DIRECTOR RIGHTS V COMPANY RIGHTS
Being a director does not guarantee access to legal advice provided to a company
Whilst it may be safe to assume that because you are a director of a company, you have unrestricted access to the financial records and books of that company, it may be surprising to know that is not entirely correct.
Section 198F of the Corporations Act 2001 (Cth) states that a director may inspect the books of the company at all reasonable times for the purposes of legal proceedings. This right exists for a period of 7 years after that director ceases to be a director of the company. Section 290 of the Corporations Act 2001 (Cth) states that a director has an unrestricted right to access the financial records of a company at all reasonable times. In addition to this, a director also has a common law right to access any other documents of that company as is required to fulfill their obligations as a director. But what happens if there is a breakdown in the relationship between a director of a company and the company itself? How would the company get confidential legal advice to deal with the adversarial director without that director simply demanding access to that legal advice by virtue of being a director of the company?
This unique circumstance was recently addressed in the case of Hammond v Quayeyeware Pty Ltd [2021] FCA 293 in the Federal Court. The facts of the case are as follows:
Ms Hammond was a founder, director and shareholder of Quayeyeware Pty Ltd (Company).
Around August/September of 2017, Ms Hammond alleged that the relationship between her and the Company had deteriorated so badly that she was not provided with sufficient information in board packs and was not informed about key details relating to the Company’s affairs such as new marketing projects and even the appointment of a new CEO.
Ultimately, two proceedings were commenced. The first proceeding was commenced by the majority shareholder against Ms Hammond, her husband, their newly incorporated company and another director of that company for various claims including breaches of shareholders deed and director’s duties, copyright and trademark infringements, misleading and deceptive conduct and tortious interference. The second proceeding was commenced by Ms Hammond and her husband against the Company seeking access to the Company’s financial and other books and records.
Whilst the Company did provide unconditional access to those books and records, Ms Hammond went on to request further access to all letter of engagement or retainers between the Company and its legal representatives. The Company refused to hand over these documents leading Ms Hammond to commence proceedings against the Company seeking a declaration as to her rights to access the financial records as well as order for general access to the Company’s books and records.
The Court found that Ms Hammond’s position as a director did not supersede the Company’s right to obtain confidential legal advice particularly when such advice relates specifically to addressing the conflict with that director.
The decision in Hammond v Quayeyeware Pty Ltd [2021] FCA 293 clarifies that if your company is in a dispute with a director, the company can obtain confidential legal advice without having to worry that it will be disclosed to that director.
Catherine Wallace at WALLACEWEIR can assist you and your company with any disputes your company may be engaged in. Please feel free to contact Cat at catherine@wallaceweir.com.au 1300 011 123 to discuss your circumstances.
Please note that this article is written as an informative piece and that you must not take the contents of this article as legal advice. Wallace Law Group accepts no liability from your reliance on this article.