ACD Tridon v Tridon Australia

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

5738/01 ACD TRIDON INC V TRIDON AUSTRALIA PTY LTD & ORS

JUDGMENT (Revised for minor typographical errors 7 June 2004) HIS HONOUR: Background to the application 1 This is a major commercial dispute, in which the proceeding before this court has been referred to a referee, the Hon AJ Rogers QC, under Part 72 Supreme Court Rules. Mr Rogers is presently conducting a hearing, which commenced on 31 May 2004. The proceeding in this court began as an application by the plaintiff (ACDT) for access to corporate information, but as a result subsequent amendments to the originating process, it has become a much broader action seeking relief against the defendants (TAPL, Mr and Mrs Lennox, and TNZL) on various grounds, including alleged breaches of directors' duties and oppression. The alleged facts and the claims for relief in the proceeding are described in my judgment in ACD Tridon Inc v Tridon Australia Pty Ltd [2002] NSWSC 896, and in more summary form in my judgment of 20 February 2004, [2004] NSWSC 77. In April 2002 ACDT's nominee director on TAPL's board of directors, Mr Arkin, commenced a proceeding in the Federal Court of Australia in which he also sought access to information of TAPL, with a view to his nominated accountant, Mr Watson, preparing one or more reports: see Arkin v Tridon Australia Pty Ltd (2002) 43 ACSR 610 (Hely J). 2 In October 2002 ACDT made an interlocutory application to restrain the defendants from causing ACDT's nominee on the board of directors of TAPL, Mr Arkin, from being dismissed as a director. That application was settled by orders and undertakings made on 7 November 2002. Mr Lennox undertook not to take steps to remove Mr Arkin as a director of TAPL, until resolution of the proceeding or further order, and ACDT and Mr Arkin gave certain undertakings restricting access to documents and information. One of ACDT's undertakings, in paragraph 3(a) of the orders, was as follows: "That it will not seek to obtain directly or indirectly, any information, report or other documents concerning the affairs of TAPL or its subsidiaries from Arkin or the solicitors, counsel and accountant retained by him in the Federal Court proceedings." 3 The Federal Court proceeding was settled on 7 February 2003, when Hely J made consent orders having the effect of permitting Mr Watson to have access to TAPL's financial records and to prepare reports for Mr Arkin, subject to certain undertakings and conditions. In particular, Mr Arkin and ACDT gave to the Federal Court undertakings in the same terms as their undertakings to this court. 4 Subsequently Mr Watson prepared seven reports for Mr Arkin ("the Watson Reports"), and Mr Arkin made an application to the Federal Court in July 2003 for an order that he be at liberty to provide the Watson Reports and associated correspondence to ACDT. That application was unsuccessful: [2003] FCA 1372 (Hely J, 2 December 2003). In his reasons for judgment, Hely J recorded a submission on behalf of TAPL that "all the issues raised by the Watson Reports are issues in the Supreme Court proceedings", and observed that the Watson Reports were part of TAPL's documents. Relying on those aspects of Hely J's judgment, ACDT made a call for production of the Watson Reports in the course of preparation for the hearing before Mr Rogers QC. 5 On 6 February 2004 the defendants applied to this court for a determination that ACDT's call for production was in breach of clause 3(a) of its undertaking to this court. By reasons for judgment delivered on 20 February 2004 ([2004] NSWSC 77), I held that ACDT should not be given access to the Watson Reports, both because its call for production of them was in breach of clause 3(a), and for discretionary reasons. The present application 6 On 11 February 2004 ACDT applied for an order permitting it to vary its undertaking to the court, in the event that the defendants were successful in their application. The present reasons for judgment relate to ACDT's application, which I heard for varying amounts of time on 10 March, 22 March, 30 March, 17 May, 25 May and 2 June 2004. 7 As amended on 10 March 2004, paragraph 1 of ACDT's interlocutory application sought an order varying paragraph 3(a) of its undertakings to the court, by adding the following provisos: "(a) provided that the undertaking shall not prevent: (i) the making of any application to the Court or Referee for the discovery, inspection or production of any documents which would otherwise be discoverable, subject to inspection or subject to production; or (ii) compliance with any requirement of the Court or Referee for the discovery, inspection or production of any documents, or any steps reasonably incidental thereto, in the proceedings referred to Mr Rogers QC by this Court. (b) provided further that the undertaking shall not prevent ACDT from taking any step by way of obtaining, preparing or leading evidence in the proceedings or any step reasonably incidental thereto." 8 ACDT's application also sought orders that there be added to the categories of discovery in the reference proceeding before Mr Rogers QC the following categories: (a) the Watson Reports; (b) any reports or affidavits including all exhibits and annexures thereto responding to or commenting on the Watson Reports obtained by TAPL and tendered to read, as the case may be, in the Federal Court proceeding; (c) all written submissions lodged with the court on behalf of TAPL in the Federal Court proceeding which referred to or commented on the Watson Reports; (d) all documents commenting on the Watson Reports whether for the purpose of the Federal Court proceeding or otherwise including, without limitation, all board minutes, file notes, memoranda and correspondence including correspondence with, and reports prepared by, lay witnesses and/or experts to the extent that these documents are not covered by category (b). 9 To a degree, the fate of paragraph 2 depends upon ACDT's success under paragraph 1. If I do not make an order varying ACDT's undertaking to permit it to have discovery, then there is no point expanding the categories of discovery in the manner proposed by paragraph 2, or at least 2(a) and (d), which appear to be covered by ACDT's undertakings. ACDT's proposal to amend the application 10 At the hearing on 25 May 2004 senior counsel for ACDT began by informing the court that his client would seek leave to vary the undertakings in a manner not covered by its interlocutory application. Essentially, ACDT now seeks, additionally, leave to vary its undertaking so as to permit it to take a statement from Mr Arkin about certain aspects of its claims in the referee proceeding. The proposed further amendment to paragraph 1 of ACDT's application has not been drafted, but senior counsel for ACDT said it would be in the nature of a qualification added to paragraph 1, to the effect that the undertakings would not prevent ACDT taking instructions from Mr Arkin in respect of the matters which are the subject of its current pleading (the fifth further amended originating process, which I shall call the "FAOP"). 11 Senior counsel for the defendants complained that no notice of ACDT's proposed amendment had been given to the defendants until just before the commencement of the adjourned hearing on that day. On 2 June 2004 the defendants adduced additional evidence, by leave, in response to the ACDT's new claim. They have not submitted that ACDT's application to amend its application should be denied on any ground of irretrievable prejudice to them. I shall permit the application to be amended. Should the undertakings be varied to permit ACDT to interview Mr Arkin and take his statement? 12 Senior counsel for ACDT informed the court that his client needs to interview Mr Arkin and take a statement from him, with respect to three parts of the FAOP, and a part of the amended first cross-claim of the first and fourth defendants. Alleged refusal of information 13 First, ACDT wishes to interview Mr Arkin about paragraphs 15 to 25 of the FAOP. Paragraphs 15 to 18 plead certain provisions of the shareholders' agreement, under which the duly authorised representatives of the parties are entitled to have access to, examine and inspect the books and records of TAPL. The FAOP then alleges that certain specified companies are controlled entities of TAPL, the books and records of which have at all material times been within TAPL's possession (paragraphs 22 and 22A). It is alleged in paragraph 23 that Mr David Goodman, a duly authorised representative of ACDT, sought to have access to the books and records of TAPL and the controlled entities, from about March 2000, but that Mr Lennox caused TAPL to delay and hinder Mr Goodman and to refuse to give him certain information (paragraphs 23 and 23A). There is also a pleading that, as at November 2001, Mr Goodman was still seeking access to books and information, and Mr Lennox caused TAPL to refuse to provide him with any further access (paragraphs 23C and 24). It is alleged that the conduct of Mr Lennox was in breach of his obligations under the shareholders' agreement and resulted in conduct by TAPL that was not in the interests of its members as a whole, and was oppressive and unfairly prejudicial to ACDT (paragraphs 23B and 25). 14 ACDT submits that Mr Arkin acted for and was the sole representative of ACDT on the board of TAPL at relevant times. It contends that it ought to be permitted to speak to him about what he observed, as a director, relevant to the allegations in paragraphs 15 to 25, for otherwise ACDT has no direct source of information and has only the evidence of Mr Goodman. It is worth emphasising that paragraphs 15 to 25 relate to the period from March 2000 to November 2001, a period ending well before the undertakings given to this court on 7 November 2002. 15 Senior counsel for defendants has taken me to a substantial body of evidence which, he says, shows that ACDT has all the evidence relevant to paragraphs 15 to 25 of the FAOP, and he invites the court to infer that Mr Arkin cannot possibly add anything more. The evidence includes two sets of minutes of meetings of directors of TAPL during the relevant period, one prepared by Mr Lennox and the other prepared by Mr Arkin. 16 It is unnecessary to describe this evidence in any detail. It seems to me that the attempt by senior counsel for the defendants to present this evidence is based on a misunderstanding of ACDT's case on the application. ACDT says that Mr Arkin may have something relevant to say about the matters alleged in paragraphs 15 to 25 of the FAOP, because he was a director at the relevant time. Its lawyers will not know whether he has unless and until they speak to him. ACDT asks the court to vary the relevant undertakings so as to permit its lawyers to take Mr Arkin's statement in order to find out whether there is something relevant that is not covered by other evidence. It is possible that there may have been conversations or events outside formal board meetings, for example, which would be relevant but not recorded in either version of the minutes. The purported transfer of ACDT's shares in TAPL 17 Secondly, ACDT draws attention to the allegations in paragraphs 94A to 97B of the FAOP. There ACDT alleges that Mr Lennox caused three forms of transfer of the shares in TAPL to be prepared, for the transfer of ACDT's shares to himself for $290,000, and that he signed the transfer forms both as transferee and also purportedly on behalf of ACDT as transferor (paragraph 94A). ACDT alleges that it did not authorise Mr Lennox to execute the transfers (paragraph 94B), and that they were liable to stamp duty but were not stamped (paragraph 94C). It alleges that there was a meeting of the directors of TAPL on 19 January 2002, at which Mr Lennox tabled the transfers and the directors of TAPL (by a majority constituted by Mr and Mrs Lennox) resolved that the transfers be registered, and subsequently registration was effected (paragraph 95). 18 ACDT claims that in passing the resolution to register the transfer, Mr and Mrs Lennox exercised their powers as directors of TAPL for collateral and improper purposes, namely to permit Mr Lennox to acquire the shares for less than their true value, and to impede ACDT's attempts to exercise its rights as shareholder (paragraph 97). It also claims that by reason of these matters, the transfers were not "proper instruments of transfer" for the purposes of s 1017B of the Corporations Act (paragraph 97A), and that the transfers were invalid and unlawful (paragraph 97B). 19 It should be noted that the allegations in paragraphs 94A to 97B relate to specific events that occurred in January 2002, well before the undertakings given to the court on 7 November 2002. 20 The defendants answer these allegations by saying that Mr Lennox was entitled to act as he did by virtue of provisions of the shareholders' agreement. In reply, ACDT contends that the defendants cannot rely on the relevant provisions of the shareholders' agreement because Mr and Mrs Lennox did not exercise the contractual power in good faith and for proper purposes. ACDT filed a reply to that effect on 3 June 2004. 21 ACDT submits that as Mr Arkin was present at the relevant board meeting, it is necessary for ACDT to talk to him about the meeting and the events surrounding it, to see if anything happened that is not recorded in the minutes and in the transcript that was taken of the meeting. Once again, the defendants submit that there is full and ample evidence of the meeting, and Mr Arkin could not possibly add to it. Again, I disagree. If, for example, there had been a conversation outside the boardroom at which views were exchanged with respect to the reasons for the acquisition or the basis for it, evidence of that conversation may be relevant to ACDT's allegations of bad faith and improper purposes. Even if Mr Arkin can tell ACDT nothing beyond what is in the minutes and transcript, it is worthwhile for ACDT to reach that point by conducting an interview with Mr Arkin. Alleged misuse of proceedings by Mr Lennox 22 Thirdly, ACDT refers to the allegations in paragraphs 97C to 97K of the FAOP. There, it is alleged that since the inception by TAPL of arbitration proceedings in June 2000, Mr and Mrs Lennox as directors of TAPL have caused or permitted Mr Lennox to have control of TAPL's conduct of the arbitration (paragraphs 97C and 97CA). It is alleged that since the inception of the present proceeding in this court, in November 2001, Mr and Mrs Lennox as directors of TAPL have caused or permitted Mr Lennox to have control of TAPL's conduct of the proceeding (paragraph 97CB), and a similar allegation is made to the effect that Mr Lennox has been allowed to control TNZL's conduct of the proceeding, since it was joined as a defendant on 19 April 2002 (paragraph 97CC). Then there are lengthy allegations that since January 2002, Mr Lennox has caused TAPL to conduct the litigation in certain specified ways in breach of Mr Lennox's obligations under the shareholders' agreement, and otherwise than bona fide in the interests of TAPL, and it is said that these matters involve improper use by Mr Lennox of his powers as the person controlling TAPL's conduct of the proceeding so as to support his personal position, and are in breach of Mr Lennox's duty as a director (paragraphs 97D, 97E, 97F and 97G). Paragraphs 97H to 97K allege that Mr Lennox has caused TAPL to retain Cutler Hughes & Harris as its solicitors without approval by ACDT, in contravention of the shareholders' agreement, and ACDT as a shareholder of TAPL has thereby suffered loss and damage. 23 ACDT says it wishes to interview Mr Arkin to find out what he knows about these matters. Again, the defendants say that it is unnecessary for ACDT to speak to Mr Arkin on these matters, because the facts are already plain to ACDT as a litigant in the Supreme Court and arbitration proceedings. I agree with ACDT that it is relevant and (subject to the undertakings) appropriate to take a statement from Mr Arkin on these matters, in case he has something relevant to say that is not otherwise known to ACDT. However, paragraphs 97C to 97K of the FAOP are, to a degree, in a different category from paragraphs 15 to 25 and 94A to 97B, because they allege continuing conduct by Mr Lennox in various periods beginning in June 2000, November 2001, January 2002 and April 2002, in each case before the undertakings were given, but continuing after 7 November 2002, when the defendants undertook not to seek to remove Mr Arkin from the board in exchange for ACDT's and Mr Arkin's undertakings. I shall return to the significance of that point. Alleged threats by ACDT in August 2001 24 Fourthly, ACDT refers to the amended first cross-claim by the first and fourth defendants. In that document it is alleged (at paragraphs 1.9 and 1.9.2) that on 15 August 2001 ACDT's solicitors provided some draft agreements which purported to settle the dispute between the parties as to distribution rights, proposals which TAPL refused (paragraph 1.10), and then ACDT's solicitor conveyed a threat from ACDT to TAPL that unless TAPL acceded to the proposed agreements before ACDT's President left Australia, ACDT would launch legal proceedings raising serious allegations against Mr Lennox and TAPL, which would involve Mr Lennox and TAPL in very substantial legal costs and could destroy TAPL (paragraph 1.11.1). 25 Senior counsel for ACDT submits that it is common ground that Mr Arkin was present at the meeting where the alleged threats were made. ACDT wishes to be able to interview Mr Arkin about the matter. It seems to me plainly appropriate, subject to questions concerning the undertakings, for ACDT to take a statement from Mr Arkin about these matters, if he was present. The topic is an event occurring in August 2001, well before the giving of the undertakings. Evidence of ACDT's previous contact with Mr Arkin

