Morcom v Murone Holdings Pty Ltd
[2019] VSC 426
•26 June 2019
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S ECI 2018 00552
BETWEEN:
| PAUL MORCOM | Applicant |
| v | |
| MURONE HOLDINGS PTY LTD and VINCENT MURONE | Respondents |
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JUDGE: | Mukhtar AsJ |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 29 November 2018, 11 April 2019 |
DATE OF JUDGMENT: | 26 June 2019 |
CASE MAY BE CITED AS: | Morcom v Murone Holdings Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2019] VSC 426 |
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DISCOVERY ― Preliminary discovery ― Discovery from prospective defendant ― Supporting affidavit sworn by applicant’s solicitor on instructions ― Whether applicant personally in a better and informed position to prove facts and grounds for a belief that he may have a right to obtain relief ― Extent of enquiries made by applicant personally ― Whether supporting affidavit discreditable ― No opposing affidavit material ― Existence of documents as sought not denied ― Application granted ― Supreme Court (General Civil Procedure Rules) 2015, r 32.05
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APPEARANCES: | Counsel | Solicitors |
| For the Applicant | Mr D G Guidolin | Wisewould Mahoney |
| For the Respondents | Mr V A Morfuni QC | Dominic Esposito Solicitors |
HIS HONOUR:
This has been an ardently opposed application, over two days, for pre‑action discovery of documents from prospective respondents under the Court’s civil procedural rule 32.05. Under that popular rule, the Court has the power to order the production of documents if the applicant has reason to believe that (in this case) he ‘has or may have the right to obtain relief in the Court’ from the respondents; and ‘after making all reasonable enquiries’ he does not have sufficient information to enable him to decide whether to commence a proceeding. He must also show there is reasonable cause to believe that the respondents have documents on the question whether he has the right to obtain relief; and inspection of those documents would assist him to decide whether to sue.
No respondent likes handing over documents to assist a threatening party to decide whether to sue. But the benevolence of the rule is better seen as serving the administration of justice by preventing speculative suits.
The origins of the prospective legal action here is a share dealing in July 2014 in a private company named George Turner Customs Pty Ltd (‘George Turner Customs’). The applicant Paul Morcom was a minority shareholder in that company. The first respondent, a corporation, was the majority shareholder. The second respondent Vince Murone was the sole director and shareholder of the first respondent. He was also the sole director of George Turner Customs.
George Turner Customs owned two businesses trading from premises in West Melbourne: a customs broker business and a customs importing agency. The applicant says that he was induced to sell his shares in George Turner Customs to the first respondent for $250,000 being the amount that Mr Murone told him the shares were worth, having regard to a proposed sale of the two businesses to Kawasaki Australia (or associated entities) being negotiated by Mr Murone. It seems the applicant accepted Mr Murone’s statement. After Kawasaki took over, the applicant was re-employed in the businesses.
The applicant later obtained reason to believe that the price paid by Kawasaki to buy the businesses meant that his shares in George Turner Customs were worth much more than $250,000. On that figure, he had deduced previously that the business sale price must have been around $3 million. He now has information which is unverified and undocumented that Kawasaki paid about $8 million. If so, he says that would put the true value of his shares at about $628,300.
The applicant wants to know the sale figure to see if he was wrongfully led by Mr Murone to sell his shares at an undervalue. He also wants to see the sale transaction documents for verification, and how the sale was structured. The respondents refuse to tell him the figure. They refuse to give him any documents. They do not say the documents do not exist. They do not say the information or documents are confidential or proprietary. When approached, Kawasaki also refused to give any information.
