O’Connor v O’Connor

1. [1]

   McCOLL JA: I agree with Simpson AJA.

2. [2]

   MACFARLAN JA: I agree with Simpson AJA.

3. [3]

   SIMPSON AJA: By Uniform Civil Procedure Rule 5.3 a court may, if certain conditions are met, order a person who is not yet a party to proceedings (“the prospective defendant”) to give discovery of documents or other things in his, her or its possession that would enable another person (potentially a plaintiff) to decide whether or not to commence proceedings against the prospective defendant.

4. [4]

   By summons filed in the Equity Division of the Supreme Court on 5 May 2017 the present appellants (Morgan O’Connor and Michael Stack) sought such an order against John O’Connor, Diona Pty Ltd (“Diona”) and Calibre Group Ltd (“Calibre”). On 30 November 2017 the primary judge dismissed the summons: O’Connor v O’Connor [2017] NSWSC 1648.

5. [5]

   By leave granted on 3 May 2018 the appellants appeal against that decision so far as it concerns John O’Connor and Diona. They do not appeal against the decision so far as it concerns Calibre. Since the decision was a discretionary one, and relates to an issue of practice and procedure, the appellants must demonstrate error of the kind specified in House v The King (1936) 55 CLR 499; [1936] HCA 40. The respondents have filed Notices of Contention, contending that the decision should be affirmed on grounds additional to those stated by the primary judge. The grounds of the Notices of Contention are limited in scope.

6. [6]

   For the reasons that follow I am of the opinion that the appeal should succeed.

Factual background

1. [7]

   The relevant facts are, for the purposes of these proceedings, largely undisputed.

2. [8]

   Diona was incorporated in 1980. It carried on business in the construction industry. Of its four issued shares, three were held by the first respondent (John O’Connor) and one was held by his wife, Margaret O’Connor (who is not a party to the proceedings). Between 1989 and 2005, another couple, John and Patricia Doherty, held shares and directorships in Diona, but those arrangements came to an end in 2005, and are presently immaterial. From 2005 the shareholding was as it had been in 1980.

3. [9]

   The first appellant, Morgan O’Connor, is John O’Connor’s brother. The second appellant, Michael Stack, was a family friend. In 2005 Morgan O’Connor and Michael Stack each contributed to Diona $150,000 in circumstances in which, they allege, each became entitled to a shareholding of 8.33% (or 1/12th) of Diona. No shares were ever issued to them. In 2006 both Morgan O’Connor and Michael Stack were appointed directors of Diona. David O’Connor, who is John O’Connor’s son, become involved in the business and, in 2008, was appointed General Manager. He did not ever acquire shares.

4. [10]

   Between early 2009 and early 2013 negotiations over the issue of shares to Morgan O’Connor and Michael Stack took place. By the middle of 2013 the parties were in dispute. At about that time Morgan O’Connor and Michael Stack were removed as directors by a meeting of shareholders (that is, John and Margaret O’Connor) without prior notice to them.

5. [11]

   On 6 November 2014 Michael Stack commenced proceedings in the Supreme Court against Diona and John O’Connor. He sought declaratory relief and orders, inter alia, to the effect that he was a shareholder and had an interest in Diona, asserting a contractual entitlement to the issue of shares representing 8.33% of the ordinary share capital of Diona. Morgan O’Connor did not himself commence proceedings, but it has always been understood that he made similar claims and that his entitlement was identical to any that Michael Stack established. Michael Stack’s proceedings came to be known as “the Diona Proceedings”.

6. [12]

   At about the same time Diona became involved in litigation against a number of other entities.

7. [13]

   The disputes between Diona and Morgan O’Connor and Michael Stack, and the other parties, were resolved by a “Deed of Mutual Settlement and Release” (“the Deed”), which is undated, but which is agreed to have been executed on 29 July 2015. Relevantly, Morgan O’Connor and Michael Stack settled their claims against John O’Connor and Diona by Diona paying them, respectively, the sums of $1,380,000 and $1,680,000 “in full and final settlement of the Diona Proceedings”.

8. [14]

   Relevantly, the Recitals to the Deed included the following:

9. [15]

   Importantly for the present proceedings, the Deed contained the following release clauses:

10. [16]

    “Claim” is defined in the Deed as:

11. [17]

    On or about 1 October 2015, John O’Connor transferred one of his shares to Margaret O’Connor. On or about 16 November 2015 all shares in Diona were transferred to Calibre, for a purchase price of $45 million. The contract of sale also included an “earn-out provision” potentially amounting to a further $45 million, entitling John O’Connor and Margaret O’Connor, in the event of Diona’s successful performance, to up to a further $45 million.

12. [18]

    The appellants now wish to assert that it is a reasonable inference that, at the time the Deed was executed, at least Diona and John O’Connor had begun negotiations with Calibre and were aware of the potential for the sale; that John O’Connor and Diona owed each of them individually a fiduciary duty, and that, in engaging in the conduct they did, they were in breach of that duty; and that John O’Connor held 8.33% of his shareholding on trust for each of them: and that each was entitled to an equitable interest in Diona to the extent of 8.33% of its value. They sought an account of profits being the difference, in the case of each appellant, between the amount received under the settlement and a 1/12th share of the purchase price under the sale to Calibre: primary judgment (at [15]). For the purpose of determining whether such claims are maintainable they sought orders for preliminary discovery under UCPR 5.3.

Preliminary Discovery

1. [19]

   UCPR 5.3(1) is in the following terms:

2. [20]

   “Claim for relief” is defined in s 3 of the Civil Procedure Act 2005 (NSW), broadly and inclusively, as including:

3. [21]

   As can be seen from the terms of the Rule, an order may be made against a prospective defendant where certain things appear to the court. Those things are:

4. [22]

   If it appears to the court that all of those circumstances exist, the court may order the prospective defendant to give discovery to the applicant of all documents that are or have been in his, her, or its possession and that relate to the question of the entitlement of the applicant to make a claim for relief.

5. [23]

   As was explicitly accepted on behalf of the respondents, the threshold set by the Rule is low: it must appear to the court that an applicant may be entitled to make a claim for relief, and that a prospective defendant may have or have had possession of relevant documents or things, and that inspection would assist the applicant to decide whether to commence proceedings.

6. [24]

   The scope of Rule 5.3 has been considered on a number of occasions. In St George Bank Ltd v Rabo Australia Ltd [2004] FCA 1360, in respect of its former Federal Court counterpart Order 15A, r 6 (which is not identical) Hely J stated a series of propositions as follows:

7. [25]

   I have omitted propositions (c), (d) and (e) as these deal with one of the differences between the Federal Court Rule and Rule 5.3. The Federal Court Rule then provided that an order may be made where:

8. [26]

   Notwithstanding those differences, in Steffen v ANZ Banking Group [2009] NSWSC 666, McDougall J considered the propositions to be “equally applicable” to Rule 5.3.

9. [27]

   In Hatfield v TCN Channel 9 Pty Ltd (2010) 77 NSWLR 506; [2010] NSWCA 69 McColl JA stated the relevant principles as follows:

10. [28]

    All that is required by Rule 5.3 is that it appears to the Court that the applicant may be entitled to make a claim for relief and that the prospective defendant may have or have had in possession relevant documents. To that extent, Rule 5.3 imposes a lower threshold test than the Federal Court counterpart.

11. [29]

    With that reservation, the principles stated by Hely J and McColl JA are uncontroversial.

12. [30]

    It may be emphasised that there is no requirement that an applicant for preliminary discovery establish even a prima facie case for relief; nor is it necessary that an applicant specify with precision the cause of action proposed, although it will be necessary, in order to make it “appear to the court” the applicant “may be entitled to make a claim for relief” that the applicant provide some particularisation of the nature of the relief in contemplation. That is so, not only to enable the court to form a view about whether the applicant may be entitled to make a claim for relief, but also to enable the prospective defendant, if an order is made, to determine which, if any, documents in possession are to be discovered.

The proceedings at first instance

1. [31]

   The summons filed in the Supreme Court identified five classes of documents that the appellants sought from all prospective defendants. Essentially, these can be seen to be documents relating to the transaction for the sale of the Diona shares to Calibre, and include documentation evidencing the negotiations that resulted in that transaction. Further documents posited as in the possession of Diona and/or Calibre concerned information provided to the Australian Securities and Investments Commission by Diona and/or Calibre in relation to the sales. The summons nominated a further three classes of documents the appellants sought from Calibre on the same subject matter.

2. [32]

   Attention should be drawn to two features of the orders sought against John O’Connor and Diona. The first is that they specifically included documents that evidenced communications with Margaret O’Connor and David O’Connor (neither of whom was a party to the application). And they specified 1 July 2014 to 30 November 2015 as the outer boundaries of the time period of the documents sought. The rationale for these dates was that such documents could potentially cast light on the value of the “earn-out figure”, (that is, the quantum of any claim) and therefore assist the appellants in deciding whether or not to commence proceedings as envisaged by r 5.3(1)(a).

3. [33]

   A final order sought was, in effect, dispensation from the operation of UCPR 21.7, which precludes use of discovered documents for collateral purposes. The summons and the evidence made clear that the appellants anticipated using any such documents, if considered worthwhile, to initiate proceedings against Margaret O’Connor and/or David O’Connor, as well as John O’Connor, Diona and Calibre.

4. [34]

   Evidence in affidavit form was given by each appellant, and by solicitors for the parties. The appellants gave evidence (unchallenged) that, at the time they entered the Deed, they were unaware that there were any discussions concerning a sale of Diona. They contended that, had they known of that potential sale, they would not have agreed to accept the settlements they did. No deponent was cross-examined. The factual matters were not disputed. The evidence included evidence of correspondence by which the appellants had sought to obtain the relevant information from the respondents without success.

5. [35]

   There was no issue that the appellants had made reasonable enquiries. John O’Connor disputed that the appellants were unable to obtain sufficient information to decide whether to commence proceedings. There was no issue that the respondents had or may have had possession of relevant documents. No issue was raised concerning whether inspection of the documents would have assisted the appellants to make “the decision concerned” (that is, whether or not to commence proceedings).

6. [36]

   In their written submissions, the appellants nominated the proceedings they contemplated as proceedings against John O’Connor and Diona for breach of fiduciary duty arising out of an asserted trust relationship. They contended that, in the circumstances, the evidence established that they had (or may have had) an arguable case that either John O’Connor or Diona was, or both were, trustees of the shares they had been promised but had not received; that John O’Connor, as director of Diona, and Diona in its own right, owed each of them a fiduciary duty, that that duty included a duty of disclosure of any contemplated or anticipated sale of Diona to Calibre, and that their failure to make such a disclosure amounted to a breach of their fiduciary duty.

7. [37]

   In relation to Calibre, the appellants asserted that the evidence was sufficient to make it appear that they had an arguable cause of action for knowing receipt of trust property, or knowing participation in a dishonest breach of fiduciary duty.

8. [38]

   In written submissions filed on behalf of John O’Connor (who was separately represented before the primary judge, but not in this Court), two reasons for opposition to the orders were nominated. The first was that the application was an abuse of process, being deployed “in no small part” for the purpose of enabling the appellants to decide whether to sue Margaret O’Connor or David O’Connor, neither of whom was a party to the application (para 3). The second was that the Deed constituted a complete answer to any claim that either appellant might make against John O’Connor. This was said to go, not to whether it appeared that either appellant might have a claim against John O’Connor, but to the exercise of the court’s discretion (para 4).

9. [39]

   John O’Connor accepted that the appellants had insufficient information to decide whether to commence proceedings against him. However, he contended that the missing information was narrowly confined to what he knew before the Deed was executed. Otherwise, he contended that each appellant was already in possession of sufficient information to decide whether or not to sue him. This appears to have been advanced to support the proposition that the application was an abuse of process, designed to assist the appellants to commence proceedings against Margaret and David O’Connor.

10. [40]

    As a secondary matter, it was argued that the category of documents sought was too broad.

11. [41]

    Diona and Calibre were jointly represented. In their written submissions, they argued that the claims against them were derivative, depending on those brought against John O’Connor. They argued that, if discovery were ordered against John O’Connor, the class of documents sought was unduly broad and ought to be restricted. They then argued, on a discretionary basis, that discovery ought to be refused as too intrusive and disruptive to their business.

12. [42]

    A significant basis of the appellants’ claim against John O’Connor and Diona lay in the decision of this Court in Brunninghausen v Glavanics (1999) 46 NSWLR 538; [1999] NSWCA 199. It is convenient at this stage to say something about that decision, the facts of which bear close resemblance to those of the present case.

13. [43]

    In Brunninghausen, the plaintiff (Mr Glavanics) and the defendant (Mr Brunninghausen) were brothers-in-law (their wives were sisters). In 1976 Mr Brunninghausen formed a company (Skima Imports Pty Ltd) which imported ski equipment. He was assisted by Mr Glavanics, who spoke German. As a reward, Mr Glavanics was issued with 1,000 fully paid shares. Mr Brunninghausen held the remaining 5,000 shares. They were the only directors. Mr Glavanics formed another company, Skima Sportswear Pty Ltd, in which he held 4,750 shares and Mr Brunninghausen held 250 shares (at no cost to him).

14. [44]

    Disputes arose between the two men. Although Mr Glavanics remained a shareholder and director of Skima Imports, and Mr Brunninghausen remained a shareholder of Skima Sportswear, for some time there was no contact between them. Mr Glavanics’ directorship of Skima Imports was no more than nominal and he was not provided with its information or accounts.

15. [45]

    The disputes between the two men caused concern to their common mother-in-law, the mother of their wives. She intervened and pressed the parties to “resolve their differences and restore harmony in the family”. Both were influenced by this intervention. They began to negotiate the sale of Mr Glavanics’ shares in Skima Imports to Mr Brunninghausen.

16. [46]

    While the parties were still in negotiation, a third person made an approach to Mr Brunninghausen with a view to purchasing the business of Skima Imports. Mr Brunninghausen began negotiations with him, without disclosing to Mr Glavanics that the approach had been made, or that he was considering offers. Eventually, Mr Glavanics accepted an offer put to him on behalf of Mr Brunninghausen: he said that he did so “for the sake of family harmony”.

17. [47]

    Subsequently, Mr Brunninghausen sold the assets of Skima Imports, and shares in two other companies controlled by him.

18. [48]

    Mr Glavanics brought proceedings in the Equity Division of the Supreme Court, claiming, inter alia, equitable compensation for breach of fiduciary duty: Glavanics v Brunninghausen (1996) 19 ACSR 204.

19. [49]

    Bryson J upheld the claim. In doing so, he said:

20. [50]

    Mr Brunninghausen appealed. This Court upheld the decision. The issue on appeal was whether Mr Brunninghausen, as director of a company, owed a fiduciary duty to a shareholder (Mr Glavanics). Handley JA, with whom Priestley and Stein JJA agreed, accepted that, as a general rule, a director occupies a fiduciary position in and owes a fiduciary duty to the company (and not to shareholders). He set out the rationale for that (at [40]-[41]). He held, however, that an exception to the general rule exists, that such an exception was established in that case, and that, in the circumstances, Mr Brunninghausen did owe a fiduciary duty to Mr Glavanics (at [100]). The test was whether “the vulnerable party” is “entitled to expect” a particular standard of conduct – as distinct from whether there is in fact, such an expectation (at [101]). At [54], Handley JA set out the circumstances of that case relevant to that finding. His Honour said:

21. [51]

    His Honour reviewed a large number of decisions. One of these, of which mention must be made, was a decision of the United States Supreme Court, in which that court held that “the special facts” of that case took it outside any general rule that directors did not owe a fiduciary duty to shareholders when purchasing their shares: Strong v Repide [1909] USSC 119; (1909) 213 US 419 (at [110] of Brunninghausen).

22. [52]

    At [98] he noted that Mr Glavanics was almost totally powerless, that he had no legal right as a shareholder to inspect the company’s books of account or financial records; that he was entitled to copies of the annual accounts but realistically chose not to exercise it, and that, in any event, those alone would not provide any real guide to the value of his shares. He had no effective right to be informed of the negotiations for the sale of the company’s business.

