Re Connective Services Pty Ltd (No 2)
[2018] VSC 128
•27 March 2018
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S CI 2011 04332
IN THE MATTER OF CONNECTIVE SERVICES PTY LTD
BETWEEN:
| SLEA PTY LTD | Plaintiff |
| v | |
| CONNECTIVE SERVICES PTY LTD & ORS | Defendants |
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JUDGE: | ROBSON J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 7 February 2018 |
DATE OF JUDGMENT: | 27 March 2018 |
CASE MAY BE CITED AS: | Re Connective Services Pty Ltd (No 2) |
MEDIUM NEUTRAL CITATION: | [2018] VSC 128 |
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PROCEDURE AND PRACTICE – Application under r 66.6 of the Supreme Court (General Civil Procedure) Rules 2005 – Relevant considerations for a stay – Consideration of issue waiver – Special circumstances not established – Stay refused.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M H O’Bryan QC with Mr J Rudd | Arnold Bloch Leibler |
| For the First, Second, Fourth to Ninth Defendants | Mr D Crennan QC and Ms A M Folie | Quinn Emanuel Urquhart & Sullivan |
TABLE OF CONTENTS
Introduction.......................................................................................................................... 1
Legal principles................................................................................................................... 1
The applicants’ claim of prejudice.................................................................................... 3
Case management................................................................................................................ 4
Section 237 of the Corporations Act 2001 (Cth)............................................................... 4
Irreversible prejudice.......................................................................................................... 5
Subject matter of the appeal will be destroyed.............................................................. 5
Damage to Macquarie and the Connective companies................................................. 7
Consideration of damage to Macquarie and the Connective companies................... 9
Slea will be able to access privileged information....................................................... 10
Consideration of privilege............................................................................................... 22
Commercial prejudice caused by the involvement of Liberty................................... 22
Prejudice to Slea................................................................................................................ 23
Conclusion.......................................................................................................................... 24
HIS HONOUR:
Introduction
On 29 November 2017, the Court gave Slea leave to bring proceedings in the name of Connective Services and Connective OSN, pursuant to s 237 of the Corporations Act 2001 (Cth) (Corporations Act), against: Glenn Lees, Mark Haron and Graham Maloney, being the directors of Connective Services and Connective OSN; Connective Group Pty Ltd and their subsidiaries; and Slea and Millsave Holdings Pty Ltd, being the shareholders of Connective Services and Connective OSN.
On 11 December 2017, the Court made orders by consent that any application for a stay of the Court’s grant of leave be listed for hearing in the week of 7 February 2018.
On 15 January 2018 the Connective Services, Connective OSN, Connective Group (and its subsidiaries) (the applicants) filed an application for leave to appeal the decision of 29 November 2017.
Since 29 November 2017, order 4 of the orders of 29 November 2017, being the order that granted Slea leave to commence the derivative proceeding, has been stayed by consent.
On 24 January 2018, the applicants filed a summons seeking a stay, pursuant to r 66.16 of the Supreme Court (General Civil Procedure) Rules 2005 and the inherent jurisdiction of the Court, of order 4 of the orders of 29 November 2017, pending the hearing and determination of the application for leave to appeal and an appeal.
The application was heard on 7 February 2018. Further submissions were filed by the plaintiff on 14 February 2018. Further submissions were filed by the first, second and fourth to ninth defendants on 14 and 16 February 2018.
Legal principles
Pursuant to r 64.25 of the Supreme Court (General Civil Procedure) Rules 2005, an appeal does not operate as a stay, except so far as a court having jurisdiction in the matter otherwise directs.
Rule 66.16 expressly grants power to order a stay and provides that:
the Court may stay execution of a judgment.
Rule 67.01 provides the following definition of ‘judgment’:
In this Order, unless the context or subject matter otherwise requires—
judgment includes order
The Court has a wide discretion to grant a stay. In the exercise of that discretion, the Court is required to take into account all the circumstances of the case, and must seek to give effect to the overarching purpose of the Civil Procedure Act 2010. The onus is on the applicant to show that a stay is justified in all the circumstances.[1]
[1]Maher v Commonwealth Bank of Australia [2008] VSCA 122 (‘Maher’) [20]; Cross Country Realty Victoria Pty Ltd v Ubertas 350 William St Pty Ltd [2015] VSCA 347 (‘Cross Country’) [81].
In the normal course, the successful party is entitled to the benefit of the judgment obtained at first instance, and there is a presumption that the decision is correct.[2] There must exist special or exceptional circumstances to take the case out of the rule that an appeal or application for leave to appeal does not operate as a stay.[3]
[2]Maher [20]; Cross Country [81].
[3]Maher [22].
In Re S&D International Pty Ltd (in liq) (No 6),[4] I canvassed cases relevant for granting a stay application. After considering the relevant principles, I concluded that:[5]
In my view, the reference to special circumstances [in the cited cases] is an acknowledgment that prima facie a successful litigant is entitled to the fruits of its litigation. The applicant for a stay bears the onus of establishing that in those circumstances a stay should be granted. The grounds must be relevant to a stay of the enforcement of the proceedings, rather than grounds which may bear upon the validity or correctness of the judgment.[6]
[4]Re S&D International Pty Ltd (in liq) (No 6) [2011] VSC 119 [120]–[130].
