In the matter of Tolco Pty Limited

By Originating Process filed on 28 August 2014, the plaintiff Tom Folino-Gallo & Sons Investments Pty Limited (“TFGS”) sought orders under (CTH) Corporations Act 2001, s 247A, authorising it to inspect books and records of the defendant Tolco Pty Limited, in which it owns 50% of the issued shares.

Administrators were appointed to the defendant on 31 July 2015, shortly after the hearing, while judgment was reserved. Pursuant to Corporations Act 2001, s 440D, proceedings against the company were thereby stayed. Initially, the administrators took the position that no further steps should be taken in relation to the matter. TFGS submitted that s 440D did not stay the delivery of a reserved judgment, which it sought. Tolco by its administrators did not require a judgment, but left the matter in the hands of the court. In those circumstances, and being of the view that even if s 440D did not stay the delivery of a reserved judgment, it had the effect that no orders could be made without the administrators’ consent or the leave of the Court, delivery of judgment was deferred pending the outcome of the administration. However, there having been no further communication from the parties or the administrators, this judgment will indicate the decision of the Court without, at least at this stage, making formal orders.

Tolco was incorporated on 28 February 2000. It conducts an engineering and construction business from Port Kembla. TFGS claims to have had an interest in Tolco since its inception, initially as a “silent partner”. As a result of the then only registered shareholder and director, Mr Gabriel Zulian, denying this in late 2011, TFGS commenced proceedings (“the 2012 proceedings”), which were settled upon terms that included the issue to TFGS of a share representing 50% of the shareholding. Consequently, a share was issued to TFGS on 11 October 2013, and since then TFGS and Mr Zulian have each held one of the two issued shares in Tolco. Mr Zulian remains the sole director and secretary of Tolco.

Since the settlement of the 2012 proceedings and becoming a registered shareholder, TFGS has sought access to various documents of Tolco which, until these proceedings were instituted, was refused. By its application, TFGS sought authority to inspect:

In addition, Tolco sought leave at the hearing to amend the originating process, to add a further category:

Corporations Act, s 247A, relevantly provides as follows:

As defined in Corporations Act, s 9, “books” includes a register, any other record of information, financial reports or financial records, however compiled, recorded or stored, and a document. If, inspection having been authorised, it is refused, the court can then make an order under Corporations Act, s 1303, compelling immediate inspection. [1]

As a member of Tolco, TFGS has the requisite standing to apply for an order under s 247A. The essential issue is whether the Court is satisfied that TFGS is acting in good faith and that the inspection is to be made for a proper purpose. TFGS’s purpose may be ascertained, in respect of the various categories of documents described in the application, from its submissions and the evidence of its director, Mr Folino-Gallo.

Paragraphs 1(a) through (d) of the application relate to Mr Zulian’s loan account, and a dividend declared as at 30 June 2012. That loan account has had credited to it a dividend declared with effect from 30 June 2012. TFGS is concerned that the dividend may have been declared in breach of Corporations Act, s 254T, and thus that Mr Zulian’s loan account may have been inappropriately credited. In addition, TFGS wishes to verify any other transactions on his loan account. Tolco submits that, apart from the 30 June 2012 dividend, there is no evidence of any matter which would require investigation in respect of the loan account; that TFGS was (on 10 October 2014) provided with the date on which the accounts were approved, so that paragraph (b) is of no further utility; that the contention that the bad debts should all have been written off in 2012 is speculative; and that as the plaintiff’s expert has already opined that the dividend should not have been declared, no inspection of documents is necessary.

Paragraphs 1(e) through (g) relate to dealings between Tolco and Tolco Port Kembla (“Tolco PK”), a company that operates from the same address and uses the same telephone number but is wholly owned by Mr Zulian, and to which it appears that a standard payment of $55,000 per month has been remitted by Tolco over several years. There is a suggestion that Tolco has paid substantial sums for machinery that is not reflected in its current assets, but may be held by Tolco PK. If so, Tolco may have a claim in respect of that machinery against Tolco PK and/or Mr Zulian. Tolco objects that these categories are unlimited in time and exceedingly broad in their terms, and that the supporting allegations that Tolco PK appears to be the same business as Tolco, and expressions of concern about profit or asset stripping, are mere unsubstantiated assertions.

