Elfic Limited v Macks

The applicants' right to be heard 18 There is a threshold issue to be resolved in relation to the standing of the applicants. They seek leave to be heard in the proceeding without becoming a party to the proceeding. The Court has the power to grant such leave pursuant to r 2.13 of the Federal Court (Corporations) Rules 2000 (Cth) which provides: "(1) The Court may grant leave to any person who is, or who claims to be: (a) a creditor, contributory or officer of a corporation; or (b) an officer of a creditor, or contributory, of a corporation; or (c) any other interested person; to be heard in a proceeding without becoming a party to the proceeding." 19 The liquidator challenged the applicants' right to be heard on the application for approval of the Funding Agreement. He relied upon the reasoning in Re Geelong Building Society (1996) 14 ACLC 334 in which a liquidator's application for authority to compromise a claim against certain debtors was before the court. Senior Master Mahony held that the debtors had not been entitled to receive notice of the application and were not entitled to be heard on it. The Master said at 340: "I do not consider that the debtors can be regarded as having the requisite interest in the outcome of the liquidator's application [to be heard]. That application cannot produce an order constituting a compromise; nor can it result in an order compelling the liquidator to effect the compromise. Such orders would or could affect the debtors because they would be the other parties to the compromise. The only 'relief' to which the liquidator's application could lead, however, is the conferring of authority on the liquidator to effect the compromise. At least usually, it is a matter for the liquidator alone whether he seeks such authority or determines to commence or proceed with litigation. How, then, can GBS' adversaries in litigation, the debtors, have an interest in supporting or opposing such an order? If they have, then the same would surely be true of a defendant to a proceeding by or on behalf of a person under disability on application to the court for sanction of a compromise of that proceeding. An application by a liquidator for authority to effect a compromise is as personal to the liquidator as an application for sanction of a compromise of the claim of a person under disability is personal to the plaintiff and his or her litigation guardian." In Re Tietyens Investments Pty Ltd (1999) 31 ACSR 1, Weinberg J (at 19) accepted this reasoning as persuasive but, having regard to the unusual circumstances of the case before him, gave the relevant non‑party leave to be heard. 20 The difficulty with the liquidator's submission in this regardis that he has served the application on the applicants. 21 The issue or potential conflict involved in allowing a party to be heard on a liquidator's application for approval of a funding agreement where the party is also a potential defendant in the proposed litigation was considered by Mansfield J in Re Addstone Pty Ltd (In liq); Ex parte Macks (unreported, Mansfield J, Federal Court of Australia, 8 December 1998). Mansfield J was faced with a party who wore two hats, one as a creditor and the other as a defendant in Supreme Court proceedings which were the subject of the funding agreement in respect of which the approval of the court was sought. Mansfield J declined to permit the party to be heard on the application for the approval of the funding agreement in its capacity as a defendant in the proceeding. However, Mansfield J held that s 477(6) of the Corporations Law (Cth) entitled the party to apply to be heard on the application as a creditor, and there was no challenge in that case to the party's standing to be heard as a creditor. Rather, the submission before Mansfield J by the liquidator was that the purported exercise of the right to be heard should not be permitted because it was an abuse of process. There was an issue as to whether the party genuinely wished to be heard as a creditor or whether, in reality, it wished to be heard as a defendant "so as to explore frustrating that action, or getting a collateral benefit for use in defending it". His Honour accepted that it might be a consequence of the proper exercise by a creditor of a right to be heard on such an application that the approval of the court was not given and that the proposed funding arrangement did not proceed. However, his Honour held that it did not necessarily follow from that consequence that the creditor's motivation was not bona fide. His Honour did not accept that the fact that the party might benefit as a defendant if the arrangement was not approved was sufficient to conclude, by itself, that the party did not wish to exercise its right as a creditor. 22 Whilst I consider that the fact that the applicants are also the proposed defendants in the proposed litigation is a relevant matter to take into account in considering their application to be heard: Re Addstone Pty Ltd (In liq); Ex parte Macks (supra), I am prepared for present purposes to accept that it is appropriate that the applicants be heard on the liquidator's application as creditors of Kingsheath. As creditors they have an interest in how the liquidator deploys the funds of Kingsheath at his disposal. They have also been served with the application.

Access to confidential exhibit "KLS 15" 23 Although it is open to the liquidator to apply for the Court's approval ex parte, without notice to any other person, courts are frequently concerned to be satisfied that there is a proper contradictor before the court who can test or challenge the liquidator's evidence and submissions. In such circumstances the procedure to be adopted as to the manner in which the hearing is to proceed is in the Court's discretion. It is therefore open to the Court to consider not only the terms upon which any such party should be heard, but alsothe terms upon which any parties should be given access to any of the material before the Court. 24 There is a further basis upon which the Court's discretion in this respect may be founded. As noted earlier, r 2.13 of the Federal Court (Corporations) Rules 2000 (Cth) provides that the Court may grant leave to, inter alia, a creditor or any other interested person to be heard in a proceeding without them becoming a party to the proceeding. It is implicit in such power that the Court may grant such leave on terms not only as to the manner in which the person is to participate in the proceeding but also as tothe material to be made available to such persons. The significant touchstone by reference to which the exercise of this discretion by the Court, and any limitation on access to material or participation in the hearing, is to be judged is the necessity to do justice to all relevant parties and to enable the Court to determine, in accordance with accepted principles, whether it should give its approval to the liquidator entering into the relevant agreement. 25 The applicants submitted that they should be entitled to examine the Funding Agreement contained in confidential exhibit "KLS 15" for the following reasons: (a) to ensure it did not infringe the rules against champerty and maintenance and was not otherwise contrary to the public interest and public policy; (b) because they were entitled to be satisfied that they were not putting at risk funds otherwise available to the creditors, that is to say funds available and not dissipated in pursuing an action when they might otherwise more properly be applied in the conduct of the winding up for the benefit of creditors generally; (c) to consider whether the proceedings were so large and complex that they were not in the interests of creditors generally. 26 The liquidator submitted that there was a foundation for an inference that the purpose of the applicants was not necessarily to oppose the application by the liquidator but rather to advance their own interests which were related to their position as potential defendants. Although those interests may be present, I do not consider that that fact alone is sufficient to deny the applicantsaccess to the documents. 27 The liquidator did not ultimately seek to claim legal professional privilege in respect of the Funding Agreement. Rather, he submitted that the issue should be determined in accordance with the principle of fairness. 28 In Re Addstone Pty Ltd (In liq) (1998) 83 FCR 583 Mansfield J, dealing with an application by a liquidator for directions as to the power of the liquidator to enter into a funding agreement pursuant to s 479(3) of the Corporations Law (Cth), noted that "[t]he precise terms of the funding agreement are a matter for the liquidator" (at 596). His Honour indicated that it was not appropriate to disclose the parties to the funding agreement or the details of the terms of the agreement beyond what was necessary to indicate the foundation for his reasons for judgment, as the liquidator thought that such disclosure might disadvantage him in the conduct of his proposed claims. His Honour accordingly ordered that the annexure to the liquidator's affidavit containing the funding agreement be confidential and not available for the inspection of any person except by leave of the court. 29 In a subsequent proceeding to which I have already referred, Re Addstone Pty Ltd (In liq); Ex parte Macks (supra), Mansfield J dealt with the same liquidator seeking court approval for entering into a funding agreement in respect of separate proceedings. His Honour was prepared to give the party who was the defendant in the proceedings access to the proposed funding agreement but excluding the precise details to the extent to which they might provide "some insight into the level of funding or the terms of funding which might be of strategic or tactical significance in the conduct of the defence in the Supreme Court actions" (at 4). 30 In Elfic Limited v Macks (unreported, Williams J, Supreme Court of Queensland, 25 February 2000), Williams J expressed the view (at [131]) that it would be wrong for a liquidator to have divulged details of the funding agreement to defendants in the proceeding "because they would have used that to their own advantage". Williams J continued at [132]: "For similar reasons I see nothing wrong with the secrecy provisions which wereincludedinthe order of Mansfield J. Similarconfidentiality requirements are found in other orders (cf Terranora Leisure Time Resort). Clearly it would be entirely inappropriate for the defendant creditors to know some of the limitations on the funding to which the liquidator was entitled." 31 As the liquidator contended, an analogy may be drawn with the procedure whereby the court summonses a person for examination about a corporation's examinable affairs pursuant to s 596B of the Act and an application is made to set aside the summons. The affidavit in support of the application is not available for inspection except so far as the court orders: s 596C(2). The courts have developed principles by reference to which the person summonsed for examination who wishes to set aside the summons is entitled to inspect the affidavit filed in support of the application for the issue of the summons. Ordinarily, a court will exercise its discretion in favour of ordering disclosure of the affidavit to the person seeking to set aside the summons where the justice of the case so requires: Re Excel Finance Corporation Ltd (Receiver and Manager Appointed); Worthley v England (1994) 52 FCR 69 at 93; Simionato & Farrugia v Macks & Macks (1996) 19 ACSR 34 at 63. These cases, as do others, rely upon In Re British & Commonwealth Holdings Plc (No 1 & 2) [1992] 1 Ch 342 in which Nourse LJ said at 355: "In my judgment inspection of the statement should prima facie be allowed where the court is of the opinion that it will or may be unable fairly and properly to dispose of the application if part of the evidence is withheld from the person against whom the order is sought. It will then be for the office holder to satisfy the court that confidentiality in whole or in part is nevertheless appropriate." See also per Ralph Gibson LJ at 367. 32 In Re Excel Finance Corporation Ltd (Receiver and Manager Appointed) (supra), the Full Court of the Federal Court conditioned the exercise of the discretion to order disclosure upon whether the justice of the case so required, citing Re British & Commonwealth Holding Plc (No 1 & 2) (supra), and continued at 93‑94: "It does not follow that the Court would permit every examinee or potential examinee to have access to such material. There are sound reasons why inspection should not be freely granted ..." The court agreed with the passage in the judgment of Nourse LJ to which I have referred. 33 I consider that it is appropriate that the applicants should have access to the confidential exhibit "KLS 15" but that there should be blanked out or deleted from the copy of the documents made available to them the amounts of funding proposed or agreed to and the return to the funders. In an ordinary litigation situation, leaving aside any issue as to security for costs, a litigant is not normally privy to the "war chest" that the opposing party has available to fund the litigation. Although the applicants, as creditors, have an interest in the financial commitments and obligations entered into by the liquidator, it would give them an unfair advantage in any litigation brought by the liquidator against them for them to have knowledge of the amount of money available to the liquidator to run the litigation. They would, by virtue of that knowledge, have a tactical and strategic advantage which ought not to be given to them. Although they wish to have regard to, and consider, the commerciality of the liquidator's agreement with IMF (Australia) Ltd, it is necessary to balance against that interest the consequence of knowledge of the amount of funding in the event that litigation against them ensues. 34 There is a real risk that disclosure of the amount of funding available to the liquidator to proposed defendants in proposed litigation would frustrate or impede the purpose of the liquidator's application for the court's approval to enter into a funding agreement. It may enable the proposed defendants to assess and implement the extent to which they could, by way of interlocutory processes, eat up the liquidator's funding before the conclusion of the trial. 35 The view I have formed is consistent with the position adopted by Mansfield J in Re Addstone Pty Ltd (In liq); Ex parte Macks (supra) and Williams J in Elfic Limited v Macks (supra). It achieves a suitable and appropriate balance between the competing interests of the liquidator and the applicants who wear two hats, creditor and proposed defendant. It also enables the Court to consider and dispose of the liquidator's application fairly and properly.

Access to the legal advice referred to in the liquidator's affidavit 36 There is a suggestion in the correspondence passing between the solicitors for the parties that no formal memorandum of legal advice has been obtained. The liquidator says he has received legal advice on the matters referred to in pars 52 and 53 of his affidavit of 22 July 2003. His solicitors have said in correspondence that no formal memorandum of advice is in existence, although a draft memorandum was prepared but not finalised. His solicitors also refer to the existence of file notes and correspondence. It is premature to investigate the form of the advice and I have proceeded on the basis that there is some written form of that advice. If it has not been reduced to writing in any form then there is nothing to produce. 37 The applicants submitted that there had been a clear waiver of the legal professional privilege to the legal advice which was referred to in pars 52 and 53 of the liquidator's affidavit. 38 The liquidator submitted that there was no waiver of legal professional privilege where the liquidator has merely disclosed the fact of the existence or the obtaining of legal advice, relying upon Derby & Co Ltd v Weldon (No 10) [1991] 2 All ER 908 at 916‑917. The liquidator further submitted that it was unfair to require him to establish that he had made a bona fide commercial decision to commence proceedings and that he had taken legal advice, without which he probably could not get approval from the Court under s 477(2B) or s 479(3) of the Act, and then be required to hand over the legal advice to the potential defendants. It was submitted that this, in substance, was the other side of the unfairness proposition propounded in a number of decisions: see Goldberg v Ng (1995) 185 CLR 83; Mann v Carnell (1999) 201 CLR 1. 39 In due course, one of the matters that will arise in the principal proceeding for consideration in deciding whether the Funding Agreement should be approved by the Court is whether or not there are good prospects of success. The relevance of the existence and nature of legal advice obtained in the proposed proceedings in the context of an application for approval of a litigation funding agreement is demonstrated by Re ACN 076 673 875 Ltd (Receiver and Manager Appointed) (In liq) (2002) 42 ACSR 296. In that case, Austin J indicated that one of the factors that should be taken into account in determining whether the court should approve such an agreement was the liquidator's prospects of success. Austin J said at 300: "Where the litigation funding is for the purpose of commencing and prosecuting proceedings, this issue is likely to assume particular importance. The presence or absence of legal advice as to prospects of success may be a matter of some significance to the court." 40 Underlying the principle of waiver of legal professional privilege is a concern about unfairness, that is to say unfairness in a person, on the one hand, claiming protection from producing the legal advice, yet on the other hand using that legal advice to support or advance a proposition. This principle is related to, and helps to explain, the notion of inconsistency which is said to be the touchstone for determining whether there has been a waiver of legal professional privilege. 41 In Mann v Carnell (supra) Gleeson CJ, Gaudron, Gummow and Callinan JJ said at 13: "It is inconsistency between the conduct of the client and maintenance of the confidentiality which effects a waiver of [legal professional] privilege. … What brings about the waiver is the inconsistency, which the courts, where necessary informed by considerations of fairness, perceive, between the conduct of the client and maintenance of the confidentiality; not some overriding principle of fairness operating at large." See also Goldberg v Ng (supra). 42 In the present case there is inconsistency between the liquidator's use of the legal advice he has obtained and the purpose of legal professional privilege in protecting confidentiality. The liquidator has gone further than simply referring to the fact or existence of the legal advice. He relies upon it to support and provide the basis for his opinion that he has "very good prospects of success" and "a strong claim" in respect of his causes of action. Not only has the liquidator relied on the advice to support his case, he has also referred to the substance of it in relation to his claim under s 588G of the Act: Ampolex Ltd v Perpetual Trustees Co (Canberra) Ltd (1996) 40 NSWLR 12; cf s 122(2) Evidence Act 1995 (Cth). 43 By relying upon the legal advice in the manner he did, I consider that the liquidator has waived such privilege as exists in relation to protecting that advice from production. I am satisfied that there has been a waiver of the legal professional privilege which initially attached to the legal advice and protected it from production under the coercive power of the Court. Nevertheless I consider that, as an exercise of discretion having regard to the procedure presently before the Court, such legal advice should not be made available to the applicants. It is not normally material which is available to an opposing party in litigation and disclosure of it may have a tendency to frustrate the purpose for which the application by the liquidator for approval to enter into the Funding Agreement has been made.

Conclusion 44 I therefore order that the liquidator produce to the applicants a copy of the documents included within confidential exhibit "KLS 15" to the liquidator's affidavit sworn 22 July 2003 but that such copy have blanked out or deleted any reference to any sums which relate to or are involved in the amount of funding to be provided by the funders or the return to the funders. I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Goldberg.