Davies v Beyond Building Systems Pty Ltd & ors

Supreme Court of NSW|2009-10-23|Before: Brereton J, White J

CITATION : Davies v Beyond Building Systems Pty Ltd & ors [2009] NSWSC 1282

HEARING DATE(S) : 23 October 2009 JURISDICTION : Equity Division

DECISION : Contempt charges proved against second & third defendants - ordered to pay $10,000 each into court as security.

CATCHWORDS : PROCEDURE - Contempt - what constitutes - disobedience of court orders relating to access to records

LEGISLATION CITED : (NSW) Supreme Court Rules Pt 55 (NSW) Uniform Civil Procedure Rules Pt 40

Anderson v Haslett [2007] NSWSC 1310 Athens v Randwick City Council [2005] 64 NSWLR 58 Attorney-General v Times Newspapers Limited [1992] 1 AC 191 Australasian Meat Industry Employees' Union v Mudginberri Station Pty Ltd [1986] 161 CLR 98 Heatons Transport (St Helens) Ltd v Transport and General Workers Union [1973] ICR 1 CASES CITED : Lewis v Pontypridd Caerphilly and Newport Railway Co [1895] 11 TLR 203 M v Home Office [1994] 1 AC 377 Markisic v Commonwealth [2007] 69 NSWLR 737 NCR Australia Pty Limited NSW v Credit Connection [2005] NSWSC 1118 Pattison v Bell [2007] FCA 137 Re Bramblevale Limited [1970] Ch 128 Re Mileage Conference Group of the Tyre Manufacturers Conference Limited's Agreement [1966] 1 WLR 1137

TEXTS CITED : Borrie and Lowe, Third Edition, The Law of Contempt

Steven Michael Davies (plaintiff) PARTIES : Beyond Building Systems Pty Ltd (first defendant) Vincent Brian Lee Smith (second defendant) Henrih Horthy (third defendant)

COUNSEL : Ms V Culkoff (plaintiff) Mr D Pritchard SC ( defendants)

SOLICITORS : Steven Klinger (plaintiff) Addisons (defendants)

