FEDERAL COURT OF AUSTRALIA

Lynch v Cash Converters Personal Finance Pty Ltd (No 3) [2017] FCA 371

ORDERS

THE COURT ORDERS THAT:

1.    By 12 June 2017, the respondents give discovery of the following documents:

All documents between 7 December 2010 and 20 November 2016 being communications between Olympia Bulnes, Peter Cummins, Michael Cooke, Ralph Groom, Peter Wessels, Simon Cooke, Mark Reid, Glenn Donaldson, Ian Day and Gavin Irons and ASIC regarding the extent to which procedures for the approval of Loans in the Interest Rate Cap Period were automated or used benchmarks, including but not limited to the use and/or functions of the Safrock System and/or the Mon-e System in respect of the assessment and/or approval of Loans in the Interest Rate Cap Period.

in the manner set out in order 2 made on 2 March 2017.

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

REASONS FOR JUDGMENT

GLEESON J:

1    The applicant seeks orders pursuant to r 20.15 of the Federal Court Rules 2011 (“Rules”) that the respondents (“Cash Converters”) give discovery of documents within the following category (“ASIC category”):

All documents between 7 December 2010 and 20 November 2016 being communications between Olympia Bulnes, Peter Cummins, Michael Cooke, Ralph Groom, Peter Wessels, Simon Cooke, Mark Reid, Glenn Donaldson, Ian Day and Gavin Irons and ASIC regarding the extent to which procedures for the approval of Loans in the Interest Rate Cap Period were automated or used benchmarks, including but not limited to the use and/or functions of the Safrock System and/or the Mon-e System in respect of the assessment and/or approval of Loans in the Interest Rate Cap Period.

2    The “Interest Rate Cap Period” is 31 July 2008 to 30 June 2013.

3    Similar orders are sought in proceeding NSD601/2016 (McKenzie v Cash Converters International Ltd). The parties to the McKenzie proceeding agreed that the decision on this application would determine the outcome of the application in the McKenzie proceeding.

Principles governing determination of application

4    Consistently with the overarching purpose referred to in s 37M of the Federal Court of Australia Act 1976 (Cth), r 20.11 of the Rules provides that a party “must not apply for an order for discovery unless the making of the order sought will facilitate the just resolution of the proceeding as quickly, inexpensively and efficiently as possible.” Any application for non-standard discovery under r 20.15 of the Rules “cannot be considered in isolation from r 20.11”: BrisConnections Finance Pty Limited (Receivers and Managers Appointed) v Arup Pty Limited [2015] FCA 1077 at [15] per Flick J.

5    Section 10 of the Court’s Central Practice Note: National Court Framework and Case Management (“CPN-1”) addresses discovery. Paragraph 10.6 provides that:

The Court will … generally only consider approving a Request in one or more of the following circumstances – where:

(a)    the Request facilitates the just resolution of the proceeding as quickly, inexpensively and efficiently as possible;

(b)    to do so will effectively facilitate a forthcoming mediation (or other ADR process);

(c)    the Court and the parties are sufficiently informed of the nature of the case and issues in dispute so that the appropriateness of the Request can be properly considered (eg possibly only after key evidence has been filed);

(d)    the Discovery Applicant has adequately justified the need for the Request, including demonstrating:

(i)    the utility of the Request and the appropriateness of discovery occurring at that time;

(ii)    the relevance and importance of the documentation or information sought;

(iii)    the limited and targeted nature of the Request; and

(iv)    that the documents sought are, or are very likely to be significantly probative in nature, or the documents materially support, or are materially adverse to, any party’s case in the proceeding.

6    Paragraph 10.7 of CPN-1 states:

A Request must be proportionate to the nature, size and complexity of the case – ie. the Request should not amount to an unreasonable economic or administrative burden on the Discovery Respondent.

Discovery ordered to date

7    On 17 December 2015, the Court made orders for discovery which required discovery by Cash Converters, relevantly, of:

8.    All Documents of Key Personnel during the Discovery Period referring to:

…

(e)     the process by which:

(i)    an assessment of the eligibility of a loan applicant for the provision of credit was or would be undertaken;

(ii)    an assessment of the suitability of credit to be provided to an applicant was or would be undertaken.

8    The “Key Personnel” included seven of the ten personnel nominated in the ASIC category. The “Discovery Period” is 26 November 2007 to 30 June 2013.

9    On 2 March 2017, the Court made orders, by consent, requiring Cash Converters to discover 18 additional categories of documents. In Annexure 2 to the 2 March 2017 orders, Gavin Irons was added to the list of people falling under the definition “Key Personnel”, and so the “Key Personnel” as defined in those orders contained eight of the ten personnel nominated in the ASIC category. Relevantly, the 2 March 2017 orders require the discovery of the following categories, to the extent not previously discovered pursuant to the 17 December 2015 orders:

6.    All documents evidencing how the Mon-e System and/or Safrock System was used to calculate and/or administer the Brokerage Fee in respect of Loans and/or what steps that administration comprised of during the Discovery Period.

And:

19.    Any documents which any Respondents propose to rely on or are detrimental to their case of which the solicitors for the Respondents are aware without having to undertake any searches or inquiries in addition to the searches and inquiries which the Respondents are required to undertake or which it has undertaken in relation to the above categories.

Background to application

10    The Lynch proceeding concerns loans obtained by persons resident in Queensland during the period 30 July 2009 and 30 June 2013 on terms that included the payment of fees styled as brokerage fees. It is part of the applicant’s case that the brokerage services purportedly provided to him were illusory (see, for example, paras 35(b) and 43(b) of the amended statement of claim). As part of this allegation, the amended statement of claim alleges that the determination of the applicant’s credit worthiness and of whether his credit application would be approved was an automated process.

11    On 4 November 2010, ASIC issued a notice under s 267 of the National Consumer Credit Protection Act 2009 (Cth) (“National Credit Act”) to the second respondent (“Safrock”) seeking production of certain books in relation to credit activities. In particular, ASIC requested documents to assist in its assessment of Safrock’s compliance with the responsible lending provisions of the National Credit Act.

12    By letter dated 31 March 2011, ASIC raised concerns about whether Safrock’s affordability calculations of consumers capacity to service credit contract sufficiently reflected consumers’ pre-existing credit commitments/expenses. ASIC also raised concerns about disclosure concerning repayment of brokerage fees.

13    By letter dated 10 May 2013, addressed to Cash Converters (Cash Advance) Pty Ltd, ASIC raised concerns about compliance with the commercial credit legislation by Cash Converters outlets in NSW. The concerns included whether reasonable enquiries were made about the consumer’s requirements and objectives in relation to the credit contract.

14    On 4 November 2016, the first respondent and Cash Converters International Ltd entered into an enforceable undertaking (“EU”) under s 322(1) of the National Credit Act concerning conduct in the period from 1 July 2013 to 1 June 2016 (that is, a period immediately after the Interest Rate Cap Period).

15    Also on 4 November 2016, ASIC, the first respondent and Cash Converters International Ltd entered into a deed of release by which ASIC relevantly released Cash Converters International Ltd and its related parties from claims by ASIC in connection with potential contraventions in relation to any credit contract entered into by Cash Converters prior to the date of acceptance of the EU.

16    Through a freedom of information application, the applicant obtained an Australian Credit Licence Application for Cash Converters (Cash Advance) Pty Ltd dated 7 December 2010 which states, in relation to a credit product called “Cash Advance”, that:

Assessments are based on a predefined formula that is controlled by the software system used in outlets to create and manage customers and their loans. The software makes its assessment based upon the consumers’ stability, income and other variable personal factors that are gathered from the customer at the time of the credit application by the Personal Finance Centre Operator.

17    This document was not discovered pursuant to the orders made in December 2015.

Relevance

18    The applicant contended that the documents are relevant to the applicant’s unconscionability case as they concern the method by which Cash Converters assessed and approved loans.

19    Cash Converters submitted that the ASIC category captures irrelevant documents because it seeks correspondence with ASIC in a period ending some three and a half years after the relevant period and in the context of an investigation which culminated in the provision of an EU. In particular, Ms Collins SC, senior counsel for Cash Converters, contended that the use of benchmarks is not an issue in the proceeding.

20    Ms Francois, counsel for the applicant, responded to this contention by observing that benchmarking is a form of automation, being an assumed amount used to account for a consumer’s expenses calculated as a percentage of a consumer’s gross income. This definition of “benchmark” is taken from the EU.

21    I accept that benchmarking may form part of an automated process of the kind alleged to have been undertaken by Cash Converters. Accordingly, I will consider the application for discovery on the basis that the use of benchmarks may be an issue in the proceeding.

22    In my view, the ASIC category is targeted to a significant issue in the proceeding, namely, “the extent to which procedures for the approval of Loans in the Interest Rate Cap Period were automated”. Understanding the word “automated” to refer to the automatic control of a process, the words “or used benchmarks” refer to a technique by which the process might be automated. Therefore, I accept that the ASIC category seeks, and only seeks, documents that are relevant to an issue in the proceeding.

23    The ASIC category is also targeted to communications between Cash Converters (or entities related to it) and ASIC. Communications of this type are likely to record Cash Converters’ considered views on the matters which they address. It may well be significant to know about statements to ASIC concerning the extent to which the relevant procedures were automated.

Scope of discovery already given

24    Cash Converters submitted that discovery of the ASIC category will not facilitate the just resolution of the proceeding as quickly, inexpensively and efficiently as possible.

25    Mr Betts’ evidence was that Cash Converters have already incurred costs in excess of $1 million for discovery. A third party contractor was engaged to assist with the identification and collection of material for the purpose of providing discovery and the discovery process involved the collation of over 1 million documents. Some 307,665 documents were processed and 11 tranches of documents have been discovered. Further costs will be incurred in the discovery process pursuant to the Court’s most recent orders.

26    Cash Converters submitted that documents regarding the loan assessment process, including procedure documents, have already been discovered. It submitted that, to the extent that the applicants’ concern is that there is a gap in the documents already discovered or to be discovered (which Cash Converters does not accept), that concern would be aptly met with an order for discovery of the “alternative category”, considered below.

27    I accept that it is relevant to consider the breadth of the discovery that Cash Converters has already given. On one view, discovery pursuant to the December 2015 orders should have produced relevant communications with ASIC at least for the period prior to 30 June 2013. However, the evidence does not confirm that this is the case.

Oppression

28    By letter dated 21 March 2017, the solicitors for Cash Converters informed the applicant’s solicitors that at least seven of Cash Converters’ officers communicated with ASIC during the course of ASIC’s investigation. The ASIC category refers to these officers and three others, whom the applicant’s lawyers consider to be likely to have communicated with ASIC.

29    Cash Converters contended that, if discovery of the ASIC category is ordered, they will need to undertake substantial additional searches beyond those required under the 2 March 2017 discovery orders to collect the documents relating to the relevant personnel and will need to run searches over and review both the existing and further collection of material for relevance. In particular, they will be required to collect documents relating to the period from the end of the “Discovery Period” to 20 November 2016.

30    Mr Betts estimated that this will result in significant costs, possibly more than $150,000.

31    It was submitted by Cash Converters that the ASIC category may include “without prejudice” communications relating to the negotiation of the EU. However, if the negotiations for the EU do not include the subject matter of the extent to which procedures for the approval of loans in the interest rate cap period were automated or used benchmarks, then they would not fall within the scope of the ASIC category. Ms Collins SC did not point to anything in the EU which suggests that the ASIC category is likely to capture “without prejudice” communications relating to the EU, although it is conceivable. In particular, negotiations about the period of the conduct covered by the EU may have addressed this subject matter. However, I am not satisfied that this possibility would render discovery by reference to the ASIC category oppressive without more.

32    In my view, the more time-consuming and expensive part of the proposed discovery is likely to be the consideration of whether a relevant communication falls within the subject matter of the ASIC category, that is whether the communication is “regarding the extent to which procedures for the approval of Loans in the Interest Rate Cap Period were automated or used benchmarks”. As Ms Collins SC noted, the scope of ASIC’s investigation extended beyond that issue to cover, more generally, questions of whether Cash Converters had contravened the responsible lending provisions of the National Credit Act.

Proposed alternative category

33    The respondents have proposed an alternative category of discovery as follows:

All documents of Key Personnel in the Interest Rate Cap Period regarding or referring to the extent to which procedures for the approval of Loans were automated, including but not limited to the use and/or functions of the Safrock System and/or the Mon-e System in respect of the assessment and/or approval of Loans in the Interest Rate Cap Period.

34    Cash Converters submitted that this alternative category will capture documents relevant to the particular issue in dispute (to the extent that they have not already been discovered pursuant to orders made in 2015) but in a way which does not involve substantial additional searches and consequential expense.

35    Accepting that submission, the alternative category does not address the matter of legitimate concern to the applicant, namely, communications with ASIC about Cash Converters’ procedures.

Consideration

36    I am satisfied that discovery of the ASIC category will facilitate the just resolution of the proceeding as quickly, inexpensively and efficiently as possible. Documents falling within the category are likely to be relatively few in number, and to contain considered communications with a Commonwealth regulator about Cash Converters processes. It is not clear that all documents falling within the category have already been discovered, even to the extent that they were created prior to 30 June 2013. Although I acknowledge that the additional discovery may be expensive, in my view, the issue to which they relate is a significant one and it will facilitate the just resolution of the proceeding to grant the discovery sought. The scope of the category is appropriately restricted by subject matter. The time frame for the relevant communications is appropriate having regard to the apparent duration of ASIC’s investigation. Having regard to these matters, I am persuaded that the discovery sought by the applicant will facilitate the just resolution of the proceeding as quickly, inexpensively and efficiently as possible.

37    Accordingly, I will make the orders sought.

Associate:

Dated:    10 April 2017