D'Ortenzio v Charles Parletta Real Estate Pty Ltd - [2018] SASC 37

SUPREME COURT OF SOUTH AUSTRALIA
(Civil)
D'ORTENZIO v CHARLES PARLETTA REAL ESTATE PTY LTD
[2018] SASC 37
Judgment of Judge Bochner a Master of the Supreme Court
27 March 2018
CORPORATIONS
Statutory derivative action - application under s 237 Corporations Act 2001 (Cth) for leave to bring proceedings on behalf of a company - whether such application is interlocutory or final.

PROCEDURE - SUPREME COURT PROCEDURE - SOUTH AUSTRALIA
Application to uplift documents produced under subpoena; application to have subpoenas set aside; application seeking orders that a party be made available for cross-examination.
Held:
1. Application to uplift documents dismissed.
2. Application to have subpoenas set aside allowed.
3. Application that a party be made available for cross-examination dismissed.
Corporations Act 2001 (Cth) s 237, referred to.
Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 0583; Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442; Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859; Gaertner v Dharah Gibinj Aboriginal Medical Service Aboriginal Corporation [2013] FCA 1330; McEvoy v Caplan [2010] NSWCA 115; Hackett v Nambucca Valley Quarries Pty Ltd [2012] NSWSC 1189; Huang v Wang [2016] NSWCA 164; Licul v Corney (1976) 180 CLR 213; Attorney-General for New South Wales v Stuart (1994) 34 NSWLR 667; Hunt v Wark (1985) 40 SASR 489; Botany Bay Instrumentation v Stewart (1984) 3 NSWLR 98; Calvary Health Care Adelaide Incorporated v Price [2013] SASC 97, considered.

D'ORTENZIO v CHARLES PARLETTA REAL ESTATE PTY LTD
[2018] SASC 37

The plaintiff has filed an originating process seeking leave, pursuant to s 237 of the Corporations Act 2001 (Cth) (the Act) to bring proceedings on behalf of the defendant against its directors. The plaintiff makes serious allegations against the directors, including misappropriation of company funds. The plaintiff is a shareholder of the defendant, and thus has standing to bring the application pursuant to s 236 of the Act. To a large extent, the plaintiff’s case against the directors is based on an independent auditor’s report dated 21 July 2017 (the auditor’s report).
The originating process was listed for hearing 13 December 2017. On 29 November 2017, some two weeks before the hearing, the plaintiff caused to be issued three subpoenas, the first to the firm of auditors seeking all of their files in relation to the audit leading to the auditor’s report, and the second and third to the author of the report, requiring him to give evidence at the hearing, and to produce any documents in his possession relating to the auditor’s report.
On 5 December, the plaintiff filed an application (FDN 11) seeking leave to uplift, inspect and copy the produced documents under the subpoenas. On 8 December 2017, the plaintiff filed a further application (FDN 17) seeking orders that one of the directors (Mr Parletta) be required to be available for cross‑examination at the hearing.
On 7 December 2017, the defendant filed an application (FDN 13) seeking to have the subpoenas set aside. As a result of this flurry of activity, the date for the hearing of the originating process was vacated, and the time instead devoted to the hearing of FDN 11, 13, and 17.
In addition, the defendant objected to the late filing of an affidavit by the plaintiff.
The application to have the subpoenas set aside (FDN 13)
The defendant’s argument on its application is three fold. Firstly, it argues that the subpoenas should never have been issued, on the basis that the plaintiff’s application is an interlocutory one, and as a result, leave is required to issue a subpoena.[1] Secondly, it argues that the subpoenas, if allowed, would be disruptive to the timetable for the hearing agreed to by the parties and ordered by the Court. Thirdly, it argues that the subpoenas are bad in substance, in that they are a blatant exercise in fishing.
[1] See Rule 172 (6) Supreme Court Civil Rules 2006.
Is an application pursuant to s 237 of the Act interlocutory or final? The plaintiff contends that it is final, the defendant that it is interlocutory. Both rely on authority to support their positions.
I am of the firm view that an application brought pursuant to s 237 is interlocutory in nature.
The plaintiff referred me to a line of authority, commencing with Swansson v RA Pratt Properties Pty Ltd[2] (Swansson) which clearly stands for the proposition that such an application is final in nature. In Swansson, Palmer J said:
It is clearly the intent of Pt2F.1A that leave to bring a derivative action must not be given lightly. An application under s237(2) is not interlocutory in character; the relief sought is final and the applicant bears the onus of establishing the requirements of the subsection to the Court' satisfaction.[3]
[2] [2002] NSWSC 0583.
