Re Junior Academy ELC Pty Ltd
[2018] VSC 192
•26 April 2018
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2017 00222
IN THE MATTER of JUNIOR ACADEMY ELC PTY LTD
(ACN 136 704 697)
| PETER URBAN | Plaintiff |
| v | |
| JUNIOR ACADEMY ELC PTY LTD (ACN 136 704 697) (AS TRUSTEE FOR GLEN EIRA ROAD (249) UNIT TRUST (ABN 54 859 835 183) & ORS (according to the attached schedule) | Defendants |
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JUDICIAL REGISTRAR: | Matthews JR |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 22 March 2018, supplemented by further written submissions on 26 March 2018 (defendants) and on 27 March 2018 (plaintiff) |
DATE OF RULING: | 26 April 2018 |
CASE MAY BE CITED AS: | Re Junior Academy ELC Pty Ltd |
MEDIUM NEUTRAL CITATION: | [2018] VSC 192 |
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PRACTICE AND PROCEDURE – Notices to produce – Whether too wide and fishing – Whether any legitimate forensic purpose – Issuing the notices to produce was not an abuse of process – One category of documents set aside – Supreme Court (General Civil Procedure) Rules 2015 (Vic), r 35.08; Crown Joinery Pty Ltd v Lyleho Pty Ltd [2007] VSC 214; Volunteer Fire Brigades Victoria v CFA (Discovery Ruling) [2016] VSC 573; Sharpe v Grobbel [2017] NSWSC 1065; Knights Quest Pty Ltd v Barokes Pty Ltd (2016) 113 ACSR 505.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Dr A Hanak | Marsh & Maher Richmond Bennison |
| For the Defendants | Mr J W S Peters QC Dr O Bigos | Jack Bock Lawyers |
MATTHEWS JR:
Introduction
This proceeding is an application by the plaintiff Peter Urban for leave pursuant to ss 236 and 237 of the Corporations Act 2001 (Cth) (‘the Act’) to commence a proceeding in the name of the first defendant against the second to fifth defendants (‘Leave Application’). The first defendant is a company of which the plaintiff and the second and third defendants are directors, being Junior Academy ELC Pty Ltd (ACN 136 704 697) (‘CELC’). Mr Barcochva Lahmy (known as Coco Lahmy) (‘Mr Lahmy’) is the second defendant; Ms Anna Lahmy (‘Ms Lahmy’) is the third defendant; Early Childhood Management Pty Ltd (ACN 161 123 459) (‘ECM’) is the fourth defendant; and Gold Glow Pty Ltd (ACN 606 801 807) (‘Gold Glow’) is the fifth defendant.
On 18 October 2017 and 1 March 2018, the plaintiff issued notices to the defendants requiring them to produce certain categories of documents (‘First Notice’ and ‘Second Notice’ respectively, together, the ‘Notices’). On 8 February 2018, the plaintiff issued a subpoena (‘Subpoena’) on a non-party to this proceeding, being Guardian Community Early Learning Centres Pty Ltd (ACN 116 020 887) (‘Guardian’). The categories of documents sought under the Subpoena overlap with the documents sought on the Notices. The defendants have issued notices of objection to the Notices on the grounds of relevance and confidentiality. The defendants have also issued an objection to the Subpoena on the grounds of relevance, confidentiality and abuse of process. The hearing and determination of those objections has been referred to me for hearing and determination, pursuant to r 84.03 of the Supreme Court (General Civil Procedure) Rules 2015 (‘Rules’).
The plaintiff swore an affidavit in support of his Leave Application on 12 September 2017, which was referred to. The plaintiff also relies on an affidavit from his solicitor, Amy Dawn Sheggerud-Woods, sworn 14 November 2017 (‘Sheggerud–Woods affidavit’).
The defendants referred to an affidavit sworn 22 February 2018 by Mr Lahmy in relation to the Leave Application.
Both parties filed written outlines of submissions prior to the hearing, and, with my leave, they filed supplementary written submissions after the hearing. The written and oral submissions were of great assistance to the Court.
For the reasons set out below, I will make orders:
(a) Setting aside category two of the First Notice;
(b) Requiring the defendants to produce the documents required by categories one and three of the First Notice; and
(c) Requiring production of the documents sought by the Second Notice, save that production will be confined to lease agreements for childcare centres.
As is explained further below, the objection to the Subpoena will be dealt with on a later occasion.
Background
As noted above, the plaintiff, Mr Lahmy and Ms Lahmy are the directors of CELC.
Some of the factual background regarding the subject matter of the proceeding appears to be uncontroversial:
(a) Through entities controlled by Mr and Ms Lahmy on the one part (‘the Lahmys’), and the plaintiff and his wife Shirley Urban on the other part (‘the Urbans’), the Lahmys and the Urbans relevantly had interests in two businesses: a childcare centre operated from 249 Glen Eira Road, Caulfield North (‘Caulfield Childcare Centre’); and a childcare centre operated from 82 Ferntree Gully Road, Oakleigh East (‘Oakleigh Childcare Centre’).
(b) The development and construction, and then establishment and operation of the Oakleigh Childcare Centre was achieved through an unincorporated joint venture, where the interests of the two participating families were equal. A company run by Ms Lahmy was appointed as the manager to conduct the Oakleigh Childcare Centre business. From around September 2011, CELC has held all the goodwill and assets which comprise the Oakleigh Childcare Centre on trust for entities associated with the Lahmys and Urbans, in equal proportions.
(c) CELC is the trustee of the Glen Eira Road (249) Unit Trust (‘Trust’). The units in the Trust are held equally between entities associated with the Urbans and the Lahmys. The Trust was established for the purpose of owning and operating the Caulfield Childcare Centre. The Caulfield Childcare Centre opened in early 2015 and was the primary asset of the Trust. The land upon which the Caulfield Childcare Centre operated was owned by an entity owned and controlled by the Urbans, which leased it to CELC. An entity controlled by the Lahmys, ECM (which is also the fourth defendant), was appointed by CELC to establish, operate and manage the Caulfield Childcare Centre pursuant to a management agreement between ECM and CELC.
(d) On 4 August 2017, CELC sold the Caulfield Childcare Centre and the Oakleigh Childcare Centre to Guardian.
With that general factual background,[1] the principal allegations made by the plaintiff and which he seeks leave to bring in the name of CELC include:
[1]The draft statement of claim and the affidavits of the plaintiff and Mr Lahmy set out the factual background in considerably more detail. I have only summarised those aspects of it which are required in order to understand the allegations which the plaintiff seeks leave to bring in the name of CELC.
(a) Mr and Ms Lahmy, through Gold Glow (which is also the fifth defendant), bought the property at 294-296 Glen Eira Road, Caulfield (‘294-296 Glen Eira Road’), which is 130 metres from the Caulfield Childcare Centre with the intention of establishing a childcare centre on that property.
(b) Mr and Ms Lahmy, or entities associated with them, have entered into an agreement or arrangement to permit Guardian to occupy 294-296 Glen Eira Road and operate a childcare centre from that property (‘Guardian Transaction’).
(c) Mr and Ms Lahmy breached their duties as directors of CELC in various ways, by pursuing the opportunity to acquire and develop 294-296 Glen Eira Road, by entering into the Guardian Transaction, and by Mr Lahmy negotiating the sale of the Caulfield Childcare Centre to Guardian at the same time as he was negotiating to enter into the Guardian Transaction and to sell other childcare centres in which the Lahmys (but not the Urbans) had an interest to Guardian.
(d) Gold Glow was involved in Mr and Ms Lahmy’s contraventions, by acquiring the property at 294-296 Glen Eira Road and developing it into a childcare centre.
(e) By not informing CELC about the acquisition and development of the property at 294-296 Glen Eira Road, ECM breached the management agreement with CELC and was also involved in Mr and Ms Lahmy’s contraventions.
Applicable principles
Rule 35.08 of the Rules permits a party to serve on another party a notice requiring that the other party produce documents mentioned in the notice ‘on any application in or at the trial of the proceeding’.[2] Unless the Court otherwise orders, the party on whom the notice is served must produce on the application or at the trial such of the documents mentioned in the notice as are in the party’s possession, custody or power and which that party does not object to produce on the ground of privilege.[3]
[2]Rules, r 35.08(1).
[3]Rules, r 35.08(2).
It was common ground that the obligations which a notice to produce imposes are similar to those imposed by a subpoena and the considerations which apply to the setting aside of a subpoena are equally applicable to a notice to produce.[4]
[4]Crown Joinery Pty Ltd v LylehoPty Ltd [2007] VSC 214 (‘Crown Joinery’), [31].
The parties were in general agreement as to the principles to be applied in a determination of this type. Both parties referred to the decision of Justice Jack Forrest in Volunteer Fire Brigades Victoria v CFA(Discovery Ruling).[5] At paragraph [55] of that judgment, his Honour stated the following, in relation to subpoenas:
[5][2016] VSC 573 (‘Fire Brigades’).
