In the matters of Micron Manufacturing Pty Ltd and Micron Group Pty Ltd [2017] NSWSC 289

Supreme Court of NSW|2017-03-17|Before: Gleeson JA

Manufacturing Pty Limited (Third Defendant) Micron Group Pty Limited (Fourth Defendant) Representation: Counsel: Mr A Macauley (Plaintiff) Mr A Joseph (Defendants)

Solicitors: Harris Freidman Lawyers (Plaintiff) Puleo Lawyers (Defendants) File Number(s): 2016/365805

Judgment Ex Tempore (revised 23 March 2017)

GLEESON JA: Application is made by the plaintiff for disclosure by the defendants of certain documents in advance of the parties serving their evidence. The proceedings have reached the stage where all evidence is now complete except for one possible further lay affidavit from the defendants' and the parties' expert evidence. This has significance for the disposition of the present application.

Background

These proceedings concern an oppression suit brought by the plaintiff, Mr Ryan McClenaghan, a 42.5 percent shareholder in each of Micron Manufacturing Pty Limited (Micron Manufacturing) and Micron Group Pty Limited (Micron Group), the third and fourth defendant companies to the proceedings. The first defendant, Mr Edward McMillan, also owns 42.5 percent of the shares in those companies. The second defendant, Mr Bernard Mooney, is the remaining 15 percent shareholder in those companies. The plaintiff was a director of both companies from mid-December 2011 up until 25 October 2016. The other directors are Mr McMillan and Mr Mooney.
Micron Manufacturing manufactures and supplies metal products directly to customers and operates out of premises in Sydney. Micron Group owns or leases the property, tools and equipment used in the business of Micron Manufacturing.
The plaintiff complains that since 25 October 2016 he has been excluded from the management and premises of the companies. He says that his employment as sales manager has been terminated. He has been purportedly dismissed as a director of the companies. He has been excluded from the management of the companies and he has received no offer to buy out his shareholding in the companies, nor been permitted to access the books and records of the companies so as to propose a figure for any buy-out.
The plaintiff commenced an oppression suit by filing an originating process on 6 December 2016, together with two supporting affidavits. The relief sought includes the sale of his shareholding in the companies to the first and/or second defendants. Alternatively, the plaintiff proposes the sale of the first and second defendants' shareholdings in the companies to the plaintiff. Otherwise the plaintiff seeks restraining orders against the defendants from relying upon certain resolutions said to have been passed on 25 October 2016 or an order for the winding up of the companies.
The defendants oppose the relief sought by the plaintiff under s 233 of the Corporations Act 2001 (Cth), including on discretionary grounds. The defendants have recently filed a cross-claim against the plaintiff alleging that the plaintiff made dishonest misrepresentations relating to his qualifications to induce the defendants to allot shares in the companies to him. The relief sought by the cross-claimants includes setting aside the allotment of shares, recovering dividends paid to the plaintiff and damages.

Disclosure application

Almost immediately after the proceedings were commenced, the plaintiff filed an interlocutory process on 7 December 2016 seeking disclosure of certain documents under Uniform Civil Procedure Rules 2005 (NSW) (UCPR), r 21.2. The categories of documents sought by the plaintiff have since been revised and amended. No order is required where matters have been dealt with informally by agreement. There remain four disputed categories. They relate to specific classes of financial information or documents concerning the financial performance of the two companies.
The plaintiff's disclosure request arises in circumstances where both sides have retained expert valuers. The plaintiff initially retained Michelle Jones from Gower Jones & Co. and due to timing difficulties, has since retained Ms Rebecca Conoulty of Sapere Forensic. The defendants have retained Mr Tony Natoli of PPB Advisory. Those experts have expressed competing views as to the need for disclosure of some of the disputed categories for the purpose of preparing a valuation report.
The plaintiff contends that the disputed categories of documents are necessary to permit Ms Conoulty to conduct a valuation of his shareholding in the two companies. The plaintiff points to his exclusion from the management and premises of the companies, and the fact that he no longer has access to the books and records of the companies. A letter from Ms Conoulty is in evidence identifying the documents she seeks for the purpose of the valuation proposed to be undertaken by her.
Against this the defendants rely on the opinion of Mr Natoli that at least some of the documents sought by the plaintiff are not necessary for a valuation of Micron Manufacturing and Micron Group. The difference between the expert views on the relevance of some of the documents sought by the plaintiff reflects, in part, differences in their views as to the scope of the valuation proposed to be undertaken.
Mr Natoli is of the view that it is not typical for a valuer to conduct an investigation, audit, or due diligence review of the financial information relating to the companies the subject of the valuation. Accordingly, he does not consider that access to the MYOB accounting files, which record all transactions supporting the reported results, is necessary. Mr Natoli accepted that if the parties instruct the valuer to undertake a comprehensive review of transactions on an audit-like testing of the reported results then the MYOB files would be reviewed as part of the valuation exercise. He points out, however, that the impact of the extended scope of such a valuation is the cost of the review and ultimately the valuation increases significantly.

Relevant principles

The Practice Note states in par 4 that the Court is not to 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".
Paragraph 5 of the Practice Note is also important. It states that "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". The Practice Note applies to proceedings in the Corporations List.
There is no dispute as to the applicable principles governing the exercise of the Court's discretion to order disclosure under UCPR, r 21.2, having regard to the terms of the Practice Note. What circumstances are "exceptional" in the sense required by the Practice Note has been the subject of comment by various judges since the Practice Note commenced on 26 March 2012. McDougall J has described the requirement for exceptional circumstances as "not normal, or usual; … something out of the ordinary; they need not be unique; … not 'exceptional' at large, but 'exceptional' because they necessitate disclosure": Leighton International v Hodges; Thiess v Reinforced Earth [2012] NSWSC 458. See also The Owners Strata Plan SP 69567 v Baseline Constructions Pty Limited [2012] NSWSC 502 at [30]-[31] (Stevenson J).
In Leda Manorstead Pty Limited v Chief Commissioner of State Revenue [2012] NSWSC 913 at [17], Gzell J, whilst agreeing with the observations of McDougall J, cautioned against setting the bar too high and emphasised that what is needed is an appraisal of all of the circumstances and the context in which the expression "exceptional" must be satisfied. That context is whether the party's case cannot be put without disclosure and whether those circumstances are exceptional.
Relevant to the present application is the statement by Ball J in Naiman Clarke Pty Ltd Atf Naiman Clarke Trust v Marianna Tuccia [2012] NSWSC 314 at [26] where his Honour said "[o]ne case where that requirement may be made is where information necessary for a party's case is absolutely within the knowledge of the party from whom disclosure is sought." Similarly there are statements in the authorities to the effect that exceptional circumstances are established where financial documents are sought so as to allow a proper valuation to be undertaken, including so that an expert can be properly briefed: RSA (Moorvale Station) Pty Ltd v VDM CCE Pty Ltd [2013] NSWSC 534; Re Mempoll Pty Ltd, Anakin Pty Ltd and Gold Kings (Australia) Pty Ltd [2012] NSWSC 1057.

Has the plaintiff demonstrated exceptional circumstances?

