Scivolo v Femia - [2017] WASC 225

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: SCIVOLO -v- FEMIA [2017] WASC 225

CORAM: MASTER SANDERSON

HEARD: 28 JULY 2017

DELIVERED : 28 JULY 2017

PUBLISHED : 8 AUGUST 2017

FILE NO/S: CIV 1592 of 2017

BETWEEN: MICHAEL ERNEST SCIVOLO
First Plaintiff
DAVID MATHEW MODICA
Second Plaintiff
SALVATORE MARK MODICA
Third Plaintiff
AND
ROBERTO ARMANDO FEMIA
Defendant

Catchwords:

Practice and procedure - Application for pre-action discovery - Turns on own facts

Legislation:

Rules of the Supreme Court 1971 (WA)

Result:

Discovery ordered

Category: B

Representation:

Counsel:

First Plaintiff                  :     Mr T O Coyle
Second Plaintiff             :     Mr T O Coyle
Third Plaintiff                :     Mr T O Coyle
Defendant:     Mr G W Jahn

Solicitors:

First Plaintiff                  :     Bennett + Co
Second Plaintiff             :     Bennett + Co
Third Plaintiff                :     Bennett + Co
Defendant:     Westmont Legal

Case(s) referred to in judgment(s):

GLR Injection Technologies Pty Ltd v Forton Automotive Treatments Pty Ltd [2009] WASC 131

