Madden as Liquidator of Aquanaut Constructions Pty Ltd (In Liq) [2001] NSWSC 966

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION HAMILTON J MONDAY, 29 OCTOBER 2001 3630/01 Application of MARTIN MADDEN in his capacity as Official Liquidator of AQUANAUT CONSTRUCTIONS PTY LTD (in Liquidation) JUDGMENT 1 HIS HONOUR: This is a motion by Keith Stevens McConnell filed on 6 August 2001 to set aside an order for production of documents made by a Deputy Registrar and directed to him. 2 The matter arises in this way. 3 Aquanaut Constructions Pty Ltd ("the company") is in liquidation and Martin Madden, its liquidator, is respondent to the motion. The company was brought undone by a development project which failed for want of finance. The company was said to have actions against a proposed financier and the solicitors who were negotiating finance on the company's behalf. The directors of the company were and are Jeffrey Burnette and Judith Burnette. They were also said to have actions personally against the same defendants for losses they suffered as guarantors of the company's obligations. After the liquidation, the liquidator assigned the company's causes of action to the Burnettes by deed of assignment dated 28 July 1993. The deed of assignment provided: "2. In consideration of the assignment set out in paragraph 1, the assignees agree to pay to the assignor an amount equivalent to 70% of any monies recovered by them as a consequence of the conduct of any proceedings in respect of the said causes of action or of any settlement made with any person or entity in respect of any of the said causes of action after deducting therefrom all legal and other costs and disbursements incurred by them in respect of advice given and legal representation obtained generally in respect of the causes of action and particularly in respect of the conduct of any proceedings or of any negotiation, mediation or other step taken in achieving a settlement.

3. With reference to the assignment set out in paragraph 1, the assignees agree to report on the said causes of action. The liquidator is to be advised of the financial status in respect of recoveries, legal costs and other disbursements on a quarterly basis." 4 In 1993 the Burnettes brought proceedings in the Common Law Division of this Court on the assigned causes of action ("the 1993 proceedings"). The statement of claim in the 1993 proceedings is not very clear in its terms and may have encompassed some of the Burnettes' personal claims as well as the company's claims. However, in 1994 the Burnettes brought separate proceedings in respect of their personal claims also in the Common Law Division ("the 1994 proceedings"). The two sets of proceedings were ordered to be heard together. Mr McConnell acted as the plaintiffs' solicitor in both sets of proceedings. 5 The proceedings did not go to trial. Both sets were settled by the one deed of settlement dated 27 March 2000. The defendants in each case were represented by Ebsworths, the solicitors for the defendant solicitors' insurer. It is clear that the deed of settlement specified separate amounts in respect of the settlement of each set of proceedings. On 19 April 2000 Mr McConnell wrote to the liquidator specifying $341,000 as the net amount of the settlement of the 1993 proceedings and promising the liquidator a cheque for $238,700, which was sent in due course. 6 On 18 July 2001 the liquidator procured an order under s 596B of the Corporations Act 2001 (Cth) (the "CA") for the examination of Mr McConnell "about the examinable affairs of the company" before a Registrar on 17 August 2001. This examination was adjourned and still stands adjourned. "Examinable affairs" is widely defined in s 9 of the CA. There is no controversy that the expression extends to what was recovered by the Burnettes under the deed of assignment, part of which had to be accounted for to the liquidator. At the same time as he procured the examination order, the liquidator procured from a Registrar an order that Mr McConnell produce to the Court before the examination the following documents in respect of the 1993 proceedings and the 1994 proceedings: "a) All Affidavits and/or evidence of the Plaintiffs or evidence prepared on their behalf in connection with the Proceedings including, but not limited to: i) any evidence in relation to the quantification of assessment of the damages claimed by the Plaintiffs;

ii) all expert reports prepared on behalf of the Plaintiffs in respect of their claim;

iii) all requests for particulars of the Plaintiffs' claim and the Plaintiffs' answers to any requests for particulars.

b) Any Position Statement, or like document, prepared on behalf of the Plaintiffs and provided to the Defendants for the purposes of the mediation before J Clarke QC.

c) All notes, file notes or memoranda recording all communications between the Plaintiffs and the Defendants and their respective legal advisers at the mediation, including all negotiations, settlement offers and apportionment of settlement figures and legal costs of the Plaintiffs as between each of themselves and between the two sets of Proceedings.

d) All draft settlement and/or agreements and letters or memoranda of advice to the Plaintiffs pertaining to the settlement of proceedings.

e) Any Settlement Deed or Deeds entered into by the parties or any other document evidencing a settlement agreement between the parties including any terms of settlement filed in the Proceedings.

f) Any written advices from counsel, including but not limited to, any advice on the prospects of success and/or settlement of the proceedings.

g) All letters of advice reporting to the Plaintiffs on the settlement of the Proceedings and its terms.

h) All trust account records, including ledgers and journals, recording receipt of the settlement monies from the Defendants and disbursement to the Plaintiffs.

i) Any records or documents evidencing the payment of any legal costs of the Plaintiffs, including all accounts, trust account statements and memoranda of fees from counsel." 7 Mr McConnell has moved to have the order for production set aside. The order was made under Part 36 r 12 of the Supreme Court Rules 1970 ("the SCR"). The motion is brought on the basis that all the documents sought are either privileged or beyond the proper ambit of any examination which might be carried out under s 596B. Complaint is also made that the search for the documents would be oppressive. The liquidator does offer to pay the costs of all proper efforts to locate and produce the documents. 8 So far as privilege is concerned, the claim is made under the Evidence Act 1995 (the "EA") s 118 (advice privilege) in respect of documents sought in requisitions c, d, f and g, s 119 (litigation privilege) in respect of requisition a, and s 131 (negotiation privilege) in respect of b, c and d. No privilege is claimed in respect of the documents sought in requisitions e, h or i. In respect of those documents, particularly as they relate to the 1994 proceedings, it is said that they are beyond the proper ambit of examination and relate to the private affairs of the Burnettes, which are no business of the liquidator. 9 The privilege claimed is conceded to have existed. The contested question is whether the privilege has been given away. The answer made to the claims of privilege is that the privilege was given away by the terms of the deed of assignment. To determine this, it is necessary to know whether the applicable regime as to privilege is in reality the EA or the common law. 10 There was a contention that the relevant regime as to privilege is the common law, pursuant to the decision of the High Court in Esso Australia Resources Ltd v The Commissioner of Taxation of the Commonwealth of Australia (1999) 201 CLR 49. However, Part 36 r 13 of the SCR was amended as of 1 October 1999, avowedly to assimilate the rules as to privilege in relation to the production of documents to the rules on the tender of evidence under the EA. Rule 13 proceeds by reference to documents which could not be adduced in evidence by reason of Part 3.10 of Division 1 of the EA. It was submitted that the rule was so drafted that it is not effective to replace the common law regime with the EA regime in relation to orders for production, but in my view it is. That is also the view of Hunter J, as expressed in Novus Australia Energy Company v Gulf Petroleum (Australia) [2001] NSWSC 579 at [27]. 11 This means that the question is whether the client has consented to the giving of the evidence or "has knowingly and voluntarily disclosed to another person the substance of the evidence" (see s 122(1) and (2) of the EA) as to the s 118 and s 119 privilege. There are similar provisions as to the s 131 privilege in s 131(2)(a) and (b). As I have said, the liquidator's case is that the privilege was given away by clauses 2 and 3 of the deed of assignment. The real problem with this submission, in my view, is the ambit of the obligations created by those clauses on the true construction of the deed. The relevant obligation is "to report on the said causes of action" and to advise of "the financial status in respect of recoveries, legal costs and/or disbursements on a quarterly basis." I am inclined to regard these not as two independent obligations but rather as one obligation, the second limb being definitive of the first. The context is an agreement whereby the liquidator assigns the causes of action in return for a proportion of the recoveries, but the assignees are under no obligation to pursue those recoveries; whether or not the actions are prosecuted are entirely within their discretion. If their advice indicates it, if they run out of money, even if on a whim they abandon the prosecution of the actions, the assignor has no complaint. If they seek to settle the proceedings they are not obliged to consult the assignor. His rights cut in if there is, in fact, a recovery. The subject matter of the reporting and its frequency (quarterly) are limited. In my view, whether the clauses are regarded as imposing one obligation or two and however far the ambit of the reporting extends, there is no requirement for the assignees to convey to the liquidator the content of the advice they receive or the details of their or their opponent's evidence in the proceedings, either of their own motion or on request. 12 On this construction, in my opinion the privilege which the Burnettes are conceded to have in documents required by the order to produce was not lost by reason of the terms of the deed of assignment. They do not amount to a consent within the meaning of s 122. So far as the exception relating to voluntary disclosure is concerned, there is a difficulty that entering into the deed does not amount to a disclosure of the evidence. But it is said that there is an obligation to disclose and that is sufficient. Leaving aside whether an obligation to disclose is sufficient, as opposed to an actual disclosure, the view I have taken as to the ambit of the obligation precludes any suggestion that the entry into the deed of assignment can operate as a voluntary disclosure within s 122. The situation as to s 131 is even clearer, since that section requires the consent of all parties to the negotiation to dispense with the privilege, and there is no suggestion of any consent by the defendant to the proceedings. If there still be any element of "fairness" involved in the loss of privilege (as to which see Adelaide Steamship Co Ltd v Spalvins (1998) 81 FCR 360 at 371, overruled by the High Court in Mann v Carnell (1999) 201 CLR 1, but not specifically overruled on this point), there is no dictate of fairness which militates against the maintenance of privilege in the circumstances of this case. 13 I therefore rule that privilege in the documents referred to has not been lost. 14 That leaves the documents in requisitions e, h and i, in respect of which no claim of privilege is made. In respect of those documents, it is contended that the requisitions of the order for production are bad as going beyond any valid ambit of a s 596B examination and relating solely to the private affairs of the Burnettes. 15 So far as the deed of settlement (requisition e) is concerned, it is conceded that the portion of the deed that settled the 1993 proceedings is relevant and this had been sought to be met by the production of a copy of the deed of settlement with only the amounts relating to the settlement of the 1994 proceedings excised. The liquidator does not accept that the excision is appropriate. 16 The authorities make it plain that the ambit s 596B is wide and that the purpose of investigating whether the liquidator ought bring proceedings or his prospects of success in them is a valid purpose of an examination: see the decisions of the Court of Appeal in Hong Kong Bank of Australia Ltd v Murphy (1992) 28 NSWLR 512 and Sherlock v Permanent Trustee of Australia Ltd (1996) 22 ACSR 16 and of Santow J in Re Global Medical Imaging Management Limited (In Liq) [2001] NSWSC 481. The liquidator says that he is not bound by Mr McConnell's answers as to the amount of the recovery and is entitled to explore whether the sum revealed as recovered in respect of the company's causes of action, as opposed to the Burnettes' personal causes of action, was, in reality, the whole of the sum so recovered. He also claims to investigate a potential breach of fiduciary duty owed to him or to the company by the Burnettes in relation to the assigned causes of action. It is contended on behalf of Mr McConnell that it is clear from the recent decision of the High Court in Pilmer v Duke Group Limited (in Liq) (2001) 75 ALJR 1067 (see [70], [71]) that there can be no question of any fiduciary duty in this case. Whilst recognising that the matters set out in [11] above as to the obligations under the deed of assignment limit the scope of any possible fiduciary duty, I am not so certain that it is clear that no fiduciary duty at all arose either when the Burnettes chose to negotiate together settlements of the 1993 proceedings and the 1994 proceedings, or at least when they received a common fund representing the fruits of both sets of proceedings: see Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 at 97. In any event, this is not the proper occasion for any decision as to that matter. It would certainly be open to the liquidator to argue, if the facts supported it, that the Burnettes have not carried out their agreement if, by arrangement with a defendant who was indifferent to the attribution as between the companies and the Burnettes of a finite total sum available for settlement, they diverted moneys in reality attributable to the company's causes of action to themselves or, perhaps, that that was done in breach of a fiduciary duty. It has also been submitted that it is offensive to Mr McConnell, a solicitor in good standing, to suggest that he might not have told the truth about the amount and characterisation of the proceeds received from the litigation. I do not for a moment doubt Mr McConnell's good standing, but it should not be regarded as offensive to him that the liquidator seeks in discharging his duties independent clarification as to whether there is any breach by the Burnettes of any fiduciary duty or, simply, whether the Burnettes carried out their contract by correctly or fairly attributing between the company and themselves moneys recovered on the settlement of the 1993 proceedings and the 1994 proceedings, rather than skewing the division of proceeds in favour of their own proceedings. 17 It seems to me that whether the Burnettes have carried out their contract with the liquidator (and perhaps whether there was a breach of any fiduciary duty arising out of the negotiation or the receipt of the fruits of the settlement of the proceedings) are legitimate subject matters of enquiry under CA s 596B. In light of this, I do not think the Burnettes can validly claim to excise from the single deed which they chose to enter into in settlement of both the 1993 proceedings and the 1994 proceedings the amount or amounts for which the 1994 proceedings were settled before producing the same to the Court on summons, or agreeing to access to it. In any event, I do not think it appropriate to divide up this commercial document for purposes of production or access in this way. Equally, I do not regard the receipt of moneys in settlement or for the costs of either set of proceedings as, in the circumstances, the Burnettes' private affairs which are beyond the legitimate reach of the summons of documents in support of s 596B examinations. 18 I therefore refuse to set aside requisitions e, h and i of the order for production. 19 Privilege is not itself a valid objection to the production of documents to the Court on subpoena, summons or order, rather than an objection to access to the documents by another person, since often inspection by the Court is necessary to determine a disputed claim of privilege and, in any event, the documents ought generally be in court when argument as to access takes place. However, here it has been possible to determine the claims of privilege without inspection of the documents and without their being at court. In those circumstances there can be no point in putting Mr McConnell to the trouble (said to be considerable) of locating, identifying and producing the same. The other requisitions of the summons will, therefore, be set aside. 20 I make the following orders: (1) Order that requisitions a, b, c, d, f and g of the order for production made on 18 July 2001 directed to Keith Stevens McConnell be set aside. (2) Otherwise dismiss Mr McConnell's notice of motion filed 6 August 2001. (3) Stand over to Wednesday 7 November 2001 at 9.30am the question of costs of the motion and Mrs Burnette's application in relation to the order for production of documents directed to her. ****************************

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