Sykes v Intermediate Capital Asia Pacific 2008 GP Limited

BESANKO J: 1 This is an application by the applicants for an order that the ICG Respondents (first to fourth and sixth to eighth respondents) make discovery of documents falling within the following categories: 1. All documents created or considered by, or on behalf of, the Investment Committee, over the Period, including any notes or minutes of meetings of the Investment Committee, regarding the basis and conditions on which the Investment Committee was willing to authorise the investment in SCF the subject of the Transaction; 2. All correspondence from or to any member(s) of the Investment Committee, sent or received over the Period and relating to the basis and conditions on which the Investment Committee was willing to authorise the said investment in SCF; 3. All documents between 1 January 2016 and 20 February 2017, whether or not the documents relate to Project Griffin, relating to consideration by the Respondents or any of them, and/or the Investment Committee, as to whether the terms of the PLNSA should be extended and what conditions might be sought or imposed in that regard; 2 "Investment Committee" means the investment committee within the Intermediate Capital Group (ICG) that considered and/or approved the Respondents entering into the Transaction. The "Period" is the period from the time of the Offer to the date of Completion, both inclusive. The "Offer" is the email from Mr Ryan Shelswell to Mr Richard Goldsack with subject "Project Cube: Indicative offer ICG/Management team", attaching a letter from ICG to Mr Craig Cartner, Mr Richard Sykes and Mr Goldsack with subject "Project Cube - Indicative Nonbinding Offer" dated 30 March 2012. "Completion" means 25 May 2012. "Transaction" means the transaction defined in the Fifth Statement of Claim. "PLNSA" is the Preferred Loan Note Subscription Agreement entered into on 25 May 2012 between Popeye Bidco Pty Ltd, Popeye Holdco Pty Ltd (Holdco), Intermediate Capital Asia Pacific Limited, ICG and AET Structured Finance Services Pty Ltd. 3 I have delivered one interlocutory judgment in this proceeding: Sykes v Intermediate Capital Asia Pacific 2008 GP Limited [2018] FCA 1848 (claim for security for costs), and a number of interlocutory judgments in a closely related proceeding: Popeye Holdco Pty Limited v Intermediate Capital Asia Pacific 2008 GP Limited [2017] FCA 369 (claim for interlocutory injunction); Popeye Holdco Pty Limited (Receivers and Managers Appointed) v Intermediate Capital Asia Pacific 2008 GP Limited (No 2) [2018] FCA 408 (claim for privilege); and Popeye Bidco Pty Limited (Receivers and Managers Appointed) v Intermediate Capital Asia Pacific 2008 GP Limited (No 3) [2018] FCA 1597 (claim for costs against non-parties). 4 The essential details of the transactions and circumstances forming the basis of this proceeding are set out in those reasons. I will adopt the abbreviations and definitions used in those reasons. 5 The applicants' application is made under r 20.13 of the Federal Court Rules 2011 (Cth) (the Rules) which relevantly provides: 20.13 Application for discovery (1) A party may apply to the Court for an order that another party to the proceeding give discovery. (2) The application must state: (a) whether the party is seeking standard discovery; or (b) the proposed scope of the discovery. … 6 The relevant paragraph in the application seeks an order for discovery in relation to three categories of documents. It is not an application for an order for standard discovery within the terms of r 20.14. It is an application for non-standard discovery. The applicants have not identified any criteria in r 20.14(1) and (2) which should not apply as they are required to do if seeking an order that the criteria do not apply (r 20.15(1)(a)). In those circumstances, and relevant to this application, I must be satisfied that the categories of documents described in the applicants' application identify documents that are directly relevant to the issues raised by the pleadings. That follows from the fact that the applicants have not identified the directly relevant requirement as a criterion which should not apply. 7 The applicants submit that central to the issues in this proceeding are the circumstances in and by which, first, the ICG Respondents' proposed "preferred equity" investment in Holdco was replaced by a debt instrument, namely, the PLNSA and, secondly, the ICG Respondents did not, contrary to written promises, and contrary to the requirements of the SSD, treat the PLNSA debt as having the "colour" of equity, and did not permit the PLNSA debt to be repaid upon and as part of an "Exit Event" (such as a sale of the business, or a fresh capital raising). 8 The essence of the applicants' case is that Mr Shelswell on behalf of the ICG Respondents made a number of representations, both oral and written, to the applicants relating to the supposed justification for the proposed change from equity to debt by way of the PLNSA. Fifteen representations are pleaded in para 99 of the Fifth Statement of Claim (Statement of Claim). 9 The applicants allege that Mr Shelswell on behalf of the ICG Respondents made a representation that raising the amount of $63.7 million by way of debt rather than redeemable preference shares was for tax purposes and no other purpose, such tax purposes being to gain the "extra" tax deduction of $9 million per annum (para 99.1) (the Tax Representation). The applicants plead that there are two aspects to the Tax Representation being first, that a tax deduction of $9 million per annum would be available if the said sum of $63.7 million was raised by debt and, second, an "extra" deduction meant that if the said sum of $63.7 million was raised by way of debt, then the available deduction would exceed, by approximately $9 million per annum, any deduction that would be available if the said sum of $63.7 million was raised by way of redeemable preference shares (para 40). 10 The applicants' case as argued by them is that the Tax Representation was a representation as to a future matter that is a representation of an extra tax deduction of $9 million per annum "moving forward" (as the applicants put it). 11 The applicants' case is that there was a "parallel" written representation by Mr Shelswell on behalf of ICG which they call the Approvals Representation to the effect that the change from equity to debt would help investment modelling and internal approvals, including producing some more cash funding post acquisition, that is, the cash that would otherwise go to the government. The Approvals Representation is also said by the applicants to be a representation as to a future matter. 12 The applicants submit that the reasonableness of both the Tax Representation and the Approvals Representation will be directly in issue (s 4(1) of the Australian Consumer Law (Schedule 2 to the Competition and Consumer Act 2010 (Cth) (ACL)). 13 The applicants submit that it will be "highly probative" for the Court to see the actual approval process which "unfolded" before the Investment Committee in the context of determining whether Mr Shelswell had reasonable grounds for making the Tax Representation and whether the change from equity to debt "in truth" had any (and what) impact upon the approvals process before the Investment Committee. 14 With respect to the 2012 Investment Committee documents and communications (i.e., categories 1 and 2), the ICG Respondents made an initial general submission to the effect that the basis and conditions upon which the Investment Committee was willing to authorise the investment in SCF are those contained in the executed transaction documents. 15 With respect to the Tax Representation, the ICG Respondents submit that: (1) the Tax Representation is not pleaded as a representation as to a future matter. The applicants' pleaded case is that the Tax Representation was misleading or deceptive, or likely to mislead or deceive, because with respect to the first aspect of the representation, the stated deduction would not be available because of the thin capitalisation regime and, with respect to the second aspect of the representation, the stated deduction would be available in any event; (2) it is speculation and, therefore, fishing as to whether the documents of the Investment Committee might be relevant to the existence or otherwise of reasonable grounds for making the representations; and (3) it is clear, so the ICG Respondents submit, that Mr Shelswell had a reasonable basis for the statement he made because it is clear he was forwarding and commenting on his understanding of a preliminary draft tax structuring considerations paper provided by Deloitte to Mr Shelswell "a mere hour earlier". 16 Despite these submissions, the ICG Respondents are prepared to provide the following documents: a. documents relied upon by Mr Shelswell, or to which he had regard, in making the statement "if I have understood the Deloitte's advice they think we could get an extra c$9m tax deduction per year by making the preferred equity into 'debt for tax purposes'" in the 4 May 2012 email; 17 With respect to the Approvals Representation, the ICG Respondents submit that such representation cannot form the basis for the order sought because the alleged representation is not pleaded by the applicants as a misrepresentation, or as misleading or deceptive, or likely to mislead or deceive. Furthermore, what is pleaded by the applicants is only part of the statement said to constitute the misrepresentation (i.e., help in getting the deal approved internally), but there is no pleading of the second part (i.e., including producing more cash funding post acquisition, that is, the cash that would otherwise go to the government). 18 With respect to the Tax Representation, I do not think that the pleading provides a basis for an order for discovery in terms of categories 1 and 2 as sought by the applicants. The applicants have not pleaded the representation as a representation as to a future matter within s 4 of the ACL. The issues raised in s 4(2) and (3) of the ACL do not emerge from the pleadings. The applicants will presumably seek to prove that the representation was false. On the face of it, that does not involve an examination of what the Investment Committee considered was the position. Even if a reasonable grounds issue is raised despite the absence of a pleading, the matter will turn on Mr Shelswell's state of mind, at least in the first instance, and the order proposed by the ICG Respondents deal adequately with that matter. Although it is not necessarily the case that Mr Shelswell's state of mind is decisive of the issue, it is speculation as to whether the Investment Committee's knowledge will be relevant. The applicants must prove that the documents sought are directly relevant and they have failed to do so. 19 With respect to the Approvals Representation, it suffers from the same difficulties, with the added and more fundamental problem that it is not clearly and fully pleaded. 20 The applicants also link their submissions in support of the orders for discovery which they seek to a further circumstance of the transaction. They allege that the capital/debt injection was increased from $63.7 million to $86,626,499 for reasons never explained to them. Having regard to the terms of the PLNSA, this had the effect of increasing the debt liability to approximately $46 million. The applicants claim that the circumstances surrounding the increase are "central to the proceeding". The applicants point out that the ICG Respondents plead a bare denial to their allegation that they were never advised by the ICG Respondents of the reasons for the increase and that, in the circumstances, a bare denial to that allegation raises a negative pregnant. The applicants submit that the ICG Respondents "cannot offer a bold denial as to a crucial matter … and then expect to face no scrutiny through the discovery process". The applicants submit that the deliberations of the Investment Committee are likely to be probative on the otherwise unexplained increase in the PLNSA. I have to say that those submissions which do not identify a specific allegation suggest to me that the exercise is a fishing expedition. 21 For their part, the ICG Respondents point to the applicants' pleading on this issue. The relevant and only pleading is in para 78 of the Statement of Claim which is as follows: 78. At no time during the Negotiations for the Transaction did any of the Respondents make Mr Sykes, Mr Woodward, or Mr Dunn aware of the reason for the divergence (of the order of $23m) between: 78.1 the sum of $63.7m, being the amount of Junior Capital identified in the Deloitte Report which Mr Shelswell had proposed be replaced by the Debt; and 78.2 the Debt of $86,626,499 referred to in clause 2.1 of the PLNSA. 22 The issue raised by this plea is whether the ICG Respondents made Mr Sykes, Mr Woodward or Mr Dunn aware of the reasons for the divergence. The ICG Respondents submit that this issue is the subject of an existing order. The orders for discovery made on 20 March 2019 include the following: 14. All correspondence in the Period from or to: a. Ryan Shelswell; and/or b. Chris Heine; and/or c. Tom Anning; and/or d. Charles Liu; and/or e. Joseph Wong; and/or f. Greg Zuo relating to the: g. proposed and actual capital structure of any and/or all of the Companies involved in the Transaction; h. proposed or actual alterations to the capital structure of any and/or all of the Companies involved in the Transaction (whether to achieve an actual or perceived tax benefit, or for any other purpose); i. the Deloitte Report, the Second Deloitte Advice and the Third Deloitte Advice, including as relates to the instructions to be provided, and the instructions actually provided, to Deloitte; j. terms of repayment of the PLNs, including: i. the repayment amount ii. the timing of repayment iii. the ability to extend the time for repayment iv. whether (and the circumstances in which) the time for repayment would or might be extended; and v. whether, if the time for repayment was extended, additional interest would be payable or other (and what) terms would be imposed; and k. alleged agreement or understanding as to, the reason(s) for and/or the fact of, the increase in the amount of the PLNs. … 16. To the extent not included within paragraph 14 above, all documents and correspondence in the Period that relate to any alleged agreement or understanding about, the reason(s) for and/or the fact of the increase in the PLNSA from approximately $63 million to approximately $86 million. 23 With respect to the difference between a loan under the PLNSA of $63 million and a loan of $86 million, that is not clearly pleaded as a misrepresentation. What is pleaded is a failure to advise of the reasons for the difference and, as I have said, the ICG Respondents submit that that is sufficiently covered by orders already made. I agree with that submission. 24 The applicants also referred to two other representations which they described as the Exit Date Representation and the Surplus Funds Representation. Those representations are pleaded in the following terms: 78A Instead, at or shortly prior to Completion, Mr Shelswell said to Mr Sykes and to Mr Woodward words to the effect that: 78A.1 they, Mr Sykes and Mr Woodward, should not be concerned about the Debt, or about any "target" Exit Date of 30 June 2017; 78A.2 the Debt and accrued interest would "even itself out" by the time of an Exit Event; 78A.3 ICG would "extend out" the date of an Exit Event by as much as "the maximum 10 year window"; and 78A.4 ICG have "held investments for up to 19 years" and "we don't sell unless we get a great outcome for everyone" (collectively, the Exit Date Representation). 