MASTER SANDERSON: Order 26A of the Rules of the Supreme Court 1971 (WA) was introduced 20 years ago this year. It was part of a suite of reforms championed by then Justice Ipp aimed at implementing case flow management. In the two decades that have passed since the introduction of the order it has been used countless times to allow potential litigants to work out whether or not it is worth taking proceedings. The aim of the order was to forestall parties issuing proceedings and waiting until discovery to ascertain whether they had the correct defendant or indeed whether they had a cause of action against the named defendant. It was hoped the order would do away with the 'hail Mary' approach to litigation.
After a few initial stuttering steps a consistent approach to O 26A has emerged. These days it is rare for there to be an argument as to the applicable principles. This application was brought pursuant to O 26A r 4. Relying on the decision in GLR Injection Technologies Pty Ltd v Forton Automotive Treatments Pty Ltd [2009] WASC 131 both parties were content to accept the following principles. To succeed the plaintiff must establish:
1.that it 'may have a cause of action';
2.that the potential cause of action is against a person whose description has been ascertained;
3.that it wants to commence proceedings against the potential party;
4.after 'reasonable enquiries' it has not been able to obtain sufficient information to decide whether or not to commence proceedings;
5.at the time of making the application the plaintiff has not reached a decision about whether or not to take proceedings;
6.there are reasonable grounds for believing that the potential party has in its possession documents that may assist in making the decision; and
7.the application must be supported by an affidavit which is served on the potential party.
After hearing argument I indicated I would make an order for pre‑action discovery as sought by the plaintiff. However, I indicated to the parties I was not satisfied that the scope of discovery sought in the originating summons was appropriate. I indicated I would publish reasons for making the order and foreshadow the scope of the discovery I thought appropriate. Having done that I would invite the parties to make submissions as to the scope of the discovery. These reasons are the first part of that process.
The relevant facts are as follows. Each of the plaintiffs and the defendant are accountants. For some time the first plaintiff was a director of Alessandrino Scivolo Pty Ltd (Alessandrino Scivolo) and ASPL Pty Ltd (ASPL). The second and third plaintiffs were shareholders of Alessandrino Scivolo between 2011 and 2013. The defendant is a former director and shareholder of both Alessandrino Scivolo and ASPL.
VM Alessandrino & Co was an accounting practice established in 1972. By 1987 it had changed its name to Alessandrino Scivolo Pty Ltd. The practice had become incorporated. The defendant became a director of Alessandrino Scivolo in July 2001. The first plaintiff says that prior to the defendant's admission as a director of Alessandrino Scivolo he attended regular meetings where how the practice would be run was discussed. He says five matters were agreed. First, none of the directors would have clients outside of the practice and all clients would be administered and billed by the practice. Second, tax returns for all clients would be lodged using the practice's existing tax lodgement facility. Third, the practice would be run for the benefit of the clients of the practice and the resources and knowledge of the directors would be pooled together for the benefit of the practice. Fourth, all directors would introduce clients to the practice who would then become part of the client base of the practice. Finally, Mr Neil Alessandrino would manage the day‑to‑day business of the practice in consultation with other directors. The first plaintiff says that although the accounting practice was incorporated it was in fact run as a partnership. Nothing in the evidence lodged by the defendant suggests that was not the case.
From 1 July 2006 the accounting practice conducted by Alessandrino Scivolo operated as the ASPL Trading Trust - ASPL Pty Ltd is the trustee of the trust. The first plaintiff in his affidavit affirmed 10 April 2017 says he had concerns about diversion of fee income from Alessandrino Scivolo to the defendant.
His concerns arose as a consequence of three separate but interrelated matters. First, in or about 2007 the first plaintiff discovered the defendant had ceased lodging his personal tax returns through the practice after the financial year ended 30 June 2007. The first plaintiff says this was unusual and he enquired of the defendant why that was so. The defendant responded he had concerns about his privacy and preferred to lodge his personal returns at home.
The first plaintiff's second concern related to missing fees. In or about 2003 Alessandrino Scivolo employed a Mrs Donna Lee Euphemie as its practice manager. In April 2004 the defendant advised the first plaintiff and his fellow directors he had arranged for Mrs Euphemie to be seconded to the office of an existing client, Body Performance Gear Pty Ltd (BPG). It was intended Mrs Euphemie would provide practice management services to BPG during the period April to June 2004. The first plaintiff subsequently discovered Alessandrino Scivolo did not receive payment of any fees from BPG for the secondment of Mrs Euphemie, nor, after 2007, were any tax returns lodged by the practice on behalf of BPG. The first plaintiff says between 2004 and 2006 BPG generated annual fees of between $14,000 and $25,000 for the practice. It is to be inferred the first plaintiff does not know who lodged tax returns on behalf of BPG or why that firm did not remain a client of the practice.
Thirdly, in or about 2006 or 2007 Alessandrino Scivolo received two invoices for commission fees in the mail. These invoices were for approximately $3,000 each and were payable by Eight Financial Services Pty Ltd (Eight Financial Services) or Mr Sam Pizzata of Eight Financial Services to the defendant. Mr Pizzata is a financial planner and a director of Eight Financial Services and was introduced to Alessandrino Scivolo and other directors through the defendant.
It was the practice of Alessandrino Scivolo to refer its clients to financial planners such as Eight Financial Services. If a successful relationship was developed then a commission would be paid by Eight Financial Services to Alessandrino Scivolo. The first plaintiff is clearly concerned commission was being paid to the defendant when it should have been paid to Alessandrino Scivolo.
