Use of s 1324 to restrain a director from appointing an administrator

Section 1324 of the Corporations Act 2001 (Cth) is cast in very broad terms and, in my opinion, is a provision which is sometimes overlooked. As a separate issue, I am sure other practitioners working in the insolvency and commercial law space, will have come across cases of deadlock or shareholder oppression in an SME, where the threat is made – or even acted upon – to appoint a voluntary administrator to a company, in what is suspected to be a scorched-earth strategy.

While we cannot know and I do not suggest any such strategy was at play in this particular case, that aspect aside, these two issues otherwise came together in March of this year in an interesting ex tempore judgment of Black J of the NSW Supreme Court. In that case, s 1324 was used to seek an injunction restraining a director from appointing an administrator for what was claimed by the applicant to be an improper purpose - In the matter of O’Neill v Advantage Hearing Pty Ltd [2013] NSWSC 175.

I will set out here in full just three of the sub-sections of the provision. Sub-sections (1) and 4) are relevant to the case now discussed. Sub-section (10) is not, but it is the sub-section of 1324 which in my view tends to be over-looked, although last year there was an interesting s 1324(10) decision in Queensland by the Full Court of the Queensland Supreme Court in May (McCracken v Phoenix Constructions (Qld) Pty Ltd [2012] QCA 129, see in particular [21]-[40]). So while it is not relevant here, I also reproduce sub-section (10) below, merely to draw attention to it.

Sub-sections 1324(1) and (4) provide as follows -

“(1) Where a person has engaged, is engaging or is proposing to engage in conduct that constituted, constitutes or would constitute:

(a) a contravention of this Act; or

(b) attempting to contravene this Act; or

(c) aiding, abetting, conselling or procuring a person to contarvene this Act; or

(d) inducing or attempting to induce, whether by threats, promises or otherwise, a person to contravene this Act; or

(e) being in any way, directly or indirectly, knowingly concerned in, or party to, the contravention by a person of this Act; or

(f) conspiring with others to contravene this Act;

the Court may, on the application of ASIC, or of a person whose interests have been, are or would be affected by the conduct, grant an injunction, on such terms as the Court thinks appropriate, restraining the first-mentioned person from engaging in the conduct and, if in the opinion of the Court it is desirable to do so, requiring that person to do any act or thing.“

“….(4)  Where in the opinion of the Court it is desirable to do so, the Court may grant an interim injunction pending determination of an application under subsection (1).”

I recommend readers also pay attention to the other sub-sections, most notably sub-sections 1324(6) and (7), to fully appreciate just how wide the powers under this section were cast, by the legislature.

Skipping ahead, sub-section 1324(10) goes on to provide the Court with an additional, potentially far-reaching power -

“(10)  Where the Court has power under this section to grant an injunction restraining a person from engaging in particular conduct, or requiring a person to do a particular act or thing, the Court may, either in addition to or in substitution for the grant of the injunction, order that person to pay damages to any other person.” 

In this case a recently-removed director of a company called Advantage Hearing Pty Ltd, Mr Matthew O’Neill, issued proceedings seeking interlocutory and substantive relief against the company itself, a director Ms Rhonda Hughes, and another person with an interest in the company, Mr Soeren Iversen, and associated entities. The company was trustee of the Advantage Hearing Trust, which appeared to conduct a hearing assessment business. While there was controversy as to the circumstances, Mr O’Neill’s employment had been purportedly terminated and he had been removed as a director. However there were problems with the application, including as to service of the affidavits in support, the defendants did not appear, and the evidence did not properly establish all that was needed to found the claim for interlocutory relief.

The plaintiff Mr O’Neill sought an order under s 1324 that, until final hearing or further order, Ms Hughes be restrained from appointing an administrator under Pt 5.3A of the Act. Black J observed (at [3]) that the steps necessary to establish such relief “would seem to be” -

1. That there is at least a serious question that the company is not in fact insolvent or likely to become insolvent, so that the appointment of an administrator is inappropriate;

2. Implicitly, that the appointment of an administrator for an improper purpose would not only be invalid but also a contravention of the Act, for example, of Ms Hughes’ duties as a director; and

3. That a basis for interim relief under s 1324 of the Act is established, in that the balance of convenience favours interim relief.

The threat of appointment of a voluntary administrator was said to emerge from a letter from the defendants’ solicitors to Mr O’Neill’s solicitors. The letter discussed proposals to resolve the dispute between the parties. It noted that if no resolution was reached, the third defendant Mr Iversen was likely to call in a loan he had made to the company, which would render the company insolvent, and Ms Hughes would then have no alternative but to appoint an administrator. Mr O’Neill’s solicitor responded, contending that the appointment of an administrator would not be for a proper purpose, and that there was no basis for the threat of that appointment because the loan was not repayable until February 2016 under the terms of the loan deed.

His Honour considered the first letter to be inadmissible, as subject to the “without prejudice” privilege, and that it would follow that the response from Mr O’Neill’s solicitor would also be subject to the privilege.

However, even if he was wrong on that and the letters were admissible to establish a threat of the appointment of a voluntary administrator, his Honour found that the basis for the interlocutory relief sought was not established, because -

(1) The evidence did not establish, as Mr O’Neill contended, that the loan could not be called on. Mr O’Neill sought to rely upon the loan being treated as non-current in the balance sheets. The deed he relied upon was unsigned, undated and unstamped, and Mr O’Neill could give no evidence either that it was executed or that the parties had conducted themselves on the basis set out in it.

(2) There was no affirmative evidence as to the company’s solvency, which his Honour observed would at least require some scrutiny of its cash flow position, and no basis for a finding that the company was neither insolvent nor likely to become insolvent, such that a voluntary administrator could not properly be appointed. His Honour emphasised that he was not finding that the company was insolvent or likely to become insolvent. Rather, he was noting there was no evidence one way or the other, as to the company’s solvency.

As Black J astutely observed (at [8]), there may be a real question as to whether a Court would, without clear evidence of solvency, restrain the appointment of an administrator under s 436A, where the provision for such appointment is important to the mechanism for reconstruction of potentially insolvent companies, and also allows directors to avoid potential liability or insolvent trading. A potential consequence of restraining the appointment of an administrator would be that directors would in fact be exposed to potential liability for insolvent trading, if a company then continued to trade in circumstances where it had been unable to appoint an administrator when it was in fact insolvent. However, I pause here to note that the defence to insolvent trading in s 588H(5), as further described in s 588H(6), does not require that a director succeed in appointing an administrator. It requires that the person “took all reasonable steps to prevent the company from incurring the debt” which, per s 588H(6) means the Court must have regard to matters which include, but are not limited to… “any action the person took with a view to appointment an administrator of the company”. If there was clear evidence that a director took steps or evinced a clear intention to have an administrator appointed to an insolvent company, but was prevented by injunction, it is difficult to see a Court rejecting the contention that the person met these requirements of the defence, subject to other relevant circumstances. As an example of another relevant circumstance – if there were other steps the director could have taken to prevent the company incurring the debt, and he or she did not take them either, I suggest the defence may be more likely to fail.

In any event his Honour found it was possible to resolve that aspect of the application on a narrower basis: a serious question had not been established that it would be an improper step to appoint an administrator, as it had not been established that the company was plainly not insolvent and unlikely to become insolvent (at [9]).

Black J pointed out that there were other avenues available to Mr O’Neil to address the position, if an administrator is in fact appointed for an improper purpose. Those protections being -

1. The administrator himself or herself has an obligation to at least take some steps to satisfy himself or herself as to the validity of his or her appointment, and in particular to review the terms of the resolution of the board by which he or she is appointed: Deputy Commissioner of Taxation v Portinex Pty Ltd [2000] NSWSC 557; (2000) 34 ACSR 422.

2. More fundamentally, the Court has jurisdiction to scrutinise the reasons given by directors for the appointment of an administrator and, if they are not objectively established, the administrator will be removed and the appointment of an administrator for a collateral purpose is potentially a breach of directors’ statutory duties: see the authorities cited at Austin and Black’s Annotations to the Corporations Act at [5.436A]. Accordingly, if an appointment of an administrator is made in circumstances where it was not objectively justified, the Court has ample powers available to invalidate the appointment. Black J expressed the view that that course seemed to be preferable, as a matter of balance of convenience, than an interlocutory injunction, in that it does not expose directors to potential liability for insolvent trading if an injunction is wrongly granted. I suggest respectfully, however, that in some cases waiting for a threatened appointment before challenging it may not be seen as preferable for a company, depending upon what effect an appointment may have upon its significant contracts or banking facilities (see below).

Mr O’Neill also pointed to the appearance of recent changes to the company’s balance sheet, recording additional liabilities to Ms Hughes and Mr O’Neill. Those could be open to challenge, but Black J took the view that that challenge could properly be brought in an application to set aside the administrator’s appointment, or at a final hearing of the proceedings.

On the issue of balance of convenience, Mr O’Neill had also contended that there would be detriment to the company if an administrator was appointed, by reason of risk to a contract with a government agency, the Office of Hearing Services. However that contract was not in evidence, such that there was no evidence of the impact of such an appointment under the terms of the contract.

I pause here to note, as mentioned above, that in some cases the appointment of an administrator will place at risk if not a significant contract or contracts vital to the business’s revenue stream, but also  a company’s banking facility. Indeed, it is possible that an appointment of itself can render a company insolvent, when it previously was able to pay its debts as and when they fell due. The difficulty for the director who has been ousted from the company in these cases in terms of an ability to pre-empt and restrain threatened conduct, is that he or she is often unable to produce the necessary evidence to obtain the orders sought, because the other directors have shut him or her out of the company and are preventing access to the company’s books and records.

Here, Mr O’Neill sought further interlocutory relief, restraining the defendants from preventing Mr O’Neill having access to certain offices of the company, access to its books and records, taking certain actions in respect of its bank accounts, and having access to its computer server. However Mr O’Neill relied upon an affidavit of some months prior, following which the defendants had given certain undertakings (not detailed in the judgment). There were assertions and counter-assertions in the correspondence between the solicitors as to whether those undertakings had been honoured or breached. There was no further evidence to establish any breach, or to establish any occasion when access had been denied to Mr O’Neill.

Black J also declined to grant an injunction restraining the defendants from preventing Mr O’Neill from engaging in his duties as an officer and employee of the company, which relief was positive in substance (although s 1324(1) expressly provides for this), and one as to ASIC recognising Mr O’Neill as a director.

An interesting case and, as is often the case with injunction applications of any sort, one which in the end came down to the quality and sufficiency of the evidence.

Appeal from liquidator’s decision to sell by tender causes of action against directors

Earlier this month Rein J of the NSW Supreme Court refused to grant an interlocutory injunction sought in proceedings brought under s 1321 of the Corporations Act 2001 (Cth) (the Act) appealing from the decision of the liquidator of a company to sell certain assets of the company by tender – see In the matter of SCW Pty Ltd [2013] NSWSC 578.

The company had been placed in liquidation not because of insolvency, but because of a deadlock between the two directors, Ms Cantarella and Mr Schirato. SCW was the holding company of a group controlled by Ms Canterella and Mr Schirato, which included a company Cantarella Bros Pty Ltd, the operator of a successful business as a fresh foods wholesaler specialising in products which included coffee under the Vittoria brand. The assets of SCW included significant real estate.

The liquidator, Jamieson Louttit of Jamieson Louttit & Associates, had been in the process of selling the assets of SCW and the liquidation was close to completion. In 2011 Mr Schirato indicated his interest in purchasing SCW’s rights against Ms Cantarella in relation to her role as a director. Mr Schirato provided the liquidator with an opinion by well-known Sydney silk Robert Newlinds SC. Mr Schirato indicated he, and a corporate entity, would be willing to pay $100,000 for the potential rights of SCW against Ms Cantarella Mr Newlinds discussed in his opinion.

The liquidator considered Mr Schirato’s proposal, and the opinion. He also had the allegations investigated, and obtained an advice from his own solicitors Piper Alderman. On these bases, he formed the view that contrary to Mr Schirato’s contention, SCW had no viable causes of action against Ms Cantarella. Prudently, however, he sought judicial direction under s 479(3) of the Act as to whether he would be justified in not treating with Mr Schirato in connection with the claimed causes of action. Both directors were represented at that hearing before Brereton J. In his decision, his Honour Brereton J held that the liquidator would not be justified in refusing to treat with Mr Schirato. That judgment may be read here, and see [3]-[9] for details of the potential causes of action that Mr Schirato was interested in pursuing.

Subsequently, the liquidator established a process whereby those parties who might have an interest in paying for an assignment to themselves of SCW’s causes of action against any of the corporate officers of SCW would be given an opportunity to tender. Those officers were the two directors Ms Cantarella and Mr Schirato, Ms Wannan (an alternate director) and Mr Jones (the company secretary).

Tenders were invited by a document sent out on 12 April 2013, which included certain aspects -

(1)  A tender must not be less than $100K,

(2)  The liquidator would accept the highest offer received if the terms were complied with, and

(3)  The liquidator would seek judicial approval for the execution of the deed of assignment .

The grounds upon which the applicants, Ms Cantarella and a corporate entity, challenged the decision of the liquidator to take this step included -

1.  The use of a tender process was unfair, as it gave the tenderers no opportunity to better the offer made by another tenderer;

2.  The description of the claims against “any past or present officer of the company other than the liquidator” or any other person connected in any way to any act or omission of any past or present officers of the company was too broad. This would impede a tenderer from offering as much as they might otherwise.

3.  The terms of the indemnity the liquidator sought in the proposed deed of assignment was too broad, which would also discourage a tenderer from making its highest bid.

4.  The tenderers were to provide cheques, to be held in the account of Piper Alderman, until the Court approves the execution of a deed of assignment. This, it was argued, exposed the potential tenderer to the risk that his her or its money would not be returned.

Rein J found it notable that the applicants did not complain about the range of persons to whom the tender letter was sent; it was sent only to the former officers of the company SCW.

His Honour notes the key principles as advanced by the applicants, at [12] -

(1)  The fundamental duty of a liquidator is to obtain the highest possible price for the company’s assets sold by him or her;

(2)  Where an appeal under s 1321(1)(d) against a discretionary decision of a liquidator is brought, the Court will reverse the liquidator’s decision “only when it is satisfied he was acting unreasonably or in bad faith”: Re Jay-O-Bees Py Ltd (in liq) [2004] NSWSC 818; (2004) 50 ACSR 565 at [46]; McGrath v Sturesteps [2011] NSWCA 315; (2011) 81 NSWLR 690, at [73].

There was no allegation of bad faith, but the applicants asserted that the liquidator was acting unreasonably, for the four reasons outlined above. Rein J took the view that since no point was taken that there was any unreasonableness in sending the invitation to tender only to former officers of the company, the liquidator’s decision to offer Ms Cantarella the opportunity to purchase the rights and thus stymie the claims that it appeared Mr Schirato sought to bring against her seemed fair and reasonable, as did the various aspects of the tender process challenged.

Rein J accepted that a tender process means that each tenderer does not know what the others may have bid, and thus has no opportunity to better other bids. But that is the process. Sale by tender is a legitimate method of selling property and did not appear to involve an unreasonable commercial decision. Whether it was likely to yield a higher or lesser figure than some other process, such as a round table auction, was a matter upon which the liquidator was required to exercise a commercial judgment, and he had done so. His Honour noted that a tender process had the additional advantage of removing the liquidator of involvement in a bidding process involving negotiations, which could be difficult to control.

Rein J held there was no discernible prejudice to the applicants in permitting the tender process to proceed, and he refused the injunctive relief sought.

One can see that the tender process in these circumstances put Ms Cantarella in an invidious, and expensive, position. It is indeed possible that any claims against her could, were they to be pursued, prove to be of insufficient merit. Yet even so, at this point in time, she faced a costly and unpalatable choice.

An interesting decision indeed.

Newsflash – High Court grants special leave to appeal in Willmott Forests – disclaimer of leases

Yesterday the High Court granted special leave to appeal the Victorian Court of Appeal’s decision in Willmott Forests Ltd (Receivers and Managers appointed)(in liquidation) v Willmott Growers Group Inc and Willmott Action Group Inc [2012] VSCA 202.

The transcript of the special leave application is not yet up on Austlii. However my friend and colleague Sam Hopper has posted a very useful update on his blog here. Also the parties’ summaries of argument are available online here (scroll down to the table for proceeding M99 of 2012).

I wrote on the Victorian Court of Appeal’s decision last year here. In short, the Court of Appeal held that a tenant’s leasehold interest could be extinguished by disclaimer of the lease agreement by the liquidator of the lessor, pursuant to s 568(1) of the Corporations Act 2001 (Cth).

In their summary of argument for special leave, Willmott Growers Group Inc noted that disclaimer of a lease by a liquidator of a corporate tenant is common (at [42]). However, they argued that disclaimer of a lease by a liquidator of a corporate lessor is a novel use of the liquidator’s disclaimer power, and that the implications of the Court of Appeal’s decision are far reaching. Tenants, particularly retail shop tenants, typically invest substantial sums into the goodwill and fit-out of their leased premises. Much of this expenditure is lost of the tenant is forced to relocate. Also, as the Court of Appeal’s decision erodes the security of tenure under a lease, it may impact upon the willingness of banks and financiers to grant finance on the security of a lease. They noted that the consequences for lessees, in particular retail tenants, are significant. The Court of Appeal had indicated at [51] that the implications of its decision extended to “shopping centre leases”. (See [36]-[41] of the applicant’s summary of argument.)

We await the High Court’s decision with interest. It is expected the appeal hearing will take place later this year, potentially August 2013, with the judgment to follow sometime thereafter.

Update – ATO’s statement on unfair preference case and reallocation of payments

Last year I reviewed the Federal Court’s decision and the Full Federal Court’s decision on appeal in a third party preference case against the Commissioner of Taxation, which had an interesting twist. My review of the first instance decision of Nicholas J of March 2012 in Kassem and Secatore v Commissioner of Taxation [2012] FCA 152 is here. My review of the appeal decision of September 2012, Commissioner of Taxation v Kassem and Secatore [2012] FCAFC 124, is here.

The interesting issue in this case was the ATO’s practice of unilaterally reallocating payments made by taxpayers of tax liabilities from one account (in this case, the integrated client account) to another (in this case, to the superannuation guarantee or “SGER” account), and whether that enables the Commissioner thereby to avoid the reach of the unfair preference provisions.

An argument the Commissioner advanced unsuccessfully both at first instance and on appeal, was that the fact that the payments were (re)allocated to the SGER account in respect of the company’s superannuation guarantee charge liability, meant that there was no unfair preference. A payment of an SGC liability is a priority payment under s 556 of the Corporations Act, so the argument went, and therefore there was no unfair preference to the Commissioner, as he would have received the same priority over other creditors in any event.

In this case, the Full Federal Court went further on this issue than Nicholas J had done. The Full Federal Court noted that the evidence showed that on 31 July 2007, an ATO employee had telephoned the NSW Supreme Court to ascertain the date of the hearing of the application to wind up the relevant company, and was told it was set for 23 August 2007. The next day, 1 August, the relevant payments were “reallocated” by the ATO.

The Full Federal Court made a specific finding (at [90]) that it was plain the Commissioner took the step of reversing and (re)allocating the payments from the integrated client account to the SGER account -

“with a view to obtaining a priority over other unsecured creditors in the event that [the petitioning creditor] obtained a winding up order when the matter was due to come before the Supreme Court.”

Their Honours observed at [91] that -

“It is a fundamental principle of the law of unfair preferences that the present statutory regime, and its predecessors are…intended to render void any transaction which, if allowed to stand, would dislocate the statutory order of priorities among creditors.”

Yet, so their Honours specifically held -

“…that is precisely what the Commissioner intended to achieve.”

Extraordinary. The Full Court observed that it was implicit in the Liquidator’s submissions that on the proper construction of s 8AAZD of the Taxation Administration Act 1953 (Cth), the power of allocation does not extend to a power of reallocation to another ATO account. Thus the Commissioner had no power to so reallocate (at [70]). The Full Court took the view that it did not need to determine this question (at [88]). I discuss this issue in greater depth in my review of the decision (here).

The Commissioner’s response? It escaped my notice at the time, but on 23 November 2012, the Commissioner published a Decision Impact Statement on the case (link). In it the Commissioner notes that he did not apply to the High Court for special leave to appeal the decision.

On this issue here discussed, the Commissioner points to the fact that it was not necessary for the Full Federal Court to make a decision about the Commissioner’s powers to allocate or reallocate payments. The Commissioner then states -

“This decision does not affect the Commissioner’s powers to allocate payments received by taxpayers in accordance with the two methods set out in Division 3 of Part IIB of the Taxation Administration Act 1953.“

It would appear that despite the findings of the Full Federal Court as to the ATO’s conduct, the Commissioner has no intention of taking steps to change the internal practices of the ATO as to reallocations made between the accounts of failing companies. Troubling. Particularly so, one might think, now that directors can be made personally liable for the unpaid and unreported superannuation guarantee charge liabilities of their companies (since 30 June 2012). What is to stop the ATO from unilaterally reallocating payments in the reverse direction, depending upon which way it considers it may best maximise the revenue to be recovered?

Newflash: The Banks win special leave to appeal Bell Group to the High Court

It is being reported that this morning, Westpac and the other 19 banks in the Bell Group litigation have won special leave to appeal their loss last year in the West Australian courts to the High Court of Australia.

At first instance in 2008 the Banks were ordered by his Honour Justice Owen to pay about $1.58 billion to the liquidators of Bell Group (link). Their appeal of that decision to the Court of Appeal of the West Australian Supreme Court failed – see that judgment here. This morning, the full bench of the High Court granted the Banks special leave to appeal.

The brief media report may be read here. And thus Australia’s reportedly most expensive and longest-running court case continues…

Refusal to adjourn winding up application, despite tax appeal

Earlier this week, the Federal Court gave judgment in Deputy Commissioner of Taxation v Bayconnection Property Developments Pty Ltd (no 2) [2013] FCA 208 (link). The case is a handy illustration of the fact that where the Commissioner applies to wind up a company, it may proceed to obtain the order even though a company has lodged an appeal as to the tax liability upon which the statutory demand was founded.

The Commissioner had served a statutory demand in April 2011. The company filed a s 459G application for an order setting it aside. It argued it had a genuine dispute as to the amount or existence of the debt, pursuant to s 459H(1). It had lodged an objection to the Commissioner’s assessment, the objection had been disallowed, and the company had taken steps to challenge the objection decision in the Administrative Appeals Tribunal. On that occasion, Barrett J in a pithy and emphatic 8 paragraphs, dismissed that proceeding in September 2011 – see In the matter of Bayconnection Property Developments Pty Ltd [2011] NSWSC 1048.

Then in November 2011 the Commissioner filed an application under s 459P to winding up the company on the ground of insolvency. This was first heard in April 2012. It was common ground that the Court was required to presume that the company was insolvent, pursuant to s 459C(2)(a), as it had not complied with the Commissioner’s statutory demand.

On that occasion (link), Robertson J adjourned the Commissioner’s winding up application, pending the outcome of the defendant company’s challenge to the Commissioner’s assessment of its tax liability. It had issued proceedings under s 14ZZM of Pt IVC of the Taxation Administration Act 1953 (Cth), in the Administrative Appeals Tribunal. The Commissioner conceded, as he had in Broadbeach at [13], that:

“Notwithstanding the presumption of insolvency that would apply under s 459C(2)(a)…upon the hearing of such winding up applications the court might properly have regard to whether the taxpayer had a “reasonably arguable” case in proceedings under Pt IVC of the Administration Act, if those proceedings then still be on foot…”.

Robertson J accepted that the company had a “reasonably arguable” case in those proceedings. The company submitted, and it was accepted, that it was insolvent only by reason of the alleged tax debt – it had no other third party creditors. It was no longer trading and had not been for some years. On that occasion, Robertson J exercised his discretion in s 459A of the Act (“On an application under s 459P, the Court may order that an insolvent company be wound up in insolvency.” ) and adjourned the winding up application. His Honour also made an order under s 459R(2) extending the period within which the wind up application must be determined (the specified period being within 6 months of the application being made).

The Tribunal then heard the tax matter over five days in August 2012 and reserved its decision. The Tribunal handed down its decision on 29 January 2013. The company (and its related defendant companies) lodged a notice of appeal to the Federal Court within time, and the tax appeal was listed for first directions on 14 March 2013. (Robertson J was hearing this winding up application on 8 March 2013.)

Before Robertson J, the defendant companies again contended that there was and would be no debt to the Commonwealth by virtue of their tax appeals. While the Court was required to presume they were each insolvent, pursuant to s 459C(2)(a) of the Act, each company was insolvent only by reason of the tax debt in question.

Robertson J turned to the fresh exercise of his discretion, on this occasion, under s 459A. His Honour took into account the general principles set out in Southgate Investment Funds Ltd v Deputy Commissioner of Taxation [2013] FCAFC 10 at [77], bearing in mind that that was a case about whether or not execution of a judgment debt should be stayed and a case where there had been no hearing on the merits, the appeal under Pt IVC of the Taxation Administration Act not having been hard.

His Honour identified the following factors which he took into account at [15], in refusing the adjournment application on this occasion -

• It is the taxpayer which bears the onus of persuading the Court that a stay ought be granted in the particular circumstances
• That great weight must be given to the clear legislative policy which gives priority to the recovery of taxation revenue notwithstanding that the taxpayer has a Pt IVC proceeding on foot
• That it is too narrow a view of the discretion to grant a stay merely because Pt IVC proceedings are pending or because on review of those proceedings there appears to be an arguable case
• That in cases where the Court considers that it is in a position to assess the merits of pending Pt IVC proceedings and that it is appropriate to do so, the weight to be attached to those merits will vary according to the relative strength of the merits but the taxpayer needs to have more than merely an arguable case
• That irrespective of the merits of pending Pt IVC proceedings, a stay will not usually be granted where the taxpayer is party to a contrivance to avoid liability to pay the tax
• That more weight would be given to the merits factor if the case is one where the Deputy Commissioner has abused his position.

