Caason Investments Pty Limited v Cao

Counsel for the First to Seventh Defendants: The First to Seventh Defendants did not appear

Counsel for the Eighth to Twentieth Defendants: A Horvath

Solicitor for the Eighth to Twentieth Defendants: Moray & Agnew Lawyers

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1558 of 2012

BETWEEN: CAASON INVESTMENTS PTY LIMITED (ACN 089 590 858)

JUDGE: MURPHY J DATE OF ORDER: 16 DECEMBER 2015 WHERE MADE: MELBOURNE

1. The Eighth to Twentieth Defendants provide standard discovery pursuant to Rule 20.14 of the Federal Court Rules 2011 (Cth), in electronic form, by 26 February 2016, the scope of which must reflect the reasons for judgment herein.
2. Should the Eighth to Twentieth Defendants be unable to meet their discovery obligations in the specified timeframe they must apply for an extension of time by 8 February 2016.
3. Costs reserved. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1558 of 2012

BETWEEN: CAASON INVESTMENTS PTY LIMITED (ACN 089 590 858)

JUDGE: MURPHY J DATE: 16 DECEMBER 2015 PLACE: MELBOURNE

REASONS FOR JUDGMENT 1 Before the Court is an interlocutory application by the plaintiffs, Caason Investments Pty Ltd and Wise Plan Pty Ltd, regarding the scope of standard discovery to be provided by the eighth to twentieth defendants who are partners in the South Australian partnership of the auditing firm Grant Thornton, which provided auditing services to Arasor International Ltd ("Arasor"). For convenience I shall refer to the eighth to twentieth defendants as "Grant Thornton". 2 The substantive proceeding is a shareholder class action brought on behalf of all persons who acquired an interest in Arasor shares between 11 October 2006 and 12 May 2008 and who suffered loss and damage as a result of, in broad terms, misleading representations by the first to seventh defendants, being directors and officers of Arasor in the relevant period ("Directors"), and by Grant Thornton. 3 The proceeding has not moved expeditiously through the interlocutory stages. It was commenced in 2012 yet pleadings are not yet closed and discovery has not yet been provided. In a case management conference on 27 November 2015 I made an order that the Directors provide standard discovery pursuant to r. 20.14 of the Federal Court Rules 2011 ("the Rules"). Grant Thornton sought an opportunity to put on affidavit material and submissions in relation to its discovery, which I allowed. 4 In the application Grant Thornton relied on the affidavit of its solicitor, Ms Kara Yacoubian, sworn 7 December 2015 and written submissions dated 9 December 2015. The plaintiffs relied upon the affidavit of their solicitor, Ms Amanda Banton sworn 4 December 2015 and written submissions dated 9 December 2015. The parties agreed to my deciding the issue on the papers.

The discovery sought 5 The plaintiffs sought standard discovery pursuant to r. 20.14 of the Rules, which relevantly provides: 20.14 Standard discovery (1) If the Court orders a party to give standard discovery, the party must give discovery of documents: (a) that are directly relevant to the issues raised by the pleadings or in the affidavits; and (b) of which, after a reasonable search, the party is aware; and (c) that are, or have been, in the party's control. (2) For paragraph (1)(a), the documents must meet at least one of the following criteria: (a) the documents are those on which the party intends to rely; (b) the documents adversely affect the party's own case; (c) the documents support another party's case; (d) the documents adversely affect another party's case. (3) For paragraph (1)(b), in making a reasonable search, a party may take into account the following: (a) the nature and complexity of the proceeding; (b) the number of documents involved; (c) the ease and cost of retrieving a document; (d) the significance of any document likely to be found; (e) any other relevant matter. (Emphasis added.) 6 There is no dispute between the parties that standard discovery is appropriate in the present case. The controversy surrounds what an order for standard discovery means in relation to the scope of discovery.