26 At the hearing on 2 June 2004 the defendants tendered some additional evidence, by leave, which showed that the plaintiff's solicitors had frequent correspondence with Mr Arkin prior to 7 November 2002. The evidence indicated that Mr Arkin had been retained as a legal adviser to ACDT prior to August 2001, and ACDT's Australian solicitors received instructions from him. However, in February 2002, after TAPL's solicitors raised concerns about Mr Arkin acting both as an external legal adviser to ACDT and as ACDT's nominee director on the board of TAPL, the Australian solicitors ceased receiving instructions from Mr Arkin in his capacity as external legal adviser to ACDT, although for a period until about August 2002 they received instructions from Mr Arkin from time to time as an intermediary for ACDT's internal legal counsel.

27 ACDT has claimed legal professional privilege in relation to certain documents produced by Mr Arkin. The basis for the claim was that the documents constituted a confidential communication between Mr Arkin's law firm, Arkin & Associates (which was retained by ACDT to provide legal advice and services in relation to matters concerning the defendants) and ACDT and others acting on its behalf.

28 The defendants also draw attention to the affidavits verify the various versions of the originating process. The affidavit of John Zimmerman made on 3 June 2002, verifying the Third Further Amended Originating Process, says that as President of ACDT, he has made inquiries, inter alios, of counsel retained by ACDT in Denver, Colorado, and he verifies the original originating process on the basis of those inquiries. There is no sworn affidavit verifying the fourth, fifth and sixth versions of the originating process, but the fifth and sixth versions attach a draft affidavit of Mr Zimmerman by which he would verify the pleading in terms identical with the third version.

29 The defendants also rely on some correspondence received from ACDT's solicitors, according to which ACDT would rely on two affidavits by Mr Goodman, and an affidavit of an expert valuer, Mr Lonergan, as its evidence in chief. Although some of letters were written after the continuation of the hearing of the present application on 25 May, when senior counsel for ACDT explained his client's wish to interview Mr Arkin, the letters made no reference to the possibility that any evidence from Mr Arkin would be tendered.

30 In light of this new evidence, the defendants make several submissions. First, they say that it is plain that ACDT was in close contact with Mr Arkin up to November 2002, such that the court should infer that he told them everything he knew about the four topics I have described. The defendants say that in the circumstances, it is incumbent on ACDT, if it wishes to interview Mr Arkin, to provide evidence showing that there is some ground for believing that Mr Arkin may be able to provide additional evidence. At the hearing on 2 June 2004 I invited senior counsel for ACDT to make an application to adduce further evidence, or to identify evidence already before me, that would provide reasonable grounds for believing that Mr Arkin might have something further to say that would be relevant to the referee proceeding. He declined to do so.

