Glentham Pty Ltd v McPhee - [2007] FMCA 1939

FEDERAL MAGISTRATES COURT OF AUSTRALIA

GLENTHAM PTY LTD v McPHEE

[2007] FMCA 1939

BANKRUPTCY – Creditor’s petition – special leave application to High Court pending – applicability of general rule that Court should not sequestrate where appeal pending – different considerations where special leave application – genuine and arguable grounds – meaning of genuine.

EVIDENCE – Privilege – legal professional privilege – waiver – counsel’s advice – whether substance of advice disclosed – privilege waived.

Bankruptcy Act, 1966 (Cth)
Bankruptcy Act, 1883 (UK) s.7(4)
Evidence Act, 1995 (Cth) ss.122(2) and (4), 135

Adelaide Steamship Co Ltd & Anor v Spalvins & Ors (1998) 81 FCR 360
Ahern v DCOT (1987) 76 ALR 137
BT Australasia Pty Ltd v State of New South Wales and Another (No. 7) (1998) 153 ALR 722
Commissioner of Taxation v Rio TintoLtd (2006) 151 FCR 341; [2006] FCAFC 86
Ex parte Heyworth; in re Rhodes (1884) 14 QBD 49
Gazcorp Pty Ltd v Liverpool City Council (2006) NSWSC 490
Lipov v Alexander Fraser and Son (1978) 36 FLR 126
NRMA v Morgan (No 2) (1999) NSWSC 694
Re Verma; Ex parte Deputy Commissioner of Taxation (1984) 4 FCR 181
Re Lewin and Glasson; Ex parte Milner (1986) 67 ALR 591
Westpac Banking Corporation v Carver (2003) 126 FCR 113; [2003] FCA 22

Darvall and Fernon (Eds), Australian Bankruptcy Law and Practice, Volume 1.
The Shorter Oxford English Dictionary on Historical Principles, Vol. 1

Applicant:

GLENTHAM PTY LTD

Respondent:

MICHAEL JOHN McPHEE

File number:

PEG 274 of 2006

Judgment of:

Lucev FM

Hearing date:

7 November 2007

Date of last submission:

7 November 2007

Delivered at:

Perth

Delivered on:

16 November 2007

REPRESENTATION

Counsel for the Applicant:

Mr M. Hotchkin

Solicitors for the Applicant:

Hotchkin Hanly

Counsel for the Respondent:

Mr N.J. Timoney

Solicitors for the Respondent:

Stables Scott

ORDERS

That the respondent produce for inspection by the applicant:

(a)any written advices; or
(b)any memoranda or other records of oral advice,

constituting counsel’s advice referred to in paragraph 14 of the respondent’s affidavit of 30 October 2007, and that the respondent do so by 4:00 pm on 26 November 2007.

That the matter otherwise be adjourned to 10.15 am on 3 December 2007 for hearing of the respondent’s application to further adjourn the hearing of the creditors’ petition.

That the respondent attend court at 10.15 am on 3 December 2007 to be cross‑examined on his affidavit of 30 October 2007 and all matters referred to therein.

That the costs of the applicant’s interim application of 5 November 2007 be paid by the respondent and if not agreed, be taxed under order 62 of the Federal Court Rules by a registrar of this court.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
PERTH

PEG 274 of 2006

GLENTHAM PTY LTD

Applicant

And

MICHAEL JOHN MCPHEE

Respondent

REASONS FOR JUDGMENT

(Revised from the Transcript)

Application

The substantive application in the matter is a creditor’s petition. By way of an interim application by the respondent, dated 24 November 2006, an adjournment of the petition pending an appeal to the Supreme Court of Western Australia, Court of Appeal, against an earlier judgment of a single judge of that court was made. Relevantly the Supreme Court of Western Australia had ordered the respondent pay the applicant the sum of $781,594.96, plus $387,950.52 in interest. The Supreme Court of Western Australia, Court of Appeal, dismissed the respondent’s appeal on 12 October 2007.

Further application

The respondent now seeks a further adjournment of the creditor’s petition, pending an application to the High Court for special leave to appeal the Supreme Court of Western Australia, Court of Appeal judgment. A special leave application was filed on 22 October 2007.

The respondent’s affidavit of 30 October 2007

In support of the respondent’s application for further adjournment of these proceedings an affidavit of the respondent was sworn on 30 October 2007. At paragraph 14 of the respondent’s affidavit the following is said:
“In making this application I am acting on counsel’s advice that the grounds of proposed appeal, as set out in the application for special leave to appeal to the High Court are strongly arguable and of sufficient and special importance to justify a grant of leave and if leave is granted an appeal with good prospects of success.”
There then follows a qualification that in referring to counsel’s advice there is no intention to waive legal professional privilege.

The applicant’s interim application

The applicant, by way of an interim application on 5 November 2007, seeks production of counsel’s advice referred to in the affidavit of 30 October 2007 and attendance of the respondent for cross-examination on that advice, alleging that legal professional privilege in counsel’s advice has been waived by reason of the disclosure contained in paragraph 14 of the respondent’s affidavit of 30 October 2007.

Issue

The principal issue in these proceedings is whether legal professional privilege has been waived by the disclosure in paragraph 14 of the respondent’s affidavit and in particular whether the substance of the evidence sought to be adduced has been knowingly and voluntarily disclosed.
That in turn raises issues as to whether the respondent’s belief as to the basis for the special leave application is relevant, because in determining whether an adjournment should be granted of the creditor’s petition on the basis of the special leave application, one of the issues is whether the special leave application is genuine. Alternatively, that it is brought on genuine and arguable grounds and whether, in this particular case, the respondent believed that there were genuine grounds on the basis of counsel’s advice.

Sequestration orders – appeals and special leave applications

Ordinarily, this court will not issue a sequestration order where an appeal is pending.[1] In Westpac the Federal Court said that a special leave application was not an appeal and different considerations apply when determining whether there ought to be an adjournment of a creditor’s petition on the basis of a special leave application. They were that the application for special leave is genuine and that there were arguable grounds for concluding special leave to appeal will be granted.[2] In Westpac the question of genuineness was at the heart of the simple formulation that the Court has referred to. That formulation in turn is derived from and has an historical context in relation to the genuine and arguable grounds referred to in earlier cases concerning appeals proper.
[1] Ahern v DCOT (1987) 76 ALR 137 (“Ahern”); Westpac Banking Corporation v Carver (2003) 126 FCR 113; [2003] FCA 22 (“Westpac”).
[2] Westpac at para.18 per Beaumont J.
The word “genuine” relevantly means not spurious or authentic.[3] A brief historical overview of the genuine and arguable ground criteria necessarily commences with Ex parte Heyworth; in re Rhodes[4] to which the Court was referred in the course of argument by the applicant. That was a case which specifically concerned s.7(4) of the Bankruptcy Act, 1883 (UK) which provided in part that the Court may, if it thinks fit, stay or dismiss the petition on the ground that an appeal is pending from the judgment. It is different in its context to the relevant provisions today, for example, of the Bankruptcy Act, 1966 (Cth). But in Heyworth, Lord Justice Baggalley, said:
“But the bona fide character of the appeal is an essential matter to be considered. If the court was satisfied that the appeal was not bona fide the discretion under subsection (4) of section 7, ought to be exercised by making a receiving order on the petition. In the present case it appears to me that there is a substantial question raised by the appeal and it is possible that on the hearing of the appeal the alleged debt may be got rid of altogether. I think the registrar has exercised a very wise discretion. He has not adjourned the petition until after the appeal has been heard he has only adjourned it generally with liberty to apply, so that if the appeal is not duly prosecuted the petitioner can apply to the court to allow him to proceed with the petition.”[5]
[3] The Shorter Oxford English Dictionary on Historical Principles, Vol. 1 at 844. (“Shorter Oxford Dictionary”).
[4] (1884) 14 QBD 49 (“Heyworth”).
[5] Heyworth at 51 per Baggalley LJ.
Lord Justice Bowen agreeing with Lord Justice Baggalley observed:
“If it could be shown that the appeal from the judgment must be a frivolous one we might reverse his decision.”[6]
[6] Heyworth at 52 per Bowen LJ.
Likewise Lord Justice Fry in agreeing with Lord Justice Baggalley said:
“If the appeal from the judgment appeared to be an entirely frivolous one the proceedings on the petition ought not to be stayed.”[7]
