FEDERAL COURT OF AUSTRALIA

Hodder & Associates Pty Ltd v National Mutual Trustees Ltd [1999] FCA 708

PRACTICE AND PROCEDURE – preliminary discovery – Federal Court Rules, O 15A,    r 6 – whether there is reasonable cause to believe applicant may have right to obtain relief – whether all reasonable inquiries have been made – whether applicant has sufficient information to enable decision to be made to commence proceedings.

Trade Practices Act 1974 (Cth) s 52

George v Rockett (1990) 170 CLR 104 at 115-116 referred to

Paxus Services Ltd v People Bank Pty Ltd (1990) 99 ALR 728 at 732-733 referred to

Minister for Health & Aged Care v Harrington Associates Ltd [1999] FCA 549 referred to

PETER HODDER & ASSOCIATES PTY LTD (ACN 065 295 954) (Representing Growers under Seymour Softwoods Trust & Ors) & ORS v NATIONAL MUTUAL TRUSTEES LIMITED (ACN 004 029 841)

V119 of 1999

WEINBERG J

6 MAY 1999

MELBOURNE

THE COURT ORDERS THAT:

1.         The application for discovery from a prospective respondent, and the motion, notice of which was given on 18 March  1999, be dismissed.

2.         The applicants pay 50 per cent of the respondent’s costs of and incidental to the application, including reserved costs if any.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

EX TEMPORE REASONS FOR JUDGMENT

1                     There is before the court a motion, notice of which was given on 18 March 1999, in which application is made pursuant to O 15A r 6 of the Federal Court Rules for discovery from a prospective respondent, National Mutual Trustees Ltd, hereafter described as “National Mutual”.  Order 15A rule 6 provides as follows: 

“Where -

(a)       there is reasonable cause to believe that the applicant has or may have the right to obtain relief in the Court from a person whose description has been ascertained;

(b)       after making all reasonable inquiries, the applicant has not sufficient information to enable a decision to be made whether to commence a proceeding in the Court to obtain that relief; and

(c)               there is reasonable cause to believe that that person has or is likely to have or has had or is likely to have had possession of any document relating to the question whether the applicant has the right to obtain the relief and that inspection of the document by the applicant would assist in making the decision –

the Court may order that that person shall make discovery to the applicant of any document of the kind described in paragraph (c).”

2                     The background to this application is complex and need not be set out in any detail.  It is sufficient to note that National Mutual was the trustee of a series of trusts created between 1989 and 1992 which were designed to provide tax effective investments to those individuals who chose to participate in a scheme which involved the growing of pine plantations.  Those individuals were referred to as the "growers".  In general, they borrowed investment funds from financiers and invested those funds with a company now in receivership, Seymour Softwoods Ltd.

3                     National Mutual was required, under the various trust deeds, to act as representative for the growers and to supervise, and act as custodian over, the funds received and payments made out by the venture.  The trust deeds set out in detail the specific obligations undertaken by National Mutual.  One such obligation was to refrain from paying out money unless satisfied that the appropriate certificates had been provided by foresters who would certify that the conditions required to be met in relation to the growth of the particular pine trees on a particular plantation had, in fact, been met.  National Mutual was also required to maintain proper records and books of account. 

4                     It may fairly be said that the role of National Mutual was both to control the flow of funds into and out of the particular investments, and to lend its name to the scheme as a form of reassurance to prospective investors that the funds would be dealt with in an appropriate manner.  Some promotional material which drew attention to the role of National Mutual in this regard was tendered before me.

5                     It appears that at some point during the operation of the trusts, difficulties arose in procuring the funds necessary to sustain the operation.  It is unnecessary to go into the details of what occurred thereafter.  It is sufficient to note that the trusts were wound up in 1995.

6                     A number of claims have been made by various financiers against some of the growers who are said to owe substantial sums of money to those financiers.  In some cases, proceedings have been brought by the financiers against the growers.  In one such case, National Mutual has been brought into those proceedings by some of the growers by way of counterclaim alleging a breach of trust against National Mutual.

7                     The present applicants purport to represent some 300 or so growers, all of whom are clients of one firm of solicitors.  They are each unit holders and beneficiaries in at least one of the four Seymour Softwoods trusts of which National Mutual was trustee.  The applicants claim that there is reasonable cause to believe that they have, or may have, the right to obtain relief in this court from National Mutual, arising from its having acted as trustee of each trust.  The causes of action which might arise were alluded to in argument.  They included, at least, contravention of the provisions of section 52 of the Trade Practices Act 1974 (Cth) (“the Act) and breach of trust. 

8                     The applicants assert that notwithstanding having made all reasonable inquiries, they do not have sufficient information to enable a decision to be made whether to commence proceedings against National Mutual.  They also assert that they have reasonable cause to believe that National Mutual has in its possession documents which relate to the question whether they have the right to obtain the relief contemplated.

9                     The respondent challenges the applicants' contention that the conditions required for the grant of preliminary discovery have been met.  The respondent submits that there is no reasonable cause to believe that any contravention of any of the provisions of the Trade Practices Act occurred or that National Mutual committed any breach of trust.  The respondent further submits that the applicants have failed to make all reasonable inquiries in accordance with the requirements of O 15A r 6(b).  Moreover, the applicants have sufficient information in their possession already to enable them to determine whether or not to institute proceedings against the respondent.

O 15A r 6(a)

10                  Counsel for the applicants relied upon three matters which he contended fulfilled the requirement pursuant to O 15A r 6(a) that there be reasonable cause to believe that the applicants may have a cause of action against National Mutual.  These were:

           The applicants had come into possession of a file note of a meeting which had taken place on 7 May 1992.  Present at that meeting were two representatives of National Mutual, two representatives of Seymour Softwoods Ltd, and a representative of Ernst & Young.  That file note purported to set out the terms of a discussion in the course of which the issue of outstanding grower debtor balances was raised for consideration.  The need to provide alternative sources of finance was canvassed.  The National Mutual representative was purported to have said that National Mutual had entered into an arrangement whereby a company associated with the directors of Seymour Softwoods Ltd would provide finance to meet all of the outstanding balances of Seymour Softwoods Ltd’s grower contracts.  A "round robin" of cheques was to be utilised in funding this proposal agreement.

           In proceedings brought in the County Court of Victoria by a grower not represented by any of the four applicants, and not a client of the firm which is acting for the prospective parties to any litigation against National Mutual, an expert witness had given evidence which was said to have cast doubt upon whether the Seymour Softwoods Ltd had met its obligations in relation to the growing, and maintenance, of pine trees.  National Mutual had not been a party to those proceedings.  The failure of Seymour Softwoods Ltd to comply with its growing and maintenance obligations meant that the tax advantages sought by the particular grower who had entered the scheme were not available.  Moreover, the failure to maintain the plantation meant that there was no residual value in the trees when the trust was ultimately wound up.

           On 11 September 1995 Philip Bruce Maddox, as corporate trust manager of National Mutual, had sworn an affidavit in the Supreme Court of Victoria.  That affidavit had been relied upon in order to obtain an order winding up the trust.  Mr Maddox, who had not attended the meeting of 7 May 1992 (which was the subject of the file note), had made no reference in his affidavit to that meeting, or what the file note recorded as having been said at the meeting.

11                  Counsel for the applicants submitted that these three matters each gave rise to reasonable cause to believe that National Mutual had engaged in misleading or deceptive conduct, possibly by silence, when meetings between National Mutual and various growers had subsequently taken place.  The funding arrangements for the venture, and the role taken by National Mutual in facilitating "round robin" cheque transactions as a medium for financing those growers to whom other sources of finance were not available ought to have been disclosed at those meetings.

12                  Moreover, counsel for the applicant submitted, there was reasonable cause to believe from that minute of 7 May 1992, and from the evidence given by the expert in the County Court proceedings, that National Mutual had failed to comply with its obligations to receive and disburse growers’ money appropriately, and upon proper certification, under the various trust deeds.  The failure of National Mutual to make available to the applicant even the audited accounts of the trust fund, let alone the complete financial records which set out the manner in which moneys had been received and disbursed, heightened the concerns of the applicants. 

13                  As to Mr Maddox's affidavit of 11 September 1995, his failure to reveal therein any of the supposed events of 7 May 1992 was said to provide reasonable cause to believe that the Act had been contravened, and that there had been a breach of fiduciary duty. 

14                  Counsel for the respondent submitted that none of the three matters identified by counsel for the applicants could conceivably give reasonable cause to believe that National Mutual had contravened the Act, or acted in breach of trust.  He submitted that those matters did not rise above the level of “surmise” or “conjecture”, and could not satisfy any objective criterion of reasonableness when it came to considering whether or not there was reasonable cause to believe that any such causes of action may exist. 

15                  The expression "reasonable cause to believe" has recently been considered by the High Court in the somewhat different context of search warrants.  In George v Rockett (1990) 170 CLR 104 the Court distinguished between mere “suspicion” and “belief”.  The members of the Court stated at 115 to 116:

“Suspicion, as Lord Devlin said in Hussein v Chong Fook Kam [1970] AC 942, at p.948 , "in its ordinary meaning is a state of conjecture or surmise where proof is lacking:  ‘I suspect but I cannot prove’”.  The facts which can reasonably ground a suspicion may be quite insufficient reasonably to ground a belief, yet some factual basis for the suspicion must be shown.  In Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266, a question was raised as to whether a payee had reason to suspect that the payer, a debtor, “was unable to pay [its] debts as they became due” as that phrase was used in s. 95(4) of the Bankruptcy Act 1924 (Cth).  Kitto J said [(1966) 115 CLR, at p. 303]:

"A suspicion that something exists is more than a mere idle wondering whether it exists or not;  it is a positive feeling of actual apprehension or mistrust, amounting to ‘a slight opinion, but without sufficient evidence’, as Chambers’s Dictionary expresses it.  Consequently, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence.  The notion which 'reason to suspect' expresses in sub-s. (4) is, I think, of something which in all the circumstances would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is in actual fact that which the subsection describes - a mistrust of the payer's ability to pay his debts as they become due and of the effect which acceptance of the payment would have as between the payee and the other creditors."

The objective circumstances sufficient to show a reason to believe something need to point more clearly to the subject matter of the belief, but that is not to say that the objective circumstances must establish on the balance of probabilities that the subject matter in fact occurred or exists: the assent of belief is given on more slender evidence than proof.  Belief is an inclination of the mind towards assenting to, rather than rejecting, a proposition and the grounds which can reasonably induce that inclination of the mind may, depending on the circumstances, leave something to surmise or conjecture.

16                  It is of course relevant to bear in mind that O 15A, r 6 is to be construed beneficially.  In Paxus Services Ltd v People Bank Pty Ltd (1990) 99 ALR 728 at 732 to 733, Burchett J observed:

In my opinion, the evidence does suggest the inference that confidential information has been improperly taken by the respondents from the applicant.  If the matter were fully explored, this inference might be rebutted.  However, the matter has not been fully explored, nor is the question posed by the language of r 6 whether any cause of action has actually been established.  In raising an inference on the more limited question which the rule does pose, the applicant has not been met by any denial from those best able to throw light on whether the inference is just, who are the respondents. 

The principle of Jones v Dunkel (1959) 101 CLR 298 is therefore applicable.  In my opinion it has at least been shown that there is reasonable cause to believe the applicant may have a cause of action against the respondents arising out of the misuse of confidential information. 

It is no answer to the applicant's application under r 6 to say that the proceeding is in the nature of a fishing expedition: cf Meth v Norbert Steinhardt & Son Ltd (1959) 33 ALJR 78 at 81.  Rule 6 is designed to enable an applicant, in a situation where his proof can rise no higher than the level the rule describes, to ascertain whether he has a case against the prospective respondent - that is, to “fish” in the old sense: see Caltex Refining Co Pty Ltd v Amalgamated Metal Workers Union, (Federal Court (Full Court) 6 December 1990, unreported); Williams Civil Procedure Victoria (1987) vol 1, 3928-9; cf Richardson Pacific Ltd v Fielding (Federal Court, (Burchett J), 22 August 1990, unreported) which was concerned with another rule in order 15A.

It would be unfortunate if a rule designed to amplify the court's power to penetrate obscurities and uncertainties in the interests of justice were to be weakened by restrictive and unnecessary glosses.  I think the rule is of a beneficial kind within the meaning of the well known principle of interpretation and should be given the fullest scope its language will reasonably allow.  The proper brake on any excesses in its use is the discretion of the court, which is required to be exercised in the particular circumstances of each case.  One guide for that discretion is provided by the reference in r 6(b) to "all reasonable inquiries", as to which see WR Pateman Pty Ltd v Walker Corp Pty Ltd (1990) ATPR 41‑016 at 51,299.

17                  The applicant does not have to make out a prima facie case in order to satisfy r 6(a) – Minister for Health & Aged Care v Harrington Associates Ltd [1999] FCA 549 per Sackville J at par 29.  On the other hand, mere “suspicion” is not, of itself, sufficient.  Nor is it sufficient for the applicant to state that he or she believes that there is a case.  There must be “reasonable cause” for that belief.  The test is, therefore, in part at least, objective.

18                  In my view, the only matter which can even remotely be said to form the basis for any belief on the part of the applicants that National Mutual has contravened the Act, or has acted in breach of trust, is the file note of 7 May 1992. 

