Directors' right to inspect the accounts - more

Under section 199 of the Companies Act, a director is entitled to inspect the accounts and financial records of a company of which he is a director. This is a very valuable right in uncovering wrongdoing. What about members' rights to the accounts of the company?

As a member, a person is entitled to information which is mainly the annual financial statements relating to a company. However, this information is aggregated information. For example, you may find that total sales is $10 million in the past year and costs of goods sold ids $6 million, but there will be no information about individual transactions.

Information about individual transactions is extremely important in detecting fraud. There have been cases of directors buying supplies at above market price to benefit their associates and relatives, or selling goods at below market price. All these actions are breaches of fiduciary duties and offences at the minimum under section 157 of the Companies Act. It is less likely that such transactions will escape the attention of an alert director.

A director can inspect all financial documents such as contracts, delivery notes and purchase orders, etc. Detailed inspection may of course take a long time and may require outside expertise. Before making a substantial investment in a non-listed company, it may be wise to consider asking for a board seat.

If a director is refused his right of inspection by other directors, it is possible to obtain a court order for the accounting documents to be inspected by the director or his accountant. It should be noted that where there are good grounds to suspect dishonesty on the part of other directors, it may be possible for a director to apply ex parte to the High Court for a court order authorising inspection. Only the applying party's lawyers will appear in court to obtain the court order. This means that the other parties are not warned about the situation until the court order is served on them. This helps to prevent the hiding or destruction of incriminating documents.