Directed Electronics OE Pty Ltd v OE Solutions Pty Ltd (No 6)

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FEDERAL COURT OF AUSTRALIA

Directed Electronics OE Pty Ltd v OE Solutions Pty Ltd (No 6) [2020] FCA 64

File number(s): VID 1157 of 2017
Judge(s): ANDERSON J
Date of judgment: 7 February 2020
Catchwords:

PRACTICE AND PROCEDURE – discovery – search order – where two respondents (a company and its sole director) made discovery of documents (including those taken pursuant to search order) and objected to production of documents on the grounds of privileges – where company’s registered business address is same as home address of director – whether company and/or director had control (i.e. possession, custody or power) of disputed documents at time that search order was executed – whether company and director can resist production of documents in categories “P1A”, “P1B”, “P2”, P3” and “P4”

EVIDENCE – privilege against self-incrimination – privilege against self-exposure to penalties – whether production of disputed documents would give rise to a real and appreciable risk of the relevant kind – where documents taken pursuant to search order are in custody of independent lawyer and independent computer expert – where copies of disputed documents are in possession of director’s solicitors (and who are company’s former solicitors) – whether order directing the independent parties or the director’s solicitors to produce relevant documents would infringe the director’s right to privileges

CORPORATIONS – receivers – whether it is just and convenient to appoint a receiver over the company for purpose of producing relevant documents on behalf of the company

Held: director entitled to resist production of documents in categories P3 and P4 (which were in sole control of director at relevant time) – documents in categories P1A, P1B and P2 (in control of both company and director at relevant time) to be made available for inspection by independent parties – receiver appointed to company to produce documents

Legislation:

Australian Consumer Law (Sch 2 of the Competition and Consumer Act 2010 (Cth) s 18

Corporations Act 2001 (Cth) ss 182, 183, 1317E

Federal Court of Australia Act 1976 (Cth) ss 23, 57(1)

Evidence Act 1995 (Cth) ss 128, 187

Legal Profession Uniform Law (Sch 1 to the Legal Profession Uniform Law Application Act 2014 (Vic) Pt 9.2, ss 34, 35, 298(b)

Federal Court Rules 2011 (Cth) Div 7.5, rr 4.01(2), 7.42, 7.44, 20.02, 20.14(1)(c), 20.16, 20.17, 20.17(2)

Legal Profession Uniform Legal Practice (Solicitors) Rules 2015, rr 14-15
Cases cited:

Archer Capital 4A Pty Ltd as trustee for the Archer Capital Trust 4A v Sage Group plc (No 3) [2013] FCA 1160; 306 ALR 414

Australian Competition and Consumer Commission v Prysmian Cavi E Sistemi Energia S.R.L. (No 8) [2014] FCA 376

B v B (Matrimonial Proceedings: Discovery) [1978] Fam 181

Champion v Rohrt [2016] VSCA 215

City of Swan v McGraw-Hill Companies Inc [2014] FCA 1271; 226 FCR 462

Coshott v Coshott [2015] FCA 1284

Directed Electronics OE Pty Ltd v OE Solutions Pty Ltd (No 2) [2018] FCA 1097

Directed Electronics OE Pty Ltd v OE Solutions Pty Ltd (No 3) [2019]…

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Details
Case
[2020] FCA 64
Decision Date

CaseChat Overview and Summary

The proceeding was between Directed Electronics OE Pty Ltd (Directed) and OE Solutions Pty Ltd (OE Solutions), a company, and its sole director, Mr Meneses. The dispute involved allegations of dishonest conduct by Mr Meneses, including acting as an intermediary in the supply of goods to Directed, and secret commissions paid to him by Hanhwa Korea. Directed sought to inspect documents held by OE Solutions and Mr Meneses, which they objected to on the grounds of privilege. The primary issues were whether Mr Meneses and/or OE Solutions had control of the documents at the time the search order was executed, and whether the production of the documents would give rise to a real and appreciable risk of incrimination or exposure to penalties.

The Full Court found that the primary judge erred in his consideration of the privilege claims. The court held that the correct question was whether the relevant documents were in the control of OE Solutions, not whether they were documents "of" Mr Meneses or the company. The court also held that the primary judge focused on the nature of the documents rather than the act of production, which is central to a claim based on the privilege against self-incrimination or the penalty privilege. The court concluded that Mr Meneses was entitled to resist production of documents in categories P3 and P4, which were in his sole control at the relevant time. The documents in categories P1A, P1B, and P2, which were in the control of both OE Solutions and Mr Meneses at the relevant time, were to be made available for inspection by the independent parties. The court appointed a receiver to OE Solutions to produce the relevant documents.