In late 2010 the first plaintiff decided to retire from Alessandrino Scivolo and ASPL. This also involved the sale of his interest in ASPL. In August 2013 the second and third plaintiffs also sold their shares. The price paid for the shares was calculated as a percentage of the gross practice income. The plaintiffs say they may have a cause of action against the defendant because in breach of his fiduciary duties he diverted income away from the practice. If that was the case then the gross fees earned by the practice was reduced and the amount each of the plaintiffs received on sale of their shareholding was consequently reduced.
In opposition to the application the defendant relied on an affidavit he swore 23 May 2017. He also relied on an affidavit of Salvatore Pizzata sworn 15 June 2017. In his affidavit the defendant maintains he did not behave improperly as alleged by the plaintiffs or at all. The flavour of his affidavit can be seen from par 40. In responding to par 69 of the first plaintiff's affidavit he says:
I am not conducting an accounting practice from home. I never have operated a business from home. I have never diverted income and commissions otherwise payable to the Company. The result is that there is no income that has been lost to the business. The sale price of the Company is not understated. Further at all material times the all directors of the Company knew the exact reason why I was filing my own tax returns and that of my wife, parents and brother from home. Given that each of the directors were fully aware of my actions and consented to me filing returns from home I am not in breach of any fiduciary duty.
To be fair to the defendant it is difficult to see how else he could have responded to the plaintiffs' claims. It is also worth noting that the defendant makes a number of claims with respect to the documents sought by the plaintiffs which actually provide more detail than would be provided by an affidavit of discovery. If the defendant were to swear an affidavit of discovery and he did not have documents sought by the plaintiffs or those documents were not under his custody or control then they would not have to be mentioned in the affidavit. An application for further and better discovery by the plaintiffs, if they suspected the defendant did in fact have the document, would run up against the difficulty of the finality of an affidavit of discovery. What the defendant's affidavit filed in opposition to the application actually did was state definitively that he did not have certain documents. On one view that places the plaintiffs in a better position than if discovery was ordered.
Nonetheless I was satisfied this was a case where it was appropriate to make a discovery order. Looking at each of the relevant criteria it is clear the plaintiffs may have a cause of action. If the defendant had been conducting a business for clients from home he would arguably have been in breach of his fiduciary duties. The fact Mrs Euphemie went to work for BPG and BPG did not lodge tax returns through the practice at least suggests a line of enquiry. But importantly any breach of fiduciary duty could potentially lead to a claim for equitable compensation.
Any cause of action by the plaintiffs would be against the defendant and his description has been ascertained. The plaintiffs clearly want to commence proceedings. They have made reasonable enquiries and have not been able to decide whether or not to commence the proceedings. The plaintiffs say in their affidavits supporting the application they have yet to decide whether or not to commence proceedings. There are reasonable grounds for believing the defendant has in his possession documents that may assist in making their decision. Affidavits in support of the application were lodged by the plaintiffs.
Against that background the plaintiffs sought relevantly in their originating summons discovery of the following categories of documents.
1.1copies of any documents that record or evidence the defendant conducting a business (other than for and on behalf of the accounting practice Alessandrino Scivolo, ASPL Pty Ltd or Alessandrino Scivolo Pty Ltd) that provided some, or all, of the following services:
1.1.1accounting taxation services;
1.1.2self-managed superannuation fund and auditing services;
1.1.3bookkeeping services;
1.1.4business advice; and
1.1.5project development and management services,
in the period commencing 30 June 2006 to 30 June 2013.
1.2the Australian Taxation Office (ATO) client and lodgement list generated by the ATO for Tax Agent Number 64026015, including copies of all tax returns lodged under this Tax Agent Number for the financial years ended from 30 June 2006 to 30 June 2013 (inclusive);
1.3copies of financial statements, ATO copies of income tax returns lodged and ATO generated notices of assessment for the financial years ended 30 June 2006 to 30 June 2013 for the following:
1.3.1the Defendant;
1.3.2Mrs Joanne Femia;
1.3.3all companies and partnerships where the Defendant or Mrs Femia are the sole or joint shareholder or beneficiary of all trusts where the Defendant or Mrs Femia are a beneficiary, including but not limited to:
(a)Nyora Pty Ltd AFT the F & P Femia Family Trust;
(b)Roberto A Femia and Joanne Femia ATF and RA & J Femia Family Trust;
(c)the Femia Property Trust;
(d)Triple Eight Investments WA Pty Ltd;
(e)D Femia Holdings Pty Ltd
(f)Kingwest Pty Ltd,
1.4Copies of bank statements for the individuals and entities listed at paragraph 1.3 above for the financial years ended from 30 June 2006 to 30 June 2013.
In my view there is no difficulty about category 1. In relation to category 2 I would be prepared to order production of the ATO client and lodgement list for the nominated tax agent number. But I am not convinced copies of the returns lodged under that number are necessarily relevant. I would accept the tax returns for the defendant and his wife should be produced. However, I am not satisfied returns for all companies and partnerships involving the defendant or his wife are relevant. Nor am I satisfied bank statements need be produced. Production of the bank statements in particular would seem to be an unnecessary invasion of the privacy of the defendant and his wife given the nature of the allegations levelled against the defendant by the plaintiffs.
As I indicated above I will hear the parties as to the scope of the discovery orders. I will also hear further submissions in relation to costs.