FEDERAL COURT OF AUSTRALIA

MG Corrosion Consultants Pty Ltd v Gilmour [2011] FCA 1514

THE COURT ORDERS THAT:

1.    Within 14 days:

(a)    The defendants produce for inspection by the plaintiff the financial statements and income tax returns of the second defendant which, to date, have only been provided in a redacted form.

(b)    The defendants give discovery of the plaintiff’s financial statements for the year ended 30 June 2000.

(c)    The defendants give discovery of the plaintiff’s financial accounts for years ended 30 June 2001 to 30 June 2004 and Sola-Kleen’s financial accounts for years ended 30 June 2003 and 30 June 2004.

(d)    The defendants give discovery of relevant accounts prepared on a cash basis for the years ended 30 June 2001 to 2007, or otherwise comply with R 20.17(2)(b).

(e)    The defendants give discovery of vouchers and like source documents for staff amenities and director’s fees or otherwise comply with R 20.17(2)(b).

(f)    The personal tax returns of the first defendant for the financial years ended 30 June 2001 to 30 June 2007 insofar as they disclose the income received by the first defendant from director’s fees from the plaintiff and management fees from the second defendant be produced. Thus, other materials in the income tax returns may be the subject of redaction.

2.    The defendants pay the costs of the plaintiff’s interlocutory application filed 17 October 2011 to be taxed if not agreed.

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

REASONS FOR JUDGMENT

issues on application for particular discovery and discovery

1    These are hard fought derivative proceedings in which the second cross-respondent, Alberto Cesario Vinciguerra, sues in the name of the plaintiff, MG Corrosion Consultants Pty Ltd against the first defendant, Malcolm Stewart Gilmour and the second defendant, which is now known as Magil Nominees Pty Ltd but at material times was known as Sola-Kleen Pty Ltd, by which name I will refer to it here.

2    Background to this proceeding may be found in the decision of Gilmour J granting leave to the commencement of the proceeding: MG Corrosion Consultants Pty Ltd v Gilmour [2010] FCA 1390. Sola-Kleen was at all times a company of which Mr Gilmour was the sole director and shareholder. Management fees were paid by the plaintiff to Sola-Kleen. The plaintiff alleges the fees greatly exceeded what would have been reasonable in the circumstances for the plaintiff’s contribution towards shared expenses incurred by Sola-Kleen. Sola-Kleen says the fees were reasonable and reflected a proper apportionment of expenses that Sola-Kleen incurred for the benefit of both it and the plaintiff. Amongst expenses challenged as having been incurred in an excessive amount are the management fees but also director’s fees paid by the plaintiff to Mr Gilmour. For example, for the years ended 30 June 2006 and 30 June 2007, the plaintiff paid Mr Gilmour director’s fees in the amounts of $118,913 and $129,633 respectively.

3    In this proceeding on 7 April 2011 orders were made requiring the parties to provide discovery in accordance with O 15 r 2 of the Federal Court Rules 1979 (Cth) (FCR 1979).

4    On 16 May 2011 the defendants, Mr Gilmour and Sola-Kleen filed a list of documents verified by affidavits sworn by Mr Gilmour.

5    The plaintiff then applied for and obtained an order on 12 August 2011, pursuant to the current Federal Court Rules 2011 (Cth) (FCR 2011), orders that the defendants provide further “standard discovery” pursuant to R 20.14 in relation to specified categories of documents.

6    On 31 August 2011, the defendants responded to this order with further discovery.

7    However, the plaintiff now complains that the discovery remains deficient and that the defendants have failed to produce for inspection all of the documents discovered and have also failed to discover other relevant documents.

8    First, the plaintiff complains about the redaction of certain information in some discovered documents which the plaintiff says is admitted by the defendants to be relevant. Secondly, the plaintiff complains that the defendants have failed in the discovery to identify and say what has become of documents that they once had or should be taken to have had in their control.

9    Accordingly, two issues arise:

1.    the question of redaction of information in discovered documents by the defendants; and

3.    the question of particular discovery of documents or categories of documents that may be or have been in the defendant’s control.

the question of redaction

10    It seems to me that, over a number of years, particularly in complex commercial litigation (although not limited to that) the practice has developed whereby, in the course of giving standard or general discovery, the party giving discovery has taken the liberty of redacting parts of the information in an otherwise relevant document. The parties may make a unilateral decision concerning the relevance or confidentiality of the redacted material, but without having first obtained the agreement of the other party or an order of the Court to make the redaction.

