personal guarantee by the director to meet the reasonable expenses of the company in providing the documents for inspection, which had to be secured by payment of AUD $50,000 into the director’s solicitors’ trust account.
A director’s right to access company books pursuant to their statutory and common law duties
A director of a company has duties under the Act, including a duty to:
- maintain financial records, and correctly record and explain the company’s transactions and its financial position and performance;
- enable true and fair financial statements to be prepared and audited;
- lodge financial reports with ASIC that are accompanied with a directors’ declaration which includes a statement as to whether there are reasonable grounds that the company will be able to pay its debts as and when they become due; and
- acting in the best interests of all shareholders of the entity.
Prohibiting a director access to a company’s books may prevent them from being able to fulfil their statutory and common law obligations, including an ability to assess the solvency of the entity.
What are books of the company?
The Act defines “books” broadly in section 9 to include:
- a register;
- financial reports and records;
- a document; and
- any other record of information.
Section 198F of the Act states that “books of the company” also extends to any books, as defined in the Act, within the company’s possession. The party requesting the company books for inspection bares the onus of proving that the information is material to either current or imminent legal proceedings, to which the director’s request is related to.
Director’s absolute right to access financial records
A director has a common law right to access any company information necessary to discharge their statutory and fiduciary duties owed to the entity. Additionally, section 290 of the Act states that a director of a company, registered scheme or disclosing entity has a right of access to the financial records at all reasonable times.
When might a director’s request to inspect company books be refused?
In Oswal, Barker J stated at [10] that where a receiver is appointed, they may be justified in refusing to allow the director access to the company records where to do so would impede the receiver’s function. It was also considered at [11] that a director’s request may be refused when there is a clear proof of a misuse of power, with the onus being on those who assert it.
What if the company unreasonably refuses to allow inspection?
If a company refuses to grant a genuine request to inspect the company books, the director can apply to the Court for an order pursuant to section 1303 of the Act. Under this section, the Court has the power to compel the company to allow the director inspection of the books.
Takeaways
To satisfy their fiduciary obligations, a director needs to be able to inspect company books, which is broadly defined in the Act. A director has an absolute right to inspect the financial records of a company at any time. Where a company unreasonably denies a director’s request to access the books, an application may be made to a Court pursuant to section 1303 of the Act. For further information about director’s right information, see the following video:
Links and further references
Legislation
Cases
Oswal v Burrup Holdings Limited [2011] FCA 609
Further information about director rights and responsibilities
If you need advice on director rights and responsibilities or access to company books, contact us for a confidential and obligation-free discussion:
Malcolm Burrows B.Bus.,MBA.,LL.B.,LL.M.,MQLS.
Legal Practice Director
T: +61 7 3221 0013 (preferred)
M: +61 419 726 535
E: mburrows@dundaslawyers.com.au
Disclaimer
This article contains general commentary only. You should not rely on the commentary as legal advice. Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.
[1] Section 588G of the Corporations Act 2001 (Cth).
