Marcos Accountants Pty Ltd v Nigtol Pty Ltd

Judgment (8 paragraphs)

[1]

Background

The underlying dispute between the parties arises in relation to the purchase by Marcos Accountants Pty Limited (Marcos Accountants), a company of which Mr Magdy Marcos is the sole director and majority shareholder, of the business (assets and undertaking) of Tolley & Co Pty Ltd (Tolley & Co), an accountancy practice formerly owned by the first defendant (Nigtol), a company of which the second defendant (Mr Tolley) is the sole director.
Marcos Accountants and Nigtol entered into a Sale of Business Agreement dated 15 September 2017 (Sale of Business Agreement). Broadly speaking, as part of that agreement a bank guarantee was provided by Marcos Accountants (to secure certain obligations under or in relation to the agreement). The arrangements between Marcos Accountants and Nigtol also apparently included an agreement for the provision of consultancy services for a period of time after the sale of the business.
There was some litigation between Nigtol and Marcos Accountants in mid-2018, the detail of which it is not necessary here to recount (proceedings numbered 2018/135665 and 2018/135657) but which resulted in a consent judgment and costs order in favour of Marcos Accountants on 18 June 2018.
The present proceedings were instituted by way of summons on 3 April 2019, on an urgent ex parte basis before the duty judge (Lindsay J). Marcos Accountants there sought (and was granted), inter alia, injunctive relief to prevent Nigtol from drawing down on the bank guarantee to which I have referred above.
On 5 April 2019, when the matter came back in the duty list (on which occasion there was an appearance for the defendants) Lindsay J granted leave to Marcos Accountants to file in Court an amended summons dated 5 April 2019 (Order 1). The amended summons sought the continuation of the interlocutory relief that had been granted on 3 April 2019 (in respect of the bank guarantee and also as to non-competition/non-solicitation) (prayers 1 and 2). The amended summons also sought: damages pursuant to the Competition and Consumer Act 2010 (Cth), Sch 2 - Australian Consumer Law (Australian Consumer Law) (for alleged unconscionable conduct and misrepresentation) (prayer 3); declaratory relief in respect of alleged breaches of the Sale of Business Agreement (prayers 5-7); damages and, alternatively, statutory damages pursuant to the Australian Consumer Law (prayers 9-12); and relief against Mr Tolley for his alleged involvement in Nigtol's breaches (prayers 13-14).

Plaintiff's submissions

Marcos Accountants submits that the NAB and ANZ subpoenas and the notice to produce should be set aside.
In respect of the notice to produce, it is submitted (in respect of each of the categories set out in items 1 to 5 of the notice to produce) that the notice to produce should be set aside as: being oppressively broad (as to the scope of documents sought and as to the (unstated) time period); lacking any legitimate forensic purpose; amounting to "fishing"; and contrary to Practice Note SC Eq 11 (the Practice Note).
It is submitted that the impugned subpoenas should be set aside for similar reasons (i.e., as lacking any legitimate forensic purpose; amounting to "fishing"; and contrary to the Practice Note), though no complaint is made as to oppression based on the time period (see T 15).
Insofar as the defendants have argued that the subpoenaed documents (and those sought by the notice to produce) are sought in aid of the defendants' application for security for costs, Marcos Accountants emphasises that the notice to produce was filed prior to the defendants' application for security for costs (on 4 June 2019) (though Marcos Accountants did not there refer me to the earlier correspondence from the defendants' solicitors raising queries as to the financial position of the plaintiff and the director standing behind it in these proceedings - to which I have referred above).
Complaint is made (as adverted to above) that the defendants have "consistently failed" to indicate whether they would file any defences/cross-claims (until asserting before the Registrar on 3 July 2019 and again before the Court on 9 July 2019 that they should be excused from filing any defence until such time as the security for costs issue has been dealt with).
Marcos Accountants argues that the true intention of the defendants is to "trawl through the Plaintiff's historic financial records in the Micawber-like hope that 'something useful will turn-up' in aid of their (as yet undisclosed) case".
It is noted that, in Mr Tolley's affidavit, reference is made to an alleged delay in settlement of the purchase of the business in the statement that "Mr Marcos asked to defer the settlement a number of times (which [Mr Tolley] now suspect[s] was due to financial pressure to procure the purchase price)". Marcos Accountants contends that the defendants have thereby "set-up" the basis for an inquiry going to its financial position "that may reasonably be expected to form part of a defence or attack upon the Plaintiff's pleaded case (that it was the Defendants' conduct alone that was causative of the Plaintiff's losses, rather than any other pre-existing financial" ([sic]; presumably a reference to 'financial pressure')).
It is said that, whilst no cross-claim has yet been filed (or disclosed), Mr Tolley's evidence further discloses the basis and quantum for amounts that he says are owed to him by Marcos Accountants (pursuant to the Sale of Business Agreement).
It is submitted that, within the context of a cross-claim, matters going to the financial position of Marcos Accountants ("importantly, any records of any fee income paid into the Plaintiffs NAB or ANZ bank accounts in respect of which Mt Tolley asserts that the First Defendant is owed a share") would form part of the information the defendants may seek by way of discovery, after the filing of pleadings and evidence; and, hence, that the defendants are here seeking to subvert the usual process of discovery. It is submitted that, to the extent that the NAB and ANZ subpoenas call for documents of any apparent relevance, those documents could be obtained through discovery in the ordinary way (after the service of evidence and upon demonstration that the documents that are sought are necessary).
In particular, Marcos Accountants contends that the requirements of the Practice Note (at par 4) have not been satisfied in relation to the NAB and ANZ subpoenas as a whole, given that evidence has not yet been served and there are no "exceptional circumstances necessitating disclosure" and that those set out at par 5 are not satisfied because the entirety of the NAB and ANZ subpoenas call for documents which are not "necessary" ("in the sense of what is reasonably required for a fair trial for the resolution of the real issues in dispute"). Marcos Accountants submits that, generally speaking, "exceptional circumstances" would require the defendants to demonstrate that they could not fairly prepare their case for trial without the documents sought and that they have not done so.
In circumstances in which the NAB and ANZ bank statements have been provided to the defendants (in redacted format), together with Marcos Accountants' May 2019 management accounts, and the ANZ financing costs have been pleaded in the statement of claim, it is submitted that the defendants' request that historic financial records dating from 2017 are "necessary" cannot credibly be maintained (and Marcos Accountants does not in any event accept the contention that the documents are sought only for the stated purpose of the security for costs application).
It is submitted that there was no attempt by the defendants (before they issued the notice to produce or the subpoenas) to apply for an order for disclosure of documents on the basis that there were exceptional circumstances necessitating their disclosure (and, thus, it is submitted, it follows that there was no compliance with the requirement in par 6 of the Practice Note).
Marcos Accountants submits that the stated categories of the NAB and ANZ subpoenas are framed so widely as to capture documents which have no apparent relevance to the matters that may be in issue and that on that basis it cannot be "on the cards" that the documents sought in those paragraphs would materially assist on the application.
As adverted to above, it is submitted (but I do not accept) that the only evident purpose of seeking historic banking records; documents recording or evidencing transactions between Marcos Accountants and its customers; and bank documents that identify credit risk issues, is for the defendants to trawl through the financial records of Marcos Accountants in search of a case which the defendants do not currently advance, but which it is hoped they might discover (i.e., a "fishing expedition"). On that basis, it is submitted that the defendants intend to deploy the documents now produced by ANZ and NAB against Marcos Accountants "in some unstated way" and therefore that the documents ought not be released.
In respect of the notice to produce, only, it is submitted that it is oppressive in scope. Marcos Accountants points to correspondence in which it was asserted that the notice to produce was liable to be set aside as an abuse of process (based upon the unlimited timeframe and expansive nature of the documents sought and the fact that the defendants had not filed any application for security for costs, at that time).
Further, it is submitted that the impugned subpoenas (which do include dates and "other refinements"), coupled with the filing of the defendants' security for costs application, represent a second attempt for substantially the same documents; and that it is an abuse of process of itself simultaneously to seek production (i.e., discovery) of substantially the same documents, in two ways. (I do not accept that this is necessarily the case, since the documents held by NAB and ANZ may well differ from those held or retained by Marcos Accountants.)
Marcos Accountants submits that there is no reason why the defendants ought be given carte blanche to look through "any" of Marcos Accountants' financial and banking records (as set out in the notice to produce).
Marcos Accountants, thus, submits that the subpoenas and the notice to produce are not reasonably necessary for the fair disposal of the security for costs application and ought to be set aside. It is said that there is no requirement to consider, for the purposes of this application, whether the undertaking proffered by Mr Marcos would be a factor militating against any later grant by the Court of either party's security for costs application.

Determination

The applicable principles on the current application were not in dispute and have been considered by me in various cases (a number of which were referred to by the parties on the present application). See, for example, Rinehart v Rinehart [2019] NSWSC 759; Broadway Plaza Investments Pty Ltd v Broadway Plaza Pty Ltd [2019] NSWSC 410 (Broadway Plaza); Wollongong Coal Ltd v Gujarat NRE Properties Pty Ltd (No 2) [2019] NSWSC 758; and Anderson v Patersons Securities Ltd (No 2) [2019] NSWSC 853.
There must be a legitimate forensic purpose shown for the invocation of the compulsory processes of the Court. Mere relevance does not satisfy the test; rather it must be "likely the documentation will materially assist on an identified issue, or there is a reasonable basis beyond speculation that it is likely the documentation will" (the onus being on the party seeking to call upon the subpoena to demonstrate that the documents have direct relevance to a line of enquiry rather than speculating on an issue more generally) (see ICAP Australia Pty Ltd v BGC Partners (Australia) Pty Ltd [2009] NSWCA 307; ICAP Pty Ltd v Moebes [2009] NSWSC 306). The fact that there has already been production of documents under the subpoenas does not mean that the jurisdiction of the Court to set them aside has been spent (see Broadway Plaza at [50]).
The Practice Note, which commenced operation in March 2012, relevantly includes the following: 4. The Court will not 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. 5. 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. 6. Any application for an order for disclosure, consensual or otherwise, must be supported by an affidavit setting out: the reason why disclosure is necessary for the resolution of the real issues in dispute in the proceedings; the classes of documents in respect of which disclosure is sought; and the likely cost of such disclosure.
A subpoena may be set aside if it involves an attempt to subvert the operation of the Practice Note by seeking what is in substance disclosure within the scope of the Practice Note in circumstances where the requirements of the Practice Note are not satisfied (see The Owners - Strata Plan No 76902 v Roads and Maritime Services [2017] NSWSC 528 at [20] per Ball J and the authorities there cited). Relevantly, a subpoena cannot be used as a substitute for an order for discovery which, under the Practice Note, could only be obtained in exceptional circumstances which have been properly identified and explained.
Similar principles apply to notices to produce as apply to subpoenas in this regard.
Turning first to the subpoenas in the present case, I consider that the defendants have established that there is a legitimate forensic purpose in the defendants seeking evidence that it is likely will be relevant to, or shed light on, the current financial position of Marcos Accountants. The onus will be on the defendants, as applicants for security, to establish that there is reason to believe that Marcos Accountants will be unable to pay the costs of the litigation if unsuccessful (see Cornelius v Global Medical Solutions Australia Pty Ltd; Farag v Global Medical Solutions Australia Pty Ltd [2014] NSWCA 65; (2014) 98 ACSR 301 at [17], [56]-[59] (Cornelius v Global Medical)).
As to whether there is a rational basis for such a belief, or a real risk of inability to pay the opposing party's costs, this has been described as setting a "low threshold" and involving an "undemanding test" (see Livingspring Pty Ltd v Kliger Partners (2008) 20 VR 377; [2008] VSCA 93 at [15]-[16]; Cornelius v Global Medical at [57]-[60]; In the Matter of Felan's Fisheries Pty Limited [2016] NSWSC 1351 at [10]). It has been said that the Court should adopt a "practical commonsense approach" to the examination of the financial affairs of a corporation (Wollongong City Council v Legal Business Centre Pty Limited [2012] NSWCA 245 at [28] (Wollongong City Council)).
If the threshold question is satisfied, the next issue to be considered on an application for security for costs is as to whether, in the exercise of the Court's discretion, security should be granted; and in that regard there is an evidentiary onus on the part of the party from whom security is sought to establish a reason why security should not be granted (see Wollongong City Council at [30] and Cornelius v Global Medical at [18]-[20]). A number of discretionary considerations have been identified as relevant in this context by Beazley JA (as Her Excellency then was) in KP Cable Investments Pty Ltd v Meltglow Pty Ltd (1995) 56 FCR 189 at 196-198 and are now largely reflected in r 42.21 of the UCPR.
The subpoenas in the present case seek documents that would in my opinion clearly be of relevance to, and likely to shed light on, the threshold question to be determined in the forthcoming security for costs applications brought by the defendants (namely whether there is reason to believe that Marcos Accountants will be unable to pay an adverse costs order at the end of a contested hearing). The undemanding nature of the test as to whether there is reason to reach the requisite belief makes that abundantly clear. (Whether the subpoenaed documents might shed light on matters relevant to the discretionary considerations is an issue that need not be explored in light of the conclusion that I have reached as to the legitimate forensic purpose by reference to the threshold question.)
It must be permissible for such a course (i.e., of issuing subpoenas seeking current and relatively recent financial documents) to be adopted, for the purpose of preparation for the security for costs application, in advance of the closure of pleadings in relation to the substantive dispute (particularly given that delay in seeking security would be a factor that may count against a grant of security). Therefore, the complaint as to the fact that pleadings have not yet been closed (at least insofar as the present application is concerned) goes nowhere in my opinion.
The fact that Marcos Accountants has now (the defendants would no doubt say, and perhaps with some justification, belatedly) provided copies (albeit redacted copies) of its most recent bank statements and management statements does not mean there is no legitimate forensic purpose in the defendants seeking to establish the historical financial position of Marcos Accountants (against which the current statements can be assessed) (in circumstances where it is not suggested that the period in which those materials are sought is oppressive).
As to whether redacted copies are sufficient to obviate any need for access to unredacted copies, the defendants maintain they should be in a position to satisfy themselves as to the source of funds recorded in the statements; whereas for Marcos Accountants it is said that these proceedings relate to complaints as to the (wrongful) solicitation of its clients; and there is an obvious reluctance on its part to permit any disclosure to the defendants of information relating to clients.
Apart from the fact that there are injunctions in place as to non-competition and non-solicitation (which one would have thought would address the concern of Marcos Accountants in this regard), such a concern could be dealt with by putting in place either orders as to confidentiality or by limiting access at this stage to, say, the defendants' legal representatives (subject to an ability on their part to seek to be able to provide access to their clients, for the purpose of obtaining instructions in relation to the security for costs applications or otherwise as necessary). The defendants' Counsel did not appear to cavil with such a regime being put in place, at least at the first instance (T 41). In any event, I see no reason to infer that the request for production of this kind of documentation is for an ulterior or collateral purpose to that of preparation for the security for costs application.
As to the notice to produce, I accept that it is too broad (as far as timing is concerned) and I consider that at least some of the categories of documents sought are objectionable in the terms in which they are framed (in that they are not specified with sufficient particularity or otherwise appear to be calling for an explanation for what might appear in the documents or require a subjective judgment as to the content of the documents so as to determine what documents fall within the notice). See, for example, item 3, which seeks details of shares held "stated at market value … including full details of the extent of any borrowings against the investments"; or item 4, which calls (further to the call for documents relating to property "held, controlled, or owned by the plaintiffs [sic]") for "the capacity, if any, by which those borrowings could be increased".
Calling for documents that require the party in question to form a judgment about factual matters in order to be able to determine whether a document is required to be produced (i.e., whether a document "identifies" or "evidences" a matter) is problematic in that it arguably does not identify with reasonable particularity the documents sought to be produced (see Universal Press Pty Limited v Provest Limited [1989] FCA 402 per Hill J at [10], albeit there in the context of a subpoena to a person not a party to litigation, to which I referred in Broadway Plaza at [138]). Similar complaint could be made here as to the apparent requirement for the recipient of the notice to produce to form a view as to whether documents provide details (or full details) of the extent of any borrowing capacity.
Furthermore, there is only one plaintiff in the proceedings (Marcos Accountants). Any notice to produce served on it but requiring the production of documents of other entities or persons (such as Tolley & Co or Mr Marcos) is problematic insofar as it is not self-evident that Marcos Accountants would be in possession, custody or control of such documents or otherwise able to compel their production in answer to the notice to produce. Documents from non-parties to the litigation would ordinarily be sought by subpoena.
Therefore, I would set aside the notice to produce but I would be prepared to permit a more narrowly drafted notice to produce to be issued to Marcos Accountants, if the defendants still see the need to obtain financial documents of the kind contemplated by the existing notice to produce. By way of example, I find it difficult to see that a notice to produce framed along the following lines (to adapt the form of the original notice) would be objectionable in the context of the forthcoming security for costs application: 1. Copies of Bank Statements, records of term deposits or other financial investments, or accounting statements of Marcos Accountants Pty Limited for the period [specifying a date not earlier than 1 September 2017] to the date of the notice to produce. 2. Receipts or documents recording cash on hand presently held by Marcos Accountants Pty Limited. 3. Documents recording shares or other securities or investments presently held in the name of Marcos Accountants Pty Limited or expressed to be held on trust for Marcos Accountants Pty Limited. 4. Documents recording any real property presently held in the name of Marcos Accountants Pty Limited or expressed to be held as trustee for Marcos Accountants Pty Limited. 5. Invoices or other documents [for a relatively confined current period, specifying that period] recording professional fees due and payable to Marcos Accountants Pty Limited.
I do not suggest that any such notice to produce should now be issued. However, a notice to produce seeking such documents, against the context of the forthcoming security for costs applications, would in my opinion have an obvious legitimate forensic purpose.
Finally, as to the suggestion that these compulsory processes have not been invoked for a legitimate forensic purpose (and are an attempt to subvert the Practice Note as to disclosure) because the notice to produce was issued before the security for costs application or because it is now not "necessary" for the documents sought (in light of the voluntary production and/or "undertaking" of Mr Marcos), I do not accept either proposition.
The chronology of events, as highlighted by Counsel for the defendants, makes clear that the defendants raised at an early stage their concern as to the financial position of Marcos Accountants and did so in the context where they were adverting to a potential application for security for costs. Quite properly, before launching into such an application the defendants sought information from Marcos Accountants in order to satisfy themselves as to those concerns. The response from Marcos Accountants' solicitors (presumably on instructions) to that enquiry was singularly unenlightening and unhelpful.
In those circumstances, I accept that the only course available to the defendants was to seek the provision of the requisite information by invoking the compulsory processes of the Court. It seems to me that the current situation is one entirely of Marcos Accountants' own making (albeit seemingly due to its suspicions as to the motives of the defendants in relation to its clients). Had it provided material up-front to satisfy a reasonable enquiry as to its ability to make good any adverse costs orders (or had it proffered an undertaking of Mr Marcos, suitably backed by evidence of his financial capacity, to make good any liability of Marcos Accountants'' for adverse costs orders), there would surely have been no need for the issue of the impugned notice and subpoenas (and hence no need for the present application). Thus, to the extent that "exceptional circumstances", in the sense in which that expression is understood in the present context - see the authorities to which I have already referred, needed to be shown, I consider that the stance adopted by Marcos Accountants to the quite reasonable enquiry as to its financial position provides that foundation. I do not accept that the issue of the subpoenas (or, for that matter, a properly framed notice to produce) amounts to an attempt to subvert the operation of the Practice Note, nor do I consider that the issue of the subpoenas following the issue of the notice to produce (insofar as there is an overlap of the documents sought) of itself amounts to an abuse of process.
Marcos Accountants should bear the costs of the present application to set aside the subpoenas (in which it was unsuccessful), in accordance with the general rule that costs follow the event. Given the late stage at which the application to set aside the notice to produce was raised (by the amended notice of motion filed at the hearing of the application to set aside the subpoenas), it seems unlikely that the defendants will have incurred any additional costs in relation to that part of the application. In circumstances where, although the defendants have been unsuccessful in resisting the challenge to the notice to produce, I consider that (if re-framed to reflect these reasons) it would not be objectionable; and where the notice to produce had not formally been pressed but was sought to be set aside for more abundant caution, I consider that the appropriate order is that each party bear its own costs (if any) of the application to set aside the notice to produce (i.e., any costs over and above those otherwise incurred in relation to the application to set aside the subpoenas.
For these reasons, I make the following orders: 1. Dismiss the plaintiff's application to set aside the subpoenas issued to each of National Australia Bank Ltd and Australian and New Zealand Banking Group Ltd. 2. Grant access to the parties to the documents produced in answer to those subpoenas limited, in the first instance (in the case of the defendants), to access by the defendants' legal representatives but without prejudice to the ability of the defendants' legal representatives to seek a variation of this order to permit access by the defendants themselves to one or more of the documents, specifying which, if necessary for the defendants' legal representatives to obtain proper instructions in relation to the forthcoming security for costs applications or otherwise in relation to the proceedings. 3. Set aside the notice to produce issued to the plaintiff by the defendants without prejudice to the ability of the defendants to issue a fresh notice to produce (reflecting these reasons), such notice to require the production of documents within seven days. 4. The plaintiff to pay the defendants' costs of the plaintiff's application to set aside the subpoenas to National Australia Bank Ltd and Australian and New Zealand Banking Group Ltd. 5. Each party to bear its own additional costs (if any) of the plaintiff's application to set aside the notice to produce (i.e., any costs over and above the costs of the plaintiff's application to set aside the subpoenas to National Australia Bank Ltd and Australian and New Zealand Banking Group Ltd).

At a glance

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Judgment (8 paragraphs)

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Legislation Cited (3)

Cases Cited (17)

Cited By (3)