This is an application by the plaintiffs to set aside notices to produce and subpoenas which have been issued in connection with a cross-claim in the proceedings.
The cross-claim is brought by the first defendant, Mr Noble, against three cross-defendants. The first cross-defendant (who is also the third plaintiff) is Secure Logic Pte Ltd, a proprietary company incorporated in Singapore. I will refer to this company as SL Singapore. The third cross-defendant (who is also the first plaintiff) is Secure Logic Pty Ltd, a proprietary company incorporated in Australia. I will refer to this company as SL Australia. SL Singapore is a 100 per cent subsidiary of SL Australia. The second cross-defendant is Mr Santosh Devaraj. He is a director of SL Australia and SL Singapore. He is also a director of a number of other companies which are directly or indirectly related corporations of SL Australia.
The cross-claim arises out of negotiations which took place between Mr Noble and Mr Devaraj, starting in January 2015, with a view to Mr Noble being employed by SL Singapore. A written contract of employment between SL Singapore and Mr Noble was apparently entered into in June 2015 with effect from 1 July 2015. Mr Noble relies upon terms of the employment contract under which he claims to have been entitled within the first three months of the contract to receive a 6 per cent shareholding in SL Singapore. He claims that the contract also entitled him to a further 6 per cent shareholding in SL Singapore, subject to compliance with various key performance indicators. He also claims that the contract entitled him to exchange shares in SL Singapore so issued to him for an equal number of shares in SL Australia. Mr Noble's case is that these terms were not complied with; the employment contract was repudiated; and that in June 2016 he ceased working for SL Singapore and accepted the repudiation, thereby bringing the employment contract to an end. He claims a number of heads of damage but the damages claimed include the loss of the 6 per cent shareholding in SL Singapore, the loss of the opportunity to receive the further 6 per cent shareholding and the loss of the opportunity to trade shares in SL Singapore for shares in SL Australia.
Mr Noble intends for the purposes of quantifying the damages claimed under these heads to lead evidence from an expert accountant, Mr Ross Mottershead, concerning the value of shares in SL Singapore and SL Australia at the relevant time.
There have been extensive negotiations between the parties concerning the production of documents. Information was provided by the plaintiffs' solicitor, Mr Lacey, in correspondence in July 2017 concerning the affairs of SL Australia, SL Singapore and various other related companies. Mr Mottershead in July 2017 provided an opinion to Mr Noble's instructing solicitors in the following terms:
I have reviewed the correspondence from Mr Andrew Lacey, the plaintiffs' representative, dated 4 July 2017 and 18 July 2017 and it is my expert opinion that the value of Secure Logic Pty Ltd (Australia) and Secure Logic Pte Ltd (Singapore) may be determined in part by considering the value of the other companies within the group.
It is my experience that different corporate group structures hold business assets and functions in different companies for reasons that include but are not limited to asset protection and tax saving. This inter-company relationship may have degrees of bearing on a single company's value.
SL Australia and SL Singapore do not form part of a corporate group in the sense in which the term is often used of a holding company with a number of directly or indirectly owned subsidiaries. As I have mentioned, SL Singapore is a wholly owned subsidiary of SL Australia. These two companies do apparently have business relationships with, and to some extent at least work together with, a number of other companies which are referred to in the evidence. But these other companies are not all subsidiaries or holding companies of SL Australia, although there are common shareholdings which may make them related companies.
Following the expression of Mr Mottershead's opinion, further information was provided by way of affidavit by Mr Lacey. In a letter dated 5 September 2017, Mr Mottershead commented:
1) The affidavit [of] Mr Lacey discloses in some detail a number of intercompany transactions between Secure Logic Pty Limited [SL Australia], Secure Logic Technologies Pty Limited, Securelogic Infosec SDN BHD, Secure Logic Pte Ltd [SL Singapore], Plush Hosting Pty Ltd, Sanbru Pty Limited and Computer Room Solutions Pty Limited. Additionally he discloses Deuba Pty Limited as trustee of the Benson Trust and Infinitium Holdings SDN BHD are shareholders of companies within the group. In my view, the affidavit of Mr Lacey discloses a number of company interrelationships which reinforces the cross relationships between the companies and therefore further reinforces the need for disclosure of financial information for each of the above companies. In effect much of the affidavit of Mr Lacey discloses that the companies do not in fact stand by themselves, but rather rely on other associated companies,
…
4) Mr Lacey discloses many other transactions between the various companies, as part of the valuation process it is likely there will be a need to ensure these charges are on a commercial basis. This will necessitate the disclosure of the financial records of each of the companies in order to accurately determine the value of Secure Logic Pte Ltd [SL Singapore] and Secure Logic Pty Ltd [SL Australia].
Apparently, Mr Mottershead's comments led to the production by the plaintiffs and associated companies of a "data room" containing documentary material emanating from the companies to which Mr Mottershead referred, or at least some of them. Mr Mottershead did not find this satisfactory. In a letter dated 2 November, he commented on the documents which had been made available in the data room as follows:
1) Nothing was made available in relation to Deuda Pty Ltd [sic], Computer Room Solutions Pty Ltd and Sanbru Pty Ltd. The affidavit of Mr Lacey dated 31 August 2017 discloses many transactions between the various companies. As part of the valuation process it is likely there will be a need to ensure these charges are on a commercial basis. This will necessitate the disclosure of the financial records of each of the companies in order to accurately determine the value of Secure Logic Pte Ltd [SL Singapore] and Secure Logic Pty Ltd [SL Australia].
The letter went on to identify four other specific issues concerning the production of documents.
On 25 July 2017, Mr Noble's solicitors had issued three notices to produce and caused the issue of three subpoenas by the Court in an effort to obtain financial information from some of the entities other than SL Australia and SL Singapore. Following debate at today's hearing, I was informed that the two of the notices to produce are not pressed. I was also told that one of the subpoenas, namely a subpoena to Deuba Pty Ltd ("Deuba"), was not pressed and that counsel for Mr Noble was content for the Court to set it aside.
This leaves for consideration one notice to produce which is addressed to Secure Logic Technologies Pty Ltd ("SL Technologies") and subpoenas to Sanbru Pty Ltd ("Sanbru") and Computer Room Solutions Pty Ltd ("CRS").
Sanbru is the holding company of SL Australia and thus indirectly of SL Singapore. It holds 100 per cent of SL Australia's shares. Sanbru also holds a shareholding in SL Technologies but it is only a 35 per cent shareholding. The other 65 per cent is held by Deuba, the company the subpoena to which was not being pressed. Sanbru also owns 51 per cent of CRS; the evidence does not identify the owner of the remaining 49 per cent.
The notice to produce and subpoenas which are pressed all follow the same pattern. There are requests for documents of the addressee company and there are also requests for documents relating to transactions or dealings between that company and what is described as the "Secure Logic Group". The "Secure Logic Group" is defined as meaning Sanbru, Deuba, SL Australia, SL Technologies, Plush Hosting Pty Ltd (the fourth plaintiff in the proceedings which was the subject of a notice to produce which is not now pressed), CRS, SL Singapore, Securelogic Infosec SDN BHD and Infinitium Holdings SDN BHD.
Since the notices to produce and subpoenas have been issued, Mr Noble's legal representatives have indicated that they are prepared to vary the calls for documents so as to limit them in some respects. I will deal with the application on the basis that what is now sought is production of documents on that more limited basis.
The documents sought in relation to the addressee company's dealings with the "Secure Logic Group" are now as follows:
Documents recording the terms of any agreement or understanding between the Company and any company in the Secure Logic Group in relation to:
a. transfer pricing;
b. employee arrangements;
c. asset hire or use; and
d. resource sharing,
limited to contracts, heads of agreement, memoranda of understanding, quotations, order forms, tax invoices, statements of account and payment receipts, that were in force in the period 1 July 2014 to 25 July 2017.
In addition, extensive documentary requests are made for records of the addressee company itself. These include:
All documents recording the Company's director(s) remuneration, including (but not limited to) in respect of superannuation, bonuses, and motor vehicle allowances, for each financial year (including year-end balances) for the period 1 July 2014 to date.
All documents recording the Company's employee salaries, leave entitlements and/or benefits, including (but not limited to) in respect of superannuation, bonuses, and motor vehicle allowances, for the period 1 July 2014 to date.
All financial statements, profit and loss statements, balance sheets, BAS returns, and income tax returns for the Company for each financial year for the period 1 July 2014 to date.
All bank account statements for the period 1 July 2017 to present.
All documents recording details of the Company's work in progress…[for ten identified months];
…
All documents recording valuations of any plant, property (including intellectual property) and equipment owned by the Company, for each financial year for the period 1 July 2014 to date.
I have quoted above most but not all of the requests that are made.
It is clear that Mr Noble, by these notices to produce and subpoenas, seeks a comprehensive disclosure of the financial position of each of the companies in question and their dealings with other companies within the so-called "Secure Logic Group", with a particular focus on the potential for transfer pricing and sharing of services within that "Group".
Counsel sought to support the notice to produce and subpoenas on the basis that such inter-group transactions might be a means of cross subsidy or even transfer pricing between SL Australia and SL Singapore, on the one hand, and other companies in the "Group", on the other.
It may be accepted that that is a possibility. However, it is necessary to show that the documents have at least some potential relevance to the issues in this case. These proceedings concern alleged contractual entitlement to shares in two identified companies. Whether or not those companies can be seen economically as forming part of some wider group, the only relevance of transactions involving other companies in the group would be transactions which potentially could affect the value of SL Australia and SL Singapore.
An immediate problem with the way in which the notices to produce and subpoenas are framed is that the request for documents in relation to dealings between the members of the "Secure Logic Group" are framed in such a way as to catch any transaction between the company in question and any other member of the Group. The result is that transfer pricing arrangements, if such existed, between SL Technologies and Sanbru, for instance, would be caught by the notices to produce and subpoenas even though the shifting of value between those two entities could have no apparent relevance to the value of shares in SL Australia or SL Singapore.
The problem is compounded by the fact that there are extremely wide requests for the production of documents directed to the affairs of each of the companies which have no apparent relevance to the valuation of SL Australia and SL Singapore as separate companies. For instance, I find it impossible to see how details of SL Technologies' employment contracts with its own employees, if there are any, could possibly be relevant to the valuation of shares in SL Australia or SL Singapore. Numerous other examples could be given.
In my view, there is a more fundamental question. Let it be supposed that SL Australia is party to some form of asset sharing or transfer pricing arrangement with some other company in the "Secure Logic Group". It is by no means obvious that the existence of such an arrangement would need to be taken into account in determining the valuation of SL Australia's shares.
The plaintiff is claiming only a 6 per cent interest with the possibility of a further 6 per cent. Even if he had achieved a 12 per cent interest in SL Singapore or SL Australia, that would not have given him control. In making his claim for damages on the basis of the value of the shares in one or other of those companies, the plaintiff must accept the companies as he finds them. This would include any arrangements that had been made between the companies and other companies within the "Group".
Even if, from the point of view of SL Australia or SL Singapore, there might be a question as to the economic value of the arrangement in question, I do not think it can simply be assumed that the valuation exercise requires that shares in SL Australia or SL Singapore be valued on the assumption that those companies are managed independently from the other companies in the so-called "Group".
Counsel for Mr Noble referred me to the recent decision of Brereton J in Sharpe v Grobbel [2017] NSWSC 1065 where his Honour stated the requirement of relevance needed to support a subpoena. Counsel submitted, and I accept, that the test is not a demanding one but all that is required is that there is "a reasonable basis for supposing that the material called for will likely add, in the end, in some way or another, to the relevant evidence in the case": Sharpe at [35].
But in my opinion, this test must be applied having regard to the scope of the production which would be required as a whole. It cannot be a justification for issuing a subpoena which would require the production of thousands of documents that one particular document, or an identifiable small subgroup of the documents, may in some way or another add to the relevant evidence in the case if the other documents called for will not. The test articulated by his Honour, in my opinion, does not excuse the legal representatives from doing their best to frame subpoenas and notices to produce in such a way as to target documents which are likely to be relevant.
For reasons which I have given, I do not think that the notice to produce and the two subpoenas which remain in issue are appropriately directed, even if transactions between SL Australia and SL Singapore on the one hand and other members of the "Group" on the other hand are potentially relevant so as to satisfy the test in Sharpe v Grobbel. The notice to produce and subpoenas require production of a potentially vast range of material which, so far as I can see, would have no apparent relevance.
Counsel for Mr Noble pointed to the fact that there is no evidence from the plaintiffs on this application of the difficulty or otherwise in complying with the subpoenas. I accept that there is no such evidence but, in my opinion, there may be circumstances where it is clear from the terms of the request itself that the request is oppressive and lacks a proper forensic basis.
In my opinion, this is such a case. I was told from the Bar Table that one of the companies in the "Group" had been purchased for $40 million and it is obvious from the evidence that these other companies have engaged in a substantial degree of commercial activity. In my opinion, it is obvious, without the need for specific evidence on the question, that they are likely to have extensive documents and that the task of complying with the very broad requests in the notice to produce and the subpoenas will be expensive or, at least, is likely to be expensive enough to justify complaint.
Counsel for Mr Noble did not attempt himself to articulate a basis on which all of the material sought in the notice to produce and the subpoenas would be relevant and, in particular, he did not seek to explain why transfer pricing arrangements between two companies other than the companies whose evaluations are in issue, for instance, could be relevant.
His submission was, however, that I do not need to consider this question for myself but should rather rely on the opinions expressed by Mr Mottershead. He submitted that valuation was an expert area and that the task of identifying what documents were needed was itself a matter for expertise. In counsel's submission, it was sufficient that a reputable expert had expressed a view that the documents were necessary, and I should not seek to go behind that opinion.
In this regard, counsel referred to the decision of Stevenson J in RSA (Moorvale Station) Pty Ltd v VDM CCE Pty Ltd [2013] NSWSC 534. That was an application for disclosure of documents where an expert to be called in the proceedings had said that certain specified documents were necessary for him to complete his report. His Honour said that the existence of this expert's opinion was sufficient to establish the relevance of the documents in question and the necessity for their disclosure and that there was no need to go into the validity of the opinion so expressed by the expert.
I accept that Mr Mottershead is an expert accountant and I accept the genuineness of the opinions that he has expressed. It is also fair to say that no objection was taken to the opinions in question for the purposes of this application but, in my view, these opinions have little or no weight. In the first place, they are expressed at an extremely general level. The opinion of the expert in the RSA case identified specific categories of documents. No equivalent process has been carried out in this case. No opinion has been expressed by Mr Mottershead by reference to the specific categories of documents which are sought by the notice to produce and subpoenas.
Ultimately, the opinions expressed are little more than a truism. If one starts from the assumption that the existence of transfer pricing or asset sharing agreements within a corporate group are relevant to the valuation of two of the group entities for the purposes of a dispute such as the present, then it is obvious that if such arrangements exist they could be relevant to valuation. But Mr Mottershead has not referred to and, so far as I can see, has not addressed that critical assumption.
Moreover, I would have thought that the most efficient and direct way to consider the matter would be to start from an analysis of the accounts of SL Australia and SL Singapore subject to valuation and to explain by reference to those accounts the particular transactions or classes of transaction likely to be relevant to valuation. This would, in turn, enable the identification in a precise way of transactions of those companies with other entities (either within or outside the "Group") which might need to be investigated further for the purpose of determining value. There is no indication that this has been done.
Even if Mr Mottershead had expressed an opinion by reference to particular categories of documents sought, it would be no more than an oracular pronouncement on his part: see Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705 at 729-730 [59]. In some cases, such a pronouncement might be sufficient at this stage of the litigation. But it does not satisfy me where neither the expert nor counsel is in a position to articulate any rational explanation for why apparently irrelevant documents are necessary. So far from supporting Mr Noble's argument that the documents should be produced, the opinions which have been offered have, to my mind, the opposite effect. They suggest to me that on Mr Noble's side of the record there has been insufficient consideration of the basis on which the valuation of the shares in question should be carried out and the documentary material which would be relevant to such analysis.
For these reasons, I think the plaintiffs' application must succeed. I see no reason why costs should not follow the event.
The orders of the Court are:
I note that the notices to produce dated 25 July 2017 and addressed to Plush Hosting Pty Ltd and to Santosh Devaraj are not pressed.
I order that the notice to produce dated 25 July 2017 and addressed to Secure Logic Technologies Pty Ltd be set aside.
I order that the subpoenas addressed to Sanbru Pty Ltd, Computer Room Solutions Pty Ltd and Deuba Pty Ltd dated 25 July 2017 be set aside.
I order that the first defendant/cross-claimant pay the plaintiffs'/cross-defendants' costs of the plaintiffs' notice of motion dated 2 August 2017 as subsequently amended and the costs occasioned by the notices to produce and subpoenas the subject of that notice of motion.
I order that the proceedings be listed for directions before the Registrar in Equity on 4 December 2017.
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Decision last updated: 15 November 2017