The rules of court – federally and in the states – provide for pre-litigation disclosure: see Federal Court Rules, Order 15A, rr 6, 7 and 9; Uniform Civil Procedure Rules (NSW) r 5.3; Uniform Civil Procedure Rules (Qld) Part 1 of Chapter 7.
Two recent decisions of the Trial Division in New South Wales and Queensland warrant attention, in that they address the calculus for such a disclosure order.
In Muscat v Qin [2024] NSWSC 113 (15 February 2024), McGrath J wrote:
INTRODUCTION
[1] By summons filed 3 February 2023, the prospective plaintiff, Andrew Muscat, seeks an order pursuant to r 5.3 of the Uniform Civil Procedure Rules 2005 (NSW) (UCPR) that the prospective defendants, Yuxin Qin (who also goes by the first name of Bill) and TA Tools Pty Ltd (formerly known as TaeguTec Tools Pty Ltd), give discovery of all documents or things which are or have been in their possession, custody or power within particular categories of documents.
[2] In common legal parlance, such an application is known as an application for preliminary discovery.
[3] In the summons, Mr Muscat sought preliminary discovery from Mr Qin and TA Tools of six categories of documents but, by the time of the hearing, 2 of those categories (categories 1 and 4) had been abandoned and an amendment made to one of the categories (category 2), such that the remaining 4 categories are in the following form:
(1) all bank accounts in which were recorded transactions to do with [TA Tools] recording all withdrawals, deposits, loans or records of interest between 1 January 2021 and 31 August 2022, although only the production of bank statements in print or soft copy were sought in answer to this category (amended category 2);
(2) all records to do with [TA Tools] made in the “GALFIN” software program between 1 January 2017 and 31 August 2022 (category 3);
(3) all communications which refer to [TA Tools] with the Australian Tax Office (ATO) between 1 January 2017 and 31 August 2022 (category 5); and
(4) all records of payments by or on behalf of [TA Tools] to any superannuation fund between 1 January 2017 and 31 August 2022 (category 6).
[4] In the summons, Mr Muscat also seeks a number of ancillary orders, the making of all of which depend on the outcome of the application for preliminary discovery. Amongst those orders is an order that Mr Muscat be at liberty to use the documents disclosed by Mr Qin and TA Tools in compliance with preliminary discovery for the purposes of commencing proceedings against Mr Qin and TA Tools in this court or any other court.
[5] Mr Qin and TA Tools both oppose the application for preliminary discovery.
[6] The application for preliminary discovery was made more than 6 months after the consensual resolution of a significant dispute between Mr Qin and Mr Muscat concerning their then equal 50% respective shareholdings and directorships in TA Tools which had resulted in proceedings in this court.
[7] On 14 July 2022, Mr Qin commenced those previous proceedings against Mr Muscat by filing an originating process seeking orders pursuant to ss 232 and 233 of the Corporations Act 2001 (Cth) for the forced sale of Mr Muscat’s shares in TA Tools to Mr Qin due to the deadlock in the management and affairs of TA Tools (Previous Proceedings).
[8] On 5 August 2022, Mr Muscat filed an interlocutory process in the Previous Proceedings also making an application under ss 232 and 233 of the Corporations Act for the forced sale of Mr Qin’s shares in TA Tools to Mr Muscat on the same deadlock basis.
[9] On 23 August 2022, the Previous Proceedings were settled on terms that Mr Muscat sold his shares in TA Tools to Mr Qin for an agreed price, resigned as a director and an employee of TA Tools and the Previous Proceedings were dismissed on 6 October 2022 with each party paying their own costs. As a result, Mr Qin now owns all of the shares of TA Tools and Mr Muscat has no further ownership or involvement in it. The precise terms of the settlement are dealt with in more detail below.
[10] The Previous Proceedings followed a relatively short history of very significant, increasing and voluminous acrimony that developed between Mr Qin and Mr Muscat from mid-2022 over every aspect of the business, whether major or minor.
[11] In the events leading up to the Previous Proceedings and during them, Mr Qin was represented by Dina Tadros of DINA Lawyers and Mr Muscat was represented by Chris McArdle of McArdle Lawyers. At many times, the communications passing between Ms Tadros and Mr McArdle were as terse in their content and tone as that of their respective clients towards each other, although it is clear that on several occasions both clients refused to adhere to sensible advice from their respective solicitors which would have reduced the level of disputation between them.
…
LEGAL PRINCIPLES
[18] Rule 5.3(1) of the UCPR is in the following form:
5.3 Discovery of documents from prospective defendant(cf Federal Court Rules, Order 15A, rules 6, 7 and 9)
(1) If it appears to the court that —
(a) the applicant may be entitled to make a claim for relief from the court against a person (the prospective defendant) but, having made reasonable inquiries, is unable to obtain sufficient information to decide whether or not to commence proceedings against the prospective defendant, and
(b) the prospective defendant may have or have had possession of a document or thing that can assist in determining whether or not the applicant is entitled to make such a claim for relief, and
(c) inspection of such a document would assist the applicant to make the decision concerned,
the court may order that the prospective defendant must give discovery to the applicant of all documents that are or have been in the person’s possession and that relate to the question of whether or not the applicant is entitled to make a claim for relief.
[19] Rule 5.3 of the UCPR has been the subject of considered analysis and application by judges at first instance and in the Court of Appeal of this court, including with reference to the counterpart Federal Court rule (although that jurisprudence pertains to the counterpart Federal Court rule as it existed prior to 13 January 2023, at which time it was amended).
