Lease Collateral Pty Ltd v Johnson

[2018] NSWSC 1157

Supreme Court

New South Wales

Medium Neutral Citation:	Lease Collateral Pty Ltd v Johnson [2018] NSWSC 1157
Hearing dates:	20/07/2018
Date of orders:	20 July 2018
Decision date:	26 July 2018
Jurisdiction:	Equity - Commercial List
Before:	McDougall J
Decision:	Leave to amend granted. Further discovery ordered. Subpoena set aside.
Catchwords:	CIVIL PROCEDURE – application to amend further amended commercial list statement – current iteration of list statement insufficiently clear – amendment will not require vacation of hearing date – no prejudice to defendants except for costs – leave to amend granted – application for further discovery – application to set aside subpoenas – no issue of principle.
Legislation Cited:	Uniform Civil Procedure Rules 2005 (NSW)
Cases Cited:	Ipstar Australia Pty Ltd v APS Satellite Pty Ltd (2018) 329 FLR 149
Texts Cited:	Practice Note SC Eq 3
Category:	Procedural and other rulings
Parties:	Lease Collateral Pty Ltd (Plaintiff) Ian Johnson (First Defendant) ACN 093 752 893 (Second Defendant) Chris Mundey (Third Defendant) David Marshall (Fourth Defendant) Helmsman Funds Management Limited (Fifth Defendant)
Representation:	Counsel: C E Bannon (Plaintiff) A d’Arville (First, Third and Fourth Defendants) J Lockhart (Second and Fifth Defendants)   Solicitors: Corrs Chambers Westgarth (Plaintiff) Mills Oakley (First, Third and Fourth Defendants)
File Number(s):	2016/293219

Judgment

1. HIS HONOUR:   On 17 October 2014, the plaintiff (LC) and a company known as Force Corp Pty Limited (Force Corp) entered into a facility agreement and other agreements. LC agreed to advance funds to Force Corp to enable it to repay loans provided by the Commonwealth Bank of Australia (CBA) and GE Capital Finance Pty Limited (GE).

2. The transaction was introduced to LC by Assetsecure Pty Limited (Assetsecure). A wholly owned subsidiary of Assetsecure known as Recfin Nominees Pty Ltd (Recfin) actually paid over to Force Corp the funds (sourced from LC) that were used to repay the CBA and GE loans.

3. LC is a member of the Challenger group of companies. Assetsecure and Recfin are not, although another company in the Challenger group holds a minority interest (33.3%) in the capital of Assetsecure.

4. Force Corp defaulted in January 2015. Recfin appointed receivers in July 2015. Force Corp went into liquidation. The receivers have recovered substantial amounts for the benefit of Recfin and LC. However, LC says, there was a deficiency of almost $30 million. It sues to recover the amount of the deficiency, together with interest.

The proceedings

5. In the substantive proceedings, LC alleges it was induced to enter into the facility agreement and related transactions by misleading representations and other misleading or deceptive conduct on the part of the first, third and fourth defendants (respectively, Messrs Johnson, Mundey and Marshall). Mr Johnson was a director of Force Corp. Mr Mundey was an officer of the second defendant (Helmsman) with the title “Investment Director”, who was seconded by Helmsman to Force Corp. Mr Marshall was the Chief Financial Officer of Force Corp.

6. LC relies on four relevant aspects of conduct that it says were misleading or deceptive. One relates to an Investigative Accountant’s report (IA report) that, LC says, was available to Messrs Johnson, Mundey and Marshall, and through them to Helmsman and the fifth defendant (Helmsman FM). LC’s case is that in all the circumstances leading up to the closing of the facility agreement and its drawdown, it was reasonable to expect that the existence and content of the IA report would have been disclosed to it.

7. Further, LC says that, in the due diligence process leading up to the closing of the transaction, Mr Mundey made representations as to EBITDA (the actual EBITDA for September 2014 and the forecast EBITDA for October and November 2014) that were misleading or deceptive. LC’s case is that, as to September 2014, the actual EBITDA was very substantially less than represented. As to the October and November EBITDA, LC says that there was no reasonable basis for making the representations.

8. Finally (for present purposes), LC says that Mr Mundey engaged in misleading or deceptive conduct in relation to a Force Corp financial model (the financial model), various versions of which were provided to LC during the due diligence process. LC says that representations made by the provision of those versions of the model were misleading or deceptive.

9. The proceedings have been set down for final hearing, to commence on 22 October 2018, with an estimate of three weeks. That date was allocated in April 2018.