78B Further, at or shortly prior to Completion, Mr Shelswell said to Mr Sykes and to Mr Woodward words to the effect that they should not be concerned if the amount of the Debt resulted in surplus funds for the Transaction, because it would be better if there were more than enough, rather than not enough, funds available for the Transaction, and because any such surplus funds could simply be repaid at or shortly after Completion (the Surplus Funds Representation). 25 The applicants' submission is again, that these are representations as to future matters and the question whether there are reasonable grounds for Mr Shelswell to have made them is an issue. The applicants submit that clearly Mr Shelswell did not act alone and it is plain the Investment Committee had the final say on the issue of funding. 26 With respect to the Exit Representation, the precise allegation is that the ICG Respondents would "extend out" the date of an Exit Event by as much as "the maximum 10 year window". That was said to be misleading or deceptive, or likely to mislead or deceive, because at the time it was made (i.e., by Mr Shelswell at or shortly prior to completion): 101C … neither ICG nor Mr Shelswell intended to "extend out" the date of an Exit Event by as much as "the maximum 10 year window" and, instead, they each intended to give effect to the Default Purpose; 27 The default purpose is pleaded by the applicants in para 63 as follows: 63. The PLNSA was designed by ICG for the purpose (the Default Purpose) of eventually triggering defaults by BidCo and Holdco, including by rendering BidCo and Holdco insolvent within the meaning of section 95A of the Corporations Act, so as to enable the ICG Group to then obtain full ownership and control of BidCo, SCF Holdings and SCF Group by registering, upon an alleged default under the PLNSA, certain executed transfers of shares in SCF Holdings and BidCo {Share Transfers) that were to be (and were in fact) executed as part of the Transaction and held in escrow: 28 The ICG Respondents submit that the only documents which are directly relevant and not fishing are the following documents which they are prepared to provide: b. documents created in the Period recording any consideration by the Investment Committee of the extension or possible extension of the date of an Exit Event. 29 With respect to the Surplus Funds Representation, the precise representation pleaded and the respects in which it is said to be misleading or deceptive, or likely to mislead or deceive, are as follows: 78B Further, at or shortly prior to Completion, Mr Shelswell said to Mr Sykes and to Mr Woodward words to the effect that they should not be concerned if the amount of the Debt resulted in surplus funds for the Transaction, because it would be better if there were more than enough, rather than not enough, funds available for the Transaction, and because any such surplus funds could simply be repaid at or shortly after Completion (the Surplus Funds Representation). 101D The Surplus Funds Representation was misleading or deceptive, or likely to mislead and deceive, in that it was not possible for any surplus raised under the PLNSA simply to be repaid at or shortly after Completion, having regard to the provisions of the PLNSA concerning Early Redemption. 30 The ICG Respondents submit that there is no rational connection between the issues raised and the documents sought by the applicants. 31 With respect to the Exit Representation, again this is not pleaded as a representation as to a future matter. In my opinion, the documents offered by the ICG Respondents are sufficient to cover documents directly relevant to issues raised by the pleadings. 32 With respect to the Surplus Funds Representation, again this is not pleaded as a representation as to a future matter. I think the ICG Respondents are correct when they submit that the documents of the Investment Committee cannot rationally affect the assessment of whether early repayment was not possible "having regard to the provisions of the PLNSA concerning Early Redemption". That issue will be determined by reference to the terms of the PLNSA. 33 Finally, the applicants submit that the Investment Committee's deliberation at the time of Project Griffin are also relevant to the Exit Date Representation and to the unexplained increase of $23 million (category 3). The ICG Respondents submit that this request is an exercise in fishing. I think the ICG Respondents are correct. It is not clear how documents of the Investment Committee in 2016-2017 bear on a representation made four or five years earlier, or a failure to explain four or five years earlier the reasons for the divergence between $63 million and $86 million. 34 I will make an order in terms of the categories of documents conceded by the ICG Respondents. I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Besanko.

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