In Messade v Baires Contracting Pty Ltd,[6] I set out the principles in relation to the provision of documents in relation to the adequacy of a subpoena. With one exception (which is irrelevant here), those principles were adopted by the Court of Appeal in Woolworths Ltd v Svajcer:
(a)it is necessary for the party at whose request the witness summons was issued to identify expressly and precisely the legitimate forensic purpose for which access to the documents is sought;
(b)the identification of such a legitimate forensic purpose is to be considered by the court without inspecting the documents sought to be produced;
(c)the applicant for the witness summons must also satisfy the court that it is ‘on the cards’, or that there is a ‘reasonable possibility’, that the documents sought under the subpoena ‘will materially assist the defence’.
(d)a ‘fishing expedition’ is not a legitimate forensic purpose and will not be permitted;
(e)the relevance of a document to the proceeding alone will not substantiate an assertion of legitimate forensic purpose. There is no legitimate forensic purpose if the party is seeking to obtain documents to see whether they may be of relevance or of assistance in his or her defence.
(f)a mere assertion of bad faith by an applicant or that something might be found demonstrating bad faith is not enough – the criteria set out in (c) must be satisfied.
(g)in criminal proceedings a ‘more liberal’ view is taken by a court in respect of the application of the test. Special weight is to be given to the fact that the documents may assist the defence of the accused.
(h)where a party fails to demonstrate a legitimate forensic purpose, the court should refuse access to the documents and set aside the witness summons.[7]
[6][2011] VSC 56, [6].
[7][2013] VSCA 270, [16].
Consideration
The nature of the proceeding
It is important to bear in mind what the proceeding is: the relevant proceeding is not the proceeding which the plaintiff ultimately wishes to bring, but his application for leave to bring that proceeding.
The parties appear to be in agreement as to the issues that will need to be determined in the Leave Application. These are the five criteria set out in s 237(2) of the Act, which provides that:
The Court must grant the application if it is satisfied that:
(a)It is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them;
(b)The applicant is acting in good faith; and
(c)It is in the best interests of the company that the applicant be granted leave; and
(d)If the applicant is applying for leave to bring proceedings – there is a serious question to be tried; and
(e)Either:
(i)at least 14 days before making the application, the applicant gave written notice to the company of the intention to apply for leave and of the reasons for applying; or
(ii)it is appropriate to grant leave even though sub-paragraph (i) is not satisfied.
The defendants have identified three of these as being particularly apposite to this application, being subparagraphs (b), (c) and (d) referred to above.
The Court’s approach to applications made under s 237 of the Act
It is necessary to briefly summarise how the Court deals with applications under s 237 of the Act, as this has some bearing on considering whether the plaintiff has a legitimate forensic purpose for seeking the documents which are the subject of the Notices and the Subpoena. I will explain this later in these reasons.
The onus is on the applicant for leave to bring a proceeding to satisfy the Court that the criteria set out in s 237(2) of the Act have been met.[8] The evidence must be sufficient to establish those criteria, or the application will fail: there is no element of discretion involved.[9] Leave to commence a proceeding is not granted lightly.[10]
[8]Arron J Homes Pty Ltd v Damjanovic [2017] VSC 541, [22] (‘Arron J Homes’).
[9]Huang v Wang (2016) 114 ACSR 586, [57]; Fiduciary Ltd v Morningstar Research Pty Ltd (2005) 53 ACSR 732, 735-6.
[10]Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313, [24] (‘Swansson v RA Pratt’).
In relation to the function of the Court on applications for leave, Sifris J stated that:
The Court does not resolve the dispute but merely exposes and identifies its existence and then determines whether it is serious or frivolous.[11]
[11]Knights Quest Pty Ltd v Barokes Pty Ltd (2016) 113 ACSR 505 (‘Knights Quest’), [90].
While the Court does not make factual determinations when considering an application for leave,[12] evaluating whether there is a serious question to be tried (ie s 237(d) of the Act) requires a consideration of the evidence.[13] Further, as the plaintiff submits, the Court must be satisfied that the proposed proceeding is in the interests of the company, not that it is likely to be so.[14]
[12]South Johnstone Mill Ltd v Dennis (2007) 64 ACSR 447, [80] (‘South Johnstone Mill’); Betta Products (Australia) Pty Ltd v Crampton [2009] FCA 520, [48].
[13]South Johnstone Mill, [77].
[14]Chahwan v Euphoric Pty Ltd (2008) 65 ACSR 661, [85]-[88].
The defendants submit that it is unnecessary for an applicant for leave to prove any damage suffered by the company.[15] They say that by analogy, it would also be unnecessary for an applicant to prove any profit or gain on the part of the defendants.
[15]The defendants relied on Re Connective Services Pty Ltd [2017] VSC 609, [185]-[187] (‘Connective Services’) in that regard.
On the other hand, the plaintiff submits that it is well established that the consideration of what is in the best interests of the company requires evidence of the amount the company is likely to recover from the proceeding.[16]
[16]Referring to Re Gladstone Pacific Nickel (2011) 86 ACSR 432, [57]. South Johnstone Mill at [74] also stands as authority for this proposition, where Middleton J observed that ‘if there were no monetary advantage to the company even if unsuccessful, this would need to be considered in the context of determining whether the proceedings would be in the best interests of the company’.
The plaintiff refers to Knights Quest, where Sifris J said that:
… the court will always have regard to whether the benefits of the proceedings are outweighed by the costs and risks that the company would suffer in bringing them.[17]
[17]Knights Quest, [61].
The plaintiff also submits that the statements made by Robson J in Connective Services, relied on by the defendants, were not a departure from this principle.[18]
[18]Connective Services, [185]-[187].
I agree with the plaintiff’s submissions in this regard. In those passages of Connective Services, Robson J was referring to alleged breaches of ss 180 and 181 of the Act and the view that those duties can be breached even if there was no actual damage to the company. Robson J then concluded that there was no necessity to prove damage, both for the underlying claim and for s 237. His Honour went on to say that even if damage must be shown to establish a serious question to be tried, relevant damage had been shown.[19] Further, having an estimate of the amount that the company is likely to recover (as the plaintiff contends) is different from proving any damage suffered by the company (as the defendants contend), and I do not regard the latter as obviating the need for the former in the context of the Leave Application.
[19]Connective Services, [187], [188].
While the Court ‘will not normally enter into the merits of the proposed derivative action to any great degree’,[20] it is also apparent, from the authorities referred to by the plaintiff,[21] that courts often consider at least some of the evidentiary basis for the claims which the applicant seeks leave to agitate.
[20]Riordan J in Arron J Homes at [75], referring to Swansson v RA Pratt, [25].
[21]Arron J Homes, [18]–[22]; Knights Quest, [38]–[40], [58]–[67], [85]–[86].
The plaintiff submits that the extent of evidence led in an application for leave varies depending on the nature of the proceeding for which leave is sought and the company to which the proceeding relates. That evidence can be substantial.
For example, it is apparent from Knights Quest that courts are often presented with a great deal of evidence in relation to an application for leave to bring a derivative action. In that case, the court book ran to six volumes of double-sided pages plus numerous exhibits.[22] The evidence in that case also included multiple extensive rival expert reports.
[22]Knights Quest, [3].
The plaintiff also referred to Connective Services, submitting that the reasons of Robson J reveal a detailed consideration of the facts on which the proposed claim was based. The evidence can include expert evidence: in Knights Quest, there were expert reports regarding Japanese law and regarding technical matters to do with the patents and products the subject of the proposed proceeding; in other cases, there has been expert accounting evidence.[23]
[23]For example, MG Corrosion Consultants Pty Ltd v Vinciguerra (2011) 82 ACSR 367 [11]-[12]; South Johnstone Mill, [74]-[75].
The Court’s approach in respect of the Notices
As part of its application for leave to bring a proceeding, the plaintiff has provided a draft statement of claim.[24] The draft statement of claim and the allegations made therein are likely to be crucial to the Leave Application, as it sets out the claims which the plaintiff wishes to bring.
[24]The draft statement of claim is exhibit ADSW–10 to the Sheggerud–Woods affidavit.
The above consideration of the nature of the proceeding leads to the key questions confronting the Court in dealing with the objections to the Notices. The plaintiff must establish a legitimate forensic purpose for the documents he seeks, which depends on both the relevance of those documents to the allegations made in the draft statement of claim and also on whether those documents are likely to be needed by the plaintiff in the Leave Application. Relevance is therefore not the only question going to legitimate forensic purpose, even though a primary focus of the parties’ submissions were as to relevance.[25]
[25]Indeed, the defendants commenced their oral submissions by saying that the key issue was apparent relevance: Transcript, 2.10-11.
It is not necessary, for the purposes of determining the objections to the Notices and the Subpoena, for me to have to reach a concluded view, where the parties differ, on the matters summarised in paragraphs 17 to 29 above. It is sufficient that I consider that there is a reasonable prospect that the plaintiff’s approach is correct, which I do. That is then a matter which I should take into account when evaluating whether the plaintiff has a legitimate forensic purpose for seeking the documents.