The substantive proceeding 7 Broadly, the Amended Consolidated Statement of Claim ("ACSOC") claims damages for losses allegedly suffered by shareholders of Arasor as a result of alleged misleading statements and representations and breaches of the continuous disclosure regime between 11 October 2006 and 12 May 2008 by the Directors and/or Grant Thornton, in contravention of the Corporations Act 2001 (Cth) ("Corporations Act"). It alleges misleading statements or representations contained in documents lodged by Arasor with the Australian Stock Exchange ("ASX"), namely: (a) the Initial Public Offering ("IPO") prospectus published 14 September 2006 ("September 2006 Prospectus"); (b) the 2006 Annual Report published on or about 28 February 2007; (c) the Short-Form Prospectus published 23 March 2007 ("March 2007 Prospectus") (d) the 2007 Half-Yearly Report published on or about 31 August 2007; and (e) the 2007 Annual Report published on 1 April 2008. The pleadings are focused on what is alleged to be Arasor's overly optimistic approach to its recognition of revenue. 8 In broad terms the alleged misleading statements or representations include that: (a) Arasor had built a network of world-class partners and customers, including Bharat Sanchar Nigam Ltd ("BSNL"), India's largest government owned telecommunications service provider; (b) Arasor had secured contracts to provide fixed wireless access terminals to BSNL; (c) upon fulfilment of its initial contract with BSNL, Arasor believed it was well-positioned to be a qualified supplier of multiple telecommunications products to BSNL; (d) Arasor's revenue would be in excess of $27 million for the full year ended 31 December 2006; (e) Arasor's revenue would be in excess of $84 million for the full year ended 31 December 2007; (f) Arasor would be profitable on an after-tax basis for the full year ended 31 December 2007; (g) Arasor's revenue for the financial year ended 31 December 2006, in compliance with the relevant accounting standards, was approximately $29.6 million; (h) Arasor's revenue for the financial half year ended June 2007, in compliance with the relevant accounting standards, was approximately $36.9 million; (i) Arasor's revenue for the financial year ended 31 December 2007, in compliance with the relevant accounting standards, was approximately $116.9 million; (j) Arasor's trade and other receivables for the financial year ended 31 December 2007 totalled $85.5 million; (k) Arasor was likely to collect its outstanding receivables balance and it had no significant concentrations of credit risk; (l) Arasor's financial performance and its receivables balances were effectively monitored on an ongoing basis, with the result that its exposure to bad debts was not significant; (m) Arasor's financial statements for the financial year ending 31 December 2006 and 31 December 2007 and for the Half Year ending 30 June 2007, including its reported revenue, were in accordance with the Corporations Act and Australian Accounting Standards and the relevant regulations and other mandatory professional reporting requirements; (n) Grant Thornton had exercised reasonable care and skill in undertaking the 2006 and 2007 Annual Audits, had reasonable grounds for giving a "negative assurance" regarding the above statement, had conducted the 2006 and 2007 Annual Audits in accordance with Australian Accounting Standards, and there were no material post balance date changes; (o) Grant Thornton had exercised reasonable care and skill in undertaking the review of the 2007 Half-Yearly Financial Statements Audit and had reasonable grounds for making the representations in the 2007 Half Yearly Auditor's Review Report, and it had conducted the review in accordance with the relevant auditing standards; and (p) Grant Thornton was not aware of any matter which caused it to believe the 2007 Half Yearly financial report was not in accordance with the Corporations Act, believed it gave a true and fair view of Arasor's financial position as at 30 June 2007 and of Arasor's performance for the half year ended on that date, and believed it complied with the accounting standard concerning interim financial reporting and the relevant regulations. 