10. I am concerned in these reasons with two notices of motion filed by LC. They were heard on 20 July 2018. I made orders that day in respect of the matters in contention, and said that I would give reasons later. These are my reasons for making those orders.

The application for leave to amend

11. Taken out of chronological order, one notice of motion (in fact, an amended notice of motion filed in court on 20 July 2018) sought leave to amend the further amended commercial list statement (FACLS). One of the amendments, to para 4.5 of the contentions, was not opposed and I gave leave in the course of the hearing.

12. The other two groups of amendments were opposed. They related to the EBITDA representations and the financial model. LC sought to amend in each case so as to allege that not only Mr Mundey but also the two Helmsman companies (as I shall call them) made the representations alleged, and thus engaged in the misleading or deceptive conduct alleged, so as to cause LC to suffer loss and damage.

13. LC’s case was that its pleading was already sufficient to put the Helmsman companies on notice that they were being sued for that conduct along with Mr Mundey. Mr James Marshall, the solicitor for the Helmsman companies, said in an affidavit that was read on the interlocutory hearing that he had not understood the pleadings in that way. I have to say that I share Mr James Marshall’s view of the FACLS as it stood on 20 July 2018.

14. Thus, LC sought to justify the amendments on the basis that they made perspicuously clear what was already apparent from the FACLS on a fair reading. In that way, LC sought to shift responsibility, for the need to make the amendments, onto the Helmsman companies. It will be apparent from what I have just said that I do not agree with that narrative.

15. I do not propose to recount the parties’ submissions in any detail. Each side provided written submissions. Each side supplemented them (in some cases, repeated them) in oral submissions.

16. LC’s contention that it should have been clear to the Helmsman companies that they were being sued for the misleading or deceptive conduct alleged in respect of the EBITDA representations and the financial model was based on a close reading of scattered parts of the pleading, and on the operation of UCPR r 14.27(3). I do not agree that it is appropriate, with reference to a commercial list statement, to draw together scattered threads of allegations and say that, by reason of those allegations and taking into account the supposed operation of r 14.27, the Helmsman companies should have been aware that they were being sued for the misleading or deceptive conduct alleged in respect of the EBITDA representations and the financial model.

17. The relevant requirements of Practice Note SC Eq 3 are clear. A list statement is not required to have the formality of a pleading. Nonetheless, it is required to specify with clarity the factual and legal bases for the relief sought. The opposing party is entitled to know what is the case it has to meet. It should not be required to hunt through disparate parts of the document in an attempt to glean an understanding of the case. I add that LC’s reference to r 14.27 is illogical, since at the time the list statement is served there can be no joinder of issue.

18. LC’s submissions relied in part on a number of allegations made in Part A of the list statement: its identification of the nature of the dispute. I do not think that a party to whom a list statement is directed should be required to treat the identification of the nature of the dispute as part of a “pleading”. Clearly, it is intended to be a summary of the dispute that is identified through the statement of contentions. It can rise no higher than the matters “pleaded” in the statement of contentions. Nor, for that matter, can the matters alleged in Part B – the statement of the issues likely to arise.

19. LC’s solicitor (more accurately, a junior solicitor in the employ of that solicitor) swore an affidavit in which he said that:

It has always been the plaintiff’s case that certain representations made by [Mr] Mundey were made both in his personal capacity and on behalf of [the Helmsman companies]…

20. The affidavit referred to two paragraphs of the contentions and three paragraphs of the statement of the nature of the case. The solicitor was not cross-examined on that affidavit. Accordingly, I accept that he set out his, or perhaps LC’s, understanding of the case sought to be made out in the paragraph from which I have quoted. But for the reasons I have given, I do not think that the FACLS was anywhere near adequate to bring home to the Helmsman companies that the case, in respect of the EBITDA representations and the financial model, was being prosecuted against them as well as against Mr Mundey.

21. I add that it was not suggested that the application should be refused because the case sought to be made out must fail.

22. The Helmsman companies also opposed the application on the basis that “there is no realistic way in which [the work required to meet the case] can be performed in the three months before the trial is to commence” [1] . I do not accept that submission. It overstates the evidence in a very significant way. The evidence of the solicitor, Mr James Marshall, was that:

1. he held “significant concerns as to the ability of the Helmsman Parties to properly respond to the EBITDA and the Financial Model Representations prior to the hearing on 22 October 2018” [2] ; and

2. “[e]ven when working at full capacity on this and no other matters (which is impractical given each person’s existing case load) this team [of solicitors and counsel working on the litigation] would still have to complete a very significant amount of work… before 22 October 2018 as well as all of the other steps required to be taken… to prepare for a trial” [3] .

