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Focus: When can receivers resist inspection of company documents?

26 February 2013

In brief: Two recent decisions have considered the circumstances in which directors can inspect the books and records of a company in receivership, and the basis on which receivers can prevent this. Partner Philip Blaxill (view CV) and Lawyer Aparna Nanayakkara report.

How does it affect you?

  • The appointment of a receiver under a security interest given by a company does not strip the directors of all their powers and duties. Directors can act, but only in a way that does not threaten the interests of the security holder (ie the lender).
  • Consequently, directors have a right to inspect books and records of a company in receivership.
  • However, a director will not be permitted to inspect the books and records of a company if it would impede the receivers in the proper exercise of their functions, or will impinge prejudicially upon the security holder's position by threatening the assets that are subject to the security interest.
  • A receiver can claim legal professional privilege over documents relating to legal advice given to them in their capacity as receiver of a company, preventing the company and its directors from inspecting the documents. However, the court will require detailed evidence to support the claim of privilege.

The Oswal decision

Mr Oswal was a director of Burrup Fertilisers Pty Ltd (receivers and managers appointed) (the company). He sought orders permitting him to inspect several categories of the company's books and records under both the Corporations Act 2001 (Cth) and the general law. At first instance1, Mr Oswal was successful in gaining access regarding some, but not all, categories of documents.

Where a receiver is in control of a company, the receiver is entitled to the possession of its books and records, by virtue of the proprietary interests of the security holder (ie the lender); the receiver has no legal entitlement to the documents. The entitlement to possession enables the receiver to fulfil the role of administering the company and realising the assets so as to repay or reduce the debt to the security holder, but the entitlement to possession is not necessarily exclusive.

On appeal2, Mr Oswal did not challenge the findings of the first-instance judge in relation to his rights to inspection under the Corporations Act. The appeal focused on the general law rights of directors to inspect documents. The documents that were the subject of the appeal were created or received after the date the receivers were appointed, and included categories of documents that concerned actions taken, or might be taken, by the receivers regarding the assets that were the subject of the receivership.

The Court of Appeal upheld the decision of the first-instance judge, dismissing Mr Oswal's appeal and denying him access to certain categories of documents. The court noted that a director has a common law right to inspect documents of the company so that they may properly perform their duties. However, Mr Oswal did not have the right to inspect categories of documents that concerned the potential sales by the receivers of the company's assets or shares. Allowing him to inspect these documents could have threatened the proper administration of the receivership, or jeopardised the assets that were the subject of the charge under which the receivers were appointed, in circumstances where there was no suggestion they were conducting the receivership improperly.

The court commented that the relevant principle regarding the powers of a director in receivership is not that a director cannot do anything unless the receiver consents, but that the director has residual powers. These include the power to challenge the appointment of the receivers in the name of the company and to bring proceedings in the name of the company, provided that, in the course of the proceedings they institute, the directors do nothing that, in any way, threatens the lender's interests.

Consequently, there are circumstances where a director will be granted access to the company's books and records, as long as this does not encroach on the receiver's performance of their duties in selling the business's assets. Any inspection of documents by the directors should therefore not be forced upon the receivers, if access to such documents would unreasonably interfere with, or threaten, the assets that are the subject of the receivership, in circumstances where there is no basis for thinking the receivers are conducting the receivership improperly.

Supplementary reasons in Carey v Korda

In Carey v Korda3, the directors of certain companies in receivership claimed statutory rights of inspection of documents, which were related to legal work undertaken by solicitors upon instructions from the receivers. The receivers and the lender refused inspection, on the ground that they were privileged, with which the primary judge agreed.

The Court of Appeal in Western Australia set aside the primary judge's orders. While the court held that privilege could be claimed, it found that the receivers' affidavit evidence was insufficient to properly ground the claim for privilege regarding the solicitor's invoices.

It held that the matter be remitted to a judge, other than the primary judge, for:

  • rehearing and determination of the issue of the validity of the receivers' objection to the production of the documents, subject to the directors' application; and
  • further directions allowing the receivers to adduce further evidence on that issue and on other matters pertaining to its rehearing.

In conclusion, directors do have a right to company books and records. However, access to them is limited and cannot threaten the interests of the security holder. The law relating to privilege will continue to apply. However, receivers should ensure that they put on sufficient evidence to ground such a claim.

Footnotes
  1. Oswal v Barrup Holdings Limited [2011] FCA 609.
  2. Oswal v Burrup Fertilisers Pty Limited (receivers and managers appointed) [2013] FCAFC 9 (7 February 2013).
  3. [2012] WASCA 228.

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