Pinara Group Pty Ltd v Whiting

REASONS FOR JUDGMENT 1 The applicant in this proceeding is Pinara Group Pty Ltd ("Pinara") and the respondents are Mr John James Whiting, Mr Breck Donald Waterman and Moore Stephens Adelaide Pty Limited. At the time of the relevant events in 2007, the relevant company was Horwath SA Pty Ltd ("Horwath") and it was subsequently taken over or joined with Moore Stephens Adelaide Pty Limited. The parties referred to the third respondent as Horwath and I will do likewise. In 2007, Pinara engaged in the business of investing in and developing small to medium, privately owned enterprises. On 30 August 2007, Pinara made a capital contribution of $5.3 million in a company then known as Southern Cross Cooperage Pty Ltd ("SCC"), receiving in return 21,200,000 new shares in SCC for an undiscounted price of 25 cents per share. Mr Whiting was a director and the managing director of SCC from approximately 8 October 2003 to approximately 2 June 2008. Mr Waterman has been a director from October 2003 to the present and was, from on or around 5 December 2007 to 31 August 2010, the managing director of SCC. 2 In or around June 2007, SCC retained Horwath to provide professional accounting services in relation to the capital raising program by SCC which ultimately resulted in Pinara's investment in SCC. In this proceeding, Pinara claims damages against Messrs Whiting and Waterman pursuant to s 12GF of the Australian Securities and Investments Commission Act 2001 (Cth) ("ASIC Act") for contraventions of the misleading or deceptive conduct prohibition in s 12DA of that Act and s 1041I of the Corporations Act 2001 (Cth) for contraventions of the misleading or deceptive conduct prohibition in s 1041H of that Act in relation to a first Information Memorandum issued by SCC and dated 16 May 2007, a second Information Memorandum issued by SCC and dated 30 June 2007, a Horwath due diligence file and a document described as an electronic copy financial model. In relation to Mr Whiting, there is also an allegation of misleading or deceptive conduct by him at a meeting held on 7 August 2007. Pinara also alleges misleading or deceptive conduct by Messrs Whiting and Waterman by reason of the non-disclosure of certain matters. As against Horwath, Pinara alleges breaches of a duty of care and contraventions of s 12DA of the ASIC Act, s 1041H of the Corporations Act and s 52 of the Trade Practices Act 1974 (Cth) in relation to an independent accountant's report prepared by Horwath dated 5 July 2007 and included in the second Information Memorandum. 3 The application before the Court is an oral application supported by affidavit by Horwath against Pinara for the following orders: 1. The applicant, Pinara Group Pty Limited ('Pinara'), and its solicitors, Johnson Winter & Slattery ('JWS'), produce for inspection by the third respondent, Horwath, and its lawyers all documents, memoranda and records (in whatever form and whether or not stored electronically) which set out, record or evidence communications made between Pinara or any person on behalf of Pinara (including JWS) with Mr Brian Morris of Edwards Marshall, Chartered Accountant, 153 Flinders Street in the State of South Australia or any person on behalf of Mr Morris relating to: 1.1 the provision by Pinara and, or, JWS, to Mr Morris of the affidavit of Peter Colin Gregg sworn on 21 March 2013 and filed on or about that date and the copy of due diligence file prepared by Horwath disclosed in the affidavit of Mr Gregg; or 1.2 Mr Morris providing advice to Pinara, and or JWS relating to, or touching on the matters relating to the amendments to the pleadings, as shown in the mark up of the proposed amended statement of claim, which is exhibit 'BWCR1' to the affidavit of Benjamin William Charles Renfrey dated 26 June 2013. 4 Horwath brings this application pursuant to rr 1.32 and 20.35 of the Federal Court Rules 2011 (Cth) ("the Rules") which are in the following terms: 1.32 Court may make any order it considers appropriate in the interests of justice The Court may make any order that the Court considers appropriate in the interests of justice. Note: See sections 23 and 28 of the Act. 20.35 Production to Court (1) A party may apply to the Court for an order that another party produce to the Court a document in the party's control relating to an issue in the proceeding. (2) The Court may inspect a document to decide the validity of an objection to production, including a claim that the document is privileged from production. 5 Horwath submits that there is an arguable case that Pinara has breached the implied obligation on it not to use documents or material produced under compulsion by Mr Whiting for a collateral or alien purpose. The particular collateral or alien purpose alleged by Horwath is the use of documents or material to obtain an opinion on the potential liability of a non-party (i.e., Horwath) and the preparation of a statement of claim against a non-party. A breach of the implied obligation may be restrained by injunction, it may form the basis of a charge of contempt of court and it may even lead to a stay or dismissal of the proceeding based on the improper use on the ground that it is an abuse of process. 