23. [53]

    His Honour then said:

24. [54]

    He then held (at [100]) that it was open to the Court to hold that the office of director in a proprietary company is, at best for some purposes, a fiduciary one in relation to the shareholders.

25. [55]

    It was principally on the basis of the decision in Brunninghausen that the appellants in the present case argued that it ought to appear to the court that they may have been entitled to make a claim for relief against the respondents.

The primary judgment

1. [56]

   The primary judge dismissed the application.

2. [57]

   His Honour observed that the claim could only succeed if the possibility of a sale to Calibre was known to John O’Connor before the date of the Deed. He considered that there was sufficient cause to believe that it may have been. His Honour accepted that the appellants did not know, and could not otherwise find out, whether it was in fact the case that the possibility of a sale to Calibre was known to John O’Connor before the settlement. He identified “the critical question” as:

3. [58]

   He then turned to Brunninghausen, and noted that a company director does not automatically owe fiduciary obligations to the company’s shareholders in purchasing their shares. He said:

4. [59]

   He said:

5. [60]

   A second basis for rejection of the claim was that, by entering into the Deed, the appellants surrendered their claims with respect to Diona (at [24]). His Honour said:

6. [61]

   He therefore concluded that the appellants had failed to establish that there was “reasonable cause to believe” that John O’Connor “was obliged to disclose any approaches from Calibre before entering into the Deed” (at [30]). At [50], he applied the same reasoning to the application so far as it sought discovery against Diona and Calibre.

7. [62]

   Notwithstanding his primary conclusion, the primary judge went on to consider whether, had he upheld the application in respect of John O’Connor, he ought also make orders in respect of documents held by Diona and/or Calibre. He treated potential claims against them as claims “of accessorial liability”, and saw no basis for such claims (at [52]).

8. [63]

   Against the possibility that those conclusions might be held to be wrong he turned to the question of the breadth of the documents sought. As mentioned above, the appellants’ claims extended to documents post-dating 29 July 2015, the date the Deed was signed. The rationale for this was that such documents might cast light on the value of the “earn-out” figure, and therefore be relevant to the decision whether or not to commence proceedings. After reviewing a number of authorities the primary judge concluded that, while the concept of “being entitled to make a claim” may be broad enough to encompass the availability of defences, it did not extend to questions of quantum (at [42]). Accordingly, even if he had been persuaded to order discovery, he would not have extended it to include documents going to the earn-out figure. It may be inferred that he would have limited the discovery to documents that pre-date 29 July 2015.

9. [64]

   The ultimate conclusion of the primary judge was that the appellants had failed to satisfy him (“make it appear”) that they may be entitled to make a claim for relief. The decision did not depend upon any failure by the appellants to satisfy him of the other components of Rule 5.3. The essential reasons were that the appellants failed to bring themselves within the principle of Brunninghausen (as relevantly “vulnerable” or “at the mercy of” John O’Connor) and that, in any event, the Deed was a complete answer to any such claim and represented a surrender of any rights that the appellants previously had.

The grounds of appeal and the Notices of Contention

1. [65]

   Four grounds of appeal were pleaded. I do not propose to set them out in full. By ground 1 the appellants asserted error in the failure of the primary judge to find, in accordance with the principles stated in Brunninghausen, that John O’Connor and Diona owed them a fiduciary duty. By ground 2 they asserted error in the conclusion that the Deed was a complete answer to any claims the appellants might have contemplated. By ground 4 they alleged error in the conclusion that, even if discovery were granted, he would have excluded documents relevantly only to questions of quantum.

2. [66]

   It seems to me that the appeal can be determined by reference to ground 3, which was, in essence, a complaint that it was inappropriate and premature for the primary judge to conclude that the appellants’ claims could not give rise to rights of action because such a determination necessarily required detailed consideration of the applicable law in the light of all the relevant evidence, and that could not or should not, be undertaken in an application under r 5.3.

