Collective Concepts Pty Ltd v SMC Gasworks Pty Ltd

Supreme Court of NSW|2019-06-25|Before: Ball J

Solicitors: Uther Webster & Evans (Plaintiff) Marque Lawyers (Defendants) File Number(s): 2019/149728

Introduction

These proceedings concern an application for preliminary discovery under r 5.3 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR).
The application is made in connection with a business sale agreement (BSA) entered into on or about 6 November 2018 between the plaintiff, Collective Concepts Pty Ltd, and the first defendant, SMC Gasworks Pty Ltd, among others, by which Collective Concepts acquired a restaurant and grocery retailing business in Newstead, Queensland (the Business) from SMC Gasworks. The Business was one of a number of restaurant and grocery retail businesses operated (through corporate entities) by the second defendant, Mr Stefano De Blasi, and the third defendant, Mr Edoardo Perlo, in New South Wales and Queensland under the name "Salt Meats Cheese". Collective Concepts is a company controlled by Mr Bradley Watson.
Prior to the acquisition of the Business, Mr Watson was given various materials relating to it including payroll reports, staff rosters, profit and loss statements for March, June and August 2018 and a draft income statement for the financial year ending 30 June 2018.
Under the BSA each of SMC Gasworks, Mr De Blasi and Mr Perlo gave various warranties including the following: 1. The Seller conducts the Business in accordance with all applicable laws and holds all Approvals necessary for the conduct of the Business (Sch F, cl 4(a)); 2. The Management Accounts (as defined in the BSA) show a materially accurate view of the affairs, financial position and assets and liabilities (actual and contingent) of the Business as at the date to which they have been prepared and of the income, expenses and results of operations of the Business for the period in respect of which they have been prepared (Sch F, cl 5.3(a)); 3. All accounts, books, ledgers and financial and all other records of the Business (a) have been fully and properly maintained and contain in all material respects complete and accurate records of all matters required to be entered in them by any relevant legislation and the Accounting Standards; (b) do not contain or reflect any material inaccuracies or discrepancies; (c) give a true and a fair view of the trade in transactions, state of affairs, results, financial and contractual position and assets and liabilities of the Business at the respective dates of their preparation … (Sch F, cl 11.1); and 4. The Due Diligence Material (as defined in the BSA), including without limitation or financial information contained therein, but excluding any forecasts is accurate in all material respects and provides an accurate record of the affairs of the Business to which that information relates. None of that material is misleading in any material particular whether by inclusion of misleading information or omission of material information or both (Sch F, cl 16(b)).

