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

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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).)

Newsflash: ITSA’s new Online Service for Bankruptcy Notices commences today

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ITSA (Insolvency and Trustee Service Australia) has been developing a re-designed website with new online services to be rolled out. Today it has announced the launch of stage 1 of its new online service to enable its personal insolvency clients to log on and transact with ITSA at any time 24/7.

The first stage relates to Bankruptcy Notices and commences today. Applications for the issue of bankruptcy notices can now be submitted and managed online. Trustees in bankruptcy access the online services through the Trustee online access portal. Note that ITSA is currently decommissioning existing html, paper and pdf forms used for Bankruptcy Notices – anyone with queries about this should call ITSA’s service centre on 1300 364 785 or check the website (link).

ITSA has said it will be expanding the functionality of its new online services later in 2013.

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

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

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

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

Applications for review of a Federal Court Registrar’s decision

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

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

Background – The contractual arrangement

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

**Update 26 June 2013:  The decision was not appealed, and the company is now in liquidation.

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

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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

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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.

The Rinehart family trust dispute – an overview of trust law principles as to the removal of trustees

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On 31 October 2012 Brereton J of the NSW Supreme Court handed down his judgment on an application by Gina Rinehart and her daughter Ginia, for the summary dismissal of the application of her other children Hope Welker, John Hancock and Bianca Rinehart for inter alia the removal of their mother as trustee of the Hope Margaret Hancock Trust – Welker v Rinehart (No 10) [2012] NSWSC 1330.

His Honour summarised the application for removal of Ms Rinehart as trustee as based upon grounds that, particularly in connection with giving consideration to the extension of its vesting date in September 2011, she so misconducted herself as to demonstrate unfitness to retain the office of trustee. At the core of this were allegations that, as the vesting date approached, she misrepresented to the beneficiaries that they would incur capital gains tax liabilities with catastrophic financial consequences for them unless she exercised her discretion to extend the vesting date, but also informed them that she would so exercise her discretion only if they gave her comprehensive releases in respect of the whole of her past and future trusteeship, and they entered into nuptial agreements with their respective partners, thereby placing immense pressure on the beneficiaries to obtain benefits for herself as the price of her performing her duties as trustee. His Honour acknowledged that it remained to be seen whether or not those allegations would be established at trial.

His Honour noted countervailing considerations which may count against the plaintiffs’ application for removal of the trustee succeeding at trial. One of these was the argument  that, the trust having by now vested, the trustee’s duties are limited. However Brereton J concluded that it could not be said that the plaintiffs’ application for removal met the test for summary dismissal of having been shown to be “hopeless”, “without prospects of success” or “doomed to fail”. He also noted there were issues that could be resolved only at trial. The application for summary dismissal failed and the proceeding will continue.

This judgment provides an interesting opportunity for a brief review of the principles of trust law that apply on an application for removal of a trustee. To distill the principles to which his Honour refers at [7]-[10] as drawn from the authorities there cited (note this is my own summary from these passages of Brereton J’s judgment, not his Honour’s own list) –

1. A trustee can be removed where he or she demonstrates a want of honesty, of capacity to exercise, or of reasonable fidelity to, the duties of a trustee. [7]

2. The Courts of Equity will not intervene at every mistake, neglect of duty or inaccuracy of conduct of trustees. [7]

3. There must be something which induces the Court to think either that the trust property will not be safe, or that the trust will not be properly executed in the interests of the beneficiaries. [8]

4. The jurisdiction to remove a trustee may also be exercised with a view to an efficient and satisfactory execution of the trusts and a faithful and sound exercise of the powers conferred upon the trustee. [9]

5. In deciding to remove a trustee the Court forms a judgment based upon a range of considerations which may be many and varied, and which combine to show that the welfare of the beneficiaries is opposed to the trustee’s continued occupation of the office. [9]

6. The judgment a Court forms must be largely discretionary. However a trustee is not to be removed unless circumstances exist which afford sound ground upon which the jurisdiction may be exercised. [9]

7. The due administration of the trust is one of the Court’s central concerns, if not the predominant one. While the safety of the trust estate is undoubtedly an important element of this, it is far from the only one, and a conclusion that a trustee did not understand the nature of the fiduciary obligation, or had manifested an inclination to act inconsistently with it, might well justify removal, even in the absence of any threat to the safety of the trust property. This is because there would in those circumstances be a risk to the due administration and performance of the trust, even if not to the safety of the trust property.[10]

8. Hostility between the trustee and the beneficiaries is of itself not enough – particularly where that hostility is generated by the beneficiaries – nor is a mere preference of a beneficiary to have a different trustee.[7]

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

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

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

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

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

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

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

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

“124. Loss of client legal privilege – joint clients

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

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

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

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

in connection with that matter.”

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

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

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

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

Newflash – Willmott Forests investors mount High Court appeal

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

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

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

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

The High Court on GST in Qantas – What it may mean for Liquidators and other external administrators

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** This article was subsequently republished with my permission in CCH’s online Insolvency and Bankruptcy news service in the week commencing of 5 November 2012 -http://www.cch.com.au/au/News/ShowNews.aspx?PageTitle=The-High-Court-on-GST-in-Qantas-—-What-it-may-mean-for-Liquidators-and-other-external-administrators&ID=38989&Type=F

This morning the High Court handed down what is perhaps the most important Australian judgment yet in the area of GST law, in Commissioner of Taxation v Qantas Airways Ltd [2012] HCA 41. It addresses a question which is the most fundamental issue in GST law – what is a “taxable supply”, so as to trigger liability to pay GST under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). I will come to the potential significance of this decision for liquidators and other external administrators in a moment.

This was an appeal by the Commissioner from a judgment of the Full Federal Court which had found in favour of Qantas (link). It concerned whether GST was payable by Qantas on airline tickets which it had sold to passengers who, for whatever reason, had not taken their flight – specifically the appeal concerned non-refundable tickets, and tickets where the passengers had a right to claim a refund which they had not pursued. Significant sums of GST were involved – in excess of $34m.

Put simply, the argument before the High Court boiled down to this – what is a “taxable supply”? In the context of airline tickets, is it the air journey, as argued by Qantas (and accepted by Heydon J)? Or is it the entry into obligations under the contract – here the conditional promise by the airline to use its best endeavours to carry the intending passenger and his or her baggage, as argued by the Commissioner? The majority found in favour of the Commissioner.

For liquidators and other external administrators who take appointment, the potential significance of the decision is with respect to contracts that a company has entered into but has not yet completed, at the time of appointment. Today’s judgment in Qantas may mean that the GST liability triggered by those contracts, which had previously been thought to fall upon the liquidator or other external administrator who completes the contract, may now fall upon the company itself. In the case of a liquidation, that would leave the Commissioner to prove in the liquidation for that GST liability, rather than be able to look to the liquidator personally for the GST.

Division 58 of the GST Act makes “representatives” (defined to include inter alia a trustee in bankruptcy, liquidator, administrator and receiver) of “incapacitated entities” liable to pay GST that would be payable by the entity, to the extent that the taxable supply is made in the course of the representative’s responsibility.

However in the wake of Qantas, if the taxable supply (which triggers GST liability) occurs upon the entry into obligations under a contract, rather than upon the actual supply of the goods or service or other obligation which is the core object of the contract (or to use the words of Heydon J, “the bargain”), then it may be open to liquidators and other external administrators to complete contracts entered into prior to their appointment, without incurring personal liability for the GST triggered by the transaction.

I suggest that this is a perhaps unintended consequence of the High Court’s decision. The majority’s judgment does not appear to confine itself, in its conclusions as to what is a “taxable supply”, to particular types of contracts such as those which are not completed.

For completeness, I note that this issue that I now raise, was addressed last year by the AAT in The Trustee for Naidu Family Trust and Commissioner of Taxation [2011] AATA 910. In that case a mortgagee in possession had contended that it was not required to pay GST on the sale of real property because the supply occurred at the time of the company’s entry into the contract of sale, rather than at the mortgagee in possession’s completion of the sale.  In finding against the mortgagee in possession, the Tribunal held that the taxable supply occurred at settlement, when the sale was completed, not when the vendor executed the contract of sale. I suggest that, in light of the decision of the majority of the High Court that Qantas made a supply at the time of contract, and subject to other complexities, the Tribunal’s decision may now be doubted.

* I must thank junior counsel for Qantas for drawing this important GST case to my attention.

Application for approval of funding agreement by Liquidators – s 477(2B) – Confidentiality and Privilege – Great Southern

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On Thursday the Federal Court in Perth handed down its decision on an ex parte application by the Liquidators of the Great Southern companies (Great Southern Limited, Great Southern Managers Limited and Great Southern Finance Pty Ltd) for approval under s 477(2B) of the Corporations Act 2001 (Cth) (the Act) to enter into a funding agreement with Riverrock Capital Limited (Riverrock) and into an agreement as to the retaining of a specific firm of solicitors (Lipman Karas Lawyers). The case is Jones, Saker, Weaver and Stewart (Liquidators), In the matter of Great Southern Limited (in liq)(Receivers and Managers Appointed) [2012] FCA 1072. The judgment of Gilmour J may be read in full here.

The judgment is not long, and provides a neat illustration of a s 477(2B) application. These are commonly – but not exclusively – made in the context of funding agreements. (Settlement agreements incorporating long-tail obligations or instalment payment arrangement spreading over longer than 3 months, also commonly give rise to such applications.) This judgment serves as a useful reminder of the legal principles relevant on such applications, and the key factors relevant to the exercise of the Court’s discretion as to whether or not to grant approval. It also serves as a timely reminder for practitioners to ensure that their affidavit material is sufficient to properly address as many of the key factors as are relevant to a particular case. Here, the Liquidators had brought an earlier application seeking the same approval for the same funding agreement, which was refused due to the inadequacy of coverage of some of the material placed before the Court on that occasion (see [1]-[6]).

Section 477(2B) of the Act provides –

“Except with the approval of the Court, of the committee of inspection or of the resolution of the creditors, a liquidator of a company must not enter into an agreement on the company’s behalf (for example, but without limitation, a lease or an agreement under which a security interest arises or is created) if:

(a)  without limiting paragraph (b), the term of the agreement may end; or

(b)  obligations of a party to the agreement may, according to the terms of the agreement, be discharged by performance;

more than 3 months after the agreement is entered into, even if the term may end, or the obligations may be discharged, within those 3 months.”

In this case, the evidence before the Court identified investigations that the Liquidators had identified as worth pursuing and, subject to the outcome of those investigations, had identified claims worth pursuing, upon which counsel’s advice had been obtained. The Liquidators lacked the funds required to pursue those investigations, and hence had sought funding. They proposed to enter into a funding agreement with Riverrock which they also placed before the Court. As the Liquidators’ investigations and any consequential proceedings were unlikely to be resolved within 3 months of execution of the funding agreement, s 477(2B) approval was required.

Three points of interest to note –

1. Approval was sought prior to entry into the agreement

As it ought to be. Note the prohibitive terms of s 477(2B). However, if an agreement is entered into prior to the seeking of leave, all may not be lost. Leave can be sought – and may be granted, subject to the Court’s view on the proper exercise of its discretion in a particular case – nunc pro tunc. For a good example of this, see a case I was involved in last year – the judgment of Gordon J on an application by the Liquidators of the Westpoint Mezzanine Companies in Vickers, in the matter of York Street Mezzanine Pty Ltd (in liq) [2011] FCA 1028. Note that where leave is sought nunc pro tunc, the orders granting retrospective leave are framed in a particular way, although the practice varies somewhat from judge to judge.

2. Issues of Confidentiality and Waiver of Legal Professional Privilege in Opinions Placed Before the Court

In this case, the application was made ex parte. There was no contradictor. Only the members of the committees of inspection and the secured creditors who had executed confidentiality agreements were put on notice that this application was to be made.

As is usual – but is not a given – confidentiality orders were made here, pursuant to s 50(1) of the Federal Court of Australia Act (1976) (Cth). These included as to the placing of the affidavits, submissions and transcript in a sealed Court envelope bearing an inscription as to confidentiality. If satisfied that it ought to do so, the Courts make these orders in the public interest in the due administration of justice concerning insolvent companies. Indeed while this is not always the case,here an order was sought – and granted – that the application be heard in camera.

For the Court’s discussion of the relevant principles and factors bearing upon the making of confidentiality orders in this case, see [8]-[22]. On the general issue of confidentiality, in the context of applications for approval of compromise agreements, I also refer you to the judgment of Lindgren J in Elderslie Finance Corporation Limited v Newpage Pty Ltd (No 6) [2007] FCA 1030; (2007) 160 FCR 423 at [43].

Confidentiality – specifically whether confidentiality will later be maintained in the face of challenge and applications for access to the material – is often a concern on these applications. This is particularly so with regards to the placing of counsel’s opinions or other legal opinions before the Court. On the one hand, in broad terms evidence must be placed before the Court to demonstrate why a long term contract (at least, longer than 3 months) is warranted in a particular case, and why on balance it is in the creditors’ interests. On the other hand, this means disclosing, in detail, information that may be either commercially sensitive or sensitive with regards to potential litigation the Liquidators may embark upon. This includes information going to, and the foundation for, the Liquidator’s good faith opinion about the merits of prospective litigation. Typically, the material placed before the Court includes the advice of counsel upon which the Liquidator’s opinion as to merit is based; indeed, the application may be unlikely to succeed without it.

These concerns were heightened by three decisions handed down in 2010-2011, two of them arising as part of the One.Tel litigation. They called into question the extent to which privilege in such legal opinions may be maintained once they are used in an application before the Court. Those decisions were: Australian Power Steering Pty Ltd v Exego Pty Ltd [2010] VSC 497, Weston v Publishing and Broadcasting Ltd [2010] NSWSC 1288 and Weston v Publishing and Broadcasting Ltd [2011] NSWSC 14. I will not delve into those decisions in detail here, but I refer you to Gordon J’s judgment in York Street Mezzanine referred to above, in the passages addressing these matters at [40]-[49].

I recommend practitioners take particular note of her Honour’s discussion of the leading authority of Macedonian Orthodox Community Church St Petka Inc v His Eminence Petar; the Diocesan Bishop of the Macedonian Orthodox Church of Australia and New Zealand [2006] NSWCA 160; (2006) 66 NSWLR 112. Especially in a case where this may be a particular concern, I commend you to have regard to the circumstances which bring a case squarely within the ambit of Macedonian Orthodox, and so best protect the Liquidators’ privilege in the legal opinion from later challenge and argument that the privilege has been waived by its use in the application for approval. Gordon J in York Street Mezzanine at [48] identifies those circumstances as being –

  1. the opinion is not provided to the Court by adduction of evidence: see Macedonian Orthodox at [44]-[45]; and
  2. the opinion is provided to the Court only after the Court has indicated that doing so is necessary before it can be in a proper position to give the judicial advice or directions sought: see Macedonian Orthodox at [51].

3. The Principles and Factors Relevant to the Court’s Discretion as to Whether to Approve the Agreement

The Principles

In this case Gilmour J identifies three relevant principles at [29], those being –

1. The role of the Court is to grant or deny approval to the Liquidator’s proposal: Re The Bell Group Ltd (in liq) [2009] WASC 235 at [57];

2. The task of the Court is not to reconsider all of the issues which have been weighed up by the Liquidators or to second guess the Liquidators’ judgment. Thus the Court’s role is not to determine if the Liquidators’ proposal is the best available option, to develop some alternative proposal which might seem preferable or to substitute its own views for those of the Liquidators: Re The Bell Group Ltd (in liq) at [57]; Re Addstone Pty Ltd (In Liquidation) (1998) 83 FCR 583 at 593-594; and

3. Rather, the Court must review the Liquidators’ proposal to “be satisfied that the liquidator is acting in good faith in the making of the commercial judgment in respect of which the Court is being asked to make an order”: Re Addstone Pty Ltd (In Liquidation) at 594. The Court’s approval of the proposal is thus not an endorsement of the proposed agreement. It is merely a permission to the Liquidators to exercise their own commercial judgment in the matter.

His Honour also observed at [30] that if the Court is satisfied that in entering into the Funding Agreement, the Liquidators have acted in good faith and for proper purposes the Court will give the Liquidators considerable latitude in exercising their commercial judgment: Re ACN 076 673 875 Ltd (rec and mgr apptd) (in liq) (Bendeich as liq) [2002] NSWSC 578; (2002) 42 ACSR 296 at [16] and Re Imobridge Pty Ltd (in liq) (No 2) [2000] 2 Qd R 280; see also Re Spedley Securities Ltd (in liq) (1992) 9 ACSR 83 at 85-86 per Giles J.

I refer you also to the six principles distilled by Gordon J in Re Stewart; Newtronics Pty Ltd [2007] FCA 1375 and reproduced by her Honour last year in York Street Mezzanine at [26].

The Factors

At [31]-[32] his Honour observed that in reviewing a Liquidator’s proposal to enter into a funding agreement the authorities have identified a non-exhaustive list of factors relevant to the exercise of the Court’s discretion. Not all of these factors will be relevant in all cases. None are determinative. These factors include –

  1. The nature and complexity of the matter and the risks involved in pursuing a claim or claims;
  2. The prospects of success of the proposed action;
  3. The amount of costs likely to be incurred in the conduct of the action and the extent to which the funder is to contribute to those costs;
  4. The extent to which the funder will contribute towards the opponent’s costs in the event that the action is not successful or towards any order for security for costs;
  5. The circumstances surrounding the making of the contract, including the ability of the funder to meet its obligations;
  6. The level of the funder’s premium;
  7. The extent to which the Liquidators have canvassed other funding options and consulted with the creditors of the company;
  8. The interests of creditors and the effect that the funding agreement may have on creditors of the company;
  9. Possible oppression to another party in the proceedings; and
  10. The extent to which the Liquidators maintain control over the proceedings.

Two remarks to make about those factors. First, you can see as you read through these factors how they shed light upon different ways in which a proposed agreement may be to the advantage or to the disadvantage of creditors. Secondly. in relation to factor 9, this contemplates prejudice of specific types, not the general “oppression” of a party facing the unpleasant prospect of litigation should the agreement be approved. In this regard, see the judgment of Austin J in Re ACN 076 673 875 Ltd (rec and mgr apptd) (in liq) [2002] NSWSC 578; (2002) 42 ACSR 296 at [25] and the passages immediately thereafter.

In preparing affidavit material in support of a s 477(2B) application, and evaluating what to include and as to how much detail to descend, close regard should be had to these principles and factors. This judgment may be found to be instructive on the issue of the adequacy of material on such applications.