Lombe v Pollak

REASONS FOR JUDGMENT Introduction 1 The respondent ("Mrs Pollak") is the registered proprietor of three home units in Wentworth Street, Point Piper ("the properties"). She acquired her interest as the sole registered proprietor under transfers made to her by her husband ("Dr Pollak") who transferred his interest in the properties to her by transfers dated 10 October 1994 and 23 October 1995. 2 Dr Pollak was made bankrupt by a sequestration order of the Court dated 5 October 2001. 3 The applicant ("the Trustee") claims that the transfers of Dr Pollak's interests in the properties were void against the Trustee under s 121 of the Bankruptcy Act 1966 (Cth) ("the Act"). By her defence, Mrs Pollak, inter alia, denies that Dr Pollak had the purpose stated in s 121(1)(b) and denies that he was, or was about to become, insolvent in October 1994 and October 1995. 4 Mrs Pollak also pleads in paragraph 5 of her defence that Dr Pollak agreed to transfer his interest in the properties to her under a Deed made between them dated 23 October 1995 ("the Deed"). I do not see how the Deed could provide an answer to the transfer which was made in 1994. Nevertheless, the effect of paragraph 5 of the Defence is that Mrs Pollak asserts that she provided consideration under the Deed which was at least as valuable as the market value of the interests acquired; see s 121(4)(a) of the Act. 5 The effect of the Deed is that, after reciting certain loans made to Dr Pollak by Mrs Pollak, on which the outstanding amount of principal and interest was said to be $204,605 ("the outstanding amount"), Dr Pollak agreed to transfer his interest in the properties in consideration for a reduction in the outstanding amount by $139,007. 6 An issue which will arise at the final hearing is how the outstanding amount was calculated and whether the amount by which it was reduced was at least as valuable as the market value of the properties. 7 The application which is before me is a notice of motion under which Mrs Pollak claims legal professional privilege for documents produced in answer to a subpoena served on her former solicitor, Mr Greg Peach of Hunt Musgrave & Peach Solicitors ("Musgrave Peach"). The subpoena calls for production of documents evidencing the calculation of the outstanding amount and the amount to which it was reduced under the Deed. It also calls for Mr Peach's files in respect of matters on which he obtained instructions from Mrs Pollak. 8 The Trustee does not contend that the documents were not privileged. Instead, the Trustee argues that Mrs Pollak has waived her claims for privilege to the documents sought by the Trustee. 9 A formal notice of motion was not filed but the parties agreed to proceed upon the basis that Mrs Pollak has filed a motion claiming privilege and that the Trustee has filed a cross-motion seeking access to two classes of documents as follows: · Any document evidencing or recording the calculation of interest included in the outstanding amount. · A letter of advice from Musgrave Peach to Mrs Pollak dated 5 December 1994 ("the MP letter") 10 The Trustee submits that Mrs Pollak has waived her claim for privilege to the interest calculations by pleading the Deed in paragraph 5 of her Defence and also by disclosing, in answer to questions asked at an examination under s 81 of the Act, that the interest calculation was carried out by her solicitor. 11 The Trustee submits that Mrs Pollak has waived privilege on the MP letter by failing to claim privilege when she was examined in some detail about the terms of the MP letter at the s 81 examination. The Trustee points out that Mrs Pollak was represented by senior counsel at the examination and that he took no objection to the questions asked of her. By contrast, Mrs Pollak's solicitors claimed privilege for the MP letter before and after the s 81 examination and stated that privilege had not been waived. The Deed and the evidence about it at the s 81 examination 12 The Deed recites that Mrs Pollak has from time to time advanced monies to Dr Pollak for use by him in his business and other ventures. 13 The Deed also recites that Dr Pollak has agreed to pay Mrs Pollak interest on the monies advanced at the rate paid by the Commonwealth Bank of Australia on savings investment passbook accounts. 14 Recital C is as follows:- "As at the date of this Deed the total outstanding monies advanced by the Lender to the Borrower together with accrued interest amounts to $204,605.00 (the 'Outstanding Amount')." 15 The Deed recites that Mrs Pollak has requested Dr Pollak to repay the outstanding amount, that Dr Pollak and Mrs Pollak are the registered proprietors as joint tenants of the properties, that the properties have been independently valued at $1,125,000, that Dr Pollak has borrowed $850,000 from the Commonwealth Bank of Australia secured by first mortgage over the properties ("the mortgage") and that Dr Pollak has agreed to transfer his interest in the properties to Mrs Pollak in part repayment of the outstanding amount. 16 Clause 2.1 provides for Dr Pollak to transfer his interest in the properties to Mrs Pollak subject to the mortgage. 17 Clause 2.2 provides:- "Upon completion of the Transfer the Outstanding Amount shall be reduced by the sum of $139,007.00 (representing an amount equal to one half of the difference between the value of the Properties and the amount currently outstanding under the Mortgage." 18 At the examination, Mrs Pollak was asked about the loans which were the source of the indebtedness stated as the outstanding amount. She was also asked how interest was calculated. The following exchange took place:- "When you came to arrive at this figure of 204,000-odd that is on the face of the deed, what did you do to calculate how much your husband owed you insofar as it comprised the interest going back to 1981?---I did not do the calculation. They were done by a solicitor. The solicitor would need, wouldn't he, or she, information as to how much that interest was to do those calculations --- Yes. Did you provide the solicitor with those ---? --- I asked the solicitor to find out from the Commonwealth Bank what the investment account interests were over a number of years and to average them out. Going back from 1995 right back to 1981?---I cannot remember the specific years that he actually looked at but there were quite a number of years. I can't be specific on exactly how many years, I can't remember. Can you tell us approximately how much the interest was that formed part of this $204,000?---I cannot." 19 Mrs Pollak was asked a further question about the solicitor's role in the calculation of interest. She replied:- "The principal (sic) of what I wanted was worked out between my husband and I. The actual amount that that fell to was worked out by the solicitor." The MP letter and the evidence about it at the s 81 examination 20 I have not inspected the letter as there was no reason to do so. The question which arises is not whether the letter was properly the subject of a claim for privilege. The question is whether privilege has been waived. 21 On 9 September 2002, approximately one month before the s 81 examination, the Trustee served a request for documents under s 77A of the Act on Mr Peach. The request included files relating to the transfer of Dr Pollak's interest in the properties. The MP letter fell within the request. 22 There was a debate between Mr Peach and the Trustee's solicitors about Mrs Pollak's right to claim legal professional privilege for the documents. On 18 September 2002 the Trustee's solicitors sent a fax to Mr Peach stating:- "We submit that Aana Pollak has waived any right to claim legal professional privilege in relation to books and files held by your office. This submission is based on the release of the enclosed document being a letter from Hunt Musgrave Peach to Mrs A Pollak dated 5 December 1994, which has come into the possession of the Trustee." 23 Mr Peach, or another solicitor in his firm, then endeavoured to find out how the MP letter had come into the possession of the Trustee. It was not until the morning of the hearing before me that Mrs Pollak's legal advisers were informed in an affidavit filed in Court how he came to be in possession of the MP letter. It was contained within a number of files provided to the Trustee in 2001 by his firm's Melbourne Forensic Division which had conducted an investigation of Dr Pollak's affairs. 24 In late September 2002 there was further correspondence between Mr Peach and the Trustee's solicitors about waiver of privilege. Mr Peach stated that Mrs Pollak had not instructed him to waive it. 25 On 9 October 2002, two days before the examination, Messrs Kemp Strang solicitors wrote to the Trustee's solicitors stating that they had been retained by Mrs Pollak to represent her at the examination. The letter stated that Mrs Pollak had not waived privilege and that the whole of the files retained by Musgrave Peach were subject to a claim for privilege. 26 At the examination, Mrs Pollak acknowledged that Musgrave Peach were her solicitors (i.e. at the time when the Deed was entered into) and that the firm's name appeared on the Deed. Mrs Pollak was then shown the MP letter. She was then taken through the MP letter paragraph by paragraph and questioned about its contents. 27 After the examination there was further debate between the solicitors about privilege. Messrs Kemp Strang stated that the examination of Mrs Pollak did not constitute a waiver. 28 The subpoena which is the subject of the present application was issued on 7 October 2003. Mr Peach produced the documents subject to a claim for privilege made by Mrs Pollak. The test for waiver 29 This application is concerned with whether there has been waiver of privilege over documents produced in answer to a subpoena. It is to be determined according to the common law; Esso Australia Resources Ltd v Federal Commissioner of Taxation (1999) 201 CLR 49. 30 The test for waiver is whether the holder of the privilege has done an act which is inconsistent with the maintenance of confidentiality in the communication. It is only partly informed by considerations of fairness. 31 The principles were stated by the High Court in Mann v Carnell (1999) 201 CLR 1 at 13 in the following passage from the judgment of Gleeson CJ, Gaudron, Gummow and Callinan JJ:- "Waiver may be express or implied. Disputes as to implied waiver usually arise from the need to decide whether particular conduct is inconsistent with the maintenance of the confidentiality which the privilege is intended to protect. When an affirmative answer is given to such a question, it is sometimes said that waiver is "imputed by operation of law"(Goldberg v Ng (1995) 185 CLR 83 at 95). This means that the law recognises the inconsistency and determines its consequences, even though such consequences may not reflect the subjective intention of the party who has lost the privilege. Thus, in Benecke v National Australia Bank (1993) 35 NSWLR 110, the client was held to have waived privilege by giving evidence, in legal proceedings, concerning her instructions to a barrister in related proceedings, even though she apparently believed she could prevent the barrister from giving the barrister's version of those instructions. She did not subjectively intend to abandon the privilege. She may not even have turned her mind to the question. However, her intentional act was inconsistent with the maintenance of the confidentiality of the communication. 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." 32 In DSE (Holdings) Pty Limited v Intertan Inc [2003] FCA 384 ("DSE"), Allsop J reviewed all of the authorities on implied waiver. His Honour came to the view at [5] that the approach of the majority in Mann v Carnell amounts to a rejection of the approach stated by a majority of the Full Court in Telstra Corp Ltd v BT Australasia Pty Limited (1998) 85 FCR 152 ("Telstra"). There, in dealing with the question of whether a pleading of reliance brought about a waiver of privilege of legal advice, Branson and Lehane JJ said at 166 that implied consent or waiver occurs:- "… if by reason of some conduct of the party otherwise entitled to the privilege, it would be unfair to the other party, in a way which goes to the integrity of the legal process, for the privilege to be maintained" 33 Another formulation of the test is found in Ampolex Ltd v Perpetual Trustee Co (Canberra) Ltd (1995) 37 NSWLR 405 at 411. There, Giles CJ (Commercial Division) was of the view that privilege is waived where in a pleading or in its evidence a party exposes to scrutiny its state of mind, being a state of mind to which legal advice is likely to have contributed. 34 In DSE, Allsop J said at [58] that privilege is waived by a pleading where:- "… the party entitled to the privilege makes an assertion (express or implied), or brings a case, which is either about the contents of the confidential communication or which necessarily lays open the confidential communication to scrutiny and, by such conduct, an inconsistency arises between the act and the maintenance of the confidence, informed partly by the forensic unfairness of allowing the claim to proceed without disclosure of the communication" 35 In DSE at [6] his Honour rejected the proposition that the privilege may be lost where the other party to a proceeding raises the issue on the pleadings. His Honour disagreed at [96] with the views of Heerey J in Data Access Corporation v Powerflex Services Pty Ltd (1994) AIPC 91-112 at 38,715 and Derrington J in Wardrope v Dunn [1996] 1 Qd R 224 at 226 that it does not matter which party raises the issue. 36 I respectfully agree with Allsop J that waiver can only occur in pleadings where the issue is raised by the party otherwise entitled to the privilege. It seems to me that the concept of waiver necessarily imports some conduct on the part of the privilege holder which brings about the loss of the privilege. 37 It is unnecessary for me to decide whether the proper formulation of the test of waiver is as stated in Telstra, Ampolex or DSE. For reasons set out below, whichever of the formulations is adopted, the pleading and the acknowledgment at the bankruptcy examination do not amount to a waiver over the advice received in relation to the interest calculations. 38 There is authority for the proposition that privilege may be waived by failure to claim it when it was available in a liquidator's examination. In Spedley Securities Ltd (In Liq) v Bank of New Zealand (1991) 26 NSWLR 711, a former officer of the Bank was examined on a draft witness statement which had been prepared by the Bank's solicitors. The witness provided the draft to the liquidator in answer to a summons under s 541 of the Companies (NSW) Code ("the Code"). The solicitors were aware that the statement had been furnished and were present at the liquidator's examination but failed to object. 39 Cole J was of the view that it was not open to the Bank to claim privilege at a liquidator's examination under s 541 of the Code. That view was subsequently rejected by a Full Court of this Court in re Compass Airlines Pty Ltd (1992) 35 FCR 447 ("Compass") (Lockhart, Beaumont and Gummow JJ). However, Cole J went on to consider the question of whether upon the assumption that privilege could have been claimed, failure to claim the privilege amounted to waiver. 40 His Honour said at 730:- "There seems to me to be no reason in principle why a party may not, by conduct, waive legal professional privilege by omitting to claim that privilege when it is available. There is no distinction in principle between failure to claim legal professional privilege for a document by including it in a list of documents discovered and available for inspection, without claiming legal professional privilege, and on the other hand sitting by and allowing use of the document already in the hands of the other party without claiming legal professional privilege, or omitting to take steps to claim legal professional privilege in respect of the document known to be in the hands of the court, or as here, the liquidator, which it was obviously intended to use. Each constitutes an implicit waiver because it constitutes an abandonment of the claim for protection …" 41 Although his Honour's statement was made when the law on implied waiver was expressed in terms of fairness, the principle stated by Cole J applies equally to the test of inconsistency. By failing to claim privilege when it is available, the holder of the privilege acts in a way which is inconsistent with the maintenance of confidentiality in the communication. The Interest Calculation 42 Paragraph 5 of the Defence merely pleads the Deed. It is a pleading by the privilege holder and is her act. But there is nothing on the face of the pleading which either expressly or impliedly makes any assertion about the contents of Mrs Pollak's communications with her solicitor or which could be said to lay open any such communication to scrutiny. 43 It is true that the calculation of interest as a component of the outstanding amount is an issue in the proceedings. It is also true that Mrs Pollak put that in issue by the pleading. But it is not implicit in the pleading that Mrs Pollak made an assertion about the content of any communication with her solicitor. Nor is it implicit in the pleading that she made an assertion about her state of mind to which legal advice is likely to have contributed. Nor, to the extent that the question is to be informed by considerations of fairness, can it be said that there is any feature of the case raised by paragraph 5 of the defence which would make it forensically unfair for Mrs Pollak to maintain privilege; see the discussion of the authorities by Allsop J in DSE at [53] - [61]; see also J D Heydon Cross on Evidence, 6th Aust edn, Butterworths 2000 at paragraph [25010] on p 669. 44 I do not see how the mere acknowledgment by Mrs Pollak in her s 81 examination that the interest calculation was made by her solicitor converts what would otherwise be a pleading that she provided consideration for the transfers into a pleading which makes an assertion about the content of her communications with her solicitor. Nor does it convert the pleading to one which asserts Mrs Pollak's state of mind. Nor at this stage of the case can the acknowledgment give rise to forensic unfairness. 45 An issue in this case at the final hearing will be whether consideration was provided and this in turn will raise, as a sub-issue the calculation of the outstanding amount and the quantification of the interest included in it. Mrs Pollak makes no assertion in the pleading about matters pertaining to legal advice. She has not filed any evidence in the proceedings, let alone evidence which makes an express or implied assertion about anything which relates to that question. 46 Of course waiver would have occurred if Mrs Pollak had revealed the substance of the advice which she received from the solicitor as to how interest was to be calculated. But there is nothing in the transcript which indicates that she did so in whole or in part. 47 Counsel for the Trustee relied upon the statement of Byrne J in Torcasio Developments Pty Ltd v County Park Developments Pty Ltd (unreported, Supreme Court of Victoria, 9 September 1991) that privilege is lost where the client directly or indirectly puts in issue the substance of the privileged communication. 48 In DSE at [63] - [68] Allsop J considered that Byrne J's statement of principle was not correct. Whether or not Byrne J was correct, it seems to me that here it cannot be said that Mrs Pollak's bare acknowledgment at the bankruptcy examination directly or indirectly put in issue in the proceedings the substance of her communications with her solicitor. This is so even when the acknowledgment is read in light of the issue raised on the pleading. 49 Nevertheless, the question of waiver of privilege may well arise at a later stage in these proceedings. The parties have not yet filed their evidence. Mrs Pollak has stated that she does not know how the interest was calculated. If she calls the solicitor to prove it, the question of waiver may be raised but that will depend on what Mrs Pollak and the solicitor say in their evidence. 50 It follows that in my view privilege has not been waived over the documents referred to in the claims for privilege set forth in paragraph 12 of the affidavit of Mr M G King sworn 28 November 2003. 51 I note that Mr King has identified the documents which were produced in paragraph 9 but in paragraph 11 he states that Mrs Pollak does not make a claim for privilege for some of the enumerated documents. One of the enumerated documents for which privilege is not claimed is a one page handwritten calculation for the period 1982 to 1985. The other documents (apart from those referred to in paragraph 11) appear to fall within the claims made in paragraph 12. There is nothing to suggest that privilege is claimed for documents which contain a mechanical statement of calculations rather than documents which are properly the subject of legal advice privilege or litigation privilege. The MP letter 52 It seems to me that s 81 of the Act does not abrogate the right of an examinee to claim legal professional privilege. In Worrell v Woods (1999) 90 FCR 264 Finn J came to the view that the provisions of s 77C of the Act do not abrogate that right. His Honour observed at 265 that a like issue arises in relation to the conduct of examinations under s 81. In my opinion it follows from his Honour's judgment that the same principle applies, (i.e., that there is no abrogation of the right under s 81). 53 In Re Compass, Lockhart, Beaumont and Gummow JJ held that s 597 of the Corporations Law did not abrogate the right of an examinee to claim legal professional privilege. The provisions of s 81 of the Act are analogous to the provisions of the Corporations Law which were considered by the Full Court. In my opinion the reasoning of the Full Court applies equally to s81 of the Act. 54 It follows that it was open to Mrs Pollak's senior counsel to claim privilege at the examination when Mrs Pollak was questioned about the MP letter. It was plain that she was being asked about the content of a letter from her former solicitor and the opportunity to claim privilege was squarely raised.