Direct Flow Pty Ltd t/a Arthur Rubber v Andrew Peterson t/a Maxx Rubber

Supreme Court of NSW|2023-03-09|Before: Robb J

Solicitors: Princeton Legal (Plaintiff) Commins Hendriks Solicitors (Defendant) File Number(s): 2022/00191060 Publication restriction: Nil

JUDGMENT

The first issue is whether the Court should make orders that will prevent the plaintiff gaining the benefit of a search order that was executed against the defendant, in circumstances where it is admitted that the plaintiff failed to disclose certain information on the ex parte application for the search order. The second issue is whether the Court should make an order for the provision by the plaintiff of security for the defendant's costs.
The plaintiff is Direct Flow Pty Ltd trading as Arthur Rubber. The plaintiff engages in the business of selling rubber products from premises in Wagga Wagga and online. The defendant is Andrew Peterson trading as Maxx Rubber. The defendant was formerly an employee of the plaintiff, who after his resignation commenced a business in competition with the plaintiff.

The plaintiff's claim

The statement of claim provides that the business now conducted under the name Arthur Rubber has operated since 1994, and the present principals of the plaintiff purchased the company and its business for $329,000 in about March 2017. The defendant was employed by the plaintiff from around 2006 to 3 December 2017, when he resigned.
In outline, the statement of claim alleges that the defendant has passed himself off as having conducted the plaintiff's business, including by falsely communicating to customers that his business was the successor business to the plaintiff's business. The statement of claim alleges that the defendant has created a product catalogue that is substantially similar to the plaintiff's catalogue and that he has used that catalogue in his business. The defendant is alleged to have been successful in securing long-term customers of the plaintiff for his business. The defendant is alleged to have breached his duty of confidentiality by using the plaintiff's trade information, and of having breached his fiduciary duty and his duty of trust, confidence and fidelity to the plaintiff. It is alleged that the defendant caused historic trading data on the plaintiff's computer system to be wiped, that he saved and stored the plaintiff's trade information on his own device, and then, after the termination of his employment, established his own business in proximity to the plaintiff's premises offering identical products and services. The plaintiff claims that, as a result of the defendant's conduct, the plaintiff's annual gross takings fell substantially. The notice of motion filed at the same time as the statement of claim sought various forms of relief, including injunctions, relief under the Copyright Act 1968 (Cth), an account of profits and damages in the sum of $385,586.
On 1 July 2022, the notice of motion came before Kunc J in the duty list. At that time the application did not include the requisite affidavits of the independent solicitor or the independent expert. The matter was allocated to the following week's duty judge for hearing once the supporting documents were filed.
Against some resistance because of the plaintiff's delay in making the application, given that the defendant's employment with the plaintiff ceased some five years earlier, the plaintiff persuaded Slattery J to make a search order on 6 July 2022. The orders required the independent lawyer to serve the defendant with copies of the order and the affidavits referred to in Schedule C of the search order before the defendant was required to permit the search party to enter the identified premises.
The search order was executed on 8 July 2022.
The proceedings were adjourned for hearing on 11 July 2022.
On 11 July 2022, Slattery J made a number of orders apparently necessary to vary or implement the search order and stood the proceedings over into the Equity Registrar's list on 4 August 2022.
Notwithstanding that order, Registrar Walton was apparently requested to make further orders on 1 August 2022, including the following order: 3. The defendant have first access for seven (7) days to any list of documents or report prepared by the independent expert [expert's name], so as to enable the defendant the opportunity to identify and isolate privileged and/or confidential information.
The Registrar made case management orders including for the filing of an amended statement of claim and a defence and the matter was listed for further directions on 26 September 2022.

Defendant's notice of motion

In the meantime, on 11 August 2022, the defendant filed a notice of motion by which he sought the following orders: 1. The orders made by the Court on 6 July 2022 giving rise to orders under Div 3 of Part 25 of the Uniform Civil Procedure Rules 2005 allowing search (Anton Piller) orders against the Defendant be set aside. 2. The orders made by the Court on 11 July 2022 and 1 August 2022 be stayed pending the outcome of this Notice of Motion. 3. The Plaintiff pay the Defendant's costs on an indemnity basis.
The defendant also sought an order pursuant to Rule 42.21 of the UCPR or s 1335 of the Corporations Act 2001 (Cth) that the plaintiff give security for the defendant's costs in the sum of $120,000, together with the usual consequential relief.

Amended notice of motion

On 16 September 2022, the defendant filed an amended notice of motion that revised his claim in relation to the search order. The amended notice of motion deleted prayers 1 and 2 and substituted for them the following: 1. The Plaintiff is not to have access to any of the material produced pursuant to the search conducted on 8 July 2022, including material collated and distributed by the Independent Expert [expert's name] until further order of the Court. 2. The Plaintiff is not to have access to any report or affidavit prepared by the Independent Expert [expert's name] until further order of the Court. 3. The Plaintiff's solicitor deliver to the Defendant's solicitor or destroy any document, files, drives or USB that they hold which they have received from the Independent Expert [expert's name] as a consequence of the search orders in respect of the search carried out on 8 July 2022. 4. The Plaintiff pay the Defendant's costs in connection with the ex parte hearing held on 6 July 2022 and, what flowed from that, including all costs in connection with the search of the Defendants business premises and home which occurred on 8 July 2022 on an indemnity basis.
The defendant's amended notice of motion was heard on 9 March 2023.
The basis of the defendant's claim was that the plaintiff had breached its obligation to make necessary disclosures to Slattery J of information known to the plaintiff at the time the plaintiff persuaded his Honour to make the search order. The information that was not disclosed consisted of a number of communications between the solicitors for the parties that were made at various times in 2021. The plaintiff accepted that the information had not been put before Slattery J, and that that ought to have been done. The plaintiff acknowledged that it had breached its duty of disclosure and apologised to the Court for its conduct. The plaintiff asserted that the breach was inadvertent, and resisted the defendant's application for the orders in the amended notice of motion for a number of reasons that will be considered below.
It will be convenient to note a number of matters that are relevant to the determination of the defendant's application in relation to the search order: 1. The plaintiff's solicitor and counsel received copies of the independent expert's report, apparently because the defendant was late in notifying the independent expert that he should not provide the report to the plaintiff's legal representatives. Those representatives have not read the report following their being informed of the application made by the defendant in its original notice of motion. 2. The defendant did not make his application for an order setting aside the search order until after he and his legal advisers had had the opportunity to review the independent expert's report. 3. The Court was informed on behalf of the defendant that the reason for the revision of the relief sought by the defendant concerning the search order was that the defendant recognised that the search order had been executed and the consequent steps had been taken. The defendant accepted that it was now too late to reverse those events. The defendant sought the orders in the amended notice of motion to achieve the practical result that the plaintiff will not benefit from the alleged wrongful obtaining of a search order. 4. Following discussion between the Court and counsel for the defendant concerning the possible wastefulness of an order that led to the destruction of any materials obtained as a result of the search and the independent expert's report, the defendant requested that the Court amend prayer 3 of the amended notice of motion to substitute the word "Court" for "Defendant's solicitor or destroy". The result will be, if the defendant succeeds on the application, that the relevant materials will be delivered to the Court and retained in its custody. That will permit, in an appropriate case, for both parties, on application, to be given access to the materials. 5. The defendant accepted (with the agreement of the plaintiff) a suggestion made by the Court that prayer 4, being the defendant's application for costs, should be deferred until the final hearing of the proceedings. Then, the Court's decision as to the appropriate costs order will be able to be made with knowledge of the established merits of the case. The deferral of the costs issue also simplified the resolution of the remaining issues, as, if the costs were required to be determined at this stage, the Court may think it necessary to have evidence bearing on the merits that was neither available nor convenient to be put before the Court.

