Morton v Nylex Ltd

[2007] NSWSC 562

CITATION:	Ian Edward Morton & 5 Ors v Nylex Ltd & 1 Or [2007] NSWSC 562
HEARING DATE(S):	22/05/07
JUDGMENT DATE :	4 June 2007
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	White J
DECISION:	1. Order that the amended summons be dismissed; 2. order that the plaintiffs pay the first defendant’s costs of the proceedings.
CATCHWORDS:	PRACTICE AND PROCEDURE – Preliminary discovery – Whether requirements of r 5.3(1)(a) of Uniform Civil Procedure Rules 2005 (NSW) are satisfied – Where it appears to the Court that the applicants may be entitled to make a claim for relief – Where it appears to the Court that reasonable inquiries have been made – Where relevant documentation already obtained through those inquiries – Where applicants have not disclosed what information they possess or identified what information is lacking for decision to be made – Whether it appears to the Court that applicants “unable to obtain sufficient information to decide whether or not to commence proceedings” – Objective assessment by the Court of information already possessed by the applicants is required to determine whether that information is sufficient for such a decision to be made – Requirements of r 5.3(1)(a) not satisfied – Order that application be dismissed. - (NSW) Uniform Civil Procedure Rules 2005, rules 5.3 and 5.4 - (CTH) Corporations Act 2001, ss 232 and 233
LEGISLATION CITED:	Uniform Civil Procedure Rules 2005 (NSW) Corporations Act 2001 (Cth) Trade Practices Act 1974 (Cth) Evidence Act 1995 (NSW)
CASES CITED:	Panasonic Australia Pty Ltd v Ngage Pty Ltd (2006) 69 IPR 595 Alphapharm Pty Ltd v Eli Lilly Australia Pty Ltd, Lindgren J, Federal Court of Australia, 24 May 1996, BC 9602085 St George Bank Ltd v Rabo Australia Ltd (2004) 211 ALR 147 Glencore International AG v Selwyn Mines Ltd (recs and mgrs apptd) (2005) 223 ALR 238 Matrix Film Investment One Pty Ltd v Alameda Films LLC [2006] FCA 591
PARTIES:	Ian Edward Morton v Nylex Limited & 1 Or
FILE NUMBER(S):	SC 1235/07
COUNSEL:	Plaintiffs: R K Newton Defendants: J Stoljar
SOLICITORS:	Plaintiffs: Hewitts Commercial Lawyers Defendants: Hunt & Hunt

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

WHITE J

Monday, 4 June 2007

1235/07 Ian Edward Morton & 5 Ors v Nylex Limited & 1 Or

JUDGMENT

1 HIS HONOUR: This is an application under rules 5.3 and 5.4 of the Uniform Civil Procedure Rules 2005 (NSW) for preliminary discovery.

2 The plaintiffs are minority shareholders in Hawker Richardson Ltd (“HRL”). In August 1997, the first defendant, Nylex Ltd (“Nylex”) acquired 87.8% of the shares in HRL. The second defendant, National Australia Bank Ltd, did not appear on the present application. The evidence read on the application suggests that it provided finance to Nylex.

Preliminary Discovery Against Nylex

3 The plaintiffs seek orders that Nylex be required to produce certain classes of documents for the purpose of assisting the plaintiffs in determining whether or not they are entitled to make a claim against Nylex for breaches of the Corporations Act 2001 (Cth) or the Trade Practices Act 1974 (Cth). The application is made pursuant to rule 5.3 of the Uniform Civil Procedure Rules. Rule 5.3 provides:

“ 5.3 Discovery of documents from prospective defendant
(cf Federal Court Rules , Order 15A, rules 6, 7 and 9)
(1) If it appears to the court that:
(a) the applicant may be entitled to make a claim for relief from the court against a person (the prospective defendant) but, having made reasonable inquiries, is unable to obtain sufficient information to decide whether or not to commence proceedings against the prospective defendant, and
(b) the prospective defendant may have or have had possession of a document or thing that can assist in determining whether or not the applicant is entitled to make such a claim for relief, and
(c) inspection of such a document would assist the applicant to make the decision concerned,
the court may order that the prospective defendant must give discovery to the applicant of all documents that are or have been in the person’s possession and that relate to the question of whether or not the applicant is entitled to make a claim for relief.
(2) An order under this rule with respect to any document held by a corporation may be addressed to any officer or former officer of the corporation.
(3) Unless the court orders otherwise, an application for an order under this rule:
(a) must be supported by an affidavit stating the facts on which the applicant relies and specifying the kinds of documents in respect of which the order is sought, and
(b) must, together with a copy of the supporting affidavit, be served personally on the person to whom it is addressed.
(4) This rule applies, with any necessary modification, where the applicant, being a party to proceedings, wishes to decide whether or not to claim or cross-claim against a person who is not a party to the proceedings. ”

