Uni-Span Height Safety Pty Ltd v Gold Coat Guardrail Pty Ltd

REASONS FOR JUDGMENT 1 By application filed 3 July 2009 the applicant made a number of claims for pre-trial discovery and injunctive relief. At the hearing however it became clear that the relief sought by the applicant would be limited to the following claims: · Pursuant to O 15A r 6 of the Federal Court Rules, that the first, second, third and fourth respondents make discovery to the applicant of all books, records, cheque butts, bank statement, computer records, accounts or financial statements, invoices, tax returns or other documents relating to or recording the financial transactions of the first respondent for the financial years 2005, 2006 and/or 2007 or part thereof. · A freezing order against the fourth respondent pursuant to O 25A r 2 of the Federal Court Rules. · Costs. 2 Submissions were made on behalf of both the applicant and the respondents at the hearing in relation to these claims. However it also became clear that the terms of the freezing order sought by the applicant required amendment because of contractual and property information pertaining to the fourth respondent which came to light during the course of the hearing. Accordingly, I made orders that the applicant file and serve a revised draft freezing order with supporting submissions, and that the respondents should have an opportunity to respond in writing. That material has now been filed and served, and I take it into consideration for the purposes of this decision.

Background 3 The summary of background facts relating to this application are taken primarily from the affidavit of Mr Carl Roetger, a director of the applicant, sworn 2 July 2009. 4 The applicant was incorporated in late 2006 following discussions between Mr Roetger, Mr Cartan (the third respondent), and Mr Wayne Bibby, all of whom became directors of the applicant with Mr Cartan assuming the role of company secretary. The shareholders of the applicant were the second respondent, and two trustee companies representing the family interests of Mr Roetger and Mr Bibby. Mr Cartan and Ms Cooley (the fourth respondent) ceased any involvement with the applicant in December 2007. 5 By a contract dated 20 February 2007 the applicant acquired from the first respondent the business of "Brisbane Guardrail", a scaffold and guardrail supply business. Mr Cartan and Ms Cooley were shareholders of the first respondent, with Ms Cooley being the majority shareholder. Mr Cartan was the sole director of the first respondent, and in a de facto relationship with Ms Cooley. 6 In Mr Roetger's affidavit, he deposes (in summary) as follows: · Mr Cartan and Ms Cooley, for themselves and on behalf of the first and second respondents, made representations to Mr Roetger and Mr Bibby during the period September 2006 to January 2007 with a view to inducing them to enter into an alliance and to inject funds into the applicant to acquire the business of the first respondent. · He believes that the 2006 financial records as provided to him and upon which he relied in causing the applicant to enter into a series of transactions were incorrect, based upon the fact that the business returned a gross income of only $818,986 for the 2007 year, resulting in a $386,360 trading loss. · He believes that a clear case is demonstrated against the first respondent, based particularly on the fact that the predicted gross revenue of $3 million for the 2007 year did not eventuate. · Mr Cartan and Ms Cooley were solely responsible for the production of the accounts of the first respondent and the strategic alliance proposal. · More information in the form of the underlying documents is required before he can make a decision to commence proceedings. Those documents are the standard documents, books and records necessary to run any business. 7 Ms Cooley swore an affidavit (affidavit of Jennifer Elizabeth Cooley sworn 23 July 2009) in which she addressed Mr Roetger's statements. 8 During the hearing it also became clear that Ms Cooley was in the process of selling properties she owned at Sanctuary Cove and Byron Bay, and that Ms Cooley, Mr Cartan and their children were relocating to Melbourne where Ms Cooley had incurred contractual obligations in relation to the purchase of an apartment.

Order 15A rule 6 9 Order 15A rule 6 provides: Where (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 has been ascertained; (b) after making all reasonable inquiries, the applicant has not sufficient information to enable a decision to be made 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 possession of 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 in making 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). 10 In relation to the order sought by the applicant pursuant to O 15A r 6 the applicant submitted in summary: · during negotiations for the acquisition of the business of the first respondent in 2006, representations were made by Mr Cartan verbally and in a strategic proposal document he prepared to the effect that: o historically for the year ended 2006 the turnover of the first respondent was $2.13 million; o the first respondent's business for the 2007 year would turn over $3 million; o based on those figures, the business of the first respondent was valued at $1,820,000. · based on these representations the applicant acquired and restructured that business. · Mr Cartan became an employee of the applicant and effectively the same business was carried on by him under the same management even after the sale. Accordingly there does not seem to be any reason why turnover should vary so greatly from 2006 to 2007 as it did. If the historical accounts are correct, turnover dropped from $2.13 million to $831,843 in 2007. The turnover which had been predicted to be $3 million in 2007 was in fact only $1.8 million. · the drop in turnover led to significant losses: o in 2007 - of $1,076,882; o in 2008 - of $223,965. · In substance O 15A r 6 has two limbs, namely that there is reasonable cause to believe that the applicant has or may have the right to obtain relief, and that there is a reasonable belief that the relevant person has possession of the documents sought. Both limbs are satisfied in this case. 11 The respondents submitted in summary: · "A reasonable cause to believe" requires more than mere assertion, and more than suspicion or conjecture. · Not only does the applicant not depose to having made all reasonable inquiries - in fact it does not depose to having made any at all, except by way of its letters to the fifth respondent (which was the accounting firm previously engaged by the first, second, third and fourth respondents) which were in fact answered. · There is no evidence that the documents now being sought have ever been requested of anyone. The applicant now has the 2005 and 2006 accounts, which were annexed to Mr Walsh's affidavit. · There is no reasonable cause to believe on the material that any elements of a cause of action as described in Mr Roetger's affidavit exist, in that: o the applicant cannot point to any representation by any of the respondents that the value of the business was $1.8 million. Ms Cooley deposes that she does not recall discussing this sum, and it is not referred to in the materials annexed to the affidavits; o the only direct evidence of misrepresentation by the respondents is a statement by Mr Roetger in his affidavit that he has investigated and believes that there have been misrepresentations; o Mr Roetger claims that a loss was made in the 2007 year, relying on the historical information contained in the applicant's Trading, Profit and Loss Statement for the Year ended 30 June 2008, however Mr Roetger has mistaken the figures because the 2007 information is only for the first half of 2007. Accordingly it is not surprising that the income and expenses listed for 2007 appear to be approximately half of those listed for 2006.

Order 15A rule 6: consideration 12 Contrary to the submission of the applicant O 15A r 6 actually has three limbs - those identified by the applicant, and the limb contained in para (b) of the rule, namely that after making all reasonable inquiries, the applicant has not sufficient information to enable a decision to be made. I shall return to the three limbs of this rule later in the judgment. 13 Nonetheless, it is common ground between the parties that the principles articulated by Hely J in St George Bank Ltd v Rabo Australia Ltd (2004) 211 ALR 147 with respect to the operation of O 15A r 6 are applicable in these proceedings. These principles are as follows: (a) The rule is to be beneficially construed, given the fullest scope that its language will reasonably allow, with the proper brake on any excesses lying in the discretion of the Court, exercised in the particular circumstances of each case; (b) each of the elements prescribed in subparas (a), (b) and (c) of the rule must be established. Preliminary discovery cannot itself be used to remedy deficiencies in the satisfaction of the conditions themselves; (c) the test for determining whether the applicant has "reasonable cause to believe", as required by subpara (a), is an objective one. Further, the words "or may have" cannot be ignored. The applicant does not have to make out a prima facie case; (d) belief requires more than mere assertion and more than suspicion or conjecture. Belief is an inclination of the mind towards assenting to, rather than rejecting a proposition. Thus it is not sufficient to point to a mere possibility. The evidence must incline the mind towards the matter or fact in question. If there is no reasonable cause to believe that one of the necessary elements of a potential cause of action exists, that would dispose of the application insofar as it is based on that cause of action; (e) whilst uncertainty as to only one element of a cause of action might be compatible with the "reasonable cause to believe" required by subpara (a), uncertainty as to a number of such elements may be sufficient to undermine the reasonableness of the cause to believe; (f) the question posed by subpara (b) of the rule is not whether the applicant has sufficient information to decide if a cause of action is available against the prospective respondent. The question is whether the applicant has sufficient information to make a decision whether to commence proceedings in the Court. Accordingly, an applicant for preliminary discovery may be entitled to discovery in order to determine what defences are available to the respondent and the possible strength of those defences, or to determine the extent of the respondent's breach and the likely quantum of any damages award; (g) whether an applicant has "sufficient information" for the purposes of subpara (b) also requires an objective assessment to be made. The subparagraph contemplates that the applicant is lacking a piece (or pieces) of information reasonably necessary to decide whether to commence proceedings; (h) it is no answer to an application under the rule to say that the proceeding is in the nature of a "fishing expedition". Indeed O 15A r 6 "expressly contemplates" what once might have been castigated as "fishing". As Burchett J commented in Paxus Services Ltd v People Bank Pty Ltd (1990) 99 ALR 728 at 733, the rule is: ... designed to enable an applicant, in a situation where his proof can rise no higher than the level the rule describes, to ascertain whether he has a case against the prospective respondent ... 14 The applicant's case invoking the jurisdiction of the Court pursuant to O 15A r 6 is not assisted by a number of difficulties in respect of its claim. So: · As became clear during Mr Ashton's submissions, the applicant's historical trading, profit and loss figures for 2007, found at p 151 of Mr Roetger's affidavit, and contrasted by Counsel for the applicant in his submissions with the earlier 2006 financial information, actually represented figures for only half of the 2007 financial year. The only explanation given by counsel for the applicant for this error was that perhaps he had not analysed the 2007 figures as accurately as he could have, but that in any event turnover for that period still appeared to be less than $2 million whereas representations had been made by Mr Cartan and Ms Cooley that the turnover should be $3 million (TS p 40 ll 19-20). However: o in my view this inaccuracy in analysis of the applicant's trading position goes to the loss claimed by the applicant, and whether the applicant actually apprehends the basis of its potential claim (if any) against the respondents. Indeed Mr Roetger in his affidavit deposes that: I strongly believe that the 2006 financial records as provided to me and upon which I relied in causing the applicant company to enter into the subject series of transactions, are incorrect. Given the fact that the subject business was carried on by the same people including management under virtually the same conditions, and returned a gross income of only $818,986 for the 2007 year, resulting in a $368,360 trading loss, the only explanation that I believe exists is that the 2006 accounts were incorrect and wrong. (para 41) In light of Mr Ashton's submission as to the 2007 accounts annexed to Mr Roetger's affidavit I can ascribe no value to this statement with respect to O 15A r 6. o this in turn raises the question whether, objectively, there is reasonable cause to believe that the applicant has or may have the right to obtain relief in this Court from the respondents or any of them; o in any event, as submitted by Mr Ashton, there appears confusion in the applicant's submissions in relation to the financial statements of the applicant between the level of turnover of the applicant and its profit and loss position, which again goes to the issue of whether, objectively, there is reasonable cause to believe that the applicant has or may have the right to obtain relief. · Evidence upon which the applicant relies as a basis for its belief that false representations were made to the applicant with respect to the 2006 figures appeared confined to Mr Roetger's "investigations" (affidavit of Carl Roetger para 22). Without more substance, the unexplained investigations of a director of the applicant are not "evidence (which) must incline the mind towards the matter or fact in question" as explained by Hely J in St George Bank (2004) 211 ALR 147. · To the extent that the applicant claims that the balance sheet and profit and loss statement for the first respondent as supplied to him by the third and fourth respondents (exhibited to Mr Roetger's affidavit at CER-16 and found on pp 206-210 of the affidavit) were false, I note that those documents are nonetheless identical to the balance sheet and profit and loss statement of the first respondent in the records of Mr Walsh and annexed to Mr Walsh's affidavit as JW2 (Mr Walsh's affidavit pp 39-43). While this correspondence of documentation is by no means conclusive in the absence of a substantive hearing, it reflects upon the applicant's claim that there is reasonable cause to believe that the applicant may have a right to relief in respect of falsified accounts supplied by Mr Cartan and Ms Cooley. · Evidence produced by the respondents demonstrated that Mr Walsh had in fact provided a number of documents requested by the applicant. More specifically, evidence before the Court demonstrated that Mr Walsh: o advised the applicant that his firm did not hold any relevant original documentation in his office, but that he could provide the applicant with electronic copies of Financial Statements and Income tax returns upon request (exhibit CER-13 affidavit of Carl Roetger sworn 2 July 2009); and o sent by letter of 4 December 2009 to the applicant's solicitors a letter enclosing the Financial Statements and Income Tax Return for the year ended 30 June 2007 for the first respondent and Mr Cartan (exhibit JW3 affidavit of Joe Walsh sworn 22 July 2009). I note in any event that copies of the first respondent's financial statements and tax returns for the years ended 30 June 2005 and 30 June 2006 are annexed to Mr Walsh's affidavit sworn 22 July 2009. · There was no evidence that the applicant had asked any of the first, second, third or fourth respondents for information of the kind sought in the application. This in turn raises the question whether "all reasonable inquiries" have been made by the applicant (as required by O 15A r 6(b)) as distinct from merely some reasonable inquiries (cf Tamberlin J in CGU Insurance Ltd v Malaysia International Shipping Corporation Berhad (2001) 187 ALR 279 at 286). 15 In my view these difficulties undermine the applicant's claim such that the jurisdiction of the Court with respect to O 15A r 6 is not invoked. I am conscious of the beneficial construction the courts place on O 15A r 6, the fact that the applicant is not required to establish a prima facie case, and the fact that in this case the applicant claims that it has suffered significant losses in respect of the business it acquired from the respondents and for which it has paid "good money" (TS p 17 l 28). Further, I note that, notwithstanding the provision by Mr Walsh in his affidavit of the 2005 and 2006 financial statements of the first respondent, Mr Walsh did so notwithstanding apparent instructions from Mr Cartan that no material beyond the 2007 financial statements be provided to the applicant (affidavit of Joe Walsh para 16). However as found in St George Bank (2004) 211 ALR 147, confirmed by the Full Court more recently in Echo Tasmania Pty Ltd v Imperial Chemical Industries PLC [2008] FCAFC 58 at [43] and Apache Northwest Pty Ltd v Newcrest Mining Ltd [2009] FCAFC 39 at [2] and [26], each of the elements prescribed in subparas (a), (b) and (c) of the rule must be established. In light of: · inadequacies and inconsistencies I have noted in the evidence advanced by the applicant supporting the existence of a cause of action; and · the applicant's incorrect analysis of the 2007 trading, profit and loss figures. I am not satisfied that the applicant has demonstrated, on an objective basis, reasonable cause to believe that it has or may have the right to obtain relief in the Court from the respondents or any of them for the purposes of O 15A r 6(a). 16 Further, in relation to compliance with O 15A r 6(b) I am not satisfied that all reasonable inquiries have been made for the information sought in the application, as required by the rule. The only evidence before the Court is that inquiries were made by the applicant of the fifth respondent, Mr Walsh. There is no evidence that any inquiries were made of the first, second, third and fourth respondents, or indeed anyone else. "All reasonable inquiries" in O 15A r 6(b) prescribes an objective standard (Alphapharm Pty Ltd v Eli Lilly Australia Pty Ltd [1996] FCA 391, [1996] FCA 1500 at [41]). While inquiries of one party only may actually constitute "all reasonable inquiries" if, for example, it is clear in the circumstances that that party is the only or the primary repository of information, or if it would be futile to ask other parties for information, it has not been demonstrated that either situation is the case here. In relation to information held by the fifth respondent, Mr Walsh informed the solicitors for the applicant by letter that the fifth respondent had only electronic copies of relevant financial statements, and that if the applicant wanted further information would have to be obtained from "the clients directly" (annexure CER-13 being a copy of a facsimile from Joe Walsh & Associates to Gadens Lawyers dated 7 November 2008). There is no evidence that inquiries by the applicant of the other respondents, or indeed other persons, were made, or would have been futile if made. 17 As stated by Hely J in St George Bank (2004) 211 ALR 147, preliminary discovery cannot itself be used to remedy deficiencies in the satisfaction of the conditions themselves. The applicant cannot substitute the application before the Court in which it seeks preliminary discovery from the first, second, third and fourth respondents, for the need to make all reasonable inquiries in accordance with O 15A r 6 and which may entail making inquiries of those same respondents prior to bringing that application. 18 It follows that I am not prepared to make an order pursuant to O 15A r 6 in terms sought by the applicant.

Freezing order 19 The applicant seeks a freezing order against the fourth respondent only, pursuant to O 25A r 2 of the Federal Court Rules which provides: 2(1) The Court may make an order (a freezing order), upon or without notice to a respondent, for the purpose of preventing the frustration or inhibition of the Court's process by seeking to meet a danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied. 2(2) A freezing order may be an order restraining a respondent from removing any assets located in or outside Australia or from disposing of, dealing with, or diminishing the value of, those assets. 20 Practice Note 23 provides guidance as to the operation of O 25A r 2. 21 Key aspects of the application of O 25A r 2 include: · exercising the power conferred by O 25A r 2 is at the discretion of the Court. · the applicant must establish a prima facie cause of action against the respondent to warrant exercise of the power (KGL Health Pty Ltd v Mechtler [2007] FCA 1410 at [4]-[5], Patterson v BTR Engineering (Aust) Limited (1989) 18 NSWLR 319 at 321-322). · the Court must be satisfied that there is a danger that the prospective judgment of the Court will be wholly or partly unsatisfied because the respondent's assets could be disposed of, dealt with or diminished. · a freezing order should be viewed as an extraordinary interim remedy because it can restrict the right to deal with assets even before judgment (KGL Health [2007] FCA 1410). 22 In summary, the terms of the revised draft order submitted by the applicant are: · The fourth respondent should be subject to an order in relation to her property at Sanctuary Cove in Queensland and Byron Bay in New South Wales. · Although the property at Byron Bay is subject to a sale contract which is not yet fully binding on the parties thereto, if the relevant contracts are exchanged and sale of that property is completed, the applicant's solicitors should be informed of matters relating to, inter alia, the indebtedness secured by the property, and the proceeds of sale of that property applied to purchase of a property in Melbourne as detailed in Ms Cooley's affidavit. · If a binding contract of sale for the Sanctuary Cove property is executed, the fourth respondent should be entitled to complete the sale of that property on the same terms and conditions as apply in relation to the Byron Bay property. · Upon the acquisition of the Melbourne property the fourth respondent should be restrained from selling, disposing of, encumbering or otherwise dealing with it until trial or further order, and the applicant by its solicitors should be fully informed as to all matters concerning the conveyance of that property. · The fourth respondent should be otherwise restrained from removing from Australia or otherwise dealing with her other assets up to the unencumbered value of $500,000. · Ordinary living expenses and reasonable legal expenses (as defined in the revised draft order) should be excepted from the order. · The order should cease to have effect if, inter alia, the fourth respondent pays the sum of $1 million into court or provides security in that sum. · The applicant offers an undertaking as to damages. 23 In written submissions the applicant contended that the terms of the draft freezing order constituted a proper balance between the competing interests of the parties, namely the need to provide the applicant with proper protection against dissipation of assets and the need to allow the fourth respondent to meet any financial obligations already firmly in place. 24 In the circumstances of this case I am not prepared to make an order in the terms sought by the applicant. I form this view for the following reasons: · As I have already found in the context of O 15A r 6, I am not satisfied on the material before me that there is reasonable cause to believe that the applicant has or may have the right to obtain relief in the Court. I have already observed that the standard of satisfaction required by O 15A r 6 is lower than that of a prima facie case. It follows that, similarly, the applicant has not established a prima facie case against the fourth respondent, in the sense that the applicant has not lead evidence which is sufficient to support its allegations and which will lead to judgment in its favour unless there is evidence which rebuts those allegations (KGL Health [2007] FCA 1410 at [9]). · Even if I were satisfied that the applicant had a prima facie case against the fourth respondent, I am not persuaded that there is any risk of frustration or inhibition of the Court's process such as to justify a freezing order as sought by the applicant. The events complained of by the applicant occurred two years ago. No evidence has been placed before me of any risk of dissipation of assets by the fourth respondent. There is undisputed evidence before me that the property at Sanctuary Cove was purchased by the fourth respondent prior to any event relevant to this application; that the properties at Sanctuary Cove and Byron Bay are subject to substantial mortgages; that Mr Cartan and Ms Cooley are relocating to Melbourne with their new business; and that over a year ago Ms Cooley paid a deposit on an apartment in Melbourne in respect of which the contract is due to settle in September 2009 (affidavit of Jennifer Cooley sworn 23 July 2009). There is no suggestion by the applicant that these activities constitute dissipation of assets - indeed the progress of these activities is anticipated by the revised draft freezing order. · I note the evidence of Ms Cooley that a freezing order on her assets would stifle the growth of the new business operated by Mr Cartan and herself (affidavit of Jennifer Cooley sworn 23 July 2009 para 25). This impact on an unrelated business of Mr Cartan and Ms Cooley in my view is a factor I should take into consideration, in the sense that the freezing order is a "substantial encroachment on the basic right and freedom of the respondent to deal with … her property" (KGL Health [2007] FCA 1410 at [12]). 25 In light of the views I have expressed with respect to the orders sought by the applicant, it follows that the application should be dismissed with costs. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Collier.

Associate: Dated: 5 August 2009 Counsel for the Applicant: Mr LP Bowden

Solicitor for the Applicant: Gadens Lawyers

Counsel for the First, Second, Third, Fourth and Fifth Respondents: Mr RS Ashton

Solicitor for the First, Second, Third, Fourth and Fifth Respondents: ClarkeKann Lawyers