National Australia Bank Ltd v Pathway Investments Pty Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S APCI 2012 0041

NATIONAL AUSTRALIA BANK LIMITED
NATIONAL AUSTRALIA BANK LIMITED	Appellant
v
PATHWAY INVESTMENTS PTY LTD	First respondent
and
DOYSTOY PTY LTD	Second respondent

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JUDGES:	BONGIORNO and HARPER JJA and BELL AJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	20 and 26 June 2012
DATE OF JUDGMENT:	2 August 2012
MEDIUM NEUTRAL CITATION:	[2012] VSCA 168
JUDGMENT APPEALED FROM:	[2012] VSC 72 (Pagone J)

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PRACTICE AND PROCEDURE – Group proceeding – Plaintiffs alleged non-disclosure and misleading and deceptive conduct against defendant – Interlocutory appeal – On defendant’s application, trial judge refused to order identity particulars and discovery in respect of group members – Whether demonstrable error of law or fact or fundamental mistake of principle – Relevance of nature of group proceedings – Relevance of overarching obligation in civil proceedings – Objective and hypothetical nature of non-disclosure tests – Whether particulars necessary for conduct of defendant’s case – Discovery sought very wide in scope – Whether out of proportion to real issues in dispute – Discovery against non-parties – Proper approach – ‘Not generally available’ – Corporations Act 2001 (Cth) ss 674-677, Supreme Court Act 1986 (Vic) s 33ZF, Civil Procedure Act 2010 (Vic) ss 1, 7-9, Supreme Court (General Civil Procedure) Rules 2005 (Vic) r 32.07.

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APPEARANCES:	Counsel	Solicitors
For the Appellant	Ms WA Harris SC with Mr RG Craig	Freehills Lawyers
For the Respondents	Mr MBJ Lee SC with Ms FK Forsyth and Mr W Edwards	Maurice Blackburn Lawyers

BONGIORNO JA:

I have had the advantage of reading in draft the reasons for judgment of Bell AJA. I agree that the appeal should be dismissed for the reasons his Honour gives.

HARPER JA:

I agree for the reasons given by Bell AJA that the appeal should be dismissed.

BELL AJA:

Introduction

In a group proceeding under pt 4A of the Supreme Court Act 1986 (Vic), Pathway Investments Pty Ltd and Doystoy Pty Ltd, on their own behalf and representing certain other shareholders, are seeking damages (said to amount to $450 million) against National Australia Bank Ltd in respect of alleged non-disclosure contrary to s 674 of the Corporations Act 2001 (Cth) and misleading and deceptive conduct contrary to s 9 of the Fair Trading Act 1999 (Vic). The learned trial judge managing the proceeding, and before whom the trial is to be conducted, has dismissed the bank’s application on summons for orders identifying the 20 largest shareholders among the group members and requiring them to give very wide discovery of documents. By leave, the bank now appeals against that decision.

The appeal involves a discretionary judgment on a matter of practice and procedure. On the established principles, the Court of Appeal will not intervene unless the trial judge has demonstrably erred in law or fact or made a fundamental mistake of principle.[1] The bank contends that the trial judge has made such an error or mistake and, in doing so, has imposed unjust restrictions on its capacity to conduct an effective defence. The plaintiffs in the proceeding submit that the trial

judge has made no such error or mistake and that the bank was seeking a great many documents which were not relevant to the issues raised in the proceeding and which could only be provided at the cost of oppressive time, effort and monetary expense.

[1]House v The King (1936) 55 CLR 499, 504-05 (Dixon, Evatt and McTiernan JJ); Lovell v Lovell (1950) 81 CLR 513, 518-20 (Latham CJ), 525-27 (McTiernan J), 533-34 (Kitto J); Atkinson v Atkinson [1969] VR 278, 279 (Barry J), 286 (McInerney and Adam JJ agreeing); Oldaker v Currington [1987] VR 712, 718 (Murray, McGarvie and Marks JJ); Wightman v Johnston [1995] 2 VR 637, 639 (Phillips JA, Brooking and Charles JJA agreeing); Commissoner of State Revenue v Landrow Properties Pty Ltd (2010) 79 ATR 800, 819 [81] (Neave, Harper and Hansen JJA).

First, to the issues in the proceeding.

Shareholders’ claim against bank

By a statement of claim, the plaintiffs commenced the proceeding against the bank on their own behalf and on behalf of other persons who or which:

(a)at some time during the period 1 January 2008 and 24 July 2008 … acquired an interest in ordinary fully paid shares in National Australia Bank Limited (NAB Shares);
(b)suffered loss or damage by or resulting from the conduct of the defendant pleaded below; and
(c)have, as at the commencement of this proceeding, entered a litigation funding agreement with International Litigation Funding Partners Pte Ltd.

Whereas the plaintiffs were small traders in the bank’s shares, the group members are wholly or mainly institutional shareholders who were large traders in those shares. The identity of the group members has been confidentially disclosed to the bank but not for the purpose of obtaining discovery of documents.

It is alleged in the statement of claim that during the relevant period the bank conducted an investment program through conduits which had been established to issue commercial paper which was collateralised by assets held by those conduits. The conduits part-owned certain specified conduit notes to which certain specified collateralised debt obligations (‘CDOs’) applied. The entire value of those notes was approximately US$1.1 billion.

The plaintiffs allege that the bank provided liquidity to the conduits during the relevant period. Under the terms of the liquidity facilities, the bank was obliged to provide loans to the conduits if they required finance to meet their debt obligations. By reason of these and other pleaded matters and circumstances, the bank was exposed to impairment or losses affecting those obligations and the conduit notes to which they related.

It is alleged that, between August 2007 and July 2008, and pursuant to certain reporting requirements, the bank made some but not sufficient statements to the market about exposure to losses under the CDOs arising out of the collapse of the US subprime mortgage market. In May 2008, the bank announced that it had made a collective provision of $181 million in respect of its expected exposure. In July 2008, it announced that it had made an additional provision of $830 million in respect of that exposure.

The plaintiffs allege that the bank knew or ought to have known at various specified times that it was exposed to impairments or losses affecting the CDOs and, further, that the likely losses were reasonably estimable in terms of the applicable provisions standard. The information about the impairments or losses which the bank knew or should have known was information concerning the bank that a reasonable person would expect to have a material effect on the price or value of the bank’s shares within the meaning of ASX Listing Rule 3.1. Contrary to that rule, between 1 January 2008 and 24 July 2008 the bank did not disclose that information and thereby breached the continuous disclosure obligation in s 674(2) of the Corporations Act. On the same facts, the bank also engaged in misleading and deceptive conduct contrary to s 9 of the Fair Trading Act and other specified legislation.

Turning to loss and damage, the plaintiffs allege that they and the group members acquired shares in the bank during the period of the alleged contravening conduct in a market where the price or value of the shares was and could reasonably be expected to be informed or affected by that conduct. In particular, the contravention of the continuous disclosure obligation caused the market price of the bank’s shares to be substantially greater than their true value and/or the market price that would otherwise have prevailed. The plaintiffs and the group members thereby suffered loss and damage.

In relation to the claim for loss or damage arising out of the alleged continuing disclosure contravention, the plaintiffs do not plead reliance on the alleged non-disclosure. In relation to the claim for loss and damage arising out of the alleged misleading and deceptive conduct contravention, they do.

The bank’s defence makes substantial responses to the plaintiffs’ statement of claim, admitting many allegations of fact which have come to be common ground, but denying all allegations of non-disclosure, misleading and deceptive conduct and liability, as well as the allegations of loss and damage. In view of the issues raised and submissions made on the appeal, it is appropriate to focus on these denials.

The bank denies the plaintiffs’ central allegation that the allegedly non-disclosed information was information concerning the bank that a reasonable person would expect to have a material effect on the price or value of the bank’s shares within the meaning of the listing rule. It was therefore not information coming within s 674(2)(b) and (c) of the Corporations Act. As explained in the appeal, this was a denial both of the allegation that the information was not publicly available and the allegation that it was material to the price or value of the bank’s shares.

In carefully pleaded terms, the bank alleges that, in the light of the information which was in the public domain about its exposure to losses under impaired CDO assets of the relevant kind (including but not confined to those specifically referred to in the plaintiffs’ statement of claim), by disclosing the information which it did the bank complied with the listing rule and the continuing disclosure obligation. In that connection, it alleges positively that the information that the bank knew (or should have known) as to its exposure to losses under impaired CDOs (again, generally and specifically) was generally available at all material times during the relevant period. Therefore it did not breach the continuing disclosure obligation. As explained by the bank on appeal, this was intended to place in issue the question of availability under s 674(2)(c)(i) and materiality under s 674(2)(c)(ii) of the Corporations Act.

