Clements, Dunne & Bell Pty Ltd v Commissioner of Australian Federal Police
[2001] FCA 1858
•20 DECEMBER 2001
Clements, Dunne & Bell Pty Ltd v Commissioner, Australian Federal Police [2001] FCA 1858
Client Legal Privilege
Clements, Dunne & Bell Pty Ltd v Commissioner, Australian Federal Police [2001] FCA 1858
INTRODUCTION
In rapidly changing times it is particularly important that society understands the way its enduring institutions operate.
One of those institutions is the judicial system. There is a strong tradition in the judicial system that the reasons for decisions are set down in writing and made public. Shortly I will be handing down my written reasons in this case consistent with that principle.
However, in an effort to assist in the understanding of those reasons, in cases of public interest, it is now common for the judge to provide a short explanation in straightforward terms. I will provide such a statement in this case. Of course, the only authoritative and complete version of the reasoning of the Court is contained in the formal reasons to be published.
STATEMENT
1. This case was brought by accountants, Clements, Dunne & Bell Pty Ltd (CDB). CDB sought orders against the Commissioner of the Australian Federal Police (AFP) preventing the AFP from obtaining access to documents seized under search warrants from CDB.
2. The documents relate to an investigation of alleged criminal activity by Mr Nick Petroulias, who was an Assistant Commissioner of Taxation, and others associated with him, in relation to the promotion and sale of tax avoidance schemes.
3. The documents seized were communications between CDB and its solicitors, Andrew Gray & Associates. These communications concerned legal advice given by Mr Gray to CDB acting on behalf of its clients. The legal advice concerned the establishment of employee benefit schemes by the clients.
4. Ordinarily, communications between solicitor and client are privileged. This means that, amongst other things, they are protected from seizure under a search warrant.
5. The law accords privilege to communications between solicitor and client in order to ensure that people are free to speak with their legal advisers without fear that the communications will be made available for the purpose of legal proceedings.
6. The privilege is, however, not absolute. The law accepts that communications between solicitor and client are not privileged where the communications arise from an improper or illegal transaction.
7. The question in this case was whether the communications between Mr Gray and CDB were privileged.
8. The AFP argued that the communications were part of improper or illegal conduct by Mr Petroulias and Mr Gray and some others.
9. It was alleged that Mr Petroulias used his position as Assistant Commissioner of Taxation to have his subordinates in the Australian Tax Office make private binding rulings which indicated that the ATO accepted the validity of the employee benefit schemes. These formal rulings were, it was alleged, used as a tool for the marketing of the schemes. Acting on behalf of some clients, CDB paid Mr Gray for advice concerning the schemes. It was alleged that a bank account was established in Hong Kong for the deposit of the proceeds of sale, and that Mr Petroulias received some of these funds in return for his role in assisting in the marketing of the schemes, including procuring the private rulings.
10. Further, it was alleged by the AFP that the employee benefit schemes purportedly entered into by the clients of CDB were a sham, that is to say, the clients did not genuinely enter into the transactions. For instance, although the central concept of the employee benefit scheme was to provide a target to be reached by employees in return for an incentive payment, no such targets were ever set. It was further alleged that Mr Petroulias, Mr Gray and CDB all knew that the clients had not genuinely entered into the scheme.
11. Finally, it was also alleged that the dominant purpose of the clients in attempting to enter into the scheme was to avoid tax. If so, the Commissioner was entitled, under the tax legislation, to ignore the scheme for the purposes of taxation, and to impose penalty tax.
12. The AFP argued that the conduct of Mr Petroulias, Mr Gray and CDB was illegal and improper and, consequently, legal client privilege did not apply to the communications between Mr Gray and CDB concerning the acquisition and implementation of the scheme.
13. It is most important to explain that this case does not involve determining whether Mr Petroulias, Mr Gray, or CDB or its directors have committed criminal offences. In order to find that legal client privilege does not apply, the Court must be satisfied that there is evidence which gives colour to the charge or, in other words, there is prima facie evidence that the allegation has a foundation in fact. This is a very different inquiry to the inquiry that occurs in criminal proceedings. In criminal proceedings, proof of guilt must be established beyond reasonable doubt. It would be wrong to conclude from these reasons that the Court has found that Mr Petroulias, Mr Gray or CDB have committed criminal offences.
14. However, I have concluded that there is sufficient evidence, which is described in the reasons for judgment, to establish the improper and illegal conduct alleged. This means that the documents passing between Mr Gray and CDB are not protected by client legal privilege.
Melbourne, 20 December 2001
CLIENT LEGAL PRIVILEGE - general principles applicable where claim for production - limitations on scope of the privilege - application of `crime/fraud exception' to the privilege
CLIENT LEGAL PRIVILEGE - `crime/fraud exception' -principles applicable where allegation of illegal or improper purpose made against client or solicitor - degree of proof required to show illegal or improper purpose - where prima facie case established in relation to client
CLIENT LEGAL PRIVILEGE - `crime/fraud exception' - principles applicable where relevant illegal or improper purpose that of a third party - where prima facie case established in relation to third party
Crimes Act 1914 (Cth) ss 29D, 30, 70, 73(2), 86(1)(e), 86A
Income Tax Assessment Act 1936 (Cth) ss 170BB, 177F, 226
Corporations Law s 137
Tax Administration Act 1953 (Cth) s 8P
Baker v Campbell (1983) 153 CLR 52 considered
Carter v The Managing Partner, Northmore Hale Davy & Leake (1995) 183 CLR 121 considered
Greenough v Gaskell (1833) 1 MY&K 97; 39 ER 618 considered
Bullivant v Attorney General for Victoria [1901] AC 196 considered
Grant v Downs (1976) 135 CLR 674 considered
Esso Australia Resources Ltd v Commissioner of Taxation (1999) 201 CLR 49 considered
A M & S Europe Ltd v Commission of the European Communities [1983] QB 878 referred to
Attorney-General for the Northern Territory v Maurice (1986) 161 CLR 475 considered
Commissioner of Australian Federal Police v Propend Finance Pty Limited (1997) 188 CLR 501 referred to
R v Bell; Ex parte Lees (1980) 146 CLR 141 applied
Attorney-General for the Northern Territory of Australia v Kearney (1985) 158 CLR 500 applied
R v Cox and Railton [1884] 14 QB 153 applied
Barclays Bank Plc v Eustice [1995] 1 WLR 1238 applied
Ventouris v Mountain [1991] 1 WLR 607 referred to
Baker v Evans (1987) 77 ALR 565 applied
Beazley v Steinhardt [1999] FCA 447 applied
Beazley v Steinhardt [1999] FCA 1255 referred to
O'Rourke v Darbishire [1920] AC 581 applied
R v Central Criminal Court, Ex parte Francis & Francis [1989] 1 AC 346 applied
Capar v Commissioner of Police (1994) 34 NSWLR 715 considered
CLEMENTS, DUNNE & BELL PTY LTD v COMMISSIONER OF THE AUSTRALIAN FEDERAL POLICE
V 210 OF 2000
NORTH J
20 DECEMBER 2001
MELBOURNE
IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 210 OF 2000
BETWEEN: CLEMENTS, DUNNE & BELL PTY LTD APPLICANT
AND: COMMISSIONER OF THE AUSTRALIAN FEDERAL POLICE RESPONDENT
JUDGE:
NORTH J DATE OF ORDER: 20 DECEMBER 2001 WHERE MADE: MELBOURNE
THE COURT ORDERS THAT:
1. The application be dismissed;
2. The applicant pay the respondent's costs of and incidental to the proceedings;
3. Leave is granted to the applicant to apply for a variation of the orders in par 2 by filing submissions by 25 January 2002;
4. The respondent is to file and serve any submissions in response by 14 February 2002.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V 210 OF 2000
BETWEEN: CLEMENTS, DUNNE & BELL PTY LTD APPLICANT
AND: COMMISSIONER OF THE AUSTRALIAN FEDERAL POLICE RESPONDENT
JUDGE: NORTH J DATE: 20 DECEMBER 2001 PLACE: MELBOURNE
REASONS FOR JUDGMENT (No. 2)
BACKGROUND
1 The background which gives rise to the present question before the Court is set out in pars 1 to 11 of the reasons for judgment (No. 1) in these proceedings, published on 6 October 2000. Those paragraphs should be read as if incorporated in these reasons.
2 However, for ease of immediate understanding of these reasons, it is useful to record that the proceedings concern documents seized by the Australian Federal Police (AFP) pursuant to search warrants executed against the applicant, Clements, Dunne & Bell Pty Ltd (CDB), a firm of accountants, and against Andrew Gray & Associates, a firm of solicitors. Andrew Gray & Associates was engaged by CDB on behalf of clients of CDB to provide legal advice and services concerned with employee benefit taxation schemes. Legal client privilege was claimed by CDB on behalf of its clients in respect of the documents.
3 It was determined that the proceedings would be dealt with in stages. By agreement of the parties I inspected the documents. In the reasons for judgment (No. 1) I dealt with the first stage of the proceedings. As the documents appeared to relate to legal advice and services concerning the tax affairs of the clients of CDB, I held that, subject to the questions to be raised in the later stages of the proceedings, the documents were subject to client legal privilege.
4 These reasons deal with the next stage of the proceedings. The question to be decided in this stage is whether the documents fall outside the reach of client legal privilege because they were created in furtherance of a criminal, illegal, or improper purpose.
5 The reasons will, first, set out the legal framework applicable, then examine the facts against that framework, and, finally, determine the legal consequences of the conduct of the participants on the claim for legal client privilege.
THE LEGAL FRAMEWORK
The existence of privilege
6 Many cases have examined the circumstances in which client legal privilege arises. In almost all of those cases there has been an attempt to explain the rationale of client legal privilege as a guide to defining the circumstances in which it arises. It is useful to examine the statements of the rationale in order to better understand whether client legal privilege applies in the present case.
7 The early history of client legal privilege was described by Dawson J in Baker v Campbell (1983) 153 CLR 52 at 126-7 as follows:
"The common law doctrine of legal professional privilege emerged in the sixteenth century as a natural exception to the then novel right of testimonial compulsion. See Holdsworth, A History of English Law, vol. 9, pp. 201-202. The history of the doctrine is traced in Wigmore, vol. viii, McNaughton rev. (1961), pars. 2290 et seq. In its origins it was concerned with the duty of the attorney - his oath and his honour - arising out of his professional relationship with his client rather than with the broader consideration of public interest in the effective working of the legal system. The modern theory that the doctrine is necessary to promote freedom of consultation of legal advisers by clients did not clearly emerge until the nineteenth century."(See also Toohey J in Carter v The Managing Partner, Northmore Hale Davy & Leake (1995) 183 CLR 121 at 144 and Deane J in Baker v Campbell at 113.)
