Thorlock International Ltd v Keenfern Pty Ltd - [2002] WASC 131

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: THORLOCK INTERNATIONAL LTD -v- KEENFERN PTY LTD [2002] WASC 131

CORAM: MASTER BREDMEYER

HEARD: 9 MAY 2002

DELIVERED : 31 MAY 2002

FILE NO/S: COR 47 of 2002

BETWEEN: THORLOCK INTERNATIONAL LTD (ACN 071 648 309)
Plaintiff
AND
KEENFERN PTY LTD (ACN 003 863 376)
Defendant

Catchwords:

Statutory demand - Application for discovery prior to determination of statutory demand

Legislation:

Corporations Act, s 459G

Result:

Application allowed

Category: A

Representation:

Counsel:

Plaintiff: Mr M L Bennett
Defendant: Ms K A Vernon

Solicitors:

Plaintiff: Bennett & Co
Defendant: Metaxas & Vernon

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

Eyota Pty Ltd v Hanave (1994) 12 ACLC 669
Robowash Pty Ltd v Robowash Finance Pty Ltd [2001] WASC 112

Case(s) also cited:

Beecham Group Ltd v Bristol Myers Co [1979] VR 273
Bell Resources Ltd v Turnbridge Pty Ltd, unreported; SCt of WA (Nicholson J); Library No 7185; 1 July 1988
Eng Mee Yong v Letchumanan [1980] AC 331
Kent Cole Concessions Ltd v Duduid [1910] 1 KB 904
Kid Crew v Vinogradov [2000] NSWSC 446
Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1942] 2 VR 290
Mulley v Manifold (1959) 103 CLR 341
Re Morris Catering (Australia) Pty Ltd [1993] 11 ACLC 919
Tanton Nominees Pty Ltd v Brockenhurst Nominees Pty Ltd, unreported; SCt of WA; Library No 980325; 15 June 1998

