TGIF 30 July 2021 – Supreme Court of Queensland decides contracts of sale are not compellable ‘financial records’

This week’s TGIF considers a recent case where the Supreme Court of Queensland rejected a director’s application to access an executory contract of sale entered into by receivers and managers on the basis it was not a ‘financial record’

Key Takeaways

• A contract for the sale of property does not constitute a financial record simply because it creates legal obligations that will have, or potentially have, a significant effect on the finances of an entity.
  
  
• There is a distinction between a ‘financial record’, such as a ledger or book of account, and a source document, such as a contract of sale. In deciding whether a document is a ‘financial record’, a court will look at whether the document records or explains the company’s transactions, or whether it is a source document that only evidences the transactions.
  
  
• In matters of statutory interpretation, particularly with respect to terms of art, expert evidence may assist the court but the ordinary process of statutory construction, including an analysis of the statute’s underlying purpose, may carry greater weight.

This application is the latest in a series of claims between parties to a joint venture in respect of the Rolleston coal mine in Queensland. As the price for thermal coal fell amid the COVID-19 pandemic, the joint-venture participants fell into dispute, including about the making of cash calls to fund the mine’s continued operations.

The junior joint-venture participant, ICRA Rolleston Pty Ltd (ICRA) was placed into administration days after another joint-venture participant, Rolleston Coal Holdings Pty Ltd (Glencore), appointed receivers and managers to seize control of the asset over which Glencore held security, being ICRA’s 12.5% share in the Rolleston coal mine, in late 2020.

In this case, the sole director of ICRA sought from the receivers and managers the production of a copy of a contract of sale for ICRA’s 12.5% share. At the time of the application, the contract of sale remained subject to the satisfaction of conditions precedent. The central issue for the Court to decide was whether an executory contract was a ‘financial record’ for the purpose of sections 9 and 421(1)(d) of the Corporations Act 2001 (the Act).

The Application

ICRA’s director (the applicant) requested a copy of the sale contract pursuant to section 421 of the Corporations Act, which empowers directors of corporations to inspect records kept by receivers and managers, including ‘financial records’.

Despite formal requests, the respondents refused to provide the applicant (or ICRA’s administrators) with a copy of the contract.

On the basis that he wished to propose a deed of company arrangement (DOCA) to the creditors at the impending second meeting of creditors and needed to see the contract of sale in order to formulate the terms of the DOCA, the applicant applied to the Court for an order pursuant to section 1303 of the Act. This application compelled the production of the contract for inspection on the basis it was a ‘financial record’ under sections 9 and 421(1)(d) of the Act.

Section 1303 of the Act gives the Court a discretion to make an order compelling production if a person, in contravention of the Act, refuses to permit the inspection of any book or supply a copy of any book.

What is a ‘financial record’?

This case was primarily concerned with whether the contract of sale fell under the definition of a ‘financial record’. Unless the contract of sale met this description, the applicant had no entitlement to inspect and copy the document, and the Court was accordingly unable to compel its production.

The Court identified three issues to be determined in answering whether a contract of sale is a ‘financial record’:

• whether the contract of sale is a document of prime entry;
  
  
• whether the contract of sale is a working paper or other document needed to explain methods or adjustments in preparing financial statements; and
  
  
• as the definition of ‘financial records’ in section 9 is an inclusive definition, whether the contract of sale is a financial record within the ordinary meaning of that term.

Both parties produced expert evidence about the nature of financial documents and accounting practices. Although Flanagan J considered the expert evidence, his Honour made it clear that the question was ultimately one of statutory interpretation.

Source documents and ‘financial records’

The applicant argued that the contract of sale was a ‘financial record’ either because:

• a document of prime entry encompasses those documents that inform the prime entries;
  
  
• a contract of sale can be used to explain financial statements or adjustments to financial statements; or
  
  
• a contract of sale fits within the ‘ordinary or natural meaning’ of a ‘financial record’.

The respondent submitted in response to each of these points that the definition of ‘financial record’ is narrow, and only extends to particular documents making up or impacting the company’s books of account. As the contract was executory and remained subject to the satisfaction of conditions precedent relating to third party consents, it was unknown when or whether the contract would complete and when or whether it would generate an input into the company’s financial statements.

Flanagan J agreed with the respondent’s submission generally that a ‘financial record’ does not encompass ‘derivative’ documents like contracts. His Honour considered the legislative purpose of section 421, which obliges receivers and managers to keep such financial records as correctly record and explain all transactions. In doing so, his Honour drew a distinction between ‘financial documents’, which correctly record and explain transactions, and the source documents that evidence the transactions.

His Honour accepted that, even though a contract may create legal obligations which have financial impact, this does not suffice to render it a ‘financial record’.

The Court therefore concluded that an executory contract of sale does not fall within the meaning of the term ‘financial records’. As a result, the application for production failed.

Comment

Before seeking to rely on compulsory inspection of production powers in respect of ‘financial records’ under the Act, applicants should be alive to the distinction between documents that reflect the effect of a transaction and documents that evidence as a transaction, as the latter category of documents may not meet the description of ‘financial record’.