In relation to loss and damage, the bank denies that the plaintiffs and the group members bought shares in a market which was affected (ie inflated) by the bank’s alleged non-disclosure and misleading and deceptive conduct. The alleged contravening conduct did not cause the price of the shares to trade at substantially greater than their true value or at a market price which was greater than would otherwise have prevailed. The alleged non-disclosed information was not material to the market price or value of the shares. Further, the plaintiffs and group members could not recover damages in respect of the alleged non-disclosure contravention on the free-standing basis that they had traded in shares in an allegedly inflated market. As is the case in relation to the alleged misleading and deceptive conduct contravention, the plaintiffs have to establish that they relied on the facts and circumstances giving rise to the alleged non-disclosure.

The bank’s positive allegation that its exposure to losses under impaired CDOs (generally and specifically) was publicly available led to a request for particulars by the plaintiffs. The bank responded by referring to general publicly available information and said that other such information would be referred to in its evidence. Further requests by the plaintiffs, and their complaints that information about CDOs generally did not go to the allegation of non-disclosure about the specified CDOs, were met with further explanations of the bank’s position but not with further particulars.

It can be seen that the main allegation of the plaintiffs, as specified in its statement of claim, is that the bank had failed to disclose information which it was bound to disclose about the losses which were likely to arise from the specified CDOs. The main defence of the bank, as specified in its defence and explained in its particulars, was that the information was publicly available and did not affect, or would not have affected, the price or value of its shares. The plaintiffs’ submissions on the appeal were that the only information which could be relevant to compliance with the disclosure obligation was information about the specified CDOs. This was strongly disputed in the bank’s submissions, which were to the effect that information about the bank’s exposure under its general CDO investment program was relevant. Neither the plaintiffs nor the bank have sought to have this issue resolved by the trial judge.

Those are the issues raised in the proceeding. Now to the identity particulars and discovery orders sought.

Bank’s application for identity particulars and discovery

21 The bank’s summons sought orders that:

(a)the Plaintiffs provide particulars of the identities of persons or entities falling within the following categories:
(i)the top 20 Group Members (by volume of shareholdings) who held more than 500,000 NAB Shares as at 1 January 2008;
(ii)the top 20 Group Members (by volume of acquisitions of NAB Shares) who acquired more than 500,000 NAB Shares during the Relevant Period;
and

(iii)the top 20 Group Members (by volume of sales of NAB Shares) who sold more than 500,000 NAB Shares during the Relevant Period,
(together, Market Participants); and

(b)each of the Market Participants provide discovery of the documents specified in Schedule 1 to this summons.

Schedule 1 to the summons specified two categories of documents. This is the first:

Category 1 Documents
1.(a) All documents referring to NAB’s actual or likely exposure to losses on CDOs or Subprime ABS, including without limitation documents referring to NAB’s exposure to conduits (including the NAB Conduits) and CDOs held by NAB directly or indirectly (including the Conduit CDOs).
(b)For the avoidance of doubt, to the extent not encompassed by (a), all documents referring to NAB’s actual or likely exposure under:
(1)liquidity facilities extended by NAB to conduits (including the Conduit Liquidity Facilities, as defined in paragraph 9 of the Defence); and/or
(2)loans made pursuant to those liquidity facilities (including the Conduit Loans), including, without limitation, documents referring to NAB’s exposure to conduits (including the NAB Conduits) and CDOs held by NAB directly or indirectly (including the Conduit CDOs).

For the purposes of the appeal, it is important to note that this category included documents relating to the bank’s exposure to losses under the CDOs specified in the statement of claim and also other CDOs held by the bank.

Here is the second category of documents:

Category 2 Documents
2. All documents recording or referring to:
(a)actual or potential decisions made by Market Participants to acquire, retain or dispose of an interest in NAB Shares during the Relevant Period, including, without limitation, memoranda, reports and other documents recommending the acquisition, retention and/or disposal of an interest in NAB Shares during the Relevant Period;
(b)any strategy, policy, mandate or benchmark which applied to or governed the acquisition, retention or disposal by a Market Participant of an interest in NAB Shares during the Relevant Period;
(c)all facts, matters or circumstances taken into account or considered by Market Participants in:
(1)deciding to acquire, hold or dispose of an interest in NAB Shares during the Relevant Period;
(2)determining the price at which they were prepared to acquire, hold or dispose of an interest in NAB Shares during the Relevant Period.

It should be noted that the documents in this category included documents relating to the entirety of the share-trading activities of the market participants in relation to the bank in the relevant period. A very large number of documents are likely to come within this category.

It is obvious from the width of the categories that an order for discovery in the terms sought would involve very onerous obligations for the market participants.

It can be seen that the summons was issued against the plaintiffs, not the group members. The bank could not have issued the summons against the group members (or those of them who were market participants) named as such because it could not utilise its confidential knowledge of their identity for that purpose.

Paragraph 2(a) of the summons sought an order for the provision by the plaintiffs of particulars of the identities of persons or entities falling within the specified categories of group members (called ‘the market participants’). Paragraph 2(b) sought discovery of the specified documents in respect of those group members, but not from the plaintiffs. Paragraph 1 sought directions.

In the appeal, the plaintiffs criticised the approach taken by the bank in the summons. They submitted that they could not comply with an order in terms of paragraph 2(a) because they did not know the identity of the market participants or paragraph 2(b) because they were not the market participants. They submitted that their solicitors could not, without instructions from the market participants, reveal the identity of the group members, and the solicitors did not have those instructions. In response, the bank referred to various clauses of the litigation funding agreement which, in its submission, would have allowed the plaintiffs to obtain the identity particulars.

Although the summons does not say so, it is clear enough what was intended by the bank. It first wanted an order that the plaintiffs supply particulars of the identity of the market participants. It then wanted an order, to be made after those particulars had been supplied, requiring the identified market participants to provide discovery of the documents sought. It is therefore also clear that the bank’s application for identity particulars was derivative. It was in aid of its primary intended purpose, which was to obtain access to the documents specified in the summons from each and all of the market participants, whether by discovery, subpoenas or otherwise.

The bank’s application was supported by an affidavit of its solicitor, Jason Betts. Among other things, the affidavit sets out the views of Dr David Tabak, an economist, as to why the documents were needed for the bank’s case. Dr Tabak later provided two reports dated 5 December 2011 and 30 January 2012, which were filed as evidence on its behalf.

The plaintiffs’ opposition to the summons was supported by an affidavit of their solicitor, Andrew Watson. Dr Ian Gordon, an expert in statistical science, provided two reports dated 22 November 2011 and 13 December 2011, which were filed on the plaintiffs’ behalf. Also filed on the plaintiffs’ behalf was a report dated 23 January 2012 from Dr Adam Werner, an expert in financial economics.

Neither the bank’s nor the plaintiffs’ experts gave oral evidence or were required for cross-examination. There was an agreed fact in the following terms:

In the event studies Dr Tabak has performed he has never had access from other than the named plaintiffs. His explanation is that securities class actions in the US are typically not closed. In his experience, he has found that materials obtained from lead plaintiffs are useful in preparing an event study.

Why trial judge refused bank’s application

In the hearing before the trial judge, the bank contended that the Court had power to make the identity and discovery orders, that the documents related to the common issues of the availability of the information in the public domain and the lack of materiality of the information to the price or value of the shares and that the documents could be used by the bank’s experts to produce probative and admissible evidence in relation to those issues. The plaintiffs accepted that the Court had power to make the orders and that the documents could be relevant to the issue of the loss and damage allegedly suffered by them and the group members individually. But they submitted that the documents did not relate to any common issue in the group proceeding and were not necessary for the production of expert evidence. They also submitted that the orders should not be made in the exercise of the Court’s discretion at this stage in the proceeding.

The trial judge considered that the fundamental question was whether the identity particulars and documents were relevant to the common issues in the group proceedings at that stage. His Honour accepted that awareness by the market of relevant information was a common issue engaged in the proceeding. On the question of the relevance of actual knowledge of that information by group members, his Honour expressed this view:

The pleadings do not, however, engage as a common issue between the group members the actual knowledge of any of the group members or the information actually held by any of them unless it can be shown to be relevant to the price of NAB shares during the relevant period.

With respect, this view was correct. The common issues raised by those pleadings were (relevantly) availability and materiality under s 674(2)(b) and (c) of the Corporations Act. The tests stated there are objective and hypothetical (see below). Under the provision, it was only if the market participants’ knowledge of the information could be related to the price or value of the shares that it could be relevant to those issues.

