PRADHAN v EASTSIDE DAY SURGERY PTY LTD & ANOR No. SCGRG-98-833 Judgment No. S256 [1999] SASC 256

Supreme Court of SA|1999-06-18|Before: Doyle CJ, Bleby JJ, Prior J

On Appeal from HIS HONOUR JUDGE BOWEN PAIN, MASTER OF THE SUPREME COURT

DOYLE CJ. I agree with the orders proposed by Bleby J and with the reasons that he gives for the making of those orders.

A company known as Westmite Pty Ltd ("Westmite") was developing a day surgery facility. In the course of that development it encountered financial difficulties. It was placed under administration and became the subject of a deed of company arrangement. Dr Pradhan, the plaintiff, was a shareholder in Westmite, and provided funds to the administration in an attempt to have the development completed. It was a complicated arrangement, with part of the additional funding being made available to provide working capital for Eastside Day Surgery Pty Ltd ("Eastside"). The plaintiff was also a director of Eastside. Under the scheme Eastside was to become the new operator of the day surgery when completed. That advance was to be secured by way of mortgage debenture over the assets of Eastside.

In consequence of these arrangements the plaintiff became a majority shareholder in Eastside and the owner of all the issued share capital of Westmite.

Eastside also got into financial difficulties, and pursuant to the debenture the plaintiff arranged for the appointment of Mr Nick Gyss as receiver of Eastside on 22 May 1996. Mr Gyss was then a partner in a firm of chartered accountants known as Grant Thornton.

As a consequence of a creditor's petition for the winding up of Eastside, Stephen Duncan, the second respondent, then employed by Arthur Andersen, was appointed liquidator of Eastside on 16 July 1996. Mr Gyss's role as receiver then terminated. The plaintiff is a substantial creditor of Eastside.

The plaintiff applied to this Court for an order removing Mr Duncan as liquidator as a result of the circumstances I am about to describe. The application was heard by a Master and was dismissed. The plaintiff now appeals against that order.

On 17 December 1996 Mr Duncan reported to the creditors as to the apparent reasons for Eastside's failure. He also reported that information then to hand indicated that Eastside had been trading in an insolvent state for some time, and in all likelihood, since it commenced trading. He reported that it was his view and that of his legal advisers that there were grounds for proceeding against the directors pursuant to s588G of the Corporations Law. That view had been formed after public examinations of the directors and officers of Eastside.

Between December 1996 and May 1998 Mr Duncan proceeded with his administration of the liquidation, including the receipt and checking of proofs of debt, a more detailed analysis of the company's affairs and negotiations with creditors and an insurer of the company. He sought and obtained legal advice about the claim against the directors, effectively the only asset of the company, and negotiated funding arrangements for the intended litigation.

The plaintiff swore two affidavits in support of his application to remove Mr Duncan as liquidator. In each of them he spoke of what occurred after the liquidator's report to creditors. In the first one he said:

"10. As a result of the intimation of the liquidator in his letter dated 17 December 1996 I instructed Corsers, Solicitors, to investigate the circumstances surrounding the possibility of an action against the directors of the Company for insolvent trading. 11. I am informed and verily believe that Corsers instructed Mr Gyss to review and consider the allegations of the liquidator and provide advice in relation to defences and procedure in relation to the action being considered by the liquidator against me as one of the directors of the Company. 12. I am informed by Messrs Corsers and verily believe that a detailed analysis of the accounts and circumstances relating to the trading of the Company and Corporations Law was undertaken by Mr Gyss on my behalf."

"3. As I deposed in my Affidavit sworn 23 June 1998 I caused Mr Gyss to be engaged to review and consider allegations of insolvent trading and to provide advice in relation to defences and procedure in relation thereto 4. In the course of Mr Gyss performing his investigations Mr Gyss had communications with me and is privy to information given to him by me in relation to the allegations of insolvent trading."

That was the extent of the information before the Master as to Mr Gyss's involvement with the plaintiff consequent upon the liquidator's report to creditors.

Since 4 August 1997, Mr Duncan has been practising with another accountant under the name Stephen Duncan & Associates.

