Giorgio v Fiorita
[2008] SASC 281
•23 August 2008
SUPREME COURT OF SOUTH AUSTRALIA
(Civil: Application)
GIORGIO & ORS v FIORITA
[2008] SASC 281
Reasons of Judge Lunn a Master of the Supreme Court
23 August 2008
PROCEDURE
Discovery order sought under 87R 60 against a non party - held power under 87R 60 to order discovery of indirectly relevant documents where in interests of justice to do so - no right of non party to file list of documents before discovery order made - order made for discovery against non party.
GIORGIO & ORS v FIORITA
[2008] SASC 281Reasons on plaintiffs’ application for non party discovery against Tax & Financial Services Pty Ltd.
JUDGE LUNN: The primary issues in this action centre on the affairs of the 3rd plaintiff, WP360 Pty Ltd (“WP360”). Prior to 25 January 2006 the defendant was a director of WP360. The plaintiffs allege, and the defendant denies, that on 25 and 31 January 2006 the defendant was removed as a director of WP360 and the first plaintiff was appointed as a director of it. The plaintiffs further allege, and the defendant denies, that prior to 31 January 2006 WP360 was the trustee of the Balnaves Family Trust (“the Trust”), that it was removed as the trustee on 31 January 2006 and that the 2nd plaintiff was appointed as the trustee of the Trust in its place. After 25 January 2006 the defendant continued to act as if she was the only director of WP360. On 6 February 2006 the defendant, acting on behalf of WP360, entered into a written agreement for WP360 to sell the accounting practice (which it had conducted under the name of “Balnaves & Associates”) (“the accounting practice”) to Tax & Financial Services Pty Ltd (“TFS”) as to 50%, to herself as to 25% and to Eileen Duncan as to 25%. WP360 was thereby divested of the accounting practice.
The facts in the preceding paragraph are taken from the 2nd further amended statement of claim (“the statement of claim”) filed by the plaintiffs on 29 May 2008 and the amended defence (“the defence”) filed by the defendant on 2 April 2007. It does not appear that the defendant has ever pleaded to the 2nd further amended statement of claim and thus the earlier defence is to be taken as her defence to it.
The contract of sale of 1 February 2006 (“the Contract”) relevantly provides as follows:
CONTRACT OF SALE
Covering sale of accountancy practice trading as Balnaves & Associates - Merger, effective as from 1st February 2006.
1 Parties:
Vendor: WP360
Purchasers: Tax & Financial Services Pty Ltd
50% equity CPA Accountants
Luisa Fiorita and/or Nominee 25%
Eileen Duncan and/or Nominee 25%
2Purchase Price: 60% of gross fees received (excluding GST) received during the immediate past twelve months.
The percentage of gross fees possibly may have to be adjusted for the new accountancy practice to accommodate its financial obligations, this shall be by agreement of all parties.
3Perms of Payment: Spread over three years by way of deduction of 1/3 of gross fees received to be paid into an escrow account, or such shorter period as may be feasible depending upon the financial funds required to operate the accountancy practice.
4Warranties: Vendor to warrant clientele but will have the right to set off new business. …..
5Security back to Vendor: Bill of Sale over the assets and goodwill of the accountancy practice located at 366 King William Street, Adelaide.
6Proprietors Voting: Unanimity of decision – No second or casting vote of the Chairperson.
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8Responsibilities of proprietors: Tax & Financial Services to provide specialist tax and accounting services together with Tax Agents services.
Luisa Fiorita and Eileen Duncan to provide management administration.
9Buy & Sell Agreement: the proprietors making up the purchaser entity to enter into a buy and sell agreement between themselves upon terms and conditions to be resolved in meeting. To include insurance policies for succession planning purposes.
10Name of Accountancy Practice: Tax & Financial Services Pty Ltd CPA Accountants.
11Service Company to Accountancy Practice:
The practice shall operate as a trading trust with Tax & Financial Services Pty Ltd as the trustee.
12Due Diligence: Completion of the proposed contract of sale is conditional upon satisfactory resolve (sic) of due diligence by the purchaser.
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14 The new entity constitution to include the usual penal clauses in the event of a proprietor committing an illegal or improper act.
