Case: St George Bank Ltd v Rabo Australia Ltd [2004] FCA 1360 ; (2004) 211 ALR 147
Outcome: followed
it is common ground between the parties that the principles articulated by Hely J in St George Bank Ltd v Rabo Australia Ltd [2004] FCA 1360 ; (2004) 211 ALR 147 with respect to the operation of O 15A r 6 are applicable in these proceedings. These principles are as follows: (a) The rule is to be beneficially construed, given the fullest scope that its language will reasonably allow, with the proper brake on any excesses lying in the discretion of the Court, exercised in the particular circumstances of each case; (b) each of the elements prescribed in subparas (a), (b) and (c) of the rule must be established. Preliminary discovery cannot itself be used to remedy deficiencies in the satisfaction of the conditions themselves; (c) the test for determining whether the applicant has "reasonable cause to believe", as required by subpara (a), is an objective one. Further, the words "or may have" cannot be ignored. The applicant does not have to make out a prima facie case; (d) belief requires more than mere assertion and more than suspicion or conjecture. Belief is an inclination of the mind towards assenting to, rather than rejecting a proposition. Thus it is not sufficient to point to a mere possibility. The evidence must incline the mind towards the matter or fact in question. If there is no reasonable cause to believe that one of the necessary elements of a potential cause of action exists, that would dispose of the application insofar as it is based on that cause of action; (e) whilst uncertainty as to only one element of a cause of action might be compatible with the "reasonable cause to believe" required by subpara (a), uncertainty as to a number of such elements may be sufficient to undermine the reasonableness of the cause to believe; (f) the question posed by subpara (b) of the rule is not whether the applicant has sufficient information to decide if a cause of action is available against the prospective respondent. The question is whether the applicant has sufficient information to make a decision whether to commence proceedings in the Court. Accordingly, an applicant for preliminary discovery may be entitled to discovery in order to determine what defences are available to the respondent and the possible strength of those defences, or to determine the extent of the respondent's breach and the likely quantum of any damages award; (g) whether an applicant has "sufficient information" for the purposes of subpara (b) also requires an objective assessment to be made. The subparagraph contemplates that the applicant is lacking a piece (or pieces) of information reasonably necessary to decide whether to commence proceedings; (h) it is no answer to an application under the rule to say that the proceeding is in the nature of a "fishing expedition". Indeed O 15A r 6 "expressly contemplates" what once might have been castigated as "fishing". As Burchett J commented in Paxus Services Ltd v People Bank Pty Ltd [1990] FCA 500 ; (1990) 99 ALR 728 at 733, the rule is: ... designed to enable an applicant, in a situation where his proof can rise no higher than the level the rule describes, to ascertain whether he has a case against the prospective respondent ... The applicant's case invoking the jurisdiction of the Court pursuant to O 15A r 6 is not assisted by a number of difficulties in respect of its claim. So: As became clear during Mr Ashton's submissions, the applicant's historical trading, profit and loss figures for 2007, found at p 151 of Mr Roetger's affidavit, and contrasted by Counsel for the applicant in his submissions with the earlier 2006 financial information, actually represented figures for only half of the 2007 financial year. The only explanation given by Counsel for the applicant for this error was that perhaps he had not analysed the 2007 figures as accurately as he could have, but that in any event turnover for that period still appeared to be less than $2 million whereas representations had been made by Mr Cartan and Ms Cooley that the turnover should be $3 million (TS p 40 ll 19-20). However: in my view this inaccuracy in analysis of the applicant's trading position goes to the loss claimed by the applicant, and whether the applicant actually apprehends the basis of its potential claim (if any) against the respondents. Indeed Mr Roetger in his affidavit deposes that: I strongly believe that the 2006 financial records as provided to me and upon which I relied in causing the applicant company to enter into the subject series of transactions, are incorrect. Given the fact that the subject business was carried on by the same people including management under virtually the same conditions, and returned a gross income of only $818,986 for the 2007 year , resulting in a $368,360 trading loss, the only explanation that I believe exists is that the 2006 accounts were incorrect and wrong. (para 41) In light of Mr Ashton's submission as to the 2007 accounts annexed to Mr Roetger's affidavit I can ascribe no value to this statement with respect to O 15A r 6. this in turn raises the question whether, objectively, there is reasonable cause to believe that the applicant has or may have the right to obtain relief in this Court from the respondents or any of them; in any event, as submitted by Mr Ashton, there appears confusion in the applicant's submissions in relation to the