[3] [2002] NSWSC 0583 at [24].
In subsequent decisions, such as Fiduciary Ltd v Morningstar Research Pty Ltd,[4] Maher v Honeysett & Maher Electrical Contractors Pty Ltd,[5] and Gaertner v Dharah Gibinj Aboriginal Medical Service Aboriginal Corporation,[6] these words of Palmer J were adopted.[7] None of these subsequent decisions undertook any independent analysis of the question.
[4] [2005] NSWSC 442.
[5] [2005] NSWSC 859.
[6] [2013] FCA 1330.
[7] See for example, Fiduciary Ltd v Morningstar Research Pty Ltd [2005] NSWSC 442 at [15], Maher v Honeysett & Maher Electrical Contractors Pty Ltd [2005] NSWSC 859 at [12] and Gaertner v Dharah Gibinj Aboriginal Medical Service Aboriginal Corporation [2013 FCA 1330 at [27].
In McEvoy v Caplan[8] (McEvoy), the New South Wales Court of Appeal came to examine the question. In determining whether the appellant required leave to appeal from a decision pursuant to s 237, Macfarlan JA, with whom Allsop P and Beazely JA agreed, said the following:
The order made by the primary judge was in my view interlocutory as it did not finally determine the rights of the parties (see Licul v Corney [1976] HCA 6; (1976) 180 CLR 213 at 225). The fact that it was and remains open to Mr McEvoy to make another application of the same kind is decisive in this respect (Carr v Finance Corporation of Australia Ltd [1981] HCA 20; (1981) 147 CLR 246 at 256–7; Malouf v Malouf [1999] FCA 284; (1999) 86 FCR 134 at [36]). Accordingly Mr McEvoy requires leave to appeal (see s 101(2)(e) of the Supreme Court Act 1970).[9]
[8] [2010] NSWCA 115.
[9] [2010] NSWCA 115 at [4].
Thus, after specifically considering (albeit briefly) the nature of the order made as one that did not finally determine the rights of the parties, the Court of Appeal concluded that such an application was interlocutory.
The question was next addressed by Gzell J in Hackett v Nambucca Valley Quarries Pty Ltd.[10] His Honour specifically addressed the conflict in authority between Swansson and McEvoy and said the following:
[10] [2012] NSWSC 1189.
[67] There is one aspect of those rulings that should be mentioned. Objection was taken to hearsay evidence on the ground that the application is final and not interlocutory.
[68] That contention is based upon a statement by Palmer J in Swansson at 318 [24]:
It is clearly the intent of Pt 2F.1A that leave to bring a derivative action must not be given lightly. An application under s 237(2) is not interlocutory in character; the relief sought is final and the applicant bears the onus of establishing the requirements of the subsection to the court’[s] satisfaction.
[69] This statement was followed by Austin J in Fiduciary at 735 [15] and by Brereton J in Maher at [12]. No authority was cited by Palmer J. No additional authority was cited by Austin and Brereton JJ.
[70] With the greatest of respect an application under the Corporations Act (Cth), ss 236 and 237 is interlocutory. There is no final determination of issues between the parties.
[71] If the application is granted, the rights of the parties can be determined by that litigation. If the application is refused, the rights of the parties are unaffected. There is no final determination of them.
[72] In Hall v Nominal Defendant [1966] HCA 36 ; (1966) 117 CLR 423 at 444 Windeyer J said that a final order was one that finally disposed, subject only to appeal, of an action or an existing dispute between the parties.
[73] Gibbs J endorsed this test in Licul v Corney [1976] HCA 6; (1976) 180 CLR 213 at 225:
The other view which, since Hall v Nominal Defendant, should, I think, be regarded as established in Australia, depends on the nature of the order made; the test is: Does the judgment or order, as made, finally dispose of the rights of the parties?
[74] In my judgment these authorities establish that an application under ss 236 and 237 of the Corporations Act (Cth) is interlocutory.
Thus Gzell J, unlike Palmer J in Swansson, has undertaken an analysis of the nature of the order made pursuant to s 237, and has examined this in conjunction with the established authorities dealing with the nature of interlocutory as opposed to final orders. His conclusion is, with respect, based on logic and established authority.