[20] As stated in O’Connor v O’Connor [2018] NSWCA 214 by Simpson AJA (McColl and Macfarlan JJA agreeing) at [21], r 5.3(1) comprises multiple elements which the applicant for such an order must demonstrate, namely that:
(1) the applicant may be entitled to make a claim for relief from the court against the prospective defendant;
(2) the applicant has made reasonable enquiries to obtain sufficient information to decide whether or not to commence proceedings;
(3) having made reasonable enquiries, the applicant is unable to obtain sufficient information to make the decision whether or not to commence proceedings;
(4) the prospective defendant may have or have had possession of a document or thing that could assist in determining whether the applicant is entitled to make a claim for relief; and
(5) inspection of such a document would assist the applicant to make the decision whether or not to commence proceedings.
[21] The following principles applicable to the operation of r 5.3 have emerged from the authorities and concern the operation of the rule generally as well as each of its constituent elements:
(1) A literal reading of r 5.3 produces a difficulty in construction which is to be resolved by taking a beneficial and broad view of the operation of the section: Globe Capital Administration Pty Ltd v Cecil Developments Pty Ltd atf the Cecil Developments Unit Trust (Receivers and Managers appointed) [2023] NSWSC 574 , Slattery J at [34] citing O’Connor at [86]–[90].
(2) To order preliminary discovery against a prospective defendant, all five circumstances set out in r 5.3(1) must exist: Tabcorp Holdings Ltd v Entain Group Pty Ltd [2023] NSWSC 220 , Stevenson J at [35]; O’Connor at [21]; Globe Capital at [33] citing O’Connor at [21] and Tabcorp at [35].
(3) The court has recently emphasised that the threshold requirements set out in r 5.3 are low — it must appear to the court that an applicant may be entitled to make a claim for relief, and that a prospective defendant may have or have had possession of relevant documents or things, and that inspection would assist the applicant to decide whether to commence proceedings: O’Connor at [23]; Racing New South Wales v Racing Victoria Ltd (No 2) [2023] NSWSC 576 , Ball J at [30] citing Simpson AJA in O’Connor at [23]; Label Manufacturers Australia Pty Ltd v Chatzopoulos [2023] NSWSC 646 , Weinstein J at [18] citing O’Connor at [23]). Indeed, Simpson AJA in O’Connor at [69] referred to the comments of Allsop CJ in Pfizer Ireland Pharmaceuticals v Samsung Bioepis AU Pty Ltd (2017) 257 FCR 62; [2017] FCAFC 193at [2] , where his Honour criticised a practice of treating applications for preliminary discovery (under the Federal Court rule) as “a form of mini trial where a form of fact finding takes place, well beyond the mandate of the words of the rule.” In O’Connor at [76], Simpson AJA specifically stated that:
It is well established that determination of an application under r 5.3 does not involve a determination of the merits of any claim for relief the applicant might propound.
(4) This was applied in Label Manufacturers by Weinstein J at [21] and emphasised in Arnaout v Arnaout [2019] NSWSC 565 , Lindsay J at [32(e)] stating:
Given the interlocutory character of an application for preliminary discovery, the Court should not lightly conclude that an application should be dismissed as not supporting a conclusion that the applicant “may have been entitled to make a claim for relief”.
(5) Rule 5.3 uses the expression “it must appear to the court” and the previous form of its Federal Court counterpart (rule 6) used the expression “there is reasonable cause to believe” (the new Federal Court rule in rule 7.23 now requiring the prospective applicant to demonstrate that it “reasonably believes”). They are not identical, and the test in r 5.3 may be wider than the test in the previous Federal Court rule and impose a lower threshold: Panasonic Australia Pty Ltd v Ngage Pty Ltd [2006] NSWSC 399; 69 IPR 595 , Young CJ in Eq at [22]; Hatfield v TCN Channel 9 Pty Ltd (2010) 77 NSWLR 506; [2010] NSWCA 69 , McColl JA at [50]; O’Connor at [24] and [28]. Notwithstanding these differences, the propositions stated in St George Bank Ltd v Rabo Australia Ltd [2004] FCA 1360; 211 ALR 147 at [26] about the operation of the previous form of the Federal Court rule are equally applicable to the operation of r 5.3: Steffen v ANZ Banking Group [2009] NSWSC 666 , McDougall J at [19]–[20]; O’Connor at [26]. In my view, rule 5.3 also imposes a lower threshold than the new form of the counterpart Federal Court rule.
(6) The first element — the applicant may be entitled to make a claim for relief from the court against the prospective defendant. It is not necessary for the applicant to show even a prima facie or pleadable case for relief. While “the mere assertion of a case is insufficient”, it will be sufficient if it “appears to the court” that the applicant may have a right of action against the respondent resting on some recognised legal ground. More than mere assertion and more than suspicion or conjecture is required. While the applicant is not required to specify with precision the cause of action proposed, the applicant must provide some particularisation of the nature of the relief in contemplation beyond mere assertion, suspicion or conjecture. The use of the word “may” indicates that the court does not have to reach a firm view that there is a right to relief and that the rule is to be beneficially construed, that is, given the fullest scope that its language will reasonably allow: St George Bank at [26(a), (d)]; Panasonic at [20]; Morton v Nylex Ltd [2007] NSWSC 562 , White J at [25]; Hatfield at [47]–[49]; O’Connor at [23], [27], [30]; RGA Reinsurance Company of Australia Ltd v Westpac Life Insurance Services Ltd [2020] NSWSC 1299 , Stevenson J at [110]; Tabcorp at [37].