Application for search order

As noted, the plaintiff initially applied for a search order in the Duty List on 1 July 2022, and the application was adjourned because the plaintiff did not have two of the requisite affidavits. I note, however, that at T 1.41 of the 1 July 2022 transcript, counsel for the plaintiff said that he was conscious of his duties appearing ex parte to provide full disclosure to the Court. In that regard, counsel acknowledged that a possible weakness in the application was the plaintiff's delay in making it.
At T 5.36, his Honour said that he understood the submission being made by the plaintiff to be: "Essentially there is evidence here that shows this man is not an honest person, and therefore I should infer that if this is done on notice he may well destroy the evidence."
At the hearing before Slattery J on 6 July 2022, the substantive evidence relied upon by the plaintiff was an affidavit of one of its directors, John Michael Bailey, dated 29 June 2022. The plaintiff also relied upon other formal affidavits required by the Court's practice before making a search order.
Counsel for the plaintiff provided his Honour with written submissions filed on 5 July 2022.
The thrust of the plaintiff's evidence and submissions was to establish that the defendant had engaged in suspicious conduct while an employee of the plaintiff, and had acted afterwards in connection with the competing business that he established in a manner that demonstrated that the plaintiff had a claim against the defendant on the basis of a number of causes of action. A significant part of the plaintiff's evidence was directed at explaining the relatively extreme delay in the plaintiff commencing the proceedings, given that the defendant had resigned on 3 December 2017 and the proceedings were not commenced until 30 June 2022, a period of almost 5 years.
The transcript of the hearing demonstrates, as would be expected, that a primary concern of Slattery J was the reasons for the delay in the commencement of the proceedings.
The plaintiff's written submission focused on the risk that, if the search order was not made, the plaintiff might not be able to obtain relevant evidence that may have been in the possession of the defendant. The submissions included: 30. [If] the orders are not granted, the subject matter of the proceedings will in effect be dissipated as the applicants would no longer be able to capture the confidential material. … 34.2. If the orders are not granted, the subject matter of the proceedings will in effect be dissipated as the applicants would no longer be able to capture the confidential material. 36. .… The Plaintiff's main concern is preservation of evidence.
The last-mentioned submission was the last written word made by the plaintiff in support of its application.
Counsel for the plaintiff made similar oral submissions to his Honour, including: "The fundamental value of the Anton Piller order is to preserve evidence that might otherwise be destroyed… " (T 5.50). See also T 6.38, where counsel said: "…I should indicate as well in terms of this being a scheme, a covert scheme which is the kind of scheme which Anton Pillers are designed to assist in the preservation of evidence…" In the result, Slattery J was prepared to make a search order, subject to certain qualifications and conditions that were incorporated in the orders actually made. As is a common practice in the Duty List, his Honour did not give separate reasons.
On the 11 July 2022 return date for the proceedings, the defendant was represented by a solicitor. The defendant through his solicitor cooperated with the plaintiff and the other persons involved in the hearing in relation to the additional orders that were necessary to enable the independent computer expert to complete his task. No complaint was made about the manner in which the plaintiff had obtained the search order. It is not entirely clear from the orders made by Slattery J and the transcript of the hearing precisely what the task required to be completed by the independent computer expert was. It at least involved imaging devices in the possession of the defendant in relation to various categories of electronic document. There was discussion about the plaintiff providing the independent computer expert with evidence of the plaintiff's customers so that the expert could identify documents on the defendant's devices that concerned the plaintiff's customers.

Information not disclosed to Slattery J

As already noted, the defendant's application is based upon the fact that the plaintiff failed to bring to Slattery J's attention a number of communications between the parties' solicitors.
The first communication is a letter from the plaintiff's solicitor to the defendant dated 31 May 2021. The letter was a letter of demand based upon allegations that the defendant had contravened ss 182 and 183 of the Corporations Act, in that he had "improperly misused [his] position as an employee by acquiring property (including company data, copyright, customer list and inventory) belonging to Arthur Rubber". There was also an allegation that, in contravention of s 94 of the Crimes Act 1900 (NSW), the defendant had stolen inventory and money during his employment by the plaintiff.
The letter contained a list of the conduct alleged by the plaintiff to have involved the contraventions stated. The letter sought an undertaking in the following terms: We request on behalf of our client that you immediately stop any and all disparaging conduct, including misleading and deceptive communications with third parties, concerning our client and his business. It is further requested that you cease to misrepresent our client's business as your own. We request that the above undertaking be set out in a written email to our office by not later than 4:30 pm AEST Wednesday, 2 June 2021. If you fail to comply then we are instructed that our client will not hesitate to exercise their available rights at law, which will include commencing court proceedings against you.
I note that the letter is marked: 'Without prejudice save as to costs'.
The second communication is a letter from the defendant's solicitor to the plaintiff's solicitor dated 2 June 2021. The letter stated on instructions that the defendant denied each and every allegation contained in the plaintiff's solicitor's letter, and that the letter had not provided any proof or evidence to substantiate the claims made against the defendant.
The letter enclosed a copy of a letter from the defendant's solicitor to the former solicitor of the plaintiff dated 18 April 2018, in which the defendant's solicitor alleged that the defendant had information that Mr Bailey had made comments defamatory of the defendant to one of the defendant's customers. The letter sought an undertaking that Mr Bailey would not defame the defendant in the future.
The defendant's solicitor also enclosed a copy of a letter dated 26 April 2018 from the plaintiff's former solicitor that said that Mr Bailey could not remember having made the particular statement and that he had not and would not do so.
The third communication is a letter from the plaintiff's solicitor to the defendant's solicitor dated 7 October 2021. The letter was slightly more than three pages in length and commenced: "Further to our correspondence dated 31 May 2021, we place you on notice that we have sufficient evidence now to commence proceedings against Mr Andrew C Peterson" for matters, including breach of fiduciary duty, breach of contract, misleading and deceptive conduct and breach of copyright. The letter then set out the plaintiff's allegations as to the defendant's breaches of duty, together with what were described as particulars of his offending conduct. The letter included attachments A to G, some of which were not in evidence on the present application. The letter stated that the plaintiff would seek damages in the amount of $185,000, and proposed that a mediation take place between the parties. The letter requested a response by not later than 4:30 PM on Monday, 11 October 2021, and then stated: "Should we not hear from your office by this time, we are instructed to initiate proceedings without further notice to you."
The fourth correspondence was a reply letter from the defendant's solicitor to the plaintiff's solicitor dated 19 October 2021. The letter addressed in some detail each of the causes of action asserted in the plaintiff's solicitor's letter, and explained why it was the defendant's position that he had no liability.
The fifth communication was an email from the plaintiff's solicitor to the defendant's solicitor dated 25 October 2021. The email contained refutations of some of the responses made on behalf of the defendant, and stated that the solicitor had received instructions to commence proceedings in the Federal Magistrates Court for breaches of the Trade Marks Act 1995 (Cth). The email made another offer of mediation.
The final communication was a letter dated 9 November 2021 from the defendant's solicitor to the plaintiff's solicitor. It advised that the defendant would not participate in a mediation. It asserted that, having regard to the lapse of time since the defendant's resignation, the claims that the defendant had acted improperly were without merit and defamatory. The solicitor stated that she had instructions to accept service of any initiating process filed by the plaintiff.
This letter enclosed a copy of a letter from Mr Tom Thompson of Kerra Consulting services in response to a document called "the RSM report". It is not clear from the evidence what the RSM report was. It was apparently a report of investigations into possible fraudulent practices at Arthur Rubber in the six months prior to the defendant's resignation. The Kerra Consulting Services report appears to provide an opinion on the significance of the creation of purchase orders to actual stock levels recorded in a program called RetailManager.

Legal principles

The starting point for a consideration of the duty of disclosure in relation to an ex parte application is the decision of Issacs J in Thomas A Edison Ltd v Bullock (1912) 15 CLR 679; [1912] HCA 72 (Thomas), where his Honour found at 681-2: …it is the duty of a party asking for an injunction ex parte to bring under the notice of the Court all facts material to the determination of his right to that injunction, and it is no excuse for him to say he was not aware of their importance. Uberrima fides is required, and the party inducing the Court to act in the absence of the other party, fails in his obligation unless he supplies the place of the absent party to the extent of bringing forward all the material facts which that party would presumably have brought forward in his defence to that application. Unless that is done, the implied condition upon which the Court acts in forming its judgment is unfulfilled and the order so obtained must almost invariably fall. I add the word "almost" in deference to such an exceptional case as Holden v Waterlow.
A frequently cited restatement of this principle is per Allsop J (as his Honour then was) in Walter Rau Neusser Oel und Fett AG v Cross Pacific Trading Ltd [2005] FCA 955 at [38]: [38] In an ex parte hearing, it is the obligation of the party seeking orders, through its representatives, to take the place of the absent party to the extent of bringing forward all the material facts which that party would have brought forward in defence of the application: Thomas A Edison Ltd v Bullock (1912) 15 CLR 678 at 681-82 per Isaacs J. That does not mean stating matters obliquely, including documents in voluminous exhibits, and merely not mis-stating the position. It means squarely putting the other side's case, if there is one, by coherently expressing the known facts in a way such that the Court can understand, in the urgent context in which the application is brought forward, what might be said against the making of the orders. It is not for the Court to search out, organise and bring together what can be said on the respondents' behalf. That is the responsibility of the applicant, through its representatives.
Regarding the obligation to disclose correspondence between the parties, see the decision of Wood V-C in Fuller v Taylor (1863) 32 LJ Ch 376 (cited in Thomas), where in the context of setting aside an interim order it was found, at 377: …it is necessary that the Court should be informed of every fact, whenever an interim order is asked for. This rule ought not perhaps to be carried to that extreme degree of nicety to which it formerly was in the case of ex parte injunctions, when the very smallest scrap of paper that was omitted was held almost to disentitle to the injunction. But when, as in the present case, a portion of the correspondence is not disclosed to the Court, and the effect of it is misrepresented in such a manner as to mislead the Court, I think the Court should in some way mark its sense of the course which has been taken.
As to the failure of a plaintiff applying for search orders to provide the Court with (in that case, without prejudice) correspondence that evidenced cooperation by the defendants, see also the decision of Bergin CJ in Eq (as her Honour then was) in Singtel Optus Pty Ltd v Almad Pty Ltd [2011] NSWSC 492 (Singtel Optus), where a search order was set aside for a lack of disclosure.
It is necessary to consider the authorities that explain the course that may be appropriate for the Court to take when it is established that the Court has made ex parte orders upon the basis of the inadequate disclosure of information known to the applicant, which is material, and which would be expected to have been placed before the Court if the respondent to the application had had the opportunity to do so.
The learned editors of Meagher, Gummow & Lehane's Equity: Doctrines & Remedies (5th ed 2014, LexisNexis Butterworths) (Equity: Doctrines and Remedies) say at [21-425] (footnotes omitted): There is a controversy as to whether any breach of the obligation [to put all of the facts before the court] will result in dissolution of the injunction, or whether the matter is discretionary and, if so, what criteria are relevant to the exercise of the discretion. There is authority that there is no discretion not to dissolve the order. There is also authority that the question is discretionary, and that among the key factors to be considered are whether non-disclosure was deliberate, whether the omitted facts were significant, whether hardship would be caused by dissolution, and whether another application could be made.
The sole case cited as authority for the mandatory dissolution of ex parte interim injunctions where there has been defective disclosure in Equity: Doctrines and Remedies is Town & Country Sport Resorts (Holdings) Pty Ltd v Partnership Pacific Ltd (1988) 20 FCR 540 (Town & Country), where Davies, Gummow and Lee JJ found, at 543: The failure of the applicants to make full disclosure of all facts relevant to the application for an interim injunction in itself necessitated the discharge of the order granted. A party who seeks the granting of an injunction on an ex parte basis has a duty to place before the Court all relevant matters including such matters which would have been raised by the respondent in his defence if he had been present… The rationale behind the principle is clear; it is of the utmost importance in the due administration of law that the Courts and the public are able to have confidence that an ex parte order has been made only after the party obtaining it has complied with its duty to disclose all relevant facts. The principle applies to an application to discharge or dissolve an ex parte interim injunction; the discharge of that injunction does not prevent a fresh application being heard and determined in the light of all relevant facts… (emphasis added)
It may be material that the members of the Full Court were concerned with an application for an interim injunction. Such an injunction will usually prevent the respondent from acting in a stated manner, or will oblige the defendant to undertake a particular act. In the former case the discharge of the interim order will free the respondent to engage in conduct, and that may sometimes be true in the latter case. Their Honours noted that the applicant might make a fresh application for a new interim order. In that context, the discharge of the original order has a technical character, as it may be reinstated in an appropriate case. The context may be materially different where a search order has been made and executed. The discharge of the order may have permanent consequences, particularly if the results of the search are returned to the respondent.
In Aristocrat Technologies Australia Pty Ltd v Allam [2016] HCA 3 (Aristocrat), in the context of an ex parte application for enforcement of a High Court judgment, Gageler J found that failure to make "full and fair disclosure…is ordinarily sufficient" to justify discharge (footnotes omitted): [15] It is an elementary principle of our ordinarily adversarial system of justice that full and fair disclosure must be made by any person who seeks an order from a court ex parte, with the result that failure to make such disclosure is ordinarily sufficient to warrant discharge of such order as might be made. The principle is not confined to particular types of interlocutory orders. Its rationale lies in the importance to the administration of justice of the courts and the public being able to have confidence that an order will not be made in the absence of a person whose rights are immediately to be affected by that order unless the court making the order has first been informed by the applicant of all facts known to the applicant which that absent person could be expected to have sought to place before the court had the application for the order been contested. (emphasis added)
These statements in Town & Country and Aristocrat are not necessarily inconsistent with what appears to be the better view on the decided cases, that is, although the failure of the applicant to make full and frank disclosure will ordinarily entitle the party subject to the search order to its discharge, it will always be in the exercise of the court's discretion. This is consistent with the view expounded by Isaacs J in Thomas.
The Victorian Court of Appeal, in Savcor Pty Ltd v Cathodic Protection International APS (2005) 12 VR 639; [2005] VSCA 213 (Savcor) found that the Court had a discretion not to set aside an ex parte order for non-disclosure, per Gillard AJA (Ormistan and Buchanan JJA agreeing): [33] In my opinion a court does have a discretion to not set aside an order despite a material non-disclosure or misrepresentation of law or fact. Setting aside does not follow as a matter of course. Relevant to the discretion is whether the material non-disclosure was serious or otherwise the importance or weight that should be attached to the omitted fact in the decision making process and also any hardship if the order was set aside. The approach is different if the plaintiff has acted culpably in the sense that the omission to disclose relevant matters was done deliberately to mislead the court. The most likely result in those circumstances would be that the order would be vacated. (emphasis added)
Savcor cited the leading Court of Appeal case Brink's Mat Ltd v Elcombe [1988] 1 WLR 1350, where Ralph Gibson LJ summarised the Court's discretion to overturn an ex parte Mareva order at 1357 as follows: … (5) If material non-disclosure is established the court will be "astute to ensure that a plaintiff who obtains [an ex parte injunction] without full disclosure … is deprived of any advantage he may have derived by that breach of duty:" see per Donaldson L.J. in Bank Mellat v. Nikpour, at p. 91, citing Warrington L.J. in the Kensington Income Tax Commissioners' case [1917] 1 K.B. 486, 509. (6) Whether the fact not disclosed is of sufficient materiality to justify or require immediate discharge of the order without examination of the merits depends on the importance of the fact to the issues which were to be decided by the judge on the application. The answer to the question whether the non-disclosure was innocent, in the sense that the fact was not known to the applicant or that its relevance was not perceived, is an important consideration but not decisive by reason of the duty on the applicant to make all proper inquiries and to give careful consideration to the case being presented. (7) Finally, it "is not for every omission that the injunction will be automatically discharged. A locus poenitentiae may sometimes be afforded:" per Lord Denning M.R. in Bank Mellat v. Nikpour [1985] F.S.R. 87, 90. The court has a discretion, notwithstanding proof of material non-disclosure which justifies or requires the immediate discharge of the ex parte order, nevertheless to continue the order, or to make a new order on terms. "when the whole of the facts, including that of the original non-disclosure, are before [the court, it] may well grant … a second injunction if the original non-disclosure was innocent and if an injunction could properly be granted even had the facts been disclosed:" per Glidewell L.J. in Lloyds Bowmaker Ltd. v. Britannia Arrow Holdings Plc., ante, pp. 1343H-1344A.
In Singtel Optus Bergin CJ in Eq said at [68] that: "it does not follow automatically that where there are material non-disclosures a search order must be set aside".
In Showcase Realty Pty Ltd v Nathan Circosta [2021] NSWSC 355 Rees J set aside an Anton Piller order ab initio on the basis that the plaintiffs had not disclosed material facts that the defendant would have brought forward in opposing the grant of the orders had they not been ex parte (namely that the clients retained by a property manager who moved between employers were his friends and family, and that their retention was therefore unlikely to be related to any misuse of confidential information of his former employer). Her Honour summarised the principles applicable to both the exercise of discretion and whether non-disclosure was "material" as follows: "[5] Where search orders have already been executed, the Court may set aside the orders ab initio if there has been a material non-disclosure: Brags Electrics Ltd v Gregory [2010] NSWSC 1205 at [17] per Brereton J. A respondent who applies to set aside an ex parte order on this basis bears the onus of showing that there has been such a non-disclosure: Brags Electrics at [10]. The test for determining whether a non-disclosure is "material" was explained by Ball J in Principal Financial Group Pty Ltd v Vella [2011] NSWSC 327 at [17] (cited with approval in Singtel Optus Pty Ltd v Almad Pty Ltd [2011] NSWSC 492 at [53] per Bergin CJ in Eq): In order for information to be material for this purpose, I do not think it is necessary that the information would have or was likely to have made a difference to the orders of the court. It is sufficient if the information is information that it could be expected that the opposing party would have wanted to bring to the court's attention and the court would have wanted to consider before making an order. It is only if the requirement of materiality is interpreted in that way that full disclosure is an adequate substitute for a party's right to be heard. [6] In [Savcor], Gillard AJA (with whom Ormiston and Buchanan JJA agreed) described it thus, at [35]: What is a material fact is a matter which is relevant to the court's determination. To be material, it would have to be a matter of substance in the decision making process. At [36], his Honour adopted Brink's Mat Ltd v Elcombe [1988] 1 WLR 1350 at 1356 (per Ralph Gibson LJ), "the material facts are those which it is material for the judge to know in dealing with the application as made: materiality is to be decided by the court and not by the assessment of the applicant or his legal advisers". [7] If there has been a material non-disclosure, the Court has a general discretion whether to discharge an Anton Piller order ab initio… [8] Further, the question is not whether a search order would have been made, or should be made, on the evidence, but whether there has been material non-disclosure. In Savcor Gillard AJA explained at [22]: … The order is set aside because of some irregularity and not on the merits. When this jurisdiction is enlivened, the court's function is to determine on the material that was placed before the judicial officer at first instance, whether a party has failed to discharge the obligation which rests upon any party seeking an order ex parte, namely, making a full and fair disclosure of all matters within its knowledge and which are material, to the court. The court is not concerned whether the order should have been made on the material before the court. … See likewise Palaris Mining Pty Ltd v Short [2012] QSC 224 at [26] per Applegarth J. [9] If the Court is not minded to set the Anton Piller aside ab initio, the order will operate in futuro only; the respondent may be entitled to compensation under the usual undertaking as to damages: Brags Electrics at [17].
In Tyche Asset Management Pty Ltd v Flyland Development Group Pty Ltd [2021] NSWSC 1283 Henry J declined to discharge freezing orders on the grounds of non-disclosure, restating the principles above and stating: [41] The exercise of the discretion whether to set aside or continue the ex parte orders takes into account all of the circumstances, including the importance and materiality of the statements and the non-disclosure, the merits of the case, the practical effect of setting aside the orders, and whether the applicant acted culpably in the sense that the non-disclosure was deliberate: Gold Ribbon (Accountants) Pty Ltd (in liq) v Sheers [2003] 1 Qd R 683; [2002] QSC 400 at [51]-[54]; Savcor at [33]-[35]; Nexdius Pty Ltd v Exposure Scientific LLC [2017] NSWSC 1608 at [83]-[93].
Finally, regarding the plaintiff's submissions, the case on which it seeks to rely at par 15 for the principle that "discharge is the exceptional course not the rule" [sic], Dart Industries Inc v David Bryar & Associates Pty Ltd (1997) 38 IPR 389 (Dart) (which cites with approval Dormeuil Freres S.A. and another v Nicolian International (Textiles) Ltd [1988] 1 WLR 1362 (Dormeuil)) may not be applicable in the circumstances of this case.
In Dart Goldberg J accepted at 419 that "investigations of the circumstances in which an ex parte Anton Piller order was granted should be restricted to those cases where there has been a serious failure to make a material disclosure". However, his Honour went on to say at 420: "Having regard to the nature of the allegations of material non-disclosure I consider it more appropriate that the application based on those allegations be put over to the trial of the proceeding."
That is, in Dart it appears that Goldberg J had determined that the non-disclosure was not sufficiently serious to warrant the discharge of the Anton Pillar orders prior to the inter partes hearing, particularly in light of the fact that it was clear from the material found as a result of the search orders that there was a serious question to be tried.
In Dormeuil, Browne-Wilkinson VC likewise deferred the determination of the application to set aside until the substantive hearing. In that case, and unlike the current proceedings, the material relating to non-disclosure was complex, and the application to set aside the ex parte order was only relevant to costs (at 1370): The sole relevance of the question "Should the ex parte order be set aside?" is, so far as I can see, to determine the question whether the plaintiff is liable on the cross-undertaking in damages given on the ex parte hearing. That is not an urgent matter. It is normally much better dealt with at the trial by the trial judge who knows all the circumstances of the case and is able, after cross-examination, to test the veracity of the witnesses.
It follows from the fact that the plaintiff has conceded that it ought to have brought the correspondence between the parties' solicitors to the attention of the Court at the time it made the application for the issue of the search order that the plaintiff accepts that the non-disclosure was material, in the sense that it would reasonably be expected that the defendant would have tendered that correspondence if it had had notice and was able to appear on the application. The plaintiff's concession was clearly proper in these circumstances. However, the plaintiff submitted that the Court should neither set aside the search order, nor make the remaining orders sought in prayers 1 and 2 of the amended notice of motion. That was because, as the plaintiffs submitted, on a proper analysis of the communications, the defendant had not squarely answered the most significant charges made against him, and in fact, on close analysis, had equivocated in relation to those claims.
