Supreme Court New South Wales Medium Neutral Citation: Brighten Pty Ltd v Lombe [2011] NSWSC 817 Hearing dates: 20/07/2011 Decision date: 20 July 2011 Jurisdiction: Equity Division - Commercial List Before: McDougall J Decision: Summons dismissed with costs. Catchwords: PRACTICE - Application for preliminary discovery - whether plaintiff could show that it may be entitled to make a claim for relief against the defendants - summons dismissed with costs. Legislation Cited: Evidence Act 1995 (NSW) Cases Cited: Hatfield v TCN Channel Nine Pty Ltd [2010] NSWCA 69 Lewis v Nortex Pty Ltd (in liq) [2002] NSWSC 1083 Rickard Constructions Pty Ltd v Rickard Hails Moretti Pty Ltd [2004] NSWSC 984 R v Rondo [2001] NSWCCA 540 Vitali v Stachnik [2001] NSWSC 303 Category: Procedural and other rulings Parties: Brighten Pty Ltd ACN 122 082 393 (Receivers and Managers Appointed) (Plaintiff) David John Frank Lombe (First Defendant) Simon John Cathro (Second Defendant) Representation: Counsel: C L Lonergan (Plaintiff) R I Bellamy (Defendants) Solicitors: Jackson Lalic Lawyers (Plaintiff) Gadens Lawyers (Defendants) File Number(s): 2011/132741 Judgment (ex tempore) 1HIS HONOUR: This is an application for preliminary discovery pursuant to UCPR r 5.3. It arises out of the following circumstances. 2The plaintiff was the proprietor and operator of the Fairmont Resort at Leura. Its purchase of the Resort was completed on 18 December 2006. Of the substantial purchase price, some $32,150,000 was provided by the Bank of Western Australia (the Bank). The Bank took security including by way of mortgage over the Resort, fixed and floating charge over all the assets of the plaintiff and a guarantee from the plaintiff's sole director and shareholder, Mr Kwok. 3For reasons that it is presently unnecessary to canvass, the Bank formed the view by October 2009 that the plaintiff was in breach of the terms of the loan facility. The plaintiff commenced proceedings seeking in effect a declaration that it was not in default and seeking to restrain the Bank from appointing a receiver. On 11 December 2009, the court ordered that the first defendant be appointed as receiver, but with relatively limited powers. In particular, the court ordered that the day to day operation, control, management and administration of the Resort should remain with the plaintiff, subject to conditions as to the supply of information to the first defendant. 4On 26 February 2010, following a further dispute in court, which it is unnecessary to summarise, the Bank appointed the present defendants as receivers on an unrestricted basis. 5Thereafter, the then solicitor for the plaintiff corresponded with the defendants and their then solicitors setting out concerns that Mr Kwok asserted he had with respect to the defendants' conduct of the Resort since their appointment. The defendants, through their solicitors, responded in some detail to those assertions but, undeterred by that, the plaintiff, through its solicitor, pressed its claims of maladministration. 6On 21 May 2010, the plaintiff's then solicitor appointed a valuer, Mr Greg Preston, to inquire into and report upon the current market value of the Resort, on the basis of instructions set out in the letter of appointment. The evidence is silent as to what, if anything, Mr Preston did, or as to what, if any, opinion he expressed, in response to his instructions. Part of the reason for this is that the plaintiff has changed solicitors and its former solicitor has retained his file, claiming a lien over it. It may be noted, however, that the plaintiff has not sought to subpoena Mr Preston to produce whatever work he did. Another problem with the appointment of Mr Preston to report may be that, within a week of his appointment, the defendants' then solicitors stated that the defendants "are not prepared to allow a valuer appointed by your client onto the property to value the Resort". 7That letter also asserted that, since an earlier valuation report had been prepared, the defendants had carried out much remedial work, the effect of which was to render less than useful any comparison between the then current valuation of the Resort and its value immediately prior to the appointment of the defendants as receivers. 8On 24 February 2011, the plaintiff's current solicitors wrote to the defendants, referring to a hearing that was to take place in this court on 16 March 2011, and stating that they were instructed that "the Resort has been sold for an amount significantly less than its market value or for [sic] the best price that was reasonably obtainable in accordance with s 420A of the Corporations Act". They requested "copies of the marketing campaign...all documents in relation to any offers made...all documents in relation to any company that was engaged to manage the Resort, including" a specified company and any others that may have been engaged. 9The letter asserted that "[o]ur client requires access to this information to decide whether or not to commence proceedings...". 10In a subsequent letter, the solicitors indicated that their client was Mr Kwok. Perhaps not surprisingly, the defendants' current solicitors then replied stating that Mr Kwok had no standing to bring any claim, and thus that the defendants were not prepared to make documents available. 11At the hearing on 16 March 2011, the court directed entry of judgment for the Bank against the plaintiff (and against Mr Kwok, pursuant to his guarantee) in the sum of about $13.5 million. That judgment debt has not been paid. The bank served a statutory demand on the plaintiff in respect of that debt. The plaintiff applied to set the statutory demand aside. The court yesterday refused that application. Time for compliance with the demand has expired. It follows that the plaintiff must be taken to be insolvent. I think it is safe to infer that it is highly likely that the Bank will follow this up by commencing proceedings for the winding up of the plaintiff. 12Against that background, I turn to the application for preliminary discovery. The categories of documents sought are extremely wide. They include, in prayer 1 of the summons, all documents that the defendants have or have had from the date of their appointment to the date of completion of sale of the Resort. By prayer 2, they include all documents relating to that sale. By prayer 3, they include "all documents, including but not limited to" some six described categories which, in part, relate to the marketing and sale process and in part relate to the management, occupancy, staff and financial performance of the Resort during the receivership. 13It was, I think, common ground that the principles relating to the threshold test under UCPR r 5.3 were set out in summary form in the judgment of McColl JA in Hatfield v TCN Channel Nine Pty Ltd [2010] NSWCA 69. The threshold test requires it to appear to the court that the applicant for preliminary discovery may be entitled to make a claim for relief. Her Honour said at [47] to [49] that: (1) it is not necessary for the applicant to show a prima facie or pleadable case; but (2) the mere assertion of a case is insufficient; there must be some reasonable cause to believe that there is a right of action; (3) belief requires more than mere assertion, suspicion or conjecture. It requires that the mind be inclined to assent to, rather than to reject, the proposition that is the subject of the belief. It is more than mere possibility; and (4) the material that inclines the mind towards the belief must be reasonably capable of doing so; and it must be directed to the necessary elements of the potential cause of action. 14Further, as her Honour pointed out, what is required is not whether there is sufficient information to decide if a cause of action is available, but sufficient information to make a decision whether to commence proceedings. Thus, as her Honour said, documents showing the possible existence of defences may be discoverable under r 5.3, because a decision whether to commence proceedings must necessarily (or, at least, prudently should) include some consideration of what defences are available and what if any strength they may have. 15In the present case, the material relied upon to show that the court should be satisfied that the plaintiff may be entitled to make a claim for relief against the defendants is, essentially, within two categories. The first category is the simple fact that the Resort was sold, on 23 December 2010, for about $24.5 million: in other words, almost $21 million less than the purchase price paid in December 2006. It is said that the discrepancy alone is sufficient to engender the necessary state of belief. 16The second category of material relied upon can be described, broadly but sufficiently, as assertions made in various letters written by the plaintiff's present or former solicitors to the defendants and their present or former solicitors. 17For example, in the second category, reference is made to a letter of 28 April 2010. That letter asserted that Mr Kwok had instructed the author "that he has very serious concerns with respect to the conduct of the Fairmont Resort business by [the defendants] since their appointment some eight weeks ago". Some ten matters were instanced: (1) the occupancy rate over Easter was said to have been very much below what it should have been based on the experience at the Resort and experience at other resorts in the Blue Mountains region; (2) the defendants had not appointed an experienced operator; (3) they had not appointed a head chef; (4) they had not appointed anyone to take charge of the conference and convention activities for which the Resort was apparently renowned; (5) there was no experienced food and beverage manager; (6) no front office manager had been appointed; (7) the accounts and IT departments were understaffed; (8) there were no gardeners employed, and the gardens were being neglected; (9) there were no vehicles for use by the staff for the proper purposes of the Resort; and (10) air conditioning problems still existed. 18The defendants' then solicitors replied to that letter, denying the allegations. Thereafter, on 24 May 2010, they wrote a very detailed letter, comprising I think 13 pages, in which they listed problems that the defendants said they had identified on their appointment, and steps taken in response to those problems; and dealt with the specific allegations contained in the letter of 28 April 2010 to the extent that they had not been covered in the preceding material. 19I should start by observing that I do not regard the letter of 28 April 2010 as any evidence of the truth of the assertions that it contains. It seems to me to be clear that it was written at a time when Mr Kwok, on behalf of the plaintiff, was considering whether or not to institute proceedings for what he regarded as the maladministration of the Resort. Accordingly, it seems to me, even if the letter is otherwise to be regarded as a business record for the purpose of s 69 of the Evidence Act 1995 (NSW), nonetheless the exclusion set out in subs (3) applies. That is because, as Barrett J said in Vitali v Stachnik [2001] NSWSC 303 at [12], the purpose of subs (3) is to prevent the introduction into evidence, as something capable of proving the assertions in it, hearsay material "which is prepared in an atmosphere or context which may cause it to be self-serving - of possibly being prepared to assist the proof of something known or at least apprehended to be relevant to the outcome of identifiable legal proceedings". (Without I hope being immodest, I might add a reference to what I said, to similar effect, in Rickard Constructions Pty Ltd v Rickard Hails Moretti Pty Ltd [2004] NSWSC 984 at [23]-[24].) 20In this context, the expressions "in contemplation of" or "in connection" with have been recognised to be words of wide meaning: R v Rondo [2001] NSWCCA 540 at [96]; Lewis v Nortex Pty Ltd (in liq) [2002] NSWSC 1083 at [4(3)]. 21But even if I were wrong as to the application of s 69(3), the letter of 28 April 2010 cannot be considered without taking full account of its reply. If the letter of 28 April is to be taken as some evidence of the truth of the matters it asserts, it seems to me that necessarily the same approach should be taken into relation to the response of 24 May. The fact that the solicitors continued to argue back and forwards between themselves thereafter does not seem to me to matter a great deal. 22Thus, as I have indicated, I do not regard the assertion set out in the letter of 28 April 2010 as having any probative significance for the purposes of the threshold test to which r 5.3 directs attention. 23There is a body of subsequent correspondence in which assertions were bandied back and forth. Clearly, as time went by, the likelihood of litigation may be thought to have increased, and the admissibility (as proof of truth of representations) of that correspondence becomes increasingly dubious. In any event, once again, it has to be noted that the assertions did not do anything to clarify the position beyond that which had been established by the letters of 28 April and 24 May 2010 to which I have referred. 24It seems to me that this leaves, as the only matter capable of engendering the requisite belief, the disparity between the purchase price in September 2006 and the sale price in December 2010. I have to say that, notwithstanding the very considerable disparity between those two figures, I do not regard that disparity as indicating, to the position of inclining my mind in favour of the plaintiff, that it may have a claim against the defendants. The court cannot but be aware that many things happened, internationally and, by reflection, within Australia, between those two dates. Further, the court cannot but be aware that, on the plaintiff's own case, the Resort does not appear to have been in a very satisfactory state at the time the defendants were appointed. In those circumstances, it seems to me, the deficiency achieved on a sale by receivers, acting on the instructions of a mortgagee, is not sufficient to engender the requisite belief. 25It is also to be borne in mind that the plaintiff has commissioned a valuation (which one would have thought was extremely relevant to the point that I just dealt with) but has not put into evidence either the valuation that was commissioned, or any account of what it said, or any explanation of why it was not prepared. The plaintiff bears the onus of proof; and the calling of the valuer, or the adducing of proof of his valuation, is a matter peculiarly within the plaintiff's control. I do not see why the court should draw inferences, on the basis of material that is both ambiguous and exiguous, in favour of a party who had the means of proof and who neither availed itself of those means of proof nor explained why it could not do so. 26For those reasons, I conclude that the application for preliminary discovery must fail. 27I should record, however, that the defendants argued that if my decision had been to the contrary, they would seek security for their costs of complying with the request. Those costs were estimated to fall within a range between $32,367.50 to $38,285.50. The defendants point to the fact that the plaintiff had an unsatisfied judgment debt (and that its principal and guarantor Mr Kwok, as guarantor, is a judgment debtor for the same amount) for an amount in excess of $13.5 million; that the judgment had not been satisfied; and that the plaintiff was insolvent (having not complied with the statutory demand). In those circumstances, there being no challenge to the quantification of the range, I would not have ordered that any preliminary discovery be provided except on terms that the plaintiff provide security, by way of cash or reasonably acceptable guarantee, for the full upper amount of the estimated costs and disbursements. 28Nor, dealing with matters of discretion, would I have ordered preliminary discovery in the full range sought by the plaintiff. At most, having regard to the basis on which relief was sought, I would have ordered preliminary discovery within paras (a) to (f) of prayer 3 of the summons. 29Finally, and dealing with discretionary matters, had I been otherwise satisfied that it was appropriate to make an order, I would have stayed the order for some time (admittedly, not very long) to see whether the Bank commenced proceedings for the winding up of the plaintiff; and if it did, I would have stayed the order further until those proceedings had been completed. I would have taken those steps on the basis that the defendants should not be put to the trouble of giving preliminary discovery if (as appears likely) any decision to commence and prosecute proceedings is likely to be taken out of the hands of Mr Kwok in the very near future. 30Having said all that, it is sufficient to order, as I do, that the summons be dismissed with costs. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 03 August 2011