The trial judge then referred to the expert reports which had been filed by the parties on the question of the relevance of the identity of the market participants and the possession by them of the information specified in schedule 1 of the summons. His Honour noted the bank’s concession that the information in the documents would not produce a ‘statistically representative sample’. He then went on to consider what use the documents would be to the bank’s experts. After examining the evidence, his Honour concluded that the documents would provide a platform for further inquiries and produce useful lines of inquiries and helpful information, which was ‘not sufficient reason for granting the discovery and particulars sought by [the bank] in group proceedings’. He would later say that this was not a case in which an expert needed specified information for the provision of an opinion which was admissible and probative as to the issues in dispute and that the position might have been different if the need for the information for such a purpose had been established.

Taking into account the usually passive role which group members play in group proceedings, the trial judge considered that identity and discovery orders should not be made in respect of group members as a matter of course. But his Honour also noted that this was a case in which the damages sought were estimated to be $450 million and that the group members were apparently large institutions with substantial financial means. His Honour clearly considered and determined the bank’s summons on its merits and did not dismiss it simply because it sought orders in respect of group members in group proceedings.

The trial judge dealt specifically with the bank’s submission, supported by Mr Betts’ evidence, that it would encounter difficulties in obtaining the identity particulars and documents by other processes. He accepted that this was so, but concluded that:

None of that, however, is sufficient to justify discovery or particulars in this case at this stage and on the materials so far adduced. I am not persuaded that there is sufficient present forensic benefit to [the bank] for the orders to be made.

In expressing that conclusion, it is clear that his Honour refused to make an order for the provision of identity particulars because he was of the view that the particulars were not intended to be used for an ultimate purpose having ‘sufficient present forensic benefit’. It follows that, if his Honour had seen that the ultimate purpose of ordering the provision of identity particulars would have been for a purpose having that benefit, he would probably have made orders for the provision of the particulars and discovery of documents or made like orders.

The trial judge took into account the possibility that a market participant might have private knowledge (‘information not available to the public’) of the relevant kind which could conceivably have been relevant to the price of the shares. Considering the costs and benefits, his Honour said he was ‘not presently persuaded’ to make the orders, taking into account that there was no evidence suggesting that a market participant had such information and that the expert reports and evidence did not suggest that the price of the bank’s shares during the relevant period were already reflective of information which had been held privately by the market participants.

The bank’s appeal raises issues in three categories which should be addressed before considering the specific grounds: (1) making identity and discovery orders in respect of group members in group proceedings; (2) the relevance of the Civil Procedure Act 2010 (Vic) to making identity and discovery orders in group proceedings; and (3) the scope of the bank’s continuous disclosure obligation.

Making identity and discovery orders in respect of group members in group proceedings

Group proceedings may be issued under pt 4A of the Supreme Court Act (and similar Federal and State legislation) where certain requirements are met. Under s 33C, the requirements are that:

(a) seven or more persons have claims against the same person; and
(b)the claims of all those persons are in respect of, or arise out of, the same, similar or related circumstances; and
(c)the claims of all those persons give rise to a substantial common question of law or fact.

By that provision, if these requirements are met, ‘a proceeding may be commenced by one or more of those persons as representing some or all of them’.

Under s 33E, the consent of a person to be a group member is not required. Section 33J makes provision for a group member to opt out of a group proceeding and the procedures for doing so.

Under s 33Z, the Court may, in determining a matter in a group proceeding, determine any question of law or fact, make a declaration of liability, grant any equitable relief and make various kinds of awards of damages. Section 33ZB provides that a judgment given in a group proceeding must describe or identify the group member who will be affected by it and the judgment binds all such group members. By s 33Q, if a common question or questions will not finally determine the claims of all group members, the Court may give directions in relation to the determination of the remaining questions.

The Court has practice notes in relation to the management and conduct of group proceedings. Under the provisions of Practice Note No 8 of 2010, group proceedings are managed by a judge in the appropriate list. Practice Note No 9 of 2010 brings the conduct of group proceedings into a set of facilitative procedures. Clause 2.2 requires the statement of claim to be drawn so that the plaintiff’s personal claim can be used as a vehicle for determining the common questions in the action. It expresses the rule that ordinarily all common questions, together with the plaintiff’s personal non-common questions (eg damages), will be resolved first. Clause 9.1 enables the trial to be split to achieve that result.

In the present case, by an order giving directions for the preparation and conduct of the trial, the trial judge has set down for hearing ‘the questions common to all group members’. The common questions are: all questions of liability arising out of the non-disclosure, misleading and deceptive conduct and other statutory contraventions alleged against the bank; that is to say, all questions except the question of loss and damage. The trial judge does not appear to have set down the questions relating to the personal claims for damages of the plaintiffs. The questions relating to the damages claims of the group members have not been set down.

Although the plaintiffs in the statement of claim do not plead reliance in relation to the non-disclosure claim under the provisions of the Corporations Act, they conceded in the appeal (and ‘forever’) that the group members (and the plaintiffs) could not obtain damages for any contravention of those provisions, or take advantage of a finding in that regard, in circumstances where they were aware of the contravening conduct. They do not concede that any such knowledge on the part of the group members was relevant to the issue of liability.

The consequence of that concession is that, if the trial as to liability were to be determined in the plaintiffs’ favour and a trial as to loss and damage were to follow, the issue of the knowledge of the individual group members of the contravening conduct would be an issue in that trial as to loss and damage and presumably would be an issue as to which appropriate discovery could be ordered. The plaintiffs do not concede that it is relevant in the trial in relation to loss and damage (or liability) that the group members may have had private knowledge of the bank’s exposure to losses under impaired CDOs not specified in the statement of claim.

The plaintiffs’ concession helpfully clarifies their position in relation to aspects of the issues which were debated in the appeal. The concession does not, however, fully answer the bank’s criticism of the trial judge’s refusal to grant the identity and discovery orders sought.

In refusing to make the orders, the trial judge was entitled to take into account the nature of group proceedings and did not give this consideration too much weight. The particular features of group proceedings, including the feature that group members are entitled to play a passive role and to chose to opt out, were described in the judgments of the High Court in Mobil Oil Australia Pty Ltd v Victoria.[2] As has been held by judges of this court[3] and the Federal Court of Australia,[4] by reason of the nature of group proceedings discovery orders are not made against group members unless there are compelling reasons justifying the need for the order. His Honour was entitled to apply the same approach in relation to the application for identity particulars.
[2](2002) 211 CLR 1, 20-20 [5] (Gleeson CJ), 30-32 [35]-[41] (Gaudron, Gummow and Hayne JJ) (‘Mobil Oil’).
[3]Thomas v Powercor Australia Ltd [2010] VSC 489 (29 October 2010) [38]-[39] (J Forrest J).
[4]P Dawson Nominees Pty Ltd v Brookfield Multiplex Ltd [No 2] [2010] FCA 176 (4 March 2010) [17] (Finkelstein J).

It may be that in particular cases the nature of group proceedings should be given lesser weight. For example, as the trial judge recognised, the group members in the present case effectively opted in (see the definition of group members in paragraph 1 of the statement of claim) and were apparently large corporations with substantial resources. Nonetheless, as his Honour decided, group members are entitled to expect that, in the usual course, the plaintiffs will be responsible for the carriage of the proceeding and group members will not be required to participate as a party or be subject to orders for discovery.

That is not to say that an application for discovery or other order against a group member can be refused without giving due consideration of the particular need for the order. As Gleeson CJ pointed out in Mobil Oil, a group proceeding is one in which many ‘claims may be dealt with, consistently with the requirements of fairness and individual justice, together’.[5] Therefore the nature of group proceedings, and the essentially passive role which group members normally play, cannot stand in the way of an order for discovery which is demonstrably necessary for the fair and just determination of a defendant’s case. The provisions of the Civil Procedure Act are also relevant in this connection, especially the overarching purpose in s 7(1) (which refers among other things to the ‘just’ resolution of the issues in dispute) and the object specified in s 9(1)(a) (‘the just determination of the civil proceeding’) (see further below). The consideration by the trial judge of the merits of the bank’s application shows that his Honour approached the present case on that basis.
[5](2002) 211 CLR 1, 24 [12].

In relation to the identity of group members, orders for the provision of identity particulars of group members were made by Edmonds J in Meaden v Bell Potter Securities Limited[6] so that (among other things) the defendant could ‘properly plead its case in defence’.[7] In that case, the group members were described, and had effectively opted in, as the group members were and did in the present case. That is an example of the kind of case in which it was necessary for the proper conduct of a party’s defence for such an order to be made.

Relevance of Civil Procedure Act to making identity and discovery orders in respect of group members

[6][2011] FCA 136 (24 February 2011).

[7]Ibid [27].