15 Special Consideration needs to be given to personal guarantees currently pledged by Luisa Fiorita on behalf of the vendor company but which will be utilised for the benefit of the new accountancy practice. Where practical assignment of leases will be undertaken or a sub lease of items to the new group. Any items that are assigned will result in a partial discharge of the Bill of Sale security held by the vendor. Where it is not practical to assign leases the items shall be leased to term and any renewal will be undertaken by the new entity.
GENERAL TOPICS:
Vendor to work up a full list of clients, names addresses and where possible tax payer classification and a profit and cash budget covering year one for the new practice.
All parties to agree as a matter of priority a suggested letter to be circulated to clients.
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RECITAL
CONTRACT OF SALE:
It is hereby agreed by all parties that the heads of agreement documented executed on 3rd February 2006 be adopted as final contract of sale.
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Signed, sealed and delivered this 6th day of February 2006.
(Execution clauses)
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The fact of the Contract, and such of its terms as are pleaded in the statement of claim, are admitted in the defence.
The initial relief sought in the statement of claim is declarations that the defendant had ceased to be a director of WP360 on 25 January 2006 and that the 1st plaintiff has since been its only director. The 2nd plaintiff, as the alleged current trustee of the Trust, seeks orders that the defendant account for all moneys received in consequence of the sale of the accounting practice and any income received by her from clients of the accounting practice. The 2nd and 3rd plaintiffs seek damages, including equitable damages, for the alleged breaches of duty by the defendant arising out of the sale of the accounting practice by WP360. Other relief is also sought concerning the defendant having improperly dealt with various assets of WP360, but that is not relevant for the present application.
The statement of claim speaks of the Contract as being a purported sale. However, it does not seek orders rescinding the sale or declaring it to be void. It is apparently limited to a claim for damages against the defendant for the loss suffered by the 2nd and/or 3rd plaintiffs from them having been deprived of the asset of the accounting practice. No proper particulars are pleaded of such damage. Neither TFS nor Eileen Duncan, as the joint purchasers with the defendant under the Contract, are joined as defendants to the action.
By a notice for specific directions issued on 2 April 2008 the plaintiffs have sought an order under 87R 60 against TFS for discovery and production of documents held by it. The descriptions of the documents sought have evolved in the course of the application and are now set out in minutes of order which were handed up by the plaintiffs’ counsel at the argument on 5 September. Later I deal with the 16 categories of documents referred to in those minutes. There is also outstanding another part-heard, but unresolved, application by the plaintiff for better discovery of documents by the defendant. It was agreed between counsel that I should deal with the application for non party discovery against TFS before completing the hearing of that other application. The same solicitors act for both TFS and the defendant.
On 3 September 2008 TFS purported to file a list of documents in response to the plaintiffs’ application for non party discovery. It had no right to do so. A non party can only make discovery in response to an order under 87R 60, and no such order has yet been made. The plaintiffs did not accept that list of documents as being adequate or complete. Apart from being a concession that TFS held some relevant discoverable documents, that list of documents is of no consequence. I am here considering what order for discovery of documents should be made under 87R 60 against TFS and not whether the list filed on 3 September 2008 was proper discovery by it under such an order. Much of the argument before me centred on statements made on behalf of TFS in affidavits and correspondence about what documents it held and whether they were properly discoverable. That is not the issue which I have to determine at present. I only have to determine what categories of documents should be properly the subject of an order for non party discovery against TFS. Whether any discovery and/or production made by TFS in response to that order is adequate is to be left for any challenge which the plaintiffs make hereafter to the affidavit of documents to be filed by TFS.
Counsel for TFS submitted that the power of the Court to order discovery against TFS under 87R 60 was limited to documents directly relevant on the pleadings. He did not cite any authority for this proposition, but I believe he was relying upon the following passage from the judgment of Bleby J in Southern Equities Corporation Ltd v Arthur Andersen & Co (No 8), 31 January 2002, Judgment No (2002) SASC 20, where he said:
12It has been held by this Court that the test of relevance to the proceedings referred to in Rule 60 was not intended to provide a different test from that applicable to discovery of documents between parties to litigation. In District Council of Stirling v Casley-Smith (1989) 50 SASR 297, Perry J said (at 305):
In my opinion, the difference in wording between the present rule relating to discovery inter-parties and the rule relating to discovery by a stranger to an action, should not be regarded as importing a different test or meaning. I see no reason why, if documents would be regarded as relevant and liable to production inter-parties, the same documents should not be liable to be ordered to be produced out of the hands of a stranger to the action.