The evidence in support of this application comes not from the applicant but from the applicant’s solicitor Mr Chris Stakis. His affidavit is based largely on his information and belief gained from his instructions from the applicant. The choice of deponent in interlocutory applications, if it isn’t the applicant personally, can raise questions of the cogency of evidence, depending on the nature of the Court application and the case. But, evidence from a deponent’s knowledge and belief is admissible. For the purposes of rule 32.05 and its apparent objects, it is pertinent that a solicitor eventually takes responsibility under the Civil Procedure Act to certify, or advise, that a proper basis for commencing litigation exists. The solicitor is in the informed position to expose the relevant objective evidence and state the opinion whether it is insufficient to commence a proceeding, and then identify for the Court what documents are needed to enable an applicant to make a decision whether to sue. It might be different if a deponent was discernibly chosen to enable an applicant to avoid responsibility.
The following facts, observations or statements of belief from Mr Stakis’ affidavit are not challenged by the respondents.
Until mid-July 2014, the applicant held 1,500 of the 19,100 shares (equivalent to about eight per cent) in the issued share capital in George Turner Customs. The remaining 17,600 shares were held by the first respondent Murone Holdings Pty Ltd of which the second respondent Vincent Murone was the sole director and shareholder. As at mid July 2014 Mr Murone was also the sole director of George Turner Customs.
George Turner Customs had as its assets a customs broker business, and, one of two issued shares in Supply Chain Logistics Pty Ltd (‘SCL’) which owned and operated a customs importing agency business (‘the Supply Chain business’). Both businesses were conducted at 52 Roslyn Street in West Melbourne. The applicant, who is 59 years of age, had been employed in the customs broker business for 40 years, and an employee of the Supply Chain business since its inception. From about mid July 2014 he was General Manager of both. He was a director of SCL, as was Mr Murone.
Mr Murone negotiated a sale of the two businesses to Kawasaki (Australia) Pty Ltd or its associated entities. It is not known whether the sale occurred by way of a transfer of assets or a transfer of shares. There is no evidence that the applicant played any part in the negotiation of the sale. The applicant says that on about 16 July 2014, Mr Murone told him that:
(i) he sold the customs broker business and the Supply Chain business to Kawasaki;
(ii) the value of the applicant’s 1,500 shares in George Turner Customs was $250,000;
(iii) the applicant would be paid for his shares in instalments over 12 months and the first payment would be the largest so that the applicant would get the bulk of the proceeds upfront;
(iv)the applicant would also receive a distribution of profits after the George Turner Customs and SCL businesses were sold; and
(v) the applicant would have to be employed in the new business.
On an assumption that the value of the applicant’s shares was referrable to the capital value of the two businesses as sold to Kawasaki, a representation made to the applicant that his 1,500 shares in George Turner Customs (approximately an 8% shareholding) were worth $250,000 means each share was worth about $167. On that basis, the 17,600 shares held by Murone Holdings (a 92% shareholding) would be worth $2,939,200. On a basis of the capital sale value of the businesses and on certain assumptions, those percentages translate algebraically to a supposition by the applicant of a sale price of around $3.125 million.
On about 16 July 2014, Murone presented the applicant with documents for the purpose of giving effect to the sale of the businesses to Kawasaki. Those documents are not before the Court. Nor is there a specific description. The applicant signed and returned the documents. One of the documents was bound to be a sale and transfer of shares to the first respondent. The applicant was not given a copy of those documents.
Under Kawasaki’s ownership of the two businesses, the applicant was the general manager. In that position, he was regularly provided with financial statements showing the performances of the businesses under the new owner. He says it became apparent to him that the two businesses were earning about $4 million in revenue and making an annual profit of about $700,000 even though the businesses lost three major accounts after Kawasaki took over. The applicant’s thinking was that if the businesses were generating that level of profits each year since Kawasaki took ownership, and substantially more prior to the sale of the businesses (with the three major accounts) then the businesses could be worth much more than the $3.125 million.
Moreover, in early 2018 (that is four years after Kawasaki’s acquisition), the former secretary and Chief Financial Officer of Kawasaki, a Mr Chris Wareham, told the applicant that Kawasaki paid significantly more than $3 million. He told him that payment was made in full at completion of the sale in July 2014. Mr Wareham is said to have played an important role in the transfer of the businesses to Kawasaki. The applicant says he received information which I take to mean ‘got word’ that Kawasaki paid about $8 million.
The applicant engaged solicitors to ascertain information about the sale. It can be reasonably supposed that such an acquisition by Kawasaki occurred by extensive and professionally prepared documentation. His solicitor Mr Stakis started by conducting multiple searches of records maintained by the Australian Securities and Investments Commission to try and understand the corporate identities and affairs, the shareholdings, the share transfers and corporate control. I shall not narrate the information apparent from the company searches. What matters is that the applicant’s solicitor swears that after examining all that information he could not confidently say precisely how Kawasaki acquired the two businesses, or how the sale transaction was structured legally, and certainly could not ascertain what it paid for those businesses.
Accordingly, by letter to the respondents dated 25 May 2018, the applicant’s solicitor gave an account of the information obtained from the ASIC searches and made specific reference to the applicant’s (unverified) information that the Kawasaki entities paid about $8 million for the businesses. The letter requested production of the sale agreement; the share transfer or any other document which the applicant was asked to sign for the purpose of giving effect to the sale agreement; and any evidence showing the payments that were received from the sale agreement, whether it be sale of the business or sale of shares in any company. The letter said that if documents were not produced, then an application would be made to the Court for preliminary discovery.
On 28 May 2018, the solicitors acting for the respondents, Dominique Esposito Solicitors, wrote this:
We act on behalf of Mr Vincent Murone and Murone Holdings Pty Ltd.
Please direct all correspondence in this matter to our firm.
Our client denies all the matters asserted by your client.
With respect to the sale transaction that you refer, that transaction was completed for value of consideration a number of years ago.
Our clients will not be entering into any further communications in relation to this matter.
That is putting up a brick wall. I think it serves only to invite legal action. The stance there taken sets the scene for the conduct and attitude of the respondents in this application. It is to be kept in mind that the enquiry for documentation was not coming from an outsider or a someone intermeddling, but from a long-standing employee and past shareholder.
That attitude led the applicant’s solicitors to request the information from Kawasaki (Australia) Pty Ltd. By letter dated 14 June 2018, a letter was sent to Kawasaki explaining the background and stating that the applicant wished to consider whether he had an action regarding the sale of his shares in George Turner Customs. The letter asked for details and documents concerning the amount paid by Kawasaki for the businesses or any transfer of shares under the sale of the businesses. It said:
In making this request, we wish to make it clear that our client makes no allegation of any wrong doing by the Kawasaki entities in the course of the purchase of the business. The request is made solely for the purpose of considering whether an action lies against the Murone parties, and only by reason that Mr Murone had refused the request by our client for limited information.
For the avoidance of doubt, any information you disclose to our client will be used solely for the purpose of any proceeding that might be issued by our client, if a claim is evident. Our client wishes to make it clear that no allegations are made at this stage against Mr Murone, but in light of the information recently provided to him as to the sale price of the business, our client wishes to make an assessment as to his proper entitlement upon the sale of the business.
The response received to that letter from Kawasaki (Australia) Pty Ltd by letter dated 20 June 2018 was disobliging. It said this:
We refer to your letter dated 14 June 2018.
In your letter, you, on behalf of your client, Paul Morcom, request various information and documents concerning the sale of George Turner (Customs) Pty Ltd which Kawasaki (Australia) Pty Ltd may or may not have in its possession concerning that transaction.
Kawasaki (Australia) does not propose to volunteer any such information or documents to your client.
It is plain from the evidence that neither the respondents nor Kawasaki are denying the existence of the documents. No information is given. No reason is given for withholding. Nowhere in the materials is there a suggestion that the documents sought could not be produced because of confidentiality or other proprietary considerations. Nowhere is it asserted that the applicant already had the information or knew as much, or was in a position to gain the information from other sources. Accordingly, the Court will proceed on the basis that there is no denial that the documents as sought in the pre-action correspondence do exist, and that documents had been given by Mr Murone for the applicant to see and sign. It is reasonable to suppose a sale agreement of this scale would have to be documented. It is reasonable to suppose there would be integral or ancillary agreements either involving the sale of assets or the sale of shares to effect the sale to Kawasaki.