Paragraphs 1(h) through (j) of the application relate to dealings between Tolco and Lighteng, which appears to have billed Tolco $197,476 between 26 September 2004 and 28 November 2004, and $131,507 between February to March 2010. Lighteng apparently provided administrative staff to Tolco between 2003 and 2013. TFGS contends that in circumstances where a substantial part of administrative employment was contracted out, it will be necessary to investigate the dealings between Tolco and Lighteng to understand labour costs and the accounts. Tolco objects that these categories are unlimited in time, exceedingly broad and in the nature of impermissible discovery; that as Mr Folino-Gallo had already been able to form the view that the payments to Lighteng were “out of proportion” and “not within acceptable variances”, there was no requirement for inspection of documents; and that merely wanting to investigate, like general curiosity, was insufficient reason for making an order. [2]

Paragraphs 1(k) and (l) relate to documents concerning the acquisition by Tolco of the business and assets of its predecessor under a deed of company arrangement (“DOCA”) dated 1 March 2000, which were as at 3 December 1999 valued at $1,127,245 market value and $639,126 realisable auction value, but do not appear in Tolco’s balance sheet. Tolco has explained that the assets were the subject of a sale and lease-back transaction between Tolco and GE Capital and that there is nothing to suggest that this was irregular. TFGS contends that insufficient detail has been provided to sustain this. TFGS wishes to investigate the documentation to ascertain what, if any, assets should be held by Tolco. Tolco submits that it has been explained that there was a sale and lease-back to GE Finance in April 2000; that no objective basis for intervention is established; and that the expressed concern that the DOCA assets may never have been received by Tolco is no more than speculation.

Paragraph 1(m) seeks the memorandum and articles. These were provided to TFGS on 20 May 2015.

Paragraph 1(n) of the application, sought to be added by amendment, relates to a suggestion that Tolco’s resources – in particular, employees and contractors – have been used otherwise than for the benefit of Tolco. Tolco objects that this amendment is late, and that the category is oppressively wide, and in the nature of discovery and fishing.

Both parties referred to the judgment of Debelle J in Acehill Investments Pty Ltd v Incitec Ltd [3] in which his Honour distilled from the cases the following propositions relevant to the exercise of the discretion to authorise inspection under s 247A, to which reference has frequently been made in this context [4] (citations omitted):

Those propositions embody, as it seems to me, three main considerations: first, that the applicant must demonstrate that it is acting in good faith and that the inspection is to be made for a proper purpose, which is judged objectively; secondly, that the procedure is not intended to be in the nature of discovery; and thirdly, that the remedy is in any event discretionary.

The delineation of proper from improper purposes is assisted by a comparison of cases in which proper purpose has been established and those in which it has not. [5] The following have been accepted as proper purposes:

Inspection has been refused where the purpose has been:

From that comparison, it emerges – perhaps unsurprisingly – that authority to inspect has been refused where the purpose is unrelated to the interests of the member qua member, or savours of an abuse of process, but has been granted where the purpose is connected with the member’s interest qua member and is not vexatious.

TFGS, by its director Mr Folino-Gallo, says that he is contemplating an application for leave to bring proceedings on behalf of and in the name of Tolco in respect of any reasonably available cause of action against any person; that he is concerned to ascertain whether there has been “asset or profit stripping”, to “verify” Mr Zulian’s loan account and investigate whether the 30 June 2012 dividend was paid in breach of Corporations Act, s 254T; and to ascertain the alternatives available to him to exit his investment in Tolco. TFGS submitted that it was not required to identify the precise case of misconduct or maladministration that it seeks to investigate, and that it was sufficient that it wished to “investigate the books and records relating to a limited number of unusual and suspicious transactions and dealings…so as to permit our client and its accounting and legal advisers to understand the detail of these transactions”. Those purposes are plainly connected with TFGS’s interest as a member and are prima facie proper purposes.

However, Tolco submitted authority to inspect should be refused, on the grounds that:

At the core of Tolco’s first objection was the proposition that TFGS must establish “some reasonable ground for believing that misconduct or maladministration (or whatever else is suggested” or “past or future wrongful or other undesirable conduct” had taken place, on some objective basis). For this proposition, Tolco invoked Smartec (at [64], citing Praetorin at [39] to the effect that there needs to be ‘some objective basis’ for intervention); Praetorin (at [94], to the effect that the requirement that before granting preliminary discovery the court must be satisfied that the applicant may be entitled to make a claim for relief means that there must be some tangible support that takes the existence of the alleged right beyond mere ‘belief’ or ‘assertion’ by the applicant); and Motasea (at [51], [20] to the effect that in an application by a director under Corporations Act, s 198F, the factual background must be established by more than unsubstantiated assertion, a mere desire to investigate something being insufficient).

