Harris Scarfe Ltd (in liq) v Ernst & Young (No 4)

[2005] SASC 443

SUPREME COURT OF SOUTH AUSTRALIA

(Civil: Application)

HARRIS SCARFE LTD (RECEIVERS & MANAGERS APPOINTED) (IN LIQ) & ORS v ERNST & YOUNG & ORS (No 4)

Reasons for Ruling of The Honourable Justice Bleby

25 November 2005

PROCEDURE - SUPREME COURT PROCEDURE - SOUTH AUSTRALIA - PRACTICE UNDER RULES OF COURT - OTHER MATTERS ARISING BEFORE TRIAL

Application for further and better discovery - Operation of Supreme Court Rule 58A.03 - Meaning of "directly relevant" in relation to an issue arising on the pleadings - Whether all receivers' files should be discovered in respect of disputed claim for damages including costs of receiver.

Supreme Court Rules 1987 r 58.04, r 58A.03, referred to.
Channel 7 Adelaide Pty Ltd v Lane & Hurley (2004) 234 LSJS 225; Southern Equities Corporation Ltd (In Liquidation) v Arthur Andersen & Co (No 5) [2001] SASC 335, applied.
Re Solfire Pty Ltd [1999] 2 Qd R 182, distinguished.

WORDS AND PHRASES CONSIDERED/DEFINED

"directly relevant"

HARRIS SCARFE LTD (RECEIVERS & MANAGERS APPOINTED) (IN LIQ) & ORS v ERNST & YOUNG & ORS (No 4)
[2005] SASC 443

1. BLEBY J:             This is an application by the first defendants, trading as Ernst & Young, for an order for further and better discovery against the plaintiffs.

2. The plaintiffs’ action claims damages for negligence, breach of contractual duty of care and misleading conduct in breach of s 56 of the Fair Trading Act1987 (SA). In essence, the plaintiffs allege that at all material times from the year ending 31 July 1996 the head of accounting of the first three plaintiffs instigated an over‑statement of assets (primarily inventory and plant), and under‑statement of liabilities (primarily creditors and accrued expenses/provisions) and expenses, with a consequential over‑statement of profits and net assets by way of adjustments to the financial records of those companies. The action is brought against the auditors of the companies for the years ended 31 July 1996 to 31 July 1999.

3. By their present application, the first defendants seek an order for further and better discovery of all documents relating to the conduct of the receiverships of the companies, including documents directly relevant to the sale of assets of the Harris Scarfe Group by the receivers and managers, the funding arrangements put in place in relation to that sale together with certain nominated files of the receivers, being files produced by the plaintiffs’ solicitors for inspection by the first defendants’ solicitors on 5 September 2005.  The plaintiffs maintain that the files were inadvertently produced on the occasion of inspection of some other documents and are not relevant to the proceedings.

4. The effect of the first defendants’ present application is to seek an order for further and better discovery of all the files of the receivers and managers of the Harris Scarfe Group.  Before explaining the basis of that application it is necessary to understand some of the issues raised on the pleadings so far.

5. The plaintiffs have particularised their loss amounting to a figure of approximately $143.283 million.  It is alleged that that loss comprises the difference between:

   (1)The net asset deficiency of Harris Scarfe, as at April 2001 (when the receiver was in fact appointed), of $150.400 million; and

   (2)The net asset deficiency of Harris Scarfe as at September 1996 of $7.117 million.

6. The particulars allege that the figure for net assets as at September 1996 assumes that a controller would have been appointed at that time and takes into account the estimated costs of realisation of the assets of Harris Scarfe at that time. Particulars indicating the calculation of that loss then follow.

7. It is important to note that the calculation of the plaintiffs’ loss assumes the appointment of a controller if the true financial state of Harris Scarfe were then known, and the orderly realisation of Harris Scarfe’s then assets. Until a controller was in fact appointed in April 2001 it is alleged that the net asset position of Harris Scarfe deteriorated substantially. What is claimed by way of damages is, in effect, the total trading losses sustained by Harris Scarfe from the date when the true position ought to have been revealed until the time when it was in fact revealed, a controller was appointed and the assets were in fact realised.

8. Included in the losses claimed by the plaintiffs is the following item:

   12.4Costs of the receivers of $13.726 million (to January 2005).

9. By their defence the first defendants plead that to the extent that the plaintiff ANZ Banking Group Limited has suffered loss or damage, such loss or damage has caused or alternatively contributed to the negligence of that plaintiff by reason of its acting inappropriately in realising the assets of the group in that:

   147.3.2Unwarranted and excessive costs and expenses were incurred in the receivership of the group.

10. Thus, what is put in issue by the pleadings, but only by a very general plea, is the extent and reasonableness of the costs and fees incurred by the receivers of the Harris Scarfe Group in disposing of the plaintiffs’ business.

11. The plaintiffs have already discovered a number of documents relevant to the issue identified above.  They include:

    ·The receivers’ receipts and payments listing, which details costs of the receivership to January 2005;

    ·Extracts from the receivers’ receipts and payments to 31 December 2003 and related documents;

    ·A computerised printout of the receivers’ time costing;

    ·The receivers’ invoices for services rendered between April 2001 and January 2003;

    ·Invoices rendered by Hindal Corporate Pty Ltd, the consultants appointed by the receivers to sell the Harris Scarfe business; and

    ·Invoices rendered by legal advisers to the receivers from time to time.

12. The first defendants refer to the report of Mr Mentha, with which they have been supplied, in which he expresses the view that the receivers’ fees were reasonable, and from which the first defendants seek to infer that other relevant information may have been made available to Mr Mentha for the purpose of forming his opinion. 

13. The obligation imposed by r 58A.03 is to discover documents which are “directly relevant” to any issue arising on the pleadings. In Channel 7 Adelaide Pty Ltd v Lane & Hurley[1] the Full Court made the following observations on recent dicta concerning r 58A.03:

    [1] (2004) 234 LSJS 225; [2004] SASC 177, at [22]-[25].

    [22]In Southern Equities Corporation Ltd (In Liquidation) v Arthur Andersen & Co (No 5) [2001] SASC 335 Bleby J expressed the view that the new test required a greater focus on the pleadings and the issues which arose thereon. He said that the test of relevance is the same as that which is applied to admissibility, but that it is not a test which includes only those documents which are strictly admissible in that documents, although relevant, may not be admissible under the common law or various statutory provisions.

    [23]    Referring to the use of the word “directly” his Honour said at [10]:

    “However, there is a further qualification, in that the documents must be ‘directly’ relevant.  I doubt whether that qualification effectively narrows, for the purposes of discovery, ordinary concepts of relevance for the purpose of admissibility into evidence.  In my opinion, it cannot mean, if the document is not itself proof of a fact in issue but is merely a piece of circumstantial evidence tending, along with other evidence, to prove the fact in issue, that it is not discoverable.  Many a case is provable and in fact proved by circumstantial evidence, including documents.  I note that a similar view was expressed by Demack J in Robson v REB Engineering Pty Ltd (1997) 2 Qd R 102 at 104 ‑ 105 in respect of a similar rule in Queensland. The Rule cannot be allowed to govern in practice the admission of documents into evidence merely because they have not been revealed in the discovery process.

    What the qualification does reinforce is the notion of relevance to proof or disproof of a fact in issue, and the unquestionable abolition of the rule which required discovery of a document which might directly or indirectly lead to a train of inquiry or which might, in some other way, otherwise advance the party’s case or damage that of the adversary.  For example, it would seem that documents going solely to the credit of a witness, unless that witness’s credit is an issue raised on the pleadings, would not be discoverable.  However, it is inappropriate to attempt to define exhaustively what will and what will not be discoverable under this Rule.”

    [24]Doyle CJ agreed with these observations in Quenchy Crusta Sales Pty Ltd v Logi-Tech Pty Ltd (2002) 223 LSJS 266. He added [11]:

    “It is not wise to attempt to state in comprehensive terms the effect of the requirement that the document be ‘directly relevant’.  The adverb ‘directly’ is probably intended to emphasise the requirement of relevance, and to be used in the sense of requiring that the document be directly in point, excluding as sufficient indirect relevance which might be established through another linking circumstance.  That is not to say, as I have already said, that a document is not directly relevant if it is merely a piece of circumstantial evidence.  The point is that a document will not be directly relevant if, rather than tending to prove an issue on the pleadings, it merely tends to prove something that may be relevant to an issue.”

    [25]In Rehn v Australian Football League and Ors (2003) 225 LSJS 378 Doyle CJ again considered the rule. He said at [24]:

    “However, as I commented in Quenchy Crusta, it is not possible to state precisely the effect of the adverb “directly” in r58A.03. Indirect relevance to an issue is not enough for the purposes of r58A.03, but distinguishing between direct and indirect relevance is not easy.

    It is consistent with the intent of r58A.03 to apply the requirement of direct relevance firmly, and to give it a relatively narrow meaning. To hold that a document is not directly relevant to an issue arising on the pleadings is not to deprive a party of access to the document. The effect of such a holding is merely that the requirement to discover the document is not imposed by r58A.03, and that the court will decide, on application to it, whether the document must be discovered. In other words, r58A.03 draws the line between an obligation to make discovery as a matter of course, and an obligation to make discovery upon application to the court and after the court has considered whether the interests of justice requires that discovery should be made.

    Another point relevant to the meaning of r58A.03 is that the rule assumes that a party is able to decide, from the pleadings, what documents must be discovered. This also suggests a narrow meaning for “directly relevant”. It would be counter-productive if a party was expected to discover documents because they might be relevant, depending on how the other party’s case was put at trial. r58A.03 assumes that a party can determine that party’s obligation to make discovery by reference to the pleadings.”

    (See also Mercantile Mutual Custodians Pty Ltd v Village/Nine Network Restaurants & Bars Pty Ltd [2001] 1 Qd. R 276 at 282).

14. The Court[2] agreed with the observations made in those cases.

    [2] Duggan J, with whom Mullighan and Nyland JJ agreed.

15. It can be seen that the phrase “directly relevant” is to be given a relatively narrow meaning.  Its application to particular classes of documents will be governed by the pleadings.  A document will be directly relevant if it tends to prove or disprove a matter which is in issue.  It is not directly relevant if it merely tends to prove or disprove something that may be relevant to a matter in issue, or if there is merely a chance that the document will prove or disprove a matter in issue.

16. This is an application for further and better discovery.  Rule 58.04 provides that the Court may order further and better discovery “where it appears to the Court that there are grounds for a belief that some document or class of documents relating to any mater in question in the proceedings may be or may have been in the possession, custody or power of a party”.  In Southern Equities Corporation Ltd (In Liquidation) v Arthur Andersen & Co (No.5)[3] I referred to the “uncompromising ethical obligation” that a legal practitioner acting for a party has to the Court to make true and honest disclosure of documents, such that the Court can rely on the assertion by the practitioner that the party has or has had no other documents which require discovery.  A party’s list of documents is generally conclusive.  I repeat what I said in Southern Equities Corporation Ltd (In Liquidation) v Arthur Andersen & Co (No.5):[4]

    What acceptance of the assertion of the plaintiff’s solicitor does mean, however, is that if the defendant is to succeed in its application, it must point to some evidence to raise the necessary belief required by Rule 58.04(e).  It requires more than merely an assumption or speculation that such documents may exist.  The necessary belief may be formed from an examination of the pleadings.  Common experience may dictate that there must have been a particular relevant document in the custody, possession or power of a party concerning a particular transaction.  The existence of a relevant document may be properly inferred from the contents of another document.  Alternatively, the description of a document or class of documents by the respondent party may be so vague and uncertain as to require more particularity.  There may be other circumstances which induce the necessary belief.  However, the Court will not act on speculation.

    [3] [2001] SASC 335 at [17].

    [4] [2001] SASC 335 at [18].

17. What is in issue in this case is the amount and reasonableness of the receivers’ costs of the receivership.  No particular pleas are raised as to the reasonableness of those costs.  The plea of the first defendant amounts to little more than a requirement that the plaintiffs be put to proof as to the extent and reasonableness of the costs.

18. There will be many documents on the receivers’ files which have no direct relevance to that question.  The files will contain documents relevant to various transactions undertaken by the receivers.  Those documents, while indicating that the receivers carried out certain activities, will not necessarily be directly relevant to the extent and reasonableness of the costs.  As evidence that certain transactions were entered into, those documents will also be evidence that certain work was undertaken by the receivers for which they would normally be entitled to charge a fee.  However, those documents will neither be directly helpful or relevant in justifying the amount or reasonableness of the fees. 

19. The first defendants relied, by analogy, on Re Solfire Pty Ltd,[5] a case involving an application to determine the remuneration of provisional liquidators under s 473 of the Corporations Law.  In that case the court required the provisional liquidators to furnish an itemised account of their respective costs and expenses.  That case does not assist the first defendants in their present claim. I therefore reject the first defendants’ contention that the whole of the receivers’ files are discoverable on this ground.

    [5] [1999] 2 Qd R 182.

20. However, that does not mean to say that the first defendants are not entitled to some further and better discovery.  While all the fee notes of the receivers have been discovered, they are in such a form as not to assist in identifying who in the receivers’ office performed what work.  They do not identify the time spent in performing that work by the persons concerned.  They do indicate who was involved, the total number of hours for which they were involved in the period covered by the fee note and the rate at which each person’s time has been charged.  The computerised printout of the receivers’ time costing also identifies the persons involved, their charge out rates per hour and number of hours involved. 

21. What none of the documents identified as having been discovered indicate is the nature of the work performed by each individual for which charges of a particular person were raised.  In other words, there is nothing to link the relevant personnel, their charge out rates and the hours charged with any particular work performed.  It is not sufficient to say that a general description of the work performed is contained in the fee note.  The time spent on that work will be relevant.  Who performed it and their particular charge out rate for that work will also be relevant.

22. I have not been referred to any particular documents which might contain that information as being identified in any other documents which have been discovered.  However, it is not difficult to infer that there must be within the plaintiffs’ possession or power work‑in‑progress sheets, time sheets, computer records or other documents, apart from documents on the working files of the receivers, which indicate the nature of the work performed, by whom it was performed and the time spent on that work by each person.  To the extent that such documents have not been discovered I direct that the plaintiffs give further and better discovery of such documents.

23. I will hear the parties as to the precise terms of any such order and as to the costs of the application.