Re Mempoll Pty Ltd

[2012] NSWSC 1057

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of Mempoll Pty Limited, Anakin Pty Limited and Gold Kings (Australia) Pty Limited [2012] NSWSC 1057
Hearing dates:	31 August 2012
Decision date:	31 August 2012
Jurisdiction:	Equity Division - Corporations List
Before:	Black J
Decision:	Interlocutory Process filed 7 August 2012 dismissed. Order nunc pro tunc that documents sought in Notices to Produce dated 28, 29 June and 18 July 2012 and Subpoena to Produce dated 28 June 2012 be disclosed pursuant to Practice Note SC Eq 11. Documents to be produced on a progressive basis and the Plaintiff be notified and have access to documents as produced. Defendants have liberty to apply to extend time for production. Costs be costs in the cause.
Catchwords:	PRACTICE AND PROCEDURE - Practice Note SC Eq 11 - Disclosure before evidence - Whether exceptional circumstances exist to warrant disclosure before evidence is served in proceedings.
Legislation Cited:	- Corporations Act 2001 (Cth) ss 233, 233(1)(j) - Civil Procedure Act 2005 (NSW) s 56 - Fair Trading Act 1987 (NSW) s 68 - Uniform Civil Procedure Rules 2005 (NSW) r 34.1
Cases Cited:	- Armstrong Strategic Management and Marketing Pty Ltd v Expense Reduction Analyst Group Pty Ltd [2012] NSWSC 393 - Brunninghausen v Glavanics [1999] NSWCA 199; (1999) 46 NSWLR 538 - Danihel v Manning [2012] NSWSC 556 - Leda Manorstead Pty Ltd v Chief Commissioner of State Revenue [2012] NSWSC 913 - Leighton International v Hodges [2012] NSWSC 458 - Naiman Clarke Pty Ltd v Tuccia [2012] NSWSC 314 - Norris v Kandiah [2007] NSWSC 1296 - Owners Strata Plan SP 69567 v Baseline Constructions Pty Ltd [2012] NSWSC 502 - Patonga Beach Holdings Pty Ltd v Lyons [2009] NSWSC 869
Category:	Interlocutory applications
Parties:	Interlocutory Process - 7/8/12 Mempoll Pty Ltd (Fourth Applicant) Anakin Pty Ltd (Fifth Applicant) Gold Kings (Australia) Pty Ltd (Sixth Applicant) PAAC Group Pty Ltd (Non-Party) Robert Ho (First Respondent) The Trading House Pty Ltd (Second Respondent) Rhodium NSW Pty Ltd (Third Respondent) Interlocutory Process - 24/8/12 Robert Ho (First Applicant) The Trading House Pty Ltd (Second Applicant) Rhodium NSW Pty Ltd (Third Applicant) Mempoll Pty Ltd (Fourth Respondent) Anakin Pty Ltd (Fifth Respondent) Gold Kings (Australia) Pty Ltd (Sixth Respondent) PAAC Group Pty Ltd (Non-Party)
Representation:	Counsel: Interlocutory Process - 7/8/12 D.E. Grieve QC/S. Ahmed (Respondents) S. Galitsky (Applicants) Interlocutory Process - 24/8/12 D.E. Grieve QC/S. Ahmed (Applicants) S. Galitsky (Respondents) Solicitors: Interlocutory Process - 7/8/12 PMF Legal (Respondents) Haylen McKenzie (Applicants) Interlocutory Process - 24/8/12 PMF Legal (Applicants) Haylen McKenzie (Respondents)
File Number(s):	12/202690

Judgment - EX TEMPORE

1. By Originating Process filed on 28 June 2012, the Plaintiffs, Mr Robert Ho and others, seek relief under s 233 of the Corporations Act 2001 (Cth), for breach of fiduciary duty and under s 68 of the Fair Trading Act 1987 (NSW) as it stood prior to 1 January 2011.

1. The relief claimed in the Originating Process includes, first, an order under s 233(1)(j) of the Corporations Act that the Defendants pay compensation in the amount of the alleged difference between the price paid by the Fourth and Fifth Defendants to acquire the Plaintiffs' shares in other Defendants and the asserted true value of those shares and, in the alternative, an order for equitable compensation in the amount of the difference between the price paid for the shares and the true value of those shares. The Originating Process therefore directs attention to the question whether the price paid for the relevant shares was less than the true value of the shares, which is the necessary premise of the claims for relief identified in the Originating Process.

1. The Originating Process was supported, inter alia, by an affidavit of Mr Ho affirmed 27 June 2012 which identifies the subject matter of the proceedings as relating to an interest in the companies operating a restaurant known as "BBQ King" in Sydney.

1. An Amended Statement of Claim was subsequently filed by the Plaintiffs on 14 August 2012 which pleads, relevantly, a relationship of trust and confidence and an obligation of good faith in respect of the restaurant business and pleads the circumstances relating to the purchase of the Plaintiffs' shares in the relevant companies. The Plaintiffs have foreshadowed a further amendment to make an express allegation that the shares in those companies were purchased by the Fourth and Fifth Defendants at a substantial undervalue. I understand the Plaintiffs' claim to raise issues of the kind considered in, for example, Brunninghausen v Glavanics (1999) NSWCA 199; [1999] 46 NSWLR 538 involving a purchase of shares within a closely held company.

1. Immediately after the commencement of the proceedings, on 28 June 2012 and 29 June 2012, the Plaintiffs issued notices to produce to the Fourth, Fifth and Sixth Defendants. Further notices to produce were issued to the Fourth, Fifth and Sixth Defendants on 18 July 2012 and a subpoena was then issued at the request of the Plaintiffs to another entity, PAAC Group Pty Ltd ("PAAC Group") on 28 June 2012.

1. I should note that care should be exercised by parties in proceedings in this Division in issuing expansive notices to produce since the introduction of Practice Note SC Eq 11. I will refer below to the circumstances in which that Practice Note is capable of affecting the issue of notices to produce. Having said that, the question which arises before me is not whether it would have been preferable for leave to be sought prior to the issue of the notices to produce in these proceedings, but whether those notices to produce should now be set aside, in circumstances that leave is now sought for their issue nunc pro tunc.

Defendants' application to set aside notices to produce

1. The first three of the notices to produce issued 28 June 2012 required production of detailed categories of financial information relating to the restaurant business conducted by the Fourth, Fifth and Sixth Defendants, including documents relating to revenue, purchases, assets, creditors, accounting records, business activity statements and tax returns of the relevant entities. The second group of notices to produce dated 29 June 2012 required production of exhibits to certain documents filed in proceedings in the Federal Court of Australia brought by two of the defendants against a third party. The third group of notices to produce dated 18 July 2012 required production of further documents relating to the Federal Court proceedings and referred to in the transcripts of those proceedings. The subpoena to PAAC Group seeks production of documents relating to transactions between BBQ King Restaurant or the relevant defendants on the one hand and another business, BBQ King Express, operated by the PAAC Group.

1. By Interlocutory Process filed on 7 August 2012, the Fourth, Fifth and Sixth Defendants moved to set aside the notices to produce and the subpoena issued to PAAC Group in reliance on Practice Note SC Eq 11. That application was supported by evidence of the solicitor for several Defendants, Mr McKenzie, who also acts for PAAC Group in the application to set aside the subpoena. Mr McKenzie's evidence is that the notices to produce and subpoena to produce seek disclosure, and effectively discovery, of documents prior to the closing of pleadings and prior to the parties serving their evidence and was served contrary to Practice Note SC Eq 11. The issue thereby raised was that of compliance with Practice Note SC Eq 11, and no issue was raised in Mr McKenzie's affidavit or in argument before me that any of the categories in the notices to produce or the subpoena gave rise to any oppression or that there was any particular difficulty in identifying or producing the documents required, if production was otherwise appropriate. I will accordingly approach the application on the basis that the only issue before me is one of the timing of production of the documents, having regard to Practice Note SC Eq 11, not the content of the categories of documents which are sought to be produced.

Plaintiffs' application for disclosure

1. By Interlocutory Process filed 24 August 2012, the Plaintiffs sought an order, nunc pro tunc, for disclosure of documents in accordance with the notices to produce and subpoena. That interlocutory process is supported by an affidavit of Mr Richard Arnold sworn 24 August 2012. Mr Arnold has qualifications as an auditor and tax agent and has provided expert reports in litigation as to the value of shares in private companies. His evidence is that he needs access to financial records of the relevant companies to establish the level of their turnover, costs and goods sold and their expenses in order to establish their profit margin and express an opinion as to the value of their shares. He gives evidence of undertaking a similar exercise in other proceedings involving one defendant in these proceedings. Mr Arnold's evidence establishes the relevance of the documents but does not, as Counsel for the Fourth, Fifth and Sixth Defendants rightly points out, establish that it is appropriate for those documents to be produced at this point, within the policies identified in Practice Note SC Eq 11. That is ultimately a question for the Court and a matter which I will address below.

