FEDERAL COURT OF AUSTRALIA

Prentice v Stanton [2004] FCA 215

PRACTICE AND PROCEDURE – discovery – costs of motion for further discovery – discretion as to costs – no question of principle

CORPORATIONS – action by liquidators against directors based on alleged insolvent trading – motion by director-defendants for further discovery – costs of motion – no question of principle.

MAXWELL WILLIAM PRENTICE & ANOR AS JOINT LIQUIDATORS OF SMART COMMUNICATIONS GROUP LIMITED (IN LIQUIDATION)

(ACN 090 744 513) v MATTHEW JAMES STANTON & ORS

N 3038 of 2002

LINDGREN J

18 MARCH 2004

SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 3038 OF 2002

BETWEEN:

MAXWELL WILLIAM PRENTICE AND MARK JULIAN ROBINSON IN THEIR CAPACITY AS JOINT LIQUIDATORS OF SMART COMMUNICATIONS GROUP LIMITED (IN LIQUIDATION) (ACN 090 744 513)

FIRST PLAINTIFF

SMART COMMUNICATIONS GROUP LIMITED

(IN LIQUIDATION) (ACN 090 744 513)

SECOND PLAINTIFF

AND:

MATTHEW JAMES STANTON

FIRST DEFENDANT

GEOFFREY JOHN BEDNAL

SECOND DEFENDANT

MICHAEL GARTH JONES

THIRD DEFENDANT

FIRST CROSS-CLAIM

MICHAEL GARTH JONES

FIRST CROSS-CLAIMANT

MATTHEW JAMES STANTON

FIRST CROSS-DEFENDANT TO FIRST CROSS-CLAIM

GEOFFREY JOHN BEDNAL

SECOND CROSS-DEFENDANT TO FIRST CROSS-CLAIM

PETER JOHN MORRIS

THIRD CROSS-DEFENDANT TO FIRST CROSS-CLAIM

GERARDO D'ANGELO

FOURTH CROSS-DEFENDANT TO FIRST CROSS-CLAIM

CAROL HOLLEY

FIFTH CROSS-DEFENDANT TO FIRST CROSS-CLAIM

	SECOND CROSS-CLAIM MATTHEW JAMES STANTON SECOND CROSS-CLAIMANT MICHAEL GARTH JONES FIRST CROSS-DEFENDANT TO SECOND CROSS-CLAIM PETER JOHN MORRIS SECOND CROSS-DEFENDANT TO SECOND CROSS-CLAIM GERARDO D'ANGELO THIRD CROSS-DEFENDANT TO SECOND CROSS-CLAIM CAROL HOLLEY FOURTH CROSS-DEFENDANT TO SECOND CROSS-CLAIM THIRD CROSS-CLAIM GEOFFREY JOHN BEDNAL THIRD CROSS-CLAIMANT MICHAEL GARTH JONES FIRST CROSS-DEFENDANT TO THIRD CROSS-CLAIM PETER JOHN MORRIS SECOND CROSS-DEFENDANT TO THIRD CROSS-CLAIM GERARDO D'ANGELO THIRD CROSS-DEFENDANT TO THIRD CROSS-CLAIM CAROL HOLLEY FOURTH CROSS-DEFENDANT TO THIRD CROSS-CLAIM
JUDGE:	LINDGREN J
DATE OF ORDER:	18 MARCH 2004
WHERE MADE:	SYDNEY

THE COURT NOTES THAT:

1. There is no order as to costs on the motion of the first and second defendants brought by notice of motion filed on 11 November 2003 or on the motion of the third defendant brought by notice of motion filed on 13 November 2003.

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

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 3038 OF 2002

BETWEEN:

MAXWELL WILLIAM PRENTICE AND MARK JULIAN ROBINSON IN THEIR CAPACITY AS JOINT LIQUIDATORS OF SMART COMMUNICATIONS GROUP LIMITED (IN LIQUIDATION) (ACN 090 744 513)

FIRST PLAINTIFF

SMART COMMUNICATIONS GROUP LIMITED

(IN LIQUIDATION) (ACN 090 744 513)

SECOND PLAINTIFF

AND:

