Plaintiff v Defendant

2 On 26 February 2013 the Plaintiff purchased a financial advice service business from Equinox Pty Ltd ('Equinox'). It was a term of the Agreement that Equinox would assist the Plaintiff in obtaining the benefit of the goodwill of the business and introduce the Plaintiff to suppliers dealing with the Business and clients of the business for a period of 6 months after the completion date or such other period as agreed.

3 Pursuant to that term Danny Burrows, the director of Equinox introduced the Defendant (a director of the Plaintiff at the relevant time) to:

(a) the Precinct Group Pty Ltd ('Precinct'). At the introduction Mr. Burrows was told that Precinct was in the process of being acquired by Enero Group Limited ('Enero'). Mr. Burrows was asked if he would accept an appointment as the financial advisor to the employees of the merged business. Mr. Burrows said that he was selling the business to the Plaintiff. As he was selling the business Enero should appoint the Plaintiff as the financial advisor to the employees of the merged business. An offer was made to the Defendant for the Plaintiff to be engaged as the financial advisor to the employees of the merged business; and

(b) Brendan Collins who was a general insurance broker who referred clients to Equinox. At the introduction Mr. Burrows told Mr. Collins that he was selling his business to the Plaintiff and that if Mr. Collins had any referrals in the future they should be made to the Plaintiff.

4 The Plaintiff alleges that the Defendant provided financial advice in his personal capacity to employees of Enero and to clients referred by Mr. Collins instead of doing so on behalf of the Plaintiff.

5 By reason of the Defendant's conduct it is alleged that he has breached his fiduciary duties owed to the Plaintiff and his duties under sections 180(1), 181(1) and 182(1) of the Corporations Act 2001 (Cth). Each of the statutory duties is a civil penalty provision.

6 Finally it is alleged that by reason of the Defendant acting for those clients, the Plaintiff has suffered loss and damage being the fees and commissions paid to the Defendant.

7 By its summons dated 19 January 2018 ('the Summons') the Plaintiff seeks orders that, among other things, the Defendant make discovery of the documents described in paragraphs 1, 2, and 3 of the Summons ('the categories'), being:

(a) in the case of category 1, certain documents 'for each client being an employee of Enero Group Limited and/or its associated entities....to whom the defendant on or after 1 June 2013 to the present date provided financial advice';

(b) in the case of category 2, 'the letter of appointment and/or authority authorising the Defendant to provide financial advice to employees of Enero Group Limited and/or its associated entities'; and

(c) in the case of category 3, certain documents 'for each person referred by Brendan Collins....to whom the defendant on or after 1 June 2013 to the present date provided financial advice'.

8 The categories of documents that are sought are relevant to financial advice given by the Defendant on or after 1 June 2013 to:

9 The Defendant opposes the orders sought by the Plaintiff on the basis that if he has, or at any time had, in his possession, custody or power, documents falling within any of the categories, discovering (and producing for inspection) such documents would tend to expose him to a penalty.

10 In this proceeding the claim made, arising out of the contravention of the statutory duties is for a compensation order pursuant under section 1317H of the Corporations Act. The proceeding is a civil action where no claim for a penalty is made.

Legal principles relating to penalty privilege and discovery

11 It is convenient to refer to the relevant legal principles before dealing with the submissions of the parties. Although the relevant principles were not in dispute, their application in the circumstances of this case led to the rival contentions.

12 In Pascoe & Anor v Divisional Security Group Pty Ltd & Ors ('Pascoe'),[1] the first plaintiff (the liquidator of the second plaintiff) sought from directors of the second plaintiff company compensation under the Corporations Act for permitting the company to trade whilst insolvent. The liquidator also sought leave to amend his claim to allege a contravention of a civil penalty provision, viz. s 588G(2), although the liquidator did not seek a civil penalty. Relying on One.Tel Ltd v Rich ('One.Tel'),[2] the defendants submitted that they should not be compelled to file verified or certified defences, or to provide discovery, or to serve affidavits in advance of the close of the plaintiffs' case.

13 White J accepted that, in limited circumstances, the defendants might be able to avail themselves of the privilege when pleading their defences. His Honour held that the relevant principles to apply to the application before him were those laid down by Deane J in Refrigerated Express Lines (Australasia) Pty Limited v Australian Meat and Livestock Corp ('Refrigerated Express'),[3] and that (unless there were exceptional circumstances) where the proceedings were for civil redress not involving a penalty the general rule was that a party ought not be excused in limine from giving discovery or answering interrogatories; rather, a party should be left to object to producing particular documents or answering particular interrogatories on the grounds that such production or answer might tend to expose him to liability or penalty.

14 White J said that unless One.Tel was an exceptional case of the kind alluded to by Deane J in Refrigerated Express, the orders made in One.Tel would be inconsistent with Refrigerated Express and Rich v ASIC. Justice White held that One.Tel was in fact an exceptional case, as there was already an ASIC civil penalty proceeding on foot. This ASIC civil penalty proceeding raised the same allegations as those in the compensation proceeding, the proceeding in which Rich sought to assert the privilege against exposure to penalty.

15 White J found that there were no exceptional circumstances in the case before him. There was no ASIC proceeding on foot or foreshadowed, and so the general principles laid down by Deane J applied. Consistently with those principles, his Honour said that the defendant in the proceeding before him may be entitled to object to answering particular questions on the grounds that answers may expose him to a civil penalty. His Honour added that the defendants may be entitled to object to producing particular documents for inspection on the same grounds, "provided in each case, that he swears to a belief that to answer the questions, or to produce the documents, would tend to expose him to that jeopardy, and the Court is satisfied the objection is well taken." But White J held that the defendants were not entitled to an order in limine from excusing them from giving discovery and answering interrogatories.

16 In CC Containers Pty Ltd & ors v Lee & ors (No 2) ('CC Containers'),[4] the plaintiff made serious allegations of fraud against the defendants. Orders for compensation were sought under s 1317H of the Corporations Act and also exemplary damages and other relief. Bare denial defences were filed and the plaintiffs applied unsuccessfully to strike out the defences.

17 The issue was put this way by Ferguson J (as her Honour then was) -

1. The issue is whether the defences should be allowed to stand in circumstances where Messrs Chong and Neale have not put on evidence to establish that there is a real and appreciable risk of prosecution or whether it is sufficient to assert the privilege given the nature of the claims made against them in the statement of claim.

1. The plaintiffs accepted that if proved, the matters alleged against Messrs Chong and Neale may constitute criminal offences. However, they submitted that Messrs Chong and Neale cannot point to an extant criminal investigation nor even to civil penalty proceedings. The plaintiffs contended that all that Messrs Chong and Neale are able to do is to point to a series of possible future events and, in their submission, that does not constitute a real or appreciable risk.
2. It seems to me that the cases dealing with the stay of civil proceedings have a different focus to cases in which a defendant claims privilege against self-incrimination or penalty privilege. In the case of a stay, the plaintiff is deprived of the opportunity of prosecuting its claim with due expedition. Where privilege is claimed however, the civil proceeding continues and the question becomes on what basis should it continue. That is, in circumstances where there is a real or appreciable risk of criminal proceedings or proceedings for the imposition of a penalty, how is the civil proceeding to be conducted to ensure that the trial is fair to all parties? This requires some balancing of the interests of each party.
3. Where, as in this case, the allegations are of a very serious nature and magnitude, the pleading alone is sufficient to establish that there is a real and appreciable risk of criminal prosecution should the matters alleged be proven. Similarly, in this case, the proof of those allegations would tend to subject Messrs Chong and Neale to a penalty in a separate proceeding. These are not trifling matters nor matters which are tangential to the claim. At the heart of this claim are allegations of regular and systemic fraud with the amount claimed being in the many millions of dollars. If the allegations are established, then in my opinion it is likely that a prosecuting agency would examine the case very closely with an eye to criminal prosecution or imposition of a penalty. In those circumstances, the privileges may be claimed.

19 In Australian Property Custodian Holdings Limited (in Liquidation) (Receivers and Managers Appointed) (Controllers Appointed) v Woolridge & Ors (No 2) ('APCH (No 2)'),[5] Robson J summarised the relevant principles as follows -

The relevant principles to this application

1. The authorities I have discussed above establish certain principles. The relevant principles appear to be as follows:

(a) In the case of self-incrimination privilege, the defendant must establish that the provision of information or the production of documents in the civil case leads to a real and appreciable risk of a criminal prosecution before the privilege can be invoked.

(b) In an action to recover a penalty it is not necessary for a defendant to establish that there is a risk the defendant will be subjected to a penalty by providing information to the plaintiff. The plaintiff is seeking the information for that very purpose.

(c) In civil actions, where no claim for penalty is made, the defendant must show that providing the information requested would tend to subject him to a penalty in separate proceedings before he can rely on the privilege.

(d) The privilege against exposure to penalty is a common law right of privilege that may be availed of as of right and is enforced and protected by the Court.

(e) The privilege against the exposure to penalty may be relied on by a defendant to a civil procedure in which a penalty is not sought ("the non penalty civil proceeding").

(f) The privilege against the exposure to penalty extends to the obligation upon a defendant to plead, give discovery and answer interrogatories in the non penalty civil proceeding.

(g) As a general rule, the privilege does not entitle a defendant to a non penalty civil proceeding to obtain an order in limine excusing him or her from giving discovery or answering interrogatories.

(h) In exceptional circumstances, a defendant may be entitled to such orders in limine.

(i) By extension, in exceptional circumstances, a defendant may be entitled to orders in limine that he may deliver a defence that departs from the Rules of Court only insofar as to protect his privilege against exposure to penalty.

(j) Exceptional circumstances may exist where the defendant to the civil proceeding is also the subject of separate civil penalty proceedings alleging the same or similar conduct.

(k) Where a defendant seeks to take the privilege against exposure to penalty in a defence, the proper course is to plead accordingly and - if challenged - the defendant will be required to justify that the privilege is taken in good faith and on reasonable grounds for the privilege to stand.

20 In Centre for Investor Education & Ors v Nemtsas & Ors,[6] I referred to 'the ordinary approach' and some of the relevant authorities as follows -

1. In relation to the obligation to give further discovery, the ordinary approach is, as was submitted by the plaintiffs, to order discovery whilst reserving the issue of self-incrimination or exposure to penalty to the stage of production for inspection, and also reserving liberty to apply in relation to the degree of specificity with which a document is to be described in the individual's list of documents.[7]

40. As Deane J observed in Refrigerated Express[8] -

These strongly worded statements plainly establish the general rule that a party to proceedings which are for civil redress and not for a penalty ought not ordinarily be excused, in limine, from giving discovery or answering interrogatories but should be left to object to producing particular documents or answering particular questions on the ground that such production or answer might tend to expose him to liability to a penalty... That general approach is not however, as a matter of law, necessarily appropriate to all circumstances... If circumstances arose where the only means of protecting the right against self-incrimination and self-penalization were to excuse a party in limine from discovery or interrogatories, such circumstances should, in my view, be seen as exceptional and as justifying a departure from the general rule. In particular, if it appeared to the court that the making of an affidavit of discovery as distinct from producing the documents referred to in such an affidavit would tend to expose a party to a penalty, any order for discovery should be adjusted to the extent necessary to preclude that tendency. It is, perhaps, conceivable that circumstances could arise where the mere making of an order for interrogatories might have a similar tendency. The cases where the making of an order for discovery or interrogatories will, in itself, involve exposing a party to self-incrimination or self-penalization must, however, be rare indeed in view of the fact that the party will remain entitled to refuse to answer questions asked or produce documents discovered if the answers or production might tend to incriminate him or expose him to a penalty.

... the only circumstances which would warrant a departure in the present case from the ordinary approach that a party should be left to object to production of particular documents or to answering particular interrogatories would be that it appeared that the actual discovery, as distinct from production for inspection, of documents or the actual order for interrogatories would tend to expose the party ordered to make discovery or answer interrogatories to liability to a penalty.

1. This is not one of the rare and exceptional cases which would justify dispensation from the requirement to give further discovery.
2. In Microsoft, a proceeding primarily concerned with copyright and trademark infringement, and not itself concerned with the imposition of a penalty, and having found in the circumstances that the giving of discovery would not add to the risk of jeopardy, Lindgren J said -

[67] Although the course of authority since Refrigerated Express is not all one way, there has been a strong disposition in a proceeding not itself concerned with the imposition of a penalty for an offence or a civil penalty, in favour of ordering discovery, reserving the issue of self-incrimination to the stage of production for inspection, and also reserving liberty to apply in relation to the degree of specificity with which a document is to be described in the individual's list of documents.

[68] While acknowledging the force of the argument in favour of relieving in limine from the obligation to give discovery, Deane J ordered discovery in Refrigerated Express, and his Honour's approach was approved by Mason ACJ, Wilson and Dawson JJ in Pyneboard and followed by Spender J in Medina, by Rolfe J in Southern Star, by French J in Hince v Caratti, by Drummond J in IMB Group and by Underwood J in Roland. In the exercise of my discretion, I propose to follow it also.

...

[70] I am not persuaded that Grassia's provision of a verified list of documents in accordance with O 15 r 6 and Form 22 of the Federal Court Rules might, in the absence of the production of any document listed for inspection, tend to incriminate Grassia. That is to say, I am not persuaded that the circumstances of the present case fall within the rare exception allowed for by Deane J in Refrigerated Express.

...

[72] It should not be thought that the rare exception referred to by Deane J in Refrigerated Express could never have work to do. It would be applicable, for example:

• where an otherwise discoverable document had been stolen and disclosure of the fact that it was in the possession, custody or power of the discovering party might tend to incriminate that party;
• where statute made disclosure of the existence of an otherwise discoverable document an offence or the subject of the imposition of a civil penalty;
• where statute made disclosure of a certain fact an offence or the subject of the imposition of a civil penalty, and any description of an otherwise discoverable document would necessarily amount to disclosure of that fact; or
• where any description of an otherwise discoverable document might tend to incriminate the discovering party or render that party liable to imposition of a civil penalty in respect of other conduct or circumstances.

1. In QC Resource Investments Pty Ltd (In Liq) v Mulligan,[9] and after referring to Refrigerated Express, Edelman J said -

[20] That case concerned injunctive relief and damages against corporate and personal defendants under the Trade Practices Act 1974 (Cth). The proceeding was a civil proceeding. It involved no claim for a penalty. But the respondents all asserted that, based upon a blanket claim of exposure to a penalty in other possible proceedings, they should be excused from discovery, production of documents, and answering interrogatories. That assertion was rejected. The case was not exceptional even though the whole basis of the action was alleging contravention of a provision which was punishable by a penalty. The respondents were required to object to producing particular documents or object to answering particular interrogatories. Justice Deane held (at 212) that if the mere description of a document over which objection to discovery was taken could tend to render the respondent liable for a penalty then the respondent could use less precision in the description, or could apply to the court to modify the order for discovery.

[21] In Pyneboard Pty Ltd v Trade Practices Commission [1983] HCA 9; (1983) 152 CLR 328, 335-336, Mason ACJ, Wilson and Dawson JJ referred to the decision in Refrigerated Express Lines with approval for the distinction between (i) refusing discovery in a mere action for a penalty, and (ii) requiring objection to particular documents in an action which was not for a penalty (the result of which might be used to establish a party's liability to a penalty in other proceedings).

[22] The rationale for the distinction between these two circumstances is obvious and capable of application to other circumstances such as dispensation from rules of pleading. In the first case, where the proceedings are themselves for a penalty then any fact which is admitted, or any positive fact which is pleaded in response, might easily be seen immediately to expose the respondent to a penalty. There will be exceptions. For instance, if the respondent's position were that there was some basic legal basis upon which the applicants' claim for a penalty was defective, independently of any facts, then that should be pleaded.

[23] In contrast, in a civil case which does not seek any penalty something more will be required before dispensation from pleading rules can be given. The reason why something more is required is because any effects of pleadings upon privilege will usually be less direct. For instance, a pleaded admission that is not admissible in separate penalty proceedings might expose the respondent to a penalty if it could start a train of enquiry that would lead to a penalty. I do not accept the submission by senior counsel for QCRI and the liquidators that this could never occur. To the contrary, it is easy to imagine circumstances in which a partial admission could substantially change the complexion of the case and lead to a train of enquiry which exposes the respondent to a penalty. As I explain below, in cases where separate penalty proceedings have already been commenced, some courts have effectively inferred that any admission or any pleading of fact might lead to a train of enquiry which could expose the respondent to a penalty. For such an inference to be made, and dispensation to be given entirely from pleading a defence, the circumstances must be exceptional. But far less exceptional circumstances are required where what is sought is dispensation merely from admitting or not admitting a fact, or from pleading to a fact, particularly where (i) the fact is central to the proceeding, and (ii) the circumstances and seriousness of the allegations have the effect that a penalty proceeding may be likely.

[24] For these reasons, in the second case, where the proceeding does not seek a penalty, the "something more" which is required before dispensation from the rules is granted will depend on all the circumstances of the case and upon the rules of pleading from which dispensation is sought. In a case such as this where the allegations are very serious, the circumstances will colour the extent to which a respondent must descend into detail to show a reasonable basis for dispensation. But it is not enough simply to allege that there is a possibility of ASIC commencing penalty proceedings. It is necessary to descend to the detail of each claim for privilege. As Robson J said in Re Australian Property Custodian Holdings Ltd (in liq) (recs and mrgs apptd) (controllers apptd) (No 2) [2012] VSC 576; (2012) 93 ACSR 130, 155 [119]:

In my view, as a general rule, the proper course to be adopted is that where a defendant in the non penalty proceeding believes he has good grounds to rely on the privilege in pleading his defence, then he should plead according to the rules, but taking the privilege where appropriate. If the pleadings in that form are then challenged by the plaintiff, then the proper course is for the defence and its justification in taking the privilege to be ruled on by the court with the defendant bearing the onus of establishing a bona fide and reasonable basis for taking the privilege.

21 The Plaintiff submitted that there were no exceptional circumstances so as to excuse the Defendant, in limine, from giving the specific discovery requested.

22 The Defendant submitted that given the specific and targeted categories of documents sought, this was an exceptional case as the mere description of the documents would in the circumstances and given the nature of the pleaded case, expose the Defendant to a penalty, even though the Defendant could not point to any contemplated proceeding for a civil penalty.

23 I am not persuaded that the circumstances of this case fall within the rare exception contemplated by Deane J in Refrigerated Express.

24 The critical issue is that there is no claim for a civil penalty in this proceeding, none is contemplated and in the circumstances of this case it is unlikely and extremely remote that production of the documents or the making of discovery would lead to a real and appreciable risk of criminal prosecution or a separate and subsequent civil penalty proceeding. In the event of success by the Plaintiff, it is most unlikely that ASIC would pursue a civil penalty in addition to compensation. Ultimately the Court is required to take a realistic and pragmatic approach. Allegations of breach of ss 180-182 of the Corporations Act are regularly made in corporations and commercial cases. If the civil penalty is not sought in the proceeding itself, it is only in those more serious cases that there is a real and appreciable risk that the matter may go further. The run of the mill case does not, even though it potentially may. To exempt defendants from discovery (and pleadings and evidence) in a civil case not involving a penalty and with no real or appreciable risk of further civil penalty proceedings would be a serious and unwarranted intrusion into the proper orderly and cost-effective conduct of civil litigation of this kind. If there was no claim for breach of statutory duty, the gateway to the civil penalty provisions, there would be no issue and dispensation from discovery would be unthinkable. There is no reason why addition of the statutory claims in a case of this kind should make any difference.

25 Ultimately it is a question of the circumstances of the particular case. The more serious the claim, for example fraud (as in CC Containers**)**, the more likely the (real) possibility of criminal or civil penalty proceeding. By contrast, in breach of statutory duty cases of the kind under consideration, compensation is usually an adequate remedy.

26 It follows that I do not regard the circumstances of this case as exceptional so as to justify an order excusing the Defendant from making discovery in limine. There is no civil penalty proceeding on foot (or foreshadowed) as in One-Tel. There is no serious fraud allegations, where the nature and extent of the pleading itself raises serious risks and prospects of the matter going further, as in CC Containers. No real and appreciable risk of criminal or civil penalty proceedings has been established. I propose to follow the authorities referred to and order general discovery and not the specific discovery sought by the Plaintiff.

27 For the reasons given an order for discovery was made on 23 February 2018.

[1] [2007] NSWSC 211; (2007) 209 FLR 197 (Pascoe). A summary of Pascoe is conveniently taken from the decision of Robson J in APCH (No 2) [2012] VSC 576 (see footnote 5), for which I am grateful.

[2] [2005] NSWSC 226; (2005) 190 FLR 443.

[3] (1979) 42 FLR 204.

[4] [2012] VSC 149.

[5] [2012] VSC 576.

[6] [2017] VSC 434.

[7] Microsoft at 388 [67], where Lindgren J stated that conclusion having reviewed the authorities.

[8] At 210-212. See also Microsoft at 389 [72].

[9] [2016] FCA 813.