Worldwide freezing orders – recent developments in Australia

Three recent Australian judgments on freezing and ancillary disclosure orders, and their application to ‘worldwide’ (outside Australia) assets, are worth noting. The first is a High Court decision as to the courts’ discretion to compel disclosure of worldwide assets pursuant to freezing and ancillary orders, despite accepting a claim to the privilege against self-incrimination. The second is a decision of the Full Federal Court on the issue of a jurisdictional precondition for worldwide freezing orders to be made by the Federal Court. The High Court has granted special leave in this case and will be hearing the appeal tomorrow, 13 October 2021. The third is an illustrative Federal Court decision handed down last week, in which worldwide freezing orders were made.

Deputy Commissioner of Taxation v Shi [2021] HCA 22

In August the High Court (4:1 majority) upheld the Deputy Commissioner’s appeal over the proper construction and application of s 128A of the Evidence Act 1995 (Cth) and whether the taxpayer in that case could – and should be permitted to – decline to comply with an order to disclose his worldwide assets relying upon the s 128A privilege against self-incrimination

The Deputy Commissioner had obtained ex parte orders in the Federal Court freezing the worldwide assets of a Mr Zu Neng (Scott) Shi, up to the unencumbered value of $41,092,549.03. Mr Shi had been the head of a large labour hire business that supplied workers through various companies, to a number of abattoirs in Victoria and NSW. The Deputy Commissioner’s evidence in support of his application dealt with investigations relating to Mr Shi, his wife and his son by the ATO and the AFP, and allegations of asset stripping, phoenix activity and systematic non-payment of taxation liabilities as well as fraud and evasion (see [56]). The sum for which the freezing orders were sought and made was the total income tax, penalty and interest for which Mr Shi had been assessed. The freezing orders were made on the acceptance by the Court that that there was a risk that assets might be removed from Australia to the detriment of the Commonwealth (see [3]-[8] and [20] of the freezing order judgment). Ancillary orders required Mr Shi to disclose all of his worldwide assets including their value, location and details, and the extent of his interest in the assets (disclosure order) (see [14]). Five months after the freezing and disclosure orders were made, judgment for the debt alleged was entered for the Commissioner by consent against Mr Shi and other respondents with costs – see [1] of the first instance judgment.)

To pause here for a moment, in practical terms, a party against whom a freezing order with a disclosure order is made, who seeks to claim the privilege against self-incrimination, generally responds to the disclosure order by filing up to three affidavits: (1) an affidavit disclosing so much of the information ordered to be disclosed to which no objection is taken (disclosure affidavit), (2) an affidavit disclosing the information required to be disclosed to which objection is taken (privilege affidavit), and (3) a separate affidavit setting out the basis of the objection (objection affidavit). As to the latter two, pursuant to s 128A(2), the privilege affidavit is delivered to the Court in a sealed envelope, and the objection affidavit is filed and served on each other party.

At first instance in the Federal Court Steward J, as his Honour then was, was satisfied that there were reasonable grounds for Mr Shi’s objection to disclosure of his worldwide assets. In other words, Mr Shi had established his claim to privilege on the grounds that disclosure of his worldwide assets may tend to incriminate him. Under s 128A(5), subject to one matter, it would follow that the Court must not require the sealed privilege affidavit to be disclosed and must return it. However a discretion lies in the space between the Court concluding the objection has reasonable grounds, and it being wholly upheld, by virtue of s 128A(6). Once it concludes under s 128A(4) that the objection has reasonable grounds, the Court then turns to consider whether to exercise its discretion under s 128A(6) to require the disclosure of the whole or part of the privilege affidavit to the other parties in the interests of justice, despite the soundness of the objection taken.

The Court may require disclosure of the information under s 128A(6) if it is satisfied of three things. In this case, the Court had to be satisfied (a) that the information disclosed in the Privilege Affidavit may tend to prove that Mr Shi had committed an offence against or arising under an Australian law (it was), (b) that the information does not tend to prove that the person has commented an offence or is liable to civil penalty under a law of a foreign country (it was), and (c) that the interests of justice so required. If it was satisfied as to all three, the Court could exercise a discretion to order all or part of the information to be disclosed.

Steward J’s decision turned upon the third of these. His Honour held that, subject to one matter, the interests of justice did favour disclosure. However his Honour considered that he was entitled to have regard to the consequences of the issue of a s 128A(7) certificate. This would mean that much of the information disclosed would not be able to be used against Mr Shi in any Australian court under s 128A(8), which would impact any future criminal proceedings as well as any future tax appeal. Steward J considered it was open to the Commissioner to exercise the powers under s 353-10 of Sch 1 to the Taxation Administration Act to obtain the same information without the ability of Mr Shi to refuse production on the grounds of self-incrimination. (see [61]) His Honour declined to order disclosure, essentially because in his view the public interest would be better served by the Commissioner obtaining the information via different means. The High Court majority held that this was an irrelevant consideration to take into account in failing to be satisfied for the purpose of s 128A(6)(c). (see [11] and [68]) The Full Federal Court had also so held. (see [62])

On appeal, the Full Court held that the interests of justice did not require disclosure of the privilege affidavit to the Commissioner, but for a different reason than at first instance. Their Honours so held on the basis that because judgment had already been entered for the Commissioner for the sum sought to be recovered, disclosure of the information was sought solely for the purpose of assisting methods of execution. This meant it was relevant to consider whether there were other available ways that execution could be assisted, including the Commissioner’s ability to examine Mr Shi as a judgment debtor under s 108 of the Civil Procedure Act 2005 (NSW). (see [62]) Lee J had also identified a risk of derivative use of the information disclosed despite ss 128A(7) and (8). Like the primary judge, but for different reasons, their Honours also declined to exercise their discretion to order disclosure.

The High Court upheld the Deputy Commissioner’s appeal, holding that these matters too were irrelevant considerations (see [11] and [68]-[69]). As to the risk of derivative use raised by Lee J, Gordon J observed that this was contrary to the proper construction of s 128A, and was addressed by a number of measures: the certificate procedure in s 128A(7), the non-derivative use prescribed in s 129A(8), the Harman undertaking; the ability of the Court to craft the form of orders made under s 128A(6) including requiring only part of the information to be disclosed, suppression or non-publication orders could be made under s 37AF of the Federal Court of Australia Act 1976 (Cth) requiring the information not be provided or disclosed to anyone other than identified persons. (see [69])

The negative proposition in s 128A(6)(b)

I pause here to address an aspect of this case worth noting, which highlights the significance for a respondent to a disclosure order in taking and establishing the claim to privilege under s 128A(2)(e) in the objection affidavit; in particular, making it clear that the respondent is objecting on the basis of a risk of incrimination as to an Australian criminal or civil penalty law, a foreign criminal or civil penalty law, or both (and providing adequate evidence as to the legal and factual foundation for that objection).