MATTHEW JAMES STANTON

FIRST DEFENDANT

GEOFFREY JOHN BEDNAL

SECOND DEFENDANT

MICHAEL GARTH JONES

THIRD DEFENDANT

FIRST CROSS-CLAIM

MICHAEL GARTH JONES

FIRST CROSS-CLAIMANT

MATTHEW JAMES STANTON

FIRST CROSS-DEFENDANT TO FIRST CROSS-CLAIM

GEOFFREY JOHN BEDNAL

SECOND CROSS-DEFENDANT TO FIRST CROSS-CLAIM

PETER JOHN MORRIS

THIRD CROSS-DEFENDANT TO FIRST CROSS-CLAIM

GERARDO D'ANGELO

FOURTH CROSS-DEFENDANT TO FIRST CROSS-CLAIM

CAROL HOLLEY

FIFTH CROSS-DEFENDANT TO FIRST CROSS-CLAIM

	SECOND CROSS-CLAIM MATTHEW JAMES STANTON SECOND CROSS-CLAIMANT MICHAEL GARTH JONES FIRST CROSS-DEFENDANT TO SECOND CROSS-CLAIM PETER JOHN MORRIS SECOND CROSS-DEFENDANT TO SECOND CROSS-CLAIM GERARDO D'ANGELO THIRD CROSS-DEFENDANT TO SECOND CROSS-CLAIM CAROL HOLLEY FOURTH CROSS-DEFENDANT TO SECOND CROSS-CLAIM THIRD CROSS-CLAIM GEOFFREY JOHN BEDNAL THIRD CROSS-CLAIMANT MICHAEL GARTH JONES FIRST CROSS-DEFENDANT TO THIRD CROSS-CLAIM PETER JOHN MORRIS SECOND CROSS-DEFENDANT TO THIRD CROSS-CLAIM GERARDO D'ANGELO THIRD CROSS-DEFENDANT TO THIRD CROSS-CLAIM CAROL HOLLEY FOURTH CROSS-DEFENDANT TO THIRD CROSS-CLAIM
JUDGE:	LINDGREN J
DATE:	18 MARCH 2004
PLACE:	SYDNEY

REASONS FOR JUDGMENT (No 1)

(Costs of motion for further discovery)

INTRODUCTION

1 These reasons relate to the question of the costs of motions for further discovery.

2 The first plaintiffs, Mr Prentice and Mr Robinson (without intending any discourtesy, I well henceforth refer to the parties by their surnames), are joint liquidators of the second plaintiff, Smart Communications Group Ltd (‘Smart’). They were appointed as joint administrators of Smart on 25 October 2001 and as liquidators on 18 December 2001. The defendants were, at relevant times, three of the directors of Smart. I will use the defendants’ surnames when distinguishing between them.

3 According to the plaintiffs’ amended statement of claim filed on 11 November 2002:

· at all material times since 30 September 2001, Smart was ‘insolvent’ as defined in s 95A of the Corporations Act 2001 (Cth) (’the Act’);

· during the period 30 September 2001 to 25 October 2001 (‘the Period’), the defendants owed a duty to prevent it from incurring debts while insolvent (see s 588G of the Act);

· during the Period, the defendants had reasonable grounds to suspect that Smart was insolvent and a reasonable person in their position would have been aware that there were reasonable grounds for suspecting that Smart was insolvent;

· each of the defendants breached his duty and contravened s 588G(2) by failing to prevent Smart from trading while insolvent;

· each of the defendants breached his duty to Smart by continuing to incur further liabilities on its behalf without any reasonable prospect of its being able to repay those debts when they fell due or at all;

· during the Period, as a result of the increase in liabilities and decrease in available assets, Smart incurred debts totalling $897,000;

· as a result of the conduct and breaches of duty of the defendants and of Smart’s trading while insolvent during the Period, Smart and its creditors suffered loss and damage by Smart’s incurring debts to creditors which it was unable to pay; and

· pursuant to s 588M(2), Prentice and Robinson are entitled to recover from the defendants, for the benefit of creditors, an amount equal to the debts incurred by Smart during the Period.

4 There are three cross-claims, one brought by each defendant, against the other directors of Smart, except that Stanton and Bednal, who have common legal representation, do not cross-claim against each other.

5 By the motions for further discovery with which I am concerned, the defendants seek further discovery by the plaintiffs.

6 It will assist if I identify at this stage certain individuals who are associated in various ways with the parties to the discovery dispute.

7 Mr C R Newlinds SC, instructed by Clayton Utz (Jennifer Ball), appears for the plaintiffs. Mr Robinson has sworn affidavits on which the plaintiffs rely.

8 Mr L S Einstein, counsel instructed by Dibbs Barker Gosling (‘Dibbs’) (Ms Jacobs and Mr Lyne), appears for Stanton and Bednal.

9 Mr L S Einstein, instructed by Kemp Strang (Mr Linden, Ms Gallate), also appears for Jones.

10 Mr Linden, Ms Gallate, an expert witness Mr Silvia, and a former officer of Smart, Thomas Endel Rimmeld, have sworn affidavits on which the defendants rely.

11 The fourth cross-defendant to the first cross-claim (brought by Mr Jones) is Gerardo D’Angelo. Mr D’Angelo is represented by Acuiti Legal (Simon Skelton). Although Acuiti Legal and Mr Skelton feature in the background facts, Mr D’Angelo is not a party to the motions.

12 Although independently represented by solicitors, Stanton and Bednal on the one hand and Jones on the other, have through their respective solicitors, been cooperating with each other and acting in coordination in relation to the discovery dispute.

13 On 11 November 2003, Stanton and Bednal, and on 13 November 2003, Jones, filed a notice of motion. Both motions sought discovery of the following documents:

‘(a) documents titled “Creditor Trial Balance” for the months April 2001, May 2001 and June 2001;

(b) documents titled or relating to “Monthly Aged Trade Creditors” for the months ending April 2001 to 25 October 2001;

(c) details of cheques drawn in favour of Trade Creditors and held for each of the months ending April 2001 to 25 October 2001;

(d) documents titled or relating to “Monthly Aged Other Creditors” for the months ending April 2001 to 25 October 2001;

(e) details of cheques drawn in favour of Other Creditors and held for each of the corresponding months ending April 2001 to 25 October 2001;

(f) bank reconciliations for each of the months ending April 2001 to 25 October 2001 including listings of unpresented cheques for each corresponding month;

(g) documents titled or relating to “Monthly Aged Trade Debtors” for the corresponding months ending April 2001 to 25 October 2001;

(h) particulars of Trade Debtors of $3,899,266.00 and Other Debtors of $600,056.00 that appear on the Balance Sheets as at 25 October 2001, including:

(i) invoices for each of the debts alleged to be incurred during the alleged insolvency period;

(ii) ledgers for each of those creditors together with the ledger to creditors whose debts were unpaid as at 1 October 2001 and thereafter;

(iii) any correspondence between the company and those creditors;

(iv) the trading history in respect of each of those creditors referred to in sub-paragraph (ii) from April 2001 to 25 October 2001;

(v) information about their subsequent realisation by the Administrators/Liquidators including the Administrators’/ Liquidators’ cash book showing the receipt of those debtor amounts and schedules detailing the realisable value of those debts;

(i) particulars of the AJ Lucas transaction in respect of debtors; ie details of the debtor book that was sold and amount it was sold for;

(j) all Smart Group companies’ Report as to Affairs;

(k) consolidated balance sheets and trading statements to 30 June 2001;

(l) consolidated trading statements for each of the four months ended July 2001 to 25 October 2001.’

CHRONOLOGICAL ACCOUNT OF BACKGROUND FACTS

14 On 25 October 2001, Prentice and Robinson were appointed as voluntary administrators of Smart. Mr Rimmeld states that, when they were appointed, all of Smart’s accounting records and documents were delivered to them. In particular, he states that the documents referred to in pars 1(a) – (g), (h)(i) – (iv), (k) and (l) of the notice of motion were delivered to them. Mr Rimmeld was not cross-examined.

15 On 13 November 2001, with Prentice and Robinson’s consent, Smart sold its business to A J Lucas Networks Pty Ltd (‘Lucas’). By the agreement, Prentice and Robinson agreed to deliver the business records relating to the business sold to Lucas on completion of the sale. Included in the assets sold were “debtors of the business”, other than debtors where the debts had been outstanding for more than 90 days.

16 On 18 December 2001 Prentice and Robinson were appointed as liquidators of Smart.

17 The plaintiffs commenced this proceeding on 19 July 2002.

18 Pursuant to orders made on 20 December 2002, Stanton and Bednal, on 22 January 2003, and Jones, on 29 January 2003, filed and served notices for discovery which sought discovery of documents in categories.

19 On 7 March 2003 the plaintiffs filed and served their list of documents verified by Mr Robinson. A total of 828 documents were listed in Part 1 of Schedule 1.

20 On 20 May 2003, Ms Gallate of Kemp Strang, solicitors for Jones, attended at the offices of Clayton Utz and inspected the documents discovered by the plaintiffs.

21 On 23 May 2003, Kemp Strang wrote to Clayton Utz asking to be supplied with copies of particular documents discovered.

22 Although there had been no inspection by, or on behalf of, Stanton and Bednal, on 26 May 2003, Dibbs requested Clayton Utz to supply copies of all documents discovered by the plaintiffs, except the documents numbered 79 to 394 inclusive.

23 On 11 June 2003, Clayton Utz forwarded to Kemp Strang copies of the documents requested, subject to a clarification being received as to one document.

24 On 13 June 2003, I ordered that inspection by all parties of discovered documents take place on or before Friday 27 June 2003.

25 On 19 June 2003, Mr Skelton of Acuiti Legal wrote to Ms Ball of Clayton Utz noting that the plaintiffs’ discovery omitted an electronic copy of the ‘Arrow Accounting Software program and related files maintained by Smart’. Mr Skelton asked Ms Ball to arrange for that document to be made available for inspection. On 26 June 2003, Kemp Strang also wrote to Clayton Utz asking to be informed when the electronic copy of the Arrow Accounting Software program and related files would be made available for inspection.

26 On 17 July 2003 Clayton Utz supplied to Dibbs copies of some of the discovered documents they had requested.

27 On 12 September 2003, Kemp Strang wrote to Clayton Utz a letter which requested production of further documents, in the following terms:

‘Further documents required

As noted above the defendants have engaged an expert with respect to the issue of Smart’s alleged insolvency in the period 1 October 2001 to 25 October 2001. So that we may progress preparation of our evidence, we would be grateful if you could let us know whether the following further financial information is available. The documents requested do not appear to form part of the plaintiffs’ list of documents.

(a) Copies of documents titled “Creditor Trial Balance” for the six month period prior to the liquidation. An example of this document is contained in the Plaintiffs Documents – Doc No 544. This document is in essence an extract copy of individual trade creditor subsidiary ledger accounts and shows an aging of amounts incurred in respect of individual creditors including individual invoice numbers and amounts together with any payments made by the Smart Group against the individual creditor invoices.

(b) Monthly aged “trade creditors” list for the months ending April 2001 to 25 October 2001.

(d) Monthly aged “other creditors” list for the months ending April 2001 to 25 October 2001.

(e) Details of cheques drawn in favour of other creditors and held for each corresponding month detailed above.

(f) Copies of Bank Reconciliations for the months ending April 2001 through to 25 October 2001. Please include listing of unrepresented cheques for each month.

(g) Monthly aged “trade debtors” list for the months ending April 2001 to 25 October 2001.

(h) Particulars of trade debtors of $3,899,266 and other debtors of $600,056 that appear on the balance sheet as at 25 October 2001. We also require information that relates to their subsequent realisation by the Administrator/Liquidator which includes a copy of the Administrators/Liquidators cash book that reflects the receipt of these debtor amounts and schedules which detail the realisable value of these debtors.

(i) Precise particulars of the A J Lucas transaction in respect of debtors. That is details of the debtor book that was sold and amount it was sold for.

(j) All Smart Group companies Report as to Affairs (“RATA”).

(k) Consolidated Balance Sheets and Trading Statements to 30 June 2001.

(l) Consolidated Trading Statements for each of the four months ended July 2001 to 25 October 2001.

(m) Administrators/Liquidators cash books from the date of appointment detailing their realisations.

We trust that the above information can be provided without the need for any formal application or notice to produce. As you would appreciate, our expert may require further information at the appropriate time and we reserve the right to request that information if necessary.’ (my emphasis)

The two notices of motion generally reflected these categories (see [13] above).

28 On 30 September 2003, Clayton Utz replied, relevantly, as follows:

‘Further documents required

As we have already advised you, all of the books and records of Smart in the possession of the Liquidators, relevant to the issues in the proceedings, have been discovered. We note that you have attended our offices and inspected these discovered documents. We also note that we have provided to you, a copy of the discovered documents requested by you.

With respect to your request that further documents be discovered, as we have informed you on previous occasions, our clients are of the view that the books and records are incomplete. We are instructed that our clients have no other documents relevant to the proceedings, which have not been discovered. If you and your expert wish to inspect our clients’ discovered documents again for the purpose of ascertaining whether any of the documents referred to by you in your 12 September 2003 letter are included, then you can make an appointment to attend our offices at a convenient time.’ (my emphasis)

29 On 21 October 2003, Kemp Strang responded to Clayton Utz’s letter of 30 September 2003, relevantly, as follows:

‘Given your response, and the fact that they do not appear to form part of your clients’ List of Documents, we can only assume from your advice to date that the documents requested by us (in our facsimile) are not currently available to the Liquidators. However, out of an abundance of caution, and so that we may progress our client’s evidence, we again request that you discover all of the documents requested in our facsimile to you of 12 September 2003. By reference to each category of document, please let us know whether it is your clients’ position that those documents do not now exist or are not within the Liquidators’ possession, power or control, or are in the possession of a third party (such as A J Lucas Group). We note that one of the categories relates to correspondence with Smart’s debtors. The fact that the debtors were due and were paid in full is fundamental to the issue whether the company was insolvent in the period alleged.’(my emphasis)

30 In this letter, Kemp Strang indicated that the third defendants intended to bring a motion failing an adequate response from the plaintiffs. On the same day, 21 October 2003, Dibbs wrote to Clayton Utz advising that they (Clayton Utz) would, that day, be receiving a fax from Kemp Strang, and that Dibbs repeated on behalf of Stanton and Bednal all requests made in Kemp Strang’s letter on behalf of Jones, and requested that the documents referred to in Kemp Strang’s letter be provided to Dibbs as well.

31 On 10 November 2003, the day before a directions hearing, Kemp Strang forwarded to Clayton Utz a form of notice of motion for further discovery and an affidavit of Mr Linden in support, which they proposed to file. The paragraphs of the notice of motion describing the documents sought were, in substance, the same as those in Kemp Strang’s letter of 12 September 2003, with the omission of paragraph (m).

32 At a directions hearing on 11 November 2003, leave was granted for the filing in Court of Mr Jones’s notice of motion and affidavit in support. Counsel for Stanton and Bednal indicated that his clients wished to move for similar orders, and their notice of motion was filed on 13 November 2003 and served on 18 November 2003. The date fixed for the hearing of the two motions was 27 November 2003.

33 On 26 November 2003, Clayton Utz wrote important letters to each of Kemp Strang and Dibbs. Relevantly, both letters stated in relation to the motions as follows:

‘We are instructed on behalf of the Liquidators to respond as follows:

1. the Liquidators consent to the orders sought in paragraphs 1(a)–(g) and paragraphs (h)(i)–(iii). In this regard, we are instructed that the documents sought in paragraphs 1(a), (b), (d), (f), (g), (h)(i) (part) and h(iii) have already been discovered;

2. with respect to paragraph 1(h)(iv), the Liquidators will agree to discover those documents, subject to the words “documents referring or recording to” being inserted;

3. the orders sought for discovery of documents in paragraphs 1(h)(v) and 1(i) are not agreed. Those documents are not relevant to the issues in the proceedings;

4. the orders sought for discovery of documents in paragraphs 1(j), (k) and (l) are agreed. With respect to paragraphs 1(k) and 1(l), we are instructed that these documents have also been discovered in the proceedings;

5. the orders sought in paragraphs 2, 3, 5 and 7 of the Notice of Motion are agreed;

6. the order sought in paragraph 4 is not agreed;

7. with respect to the order sought in paragraph 6, we are instructed that the Liquidators will agree to an order that costs be reserved on the basis that, as noted in our 30 September 2003 letter to Kemp Strang Lawyers, all the books and records of Smart in the possession of the Liquidators, which are relevant to the issues in the proceedings, have already been discovered. We have already provided to you at your request, a copy of some of those documents for inspection by you. We note that your expert has not attended our office to inspect the Liquidators’ discovered documents.’