The New South Wales Court of Appeal again came to consider the question in Huang v Wang.[11] The question was not dealt with explicitly by Bathurst CJ; rather, he appeared to take it as established that an application under s 237 was interlocutory. When discussing the criteria set out in s 237(2), and in particular the need for the applicant to establish that the action is in the best interests of the company, he said:
It is correct that these cases were decided at a time when it was considered that proceedings under s 237 of the Act were final in nature, a view held to be incorrect in McEvoy at [4] per Macfarlan JA, Allsop P and Beazley JA agreeing.
[11] [2016] NSWCA 164.
Thus, he takes it as a given that an application under s 237 is properly to be regarded as interlocutory in nature. McColl JA agrees with his reasoning, without separately addressing the matter.
Barrett AJA, however, sought to confine the decision in McEvoy to its facts, and said that a different decision as to the nature of the order might be reached in different factual circumstances:
[84] In those circumstances, it was no doubt correct to say that an order granting leave under s 237 would not have finally disposed of the rights of the parties and that the order would therefore have been interlocutory. In some other cases, however, the position may be different and the order might properly be viewed as a final order.
[85] A person with standing under s 236(1) may file a s 237 leave application which merely names the company itself as respondent and identifies the case that the person wishes the company to pursue against some unrelated third party. A recent example of such a case is Cooper v Myrtace Consulting Pty Ltd [2014] FCA 480. Because the reason for the application is usually the unwillingness of the company to bring the proceeding in question, the likelihood is that the company will oppose the application. In such a case, the debate is solely on an issue of internal governance and domestic concern: whether the company should sue the third party and whether the applicant, who otherwise lacks the ability to put the company into motion, has established a statutory entitlement to act on the company’s behalf in that respect. The only persons legitimately interested in that debate are the applicant and the company.
[86] When a s 237 application is framed and advanced in the way just described, the only parties to the controversy before the court are the applicant and the company. It follows that an order granting leave under s 237 in such a case is an order that finally disposes of the rights of those parties regarding the relevant subject matter, being the question whether the applicant should be permitted to bring the particular action on the company’s behalf.
[87] Generally speaking, the unrelated third party that the s 237 applicant wishes to see the company sue is not a necessary party to the s 237 application: see Carpenter v Pioneer Park Pty Ltd [2004] NSWSC 973; 186 FLR 104 (leave to appeal refused by this Court on 20 May 2005); Roach v Winnote Pty Ltd [2006] NSWSC 231; 227 ALR 758; O’Meara v FWV Stanke Holdings Pty Ltd [2007] SASC 286. But if, as in McEvoy v Caplan, the application for leave is brought in existing proceedings and the applicant actively involves the third party in the application, that issue is preempted or sidestepped by the applicant’s own decision to proceed in that particular way: see, for example Chahwan v Euphoric Pty Ltd [2006] NSWSC 1002 at [9]–[15].[12]
[12] [2016] NSWCA 164 at [84] – [87].
Thus, he reaches the view that whether such an application is interlocutory or final may depend on the factual circumstances of the matter.
With respect, I am unable to agree with this conclusion (and I note that it was not a view expressed or shared by Bathurst CJ or McColl JA). An application pursuant to s 237 can never be final in nature, regardless of the factual circumstances of the case. Such an application can never finally determine the rights of the parties; even if unsuccessful, an applicant may bring a further application if new material comes to light or circumstances change. It does not create a res judicata or an issue estoppel. It is worthwhile noting the words of Gibbs J in Licul v Corney:[13]
The distinction between final and interlocutory judgments is not always easy to draw and there has been disagreement as to the test by which the question whether a judgment is final or interlocutory is to be determined. One view — which was preferred by the Court of Appeal in Salter Rex and Co v Ghosh [1971] 2 QB 597; [1971] 2 All ER 865 — is that the test depends on the nature of the application made to the court. The other view which, since Hall v Nominal Defendant (1966) 117 CLR 423; [1966] ALR 705 should, I think, be regarded as established in Australia, depends on the nature of the order made; the test is: Does the judgment or order, as made, finally dispose of the rights of the parties? Within either of those tests the judgment of the Full Court in the present case is not a final judgment. It does not have the effect of finally disposing of the rights of the parties. It leaves it open — at least in theory — to the applicants to make a further application, upon prior notice served on the respondent himself, for an extension of time for service of each summons, and if that extension is granted, and the summonses are served, to proceed with the actions. The order is therefore not final in nature whatever its practical effect may be.[14]
[13] (1976) 180 CLR 213.