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4263/09 Steven Michael Davies v Beyond Building Systems Pty Ltd & ors JUDGMENT (ex tempore) 1 HIS HONOUR: In the substantive proceedings the plaintiff Steven Michael Davies, who is one of three shareholders in the first defendant Beyond Building Systems Pty Limited ("BBS"), the second defendant Vincent Brian Lee Smith and the third defendant Henry Horthy being the others, complains that the affairs of BBS are being conducted in a manner oppressive of him, chiefly by reason of his removal as director on 22 June 2009 and the proposed issue of additional shares to the shareholders in a manner calculated to dilute his shareholding. The second and third defendants Mr Smith and Mr Horthy remain as directors of BBS. After a contested interlocutory hearing, White J on 18 September 2009 made the following interlocutory orders: 1. The defendants by themselves, their servants and agents be restrained from: a. taking any further steps to remove the plaintiff as a director of the 1st defendant; and b. taking any further steps to issue shares in the first defendant. 2. The defendants by themselves, their servants and agents suffer and permit the plaintiff to exercise all of the powers and functions of a director of the first defendant subject to the plaintiff not causing the first defendant to incur any obligations to third parties without the approval of the board. 3. That by 23 September 2009 the defendants reinstate the plaintiff's capacity to access the financial records of the first defendant (whether in the name of the first defendant or not) by providing the plaintiff's solicitor with all access codes, passwords or other information necessary to enable him to have access to the financial records of the first defendant held on computer. 4. That the defendants by themselves, their servants and agents permit the plaintiff to inspect the books of the first defendant (including any electronic record of information) and including customer lists and documents evidencing the current status of the first defendant's customers for the purpose of these proceedings. 5. Order that the plaintiff's claim for interlocutory relief be otherwise dismissed. 6. Order that the costs of the interlocutory application will be costs in the proceedings. 2 By Notice of Motion filed on 29 September 2009, the plaintiff charges that Mr Smith and Mr Horthy are guilty of contempt of court in that they failed to provide any of the access codes, passwords or other information necessary to enable the plaintiff to have access to the financial records of BBS held on computer, in contravention of order 3 of 18 September 2009. Although, as appears commonplace in this type of application, there is some ambiguity in the motion as to whether it is brought pursuant to Supreme Court Rules Pt 55 for a criminal contempt, or under Uniform Civil Procedure Rules Pt 40 for civil contempt, it seems that what is alleged is a contempt by disobedience of a court order, constituting a civil contempt, and I treat the matter, as I think the parties did, as an application under Pt 40 of the Uniform Civil Procedure Rules. In any event, the practical significance of the distinction is now slight: the criminal standard of proof applies, and, as is appropriate, the hearing was conducted substantially as a summary criminal trial [cf Anderson v Haslett [2007] NSWSC 1310]. 3 Essentially, liability for failing to comply with a Court Order is strict, as Lord Oliver said in Attorney-General v Times Newspapers Limited [1992] 1 AC 191, 217 (referred to by Lord Woolf in M v Home Office [1994] 1 AC 377, 426) in the sense that all that requires to be proved is service of the order and the subsequent doing by the party bound of that which is prohibited. It will be necessary, however, to consider further to what extent it is necessary for an applicant to prove that an alleged contemnor was capable of complying with the order in question. 4 On this application the main issues therefore are: first, did the respondents Mr Smith and Mr Horthy have proper notice of the terms of the order; and secondly, have the respondents failed to comply with the order, having regard to its proper construction and questions of capacity or impossibility? Although, at first, it seemed that all matters that could be put in issue were put in issue, ultimately Mr Smith did not dispute that on his part there had been a breach of order 3, and Mr Horthy maintained only that he could not be guilty of contempt because he did not himself have access to the password, provision of which would have enabled access to what in the evidence came to be called the Paypal account. 5 Dealing first with the question of notice of the order to the respondents, it was not suggested that personal service of the order endorsed with a penal notice in accordance with UCPR r 40.7 (1) and (3) was effected. However, it was established that a sealed copy of the order, albeit without a penal notice, was provided to the solicitors for the respondents prior to expiry of time in compliance with the order. As I found, when it was submitted at the conclusion of the applicant's case that there was no case to answer, there was evidence from which at least, in the absence of evidence to the contrary, it was open to the court to conclude that the defendants had been notified of the terms of the order, whether by telephone, facsimile, email or otherwise, within r 40.7 (4)(b). Not only did no evidence to the contrary emerge, but evidence adduced in Mr Horthy's case affirmatively established that before time for compliance with the order had expired, he had received a copy of the order from the solicitors then acting for him. Neither respondent now disputes that he had notice of the order. 6 As the evidence stands, I am unable to be satisfied to the requisite standard that a copy bearing the penal notice was served. That, however, as I have said, goes to whether it may be inappropriate to proceed by way of committal or sequestration, and does not prevent a conclusion that there has been a contempt of court for which other sanctions might be available. Indeed it does not necessarily preclude the court even from proceeding by way of committal, if the dispensing power under r 40.7 is exercised although whether such a remedy should be invoked is influenced by whether the contemnor was aware of it, [see NCR Australia Pty Limited NSW v Credit Connection [2005] NSWSC 1118]. 7 So far as service of the motion for contempt is concerned, there is no dispute but that it was duly served on Mr Horthy within the appropriate time. Ultimately it was served on the solicitors acting for Mr Smith, after there had been several unsuccessful attempts to serve him personally, and on the morning of 13 October, not quite three clear days before the return date. Those solicitors, and I, infer, Mr Smith, were well aware of the return date, it having been earlier fixed, but Mr Smith for some reason or other chose to leave the jurisdiction for business reasons. 8 As I indicated on the initial application for an adjournment, it seems to me that service just out of time on his solicitors involved no prejudice to what ought to have been his ability to meet the motion on the return date, and for that reason I then refused the adjournment. To the extent necessary I will therefore abridge time for service of the motion for contempt on Mr Smith to the time at which it was served, and I direct that the motion be taken to have been served personally on him at that time. 9 Although at least at one time, the provision of access to various other accounts had been in issue, the case focused on what was called the Paypal account, access to the other financial records of BBS having ultimately been provided to Mr Davies. The essential complaint in the contempt proceeding was that a password which would have permitted Mr Davies to have access to the Paypal account (or accounts) was not provided to him within the time limited by the order - that is to say, by 23 September 2009. 10 At the conclusion of the plaintiff's case, two submissions were made in connection with the submission that there was no case to answer which ought to be recorded at this stage. First, it was submitted that there was no evidence that the Paypal account was a financial record of BBS, it being in the name of Mr Smith. I then concluded that there was evidence from which, in the absence of evidence to the contrary, the court could infer that the Paypal accounts were indeed financial records of the first defendant. In particular, there was a letter from Phillips Fox, who were then acting for the defendants, to the plaintiff's solicitor Steven Klinger, on 24 September 2009, in which it was said: The Paypal account is held by Vincent Smith and includes both BBS and personal transactions.

