A recent decision by the Full Court of the Federal Court sheds light on what amounts to good faith and a proper purpose when a shareholder applies to inspect company books.
The Decision
A major shareholder of a finance company applied to the Federal Court under section 247A of the Corporations Act 2001 to inspect the company's books in the context of refinancing. The primary judge dismissed the application, the shareholder appealing on the ground that, amongst other things, the primary judge erred in finding that there wasn't an issue to investigate in relation to possible claims for breach of directors duties and oppression.
The Full Court dismissed the appeal finding that, amongst other things, the material before the primary judge didn't result in there being an issue to investigate and that the shareholder could not, therefore, satisfy that it was acting in good faith in bringing the application. It was found that there was no foundation for the shareholder's concerns about the board's financing decision or decision-making process.
Comment
The decision reinstates the importance of having a proper purpose and acting in good faith when a shareholder applies to inspect company books.
Having a "case to investigate" is an element of good faith and this often excludes applications where shareholders have no foundation for concerns about a company's operation and who are instead only seeking to establish if something wrong may have happened.
Shareholders, therefore, need to consider whether they have substantiated concerns about a company's operation before applying to inspect a company's books.
Enares Pty Limited v Nimble Money Limited [2022] FCAFC 126