The applicant and Mr Murone are not strangers. They were involved in the same businesses. Valuation of shares is no elementary exercise and there is more to it than a linear equation. On the available information, what had been sold to Kawasaki were the two assets of those companies, the two businesses. This application is not concerned with making a valuation. The applicant proceeds by something more than a reckoning that as a shareholder his interests, financial or economic, is represented by proportional interest in the companies as a going concern and notionally the value or asset backing of the shares is in the value of the business. When the businesses were sold the task of ascertaining approximately the sale value of the business as a capitalised figure enable an estimation of a share valuation referable to the size of a person’s shareholding.
The applicant’s apprehension is that he was induced to sell his shares to Murone Holdings by representations made to him by Murone about the value of his minority shareholding. The applicant has Wareham telling him that the company was sold for $8 million but the respondents and Kawasaki refuse to give any information or documents to enable him to ascertain how the businesses were sold and for what price. Until he knows the price for which the sale of the businesses occurred, and the way the sale and acquisition was structured, he is in no position to see if he may have (to use the language of the rule) and his lawyers are in no position of pleading and instituting a case against the respondents. That is the basis of the application.
The originating motion seeks the following documents:
1.Pursuant to Rule 32.05 of the Supreme Court (General Civil Procedure) Rules 2005 the Respondents make discovery to the Applicant of any document or thing in their possession, custody or power relating to:
(a)the acquisition by and/or transfer to the Respondents, or either of them, of the shares held by the Applicant in George Turner (Customs) Pty Ltd (ACN 004 928 296);
(b)the sale and/or transfer of the assets of George Turner (Customs) Pty Ltd (ACN 004 928 296) to:
(i) the Respondents, or either of them; and/or
(ii) George Turner Pty Ltd (ACN 167 337 031); and/or
(iii) Kawasaki (Australia) Pty Ltd (ACN 000 748 621);
(c)the sale and/or transfer of the assets of Supply Chain Logistics Pty Ltd (ACN 118 543 196) to:
(i) the Respondents, or either of them; and/or
(ii) George Turner Pty Ltd (ACN 167 337 031); and/or
(iii) Kawasaki (Australia) Pty Ltd (ACN 000 748 621); and/or
(iv) Supply Chain Logistics (Aust) Pty Ltd (ACN 168 337 040);
(d)the acquisition by and/or transfer to Kawasaki (Australia) Pty Ltd (ACN 000 748 621) of the shares held by the Second Respondent in George Turner Pty Ltd (ACN 167 337 031) and Supply Chain Logistics (Aust) Pty Ltd (ACN 168 337 040).
As I have said, the respondents’ approach was not to engage with anything said in the supporting affidavit sworn by Mr Stakis. Instead they went on the counter-attack. They required the applicant to produce documents. The apparent stratagem was to disqualify the application by first exploring what the applicant truly knew about the sale figure, or what he was in a position to know or ascertain at the time or had the means to find out, from which to then contend that he knew or must have known the sale price and was already in a position to decide whether or not to commence proceedings or make further enquiries. It also transitioned to try and show for the purposes of the Court’s ultimate discretion on the application, that if the applicant knew the sale price that would make a prospective misrepresentation case unsustainable.
On orders made on 24 August 2018, I ordered the applicant, without any resistance, to produce certain documents as identified in Mr Stakis’ affidavit. They were financial documents given to the applicant after Kawasaki took control. Those documents were produced. I also ordered the respondents to then file any affidavit in opposition to the application so the Court could without further delay proceed to determine the application on its merits.
But the next move by the respondents was to serve a Notice to Produce under r 29.10 requiring the applicant to file certain documents said to have been referred to in Mr Stakis’ affidavit, and then requiring production of all documents and instructions given by the client to Mr Stakis that informed his affidavit. Then, on 8 November 2018, the respondents filed a summons in effect to enforce the notice to produce which sought inspection of documents in the notice to produce, and inspection of other documents. That in turn was followed on 9 November 2018 by a subpoena under 42A to Mr Stakis requiring him to produce all documents that informed his affidavit. That was tantamount to asking for his solicitor’s file. That potentially raised many questions, and was met with objections that the subpoena was an abuse of process.
I will not go into the details of each of those steps taken by the respondents. They are entitled to test the application, but it resulted in a prolongation of the case because ultimately, on 29 November 2018, I made orders to set aside the notice to produce; to dismiss the respondents’ summons; and to allow the applicant’s objection to the subpoena. I did so because, in essence, the applicant had already produced the documents as sought; the pursuit was too wide; or served no legitimate forensic purpose. One might have thought that if the respondents wished to show that the applicant knew more than he was saying, it was up the respondents to adduce evidence presumably from Mr Murone about the representations or other circumstances to show that the applicant knew the sale price and accepted the sale price of his shares with informed knowledge about their value.
Eventually, two affidavits were filed in opposition to the application. The first was an affidavit of the respondents’ solicitor Mr Mathew Thomsen, sworn 8 April 2019. That affidavit was largely argumentative and therefore inadmissible. It was based on instructions from Mr Murone that the applicant was in need of a loan of money in response to which Mr Murone says he offered $250,000 for his shares ‘take it or leave it’. The second affidavit was by a chartered accountant, Mr John William McKenzie. He was the accountant for George Turner Customs. This affidavit appeared to be mainly in the nature of expert evidence about share valuation, and challenging the basis of the applicant’s apprehensions.
The applicant took objection to the late delivery of these two affidavits without any explanation being given by the respondents’ solicitor. Objection was also taken to their relevance and admissibility. I informed senior counsel for the respondents that before considering whether to refuse late filing and service of those affidavits, the Court would be bound to give Mr Thomsen the opportunity to give sworn spoken evidence in Court to explain the delay, for which I would allow cross examination. The respondents then withdrew any reliance on those two affidavits. The upshot was there is no affidavit material in opposition to the application.
In submissions, the respondents’ resistance was based on whether the applicant had met the requirements of r 32.05. There was no resistance on the grounds that the materials were confidential. There was no submission made that the nature and extent of documentation as sought in the motion was overreaching as being beyond the entitlements under r 32.05. Rather, the resistance proceeded on the following submissions.
First it was submitted that the Court should take the approach similar to the approach to be taken by a court when considering an application for equitable relief such as interim injunction, and expect an applicant to disclose all information available to him. That is, the applicant was obliged to reveal to the Court all that he knew about the sale and the businesses so as to satisfy a Court that all enquiries had been made and that what he knew was still not enough to make an informed decision whether to sue. The assumption seemed to be that he had not told his solicitor all that he knew. Senior Counsel for the respondents submitted that the applicant was in an informed position because he was a director of Supply Chain Logistics and a shareholder of George Turner Customs. It was said he must demonstrate to the Court that he had no other means of ascertaining the sale price and had to proffer an explanation as to why he could not, in his managerial position, have ascertained the price, especially as he is ‘part of the outfit’. It was submitted that it ‘beggars belief’ and was wholly improbable that the applicant ‘did not know what was going on’, by which I took to be an assertion, and no more, that a man in his position must have known about the sale and the price and that it now suits him to say he was ignorant about the selling price to the third party, all the better to obtain documents to see if he can make a case. The submission went on to say that in, any case, in the applicant’s prospective case based upon misleading and deceptive conduct by Mr Murone for a pre contractual misrepresentation, a Court would need to know what it was that the applicant actually knew before he could be said to have been misled. From there, I was asked to conclude that I could not be satisfied that he had reasonable cause to believe that he had a right of relief, as an essential precondition of rule 32.05.
