A Director’s Access to Company Books During Personal Litigation
Being appointed as a director of a company is not something you choose to do lightly. Accepting a role as a director brings with it many statutory and fiduciary obligations which, if not complied with, can see the director personally liable for their actions and potentially company debts. However, when a director becomes involved in personal litigation, often as a result of breaching these statutory and fiduciary obligations, questions often arise around their ability to access company records which may be vital in successfully litigating the matter.
A director’s right to access the books of a Company
A director has a common law right to access all company information necessary to discharge their statutory and fiduciary obligations which are owed to the company1. In addition to this common law right to access, a director is also able to access financial records of a company under section 290 of the Corporations Act 2001 (Cth) (the Act).
As both of these common law and statutory rights only provide for access to limited company documentation while a director is discharging their duties, if a director or former director finds themself, or expects to find themself, involved in litigation, accessing company documents may be necessary.
Section 198F of the Act states that a director of a company, or a person who was a director within the last seven years, may inspect the books of a company 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 person has reason to believe will be brought against them.
Upon the inspection of books under section 198F, a director is entitled to make copies of the books for the purpose of the legal proceedings.
Books of the Company
The Act broadly defines ‘books’ to include;
- a register;
- any other record of information;
- financial reports/records; and
- a document.
For the purposes of section 198F of the Act, the phrase ‘books of the company’ extends to any books, as defined by the Act, in the company’s possession2. While this allows for a fairly extensive entitlement to documentation, the onus is on the requesting party to demonstrate the books of the company to which a director is requesting to inspect, are material to the current or imminent legal proceeding to which the request relates3.
A current director’s right to inspect books under section 198F of the Act specifically excludes the right to inspect the company’s financial records, whereas a former director’s right to inspect books under section 198F includes the right to inspect financial records. However, this distinction has little practical effect as a current director has a statutory right to access financial records under section 290 of the Act.
The Director Must be a Party
In certain circumstances, particularly where there has been a breakdown in the relationship between the directors of a company, a director may attempt to invoke section 198F of the Act to inspect books in order to build a case to pursue a statutory derivative action against their co-director for breaches of duties owed to the company. Courts have found that this is not a proper invocation of section 198F of the Act.
A director or former director who, as a director, former director or shareholder, proposes to bring a derivative action in the company’s name, is not considered to be personally a party to the derivate legal proceedings4. The rationale behind this distinction is that, despite the director or former director’s involvement in seeking leave for the proceeding to be commenced, ultimately, it is the company that is the party seeking relief, not the director or former director personally.
Company Unreasonably Refuses to Allow Inspection
In the event that a company refuses to grant a proper request to inspect books under section 198F, the director may apply to the court for an order under section 1303 of the Act to compel the company to allow the director the opportunity to inspect the books in question.
If you’ve found yourself dragged into litigation and need some assistance in getting your hands on company documents, please contact our office.
- State of South Australia v Barrett (1995) 13 ACLC 1369, 1372, 1376;
- Oswal v Burrup Holdings Limited [2011] FCA 609, [19];
- Stewart v Normandy NFM Ltd [2000] SASC 344, [10];
- Boulos v Carter [2005] NSWSC 891 at [29].
Tagged in: company director, company financial records, corporations act, Corporations Act 2001