Lowden v Elliott Harvey Securities Ltd

Federal Court of Australia|2016-02-02|Before: Edelman J

The informal applications for inspection and discovery from non-parties be adjourned to a date to be fixed.
Unless the fourth respondent complies with the requirements of orders 1 and 2 made on 13 October 2015 by 4 pm on 12 February 2016 and order 3 by 4 pm on 26 February 2016, then the applicants shall be entitled to enter judgment against the fourth respondent in the form of the relief sought in the originating process for QUD254/2012 filed 28 May 2012, and the originating process for QUD494/2013 filed 31 July 2013. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Introduction 1 It is not necessary to set out the background or facts to this proceeding in any detail. It suffices to say that the proceeding, although civil, involves serious allegations against the respondent directors. The case involves claims by dozens of applicants against the respondent directors for around $11 million. The claims are based on allegations of breaches of numerous duties under the Corporations Act 2001 (Cth) as well as claims described as "knowing concern in and assistance" in breaches of trust and breaches of fiduciary duty. It appears that these claims are intended to be claims of the nature described in the second limb of Barnes v Addy (1874) LR 9 Ch App 244, 251-252 and possibly also claims of the type described by Romilly MR in Eaves v Hickson (1861) 30 Beav 136, 141; (1861) 54 ER 840, 842. 2 For various reasons, not all of which are satisfactory, the progress of this matter has languished. Over the recent months since allocation to my docket it has been particularly difficult for the proceeding to move at an acceptable pace. One reason is that the applicants claim to be creditors of the former first respondent, Elliott Harvey Securities Limited (EHSL), as investors in the EHSL Investment Scheme. But EHSL was placed into voluntary liquidation on 24 July 2015. This had the effect of staying the proceedings. The voluntary liquidation occurred after judgment on a statutory demand (including with an order for indemnity costs against the solicitors, Elliott & Harvey Solicitors, on their application to set aside the statutory demand). The proceedings have now been discontinued against EHSL. The four other initial respondents were directors of EHSL. One of them became bankrupt and the proceedings were discontinued against him. The others were represented but last year they became unrepresented. 3 At my suggestion, the parties have agreed to another mediation of the matter. The matter is due to be mediated in two weeks. It cries out for a commercial resolution prior to what will almost certainly be an expensive and lengthy trial. It is of grave concern that the solicitor for the applicants has not yet obtained instructions from the applicants concerning the presence (i) of representative parties at the mediation with the power to compromise the proceedings on behalf of the applicants or (ii) of representatives of groups which together comprise all of the applicants. It is also a matter of concern that the applicants' solicitors may not be in contact with all the applicants. For instance, it appears that one of the applicants died nearly a decade ago, years before these proceedings were commenced. 4 The applicants have now brought a series of applications at short notice and shortly before the mediation. No formal application has been made but five affidavits have been sworn, without leave, in support of the applications. In all but one case, the necessary respondents to the applications were not present before the Court. Nevertheless, it is efficient to dispense with a requirement for formal applications and to deal with the issues raised. Although these reasons cannot resolve the applications against absent parties, they are provided as a structured way for the parties to advance these issues quickly and efficiently and for them to be relisted if necessary, and at short notice.

The orders sought 5 The applicants seek the following orders: (1) Pursuant to section 486 of the Corporations Act 2001 (Cth) the Applicants be permitted to inspect the books and records of EHSL in possession of the Liquidators as set forth in a letter from Archibald & Brown Solicitors to Kerrie Guy dated 8 December 2015. (2) Alternatively, pursuant to Rule 20.23(1) of the Federal Court Rules 2011 (Cth), that EHSL make discovery of documents to the Applicants as set forth in a letter from Archibald & Brown solicitors to Kerrie Guy dated 8 December 2015. (3) The Applicants pay EHSL's reasonable expenses of making discovery and giving production. (4) That judgment be entered against the Fourth Respondent. (5) Pursuant to Rule 20.23(1) of the Federal Court Rules 2011 (Cth), that Elliott Harvey Solicitors make discovery to the Applicants of all documents relating to the sale of Lot 102,SP204285 of the Miami One property development. (6) Pursuant to Rule 20.23(1) of the Federal Court Rules 2011 (Cth), that Ham Bros Pty Ltd disclose to the Applicants the documents referred to in a letter to it from Archibald & Brown Lawyers dated 12 January 2016 relating to the purchase of Ham Bros Pty Ltd of Lot 102,SP204285 of the Miami One property development. 6 It is unfortunate that these applications were brought without proper conferral and without notice and opportunity for relevant parties to attend and make submissions. The application for inspection and discovery should have been brought on reasonable notice to the liquidators. It raises issues and questions regarding (i) legal professional privilege including joint privilege, (ii) ownership of the relevant documents, and (iii) whether the proper party to the application at least in relation to some of the documents should have been Ms Guy. 7 As for the applications against Ham Brothers and Elliott Harvey Solicitors, even though a formal application was not filed, they should have been given a reasonable opportunity of being present at this directions hearing, especially in circumstances in which no formal application was made and orders were sought against them. 8 The exasperation of the applicants' solicitors is, however, understandable in some respects. One of those respects is the conduct of the fourth respondent, Mr Stella. It is unfortunate that Mr Stella did not respond to communications from the applicant's solicitors and has not complied with court orders. I will make springing orders against him. There is also serious concern about previous compliance with court ordered disclosure by the respondents and their previous solicitors.

Proposed orders 1-3: Inspection or discovery of documents held by a non-party (EHSL) 9 The applicants' submissions and voluminous evidence in relation to these proposed orders were not easy to follow. Many submissions concerned complaints about failures of the individual director respondents to comply with court orders, particularly orders made on 13 October 2015 for disclosure of documents. But the orders for inspection and discovery are not currently sought against the directors. They are sought against EHSL, now in liquidation. 10 It appears that the relevance of the applicants' complaints about the failures to disclose arises because in September 2015, Elliott Harvey Solicitors delivered 56 boxes of documents to the offices of the liquidators. The applicants believe that many of those documents are relevant to these proceedings and were the subject of disclosure requests and orders. 11 The applicants refer to a List of Documents held by the liquidators of EHSL. The liquidators hold documents relating to the ASIC investigation into EHSL: Box E02357 items 2, 6, 12.13; Box E02358 item 2; Box E02371 item 11; Box E02377 item 1, Box E02381 item 9, Box E02392 item 11. 12 The applicants have identified reasons why many of the documents in these boxes are relevant. Some examples include insurance documents which relate to issues concerning the adequacy of insurance, final demands which indicate how the investors' funds were disbursed and ASIC documents relevant to particular pleadings in the statement of claim. In total the applicants identified 73 categories of relevant documents about which they had previously requested production. 13 For the purposes of this application I will also proceed (without deciding) on the basis that the company (prior to the appointment of the liquidators) and the individual directors have not disclosed all the relevant documents that may be held by the company. For instance, the applicants say that on 27 January 2016 Ms Guy disclosed a substantial number of documents not previously disclosed including communications with Michael Harvey, memoranda for filing, and some minutes of directors meetings. 14 On 8 September 2015, the applicants wrote to the liquidators of EHSL and requested inspection of the documents. The liquidators responded on 17 September 2015 saying that they required a court order to permit inspection of the books. 15 Section 511(1)(b) of the Corporations Act 2001 (Cth) allows creditors to apply to the Court to exercise all or any of the powers that the Court might exercise if the company were being wound up. The applicants seek to have the Court exercise the power in section 486 of the Corporations Act 2001 (Cth). 16 Section 486 of the Act provides as follows: Inspection of books by creditors and contributories The Court may make such order for inspection of the books of the company by creditors and contributories as the Court thinks just, and any books in the possession of the company may be inspected by creditors or contributories accordingly, but not further or otherwise. 17 Section 9 of the Corporations Act 2001 (Cth) defines "books" as including: (a) a register; and (b) any other record of information; and (c) financial reports or financial records, however compiled, recorded or stored; and (d) a document; but does not include an index or recording made under Subdivision D of Division 5 of Part 6.5. 18 A number of issues arise under s 486. None of these issues can be resolved in an informal application of this nature, particularly where the liquidators are not present or represented and in circumstances in which they have indicated in correspondence that they do not waive the company's privilege over privileged company communications. As I explain below, the issues include the extent to which the claim for inspection is barred by: (1) claims by the liquidators for legal professional privilege; (2) a claim by Ms Guy that many of the documents held by EHSL are not company documents and were provided to the liquidators by mistake; and (3) a claim by Ms Guy and possibly other respondents for legal professional privilege over some of the documents. 19 As to (1), the liquidators have not indicated their response to such an application. They would be entitled to claim legal professional privilege over any of the documents which they consider to be privileged. On 9 October 2015, the liquidators said that they have instructed a solicitor to identify those documents covered by privilege. 20 As to (2), Ms Guy's evidence suggests that there are some irrelevant and confidential documents that were mistakenly included in the boxes given to the liquidators. 21 As to (3), Ms Guy has the basis for a claim that the documents should not be discovered or inspected on the ground of legal professional privilege. Advice given by a company's lawyer to one or more of the company's directors in their capacity as director will be privileged if the lawyer is independent of the director, and it is a confidential communication which is sent by the lawyer in their professional capacity as a lawyer: Waterford v Commonwealth [1987] HCA 25; (1987) 163 CLR 54, 70-71 (Brennan J), 95-96 (Dawson J). Ms Guy says that the solicitors to EHSL also acted as her solicitors (and the solicitors for the other directors). She says that legal advice was provided jointly to her as well as the company. She says that she has never waived privilege in any communications with the company solicitors. There may also be questions concerning whether Ms Guy or any of the other individual directors expressly or impliedly waived privilege over any of those documents: see Mann v Carnell [1999] HCA 66; (1999) 201 CLR 1. For instance, Ms Guy has disclosed communications with Harvey Edwards, in-house legal advisor for EHSL. These questions also interrelate with the privilege which is claimed by the liquidators over documents over which EHSL has privilege. 22 There is also doubt whether these issues are properly addressed in the course of an application for inspection of the books of the company (which would necessarily first require a determination of the documents over which privilege is claimed) rather than an application for further discovery from the respondents, or non-party discovery from EHSL. Against these doubts I recognise that there is some concern about the response of the respondent directors, and their solicitors, to previous requests for discovery and production. The respondents' solicitors initially said that their ASIC file had been destroyed. The respondents' previous solicitors said that they would request a copy of their ASIC file and that they would forward relevant parts to the applicants' solicitors. As far as the applicants are aware, the respondents' solicitors did not request ASIC documents. Nor did they forward any documents from ASIC to the applicants' solicitors. 23 Perhaps anticipating the difficulties of the application for inspection, the applicant also sought orders for non-party discovery under r 20.23(1) of the Federal Court Rules 2011 (Cth). The applicants identified a long list of the documents they wish to have discovered and they have provided reasons for the relevance of those documents. 24 Since the proceedings have been discontinued against EHSL (following the liquidation), it is now a non-party. Rule 20.23(1) of the Federal Court Rules 2011 (Cth) provides for discovery against a non-party: Discovery from non‑party (1) If a party believes that a person who is not a party has or is likely to have, or has had or is likely to have had, in the person's control, documents that are directly relevant to an issue raised on the pleadings or affidavits, the party may apply to the Court for an order that the person make discovery of the documents to the party. … 25 In Lion-Dairy & Drinks Pty Limited v Sinclair Knight Merz Pty Limited [2014] FCA 114 Griffiths J emphasised that although direct relevance is now a primary criterion under r 20.23(1), the Court can consider, in the exercise of discretion, the factors relevant under the older rule for non-party discovery. In particular, one of the matters which is a relevant factor to be taken into account in this case is whether the applicants have exhausted other available avenues to obtain copies of the relevant material. 26 Ms Guy, the second respondent, objects to the order for discovery for reasons of legal professional privilege and irrelevance (a category which includes those documents she described as her "own" documents but which were not relevant to the proceedings). In the circumstances of this case involving past delays and considerable expense already incurred and the apparent relevance of many of the documents sought, the time and expense of substantial argument about direct relevance of 73 categories of documents, by a party against whom the order is not being made, is disproportionate. However, in oral submissions Ms Guy helpfully accepted that there were only 16 of the 73 items sought over which she claimed privilege or asserted to be irrelevant (see annexure KG21). The other respondents took the same position. It may therefore be that any objection by the respondents to further discovery from EHSL could easily be avoided by the applicants, at least in the first instance (although given the delays in this matter very possibly also in the last instance), seeking only the 56 documents over which there was no objection. This would be an extremely efficient course if it were also to be the case that the liquidators of EHSL did not seek to assert legal professional privilege over discovery of those 56 documents. 27 The appropriate course is for the applications for inspection and non-party discovery to be adjourned to give the applicants the opportunity to consider whether to reformulate their application and for the liquidators to have an opportunity to respond. However, I note that the liquidators said three months ago that they had instructed solicitors to identify which documents were privileged.

Proposed order 4: application for default judgment against Mr Jeffrey Stella (the Fourth Respondent) 28 The applicants seek default judgment against Mr Stella pursuant to r 5.23(2) of the Federal Court Rules 2011 (Cth) on the basis that Mr Stella has failed to comply with orders of the Court made on 13 October 2015. 29 Rules 5.22 and 5.23 deal with the making of orders on default and r 5.23(2) gives a broad power to the Court, in the interests of justice, to order default judgment including for failure to comply with orders of the Court and springing orders for judgment if orders are not complied with by a particular time. 30 On 13 October 2015 I made the following orders: 1. On or before 1 December 2015, each of the third, fourth and fifth respondents are to reply to the applicants' request for further and better particulars of the second amended defence dated 19 June 2015. 2. On or before 1 December 2015, each of the third, fourth and fifth respondents are to provide further disclosure arising from their second amended defence, including the documents contained in the request from the applicants solicitors letter to the respondents, dated 3 June 2015, unless any or each of the respondents, by writing to the applicants on or before 6 November 2015, disputing their relevance to an issue in the proceeding. 3. The third, fourth and fifth respondents file and serve any affidavits they intend to rely upon at the trial of the proceedings by 4pm 1 December 2015. … 31 Mr Stella has not served an affidavit of evidence. He has not provided further or better particulars. He has not made further disclosure. 32 The applicants' solicitors sent emails to Mr Stella on 16 December 2015 and 18 January 2016 explaining that if he did not comply with the orders, the applicants would seek default judgment. The applicants' solicitors obtained "read" and "delivered" notifications in relation to the emails. But Mr Stella did not reply. 33 Mr Stella's failure to comply with court orders and his failure to respond to the applicant's solicitors is disrespectful. It has become a cause of delay to these proceedings. Taking into account his position as an unrepresented litigant, however, I do not consider that default judgment should be ordered at this stage. Nevertheless, a springing order should be made. 34 I will order that unless the fourth respondent complies with the requirements of orders 1 and 2 that I made on 13 October 2015 by 4 pm on 12 February 2016 and order 3 by 4 pm on 26 February 2016, then the applicants shall be entitled to enter judgment against the fourth respondent in the form of the relief sought in the originating process for QUD254/2012 filed 28 May 2012, and the originating process for QUD494/2013 filed 31 July 2013.

Proposed order 5: non-party discovery by Elliott Harvey Solicitors of documents relating to the sale of Lot 102 of the Miami One property development 35 On 12 January 2016, the solicitors for the applicants requested disclosure from Elliott Harvey Solicitors of their file related to Lot 102 of the Miami One Project. They say that Lot 102 was security for the loan at the centre of these proceedings. The applicants also allege that it was held on trust for them. As the solicitor for the applicants accepted, the sale appears to be relevant to the overall loss of investors because that loss would be reduced by the extent to which EHSL holds the proceeds on trust for the applicants. However, an accounting for the proceeds of sale has not been provided in these proceedings. 36 Ms Dominique Harvey, director of Elliott Harvey Solicitors, responded to the 12 January 2016 request on 22 January 2016 saying that she was seeking advice in relation to the request. Elliott Harvey Solicitors were not present at the application this morning. They should be given the opportunity to make any submissions in response to this application. But the matter should not be delayed. I will relist this application at short notice if necessary. The reason why short notice is sufficient is because the request is simple. Two weeks have passed. This is a matter that should be addressed very soon, and certainly before the mediation. Any "advice" which Ms Harvey needed to obtain should have been obtained by now. The documents sought appear to be directly relevant. It is difficult to see how any claim to privilege could be made in relation to them if they are confined to the same documents as are sought from Ham Bros Pty Ltd (as described below). If a formal application and a hearing is required by Elliott Harvey Solicitors, and if there turns out to be no basis upon which production of the documents can be resisted, then this is a matter that can be addressed by appropriate costs orders.

Proposed order 6: non-party discovery by Ham Bros Pty Ltd of documents relating to the purchase of Lot 102 of the Miami One property development 37 On 12 January 2016, the solicitors for the applicants requested disclosure from the purchaser, Ham Bros Pty Ltd, of (i) a copy of the contract of sale, (ii) a copy of the settlement notice, (iii) a copy of details of the person to whom settlement cheques were directed. 38 The solicitors for Ham Bros responded to the letter on 25 January 2016. They said that Ham Bros was "not in a position to provide any response, information or documents relating to the transaction referred to in your correspondence". However, the solicitors said that their client will comply with any lawful direction or order to which they are subject. 39 It is unclear from this response whether Ham Bros wishes to be afforded the opportunity to make any submissions in opposition to this application. At the moment I do not see any basis upon which it can be resisted by Ham Bros. But I will adjourn this application to afford them the opportunity of being represented at the relisting of the application if it is to be opposed. If it is not opposed then time and expense might be saved simply by providing copies of the relevant documents to the solicitors for the applicants. Again, if a formal application and a hearing is required by Ham Bros, and if there turns out to be no basis upon which production of the documents can be resisted, then this is a matter that can be addressed by appropriate costs orders.

Conclusion 40 Apart from a springing order against Mr Stella, none of the applications brought by the applicants can be resolved this morning. The principal reason why they cannot be resolved is that it would not be just to decide an informal application against a party who is not present, when that application is brought shortly before a directions hearing and without sufficient notice to the affected parties. Nevertheless, in circumstances in which the applicants and Ms Guy have already filed considerable evidence, these reasons have been provided in the hope that they will structure the approach that the applicants take to the relisting of these informal applications and also in the expectation that they may assist to reduce the time and expense for the non-parties to whom the applications are directed in identifying the issues involved. I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Edelman.

SCHEDULE OF PARTIES QUD 254 of 2012 Applicants Second Applicant: GAIL LYNETTE LOWDEN Third Applicant: JOHN AGIUS AND ROMA AGIUS Fourth Applicant: JENNIFER KAY ARNOT Fifth Applicant: DOUGLAS JOHN BROWN AND GAIK LIN BROWN Sixth Applicant: DENISE LORRAINE CASON Seventh Applicant: FREDERICK CASON AND DENISE CASON ATF THE CASON SUPER FUND Eighth Applicant: THERESA JUDITH CLANCY Ninth Applicant: BRIAN LAWRENCE CLANCY AND THERESA JUDITH CLANCY Tenth Applicant: RAYMOND HARRY COLLEY AND JEAN LORETTA COLLEY Eleventh Applicant: GENE COONEY Twelfth Applicant: WALTER KENNETH COOPER AND DORIS ELAINE COOPER Thirteenth Applicant: JOHN MARTIN COUTTS Fourteenth Applicant: NEILL ANDREW DARK Fifteenth Applicant: SHIRLEY DE KROM AND PHILIBERTUS JOHANNES DR KROM Sixteenth Applicant: FLORENZO VINCE DE PAOLI Seventeenth Applicant: ROLF DOERING Twenty First Applicant: JOHN STANLEY FEARBY AND BERYL JOAN FEARBY Twenty Second Applicant: GARRY JAMES FOWLER AND ALISON KAY FOWLER ATF THE FOWLER SUPERANNUATION FUND Twenty Third Applicant: CORALIE JUDITH FRANCIS Twenty Fourth Applicant: BRIAN JOHN FREEMAN Twenty Fifth Applicant: BARBARA FREEMAN Twenty Sixth Applicant: REGINALD FRANCIS HEATH Twenty Seventh Applicant: GEOFFREY PHILLIP HEDGER Twenty Eighth Applicant: BARBARA JOY INNES-WALKER Twenty Ninth Applicant: DAVID INNES-WALKER AND BARBARA JOY INNES-WALKER Thirtieth Applicant: JJ & HC THORNTON PTY LTD ACN 000 590 992 Thirty First Applicant: CLAIRE VERONICA KING Thirty Second Applicant: BRIAN RAYMOND CONNELL LAYCOCK Thirty Third Applicant: LORRAINE DAWN LIDSTON Thirty Fourth Applicant: NATALIA LOBASTOV Thirty Fifth Applicant: LEONARD NEIL MACKENZIE AND HEATHER JUNE MACKENZIE Thirty Sixth Applicant: EILEEN JOSEPHINE MAYBLOM AND DESMOND ALLAN MAYBLOM Thirty Seventh Applicant: LEWIS MCKENZIE Thirty Ninth Applicant: EDELTRAUT INGRID MEYER Fortieth Applicant: MONTE TOMBA PTY LTD ACN 077 006 672 ATF F & E DE PAOLI SUPER FUND Forty First Applicant: MT GRAVATT CHURCH OF THE NAZARENE TRADING AS CAPALABA COMMUNITY CHURCH OF THE NAZARENE Forty Third Applicant: KONRAD KURT NITZSCHNER Forty Fourth Applicant: CLIFFORD FRANCIS PFEIFFER AND MARGARET PFEIFFER Forty Fifth Applicant: RICHARD POPP Forty Seventh Applicant: LINDA RECTOR Forty Eighth Applicant: SABINA RENSEN Forty Ninth Applicant: MOATTA REZA AND NASREEN REZA Fiftieth Applicant: WANDA JEWEL RIGBY Fifty First Applicant: DAPHNE MAY ROLLS Fifty Second Applicant: RONALD SPINKS Fifty Third Applicant: RAYMOND WILLIAM TARGETT AND JOAN MAREE TARGETT Fifty Fourth Applicant: TASVAL SALES PTY LTD ACN 009 487 281 Fifty Fifth Applicant: OLIVE DOROTHY THORNTON Fifty Sixth Applicant: ELISE KYM WARREN Fifty Seventh Applicant: DIETER GEORG WELLMAN Fifty Eighth Applicant: BENNIE JOHN WHILEY AND JOAN CATHERINE WHILEY Fifty Ninth Applicant: MERVYN ARTHUR GEORGE WILDY Sixtieth Applicant: THOMAS KEITH WYLIE AND VALDA AMY WYLIE Sixty First Applicant: TATSUO YAMAGUCHI Sixty Second Applicant: ERIC WILLIAM HOLLAND Sixty Third Applicant: ZENA ROSE HOLLAND Respondents Third Respondent: KERRIE GUY Fourth Respondent: JEFFREY ANTHONY STELLA Fifth Respondent: GERALD BIRT

QUD 494 of 2013 Applicants Second Applicant: AVRIL RAYNEL Third Applicant: WALTER KENNETH SHAW Fourth Applicant: GWENYTH MAY SHAW Fifth Applicant: NEALE LAWRENCE SHAW Sixth Applicant: HENRY ROGERS BETTS Respondents Fourth Respondent: JEFFREY ANTHONY STELLA Fifth Respondent: GERALD BIRT

Corporations Act 2001(Cth)s 486, ss 9, 486, 511(1)(b)

Federal Court Rules 2011(Cth)rr 5.22, 5.23, 5.23(2)

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