(7) In Racing New South Wales at [35]–[36], Ball J observed the following in relation to the operation of UCPR r 5.3(1)(a):
35 Two points should be made about these last two decisions. First, I do not read White J’s judgment in Morton v Nylex Ltd as saying that the test imposed by UCPR r 5.3(1)(a) is a purely objective test. It is the plaintiff who makes the decision whether to commence proceedings and it is for the plaintiff to identify the claim for relief it is considering bringing and the additional information it says it needs to decide whether to bring those proceedings. The question for the Court is whether there is a reasonable basis for thinking that the plaintiff may be entitled to make a claim for relief of that type and, if so, whether the information the plaintiff says it lacks is reasonably necessary to make a decision on whether to bring such a claim.
36 Second, the question is whether objectively the plaintiff has sufficient information to bring proceedings, not whether it has sufficient information to plead a particular cause of action. Often, the answer to the first question will follow from the answer to the second. But it need not. To the extent that the plaintiffs made a concession in Tabcorp to the contrary, in my opinion that concession was wrongly made. I return to this point below.
(8) The second element — the applicant has made reasonable enquiries to obtain sufficient information to decide whether or not to commence proceedings. What amounts to “reasonable enquiries” is a question of fact to be determined having regard to all the relevant circumstances of the particular case and it does not follow from the mere fact that further enquiries could have been made, and would have been helpful, that the omission to make those inquiries is a failure to make reasonable enquiries. The applicant must place before the court “all of the evidence already available to it relevant to the sufficiency of the information it possesses to enable a decision to be made whether to commence the proceeding. The applicant must not hold back information”: Glencore International AG v Selwyn Mine Ltd [2005] FCA 801; 223 ALR 238 , Lindgren J at [15]. The court is entitled to take into account the relationship (if any) between the applicant and the prospective defendant and whether there are other means of obtaining the information. The cost, delay and utility or uncertainty of resorting to those alternative means is also relevant. The question is whether objectively the applicant has sufficient information to decide whether to commence proceedings, not whether or not it has an apparently arguable case to commence proceedings, or whether the applicant has sufficient information to plead a particular cause or action, or whether the respondents have documents which may assist to build up a case which the applicant could now decide to bring: Papaconstuntinos v Holmes a Court [2006] NSWSC 945 , Simpson J at [16]–[17]; Morton at [33]; Steffen at [15], [87]; Hatfield at [51], [165]; O’Connor at [76], [90]; Arnaout at [32(h)]; The Pharmacy Guild of Australia v Ramsay Health Care Ltd [2019] NSWSC 1045 , Ward CJ in Eq at [251]; RGA Reinsurance at [114]; Tabcorp at [41]–[42]; Racing New South Wales at [32], [36]–[37].
(9) The third element — having made reasonable enquiries, the applicant is unable to obtain sufficient information to make the decision whether or not to commence proceedings. An applicant must show that they are “lacking something reasonably necessary to make a decision whether to institute proceedings”: Morton at [33]. The test is objective but not purely so, requiring the applicant to disclose what information they already have relevant to making such a decision, to identify what information is lacking and to give clear evidence as to “the ways the information they have gleaned is insufficient to enable them to decide whether or not to commence proceedings”: Rinehart v Rinehart [2015] NSWSC 1201; 108 ACSR 415 , White J at [94]. Meeting the test does not rest merely in the assertion of the applicant or their legal adviser. Pre-action correspondence and notices of claim are significant for the purposes of such an inquiry. The question permits some consideration of the apparent strength or weakness of the applicant’s case yet does not involve a determination of the merits of any claim for relief an applicant might propound. Hence, an applicant may be entitled to preliminary discovery of documents relevant to available defences, or the extent of apprehended breaches, or the likely quantum of damages, as well as of documents which may establish whether there is a cause of action, but a potential claim that is so weak as to be untenable or unarguable will not suffice: St George at [26(f)]; Morton at [33]–[34]; Kevin Young v The Neil Jenman Group Pty Ltd [2015] NSWSC 1908 , Hidden J at [33]; B & J Hudghton Investments Pty Ltd as trustee for the B & J Hudghton Family Trust v Lakeba Group Ltd [2022] NSWSC 830 , Rees J at [23]; O’Connor at [70].
[22] In BGC Securities (Australia) Pty Ltd v Shillington [2022] NSWSC 611 , Henry J stated at [41] (citations omitted):
The evaluation of whether it appears that the applicant may have a claim for relief is different to the question of whether the applicant is unable to obtain sufficient information to decide whether or not to commence proceedings. The consideration of whether the applicant has “sufficient information” contemplates that an applicant lacks a piece of information which is “reasonably necessary” to decide whether to commence proceedings. Information bearing upon that practical decision may include questions such as whether defences exist, the strength of any such defences and the quantum of a claim.
(1) The fourth element — the prospective defendant may have or have had possession of a document or thing that could assist in determining whether the applicant is entitled to make a claim for relief. It is no answer to an application under r 5.3 to say that the proceeding is in the nature of a “fishing expedition” as it expressly contemplates what might once have been castigated as fishing. That said, r 5.3 is not to be used for conducting a wide-ranging fishing expedition: St George Bank at [26(h)]; B & J Hudghton at [22].
