Federal Court of Australia

Ford, in the matter of Careers Australia Group Ltd (in liq) v Mansfield (No 2) [2022] FCA 1565

ORDERS

THE COURT ORDERS THAT:

Plaintiffs' Discovery

1.    Pursuant to r 20.15 of the Federal Court Rules 2011 (Cth) (FCR), by 14 April 2023 non-standard discovery of documents responsive to each category set out in section II of Annexure A to these orders is to be given by the plaintiffs.

2.    The discovery referred to in Order 1 is to be provided in an electronic format in accordance with the electronic discovery protocol agreed between the parties.

3.    The plaintiffs are not required to discover any documents pursuant to Order 1 which have previously been produced by the plaintiffs pursuant to any previous discovery orders in this proceeding or in proceeding no. VID 238 of 2020.

Defendants’ Discovery

4.    Pursuant to r 20.15 of the FCR, by 14 April 2023 non-standard discovery of documents responsive to each category set out in section III of Annexure A to these orders is to be given by the relevant defendant(s) identified in Annexure A.

5.    The discovery referred to in Order 4 is to be provided in an electronic format in accordance with the electronic discovery protocol agreed between the parties.

6.    The defendants are not required to discover any documents pursuant to Order 4 which have previously been produced by the relevant defendants pursuant to:

(a)    any previous discovery orders in this proceeding or in proceeding no. VID 238 of 2020; or

(b)    documents already produced to the plaintiffs in Federal Court proceeding no. NSD1381 of 2020 by any of the defendants who were served with a summons to produce at examination or notices for production in those proceedings, pursuant to ss 596A or 596D(2) of the Corporations Act 2001 (Cth),

and are not required to discover any emails to, from, CC or BCC an email address ending in:

(i)    “@careersaustralia.edu.au”;

(ii)    “@asm.edu.au”;

(iii)    “@workstar.com.au”;

(iv)    “@globallearnings.support.com”; or

(v)    “@acae.edu.au”.

Further Directions

7.    The parties have liberty to apply to the Court for further directions.

Annexure A

Discovery Categories

I.    Definitions

The following defined terms are used in this Annexure:

Act means the Corporations Act 2001 (Cth).

BXR Defence means the Defence filed in the proceeding by the Sixth, Seventh and Twelfth Defendants on 20 June 2022.

CAG Personnel means any director, officer, employee, or representative of one or more of the Plaintiff Companies.

Communications includes emails, letters, voice recordings, conversations, text messages, short message services, WhatsApp messages and other forms of communication.

DET or Department of Education means the Department of Education, and includes the Minister for Education and any director, officer, employee or representative of the Minister for Education or the Department of Education, and individuals with the email address @education.gov.au, @det.qld.gov.au, @det.vic.gov.au, @det.nsw.gov.au, @det.sa.gov.au, @det.wa.gov.au, @det.nt.gov.au or similar.

Document has the same meaning as in section 9 of the Act and includes any Communications.

NAB means National Australia Bank and includes any director, officer, employee or representative of National Australia Bank, and individuals with an email address containing the domain @nab.com.au or similar.

Related Entity has the same meaning as ‘related body corporate’ in section 9 of the Act.

Westpac means Westpac Banking Corporation and includes any director, officer, employee or representative of Westpac Banking Corporation, and includes individuals with an email address containing the domain @westpac.com.au or similar.

White Cloud Directors Defence means the Defence filed in the proceeding by the Third, Fourth, Fifth and Eighth Defendants on 21 June 2022.

Capitalised terms used but not defined in this Annexure have the meanings given to them in the Statement of Claim filed in this proceeding on 23 February 2022.

II.    Discovery Categories sought from the Plaintiffs

III.    Discovery Categories sought of the Defendants

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

REASONS FOR JUDGMENT

O’BRYAN J:

Introduction

1    The first plaintiff is the liquidator of Careers Australia Group Limited (CAG) and certain of its subsidiaries (collectively, the Careers Group). The liquidator has commenced two proceedings in this Court under the Corporations Act 2001 (Cth) (Act) seeking to recover moneys for the benefit of the creditors of CAG and the subsidiaries of CAG that are the plaintiffs in the two proceedings (plaintiff companies): proceeding VID 238 of 2020, which I will refer to as the Preference Proceeding, and proceeding VID 749 of 2021, which I will refer to as the Directors Proceeding. The two proceedings are being case managed together, with a view to determining in due course whether the whole of, or any question arising in, the Preference Proceeding and the Directors Proceeding should be tried and determined concurrently.

2    An outline of the allegations in the two proceedings was given in my previous judgment, Ford v Commissioner of Taxation, in the matter of Careers Australia Group Ltd (in liq) (No 2) [2022] FCA 1151 (Ford No 2).

3    For the reasons explained in Ford No 2, on 28 September 2022 I made orders in both proceedings that:

(a)    the parties confer with respect to orders for the completion of discovery by all parties on the issue of insolvency and file proposed orders;

(b)    the parties confer with respect to certain matters concerning a referral of the question of the insolvency of the plaintiff companies to a referee and file proposed orders; and

(c)    the parties confer with respect to orders for the completion of discovery by all parties on issues arising in the proceeding other than the issue of insolvency and file proposed orders.

4    On 25 November 2022, I made orders in both proceedings with respect to the completion of discovery by all parties on the issue of insolvency and with respect to a referral of the question of the insolvency of the plaintiff companies to a referee: see Ford v Commissioner of Taxation, in the matter of Careers Australia Group Ltd (in liq) (No 3) [2022] FCA 1420.

5    On 29 November 2022, I made orders in the Preference Proceeding by consent of the parties with respect to the completion of discovery by all parties on issues arising in the proceeding other than the issue of insolvency.

6    Between 25 and 29 November 2022, I received competing proposed orders from the parties in the Directors Proceeding, together with supporting submissions, with respect to the completion of discovery by all parties on issues arising in the proceeding other than the issue of insolvency.

7    These reasons address the remaining issues in dispute between the parties in the Directors Proceeding with respect to discovery.

8    In their competing proposed orders, the parties seek orders for discovery by way of categories under r 20.15 of the Federal Court Rules 2011 (Cth). All parties agree to that form of discovery and the extent of dispute with respect to the categories is confined. If the areas of dispute were more extensive, a question would have arisen whether “non-prescriptive” standard discovery under r 20.14 would have been a preferable approach.

9    Although non-standard discovery under r 20.15 permits more extensive discovery than is required by r 20.14, the requirements of r 20.14(1) and (2) continue to apply unless an application is made to have them excluded: see Clifton (Liq) v Kerry J Investment Pty Ltd trading as Clenergy [2020] FCAFC 5; 379 ALR 593 at [171]-[173]. No such application has been made and, as such, the documents within the categories should meet the criteria specified in r 20.14(1) and (2). The criteria are:

(1)    If the Court orders a party to give standard discovery, the party must give discovery of documents:

(a)    that are directly relevant to the issues raised by the pleadings or in the affidavits; and

(b)    of which, after a reasonable search, the party is aware; and

(c)    that are, or have been, in the party’s control.

(2)    For paragraph (1)(a), the documents must meet at least one of the following criteria:

(a)    the documents are those on which the party intends to rely;

(b)    the documents adversely affect the party’s own case;

(c)    the documents support another party’s case;

(d)    the documents adversely affect another party’s case.

10    There are twelve defendants in the Directors Proceeding and a number of the defendants have common legal representation. It is convenient to group the defendants by reference to their legal representation as follows:

(a)    the first defendant, Mr Mansfield;

(b)    the second defendant, Mr McKendry;

(c)    the third, fourth, fifth, eighth and eleventh defendants, the White Cloud defendants;

(d)    the sixth, seventh and twelfth defendants, the BXR defendants;

(e)    the ninth defendant, Mr Gilmore; and

(f)    the tenth defendant, Mr Pepper.

11    On 25 November 2022, the plaintiffs filed proposed discovery orders and supporting submissions. In their submissions, the plaintiffs addressed three categories of discovery to be given by the plaintiffs believing them to be disputed by at least some of the defendants. The plaintiffs also addressed three categories of discovery to be given by the defendants (categories 1, 6 and 8) again believing them to be disputed by at least some of the defendants.

12    On 28 November 2022, the BXR defendants filed submissions notifying that they agreed with the discovery categories proposed by the plaintiffs other than categories 1 and 8 of the discovery to be given by the defendants.

13    On 29 November 2022, the White Cloud defendants filed submissions notifying that they also agreed with the discovery categories proposed by the plaintiffs other than categories 1 and 8 of discovery to be given by the defendants.

14    On 29 November 2022, Mr Mansfield (through his solicitor) sent an email to the Court notifying that he adopted the position of the BXR defendants.

15    On 29 November 2022, Mr McKendry (through his solicitor) sent an email to the Court notifying that he took no position on the disputed categories 1 and 8 of the discovery to be given by the defendants and otherwise agreed with the discovery categories proposed by the plaintiffs.

16    Neither Mr Gilmore nor Mr Pepper notified the Court of their position on the discovery categories proposed by the plaintiffs.

17    Having regard to the foregoing, I will proceed on the basis that the dispute between the parties is confined to categories 1 and 8 of discovery to be given by the defendants.

Category 1 of the discovery sought from the defendants

18    Category 1 of the discovery sought from the defendants by the plaintiffs is in the following terms:

All Documents created in the period 1 July 2013 to 25 May 2017 relating or otherwise referring to:

(a)    the 2015 Dividend;

(b)    the May 2016 Dividend;

(c)    the Backstop Dividend;

(d)    the Backstop Agreement;

(e)    the intended direct and/or indirect beneficiaries of any dividends paid by CAG;

(f)    the repayment of funds invested by any direct or indirect shareholders into CAG and/or Cirrus; or

(g)    the purpose of any dividend or distribution (capital, profit or otherwise) to any direct or indirect shareholders of CAG and/or Cirrus.

19    The White Cloud defendants and the BXR defendants submitted that the plaintiffs’ category 1 is too broad. They submitted that, in their statement of claim, the plaintiffs only directly impugn two dividends being the 2015 Dividend and the Backstop Dividend. The May 2016 Dividend, which was cancelled, is referred to as part of the broader factual matrix upon which the plaintiff relies but is not itself the subject of an alleged contravention. They submitted that no issue arises on the pleadings with respect to any other dividend declared or paid by CAG, or any distribution of capital or repayment of funds to investors generally.

20    The White Cloud defendants proposed that the category be confined as follows:

All Documents relating or otherwise referring to:

(a)    the 2015 Dividend, including but not limited to, any Documents evidencing how Cirrus used the funds distributed by CAG;

(b)    the May 2016 Dividend;

(c)    the Backstop Dividend;

(d)    the Backstop Agreement; or

(e)    the purpose of the payment of the 2015 Dividend and the Backstop Dividend to the shareholders of CAG.

21    The BXR defendants proposed that the category be confined as follows:

All Documents created in the period 1 July 2015 to 25 May 2017 relating or otherwise referring to:

(a)    the 2015 Dividend;

(b)    the May 2016 Dividend;

(c)     the Backstop Dividend; or

(d)     the Backstop Agreement.

22    The plaintiffs submitted that, on the pleadings, the following issues arise: whether the BXR Group and White Cloud Group (being the investment groups affiliated with the eleventh and twelfth defendants) were the primary beneficiaries of dividends paid by CAG; the purpose of the payment of such dividends; and whether certain directors and officers of CAG had a material personal interest in approval of the dividends. They submitted that proposed sub-categories (e) to (g) are intended to ensure that the defendants disclose documents which are relevant to these issues raised by the dividend claims. Sub-categories (a) to (d) are insufficient for this purpose, as they would not capture documents which concern the intended beneficiaries, the repayment of invested capital or the purpose of the payment of dividends generally (that is, any document which does not concern a specific dividend but rather the shareholders’ expectations as to all dividends paid by CAG generally). The plaintiffs sought that the category be subject to a date range of 1 July 2013 to 25 May 2017 because discussions may have occurred outside the one-year period in which the pleaded dividends were in fact paid – for example, at the time the BXR and White Cloud shareholders initially decided to invest in the Group, the time that earlier dividends were paid by CAG in 2014, or at other times prior to the payment of the particular dividends at issue in the proceeding. Similarly, the plaintiffs submitted that it is appropriate to extend the date range up to the date of the voluntary administration of the Group in circumstances where the dividend claims extend to the failure by CAG directors to reverse the relevant dividends.

23    I accept the submissions of the defendants to the effect that the plaintiffs’ proposed category 1 is too broad. It states a category of documents which far exceeds documents that are directly relevant to the pleaded allegations. As submitted by the defendants, the plaintiffs only directly impugn two dividends in their statement of claim, the 2015 Dividend and the Backstop Dividend; the May 2016 Dividend was cancelled and is referred to as part of the broader factual matrix. The relevant allegations are as follows.

24    In relation to the 2015 Dividend, the plaintiffs allege that:

(a)    on or about 18 December 2015, the CAG directors unanimously resolved that CAG declare and pay a dividend of $40 million to CAG’s ordinary shareholders (the 2015 Dividend);

(b)    on the same day, the 2015 Dividend was paid;

(c)    the 2015 Dividend was not paid out of the accumulated profits of CAG and, as a consequence, the payment of the 2015 Dividend contravened the requirements of Article 61.6 of CAG’s Constitution;

(d)    the payment of the 2015 Dividend materially prejudiced the ability of CAG to pay its creditors and contravened the requirements of s 254T(1)(c) of the Act;

(e)    each of the CAG directors approved the 2015 Dividend for the predominant or primary purpose of repaying funds invested by the major shareholders into CAG;

(f)    prior to the approval of the 2015 Dividend by the CAG directors, Mr Mansfield and Mr McKendry did not consider that the 2015 Dividend was in the best interests of CAG or the Group (or alternatively expressed a view that the 2015 Dividend was not in the best interests of CAG or the Group) and each of the other CAG directors knew, or alternatively a reasonable director in his or her position would have known, that Mr Mansfield and Mr McKendry did not consider that the 2015 Dividend was in the best interests of CAG or the Group (or alternatively expressed a view that the 2015 Dividend was not in the best interests of CAG or the Group);

(g)    each of the CAG directors breached his or her duties to CAG in approving the 2015 Dividend and causing or permitting CAG to pay the 2015 Dividend;

(h)    each of the CAG directors approved the 2015 Dividend upon the request, or at the behest, of the major shareholders; and

(i)    each of the major shareholders aided, abetted, counselled or procured and/or has been directly or indirectly, knowingly concerned in or party to the CAG directors’ breaches of duty.

25    In relation to the May 2016 Dividend, the plaintiffs allege that:

(a)    on or about 3 May 2016, the CAG directors unanimously resolved that CAG declare and pay a dividend of approximately $25.31 million to CAG’s ordinary shareholders (May 2016 Dividend);

(b)    on or about 1 July 2016, the sum of $25,310,000 was recorded in the financial accounts of CAG as a promissory note payable by CAG to Cirrus;

(c)    on or about 3 October 2016, the CAG directors unanimously resolved to cancel the May 2016 Dividend for reasons including to safeguard the cash balance of the Group and ensure that cash was preserved for payroll and payment of creditors; and

(d)    as a consequence of the cancellation of the May 2016 Dividend, the Cirrus promissory note was reversed.

26    In relation to the Backstop Agreement and the Backstop Dividend, the plaintiffs allege that:

(a)    pursuant to an agreement between, amongst others, Mr McKendry and CAG dated on or about 4 March 2014 and amended on or about 9 May 2016 (Backstop Agreement), Mr McKendry was given options to acquire shares in CAG and, subject to certain conditions, Mr McKendry was granted an irrevocable option to require Cirrus to purchase his shares in CAG in specified amounts at specified times, the first date such a right was exercisable being 1 July 2016;

(b)    on or about 9 May 2016, Mr McKendry exercised options to acquire shares in CAG (such shares being held on Mr McKendry’s behalf by Stratocumulus as Trustee for the Employee Share Trust);

(c)    on or about 7 July 2016, the non-executive directors unanimously resolved, by circulating resolution, that CAG pay a dividend of $1,736,521 to CAG’s ordinary shareholders (Backstop Dividend);

(d)    on or about 20 July 2016, the Backstop Dividend was paid to CAG’s ordinary shareholders (including to Stratocumulus as trustee for the Employee Share Trust);

(e)    the payment of the Backstop Dividend materially prejudiced the ability of CAG to pay its creditors and contravened the requirements of s 254T(1)(c) of the Act;

(f)    each of the non-executive directors approved the Backstop Dividend for the predominant or primary purpose of permitting Cirrus to pay monies to Mr McKendry and meeting Cirrus’ obligation to Mr McKendry under the Backstop Agreement; and

(g)    each of the non-executive directors breached his or her duties to CAG in approving the Backstop Dividend and causing or permitting CAG to pay the Backstop Dividend.

27    Although the plaintiffs allege that at no time did CAG reverse or cancel the 2015 Dividend or the Backstop Dividend, those allegations are admitted. Further, the allegations relate to causation of loss, not breach of duty or law.

28    Having regard to the pleaded allegations, I consider an appropriate category of documents to be as follows:

All Documents created in the period 1 January 2015 to 25 May 2017 relating or otherwise referring to:

(a)    the 2015 Dividend;

(b)    the May 2016 Dividend;

(c)    the Backstop Dividend;

(d)    the Backstop Agreement; or

(e)    the purpose(s) of the payment of the 2015 Dividend and the Backstop Dividend to the shareholders of CAG; and

(f)    the use(s) by Cirrus of the funds distributed by CAG by the 2015 Dividend and the Backstop Dividend.

29    I consider it appropriate to confine the category by the date range of 1 January 2015 to 25 May 2017. The alternative would be to remove the date range altogether, as the document category is otherwise defined by the enumerated events. However, I consider that including a date range is likely to assist the parties in confining any necessary documentary searches and reduce disputation. While the end date of 25 May 2017 is a considerable period after the payment of the Backstop Dividend, relevant documents may have been created in that period and the period is not excessive.

Category 8 of the discovery sought from the defendants

30    Category 8 of the discovery sought from the defendants by the plaintiffs is in the following terms:

To the extent not already disclosed, all Documents (including drafts) sent or dated in the period 1 July 2015 to 25 May 2017 by or on behalf of Cirrus, the Shareholder Defendants, and/or any Related Entity of the Shareholder Defendants, to any of their respective shareholders and/or investors relating or otherwise referring to any of the Plaintiff Companies.

31    The White Cloud defendants and the BXR defendants submitted that the plaintiffs’ category 8 is too broad and is unjustified by the pleaded allegations in dispute. They submitted that, as framed, the category would capture every document sent to any shareholder or investor of Cirrus, White Cloud, BXR or any related entity which relates, or makes a passing reference, to CAG or any entity in the CAG Group, irrespective of the relevance or otherwise of those documents to the real issues in dispute.

32    The BXR defendants submitted that category 8 should be deleted. The White Cloud defendants supported that submission. In the alternative, they proposed that the category be reformulated as follows:

To the extent not already disclosed, all Documents (including drafts) sent or dated in the period 1 July 2015 to 25 May 2017 by or on behalf of Cirrus, the Shareholder Defendants, and/or any Related Entity of the Shareholder Defendants, to any of their respective shareholders and/or investors relating or otherwise referring to:

(a)    the 2015 Dividend, the May 2016 Dividend or the Backstop Dividend;

(b)    any permanent or temporary VFH Licence, VSL Licence or TEQSA Licence held by the Plaintiff Companies;

(c)    projections regarding the enrolment of students by the Plaintiff Companies;

(d)    the impact of any legislative reforms to the VFH Scheme, the VSL Scheme or the Higher Education Scheme; or

(e)    the financial status of the Group.

33    The plaintiffs submitted that the documents covered by proposed category 8 are relevant to a range of issues in dispute including:

(a)    the knowledge and awareness of the non-executive directors as to the financial position of the Group over the duration of the period;

(b)    the steps undertaken by the non-executive directors to monitor the financial position of the Group over the duration of the period;

(c)    the non-executive directors’ reliance upon information provided by management over the duration of the period; and/or

(d)    the reasonable reliance of the non-executive directors on continued support by banks, a possible divestment of the business or part of the business and other issues as a basis to believe that the Group would remain solvent.

34    The plaintiffs further submitted that, regardless of whether investor communications specifically address matters such as the 2015 Dividend or financial support of the Group, the content of communications made by Cirrus, the shareholder defendants or their related entities to shareholders and investors regarding the plaintiff companies (including the absence of information being provided or steps being taken in respect of certain matters) will be relevant to these matters at issue in the proceeding.

35    I accept the submissions of the defendants to the effect that the plaintiffs’ proposed category 8 is too broad. As framed, it is a category that “sweeps up” all investor communications that refer to the plaintiffs’ companies in the hope that something relevant may turn up. As such, it is not a category that meets the relevance requirements of r 20.14(1). If and to the extent the plaintiffs seek discovery of documents relevant to the knowledge and awareness of the non-executive directors as to the financial position of the Group during the relevant period, a category of documents directed to that issue should have been framed. A number of categories of discovery would appear to touch on that issue in any event.

36    It is not the role of the Court to draft or redraft categories of discovery for any of the parties, particularly in circumstances where the parties have formulated detailed categories at the conclusion of lengthy discussions. In my view, the plaintiffs’ proposed category 8 cannot be justified as an appropriate category directed at relevant documents, and should therefore be rejected.

Conclusion

37    In conclusion, I will order discovery largely in the form agreed between the parties. The two variations are that, in respect of the discovery sought from the defendants by the plaintiffs, I will narrow the scope of category 1 and I will delete category 8.

38    The parties have adopted a cooperative approach to the issue of discovery with the area of dispute being narrow. Each of the parties has also enjoyed a measure of success on the area of dispute. In the circumstances, it is appropriate that costs be in the cause.

Assoiate:

Dated:    21 December 2022

SCHEDULE OF PARTIES