Plaintiff v Defendants

Plaintiff v Defendants - [2014] VSC 202 - VSC 2014 case summary — Zoe

[25]

Para 6(a) and para 6(c) pose an objective test, the opening words 'there is' in each paragraph signifying 'there exists'; but the 'insufficiency test' of para 6(b) has both subjective and objective aspects.
Although I need not explore the subjective aspect fully, it seems clear that if the evidence went so far as to show that a particular applicant was already able to decide to commence a proceeding by, for example, showing that the applicant had in fact decided to do so, para 6b would not be satisfied even though the information available satisfied the objective aspect of the insufficiency test referred to below.
The fact that a particular applicant genuinely feels unable, because of a lack of information, to decide to commence a proceeding does not, without more, satisfy para 6(b); the objective aspect of the paragraph requires it to be shown as an objective fact that the applicant lacks 'sufficient information to enable a decision to be made whether to commence a proceeding'.
In my view, the objective aspect of para 6(b) invokes a notion of 'reasonable sufficiency', the question raised being whether it is reasonable that the applicant for an order be required to take its decision without having the information to become available from inspection of the document or documents of which discovery is sought.
If the insufficiency test is satisfied, a second question will arise, namely, whether the Court's discretion should be exercised in favour of the making of an order.
The questions posed by [the rule] and referred to above are to be answered in the context of an adversary system of forensic contest in which a proposed respondent is ordinarily entitled to withhold its evidence, certainly prior to the commencement of proceedings.
The questions are also to be answered in the light of the nature of the 'cause of action' contemplated and the range of information potentially available in respect of a cause of action of that kind.
Contrary to a submission of Eli Lilly, in my opinion r6 is not necessarily rendered unavailable by the fact that the applicant already has available evidence establishing a prima facie case for the granting of relief. This is made clear by the reference in para(a) to the existence of 'reasonable cause to believe that the applicant has ... the right to obtain relief ...'. It would impose an artificial constraint on r6, not supported by its terms or purpose, to exclude, a priori, all cases in which the insufficiency of the information possessed by the applicant to enable a decision to be made whether to litigate is due to a matter of 'defence' which would defeat the prima facie case.
Rule 6 does not provide a means by which an applicant will be enabled to have available to it every document which would assist it in deciding whether to litigate. If that were the intention, para (a) and para (c) would stand alone and the additional condition set out in para(b) would not be necessary.
Para6 (b) contemplates that after making all reasonable inquiries, the applicant has come up against a problem, namely, that it is lacking a piece of information or pieces of information reasonably necessary to enable it to decide whether to commence a proceeding.

[30]

SOL's [the prospective defendant's] argument on this point is contingent on my finding that the AFL had made up its mind to commence proceedings. I do not find this to be the case. Although there are strong intentions expressed by the AFL in the correspondence, a conclusion that it still lacked sufficient information of the kind contemplated by the rule, namely, information confirming a potential cause of action is open to the court. If I were to make a finding that the AFL had made a subjective decision to commence proceedings on the evidence, one would have to ask who, and for what?

SOL's approach to this aspect of the AFL's application focused on key phrases and assertions in the correspondence. However, in my view, the kinds of benefits contemplated by the rule require the court to view all of the evidence rather than to clinically dissect material, for example, phrases in letters. Sometimes statements, even postures, are made in exchanges that warrant closer analysis and scrutiny before the boom of the writ comes down.

As stated by Gillard J in United Energy Limited v Energy Risk Management Pty Ltd,[12] a robust legal practitioner may consider that there is sufficient evidence to justify the bringing of a proceeding. On the other hand, nobody could possibly criticise a cautious lawyer seeking further information before making the decision.[13]

Similarly in FAI Home Security Pty Ltd v Price,[14] a conservative approach on the part of an applicant was approved by Byrne J, the gist of the rule is to enable a prospective plaintiff to obtain material sufficient to make a decision to commence a proceeding. Counsel for FAI maintained that, for a conservative litigant, the material presently available to it was not sufficient for this purpose. In the circumstances of this case I agree.[15]

The AFL is arguably seeking to take a cautious and conservative, even prudent, course. Having regard to the policy underlying the rule, that there may be a benefit, the court should not condemn the applicant for taking such an approach.

[36]

[29] Often in the past a proceeding was instituted in the expectation that the plaintiff had a good cause of action postponing a final decision as to the merits until all the discovery and inspection steps were completed.

[30] If it turned out upon a proper consideration of all relevant documents that the plaintiff did not have a cause of action, it causes, inter alia, much anguish, soul searching and results in wasted legal costs and time. It does nothing for the administration of justice that the party has to go down that path to determine whether he has a good cause of action.

[31] The object of the rule is to avoid that undesirable situation occurring and to enable a prospective plaintiff to see the relevant documents which the prospective defendant has or has had in his possession in order to make an informed decision as to whether he has a good cause of action.

[32] It is clear from the wording of the rule that the applicant does not have to show that he does have a good cause of action before he can obtain his order, and indeed to require him to do so would defeat the very object of the rule.

[33] On the other hand, an applicant would have to show more than a mere hunch, a hope or a suspicion that he may have a good cause of action. The fact that the end result of a successful application is a fishing expedition for evidence is not a ground for refusing relief. See Dunning v United Liverpool Hospitals (1973) 1 W.L.R. 586, 591 per Stamp LJ and Clarkson v DPP [1990] VicRp 65; (1990) VR 745, 758 per Murphy J.

[35] The prime object of the rule is to enable access to documents to enable an informed decision to be made. The fact that in the process the applicant gathers evidence also, is not a ground for refusing relief; it is an inevitable by-product of the procedure.

[36] The rule sets out what matters have to be considered and established on an application and places the onus on the applicant to establish the bases for an order. However, in my opinion the power should be exercised to give effect to the clear purpose of the provision which is to advance the administration of justice, namely, that a prospective plaintiff should be able to make an informed decision whether to proceed or not upon proper material before issuing his proceeding.

[37] By providing this facility to assist the decision making process, speculative or baseless claims can be avoided with a consequential saving in cost and time.

[38] These conclusions lead to a conclusion that the rule should be liberally applied.

...

[43] The rule is to enable a prospective plaintiff to make an informed decision. If an order is not made the only course open to the prospective plaintiff is to issue the proceeding and then put in operation procedures available to gain access to the other party's documents. This may involve an application for an interlocutory injunction in which a subpoena is issued to produce the documents at court on the application. Another course is the discovery process during the interlocutory steps. The practical result will be inspection later rather than sooner and the incurring of legal costs. If a decision is then made to discontinue, costs will have been unnecessarily incurred and time wasted, factors which reflect upon the administration of justice. The pragmatic approach supports a sooner rather than a later decision and an approach by the court to readily facilitate the making of an informed decision by a prospective plaintiff on proper materials at an early stage.

(Citations in original)

[47]

The purpose of this letter is to advise that, based on instructions which we have received from Glezer and documents we have obtained from ASIC, we believe that the acquisition of Glezer's shares in Deals by Arbitrage Holdings Pty Ltd (AH) owned by Adam Schwab (Schwab) and the National Victorian Conglomerte Pty Ltd (NVC), owned by Jeremy Same (Same) was procured by the fraudulent misrepresentations of Schwab and same. In particular, we refer to the representations given by Schwab and Same to Glezer, through a valuer, Peter Colliver, in respect of the on-going involvement of Mark Hoenig (Hoenig) with Deals

The documents we have obtained from ASIC demonstrate that there was a transfer of shares by Schwab and Same, through their companies, to Hoenig through his company Zaycorp Pty Ltd (Zaycorp) on 30 April 2013, one day after the purported transfer of shares by Glezer to AH and NVC. It is clear that the statements made by Schwab and Same regarding the on-going involvement of Hoenigwere deliberately false and were made in order to reduce the value of Glezer's shares and obtain a maximum possible benefit for themselves. Our client's view in this regard is strengthened by the fact that Glezer sold at a value of approximately $15 the shares that were sold to Zaycorp a day later for substantially more, and our client believes for about double that price, and a selective buy-back of Borenstein's shares was undertaken by Deals a few weeks later at $50 per share.

As directors of Deals, it is well established law that Schwab and Same at all times owed fiduciary duties to Glezer as a shareholder both during the negotiation and share sale process. They have breached their duties in a most profound way by deliberately making false statements and offering up a valuation which is based, in part, on false information. To make matters worse, the gains which were realised by operation of the false statements were realised by Schwab and Same themselves.

We believe the share sale agreement should be set aside and Glezer reinstated as a shareholder. We also believe that there is strong evidence to suggest that Schwab and Same have breached their duties as directors and we are taking advice as to whether to report this conduct to ASIC. In order to consider Glezer's position further we intend to make an application for pre-trial discovery (draft Orders attached) as a pre-cursor to commencing proceedings against Schwab Same Hoenig and their respective companies and Deals (prospective defendants). The proceedings will seek to have the share sale set aside and will seek declaratory relief against some or all of the prospective defendants together with damages.

The attached document sets out the categories of discovery which will be sought at the application. In order to avoid this application being made, could you send us the documents in electronic form, or alternatively provide us with copies of such documents, by no later than 4 pm on Friday 29 November 2013.

We look forward to receipt of the documents.

[49]

We refer to the above matter and to our email letter to you dated 15 November 2013 (first letter) together with your response dated 29 November 2013. In the passages of our first letter which you have reproduced in your response, you have conveniently omitted words from the first main paragraph. When read without any such omission, you will note that the paragraph states as follows:

The purpose of this letter is to advise that, based on Instructions which we have received from Glezer, we believe that the acquisition of Glezer's shares in Dea/s.com.au Pty Ltd (Deals) by Arbitrage Holdings Pty Ltd (AH), owned by Adam Schwab (Schwab), and National Victorian Conglomerate Pty Ltd (NVC), owned by Jeremy Same (Same), was procured by the fraudulent misrepresentations of Schwab and Same.

The remainder of our first letter then sets out the basis on which those allegations are made based on the materials we have to hand. We do not pretend to have a full set of documents or a full set of facts which puts us in the position to decide: (a) whether to issue proceedings; (b) on what causes of action; or (c) if so against whom. We intend to take the necessary steps to obtain the 'complete picture' before Issuing a writ. There are approximately 10-12 parties which could possibly be the subject of litigation and we need the documents which we have asked for in order to narrow the possible scope of the parties and the dispute. This approach fits neatly within the scope of rule 32.05 of the Supreme Court (General Civil Procedure) Rules 2005: see, for example, United Energy Ltd v Energy Risk Management Pty Ltd [1998] VSC 133. Our client is entitled to a beneficial construction of Rule 32.05; that is, one which permits our client to obtain information necessary to allege with proper particulars, the nature of the dispute against the chosen Defendants. This careful approach conformant with the overarching obligations of this firm, an our client, pursuant to the Civil Procedure Act 2010.

Therefore, with respect, your bare denial of the serious matters in our first letter and refusal to provide any cooperation is surprising in the circumstances. If your clients have good grounds to deny the contents of our first letter, we invite you to provide us with documents and/or an explanation which might help us understand the basis of the denial.

[60]

[2] The purpose of this letter is to advise that, based on instructions which we have received from Glezer and documents we have obtained from ASIC we believe that the acquisition of Glezer 's shares in Deals by ... was procured by the fraudulent misrepresentations of Schwab and Same. In particular, we refer to the representations given by Schwab and Same to Glezer, through a valuer, Peter Colliver, in respect of the on-going involvement of Mark Hoenig (Hoenig) with Deals.

[3] ... It is clear that the statements made by Schwab and Same regarding the on-going involvement of Hoenig were deliberately false and were made in order to reduce the value of Glezer's shares and obtain a maximum possible benefit for themselves. Our client's view in this regard is strengthened by the fact that Glezer sold at a value of approximately $15, the shares were sold to Zaycorp a day later for substantially more, and our client believes for about double that price, and a selective buy-back of

Borenstein's shares was undertaken by Deals a few weeks later at $50 per share.

[4] As directors of Deals, it is well established law that Schwab and Same at all times owed fiduciary duties to Glezer as a shareholder both during the negotiation and shares sale process. They have breached their duties in the most profound way by deliberately making false statements and offering up a valuation which is based, in part, on false information. To make matters worse, the gains which were realised by operation of the false statements were realised by Schwab and Same themselves.

[5] We believe that the share sale agreement should be set aside and Glezer reinstated as a shareholder. ... In order to consider Glezer 's position further, we intend to make an application for pre-trial discovery (draft Orders attached) as a pre-cursor to commencing proceedings against Schwab, Same, Hoenig. their respective companies and Deals (prospective defendants). The proceedings will seek to have the share sale set aside and will seek declaratory relief against some or all of the prospective defendants together with damages. (Emphasis added).

At a glance

Court

Decision date

Before

Source

Judgment (99 paragraphs)

Parties

Legislation Cited (5)

Cases Cited (4)