4 The plaintiffs seek orders that Nylex produce to them the following documents:

“ All documents held by Nylex in respect of

I. Project Lex as set out in KPMG document dated 12 November 2001;
II. Project Wombat as set out in minutes of directors meeting of Nylex dated 24 April 2003;
III. Project Rawson as set out in KPMG document dated April 2003;
IV. Project Penfolds as set out in the e-mail from Stephen Cecil to Bronwyn Constance (Nylex) dated 8 February 2002;
V. Project Yattarna as set out in e-mail from Marcus Davenport (Clayton Utz) to Lloyd Doddridge (Nylex) dated 13 June 2003;
VI. Sale contracts for Marsden & McGain Pty Limited (‘Marsden’), T.E.D. Engineering Australia Limited (‘T.E.D. Engineering’), U-Neek Bending Co. (‘U-Neek’), Australian Controls (‘Australian Controls’), Mills Elastomers (‘Mills’) and Champion Compressors Proprietary Limited (‘Champion’);
VII. Asset Divestment Program (Plan) as set out in letter from Julian Vella (KPMG) to Peter Crowley (Nylex) dated 22 March 2002;
VIII. Acquisition and Divestment Plan as discussed in letter from KPMG (Peter White) to Nylex (Peter Crowley) dated 5 October 2001;
IX. Deed of Novation of Facilities between Hawker Richardson Limited, Nylex and National Australia Bank dated 15 July 2003;
X. Lenders Strategic Plan as set out in letter from Julian Vella (KPMG) to Peter Crowley (Nylex) dated 22 March 2002;
XI. Group Debt Reduction Plan as set out in letter from Julian Vella (KPMG) to Peter Crowley (Nylex) dated 22 March 2002;
XII. Override agreement as referred to in the letter from KPMG to Nylex dated 19 December 2001;
XIII. Standstill Agreement dated 11 September 2001 as set out in letter from Clayton Utz (Seak-King Huang) to Nylex (Bronwyn Constance) dated 12 September 2001;
XIV. Revolving Cash Advance Facility Agreement dated 20 February 2004 and referred to in e-mail from Marcus Davenport dated 9 March 2004;
XV. Valuations of KPMG for Marsden & McGain, Ted Engineering, U-Neek Bending, Australian Controls, Mills and Champion;
XVI. KPMG Scoping study dated 2 February 2002;
XVII. Letters of engagement of KPMG and KPMG Corporate Finance for the period 1 January 2001 to 31 December 2004 for hte valuations of Hawker Richardson subsidiaries;
XVIII. Loan facility agreement dated 15 July 2003;
XIX. Minutes of asset Divestment Strategy Committee of Nylex 1 January 2001;
XX. all e-mails between Lloyd Doddridge and N. Christensen for the period 1 July 2002 to 31 December 2003;
XXI. All KPMG Monitoring reports;
XXII. All finance directors reports of Nylex for the years 2002 and 2003;
XXIII. All e-mails between Philip Gibbs and Peter White for the period 1 May 2003 to 31 August 2003;
XXIV. Franking credits obtained by Nylex in the sale of TED Engineering. ”

5 The issues on this application are:

1. whether it appears that the applicant may be entitled to make a claim for relief against Nylex. Nylex submits that the plaintiffs have not shown that there is reasonable cause to believe that they may be entitled to make any claim for relief against it;

2. whether it appears that the plaintiffs, having made reasonable enquiries, are unable to obtain sufficient information to decide whether or not to commence proceedings against Nylex;

3. whether it appears that Nylex may have possession of documents that can assist in determining whether or not the plaintiffs are entitled to make such a claim for relief and would assist the plaintiffs in making such a decision;

4. whether the plaintiffs are improperly bringing proceedings against Nylex under r 5.3 to compel the production of documents to which they claim to be entitled pursuant to orders made in other proceedings against HRL, on an application by certain of the plaintiffs for orders under s 247A of the Corporations Act against HRL authorising those plaintiffs to inspect and take copies of books of HRL;

5. whether there are discretionary reasons for refusing the application in respect of all or some of the documents sought; and

6. if orders for discovery are made, what amount should the plaintiffs be ordered to pay for Nylex’s costs of producing documents for inspection.

