Consideration
26 Having regard to all the circumstances, and on the basis of the evidence and material currently before the Court, I am not satisfied that the Applicants should be required to give discovery of the categories of documents specified in the Interlocutory Application. My reasons for so concluding are as follows.
27 First, on the basis of the evidence as it currently stands, I am not satisfied that the documents sought are directly relevant to the issues raised by the pleadings or the anticipated evidence at trial. My finding in this regard is based not so much on the narrow pleading point raised by the Applicants, but rather on the basis that, in my opinion, the contention that there may be a different tax treatment, or different tax consequences, between the hypothetical receipt of the Sage consideration and the actual receipt of the Bain consideration rises no higher than conjecture, at least on the basis of the evidence currently before the Court. It is difficult to see how there could be any materially different tax consequences if, like the sale to Bain, the sale to Sage had ultimately proceeded pursuant to a formal written contract entered into in the Cayman Islands. It is common ground that the alleged contract between Sage and the Applicants envisaged that the terms of the share sale would be formalised in a written agreement, the Share Sale Agreement. It also appears to have always been envisaged that the Share Sale Agreement would be executed in the Cayman Islands. Had that occurred, it is by no means clear why it would necessarily follow that the Commissioner of Taxation would assess the tax consequences of the sale on the basis that the sale occurred pursuant to a contract that was entered into in Australia.
28 In oral submissions, counsel for Sage submitted that "the proposition that the Commissioner of Taxation wouldn't have a difficulty with the idea that even though a binding contract was made in Sydney, because it was subsequently restated in more fulsome terms and executed in the Cayman Islands, that it was actually a Cayman Islands contract is, at best, highly contestable." No authority or evidentiary basis for this submission was advanced. Mr Cooper says nothing on this topic in his letter to Sage's lawyers. It is a submission that is contrary to the information and belief evidence of Mr Harris that the Applicants' tax expert, Mr King, was not aware of any basis upon which it could be contended that there would be any relevant difference in the tax treatment.
29 There is nothing in Mr Cooper's letter to Sage's lawyers to support the proposition that the sale to Sage, had it proceeded as agreed or envisaged, would have been taxed on a different basis. Indeed, Mr Cooper's letter appears to proceed on the basis that, at least in the case of the 10th to 51st Applicants, the Applicants would be liable to pay tax in Australia and New Zealand on the same basis under both the alleged Sage contract and the actual Bain contract. If that is the case with the 10th to 51st Applicants, it is not entirely clear why there would be any different tax treatment with the other Applicants.
30 Sage's submission on this issue depends on the proposition that the relevant sale contract (in the case of any sale to Sage) would be considered to have been executed in Australia. It is then submitted that, because the First to Ninth Applicants are either foreign entities or flow-through entities, any ordinary income derived from Australian sources would be assessable income in Australia: Income Tax Assessment Act 1997 (Cth), s 6-5(3). A relevant consideration in determining whether any income derived from an Australian source is said to be where any relevant purchase and sale contracts are executed. Sage relies in this respect on Taxation Determination 2011/24 (TD 2011/24). As TD 2011/24 records, however, the question whether income is from an Australian source is a potentially complex question of fact. The place of execution of contracts is only one of many potentially relevant considerations and is certainly not determinative. Nothing said in Mr Cooper's letter suggests that he considered the place of execution of contracts to be an important, let alone determinative, consideration here. He does not refer to TD 2011/24. According to Mr Cooper's letter, the issue of whether any profit from the sale might be considered to be from an Australian source only arises if the profit is considered to be revenue in nature, as opposed to capital in nature. Even then, it would not necessarily follow that the profit would be taxable in Australia given the potential operation of double tax treaties.
31 To justify an order for discovery of documents relating to the tax affairs of the Applicants, or some of them, Sage must be able to point to some firm basis upon which it can be concluded that the documents are directly relevant to the issues raised by the pleadings or evidence. It has not done so. There is no firm legal or evidentiary basis for concluding that the documents sought will or even might reveal a different tax treatment that will or even might be relevant to the quantum of damages. It is unclear whether the Commissioner of Taxation would, or would have a basis to, consider that any sale to Sage, had it occurred as envisaged, would have been pursuant to a contract executed in Australia. Even if that was clear, it still would not necessarily follow that any profit from the sale would be taxed or taxable in Australia.
32 The second reason for refusing the discovery order sought is that, even if there was some proper basis for contending that any sale to Sage would have been assessed by the Commissioner of Taxation on the basis that the relevant sale contract had been entered into in Australia and therefore there might be some differential tax treatment, in my opinion the broad and wide ranging type of inquiry that Sage has engaged its tax expert to conduct is not warranted in any event. The inquiry envisaged by Mr Cooper is complex and involves a number of assumptions and hypotheticals. It involves, in relation to the First to Ninth Applicants, an inquiry into the hypothetical (in the case of the alleged Sage contract) and actual (in the case of the Bain contract) Australian and international tax treatment of the consideration received by potentially many entities (depending on how many "flow through" entities are involved) having regard to tax residency, the potential application of double tax treaties, the nature of any income or profit (whether it was capital or revenue in nature) and other matters.
33 Whatever the precise scope and operation of the Gourley principle, it does not mean that the potential tax consequences of the loss complained of must or should be taken into account in all circumstances in the assessment of damages, particularly if the damages to be awarded to a plaintiff are taxable. In particular, the principle does not extend to cases where the potential tax consequences are uncertain or depend upon imponderables, or where the added complexity involved in taking tax into account, or the remoteness of the potential differential tax treatment, would outweigh any gain to fairness of compensation.
34 The authorities relating to the adjustment of damages to take into account tax implications were reviewed by the New South Wales Court of Appeal in Daniels v Anderson (1995) 37 NSWLR 438 at 581-586 (Daniels). In Daniels, the trial judge had made orders that were designed to adjust the amount of the verdict to take into account a change between the company tax rate that the plaintiff would have paid tax on and the tax rate that would be applied to the verdict. The Court allowed an appeal against those orders. Clarke and Sheller JJA referred to the judgment of Walsh J in Williamson v Commissioner for Railways (1960) SR (NSW) 252, where his Honour said (at 280):
But neither in Gourley's Case nor in the other cases in which it has been considered, has there been an extension of its principle beyond cases where the claim is that earnings or profit which would otherwise have been made have been lost, and where it is evident that such earnings or profits, if made, would have attracted a direct liability for the payment thereon of income tax. I am not disposed to extend the principle beyond such cases, The attempt here made is to extend it so as to take taxation into account in every situation where it appears that it is possible to say that if the loss complained of had not occurred, or if, when it occurred, the plaintiffs had made it good, there would have been some consequential difference in the tax payable. Gourley's Case stresses the importance of the principle of remoteness under which it is not all the consequences of the loss which are to be taken into account.
35 In relation to the orders made by the trial judge, Clarke and Sheller JJA concluded as follows (at 585-586):
As Walsh J said in Williamson the principle of remoteness means that not all the consequences of the loss complained of are to be taken into account in assessing damages. The need after judgment for inquiry about the consequences of the changed rate of company tax is a telling indicator that they are too remote to be taken into account. Even if a judicious blend of principle and expediency should determine the account to be taken of the impact of tax, in our opinion such an adjustment cannot be supported in the present case. AWA has adverted to circumstances which would make it difficult if not impossible to arrive at an amount which would allow appropriately for the tax consequences of the reduction in the company rate. In most cases if damages to be awarded to a plaintiff are taxable, taxation should not be taken into account in their assessment. There may be exceptions, but this case is not one.
36 The reference in this passage to the "judicious blend of principle and expediency" is a reference to the judgment of Stephen J (in dissent) in Atlas Tiles Ltd v Briers (1978) 144 CLR 202. Stephen J said (at 235-236) that the so-called conditions precedent to the application of the Gourley principle, loss of income subject to tax and a verdict that was not, represented a judicious blend of principle and expediency that must determine when, in the assessment of damages, the incidence of taxation is to be taken into account. His Honour continued (at 235):
In that blend the principle in question is that damages should be no more than compensatory, the expediency is concerned with the degree of added complexity which attainment of that principle may involve. It is easy to imagine a particular taxing provision the effect of which, if not taken into account in the process of assessment, will nevertheless have but little effect upon attainment of the desired goal of just compensation. In such a case the added complexity involved in taking tax into account may outweigh the relatively slight gain in fairness of compensation.
