The Duke Group Ltd (in Liquidation) v Angus Claymore Pilmer

[1993] SASC 3852

COURT IN THE SUPREME COURT OF SOUTH AUSTRALIA MULLIGAN J

CWDS
Discovery and interrogatories - discovery and inspection of documents - Practice and procedure - discovery - documents produced to court pursuant to summons issued in s.541, Companies (South Australia) Code - released to liquidator - documents discovered to plaintiff in another action in this Court - application by plaintiff for ruling as to whether bound by implied undertaking not to use documents for a collateral or ulterior purpose and if so for leave to discover documents to defendants and permit inspection - plaintiff bound by implied undertaking - discovery of documents produced in s.541 examination and use of them at trial of this action not in breach of undertaking - not collateral or ulterior purpose - leave granted for such use of other documents - Svbron Corporation and Anor y Barclays Bank PLC (1985) 1 Ch 299 and Hamilton v Oades (1989) 166 CLR 486 referred to. Companies (South Australia) Code s.54l. Harman v Secretary of State for the Home Department
(1983) I AC 280; Crest Homes PLC v Marks and ors (1987) 2 All ER 1074; Sentry Corporation v Peat Marwick Mitchell and Co (1990) 95 ALR 11; Grocon Ltd v Alucraft PL (In Liq) (1992) 10 ACLC 1127; Casley-Smith and Ors v DC of Stirlinq and Anor (1989) 51 SASR 447; Holpitt PL v Varimu PL and Ors (1991) 103 ALR 684 and Alliance Petroleum Australia NL and Ors v The Australian Gas Light Co (1983) 34 SASR 215, applied.

HRNG ADELAIDE, 8 March 1993 #DATE 12:3:1993
Counsel for plaintiff:                 Mr R J Whitington
Solicitors for appellant:             Fisher Jeffries
Counsel for defendants:                 Mr S T Lane
Solicitors for defendants:             Ross and McCarthy
Counsel for respondent Arthur Young:    Mr M A Frayne
Solicitors for respondent Arthur Young: Mouldens
Counsel for respondent Peat Marwick:    Mr D P Rydon
Solicitors for respondent Peat Marwick: Finlaysons

ORDER
The orders are set out in the judgment.

JUDGE1 MULLIGHAN J    The plaintiff has brought an action against the defendants, the principals of a firm of accountants, for damages for breach of contract and in negligence. That action has not yet been entered for trial and the parties are in the process of completing all necessary pre-trial procedures. The plaintiff is in liquidation and the liquidator is in possession of certain documents which it has discovered to the defendants. It proposes to permit the defendants to inspect them. It has brought an application for an order on a ruling which will permit it to do so. 2. The perceived need for such an order arises in this way. Examinations of persons concerned with the plaintiff and related companies under s.541 of the Companies (South Australia) Code were conducted at the behest of the liquidator. Summonses were issued by the court to various partners or employees of Messrs. Peat Marwick Hungerfords who had conducted audits of companies in the Duke Group. The name of that firm may now be KPMG Peat Marwick. Whatever it is, I refer to it as "Peats". Many documents have been produced to the Court in answer to those summonses. A partner or employee of another firm of accountants, Arthur Young (Reg.), also produced documents in answer to a summons issued by the court pursuant to s.541. The liquidator was represented at the examinations by the same solicitors and counsel who appear in this action for the plaintiff. All of the documents produced at the examinations were made available to the liquidator and his legal advisers and copies of them have remained in their possession. 3. The plaintiff brought an action in this Court against Arthur Young for damages for breach of contract and negligence and other relief in consequence of the preparation of a report submitted to shareholders of the plaintiff in June 1988. Peats were joined as a third party. During the course of that action both Arthur Young and Peats made discovery of documents including those which had been delivered to the Court in compliance with summonses issued as part of the s.541 examinations. As I understand the position many documents were admitted into evidence at the trial of that action. Others were marked for identification. The action was settled. 4. The legal advisers of the plaintiff have formed the view that all of these documents are relevant for the purpose of discovery to the defendants in this action and that they are obliged to make discovery of them and to permit the defendants to inspect them and take copies if they so wish. Indeed the plaintiff proposes to seek to have some of these documents admitted into evidence against the defendants. 5. This application is brought by the plaintiff, ex abundanti cautela, in view of the contention that it is prevented from making discovery and permitting the defendants to inspect the documents because it is bound by an implied undertaking. The nature of that undertaking is discussed by Lord Diplock in Harman v. Secretary of State for the Home Department (1983) 1 AC
280 at p 304 as follows:-
    "This is why an order for production of documents to a solicitor
    on behalf of a party to civil litigation is made upon the
    implied undertaking given by the solicitor personally to the
    court (of which he is an officer) that he himself will not use
    or allow the documents or copies of them to be used for any
    collateral or ulterior purpose of his own, his client or anyone
    else; and any breach of that implied undertaking is a contempt
    of court by the solicitor himself. Save as respects the gravity
    of the contempt no distinction is to be drawn between those
    documents which have and those which have not been admitted in
    evidence; to make use for some collateral or ulterior purpose
    of the special advantage obtained by having possession of copies
