PharmX Pty Ltd (in its capacity as trustee of the PharmX Unit Trust) v Fred It Group Pty Ltd

[2019] VSC 321

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST – LYONS J

S ECI 2019 00770

IN THE MATTER OF an application pursuant to Rule 54.02 of the Supreme Court (General Civil Procedure Rules) 2015
BETWEEN:
PHARMX PTY LTD (IN ITS CAPACITY AS TRUSTEE OF THE PHARMX UNIT TRUST)	Plaintiff
v
FRED IT GROUP PTY LTD (ACN 109 546 901) and others according to the schedule	Defendants

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JUDGE:	LYONS J
WHERE HELD:	Melbourne
DATE OF HEARING:	14 May 2019
DATE OF RULING:	16 May 2019
CASE MAY BE CITED AS:	PharmX Pty Ltd (in its capacity as trustee of the PharmX Unit Trust) v Fred IT Group Pty Ltd
MEDIUM NEUTRAL CITATION:	[2019] VSC 321

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PRACTICE AND PROCEDURE – Subpoenas – Application for leave to issue subpoenas to attend to give evidence – Interlocutory application – Where leave opposed – Whether evidence relevant or sufficiently relevant to interlocutory application – Rules 40.02(a) and 42.02(2)(a) of the Supreme Court (General Civil Procedure Rules) 2015 (Vic) – Sections 8 and 9 of the Civil Procedure Act 2010 (Vic) – Leave refused

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APPEARANCES:	Counsel	Solicitors
For the First Defendant	Mr P H Solomon QC with Ms M O’Sullivan	Cornwall Stodart
For the Second and Third Defendants	Mr D J Batt QC with Ms T Spencer Bruce	K&L Gates

HIS HONOUR:

1. In this application, the applicants (the second and third defendants), by Summons filed 8 May 2019, seek leave to be released from the implied undertaking recognised in Harman v Secretary of State for the Home Department[1] in relation to a shareholders’ agreement executed on or about 30 September 2013 between the first defendant and others (the ‘Fred IT Shareholders’ Agreement’).  They seek this order for the purposes of:

(1)       issuing notices pursuant to the Stapled Securities Agreement relating to a PharmX Trading Trust dated 27 February 2006 (the ‘SSA’ and the ‘Trust’, respectively), which relevantly binds the defendants as unit holders in that trust; and

(2)       commencing and maintaining proceedings against the first defendant, Fred IT Group Pty Ltd, in respect of any breach of the SSA.

[1][1983] 1 AC 280.

1. The first defendant opposes such leave being granted.  However, it seeks to call oral evidence by issuing a subpoena to each of Mr David Wenham (a director of the second defendant) and Mr Kevin James New (a director of the third defendant) (collectively, the ‘directors’).  The directors both reside in New South Wales.  This is in circumstances where:

(1)the applicants and the directors have acknowledged using the Fred IT Shareholders’ Agreement earlier this year in breach of the implied undertaking; and

(2)the directors have not gone on oath in this application to depose to the circumstances in which the Fred IT Shareholders’ Agreement was obtained and/or used by them.

1. Although the argument proceeded on the basis that the first defendant sought leave to issue a subpoena to each of the directors to attend to give evidence, in fact, it is necessary for the first defendant to obtain leave to call oral evidence on an interlocutory application and to serve subpoenas for that purpose. Rule 40.02(a) of the Supreme Court (General Civil Procedure) Rules 2015 (the ‘Rules’) provides that, except where otherwise provided by any Act or the Rules, and subject to any agreement between the parties, evidence shall be given on an interlocutory or other application in any proceeding by affidavit. Further, r 40.03(1) relevantly provides that, notwithstanding r 40.02, the Court may order that evidence be given orally on the hearing of an interlocutory or other application in any proceeding.

1. The first defendant submits that it seeks to call and subpoena the directors for a legitimate forensic purpose: to establish the circumstances in which the Fred IT Shareholders’ Agreement was obtained and used by the directors and, in particular, whether the directors knowingly misused that document in breach of the implied undertaking.

1. The applicants oppose oral evidence being called or subpoenas being issued for such evidence.  They seek an order that the proposed subpoenas not be issued for the purposes of r 42.02(2)(a).  That rule provides that the Prothonotary shall not issue a subpoena if the Court has made an order, or there is a Rule of the Court, having the effect of requiring that the proposed subpoena not be issued, or not be issued without the leave of the Court and that leave has not been given.  In doing so, the applicants submit that any evidence that the directors may give is:

(1)       not relevant to this application; or

(2)alternatively, not sufficient relevantly to justify the calling of the directors to give evidence about these matters, consistent with the overarching purpose of the Civil Procedure Act 2010 (Vic) (the ‘CPA’) to facilitate the just, efficient, timely and cost-effective resolution of the real issues in dispute.

1. This is in circumstances where the applicants concede that, for the purpose of this application, in the absence of any evidence of the directors, the Court may properly infer that the directors knowingly misused the Fred IT Shareholders’ Agreement in breach of the implied undertaking.

1. I do not accept that the issue of whether the directors have previously breached the implied undertaking is not relevant to this application.  In summary, the applicants submitted that the issue was relevant to whether a court should retrospectively grant leave to use a document in a manner which would otherwise be in breach of the implied undertaking, but not to a fresh application to use the document prospectively.  This application is of the latter kind.

1. However, the authorities in relation to an application for leave to be released from the implied undertaking make plain that the Court may take into account all relevant matters in determining whether special circumstances exist to release the applicant from the implied undertaking.[2]

   [2]Springfield Nominees Pty Ltd v Bridgelands Securities Ltd (1992) 38 FCR 217, 225 (Wilcox J).

1. In my view, one of the relevant factors which a court may take into account in determining whether special circumstances exist to release an applicant from the implied undertaking is that the applicant has previously breached the implied undertaking in relation to the document in respect of which the application is made.  I hasten to add that I consider it only one of the relevant factors to be taken into account in the exercise of the Court’s discretion.  For example, steps taken by the applicant to address or redress that breach in the meantime would also be relevant.

1. There is then the issue of whether I should allow the first defendant to call the directors and to issue and serve a subpoena on each of them for that purpose. In considering this issue, I have had regard to the provisions of Order 40 of the Rules set out above. I have also had regard to:

(1)s 8(1) of the CPA, which requires the Court to seek to give effect to the overarching purpose in the exercise of any of its powers; and

(2)s 9 of the CPA, which requires the Court, in making any order in a civil proceeding, to further the overarching purpose by having regard, among other things, to the just determination of civil proceeding, the efficient conduct of the business of the Court, the efficient use of judicial and administrative resources and dealing with a civil proceeding in a manner proportionate to the complexity or importance of the issue in dispute.

1. The evidence before me in this application is to the following effect.

1. First, the Fred IT Shareholders’ Agreement was produced by the first defendant to the trustee of the Trust pursuant to an order of the Court in late 2019 in a separate proceeding issued by the first defendant against the trustee of the Trust.  At the time it was produced, the solicitors for first defendant drew the trustee’s attention to the effect of the implied undertaking.

1. Second, the applicants and the directors obtained the Fred IT Shareholders’ Agreement and then used it in breach of the implied undertaking in issuing certain notices to the first defendant in late February 2019.

1. Third, on 6 and 8 March 2019, the solicitors for the first defendant wrote to the directors and/or their solicitors seeking confirmation that they had complied with their obligations under the implied undertaking and that they did not rely upon the Fred IT Shareholders’ Agreement in the course of, or for the purpose of, issuing the notices.

1. Fourth, on 8 March 2019, Mr James New replied that he was ‘comfortable that there was a proper basis to issue the notices and [his] director’s duties have been complied with’.

1. Fifth, on 14 March 2019, the new solicitors for the applicants wrote to the first defendant’s solicitors recording that their clients remained of the view that the notices were valid.

1. Sixth, on 27 March 2019, the solicitors for the applicants wrote to the first defendant’s solicitors stating:

Messrs Wenham and James-New have reflected on the matter and acknowledge that, notwithstanding that they have held concerns about a change of control in your client since 2013, the content of the [Fred IT] Shareholders’ Agreement was one of a number of factors that were in their minds in causing the issuance of the Notices.

To the extent that the content of the [Fred IT] Shareholders’ Agreement was a factor in relation to the issuance of the notices, Messrs Wenham and James-New, and our clients, deeply regret that that occurred, and apologise to your client, and will through counsel at the next available opportunity apologise to the Court.

1. Seventh, the matter next returned to court on 12 April 2019.  At that time, the letter of 27 March 2019 was produced to the Court.  Junior counsel for the applicants referred to the acknowledged use of the Fred IT Shareholders’ Agreement in breach of the implied undertaking in issuing the notices.  She then stated:

I’m instructed, Your Honour, to also make an apology to this court on behalf of my clients, their directors and their legal advisers that the document was used in that way.

1. As noted above, the applicants and the directors have given no evidence about the circumstances in which they obtained or used the Fred IT  Shareholders’ Agreement.  That is the forensic purpose for which the first defendant seeks to call the directors to give evidence: in particular, whether the directors knowingly breached the implied undertaking.

1. In reply to this submission, junior counsel for the applicants conceded that, for the purpose of the application and in the absence of any evidence from the directors relied upon by the applicants, it is properly open to the Court to infer that the directors had knowingly breached the implied undertaking.

1. In these circumstances, I am not satisfied that leave should be granted for the first defendant to call the directors to give oral evidence and for subpoenas to be issued for that purpose in this application.

1. In my view, in light of the concession of the applicants, there is no, or no sufficient, legitimate forensic purpose in calling the directors to give evidence on this application.  If the Court may infer knowing misuse of the document in breach of the implied undertaking (which is itself a serious matter), in my view, it is likely that any additional findings about the directors’ states of mind will have little or no relevance to the outcome of this application.

1. As noted above, I have also had regard to the provisions of ss 8 and 9 of the CPA to the extent that any additional findings about the directors’ states of mind may be of relevance to the outcome of this application. In my view, calling the directors to give evidence about the extent of their knowledge of the implied undertaking at the time of the misuse (and issuing subpoenas to them for that purpose) is not justified in terms of the just, efficient and cost-effective resolution of this application. I consider that the time and expense involved in calling such oral evidence is not proportionate to the limited relevance such evidence is likely to have to this application, in light of the applicants’ concession.

1. As a result, I decline the first defendant’s application for leave to call oral evidence by issuing subpoenas to the directors.

1. Subject to the views of the parties, in light of these reasons, I consider it unnecessary to make any order of the kind sought by the applicants.

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SCHEDULE OF PARTIES

S ECI 2019 00770

IN THE MATTER OF an application pursuant to Rule 54.02 of the Supreme Court (General Civil Procedure Rules) 2015
BETWEEN:
PHARMX PTY LTD (IN ITS CAPACITY AS TRUSTEE OF THE PHARMX UNIT TRUST)	Plaintiff
- and -
FRED IT GROUP PTY LTD (ACN 109 546 901)	First Defendant
MOUNTAINTOP SYSTEMS PTY LTD (ACN 002 897 234)	Second Defendant
DALEFLAG PTY LTD (ACN 092 950 822)	Third Defendant
CORUM SYSTEMS PTY LTD (ACN 091 519 603)	Fourth Defendant