By a notice of motion filed on or about 10 August 2018, the plaintiff and the first and second cross-defendants sought orders setting aside each of four subpoenas issued by the cross-claimant, Ms Kate MacDonald.
The motion has come before me as Duty Judge. The four subpoenas in question have already been issued with the leave of the Registrar and, as I understand it, served on the recipients who are not parties. Some of those recipients have at least partly produced documents. None of them have attended on this motion. To the extent that, in considering the subpoenas I may address and reduce their scope, I am not intending to limit the ability of any of the recipients to argue that they are oppressive or the like.
Given the matter has a somewhat unfortunate history and that it is due to be heard in February next year, I considered that the only practical way to resolve it in an expeditious fashion was to address each subpoena in turn.
Accordingly, I have just heard argument on the first of the subpoenas which is addressed to an entity known as Lift Brands (Australia) Pty Ltd ("Lift Brands").
The background of the matter is partly set out in a judgment of Davies J (Yakiti Pty Ltd v MacDonald [2018] NSWSC 1392) and an earlier judgment of Fagan J (Yakiti Pty Limited v Kate MacDonald, Supreme Court, 9 March 2018, unreported).
By way of short summary, the plaintiff Yakiti sues Ms MacDonald for possession of land and recovery of various amounts that were loaned to her in 2016. In the latest iteration of her cross-claim, Ms MacDonald pleads that the funds that were advanced were, to the knowledge of everyone, on-lent to a gym business of "Snap Fitness" franchises run by what was then known as The Henley Group which encountered financial difficulties in 2016.
Ms MacDonald further pleads that in October 2016 she entered into an agreement with the principal of the Henley Group, Mr Henley and the three cross-defendants, which include Yakiti. the principal of Yakiti, Mr Moini, and a Mr Kon Prin, the effect of which was that the parties would establish a new company which would purchase the assets of The Henley Group; that the participants would then cause to be issued shares in the new company to the participants to the agreement according to certain allocations; that further amounts would be advanced, including by Ms MacDonald; and that the loans that Ms MacDonald had taken out which were the subject of Yakiti's claim, were to be treated as financial contributions to The Henley Group and, ultimately, extinguished.
Ms MacDonald further pleads that it was agreed that any requirement for her to make a further capital contribution was deferred until she was discharged from hospital, but in the meantime the three cross-defendants, without notification to her, pursued their agreement to acquire the business of The Henley Group and thus, effectively, cut her out of the deal. She claims that there was thereby a breach of the agreement and seeks damages represented by the lost chance of participation in the profits and ownership of the new entity as well as an amount representing any judgment debt she is found to owe Yakiti.
Ms MacDonald also claims that the conduct of the cross-defendants was unconscionable, in that they took advantage of her time in hospital to her detriment to, as I have said, cut her out of the deal that had been agreed.
Paragraph 45 of her pleaded claim of unconscionability is as follows:
"The relevant conduct was unconscionable in circumstances where:
(1) The cross-defendants had, on 5 November 2016, represented the cross-claimant that she did not need to comply with the term pleaded in paragraph 4G above until after she was discharged from hospital and/or;
(2) The purposes of the mortgages provided by the cross-claimant to the first cross-defendant was to secure the loans the first cross-defendant had made to Jake Henley and The Henley Group of companies and/or;
(3) The first defendant acquired the assets of Jake Henley and The Henley Group of companies and no further consideration be on the loans that the first and second cross-defendants had already made to Jake Henley and The Henley Group of companies."
As noted, the first subpoena to be debated was issued to Lift Brands. Lift Brands is said to be the ultimate franchisor of the group of gyms formerly conducted by The Henley Group and now conducted by the "new company referred" to in the cross-claim, namely All About Fitness Gym and Health Clubs Pty Ltd ("All About Fitness").
The subpoena is unrestricted in time. It seeks six categories of documents. The first is effectively all documents relating to the assignment, transfer or grant of franchises to any of the relevant entities including All About Fitness. The second is copies of the franchise agreements. The third is communications on the same topic. The fourth category concerns documents recording the number of members for each Snap Fitness franchise as at 1 October 2016. The fifth category seeks documents recording membership numbers at a particular franchise at the time of the first direct debit of members' bank accounts. The sixth category is copies of any leases and licence agreements, equipment, finance agreement or hire purchase agreements.
