To manage a company and discharge their duties, directors need access to company information. Tension between directors can arise about what access they can have to company books, particularly in the context of a dispute at board level. However, directors have statutory rights and common law rights to access company books. This article summarises those rights and briefly discusses what happens if they are ignored.
What are 'books'?
'Books' is defined in the Corporations Act 2001 (Cth) to include:
- a register;
- any other record of information;
- financial reports or financial records; and
- a document.
What rights of access does a director have to inspect company books?
As with many issues related to the internal management of a company, the first place to look is the company's constitution. It may say something about rights of directors' rights to access certain company records. However, the constitution will not deal with all rights of access.
Proceedings - current or contemplated
Section 198F(1) of the Corporations Act permits a current director to inspect the books (other than its financial records) of the company at all reasonable times for the purpose of a legal proceeding:
- to which the director is a party;
- that the director proposes in good faith to bring; or
- that the director has reason to believe will be brought against them.
Former directors have similar rights for 7 years after they cease to be a director, and in that case, the right extends to the company's financial records, as set out in section 198F(2) of the Corporations Act.
Section 290 of the Corporations Act permits a director to access 'financial records' at all reasonable times.
'Financial records' are defined in the Corporations Act to include:
- invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes and vouchers; and
- documents of prime entry; and
- working papers and other documents needed to explain: (1) the methods by which financial statements are made up; and (2) adjustments to be made in preparing financial statements.
The right to inspect financial records is lost once a director ceases to be a director (except the right under 198F(2) discussed earlier).
Right to inspect financial records in receivership
Directors can also inspect financial records kept by a managing controller of property of a company e.g. a receiver, pursuant to section 421(2) of the Corporations Act. Those are such financial records the managing controller is required to keep as correctly record and explain all transactions that the managing controller enters into as the managing controller.
Common law right of access
Directors also have a common law right to access company information, which existed before the introduction of statutory rights in the Corporations Act and its predecessor.
In Geneva Finance Ltd; Quigley (Receiver and Manager Appointed) v Cook (1992) 7 ASCR 415, his Honour Owen J summarised some of the principles developed through the common law, which remain relevant today, including:
- A director owes fiduciary duties to the company.
- A director has a right of access to the books and records which relate to the affairs of the company. The right is an incident of the office of a director and exists so that a director might properly perform his or her duties.
- The right of access to documents generally (as opposed to accounting records) arises at common law and the court has a residual discretion whether or not to order inspection.
- The position in relation to access to accounting records is specifically dealt with in s 289(9) of the Corporations Law (the predecessor to section 290(1) of the Corporations Act) but the position may not be materially different.
- The right of access to documents carries with it a right to take copies and a right to engage agents to carry out the inspection where skilled assistance is necessary and provided that the duties of confidentiality which the director owes will not be compromised.
- Generally speaking, a court will presume that a director intends to act in a way consistent with his or her duties and not to abuse the confidence reposed in the director by using information for an improper purpose. A director does not have to demonstrate a "need to know" or furnish reasons before exercising the right of access to documents.
- In the absence of clear proof that a misuse of power is involved (the onus of which lies on those asserting it) the court will be slow to prevent the exercise by a director of a right of the nature described.
If a receiver has been appointed to company property, the receiver would be justified in refusing to grant access to the documents where to do so would impede the receiver in the proper exercise of his or her functions or would impinge prejudicially upon the position of the debenture holder by threatening or imperilling the assets which are subject to the charge.
What if the right to inspect is denied?
If a director is denied the right to inspect books of a company, in breach of the provisions of the Corporations Act referred to above, he or she may seek order of the Court compelling immediate inspection of the book or the supply of a copy of the relevant book under section 1303 of the Corporations Act.
Sections 290(2) and (4) of the Corporations Act also empower the Court to make any order it considers appropriate to grant or limit access for inspection of company financial records.
Likewise, the Court can grant relief to directors denied their general law right to inspect books of the company.
Directors have rights of access to company books. Those rights are not unlimited, however, they can be quite broad.
Court applications about access to company books can be costly and time consuming.
In circumstances where access is a statutory or general law right, it should be granted upon request by a director. However, it may not be immediately apparent whether a right to access exists, even to experienced company directors. In that case, legal advice should be sought to avoid a costly argument in court.
For further information please contact:
Marc Baddams, Partner
Phone: +61 2 9777 8395
Catherine Li, Graduate at Law
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.