Requests for Production of Documents

6 Until 1999, HRL was a listed public company. The plaintiffs contend that after Nylex acquired 87.8% of the shares in HRL, it took control of the board, the management and the finances of HRL. According to correspondence from the solicitors for Mr Morton, the first plaintiff, HRL’s accounts for the financial year ended 30 June 1997 reported its having net assets of $47,300,000. According to the plaintiffs’ solicitors, the 2001 annual report of HRL reported that management had reviewed the operations of the group and identified business operations to be rationalised through divestment or closure. The solicitors quoted from the 2000 annual report that as part of the review, $22,522,000 had been written off to profit and loss. Mr Morton deposed that all of the assets and businesses of HRL had been disposed of by 30 June 2006 and that at that time, HRL had a deficiency of net assets of $2,900,000.

7 From the correspondence tendered on the application, it is common ground that in 2002 or 2003, businesses of HRL known as Australian Controls and Mills Elastomers, and shares held by HRL in a subsidiary called TED Engineering Australia Ltd were sold to other subsidiaries of Nylex. HRL also sold shares in Champion Compressors Pty Ltd to a subsidiary of Nylex. The plaintiffs contend that these were wholly owned subsidiaries of Nylex. They contend that since January 1999, the directors of HRL were also directors or executives of Nylex, that there were no independent directors of HRL, and that no approval for the sales were sought from shareholders. From the correspondence tendered, it is common ground that the sales were effected upon valuations, or at the mid-point of a range of valuations, provided by KPMG Corporate Finance. The plaintiffs’ solicitors asserted that in announcements made to the ASX, Nylex had identified KPMG Corporate Finance as a strategic and financial adviser to it.

8 Mr Morton deposed that since Nylex purchased shares in HRL, the following HRL controlled entities or businesses had been sold: Marsden & McGain Pty Ltd; TED Engineering Australia Ltd; U-Neek Bending Co; Australian Controls; Mills Elastomers; Scientific Devices Australia Pty Ltd; Hawker Richardson Trading; and a shareholding in Champion Compressors Pty Limited. So far as the evidence on the present application reveals, only the shares in TED Engineering Australia Ltd, Champion Compressors Pty Ltd and the Mills Elastomers and the Australian Controls Businesses, were sold to related entities. The plaintiffs’ solicitors contended in correspondence that apparently viable businesses were sold to provide funds to enable Nylex to reduce its debt exposure to National Australia Bank.

9 From 20 November 2002, Mr Morton sought production of documents from HRL in relation to such divestments. HRL’s initial response was to refuse the application on the grounds that he had no legal entitlement to the information and that the information was commercially confidential. On 29 August 2003, Fisher Jeffries, writing on behalf of Mr Morton, outlined Mr Morton’s concerns, including a concern that whereas it was reported that the businesses of Australian Controls and Mills Elastomers were sold at an independent valuation, the valuation of KPMG Corporate Finance could not be characterised as independent as it had been identified as a strategic and financial adviser to Nylex. Fisher Jeffries sought information and documents including:

“ (a) the KPMG Corporate Finance valuation in respect of the Australian Controls and Mills Elastomers businesses;
(b) Instructions issued to and correspondence with KPGM Corporate Finance with respect to that valuation;
(c) Any further or other advice provided to Hawker with respect to the sale of Australian Controls and Mills Elastomers businesses;
(d) Hawker and Austrim Nylex board minutes with respect to the sale of the Australian Controls and Mills Elastomers businesses;
(e) Hawker and Austrim Nylex board papers with respect to the sale of the Australian Controls and Mills Elastomers businesses;
(f) Documents evidencing steps taken to procure other offers and other offers received with respect to the Australian Controls and Mills Elastomers businesses and to the extent other offers were received, the consideration and disposition of those offers;
(g) Communications with the National Australia Bank and any other lender to Hawker and/or Austrim Nylex with respect to the sale of the Australian Controls and Mills Elastomers businesses;
(h) Documents evidencing how the proceeds from the sale have been applied;
(i) Documents evidencing consideration as to the impact of the sale of the Australian Controls and Mills Elastomers businesses upon the future viability of Hawker;
(j) Documents as to the most recent assessment of the future viability of Hawker, and in particular TED Engineering operations. We note that on 30 June 2003, Hawker lodged a notice with ASIC that 18,261,482 shares in the capital of TED Engineering Australia Limited registered in the name of Hawker were released from a charge in favour of National Australia Bank dated 6 December 1993. Further, by revocation deed dated 30 June 2003 the deed of cross guarantee which had been entered into on 28 June 1995 and subsequently varied on 20 June 1997 and 29 November 2001 was revoked in relation to TED Engineering Australia Ltd and TED Engineering Manufacturing Pty Ltd. ”

