PharmX Pty Ltd (in its capacity as trustee of the PharmX Unit Trust) v Fred It Group Pty Ltd (No 2)
[2019] VSC 494
•24 July 2019
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
COMMERCIAL LIST
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) and others according to the schedule | Defendants |
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JUDGE: | LYONS J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 27 June 2019 (Further written submissions 12 July 2019) |
DATE OF RULING: | 24 July 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 (No 2) |
MEDIUM NEUTRAL CITATION: | [2019] VSC 494 |
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PRACTICE AND PROCEDURE – Application for release from Harman undertaking – Where prior breach of undertaking – Where prior breach redressed - Special circumstances – Interests of justice – Leave granted – Express undertaking required
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APPEARANCES: | Counsel | Solicitors |
| For the First Defendant | Ms M O’Sullivan | Cornwall Stodart |
| For the Second and Third Defendants | Ms T Spencer Bruce | K&L Gates |
HIS HONOUR:
Introduction and summary
In this proceeding, the trustee of the PharmX Unit Trust (the ‘Trustee’ and the ‘Trust’) seeks the determination of questions of construction relating to agreements relevant to the Trust arising from proceedings issued by one of the unit holders in the Trust and judicial advice in respect of its conduct of those proceedings.
The shares in the Trustee are ‘stapled’ to the units in the Trust so that each shareholder is a unitholder in the Trust in the same proportions (collectively, the ‘Stapled Securities’). The holders of the Stapled Securities (the ‘holders’) are:
(1) Fred IT Group Pty Ltd (the ‘first defendant’) as to 30%;
(2) Mountaintop Systems Pty Ltd (the ‘second defendant’) as to 20%;
(3) Daleflag Pty Ltd (the ‘third defendant’) as to 20%; and
(4) Corum Systems Pty Ltd (the ‘fourth defendant’) as to 30%.
The questions of construction raised by the Trustee relate to two separate issues which arise from proceedings instituted in this Court by the first defendant against the Trustee in late 2018 for unpaid income entitlements under cl 27.3 of the Trust Deed (the ‘first proceeding’). I have heard argument on these questions of construction but am yet to hand down my reasons for decision.
The first question of construction relates to the deemed entitlement to income of each holder under cl 27.3 of the Trust Deed (which applies in default of a resolution of the Trustee for distribution of income in the relevant year).
The second question of construction relates to the acquisition of 50% of the shares in the first defendant by Telstra Ltd pursuant to an agreement executed in late September 2013 (the ‘Fred IT Shareholders’ Agreement’). The issue is whether that acquisition triggers the ‘change of control’ provisions in cl 15 of the Stapled Securities Agreement dated 27 June 2006 which binds the holders. If it does, it may affect the first defendant’s entitlement to unpaid income. Further, if it does, the other holders may obtain, or have obtained, the rights either to purchase the Stapled Securities of the first defendant or to allege a breach of the Stapled Securities Agreement by the first defendant.
It is this second issue that gives rise to this application. The applicants are the second and third defendants. By summons filed on 9 May 2019, they seek leave to be released from the implied undertaking recognised in Harman v The Secretary of State for the Home Department[1] in relation to the Fred IT Shareholders’ Agreement. They seek this order for the purposes of:
(1) issuing notices pursuant to the Stapled Securities Agreement; and
(2)commencing and maintaining proceedings against the first defendant in respect of any breaches of the Stapled Securities Agreement arising from the Fred IT Shareholders’ Agreement.
[1][1983] 1 AC 280.
In summary, the applicants submit that leave should be granted because the use of the Fred IT Shareholders’ Agreement will enable them to pursue any rights in relation to the change of control brought about by reason of the Stapled Securities Agreement. Absent leave, the applicants are prevented from using that document, or the knowledge obtained from it, which is relevant to whether there has been a change of control and whether rights have accrued as a result.
The first defendant opposes this application. In summary, this is because the applicants have previously breached the implied undertaking in respect of the document that is the subject of this application. It submits that breach was grave, in the face of warnings about the implied undertaking, and persistent. Further, the directors of the applicants have not gone on oath about the circumstances in which they obtained the document or used it in breach of the implied undertaking. The first defendant also relies upon the private nature of the Fred IT Shareholders’ Agreement and the first defendant’s unwillingness to allow it to be further used by the applicants.
