The Scope Of A Director s Right To Inspect Company Accounts

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1 The Scope Of A Director s Right To Inspect Company Accounts Introduction A director of a company has the right, under section 199 of the Singapore Companies Act and common law, to inspect the company s accounting documents. However, this right is subject to certain limitations. In Hau Tau Khang v Sanur Indonesian Restaurant Pte Ltd and another [2011] SGHC 97, Steven Chong J in the High Court, on appeal from the decision of the Assistant Registrar below, had occasion to explore the scope of the right to inspect. The Respondent in the appeal submitted that the right to inspect would be displaced where it was exercised for a collateral purpose not pertaining to the discharge of the director s duties, while the Appellant took a narrower view, submitting that the right would only be displaced where its exercise would be injurious to the company. Chong J agreed with the Respondent s formulation of the scope of the right to inspect, finding it more consistent with existing case law and the underlying purpose of the right to inspect. Here, the Appellant applied to exercise his right to inspect the accounting documents of the company in which he was managing director. His purpose of inspection was to defend against an intended derivative action to be instituted against him by another director for breach of duty arising from certain discrepancies in the accounts. The Court held that the Appellant s purpose for invoking the right to inspect was related to the discharge of his duties as director, and thus allowed his application. The Respondent was represented by Adrian Wong and Nelson Goh of Rajah & Tann LLP, as counsel for instructing solicitors, M/s Andrew Chua & Co. Brief Facts (1) The Appellant and Respondent were co-directors and shareholders of the Sanur group of companies ( the Companies ). (2) After a forensic examination of the accounts of the Companies in his possession, the Respondent applied for leave of court to commence a derivative action against the Appellant for alleged breaches of fiduciary duties based on financial irregularities. 1 Rajah & Tann LLP

2 (3) In response, the Appellant, who was the managing director of the Companies, applied under section 199(3) of the Companies Act ( section 199(3) ) to exercise his right as director to inspect the Companies accounting documents. He also applied for specific discovery of the Companies documents and accounts. (4) The Assistant Registrar dismissed both applications. The Appellant appealed against both Issues decisions. Steven Chong J s decision focussed mainly on the application under section 199(3) since both applications involved the same set of documents. It was accepted by the parties that the Appellant s purpose in exercising his right to inspect was to defend against the Respondent s intended action for breach of fiduciary duties. The Court thus had to determine the scope of the Appellant s right to inspect the Companies accounting documents under section 199(3), and whether the Appellant s purpose in exercising his right to inspect was a legitimate one. Holding of the High Court (Steven Chong J) Scope of section 199(3) Section 199(3) states that a company s accounting records shall at all times be open to inspection by the directors. Even though the right to inspect has been described as an absolute right in case law, the Court acknowledged that it was still subject to certain limitations. The Respondent submitted that the right would be displaced where it was exercised for any collateral purpose not pertaining to the discharge of the director s duties. (ii) The Appellant took a narrower view submitting that the right would only be displaced where its exercise would be injurious to the company. The Court eventually agreed with the Respondent s formulation as regards the scope of the right to inspect. While it is clear that the right to inspect will be refused when it will cause injury or detriment to the company, it cannot be the only restriction (as contended by the Appellant). The right can also be displaced if the director intends to use it for any purposes collateral to the discharge of his director s duties. 2 Rajah & Tann LLP

3 (ii) This is in keeping with existing authority. Notably, the High Court approved of the seminal English Court of Appeal decision in Oxford Legal Group Ltd v Sibbasbridge Services plc and anor [2008] EWCA Civ 387 ( Oxford Legal ) cited by the Respondent. (iii) Further, it is consistent with the fact that the right to inspect was conferred on directors to facilitate the discharge of all director s duties. Nonetheless, the scope of the right to inspect is still very wide. The burden of proving that the right cannot be invoked lies on the party opposing the right, and the threshold of proof is high. (ii) The right to inspect need not be strictly exercised in relation to director s duties pertaining to company accounts; it can be related to the discharge of all director s duties. (iii) The right is not restricted to the performance of present and future duties as a director. Application under section 199(3) On the facts, the Court found that the Appellant s purpose of exercising the right to inspect did not bring him outside the scope of the right. Even though his intention was to prove he had not acted in breach of his director s duties, it was still related to the discharge of his duties. The Court distinguished the circumstances from the facts in Oxford Legal, where it was found that the right to inspect had been exercised for improper purposes. In Oxford Legal, the director was exercising his right not in furtherance of his obligations as director, but to safeguard his interest as shareholder. (ii) The director in Oxford Legal would not have obtained the documents he sought during discovery, and could thus be said to be subverting the discovery process. The Appellant here did not face any similar restriction. Therefore, the Appellant s application for inspection under section 199(3) was allowed. Application for specific discovery Although there was no need to consider the application for specific discovery (since the documents were already found to be available for inspection by the Appellant under section 199(3)), the Court went on to explain why it would have disallowed the application. 3 Rajah & Tann LLP

4 The Court will not order specific discovery before general discovery unless it is necessary or desirable. The applicant must show exceptional circumstances to justify discovery at that stage of proceedings. Here, the Appellant had not shown such exceptional circumstances. It argued that specific discovery would aid the Court in deciding whether to grant the Respondent leave to commence the derivative action. However, the Court found that the Respondent s allegations extended beyond financial irregularities in the accounts, and could not be summarily addressed even with specific discovery. Specific discovery would not save time and costs, and the application would thus be rejected. Concluding Words This decision clarifies the scope of a director s right to inspect company accounting documents. The extent of a director s right to inspect has been acknowledged as being rather wide; he need not furnish reasons before exercising the right, and in the absence of proof to the contrary, he is assumed to be acting for the benefit of the company. However, this judgment confirms that the central purpose of the right to inspect is the fulfillment of the director s duties, and that the right must thus, at the very least, be exercised in relation to these duties. The exceptions to the absolute right cannot be confined solely to acts which may cause injury to the company. 4 Rajah & Tann LLP

5 Contacts Adrian Wong Partner D (65) F (65) adrian.wong@rajahtann.com Nelson Goh Associate D (65) F (65) nelson.goh@rajahtann.com Please feel free to also contact the Knowledge and Risk Management Group at eoasis@rajahtann.com Rajah & Tann LLP is one of the largest law firms in Singapore and Asia, with representative offices in Shanghai and Vientiane, as well as an associate office (Kamilah & Chong) in Kuala Lumpur. As a full service regional law firm, our knowledge, resources and insight can be your business advantage. Rajah & Tann LLP is firmly committed to the provision of high quality legal services. It places strong emphasis on promptness, accessibility and reliability in dealing with clients. At the same time, the firm strives towards a practical yet creative approach in dealing with business and commercial problems. The contents of this Update are owned by Rajah & Tann LLP and subject to copyright protection under the laws of Singapore and, through international treaties, other countries. No part of this Update may be reproduced, licensed, sold, published, transmitted, modified, adapted, publicly displayed, broadcast (including storage in any medium by electronic means whether or not transiently for any purpose save as permitted herein) without the prior written permission of Rajah & Tann LLP. Please note also that whilst the information in this Update is correct to the best of our knowledge and belief at the time of writing, it is only intended to provide a general guide to the subject matter and should not be treated as a substitute for specific professional advice for any particular course of action as such information may not suit your specific business and operational requirements. It is to your advantage to seek legal advice for your specific situation. In this regard, you may call the lawyer you normally deal with in Rajah & Tann LLP or the Knowledge & Risk Management Group at eoasis@rajahtann.com. 5 Rajah & Tann LLP