The defendants' primary position is that the disclosure application is premature, and accordingly the plaintiff has not established exceptional circumstances. In support of the prematurity argument, the defendants pointed to a number of matters.
First, that liability has not yet been established in the oppression suit and accordingly a valuation report could not, it is said, be relevant and furthermore that the documents sought are not necessary to quell any dispute between the parties. Secondly, the plaintiff has not yet established what relief he might be entitled to and it is possible that the plaintiff might be refused relief on discretionary grounds. Thirdly, no order for expert evidence has yet been made. Fourthly, the defendants emphasise that they have already provided a large amount of documents to the plaintiff by means of informal discovery.
None of these arguments are persuasive in the particular circumstances of the present case. First, the timing at which financial information ought to be disclosed in an oppression suit will always be sensitive to the facts of the particular case. In the present case, it is plain that the relationship between the plaintiff and the other shareholders has fractured and that the breakdown between the shareholders is irremediable. Importantly, both sides have retained expert valuers, no doubt with a view to assessing the value of the plaintiff's shareholdings in the companies. Whilst not in any way pre-empting the relief which might be obtained if the plaintiff was successful in the oppression suit, contrary to the defendants' submissions, the obtaining of expert reports based on up-to-date financial information is more likely, rather than less likely, to assist the parties quell the disputes between them.
Secondly, that the plaintiff has sought alternative remedies and has not yet established an entitlement to relief involving an acquisition of his shares in the company or vice versa, is not determinative of whether the documents sought are relevant to a fact in issue in the proceedings. The value of the plaintiff's shareholding in the companies is an issue in the proceedings, irrespective of any discretionary arguments the defendants might raise against relief in the nature of a buy-out. In addition, it is somewhat inconsistent for the defendants to raise the prematurity argument when they have already provided a large range of other financial information as requested by the plaintiff and, as mentioned, both sides have already retained expert valuers.
Thirdly, it is of little moment that no order for expert evidence has yet been made. The proceedings have reached a stage where the lay evidence is complete (except possibly for a further affidavit from the defendants) and the parties have now agreed to the making of directions for the service of expert evidence.
Fourthly, that the defendants have already provided a large number of documents is relevant to whether disclosure should be ordered in respect of the whole or part of any particular disputed categories but it is not a complete answer to whether or not the plaintiff has established exceptional circumstances.
I am satisfied that exceptional circumstances are established and, subject to the one qualification referred to below, the documents sought are necessary for a fair disposal of the matter in the interests of a fair trial. The plaintiff, who was formerly a director of the companies, has been shut out of the companies since October 2016. The information sought is solely in the possession of the defendants. The information is required for a proper purpose, to brief the plaintiff's expert, retained for the purpose of conducting a valuation of his shareholding in the companies. As in Re Mempoll, the disclosure of the relevant information sooner rather than later is consistent with the objective of the just, quick and cheap resolution of the real issues in dispute, as contemplated by s 56 Civil Procedure Act 2005 (NSW). Access to that information will allow the plaintiff to brief the expert retained on his behalf as to matters which can be expected to be the subject of a dispute at the final hearing.

The disputed categories

I now turn to the disputed categories for disclosure. Those categories are categories 17, 18, 18A and 19. Following discussions between counsel for the parties, agreement was reached in relation to each of those categories except category 18A. These reasons need only deal with that category.

Category 18A

Category 18A seeks a backup of MYOB accounting files for the period 1 July 2014 to 31 October 2016 for the Micron Group and Micron Manufacturing, including passwords. There initially was a dispute as to whether the company's accountants used MYOB for the companies' accounts.
The position, according to evidence given by the defendants' solicitor Mr Puleo, on instructions, is that the MYOB system was not used directly. Mr Puleo said that the defendants' accountants input the details from the defendants' M1 system into MYOB Professional and then into their own software system that interfaces with the ATO. It is also said that the defendants' accountants do not have all the details that make up the general ledger files for the companies.
The defendants further submit, based on the opinion of Mr Natoli referred to earlier, that access to these files is not necessary, assuming the scope of the valuation to be undertaken by Ms Conoulty does not involve an investigation, audit, or due diligence review of the financial information. Mr Natoli expressed the view that the valuer can ask for specific transaction data supporting specific accounts and would not need the entire MYOB system.
In my view the plaintiff has not established at this point that it is either necessary or appropriate that the plaintiff be given complete access to the defendant companies' MYOB accounting system. If upon analysis of the financial information which has already been provided, or is shortly to be provided to the plaintiff, particular transactions or class of transactions are identified in respect of which the plaintiff's valuer requires more detailed information (at either a general ledger or general journal level) the appropriate course is for the experts to act co-operatively and indicate the type of information required. The Court expects that the experts (and the parties) will act reasonably in making any such requests and in turn in responding to any such requests. The need for this level of detailed financial information has not been established at the present time.

Costs

As to costs the parties disagree as to the appropriate order. The plaintiff seeks costs of the interlocutory process on the basis that he has achieved substantial success in terms of obtaining disclosure of documents informally before today's hearing and reaching agreement at the hearing with respect to three of the four disputed categories. The plaintiff sought an order that the defendants pay the costs of the application, or alternatively an order that the plaintiff's costs be costs in the proceedings.
The defendants' position is that costs should be reserved, or costs should be the plaintiff's costs in the proceedings, or there should be no order for costs, or that any order for costs in the plaintiff's favour should be reduced to reflect the degree of success achieved by the plaintiff on the present application.
Counsel for the defendants emphasised that the defendants had provided informally prior to the hearing a substantial number of documents the subject of the plaintiff's disclosure requests and that the parties have reached a compromise in relation to three of the four categories in dispute. To that may be added the fact that the plaintiff has been unsuccessful in relation to the remaining disputed category, 18A. Against this it may be said that the defendants have put the plaintiff to the costs of demonstrating that exceptional circumstances exist in the present case, which is a condition of the Court's discretion to order disclosure under UCPR r 21.2.
I should interpolate at this point that neither party suggested that the Practice Note did not apply in the circumstances of the present case where the parties have substantially completed their lay evidence and for that reason the primary purpose of the Practice Note has been achieved, being that the parties not have access to materials which might be used to tailor their evidence: see Graphite Energy Pty Ltd v Lloyd Energy Systems Pty Ltd [2014] NSWSC 1326 at [15]-[16]. In Graphite Energy, Brereton J expressed the view that the exceptional circumstances requirement does not, upon proper construction of the Practice Note, apply in circumstances where the parties have served their lay evidence or substantially done so and all that remains is the service of expert evidence.
Returning to the issue of costs, the plaintiff has had a measure of success on the application in establishing that exceptional circumstances exist. The ultimate outcome of the four disputed categories is that three have been dealt with by way of compromise and in respect of one, the plaintiff was unsuccessful. In all the circumstances I consider that the appropriate order for costs is that the defendants pay 50 per cent of the plaintiff's costs of the hearing today. As previously mentioned the parties have otherwise reached agreement as to the orders which should be made.

Conclusion and orders

For the above reasons, I make the following orders: 1. Pursuant to UCPR r 21.2, the third and fourth defendants give discovery to Harris Freidman, 10/25-29 Bligh Street, Sydney, copies (either hard or digital) of documents falling within the categories numbered 17, 18 and 19 set out in the document headed "Annexure A" to the proposed Short Minutes of Order (and marked MFI-1) by 4pm on 31 March 2017 or otherwise within three business days of the document coming into existence. 2. The defendants to file and serve any other lay evidence by 31 March 2017. 3. By 31 March 2017, the plaintiff to file and serve his defence to the defendants' cross-claim, together with a statement of claim. 4. The defendants to file and serve their defence to the statement of claim on or before 28 April 2017. 5. By 8 May 2017, the plaintiff to serve any expert valuation evidence to be relied upon, as well as any lay evidence in reply. 6. By 5 June 2017, the defendants to serve any expert valuation evidence to be relied upon. 7. List matter for further directions before the Corporations List Judge on 3 July 2017 at 9.45am. 8. Liberty to restore the matter on three days' notice, such notice to specify the grounds for, and the nature of, the relief sought. 9. The Court notes that the parties have agreed to conduct a private mediation by 30 June 2017 and failing that to approach the Court for Court annexed mediation. 10. The Court notes the agreement of the parties that, in respect of documents produced pursuant to order 1 that relate to customer sales by the third and fourth defendants post 25 October 2016, such documents and information are only to be disclosed in the first instance to the plaintiffs' legal representatives and his retained valuer. 11. The defendant to pay 50 percent of the plaintiff's costs of the hearing today.

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: 16 April 2018

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