11    It is not necessary for me here to review the background to this practice or the extent to which, under different rules of court in different jurisdictions in this country and elsewhere, the practice is supported. I generally agree, however, with the views of Logan J of this Court, made by reference to the recently superseded FCR 1979, that in discovery a whole document should be produced unless there is some prior agreement to the contrary from the opposing party or some prior dispensation from the Court: Sunland Waterfront (BVI) Ltd v Prudentia Investments Pty Ltd (No 4) [2010] FCA 863 (Sunland) at [98]. A question arises whether some different position obtains under the new FCR 2011.

12    I recognise that in some cases – and the minutes of a long meeting of some organisation may provide a good example – a document may contain many parts and many of them may be totally irrelevant to matters in issue in the proceeding such that redaction may easily be agreed by the parties. Ordinarily, however, it is undesirable for a party to go through a whole, apparently integrated document – for example, a letter or email – and make unilateral decisions about the relevance of certain words, sentences or paragraphs or sections. If the other party’s sensible agreement to redaction cannot be obtained – bearing in mind the obligation of parties and their lawyers to act co-operatively in litigation under s 37M and s 37N of the Federal Court of Australia Act 1976 (Cth) (FCA) – then an application to the Court to rule on redaction is appropriate. If a party has acted unreasonably, their conduct may be recognised in an adverse costs order.

13    Where a party giving discovery considers that a document or material disclosed in the document in whole or in part is confidential, other considerations arise. If the party considers the material is confidential because it is the subject of the client privilege or legal professional privilege under the Evidence Act 1995 (Cth) or the general law, that status will be claimed on giving discovery and the document might possibly be the subject of redaction in that regard or not made available for inspection. But the document must be disclosed as one held by the party and the claim of privilege made. That process enables the party to whom discovery is being given, the opportunity to contest the claim to privilege.

14    However, where the party giving discovery simply makes a general claim to the confidentiality of the document or material in it – for example, because they consider the document discloses sensitive commercial information – then it seems to me quite inappropriate for that party unilaterally to redact the information or not produce the document at all. Simply to mention the option of not producing the document at all is sufficient to demonstrate the difficulty with that approach. Plainly, the document in such a circumstance is acknowledged to be relevant. All that the discovering party is claiming is that the document should have limited circulation. Not to disclose it in discovery would constitute concealment. In circumstances where this sort of confidentiality claim is asserted then, in my view, there is an obligation on the discovering party to apply early on for an appropriate confidentiality order pursuant to s 50 of the FCA, even if the parties agree that a confidentiality regime is required. This is because it is not open to the parties unilaterally to set the bounds of confidentiality; the Court must be satisfied as to appropriateness of the proposed confidentiality regime under s 50 FCA: Hogan v Australian Crime Commission [2010] HCA 21; (2010) 240 CLR 651 at [32].

15    The parties before me suggest, however, that there may be an argument that R 20.32 of the FCR 2011, which did not have an equivalent in the superseded FCR 1979, alters the principles suggested by Logan J in Sunland, in relation to which I have expressed my general agreement. Rule 20.32 enables the Court to make an order for production from a party in the following terms:

(1)     A party (the first party) may apply to the Court for an order that another party (the second party) produce for inspection any document that is included in the second party’s list of documents and that is in that party’s control.

(2)     The Court may order that inspection be given by electronic means.

It is suggested that the fact that the first party may apply to the Court for an order that the second party produce for inspection any document that is included in the second party’s list of documents in that party’s control, may be construed as tacit recognition of the right of the second party unilaterally to withhold from inspection the whole or parts of a disclosed document.

16    In my view R 20.32 should not be construed as a tacit recognition of a practice that permits a party unilaterally to redact or withhold information. Rule 20.32 is premised, in my view, on an understanding that where a party considers they are not obliged to produce for inspection any relevant document they must disclose that document in their list of documents. The expected reason for not producing a document for inspection would be that there is a justifiable claim for privilege in respect of it. Rule 20.32 recognises the power of the Court to determine the privilege question and, if there is none, order production.

17    Nonetheless, I accept, as in the case now before me, that if a party has given standard discovery under FCR 2011 and produced a document, but has taken the inappropriate step of unilaterally redacting parts of that document, then it is open to the party receiving the discovery to apply for an order for production of the whole of the document pursuant to R 20.32 in order to remedy the deficiency.

18    But I repeat that, in my view, it is inappropriate, as a matter of practice, without prior agreement between the parties or order of the Court, for the discovering party unilaterally to decide not to produce a document because it considers it, or parts of it, are not relevant or because they consider information to be confidential.

19    As to redaction, in my view, the administration of justice is best served first by the parties endeavouring to agree on redaction where one party considers that redaction is appropriate, or, if the parties are unable to come to some agreement about that, to apply to the Court to obtain a ruling on relevance. One can understand that in some circumstances – for example where a party has a diary in which many personal and obviously irrelevant matters are set out, as well as many relevant matters – where, for whatever reason, the parties are incapable of agreeing about what, if any, redaction is appropriate, questions of relevance and redaction will have to be decided by the Court.

20    As to confidential information not said to be privileged, it is also open to parties to come to some agreement about what documents might fall under a confidentiality regime and in respect of which an order of the Court will be required. It seems to me quite feasible for a party, where confidentiality is in issue, to indicate formally or informally to the other party that there are relevant documents but that they fall into the confidential category and that inspection will not be given pending an application to the Court for an appropriate confidentiality order. The application should then be made promptly.

21    Having stated those principles I turn to the particular circumstances of this application for an order for production of the whole of the currently redacted documents.

22    The defendants, pursuant to my order and by consent, have provided the disputed documents in an unredacted form indicating also what was redacted upon production. The defendants say that the redacted material is not relevant or is “confidential” because of commercial sensitivity. My task is to rule first, on relevance, and then, if necessary, on “confidentiality”.

23    The particular confidentiality claimed is that redacted information is of a nature that in the hands of Mr Vinciguerra, who is maintaining the derivative action, would give him some unfair competitive advantage in the operation of a competing business. The assumption of the parties is that, if I were to support the claim made on behalf of the defendants, then some confidentiality regime would need to be put in place along the lines of allowing the plaintiff’s lawyers to have regard to the documents, but not Mr Vinciguerra. I would then hear further from the parties on the terms of the confidentiality regime.

24    Financial records of Sola-Kleen: the defendants have produced Sola-Kleen’s financial statements and income tax returns (as trustee for the Gilmour Family Trust) but only in a redacted form.

25    Having perused the document and the redactions, there can be little doubt that the financial statements and income tax returns of Sola-Kleen are relevant to the proceeding. The materials bear on the trading, income and receipt of management fees at material times by Sola-Kleen, the question of the amount and appropriateness of management fees being a significant issue in the proceeding.

26    Related to that issue is the appropriate apportionment of expenses between the plaintiff and Sola-Kleen, for the services that Sola-Kleen provided to the plaintiff.

27    As the plaintiff contends, an informed assessment of the reasonableness of fees paid to Sola-Kleen and the appropriateness of the apportionment of expenses between the plaintiff and Sola-Kleen most likely cannot sensibly be made without regard to the operations of Sola-Kleen. It would seem appropriate to know exactly what expenses were incurred, for example, in the operation of the business in order to understand whether management fees actually paid out are appropriate or arguably excessive. The document in full bears on these issues.

28    The remaining question is whether the relevant redacted information should be produced under some confidentiality regime. In this regard, the submission of the defendants is that to provide the relevant documents to the plaintiff would be to provide Mr Vinciguerra with commercially sensitive confidential information that he, through his business Capic, would then be able to use to the disadvantage of the defendants’ rival business. The defendants submit that allowing Mr Vinciguerra access to the originals of the redacted documents would give him an insight into the manner in which the first defendant’s business is conducted, including its inventory and profit margins. He and his business would thereby obtain a competitive advantage. The defendants highlight the fact that Mr Vinciguerra has never been a director of the second defendant and has never been privy to any confidential information of the second defendant, although he was at other material times a director of the plaintiff.

29    The plaintiff submits that the defendants cannot establish any justification for inspection to be limited to redacted documents and submit the defendants have made no attempt to explain how financial records which, at their most recent, are nearly four and a half years old and, at their oldest, are over 10 years old could possibly give a competitive advantage to Mr Vinciguerra.

30    The plaintiff further submits that the Court made findings on Mr Vinciguerra’s application for leave to bring the derivative action to the effect that the claim concerns historical conduct that would not involve access to any current records of the defendant and that there is no reason to infer that the existence of litigation would impact in any significant way on the defendant’s ongoing commercial affairs: Vinciguerra v MG Corrosion Consultants Pty Ltd [2010] FCA 763 at [96] (upheld on appeal MG Corrosion Consultants Pty Ltd v Vinciguerra [2011] FCAFC 31; (2011) 82 ACSR 367). Accordingly, the plaintiff says that the Court then rejected the contention that Mr Vinciguerra was in direct competition with the plaintiff through his business Capic and that the grant of leave would give Mr Vinciguerra access to sensitive commercial information of the plaintiff.

31    This is a case where the real question is whether the implied undertaking of a party in court proceedings who receives pre-trial disclosure, not to use the information disclosed for any purpose apart from the litigation unless the Court otherwise sanctions that use, sufficiently ensures the protection of this confidential information.

32    In arguing that the implied undertaking is an insufficient protection, the defendants relies on Mobil Oil Australia Ltd v Guina Developments Pty Ltd [1996] 2 VR 34, a decision of the Supreme Court of Victoria Court of Appeal (Winneke P, Phillips and Hayne JJA). That case recognised, as have many others before it and after it, that confidentiality is not ordinarily a sufficient reason to deny inspection of documents by a party as it is usually protected by the requirement that the documents be used only for the purposes of the litigation. However, it may be different when the party obtaining discovery is a trade rival. Then confidentiality may be destroyed once and for all, at least so far as that rival is concerned, and the obligation not to use the documents except for the purposes of the litigation is impossible to perform.

33    President Winneke and Phillips JA agreed with the judgment of Hayne JA (as his Honour then was). Ultimately Hayne JA found that the primary judge erred by ruling against the defendant’s claim that a significant commercial advantage could or would be obtained by the plaintiff if it received certain information, without even considering the terms of the documents in question. For that reason, in this case I requested the provision of the unredacted documents so that I could consider the import of the redacted portions.

34    Having considered the redacted material, which includes round numbers as against income and expenses (in the main) that are some years old, I am unable to identify any risk, let alone real risk, that the provision of this information to the plaintiff and so Mr Vinciguerra in this proceeding, could give Mr Vinciguerra some unfair competitive advantage if he were to misuse the information. In these circumstances I reject the defendants’ claim that the confidentiality of the redacted material requires an order of the Court preventing Mr Vinciguerra seeing that information. This is a case in which, in my view, the usual duty on a party, which plainly includes Mr Vinciguerra, to use the information disclosed in discovery only for the purposes of the litigation is sufficient to protect its confidentiality.

35    I would therefore make the following order:

1.    The defendants produce for inspection by the plaintiff the financial statements and income tax returns of the second defendant which, to date, have only been provided in a redacted form.

36    Mr Gilmour’s personal tax returns for financial years ending 30 June 2001 to 30 June 2007: Mr Gilmour has discovered personal tax returns but has only produced redacted copies which obscure all items other than the management fees he has received. The plaintiff says the financial statements for the years ended 30 June 2006 and 30 June 2007 record that director’s fees in the amount of $118,913 and $129,633 respectively were paid. These fees must have been paid to Mr Gilmour as he was the sole director of the plaintiff at the time. Further, the management fee calculations disclosed in other documentation record that the management fees for the year ended 30 June 2005, 2006 and 2007 included amounts of $94,512, $204,776 and $204,776 to Mr Gilmour, presumably representing a portion of what Sola-Kleen paid Mr Gilmour during those years.

37    The plaintiff argues that one should presume that Mr Gilmour has actually been paid more by Sola-Kleen than the portion of payments that are sought to be recovered through the management fees. Thus, the plaintiff contends there is a central issue as the propriety of the payments received by Mr Gilmour and so it is necessary to test what he has actually received by looking at his tax returns in order to see what income he has received.

38    Mr Gilmour rejects the submission that his personal tax returns may be considered relevant to the matter in issue. He says that if the plaintiff wants to establish the amounts paid to Mr Gilmour by the plaintiff, then that is a matter that can be determined by the financial reports of the plaintiff. Any payments made by the second defendant to Mr Gilmour are not relevant as that is a matter between the second defendant and Mr Gilmour which does not involve the plaintiff.

39    When pressed about the relevance of information in Mr Gilmour’s personal tax returns concerning income, director’s fees and management fees more generally to the plaintiff’s claim that excessive management fees were paid to Sola-Kleen and director’s fees to Mr Gilmour, counsel for the plaintiff submitted that the plaintiff submissions necessarily were made having seen the records of the second defendant. Only part of the payments to Mr Gilmour with which the plaintiff is concerned are director’s fees paid by the plaintiff and recorded in the plaintiff’s financial statements. The other payments with which the plaintiff is concerned are those set out in documents purporting to record the calculation of management fees for particular years. The plaintiff does not know if those payments were actually made. If they were actually made, the plaintiff wants to know what portion of the total payments from the second defendant to the first defendant in any given year were, in order to see what portion has actually been incurred by the plaintiff, and how much Mr Gilmour was paid by Sola-Kleen.