    of any of an adverse party's documents obtained upon discovery
    is, in my view, a contempt of court";
    and, at p.306:-
    "I would myself add this as a reason (additional to those based
    on the desirability of encouraging full and unreserved discovery
    of documents before trial that were given in the courts below)
    why public policy requires that the implied undertaking given by
    a solicitor to the court, on obtaining production on discovery
    of documents belonging to his own client's adversary, that he
    will not take advantage of his possession of copies of those
    documents to use them or to enable others to use them for some
    collateral purpose, does not terminate as respects each
    individual document at the very moment that that document,
    whether admissible or not, is actually read out in court." 6. Lord Scarman expressed the obligation, at p.312, as:-
    "The law imposes the obligation under consideration in this
    appeal for the protection of the party compelled to make
    discovery of documents in legal proceedings. It does so by
    implying an undertaking by the party to whom discovery is made
    and his solicitor not to use them for any purpose other than
    that of the action. Disregard of the undertaking is enforceable
    by the party for whose benefit it is exacted in committal
proceedings for contempt of court." 7. This implied undertaking imposed in the discovery process in the course of inter partes litigation is widely accepted and acknowledged: see also Crest Homes PLC v. Marks and ors. (1987) 2 All ER 1074. In Sentry Corporation v. Peat Marwick Mitchell and Co. (1990) 95 ALR 11, the Full Court of the Federal Court accepted that Northrop J, at first instance, had correctly stated the position in this country as follows:-
    "It is clear that according to Australian law a person who
    acquires a document pursuant to the processes of the court is
    under a duty not to disclose or make use of that document for
    purposes other than the court proceedings without the leave of
    the court or the person from whom the document has been obtained
    ... if knowledge is acquired from a document and use is made of
    that knowledge for purposes other than the case itself then that
    document and that knowledge has been used in contravention of
    the general principle ..." See Sweeney J at p.23 and Lockhart J at p.38. The plaintiff contends that the obligation does not apply in the present circumstances but seeks a ruling from the court, which is an appropriate course to take: Harman's case (supra) per Lord Keith at p.308. 8. Notice of this application was given to the defendants, Arthur Young and Peat Marwick. The defendants request discovery and inspection of all of the documents. Both Arthur Young and Peats contend that the plaintiff is prevented from making discovery to the defendants and from permitting inspection by the implied undertaking and that there is no sufficient reason for it to be released from that undertaking. It is conceded that both Arthur Young and Peats have standing on this application and are entitled to be heard in opposition to the ruling sought. It is appropriate to mention that there is a real possibility that the defendants may wish to join Arthur Young or Peats as third parties and inspection of the documents may influence their decision to do so. That is a matter of no significance. Either the defendants should be permitted to inspect the documents or they should not, which is to be decided upon the application of the correct principles. 9. The first question is whether there is an implied undertaking imposed upon the liquidator and his legal advisers of the nature discussed in Harman's case with respect to documents produced to the court in the course of s.541 examinations and released by the court to the liquidator and his legal advisers. The second question is, if there is such an undertaking, whether the plaintiff and its legal advisers would be in breach of it by discovering the documents to the defendants in this action and permitting inspection of them and by tendering any of them at the trial of this action. 10. I have been referred to many cases which acknowledge the existence of the implied undertaking where documents of a person have come into the possession of another due to the compulsory processes of the court. Those processes include a subpoena duces tecum as well as the discovery process in the course of inter partes litigation. Sybron Corporation and Anor. v. Barclays Bank PLC
(1985) 1 Ch 299 is an example of the existence of the implied undertaking where a party has been compelled to produce documents having been served with a subpoena. The undertaking has been held to apply where documents have been obtained pursuant to an Anton Piller order: Crest Homes PLC v. Marks and ors. (supra). 11. The answer to these two questions depends, in large measure, upon the true role of a liquidator and the purpose of an examination pursuant to s.541. The principal task of the liquidator, in the present context, is to collect and realize the assets of the plaintiff, discharge its debts and liabilities and pay any balance, after payment of all costs and expenses to the members of the plaintiff according to their rights and interests or otherwise as provided in the articles: McPherson: The Law of Company Liquidation (3rd Ed.) at p.1. An examination pursuant to s.541 is an important procedure which may facilitate the liquidator in the discharge of his functions. Mason CJ in Hamilton v. Oades (1989) 166 CLR 486 discussed the purpose of such an examination, at pp 496-497:-
    "There are the two important public purposes that the
    examination is designed to serve. One is to enable the
    liquidator to gather information which will assist him in the
    winding up; that involves protecting the interests of creditors.