   1. Written submissions dated 19 July 2018, [28].

   2. Affidavit sworn 13 July 2018, [28].

   3. Ibid, [30].

23. If I may say so with respect, that affidavit evidence falls a long way short of justifying the spin put on it in the paragraph of the written submissions to which I have referred.

24. Mr James Marshall identified a number of steps that would have to be taken to meet the new case. I accept his evidence on that point. The only step that is likely to take any real length of time, in my view, relates to expert evidence. That will involve finding an independent expert to consider the expert evidence already served by LC and by Mr Mundey, and (if necessary) prepare his or her own expert report.

25. Mr James Marshall said that in his experience, that process “often takes at least two to three months (at a minimum)” to be completed [4] . In this case, however, the expert would not be breaking new ground. He or she would be reviewing the reports already prepared and the underlying material. It is by no means certain that he or she would come to some different view to that expressed in one or other of the existing expert reports. Whilst I accept that it will be something of a rush to get an expert briefed, and to consider the matter and prepare a report, I think that the fear expressed as to inadequacy of time is somewhat overstated.

    4. Ibid, [29(a)].

26. I am not at all persuaded that the task of preparing to meet the new case will be as time-consuming as Mr James Marshall sought to suggest. Nor am I persuaded that to allow the new case to be pleaded will have the dire consequences adverted to in the submissions for the Helmsman companies.

27. The application for leave to amend did not directly affect the individual defendants. However, their position was clear: they did not wish the hearing date to be imperilled, and thus were concerned at the making of any orders which might have this effect. For the reasons I have given, that does not appear to me, on the evidence to date, to be a problem that they need confront.

28. Accordingly, I granted leave to amend.

29. I should note that LC also relied on the fact that the draft second FACLS had been circulated some five weeks before the interlocutory hearing on 20 July 2018. If that were intended to raise, as a point in its favour, that the Helmsman companies could have started work on the new case even before the court granted leave to amend, it is not something that I would accept.

30. Finally, before I leave this aspect of the case, I should note that there was a question as to whether r 14.27 had any application. In terms, Part 14 deals with pleadings. It applies, specifically, to proceedings commenced by statement of claim and to proceedings in which a statement of claim has been filed. On its face, Part 14 seems to have no application to proceedings in the Commercial List that are commenced by way of summons and supported by a commercial list statement.

31. However, LC relied on a decision of the Court of Appeal, Ipstar Australia Pty Ltd v APS Satellite Pty Ltd [5] . In that case, Bathurst CJ (with whom Beazley P and Leeming JA agreed, although the latter added additional observations not directed to this point) appeared at [260] to conflate a commercial list statement and subsequent quasi-pleadings to pleadings in the strict sense. As I understand it, his Honour suggested that Part 14 could be applied, in effect, by analogy.

    5. (2018) 329 FLR 149.

32. In case I have misinterpreted what the Chief Justice said, I set out [260], [261] of his Honour’s reasons:

260. Proceedings in the Commercial List of the Supreme Court are commenced by summons and are governed by Practice Note SC Eq 3, which does not specifically refer to the filing of a reply to a commercial list response. If these proceedings were commenced by statement of claim, the filing of a reply would be permitted by r 14.4 of the Uniform Civil Procedure Rules 2005 (NSW) (the UCPR). Further, a “pleading” is relevantly defined in the dictionary to the UCPR to include “a statement of claim, defence, reply and any subsequent pleading for which leave is given”. Although Part 14 of the UCPR does not directly apply in proceedings commenced by summons (see r 14.1), a commercial list statement and a commercial list response stand in the place of pleadings. In circumstances such as the present case where a reply to the commercial list response was permitted, it would seem to me that such a reply forms a part of the pleadings.

261. In these circumstances, the pleaded case did encompass the allegation that Ipstar was liable for defects irrespective of whether they were caused by the water ingress or firmware problems.

33. There is no reason to take this point further, because I have dealt with the application in favour of LC (save for the question of costs, to which I next turn) on other grounds.

34. LC accepted that it should pay the costs of and incidental to and thrown away by reason of the amendments. It did however submit that the costs of the notice of motion, insofar as it dealt with the amendments, should be costs in the cause. I do not agree.

35. The notice of motion was made necessary because LC needed to make it clear that the case on the relevant representations was brought against the Helmsman companies as well as against Mr Mundey. For the reasons I have given, I think it was necessary for that to be “pleaded” clearly and specifically. LC needed the court’s exercise of discretion in its favour. There were powerful arguments why that discretion should not be exercised. The fact that I was prepared, on balance, to exercise it as LC sought does not detract altogether from the force of those arguments.