1. The notices to produce are issued under Uniform Civil Procedure Rules 2005 (NSW) r 34.1 which provides for the service of a notice to produce requiring the production of specified documents or things. In Norris v Kandiah [2007] NSWSC 1296 at [3] Brereton J observed that a notice to produce under that rule is akin to a subpoena for production; see also Patonga Beach Holdings Pty Ltd v Lyons [2009] NSWSC 869 at [12]. It is not necessary for me to pause to consider whether the categories specified in the notices to produce were properly within the subject of the rule, since the Fourth, Fifth and Sixth Defendants did not contend to the contrary and, as I noted above, no point as to relevance or oppression was taken in this application.

1. With that background, I turn to the issue which was the subject of the true contest before me, namely the application of Practice Note SC Eq 11 in the circumstances of these proceedings. That Practice Note is headed "Disclosure in the Equity Division" and took effect on 26 March 2012. It provides, relevantly, that:

• The Court will not make an order for disclosure of documents until the parties to the proceedings have served their evidence, unless there are exceptional circumstances necessitating disclosure (para 4).

• There will be no order for disclosure in any proceedings in the Equity Division unless it is necessary for the resolution of the real issues in dispute in the proceedings (para 5).

• Any application for an order for disclosure, consensual or otherwise, must be supported by an affidavit setting out specified matters, including the reasons why disclosure is necessary for the resolution of the real issues in dispute in the proceedings (para 6).

1. Practice Note SC Eq 11 does not, in terms, apply to notices to produce because such notices do not seek an order for "disclosure of documents". However, in Owners Strata Plan SP 69567 v Baseline Constructions Pty Ltd [2012] NSWSC 502 at [23]-[24] Stevenson J observed that:

"It would subvert the intended operation of the Practice Note if parties could avoid its operation by adopting the expedient of serving a notice to produce, rather than seeking an order for disclosure.

Indeed, if a notice to produce was served with the object of avoiding the operation of the Practice Note, such service might well constitute an abuse of the Court's process."

1. I agree with the views expressed by Stevenson J, and as his Honour observed, the Court will be ready to set aside a notice to produce in an appropriate case if it appears to involve the subversion of the operation of the Practice Note. Equally, an application may be made for leave to issue a notice to produce nunc pro tunc, having regard to any evidence which is led to support the need for disclosure.

1. I turn now to the question whether exceptional circumstances are established in this case. I approach that question having regard to the purpose which is served by Practice Note SC Eq 11 which, as McDougall J noted in Leighton International v Hodges [2012] NSWSC 458 at [4]-[7], is the latest step taken by the Court in its efforts to deal with the costs of litigation, particularly so far as it concerns the costs of discovery of electronic material. The manner in which proceedings will be conducted in the vast majority of cases in the Equity Division of this Court, as contemplated by that Practice Note, was well described by Bergin CJ in Eq in Armstrong Strategic Management and Marketing Pty Ltd v Expense Reduction Analyst Group Pty Ltd [2012] NSWSC 393 at [65]-[66], commencing with the plaintiff's service of the evidence including documents on which it relies, followed by the defendant's service of the evidence including the documents on which it relies, so that the real issues in proceedings are confined not only by the pleadings but also by the evidence. That approach will serve the purpose of the Practice Note, of seeking to do what can be done in the vast majority of cases to avoid unnecessary discovery.

1. However, the Practice Note itself contemplates that the Court may make an order for disclosure before the parties, or one of them, have served their evidence where there are "exceptional circumstances necessitating disclosure". In Leighton International v Hodges above at [19] McDougall J noted that there can be no all encompassing definition of "exceptional circumstances"; what is required is an assessment of the relevant provision and its application in the particular case; and such circumstances require something more than circumstances which are regularly, routinely or normally encountered. His Honour observed at [20], in a passage which was approved by Stevenson J in Baseline Constructions above at [30], that:

"As a matter of language, something is exceptional if it is out of the ordinary or unusual. To my mind, the exceptional circumstances referred to in paragraph 4 of the Practice Note must be circumstances that are not normal, or usual; they must be something out of the ordinary; they need not be unique; but however one characterises them they are not "exceptional" at large but "exceptional" because they necessitate disclosure.