[5]Re S&D International Pty Ltd (in liq) (No 6) [2011] VSC 119 [130].
[6]See Neate v Thoroughbred International Marketing (2012) 24 VR 318 (‘Neate’), 321; Cross Country [90] (Kyrou and McLeish JJA).
Special circumstances would ‘exist where for whatever reason, there is a real risk that it will not be possible for a successful appellant to be restored substantially to his former position if the judgment against him is executed’,[7] or where ‘a successful appellant would be deprived of the fruits of his appeal if a stay of execution were not granted [as] in such a case, the appeal might be rendered nugatory.’[8]
[7]Cellante v Kallis Industries Pty Ltd [1991] 20VR 653 (Young CJ). See also McBride v Sandland (No 2) (1918) 25 CLR 369.
[8]Maher (Dodds-Streeton JA) [25] citing Scarborough’s v Lew Junction Stores Pty Ltd (Adam J); Cross Country [82]; Cellante v Kallis Industries Pty Ltd [1991] 20VR 653, citing Wilson v Church (No 2) (1879) 12 Ch D 454; and Klinker Knitting Mills Pty Ltd v L’Union Fire Accident and General Insurance Co Ltd [1937] VLR 142.
In Maher, Dodds-Streeton JA said that:[9]
An appeal could be rendered nugatory in that sense in a variety of ways. The test could be satisfied where a defendant appeals and there is a real risk that the plaintiff would remove the proceeds of the judgment from the jurisdiction. Similarly, special circumstances may be recognised where, for example, although the respondent is solvent, the subject matter of the appeal is, in substance, irreplaceable.
The prospect that the appeal may be rendered nugatory must be balanced against the principle that the successful party is entitled to the fruits of the judgment. A stay should not be granted unless there is at least an arguable ground of appeal, although otherwise speculation as to the ultimate prospects of success is usually inappropriate.
[9]Maher [26]–[27].
In summary, special circumstances justifying a stay are to be balanced against the principle that the successful party is entitled to the fruits of the judgment, together with any specific prejudice arising from granting the stay.[10]
[10]Maher [27]; Cross Country [87].
The applicants’ claim of prejudice
Slea intends to issue the derivative leave proceedings. The applicants submit that they will be prejudiced if the proposed proceedings are not stayed for the following reasons.
Case management
The applicants submit that a stay should be granted in accordance with the principles of case management, and that if an appeal is successful, after the proceeding has been commenced, the Court’s time and judicial and administrative resources will have been wasted. Additional costs will be imposed on the parties and their business in conducting unnecessary litigation.
In response, Slea submits that case management principles do not warrant a stay. If the appeal is successful, and if Slea is not otherwise granted leave to bring the derivative proceeding, any intermediary steps can be unwound and appropriate costs orders can be made.
Slea was granted leave to bring a derivative action on the condition that Slea undertakes to pay, bear and indemnify the applicants against all costs associated with the bringing of the derivative proceeding.
In oral submissions, the applicants did not argue that case management principles amount to special circumstances. Rather it was put that as a logical and attractive linear chronology, a stay should be granted pending the outcome of any appeal.[11]
[11]Transcript of proceedings, Re Connective Services Pty Ltd (No 2) (7 February 2018) T23.
In my opinion, case management principles, without more, do not justify a stay.
Section 237 of the Corporations Act 2001 (Cth)
The applicants submit that if the judgment is executed, but their appeal is subsequently successful, they will have suffered irreversible prejudice as they will have been improperly made parties to a proceeding which had no basis in law and have been subjected to unwarranted interference in their internal management.
This is said to arise because of the nature of s 237 of the Corporations Act. The applicants say that the circumstances are distinct from a judgment that requires the payment of funds, which can simply be repaid if an appeal is successful. It is submitted that, in the case of a s 237 application, the prejudice suffered by being made a party to a proceeding without legal basis cannot be so remedied.
Slea submits a grant of leave under s 237 is not a special case that justifies a stay and that no authority is cited for such a proposition.
In my opinion, a grant of leave under s 237 is not, in and of itself, a special circumstance sufficient to deny Slea the fruits of the litigation.
Irreversible prejudice
Thirdly, the applicants submit that they will suffer the following three additional grounds of irreversible prejudice if a stay is not granted.
Subject matter of the appeal will be destroyed
The first ground is that the appeal would be rendered nugatory if stay is not granted, as the subject matter of proposed ground 3 will be destroyed. Ground 3 contests the Court’s finding that the proceeding would not be against the best interests of the Connective companies, by reason, inter alia, of the commercial impact of the Connective companies commencing proceedings against Macquarie (who is described as the group’s cornerstone investor), the Connective CEO, chairman, and executive director, and related companies.
