Daniel Flynn v PPK Mining Equipment Pty Ltd

[2022] NSWSC 501

Supreme Court

New South Wales

Medium Neutral Citation:

Daniel Flynn v PPK Mining Equipment Pty Ltd [2022] NSWSC 501

Hearing dates:

22 April 2022

Date of orders:

22 April 2022

Decision date:

22 April 2022

Jurisdiction:

Equity - Commercial List

Before:

Ball J

Decision:

(1) Order pursuant to r 33.4 of the Uniform Civil Procedure Rules 2005 (NSW) that the subpoena addressed to Ernst & Young and filed on 10 March 2022 be set aside;

(2)   Order that the plaintiffs pay Ernst & Young’s costs of and incidental to the motion filed on 11 April 2022.

Catchwords:

CIVIL PROCEDURE — Subpoenas — Application to set aside subpoena — Whether subpoena fishing — Where subpoena relevant only to credit

Legislation Cited:

Uniform Civil Procedure Rules 2005 (NSW)

Cases Cited:

Thomas v SMP (International) Pty Ltd (No 2) [2010] NSWSC 870

Category:

Procedural rulings

Parties:

Ernst & Young (Applicant)
Daniel Flynn (First Plaintiff | First Respondent)
Flynfam Pty Limited as trustee for Flynn Family Trust (Second Plaintiff | Second Respondent)
PPK Mining Equipment Pty Ltd (First Defendant)
PPK Group Limited (Second Defendant)

Representation:

Counsel:
J Entwisle (Applicant)
AD Justice (Plaintiffs | Respondent on Motion)

Solicitors:
Ernst & Young (Applicant)
Moray & Agnew (Plaintiffs/Respondents)

File Number(s):

2019/11615

Publication restriction:

None

Judgment

1. By a notice of motion filed on 11 April 2022, the applicant, Ernst & Young, sought to set aside a subpoena served on it by the plaintiffs. On 22 April 2022, I granted the orders sought by Ernst & Young. These are my reasons for doing so.

2. Mr Campbell Jackson is a partner of Ernst & Young. He has prepared two expert reports for the defendants for the purpose of these proceedings. Broadly speaking, the reports deal with the calculation of the revenue earned during the period 17 October 2015 to 16 October 2016 by a group of companies acquired by the defendants from the plaintiffs. The amount of revenue earned during that period is relevant to the question whether the plaintiffs are entitled to certain deferred consideration under the relevant share sale agreement. The reports were prepared in response to expert reports prepared for the plaintiffs by Ms Suzanne Delbridge. At the hearing of this matter, it is likely to be necessary for the Court to decide whether to accept the evidence given by Ms Delbridge or the evidence given by Mr Jackson.

3. In his second report dated 21 December 2021, Mr Jackson says:

Disclosure of interests

21.   I note since the issuance of the First Jackson Report EY have become the external auditor of PPK, commencing in the year ended 30 June 2020. I have followed our internal independence requirements and obtained clearance from EY Oceania Risk Management & Independence team to continue to work on this matter.

22.   I am not aware of any circumstances that, in my view, would constitute a conflict of interest or would impair my ability to provide objective assistance in this matter. During the Relevant NPAT Period, neither EY nor I, nor any employees involved in the preparation of this Report, were the auditors, tax agents, or accountants for PPK. At any point neither I, nor any employees involved in the preparation of this Report, were the auditors, tax agents, or accountants for PPK and appropriate safeguards including appropriate and ethical dividers were in place between the audit and forensic team members working under my direction on this engagement.

4. The subpoena relevantly sought the following documents:

2.   All correspondence and documents passing between Campbell Jackson and any and all members of the Ernst & Young Oceania Risk Management and Independence Team considering and approving or clearing Campbell Jackson and any of his employees to undertake work on his report dated 21 December 2021.

3.   The internal independence requirements and/or policy and all other documents prepared or considered by the EY Oceania Risk Management and Independence Team, for EY’s engagement as the External Auditor for PPK Group Limited, ACN 003 964 181.

