Nedlands Pty Ltd & Anor v Chisholm & Anor No. Scgrg-96-844 Judgment No. S455

[1999] SASC 455

NEDLANDS PTY LTD & ANOR v CHISHOLM & ANOR
[1999] SASC 0455

Magistrates Appeal: Civil

1 WILLIAMS J.  This is an appeal by the defendant against a Master's order dated 25 August 1999 whereby he dismissed certain aspects of the defendant's application for discovery of two classes of document.

1. Discovery of documents relating to the "cattle investors"

2 It is convenient to record the background facts as seen through the eyes of the defendant's counsel.  This material is drawn partly from the pleadings, partly from affidavits filed in support of the present application and partly from material extracted from discovered documents.
3 The defendant is a stockbroker who had a long-standing association with Killington, deceased.  As a result of this relationship the defendant came to trust Killington.  During 1991 Killington induced the defendant to become a co-director with Killington of the first plaintiff's company Nedlands Pty Ltd ("Nedlands") of which he was the governing director.  Although he did not disclose his financial position to the defendant, Killington had personal financial difficulties and was facing potential liabilities associated with another venture called the Lawton Gray Pastoral Partnership in which Killington was in partnership with Mr Ian Lawton.  There is said to have been, and known to Killington, a financial cloud over this partnership by reason of a possible liability to a group of investors in a cattle dealing scheme which the partnership had promoted.  One of the investors was Mr Andrew Burdett.  The defendant alleges that the second plaintiff, Mr Russell Heywood-Smith, or his firm BDO Nelson, acted as advisor to Killington and had communications with the "cattle investors" on behalf of the partnership.
4 In a letter dated 3 February 1999 from the defendant's solicitors to the plaintiffs' solicitors seeking discovery, the defendant claims to be entitled to discovery of
"5.  All documents relating to correspondence between Mr Heywood-Smith and/or BDO Nelson and the "cattle investors" in the Partnership, including all documents relating to Mr Andrew Burdett in his capacity as a "cattle investor";

5 Killington went overseas and it may be inferred that he was avoiding creditors.  The defendant, at Killington's request, then realised assets of the plaintiff company and entered into a series of transactions which had the effect of denuding Nedlands of value.  Some of the transactions involved the remittance of Nedlands' money to Killington's account in Singapore and in one instance involved the application of Nedlands' money to a new venture in Killington's name.  Killington became bankrupt and the Official Trustee in Bankruptcy became his Trustee.  Upon the Official Trustee's application an order was made by the Federal Court on 20 September 1994 for the winding up of Nedlands.  Mr Heywood-Smith was appointed liquidator.
6 In the present proceedings Nedlands, and its liquidator as plaintiffs, complain that the defendant's actions as a director are in breach of his duties.  The plaintiffs are seeking to recover from the defendant an amount by way of compensation for the monies improperly withdrawn from Nedlands for Killington's personal benefit. The defendant has taken third party proceedings against Killington's estate, with leave of the Federal Court, seeking an indemnity or contribution from Killington's estate as a fiduciary or for his tortious breach of duty.
7 Extracts from the third party statement of claim are as follows:
"13. Notwithstanding the relationship of trust and confidence, at all material times, Killington failed to disclose the true nature of his personal financial affairs to the defendant.  In particular, Killington failed to disclose to the defendant the nature and extent of the financial difficulties of the "Lawton Gray Pastoral Partnership" (of which Killington was a partner), the existence of purported creditors of that partnership and the nature and extent of their claims, and the advice Killington had received, from, amongst others, the second named plaintiff (who was at various times acting as advisor to Killington), to take steps to dispose of his assets in order to pay the purported creditors.
...
15.  On or about the 20th day of January 1991 when Killington was in Singapore, in a telephone conversation with the defendant Killington requested or directed the defendant to send monies to a bank account in Killington's name in Singapore.  In the same conversation, Killington also informed the defendant that he was unable to open an account in the name of Nedlands ("the assertion') and that such monies should therefore be made payable to the account in Killington's name in Singapore ("the Singapore bank account").

