A DIRECTOR’S STATUTORY RIGHTS OF INSPECTION OF ACCOUNTS

• Author: TERENCE TAN
• Published date: 01 December 1994
• Date: 01 December 1994
• Citation: (1994) 6 SAcLJ 118

INTRODUCTION

Information is thought to be the resource that will determine the rise and fall of nations and companies in the coming years. Within a company itself, access to information is important for management decision making. It is also highly important for decision making by shareholders. The information will be useful for them in making investment decisions like buying or selling shares or their derivatives1 in the company, and in relation to the stewardship function. Here the shareholders are deciding on the manner of exercising their rights at the general meeting to re-elect directors or to elect new persons. Subsidary decisions that might be made in relation to these would be whether to requisition a general meeting to remove the directors2, or whether to table a resolution at a general meeting that has been called by the company. In extreme cases, the shareholders with the necessary voting power may want to decide whether or not to pass a resolution to wind-up the company3 or to put it into judicial management4.

MEMBERS’ RIGHTS TO INFORMATION

How then do the members obtain the necessary information? The general rule is that the members have no statutory right to inspect documents belonging to a company. They do have limited rights of inspection of certain registers and documents. These registers include the minute books of general meetings5, the register of members6, the register of charges7, and the register of debenture holders8.

In addition, the members have a right to certain financial and other statements once a year9. These documents are the profit and loss account,

the balance sheet, the report of the directors. Notwithstanding the apparent detail required in the preparation and presentation of the accounts10, the fact remains that a lot of information is not revealed in these statements, for example, the profit and loss account shows the total sales figure. However, this does not show the details, for example, what goods were sold, at what price, at what mark-up, to which customers, on what terms as to delivery and credit. Because of this lack of detail in the entire accounts, it is possible for the directors of the company to engage in a whole range of illegal activities, including transfer pricing of goods to companies controlled by them, guaranteeing debts of other companies controlled and owned by them11.

The members’ right to information in often not much better than that of the general public. In the case of non-exempt private companies, the company must lodge an annual return with the Registry of Companies12. This annual return would include the profit and loss account and the balance sheet. These documents will then be available for inspection by the general public.

One method of safeguarding a member’s shareholding would be by the appointment of either himself or his representative to the board of directors13. By this method, the member or his representative would have access to the records of the company14. The article will next explore the rights to information of the directors as contrasted with the rights of members.

THE POSITION OF DIRECTORS

The directors are fiduciaries of the company. In most circumstances, they

tasked with the management of the company15 and are given control of the company’s property. An important issue in relation to the directors’ management power that is to be discussed here is the extent to which a director are able to obtain inspection of company documents against the will of his fellow directors. We must not assume that the board of directors is a homogenous group of persons who think alike and have identical interests. In many cases, where a company has different factions of shareholders, each faction may appoint certain directors to represent them. The Companies Act16 recognises this in Section 152(1) where it is provided that where a director of a public company is appointed to represent a particular class of shareholders or debenture holders, then a resolution to remove him shall not take effect until his successor has been appointed. (All further references to section numbers shall be to sections in the Companies Act, Chapter 50 unless otherwise stated). This article will proceed to explore the statutory rights of directors to inspection, its history, the extent and duration of these rights of inspection, the means of enforcing these rights and the judicial discretion in relation to enforcement.

HISTORY OF A DIRECTOR’S RIGHT OF INSPECTION

An early authority for a director’s right of inspection, Burn v London and South Wales Coal Co and Risca Investments Co17, accepted that a director had a common law right to see and take copies of documents belonging to his company. This right was not confined to inspection at the general meeting. This was in order that he might properly perform his duties. This view was followed in the case of Conway v Petronius.18

In the United Kingdom Companies (Consolidation) Act 1908, a right of inspection was given to creditors and members as regards the company’s register of mortgages. No specific right of inspection of any type was given to directors. Schedule 1 of the Act however set out Table A which contained articles for companies limited by shares (it is unclear if these were optional or compulsory). Regulation 103 of this Table declared that “The directors shall cause true accounts to be kept - of the sums of money received and expended by the company and the matter in respect of which such recepit and expenditure takes place, and of the assets and liabilites of the company”.

Regulation 104 provided that “The books of account shall be kept at the registered office of the company, or at such other place or places as the

directors think fit, and shall always be open to the inspection of the directors.” The words of this regulation are very similar to the words of our own s 199(3). In a later statute, the Companies Act 1928, s 39(2) contained a provision similar to Regulation 104. In addition, s 39(5) provided for criminal penalties for directors who failed to take reasonable steps to ensure compliance with the above two mentioned regulations. These provisions finally found themselves in s 147 of the Companies Act 1948. At present, they are found in s 222 of the Companies Act 1985.

RIGHTS OF DIRECTORS TO INSPECTION

By virtue of s 199(1) of the Companies Act, the directors must keep accounting and other records as will sufficiently explain the transactions and financial position of the company and enable true and fair profit and loss accounts and balance sheet to be prepared19. These records must be kept for a period of seven years from the date of completion of the transactions or operations to which they respectively relate. Furthermore, the records must be kept at the registered office of the company or at such other place as the directors think fit20. In addition, the records have to be at all times open to inspection by the directors21. This does not literally mean that the directors are entitled to inspect at all times, day or night. S 396 provides that where any document of a company is required to be open for inspection, then allowing inspection during the hours when the registered office is open will be sufficient. Under s 142, the registered office of a company must be open for at least three hours on an ordinary business day, Saturdays, weekly and public holidays excepted. A failure to allow inspection is arguably an offence under s 407 of the Companies Act. Besides the criminal sanction of a fine, there is also the threat of disqualification of the person concerned from acting as a director of the company since this would be an offence in relation to the management of the company22.

DOCUMENTS ENCOMPASSED WITHIN THE RIGHT OF INSPECTION

What exactly are the accounting and other records encompassed by s 199? In Berlei Hestia (NZ) Ltd v Fernyhough23, the order granted to the directors covered access to “all books of account, management accounts, working

papers, managerial reports, contracts, instruments of transfer, invoices, records and other documents relevant to the affairs and management of the company.

In Re South Queensland Broadcasting Holdings24, the court allowed inspection of ”the general and private ledgers of the company; the debtors and creditors ledgers, all cash books, journals and supporting documents; bank statements; copies of previous profit and loss accounts and balance sheets; copies of previous consolidated balance sheets and profit and loss accounts, copies of income tax returns and assessments together with adjustment sheets, and all relevant documents in support of the previously mentioned records”.

In Conway v Petronius25, the order referred to “all books of account, management accounts, working papers, bank statements, cheque stubs, contracts and invoices.” Based on Re South Queensland Broadcasting Holdings26, it would seem that what documents come within the term “accounting records” is a finding of fact which the appellate court would be slow to interfere with.

One issue that has not been discussed is whether the directors have a right of inspection of all company documents27 regardless of whether they are internal or external documents. The word “external” means that the documents impact on the company’s relations with outsiders like customers and suppliers, and government departments, while internal documents cover documents covering the internal workings of the company or documents between the company and insiders like the shareholders, directors and employees. Documents like employees’ employment contracts, share transfer forms and management reports are examples of internal documents. It is thought that since all theses documents do have a financial impact, and hence affect the financial statements referred to in s 199(1), a director will have the right of inspection over all these documents. As regards documents with no direct...