…Disclosure is necessary for the fair disposal of the claim to save costs…

In Destiny Investments (1993) Ltd v TH Holdings Ltd shareholders in a joint venture company have been granted an order requiring auditors to disclose documents to enable a valuation to be carried out.

The joint venture company was formed for the purpose of acquiring hotels.

The principal relief sought by the petitioner was an order that T, one of the shareholder joint venturers, should buy out their interest at an appropriate valuation.

The principal allegations in the petition included that:

  • ownership of one hotel was wrongly removed from the company’s control for the benefit of T;
  • T renegotiated the company’s financing and as part of that transaction issued additional shares in the company to itself, thus considerably diluting the petitioner’s shareholding, the percentage of which had been agreed at the outset;
  • various costs were incurred by T and these costs were allocated to the company, creating substantial further debt owed to T; and
  • there were various transactions totalling about £13 million made between the T group companies and the joint venture company’s group, allegedly favouring the T group companies, in respect of which the petitioners wanted further information.

The Respondents denied that relevant documents existed.  The petitioner sought third party disclosure from the company’s auditors, who at first refused to disclose other than a narrowly defined set of documents, but later reached agreement as to the scope of documents that they would be prepared to disclose, subject to the consent of the respondents.  The respondents however declined to agree any disclosure by the auditors at all.  The petitioner applied to the court for an order for disclosure under Part 31.7 of the Civil Procedure Rules.

The Judge summarised the current state of the law.  To make an order for disclosure under Part 31.7 the court must be satisfied on three matters:

  • The documents are likely to support the applicant’s case or adversely affect the case of another party. “Likely” means that they may well do so. It does not have to be established that it is probable that they will do so, but there does have to be something more than a mere possibility.
  • The documents sought are clearly and sufficiently identified, so that someone who is not a party to the action will be able to comply with the order without difficulty.
  • Disclosure is necessary for the fair disposal of the claim to save costs.

The Judge concluded that the documents sought were necessary for the purposes of the appointed valuers carrying out a valuation of the company, and that it was clearly necessary in the interests of a fair trial that such parts of the documents as were retained by the auditors on their audit files should be disclosed to the petitioners.

 

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