Shareholders’ right to inspect books under s 247A Corporations Act

A shareholder of a company can apply to the Court seeking an order that it be provided with access to the company’s books and records under certain circumstances, provided that the shareholder is acting in good faith and seeking inspection for a proper purpose.

Shareholders’ right of inspection section 247A, Corporations Act 2001 (Cth)

Section 247A(1) of the Corporations Act 2001 (Cth) (Corps Act) allow a shareholder to apply to a Court for an order authorising them, or another person on their behalf, to inspect the books of a company in certain circumstances.  Section 247A(1) of the Corps Act is as follows:

“(1) On application by a member of a company or registered 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.

[Bold is our emphasis]

What are the “books”?

Section 9 of the Corps Act defines “books” as including:

•  a register; and
•  any other record of information; and
• financial reports or financial records, however compiled, recorded or stored; and
• sustainability reports or sustainability records, however compiled, recorded or stored; and
• a document.

The Supreme Court of Queensland has interpreted the word “document” in the former statutory equivalent of section 9 as extending the definition of “books” to include copies of documents that were obtained through discovery:

“… the use of the word ‘document’ in the extended definition of ‘books’ … clearly extends the scope of [s 9] to copies of books and documents, howsoever made, which were obtained as part of the discovery and inspection procedure in the action.”^[1]

The possibility that a company’s annual report might be a book was raised in the case of Residues Treatment & Trading Co Ltd & Anor v Southern Resources Ltd & Ors (1989) 7 ACLC 608, but the issue was left undecided.

What does “good faith” and “proper purpose” mean?

The Full Court of the Federal Court of Australia in the case of Enares Pty Limited v Nimble Money Limited [2022] FCAFC 126 (Enares) considered the meaning of the phrases “good faith” and “proper purpose” as per section 247A.  The case involved an urgent application brought by Enares Pty Ltd (Appellant) to inspect the books and records of Nimble Money Pty Ltd (Respondent), appealing the decision of the Primary Judge who dismissed the Appellant’s originating application.  The Full Court was required to decide whether the Appellant was acting in good faith and for a proper purpose in seeking access to the Respondent’s books and accounts.

It was initially thought that the purpose of the Appellant’s inspection was to secure information which it may use to obtain “injunctive relief” against the board about the issuance of new convertible notes.  By the time the application was heard by the Primary Judge, an agreement had been reached with a new subordinated noteholder.  Therefore:

“Enares claimed it sought inspection because it was concerned that the Board members had breached their duties by the decision to issue new notes or that their conduct was oppressive within the meaning of ss 232 and 233 of the Act.”^[2]

The Full Court held that:

“The primary judge was correct to conclude that Enares was neither acting in good faith nor seeking inspection for a proper purpose within the meaning of s 247A of the Act. Her Honour correctly held that, in the circumstances of Nimble’s financial distress and the refinancing options available to it, there was no foundation for Enares’ alleged concerns that the members of the Board breached any duty or acted other than in the interests of the shareholders as a whole in refinancing the subordinated debt by issuing new notes.”^[3]

[Bold is our emphasis]

Who has the onus of establishing “good faith” and “proper purpose”?

The Full Court concluded in Enares that section 247A requires the applicant to bear the onus of establishing that it is acting in good faith and for a proper purpose, citing paragraph 36 of Praetorin Pty Ltd v TZ Ltd [2009] NSWSC 1237 and page 602 of Intercapital Holdings Ltd v MEH Ltd (1988) 13 ACLR 595.^[4]  The Court said at [38] that:

“The proper purpose so identified must relate to each category of document which the applicant seeks to inspect: Rasley (Singapore) Pte Ltd v Financial & Energy Exchange Ltd [2020] FCA 1462 (Rasley v Financial & Energy Exchange): such that, if the terms of the application are cast too widely, there is a real risk of undermining the veracity of the asserted purpose.“^[5]

The Court said at [39] that whilst there had been many statements attempting to fully describe the expression “acting in good faith and for a proper purpose“, they are generally concerned with the following two (2) matters:

• firstly, whether the applicant’s asserted purpose of inspection is legitimate, given the nature of the statutory relationship between the shareholder on the one hand and the company and its directors on the other; and
• secondly, whether the applicant has established by admissible evidence that it, in fact, has the asserted purpose and that the application has been made to advance it.  In other words, is the applicant pursuing the asserted purpose in good faith?

The requirement for a legitimate purpose for inspection

A useful discussion of the principles from the case law relating to a “legitimate purpose” for inspection is contained in Enares at [40]–[41], where it was said that:

“The requirement that inspection is sought for a ‘proper purpose’ requires that the asserted purpose of the application for inspection is related to the rights of the applicant qua shareholder of the company: Ingram (As Trustee For The Ingram Superannuation Fund) v Ardent Leisure Ltd [2020] FCA 1302 [74] (Ingram v Ardent Leisure Ltd). … The intended purpose of seeking inspection must relate to the shareholder’s rights and interests in that capacity in relation to the company or its directors.“^[6]

Proof of “good faith” and “proper purpose”

The Court at paragraphs [44]–[48] of Enares discussed the requirements for an applicant to establish that they are pursuing a legitimate purpose in good faith, concluding that:

“… in the ascertainment of whether the application is made in good faith consideration must be given to whether the applicant’s concerns are ‘real’ or ‘legitimate’ and this requires a more granular analysis of whether there is an objective basis or foundation for the concerns.  If there is no ‘case for investigation’ or the applicant’s issues are insubstantial or fanciful, or ‘artificial, specious or contrived’, the concerns, even if subjectively held, cannot form a basis for an application made in good faith.“^[7]

[Bold is our emphasis]

Therefore, for an applicant to be successful in proving that they are acting in good faith and with a proper purpose in seeking access to the books and records:

• the applicant must be able to articulate a basis on which it might be found that illegal, improper or otherwise undesirable conduct has occurred;^[8] and
• the issue raised must be “substantial and not fanciful” and not “artificial, specious or contrived”.^[9]

The Supreme Court of Queensland has also held that access to the company’s books and accounts under section 247A should not be used as an alternative to discovery:

“As a matter of principle, it ought to be accepted the s 247A authorisation to inspect the books of a company ought not to be in the form of a substitute inspection of documents pending litigation, however, as McPherson J emphasised in Claremont Petroleum the proper order depends upon the circumstances of the case.”^[10]

Furthermore, the Full Court of the Federal Court of Australia has clarified in an earlier case that access under section 247A is not as broad as discovery:

“The procedure under s 247A is not intended to be as wide-ranging as discovery so that the general rule is that inspection will be limited to such documents as evidence the results of board decisions, rather than all board papers leading to decisions, but there may be occasions when it is proper to permit inspection of board papers: Acehill at [31].“^[11]

Is seeking access for the purpose of valuing a minority shareholder’s shares legitimate?

No case law has been identified that deals specifically with whether seeking access under section 247A for the purpose of validating a valuation undertaken by a professional constitutes a proper purpose.  However, oppression is a legitimate purpose.  O’Sullivan J in M.J.M Holdings (NT) Pty Ltd v Australian Marine Contractors [2024] FCA 691, at [93], states that:

“A predominant purpose directed at determining whether there has been a breach of director’s duties or whether there has been oppressive conduct is within the scope of a proper purpose.”

Concluding comments on the operation of section 247A

Section 247A of the Corps Act allows the Court to make an order authorising a shareholder, with a proper purpose and acting in good faith, to inspect a company’s books and records.  “Proper purpose” means a purpose related to the applicant’s rights and interests in relation to the company, in their capacity as shareholder.  The applicant bears the onus of establishing good faith and proper purpose, which are both determined objectively.

Links and further references

Legislation

Corporations Act 2001 (Cth)

Cases

Acehill Investments Pty Ltd v Incitec Ltd [2002] SASC 344

Furniss v Blue Sky Alternative Investments Limited (No 3) [2021] QSC 230

Enares Pty Limited v Nimble Money Limited [2022] FCAFC 126

Green v FP Special Assets Ltd & Ors (1991) 9 ACLC 75

Ingram (As Trustee For The Ingram Superannuation Fund) v Ardent Leisure Ltd [2020] FCA 1302

Intercapital Holdings Ltd v MEH Ltd (1988) 13 ACLR 595

M.J.M Holdings (NT) Pty Ltd v Australian Marine Contractors [2024] FCA 691

Mesa Minerals Limited v Mighty River International Limited [2016] FCAFC 16

Praetorin Pty Ltd v TZ Ltd [2009] NSWSC 1237

Rasley (Singapore) Pte Ltd v Financial & Energy Exchange Ltd [2020] FCA 1462

Residues Treatment & Trading Co Ltd & Anor v Southern Resources Ltd & Ors (1989) 7 ACLC 608

Style Limited, in the matter of; Merim Pty Ltd v Style Limited [2009] FCA 314

Further information about shareholder rights

If you are a shareholder and need advice on your rights to inspect a company’s books and records, contact us for a confidential and obligation-free discussion:

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] Green v FP Special Assets Ltd & Ors (1991) 9 ACLC 75 at 81.

[2] Enares Pty Ltd v Nimble Money Ltd [2022] FCAFC 126 at [4].

[3] Enares Pty Ltd v Nimble Money Ltd [2022] FCAFC 126 at [5].

[4] Enares Pty Ltd v Nimble Money Ltd [2022] FCAFC 126 at [37] and [110].

[5] Enares Pty Ltd v Nimble Money Ltd [2022] FCAFC 126 at [38].

[6] Enares Pty Ltd v Nimble Money Ltd [2022] FCAFC 126 at [40].

[7] Enares Pty Ltd v Nimble Money Ltd [2022] FCAFC 126 at [48].

[8] Rasley (Singapore) Pte Ltd v Financial & Energy Exchange Ltd [2020] FCA 1462 at [28].

[9] Style Limited, in the matter of; Merim Pty Ltd v Style Limited [2009] FCA 314 at [66]–[67].

[10] Furniss v Blue Sky Alternative Investments Limited (No 3) [2021] QSC 230 at [14].

[11] Mesa Minerals Limited v Mighty River International Limited [2016] FCAFC 16 at [22].

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