MASTER BREDMEYER: This is an application by the defendant for discovery of particular documents prior to the determination of an application to set aside a statutory demand.
By way of background, the plaintiff has applied to set aside a statutory demand served on it by the defendant in the sum of $55,000. The defendant Keenfern Pty Ltd (Keenfern), is the private company of Mrs Olga Sawtell. She is the sole director and shareholder of the company. Her company contracted her services to the plaintiff under a consultancy agreement. Under that agreement, she was to be the plaintiff's chief executive officer and was to be paid $300,000 per annum. She was terminated under that agreement by a letter sent on 30 November 2001. Under the agreement, she is entitled to six months' notice of termination. Her statutory demand is for the following sums:
"Description of Debt  Amount of Debt
Consulting Fees due to Keenfern Pty Ltd for
December 2001 and January 2002 of $25,000          $50,000
Per month plus GST of $2,500.00 per month           $ 5,000
$55,000"
I assume that is for two months' consultancy fees in lieu of notice.
The plaintiff has filed an affidavit of Anthony Denis Nulsen, sworn 22 February 2002, in support of its application to set aside the demand. The affidavit does not dispute the sum claimed in the demand, but says that the plaintiff has offsetting claims which exceed that sum. There are four offsetting claims and I will quote pars 18 to 24 of the affidavit dealing with the first claim.
"Patents
18.The Plaintiff contends (and I know from my own personal knowledge) that Ms Sawtell's advice to the Board in 1999 and until in or about early 2001 was that most of the Plaintiff's products and processes and intellectual property should not be patented by the Plaintiff. Ms Sawtell continually advised the Plaintiff that the Plaintiff's intellectual property was best protected, not by patents, but simply by the confidentiality agreements entered into with the employees/contractors engaged by the Plaintiff for the development of such products and processes and by maintaining strict confidentiality in the Plaintiff's operations. Ms Sawtell's advice to the Plaintiff was to only register a 'strategic few' of the patents, being those most difficult to copy or 'core to the enhanced developments'. Ms Sawtell referred to this as the 'Kentucky Fried Chicken' strategy which, I understood from my conversations with her, was a referrence [sic] to the fact that, as Ms Sawtell told me, Kentucky Fried Chicken had adequately protected its intellectual property rights for years without patents simply by maintaining strict confidentiality and using the general law of intellectual property of confidentiality.
19.In providing this advice to the Board, Ms Sawtell consistently referred to the fact that, in her view, applying for patents over intellectual property only sought to highlight and draw attention to those processes and did not have the benefits that the layperson thought flowed from patenting intellectual property.
20.Now produced to me, annexed hereto and marked with the letters 'AN6' is a true copy of a memorandum to all Board members from Ms Sawtell dated 15 December 1999.
21.Ms Sawtell consistently referred, both to me and in my presence, to the fact that she had attained an Honours Degree in Law, with a specialist area in patents and trade marks.
22.I recall that in or about the middle of 2001, Ms Sawtell changed her view in this regard after a meeting she had with British Technology Group in London. In or about early 2000, I had tried to raise with Ms Sawtell her intellectual property strategy and the risk that this involved. In fact, Ms Sawtell's failure to obtain or cause to obtained patents over the intellectual property rights held by the Plaintiff has resulted in other overseas interests applying for patents over products and processes relevant to the Plaintiff s product. Some of those patents are currently held, inter alia, by a United Kingdom company, British Technology Group, and a United States of America company, Quantum Magnetics.
23.The Plaintiff regards Ms Sawtell's (and thereby the Defendant's) conduct as negligent, alternatively a breach of the contractual duty of care owed by the Defendant to the Plaintiff.
24.As a direct result of Ms Sawtell's failure to patent the intellectual property in a timely and proper fashion, the Plaintiff has had to negotiate with, for instance, the British Technology Group as to the conditions upon which the Plaintiff may be allowed to use the intellectual property the subject of those patents, which is intellectual property the Plaintiff itself developed."
Mrs Sawtell has filed an affidavit, sworn 21 March 2002, in support of the defendant's application for discovery. In relation to the offsetting claim to do with patents she says this:
"14.As to paragraphs 18, 19, 20, 21, 22, 23 and 24, I require inspection of the following documents before I can properly answer those allegations:
14.1all files pertaining to the patents;
14.2patent management committee minutes of meetings;
14.3legal files pertaining to the patents as advice and assistance was obtained from Wray & Associates Patent Attorneys;
14.4all interoffice memos, directions, opinions from and to Warwick Chisholm, the plaintiff's patents manager;
14.5a file I maintained in my filing cabinet entitled "Patents';
14.6minutes of Board meetings from July 1998 to 30 November 2001."
I consider Mrs Sawtell is being very coy here. She was the chief executive officer of the plaintiff and she was the one in charge of protecting its intellectual property. She also has an Honours Degree in Law with a specialist area in patents and trademarks. I consider she would be able to say much in response to the plaintiff's claim on patents as set out in Mr Nulsen's affidavit without the necessity for seeing the documents sought. On the other hand, her response will be more detailed and, arguably, more credible, if she gets discovery of these documents and annexes relevant documents to her affidavit to buttress her evidence.