    The other is to enable evidence and information to be obtained
    to support the bringing of criminal charges in connexion with
the company's affairs: Mortimer v. Brown (1970) 122 CLR 493 at
    pp 496 and 499. Sub-section (2)(a) and (b) emphasizes the high
    public importance of these purposes. The examination is
    designed to elicit, among other things, evidence and information
    relating to the question whether the witness 'has been, or may
    have been, guilty of fraud, negligence, default, breach of
    trust, breach of duty or other misconduct in relation to' the
corporation." 12. In obtaining the orders pursuant to s.541 for the various persons to attend for examination and for the documents to be produced, in effect by Arthur Young and Peats, the liquidator was employing the first of those two public purposes. Upon completion of the examinations and after perusal and consideration of the documents produced, he was then able to consider what action to take to collect and realize the assets of the plaintiff. Hence the action against Arthur Young and this action. Whilst I have not found any authority directly on point, I think it follows from the cases to which I have referred and other cases cited in argument that the implied undertaking exists wherever the coercive power of the court has been employed to enable a person to obtain the documents of another. The nature of the coercive power is of no significance. So, I take the view that the undertaking was imposed when the liquidator and his legal advisers came into possession of the documents which were compelled to be produced to the court pursuant to s.541. 13. The next question is whether the liquidator or his legal advisers would be in breach of the undertaking and therefore in contempt if the documents are discovered to the defendants in this action and inspection is permitted. The undertaking is not to use the documents for a collateral or ulterior purpose. The use of the documents for the purpose of getting in and realizing the assets of the plaintiff in the liquidation or winding up process could hardly be described as a collateral or ulterior purpose. The liquidator identified a cause of action against the defendants and resolved to pursue it. Having done so the plaintiff, through the liquidator and its own legal advisers, is obliged to discover all relevant documents and permit inspection of them. In doing so, it is acting in pursuance of the recovery and realization of an asset. This conclusion accords with the reasoning of Byrne J in Grocon Ltd. v. Alucraft Pty. Ltd. (In Liq.) (1992) 10 ACLC 1,127 and Cole J in Spedley Securities Ltd (in liq) and Another v Bank of New Zealand (1991) 6 ACSR 331. In Grocon the liquidator had disclosed to a creditor documents obtained in the discovery process so that the creditor could make an informed decision as to whether to fund the litigation. Byrne J appears to have accepted that there was an implied undertaking but held that the documents had not been used for an ulterior or collateral use. He went on to say, at p.1,129:-
    "In principle, it is perfectly proper for a liquidator to use
    discovered material in the discharge of the statutory function
    of determining whether to proceed with litigation in which the
    company is engaged at the commencement of the winding-up: see
    Corporations Laws.477(2). This is a decision which the
    liquidator must make based on legal advice from his own lawyers
    and perhaps in consultation with creditors. 14. In my opinion, it is proper also for the liquidator to seek funding from a creditor and for that purpose to provide to the legal advisors, of the creditor such material as is necessary for them to advise their client. Such conduct is consistent with the proper conduct of the litigation and, indeed, of the liquidation." 15. In Spedley's case Cole J said, at p.347:
    "My view is that a liquidator is entitled to use information,
    documents and statements for the purpose of subsequent
    proceedings in the winding up where the information or documents
    are obtained pursuant to s 541. Were it otherwise, the public
    purpose for which s 541 is enacted may be stultified." 16. Consequently, in my view, whilst the undertaking was imposed upon the liquidator and the plaintiff's solicitor and counsel, discovery to the defendants and permitting them to inspect the documents is not a breach of the undertaking. Also, it follows that the plaintiff and its legal representatives would not be in breach of the undertaking upon tendering any of the documents at the trial of this action. 17. Mr. Rydon, who appeared for Peats, raised further objections to the use of the documents provided by his clients. He contended that many of the documents were not relevant to any issue in this action and should not be discovered by the plaintiff to the defendants. Consequently there should not be a ruling as sought by the plaintiff. The obligation to make discovery is on the plaintiff, R.58 of the Supreme Court Rules 1987. There is also an obligation upon its legal advisers to ensure that it gives complete discovery: Ferguson and Anor v. Mackaness Produce Pty. Ltd. (1970) 2 NSWR 66 per Macfarlan J. at p 68 and Woods v. Martins Bank Ltd and Anor (1959) 1 QB 55 per Salmon J. at p 60. In both of those cases the emphasis was given to the true role of the legal adviser. Salmon J expressed that role as follows:-