3. [67]

   John O’Connor and Diona filed separate Notices of Contention. Each contended that the application for preliminary discovery ought to have been dismissed insofar as it sought production of documents for use in any potential prospective proceedings against Margaret O’Connor and David O’Connor. Curiously, each also contended that:

4. [68]

   Diona pleaded a further ground, that the application against it was predicated on a claim for relief for breach of fiduciary duty arising out of its holding unissued share capital in itself on trust for each appellant but that a proprietary limited company could not hold unissued share capital in itself on trust for a beneficiary.

5. [69]

   Counsel for the appellants relied on a recent decision of the Full Court of the Federal Court of Australia: Pfizer Island Pharmaceuticals v Samsung Bioepis AU Pty Ltd (2017) 351 ALR 103; [2017] FCAFC 193 (the judgment was published the day before judgment in the present case was delivered). Pfizer also concerned a Federal Court counterpart of r 5.3 (not the same as either r 5.3 or the Federal Court rule under consideration in St George Bank). The appellants relied on some general propositions stated by Allsop CJ in para [2] in which his Honour criticised a developing practice of treating applications for preliminary discovery under the relevant rule as:

6. [70]

   In Pfizer the primary judge had rejected an application for preliminary discovery by determining the relative merits of two competing bodies of expert opinion, without cross-examination. That is significantly different from determining whether an undisputed set of facts is or is not within an established legal principle (as is the case here). Nevertheless, the caution expressed by Allsop CJ is apt. It was, in my opinion, only if the appellants’ claims of a fiduciary duty based on their asserted entitlement to an equitable right in Diona were so weak as to be untenable or unarguable that they ought to have been dismissed as not supporting a conclusion that they:

7. [71]

   The appellants’ argument was that the primary judge erroneously distinguished Brunninghausen, which was, in truth it was submitted, factually “quite close” to the present case. It will be recalled that, at [54] of Brunninghausen, Handley JA pithily set out the relevant factors, founding a finding that a fiduciary duty existed, as being:

8. [72]

   With the exception of the third, all of these factors are here present. Counsel for the respondents argued that “a critical feature” in Brunninghausen was:

9. [73]

   Counsel also sought to support the statement by the primary judge that, on the authority of Brunninghausen, it was necessary, in order for the appellants to establish a fiduciary duty, to demonstrate “special facts”. Neither of these propositions is, in my opinion, incontestable. On the contrary, each is highly debatable. The first overlooks the clear statement by Handley JA (at [101]) that the relevant test is not the existence of an expectation in fact, but whether the vulnerable party is “entitled to expect” a particular standard of conduct. I have difficulty in seeing how the intervention of the mother-in-law in Brunninghausen was of such moment as to create a fiduciary duty on the part of Mr Brunninghausen; Indeed, Bryson J, in a passage referred to without disapproval by Handley JA (at [24]), considered the influence of the intervention on the duty to be “extremely slight” (at p 220). I have difficulty in seeing the intervention as a feature sufficient to distinguish Brunninghausen from the present case. And I very much doubt that Brunninghausen is authority for the proposition that “special facts” are required to establish the existence of a fiduciary duty in a director or a company to a shareholder.

10. [74]

    But the correctness or otherwise of these arguments is not presently to the point. Their correctness or otherwise ought to be determined on a fully argued claim for relief, should such a claim be brought. To deny that the appellants “may have been entitled to make a claim for relief” based on Brunninghausen principles is to dismiss at an interlocutory stage what may be a legitimate and arguable case.

11. [75]

    The position is similar in relation to the conclusion that the Deed was a complete answer to any claim the appellants might bring. Such a conclusion depends upon a close examination of the release clauses in the Deed. Senior counsel for the respondents took the court through the Deed, for the purpose of demonstrating that the conclusion was correct. That analysis, while itself clearly arguable, only persuaded me that the conclusion ought not be reached in an application such as was here in question. It is the appellants’ contention that the releases were induced by the very conduct which would be the basis of their claims for relief. There is a circularity in finding that a claim that the appellants surrendered their rights as a result of improper conduct is defeated by the surrender of those rights. At least a release would have to make it clear that it was intended to preclude such a claim. Arguably, the present release did not do that. Alternatively, it is arguable that the release itself is liable to be set aside for breach of fiduciary duty, a possibility which, contrary to the submission of the respondents, is not foreclosed by the manner in which the appellants conducted their case at first instance.

12. [76]

    It is well established that determination of an application under r 5.3 does not involve a determination of the merits of any claim for relief the applicant might propound. But, with respect, that is what his Honour did. That was error in the House v The King sense.

13. [77]

    It also appears to me that, at [30] the wrong test was applied. The primary judge considered that the appellants had failed to establish that there was “reasonable cause to believe” that John O’Connor “was obliged to disclose any approaches from Calibre. But r 5.3 imposes no “reasonable cause to believe” test; nor does it require the applicant to establish that the prospective defendant “was obliged” to do anything. Rather, the test is whether it “appears to the court’ that a cause of action “may” exist.

14. [78]

    The “reasonable cause to believe” test appears to have crept into the debate about the construction of r 5.3 because, in Hatfield, the parties accepted the pre-existing jurisprudence in the area, which included the jurisprudence with respect to the analogous Federal Court rules, specifically the propositions stated by Hely J in St George Bank, and adopted, for example, by McDougall J in Steffen.

15. [79]

    In Hatfield, at [50], McColl JA noted several decisions of the Supreme Court that suggested that the “appears to the court" test is wider than the Federal Court “there is reasonable cause to believe” test. As this demonstrates, close attention needs to be directed to the language of r 5.3.

16. [80]

    For these reasons I would uphold ground 3 of the appeal.

17. [81]

    The question then is what course this Court ought to take. As mentioned at the outset of these reasons, there was no real issue at first instance concerning any of the components of r 5.3 other than whether the appellants had shown that they potentially had a claim for relief. In written submissions John O’Connor argued that the appellants already had access to information, but this does not appear to have been pressed with any degree of vigour.

18. [82]

    The consequence is that this Court is in a position to make the necessary assessment, and exercise the discretion conferred. That discretion should be exercised in favour of the appellants and orders made in accordance with r 5.3.

19. [83]

    Before that is done, it is necessary to refer to ground 4 of the appeal, by which the appellants assert error in the conclusion that r 5.3(1) did not extend to permit discovery of documents relevant only to quantum. On that basis the primary judge would have limited any discovery ordered to documents coming into existence on or before 29 July 2015.

20. [84]

    Counsel for the appellants referred to the decision of White J (as his Honour then was) in Ian Edward Morton & 5 Ors v Nylex Limited & 1 Or [2007] NSWSC 562, in which his Honour said:

21. [85]

    In Garth Barnett Interior Design Pty Ltd v Ellis [2009] NSWCA 193 at [17], Young JA quoted and expressly agreed with that statement. Giles JA identified “the central question” as:

22. [86]

    As counsel recognised, neither of these statements is binding on this Court. In this respect, r 5.3 presents a difficulty of construction. The ultimate order that the Court is empowered to make is an order for the discovery of documents in the possession of the prospective defendant “that relate to the question of whether the applicant is entitled to make a claim for relief”. That is directed to questions concerning the existence of a cause of action. In its terms, it does not appear to relate to the practical decision whether or not to commence proceedings, a decision that will, ordinarily, at least in part, include questions such as whether there exist defences that might defeat the claim, and, importantly, for this discussion, whether a claim would potentially be worthwhile in the sense of yielding an award of damages or other order sufficient to justify the commencement of proceedings.

23. [87]

    That analysis raises a question about the relevance of the closing words of para (a) of r 5.3(1):

24. [88]

    That decision is different from an evaluation of whether a cause of action exists, and will ordinarily be informed by matters beyond the entitlement to make a claim, and extend to defences and quantum. No doubt it was these words that White J, Young JA and Giles JA had in mind when making the statements set out above.

25. [89]

    If the documents required to be produced are limited to those relating to the entitlement to commence proceedings (as in the chaussure) the point of the closing words of para (a) is lost. There is a latent tension between para (a) and the chaussure.

26. [90]

    On a literal reading of the rule priority would be given to that part of the Rule that, when an order is made, will impose obligations on the prospective defendant. On that reading, the documents to which an applicant would be entitled under rule 5.3 are those going to their entitlement to make a claim, and documents going only to the potential value of the claim would be excluded. But that construction would effectively write the closing words of para (a) out of existence. The concept of “decid[ing] whether or not to commence proceedings” as distinct from determining whether or not there is an entitlement to commence proceedings must be given some weight. If the rule is to be given a beneficial construction and “the fullest scope that its language will reasonably allow”, it must be taken to include documents going only to quantum.

27. [91]

    I would therefore uphold ground 4 of the appeal.

What orders to make?

1. [92]

   It follows from the above that ground 3 of the appeal should succeed. It is necessary then to consider the Notices of Contention. It will be apparent from the conclusions already stated that the first ground of each, which is based upon the assertion that the inclusion of documents representing communications with Margaret O’Connor and David O’Connor, exposed an abuse of process, ought to be rejected. I have already expressed a view about the second ground, which appears to be an attempt to use the decision of the appellants not to appeal against the decision so far as it relates to Calibre as retrospective justification for the first instance decision; this ground of the Notice of Contention must also be rejected.

2. [93]

   Diona’s final ground, that a company cannot hold unissued share capital in itself on trust for a beneficiary, focuses too narrowly on the case the appellants seek to advance; that case will have to be formulated with more precision if a decision is made to proceed. For the moment it is sufficient to say, in the language of r 5.3, that it appears that the appellants may be entitled to make a claim for relief against Diona. This ground should also, therefore, be rejected.

3. [94]

   At the conclusion of the hearing in this Court the appellants produced documents specifying the orders they now seek. The operative orders identified are that the respondents give discovery of four categories of documents.

4. [95]

   By way of sample, the first category is:

5. [96]

   A number of points in opposition to the detail of the proposed orders were advanced, only three of which need to be noted. The respondents maintained their position that the application to obtain documents evidenced in correspondence or other communications with Margaret O’Connor and/or David O’Connor was an abuse of process, as designed to put the appellants in a position to decide whether or not to commence proceedings against either or both of them, something which lies outside the scope of r 5.3. Some emphasis was placed on the fact that neither had been joined as defendant to the application.

6. [97]

   It is true that the appellants acknowledged that they had in mind that documents produced might give them a basis on which to proceed against Margaret O’Connor or David O’Connor or both; that was the explicit purpose of the (now abandoned) application for dispensation from UCPR 21.7.

7. [98]

   However, given the positions of Margaret O’Connor and David O’Connor in Diona (25%, subsequently 50%, shareholding, and director respectively) it is well within the bounds of contemplation that either or both may have been informed, or engaged, in the transaction in such a way that correspondence with them could throw light on the transaction, without necessarily exposing either to liability. The application for dispensation from r 21.7 is not now pressed but it is reasonable to think that material in the respondents’ possession may include correspondence with those individuals that relate to the proposed or foreshadowed claims against the respondents.

8. [99]

   Moreover, unless there was some evidence sufficient to make it appear to the court that either Margaret O’Connor or David O’Connor may have had possession of relevant documents, naming them as prospective defendants would have been an abuse of process.

9. [100]

   The second point of substance raised concerns the second category of documents sought, which is of documents “in relation to the affairs of Diona” within the same period. The argument was that such an order would require production of documents going beyond those relevant to the sale of Diona. As the primary judge found (at [41]), the Court’s power to order discovery is limited to the documents specified in the chaussure to r 5.3, which provides its own limitation on excess.

10. [101]

    The third complaint was as to documents going only to quantum. It follows from what I have said in relation to ground 4 of the appeal (see [83-91] above) that this complaint should be rejected.

11. [102]

    The most significant complaint about the draft orders lay in the temporal boundaries specified. Three of the categories proposed sought production of documents dated between 1 July 2014 and 30 November 2015. One sought documents “in the period between 1 July 2015 to date”. It was suggested that this was a further attempt to obtain documents going to the earn-out figure, and therefore the quantum of damages potentially available. That complaint also ought to be rejected.

12. [103]

    The orders I propose are: