McGrath v HNSW Pty Limited

REASONS FOR JUDGMENT 1 The applicants apply to set aside a notice to produce dated 12 March 2015. 2 The notice to produce, issued pursuant to rule 30.28(1) of the Federal Court Rules 2011 (Cth), seeks the production of documents mentioned in a valuation report prepared by KPMG dated 26 October 2012 and discovered by the applicants. The KPMG report contains an opinion as to the fair market value of the McGrath group as at 31 August 2010.

Factual background 3 The ownership of the McGrath group was restructured in November 2006. The transaction underpinning the restructure is the subject of the proceedings. The applicants contend that they suffered loss as a result of the restructure while the respondents contend that the applicants were better off. 4 The applicants' case is that, prior to the restructure, they (through their ownership of shares in Suveli Pty Ltd) owned 50% of the McGrath group and Robert McGrath and his wife (through their ownership of Tahuvo Pty Ltd ("Tahuvo")) owned the other 50%. 5 On the applicants' case, the restructure involved the first applicant, John McGrath, reducing his stake in the McGrath group from 50% to 30%. This was achieved by the cancellation of Suveli's shares in the McGrath group, the issuing to John McGrath of 30% of the shares in Tahuvo, the transfer of certain assets previously owned by the McGrath group to John McGrath, and a cash payment from Robert McGrath to John McGrath. 6 On about 1 December 2006, John McGrath and Robert McGrath entered into an agreement titled "shareholder agreement" containing provisions apparently directed to protecting John McGrath's minority interest in Tahuvo and in the underlying assets of the McGrath group. Clause 8 of the agreement provides for the valuation and sale of shares in Tahuvo in certain events. Clause 8.2 of the shareholder agreement provides: The parties must procure that the Valuer undertakes and completes a valuation of the Tahuvo Shares within 3 months after receiving instructions and must value Tahuvo by reference to audited accounts and the fair market value of the McGrath Group as a whole (including all Subsidiaries of Tahuvo and the McGrath Group generally) specifying the value in terms of a dollar amount per Share. 7 From 2007 to 2012, Robert McGrath and John McGrath had various disputes as to the affairs of the McGrath group. Those disputes culminated in the KPMG valuation and the purchase by Robert McGrath of John McGrath's 30% stake in Tahuvo. 8 According to the applicants, immediately after the restructure Automotive Holdings Group purchased many of the McGrath group's significant assets (being the group's motor dealerships but not its real property). As a consequence, it is said that the KPMG valuation is of little or no relevance to the value of the McGrath group immediately before and after the restructure.

The applicants' discovery 9 On 29 September 2014, the respondents filed an interlocutory application for discovery of categories of documents including documents relating to the value of John McGrath's shares in Tahuvo in the period 20 October 2006 to 31 December 2012. 10 On 2 October 2014, during a directions hearing, there was debate about the scope of discovery that the applicants should be required to give. After argument, orders were made that the respective parties give discovery of agreed specified categories of documents, and the matter was adjourned to enable the parties to endeavour to resolve their dispute as to categories not agreed. 11 On 3 October 2014, the respondents' solicitors wrote to the applicants to agree to limit discovery relevantly to documents relating to the value of John McGrath's shares in Tahuvo immediately after the restructure, but sought a new category of discovery seeking instruction letters and other materials provided to KPMG. 12 On 7 October 2014, the applicants' solicitors wrote to the respondents' solicitors opposing the inclusion of the proposed new category but offered to discover the KPMG valuation. 13 On 8 October 2014, the respondents' solicitors wrote to the applicants' solicitors agreeing to limit the proposed new category to the KPMG valuation. 14 On 10 October 2014, by consent, orders were made reflecting the parties' revised agreement as to the categories of documents for discovery.

Documents now sought by the respondents 15 The documents now sought fall into two categories: (1) Four letters of instructions referred to on page two of the KPMG report; and (2) Nine documents included in a list appended to the KPMG report titled "Sources of information". The relevant appendix states that, in preparing the report, its authors "have been provided with and considered" the listed sources of information. 16 The respondents do not seek production of all documents listed in the appendix. They seek the following: (1) Summary documents regarding the 2006 restructure provided by Robert McGrath; (2) John McGrath's main submission dated 30 July 2012; (3) John McGrath's responding submission to Sean Collins, KPMG dated 14 August 2012; (4) Robert McGrath's submission to Sean Collins, KPMG dated 20 July 2012; (5) Robert McGrath's responding submission to Sean Collins dated 14 August 2012; (6) Robert McGrath's response dated 13 September 2012; (7) John McGrath's response dated 14 September 2012; (8) Robert McGrath's response dated 18 October 2012; (9) John McGrath's response dated 19 October 2012. 17 The respondents seek production of the documents for the following reasons: (a) To know the precise instructions given to KPMG for the purposes of its valuation; (b) The documents are said to be reasonably likely to canvass matters in issue in the proceeding being: (i) the value of the minority rights provisions in the shareholders agreement; (ii) the disparity between the value of the McGrath group as assessed by KPMG and the value relied upon by the applicant's expert, Mr Bryant; (iii) the restructure transaction itself. 18 The applicants seek to set aside the notice to produce on three grounds: (1) The respondents have not established the apparent relevance of the documents, so that the notice to produce is a fishing expedition; (2) The documents are either not relevant or are insufficiently relevant to justify their production; (3) The notice to produce is an abuse of process because it is an impermissible substitute for an application for further discovery where: (a) The documents now called for were previously the subject of dispute between the parties as to the categories of documents to be discovered; (b) The discovery categories were the subject of an interlocutory application that was heard by this Court; and (c) Prior to the Court giving judgment on the discovery categories, the respondents ultimately agreed not to press for the inclusion of a category that would have captured the documents.

Legal framework 19 Rule 30.28(1) provides: (1) A party may serve on another party a notice, in accordance with Form 61, requiring the party served to produce any document or thing in the party's control: (a) at any trial or hearing in the proceeding; or (b) at any hearing before a Registrar or any examiner or other person having authority to take evidence in the proceeding. (2) If the document or thing required to be produced under subrule (1) is not produced, the party serving the notice may lead secondary evidence of the contents or nature of the document or thing. (3) If a notice under subrule (1) specifies a date for production, and is served 5 days or more before that date, the party served with the notice must produce the document or thing in accordance with the notice, without the need for a subpoena for production. Note A party who fails to comply with a notice under subrule (1) may be liable to pay any costs incurred because of the failure. 20 In this case, the notice sought production of the documents at a directions hearing on 17 March 2015. 21 A notice to produce may be set aside for lack of apparent relevance: Trade Practices Commission v Arnotts Ltd (No 2) [1989] FCA 248; (1989) 88 ALR 90 at 101-103. The test of relevance is whether the documents are reasonably likely to add, in the end, in some way or other, to the relevant evidence in the case: Seven Network Ltd v News Ltd (No 5) [2005] FCA 510; (2005) 216 ALR 147 at [10]; Cheung Kong Infrastructure Holdings Ltd v BlueScope Steel Ltd [2010] FCA 739 at [21].

Abuse of process and discovery 22 Counsel for the applicants, Mr Spencer, referred to Azzi v Volvo [2006] NSWSC 283 at [11] ("Azzi") as authority for the general proposition that a subpoena which seeks documents that could have been the subject of discovery is an abuse of process. A notice to produce is relevantly analogous to a subpoena: Azzi at [4]. Accordingly, Mr Spencer submitted, the notice is an abuse of process because the parties explicitly agreed that the documents were not required to be discovered. Alternatively, he submits, if the documents are discoverable, the respondents should apply for further discovery. 23 In my view, Brereton J's general statement in Azzi at [11] should not be understood as implying that the processes of subpoena and notices to produce may not be used to obtain documents from a party in an appropriate case, even though the documents could have been the subject of an order for discovery. Commissioner for Railways v Small (1938) 38 SR (NSW) 564 is the classic authority for the proposition that a subpoena seeking discovery or further discovery from a party will be set aside. However, that decision must be understood in its context. The plaintiff had been given discovery and five days before the matter was listed for trial served a subpoena addressed to the defendant. After observing that a subpoena addressed to a party must still state with reasonable particularity the documents to be produced (and thereby acknowledging that a subpoena may be addressed to a party in an appropriate case), Jordan CJ said: …it is not legitimate to use a writ of subpoena duces tecum as a substitute for an application for discovery of documents, or as an alternative to an application for further and better discovery. Discovery applications should be made at the proper time and place. It would greatly impede the trial of actions at nisi prius, and impose an intolerable burden upon the presiding judge, if he were required from time to time to suspend proceedings and wade for himself through masses of documents for the purpose of endeavouring to determine whether any of them are relevant. Especially is this so when the documents may be called for whilst the case is still at the stage when it is difficult or perhaps impossible for the Judge to know what may become relevant and what may not. In the absence of special circumstances, e.g. Griebart v Morris [1920] 1 KB 659, a party is no more entitled to use a subpoena duces tecum than he is a summons for interrogatories, for the purpose of "fishing", i.e., endeavouring, not to obtain evidence to support his case, but to discover whether he has a case at all: Hennessy v Wright 24 QBD 445 at 448, or to discover the nature of the other side's evidence: Griebart v Morris [1920] 1 KB 659 at 666. Even if the documents are specified, a subpoena to a party will be set aside as abusive if great numbers of documents are called for and it appears that they are not sufficiently relevant: Steele v Savory [1891] WN 195. 24 In Diddams v Commonwealth Bank of Australia [1998] FCA 497, a subpoena was issued shortly before the matter was listed for hearing, after the parties had given discovery and the proceeding had otherwise been under the management of the court for a considerable time. The subpoena was called upon before a Registrar on the third day of the hearing. The applicant's counsel called upon the subpoena after being called on to commence his cross-examination of a witness. In deciding to set aside the subpoena, Branson J noted: Where the Court has by detailed directions set a timetable for the undertaking of the procedural steps necessary to bring a matter to readiness for trial, including a timetable for the discovery and inspection of documents, it is to be expected that the parties will seek such documents "relating to any matter in question between [them]" as they wish to have access to through the process of discovery and inspection…. If such documents are sought by subpoena or notice to produce issued close to trial, the Court's endeavours to manage the process of the preparation of the matter for trial, and to ensure that no interlocutory issues are outstanding at the hearing date, may be subverted. 25 Branson J expressed concern that the processes of discovery should not be avoided "by the simple device of serving a subpoena duces tecum upon an opposing party". 26 In Australian Competition and Consumer Commission v Shell [1999] FCA 212; (1999) 161 ALR 686, the parties had given discovery. The ACCC did not accept Shell's contention that it did not have certain documents in its possession. The ACCC had filed an application for supplementary discovery. Although the application for supplementary discovery was not heard, Shell filed a supplementary list of documents and directions were given to complete all steps necessary before listing the matter for trial. At the ACCC's request, a subpoena seeking production of 14 categories of documents was issued to Shell. On the application to set aside the subpoena, the principal submission made on behalf of Shell was that the subpoena procedure was inappropriate in the circumstances of the case and that the ACCC ought to have proceeded by way of an application for further and better discovery. That submission was accepted on the basis that the ACCC "should not be permitted to avoid the evidentiary onus required in O 15, r 8 [the predecessor to Rule 20.21] in order to go behind the two affidavits of documents provided by Shell by issuing a subpoena in this form". 27 In Construction, Forestry, Mining and Energy Union v BHP Coal Pty Ltd (No 3) [2012] FCA 61, the Court set aside a notice to produce issued pursuant to rule 30.28. The notice was served shortly before the commencement of the trial in the matter. The notice required production of several broad categories of documents. The proceeding had been the subject of an extensive agreed discovery process as well as court ordered discovery. Collier J expressed the view that the "potential disruption of a trial by unduly proximate service of a Notice to Produce may be a determinative factor in considering an application to set aside the Notice" (at [7]). Her Honour found that the timing of the service of the notice to produce was unreasonable, particularly in light of orders for discovery that had been made six weeks earlier. The notice was set aside because her Honour was not satisfied that the documents were sufficiently relevant to justify production.

Consideration 28 None of the cases referred to above supports a conclusion that the notice to produce in this case is an abuse of process. 29 The notice to produce makes a request for 13 specified documents (in contrast to the notice to produce in Azzi which was said at [7] to cast "a considerable burden" on its recipient). It is not oppressive in its scope, and it was not served at a disruptive or otherwise inconvenient time. 30 I do not agree that an application for further (or supplementary) discovery was the only appropriate application in this case where specific documents are sought. The essence of discovery is that it places an obligation on the discovering party to decide whether documents in that party's possession are discoverable because they relate to the issues in the proceeding: Lucas Industries Ltd v Hewitt (1978) 18 ALR 555 at 569. In this case, the respondents are not seeking an order that would require the applicants to make such a decision: they simply want to see particular documents which they contend are of apparent relevance and which the applicants had resisted providing by way of discovery. 31 Nor are the respondents seeking to go behind an affidavit of discovery. It is common ground that the documents now sought did not fall within the ambit of the discovery ordered by consent. 32 I also reject the contention that the parties' agreement as to categories for discovery operates as any kind of bar on a respondent's entitlement, in an appropriate case, to seek documents by notice to produce. Rule 30.28(1) provides no support for such a contention. In my view, the notice to produce was an appropriate and convenient tool to seek the production of documents which the applicants were not willing to produce voluntarily. 33 Accordingly, I do not accept that the notice to produce is an abuse of process. 34 Turning to the applicants' contentions concerning the lack of relevance of the documents sought, apparent relevance is a matter of degree: Azzi at [6]. Here, the question is whether the documents sought have apparent relevance to the question of the loss, if any, suffered by the applicants as a result of the restructure transaction. 35 I am persuaded that the apparent revision of instructions to KPMG in October 2012, noted in the KPMG report and said to refer to clause 8.2 of the shareholders' agreement, makes it reasonably likely that each of the documents sought in the notice contains material concerning whether and why KPMG should apply a minority discount in conducting their valuation as at August 2010. Clause 8.2 is evidently directed to avoiding a dispute about that issue. It is reasonably likely that correspondence and submissions prior to the revised instructions involved a debate, ultimately resolved by the reference to clause 8.2, about matters relevant to the value of John McGrath's shares arising out of the interests and rights he acquired by the 2006 restructure and, in particular, his position as a minority shareholder in Tahuvo. 36 Having regard to the history of the matter, including the fact that the Tahuvo financial statements for the year ended 30 June 2010 contained a contingent liability concerning the calculation of John McGrath's consideration pursuant to the restructure, the material sought is also reasonably likely to address the value of John McGrath's interest in the McGrath group by reference to matters relevant to the value of his interest in the group in around 2006. In support of this conclusion, I note that one of the documents sought is apparently titled "Summary documents regarding the 2006 restructure provided by Robert McGrath". 37 At this interlocutory stage in the proceedings, I am not satisfied that I should conclude that significant changes in the structure and assets of the McGrath group render the KPMG valuation necessarily of no apparent relevance to the issues in the proceeding. The letters of instructions are of apparent relevance to the opinions expressed in the KPMG report, which I cannot conclude are of no apparent relevance to the issue of the applicants' loss. 38 As the disputed documents were not tendered on the application, and having found the apparent relevance test to have been met, I cannot be satisfied that they are either irrelevant or of insufficient relevance to warrant production.

Conclusion 39 The application will be dismissed with costs. I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.