The law
The Court has a discretion to modify or release the implied undertaking in the interest of justice. The authorities speak of the need for ‘special circumstances’ before the discretion can be exercised.[2] Generally speaking, special circumstances do not require extraordinary factors before the discretion will be exercised. Rather, ‘good reason must be shown why, contrary to the usual position, documents produced or information obtained in one piece of litigation should not be used to the advantage of a party in another piece of litigation or for non-litigious purposes’.[3]
[2]Springfield Nominees Pty Ltd v Bridgelands Securities Pty Ltd (1992) 38 FCR 217, 225 (‘Springfield’); Slea Pty Ltd v Connective Services Pty Ltd (2017) 53 VR 161 [53] (‘Slea’).
[3]Liberty Funding Pty Ltd v Phoenix Capital Ltd (2005) 218 ALR 283 [31].
Further, I note the comments of Davies J, when a member of this Court, in Laen Pty Ltd v At the Heads Pty Ltd:
The purpose of the implied undertaking is to protect against the misuse of material produced under coercion of the Court’s processes, not to prevent a party’s access to justice. If the proposed use is for the purposes of other proceedings, the Court’s power in relation to its own proceedings will provide the necessary protection against misuse. The existence of the implied undertaking cannot fetter or restrict the Court’s power in relation to its own processes in proceedings instituted before it. Nor can it operate as an estoppel against the use of the processes of the Court in that other proceeding.[4]
[4][2011] VSC 315 [10] (‘Laen’) (citations omitted).
There are a number of relevant factors which a court may take into account in determining whether special circumstances exist to modify or release the implied undertaking. In Springfield, Wilcox J said:
It is neither possible nor desirable to propound an exhaustive list of those factors. But plainly they include the nature of the document, the circumstances under which it came into existence, the attitude of the author of the document and any prejudice the author may sustain, whether the document pre-existed litigation or was created for that purpose and therefore expected to enter the public domain, the nature of the information in the document …, the circumstances in which the document came into the hands of the applicant for leave and, perhaps most important of all, the likely contribution of the document to achieving justice in the second proceeding. [5]
[5]Springfield (n 2), 225.
A number of these factors were relied upon by the parties in this proceeding. I will deal with them in due course.
There was argument before me as to whether this application was in substance a retrospective or prospective application for leave. The applicants submitted that it was prospective in the sense that the applicants were seeking leave of the Court to use the document obtained in this proceeding to issue notices and perhaps to institute proceedings. By contrast, the first defendant submitted that the application was in substance retrospective because the applicants were seeking to use the document in the same manner as it had been used impermissibly by them in the course of the first proceeding.
In my view, little turns on this distinction for the purpose of this application. This is because it was conceded by counsel for the first defendant that the factors that would be relevant to retrospective leave were the same factors which need to be considered for prospective leave. As a result, while I am mindful of the previous breach of the implied undertaking by the applicants, I will determine this application by balancing the factors relevant to it. In order to do so, I will now turn to the relevant facts.
The facts
The parties were informed that Telstra Ltd had acquired an interest in the first defendant at a meeting of the directors of the Trustee in 2013.
In 2016, the applicants made requests for documents relating to that interest (including any shareholders’ agreement) directly to the first defendant and via the Trustee. For example, I refer to the letter to the chairman and directors of the Trustee (both in their capacity as directors of the Trustee and of each of the nominating holders) dated 13 April 2016. That letter referred to the likelihood of a shareholders’ agreement and the need for the Trustee to conduct a proper investigation to confirm the change of control. I also refer to:
(1) an email dated 28 September 2016 from Mr Wenham to Mr Johnson of the first defendant requesting an opportunity for Mountaintop to consider definitive evidence as to whether or not a change of control had occurred; and
(2) an email from the first defendant to the independent chairman of the Trustee dated 16 November 2018 requesting a complete and accurate copy of all the documentation that effected the sale to Telstra, particularly any shareholders’ agreement.
The Fred IT Shareholders’ Agreement was not provided at that time.
In late 2018, the first defendant commenced the first proceeding against the Trustee for unpaid income entitlements under cl 27.3 of the Trust Deed. At the first directions hearing, I ordered that the agreement or agreements pursuant to which Telstra Ltd acquired an interest in the first defendant be provided to the Trustee so that it could consider its position.
The Fred IT Shareholders’ Agreement was produced by the first defendant to the Trustee pursuant to that order on 16 January 2019. At the time it was produced, by letter dated 16 January 2019, the solicitors for the first defendant drew the Trustee’s attention to the effect of the implied undertaking. This was no doubt because the document was likely to be provided to all the directors of the Trustee which included the directors of the applicants.
