When can a company refuse access to accounting records to a director?

The right of a director to inspect a company’s accounting records is an issue which commonly arises. My colleague Iwan Emmanuel’s article ‘What Rights Do Directors Have To Access Company Information?’ can be found here, and is one of our most frequently visited blogs.

Iwan makes the point that the right to inspect only applies in order to enable the director to carry out their duties. So, what if the request to inspect those documents by a director is contested by the Company?

Section 388 of the Companies Act 2006 provides

(1) A company's accounting records—

(a) must be kept at its registered office or such other place as the directors think fit, and

(b) must at all times be open to inspection by the company's officers.

What’s the purpose of the request for inspection?

An important case on this is Oxford Legal Group Ltd v Sibbasbridge Services plc [2008] EWCA Civ 387, where a director sought disclosure of company records under the provisions of s221/2 of the Companies Act 1985. Whilst those provisions have since been replaced by similar provisions under the Companies Act 2006, the case is still good law.

To fully appreciate the Court of Appeal decision, it is worthwhile reading the first instance decision of the High Court, which was heard by Mr Justice Kitchin. A key paragraph is as follows (writer’s emphasis):

“[34] … ..the right of a director to inspect the books of accounts of a company stems from his holding of the office of director and is a right conferred by the common law in order to enable him to carry out his duties as director and for the benefit of the company. ..

But if it is clearly shown that a director is not using the right for the purposes for which it is conferred but rather to injure the company or for other and improper purposes then the court may not intervene to assist him. Each case must depend upon its own facts.”

The High Court held that the applicant in Oxford Legal Group Ltd v Sibbasbridge  was seeking the documents for a different purpose than the one intended by statute, namely he was seeking documents which might help him in another case about alleged loss of value of the business. In particular (writer’s emphasis):

“44.  I believe all these matters raise a strong inference that Mr Brooks is using OLG in these proceedings to try and secure the disclosure of documents that may assist him in the petition and support his contention that SBS has suffered a diminution in value as a result of wrongful activities of Mr Hoyer Millar………………….

Indeed, I consider the defendants have established a substantial and credible case that OLG's real purpose is to assist Mr Brooks rather than to benefit SBS. Disclosure has already been sought and given in the petition and no doubt any request or application for further disclosure will be considered on its merits.”

When the case reached the Court of Appeal, the High Court decision to dismiss the application for an order for disclosure was upheld. It was found that the proceedings “are properly to be seen as ancillary to the section 459 petition: as a skirmish in the battle to establish the price which Mr Hoyer Millar will be required to pay for the shares in SBS”.

Do you need to show that the request would injure the Company?

Importantly, there is no requirement for a Company, in refusing inspection, to show that the improper purpose would injure the Company (although that would make for a strong case for refusal). It is enough that the request it is not for the proper purpose of enabling him to carry out his duties as director and for the benefit of the company.

The learned judge and Court of Appeal (rightly) in the Oxford case focused on the immediate application, which was for documents under the Companies Act, which legislation was provided so that directors can perform their duties to the company. Where that legislation was used for a different, collateral, purpose, the Court would not permit or order disclosure. That was something which the Court dealing with the other disputes could or might order.

In conclusion , if a director requests access to inspect a company’s accounting records, the key question will be: Is this request for the furtherance of his or her duties as director, or rather is the ‘real purpose’ something else?

 

This article was written by Toby Walker, Dispute Resolution Partner at Allan Janes LLP. You can contact him directly on 01494 893512 or at toby.walker@allanjanes.com