Australian Securities and Investments Commission v Australian Property Custodian Holdings Limited

Federal Court of Australia|2013-02-12|Before: Mr J, Murphy J

REASONS FOR JUDGMENT 1 This proceeding is an application for imposition of a civil penalty by the Australian Securities and Investments Commission ("ASIC") against Australian Property Custodian Holdings Limited (receivers and managers appointed) (in liquidation) (controllers appointed) ("APCHL") and five former directors ("the Director Defendants") of that company ("the Penalty Proceeding"). 2 Before me is an application by the Director Defendants to modify their implied undertakings to this Court not to use any documents discovered, or to be discovered, by ASIC and APCHL in this proceeding, other than for the purposes of this proceeding. They seek modification of the implied undertaking only to the extent necessary to enable them to use any such documents for the purpose of related proceedings in the Supreme Court of Victoria No. S CI 2012 1199, brought by APCHL against the Director Defendants and others ("the Compensation Proceeding"). 3 Orders allowing the modification were proposed at a directions hearing on 18 December 2012, subject to any objections by persons who are not parties to the Penalty Proceeding whose documents had been, or were to be, discovered in the proceeding. 4 The Director Defendants and APCHL are parties in both proceedings and they either support or do not oppose the proposed modification. However, although there is a substantial degree of overlap in the facts relied on in the two proceedings, the Compensation Proceeding involves more defendants and a wider range of allegations. For example, the Compensation Proceeding includes: (a) a claim in professional negligence against Madgwicks Lawyers; (b) a claim for breach of fiduciary duties against Kidder Williams Limited and two of its officers, the corporate advisors to APCHL ("the Kidder Williams Defendants"); and (c) claims for breach of directors duties against Anthony Hancy and Neil Rodaway, two former non-executive directors of APCHL ("the Non-Executive Director Defendants"). In the Penalty Proceeding no claim is made against Madgwicks Lawyers or any of its partners, the Kidder Williams Defendants or the Non-Executive Director Defendants. 5 Each of Madgwicks Lawyers and three members of that firm ("the Madgwicks Interests"), the Kidder Williams Defendants and the Non-Executive Director Defendants, (together, "the Objectors") object to the proposed orders.

Relevant principles 6 The parties made detailed submissions as to the applicable principles for the exercise of the discretion to modify or release a party from the implied undertaking. There was no great disagreement as to these principles, only differences as to how they operate in the circumstances of this case. 7 The discretion is circumscribed by the importance attributed to the implied undertaking and the purposes it serves, and is not to be freely exercised. In Hearne v Street (2008) 235 CLR 125 Hayne, Heydon and Crennan JJ observed at [107]: The importance with which the courts have viewed the obligation under discussion is indicated by the fact that although it can be released or modified by the court, that dispensing power is not freely exercised and will only be exercised where special circumstances appear (Esso Australia Resources Ltd v Plowman (1995) 183 CLR 10 at 37). 8 In Liberty Funding Pty Ltd v Phoenix Capital Ltd (2005) 218 ALR 283 ("Liberty Funding") at 289-290; [2005] FCAFC 3 at [31] the Full Court per Branson, Sundberg and Allsop JJ summarised the applicable principles. Their Honours observed: In order to be released from the implied undertaking it has been said that a party in the position of the appellants must show "special circumstances": see, for example, Springfield Nominees Pty Ltd v Bridgelands Securities Ltd (1992) 38 FCR 217. It is unnecessary to examine the authorities in this area in any detail. The parties were not in disagreement as to the legal principles. The notion of "special circumstances" does not require that some extraordinary factors must bear on the question before the discretion will be exercised. It is sufficient to say that, in all the circumstances, good reason must be shown why, contrary to the usual position, documents produced or information obtained in one piece of litigation should be used for the advantage of a party in another piece of litigation or for other non-litigious purposes. The discretion is a broad one and all the circumstances of the case must be examined. In Springfield Nominees, Wilcox J identified a number of considerations which may, depending upon the circumstances, be relevant to the exercise of the discretion. These were: • the nature of the document; • the circumstances under which the document came into existence; • the attitude of the author of the document and any prejudice the author may sustain; • whether the document pre-existed litigation or was created for that purpose and therefore expected to enter the public domain; • the nature of the information in the document (in particular whether it contains personal data or commercially sensitive information); • the circumstances in which the document came in to the hands of the applicant; and • most importantly of all, the likely contribution of the document to achieving justice in the other proceeding. 9 It will usually be necessary for the party applying for modification or release from the undertaking to specify the documents in respect of which the modification or release is sought: Australian Securities and Investments Commission v Marshall Bell Hawkins Ltd [2003] FCA 833 at [12]-[13] per Merkel J; Ambridge Investments Pty Ltd v Baker & Ors (No 3) [2010] VSC 545 at [40], [43] per Vickery J.

Consideration 10 Although it should be dealt with soon, in my view it is presently premature to decide this application. 11 Discovery is yet to be dealt with in the Compensation Proceeding, and there is also an issue as to whether APCHL can subpoena ASIC to compel production of transcripts of examinations conducted by it pursuant to s 19 of the Australian Securities and Investment Commission Act 2001 (Cth) ("ASIC Act"). An application by the Kidder Williams Defendants to have a subpoena to ASIC set aside, including on constitutional grounds, is listed for hearing in the Supreme Court of Victoria before his Honour Justice Robson tomorrow. The Objectors argue that if I make an order modifying the implied undertaking then those transcripts may be available to the Director Defendants to use in the Compensation Proceeding even if Robson J determines the application in favour of the Objectors. 12 In my view the applications before Robson J in relation to the s 19 transcripts, and his Honour's pending consideration of discovery, may have the effect that this application assumes less significance to the parties. In the interests of comity and the case management of related proceedings I telephoned Justice Robson to discuss the application before me. His Honour's preference is that I defer its consideration. 13 The other reason to defer its determination is that, as I set out below, the Director Defendants should better specify the documents the subject of the application so that their relevance, intended use and significance in the Compensation Proceeding is clearer. 14 I will accordingly adjourn this application. Because there is some urgency to it the adjournment should not be lengthy. If required I will be in a position to hear further submissions within the next month. 15 Although I am adjourning the application, it will likely be of assistance to the parties on the resumed application if I set out my preliminary views after having had the benefit of hearing their submissions.

Efficiency and cost considerations 16 The Director Defendants argue that as their lawyers are the same in both proceedings, it will be costly and inefficient if the documents being used by them to defend the Penalty Proceeding cannot be used at the same time to advance their defence of the Compensation Proceeding. I am required by s 37M of the Federal Court of Australia Act 1976 (Cth) to approach the determination of this application on the basis of the overarching purpose of facilitating the just resolution of disputes according to law, as quickly, inexpensively and efficiently as possible. The same considerations apply in the Supreme Court pursuant to s 1(1)(c) of the Civil Procedure Act 2010 (Vic). 17 A related issue is the difficulty experienced by solicitors and counsel for the Director Defendants, who are engaged in preparing the defence of the Penalty Proceeding and the defence of the Compensation Proceeding. Various counsel argued with some force that, as they come to understand the discovered documents, it is very difficult and perhaps impossible for them to compartmentalise this knowledge so as not to use it in the Compensation Proceeding. They argue that, in taking steps such as the preparation of witness statements in the Penalty Proceeding, which might also form the basis of witness statements in the Compensation Proceeding, there is a risk that they may inadvertently breach the implied undertaking. It is this risk which indicates that this application should be determined with speed. Counsel and solicitors seeking to conscientiously perform their obligations to their clients should not be exposed to this risk. 18 The Objectors did not attempt to address these considerations, instead focussing their attack on other issues. In my preliminary view, these considerations support a modification of the implied undertaking so that counsel and solicitors for the Director Defendants are able to prepare their clients' defences to both proceedings in a practical and efficient way, doing so at the same time.

The relevance of the discovered documents to the Compensation Proceeding 19 The Penalty Proceeding and the Compensation Proceeding are closely related. The facts underpinning both proceedings overlap to such a degree that the documents relevant to the Penalty Proceeding are likely to be relevant to the Compensation Proceeding. Mr Williams, senior counsel for the sixth defendant submits, and I accept, that a Venn diagram of the two proceedings would show the Penalty Proceeding as entirely contained within the Compensation Proceeding. The pleadings in the two proceedings display this close relationship, and the Objectors did not argue otherwise. In fact the written submissions by the Non-Executive Director Defendants and the Madgwicks Interests effectively concede the issue of relevance. 20 Insofar as the two proceedings are different, it is the Compensation Proceeding which is broader. Although it is not difficult to contemplate documents relevant to the Compensation Proceeding which have no relevance to the Penalty Proceeding, documents that are relevant to the narrower Penalty Proceeding are likely also to be relevant to the other proceeding. 21 The Director Defendants argue that I must treat documents discovered by ASIC and APCHL as having been determined to be relevant by them, and therefore prima facie relevant to the Compensation Proceeding. I am not however convinced that this is so. The Kidder Williams Defendants say that they were compelled to produce documents to ASIC (pursuant to s 33 of the ASIC Act) and to APCHL (under summonses for examination pursuant to s 596A of the Corporations Act 2001 (Cth)) which are not relevant to the Compensation Proceeding. They took me to the notices for production and summonses for examination which indicated the breadth of the documents produced to ASIC and APCHL - which have since been discovered in the Penalty Proceeding. I note too that APCHL is in liquidation and has decided to take no active step in the Penalty Proceeding. When the discovery regime was set APCHL's representative evinced little interest in carefully further reviewing the documents produced to it. 22 At the centre of the complaint by the Kidder Williams Defendants, adopted by the other Objectors, is that irrelevant documents will be available for use in the Compensation Proceeding if the implied undertaking is modified. In fact, they concede that if the documents the subject of the proposed order are sufficiently identified and they are able to satisfy themselves that they are likely to be relevant and discoverable in the Compensation Proceeding then they cannot maintain their objection to the orders. This is an important concession. 23 It must be accepted though that it is unavoidable in the case involving discovery of more than 1.2 million documents that there are some imperfections in discovery. The Objectors' concerns regarding irrelevant documents must be taken into account in exercising the discretion, but are just one factor in the balance. In my preliminary view, it is not realistic in this case to require that the Director Defendants undertake or provide a document by document analysis to justify modification of their implied undertakings. 24 The Director Defendants also point out, and I accept, that any documents that are allowed to be used in the Compensation Proceeding will only be allowed to be used if they are accepted as relevant by the Supreme Court. Such documents would be required to be discovered in the Compensation Proceeding in any event. Any documents that are not relevant will not be used in the Compensation Proceeding. In these circumstances it is difficult to envisage any significant prejudice to the Objectors by the orders proposed. Further, because the Director Defendants have already received the discovered documents any prejudice (or at least most of it) has already been suffered. In any event, any question as to objections or sensitivities regarding particular documents proposed to be used in the Compensation Proceeding may be dealt with by Robson J.

Have the documents and the purpose been adequately specified 25 The Objectors contend that the application is flawed in that the Director Defendants have failed to articulate with any specificity the documents for which modification of the undertaking is sought, and failed to specify the purpose for which each document is sought to be used in the Compensation Proceeding. They contend that, without specifying the documents and the specific purpose of the proposed use in the other proceeding, it is impossible to apply the necessary test to determine whether "special circumstances" exist for modification of the implied undertaking. 26 In particular, the Objectors say that they are presently unable to understand whether modification of the undertaking is only sought in relation to documents which are relevant to the Compensation Proceeding. They advise that they will not maintain their objections if satisfied the documents are relevant. 27 The authorities indicate that it is usually necessary for a party seeking release or modification from the implied undertaking to specify the documents in respect of which the application is made and the use to which the documents will be put in the other proceeding. However, as the Full Court observed in Liberty Funding, all the circumstances of the case must be examined in deciding whether there is good reason to allow modification or release from the implied undertaking. The most important consideration in determining whether "special circumstances" exist is the likely contribution of the documents in question to achieving justice in the other proceeding. 28 The scale of the discovery in this matter makes clear the huge time and expense that would be involved in the task of individually specifying the documents and their intended use in the way that the Objectors apparently seek. This is important, especially when viewed against the Objectors' failure to establish any significant prejudice. Another important consideration is the fact that the Director Defendants enjoy a "penalty privilege". This means that they need not elect at this stage whether to call evidence in the Penalty Proceeding or notify ASIC of the way in which they will present their cases. Until they have done so, the privilege also allows them to withhold such evidence and notice in the Compensation Proceeding. In my preliminary view, the circumstances of this case indicate that specification of the documents and their intended use is not required to be performed with the particularity which the Objectors seek. 29 While the Director Defendants must satisfy me as to the relevance and use of the subject documents in the Compensation Proceeding, they are not required to do so in a way which "shows their hand". In all the circumstances of this case my preliminary view is that it is unnecessary to do this by reference to each individual document. I consider that it will be enough if the Director Defendants group documents by broad category sufficient to broadly identify them and enable me to reach a view as to their likely relevance, intended use and likely contribution to achieving justice in the Compensation Proceeding. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Murphy.

Australian Securities and Investment Commission Act 2001(Cth)

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