Yesterday her Honour Ferguson J handed down an interesting decision, which serves as a  useful reminder about public examinations of directors for potential insolvent trading claims – including de facto and shadow directors – and the consequences of those individuals failing properly to maintain their privilege against self-incrimination for criminal or penalty proceedings. The case was that of Le Roi Homestyle Cookies Pty Ltd (in liquidation) v Gemmell [2013] VSC 452.

Before issuing any insolvent trading proceedings against two individuals alleged to have been both de facto and shadow directors, the liquidators had conducted public examinations of each of them. In large part, the insolvent trading claims against the defendants were based on information elicited in the course of the public examinations.

Public examinations are seen as something of a Star Chamber procedure, although there are obvious public policy reasons for permitting this. Whilst directors are inevitably reluctant to answer questions under public examination and potentially furnish the liquidators with evidence to use against them in future litigation, under s 597 of the Corporations Act 2001 (Cth) examinees are compelled to attend (s 597(6)) and to answer the liquidators’ questions (s 597(7)).

Whilst examinees must answer even if the answers might expose them to a penalty or criminal prosecution, they are afforded some protection. If they expressly claim the privilege, their answers may not be used against them in criminal or penalty proceedings. Sub-sections 597(12) and (12A) provide –

“(12) A person is not excused from answering a question put to the person at an examination on the ground that the answer might tend to incriminate the person or make the person liable to a penalty.

(12A) Where:

(a) before answering a question put to a person (other than a body corporate) at an examination, the person claims that the answer might tend to incriminate the person or make the person liable to a penalty; and

(b) the answer might in fact tend to incriminate the person or make the person so liable;

the answer is not admissible in evidence against the person in:

(c) a criminal proceeding; or

(d) a proceeding for the imposition of a penalty;

other than a proceeding under this section, or any other proceeding in respect of the falsity of the answer.”

Generally, where advised to do so by their legal practitioner and/or given the usual warning in this regard by the Associate Judge, director examinees will claim the privilege and thereafter simply say the word “privilege” as a preface to every answer they give.

Here, whilst they received the warning, neither defendant claimed either penalty privilege or privilege against self-incrimination. Despite this, in the insolvent trading proceedings subsequently brought they sought orders dispensing with and relieving them from complying with the pleading and discovery requirements of the rules to the extent that compliance may have a tendency to expose them directly or indirectly to a civil penalty in respect of the subject matter of the proceeding, or to a criminal sanction. Contravention of s 588G(2) exposes directors to civil penalty orders (s 1317E(1)) and, if the person’s failure to prevent the company incurring the debt whilst insolvent was dishonest, criminal proceedings (s 588G(3)).

The Associate Judge dismissed their application, and the defendants appealed. Ferguson J held that the defendants had waived their rights to claim privilege, could no longer invoke those privileges to avoid filing fully responsive defences or make discovery, and must now plead defences and make discovery in accordance with the Rules.

Ferguson J reproduced, with approval, the relevant principles as distilled by Robson J in Re Australian Property Custodian Holdings Ltd (in liq)(recs & mgrs apptd) (No 2) [2012] VSC 576; (2012) 93 ACSR 130 (also cited as “Re APCH (No 2)“) – a judgment which I commend to you as providing an excellent and detailed consideration of the key relevant authorities – at [115] –

(a) In the case of self-incrimination privilege, the defendant must establish that the provision of information or the production of documents in the civil case leads to a real and appreciable risk of a criminal prosecution before the privilege can be invoked;

(b) In an action to recover a penalty it is not necessary for a defendant to establish that there is a risk the defendant will be subjected to a penalty by providing information to the plaintiff. the plaintiff is seeking the information for that very purpose.

(c) In civil actions, where no claim for penalty is made, the defendant must show that providing the information requested would tend to subject him to a penalty in separate proceedings before he can rely on the privilege.

(d) The privilege against exposure to a penalty is a common law right of privilege that may be availed of as of right and is enforced and protected by the Court.

(e) The privilege against the exposure to penalty may be relied on by a defendant to a civil procedure in which a penalty is not sought (“the non penalty civil proceeding”).

(f) The privilege against the exposure to penalty extends to the obligation upon a defendant to plead, give discovery and answer interrogatories in the non penalty civil proceeding.

(g) As a general rule, the privilege does not entitle a defendant to a non penalty civil proceeding to obtain an order in limine excusing him or her from giving discovery or answering interrogatories.

(h) In exceptional circumstances, a defendant may be entitled to such orders in limine.

(i) By extension, in exceptional circumstances, a defendant may be entitled to orders in limine that he may deliver a defence that departs from the Rules of Court only insofar as to protect his privilege against exposure to penalty.

(j) Exceptional circumstances may exist where the defendant to the civil proceeding is also the subject of separate civil penalty proceedings alleging the same or similar conduct.

(k) Where a defendant seeks to take the privilege against exposure to penalty in a defence, the proper course is to plead accordingly and – if challenged – the defendant will be required to justify that the privilege is taken in good faith and on reasonable grounds for the privilege to stand.

Her Honour added to this list a principle I will denote as “(l)” –

(l) The privileges can only be overridden by statutory authority, or waived and may not be abrogated by the purported exercise of a judicial discretion (see [10]).

Ferguson J considered the submissions put for the parties at [17], including the submission for the liquidators that the prospect of criminal prosecution of the defendants was remote, and that penalty privilege is of a lower order of importance. Her Honour observed that if the liquidators established their claims against the defendants, it was almost inevitable that the facts necessary for the imposition of a civil penalty would also be established. It would also be likely to establish at least some of the elements that would need to be proved in a criminal prosecution (although her Honour did not comment on the differing standards of proof). Her Honour indicated that in her view, here it could not be said that the risk of penalty or criminal proceedings was not so low as to be of no consequence.

However whether the defendants ought be excused from filing defences and providing discovery turned also upon whether they had waived any right to maintain the privileges in this proceeding. Ferguson J noted that there was no suggestion that by pleading their defences or providing discovery, the defendants would expose themselves to any different penalty or criminal proceeding to which they were not already exposed by virtue of having failed to claim privilege during the course of their public examinations. That information was already in the hands of the liquidators, and potentially ASIC or a prosecutor, and could be used by them without the restrictions that might otherwise have applied had a claim for privilege been invoked. Moreover, the defendants had had their rights explained to them at the beginning of their examinations by the Associate Judge. Having received that warning, they did not claim either privilege (see [30]).

Ferguson J found that the defendants had waived the right to claim the privileges in respect of the answers that they gave during their public examinations, and held that they should not be permitted to avoid properly pleading and providing discovery. If they were to be so excused, the outcome would be irrational. They had already lost the protection they now sought, and they did not submit that in pleading their defences and making discovery they would have to go beyond the information already provided during their examinations. There was no justification for relieving them of their obligations to comply with the pleading and discovery requirements.