(2) In Beston Parks Management Pty Ltd v Sexton [2008] VSC 392 , Hollingworth J at [53] said in relation to rule 32.05 of the Supreme Court (General Civil Procedure) Rules 2015 (VIC), which is in substantially similar terms to rule 5.3:
Although some “fishing” enquiry is permitted, a “flimsy foundation” or “mere hunch” will not be sufficient to constitute reasonable cause.
(3) In Victorian Taxi Families Inc v Taxi Services Commission (2018) 61 VR 91; [2018] VSC 594 , Derham AsJ at [71] outlined the principles relevant to the equivalent of the fourth element as follows (citations omitted):
(a) “possession” means “possession, custody or power”;
(b) there must be a reasonable cause to believe that the respondent “has or is likely to have or has had or is likely to have had in that person’s possession any document relating to the question whether the applicant has the right to obtain the relief”. This requires the identification of documents that relate to the question whether the applicant has the right to obtain the relief; and
(c) that inspection of the document by the applicant would assist the applicant to make the decision. This involves consideration of what the applicant lacks and what is reasonably necessary for it to make a decision regarding whether to institute proceedings. That involves consideration of what the applicant has to advance its right to relief.
(4) The fifth element — inspection of such a document would assist the applicant to make the decision whether or not to commence proceedings. Preliminary discovery cannot be used to build up a case which an applicant has already decided, or could decide to bring: Morton at [33]; SMBC Leasing and Finance, Inc v Flexirent Capital Pty Ltd [2022] FCA 1393 , Lee J at [4]. Similarly, a party who has already asserted an entitlement to commence substantive proceedings could not sustain an application for preliminary discovery under this rule: Contour Building and Construction Pty Ltd v Kerr [2008] NSWSC 883 , Barrett J at [10]–[14].
(5) Finally, if each of the five elements are satisfied, the court has a discretion whether or not to order the respondents to provide discovery of the documents in question, which is to be exercised judicially and with regard to the case management provisions of the Civil Procedure Act 2005 (NSW) and the UCPR. In the exercise of this discretion, the applicant’s prospects of success can be relevant and the discretion operates as a brake on any excesses that may flow from a beneficial construction of the rule, meaning that the court may refuse to grant an order even where all the factors referred to in UCPR r 5.3 are satisfied. Courts regularly decline to exercise such discretion in cases where the grant of discovery would be disproportionate to the relevance of the documents and the potential benefit obtained by the plaintiffs: St George Bank at [26(a)]; Hatfield at [52], [165]; O’Connor at [24]–[29]; B & J Hudghton at [19]; RGA Reinsurance at [107]; Arnaout at [32(j)]; BGC Securities at [44].
…
DETERMINATION
[444] For the reasons set out below, I have determined that Mr Muscat should fail in his application for preliminary discovery. In essence, Mr Muscat has comprehensively failed to meet the onus upon him to prove multiple parts of the elements that are required to be demonstrated by an applicant for an order under r 5.3 of the UCPR.
[445] I have addressed all of those elements below.
[446] Addressing the first element in r 5.3 (that the applicant may be entitled to make a claim for relief from the court against the prospective defendant), Mr Muscat has objectively failed to identify any claim for relief he may be entitled to make against TA Tools. For that reason alone, his application against TA Tools must fail.
[447] In relation to Mr Qin, nothing put forward by Mr Muscat demonstrates anything other than assertion, suspicion or conjecture that Mr Muscat may be entitled to make a claim for relief from the court against Mr Qin. While it is recognised that r 5.3 fixes a low threshold, Mr Muscat is well below even that low threshold.
[448] Mr Muscat merely asserts that he has potential claims for breaches of the Corporations Act, the Shareholder Agreement, contract and fiduciary duties without in any way grappling with how any of those potential claims might be available to him for relief against Mr Qin. Any obligations owed by Mr Qin under the Corporations Act or by virtue of his fiduciary duties as a director of TA Tools were not owed to Mr Muscat — they were owed to TA Tools. They cannot be brought at the behest of Mr Muscat, who is neither a director nor even a shareholder of TA Tools.
[449] Any entitlement to any claim for relief against Mr Qin asserted to be based on breaches of the Shareholder Agreement is also one which is bound to fail, principally because all of the “financials” said to have been kept from Mr Muscat were in fact provided to him.
[450] This is particularly the case in relation to the categories of documents he seeks in this preliminary discovery application, being the bank statements to which he had continual access over the entire time he was a shareholder of TA Tools, full access to GALFIN (which he had for more than 2 months from 27 June 2022), full access to the ATO portal (which he had for more than 2 months from 20 June 2022), and the payroll analysis report for January 2017 to July 2022 (which he was provided with on 3 August 2022). In addition, he was given complete access to the physical documents held at the offices of TA Tools on 22 July 2022 and he chose to stay for only three hours. Throughout all of these endeavours, Mr Muscat had the assistance of Mr Corra, who was able to assist him as a former employee of TA Tools.
[451] All of these events occurred prior to Mr Muscat making the decision, with the benefit of legal advice from Mr McArdle, that he was willing to sell his shares in TA Tools to Mr Qin as part of the settlement agreement which led to the consensual dismissal of the Previous Proceedings.
[452] On any reasonable basis, Mr Muscat has not proved that he may be entitled to claim relief from the court against Mr Qin or TA Tools and he has failed to meet the first element in r 5.3 of the UCPR.
[453] Addressing the second element in r 5.3 (that the applicant has made reasonable enquiries to obtain sufficient information to decide whether or not to commence proceedings), Mr Muscat has also failed objectively to demonstrate why all of his previous enquiries failed to yield sufficient information for him to decide whether or not to commence proceedings. The very information that he seeks has already been in his possession. He has made no attempt to indicate how that information is insufficient to enable him to make the relevant decision.
[454] Addressing the third element in r 5.3 (that having made reasonable enquiries, the applicant is unable to obtain sufficient information to decide whether or not to commence proceedings), this is very similar to Mr Muscat’s failure to satisfy the second element. Mr Muscat has failed to show why all of the information that he has and has had in his possession is insufficient to enable him to decide whether or not to commence proceedings. I have rejected Mr Muscat’s evidence that he does not have sufficient information to decide whether or not to commence proceedings, so to the extent that this element involves a subjective consideration, Mr Muscat’s case derives no assistance from that.
[455] Addressing the fourth element in r 5.3 (that the prospective defendant may have or have had possession of a document or thing that could assist in determining whether the applicant is entitled to make a claim for relief), I consider that if ever an application was to be regarded as a wide-ranging “fishing expedition” which falls outside of that which is expressly contemplated by r 5.3, it is this application. In effect, the nature of the documents in the categories sought by Mr Muscat are so wide-ranging and cover such a long period of time (the entire life of TA Tools) that they amount to nothing more than a speculative trawl through the entirety of TA Tools’ operations, all based on a flimsy foundation or a mere hunch that something might be found. The high-water mark illustrating this point is category 3, which seeks:
All records to do with [TA Tools] made in the “GALFIN” software program between 1 January 2017 and 31 August 2022.
[456] That is effectively every accounting entry ever made in the GALFIN software program. None of the other categories are much better. Mr Muscat does not favour me with any explanation as to why such a deep and wide search through the affairs of TA Tools should be permitted. It truly is so far outside of what the purpose and intent of r 5.3 plainly is that it must not be permitted.
[457] Addressing the fifth element in r 5.3 (that inspection of such a document would assist the applicant to make the decision whether or not to commence proceedings), Mr Muscat clearly fails at this level as well. I consider that the cross-examination of Mr Muscat amply demonstrated that he has already decided that he could bring the proceedings he contemplates (notwithstanding that decision was misconceived, as I have indicated in relation to the first element above). He already considers that whatever Mr Qin might produce will be “crap”, that on this application he is “wasting time and money”, and that he “just want[s] to get on with suing Mr Qin for breaching the shareholder’s agreement”.
[458] Mr Muscat is also fatally wounded on this element by his assertion that he has an alternative possible basis pursuant to which he has an entitlement to the very same categories of documents under s 198F of the Corporations Act. That involves an assertion that he proposes in good faith to bring legal proceedings against TA Tools, which is fundamentally inconsistent with his assertion that in bringing the preliminary discovery application, he is yet to decide whether to bring proceedings.
[459] Finally, even if each of the five elements were satisfied, as a matter of discretion under r 5.3, I would refuse the application for preliminary discovery. That is because in the overall scheme of the events leading to Mr Muscat’s decision to settle the Previous Proceedings by selling his shares in TA Tools to Mr Qin and otherwise sever all of his employment and financial connections with it, I consider that this application has been brought for the purpose of getting Mr Qin to pay Mr Muscat more money because:
(1) he believes that Mr Qin is quite wealthy;
(2) he believes that he should have received more money as part of the settlement; and
(3) contrary to his denial, he does regret settling below the amount he thinks he should have received.
[460] In my consideration, the court should not permit r 5.3 of the UCPR to be used for that extraneous purpose.
(emphasis added)
In Blue Dog Group Pty Ltd v Glaucus Research Group California, LLC & Ors [2024] QSC 37 (15 March 2024), Brown J wrote:
[1] The applicant, Blue Dog Group Pty Ltd (Blue Dog) applies for orders for the production of documents pursuant to rr 208C and 208D of the Uniform Civil Procedure Rules 1999 (Qld) (UCPR) against Glaucus Research Group California LLC (Glaucus), Soren Aandahl and Matthew Wiechert (together, the Glaucus parties), outlined in schedule 2 of its originating application. It also seeks orders for the production of documents against Argonaut Ltd (Argonaut) and Euroz Hartleys Ltd (Hartleys) pursuant to r 208C of the UCPR, outlined in schedule 3 of its originating application. In addition, it seeks documents outlined in Schedule 1 of its originating application from Glaucus pursuant to r 208D.
[2] No parties appeared at the application. Argonaut and Hartleys, however, had indicated they were not intending to appear and, in the former case, did not consent nor oppose the orders sought and, in the latter case, consented to the orders sought. The Glaucus parties are all located in the United States of America. The question of service of those parties was a live issue in the application.
Background
[3] Blue Dog is an ASX listed company which own shares in the ASX listed company Blue Sky Alternative Investments Limited (then trading as “BLA” on the ASX). Blue Sky carried on a business of raising and managing funds and investments. Blue Sky’s sole director is Mark Sowerby, who was the founder and former managing director of Blue Sky.
[4] In February 2017, the intention of Glaucus to undertake activist short selling in Australia was publicised through various Australian media outlets, but not the identity of the Australian companies that were to be targeted. Soren Aandahl is described as being the director of research of Glaucus at the relevant time. Matthew Weichert is described as the President of Glaucus at the relevant time.
[5] On 28 March 2018 Glaucus published a report about Blue Sky (Blue Sky Report). The Blue Sky Report identified what the authors considered were a number a short fallings of Blue Sky. In particular, Blue Dog contends that the report suggested that:
(a) Blue Sky had overstated the value of its funds under management;
(b) Blue Sky had overstated the value of its investment and its investment returns;
(c) Blue Sky charged excessive management fees; and
(d) Blue Sky’s recently retired managing director, who also controls Blue Dog, had sold his shares because he expected the company to collapse.
[6] Blue Dog contends there are a number of false or misleading statements in the Blue Sky Report such that it has a claim for misleading or deceptive conduct in contravention of the Corporations Act 2001 (Cth) (Corporations Act) based on the content of the report. While the report contains a number of opinions, the applicant contends that core allegations in the report were wrong or misleading and not supported by the reasons given (the particulars of which are set out in Annexure A to their submissions).
[7] Blue Dog contends the Blue Sky Report was published for the purpose of causing the market price of Blue Sky shares to decline so that Glaucus Parties and their clients would profit from the short positions they then held in those shares and that, in fact, it caused the value of the shares to drop substantially, causing loss to Blue Dog.
[8] Blue Dog also submits that it has a claim based on insider trading in contravention of the Corporations Act. It contends that the information that Glaucus “would or may issue a report” which was highly critical of Blue Sky (the Blue Sky inside information) was information not generally available and, if it were generally available a reasonable person would have expected it to have a material effect on the price or value of Blue Sky shares, derivatives or other financial products (Blue Sky related financial products). The Blue Sky inside information is alleged to have been disclosed to and deployed by market participants, including the broking clients of Hartleys and Argonaut, who knew our ought to have known that the information was not generally available in the market and that if the information were generally available, it would be expected to have had a material effect on the price or value of Blue Sky-related financial products. It is contended that the information was used by the broker clients to buy or dispose of, or enter into an agreement to do so, a Blue Sky related financial product between receiving the Blue Sky inside information and the release of the Blue Sky Report.
[9] The Glaucus parties were said to have contravened s 1043A(2) of the Corporations Act by communicating the Blue Sky inside information to the broking clients. Any party associated with Glaucus who acquired or disposed of Blue Sky-related financial products prior to the publication of the Blue Sky Report are also said to have breached s 1043A of the Corporations Act. The basis of the claim is set out by Mr Shepherd in his first affidavit.1
[10] According to Mr Shepherd, Blue Dog has identified evidence that suggests that there was unusual trading in Blue Sky shares in the period shortly before the report was published. An independent expert, Mr Fehon of McGrath Nicol, has reviewed the trading data and identified that there was a significant increase in short selling activity between 15–28 March 2018 that was “unusual and warrants further investigation”. The share trading activity occurred through two broking firms, Hartleys and Argonaut, which is said to be unusual and not consistent with prior trading activity of Hartleys and Argonaut in relation to Blue Sky financial products. Mr Fehon considers that is the most likely explanation for the share activity is that those traders, had prior knowledge that Glaucus would publish the report critical of Blue Sky, although he canvasses other possibilities,
[11] The claim for insider trading is proposed to be made by Blue Dog against:
(a) those market participants who engaged in the trading said to be short selling;
(b) anyone who disclosed the Blue Sky inside information; and
(c) potentially Glaucus itself, as an accessory.
[12] The claim for misleading or deceptive conduct and/or false or misleading statements is proposed to be made against Glaucus and anyone involved in preparing the report, which may extend to officers of Glaucus and anyone with whom Glaucus communicated prior to the release of the report in a manner that leads them to be arguably “involved” in it for the purpose of s 79 of the Corporations Act.
[13] Blue Dog contends that it has suffered a loss caused the alleged insider trading, being the reduction in value of its shares in Blue Sky, as well as a loss of market confidence. The alleged loss is also submitted to have been contributed to by the misleading and deceptive conduct, resulting in a diminution of Blue Dog’s shareholding to a value of nil by 13 May 2021.
Rule 208C of the UCPR
[14] Neither r 208C nor r 208D appear to have been the subject of authoritative consideration in this State.
[15] Rule 208C provides, in relevant part:
(1) The court may make an order under subrule (2) if it appears to the court that —
(a) an applicant may have a right to relief against a prospective defendant; and
(b) the applicant has made reasonable inquiries, but is unable to sufficiently ascertain the identity or whereabouts of the prospective defendant; and
(c) another person may have information, or possession or control of a document or thing, that may assist in ascertaining the identity or whereabouts of the prospective defendant.
(2) The court may order that the other person —
(a) attend to give evidence relating to the identity or whereabouts of the prospective defendant as directed by the order; or
(b) produce to the applicant a document or thing relating to the identity or whereabouts of the prospective defendant as directed by the order.
…
(4) Unless the court orders otherwise —
(a) an application for an order under subrule (2) must be supported by an affidavit stating —
(i) the facts on which the applicant relies; and
(ii) the information, document or thing in respect of which the order is sought; and
(b) a copy of the application and the supporting affidavit must be served personally on the other person.
(5) An application for an order under subrule (2) must be made —
(a) if it relates to an existing proceeding to which the applicant is a party — by application in the proceeding; or
(b) otherwise — by originating application.
[16] The power of the Court to make orders as to preliminary discovery provided in r 208C was apparently introduced to supplement the power of the Court to order disclosure in addition to preliminary disclosure available under the principles set out in the House of Lords’ decision of Norwich Pharmacal Co v Customs and Excise Commissioners. There are a number of pre-conditions to making such an order which must be met given the intrusive nature of the order but the threshold of what must be established is tempered by the fact that the elements must be established to a level that it “appears to the Court” they are satisfied. The fact that there is a reference to “may” indicates it remains a matter within the court’s discretion.
[17] Relevant to s 208C are a number of definitions contained in r 208B of the UCPR, including:
(a) “Prospective Defendant” means a person against whom the applicant intends to start a proceeding;
(b) “identity” of a prospective defendant is defined to include “the name and the occupation, if any, of the prospective defendant”; and
(c) the term “whereabouts” in relation to a prospective defendant is defined to include “a place of residence, a registered office, place of business or other location of the prospective defendant”.
[18] As a result of the definition of “prospective defendant”, the LexisNexis commentary to the r 208C suggests that, in addition to the requirements outlined in r 208C (1), the Court must also be satisfied that the applicant intends to start a proceeding against the “prospective defendant”. I accept that is the case although how it is to be construed must have regard to the context in which it appears.
[19] Caution must be exercised when reviewing courts’ analysis of similar, but differently worded, rules in other jurisdictions. However, these decisions do provide some assistance in considering how the local rule is to be construed. In New South Wales, r 5.2 of the Uniform Civil Procedures Rules 2005 (NSW) (NSW Rules) provides for preliminary disclosure to ascertain the identity or whereabouts of a potential defendant. That rule does not speak of a “prospective defendant” but, by virtue of the definition of “identity or whereabouts” in r 5.1, it must be established that the applicant for preliminary discovery seeks documents or information about the person against whom the applicant “desires to commence proceedings”. The desire must be “a bona fide desire” and not “merely a capricious desire unsupported by any ground for believing that the object of desire can be realised”. Thus more was required than the applicant “simply assert some subjective desire”. This is in contrast to the requirement in r 208(1)(a) that the applicant may have a right of relief against a “prospective defendant”, which imports the notion of an intention to bring proceedings .
[20] In Roads and Traffic Authority (NSW) v Care Park Pty Ltd , Barrett JA observed that:
… As a matter of language, however, a desire may be characterised as something less fixed and certain than an intention or a purpose. A person with an intention or purpose has progressed to a degree of determination stronger than that of a person with only a desire.
[21] In order to establish that a party “may have a right to relief”, the applicant must set out sufficient facts to satisfy the Court that it at least appears that the applicant may have an entitlement to relief, but it is not necessary to do so with precision or demonstrate that it may have a right to relief but not necessarily a prima facie case. The reference to “prospective defendant” in r 208C, must be construed having regard to the words “ may have a right to relief”, which qualifies the intention that must be shown. In my view having regard to the words and context of r 208C(1) it must be shown that the applicant has a genuine positively held intention to bring proceedings against the prospective defendant seeking relief but which may be conditional upon the applicant obtaining information as to the prospective defendant.
[22] In relation to r 5.3(1)(a) of the NSW Rules, which includes a requirement that “the applicant may be entitled to make a relief from the court against a person”, Simpson AJA stated in O’Connor v O’Connor that:
It may be emphasised that there is no requirement that an applicant for preliminary discovery establish even a prima facie case for relief; nor is it necessary that the applicant specify with precision the cause of action proposed, although it will be necessary, in order to make it “appear to the court” the applicant “may be entitled to make a claim for relief” that the applicant provide some particularisation of the nature of the relief in contemplation. That is so, not only to enable the court to form a view about whether the applicant may be entitled to make a claim for relief, but also to enable the prospective defendant, if an order is made, to determine which, if any, documents in possession are to be discovered.
[23] Mr Shepherd has deposed to the basis upon which it is alleged that Blue Dog has claims for insider trading and misleading and deceptive conduct. Blue Dog positively intends to commence proceedings against the prospective trading relevant broking clients and Glaucus Insider defendants (referring to those associated with Glaucus who communicated or used insider information before the publishing of the report) if it can identify the prospective defendants from the documents disclosed. He also deposes to Blue Dog having informed him that it would commence proceedings against Glaucus if it obtains the requested documents, making it practicable to commence proceedings. It is the right to relief against parties for Insider Trading that is the basis for Blue Dog’s claim under r 208C and r 208D, not the claim for misleading and deceptive conduct. I am therefore not addressing the latter claim any further for the purposes of this decision.
[24] In Roads & Traffic Authority (NSW) v Australian National Parks Pty Ltd , Mason P offers some assistance in identifying what is required to meet the threshold in r 208C(1)(b):
… the applicant must be unable sufficiently to ascertain the identity or whereabouts of the intended defendant despite having made reasonable inquiries. What is reasonable is a question of fact in all the circumstances. The availability of other means of the ascertainment (eg resort to the FOI Act) does not in itself make it unreasonable to claim an alternative remedy under the rule … The cost, delay and uncertainty of alternative measures is relevant to the rule’s ‘reasonable inquiries’ component.
[25] The question of whether reasonable enquiries have been made is an objective assessment.
[26] In Roads & Traffic Authority (NSW) v Australian National Car Parks Pty Ltd , Mason P further observed in relation to a similar rule to r 208(1)(c) that:
[15] …the applicant must show that the respondent to the application ‘may have information, or may have or have had possession of a document or thing that tends to assist in ascertaining the identity or whereabouts’ of the prospective defendant. …
[16] The appellant correctly submits that the information, document or thing that is sought must itself have the requisite tendency in ascertaining identity or whereabouts. However, the words “may” and ‘tends to assist’ in r 5.2(1)(b) show that the applicant does not have to establish in advance that the desired information, document or thing will necessarily reveal the identity or whereabouts of the prospective defendant…
[27] The Queensland rule only requires that the information, document or thing “may assist in ascertaining the identity or whereabouts of the prospective defendant”, whereas New South Wales’ rule refers to “tends to assist”. Thus the Queensland rule has a slightly lower threshold.
[28] If the pre-conditions are satisfied and the power in r 208C(2) is enlivened, the Court then has a discretion to make an order. At least in New South Wales, the view is that the discretion would only be exercised in favour of the applicant “when it is in the interest of justice to do so.” Similar considerations would apply in the exercise of the discretion under the r 208C, however it has not been made explicit as it has under r 208D.
Rule 208D of the UCPR
[29] Rule 208D provides:
(1) The court may make an order under subrule (2) if it appears to the court that —
(a) an applicant may have a right to relief against a prospective defendant; and
(b) it is impracticable for the applicant to start a proceeding against the prospective defendant without reference to a document; and
(c) there is an objective likelihood that the prospective defendant has, or is likely to have, possession or control of the document; and
(d) inspection of the document would assist the applicant to make the decision to start the proceeding; and
(e) the interests of justice require the order to be made.
(2) The court may order that the prospective defendant —
(a) disclose the document to the applicant as directed by the order; or
(b) produce the document to the court as directed by the order.
(3) Unless the court orders otherwise —
(a) an application for an order under subrule (2) must be supported by an affidavit stating —
(iii) the facts on which the applicant relies; and
(iv) the document in respect of which the order is sought; and
(b) a copy of the application and the supporting affidavit must be served personally on the prospective defendant.
(4) An application for an order under subrule (2) must be made —
(a) if it relates to an existing proceeding to which the applicant is a party — by application in the proceeding; or
(b) otherwise — by originating application.
[30] In order for the Court to exercise its discretion and make an order under r 208D(2), five conditions must appear to the Court:
(a) first, an applicant may have a right to relief against a prospective defendant, which again requires that the definition of prospective defendant be established;
(b) secondly, that it is impracticable for the applicant to start a proceedings against a prospective defendant without reference to a document;
(c) thirdly, that there is an objective likelihood that the prospective defendant has, or is likely to have, possession or control of the document;
(d) fourthly, inspection of the document would assist the applicant to make the decision to start the proceeding; and
(e) fifthly, the interest of justice require the order to be made.
[31] The NSW Rules’ equivalent of r 208D is r 5.3. To the extent that r 5.3 uses similar terminology, the authorities with respect to its operation are of some assistance. In this regard, r 5.3(1)(a) is drafted in similar terms to r 208C(1)(a) and r 208D(1)(a). The approach discussed above in relation to r 208C(1)(a) also applies to r 208D(1)(a).
[32] As has been noted in the LexisNexis commentary to the UCPR, there is some tension in the reference to “prospective defendant” and to the second and fourth conditions. The second and fourth conditions are premised on the absence of the document which makes it impracticable to commence the proceedings and that the document once discovered would assist the applicant to make a decision to start the proceeding. The commentary suggests that the tension should be resolved by construing the intention required for the purposes of r 208D to be a conditional intention which, in my view, is the proper construction of the rule in a way which accords with the wording of the rule and gives effect to all of the requirements in a harmonious way when read as a whole. The observations of Barrett AJA in Roads and Traffic Authority (NSW) v Care Park Pty Ltd provide some support for this observation.
[33] Thus, it is sufficient as in the present case that there is evidence the applicant intends to commence proceedings against a prospective defendant if:
(a) they are permitted to inspect the document; and
(b) the contents of the document are such that it is appropriate to commence the proceeding.
Application against fourth and fifth respondents
[34] Hartleys is an Australian brokerage firm. It is one of the brokers which has been identified by the applicant and Mr Fehon as having clients engaging in unusual activity prior to the report of the Glaucus parties being released.
[35] Hartleys did not oppose the orders that are sought.
[36] Argonaut is the second brokerage firm whose clients have been identified as engaging in unusual activity prior to the Blue Sky Report being released. Argonaut has taken a neutral position, neither consenting to nor opposing the orders sought. Neither party appeared but both responded to Blue Dog’s lawyers in relation to the application and indicated they did not wish to appear.
[37] Pursuant to s 17 of the Service and Execution of Process Act 1992 (Cth), Argonaut had 21 days to file a notice of appearance from the date of service. The hearing of the application occurred before the 21-day period had expired. Under s 17(1)(b), however, the Court may allow a shorter period. On the material before the Court in the present case, Argonaut had clearly been served with the application and determined not to appear. In those circumstances, the Court considers that it was appropriate for the matter to proceed notwithstanding the 21 days had not fully elapsed.
[38] As I have referred to above, prior to the release of the Blue Sky Report on 28 March 2018, Mr Fehon, on the basis of his analysis of share trading data that he obtained from the ASX, noted there was a significant increase in short selling activity in Blue Sky Alternative Investments Limited shares and other Blue Sky related financial products between 15–28 March 2018 and that the share trading activity of the broking firms Argonaut and Hartleys was unusual and not consistent with previous trading activities, initially by Argonaut and then by Hartleys.
…
[119] As I am not satisfied that Matthew Weichert or Glaucus has been served, it is unnecessary for me to consider whether rr 208C and 208D of the UCPR have been satisfied and an order should be made against them. The application for Glaucus should be adjourned.
(emphasis added, footnotes deleted)
