FEDERAL COURT OF AUSTRALIA

Sandhurst Trustees Limited v Clarke [2015] FCAFC 21

THE COURT ORDERS THAT:

1.    The application for leave to appeal be dismissed.

2.    The applicant pay the respondent’s costs of the application.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

introduction

1    The respondents (“Mr and Mrs Clarke”) successfully applied for preliminary discovery of 39 categories of documents against the applicant (“Sandhurst”) under r 7.23 of the Federal Court Rules 2011 (Cth) (“Federal Court Rules”). Sandhurst now seeks leave to appeal the orders made. The leave of the Court is required because an application for preliminary discovery is interlocutory and not final: s 24(1) and (1A) of the Federal Court of Australia Act 1976 (Cth) (“Federal Court Act”); Malouf v Malouf (1999) 86 FCR 134; [1999] FCA 284 at [36]. The application for leave to appeal has been heard on the basis that the application is treated as the hearing of the appeal, if leave is granted. For the reasons that follow, we have concluded that leave to appeal should be refused.

background

2    Sandhurst is a licensed trustee company. On 7 June 2005, Sandhurst was appointed by Wickham Securities Limited (“Wickham”) to act as the trustee of the Wickham Securities Trust (“the Trust”) for the benefit of noteholders of debenture notes issued by Wickham. The establishment of the Trust for the benefit of the noteholders was a requirement of s 283AA of the Corporations Act 2001 (Cth) (“the Act”). By s 283AB of the Act, it was a requirement for the trust deed to provide that the following rights and interests are held in trust by the trustee for the benefit of the noteholders:

(a)    the right to enforce Wickham’s duty as borrower to repay;

(b)    any charge or security for repayment; and

(c)    the right to enforce any other duties that Wickham as borrower and any guarantor have under the terms of the debentures, or the provisions of the trust deed or Chapter 2L of the Act.

3    The terms of the trust deed relevantly imposed obligations upon Sandhurst as trustee, amongst other things:

(a)    to exercise reasonable diligence to ascertain whether the property of Wickham that is or should be available (whether by way of security or otherwise) would be sufficient to repay the amount deposited or lent when it becomes due;

(b)    to exercise reasonable diligence to ascertain whether Wickham has committed any breach of the terms of the Notes, the trust deed or Chapter 2L of the Act;

(c)    to ensure that Wickham complied with Part 2K of the Act to the extent that it applied to the notes; and

(d)    to notify ASIC as soon as practicable if Wickham has not complied with ss 283BE, 283BF, 318(1) or 318(4) of the Act: cl 12.1.

4    The duties of Sandhurst as trustee under Chapter 2L relevantly included the duties prescribed in s 283DA(a) and (b), namely:

(a)    to exercise reasonable diligence to ascertain whether the property of the borrower and of each guarantor that is or should be available (whether by way of security or otherwise) would be sufficient to repay the amount deposited or lent when it becomes due; and

(b)    to exercise reasonable diligence to ascertain whether the borrower or any guarantor has committed any breach of the terms of the debentures, the trust deed or Chapter 2L of the Act.

5    Mr and Mrs Clarke are the trustees of the G & M Clarke Superannuation Fund (“the superannuation fund”). Between September 2008 and September 2012, the superannuation fund made investments totalling $240,000 with Wickham. Of this total amount, $20,000 was either withdrawn or paid back on maturity, leaving an investment of $220,000. In December 2012, Wickham was placed into administration, and in February 2013, the company was placed into liquidation by resolution of its creditors. In a report dated 5 September 2013, the liquidators advised that the estimated gross loan recoveries for noteholders were in the range of 6 cents to 35 cents in the dollar before deducting the costs likely to be incurred in achieving an increased estimated realisation.

6    In December 2013, Mr and Mrs Clarke made application to the Court for preliminary discovery of a number of documents from Sandhurst. The application was supported by two affidavits, one sworn by Mr Clarke on 18 February 2014 and the other sworn by Ms Saddler, the solicitor acting for Mr and Mrs Clarke, on 5 December 2013. Mr Clarke set out the factual matters on which he relies and deposed that the action that he and his wife propose to take against Sandhurst is a claim for damages for breach of the fiduciary duties owed by Sandhurst as trustee to them as noteholders, under the trust deed and pursuant to s 283DA of the Act. He also referred to Ms Saddler’s affidavit and verified that the contents of her affidavit are true and correct to the best of his knowledge and belief and accorded with his instructions. Ms Saddler deposed in her affidavit, relevantly as follows at paras 48-52:

Mr and Mrs Clarke believe that they may have a right to obtain damages from Sandhurst for a breach of section 283DA of the Act or due to a failure on the part of Sandhurst to act in accordance with its duties as trustee (the potential action). In particular, they believe that Sandhurst:

a.    failed to exercise reasonable diligence to ascertain whether the property of Wickham (whether by way of security or otherwise) was sufficient to repay the amount lent;

b.    failed to exercise reasonable diligence to ascertain whether Wickham committed any breach of the terms of the Notes, the trust deed, or Chapter 2L of the Act, particularly with regard to:

i.    the conduct of Wickham’s business;

ii.    the way and manner in which Wickham’s financial and other records were kept;

iii.    the way in which the money raised through the issue of Notes was applied by Wickham;

iv.    Wickham’s compliance with the general covenants set out in Clause 6.1 of the trust deed;

v.    reports provided by Wickham pursuant to s 283DF of the Act and Clause 6.3 of the trust deed;

vi.    Wickham’s compliance with the financial covenants set out in Clause 6.4 of the trust deed; and

vii.    Wickham’s compliance with the terms of any issued prospectus.

c.    failed to ensure that Wickham complied with Chapter 2K of the Act, to the extent that it applied to the Notes.

The Applicants have in their possession some documents relating to the conduct of Sandhurst. In particular, they have documents relating to the appointment of the Administrators and subsequent liquidation of the company and some documents relating to the Notes issued. Copies of these documents and an index to the documents are exhibits JMS24 herein.

In addition the Applicants have copies of the financial statements and reports of Wickham, quarterly certificates of the Wickham and the quarterly reports to trustees.

Exhibited hereto and marked with the letters JMS25 are copies of the reports to trustees for the quarter ending 30 September 2006 to the quarter ending 30 September 2012 which were provided by Wickham to Sandhurst.

The Applicants are of the view that the documents which they have in their possession are not sufficient to determine whether to start the potential action in the Federal Court of Australia against Sandhurst. For example, the documents do not specify what actions were taken by Sandhurst to determine whether the property of Wickham (whether by way of security or otherwise) was sufficient to repay the amount lent. Nor do the documents show what actions were taken by Sandhurst to investigate the actions of Wickham to ensure that they complied with the various statutory requirements or the way in which it undertook its duties set out in section 283DA of the Act.

Such documents would be in the possession of Sandhurst as they involve actions taken by that company.

7    Ms Saddler also deposed that her firm had been contacted by an additional 80 unsecured noteholders and that Mr and Mrs Clarke had agreed to act as the lead applicants in any representative action against Sandhurst brought for the benefit of all current noteholders.

rule 7.23 of the federal court rules

8    Rule 7.23 of the Federal Court Rules provides as follows:

(1)    A prospective applicant may apply to the Court for an order under subrule (2) if the prospective applicant:

(a)    reasonably believes that he or she may have the right to obtain relief in the Court from a prospective respondent whose description has been ascertained; and

(b)    after making reasonable inquiries, does not have sufficient information to decide whether to start a proceeding in the Court to obtain that relief; and

(c)    reasonably believes that:

(i)    the prospective respondent has or is likely to have or has had or is likely to have had in the prospective respondent’s control documents directly relevant to the question whether the prospective applicant has a right to obtain the relief; and

(ii)    inspection of the documents by the prospective applicant would assist in making the decision.

(2)    If the Court is satisfied about matters mentioned in subrule (1), the Court may order the prospective respondent to give discovery to the prospective applicant of the documents of the kind mentioned in subparagraph (1)(c)(i).

9    The terms “prospective applicant” and “prospective respondent” are defined in r 7.21 as follows:

prospective applicant means a person who reasonably believes that there may be a right for the person to obtain relief against another person who is not presently a party to a proceeding in the Court.

prospective respondent means a person, not presently a party to a proceeding in the Court, against whom a prospective applicant reasonably believes the prospective applicant may have a right to obtain relief.

