Plaintiff v Defendants

2 The plaintiff, John Kallitsas, is a shareholder in Emerson Finance Pty Ltd, the first defendant in this proceeding (the company). He was a director of the company until removed on 31 October 2002. The second, third and fourth defendants are the directors of the company and shareholders. In October 2002 each of the plaintiff and second, third and fourth defendants held one $1 share in the capital of the company.

3 The company carries on the business of providing financial services for the management of motor vehicle fleets. In August 2002, the plaintiff wrote to his fellow directors advising them that he had decided to leave the company and pursue other business opportunities. The plaintiff gave a transfer notice under cl 25 of the constitution of the company giving notice to his fellow directors of his desire to transfer his share for $130,000. Negotiations over his decision to leave the company and dispose of his share did not go smoothly. The plaintiff sought to make his departure conditional on the purchase of his share at the asking price. His fellow shareholders declined the offer. At a meeting of directors on 14 October 2002, the plaintiff sought copies of financial reports of the company but his request was refused by the board on the grounds that his fellow directors believed that he had become or was likely to become a competitor. On 31 October 2002, the board removed the plaintiff as a director effective from that date.

4 The plaintiff continued to seek financial information and the board continued to refuse his demands. In 2004, however, the company through its solicitors, offered the plaintiff access to the company's 2003 accounts subject to his signing a confidentiality undertaking which he did on 21 March 2005. He was given access to the 2003 and 2004 accounts. It seems likely that the offer and access to those accounts was stimulated, at least in part, by a complaint made by the plaintiff to the Australian Securities and Investments Commission. On 10 May 2005 the plaintiff wrote to the third defendant thanking him for meeting with him on 21 March 2005 and for the financial statements that had been provided on that occasion. The plaintiff's letter continued:

I must reiterate that the whole intention of me wanting to obtain a copy of the financial statements is purely from a shareholder's perspective to evaluate the value of my 25% shareholding with the company and may I again allay your concerns that it is not for any competitive reasons.

5 In September 2005, the plaintiff sought access to the 2005 accounts. This followed a resolution of the board to offer an additional 999 $1 shares to each of the four shareholders, including the plaintiff. The plaintiff accepted the offer.

6 On 1 November 2005, the director's passed the resolution to offer each present and former directors 250 new shares for each year or part of a year of service with the company. That resolution, if implemented, would almost certainly have had the effect of diluting the plaintiff's shareholding in the company. The plaintiff responded to the offer on 15 December 2005 by rejecting the offer, describing it as oppressive.

7 On 22 December 2005, the plaintiff's solicitor, Mr Mier, wrote to the company enclosing a draft "Originating Process" which was to be issued forthwith "if the issues which exist between our clients on the one hand and Emerson Finance Pty Ltd and the named proposed defendants on the other, are not resolved to our client's satisfaction and with alacrity". A mediation was proposed. The "issues" were not defined.

8 The draft Originating Process was an application under ss 232, 233, 461 and 472 of the Corporations Act 2001, in which the plaintiff sought orders winding up the company on the ground "that the conduct of its affairs is contrary to the interests of the members as a whole or oppressive to, unfairly prejudicial to, or unfairly discriminatory against, the plaintiff as a member of [the company]". In the alternative, the plaintiff sought a winding up order under s 461 of the Corporations Act on the ground that the directors of the company had acted in their own interests and in a manner unfair or unjust to the plaintiff as a member. The plaintiff also sought orders for the appointment of a receiver or receiver and manager and that the continuing shareholders purchase his shares at fair value.

9 The defendants agreed to mediate the dispute which, as best I can discern from the correspondence, revolved around the plaintiff's desire to sell his shares to the other shareholders and their reluctance to pay his price. There was also the plaintiff's demand for financial information which was, by this time, the 2005 accounts. This information was said to be required to enable the plaintiff to estimate the value of his shareholding. There was also the plaintiff's complaint about the proposed new share offer.

10 On 1 February 2006, the defendants' solicitors sought, amongst other things, clarification of the "issues" for the purpose of the proposed mediation. Mr Mier responded on 24 February 2006 stating that, before attending mediation, the plaintiff would require access to "the complete books of account of Emerson Finance Pty Ltd". Insofar as the response descended to particularise the "dispute" Mr Mier stated:

Our client's objective is that once the proper value of his shares has been established, that his shares be purchased for fair value, that he be remunerated for his contribution to the company in the sum of $100,000 (no salary was paid to him for two years), and that a complete, final and "clean" disentanglement of our respective client's affairs be accomplished.

11 In my view, the plaintiff's real purpose in threatening legal proceedings and proposing mediation was to create a favourable environment in which to negotiate with the other shareholders in the company for the purchase of his shares at an acceptable price and for monetary compensation for unpaid work. He sought access to "the complete books of account" of the company to assist him achieve that objective.

12 On 6 July 2006, Mr Mier wrote to the defendants' solicitors listing financial records sought by the plaintiff for the purpose of the proposed mediation. The records sought were for the period 1 January 2001 to that date. They were: income tax returns; BAS statements; payroll records; details of fees paid to current directors; the general ledgers; and all contracts for lease vehicles. The letter made it plain that the records were required for the purpose of mediation. The defendants refused to provide the information. On 18 September 2006, Mr Miers threatened "pre-issue discovery proceedings". On 22 September 2006, the defendants' attitude softened and their solicitors offered financial information, presumably that which had been sought by the plaintiff, subject to a simple confidentiality agreement in the form attached to the letter.[1]

13 On 13 October 2006, Ms Matsushita, of the defendants' solicitors, and Mr Mier spoke about the terms of the proposed confidentiality agreement. Mr Mier said that he was unhappy with the word "utilise" in the draft confidentiality agreement and that more appropriate words in substitution were "utilise... to the detriment of the company" or "in the marketplace". He said that his client might be satisfied with an amendment along those lines. Ms Matsushita asked if Mr Mier would like her to obtain instructions but he replied, No. Mr Mier asked if Ms Matsushita had instructions to accept service. Although she confirmed her instructions to accept service on 16 October 2006, this proceeding was not commenced until 27 November 2006.

14 There arose an issue before me as to whether an affidavit sworn by Mr Mier on 13 December 2006 in response to an affidavit of Ms Matsushita sworn 11 December 2006 was before the master at the time of making the order for costs. The significance of the affidavits is that they both give an account of the conversation between Ms Matsushita and Mr Mier on 13 October 2006. The defendants rely upon the account given by Ms Matsushita to support the master's decision on costs.

15 I do not regard Mr Mier's affidavit as contradicting the evidence of Ms Matsushita in any material respect. Mr Mier rejected any further negotiation and confirmed his client's resolve to commence this proceeding. I have taken account of Mr Mier's affidavit in reaching my decision in this matter on the assumption that it was before the master at the relevant time.

16 In his Originating Motion the plaintiff recites the facts leading to his removal as a director; the issue of new shares; the failure of the company to provide him with financial accounts for the years ending 30 June 2005 and 30 June 2006; that he had reasonable cause to believe that he had or may have a claim against the defendants for oppression; his claim for a share of profits in the company; and a claim for money had and received by one or more of the directors. The application was made under r 32.05 which establishes a discovery procedure to ascertain whether the applicant has a good cause of action against a defendant or defendants. Rule 32.05 provides that:

(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 the applicant has ascertained;

(b) after making all reasonable inquiries, the applicant has not sufficient information to enable the applicant to decide 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 in that person's possession 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 the applicant to make 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).[2]

17 The documents sought by the plaintiff in this proceeding are set out in Schedule A to the Originating Motion. They are: profit and loss statements for the financial years ending 30 June 2005 and 30 June 2006; balance sheets for each of the financial years ending 30 June 2005 and 30 June 2006; minutes of meetings of directors of the company for each of the calendar years 2003, 2004, 2005 and 2006; minutes of meetings of shareholders of the company for each of the calendar years 2003, 2004, 2005 and 2006; BAS statements from 1 July 2004; income tax returns for the years ended 30 June 2005 and 30 June 2006; payroll records from 14 September 2001; and details of fees paid to directors from 14 September 2001. There is a significant, but not complete, overlap between the documents sought by the plaintiff in his Originating Motion and those sought by Mr Mier in his letter of 6 July 2006.

18 In his affidavit in support of the Originating Motion, the plaintiff said:

My lawyers and I have been unable to determine what relief I can best pursue against one or other of the defendants given the absence of a disclosure of any financial statements showing the financial position of Emerson Finance. I could possibly seek orders from this honourable court based on oppression of a minority shareholder. Then again, both my lawyers and I are conscious of the fact that my shareholding was, some years ago, worth something in the region of $130,000. What their present value is I do not know. Furthermore, an alternative claim which might be open to me would be to seek a taking of accounts or to pursue the company and/or its directors for moneys had and received - being moneys which should have been, properly, paid across to me.

19 The Summons on Originating Motion, also issued by the plaintiff on 27 November 2006, was adjourned on four occasions, twice by consent, while the parties negotiated over the production of material and arranged for inspection which took place on about 24 April 2007. By that time the defendants had produced the financial information set out in the schedule to a Deed of Confidentiality apparently executed by the plaintiff and his accountant in advance of inspection. The schedule to the Deed of Confidentiality conforms in broad terms with Schedule A to the Originating Motion.

20 Following inspection, the plaintiff sought clarification of certain issues arising out of the inspection and prepared questions which were sent to the defendants' solicitors. Answers were provided on 20 September 2007. The matter came back before the master on 25 September 2007. On the previous day, Ms Miranda Ball, of the defendants solicitors, swore an affidavit setting out the history of the proceeding, the negotiations, the disclosure that had taken place and the adjournments. The apparent purpose of the affidavit was to oppose any further adjournment. On 25 September 2007, the plaintiff sought a further adjournment but his application was refused. The master struck out the proceeding with a right of reinstatement within a month upon five days notice. The right of reinstatement was to enable the plaintiff and his accountant an opportunity to reflect on the adequacy of the material they had received. No application was made to reinstate the proceeding.

21 The master stood over the question of costs until 10 December 2007 with directions given for the filing of affidavits. On 10 December 2007, the matter was further adjourned and on 13 November 2007 the master made the following costs order:

1. The Plaintiff pay the Defendants' costs of the proceeding, including reserved costs.
2. The Plaintiff's costs of the proceeding (excluding any costs payable by him pursuant to paragraph 1 of these orders) up to and including the inspection of documents carried out by him on or about 24 April 2007, be the Plaintiff's costs in any proceeding issued by him against the First Defendant and any other necessary parties and be reserved to the trial Judge of that proceeding.
3. paragraph 1 of these orders be stayed until 8 February 2008 or any further order of a Judge or Master of this Court.

22 Mr Mier has deposed that "the master's reasons, short in compass, were that the application need not have been issued as the defendants, so the master determined, had been prepared to give access to the documents they eventually delivered up post the issuance of the application in this proceeding". The plaintiff submits that the master made a mistake of fact, material considerations were not taken into account and irrelevant matters guided her decision. The plaintiff's complaint as to costs seems to come down to this: that the master was wrong to conclude that the defendants had been prepared to give access to the documents they eventually delivered when this proceeding was commenced. The plaintiff submits that the usual order for costs in a proceeding such as this is an order that the costs of discovery are costs in the substantive proceeding to be commenced by the party seeking the documents. I very much doubt that any such orders are usual, particularly where no substantive proceeding had been commenced. I note that the plaintiff proffered an undertaking to commence a proceeding in which the discovery costs could be dealt with should his application for leave be successful.

23 In Che Eun Schmidt v Che Sul Won and Ors[3] the Court of Appeal, when making an order for costs on an application under r 32.05 spoke of "the customary orders for costs and expenses in favour of the respondents on an application of this kind and in respect of their making discovery and obtaining inspection pursuant to this order, in accordance with r 32.11(1)". If and when a proceeding is commenced in which the plaintiff relies upon the fruits of pre-trial discovery, the court may have an opportunity to compensate the plaintiff in appropriate circumstances. In this case the master confined the plaintiff's opportunity to recover costs in a subsequent proceeding to the portion of his costs up to 24 April 2007 which was the date of inspection. In so doing, the master must be taken to have intended to deny the plaintiff any opportunity to later recover costs paid to the defendants. It was not submitted by the plaintiff that the master should not have made an order of this kind, distinguishing between costs which may later be recovered at the discretion of a Judge in a subsequent proceeding and costs which may not be so recovered. The plaintiff's complaint, as I have said, is that no order for costs should have been made against him.

24 The requirement for leave to appeal on the question of costs was discussed by Batt JA (with whom Charles and Callaway JJA agreed) in Etna and Anor v Arif and Ors[4] where he said:

With regard to the discretion to grant leave, Callaway, J.A. in Hanlon v. Brookes at 1632 observed:

It is almost invariably the case that the judge at first instance is better placed to deal with the costs after a long trial and counsel seeking leave ordinarily has a difficult task. The test is not whether we should have exercised the discretion in the same way as his Honour but whether there was or were a ground or grounds on which he could reasonably do so.

In Wentworth v. Rogers (No.3) (1986) 6 N.S.W.L.R. 642, which concerned an application for leave to appeal against an order for costs, Kirby, P. (with whom Glass, J.A. agreed) stated at 644 that the principles requiring leave to appeal from interlocutory decisions applied with special force where the decision in question was one of practice and procedure, referring to the well-known statement of Jordan, C.J. in Re The Will of F.B. Gilbert (Deceased) (1946) 46 S.R.(N.S.W.) 318 at 323 and to subsequent developments. His Honour further stated that the New South Wales provision corresponding in substance to s.17A(1)(b) amounted to a legislative recognition of those considerations. He continued:

Accordingly, it is normally necessary for a claimant for such leave to show something more than that the appeal court would, if exercising its discretion afresh, have come to a conclusion different to that reached by the trial judge. Some error of principle in the exercise of the discretion, a consideration of irrelevant matters or some other manifest mistake is needed to take the case out of the ordinary situation in which, wherever a discretion is to be exercised, minds may differ on the result.

One of the purposes of this provision is to ensure that costs questions, important though they frequently are to litigants not only cannot be further litigated by a party as of right on appeal, but also may only be allowed to be further litigated by appeal if the Court of Appeal thinks there is some good reason, over and above the Court's own opinion of what would have been the best costs order in the particular circumstances, for doing so. In a great many cases, including the present, costs are in the discretion of the Court; they also seem to me to fall within the category of matters of practice and procedure.

25 In this application the plaintiff must show something more than that this court would have come to a different conclusion to the master. The plaintiff must demonstrate some error of principle in the exercise of discretion or the consideration of irrelevant matters or some other manifest mistake. Assuming the record of the master's reasons to be correct and complete, it seems to me that the master was addressing the failure of the plaintiff to have made all reasonable enquiries to obtain the desired material before commencing this proceeding.

26 Rule 32.05(b) requires an applicant to have made all reasonable inquiries. This rule prescribes an objective assessment of whether an applicant has reasonably exhausted alternative sources of information and having done so demonstrates that they have insufficient information to enable a decision to be made to commence a proceeding. The applicant must disclose what information they already have to make a decision whether to commence a proceeding in court and identify what information is lacking. These requirements were summarised by White J in Morton v Nylex Ltd[5] as follows:

The onus is on the plaintiffs to make it appear to the Court that, having made reasonable inquiries, they are unable to obtain sufficient information to decide whether or not to commence proceedings against Nylex. The third requirement of r 5.3(1)(a) requires an objective assessment of the information already possessed by the plaintiffs to determine whether that information is sufficient for such a decision to be made. The question is whether the applicant has insufficient information to be able to decide whether to institute proceedings; not merely to establish a cause of action. Hence, an applicant may be entitled to preliminary discovery of documents relevant to available defences, or the extent of apprehended breaches, or the likely quantum of damages, as well as of documents which may establish whether there is a cause of action. However, unless the applicant is lacking something reasonably necessary to make a decision whether to institute proceedings, he or she is not entitled to preliminary discovery. An applicant must disclose what information he or she already has relevant to making such a decision, and identify what information is lacking. Preliminary discovery cannot be used to build up a case which an applicant has already decided, or could decide, to bring (Alphapharm Pty Ltd v Eli Lilly Australia Pty Ltd (Lindgren J, Federal Court of Australia, 24 May 1996; St George Bank Ltd v Rabo Australia LtdGlencore International AG v Selwyn Mines Ltd (recs and mgrs apptd) [2005] FCA 801; (2005) 223 ALR 238 at 241 [15]; Matrix Film Investment One Pty Ltd v Alameda Films LLC [2006] FCA 591 at [15]-[19], [25]).

27 Views may differ about the willingness of the defendants to provide the financial information under a suitable confidentiality agreement and the reasonableness of the plaintiff when refusing to continue to negotiate in October 2006, but the fact remains that the defendants were prepared to make available to the plaintiff the documents sought by him at that time subject to his agreement to maintain confidentiality. In my opinion, it was open to the master to decide that this proceeding was unnecessary. I would go further, however, and add that, in my view, the documents sought by the plaintiff were not sought by him for the purpose of deciding whether he had the right to obtain the relief in the draft Originating Process but were sought to assist his negotiations with the other shareholders over the value of his shares. It is true that some of the financial information may assist the plaintiff to particularise his money claims, but I do not consider his demand for the particular documents sought by him was to enable him to decide whether to commence proceedings to obtain the relief foreshadowed in his draft Originating Process. By late 2005 the plaintiff was in a position to articulate his substantive claims against the defendants. He had "sufficient information to enable him to decide whether to commence a proceeding in the court to obtain that relief". He may not have been in a position to quantify his claim for money had and received, but he knew enough to make the claims and commence the proceeding.

28 For the foregoing reasons I am of the opinion that the plaintiff has not demonstrated any good reason for interfering with the decision below. No error of principle has been identified and there is no manifest error or mistake of fact.

[1] The proposed confidentiality agreement was in the following terms: I, John Kallitsas ... hereby covenant and agree not to disclose, utilise or make available any financial information in respect of Emerson Finance Pty Ltd (company) provided to me as a shareholder of the company to any person, organisation or third party.

[3] [1997] VSC 24.

[4] [1999] VSCA 99; [1999] 2 VR 353.

[5] [2007] NSWSC 562, [33].