10 Further requests for information in relation to the sale of “TED Engineering” were made on 22 September 2003 and 3 November 2003. On 3 November 2003, Fisher Jeffries requested that Mr Morton and his legal advisers be authorised to inspect and take copies of the following:

“ 1. The KPMG Corporate Finance valuation obtained with respect to the TED companies;
2. Instructions issued to and correspondence with KPMG Corporate Finance with respect to that valuation;
3. Any further or other advice provided to Hawker with respect to the sale of the TED companies to National;
4. Hawker and Austrim Nylex board minutes with respect to the sale of the TED companies to National;
5. Hawker and Austrim Nylex board papers with respect to the sale of the TED companies to National;
6. Documents evidencing steps taken to procure other offers and other offers received with respect to the TED companies and to the extent other offers were received, the consideration and disposition of those offers;
7. Communications with the National Australia Bank and any other lender to Hawker and/or Austrim Nylex with respect to the sale of the TED companies to National;
8. Documents evidencing how the proceeds from the sale were applied;
9. Documents evidencing consideration as to the impact of the sale of the TED companies upon the future viability of Hawker.

11 On 21 November 2003, Clayton Utz responded to Fisher Jeffries letter of 29 August 2003. Amongst other things, they said:

“ (a) each of the sales of the Company’s businesses which has occurred has been conducted after proper consideration by the Board of the interests of all of the Company’s shareholders, with the advice of appropriate experts, and subject to the scrutiny of the Company’s bank, the National Australia Bank which has security over of the assets of the Company;
(b) the fact that the sale of Australian Controls and Mills Elastomers was to a related entity is not of itself relevant. The critical questions are whether or not the Company obtained proper value for the businesses sold, and whether the sale was determined by the directors to be in the best interests of all the Company’s shareholders. The same can be said of the fact that the directors are not independent of a related entity;
(c) approval of non-related shareholders for the sale was not required. ”

12 The reasoning quoted in paragraph (b) above may be open to question. The plaintiffs could plausibly argue that where directors had conflicting duties, that is on the one hand a duty to HRL to obtain the best price for assets sold, and on the other hand a duty to the purchaser, or Nylex as the purchaser’s parent, to pay the lowest price possible, the position is analagous to a case in which the directors face a conflict between their duty and their personal interest. In such a case, equity forbids the fiduciary from entering into the transaction except with the informed consent of his or her principal. In such a case, equity will not inquire into the fairness of the price, except where the question of the quantum of equitable compensation needs to be determined. The plaintiffs could argue that, far from the question of the fairness of the price being the critical question, it was irrelevant to the propriety of the transactions unless the directors had the informed consent of HRL.

13 Clayton Utz also advised that:

“ Whatever the relationship between Austrim Nylex and KPMG Corporate Finance, KPMG Corporate Finance was retained by the company (that is, HRL) to provide it with expert advice as to the value of the businesses and that advice was provided. KPMG Corporate Finance’s relationship with Austrim Nylex does not mean the advice was not capable of being relied upon. ”

14 There was no denial that KPMG Corporate Finance was engaged as adviser to Nylex. The plaintiffs can plausibly point to grounds for investigation as to whether the valuations on the basis of which assets of HRL were apparently sold were independent.

15 In the same letter, Clayton Utz agreed to make available to Mr Morton and his solicitors copies of the KPMG Corporate Finance valuations in respect of Australian Controls, Mills Elastomers and TED Engineering Australia Ltd (subject to any necessary consent of KPMG Corporate Finance), and extracts from HRL’s board minutes and board papers in respect of the sale of the Australian Controls and Mills Elastomers businesses and the company’s shares in TED Engineering Australia Limited. This agreement was conditional upon execution of a confidentiality agreement.

16 On 27 July 2004, after considerable debate as to the terms of the required confidentiality agreements, on 27 July 2004, Clayton Utz provided to Fisher Jeffries valuations prepared by KPMG in respect of Australian Controls, Mills Elastomers and TED Engineering Australia Limited. On 5 August 2004, they provided minutes of meetings of directors of HRL held on 29 August 2002 and 24 April 2004 and copies of parts of board papers.

17 On 4 October 2005, Mr Morton and another of the present plaintiffs, Mr Richards, filed an originating process seeking an order under s 247A of the Corporations Act that they and their legal representatives or forensic accountant be authorised to inspect various classes of documents of HRL. The description of documents sought runs to some three pages. The documents sought included all documents setting out the internal strategies and policies of HRL between 30 June 1997 and 31 December 2003 dealing with, amongst other things, the sale or divestment of its assets. Those plaintiffs also sought the production of all instructions or briefs to KPMG Corporate Finance in respect of its valuations and all correspondence between KPMG or KPMG Corporate Finance in relation to the valuations, or in relation to any proposal to sell any of the businesses or assets of HRL.