11 There was a Skype conversation between Mr Davies and Mr Smith, in which Mr Davies had referred to "our Paypal account" having been frozen. There is evidence that Mr Davies had in part downloaded, from computers of the first defendant, records of the Paypal account. There is evidence, and not only from Mr Davies but also acknowledged in the witness box by Mr Horthy, that a very large part of BBS's receipts - a figure of 80% was mentioned - are processed through the Paypal account. In the light of that evidence, and in the absence of any evidence to the contrary, it is self-evident that the Paypal account fell within the terms of White J's order, being "financial records of the first defendant whether in the name of the first defendant or not". Indeed, I do not understand the contrary now to be maintained; if it were, the contention would have been unsuccessful. 12 Secondly, at the conclusion of the plaintiff's case, it was submitted that there was no evidence that records of the Paypal account were held on a computer of BBS. At that stage, I found that, in the absence of evidence to the contrary, there was evidence capable of establishing that Mr Davies could obtain printed statements of the Paypal account and had downloaded monthly sale reports from the Paypal account on computers of BBS. The results of such downloads were annexed to one of his affidavits. Again, no contrary evidence has been adduced, and again, I do not understand the contrary to be maintained. 13 The evidence plainly establishes that access to the Paypal account, and in particular the password necessary to obtain such access, was not provided to Mr Davies by 23 September. Indeed, it was ultimately provided in court, during the hearing yesterday on 22 October 2009. 14 It is at this point that it is necessary to consider the significance of the circumstance that Mr Horthy has sworn that at no time did he know or have in his possession the password to the Paypal account. He submits that the order could only require him to do what it was in his power to do, and that it was not in his power to produce the password to the Paypal account - an account that was in Mr Smith's name and the password to which was known to Mr Smith but not to him. 15 I confess that initially I inclined to the view that the onus of proving impossibility of compliance with an order fell on the respondents. That is a view which is supported by Borrie and Lowe, The Law of Contempt, 3rd ed, at 568, where the authors say, with reference to Lewis v Pontypridd Caerphilly and Newport Railway Co (1895) 11 TLR 203: So far as disobedience to a positive order is concerned, it has been held that it is the duty of the defendants to find out the proper means of obeying the order and although it may be a defence to show that compliance with the order was impossible, the burden of proving such an impossibility is upon the defendants.