Subject to a minor textual amendment, Prentice and Robinson were indicating a willingness to consent to an order that they provide verified discovery of all the documents identified in the notices of motion, except those referred to in pars 1(h)(v) and 1(i), which they claimed were irrelevant to any issue in the proceeding. As to the others, Prentice and Robinson were contending that discovery had already been given of all of them except those referred to in pars 1(c), 1(e) and part of 1(h)(i).

34 On 27 November 2003, by consent and subject to minor textual amendments, I made orders in terms of pars 1, 2, 3 and 5 of the notices of motion. I also ordered that the defendants’ costs of the motions be reserved to 9.00 am on 19 December 2003 and relisted the proceeding for further directions at that time.

35 The defendants submit that prima facie there should be an order for costs in their favour since, in substance, all the orders for which they moved were made. It is odd that Prentice and Robinson consented to an order that they give discovery of documents, at least many of which, they were contending they had already discovered.

36 On 12 December 2003 the plaintiffs filed a verified supplementary list of documents dated 11 December 2003 and an affidavit of Mr Robinson sworn on that date. Part 1 of Schedule 1 of the supplementary list discovered further documents numbered 829 to 847.

37 According to the supplementary list, documents which the plaintiffs once had, but did not any longer have, in their possession, custody or power, included, relevantly, the following:

‘3. The originals and copies, including any electronic copies of:

(a) the “ledgers for each of the creditors together with the ledger to creditors whose debts were unpaid as at 1 October 2001 and thereafter”;

(b) the “trading history in respect of each of those creditors referred to in subparagraph (ii) from April 2001 to 25 October 2001;

(c) in respect of the “AJ Lucas transaction”, “… details of the debtor book that was sold and the amount it was sold for”

referred to at paragraphs 1(h)(ii), 1(h)(iv) and 1(i) of the First, Second and Third Defendants’ Notices of Motion filed on 11 November and 13 November 2003 respectively.’

According to the supplementary list, these documents were last in the plaintiffs’ possession, custody or power on or about 13 November 2001, when they were delivered to Lucas.

38 Mr Robinson’s affidavit of 11 December 2003 explained the position by reference to the following four classes of documents (Mr Robinson was not cross-examined):

(a) Firstly, many of the categories of documents the subject of the consent orders of 27 November 2003, were discovered in the plaintiffs’ original list of documents filed on 7 March 2003. In his affidavit, Mr Robinson identifies documents in the original list which he says are those referred to in the following paragraphs of the notices of motion:

1(a)

1(b)

1(c) and (e)

1(f)

1(g)

1(h)

1(h)(i)

1(j)

1(k)

1(k) and (l)

1(l)

(b) Secondly, there are documents which were not the subject of categories in the defendants’ notices for discovery filed on 22 January 2003 and 29 January 2003, but which were now discovered in the plaintiffs’ supplementary list of documents. They are the documents referred to in the following paragraphs of the notices of motion:

1(h)

1(h)(v)

1(i)

1(j)

(c) Thirdly, there are documents which were not provided to Prentice and Robinson on their appointment, or were delivered to Lucas pursuant to the Sale of Business Agreement of 13 November 2001. These are documents referred to in the following paragraphs of the notice of motion:

1(j)

1(h)(ii)

1(h)(iv)

1(i)

(d) Fourthly, the plaintiffs have not discovered copies of Smart’s trial balance to 31 May 2001, aged trial balance to 31 May 2001 or bank reconciliation to 31 May 2001, 31 July 2001 or 30 September 2001 referred in paras 1(a), (c) [sic – should be 1(b)] and (f) of the notices of motion, because they are not in the possession, custody or control of the plaintiffs and may have been delivered to Lucas on the sale to it of Smart’s business.

39 Paragraphs 18–22 of Mr Robinson’s affidavit are as follows:

‘18. If not included in the documents already discovered by the Plaintiffs in respect of the creditors of the Second Plaintiff, the Plaintiffs have not discovered, nor been able to locate, a copy of “documents titled or relating to ‘Monthly Aged Other Creditors’ for the months ending April 2001 to 25 October 2001” and “details of cheques drawn in favour of Other Creditors and held for each of the corresponding months ending April 2001 to 25 October 2001” requested at paragraphs 1(d) and 1(e) of the First, Second and Third Defendants’ Notices of Motion filed herein on 11 and 13 November 2003 respectively. I have instructed Mr Howson to undertake searches of all available books and records to locate those documents and am informed by Mr Howson, and verily believe, that the documents listed above relating to “Other Creditors” are not in the possession, custody or control of the Plaintiffs in these proceedings.

19. The books and records of the Second Plaintiff are maintained by the First Plaintiffs in archived storage at Alexandria, NSW. Those books and records are contained in approximately 122 large boxes of documents which each contain approximately 4 to 5 files in each box.

20. Approximately 7 boxes containing books and records of the Second Plaintiff are located at the offices of my solicitors, Messrs Clayton Utz for the purposes of being made available for discovery. I understand from the List of Documents filed for the Plaintiffs in these proceedings on 7 March 2003 that the listing of those documents which were previously made available for discovery consists of 828 numbered items which, in turn, consists of 12103 pages of documents.