13At the time the obligation on parties to litigation was to give discovery of all documents “relating to any matter in question in the action”: Rule 58.01(1).
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14Since 3 June 2000, the obligation between parties to discover documents has become limited to documents “which are directly relevant to any issue arising on the pleadings”: Rule 58A.03. I discussed the effect of that change in Southern Equities Ltd (in liquidation) v Arthur Andersen & Co (No 5) [2001] SASC 335 (at [4-12]. I will not repeat what I then said. In my opinion, the approach taken in the two Casley-Smith Cases to which I have referred must continue to be applied and that the test now applicable to discovery between parties should be applied to non-party discovery. To do otherwise would be productive of confusion and uncertainty, although it means that the provisions of Rule 60 must be given an ambulatory meaning.
I doubt that this passage precludes an order under 87R 60 for the discovery of indirectly relevant documents. 87RR58A.03 and 58A.04 differentiate between discovery of directly relevant documents, which is mandatory, and discovery of indirectly relevant documents, which is limited to where it is ordered in the interests of justice. I believe the passage quoted was saying no more than that an order under 87R 60 for the discovery of indirectly relevant documents should be limited to where it is in the interests of justice to order it in the same way as such discovery is limited under 87R 58A.04, but not that there can be no discovery ordered under 87R 60 of indirectly relevant documents.
The criteria for the exercise of the discretion under 87R 60 was stated by White J in Commissioner of Police v Channel Seven Adelaide Pty Ltd, 19 June 2008, [2008] SASC 164, to be as follows:
The Court has a discretion with respect to the range of documents which a non-party should be ordered to disclose. That discretion must take account of a number of factors including the directness (or indirectness) of the relevance of the documents to the issues in the case; the coercive nature of the process; the extent to which the non-party is likely to incur expense or experience difficulty in complying with the order; and the extent to which compliance with the order will impinge upon the confidentiality of the information held by the non-party, or upon the privacy of the non-party or other persons. A non-party should not be required, under the coercion of a Court order, to disclose any more documents than are necessary to dispose fairly of the proceedings. Ultimately the order should be framed so as to best serve the interests of justice in the particular case.
I apply these criteria in this matter. White J clearly envisaged that indirectly relevant documents could be discoverable under 87R 60, and insofar as there is any inconsistency between what he said and what Bleby J said, as quoted above, I prefer to follow what White J has said. Accordingly, I treat the indirectness in the relevance of any category of documents sought as a matter only going to the exercise of my discretion on whether discovery is to be ordered against a non party.
If the plaintiffs succeed in any of their causes of action against the defendant for damages (including equitable damages) or for an accounting, what happened to the accounting practice after 1 February 2006, and the profits derived from it, will be relevant and are likely to be the subject of considerable evidence at the trial. There are several alternative ways in which the plaintiffs could seek to have their damages calculated. They are probably entitled to run their cases at trial on these different methods in the alternative, and thus documents relating to any of them will be relevant.
A relevant consideration in the exercise of the discretion under 87R 60 is that the plaintiffs have had no direct involvement in what has happened to the accounting practice after 1 February 2006. These are largely matters within the particular knowledge of the defendant, TFS and Ms Duncan as the purchasers under the Contract. The defendant in her discovery has not generally dealt with the categories of documents which are now sought from TFS. Counsel for TFS did not object to this application proceeding before the application for better discovery against the defendant.
In the affidavits and correspondence TFS has asserted that the accounting practice acquired under the Contract has been conducted since 1 February 2006 separately and independently from its own accounting practice, and therefore any documents relating to its own accounting practice are not relevant or discoverable. The plaintiffs have challenged the assertion that the accounting practice was carried on separately from what had been the previous practice of TFS. It is not necessary for me to resolve this issue on the present application. As stated above, I am making orders on the basis of what categories of documents are relevant and are to be discoverable by TFS. If the categories ordered extend to documents relating to activities of TFS other than the accounting practice, such documents, subject to the question of privilege, will be discoverable. (Whether TFS can mask portions of the documents on the ground that that they are irrelevant is a matter to be considered if, and when, it occurs). If TFS responds to any part of the order for discovery that it does not have any documents of that particular class, then it will be open to the plaintiffs, if they so wish, to challenge that response. It is only at that point that the conflicting evidence about what documents TFS may have will need to be addressed by the Court.
In relation to some of the categories of documents, TFS has objected to being required to make discovery on the grounds of oppression. While potential oppression must be addressed separately in respect of each category of documents it is convenient to make some general comments here about it. It was not disputed that TFS will be entitled to be paid under 87R 60.05(1) its reasonable costs of complying with any orders for discovery. (Counsel for TFS foreshadowed that it would seek payment of those costs in advance of making its discovery, but that is to be left for a subsequent application). TFS conducts a relatively small accounting practice and it will be onerous for its principal, Mr Hauptman, to be kept away from his usual work for any substantial period of time. However, the defendant under clause 8 of the Contract was required to provide management and administration for the accounting practice. I infer that the defendant would have some familiarity with the documents which would reduce the time which Mr Hauptman would have to spend in complying with an order for discovery.
The paragraph headings below in bold are the various categories of documents of which the plaintiffs now seek discovery from TFS.
1.1Copies of Profit and Loss Balance Sheet and Income Tax Returns for Tax & Financial Services Pty Ltd for years ending 30 June 2005, 30 June 2006 and 30 June 2007.
This is to be limited to documents containing entries which in whole or in part relate to the accounting practice and its clients. Those for the 2006 and 2007 years are directly relevant. Those for the 2005 year are indirectly relevant in that they will provide comparative figures which may well be useful in interpreting the figures for the 2006 and 2007 years. There will be an order in terms of the Order para 1(1) below.
1.2Its bank statements from 1 January 2006.
In ordering this discovery there will be similar limitations to those imposed for the 2006 and 2007 financial statements in 1.1.
1.3Documents relating to work done for, or bills sent to, or monies received from each of the clients referred to in exhibits JR1 and JR2 to the affidavit of Jihan Rachid sworn on 2 April 2008.
This is to be limited to documents relating to the amounts charged for work done and moneys received for that work. It is not to extend to documents dealing with the performance of the work. I accept this will require someone on behalf of TFS to examine about 630 client files and to extract the relevant documents. Nothing was said about any difficulty in accessing the files. It need not necessarily be Mr Hauptman who would have to perform this exercise. There will be an order in terms of the Order para 1(3) below.
1.4Correspondence to any person referring to the merger between Tax & Financial Services (or Tax & Financial Services City South) and the business formerly known as Balnaves and Associates.
1.5Documents relevant to establishing where and to whom correspondence referred to in paragraph 1.4 was sent.
Paragraph 13 of the statement of claim pleads:
TFS sent notices by post to clients of the accounting practice informing them of the merger and the accounting practice no longer derives income from such clients.
Paragraph 13 of the defence pleads:
As to paragraph 13 of the Claim, the defendant:
13.1 Admits that TFS sent letters to clients of the accountancy practice informing them of the merger.
13.2Admits that the merged accountancy practice received income from certain of such clients.
Presumably the plaintiffs have pleaded the case they wish to make about notices to clients of the accounting practice in their statement of claim. On the defence there is no significant issue remaining to be determined on this topic. No discovery is to be ordered on these paragraphs.
1.6Any copies or originals of the “contract” referred to in paragraph 12 of the Second Further Amended Statement of Claim.
Paragraph 12.3 of the defence admits the Contract. There is no issue on the pleadings as to either its due execution or its terms. No further discovery is to be ordered on this paragraph.
1.7Documents relating to the payment of the purchase price or other monies relating to the acquisition of or merger with the business formerly know as Balnaves and Associates, including as to the payment of the purchase price pursuant to clause 2 of the contract referred to in paragraph 12 of Second Further Amended Statement of Claim, and if the purchase price has not been paid any documents relevant to the non payment of that purchase price.
