Autosports Castle Hill Pty Ltd v Altitude Brighton Pty Ltd

Introduction 1 These reasons concern the question of costs in relation to an application for preliminary discovery pursuant to r 7.23 of the Federal Court Rules 2011 (Cth). 2 The application for preliminary discovery arose in the following circumstances. The prospective applicant, Autosports Castle Hill Pty Ltd (ACH), acquired a motor vehicle dealership in Bentley, Victoria (the dealership) from the first prospective respondent, Altitude Brighton Pty Ltd (Altitude) on 14 September 2016. At the time, the second prospective respondent, Mr Barber, was Altitude's sole director and shareholder. Part of the purchase price for the dealership was determined by a formula referenced to the audited accounts for the dealership for the year ended 30 June 2016 (the 2016 audited accounts). 3 On 9 September 2016, before the effective date of the acquisition, Volvo Car Australia Pty Ltd (Volvo) issued an invoice to Altitude for $162,975. The invoice was issued to recover payments (the reversal invoice), described as holdback payments, which Volvo had made to Altitude in January 2016, apparently erroneously. In an email sent to Volvo on 14 September 2016, Mr Barber said that the reversal would not only be embarrassing for Altitude in its first month of trading with ACH, but "catastrophic with our financial reporting …". 4 On the same day, Mr Barber authorised the issue of the 2016 audited accounts. As the dealership had been conducted by Altitude as a trustee, the 2016 audited accounts contained a Trustee's Report. The Trustee's Report was signed by Mr Barber and contained the following statement: No matter or circumstance has arisen since 30 June 2016 that has significantly affected the Trust's operations, results or state of affairs, or may do so in future years. 5 Similar or corresponding statements were made in other sections of the 2016 audited accounts. 6 ACH believes that the 2016 audited accounts may have incorrectly recognised the holdback payments, and incorrectly failed to recognise the reversal of those payments, and therefore may have materially misrepresented the amount of the net profit by reference to which part of the purchase price for the dealership had been calculated. 7 In light of these matters, ACH considers that it might have a potential right to obtain relief against the prospective respondents pursuant to s 236 of the Australian Consumer Law for misleading or deceptive conduct in contravention of s 18 thereof.

The application for preliminary discovery 8 As ACH did not consider that it had sufficient information to enable it to decide whether or not to commence proceedings against the prospective respondents, it filed an originating application for preliminary discovery on 16 April 2019. The discovery sought was for: a. Copies of Altitude's accounting journals and general ledger entries for the 2015 or 2016 financial years which record: i. the recognition of any of the holdback payments identified in the Holdback Reversal Invoice; or ii. the reversal of any of those holdback payments. b. Copies of any communications between Altitude and its auditors (PricewaterhouseCoopers) which: i. attach the Holdback Reversal Invoice; or ii. refer to the Holdback Invoice, created in the period 9 September 2016 to 14 September 2016 (inclusive). 9 In an affidavit made on 13 April 2019, ACH's solicitor, Mr Marshall, explained why ACH held the view that it had insufficient information to commence proceedings. Mr Marshall also explained the unsuccessful enquiries that ACH had made in order to obtain relevant information and why the prospective respondents might hold documents which would assist ACH in making a decision as to whether it has a right to obtain relief from them. 10 The application for preliminary discovery first came before me for case management on 20 May 2019. At the request of the parties, I listed the application for hearing (the appointed date was 9 September 2019) and made programming orders for the filing of evidence and written submissions. At that time, Mr Marshall's affidavit had already been filed. 11 As events transpired, the prospective respondents did not file any responsive evidence; nor did they file any written submissions in response to ACH's written submissions, which were filed on 26 August 2019. 12 On 6 September 2019, one business day before the appointed hearing, my Chambers was informed that agreement had been reached that the prospective respondents would provide the discovery that was sought. However, the parties were at issue concerning the costs of the application. I hasten to add that ACH does not dispute that it should pay the prospective respondents' reasonable expenses of complying with the order for preliminary discovery.

