Malouf v Malouf

THE COURT: 1 This is an application for leave to appeal from orders made by a Judge of this Court dismissing a claim for pre-trial discovery pursuant to Federal Court Rules ("FCR"), O 15A r 6. Leave is necessary because the orders made by the primary Judge were interlocutory in character: Federal Court of Australia Act 1976 (Cth) ("Federal Court Act") s 24 (1A); Malouf v Malouf [1999] FCA 284 (FC). Although the application for leave has been made outside the time provided by FCR, O 52 r 5 for the filing of such an application, the time was extended by an order made by another Judge of the Court. 2 We have had the advantage of full argument in which counsel have canvassed both the question of leave and the merits of the appeal, should leave be granted. FCR, O 15A r 6 is in the following terms: "(6) Where - (a) there is reasonable cause to believe that the applicant has or may have the right to obtain relief in the Court from a person whose description has been ascertained; (b) after making all reasonable inquiries, the applicant has not sufficient information to enable a decision to be made whether to commence a proceeding in the Court to obtain that relief; and (c) there is reasonable cause to believe that that person has or is likely to have or has had or is likely to have had possession of any document relating to the question whether the applicant has the right to obtain the relief and that inspection of the document by the applicant would assist in making the decision- the Court may order that that person shall make discovery to the applicant of any document of the kind described in paragraph (c)." 3 The applicant is the brother of the first and second respondents. In 1995, all three were shareholders in the third respondent ("Osmal Holdings"), a company incorporated in 1954. Osmal Holdings was the holding company for a company founded by the applicant's father, Osmal Products Pty Ltd ("Osmal Products"), which conducted a wholesale clothing business. 4 It appears that disputes between the applicant and his siblings have been continuing for many years. The applicant's claim to pre-trial discovery arises out of a Share Sale Agreement ("the Agreement") made on 21 February 1995 between the applicant as the "Seller", and the first and second respondents, as the "Buyers". Under the Agreement, the applicant sold his shares in Osmal Holdings for a consideration of $1,262,500. The Agreement was reached after lengthy negotiations, in the course of which valuations were made of the applicant's 22.79 per cent shareholding. The valuation obtained by the applicant from KPMG Corporate valued the holding at $3.660 million. That from Coopers & Lybrand (Securities) Limited for the respondents came to $100,000. 5 The applicant claims that he was induced to enter the Agreement by a representation made to him on 16 February 1995 by the first respondent. He alleges that the first respondent said the following: "The profit outlook for Osmal is not good. The 1995 profit will be nil or near to nil because we have to move out of warehouse A (this was a rented warehouse in Alexandria). The rent is low, we have a very good deal but the owner wants to sell. The move will be very expensive, fittings, fixtures, stock, everything has to be relocated. ...the profit outlook in the next two years after that will not be anything like what we have made in past years. We are faced with a lot of competition, things in this end of the trade are very uncertain, there is pressure on our margins. Our margins will be lower and we will have to pay more rent than we pay now. Business will become much more difficult for us." The applicant further says that this representation was, or might have been false and that he would not have entered the Agreement had he known of the falsity. There seems to be no evidence that the representation was made on behalf of the second or third respondents, but no point was made about this, either before the primary Judge or on the appeal. 6 In the proceedings instituted by the applicant under FCR, O 15A r 6, he sought documents which he claimed would assist in making the decision whether to commence proceedings in the Court to obtain relief from the respondents. While the applicant initially sought a wide class of documents, the primary Judge treated the application as primarily one for the discovery of the audited financial accounts and statements of Osmal Holdings and Osmal Products for the year ended 30 June 1995 (although Osmal Products was not joined as a party to the proceedings). 7 On the applicant's case, access to these documents would assist him in determining whether the representation as to the likely profitability (or unprofitability) of Osmal Holdings was misleading or deceptive. The linchpin of the applicant's argument was the fact that Osmal Holdings purchased a commercial property at St Peters on 28 June 1996 (some sixteen months after the sale by the applicant of his shares) for $1.61 million, subject to a mortgage of $640,000. It was said that the acquisition by Osmal Holdings of the equity in a building at unit cost of about $1 million, suggested that the representation as to likely profits, made in February 1995, was false, and that the sale of shares was at an undervalue. 8 The primary Judge delivered an ex tempore judgment. His Honour noted that the parties had been in dispute over financial matters over a period of almost ten years. He recorded that the applicant had held 22.79 per cent of the shares in Osmal Holdings, but he had no right to attend or vote at meetings of the company. Thus Osmal Holdings was effectively under the control of the first and second respondents. 9 His Honour stated that he approached the principle underlying FCR, O 15A, r 6 "on a fairly expansive basis". Although his Honour did not cite any authority for the proposition, it is clear enough that he had in mind the well-known observations of Burchett J in Paxus Services Ltd v People Bank Ltd (1990) 99 ALR 728, at 733: "It is no answer to the applicant's application under r 6 to say that the proceeding is in the nature of a fishing expedition.... Rule 6 is designed to enable the applicant, in a situation where his proof can rise no higher than the level the rule describes, to ascertain whether he has a case against the prospective respondent - that is, to 'fish' in the old sense.... It would be unfortunate if a rule designed to amplify the court's power to penetrate obscurities and uncertainties in the interests of justice were to be weakened by restrictive and unnecessary glosses. I think the rule is of a beneficial kind within the meaning of the well known principle of interpretation, and should be given the fullest scope its language will reasonably allow. The proper brake on any excesses in its use is the discretion of the court, which is required to be exercised in the particular circumstances of each case." (Citations omitted.) 10 The primary Judge then addressed the criteria specified in FCR, O 15A, r 6: "[T]he test in the rule must be approached on an objective basis. That means that its use is not determined by what an applicant for such documentation might think or hope or believe the documents might show but that on the evidence there should be a reasonable prospect that an action could be revealed by the revelation of material in the possession of another but at present not available to the applicant making reasonable inquiries. ... It is thus necessary to look carefully at the evidenced material to ascertain whether the cause of action proposed is reasonably available or may be reasonable [sic] available or whether the seeking of pre-trial discovery is designed to harass or embarrass, either alone or as one of a series of actions in that category." 11 His Honour pointed out that the respondents had not sought to challenge the applicant's account of the representations made to him. Nor had they adduced evidence to displace the "prima facie likelihood" that the equity in the building had been acquired from its own profits or liquid assets, rather than from any other source. 12 On the other hand, the primary Judge was highly critical of the evidence and behaviour of the applicant. According to his Honour, the applicant had made extreme charges against the first and second respondents, from which he sought to retreat in the witness box. He had threatened legal proceedings throughout the years of disputation, but had not instituted them (other than the application for preliminary discovery). His Honour found that · the applicant was a witness upon whom very little reliance could be placed; and · his behaviour suggested that he did not really have any intention of launching an action of the kind foreshadowed. 13 The primary Judge then turned specifically to whether the applicant had satisfied FCR, O 15A r 6(a): "The representations were said to have been made in February 1995. The suggestion in the representations was that the profitability of this company, as I have said, would be negligible at that time and, presumably, for the immediate future. The purchase of the equity of almost a million dollars was made sixteen months later. No suggestion has been made that the representations included a suggestion that the company would not be making profits the following year, or would not at least have access to capital which would enable them to make the purchase referred to at that time. The correspondence shows that a purchase of a similar size had been contemplated three months before the sale of the shares, namely, in or around December 1994. Hence, the applicant was not under any misapprehension at all that this company was apparently in a position to make a capital purchase, or was at least contemplating making a capital purchase of about the same size as it made sixteen months after the share sale. Hence, the idea that the purchase of the property sixteen months later came as some sort of shock to the applicant is a proposition that simply cannot be accepted. If it were capable of being accepted as an objective matter, I would simply not accept it in the case of this applicant. ... I think therefore that this case throws up a circumstance in which were the applicant a credible proponent of an action, or were an action to be otherwise credibly arguable, I would have had no doubt that the 1995 accounts should be made available. But on the material which has been presented, I can see for myself no reasonable basis for concluding that the applicant has, or may have, the right to obtain relief of the kind that he has put forward in this Court from any of the respondents, or even a genuine intent to try." (Emphasis added.) 14 The primary Judge also found that the applicant had not satisfied O 15A r 6(b), because he had not made "reasonable inquiries" to obtain the relevant information and, in any event, he had sufficient information, without the 1995 accounts and statements, to enable him to make a decision whether or not to commence a proceeding to obtain relief in respect of the share sale. 15 His Honour expressed the following conclusions (at 9-10): "My conclusion, therefore, is that there is no reasonable cause to believe that the applicant has or may have the right to obtain the relief in the Court which he seeks or suggests, or that he has any serious intent to commence any proceeding at all. I also conclude that the applicant did not make all reasonable inquiries to ascertain the material he now seeks. I also conclude that he is not presently deprived of sufficient information to enable a decision to be made as to whether to commence the proceeding which he proposes. Even if these conclusions were all wrong, I would not be prepared to exercise a discretion in his favour that there should be pre-trial discovery for the reason that the applicant has not been frank with the Court. He has not attempted to place before the Court all the matters which one would expect from a litigant seeking the exercise of discretionary relief and in fact has gone out of his way to attempt to deprive the Court of openness and full disclosure of relevant facts. That is simply not the basis upon which discretionary relief could ever be exercised in a person's favour. The application will be dismissed with costs." (Emphasis supplied.) 16 The applicant does not dispute that he was not entitled to the relief he sought in these proceedings unless he satisfied the requirements of each limb of FCR O 15A r 6, including sub-rule (a). The applicant did not suggest that his Honour mis-stated the principles governing the application of r 6(a). On the contrary, Mr Hammerschlag who appeared with Mr Iuliano for the applicant, accepted that his Honour had correctly stated the test. That test, as his Honour noted, is an objective one, which requires the applicant to show that he has reasonable cause to believe that he has or may have the right to obtain relief in the Court from identified persons: see Minister for Health & Aged Care v Harrington Associates Ltd [1999] FCA 549, at pars 28-29. 17 In our opinion, his Honour's conclusion, that the applicant had not satisfied the requirements of O 15A r 6(a) is not attended by sufficient doubt to warrant the grant of leave to appeal. His Honour took into account, as was clearly appropriate, the limited terms of the alleged representation. The applicant admitted in evidence that in February 1995 he knew that Osmal Holdings was contemplating at that time the purchase of a property for $1.6 million and that he had regard to that fact in valuing his own interest in the company. His Honour was entitled to take the fact of the contemplated purchase, and the applicant's knowledge of that fact, into account when determining the significance to the applicant's case of the subsequent purchase of the property at a net cost of $1 million. In the circumstances, it is very difficult to see how the 1996 purchase would support an inference that the representation made by the first respondent was misleading or deceptive, even on the assumption that it was paid for out of the company's accumulated profits or liquid assets. It is also to be remembered that the price the applicant received for his shares (comprising 22.79 per cent of the total capital of the company) implies that Osmal Holdings had net assets in the order of at least $5 million in February 1995. (There was documentary evidence suggesting that the company's net tangible assets in February 1995 amounted to $5.2 million.) This is not a case where the assets of the company at February 1995 could not have supported the purchase of a property for an outlay of $1 million. The conclusion his Honour reached was that, on the evidence, the applicant had failed to satisfy the test laid down in FCR, O 15 r 6(a). His Honour's approach does not reveal any error of principle, nor any failure to appreciate the evidence. 18 Mr Hammerschlag criticised the judgment for making findings adverse to the credit of the applicant. He submitted that an application under FCR, O 15A r 6 is analogous to a case where a court must determine whether there is a "genuine dispute" between parties and that it is inappropriate in such a case to attempt to resolve the factual issues between the parties: Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785; Rohalo Pharmaceutical Pty Ltd v R P Scherer SpA (1994) 15 ACSR 347. He also submitted that these findings had infected his Honour's conclusions as to whether the requirements of O 15 r 6 had been satisfied, including those relating to sub-rule (a). 19 A fair reading of his Honour's judgment, in our view, indicates that he concluded that the applicant had failed to meet the criterion laid down in FCR, O 15A r 6(a) by reference to his findings as to primary facts unaffected by his views as to the applicant's credibility. As his Honour pointed out, there was no real dispute as to the primary facts. And, as Mr Finch SC submitted on behalf of the respondents, his Honour made it clear that his views as to the credit of the applicant provided additional grounds for rejecting the claim for preliminary discovery. 20 We also consider that this is not a case where any substantial injustice would result to the applicant if leave were refused. His Honour found that the applicant has sufficient information to enable him to make a decision as to whether to commence the foreshadowed proceedings. In our view, there was material to support his Honour's finding, including the applicant's admission that in February 1995 he had up-to-date financial information concerning the company and that he knew that the company's operating profit had decreased. His Honour relied upon this finding to conclude that the applicant had not satisfied FCR, O 15A r 6(b), but it also supports the proposition that the applicant has adequate information on which to base a decision whether or not to institute proceedings. 21 For these reasons, the application for leave to appeal should be refused, with costs. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Tamberlin, Sackville & Katz.