8 The classical statement of the 19th century rationale is found in the judgment of Brougham LC in Greenough v Gaskell (1833) 1 MY&K 97 at 103; 39 ER 618 at 621:
"But it is out of regard to the interests of justice, which cannot be upholden, and to the administration of justice, which cannot go on, without the aid of men skilled in jurisprudence, in the practice of the Courts, and in those matters affecting rights and obligations which form the subject of all judicial proceedings. If the privilege did not exist at all, every one would be thrown upon his own legal resources; deprived of all professional assistance, a man would not venture to consult any skilful person, or would only dare to tell his counsellor half his case."
9 Another foundational expression of the reason for client legal privilege was made by the Earl of Halsbury LC in Bullivant v Attorney General for Victoria [1901] AC 196at 201 as follows:
"For the perfect administration of justice, and for the protection of the confidence which exists between a solicitor and his client, it has been established as a principle of public policy that those confidential communications shall not be subject to production."
10 In Australia, the rationale for client legal privilege appears in the regularly cited passage from the judgment of Stephen, Mason and Murphy JJ in Grant v Downs (1976) 135 CLR 674at 685 as follows:
"The rationale of this head of privilege, according to traditional doctrine, is that it promotes the public interest because it assists and enhances the administration of justice by facilitating the representation of clients by legal advisers, the law being a complex and complicated discipline. This it does by keeping secret their communications, thereby inducing the client to retain the solicitor and seek his advice, and encouraging the client to make a full and frank disclosure of the relevant circumstances to the solicitor. The existence of the privilege reflects, to the extent to which it is accorded, the paramountcy of this public interest over a more general public interest, that which requires that in the interest of a fair trial litigation should be conducted on the footing that all relevant documentary evidence is available. As a head of privilege legal professional privilege is so firmly entrenched in the law that it is not to be exorcised by judicial decision. None the less there are powerful considerations which suggest that the privilege should be confined within strict limits."
11 This passage identified the fact that, when the law accords protection to particular communications between solicitor and client, the result represents a balance between competing public interests - a public interest in the disclosure of all relevant communications, and a narrower public interest in preserving confidentiality between solicitor and client in aid of the administration of justice.
12 Determining the appropriate balance in particular circumstances has been controversial and unsettled. Thus, for instance, in Grant v Downs four of the five justices determined that a document was privileged if it was brought into existence for the sole purpose of obtaining advice or for use in legal proceedings. In Esso Australia Resources Ltd v Commissioner of Taxation (1999) 201 CLR 49 a majority of three justices (Gleeson CJ, Gaudron and Gummow JJ) held that privilege attached to a document which was brought into existence for the dominant purpose of obtaining legal advice. The decision thereby extended the scope of privilege to communications which would not have been privileged under the test established in Grant v Downs.
13 Esso is the most recent case concerning client legal privilege in the High Court. Although the balance was struck differently than in Grant v Downs, the majority adopted the rationale as expressed in Grant v Downs. They said at par 35:
"The rationale of the privilege has been explained in a number of cases, including Baker v Campbell, and Grant v Downs itself. The privilege exists to serve the public interest in the administration of justice by encouraging full and frank disclosure by clients to their lawyers. In Waterford v the Commonwealth[(1987) 163 CLR 54 at 64-65. See also Carter v Northmore Hale Davy & Leake at 128, per Brennan J; at 134, per Deane J; at 147, per Toohey J; at 163 per McHugh J] Mason and Wilson JJ explained that legal professional privilege is itself the product of a balancing exercise between competing public interests and that, given the application of the privilege, no further balancing exercise is required. As Deane J expressed it in Baker v Campbell[at114], a person should be entitled to seek and obtain legal advice in the conduct of his or her affairs, and legal assistance in and for the purposes of the conduct of actual or anticipated litigation, without the apprehension of being prejudiced by subsequent disclosure of the communication. The obvious tension between this policy and the desirability, in the interest of justice, of obtaining the fullest possible access to the facts relevant to the issues in a case lies at the heart of the problem of the scope of the privilege. Where the privilege applies, it inhibits or prevents access to potentially relevant information. The party denied access might be an opposing litigant, a prosecutor, an accused in a criminal trial, or an investigation authority. For the law, in the interests of the administration of justice, to deny access to relevant information, involves a balancing of competing considerations."
14 In Baker v Campbell, a majority of the High Court (Murphy, Wilson, Deane and Dawson JJ, Gibbs CJ, Mason and Brennan JJ dissenting) determined that privilege attached to documents seized under search warrants, and was not confined to judicial or quasi-judicial proceedings. The result, again, illustrates the close differences of opinion which have arisen in determining the proper balance between the various interests.
15 It is noteworthy that the two decisions which have the most general impact on the reach of client legal privilege, namely, Baker v Campbell and Esso, have both involved the broadening of the area in which privilege attaches.
16 It may be that the move to widening the scope of client legal privilege can be traced to some alternative formulations of the rationale which have emphasised that privilege is a principle with a human rights element, or one which reflects an aspect of the principle of the rule of law. Each of the majority justices in Baker v Campbell referred to one of these aspects. Murphy J said at 85:
"The privilege is commonly described as legal professional privilege, which is unfortunate, because it suggests that the privilege is that of the members of the legal profession, which it is not. It is the client's privilege, so that it may be waived by the client, but not by the lawyer (Reg. v Davies (1921) 21 S.R. (N.S.W.) 311, at pp. 313-314; Re Golightly [1974] 2 N.Z.L.R. 297, at p. 303; People v. Doyle (1977) 74 Cal. App. (3d) 691, at p. 692; 141 Cal. Rptr. 639 at p. 640). Its rationale is no longer the oath and honour of the lawyer as a gentleman (see Radin `The Privilege of Confidential Communication Between Lawyer and Client', California Law Review, vol. 16 (1928), p. 487). It is now supported as `a necessary corollary of fundamental, constitutional or human rights' (see A.M. & S. Europe Ltd. v. Commission of the European Communities [1983] Q.B., at 941). In Reg. v. Uljee[[1982] 1 N.Z.L.R. 561, at p. 569], Cooke J. referred to `a strong sense that any person charged or in peril of a charge has a fundamental human right to professional advice - which may not be effectively given if facts are withheld.'"
17 Wilson J said at 95:
"It is not only a matter of protection of the client. The freedom to consult one's legal adviser in the knowledge that confidential communications will be safeguarded will often make its own contribution to the general level of respect for and observance of the law within the community: see an article by Charles A. Miller, `The Challenges to the Attorney-Client Privilege', Virginia Law Review, vol. 49 (1963), p.262."
18 Deane J, in dealing with the then recent decision of the European Court of Justice in A M & S Europe Ltd v Commission of the European Communities [1983] QB 878, said at 119-120:
"the doctrine of legal professional privilege was plainly accepted by the European Court as a general principle which effectively protects privileged documents from production or seizure by administrative compulsion or in the course of an administrative inquiry. In words reminiscent of what had been said by Knight Bruce V. C. in Pearse v Pearse [(1846) 1 De G. & Sm. 12, at pp. 28-29; 63 E.R. 950, at p. 957], the members of the European Court explained the rationale of the general principle which they held to be part of the law of all member States [1983] Q.B., at 949:`That confidentiality serves the requirement, the importance of which is recognized in all of the member states, that any person must be able, without constraint, to consult a lawyer whose profession entails the giving of independent legal advice to all those in need of it.'
That general principle represents some protection of the citizen - particularly the weak, the unintelligent and the ill-informed citizen - against the leviathan of the modern state. Without it, there can be no assurance that those in need of independent legal advice to cope with the demands and intricacies of modern law will be able to obtain it without the risk of prejudice and damage by subsequent compulsory disclosure on the demand of any administrative officer with some general statutory authority to obtain information or seize documents."
19 Dawson J, in a passage which may not go much further than the traditional formulations, said at 128:
"The restriction of the privilege to the legal profession serves to emphasize that the relationship between a client and his legal adviser has a special significance because it is part of the functioning of the law itself. Communications which establish and arise out of that relationship are of their very nature of legal significance, something which would be coincidental in the case of other confidential relationships. It has been found necessary that professional guidance in the complex processes of the law should be uninhibited by the possibility that what is said to enable advice to be sought or given might later be used against the person seeking the advice."
20 The same amplification of the rationale can be seen in several other judgments. In Attorney-General for the Northern Territory v Maurice (1986) 161 CLR 475, Deane J said, at 490-1:
"It is a substantive general principle of the common law and not a mere rule of evidence that, subject to defined qualifications and exceptions, a person is entitled to preserve the confidentiality of confidential statements and other materials which have been made or brought into existence for the sole purpose of his or her seeking or being furnished with legal advice by a practising lawyer or for the sole purpose of preparing for existing or contemplated judicial or quasi-judicial proceedings: see generally, Baker v Campbell. The general principle is of greater importance to the protection and preservation of the rights, dignity and freedom of the ordinary citizen under the law and to the administration of justice and law in that it advances and safeguards the availability of full and unreserved communication between the citizen and his or her lawyer and in that it is a precondition of the informed and competent representation of the interest of the ordinary person before the courts and tribunals of the land. Its efficacy as a bulwark against tyranny and oppression depends upon the confidence of the community that it will in fact be enforced. That being so, it is not to be sacrificed even to promote the search for justice or truth in the individual case or matter and extends to protect the citizen from compulsory disclosure of protected communications or materials to any court or to any tribunal or person with authority to require the giving of information or the production of documents or other materials: see Pearse v Pearse[at 28-29]; Baker v Campbell[at 115-116]. The right of confidentiality which the principle enshrines has recently, and correctly, been described in the European Court of Justice as a `practical guarantee' and `a necessary corollary' of `fundamental, constitutional or human rights': see A. M. & S. Europe Ltd v. Commission of the European Communities[at 941, 947]; Baker v Campbell [at 85]. Indeed, the plain basis of the decision of the majority of this Court in Baker v Campbell was the acceptance of the principle as a fundamental principle of our judicial system.: see Murphy J. [(1983) 153 CLR at p. 88]; Wilson J. [(1983) 153 CLR at pp. 95-96]; Deane J. [(1983) 153 CLR at pp. 166-117]; Dawson J. [(1983) 153 CLR, at pp. 131-132]. Like other traditional common law rights, it is not to be abolished or cut down otherwise than by clear statutory provision. Nor should it be narrowly construed or artificially confined."
