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and address them opening new negotiations with other parties, keeping the banks onside, until their support was withdrawn shortly before Timbercorp’s collapse in mid-April 2009 .

Background

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.
Conclusion
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.

Dramatic developments in Centro – (a) PwC admissions and (b) warning on costs against their lawyers personally

In case anyone has missed it, the past 24 hours have seen some dramatic developments in the Centro class action currently being heard in the Federal Court by Justice Gordon. (For a brief summary of what this case is about, see the first paragraphs of my previous post about the Centro class action here.)

It has been reported in the Age and the Australian that yesterday, counsel for PwC made some significant, limited admissions as to negligence, although not as to liability. The Australian reports that PwC, through counsel Richard McHugh SC, now concedes that it should have identified the $3.1billion in short-term debts that had been incorrectly classified as non-current in the company accounts for 2007. It is reported that Mr McHugh said –

“My client accepts for the purposes of the proceeding that audit staff were provided with information at a particular date which means more should have been done in relation to the classification….And that amounts to a breach of retainer and a breach of duty.”

However PwC has argued that the accounting errors did not cause the loss alleged to have been suffered by shareholders. Mr McHugh reportedly argued that the cause of the loss was, rather, the refinancing problems Centro was experiencing and not revealing, “and everything that went with it”, as well as shareholders investing based upon Centro’s history of paying considerable distributions. (I note in passing that the Full Federal Court recently handed down its decision on causation and shareholder losses claimed to be caused by misleading and deceptive conduct in De Bortoli Wines Pty Ltd v HIH Insurance Ltd (in liq) & Ors [2012] FCAFC 28.)

Somewhat curious is the argument advanced for PwC yesterday, as reported by the Age, that it was not PwC but rather its individual audit partner, Stephen Cougle, who made inaccurate representations about the quality of Centro’s flawed 2006/2007 audit. According to the Australian, PwC’s counsel Mr McHugh also argued that Mr Cougle was not directly responsible for the errors in the accounts, because when the first $1bn-plus error was discovered by PwC staff, Mr Cougle asked his staff if there were further issues in the accounts and was assured there were not.

Both papers report that Justice Gordon pressed Mr Hugh on these arguments, described by the Age as a “blistering exchange”, and that Justice Gordon warned PwC that if it persisted in holding a position that she ultimately found had no basis, the court could order costs against PwC’s counsel and lawyers personally. It appears that Mr Hugh took umbrage at this, remarking that her Honour’s reference to the issue of costs was “grossly inappropriate”.

It is not the first time Justice Gordon has warned parties in the expensive Centro class action that provisions of the Federal Court Act allow courts to award costs against lawyers personally if they have not acted to resolve disputes quickly, efficiently and inexpensively. Indeed her Honour has good cause to remind parties of this. Historically such orders have been unusual, but it may be that we can now expect to see more of them. Just a month ago, Gray J of the Federal Court ordered costs to be paid by a solicitor personally under s 43(3)(f) of the Federal Court Act, in Modra v State of Victoria [2012] FCA 240. In that case, there had been a history of deficient pleadings and several hearings concerning them, culiminating in an order for a further amended statement of claim to be filed and for the costs thrown away and of the last hearing to be borne by the applicant’s solicitor. In holding that the applicant’s solicitor should bear the costs personally, Gray J examined ss 37M and 37N of the Federal Court Act. His Honour held at [31] that since 1 January 2010, the duty of a legal practitioner in a proceeding in the Federal Court has been changed significantly: he or she must now conduct a proceeding in a way that is consistent with the overarching purpose referred to in s 37M, which has objectives that include efficiency, timeliness and economy, as well as justice. Whilst he accepted that the question of whether a lawyer should be ordered to pay costs personally should be determined by the principles found in the decided cases, his Honour observed that his so accepting was subject to the significant qualification of the changes to a legal practitioner’s duty effected by the introduction of ss 37M and 37N. (Note that the overarching purpose introduced in the Federal jurisdiction is of course broadly echoed in Victoria in the Civil Procedure Act 2010 (Vic) – see in particular Chapter 2 as to the overarching purpose and overarching obligations).

There have been further developments on this costs warning issued by the judge in Centro, this morning. The Age has reported that PwC’s counsel Mr McHugh informed her Honour in Court that her comments about possibly awarding costs against PwC’s counsel and lawyers  personally had put them in a difficult position. Mr McHugh said that her Honour’s comments may give rise to a conflict of interest between the lawyers’ own concerns and those of their client PwC. He reportedly said the “making of the threat” may interfere with the proper conduct of the defence by PwC, although he said the members of the legal team needed to make it clear that the defence they were putting to the court was “not without foundation”. It is reported that twice Mr McHugh asked Justice Gordon to withdraw her comments about costs. On the first occasion, her Honour declined to withdraw them but agreed to stand the case down while PwC and its lawyers considered their position.  Subsequently, another barrister representing PwC, Cameron Moore SC briefly returned to Court and asked for five more minutes. Mr Moore reportedly informed the Court that when he returned PwC would have “something to announce to the Court.”

When the hearing resumed at noon, counsel for PwC reportedly again asked Justice Gordon to withdraw the costs comments. Her Honour replied that she would consider the matter. Curiously, Mr McHugh reportedly then said that members of the legal team might have to withdraw, but immediately stopped himself, withdrew the comment, and said PwC’s defence would continue.

PwC’s auditing partner Stephen Cougle has since taken the stand.