The submissions 13 ACH submits that the prospective respondents should pay its costs of the preliminary discovery application for three reasons. 14 First, ACH has been entirely successful in its application. 15 Secondly, the prospective respondents have taken an adversarial approach to the application. Prior to ACH filing the originating application, the prospective respondents advanced positive arguments against the substance of the application, which Mr Marshall addressed in his affidavit to which I have referred (comprising 15 pages and a substantial documentary exhibit). Further, the fact that orders were made at the case management hearing on 20 May 2019, which included listing the application for a contested hearing, showed that the prospective respondents continued to resist the giving of the discovery that ACH sought. 16 Thirdly, ACH submits that the prospective respondents' conduct in relation to its application has been unreasonable. It says that the substance of the application was first ventilated in a letter dated 14 August 2018, more than one year before the filing of the originating application, in circumstances where its case for preliminary discovery is straightforward - a fact which, ACH says, is supported by the prospective respondents not filing responsive evidence or submissions. 17 For their part, the prospective respondents submit that success in obtaining an order for preliminary discovery does not entitle a prospective applicant to an order for costs or disentitle an unsuccessful prospective respondent to its costs of opposing the preliminary discovery application: J&A Vaughan Super Pty Ltd v Becton Property Group Limited [2013] FCA 340 at [17]; McFarlane as Trustee for the S McFarlane Superannuation Fund v IOOF Holdings Limited (No 2) [2018] FCA 932 at [7]. The prospective respondents accept, however, that an unsuccessful prospective respondent might expose itself to an adverse costs order if it acts adversarially: Pfizer Ireland Pharmaceuticals v Samsung Bioepis AU Pty Ltd (No 2) [2019] FCA 657 at [25]. 18 The prospective respondents point to the fact that they did not ignore ACH's letter of 14 August 2018 but, rather, responded to it by endeavouring to provide explanations on two occasions - one incorporating an explanation from PricewaterhouseCoopers confirming the "correct accounting treatment of the transactions in question". They say that they were not obliged to provide any explanation. Nevertheless, they did. They argue that ACH's application for preliminary discovery arises from the fact that it was not satisfied with the explanations that had been given. 19 Further, the prospective respondents submit that they have not adopted an adversarial approach. They have not sought to contradict ACH's evidence (Mr Marshall's affidavit) and, ultimately, they have consented to the application, obviating the need for a hearing. 20 Finally, the prospective respondents submit that the appropriate award of costs should be framed conditionally, to the effect that: (a) in the event that ACH commences substantive proceedings against them within two months, the costs of the application for preliminary discovery should be costs in the cause of those proceedings; and (b) in the event that ACH does not commence substantive proceedings within that time, there should be no order as to costs.

Conclusion 21 I accept that the Court's jurisdiction to order preliminary discovery is an extraordinary one. I also accept that a successful prospective applicant has no automatic entitlement to an award of costs in its favour. 22 While, ultimately, the prospective respondents in the present case did not contest the making of the order for preliminary discovery that was sought, I am persuaded that their conduct warrants an order for costs being made against them. The discovery sought by ACH was modest and hardly intrusive. At the time the matter came before me for case management, Mr Marshall's affidavit had been available to the prospective respondents for some weeks. That affidavit makes a persuasive case for the preliminary discovery that was sought. The stance taken by the prospective respondents at the case management hearing was clearly one of resistance to preliminary discovery being given. The prospective respondents cannot advance, as a virtue, their ultimate consent to preliminary discovery being granted. They advance no reason why the consent that was given on 6 September 2019 could not have been given on 20 May 2019, at the latest. The prospective respondents' approach required ACH to incur, unnecessarily, additional costs in filing written submissions and preparing for a hearing. 23 Therefore, I do not accept that the present case is one where a conditional costs order is appropriate. The appropriate order is that the prospective respondents pay ACH's costs, regardless of whether, ultimately, ACH commences proceedings against them.

Disposition 24 An order for costs will be made accordingly. As I have noted, ACH accepts that it should pay the prospective respondents' reasonable expenses in providing the discovery that has been ordered. I certify that the preceding twenty-four (24) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.