BETWEEN : KIM RILEY in his capacity as Trustee of the KER TRUST

Practice and procedure - Discovery prior to action - Proper test - Interpretation of O 26A r 4 - Terms of order made - Proper order for costs both of application and of giving discovery

Alphapharm Pty Ltd v Eli Lilly Australia Pty Ltd, unreported; Fed Ct (Lindgren J); 24 May 1996

Home Office v Harman (1983) 1 AC 280

Ledger v Natwest Australia Bank Ltd, unreported; SCt of WA; Library No 980061; 16 February 1998

Mercator Software Pty Ltd v Education Department of WA, unreported; SCt of WA; Library No 990058; 12 February 1999

Mobil Oil Australia Ltd v Guina Developments Pty Ltd [1996] VicRp 54; (1996) 2 VR 34

Tipperary Developments Pty Ltd v Western Australia [1999] WASC 62; (1999) 21 WAR 250

1 MASTER SANDERSON: This is the plaintiff's application for discovery from a potential party. The application is brought under the provisions of O 26A r 4. Relevantly, that rule reads as follows:

"(1) This Rule applies if a person who may have a cause of action against a person whose description has been ascertained ("the potential party") wants -

(a) to commence proceedings against the potential party; or

(b) to take proceedings against the potential party in the course of an action to which the person is a party,

but the person, after reasonable inquiries, has not been able to obtain sufficient information to enable a decision to be made as to whether to commence or take the proceedings.

(2) If there are reasonable grounds for believing that the potential party had, has, or is likely to have had or to have, possession of documents that may assist in making the decision, the person may apply for an order under this Rule.

2 The plaintiff's application is supported by two affidavits of Andrew Alexander Grech ("Grech"), the first sworn 10 January 2000 and the second sworn 17 March 2000. In answer to the application, the defendant filed an affidavit of Peter Sisley Thomas, sworn 2 March 2000. This affidavit dealt exclusively with the issue of the cost of giving discovery. It was not directed at the substantive issue raised by the application.

3 The grounds upon which the application was made can be simply stated. As the title of the action indicates, the plaintiff is the trustee of the Ker Trust ("the Trust"). The Trust was established in February 1995, and Helen Riley ("Mrs Riley"), the wife of the present plaintiff, was appointed trustee in June 1994. She was replaced by the plaintiff in June 1999. The plaintiff held the position of managing director of the defendant from 1989 until December 1993. Prior to September 1994, the Trust was the beneficial owner of 3,172,000 shares in the defendant. Between September 1994 and July 1995, the Trust sold these shares for a gross consideration of $290,270. In his first affidavit, Grech, who is the solicitor for the plaintiff, says (in par 4) that he has been informed by Mrs Riley that:

"In selling the shares, Mrs Riley acted in part on a recommendation from Mr Riley to sell the shares because of a perception that the share price would be likely to fall due to the failure of JBG [the defendant] to get its major gold resource project at Kathleen Valley into production and an apprehension that JBG had no other likely sources of income production or wealth."

4 Grech goes on to say that on or about 11 June 1996 the defendant announced to the Australian Stock Exchange ("the Exchange") that "significant sulphide nickel mineralisation" had been located on the defendant's tenements at Kathleen Valley. This announcement to the Exchange by the defendant appears as annexure "A" to Grech's first affidavit. The announcement refers to drilling undertaken on the defendant's Kathleen Valley tenements by Western Mining Corporation in 1994. The plaintiff now says that if the defendant had advised the market in 1994 of the existence of nickel on its tenements, the plaintiff would not have sold its shareholding when it did and it would have been in a position to sell its shares at a later date for a higher price. The plaintiff says that the failure of the defendant to inform the market of the drill results in 1994 was a breach of the listing rules of the Exchange and is actionable under the provisions of the Corporations Law. I will deal below in more detail with the nature of the cause of action the plaintiff says it may have. First it is necessary to complete the factual picture.

5 The announcement made by the defendant to the Exchange was accompanied by a media release dated 11 June 1996. Both the announcement and the media release were the subject of a query from the Exchange dated 18 June 1996. This query appears as annexure "D" to Grech's affidavit. In part, it reads as follows:

"The media release indicates that the drilling results for the four drill holes were supplied to the Company sometime late in the week ending 8 June 1996. However, the abovementioned newspaper articles indicate that the drilling results were received by the Company nearly two years ago and that the Company did not make any release to the market about the results because it did not understand the significance of them until only recently. We understand that in fact, the drilling results were received by the Company approximately 2 years ago."

6 The Exchange went on to ask a series of questions which clearly indicate that it was concerned that price-sensitive information had been in the hands of the defendant for almost two years and had not been released. The Exchange wanted to know why that was so. The defendant replied to the Exchange's query on the same day (annexure "E"). After referring to the query, the defendant said:

"1. WMC provided drill results (and other results referred to in paragraph 2 below) to Jubilee on 1 August 1994 and 6 September 1994. The media release should have stated that it was 'clarification of drilling results ... supplied to the Company ...'

2. WMC provided the raw data of drill logs, analytical results, electromagnetics and magnetics in 1994.

3 & 4. The Company became aware of the significance of the drill results on Friday 7 June 1996.

The information provided in 1994 did not include a narrative or a map or cross section and did not put the information in context ...

On Friday 7 June 1996 (following an approach by WMC) the Company met WMC representatives when we were provided with vital cross sections of the drill holes and were given the opportunity to question WMC about the geology and the reasons for WMC's renewed interest in the property. Following this meeting the Company met to discuss the information and then concluded that it was significant and should be reported to the market as soon as possible which was done (It should be noted the market had closed on Friday 7 June and the Company made the announcement on Monday 10 June - when the market was also closed). The significant turning point was that based on the information provided by WMC at that meeting ... "

7 Subsequent to this response, which, in line with its usual practice, was published by the Exchange, the plaintiff wrote to the defendant querying further why no announcement was made in 1994 and seeking copies of documents which had been provided by WMC to the defendant in 1994. The defendant declined to produce the documents requested, referring only to the announcement made to the Exchange and suggesting that this information was both accurate and sufficient. There then followed extensive correspondence which can be summarised by saying that the plaintiff has repeatedly requested copies of the documents supplied to the defendant in 1994 by WMC and the defendant has refused to supply this material. Further, WMC has declined to provide any material. The plaintiff now seeks to obtain these documents by way of pre-action discovery.

8 All companies which are listed on the Exchange have to comply with the "ASX Listing Rules". Among the most important of the rules is r 3A(1), which requires a listed company immediately to notify the Exchange of what generally is referred to as "price-sensitive information". This requirement is essential to the maintenance of an informed market. This rule is given added force by s 1001A of the Corporations Law, which, by its terms, requires a listed entity to make continuous disclosure of price-sensitive information. Section 1001A(2) is in the following terms:

"The disclosing entity must not contravene those provisions by intentionally, recklessly or negligently failing to notify the securities exchange of information:

(b) that a reasonable person would expect, if it were generally available, to have a material effect on the price or value of ED securities of the entity."

"ED securities" are shares quoted on a stock exchange - see s 11AD and s 111AE of the Corporations Law.

9 If the action were to proceed, the plaintiff would have to establish that the defendant intentionally, recklessly or negligently failed to notify the Exchange of information contained in the document supplied to the defendant by WMC in 1994, which a reasonable person would expect to be price-sensitive. The plaintiff says that he wants to inspect these documents prior to issuing any proceedings. He says that without inspecting the documents he cannot decide whether or not he has a good cause of action.

10 Counsel for the defendant submitted that, properly constructed, r 4(1) should be read as follows:

"This rule applies if a person who (in the opinion of the Court) may (reasonably be said to) have a cause of action against a person whose description has been ascertained ... "

It was counsel's submission that the insertion of these words was necessary properly to interpret the rule. It was submitted that the Court had to make the determination and that that justified reading in a phrase to that effect. It was submitted further that the rule could not be left at large and that the concept of reasonableness was necessary to define the parameters of the rule. With respect, I can see no reason to depart from the clear wording of the rule, and I can see no justification for inserting words which are not there. I have indicated in the past that I take the view that O 26A r 4 sets a low threshold for any applicant: see Davis v Sagar Pty Ltd, unreported; SCt of WA; Library No 980443; 10 August 1998. Whether this is the proper way to approach the matter may be open to question: see McCarthy v Dolpag Pty Ltd [2000] WASCA 106 at par 13 and par 14. But whether or not it is correct to speak of a threshold test, the word used in the rule is "may". The expression is not "may have on reasonable grounds" or "may have a prima facie case". The expression in its terms is permissive and it seems to me to require that there be "a possibility" or "a likelihood". Certainly, the expression does not in any way suggest that detailed consideration should be given to the merits of the claim foreshadowed.

11 The prime submission of counsel for the defendant was that, on the facts of this case, there was no evidence to establish that the plaintiff "may" have a cause of action against the defendant. The difficulty, so the defendant said, was that the evidence did not establish that the documents obtained by the defendant in 1994 were or might be price-sensitive. It was submitted that it was necessary for the plaintiff to establish, presumably by independent expert evidence, that drill results and other information were price-sensitive. This, it was said, amounted to taking judicial notice of the effect of such information and that was impermissible: see Holland v Jones [1917] HCA 26; (1917) 23 CLR 149 at 153.

12 About that submission two things can be said. First, I have doubts that such a rigorous approach in interlocutory matters is warranted. Pursuant to the ASX Listing Rules, as reinforced by s 1001A of the Corporations Law, continuous disclosure is required of listed companies. There is no dispute that documents relating to mining tenements held by the defendant were received by it in 1994. It is common knowledge, a matter of which I could take judicial notice, that the price of listed mining companies can move up or down, depending upon what the market knows of their future prospects. In the circumstances, and on an interlocutory application, in my view it is not necessary to produce evidence that drill results might be market-sensitive information. That conclusion can be reached merely from the nature of the defendant's business and the regulatory regime under which it operates.

13 Secondly, and perhaps more importantly, the evidence indicates that the Exchange regarded the 1994 documents as market-sensitive. If that were not the case it would not have written to the defendant after the 1996 announcement seeking an explanation as to why no announcement was made in 1994. When the query from the Exchange is matched against the 1996 announcement and the subsequent press release, it is not difficult to conclude that the 1994 documents might have contained price-sensitive material.

14 A further submission was put by the defendant in relation to the reference in par 30 of Grech's affidavit that the share price of the defendant was materially affected by the 1996 announcement. Reference was made to annexure "Y" to Grech's affidavit, which purports to show the price movements of the defendant's stock between February 1993 and August 1999. Counsel for the defendant pointed out that the announcement in 1996 did not have an immediate impact on the price of the defendant's stock. In fact, its value declined after the announcement and did not rise significantly until September of 1997.

15 The measure of any loss sustained by the plaintiff will be a matter for the trial Judge to consider when, and if, the plaintiff is able to establish that the defendant is liable under s 1001A. But it does not impact upon consideration of whether the plaintiff may have a cause of action against the defendant in the context of this application. Insofar as counsel made the point that par 30 of Grech's affidavit was inaccurate, I accept that submission. However, accepting that submission does not in any way impact upon the outcome of this application.

16 In all the circumstances, I am satisfied that an order ought be made under O 26A r 4. However, I am not satisfied that the order so made ought be as wide as the terms of the originating summons or, indeed, as wide as the minute of proposed order tendered at the hearing. In McCarthy v Dolpag Pty Ltd (supra) the Full Court made the point that discovery was an invasive process and, so far as possible, its ambit ought be limited: see par 13. That being so, in my view the appropriate order should read as follows:

"The defendant, pursuant to O 26A(4), produce all documents provided by Western Mining Corporation ("WMC") to the defendant ("JBG") in 1994 relating to any drilling by WMC in JBG'S McFarlane's Find Tenement and surrounding tenements owned by WMC."

17 As I indicated to the parties during the course of the hearing, there should be leave to the defendant to apply. In a situation where proceedings have not been issued and the cause of action upon which the plaintiff relies has not been clearly defined, there is at least a prospect that the defendant will be unsure of its obligations when giving discovery. If any uncertainty remains unresolved after discussion between the parties, the defendant should be free to return to the Court to obtain directions.

18 In relation to costs, the plaintiff should pay the costs of the application. Although the application has been successful, it is the plaintiff who is seeking an indulgence from the Court. The defendant should not be obliged to consent to a discovery order which amounts to a serious invasion of its rights without the sanction of the Court. In other words, the defendant has not acted unreasonably in declining to give discovery, and it should be entitled to the costs of responding to the application.

19 As regards the cost of providing discovery, in my view those costs should be reserved. If the plaintiff does not commence proceedings, the costs of giving discovery ought be the defendant's, and they ought be awarded on an indemnity basis. There is no reason in those circumstances why the defendant should be out of pocket. If, however, the plaintiff does commence proceedings, the discovery provided by the defendant will reduce the time taken and the costs incurred in providing discovery in the action. In those circumstances, an order for costs in the cause or that costs be reserved would, in my view, be appropriate.

20 There is also a question of security for costs of giving discovery. That is a matter covered by O 26A r 7. In my view, it would be appropriate for security to be provided by the plaintiff, either by deposit with the Court or by bank guarantee. There appears to be some confusion as to precisely what costs will be incurred by the defendant in giving discovery. It did not prove possible to resolve this issue during the course of the hearing. I will hear further submissions on this issue and in relation to all of the orders I have foreshadowed.