18 Orders were made on 12 May 2006 for production of the documents sought. There were eighteen specified categories of documents. As a result of these orders, in about August 2006, nine boxes of documents were produced for inspection.

19 By letters dated 25 October 2006, 2 November 2006, and 23 November 2006, the plaintiffs’ solicitors enclosed lists of documents which they contended had not been produced by HRL, but which were referred to in documents which had been produced.

20 The plaintiffs also tendered a letter from their solicitors to Nylex’s solicitors stating that a perusal of documents produced by HRL highlighted further documents that had not been produced. As I understand the letter, the solicitors asserted that there had been produced a document called “HRL (TED) loan agreement” which in turn referred to “Transaction Documents, Override Agreement”, and certain other documents, but the documents referred to had not been produced. A similar allegation was made in relation to documents styled “guarantee and indemnity”, and “Business Transfer Agreement”.

21 None of the documents obtained by the plaintiffs was tendered on this application. I have already referred to the documents or classes of documents sought by the plaintiffs from Nylex. As an illustration, the first category of documents sought was described as “Project Lex as set out in KPMG document dated 12 November 2001”, however, the KPMG document referred to was not tendered.

22 The second category of documents sought was “Project Wombat as set out in minutes of directors’ meeting of Nylex dated 24 April 2003”. Again, the minutes of that meeting were not produced. I can infer from the solicitor’s correspondence that “Project Wombat” was the project for the divestment of assets and businesses of HRL.

23 Later in these reasons, I will deal further with the lack of information about a number of the categories of documents sought in the amended summons.

Appearance That Plaintiffs May be Entitled to Make a Claim for Relief Against Nylex

24 Mr Stoljar of counsel who appeared for Nylex submitted that the plaintiffs had not shown that there was reasonable cause to believe that they may be entitled to make a claim for relief against Nylex. He submitted that Nylex, as distinct from HRL, or the directors of HRL, was not shown to be a prospective defendant. He submitted that on the plaintiffs’ own evidence, the plaintiffs did not know whether they had any rights to pursue against Nylex. This, it was said, meant that the first of the requirements in r 5.3(1)(a) had not been established.

25 The first of the requirements in r 5.3(1)(a) is that it appear to the Court that the applicant may be entitled to make a claim for relief against the prospective defendant. In order for it to “appear” to the Court that the applicant “may be entitled” to make a claim for relief, it is not necessary for the applicant to show a prima facie or pleadable case. On the other hand, the mere assertion of a case is insufficient. It will be sufficient if there is reasonable cause to believe that the applicant may have a right of action against the respondent resting on some recognised legal ground (Panasonic Australia Pty Ltd v Ngage Pty Ltd (2006) 69 IPR 595 per Young CJ in Eq at 589 [20] and 599 [27]).

26 Mr Stoljar submitted that the plaintiffs’ own evidence did not satisfy even this undemanding test. Mr Morton deposed:

“ 14. From the records that I currently have, it appears to me that there may have been breaches of the Corporations Act, including but not limited to section 232 and the Trade Practices Act.
15. In trying to identify the potential breaches I have also sought documents from one of the financial institutions involved in the provision of finance to Nylex and/or HWR.
16. No further documents have been produced by HWR. Annexed hereto are copies of correspondence between the solicitors since 4th December 2006.
17. Until I can obtain further documents I do not know whether the other plaintiffs and myself have rights to pursue Nylex, HWR, the directors of both or one only of them or possibly the financial institutions or advisors of Nylex and HWR. ”

27 Rule 5.3 does not authorise the making of an order for preliminary discovery to enable a plaintiff to decide whether to sue third parties. The order can only be made against a prospective defendant where it appears that the applicant may be entitled to make a claim against that person. The plaintiffs are not entitled to preliminary discovery against Nylex to enable them to sue HWR, or the directors of Nylex or HWR, or financial institutions or advisers.

28 No attempt was made in the plaintiffs’ evidence to identify what provision of the Corporations Act or the Trade Practices Act may have been breached, or what cause of action the plaintiffs might have against Nylex. The plaintiffs’ counsel submitted that they may be entitled to relief under s 233 of the Corporations Act against Nylex on the ground that by reason of the conduct of the directors appointed by Nylex, the affairs of HRL had been conducted in a manner which was contrary to the interests of the members as a whole, or was oppressive to, or unfairly prejudicial to, or unfairly discriminatory against, the plaintiffs. Counsel submitted that the plaintiffs may have a claim for contravention of s 51AA of the Trade Practices Act.