As the parties accepted, the Court has discretionary power in group proceedings under its general power in s 33ZF of the Supreme Court Act to make an order requiring the identification of, and the provision of discovery by, a group member. Such an order, which can be made of the Court’s own motion or on an application by a party, is permitted if the Court thinks that it is ‘appropriate or necessary to ensure that justice is done in the proceeding’.

In relation to discovery against group members, the bank also relied on the Court’s discretionary power in r 32.07 of the Supreme Court (General Civil Procedure) Rules 2005 (Vic) to order a non-party to make discovery in respect of documents which the person ‘has or is likely to have or has had or is likely to have had in that person’s possession … which relates to any question in the proceeding’. The scope of this power has been explained in this court[8] in terms of the wide test expressed in the Peruvian Guano Case.[9]
[8]Keviris Pty Ltd v Capital Building Society (Unreported, Supreme Court of Victoria, Kaye J, 9 February 1988) 6-7; Ensee Holdings Pty Ltd v BWN Holdings Pty Ltd (Unreported, Supreme Court Victoria, Batt J, 23 June 1994); Buckley v The Herald & Weekly Times Pty Ltd [2010] VSC 413 (16 September 2010) 5 (Kaye J); Hodgson v Amcor Ltd [2011] VSC 63 (4 March 2011) [131]-[136] (Vickery J).
[9]Compagnie Financiere et Commerciale du Pacifique v Peruvian Guano Co (1882) LR 11 QBD 55, 62-63 (Brett LJ).

The powers of the Court to make orders under s 33ZF of the Supreme Court Act and r 32.07 of the Supreme Court (General Civil Procedure) Rules must now be exercised in accordance with the Civil Procedure Act. One purpose of the Civil Procedure Act is ‘to reform and modernise the laws, practice, procedure and processes relating to civil proceedings in the Supreme Court’ (s 1(1)(a)). Another is to provide for an overarching purpose in the conduct of civil proceedings (s 1(1)(c)), which is stated in s 7(1) thus:

The overarching purpose of this Act and the rules of court in relation to civil proceedings is to facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute.

Section 8(1) of the Civil Procedure Act requires the Court to seek to give effect to this overarching purpose in the exercise and interpretation of ‘any of its powers’, including its inherent, implied or statutory jurisdiction (s 8(1)(a)) and its common law and procedural rules or practices (s 8(1)(c)). Under s 9(1), in making any order or giving any direction in a civil proceeding, the Court is required to further the overarching purpose by having regard to a number of specified objects. The first is the just determination of the civil proceeding (s 9(1)(a)), which must be paramount. Others include the efficient conduct of the business of the Court (s 9(1)(c)), minimising delay (s 9(1)(e)), the timely determination of the dispute (s 9(1)(f)) and dealing with the proceeding in a manner which is proportionate to the complexity and importance of the issues, and the amount, in dispute (s 9(1)(g)). Section 9(2) specifies relevant considerations and s 9(3) makes it clear that the provisions of this section are non-derogatory. These provisions apply to the exercise of the Court’s power with respect to group proceedings in ch 4A of the Supreme Court Act.

Separately to the enactment of the Civil Procedure Act but consistently with the policy of its provisions, the Court has tightened the scope of the discovery which parties to civil proceedings are required to provide under the Supreme Court (General Civil Procedure) Rules. Pursuant to r 29.01(3), parties are now required to give discovery of:

(a)       documents on which the party relies;
(b)       documents that adversely affect the party’s own case;
(c)       documents that adversely affect another party’s case;
(d)      documents that support another party’s case.

As the submissions made for the bank point out, the scope of the discovery specified in the language of r 32.07 in respect of non-parties, as hitherto understood, is wider than the scope of the discovery specified in r 29.01(3) in respect of parties, as now applicable. It made submissions seeking to justify wider discovery in respect of non-parties, such as the difficulty of a non-party deciding whether a document might affect a party’s case.

Although the terms of r 32.07 must be acknowledged, s 8(1) of the Civil Procedure Act now requires the exercise of the discretion to make an order for non-party discovery to be exercised in a manner which seeks to give effect to the overarching purpose specified in s 7(1) and furthers the object specified in s 9(1) of that Act. The general powers of the Court in group proceedings specified in s 33ZF of the Supreme Court Act must also be exercised in that manner. In an application for an order for third-party discovery, the exercise of the discretion in r 32.07 and the power in s 33ZF in that manner requires a tighter focus than previously on the relevance of the documents, and how the documents would affect a party’s case, in relation to the real issues in dispute, as is now required under r 29.01(3) in relation to party discovery.

Scope of bank’s continuous disclosure obligations

Chapter 6CA of the Corporations Act makes provision for the continuous disclosure of information by particular entities, including the bank in respect of its shares.[10]
[10]The history of the provisions was described by Mason P in R v Firns (2001) 51 NSWLR 548, 556-562 [40]-[63] (New South Wales Court of Appeal) (‘Firns’) and Martin CJ (Le Miere AJA agreeing) in Jubilee Mines NL v Riley (2009) 253 ALR 673, 685-686 [45]-[54] (Western Australian Court of Appeal) (‘Jubilee Mines’) (both by reference to the former ss 1002G and 1002B of the Corporations Law); Australian Securities & Investment Commission v Southcorp Ltd (2003) 130 FCR 406, 408-411 [7]-[16] (Lindgren J) (‘Southcorp’).

The continuous disclosure obligation is of fundamental importance to the competitive efficiency and operational integrity of the market for Australian securities, including shares. According to Lindgren J in Australian Securities & Investments Commission v Southcorp Ltd [No 2],[11] the provisions were designed (among other things) ‘to prevent selective disclosure of market sensitive information’.[12] In Re Chemeq Ltd,[13] French J referred with approval to the description in an official report that statutory systems of continuous disclosure promoted ‘confidence in the integrity of Australian capital markets’.[14] Martin CJ analysed the former provisions and the applicable listing rules in Jubilee Mines NL v Riley.[15] His Honour concluded that their evident purpose ‘is to ensure an informed market in listed securities’ and that ‘all participants in [that] market … have equal access to all the information which is relevant to, or more accurately, likely to, influence decisions to buy or sell those securities’.[16] Spigelman CJ, Beazley and Giles JJA considered the provisions of s 674 of the Corporations Act in James Hardie Investments NV v Australian Securities & Investments Commission.[17] Their Honours said that the regime

is designed to enhance the integrity and efficiency of Australian capital markets by ensuring that the market is fully informed. The timely disclosure of market sensitive information is essential to maintaining and increasing the confidence of investors in Australian markets, and to improving the accountability of company management. It is also integral to minimising incidences of insider trading and other market distortions.[18]

[11](2003) 130 FCR 406.

[12]Ibid 408 [2].

[13](2006) 234 ALR 511 (Federal Court of Australia) (‘Chemeq’).

[14]Ibid 522 [43].

[15](2009) 253 ALR 673.

[16]Ibid 639 [87] (Le Miere AJA agreeing) (speaking of ss 1002B and 1002G of the Corporations Law).

[17](2010) 274 ALR 85 (New South Wales Court of Appeal) (‘James Hardie’).

[18]Ibid 162 [355]. In Morley v Australian Securities & Investment Commission [No 2] [2011] NSWCA 110 (6 May 2011) [66] their Honours endorsed these remarks.

In the present case, a significant (perhaps the most significant) common question is whether the bank breached its continuing disclosure obligations under ch 6CA, as contended by the plaintiffs. The answer to that question will depend on the application of s 674(2)(c) in the facts and circumstances which are established.

This is s 674(2)(c):

(2) If:
(a) this subsection applies to a listed disclosing entity; and
(b)the entity has information that those provisions require the entity to notify to the market operator; and

(c) that information:
(i) is not generally available; and
(ii)is information that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of ED securities of the entity;

the entity must notify the market operator of that information in accordance with those provisions.

It can be seen that, under s 674(2)(c)(i), a condition of the application of the continuous disclosure obligation is that the relevant information ‘is not generally available’. In the appeal, this was referred to as the availability issue.

Section 676 makes provision for when information is to be regarded as not generally available. Sub-sections 676(2) and (3) provide:

(2) Information is generally available if:
(a) it consists of readily observable matter; or
(b)without limiting the generality of paragraph (a), both of the following subparagraphs apply:
(i)it has been made known in a manner that would or would be likely to, bring it to the attention of persons who commonly invest in securities of a kind whose price or value might be affected by the information; and
(ii)since it was so made known, a reasonable period for it to be disseminated among such persons has elapsed.

(3)Information is also generally available if it consists of deductions, conclusions or inferences or drawn from either or both of the following:
(a)information referred to in paragraph (2)(a);
(b)information made known as mentioned in subparagraph (2)(b)(i).

As the question under s 676(2)(a) is whether the information consists of ‘readily observable matter’, the test is ‘not whether the particular matter was widely observed but whether it could have been’.[19] Under s 672(2)(b)(i), the critical question is whether the information has been made known to ‘persons who commonly invest’ in securities whose price or value might be affected by the information. In the present case, that makes the price or value of the shares an element of what is relevant to the issue of availability, as was decided by the trial judge.

[19]Australian Securities and Investment Commission v Citicorp Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35, 107 [551] (Jacobson J).

It can be seen that, under s 674(2)(c)(ii), a condition of the application of the continuous disclosure obligation is that the relevant information is information that ‘a reasonable person’ would expect to have a ‘material effect’ on the price or value of the security. In the appeal, this was referred to as the materiality issue.

Section 677 makes provision for when a reasonable person would expect information to be material:

For the purposes of sections 674 and 675, a reasonable person would be taken to expect information to have a material effect on the price or value of ED securities of a disclosing entity if the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of the ED securities.

In Jubilee Mines,[20] Martin CJ (Le Miere AJA agreeing) discussed the operation of s 1001D of the Corporations Law (which is not materially different to s 677 of the Corporations Act). His Honour said the provision was ‘analogous to a deeming provision’, but it was not exhaustive.[21] Section 1001D provided the answer to the question in the former s 1001A(2)(b) of the Corporations Law (which is not materially different to s 674(2)(c)(ii) of the Corporations Act) and, even though the provision was not exhaustive, it was difficult to envisage how information might be material if it did not have the specified characteristics.[22] Thus, s 677 of the Corporations Act may be regarded as analogous to a deeming provision which operates such that information having the characteristics referred is taken as to be within the scope of s 674(2)(c)(ii).
[20](2009) 253 ALR 673.
[21]Ibid 687 [57]-[58].
[22]Ibid 687 [57]-[59].

The parties made competing submissions about the proper interpretation and application of the continuing disclosure provisions. The bank submitted that evidence of whether the market participants had knowledge of the information (to which the category 1 documents related) and the reasons for their share-trading decisions (to which the category 2 documents related) was relevant to the issue of availability under s 674(2)(c)(i) and materiality under s 674(2)(c)(ii). The plaintiffs submitted that such evidence was not relevant because the applicable tests were objective, not subjective. In their submission, neither what the market participants knew nor the reasons for their share-trading decisions was relevant to the issue of contravention, although these matters were relevant to the issue of loss and damage.

The language of s 674(2) (and the other relevant provisions of ch 6CA) is objective. Following that language, the authorities have interpreted the applicable tests in this and the comparable legislation as being objective and hypothetical. But in most of the cases, and without undermining the character of the tests, a certain amount of evidence of subjective facts and circumstances was admitted and taken into account.

For example, R v Firns[23] contains a discussion of ‘readily observable matter’ in the context of the former provisions of ss 1002B and 1002G of the Corporations Law. Mason P (Hidden J agreeing) held that whether the matter was ‘readily observable’ was ‘par excellence a jury question’[24] which was ‘complex and nuanced’ and took into account ‘the capacity for types of information to be relayed across the world instantaneously through modern means of telecommunications’.[25] His Honour went on to say:

Observability does not depend upon proof that a person or group of persons actually perceived the information. That is not to say that the depositing of information in an obscure portion of a public library would establish ready observability. The issue is a factual or jury one. But the point of present relevance is that the objective and hypothetical circumstances are to be looked at, not merely the actualities in the particular case. Ready observability cannot be located a priori in the Australian capital cities where the ASX has a physical presence.[26]

Thus, the objective and hypothetical circumstances must be the focus, but the actualities of a particular case may be relevant.

[23](2001) 51 NSWLR 548.

[24]Ibid 565 [88].

[25]Ibid 565 [87].

[26]Ibid 565 [88].

Catena v Australian Securities & Investments Commission[27] concerned the insider-trading provisions of s 1043A of the Corporations Act. A question in the appeal was whether the Administrative Appeal Tribunal had evidence that the relevant information was ‘not generally available’ as specified in the definition of ‘inside-information’ in s 1042A. The definition of ‘generally available’ in s 1042C is not materially different to the definition of that compound term in s 676(2) of the Corporations Act.
[27](2011) 276 ALR 25 (Federal Court of Australia – Full Court).

North, McKerracher & Jagot JJ treated the question of whether information was generally available as an objective one. But they held it was relevant to take into account evidence of subjective circumstances, including the testimony of individual company officers. As the tribunal had evidence of that kind (as well as other evidence), it could not be said that the tribunal had erred in law by making a finding in the absence of evidence.[28]
[28]Ibid 32-33 [29]-[30].

Returning to Jubilee Mines,[29] in that case the plaintiff (Mr Riley) brought a claim under the former s 1005 of the Corporations Law for loss and damage suffered by reason of the failure of the defendant (Jubilee) to disclose information in alleged contravention of the disclosure obligations in s 1001A. The information at issue concerned the discovery of mineral in a tenement in 1994 which the company did not announce until 1996. A master of the Court found the mine to be liable to Mr Riley for losses suffered when he sold his shares in the company without knowing about the discovery. Martin CJ, McLure JA and Le Miere AJA upheld the appeal, essentially because the mine had no present intention of mining the mineral when it was discovered, had no financial capacity to do so and did not appreciate the significance of the discovery.
[29](2009) 253 ALR 673.

In relation to the question of the materiality of the information, evidence was given by two share-trading experts on the mine’s side and two also on the plaintiff’s side.[30] Evidence was given by the plaintiff (who was regarded as a person who commonly invested in the relevant securities) about what trading decisions he would have made if he had known about the non-disclosed information.[31] Evidence was also given by company officers that Jubilee had no intention of mining, or the financial capacity to mine, the tenement.[32] There was evidence about the market impact of the 1996 announcement.[33]
[30]Ibid 680-81 [31]-[33].
[31]Ibid 683 [39], 699 [121].
[32]Ibid 694 [94], 695 [96], 696 [103].
[33]Ibid 702 [134].

Martin CJ held that Jubilee’s disclosure obligations ‘must be assessed having regard to the totality of relevant information’.[34] His Honour’s approach was to construct a ‘hypothetical scenario’[35] against which objectively to assess the company’s compliance. That scenario comprised the relevant facts and circumstances which the reasonable common investor in the relevant securities would, considering the evidence in the case, be treated as having known. The role of the Court was ‘to stand in the shoes of the hypothetical investor’ nominated by the disclosure provisions.[36]
[34]Ibid 693 [90] (Le Miere AJA agreeing).
[35]Ibid 700 [123]; see also 694 [92].
[36]Ibid 700 [123].

Among the relevant considerations taken into account by Martin CJ were that the mine had no present intention of mining, or financial capacity to mine, the tenement,[37] the impact of the 1996 announcement on the share price[38] and the evidence of the share-trading experts.[39] On the whole of the evidence, Martin CJ concluded that the announcement of the discovery of the mineral in 1994 would not have influenced the trading decisions of persons who commonly invest in such shares.[40] Jubilee therefore had no obligation to disclose the discovery until circumstances changed in 1996.
[37]Ibid 693-94 [90].
[38]Ibid 702 [134].
[39]Ibid 700 [123].
[40]Ibid.

In James Hardie Industries NV v Australian Securities & Investments Commission,[41] James Hardie Industries NV was found to have contravened s 674 of the Corporations Act by failing to notify the market of information relating to its separation from James Hardie Industries Ltd.
[41](2010) 274 ALR 85.

Expert evidence was given at trial that the non-disclosed information was information which a reasonable person would expect to be material to the share price.[42] The evidence was challenged on appeal on the basis that certain individual components of the reasoning were defective. Spigelman CJ, Beazley and Giles JJA rejected the challenge. Their Honours held the expert ‘had the expertise to express an opinion as to what a reasonable investor would consider to be material’ and the overall effect of the evidence was not eliminated by the challenge to the defective components of the reasoning.[43]
[42]Ibid 192 [504]-[507].
[43]Ibid 195 [523].

The Court considered the nature of the materiality test and the relevance of subjective evidence. James Hardie Industries NV sought to defend the non-disclosure by relying on ‘the board’s commercial judgment’ in deciding that the information was not disclosable.[44] Spigelman CJ, Beazley and Giles JJA held that this argument sought ‘to import a subjective element into the determination of materiality’.[45] After stating that the test of materiality was an ‘objective one’, their Honours said this about the relevance of a company’s reasons for not disclosing information:

The matters a company takes into account and the reasons it has for deciding that information is not disclosable may be relevant, in that they provide part of the factual matrix in which the determination of materiality has to be made. However, the company’s deliberations and ultimate decision are not determinative of whether information is material. That is the court’s decision after an evaluation of the whole of the evidence. Even if there was no other evidence apart from the company’s own deliberations, it remains for the trial judge to evaluate whether information is material so as to require disclosure under s 674.[46]

[44]Ibid 195 [526].