16.  Between the 20th day of January 1992 and 7th day of May 1992, the defendant acting under a belief as to the truth of Killington's assertion and pursuant to the relationship of trust and confidence that existed between them, and at the requests of or directions of Killington, facilitated or assisted in or arranged for or was aware of the transfer of monies allegedly belonging to Nedlands from South Australia to the bank account in Singapore.
...
19.  If it is the case that the defendant is in breach of his duties as alleged then the defendant's breach arises from his compliance with the requests or directions given to him by Killington in ignorance of the true state of Killington's financial affairs and Killington's true intentions in going to Singapore.

20.  The failure by Killington to disclose the matters referred to in paragraph 13 and the requests or directions that Killington made of or gave to the defendant in the circumstances referred to in paragraphs 15 and 16 above and of his true intentions in going to Singapore constitute a breach of the fiduciary duty and the tortious duty owed by Killington to the defendant."

8 The thrust of the defendant's complaint for the present purposes is that Killington, as governing director of Nedlands, withheld details of his personal financial problems from his co-director of which he was aware and ought to have disclosed.  For the purposes of the action, the defendant no doubt, would compare the actual financial circumstances as known to Killington, in which he obeyed Killington's directions, with the circumstances which he believed to exist.  The defendant upon his case would wish to demonstrate the enormity of Killington's deception concerning the financial cloud to which I have referred.
9 In my opinion the documents described in item 5 of the letter dated 3 February 1999, abovementioned, should be discovered in the light of the allegations set out in pars13 and 20 of the third party statement of claim.
10 The Master reached a contrary conclusion based upon his examination, in particular of par13, of the third party statement for claim.  His reasons on this point are quite short.  The Master said:
"However, by means of the third party proceedings, the defendant seeks indemnity or contribution from Killington on the basis of Killington's failure to appraise the defendant of Killington's overall financial position and, in particular, in relation to the "Lawton Gray Pastoral Partnership".  In connection with that, it is pleaded in paragraph 13 of the third party statement of claim that the second plaintiff gave Killington certain advice with regard to disposal of his assets.  In the defence to the third party statement of claim, the Official Trustee claims that he does not know and therefore cannot admit that allegation.  It is accepted that, although the third party is the Official Trustee because of the bankruptcy of Killington, Official Trustee stands in the place of Killington.  Insofar as this matter is concerned, therefore, the defendant is entitled to discovery of the documentation in paragraphs 2 and 8.

I do not consider, however, that this reasoning would extend to entitle the defendant to an order in respect of paragraph 5."

11 Paragraph 13 of the third party statement of claim refers to "the nature and extent of the financial difficulties" and the "nature and extent of ... claims". This plea raises an issue wider than whether or not there was a particular liability.  The full ramifications for Killington of the situation in which he found himself are matters within the ambit of the information to which pars13 and 20 of the third party statement of claim apply. 
12 Communications which have passed between Mr Heywood-Smith, when acting for the partnership, and investors may be expected to bear on this issue.  Upon my reading of the pleadings a nexus has been demonstrated between the material now sought and a matter in issue.  A forensic purpose can be identified so as to justify discovery.  
13 Mr Whitington QC, of counsel for the plaintiffs would seek, by his submission, to have me treat the issue as being quite narrow.  He points out that the defendant does not expressly plead that he ought to have been told. However, I regard that assertion as being implicit in par20 of the third party statement of claim.  Mr Whitington QC contends that, upon the argument of Mr Gray QC, of counsel for the defendant, the only relevant question is whether or not certain debts existed which were undisclosed to the defendant.  In my opinion the issue is wider than this.  The allegation in par13 is that Killington left the defendant out of the picture and the defendant is thus entitled to identify the true situation.  Mr Heywood-Smith's involvement can be seen from the analysis of the discovered material which Mr Gray QC placed before me.  It is not only Mr Heywood-Smith's advice which is made relevant but also his dealings generally with the cattle investors on behalf of the partnership.
14 At the outset of argument I pointed out that Mr Heywood-Smith was a plaintiff in his capacity as liquidator of Nedlands, whereas the material in question, must have come within his power in his personal capacity as Killington's advisor or more generally in representing the partnership.  I therefore raised the question whether the application should proceed upon the basis of a non-party discovery application in accordance with SCR60. As the point was not taken before the Master, Mr Whitington QC, properly declined to rely on the point.