1. This approach is supported by several subsequent decisions of this Court. In Naiman Clarke Pty Ltd v Tuccia [2012] NSWSC 314 at [26], Ball J noted that the Practice Note does not prohibit disclosure before evidence is served and also observed that the requirement of exceptional circumstances might be met where information necessary for one party's case was solely within the knowledge of another party from which disclosure was sought. In Danihel v Manning [2012] NSWSC 556 at [16] Bergin CJ in Eq noted that "exceptional circumstances", for the purposes of Practice Note, may be established by demonstrating the necessity to obtain documents to fairly prepare a case for trial, that is, that the party is unable to serve its evidence without certain documents.

1. In Leda Manorstead Pty Ltd v Chief Commissioner of State Revenue [2012] NSWSC 913 at [17], Gzell J reviewed these authorities and emphasised the need for "caution against setting the bar too high". His Honour observed that:

"To be exceptional the circumstance need not be unique or unprecedented or very rare. What is needed is an appraisal of all the circumstances and the context in which the expression must be satisfied. Are there circumstances necessitating disclosure before evidence in the sense that the party's case cannot be put without the disclosure? Are those circumstances exceptional?".

1. The Practice Note also provides that disclosure will be ordered only when it is "necessary" for the resolution of the real issues in dispute. I agree with McDougall J's observation in Leighton International at [22] that this contemplates that disclosure is shown to be:

"reasonably necessary for disposing of the matter fairly or in the interests of a fair trial".

In that case, at [55], his Honour allowed disclosure where the Plaintiff did not have sufficient documents otherwise to make out its case.

1. In the present case, I am comfortably satisfied that "exceptional circumstances" are established, and that the documents sought to be produced are necessary for the fair disposal of the matter and in the interests of a fair trial. The fundamental premise of Mr Ho's case, both in respect of the claims that are pleaded and also in his evidence as set out in his affidavit of 27 June 2012, is that there was a substantial inequality of information between himself and the Defendants. His evidence is that, for example, he was not given notice of the meetings of directors or shareholders of the relevant companies and did not attend such meetings; that he trusted his business partners and advisers; and that both the accountant for BBQ King and the First and Second Defendants deflected requests for financial information in relation to the restaurants. He contends that, for these reasons, he had no reason to believe that the value of the shares in the companies was other than what he claims was represented to him when he sold those shares in 2009. It is not, of course, necessary to determine at this stage whether those allegations are correct or not. They may or may not be made good at the trial. However, they identify a context where the Plaintiffs contend that information was not known to them which was necessary to properly value the shares, and that those shares were sold at undervalue based on misrepresentations. Again, those allegations may or may not be established at a final hearing.

1. In my view, this case is very different from the more common situation where each party has access to the information necessary to make good their respective cases. For Mr Ho to establish his case, he needs to show not only that he lacked the relevant information, which is the contention advanced in his affidavit, but also needs to establish the content of that information. This can readily be illustrated. If the Defendants were, reasonably, to seek particulars of the extent of undervalue at which of the shares are alleged to have been sold, then a constructive response would need to take into account the information that Mr Ho presently contends he was not provided. Whether the shares in the companies were sold at undervalue goes not only to the quantum of any damages but also to whether the causes of action in oppression and misleading and deceptive conduct are established because, if the shares were not sold at an undervalue, those claims may well fail.

1. In my view, which I understand to be consistent with that which has been adopted in the authorities to which I have referred above, a situation where highly relevant information is solely or largely in the possession of one party may well give rise to exceptional circumstances for the purpose of the Practice Note, and I consider that it does so in this case. I am reinforced in that view because it seems to me that the disclosure of the relevant information, sooner rather than later, is consistent with the objective of the just, quick and cheap resolution of the real issues in dispute, as contemplated by s 56 of the Civil Procedure Act 2005 (NSW). Access to that information will allow the Plaintiffs to take expert advice as to the matters which they may press in evidence at a final hearing; will allow them to prepare to lead expert evidence in the proceedings, notwithstanding that the form of such evidence will depend upon further directions of the Court; and will allow both parties to be in a position to assess the strengths and weaknesses of their respective cases from a more informed standpoint. All of these factors seem to me to be factors which support both the existence of exceptional circumstances and the necessity of disclosure for the conduct of a fair trial.

