A company that is being sued in relation to the alleged breach of its contract to purchase shares in the business of another company has been unsuccessful in its interlocutory application to seek discovery of documents from the vendor company relating to the tax consequences of its subsequent sale of the shares to another purchaser that took place in the Cayman Islands.
The applicant argued that although the subsequent sale of the shares to the new purchaser was for a lesser amount (id=”mce_marker”.045m) as opposed to the amount it had agreed to purchase the shares for (id=”mce_marker”.35m), the damages sought by the vendor for the alleged breach of the contract would be required to be reduced because of the tax advantages arising from making the contract in the Cayman Islands.
However, the Federal Court dismissed the application for the following reasons:
- although the agreement to sell the shares to the applicant was agreed upon in Australia, the evidence to date indicated that the final contract would have likewise been concluded in the Cayman Islands and that, therefore, any argument of different tax consequences was primarily “conjecture” and, in any event, the issue of whether income is from an Australian source is a complex question of fact;
- the wide ranging type inquiry sought by the applicant (and the tax expert it had engaged for this purpose) was not warranted in the circumstances as the issues were not only complex but involved a number of assumptions and hypotheticals (eg in relation to the number of parties involved, their residency status and the effect of international tax agreements etc); and
- in terms of the discretion to grant such discovery, the Court noted that under the relevant Federal Court rules a “party must not apply for an order for discovery unless the making of the order sought will facilitate the just resolution of the proceeding as quickly, inexpensively and efficiently as possible” and, in this regard, the burden of granting the discovery sought was out of all proportion to any potential relevance the discovered documents might have.
Accordingly, the Court ruled that the extensive discovery sought by the applicant was not warranted in the circumstances as the documents sought were not directly relevant to the issues raised by the pleadings or in the anticipated evidence at trial.
(Archer Capital 4A Pty Ltd as trustee for the Archer Capital Trust 4A v The Sage Group plc (No 1) [2013] FCA 1029, Federal Court, Wigney J, 10 October 2013).
[LTN 198, 14/10/13]