[7] Heyworth at 52 per Fry LJ.
Thus, it would appear that in its origins there was a necessity for the appeal to be brought and prosecuted bona fide; that is in good faith. The Court notes that their Lordships also referred to or used the word “frivolous” and suspects that they did so in a legal pleading sense of the word; namely, that something be “manifestly futile”.[8]
[8] Shorter Oxford Dictionary, Vol. 1 at 809.
In Lipov v Alexander Fraser and Son,[9] Sweeney J observed, obiter, that an appeal instituted:
“…which appears bona fide is a good reason for adjourning the hearing of a bankruptcy petition based upon the judgment subject to the appeal.” [10]
[9] (1978) 36 FLR 126 (“Lipov”).
[10] Lipov at 130 per Sweeney J.
That view was seemingly based on the practice under the earlier English bankruptcy legislation[11]
[11] And in particular the 1883 and 1924 Acts.
The view in Lipov was doubted in Re Lewin and Glasson; Ex parte Milner,[12] where the Federal Court seemed to consider that the granting of the adjournment in Heyworth was conditioned by the particular statutory provision there under consideration.[13] Nevertheless, in that case the Court did say:
“The question whether the appeal is brought bona fide and on substantial grounds is, however, a circumstance to be taken into account in exercising the discretion whether or not to adjourn the petition.”[14]
[12] Re Lewinand Glasson; Ex parte Milner (1986) 67 ALR 591 (“Lewin”).
[13] Lewin at 594-595 per Pincus J referring to Bankruptcy Act, 1883 (UK) s.7(4).
[14] Lewin at 594-595 per Pincus J.
Lipov and Lewin have this much in common: they suggest that before an adjournment can be granted an appeal must be bona fide. That they have in common with Heyworth.
In Re Verma; Ex parte Deputy Commissioner of Taxation[15] the Federal Court put the question as being whether:
“The present debtor demonstrated the existence of a genuine contest ?”[16]
that is, a dispute genuinely based on substantial grounds, and went into some detail in relation to the particular evidence in that case. It is unnecessary to canvass that in this case but the Federal Court did examine the evidence to determine whether or not there was a genuine dispute. 1987 saw the now leading case of Ahern[17] decided. In Ahern the Full Court of the Federal Court held as follows:
“It is also well-established that in general a court exercising jurisdiction in bankruptcy should not proceed to sequestrate the estate of a debtor where an appeal is pending against the judgment relied on as the foundation of the bankruptcy proceedings, provided the appeal is based on genuine and arguable grounds.”[18]
[15] (1984) 4 FCR 181 (“Verma”).
[16] Verma at 187 per Beaumont J.
[17] (1987) 76 ALR 137.
[18] Ahern at 148 per Davies, Lockhart and Neaves JJ. The Full Court referred to Heyworth and Verma , as well as the early High Court case of Bayne v Baillieu (1907) 5 CLR 64.
The Full Court then continued as follows:
“These cases rest on the broad principle that before a person can be made bankrupt the court must be satisfied that the debt on which the petitioning creditor relies is due by the debtor and that if any genuine dispute exists as to the liability of the debtor to the petitioning creditor it ought to be investigated before he is made bankrupt.”[19]
[19] Ahern at 148 per Davies, Lockhart and Neaves JJ.
So like Verma, Ahern adverts to the question of whether or not there is or is not a genuine dispute as to the relevant debt. Ahern has been followed many times.[20]
[20] See the cases set out in paragraph 52.1.35 of Darvall and Fernon (Eds), Australian Bankruptcy Law and Practice, Volume 1.
In summary it can be said of genuineness in relation to a special leave application or an appeal. that they involve a consideration of whether the application or the appeal is brought in good faith, that is, that it is authentic and not spurious, and that part of that is whether it is related to the substance of the grounds and the authenticity of those grounds. The other part of the consideration that is involved, looking at Heyworth and some of the subsequent cases, is whether the appeal is then prosecuted in good faith. Here the genuineness of the special leave application is relevant in that first context rather than the latter context.

Disclosure of the substance of the evidence

Counsel’s advice would, absent legal professional privilege, be relevant, but in this case at paragraph 14 of the respondent’s affidavit of 30 October 2007, it is arguably put in issue.[21]
[21] Adelaide Steamship Co Ltd & Anor v Spalvins & Ors (1998) 81 FCR 360 at 372 per Olney, Kieffel and Finn JJ. (“Adelaide Steamship”).

The question then becomes, having regard to section 122 of the Evidence Act, 1995 (Cth)[22] whether or not the disclosure is such that the substance of the evidence has been disclosed. Section 122(2) and 122(4) of the Evidence Act provide as follows:
“(2)   Subject to subsection (5), this Division does not prevent the adducing of evidence if a client or party has knowingly and voluntarily disclosed to another person the substance of the evidence and the disclosure was not made:
(a)     in the course of making a confidential communication or preparing a confidential document; or
(b)     as a result of duress or deception; or
(c) under compulsion of law; or
(d)     if the client or party is a body established by, or a person holding office under, an Australian law–to the Minister, or the Minister of the State or Territory, administering the law, or the part of the law, under which the body is established or the office is held.
…
(4)     Subject to subsection (5), this Division does not prevent the adducing of evidence if the substance of the evidence has been disclosed with the express or implied consent of the client or party to another person other than:
[22] “Evidence Act”.
(a)     a lawyer acting for the client or party; or
(b)     if the client or party is a body established by, or a person holding an office under, an Australian law–the Minister, or the Minister of the State or Territory, administering the law, or the part of the law, under which the body is established or the office is held.”
Section 122 excludes or, at the very least, significantly modifies the common law in relation to the question of waiver of legal professional privilege.[23]
[23] Adelaide Steamship at 372 - 374 per Olney, Keifel and Finn JJ.
The relevant authorities are summarised in the New South Wales Supreme Court decision in Gazcorp Pty Ltd v Liverpool City Council.[24] This Court can do no better than read what the Court said in Gazcorp, which included a lengthy quote from NRMA v Morgan (No 2):[25]
[24] (2006) NSWSC 490 (“Gazcorp”).
[25] (1999) NSWSC 694, a judgment of Giles J which was raised with Counsel during the course of argument in the hearing.
“In NRMA v Morgan (No 2) (1999) NSWSC 694 Giles J summarised a number of the authorities in the following terms:
In Ampolex Ltd v Perpetual Trustee Co (Canberra)(1996) 40 NSWLR 12 a sentence in a Part B statement that, ‘Ampolex maintains that the correct ratio is 1:1 and has legal advice supporting this position’ was held by Rolfe J to be a disclosure of the substance of the legal advice. His Honour rejected a suggested distinction between the substance of the advice and the effect of the advice and said (at 19) that the substance could be disclosed even if the ultimate conclusion without the reasoning process was revealed. It was sufficient that there was disclosure of what the advice was. In Australian Competition and Consumer Commission v Australian Safeway Stores Pty Ltd (1998) 153 ALR 393 Goldberg J held that a reference to a brief without its contents, or any summary of or extrapolation of those contents was insufficient for disclosure of the substance.
In BT (Australasia) Pty Ltd v State of New South Wales (No 7) (1998) 153 ALR 722 Sackville J referred to distinctions between a mere reference to legal advice and disclosure of its substance and between an expression of view as to the likely outcome of litigation and the statement of the substance or effect of legal advice. His Honour observed, with reference to the earlier Federal Court decision of Adelaide Steamship Co Ltd v Spalvins (1998) 152 ALR 418, that the test of loss of privilege by disclosure of special circumstances was a quantitative test which asks whether there had been sufficient disclosure to warrant loss of privilege.
Finally, in Southern Cross Airlines Holdings Ltd (in liquidation) v Arthur Andersen & Co (1998) 28 ACSR 455 Drummond J held that a brief general summary of certain advice was insufficient to amount to a disclosure of the substance of the advice, also referring to Adelaide Steamship Co Ltd v Spalvins. His Honour did not agree with the equation of substance and effect, saying that disclosure of the effect of a document may occur where only the conclusion reached has been disclosed and that disclosure of the substance could not occur without disclosure of ‘both the conclusion and the critical but not all the steps by which that conclusion was reached’ (at 462). However, his Honour said that the decision of Rolfe J in Ampolex was undoubtedly correct and so his Honour cannot have intended that much be disclosed by way of critical steps.
One may add to these statements of principle a decision of the Full Court of the Federal Court of Australia in Adelaide Steamship Co Ltd v Spalvins (1998) 152 ALR 418 where the joint judgment of Olney, Kiefel and Finn JJ observed at 426 in relation to the phrase ‘substance of the evidence’ used in sections 122(2) and (4) that:
‘The test is a quantitative one which asks whether there has been sufficient disclosure to warrant loss of the privilege. If what is disclosed falls short of the test posed by this section there is no waiver.’
It is pertinent to observe that Rolfe J in Ampolex in fact observed (at 19) that the particular words in the statement held in context not to have constituted a disclosure of “the legal advice did not purport to state the advice or its substance or effect”.[26]
[26] Gazcorp at paras. 9-11 per Einstein J.
It is clear that there are very fine distinctions involved based on the actual words used in the challenged disclosure. In Gazcorp the disclosure in issue was an item in a chronology entry which read as follows:
“1 August 2003, letter from Marsdens advising of class 4 appeal and council’s options in regard to appearing in a submitting role. The letter also suggests that council decision to approve the development for a purpose other than a shop was manifestly unreasonable.”[27]
[27] Gazcorp at para. 12 per Einstein J. The reference there to Marsdens is a reference to the law firm Marsdens and the references to the council are references to the local government council concerned.
In Gazcorp the Supreme Court found that the words used in the second sentence quoted above constituted sufficient disclosure to amount to a disclosure of the substance of the advice given to the council in the letter. The Supreme Court observed in Gazcorp that had the first sentence only appeared, then the substance of the advice would not have been disclosed. The Court said:
“Whilst the item does not purport to quote from the advice, a fair reading of the item clearly makes good the proposition that there has been a disclosure of the substance of the evidence within the meaning of the phrase to be found in section 122(2).”[28]
[28] Gazcorp at para. 16. per Einstein J. The reference to section 122(2) is a reference to the Evidence Act.

