Case: Paxus Services Ltd v People Bank Pty Ltd (1990) 99 ALR 728
Outcome: cited
The main issue that was argued before me was whether, within the meaning of O 15A r 6, there is reasonable cause to believe that the respondents may have the right to obtain relief from KPMG. On this question, some preliminary observations can be made: &#8226; It is necessary to examine the various elements of the potential cause of action that is sought to be relied upon to determine whether there is reasonable cause to believe that each of the necessary elements exist. That task requires the Court to conclude at least that there is a reasonable cause to believe that each of the elements of the relevant cause of action might be established. The test is an objective one, and it is not necessary to prove that each of the elements do in fact exist. The rule contemplates that there be reasonable cause to believe that the respondents may have a right to obtain relief: see Austrac Operations Pty Ltd v New South Wales [2003] ATPR 41-960 at [11] and Leighton Contractors Pty Ltd v Page Kirkland Management Pty Ltd [2006] FCA 288 at [5] . &#8226; If the cause of action on which an application for preliminary discovery is based could not succeed, is bound to fail, is ill-founded or is doomed to fail, then discovery ought not be ordered: Bradley v Eagle Star Insurance Co Ltd [1989] 1 All ER 961 at 963 to 964; Harris v Newcastle-upon-Tyne Health Authority [1989] 2 All ER 273 at 277. If the potential cause of action would not survive an application for summary judgment pursuant to s 31A of the Federal Court of Australia Act 1976 ('Federal Court Act'), then discovery ought not to be ordered. &#8226; "Belief" under O 15A r 6 requires more than mere assertion, a "hunch", conjecture or suspicion. Belief is an inclination of the mind towards assenting to, rather than rejecting, a proposition: see: John Holland Services Pty Ltd v Terranora Group Management Pty Ltd [2004] FCA 679 at [13] to [14]; St George Bank Ltd v Rabo Australia Ltd (2004) 211 ALR 147 at 154. &#8226; The availability of preliminary discovery under O 15A r 6 depends upon the evidence before the Court. . The evidence must incline the mind towards the matter of fact in question: see Austrac Operations [2003] ATPR at [37]; John Holland Services [2004] FCA at [13] to [14], [17] and [73] and St George v Rabo 211 ALR at 154. &#8226; The rule is one which should be construed beneficially. In Paxus Services Ltd v People Bank Pty Ltd (1990) 99 ALR 728 at 733 Burchett J said: It is no answer to the applicant's application under r 6 to say that the proceeding is in the nature of a fishing expedition: cf Meth v Norbert Steinhardt &amp; Son Ltd (1959) 33 ALJR 78 at 81. Rule 6 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 -- that is, to "fish" in the old sense... It would be unfortunate if a rule designed to amplify the court's power to penetrate obscurities and uncertainties in the interests of justice were to be weakened by restrictive and unnecessary glosses. I think the rule is of a beneficial kind within the meaning of the well known principle of interpretation, and should be given the fullest scope its language will reasonably allow. The proper brake on any excesses in its use is the discretion of the court, which is required to be exercised in the particular circumstances of each case. See also CGU Insurance Ltd v Malaysia International Shipping Corporation Berhad (2001) 187 ALR 279 at [23] per Tamberlin J. 77 The respondents relied upon a report of John Stewart of BDO Kendalls dated 19 April 2007 in an endeavor to demonstrate breach (and causation). I appreciate that no evidence has been adduced by KPMG and inferences may be drawn from a failure to call evidence in the appropriate case (see Paxus Services 99 ALR at 732 to 733), but this does not excuse the respondents from demonstrating that there is a reasonable cause to believe there may be an entitlement to relief. 78 Mr Stewart set out the following matters he was asked to address: &#8226; "My opinion as to whether there is, on a prima facie basis, reason to think that the financial reports of [York Street] and [Market Street] for the periods ended 31 December 2002, 30 June 2003, 31 December 2003 and 30 June 2004 ("enclosed financial reports") do not disclose a true and fair view of the financial position of [York Street] and [Market Street] " ; &#8226; "If I determine that, on a prima facie basis, there are reasons to believe the financial reports of [York Street] and [Market Street] do not disclose a true and fair view of the financial position of what audit issues, in my opinion, appear relevant in considering the financial position of the companies: for instance, is there an issue as to whether the balance sheets of [York Street] and [Market Street] should have included a provision for doubt as to the recoverability of the loans to, respectively, Scots Church Development Ltd and 60 Market Street Trust" ; and &#8226; "Advice as to what KPMG documents I would require access to, to enable me to provide an expert opinion as to whether or not the KPMG audits of the financial reports of [York Street] and [Market Street] were carried out with due skill and care for each of the years ended 30 June 2002, 30 June 2003 and 30 June 2004". 79 In the report, Mr Stewart: (a) examined the reports to creditors prepared by the liquidators of York Street and Market Street; (b) looked at York Street's financial reports for the year ended 30 June 2003; and (c) looked at Market Street's financial reports for the periods ending 31 December 2002, 30 June 2003, 31 December 2003 and 30 June 2004. 103 Ultimately, the question of whether discovery should be ordered is a matter involving the exercise of judicial discretion. The discretion is to be exercised having regard to the particular circumstances of each case: see Paxus Services 99 ALR at 733 to 734; Minister for Health and Aged Care v Harrington Associates Ltd [1999] FCA 549 at [27] .