I do not accept the plaintiff's submission. The full explanation for that rejection would require a complex analysis of the text of the communications, which I think is not warranted. That is because, although I accept that this submission may have had apparent vitality to lawyers who were steeped in the underlying issues, I am satisfied that the subtleties of the argument would not have been apparent in the context of a duty judge dealing with an urgent interlocutory application. That is, upon my reading of the parts of the communications relied upon by the plaintiff, the points that it seeks to make simply do not emerge with sufficient clarity from the wording. I cannot speak for Slattery J, but it appears to me from a careful reading of the transcript of the application before his Honour that a close analysis of the communications for the purpose of determining the superficial strength of the defendant's responses to the plaintiff's claims would not have been undertaken, nor would it have had a significant bearing on the outcome. That is largely because, as I understand the course of the application, as disclosed in the transcript, it is probable that the existence of the communications, taken as a whole rather than in respect of the detailed allegations and responses, would most likely have led to a rejection of the application.
While I speak with great diffidence concerning how the reasoning of Slattery J may have been affected by the disclosure of the correspondence, I start from an understanding that the transcript demonstrates a marked reservation by his Honour, as a result of the clear evidence of delay in making the application. In the context of an urgent application in the Duty List, it is likely that the disclosure of the communications would have demonstrated the following matters: 1. The plaintiff first notified the defendant of the initial basis of its claim on 31 May 2021, about 15 months before the commencement of the proceedings. 2. At all times thereafter the defendant was represented by a solicitor. 3. The parties had exchanged correspondence in which the plaintiff's claims, as they evolved, were ventilated in detail and the defendant had provided responses. Whatever might have flowed from a minute examination of the defendant's responses, they appeared superficially to be conscientious and entirely rejected the plaintiff's claims. 4. The defendant had acted in a conventional and responsible way by not ignoring the plaintiff's claims, but by retaining legal representation so that he could respond to the plaintiffs' claims in a proper way. 5. Significantly, the plaintiff had already asserted that it was in a position to commence proceedings, which is inconsistent with the need on the part of the plaintiff to execute a search order before it was in a position to know whether it could properly commence proceedings. 6. The last word in the communications was the defendant's statement in his solicitor's 9 November 2021 letter that he would not participate in a mediation, and that the solicitor had instructions to accept service of initiating process. That information would probably have put an entirely different complexion on the significance of the plaintiff's delay. The defendant had been waiting for about eight months for the plaintiff to commence the proceedings that it had threatened and said it was in a position to commence. 7. Given that a primary purpose of the making of a search order is to preserve evidence and to deprive a dishonest defendant of the opportunity to destroy that evidence, the correspondence would have established that the defendant had had notice of the plaintiff's claim since 31 May 2021, and thus had more than a year's opportunity to destroy relevant evidence. Notwithstanding that opportunity, as a matter of appearances the defendant had acted responsibly in dealing with the plaintiff's claims.
I therefore conclude that, in this case, the nondisclosure of information known to the plaintiff was material in the sense that it did not bring to the attention of the Court information that the defendant would have tendered if he had had the opportunity to do so, but the failure is material in the stronger sense that there is a high probability that the disclosure would have caused the Court to dismiss the application.
One reason for that conclusion is the existence of Practice Note SC Eq 11, (Practice Note) which relevantly provides: Disclosure 4. The Court will not make an order for disclosure of documents (disclosure) until the parties to the proceedings have served their evidence, unless there are exceptional circumstances necessitating disclosure. 5. There will be no order for disclosure in any proceedings in the Equity Division unless it is necessary for the resolution of the real issues in dispute in the proceedings. 6. Any application for an order for disclosure, consensual or otherwise, must be supported by an affidavit setting out; the reason why disclosure is necessary for the resolution of the real issues in dispute in the proceedings; the classes of documents in respect of which disclosure is sought; and the likely cost of such disclosure.
I consider that it is improbable that, if the plaintiff had commenced these proceedings in a timely way after it threatened to do so, the Court would have made an order against the defendant for disclosure of documents until the parties had serve their evidence. It does not appear that the Court would have accepted that there were exceptional circumstances as contemplated by the Practice Note in this case.
In this case, if the Court were to permit the plaintiff to have access to the fruits of the execution of the search order, the result would be that the plaintiff will have been permitted to circumvent the application of the Practice Note. That is at least a substantial reason in favour of the Court making orders in terms of prayers 1 and 2 of the amended notice of motion at this stage.
I have made the observation above that the considerations that inform how the Court should deal with a search order made on the basis of inadequate disclosure may differ from the situation where the order made was an interlocutory injunction. The primary object of the making of a search order is the preservation of evidence that might otherwise be destroyed. That evidence will not always be limited to evidence of general relevance to the plaintiff's claims, but may be evidence of the actual wrongdoing that is the foundation of the plaintiff's case. Neither party in this case made any application to bring the results of the execution of the search order that may be embodied in the report of the independent computer expert to the attention of the Court. I do not suggest that either party ought to have done so, and there would plainly be difficulties that might arise if the defendant and the Court were in a position to know the results of the search but the plaintiff was not. Nonetheless, the fact is that the Court does not know what the search discovered. The possibilities range from evidence of breaches of duty upon the part of the defendant to the appearance of complete innocence of the defendant in the conduct of his business in competition with the plaintiff's business.
As I have noted above, when discussing the plaintiff's 7 October 2021 letter to the defendant's solicitor, at that time the plaintiff proposed to seek damages of $185,000. The Court was informed at the hearing that the plaintiff initially intended to commence its proceedings in the District Court at Wagga Wagga, and I understand that the proceedings may be transferred to that Court when this Court has dealt with all issues that are solely within its jurisdiction. The requirements of s 56 of the Civil Procedure Act 2005 (NSW) cause me concern as to whether the effect of withholding the results of the execution of the search order from the plaintiff at this stage will simply be to prolong the proceedings and add to the costs. That is on the assumption that, after the parties have completed their evidence, the plaintiff may be able to persuade the Court to give it access to the results of the execution of the search order.
Nonetheless, the failure of proper disclosure in this case, though unintentional, was serious and material, and the disclosure of the results of the search to the plaintiff would subvert the application of the Practice Note. As the defendant has had the opportunity on legal advice to consider the consequences, and as he has asked the Court to make orders in terms of prayers 1 and 2 of the amended notice of motion, I am satisfied, on balance, that the Court should make those orders. The orders that are made will cause the results of the search to remain in the custody of the Court, and the plaintiff will be given leave to make application for access to that evidence at a time that is consistent with the application of the Practice Note.

Security for costs

As already noted, the defendant by his amended notice of motion seeks an order that the plaintiff provide security for his costs of the proceedings in the amount of $120,000.
The defendant's solicitor, by her affidavit sworn on 11 August 2022, provided evidence in the conventional form of her estimate that the defendant will incur further costs on a party-party basis up to the conclusion of the hearing of $130,000 including GST. I understand from the chapeau to par 22 and from par 24 of the affidavit that the $130,000 estimate is for the defendant's costs incurred from the date of the affidavit, which was sworn on the date of the defendant's original notice of motion. I am satisfied that the hourly rates upon which the solicitor has made her calculations are reasonable, and that an allowance of four days for each of preparation and the hearing is reasonable. The plaintiff did not lead evidence to challenge the defendant's solicitor's estimate of the costs.
The evidence established that the plaintiff does not own any real property. The plaintiff declined an offer by the defendant to accept a security over real property owned by the plaintiff's principals. That may be reasonable, as the property is apparently the principals' residence, but it requires the Court to deal with the application on the basis that the plaintiff does not own any real property.
The plaintiffs submitted that, by reason of the nature of its claim against the defendant, and the evidence that the plaintiff has lost a number of its important customers to the defendant, the defendant's conduct may to some degree be a cause of any risk that the plaintiff will not be able to meet any costs order that may be made in favour of the defendant in these proceedings. There is, however, no reasonably direct evidence to justify the Court in making a finding of fact in favour of the plaintiff on that issue. It is equally possible that, in the years since the defendant resigned his employment by the plaintiff, he has been able to acquire former customers of the plaintiff by offering a superior service.
The plaintiff primarily relied upon a business valuation opinion dated 5 September 2022 by Nicholas Driver of Driver Accounting Pty Ltd. The defendant did not resist the admission Mr Driver's report into evidence and did not challenge his expertise.
The conclusions reached by Mr Driver in his report may be summarised as follows: 1. Mr Driver adopted a valuation of $150,000 for the business of the plaintiff, based upon Net Operating Assets. 2. The Net Operating Assets were assessed as having a value of $148,446. In determining that value, Mr Driver calculated the total value of cash, trade receivables, inventory and property, plant and equipment. Mr Driver excluded amounts stated in the plaintiff's financial statements of $175,000 for goodwill and $36,498 for other assets and loans. 3. Mr Driver did not consider that he was able to establish a value of the plaintiff's business on the alternative basis that depended upon a multiple of future maintainable earnings, as the nature of the plaintiff's business was such that he was not able to reliably estimate EBIT (earnings before interest and tax). As I understand Mr Driver's report, this conclusion means that he was not able to make the adjustments necessary to determine EBIT in a reliable way, and did not mean that the plaintiff was incapable of generating profits. 4. According to the plaintiff's 30 June 2021 financial statements, the total liabilities of the plaintiff were $387,807, compared to total assets of $359,944 (which included the categories of assets that Mr Driver had excluded in determining the value of the plaintiff's business based upon Net Operating Assets). 5. The net profit (loss) of the plaintiff's business in the four years since it was acquired by its present principals and for which financial statements are available were $30,610, ($69,911), $207 and ($609). In the 2019 year, turnover decreased by $115,212 or 18% compared to the 2018 year. The business has not recovered from that significant downturn in subsequent years.
Rule 42.21 of the UCPR relevantly provides: 42.21 Security for costs (1) If, in any proceedings, it appears to the court on the application of a defendant - … (d) that there is reason to believe that a plaintiff, being a corporation, will be unable to pay the costs of the defendant if ordered to do so, or … the court may order the plaintiff to give such security as the court thinks fit, in such manner as the court directs, for the defendant's costs of the proceedings and that the proceedings be stayed until the security is given. (1A) In determining whether it is appropriate to make an order that a plaintiff referred to in subrule (1) give security for costs, the court may have regard to the following matters and such other matters as it considers relevant - (a) the prospects of success or merits of the proceedings, (b) the genuineness of the proceedings, (c) the impecuniosity of the plaintiff, (d) whether the plaintiff's impecuniosity is attributable to the defendant's conduct, … (f) whether an order for security for costs would stifle the proceedings, … (k) whether the security sought is proportionate to the importance and complexity of the subject matter in dispute, … … (2) Security for costs is to be given in such manner, at such time and on such terms (if any) as the court may by order direct. …
Section 1335 of the Corporations Act has the same effect as Rule 42.21, notwithstanding its different wording. Subsection (1) provides: 1335 Costs (1) Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his, her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.
There is no need to give separate consideration to the application of this section to the facts of the present case.
On the evidence, the Court is not able to take a view about the plaintiff's prospects of success or the merits of the proceedings. The defendant has not suggested that the proceedings are not genuine. The real issue is whether an order for security for costs should be made based upon the apparent impecuniosity of the plaintiff. As noted above, the evidence does not permit the Court to form a view as to whether any impecuniosity on the part of the plaintiff is attributable to the defendant's conduct. The plaintiff has not suggested that an order for the provision of security for costs would stifle the proceedings. That suggestion would be inconsistent with the plaintiff's position that it is not relevantly impecunious. Although the security sought, at $120,000, is a substantial proportion of the apparent claim of $185,000, the factual issues that arise are likely to be complex and the parties' conduct over a significant number of years will be relevant to the determination of the plaintiff's claim.
In these circumstances, the only real issue is whether there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if ordered to do so. This threshold issue (being that there is reason to believe) is relatively "undemanding": see Hurworth Nominees Pty Ltd v ANZ Banking Group Ltd [2005] NSWSC 1360 at [41] per White J (as his Honour then was); 15 Management Pty Ltd v Newstar Sports Management Pty Ltd [2009] NSWSC 1208 at [32] per Nicholas J; HP Mercantile this Pty Ltd v Dierickx [2013] NSWCA 87 at [6]-[9] per Ward JA (as her Honour then was); and Xinfeng Australia International Investment Pty Ltd v GR Capital Group Pty Ltd [2019] NSWSC 1546 at [90] and [93] per Ward CJ in Eq (as her Honour then was). What is required is that there be a "rational basis for the belief" that the plaintiff will be unable to pay the defendant's costs if ordered to do so: Treloar Constructions Pty Ltd v McMillan [2016] NSWCA 302 at [11] per Beazley ACJ. The plaintiff may be "unable to pay the costs of the defendant" in the relevant sense if it is only capable of paying those costs if given an extended time to realise assets which might be difficult to realise: see Beach Petroleum NL v Johnson (1992) 7 ACSR 203 at 205 per von Doussa J.
The present is not a case where the plaintiff is clearly insolvent but I am satisfied as a matter of rational possibility that it will not be able to pay the defendant's costs, if those costs are ordered to be paid by the plaintiff and are assessed at $130,000. On the evidence it seems to be improbable that the plaintiff could pay the defendant that sum without realising substantially all of its assets and undertaking. It may be doubtful that the plaintiff could generate the value as found in Mr Driver's report if under pressure to sell quickly. That said, this is not a case where there is an obvious likelihood that the plaintiff will not be able to pay the defendant's costs.
An important consideration on the present application is that the circumstances of the particular case may warrant the Court in not providing full security for the amount of costs that the defendant has estimated that it will incur. Even the most careful estimate will be a matter of opinion and may be no more than an elaborate guess as to the future course of the proceedings. There will always be a risk that if the Court requires too high an amount of security to be provided that will in fact stifle the proceedings or inhibit their prosecution by the plaintiff even in cases where the plaintiff is unable to prove that likely outcome at the time of the application. As stated by Basten JA in Pioneer Park Pty Ltd (in liq) v Australia and New Zealand Banking Group Ltd [2007] NSWCA 344; (2007) 65 ACSR 383 at [66]: (Tobias and McColl JJA agreeing, noting that that there was some difference in the final amount that they would have ordered in the circumstances of that case): "it is usual to fix an amount by way of security which is below the applicant's estimation, so as not to impose an undue burden on the corporate appellant or plaintiff and so that the applicant will bear the risk of over-estimation.
Furthermore, as Mason P said in Sagacious Procurement Pty Ltd v Symbion Health Ltd [2007] NSWCA 2005: [14] In Procon (Great Britain) Ltd v Provincial Building Co Ltd [1984] 1 WLR 557, Griffiths LJ said (at 571): "It is, of course, for the party seeking an order for security to put before the court material that will enable the court to make an estimate of the costs of the litigation. In the normal course of things, it is to be expected that the court will, to some extent, discount the figure it is asked to award. Allowance will have to be made for the unquenchable fire of human optimism and the likelihood that the figure of taxed costs put forward would not emerge unscathed after taxation."
I am satisfied that the defendant is entitled to an order that the plaintiff provide security for his costs, but I consider that the amount of the security should be substantially discounted from that claimed by the defendant. I will order the plaintiff to provide security in the amount of $80,000, but that should be on the basis of a timetable that requires $20,000 to be paid within 28 days of the making of the orders, $20,000 to be paid within 14 days after the completion of the evidence by service of the parties' affidavits, and the final $40,000 to be paid no later than 28 days before the date fixed for the commencement of any hearing to determine the proceedings.
I am concerned as to how these orders may take effect, given the amount of damages that the plaintiff will apparently seek and the proposal that the proceedings be transferred to the District Court. As these reasons have taken into account the operation of the Practice Note, which will not apply if the proceedings are transferred to the District Court, I will include an order giving the parties leave to apply for an order that they have access to the material that will be delivered into the custody of this Court, such leave being exercisable after the completion of the evidence. If the proceedings are transferred to the District Court, either party who wishes to exercise the leave will have to make arrangements for the material in the custody of this Court to be transferred to the custody of the District Court.

Orders

The orders of the Court are: 1. The plaintiff is not to have access to any of the material produced pursuant to the search conducted on 8 July 2022 pursuant to the search order made by the Court on 6 July 2022, including material collated and distributed by the independent expert, until further order of the Court. 2. The plaintiff is not to have access to any report or affidavit prepared by the independent expert until further order of the Court. 3. The plaintiff's solicitors deliver to the Court (by arrangement with the Associate to Robb J) any document, files, drives or USB that they hold which they have received from the independent expert as a consequence of the search order in respect of the search carried out on 8 July 2022. 4. The Court will retain custody of the material delivered pursuant to order 3 until further order of the Court. 5. Grant leave to the parties to apply for orders under orders 1, 2 and 4 and otherwise for access to the material held in the custody of the Court in accordance with order 4 following the completion of the service of the parties' evidence in the proceedings. 6. Orders in response to the leave granted by order 5 may be made by this Court or any other court to which these proceedings may be transferred. 7. The plaintiff is to give security for the defendant's costs of the proceedings in the sum of $80,000 to be paid into Court, as follows: 1. $20,000 within 28 days of the making of these orders; 2. $20,000 within 14 days after the completion of service of the parties' evidence in the proceedings; and 3. $40,000 no later than 28 days before the date fixed for the commencement of the hearing of these proceedings. 1. If the plaintiff fails to provide security at any time as required by order 7, the proceedings will be stayed until such time as the required security is provided. 2. Reserve the determination of prayer 4 of the defendant's amended notice of motion filed on 16 September 2022 to the hearing of the proceedings. 3. Reserve the costs of the defendant's amended notice of motion generally to the hearing of the proceedings. 4. Stand the proceedings over to the Registrar's list on 8 May 2023 for directions.

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: 03 April 2023

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