Supreme Court New South Wales Medium Neutral Citation: Hirshman v Dixon-Smith (No 2) [2015] NSWSC 1958 Hearing dates: 2 December 2015 Date of orders: 18 December 2015 Decision date: 18 December 2015 Jurisdiction: Equity Before: Robb J Decision: The parties are to bring in short minutes of order to give effect to these reasons for judgment Catchwords: PROCEDURE – discovery – application for discovery after commencement of suit – discovery required to determine whether statement of claim should be amended and if so to plead amendment properly – defendants do not oppose discovery for some categories, require variation of other categories, and oppose yet other categories – discovery ordered for certain categories of documents, others varied or rejected PROCEDURE – whether plaintiffs' notice of motion seeking leave to file amended pleading be dismissed – plaintiffs should have opportunity to propound further draft pleading after the defendants' discovery is provided – notice of motion stood over PROCEDURE – costs – two failed attempts by plaintiffs to amend pleading – plaintiffs should have previously sought discovery to properly amend pleadings – previous judgment found many flaws in plaintiffs' draft pleadings not attributed to absence of discovery by defendants – plaintiffs to pay costs of the defendants concerning previous unsuccessful pleading amendment applications Legislation Cited: Civil Procedure Act 2005 (NSW) Supreme Court (General Civil Procedure) Rules 2005 (Vic) Cases Cited: Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243 Hirshman v Dixon-Smith [2015] NSWSC 1599 White v Overland [2001] FCA 1333 Category: Procedural and other rulings Parties: James Henry Hirshman (first plaintiff) Meryn Jane Hirshman (second plaintiff) Merjan Pty Ltd as Trustee of the Hirshman Family Discretionary Trust (third plaintiff) Stuart Dixon-Smith (first defendant) Townway Pty Ltd (second defendant) Representation: Counsel: D Pritchard SC/J Emmett (plaintiffs) M T Steele SC/M F Newton (defendants) Solicitors: Holman Webb (plaintiffs) Thompson Eslick Solicitors (defendants) File Number(s): 2013/34207 Publication restriction: None Judgment Introduction 1. These reasons for judgment deal with two primary issues that are in dispute between the parties. The first concerns an application by the plaintiffs for the discovery of certain categories of documents by the defendants and a related company. The second concerns the costs order that the court should make in relation to an application by the plaintiffs to amend their statement of claim, which has, to this point, not been successful. A subsidiary issue is whether the plaintiff's notice of motion seeking leave to amend should now be dismissed. 2. I declined the plaintiffs' application for leave to amend their statement of claim in reasons for judgment published on 29 October 2015: see Hirshman v Dixon-Smith [2015] NSWSC 1599. The relevant facts, and a description of the issues between the parties that the plaintiffs sought to raise in their draft second further amended statement of claim (the draft pleading), are set out in some detail in that judgment. I will not repeat them here, save to the extent necessary to explain my present reasons. Background 1. I will simplify the background facts. I will not distinguish, unless necessary, between the individual plaintiffs and the individual defendants. 2. The plaintiffs allege that they and the defendants invested in a joint venture involving land at Byron Bay. The Byron Bay land is divided into two parcels called the Eastside Land and the Westside Land. The joint venturers also operated a sand quarry on the land (the Quarry). Both parcels of land are owned by the one company, Crisjoy Pty Ltd (Crisjoy), as trustee of the Lighthouse Unit Trust. The Quarry is operated by another company called Leadshine Pty Limited (Leadshine). 3. The plaintiffs and the first defendant, Mr Dixon-Smith, held their interest in the Byron Bay venture through the second defendant, Townway Pty Ltd (Townway). Townway owns shares in Crisjoy and Leadshine, and units in the Lighthouse Unit Trust. The interests in the Byron Bay venture held collectively by the plaintiffs and the defendants are minority interests. 4. For present purposes, the crux of the allegations made by the plaintiffs is a claim that, on 6 February 2007, Mr Hirshman and Mr Dixon-Smith entered into an agreement whereby they agreed that, although no change would be made to the legal structure of their collective investment in that Byron Bay venture, they would ultimately, as between themselves, account for the profits earned by the venture in a particular way. In short, any profits earned by the venture out of the development of the Eastside Land would belong to Mr Dixon-Smith, and any profit from the development of the Westside Land and the Quarry would be divided equally between Mr Hirshman and Mr Dixon-Smith. Mr Hirshman and Mr Dixon-Smith would also be liable to meet any expenses concerning their combined interests in the Byron Bay venture in the same proportion as had been agreed that they would share the profits. 5. The effect of the 6 February 2007 agreement was that, on the one hand, it would not change the structure of any investment in the venture, but on the other hand, following the accounting exercise that would take place as a result of the agreement, the benefits that the plaintiffs would receive would reflect half of the profits earned from the development of the Westside Land and the operation of the Quarry, while Mr Dixon-Smith would ultimately receive whatever profits were earned from the development of the Eastside Land. 6. The draft pleading was somewhat equivocal about the nature of Mr Dixon-Smith's control over the activities of Crisjoy and Leadshine. There are allegations that Mr Dixon-Smith controlled both companies, as their sole director, from 22 June 2012. It is not clear what the position was before that date. As will appear below, it seems that the primary events that are relevant for present purposes occurred after 22 June 2012. 7. As I have said, the collective investment of the parties in the Byron Bay venture was held through Townway. Townway was therefore one of the joint venturers. Any profit from the conduct of the Byron Bay venture would be earned by Townway. The combined effect of the terms of the 6 February 2007 agreement and the fact that any profit would be derived through Townway was as follows. To the extent that Mr Dixon-Smith could control the activities of Crisjoy and Leadshine, if he caused those companies to generate profit in a way that artificially increased the profit attributable to the Eastside Land, in a way that correspondingly diminished the profit yielded by the Westside Land and the Quarry, the implementation of the accounting exercise required by the agreement would increase his share of the overall profit from the Byron Bay venture to the disadvantage of the plaintiffs. Furthermore, if Mr Dixon-Smith artificially reduced Townway's share in the Byron Bay venture, and increased his own share through the use of a vehicle other than Townway, he would also increase his share in the profits of the Byron Bay venture to the detriment of the plaintiffs. That would be because the absolute value of any share in the overall profit from the Byron Bay venture that would be received by Townway, for division between the parties, would be reduced. Issues relevant to application for discovery 1. Mr Dixon-Smith affirmed an affidavit in these proceedings on 24 April 2014. In paragraphs 359 to 361, and pars 470 and 471 (the latter in reply to part of an affidavit of Mr Hirshman), Mr Dixon-Smith deposed to a number of events relevant to the activities of the Byron Bay venture. 2. It is these events that prompted the plaintiffs to seek leave to file their draft pleading, and which has led to the present application for discovery. 3. The relevant events are set out in pars 60D to 60K of the draft pleading (see par 105 of my earlier reasons for judgment). 4. There are two relevant aspects of those allegations. The first concerns a demand made by Balmoral Broken Head Pty Ltd (Balmoral) on 13 March 2012 on Townway as guarantor for the obligations of Crisjoy under a loan agreement called the Mezzanine Facility Agreement for $2,961,252.96. The debt owed to Balmoral had been accumulating at a default interest rate since its maturity on 16 December 2008. 5. It is necessary to interpolate that the third defendant to the draft pleading is a company called Oriday Pty Ltd (Oriday). Oriday is a company controlled by Mr Dixon-Smith and his wife. Oriday is not presently a party to these proceedings. 6. The plaintiffs allege that Mr Dixon-Smith caused Oriday to advance a total of $1,910,319.55 to Crisjoy to enable that company to repay Balmoral. 7. The next claim is the one that is relevant for present purposes. The plaintiffs allege that Mr Dixon-Smith caused Leadshine to borrow $1 million from Paul Ramsay Holdings Pty Ltd (Paul Ramsay). Leadshine lent $950,000 of that money to Mr Dixon-Smith. Mr Dixon-Smith paid the $950,000 to Balmoral in discharge of the guarantee given by him in respect of the Mezzanine Facility Agreement. Consequently, Mr Dixon-Smith obtained for himself by subrogation at least part of the benefit of the security held by Balmoral over the Eastside Land. 8. It will be appropriate at this point to collect together a number of threads of these allegations. The plaintiffs claim that Crisjoy's borrowing from Balmain under the Mezzanine Facility Agreement related solely to the development of the Eastside Land. Crisjoy was the borrower. Mr Dixon-Smith was a guarantor. Townway was also a guarantor. The Mezzanine Facility Agreement matured on 16 December 2008, but was allowed to accumulate default interest for almost 3 ½ years until 13 March 2012. Balmoral served a demand for repayment. The loan was repaid. Almost $2 million was repaid by Mr Dixon-Smith causing Oriday to advance that amount to Crisjoy. Most of the balance was raised by Leadshine borrowing $1 million from Paul Ramsay. That money was not advanced directly to Crisjoy, but $950,000 of it was advanced to Mr Dixon-Smith, which he used to directly reduce his exposure as a guarantor, by paying that sum to Balmoral. As a result, he became subrogated to Balmoral's security over the Eastside Land. 9. It may be accepted that the structure of these transactions is not entirely straightforward, and to that extent it may be unusual. The evidence that is presently available does not explain why this particular structure was adopted. While perhaps unusual, it does not follow that it is likely to be improper. First, if the 6 February 2007 agreement is put aside for the moment, it appears that Townway and the other joint venturers had interests in both Crisjoy and Leadshine. Consequently, it is not necessarily strange that Leadshine, which operated the Quarry, was used to assist in the repayment of the loan to Balmoral. Secondly, there is a basis for inferring that the Byron Bay venture may have been in a state of some financial distress, because otherwise it would be improbable that the joint venturers would have allowed the Mezzanine Facility Agreement to accumulate at default interest rates for almost 3 ½ years. It is accordingly quite possible that the particular structure that was adopted was chosen because it was the best means available of repaying Balmoral in circumstances that presented some difficulty. 10. Be all this as it may, the fact of the existence of the 6 February 2007 agreement has generated suspicion on the part of the plaintiffs. That suspicion flows out of the use of Leadshine to borrow money for the ultimate purpose of repaying part of the debt owed by Crisjoy to Balmoral, which was only secured by the Eastside Land. That, so to speak, mixes up the part of the Byron Bay venture in which the plaintiffs were to share, with the part in which they would not benefit. Thus, even though there may have been a sensible commercial reason for Leadshine's participation; for example, it may have had equity in the Quarry that would provide adequate security to Paul Ramsay in order to borrow $1 million, and even though the joint venturers collectively may have had good reason to employ their interest in Leadshine to relieve the Eastside Land from the security granted to Balmoral, the plaintiffs apparently fear that the involvement of Leadshine might disadvantage them when the time finally comes for implementing the 6 February 2007 agreement. 11. The plaintiffs also express concern about the aspect of the transaction in which Leadshine advanced $950,000 to Mr Dixon-Smith, which exposes Leadshine to the risk of default by him. The plaintiffs are also concerned about the fact that Mr Dixon-Smith now has a security over the Eastside Land by subrogation to Balmoral's security. 12. The second aspect of the transaction whereby the Mezzanine Facility Agreement was repaid apparently involves transactions set out in pars 60I to 60K of the draft-pleading. The plaintiffs assert that these transactions are related to that which is outlined above whereby Leadshine borrowed $1 million and advanced $950,000 to Mr Dixon-Smith; because that is the way it appears from the small amount of evidence given on the subject in Mr Dixon-Smith's 24 April 2014 affidavit. The plaintiffs do not actually know that the two transactions were connected, and accordingly were not able to allege in their draft pleading what the connection was. 13. The plaintiffs allege that on 28 June 2012 Mr Dixon-Smith caused Crisjoy to issue Oriday with 9900 fully paid shares in Crisjoy, and an unknown number of units in the Lighthouse Unit Trust. He also caused Leadshine to issue to Oriday 900 fully paid shares in Leadshine. These transactions had the following consequences. Oriday became the holder of 99% of the issued shares in Crisjoy, and Townway's shareholding was diluted from 20% to 0.2%. Oriday became the holder of 90% of the issued shares in Leadshine, so Townway's interest in Leadshine was diluted from 20% to 2%. Oriday became the holder of 90% of the units in the Lighthouse Unit Trust, and Townway's unit holding was diluted from 40% to 4%. The plaintiffs' interests in the various shares and units were proportionally reduced. 14. The plaintiffs wished to allege by their draft pleading that these transactions involved Mr Dixon-Smith, and Oriday, by reason of its participation in the transactions with all of the knowledge of Mr Dixon-Smith, having breached various duties that were owed to the plaintiffs. 15. The plaintiffs faced the difficulty, however, that they did not know what consideration, if any, Oriday provided to Crisjoy and Leadshine for the issue of these shares and units, or whether that consideration was adequate in relation to the value of the securities that were issued. The plaintiffs also did not know whether the circumstances in general justified the issue of the securities to Oriday. As I have said, they also did not know whether, and if so how, these transactions were connected with the transactions whereby the debt owed to Balmoral was repaid. 16. Nonetheless, the plaintiffs sought to allege that they had suffered damage as a result of the participation of Mr Dixon-Smith and Oriday in all of the transactions. They could not, however, particularise their loss, or even describe its nature accurately. 17. This lack of information on the part of the plaintiffs, and the consequences it had for the drafting of the draft pleading was one of the reasons why I declined to give the plaintiffs leave to file the draft pleading. 18. This is the reason why the plaintiffs have now sought discovery of certain categories of documents from the defendants and Oriday, so that they can properly revise the draft pleadings. Earlier requests by plaintiffs for discovery 1. By their notice of motion filed on 20 August 2014, the plaintiffs sought discovery from the defendants in the following terms in relation to their Byron Bay venture claim: 10 documents recording communications between any of the Defendants and Oriday Pty Ltd in respect of the land owned by Crisjoy Pty Ltd located on Broken Head Road, Suffolk Park NSW and the quarry business operated by Leadshine Pty Ltd in the period March 2012 to December 2012; 11 documents recording communications between any of the Defendants and any or all of Paul Ramsay and Paul Ramsay Holdings Pty Ltd in respect of the $1,000,000 loaned to Leadshine Pty Ltd in the period March 2012 to December 2012. 1. I have been told that the defendants refused to give this discovery, on the ground that it sought disclosure of documents that were not relevant to any issues raised by the pleadings as they stood at the date the notice of motion was filed. In response to this refusal, the plaintiffs deferred pressing their claim for discovery at that time, and instead did their best to draft the first version of their draft pleading. 2. As I explained at par 12 of my earlier reasons for judgment, on 30 June 2015 the plaintiffs effectively withdrew that draft, and said they would propound a revised draft pleading. They did so, and it was that second draft that I refused to give the plaintiffs leave to file in my judgment published on 29 October 2015. 3. In the interim, on 24 July 2015, the plaintiffs' solicitors sought discovery of certain classes of documents in a letter to the defendants' solicitors, in order to enable the plaintiffs to revise their draft pleading. By letter dated 27 July 2015, the defendants' solicitors declined to give the discovery, for various reasons, including, again, that the categories of documents were not relevant to any issues raised by the current pleadings. Again, the plaintiffs did not issue the claim for discovery, but rather made a second attempt to amend their pleading, unsuccessfully as it has turned out. 4. I will return to the significance of these attempts by the plaintiffs to obtain discovery from the defendants in order to properly amend their pleadings below, when I come to consider the dispute between the parties as to the costs order that should be made. 5. The plaintiffs, having decided on two occasions not to pursue their claim for discovery to aid the revision of their pleadings, have now pursued that issue in order to permit them to try again to revise their draft pleading to cure the deficiencies that led the court to decline their application for leave to amend. The plaintiffs' present claim for discovery 1. The claim that is now before the court for an order that the defendants and Oriday give discovery to the plaintiffs of certain categories of documents has not been made by any formal process. The categories for discovery now sought are not the same as those in the plaintiffs' notice of motion filed on 30 August 2014. On 17 November 2015, I made directions for the parties to exchange submissions. The categories of documents for which the plaintiffs seek discovery are set out in par 12 of the plaintiffs' submissions dated 23 November 2015. The defendants responded by written submissions dated 30 November 2015. 2. The parties have made submissions concerning the legal principles that the court should apply in deciding what, if any, discovery the defendants and Oriday should be ordered to make to the plaintiffs at this stage of the proceedings. 3. The proceedings have been on foot since 4 February 2013, and, as I understand it, the parties have exchanged a substantial quantity of evidence on the basis of the existing pleadings. Mr Dixon-Smith's 24 April 2014 affidavit prompted the plaintiffs' desire to further amend the pleadings, in the way that I have described above. The information given by Mr Dixon-Smith in his affidavit has not been sufficient to enable the plaintiffs to amend their existing pleadings in a manner that satisfies the rules of pleading. They now apply for discovery in order to enable them to do so. This is not, therefore, an application for discovery before suit. It is an application for discovery during the course of a suit, to enable the plaintiffs to plead a proper response to new information of which they have learned as a result of receiving the defendants' evidence. 4. As will be seen, the defendants have not absolutely resisted the plaintiffs' claim. They have agreed to give some discovery; they have agreed to give discovery of other categories sought by the plaintiffs, provided the description of the categories is revised; and they have declined to give discovery of other categories. 5. This is not, therefore, a necessary or appropriate occasion for the court to fully consider the principles that should be applied in circumstances such as the present, but where the application for discovery in order for a party to amend its pleadings is entirely resisted by the other party. 6. It will be sufficient for me to note that the plaintiffs urged on the court the submission that the effect of ss 56 to 60 of the Civil Procedure Act 2005 (NSW) was to widen the circumstances in which the court could order a party during the course of proceedings to give discovery to the other to enable that other to perfect its pleadings. The plaintiffs relied on various authorities, but particularly the decision of Warren J (as her Honour then was) in Computershare v Perpetual Registrars (2000) 1 VR 626 at [28], where her Honour made the following observations concerning discovery of documents by the defendants in that case prior to the closure of pleadings pursuant to O 29.07 of the Supreme Court (General Civil Procedure) Rules 2005 (Vic): [28] It was urged by Mr Archibald QC that I should read into O 29.07 a requirement that Computershare demonstrate exceptional circumstances. O29.07 was a novel rule introduced by Statutory Rule No 99 of 1986. Prior to its introduction discovery between parties was governed by O 31.12. The latter rule vested in a judge the broad discretion to order discovery at any stage, either generally or limited to certain classes of documents, as the court in its discretion sought fit. O29.07 essentially codified the position at common law but in doing so left the matter entirely at the discretion of the court. There was not a prerequisite inserted in the new rule requiring an applicant for early discovery to satisfy the court of exceptional circumstances. In my view the imposition of the requirement of making out exceptional circumstances sets too high an obstacle for an applicant and, furthermore, in particular circumstances may well frustrate the very purpose for which the rule was inserted. In determining whether or not to exercise the discretion under O29.07 it will be necessary for a court to assess the circumstances in each case. In this matter I am satisfied that the discretion ought be exercised on three grounds. Firstly, Computershare has demonstrated a pre-existing relationship between it and the first and second defendants. Secondly, Computershare has a strong and unrebutted suspicion as to the use of information that it regards as confidential. Thirdly, the statement of claim filed by the plaintiff has already been the subject of attack by the Perpetual interests. A summons was issued returnable before me by the Perpetual interests seeking to strike out the plaintiff's claim or, alternatively, particular paragraphs of the statement of claim. The summons was not pursued before me and Mr Archibald indicated that his client would be satisfied to have the summons dismissed or dealt with at another time. Be that as it may, the plaintiff is reasonably entitled to regard itself in a position where its statement of claim is potentially under attack and it requires information to enable it to further plead and particularise its case in circumstances where the relevant matters are exclusively within the province of knowledge of the defendant. In the circumstances, therefore, I consider it appropriate that the defendants provide discovery pursuant to O29.07. (Emphasis added) 1. Order 29.07 authorises the court to order that a party to proceedings make discovery of documents to any other party notwithstanding that the pleadings between any parties are not closed. The plaintiffs relied upon her Honour's statement that O 29.07 essentially codified the position at common law, so that the plaintiffs would be entitled to make a similar application for discovery by the defendants before closure of the pleadings at general law. The plaintiffs also submit that the three reasons for granting discovery upon which Warren J relied apply to the present case. 2. Although, as I have said, the defendants' resistance to the plaintiffs' application was qualified, they made two principle submissions concerning the basis upon which the court should decide the differences between the parties. First, the defendants submitted that the court should treat the plaintiffs' application as if it was, in substance, an application for discovery before suit. Accordingly, the defendants say, the court should have regard to the principles relevant to an application made for preliminary discovery under UCPR r 5.3. The defendants submit that the court should be cautious in approaching the task of deciding whether the defendants should be ordered to give discovery in respect of any category of documents that is not relevant to existing issues in the proceedings. 3. Secondly, the defendants submit that the court should not forget that Oriday is not a party to the proceedings. Oriday is clearly associated with Mr Dixon-Smith, but it should not be regarded merely as his alter ego, because his wife has a separate interest in the company. 4. In all of these circumstances, I propose to adopt the following approach. The present application is not strictly an application for discovery before suit. It is an application made after the commencement of the proceedings for limited discovery in order to enable the plaintiffs to properly plead an amendment to their existing pleadings to deal with the consequences of information that came to their notice in an affidavit served by the defendants. While the plaintiffs learnt of that information in that way, the disclosure of the information did not automatically entitle the plaintiffs to the discovery they now seek. The information may be peripheral to the defendants' case. The information appears to be incomplete, and it is doubtful that it would prove anything of significance by itself. A party is not entitled to discovery of documents from the other party, simply because that other party serves evidence it proposes to rely upon. Nonetheless, the new information is capable of having relevance to the rights that the plaintiffs seek to enforce in their proceedings as they stand. However, the nature of that relevance is not clear. It is, at present, uncertain whether the new information, and the additional information now sought by the plaintiffs, is irrelevant. It would be too extreme to describe the plaintiffs' present application as being mere fishing. However, it is a real possibility that the suspicion that the new information has engendered in the plaintiffs' minds might be illusory. 5. I have approached the dispute on the basis that I should deal with the application in a practical way. I should be conservative, and restrict the discovery that should be ordered to be given to categories that are limited to what should be necessary to give the plaintiffs the information that they require to decide whether an amendment to their pleadings is necessary, and to permit them to draft any amendments properly. I should deal with the risk that it may turn out that the plaintiffs will receive inadequate information by giving them leave to make further, precisely defined, claims for further discovery, if that is necessary to fill any unexpected gaps in the information disclosed by the discovery that will be given. I should not order that discovery be given by Oriday, if it is reasonable to assume that sufficient information can be given by discovery by the existing defendants. General observations concerning need for discovery 1. I will make the following general observations before I consider the categories of documents for discovery sought by the plaintiffs. 2. First, I think that the need for further discovery is much less obvious in the case of Leadshine's involvement in the repayment of the Balmoral loan than it is in relation to the transactions that have diluted Townway's interests in the Byron Bay venture. 3. While Leadshine's involvement in the repayment of the Balmoral loan may be considered to be in some respects unusual, I do not think that it is particularly suspicious. When the time came to repay Balmoral, the joint venturers probably had to raise the necessary funds by whatever means were available. It is likely that Leadshine participated because it had assets that were sufficient to secure part of the funding required. It is true that Leadshine advanced $950,000 to Mr Dixon-Smith, rather than lending the money directly to Crisjoy. As I have noted, that gives rise to the risk that Mr Dixon-Smith may not be able to repay the loan. It is also possible that the transaction may have had the result that Mr Dixon-Smith has a security interest in the Eastside Land, that he would not otherwise have had. That should not be of concern to the plaintiffs, because the effect of the 6 February 2007 agreement was that they gave away their entitlement to share in any profit from the development of the Eastside Land. Furthermore, and more importantly, the accounting exercise the subject of the 6 February 2007 agreement can only be conducted after the Byron Bay venture is concluded. It is only when it is known whether there are any profits from the development of the Eastside Land, the development of the Westside Land, and the operation of the Quarry, that it will be meaningful to undertake the accounting exercise to determine the basis upon which the profits should be divided under the agreement. I infer that the Byron Bay venture is some time, perhaps a considerable time, away from completion. Profits may never be made. It is not clear why, even if Leadshine's participation in the repayment of the Balmoral debt may diminish the likelihood that it will ultimately be profitable to the joint venture, that adjustments for Leadshine's participation could not be made as part of the accounting exercise required by the agreement. 4. The position is somewhat different in relation to the transactions that have led to the dilution of Townway's interests in the Byron Bay venture. The effects of that dilution will be real, so that if any profits are made from any components of the joint venture, the amount that will be received by Townway in absolute terms will be reduced. If the 6 February 2007 agreement is then implemented, there will be a real proportionate reduction in the amounts that the plaintiffs will receive. 5. As I said at par 243 of my earlier reasons: "The transactions involving Oriday are plainly on their face extraordinary, and cry out for a proper explanation". 6. The connection between Leadshine's participation in the repayment of the Balmoral debt and the transactions that led to the dilution of Townway's interests in the Byron Bay venture is not clear. As stated above, on 13 March 2012 Balmoral's solicitors made a demand on Townway, as a guarantor of the debt owed by Crisjoy, to pay $2,961,252.96. The dilution transactions occurred on 28 June 2012. The plaintiffs asserted in their draft pleading that Oriday advanced $949,435 to Crisjoy in the financial year ending 30 June 2012 and $960,884.55 in the financial year ending 30 June 2013 (see par 60F). Leadshine borrowed the $1 million from Paul Ramsay on 25 October 2012. Mr Dixon-Smith said in his affidavit (par 361) that Leadshine and Crisjoy "obtained finance and fully repaid the amounts owing to Balmoral, but in the process granted security over their assets and issued new shares and units causing Townway's interest in Leadshine and the Lighthouse Unit Trust to be diluted to 4% and its interest in Crisjoy to be diluted to 0.4%". Mr Dixon-Smith said (par 470) that Oriday provided loans and fresh equity to the Lighthouse Unit Trust and Leadshine of approximately $1,600,000, but this was not enough to repay the Balmoral debt, so that it was necessary for the additional $1 million to be borrowed by Leadshine. 7. The plaintiffs did not disclose the rationale for selecting the categories of documents for which they seek discovery in their submissions, in the sense of explaining how the expected contents of each category of documents would yield information that would, with all of the other information sought, explain the issues of concern to the plaintiffs. That inhibits the ability of the court to determine the categories of documents that should be necessary and sufficient to enable the plaintiffs to ascertain whether Leadshine's involvement in the repayment of the Balmoral debt, and the transactions that diluted Townway's interests in the Byron Bay venture, were justified or not. Categories of documents for discovery sought by plaintiffs Category (a) 1. The defendants agreed to give discovery of the following category of documents, but submitted that the word "refer to" should be replaced by the words "record". They submit that the discovery at this preliminary stage should be satisfied by the production of minutes recording the transactions. The plaintiffs respond that the description of the category of documents is appropriate because it is already limited only to minutes. (a) Minutes of Crisjoy it Pty Ltd (Crisjoy) (either in its corporate capacity or as trustee of the Lighthouse Unit Trust (LUT)) which refer to:- i. the issue of shares in Crisjoy it to Oriday Pty Ltd (Oriday); or ii the issue of units in the LUT to Oriday. 1. It may be that the minutes that authorised the issue of the securities will be sufficient, if they contain adequate information concerning the terms on which the securities were issued, particularly the consideration, and the justification for that consideration being chosen. It is possible that these subject matters may have been dealt with in different minutes, although that may be unlikely. It may be that the word "record" is too narrow, while the words "refer to" may be too wide. It will be best if words are used that describe the subject matter of the information that requires disclosure. 2. The words "which refers to the issue" should be replaced by "which authorised the issue of, or contain the terms of the issue of, or state the consideration payable for, or explain the rationale for the consideration for". Category (b) 1. The defendants agreed to give discovery of the following category of documents, subject to the same changes as for category (a). (b) Minutes of Leadshine Pty Ltd (Leadshine) which refer to the issue of shares in Leadshine to Oriday. 1. The same change to the description of the category should be made as stated above in relation to category (a). Category (c) 1. The defendants stated that they had already given discovery of the documents referred to in the following category. (c) The balance sheets for Crisjoy (either in its corporate capacity or as trustee of the LUT) and Leadshine at the time of issue of the shares in Leadshine and Crisjoy to Oriday and the units in the LUT to Oriday. 1. The defendants explained (by reference to discovery document references) that they had discovered the Lighthouse Unit Trust balance sheets and the Leadshine balance sheets as at 30 June 2011 and 2012. As Crisjoy was the trustee of the Lighthouse Unit Trust, it may be likely that its balance sheets in its personal capacity would disclose little relevant information. If they exist, however, the balance sheets for Crisjoy in its personal capacity, and all of the balance sheets for the year ended 30 June 2013 should also be discovered, if that has not already occurred. I have added the 2013 year because Leadshine borrowed the $1 million from Paul Ramsay on 25 October 2012. Category (d) 1. The defendants have submitted that an order should not be made in the following terms against Oriday. Oriday is not a party to the proceedings. The legal representatives for the defendants do not have instructions to represent Oriday. (d) Minutes of Oriday which refer to the acquisition of the following securities:- i. 9900 shares in Crisjoy; ii. 900 shares in Leadshine; and iii. units in the LUT. 1. The court should not at this stage ignore the fact that Oriday is not a party to the proceedings. The information that should explain and be determinative of the justification for the transactions should be able to be found in the documents of the issuers discovered by the defendants. The plaintiffs already know that Mr Dixon-Smith was at relevant times a director of Oriday. They should be in a position to allege, if there is a proper basis to do so, that Oriday had Mr Dixon-Smith's knowledge of the transactions. Category (e) 1. The defendants agreed to give discovery of the following category of documents. (e) Share register or unit register maintained by Crisjoy (either in its corporate capacity or as trustee of the LUT) or Leadshine Category (f) 1. The defendants agreed to give discovery of the following category of documents, subject to the description being changed in the same manner as for category (a). (f) Documents which record or refer to the consideration paid by Oriday in respect of the following securities:- i. 9900 shares in Crisjoy; ii. 900 shares in Leadshine; iii. Units in the LUT. 1. The category should be described in a similar way to the manner in which I have revised category (a), to read: "Documents which record the consideration paid by Oriday, or explain the rationale for the consideration paid by Oriday" etc. Category (g) 1. The defendants submit that they should not be obliged to give discovery of the following category of documents. They say that the use of both the words "recording" and "reasons" is problematic. They say that the other categories of documents should be sufficient, and that this category should not be required to enable the plaintiffs to decide whether or not they have a proper basis for alleging a cause of action. The plaintiffs submit that the category is not as wide or indefinite as the defendants suggest, and that the use of the word "recording" will naturally act to confine the documents required to be discovered. (g) Documents recording the reasons for the issue of shares or units referred to in paragraph (a) or (b). 1. I agree with the defendants' submission that this category is likely to be problematic. What is meant by the word "reasons"? Is it subjective, being the reasons for the grantor companies issuing the securities? Does it extend to the objective reasons for the grantors entering into the transactions? Does it encompass the underlying facts that led to the transactions being entered into? Even the word "recording" may be more elastic in meaning than the plaintiffs suggest. At one extreme, it may only catch a document if it explicitly records the reasons for the transaction. It would arguably extend, however, to documents which record facts that make up part of the mosaic that might constitute the reasons for the transactions. 2. The defendants have already told the plaintiffs that the transactions were entered into in order to permit Crisjoy, or one of its guarantors, to repay parts of the debt Crisjoy owed to Balmoral. The plaintiffs are entitled to discovery of documents that confirm that purpose. They are entitled to discovery of documents that show the consideration paid to the issuers by Oriday. They are also entitled to documents sufficient to enable them to decide whether or not consideration paid was proper. That step may be difficult, if the grantor companies' financial statements record the value of the companies' assets on an historical basis. 3. I have concluded that at this stage of the proceedings I should not order the defendants to give discovery in terms of category (g). Category (h) 1. The defendants have agreed to give discovery of the following category of documents, save that they say that the description of the category should be revised in the same manner as category (a). The plaintiffs submit that the category is sufficiently limited by the fact that it captures only minutes. They also submit that the description of the category should include the words "refer to" as such minutes may be expected to indicate the reasons for the issue of the shares and units. I do not understand this latter submission, in so far as it suggests that there is a direct connection between Oriday making a loan to Crisjoy, and Crisjoy issuing securities to Oriday. (h) Minutes of Crisjoy (either in its corporate capacity or as trustee of the LUT) which refer to the loan of monies from Oriday. 1. I propose to order that this category be described in the manner suggested by the defendants. I do so partly because of the existence of category (j), to which I will come below. Further, the plaintiffs have not given any reason why it could be a breach of the 6 February 2007 agreement for Crisjoy to borrow money from Oriday to repay the debt that it owed to Balmoral. This will only replace one debt with another, and will be advantageous to Crisjoy if the rate of interest was less than the default rate that was payable to Balmoral. Category (i) 1. The defendants say that Oriday should not be ordered to give discovery of the following category of documents. (i) Minutes of Oriday which refer to the loan of monies to Crisjoy. 1. I agree, for the reasons given above in relation to category (d). I refer also to the observation made above in relation to the preceding category, that no reason has been given as to how these loans could be a breach of the 6 February 2007 agreement. Category (j) 1. The defendants agreed to give discovery of the following category of documents. (j) Loan Agreements between Oriday and Crisjoy (either in its corporate capacity or as trustee of the LUT). Categories (k), (l) and (m) 1. The defendants submit that they should not be ordered to give discovery of the documents in categories (k), (l) and (m). It will be convenient to deal with these three categories together. The defendants submit that there is nothing in the draft pleading which supports the proposition that the transactions referred to in these categories are connected with the transactions which diluted Townway's interests in the Byron Bay venture. They then submit that it is to be expected that documents such as company minutes in relation to the issue of the shares and units will disclose the relationship (if any) between those transactions and the transactions the subject of these categories. The defendants submit that these transactions occurred in October 2012 while the dilution transactions happened in June 2012. They say that the documents sought will involve confidential commercial information of a third party, Paul Ramsay. Finally, they submit that the documents in these categories are not required to allow the plaintiffs to decide whether or not they have a proper basis for alleging a cause of action in relation to the issues of shares and units as part of the dilution transactions. (k) Minutes of Leadshine which referred to: i. the loan of monies to Stuart Dixon-Smith; and ii. the loan of monies from Paul Ramsay Holdings Pty Ltd (Paul Ramsay). (l) loan agreement between Leadshine and Paul Ramsay. (m) loan agreements between Leadshine and Stuart Dixon-Smith. 1. In my view, the plaintiffs are entitled to discovery of certain documents within these categories. They are entitled to information limited to that which gives them some basis for understanding why Leadshine borrowed money for the purpose of allowing Crisjoy to repay its debt to Balmoral, and why the $950,000 was advanced to Mr Dixon-Smith, rather than to Crisjoy. However, I accept that the description of the categories should be confined, because the plaintiffs have not articulated any reasons why these transactions are likely to involve a breach of the 6 February 2007 agreement, or any other breach of duty owed to the plaintiffs. 2. I will order the defendants to give discovery in terms of category (k) with the word "record" being substituted for the words "referred to". I will not order discovery in terms of category (l), as the plaintiffs have not justified a requirement for disclosure of the confidential loan agreement between Leadshine and Paul Ramsay. I will order discovery in terms of category (m). Categories (n) and (o) 1. The defendants submit that they should not be ordered to give discovery in terms of categories (n) or (o), as the other categories for discovery should be sufficient. The defendants say that any loan registers or loan ledgers will contain information concerning all loans taken out by the companies, and this information will be irrelevant to the extent that it does not refer to the loans described in the other categories for discovery. (n) Any loan register maintained by Crisjoy (either in its corporate capacity or as trustee of the LUT) or Leadshine. (o) Any loan ledgers maintained by Crisjoy (either in its corporate capacity or as trustee of the LUT) or Leadshine. 1. I agree with the defendants' submission that they should not be ordered to give discovery in accordance with categories (n) and (o). Category (p) 1. The defendants submit that they should not be ordered to give discovery of the following category of documents, for the same reasons that they have given in relation to category (g). (p) Documents recording the reasons for the loans described in paragraphs (h) to (o) above. 1. I will not order the defendants to give discovery of this category of documents. My reasons are substantially the same as those set out above in relation to category (g). The plaintiffs' entitlement to discovery of this category is more tenuous than in relation to category (g). The plaintiffs have been told that these borrowings occurred in order to fund the repayment of the Balmoral debt, and I do not accept that they need this information in order to decide whether or not they can plead a proper cause of action against the defendants. Category (q) 1. The defendants say that they should not be required to give discovery of the following category of documents. (q) Documents recording the repayment of monies to Balmoral Broken Head Pty Ltd owed pursuant to the Mezzanine Loan Agreement dated 9 August 2005. 1. The plaintiffs have been told that the Balmoral debt has been repaid. There is no reason to believe that did not occur, as Balmoral has not apparently taken any action to recover the debt. I will not order that discovery be given of this category. Category (r) 1. The defendants say they should not be required to give discovery of the following category of documents. (r) Documents recording any alternative proposal, or consideration of any alternative proposal, to refinance the monies owing to Balmoral Broken Head Pty Ltd pursuant to the Mezzanine Loan Agreement dated 9 August 2005 otherwise than through repayment by Stuart Dixon-Smith and the subscription of shares/units in Crisjoy, Leadshine and the LUT. 1. Category (r) is very wide. The first question is whether the transactions which are the subject of the other categories for discovery were justified on the basis of the objective terms upon which they were carried out. If they were not, then the plaintiffs may be able to plead a cause of action in relation to the transactions. Category (r) appears to proceed upon the premise that, even if the transactions were justified on their own terms, a cause of action may lie in the plaintiffs because either alternative transactions to achieve the same results were available and not implemented, or because such alternative transactions were not considered. 2. I do not accept that the defendants should be ordered to give discovery of this category of documents. Once the plaintiffs have the benefit of discovery of the other categories of documents going to the terms upon which the transactions were entered into, it should be left to the plaintiffs' own resources to decide whether some alternative transaction was available that should have been implemented. Categories (s), (t) and (u) 1. The defendants submit that they should not be ordered to give discovery of documents in categories (s), (t) and (u). It will be convenient to deal with these three categories together. (s) Documents recording the repayment of monies by Crisjoy to Oriday. (t) Documents recording the repayment of monies by Leadshine to Paul Ramsay. (u) Documents recording the repayment of monies by Stuart Dixon-Smith to Leadshine. 1. I cannot see the harm in the defendants being required to give discovery of documents that literally "record" the repayment of the debt's referred to in these categories. Any loss that the plaintiffs could conceivably suffer as a result of the debts referred to in the categories would be reduced to the extent that the debts had been repaid. It is in the interests of the proper conduct of these proceedings that the plaintiffs have that information. Category (v) 1. The defendants say that they should not be ordered to give discovery of the following category of documents. (v) Documents recording the reasons for the repayments described in paragraphs (q) to (u). 1. I accept the defendants' submission. The plaintiffs only press this category in so far as it refers to the documents described in category (q) concerning the reasons for the decision to refinance the Balmoral debt. I do not accept that discovery within this category in relation to refinancing the Balmoral debt is justified, as it is self-evident why it was necessary for the Balmoral debt to be repaid, given the terms of the demand and the fact that it was accumulating at default interest rates. Costs 1. The defendants submit that the court should order that the plaintiffs' notice of motion of 29 April 2015 be dismissed, and that the plaintiffs pay the defendants' costs of and incidental to that notice of motion. 2. The plaintiffs submit that the court should not dismiss their notice of motion at this time; that the court should give the plaintiffs an opportunity to propound a further draft pleading after the discovery dealt with in these reasons for has been given; and for that purpose the court should allow the plaintiffs an opportunity to further amend their notice of motion. 3. The plaintiffs further submit that the court should not deal with the question of costs until after the proposed amendment has finally been dealt with. 4. Alternatively, if the court is persuaded to deal with the issue of costs now, it should order that they be costs in the cause. 5. I am prepared to accept the plaintiffs' submission that I should not finally dismiss their notice of motion seeking leave to file a second further amended statement of claim at this stage. I will stand the notice of motion over to a further date for directions, as part of the orders that I will make consequentially upon these reasons for judgment. 6. I reject the plaintiffs' submission that the court should order that the costs of the notice of motion to date be costs in the cause. 7. I accept the defendants' submission that fairness requires the court to now make an appropriate order for costs in relation to the two failed attempts by the plaintiffs to get leave to file a second further amended statement of claim. 8. The plaintiffs say that the 2012 transactions first came to light because they were referred to in Mr Dixon-Smith's affidavit, and that by including this evidence in the affidavit, the defendants considered these transactions were relevant to the proceedings. This submission may be correct, so far as it goes, but it plainly does not follow that whenever a party introduces evidence into the proceedings, whatever the significance of that evidence might be, the party invites the other to seek to amend its pleadings in circumstances that, whatever the fate of the attempt to amend may be, the party introducing the evidence must bear its own costs of the exercise. 9. The plaintiffs submit that they sought discovery of documents relating to the transactions, being categories 10 and 11 of the categories sought in their discovery motion filed on 20 August 2014. The defendants resisted these categories on the basis that they were irrelevant to the pleaded issues, and by agreement between the parties the issue of whether discovery should be given of these categories was deferred. 10. The plaintiffs nonetheless attempted to plead their draft pleading, which led to the events that occurred at the first hearing on 30 June 2015. 11. Following that hearing, the plaintiffs sought production of further documents and the defendants refused to provide any of them. The categories of documents sought were set out in paragraphs 1 to 10 of the plaintiffs' solicitor's letter dated 24 July 2015. I will not set out the terms of those categories. The categories were described in different terms to the categories set out in the plaintiffs' written submissions dated 23 November 2015. 12. By their letter of 27 July 2015, the defendants' solicitors again declined to provide discovery in terms of the categories requested. In outline, the defendants said that the plaintiffs had not submitted a further draft pleading within 21 days after the 30 June 2015 hearing, as suggested on that date, and the categories sought did not relate to any matter in issue in the proceedings. 13. The plaintiffs did not pursue their request for further discovery, and instead formulated the draft pleading that was dealt with at the hearing on 27 August 2015, and is the subject of my reasons for judgment published on 29 October 2015. 14. The plaintiffs say that the defendants' earlier failure to give discovery as requested was partially responsible for the inability of the plaintiffs to be able to draft a second further amended statement of claim in proper form, so that the defendants should bear some cost consequences of their actions. The plaintiffs submitted that the defendants have not complied with their obligation to cooperate to ensure that the real issues between the parties are brought forward for determination. 15. The plaintiffs submitted that the observations made by Allsop P (as his Honour then was) in Baulderstone Hornibrook Engineering Pty Ltd v Gordian Runoff Ltd [2008] NSWCA 243 at [161] and the earlier observations made by the same judge in White v Overland [2001] FCA 1333 at [4] justify an order that the parties bear their own costs of the application for leave to amend. I do not agree. It must be accepted now that the parties in civil proceedings have a statutory duty to assist the court to further the overriding purpose to facilitate the just, quick and cheap resolution of the real issues in dispute and to participate in the processes of the court to that end. This principle may possibly have some application when the time comes to consider what order should be made in relation to the plaintiffs' application for discovery from the defendants. I do not think it has the effect that the defendants should be ordered to bear their own costs of their successful resistance to the plaintiffs' application for leave to amend, when the plaintiffs elected to seek leave to file the two versions of their amended pleading without first resolving their claim for the discovery they now seek in order to revise their pleading properly. 16. I have decided that the proper course is to order the plaintiffs to pay the defendants' costs of their consideration of the draft pleadings that were before the court on 30 June 2015 and 27 August 2015, and also the appearances on those two dates, as well as costs directly related to those two matters. I will reserve the costs of the hearing on 2 December 2015 that is the subject of these reasons for judgment. 17. My first reason for taking this course is that I consider that it was a matter for the plaintiffs to decide whether they could properly plead their second further amended statement of claim without having the discovery that they requested for that purpose. The plaintiffs agreed to defer their initial request for discovery, and did not press their second request, after it was rejected by the defendants on 27 July 2015. I consider that the plaintiffs ought to have appreciated that they could not properly amend their pleadings until they had that discovery. 18. Secondly, as my reasons for judgment published on 29 October 2015 demonstrate, I have concluded that there are many flaws in the versions of the draft pleading that the plaintiffs have propounded to date, and many of those flaws cannot be attributed to the absence of discovery by the defendants. The issue is too complex to deal with in these reasons, but the reasons should be reasonably apparent from a consideration of my earlier judgment. 19. It will be sufficient for me to note briefly that there are strong reasons for concluding that the plaintiffs' proposed claim for breach by the defendants of the 6 February 2007 agreement is premature, as the Byron Bay venture has not been completed, and there are no means of knowing now whether or not any of the components of that venture will generate profits, or whether there has been any breach of the agreement, and if there has, what loss has been suffered by the plaintiffs. Furthermore, if the essence of the agreement is that it requires an adjustment on an accounting basis of the distribution of the profits earned from different components of the venture, there is no apparent reason why Mr Dixon-Smith was required actually to manage the whole venture in a manner consistent with the underlying premise of the 6 February 2007 agreement, to the potential disadvantage of the other parties interested in the venture. I add that, although I adhere to the view that I expressed in my earlier reasons for judgment that the transactions that led to the dilution of Townway's interests in the Byron Bay venture cry out for explanation, it does not follow that it is likely that those transactions were improper. 20. I will invite the parties to bring in short minutes to reflect these reasons for judgment, and also to provide for directions concerning the future conduct of these proceedings. ********** 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: 18 December 2015