29 Section 51AA of the Trade Practices Act provides that a corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law, from time to time, of the States and Territories. The plaintiffs did not articulate any specific claim that Nylex had engaged in unconscionable conduct in contravention of the unwritten law.

30 Mr Stoljar was correct in submitting that the plaintiffs’ evidence did not identify any recognised legal ground upon which the plaintiffs may have a cause of action against Nylex. However, the correspondence referred to earlier in these reasons (which was tendered by Nylex) does show a reasonable cause to believe that the plaintiffs, as minority shareholders in HRL, may be entitled to relief under s 233 of the Corporations Act in relation to the conduct of Nylex as the majority shareholder and the appointor of the directors of HRL. HRL now has a deficiency of net assets. There is reason to believe that it sold many of its assets, including shares in subsidiary companies and its businesses, to wholly owned subsidiaries of Nylex. There is reason to believe that in effecting such sales, HRL’s directors, who were appointees of Nylex, had a conflict of duties. There is no material to show that HRL gave an informed consent in a manner permitted by its constitution to its directors so acting. Nylex, as the parent company of both HRL and its wholly owned subsidiaries which purchased HRL’s assets, may be liable to orders under s 233 for the compulsory purchase of the plaintiffs’ shares, or to compensate HRL, or to account for any profits derived by its subsidiaries, at least if it is shown that it procured or assisted in any breach of fiduciary duty by the directors, or if it is shown that it was a director of HRL within the meaning of s 9 of the Corporations Act. Particularly may this be so if the valuations at which the assets of HRL were sold could be impugned. There is reason to believe from the uncontradicted statements made in correspondence that the valuers may not have been independent, but were acting for Nylex and its wholly owned subsidiaries.

31 The evidence on this application does not establish reasonable cause to believe that such causes of action do exist. But it does appear that such causes of action may exist and that the plaintiffs may be entitled to relief under s 233 of the Corporations Act.

Appearance that the Plaintiffs are Unable to Obtain Sufficient Information to Decide Whether or Not to Commence Proceedings Against Nylex

32 The second and third of the requirements in r 5.3(1)(a) are that it appears to the Court that the applicant has made reasonable inquiries and that, having done so, the applicant is unable to obtain sufficient information to decide whether or not to commence proceedings.

33 The onus is on the plaintiffs to make it appear to the Court that, having made reasonable inquiries, they are unable to obtain sufficient information to decide whether or not to commence proceedings against Nylex. The third requirement of r 5.3(1)(a) requires an objective assessment of the information already possessed by the plaintiffs to determine whether that information is sufficient for such a decision to be made. The question is whether the applicant has insufficient information to be able to decide whether to institute proceedings; not merely to establish a cause of action. Hence, an applicant may be entitled to preliminary discovery of documents relevant to available defences, or the extent of apprehended breaches, or the likely quantum of damages, as well as of documents which may establish whether there is a cause of action. However, unless the applicant is lacking something reasonably necessary to make a decision whether to institute proceedings, he or she is not entitled to preliminary discovery. An applicant must disclose what information he or she already has relevant to making such a decision, and identify what information is lacking. Preliminary discovery cannot be used to build up a case which an applicant has already decided, or could decide, to bring (Alphapharm Pty Ltd v Eli Lilly Australia Pty Ltd (Lindgren J, Federal Court of Australia, 24 May 1996, unreported); St George Bank Ltd v Rabo Australia Ltd (2004) 211 ALR 147 at 154 [26]; Glencore International AG v Selwyn Mines Ltd (recs and mgrs apptd) (2005) 223 ALR 238 at 241 [15]; Matrix Film Investment One Pty Ltd v Alameda Films LLC [2006] FCA 591 at [15]-[19], [25]).

34 There is no issue that the plaintiffs have made reasonable inquiries. They have made persistent inquiries over a number of years. However, there is little evidence before me of what information they have obtained as a result of those inquiries. None of the documents they have obtained from HRL was produced. No attempt was made to summarise the contents of such documents. No explanation was given as to what the plaintiffs have learned as a result of their inquiries, or in what particular respects their information is deficient so that they are unable to decide whether or not to commence proceedings against Nylex. There is only a broad assertion by Mr Morton in paragraph 17 of his affidavit that “until I can obtain further documents I do not know whether the other plaintiffs and myself have rights to pursue Nylex, HWR (HRL), the directors of both or one only of them or possibly the financial institutions or advisors of Nylex and HWR.” Mr Morton does not explain why that is so.