16 However, more recent Australian authority suggests that that is not the test to be applied here. 17 I put to one side, because I think they fall in a different category, those cases that deal with orders for production of documents. I dealt with such a case in Anderson v Hassett; see also Markisic v Commonwealth [2007] 69 NSWLR 737, [61]; and Re Bramblevale Limited [1970] Ch 128. All those cases concerned orders for production of documents or a subpoena for production of documents. It is implicit in an order for production or a subpoena for production, and indeed in many cases explicit, that what is required of a party responding to such an order or subpoena is production of documents from within his or her possession, custody or power. That is a matter of construction of the order, and not one of impossibility. In order to establish that there has been contempt, it is necessary in such a case to show that there are documents of the type in question in existence and that they were in the possession, custody or power of the alleged contemnor. 18 The order in the present case is not an order for production. In my view there is no reason, as there was in Anderson v Hassett, to construe the order as limited to things in each defendant's possession, custody or power. 19 Impossibility is not always a clearcut matter. Often, mandatory orders in particular, and sometimes even prohibatory injunctions, require certain acts to be done by a particular time. Sometimes it may eventuate that doing the best they can, the party bound by the order is unable to have the works completed or the state of affairs reached within the time limited by the order. In such a case, the court would not commit for contempt a party that had used its best endeavours to achieve the required result. But it is not permissible in such a case for a party at the outset to make a judgment that it will not be able to comply within the time limited by the order, assert that it is impossible to comply within time, and throw up its hands and make no effort to comply. In such a case, impossibility can be a matter of degree and not a question that is clearcut as it might be where, for example, a relevant document is not in the possession, custody or power of a party bound. 20 In Heatons Transport (St Helens) Ltd v Transport and General Workers Union [1973] ICR 1, Sir John Donaldson said: Orders of any court must be complied with strictly in accordance with their terms. It is not sufficient by way of answer to an allegation that a court order has not been complied with for the person concerned to say that he 'did his best'. But if a court order requires a certain state of affairs to be achieved, the only way in which the order can be complied with is by achieving that state of affairs.

21 His Lordship continued to explain that a court would not make an order that was impossible of compliance. Nonetheless, his Lordship's statement suggests that it would not be enough for defendants to show that they did their best if they failed, even due to impossibility, to achieve a certain state of affairs. 22 However, in Pattison v Bell [2007] FCA 137, Gray J of the Federal Court of Australia considered Re Bramblevale and Lewis v Pontypridd and concluded that, in principle, it lies upon anyone making an allegation that a contempt of court has been committed by a failure to perform an act required by a court order to prove that the alleged contemnor could have performed the act. His Honour said: [33] Counsel for the applicant conceded that the onus lay upon him to prove these charges beyond reasonable doubt. He did contend, however, that on any issue as to whether either of the respondents lacked the capacity or the ability to comply with an order of the Court, the onus fell on that respondent to prove that lack of capacity or inability. This contention was based on somewhat obscure authority, Lewis v Pontypridd ; Caerphilly and Newport Railway Co (1895) 11 TLR 203. The judgment of the English Court of Appeal in that case, delivered by Lord Esher MR on behalf of himself and Lindley and Rigby LJJ, is apparently not reported in any mainstream series of law reports. It is reported, not verbatim but in indirect speech, in the Times Law Reports. Apparently, the defendant company in that case had been ordered forthwith to make a junction connecting its railway line with the plaintiff's works, a junction it was obliged by Act of Parliament to create. Having failed to do the work, the company was prima facie in the position of having disobeyed a judgment. The company denied having wilfully disobeyed the judgment. Wilful disobedience was an essential element of the charge of contempt under the relevant rule of court applied in that case. Lord Esher MR's judgment is reported relevantly as follows:

The directors said that the company had never been able to comply with the judgment, and therefore could not be said to have wilfully disobeyed it. If from the time when the judgment was given they had always been unable, through want of funds, to do the work, probably they could not be said to have wilfully disobeyed the judgment. But it was necessary for the directors to make that out. They said that they had never had any funds out of which they could do the work, because they had paid away all the money which they earned in the ordinary expenses of carrying on the railway. It might be that they were entitled to keep the railway going. But, in [Lord Esher MR's] opinion, they were bound, so long as this obligation was lying upon them, to keep down their expenses to the lowest point possible. They failed to show that they could not have obeyed the judgment if they had used proper economy.

[34] It is by no means clear from this report that Lord Esher MR was speaking about the legal onus of proof, when he was reported as saying that 'it was necessary for the directors to make that out'. His Lordship may simply have been drawing attention to the obvious need for the company to rely on evidence available from within it if it wished to contest the issue of wilfulness in that case. In my view, it would be contrary to principle to cast onto an alleged contemnor the onus of proving lack of capacity or ability to comply with a court order. It would be unthinkable that a person should be found guilty of contempt of court for failing to do something that could not be done. In my view, it lies upon anyone making an allegation that a contempt of court has been committed by a failure to perform an act required by a court order to prove that the alleged contemnor could have performed the act.