21 In Carter,Brennan J said at 127-8:
"In my opinion, the basic justification for allowing the privilege is the public interest in facilitating the application of the rule of law.Administration of the law is not the function of the courts alone. The law is administered more frequently and more directly by legal advisers than it is by judges. Legal professional privilege ensures that the law's writ can run effectively whenever a legal problem arises or a person seeks to chart a course of conduct in conformity with the law. The point was made by Advocate General Warner in AM & S Europe Ltd v Commission of the European Communities [at 913]:
`Whether it is described as the right of the client or the duty of the lawyer, this principle has nothing to do with the protection or privilege of the lawyer. It springs essentially from the basic need of a man in a civilised society to be able to turn to his lawyer for advice and help, and if proceedings begin, for representation; it springs no less from the advantages to a society which evolves complex law reaching into all the business affairs of persons, real and legal, that they should be able to know what they can do under the law, what is forbidden, where they must tread circumspectly, where they run risks.'
In Waterford v The Commonwealth [at 74], I said:
`the public interest served by legal professional privilege lies in its tendency to broaden the operation of the rule of law as well as to enhance the individual's capacity to secure its protection.'"
22 Toohey J, with whom Gaudron J agreed (at 158), said at 145:
"The privilege has been described as an important element in the protection according to the law of the privacy and liberty of the individual which is an essential mark of a free society [Baker v Campbell at 95, per Wilson J], as of fundamental importance to the protection and preservation of the rights, dignity and equality of the ordinary citizen under the law [Baker v Campbell at 118, 120, per Deane J. See also Attorney -General (NT) v Maurice at 490, per Deane J; Waterford v The Commonwealth at 82, per Deane J] and as no less fundamental than the right which supports the privilege against self-incrimination [Baker v Campbell at 127, per Dawson J]. In New Zealand Cooke J has described legal professional privilege in criminal matters as involving `a strong sense that any person charged or in peril of a charge has a fundamental human right to professional advice' [R v Uljee at 569]. Canadian decisions have identified the privilege as a fundamental civil and legal right [Solosky v The Queen (1979) 105 DLR (3d) 745 at 760; R v Littlechild (1979) 108 DLR (3d) 340 at 347; Descoteaux v Mierzwinski [1982] 1 SCR 860 at 880; (1982) 141 DLR (3d) 590 at 609; Geffen v Goodman Estate (1991) 81 DLR (4th) 211 at 232. The existence of the Canadian Bill of Rights at the time Soloksy was decided should be noted.]"
23 His Honour then referred to the passage extracted in the previous paragraph of these reasons from the opinion of Advocate General Warner in the European Commission case.
24 McHugh J said, at 161:
"Now that this Court has held that legal professional privilege is not a rule of evidence but a substantive rule of law, the best explanation of the doctrine is that it is `a practical guarantee of fundamental, constitutional or human rights' [A M & S Europe Ltd v Commissioner of European Communities [1983] QB 878 at 941and see Solosky v The Queen (1979) 105 DLR (3d) 745 at 760; R v Uljee [1982] 1 NZLR 561 at 569; Descoteaux v Mierzwinski [1982] 1 SCR 860 at 880; (1982) 141 DLR (3d) 590 at 609 citing R v Littlechild (1979) 108 DLR (3d) 340 at 347; Geffen v Goodman Estate (1991) 81 DLR (4th) 211 at 232; Maurice (1986) 161 CLR 475 at 490]. By protecting the confidentiality of communications between lawyer and client, the doctrine protects the rights and privacy of persons including corporations by ensuring unreserved freedom of communication with professional lawyers who can advise them of their rights under the law and, where necessary, take action on their behalf to defend or enforce those rights. The doctrine is a natural, if not necessary, corollary of the rule of law and a potent force for ensuring that the equal protection of the law is a reality."
His Honour repeated this approach in Commissioner of Australian Federal Police v Propend Finance Pty Limited (1997) 188 CLR 501, at 552.
25 Although one may discern a general tendency in the formulation of the rationale for client legal privilege to expand the circumstances in which privilege applies, one must also have regard to several decisions in which an extension of the circumstances to which privilege applies has been rejected.
26 Thus, in R v Bell; Ex parte Lees (1980) 146 CLR 141,a unanimous High Court held that the communication in confidence by a wife of her address to her solicitor was not privileged. Disclosure could be compelled by the Family Court in order to prevent frustration of an order granting custody of a child to the husband where the wife had disappeared, taking the child with her.
27 In Attorney-General for the Northern Territory of Australia v Kearney (1985) 158 CLR 500,Gibbs CJ, Mason, Wilson and Brennan JJ (Dawson J dissenting) held that legal advice given by legal officers of the Northern Territory government to the that government, in relation to the making of regulations which were in deliberate abuse of the statutory power, was not privileged.
28 Then, in Carter, Brennan, Deane and McHugh JJ (Toohey and Gaudron JJ dissenting) held that a person who had documents subject to client legal privilege could not be compelled to produce them on subpoena, even if the documents might establish the innocence of an accused, or indirectly assist his defence.
Limitation on the scope of privilege
29 Although the overall trend of the cases suggests an expanding area of privilege, it is well accepted that communications falling within what is, inaccurately, known as the crime/fraud exception do not attract privilege.
30 The description is inaccurate, first, because such communications do not fall within a protected category at all and, hence, are not excluded by way of an exception. Second, the communications are not limited to those in pursuit of a crime or fraud, but extend to communications in pursuit of an illegal or improper object.
31 In R v Cox and Railton [1884] 14 QB 153 Stephen J said at 167:
"The reason on which the rule [conferring privilege] is said to rest cannot include the case of communications, criminal in themselves, or intended to further any criminal purpose, for the protection of such communications cannot possibly be otherwise than injurious to the interests of justice, and to those of the administration of justice. Nor do such communications fall within the terms of the rule. A communication in furtherance of a criminal purpose does not `come into the ordinary scope of professional employment.' A single illustration will make this plain. It is part of the business of a solicitor to draw wills. Suppose a person, personating someone else, instructs a solicitor to draw a will in the name of the supposed testator, executes it in the name of the supposed testator, gives the solicitor his fee, and takes away the will. It would be monstrous to say that the solicitor was employed in the `ordinary scope of professional employment.' He in such a case is made an unconscious instrument in the commission of a crime."
32 And, at 168, his Lordship said:
"In order that the rule may apply there must be both professional confidence and professional employment, but if the client has a criminal object in view in his communications with his solicitor one of these elements must necessarily be absent. The client must either conspire with his solicitor or deceive him. If his criminal object is avowed, the client does not consult his adviser professionally, because it cannot be the solicitor's business to further any criminal object. If the client does not avow his object he reposes no confidence, for the state of facts, which is the foundation of the supposed confidence, does not exist. The solicitor's advice is obtained by a fraud."
33 In Bullivant, the Earl of Halsbury LC said, at 201, after stating the circumstances in which privilege attaches:
"But to that, of course, this limitation has been put, and justly put, that no Court can be called upon to protect communications which are in themselves parts of a criminal or unlawful proceeding."
34 In R v Bell; Ex parte Lees Stephen J said, at 152:
"The law, although anxious to ensure unrestrained recourse to professional advice on the part of those whose legal rights or duties are in question, has no concern to encourage those who seek advice so that they may the better undertake or continue criminal or fraudulent conduct."(See also Wilson J, at 161)
35 In Kearney, Gibbs J provided the following comprehensive review of the scope of the limitation, at 511-4:
"One exception to which the general rule is subject is that communications by a client for the purpose of being guided or helped in the commission of a crime or fraud are not privileged from discovery. This exception is frequently stated as though it were confined to crime and fraud. In Varawa v. Howard Smith & Co. Ltd. [(1910) 10 CLR 382], at p 385, Griffith C.J. said:`The point is taken now that the objection of privilege does not apply to a case of fraud, or intended fraud, or of intended crime. I am not sure that the exception has ever been extended beyond these two cases. But I am sure that it has never been held to apply to a case where all that is alleged is that the evidence will show that the plaintiff knew he had not a good cause of action.'
In Crescent Farm (Sidcup) Sports v. Sterling Offices Ltd [(1972) Ch 553], Goff J. held that communications made between solicitor and client for the purpose of committing a breach of contract or furthering a conspiracy to commit a breach of contract did not cease to be privileged. He said, [at p.565]:
`I agree that fraud in this connection is not limited to the tort of deceit and includes all forms of fraud and dishonesty such as fraudulent breach of trust, fraudulent conspiracy, trickery and sham contrivances, but I cannot feel that the tort of inducing a breach of contract or the narrow form of conspiracy pleaded in this case come within that ambit.'
In Wigmore, op.cit., par.2298, at p.573, it is said that the reasons for the protection given by the privilege `cease to operate ... where the desired advice refers not to prior wrongdoing, but to future wrongdoing', and the question is then asked, amongst others, `Must not that unlawfulness [the unlawfulness of the end for which the advice is sought] be either a crime or a civil wrong involving moral turpitude?' The learned author states, at p.577, that this question should be answered in the negative, but goes on to acknowledge that the decisions show `an inclination to mark the line at crime and civil fraud'. He adds:
`Yet it is difficult to see how any moral line can properly be drawn at that crude boundary, or how the law can protect a deliberate plan to defy the law and oust another person of his rights, whatever the precise nature of those rights may be.'
Mr Bennett, who appeared for the Attorney-General for the Northern Territory, submitted that since a public body which makes regulations for an extraneous purpose does not commit a crime or a fraud, and is not guilty of dishonesty, communications between such a body and its legal advisers for the purpose of obtaining and giving legal advice in furtherance of the unauthorized exercise of the statutory powers remain within the ambit of the privilege. The statement that a public body exercising statutory powers has acted in bad faith does not necessarily import fraud or dishonesty; it may mean no more than that the body has exercised its powers for an ulterior purpose. It was therefore submitted that it would be an unjustified extension of the existing exception which relates to communications in furtherance of crime or fraud to include within it a case in which the communications were made to seek and give assistance in the exercise of statutory powers for an ulterior purpose.
However, not all the authorities state the principle of the exception in a way that would confine it to crime or fraud. In Russell v. Jackson (1851) 9 Ha. 387, at pp 392-393 (68 ER 558, at p 560) Turner V-C. said:
`Can it then be said that the communication should be protected because it may lead to the disclosure of an illegal purpose? I think that it cannot; and that evidence which would otherwise be admissible cannot be rejected upon such a ground. On the contrary, I am very much disposed to think that the existence of the illegal purpose would prevent any privilege attaching to the communication. Where a solicitor is party to a fraud no privilege attaches to the communications with him upon the subject because the contriving of a fraud is no part of his duty as solicitor; and I think it can as little be said that it is part of the duty of a solicitor to advise his client as to the means of evading the law.
This passage has frequently been cited with apparent approval - e.g, by Isaacs J. in Varawa v. Howard Smith & Co. Ltd., [(1910) 10 CLR 382] at p 389 and by Stephen J. in Reg. v. Bell; Ex parte Lees [(1980) 146 CLR 141, at p 152]. There are other authorities in which the principle is stated with equal width. One of them, Gartside v. Outram [(1856) 26 L.J. Ch 113], is cited in Reg. v. Cox and Railton [(1884) 14 QBD 153, at pp 169-170], together with Russell v. Jackson. In another, Bullivant v. Attorney-General for Victoria [(1901) AC 196 at 201], the Earl of Halsbury L.C. said, `that no court can be called upon to protect communications which are in themselves parts of a criminal or unlawful proceeding'. In the same case Lord Shand and Lord Davey spoke of `fraud or illegality' [see at pp.203, 204-205]. It is plain from the judgment of Lord Lindley, [at p.207], that he considered that a communication with a solicitor by a client who says: `Tell me how to escape from the consequences of the Act of Parliament, although I am brought within it' would indicate an intention to seek help to evade the law by illegal conduct and would not be privileged, although if the client asked how he could do something which would not bring him within the scope of the Act, there would be evasion in another sense, but no illegality, and the communication would be privileged.
The explanation given by Turner V-C for the principle on which the exception rests, namely that a communication in furtherance of an illegal purpose is not within the ordinary scope of professional employment, was in substance accepted as correct in Reg. v. Cox and Railton, [at pp 168-169] and is now generally accepted. Cardozo J. put it shortly in Clark v. United States [(1933) 289 US 1, at p 15]: `The privilege takes flight if the relation is abused.'
These statements of the principle, and the reason on which it is based, suggest that the exception is not confined to cases of crime and fraud, even in the wide sense in which `fraud' has been used in this context, unless the meaning of that word is extended to include anything that might be described as a fraud on justice."
36 And Dawson J said at 528-9:
"It is true that different expressions are to be found in the cases to explain what is meant by crime or fraud in the present context: `any unlawful or wicked act' (Annesley v. Anglesea[(1743) 17 St. Tr. 1139, at p 1229)]; `a criminal or unlawful proceeding', `fraudulent contrivance, or ... any illegal proceeding', `an improper or an illegal act', `illegality or fraud or trickery' (Bullivant v. Attorney- General for Victoria [(1901) AC 196, at pp 201, 203, 205 and 206]); `crime or civil fraud', `wrong-doing', `illegal object' (Varawa v. Howard Smith & Co. Ltd., [at pp 386, 387 and 390]); `any illegal or improper purpose', `to frustrate the processes of law', `taint of illegality', (Reg. v. Bell; Ex parte Lees [(1980) 146 CLR 141, at pp 145, 156 and 162]); `crime or fraud or civil offence' (Baker v. Campbell [(1983) 153 CLR 52, at p 86]). Despite their apparent breadth, these expressions have, I think, been used more to explain the nature of the exception rather than to restrict the scope of the privilege."
37 In Barclays Bank Plc v Eustice [1995] 1 WLR 1238 Schiemann LJ, with whom Aldous and Butler-Sloss LJJ agreed, referred, at 1248-9, to the following passage in the judgment of Bingham LJ in Ventouris v Mountain [1991] 1 WLR 607 at 611:
"The doctrine of legal professional privilege is rooted in the public interest, which requires that hopeless and exaggerated claims and unsound and spurious defences be so far as possible discouraged, and civil disputes so far as possible settled without resort to judicial decision. To this end it is necessary that actual and potential litigants, be they claimants or respondents, should be free to unburden themselves without reserve to their legal advisers, and their legal advisers be free to give honest and candid advice on a sound factual basis, without fear that these communications may be relied on by an opposing party if the dispute comes before the court for decision. It is the protection of confidential communications between client and legal adviser which lies at the heart of legal professional privilege ... Without the consent of the client, and in the absence of iniquity or dispute between client and solicitor, no inquiry may be made into or disclosure made of any instructions which the client gave the solicitor or any advice the solicitor gave the client, whether in writing or orally."
38 Schiemann LJ continued, at 1249:
"It will be noted that in the last sentence cited Bingham L.J. referred to the `absence of iniquity.' In so doing he was recognising the effect of a line of cases which have established that advice sought or given for the purpose of effecting iniquity is not privileged. The present appeal is concerned essentially with the question whether the effecting of transactions at an undervalue for the purpose of prejudicing the interests of a creditor can be regarded as `iniquity' in this context. "Iniquity' is I believe, without having done any research on the point, Bingham LJ's word. The case law refers to `crime or fraud' (Reg v Cox and Railton (1884) 14 QBD 153, 165), `criminal or unlawful' (Bullivant v Attorney General for Victoria [1901] AC 196, 201), and `all forms of fraud and dishonesty such as fraudulent breach of trust, fraudulent conspiracy, trickery and sham contrivances' (Crescent Farm (Sidcup) Sports Ltd v Sterling Offices Ltd. [1972] CH. 553, 565). The case law indicates that `fraud' is in this context used in a relatively wide sense."
39 Then, at 1252, Schiemann LJ said:
"For reasons given earlier in this judgment we start here from a position in which, on a prima facie view, the client was seeking to enter into transactions at an undervalue the purpose of which was to prejudice the bank. I regard this purpose as being sufficiently iniquitous for public policy to require that communications between him and his solicitor in relation to the setting up of these transactions be discoverable....
If the strong prima facie case turns out to be correct then the defendants have deliberately indulged in something which I would categorise as sharp practice."
40 In Propend Brennan J said, at 514:
"In determining whether a claim of legal professional privilege can be upheld, it is open to the party resisting the claim to show reasonable grounds for believing that the communication effected by the document for which legal professional privilege is claimed was made for some illegal or improper purpose, that is, some purpose that is contrary to the public interest."
41 Gummow J described the scope of this limitation, at 563-4 as follows:
"[T]he privilege does not attach to a communication made as part of a criminal or unlawful proceeding or in furtherance of an illegal object. The privilege would not attach where the plaintiff sought legal assistance as a step in, or preparatory to, the commission of a crime or fraud, even though the solicitor was unaware of the purpose of the communication at the time it was made [R v Bell; Ex parte Lees (1980) 146 CLR 141 at 145]. The communication would still be `designed to facilitate future wrongdoing' [Carter v Northmore Hale Davy & Leake (1995) 183 CLR 121 at 163]. In addition, the privilege does not protect communications made to further a deliberate abuse of statutory power and by that abuse to prevent others from exercising their rights under the law [Attorney-General (NT) v Kearney (1985) 158 CLR 500]. It follows that the operation of the privilege is not decided, as a general proposition, merely by a determination in the instant proceeding of whether facts amounting to a crime have been proved. The nature of the alleged impropriety and thus the issue of existence of the privilege will vary from case to case."
42 A case in which the limitation was applied, and which bears some similarity to the present case, is Baker v Evans (1987) 77 ALR 565. In that case documents were seized from the offices of solicitors pursuant to a search warrant. The solicitors contended that the documents were privileged. The respondents contended, inter alia, that the documents came into existence in the course of devising and implementing a fraudulent scheme to evade sales tax, and hence, privilege was not available. The scheme involved elaborate documentation which was designed to have the effect of reducing the value of motor vehicles for sales tax purposes. The fraud alleged was not that the scheme, if implemented, would have reduced the tax payable, but rather that the documentation was produced in order to make it appear that certain transactions which reduced the value of the vehicles had been entered into, when, in truth, they had not. The case against the applicants was that the scheme was "a mere pretence". Pincus J held that there was prima facie evidence that the allegations of illegality had some foundation in fact. His Honour said at 574:
"The sworn information would have conveyed to the first respondent that a scheme had been operated which purported to reduce the value of the property sold at the critical point in the chain of transactions, but which did not in truth reduce it. The failure to achieve a reduction was not a consequence of any esoteric points of property law, but simply of the fact that the transactions which might otherwise have created a security interest were effected when those who participated in them had ceased to have any interest in the goods."
43 Another example of a case in which the claim to privilege over documents seized from the solicitor was denied is Beazley v Steinhardt [1999] FCA 447. Dowsett J was satisfied that a prima facie case of intention by the applicants to defraud the Commonwealth contrary to section 29D of the Crimes Act 1914 (Cth) had been made out, where the applicants had apparent sources of income from companies resident outside Australia, but had failed to file tax returns for a period of about 20 years. Dowsett J referred to the possibility that the structure utilised by the applicants was a sham, at par 34, as follows:
"It is also possible to infer that the applicants established a structure outside of Australia designed to assist them to conceal the true character of funds available to them, in order to avoid tax. It may be that the structure achieves that purpose in an entirely lawful way, but the concern for secrecy disclosed in some documents arguably suggests a guilty mind, or a least an awareness that the structure may be a mere facade, capable of successful attack by the revenue authorities."
44 His Honour's decision was upheld on appeal (Beazley v Steinhardt [1999] FCA 1255).
Degree of proof required
45 The major cases which have examined the degree of proof necessary to establish that a communication is not privileged have concerned instances where allegations of fraud or impropriety were made in pleadings or in criminal charges. In such circumstances, the question arose whether the pleading or the charge was alone adequate to establish the existence of wrongdoing such that the court would hold the communication not to be privileged. Whilst the circumstances of the present case are far removed from cases in which the allegation of fraud was barely substantiated, the cases have described the principles applicable to establishing the necessary level of impropriety.
46 In Bullivant, an examination was laid against executors claiming particular duties and alleging that the testator had executed certain voluntary conveyances with intent to evade payment of those duties. The Supreme Court of Victoria ordered the examination on commission of a solicitor in England. In the course of the examination, the witness was asked to produce a diary kept by the solicitors for the testator containing instructions given by the testator in relation to the voluntary conveyances.
47 The House of Lords upheld the claim for privilege. The Earl of Halsbury LC said, at 201:
"If you are to say, `I will not say what these communications are because until you have actually proved me guilty of a crime they may be privileged as confidential,' the result would be that they could never be produced at all, because until the whole thing is over you cannot have the proof of guilt. On the other hand, if it is sufficient for the party demanding the production to say, as a mere surmise or conjecture, that the thing which he is so endeavouring to inquire into may have been illegal or not, the privilege in all cases disappears at once. The line which the Courts have hitherto taken, and I hope will preserve, is this - that in order to displace the prima facie right of silence by a witness who has been put in the relation of professional confidence with his client, before that confidence can be broken you must have some definite charge either by way of allegation or affidavit or what not."
48 Then, in a passage which has particular relevance to the analysis of the facts of this case, his Lordship said, at 201-2:
"Now, my Lords, when I look at all that is to be found here, I find no such definite charge at all. If, for the purpose of evading the payment of duty to which the man was liable, he entered into some secret and covinous arrangement whereby, although he should still retain the property during his lifetime, nevertheless colourable deeds should be executed which would shew that the property was not liable to duty, that would undoubtedly be a fraud, and I should think there would be no doubt that a person who was engaged in such a transaction could be compelled either to produce the correspondence or to state the conversation shewing how the alleged fraud was intended to be carried out. But there is no such allegation - there is nothing here which any Court can regard as an allegation of fact sufficient to displace the privilege. If the fact were merely that the person did execute voluntary deeds the effect whereof was that the tax never fell upon the property at all, I do not know that there is any offence in that either in Victoria or in this country."
49 And, at 203, he said:
"[T]he judge would have to satisfy himself whether there was really established to his satisfaction a charge of fraud or something that would displace the privilege - I do not say prove it - but it would be a reasonable and proper thing under the circumstances to establish the proposition that the issue to be tried was whether there was really a fraud or not, and that this was a piece of evidence relevant to establish the fraud."(See also Lord Davey at 205).
50 The House of Lords again considered the issue in O'Rourke v Darbishire [1920] AC 581. In this litigation the heir at law and next of kin of Sir Joseph Whitworth made claims to his residuary estate. The residuary estate had originally been left to educational institutions. Sir James altered his will to leave the residue to his executors. The will contained an indication that he had confidence that they would carry out his wishes to the utmost of their power. Part of the claim was that the testator changed his will as a result of the fraud of the executors. They, it was suggested, convinced the testator that the residue would be used for educational purposes, whilst they intended to appropriate the residue largely for themselves. The executors resisted production of certain documents on the grounds that the documents were privileged.
51 Viscount Finlay said, at 604:
"The appellant also relied on the proposition that no privilege comes into existence with regard to communications made in order to get advice for the purpose of carrying out a fraud.This is clear law, and, if such guilty purpose was in the client's mind when he sought the solicitor's advice, professional privilege is out of the question. But it is not enough to allege fraud. If the communications to the solicitor were for the purpose of obtaining professional advice, there must be, in order to get rid of privilege, not merely an allegation that they were made for the purpose of getting advice for the commission of a fraud, but there must be something to give colour to the charge. The statement must be made in clear and definite terms, and there must further be some prima facie evidence that it has some foundation in fact. It is with reference to cases of this kind that it can be correctly said that the Court has a discretion as to ordering inspection of documents. It is obvious that it would be absurd to say that the privilege could be got rid of merely by making a charge of fraud. The Court will exercise its discretion, not merely as to the terms in which the allegation is made, but also as to the surrounding circumstances, for the purpose of seeing whether the charge is made honestly and with sufficient probability of its truth to make it right to disallow the privilege of professional communications. In the present case it seems to me clear that the appellant has not shown such a prima facie case as would make it right to treat the claim of professional privilege as unfounded."
52 Lord Sumner said, at 614:
"It is therefore the business of the party claiming production to meet a properly framed claim of professional privilege by showing that the privilege does not attach because it is being asserted for documents which were brought into existence in furtherance of a fraud, and he can only do this by establishing a prima facie case of fraud in fact."
53 Lord Parmoor said, at 623:
"If in the present appeal there is disclosed a real prima facie case of definite fraud, this must be found in the allegations contained in the pleadings and particulars, seeing that there has been no affidavit, and no information from any other source. In the statement of claim fraud is alleged, as an alternative to a secret trust, on the ground that the form in which the testamentary disposition of the testator was settled or arranged by Christie and Darbishire was a mere fraudulent device or scheme for appropriating, to the use of Whitworth's executors, a very large portion of the testator's estate. This allegation is not supported by the statement of any facts which might give positiveness or distinctness to the charge, but rests on nothing more than pleading, or mere surmise and conjecture."
54 Lord Wrenbury said, at 633:
"If I may venture to express this in my own words I should say that to obtain discovery on the ground of fraud the plaintiff must show to the satisfaction of the Court good ground for saying that prima facie a state of things exists which, if not displaced at the trial, will support a charge of fraud. This may be done in various ways - admissions on the pleadings of facts which go to show fraud - affidavits in some interlocutory proceedings which go to show fraud - possibly even without admission or affidavit allegations of facts which, if not disputed or met by other facts, would lead a reasonable person to see, at any rate, a strong probability that there was fraud, may be taken by the Court to be sufficient. Every case must be decided on its merits: Reg v Cox (14 QBD 153, 175). The mere use of the word `fraud' or the prefix of the adverb `fraudulently' from time to time throughout the narrative will not suffice."
55 Bullivant and O'Rourke have been the foundations for the learning on this question in Australia. The most usual starting point is the judgment of Gibbs CJ in Kearney where, at 516, he said:
"The privilege is of course not displaced by making a mere charge of crime or fraud or, as in the present case, a charge that powers have been exercised for an ulterior purpose. This was made clear in Bullivant v Attorney-General (Vict)[[1901] AC at pp. 201, 203, 205] and in O'Rourke v Darbishire ([1920] AC 581 at pp. 604, 613-614, 622-623, 632-633). As Viscount Finlay said in the latter case, `there must be something to give colour to the charge'. His Lordship continued:`The statement must be made in clear and definite terms, and there must further be some prima facie evidence that it has some foundation in fact ... The Court will exercise its discretion, not merely as to the terms in which the allegation is made, but also as to the surrounding circumstances, for the purpose of seeing whether the charge is made honestly and with sufficient probability of its truth to make it right to disallow the privilege of professional communications.'"
56 In Propend, documents were seized by the AFP from solicitors retained by the respondents to advise on certain tax matters. The respondents and the solicitor were suspected of defrauding the Commonwealth in contravention of ss 86(1)(e) and 86A of the Crimes Act 1914 (Cth) by inter alia, claiming deductions in excess of expenses actually incurred. Also, it was suspected that the respondents had disposed of a partnership in a way which resulted in the payment of all creditors except the Commissioner of Taxation contrary to the provisions of the Crimes (Tax Offences) Act 1980 (Cth).
57 In Propend, the only evidence of the illegal actions was the sworn information on the basis of which the search warrant was issued. One issue considered by the Court was whether this evidence established that the documents seized were brought into existence for an illegal or improper purpose and, hence, not subject to client legal privilege. In separate judgments the Justices held that the evidence was not sufficient to displace client legal privilege. Other than Gummow J, each of the Justices referred to the passage in the speech extracted in par 51 of these reasons of Viscount Finlay in O'Rourke, where he stipulated that in order to establish such purpose there must be "something to give colour to the charge," and to the adoption of this test by Gibbs CJ in Kearney extracted in par 55 of these reasons: see Brennan CJ at 514; Dawson J at 521; Toohey J at 534; Gaudron J at 546; McHugh J at 556; and Kirby J at 592.
THE FACTS
The Activities of Mr Petroulias and the Promoters
58 The evidence relied upon by the AFP is contained in a large number of affidavits which record the results of the investigation by the AFP into the activities of Mr Nick Petroulias and persons associated with him, including Mr Andrew Gray. Those affidavits are sworn or affirmed by the following deponents on the dates listed:
• Peter Baxter sworn on 22 June 2000;
• Stephen Joseph Brown sworn on 7 July 2000;
• Quincy Tang sworn on 18 July 2000;
• Peter John Donaldson sworn on 19 July 2000;
• Amanda Elizabeth Perks sworn on 19 July 2000;
• Leonie Jayne Bloomfield sworn on 19 July 2000;
• John Steven Burrows sworn on 19 July 2000;
• Peter Baxter sworn on 23 August 2000;
• John Steven Burrows sworn on 18 December 2000;
• Stephen Joseph Brown sworn on 17 January 2001;
• Stephen Joseph Dometto sworn on 19 January 2001;
• Peter Constantinou sworn on 19 January 2001;
• David Kenneth Wildman sworn on 19 January 2001;
• Stephen Wayne Gray sworn on 19 January 2001;
• Raewyn Helen McLean affirmed on 19 January 2001;
• Peter Zdelar sworn on 19 January 2001;
• Peter Baxter sworn on 22 January 2001;
• David Kenneth Wildman sworn on 23 January 2001;
• Quincy Tang sworn on 23 January 2001;
• Kathryn Leigh Tait sworn on 23 January 2001;
• Peter Banach sworn on 23 January 2001; and
• Allen Frederick Willams sworn on 24 January 2001.
59 The respondent relied on four affidavits sworn by Mr Clements on 10 July 2000, 14 July 2000, 27 October 2000 and 12 April 2001. Mr Clements was cross-examined on the contents of his affidavits. The respondent also relied on three further affidavits sworn by directors of clients of CDB. They are:
• Mark Rolls, director of Radioactive Clothing Pty Ltd, sworn on 10 August 2000;
• Alfred Mansour, director of A&G Steel Metal Fabrications Pty Ltd, sworn on 11 August 2000;
• Leo Moio, director of Fraser Jenkinson, filed on 11 August 2000.
60 What follows is an examination of such of that evidence as is relevant to the present question before the Court.
61 In February 1997, Mr Petroulias was engaged through his company Middleduke Pty Ltd as a consultant to the Australian Tax Office (ATO) to undertake work relating to the High Wealth Individuals Task Force. On 11 November 1997, he was appointed as an Assistant Commissioner of Taxation.
62 Toward the end of 1997, a company incorporated in the British Virgin Islands, Productivity Incentive Corporation Limited (PIC), began marketing employee incentive plans in Australia.
63 Mr Petroulias drafted promotional material for PIC which included, for instance, the following:
"Productivity Incentive Corporation Limited is an international specialist in advising businesses on capturing maximum synergies from their human resources. Through our local representatives we can provide our experience to the Australian business community. Our independent representatives can provide an initial consultation on the EROPs [Employee Reward and Ownership Plans] that can be designed to create productivity benefits. You can contact your local representative detailed on the back of the information kit."
64 In October, November and December 1997 a number of seminars where held by some solicitors and other persons acting in conjunction with PIC. One of the seminars was held by Mr Gray at the Melbourne Hilton on 26 November 1997. Mr Petroulias attended the seminar. The invitation stated that:
"This complimentary seminar will feature commentators who have extensive practical experience in employee reward and incentive schemes, including a senior representative from the Australian Taxation Office. The speakers will discuss:q Pro-active remuneration planning;
q Individual and team based incentive schemes;
q Strategic performance incentives;
q Innovative management investment;
q Performance plan implementation;
q Variations of popular incentive schemes;
q Efficacy of some schemes in terms of taxation law;
q Payroll Tax, Workcover and superannuation consequences;
q Pitfalls of some schemes - will the bubble soon burst?
q Part IVA and legislation;
q The ATO position relation to various schemes;
q Alternatives to existing schemes; and
q Productivity Incentive Plan alternatives"
65 One of the schemes offered by Mr Gray was called the Productivity Incentive Plan (PIP). The mechanics of the PIP were described in literature produced by Mr Gray as follows:
" MECHANICS OF THE PRODUCTIVITY INCENTIVE PLANThe Productivity Incentive Plan (`PIP') involves the creation of a special purpose PIP company. The object of the special purpose company is to provide an incentive for the employees of the employer company to become more productive so as to increase the profitability of the business by providing an additional reward to its employees in excess of their normal remuneration. The PIP company will be investing the capital base created by any productivity incentive payments made by the employer company to maximise employee reward in accordance with the objective.
The special purpose company will have the following types of shares:
1. Initial subscriber shares;
2. Incentive providing Shares;
3. Employee shares;
4. Special residuary shares; and,
5. Plan Manager shares.
Incentive providing shares
Each year the employer will subscribe for `incentive providing shares'. The shares will be issued at $1.00 each. The shares give the right to put a list of productivity targets and performance criteria to the PIP company which the PIP company is to supervise the achievement of.
There is an obligation on the employer subscriber of those shares to make a `a productivity incentive payment' to the PIP company each period as part of the original consideration for the purchase of the employer shares and is not entitled to receive back any part of the productivity incentive paid to the PIP. The payment of `the productivity incentive payment' which is an integral part of the consideration for the employer shares, will entitle the employer to new incentive providing shares which in turn include the right to put a new list of performance targets and performance criteria to the PIP company to manage.
If in any period, the employees do not achieve their targets in any period, the employer will only need to make a productivity incentive payment of $1.
It is expressly provided that the productivity incentive payment is part of the capital base of the PIP company.
It is also expressly provided that the productivity incentive payment should not be regarded as an integral component of any participant's current or continuing remuneration package.
Employee Shares
The employee shares will have the necessary restrictions attached to them so as to bring them within the Division 13A of the Act. Those employees who wish to participate in the scheme will apply for $1.00 shares and these will be paid by the employer on behalf of the employee. The acquisition of the employee shares will be [sic] give rise to a discount of $1.00 each for each [sic] which will trigger Division 13A to assess the discount at the time that the shares were acquired by the employee.
Special residuary shares
Special residuary shares have the sole purpose of ensuring that the employer does not receive the PIP investments in the event that all employees become disentitled to the benefits. They are essentially the same as employee shares in that they are subject to the same rights and restrictions. They exist solely to stop the return of the underlying investment to the employer company if all employee shares are forfeited any future time. In the event of a forfeiture by all employees, the employer cannot effectively benefit by being the only shareholder in the PIP company.
An employee who fails to satisfy the conditions attaching to his or her shares and their issue may forfeit his or her underlying rights to those shares. However the PIP company would continue to hold the underlying investments attributable to those forfeited employee shares. Those holding special residuary shares are effectively holding the shares and rights to the underlying investment in a trustee capacity.
Independent Fund Manager Shares
Manager shares are issued to Productivity Incentive Corporation or another independent party of suitable professional standing nominated by the employer with the participating employees to manage the PIP investments ensuring a degree of independence from the employer company and the employees. The holder of the manager shares will be entitled to control the voting of the general meeting and the board of directors. The shares will not entitle any rights to dividends or to a return of capital.
Summary
The employer company will purchase incentive providing shares which give it the right to put list [sic] of targets and performance criteria to the PIP company which independently manages the achievement of those targets and the investment of the capital base for the future benefit of the employees. If the targets are met, the employer will make a productivity incentive payment and that payment will give it the right to purchase further incentive providing shares for setting the next generation of targets. Only if the targets are not met, the productivity incentive payment will be a $1 amount. The $1 payment will nevertheless gives [sic] the employer a right to purchase further incentive providing shares for the setting the next generation of targets."
66 The tax consequences of the PIP were described in a briefing paper prepared by Mr Gray as follows:
" TAX IMPLICATIONS OF PRODUCTIVITY INCENTIVE PLANSFor the employer
• Contributions by the employer to the Plan are incurred in the course of carrying on business for the purpose of producing assessable income and are deductible.
• Contributions do not fall within the superannuation guarantee scheme and are not `wages' for payroll tax and workers compensation purposes. This is the result for most States including NSW and Victoria.
• Provided contributions made in respect of a participating employee are reasonable, the provisions of Divisions 26-35 and 26-40 of the 1997 ITAA [Income Tax Assessment Act 1997 (Cth)] (section 65) and section 109 of the Income Tax Assessment Act, 1936 (`the 1936 Act') should have no application.
• As the trustee or incentive control company is independent, it is not an `associate' of the employer nor the participating employees for FBT [Fringe Benefit Tax] purposes. No FBT liability will arise in respect of contributions made to the plan and the assets acquired by the plan entity.
• As the shares or units will be issued to the employees for market value, no FBT liability will arise. The loan fringe benefit that arises on the interest free loan is reduced to zero due to the otherwise deductible rule.
• Employees are ultimately taxed under the CGT [Capital Gains Tax] provisions and therefore, can benefit from indexation and averaging.
For the employee
• Participating employees will not be assessable on the amounts contributed by the employer.
• Participating employees are not assessable on the value of the shares or units issued to them.
• Avoids the restrictions in the new sections 108 and 109 of the Tax Act.
• Offers the following advantages over superannuation:
Ø No limit on deductible contributions provided that contributions are reasonable and commercially justifiable;
Ø No 15% contributions (surcharge) tax or SGC liability;
Ø No preservation restrictions; and,
Ø SIS investment restrictions do not apply
• Asset protection from creditors
• Each participating employee will be assessable on his share of the net income of the trust or controlling company for tax purposes.
• Distributions of income and/or capital from the trust or controlling company to participating employees will not be eligible termination payments. Taxation is effectively deferred until units or shares are redeemed by the employee.
Part IVA
Where the dominant purpose of an employer in creating the Productivity Incentive Plan is to retain key employees and increase employee productivity and provided amounts contributed to the plan are reasonable, the general anti-avoidance provisions of Part IVA of the 1936 [sic] will have no application.
Advance Opinion
An advance opinion has been obtained from the Australian Taxation Office which confirms all of the tax implications associated with the Productivity Incentive Plan."
67 Notes of Mr Gray's contribution at the seminar indicated that he cast doubt on the efficacy of other employee benefit schemes then in the market as follows:
"There can be no doubt that there is a plethora of incentive plans currently being offered by a number of organisations. We are fortunate in that we have been able to consider the efficacy of a number employee incentive plans. Some of the plans examined to date, are in our opinion, technically deficient. We know that some plans have already attracted the attention of the Australian Taxation Office. The technical deficiencies inherent in a number of other plans can, unfortunately, only be certain to attract similar attention in the future."
68 One selling point relied upon by Mr Gray was that an advance opinion had been obtained from the ATO which confirmed all the tax implications (including Part IVA matters) associated with the PIP. An advance opinion is administratively binding on the Commissioner.
69 Mr Petroulias knew that there was a marketing advantage in having advance opinions and/or private binding rulings from the ATO. He assisted in this aspect of the activities of PIC in the following ways.
70 Geoff Strong and Nick Panos both worked at Coleman & Greig Solicitors. On 2 September 1997, Mr Panos sought an advance opinion on behalf of Productivity Incentive Australia Limited (PIA) in respect of a Productivity Incentive Trust Plan (PITP) (`the first advance opinion'). Such plans were closely related to the PIPs and achieved similar tax outcomes. PIA was described in the request as "the authorised representative of" PIC. Mr Strong controlled PIA. On 9 September 1997, Mr Petroulias sent a fax to Lowman Chow, the officer at the Hurstville office of the ATO handling the request for an advance opinion. The fax was strongly supportive of providing the advance opinion requested.
71 On 9 September 1997, Mr Panos submitted a request for an advance opinion on behalf of PIA in respect of a PIP (`the second advance opinion'). This request was directed to Mr Michael Charles at the Dandenong office of the ATO.
72 On 12 September 1997, Mr Petroulias sent a facsimile to Mr Gray attaching a record of a conversation with colleagues about a salary sacrifice arrangement and asked Mr Gray "Can we make it into a product?". Mr Petroulias sent a further facsimile to Mr Gray relating to the matter on 15 September 1997.
73 On 1 October 1997, Mr Gray wrote to an accountant who was a client of his, Mr Barry Quinn from Phillipson Fletcher Pty Ltd as follows:
"RE: EMPLOYEE INCENTIVE SCHEMESYou will recall that I mentioned the development of a [sic] new employee incentive plans which have tax benefits for both employers and employees.
For some time, we have been working on this project with Productivity Inventive Corporation Limited, a specialist remuneration planner which spends much of its time in the design of employee reward and ownership plans.
On 6 and 7 October 1997 Dr Nick Petroulias will be working with our firm to assist is [sic] us disseminating the many benefits of the new incentive trust and company plans to our more valued clients.
During those days, Nick and I will be holding selective briefings with certain clients of the firm both at our offices, and those of our clients. As we value highly our relationship with Phillipson Fletcher Pty Ltd, we wish to give Phillipson Fletcher Pty Ltd and its professional staff the opportunity of a thorough briefing in relation to the incentive plans which we believe will be of great interest to you all. A brief resume of the trust plan is enclosed.
We could arrange a briefing session either at your offices, or an exclusive briefing session for your professional staff at our offices - whichever you prefer.
There are a number of similar incentive plans being `flogged' in the market place. We know that some of those plans are now under scrutiny by the Australian Taxation Office. We also know that some of those plans are technically deficient and inevitably, will attract such scrutiny. What has been devised with the productivity incentive plans is a technically superior structure, both in creation and implementation, for better benefit of both employer and employee alike. The opportunity has been taken to capitalise on the shortcomings of other plans in the market place and improve upon their technical deficiencies. Interestingly, most other plans lack advance opinions from the Australian Taxation Office. The productivity incentive plans will have advance opinions from the ATO which we understand will be finalised in the next few days. Not only will the advance opinions deal with the efficacy of the plans themselves, but will also deal with testing the plans against the provisions of Part IVA of the Income Tax Assessment Act 1936. Our indications are that the ATO will issue favourable advance opinions (including Part IVA aspects) later this week.
Adoption of the productivity incentive plans by clients of Phillipson Fletcher also allows it as a practice, to value add to the existing, comprehensive range of professional services which it offers. Incentive plan structures of this nature must of necessity, be administered by competent professionals. In this regard, there is more than ample scope for Phillipson Fletcher to value add to its existing client fee base.
Nick and I would welcome the opportunity to speak to yourself, partners and professional staff in relation to the plans and explain to you the many advantages that they offer and their superiority in terms of other plans in the market place. If the opportunity of a briefing session holds attraction please contact me as soon as possible so that we can isolate a suitable time either at your office or ours on Monday or Tuesday of next week."
74 On 7 October 1997, Mr Gray came to Mr Quinn's office with Mr Petroulias and they gave a two hour presentation to the staff of Phillipson Fletcher Pty Ltd concerning employee share schemes.
75 There are entries in Mr Panos' diary for each of 20, 21 and 22 October reminding Mr Panos to "organise payment for Petroulias".
76 On 8 October 1997, Mr Petroulias again wrote to Lowman Chow, the ATO officer at Hurstville who had the carriage of the first advance opinion. Mr Petroulias wrote in supportive and encouraging terms, and, on the following day, a favourable advance opinion was issued.
77 On 20 November 1997, Mr Petroulias met with Mr Malcolm Cooper, the Managing Director of Australian and International Corporate Services Limited, a company which offered the service of incorporating companies around the world for its clients. Mr Petroulias inquired about establishing a company in Hong Kong with five bank accounts operated through the Hong Kong and Shanghai Bank. He said that the purpose of the arrangement was to share commission among five people. In a file note apparently relating to this possible arrangement, Mr Petroulias noted that the bank account should be in the name of PIC.
78 On 18 November 1997, Mr Petroulias sent a fax to Mr Charles concerning the second advance opinion. He made changes to the draft proposed by Mr Charles. The opinion was essentially favourable to the plan. On 25 November 1997, the second advance opinion was provided by Mr Charles in the terms suggested by Mr Petroulias.
79 On 25 November 1997, Mr Panos made a request for a further advance opinion (`the third advance opinion') in respect of a PITP. Mr Panos was acting on behalf of Morgan HR Pty Ltd (MHR) which was controlled by Richard Morgan. Mr Morgan was also involved in selling PIPs. Again, Mr Panos' request for an advance opinion began by stating that MHR was an authorised representative of PIC. This request was sent to Mr Jim Targett at the Hurstville office of the ATO. On 14 December 1997, Mr Petroulias rang Mr Targett. Mr Targett's file note of the conversation states:
195 First, the private rulings did not say that the articles could be effectively amended retrospectively. Rather, the rulings recorded that the views expressed in them were based on the assumption that the articles were amended retrospectively. This was an assumption which CDB's clients asked the ATO to accept for the purpose of making the rulings.
196 Second, the resolutions effecting the amendments did not purport to operate retrospectively. Absent some specific provision, an amendment operates from the date of the making of the special resolution (s 137 Corporations Law). The draft minutes of the extraordinary general meeting of Glow Zone, which I take by way of example, record the text of the special resolution as follows:
"1. The Company's existing Articles of Association be deleted in their entirety; and2. The amending Articles of Association be substituted as from the date of this meeting to thenceforth be the Company's Articles of Association." (emphasis added)
I infer that the special resolution was passed in the form of this draft. It is noteworthy that the chairperson of the meeting is recorded as being Mr Clements.
197 Third, even if the amendment had operated retrospectively, implementation of the scheme required the facts upon which the articles would operate. Thus, the amendment, arguably, could have provided that a target set prior to the making of the amendment be taken as the target for employees under the scheme then adopted by the articles. But no targets had been set, and hence, no basis existed for any retrospective operation of the amendments.
198 The way in which Mr Petroulias, Mr Gray and Mr Bell dealt with the question of retrospective amendment of the articles throws light on the nature of the transaction. From the outset, CDB was insistent that the new scheme operate for the 1996/97 financial year. Mr Bell only made contact with Mr Gray in November 1997; that is, after the end of the 1996/97 financial year. The retrospective amendment of the articles was meant to allow CDB to say that the scheme operated in 1996/97. The intention was revealingly expressed by Mr Petroulias in a discussion with Mr Bell, in the circumstances set out in par 105 of these reasons. Mr Petroulias suggested that Mr Bell should put forward a proposal to the ATO to "pretend the old ones [Coadys' schemes] did not exist and roll over into the new as though it was the original ... intention from the start". Consistent with this discussion, the retrospective operation of the scheme was a pretence, and was recognised by Mr Petroulias and Mr Gray to be such. In all the circumstances, there is no reason to believe that Mr Bell did not also recognise this fact.
199 The retrospective operation of the articles had nothing to say about the setting of the required targets. That was a separate issue. It was an issue apparently overlooked in the design of the pretence. Although there was a pretend scheme, there was no pretend incentive. That omission points strongly to the purported transaction being a sham.
200 Some further insight into the position of CDB can be gained from the way it dealt with Mr Gray on the issue of seeking to set targets for the employees. If the incentive arrangement was genuine, one would have expected that the employer company, rather than its solicitor, would have set the targets to be reached by its employees. The knowledge and information about the business relevant to setting the incentive targets was available to the clients far more readily than to Mr Gray. The nature and level of the targets depended on the practical circumstances of the business operations, and on judgments to be made by those operating the business. Yet CDB, on behalf of its employer clients, relied on Mr Gray to formulate the nature of the incentives to be paid to the employees.
201 For instance, it appears that Mr Petroulias raised the problem of the particulars of the incentive arrangements in the context of the Farmer Cortese application for a private ruling. Mr Bell sent Mr Gray a fax, the content of which is set out in par 125 of these reasons, which described the contributions already made as "bonus type payments" and then went on to say:
"You may need to provide us with some guidance on this aspect to be included in the Application for Private Ruling."
202 In response, Mr Gray formulated an answer which was sent by Mr Bell to Mr Petroulias on 25 February 1998. That response is set out in par 126 of these reasons. Paragraph 2 of the response refers to a binding obligation between the employer and employees which was made in or about January 1997. In Mr Bell's report of his conversation with Mr Petroulias, set out in full in par 125 of these reasons, Mr Petroulias is recorded as suggesting this very date as being acceptable to the ATO, as follows:
"He [Petroulias] requested copies of correspondence and minutes which evidence that the remuneration to be paid is binding and the date of this understanding. For example, he quoted the ideal situation as `say date is 1/1/97 - We agree to compensate you in this way ...'. That is, there is a binding obligation."
203 Furthermore, on 5 May 1998, Mr Clements made a file note concerning a discussion with Mr Gray over the draft ruling in relation to Glow Zone. Paragraph 2 of the file note, which is set out in par 137 of these reasons, again shows that Mr Clements relied upon Mr Gray to formulate the evidence of an incentive agreement as follows:
"Refer 5(b) of Ruling appln - this refers to a formal agreement.Gray was to provide this agreement, and other relevant documentation, etc."
204 Mr Gray's role is further confirmed in a fax, which is set out in par 139 of these reasons, from Mr Clements to Mr Gray on 6 May 1998. In that fax, Mr Clements recorded that, in relation to providing an explanation of the incentive agreement to the ATO, Mr Gray had said "that's what you have got me for". After receipt of the private ruling in relation to Farmer Cortese, Mr Bell sent Mr Gray a fax which is set out in par 141 of these reasons, which included the request to Mr Gray to:
"advise as to the manner in which the incentive arrangement for the year ended 30 June, 1998 is to be established."
205 Finally, as part of the resolution of the dispute over payment to Mr Gray, Mr Gray provided a sample incentive arrangement, which is set out in par 144 of these reasons, which might be used by the clients.
206 Further, the differential between the contributions paid and the salary paid to the employees of the clients is consistent with an entirely unreal transaction. For instance, the Managing Director of Fraser Jenkinson, Mr Leo Moio, received a salary of $22,400 and an employee share plan contribution of $90,000. Then, again to justify the employee share plan contribution for Mr David Miller, who was employed by Glow Zone, a remuneration consultant advised that the appropriate salary was $212,530, whereas Mr Miller was in fact paid $89,000. I do not accept that the level of the base salary and the differential between it and the total remuneration in all the circumstances, prima facie, represents a real transaction. Mr Clements was asked to explain the practical business circumstances relating to each of his clients which were relevant to the setting of the incentive payments. His evidence was not persuasive on this issue. The totality of his evidence leads me to conclude that there was no attempt at analysis by Mr Clements and his clients of strategies to provide incentives to employees for the purpose of the PIP, either before or after CDB received the draft articles.
207 Finally, the nature of the three employer companies made them unlikely participants in a genuine incentive scheme. In each case, the employer made contributions on behalf of employees who were also the owners or controllers of the companies either as directors, or shareholders, or the family of directors or shareholders. At least in the case of Mr Clements' clients - A&G and Fraser Jenkinson - the employer companies did have arm's length employees who could have participated in such a scheme, but, in each case, those employees were not included. Rather, it was the non-arm's length employees who were included in the scheme. In all the circumstances, I do not accept Mr Clements' evidence that it was intended to extend the schemes to arm's length employees in later years. There is no persuasive reason why that could not have been done immediately if the reason for establishing the schemes was to provide incentives to employees. Further, by the 1998 financial year, the PIP was, as far as the ATO was concerned, in its second year of operation, and no arm's length employees had been added to the PIP.
THE LEGAL CONSEQUENCES
208 Against the legal framework outlined earlier in these reasons, and the factual conclusions set out in the previous section, what consequences follow in respect of the claim for client legal privilege? It is convenient to examine this issue by reference separately to the effect of the improper and illegal conduct of the clients through CDB, their solicitor Mr Gray, and Mr Petroulias and the other promoters.
The effect of the clients' conduct
209 The documents passing between Mr Gray and CDB which have been seized under the warrants were brought into existence in furtherance of a prima facie wrongful claim for tax deductions on behalf of the clients. The claims involved a number of illegal or improper actions.
210 The evidence establishes that the clients lodged tax returns claiming deductions on the basis that they had implemented the employer benefit schemes. I infer that the clients made declarations when lodging the tax returns to the effect that the statements in the returns were truthful. In respect of the claims for deductions for contributions to the employee benefit schemes, the declarations were not truthful. Prima facie, the declarations were known to be false. At the relevant time, knowingly making a false declaration was an offence under s 8P of the Tax Administration Act 1953 (Cth) (TAA). The maximum penalty for a first offence is a fine of $3,000 and for a second or subsequent offence is a fine of $5,000 or imprisonment for 12 months or both.
211 Further, prima facie, in purporting to enter into the schemes the clients had the dominant purpose of obtaining a tax benefit rather than the purpose, as asserted, of providing incentives to employees. Part IVA of the ITAA 1936 contains general anti-avoidance measures in relation to tax. In essence, it allows the Commissioner of Taxation to ignore the target transactions and to impose tax as if the transactions had not occurred. For the purpose of this proceeding, I am satisfied, on a prima facie basis, that the clients' conduct in purporting to enter into employee benefit schemes falls within Part IVA.
212 The applicant argued that Part IVA established an administrative mechanism designed to protect revenue, but that it did not render illegal schemes which fell within it. Section 177F gave the Commissioner a discretion to cancel a tax benefit gained as the result of entering a scheme. Counsel for CDB emphasised the fact that the cancellation of the tax benefit was not automatic, but depended on the exercise of discretion by the Commissioner. Whilst this is so, the complete picture must take account of s 226 of the ITAA 1936 which provided that, where the Commissioner cancelled a tax benefit, there was an automatic statutory penalty of up to 50% of the amount of tax payable as a result of the cancellation of the benefit. There is, therefore, a clear punitive aspect to the regime. In my view, the fact that the provisions of Part IVA are applicable to the scheme renders the clients' actions improper in the sense required for the application of the doctrine which limits the reach of client legal privilege.
213 Finally, there is prima facie evidence that the actions of the clients, through CDB, were illegal in the ordinary sense namely, that they constituted a criminal offence. Their actions, prima facie, constituted a breach of s 29D Crimes Act 1914 (Cth), which made it an offence to defraud the Commonwealth. It was a fraud on the Commonwealth to pretend that they had entered into transactions when they had not, and in particular, when those purported transactions permitted them to avoid tax which would otherwise have been payable.
The effect of the solicitor's conduct
214 Where a client is engaged in fraudulent conduct, communications with their solicitor in furtherance of the fraud are not privileged, and that is so, whether the solicitor is party to the fraud or not.
215 But, in this case, CDB claimed that it and its clients were innocent of any fraud, even if Mr Gray was party to the fraud of Mr Petroulias and the other promoters.
216 If, contrary to my findings, CDB and the clients were not party to the underlying fraudulent avoidance of tax, but the sale of the schemes to them by Mr Gray was the implementation by him of the illegal plan organised by Mr Petroulias and the other promoters, are the documents privileged? I have found no case which considers the situation where there was no fraudulent conduct directly affecting the solicitor client relationship. However, the issue is no different in principle to the issue raised in the two cases considered in the next section, which dealt with the effect of fraud of third parties on the existence of client legal privilege. I now turn to consider that question.
The effect of the conduct of Mr Petroulias and the other promoters
217 In R v Central Criminal Court, Ex parte Francis & Francis [1989] 1 AC 346 the House of Lords considered whether documents held by a solicitor were subject to legal professional privilege. Mrs G purchased a property and engaged solicitors to act for her in that transaction. The Drug Squad of the Metropolitan Police believed that the property was purchased with funds given to Mrs G by a relative who had acquired the funds from drug trafficking. The police applied for an order to obtain access to the solicitor's file. It was accepted that Mrs G was innocent of any complicity in illegal conduct, and that the solicitors acted with complete propriety in the transaction. The statute under which the police acted did not permit access to items subject to legal privilege. But, s 10(2) of the Police and Criminal Evidence Act 1984 (UK) provided that:
"Items held with the intention of furthering a criminal purpose are not items subject to legal privilege."
218 The majority of their Lordships determined that, on the proper construction of s 10(2), the intention referred to was not restricted to the intention of the holder of the document, but extended, if the holder was a solicitor, to the client or even a third person. Lord Goff (with whom Lord Griffiths agreed at 385), addressed the question of the fraud of a third person at 395-7 as follows:
"There remains however a further question. Does the exception in subsection (2) apply (in the case of items in the possession of a solicitor) where the intention of furthering a criminal purpose is not the intention of the client, but is the intention of a person who is using the client as an innocent tool for the purpose of effecting his intention?That the words of the subsection are wide enough to embrace such an intention, I have no doubt. But once again a literal reading cannot provide, of itself, a satisfactory answer. It is necessary to consider the words in their context, including in that context not only the remainder of the section but also the evident legislative purpose.
As I have already indicated, it appears to me, having regard to the contents of subsection (1), and the construction which I have considered must be placed upon subsection (2), that the intention of the legislature was to encapsulate in section 10 the common law principle relating to what used to be called legal professional privilege. It is appropriate therefore to turn to the common law for guidance. Unfortunately, however, there is no authority directly in point; for, so far as the researches of counsel have revealed, the point has never before arisen for legal decision. It follows that it is necessary to consider the point as a matter of first impression.
The crucial question is whether the third party's criminal intention should have the effect of excluding the privilege of the client whom the third party is using as an innocent tool. The Divisional Court answered this question in the affirmative. Lloyd L.J. said ante, p. 355E-G:
`I feel great hesitation about this. But I am fortified by Mr. Newman's concession that "a criminal purpose" in section 10(2) must mean "any criminal purpose". If so, then the logic of the argument which I have accepted so far, leads to the conclusion that the criminal purpose may be the purpose of a third party as well as the client, at any rate if the client is the innocent instrument or beneficiary of the third party's criminal purpose. That is indeed the position in the present case on the facts alleged by the police.'
In considering this question, it is necessary to inquire what is the rationale of this exception to legal professional privilege at common law. This is to be discovered from Reg. v. Cox and Railton, 14 Q.B.D. 153 itself. In that case, the judgment of the Court for Crown Cases Reserved (Grove J., Pollock and Huddleston BB., Lopes, Hawkins, Stephen, Watkin Williams, Mathew, Day, and Smith JJ.) was delivered by Stephen J. He referred, at p. 167, to the judgment of Lord Brougham in Greenough v. Gaskell (1833) 1 My. & K. 98, 103, in which he stated the foundation of the rule of legal professional privilege to be as follows:
`It is out of regard to the interests of justice, which cannot be upholden, and the administration of justice, which cannot go on without the aid of men skilled in jurisprudence, in the practice of the courts, and in those matters affecting rights and obligations which form the subject of all judicial proceedings.'
Stephen J. then continued:
`This rule has been accepted and acted upon ever since, and we fully recognise its authority, but we think that the present case does not fall either under the reason on which it rests, or within the terms in which it is expressed. The reason on which the rule is said to rest cannot include the case of communications, criminal in themselves, or intended to further any criminal purpose, for the protection of such communications cannot possibly be otherwise than injurious to the interests of justice, and to those of the administration of justice. Nor do such communications fall within the terms of the rule. A communication in furtherance of a criminal purpose does not "come into the ordinary scope of professional employment."'
Now, when I have regard both to the purpose which has long been understood to underline the principle of legal professional privilege, and to the reason why communications passing between a client with a criminal purpose and a solicitor who is innocent of any such purpose are held not to be protected by such privilege, it appears to me to be immaterial to that exception whether it is the client himself, or a third party who is using the client as his innocent tool, who has the criminal intention. In either case, to adopt the words of Stephen J., the communications are intended to further a criminal purpose; in either case, the protection of such communications cannot be otherwise than injurious to the interests of justice; and in either case, the communications are in furtherance of a criminal purpose, and so cannot come within the ordinary scope of professional employment. Accordingly, unless there is some authority, or compelling reason, leading to an opposite conclusion, I would hold that the criminal intention of the third party will, in the circumstances under consideration, exclude the application of the principle of legal professional privilege at common law, even though the privilege, if it attached, would be the privilege of the client and not the third party.
I have already stated that, so far as I am aware, there is no authority which points to the opposite conclusion. Is there any compelling reason which does so? The only reason suggested in the course of argument was that the client (as opposed to the third party) might be making the relevant communications to his solicitor in circumstances in which he was entitled to assume that the matter was protected by privilege, and in which he therefore felt able to communicate with his solicitor freely and without fear that his communications might thereafter be disclosed without his consent. To that objection there are, I consider, a number of answers. The first is that his privilege will only be excluded in so far as it relates to communications (or items enclosed with such communications, or to which reference is made in them) made with the third party's intention of furthering a criminal purpose. No other communication will be excluded from the application of the privilege; and the client's confidence will to that extent be protected. Second, the client is ex hypothesi innocent of the criminal purpose; disclosure of the circumstances will not in that respect be to his disadvantage. Third, the type of case under consideration must surely be most exceptional. Fourth, and most important of all, it seems to me that the disclosure of the third party's iniquity must, in the interest of justice, prevail over the privilege of the client, innocent though he may be.
Such being the principle at common law, I can see no reason why section 10(2) of the Act of 1984 should not be construed to the same effect."
219 In Capar v Commissioner of Police (1994) 34 NSWLR 715, the applicant sought a declaration that documents in the possession of the Legal Aid Commission were subject to legal professional privilege. The applicant was charged with murder. Two of his children provided statements to the police which implicated the accused. Shortly afterwards, another of the applicant's children, named Canan, procured the two children who had made initial statements to make further statements exculpating the applicant. These later statements were left in a mail box of the Legal Aid Commission. The police applied for the issue of a search warrant to obtain the later statements from the Legal Aid Commission to assist their investigation of an attempt by Canan to pervert the course of justice. Donovan A-J concluded that the statements did not fall within the Grant v Downs test current at the time, and hence, the documents were not privileged. He then considered whether, if the documents were otherwise privileged, such privilege did not apply because the statements were part of an illegal enterprise. He found that there was prima facie evidence of illegality. He then said at 722:
"Mr Molomby, for the plaintiff, has argued in response that all the cases of illegality which have been put forward are cases which taint the client, in that in some way or another the client is involved in the fraud or illegality. He argues that the present case is no such situation, the plaintiff is not tainted by the illegal acts of Canan. It seems to me that it may be, and I put it no higher, that Canan, in attempting to assist his father by obtaining the allegedly false statements, does, for the purposes of the present situation, sufficiently taint the client. I do not need to decide that issue. Rather, it seems to me that although there are no authorities where illegality has been held to arise where the illegality was that of a third party rather than that of the client or the solicitor, nevertheless the principle of illegality still applies.The above reason why illegality may not apply in the present case was solely because the third party, Canan, in obtaining the statement, had done so unilaterally without creating any relationship between himself and the solicitor or the client at the time when he procured the statements. It would follow, in my view, that if he acted independently and unilaterally, thereby not tainting the plaintiff with the illegality, then the communication would not be one which falls within the true third party legal professional privilege. If, on the other hand, he had acted within the category of legal professional privilege, then the illegality would sufficiently taint the whole relationship for the illegality to be a basis for the removal of the privilege."
Although decided some five years after Francis, this case is not mentioned in the judgment of Donovan A-J. Even so, his Honour does not seem to express any doubt about the existence of the third party illegality exception to legal professional privilege.
220 I agree with the analysis made by Lord Goff in Francis that the rationale for legal client privilege rests on the public interest, and that the public interest is best served in extending the limitation on the reach of client legal privilege to cover cases of fraud by third parties. This would, if necessary, provide a further reason why the documents in the present case do not attract client legal privilege. Those documents form part of the implementation of the fraudulent conduct of Mr Petroulias and Mr Gray.
CONCLUSION
221 For the reasons given, the application must be dismissed. In these circumstances, it is not necessary to consider whether the privilege was lost as a result of waiver, which would have been determined, if necessary, in the final stage of the consideration of the application.
222 In the ordinary way, the costs of the proceeding should follow the event. Arrangements should be made with my Associate for the return of the documents which are the subject of the proceedings.
I certify that the preceding two hundred and twenty-two (222) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice North.
Associate:
Dated: 20 December 2001
#DATE 20:12:2001
Counsel for the Applicant: Mr Dreyfus QC with Mr Herskope Solicitor for the Applicant: Rigby Cooke Counsel for the Respondent: Mr Crennan SC with Mr Ginnane Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 4, 5, and 6 June 2001 Date of Judgment: 20 December 2001
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