31 On reflection, it seems to me that ACDT's lawyers should be allowed to interview Mr Arkin and take a statement from him so as to establish, with finality, whether there is any evidence Mr Arkin can usefully give about the four topics in question. It is unnecessary for ACDT to show some reasonable grounds for believing that Mr Arkin has something more to say. The court's overall concern is to ensure that there are no impediments to preparation of the cases of the parties for the referee hearing, except impediments justified by reference to the undertakings or by other matters pointing to unfair prejudice. 32 I shall come to the undertakings later. As to unfair prejudice, senior counsel for the defendants submitted, in effect, that ACDT's lawyers would not be able to limit the interview with Mr Arkin to the four topics that have been identified, and therefore that he would inevitably speak about other matters in breach of his undertaking and indirectly, the undertaking by ACDT. 33 I do not accept this submission. There is no evidence before me to suggest that Mr Arkin would be motivated by bad faith or would lack the competence to confine himself to the topics in question. (In saying this, I have taken into account the submissions by senior counsel for the defendants which may be found at page 49 of the Transcript for 25 May 2004, in which he referred to findings made by Mr Rogers QC.) I see no reason why, if the limitations of the interview and statement are clearly identified, Mr Arkin would not confine himself strictly to those limitations, or why ACDT's lawyers could not superintend the interview process so as to ensure that only the identified topics are explored. But just in case there is some slippage in the process, I shall incorporate in my orders a provision restraining ACDT from tendering any evidence of Mr Arkin in the referee proceeding without the court's leave.

34 Senior counsel for the defendants submitted that the correspondence by ACDT's solicitors amounted to an election binding on ACDT that it would rely, in chief, only on the evidence of Mr Goodman and Mr Lonergan, and would not seek to rely on any evidence from Mr Arkin. But the only correspondence in which the solicitors specify ACDT's evidence in chief was written after 25 May 2004, after ACDT made its application for variation of the undertakings to permit it to interview and take a statement from Mr Arkin. ACDT's position with respect to Mr Arkin had therefore been made clear to the defendants. In the circumstances, the correspondence cannot be construed as amounting to an election to abandon the prospect of tendering his evidence in chief.

35 Senior counsel for the defendants submitted that I should not deal with the application to vary ACDT's undertakings separately from and prior to Mr Arkin's application for variation of his undertakings. I disagree. Although the matters are related, I see no reason for deferring my decision with respect to ACDT's undertakings. On the contrary, I wish to resolve the matter as quickly as I can so as not to cause any undue delay or complication to the hearing before Mr Rogers QC. The relevant undertakings 36 As senior counsel for ACDT acknowledged, if ACDT were to approach Mr Arkin about these four topics without any variation of its undertakings, there would be a breach of undertaking 3(a). Arguably, there would also be a breach of undertaking 3(b), by which ACDT undertook to the court not to cause or permit Mr Arkin to give instructions to the solicitors or counsel retained by ACDT in the Supreme Court proceeding. This would depend on whether taking a statement from Mr Arkin amounts to his giving an "instruction". 37 However, paragraph 5 of the undertakings qualifies the undertakings in paragraph 3, by making them subject to any orders of this court and therefore providing a mechanism for the court to approve a variation. It provides: "5. The above undertakings in paragraphs 2 and 3 apply subject to further or other order of this Court, where the same shall be reserved to his Honour, Mr Justice Austin (or such other Justice of this Court as having carriage of this matter from time to time), and in the course of the same, any documents subject to an application for such an order shall be treated as confidential and the papers treated as sealed until or at the further direction of this Court." 38 Additionally, Mr Arkin gave various undertakings to this court, found in paragraph 4 of my orders, including · a broadly-expressed undertaking not to reveal any information concerning the affairs of TAPL or its subsidiaries to any person other than his nominated accountant, his personal legal representatives, a member of the staff of his law firm, or a statutory authority (subparagraph 4(c)); · an undertaking not to be a party, whether directly or directly, to any breach of ACDT's undertaking given in paragraph 3 (subparagraph 4(d)); · an undertaking that, in the course of performing his role as a director of TAPL, he would not co-operate with anyone retained by ACDT (subparagraph 4(e)); · an undertaking not to be involved, directly or indirectly, with instructing ACDT's lawyers in the Supreme Court proceeding (subparagraph 4(f)). 39 Arguably Mr Arkin would breach some or all of these undertakings if he were to give a statement to ACDT concerning any of the four identified topics, without first having the undertakings varied. However, like ACDT's undertakings in paragraph 3, Mr Arkin's undertakings in paragraph 4 are expressed to be subject to further or other orders of the court, but in this case the specified court is the Federal Court (see paragraph 6 of my orders). Paragraph 6 provides: "6. The undertakings in paragraph 4 apply subject to further or other orders of the Federal Court, where the same shall be reserved to a Justice of that Court, and in the course of the same, any documents subject to any application for such orders shall be treated as confidential and the papers treated as sealed until or at the further direction of that Court." 40 On 7 February 2003, when Hely J made orders in settlement of the Federal Court proceeding, he noted that Mr Arkin gave to the Federal Court an undertaking in terms of paragraphs 4 and 6 of the undertakings that he had given to the Supreme Court on 7 November 2002. 41 Therefore, before Mr Arkin would be in a position to give a statement to ACDT for use in the reference proceeding, it would appear to be necessary for him to obtain an appropriate order of the Federal Court (although I do not presume to decide this, in the present application). He has applied to do so, and he has also made an application to this court for variation of order 4, inviting the court to exercise inherent jurisdiction. Mr Arkin's application to this court is not presently before me for determination. I note that the defendants have made an application, in this court, for summary dismissal of Mr Arkin's application to this court. Again, the defendants' application is not presently before me for determination. Alleged futility 42 Senior counsel for the defendants submitted that it would be futile for me to authorise ACDT to vary its undertaking so that it could take a statement from Mr Arkin, when the statement could not be taken unless a similar order were made in favour of Mr Arkin by the Federal Court. My understanding (without purporting to make any decision on matters not currently before me) is that two, and possibly three or even four, steps must be taken before Mr Arkin can be interviewed on behalf of ACDT. An order must be made by this Court concerning the variation of ACDT's undertaking to this Court, and it seems that an order must be made by the Federal Court concerning Mr Arkin's undertaking given to the Federal Court. It may also be necessary for this court to make an order in favour of Mr Arkin and for the Federal Court to make an order in favour of ACDT. Whether two steps, or three or four steps, are needed, it cannot be said to be futile for this Court to respond to ACDT's application that the first step be taken. It may even be helpful to the Federal Court, when it considers Mr Arkin's application, to know that the Supreme Court has dealt with ACDT's corresponding application. 43 Whilst on the subject of procedure for the variation of undertakings, I should address a difference of opinion emerging in submissions, as to the meaning of paragraphs 5 and 6 of my orders of 7 February 2002, which were in substance repeated in the Federal Court. As I understood him, senior counsel for the defendants submitted that if either ACDT or Mr Arkin makes an application, in either court, for the variation of the undertakings to permit ACDT to have access to documents in Mr Arkin's possession, the documents subject to the application are to be treated as confidential and to be treated as sealed, by virtue of paragraphs 5 and 6. If that is correct then, by virtue of the application made to this court by ACDT, and the applications made to the Federal Court and this court by Mr Arkin, the Watson Reports and the associated documents have become confidential and sealed documents, the confidentiality of which could not be removed except by orders made both by this court and the Federal Court.

44 I prefer the construction of paragraphs 5 and 6 advocated by senior counsel for ACDT. In my opinion, paragraph 5 has the effect that documents subject to an application by ACDT for variation of the undertakings in paragraph 3 are treated as confidential, and sealed, subject to the direction of this court; whereas paragraph 6 has the effect that documents subject to an application by Mr Arkin for variation of the undertakings in paragraph 4 are treated as confidential, and sealed, subject to a direction of the Federal Court. Copies of the Watson Reports and the associated documents have been provided to TAPL. If this court orders discovery and inspection of those copies of the documents, thereby "unsealing" them, Mr Arkin is not involved in the process. The fact that Mr Arkin has made an application in respect of his copies of the same documents, which are treated as confidential and sealed pending resolution of the application by the Federal Court, does not mean that the Federal Court must "unseal" the copies of the documents held by TAPL before discovery and inspection of those documents can take place pursuant to my orders. My decision on the application to interview and take a statement from Mr Arkin 45 ACDT wishes to interview Mr Arkin with respect to what its senior counsel calls "historical events, not ongoing transactions or plans", namely the four topics identified by senior counsel at the hearing on 25 May. That is not entirely true, because, as I have explained, the third topic relates to a period beginning in January 2002 and still continuing. I shall assess the matter or the assumption that the third topic is confined, for the purposes of any interview and statement, to the allegations in paragraphs 97C to 97K so far as they relate to the period from January 2002 to 7 November 2002. 46 While it is far from clear that Mr Arkin will be able to add to the existing evidence at all, it is highly likely that any statement he can make relating to all or any of the four topics would be relevant to the issues for determination in the reference proceeding. As I have said, it is obviously important for the court to ensure that there is no unwarranted impediment, for either party to the reference proceeding, to their making use of all the evidence relevant to their respective cases. Therefore ACDT's lawyers should be permitted to interview Mr Arkin with respect to the four topics that have been specified, unless there is good reason to prevent such an interview taking place. 47 In my opinion the attempt by the defendants to demonstrate that there was no remaining issue in the case, after concessions that had been made by senior counsel for ACDT before the referee, as to which Mr Arkin could give any evidence, has been unsuccessful. In the four areas identified, I am satisfied that it is possible that Mr Arkin may say something relevant to matters remaining for determination. I do not agree with the defendants that ACDT needs to establish reasonable grounds for believing that Mr Arkin can be of assistance, before being permitted to vary its undertakings so that Mr Arkin can be interviewed. It is enough, in my opinion, that it is possible that Mr Arkin can assist. It is manifestly untenable to contend that, because ACDT's solicitor gave a certificate under s 198L of the Legal Profession Act 1987 (NSW) with respect to the FAOP, without having spoken to Mr Arkin, that the solicitor has acknowledged that Mr Arkin's evidence is not needed. 48 It seems to me that, while conducting an interview with respect to the four topics would be conduct falling strictly within ACDT's undertakings and not permitted by them, it would be appropriate for the court to allow the undertakings to be varied so that the interview can take place. The undertakings given to this court and the Federal Court were expressed in very wide terms, but in my opinion they were generated by a concern that was narrower than the drafting. 49 As I explained in my reasons for judgment dated 20 February 2004 ([2004] NSWSC 77, at [9]), the transcript of 7 November 2002 shows that the defendants were concerned, during the interlocutory hearing on that day, that Mr Arkin would use information that came to him as a director of TAPL for the purpose of assisting ACDT in the proceeding now before the referee, to the detriment of the defendants. Essentially that was a prospective concern. It was not identified at the hearing in November 2002 as a concern to prevent Mr Arkin from giving evidence, consistently with his duties as director of TAPL, with respect to allegations concerning past events. 50 The transcript of evidence on 7 November 2002 cannot be used as evidence of the common intention of the parties at the time of their agreement to consent to the orders and undertakings that I made on that day (see my judgment at [10]). However, it is appropriate for the court to refer to the transcript in order to identify the underlying concerns of the defendants that led to the making of the orders and undertakings on that day, where the question is not the proper construction of the undertakings, but whether to permit a departure from them. 51 Senior counsel for the defendants submitted, repeatedly, that to allow the defendants to interview Mr Arkin on the four topics that have been identified would be fundamentally to subvert the arrangements made on 7 November 2002. He said that in making those arrangements, his clients expected that Mr Arkin would be "sterilised" and hence excluded from any participation in the proceeding, and that his clients would not have entered into the arrangements on 7 November 2002 had they known that Mr Arkin might nevertheless be permitted to give a statement to ACDT which might be used in evidence in the proceeding. 52 I do not accept that submission. It seems to me unlikely that either party contemplated on 7 November 2002 that the arrangements would exclude Mr Arkin from giving evidence of historical events about which he could speak, as opposed to providing information or giving a statement to ACDT with respect to the reports that he was then authorised to procure, or with respect to his conduct as a director of TAPL by virtue of his being permitted to remain on the board after 7 November 2002. After all, if the defendants had caused Mr Arkin to be removed from the TAPL board on 7 November 2002, that would not have affected his ability to give evidence about events up to that time, on behalf of ACDT, to the extent that doing so would be consistent with his duties as a former director of TAPL. 53 I believe that my reasoning on these matters is consistent with the discretionary reasons upon which I relied in my judgment of 20 February 2004 ([2004] NSWSC 77, at [45]-[50]). I said (at [46]) that "by December 2003 the overall arrangement between the parties was that, pending resolution of the Supreme Court proceeding, Mr Arkin would remain a director of TAPL, and would have access with Mr Watson's assistance to TAPL's financial records in order to perform his duties as director, but the information obtained by that process was not to be shared with ACDT". I regarded that interpretation of the arrangement as consistent with the reasoning of Hely J in Arkin v Tridon Australia Pty Ltd [2003] FCA 1372, at [25]. I reasoned that if ACDT were permitted to gain access to the Watson Reports by calling for their production in the reference proceeding, the package of undertakings given to the Supreme Court on 7 November 2002 and repeated in the Federal Court on 7 February 2003, and the arrangements reflected in the undertakings as at February 2003, would have been undermined. I concluded that ACDT's exclusion from access to the Watson Reports was an essential ingredient of the arrangements, notwithstanding that TAPL's acquisition of the Reports might have made them discoverable in a general sense. 54 Of course, the Watson Reports were prepared after 7 November 2002, and the defendants co-operated with Mr Watson by providing him with information only after the package of undertakings in this court and the Federal Court was settled. Access to Mr Arkin for a statement in respect of matters occurring before 7 November 2002 is in a completely different category. 55 My conclusion, therefore, is that I should allow ACDT's undertakings to be varied to a limited extent, namely to permit ACDT to interview Mr Arkin and take a statement from him with respect to the four specific topics identified as paragraphs 15 to 25, 94A to 97B and 97C to 97K of the FAOP, and paragraphs 1.9 to 1.11.3 of the amended first cross-claim by the first and fourth defendants, provided that the topic identified in paragraphs 97C to 97K is limited to the period up to 7 November 2002, and that the interview and statement is limited to those matters and no others. I shall order that ACDT is not to adduce any evidence from Mr Arkin in the referee proceeding without the leave of this court. 56 No doubt there will be difficulties for Mr Arkin and his interlocutors by virtue of his fiduciary duty as director of TAPL, but those difficulties are not so severe as to prevent any statement from being taken. I wish to emphasise that if the interview and statement extend to other areas not permitted by the orders I propose to make, there would be a breach of undertaking by ACDT (and perhaps also by Mr Arkin) which I would regard as serious. Proposed variation of undertakings to permit ACDT to call for production of the Watson Reports and associated documents in the reference proceeding 57 In my reasons for judgment of 20 February 2004, I found that the Watson Reports satisfied the criterion of relevance, for the purposes of discovery, prescribed by Part 23 rule 1(d) of the Supreme Court Rules. In regard to the material before me now, it seems to me plain that all of the documents identified in paragraph 2 of ACDT's application (that is, the Watson Reports and the "associated documents") fall into the same category.

