FEDERAL COURT OF AUSTRALIA

Kaboko Mining Limited v Van Heerden [2016] FCA 1532

ORDERS

THE COURT ORDERS THAT:

1.    The interlocutory application filed 19 October 2016 be dismissed.

2.    The fourth defendant pay the costs of the plaintiff in relation to the interlocutory application, to be assessed if not agreed.

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

REASONS FOR JUDGMENT

MCKERRACHER J:

1    A subpoena to produce documents addressed to Mr Joseph Carbone was issued in these proceedings on 13 September 2016 (subpoena). Mr Carbone complied with the subpoena soon thereafter. The fourth defendant, Mr Brewer, applied for the subpoena and orders for inspection to be set aside. I dismissed this application on 27 October 2016 for the reasons that follow.

BACKGROUND

2    By its initiating application, the plaintiff (Kaboko) alleges that the defendants breached the statutory and fiduciary duties owed by them to Kaboko.

3    The statement of claim may be summarised as follows:

(a)    The defendants are directors or former directors of Kaboko, which is a listed company that represents itself as a manganese exploration, development and mining company. They each owed statutory, fiduciary and general law duties to Kaboko.

(b)    The first defendant is or relevantly was a director of Impondo Mining and Resource Consultants Pty Ltd, Impondo Zambia Ltd and African Asian Mining Development Limited (AAMDL).

(c)    The second and third defendants are, or were, the company secretary and general counsel (respectively) of Okap Ventures Pty Ltd.

(d)    Kaboko entered into an Offtake Agreement and a Prepayment Facility Agreement (Facility Agreement) with Noble Resources Limited (NRL) on 26 July 2012 (together the Noble Agreements), and in so doing gave various warranties to NRL.

(e)    On 12 December 2012, NRL assigned its rights and interests in the Facility Agreement to Noble Resources International Pte Ltd (Noble).

(f)    The Facility Agreement was amended on 18 September 2012, 26 October 2012, 20 December 2012, 11 January 2013 and 25 July 2013.

(g)    By the amendment agreement of 11 January 2013, each of Kaboko and the second, third and fourth defendants warranted that Kaboko or a subsidiary of Kaboko held certain mining licences.

(h)    NRL and Noble advanced funds pursuant to the Facility Agreement by way of six drawdowns between 26 July 2012 and 14 August 2013 totalling $5,950,000.00.

(i)    Kaboko breached various of its obligations, warranties, undertakings and representations made by it or owed to NRL under the Noble Agreements.

(j)    The defendants breached their various duties as directors and officers of Kaboko, which they ought to have known would cause loss to Kaboko, and did cause loss to Kaboko, by failing to keep books and records and comply with applicable accounting standards.

(k)    In breach of the duties owed by them to Kaboko, the defendants failed to use the funds for the purposes permitted by the Facility Agreement or alternatively failed to keep proper books and records regarding the use of the funds and/or deploy appropriate controls and systems to ensure that its subsidiaries used the funds for a permitted purpose.

(l)    Contrary to representations made by Kaboko as well as the second, third and fourth defendants in a letter to Noble dated 11 January 2013, Kaboko did not hold all mining licences referred to in the Noble Agreements, which the defendants ought to have known constituted a breach of the Noble Agreements and would cause loss to Kaboko.

(m)    In breach of their duties to Kaboko, the first, second and third defendants caused Kaboko to, in turn, breach its obligations pursuant to the Facility Agreement by causing Kaboko to sell manganese ore to third parties.

4    In relation to the matters the subject of this interlocutory application, in short, Mr Carbone approached the solicitors for Kaboko on 6 September 2016 and stated he had documents which demonstrated the mismanagement of the Kaboko's affairs by its officers.

5    The subpoena addressed to Mr Carbone called for production of documents between Mr Carbone and any of the defendants in relation to his shareholding in Kaboko or the affairs of Kaboko.

6    On 13 September 2016, on the application of Kaboko, a Registrar of the Court issued the subpoena. The subpoena was returnable on 14 October 2016. The subpoena was served on Mr Carbone on 15 September 2016. Mr Carbone complied with the subpoena on 16 September 2016, one day after it was served on him.

7    The documents produced in response to the subpoena were described by the Court as follows:

In general terms, the documents produced in response to the subpoena addressed to Joseph C Carbone consist of copies of 11 bundles or email correspondences between Mr Carbone and various other persons in:

2011 (1)

2012 (1)

2014 (8) and

2015 (1)

Some of the emails are between Mr Carbone and Mr Brewer. Some are between Mr Carbone and Mr van Heerden. Some are between Mr Carbone and Mr Landau. Some involve emails sent to and from or copied to 3 or more of these persons.

THE FOURTH DEFENDANT’S APPLICATION TO SET ASIDE THE SUBPOENA

8    The fourth defendant is a party to the proceeding and thus has standing to make the application.

9    The fourth defendant seeks that the subpoena be set aside and opposes inspection of the subpoenaed documents for the following reasons, which are dealt with below:

(a)    the subpoena was issued prematurely (issue 1);

(b)    the subpoena was not sufficiently precise (issue 2);

(c)    the basis of assessing relevance is misconceived and constitutes a fishing exercise (issue 3); and

(d)    the documents are irrelevant (issue 4).

APPLICABLE LEGAL PRINCIPLES

10    The Court has an overarching jurisdiction to determine whether to permit inspection of documents produced on subpoena and if so, the terms on which inspection is to be allowed: r 24.20(3) of the Federal Court Rules 2011 (Cth) (FCR) provides that a person may inspect a document only if the Court has granted leave and the inspection is in accordance with the leave. By r 24.15(1) of the FCR, a party or any person having a sufficient interest, may apply to the Court to set aside a subpoena in whole or in part, or seek alternative relief in relation to it. The Court’s power to set aside a subpoena is an incident of its inherent power to regulate the use of its processes by parties to the litigation: Mandic v Phillis (2005) 225 ALR 760 (at [38]).

11    In National Employers' Mutual General Insurance Association Ltd v Waind [1978] 1 NSWLR 372, the Court of Appeal set out the law and practice relating to the production and inspection of subpoenas (at 381):

(a)    There are three steps in having a third party bring documents to court and their use thereafter:

(i)    step 1 - obeying the subpoena, by the witness bringing the document to the court and handing them to the judge;

(ii)    step 2 - the decision of the judge concerning the preliminary use of the documents, which includes whether or not permission should be given to a party or parties to inspect the documents; and

(iii)    step 3 - admission into the evidence of the document in whole or in part; or the use of it in the process of evidencing being put before the court by cross-examination or otherwise.

(b)    In these three steps the stranger and the parties have different rights, and the function of the judge differs.

The three steps in the procedure of having a third party bring documents to court, and in their use thereafter, have been confirmed in a number of subsequent cases, including Anderson Formrite Pty Ltd v Hornibrook Pty Ltd (No 3) [2009] FCA 273 (at [3]) and Apache Northwest Pty Ltd v Western Power Corporation (1998) 19 WAR 350 (at 371).

12    It was said for Mr Brewer that there were numerous grounds on which a subpoena will be set aside, including if the scope of the subpoena is unreasonably wide (citing Horizontal Falls Adventure Tours Pty Ltd v Thomas [2009] FCA 639) and if the subpoena requires the addressee to make fine judgments as to whether or not documents fall within the subpoena (citing Southern Pacific Hotel Services Inc v Southern Pacific Hotel Corporation Ltd [1984] 1 NSWLR 710 (at 720-721)). It must be said that these principles in most part inform the grant of leave by the Court to issue subpoenas or the discretion of the Court to set aside a subpoena that is yet to be complied with.

13    In this instance, as the subpoena has been complied with, the relevant question is whether the subpoena has a legitimate forensic purpose by reference to the test of ‘apparent relevance’, as summarised by Wigney J in Gloucester Shire Council v Fitch Ratings Inc [2016] FCA 587 (at [22]):

"... The test for whether a subpoena has a legitimate forensic purpose has been put in terms of whether the material caught by the subpoena appears to have relevance in the sense of "throw[ing] light" on at least some of the issues in the principal proceedings ... It has also been said that it must be "on the cards" that the documents sought will materially assist the party at whose request the subpoena has been issued ... Slightly more prosaic statements of the test include that the documents must have some "apparent" or "adjectival" relevance, or would be reasonably likely to add, in the end, in some way or another, to the relevant evidence in the case ...

See also Apache (at [41]).

14    Further, in circumstances where a subpoena is issued at an early stage in proceedings where the issues have not clearly been defined, the Court must approach the question of relevance more flexibly. As Wigney J explained in Fitch (at [23]):

The common theme of these various statements of the applicable test of relevance in the context of subpoenas or notices to produce is that it is less stringent than the test of relevance that applies in the context of the admissibility of evidence. And where, as here, the proceeding is at a very early stage and the issues have not been clearly defined, the question whether documents sought by a subpoena have apparent relevance should not be approached too narrowly or rigidly. In such circumstances, the court should be wary of too readily excluding the possibility that a document or class of documents might at the end of the day be relevant to a fact in issue in the litigation. The court should not lose sight of the fact that the public interest requires that in the interests of a fair trial litigation should be conducted on the footing that all relevant documentary evidence is available ...

This was also the subject of explanation by the Court of Appeal in Apache (at [46]):

… In our view the expression "necessary" as used by Rogers CJ needs to be understood, at least in the present case, in the broad sense of embracing any document which has value, in the sense of at least apparent relevance, in "fairly disposing of the proceedings", even if it might not readily be seen, at the pre-inspection stage, necessarily to be admissible in evidence.

15    A subpoena may also be set aside where it is used for an impermissible purpose such as a fishing expedition. As Wigney J also explained in Fitch (at [24]):

… A finding of “fishing” amounts to a finding that the subpoena has no legitimate forensic purpose because the documents are sought to discover if the issuing party has a case, not to support a case that has already been articulated: Commissioner for Railways v Small (1938) 38 SR (NSW) 564 at 575. A finding of “fishing” also appears to involve a question of oppression. A subpoena will be more readily set aside if great numbers of documents are required to be produced in circumstances where it cannot be demonstrated that they are likely to be sufficiently relevant: Dorajay at [34].

The fourth defendant’s contentions

Issue 1: The subpoena was issued prematurely

16    Mr Brewer contends that Kaboko has issued the subpoena at a very early and unusual stage of the proceeding. For example, defences have not been filed and so the issues in the proceeding have not crystallised. Accordingly, it is not possible to ascertain what issues will be in dispute in the proceeding.

17    Mr Brewer says Kaboko must be taken to have accepted that in issuing the subpoena so early, it would be incumbent on it to establish that it has a legitimate and forensic purpose in issuing the subpoena. It has failed to discharge that onus in that it has not established that the documents sought and then produced pursuant to the subpoena are relevant, even in an indirect way, to the issues in the proceeding, according to Mr Brewer.

Issue 2: The subpoena is not sufficiently precise

18    Mr Brewer draws attention to the principle that, if, at the time when the subpoena is served, the issues between the parties have not crystallised, the burden on the issuing party to precisely identify documents is greater: Adelaide Steamship Co v Spalvins (1997) 24 ACSR 536 per O’Loughlin J (at 546).

19    Mr Brewer says that the requirement that Mr Carbone produce documents in relation to the ‘affairs’ of Kaboko is too wide. Further, Kaboko has not discharged the burden to be precise in its identification of relevant documents even applying the usual standards, and, therefore, falls well short of the higher threshold of specificity identified by O’Loughlin J in Adelaide Steamship.

Issue 3: The basis of assessing relevance is misconceived and the subpoena constitutes a fishing exercise

20    Mr Brewer points to the fact that Mr Carbone’s assessment as to whether documents in his custody evidence mismanagement of Kaboko is irrelevant. The question for determination is whether the documents responsive to the subpoena are relevant to the issues arising in this proceeding.

21    Even if Mr Carbone’s assessment as to the relevance of the documents was a factor to be taken into account, Mr Brewer contends that Mr Carbone cannot possibly have made a properly informed assessment as to whether he held relevant documents because, for reasons unknown, Kaboko refused Mr Carbone’s request that a solicitor for Kaboko explain what the proceeding is about. Mr Brewer says that an inference should be drawn that it suited Kaboko to keep Mr Carbone uninformed so as to allow Kaboko to cast its net as widely as possible, as there is no reason why Kaboko could not tell Mr Carbone what the case was about and no evidence has been led that would explain why Mr Carbone’s request was declined.

22    Mr Brewer submits that the Court would have no difficulty finding that the subpoena amounts to a fishing expedition on the bases of the vague and wide manner in which the subpoena has been cast.

Issue 4: The documents called for and produced are irrelevant

23    Mr Brewer suggests that documents in relation to Mr Carbone’s shareholding in Kaboko are plainly irrelevant. Each of the documents produced in response to the subpoena is an email sent or received by a shareholder of Kaboko who has no involvement in the management of the company.

24    Mr Brewer stresses that, given that Mr Carbone has already produced documents to the Court, the categories of documents that are called for in the subpoena and, in consequence, the documents actually produced by Mr Carbone, are simply not relevant.

25    Accordingly, Mr Brewer says that these emails are plainly not relevant to the exercise of proving or disproving the issues arising in the statement of claim nor could documents falling within the scope of the subpoena ever result in the production of documents that are relevant.

consideration

Issue 1: The subpoena was issued prematurely

26    The submission that the subpoena was issued at a very early and unusual stage of the proceeding cannot be maintained in light of the fourth defendant's own statement (in the context of the fourth defendant's request for $150,000 security for costs up to discovery) that:

As you would be aware, claims of the type made by Kaboko necessitate a large-scale document review at an early stage of proceedings. For all the usual reasons and because of the front-loaded nature of the work to be undertaken by us, we say that the substantive proceeding should not proceed against our client unless and until your client has given appropriate security.

27    The subpoena has been issued and complied with. The considerations regarding inspection of documents already produced to the Court are different from the considerations relevant to whether a subpoena should be set aside, as discussed further below.

Issue 2: The subpoena is not sufficiently precise

28    Once complied with, questions of the breadth of a subpoena are irrelevant. In City of Sydney v Streetscape Projects (Australia) Pty Ltd [2011] NSWSC 364, Einstein J held (at [23] and [29]):

23    In respect of Mr Collins first argument in JDC-2 concerning the ambiguity and broadness of paragraph 3, it was submitted that since the Commonwealth Bank did not object on this basis and actually produced the relevant documents, the argument is clearly wrong.

...

29    As for the subsidiary objections relating to the broadness of the subpoena and confidentiality, I accept Mr Bova 's submissions. The Commonwealth Bank has complied with the subpoena and therefore the broadness argument is no longer a live issue. ...

29    The fourth defendant relies upon Adelaide Steamship, which concerned an application to set aside a subpoena. In contrast, in the present case, the subpoena has already been complied with.

30    The only potential harm from inspection is that Kaboko incurs the time and cost of inspecting 11 bundles of emails.

Issues 3 and 4: Relevance

31    Kaboko agrees that Mr Carbone's assessment of relevance is irrelevant.

32    The assertion that the subpoena constitutes a fishing expedition overlooks the unusual circumstance in this case, being that Mr Carbone initially approached the solicitors that issued the subpoena.

33    The issues in this action concern the management of Kaboko by its officers, divided into four broad claims that are described by Kaboko as the:

(a)    permitted use schedule claim;

(b)    books and records claim;

(c)    mining licences claim; and

(d)    third party sales claim.

34    The emails are at least ‘apparently relevant’ for reasons including:

(a)    the action concerns matters from 2011 onwards, and the emails are in the period 2011 to 2015;

(b)    the emails are between Mr Carbone and Kaboko officers, including the first and fourth Defendants; and

(c)    Mr Carbone has indicated that the emails concern the management of Kaboko, including mismanagement of money. Mr Carbone has also referenced matters pertaining to the third party sales claim. These relate to the claims set out above.

35    I am satisfied that the documents produced in response to the subpoena have at least ‘apparent relevance’ to the issues in dispute.

CONCLUSION

36    As the subpoena had been complied with and the subpoenaed documents were apparently relevant, inspection was granted.

Associate:

Dated:    15    December 2016

SCHEDULE OF PARTIES