40    Counsel contends that the quantum paid to Mr Gilmour by Sola-Kleen is also relevant to the propriety of what was paid, because if Mr Gilmour was paid a fair remuneration for acting as managing director by both the plaintiff and the second defendant, and half of that cost has been passed on by the second defendant to the plaintiff through management fees, an additional six figure director’s fee paid by the plaintiff will be quite easy to challenge.

41    Counsel emphasised that without the first defendant’s tax returns it is unable to impugne the plaintiff’s records.

42    In summary, the plaintiff submits that it is entitled to test by all legitimate means necessary whether Mr Gilmour was actually paid the sums disclosed in the plaintiff’s records so far discovered.

43    Counsel for Mr Gilmour contends that the Court must bear in mind that there are two distinct categories of payment: the director’s fees and the management fees. To deal with the management fees, the position is that management fees were paid to Sola-Kleen and that those were then paid by Sola-Kleen to Mr Gilmour and the arrangements between Sola-Kleen and Mr Gilmour is not something in issue in the proceeding. Even if it were the case that management fees are relevant in the hands of Mr Gilmour, it does not follow that the proportion then onpaid to him satisfies the test of relevance in that they do not directly go to a matter in issue, that is, bolster one side’s case or be detrimental to the other.

44    I was at first, in considering this issue, inclined to accept the submissions made on behalf of Mr Gilmour. However, on closer reflection, I am persuaded that, in this case, Mr Gilmour’s tax returns as to what director’s fees and management fees he received from Sola-Kleen as disclosed in his tax returns should be the subject of discovery. The circumstances of this case as alleged are that the defendants in effect ran the plaintiff company. Sola-Kleen received management fees for doing so. Mr Gilmour received director’s fees for doing so. Sola-Kleen also paid a proportion of management fees, apparently, to Mr Gilmour. It seems to me that, if the payment of these various fees is the central issue in this proceeding, it is directly relevant to know just what director’s fees and management fees Mr Gilmour received, and in that regard his personal tax returns disclosing such income are directly relevant.

45    I do not accept, however, a broader contention put on behalf of the plaintiff that the tax returns are also directly relevant because they would enable a line of cross-examination concerning just what activities Mr Gilmour was involved in at material times so that some measure of his availability can be made in order to judge whether or not he was available to do the things on behalf of the plaintiff that justified the director’s and management fees in issue. They may be indirectly relevant but that is a matter that can be pursued quite independently of the returns.

46    I would therefore order that:

1.    The personal tax returns of the first defendant for the financial years ended 30 June 2001 to 30 June 2007 insofar as they disclose the income received by the first defendant from director’s fees from the plaintiff and management fees from the second defendant be produced. Thus, other materials in the income tax returns may be the subject of redaction.

Questions of particular discovery

47    Plaintiff’s financial statements for the year ended 30 June 2000: The defendants did not disclose documents meeting this description in their list of documents, so an order for production of such a document under R 20.32 is not apposite. However, the plaintiff says it is entitled to have particular discovery of the document under R 20.21, on the basis that the document may be, or has been, in the control of the defendants.

48    In fact, the defendants acknowledge they have documents meeting this description but contend there was no obligation, in the course of giving standard discovery, to disclose them as they are not “directly relevant” to the issues raised by the pleadings, for the purposes of R 20.14(1)(a). This is because, as the defendants contend, these financial statements are not considered to “adversely affect” the defendants’ own cases, for the purposes of R 20.14(2)(b). In short, the defendants say that the 2000 financial year statements are simply irrelevant to the question of inappropriate or excessive director’s fees and management fees, as on the pleading it is only those from 2001 onwards that are in issue.

49    The plaintiff says that the 2000 financial statements are relevant to assessing the authenticity of the financial statements for the year ended 30 June 2001, which the defendants have discovered and that given the 2001 accounts purport to have been prepared by an accounting firm which did not exist at the time (having regard to the notations on the discovered 2001 accounts) the discovery of the 2000 accounts would provide a means of verifying the authenticity of the 2001 accounts. The plaintiff also contends the 2000 accounts are relevant to assessing the authenticity of a “service agreement”, dated 28 February 2000, which has been discovered, pursuant to which the defendants might be engaged to provide management services. The plaintiff says the service agreement refers to the “business” conducted by the plaintiff, but no documents have been discovered which evidence what that business or the expenditure incurred by the plaintiff in conducting that business. One may assume the 2000 accounts will record the activity of the company at that time.

50    The plaintiff finally contends that the 2000 accounts are also relevant to the issue concerning the appropriateness of the management fees. The activities of the plaintiff in 2000 may be regarded when assessing what activities are said to have been conducted in 2001 for the purposes of management fees then charged. If services provided by Sola-Kleen were not necessary in the year ended 30 June 2000, but are said to have been necessary in subsequent years, the extent of similarity in the plaintiff’s operations in the year ended 30 June 2005 will be relevant.

51    In my view, the 2000 accounts should be considered “directly relevant” for the purpose of the Rules. The simplest way of assessing relevance in this case is to appreciate that in the course of cross-examining the defendants it would plainly be open to the plaintiff to have the defendants compare and contrast the trading positions in the 2000 and the 2001 and subsequent years in order to explain any differences in the level of management fees in fact paid in those two financial years, if any. The fact that a service agreement was concluded in the 2000 year also emphasises such a line of cross-examination. On this basis I consider the 2000 accounts to be directly relevant and they should now be the subject of discovery.

52    The Court will therefore order that:

1.    The defendants give discovery of the plaintiff’s financial statements for the year ended 30 June 2000.

53    Plaintiff’s financial accounts for years ended 30 June 2001 to 30 June 2004 and Sola-Kleen’s financial accounts for years ended 30 June 2003 and 30 June 2004: The defendants have discovered financial statements for the plaintiff for the years ended 30 June 2001 to 30 June 2004, and for Sola-Kleen for the years ended 30 June 2003 and 30 June 2004, which record that they were prepared by Armenti and Associates Pty Ltd, an accounting services company. It is common ground that the accounting services company was not incorporated until 2005.

54    The plaintiff observes, correctly, that Mr Gilmour in [15] of his affidavit of 17 November 2011, has deposed that he believes that Mr Armenti “placed the details” for Armenti and Associates Pty Ltd onto the plaintiff’s financial accounts at some time after 2005. The plaintiff says this statement is inadmissible opinion evidence and is also hard to accept.

55    The plaintiff also observes that the Mr Gilmour annexed financial statements for the plaintiff for the year ended 30 June 2001 to his affidavit of 19 January 2007, sworn for the purposes of the derivative action leave proceedings. The plaintiff points out that those financial statements feature the name and logo of a different firm of accounts, Harradine and The, and involve a different formatting. A copy of the 2001 financial statements provided bears a facsimile header which indicates it was transmitted by Armenti and Associates Pty Ltd on 17 January 2007, something inconsistent with Mr Armenti having “placed the details” on the accounts.

56    The plaintiff also emphasises that nothing in Mr Gilmour’s 17 November 2011 affidavit deposes to him not having in his control any other financial statements. He does not expressly address the question of having previously had other financial statements in his or the company’s control.

57    The defendants say that Mr Gilmour in his earlier affidavits did not provide evidence as to how the accounts were produced merely expressed his belief in that regard. The defendants say that Mr Gilmour’s evidence provides an explanation to the plaintiff rather than a bare assertion that those are the only financial records in Mr Gilmour’s control.

58    The defendants then make a submission that the plaintiff’s submissions confirm that version of the financial report for the plaintiff for the year ended 30 June 2001 referred to in item 1 of the defendants’ list of documents filed on 1 September 2011, differs from the version of the financial report for the plaintiff for the year ended 30 June 2001 annexed to Mr Gilmour’s affidavit sworn 19 January 2007, “in formatting and logo only” and that the two do not differ in substance having the same figures.

59    There is in my view some evident confusion about just what financial accounts do exist for the relevant period.

60    It goes without saying, although I suspect it is too often forgotten in practice both by solicitors advising parties and the parties themselves, that standard discovery pursuant to R 20.17(2)(b) requires not only disclosure of documents currently in their possession, but also “each document that has been, but is no longer in the party’s control, a statement of when the document was last in the party’s control and what became of it”.

61    From the submissions made in writing and at the hearing of this application by counsel for the defendants, the Court was left uncertain as to the precise provenance of the discovered document. It may simply be the case that original documents meeting this description no longer exist and that the document discovered had been printed out more recently by the present accounting services company from a computer system, and that the belief of the defendants is that the recent printout reflects the precise information that was contained in the original documents.

62    What is not clear is whether there were original financial accounts meeting this description which have since been mislaid or lost. This is a matter that should be clarified by giving a further affidavit of discovery and particular production, and if particular production is not possible, then an explanation as to what has happened to documents that were once in the party’s control.

63    In making orders and observations to this effect I should also note that, pursuant to R 20.18, if a party has or has had in its control “one or more copies of a particular document”, it need not give discovery of the copies only because the original or any other copy is discoverable. In this case however it may be that the original does not exist, has not been discovered and so it is appropriate to discover copies. The question of course always is whether a particular document is truly a “copy” of an original and not a separate, discrete document which ought to be discovered in its own right. If for example there were a series of financial statements produced in draft or on different occasions, then it may be necessary to give consideration to the discovery of each document.

64    I will then make the following order:

1.    The defendants give discovery of the plaintiff’s financial accounts for years ended 30 June 2001 to 30 June 2004 and Sola-Kleen’s financial accounts for years ended 30 June 2003 and 30 June 2004.

65    Accounts prepared on a cash basis: In Mr Gilmour’s affidavit of 17 November 2001 he deposes that he does not have in his control any other financial statements for the plaintiff and Sola-Kleen for the years ending 30 June 2001 to 30 June 2007, whether on a cash basis or otherwise. The plaintiff says, however, he does not depose to him and the plaintiff never having had such documents.

66    The plaintiff is concerned there were in fact accounts prepared on a cash basis and points to the affidavit of the accountant, Mr Trevor John Harradine, sworn 23 November 2010 at [7], which plainly suggests that there were.

67    The plaintiff says that if financial accounts prepared on a cash basis existed but are no longer in the control of the defendants, then Mr Gilmour should provide a statement of when they were last in his possession and what has become of them.

68    In my view, the evidence relied upon by the plaintiff in making this application does indeed provide some confusion. Explanations from the bar table as to what the true position may be in relation to the preparation of accounts on a cash or accrual basis may or may not be helpful. This is an issue in my view which ought to be clarified without delay, rather than cause confusion and delay at a trial in the course of cross-examination about the accounts.

69    In these circumstances, I think it is appropriate to order that in relation to this category of document the defendants state by way of an affidavit whether such a document has been but is no longer in the party’s control and provide a statement of when the document was last in the party’s control, if it were and what became of it, if it had it.

70    If the circumstances are such that there is some other explanation which removes the confusion apparent on the face of the affidavit referred to by the plaintiff, then the defendants may take this opportunity to clarify the position.

71    I would therefore order:

1.    The defendants give discovery of relevant accounts prepared on a cash basis for the years ended 30 June 2001 to 2007, or otherwise comply with R 20.17(2)(b).

72    Advice regarding the calculation of management fees: The plaintiff says there must be documents in this category but they have not been disclosed and they should be. If such documents were in the control of the defendants then the appropriate statements should be made by affidavit.

73    The plaintiff refers to what Mr Gilmour said in his affidavit of 19 January 2007 in the derivative proceeding leave application at [73], to the effect that the accountant, Mr Armenti, advised that management fees were calculated according to rates which were lawful.

74    The plaintiff then draws attention to what Mr Gilmour says in his affidavit, sworn 17 November 2011, to the affect that annexure MG7 is the only document in his control which records advice given to the plaintiff by Mr Armenti in relation to management fees.

75    The plaintiff says that this document does not address the appropriateness or otherwise of the amounts charged but merely constitutes mathematical formulae and calculations.

76    The plaintiff says that these calculations do not relate to the years 2001 to 2003, even though in the affidavit of the other accountant, Mr Harradine, he deposed that for the period 1 July 2001 to January 2003 he calculated the management fees and provided that information to Mr Armenti. The plaintiff says that on this is it contended that Mr Harradine performed mental calculations and orally communicated them to Mr Armenti there must be or must have been documentation and it should be disclosed. The plaintiff says such documentation would have been prepared by Mr Harradine with the intention of passing it to Mr Armenti not merely as a working document for himself, consequently it is within the defendants’ “control”.

77    The plaintiff further submits that the particulars in [9] of the defence has the defendants pleading the amount of management fees calculated by Graham Ruthven as being “actually paid” and if this is right then they must at some point have been calculated, but the discovered documents did not contain calculations of the amount paid.

78    The defendants submit that Mr Armenti, as an accountant, performed a calculation and the plaintiff would apply relevant accounting practices without necessarily identifying the legal reasons for doing so and there is no reason why the plaintiff would have asked Mr Armenti to provide the details of his calculation.

79    The defendants also say that they listed all management fee calculations and that contrary to the plaintiff’s submission, the list of the documents filed on 1 September 2011 contains the management fee calculation for the financial year ended 30 June 2003.

80    In my view, there is an insufficient basis to make the orders sought. The plaintiff’s position is simply that, having analysed a range of documents, it believes that there must be documents which either existed in the past or which have not been discovered. That belief depends on a considerable degree of speculation and I do not consider there is a sufficient evidentiary basis to make an order designed to cause particular production or to obtain an explanation about the whereabouts of such documents.

81    Accordingly, this aspect of the plaintiff’s application fails.

82    Staff amenities expenses and director’s fees: The plaintiff complains that the documents discovered by the defendants in respect to staff amenity expenses consist of ledger entries only without provision of the source documents. The plaintiff contends that the accuracy of the ledger entries cannot be tested and that the defendants have not discovered any records of director’s fees paid by the plaintiff other than in the financial statements.

83    The plaintiff draws attention to the requirements of s 286 of the Corporations Act 2001 (Cth) and the requirement that source documents be kept.

84    Again, the plaintiff says that if these documents are no longer in the defendants’ control they should provide a statement of when the documents were last in their control and what has become of them.

85    The defendants say they have discovered all staff amenities documents in their control and that located source documents have been provided.

86    In the course of amplifying this submission, counsel for the defendants indicated that the defendants and their solicitors had similarly struggled to find documents that one would normally expect to find and discover.

87    In this particular instance I consider it is appropriate for the defendants to meet the requirement of R 20.17(2)(b) and provide a statement by affidavit, if it be appropriate, that documents meeting the description of these source documents have been, but no longer are, in the party’s control, together with a statement of when the document was last in the party’s control and what became of it, to the extent that that can be done; or to provide some other explanation which enables the substance of the requirement of the rule to be met.

88    This is a practical illustration in my view of what is required when standard discovery is given and a party and their solicitors become aware that obviously there were documents, but they can no longer be found. It may reasonably be inferred in all of the circumstances that the documents were under the control of the party but no longer are. The best explanation that can be given, should be given if that is the case.

89    Accordingly, I will make the following order:

1.    The defendants give discovery of vouchers and like source documents for staff amenities and director’s fees or otherwise comply with R 20.17(2)(b).

costs

90    Ordinarily, in relation to an interlocutory application for particular discovery or further discovery of this nature, if a party achieves substantial success on the application, it should have its costs.

91    In this instance the defendants submit that costs should be in the cause, principally submitting that as Mr Vinciguerra was at various times in control of documents of the plaintiff as a director of the company and as such an application should not have been necessary.

92    It is also suggested that the plaintiff did not give discovery of documents which he had.

93    In relation to the latter submission, the plaintiff points out that it was not required to discover documents which it reasonably believed were already in the possession, custody or power of the defendants at material times under the former FCR 1979.

94    In the circumstances I am satisfied that the plaintiff has been obliged to make the interlocutory application for further disclosure due to the principal position taken by the defendants. In light of the orders I have made, the plaintiff has been substantially successful and it is appropriate that the plaintiff have its costs.

95    I will therefore order in relation to costs as follows:

1.    The defendants pay the costs of the plaintiff’s interlocutory application filed 17 October 2011 to be taxed if not agreed.

orders

96    The Court orders that:

1.    Within 14 days:

(a)    The defendants produce for inspection by the plaintiff the financial statements and income tax returns of the second defendant which, to date, have only been provided in a redacted form.

(b)    The defendants give discovery of the plaintiff’s financial statements for the year ended 30 June 2000.

(c)    The defendants give discovery of the plaintiff’s financial accounts for years ended 30 June 2001 to 30 June 2004 and Sola-Kleen’s financial accounts for years ended 30 June 2003 and 30 June 2004.

(d)    The defendants give discovery of relevant accounts prepared on a cash basis for the years ended 30 June 2001 to 2007, or otherwise comply with R 20.17(2)(b).

(e)    The defendants give discovery of vouchers and like source documents for staff amenities and director’s fees or otherwise comply with R 20.17(2)(b).

(f)    The personal tax returns of the first defendant for the financial years ended 30 June 2001 to 30 June 2007 insofar as they disclose the income received by the first defendant from director’s fees from the plaintiff and management fees from the second defendant be produced. Thus, other materials in the income tax returns may be the subject of redaction.

4.    The defendants pay the costs of the plaintiff’s interlocutory application filed 17 October 2011 to be taxed if not agreed.

Associate:

Dated:    23 December 2011