Robertson J found it significant that the tax appeal from the AAT to the Federal Court was on, and limited to, questions of law. Whereas he had held in April 2012 that each company had an arguable case which extended to the facts, the position now was that each defendant company was limited to questions of law. His Honour considered the grounds, and found that they were not reasonably arguable (at [26]). His Honour found that even if he was wrong on that and the grounds of the tax appeal were reasonably arguable, they were not strong, and the clear legislative policy which gives priority to the recovery of taxation revenue, would outweigh any merits of the appeal to this Court. Perhaps even the highly esteemed tome, Fary on Adjournments, would not have aided the defendant companies in staving off the result, in this case.

His Honour ordered that the companies be wound up.

For those interested, I refer you to my case review last month of HC Legal Pty Ltd v Deputy Commissioner of Taxation [2013] FCA 45, a most interesting case involving the dismissal of an application by a company to set aside a statutory demand issued by the Commissioner (link).

ASIC Information Sheet 165 – Legal Professional Privilege and Responding to Compulsory Production Notices

Late last year (13 December 2012) ASIC released its Information Sheet 165 outlining the approach it takes to claims of legal professional privilege (LPP). ASIC has compulsory information gathering powers to require disclosure of information. This power may be exercised in respect of their regulatory work. As ASIC stated in its press release, documents and information that attract a valid claim of LPP does not have to be provided. However, when the recipient of a notice compelling production of documents makes a claim of LPP, issues can arise as to whether the claim has been properly established, and whether LPP information can be provided to ASIC on a limited and confidential basis.

In Section 6 of the information sheet, ASIC states in summary that if in ASIC’s opinion a claim of LPP is not substantiated by the information provided, or in their view it is otherwise not valid (by reason of waiver or because it is simply not privileged, in their view) then you, the party claiming LPP in a document, have several choices. You may (a) withdraw your claim of LPP and provide the information to ASIC, (b) enter into a voluntary LPP dispute resolution process with ASIC, or (c) make an application to Court to seek a declaration that the information is privileged.There is also a fourth choice: (d) maintain your claim of LPP but provide the documents voluntarily on a strictly confidential basis.

Earlier in ASIC’s Information Sheet, at Section 5, ASIC outlines the procedure they refer to as “Voluntary confidential disclosure of LPP information”. Under this approach, ASIC may accept, on a confidential basis, privileged information voluntary provided by a notice recipient. Broadly, ASIC and the privilege holder agree that the disclosure of the information is on a strictly confidential basis, and ASIC and the privilege holder agree that the disclosure is not a waiver of any privilege existing at the time of the disclosure. ASIC notes that this prevents ASIC from later asserting that the provision of the information to it amounts to waiver, but may not prevent third parties from asserting that privilege has been waived thereby.

In this regard, I note that in the Centro privilege decision I reviewed last year, PwC sought to argue that Centro had waived privilege by their provision of documents to ASIC by virtue of notices issued under s 30 of the ASIC Act 2001 (Cth) requiring their compulsory production. Centro had provided some unredacted documents to ASIC under covering letters expressing their provision to be on a confidential basis, with an express reservation of privilege and an express lack of intention to waive privilege. Bromberg J held that while there might have been a limited waiver by Centro as against ASIC, there was not necessarily waiver as against a third party like PwC. His Honour referred to the High Court’s decision in Mann v Carnell [1999] HCA 66; 201 CLR 1 at [32]. See Kirby v Centro Properties Limited (No 2)[2012] FCA 70 and my post of February 2012 entitled “Centro class action developments – (a) privilege and (b) a bombshell”. (The privilege section of this post was later republished in extended form, and may be viewed here.)

It is useful to consider the judgment by Bromberg J in Kirby v Centro on this issue of the “voluntary” provision of privileged documents to ASIC in response to a notice from ASIC compelling production, in particular the passages at [97]-[108].

In relation to waiver, the judgment provides some comfort, in that it demonstrates that documents provided under compulsion to ASIC for a limited purpose, may retain the protection of privilege as against other third parties (cf AWB Ltd v ASIC [2008] FCA 1877 at [26]). However caution is warranted. Much will depend upon the circumstances of their provision, and the extent to which a company can claim that its provision of the documents was consistent with the maintenance of confidentiality in those documents as against third parties.

ASIC’s letters accompanying the s 30 notices requiring production of documents in Kirby v Centro stated that ASIC understood a valid claim of legal professional privilege was a reasonable excuse for not producing documents pursuant to the s 30 notice and that accordingly, Centro was not obliged to produce documents which were covered by a valid claim to privilege. However, so ASIC’s letters said, if a claim for legal professional privilege was made, detailed information in support of that claim was required by ASIC in order that ASIC could assess whether the claim was justified.

In response Centro provided documents, some unredacted, including those to which it later claimed privilege in these proceedings as against PwC. Centro’s solicitors went to some length in their covering letters accompanying the documents (see paragraph [99]). It is instructive to have regard to some of the statements their letters included, bearing in mind the successful result they obtained here on the question of privilege –

• That Centro did not intend to waive legal professional privilege by providing documents to ASIC to which Centro may be entitled to claim legal professional privilege,
• That in the event that Centro ascertained that a document or part of a document was one over which it was entitled to assert a claim for legal professional privilege, Centro reserved the right to seek to assert legal professional privilege over that document,
• As to confidentiality, that the documents provided to ASIC were confidential and that they were being provided on the basis that ASIC would treat the documents as confidential and not provide them, or disclose the information contained within them to any other person except under legal compulsion or with Centro’s prior written consent.

(I note that on 28 February 2012 PwC sought leave to appeal the judgment of Bromberg J, but leave was refused by North J (link).)

Statutory demands from the Tax Office – HC Legal Pty Ltd v DCOT [2013] FCA 45

On Tuesday the Federal Court dismissed an application by a company trading as a law firm to set aside a statutory demand issued by the ATO. It is an interesting case and the judgment provides a useful reminder that even though a company may have challenged a tax assessment and an objection or appeal proceedings are pending, this is no bar to the Commissioner issuing a statutory demand, and does not of itself provide grounds to have one set aside. The judgment of Murphy J is that in HC Legal Pty Ltd v Deputy Commissioner of Taxation [2013] FCA 45.

In applications to set aside a statutory demand, the ATO is in a privileged position compared with anyone else. This is because even where the taxpayer disputes the tax debt, the ATO  has the benefit of several legislative provisions which have the effect of deeming notices of assessment and declarations as conclusive evidence that the amounts and particulars are correct and due. The Hight Court has held that the operation of those provisions cannot be sidestepped by an application by a taxpayer under s 459G of the Corporations Act to set aside a statutory demand by the Commissioner: Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd [2008] HCA 41; (2008) 237 CLR 473 (Broadbeach Properties).

Before turning to the substantive part of the case, I will first briefly address two other aspects.

Applications for review of a Federal Court Registrar’s decision

HC Legal Pty Ltd v DCOT was in fact a rehearing de novo of the set-aside application which had first been made to a Registrar and dismissed. The plaintiff (HCL) had then made application for a review of the Registrar’s decision pursuant to s 35A(5) of the Federal Court Act 1976 (Cth). His Honour said the following in relation to the nature of applications for review of a Federal Court Registrar’s decision, at [4] -

“It is uncontroversial that the application involves a rehearing de novo, at which the parties may adduce further evidence. The Court is to exercise its discretion afresh, unfettered by the decision of the Registrar: Martin v Commonwealth Bank of Australia [2001] FCA 87; (2001) 217 ALR 634 at [6] and [12]; Mazukov v University of Tasmania [2004] FCAFC 159 at [22]-[27]; Callegher v ASIC [2007] FCA 482; (2007) 239 ALR 749 at [46].”

Background – The contractual arrangement

This case involved a rather curious contractual arrangement, which lead directly to the tax liability and statutory demand that followed. The law firm in question Hambros and Cahill Lawyers (HCL) was a small one, with two lawyers as its directors. In December 2011, HCL entered into an agreement with an entity related to the winemaker Andrew Garrett (Holy Grail). Under the agreement, for a fee, Holy Grail granted HCL the exclusive rights to provide legal services to Mr Garrett’s associated entities. Not only might it be thought unusual for a law firm to purchase the rights to represent clients, but the size of the fee HCL agreed to pay for this right was staggering: $45m plus GST – a total of $49.5m. HCL was to pay this fee pursuant to a vendor finance agreement, the vendor being Holy Grail and the borrower being HCL. The effect of this was that HCL did not need to advance any funds at the time.

In early 2012, when HCL came to lodge its BAS for that last quarter in 2011, it stated it had made a capital purchase in the sum of $49.5m in the last quarter of 2011, and claimed input tax credits from the Commissioner in the sum of $4.5m for the GST paid on that purchase. After deductions for GST amounts it owed, the input tax credits it claimed came to $4,491,954, which the Commissioner then remitted to HCL. There was no evidence as to what then happened to that money in the hands of HCL, but HCL’s counsel informed the Court that it had been used to pay certain expenses of the firm, pay a deposit to purchase Seabrook Chambers in Melbourne, and the balance of $2m each was distributed to the two directors, posted in the books as a loan, although each director had paid back $350,000 to HCL.

As Murphy J put it: “The Commissioner’s concern regarding the transaction and the claim for input credits of $4.491 was immediately apparent.” Shortly thereafter the Commissioner froze HCL’s bank accounts and moved to audit the firm.

In May 2011, following the audit, the Commissioner assessed HCL as liable to pay $4.5m in GST. However, although the ATO’s Running Balance Account (RBA) statement for the company showed that GST liability as relating to the last quarter of 2011, the notice of assessment referred to the first quarter of 2012. Under a separate notice, with the correct tax period cited, there was also a penalty imposed of $2.5m.

On 19 June 2012 HCL lodged its objection to the assessment and penalty.

On 4 July 2012 the Commissioner served the statutory demand, seeking payment of $6.95m – $4.5m in GST, $2.25 penalty and interest charges.

On 11 September 2012 the Commissioner sent a letter enclosing a new, revised assessment to HCL, asserting the first notice had contained a typographical error and that the correct tax period was the last quarter of 2011. This was followed by an email from the Commissioner’s office referring to the error in the first assessment.

The Statutory Demand – Was there a “genuine dispute” such that it should be set aside?

The Court may set aside a statutory demand on the basis that there is a genuine dispute about the existence or amount of the debt to which the demand relates: s 459H(1)(a) and (3) of the Corporations Act 2001 (Cth) (the Act).

In the hearing before the Registrar, HCL had not contended that there was a genuine dispute under s 459H because, said Murphy J in his judgment, of the statutory protection afforded to debts arising from tax assessments. In the Broadbeach Properties case referred to above, the High Court said this at [57]-[58] -

“Section 459G applications by taxpayers are not Pt IVC proceedings and production by the Commissioner of the notices of assessment and of the GST declarations conclusively demonstrates that the amounts and particulars in the assessments and declarations are correct ([Taxation] Administration Act, Sch 1, s 105-100 [now s 350-10]; [Income Tax] Assessment Act, s 177(1)). That being so, the operation of the provisions in the taxation laws creating the debts and providing for their recovery by the Commissioner cannot be sidestepped in an application by a taxpayer under s 459G of the Corporations Act to set aside a statutory demand by the Commissioner.

“The matter was explained, with respect, correctly by Williams J in Bluehaven Transport Pty Ltd v Deputy Federal Commissioner of Taxation (2000) 157 FLR 26 at 32. The use by the Commissioner of the statutory demand procedure in aid of a winding up application is in the course of recovery of the relevant indebtedness to the Commonwealth by a permissible legal avenue. The phrase “may be recovered” in ss 14ZZM and 14ZZR of the Administration Act applies to the statutory demand procedure. That state of affairs places the existence and amounts of the “tax debts” outside the area for a “genuine dispute” for the purposes of s 459H(1) of the Corporations Act.”

To consider that for a moment: In other words, the effect of the legislative provisions cited in the first of these two paragraphs is that when it comes to debt recovery, the ATO’s claims are in a sense “bulletproof” – the notices of assessment and declarations they issue are treated as conclusive evidence that they are correct as to the amount and particulars of the tax liabilities. The effect of the provisions in the second paragraph is that the Commissioner can continue with recovery actions even if a review on objection or an appeal pending, as if no such review or appeal were pending.

While HCL did not run it before the Registrar, before Murphy J, HCL advanced the argument that there was a genuine dispute under s 459H(1). HCL argued that the Commissioner had conceded the first notice of assessment was flawed, pointing to the issue of the second notice, and the ATO correspondence about the error. HCL argued that this negated the first assessment on which the statutory demand was predicated.

His Honour rejected these arguments, on a number of grounds -

• The Commissioner had not discharged the first assessment made, as evidenced by the RBA statement showing no adjustment;
• The contentions of HCL were misconceived as they equated an “assessment” with a “notice of assessment”, the former being the official act or operation of the Commissioner, the second being the piece of paper informing of it (see [31]-[32] and the authorities and provisions there cited);
• The first notice of assessment with its error as to the relevant tax period did not affect the assessment itself. Indeed under s 105-20(1), Schedule 1 of the Taxation Administration Act 1953 (Cth), the assessment would remain valid even if notice of the assessment was not given at all ([33]-[34]);
• It was clear, including from HCL’s objection and submissions, that HCL was not mislead by the error in the first notice ([35]);
• In any event, the Commissioner corrected the error by way of the second notice of assessment, which was provided prior to the hearing. The existence of a genuine dispute must be determined at the time the Court hears the application (see [36] and the authorities there cited);
• The Commissioner also has the benefit of s 8AAZI of the Taxation Administration Act, which provides that the production of an RBA statement is prima facie evidence that the RBA was duly kept and that the amounts and particulars in the statement are correct. The relevant RBA was in evidence before the Court and showed that the amount reflected in the statutory demand was the amount of HCL’s debt to the Commissioner as at the date of the statutory demand (see [37]-[38] and [40]-[41]);
• Various other legislative provisions have the effect that the amounts set out in the RBA statement were now due and payable by HCL: see subsection 8AAZH(1) of the Taxation Administration Act 1953 (Cth), and s 255-5 and 255-1 of Schedule 1 of that Act (see [39]);
•  The Commissioner also relied upon the above-mentioned s 350-10 of Schedule 1 of the Taxation Administration Act, which provides that the production of a notice of assessment is conclusive evidence that the assessment was properly made, and the amounts and particulars of the assessment are correct. His Honour was not persuaded that in the circumstances of this case that provision operated as the Commissioner contended, with regards to the first notice of assessment. However in light of his conclusions above, it was unnecessary to decide this question (see [41]).

The Court found that HCL’s contentions raised a spurious rather than bona fide or real ground of dispute. His Honour did not accept that the error in the first notice of assessment gave rise to a genuine dispute under s 459H of the Act as to the existence or amount of the debt to which the statutory demand related. The assessment itself was unchanged. (See [42] and the authority there cited.)

Whether the Statutory Demand should be set aside for some other reason

HCL also argued that the statutory demand should be set aside as there was “some other reason” which would justify the Court’s exercise of its discretion to do so pursuant to s 459J(1)(b) of the Act. HCL based this upon the Commissioner’s conduct, upon the fact that HCL had disputed the assessment by lodging an objection, and upon the contention that it had a reasonably arguable case on its objection.

In Hoare Bros Pty Ltd v Deputy Commissioner of Taxation (1995) 19 ACSR 125 at 139, the Full Federal Court observed that the discretion might be exercised where it is “shown that the Commissioner’s conduct was unconscionable, was an abuse of process, or had given rise to substantial injustice.”

Later judgments have indicated that the discretion is of broad compass, and Murphy J expressed the view that he did not consider the Court in Hoare Bros was seeking to exhaustively set out the situations it comprehends (although I suggest it provides a useful guide). HCL argued, and his Honour accepted, that it was not necessary to show that substantial injustice would be caused if the discretion were not exercised, although he qualified that, noting that in Broadbeach the High Court had overturned one of the decisions HCL relied upon in this submission. In other words, it indeed might be necessary to demonstrate substantial injustice would follow were the statutory demand allowed to stand.

HCL argued that the existence of proceedings disputing a tax assessment may be relevant to the exercise of the discretion, and pointed to a line of authority in support of that view (see [46]). However, as his Honour noted -

• Section 14ZZM of the Taxation Administration Act provides -“The fact that a review is pending in relation to a taxation decision does not in the meantime interfere with, or affect, the decision and any tax, additional tax or other amount may be recovered as if no review were pending.”
• Section 14ZZR provides – “The fact that an appeal is pending in relation to a taxation decision does not in the meantime interfere with, or affect, the decision and any tax, additional tax or other amount may be recovered as if no appeal were pending.”
• In 2008 in Broadbeach, subsequent to the authorities HCL relied upon, the High Court observed at [60]-[61] that – “[T]he hypothesis in the present appeals must be…that there is no “genuine dispute” within the meaning of s 459H(1). Both the primary judge and the Court of Appeal emphasised the importance of the disruption to taxpayers, their other creditors and contributories that would ensure from a winding up, together with the absence of any suggestion that the revenue would suffer actual prejudice if the Commissioner were left to other remedies to recover the tax debts. But these considerations are ordinary incidents of reliance by the Commissioner upon the statutory demand system….The “material considerations”…which are to be taken into account, on an application to set aside a statutory demand, when determining the existence of the necessary satisfaction for para (b) of s 459J(1) must include the legislative policy, manifested in ss 14ZZM and 14ZZR of the Administration Act, respecting the recovery of tax debts notwithstanding the pendency of Pt IVC proceedings.” 
  
• His Honour considered that the legislative policy in ss 14ZZM and 14ZZR is that tax assessments are to be paid, even though a review or appeal is on foot;
• His Honour also pointed to the judgment of Olney J in Kalis Nominees Pty Ltd v Deputy Commissioner of Taxation 91995) 31 ATR 188 at 193 where Olney J – with a note of regret at the end – said: “…The policy of the law would be defeated if a demand were set aside under s 459J(1)(b) simply because a review of an objection decision is pending. A taxpayer must, in the context of a case of this nature, demonstrate more than the fact that he disputes his liability for the tax as assessed and that he is actively pursuing his remedies. It is both unnecessary and undesirable to endeavour to list the circumstances which would justify the exercise of the discretion under s 459J(1)(b) except to say that in the case in which the Commissioner is not shown to have acted oppressively or to have treated the applicant in a manner different from other taxpayers in a similar position, it is not appropriate that the discretion to set aside the demand should be exercised. Section 459J(1)(b) does not provide an occasion for the Court to express its views on the reasonableness or otherwise of the taxation legislation.” 

In response, HCL pointed to the concession the Commissioner had made in Broadbeach that upon the hearing of a winding up application, the court might properly have regard to whether the taxpayer had a “reasonably arguable” case in pending proceedings in which it was objecting to the tax assessment. HCL argued that there was no reason why the existence of a “reasonably arguable” case cannot be taken into account at the statutory demand stage, rather than at the winding up stage as suggested by their Honours in Broadbeach.

His Honour rejected this also. In Broadbeach at [62] the Hight Court had said -

“…Such consideration [of the time which has elapsed and the progression of the Part IVC proceedings towards determination], if it were supported by evidence of the state of progression of the Pt IVC proceedings, would be relevant in the operation of Pt 5.4 of the Corporations Act, if at all, at the later stage of the hearing of any winding up application.” 

In any event, Murphy J could not be satisfied on the evidence before him that HCL had a reasonably arguable case, and HCL did not seek to develop its submissions beyond a mere assertion that its acquisition of the right to provide legal services was a “creditable acquisition” within the meaning of the GST Act, and that it was therefore entitled to the input tax credit of $4.5m claimed.

In relation to conduct of the Commissioner which it argued justified the Court exercising its discretion under s 459J(1)(b) to set aside the statutory demand for “some other reason”, HCL pointed to -

• the Commissioner’s freezing of HCL’s accounts – which lasted for 1 day,
• an alleged breach of undertaking to defer recovery proceedings – his Honour found that the agreement was only for the Commissioner to defer them until after an extension for HCL to lodge its objection had expired, which the Commissioner did,
• a refusal to agree to defer recovery until after the determination of HCL’s objection and any appeals – the Commissioner refused to do so unless HCL was prepared to provide acceptable security for the debt, which HCL declined to provide,
• the garnishee notice the Commissioner issued and directed to HCL’s bank – which resulted in recovery of a small amount and which was rescinded after a short time, and
• HCL’s suspicion that the assessments were tainted by bad faith. It had made several FOI requests for the Commissioner’s documents relating to the freezing of accounts and the audit, and had received documents in response – his Honour found none of the documents he was taken to evidenced any bad faith on the part of the Commissioner.

His Honour held that in all the circumstances of the case he did not consider the Commissioner’s actions, considered individually or collectively, were unconscionable, oppressive, abusive, or productive of substantial injustice. There was nothing to justify the exercise of his discretion.

His Honour noted, perhaps wryly, that 11 months later, HCL and its directors still had the benefit of the almost $4.5m remitted to it by the Commissioner. He dismissed the application to set aside the statutory demand and awarded costs of the application, and of the hearing before the Registrar, against HCL.

I will endeavour to monitor the Federal Court portal to see if the judgment is appealed, and if so will post an update to that effect.

Newsflash: Great Southern Class Actions to start tomorrow (Monday 29 Oct)

One of the largest set of group proceedings yet commenced in the Supreme Court of Victoria is set to start tomorrow (Monday 29 October 2012). The trial will be heard by his Honour Justice Croft and at this stage is estimated to run for 4-5 months. Interestingly, the Supreme Court is providing a live streaming facility on its website, for the viewing of the opening addresses. The webcast portal may be found here.

The Great Southern class actions comprise in excess of 22,000 group members and individual plaintiffs. According to the Supreme Court website, there are 16 group proceedings and 12 individual proceedings which were commenced in the Supreme Court with respect to various agribusiness projects (managed investment schemes) undertaken by Great Southern on behalf of investors. The various agribusiness projects included forestry, horticulture, viticulture and cattle schemes. There are also a large number of County Court proceedings which were uplifted to the Supreme Court (though a large number of these were stayed pending the outcome of the trial).

In broad terms, the Great Southern class actions involve various claims against the Great Southern entities and their directors, including whether certain product disclosure statements for the various agribusiness projects complied with the Corporations Act 2001 (Cth), and whether the Great Southern entities breached their statutory duties as responsible entities variously of the managed investment schemes. There are also allegations of misleading and deceptive conduct.

Each of the 16 separate group proceedings, brought pursuant to Part IVA of the Supreme Court Act 1986 (Vic) relates to a distinct product disclosure statement issued in respect of one or more Great Southern managed investment schemes. The plaintiffs were investors in these schemes.

In the months leading up to the commencement of trial, there have been a multitude of pre-trial issues to be addressed, and disputes to be resolved. One of these has been a contest between the parties as to whether a claim for privilege could be maintained by Great Southern Managers Australia Limited (GSMAL) in a board paper that contained some legal advice. The plaintiffs/investors wanted to tender the so-called “2005 Board Paper” at trial. The issue was whether or not  s 124 of the Evidence Act 2008 (Vic) permitted them to do so.

Last month, on 5 September 2012, the Court of Appeal handed down its judgment on the issue. Aside from a minor point as to the breadth of the declaration to be made, their Honours agreed with his Honour Sifris J, who had held at first instance that  s 124 of the Act permitted the plaintiffs/investors to tender the document.

Various arguments were advanced, but in essence, the issue turned on the proper construction and operation of s 124 of the Act; the section governing the loss of client legal privilege where the privilege is that of joint clients. Section 124 provides as follows -

“124. Loss of client legal privilege – joint clients

(1) This section only applies to a civil proceeding in connection with which 2 or more parties have, before the commencement of the proceeding, jointly retained a lawyer in relation to the same matter.

(2) This Division does not prevent one of those parties from adducing evidence of - 

(a) a communication made by any one of them to the lawyer; or

(b) the contents of a confidential document prepared by or at the direction or request of any one of them - 

in connection with that matter.”

The legal advice said to be contained in the June 2005 Board Paper consisted of emails which contained legal advice provided to GSMAL as principal client, which had been sought by GSMAL for the benefit also of scheme members (investors).

The Court of Appeal agreed with Sifris J’s conclusion that the requirement of a lawyer having been ‘jointly retained’ in s 124(1) was met in circumstances where the advice as sought for the benefit of the scheme members (investors). The section does not require all of the joint privilege holders to expressly retain the lawyer. It is directed to the substance of the transaction, not the agency through which it is effected. (See [21]-[30]).

For this and other reasons, the Court of Appeal held the plaintiffs/investors entitled to adduce evidence of the 2005 Board Paper at the trial. The judgment may be read in full here.

It will be interesting to see how this proceeding unfolds, including how significant this particular evidence proves to be.

Newflash – Willmott Forests investors mount High Court appeal

In a much anticipated move, Willmott Forests investors have lodged an application for special leave to appeal to the High Court of Australia, from the Victorian Court of Appeal’s recent decision on a question of disclaimer of leases by a liquidator, according to a report in today’s Australian Financial Review.

My review of the Court of Appeal’s decision – from which the Willmott Forests investors seek to appeal – is here. My reviews of earlier Willmott Forests decisions are here and here.

The Australian Financial Review article is here, and credit must go to my friend and colleague Sam Hopper for noting this development; his post is here.

Little is yet known publicly of the detail of the special leave application. I will monitor developments and seek to keep readers informed. In the meantime, I note that the website of one of the two investor groups involved in the litigation – Willmott Action Group Inc – appears to have been dismantled. It is unclear as to what, if anything, this signifies.