Starbelle Energy Pty Limited as trustee for the Cronulla Coal Unit Trust v New Emerald Energy Pty Limited

Federal Court of Australia|2024-04-02|Before: Mr P, Mr J, Jackman J

A minority shareholder (Starbelle) applied for court permission to sue directors of a company (NEE) on the company's behalf, alleging the directors improperly caused NEE to buy expensive cranes. Before the permission hearing, Starbelle sent subpoenas to the bank (NAB), the auction house (Pickles), and a director of an allegedly involved company (Mr Madsen) to get documents about the crane purchase and ownership. The defendants tried to block these subpoenas, arguing they were irrelevant or oppressive. The Court rejected this, ruling that subpoenas can be used in this type of case if they have a legitimate purpose and plausibly relate to the issues. Here, the documents could shed light on who authorised the payment, who really owned the cranes, and whether the directors acted properly. The Court allowed Starbelle to access the documents.

JACKMAN J: 1 On 26 February 2024, the plaintiff (Starbelle) commenced this proceeding by originating process and a supporting affidavit of Mr Giuseppe Bergamin, dated 21 February 2024. Starbelle owns 42 per cent of the shares in the first defendant (NEE) and seeks leave pursuant to s 237 of the Corporations Act 2001 (Cth) to commence a derivative action against: (a) NEE's directors for alleged breaches of statutory and fiduciary duties, the two directors being the second and third defendants, Mr Williams and Mr Pixley, respectively; and (b) two entities allegedly involved in those breaches, being the fourth defendant (Minequip) and the fifth defendant (UCR). 2 The application for leave pursuant to s 237 is fixed for hearing on 3 July 2024. 3 Starbelle recently issued three subpoenas with leave of the Court pursuant to r 24.12 of the Federal Court Rules 2011 (Cth) (Rules): (a) a subpoena to the National Australia Bank dated 18 March 2024; (b) a subpoena to Pickles Auctions Pty Limited (Pickles) dated 18 March 2024; and (c) a subpoena to Mr Benjamin Madsen, the sole director of Minequip, dated 20 March 2024. 4 Minequip seeks to set aside each of these subpoenas in their entirety pursuant to r 24.15(1). Mr Madsen seeks to set aside the subpoena addressed to him. Documents have been produced in response to the subpoena addressed to the National Australia Bank (NAB), but have not yet been inspected. 5 The factual background is set out in the affidavit of Mr Bergamin. In summary: (a) in November 2022, NEE purchased two cranes at an auction conducted by Pickles for $1,900,225. Starbelle's case is that NEE had no business need for the cranes and was not engaged in providing finance. Starbelle contends that NEE's directors, Mr Williams and Mr Pixley, caused NEE to make this payment from its account with NAB; (b) shortly after their purchase by NEE, the cranes were the subject of back-to-back hire agreements involving Minequip and UCR. NEE was not a party to those hire agreements; (c) between December 2022 and August 2023, a total of $2.27 million worth of invoices was sent to another company, New Wilkie Energy Pty Limited (NWE). NWE paid a total of $1.77 million. NWE is now in administration; and (d) in February 2024, attempts were made by Minequip to sell the cranes. Starbelle became aware of the proposed sale along with the other matters referred to above, and threatened to seek an urgent interlocutory injunction. No urgent interim relief was sought in light of the fact that acceptable undertakings were provided. 6 Starbelle accepts that in its application for leave it must satisfy the Court of the five elements identified in s 237(2), which require that: (a) it is probable that NEE will not bring proceedings; (b) Starbelle is acting in good faith, as to which the cases, such as Swansson v RA Pratt Properties Pty Ltd [2002] NSWSC 583; (2002) 42 ACSR 313 at [36] (Palmer J), suggest this is a two-part test asking: first, whether Starbelle honestly believes that a good cause of action exists and has a reasonable prospect of success; and second, whether the application is brought for a collateral purpose; (c) leave is in the best interests of NEE; (d) there is a serious question to be tried, which has been described in the case law as whether the applicant is able to identify the legal or equitable rights to be determined at trial in respect of which final relief is sought: Ragless v IPA Holdings Pty Ltd (in liq) [2008] 65 ACSR 700 at [40] (Debelle J); and (e) notice has been given to NEE of the application.

General observations 7 In Seven Network (Operations) Ltd v Fairfax Media Publications Pty Ltd [2023] FCAFC 185, the Full Court dealt with a question of whether subpoenas should be set aside. The Court said that the fundamental principle is that the party issuing a subpoena must demonstrate that the subpoena has a legitimate forensic purpose, and it may be set aside if it is cast in terms which require the production of documents which do not have apparent relevance to the issues in the case: [37]. At [38], the Full Court approved the reasoning of the New South Wales Court of Appeal in Secretary of the Department of Planning, Industry and Environment v Blacktown City Council [2021] NSWCA 145, which provides authority for the following propositions: (a) the language of "test" should be eschewed; whether a subpoena should be set aside depends on whether it involves an abuse of process, and it will be an abuse of process if it is not issued for a legitimate forensic purpose: Bell P at [60]-[61], with whom McCallum JA agreed at [98]; (b) it is not necessary to show that the documents subpoenaed will, or will be likely to, assist the case of the party that has issued the subpoena: Bell P at [57]-[58], Brereton JA at [86] and [96], McCallum JA at [98] and [100]; (c) it is sufficient to show that the subpoena can plausibly be seen to relate to an issue or issues in the proceedings or to cast light on such an issue, and that the subpoena is not in other respects too vague or oppressive: Bell P at [57], McCallum JA at [98] and [100]; (d) put differently, it is sufficient to show that there is a reasonable basis for supposing that the material called for would be likely to add, in the end, in some way or another, to the relevant evidence in the case: Brereton JA at [89], with whom McCallum JA agreed at [100]; and (e) it is sufficient to show that the documents sought are apparently relevant in the sense that it can be seen that the documents sought to be produced by way of subpoena will materially assist on an identified issue or that there is a reasonable basis beyond speculation that it is likely that the documents subpoenaed will so assist: Bell P at [65], with whom McCallum JA agreed at [98]. 8 There was some dispute as to the application of the above principles in the context of proceedings concerning s 237. On the one hand, Starbelle draws attention to the fact that subpoenas were permitted in a s 237 application by Brereton J in Sharpe v Grobbel [2017] NSWSC 1065 at [37]-[41] and [44]. On the other hand, Minequip and Mr Madsen draw attention to the scepticism expressed as to the use of subpoenas in s 237 applications in McLaughlin v Dungowan Manly Pty Ltd [2009] NSWSC 1501 at [59] (Ward J) and D'Ortenzio v Charles Parletta Real Estate Pty Ltd [2018] SASC 37 at [25] and [29] (Bochner J). But whereas those passages appeared to deal with the situation where a plaintiff was concerned that it was unable to establish a serious question to be tried in the absence of the subpoenaed documents, counsel for Minequip and Mr Madsen expressly declined to submit that Starbelle is in that situation. Whether there is a serious question to be tried is a relatively low standard, and the fact that Starbelle wishes to issue subpoenas to obtain further evidence does not indicate that, without the subpoenaed documents, Starbelle regards its claim as speculative or unable to be pleaded, particularised or proved. It appears to me that Starbelle merely wishes to be in as strong a position as possible when the s 237 application is heard so as to satisfy the court that there is a serious question to be tried. 9 In my view, there is no blanket rule for or against the use of subpoenas in s 237 applications. Each case will depend on its own circumstances. 10 Some criticism was made of the lack of a pleading in the present case, and of subpoenas being issued in advance of there being pleadings by the parties. In fact, there is no need for Starbelle to file a statement of claim at this stage, as the proceedings have been regularly commenced by way of originating process: r 2.2 of the Federal Court (Corporations) Rules 2000 (Cth). In addition to the originating process and affidavit in support, a detailed letter was sent by Starbelle's solicitors to the directors of Minequip and UCR on 16 February 2024, setting out the allegations of involvement in the alleged breaches of directors' duties. The solicitors for Minequip and Mr Madsen replied on 20 February 2024, saying that Starbelle's demands were "baseless". I infer from the terms of that letter that it is the intention of Minequip and Mr Madsen, at least at a general level, to put in issue all of the allegations articulated by the solicitors for Starbelle in that correspondence. I note also that in the Seven Network case, the issues by reference to which relevance was assessed had been defined by solicitors' correspondence.

Subpoena to NAB 11 The subpoena addressed to NAB seeks documents recording or referring to the payment to Pickles of about $1.9 million from NEE's account with NAB on or about 23 December 2022, and documents recording or evidencing the identity of persons authorised to operate that account. I accept that it is relevant to the serious question to be answered in the present proceedings to identify which entity paid for the cranes in late 2022, and if it was NEE, then who on behalf of NEE caused the payment to be made. Those issues arise because of the allegations of breaches of directors' duties, the question as to the ownership of the cranes, and the further question of the benefit that NEE's directors might have thought NEE would derive from the transaction. 12 During the debate before me, NEE accepted that it did, in fact, make the payment of the $1.9 million in December 2022. I note that NAB has already produced documents, and Starbelle did not know until today that NEE would make the aforementioned concession. I note also Minequip's statement that on the substantive hearing of the s 237 application it may wish to point to antecedent transactions concerning the deposit of moneys in NEE's bank account with NAB. While it does not appear that there will be any issue on the s 237 application as to the identity of the entity which actually paid for the cranes, there may well still be an issue as to whether the payment was authorised by the directors of NEE. 13 I regard this as more than merely a fishing expedition on the part of Starbelle. There is, at present, some material which may, in due course, justify a reasonable inference that the directors did authorise the payment, but I can see a real forensic benefit in obtaining documents that might throw clearer light on that question. Accordingly, I regard the subpoena addressed to NAB as having been properly issued. As I say, the subpoena has been answered, and I will, in due course, make orders granting access to the documents subject to any claim for privilege.

Subpoena to Pickles 14 Pickles is the auction house through which the cranes were sold on or about 24 November 2022. The relevant subpoena seeks documents relating to the sale by auction, the identity of the client to whom the client number on the invoice was assigned, instructions as to the delivery of the cranes, documents concerning the ownership and use of the cranes, and communications in connection with the cranes. It seems to me that these documents go to the question of ownership of the cranes, and also to the question of which entity may have caused NEE to pay the purchase price to Pickles for the cranes. 15 The documentary evidence is inconsistent as to the true ownership of the cranes. The payment of the purchase money may well suggest that the owner was NEE, but the hire agreement between Minequip and UCR suggests that the owner was Minequip, and the invoice issued by Pickles for the sale was not addressed to NEE, but to Mr Callaghan, a director of UCR. There is also a hire agreement between UCR and NWE, which was entered into on the same day as the Minequip and UCR hire agreement, suggesting that UCR may have been the owner of the cranes. Further, the solicitors for UCR have asserted a tripartite agreement under which NWE appears to have been intended as the true owner (see their letter of 13 December 2023). It appears to me that there is a real prospect of Pickles holding documents which may well shed light on the true ownership of the cranes. 16 There is also an issue as to the intentions of the relevant parties as to the use of the cranes, and that issue is relevant to Starbelle's submission that NEE had no use for the cranes as a step towards their allegations of breaches of directors' duties in relation to the fact that NEE paid for those cranes. I apprehend that there will be a real question as to the benefit which the directors of NEE perceived the payment of $1.9 million may have had for NEE, particularly in light of the fact that the solicitor for NEE at the hearing before me said that he had no instructions in that regard. There is a real prospect of Pickles holding documents which may shed light on the intended use of the cranes. 17 Criticism has been made of the use of phrases such as "in relation to" or "referring to" in the subpoena addressed to Pickles. However, in my view, the subject matter of the categories of documents sought is sufficiently specific and concrete for the recipients to identify the applicable documents without having to form the kind of judgment that is required in the context of a request for general discovery: see Seven Network at [48].