    "No doubt the defendants' solicitors explained to their clients
    that they must disclose all relevant documents which were or had
    been in their possession. The solicitors' duty, however, does
    not stop there. It cannot be too clearly understood that
    solicitors owe a duty to the court, as officers of the court,
    carefully to go through the documents disclosed by their clients
    to make sure, as far as possible, that no relevant documents
have been omitted from their clients' affidavit." 18. Subject to the procedures available for a party to challenge the sufficiency of discovery, the list of documents or affidavit of discovery is conclusive as to the documents which a party must disclose and as to the relevance, for discovery, of the documents a party has in his control: Mulley v. Manifold (1959) 103 CLR 341 per Menzies J at p 343. No doubt the role of the legal adviser is a reason for treating the discovery as conclusive. Of course, if discovery is more extensive than relevance requires, no harm is done. The other party has too many documents but is not deprived of the knowledge of documents which bear upon issues in the case or which may reveal fruitful lines of inquiry. 19. It is perhaps only in the realm of discovery from strangers to the litigation that the production of documents which do not pass the relevance test may be challenged. However, even then the stranger has no interest in the issue of relevance: Casley-Smith and Ors v. District Council of Stirling and Anor (1989) 51 SASR 447 per White J at p 457. 20. Here the plaintiff has made discovery and proposes to permit inspection because its legal advisers, in discharge of their duty, have concluded that the documents are relevant for the purpose of discovery. I do not think the court can go behind that decision. It is in the very nature of the discovery process that the court and the parties to litigation must rely upon solicitors to make the judgment as to whether or not a document is relevant. Arthur Young and Peats cannot challenge it. 21. I turn now to the documents, other than those produced at the s.541 examinations which were discovered in the action against Arthur Young by Arthur Young and Peats the liquidator. 22. There can be no doubt that the plaintiff's solicitors and counsel are bound by the undertaking with respect to the other documents discovered in the action against Arthur Young. The cases suggest that a party should only be released from the undertaking in special circumstances. In Crest Homes PLC v. Marks and ors. (supra), it was said that the court would not release a party from the undertaking or modify such undertaking "save in special circumstances and where the release or modification will not occasion injustice to the person giving discovery ... each case must turn on its own individual facts": Lord Oliver at p.1083. I agree with the observations of Burchett J in Holpitt Pty. Ltd. v. Varimu Pty. Ltd. and Ors. (1991) 103 ALR 684 as to the practical significance of this test. At p 687 he said:-

    "In my opinion, the court's duty, in an application of this
    kind, is to consider whether the applicant has shown some
    circumstance which takes the matter out of the ordinary course,
    according to which production of documents pursuant to an
    obligation to make discovery involves the implied undertaking to
    the court; and, if so, whether an exercise of the court's
    discretion in favour of the application would be in the
interests of justice." 23. It would plainly be contrary to the interests of justice for the plaintiff to have in its possession documents discovered by Arthur Young and Peats which the plaintiff's legal advisers considered relevant for the purposes of discovery and some of which the plaintiff proposes to tender at the trial and for the defendants to be denied inspection of them. I have not found it necessary to consider whether the use of documents by tendering them at the trial of the action against Arthur Young necessarily excludes them from the implied undertaking. The plaintiff should have leave to allow the defendants to inspect, and take copies of the documents, subject to any order to the contrary due to questions of confidentiality. 