19                  The evidence given by the expert in the unrelated County Court proceeding was confined to the state of one particular plantation in one of the four years in which National Mutual acted as trustee.  That evidence does not, in my view, even if taken at its highest, provide a reasonable cause to believe that the growers were, or may have been, relevantly misled or deceived.  Nor does it provide reasonable cause to believe that National Mutual did not carry out, or may not have carried out, its obligations under the various trust deeds in relation to the disbursement of trust funds.  To assert that it does is to draw a very long bow. 

20                  The omission by Mr Maddox from his affidavit of 11 September 1995 of any reference to the meeting of 7 May 1992 (which he did not, in any event, attend, and of which he may not even have been aware) seems to me to carry no weight at all in support of the applicants’ contention that there is reasonable cause to believe that they may have various causes of action against the respondent.

21                  The file note of 7 May 1992 does at least raise the question whether or not National Mutual acted at all times strictly in accordance with its role as defined in the trust deeds.  I have neither sought nor heard an explanation from counsel for National Mutual as to the file note.  There are any number of possible explanations which would be consistent with innocence of any wrongdoing on its part.  In my view, while it may said that the file note could reasonably ground a suspicion as to the conduct of National Mutual, and raise the question whether it may have acted in breach of trust, it does not give reasonable cause to believe that National Mutual acted in such a way.

22                  It follows that I am not persuaded that the requirements of O 15A r 6(a) have been fulfilled.  For that reason alone I would dismiss the application before the Court.  I propose, however, to consider also the question whether the requirements of O 15A r 6(b) have been fulfilled.

O 15A r 6(b)

‘Reasonable inquiries’

23                  Counsel for the applicants relies upon two letters sent by his instructors on 5 October 1998 and 20 October 1998, respectively, to National Mutual.  In these letters the applicants' solicitors requested the provision of a large number of documents relating to the four Seymour Softwoods Trusts.  These included many accounting records and other like documents.  The letters indicated that a failure on the part of National Mutual to provide the documents sought would lead to an application for preliminary discovery being made to the Court. 

24                  The respondent did not reply in writing to those two letters.  Rather, on 22 October 1998 Mr Maddox on behalf of National Mutual rang the solicitor acting for the applicants who was the author of those letters.  Mr Maddox advised that he had received the letters and stated that the respondent was not prepared to provide access to any of the documents requested.

25                  It is clear that the beneficiaries of the various trusts have certain entitlements as against National Mutual, as trustee, to be provided with information concerning the operations of the trusts (see generally Ford and Lee, Principles of the Law of Trusts, looseleaf, pages 25 to 33).  That was not, however, the context in which the applicants' solicitors made their requests.

26                  The documents sought included, but ranged far beyond, those which a trustee would normally be required, in accordance with his fiduciary obligations, to provide to a beneficiary for inspection. 

27                  Counsel for the respondent conceded, very properly, that the applicants were entitled to see the audited financial accounts of the trusts, and possibly a number of other financial records pertaining to the operation of the trusts as well.  He submitted, however, that the request made by the applicants in their letters of 5 October 1998 and 20 October 1998 had not been couched in anything like those terms.  A proper request would, he submitted, have been met with a proper response. 

28                  In my view, counsel for the respondent's contentions should be accepted.  I do not believe that the applicants have made “all reasonable inquiries” to enable a decision to be made as to whether or not to initiate proceedings against National Mutual.  Some, at least, of the documents they now seek could have been obtained merely by asking for those documents, and doing so in a manner which demonstrated that they were simply exercising their rights as beneficiaries under the relevant trust.  No such request was ever made.  There was, rather, a demand, which was backed up by a threat to bring proceedings for preliminary discovery if the wide ranging number of documents sought were not immediately provided.  That does not, in my opinion, demonstrate that all reasonable inquiries had been made prior to bringing proceedings under O 15A r 6.

29                  I should say, however, that I am of the view that Mr Maddox’s blanket refusal to provide any of the documents sought by the applicants in the course of the telephone conversation of 22 October 1998 was hardly conducive to resolving the applicants’ concerns, and hardly consistent with the manner in which a trustee should deal with a request made by, or on behalf of, a beneficiary, or a former beneficiary, of a trust to see documents relating to the administration of the trust.

‘Sufficient information’

30                  Having regard to the findings which I have made in relation to O 15A r 6(a), and in relation to the first part of O 15A r 6(b), it is unnecessary, strictly speaking, for me to resolve this question.  I would simply note the observations of Sackville J in Minister for Health and Aged Care v Harrington Associates Ltd (supra) at pars 44-46 regarding the principles which should govern the determination of this question.  I respectfully agree with what his Honour there states.

Associate:

Dated:              6 May 1999