Relevant legal principles

The relevant legal principles are not in dispute. UCPR r 5.3 provides: (1) If it appears to the court that: (a) the applicant may be entitled to make a claim for relief from the court against a person (the prospective defendant) but, having made reasonable inquiries, is unable to obtain sufficient information to decide whether or not to commence proceedings against the prospective defendant, and (b) the prospective defendant may have or have had possession of a document or thing that can assist in determining whether or not the applicant is entitled to make such a claim for relief, and (c) inspection of such a document would assist the applicant to make the decision concerned, the court may order that the prospective defendant must give discovery to the applicant of all documents that are or have been in the person's possession and that relate to the question of whether or not the applicant is entitled to make a claim for relief. (2) An order under this rule with respect to any document held by a corporation may be addressed to any officer or former officer of the corporation. (3) Unless the court orders otherwise, an application for an order under this rule: (a) must be supported by an affidavit stating the facts on which the applicant relies and specifying the kinds of documents in respect of which the order is sought, and (b) must, together with a copy of the supporting affidavit, be served personally on the person to whom it is addressed. (4) This rule applies, with any necessary modification, where the applicant, being a party to proceedings, wishes to decide whether or not to claim or cross-claim against a person who is not a party to the proceedings.
UCPR r 5.3(1)(a) requires that it appear to the Court that the applicant may be entitled to make a claim for relief against the prospective defendant. What is required is a reasonable cause to believe that the applicant may have a right of action against the respondent based on a recognised legal ground: Panasonic Australia Pty Ltd v Ngage Pty Ltd [2006] NSWSC 399; (2006) 69 IPR 595 at 589, 599 per Young CJ in Eq; Morton v Nylex [2007] NSWSC 562, [25] per White J.
An applicant is not required to demonstrate a prima facie or pleadable case. However, a mere assertion, suspicion or conjecture of a case is not sufficient: Morton v Nylex at [25] per White J; Hatfield v TCN Channel Nine Pty Ltd [2010] NSWCA 69 at [47], [49] (McColl JA, with Young JA and Sackville AJA agreeing); Quanta Software International Pty Ltd v Computer Management Services Pty Ltd (2000) 175 ALR 536 at [24].
UCPR r 5.3(1) also requires that it appear to the Court that the applicant cannot obtain sufficient information to decide on whether to commence proceedings despite having made reasonable inquiries. An applicant bears the onus of demonstrating that it is unable to obtain that information: Hatfield v TCN Channel Nine Pty Ltd at [51] (McColl JA, with Young JA and Sackville AJA agreeing).
The Court must determine whether the applicant does not have sufficient information to be in a position to decide whether to commence proceedings, not merely to establish a cause of action. That is assessed objectively. The applicant must be lacking something 'reasonably necessary' to make their decision. It must also disclose the information it already has relevant to making that decision, and identify what it is it is lacking: Morton v Nylex at [33] per White J.

Procedural history

The proceedings originally came on for hearing on 12 June 2019. At that time, Collective Concepts relied on an affidavit of Mr Watson which gave no explanation of the investigations and analyses he had undertaken and no explanation for why the documents it sought would assist it in determining whether it should bring claims other than bald assertions to that effect by Mr Watson.
At that time, I indicated that I would be willing to adjourn the proceedings to give Collective Concepts an opportunity to adduce further evidence, but that a condition of any such adjournment was that Collective Concepts pay the defendants' costs of the hearing on that day on an indemnity basis. Ms Taylor, who appeared for Collective Concepts, acceded to that condition.
On 20 June 2019, Collective Concepts served a second affidavit of Mr Watson setting out in substantial detail the investigations he had undertaken that lead him to express the conclusions he did in his first affidavit.

The documents sought

The documents sought by Collective Concepts in its summons fall into the following categories: (a) All documents which record or evidence and/or may assist in recording or evidencing financial information relating to the SMC Gasworks business from 1 November 2017 to 20 November 2018, including, but not limited to: (i) detailed financial records, including financial statements and notes and directors' declarations about these statements and notes; (ii) daily, weekly and monthly sales data, including detailed breakdowns of how these sales were generated (e.g. catering, drinks, food, food truck) and all underlying or supporting information; (iii) all information obtained from any POS system used in the SMC Gasworks business; and (iv) detailed tax returns. (b) All documents which record or evidence and/or may assist in recording or evidencing financial information relating to the Salt Meats Cheese market stall which operated in various locations in the Brisbane area and the Salt Meats Cheese food truck for the period 1 November 2017 to 20 November 2018, including, but not limited to, from daily, weekly and monthly sales data and detailed breakdowns of how these sales were generated. (c) Detailed bank statements for all bank accounts used by the SMC Gasworks business from 1 November 2017 until 30 November 2018, in particular, statements showing daily EFTPOS settlement figures. (d) All employee records, including pay slips and information regarding employment classifications and visa status.

Consideration

During the course of the resumed hearing, there was not a substantial difference between the parties in relation to the documents sought in paragraphs (a) and (c) having regard to the additional evidence provided by Mr Watson.
The defendants contended that Collective Concepts was not entitled to all the documents falling within the preamble of para (a). That amounted to all the financial records relating to the Business during the period 1 November 2017 to 20 November 2018. Collective Concepts did not seriously contend that all those documents were necessary to provide it with the information it sought. The debate was about the documents sought in sub-paras (i) to (iv).
In relation to those, the defendants pointed out that Collective Concepts was only entitled to documents. It was not entitled to information. The defendants accepted that Collective Concepts was entitled to any financial statements and tax returns for the period from 1 November 2017 to 20 November 2018 and did not oppose giving discovery of documents recording sales data on a daily, weekly and monthly basis, including any documents showing how those sales were generated. Nor did they seriously oppose giving discovery of documents recording information obtained from any POS system used by SMC Gasworks. Likewise, in relation to category (c), the defendants did not oppose giving discovery of bank statements for the business from 1 November 2017 until 30 November 2018. Each of those categories of documents would shed light on the question whether revenue was overstated in the material given to Collective Concepts and would assist it in making a decision whether to bring proceedings for breach of warranty or for misleading and deceptive conduct.
Collective Concepts accepted that the defendants could only be required to give discovery of existing documents and that discovery in terms that was acceptable to the defendants was sufficient to provide it with the information it sought in relation to the revenue of the Business before acquisition.
Categories (b) and (d) were, however, pressed by Collective Concepts.
In relation to category (b), Collective Concepts submitted that that information would assist it to make a decision because it may provide an explanation for any overstatement. That is said to be so because of the possibility that revenue earned from the market stall and food truck may have been included in the revenue of the Business. During the course of the hearing, I indicated that I had difficulty with that proposition. The evidence is that the business consisting of the market stall and food truck was owned by a company other than SMC Gasworks. If the revenue of that company was included in the revenue of the Business, it is to be expected that that would be apparent from the financial records relating to the Business. The separate financial records of a business operated by another company are unlikely to shed any light on the revenue attributed to the Business. Moreover, it was simply speculation that the revenue figures of the Business might have been inflated by the addition of revenue figures from other businesses. For those reasons, I indicated during the course of the hearing that I would not be prepared to order discovery in terms of category (b).
That leaves category (d). Mr Watson gave evidence that prior to entering into the BSA he was given a spreadsheet titled "Payroll w.e. 11-03-18" setting out the total payroll costs for each employee of the Business for the period 5 to 11 March 2018 and a roster for the Business titled "Schedule for SMC Group Pty Ltd Mon 05/03/18 to Sun 11/03/18" for the period 5 to 11 March 2018. He says that following the acquisition he used the information contained in the roster he was given to create rosters for the Business and that he calculated the total payroll using that roster and applying the relevant award rates. He says that he observed that a comparison of his labour costs and the labour costs disclosed in the information he had been provided suggested that his labour costs in operating the Business appeared to be higher than those prior to the acquisition, but that he had insufficient information about the payroll of the Business before Collective Concepts acquired it to know whether that was the case or not.
Mr Watson says he then undertook an analysis of the payroll of the Business following acquisition with a notional payroll before acquisition. The details of the analysis are not important. What is relevant is that in determining his own payroll, Mr Watson created a roster and then determined the pay each person on the roster was entitled to in accordance with the relevant award. He says he compared the payroll calculated in accordance with that methodology with a notional payroll that was calculated using the same roster but applying an average hourly rate that was set out in a document Mr De Blasi had given to him shortly after Collective Concepts acquired the Business. That document sets out what is described as the "Base Rate" for individual employees and their visa status. According to evidence given by Mr Watson, Mr De Blasi said, at the time he gave Mr Watson the document, that the rates shown on the document were "flat rates of pay" that were applicable to each employee. Using the figures in that document, the notional payroll was less than the actual payroll. According to Mr Watson, that is some indication that SMC Gasworks had been underpaying its staff.
Mr Finnane, who appeared for the defendants, took issue with that evidence. In particular, he took issue with the premise that the document provided to Mr Watson by Mr De Blasi set out a single flat rate of pay that was paid to each employee regardless of when they worked or the hours that they worked. On its face, the document set out base rates of pay to which applicable loadings were applied.
It may be that there is a contest concerning what Mr De Blasi said to Mr Watson, and there may be a question what he meant by the words that he used. However, it is reasonably arguable on the evidence before the Court that the document provided to Mr Watson sets out the actual rates of pay for each employee while the Business was owned by SMC Gasworks. If that is correct, then the analysis undertaken by Mr Watson provides a reasonable basis for concluding that SMC Gasworks may have underpaid its employees. It was not suggested that Collective Concepts already had sufficient information to form a view on that question. Moreover, it appeared to be accepted that the information sought by Collective Concepts would assist in shedding light on that question and therefore assist in determining whether there was a basis for a claim that SMC Gasworks had unpaid its employees and, if so, the extent of any underpayment. That, in turn, would assist Collective Concepts to make a decision whether to bring a claim. For those reasons, I have concluded that the documents falling within category (d) should be discovered.

Costs

That leaves the question of costs.
As to the costs of giving discovery, Collective Concepts' primary position was that those costs should be the costs of any proceedings commenced by it against any of the defendants within six months of the production of the documents. In the alternative, it accepted that in addition it should pay those costs if proceedings were not commenced within six months. The defendants' primary position was that Collective Concepts should pay the costs. It also accepted, though, that if Collective Concepts commenced proceedings, the costs should be costs of those proceedings.
In my opinion, the preferable order is the one sought by the defendants. It is appropriate that if no proceedings are commenced then Collective Concepts should pay the defendants' costs of production. On the other hand, if proceedings are commenced, the costs should be costs in those proceedings. The most practical way of achieving that result are the orders sought by the defendants.
As to the costs of the proceedings, Collective Concepts seeks its costs. The defendants, on the other hand, contend that each party should bear his or its own costs. According to the defendants, Collective Concepts acted unreasonably in not seeking to negotiate the scope of disclosure in a context where the defendants offered to provide it with some documents. Moreover, both parties enjoyed a degree of success on the application. Lastly, the defendants opposed giving discovery at a time when Collective Concepts had filed inadequate evidence in support of its application. They agreed to some categories when presented with proper evidence.
I have concluded that it would be appropriate for the defendants to pay Collective Concepts costs (other than those costs already the subject of a costs order). Collective Concepts was substantially, although not wholly, successful in its application. It is true that it did not engage in any meaningful negotiations in relation to the production of documents. On the other hand, it seems apparent from the position taken by the parties in the proceedings that it is unlikely that the parties would have been able to agree on the scope of production. Consequently, I do not think it could be said that Collective Concepts acted unreasonably in commencing and pursuing the proceedings. The issues on which Collective Concepts failed were not clearly severable from the issues on which it succeeded. Nor could it be said that they were dominant so as to justify a departure from the principle stated in UCPR r 42.1 that costs should follow the event.

Orders

The orders of the Court are: 1. Within 28 days of today's date the defendants give discovery pursuant to r 5.3 of the Uniform Civil Procedure Rules 2005 (NSW) of the following documents (within the meaning of the Evidence Act 1995 (NSW)) in their possession, power, custody or control relating to the business carried on by the first defendant at Tenancy 3B, 63 Skyring Terrace, Newstead, Queensland (the Business): 1. financial statements of the Business covering any part of the period from 1 November 2017 to 20 November 2018 (the Period); 2. documents recording daily, weekly and monthly sales data for the Period, including any documents showing how those sales were generated; 3. documents recording information obtained from any POS system used in the Business during the Period; 4. tax returns covering any part of the Period; 5. bank statements for all bank accounts used by the Business in respect of the Period; and 6. all employee records, including pay slips and documents recording employment classifications and visa status for all employees who worked in the Business during the Period. 1. The plaintiff pay the defendants' reasonable costs of giving discovery in accordance with order (1). 2. The costs referred to in order (2) be costs in any proceedings commenced by the plaintiff against any of the defendants in respect of the sale of the Business to the plaintiff. 3. The defendants pay the plaintiff's costs of these proceedings (other than costs already the subject of a costs order).

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. Decision last updated: 27 June 2019

Australian Consumer Law Evidence Act 1995(NSW)

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