What, if any, part of the purchase price has been paid under the Contract is directly relevant. The defendant did not oppose this order subject to some minor amendments to its wording, but I consider that the plaintiffs are entitled to an order in the terms sought.
1.8Any document referring to Balnaves and Associates.
The prayer for relief seeks an order that the defendant deliver up books and records of WP360 which presumably includes documents in the business name of “Balnaves and Associates” which it used. There is no evidence to suggest that TFS, as distinct from the defendant, has these documents. This category, as proposed, is far too broad and compliance would be oppressive. There will be no order on this paragraph.
1.9Copies of documents supplies to Tax & Financial Services Pty Ltd to in relation to the entry into the contract referred to in paragraph 12 of the Second Further Amended Statement of Claim.
Clause 12 of the Contract refers to a due diligence requirement. The documents in question would be at least indirectly relevant, and may well be of some significance at the trial of the action. It would not be unduly oppressive to have them discovered. There will be an order in terms of 1.9.
1.10Correspondence or other documents received from any person in response to the correspondence referred to in paragraph 1.4 above.
This correspondence is relevant to which of the clients of the accounting practice elected not to continue with TFS. That will be material to damages. It was not suggested there would be oppression in locating such correspondence. There will be an order in terms of 1.10.
1.11The hard drive of the computer formerly used by Balnaves and Associates, and any back up tapes or other electronic records containing information previously on the computer formerly used by Balnaves and Associates.
In the list of documents filed on 3 September, TFS disclosed as discoverable documents 2 computer hard drives on the computer previously owned by WP360, but said they were inoperable. Any likely difficulties in accessing data from the hard drive may be overcome if there were back up tapes. It will be a simple matter to discover whether such tapes are held by TFS or not. There will be an order in terms of 1.11.
1.12Computer hard drives and any electronic record which contain communications between it and the defendant or WP360 or any other party referred to or nominated pursuant to the contract of sale dated 1 February 2006 about the acquisition or merger of the accounting practice Balnaves and Associates or the clients of that practice.
This is not directed to any particular issue arising on the pleadings. Insofar as such computer records contain documents which are discoverable in the other categories which I am prepared to allow, they will be discoverable under those categories. This appears to be a “catch all” type request for documents which may well only be indirectly relevant. It is notoriously difficult to “mask” irrelevant data when having to discover computer discs and the like. There is no sufficient justification for such an order and it will be refused.
1.13Documents relevant to any of the issues referred to in paragraphs 1, 2, 3, 5, 8, 9, 11, 12, 14 and 15 of the contract referred to in paragraph 12 of the Second Further Amended Statement of Claim.
It is necessary to deal with each paragraphs of the Contract separately, as follows:
1The only issue relates to “or Nominee” and if there was any such nomination. If there was a nomination by the defendant, it may well be relevant to damages.
2Documents relating to the payment of the purchase price being calculated as a percentage of gross fees received are relevant.
3Documents relating to the payment of any other fees into an escrow account are relevant.
5Whether any bill of sale was given to the defendant is relevant.
8 The payment of any wages or the like to the defendant for management and administration services is relevant to damages for breach of fiduciary duty.
9The “Buy and Sell” agreement is likely to be relevant to the expenses of running the accounting practice and therefore to any benefit to the defendant.
11The operation of the service company through a trading trust with TFS as the trustee is also relevant to the profitability of the accounting practice.
12Documents as to any due diligence process are indirectly relevant and likely to be of sufficient significance to justify a discovery order.
14This merely goes to the inclusion of the term in some future document and not to the conduct of the parties. It is “fishing” to seek documents whether the defendant, TFS or Ms Duncan had committed any illegal or improper act. This will not be allowed.
15These matters are relevant to calculation of the plaintiffs’ damages against the defendant.
Accordingly, there will be an order in terms of 1.13 directed towards all of the enumerated paragraphs of the Contract except paragraph 14.
