Lewis v Nortex Pty Ltd

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

3081/97 PETER LAWRENCE LEWIS v NORTEX PTY LIMITED (In Liq) 1750/02 LAMRU PTY LIMITED v KATION PTY LIMITED & ORS JUDGMENT - Re Admissibility of Annexure A to Affidavit to R W Lamb sworn 11 April 2002 (T1760) 1 HIS HONOUR: This judgment deals with the admission into evidence of the last words of paragraph 6 of the affidavit of R W Lamb sworn 11 April 2002, "a copy of which is annexed hereto and marked A". The admission of those words would carry into evidence annexure A to that affidavit and that is what is really in contention. 2 Objection is taken to the document on the basis that it is a document which is privileged by virtue of the provisions of s 131 of the Evidence Act 1995 ("the EA") and that its tender is prevented by that privilege. Section 131 of the EA provides, so far as relevant, as follows: "131 Exclusion of evidence of settlement negotiations

(a) a communication that is made between persons in dispute, or between one or more persons in dispute and a third party, in connection with an attempt to negotiate a settlement of the dispute, or

(b) a document (whether delivered or not) that has been prepared in connection with an attempt to negotiate a settlement of a dispute. (2) Subsection (1) does not apply if: (a) the persons in dispute consent to the evidence being adduced in the proceeding concerned or, if any of those persons has tendered the communication or document in evidence in another Australian or overseas proceeding, all the other persons so consent, or

(b) the substance of the evidence has been disclosed with the express or implied consent of all the persons in dispute, or

(c) the substance of the evidence has been partly disclosed with the express or implied consent of the persons in dispute, and full disclosure of the evidence is reasonably necessary to enable a proper understanding of the other evidence that has already been adduced, or

(d) the communication or document included a statement to the effect that it was not to be treated as confidential, or

(e) the evidence tends to contradict or to qualify evidence that has already been admitted about the course of an attempt to settle the dispute, or

(f) the proceeding in which it is sought to adduce the evidence is a proceeding to enforce an agreement between the persons in dispute to settle the dispute, or a proceeding in which the making of such an agreement is in issue, or

(g) evidence that has been adduced in the proceeding, or an inference from evidence that has been adduced in the proceeding, is likely to mislead the court unless evidence of the communication or document is adduced to contradict or to qualify that evidence, or

(h) the communication or document is relevant to determining liability for costs, or

(i) making the communication, or preparing the document, affects a right of a person, or

(j) the communication was made, or the document was prepared, in furtherance of the commission of a fraud or an offence or the commission of an act that renders a person liable to a civil penalty, or

(k) one of the persons in dispute, or an employee or agent of such a person, knew or ought reasonably to have known that the communication was made, or the document was prepared, in furtherance of a deliberate abuse of a power.

(3) For the purposes of subsection (2)(j), if commission of the fraud, offence or act is a fact in issue and there are reasonable grounds for finding that: (a) the fraud, offence or act was committed, and

(b) a communication was made or document prepared in furtherance of the commission of the fraud, offence or act,

the court may find that the communication was so made or the document so prepared." 3 There is no doubt in this case that the document falls within s 131(1) of the EA. It is common ground that it is a document that was prepared in connection with a formal mediation that was held before Sir Laurence Street in May 1997 in an attempt to resolve the disputes between these embattled parties. The only question is whether it is removed from privilege through one of the "gateways", as they are commonly called, provided for in s 131(2), the two material gateways being those provided for in paragraph (c) and paragraph (j) of the subsection. Most of the argument that has taken place before me has related to paragraph (j). 4 The document is a document written by Mr Peter Lewis, himself a party to the proceedings and the controller of Kation Pty Limited ("Kation"), in response to challenges made by Mr Lamb, the controller of Lamru Pty Limited ("Lamru"), to draft accounts of Nortex Pty Limited ("the company") for the financial year ended 30 June 1996. Those draft accounts are already in evidence. Although they were used at the mediation, there is some doubt as to whether they fall within s 131 because they had to be prepared for the general purposes of the company in any event but, whether or not they do, does not matter. The fact simply is that they are in evidence. It is agreed that, if as a result of my ruling the Lewis response document is to be admitted, the Lamb challenge document will also need to go into evidence as the document being answered, to provide context. 5 The principal subject matter of the argument, was whether the document was taken out of the privileged category on the ground that it was prepared in furtherance of the commission of a fraud. Two matters of law or interpretation of the section were dealt with in the course of debate. The first was the meaning of "furtherance" in s 131(2)(j) and the second was the correct approach to the test posed for the relevant finding of fraud for the purposes of the section by subs (3) of s 131. 6 Many parts of the EA stand as codes on particular subject matters, in that they completely displace the pre existing common law on that subject matter: see Bruinsma v Menczer (1995) 40 NSWLR 716 at 719 - 720 per Santow J concerning s 131 and Telstra Corporation v Australis Media Holdings [No 2] (1997) 41 NSWLR 346 at 349 - 350 per McLelland CJ in Eq concerning s 122; and see generally Odgers' Uniform Evidence Law (5th Ed, 2002) lvi - lvii. Despite this, common law authorities may be of use in respect of both these matters, since s 131(2)(j) and s 131(3) both closely follow or resemble the corresponding provisions of the common law to the extent that the phrase "the furtherance of the commission of a fraud" was an expression used in the common law authorities: see the passage from the judgment of McHugh J cited in [8] below. 7 Despite this, there is little authority on the meaning of "furtherance" in this context. Its meaning is probably best provided in the circumstances by recourse to the dictionary. In the Oxford English Dictionary "furtherance" is relevantly defined as: "The fact or state of being furthered or helped forward; the action of helping forward; advancement, aid, assistance."

The essential notion as applicable in this context is the notion of the action of helping the fraud forward or advancing it. 8 A useful summary as to the incidence of s 131(3) of the EA is found in the decision of Santow J (as his Honour then was) in Kang v Kwan [2001] NSWSC 698 at [37], where his Honour discussed the similar provisions of s 125 of the EA relating to the displacement of client legal privilege. A dictum frequently cited as to the meaning of "reasonable grounds for finding ... fraud" is that of McHugh J in Commissioner of Australian Federal Police v Propend Finance Pty Limited (1997) 188 CLR 501 at 556: "A mere allegation of illegal purpose or fraud is not, of itself, sufficient to displace a claim of legal professional privilege. A person who alleges that legal professional privilege does not apply to a communication tenders an issue for decision and has the onus of proving it. Subject to any statutory provisions to the contrary, any evidence tendered in a court of justice to prove an issue must comply with the ordinary rules of evidence. Legal professional privilege is a legal right. Its prima facie application to a communication can only be displaced by admissible evidence. That evidence does not have to prove that the communication was made in furtherance of a crime or the commission of a fraud, but it must establish a prima facie case that the communication was so made. In O'Rourke v Darbishire [1920] AC 581 at 604 cited with approval in Kearney (1985) 158 CLR 500 at 516, per Gibbs CJ, Viscount Finlay said that what is required is 'something to give colour to the charge. The statement must be made in clear and definite terms, and there must further be some prima facie evidence that it has some foundation in fact'."

As I have said, that authority is still applicable because the relevant provision of the EA in effect reproduces the effect of the common law. 9 The fraud alleged in the present case essentially arises as follows. Lamru points to the closing stock figure contained in the 1996 accounts, a figure of some $2.306m, and says that the stock record showing the actual stock on the shelves as at 28 June 1996 (a copy of which was taken with Mr Lamb when he left the company), with adjustments for the last couple of days of the financial year, shows a substantially higher figure of stock actually on the shelves. This is shown in the stock list as $2.898m, but Lamru concedes that it probably should be adjusted in various ways to be read down to the effect that the stock on the shelves was about $200,000 more at the end of the financial year 1996 than the figure in the accounts of $2.306m. Lamru suggests that during the succeeding financial year (y/e 30 June 1997) Kation, the other partner in the partnership company, through Mr Peter Lewis, took that stock, sold it and pocketed the cash proceeds. 10 Until the early stages of the evidence in the present trial the case of fraud appeared very thin because, whilst there appeared to be a prima facie case of discrepancy between the stock on shelf and the closing stock in the accounts, it is a considerable leap from there to draw the inference that, if the stock on shelf were subsequently gone, it had been sold by the other partner and the cash proceeds pocketed. 11 However, during the course of the trial Mr Lamb has given evidence, which was not brought forward in the original affidavits, under cover of a certificate granted under s 128 of the EA (Lewis v Nortex Pty Ltd (In Liq); Lamru Pty Ltd v Kation Pty Ltd [2002] NSWSC 1192) to the effect that, from the time that he became engaged in the affairs of the company about 1991, it had been the practice for him and Mr Peter Lewis to maintain a "stock reserve". The dollar figure for this stock reserve is shown on a document in evidence which was a document for discussion between Mr Lamb and Mr Lewis in an attempt to settle their differences when these arose in 1996/1997. The stock reserve represented the value of stock which was on the shelves but not recorded in the books of the company, in fraud of the Australian Taxation Office. This stock was sold for cash and the cash was not recorded in the company's books, but simply divided between Lewis and Lamb on a 60/40 basis, that being the proportion in which they, through their companies, owned the operation. Lamru says that, for the purpose of establishing the fraud alleged, an inference can be drawn in association with other facts that it was likely that Mr Peter Lewis continued this practice in the 12 months after Mr Lamb's departure, but himself took 100 per cent of the proceeds. 12 It is certainly true that the giving of this evidence, the time for the denial of which, if there be a denial, has not yet arrived, has transformed the strength of the case of fraud which Lamru seeks to make out. 13 The relevant content of the document sought to be tendered deals with the closing stock figure of $2.306 million, the establishment of which is a central part of this charge of fraud. Lamru challenges the veracity of the figure which was tendered before me on the voir dire and puts forward the figure of $2.898m which Mr Lamb derived from the computerised stock list as at 28 June 1996. The relevant parts of the tendered document are two portions of Mr Peter Lewis' responses to that challenge. Those portions are as follows: "Closing Stock - Mark Lewis says he did not provide a stock list on 28th June. The stock verification was not nearly finished at that date. There appear to be a number of variances that were difficult to reconcile ... Stock on Hand - this has been one of RL's specific responsibilities. RL has been given the opportunity to verify stock details." 14 There was lengthy argument concerning the question of whether or not privilege remained available or whether the document tendered passed through the paragraph (j) gateway. 15 Essentially, Mr Cotman, of Senior Counsel for the Lewis interests, submitted that all that could be derived from the document was the construction of the passages that I have set out as being in the nature of an admission. If this were so, they would be only evidence of a fraud, not something that advanced the fraud. Evidence of a fraud, rather than its furtherance, is not something that falls within the terms of paragraph (j). Equally, Mr Cotman said, if they were to be characterised as denial of a fraud, denial of a fraud by itself could not fall within paragraph (j). Likewise, he said, where one is not looking at a document created for other purposes but "something wholly generated within the mediation ... unless one can say that the mediation is itself a step in the fraud, then one simply has a document that is in furtherance of the mediation" and it cannot be said to be the furtherance of a fraud. 16 Mr Motbey, of counsel for Lamru, submitted that, whilst it may be that simple omission to reveal a fraud that one has committed may not be able to be characterised as being in furtherance of the fraud, if one takes active steps to conceal the fraud then those steps can be said to be in furtherance of the fraud, whether or not all other acts at that time necessary to perpetrate the fraud have been done. He said that even if the fraudulent acts are complete, the fraud is furthered by being kept concealed, since it will be defeated by revelation, which will cause it to be thwarted or undone. 17 In my view, there is substance in this submission. It is not clear whether all acts to carry out the fraud (if it were carried out) had been done by the time that the Lewis document was brought forward in May 1997. However, in my view the fraud is advanced or helped forward if active steps are taken to conceal it or maintain its concealment. 18 This, in my view, occurred in this case. Whether or not the abstraction of the stock had taken place by that time, if the fraud alleged by Lamru is established, it is clear that by that time Lewis had determined to bring forward a set of accounts in which the closing stock was understated. That was a central part of the fraud, the promulgation of an untrue closing stock figure in the accounts being an essential part of how it was to be carried out. Mr Lamb's challenge document, on a fair reading (the details do not need here to be set out), challenges the veracity of the stock figure. In response to that, Mr Peter Lewis seeks to set at nought or brush aside the challenge by asserting, in effect, that the figure by comparison with which it is said to be untrue is not established, and by hinting that Mr Lamb himself had had adequate opportunity either to perceive the situation as to stock at relevant times, or, perhaps, himself cause its disappearance, if it had disappeared. It seems to me that by responding as I have stated to those challenges, Mr Peter Lewis could be said to be taking active steps to conceal the fraud, whether or not its perpetration was actually concluded at that point of time, and, in that sense, to be acting in furtherance of the commission of the fraud within the meaning of paragraph (j). 19 Mr Cotman also put complex accounting arguments, the effect of which was said to be that the effect of the actions carried out, if they were carried out, would simply be to defer the profit from one year to another, and that Lamru had had in a later year the advantage of any stock excluded from the accounts. I am far from certain that this is clearly demonstrated. In any event, to say that damage arising from the fraud was not established by reason of a proposition such as this would not be to deny the commission of a fraud in a relevant sense if goods were sold from the shelves and the proceeds not included in the 1996 accounts and not accounted for to Lamru as part of its share in that year. 20 Despite the fact that I have talked in terms of the hypothetical establishment of the fraud, the other serious argument in the case has been as to whether or not, on the material before me, it could be said that there are reasonable grounds for finding that the fraud was committed in the sense defined by McHugh J in the passage set out above. In my view, the less said in detail about this matter the better, since I shall ultimately have to pass upon whether or not a fraud is established in these proceedings. Suffice it to say that in the light of the matters set out in [9] to [21] above, I have come to the view that there is some evidence at a prima facie level that has foundation in fact grounding the claim of fraud, or "something to give colour to the charge", in his Honour's words. That being so, in my view the Lewis document containing the passages I have set out above passes through the gateway provided by paragraph (j). 21 At one stage the argument was put that the preparation of the document had to be for the sole or dominant purpose of the commission of the fraud or it could not fall within paragraph (j). In the end, I do not think this is the way that Mr Cotman put his case, rather than the ways which I have set out in [15] above. However, I should say quite directly that he was not able to cite me any authority that, in my view, supported or came close to supporting the proposition in the first sentence of this paragraph. If that proposition were correct, then it probably would be impossible for the Lewis response to fall within paragraph (j), since it certainly is true it was prepared for the purpose of being used within the mediation and was so used. 22 However, I do not think that paragraph (j) contemplates a communication or document having one purpose only. Although the document was prepared for the purpose of the mediation (indeed, by reason of the provisions of s 131(1)(b) it had to be prepared in connection with the mediation to fall within s 131 at all), in my view, when part of the subject matter that it necessarily had to deal with was the statement of the closing stock figure which was one of the fundamentals of the fraud, it proceeded by an attempt, as I have said, to conceal or deflect attention from the falsity of that figure in the way that I have stated. 23 Although Mr Motbey put his tender initially on the basis of paragraph (c) of s 131(2), I do not think, in the end, that was pressed. I find it difficult to see that the evidence contained within the Lewis response could be said to have been partly disclosed so that full disclosure of the evidence was reasonably necessary to enable a proper understanding of the evidence already adduced. 24 For the above reasons I admit into evidence the last words of paragraph 6 of the affidavit of R W Lamb sworn 11 April 2002 and, with them, annexure A to that affidavit, which is the document I have described as "the Lewis response". That, as I have stated, is upon condition that there is tendered the document that I have described as "the Lamb challenge" to put the Lewis response into context.

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