On 27 April 1998 Mr Gyss became an employee of Stephen Duncan & Associates. Since his employment by the firm, Mr Gyss has not been involved in the liquidation of Eastside. He has been told by Mr Duncan that he will not be so involved. Mr Duncan says that he has discussed with Mr Gyss briefly the fact of his appointment as receiver and manager of Eastside, but has not discussed any matters pertaining to the company arising from his appointment as receiver and manager. He also says that he has not discussed with Mr Gyss any of the matters relating to the alleged trading of the company whilst insolvent.

By letter dated 20 May 1998 the solicitors for the liquidator wrote a letter to the plaintiff demanding the sum of $676,242.43 "being the total liabilities incurred by the company over the period from 3 July 1995 to 17 May 1996, during which time you were a director of the company". The letter alleges that the plaintiff breached the duty imposed on him by s588G of the Corporations Law. Further correspondence ensued between the plaintiff's solicitors and the solicitors for the liquidator regarding the ability of the latter to continue to act. On 23 June 1998 the plaintiff commenced these proceedings seeking to have Mr Duncan removed as liquidator. He relied on the present relationship of Mr Duncan with Mr Gyss and the fact that Duncan's firm also employed another person who had previously assisted, under supervision, in the preparation of tax returns for the plaintiff, his family and companies. The question of the employment by Duncan of that other employee is now no longer an issue.

The Master who heard the application referred to the principal authorities regarding the independence of liquidators. He concluded that Mr Gyss's prior involvement with the company was not likely to impede or inhibit the liquidator from acting impartially in the interests of all creditors. He did not consider that it would give rise to a reasonable apprehension on the part of a creditor that he might be so impeded or inhibited: Advance Housing Pty Ltd (in liquidation) v Newcastle Classic Development Pty Ltd (1994) 14 ACSR 230, per Santow J at 234. He also considered that the liquidation was well advanced and that the claim against the directors was the only potential asset available for distribution to creditors. He concluded:

"Having considered the matter in an objective fashion, I do not consider that there is a conflict of interest, nor that a conflict might be perceived. Nor do I consider that there is a realistic prospect of embarrassment or a serious possibility of conflict in the liquidator continuing to act."

The only possible conflict which the Master had identified was that Mr Gyss might be intimidated or for some reason not give his full support if the plaintiff were to rely upon the expert evidence of Mr Gyss in the conduct of his defence to the claims made by the liquidator. The inference seems to be that the only evidence that Mr Gyss might be required to give would be as to the reconstruction of the accounts of Eastside in order to show its actual trading position at any given time. The Master considered that that was a different situation from that contemplated by the cases, and one which could easily be remedied by the plaintiff engaging some other expert to provide the necessary evidence.

When the appeal was first argued in this court, it proceeded on the same material as that which was before the Master. Had the evidence remained as it was, I would have dismissed the appeal.

The principles to be applied in such a situation seem not to be in doubt. A number of relevant statements of principle was assembled by Thomas J of the Supreme Court of Queensland in Re Club Superstores Australia Pty Ltd (in liquidation) (1993) 10 ACSR 730 at 734-735:

"The guiding principle in the appointment by the court of a liquidator is that he must be independent and must be seen to be independent: Re National Safety Council of Australia Victorian Division [1990] VicRp 2; [1990] VR 29 at 34, citing with approval McPherson on Company Liquidations, 3rd ed, p 209. I should apply the same principles to an application to remove a liquidator as I would apply to an application to appoint a person to be a liquidator: Re Shanks Byrne Industries Pty Ltd [1979] NSWLR 880 at 883; 4 ACLR 676 per Needham J. It does seem to me that the liquidator is put into a position where he may have to review transactions in respect to which his partner has given advice, and payments into and disbursements from a trust account of which his partner is an auditor. That places him, in my opinion, in a position where his independence might seem to be in question. There is no suggestion that the liquidator would not perform his duties with complete integrity and to the best of his ability. But a liquidator must be independent and must be seen to be independent: Re Queensland Stations Pty Ltd (in liq) (1991) 9 ACLC 1341 at 1344 per Ryan J. Notwithstanding the professional standing of the proposed liquidator, it is inappropriate that he as scheme manager of the creditor should also be liquidator of the company which is indebted to the creditor: Re Kabat Pty Ltd (1985) 3 ACLC 828 at 830 per Master Lee QC. It is of the greatest important that there should be no possibility of criticism attaching to one of the court's own officers on the ground of a conflict of interest. The liquidator needs to be seen to be independent in any matter which his duties as liquidator may require him to investigate: Re Giant Resources Ltd (1991) 1 Qld R 107 at 117 per Ryan J. There is ... evidence which does indicate some nexus between the provisional liquidators and members of their firm with companies which will require to be investigated if the liquidation is to be properly carried out. Having regard to this, and to the opposition to their appointment expressed by a majority of unsecured creditors, I consider that I should make an order that they be removed and replaced by another provisional liquidator. I consider that this should be done, notwithstanding the difficulties which the newly appointed liquidator will no doubt experience ... ibid at 117."

"I accept the submission of Mr Jackson QC for the liquidator that some realistic prospect of embarrassment or a serious possibility of conflict in his continuing to act needs to be seen before a dismissal is required. But once a realistic possibility of conflict arises, it is not possible to wait and see. It is necessary in the interests of efficiency and of avoiding disquiet that an order be made."

In Advanced Housing Pty Ltd (in liquidation) v Newcastle Classic Developments Pty Ltd (1994) 14 ACSR 230 Santow J in the New South Wales Supreme Court cited the above passages with approval and continued (at 233-234):

"In Aboriginal & Torres Strait Island Commission v Jurnkurakurr Aboriginal Resource Centre Aboriginal Corporation (in liq) (1992) 10 ASCR 121 Asche J cited with apparent approval the passage in the McPherson Law of Company Liquidation 3rd ed by J O'Donovan 1987 at 227-8, headed "Grounds for Removal". In particular the following passage appears which is important here: Consequently, those who assert that the liquidator should be removed, are under a duty to establish at least a prima facie case that this is for the general advantage of the persons interested in the winding up, and that the onus of proof will not be easy to discharge if the liquidator has become well acquainted with the business and affairs of the company, or the process of winding up has almost reached completion. In performing his functions the liquidator must both be and appear to be independent and impartial of the creditors; Re Intercontinental Properties Pty Ltd (in liq) (1977) 2 ACLR 488 at 491-2. In Re Chevron Furnishers Pty Ltd (rec and mgr apptd) (in liq); Queensland Amalgamated Industries Pty Ltd v Harris (1993) 12 ACSR 565 the following passage appears at 570: Much was also said in the course of argument about the necessity for a liquidator not only to be "independent" but also to be "seen to be independent". In that regard reference was made, inter alia, to Re National Safety Council of Australia Victoria Division [1990] VicRp 2; [1990] VR 29 at 34; Re Queensland Stations Pty Ltd (1991) 9 ACLC 1341 at 1344; Re Giant Resources Ltd (1991) 1 Qd R 107; and Re Clubs (sic) Superstores Australia Pty Ltd (1993) 10 ACSR 730. The principle established by those cases is undoubted. The liquidator must have had no prior or other involvement either with the company in liquidation, its directors and major shareholders, or one of its creditors such that he could not fairly and impartially carry out his duties as liquidator requiring him, in broad terms, to act in the best interests of the general body of creditors. The facts here do not establish any want of independence in that sense. If the foregoing statement were taken as precluding any association, it being in the circumstances obiter, then even the most limited prior involvement with the company in liquidation could disqualify the relevant firm of accountants from providing one of its partners as liquidator. In my judgment, the correct balance is struck by permitting a liquidator to act as such even if there be a prior involvement with the company in liquidation, providing that involvement is not likely to impede or inhibit the liquidator from acting impartially in the interests of all creditors or be such as would give rise to a reasonable apprehension on the part of a creditor that the liquidator might be so impeded or inhibited. In short the question should be whether there would be a reasonable apprehension by any creditor of lack of impartiality on the liquidator's part in the circumstances, by reason of prior association with the company or those associated with it, including creditors, or indeed any other circumstance."

Thus in Re Club Superstores Australia Pty Ltd itself the liquidator was removed by order of the court where, before being appointed liquidator, he had given specific advice to a director of the company regarding his own personal affairs, those of his wife and of the unit trust and other companies with which they were associated. The advice included advice as to the possible exposure of the director and his wife to liability to the liquidator of the company in certain circumstances. There was a perception of conflict casting doubt upon the liquidator's independence, and this was not offset by any inconvenience that resulted from the change of liquidator at a relatively early stage of the liquidation.

In Re National Safety Council of Australia, Victorian Division the liquidator was removed at an early stage of the liquidation because of the possible need for him to investigate whether the company had a right of action against the firm of auditors of which the liquidator was a member. A similar situation arose in Re Queensland Stations Pty Ltd where the liquidator might have been called upon to review transactions in respect of which his partner had given advice, thus calling his independence into question, and in Re Giant Resources Limited a similar potential conflict of interest arose which caused a provisional liquidator to be removed. The situation causing removal in Aboriginal and Torres Strait Islander Commission v Jurnkurakurr Aboriginal Resource Centre Aboriginal Corporation (in liquidation) was the possibility that the liquidator might be placed in a position of investigating whether his firm had been negligent in advice given to a possible creditor. The potentially disqualifying feature in Advance Housing Pty Ltd (in liquidation) v Newcastle Classic Developments Pty Ltd was that the liquidator might have to investigate payments made by the company to the firm of which he was a partner as to whether the payments constituted unfair preferences within s588FA(1) of the Corporations Law.

The factors which were said to disqualify the liquidator in this case were the following:

1. Gyss had been the receiver and manager of the company. It would be the duty of the liquidator to scrutinise his actions, and there may be a conflict between the liquidator's duty to do that and his interest, as employer, to protect his employee. However, the evidence showed that the liquidator had investigated that aspect and had satisfied himself that there was no irregularity well before he employed Mr Gyss. It was unlikely that any such conflict could arise in the circumstances of this case.

2. It was suggested that Mr Gyss had provided confidential advice to the plaintiff and that by virtue of the current employment relationship, that gave rise to a relevant conflict which now disqualifies the liquidator from acting. I have already set out the extent of the plaintiff's assertions contained in the two affidavits regarding his dealings with Mr Gyss. There was nothing in the affidavits to suggest that any information given by or on behalf of the plaintiff was information of a confidential nature or that Mr Gyss had access to any information which the liquidator does not now have. There was no indication as to whether advice was given to the plaintiff or to the directors of the company, other than that some factual analysis of the accounts and trading of the company was undertaken, no doubt to demonstrate the financial position of the company at particular times. It was not apparent that that required any confidential information or that it could not now be reconstructed in the same way from the information now available to the liquidator. In brief, the evidence supplied by the plaintiff fell far short of the requirement to justify removal on this ground.

3. It was said that Mr Gyss might be required to give evidence adverse to the liquidator in the proceedings which the liquidator had commenced against the plaintiff. From the rather sparse information given by the plaintiff, it seems that the only evidence which it could be inferred that Mr Gyss might give would be the evidence of the type referred to in paragraph 2. That would not appear to be confidential information, and as the master observed, is information which could be provided by some other appropriate person.

4. It might be thought that the liquidator would not wish to pursue the claim against the plaintiff with vigour because he was a former client of Mr Gyss, his present employee. There was no evidence to suggest that that was in fact the perception of the creditors other than of the one creditor (the plaintiff) who was being pursued by the liquidator. There might perhaps be some substance in the submission if it could be shown that there was an ongoing relationship between Mr Gyss and the plaintiff, but the evidence suggested that that had long since ceased, and well before Mr Gyss became an employee of the liquidator.

5. Mr Gyss had provided advice to the plaintiff, and there might be some perception of conflict where the former adviser is now employed by the liquidator. Again, without more information as to the nature of the advice, it is difficult to justify removal on this ground alone.

I conclude from the information provided that Mr Gyss's previous involvement with the company and with the plaintiff, given the timing of his employment by the liquidator, was not likely to impede or inhibit the liquidator from acting impartially in the interests of all creditors. It would not give rise to a reasonable apprehension that the liquidator might be so impeded or inhibited merely by virtue of their prior association as then deposed to. By the time Mr Gyss was first employed by the liquidator, his investigation of the affairs of the company was all but complete. All that remained was to institute the recovery proceedings for compensation allegedly due to the company by the directors pursuant to s588M of the Corporations Law. His investigation had apparently revealed nothing untoward about Mr Gyss's short period of administration of the company before it went into liquidation. The plaintiff's evidence before the Master revealed nothing which would suggest that the liquidator's independence was in any way compromised by Mr Gyss's involvement in the company or with the plaintiff.

At worst it appeared that Mr Gyss may have done some reconstruction of the company's finances from its own records in order to determine its financial position at the time of his administration, and possibly before. But there was nothing about that which could not have been done from the company's records by any qualified accountant.

Not only was there nothing to suggest that the liquidator's independence was compromised, but it was plainly in the interests of the creditors that the fruits of the liquidator's investigations and negotiations should not be lost by the inevitable delay and additional expense in handing over to another liquidator. The Master was correct in refusing the application to remove the liquidator on the ground that it now employed Mr Gyss.

That was the position at the time when the matter was first argued before the Full Court. As a result, no doubt, of some observations which fell from members of the court during the course of argument, after judgment had been reserved an application was made by the plaintiff for leave to tender a further affidavit of the plaintiff and of his solicitor, both sworn on 7 May 1999, and to re-open the argument before the Full Court.

The affidavit from the plaintiff's solicitor deposes to the fact that no attempt was made to approach Mr Gyss to ascertain the information with which he had been supplied by the plaintiff because "it was believed that it would be inappropriate to approach him while the court process was under way". However, after the hearing of the appeal had concluded Mr Gyss delivered all the papers in his possession to the plaintiff's solicitors, with a request that they not show the documents to the plaintiff. The implication was that they could be used for the purpose of preparation of an affidavit by him. Some five weeks later, when the plaintiff's solicitors had taken no steps to advance the matter, Mr Gyss informed them that he would not provide an affidavit and demanded return of the documents. The demand was complied with. Mr Gyss then apparently sought further independent legal advice, and made available to the plaintiff's solicitors copies of only those documents in his possession relating to the plaintiff personally. In her affidavit the plaintiff's solicitor concludes:

"9. It is clear from a perusal of the documents which I copied that Dr Pradhan has provided confidential information to Mr Gyss. I am prepared to produce documents to the court if required. The documents consist of inter alia, handwritten notes of Mr Gyss apparently based on information given by Dr Pradhan to him about his personal position with respect to the allegation of insolvent trading".

In his affidavit the plaintiff repeats a certain amount of the information contained in the solicitor's affidavit. He says that his solicitors have now shown him some copies of documents obtained from Mr Gyss's solicitors and that the information contained in some of those documents was given by him to Mr Gyss by way of confidential information. He asserts that Mr Gyss gave him confidential advice regarding his position as a director of the company. Of the appointment of Mr Gyss as receiver and manager of the company he says:

"10. Mr Gyss was appointed Receiver and Manager and I assisted him in his duties. I met with him from time to time and I told Mr Gyss of the relationship between myself and the other directors about money owed by various directors and also I told him that the company had experienced infighting between the directors which caused difficulties in keeping the company going. I also told him everything I knew then relevant to my involvement with the company. Some of the conversations were of a confidential nature. 11. In my meetings with Mr Gyss I also told him of my own personal finances and resources. 12. In the course of these discussions insolvent trading was raised. I sought Mr Gyss' advice about my legal position."

The question arises whether we should now receive that evidence and, if we do, what consequences should follow.

There is no doubt that pursuant to Rule 95.15 this Court may in its discretion receive further evidence upon any question of fact. Whether it does so will depend, among other things, on whether it was available at the time and why it was not led before the Master, and whether, if admitted, it is likely to have a material effect on the result. The primary concern should be the interests of the administration of justice.

I find it extraordinary that this information was not provided to the Master before the matter first came before him for a hearing. There is no reason why the solicitors should not have approached Mr Gyss at a much earlier stage. The documents in his possession may well then have been revealed. Equally, there is no reason why the plaintiff could not have deposed, at a much earlier stage than he did, to the fact that he gave confidential information to Mr Gyss and sought advice from him about his personal position in relation to the alleged insolvent trading. On the resumed hearing of the appeal, the only explanation offered by counsel for these failures was that the plaintiff's legal advisers considered that the information contained in the first affidavits was sufficient to justify the application. There is no doubt that the evidence could have been obtained with the exercise of reasonable diligence for use before the Master.

In my opinion, however, the interests of justice require that the evidence be received if it is likely to have a material effect on the outcome of the case, and the plaintiff should not be prejudiced by any failure on the part of his solicitors either to make proper enquiry or to prepare comprehensive affidavits. Furthermore, an application to remove a liquidator is one which can be made at any time according to information available to the applicant as the liquidation progresses. It is not as though the application seeks a final determination and enforcement of rights as in typical inter-partes litigation.

The important question is therefore whether this fresh evidence, if accepted, will have a material effect on the outcome. In my opinion, it may. That is because the grounds on which the application is made no longer merely raise questions of actual or perceived independence of the liquidator, such as calling in question past advice given by the liquidator, his partner or employee. Nor is it a question of merely asking whether the appointment is in the best interests of the persons who have an interest in the winding up. What now becomes paramount are wider issues of the administration of justice.

The liquidator in this case was appointed by the Court. Whether appointed by the Court or not, the Court retains a general supervisory jurisdiction over his activities. Like a legal practitioner, he is an officer of the court in the administration of the winding up. His investigations have shown, and a committee of creditors has agreed, that he should bring proceedings against the former directors of the company for a substantial sum of money pursuant to s588G of the Corporations Law. That section relevantly provides as follows:

"(1) This section applies if: (a) a person is a director of a company at the time when the company incurs a debt; and (b) the company is insolvent at that time, or becomes insolvent by incurring that debt, or by incurring at that time debts including that debt; and (c) at that time, there are reasonable grounds for suspecting that the company is insolvent, or would so become insolvent, as the case may be; and (d) that time is at or after the commencement of this Part. (1A) For the purposes of this section, a company that buys back shares incurs a debt (even if the consideration is not a sum certain in money). The debt is incurred at the time when the buy-back agreement is entered into. (2) By failing to prevent the company from incurring the debt, the person contravenes this section if: (a) the person is aware at that time that there are such grounds for so suspecting; or (b) a reasonable person in a like position in a company in the company's circumstances would be so aware. (3) ....... (4) ......."

The essential elements which will have to be proved by the liquidator in those proceedings are:

(b) There were reasonable grounds for suspecting that the company was insolvent; and either

(d) That a reasonable director in the company's circumstances would have been so aware.

In the case in question this will obviously require an enquiry into the state of knowledge and state of mind of the plaintiff. The plaintiff has sworn that he has given confidential information touching on those topics to Mr Gyss, then acting as his professional advisor. Mr Gyss is now an employee of the liquidator, and his knowledge must be taken vicariously to be that of the liquidator. In my opinion, if the assertions of the plaintiff were accepted, the liquidator is in no different position from that of a solicitor who has acted for or advised a party to litigation and who then becomes a partner or associated with another solicitor acting on the opposite side of the litigation.

Whether the liquidator may be disqualified - the obligation of confidentiality

Whilst there is no privilege attaching to communications between accountant and client, the primary concern of the Courts in this area has been the protection of confidential information from possible use or influence in the conduct of litigation where that information has been disclosed to a professional adviser who has or who has had a fiduciary obligation to the client to act only in the interests of that client. It is plain that, in the case of solicitors, the mere fact that a solicitor has acted for a client in the past does not preclude him or her from acting against the client on a later occasion even in respect of the same matter. Rakusen v Ellis Munday and Clarke [1912] 1 Ch 831. Whilst other aspects of the decision in that case have been questioned, that proposition has never been doubted, and has been applied in many Australian cases since then. It has equal application to accountants.

The basis on which solicitors have been restrained from acting has its origins in the preservation of legal professional privilege and the avoidance of professional conflict of interest involving fiduciaries. The cases suggest that the emphasis is on the latter: e.g. Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461 per Lord Cranworth LC at 471:

"It is a rule of universal application, that no-one, having such duties to discharge, shall be allowed to enter into engagement in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect."

In Mallesons Stephen Jaques v KPMG Peat Marwick (1991) 4 WAR 357 Ipp J (at 362) could see no reason why a distinction should be drawn between the obligations arising out of legal professional privilege and the obligations arising out of a fiduciary relationship. I agree. In Re a Firm of Solicitors [1995] 3 All ER 482 the emphasis was most certainly on the preservation of confidential information in a fiduciary relationship rather than on the narrower ground of legal professional privilege. In principle, there is therefore no reason why the obligation of confidentiality should be confined to solicitors. That indeed has been recognised by the House of Lords in Prince Jefri Bolkiah v KPMG [1998] UKHL 52; [1999] 1 All ER 517 where a firm of accountants was prevented from acting where some of their partners and staff were in possession of confidential information relevant to an inquiry being conducted by the firm for another client.

Because the full factual position in this case may yet have to be determined, it is unnecessary for this Court to pass finally on whether the liquidator should be removed. If in fact the plaintiff retained Mr Gyss to advise him in respect of his position concerning his relationship with Eastside, including his possible liability to the company, and if for that purpose he provided confidential information to Mr Gyss about that relationship and the plaintiff's knowledge of the affairs of the company from time to time, it is information which is plainly material to the success or otherwise of the liquidator's present claim against the plaintiff.

In being so retained, there is every likelihood that a relationship between Mr Gyss and the plaintiff was not only one of trust and confidence reposed in a professional adviser, but one where a duty of loyalty arose to the plaintiff to act solely in the interests of the plaintiff. If a potential conflict arose between Mr Gyss's duty of loyalty to his client on the one hand, and his own or someone else's interest on the other, he would owe a fiduciary duty to the client to act only in the client's interest, and to avoid that situation of conflict: Duke Group Ltd (In Liquidation) v Pilmer and Others [1999] SASC97 at [726] - [736].

In those circumstances a professional adviser is obliged to ensure that the information given to him will not be used to the detriment of his former client. So far as is possible the law will ensure that that obligation is adhered to. The reasons are adequately explained by Ipp J in Mallesons Stephen Jaques v KPMG Peat Marwick (supra), an analogous case involving a solicitor. Furthermore, just as the knowledge of one partner will be imputed as the knowledge of his other partners, so will the knowledge of an employee be imputed to his employer. In Mallesons Stephen Jaques v KPMG Peat Marwick it was held to be against the public interest in the administration of justice to countenance a scheme whereby a group of partners within a firm of solicitors was able to represent a prosecutor in criminal proceedings in conflict with the duties owed by other partners to the accused person, to the mutual financial profit of them all.

In my opinion the same position applies to a liquidator who, by similar means, is bestowed or is deemed by the law to have been bestowed with knowledge of the affairs of a person and who, as an officer of the court and in the interests of creditors as a whole, is obliged to sue in order to fulfil his duty as liquidator.

Does it make any difference that the relationship between the plaintiff and Mr Gyss terminated well before Mr Gyss became employed by the liquidator? The fiduciary relationship may have ended, but the continuing obligations arising out of it do not. The House of Lords in Prince Jefri Bolkiah v KPMG (supra) at 527, in a similar situation where the previous relationship had ended, based its decision not on the existence of the fiduciary relationship which had since been terminated, but on the continuing duty to preserve the confidentiality of information imparted during the subsistence of the relationship. That may well be correct, but in my opinion the duty of confidentiality and the need to preserve it in this type of case will still arise out of the fiduciary nature of the previous relationship.

Is it sufficient that steps have been and may be taken in the liquidator's office to exclude Mr Gyss from any participation in the administration of the company? The duty to preserve confidentiality is not just to take all reasonable steps to do so. It is an unqualified duty not to communicate information to a third party. "The former client cannot be protected completely from accidental or inadvertent disclosure. But he is entitled to prevent his former solicitor from exposing him to any avoidable risk; and this includes the increased risk of the use of the information to his prejudice arising from the acceptance of instructions to act for another client with an adverse interest in a matter to which the information is or may be relevant.": Prince Jefri Bolkiah v KPMG (supra) at 527.

As the House of Lords said in that case, it becomes a matter of assessing the degree of risk of the disclosure or misuse of the confidential information. In Rakusen v Ellis Munday and Clarke [1912] 1 Ch 831 Cozens-Hardy MR (at 835) stated the test as the Court being "satisfied that real mischief and real prejudice will in all probability result if the solicitor is allowed to act". That formulation has been severely criticised. See a review of the relevant authorities by Gummow J in National Mutual Holdings Ltd v The Sentry Corporation (1989) 22 FCR 209 at 228-230. It was not followed by Ipp J, after an exhaustive review of the authorities in Mallesons Stephen Jaques v KPMG Peat Marwick (supra). Ipp J concluded that, consistent with the nature of the relationship, if "there is a real and sensible possibility that (the solicitor's) interest in advancing the case of the new client might conflict with his duty to keep information given to him by the former client confidential, or to refrain from using that information to the detriment of the former client, then an injunction will lie". The Rakusen test was doubted by Spender J in Murray v Macquarie Bank Ltd (1991) 33 FCR 46. It was not followed by Burchett J in Wan v McDonald [1992] FCA 4; (1992) 105 ALR 473, after an extensive review of the authorities and the principles behind them at 492-496. See also Carindale Country Club Estate Pty Ltd v Astill [1993] FCA 218; (1993) 115 ALR 112.

The Rakusen test has now also been abandoned by the House of Lords. See Prince Jefri Bolkiah v KPMG (supra) at 528 where Lord Millett, speaking for the House, said:

"Many different tests have been proposed in the authorities. These include the avoidance of 'an appreciable risk' or 'an acceptable risk'. I regard such expressions as unhelpful: the former because it is ambiguous, the latter because it is uninformative. I prefer simply to say that the court should intervene unless it is satisfied that there is no risk of disclosure. It goes without saying that the risk must be a real one, and not merely fanciful or theoretical. But it need not be substantial."

In my opinion, notwithstanding some earlier authorities to the contrary, that is the test that should be applied in this Court also.

Once it is established that the liquidator or his firm is in possession of information which was imparted by the plaintiff in circumstances where that confidence must remain, and where the information is relevant to the proceedings now being taken by the liquidator against the plaintiff, the evidential burden shifts to the liquidator to show that there is no risk that the information will come into his possession or into the possession of those of his staff who have the responsibility for the administration. It will only be in very rare cases, if at all, that a "Chinese wall", whereby those who have been involved on one side of the litigation remain completely separate from those involved in the other side, will be sufficient protection There will always be a risk that some confidential information will be inadvertently revealed across the wall: Re a Firm of Solicitors [1992] 1 All ER 353. This is particularly so where there is an attempt to place an information barrier between people who are accustomed to working with each other, and is likely to be almost impossible in a relatively small firm.

This has been a rather elaborate explanation as to why the plaintiff's evidence, if it were to remain the same, might well have an influence on the result of the application. On the application of those principles I think it could. So it is for these reasons, in my opinion, that the fresh evidence is properly received by this Court, notwithstanding the lack of diligence in placing it before the Master.

Counsel for the liquidator, Mr Rice, in opposing the reception of the affidavits, complained that, had they been before the Master, he would have sought to cross-examine the plaintiff, and may well have wished to lead other evidence. Not surprisingly, there is every chance that there will be a conflict arising on the evidence which will need to be resolved before a final determination can be made about removal of the liquidator. In those circumstances, it would be inappropriate for this Court to determine the plaintiff's application. There must be an opportunity for the resolution of any potential conflict of evidence to occur. In my opinion the matter should be remitted to the Master to allow the plaintiff to be cross-examined on his affidavits and to allow the liquidator to call further evidence if he is so advised.

It will be for the Master to determine whether the relationship between Mr Gyss and the plaintiff was such that confidences between them should be preserved, whether in fact Mr Gyss was party to information which was confidential to the plaintiff, whether that information was or might be relevant to the matter now engaging the liquidator against the plaintiff, whether or not the plaintiff has consented to the disclosure of the information and whether there exists a risk of disclosure of the information to the liquidator which is not merely fanciful or theoretical. The liquidator in those circumstances carries a heavy burden to show that there is no such risk.

I would therefore allow the appeal, set aside the Master's order dismissing the plaintiff's application and remit the matter to the Master for further hearing. I would also set aside the Master's order that the plaintiff pay the defendant's costs of the application to be agreed or taxed. I would do so only in order that the Master may review that order in the light of any further proceedings before him. Whatever the final result may be, it may be appropriate for the order in relation to that hearing to stand. That will be for the Master to determine. In view of the plaintiff's failure to place the relevant information before the Master when it should have been so placed, the plaintiff has only himself to blame for the bringing of this appeal. I would order that the plaintiff should pay the defendant's costs of the appeal to be agreed or taxed.

At a glance

Court

Decision date

Before

Source

Judgment (75 paragraphs)

Parties

Cases Cited (6)