It was also submitted that the applicant has not shown that all reasonable enquiries were made, as he has said nothing about his duties as a manager and his exposure to information. It was submitted that the Court should not believe that Mr Morcom only came to know about the financial affairs after the sale. He went on to say that it is not reasonable that just because Kawasaki showed a profit after the sale, then the vendor must have been showing a greater profit beforehand. He must have had, it was asserted, information available to him in his capacity as general manager, or he must have been given the financial information before the sale from which he would be able to deduce the share value and the value of the business, and, indeed, to know what the sale price would have been. Senior counsel submitted that put the lie to the theme of his affidavit that he was ignorant about the price. The submission then was that I should not believe him when he instructed his solicitor that he did not know the price. All this went to the submission that the application failed at the threshold or should be disqualified.
It was also said that the applicant has failed to tell the Court what he knew and did not know as a shareholder, director and general manager. But as a shareholder, the applicant’s case is that he acted upon what Murone had told him about the value of his shares as a minority shareholder. The applicant was not a director of George Turner Customs, Murone was the sole director. On the ASIC searches the applicant was a director and employee of Supply Chain Logistics Pty Ltd, but evidence put before the Court suggested there had been a transmission of the business across to another corporation, SCL (Aust) Pty Ltd, of which Kawasaki was the owner of the total share capital of two shares.
It was then submitted that even if all reasonable enquiries had been made, the question was: was it reasonable to say that he could not make a decision to sue because he did not know the sale price? Senior Counsel submitted that it was enough to have been given the information by Wareham and that in truth, all this application was doing was searching for certainty. The suggestion seemed to have been that it was incumbent on the applicant to get a witness statement from Wareham from which a basis would exist for alleging what the sale price was, without the need to resort to pre‑action discovery. It was also submitted that if Wareham had given him the information about the sale price, then Mr Morcom should have then used that information to make all reasonable enquiries. It was submitted that the applicant had not made all reasonable enquiries before the solicitor’s letter was sent.
I do not accept any of these submissions. I am being asked to disbelieve the applicant’s instructions or assume he knows more than he is willing to say, yet there is no affidavit material from the respondents or anyone else about what they say the applicant was told or the information he was actually exposed to, or any other factual circumstances beyond supposition to make it innately incredulous that the applicant must have known the sale price. I think it is inadequate to simply assert ‘the applicant should reveal all that he knew about the sale’, ask the Court to conclude that he has not done so, and from that conclude that he knew more about the price than he is letting on. The response is plain, to my mind. These are mere assertions. If the respondents have evidence that the applicant did know the price and did have exposure to information to ascertain the price, then that should have been put forward to join issue. The respondents have not adduced any evidence in opposition to the application. They have, in Court, in effect carried out what their initial letter said: ‘we will not be entering into any further communications in relation to this matter’.
As a matter of ordinary litigation experience I can accept, if and when a proceeding is commenced, there will be more to this case on the merits, factually or forensically, than has been exposed in the evidence in support of this pre-action application. And there will also presumably be revelations to be made by the thus far silent respondents. But I am not concerned with guessing the merits of the contemplated case or disbelieving the untested source of the affidavit evidence. Rule 32.05 is a tool of justice and it is applied benevolently unless it is apparent that it is being pursued on nothing more than a hunch without any prior diligent investigation, speculatively or unnecessarily and therefore invasively. Questions about the applicant’s credibility or state of knowledge or reliance on Murone or his independent means of knowing the value of his shares (and other considerations present typically in a pre-contractual misrepresentation case) are all matters for trial in the defence of any proceeding that the applicant may bring.
I think the respondents are conflating the basis for seeking pre‑action discovery with the merits of the case if an action is brought. The question of what Morcom knew, or might have known, or could have known about the sale price or the structure of the sale may, and I say only may, go to the question about the merits of any action against Murone for misleading and deceptive conduct. That is, on the question of reliance there might be a question whether it was reasonable for the applicant to act on what was said by Murone, or whether independently of any representation the applicant had his own means of knowledge. But these should all be matters for trial, depending on the composition of the cause of action and the defence taken.