10    The applicable principles in respect of r 7.23 were set out in the judgment below at [10] as follows:

It follows that an applicant must show, apart from any other considerations, that he or she believes that he or she may have a right against the proposed respondent to relief (deriving from an identified and contended cause of action) and the belief is, objectively, reasonably held rather than a “mere” belief or mere assertion or matter of speculation, notwithstanding that r 7.23 is to be construed beneficially so as to give the fullest scope reasonably allowed of the language of the rule (St George Bank Ltd v Rabo Australia Ltd [2004] FCA 1360 at [26]) and also recognising that the notion of a “reasonable belief” reflects a threshold to be satisfied by the applicant set at “quite a low level”. The evidence must demonstrate that there is some tangible support for the belief that takes the existence of the alleged right beyond mere belief, assertion or speculation (Reeve v Aqualast Pty Ltd at [65]).

11    Senior counsel for Sandhurst did not take issue with this passage.

the decision below

12    The primary judge was satisfied that:

(a)    Mr Clarke’s belief that he may have a right to obtain relief in the Court from Sandhurst was not “mere speculation”, concluding (at [156]) that:

There is a basis upon which he could form an objectively reasonable belief that he may be entitled to relief in the Court in proceedings based upon a contended breach of duty on the part of [Sandhurst].

(b)    Mr Clarke and his advisors had made reasonable enquiries to try and obtain information sufficient to enable Mr Clarke to decide, with legal advice, whether to start a proceeding in the Court against Sandhurst on the grounds identified;

(c)    after making those reasonable enquiries, Mr Clarke does not have sufficient information available to him to decide whether to commence a proceeding in the Court to obtain the relief sought; and

(d)    Mr Clarke reasonably believes that Sandhurst has, or is likely to have, or has had, or is likely to have had, in its control documents directly relevant to the question of whether Mr Clarke has a right to obtain relief in the proposed proceedings and that inspection of the documents by Mr Clarke and his advisors would assist him in making that decision.

13    Although not expressly stated in the reasons, it is implicit that such findings applied also to Mrs Clarke, given the terms of the orders made.

14    In finding that the condition in r 7.23(1)(a) was established, the Court relevantly reasoned at [155] as follows:

It seems to me, however, that Mr Clarke could, objectively, reasonably hold the view that he may be entitled to a right to relief in the Court in respect of the contended breaches of duty. It may be that many of the matters contended for by Sandhurst have merits in the context of a trial of questions of fact and law should a claim be commenced. However, at the very threshold, Mr Clarke in forming a belief about whether he may have a right to obtain relief in the Court in respect of contended breaches on the part of Sandhurst does so against the background of a range of factors conditioning that view and they are these:

1.    Sandhurst, a professional trustee, agreed to act as trustee “for the benefit of the Noteholders” subscribing for unsecured deposit note debentures pursuant to prospectuses issued in accordance with the Trust Deed and the Act. The Trust Deed and the Act cast duties upon the trustee the purpose of which is to provide some measure of protection for the noteholders.

2.    The analysis conducted by the administrators and then those individuals in their capacity as liquidators of Wickham reveals by reference to the reports dated 29 January 2013, 29 April 2013 and 5 September 2013 a total failure in the underlying position of Wickham and the performance of the business undertaking of raising money by investments made by noteholders and the lending of those funds to borrowers.

3.    The content of the reports, available to Mr Clarke for his consideration, have been described in detail in these reasons. The final report dated 5 September 2013 says that of 24 loans made by Wickham only three of those loans were made on the basis of first mortgage security. Five further loans were made on the basis of second mortgage security. No files have been able to be located in respect of four loan transactions. In respect of eight borrowers, the position emerges that the borrowing entity has now had receivers and managers appointed. In respect of four further loan transactions, the borrowing entity is either in liquidation or is deregistered or in the process of being deregistered as a company.

4.    Although the noteholders’ funds were to be lent by Wickham in accordance with the criteria prescribed by Sch 4 of the Trust Deed, the reports of the administrators and liquidators suggest that the criteria were not properly applied.

5.    Moreover, Mr Sherwin has been a director of the company from the outset. He is described in the prospectus documents as a man having extensive experience in the financial planning industry and other relevant experience. Mr Siemons was a director of Wickham from about April 2009. He was described in the supplementary prospectus as having been involved in financial management for over 25 years with extensive experience in analysing financial statements and preparing management accounts. Yet, when interviewed by the administrators in the course of their investigations and asked about Wickham’s “business activities including details of the loan book”, Mr Sherwin and Mr Siemons apparently said to the administrators that they “knew nothing about the business operations and that they were handled by Garth Robertson”.

6.    Not only was there a major failing in the financial position of Wickham, there was, apparently, a major failure on the part of two directors to properly engage with the business activities, operations and undertaking of Wickham.

7.    An investor lending money to Wickham within a statutory structure which necessitated the presence of a trustee acting for the benefit of the noteholders, might well form a view that a professional trustee experienced in engaging with individuals purporting to act as directors of a borrower from noteholders might well have developed a professional and sophisticated “nose” (although not necessarily that of a “blood hound”) attracting the attention of the trustee to the notion that neither Mr Sherwin nor Mr Siemons apparently knew anything about the business operations of Wickham and, in particular, the matters about which the administrators inquired, namely, the business activities of Wickham and the loan book. The loan book was the asset, the interest returns upon which would provide the security for the redemption of the investments by the noteholders. A noteholder might well ask “what was the trustee doing?”. The answer might be a great deal but, for present purposes, the question simply is whether a noteholding lender to Wickham might reasonably form, objectively, a view that he or she may have a right to relief in the Court in respect of a contended breach of the identified duty, by the trustee.

8.    The reports reveal a gross exaggeration in the value of the identified loans by Wickham.

9.    The reports reveal, as early as 29 January 2013, a substantial failure on the part of Wickham to maintain proper files, records of loan transactions, correspondence, valuations and other documentation in relation to loan transactions.

10.    The final report of the liquidators on 5 September 2013 suggests that loan recoveries might be as low as 6c in the dollar or might rise to an upper estimate of 35c in the dollar before the costs and expenses of the liquidation and realisation of the debts are taken into account.

11.    Mr Sherwin and Mr Siemons told the liquidators that Mr Garth Robertson was the man who knew all about the business activities of Wickham, its business operations and matters related to the loan book. The liquidators have identified a particular concern about the contended conduct of Mr Robertson as already discussed. Mr Robertson resigned as an employee and director of Wickham on 19 December 2012, two days before the appointment of administrators.

12.    Again, an investor lending money to Wickham within a statutory structure requiring the presence of a trustee acting for the benefit of the noteholders might well ask whether a professional trustee standing in the shoes of Sandhurst might have taken steps to investigate the degree of Mr Roberson’s engagement with the business undertaking of Wickham. Perhaps officers of Sandhurst did precisely that and were satisfied with their enquiries.

13.    Whilst Sandhurst might well rely upon the audit reports, the unqualified nature of those reports and the absence of any matter drawn to the attention of the trustee falling within s 313(2) of the Act, the uncontradicted position seems to be that Mr Kingston so totally failed to discharge his duties that he has given an undertaking to ASIC never to act as an auditor again.

14.    An investor lending money to Wickham within a statutory structure requiring the presence of a trustee acting for the benefit of the noteholders might well ask whether an experienced, sophisticated, professional trustee, experienced in dealing with auditors, ought to have become astute to, by reason of enquiry or otherwise, at least some circumstance which suggested a basis for concern about apparently profound inadequacies in the skills and performance of the person purporting to properly act as an auditor of financial statements of a disclosing entity dealing with the money of investors. So total and complete was Mr Kingston’s failures in the conduct of the audit that he voluntarily gave the undertaking to ASIC described in the report of the administrators.

15.    An investor lending money to Wickham within a statutory structure requiring the presence of a trustee acting for the benefit of the noteholders might, objectively, reasonably form the view that relying upon the statements of directors (and particularly a declaration signed by Mr Sherwin who says that he had no knowledge of the business activities of the company) and the certificates of an auditor so profoundly failing in the discharge of audit responsibilities as to give an undertaking not to act as an auditor again, was not sufficient to properly discharge the duties of the trustee to a noteholder under the Trust Deed or s 283DA of the Act, (that is to say, Mr Clarke as a person who contends he suffered loss or damage by reason of the trustee’s contravention of s 283DA of the Act).

16.    In addition, the administrators, as professional insolvency investigators in relation to these matters, took the view that if Wickham was placed in liquidation there was a proper basis for at least conducting investigations into whether Sandhurst had complied with its obligations under the Trust Deed (see [90] of these reasons). Moreover, the liquidators later took the view that there was a proper basis for continuing to investigate Sandhurst’s compliance with obligations under the Trust Deed (see [104] of these reasons) and in the further report of 5 September 2013 the liquidators continue to note that they are conducting investigations into compliance by Sandhurst with its obligations under the Trust Deed (see [109] of these reasons). If the administrators and then the liquidators are expressing these views as experienced administrators, Mr Clarke might reasonably believe, in the context of these other matters, that there is a proper basis for concern about the discharge of duties on the part of the trustee and that he may have a right to relief in the Court in respect of a contended breach of duty on the part of the trustee.

It follows that Mr Clarke’s belief is not mere speculation. There is a basis upon which he could form an objectively reasonable belief that he may be entitled to relief in the Court in proceedings based upon a contended breach of duty on the part of the trustee. Of course, all of the relevant questions of fact and law would need to be determined in the relevant proceedings.

proposed grounds of appeal

15    Sandhurst seeks leave to appeal on the following five grounds:

(1)    The primary judge erred in fact and/or law by finding that Mr and Mrs Clarke held a reasonable belief that they may have a right to obtain relief from Sandhurst, including because:

a.    that was not the subject of any admissible evidence from Mr and Mrs Clarke and the primary judge erred in law in this regard by admitting or considering evidence over the objections of Sandhurst or not dealing with Sandhurst’s objections to that evidence;

b.    any such belief was mere speculation or assertion, contrary to the finding of the primary judge;

c.    the primary judge did not address the relevant question of what was required of Sandhurst in discharge of its duty of reasonable diligence or the requisite elements of the alleged causes of action; including the required causal link to the loss asserted and the absence of any evidence of reliance by Mr and Mrs Clarke on anything done or not done by Sandhurst;

d.    the primary judge failed to have regard to the fact that there was no evidence that anything that was communicated to Sandhurst suggested that the directors or auditor had breached their duties;

e.    the primary judge erroneously determined the question of Mr and Mrs Clarke’s reasonable belief on the basis of the matters set out at [155] with the benefit of hindsight and did not address what Sandhurst should have done at the time or why. Given what was known to Sandhurst at the time and its evidence in that regard Sandhurst could not be said to have committed any wrongful act or omission giving rise to a right to relief.

(2)    The primary judge erred in fact and/or law by finding that Mr and Mrs Clarke did not have sufficient information to decide whether or not to start a proceeding in respect of the asserted right to relief when such a finding was against the weight of the evidence;

(3)    The primary judge erred in fact and/or law in finding that Mr and Mrs Clarke held a reasonable belief that Sandhurst has, or is likely to have, documents in its possession which are directly relevant to the question of whether or not Mr and Mrs Clarke have a right to relief – in the absence of admissible evidence in relation to the documents likely to be in Sandhurst’s possession (and erred in not upholding Sandhurst’s objections to the evidence in this regard);

(4)    The primary judge erred in law by failing to address the direct relevance test and consider which of the 39 categories of documents were directly relevant to the question of whether or not Mr and Mrs Clarke may have a right to relief;

(5)    The primary judge erred in law in making findings that were not contended for by Mr and Mrs Clarke nor argued by the parties during the hearing, including that:

a.    an investor lending money to Wickham “might well form a view that a professional trustee experienced in engaging with individuals purporting to act as directors ... might well have developed a professional and sophisticated ‘nose’ ... ”;

b.    an investor lending money to Wickham “might well ask whether a professional trustee standing in the shoes of Sandhurst might have taken steps to investigate the degree of Mr Robertson’s engagement with the business ... ”;

c.    an investor lending money to Wickham might well ask whether a professional trustee in Sandhurst’s position ought to have detected the failings of the auditor;

d.    reliance on certificates of directors and auditors who had profoundly failed in the discharge of their duties was not reasonable;

e.    because the liquidators and administrators had investigated Sandhurst, it was reasonable to assume there had been some failing on its part; and

f.    Sandhurst had contended that cl 13.5 exempts Sandhurst from any liability under s 283DA of the Act, when it did not so contend.

leave to appeal

16    It was not contentious that the principles to be applied in the determination as to whether leave should be granted are:

i.    whether in all the circumstances the decision is attended with sufficient doubt to warrant its being reconsidered by the Full Court; and

ii.    whether substantial injustice would result if leave was refused, supposing the decision to be wrong: Décor Corporation Pty Ltd v Dart Industries (1991) 33 FCR 397; [1991] FCA 655.

17    Sandhurst argued that the threshold for a grant of leave in the present case was not high because the order for preliminary discovery is final in effect and, therefore, it was submitted, “a prima facie case for granting leave to appeal exists”: Wills v Australian Broadcasting (2009) 173 FCR 284; [2009] FCAFC 6 (“Wills”) at [31]. Cases such as Echo Tasmania Pty Ltd v Imperial Chemical Industries PLC [2008] FCAFC 58 (“Echo Tasmania”) and Apache Northwest Pty Ltd v Newcrest Mining Ltd (2009) 182 FCR 124; [2009] FCAFC 39 support the proposition that an order for preliminary discovery has, in a practical sense, a final operation. However, that does not mean that it is not incumbent on the applicant to justify the grant of leave by showing doubt about the correctness of the decision below and pointing to the substantial injustice that would result if leave was refused: Wills (2009) 173 FCR 284 at [31]. For the reasons that follow we do not consider that the proposed appeal grounds raise any doubt about the correctness of the decision below and no error of principle in the approach taken by the primary judge has been demonstrated.

proposed ground 1

18    Sandhurst submitted that there is legal error in the primary judge’s finding that Mr Clarke reasonably believed that he and Mrs Clarke have a right to relief from Sandhurst based upon a contended breach of duty on the part of Sandhurst. Sandhurst, in its oral submissions to the Court, did not challenge the primary judge’s finding that Mr Clarke holds a belief that he has such right to relief but limited its challenge to the primary judge’s finding at [155] that Mr Clarke held a “reasonable belief” based on the matters there set out.

19    First it was contended that Mr Clarke did not give any evidence about the matters upon which the primary judge based his finding, and that many of those matters were neither put by the respondents nor otherwise argued before the primary judge. However, whether Mr Clarke had reasonable grounds for believing that he has rights of relief against Sandhurst is to be answered by the objective circumstances, not by Mr Clarke’s view about the reasonableness of his belief. To put it another way, a requirement that the belief be reasonably held is an objective requirement, the existence of which does not depend upon the applicant’s state of mind but upon the existence of matters upon which the Court may be satisfied that there are reasonable grounds for the applicant’s state of mind: George v Rockett (1990) 170 CLR 104 at 112. It is for the Court to be satisfied that the belief is one that is reasonably held. The criterion in r 7.23(1)(a) is a requirement that the belief must be reasonable. In considering whether a belief is reasonably held, the Court is not confined to the matters about which the applicant has deposed, but can consider the facts and matters put before the Court by the applicant and whether, having regard to those facts and matters, the Court is satisfied that the applicant’s belief is one that is reasonably held. In the present case, the factors upon which the primary judge based his decision were all matters that were capable of inference from the material that was before the Court and in the circumstances, there was no error by the primary judge in basing his finding on those factors.

20    Secondly, Sandhurst argued that there was no admissible evidence providing an evidentiary foundation for the primary judge’s finding that Mr Clarke had a reasonable basis for his belief because it was incumbent upon Mr Clarke to depose to the objective foundation on which he believed he may have a right to relief against Sandhurst. We disagree. No such requirement is found in the statutory language of r 7.23(1)(c). Rather, the requirement is to show that the belief held by the applicant is one that is reasonably based. That requires an applicant to satisfy the Court that there are reasonable grounds for the belief: that is, the existence of facts that are sufficient to induce that belief in a reasonable person: George v Rockett (1990) 170 CLR 104 at 112. Accordingly we reject this contention for the same reasons that we rejected the first contention.

21    It was also contended that the primary judge erred by receiving in evidence, over Sandhurst’s objections, para 48 of Ms Saddler’s affidavit deposing as to Mr and Mrs Clarke’s belief, when Sandhurst had objected to the admissibility of para 48 of Ms Saddler’s affidavit and the primary judge did not rule on those objections. Paragraph 48 of Ms Saddler’s affidavit is extracted at para 6 above. It was submitted that the paragraph was objectionable because it comprised no more than an argumentative submission that Sandhurst had reached its statutory and general law duties to noteholders. It was put that Ms Saddler did not depose to, or detail, in any way, what Sandhurst should have done, what it did do or what it did not do (allegedly) but was simply an assertion that Sandhurst may not have complied with its duties without any factual foundation. Additionally, it was put, the adoption of this paragraph by Mr Clarke at para 2 of his affidavit as evidence of his belief did not, and could not, establish the criteria necessary to be established under r 7.23(1). Again we disagree with these submissions. In the first place, r 7.23(1)(a) does not require an affidavit from an applicant deposing as to his or her belief. The onus is on an applicant for preliminary discovery to satisfy the criterion in r 7.23(1)(a) but that onus can be established inferentially. That is to say, the nature of the allegations against the prospective respondent and the circumstances out of which they arise may provide a sufficient basis upon which the Court may be satisfied that the applicant for preliminary discovery reasonably believes that there is a right to relief against the prospective respondent. Secondly, whilst the primary judge did not rule on the admissibility of the paragraphs, it would not have been fatal to the application had the paragraphs been ruled inadmissible. What is required is that there must be some evidence on which to satisfy the Court as to the existence of reasonable grounds for the applicant’s belief as to the right to relief against the prospective respondent. Critically and significantly in the present case, and contrary to Sandhurst’s submission that para 48 of Ms Saddler’s affidavit was simply an assertion that Sandhurst may not have complied with its duties without any factual foundation, Ms Saddler had put into evidence documents which show that there is a possible basis for the claim that there has been a breach of duties by Sandhurst. These documents are referred to at [76]-[109] of the judgment below as follows:

On 21 December 2012, Mr Grant Sparks and Mr David Leigh of PPB Advisory were appointed joint and several administrators of Wickham by a resolution of the directors under s 436A of the Act.

On 7 January 2013, the first meeting of creditors of Wickham was held. Sandhurst, representing the noteholders, attended the first meeting of creditors.

On 29 January 2013, the administrators issued a preliminary report to creditors arising out of a review of the financial accounts; a review of the available books and records of Wickham; an investigation of Wickham’s loan portfolio and the security held for loans made by it; and an investigation of loans and transactions with related entities.

The preliminary report contains the following information.

The administrators conducted interviews with Mr Sherwin and Mr Siemons regarding the business activities of Wickham including details of Wickham’s loan book. The administrators note the remarkable observation by Mr Sherwin and Mr Siemons in the course of interviews that those directors “knew nothing about the business operations” (s 2.3) and that Wickham’s operations were “handled by Garth Robertson”. Mr Robertson resigned as an employee and director of Wickham on or about 19 December 2012. The administrators requested him to make his laptop computer available so that they could image company data. Mr Montgomery resigned as a director on 11 April 2012.

The preliminary investigations by the administrators identified a number of “significant issues”.

First, the directors had “not accurately [reported] the position and quality of [Wickham’s] loan portfolio” [emphasis added] to Sandhurst since at least August 2010 when receivers and managers were appointed to a borrower called WLP Pty Ltd.

Second, Wickham provided Sandhurst with an “Account Balance Confirmation letter” advising that the balance of Wickham’s “Application Account” was $10,779,835.00 as at 30 November 2012 when the actual balance at that date was $264,892.00. In other words, the balance of the Application Account was overstated by $10,514,943.00. The administrators expressed this view: “It is our view that this confirmation letter has been fabricated” [emphasis added]. The administrators also say that their investigations indicate that an account balance of $10,779,835.00 did not exist at any time in the 12 month period prior to Wickham’s letter to Sandhurst confirming that account balance.

Third, although the prospectus issued by Wickham dated 15 December 2010 was open for 13 months, Wickham’s records indicate that it continued to accept amounts from noteholders after the closing date of 14 January 2012. The contributions beyond the closing date amount to $1,962,500.00.

At section 2.4 of their report, the administrators observe that their investigations revealed that Wickham provided Sandhurst with a schedule disclosing 21 loans totalling $28,181,010.00 as at 30 June 2012. The administrators say that they have identified another loan file where the debt was not reported to Sandhurst as at 30 June 2012. The administrators estimated in their preliminary report a range of “gross realisations” that might occur from the loan portfolio as $1,738,000.00 as the low estimate and $6,265,500.00 as the upper estimate with the book value of the loan portfolio recorded as $28,180,010.00 in respect of 22 loans.

In the Executive Summary in section 2 under section 2.4, the administrators set out a schedule which says that of those loans, three were supported by first mortgage security; five by second mortgage security; three loans were not supported by any available loan file; seven of the loans were made to entities in respect of which receivers and managers had been appointed to the borrower, and in respect of four loans, the borrower was in liquidation or had become a deregistered company. Wickham recorded total noteholder liabilities of $27,671,014.00. The estimated gross return on the loan portfolio was 6c to 22c in each dollar before taking account of the costs of recovering the loans, legal fees and the costs and expenses of the administrators (and/or liquidators).

The report notes that Sandhurst had taken steps to convene a meeting of noteholders for 5 February 2013 and that ASIC had commenced action in the Federal Court against Mr Sherwin and entities related to him for freezing orders.

A second meeting of creditors was proposed for 6 February 2013.

In the report the administrators also note aspects of the loan criteria. They note that loan terms for loans made prior to 9 July 2006 were to be no more than 12 months and loan terms after that date no more than 24 months. The maximum loan to valuation ratio was to be 85% with valuations less than six months old at the time of a loan approval.

As to Sandhurst, the administrators observe that if Wickham is placed into liquidation, the liquidators would investigate whether “Sandhurst has complied with its obligations pursuant to the Trust Deed”. The administrators also observe that they had written to Sandhurst “seeking further information, and will continue investigations to ascertain if these obligations have been complied with”. The administrators also note that “Sandhurst did have concerns about the Company’s loan portfolio and cash flow” and that this concern resulted in the administrators (before appointment as administrators) being “engaged on 6 December 2012 to commence an Independent Review of the loan portfolio”.

Section 5 of the preliminary report provides further information concerning the investigations conducted by the administrators. In that section, the administrators make these comments. They express the opinion that the books and records of Wickham have not been maintained in accordance with s 286 of the Act. The company records do not include any management accounting records or loan balance records. At the date of the report, Mr Robertson had not provided his laptop to the administrators which was said to contain company data. Investigations by the administrators had not identified any records either electronic or paper detailing how Wickham had calculated interest payable on loans or detailing individual loan transactions with particular borrowers.

The directors made files available for review although only 13 files were made available notwithstanding that there were 22 loan transactions. During the course of investigations by the administrators, two different versions of a list of loans made by the company emerged. One report identified 18 loans with an outstanding balance of $27,094,010.00 and the second report detailed 21 loans with balances of $28,180,010.00. Three additional loans were identified totalling $1,086,000.00.

In section 5, the administrators summarise their investigation of the loan portfolio. Three loans are supported by first ranking mortgages. One loan is current. One borrower claimed that the loan had been repaid. As to the third loan, Wickham was in the course of realising the security. Of the other loans, two properties, subject to second ranking mortgages, were subject to sale contracts. Receivers and managers had been appointed to six borrowers representing seven loans. Liquidators had been appointed to three borrowers. Six borrowers had current loans although there were no details in the company files about the currency of the loans. Only two borrowers had been identified as regularly paying interest on their loan account during the 2012 calendar year.

The review of the loan portfolio revealed that current valuation reports were not held; valuation reports were not addressed to Wickham; not all loan files held a copy of a loan approval by Wickham’s Board or its investment committee; no current correspondence was evident on the files; and there were no approvals of loan extensions beyond the initial approved term in the majority of the files.

The administrators were unable to locate files for the additional loans made in 2012.

The administrators say that no recovery is expected from those borrowers that have receivers and managers appointed or where liquidators have been appointed.

In terms of reporting to Sandhurst, Wickham provided reports for the periods ended 30 September 2009 to 30 September 2012. The administrators note that Sandhurst advised them that it had concerns about Wickham’s cashflow position and requested Wickham to provide Sandhurst with a cashflow forecast. An email from Wickham to Sandhurst dated 30 November 2012 enclosed a cashflow forecast for three months to February 2013 together with a “Bank Confirmation Statement” apparently issued by the Bank of Queensland and its funds manager, DDH Graham Limited, disclosing a balance in Wickham’s “application account” on 30 November 2012 of $10,779,835.00. Upon investigation, DDH Graham Limited advised the administrators that the Confirmation Statement as at 30 November 2012 “[had] not been generated by [it]”. The account transaction listing received by the administrators from the Bank of Queensland shows that the actual bank account balance at 30 November 2012 was $264,892.00 thus leaving the administrators to conclude that the earlier confirmation letter was fabricated.

At section 5.6, the administrators note that Wickham’s annual accounts disclose that Wickham’s auditor, Mr Brian Kingston, had provided an unqualified audit opinion dated 12 September 2012 that Wickham’s accounts at 30 June 2012 represented a “true and fair view” of Wickham’s position at that date. The administrators say that they propose to review that audit opinion in the light of information arising out of their investigations. The administrators set out information in relation to the financial years ending 2010, 2011 and 2012 and conclude that they do not consider that the information disclosed in the accounts to 30 June 2012 is accurate.

At section 5.11, the administrators consider, based on their preliminary investigations, that Wickham’s failure is attributable to defaults on loans, insufficient income to pay interest to its unsecured noteholders, insufficient working capital and the deficiencies of management. The administrators observe that Wickham did not maintain records that correctly record and explain its transactions, financial position and performance thus preventing true and fair financial statements to be prepared and audited. Further, Wickham continued to accept funds from noteholders after 14 January 2012 receiving an additional $1,962,500.00.

At the meeting of creditors on 6 February 2013, the administrators were appointed liquidators of Wickham.

On 29 April 2013, the liquidators provided a report to Wickham’s noteholders. In that report, the liquidators say that investigations subsequent to the report of the administrators on 29 January 2013 had identified two further loans amounting to $5,130,000.00. One loan was for $400,000.00. A receiver and manager had been appointed to the borrower in June 2012. Investigations suggested that there was no value in the second mortgage security held by Wickham. The second loan was for $4,730,000.00 and investigations were continuing into that loan. A revised estimate of the gross realisations that might occur from the loan portfolio was summarised in this way. The revised lower estimate of recoveries was $1,738,000.00 and the revised upper estimate was $9,699,500.00 in respect of 24 loans having a book value of $33,310,010.00. Realisations to the date of the report, 29 April 2013, amounted to $993,323.00.

Of the 24 identified loans, three were supported by first mortgage security; five by second mortgage security; four had no loan file; eight were loans made to borrowers where receivers and managers had been subsequently appointed; and in respect of four loans, the borrower was in liquidation or the company had been deregistered.

At para 3.1 of the report, the liquidators observe that investigations were continuing into the question of whether Mr Kingston had conducted an audit of Wickham’s accounts in accordance with the required accounting standards required to be applied under Part 2M.5 of the Act.

As to Sandhurst, at para 3.2 the liquidators observe: “Investigations have continued into compliance by Sandhurst with its obligations pursuant to the Trust Deed. Our review includes the information provided by the Company to Sandhurst, and Sandhurst’s obligation to analyse and investigate the information provided to them”.

At para 3.3, the liquidators observe that their investigations into Wickham’s loan portfolio have identified “numerous irregularities”.

On 5 September 2013, the liquidators provided a further report to Wickham’s noteholders.

In that report, the liquidators observe that their investigations have revealed 24 loans at a book value of $33,310,010.00 and the revised lower estimate of recoveries amounts to $1,758,431.00 with a revised upper estimate of $9,719,931.00. Realisations to 5 September 2013 had increased from $993,323.00 to $1,038,754.00. The estimated gross loan recoveries would be in the range 6c to 35c in the dollar before deducting the costs likely to be incurred in achieving an increased estimated realisation. In the Executive Summary, the liquidators say that they have identified transfers amounting to $494,454.00 from Wickham’s account to an account held by Mr Robertson and a payment of $95,113.00 from Wickham’s account to builders completing renovations to Mr Sherwin’s residence in Wooloowin. The revised schedule at para 2.1 identifies three loans subject to first mortgage security; five loans subject to second mortgage security; four loans where no loan file was identified; eight transactions in respect of which receivers and managers had been appointed to the borrower as at the date of the report (5 September 2013); and four transactions where the borrower had been placed in liquidation or the company had been deregistered.

At para 4.1, the liquidators note that ASIC has cancelled the registration of Wickham’s auditor, Mr Brian Kingston, on the footing that ASIC considered that he had failed to carry out or adequately perform the duties of an auditor in relation to Wickham’s accounts. ASIC took the position that Wickham’s audit was not conducted in accordance with AASB applicable standards because Mr Kingston had failed to obtain sufficient appropriate audit evidence to support material financial balances in the 2012 financial report; an unqualified audit opinion was given without sufficient or appropriate audit evidence to support the adoption of a “going concern” basis for the accounts for the 2012 financial year; an adequate level of professional enquiry was not exercised in auditing the “recoverable value” of the loan portfolio assets; and key audit planning, execution and completion procedures were not performed or documented by Mr Kingston. The auditors note that Mr Kingston signed an enforceable undertaking given to ASIC “that he would never reapply for registration or perform any duties or functions of an auditor” (para 4.1).

As to Sandhurst, at para 4.2 the liquidators note that “[i]nvestigations are continuing into compliance by Sandhurst with its obligations pursuant to the Trust Deed”.

22    We agree with the reasons of the primary judge at [155] extracted above at para 14 as to why that evidence objectively supports a reasonable belief in a right to relief against Sandhurst for breach of duties.

23    Thirdly, Sandhurst submitted that the primary judge ought not to have made orders requiring pre action discovery in favour of Mrs Clarke as there was no evidence from her at all as to her belief. As stated above, such evidence was not required from Mrs Clarke provided there was sufficient material before the Court from which the Court could infer that she holds that belief. In any event, Ms Saddler did depose that Mrs Clarke holds that belief.

24    Fourthly, Sandhurst contended that the primary judge also erred by not addressing the requisite elements of the proposed cause of action against Sandhurst and the lack of evidence as to those elements which, it was submitted, was required for the belief to be objectively “reasonable”. Again we disagree. As Perry J observed in ObjectiVision Pty Ltd v Visionsearch Pty Ltd (2014) 108 IPR 244; [2014] FCA 1087 , r 7.23(1)(a) does not speak of a belief in the existence of a cause of action but rather of a right to relief and uses the words “may have”. Perry J at [36] cited with approval EBOS Group Pty Ltd v Team Medical Supplies Pty Ltd (No 3) (2012) 199 FCR 533; [2012] FCA 48 at [31], where Katzmann J explained in rejecting the submission that the prospective applicants must prove a reasonable belief in the existence of every element of each cause of action which they may have against the respondents:

The rule does not speak in terms of a belief in the existence of a cause of action. It speaks of a right to relief. And it is concerned with a belief in the possibility (not the existence) of such a right. The words used are “may have”. In these respects it is not materially different from its predecessor [O 15A r 6, Federal Court Rules 1979 (Cth)]. Of course, in one sense, the expression “right to relief” begs the question. Relief for what? Satisfaction of the first criterion does therefore require identification of the nature of the relief which is the subject of the belief … But an applicant does not have to make out a prima facie case … Nor does an applicant have to establish every element of the cause of action.

We agree with this passage. Contrary to the submission for Sandhurst, it was not incumbent upon the respondents to identify how or what Sandhurst did, or did not do, amounted to a breach of s 283DA. The objective circumstances detailed at [155] of systemic failure by Wickham to comply with its statutory obligations and the fact of its insolvency were sufficient to show a reasonable basis for Mr Clarke’s belief that Sandhurst breached its statutory, contractual and fiduciary duties, as the primary judge held. It may well be that matters of fact and law raised by Sandhurst against the reasonableness of Mr Clarke’s belief may have some merit by way of defence to proceedings against Sandhurst for breach of duties, if commenced. However, such matters do not gainsay that the evidence relied on was sufficient to show that there is a reasonable basis for Mr Clarke’s belief.

25    It was also argued that the primary judge did not address the required causal link between the damages asserted and the absence of any evidence of reliance by the respondents on anything done or not done by Sandhurst. It was submitted that there was no evidence that either Mr or Mrs Clarke had read or relied on anything and contended that it was essential to consider this so as to determine whether any belief as to a right of relief in this Court was reasonable. We again disagree. The Clarkes only needed to adduce evidence that was sufficient to “incline the mind towards the matter or fact in question”: Echo Tasmania [2008] FCAFC 58 at [43] – that is, that they reasonably believed that they may have a right to relief from Sandhurst in respect of contended contraventions. It is to be noted also that a contravention of s 283DA of the Act gives rise to claim in damages without the need to show reliance: s 283F of the Act. Section 283F(1) of the Act provides, relevantly that a person who suffers loss or damage because a trustee (among others) has contravened a provision of Chapter 2L (and, relevantly, Part 2L.4 of Chapter 2L) may recover the amount of loss or damage from the trustee or person involved in the contravention.

26    No error in the primary judge’s approach has been shown. The primary judge did not ask the wrong question and it was plainly open for the primary judge to conclude as he did at [155] point 16 that:

If the administrators and then the liquidators are expressing these views as experienced administrators [ie that there was a proper basis for conducting investigations into whether Sandhurst had complied with its obligations under the trust deed] Mr Clarke might reasonably believe, in the context of these other matters, that there is a proper basis for concern about the discharge of duties on the part of the trustee and that he may have a right to relief in the Court in respect of a contended breach of duty on the part of the trustee.

proposed ground 2

27    Sandhurst contended that the primary judge erred by finding that the respondents did not have sufficient information to decide whether or not to start a proceeding.

28    Ms Saddler had deposed in para 25 her affidavit that the respondents were of the view that the documents which they have in their possession were not sufficient to determine whether to start the potential action against Sandhurst. That paragraph was also objected to by Sandhurst but the objection was not ruled on by the primary judge. The short answer is that it was unnecessary in any event for a ruling to be made because Mr Clarke deposed in para 25 as to his and Mrs Clarke’s belief that the documents they have in their possession are insufficient to enable them to determine whether to start the proposed proceeding against Sandhurst and that paragraph was not the subject of objection at the hearing.

29    Sandhurst next submitted that the respondent’s evidence and submissions before the primary judge were that they simply wish to inspect all the documents of Sandhurst to determine what it did or did not do and that the affidavits filed on behalf of the respondents do not set out why all the information sought (and ordered) was needed by the Clarkes to determine whether to start a proceeding. It was contended that there was no attempt by the respondents to link any particular documents to any aspect of an asserted cause of action about which they lacked information and that the primary judge did not address this at all in the reasons. The submission must be rejected. At [124] the primary judge referred to the evidence of Mr Clarke that, in Mr Clarke’s view, the documents that he has in his possession are not sufficient to enable him to determine whether to commence the proposed proceedings because he was unable to determine whether Sandhurst exercised reasonable diligence or breach fiduciary duties owed to him as a noteholder:

(a)    in ascertaining whether the property of a borrower was sufficient to repay the amount by Wickham;

(b)    in ascertaining whether Wickham had complied with the terms of the trust deed in making a loan to a borrower;

(c)    by failing to follow the procedures set out in the trust deed when considering the information contained in the prospectuses and supplementary prospectuses;

(d)    by failing to check and consider the quarterly reports issued by Wickham.

Furthermore, the evidence was that Ms Saddler on behalf of the respondents wrote to Sandhurst requesting inspection of the categories of documents which Ms Saddler was of the view that Sandhurst has or is likely to have in its control that are directly relevant to the question of whether the respondents have a right to obtain relief. Sandhurst responded to that letter and declined to provide the documents sought on the basis that the documents set out in the schedule were either not in the possession, custody or control of Sandhurst, were confidential or were more appropriately obtained via a request to Wickham. The primary judge found at [157] that Mr Clarke has available to him a very limited number of documents and that having regard to Ms Saddler’s affidavit and the correspondence referred to, he was satisfied that Mr Clarke and his advisors had made reasonable inquiries to try and obtain information sufficient to enable Mr Clarke to decide, with legal advice, to start a proceeding in the Court against Sandhurst on the grounds identified. Further, the primary judge was satisfied that after making those reasonable inquiries, Mr Clarke did not have sufficient information available to him to decide whether to commence a proceeding. No error of fact or law is disclosed. No challenge was made by or on behalf of Sandhurst either by way of response to the request for inspection by Ms Saddler or at the hearing of the respondents’ application for preliminary discovery below to the categories of documents sought on the basis that the documents sought could not be relevant to the proposed claim.

proposed ground 3

30    Sandhurst contended that the primary judge erred in fact or law by finding that the respondents have a reasonable belief that Sandhurst has had, or is likely to have, documents in its possession which are directly relevant to the question of whether or not they have a right to relief. It was submitted that there was an absence of any admissible evidence in relation to the documents likely to be in Sandhurst’s possession.

31    The only direct evidence before the primary judge as to the requirement of r 7.23(1)(c)(i) was the following deposition of Mr Clarke: “I have been advised by my solicitor that there would normally be in existence documents dealing with the following allegations of a trustee in the position of Sandhurst … ”. Ms Saddler similarly deposed in her affidavit that the documents sought “would be in the possession of Sandhurst as they involve actions taken by that company”. It was contended that the primary judge erred in receiving Mr Clarke’s evidence over Sandhurst’s objection by reason that it was hearsay deposition from a source not clearly identified but, presumably, Ms Saddler and, the submission went, on the basis that the hearing was conducted as a final hearing, the hearsay was inadmissible. It was submitted that even if the hearing was interlocutory the hearsay reference to a purported opinion of “my solicitor” was clearly not admissible for the reason that it did not satisfy any of the requirements for the receipt of opinion evidence. We also do not think that there is any substance in this ground.

32    First, hearsay evidence was admissible because it was plainly an interlocutory hearing, not a final hearing. The primary judge correctly admitted this evidence on the footing that it identifies the basis on which Mr Clarke had formed his belief about matters relating to particular documents. Secondly, the question for the Court is whether the Court should be satisfied that the applicant for preliminary discovery “reasonably” believes that the prospective respondent has or is likely to have documents directly relevant to the question. The issue then is whether the evidence adduced is sufficient to establish that there was a reasonable basis for the belief. It was open for the primary judge to be so satisfied for the reasons given by the primary judge. Putting aside Mr Clark’s deposition, it was open to infer from all the evidence before the Court, including and facts and documents deposed to by Ms Saddler, that there was a reasonable basis for a belief that Sandhurst was likely to have documents directly relevant to the prospective action.

proposed ground 4

33    Sandhurst contended that the primary judge erred in law by failing to consider whether each of the 39 categories sought by the respondents were directly relevant to the question of whether or not they may have a right to relief. Before the primary judge, beyond advancing a general submission that Mr and Mrs Clarke had failed to demonstrate that the 39 categories of documents satisfied the direct relevance test, Sandhurst did not directly challenge or raise specific objections to the 39 categories. Nor did Mr and Mrs Clarke advance any specific submissions concerning the direct relevance of each of the 39 categories. They appeared to proceed on the basis that the relevance of the categories was self-evident. On appeal, Sandhurst now contends that a large number of the categories are not directly relevant.

34    Sandhurst seems to assume that r 7.23 of the Federal Court Rules is the source of the Court’s power to make an order for preliminary discovery. The source of the power is, in fact, s 23 of the Federal Court Act. In Corrs Pavey Whiting & Byrne v Collector of Customs (Vic) (1987) 14 FCR 434 (“Corrs”) at 445 – 6, Gummow J discussed the power to order discovery before suit. His Honour traced the power back to the auxiliary jurisdiction in equity, used to aid litigants in the common law courts. Although, as Gummow J pointed out, the English cases dealt only with disclosure of the identity of the appropriate defendant, the American cases supported the availability of such relief in a broader range of circumstances. There seems to be no reason in principle for distinguishing between disclosure of the identity of a potential defendant and disclosure of information relevant to the proposed claim. The drafters of r 7.23 and similar rules in other courts have apparently made that assumption. Although Gummow J was in dissent as to the outcome in Corrs, the majority did not consider this question. There can be little doubt that s 23 of the Federal Court Act provides sufficient power to justify the process contemplated by r 7.23: see Kirella Pty Ltd v Hooper (1999) 161 ALR 447; Zapf Creation AG v OWT Australia Pty Ltd [2001] FCA 759; and Slick v Westpac Banking Corporation [2006] FCA 1712. The Federal Court Rules merely guide the parties and their lawyers as to the way in which the Court will proceed: see “Overview of the Federal Court Rules 2011”.

35    Gummow J noted the possibility that the Federal Court Rules might, in some cases, operate so as to establish an exclusive code, regulating the availability of relief previously available under the general law. In our view, nothing in r 7.23 suggests an intention to limit the power conferred by s 23 of the Federal Court Act or pre-existing equitable practices. Rather it, indicates the way in which a party should seek such an order. In any event rr 1.32 – 1.35 of the Federal Court Rules make it clear that the Court is not bound by the Rules. Even if r 1.34 requires an express dispensation, r 1.35 makes it clear that an order need not be consistent with the Rules. In those circumstances, we find it difficult to understand how a failure to address a particular provision of any rule can, without more, lead to the conclusion that the relevant discretion has miscarried. The rule may deal with some matter which is, of itself, a relevant consideration in deciding whether to make the order sought. If a party submits that because the other party has not complied with the terms of a rule, the Court should not, in the exercise of its discretion, make the order sought, then the Court should consider that argument. Failure to do so may constitute an appealable error. Further, in some cases, it may appear that the parties have conducted the case on the basis that entitlement to the order depended upon compliance with r 7.23. In such a case, questions of procedural fairness may arise.

36    In any event, in our view, the primary judge considered the question of direct relevance in conjunction with his consideration of the Clarkes’ belief as to the existence of a claim to relief. In the present case, Mr Clarke and Mrs Clarke sought discovery of 39 categories of documents. They claimed reasonably to believe that Sandhurst had, or was likely to have had, in its control documents which were directly relevant to the question of their right to relief. Rule 7.23(2) relates to documents which satisfy the test prescribed in r 7.23(1). It does not prescribe a further test of relevance.

37    An application pursuant to r 7.23 will generally be made on legal advice. That advice will probably identify possible causes of action, information which is necessary in order to commence proceedings and the categories of documents which may both exist and assist. Such advice will generally be based on relevant statutory obligations binding the potential discovering party, the solicitor’s experience, the knowledge of the party seeking the order and/or the knowledge of other persons, including experts.

38    At [158] the primary judge found that Mr Clarke (on his own behalf and that of Mrs Clarke) reasonably believed that Sandhurst had, or was likely to have had control of documents directly relevant to the question of the Clarkes’ right to claim relief. At [159] the primary judge demonstrated that he was referring to the documents identified in Sch 2 to the application. The primary judge considered the question of direct relevance in conjunction with his consideration of the Clarkes’ belief as to the existence of a claim to relief. That consideration appears at [11] – [155].

39    The discussion at [11] – [37] concerns the relevant trust deed. It demonstrates the likelihood that certain documents were created. At [38] – [51] his Honour discusses relevant statutory requirements, many of which provide for the creation of documentation. At [52] – [75], the primary judge describes the preparation and issue of prospectuses, including the content of such prospectuses. At [76] - [110], his Honour discusses the appointment of administrators and the conduct of the administration. Various irregularities emerged from the administrators’ enquiries, including an allegation that at least one document had been fabricated. The administrators’ report discusses the dealings between Sandhurst and Wickham, including a reference to Sandhurst’s having taken steps to convene a meeting of noteholders. It identifies other concerns about Wickham’s book-keeping and the limited extent of documentation concerning loans allegedly made. There are also references to Sandhurst’s concerns about Wickham’s affairs. On 6 February 2013 the administrators were appointed as liquidators, and investigations continued.

40    At [111] – [128] the primary judge considers Mr Clarke’s evidence. Mr Clarke refers to correspondence between Sandhurst and his solicitor, which correspondence suggested that Sandhurst had received certain documentation from Wickham. Mr Clarke identifies matters which, it seems, Sandhurst ought to have investigated. At [122] the primary judge identifies the categories of documents which, according to Mr Clarke’s solicitor’s advice, would normally exist. They are:

(1)    notices by Wickham to Sandhurst that it proposes to issue notes under each prospectus and supplementary prospectus (where relevant);

(2)    copies of each prospectus in draft provided by Wickham to Sandhurst;

(3)    any amendments suggested by Sandhurst to those documents;

(4)    reports from an auditor stating the amount of the notes to be issued under each prospectus and commenting that the auditor has not become aware of any material circumstance which might affect the amount of notes to be issued;

(5)    investigations undertaken by Sandhurst to determine whether the property of a borrower was sufficient to repay the amount deposited or lent by Wickham when the loan became due for payment;

(6)    investigations undertaken by Sandhurst to ascertain whether the terms of the Trust Deed had been complied with by Wickham and particularly whether finance had been provided to borrowers from Wickham in accordance with the Sch 4 “Lending and Security Criteria”;

(7)    investigations as to whether loans made by Wickham to a borrower were fully documented; made on a commercial basis as to interest, terms and security; made for no more than 12 months; included security sufficient to satisfy obligations owed under the loan agreement; included security by way of a registrable first or second mortgage; exhibited a maximum loan to valuation ratio of 85% of an independent valuation of the real property; were supported by an independent valuation meeting the relevant requirements of Sch 4 of the Trust Deed; and in the case of a development of real property, whether a detailed feasibility report prepared by or for the borrower was available to Wickham evidencing the viability and profitability of the development project before the loan was made;

(8)    certificates from an auditor in accordance with cl 6.4(d) of the Trust Deed;

(9)    requests for information required by Sandhurst from borrowers in order to obtain any further report from an accountant;

(10)    requests for information sought under cl 9.2 of the Trust Deed.

41    At [124] the primary judge observed that Mr Clarke claimed to be, “unable to determine whether Sandhurst discharged its duty of ‘reasonable diligence’ or whether Sandhurst breached fiduciary duties owed to him … as a noteholder, namely”:

(a)    in ascertaining whether the property of a borrower was sufficient to repay the amount lent by Wickham;

(b)    in ascertaining whether Wickham had complied with the terms of the Trust Deed in making a loan to a borrower;

(c)    by failing to follow the procedure set out in the Trust Deed when considering information contained in the prospectuses and supplementary prospectuses; and by failing to check and consider the quarterly reports issued by Wickham.

42    At [130] – [152] the primary judge deals primarily with statements made to Sandhurst by Wickham and its directors, and various audit reports upon which Sandhurst apparently relied. At [155], his Honour summarizes the position in some detail. Our understanding of his Honour’s reasons is that he considered both the reasonableness of Mr Clarke’s belief as to the existence of a right to relief, and the reasonableness of his belief that Sandhurst had, or previously had in its control, documents which were directly relevant to the question of his entitlement to such relief. That much becomes clear when the reasons are read, having regard to the categories identified in Sch 2 of the application.

43    At first instance, Sandhurst simply submitted, at para 2.3 of its submissions, that there was no evidence that it had, in its possession, documents which were directly relevant to the question of entitlement to relief. At paras 21 – 23 it submitted:

21.    The Application seeks 39 very broad categories of documents over an 8 year period. Most of the categories would require discovery of any “document”: which is defined in an expansive way and would include any electronic information.

22.    The Affidavits do not, in any admissible way, set out why all of that information is needed to make a decision about whether or not to start a proceeding. Sandhurst submits that the documents are sought to determine what relief might be claimed at all and would involve a review of all of its documents, not only those necessary to make the decision about whether to start the proceeding. The Prospective Respondent submits that the Application should fail on that basis.

23.    The obvious oppression (see below) inherent in the scope of the Prospective Applicants’ Application ought be weighed against their contention that discovery of all of Sandhurst records ought be ordered so as to permit the Prospective Applicants to identify what was not done. This proposition is with respect entirely contrary to the terms of Rule 7.23 and is without precedent in the context of pre-action discovery.

44    Apart from the complaint about the breadth of the orders sought and the assertion of oppression, the submission was:

The Affidavits do not, in any admissible way, set out why all of that information is needed to make a decision about whether or not to start a proceeding.

Its oral submissions at first instance appear at Transcript 43 ll 11 – 18 and Transcript  45 l 44 to Transcript 47 l 30. Initially, the submission seems to have been that a reasonable belief as to direct relevance could not be demonstrated because the, “ingredients of the cause of action” were not clear. His Honour seems not to have accepted the submission as to lack of clarity. Counsel also submitted that the Clarkes’ case was primarily about, “whether or not [Sandhurst] took steps to investigate the security position and the criteria under clause 6 of the trust deed and schedule 4”. It then submitted that the minutes of order “go far beyond anything that could possibly fall simply to an issue of whether or not security had been considered and steps taken”. Apparently by way of example, counsel referred to item 37 in Sch 2:

… any document or documents concerning a meeting of noteholders called by either Wickham or the Trustee.

Counsel then observed at Transcript 46 l 44 to Transcript 47 l 2 that:

And your Honour, this goes far beyond what could possibly satisfy the third of the criteria in rule 7.23 namely, direct relevance and how on earth, as an example, documents relating to the calling of a meeting of noteholders about which there’s no evidence before the court anyway is in some way informative and directly relevant to any cause of action, bearing in mind that the criteria of that asserted cause of action are not even address.

45    It seems that there was evidence that Sandhurst had at least considered whether to call such a meeting. It is, to say the least, surprising that Sandhurst’s complaint as to relevance should be so general. Sandhurst then submitted that the Clarkes had not attempted to link any of the categories to “what it is they say they need to decide to commence the action”. However his Honour seems to have understood both the nature of the possible claim and the documents which were said to be potentially relevant to it.

46    The Clarkes’ case is that Sandhurst had a statutory duty, pursuant to s 283DA of the Corporations Act 2001 (Cth) (the “Corporations Act”) which in its form prior to 30 January 2012 provided:

The trustee of a trust deed entered into under section 283AA must:

(a)    exercise reasonable diligence to ascertain whether the property of the borrower and of each guarantor that is or should be available (whether by way of security or otherwise) will be sufficient to repay the amount deposited or lent when it becomes due; and

(b)    exercise reasonable diligence to ascertain whether the borrower or any guarantor has committed any breach of:

(i)    the terms of the debentures; or

(ii)    the provisions of the trust deed or this Chapter; and

(c)    do everything in its power to ensure that the borrower or a guarantor remedies any breach known to the trustee of:

    (i)    any term of the debentures; or

    (ii)    any provision of the trust deed or this Chapter;

unless the trustee is satisfied that the breach will not materially prejudice the debenture holders’ interests or any security for the debentures; and

(d)    ensure that the borrower and each guarantor complies with Part 2K to the extent that it applies to the debentures; and

(e)    notify ASIC as soon as practicable if:

(i)    the borrower has not complied with section 283BE, 283BF or subsection 318(1) or (4); or

(ii)    a guarantor has not complied with section 283CC; and

(f)    notify ASIC and the borrower as soon as practicable if the trustee discovers that it cannot be a trustee under section 283AC; and

(g)    give the debenture holders a statement explaining the effect of any proposal that the borrower submits to the debenture holders before any meeting that:

(i)    the Court calls in relation to a scheme under subsection 411(1) or (1A); or

(ii)    the trustee calls under subsection 283EB(1); and

(h)    comply with any directions given to it at a debenture holders’ meeting referred to in section 283EA, 283EB or 283EC unless:

(i)    the trustee is of the opinion that the direction is inconsistent with the terms of the debentures or the provisions of the trust deed or this Act or is otherwise objectionable; and

(ii)    has either obtained, or is in the process of obtaining, an order from the Court under section 283HA setting aside or varying the direction; and

(i)    apply to the Court for an order under section 283HB if the borrower requests it to do so.

The effect of the amendment on 30 January 2012 was to delete subsection (d). We do not understand the amendment to be of any significance.

47    The Clarkes seek to prove that such duty included the taking of positive action including, in particular, making relevant enquiries concerning Wickham’s loan transactions. No doubt questions will also arise as to the actual state of Sandhurst’s knowledge concerning Wickham’s affairs. At paras 38 and 39 of the Clarkes’ submissions at first instance, it was submitted that:

38.    Documents may show one of two things – either the actions taken or, alternatively, a failure to take action. Such information is crucial in determining whether to commence an action against Sandhurst. Without this information the Applicants do not know what action Sandhurst took (or failed to take) and they are unable to determine whether to start proceedings.

39.    Mr Clarke says in his affidavit that he [is] of the view that the documents which the Applicants have in their possession are not sufficient to enable them to determine whether to start the proposed action against Sandhurst. In particular they are unable to determine whether Sandhurst exercised reasonable diligence or breached its duties owed to Noteholders:

(a)    in ascertaining whether the property of a borrower was sufficient to repay the amount lent by Wickham;

(b)    in ascertaining whether the terms of the trust deed had been complied with by both borrowers and Wickham;

(c)    by failing to follow the procedure set out in the trust deed when considering the information contained in the prospectuses and supplementary prospectuses; and

(d)    by failing to check and consider the quarterly reports.

48    The bases of the possible claim are set out in his Honour’s reasons at [127]. It is said that Sandhurst:

(a)    failed to exercise reasonable diligence to ascertain whether the property of Wickham (whether by way of security or otherwise) was sufficient to repay the amount lent;

(b)    failed to exercise reasonable diligence to ascertain whether Wickham committed any breach of the terms of the Notes, the trust deed, or Chapter 2L of the Act, particularly with regard to:

(i)    the conduct of Wickham’s business;

(ii)    the way and manner in which Wickham’s financial and other records were kept;

(iii)    the way in which the money raised through the issue of Notes was applied by Wickham;

(iv)    Wickham’s compliance with the general covenants set out in Clause 6.1 of the trust deed;

(v)    reports provided by Wickham pursuant to s 283DF of the Act and Clause 6.3 of the trust deed;

(vi)    Wickham’s compliance with the financial covenants set out in Clause 6.4 of the trust deed; and

(vii)    Wickham’s compliance with the terms of any issued prospectus.

(c)    failed to ensure that Wickham complied with Chapter 2K of the Act, to the extent that it applied to the Notes.

49    At [155] his Honour summarized the 16 “factors” said to be related to Mr Clarke’s “view” extracted above at para 14. Those factors reasons are critical to the issue of relevance.

50    The documents identified in Sch 2 generally fall into the following categories:

1.    documents concerning particular loan transactions entered into by Wickham;

2.    documents concerning Wickham’s financial affairs or otherwise indicating the extent of Sandhurst’s knowledge of those affairs;

3.    documents concerning steps taken to perform functions identified in the trust deed and/or documents, the generation of which was contemplated by the trust deed; and

4.    documents identifying, or otherwise concerning enquiries undertaken (or not undertaken) by Sandhurst in discharge of its obligations as trustee.

51    As far as we can see only categories 14 and 37 arguably fall outside of the general areas identified by his Honour at [155]. Category 37, seeks any document concerning a meeting of noteholders called by either Wickham or Sandhurst. We have already pointed out that Sandhurst had considered calling such a meeting, apparently because it was clear that Wickham was in financial difficulties. In our view, documents concerning a proposed or actual meeting may well disclose the extent and nature of Sandhurst’s state of knowledge and understanding at that time, both as to Wickham’s affairs and as to its own obligations. Hence there is a reasonable basis for the view that such documents are directly relevant. Category 14 seeks a copy of the noteholder’s register. The direct relevance is perhaps not so obvious but it could not be said, in our view, that this category of documents has no relevance at all to the claims proposed.

52    As to the other categories, we consider that their relevance is obvious. They relate directly to the way in which Sandhurst sought to discharge its obligations. That is the very basis of the proposed claim. The documents should be viewed as a whole. It may well be that an individual document says nothing, but relevant information may well emerge from a consideration of all of the documents in combination. It must not be forgotten that Wickham failed. It must be at least arguable that the mechanism provided by the Corporations Act in order to protect noteholders, the appointment of a trustee, also failed. The primary judge accepted that there was reason to believe that Sandhurst had failed to discharge its obligations. A noteholder could not assess his or her prospects of obtaining relief in those circumstances, unless he or she could examine the way in which the trustee had sought to discharge such obligations. Once it is accepted that the Clarkes reasonably believe that they may have a right to relief, it follows that they should be allowed reasonable access to documents which evidence Sandhurst’s performance of its duties.

53    The primary judge may not have produced a schedule explaining each document and its relationship to the possible claim but, with the possible exception of category 14, the direct relevance of each category to the issues identified by his Honour is plain. That this is so is eloquently demonstrated by Sandhurst’s failure to make other than the vaguest of attempts to indicate absence of relevance.

54    Appeal ground 4 asserts that the primary judge failed to consider the question of direct relevance. No appeal ground challenges any actual decision as to the matter. If we are correct in the view that his Honour considered the question, Sandhurst must fail on ground 4 including with respect to category 14. At the hearing of the appeal, the Court invited the parties to provide submissions as to relevance. Consideration of those submissions would only be necessary if the Court were satisfied that his Honour had not considered the question of relevance and was minded to, itself, perform that function. On our view of the case, we need not refer to those submissions. We have, nonetheless, considered them. They are generally unhelpful, largely because they fail to reflect the nature of the Clarkes’ possible claim, or the way in which his Honour addressed the Clarkes’ belief, both as to any claim to relief, and as to the direct relevance of the categories of documents sought. There is no merit in ground 4.

proposed ground 5

55    This ground again focusses on [155], of the primary judge’s reasons. It was submitted for Sandhurst that there has been a denial of procedural fairness because the findings made were not contended for by the respondents, nor argued by the parties during the hearing. Again there is no substance in this submission. The legal principles relating to procedural fairness were recently reviewed and usefully summarised by the New South Wales Court of Appeal in Warkworth Mining Ltd v Bulga Milbrodale Progress Association Inc (2014) 307 ALR 262; [2014] NSWCA 105 at [35]-[43] where the court recognised that procedural unfairness may arise where information is used by a decision maker in a way that could not reasonably be expected by one party and that party is not given an opportunity to respond to that use, or where the matter is determined on a basis that was not in issue or argued in the proceedings. In this case Sandhurst has failed to demonstrate that the evidence was applied or relied upon by the primary judge in a way that could not reasonably have been expected. Given the broad evidentiary matrix before the Court and the matters ventilated in the submissions and oral argument, it was well open for the primary judge to make the observations and draw the inferences that he did for the purpose of assessing the objective reasonableness of Mr Clarke’s belief.

conclusion

56    The application should be dismissed.

Associate:

Dated:    26 February 2015