9 Paragraphs 45 to 47 of the ACSOC plead that Grant Thornton impliedly represented it exercised appropriate care, skill and judgment in making the negative assurance statements in the September 2006 Prospectus that "nothing had come to its attention to cause it to believe that": (a) the historical information set out on pages 48 to 62 of the September 2006 Prospectus did not fairly present Arasor's historical financial position as at 1 June 2006 and its historical performance and cash flows in the period since incorporation in accordance with Australian Accounting Standards and mandatory professional reporting requirements and policies; (b) the Consolidated Pro-Forma Balance as at 1 June 2006 had not been properly prepared on the basis of the pro-forma transactions; (c) the Directors' best-estimate assumptions did not provide a reasonable basis for the preparation of the forecasts; and (d) the forecast financial performance of Arasor in the years ending 31 December 2006 and 31 December 2007 were not properly compiled on the basis of the Directors' best-estimate assumptions and not presented fairly in accordance with Australian Accounting Standards and mandatory professional reporting requirements and policies. 10 However, no allegation is made of misleading statements or representations by Grant Thornton in respect of the September 2006 Prospectus at the time the prospectus was published. Ms Banton's affidavit did not fully grapple with the issues between the plaintiffs and Grant Thornton, and instead she summarised all issues in the case (rather than doing so just by reference to Grant Thornton). 11 However, the ACSOC pleads that Grant Thornton's statements in the September 2006 Prospectus were expressly incorporated into the next capital raising document, the March 2007 Prospectus. By Grant Thornton's consent to the inclusion in the March 2007 Prospectus of an auditor's report and independence declaration (which had been included in the 2006 Annual Report), it is alleged to have represented that: (a) there had been no material changes to the financial information and forecasts set out in the September 2006 Prospectus save as set out in Arasor's prior ASX announcements; (b) there were no matters arising since 31 December 2006 of which Grant Thornton was aware that were required to be recorded in Arasor's financial statements (or notes to them) and which had not been; and (c) Arasor's 2006 Annual Financial Statements (and notes) were in accordance with the Corporations Act, the Corporations Regulations, and relevant accounting standards. 12 It is alleged that these representations were misleading including in that the value of Arasor's intangible assets was overstated. It is also alleged that the negative assurance statement by Grant Thornton in the September 2006 Prospectus had become misleading by the time of the publication of the March 2007 Prospectus, in that Grant Thornton could not have had a reasonable basis for the belief it there expressed because it knew or ought to have known of an array of matters going to Arasor's contract arrangements, customers, revenue and future revenue. 13 The ACSOC makes various other allegations against Grant Thornton in relation to the 2006 and 2007 Annual Auditor's Audit Reports. For example, paragraph 143 of the ACSOC pleads that Grant Thornton made representations in the 2006 Auditor's Audit Report on 28 February 2007, the 2007 Half Yearly Auditor's Review Report on 30 August 2007 and the 2007 Auditor's Audit Report on 31 March 2008 ("the Audit Reports") which were misleading because Grant Thornton: (a) did not exercise reasonable skill and care in undertaking the review of the Audit Reports; (b) did not have reasonable grounds for making the representations alleged; and (c) breached the Australian Auditing Standards: (i) by failing to adequately understand Arasor and its environment including its internal controls sufficient to identify and assess the risks of material misstatement; (ii) by failing to obtain sufficient evidence to be able to draw reasonable conclusions on which to base its audit opinions; (iii) by failing to properly use the work of other auditors and by failing to consider whether its own participation was sufficient to act as the principal auditor; (iv) by failing to detect continued non-payment in respect of the BSNL deals; and (v) by failing to issue a qualified audit opinion.

Scope of standard discovery in the present case 14 The plaintiffs sought orders compelling Grant Thornton to discover documents located by a reasonable search that are directly relevant to the issues in the case, comprising documents upon which Grant Thornton intend to rely, are adverse to Grant Thornton's case, or adverse to the plaintiffs' case. It is central to the dispute that the plaintiffs sought to require Grant Thornton to discover the entirety of its audit or review files, working papers and correspondence including any such documents that concerned the September 2006 Prospectus. 15 The plaintiffs relied on the advice of an (at this stage unnamed) audit and accounting expert ("the audit expert"). The audit expert advised the solicitors for the plaintiffs that he or she needed to see: (a) time records so that he or she could see how long the various members of the teams spent on different aspects of the audit or review. This was to assist the expert to determine whether the manner in which the work was done and delegated was that which would have been conducted by a reasonably competent audit firm; (b) correspondence between Grant Thornton and Arasor and between Grant Thornton and auditors of subsidiary companies. This was to enable the audit expert to assess whether standards relating to the use of work of other auditors had been complied with and whether there were matters in correspondence which a reasonably competent auditor should have taken account of in planning and conducting the audit or review; and (c) documents prepared or received in the course of the audit or review such as minutes, file notes, documents in relation to communications with Arasor, working papers, including audit or review programs, audit or review planning documents, descriptions of systems and processes, analyses and testing, issues memoranda, summaries of significant matters, contracts, agreements and checklists concerning significant matters, reviews of audit or review work performed by auditors of subsidiary entities and copies of financial statements, both final and those upon which review work had been conducted or noted. 16 Importantly, the audit expert advised that he or she needed all of Grant Thornton's auditing files because they: …enable me to see how the audits or reviews were planned or conducted; how the findings were assessed; and how findings were communicated to shareholders and directors or management… [a]ll the parts of an audit or review are interrelated so that a matter dealt with in one part of the working papers may [be] relevant and of significance to another part of the audit or review. For me to assess the work done, it is important that I am able to see and evaluate the whole of the audit or review… On this basis the plaintiffs sought the entirety of Grant Thornton's audit or review files, including working papers, correspondence and time records. 17 On the assumption that an order for standard discovery would be made, Grant Thornton contended that it should not be obliged to discover the entirety of its files. Amongst other things it contended that: (a) the allegations regarding its provision of negative assurances at paragraphs 45 and 46 of the ACSOC are not the source of great controversy; (b) there is no claim that the making of the negative assurances was misleading; and (c) the only other part of the pleading which links Grant Thornton to the September 2006 Prospectus is the allegation at paragraph 68 that the statements and representations in the prospectus were repeated in the March 2007 Prospectus, and that they were misleading statements or representations as at that date. While those matters can be accepted they do not go far. 18 Grant Thornton argued that there is no basis for concluding that the documents regarding the September 2006 Prospectus described at paragraphs 11-16 of the Second Schedule to Ms Banton's affidavit are directly relevant to the issues raised by the pleadings or will facilitate the just resolution of the proceeding as quickly, inexpensively and efficiently as possible. It contended that documents in connection with the September 2006 Prospectus cannot be directly relevant to any disputed issue between the plaintiffs and Grant Thornton, and that the application is merely a fishing expedition and oppressive. 19 I do not accept these contentions. In my view Grant Thornton should discover all of its audit or review files regarding Arasor including in relation to the September 2006 Prospectus, including working papers, correspondence and time records. 20 I say this, first, because the class action makes claims on behalf of all persons who acquired an interest in Arasor shares over a 19 month period on the ASX and in two capital raisings. I was not provided with any assessment of the quantum of damages claimed in the proceeding, but I approach the scope of discovery on the basis that the proceeding claims damages of tens of millions of dollars on behalf of some thousands of class members. 21 Second, I accept the plaintiffs' submission that there is a substantial asymmetry of information between the plaintiffs and class members on the one hand and Grant Thornton on the other, significantly more so than in 'ordinary' commercial litigation. The plaintiffs and class members are very much outsiders to the events within Arasor, and to Grant Thornton's involvement (if any) in alleged misleading statements or representations. They will be at a significant disadvantage if a narrow approach is taken to the scope of discovery. 22 Third, it is inappropriate to characterise the plaintiffs' application for documents relating to the September 2006 Prospectus as a fishing expedition. In Trade Practices Commission v CC (NSW) Pty Ltd (1995) 58 FCR 426 at 438; [1995] FCA 556 Lindgren J said, and I agree, that "fishing" means that "discovery must not be used for the purpose of ascertaining whether a case exists, as distinct from the purpose of compelling the production of documents where there is already some evidence that a case exists". As his Honour observed, the facts of a particular case can sometimes make the distinction between "fishing" and "non-fishing" difficult to discern. 23 In the present case, the plaintiffs have relied on Arasor's publicly available documents to allege a case against Grant Thornton in relation to, amongst other things, representations made in the March 2007 Prospectus. The effect of the plaintiffs' submissions is that they seek documents regarding the September 2006 Prospectus not in order to establish whether a case exists against Grant Thornton concerning its conduct in respect to that prospectus, but in order to make out their pleaded case in respect to the March 2007 Prospectus. That is not "fishing". 24 Fourth, underpinning the relevant allegation against Grant Thornton is the contention that before it made representations in the March 2007 Prospectus, and consented to the inclusion of the material in the September 2006 Prospectus in the March 2007 Prospectus, it was obliged to review its earlier work in relation to the September 2006 Prospectus. On this basis, its documents relating to the September 2006 Prospectus appear to be directly relevant to the issues in dispute. 25 Fifth, the advice provided by the audit expert - to the effect that he or she could not offer an expert opinion regarding Grant Thornton's conduct without the benefit of the entirety of the files including correspondence, working files and time records - is critical. Grant Thornton adduced no evidence from an expert to the contrary. 26 Ms Banton deposed to a conversation between the audit expert and an employee solicitor (which I canvassed at [15]-[16] above). Except in a limited way, Grant Thornton did not adduce evidence to contradict the views attributed to the expert. Ms Yacoubian deposed only that she was instructed by a partner of Grant Thornton that roughly 50% of the paper files and 50% of the electronic audit files are likely to be relevant to the issues raised in the following paragraphs of the ACSOC: (a) paragraphs 98 and 99 regarding the repeated Prospectus Statements; (b) paragraphs 109 to 110 concerning the 2006 Annual Report; (c) paragraphs 130 to 132 concerning the 2007 Half Yearly Review; and (d) paragraphs 137 to 140 concerning the 2007 Annual Audit. Ms Yacoubian made no reference to paragraph 143 of the ACSOC. 27 It is central to my decision that the audit expert advised that all parts of an audit are interrelated and that to offer an opinion he needed the entirety of the audit or review files including working papers, correspondence and time records. 28 Sixth, while I must accept the possibility that some parts of the audit or review files may not be directly relevant, if Grant Thornton's approach to the scope of discovery is taken there will likely be further disagreement between the parties, and resultant further delay. Grant Thornton's files are not so voluminous that discovery of them in their entirety will slow the case down. In my view discovery of the entirety of the files is more likely to speed things up. 29 Seventh, there is little in Ms Yacoubian's affidavit which indicates that the discovery sought will be oppressive for Grant Thornton or overly expensive considered in proportion to the complexity of the issues for determination and the potential quantum of the overall claim. Amongst other things: (a) Grant Thornton's full files are already in electronic form, except for three archive boxes of hardcopy documents that would only take five days to be scanned, coded and uploaded onto an electronic platform; (b) the full back-up tapes of Grant Thornton's emails and client files have apparently already been extracted and downloaded onto an external hard drive; (c) it appears that all of the electronic documents will be processed in a form that allows targeted keyword searching by early January 2016; and (d) the electronic parts of the audit files are accessible by way of remote access to a terminal server. 30 It appears that Grant Thornton has already conducted some necessary searches and is well on the way to being able to make standard discovery, including the contested documents, by early next year. There is little to indicate that the scope of discovery sought would be so onerous or expensive that it would not facilitate the just resolution of the proceeding as quickly, inexpensively and efficiently as possible. 31 Eighth, Grant Thornton seemed to accept that, through the incorporation of representations in the September 2006 Prospectus into the March 2007 Prospectus, documents from the earlier period would be relevant in relation to the March 2007 Prospectus claim, at least insofar as Grant Thornton '"reviewed" those documents on the later occasion. On Grant Thornton's approach the person making decisions as to which documents to discover would be required to decide which documents from the earlier period were reviewed and which were not, which would be a task fraught with difficulty. In my view, if the audit files in their entirety are not produced, it is likely that there will be disputes between the parties in respect of the documents which are not produced with resultant delay and cost. 32 In circumstances where Grant Thornton did not satisfy me that there would be any real oppression, difficulty or undue expense in providing the documents relating to the September 2006 Prospectus, and given the significant delay that has occurred in getting this matter on for trial, I am disinclined to provide room for the parties to engage in further debates about the scope of discovery or about whether any discovery order made has been met. In all the circumstances a bright line approach to discovery is likely to be the most efficient and inexpensive approach. 