The issue arises from the negative proposition of which the Court must be satisfied under s 128A(6)(b) before it is able to exercise the discretion, a matter raised by Mr Shi in his notice of contention. That proposition is, essentially, that the information in the privilege affidavit does not tend to expose Mr Shi to criminal or civil penalty liability in a foreign country. Mr Shi submitted to the High Court that once the Full Court majority had found that the onus was on the Commissioner to satisfy the Court of that matter, it should have found that it was not open to the primary judge to be satisfied of this negative proposition. (see [64])

However Gordon J noted that under s 128A(2), it had been open to Mr Shi to object to disclosure on the grounds of the risk of incrimination as to either Australian laws or foreign laws. Mr Shi did not object with reference to his exposure to incrimination for criminal or civil liability under a foreign law. His objection had been only based upon potential incrimination under Australian law. At best, her Honour noted, Mr Shi’s solicitor and counsel had made a bare general assertion that disclosure may tend to prove the commission of an offence against a law of a foreign country. However the objection was not taken on that ground, and bare assertion by counsel was not sufficient for s 128A(2). (see [65]) Her Honour concluded that a failure to object on the grounds of foreign law meant that the question raised by s 128A(6)(b) does not arise. (see [67])

The plurality also found that Mr Shi did not take the objection based upon a tendency of the information to incriminate him for a crime or civil penalty under any Chinese law, nor did he lead any evidence capable of establishing such a tendency. However rather than concluding that the question raised by s 128A(6)(b) did not arise, their Honours concluded that the omission of such a basis for objection pursuant to s 128A(2)(e) is a sufficient evidentiary foundation for the Court, in the absence of evidence to the contrary, to be satisfied of the negative proposition in s 128A(6)(b). (see [9]-[10])

Hence the plurality and Gordon J took different paths, but arrived at the same destination. Whether or not the requirement for the Court to be satisfied of the negative proposition in s 128A(6)(b) arose here, this was no impediment in this case. The discretion to compel disclosure could properly be exercised pursuant to s 128A(6) if the interests of justice so required (and, it was held, they did). Edelman J, in dissent, disagreed, taking the view that s 128A(6)(b) placed an onus upon the Deputy Commissioner to negate Mr Shi’s prima facie entitlement to the privilege, which was not done. (see [77]-[78] and surrounding passages)

On the question of onus as to the matters set out in s 128A(6)(a) and (b), Gordon J held that it is for the party claiming the objection to set out the basis for the objection pursuant to s 128A(2) and (4). Sections 128A(6)(a) and (b) do not impose a standard or burden on that party additional to or higher than that imposed by s 128A(2) and (4). The premise that the onus is on the party seeking disclosure to satisfy the court of the matters in s 128A(6)(a) and (b) is contrary to the proper construction of s 128A. (see [70]) Edelman J in dissent disagreed, taking the view that it was for the party seeking to abrogate the privilege to satisfy the Court to exercise its discretion under s 128A(6) to strip the person of that privilege. (see [102]) Whilst generally agreeing with the views of Gordon J, the plurality did not address the issue of onus specifically.

The plurality make the point in obiter at [8] that if the person claiming the privilege based their objection to disclosure on the ground that it might incriminate them as to a criminal offence or penalty under a foreign law and if the Court was satisfied that there were reasonable grounds for the objection pursuant to s 128A(4), this would necessarily mean that the Could could not at the same time be satisfied of the negative proposition in s 128A(6)(b). This is an important point. It means that if the objection is taken based upon self-incrimination as to a foreign law, and the Court is satisfied on the material that there are reasonable grounds for the objection, then the Court cannot compel disclosure in the interests of justice. The discretion does not arise.

The interests of justice – s 128A(6)(c)

On the issue of the proper application of s 128A(6((c), and the matters properly to be considered by the Courts, the plurality Kiefel CJ, Gageler and Gleeson JJ observed –

“Evaluation of the interests of justice for the purpose of s 128A(6)(c) is informed primarily by balancing the public interest in the person to whom the extant disclosure order is directed complying with that disclosure order by disclosing information to the party to the civil proceeding in whose favour the order has been made, against the potential detriment to the person that arises from the tendency of the information to prove that the person has committed an offence against or arising under, or is liable to a civil penalty under, an Australian law. A court assessing that potential detriment must obviously take into account the prohibition in s 128A(8) on derivative use of the information disclosed. As recognised by the primary judge, and as explained by Gordon J, a court assessing that potential detriment must also take account of constraints on the use and dissemination of the disclosed information that arise within the context of the civil proceeding in which the disclosure order has been made. Those constraints include the obligation of the party to whom disclosure is made, and of any other person to whom the disclosed information might be given, not to make any use of the information other than for the purpose of the civil proceeding without leave of the court. they include too the availability of orders restricting the dissemination of the disclosed information, relevantly under s 37AF of the Federal Court of Australia Act 1976 (Cth).”

Huang v Deputy Commissioner of Taxation [2020] FCAFC 141; 280 FCR 160

In this case, the taxpayer Mr Changran Huang successfully appealed the making of worldwide freezing orders against him and an ancillary order as to the disclose of information (asset disclosure order) only insofar as it applied to assets outside Australia. Mr Huang had substantial assets in China and Hong Kong.

The freezing orders had applied to assets held by Mr Huang in Australia to the unencumbered value of over $140million as well as to assets outside Australia. Mr Huang challenged the extension of the freezing and ancillary (disclosure) orders to assets outside Australia, submitting that foreign revenue laws would not be enforced either directly or indirectly in China or Hong Kong. The Deputy Commissioner’s own case was that enforcement of a judgment against Mr Huang in Hong Kong or China “is not likely” (see [23]-[24] and [34]) although she submitted that the evidence did not establish that enforcement in China or Hong Kong or elsewhere in the world was impossible. (see [25])

The plurality, Besanko, Thawley and Stewart JJ, observed that the purpose of a freezing order as identified in r 7.32 of the Federal Court Rules 2011 (Cth) is the prevention of the frustration or inhibition of the Court’s process by seeking to meet a danger that a judgment or prospective judgment of the Court will be wholly or partly unsatisfied. A freezing order is no doubt an important weapon in the Court’s arsenal, but it must not be used for a purpose beyond that identified in r 7.32. (see [41]) If assets are beyond the reach of the Court’s enforcement processes, then a freezing order with respect to those assets is not for the purpose identified in r 7.32 because there is no longer a realistic possibility that the removal or disposition of the assets will frustrate or inhibit the Court’s process such that a judgment or prospective judgment will be wholly or partly unsatisfied. (see [42])

Their Honours accepted that the primary judge had applied an incorrect test, as to whether it was “not impossible” that the Deputy Commissioner may be able to take enforcement action against Mr Huang in China or Hong Kong. Their Honours held that a realistic possibility of enforcement in a foreign State is necessary. That is, there must be a realistic possibility that any judgment obtained by the plaintiff can be enforced against assets of the defendant in the place to which the proposed order relates. A test of a ‘realistic possibility’ is consistent with the approach taken by the courts in determining what must be shown in terms of the risk of the removal of assets or the disposal of assets, matters to which a freezing order is directed. (see [43] and [47]) Their Honours sought to make clear at [47]

“At the same time, and at the risk of stating the obvious, we wish to make it clear that we are not laying down any general principle as to the evidence which will be necessary to satisfy that test. Each case is likely to turn on all its circumstances and the cogency of the evidence and the inferences which can be drawn from it.”

Their Honours then applied the test and concluded that none of the matters relied on by the primary judge, either individually or collectively, provided a basis for a conclusion that enforcement of a judgment in China or Hong Kong was a realistic possibility. (see [49] et seq) Those matters were –

  1. That there were exceptions to the presumption in Damberg v Damberg, the presumption that foreign law is the same as Australian law where a party with the onus fails to prove the content of foreign law. No particular exceptions were identified as possibly applicable. The law applied by the courts in this country will not countenance a claim by a foreign government, directly or indirectly, for the enforcement of a foreign revenue debt. (see [51]-[56])
  2. The potential use of bankruptcy procedures, the recognition of which in Hong Kong may be unaffected by the foreign revenue rule. The latter part of that proposition was doubted by the Court, where this would constitute indirect enforcement of a foreign revenue debt. (see [57]-[58])
  3. The potential willingness of the courts of Hong Kong and China to enforce Australian insolvency laws. Same point. (see [59])
  4. The possibility of Mr Huang moving assets to other jurisdictions where enforcement is readily available. There was no evidence of a threat to do this, and it was a theoretical possibility. Their Honours did not consider this could be a basis for an order restraining the disposition or diminution of assets in jurisdictions where enforcement was not a realistic possibility. (see [60])
  5. The potential willingness of the courts of China and Hong Kong to enforce Australian laws relating to the payments of penalties and interest. However these follow from the tax which is owed by reason of Australian revenue laws and arise by reason of those laws. Their Honours’ view was that it was not open to the Deputy Commissioner to argue that penalties and interest may not fall within China and Hong Kong’s reservations in the Convention on Mutual Administrative Assistance in Tax Matters in light of her failure to adduce evidence of the Convention in accordance with s 174 of the Evidence Act 1995 (Cth). In any event, in their Honours’ view penalties and interest are within the rule against the enforcement of the revenue laws of a foreign State. (see [61])

Their Honours concluded there was no realistic possibility that the Deputy Commissioners’ judgment debt would be enforceable in China or Hong Kong. (see [62]) The appeal was allowed.

On 11 February 2021, the High Court granted special leave to the Deputy Commissioner to appeal this decision. The Deputy Commissioner has submitted that the appeal is on the issue of whether the power of the Federal Court to grant a freezing order is subject to a mandatory jurisdictional precondition that there be proof of a realistic possibility of enforcement of a judgment debt against assets of the respondent in each foreign jurisdiction to which the proposed freezing order relates. The Deputy Commissioner submits that the Full Court was wrong to construe r 7.32 of the Federal Court Rules 2011 (Cth) as being subject to an unexpressed mandatory jurisdictional precondition to this effect. Difficulties of enforcement may be a permissible discretionary consideration in an application to discharge a freezing order previously made, weighed with other relevant discretionary considerations. However it ought not be a mandatory evidentiary requirement operating as a precondition to the power to grant or continue any freezing order, noting that worldwide freezing orders are frequently sought ex parte in urgent circumstances. (The DCOT’s submissions may be read here. Those for Mr Huang may be read here.) The appeal is due to be heard tomorrow 13 October 2021.

Rambaldi (Trustee) v Sumpton, in the matter of the Bankrupt Estate of Sumpton [2021] FCA 1199

In this case the Trustees in Bankruptcy of Mr Robert Sumpton had sought orders for the transfer of shares in Conecc Concrete Solutions Private Ltd, a foreign company located in India. The Bankrupt had failed to disclose his interest in these shares to the Trustees, which is an offence under s 265 of the Bankruptcy Act which may result in a maximum penalty of one year’s imprisonment.

The Trustees brought an ex parte application for freezing and ancillary (asset disclosure) orders, to reduce the risk of dissipation of those assets and preserve the Trustees’ interest in those shares for the benefit of the creditors of Mr Sumpton’s bankrupt estate. Anderson J agreed that the CCS shares fell within the description of property which vests in the Trustees following Mr Sumpton’s bankruptcy, having regard to ss 5, 58(1) and 116(1) of the Bankruptcy Act.

Applying the key principles governing freezing order applications (summarised briefly at [9]-[15]), one of the matters the Trustees needed to show was that unless the freezing order were granted, there was a reasonable apprehension that assets would be dissipated so as to frustrate the action or execution. They did not need to demonstrate a positive intention on Mr Sumpton’s part to frustrate a judgment, nor did they need to demonstrate that the risk of dissipation was more probable than not. It was enough for the Trustees to establish that, in the absence of relief, there was a danger or real risk that the assets would be dealt with in a way that would prevent them from recovering judgment.

Where allegations made against a respondent contain allegations of serious dishonesty, evidence of that nature is capable of satisfying the Court of the existence of the requisite danger to dispose of, deal with or dissipate assets: Spotlight Pty Ltd v Mehta [2019] FCA 1796 at [23]. In this regard the Trustees pointed to Mr Sumpton’s failure to disclose the shares, and that this was an offence punishable by imprisonment.

The Trustees submitted that their concern that if a freezing order is not made that their attempts to realise their interest in the CCS shares may be prevented by Mr Sumpton seeking to transfer them away without recourse to the Trustees, was based on the following matters –

  1. Mr Sumpton had failed to lodge his tax returns for the past 3 years.
  2. There had been no disclosure by Mr Sumpton of his shareholding in CCS.
  3. Mr Sumpton’s failure to provide further information in relation to his examinable affairs and answer questions in relation to his property interests.
  4. The difficulties for the Trustees in realising their interest in, and taking transmission of, the CCS shares.

The Trustees submitted that it was necessary for them to obtain a court order in the form of a ‘freezing order’, before engaging with CCS, so that they were able to engage with CCS in respect of realising the shares issued to Mr Sumpton which had vested in them as trustees of his bankrupt estate. (see [24])

His Honour noted that the Trustees sought a worldwide freezing order out of an abundance of caution in circumstances where the CCS shares relate to an Indian company. As Mr Sumpton is located in Australia and is an undischarged bankrupt, all of his assets whether local or intentional vested in the Trustees. The Trustees did not foresee any issue in effecting the transfer of the CCS shares once Mr Sumpton executed the necessary documentation.(see [27])

Anderson J referred to the pending High Court appeal from the decision in Huang v Deputy Commissioner of Taxation [2020] FCAFC 141; 280 FCR 160, and noted that there is an issue as to whether it is a jurisdictional precondition to the granting of a freezing order with respect to overseas assets, that there be a realistic possibility that any judgment obtained by the applicant can be enforced against assets of the defendant in the place to which the proposed order relates. However his Honour concluded that to the extent that the jurisdictional precondition applies, the Trustees anticipate that they will be able to obtain the transfer of the CCS shares once Mr Sumpton executes the necessary documents, or alternatively, they will be able to obtain a transfer based on the provisions of the Articles of Association and the Indian Companies Act. (see [28]-[29])

His Honour was satisfied that it was appropriate to make the freezing order in the terms sought.

Conclusion – Takeaways

On the issues dealt with in these decisions, the takeaways are these –

  1. What informs the courts’ discretion to compel disclosure of worldwide assets in the interests of justice, despite accepting the soundness of a claim to privilege against self-incrimination – The High Court in DCOT v Shi has clarified what is and is not relevant to the “interests of justice” assessment to be made by the courts under s 128A(6)(c). Evaluation of the interests of justice in each case will primarily involve weighing the balance between the public interest in the disclosure sought on the one hand, against the potential detriment of the tendency of the disclosure to incriminate a person under an Australian law on the other. It is irrelevant to consider other means the plaintiff may have for obtaining the information sought. If the courts are inclined to order disclosure notwithstanding the reasonable grounds for the claim to privilege, they will give consideration to whether to order disclosure to the whole or only part of the privilege affidavit, and what other orders ought be made to minimise the detrimental impact of the disclosure on the respondent.
  2. Who bears the onus relevant to the exercise of the discretion The question of onus as to the matters to be established for the discretion to arise – those at ss 128A(6(a) and (b) – is not clearly settled. It may be likely that Gordon J’s view on this will be treated as authoritative, given the alignment of her Honour’s judgment with that of the plurality. That is: that the onus is not on the party seeking the disclosure, which would be contrary to the proper construction of s 128A. It is for the party claiming the objection to set out the basis for the objection pursuant to s 128A(2) and (4). Sections 128A(6)(a) and (b) do not impose a standard or burden on that party additional to or higher than that imposed by s 128A(2) and (4). (see DCOT v Shi [70])
  3. The discretion to compel disclosure despite the privilege is only available where the tendency to incriminate relates to Australian law – Where the party claiming the objection bases their objection on the risk of incrimination as to a foreign criminal or civil penalty law – and if that objection is accepted by the Court as based on reasonable grounds – the discretion to compel disclosure under s 128A(6) in the interests of justice is not available. This follows from the conclusion of the plurality in obiter that in those circumstances, the Court will be unable to be satisfied as to the negative proposition in s 128A(6)(b): the plurality in DCOT v Shi at [8].
  4. Is there a mandatory jurisdictional precondition to the making of worldwide freezing orders under the Federal Court Rules – High Court decision pending – The Full Federal Court has held in Huang v Deputy Commissioner of Taxation that there must be a ‘realistic possibility’ that any judgment obtained by the plaintiff can be enforced against assets of the defendant in the place to which the proposed order relates, for a worldwide freezing order to be made in Australia pursuant to r 7.32 of the Federal Court Rules. The High Court will hear the Deputy Commissioner’s appeal on this tomorrow, 13 October 2021. We await the High Court’s judgment with interest.

Practice Alert: Federal Court’s New National Framework

I commend practitioners to take note of this important Practice Alert written by my esteemed Sydney colleague Dominique Hogan-Doran. It outlines the new national structure for the Federal Court of Australia, and the incoming national framework for the regulation of the market for legal services, noting that the Legal Profession Uniform Law is expected to take effect in NSW and Victoria from early 2015. I also note that last week the Victorian Legal Services Commissioner published a useful summary of the changes here.

Timbercorp appeal fails, as the Great Southern trial draws to a close

As the marathon Great Southern trial finally draws to a close in the Victorian Supreme Court – just before the first anniversary of its commencement (link) – there has been a significant, relevant judgment delivered. Last week the Victorian Court of Appeal handed down its decision in another class action case involving failed agribusiness managed investment schemes with questions raised about their product disclosure statements – Woodcroft-Brown v Timbercorp Securities Ltd & Ors [2013] VSCA 284.

In dismissing the investors’ appeal, the Court of Appeal held that the trial judge Judd J had not erred in any of his challenged findings. One of those was that the Timbercorp directors did not have actual knowledge of a significant risk to viability until bank support wavered. This was well after publication of the last PDS, and after the collapse of Lehman Brothers in late 2008, which was swiftly followed by the sudden termination of negotiations Timbercorp had been engaged in for the sale and leaseback of certain of its properties and forestry assets. Even then the directors were able to manage those set-backs and address them opening new negotiations with other parties, keeping the banks onside, until their support was withdrawn shortly before Timbercorp’s collapse in mid-April 2009 .


Beginning in 1992, the Timbercorp Group operated a number of horticultural and forestry managed investment schemes (MISs), including almonds, olive oil, grapes and eucalypt plantation projects, with Timbercorp Securities PL as the Responsible Entity. Timbercorp Finance PL’s role was to lend money to investors so that they could invest in the MISs. The defendants to the litigation were those two companies plus three persons who were directors of both companies and of the holding company Timbercorp Ltd.

The Timbercorp Group invested in excess of $2 billion on behalf of about 18,500 investors. Using a combination of debt and equity, the Group would acquire and develop land into plantations and orchards to generate a long term revenue stream from management fees and licence fees and would sell interests in the project to investors. The land and its developments would then be sold either into a property trust where the Group would retain some of the equity in the asset, or it would be sold to a third party buyer, usually on a sale and leaseback basis.

The Group also generated profit by Timbercorp Finance lending to investors, usually up to 90 per cent of their investment. In addition the Group raised funds by securitising its loan book and using the loans as security for finance bonds and bank facilities. To fund the infrstructure and working capital of the projects, the Group would sell assets, raise equity, securitise loans, and arrange debt facilities with the Commonwealth Bank, ANZ, HBOS and Westpac.

After the Group began to experience trouble, Timbercorp kept its bankers informed of developments and the Group’s financiers entered into or renegotiated facilities, extended repayment dates, increased facility amounts and, when necessary, modified covenants to avoid a breach.

The Group’s profitability began to be affected by an adverse tax announcement by the ATO impacting upon the Group in 2007/08. Three days before Lehman Brothers collapsed the Group was managing that issue and its impact, and had already commenced negotiations with various third parties for the sale and leaseaback of a number of its properties and forestry assets.

When Lehman Brothers collapsed in the US on 15 September 2008, this lead to the effective closure of global markets. The next day, one of the purchasers terminated negotiations and the others soon followed. In November further steps were taken to seek to sell assets, and the Group’s auditors expressed concerns about the business as a going concern, noting its working capital deficiency of $82.8 million

In December 2008 Timbercorp Ltd presented an “apparently healthy position” in its Annual Report, including a directors’ declaration of solvency, though the opinion in the audit report included was guarded.

The Group managed to maintain bank support  until April 2009, when it collapsed and went into voluntary administration; liquidation followed in June 2009. At the time the company was wound up, Timbercorp Finance had outstanding loans to more than 14,500 investors totalling $477.8 million.

First Instance Judgment

In striking contrast with Great Southern, the Timbercorp trial ran over (only) 24 sitting days. It dealt with common questions and only looked at individual loss, reliance and causation in relation to the appellant Mr Woodcroft-Brown, and a Mr Van Hoff.

Mr Woodcroft-Brown had commenced proceedings on his own behalf and on behalf of persons who, at any time during the period 6 February 2007 and 23 April 2009 acquired or  held an interest in a MIS of which Timbercorp Securities was the Responsible Entity. Earlier investors were represented by Mr Van Hoff, who had invested in MISs before and after 6 February 2007 and financed the majority with money borrowed from Timbercorp Finance, and evidence was led from him as to breach, causation and reliance.

Mr Woodcroft-Brown argued that had certain matters been disclosed, he would neither have invested in the MISs nor borrowed money from Timbercorp Finance. Mr Van Hoff made a similar argument on behalf of early investors. In particular, they argued that Timbercorp Securities failed to disclose in its Product Disclosure Statement (PDS) information about significant risks, or risks that might have had a material influence on the decision to invest, in breach of disclosure obligations under the Corporations Act 2001 (Cth). They also argued that the Directors’ declarations made in two scheme financial reports were false or misleading and in breach of the Corporations Act, the ASIC Act 2001 (Cth) and the Fair Trading Act 1999 (Vic). The relief sought included declaratory relief, damages and/or compensatory orders, including an order that investors were not liable for repayment of the loans from Timbercorp Finance.

The directors denied the allegations against them, claiming to have taken reasonable steps to ensure that the PDSs would not be defective, a defence under s 1022B(7) of the Corporations Act.

His Honour Justice Judd at first instance found comprehensively in favour of the defendants. His Honour found that they were not required to diclose the risk identified by the plaintiffs, that there had been no misleading or deceptive conduct and, in any case, that there had been no relevant reliance by Mr Woodcroft-Brown or Mr Van Hoff on the alleged non-disclosures or representations. His Honour also made several adverse findings about the way the plaintiffs conducted their case. The first instance judgment may be read here.

The Non-Disclosure of Risk Case – see [29]-[57]

It was necessary for the plaintiffs to establish that there was an obligation to disclose certain matters under either s 1013D or s 1013E of the Corporations Act. Broadly, those provisions relevantly require PDSs to include information which a person would reasonably require for the purpose of making a decision as a retail client whether to acquire the financial product, including information about any significant risks associated with holding the product, and information which might reasonably be expected to have a material influence on their decision.

Section 1013C(2) of the Corporations Act qualifies that, by not requiring disclosure to the extent the information concerned is not known to the disclosing party, here Timbercorp Securiites or any director of it. Section 1013F(1) contains a further qualification, providing that information is not required to be included in a PDS if it would not be reasonable for a prospective (my word) retail client considering the product to expect to find the information there.

The plaintiffs had argued that there should have been discosure of the ‘structural risk’ in each PDS issued after April 2000, and of information about ‘adverse matters’ (matters which put the Group at a heightened risk of failure) as and when they occurred.

His Honour held that because of financial information about the Group available on its website, Annual Reports, ASX announcements and the material prpared by analysts, the information the plaintiffs argued ought to have been provided to potential and existing investors was not required because of the operation of s 1013F.

His Honour found ultimately that the appellant failed to satisfy or displace the operative effect of s 1013C(2) given the absence on the evidence of actual knowledge by the corporation or its directors of the risks as alleged, due to the way in which the appellant pleaded its case. For instance the Directors did not have actual knowledge that the adverse matters (such as the tax issue and the GFC) posed a risk that Timbercorp Securities would be unable to fulfil its contractual obligations, until the Directors realised bank support became equivocal. That was the point at which the ‘adverse matters’ stopped being the types of events that management deals with day to day and address, and turned into a crystallised risk to viability (see [38] and [40]-[53]).

In order to succeed on appeal, the appellant needed to demonstrate that the findings of fact of his Honour on these issues, were not open.

The Misrepresentation Case[58]-[71]

Section 1022A of the Corporations Act defines a disclosure document or statement (including a PDS) as ‘defective’ if, inter alia, it contains a misleading or deceptive statement. Section 1022B(7) provides a defence of having taken reasonable steps to ensure it would not be defective. Section 12DA of the ASIC Act, prohibiting misleading or deceptive conduct in certain documents, and s 9 of the Fair Trading Act, prohibiting misleading or deceptive conduct in trade or commerce, were also relied upon by the plaintiffs.

They alleged the Timbercorp Group had made two types of false or misleading representations. The first was that the Group was financially sufficiently strong that investors would reasonably expect the MISs to be managed for the foreseeable future and that the principal risks associated with the relevant MISs were fully disclosed. His Honour found that the representations as to the Group’s strength were too vague and uncertain to be actionable, and that there were reasonable grounds for that confidence in any case.

The second was that scheme contributions equalled or exceeded the cost of establishing and maintaining a scheme, in that investors’ payments would be ‘quarantined’ and applied only to their relevant MIS, and MIS contributions would be sufficient to fund the relevant MIS. His Honour held that those representations alleged were not in fact made, and were indeed inconsistent with the PDSs and other generally available information.

The appellant also argued that Timbercorp Securities and the Directors made statements in March and September 2008 that were misleading or deceptive, to the effect that there had been no circumstances that had or may have significantly affected the operations of the relevant MISs. Judd J found that their case here failed on both causation and reliance. It was necessary for the appellant to establish that there was reliance placed upon the non-disclosures and the misleading conduct so as to cause entry into the investment product and, therefore, subsequently to cause loss. His Honour did not believe the evidence advanced by the appellant, or by Mr Van Hoff, on these issues (see [68]).

The Court of Appeal added the observation that the provisions relied on in relation to misleading conduct did not operate in relation to the disclsoure obligations in the PDSs per ss 1041H(3) and 1041K(2) of the Corporations Act, and s 12DA(1A)(c) of the ASIC Act (see [67]).

Shift in the appellant’s case – see [71]-[86]

There was a dispute both at trial and on appeal as to whether the appellant’s case had shifted during the course of the trial such that the appellant pursued a case that went beyond his pleading. The shift concerned the identification of the risks the appellant alleged should have been disclosed. The trial judge found that during the course of the trial, the appellant had materially shifted his conception of the relevant risk and in doing so departed from his pleaded case. One of the changes the trial judge found was the change in the way the appellant relied on the ‘adverse matters’ (such as the tax issue, and the GFC) in that, rather than focusing on their importance as stand alone risks, they achieved their materiality from the risk to the Group’s financing facilities increasing the risk of failure.

His Honour took the view that the reformulation of the appellant’s case was an attempt to ‘sidestep’ the opinions in the joint experts’ report, that as long as the Group’s bankers continued to support the Group’s operations, there was no significant risk that the Group would not have the financial capacity to manage any of the schemes through to their contemplated completion.

His Honour held that the appellant should be confined to his case as pleaded, both because the expert reports and the joint expert report were directed to the case as pleaded, and because of the way in which the respondents had fashioned and presented their evidence in response to that case. The Court of Appeal found no error in his Honour’s approach. Their Honours noted that on appeal, the appellant purported to urge the very case that was not pleaded at trial and which the trial judge rejected. Moreover, so the Court of Appeal observed, even if the appellant was permitted to advance the unpleaded case it was not supported by the evidence at trial.

On Appeal

The appeal was heard by their Honours Warren CJ, Buchanan JA and Macaulay AJA, who delivered a joint judgment.

After a discussion of the decision below, they reviewed the detailed evidence led by the Directors about the Group’s business model and the effect of the events of 2008.

The Group’s business model was to create capital intensive assets with a long term income stream and then to sell those assets within the period of three to five years. For each horticultural scheme, after five years the consequences of failing were intended to reduce to virtually nothing. For each forestry scheme, from about five years, the consequences of failure were intended to reduce gradually until harvest. The appellant submitted that the proper test would be that a risk of total loss of the investment must be disclosed unless the chance of the risk materialising was negligible.

In 2007 moving into 2008, the financial position of the operation was seen to be strong and profitable. The Court noted that importantly, as at 30 September 2008, there was no indication of any risk by reason of financial circumstances to the Group’s capacity to discharge its obligations in relation to the management of the projects. It was not until the last quarter of the 2008 calendar year, following the collapse of Lehman Brothers and after the proposed sale of forestry assets to Harvard Management Company failed to proceed, that banker support wavered. Even then, banker support continued into the new year, with the banks providing Timbercorp with an opportunity to dispose of assets.

At the end of 2008, the bankers for the Group were prepared to increase support. As late as November 2008, the CBA agred to vary loan covenants and extend expiry dates into 2009. Judd J had found there was no sign of the Group having difficulty in securing from capital markets the requisite funding for its activities.

Indeed Judd J had noted that the experts’ report provided a complete answer because, whilst the bank support evaporated eventually after the Lehman collapse, before that time, there was no reason to conclude that it would not be continued on an indefinite basis. In light of that, the experts’ opinion was that there was no significant risk that the Group would not have had the financial capacity to manage any of the schemes through to their contemplated completion, for their full term.

Grounds of appeal 
Some of the specific grounds of appeal raised were as follows –
Ground 1 – [125]-[132]  The complaint was essentially that his Honour had erred in construing the expression “significant risk” in s 1013D(1)(c) of the Corporations Act. The Court of Appeal held that the trial judge was correct when he said the definition was intended to be a flexible requirement tailored to the type of product involved and its particular circumstances. Amongst the constellation of issues in weighting ‘significant risk’, there is the probability of the occurence, the degree of impact upon investors, the nature of the particular product, and the profile of the investors, together with other matters. This group of issues is not closed and will vary depending upon the circumstances. (See [125]-[132])
Ground 2 [133]-[141] Again as to the construction of s 1013D(1)(c), the appellant argued his Honour erred in his assessment of when a risk is “significant”. This ground invoked matters associated with management of risk. In essence, the appellant submitted that the trial judge erred in holding that a risk is not significant if it is capable of successful management and is being managed. However the Court of Appeal disagreed that his Honour considered management of risk for the purposes of construction of the section. Rather, his Honour considered it as a matter of evidence and something that may intercept the potential emergence of a risk of significance.
Ground 4 –  [144]-[157] – The appellant argued his Honour erred in his construction of s 1013F, which provides for what information need not be included in a PDS.
Ground 13[212]-[225] -The appellants alleged that in his analysis of whether “the financial representations” and “project contributions representations” were misleading or deceptive, his Honour erred by failing to consider the effect of each PDS on an ordinary and reasonable reader. The criticism made was the focus of the analysis should be the effect of the representations upon the persons to whom the representations were addressed, not upon the mental state of the person making the representations.
The Court of Appeal expressed the view that whether the representations were misleading and deceptive did depend at least in part upon the mental state of the maker of the representations, because they would ordinarily be understood as statements of opinion. They were not apt to mislead if the opinion was genuinely and reasonably held by the maker of the statements. Their Honours also noted that the obligation to disclose risks to the schemes depended upon the actual knowledge of the risks. The respondents met the allegations with detailed evidence of their management of the business risks including the taxation announcement and the credit crisis, and the state of mind of the Directors as to the Group’s financial health and future prospects. It was entirely appropriate, so their Honours averred, for the trial judge to have regard to this evidence in determining whehter the alleged representations were misleading or deceptive. In any event, so the Court found, the trial judge did not simply analyse the representations from the standpoint of the respondents, but examined their likely effect upon the class of investors to whom the PDSs were addressed.
Counsel for the appellant submitted that the trial judge erred in that he failed to consider the impression which the PDSs would have had upon a relatively unsophisticated investor. However the Court disagreed that his Honour’s reasons disclosed that he unduly elevated the understanding and experience of the investors. Their Honours noted that the only two investors to give evidence were both knowledgeable and sophisticated. One was a qualified engineer and successful business engaging in property development through several companies. He was familiar with the share market and was computer literate. He understood balance sheets and P&L statements. The other, Mr Van Hoff, was the sole shareholder and director of a company that conducted a transport business. He had been in business for some 22 years, had a portfolio of shares and a self-managed superannuation fund. In any event, the plurality observed that the appellant’s claim failed for reasons which did not turn upon the perceptiveness, sophistication or knowledge of the investors.
Ground 14 – reliance – [226]-[239] – The appellant challenged the trial judge’s finding that there was no relevant reliance by the two plaintiffs on the alleged non-disclosures, by concluding that the sole driver for their decision to invest was the tax-effective nature of the projects and that they were indifferent to the content of the documents, and that there was a necessary inconsistency between reliance on the strength of the group, and the assumption that projects were quarantined one from another.
To succeed, the appellant had to establish that the alleged representaions constitued a decisive consideration in the decision to invest in the Timbercorp scheme. The witness statements of Mr Woodcroft-Brown and Mr Van Hoff recorded that they read the PDSs and stated their reliance on the representations in temrs which were virtually identical and which echoed hte allegations made in the statemnt of claim. The Court of Appeal described it as unsurprising that the trial judge stated he placed little reliance on this formulaic evidence.
In light of evidence given on cross-examination, the trial judge was not persuaded that the appellant Mr Woodcroft-Brown had read the PDSs in any detail. There had been a meeting with a financial adviser where he was presented with a number of PDSs for a three different investments schemes for him to consider, with a view to reducing his tax liability on a profit earnt, and did not have time to do much more than skim through them. The trial judge concluded that the appellant acted on the recommendation of the financial advisor, motivated by his “anxious desire” to obtain a tax deduction. The trial judge found that the actual content of the PDS or the absence of information, was not what induced the appellant to invest in the project. It was a matter of selecting a project to provide him with the required tax-relief. His Honour said he had no doubt that the financing option – 12 months interest free = was an inducement.
The trial judge found similarly with respect to Mr Van Hoff. He was not satisfied that Mr Van Hoff read any of the PDS in any detail. He may have glanced at parts, but was willing to invest without careful consideration of the documents. That was treated as undermining his evidence insofar as he relied on the contents of the documents, or the absence of information contained in them. His Honour found that Mr Van Hoff did not look to the PDSs as a source of information to assist him in his decision to invest in Timbercorp schemes. He chose the schemes on the basis of advice from his accountant and others, in search of tax relief.
Counsel for the appellant submitted that there was no inconsistency between investing with a view to obtaining a tax-deduction, and investing to obtaining income. However the Court of Appeal observed that while it may be acepted that the appellant and Mr Van Hoff were not indifferent to whether their investments would be profitable, it does not follow that their hope of profit was derived from any representations made by the respondents.
Their Honours upheld the trial judges’ conclusions here also.
Overall, the Court of Appeal held that the appellant had failed to demonstrate that the factual conclusions the trial judge made upon the application of correct legal test were not open to his Honour to find. They held that none of the grounds succeeded, and dismissed the appeal.
Not a good result for the investors in the Timbercorp management investment schemes, although the Timbercorp liquidators should be commended for their announcement following the judgment that they would offer some borrowers a chance to settle their loans and receive a 15% or 10% discount on their debt, although even this may do little to assuage the ongoing financial pain of the borrowers.
It could be a long while yet before his Honour Justice Croft hands down his judgment in Great Southern. After the 24 sitting days of the Timbercorp trial from late May to early July 2011, Judd J handed down his judgment an admirable 2 months later. After the almost full calendar year of the Great Southern class action trial, albeit with breaks punctuating that timeframe, Croft J will have a sizeable job ahead, and it is hard to see how his Honour’s judgment could be likely to be delivered much before mid-2014, and possibly later.
Thus it could be a while yet before we learn what evidentiary problems the Great Southern investors might have had and whether they went to issues that were sticking points in Timbercorp, such as reliance or causation. Nor will we know for a while in detail what the evidence disclosed about the knowledge of the representors in the Great Southern PDSs as to the risks of the investments at the relevant times.
We also do not yet know whether there was a smoking gun in the new evidence found on several company servers and computers that were discovered late in the trial. It has been reported that this development lead to the reconvening of the trial after evidence had been thought to have been closed, and the recalling of several witnesses. It was reported that counsel for the Great Southern investors submitted that the new evidence showed Great Southern used cash top-up payments to mask the fact that log yields from plantations were below forecast. It was not until the 11th month since the trial opened that evidence was reportedly heard from the former head of forestry at Great Southern, that the company was aware at a material time that plantations were not meeting forecast yields. It was also submitted by counsel for the investors that to sate investor demand, the firm bought plots not suitable for yielding plantations as forecast in the PDS (link).
In any event what we can probably be confident of, is that much will now be made in final oral submissions of the Court of Appeal’s judgment in Timbercorp by the Great Southern defendants.

Snapshot updates on Willmott Forests, phoenixing and new offers of compromise rules

Willmott Forests

Earlier this month the High Court heard the appeal against the Victorian Court of Appeal’s decision in Re Willmott Forests Ltd (Receivers and Managers appointed)(in liquidation) v Willmott Growers Group Inc and Willmott Action Group Inc [2012] VSCA 202.

I wrote on the Victorian Court of Appeal’s decision last year here. (My reviews of earlier Willmott Forests decisions are here and 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). The transcript of the High Court hearing of the appeal from that decision may be read here, and the parties’ written summaries of argument are available online here (under the heading for proceeding M99 of 2012).

The Victorian Court of Appeal’s decision has excited some controversy. In their summary of argument for special leave to appeal from that decision, 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 Victorian 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 judgment with interest.

Update on draft legislation targeting phoenix companies

Early last year I wrote about a set of two draft bills that had been released by the Gillard government directed at cracking down on phoenix companies. These were the Corporations Amendment (Phoenixing and other measures) Bill 2012 (the Phoenixing Bill), and the Corporations Amendment (Similar Names) Bill 2012 (the Similar Names Bill). You can read my detailed discussion of those two draft Bills here.

Briefly, the Phoenixing Bill comprised two measures. One was to give ASIC administrative powers to order the winding up of abandoned companies. The primary aim of this measure was said to be the protection of workers’ entitlements, and their ability to access GEERS, with the additional benefit of enabling a liquidator to investigate the affairs of an abandoned company, including suspected phoenix activity or other misconduct. The second set of measures in that Bill was to facilitate the online publication of corporate insolvency notices. As many of you will know, this Bill was enacted last year and ASIC’s insolvency notices website went live in July 2012.

The draft Similar Names Bill proved to be more controversial. Broadly, it proposed amendments to the Corporations Act which would impose personal joint and individual liability on a director for debts of a company that has a similar name to a pre-liquidation name of a failed company (or its business) of which that person was also director for at least 12 months prior to winding up.  The debts for which a director could were to become personally liable were debts incurred by the new (phoenix) company within five years of the commencement of the winding up of the failed company. There was to be scope for directors to obtain exemptions from liability.

My comments on that draft Bill may be read here. There were numerous other fairly significant criticisms made of the draft legislation, set out in submissions lodged by a number of bodies concerned with the proposals, including the Australian Institute of Company Directors and the Law Council of Australia. Their criticisms included that the exposure draft drew no distinction between failed companies, and those abandoned or placed into liquidation for the purpose of engaging in phoenix activity; it did not define “fraudulent phoenix activity” or require a dishonest intention on the part of directors to defraud or deceive creditors before it imposed personal liability; and that it effectively reversed the presumption of honesty or “innocence”, unless the contrary were proven.

It appears that those submissions and the draft reforms were under consideration, as that Bill was not then introduced to Parliament. Indeed it had still not been introduced by the time of the dissolution of Parliament and the onset of the caretaker conventions ahead of the upcoming federal election. Thus the future of the draft Bill, or any other legislative measures to be taken to address phoenix activity, will be a matter for a future federal government to consider.

New Victorian Supreme Court Rules on Offers of Compromise

These are to come into effect on 1 September 2013 and can be read here.

The amendments include a new rule 26.02(4) which requires the issue of costs to be expressly addressed in an offer of compromise. Offers of compromise may be expressed to be inclusive of costs, if preferred by the offeror. New rule 26.02(4) requires that:

“An offer of compromise must state either – 

(a) that the offer is inclusive of costs; or

(b) that costs are to be paid or received, as the case may be, in addition to the offer.”

Note that the minimum time for which an offer of compromise must remain open to be accepted remains 14 days (r 26.03(3)), although there has been an adjustment to the timeframe for payment to be made post acceptance, where the offer does not provide otherwise (increases to 28 days – see the amendment to rule 26.03.01.)

New rule 26.08(4) provides for a defendant whose offer of compromise is unreasonably refused to be awarded standard costs up to the time of the offer and indemnity costs thereafter, unless the Court otherwise orders.

New rule 26.08.01 provides for Courts to take into account pre-litigation offers when making a determination as to costs. Thus offers made even when no litigation is yet on foot ought be given careful consideration. Potentially, the unreasonable refusal of a pre-litigation offer could leave a party exposed to an increased costs order.

Victorian Supreme Court costs – the party/party is over

Many practitioners will already be aware of the new costs regime coming into force in the Victorian Supreme Court next week – 1 April 2013. It is worth noting. For those who would like a handy “cheat sheet” summary, I refer you to this excellent one prepared by my friend and colleague, Paul Duggan.

Paul Duggan

No April Fool’s Day jokes please.

Effective 1 April 2013 the Victorian Supreme Court has a new costs regime.

The highlights:

  • The ‘party and party basis’ (by which most Supreme Court cost bills have historically been taxed) is axed.
  • Henceforth, costs orders will generally be taxed on the more generous ‘solicitor and client basis’ (that is “all costs reasonably incurred and of reasonable amount”) although that yardstick is to be renamed the ‘standard basis.’
  • Costs on an indemnity basis remain available.
  • Solicitors’ time on the standard basis will be claimable in 6 minute units at the rate of $36 + GST per unit (ie $360 + GST per hour).
  • Unless otherwise ordered, the maximum daily allowance for counsel is $5000 + GST per day for juniors and $7500 + GST per day for silks.
  • Photocopying (currently allowable at a whopping $2.30 per page) becomes discretionary but is likely to be…

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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).)

Interesting UK decision on legal professional privilege and its application to advice by accountants

On 23 January 2013 the UK Supreme Court handed down a very interesting decision on the question of whether the UK legal advice privilege (LAP) extended, or should be extended, so as to apply to legal advice given by someone other than a member of the legal profession and, if so, how far the privilege extends, or should be extended. The case is Prudential plc, R v Special Commissioner of Income Tax [2013] UKSC 1 (link).

A company had obtained legal advice from its accountants PwC in relation to a tax avoidance scheme, and argued that it was entitled to refuse to comply with a notice to produce from the tax office, on the ground that the documents were covered by LAP. Its position was supported by the intervenor, the Institute of Chartered Accountants for England and Wales. They argued, inter alia, that given that the privilege is justified by the rule of law, and that it exists for the benefit of a client who seeks and receives legal advice, for instance on its tax affairs, there is no principled basis upon which it can be restricted to cases where the advisor happens to be a member of the legal professions, as opposed to a qualified accountant (see [26]).

The contrary case was advanced for Her Majesty’s Revenue & Customs office, supported by the Law Society, the Bar Council and the AIPPI UK (an intellectual property body). They argued that it has been universally assumed that LAP is restricted to advice given by lawyers, and that the Court should not extend it to accountants in connection for tax advice for reasons which boiled down to the argument that it was a matter for Parliament to extend the privilege to legal advice given by accountants if it saw fit (see [27-28]).

Whilst the majority of the Lords (5:2) held that LAP did not extend to the advice provided by PwC, a certain amount of reluctance is clearly detectable. The minority, Lords Sumption and Clarke, gave powerful dissenting judgments, which are also worth a read.

Lord Neuberger, with whom Lord Walker agreed, in giving one of the majority judgments raised the finely balanced question of whether if the Court allowed the appeal it would be extending the breadth of the privilege, or simply identifying the breadth of the privilege. The former would involve changing the law; the latter, declaring what the common law has always been. However his Lordship noted that it is universally believed that LAP only applies to communications in connection with advice given by members of the legal profession (see [29] and the authorities, texts and reports cited at [30-33]), legislation had been framed upon that basis, and the UK Parliament had rejected a proposal in 2003 that the privilege be extended to legal advice given by lawyers.

Lord Neuberger concluded that allowing the appeal would involve extending the privilege, and would not be treated as limited to tax advice given by expert accountants, as it would ineluctably follow that legal advice given by some other professional people would also be covered.

However interestingly, his Lordship evaluated the principled arguments for restricting LAP to lawyers’ advice as “weak, but not wholly devoid of force” (at [43]), in contrast with his description of the argument for allowing the appeal as “a strong one in terms of principle” (at [40]). He summarised the case for allowing the appeal as –

  • Legal advice privilege is based on the need to ensure that a person can seek and obtain legal advice with candour and full disclosure, secure in the knowledge that the communications involved can never be used against that person,
  • LAP is conferred for the benefit of the client, and may only be waived by the client; it does not serve to protect the legal profession;
  • In light of this, it is hard to see why, as a matter of pure logic, that privilege should be restricted to communications with legal advisers who happen to be qualified lawyers, as opposed to communications with other professional people with a qualification or experience which enables them to give expert legal advice in a particular field.

His Lordship rightly noted that once the privilege is extended, it would be difficult to determine where the line ought be drawn. Where it is confined to lawyers, it is not such a difficult matter. However once it is extended one gets into various shades of grey. It becomes something of a minefield. He concluded that the appeal gives rise to issues of policy, which should best be left to Parliament. His Honour also noted that if LAP is to be extended to professions other than lawyers, its extension may only be appropriate on a conditional or limited basis.

Lord Sumption’s dissenting judgment is quite compelling. I will not go through it in any detail, but I commend it to you if you have an interest in this issue.

At [123], he makes the point that:

“Once it is appreciated (i) that legal advice privilege is the client’s privilege, (ii) that it depends on the public interest in promoting his access to legal advice on the basis of absolute confidence, and (iii) that it is not dependent on the status of the advisor, it must follow that there can be no principled reason for distinguishing between the advice of solicitors and barristers on the one hand and accounts on the other. The test is functional. The privilege is conferred in support of the client’s right to consult a skilled professional legal adviser, and not in support of his right to consult the members of any particular professional body. …[T]oday there are at least three professions whose practitioners have as part of their ordinary professional functions the giving of skilled legal advice on tax. Accountants are among them. Any distinction for this purpose between some skilled professional advisers and others is not only irrational, but inconsistent with the legal basis of the privilege.”

He addresses the counter-arguments that other professionals (non-laweyrs) did not have the same stringent legal obligations of non-disclosure as lawyers, and that barristers and solicitors have a unique relationship with the courts (at [125]). His Lordship disposes of these at [126-127].

Lord Sumption took the view that allowing the appeal would not involve extending the privilege, but rather would mean only recognising that as a matter of fact much legal advice falling within the principles is nowadays given by legal advisers who are not barristers and solicitors but are accountants (at [129]). His view as to the question of identifying where the line is drawn, if legal advice privilege is extended beyond advice given by lawyers, is set out at [138]. His Lordship does recognise some of the complexities, but sees a difference between the giving of legal advice on the one hand, and the position on the other hand where a knowledge of the law on an issue can be purely incidental to the exercise of a broader advisory function, such as by an investment banker or an auditor.

My own view is mixed. I do not quite accept Lord Sumption’s suggestion as to the simplicity in identifying the boundaries of the entitlement to the privilege were it extended, and would see there as being a sizeable leap in the numbers of claims of privilege, with many being difficult to adjudicate upon.

On the other hand, there is a compelling logic to the application of the principles underpinning legal advice privilege beyond the legal profession, as discussed in this case. And in a functional sense, to put it at its most simple…when one regards our mountainous body of tax legislation and case law, what is it, if it is not law? And what is advice upon it, if it is not legal?

Next, once the privilege is extended beyond the legal profession to accountants giving tax advice (leaving aside other professionals)…what about other areas of law upon which accountants who specialise in other areas advise? Insolvency and corporations law, for example?

An interesting issue. Perhaps one way to solve the question of where the line ought be drawn, if the privilege is treated as extending beyond advice given by lawyers, is that suggested by Lord Hope, who wrote the other dissenting judgment. His Lordship agreed with Lord Sumption that the legal advice privilege extends to advice given by members of a profession which has as an ordinary part of its function the giving of skilled legal advice. Lord Hope added that he would expect that criterion to be satisfied only where, and to the extent, that they are members of a properly regulated professional body (at [149]).

In Australia, on 15 April 2011, the Assistant Treasurer the Hon Bill Shorten released a discussion paper which explores the issue of the extension of the privilege to tax advice by accountants, and called for submissions from interested parties. Submissions were due by 15 July 2011. As far as I am aware, the matter has progressed no further.

* I must acknowledge and thank my tax barrister colleague in Lonsdale Chambers for drawing this interesting case to my attention.

Three newsflashes (two ironically juxtaposed) and a hohoho

Yesterday saw two developments on the same day; both insolvency practitioner-related and, as you will see, that the two occurred on the same day was certainly ironic. First, the Parliamentary Secretary to the Federal Treasurer and Attorney-General released an exposure draft of the primary amendments to be included in the Insolvency Law Reform Bill. The Bill implements the first tranche of reforms previously released in a proposals paper directed at modernising and harmonising the regulatory framework applying to insolvency practitioners in Australia, and how they are registered, disciplined and regulated. The stated aims include to increase transparency and accountability, and improve communication, high professional standards and the community’s confidence in the effective regulation of insolvency practitioners. For more information and to read the exposure draft and its accompanying explanatory material, go to the Treasury’s webpage here. The closing date for submissions is 8 March 2013.

The second development yesterday was the revelation that accounting firm RSM Bird Cameron had issued proceedings against a former partner in the firm, an insolvency practitioner of 20 years standing, which included allegations of breaches of fiduciary duty and fraud. Yesterday Chief Justice Warren of the Victorian Supreme Court delivered judgment on an injunction application the liquidator had issued, seeking to restrain Fairfax Media Ltd from publishing the allegations. Her Honour, after reviewing the key principles derived from the authorities and considering the submissions made by the parties, refused the application.

The third newsflash, on a different topic, is the recent announcement by the Victorian Supreme Court as to changes to the procedure for appeals from a decision of an Associate Justice, to commence on 1 January 2013. The principal amendments are to Rule 77.06 et seq of the Supreme Court (General Civil Procedure) Rules 2005, are contained in the Supreme Court (Associate Judges Appeals Amendment) Rules 2012 (link). Essentially, appeals from Associate Judges to a Judge of the Trial Division will be by way of re-hearing (such that error must be shown), rather than by a re-hearing de novo. Procedures will include a requirement that Notices of Appeal be served within 14 days. For more information, click on the above link to the announcement, and see new Practice Notice 4 of 2012 (link).

The amendments include the addition of a new Rule 16.5 to the Supreme Court (Corporations) Rules 2003, to apply the new procedures also to appeals from Associate Judges in corporations matters. New Rule 16.5 will further provide that an appeal will lie to the Court of Appeal:

  • in an application under s 459G of the Corporations Act (applications to set aside statutory demands); and
  • in respect of any matter referred to an Associates Judge by a Judge of this Court under Rule 16.1(3).

Finally, Merry Christmas to all, and my wishes to you and your families for a happy and healthy 2013. My apologies that the busy demands of my practice have reduced my rate of writing on this site in recent months. May you all enjoy a wonderful and restful break in the weeks to come.

Newsflash: Centro settlement approved by the Court this morning

It has been reported that the $200 million Centro class action settlement reached in early May was approved this morning by Middleton J of the Federal Court of Australia. None of the shareholders participating in the class action objected to the settlement. The judgment is not up on Austlii yet, but you can read the full article on the Age website here.

It is reported that of the $200 million, $67 million will be paid by former auditors PricewaterhouseCoopers, with the balance to be paid by Centro-related companies. After legal costs and after the commission to litigation funders, it is said that shareholders are likely to share in a pool of just over $120 million.

You can read my earlier post of 8 May about the settlement reached here, my post of 17 April about some developments in the case which took place that day here, and my post of 27 February giving a brief background of the case and reporting on developments and an interesting Centro decision on the question of legal professional privilege here.

Breaking news: Centro $200m settlement reached

It is being reported that the class action against the directors of Centro is to settle for $200m. The full article on the Age website can be read here.

Highlights, according to this report, are –

  • A global settlement has been reached that takes in Centro, its directors and auditor PricewaterhouseCoopers,
  • It is suggested in the Age that PwC might pay as much as a third of the settlement, although it is difficult to assess how reliable that detail may be, given that apparently discussions finalising details of the deal are ongoing,
  • It is believed to be the largest settlement ever reached in an Australian shareholder class action.
  • Shares of litigation funder IMF, which is backing the class action claim run by Maurice Blackburn, entered a trading halt this morning, pending the earlier of an announcement as to the Centro settlement or the start of trade Thursday morning,
  • Centro Retail Australia has also requested a trading halt for its shares.

My previous posts regarding the Centro class action can be read here and here.