First Notice
Category one – submissions
Category one of the First Notice seeks sale agreements from Mr and Ms Lahmy, Gold Glow, and/or their related entities as vendor to Guardian as purchasers of their interests in childcare businesses and/or centres.
The defendants say that this category of documents is irrelevant as the only transaction that is sought to be impugned is the Guardian Transaction, which is the agreement/arrangement to permit Guardian to occupy the premises at 294-296 Glen Eira Road Elsternwick, and no claim is made in relation to any other sale transaction with Guardian. The defendants also say that the plaintiff seeks this category of documents to see if he has a case in respect of the sale of other childcare centres, which they say could be located anywhere, which they submit is classic fishing.
The plaintiff says that these documents are relevant to the paragraphs in the draft statement of claim which raise allegations relating to the sale of other childcare centres owned by the Lahmy interests to Guardian. Those paragraphs are identified as 31(a), 31(c), 31(d), 31(f) and 31(g). The plaintiff submits that the other childcare centres are identified in the plaintiff’s affidavit sworn 12 September 2017.[26]
[26]At [113].
The plaintiff also submits that the documents are relevant to the question of whether the proposed proceeding would be in the best interests of CELC and whether there is a serious question to be tried in relation to the proposed claims.
Category two – submissions
Category two of the Second Notice seeks production of documents upon which the defendants or their related entities based the value of the interests in the childcare centres or businesses sold to Guardian, including the two owned by CELC.
The defendants submit that this category of documents is irrelevant to any issue in the proceeding. They say that the breaches of duties alleged in paragraph 31 of the draft statement of claim relate to the acquisition of 294-296 Glen Eira Road and the operation of a childcare centre there by Guardian. They say that no complaint is made about the sale of the Caulfield Childcare Centre by CELC to Guardian. They also say that there is no allegation in relation to the sale of any other childcare businesses and/or centres to Guardian. They say that while there are some references in the particulars to Mr Lahmy undertaking negotiations for the sale of the Caulfield Childcare Centre at the same time as he was negotiating to enter into the Guardian Transaction and to sell other childcare businesses to Guardian, there is no allegation that the sale of other childcare businesses to Guardian adversely affected CELC in some way. They say that this category is classic fishing, and that the plaintiff is unable to make any allegation in relation to the sale of other childcare businesses, and so seeks documents in relation to the sale in the hope that it will enable him to make a claim.
The plaintiffs say that these matters are relevant to the claims pleaded at paragraphs 31(a), (c), (d), (f) and (g) of the draft statement of claim.[27]
[27]See footnote 28 below.
The plaintiff submits that categories one and two do not constitute fishing. He says that the sale of other childcare centres occurred at the same time as the sale of the Caulfield Childcare Centre and that it was a sale to the same purchaser, being Guardian. The sale of the Caulfield Childcare Centre was documented in a formal offer and contract of sale and the plaintiff says that it is highly likely that similar documents were executed in relation to other childcare centres owned by Mr and Ms Lahmy or their interests. The plaintiff submits that the draft statement of claim advances a clear case of breach of duty in relation to the sale of other childcare centres by Mr and Ms Lahmy and that there is a good prospect that the documents will assist in obtaining leave to prosecute that claim.
Categories one and two - analysis
It is convenient to deal with these two categories together.
I do not accept the defendants’ submissions in relation to categories one and two.
The plaintiff pleads various breaches by Mr Lahmy and Ms Lahmy of duties they owed to CELC. The breaches of duty include a failure to act in good faith and in the best interests of CELC by, inter alia, failing: to disclose to CELC’s board of directors the personal interests of the Lahmys in the negotiations with Guardian when Mr Lahmy was conducting those negotiations; to give CELC an opportunity to be represented by an independent person in those negotiations; and to give CELC an opportunity to maximise the price which could be achieved for the Caulfield Childcare Centre.
Those breaches are particularised by reference to a number of matters, including circumstances in which the sale of the Caulfield Childcare Centre was negotiated, where those circumstances include the Guardian Transaction and the sale of other childcare centres to Guardian.[28] Those particulars raise, squarely, both the Guardian Transaction and the sale of other childcare centres when Mr Lahmy was negotiating the sale of the Caulfield Childcare Centre. The terms of those transactions are clearly relevant to the question of whether Mr and/or Ms Lahmy have breached their duties to CELC. This goes to the question of whether there is a serious question to be tried.
[28]See paragraph C of the particulars to 31(a), the particulars to paragraph 31(b), paragraph D of the 31(c), paragraphs B and C of the particulars to 31(d), paragraph C of the particulars to 31(f), and paragraph D of the particulars to paragraph 31(g).
Nor do I accept the defendants’ submissions regarding relevance in respect of category two. The defendants say that this category is classic fishing because the plaintiff does not allege that the sale of the other childcare businesses adversely affected CELC and that no complaint is made about the sale of the Caulfield Childcare Centre to Guardian.
The draft statement of claim alleges, in the paragraphs already referenced above, that the sale of the other businesses meant that Mr and Ms Lahmy breached their duties to CELC to avoid conflicts, to not use their position to gain an advantage for themselves or their associates, to act in good faith, to make proper disclosure, to ensure CELC properly discharged its duties as trustee, and to act with care and diligence, when negotiating the sale of the Caulfield Childcare Centre. The prayer for relief seeks, inter alia, compensation, taking of accounts, enquiries as to damages or profits.
While the defendants may be correct that an allegation that the sale of the other businesses adversely affected CELC is not expressly pleaded in those terms, or that no express complaint is made about the sale of the Caulfield Childcare Centre, it seems to me that such claims are included within the draft statement of claim, for the reasons set out above.
Further, they may go to whether it is in the best interests of CELC for leave to be granted as they may well assist with a rough estimate of the quantum. This goes to the question of whether granting leave to bring the action is in the best interests of CELC.
I am satisfied that the plaintiff has a legitimate forensic purpose for the documents sought by these two categories (subject to paragraphs 50 to 52 below), in that they are both relevant and likely to be needed in respect of the Leave Application.[29]
Width of category two
[29]See paragraph 32 above.
However, relevance and legitimate forensic purpose are not the only considerations. The defendants submitted that category two of the First Notice was hopelessly wide and that it was impossible to tell what documents would be captured by the description. The plaintiff says that there is no evidence before the Court that producing documents in this category would be oppressive or that there is a vast amount of documentation, and so the defendants’ criticism should be rejected.
I agree with the defendants’ submission. Leaving aside the question of oppression, the category is expressed in terms which would include source documents and I am not convinced that it is sufficiently clear what documents would need to be provided. To my mind, this category is drawn so widely that it is akin to a category of documents for discovery, which I do not consider to be appropriate here.
Dr Hanak indicated that some re-working of the category may be possible, but Mr Peters submitted that it was not permissible to try and recast it now. There was no precision about the possible recasting of category two and I was not prepared to allow that to be done on the run. Therefore, category two of the First Notice should be set aside.
Category Three
The third category of the First Notice seeks settlement statements showing the sums paid by Guardian to purchase the childcare businesses owned by CELC and Mr and Ms Lahmy, Gold Glow and/or their related entities, the application of the sale proceeds to any secured creditors, and the application of the balance of the sale proceeds to the various vendors.
The defendants say that the settlement statements for the sale by CELC to Guardian of the Caulfield Childcare Centre and the Oakleigh Childcare Centre have already been provided to the plaintiff. The defendants say that settlement statements for any other sales of childcare centres are not relevant to any issue in the proceeding, as there is no allegation in relation to the sale of any other childcare businesses and/or centres to Guardian. They therefore say that this category of the First Notice ought to be set aside.
The plaintiff says that the draft statement of claim advances claims for breach of duty relating to the other childcare centres and that the documents sought are relevant to those allegations. The plaintiff says that these will be relevant to the matters which he must establish under sub-ss (c) and (d) of s 237(2) of the Act.
For the same reasons as set out above, I accept the plaintiff’s submissions in regard to category three of the First Notice.
Second Notice
By this notice, the plaintiff seeks production of lease agreements between Mr and Mrs Lahmy or their related entities and Guardian as lessee of real property.
The defendants say that this category of documents is extremely wide and that it is irrelevant to any issue in the proceeding. Again, this submission is based on the assertion that apart from the Guardian Transaction, no other transaction with Guardian is sought to be impugned. The defendants say that the complaint about the Guardian Transaction concerns the entry into it, not about its terms. They say the entry into the Guardian Transaction is not disputed and that the terms are irrelevant.
The plaintiff says that the documents sought by the Second Notice are confined to the lease agreements and that there is no evidence to suggest that production would be difficult or oppressive. The plaintiff also says that the documents sought are relevant to the allegations made in paragraphs 30 and 31(a), 31(c), 31(d), 31(f) and 31(g) of the draft statement of claim.
I do not accept the defendants’ submission that no transaction other than the Guardian Transaction is sought to be impugned, or that the complaint about the Guardian Transaction concerns only the entry into it and not its terms, for the reasons set out above.