However, in the context of a member’s inspection under s 247A, the principles applicable on applications for preliminary discovery [Praetorin at [94]] or applications by directors under s 198F (which provides that a director may inspect the books of the company for the purposes of a legal proceeding to which the person is a party; or which that person proposes in good faith to bring; or which that person has reason to believe will be brought against him or her) [Motasea at [51]; Boulos at [31]] are of limited relevance, because such applications are necessarily ancillary to pending or contemplated proceedings for substantive relief, whereas authority for a member to inspect documents under s 247A does not depend on there being any pending or contemplated proceedings. As Barrett J observed in Smartec, the words "in good faith" and "for a proper purpose" in s 247A are not confined by reference to some cause of action or legal wrong, but are at large. [21] The touchstone of the discretion is “what the court ought to require that the company tell its shareholder”. [22] While it is a relevant consideration that there is a specific dispute rather than general dissatisfaction with management, an application should not be necessarily be refused because it is grounded on general dissatisfaction with management, and the extent and value of the applicant’s personal interest is a relevant consideration. [23] Thus, I do not accept that an order under s 247A can be made only where some reasonable ground can be established, on an objective basis, for believing that there has been or will be some particular misconduct, maladministration or other wrongful or undesirable conduct.

While the evidence and the submissions, both written and oral, tended to traverse the various categories on an issue by issue basis, in this case it is helpful to take a more general view. In this case, the size and nature of the applicant’s interest, mentioned by Bryson AJ in Rowland v Meudon as a relevant consideration, is of considerable significance. TFGS holds 50% of the issued capital in Tolco, which is a closely held company – an incorporated quasi-partnership. It became a registered shareholder following a dispute as to whether it was in effect a silent partner; the outcome of the 2012 proceedings reflected substantial success for TFGS in that contention. The only director is the other shareholder, who had denied that TFGS had that interest. TFGS now entertains concerns that, through declarations of dividend, loan account transactions, intercompany dealings and use of employees and contractors, Mr Zulian and/or his associates may have obtained benefits from Tolco in excess of those to which he was lawfully entitled, to the detriment of TFGS. In order to ascertain whether there is substance in those concerns, TFGS desires to inspect books of Tolco.

There is an enormous difference in this context between the position of a small shareholder in a large public listed company, where there are many protective governance measures in place, with that of a 50% shareholder in a small private company in which the sole director is the other 50% shareholder. In the former situation, the expectation of the maintenance of an informed market and investor body is underwritten by the continuous disclosure regime which is administered by ASX; the need for a single investor to have access to company documents is likely to be greatly reduced by the existence of that regime. [24] In the latter situation, however, there is no such regime, and a prudent shareholder would periodically inspect the company books, and a reasonable director ought to allow it – there is effectively no other means by which the shareholder can exercise due diligence in respect of the investment. In the context of Tolco’s history and ownership, it ought to make its books and records readily and extensively available to its 50% shareholder TFGS, having vindicated its shareholding, to review to the extent it wishes the conduct of the company affairs under the management of the sole director.

However, the form of orders sought by TFGS savours of imposing on Tolco an obligation in the nature of discovery. The function of an order under s 247A is to authorise a shareholder to inspect a company’s books – not to require a company to undertake an exercise of discovery. [25] Authority to inspect books of a company does not involve imposing on the company an obligation to examine its own books to form a judgment whether particular documents do or do not relate to a particular issue or subject matter. Orders under s 247A should be framed so as to identify particular books or classes of books (such as minutes, cash books, wages books, correspondence registers, cheque books, or MYOB records), for defined periods where appropriate, rather than issues or topics to which documents may relate – since the latter impermissibly requires the company to undertake an exercise in the nature of discovery. Only paragraph (m) of the orders sought does this, and the documents referred to in it have already been provided.

My conclusions may be summarised as follows. In the context of Tolco’s history and ownership, it ought to make its books and records readily and extensively available to its 50% shareholder TFGS, having vindicated its shareholding, in order that TFGS may review, to the extent it wishes to do so, the conduct of the company’s affairs under the management of the sole director. However, the form of orders sought by TFGS savours of imposing on Tolco an obligation in the nature of discovery. Accordingly, while I would be disposed to make an order under s 247A authorising TFGS to inspect books of Tolco, I would not make an order in the form sought in the application. If the application is to be pressed, and subject to the impact of any statutory stay, the plaintiff should bring in short minutes more appropriately specifying the books which it wishes to inspect, in a form which identifies the relevant books or classes of books, and does not require the defendant to undertake a process akin to discovery.

Having published these reasons, my only order is: