Westpac Banking Corporation v ITS Taxation Services

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4345/02 WESTPAC BANKING CORPORATION V ITS TAXATION SERVICES & ORS JUDGMENT 1 HIS HONOUR: The first plaintiff ("Westpac") appointed receivers and managers to the assets and undertaking of the second plaintiff ("Specialists") pursuant to its security. Westpac claims that before it did so, Specialists transferred substantial assets to the first defendant ("Services"). Westpac seeks to trace those assets into the hands of Services and to assert rights (including proprietary rights) over them. The second defendant, Mr Anderson, has been at all relevant times the sole director of Services and a director of Specialists. 2 Subsequently, pursuant to an interlocutory application by Westpac, the Court appointed the third defendant, Mr Singleton, to be the receiver and manager of assets of the Services. The 4th to 14th defendants claim an interest in the assets of Services, pursuant to an instrument of charge, and they assert priority over Westpac's claim. 3 Mr Anderson consulted Robert Postema of Piper Alderman and obtained advice from him in conference and by telephone in about March-July 2002, before the transactions challenged by Westpac took place. Gordon Grieve of Piper Alderman also participated in the giving of that advice. Westpac has recently issued a subpoena to Piper Alderman to produce documents relating to that advice, and Piper Alderman has done so. Westpac now seeks access to the produced documents. 4 Mr Anderson asserts that Westpac should be denied access to parts of one of the documents on the ground of legal professional privilege. Neither Specialists nor Services seeks to assert privilege over any part of the document. 5 Mr Anderson has identified the parts of the document to which he claims privilege by masking them. The unmasked version has also been provided to me and I have marked it for identification and read it, without putting it into evidence, following by analogy the procedure set out in s 133 of the Evidence Act 1995 (NSW). 6 The question, arising as it does out of the answer to a subpoena, is not directly governed by Part 3.10 Division 1 of the Evidence Act, which prevents evidence protected by "client legal privilege" from being adduced at the trial. However, Part 36 rule 13 of the Supreme Court Rules has the effect that the Court should not grant access to a document that has been produced in answer to a subpoena if, by virtue of the operation of Part 3.10 Division 1, the evidence of the document could not be adduced over objection at the hearing. By virtue of this rule, the Court is to apply the statutory law, rather than the common law, in assessing whether a claim to the privilege in respect of documents produced on subpoena has been made out. 7 Both s 118 and s 119 of the Evidence Act, dealing respectively with the privilege concerning legal advice and the privilege concerning professional legal services relating to litigation, both of which might be relevant in the present case, treat the privilege as belonging to the "client". Section 117(1)(b) includes in the definition of "client" an agent of the client. That appears to have the consequence that the agent may make an objection on the ground of privilege or be the recipient of a confidential communication which is privileged. But the privilege belongs to the principal rather than the agent, in the sense that an agent who retains a lawyer on behalf of a principal cannot maintain the privilege if the principal consents to disclosure. 8 The question of fact for immediate decision is whether the advice set out in the parts of the document for which privilege is claimed was: · advice given to Mr Anderson as Piper Alderman's client in a principal capacity, or given to Mr Anderson as a client jointly, as co-principals, with Specialists and/or Services, or: · advice given only to Specialists and/or Services, and not to Mr Anderson except as agent for them. 9 If I were to decide that the former alternative is correct, then questions would arise as to whether Mr Anderson has waived the privilege. The question of waiver has not yet been argued. 10 The correct approach, where the Court is required to identify the client for the purpose of deciding who is entitled to claim legal professional privilege, is illustrated by Hodgson CJ in Eq in Watson v McLernan [2000] NSWSC 306, at [86]-[87]. One must consider the content of the advice, and in particular the persons whose rights and obligations are addressed. One must also weigh up the surrounding facts and circumstances, taking into account who the solicitor billed for the advice, who paid for the advice (if payment has been made), who approached the solicitor, and that person's relationship to the others who might be regarded as the clients. 11 The document said to contain privileged material is Mr Postema's file note dated 17 May 2002, relating to his conversations with Mr Anderson in conference on 16 May and by telephone call on 17 May. The file note recorded, by way of background, that Westpac had lent money to Specialists in the order of $4 million, but was not prepared to fund the company's ongoing growth, and that Westpac held security over Specialists and certain subsidiaries but not over Services. The file note identified two fundamental issues for consideration, namely whether Specialists could walk away from the Westpac facility and allow itself to go into some form of administration or liquidation, and whether Services could be used as a fundraising vehicle for another financier to finance the business. It noted that there was a specific proposal to deconsolidate Services so that it was no longer a subsidiary of Specialists, and then use it as a funding vehicle, which would grant a charge in favour of another financier. 12 The file note recorded Mr Postema's advice at some length. He noted that the deconsolidation of Services could raise issues with respect to the existing shareholders of Specialists, who might allege oppression. He expressed concern as to whether the proposal might involve misleading and deceptive conduct as regards Westpac, if the bank was not notified in advance, and said that there might be a similar problem regarding the incoming financier if full disclosure was not made. He noted that Westpac might claim that although Services was not expressly identified in its security documentation, it was nevertheless entitled to a charge over the assets of Services, but he noted that there would be some difficulties for Westpac in making that argument. 13 It can be seen that subjects of advice all appear to relate to the business and affairs of the two companies, Specialists and Services, and whether it would be desirable from the point of view each company to implement the proposal. In terms, the advice summarised in the file note does not appear to address the position of Mr Anderson as an individual, either in his capacity as director of one or both of the companies or otherwise. 14 The material in respect of which Mr Anderson claims privilege is in the parts of the file note that address the position of the directors of Specialists. On the face of the document, the advice seems to be given as part of a review of the business and affairs of Specialists, in the context of the proposal. "The directors" appear to have been regarded by Mr Postema as the corporate organ that would give effect to the proposal on the part of Specialists. Matters concerning the exposure of "the directors", as a corporate organ, are considerations to be taken into account by the corporation in deciding whether to implement the proposal. Mr Postema does not appear to have addressed his mind to the position of any individual director, but rather the exposure which might arise for a corporate organ in the implementation of the plan, providing a reason for the corporation not to proceed. 15 In other words, on a proper construction of the file note as a whole, including the unmasked portions, it is a note which summarises advice provided to two corporations (Specialists and Services) via a director of both of them. This conclusion is reinforced by the fact that Mr Anderson was not the sole director of Specialists, so the expression "the directors" does not merely denote Mr Anderson. 16 There is some other evidence bearing on the question whether Mr Anderson individually was a client of Piper Alderman. It reinforces the conclusion, arising upon the construction of the file note, that the clients were Specialists and Services rather than Mr Anderson. 17 Mr Kershaw, one of the receivers of Specialists, has given evidence of the contents of a creditors ledger which his staff printed from Specialists' accounting system in October 2002. Piper Alderman Management Limited appears in the creditors ledger as a creditor for $3,097.65. The letters "RATA" appear at the top of the right-hand column of the ledger. It is likely that those words are an abbreviation for "Report As To Affairs". The letters were not inserted by Mr Kershaw or his staff, and I infer therefore that they were inserted in the ledger by or under the directions of the directors of Specialists. 18 The amount of $3,097.65 corresponds with an invoice issued by Piper Alderman to Mr Anderson as managing director of Specialists dated 22 April 2002, which is expressed to be for provision of advice "in relation to ITS due diligence", suggesting that the advice was provided to Specialists and Services rather than to Mr Anderson. Piper Alderman has lodged a proof of debt for this amount and for its services with respect to other work for Specialists, where the invoices were not directed to Mr Anderson. 19 A director and the company secretary of Specialists (but not Mr Anderson) signed a Report As To Affairs in respect of Specialists as at 26 August 2002 and provided a copy of it to Mr Kershaw, who has annexed the document to his affidavit. It is dated 20 September 2002. The document does not give details of individual creditor amounts but mentions a global amount of $48,000 for "lawyers and accountants". The evidence includes an earlier version of a Report As To Affairs for Specialists (dated 9 September 2002), evidently signed by the same individuals but giving slightly different figures, and instead of listing $48,000 for "lawyers and accountants", this earlier document lists $45,000 for "Piper Alderman and Young Barnsdall accountants". 20 This evidence, as a whole, supports the conclusion that the client of Piper Alderman was Specialists, or that Specialists as the parent entity was invoiced for the provision of advice to two clients, Specialists and its subsidiary, Services. 21 Mr Anderson's evidence, in his affidavit made on 23 February 2004, is that he engaged Mr Postema to provide advice on the corporate structures of Specialists and Services on about 18 March 2002, and that he received legal advice from Mr Postema at about that time. He says that advice was subsequently provided to him by Mr Postema in conferences and by telephone, and that file notes were taken by Piper Alderman, but he did not receive any written advices. Of course, at all relevant times Mr Anderson was the sole director of Services and a director of Specialists. The fact that he personally approached Piper Alderman for advice does not establish that he personally was a client of Piper Alderman. 22 In his affidavit made on 3 September 2003, Mr Anderson said, "Piper Alderman advised us that we were within our rights to deal with the assets of ITS Taxation Services without having regard to Westpac". Putting to one side the question whether that is an accurate summary of Piper Alderman's advice, it is significant for present purposes that Mr Anderson himself said, in September 2003, that the advice was given to "us", suggesting the corporate form rather than him personally. 23 On 5 April 2002 Piper Alderman wrote to Mr Anderson setting out the terms of the firm's engagement and identifying the lawyers who would be engaged. The letter has been referred to in other correspondence as the "Costs Agreement" and I shall also use that description, although in fact there is no specific estimate of costs in the letter. The letter was addressed to Mr Anderson as the managing director of Specialists. It was headed "General Corporate Advices relating to the Snowball Group Limited Acquisition of [Specialists]". The scope of the legal work was defined as "to provide corporate advices in relation to the proposed acquisition by Snowball Group Limited of [Specialists], from time to time". The letter enclosed a document headed "Acceptance of Terms of Engagement", which made provision for signature by an authorised officer of a corporation rather than by an individual. 24 In a letter to the solicitors for the receiver of Services dated 26 November 2003, enclosing a copy of the firm's letter to Mr Anderson of 5 April 2002, Mr Grieves said it was apparent from that letter that Specialists was the firm's client in relation to the scope of legal work described in the letter. However, he said it was unclear from the documents in the file whether the particular advice for which privilege was claimed came within the scope of the legal work described in the letter of 5 April 2002, and whether that advice was given to Mr Anderson in his capacity as a director of Services and/Specialists or otherwise. The letter noted that Partner Alderman's bill had not been paid. 25 I agree with Mr Grieves that the Costs Agreement points to the conclusion that Specialists was the client in respect of the matters identified in the letter. Although the position is not clear on the limited evidence before me on the application, it appears that the advices recorded in Mr Postema's file note went outside the letter's formulation of the scope of the retainer. Nevertheless, there being no other retainer, the Costs Agreement is an indication that the client for the later advice was also the corporate entity. It appears from Mr Postema's file note that he considered the proposal brought him by Mr Anderson from the point of view of Services as well as from the point of view of Specialists, although his emphasis was on the position of Specialists. To the extent that he did so, Services was probably also a client of Piper Alderman. But none of this supports the conclusion that Mr Anderson was a client of the firm. 26 It has not been suggested in the course of the present proceeding that Piper Alderman have had any role to play in representing Mr Anderson as the second defendant in the proceeding. There is evidence that Mr Anderson retained separate solicitors, Gilbert & Tobin, to act for him in 2003, until either his evidence was served or the matter could be settled. 27 Mr Addison, the solicitor acting for the receiver of Services, has given evidence that in October 2003 he received a telephone call from a solicitor at Piper Alderman with respect to the subpoena, during which the solicitor said "the documents relate to legal advice given by Piper Alderman to the ITS group of companies". The purpose of the call was to invite the receiver to inspect the documents in order to ascertain whether Services wished to claim privilege over any of them. The solicitor said he had already approached the liquidator of Specialists and invited him to inspect the documents. The solicitor did not say that Piper Alderman had approached or would approach Mr Anderson for the same purpose. Mr Addison himself received a telephone call from Mr Anderson on 25 November 2003, during which Mr Anderson said he was unaware of the subpoena and had not been invited to review Piper Alderman's documents for the purpose of determining a claim to privilege, but that he would make contact with the firm. All of this suggests that, at least from Piper Alderman's viewpoint, Mr Anderson was not a client for the purpose of claiming privilege. 28 The problem that has arisen in this case is not uncommon. Where a corporation seeks external legal advice, it is often the case (especially where the company is not large enough to have internal legal counsel) that the advice is sought by a director. It is relevant for the company to be informed about potential liability of its directors in the implementation of a proposal, if the proposal gives rise to such a risk. It is also obviously appropriate for each individual board member to receive advice about their potential exposure to liability, perhaps at the company's cost. The lawyers who give advice in these circumstances are not always as meticulous as they might be to distinguish between advice tendered to the corporation and advice tendered to each and every board member with respect to their individual positions. As Hodgson CJ in Eq remarked in Watson v McLernan (at [87]), "it is important for a solicitor to identify who the client is" - especially, I would add, when advice is sought affecting the interests of one or more corporate entities and their directors. Failure by the lawyers to be clear about the identity of their client or clients can lead to various problems, including the one that I have had to consider this case. 29 Here, however, the task of identifying the client is not too difficult once the document has been considered and construed in light of the surrounding evidence. Everything points to the conclusion, which I have reached, that Mr Anderson was not a client of Piper Alderman for the purpose of making a claim for legal professional privilege, except in his capacity as agent for Specialists and Services, which consent to disclosure, and therefore there is no proper basis for denying Westpac access to the unmasked file note. 30 I shall make an order accordingly, and hear the parties on the question of costs. **********

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