Under section 247A of the Corporations Act 2001 (Cth) the Court has a discretion to authorise a shareholder to inspect the company’s books and records if the Court is satisfied that the shareholder ‘is acting in good faith and that the inspection is to be made for a proper purpose’. If this threshold test is not satisfied, the Court’s discretion to make orders for inspection is not enlivened. The Full Court of the Federal Court analysed the threshold test under s247A in Enares Pty Limited v Nimble Money Limited [2022] FCAFC 126.
The purpose for an inspection order under s 247A must be related to the applicant’s rights as a shareholder. The applicant must establish with admissible evidence that their suspicions of breach of duty or oppression are objectively reasonable.
Legislation
Section 247A provides relevantly:
(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.
Case summary
Nimble Money Limited (Nimble) is an unlisted public company. In 2019 Nimble adopted a strategy to move to medium to long-term money lending. The company predicted a short-term downturn during this transition. The downturn was significantly worsened by the pandemic.
Enares Pty Ltd (Enares) was the larger of Nimble’s two major shareholders and held approximately 15% of the shares at the time of the dispute.
Nimble had reached an agreement to renew an existing debt facility. The agreement was conditional on either refinancing a subordinated debt or raising equivalent equity. The subordinated debt had been issued as “Series 13 Notes” and were held by Nimble’s two major shareholders.
Enares put a proposal to Nimble that the funds be raised by a rights issue of Nimble shares to existing members rather than a new issue of subordinated notes. Nimble did not accept the proposal. Nimble indicated that it would seek expressions of interest from key stakeholders once new directors had been appointed. Nimble then announced it had chosen to refinance the subordinated debt by issuing new notes rather than follow Enares’ preference.
Enares initially sought inspection of Nimble’s books for the purpose of securing information which it might use to obtain injunctive relief against regarding issuing of new notes. By the time the application was heard an agreement had been reached with new subordinated debt financiers to take new notes. Enares then claimed it sought inspection because it was concerned that Board members had breached their directors’ duties by the decision to issue new notes, or that the conduct was oppressive. Enares also claimed it was concerned about the value of its shareholding in Nimble. The primary judge refused the application to inspect the books and records on the basis that Enares was neither acting in good faith nor for a proper purpose within the meaning of section 247A. Enares appealed.
The Full Court of the Federal Court found that the primary judge was correct in refusing the application on the basis that Enares was not acting in good faith. The Full Court held there was no objective foundation for Enares’ alleged concerns that the Nimble directors breached any duty or acted other than in the interests of the shareholders as a whole.
Discussion of section 247A
The Full Court outlined the operation and nature of section 247A and stated that[1] :
Further, the Full Court held that authorities explicating the meaning of the phrase ‘acting in good faith and that the inspection is to be made for a proper purpose’ are generally concerned with either of two matters. First, whether there is a legitimate purpose for inspection and second, whether the applicant has established by admissible evidence that they in fact have that purpose, and that the application has been made to advance that purpose, which is an element of good faith. Both matters must be satisfied although they will regularly involve overlapping considerations.
Legitimate purpose for inspection
The requirement of a legitimate purpose means that the asserted purpose of the application to inspect must be related to the rights of the applicant in their capacity as shareholder. The Full Court recognised that ‘seeking inspection of documents in order to ascertain whether there has been a breach of a directors’ duty or whether oppressive conduct has been engaged in’[2], and the desire of a member to protect their investment, are legitimate and proper purposes. However, it is necessary to accept the ‘basic rule that shareholders do not ordinarily have access to the courts to challenge directors’ managerial decisions’[3]. Mere dissatisfaction with managerial decisions will not be a basis for an order under s 247A if the conduct is not oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a member under s 232.
Case for investigation
The Court explained that the second inquiry under s 247A requires the applicant to establish a case for investigation with admissible evidence. Establishing a case for investigation does not establish good faith, but failure to show a case for investigation means the applicant is not acting in good faith. Therefore, members who have no cause for concern cannot obtain an order under s 247A to simply ascertain whether there is cause for concern, or to satisfy themselves that no breach of duty has occurred. There must be ‘something akin to some tangible support for the concern being something beyond mere belief or assertion’[4], or a ‘reasonable suspicion of breach of duty’[5]. However, this does not require the applicant to establish a complete cause of action.
Exercise of the discretion
Once the Court is satisfied that the applicant is acting in good faith and that the inspection is to be made for a proper purpose, the court’s discretion to make the order is enlivened. The parties accepted that the exercise of the discretion turns on what a company ought to tell its shareholders. The Full Court referred to the apparent approval by Barrett J in Smartec Capital Pty Ltd v Centro Properties Ltd (2011) 83 ACSR 461 (Smartec) of comments:
The Full Court did not consider discretion under s 247A in detail in this case although it noted that the discretion is to be exercised in all the circumstances of the case and that satisfaction of the elements of good faith and proper purpose is likely to be ‘a not insignificant part of those circumstances’[7].
In Smartec Barret J identified other factors relevant to the Court’s discretion under s 247A. In that case Barrett J held that the court’s discretion under s247A is likely to be more sparingly exercised in the case of an ASX listed entity where the continuous disclosure regime is likely to greatly reduce the need for one investor to have access to company records to the exclusion of all other investors[8]. Accordingly, Barrett J limited the scope of the documents that the shareholder was entitled to inspect in that case.
Application of principles
The Full Court accepted that Enares’ stated purpose to investigate possible breaches of directors’ duties or oppressive conduct would be a proper purpose within s247A. It also accepted that the director of Enares subjectively had concerns about breaches of directors’ duties and oppressive conduct,
However, the Full Court upheld the primary judge’s finding that there was no sufficient objective foundation for those concerns. Enares had failed to articulate precisely how the conduct in question amounted to breaches of directors’ duties and oppressive conduct. Further, the Full Court upheld the primary judge’s finding that Enares’ asserted concerns had ‘an air of commercial unreality’ in circumstances where Nimble required additional funds as a matter of urgency. It followed that there was no case for investigation, good faith was not established and the discretion under s247A was not enlivened.
Nicola Nygh
14 February 2023
[1] Enares Pty Limited v Nimble Money Limited [2022] FCAFC 126 (Nimble Decision) at [36]-[38],
[2] Nimble Decision at [42].
[3] Nimble Decision at [43].
[4] Nimble Decision at [47].
[5] Nimble Decision at [48]
[6] Smartec Capital Pty Ltd v Centro Properties Ltd (2011) 83 ACSR 461 (Smartec) at [68] citing Bryson JA in Rowland v Meudon Pty Ltd (2008) 66 ACSR 83 at [41].
[7] Nimble Decision at [50].
[8] Smartec at [76]
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