Subpoena to Mr Madsen 18 There are documents in evidence before me which indicate that Mr Madsen was involved in purchasing the cranes in late 2022 and seeking finance to pay for them. The subpoena to Mr Madsen seeks, in the first place, communications between Mr Callaghan, Mr Madsen and/or Mr Williams in relation to the sale of the cranes by Pickles in December 2022 and the funding of that sale. These documents seem to me to bear on the identity of the person or entity which caused the payment for the cranes to be made, the identity of the true owner of the cranes, the arrangements for finance which were undertaken at that time, and the intentions of the relevant parties concerning the use and benefit of the cranes. Categories 3, 7 and 8 seek documents recording the ownership of the cranes which bear on the same issues. 19 Categories 4 and 5 seek communications between Mr Callaghan, Mr Madsen and/or Mr Williams in relation to Minequip's entry into a lease agreement in December 2022 between UCR and Minequip (being the document which suggests that Minequip is the owner of the cranes) and an assignment deed in September 2023 (between UCR, Minequip and NWE). These documents strike me as relevant to the source of the funds for the purchase, the ownership of the cranes, the benefit to NEE from its payment of $1.9 million, and the intentions of the relevant parties concerning the transactions either individually or as a whole. As such, the documents have a sufficient bearing on the allegations of breaches of directors' duties and allegations of involvement by Minequip and UCR in any such breaches. 20 Category 6 seeks documents in relation to the tripartite agreement which has been asserted by UCR's solicitors as an explanation for UCR's conduct in the purchase of the cranes, and suggests that NWE may have been the source of funds for the purchase of the cranes. It seems to me that those documents are likely to shed light on the true ownership of the cranes, the source of funds to purchase them, and any perceived benefits to the relevant parties in relation to the transactions, both individually and as a whole. 21 Again, the use of phrases such as "relating to" and "referring to" has been criticised, but I do not regard them as objectionable for the same reasons that I have given in relation to the Pickles subpoena. 22 It is true that Mr Madsen is the sole director of Minequip, which is a defendant, and that the documents sought on the subpoena are likely to overlap with documents which may, in due course, be discovered by Minequip as a party to the proceedings. However, Starbelle points out that Mr Madsen was not a director of Minequip at the time of the purchase of the cranes from Pickles in late 2022, and his email addresses at that time used the names of companies other than Minequip. Accordingly, while I accept that there may well be an overlap in the documents which Mr Madsen has personally, and the documents which Minequip may in due course discover, the overlap strikes me as unlikely to be complete. I regard it as entirely proper for Starbelle to issue a subpoena to Mr Madsen for the documents which are in his personal possession. 23 Minequip and Mr Madsen also submit that the subpoena to Mr Madsen is oppressive. However, the evidence in support of that submission is limited to assertions by the solicitors for Minequip and Mr Madsen (see the letter of King & Wood Mallesons of 22 March 2024). I am not persuaded that the cost involved in answering the subpoena outweighs the potential benefit to Starbelle from the production of the documents. To the extent that Mr Madsen does incur reasonable loss and expense by answering the subpoena, he is entitled to be compensated pursuant to r 20.22. No submission was put to me to the effect that that compensation would not be adequate. 24 Accordingly, I dismiss the interlocutory application with costs. I certify that the preceding twenty-four (24) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Jackman.

SCHEDULE OF PARTIES NSD 197 of 2024 Defendants Fourth Defendant: MINEQUIP PTY LIMITED Fifth Defendant: UNITED CIVIL RESOURCES PTY LIMITED

Federal Court Rules 2011(Cth)rr 20.22, 24.12, 24.15

Outcomedefendant

Disposition:

Application to set aside subpoenas dismissed; plaintiff granted leave to uplift and inspect documents produced subject to privilege; costs awarded against Fourth Defendant and, to the extent relating to the Madsen subpoena, against Benjamin Thomas Madsen

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