1. In these circumstances, I propose to dismiss the application brought by the Fourth, Fifth and Sixth Defendants by Interlocutory Process dated 17 August 2012 seeking to set aside the notices to produce and subpoena. I would, in principle, make the orders sought in paragraphs 1-4 of the Interlocutory Process filed by the Plaintiffs dated 24 August 2012, being orders nunc pro tunc for disclosure and orders for production of the relevant documents.

1. I have also heard the parties as to, first, whether a time period should be specified in orders in respect of the production of documents and, second, what that time period should be. Mr Grieve QC, who appears for the Plaintiffs, points out, and I accept, that the time period specified in the proposed orders is essentially a question of mechanics. The notices to produce and subpoena have their compulsive force arising from the fact that they were issued under the Uniform Civil Procedure Rules and have not been set aside. The time period specified simply indicates the time in which they should be complied with. The time specified in the orders proposed by the Plaintiffs is 14 days. Mr Galitsky, who appears for several defendants (including the Fourth, Fifth and Sixth Defendants), has sought production within 28 days, which is not an unduly lengthy period, and appears to reflect an appropriate recognition of the need for compliance with the orders within a reasonable time period.

1. There is no evidence before me as to the time which would be taken to collate the documents but it is likely as a matter of common sense that some will be more readily identifiable and some more difficult to identify. I consider that the pragmatic course in this situation is to allow a period of 21 days for production of the documents with leave to apply so that, if at the end of the 21 days, the majority of the documents have been produced, then an application can be made supported by evidence indicating the additional time that may be required to produce documents falling within the remaining categories. I will further make a direction that documents be produced on a progressive basis.

1. An application by the Plaintiffs was made for an order, which is not resisted by the Defendants, that the Defendants notify as documents are produced. The Plaintiffs also seek an order for access to the documents as produced. It was put by Mr Galitsky, who appears for the Defendants, that this would complicate the process for production. I do not follow that submission, since it seems to me an order for access would obviate the need for the parties to appear before the Court for specific orders to access as documents are produced. The views I have expressed above indicate that access should be permitted as documents are produced, since that is the necessary implication of my finding that access is required for the proper preparation of the case. I will, of course, make such an order subject to any proper claim for privilege.

1. Accordingly I make the following orders:

1. The application brought by the Fourth, Fifth and Sixth Defendants dated 7 August 2012 be dismissed.

2. An order nunc pro tunc for disclosure of documents sought in the Notices to Produce from the first plaintiff addressed to each of the Fourth, Fifth and Sixth Defendants dated 28 June 2012, 29 June 2012 and 18 July 2012 and the Subpoena to Produce from the First Plaintiff issued to PAAC Group Pty Ltd dated 28 June 2012, pursuant to Practice Note SC Eq 11.

3. Direct that the documents falling within the scope of the Notices to Produce and Subpoena be produced on a progressive basis and within 21 days of the date of this order, subject to order 4 below.

4. The Defendants have liberty to apply to extend the time for production, such application to be supported by affidavit evidence of the steps taken to produce the relevant documents and any difficulties in respect of the timing of production.

5. The Defendants notify the Plaintiff as documents are produced and the Plaintiff have access to, and have leave to copy documents as produced, subject to any proper claim for privilege.

Costs

1. I have also heard the parties as to the costs of the application. The Plaintiffs submit that they should have their costs of the application on the basis that they have been successful in obtaining an order permitting disclosure of the relevant documents and conversely the Defendants have been unsuccessful in setting aside the notices to produce and the subpoena. Mr Galitsky responds, with some force, that the manner in which this application has arisen reflects the fact that notices to produce were served, without previously obtaining leave of the Court under Practice Note SC Eq 11 which had by then come into effect, requiring this application to be heard as a separate application.

1. The question of costs here is finely balanced. The Plaintiffs have had a degree of substantive success in the application before me. However, it does seem to me that the application has taken this particular form because of non-compliance with Practice Note SC Eq 11 at the time the notices to produce were originally served. Had the question of disclosure first been raised in a directions list before the Corporations Judge the issues may or may not have been capable of being resolved in a less time-consuming way than their agitation in the separate applications before me.

1. I consider that on balance, the proper order is that the costs of the application be costs in the cause.

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Decision last updated: 07 September 2012