21. I am informed by Bryan Howson of PPB, and verily believe, that Mr Howson undertook the following searches in respect of the documents sought in the First, Second and Third Defendants’ Notices of Motion:

(a) conducted a detailed review of all seven boxes of documents previously discovered;

(b) conducted a review of the detailed box listings maintained by the First Plaintiffs of the boxes of books and records of the Second Plaintiff;

(c) arranged for the retrieval of 16 boxes of books and records of the Second Plaintiff from the storage facility located at Alexandria (16 boxes) and conducted a detailed review of the contents of all 16 boxes including tagging and identifying any relevant documents to be discovered in the Supplementary List of Documents;

(d) created a schedule of the tagged docs including a description of each document and identified the relevant paragraph number from the First, Second and Third Defendants’ Notice of Motion; and

(e) I am informed by Mr Howson, and verily believe, that on 10 December 2003, Mr Howson telephoned Mr Kevin Bush of Walter Turnbull and, in Mr Bush’s absence, spoke with Mr Michael Ross. I am informed by Mr Howson, and verily believe that Mr Howson asked Mr Ross to deliver to the First Plaintiffs copies of any financial records of the Second Defendant which were in Walter Turnbull’s possession for the purposes of enabling the Plaintiffs to comply with the Orders made on 27 November 2003.

22. I am informed by Mr Howson, and verily believe that Mr Howson expended approximately 10 hours carrying out the tasks listed at paragraph 21 above.’

40 On 16 December 2003, Clayton Utz wrote to Kemp Strang and Dibbs, asking whether, in the light of Mr Robinson’s affidavit of 11 December 2003, the defendants still intended to press for an order for costs of the motions. Clayton Utz advised that their clients would agree to an order that the costs of motions be costs in the cause, ‘despite there being good reasons why the Liquidators should be awarded their costs’. They also advised that if the defendants pressed for costs, the plaintiffs would rely on the present letter and seek indemnity costs.

41 On 18 December 2003, Dibbs replied suggesting that a preliminary review of the plaintiffs’ supplementary list and of Mr Robinson’s affidavit suggested that some documents still appeared not to have been discovered. They suggested that the directions hearing fixed for Friday 19 December 2003 be stood over to 6 February 2004.

42 On the same date, 18 December 2003, Clayton Utz replied, joining issue with certain matters that had been raised by Dibbs and asserting that Prentice and Robinson had made full and complete discovery, and that any ‘deficiencies’ were a result of either Smart’s books and records being incomplete, or the sale of the business to Lucas.

43 On 19 December 2003, I ordered that by 30 January 2004 the defendants provide the plaintiffs with a list of documents which the defendants contended had not been, but ought to have been, discovered by the plaintiffs, and were essential to a determination by the defendants’ expert’s views in relation to the issue of insolvency. The proceeding was stood over to 6 February 2004 and the costs of the motions were reserved to that date.

44 On 30 January 2004, Kemp Strang and Dibbs both wrote to Clayton Utz attaching a list of documents said not to have been produced by the plaintiffs and said to be necessary to a consideration of the question of Smart’s solvency. Each list identified 13 categories of documents as follows (the lists were substantially identical except for para 11 which, in Kemp Strang’s list, contained an additional sentence which I have not reproduced here):

‘1. Monthly Aged Trade Creditors List (Detailed Creditor Trial Balance) for the months of April, May, June and October 2001.

2. Monthly Aged Trade Creditors List (Summarised Creditor Trial Balance) for May 2001.

3. Details of held cheques for trade creditors for the months of April and June 2001.

4. Monthly Aged Other Creditors lists for the months of April 2001 to October 2001.

5. Details of cheques held for other creditors for the months of April to October 2001.

6. Copies of invoices that correspond to the Listing of Debts incurred from 1 October to 25 October 2001.

7. Monthly Aged Trade Debtors List (Summarised) for the months of April, May, June and September 2001.

8. Monthly Aged Trade Debtors List (Detailed) for the months of April to June, September and October 2001.

9. Particulars of Trade Debtors of $3,899,266 and other debtors of $600,056 that appear on the balance sheet as at 25 October 2001.

10. Correspondence between the company and the creditors.

11. Information that relates to the subsequent realisation by the Liquidator/Administrator of the company’s debtors, including:

(a) Particulars of the debtors acquired by AJ Lucas;

(b) the agreed payment for those debtors including verification of the receipt of such money in the liquidators cash book;

(d) the Liquidators/Administrators cash book; and

(e) Particulars of all trade debtors and other debtors owing as at 25 October 2001; and

(f) Particulars of debts currently remaining to be collected by the Liquidator/Administrator.

12. Monthly Bank Reconciliations for Smart for May 2001 and for Security Communications Australia for May, June, July and September 2001, and for Smart Source Australia for May to July 2001 and September 2001.

13. Copy of the Smart computer system.’

45 On 4 February 2004, Clayton Utz wrote to Kemp Strang and Dibbs advising that they intended to serve a further affidavit of Mr Robinson and suggesting that the motions be fixed for a one day hearing. On 5 February 2004 Dibbs replied stating that their understanding was that the only outstanding issue was that of the costs of the motions.