24. It was contended that some of the documents may reveal confidential information about clients of Peats and about the auditing methodology of Peats which should not be made available to the defendants who are market rivals. No specific documents were identified in either context. In Alliance Petroleum Australia N.L. and Ors v. The Australian Gas Light Company (1983) 34 SASR 215 the tension between proper discovery in the interests of administration of justice and preservation of confidentiality of information was considered by the Full Court. King CJ and Wells J adopted the view of the primary judge, Bollen J, that the risk to confidentiality must be tolerated in the interests of administration of justice. However, that is not to say that any problem of confidentiality is to be ignored. King CJ said in the Gas Light case, at p.239: "One can only express the hope that every proper effort will be made to protect the interests of the witnesses in the confidentiality of the information in the documents." 25. In that case the court was concerned with the production of documents in answer to subpoenas duces tecum but the observations there made apply equally to discovery of documents of a stranger, often referred to as third party discovery, during the course of inter partes litigation or as has occurred here. Should the possibility exist that the secrets of Peats, or Arthur Young, or their clients, be disclosed during the inspection process, the parties should take steps to protect such confidences so far as is consistent with the discovery and inspection process. If the parties cannot agree as to appropriate procedures, or as to whether a particular document may be inspected, Peats and Arthur Young may apply for appropriate orders. Should that occur, they will have to identify the documents and the reasons for their concerns. 26. I have not overlooked Mr. Whitington's argument that Arthur Young and Peats are prevented from raising the issue of confidentiality at this stage with respect to those documents produced at the s.541 examinations. He contended that any objection had to be made at the time documents were produced to the court and it is now too late to do so. At this stage I have not thought it necessary to decide whether that argument should be accepted. Having concluded that the undertaking is implied in both situations, it may be that a party can disclose confidential information contained in documents, bearing in mind the purposes of a s.541 examination, and remain at liberty to object to production to others in subsequent proceedings. That issue can be resolved if necessary. 27. Lastly, it was contended that this application should be refused as it should have been made to the Master who conducted the s.541 examinations. Such a contention can only be made with respect to the documents produced at those examinations. I was referred to Holpitt's case (supra). In that case Burchett J was concerned with an application by a party for leave to use documents which had been discovered in one action in the Federal Court in another action in the same court. Burchett J said, at p.685:-
    "It seems to me that the notice of motion should properly have
    been taken out in the proceedings in which the implied
    undertaking to the court was given. This is the course which
    was pursued in Crest Homes, as appears at 854. However, the
    parties were in agreement that I should deal with the matter on
    the footing that the motion was properly before me. As all the
    relevant proceedings were brought in the Federal Court, there
    seems to be no problem about this." It was made plain that neither Arthur Young nor Peats consented to the present applications being heard in this action. 28. The s.541 examinations were conducted in this Court and the action against Arthur Young was tried in this Court. Like Burchett J, I can see no reason why the application of the plaintiff cannot be made in these proceedings. There is no purpose in requiring the matter to be heard by the Master who conducted the s.541 examinations or the judge who tried the action against Arthur Young. It is convenient to seek the ruling and appropriate order in the current proceedings, particularly as there is no issue as to the standing of Arthur Young and Peats. 29. I rule that the plaintiff and its legal representatives are not in breach of an implied undertaking in making discovery to the defendants of the documents produced at the s.541 examinations and in permitting the defendants to inspect and take copies of them. I give leave to the plaintiff to discover to the defendants the other documents discovered by Arthur Young and Peats in the action against Arthur Young and to permit the defendants to inspect and take copies of them. 30. I give liberty to the parties to this action and to Arthur Young and Peats to apply and, in particular, to apply for orders or directions as to discovery and inspection of documents in respect of which a claim of confidentiality is made. 31. I adjourn the question of costs for further consideration.