[35] This view was applied by the English Court of Appeal in Re Bramblevale Ltd [1970] 1 Ch 128. In that case, the managing director of a company had been ordered to produce the company's books to its liquidator. At first instance, he had been found guilty of contempt of court on the basis that he was shown to have had the books in his possession on a particular date, so that it could be presumed that he still had them in his possession more than a year later. The Court of Appeal overturned the finding, holding that the managing director could not be found guilty of contempt of court unless it were proved beyond reasonable doubt that he still had the books in his possession after the order had been made. Bramblevale was cited in Witham v Holloway (1995) 183 CLR 525 at 529-530 per Brennan, Deane, Toohey and Gaudron JJ. In Witham , the question was whether the appropriate standard of proof was beyond reasonable doubt or the balance of probabilities. The case itself did not involve any issue of capacity or ability to obey the order. Nonetheless, no reservation was expressed in the citation of Bramblevale , on the basis that any onus could lie upon the alleged contemnor on any issue. See also Chelvarajah v Global Protection Pty Ltd [2004] FCA 1661; (2004) 142 FCR 296 at [61]-[68]. 23 In Markisic v Commonwealth of Australia, Campbell J said (at 64), with reference to Australasian Meat Industry Employees' Union v Mudginberri Station Pty Ltd (1986) 161 CLR 98, the following: As I read their Honours, their view is that the imposition of punishment is justified for a breach of the court order only if there is wilful disobedience, in the sense of deliberate action or inaction that is not casual, accidental or unintentional. That conclusion applies regardless of whether the contempt involved in the disobedience to the order is classified as a civil or criminal contempt. Thus, proof that a contempt has been committed by breaching a court order involves proving enough to conclude that the action or inaction said to constitute the breach was deliberate, and not casual, accidental or unintentional. Consistently with Witham , that needs to be proved beyond reasonable doubt.

24 It seems to me that the reference to, "action or inaction that was not casual, accidental or unintentional" includes the concept of impossibility. 25 Proof that contempt has been committed thus involves proof of enough to conclude that the relevant action or omission was not caused by impossibility. 26 Despite my initial inclination to the view attributed to Lord Esher MR in Lewis v Pontypridd, and that of Sir John Donaldson in Heatons Transport, I think I should follow the judgment of Gray J in the Federal Court and hold that it is for the applicant, in principle, to prove that the alleged contemnors could have performed the acts in question. 27 The order required the defendants to produce a certain state of affairs, namely: Access to the financial records of the first defendant held on computer.