In BT Australasia Pty Ltd v State of New South Wales and Another (No. 7)[29] the Federal Court ordered production of advices in circumstances where there were disclosures in BT Australasia’s financial statements not confined to an expression of opinion concerning the likely outcome of proceedings. In relation to the relevant advices, the Federal Court said as follows:
“They set out the conclusion expressed by Queen’s Counsel in what appear to be two advices:
(a) an advice (it is not clear whether or not in writing) to the effect that the proceedings commenced by BTA are soundly based in legal principle and have considerable strengths in relation to the various bases of legal liability alleged against the state and Telstra; and
(b) the written advice of April 1996 informing BTA that there are substantial difficulties with the State’s cross‑claim and good prospects of BT effectively resisting the cross‑claim to the point where liability under the cross‑claim (if any), would be relatively insignificant.
In my view, the substance of those advices has been disclosed. BTA was not obliged to disclose the contents of the advices in this form … and thus the disclosure was voluntary. Furthermore, it was made to the world at large. Accordingly, I consider that BTA has lost its privilege in respect of the advices.”

[29] (1998) 153 ALR 722 (“BT Australasia”).

Analysis of paragraph 14 of respondents affidavit of 30 October 2007

Paragraph 14 of the respondent’s affidavit of 30 October 2007 when analysed says this:
(a) that the respondent, acted on counsel’s advice in making this application, that is, the further interim application for an adjournment pending the outcome of the special leave application;
(b) that counsel’s advice as disclosed was not limited to the likely outcome of the proceedings, that is, the special leave application proceedings; and
(c) that counsel’s advice goes further and says that the proposed grounds of appeal if special leave is granted are:
(1) strongly arguable;
(2) of sufficient special importance to justify the grant of special leave; and
(3) if special leave were granted, the appeal itself would have good prospects of success.
Where the issue is whether there is a genuine special leave application, and that includes considerations of whether the application is brought on grounds that are authentic and not spurious, and are in fact grounds brought in good faith, the extent of the voluntary disclosure of counsel’s advice in paragraph 14 of the respondent’s affidavit of 30 October 2007 is, in the Court’s view, sufficient disclosure to constitute waiver of legal professional privilege in counsel’s advice. In the language of the Full Federal Court’s decision in Commissioner of Taxation v Rio Tinto Ltd[31], although not dealing directly with section 122(2) of the Evidence Act but the equivalent common law application of the privilege, this is a case where the respondent has made an assertion in the litigation that lays open the privileged documents to scrutiny with the consequence that an inconsistency arises between the making of the assertion and the maintenance of the privilege.[32]
[31] (2006) 151 FCR 341; [2006] FCAFC 86 (“Rio Tinto”)
[32] Rio Tinto, FCR at 360 per Kenny, Stone and Edmonds JJ; FCAFC at para. 65 per Kenny, Stone and Edmonds J.

Evidence Act, s.135

Having found that there is waiver of legal professional privilege in counsel’s advice, the Court considers that there is nothing in the evidence or the nature of the proceedings, as they presently stand, which would otherwise cause the Court to refuse to admit counsel’s advice into evidence by reason of s.135 of the Evidence Act.

Orders

The Court will hear counsel as to the final form of the orders, but the Court proposes making orders in the following terms:

(1) That the respondent produce for inspection by the applicant:
(a) any written advices; or
(b) any memoranda or other records of oral advice constituting counsel’s advice,

referred to in paragraph 14 of the respondent’s affidavit of 30 October 2007, and that the respondent do so by 4:00 pm on 26 November 2007.
(2)That the matter otherwise be adjourned to 10.15 am on 3 December 2007 for hearing of the respondent’s application to further adjourn the hearing of the creditors’ petition.
(3)That the respondent attend court at 10.15 am on 3 December 2007 to be cross‑examined on his affidavit of 30 October 2007 and all matters referred to therein.
(4) That the costs of the applicant’s interim application of 5 November 2007 be paid by the respondent and if not agreed, be taxed under order 62 of the Federal Court Rules by a registrar of this Court.

I certify that the preceding thirty-one (31) paragraphs are a true copy of the reasons for judgment of Lucev FM

Associate: M Hewitt

Date: 22 November 2007

[30] BT Australasia at 744 per Sackville J.