Rights to Inspect Documents by Directors: Principles in Low Ean Nee v. SNE Marketing Sdn Bhd [2024] 1 MLJ 447

Rights to Inspect Documents by Directors: Principles in Low Ean Nee v. SNE Marketing Sdn Bhd [2024] 1 MLJ 447

The Statutory Right for Inspection of a Director

A director’s right to inspect a company’s records is a statutory right explicitly provided under Section 245 of the Companies Act 2016. Section 245(4) expressly provides that the company’s accounting and other records “shall at all times be open for inspection by the directors”[1], enabling directors to access such records to fulfil their statutory and fiduciary duties effectively. This article discusses the Court of Appeal’s decision in Low Ean Nee v. SNE Marketing Sdn Bhd [2024] 1 MLJ 447, which clarifies the extent of a director’s statutory right to inspect a company’s records under Section 245 of the Companies Act 2016.

Key Facts

The Respondent, a multi-level direct marketing company, supplies food supplements, nutritional products, and dietetic substances under the SNE trademark. The Appellant is a shareholder and was a director of the Respondent during when the application for inspection to the accounting and other records of the Respondent was filed at the High Court. However via a directors’ resolution, the Appellant was removed from her office as the director of the Respondent on 9 December 2021.

On 27 October 2020, the Appellant had requested to inspect the Respondent’s accounting and other records. However, the Respondent refused access, claiming that the Appellant had previously copied documents in January 2019 and had been involved in litigation that harmed Respondent. The Respondent also raised concerns about the Appellant’s motives, alleging that the access to the records was sought for improper purposes, citing the Appellant’s prior oppression suit and criminal proceedings involving the Respondent’s managing director.

In response, the Appellant maintained that her request was legitimate and filed an application in the High Court, seeking an order to inspect and make copies of the documents. The Respondent, in turn, insisted that the Appellant provide a covenant not to use the documents for any ulterior or detrimental purposes before granting access. The case centres around whether the Appellant’s request for document inspection was made in good faith, exercising her statutory rights as a director under Section 245 of the Companies Act 2016.

The Decision of the High Court

The Appellant’s application to inspect and obtain copies of documents from the Respondent was dismissed on 28 September 2021. In dismissing the application, the High Court was of the view that the Appellant was not entitled to exercise her statutory right of inspection of the documents, inter alia, because the Appellant was effectively a non-participating director of the Respondent. The High Court concluded that the Appellant was actuated by mala fides and that the documents were not necessary, and the Appellant did not need them in carrying out her duties as a director of the Respondent.

The Appellant’s failure to provide reasons why she required access to the documents and to provide the undertaking that she would not use the documents for any ulterior and/or improper purpose detrimental to the interest of the Respondent together with her previous actions in using the Respondent’s documents to which she was given access, to initiate actions against other directors, led the Court to find that the Respondent had proven the Appellant’s request for inspection of the documents was made in bad faith and with an ulterior, improper, or collateral purpose. Additionally, the High Court highlighted that, given the Appellant’s lack of involvement in the Respondent’s operations, it was inconceivable that the documents were required to assist her in undertaking her duties as a director.

The High Court found that the Respondent had provided sufficient evidence to prove that the request for the documents was unrelated to the discharge of the Appellant’s duties as a director and was actuated by an ulterior motive, which would be detrimental to the interest of the Respondent.

The Decision of the Court of Appeal

Law in Relation to a Director’s Right to Inspect

The Court of Appeal held that it is well settled law that the Appellant, as a director of the Respondent, has an absolute right to inspect the documents, and the Appellant is not required to provide any covenant or reasons for the inspection. It is trite law that a director’s right to inspect a company’s accounting and other records exists at common law. Section 254 of the Companies Act 2016 is therefore declaratory of this common law right. A director’s right to inspect accounting and financial records is a concomitant of the fiduciary duties of good faith, care, skill, and diligence owed to the company. Accordingly, like other rights and powers, it must be exercised for the benefit of the company.

The obligation of the company to allow inspection by its director is regarded as mandatory. Being an absolute right, a director is prima facie entitled to inspection and is not required to demonstrate any specific ground or “need to know” as a basis. However, this right remains valid only if exercised for the proper performance of the director’s duties to the company and not with the intent to cause detriment to the company.

According to established jurisprudence, the Court has no residual discretion to refuse a director’s right to inspection. The principle is that when the Court bars a director from exercising this right, it is not exercising discretion but instead concluding, based on the evidence presented, that the director intends to use the information obtained for ulterior purposes, such as causing detriment to the company. In such cases, the Court finds that the director is abusing the confidence reposed in them. Consequently, the right to inspection is forfeited if exercised not to advance the company’s interests but to pursue ulterior motives intended to harm the company.