financial statements of the applicant between the level of turnover of the applicant and its profit and loss position, which again goes to the issue of whether, objectively, there is reasonable cause to believe that the applicant has or may have the right to obtain relief. Evidence upon which the applicant relies as a basis for its belief that false representations were made to the applicant with respect to the 2006 figures appeared confined to Mr Roetger's "investigations" (affidavit of Carl Roetger para 22). Without more substance, the unexplained investigations of a director of the applicant are not "evidence (which) must incline the mind towards the matter or fact in question" as explained by Hely J in St George Bank [2004] FCA 1360 ; (2004) 211 ALR 147. To the extent that the applicant claims that the balance sheet and profit and loss statement for the first respondent as supplied to him by the third and fourth respondents (exhibited to Mr Roetger's affidavit at CER-16 and found on pp 206-210 of the affidavit) were false, I note that those documents are nonetheless identical to the balance sheet and profit and loss statement of the first respondent in the records of Mr Walsh and annexed to Mr Walsh's affidavit as JW2 (Mr Walsh's affidavit pp 39-43). While this correspondence of documentation is by no means conclusive in the absence of a substantive hearing, it reflects upon the applicant's claim that there is reasonable cause to believe that the applicant may have a right to relief in respect of falsified accounts supplied by Mr Cartan and Ms Cooley . Evidence produced by the respondents demonstrated that Mr Walsh had in fact provided a number of documents requested by the applicant. More specifically, evidence before the Court demonstrated that Mr Walsh: advised the applicant that his firm did not hold any relevant original documentation in his office, but that he could provide the applicant with electronic copies of Financial Statements and Income Tax Returns upon request (exhibit CER-13 affidavit of Carl Roetger sworn 2 July 2009); and sent by letter of 4 December 2009 to the applicant's solicitors a letter enclosing the Financial Statements and Income Tax Return for the year ended 30 June 2007 for the first respondent and Mr Cartan (exhibit JW3 affidavit of Joe Walsh sworn 22 July 2009). I note in any event that copies of the first respondent's financial statements and tax returns for the years ended 30 June 2005 and 30 June 2006 are annexed to Mr Walsh's affidavit sworn 22 July 2009. In my view these difficulties undermine the applicant's claim such that the jurisdiction of the Court with respect to O 15A r 6 is not invoked. I am conscious of the beneficial construction the courts place on O 15A r 6, the fact that the applicant is not required to establish a prima facie case, and the fact that in this case the applicant claims that it has suffered significant losses in respect of the business it acquired from the respondents and for which it has paid "good money" (TS p 17 l 28). Further, I note that, notwithstanding the provision by Mr Walsh in his affidavit of the 2005 and 2006 financial statements of the first respondent, Mr Walsh did so notwithstanding apparent instructions from Mr Cartan that no material beyond the 2007 financial statements be provided to the applicant (affidavit of Joe Walsh para 16). However as found in St George Bank [2004] FCA 1360 ; (2004) 211 ALR 147 , confirmed by the Full Court more recently in Echo Tasmania Pty Ltd v Imperial Chemical Industries PLC [2008] FCAFC 58 at [43] and Apache Northwest Pty Ltd v Newcrest Mining Ltd [2009] FCAFC 39 at [2] and [26], each of the elements prescribed in subparas (a), (b) and (c) of the rule must be established. In light of: inadequacies and inconsistencies I have noted in the evidence advanced by the applicant supporting the existence of a cause of action; and the applicant's incorrect analysis of the 2007 trading, profit and loss figures. I am not satisfied that the applicant has demonstrated, on an objective basis, reasonable cause to believe that it has or may have the right to obtain relief in the Court from the respondents or any of them for the purposes of O 15A r 6(a). As stated by Hely J in St George Bank [2004] FCA 1360 ; (2004) 211 ALR 147 , preliminary discovery cannot itself be used to remedy deficiencies in the satisfaction of the conditions themselves. The applicant cannot substitute the application before the Court in which it seeks preliminary discovery from the first, second, third and fourth respondents, for the need to make all reasonable inquiries in accordance with O 15A r 6 and which may entail making inquiries of those same respondents prior to bringing that application. It follows that I am not prepared to make an order pursuant to O 15A r 6 in terms sought by the applicant. Freezing order The applicant seeks a freezing order against the fourth respondent only, pursuant to O 25A r 2 of the Federal Court Rules which provides: 2(1) The Court may make an order (a freezing order ), upon or without notice to a respondent, for the purpose of preventing the frustration or inhibition of the Court's process by seeking to meet a danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied. 2(2) A freezing order may be an order restraining a respondent from removing any assets located in or outside Australia or from disposing of, dealing with, or diminishing the value of, those assets.