58 Starting with the proposition that all the documents would be discoverable by ACDT and open for inspection, but for the undertakings and the circumstances surrounding the giving of the undertakings, senior counsel for ACDT proposes that the court should order discovery of the documents to ACDT's legal advisers, subject to a restriction that they do not communicate the contents of the documents to their client ACDT without the leave of the court. He makes a submission on the following lines. The pleadings are about historical events rather than ongoing trading. The proposed restriction will enable the lawyers for ACDT to look at the Watson Reports and the associated documents to see whether there is anything in them going to those historical events. If there is, then an application can be made by the lawyers on behalf of ACDT for leave to tender the relevant parts of the documents. This procedure, it is submitted, should remove the concerns I expressed under the heading "Discretionary considerations" at [45] to [50] of my reasons for judgment of 20 February 2004 (summarised above). Any submissions to be made on behalf of the defendants with respect to privilege and other matters would become relevant only if an application were made for leave to adduce evidence, and they could be dealt with at that time.

59 I agree with this submission, subject to two important qualifications. First, given the apparent commercial and forensic sensitivity of the matters concerned, I think it is appropriate to require that none of the documents to be produced on discovery and inspected by the legal representatives of ACDT may be tendered in the reference proceeding, without the further leave of the court. Senior counsel for ACDT submitted that such a restriction would be unnecessary, although he conceded that there would be difficulties in counsel tendering documents to the referee without their client's instructions. I think the safer course is to require leave from the court.

60 Secondly, as I have explained, the undertakings arose out of the bargain reached by the parties on 7 November 2002, under which the defendants would allow Mr Arkin to remain on the TAPL board but Mr Arkin and ACDT would be prohibited from making use, in the proceeding, of the information that came to Mr Arkin as a result of his remaining on the board. Although senior counsel for ACDT puts the submission in terms of historical events rather than ongoing trading, he has not fixed the end point of the historical period at a sufficiently early time. In my opinion, it would be inconsistent with the spirit and underlying purpose of the arrangements reflected in the undertakings to allow ACDT access to any information that has come to Mr Arkin as a director of TAPL after 7 November 2002.