It requires a strong case to disentitle a director from exercising the statutory right of inspection under Section 245 of the Companies Act 2016. The burden rests on the Respondent to prove, through clear and convincing evidence, and not mere bald assertions or speculation, that the Appellant was motivated by improper intentions in filing the application under Section 245 of the Companies Act 2016.

Appellant’s Absolute Right to Inspect the Documents of the Respondent

In the present matter, the Court of Appeal found no evidence of any intention by the Appellant to harm the Respondent. While the Appellant may indeed have intended to initiate other legal proceedings against the directors and shareholders, such an intention falls within her rights. The pertinent question here is whether there was any evidence to suggest that her actions were aimed at injuring the Respondent. The answer is unequivocally no.

Referring to the decisions in Dato’ Seri Timor Shah Rafiq v. Nautilus Tug & Towage Sdn Bhd [2018] 8 MLJ 394 and Ho Yee Chin v. Ho Min Hao & Ors [2016] MLJU 318, the Court of Appeal disagreed with the learned Judicial Commissioner’s view that the Appellant’s actions in lodging a police report, initiating the oppression suit, and her lack of active involvement in the Respondent’s management, could be construed as evidence of improper motives, a likelihood of injuring the Respondent, or an absence of need for the requested documents.

In fact, the Appellant’s hostility towards her co-directors and her passiveness as a director of the Respondent further strengthen the argument that she should be granted the right to inspect the documents, which, in law, is an “absolute right”. The Court of Appeal was therefore satisfied that the learned Judicial Commissioner’s decision to refuse the order under Section 245 of the Companies Act 2016 was, in all circumstances, plainly wrong and warranted intervention by the appellate court.

Ceasing of the Appellant’s Position as Director Post the High Court’s Decision

The Court of Appeal, however, found it necessary to consider the impact of the post-High Court event, namely the Appellant’s removal as director. The Appellant filed the Notice of Appeal on 14 October 2021, and she was a director at the time of filing of the Notice of Appeal. However, by a directors’ resolution dated 9 December 2021, the Appellant was removed as a director of the Respondent. In arriving at its decision, the Court of Appeal referred to the landmark decision of the Singapore Court of Appeal in Haw Par Bros (Pte) Ltd v. Dato Aw Kow [1973] 2 MLJ 169 (SGCA). According to the Haw Par principle, a director’s right to inspect and, if necessary, take copies of company documents arises from the nature of a director’s duties and the need to properly perform those duties. Following this principle, an ex-director is not entitled to seek the Court’s aid for an order of inspection.

It was argued by the Appellant that her removal was invalid, as it was affected by a director’s resolution, whereas under the Respondent’s Constitution and pursuant to Section 206(1)(a) of the Companies Act 2016, she could only be removed by a resolution of the shareholders at a general meeting.

The Court of Appeal stated that the present appeal is not the appropriate forum to address the issue of the alleged invalidity of the Appellant’s removal as a director of the Respondent. This issue must be pursued through separate proceedings. If the Appellant succeeds in challenging her removal as a director, she may then file a new application for inspection. However, until that occurs, the Court held that the Haw Par principle applies to the facts of this case, leading to the dismissal of the appeal.

However, the Court of Appeal further stated that, but for the Appellant’s removal as a director and the application of the Haw Par principle, the Court would have allowed the appeal and granted the order as sought in the originating summons. In conclusion, the Court emphasized that Section 245 of the Companies Act 2016 exists to benefit a director in the performance of his or her duties.

Conclusion

In conclusion, the Court of Appeal’s decision in Low Ean Nee v. SNE Marketing Sdn Bhd [2024] 1 MLJ 447 highlights the fundamental and absolute nature of a director’s right to inspect company documents under Section 245 of the Companies Act 2016. This statutory right is vital for directors to effectively discharge their fiduciary duties and responsibilities. The Court reaffirmed that a director is entitled to inspect the company’s records without the need to provide reasons or demonstrate a “need to know”, unless the request is motivated by improper purposes. While the Appellant’s removal as a director post-High Court decision brought complexities to the case where challenges to the validity of such removal must be addressed in separate proceedings, the Court’s decision nonetheless underscores the importance of safeguarding directors’ rights to ensure they can fulfil their duties in the best interests of the company.

If you have any questions or queries, please contact our Dispute Resolution Associate, Aireen Natasha (aireen@nzchambers.com).

Author: Aireen Natasha

References:

[1] In pari materia with Section 167(3) of the Companies Act 1965.