Lim Kok Leong v Seen Joo Company Pte Ltd & Ors [2014] SGHC 239

The Singapore High Court in Lim Kok Leong v Seen Joo Company interpreted section 199 of the Companies Act in relation to a request by a “sleeping” director to inspect the accounting and other records of the company, which the company had refused. The court found that the company must allow all directors the right to inspect the books regardless of whether the director in question was active or inactive. The court also found that a section 199 application to seek inspection of a company’s records can be made against the company and its directors.

Facts

The plaintiff (“LKL”) had been a “sleeping” director of the first defendant (the “Company”) since 1997. LKL had not been involved in the management or the day-to-day operations of the Company. He did not attend most directors’ meetings nor the Company’s Annual General Meetings, and he did not show any interest in the Company.  He had never previously asked to see the Company’s records and he had neither undertaken any financial liability on the Company’s behalf nor signed any official documents on behalf of the Company.

On 1 July 2014, LKL sought to inspect the accounting and other records of the Company for the last five years. The Company refused this and subsequent requests. LKL then took out an application under section 199 of the Companies Act (the “Act”) to compel the Company and its directors to allow him access to the Company’s accounting and other records.

The defendants alleged that LKL’s request to inspect the records of the Company arose only because LKL had discovered that he had been removed as a director of another company of which three of the defendants in this action were shareholders.

Interpretation of section 199

The issue before the court was whether LKL should be granted inspection of the Company’s records. LKL submitted that section 199(3) of the Act gave the directors an absolute right to inspect the accounting and other records of the Company and therefore LKL did not have to provide a justification for his request. It was presumed that his request to inspect the records was made in the best interests of the Company and the onus was on the defendants’ to rebut this presumption which, LKL argued, they had failed to do.

The defendants argued that LKL’s right to inspect the accounting records flowed from his office as a director. Any refusal by the Company could not confer a civil right of action on a director against itself, much less against another director. It was also contended that LKL’s request was not madebona fide as it was sudden and had no precedent. LKL had not, in the entire 18 years that he had been a director, ever inspected the records. The defendants also argued that LKL wanted the accounting records for an improper purpose, as he was a director of two other entities that had similar businesses as the Company.

It was the court’s view that section 199(1) of the Act imposes a statutory obligation on “every company and the directors and managers of the company” to keep and maintain accounting and other records of the company. Section 199(3) clearly states that the company’s records “shall at all times be open to inspection by the directors”. The court stated that the use of the word “shall” in section 199(3) denoted that Parliament has prescribed a mandatory obligation on the part of the Company to allow LKL to inspect the Company’s records under section 199.

The court found that LKL had an absolute right as a director of the Company to inspect the accounting and other records, notwithstanding the fact that he was a sleeping director. LKL’s directorship was recognised by the defendants, who also acknowledged that a director could inspect the company’s accounting and other records regardless of whether he was active or inactive. It followed that it would not therefore matter that the director had been disinterested in those records in the past.

The court was of the view that the defendants would be able to refuse LKL access to the records if they could show that he wanted them for an improper purpose. However, the defendants failed to do so. LKL had long ceased his involvement in the companies that the defendants had alleged he was involved in, and which were in competition with the Company.

The defendants also contended that LKL could not join the directors in his application for inspection under section 199(3) of the Act, submitting that the right to inspect the records of the Company was only against the Company as it was the Company that was obliged to keep the records. Further, company directors owed a fiduciary duty to the company and not to other directors or shareholders. Thus LKL’s right could be enforced against the Company but not against the other directors.

The court considered the position in the UK and Australia and found that it was justifiable to include the directors as defendants as they were personnel specifically mentioned under section 199(1) of the Act. The court noted that the Company’s directors were officers of a company, and were persons whom section 199 intended to be held responsible for compliance, which included making records of the company available for inspection by the directors. In the court’s view, while the common law right of a director to inspect the company’s documents is preserved and remains unchanged under section 199, this provision also provides a statutory right for an aggrieved director to compel his fellow directors to produce the documents.

The court found that the UK and Australian provisions in this regard are worded differently from section 199 to the extent that the duty to maintain proper company records applies only to the company and does not extend to the directors and managers. The position is different under section 199(1) of the Act, which statutorily extends the responsibility personally to the directors and managers of the company.

Judgment

For the reasons above, the court allowed LKL’s application to inspect the accounting and other records of the Company.

Practical pointers

This case makes it clear that in Singapore a director has an absolute right to inspect the accounting and other records of a company regardless of how active he/she is in the company, subject only to the exception that the company may refuse to do so if it is for an improper purpose.

However, it is for the company to prove that the purpose is improper, and therefore companies will need to show more than a suspicion that there is an improper purpose before they can deny their directors inspection of the company records.

Also, this case makes it clear that directors, as individuals, can also be made parties to a claim under section 199 for refusing to allow inspection of company records under section 199(3) of the Act. As such, directors will need to be careful in opposing the right of their fellow directors to inspect company records unless there is good reason to believe that the director requesting inspection is doing so for an improper purpose.