46 On the same date Kemp Strang wrote to Clayton Utz advising that the issue of costs and of ‘incomplete discovery’ by the plaintiffs were outstanding.

47 On 5 February 2004, Clayton Utz advised Kemp Strang that if they still had a complaint about the adequacy of discovery, they should file a further notice of motion. They also confirmed that they were instructed to seek their costs of the motions on an indemnity basis.

48 On 5 February 2004, Clayton Utz emailed Dibbs, urging that the motions be assigned a day for argument. The email also asserted that since 19 December 2003 there had been no request for inspection of the plaintiffs’ discovered documents, and that it appeared that the defendants had not read or considered Mr Robinson’s affidavit of 11 December 2003.

49 Further, on 5 February 2004, Dibbs wrote to Clayton Utz asserting that, apart from the issue of costs, the motions had been dealt with and that the question of costs should be heard the next day, 6 February 2004.

50 On 6 February 2004, the motions, in so far as they related to costs, were fixed for hearing on 3 March 2004, and on 3 March 2004 the hearing on the issue of costs occurred.

REASONING

51 The plaintiffs were required to give discovery of all documents within the original categories which were, or had been, within their possession, custody or power. In order to succeed on their motions, the defendants would have had to prove that notwithstanding the verification of the original discovery, the documents referred to in the notices of motion:

(a) were, or had been, within the possession, custody or power of the plaintiffs; and

(b) fell within the categories described in the original notices for discovery dated 22 January 2003 and 29 January 2003.

52 It is well established that ordinarily:

· an affidavit verifying discovery will be accepted as conclusive as to the adequacy of discovery;

· cross-examination of the deponent of an affidavit verifying discovery for the purpose of showing that discovery has been inadequate will not ordinarily be permitted; and

· while the inadequacy of verified discovery can be shown from the affidavit verifying the list of discovered documents, from the documents discovered or from an admission in the pleading, it will not be permitted to be shown by an opposing affidavit.

Of the many authorities that might be cited for these propositions, reference need be made only to; Jones v Monte Video Gas Co (1880) 5 QBD 556; Mulley v Manifold (1959) 103 CLR 341; Fruehauf Finance Corporation Pty Ltd v Zurich Australian Insurance Ltd (1990) 20 NSWLR 359; Auspine Ltd v HS Lawrence & Sons Pty Ltd [1999] FCA 1749; Finance Sector Union of Australia v Commonwealth Bank of Australia Ltd [2000] FCA 1389; Brookfield v Yevad Products Pty Ltd [2002] FCA 1376 and Spyer v Cuddles ‘N’ Mum (Franchise) Pty Ltd (No 3) [2002] FCA 1563.

53 It comes nowhere near the mark to lead evidence that an expert retained by the defendants needs further documents in order to undertake a task for which he has been engaged: the documents may not have been within the possession, custody or power of the plaintiffs because of poor record keeping of Smart when it was trading.

54 The defendants submit that the plaintiffs’ supplementary list of documents identifies documents that were within the original categories but were not previously discovered. These documents correspond to some of the documents requested in paras 1(c), 1(d), 1(e), 1(f), 1(g), 1(h), 1(h)(i) - 1(h)(v) and 1(i). Prima facie, the defendants should have their costs of the motions in respect of these documents. However, the plaintiffs claim that some of these documents were notincluded in the original document categories, namely some of the documents contained in paras 1(h), 1(h)(i), 1(h)(v) and 1(i). The defendants called for discovery of these documents by letter on 12 September 2003. The plaintiffs did not then respond to the effect: “You did not request discovery of these documents originally but we will discover them now.” It was necessary for the defendants to move for orders. I do not see why the defendants should not have at least part of their costs of the motions in relation to documents in this category, the part down to the time when the plaintiffs took the stance mentioned (the defendants paying the plaintiffs’ costs on this aspect after that time).

55 In his affidavit of 11 December 2003, Mr Robinson deposes that some of the documents referred to in the notice of motion are no longer in the possession, custody or control of the plaintiffs because they were transferred to Lucas pursuant to the Sale of Business Agreement [paras 38(c) and (d) above]. In response, the defendants submit that although the “Business Records” of Smart relating to “Debtors” (defined in the Sale of Business Agreement as all debtors of the business as at the close of business on 6 November 2001, excluding those in excess of 90 days) were to be delivered to Lucas on settlement of sale, these Business Records remained, and were always, within the plaintiffs’ “power” for discovery purposes, because Clause 4.9 of the Sale of Business Agreement provided:

“The purchaser will retain the Business Records subject to sale of the Business to a third party in its possession and control for a period of not less than 7 years following Completion Date and must permit the Administrators and his employees and contractors reasonable access to the same.” (my emphasis)

56 The plaintiffs concede that Clause 4.9 reserved to Smart a right of reasonable access to the Business Records relating to the relevant debtors. The plaintiffs further concede that they had a legal obligation to discover those documents. However, it is the plaintiffs’ submission that as the defendants have caused a subpoena to be issued to Lucas in respect of the documents, and since Lucas has produced the documents to the Court in response to the subpoena and the defendants have been granted access to them, there is no sound reason why the documents need to be discovered by the plaintiffs. The plaintiffs further submit that the defendants have suffered no practical disadvantage by the plaintiffs’ failure to discover these documents.

57 The defendants’ subpoena to Lucas was issued on 17 February 2004; Lucas produced the documents to the Court in answer to them on 3 March 2004, the date of the hearing on the costs of the motion; and access to the documents was granted to the defendants on the latter date. These recent developments provide no reason for the plaintiffs not to have discovered the Lucas documents in the plaintiffs’ list of 7 March 2003. More generally, where there is otherwise an obligation to discover documents, it is no ground for not discovering them that the party seeking discovery can obtain access to them by another means. The existence of the alternative means of access to the documents may be a reason why, in all the circumstances, discovery should not be ordered in the first place, but that is another matter. The plaintiffs did not raise the availability to the defendants of the subpoena procedure initially when the scope of the discovery obligation was defined.

58 Prima facie, the plaintiffs should pay the defendants costs of the motions for further discovery, in so far as they related to the Lucas documents.

59 Next, there are documents which were discovered originally, and which were also included in the consent orders of 27 November 2003. The plaintiffs’ consent to the making of those orders must be understood in the light of the letters from their solicitors, Clayton Utz, to Dibbs and Kemp Strang dated 26 November 2003. In those letters, Clayton Utz, in effect, reserved the plaintiffs’ right to contend that discovery of these documents had previously been given. Mr Robinson’s affidavit of 11 December 2003 matches new categories with documents enumerated in the plaintiffs’ original list.

60 The defendants should have appreciated the duplication involved, particularly in view of the plaintiffs’ insistence, through their solicitors, that all relevant documents in the possession, custody or power of the plaintiffs had already been discovered.

61 The defendants should pay the plaintiffs’ costs of the motions in so far as those costs relate to these categories.

62 Next, there are several documents which Mr Robinson stated in his affidavit were not in the plaintiffs’ possession, custody or control, but which in fact were later discovered in the plaintiffs’ supplementary list. The plaintiffs should bear the defendants’ costs in respect of this category.

63 There may be a further group of documents. It must be remembered that Prentice and Robinson were not in control of Smart when it was trading, and therefore have no direct or personal knowledge of the business records it kept at that time. When the defendants seek particular documents and the plaintiffs cannot, after search, locate them, they can only state, in effect, “We do not have these now; we cannot say that they were never in Smart’s possession, custody or power; if they were, they went from Smart either on the sale to Lucas or at some other time that we cannot identify.” These documents are distinct from those which Prentice and Robinson are able to state affirmatively were delivered to Lucas.

64 In my view, Mr Robinson’s affidavit of 11 December 2003 makes this position plain. In relation to these documents, on one view the defendants should have their costs of the motions down to 11 December 2003, and the plaintiffs should have their costs after that date.

65 With respect to many of the document categories defined in the defendants’ notices of motion, however, the position as to which party should pay costs and whether costs should be apportioned is unclear. Within one document category, there may be a number of different sub-categories of documents for which costs should be differentially allocated. In summary, several distinct situations pose particular difficulties. Firstly, the defendants included documents in the November notice of motions despite the plaintiffs’ statements to the effect that these documents were not in their possession, custody or power. Some of these documents had been transferred to Lucas, and in respect of these the plaintiffs should pay costs, but others were apparently never received by the plaintiffs at all, and in respect of these the defendants should pay costs. It is not always clear into which category some of the documents fall, the plaintiffs stating in respect of several document categories that the documents may never have been received, or, in the alternative, may have been transferred to Lucas on sale of business. Secondly, there are document categories in respect of which;

· some documents were not requested in the defendants’ original discovery list;

· some documents were requested but had already been discovered by the plaintiffs; and

· some documents are included in the plaintiffs’ supplementary list but are categorised by the plaintiffs as new document categories not previously requested, and by the defendants as a response to the original notice of discovery.

It is not always possible to define accurately and exclusively the boundaries between these categories and I do not know how many documents fall within each.

66 I would wish to avoid, if possible, the necessity of a complex taxation of costs involving an allocation of costs as between categories. If the motions had proceeded to a hearing the defendants would have succeeded as to some documents and the plaintiffs would have succeeded as to others. I have considered the possibility of ordering the plaintiffs to pay the defendants’ costs down to the filing and service of Mr Robinson’s affidavit on 11 December 2003, and ordering the defendants to pay the plaintiffs’ costs after that date, but have concluded that a fairer result is that there be no order as to costs and that each party bear its own costs of the motions.

CONCLUSION

67 For the above reasons, there will be no order as to the costs of the motions brought by notice of motion filed on 11 November 2003 and 13 November 2003, to the intent that the parties to the motions bear their own costs of the motions.

I certify that the preceding sixty-seven numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren.

Associate:

Dated: 18 March 2004

Counsel for the Plaintiffs:	CR Newlinds SC

Solicitor for the Plaintiffs:	Clayton Utz

Counsel for the First and Second Defendants:	LS Einstein

Solicitor for the First and Second Defendants:	Dibbs Barker Gosling

Counsel for the Third Defendant:	LS Einstein

Solicitor for the Third Defendant:	Kemp Strang

Date of Hearing:	3 March 2004
Date of Judgment:	18 March 2004

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