[14] (1976) 180 CLR 213 at 224–225.
Section 237 leaves open to the plaintiff the opportunity to make a further application if further information comes to light, or the situation changes in a relevant way. This is regardless of the fact of whether the application is made in an existing proceeding, or is independent of any other action before the Court. Thus, it cannot be said that an application under s 237 is final in any way; it does not finally dispose of any rights of either party. It must be interlocutory.
Finally, I note the definition of “interlocutory proceeding” in the Rules. It is defined as:
…a proceeding of any of the following kinds in which an order or direction of the Court is sought –
(a)a proceeding that is preliminary or ancillary to an action or appellate proceeding, or an intended action or appellate proceeding, in the Court;
…[15]
[15] Supreme Court Civil Rules, Rule 4.
An application under s 237 is clearly preliminary or ancillary to an intended action.
As a result of this finding, leave was required before subpoenas could be issued in this matter. The current subpoenas must be set aside as they were issued without leave.
Even if an application for leave had been made in this matter, I would not have allowed the issue of the subpoenas. I am of the view that the subpoenas are merely fishing. I am also of the view that the plaintiff’s own submissions concede this. The plaintiff put to me that the auditor’s report was subject to a “dramatic qualification”.[16] This “dramatic qualification” is found in appendix 1 of the auditor’s report, which is exhibited to the plaintiff’s affidavit filed on 25/9/17.[17] The plaintiff says that, because of this dramatic qualification, she should have access to the documents underpinning this opinion. She addresses the matter this way:
In order for your Honour to give the leave you have to be satisfied that there's a prime facie case, you have to be satisfied that the application is brought in a bona fide way and your Honour has to be satisfied that there's the giving of relevant notice, we've passed over that, and then your Honour has to be satisfied that the proposed proceedings in respect of which leave is sought is in the interest of the company.
Your Honour might apprehend the dilemma and that is unless I have the opportunity of addressing those questions through the forensic process to which the subpoena is directed, then I would run the risk of not persuading your Honour to grant the leave and then we will never have a second inquiry, when Mr Parletta is saying 'Nothing to see here'.
[16] T11.2.
[17] FDN 2 at MD4.
The effect of this submission is that the plaintiff has conceded that she does not, or may not, currently have sufficient material to satisfy the criteria set out in s 237, but with access to further documents, she may be able to do so. While the draft statement of claim relies on the auditor’s report, and its “dramatic qualification” to underpin the plaintiff’s claim, the plaintiff seeks the documents relied on the by auditor, in order to make out her s 237 application. In my view, this is nothing but fishing. If the qualification in the auditor’s report is as dramatic as the plaintiff insists, it should be sufficient to allow her to satisfy the criteria. If the plaintiff needs to undertake further investigations to enable her to make out the s 237 criteria, then she should have done so prior to the issue of the originating process. A subpoena should not be used as an investigative tool, where there are other options, such as pre-action disclosure, available to a party. In this instance, the issue of the subpoena is not for a legitimate forensic purpose.
This notion was discussed, in relation to a claim for public interest immunity, by the Court in Attorney-General for New South Wales v Stuart:[18]
The third matter upon which the Attorney General relies concerns the need for the party seeking access to documents to demonstrate a legitimate forensic purpose before any balancing exercise between the conflicting aspects of the public interest can be undertaken. I earlier quoted authority for that need: Burmah Oil Co Ltd v Bank of England (at 1113-1114, 1129); Alister v The Queen (at 412, 414, 438). The concept of legitimate forensic purpose is not confined to claims of public interest immunity. It arises whenever a party seeks access to documents for which he has issued a subpoena; where objection is taken, a party who is unable to show that it is at least "on the cards" that such documents will assist his case is not entitled to have access to such documents simply to see whether they may do so: Regina v Saleam (at 17-18). He is not entitled to conduct a fishing expedition. The need to show a legitimate forensic purpose arises even if the claim of public interest immunity fails. It is therefore a pre-requisite before the balance required for that claim can be struck.
[18] (1994) 34 NSWLR 667.

The notion of fishing was described by King CJ in Hunt v Wark[19] in the following way:
The purpose was purely "fishing", that is to say to see whether anything might turn up in the documents which might provide a ground for the rejection of evidence.
[19] (1985) 40 SASR 489.
In Botany Bay Instrumentation v Stewart[20] (Botany Bay Instrumentation), Powell J outlined a number of categories of cases where a court will exercise its discretion to set aside a subpoena. These included:
…
5. where the subpoena has been used for the purpose of obtaining discovery against a third party;
…
(citations omitted)[21]
[20] (1984) 3 NSWLR 98.
[21] (1984) 3 NSWLR 98 at 100.
It seems to me that this is what the plaintiff is seeking to do with the subpoenas she has issued; she is wanting to see if, by seeking disclosure from a third party, “anything might turn up” which will allow her to meet the criteria set out in s 237. This may have been appropriate prior to the issue of the originating process; it may also be appropriate to seek non-party disclosure in the same terms in the event that leave under s 237 is granted. Indeed, in the event that leave is granted, the documents relied on by the auditor in producing the auditor’s report may well be relevant to the merits of the issues in dispute between the plaintiff and the defendant. However, at the threshold stage, when leave to proceed is being sought, it seems to me that the issue of the subpoenas sought by the plaintiff amounts to no more than an attempt to investigate the case that has already been launched.
For completeness, I note that the plaintiff submitted that, as the recipients of the subpoenas had not objected to their issue, it was not for the defendant to do so. I am of the view that this position is effectively dealt with by Powell J in Botany Bay Instrumentation, where he said:
…an application to set aside a subpoena which is an abuse of process may be made not only by the person to whom the subpoena is directed but also by a party to the litigation and any other person who might be shown to have a legitimate interest in having the subpoena set aside.[22]
[22] (1984) 3 NSWLR 98 at 102.
This also disposes of the plaintiff’s application to uplift, inspect and copy the documents produced pursuant to the subpoenas.
I also consider that the plaintiff’s application to cross-examine Mr Parletta should be dismissed.
The plaintiff put to me that it was necessary to cross-examine Mr Parletta on his affidavit, because otherwise, the Court may take the contents of his affidavit as the truth. In oral submissions, it was put to me in this way:
The fundamental rules of procedure, the common law for affidavit evidence is that if the contents of an affidavit are not challenged then the court receives the fact within the affidavit as proved.[23]
[23] T30.26-29.
The plaintiff puts a somewhat different submission in her written submissions, putting the position that, in her view, the affidavit of Mr Parletta contained “inconsistencies and lacunae”, which she should have the opportunity to test, challenge and explore.[24] In my view, however, each of these submissions misconceives the nature of the s 237 application. No findings of fact will be made on such an application, save for those necessary to satisfy the criteria in s 237. The only findings that will be made will be whether:
[24] Plaintiff’s written submissions filed on 13 December 2017 at [18].
(a)it is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them; and
(b) the applicant is acting in good faith; and
(c) it is in the best interests of the company that the applicant be granted leave; and
(d) if the applicant is applying for leave to bring proceedings - there is a serious question to be tried; and
(e) either:
(i) at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or
(ii) it is appropriate to grant leave even though subparagraph (i) is not satisfied.[25]
[25] Section 237(2).
The factual matters deposed to by the plaintiff and Mr Parletta will go to criteria (c) and (d). No decision, however, will be made at the hearing of the application as to the truth of the matters deposed to. The competing affidavits will be assessed to determine if there is a serious issue to be tried and whether the application is in the best interests of the defendant; it is not the appropriate forum to seek to “test, challenge, and explore” the factual issues deposed to. This will come at the substantive hearing of the matter should leave be granted.
It is not appropriate in the circumstances to exercise the discretion that I have to allow cross-examination. As the purpose of the hearing is not to make factual findings as to the conduct of the defendant or its directors, the cross‑examination will be of no practical utility (per Calvary Health Care Adelaide Incorporated v Price).[26]
[26] [2013] SASC 97 at [19] – [20].
Finally, I note that the defendant has objected to the use by the plaintiff of her affidavit filed on 8 December 2017. While it was filed late and without leave, I am of the view that orders can be made allowing the defendant time to file material in response and as a result no prejudice will be suffered by it. Consequently, leave will be granted to the plaintiff to rely on this affidavit.
I make the following orders:
1FDN 11 is dismissed.
2FDN 13 is allowed.
3FDN 17 is dismissed.
4The plaintiff has leave to rely, at the hearing of this matter, on her affidavit filed on 8 December 2017.
I will hear the parties as to the filing of responding material by the defendant to the plaintiff’s late affidavit and as to costs.