35 This paragraph of Mr Morton’s affidavit was not objected to, presumably because Nylex wished to rely on it to show an absence of a reasonable cause to believe that a cause of action against Nylex exists. Had it been objected to, it would have been inadmissible. It is opinion evidence about the existence of a fact, but is not supportable under either s 78 or s 79 of the Evidence Act 1995 (NSW). Not having been objected to, the evidence is there for what it is worth. I do not consider that it carries any weight on the question of whether it appears that the plaintiffs do not have sufficient information to decide whether or not to commence proceedings against Nylex. That question is to be determined objectively. Its answer does not depend on Mr Morton’s subjective beliefs. In any event, there is no evidence of what Mr Morton believes he will need in order to make such a decision. There is no evidence that Mr Morton is legally qualified. There must be many cases in which a plaintiff would not know whether the information available to him or her were a sufficient basis to justify the bringing of proceedings. That is one reason prospective plaintiffs usually consult lawyers. There is no evidence from the plaintiff’s solicitors or counsel that they do not consider that the information presently available to the plaintiffs is insufficient to make a decision as to whether or not proceedings should be commenced against Nylex and, if so, why that is.

36 Counsel for the plaintiffs made a general submission that the plaintiffs would not wish to commit themselves to potentially expensive litigation without sufficient information. However, no particular submission was made as to how the third and final requirement of r 5.3(1)(a) was satisfied. In saying this, I am not being critical of counsel’s submissions. The evidence did not allow for submissions of any particularity.

37 It was left to me to try to glean what information the plaintiffs have and why such information may be insufficient from a general summary of the contents of nine boxes of documents prepared by a consultant for the defendant, and from the schedule produced by the plaintiffs’ solicitors describing some of the documents which have been produced, which in turn identify other documents which have not been produced.

38 It is not possible to draw inferences from the plaintiffs’ solicitors’ schedule of documents not produced about the extent of information in the documents which have been produced. I can infer from the description of some of the documents not produced that such documents are likely to be relevant to a decision whether or not to institute proceedings. One example will suffice. One document produced was described as an “email dated 24 October 2003 from Neil Christensen to Nick Miller Re: Possible further Hawker Divestments”. It apparently stated “I attach a copy of the Board Paper prepared for both ARL and HRL Boards prior to Project Wombat as background (elements of which deal with why HRL was proposing to sell)”. Apparently, the board paper referred to was not produced. Whilst I can infer the board paper would be relevant, I cannot infer that the documents the plaintiffs already have do not provide sufficient information to enable them to decide whether or not to institute proceedings. Taking the email of 24 October 2003 as an example, for all I know, it might contain an extensive discussion of the contents of the document to which it refers, which lays out in chapter and verse a strong prima facie cause of action. Moreover, since 2004, Mr Morton has had the valuations of KPMG Corporate Finance and what are said to be the relevant board minutes and board papers of HRL relating to the sales of the Australian Controls and Mills Elastomers businesses and the shares in TED Engineering Australia Ltd. There was no evidence as to the contents of those documents.

39 Nylex read an affidavit of a consultant who annexed a summary of the contents of each of the nine boxes of documents produced in the proceedings against HRL. The descriptions were too general to draw any conclusion as to the extent of the information already supplied to the plaintiffs.

40 Nylex has not produced any evidence that the plaintiffs have sufficient information to enable them to make the decision. However, the onus does not lie on Nylex. The onus lies on the plaintiffs to establish the negative requirement in r 5.3(1)(a) that they are unable to obtain sufficient information to decide whether or not to commence proceedings. The assertion by Mr Morton that, until documents are produced, he does not know whether or not the plaintiffs are entitled to make a claim against Nylex does not cast an evidentiary onus on the defendants. That is not just because Mr Morton does not give any reason for his opinion. It is also because the plaintiffs may have sufficient information to decide whether or not to commence proceedings, even if Mr Morton does not know it. The plaintiffs’ evidence did not reach a point where an evidentiary onus was cast upon Nylex to show that the plaintiffs had sufficient information to make a decision whether or not to commence proceedings.

41 Because the third and final requirement of r 5.3(1)(a) is not satisfied, the claim against Nylex must fail. In deference to the arguments of counsel I will indicate briefly my views in relation to the other grounds of opposition advanced by Nylex.

Other Grounds

42 It is not necessary to deal with the other grounds of objection, although in deference to counsels’ arguments, I will briefly indicate my conclusions.