61 Senior counsel for ACDT made another submission, independent of the submission for disclosure and inspection to the legal representatives. He said that some of the documents described in paragraph 2 of the amended notice of motion are documents that have been tendered in open court, in the Federal Court proceeding. They are therefore in the public domain, and there can be no valid objection to adding them to the categories of discovery in the reference proceeding. In my view the best course is not to make a decision on that submission at the present time. The procedure proposed by senior counsel for ACDT, and generally acceptable to me, will mean that the legal representatives of ACDT will have the opportunity to review the documents in all categories specified by paragraph 2 of the amended notice of motion, and decide whether there is anything they wish to tender. If there is, they may then make an application to the court for leave to do so. It may be relevant, at that time, to draw the court's attention to the fact that a particular document has been tendered in the Federal Court. It may be necessary to prove that fact in respect of the document in question, if it is not conceded.

62 Therefore I propose to make orders for discovery by the defendants, and inspection by ACDT, of the documents identified in paragraph 2 of ACDT's application, restricted to legal representatives of ACDT. But I shall do so on the basis of determining, here and now, that no information in those documents relating to any events after 7 November 2002 will be capable of being tendered in evidence in the proceeding. This may well make it difficult to tender any expression of the expert opinion by Mr Watson, to the extent that his opinion might have taken into account events after that date.

63 There is no basis for suggesting that any of the Australian legal representatives of ACDT should be excluded from access to the discovered documents for inspection. It will be up to the legal team to designate the individuals who will perform the task of inspection, and to make appropriate decisions to avoid any difficulties that may arise out of the circumstance that those individuals will acquire some knowledge which they may never be able to disclose to the client.

64 During the course of the hearing on 25 May 2004, I contemplated giving the defendants some additional reassurance by permitting them to mask any parts of the documents which have a commercial sensitivity but not a forensic significance. The suggestion was roundly rejected by senior counsel for the defendants, and I shall therefore not pursue it.

May leave be granted to vary undertakings without proof of material change of circumstances?

65 Senior counsel for the defendants submits that the court has no jurisdiction to grant ACDT leave to vary its undertakings, because of the principle that consent orders on matters that are not merely procedural cannot be varied unless there is a material change of circumstances, and there has been no such change in the present case. He relies on Idoport Pty Ltd v National Bank of Australia (No 5) [2000] NSWSC 148, and the cases cited by Einstein J in Idoport, including Butt v Butt [1987] 1 WLR 1351 and Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170.

66 It seems to me that there is a simple answer to this submission. The application before the court is not an application to vary consent orders, but rather it is an application to grant leave to a party who has made undertakings to the court, noted by the court's orders, to vary those undertakings. The undertakings noted by the court, in paragraph 3 of its orders, are qualified by paragraph 5, which has the effect that the undertakings are in their terms subject to further or other order of this court. ACDT's application seeks a further order of the court as permitted by its undertaking. The present case may be contrasted with Fylas Pty Ltd v Vynal Pty Ltd [1992] 2 Qd R 593, 601, where McPherson J noted that the undertakings before the court in that case were not expressly limited to operate until further order of the court, and in the absence of any such express limitation, the court was without power to vary undertakings.

67 Paragraph 5 does not articulate any criteria to be employed by the court in dealing with an application of the kind contemplated, but the absence of express criteria is not fatal. In my opinion it is appropriate, when proceeding under paragraph 5, for the court to have regard to the true nature of the bargain reached by the parties on 7 November 2002, as embodied in the court's orders, and to assess whether ACDT's application undermines any material part of the bargain. This is what I have tried to do.

Should Mr Lennox be relieved of his undertaking not to take steps to remove Mr Arkin as a director of TAPL?

68 In their written submissions, counsel for the defendants argued that if the court were disposed to grant ACDT's application, then there should be full "restitutio in integrum". They proceeded to refer to many authorities supporting the proposition that equity will in general not set aside any disposition or transaction unless restitutio in integrum is possible.

69 This is not case in which it is relevant to invoke the equity to have restitutio in integrum, which arises where a transaction is set aside on equitable grounds. Here nothing is being set aside, but instead, further orders are to be made pursuant to the terms of the bargain that was struck; and moreover, the orders are to be made in the exercise of the court's discretion and not by the application of any equitable doctrine to set aside transactions. It is best to see this submission on behalf of the defendants as a broader submission which asserts that if the court is to relieve ACDT of an important part of its undertakings, fairness requires that Mr Lennox be relieved of his undertaking not to take steps to remove Mr Arkin from TAPL's board. As senior counsel for the defendants put it in oral submissions, "what's good for the goose is good for the gander".

70 I reject the defendants' submission. I do not regard the variations of the undertakings that I will permit, as a substantial retreat by ACDT from the bargain that it struck on 7 November 2002. As I have indicated, the variations to the undertakings will be confined to the exploration of events prior to the time when the undertakings were given. ACDT's undertakings will remain in place with respect to events after 7 November 2002.

71 Moreover, Mr Lennox's undertaking serves, as would an interlocutory injunction, to preserve the status quo pending the final hearing of the proceeding, in circumstances where the basis for his asserted entitlement to prevent ACDT from having representation on the TAPL board is a series of share transfers the validity of which is disputed. At this stage in proceeding, compelling reasons going to the balance of convenience would be needed before the court would permit the status quo to be disrupted, and there are no such compelling reasons in the evidence before me now.

72 In their written submissions counsel for the defendants said that if ACDT's claim for an injunction to restrain Mr Lennox from dismissing Mr Arkin from the TAPL board were to be revived, their clients would wish to show that "a vast spectrum of further facts" had arisen which would justify Mr Arkin's dismissal as a director and would emphasise the continuing danger that he posed to TAPL whilst occupying that position. They said that "time would have to be taken and resources and costs devoted to preparing massive affidavits that would lead to a lengthy hearing". It seems to me that these submissions themselves provide a justification for preserving the status quo by holding Mr Lennox to his undertaking pending completion of the referee proceeding, and not permitting the interlocutory issue to be re-agitated at this stage.