1. Discovery of documents relating to funding of plaintiffs

15 In addition to the abovementioned material the defendant seeks discovery of documents relating to the funding of the plaintiffs in respect of the present proceedings. The notice of appeal mentions the funding of the third party but that has not been argued.
16 Mr Gray QC, claims that this material is relevant:
(a)  to the defendant's application for security for costs against the plaintiffs. This application dated 26 March 1999 has not yet been heard.
     and
(b) to enable the defendant, in accordance with the principles discussed in Knight & Anor v FP Special Assets Limited & Ors (1992) 174 CLR 178, to give notice to those who are maintaining the plaintiffs' conduct of the action.

17 I am not disposed to order discovery based upon the application for security for costs.  The defendant should bring on that application with supporting affidavits.  The plaintiffs may choose to file material in opposition.  I will not foreshadow what course the application will take thereafter.  The defendant does not acquire any right to discovery by virtue of the fact that he has filed an application for security for costs against the plaintiffs.
18 The defendant wishes to give notice as a precaution upon the footing that there are non-parties having an interest in the proceedings who may be demonstrated as falling within the class identified in Knight's case (Supra) at 192-3.  It is not in dispute that the plaintiffs are being financially supported in the conduct of the action.  I consider that the defendant should be entitled to give notice to those who are financially supporting the plaintiffs.  This step would ensure that the defendant is protected in asserting a claim for costs against non-parties to the action in the event that the outcome or conduct of the action appears eventually to justify such a claim.
19 Mr Gray QC has foreshadowed how in the present circumstances, as he alleges them, an application for security for costs may be regarded as appropriate  (refer to Knight's case (Supra) per Dawson J at 204-5).  If notice to the non-parties is given forthwith there will be an opportunity for them to seek to be joined as parties and to place before the Court directly such information as their position justifies, or otherwise to take advantage of the procedure of the Court.
20 It is unnecessary for me to make a discovery order regarding the funding material.   Mr Whitington QC is prepared to give an undertaking on behalf of the plaintiffs which will ensure that an appropriate form of notice is given to those who stand behind the plaintiffs. I will hear the parties as to the form of the solicitor's undertaking and notice and the mechanics associated therewith.
21 There has been extensive arguments upon this application.  Counsel have reviewed the authorities which might be applied.  However, the undertaking to be proffered on behalf of the plaintiffs will make it unnecessary for me to make a determination of any principle.
22 Mr Gray QC also took me to material which identified those who might be expected to obtain some ultimate benefit from the successful prosecution of the proceedings.  He noted that Killington's family are the shareholders of Nedlands, together with the Official Receiver.
23 Counsel for the defendant points to the incongruity of a claim being made to benefit Killington's estate when it was Killington's irresponsible behaviour which lay behind Nedland's loss.  He also pointed to the position of Mr Lawton, a member of the abovementioned partnership, who stands as a member of the committee of inspection on behalf of Killington's creditors. He is apparently offering supplementary indemnity to the Official Receiver beyond the pro rata indemnity provided by a group of creditors.
24 It may be inferred from material collected by Mr Gray QC that Mr Lawton may be acquiring the interests of other creditors in Killington's estate so as to increase his voting rights.  Mr Gray QC has questioned where Mr Lawton, and perhaps others, may stand in terms of responsibility upon indemnity for the costs of this action.  It is not a matter of dispute that two insurance companies have entered into an arrangement with the second plaintiff upon the authority of a Federal Court order.  The proposed undertaking will give rise to an obligation to make comprehensive enquiries to search out those whose financial involvement may not be transparent.  As the funding arrangements may be fluid it will be necessary that  the undertaking impose a continuing obligation to give notice to those who may join the scheme of indemnity by  whatever route.
25 I will hear the parties as to the formal order.

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