The court ordered that Mr Meneses was relieved from the obligation to produce documents for inspection in categories P3 and P4 on the grounds of the privilege against self-incrimination and the privilege against self-exposure to penalties. OE Solutions was required to produce for inspection the documents in categories P1A, P1B, P1C, P1D, and P2. Mr John Lindholm of KPMG Australia was appointed as the receiver of the producible documents, with the power to instruct the independent solicitor and computer expert to produce the documents for inspection by the parties in the proceeding, including Directed. Directed was to pay the receiver's remuneration and costs, with the question of whether they should form part of the costs in the proceeding reserved to the trial judge.

Orders

Orders of the court

1. The application by the First Respondent (OE Solutions) and the Sixth Respondent (Mr Meneses) (together, the Meneses Parties) to be relieved from the obligation to produce documents for inspection by the Applicant (Directed) on the grounds of the privilege against self-incrimination and the privilege against self-exposure to penalties:

(a) in relation to OE Solutions, is dismissed; and

(b) in relation to Mr Meneses:

(i) is dismissed in respect of the documents enumerated in categories P1A, P1B and P2 of Part 2 of the Meneses Parties’ Lists of Documents filed on 18 December 2019 and 6 January 2020 (List of Documents); and

(ii) is granted in respect of the documents enumerated in categories P3 and P4 in Part 2 of the List of Documents.

2. OE Solutions is required to produce for inspection by the parties in this proceeding, including Directed, the documents enumerated in categories P1A, P1B, P1C, P1D and P2 of Part 2 of the List of Documents (Producible Documents).

3. Pursuant to s 57(1) of the Federal Court of Australia Act 1976 (Cth), Mr John Lindholm of KPMG Australia (KPMG) is appointed, without any requirement to file security, until further order as receiver of the Producible Documents (Receiver), in accordance with the powers in the Schedule of Powers or such further or other powers as the Court thinks fit.

4. The Receiver is entitled to:

(a) remuneration for work done pursuant to these orders by him and the staff of KPMG acting under his supervision to be calculated in accordance with the usual hourly rates charged by the firm as set out in the consent to act as receiver dated 3 December 2019 (being Annexure ABW-1 to the Affidavit of Anthony Watson sworn 19 December 2019) (Remuneration); and

(b) reasonable costs and expenses (including without limitation legal expenses) properly incurred by him in the performance of his duties and the exercise of his powers and any matters arising from, relating to, incidental to and in connection with the performance of his duties and the exercise of his powers pursuant to these orders (Costs and Expenses).

5. Directed will, in the first instance, pay the Remuneration and Costs and Expenses of the Receiver referred to in Order 4 above, with the question of whether they should form part of the costs in the proceeding reserved to the trial judge.

6. Liberty to apply.

Schedule of Powers

In this Schedule:

Independent Solicitor means Mark Andrew Schofield or Kenneth Chai (or both), being independent solicitors appointed pursuant to the search order made in this proceeding on 26 October 2017 and subsequent variations thereof.

Independent Computer Expert means Justin Geri or Edgar Zayas (or both), being independent computer experts appointed pursuant to the search order made in this proceeding on 26 October 2017 and subsequent variations thereof.

Producible Documents has the meaning given to that term in paragraph 2 of these Orders

1. The Receiver has the power to:

(a) instruct the Independent Solicitor and Independent Computer Expert to:

(i) produce the Producible Documents for inspection to the parties in this proceeding; and

(ii) upon request, provide copies of the Producible Documents to the parties in this proceeding or permit copies of the Producible Documents to be made by the parties in this proceeding;

(b) do all things necessary or convenient to be done for or in connection with, or as incidental to the matters referred to in sub-paragraph (a) above.

2. In order to enable him properly to discharge his functions and exercise his powers under these orders, the Receiver may obtain independent legal advice as he deems appropriate.

TABLE OF CONTENTS

Introduction and summary

[1]

Background

[14]

This proceeding

[14]

Claims of privilege

[27]

Determination by the primary judge

[31]

Appeal to the Full Court

[32]

Remitter of privilege determination

[37]

List of documents

[42]

Mr Meneses’ affidavits

[42]

Categories of documents

[46]

Protocol to determine privilege claims

[51]

Partial controversy regarding the Protocol

[55]

Explanatory documents

[61]

Summary of materials considered

[66]

Relevant principles

[67]

Discovery and control of documents

[68]

Search orders

[73]

Privileges against self-incrimination and self-exposure to penalties

[76]

Appointment of a receiver

[77]

Privilege claims

[82]

Would production of the relevant documents give rise to a real and appreciable risk of the relevant kind?

[83]

Who had control of the documents at the time the search order was executed?

[87]

Categories P1A and P1B

[88]

Category P2

[92]

Categories P3 and P4

[105]

Conclusion on control of the Disputed Documents

[111]

Production of documents

[112]

Key authorities

[116]

Griffin

[116]

Sadie Ville

[121]

Production by the independent parties

[127]

Consideration

[130]

Production by NRF

[138]

Consideration

[143]

Appointment of receiver

[157]

Scope of receiver’s powers

[165]

Conclusion

[166]

Background

Background to the litigation

Given OE Solutions is essentially a one person company, and that person (Mr Meneses) is entitled to rely on the privileges to resist production of the documents, the preferable way for the production of documents in categories P1A, P1B, P1C, P1D and P2 to occur is for a receiver to be appointed over those documents for that discrete purpose. The receiver will then be empowered to instruct the independent lawyer and independent computer expert to produce the documents for inspection by the parties in the proceeding, including Directed.BackgroundThis proceeding Directed is an Australian automotive electronics developer and supplier. It specialises in the development and distribution of in-vehicle electronics, hardware, telematics and emerging technologies. This proceeding was commenced by Directed in October 2017 against various respondents, including the Meneses parties. The other respondents included:(a)the second respondent, Hanhwa Aus Pty Ltd (Hanhwa Aus);(b)the third respondent, Han Hwa Hightech Australia Pty Ltd (Han Hwa Hightech Aus);(c)the fourth respondent, Leemen Aus Pty Ltd (Leemen Aus);(d)the fifth respondent, Hanhwa Hightech Co., Ltd (Hanhwa Korea);(e)the eighth respondent, Kichang (Ryan) Lee (Mr Lee);(f)the twelfth respondent, Leemen Co. Ltd (Leemen Korea),(collectively, Hanhwa parties). Hanhwa Aus, Han Hwa Hightech Aus and Leemen Aus are companies incorporated pursuant to the Corporations Act 2001 (Cth) (Corporations Act), while Hanhwa Korea and Leemen Korea are companies incorporated pursuant to the laws of South Korea. Directed alleges that, at all relevant times, Mr Meneses was an employee of Directed, having commenced his employment in May 2009. Mr Meneses was employed as Directed’s Business Development Manager, and had been acting as its General Manager. An affidavit made in support of the search order deposes to a number of facts supporting the allegations that Directed makes in the proceeding against Mr Meneses. Those allegations may be summarised as follows. Since 2009, Directed had acquired components, products and equipment from Hanhwa Korea. In 2010, Mr Meneses identified a new supplier for some of the products which Directed required and, from about that time onwards, Directed purchased products from OE Solutions. OE Solutions has its registered office at the Aspendale Gardens property. Directed alleges that, over a period of years, OE Solutions rendered invoices to Directed, which it paid, for the supply of products which OE Solutions acquired from one of Directed’s existing suppliers, Kenmarco Industries Pty Ltd (Kenmarco). In substance, Directed alleges that Mr Meneses dishonestly arranged for his own company, OE Solutions, to be an intermediary in the supply of goods by Kenmarco to Directed, and dishonestly charged marked-up prices to Directed. Directed alleges a range of other wrongful conduct by Mr Meneses and the other respondents to the proceeding. The allegations include that OE Solutions and Hanhwa Korea entered into a written agreement dated 12 May 2012 under which Hanhwa Korea agreed to pay secret commissions to OE Solutions. Directed alleges that Hanhwa Korea paid into the bank account of Mr Meneses not less than $1.096 million in secret commissions between 2009 and 2016.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

On 1 November 2019, the Full Court held that the primary judge erred in his consideration of the privilege claims: Meneses v Directed Electronics OE Pty Ltd [2019] FCAFC 190 (Full Court Judgment) at [11], [149]-[155] and [158] per Moshinsky, Wheelahan and Abraham JJ. The Full Court also dismissed Directed’s amended notice of contention, which is irrelevant to detail for current purposes: ibid at [11] and [156]-[157]. The Full Court subsequently held that Directed pay the Meneses parties’ costs of the application for leave to appeal and the appeal, but that the costs of the application before the primary judge be reserved: Meneses v Directed Electronics OE Pty Ltd (No 2) [2019] FCAFC 200 (Full Court Costs Judgment). The Full Court Judgment explained the primary judge’s errors as follows:[149] … in our respectful opinion the primary judge erred in his consideration of the Meneses parties’ claims based on Mr Meneses’s reliance on privilege against self-incrimination and the penalty privilege. First, in framing and answering question 1, the primary judge directed attention to whether the relevant documents were documents “of” Mr Meneses, or “of” a company. However, in our view, the correct question, at this stage of the analysis, was whether the relevant documents were in the control of OE Solutions. Rule 20.16 of the Federal Court Rules provides that a party gives discovery by serving a list of documents in accordance with r 20.17, which requires (inter alia) that a list must describe each document in the party’s control for which privilege from production is claimed, and the grounds of the privilege. The term “control” in relation to a document is defined in the Dictionary as meaning “possession, custody or power”. In B v B [1978] Fam 181 Dunn J stated that for the purposes of the corresponding 1964 English rule, O 24:… “possession” means “the right to the possession of a document.” “Custody” means “the actual, physical or corporeal holding of a document regardless of the right to its possession,” for example, a holding of a document by a party as servant or agent of the true owner. “Power” means “an enforceable right to inspect the document or to obtain possession or control of the document from the person who ordinarily has it in fact.”[150] Part of the difficulty in the present case is that the Meneses parties’ lists of documents did not indicate whether the documents identified were in the control of OE Solutions or Mr Meneses or both. … the affidavits verifying the lists of documents simply stated that the documents identified in Part 2 were in the control of Mr Meneses, either personally or in his capacity as sole director of OE Solutions. In this respect the lists of documents did not strictly comply with the relevant rules. In any event, the correct question was whether the relevant documents (being the documents in respect of which the privileges were claimed) were in the control of OE Solutions. In respect of the documents that were taken from the Aspendale Gardens property, it seems likely that at least some of the documents were in the power of OE Solutions, in that the company had an enforceable right to obtain possession of the documents. (They may also have been in its possession or custody.) It may be that, in considering whether the documents were documents “of” Mr Meneses or a company, the primary judge had in mind whether the documents were in the control of a company. However, it is not clear whether this is the case. Further and in any event, for several of the categories of documents identified in Mr Meneses’s confidential affidavit, the primary judge concluded that the documents were documents of Directed OE or the Hanhwa parties, rather than OE Solutions. However, in the context of considering whether an order for production should be made against OE Solutions, the correct enquiry was to determine whether that company had control of the relevant documents.[151] Secondly, in answering question 1, the primary judge focused on whether the nature of the documents themselves gave rise to privilege, rather than whether the act of production of the documents would give rise to a real and appreciable risk of the relevant kind. For example, in relation to categories 1 and 2, the primary judge concluded that he could not be satisfied that any of the documents in these categories “are capable of attracting Privilege” (at [69]). A similar conclusion was reached in relation to the documents in the other categories. This indicates that the primary judge focused attention on the nature of the documents themselves rather than the act of production, which is central to a claim based on the privilege against self-incrimination or the penalty privilege in a context such as this.[152] Thirdly, and relatedly, the primary judge ordered Mr Meneses (in addition to OE Solutions) to produce the relevant documents. Given the primary judge’s finding (in response to question 6) that the relevant documents had a real and appreciable tendency to incriminate Mr Meneses or to expose him to a civil penalty, we assume that the order was directed to Mr Meneses in his capacity as agent for OE Solutions. However, in light of the discussion of the principles set out earlier in these reasons, we do not consider it open to order an individual who is himself or herself at risk of prosecution or the institution of proceedings for a civil penalty to produce the relevant documents on behalf of a company. This would require that individual to undertake an act of self-incrimination or self-exposure to penalties. To the extent that the US cases suggest that an act of production by a director of a company is merely an act as agent for the company, those cases do not reflect Australian law.

Ratio Decidendi

Legal Principle Established

Hanhwa Aus, Han Hwa Hightech Aus and Leemen Aus are companies incorporated pursuant to the Corporations Act 2001 (Cth) (Corporations Act), while Hanhwa Korea and Leemen Korea are companies incorporated pursuant to the laws of South Korea. Directed alleges that, at all relevant times, Mr Meneses was an employee of Directed, having commenced his employment in May 2009. Mr Meneses was employed as Directed’s Business Development Manager, and had been acting as its General Manager. An affidavit made in support of the search order deposes to a number of facts supporting the allegations that Directed makes in the proceeding against Mr Meneses. Those allegations may be summarised as follows. Since 2009, Directed had acquired components, products and equipment from Hanhwa Korea. In 2010, Mr Meneses identified a new supplier for some of the products which Directed required and, from about that time onwards, Directed purchased products from OE Solutions. OE Solutions has its registered office at the Aspendale Gardens property. Directed alleges that, over a period of years, OE Solutions rendered invoices to Directed, which it paid, for the supply of products which OE Solutions acquired from one of Directed’s existing suppliers, Kenmarco Industries Pty Ltd (Kenmarco). In substance, Directed alleges that Mr Meneses dishonestly arranged for his own company, OE Solutions, to be an intermediary in the supply of goods by Kenmarco to Directed, and dishonestly charged marked-up prices to Directed. Directed alleges a range of other wrongful conduct by Mr Meneses and the other respondents to the proceeding. The allegations include that OE Solutions and Hanhwa Korea entered into a written agreement dated 12 May 2012 under which Hanhwa Korea agreed to pay secret commissions to OE Solutions. Directed alleges that Hanhwa Korea paid into the bank account of Mr Meneses not less than $1.096 million in secret commissions between 2009 and 2016. The claims against Mr Meneses are extensive and include breaches of duties under ss 182 and 183 of the Corporations Act, which are civil penalty provisions: ibid, s 1317E. The claims against Mr Meneses also include breaches of fiduciary duties, breaches of contractual obligations, inducing breach of contract, infringement of copyright, contraventions of s 18 of the Australian Consumer Law, being Sch 2 to the Competition and Consumer Act 2010 (Cth), and accessorial liability for the contraventions of the Corporations Act by the seventh respondent to the proceeding, Craig Mills (who is alleged to have been employed for certain periods by Directed, Han Hwa Hightech Aus and Hanhwa Aus). It is convenient to extract part of the allegations pleaded against Mr Meneses. Section H of the Further Amended Statement of Claim dated 5 August 2019 (FASOC) (the relevance of which will be discussed further below) alleges that Mr Meneses had engaged in certain “Secret Commissions Conduct”. That section of the FASOC relevantly contained the following allegations:PART B - UNLAWFUL CONDUCTH. Secret CommissionsH.1. Secret Commissions Conduct31. During and until shortly after Meneses' employment with Directed OE, Hanhwa Korea, Leemen Korea and Hanhwa Aus, at the direction of Ryan Lee, secretly and dishonestly:(a) engaged Meneses through OE Solutions to work on developing new business opportunities for Hanhwa Korea, Hanhwa Aus and Leemen Korea;(b) by themselves and/or through their associates made payments to Meneses to induce Directed OE to purchase products and components from Hanhwa Enterprise and/or Hanhwa Korea and Leemen Korea to the exclusion of alternative suppliers;Particulars(i) The Applicant refers to and relies upon the matters set out in Section 2 of Schedule 1 Particulars;(ii) In paragraph 31 of their Amended Defence filed 21 December 2018, the Hanhwa Parties allege that:(A) Secret Commission payments made between 21 July 2009 and 26 November 2009 were made by Nan-Shik Min. Nan- Shik Min is a shareholder of Hanhwa Korea, has made an affidavit of documents in this proceeding on behalf of Leemen Korea and is the wife of Y S Lee. It is to be inferred, that insofar as those payments were made by Nan- Shik Min, she did so at the request and on behalf of Hanhwa Enterprise;(B) Secret Commission payments made between 22 December 2009 and 21 May 2012 were made by Hanhwa Enterprise.(C) These are the best particulars Directed OE can currently give.(iii) The Applicant further refers to the following payments made by Hanhwa Aus to OE Solutions:(A) 22 September 2017 – $61,033.50;(B) 24 October 2017 - $50,416.30;(C) 20 November 2017 - $50,416.30;In respect of A, B and C, on 22 June 2017, Ryan Lee sent an email to Meneses at the Meneses Hanhwa Email Address, copied to the Meneses Personal Email Address, advising that outstanding commissions of $150,000 for the period January 2017 to June 2017 would be paid by Hanhwa Aus, rather than Hanhwa Korea. (HAN.001.033.7469 - Confidential)(iv) Further particulars may be provided prior to trial. These are the best particulars the Applicant is currently able to give.(c) provided to Meneses and/or OE Solutions in equity a shareholding of 40% in Hanhwa Aus;ParticularsThe Applicant refers to and relies upon the particulars to paragraph 3 above.(Secret Commissions Conduct).32. Meneses acted dishonestly in that he:(a) knew the purpose of the payments made and shareholding provided pursuant to the Secret Commissions Conduct;(b) accepted the payments and shareholding;(c) kept the payments and shareholding secret from Directed OE; and(d) procured Directed OE to purchase products from Hanhwa Enterprise and/or Hanhwa Korea and Leemen Korea to the exclusion of alternative suppliers.ParticularsThe Applicant refers to and relies upon the particulars to paragraph 31 above.…