JUDGMENT No. LE 28 IL 228 GENERAL DISTRIBUTION IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 570 of 1998 BETWEEN: WARWICK GEORGE STRAUSS MALOUF APPLICANT AND: JOHN GEORGE STRAUSS MALOUF FIRST RESPONDENT PAMELA MARY STRAUSS MALOUF SECOND RESPONDENT OSMAL (HOLDINGS) PTY LTD THIRD RESPONDENT etal JUDGE: THE HON JUSTICE MARCUS EINFELD FEDERAL COURT DATE 2 OCTOBER 1998 OF AUSTRALIA ; 21 JAN 2n3 PLACE: SYDNEY LIBRARY REASONS FOR JUDGMENT I propose to give brief immediate reasons as I have formed a clear view about the matter. If necessary, I shall supplement them later but, in view of the hour of the day, I shall keep them briefer than a written judgment would ordinarily be. This is an application for what is familiarly called pre-trial discovery. The rule under which the application is made is Order 15A rule 6 which permits discovery before action in limited circumstances. For present purposes, pre-trial discovery may be treated as a compulsory process causing the production of documents that would normally not be produced until after an action commenced. There are three prerequisites provided by the rule for pre-trial discovery. Firstly, there must be 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. This means that there must be, by an objective judgment, reasonable cause to believe that the applicant for the discovery has or may have the right to bring a successful action in the Court against the person in control or custody of the documents concerned. The second criterion is that, after making all reasonable inquiries, the applicant does not have sufficient information to enable a decision to be made whether he or she should or may commence a proceeding in the Court for the purposes concerned. This means what it says, that is, that an applicant who wishes to obtain pre-trial discovery must first make all reasonable inquiries and, having made those inquiries, is still deprived of necessary information to enable the proceedings to be commenced or a decision to be made as to whether they should be. The third criterion is that there is reasonable cause to believe that the other 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. That criterion means that there is a person identified, that is, the person against whom the pre-trial discovery order is being sought, who has, or is likely to have had at some relevant time, a relevant document for making the decision as to whether the action should be commenced. In this particular case the application made by the applicant, Warwick Malouf, who I gather from the papers is known as "Rick", is for the discovery to him of the financial statements and associated documents of Osmal Products Pty Limited (a subsidiary of Osmal Holdings Pty Limited) for the financial year to 30 June 1995, What is sought in that category are the balance sheets, profit and loss accounts and the drafts of those documents for that year, but the discovery application is more expansive than that because there is then sought a category called: All other documents of whatever kind used in the preparation of the 1995 profit and loss accounts, or the 1995 balance sheets, or referred to in them. Also sought are all management accounts of the holding company, as well as the subsidiary for the financial year ended 30 June 1995. As far as I am awate, the evidence does not actually show that there were any management accounts, but they would probably be embraced within the financial accounts earlier referred to. There is a request for all documents in respect of or referable to the stock-take of the subsidiary company for the financial year ended 30 June 1994. The application also seeks the same documents in respect -3- of the financial year ended — the application says 20th, but presumably means — 30 June 1995. There is also a request for: All documents in respect of, or referable to the shareholdings in the [holding company] during the financial years ended 30 June 1995, and 1996. A number of comments could be made about that global set of documents, but because the argument has focussed on the audited, financial accounts and statements for the year to 30 June 1995, I shall desist from commenting further and treat the application as primarily an application for the discovery of those documents. It will suffice to say that on the evidence there seems to be no basis at all for the production of the documents in respect of the year to 30 June 1996, and as far as I can see the documents for the 1994 year have been previously made available. This is a family dispute and it bears all the hallmarks that family disputes almost invariably bear when they come to court. The first and second respondents are the brother and sister of the applicant. The third respondent, Osmal Holdings Pty Limited, is or was a family company. The dispute goes back many years. The correspondence in evidence indicates a period of almost 10 years but reading between the lines it appears that there has been friction in this family over financial matters and over shareholdings and entitlements to shares in family assets for significantly longer than that. I say that it bears the hallmarks of family disputes because family disputes almost inevitably descend into emotional and exaggerated claims which ordinary commercial disputes usually do not. In family disputes the language seems to know few bounds and this case is not disappointing in that regard. The particular matter that has activated the present dispute is the sale of shares in the family company by Rick to John and Pamela on 16 February 1995 for a sum of $1,262,500. If another view is taken of the facts as advocated in the course of the argument, it is possible that this sale was effectively for $1,576,000 in that a loan of company moneys to the applicant was forgiven in the deal which resulted in the sale of shares. It is not necessary for the purposes of my present remarks to resolve whether in fact there was a loan at all and whether it was forgiven, and therefore whether the sale of the shares was for the higher of those two sums. -4- Rick's allegation is that John made one or more representations to him at or about the time of the sale of shares which induced the sale of the shares for the sum referred to. The representations for present purposes can be summarised as that the company would not be profitable or would hardly be profitable in the immediate future and that these shares were therefore worth no more than the amount John paid Rick for them. For reasons which it is not now necessary to particularise but which is covered in the evidence and in the articles of association and other documentation, it is important to observe that Rick's shares did not entitle him to attend or vote at meetings of the company. That fact and other matters relating to the structure of the company and inheritances from the parties! father meant that the company was at the time in the control of John and Pamela. In other words, Rick's shares were of little or no value to them because they already controlled the company in any event. For the same or similar reasons, the shares were of no value to any third party because obviously no person who purchased the shares gained any influence, additional influence even capacity for influence over the company. As a consequence, the valuation of the shares could only be dealt with on the basis of a calculation of the company's equity and what presumably would have been a fair price to be obtained if the company had been sold at the relevant time and the sale price divided proportionately to the respective shareholdings. Rick's shareholding was in fact 22.79 per cent. Undoubtedly the passing of his shares to John and Pamela might have been of some value to them in that the removal from the share register of a recalcitrant shareholder and no doubt a cause of some distress to all concerned, would have removed some tension. However, the additional financial value to them of his shares was marginal. In his proposed litigation Rick wishes to suggest that if at the time he sold or agreed to sell his shares, he had known what he hopes or suspects might be in the financial accounts of the company for the year to 30 June 1995, he would have learned the untruth of John's representation that it had minimal worth and that its profits were or would be nil or virtually nil for the foreseeable future. He believes or hopes that these accounts will show that the company had or was likely to obtain the money which it apparently had on 28 June 1996, some 16 months or so later, when it purchased a commercial property in St Peters for $1.61 million which was subject to a mortgage to the ANZ Bank of some $640,000 — in other words, when it bought an equity in a building of the order of a million dollars. The applicant says that his suspicion is a reasonable inference from this purchase and, I suspect, from the reluctance or unwillingness of the respondents to produce the 1995 accounts; that in fact the representation in February 1995 that the company was running at best marginally in profit terms would be shown to be incorrect; that as a consequence his proceeds from the sale of shares would on a fair valuation have to have been significantly increased. The applicant presents the argument that the June 1995 accounts would enable him to sue at least the first respondent for this under-valuation of his shares. I approach the principle lying behind Order 15A rule 6 on a fairly expansive basis. This Court and, for that matter, courts generally have long since put aside the concept that litigation can be conducted in a type of ambush or obstructive way that permits parties to sit on documents or be wholly frustrating to others who have a serious financial or other genuine interest in the open running of a company, no less than the running of government or society. In our society, people who have rights are, as they should be, allowed to pursue them. This rule was introduced for the purpose of making it possible for people who can show that they are not on some nuisance frolic to be difficult or painful or to cause other people expense or difficulty but that they have a reasonable chance of bringing successful legal proceedings, to get access to documents which can assist in that goal. Even so, the test in the rule must be approached on an objective basis. That means that its use is not determined by what an applicant for such documentation might think or hope or believe the documents might show but that on the evidence there should be a reasonable prospect that an action could be revealed by the revelation of material in the possession of another but at present not available to the applicant making reasonable inquiries. The rule makers would have had in mind the possibility that people might make applications for documents — particularly in family company or family breakdown type situations — to create harassment and embarrassment and cost which is unjustified. It is thus necessary to look carefully at the evidenced material to ascertain whether the cause of action proposed is reasonably available or may be reasonable available or whether the seeking of pre-trial discovery is designed to harass or embarrass, either alone or as one of a series of actions in that category. As counsel for the applicant has correctly pointed out, the respondents have not sought by -6- evidence to directly challenge the applicant's statements in relation to the basic facts. That is to say, there is no contrary evidence before the Court which denies that representations were made of the kind referred to. Nor has evidence been placed before the Court by the respondents designed to show that the building bought 16 months after the share sale was bought with moneys other than the profits or liquid assets of the company, or that it had characteristics and factors to lessen the prima facie likelihood that a company buying real estate equity of a million dollars presumably supplies the money from within its own assets and financial and security resources rather than from any other source. The respondents have also not placed before the Court any evidence as to why they purchased the shares from the applicant and for that matter even how precisely the purchase figure was arrived at. A document is placed before the Court to indicate that the shares may have been worth of the order of $1.2 million but as some of the items on that sheet appear to be open to some dispute, I do not think that I can place a great deal of reliance upon it now. Nonetheless, the applicant bears the responsibility of placing himself within the terms of rule 6 and the question now is whether he has done so. An important criticism of the applicant by the respondents in this litigation is that his affidavits in support of his application are, to say the least, less than fulsome in their production of the facts. They are in fact brief and contain very little, if any, of the indications of turbulence that has permeated the relationship of the parties to this litigation over very many years. This turbulence is undoubtedly relevant to the litigation. For the reasons I have earlier given, I cannot now trace right through this history in the judgment. In any case the case has been heard today and the transcript covers that history more than adequately. It will suffice to say that in material made available to the Court during the course of the case, the applicant was engaged in a full fledged confrontation with his brother and sister about the running of the company and about the treatment and valuation of his shareholding over a period of something of the order of four years prior to the sale of the shares. His language in many of the documents was, to say the least, quite extreme. I am not now in a position to determine whether the language was justified. What is of concern today is that despite the fact that he accused his brother and sister in quite florid language of fraud, deceit, -7- criminal conduct and many other particularly culpable activities, he was at pains in the witness box to try to back away from the severity of his attacks on them. For that and other reasons, his evidence disclosed him as a witness upon whom very little reliance could be placed. The correspondence shows that he has been threatening legal proceedings throughout the years, long prior to any question of his selling his shares in February 1995 being raised. Such litigation never took place. Some reasons were given as to why some of the litigation did not take place, including in one case that his mother was unwilling to give evidence, presumably in support of his case. This assertion is hardly revelatory of a good reason for not having brought proceedings, because it might equally be open to the conclusion that his mother would not have been able to support his case if she had given evidence. I do not make any decision about that matter for obvious reasons, but it does show the state of mind of the applicant. He was willing himself to write and have his lawyers write — in some cases in very unlawyer-like language, I must say — all types of allegations, not merely against the respondents, but even in some cases against their lawyers who were said to have connived with them in a deliberate attempt to deceive and defraud the applicant. Particularly as it was not followed up by any of the threatened proceedings, this type of language does not suggest that when the applicant alleges he may have a right of action if documents are produced to him now, he really has any intentions at all of launching any such action, or even any particularly formulated belief that the documents, if produced, would be likely to reveal any material that is not already known and would be able to found such an action. There are other factors involved in this matter too. The representations were said to have been made in February 1995. The suggestion in the representations was that the profitability of this company, as I have said, would be negligible at that time and, presumably, for the immediate future. The purchase of the equity of almost a million dollars was made sixteen months later. No suggestion has been made that the representations included a suggestion that the company would not be making profits the following year, or would not at least have access to capital which would enable them to make the purchase referred to at that time. The correspondence shows that a purchase of a similar size had been contemplated three months before the sale of the shares, namely, in or around December 1994. Hence, the -8- applicant was not under any misapprehension at all that this company was apparently in a position to make a capital purchase, or was at least contemplating making a capital purchase of about the same size as it made sixteen months after the share sale. Hence, the idea that the purchase of the property sixteen months later came as some sort of shock to the applicant is a proposition that simply cannot be accepted. If it were capable of being accepted as an objective matter, I would simply not accept it in the case of this applicant. The correspondence and the language used by the applicant in the correspondence suggests that he has been willing to throw around wild allegations and threats for years but do , absolutely nothing about them. He was even prepared, as I have said, to involve his lawyers in statements from which an lawyer ordinarily should and would be standing aloof or, at least, moderating in terms of language in party and party correspondence, but because it appears that the applicant was willing to make these extreme allegations, it seems that his lawyers, or some of them, were willing to get caught up in the emotions at the time. In the circumstances of a family dispute, that is, at the very least unwise. It may be even more. I think therefore that this case throws up a circumstance in which were the applicant a credible proponent of an action, or were an action to be otherwise credibly arguable, I would have had no doubt that the 1995 accounts should be made available. But on the material which has been presented, I can see for myself no reasonable basis for concluding that the applicant has, or may have, the right to obtain relief of the kind that he has put forward in this Court from any of the respondents, or even a genuine intent to try. There is also a problem arising in respect of his compliance with the second criterion, that is, whether he has made all reasonable inquiries and whether he has sufficient information now to enable a decision to be made on the question of whether he should launch his action. The fact that the company was contemplating a purchase of a capital asset of about the same value as was purchased sixteen months after the share sale just three months before the share sale, suggests that he has sufficient information available to him now, without the June 1995 accounts, to assert that the representations were false. However, he may have difficulty in proving their falsity if, as was apparently the case, he knew just a few months before that a capital asset purchase of some size was being contemplated by the company. In fact, he addressed himself directly to that proposal in a letter to which he annexed a very -9. strongly worded attack on the very proposition. In his evidence in this Court, he sought to muddy the waters and confuse the picture by suggesting that his document was not, in effect, an attack on the purchase. In my view, any reasonable reading of the document shows that it was. Moreover, his evidence today attempted to blur the clear message of the letter and the annexure, and to back away from the fact that what he was directing himself to in the letter was the proposed purchase just a short while before the share sale. All this is indicative that the applicant has not been frank with the Court and has not shown the candour which is required to have discretionary relief granted in his favour or, prior to discretionary relief, even the finding of facts based upon his evidence. On the first of the questions raised by the second criterion, that is whether the applicant made reasonable inquiries, there is to say the least one of the grossest anomalies in the evidence in the case I have heard in a long time. During his evidence photographs were tendered of the property purchased by the company in June 1996. They show a substantial commercial property although no evidence was actually given as to what it is being used for, or even whether the company is a landlord receiving rent. The anomaly the applicant's claim that he ascertained details of the purchase price of the property and other matters relating to it by telephoning the South Sydney Council. Yet the evidence shows that this property is in the area of the Marrickville Council. How the South Sydney Council could have supplied him with any information about a property in Princes Highway, St Peters, which even without the documents is manifestly not in the South Sydney municipal area, is completely incomprehensible to me. The matter would be relatively unimportant except that the applicant adhered to this evidence very solidly in cross-examination and refused to concede that he may have mistaken the Council. The third criterion does not need to be addressed because no doubt the respondents do have or can get access to the 1995 accounts of the company. Provided that the inspection of the records would assist in making the decisions as to whether to launch the action, the matter would not require any other factfinding at all. My conclusion, therefore, is that there is no reasonable cause to believe that the applicant has or may have the right to obtain the relief in the Court which he seeks or suggests, or that he has any serious intent to commence any proceeding at all. I also conclude that the applicant did not make all reasonable inquiries to ascertain the material he now seeks. I also conclude -10- that he is not presently deprived of sufficient information to enable a decision to be made as to whether to commence the proceeding which he proposes. Even if these conclusions were all wrong, I would not be prepared to exercise a discretion in his favour that there should be pre-trial discovery for the reason that the applicant has not been frank with the Court. He has not attempted to place before the Court all the matters which one would expect from a litigant seeking the exercise of discretionary relief and in fact has gone out of his way to attempt to deprive the Court of openness and full disclosure of relevant facts. That is simply not the basis upon which discretionary relief could ever be exercised in a person's favour. The application will be dismissed with costs. I certify that this and the preceding nine (9) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Marcus Einfeld Associate: MR . Dated: 4 October 1998 Counsel for the Applicant: Mr A. Vrisakis Solicitor for the Applicant: Blake Dawson Waldron Counsel for the Respondents: Mr S.G. Finch SC Solicitor for the Respondents: Phillips Fox Date of Hearing: 2 October 1998 Date of Judgment: 2 October 1998