Attorney-General (Northern Territory) v Kearney

REASONS FOR JUDGMENT 1 The company formally known as TEAC Australia Pty Ltd (TEAC) is subject to a Deed of Company Arrangement. The deed administrators are conducting an examination into the company's affairs pursuant to ss 596A and 596B of the Corporations Act 2001 (Cth). During the course of the examination the deed administrators obtained orders for the production of documents from three firms of solicitors. The deed administrators now seek to inspect those documents. The clients object to the inspection of many of those documents on the ground of legal professional privilege. The deed administrators contend that the solicitors were used to implement a scheme to defraud TEAC's creditors and the documents over which privilege is claimed came into existence in that process. Thus they say the documents are not privileged. That is the issue that must be resolved. 2 It is convenient to begin with a brief sketch of the background, most of which is uncontroversial. I should mention that the evidence from which the background is drawn is that which would be admissible on a final hearing. In Commissioner of Australian Federal Police v Propend Finance Pty Ltd (1996) 188 CLR 501, 556 McHugh J said: "Legal professional privilege is a legal right. Its prima facie application to a communication can only be displaced by admissible evidence." The view to the opposite effect expressed in several New South Wales cases, including Re Doran Constructions Pty Ltd (in liq) (2002) 20 ACLC 909 and Re Southland Coal Pty Ltd (receivers and managers appointed) (in liq) (2006) 59 ACSR 87, is not likely to be correct. The New South Wales cases hold that it is the nature of the proceeding in which the issue of privilege arises which governs whether or not the fight about privilege is interlocutory. The other (and preferable) view is that it is the character of the dispute itself that is determinative. 3 TEAC was an importer and distributor of electrical equipment manufactured by the Teac Corporation of Japan. Its shareholders were TEAC Corporation and Gavin Muir Pty Ltd (GMPL), with each holding 50% of the issued capital. GMPL held its interest as trustee of the Muir Family Trust. The late Mr Muir controlled GMPL and was the managing director of TEAC. 4 In March 2005 TEAC was placed into administration. At the time GMPL was indebted to TEAC in the amount of approximately $3,200,000. This was the aggregate of sums advanced and interest accrued under a loan agreement dated 1 April 1998. On 15 July 2005, the administrators wrote to GMPL demanding repayment of the debt. They threatened action if the debt was not repaid within 14 days. GMPL did not comply with the demand. So, having removed Mr Muir from office on 16 September 2005, the administrators served a statutory demand on GMPL on 19 September 2005. This led to an application by GMPL to have the demand set aside. That proceeding was ultimately dismissed by consent and the statutory demand was left unsatisfied. 5 While these events were being played out GMPL began to dispose of its assets. Its only substantial asset was a house in Moule Avenue Brighton, which it held on behalf of the Muir Family Trust. The house was worth over $6 million and was subject to a first mortgage in favour of Perpetual Trustee Company to secure a debt of around $3.5 million. Mr Muir's wife, Betty, lived in the house. She had separated from her husband in 1993, but had been allowed to live in the house. In the meantime, GMPL paid all the outgoings. 6 The next stage in the disposal of trust assets occurred on 14 September 2005. On that day GMPL granted a second mortgage over the house to Stevpan Nominees Pty Ltd to secure a loan of approximately $550,000. Most of the loan money was applied toward discharging Mr Muir's personal liabilities. 7 On 16 September 2005 GMPL entered into a contract to sell Moule Avenue for $6,700,000. Settlement was due on 17 October 2005. 8 On 20 September 2005, GMPL's solicitor, Mr Lewin of Mills Oakley Lawyers (MOL), telephoned Mr Groppi, a solicitor at DE Jones & Associates, to enquire whether Mr Groppi's firm would act on behalf of Mrs Muir in relation to a matrimonial property settlement. Later that day, Mr Lewin and Mrs Muir met Mr Groppi at his office. Mr Groppi agreed to act on Mrs Muir's behalf. Three days later DE Jones & Associates lodged on behalf of Mrs Muir a caveat over the title to Moule Avenue in which she claimed to be the equitable owner of the property "pursuant to a constructive trust". 9 By 11 October 2005 (that is, about a week before the settlement of the sale of Moule Avenue) DE Jones & Associates and MOL had reached agreement on behalf of their respective clients that Mrs Muir would receive the proceeds of sale after payment of the debts due to secured creditors and the deduction of reasonable selling expenses. A Deed of Settlement recording this agreement was executed by Mrs Muir, Mr Muir and GMPL. The deed contained the following recitals: C. The Wife [Mrs Muir] has disputed the entitlement of the Trustee [GMPL] to dispose of the Wife's Home without first recognising the Wife's interest pursuant to a constructive trust in all net proceeds of sale [the "Constructive Trust Claim"] … F. In addition to the Constructive Trust Claim the Wife and TVC [TV Connect Pty Ltd, a company controlled by Mrs Muir] have alleged that the Trustee is indebted to the Wife and to TVC for a total amount in excess of $4 million [the "Trust Debt"]. G. The Trustee: (i) has disputed the Constructive Trust Claim and has been directed by the Ex-husband [Mr Muir] not to pay the full amount of the Constructive Trust Claim to the Wife; and (ii) has disputed that it is liable to pay the full amount of the Trust Debt to the Wife and to TVC. … I. Without any admissions of liability and for the sole purpose of avoiding litigation the Ex-husband and the Trustee have agreed to pay money to the Wife and the Wife and TVC have agreed not to commence any legal action against the Trustee in respect of the Constructive Trust Claim and the Trust Debt … in accordance with the terms of this Deed. 10 I have the transcript of the examination of Mrs Muir. It is clear from her evidence that each of these recitals is untrue. For example, Mrs Muir admitted that: (1) Mr Muir offered her "an amount left over" from the proceeds of sale; (2) she was unaware of any basis upon which GMPL owed her and TVC over $4 million; (3) there was no dispute between any parties about her possible entitlement to the net proceeds of sale pursuant to a constructive trust; and (4) there was no litigation on foot and Mrs Muir had not contemplated bringing an action to enforce her purported entitlement to the proceeds. Nonetheless, following the settlement of the sale on 18 October 2005, Mrs Muir was paid $1,713,473.13. 11 Another caveat was lodged over Moule Avenue on 20 September 2005. The caveators were Brian and Helen Patterson. They had advanced $339,750 to Mr Muir on 18 February 2005 to be used by him in a development in Port Melbourne. In their caveat the Pattersons claimed that they had "an equitable interest [in the form of a] Charge [over Moule Avenue] [p]ursuant to a Deed of Charge in writing dated 18th February 2005 between [GMPL] and [the Pattersons]." There was no written guarantee or charge. In a letter to State Solicitors, who were acting for the Pattersons, Mr Lewin pointed this out and demanded that the caveat be removed. This did not happen. Instead, on 6 October 2005, Mr Lewin prepared an agreement for execution by the Pattersons, Mr Muir and GMPL in which GMPL and Mr Muir acknowledged the existence of the guarantee and charge. Mr Lewin sent the agreement to Messrs Alderuccio, a firm of solicitors that acted for Mr Muir from time to time. The cover sheet suggested the Deed had been drawn up by Messrs Alderuccio. Mr Lewin did, however, arrange for the agreement to be executed. In due course the Pattersons received their money out of the proceeds of sale. 12 A significant portion of the proceeds (approximately $485,000) was paid to MOL. The firm acted for GMPL as well as for Mr Muir and Bay Street Corporation Pty Ltd (BSC), another of company controlled by Mr Muir. On 18 July 2005, MOL was granted a charge over Moule Avenue to secure the payment of its fees for work performed for GMPL, Mr Muir and BSC. The work related to the sale of properties owned by BSC, investigations by ASIC into alleged breaches by Mr Muir of the Corporations Act and liaising with the deed administrators on behalf of Mr Muir and GMPL. A portion also related to the claim made against GMPL by TEAC. 13 The result of these transactions was as follows. First of all, not one cent from the proceeds of sale was available to discharge the debt due to TEAC. Secondly, hundreds of thousands of dollars out of the proceeds were used to discharge debts owed by Mr Muir or his companies. Third, the money paid to Mrs Muir may have been money to which she was entitled. In an affidavit Mrs Muir described briefly the properties she and her former husband had purchased and sold during the course of their marriage. On the basis of this evidence it is possible to conclude that she had a tracing claim to some part of the proceeds. It is also possible that she had a claim to the proceeds under the Family Law Act 1975 (Cth). But her claim has never been tested or subjected to close scrutiny. 14 It was no accident that none of the proceeds ended up with TEAC. That is what Mr Muir had intended. To achieve his object he needed the assistance of solicitors. The deed administrators seek access to the documents the solicitors brought into existence in relation to the transactions that led to the disposal of the proceeds. No doubt they wish to ascertain whether it is worthwhile bringing any recovery proceedings. 15 The issue to be resolved is whether in these circumstances legal professional privilege can subsist over the documents. The answer will depend on the ambit of the so called "fraud or crime" exception. 16 For reasons of public policy there is no privilege in a communication which is a part of criminal or unlawful conduct: Bullivant v Attorney-General (Vic) [1901] AC 196, 201. The rule is not confined to a communication in pursuance of fraud or illegality. In Attorney-General (Northern Territory) v Kearney (1985) 158 CLR 500, it was applied to a public body that had exercised its powers in bad faith. It was not suggested that the authority had acted fraudulently or dishonestly. The allegation was that the authority had exercised its powers for an ulterior purpose. That was sufficient because the word "fraud" is wide enough to include "fraud on justice" (Kearney 158 CLR at 514) or conduct that would "frustrate the processes of law" (R v Bell; Ex parte Lees (1980) 146 CLR 141, 156). The exception includes a communication to further any abuse or misuse of power or deliberate breach of a legal duty: Southern Equities Corporation Ltd (in Liq) v Arthur Anderson & Co (1997) 70 SASR 166, 174. 17 There is a strong prima facie case that Mr Muir deliberately organised the affairs of GMPL to ensure that its principal creditor, TEAC, would not recover its debt. This was in circumstances where GMPL was entitled to be indemnified against that liability from the trust assets. Indeed, for purposes of enforcing the indemnity GMPL had a charge or right of lien over those assets. The payments out of the proceeds of sale could only be made because GMPL had relinquished its charge. To allow GMPL to give up its charge was a deliberate breach by Mr Muir of his duties as a director. It may have been much more than that if Mr Muir was acting in concert. An agreement to cause financial prejudice by dishonest means is a common law conspiracy to defraud: Peters v The Queen (1998) 192 CLR 493, 522-525. The relevant mens rea is the intention to prejudice the interests of a creditor. Dishonest intention is not an element of the offence. 18 In my view the public interest that supports legal professional privilege must give way in respect of the documents in light of Mr Muir's ostensibly illegal conduct. 19 This conclusion is in line with the cases: see Barclays Bank Plc v Eustice [1995] 1 WLR 1238 (communications relating to a transaction entered into at an undervalue for purposes of defeating a creditor); Gartner v Carter [2004] FCA 258 (advice sought to restructure a corporate group to put assets beyond the reach of a secured creditor); Australian Securities and Investments Commission v Mercorella (No 3) (2006) 58 ACSR 40 (advice obtained about the grant of securities to one class of creditors that would defeat the rights of other creditors). 20 My ruling is not intended to cover all the communications between Mrs Muir and her solicitors, DE Jones & Associates. There is no evidence to suggest that Mrs Muir had any involvement in Mr Muir's scheme. In R v Central Criminal Court, Ex parte Francis & Francis (1989) AC 346, the House of Lords held that where a person intent on fraud uses an "innocent tool" to further his criminal purpose, the communications between the innocent person and his lawyers are not privileged. That must be a very exceptional case. Here I think it is appropriate to draw a distinction between, on the one hand, communications between Mrs Muir and her solicitors which ought remain confidential and, on the other hand, communications between her solicitors and MOL in respect of which privilege could not attach. I also think that communications between Mrs Muir and her solicitors which relate to or pass on the discussions between her solicitors and MOL are not privileged. 21 I will leave it to the parties to make arrangements for the documents to be provided to the administrators. I will order that the deed administrator shall have the costs of the hearing. I certify that the preceding twenty one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein.