LM Investment Mgmt Ltd v Drake

LM Investment Management Ltd (plaintiff) brought an action against Drake and two companies (defendants) seeking relief in relation to breaches of fiduciary duty and negligent misstatements. Drake, the second defendant, filed a defence but did not comply with the pleading requirements under the Uniform Civil Procedure Rules 1999 (Qld). Drake argued that he was entitled to maintain his non-complying defence on the ground of penalty privilege because compliance with the rules could result in proceedings by the Australian Securities and Investments Commission (ASIC) for a pecuniary penalty order against him. The primary issue before the court was whether Drake's potential exposure to a penalty order under the Corporations Act 2001 (Cth) entitled him to maintain a non-compliant defence on the ground of penalty privilege.

The court held that penalty privilege was a qualified privilege, which meant that the party claiming the privilege must establish that they had a duty or interest to assert the right or claim. The court found that penalty privilege could be claimed where there was a real and substantial connection between the matter complained of and the alleged penalty. However, the court held that Drake had not made out a case for penalty privilege because he had not established that there was a real and substantial connection between his non-compliant defence and the potential penalty order. The court found that the potential penalty order was too speculative and remote to constitute a real and substantial connection.

The court ordered that Drake file and serve an amended defence that complied with the pleading requirements within 28 days. The court also ordered that the plaintiff notify Drake of any challenge to any claim of privilege in the amended defence within 7 days of service. The court further ordered that Drake file an affidavit setting out the ground, basis and any relevant circumstances in support of any challenged claim of privilege within 14 days of notification of the challenge. The court also ordered that Drake pay the plaintiff’s costs of the application.