1.14The trust deed for the Tax & Financial Services City South Trust referred to in paragraph 6 of the Affidavit of Mark Hauptman sworn on 22 august 2008;
1.15The consent to act as trustee referred to in paragraph 6 of the affidavit of Mark Hauptman sworn on 22 august 2008;
1.16Any documents relating to the affairs of the Tax & Financial Services City South Trust, including correspondence, electronic communications, minutes of meetings, and resolutions.
The affidavit of Mr Hauptman discloses that on 1 February 2008 TFS commenced to act as the trustee of a trust named “Tax & Financial Services City South”. The categories in 1.14 and 1.15 are relevant in that they relate to the continuation of the accounting practice after 1 February 2008. Paragraph 1.16 is too wide, but it will be limited to documents relating to a continuation of the accounting practice. (There is in existence a company called “City South Tax & Financial Services Pty Ltd” of which the defendant is a director. However, no order has been sought against that company).
The application by the plaintiffs seeks that the discovery be verified on oath. This was opposed by TFS. There is no express power in 87R 60 to require it to be verified on oath, but it is probably encompassed by 87R 60.02(c)(iii). In view of the history of the matter, and the importance of proper discovery by TFS for the proper trial of this action, I consider that it is appropriate that such discovery should be verified by affidavit.
In view of the foreshadowed application of TFS that the costs of making the discovery by it should be paid before it is required to make any discovery, I will not at this stage make any order about the time within which discovery is to be given by TFS.
I have today made the following orders:
(In the following orders the abbreviations used have the same meanings as in the Reasons).
1TFS is to file a further list of documents and make discovery of the documents in its possession, custody or power in the following categories:
(1)Copies of its Profit and Loss Balance Sheet and Income Tax Returns for the years ending 30 June 2005, 30 June 2006 and 30 June 2007; but only insofar as they relate to the Contract or the accounting practice and its continuation, or for the 2005 year where they contain comparative figures for relevant figures in the 2006 and 2007 years.
(2)Bank statements from 1 January 2006 insofar as their entries relate to the Contract or the accounting practice and its continuation.
(3)Documents relating to the amount charged for work done, or bills sent to, or monies received from each of the clients referred to in exhibits JR1 and JR2 to the affidavit of Jihan Rachid sworn on 2 April 2008 for the period after 1 January 2006.
(4)Documents relating to the payment of the purchase price or other monies relating to the acquisition of or merger with the business formerly known as Balnaves and Associates, including as to the payment of the purchase price pursuant to clause 2 of the contract referred to in paragraph 12 of Second Further Amended Statement of Claim, and, if the purchase price has not been paid, any documents relevant to the non payment of that purchase price.
(5)Copies of documents supplied to Tax & Financial Services Pty Ltd in relation to its entry into the Contract.
(6)Correspondence or other documents received from any person in response to the correspondence referred to in paragraph 1.4 of the minutes.
(7)The hard drive of the computer formerly used by Balnaves and Associates, and any back up tapes or other electronic records containing information previously on the computer formerly used by Balnaves and Associates.
(8)Documents relevant to any of the issues referred to in paragraphs 1, 2, 3, 5, 8, 9, 11.12 and 15 of the Contract.
(9)The trust deed for the Tax & Financial Services City South Trust referred to in paragraph 6 of the affidavit of Mark Hauptman sworn on 22 August 2008.
(10)The consent to act as trustee referred to in paragraph 6 of the affidavit of Mark Hauptman sworn on 22 August 2008.
(11)Any documents relating to the affairs of the Tax & Financial Services City South Trust, including correspondence, electronic communications, minutes of meetings, and resolutions insofar as they relate to the continuation of the accounting practice.
2The application for discovery by TFS of the documents in the categories 1.4, 1.5, 1.6, 1.8 and 1.12 of the revised minutes of order is refused.
3The question of the time within which TFS is to make the discovery adjourned for further consideration.
4Liberty to TFS to bring on for hearing on the adjourned hearing any application relating to the payment of the costs of giving discovery.
5Time for any appeal against paragraphs 1 and 2 above extended so as to commence from the making of the order fixing the time within which discovery is to be given.
6 The question of costs reserved.
7 Fit for counsel.
8Adjourned to a Directions Hearing on 6 November 2008 at 11.30 am.
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