Conclusions as to ACDT's application to vary its undertakings

73 I shall make orders to the following effect: (1) An order, pursuant to order 5 made by this court on 7 November 2002, granting leave to the plaintiff to vary its undertakings noted by the court in paragraph 3 of the orders of that date, to permit the Australian legal representatives of the plaintiff (subject to order (2)): (a) to interview and take a statement from Mr Harry Arkin with respect to (i) paragraphs 15 to 25, (ii) paragraphs 94A to 97B, and (iii) paragraphs 97C to 97K (but only in respect of matters occurring or alleged to have occurred on or prior to 7 November 2002), of the Fifth Further Amended Originating Process, and (iv) paragraphs 1.9 to 1.11.3 of the Amended First Cross-Claim by the First and Fourth Defendants; and (b) to have discovery of and to inspect all documents in the categories identified in paragraph 2 (a) to (d) inclusive of the plaintiff's Amended Notice of Motion filed on 10 March 2004. (2) Subject to any further order of the court, the leave to be granted in terms of paragraph (1) will be subject to the condition that no information relevant to this proceeding, procured as a result of (a) the exercise of that leave, or (b) any interview with or statement by Mr Arkin, or (c) any inspection of discovered documents, may, without the further leave of the court, be (d) adduced by the plaintiff in any legal proceedings (including the referee proceeding), or (e) communicated to the plaintiff or any other person (except the legal representatives of the parties, their employees and agents).

74 I recognise that the drafting of the orders may be improved. I shall direct ACDT to bring in draft short minutes of orders to give effect to what I propose. It will be necessary for ACDT to give modified undertakings to the court pursuant to the leave that I shall grant.

75 As I have said, it appears that ACDT will not be able to interview Mr Arkin and take a statement from him until Mr Arkin obtains the Federal Court's leave to vary his undertakings correspondingly. In his current application to the Federal Court Mr Arkin asks to be fully released from his undertakings to that court. It remains to be seen whether the Federal Court will see any merit in continuing the regime of mirror undertakings in the two courts, when the proceeding in the Federal Court has effectively come to an end and the outstanding issues between the parties are hotly in contest in this court.

76 At the conclusion of his submissions, senior counsel for the defendants suggested that if I were against him, it would be preferable for a letter to be written to Mr Arkin, perhaps even by the court itself, setting out the questions that ACDT's legal advisers wish to raise, and that the letter be reviewed by the defendants' legal team before it is sent. It strikes me that such a procedure would be inefficient and productive of further dispute, and I have therefore decided to prefer the approach advocated by ACDT, which is to permit interview and the taking of a statement.

77 As to costs, I indicated in my reasons for judgment of 20 February 2004 (at [53]) that I had formed a provisional view with respect to the costs of the defendants' application for construction of the undertakings. My provisional view was that I should order ACDT to pay the defendants' costs of that application, to be assessed in the ordinary way rather than on the indemnity basis, and to be paid forthwith. However, I did not make any order for costs of the defendants' application, as the parties proceeded to deal with the balance of ACDT's application for variation of the undertakings, without making further submissions on the costs of the defendants' application. Therefore the costs of both applications remain to be dealt with. Although the total amount of costs will by now be a substantial figure, I judge it to be in the interests of the parties that the question of costs be dealt with expeditiously. I shall therefore fix a time to do so, and limit the parties to oral submissions (including, if necessary, the tender documentary evidence with respect to costs) lasting, in each case, no more than 15 minutes and without written supplementation.

78 The defendants have made application, pursuant to paragraph [83] of my reasons for judgment on an earlier application for security of costs, dated 30 April 2003, for an increase in the amount provided as security for costs. On that occasion I directed ACDT to provide security in the sum of $24,419 in respect of the costs of enforcing any judgment for costs in Canada, security in the sum of $255,000 for TAPL and TNZL, and security in the sum of $75,000 for Mr and Mrs Lennox.

79 Senior counsel for ACDT has informed the court that his client acknowledges the defendants' entitlement to ask for an increase in the provision of security. He contends that I have already adequately provided for the cost of enforcing any judgment against ACDT in Canada. I agree. The question is how much to allow as security for the four defendants in other respects.

80 In her affidavit made on 17 May 2004, Ms Staff estimates that the costs incurred by TAPL and TNZL to that date, on a solicitor and client basis, are approximately $1,935,000. She says that at least approximately 60% would be recoverable for party and party costs. In his affidavit made on 17 May 2004 Mr Lawson, the solicitor for Mr and Mrs Lennox, estimates that his clients' further costs, in respect of which additional security is sought, will be approximately $254,200.

81 Senior counsel for ACDT pointed out that on the last occasion, TAPL sought $1.3 million and received $255,000, approximately 20% of the amount sought. Mr and Mrs Lennox sought about $200,000 and received about $75,000, a little less than 40% of what they sought. At the present time TAPL seeks an additional $675,000. He said that if I were to apply the same percentage adopted previously, I would grant it approximately $132,000. Mr and Mrs Lennox seek $254,200. 40% of that amount would be approximately $101,000.

82 It seems to me that, when the application is to "top up" security for costs already ordered, it is unnecessary to go into the level of detail adopted on the first application. I agree with senior counsel for ACDT that it is sufficient, in the exercise of the court's discretion, to adopt the approach of allowing a percentage of actual and estimated solicitor and client costs, taking into account the assessments I made earlier.

83 On the other hand, in the absence of the kind of evidence offered by Mr L'Estrange on the last occasion, I think it would be unduly harsh on TAPL and TNZL to confine them to 20% of their overall estimated solicitor and client costs. I think that figure should be adjusted upwards, in light of Ms Staff's evidence, to 30% of the solicitor and client estimate. It follows, in my view, that TAPL and TNZL should have security for costs measured that 30% of the total actual and estimated solicitor and client costs of $1,935,000, that is, $580,500. Since they have already received security for $255,000, the appropriate order is to require ACDT to provide additional security for TAPL and TNZL of $325,500.

84 As regards Mr and Mrs Lennox, the allowance I made on the last occasion was a little under 40% of the amount claimed. Continuing that percentage assessment, I shall allow them additional security calculated at 40% of the additional amount claimed ($254,200), namely $101,680. **********

Last Modified: 06/10/2004 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.