The applicants clearly obtained the Fred IT Shareholders’ Agreement and used it in late February 2019 in breach of the implied undertaking in issuing certain notices to the first defendant pursuant to cl 15 of the Stapled Securities Agreement. As the directors of the applicants have not gone on oath, there is no evidence as to how this occurred. However, it is clear that the document was received by the directors of the applicants in their capacity as directors of the Trustee pursuant to the orders of the Court in the first proceeding.
On 6 and 8 March 2019, the solicitors for the first defendant wrote to the directors of the applicants 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. Indeed, in the 6 March letter to Mr James-New (the director of the third defendant), the solicitors for the first defendant wrote that the Trustee was provided with these documents pursuant to the orders of the Court and that the first defendant was concerned that the timing of the notices appeared to coincide with the provision of the documents to the Trustee.
In that letter, Mr James-New was invited to provide written confirmation that he had complied with his obligations as a director of the Trustee in complying with the Harman undertaking and that he did not rely upon the documents produced in the course of, or for the purposes of, issuing the notices. In response, on 8 March 2009, Mr James-New replied that he was ‘comfortable there was a proper basis to issue the notices and [his] director’s duties have been complied with’.
Further, on 14 March 2019, the new solicitors for the applicants wrote to the first defendant’s solicitors recording that their client remained of the view that the notices were valid. As a result, the first defendant issued a proceeding against the applicants which sought to restrain them from acting on the notices (the ‘second proceeding’).
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.
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. 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.
The applicants agreed to pay the first defendant’s costs of and associated with the notices issued in late February 2019 and the second proceeding on an indemnity basis. Those costs have now been paid.
The construction questions raised in this proceeding were heard in mid May 2019. The Fred IT Shareholders’ Agreement was admitted into evidence as part of the tender bundle. Much of the argument before me on the change of control issue focussed on the terms of that agreement.
Analysis
In this case, it goes without saying that the Fred IT Shareholders’ Agreement is important to the applicants given its significance in determining whether there has been a change of control under the Stapled Securities Agreement. If that has occurred, there are likely to be substantial rights that can be enforced by the applicants. In the usual case, the significance of the Fred IT Shareholders’ Agreement in determining whether there has been a change of control is a special circumstance which would justify modifying or releasing the applicants from the implied undertaking for the applicants to use that document for the purposes of issuing a notice under the Stapled Securities Agreement or related proceedings. However, the first defendant relies upon a series of factors which take this case out of the ordinary. I will deal with each in turn.
Nature of document
The first defendant submitted that the Fred IT Shareholders’ Agreement was in essence a private document between Fred IT and Telstra and the first defendant did not wish it to be further disclosed. I can understand the position adopted by the first defendant. However, as the authorities make plain, it does not always follow that the unwillingness of an effected party will always weigh against the release of the document.[6] That unwillingness may be relevant if the effected party can show it will suffer prejudice and/or inconvenience. None is relied upon in this case.
[6]See, eg, Laen (n 4) [12].
How the document came into the hands of the applicants
The first defendant submitted that the Fred IT Shareholders’ Agreement was not properly in the hands or possession of the applicants. This is because it submitted that the applicants were only joined to this proceeding because the first defendant issued the second proceeding against it and, by way of defence, the applicants foreshadowed the change of control issue.
I do not accept the submission that the Fred IT Shareholders’ Agreement was not properly in the hands of the applicants. It is true that I joined the applicants as parties to this proceeding at the time when there were proceedings against the applicants on foot. However, after that proceeding was discontinued, I requested argument from the parties on the effect of the discontinuance on the conduct of this proceeding. Notwithstanding that discontinuance, I formed the view that the applicants were necessary and proper parties to the issues of construction raised in this proceeding. As a result, I conclude that they have properly obtained the Fred IT Shareholders’ Agreement in the course of this proceeding.
Further, counsel for the first defendant submitted that the document was in fact obtained by the applicants in the course of the first proceeding issued by the first defendant. She submitted that leave should have been sought and obtained in that proceeding as it would put form before substance to assert that the Fred IT Shareholders’ Agreement was in fact obtained in this proceeding.
I accept that the Fred IT Shareholders’ Agreement was originally obtained by the applicants as a result of a Court order in the first proceeding and that the applicants misused it in that context. However, as I have set out above, that document was also properly obtained by the applicants in this proceeding. It has now been tendered into evidence and is, to a large extent, in the public domain. As noted above, in the course of the hearing of the construction issues in this proceeding extensive reference was made to the terms of that document. That all occurred because the Trustee issued this proceeding as a result of the first proceeding issued by the first defendant in late 2018.
As a result, I consider that the proper application for the applicants to bring was to seek leave in this proceeding. That does not change that one of the factors that I must take into account in this application is the prior misuse arising from the first proceeding. It is to that issue I now turn.
Prior misuse
As noted above, the applicants have already misused the Fred IT Shareholders’ Agreement in breach of the implied undertaking. This is in a context where the directors of the applicants have not gone on oath as to the circumstances in which the document was received or the breach occurred.
In the course of previous argument relating to this application, junior counsel for the applicants conceded that, for the purposes of this application, in the absence of any evidence from the directors relied upon by the applicants, it is properly open for the Court to infer that the directors of the applicants had knowingly breached the implied undertaking. I so infer on the facts of this case. That is a significant finding. Further, there are additional factors which make the breach more serious.
First, counsel for the first defendant emphasised that the breach was grave given that the letter of 16 January 2019 attaching the document reminded the Trustee and its directors of the implied undertaking. I accept the submission that the breach was grave. Second, counsel for the first defendant submitted that the breach was persistent given the letters of 6 and 8 March 2016. I accept the submission that the breach was persistent given that no withdrawal or apology was forthcoming until 27 March 2019.
As to the absence of an explanation, as I have said, I infer that there was a deliberate breach of the implied undertaking in issuing the notices. However, I do not consider that the absence of an explanation alone disentitles the applicants from the exercise of the Court’s discretion in their favour. This is notwithstanding that, as I made plain during argument, the Court disapproves of deliberate breaches of its processes, including implied undertakings. Our legal system relies upon parties and litigants complying with the rules and practices which have developed in the conduct of civil proceedings, even practices which appear not to be in the best interests of a particular party. The conduct of the applicants and the directors in deliberately breaching the implied undertaking is deplorable and reflects badly on their integrity. It is a significant factor in the exercise of my discretion.
Addressing the breach
However, as I recorded in my earlier judgment,[7] the Court ought take into account steps which may have been taken by the applicants to address or redress the breach in the meantime. In my view, the exercise of my discretion in the interests of justice requires me to have regard to such conduct in redressing even a deliberate breach of the implied undertaking.
[7]PharmX Pty Ltd (in its capacity as trustee of the PharmX Unit Trust) v Fred IT Group Pty Ltd [2019] VSC 321.
In this case, I consider that the applicants have ‘purged’ or ‘cleaned their hands’ of any deliberate failure to comply with the implied undertaking by apologising to the first defendant and to the Court and also by paying the indemnity costs of the first defendant arising by reason of the failure to comply with the implied undertaking.
I have used the language of the law of contempt and the equitable maximum unclean hands in this regard. In my view, it is appropriate to have regard to such general principles in considering this application. It cannot be (as the first defendant submits) that if there has been a deliberate misuse of a document, such misuse prevents the applicants from using that document for all time, regardless of whether that misuse has been addressed or redressed. Once again, this is not to condone or sanction in any way the conduct of the applicants in this case. However, it is to recognise that, in such applications, a number of factors may be taken into account in acting in the interests of justice.
Possible future misuse
The first defendant then contended that the deliberate misuse of the Fred IT Shareholders’ Agreement to date provides a sufficient basis to infer that the applicants may ‘exploit’ it now for a commercial advantage. The purpose for which the document was used on the evidence before me relates only to the notices issued in February 2019. While that had a commercial aspect, the purpose was to protect or enforce the legal rights of the applicants.
In any event, any future breach may be addressed by way of proceedings for contempt. Should a future breach be established, the findings which I have made about the applicants’ conduct to date could no doubt be relied upon. I will have more to say about this in relation to the form of any relief in this application.
Proposed use
I now turn to the proposed use of the document. It is for the purpose of issuing notices based upon the alleged change of control pursuant to the rights of the parties agreed in the Stapled Securities Agreement and to issue consequential proceedings. As I have set out above, it is self-evident that the Fred IT Shareholders’ Agreement is important to the applicants in determining whether there has been a change of control under the Stapled Securities Agreement. Such issues cannot be ventilated or pursued without relying upon the Fred IT Shareholders’ Agreement. This factor weighs heavily in the exercise of my discretion: as noted above, ‘perhaps the most important of all’ factors to be considered on such applications is the likely contribution of the relevant document to achieving justice in a proceeding.
Further, and related to the last point, counsel for the applicants submitted that, given any alleged change of control took place on 30 September 2013, any breach of the Stapled Securities Agreement may have occurred at that time with the result there is a risk that the limitation period for such breach expires on or around 30 September 2019.
Counsel for the first defendant submitted that the limitation period was not relevant to this application and I should have no regard to it. She relied upon the judgment of Judd J in Slea.[8]
[8]Slea (n 2) [66].
In that case, his Honour declined to consider the merits of a potential limitation defence in the event a new proceeding was required to be issued. This was in the context of an application for leave nunc pro tunc to be released from the implied undertaking. Judd J considered that to require the party in breach to commence new proceedings would be to contrive circumstances that would create for the other party an opportunity to raise a limitation defence otherwise not available in the existing proceeding. It was in these circumstances that his Honour considered the spectre of the limitation defence was ‘unhelpful’.
This case is very different. In my view, there is a risk that, if leave is not granted, the applicants may be prevented by the limitation period from pursuing all their contractual rights in the event that the purchase of shares by Telstra in September 2013 gives rise to a change of control as defined in the Stapled Securities Agreement. I consider that risk is relevant to the exercise of my discretion.
Finally, counsel for the first defendant submitted that any issues which might arise in relation to the limitation period have been brought about because of the conduct of the applicants in failing to pursue these issues after they were first informed of Telstra’s purchase of an interest in the first defendant in 2013. I agree that the applicants bear some responsibility for the delay in issuing this application. However, as set out above, I consider that requests were made of the first defendant for the provision of the relevant documents relating to the acquisition of an interest by Telstra Ltd (including the Fred IT Shareholders’ Agreement) in 2016 which were not adequately responded to by the first defendant. As a result, I do not consider it appropriate to give much weight to this factor in the exercise of my discretion.
In all the circumstances, I am of the view that leave should be given for the applicants to use the Fred IT Shareholders’ Agreement for the purposes set out above.
However, given the previous conduct of the applicants, I require an express undertaking from them not to use or permit to be used the Fred IT Shareholders’ Agreement (or any copy thereof), or knowledge acquired from any inspection thereof, otherwise than for the purposes set out in their summons without the written consent of the first defendant or leave of the Court. This is consistent with the inherent jurisdiction of the Court.[9]
[9]Kimberley Mineral Holdings Ltd (in liquidation) v McEwan [1980] 1 NSWLR 210.
Other issues and costs
When notices were last issued under cl 15 of the Stapled Securities Agreement in February 2018 by the applicants, there was an application for an injunction preventing the applicants from acting on those notices until the hearing and determination of the questions of construction in this proceeding. The spectre of such an application arises given that I am minded to grant leave. I have been keen to avoid any additional legal costs or expenses until my judgment in this proceeding has been delivered and considered by the parties.
As a result, I raised this issue with the parties on the day I heard the substantive argument. At that time, I indicated my preliminary view that I was minded to grant leave. The parties agreed to consider this issue and prepare a proposed form of order. Two versions were submitted on 29 June 2019. There were two differences. First, the applicants sought the permitted use to include issuing related proceedings against the Trustee. Second, there was a dispute as to the costs order to be made.
Further submissions on these two issues were filed on 12 July 2019. At the time, the first defendant indicated it no longer objected to the permitted use including related proceedings against the Trustee. The only remaining issues is costs.
The first defendant seeks its costs of this application on an indemnity basis. It submits that the applicants seek an indulgence of the Court in circumstances where they have previously breached the Harman undertaking as set out above.
The applicants seek that there be no order as to costs. While they accept this is an application for an indulgence, they submit that the first defendant refused their request to be released from the Harman undertaking in April 2019 and opposed this application. As the first defendant has been unsuccessful in opposing this application, it should bear its own costs.
In my view, it is appropriate that the applicants pay the costs of the first defendant of this application on a standard basis. First, the applicants have sought an indulgence of the Court. Second, I do not consider that it was unreasonable for the first defendant to oppose this application given the previous conduct of the applicants. However, I do not consider that indemnity costs should be ordered. In my view, an order for indemnity costs would be to punish the applicants for their previous misuse of the Fred IT Shareholders’ Agreement. That is not the purpose of an order for costs in this application.
As a result, I have concluded that the interests of justice require that the applicants pay the costs of the first defendant of this application on a standard basis.
I will ask that the solicitors for the applicants prepare orders in accordance with the draft form of order submitted by them but which also contains:
(1) an express undertaking by them in ‘Other Matters’ not to use or permit to be used the Fred IT Shareholders’ Agreement (or any copy thereof), or knowledge acquired from inspection thereof, otherwise than for the purposes of paragraph 1 of the orders without the written consent of the first defendant or the leave of the Court; and
(2) a costs order which reflects these reasons.
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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 |
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