A recent decision of the Federal Court in London City Equities Limited v Penrice Soda Holdings Limited  FCA 674 illustrates the trend set by the courts in recent years to exercise the discretion under s247A of the Corporations Act in favour of shareholder claimants.
On the basis that it held 8% of the issued share capital of Penrice Soda Holdings Limited (Penrice), London City Equities (LCE) sought authorisation to inspect Penrice's books under ss 247A(1) and 247A(3) of the Corporations Act 2001 (Cth) (the Act). The books that LCE sought to investigate related to three areas of concern, namely:
- the potential non-disclosure or misleading disclosure of certain financial information and whether Penrice or one or more of the directors of Penrice was responsible for the said conduct
- whether in 2008 Penrice paid dividends other than from profits
- whether Penrice funded the defence of two of the directors of their positions on the board.
In order to decide whether to bring proceedings against the directors or against Penrice, LCE needed to assess whether it was capable of sustaining a claim against the directors (and which directors), as well as whether the directors would be able to satisfy a judgment in favour of LCE. LCE expressed concern as to whether the directors were covered for a claim against them and the monetary limit of such coverage.
LCE applied to the Federal Court for access to 15 categories of documents that dealt with the transactions and periods of time in which the directors exercised judgment relating to the areas of concern LCE sought to investigate. Included in the application was a reference to all documents "recording, referring or relating to Penrice's Directors and Officers insurance policies for the periods from 1 July 2008".
Sections 247A(1) and 247A(3) of the Act and recent common law trends
Pursuant to s247A of the Act, shareholders are entitled to apply for orders authorising them to inspect the books of a company provided the application is made in good faith and for a proper purpose.
Robertson J affirmed that the test for this requirement was whether there was a "case for investigation". He also noted that his discretion to make an order for inspection included discretion as to which of the books should be made available for that purpose. His Honour relied on Re Style Ltd; Merim Pty Ltd v Style Ltd (2009) 255 ALR 63 which enounced that books inspected should be limited to those that bear on, and are particularly relevant to, the purpose for which the inspection is sought.
His Honour further observed that where the case to investigate rests largely on the position of directors and their knowledge at certain points in time, it is not appropriate to merely confine the ambit of documents to be inspected to the results evidencing decisions of directors.
Penrice contended that the discretion under s247A of the Act should be exercised only where the inspection of documents concerns the investigation of the facts potentially in issue and not merely the financial position of the potential defendants.
In reliance on the decisions in Re Style Ltd; Merim Pty Ltd v Style Ltd (2009) 255 ALR 63 and Snelgrove v Great Southern Managers Australia Ltd (in liq) (receiver and manager appointed)  WASC 51, where shareholders were given access to inspect D&O policies, His Honour considered the scope and nature of the cover as relevant factors in any decision as to whether to initiate proceedings against the directors. As Le Miere J explained in Snelgrove, it is consistent with modern case management objectives that litigation not be wasteful and found that obtaining an understanding of the scope of liability cover available to directors and officers constituted a proper purpose under s247A.
Notwithstanding the challenging breadth and varying dates of the subject matter of the categories of documents sought to be inspected, His Honour found that the s247A application had been made in good faith and for a proper purpose.
Following a meticulous assessment of each of the 15 categories of documents requested by LCE, the Court found that 11 of those listed within the originating process bore on and were relevant to the purpose submitted by LCE. His Honour amended the scope of all of the categories of documents for which he made orders other than one which was not in issue, and further limited the time frames of the categories to ensure they were closer in proximity to the transactions and events the subject of LCE anticipated proceeding.
As to inspection of D&O policies, whilst judicial cognisance had been taken of Penrice's contention with the trend set in Re Style Limited and Snelgrove, the Court remarked that unless the approach was clearly wrong, consistency demanded an application of earlier decisions. Accordingly, orders were made authorising access to, and the inspection of Penrice's D&O policies.
This decision cements the trend in favour of shareholder claimants seeking to gain access to D&O insurance policies and in so doing exposes insurers to a magnet effect of litigants and litigation funders.
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