I agree with the plaintiff’s submission that the documents sought by the Second Notice are confined to the lease agreements, although I consider that it should be further confined to leases where the use of the premises is the operation of a childcare centre.
Abuse of process
Defendants’ submissions
The defendants submit that the Notices and the Subpoena ought to be set aside as they are an impermissible attempt to circumvent discovery. The proceeding is an application for leave to commence a derivative action; there is no substantive proceeding yet and, the defendants say, there may never be one if leave is refused. They say that the appropriate time for the plaintiff to seek any documents would be after the commencement of a substantive proceeding following the grant of leave, and the appropriate avenue of doing so is discovery.
The defendants submit that it was open to the plaintiff to seek preliminary discovery under r 32.05, where he would be required to follow the procedures set out in r 32.05, but he did not do so. The plaintiff’s solicitors wrote to the defendants’ solicitors on 7 August 2017 seeking the same categories of documents as contained in the First Notice, and threatened that if the documents were not produced he would seek preliminary discovery.[30]
[30]Exhibit ADSW–1 to the Sheggerud-Woods affidavit.
The defendants say that this indicated that the plaintiff was not then able to decide whether to commence the proceeding, presumably since this is the basis upon which a preliminary discovery application would be made. The documents were not provided by the defendants, yet the plaintiff commenced a proceeding a few weeks later on 12 September 2017.
The defendants also submit that if an applicant for leave cannot show there is a serious question to be tried without seeking evidence from a prospective defendant on subpoena, then it is hard to see how the subpoena would not be seen as being impermissible fishing. The applicant would be using the subpoena to determine whether it had a case, rather than seeking evidence in support of a known case.[31]
[31]Referring to McLaughlin v Dungowan Manly Pty Ltd [2009] NSWSC 1501, [59] (‘McLaughlin’).
Plaintiff’s submissions
The plaintiff submits that the documents sought in the Notices and the Subpoena are relevant to the Leave Application for the reasons already outlined. Rule 35.08 permits a notice to be served in an application in a proceeding or at trial. At this stage, no discovery has been ordered. The plaintiff submits that this means that the notices are not an attempt to circumvent discovery.
In my view, that submission misses the point. In a proceeding of the type which has been issued by the plaintiff, being an application for leave to bring a derivative action, discovery is not available. It is therefore axiomatic that the notices are not an attempt to circumvent discovery since discovery is not available. Rather, the point raised by the defendants is whether the notices are an attempt to avoid seeking preliminary discovery under r 32.05. In order to establish an entitlement to discovery under r 32.05, the plaintiff would have to, amongst other things, establish that he had did not have sufficient information to determine whether or not to commence proceedings. The defendant submits that it was clear during correspondence between the solicitors that the plaintiff had already decided to bring a proceeding.
Noting that he has the onus of establishing the criteria set out in s 237(2) of the Act, the plaintiff says that he has invoked the processes available to him under the Rules in a legitimate way. Further, he says no abuse of process has been established. The plaintiff refers to several examples where a subpoena or notice to produce have been used in an application for leave, noting that although in some of those examples the subpoena or notice to produce were set aside, this was not because the procedure adopted was inappropriate in the context of an application for leave.[32]
[32]Slea Pty Ltd v Connective Services Pty Ltd [2017] VSC 361 (regarding a subpoena). I note that it is not apparent from this decision what the underlying case is about, so I have not been able to ascertain whether this decision concerned a subpoena issued in respect of an application under s 237 for leave; Connective Services, [204] (regarding a notice to produce) and [275] (regarding a subpoena); Sharpe v Grobbel [2017] NSWSC 1065, [36]-[41] (regarding a subpoena); Hislop v Paltar Petroleum [2017] FCA 1078 (regarding a notice to produce).
The plaintiff also submits that the timely and efficient disposition of applications relating to production of documents must now be viewed in light of the provisions of s 7 of the Civil Procedure Act 2010 (Vic) (‘CPA’),[33] relying on Fire Brigades at [62]. The plaintiff submits that production of documents should occur where that will assist in achieving an efficient and cost effective resolution of the real issues in dispute, and that that is the case here.
[33]Section 7 (1) of the CPA provides that: ‘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.’
Analysis
The issue which J Forrest J was dealing with in Fire Brigades when he made the observation referred to in the previous paragraph and relied upon by the plaintiff was the determination of whether the subpoena in that case was directed to discovery generally as opposed to matters of evidence. His Honour noted that the authorities referred to by the parties predated the introduction of the CPA and that the timely and efficient disposition of applications such as the one before him could not be achieved by trying to draw some form of bright line between the two categories, particularly where setting aside the subpoena on the basis it amounted to discovery would result in an identical application being made under r 32.07,[34] thus causing further delay and cost.
[34]Rule 32.07 permits an application to be made by a party for discovery from a non-party to the proceeding.
I do not see how this assists the plaintiff: there is no alternative procedure being proposed here. All that can be relevantly drawn from this is that the overarching purpose set out in s 7 of the CPA applies to this application, which goes without saying.
I do not accept the defendants’ submission that issuing a subpoena or notice to produce in the context of an application for leave pursuant to s 237 of the Act is an abuse of process.
The Rules permit a notice to produce to be issued on a party on any application in the proceeding or at the trial of the proceeding.[35] The Rules do not restrict that in any way to applications or proceedings of certain types. Therefore, an ordinary reading of the Rules supports the plaintiff’s submission that he can invoke that procedure on his Leave Application.
[35]Rules, r 35.08.
This conclusion is fortified by some of the examples where a notice to produce had been issued as referred to by the plaintiff, particularly Connective Services and Hislop v Paltar Petroleum. Although Sharpe v Grobbel concerned a subpoena, in that case Brereton J of the New South Wales Supreme Court held that there was a reasonable basis for supposing that the documents sought by the subpoena will likely add to the relevant evidence in the case, including whether the applicant for leave was acting in good faith and in the best interests of the company in bringing the application for leave.[36] This example, along with the others referred to in footnote 32 of these reasons, suggest that the observations of Ward J in McLauglin, set out in paragraph 65 above, do not constitute a bar to subpoenas or notices to produce being used in applications for leave. Rather, those cases all involve the consideration of whether there is a legitimate forensic purpose for the documents sought in each instance, by reference to the circumstances in each case, which is the approach I have followed here.
[36]Sharpe v Grobbel [2017] NSWSC 1065, [36]-[41].
Further, I do not accept the defendants’ submission that the Notices are an invalid attempt to circumvent seeking preliminary discovery under r 32.05. The factors taken into consideration in such an application are different to those applicable to an application for leave under s 237 of the Act. When seeking preliminary discovery, the applicant has to (amongst other things) establish that they need the documents in order to determine whether or not they have a cause of action. That is not the purpose for which the plaintiff seeks the documents in the Notices for his Leave Application. He seeks the documents for use as evidence in establishing, to the Court’s satisfaction, the s 237(2) criteria. I was not taken to any evidence as to why the plaintiff did not pursue a preliminary discovery application as he had foreshadowed,[37] and I am not prepared to draw an inference in that regard.
[37]See paragraph 64 above.
Subpoena dated 8 February 2018 issued to Guardian
The parties were agreed that, due to the overlap in the categories of documents, consideration of the Subpoena should await the outcome of the hearing in relation to the Notices. Generally speaking, it appears that the parties are agreed that the fate of the Subpoena will be the same as the fate of the Notices. The Court was informed that the plaintiff has reached an agreement with Guardian that that is the approach that will be taken.
Confidentiality
The defendants submit that the documents sought are commercially sensitive, particularly since the plaintiff is a commercial competitor of the Lahmy parties and of Guardian. The parties agreed that if documents are ordered to be produced they should be confined in the first instance to solicitors, counsel and any experts to be retained, and that if there is an identified need for documents to be shown to the plaintiff in order for his solicitors to obtain instructions then they would seek to enter into an agreed confidentiality regime. That is a sensible course, and the parties will have leave to apply if they are unable to reach agreement as to matters to do with confidentiality.
Conclusion
For the reasons set out above I will set aside category two of the First Notice and order that the defendants produce the documents sought in categories one and three of the First Notice. I will also order that the defendants produce the documents sought in the Second Notice, save that the lease agreements are to be confined to any premises which are being used for childcare centres.
SCHEDULE OF PARTIES
| S ECI 2017 00222 | |
| BETWEEN: | |
| PETER URBAN | Plaintiff |
| - v - | |
| JUNIOR ACADEMY ELC PTY LTD (ACN 136 704 697) (AS TRUSTEE FOR THE GLEN EIRA ROAD (249) UNIT TRUST (ABN 54 859 835 183)) | First Defendant |
| BARCOCHVA LAHMY | Second Defendant |
| ANNA LAHMY | Third Defendant |
| EARLY CHILDHOOD MANAGEMENT PTY LTD (ACN 161 123 459) | Fourth Defendant |
| GOLD GLOW PTY LTD (ACN 606 801 807) | Fifth Defendant |
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