33 Ninth, Grant Thornton relied on the decision of City of Swan v McGraw Hill Companies Inc (2014) 226 FCR 462; [2014] FCA 1271 ("City of Swan") (Rares J) at [21]-[28]. It contended that documents related to the September 2006 Prospectus are only relevant to the plaintiffs' claim against the Directors and (based on his Honour's remarks in City of Swan) Grant Thornton was not obliged to discover them. I do not accept that Grant Thornton's documents related to the September 2006 Prospectus are only relevant to the claims against the Directors, but even if that statement is assumed to be correct I would not accept Grant Thornton's contention. 34 The proper scope of standard discovery is a matter to be decided consistently with the overarching purpose and objectives in s 37M of the Federal Court of Australia Act 1976 (Cth) ("the Act") and Practice Note CM5. To limit discovery in the way Grant Thornton proposed is likely to give rise to the plaintiffs seeking leave to issue subpoenas requiring Grant Thornton to produce any documents it holds relevant to the plaintiffs' case against the Directors. Alternatively, as Grant Thornton noted, the plaintiffs could seek documents from Grant Thornton relevant to their claims against the Directors by way of an application for non-standard discovery under r. 20.15. Requiring the plaintiffs to subpoena documents from Grant Thornton, or make an application for non-standard discovery, will simply extend the time it takes for the plaintiffs to get access to relevant documents in the case overall, and will make it difficult for the parties to meet the interlocutory timetable set. The need to avoid further delay in this already slow-moving case is fundamental to my decision. 35 It is also worth noting that City of Swan is not on all fours with the present case. It concerned an application by the respondent seeking that one of the applicants review a vast array of documents in its possession by virtue of discovery in a large earlier class action, Wingecarribee Shire Council and Ors v Lehman Brothers, to see whether such documents supported or adversely affected the case of one or other of the co-applicants in the subject proceeding. Rares J refused the application and (at [21]) said that: … To require a discovering party to give discovery of documents that are directly relevant to issues raised by the pleadings but that do not involve him, her or it, would impose a burden that, in my opinion, would be not conformable with the requirement of r 20.11. That is because such an extended obligation would not facilitate the just resolution of the proceeding so far as it concerned the discovering party and its opponent or opponents as quickly, inexpensively and efficiently as possible. 36 I do not take his Honour to be attempting to lay down an immutable principle that standard discovery under r. 20.14 cannot include an obligation on a party to litigation to make discovery of documents that are directly relevant only to issues between the party seeking discovery and the case of another party to that litigation. I see his Honour's remarks as being directed to the sensible conclusion that the discovery the respondent sought in that case was inconsistent with the requirement to facilitate the just resolution of the proceeding as quickly, inexpensively and efficiently as possible. 37 In any event I am disinclined to agree with his Honour's construction of r. 20.14(2)(c) and (d). The rule requires a party that is subject to an order for standard discovery to discover documents that support or adversely affect "another party's case". The Directors are another party in the present proceeding and the causes of action against the two groups of defendants are to an extent factually and legally interrelated. Grant Thornton must discover documents it holds which are relevant to the case between the plaintiffs and the Directors. Whether to order standard discovery, and the proper scope of such discovery, is a matter to be decided consistently with the overarching principles in s 37M and Practice Note CM5 rather than by reading down the expression "another party's case".

Conclusion 38 For these reasons I have made orders for standard discovery by Grant Thornton. I direct that Grant Thornton provide discovery of the entirety of its audit and review files relating to Arasor including in relation to the September 2006 Prospectus, including working papers, correspondence and time records. 39 Having said this, I direct the parties to immediately enter into discussions so that Grant Thornton is not obliged to discover duplicates, documents that are of no real moment, and documents which the parties agree are not directly relevant. It should be kept in mind that the intent of such discussions is to reduce the burden of discovery on Grant Thornton, not to increase the burden by making its representatives undertake further work dissecting files which could be produced in their entirety if that is quicker, easier and less expensive for Grant Thornton. 40 In relation to the format of discovery, Ms Yacoubian deposed that Grant Thornton will discover the documents electronically, and will provide those documents that require the use of Grant Thornton's audit software by providing the plaintiffs' representatives and expert witnesses with remote access to a 'terminal server', subject to appropriate confidentiality undertakings. I have no difficulty with this approach and I do not order that the documents be provided on a laptop computer loaded with the relevant software. I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Murphy.