Yes Family Pty Ltd v Sphere Healthcare Pty Ltd [2016] NSWSC 917

Supreme Court New South Wales

Medium Neutral Citation: Yes Family Pty Ltd v Sphere Healthcare Pty Ltd [2016] NSWSC 917 Hearing dates: 15 June 2016 Decision date: 04 July 2016 Jurisdiction: Equity Before: White J Decision: Plaintiff to bring in short minutes of order to give effect to these reasons. Catchwords: PRACTICE AND PROCEDURE – Preliminary discovery – whether requirements of r 5.3(1)(a) of Uniform Civil Procedure Rules are satisfied – whether plaintiff may be entitled to make a claim for relief that defendant has breached terms of commercial lease – whether plaintiff has been unable to obtain sufficient information to decide whether or not to commence proceedings – preliminary discovery ordered with respect to some categories of documents sought Legislation Cited: Conveyancing Act 1919 (NSW) Uniform Civil Procedure Rules 2005 (NSW) Cases Cited: Hatfield v TCN Channel 9 Pty Ltd [2010] NSWCA 69; (2010) 77 NSWLR 506 Morton v Nylex Ltd [2007] NSWSC 562 Category: Procedural and other rulings Parties: Yes Family Pty Ltd (Plaintiff) Sphere Healthcare Pty Ltd (Defendant) Representation: Counsel: V R Gray (Plaintiff) J Knackstredt (Defendant)

Solicitors: Marsdens Law Group (Plaintiff) Kardos Scanlan (Defendant) File Number(s): 2015/326562

Judgment 1. HIS HONOUR: This is an application for preliminary discovery. The plaintiff, Yes Family Pty Ltd ("Yes Family"), is the owner of a property in Church Road, Moorebank that is subject to a lease to the defendant, Sphere Healthcare Pty Ltd ("Sphere"). It seeks preliminary discovery of documents from Sphere that it says it requires in order to decide whether or not to commence proceedings against Sphere in respect of alleged breaches of the lease. 2. The application for preliminary discovery is made pursuant to r 5.3 of the Uniform Civil Procedure Rules 2005 (NSW). That rule provides: "5.3 Discovery of documents from prospective defendant (cf Federal Court Rules, Order 15A, rules 6, 7 and 9) (1) If it appears to the court that: (a) the applicant may be entitled to make a claim for relief from the court against a person (the prospective defendant) but, having made reasonable inquiries, is unable to obtain sufficient information to decide whether or not to commence proceedings against the prospective defendant, and (b) the prospective defendant may have or have had possession of a document or thing that can assist in determining whether or not the applicant is entitled to make such a claim for relief, and (c) inspection of such a document would assist the applicant to make the decision concerned, the court may order that the prospective defendant must give discovery to the applicant of all documents that are or have been in the person's possession and that relate to the question of whether or not the applicant is entitled to make a claim for relief. (2) An order under this rule with respect to any document held by a corporation may be addressed to any officer or former officer of the corporation. (3) Unless the court orders otherwise, an application for an order under this rule: (a) must be supported by an affidavit stating the facts on which the applicant relies and specifying the kinds of documents in respect of which the order is sought, and (b) must, together with a copy of the supporting affidavit, be served personally on the person to whom it is addressed. (4) This rule applies, with any necessary modification, where the applicant, being a party to proceedings, wishes to decide whether or not to claim or cross-claim against a person who is not a party to the proceedings." 1. In Hatfield v TCN Channel 9 Pty Ltd [2010] NSWCA 69; (2010) 77 NSWLR 506 McColl JA summarised the principles relevant to an application for preliminary discovery as follows: "[47] First, '[i]n order for it to "appear" to the Court that the applicant "may be entitled" to make a claim for relief, it is not necessary for the applicant to show a prima facie or pleadable case': Morton v Nylex Ltd (at [25]). [48] Secondly, while 'the mere assertion of a case is insufficient … [i]t will be sufficient if there is reasonable cause to believe that the applicant may have a right of action against the respondent resting on some recognised legal ground': Morton v Nylex (at [25]). [49] Thirdly, 'belief requires more than mere assertion and more than suspicion or conjecture. [It] is an inclination of the mind towards assenting to, rather than rejecting a proposition. Thus it is not sufficient to point to a mere possibility. The evidence must incline the mind towards the matter or fact in question. If there is no reasonable cause to believe that one of the necessary elements of a potential cause of action exists, that would dispose of the application insofar as it is based on that cause of action': St George Bank Ltd v Rabo Australia Ltd [2004] FCA 1360; (2004) 211 ALR 147 at 154 [26](d), per Hely J, referring in turn to John Holland Services Pty Ltd v Terranora Group Management Pty Ltd [2004] FCA 679 at [13], [14], [17] and [73], per Emmett J. The use of the word 'may' indicates the court does not have to reach 'a firm view that there is a right to relief': Telstra Corporation Ltd v Minister for Broadband, Communications and the Digital Economy (2008) 166 FCR 64 at 79 [58]. [50] Fourthly, the requirement that the matters set out in r 5.3 of the Uniform Civil Procedure Rules 'appear[s]' to the court to establish an entitlement to an order under the rule may be wider than the requirement in the Federal Court Rules, O 15A, r 6 that there 'is reasonable cause to believe': see Panasonic Australia Pty Ltd v Ngage Pty Ltd [2006] NSWSC 399; (2006) 69 IPR 595 at 598 [22] per Young CJ in Eq; Papaconstuntinos v Holmes à Court [2006] NSWSC 945 at [17] per Simpson J; Hornsby Shire Council v Valuer General of NSW [2008] NSWSC 1179 at [33], per Adams J. Nevertheless Hely J's statement in St George Bank (at 154 [26](e)) remains apposite, namely that 'whilst uncertainty as to only one element of a cause of action might be compatible with the 'reasonable cause to believe' required by subpara (a), uncertainty as to a number of such elements may be sufficient to undermine the reasonableness of the cause to believe'. [51] Fifthly, 'the question posed by [r 5.3(1)(a)] … is not whether the applicant has sufficient information to decide if a cause of action is available against the prospective respondent [but] … whether the applicant has sufficient infor­mation to make a decision whether to commence proceedings in the court. Accordingly, an applicant for preliminary discovery may be entitled to discovery in order to determine what defences are available to the respondent and the possible strength of those defences': St George Bank (at 154 [26](f))(emphasis in original); see also Morton v Nylex (at [33]). Thus application of the rule will not be precluded by the fact that the applicant already has available evidence establishing a prima facie case for the granting of relief, as there might be matters of defence which could defeat a prima facie case: Alphapharm Pty Ltd v Eli Lilly Australia Pty Ltd [1996] FCA 1500 at [41], per Lindgren J, referred to with approval by the Full Federal Court (French J, Weinberg J and Greenwood J) in Telstra Corporation Ltd (at 80 [60]). [52] Sixthly, as Hely J said in St George Bank (at 153 [26](a)), 'the rule is to be beneficially construed, given the fullest scope that its language will reasonably allow, with the proper brake on any excesses lying in the discretion of the court, exercised in the particular circumstances of each case'." 1. A plaintiff is not entitled to preliminary discovery unless it is lacking something reasonably necessary to make a decision whether or not to institute proceedings. An applicant may be entitled to preliminary discovery of documents relevant to available defences, but preliminary discovery cannot be used to build up a case which an applicant has already decided, or could decide to bring (Morton v Nylex Ltd [2007] NSWSC 562 at [33] and cases there cited). 2. Yes Family seeks orders that Sphere give discovery of the following documents or classes of documents: "(a) Correspondence (including electronic mail) between Sphere Healthcare and/or its shareholders as at the commencement of the lease ('Original Shareholders') to any third party relating to such third party (or any associated entity) investing funds in Sphere Healthcare by way of equity funding or convertible debt funding or under any arrangement which by any means and either conditionally or unconditionally effected a change in control of Sphere Healthcare. (b) File notes or similar records or electronic communications between or amongst the Original Shareholders, the directors and the senior management of Sphere Healthcare or any of those persons concerning any possibility, arrangement, agreement or other dealing (whether or not implemented) whereunder any third party (including the beneficiary or beneficiaries of a trust which, through its trustee or trustees, was not an Original Shareholder) would or might invest or agreed (conditionally or unconditionally) to invest funds in Sphere Healthcare by way of equity funding or convertible debt funding or under any arrangement which by any means and either conditionally or unconditionally effected a change in control of Sphere Healthcare. (c) Any trust deed, agreement, correspondence or other document constituting or evidencing the terms on which any shares issued by Sphere Healthcare since the commencement of the lease are or would be held by the registered shareholder on trust for any other person or entity. (d) Any resolutions of the director or directors of Sphere Healthcare since the commencement of the lease relating to the issue of new shares in Sphere Healthcare or relating to the persons or entities on behalf of whom such shares would be held by the registered shareholder. (e) Invoices issued during the period 1 April to 30 June 2015 for sale of infant formula manufactured or produced in the Demised Premises. (f) All architectural and engineering plans relating to alteration works carried out in the Demised Premises since the commencement of the Lease. (g) All specifications for plant and equipment for the manufacture or production of infant formula installed or located in the Demised Premises. (h) All invoices for the purchase of plant and equipment for the manufacture or production of infant formula installed or located in the Demised Premises. (i) All lease agreements for the lease of plant and equipment for the manufacture or production of infant formula installed or located in the Demised Premises." 1. Yes Family is the assignee of the reversion. It acquired the Moorebank property by a transfer dated 26 October 2011. 2. Sphere entered into a five-year lease commencing on 17 April 2008 with three options for renewal for a period of five years each with the previous owner. On 27 September 2010 the lease was varied by extending the term of the lease so as for it to expire on 16 April 2018. There are options for renewal for two further terms of five years. 3. The terms of the lease include the following: "6.1 The Lessee may only use the Premises for the use specified in item 5." 1. Item 5 provides: "Permitted use Pharmaceutical production and warehouse facility" 1. Clause 7.6(a) provides: "The Lessee must not make or permit any Proposed Work without the Lessor's Consent." 1. Clause 8.1 provides: "The Lessee may not assign, transfer, sublet or otherwise deal with or part with possession of the Premises or this Lease, any part of them or any interest in them or attempt to do so without the Lessor's Consent which consent must not be unreasonably withheld." 1. There are two clauses of 8.2. Clause 8.2 is also a covenant against assigning or subletting without the lessor's consent, which consent is not to be unreasonably withheld in certain specified events. The second clause 8.2 provides: "8.2 Corporate ownership If the Lessee is a company, other than a company whose shares are listed on any Australian Stock Exchange, any change in the shareholding of the Lessee effectively altering the control of the Lessee, apart from a change in the shareholding of the Lessee effected in order to list the Lessee on an Australian Stock Exchange, is an assignment of this Lease. In that case the Lessee must not: (a) register, record or enter in its books any transfer of any share or shares in the capital of the Lessee; (b) deal with any beneficial interest in any such share or shares; (c) issue any new share or shares; or (d) take or attempt to take any action having the effect: (i) of effectively altering the control of the Lessee; (ii) that the shareholders of the Lessee at the date of this Lease together beneficially hold or control less than 51% of the voting rights of capital in the Lessee, Until after the Lessee has complied with the conditions of Clause 8.1." 1. On or about 16 June 2015 Yes Family served a notice under s 129 of the Conveyancing Act 1919 (NSW) on Sphere asserting that Sphere was in breach of various clauses, including clause 8 and clause 6.1. It required Sphere to remedy the alleged breaches by, relevantly: "a) Clause 8: by evicting from the demised premises all assignees, subtenants and any other persons or entities in possession of the demised premises or any part or parts thereof; b) Clause 6.1: by ceasing to use the demised premises or any part thereof for any purpose other than pharmaceutical production and warehouse facility." 1. The alleged breaches were not particularised. In a letter dated 29 July 2015 from Marsdens Law Group, who acted for Yes Family, to Kardos-Scanlan, solicitors for Sphere, the plaintiff's solicitor identified the alleged breach of 8.2 of the lease as being that: "It is a matter recorded in the ASIC records and otherwise confirmed, that a relevant third party acquired the Lessee in 2014 and has since undertaken a comprehensive financial, operational and management restructure of the business. As part of this process, a corporate entity, Sphere Healthcare (Asia) Pty Limited, under the control of such third party, made application for and obtained official approval for the use of the Demised Premises for the manufacture and processing of infant formula for consumption in China from the Certification and Accreditation Administration of the Peoples Republic of China (CNCA) after an official inspection and concurrently with approval by the Australian Quarantine Authority and NSW Department of Public Health for the blending, canning and packing of infant formula milk products for export to and consumption in China." 1. Further alleged breaches were described as follows: "Our client reasserts its allegation that the Lessee has used the whole or part of the Demised Premises for purposes other than the Permitted Use; namely for the purposes of a milk product factory blending, canning and packaging milk product for sale and export when it was only permitted to use the Demised Premises for the purpose of pharmaceutical production and warehouse facility ('Permitted Use'). Your assertion that 'infant formula is a pharmaceutical product' is denied. Our client maintains that in outright breach of the lease, your client has contravened the permitted limited use under the terms of the Lease by utilising a substantial part of the Demised Premises not for pharmaceutical production and warehouse, but as a milk product processing factory for the blending, canning and packaging of milk products. In doing so, your client has substantially altered the premises, made structural alterations, made openings in walls and altered the criteria for fire protection equipment without the approval of our client as the Lessor, (or, we might add, the relevant authorities, including the Liverpool City Council, the Water Board, the fire safety regulators, and any other authorities having jurisdiction with regard to such building work and the change of usage). Your client, the Lessee, in breach of the lease, planned and proceeded with the unapproved construction work potentially contrary to the fire requirements and without the approval of the Lessor's insurer, and without notice to the Lessor and the authorities, and then, in clear violation of the terms of the lease, changed the use to which that section of the demised premises is put." 1. On 21 August 2015 Kardos-Scanlan responded to the s 129 notice and Marsden Law Group's letter of 29 July with statements that included the following: "1. Clause 8 (Assignment) The Notice alleges that Sphere is in breach of clause 8 of the Lease. However, the Notice does not provide any details whatsoever regarding the nature of the alleged breach. Based on your 29 July Letter, it appears the assertion is that Sphere is in breach of the Lease asa aresult of a financial, operational and management restructure of the business that occurred in 2014 and the award of official certification by the CNCA to a company called Sphere Healthcare (Asia) Pty Limited (Sphere Asia). We respond to those allegations below. Sphere Asia is a wholly owned subsidiary of Sphere Healthcare Holding Company Pty Ltd, which is in turn a wholly owned subsidiary of Sphere. Mr Paul Riley is the sole director and secretary of Sphere Asia and also the sole director of Sphere. No assignment, sub-lease or licence of the Premises has been granted to Sphere Asia. We are instructed that Sphere Asia is a subsidiary of Sphere that has been incorporated to hold the CNCA licence. Sphere Asia has not manufactured any products from the Premises nor has it distributed any products into China. The fact that Sphere Asia holds a CNCA licence in no way constitutes a breach of clause 8 of the Lease by Sphere. In relation to the restructure of the business that occurred in 2014 we are instructed that on or about 10 July 2014, 973,831,638 shares in the company were issued to Sphere's financier, AREO Sarl (AREO). This occurred as a result of AREO exercising its right to be issued with shares in Sphere as part of the company's short term refinancing. As a result of that share issue, the Fulcrum funds ceased to hold a majority of Sphere's issued share capital. However, this position was rectified on or about 3 October 2014 when all of the shares held by AREO were transferred to the Fulcrum funds. To the extent that an assignment occurred within the meaning of clause 8.2 of the Lease due to a change of control, our client sincerely regrets that this occurred without first obtaining the Landlord's consent. We note, however, that during this entire period Mr Paul Riley continued to manage the operations of the business and continued to act as sole director of Sphere. As stated above, 3 October 2014 when control of all the shares in Sphere returned to the Fulcrum funds. In any event, as noted above, any breach of clause 8 was remedied long ago, it follows that our client is not in breach of clause 8, and was not in breach of that clause at the time you issued the Notice. 2. Clause 6.1 (Use of Demised Premises) The Notice alleges that Sphere is in breach of clause 6.1 of the Lease. However, the Notice does not provide any details whatsoever regarding the nature of the alleged breach. We understand from your 29 July Letter that, your client asserts that the permitted use identified in the Lease being 'pharmaceutical production and warehouse facility' does not include the production of infant formula. Our client refutes this assertion. It maintains its position that the production of infant formula falls within the scope of permitted use for the Premises. As you are aware, the Lease does not define what is meant by 'pharmaceutical production' and our client's position is that to apply a narrow definition to that term in the way that your client asserts, would undermine the purpose of the Lease. In particular, we are instructed by our client that Sphere makes products at the Premises which comply with its TGA licence. At the time the Lease was entered into in 2008 and since that time, the Premises has [sic] been used to manufacture a range of complementary medicines and nutritional products, including dairy related powders and tablets. Our client's position is that such products fall within the meaning of the permitted use in the Lease, particularly given the circumstances of its entry. Given this, our client is surprised by the Landlord's claim that it is in breach of clause 6.1 of the Lease. We understand that your client has been well aware that infant formula has been produced at the Premises since at least 2011. We are also instructed that one of the Landlord's associated companies has even requested quotes from our client to manufacture and produce infant formula from the Premises on its behalf. We are instructed that representatives of your client's associated companies have attended meetings at which the provision of information formula to them has been discussed."