[45]Ibid 195 [527].

[46]Ibid.

It can be seen that, while emphasising the objective nature of the test, their Honours did not rule out subjective evidence as such evidence could be relevant to the ‘factual matrix’ in which the test was to be applied. However, in that case, the evidence was the company’s reasons for not disclosing the information rather than evidence of what large shareholding companies in the market knew about the information or how it would have influenced their share-trading decisions.

As in Jubilee Mines,[47] a question arose in James Hardie about the relevance of evidence about the effect on the share price of the disclosure of the information. The trial judge had refused to take such evidence into account. Spigelman CJ, Beazley and Giles JJA referred[48] with approval to Rivkin Financial Services Ltd v Sofcom Ltd[49] where Emmett J took into account in favour of the alleged contravener that the disclosure had no appreciable effect on the market.[50] Their Honours held[51] that the reaction of the market, as evidenced by any share price movement, was relevant in the sense described by Gilmour J (following Rivkin and Jubilee Mines) in Australian Securities & Investments Commission v Fortescue Metals Group Ltd[No 5],[52] namely as a ‘cross-check as to the reasonableness of an ex ante judgment about a hypothetical disclosure’.[53] Spigelman CJ, Beazley and Giles JJA went on later to state this conclusion about the nature of the test in s 674 of the Corporations Act:

The test … is an objective test, determined ex ante the relevant event which requires disclosure. That the party with the obligation to disclose might convince itself that information would not be expected to have a material effect on the price or value of its securities, does not answer the question whether the material was disclosable as required by s 674.[54]

Applying that approach, their Honours decided that the failure of the trial judge to refer to this evidence did not affect the outcome of the appeal.[55]

[47](2009) 253 ALR 673.

[48](2010) 274 ALR 85, 197 [533].

[49](2004) 51 ACSR 486 (Federal Court of Australia) (‘Rivkin’).

[50]Ibid 516 [115].

[51](2010) 274 ALR 85, 197 [534]-[537].

[52](2009) 264 ALR 201 (Federal Court of Australia).

[53]Ibid 301 [477]. Ex ante means ‘based on expected results, forecast’: Bruce Moore (ed), The Australian Concise Oxford Dictionary (Oxford University Press, 4^th ed, 2004) 481.

[54](2010) 274 ALR 85, 199 [546].

[55]Ibid 197 [537].

In Kirby v Centro Properties Ltd [No 4],[56] an issue was what was known in the market. There was evidence in the reports of market analysts about what they thought and said about Centro Group at the relevant time. It was accepted in the case that the making and publication of the reports might be relevant to whether the allegedly non-disclosed information was generally available and therefore not subject to the disclosure obligation. But the Centro Group sought discretionary exclusion under s 136 of the Evidence Act 1995 (Cth) of comments in the reports which criticised its disclosure performance.
[56](2012) FCA 323 (29 March 2012) (Federal Court Australia) (‘Centro Properties Ltd No 4’).

Gordon J refused the application. Her Honour held that the Centro Group was not entitled to ‘pick and choose’ which parts of the reports should go before the Court.[57] She held that the analysts’ reports had ‘probative value’ because they were relevant to ‘market knowledge’ and use of the reports in relation to that question would not be unfairly prejudicial or misleading and deceptive.[58]
[57]Ibid [6].
[58]Ibid [15].

It was submitted by the bank in the present case that, just as evidence of what ‘market analysts’ thought and said about the Centro Group at the material time was relevant in that case, so evidence of what information the ‘market participants’ had and the reasons for their share-trading activities at the material time was relevant in this case. That submission has some force but cannot be wholly accepted.

There is a distinction between the two kinds of evidence. The evidence of the market analysts on the general subject of market knowledge in Centro Properties Ltd No 4 was in the nature of expert objective evidence of opinion about the market generally. In the present case, the evidence of market participants on the subject of what information they held and the reasons for their share-trading decisions is in the nature of non-expert subjective evidence of fact about their own activities. That is not to say that non-expert subjective evidence of that kind is necessarily irrelevant to the question of market knowledge. But it cannot be exactly compared with expert objective evidence about that issue.

As this discussion of the authorities makes clear, the tests specified in s 674(2)(c), and explained in ss 676(2) and (3) and 677, of the Corporations Act are objective and hypothetical in nature. Whether information is not generally available or is information which a reasonable person would expect to be material to the price or value of securities is a question of fact for the Court to determine on an objective and hypothetical basis.

However, all of the relevant facts and circumstances must be taken into account in making that objective and hypothetical determination. Opinion evidence from suitably qualified share-trading experts will be admissible when relevant. Depending on the nature of the contravention alleged, individual facts about the operation or behaviour of the market, the reasons why information was not disclosed and the impact of any subsequent disclosure on the price of the securities, may also be admissible and relevant.

In the present case, the contravention alleged is the non-disclosure of information about the exposure by the bank to specified CDO losses in the relevant period. In relation to availability, if the bank could establish that large shareholders having the individual capacity to influence the price of the shares had knowledge of the information, this could theoretically advance its case or adversely affect the plaintiffs’ case in relation to the question whether the information was publicly available. Given such evidence, the Court might be more likely to conclude that the information would be, or more likely to be, known by common investors in securities of the kind. Although the question of availability is objective and hypothetical, evidence of knowledge of the information by large shareholders might therefore be relevant to the Court’s determination of this issue. However, as the focus must remain on the objective and hypothetical nature of the test to be applied, the Court would be at pains to ensure that the test was not subverted, and the trial was not dominated, by an undue concentration on evidence of this nature.

In relation to materiality, if large shareholders having the individual capacity to influence the market for the shares had knowledge of the information and yet this did not affect their share-trading decisions, or it affected those trading decisions in a way that became incorporated into the share price, this too could theoretically advance the bank’s case and adversely affect the plaintiffs’ case on that issue. Although the question of materiality is objective and hypothetical, the manner in which the information was treated (or not) by large shareholders in the market might be relevant to the Court’s determination of this issue. It is also possible to see, theoretically, how individual evidence of this nature might be used to illustrate and support expert evidence on this subject. Again, the Court would not allow the ultimate focus of its attention to be on the individual large shareholders rather than the market, for that would undermine the application of the statutory tests.

It follows that it would have been an error for the trial judge to refuse to order the provision of identity particulars and discovery of documents on the basis that it could not be relevant to any common issue for the bank to seek identity particulars and documents for the purpose of presenting evidence (whether through experts or otherwise) that large shareholders knew of the information, that the information had become incorporated into the share price or that it was not relevant to their share-trading decisions. On the other hand, it would not have been an error for the trial judge to refuse to make such orders on the basis that the bank had not established that there was sufficient reason to think that such evidence could likely be obtained from the market participants or that the scope and extent of the discovery sought could not be justified having regard to the objective and hypothetical nature of the statutory tests or was out of all proportion to the real issues in dispute.

Now to why the trial judge did not err in refusing to make the orders sought, which will involve a consideration of the bank’s specific grounds of appeal.

Trial judge did not err in refusing to make orders sought
Grounds 1(a), (b), 2(a) and 4(b): no statistically representative sample

In grounds 1(a), (b), 2(a) and 4(b) of its notice of appeal, the bank contends that the trial judge erred in treating as determinative or attaching weight to the consideration that the discovery sought would not provide a statistically representative sample of the knowledge held by all market participants when the documents would have been useful in the preparation of expert evidence (including an event study) and Dr Tabak was not cross-examined.

The submissions made in support of these grounds focussed on the evidence of Dr Tabak as to the use which would be made of the documents. According to that evidence, to be useful the documents did not have to assist in providing a statistically representative sample of the knowledge of the market participants or the whole market. Rather, the documents would be useful because they would help to show what decisions or events had influenced market activity during the relevant period, especially those for which market-influential participants were responsible. More specifically, the documents would help to identify particular events which would improve the quality and probative force of an event study about that market activity. Such a study, which would be scientifically reliable and legally probative of the cause of the share price movements (or lack thereof) in the relevant period, would connect those movements with relevant events. The bank hoped to show that events other than the alleged non-disclosure were responsible, or more responsible, for trading activity in the shares than the non-disclosure. It hoped to show that the relevant information had been incorporated into the price of the bank’s shares during the relevant period. It also hoped to show that large investors were very sophisticated and more interested in the long-term performance of the bank and the fundamental valuation of its shares than its short-term exposure to losses.[59] A study in relation to these matters which was successful from the bank’s point of view would, in its submission, at least be relevant to the issue of materiality under s 674(2)(c)(ii) of the Corporations Act and, further, would assist in showing that any non-disclosure did not result in share-price inflation.
[59]The court was informed on appeal that evidence of materiality – what mattered to share price and what did not – would be elicited from sophisticated investors at trial on both sides.

The plaintiffs submit that the bank’s submissions on the appeal represented the third evolution of its argument on this point. This submission must be rejected. While the bank’s argument has become progressively more refined, it does not appear that the bank’s submissions on appeal are fundamentally different to its submissions to the trial judge.

The evidence on this subject was addressed in detail in the submissions made on appeal (as it was in the submissions made to the trial judge). Having regard to that evidence and those submissions, the bank has not established that the trial judge was mistaken in his characterisation of the evidence. His Honour was entitled to conclude that the bank’s prospects of obtaining admissible and probative expert evidence were not strong enough to justify the orders sought. His Honour’s judgment was not driven by the consideration that the orders for identity particulars and discovery were being sought for the purpose of providing statistically representative evidence.

As explained by Dr Tabak in his first report (which was provided after Dr Gordon supplied his first report), market participants, especially those with significant shareholdings, could and did influence the price of shares by making trading decisions (including decisions not to trade) after taking privately held information into account. The impact of such decisions could be studied without the need for the information to come from a statistically representative sample of market participants. A group of large shareholders were more relevant for such a study than a statistically random sample of shareholders. Dr Tabak’s second report (which was supplied after Dr Werner’s report and Dr Gordon’s second report were supplied) developed these views and answered certain criticisms of them.

For the sake of analysis, Dr Tabak’s views may be accepted. One serious difficulty for the bank is that Dr Tabak’s views as to the actual use which might be made of the documents sought were qualified. The descriptors used in his first report include ‘information can often suggest further avenues for exploration that may lead to more useful or accurate analyses’, ‘help inform analyses’, ‘can be helpful’, ‘may shed light’, ‘use to suggest potential analyses’, ‘often helps pin down’ and ‘may provide something useful’. The descriptors in his second report include, ‘will be likely to be relevant’, ‘will be relevant to’, ‘might be helpful or relevant’, ‘might be useful’ (several times), ‘would be useful and relevant for various reasons’ and ‘would likely be relevant’. Dr Tabak did not give evidence that the documents sought were reasonably necessary for the analysis which he wanted to undertake.

When considering Dr Tabak’s evidence about the value of the documents sought, it is necessary to take into account that he was expressing himself in economic and not in legal terms. Even taking that into account, it was open to the trial judge to characterise Dr Tabak’s evidence in the way that he did. In particular, his Honour was entitled to find that the evidence had not established that the documents sought were needed to enable an expert to provide a report which would be likely to produce probative and admissible evidence. He was likewise entitled to find that Dr Tabak’s evidence was that the intended investigations were likely to produce useful lines of inquiry and helpful information and not necessarily actual evidence.

The trial judge did not decide that an event study or other analysis of the effect of privately held information on share price would be irrelevant. His Honour decided that, on the evidence before him, the present forensic benefits were not sufficient to warrant orders for discovery of the kind sought. There was no evidence suggesting that the market participants actually had private knowledge of the allegedly non-disclosed information. Neither was there evidence suggesting that the market participants actually had private knowledge of other information which would be particularly relevant to studies of the kind contemplated. There was generalised evidence that the market participants, like other large participants in the share market, took various matters into account and conducted certain analyses when making share-trading decisions. But the evidence did not establish that the documents sought were necessary for studies to be undertaken of that phenomenon. On the evidence, there was nothing sufficient to establish that a probative and admissible event study (or other analyses) could not be produced without the documents sought or that such a study would be significantly less valuable because it was not based on those documents.

The point was taken on behalf of the bank that the evidence warranted a finding that the bank’s expert evidence would be better and more persuasive with access to the documents sought. That does not defeat the force of the finding by the trial judge, which was open on the evidence, that the documents were not reasonably necessary for the purpose of the study which was contemplated.

Grounds 1(c) and 2(b): issues relevant under s 674 of the Corporations Act

In grounds 1(c) and 2(b), the bank contends that the trial judge erred in refusing to make the identity and discovery orders when the documents sought were directly relevant to fundamental common issues in the proceeding, being the extent of knowledge of key participants in the market of information of the kind which was alleged not to have been disclosed, the extent to which the information had been incorporated into the price for the bank’s shares and materiality. The trial judge erred in concluding that the discovery would at best put the bank on a chain of inquiry when the documents would be directly relevant to elements of the bank’s alleged contravention of s 674 of the Corporations Act and the statutory proscriptions of misleading and deceptive conduct. His Honour failed to appreciate the relevance of the documents to the common issues, the manner in which the bank sought to deploy them and the true import of the expert evidence.

The bank wants discovery of the category 1 documents from the market participants for a number of reasons. In its submission, the possession by the market participants of such documents is relevant to both availability and materiality. As to availability, it would support the bank’s case that the information was generally available, and adversely affect the plaintiffs’ case that it was not, if the documents revealed that the market participants knew of the bank’s likely exposure to losses under CDOs generally and the relevant CDOs specifically. That such documents were possessed by the market participants as large shareholders having the capacity to influence the share price would also be relevant to materiality. It would support the bank’s case and adversely affects the plaintiffs’ case if the market participants had such documents because it may enable the bank to show that their share-trading decisions would have incorporated knowledge of the allegedly non-disclosed information into the market, in which case it would have been reasonable for the bank not to make a public announcement disclosing the information.

Further, in the bank’s submission the documents in category 1 would supply a foundation for challenging (in cross-examination and otherwise) the plaintiffs’ expert and other witnesses and assist (be ‘helpful to’) the bank in preparing its case in the way described above.

The bank also had a number of reasons for wanting discovery of the category 2 documents from the market participants. It was submitted that it would support the bank’s case and adversely affect the plaintiffs’ case if the documents revealed that the market participants made decisions to buy and sell shares in the bank on the basis of considering a wide range of information of which the bank’s potential exposure to losses (being CDO losses generally and the relevant CDOs specifically) was only part of the picture. On this approach, the more comprehensive was the analytical consideration of the market participants of their trading decisions, the less likely was it that the allegedly non-disclosed information would be regarded as not generally available and material. The bank also intends to use the documents in this category in challenging the plaintiffs’ witnesses.

The plaintiffs’ primary submission is that, since the tests of compliance in s 674(2)(c) are objective and hypothetical, possession of private information by the market participants, their private ‘subjective musings‘ in relation to the bank’s exposure to losses and the reasons for the share trading decisions of the market participants cannot be relevant. They submit in the alternative that the trial judge was entitled to conclude there was no evidence that anything of particular relevance would be obtained by granting the orders sought.

For the reasons already given, the plaintiffs’ primary submission must be rejected. While the focus in the application of the tests in s 674(2)(c) must be on the objective and hypothetical nature of the task, it is possible to see, theoretically, how documents of the kind sought might reasonably be likely to assist the bank’s case or adversely affect the plaintiffs’ case in relation to the real issues in dispute. The bank’s application for discovery therefore could not properly have been dismissed, and was not dismissed by the trial judge, on this general basis.

Turning to the specifics of the bank’s application, it was not seeking discovery of a narrow kind in respect of a few large shareholders who, for particular reasons relating to them, were reasonably suspected of having documents of the relevant kind. It was seeking very wide discovery in respect of the 20 market participants in their capacity as large shareholders of the bank. As already noted, the bank’s contention that the market participants were likely to have documents of the relevant kind was only based on the highly generalised evidence of Dr Tabak concerning what large shareholders could be expected to have. Besides the fact that the market participants were large shareholders of the bank, there appears to be nothing in particular justifying their selection as an appropriate target for the discovery which was sought. Dr Tabak’s evidence was that large shareholders (sophisticated investors) like the market participants typically invested time, energy and resources into their share-trading activities. If that is so, the discovery might just as relevantly have been sought from large shareholders simply chosen as such, if it were reasonably practicable to do so. The bank submitted it was not reasonably practicable to do so and relied on Mr Betts’ evidence to that effect. On analysis, the bank’s submissions do not wholly answer the plaintiffs’ criticisms of the bank in relation to the issue of alternative means. More importantly, the trial judge considered this question and the bank has not shown his Honour’s conclusion to be incorrect. That conclusion was that the issue had to be considered in the context of the orders sought and these were not justified in the circumstances, although more limited orders may be justified in other circumstances.

