Yes Family Pty Ltd v Sphere Healthcare Pty Ltd (No. 2)

HIS HONOUR: On 4 July 2016 I found that the plaintiff, Yes Family Pty Ltd (“Yes Family”), was entitled to preliminary discovery from the defendant, Sphere Healthcare Pty Ltd (“Sphere Healthcare”), of certain classes of documents including those in paragraphs (a), (b), (c) and (d) of the summons (Yes Family Pty Ltd v Sphere Healthcare Pty Ltd [2016] NSWSC 917 at [5] and [47]) (“the first judgment”). An order for such discovery was subsequently made on 8 July 2016.

The matter was relisted before me on 10 August 2016. The plaintiff complained that there had been non-compliance with the order. The defendant sought a revision of the order insofar as it concerned the production of the documents in paragraphs (a) and (b). The defendant’s solicitor, Mr Scanlan, made an affidavit on 8 August 2016 in which he deposed that categories (a) and (b) potentially captured approximately 10,000 documents which would require review by the responsible officer of the defendant in the first instance and then review by him or counsel. He said that in those circumstances the defendant sought a revision of categories (a) and (b) so that they were replaced with the following:

Mr Scanlan deposed that:

On 10 August 2016 Mr Knackstredt who appeared for the defendant, submitted, without elaboration, that if paras (a) and (b) of order 1 made on 8 July 2016 were read one way, there were no documents to produce, but if read another way, there would be 10,000. He submitted that to avoid further argument and that given that what the plaintiff was interested in is documents that might evidence a change of control of the defendant, the documents that should be required to be discovered should be narrowed in accordance with Mr Scanlan’s affidavit.

I acceded to the application to the extent that I stayed order 1(a) and (b) made on 8 July 2016 until further order and ordered that by 16 August 2016 the defendant by its proper officer give to the plaintiff discovery on oath or affirmation of:

I said that we could see what happened as a result of the production of the narrower class of documents and I could hear submissions in relation to that. That course was not opposed by either party.

I did not vary the orders made on 8 July 2016, but stayed the operation of orders 1(a) and (b) until further order.

On 16 August 2016 the defendant served a list of documents and a CD containing documents that had been the subject of the orders made on 10 August 2016. The plaintiff complains that the documents produced do not show who has the ultimate beneficial interests in the shares in Sphere Healthcare. The plaintiff’s solicitor says that the plaintiff requires additional discovery to enable it to determine who are the beneficial owners of the shares in Sphere Healthcare. Mr Gray, who appeared for Yes Family, submitted that the limitation on the classes of documents produced meant that no light had been thrown on the question of whether ROC Partners in fact exercised control over the activities of Sphere Healthcare.

The solicitor for Sphere Healthcare, Mr Bhattacharya, deposed that he was informed by Mr Paul Riley, the sole director of Sphere Healthcare, and believed that the shares in Sphere Healthcare are held by Fulcrum Capital Partners Fund No. 1 GP Pty Ltd, a proprietary company, (15 million shares); Fulcrum Capital Partners Fund No. 1 LP, an incorporated limited partnership, (6,054,289 shares); and Fulcrum Capital Partners Fund No. 1 B Pty Ltd, a proprietary company, (977,747,391 shares). Fulcrum Capital Partners Fund No. 1 B Pty Ltd holds 97.9 per cent of the shares. Mr Bhattacharya deposed that Fulcrum Capital Partners Fund No. 1 B Pty Ltd holds its shares in its capacity as trustee of the Fulcrum Capital Partners Fund No. 1 Sidecar Fund Trust No. 2, which is a unit trust. The trust deed has been provided as part of the preliminary discovery.

Fulcrum Capital Partners Fund No. 1 LP and Fulcrum Capital Partners Fund No. 1 B Pty Ltd that holds shares as trustee for a unit trust, have collectively been referred to as “the Fulcrum Funds”. Mr Bhattacharya deposed to having been informed by Mr Riley that the investors in the Fulcrum Funds, being the limited partners in Fulcrum No. 1 LP and the unitholders in the trust, are wholesale private equity funds and superannuation funds unrelated to Sphere Healthcare. He deposes that Mr Riley informs him that the details of the members of those superannuation funds and wholesale funds are not accessible to Mr Riley, nor to Sphere. He deposes that Mr Riley informs him that neither the intermediary funds nor their investors are managed by Sphere or by Sphere’s shareholders, and that Sphere does not possess or have custody of documents that enable the identification of the ultimate beneficial owners of the interests held by the Fulcrum Funds in Sphere.

Mr Bhattacharya deposes that both Fulcrum Capital Partners Fund No. 1 LP and Trust SC2 (that is, the Fulcrum Capital Partners Fund No. 1 Sidecar Fund Trust No. 2, being the trust on which Fulcrum Capital Partners Fund No. 1 B Pty Ltd holds 97.9 per cent of the shares) are, according to information provided to him by Mr Riley, managed by Fulcrum Capital Partners Ltd pursuant to a management deed made on 21 December 2006. The management deed appointed Fulcrum Capital Partners Ltd as manager of, amongst others, Fulcrum Capital Partners Fund No. 1 LP and Fulcrum Capital Partners Fund No. 1 B Pty Ltd.

The documents produced do not provide an explanation of statements published by Sphere that Sphere is 100 per cent owned by ROC Partners.

In my reasons for judgment of 4 July 2016 I referred (at [21]) to other evidence that included email correspondence from Mr Riley in which he referred to requirements of ROC Partners that would be consistent with its having more than an advisory role to the investors and the shareholders of Sphere. In that email Mr Riley said that in relation to a notice of alleged breach of the terms of the lease that “ROC wish to discuss the current Notice of Alleged Breach and will be looking to confirm that the Yes Family Trust will withdraw the breach notices in full prior to accessing the data room.” He said that in certain events “ROC will require confirmation that the Yes Family Trust will not stand in the way of a future sale of Sphere to a third party”.

There was also evidence that a Mr Adam Field of Sphere Healthcare had advised someone called John at GNP Pharmaceuticals Pty Ltd that:

A LinkedIn profile stated that he was a ‘consultant at ROC Partners’.

A LinkedIn profile of a Mr Benjamin Plohl described his apparently current experience as being “ROC Partners private equity – Restructuring and Turnaround” and as “Financial Controller” of Sphere Healthcare from November 2014 to the then present time (September 2015).

In my reasons of 4 July 2016 I observed that the evidence then adduced by the defendant from its solicitor did not necessarily exclude the existence of agreements whereby ROC Partners may have beneficially owned shares in Sphere or may have entered into agreements that gave effective control of those shares, although I noted that if that were the fact it could be expected that the fact would have been disclosed, if known to the solicitor, in his affidavit (at [20] and [22]).

Yes Family says that the documents produced to date throw no further light on the questions of ROC Partners’ ownership or control of the shareholding in Sphere or on its control of the management of Sphere. On 26 September 2016 it filed a notice of motion seeking the following orders:

On the return of that notice of motion Yes Family was given leave to amend the relief sought to include an order that:

On the hearing of the notice of motion other issues were identified, namely, whether the stay of the order for the production of documents the subject of orders 1(a) and (b) made on 8 July 2016 should be lifted and whether in lieu of an affidavit addressing the matters referred to in paras (a)-(c) of the amendment to the notice of motion as set out at [19] above, the defendant should be required to produce documents relating to those issues.

The defendant raised as an initial objection to the further relief sought by the plaintiff that the court does not have power to make an order for further production of documents because the application under r 5.3 has already been determined (Bailey v Marinoff (1971) 125 CLR 529 at 530 and 532).

The assumption in this submission was that the order made on 8 July 2016 was a final order that, unless set aside on appeal, finally determined the right of the plaintiff to obtain, and the obligation of the defendant to give, preliminary discovery of documents. In Levis v McDonald (1997) 75 FCR 36, Lindgren J held that an application for preliminary discovery was not an interlocutory application and therefore hearsay evidence was not admissible. That view has since been rejected, most notably, for this Court, by Bathurst CJ with whom Beazley and McColl JJA agreed in The Age Company Ltd v Liu (2013) 82 NSWLR 268; [2013] NSWCA 26 at [104]. Bathurst CJ’s observation is particularly noteworthy because there the primary judge had expressed agreement with the view of Lindgren J in Levis v McDonald that an application for preliminary discovery was not an interlocutory proceeding since the relief provided finally determined the rights of the parties in relation to the particular issue tendered for decision, although the primary judge acknowledged that the weight of authority was to the contrary (Liu v The Age Company Ltd [2010] NSWSC 1176 at [25] and [26]). Bathurst CJ emphatically stated that applications for preliminary discovery are interlocutory.

The Full Court of the Federal Court has reached the same conclusion (Malouf v Malouf (1999) 86 FCR 134; Hooper v Kirella Pty Ltd (1999) 96 FCR 1).

In my reasons of 4 July 2016 I noted (at [31]) that no submissions were made as to the width or appropriateness of the categories of documents sought in the summons. The contest was as to whether the plaintiff needed the production of further documents in order to be in a position to decide whether it could institute proceedings asserting a breach of clause 8.2 of the lease. Contrary to what was asserted in Mr Scanlan’s affidavit of 8 August 2016 production of the documents in the revised categories (a) and (b) the subject of the orders made on 18 August 2016 did not throw any light on the questions arising from the assertion by Sphere that it was 100 per cent owned by ROC Partners.

Counsel for Sphere submitted that ROC Partners was an advisor or manager to investors in the Fulcrum Funds which were themselves the investors in Sphere. Newspaper reports from 2014 tendered on the first hearing stated that Macquarie Group was selling its private equity funds management division to its current management team to be renamed ROC Equity Partners. There was evidence that a shareholder of Sphere as at April 2008, Fulcrum Capital Partners Fund No. 1 GP Pty Ltd, had as its shareholders Macquarie Investment Management Ltd as trustee for four trusts as well as other shareholders. No documents have been produced relevant to the question of whether ROC Partners is accustomed to exercising effective control.

Counsel for Sphere submitted that Sphere’s shareholders were the Fulcrum Funds which were managed by Fulcrum Capital Partners Ltd pursuant to a management agreement that has been discovered pursuant to the last orders made. It was entered into in 2006. Counsel submitted that there were investors in the Fulcrum Funds that were various wholesale, private equity and superannuation funds which were advised by ROC Partners. Counsel submitted that the information memorandum issued by Sphere that stated that Sphere was 100 per cent owned by ROC Partners was an inaccurate marketing document. There is no evidence to that effect.

The power to order preliminary discovery of documents does not extend to requiring the defendant to serve an affidavit of a person with knowledge of the relevant facts as sought by the plaintiff in its amended notice of motion. Rule 5.3 enables the court to order a prospective defendant to give discovery of documents if the criteria in r 5.3(1) are satisfied. It does not empower the court to make an order for the service of an affidavit as sought by the plaintiff. Mr Gray who appeared for the plaintiff submitted that such power was contained in s 61 of the Civil Procedure Act 2005 (NSW) that authorises the court by order to give such directions as it thinks fit, whether or not inconsistent with the rules of court, for the speedy determination of the real issues between the parties to the proceedings. However, the real issue in this proceeding is whether the Court can make further orders for preliminary discovery. The real issue in this proceeding is not whether there has been a breach of clause 8.2 of the lease. That is, the real issue is whether it appears to the Court that the plaintiff may be entitled to make a claim for relief against the defendant on the basis that the defendant has breached clause 8.2 of the lease, but, having made reasonable enquiries, is unable to obtain sufficient information to decide whether or not to commence proceedings against the defendant, and the defendant may have possession of a document or thing that could assist in determining whether the plaintiff is entitled to make such a claim for relief.

Counsel for Sphere submitted that if the application for preliminary discovery was interlocutory, the principles stated by McLelland J (as his Honour then was) in Brimaud v Honeysett Instant Print Pty Ltd (1988) 217 ALR 44 at 46-47 applied, that is, an application to set aside, vary or discharge the order must be founded on a material change of circumstances since the application was heard, or on the discovery of new material which could not reasonably have been put before the court on the hearing of the original application. This principle was applied by Perram J in Dallas Buyers Club LLC v Iinet Ltd (No. 5) [2015] FCA 1437; (2015) 115 IPR 544 at [14]-[15], where after a contested hearing the court stayed an order for preliminary discovery and the applicant unsuccessfully sought to vary the terms of the stay. However, unlike that case, and unlike Liu v The Age Company Ltd [2016] NSWCA 115, this is not a case in which an unsuccessful party seeks to set aside, vary or discharge an interlocutory order, or seeks an interlocutory order a second time after having initially failed. Rather, the plaintiff was successful in obtaining an order for preliminary discovery, but the documents produced at the suggestion of the defendant as being sufficient for the plaintiff’s purposes have been found to be insufficient. In these circumstances, I consider it is open to the plaintiff either to seek a lifting of the stay of the orders made on 8 July 2016, or for an order for preliminary discovery of a more limited but different class of documents. No doubt the latter course involves in substance an amendment of the original application, but in the absence of prejudice to the defendant the plaintiff is entitled to pursue an amended application.

On the latest application, Sphere’s solicitor, Mr Bhattacharya deposed:

It is convenient to repeat the order for discovery which is presently stayed, the order being made on the provision of short minutes of order by the parties:

Clearly the definition of “Original Shareholders” in paragraph (a) refers to those persons who were shareholders of the defendant at the commencement of the lease. The lease commenced on 17 April 2008. According to the diagram referred to in para [7] of Mr Bhattacharya’s affidavit quoted above, the shareholders of Sphere as at 17 April 2008 were John Power and Robert Power each as to 0.000002 per cent, JR Power Investments Pty Ltd as to 58.86 per cent and Fulcrum Capital Partners Fund No. 1, GP Pty Ltd as to 41.13 per cent. The same diagram shows the shareholders of Fulcrum Capital Partners Fund No. 1 GP Pty Ltd as Macquarie Investment Management Ltd in its capacity as trustee of four different trusts and two other companies as trustees of two different trusts. Confusingly, the diagram is headed “Limited Partners as at Lease Commencement Date” although no limited partnership is shown as a shareholder of Sphere as at the commencement date of the lease.

Paragraph 1(a) of the orders is ambiguous. On one reading, the reference to correspondence between the Original Shareholders and any third party relating to its investing funds in Sphere is such correspondence between all of the Original Shareholders and such a third party. On another reading it might mean correspondence between any such Original Shareholder and such a third party. Of course, Sphere could only be required to discover documents that are in its possession, custody or power. But quite apart from the ambiguity, the scope of the documents sought goes well beyond what could properly be required. The plaintiff does not seek documents relating to the transactions of November 2011 described in paras 9 and 10 of Mr Bhattacharya’s affidavit, although on the alternative reading of para (a) they would probably be caught. Nor does the plaintiff seek documents relating to the July 2014 transactions referred to in Kardos Scanlan’s letter of 21 August 2015 referred to at para [16] of the first judgment. Rather, it wants documents relating to what it apprehends was a change of ownership or control referred to in the information memorandum of May 2015 referred to at paras [17] and [18] of the first judgment and as set out at paras [13]-[16] above.

The reference in paras 1(a) and (b) of the orders to the “Original Shareholders” is inapt for that purpose. Of the Original Shareholders only Fulcrum Capital Partners Fund No. 1 GP Pty Ltd (now a 1.5 per cent shareholder) continued to hold shares at the relevant time.

Likewise para 1(b) of the orders can now be seen to be inapt for the plaintiff’s intended purpose.

Similarly, the relief sought in para 1 of the notice of motion filed on 26 September 2016 is not directed to whatever might have been the transactions referred to above that led to the publication of documents suggesting there was a change of ownership and control of Sphere Healthcare in 2015.

I apprehend that it was for these reasons that Mr Gray pressed for an affidavit as set out at [19] above.

Although the plaintiff is not entitled to an order in the terms sought for the provision of an affidavit, for the reasons in my first judgment it is entitled to an order for the discovery of documents relating to the matters for which the affidavit is sought. In my first judgment I said (at [26]):

For these reasons I conclude that the defendant should be required to give preliminary discovery of documents in its possession, custody or power that:

I will hear from counsel for the parties as to the time by which such preliminary discovery should be given and on costs.