Pellarini v Bicher & Son Pty Ltd

Supreme Court of NSW|2024-02-20|Before: Cavanagh J

JUDGMENT

Pursuant to a summons filed on 10 July 2023 the plaintiff seeks an order for preliminary discovery.
The plaintiff is a minority shareholder (49.9995%) in the defendant company. The defendant operates the restaurant business known as Machiavelli Ristorante Italiano. Nicolae Bicher owns the remaining shares. He is also the sole director of the company.
The plaintiff seeks an order that the defendant give preliminary discovery of the following documents for the period 20 May 2020 to 30 June 2023: 1. the defendant's point of sale records generated for all takings at the restaurant business, including those records commonly referred to as the "Z tapes"; and 2. the defendant's business activity statements ("BAS") as lodged with the Australian Taxation Office ("ATO").
The hearing of the application took place on 20 February 2024. Mr Anderson appeared for the plaintiff. Ms Francois appeared for the defendant.
A joint court book was provided. The plaintiff relied on his affidavits dated 7 July 2023 and 2 November 2023. The defendant relied on affidavits of Rosanna Riccio dated 7 September 2023 and 29 November 2023 as well as an affidavit of David Ross dated 20 September 2023.
The defendant was granted leave to adduce further oral evidence of Ms Riccio (over the objection of the plaintiff). This evidence related to the defendant's system of dealing with cash and making its point of sale records available to the company's auditor, although she was cross-examined on a wider range of issues.

Principles to be applied

The plaintiff seeks an order under r 5.3(1) of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") which is in the following terms: 5.3 Discovery of documents from prospective defendant (1) If it appears to the court that - (a) the applicant may be entitled to make a claim for relief from the court against a person (the prospective defendant) but, having made reasonable inquiries, is unable to obtain sufficient information to decide whether or not to commence proceedings against the prospective defendant, and (b) the prospective defendant may have or have had possession of a document or thing that can assist in determining whether or not the applicant is entitled to make such a claim for relief, and (c) inspection of such a document would assist the applicant to make the decision concerned, the court may order that the prospective defendant must give discovery to the applicant of all documents that are or have been in the person's possession and that relate to the question of whether or not the applicant is entitled to make a claim for relief.
It is apparent from the words of r 5.3(1) that the court has a discretion whether to order the prospective defendant to give discovery of the documents sought (O'Connor v O'Connor [2018] NSWCA 214 at [24] quoting Hely J in St George Bank Ltd v Rabo Australia Ltd [2004] FCA 1360 at [26]).
The discretion may only be exercised in favour of the applicant if it appears to the court that each of the matters set out in subparagraphs (a), (b) and (c) are satisfied, being: 1. the applicant may be entitled to make a claim for the relief but having made reasonable inquiries is unable to obtain sufficient information to determine whether to institute proceedings; 2. the defendant may have in its possession documents which can assist in determining whether to pursue a claim; and 3. inspection of the documents would assist the plaintiff to make a decision whether to pursue a claim.
In Hatfield v TCN Channel Nine Pty Ltd (2010) 77 NSWLR 506 McColl JA summarised the applicable principles as follows at [47]-[52]: "First, "[i]n order for it to 'appear' to the Court that the applicant 'may be entitled' to make a claim for relief, it is not necessary for the applicant to show a prima facie or pleadable case": Morton v Nylex (at [25]). Secondly, while "the mere assertion of a case is insufficient … [i]t will be sufficient if there is reasonable cause to believe that the applicant may have a right of action against the respondent resting on some recognised legal ground": Morton v Nylex (at [25]). Thirdly, "belief requires more than mere assertion and more than suspicion or conjecture. [It] is an inclination of the mind towards assenting to, rather than rejecting a proposition. Thus it is not sufficient to point to a mere possibility. The evidence must incline the mind towards the matter or fact in question. If there is no reasonable cause to believe that one of the necessary elements of a potential cause of action exists, that would dispose of the application insofar as it is based on that cause of action": St George Bank Ltd v Rabo Australia Ltd [2004] FCA 1360; (2004) 211 ALR 147 (at 26) per Hely J, referring in turn to John Holland Services Pty Ltd v Terranora Group Management Pty Ltd [2004] FCA 679 (at [13], [14], [17] and [73]) per Emmett J. The use of the word "may" indicates the court does not have to reach "a firm view that there is a right to relief": Telstra Corp Ltd v Minister for Broadband, Communications and the Digital Economy [2008] FCAFC 7; (2008) 166 FCR 64 (at [58]). Fourthly, the requirement that the matters set out in UCPR 5.3 "appear[s]" to the court to establish an entitlement to an order under the rule may be wider than the requirement in the Federal Court Order 15A r 6 that there "is reasonable cause to believe": see Panasonic Australia Pty Ltd v Ngage Pty Ltd [2006] NSWSC 399; (2006) 69 IPR 595 (at [22]) per Young CJ in Eq; Papaconstuntinos v Holmes à Court [2006] NSWSC 945 (at [17] per Simpson J; Hornsby Shire Council v Valuer General of NSW [2008] NSWSC 1179 (at [33]) per Adams J. Nevertheless Hely J's statement in St George Bank Ltd (at 26) remains apposite, namely that "whilst uncertainty as to only one element of a cause of action might be compatible with the 'reasonable cause to believe' required by subparagraph (a), uncertainty as to a number of such elements may be sufficient to undermine the reasonableness of the cause to believe". Fifthly, "the question posed by [UCPR 5.3(1)(a)] … is not whether the applicant has sufficient information to decide if a cause of action is available against the prospective respondent [but] … whether the applicant has sufficient information to make a decision whether to commence proceedings in the Court. Accordingly, an applicant for preliminary discovery may be entitled to discovery in order to determine what defences are available to the respondent and the possible strength of those defences": St George Bank Ltd (at 26) (emphasis in original); see also Morton v Nylex (at [33]). Thus application of the rule will not be precluded by the fact that the applicant already has available evidence establishing a prima facie case for the granting of relief, as there might be matters of defence which could defeat a prima facie case: Alphapharm Pty Ltd v Eli Lilly Australia Pty Ltd [1996] FCA 1500 (at [41]) per Lindgren J; referred to with approval by the Full Federal Court (French, Weinberg and Greenwood JJ) in Telstra Corp Ltd (at [60]). Sixthly, as Hely J said in St George Bank Ltd (at 26), "the Rule is to be beneficially construed, given the fullest scope that its language will reasonably allow, with the proper brake on any excesses lying in the discretion of the Court, exercised in the particular circumstances of each case"."
In this matter, the defendant is in possession of the documents the plaintiff seeks. It is difficult to know what the documents might show but it seems likely that they would assist the plaintiff in making a decision whether to pursue a claim.
At least on the plaintiff's claim, inspection of the Z tapes will assist in determining whether there are cash sales which have not been disclosed in the BAS returns and thus whether the plaintiff has failed to comply with its taxation obligations (being the basis on which the plaintiff says it will be seeking relief by way of a winding up order against the defendant).
As was said in Morton v Nylex Ltd [2007] NSWSC 562 ("Morton") at [25], it is not necessary that the plaintiff show a prima facie case but the mere assertion of a case is insufficient. It may be sufficient to show that the applicant may have a cause of action based on some legal principle but the court does not have to reach a firm view as to the prospects of the cause of action (Telstra Corporation Ltd v Minister for Broadband, Communications and the Digital Economy (2008) 166 FCR 64 at [58]).
To give effect to the purpose of the rule, the bar must be relatively low. That is because the purpose of the rule is to enable a person to obtain documents so as to determine whether to pursue a case. It must be that it is not necessary for the plaintiff to establish that he would have a good case if certain documents were produced.
Having said that, it would not be sufficient for the plaintiff to merely assert a cause of action without some foundation or basis for that cause of action. Mere suspicion would not suffice. The rule could not provide a mechanism for one person to force another person to provide documents without identifying the potential cause of action and the way in which such documents might inform the person's decision whether to pursue such a cause of action.

Determination

It is important to emphasise that the plaintiff does not suggest that the defendant is misusing, misappropriating or stealing money. The plaintiff suggests that the defendant has not been including the cash sales in the monthly BAS forms, such that the income has not been reported to the ATO as and when it was received.
In his affidavit of 7 July 2023, the plaintiff points out that one issue in the earlier proceedings was the conduct in connection with cash takings and resulting non-compliance with taxation obligations. On the plaintiff's case this has again arisen.
The plaintiff includes in his affidavit a schedule which sets out the cash sales for May 2020 to May 2023. As he points out, no sales were included in the bank records for the period November 2022 to May 2023. He describes this as highly unusual. He points out that only following a meeting about a possible sale on 23 May 2023 and a letter from his solicitors did the defendant make a number of cash deposits in respect of cash received as early as October 2022.
The total cash deposits made in that period May/June 2023 were $168,649. It follows that if these cash sales had been reported in the monthly BAS, there would have been an additional component for GST payable on a monthly basis.
The plaintiff has concerns that the defendant has not been accurately disclosing its income to the ATO and believes that production to him of the documents sought, including the Z tapes, may assist him in determining whether he should pursue an action to have the defendant wound up. Behind this submission must be the submission that the Z tapes might reveal more discrepancies in terms of cash sales.
The defendant's answer to this is to rely on the evidence introduced on the application as to the systems that it now has in place for dealing with the monies it receives, particularly following the earlier decision of Black J. As the defendant points out, his Honour was critical of both the plaintiff and Mr Bicher in the earlier judgment.
Subsequent to that judgment, the defendant has taken steps to improve its systems, in part to avoid a repeat of what appears to have been theft of significant amounts of cash over a number of years by its former Maître D.
The monthly information is collated by Ms Riccio who is the general manager of the restaurant. Prior to October 2018, the plaintiff's accounting firm was responsible for managing the finances of the business and the plaintiff was in charge of managing all the cash handling procedures.
As at October 2018, the defendant engaged an independent accountant with the result that the plaintiff's access to the company finances has been restricted to read-only access to management accounts, including the bank transactions.
Ms Riccio has taken over the reconciliation of the cash sales. There is now a written system recording the day's takings.
The defendant's financial statements are audited annually as part of that process. The auditor has copies of all the weekly banking balance sheets. There was an issue at the hearing as to whether the auditor had access to the Z tapes. Ms Riccio said that she provided access to the auditor and that he was given a password to the system. She was able to see herself that the auditor had access to the system, including the Z tapes, although she could not say how much time he had spent looking at the Z tapes.
It is certainly a coincidence that significant quantities of cash were banked in the period May to June 2023 only after the initial meeting regarding the potential sale of the business and then after the letter from the solicitors for the plaintiff enquiring as to the issues which arise in these proceedings. This might raise a doubt as to what was going on and why there had not been any cash banked during the period October 2022 to May 2023, but it is not asserted that any person was guilty of the type of conduct about which there was considerable comment in the earlier proceedings. The only claim which the plaintiff may wish to pursue is that the defendant be wound up on the grounds of the failure to comply with its taxation obligations.
It may be that cash sales should have been included as part of the monthly BAS but I accept the reason provided by Ms Riccio for the delay in banking the cash. I found her to be an impressive witness and no reason was suggested why I would doubt her evidence or her explanation for the delay in banking the cash.
Ms Riccio's evidence and explanation for the delay in banking cash was supported by the evidence of Mr Ross, the independent accountant.
He says that it is common for errors to be made in monthly returns, particularly when dealing with small businesses. He undertakes reconciliation of GST accounts after the end of every financial year to ensure that any discrepancies can be identified. In mid-July 2023 he received instructions to lodge amended BAS returns. This is because the defendant had deposited cash received from earlier sales into their bank account. He lodged the amended BAS returns.
An explanation has been provided and the BAS forms were amended and corrected to include the cash sales. The defendant's accountant says that this has resulted in an additional impost of $12,000, which I assume has been paid.
Any suggestion that the Court would entertain a winding up application on the basis that the defendant failed to properly disclose those cash sales as part of its monthly BAS, in circumstances in which the BAS were corrected before the end of the relevant financial year, must be rejected. It is plainly in the public interest that companies pay their taxes when due and that GST received is paid to the Commonwealth when due but the discrepancy in this matter (now resolved) is not of a level that could warrant the winding up of the company.
There is no evidence that would suggest that the defendant has been withholding large sums of cash or is not reporting such sales to the ATO, that is large sums in addition to the amounts that it banked in May and June 2023. Further, when the sum of $168,000 is included in the monthly accounts, the takings are generally consistent with other periods. This tends to negate any suggestion that there may be other cash sales not being recorded on a monthly basis.
In my view, all the plaintiff can point to is suspicion and, at least in part, the defendant's banking of the cash and disclosure to the ATO being responsive to his enquiries. Yet, as I have said, I accept Ms Riccio's evidence on the issue and it has not been suggested by or on behalf of the plaintiff that she has simply made up a story.
All of this leads to the conclusion that the plaintiff is not able to establish that which he is required to establish, being that it appears that he may have a claim for relief against the defendant.
I am not satisfied that he would have any claim for relief of the type he suggests. As was said in Morton at [25], the mere assertion of the case is insufficient. Even if there are some further discrepancies, it does not seem to me that that there would be any prospect of the application for winding up of the defendant being successful on the grounds suggested.
The applicant has not established all the matters necessary to obtain an order for preliminary discovery.
In the circumstances, the summons is dismissed.
I order the plaintiff to pay the defendant's costs.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 07 March 2024

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