The respondents seems to be suggesting that, having spoken to Wareham, there was enough there upon which to commence proceedings and then obtain discovery later. But, an applicant for preliminary discovery is entitled to be cautious before making a decision to embark upon costly litigation.[1] In my view, what Wareham told the applicant was the impetus for the further enquiries of the respondents and of Kawasaki, both to no avail. It would not have been an adequate basis to commence proceedings by referring to a conversation with Wareham. I doubt if any competent solicitor would be willing to sign a proper basis certificate under the Civil Procedure Act on nothing more than a conversation with Wareham, with or without a witness proof, because what really matters to establish the case is the actual agreement itself and an ability to allege the sale price. This part of the respondents’ submission goes against what the courts have said about the concept of a ‘bare pleadable case’ and how it goes fundamentally against the purpose of the rule. In Optiver Australia Pty Ltd v Tibra Trading Pty Ltd,[2] the Full Court of the Federal Court said:
A case may be pleadable, and not merely barely so, even if the evidence supporting the pleaded case is dubious or vulnerable to contradiction. Section 165 of the Evidence Act 1995 (Commonwealth), although concerned with jury trials, provides some examples of categories of evidence which experience has shown to be likely to be unreliable: hearsay, identification evidence, evidence of witnesses affected by age, ill‑health or injury, evidence of prison informers et cetera et cetera. Quite apart from these categories, the pleader may have evidence of a reputable person which sufficiently supports the pleaded cause of action but, to the pleader’s knowledge, there may be equally reputable witnesses who will swear to the contrary. Or there may be a perfectly good applicant’s pleadable case but potential defences, such as under a contractual provision or problematic or unpredictable issue such as waiver, estoppel, or unconscionable conduct. Or there may be real uncertainty as to the quantum of provable damage, such as to throw doubt on the practical wisdom of issuing proceedings. [authorities omitted]
The concept of a ‘bare pleadable case’ is not only a gloss on the text of the rule but is fundamentally inconsistent with its purpose. The policy behind the rule is that even where there is a reasonable cause to believe that a person may have a right to relief, nevertheless that person may need information to know whether the cost and risk of litigation is worthwhile. As Hely J pointed out in St George Bank Ltd v Rabo Australia Ltd (2004) 211 ALR 147 at [26], the question does not concern the right to relief but rather ‘whether to commence proceedings’. Inspection of documents in the possession of the proposed respondent may enable a properly informed decision to be made whether to commence a proceeding to obtain the relief. The ‘bare pleadable case’ approach diverts attention from the true purpose of the rule. A person may have a pleadable case, but still not sufficient information upon which to decide whether to embark upon litigation.
[1]BJ Bearings Pty Ltd v William Robert Whitehead and Others [2016] VSC 44. [19].
[2](2008) 169 FCR 435.
In this case, the question of the consideration paid for the sale of the businesses and the structure of the sale and acquisition will surely be ascertainable from the sale agreements or any other documents as were sought. The responsible conduct of litigation, I think, would require proceeding not with the possible infirmity of an ex‑financial officer of Kawasaki for a conversation four years after the acquisition, but by reference to, presumably, the clear contents of commercial agreements. In any case, the applicant’s solicitors here did the responsible thing by directing an enquiry to Kawasaki in June 2018 based on what Wareham had said. But, that request met a refusal from Kawasaki. Thus, I cannot see how it could be said that the applicant had sufficient information by which to commence proceedings.
There are numerous authorities on the applicable principles under rule 32.05. It is sufficient to recite the principles as stated in Plzen Pty Ltd v P & O Wharf Management Pty Ltd[3] as follows (with my emphasis):
[3][2007] VSC 318.
(a) the rule is to be construed benevolently or beneficially;
(b)its primary object is to advance the administration of justice by enabling a prospective applicant to make an informed decision on proper material about whether or not to bring an action;
(c)the test for determining whether the application has ‘reasonable cause to believe’ is an objective one;
(d)the test is satisfied if the applicant ‘may have’ the right to obtain relief;
(e)the applicant does not have to show that it has a prima facie case that it has the right to obtain relief;
(f)an application must not be based upon a mere hunch;
(g)‘belief requires more than mere assertion and more than suspicion or conjecture’, the ‘evidence must incline the mind towards the matter or fact in question’;
(h)but the assent of belief is given on more slender evidence than proof and the grounds which can reasonably induce the required inclination of the mind may, depending on the circumstances, leave something to surmise or conjecture;
(i)it is no answer to an application for pre-trial discovery to say that it is in the nature of a ‘fishing’ expedition because that is permitted by the rule if the required conditions are made out;
(j)if there is no reasonable cause to believe that one of the necessary elements of a potential cause of action exists, that would dispose of the application insofar as it is based on that cause of action;
(k)while uncertainty as to only one element of a cause of action might be compatible with the required ‘reasonable cause to believe’, uncertainty as to a number of such elements may be sufficient to undermine the reasonableness of the cause to believe; and
(l)control of any excesses could be exercised as a matter of the Court’s discretion in the particular circumstances of each case.
To that I would add what I think respectfully is this very important statement of Chief Justice Allsop of the Federal Court of Australia in Pfizer Ireland Pharmaceuticals v Samsung Bioepsis AU Pty Ltd[4] on the evaluation of the rule in its identical form in that Court:
It is important to approach the task with the fundamentals of the rule in mind. There have been a large number of cases now (both at first instance and Full Court) dealing with and explaining the relevant rule. Those authorities should not be utilised to form a complex matrix of sub‑rules for the operation and application of a tolerably straightforward provision. Whilst there was no submission that any of these cases was wrongly decided, there does appear to have been a tendency to create an overly abstracted conceptualisation of refined states of mind which, if the words of the rule are not kept in mind, can lead in application to a misstatement of the essence of the rule, focused as it is upon what may be the position. The foundation of the application in r 7.23(1)(a) is that an applicant (a person or a corporation) reasonably believes that he, she or it may have a right to relief. The belief therefore must be reasonable (expressed in the active voice that someone reasonably believes) and it is about something that may be the case, not is the case. It is unhelpful and likely to mislead to use different words such as ‘suspicion’ or ‘speculation’ to re‑express the rule. For instance, it is unhelpful to discuss the theoretical difference between ‘reasonably believing that one may have a right to relief’ and ‘suspecting that one does have a right to relief’ or ‘suspecting that one may have a right to relief’ or ‘speculating’ in these respects. The use of such (different) words and phrases, with subtleties of differences of imprecise meaning, and not found within the rule itself is likely to lead to the proliferation of evidence and of argument, to confusion and to error. One must keep the words of the rule firmly in mind in examining the material that exists in order to come to an evaluation as to whether the relevant person reasonably believes that he or she may have a right to relief. That evaluation may well be one about which reasonable minds may differ.
[4][2017] FCA 285 [8]. See also [120] and [121] per Perram J and [172], [177], and [178] per Nicholas J.
Applying those principles, on the evidence that is before the Court, and eschewing any unavailable judgments on credibility, I think the grounds of the application are made out, and the applicant is entitled to the discovery that he seeks in the amended originating motion. I think the ambit of the application is moderate and reasonable, and it comes not from an intermeddling or adventurous stranger to the transaction but from someone whose financial interests were directly affected by the transaction. I would be disposed to making an order for discovery in the terms as expressed in the originating motion.
That leaves the question of costs which I detect will be the subject of disputation. May I take leave to refer the parties to the decision of Guest v Guest (No 2).[5] I shall reconvene a court on a date convenient to both parties to hear submissions on costs and for the making of final orders.
[5][2016] VSC 76.
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