It is necessary to take into account the overarching purpose in s 7(1) and the objects in s 9(1)(a) and (g) of the Civil Procedure Act and the objective and hypothetical nature of the tests in s 674(2)(c) of the Corporations Act. Doing so, it really does appear that the bank was seeking discovery of documents from the market participants on a scale which was unnecessary for the just determination of the real issues in dispute and disproportionate to the potential relevance of evidence of the nature sought. Further, granting discovery of the kind and on the scale sought would have run the serious risk of the trial becoming focussed far too greatly on the subjective knowledge and individual share-trading processes and decisions of the group members who were market participants rather than on the availability and materiality of the allegedly non-disclosed information considered objectively and hypothetically in terms of the whole market.

The reasons for decision of the trial judge show that his Honour fully and (with respect) correctly appreciated the common issues in the proceeding, the nature of the tests which had to be applied and the reasons why the bank was seeking the discovery which it did. His Honour did not decide that the documents sought could not be relevant to the common issues in the proceeding. His Honour did not decide that the documents sought could never be relevant because of the objective and hypothetical nature of the relevant tests. His Honour did not decide that the bank could never obtain appropriate discovery from individual large shareholders (whether or not market participants) of the documents sought. His Honour decided that the evidence and submissions of the bank were not ‘sufficient to justify discovery or particulars in the case at this stage and on the material so far adduced’. His Honour expressly noted that the decision might be different if it were established that specific information was necessary and not otherwise readily available. That decision was within the exercise of his Honour’s discretion with respect to a matter of practice and procedure.

Grounds 3(a), (b) and (c)

In grounds 3(a), (b) and (c), the bank contends that the trial judge erred in placing weight on the circumstances that the evidence did not suggest that the price of the bank’s shares had already incorporated the existence of the information sought, that his Honour should have appreciated that the purpose of the summons was to obtain such evidence for use in the proceedings and that the bank had limited capacity to obtain such evidence without the documents sought.

For the reasons already given, the trial judge did not fail to appreciate that the purpose of the summons was to obtain the evidence referred to. His Honour refused to order the very wide discovery sought by the bank in respect of the market participants on the basis of generalised evidence about what large shareholders typically might possess and how typically they made share-trading decisions. His Honour did not err in so doing. The focus of the trial judge was on the very wide discovery sought by the bank at the particular stage of the proceeding. Even taking into account the difficulties which the bank might have in obtaining that discovery by other means, the orders sought were not justified. That too was within the proper exercise of his discretion.

Grounds 4(a), (c) and (d)

In grounds 4(a), (c) and (d), the bank contends that the trial judge erred in deciding that the discovery sought had to be essential for enabling an expert to produce a report when it was sufficient that the discovery was being sought to obtain directly relevant and useful evidence, in failing to refer to and take into account evidence about information in the marketplace regarding the bank’s exposure to losses under impaired CDO-type losses and in failing to hold that the bank had a legitimate forensic purpose for obtaining the discovery sought.

The question before the trial judge was whether identity and discovery orders of the kind sought should be made. His Honour first had to identify the potential relevance of the documents sought, which he correctly did. Due to the objective and hypothetical nature of the availability and the materiality tests in s 674(2)(c) of the Corporations Act, the documents could only have a certain relevance in the proceedings. As already noted, the evidence that the market participants were likely to possess such documents was highly generalised, based on what might typically be expected in the case of large shareholders and was not directed at them individually. The evidence was equally relevant to any large institutional shareholder.

In this setting, his Honour’s conclusion that the bank did not have a sufficient forensic purpose for obtaining the orders sought was open and not shown to be incorrect.

Grounds 5(a), (b) and (c)

In grounds 5(a), (b) and (c), the bank contends that the trial judge erred in failing to order the provision of the identity particulars when the identities of the market participants were already confidentially known, the utility of the particulars sought was not challenged in the evidence and the provision of the particulars was not shown to be oppressive or burdensome.

The bank did not claim an order for the provision of identity particulars for any purpose other than obtaining documents from the market participants of the very wide kind specified in the summons. On the analysis above, the trial judge approached the matter on the basis that the outcome of the application for the identity particulars in respect of the market participants would turn on the outcome of the application for the discovery orders sought in respect of them. If the trial judge had considered that the bank was entitled to an order of the kind sought in respect of discovery, his Honour would likely have considered how it could practicably be made. That would have required him to consider what course should be taken in relation to the provision of the identity particulars. The issue of principle which his Honour chose first to determine was whether the discovery orders should be made. With respect, that was the correct approach and it was open to him to dismiss the application for identity particulars on the basis that the application for discovery would be dismissed. It is implicit in his Honour’s reasoning that he would not order the provision of identity particulars so that the bank could, by issuing subpoenas to all of the market participants individually or some other process, achieve by that means what his Honour would not permit by ordering discovery. That conclusion was also open.

Grounds 6(a), (b), (c) and (d)

In grounds 6(a), (b), (c) and (d), the bank contends that the trial judge erred in failing to distinguish between its application for the provision of identity particulars and its application for discovery, in deciding that the provision of such particulars could only be justified if they were relevant to the market price of the bank’s shares or for obtaining statistically reliable evidence concerning common issues in the proceeding, in equating the principles governing non-party discovery and the provision of identity particulars and in failing to give independent reasons for refusing to order the provision of such particulars.

For the reasons already given, it is clear that the trial judge refused to order the provision of identity particulars because his Honour was refusing to order discovery in respect of the documents. It is implicit in his Honour’s reasoning that he would not order particulars so that subpoenas or some other process could be used to achieve that same end. It was open to his Honour to do so. This did not involve a conflating or misapplication of the principles governing the two aspects of the bank’s application.

The bank has not succeeded on any of its grounds of appeal. It is therefore unnecessary to consider the plaintiffs’ notice of contention and application for admission of additional evidence.

Conclusion

The main issue in the group proceeding before the trial judge was whether the bank had contravened its obligation of continuing disclosure under s 674(2)(c) of the Corporations Act by allegedly failing to disclosure relevant information about its exposure to about $1.1 billion in losses under certain specified collateralised debt obligations arising out of the collapse of the US sub-prime mortgage market. The tests in s 674(2)(c) are objective and hypothetical in nature and are directed at what information was available and material to the bank’s share market generally in the relevant period.

The bank sought identity particulars and discovery in respect of 20 individual group members in the proceeding (called market participants) who were large shareholders. The discovery sought was very wide. The document categories included documents relating to the bank’s exposure to losses under collateralised debt obligations generally, not just under those specified in the plaintiffs’ statement of claim. The categories also included documents relating to all of the share-trading decisions of the market participants in relation to the bank’s shares in the relevant period, including their strategies, policies and benchmarks.

The judge allocated to manage the proceeding and conduct the trial refused to grant the identity particulars and discovery sought at this stage in the proceeding. On the evidence, his Honour found that the bank did not contend that the market participants had particular information of relevance which was not possessed by other large shareholders. It was not contended that the documents sought were necessary for the production of expert evidence. It was contended that the documents would be useful and beneficial in the conduct of the bank’s case. His Honour took into account that the discovery was being sought in respect of group members who normally play a passive role in such a proceeding. Having regard to those considerations and the issues in the case, his Honour was not convinced that the bank had a sufficient legitimate forensic purpose for obtaining the very wide categories of documents which were being sought. His Honour therefore dismissed the application for discovery. The application for identity particulars was dismissed on the same basis.

In this appeal, the bank has not established that his Honour’s decision involved a demonstrable error of law or fact or a fundamental mistake of principle. It was open to his Honour to make the decision which he did in the exercise of his discretion on a matter of practice and procedure in the proper management of the proceeding.

His Honour did not err in taking into account the nature of a group proceeding under pt 4A of the Supreme Court Act. Usually the plaintiffs conduct such a proceeding on behalf of themselves and the group members who might stand to benefit from the outcome. The group members (in this case, the market participants) usually play a passive role and discovery orders are not made against them unless, for example, it is reasonably necessary for the conduct of the defendant’s case. It was open to his Honour to decide that the bank had not established sufficient grounds for departing from the usual course in the present case.

The bank was seeking orders for the provision of identity particulars and discovery in the exercise of the Court’s powers in s 33ZF of the Supreme Court Act and r 32.07 of the Supreme Court (General Civil Procedure) Rules. Those powers must be exercised in accordance with the overarching purpose of civil proceedings as specified in s 7(1) of the Civil Procedure Act, which is ‘to facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute’. The Court must also take into account the object specified in s 9(1)(g) of that Act, which is that civil proceedings should be dealt with in a ‘proportionate’ manner. The decision of the trial judge was consistent with that purpose and object.

I would therefore dismiss the bank’s appeal.

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Citations

National Australia Bank Ltd v Pathway Investments Pty Ltd [2012] VSCA 168

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Cited Sections

[2012] VSCA 168

2 August 2012