28 Provision of access codes and passwords to facilitate that was part of the obligation imposed by the order, but the end state required to be achieved was access to the financial records of the first defendant. I accept Mr Horthy's evidence, which in this respect was not seriously challenged, that he did not know or have personal immediate access to the Paypal account password. But accepting that does not necessarily mean that the plaintiff has failed to show that, to use Gray J's words, Mr Horthy, "could have performed the act". 29 The plaintiff has established, largely by cross-examination of Mr Horthy, that he knew that Mr Smith had the password; and he knew that the finance department had the password. As to Mr Smith, there is no doubt that Mr Horthy knew that Mr Smith had and could, if so minded, provide the password. As to the finance department, the evidence is clear that he knew that the previous CFO, Mr Ardron, had had the password, he knew that the password had been given to the finance department; and he knew that the current CFO, Mr Grosser, at some time had had the password, though he was not aware whether he still had it. 30 While I accept, following Gray J's decision, that the onus of proving that the contemnor could have performed the act involved falls on the applicant, I also accept that to the extent that that requires modification of what Sir John Donaldson said in Heatons Transport - so that it might now be enough for the respondent to say that he "did his best" - an order such as this at least imposes on a party bound by it an obligation to use their best endeavours to comply with it, and not simply to make no endeavour because of a view that they could not be assured of success in making that endeavour. While I accept that the onus of showing that the respondent could comply with the order falls on the applicant, that does not mean that the respondent bears no evidentiary onus on the issue. To the contrary, in cases of impossibility, there will ordinarily be some evidentiary onus on the respondent, at least to raise the issue and adduce some evidence on it. In this case it seems to me abundantly clear that the non-compliance was intentional in the relevant sense and not attributable to accident or impossibility. To my mind, anyone in Mr Horthy's position who was seriously attempting to comply with the order of the court would at least have asked Mr Smith - who he knew had the password - to provide it, and would have - in his position as CEO and thus having the authority of the Board over the employees of the company - have asked employees of the company to provide it. The possibility of compliance is most clearly demonstrated by the fact that when Mr Horthy later asked Mr Smith for the password, for the purpose of providing it to their lawyers in connection with the defence of the present application, Mr Smith apparently voluntarily provided it to Mr Horthy and then to their lawyers and then to the court. 31 Any bona fide attempt to comply with the order would have involved making the types of inquiries to which I have referred. If those inquiries had been made and Mr Smith had indeed refused to provide the password or an employee had refused to do so, a different conclusion might then have arisen. But even then, it seems to me that it would have been possible for Mr Horthy to convene a meeting of the Board at which he and Mr Davies in his restored capacity as a director would have had a majority, and required any employee of the company to hand over the password. 32 In short, it seems to me that by failing to make any genuine endeavour to comply with the order, Mr Horthy committed a contempt of court. I am satisfied beyond reasonable doubt that he had notice of the order and that he failed to comply with it and that that failure was not casual, accidental or unintentional. 33 On this application, the question of the construction of the order has not been in issue. However, it is as well that I record that it is well-established that a misconstruction of an order is no defence to a proceeding for contempt, even if that misconstruction is a not unreasonable one and even if it is on legal advice [see Re Mileage Conference Group of the Tyre Manufacturers Conference Limited's Agreement [1966] 1 WLR 1137, 1161-2; Athens v Randwick City Council [2005] 64 NSWLR 58; and Anderson v Hassett [7]]. 34 The order has to be construed as a whole and in the context of the other orders made at the same time. One of those orders was to restrain the defendants from taking any further steps to remove the plaintiff as a director. Another required the defendants to suffer and submit the plaintiff to exercise all of the powers and functions of a director (with one irrelevant qualification). The third required them to reinstate his capacity to access the financial records of the first defendant: To enable him to have access to the financial records of the first defendant held on computer.

35 On its face, there is nothing in that order which would limit it to restoring the plaintiff's access to the status immediately prior or the day prior to his removal as a director on 22 June 2009. It is true that some advice was apparently obtained from Phillips Fox, which I am inclined to accept, (albeit without foreclosing further argument on this, which might arise at a later stage), did suggest, as Mr Horthy would have it, that the order required only reinstatement to his position immediately prior to 22 June. However, that advice was given in circumstances where Phillips Fox were apparently not told that Mr Davies had had access to the Paypal account during June, but that it had been revoked at some stage during June earlier than 21 June. 36 It seems to me that anyone asked to construe order 3, if informed that, in the course of the breakdown of the relationship between the directors although a week or two prior to Mr Davies' ultimate removal on 22 June, his access to the Paypal account had been removed, would have advised that the order caught that access and required it to be reinstated. On its proper construction, in my view, given the that the evidence establishes that Mr Davies did have access at least as at 9 June 2009, the order properly construed required said access to be reinstated to him. 37 Accordingly, I find the charges of contempt against both defendants proved. 38 My orders are:

Order that the second and third defendants pay into court to the credit of these proceedings $10,000 each within fourteen days as security for their future good conduct in these proceedings, such sum (unless the Court otherwise orders) to be forfeited to the Registrar if, on any further contempt application in these proceedings, a finding is made that the relevant defendant has failed to comply with an order of the Court, and otherwise to be returned upon final determination of the proceedings at the first instance.

Order that the second and third defendants pay the plaintiff's costs.

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