Hemley v Medical Indemnity Protection Society [2000] VSC 496

5. The Rule and the jurisdiction have come under not inconsiderable judicial notice in the last decade. I refer to Paxus Services v. People Bank Pty. Ltd.[1]; Gibson v. ANZ Banking Group Ltd.[2]; Scarletti Pty. Ltd. & Ors v. Milwood Printing Co. Pty. Ltd.[3]; United Energy Ltd. v. Energy Risk Management Pty. Ltd;[4] FAI Home Security Pty Ltd v Price & Ors.[5]

8. I briefly encapsulate the facts of the matter. The first applicant Hemley had been a member of the Medical Protection Society of the United Kingdom ("MPS UK") since 1979. The respondent MIPS became an incorporated mutual society on 9 September 1988 and the first applicant became a concurrent member of MPS UK and MIPS. Shortly after that, MPS UK and MIPS entered into an arrangement whereby the UK society agreed to meet "all court awards and settlements made against or on behalf of" members of MIPS. In February 1993 MIPS became incorporated as a company limited by guarantee. It would appear that MPS UK held a majority of shares in MIPS. The Exhibit RHH13 to the first affidavit of Hemley shows that the 1996 annual return of MIPS disclosed few assets and liabilities. It would appear that at some time in 1997 MPS UK made arrangements with the Medical Defence Association of Victoria (then apparently one of the controllers of MIPS) whereby MPS UK was relieved of its existing liabilities in Victoria upon paying a negotiated sum. Thereafter, from April 1998 on, MPS UK took no new business in Victoria and was relieved of all liabilities between July 1988 and January 1998. The pre-July 1988 liabilities remained with MPS UK. According to one of the affidavits of Mr Hemley (Exhibit RHH22) the articles of MIPS were amended on 24 March 1998 to convert all professional members to non-voting members. Thus, members had no right to notices of meetings or attendance at them. Other amendments gave MIPS the power to levy members to make contribution in addition to annual subscriptions. About this time the applicants received information as to the changes in arrangements for funding of indemnity, that MPS UK was no longer involved with indemnity in Victoria and that Hemley could no longer be a member of MPS UK which would no longer fund indemnity because MIPS would. It would appear that what is now named Professional Management of Australia Pty Ltd became the controlling shareholder in MIPS, probably instead of MPS UK. There does not appear be any doubt, therefore, that MPS UK had discontinued its Australian business connection and was no longer exposed to outstanding claims, including the so-called IBNRs, that is, claims incurred but not reported. Both applicants ceased to be members of MPS UK in June 1998.

11. In 1999 MIPS resolved to levy a back funding contribution, said to be founded upon actuarial advice. The imposition of the back funding contribution was announced in October 1999. Its purpose is said to be to garner a fund to meet outstanding claims, including IBNRs, the actuaries having estimated an overall deficit of $12m., virtually wholly unfunded. The back funding contribution was the equivalent of a year's annual subscription and the terms upon which it was required was that members who did not make the required payments would become unfinancial members and, therefore, become ineligible for any benefits of membership and thereby remained unindemnified. This obligation and its consequences remained unaffected by retirement or resignation as from 29 October 1999.

14. On 25 January 2000 the second applicant inquired from MIPS as to whether the back funding contribution was intended to fund IBNRs that preceded 1 July 1998 or only IBNR claims after 1 July 1998. He was informed that the shortfall related to IBNRs not reported as at 30 June 1999 which might be made and reported in the future but which arose from clinical events which would have occurred not only before 1 July 1999 but even earlier than 1 July 1998.

17. The first applicant resigned from MIPS on 11 April 2000 and was informed by MIPS that he would cease to be entitled to any of the benefits of membership as being unfinancial which he would be unless he made the back funding contribution. Thereafter both the applicants and their solicitors sought copies, information and documents from both MIPS and MPS UK.

20. The applicants' summons of 30 October 2000 specifies the classes of documents sought by way of preliminary discovery. These included documents evidencing arrangements between MIPS and MPS UK from 1 January 1993 to 30 June 1998 with respect to the provision of discretionary indemnity. There were sought documents relating to the provision by MIPS of discretionary indemnity to its members 30 June 1988 to 30 June 1998, similarly with respect to the provision by MPS UK in the same period. It also sought the actuary's report, all agreements in relation of transfer of shares held in MIPS in 1998 from MPS UK or any company associated with it to Professional Management Australia Pty. Ltd., Victorian Medical Insurance Agency Ltd. or Medical Defence Union Pty. Ltd., all of whom have or have had roles in relation to direction and control of MIPS. In particular I note that all documents recording or relating to any agreement made in 1997 and 1998 under which MIPS agreed to pick up the liability for the known claims of concurrent members of MPS UK and MIPS are sought and any documents by which MDAV, Professional Management, VMIA or the Medical Defence Union agreed to indemnify the English society in respect of all known and unknown claims of the members of MIPS or MPS UK.

23. The essentials of the applicants' claims appear to be as follows. They were both members of MIPS until April 2000. MIPS amended its constitution to give itself the power to call for a back funding contribution and did so. At that point of time the applicants did not have the right to be notified of the proposal and were not notified by the proposal to amend the constitution or exercise new power. These steps involve fiduciary obligations.

26. Mr Santamaria, Q.C. for the applicants put the case that the applicants had already paid MPS UK for the discretionary indemnity cover and, having paid for it, MPS UK remained liable to them. It was put that any arrangements made between MIPS and MPS UK and Medical Defence Association of Victoria were made without notification to the applicants who were not a party to those arrangements. Those rights could not be rights against MPS UK could not be diminished by arrangements which appear to have involved the transfer of the liabilities of MPS UK to MIPS. Thus it was put that it was at least arguable that those liabilities could not be transferred without their consent. Since MPS UK had paid MIPS to take over the liabilities, it was bound to have required and obtained an indemnity, probably from MDAV. Thus the case was put that MIPS had amended its constitution and called for a back funding contribution to finance liabilities that had already been paid for by the applicant to MPS UK in order to relieve MIPS from the consequences of the indemnity and any claims.

29. The applicants, it was said, wished to access all documents in order that they could make a decision as to whether or not they should commence a proceeding alleging that the conduct was oppressive. This matter of law was a consequence of s.140 of the Corporations Law. The applicants could not be stripped of their rights in that way. The argument is that the amendment of the articles was for an improper purpose; that it breached the personal right of the member, as did the exercise of the purported power. The true reason for making the amendment was to authorize the making of an unjustified call to fund liabilities which had already been funded. The applicants had been stripped of their right to vote. They might bring an action, either by themselves or on behalf of all other non-voting members affected in the same way. A claim was made that correspondence between the applicants on the one hand MIPS and MPS UK on the other had failed to achieve the production of documentation called for as bearing upon the applicants' rights to indemnity in respect of IBNRs between 1988 and 1998.

32. As I understand the formulation of the argument in support of the application for preliminary discovery, it is said to be critical to have access to documents which throw light upon the issue as to whether or not MPS UK was liable for and remained liable for the IBNRs between 1988 and 1998 because, if it was and is liable, the exercise by MIPS of its powers to raise funds for liabilities in respect of which it was not liable, and the steps associated with it, were improper and unlawful. The claim is made that, notwithstanding ample documentation already elicited, there are critical gaps rendering the making of a decision as to the taking of legal action perilous. In this way it was put that the applicants had made all reasonable inquiries and they still did not have sufficient information to enable them to decide whether to commence a proceeding in this Court to obtain the relief. In aid of that it was contended that such documents as the applicant had been able to discover and obtain gave reasonable cause to believe that the respondent had documents which would assist them to make a decision, namely documents that related to the liability or the non-liability of MPS UK in respect of the IBNRs which the applicants contended they were entitled to exercise the discretionary indemnity for which they paid. Thus the claim is that they wish to sue MIPS because MIPS amended its constitution leading to a decision to make a call equal to next year's premiums. This was oppressive and unjust because they had paid for the IBNRs cover which the call is allegedly directly to fund.

35. The key point of the defendant's submissions is that the applicants are not paying twice as a consequence of the call for the back funding contribution because they never paid for IBNRs in the United Kingdom, occurring in 1988 to 1998 because they were wholly unfunded. Thus it was put that the vital element in the proposed oppression action, namely that the applicants were unfairly and unjustly treated not only by the amendments to the constitution but the call for the back funding contribution, was absent. Although no conclusion concerning liability is necessary at this point, it should be stated that the respondent strongly denies any oppression or unfairness, claiming that the course adopted was the most equitable method of achieving full funding of both known and IBNR liabilities.

38. Mr Colbran, Q.C. for MIPS, went immediately to the affidavit of Dr Paul Nisselle, the chief executive of the respondent, he in effect claiming that the applicants were moving forces in two groups: the Medical Defence Response Group and perhaps also United Medical Protection, rival groups to MIPS. An exhibit to that affidavit was a in-colour extract from the Medical Defence Response Group's web-site with photographs of the applicants. Part of the features of that text involved a statement by the group as to why they had instigated the class action (presumably the action, in contemplation of which this application for preliminary discovery is made). It was said that "we will challenge the MIPS's call for back funding contribution by instituting a class action in the Supreme Court of Victoria" and "legal advice by us indicates that the call may be invalid and susceptible to a challenge" and, perhaps even more firmly, "We will challenge the call in the Supreme Court of Victoria by instituting a class action". The substantial focus of the document is on fund-raising for the purpose of funding for support of "the subsequent class action". There is a reference to the funds being held in an account which "will be called upon to fund the class action against MIPS's call and to cover administrative costs". It further stated "We guarantee confidentiality if you join us in support of the class action we are taking on behalf of MIPS members. We are prepared to be the public face of the class action, but we need the support of our colleagues." This material was introduced on the basis of providing evidence that the applicants had already made the decision to commence the proceeding and, for all that the defendant knew, had already commenced it.

41. Mr Colbran submitted that there was nothing new in the MIPS 1998 amendments. He drew attention to Exhibits RAAH10 and 11 (the first applicant's affidavit) which were the 1998 accounts of the UK society and which reiterated that the society had the right each year to call for additional funds from its members up to an amount equal to the annual subscription. He also argued that the statements in those accounts made it clear, in the description of costs and damages, that the money for the liabilities transferred to MIPS or one of its emanations in 1998 did not include funds raised to cover IBNRs which, in the context of a mutual protective society which MPS UK was, was a myth. There never was any liability with respect to IBNRs in that society until the claim was made and accepted. He claimed that it was not until 1999 which the English society, just like in Australia, started to make provision on an actuarial basis for IBNRs, this material emerging from Nisselle's affidavit. Mr Colbran argued that there is no doubt that the applicants had general insurance with MPS UK and noted Mr Santamaria's contention that they could not lose the right they had against the UK company unless they consented. Indeed Mr Colbran claimed that the applicants had been told again and again that the respondent had undertaken the liabilities of the UK company in 1998. They had, however, lost their right to indemnity because they resigned. He argued that as a consequence of the Tito Report in 1995 a change of policy had occurred and mutual societies of this kind now had to make provision for incurred but not reported incidents and had to get money in to meet them. He denied that the monies paid with respect to the taking over the Australian end of the liabilities did not cover this, those sums being made only for claims that had been notified. That was how that figure was arrived at. He claimed Exhibit 15, the relevant accounts, showed this. Mr Santamaria denied this, claiming that Nisselle's affidavit made it clear that the money received from England covered not only the notified claims but also the IBNRs. Mr Colbran seemed disinclined to get involved in this dispute but simply said they did not need any additional documents to enable them to know what they wished to do. He appeared to accept that the applicants would be disadvantaged if they had paid in respect of the IBNRs as part of the membership of the English society and were being called upon to pay them again. However, his case was that the UK accounts established that the IBNRs had not been funded in the United Kingdom. This, he argued, was a matter for trial. Mr Colbran put it, that at some point that between 1988 and 1998 MIPS were not acting as an indemnifier of any kind was but a representative of the London society, a branch office as I suggested. Mr Colbran put it, in a form of a question "What more do they need now to make the decision? Because the essence of their case is simply they were a member, they paid their subscriptions, they say they're entitled and they can't lose that."

44. Mr Colbran claimed that the documents sought in the summons were documents that might indicate they were covered, perhaps others too, by the United Kingdom organization. That, he contended, was not necessary because that was not an issue. Questions as to how the premiums were raised and in the accounts they were dealt with in the United Kingdom fell outside the documents identified in the summons. Mr Colbran reiterated that the notes to the accounts (which referred to the change in accounting policies and the alteration in the making of provision for discounted future settlement values) also specifically stated (see item 24) that the society had the right to call each year for additional funds from each member up to an amount equal to the annual subscription.

47. I turn briefly to the relevant legal principles. It should be said, however, that there is not much in dispute. The problem, as ever, is in the application of principle to the facts. The applicants do not have to establish their cause of action in this proceeding. There was sufficient made out to enable it to be concluded that there is reasonable cause to believe the applicants might have a right to obtain relief in this court of the kind broadly described. It would appear that some declaratory relief, even possibly injunctive relief, might be available if the applicants or others associated with them were able to satisfy a court that they had been unfairly or oppressively treated. For my part, the legal basis for the applicants claims lacks clarity and conviction in many respects and, on so much of the material as I have been exposed to, the proposed proceeding is beset by many difficulties. Nevertheless, I would not be prepared to take the view at this point of time that the applicants have not satisfied sub-paragraph (a) of Rule 32.05.

50. However, there are other formidable difficulties in the path of the applicants in my view. One has only to read the affidavits of Mr Hemley, and the substantial exhibits (only parts of which were necessary to be reproduced here) which make it apparent that the applicants are already in possession of a substantial body of information including documents. But there is a real question in my mind as to whether or not the applicants' pursuit of preliminary discovery of the described documents will prove to have much to do with the case. In the applicants' written submissions the question was specifically asked as a heading to part of the argument "Where is the liability: MPS UK or MIPS?" It did not appear to be much disputed by the respondent that it was MPS UK (subject to the discretionary nature of the indemnity) that was on risk between 1988 and 1998. During that period MIPS was nothing more than a representative agent in Australia. There seemed to me to be some force in Mr Colbran's statement that the documents that the plaintiffs are really after are not likely to be found with the respondent but with MPS UK. It is not clear to me on the material that the inquiry or refusal as to the production of the documents that might show whether or not the IBNRs were funded or unfunded or how they were dealt with by MPS UK has taken place. It may have been of greater relevance in a general way to get preliminary discovery from MPS UK although one accepts there would have been formidable procedural and substantive difficulties about that. My inquiry of senior counsel for the applicants as to why is it not contemplated to join both of the societies was deftly avoided and indeed did not have to be answered. The issue as to the terms upon which MIPS (or whichever was the controlling insurer or insurers at the relevant time) took over MPS UK's Australian liabilities, and how the indemnities were expressed may prove to be significant. As Mr Santamaria said, his clients are entitled to fish a little. See Paxus Services (supra). Nevertheless the Court must be cautious not to be over-bold in permitting preliminary discovery. The Rule is enabling and beneficial and, to use the language of Burchett, J. in Paxus "should be given the full scope its language will reasonably allow". The Appeal Division of this Court in Scarletti did not accept the views of Marks, J. in Budget Corporation v. Ansett[6] to the effect that the Court should be satisfied that there will be a real benefit from making the order, such as the possible avoidance of unnecessary or fruitless litigation or the gaining by a potential plaintiff of information (which only the party from whom discovery is sought has and which might assist in the ends of justice. The Appeal Division took the view that the Court may attain the relevant belief if the Court were satisfied that there may be a real benefit for the making of the order. In Gibson v. ANZ Banking Group[7], Gobbo, J. of this Court put the matter as follows:

"I am satisfied that what the plaintiff is really seeking in this case is some form of incidental verification or some form of confirmation to buttress their present state of belief. Although there might be a public interest argument for allowing prospective litigants to secure, on terms, access to documents to enable them to verify their belief that they have a sufficient cause of action, that is not at present the ambit of this Rule. The Rule is really directed to assisting the applicant who, after making all reasonable inquiries, finds himself or herself without sufficient information to enable himself or herself to decide whether to commence proceedings. In my view, the gist of the Rule is directed to know not whether the case is a strong one or a weak one, not whether it is incidentally supported or what the full range of other material is, but whether the applicant has sufficient information to enable that applicant to decide whether to commence a proceeding."

This statement of the law has been applied in many cases, most recently by Byrne, J. in FAI Home Security (above).

55. In my view, the documents sought in the summons are likely to be relevant and at least in some part, admissible at trial. It may be doubted that they are all discoverable even after the commencement of the proceeding but the present question is whether they should be discovered now, or whether the case is such that it should be left to in-trial discovery.

58. I have not been persuaded that this is an appropriate case to order preliminary discovery. It is self-evident that the applicants know much of what has occurred and the history. It may be that the applicants reasonably desire to know more about how MPS UK dealt with claims in the period 1988 to 1998. They will be able to discover this if they join that society but would also, although not without difficulty, be able to obtain non-party discovery if a proceeding is brought against MIPS. However the applicants have not convinced me that it is necessary that they have access to the described documents to enable them to decided to commence the proceeding. The extract from the web-site previously referred to points strongly in the direction that a firm, but not necessarily irrevocable, decision has been taken to commence the proceeding. This is in essence what it says, and explains why they are raising money. This is, as I conclude, because the applicants have had sufficient information to make that decision.

61. I am not satisfied that the applicants, after reasonable inquiries, have not obtained sufficient information to enable them to reach a decision to commence their proceeding to obtain the relief foreshadowed. Even if I were not aided by the statements in the text on the Group's web-site, I would still not be able to reach the view that the applicants did not have sufficient information to enable them to decide.

64. Accordingly, the application is refused and the summons dismissed, with costs.

[1] [1990] FCA 500; (1990) 99 A.L.R. 728.

[2] Unreported, Supreme Court of Victoria (Gobbo, J.) 30 August 1991.

[3] Unreported, Supreme Court of Victoria, Appeal Division, 28 July 1994.

[4] [1998] VSC 133 (unreported, Gillard, J., 13 June 1998).

[5] [1999] VSC 274 (unreported, Byrne J., 20 August 1999).

[7] Unreported, Supreme Court of Victoria (Gobbo, J.) 30 August 1991.