To the extent that this material seeks documents concerning the transfer of the franchise agreements from The Henley Group to All About Fitness, then I am satisfied it has a sufficient connection with the matters set out in the cross-claim for it to be issued in that it is sufficiently "on the cards" that there will be some material that may assist Ms MacDonald's case.
That said, I note that during the course of the submissions, counsel for Ms MacDonald submitted that this material would reveal something "ruthless" about the manner in which the assets of The Henley Group of companies were acquired by the cross-defendants when transferred to All About Fitness. Having perused Ms MacDonald's cross-claim, that does not appear to reflect any pleaded allegation. In particular, Ms MacDonald does not appear to plead a case of unconscionability based upon an assertion that, notwithstanding that Yakiti lent her money on the understanding it would be given to The Henley Group, it and its directors then effectively engaged in conduct that compromised The Henley Group's ability to repay her debts by "ruthlessly" transferring its assets.
Nevertheless, as I have said, a sufficient connection between the documents sought and the pleaded issues exists to warrant the issue of the subpoena. In particular, it seems to me that a consideration of whether, in effect, a very beneficial financial transaction was put into effect in the latter part of 2016 could bear significantly upon the probabilities as to whether an agreement of the kind pleaded by Ms MacDonald in fact existed. At the core of Ms MacDonald's claims, at least so far as she seeks to resist Yakiti's claim, is the proposition that Yakiti was content to treat the loans made by it to Ms MacDonald as loans made to The Henley Group and that it was effectively recouping that loan by virtue of the acquisition of The Henley Group's assets and their transfer to All About Fitness.
Counsel for Ms MacDonald contended that this is what is pleaded in paragraph 45C of the cross-claim, a matter that was disputed by counsel for Yakiti. It is not necessary to resolve that pleading dispute. Instead, it suffices to note that the nature of the transaction that was being put into place has the potential to effect a finding as to whether the pleaded agreement was made because it bears on the likelihood that Yakiti would agree to a deal of the kind Ms MacDonald pleads.
Bearing in mind that Lift Brands themselves are not to be denied any opportunity to argue the scope of the documents sought, that is sufficient to justify paragraphs 1 to 3 of the subpoena issued to Lift Brands, although they should be time limited to documents created between 1 September 2016 and 1 March 2017 (and paragraph 3 should be limited to documents "evidencing or relating to the assignment, transfer or grant of the Snap fitness Franchises").
As noted, paragraph 4 seeks gym membership numbers as at 1 October 2016 and paragraph 6 seeks copies of leases and licence agreements, including finance agreements. This material is relevant to an assessment of the value of lost chance that Ms MacDonald says is a consequence of her being denied her contractual rights.
Counsel for Yakiti submitted that material of that kind should not be allowed because it is plain from the history of the matter that Ms MacDonald does not have leave to obtain a valuer's report and she would not be able to do so in the time before the hearing. However, that submission puts far too much cart before the horse. Ms MacDonald would have no hope whatsoever of obtaining leave to rely upon a valuation report unless she at least had material to provide to a valuer and she should not be denied the opportunity to try and take that step. Further, even if she is denied any leave to rely upon expert material, then that at least should not prevent her from attempting to use source material to prove the value of the business.
Paragraphs 4 and 6 of the subpoena will be allowed. Paragraph 5, as stated, requires documents recording membership numbers for a particular franchise from the time of the first direct debit of members' bank accounts by "Easy Debit". Nothing was said to justify that particular paragraph and it will not be allowed.
[Counsel addressed in relation to the other subpoenas]
The parties have now agreed that the fate of the second and third subpoenas followed my findings in relation to the first subpoena. Thus, in relation to the subpoena to Scott Dickinson, paras 2 and 3 are not pressed and para 1 will be the subject to a time limitation of 1 September 2016 to 1 March 2017. The same applies to the third subpoena addressed to Mr Shane Steinwell.
The last subpoena is addressed to a private equity firm, Quadrant Private Equity ("Quadrant"). The schedule to that subpoena seeks two categories of documents. One category seeks all documents relating to a purchase or offer to purchase Snap Fitness franchises. The second category seeks correspondence between any of the relevant parties referring or relating to any of the Snap Fitness franchises.
In November 2016, Quadrant made a nonbinding indicative offer to Mr Henly to acquire nine Snap Fitness gyms. It is not appropriate to specify the indicative price but it suffices to state that it was not insubstantial. However, the offer was also heavily conditioned. It included a requirement that debts and tax liabilities and the like of the franchises were discharged. It also required there be a period of due diligence in which Quadrant could satisfy itself as to the assumptions upon which its offer was made. Any purchase ultimately needed approval of the board of Quadrant.
As I understand it, the material that is sought from the Quadrant is said to be relevant to the quantification of Ms MacDonald's lost chance to participate in the new business that is All About Fitness. Counsel for Yakiti submits that an indicative nonbinding offer of the kind that was made could not assist in that process given the various conditions attaching to the bid and the fact that any real valuation would need to consider the source material rather than what a third party was prepared to offer.
There is some force in that but it must be remembered the Court is not now addressing the question of the admissibility of evidence concerning value but rather whether Ms MacDonald should be shut out from obtaining material which might lead to admissible evidence concerning value.
There is a reasonable likelihood that Quadrant may be in possession of source material or performed its own analysis which will provide, or could provide, some support for a finding by a trial judge as to at least what the minimum value of the business Ms MacDonald claims she was entitled to participate in. For these purposes that is sufficient although the subpoena will again need to be time limited.
At the risk of repetition, I restate that nothing in this judgment is meant to limit the rights of the recipients of the subpoenas to argue that they are oppressive or their scope should otherwise be reduced.
[Counsel addressed re costs]
Whether this entire exercise in relation to subpoenas is justified will not really be known until the matter is litigated. There was some measure of success for Yakiti and the other cross-defendants however Ms McDonald obtained the better result. I think the appropriate order is that the costs of the notice of motion be Ms MacDonald's costs in the cause of her cross-claim and that otherwise there be no order as to costs.
[Counsel were directed to provide orders reflecting the judgment]
Accordingly, the following orders were made:
(1) Order that the subpoena to produce addressed to Lift Brands Australia Pty Ltd filed on 30 July 2018 be varied as follows:
(a) Paragraphs 1 and 3 be limited to the period from 1 September 2016 to 1 March 2017;
(b) Paragraph 3 be further restricted to documents 'evidencing or relating to the assignment, transfer or grant of the Snap Fitness Franchises'; and
(c) Paragraph 5 be deleted.
(2) Order that the subpoenas to produce addressed to:
(a) Scott Dickinson of Ruskilly Pty Ltd t/as Sustainable Turnaround; and
(b) Shane Steinwell
both filed on 30 July 2018 be varied to:
(c) delete paragraphs 2 and 3; and
(d) Limit paragraph 1 to the period from 1 September 2016 to 1 March 2017.
(3) Order that the subpoena to produce addressed to Quadrant Private Equity Pty Ltd filed on 30 July 2018 be varied so that paragraphs 1 and 2 be limited to the period from 1 March 2016 to 1 March 2017.
(4) Order the defendant to serve a copy of these orders and a copy of the judgment of Beech Jones J dated 4 October 2018 upon Lift Brands Australia Pty Ltd, Scott Dickinson of Ruskilly Pty Ltd t/as Sustainable Turnaround, Shane Steinwell and Quadrant Private Equity Pty Ltd.
(5) Grant leave to the recipients of each of the subpoenae to Lift Brands Australia Pty Ltd, Scott Dickinson, Shane Steinwell and Quadrant Private Equity Pty Ltd to uplift such, if any, documents as they have produced to date in answer to the subpoena addressed to them, for the purpose of their review and re-production of documents in answer to the subpoena as varied by these orders.
(6) Order that the subpoenas to Lift Brands Australia Pty Ltd, Scott Dickinson of Ruskilly Pty Ltd t/as Sustainable Turnaround, Shane Steinwell and Quadrant Private Equity Pty Ltd be returnable at 9am on 11 October 2018.
(7) Costs of the notice of motion filed on 10 August 2018 be Ms McDonald's costs of the cross claim.
(8) Direct the parties to confer no later than 14 November 2018 so as to agree a bundle of documents that the parties wish to tender at the hearing.
(9) Notice of Motion dated 10 August 2018 otherwise dismissed.
[2]
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Decision last updated: 11 October 2018