36. Accordingly, I conclude that the Helmsman companies should have their costs of the application for leave to amend, as well as the costs thrown away by reasons of the amendment.

The application for discovery

37. The next matter dealt with concerned discovery. In the event, the dispute was narrowed very much by discussion, for which I am grateful. The remaining matters in dispute related to four categories of documents (in effect, two related groups of categories) and the only issue was whether the discovery ought be ordered in respect of documents coming into existence between 30 June 2014 and 31 January 2015 (as LC sought) or whether there should be some earlier cut-off date.

38. The basic position was clear. It was accepted that documents created after the closing date could bear upon the misleading or deceptive conduct case brought by LC. For example, as to representations as to future matters, subsequent events could have some bearing on the question of whether there were reasonable grounds for making the representations at the time they were made. Again, insofar as there was a question of the likelihood, as at 17 October 2014, of the occurrence of events thereafter, events that occurred soon after might assist in the resolution of that question.

39. The only dispute was whether the cut off date should be brought forward. The individual defendants submitted that it would take a lot of work, and involve a lot of expense, for their solicitors to do the work. LC responded with an affidavit from an IT specialist in the employ of its solicitors, who said that she and her team could do the matter much more quickly. That does not meet the point. The solicitors for the individual defendants will have to perform the task with the resources they have to hand. They do not have available to them the resources of the far larger firm retained by LC.

40. The evidence given by the solicitor for the individual defendants was not challenged, and I accept it. As I have said, the evidence that was said to controvert it does not do so.

41. The submissions for the individual defendants emphasised that, as time passed, the likelihood of there being relevant documents decreased. I agree. On the other hand, it is not difficult to see that documents brought into existence in the six weeks or so following the close of the transaction might well have some bearing upon the relevant factual disputes.

42. In those circumstances, I decided that the cut-off period for the contested categories for discovery should be 31 December 2014. That decision is incapable of reasoned explication beyond the matters to which I have referred. To that extent, it is arbitrary. In reaching that decision, I sought to balance as best I could the competing interests of the parties: on the one hand, having access to all possibly relevant material, and, on the other, having their legal team work on preparation of the hearing and not be distracted by the need to trawl through a mountain of documents to find some that might fall within the categories in question.

43. It appeared to be common ground, and in event was and is my view, that the costs of the application for discovery should be costs in the cause.

The application in relation to subpoenas

44. The final matter dealt with related to a notice of motion filed on 16 May 2016. That notice of motion sought to set aside a number of subpoenas issued at the request of the individual defendants. It was common ground that all but one of those subpoenas should be set aside. The one that remained in dispute had been directed to Recfin. In essence, it sought copies of documents obtained by Recfin in carrying out (as it was said to have done) its own due diligence on the transaction.

45. An important matter of background is that, by orders already made for discovery, LC was required to produce all due diligence documents in its possession. That obligation would catch documents that were brought into existence by (for example) Recfin and given to LC. There was no suggestion that LC’s compliance with its discovery obligations was inadequate.

44. The relevant defendants’ solicitor sought to justify the further discovery on the basis that “there may be documents falling within the categories held by Assetsecure or Recfin which has [sic] not been discovered by [LC]” [6] . If I may say so, that rises no higher than the level of speculation. It is not a reason for upholding a subpoena that seeks to cast a very large net into a very extensive body of water.

    6. Affidavit sworn 19 July 2018, [34].

45. Another reason given was that “some of the categories cover documents which were not captured by the discovery orders” [7] . Ball J made those discovery orders following a contested two day hearing. There was no attempt made to show why those orders were inadequate, or that they had become so by reason of subsequent events. I do not regard that as a proper justification for the subpoena in question.

    7. Ibid, [35].

46. There was originally a dispute as to the costs that Recfin would incur in complying with the subpoena. That dispute went away when the relevant defendants agreed to provide, at their (or their insurer’s) expense, a third party expert to undertake the extensive and no doubt expensive task of sorting through documents to find ones that would be responsive to the subpoena.

47. Nonetheless, in my view, no sufficient justification was offered as to why the subpoena should stand.

48. Accordingly, I ordered that it too be set aside.

49. It was accepted that, having regard to my conclusion, LC (which brought the application although it was not the recipient of the subpoena) should have its costs.

Orders

52. After the conclusion of the hearing, the parties provided draft orders to give effect to the conclusions I expressed. I have made those orders in chambers. There is no need to set them out.

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Endnotes

Decision last updated: 26 July 2018