37 Counsel for Sage referred to the decision of Moynihan J in Jindi (Nominees) Pty Ltd v Dutney (1993) 26 ATR 206 (Jindi), a case where tax was taken into account in assessing damages. That case, however, appeared to involve a fairly straightforward exercise of taking into account, in assessing damages on the particular facts of the case, the fact that returns on investments that would have been made, but for the acts or omissions of the defendants, would have been taxable. The scenario considered in Jindi is distinguishable from the complex exercise and analysis envisaged by Sage through Mr Cooper. Jindi was also decided prior to Daniels.
38 There could be little doubt that the exercise involved in attempting to calculate the amount of tax paid or payable by the Applicants arising from the sale to Bain and comparing it to the amount of tax that would have been payable if the MYOB shares had been sold to Sage would be difficult and complex, if not uncertain and dependent on many imponderables. That is the effect of the information and belief evidence of Mr Harris based on his discussions with the Applicants' tax expert Mr King. The difficulty and complexity is also self-evident from the terms of Mr Cooper's letter, relied on by Sage. Mr King's opinion is also that the documents sought by Sage would not enable Mr Cooper to compare the tax consequences of the two scenarios. In this respect, it is highly doubtful that any different tax consequences are readily identifiable or quantifiable. It is also highly likely that "the added complexity involved in taking tax into account may outweigh the relatively slight gain in fairness of compensation" and that any potential difference in tax consequences is likely to be too remote (in the Williamson sense) to take into account in relation to the assessment of damages. The extensive discovery sought by Sage is accordingly not warranted or justified by the Gourley principle. In this respect, the documents sought are not directly relevant to the issues raised by the pleadings or in the anticipated evidence at trial.
39 The third reason for my refusing to order the discovery sought is related or similar to the second reason, but rests on more discretionary considerations. Rule 20.11 of the Rules provides that a "party must not apply for an order for discovery unless the making of the order sought will facilitate the just resolution of the proceeding as quickly, inexpensively and efficiently as possible." This rule reflects the overarching purpose of the civil practice and procedure provisions found in s 37M of the Federal Court Act. That purpose is also reflected in Practice Note CM 5.
40 Even if I was satisfied that there was some concrete legal or evidentiary basis for Sage's contention that there may be relevant and material differences between the way the Sage consideration would have been taxed and the way the Bain consideration was taxed, and that those differences were readily ascertainable and quantifiable and not too remote, I accept the Applicants' submission that the burden of giving the discovery sought is out of all proportion to any potential relevance the discovered documents might have. Whilst there is no evidence from the Applicants in relation to the extent of the searches that would be required to comply with the discovery orders sought, or the cost or burden of such searches, or the volume of documents likely to be discovered, it can in my view be inferred from the very breadth and scope of some of the categories of documents sought that compliance would be difficult, time consuming and expensive.
41 In this regard, I also take into consideration that this matter has been set down for hearing to commence on 25 November 2013 with an estimate of 20 days. I have difficulty in seeing how the discovery order sought, if made, would not imperil the hearing date. I have even more difficulty in seeing how, in the relatively short time before the hearing is to commence, documents caught by such a discovery order could be discovered, inspected, analysed by Sage's expert and a report prepared in relation to the taxation consequences on the basis of those documents. Even if that was possible, some provision would then have to be made for a report in reply by a tax expert retained by the Applicants. If there was no agreement between the experts, that would result in effectively a trial within a trial: the consideration and determination of what could be a potentially difficult and complex tax question as part of the assessment of damages. In all the circumstances, I am not satisfied that the discovery sought is necessary to facilitate the just resolution of the proceeding as quickly, inexpensively and efficiently as possible. The application should be refused in the exercise of the Court's discretion on that basis.
42 As I adverted to earlier in this judgment, Sage also sought to justify the discovery order, at least in its written submissions, on the basis that the documents sought would be relevant to the state of mind of the Applicants. I reject this justification for the discovery sought for a number of reasons. First, Sage's case in this respect is that it was the Applicant's plan and intention that any contract for the sale of MYOB would be entered into in the Cayman Islands, not in Sydney, and that the reasons for this included securing a tax benefit for certain Applicants. Yet it is readily apparent that the Applicants do not dispute that it was their intention for any formalised contract for the sale of the MYOB shares to be executed in the Cayman Islands. The discovery sought could not be justified on the basis of making out a fact or facts not in dispute, or not likely to be in dispute. Second, even if this was a fact in issue, it could perhaps warrant discovery of a narrow category of documents relating to the reasons for wanting to have the sale contract executed in the Cayman Islands. It would not justify the extensive discovery sought.