4.   All documents evidencing the “ethical dividers” in place between members of EY audit and forensic teams as set out in paragraph 22 of Campbell Jackson’s report dated 21 December 2021. [Footnote omitted]

5. The plaintiffs submitted that it was apparent from the paragraphs of Mr Jackson’s report quoted above that there was an issue concerning his independence arising from the fact that a partner of Ernst & Young had been retained as an auditor of the defendants. They submitted that they were entitled to investigate that question, since Mr Jackson’s credit was likely to be an issue in the case and the documents they sought were necessary or relevant for that purpose. I did not accept that submission.

6. The question of Mr Jackson’s independence might be said to arise from the fact that Ernst & Young has an interest in retaining the defendants as an audit client and that that interest may consciously or subconsciously affect Mr Jackson’s opinions on the questions raised by the current proceedings. However, the documents sought by the subpoena could shed no light on that matter. They go to a different question — namely, whether Mr Jackson had complied with Ernst & Young’s internal independence requirements. Whether Mr Jackson had complied with those requirements could shed no light on the question whether his opinions were or were likely to be affected by the retainer of one of his partners as an auditor of the defendants and the desirability of maintaining that audit relationship. To the extent that that matter affects Mr Jackson’s independence, it does so whether or not Mr Jackson complied with the internal independence requirements. On the plaintiffs’ case, what is important is that Mr Jackson knew of the audit retainer, not whether he obtained internal approval to act notwithstanding its existence.

7. The material sought by the plaintiffs extends to documents evidencing the “ethical dividers” in place between members of Ernst & Young’s audit and forensic teams, which is also a matter referred to by Mr Jackson in his report. The plaintiffs submitted that the question whether Mr Jackson had complied with those procedures was relevant to his credit and for that reason they should be permitted to obtain the documents sought. In my opinion, there were at least three problems with that submission.

8. First, the subpoena was seeking documents to obtain evidence in support of a proposition — that Mr Jackson is not a credible witness because the Court should not accept the evidence in his report that appropriate and ethical dividers were in place — in circumstances where there is no reason to think that that the factual matters underlying that assertion (that appropriate and ethical dividers were not in place) might be true. In that sense, the subpoena was fishing or speculative; and it should not be permitted for that reason.

9. Second, there was an insufficient connection between any failure by Mr Jackson to comply with protocols concerning conflicts of interest and the opinions he expressed in his report. The plaintiffs were unable to explain why some lapse by Mr Jackson in complying with those protocols could affect the conclusions of his report. Normally, the question whether there are “appropriate and ethical dividers” in place is relevant to the question whether a member of a firm doing work for one client is able to obtain confidential information of another. Here, however, Mr Jackson and the audit partner are acting for the same client. Information barriers and the like are irrelevant in those circumstances.

10. Third, even if some general attack on Mr Jackson’s credit might be relevant to the question whether the conclusions of his report should be accepted, the connection between any failure to put in place adequate protocols to deal with conflicts of interest and the conclusions of Mr Jackson’s report is so tenuous that it would not justify an investigation at the trial of that question. As Pembroke J pointed out in Thomas v SMP (International) Pty Ltd (No 2) [2010] NSWSC 870 at [19(e)]:

The court will exercise particular caution when a subpoena is sought to be justified solely on the credit basis: [citing Fried v National Australia Bank Ltd [2000] FCA 911 at [27] per Weinberg J]. The judge must be satisfied about the utility of the production of the documents, and the fairness to the witness, having regard to the potential for abuse and the need to control and confine cross examination within manageable limits …

11. In the present case, an investigation into the question whether Mr Jackson complied with Ernst & Young’s conflicts protocols would unnecessarily lengthen the hearing for no real benefit. Once that proposition is accepted, there is no reason to permit the plaintiffs to obtain documents going to that issue.

12. Accordingly, I made the following orders:

1. Order pursuant to r 33.4 of the Uniform Civil Procedure Rules 2005 (NSW) that the subpoena addressed to Ernst & Young and filed on 10 March 2022 be set aside;

2. Order that the plaintiffs pay Ernst & Young’s costs of and incidental to the motion filed on 11 April 2022.

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Decision last updated: 28 April 2022