43 Nylex’s submissions with respect to rule 5.3(1)(b) and (c) raised an interesting question as to whether, when application is made for discovery of particular categories of documents in the prospective defendant’s possession (rather than for all documents that relate to the question of whether or not the applicant is entitled to make a claim for relief), the applicant must show that the documents would assist a determination of the applicant’s entitlement to make a claim for relief, rather than that they could or might do so. It was assumed in argument that it was enough if it appeared that the documents could assist in the making of such a determination. I need not consider whether this assumption was correct. Even on the basis of the assumptions adopted in argument, there was such a paucity of information about the documents already produced, and about the meaning of the references to further documents whose production was sought in the amended summons, that it is difficult to say of many of the categories sought that the documents could assist in making such a determination. For example, I was given no information about the documents described in paragraphs XII-XIV, XX, XXI and XXIII of the amended summons. I could not glean anything about the likely content of such documents from the description of categories. In the absence of any evidence as to why the plaintiffs are seeking these documents, there is no basis for inferring that they could assist in determining whether or not the plaintiffs are entitled to make a claim for relief against Nylex. Accordingly, had I been satisfied that subpara (a) of r 5.3(1) had been satisfied, I would have excluded those categories of documents from the documents ordered to be produced.

44 Had the plaintiffs satisfied the requirements of r 5.3(1)(a), I would not have refused an order for discovery of documents that satisfied the tests in r 5.3(1)(b) and (c) on discretionary grounds. The plaintiffs were not pursuing an indirect mode of enforcement of orders made against HRL. They sought documents in the possession of Nylex, not documents in the possession of HRL. One category of documents was confidential. But I would not have made an order for discovery in relation to that category in any event, as r 5.3(1)(b) and (c) were not satisfied in relation to it. Finally, I would have made an order for the payment of costs of production of the documents in the amount indicated in the affidavit of Ms Janezic.

Claim Against National Australia Bank

45 The plaintiffs sought orders that the National Australia Bank produce documents relating to the assets divestment program and plans for reduction of the “Nylex group” debt. There were sixteen categories of documents sought. The documents were said to be sought for the purpose of “the plaintiff(s) ascertaining that the documents sought relate to an action by the plaintiffs against the person or persons against whom an action may lie for breaches of the Corporations Act including but not limited to section 232 of the Corporations Act and possible breaches of the Trade Practices Act.” The claim against the National Australia Bank was made pursuant to r 5.4, not pursuant to r 5.3. The plaintiffs did not contend that the National Australia Bank was a prospective defendant.

46 Rule 5.4 provides:

“5.4 Discovery of documents from other persons
(cf Federal Court Rules , Order 15A, rule 8)
(1) The court may order that a person who is not a party to proceedings, but in respect of whom it appears to the court that the person may have or have had possession of a document that relates to any question in the proceedings, must give discovery to the applicant of all documents that are or have been in the person’s possession and that relate to that question.
(2) Unless the court orders otherwise, an application for an order under this rule:
(a) must be supported by an affidavit stating the facts on which the applicant relies and specifying the kinds of documents in respect of which the order is sought, and
(b) must, together with a copy of the supporting affidavit, be served personally on the person to whom it is addressed.”

47 Orders may be made under r 5.4 where it appears to the Court that the person against whom discovery is sought may have or have had possession of documents that relate to a “question in the proceedings”. The only proceedings on foot are these proceedings for preliminary discovery. The only relevant questions in the proceedings are whether the criteria in r 5.3 are made out in the claim against Nylex, and whether the terms of r 5.4 are made out. The documents sought do not relate to those questions. They may relate to questions which would arise in substantive proceedings if such proceedings are instituted by the plaintiffs against Nylex or others. The questions in the present proceedings are resolved without the need for the production of any documents from the National Australia Bank.

48 It was submitted by counsel for the plaintiffs that it is possible, or may even be likely, that if orders for preliminary discovery are made against Nylex, further supplementary orders will be sought in due course if Nylex’s production of documents is inadequate. Based on the asserted non-production of documents by HRL, it was submitted that this was very much on the cards.

49 No such question has arisen in the proceeding. The documents are not sought to resolve any such question. The form of order sought expressly states the purpose for which the documents are sought. That purpose is not to resolve any question in any existing proceeding.

50 National Australia Bank did not appear in the proceedings to object to the orders sought. There was evidence that an employee of the National Australia Bank told the plaintiffs’ solicitor that the bank did not bother appearing in proceedings for discovery, and that if the plaintiffs got their orders, they should serve them on the bank and the bank would produce such documents as it had. Nylex objected to an order addressed to the National Australia Bank.

51 Non-opposition by the National Australia Bank is not a basis for jurisdiction to make the orders sought. The requirements of r 5.4 are not satisfied.

Orders

52 For these reasons, I order that the amended summons be dismissed. I order that the plaintiffs pay the first defendant’s costs of the proceedings.

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