6 There were no detailed submissions by the parties on the Court's power to make the orders sought by Horwath. It may be doubted whether r 20.35 is a source of the power as, prior to the application, a possible breach of the implied undertaking was not an issue in the proceeding. The case was argued on the merits, and, as I have decided that the application must be dismissed, I will deal with it in that way. The principal area of debate was whether it is arguable that the use of the documents or material for the purpose identified by Horwath was a use in breach of the implied obligation. I have reached the conclusion that it was not. 7 The present application has the following unusual features. First, it is not an application claiming that there has been a breach, but rather, it is premised on the basis that it is arguable there has been a breach of the implied obligation. Secondly, it is not brought by the party who provided the documents or material but rather, by a company subsequently joined as a respondent to the proceeding. Thirdly, the party bringing the application has not clearly foreshadowed the relief it will seek should production support its case of a breach of the implied undertaking. 8 It is necessary at this point to say something about the relationship between the claims against Messrs Whiting and Waterman on the one hand, and the claims against Horwath on the other. 9 The second Information Memorandum included Horwath's independent accountant's report which was signed by Mr Peter C Gregg. Mr Gregg described Horwath's engagement as involving a review of SCC's financial projections (i.e., operating results, balance sheet and cash flow position) for the financial years ending 30 June 2008, 2009 and 2010 and as assisting SCC in establishing a due diligence file that potential investors could inspect if they so chose. Mr Gregg on behalf of Horwath expressed the opinion that the assumptions upon which the management forecasts in the second Information Memorandum were based were reasonable. 10 Pinara alleges that Horwath was not independent as it claimed in its report because, in addition to the above engagement, it had agreed with SCC that it would prepare a financial model which SCC would then use as a tool to justify to investors SCC's proposed business plan. 11 In short, Pinara alleges that Horwath should not have stated that it was independent and it also alleges that Horwath should not have expressed the opinion it did about the management forecasts. Such conduct involved (so Pinara alleges) a breach of its duty of care to Pinara and misleading or deceptive conduct in contravention of s 12DA of the ASIC Act, s 1041H of the Corporations Act and s 52 of the Trade Practices Act. 12 Part of the case against Mr Whiting and Mr Waterman is that they engaged in misleading or deceptive conduct in contravention of s 12DA of the ASIC Act and s 1041H of the Corporations Act in relation to the forecast earnings before interest and tax ("EBIT") and the financial projections in the second Information Memorandum. 13 The loss and damage claimed by Pinara against Horwath is the same as is claimed against Messrs Whiting and Waterman, being the loss suffered as a result of Pinara's capital investment in SCC. Pinara puts its case as a no transaction case, that is, it would not have invested in SCC but for the breaches and contraventions. 14 When the proceeding was commenced on 12 June 2012, Mr Whiting was the sole respondent and in his defence dated 11 July 2012 he pleaded, among other things, that he had reasonable grounds for making the EBIT representations and/or the second Information Memorandum financial projections at the time they were made and he gave the following particulars (at [61.4]): Particulars A. The EBIT Representations and the Second IM Financial Projections were prepared by Conigrave of SCC and Gregg of Horwath upon whose expertise the Respondent reasonably relied. B. The Respondent reviewed the EBIT Representations and Second IM Financial Projections and in light of his understanding of the business and its historical financial performance formed the view that the representations and projections were reasonable. 15 It is necessary at this point to say something about the course of the proceeding. 16 On 11 July 2012, Mr Whiting brought a cross-claim against Mr Waterman and Mr Graham John Peacock. Mr Whiting claimed that Mr Peacock had been since on or about 9 September 2004 and was currently an executive director of SCC. 17 By letter dated 12 November 2012 Pinara instructed Mr Brian Morris of Edwards Marshall to provide a report on certain issues in the proceeding. On 21 December 2012, Mr Morris provided his report. At about the same time the applicant filed and served a number of witness statements. 18 Mr Whiting filed and served his witness statements in March 2013, save and except for the expert report of Mr Hall which responded to the report of Mr Morris. That report is dated 8 April 2013. One of the witness statements filed and served by Mr Whiting was an affidavit of Mr Gregg sworn on 21 March 2013. Mr Gregg is a chartered accountant and he was the partner in charge of Horwath's Adelaide office and remained in that position for approximately seven years before Horwath "went public" in or around 2008. In his statement Mr Gregg details his involvement in Horwath's retainer by SCC. 19 On 2 May 2013, I made an order that Pinara file and serve any expert report in reply to the expert report filed by Mr Whiting on or before 28 June 2013. 20 By interlocutory application dated 26 June 2013 Pinara sought the following orders, relevantly: 1. That Breck Donald Waterman be joined as the Second Respondent to the proceedings pursuant to Rule 9.05 of the Federal Court Rules. 2. That Moore Stephens Adelaide Pty Ltd ACN 107 298 608 be joined as the Third Respondent to the proceedings pursuant to Rule 9.05 of the Federal Court Rules. 3. That the Applicant have leave to file and serve an Amended Statement of Claim substantially in the form of the document annexed to the affidavit of Benjamin William Charles Renfrey and marked "BWCR1". 21 Pinara's application was supported by an affidavit of its solicitor, Mr Renfrey, sworn on 25 June 2013. In that affidavit Mr Renfrey refers to Pinara's receipt of Mr Gregg's affidavit and to matters contained in Mr Gregg's affidavit. Mr Renfrey states: 10. As a result of the matters deposed to in Mr Gregg's affidavit and the affidavits of the Respondent and Mr Conigrave, the Applicant seeks to join Horwath to the proceedings as an additional Respondent to ensure that all issues in dispute in the proceedings are able to be heard and finally determined and to allow the determination of related disputes to avoid multiplicity of proceedings. The detailed facts on which the Applicant's cause of action against Horwath is based are set out in the draft Amended Statement of Claim at "BWCR1". 22 Mr Morris' expert report in reply to Mr Hall's report was filed and served on 28 June 2013. On 4 July 2013, I made the orders sought by Pinara for joinder and the filing of an amended statement of claim. The amended statement of claim was filed on that day. An expert's report in relation to Pinara's claim against Horwath was prepared by Mr Morris and is dated 22 July 2013. The documents referred to by Mr Morris in his report include Mr Gregg's affidavit, including annexures, and a copy of the due diligence file prepared by Horwath and disclosed in Mr Gregg's affidavit. Horwath filed and served a defence dated 5 September 2013. The defence includes the following statement: The third respondent, Moore Stephens Adelaide Pty Limited, formerly Horwath SA Pty Limited ('Horwath'), fully reserves, and does not waive, its rights in relation to the use which the applicant, Pinara Group Pty Limited ('Pinara'), has made of documents of Horwath which have been produced to and, or, inspected by Pinara, pursuant to orders made in the proceedings and, or, pursuant to the Federal Court Rules before the joinder of Horwath; and, in relation to the use which Pinara had made of the affidavit of Peter Colin Gregg sworn on 21 March 2013, including annexures, filed and served pursuant to orders made on 31 January and 12 March 2013, and, or, pursuant to the Federal Court Rules, before the joinder of Horwath. 23 In support of the application, Horwath relied on an affidavit sworn by a solicitor of the firm acting for it. On 1 August 2013, Horwath's solicitors wrote to Pinara's solicitors raising the issue of the use of Mr Gregg's affidavit and Horwath's due diligence file. On 29 August 2013, Pinara's solicitors responded in the following terms: Mr Gregg's affidavit and the due diligence file were provided to our client's expert, Mr Brian Morris of Edwards Marshall, for the purpose of: (a) preparing Mr Morris' report in reply to the expert report of Mr Jeff Hall filed by Mr Whiting; and (b) obtaining advice for our client on the merits of any claim against your client. 24 Further correspondence followed between the solicitors for the respective parties but it is not necessary for me to set out the details. 25 I turn now to the authorities which have considered whether the use of documents or material produced under compulsion in a proceeding for the purpose of joining a new party is a breach of the implied obligation not to use the documents or material for a collateral or alien purpose. The formulation of the relevant principle differs, but, for reasons I will give, on the narrowest formulation of the relevant principle this case does not involve a breach of the implied obligation. 26 In Wilden Pump & Engineering Company v Fusfeld [1985] FSR 581 Falconer J held that there was no breach of the implied undertaking merely because there was a different proceeding. The ratio decidendi of that case is fairly narrow because one proceeding in that case was brought solely to further the other proceeding. In Sybron Corporation v Barclays Bank Plc [1985] Ch 299 Scott J said that there was no breach of the implied obligation where a discovered document was used to join a new party or add a new cause of action. 27 In Allstate Life Insurance Co and Others v Australian and New Zealand Banking Group Ltd and Others (1995) 57 FCR 360 ("Allstate") Hill J considered whether the use of discovered materials by a respondent to bring a cross-claim against an applicant or another party not party to the main proceedings was a breach of the principle that discovered material may not be used for a collateral or ulterior purpose without the leave of the court or the consent of the party providing discovery. His Honour said (at 378 - 379): The cases make it clear, however, that it will not be a collateral or ulterior purpose to use documents disclosed on discovery to add new causes of action or parties to the action in which the documents have been disclosed: P Matthews and H M Malek, Discovery (1992), Ch 12, p 257; Wilden Pump Engineering Co v Fusfield [1985] FSR 581; Sybron Corporation v Barclays Bank Plc [1985] Ch 299. 28 A little later his Honour said (at 380): It seems to me to follow that, in principle, there should be no difference between the use of discovered materials by an applicant in adding new causes of action against a respondent, on the one hand, or indeed new respondents, and an application by a respondent to the main proceedings for leave to cross-claim against a party not a party to the main proceedings or for the bringing of a cross-claim against an applicant by a respondent, on the other. In my view the principle in Harman has no application to any of these cases. In all of them use of discovered material is a use for the purpose of the legal proceedings and involves no contempt. 29 In The Bell Group Limited (in liq) & Ors v Westpac Banking Corporation & Ors [2001] WASC 315 Owen J said (at [291]): I am satisfied, in the circumstances of this case, that the use of the discovered documents for the purpose of joining LDTC as a party for it to assert a cause of action is not a contravention of the implied undertaking. I should not be taken as saying that this will be the result in every case. Each case must be judged according to its own peculiar fact circumstances. The place which discovery holds in the litigation process and the integrity of that process must not be undermined. Nonetheless, in this case I think there is a close nexus between the relevant interests. The documents were not used for a collateral or improper purpose. 30 In Arnold Mann v Medical Defence Union Limited [1997] FCA 45 ("Mann") Ryan J expressed the view that the principle formulated by Hill J in Allstate was too broadly stated. His Honour said that whilst in considering the purpose(s) of the proceeding, a Court is not restricted to the pleadings at the time the document or material is used, it is not the case that any use for the purpose of adding a new cause of action or new party falls outside the scope of the implied obligation. His Honour considered Allstate to be a case of the kind where a document is used to frame a case of fraud in addition to a case of breach of contract where the fraud is said to have infected the same transaction. His Honour considered that the use of documents or material to add a new cause of action or a new party falls outside the implied obligation where the new cause of action or new claim bears a reasonable relation to the prosecution of the case sought to be made or the mounting of a defence to that case. 31 The High Court considered the implied obligation in Hearne v Street (2008) 235 CLR 125. The plurality of Hayne, Heydon and Crennan JJ said (at 154 - 155 [96]): Where one party to litigation is compelled, either by reason of a rule of court, or by reason of a specific order of the court, or otherwise, to disclose documents or information, the party obtaining the disclosure cannot, without the leave of the court, use it for any purpose other than that for which it was given unless it is received into evidence. (Citations omitted.) 32 The principle applies to documents inspected after discovery and witness statements served pursuant to a judicial direction. The obligation is one of law which arises from the circumstances in which the material was generated and received. The undertaking is one given to the Court. There is nothing voluntary about the undertaking. Because the undertaking is given to the Court, a breach of the undertaking constitutes a contempt. The undertaking is an important one which is evidenced by the fact that the dispensing power is not freely exercised and will only be exercised where special circumstances appear. 33 Horwath contended that Hearne v Street overruled or disapproved of the principle stated by Hill J in Allstate as modified by Ryan J in Mann. I do not think that that is correct. I do not think that the High Court was addressing the particular issue which was considered in those authorities. The statements of general principle by the High Court were not directed to the particular issue raised in this case. 34 This is not a case of adding a new cause of action against an existing party. In such cases, the law strongly favours the avoidance of a multiplicity of proceedings (s 22 of the Federal Court of Australia Act 1976 (Cth) and r 9.01 of the Rules) and the implied obligation does not apply to the addition of a new cause of action which bears a reasonable connection to existing causes of action. 35 This is a case of adding a new party where the document or material provided was provided by an existing party and one of the documents was a witness statement from the proposed new party (or its agent or employee) put forward by an existing party. The existing party did not appear on the proposed new party's application. A number of matters are relevant to the joinder of parties, but one important matter is that, where possible, joinder will be permitted so that all disputes in relation to one subject matter are resolved at the same time (r 9.05 to the Rules refer to a related dispute and, again, of avoiding a multiplicity of proceedings). 36 In this case, there is a reasonable connection between Pinara's claim against Mr Whiting and Mr Waterman, on the one hand, and Horwath on the other. Mr Whiting himself pleads reasonable reliance on Horwath and has foreshadowed reliance on Mr Gregg's affidavit. As is shown above, there is an overlap between the claims against Mr Whiting and Mr Waterman, on the one hand, and Horwath on the other, as far as the management forecasts, including of the EBIT, are concerned. The same loss is claimed in both cases. 37 I will dismiss the application because I do not think that there is an arguable case of a breach of the implied obligation. I do not think it arguable that the implied obligation applied to the use allegedly made of the documents or material by Pinara. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Besanko.