An order for discovery under O 26 of the Supreme Court Rules is available in any civil proceeding. It is not confined to an action commenced by writ: Seaman [26.7.1].
Discovery is not normal in the statutory demand jurisdiction. It should seldom be required. It is meant to be a summary jurisdiction. The Court is not deciding matters in dispute on the balance of probabilities. In deciding whether there is a genuine dispute or a genuine offsetting claim, the Court is deciding whether there is "a plausible contention requiring investigation" or "a serious question to be tried": Eyota Pty Ltd v Hanave (1994) 12 ACLC 669. The onus of proof is not very high. Therefore, discovery should not normally be given in the interests of promoting the just determination of litigation, disposing efficiently of the business of the court and saving costs: O1 r 4B. In the same way, discovery is seldom allowed in a summary judgment application. I have granted discovery to a defendant in that jurisdiction on a few occasions. For example, I have granted discovery of bank statements to a defendant in a mortgage action who claimed he had made payments which had not been credited and who did not have a full set of bank statements.
The only case cited to me on discovery in the context of the statutory demand regime, is that of Robowash Pty Ltd v Robowash Finance Pty Ltd [2001] WASC 112, a decision of Master Sanderson. In that case, the debtor had applied to set aside a statutory demand but it had its application dismissed for failure to serve it properly on the creditor. The debtor then faced a winding‑up application and sought leave, under s 459S, to challenge the winding‑up application on the grounds that the demand was bad. As part of that application, the debtor sought discovery of certain documents. Its application was refused. Master Sanderson thought that the debtor (Robowash Finance Pty Ltd) would not be harmed by that refusal. I quote from part of par 17 of that decision:
"In dealing with this application it must be remembered what it is that Finance has to establish to satisfy the court that the debt of $89,000 should not be included in its liabilities when the court assesses whether or not it is insolvent. The test is the same as that to be found in s 459G - Finance must show that there is a bona fide dispute as to the debt. If Finance is able to establish that it does not have all the necessary documents, that further relevant documents exist and that it cannot fully assess Robowash's claim without access to those documents, then it will have established that there is a bona fide dispute as to the debt. In other words, by establishing circumstances that justify an order for discovery Finance would have established enough to show a bona fide dispute. No order for discovery is necessary for Finance to achieve its aims."
I agree with what Master Sanderson said in that extract, but I consider the case is distinguishable. This application for discovery is not by the debtor seeking to establish a genuine dispute or an offsetting claim, it is by the creditor seeking to refute offsetting claims raised by the debtor. Although, as I have said above, I consider the defendant was capable of giving a substantive response to the plaintiff's claims on the patents issue, and has chosen not to do so, I, nevertheless, consider that the discovery sought could be of considerable benefit to the defendant. It may be, for example, that minutes of board meetings or minutes of the Patent Management Committee might show that Mrs Sawtell's policy of applying only for a few patents, was endorsed fully by other board members. On balance, I think I should grant this application.
I think similar orders for discovery should be made in relation to the other three offsetting claims. In the second offsetting claim which deals with funding mandates, and is set out in pars 25 to 28 of Mr Nulsen's affidavit, Mrs Sawtell has again chosen not to say anything substantive about the allegations, but rather to require discovery of certain documents first. Those documents include board minutes and I can see how relevant they could be. One of the allegations made against Mrs Sawtell is that she appointed a financial adviser, Johnson Taylor Potter Corporate Finance Pty Ltd, to raise finance on behalf of the plaintiff, without first informing the board or obtaining the board's authority for that appointment. If, for example, correspondence or board minutes show that the board authorised that appointment, then that would rebut the plaintiff's allegations.
In relation to the third and fourth offsetting claims, Mrs Sawtell has chosen to say a little in rebuttal of the claims, but has also requested discovery of certain documents in order to "properly answer" the allegations.
In summary, I propose to grant the discovery sought, but I consider the costs of the application should be reserved to the Master hearing the substantive application. I do that because I think the defendant should be put at risk as to a special costs order being made against the defendant. I say that because Mrs Sawtell has chosen, on these four offsetting claims, to say nothing, or very little on the merits of the claim. I consider she is capable of saying much more about them by virtue of her appointment as chief executive officer and her intimate involvement in the four aspects of the plaintiff's business under scrutiny. As I have said, she has chosen, for tactical reasons, and no doubt on legal advice, to apply for discovery first. If, on the determination of the substantive application, the Master decides that this discovery was unnecessary, then the costs of it should be visited against the defendant, possibly on a solicitor‑client basis.
I will hear the parties on the form of orders.