Mr Atkins, an independent director of the Connective companies, gave evidence at trial, and in his affidavit of 6 August 2016, of the detrimental effect on Connective Services and Connective OSN, and the whole Connective Group, in bringing the derivative proceedings. The applicants contend that, if the proceeding is commenced and the Court subsequently upholds ground 3, then the appeal, if successful on this ground, would be rendered nugatory, as the damage would have already been done by commencing the proceedings.
Mr Atkins set out what he alleges would be the damage that would flow from the proceeding being successful, and damage that would flow merely from the bringing of the proceeding:
42.A business’s reputation is critical to its success and viability. Based on my marketing experience, I consider that the act of two companies being forced to sue their own directors and related companies gives an appearance of instability and disorder, which would lead to dilution of market confidence and brand value diminution.
43.Moreover, if those companies were forced to sue a major institutional investor with strong market credibility, such as Macquarie, this would further damage the company brand.
44.I consider there to be a real risk that this damage would be caused whether or not the proposed derivative is successful.
45.The nature of a derivative action, as I understand it is that the companies would be suing a cornerstone investor to force it to exit the Connective's business, and the Connective Companies' CEO, chairman and a director for breach of duties. Leaving aside the clear lack of benefit (as specified in this affidavit), the mere fact of this occurring would cause significant detriment to Connective's ability to instil and maintain confidence in key markets – particularly amongst brokers and lenders. This has the potential to have significant implications for the Connective business, especially its profitability, because:
a.Mortgage brokers are the direct customers of aggregators and the number of mortgage brokers has an impact on any aggregator’s profitability. The Connective Companies offer mortgage brokers what I understand to be unique terms which expose the business to any fluctuations in broker numbers. Relevantly, the Connective Companies allow brokers to terminate their agreement with the business at any time {on 30 days' notice) without losing their loan books. Connective also offers brokers the option of a fixed monthly fee as well as a percentage of commission per loan.
b.If the derivative action were allowed to proceed I consider that it would be difficult to explain to brokers. Effectively, we would be trying to persuade them that the business is doing well and supported by Macquarie, while having to explain why Connective Services and Connective OSN are suing Macquarie to exit it as a cornerstone investor. This is obviously highly undesirable.
c.Our competitors would be able (and I would expect them) to take advantage of the fact that Connective Services and Connective OSN would In effect be suing directors of the Connective Companies and Macquarie, when 'vying for broader market share.
…
(vi) Effect on management of the Connective Business
51.I believe that the proposed derivative action would have a [sic] impact on the day to day management of the Connective Business, beyond the distraction and consumption of time and resources which is already caused by the other litigation which has been commenced by Slea, In a number of ways as described below.
52.The proposed derivative action would undermine the confidence of senior executives and the board, particularly in relation to anything which would be seen to be reliant on Macquarie, given that in the proposed derivative action one part of the business would be seeking to sue Macquarie and force it out.
53.Three current directors of the Connective Companies are named as defendants in the proposed derivative action, inducting the group's CEO Glenn Lees and its Chairman Graham Maloney. They would face significant pressures on their time energy and focus while defending such an action. This diversion of focus and resources would detrimentally impact the management and stewardship of the business. Given that James Angus may also face specific pressures as a consequence of the proceedings, I would be the only board member not directly involved m the proposed derivative action.
54.This concerns me greatly. Both Glenn Lees and Mark Haron in particular, have been critical to the success of Connective, and any action which reduced their involvement or influence would have wide reaching ramifications for the business.
…
56.It is likely that staff engagement would be damaged by the proposed derivative action, given that it seeks to impugn leaders of the business, could force out a cornerstone investor and could impact on the success of the business going forward. Given the number of employees engaged by the Connective Companies, as illustrated by the graph [contained in the affidavit], disengagement could have a significant impact on the profitability and success of the business.
…
58.Based on my experience in corporate recruitment, I believe that it would be difficult to retain and hire senior executives, in particular, in an environment where the companies were involved in a dispute of the type set out in the proposed derivative action.
The applicants, relying on Neate, submit that in circumstances where there is a bona fide live ground of appeal that may be rendered nugatory, that this ground alone is sufficient justification for a stay to be granted. In these circumstances, the applicants submit that it is not necessary to demonstrate that the ground of appeal has a reasonable prospect of success.
Damage to Macquarie and the Connective companies
The applicants submit that there is no serious suggestion that this is a ground of appeal lacking in bona fides and whilst it may be correct that there is presently limited media attention given to the derivative leave proceeding, once Macquarie is named as a defendant, the situation may change and irretrievable damage may be caused.[12]
[12]Transcript of proceedings, Re Connective Services Pty Ltd (No 2) (7 February 2018) T25, T29.
As I understood the oral submissions on this point, the damage would be to Macquarie, who is not a party to the proceedings before me.[13] In their written submissions, the applicants state that the way they put their stay application is that it is the Connective parties’ interests which are affected by execution of the judgment. They nonetheless contend that the Court is to take into account all circumstances of the case in considering whether to grant a stay;[14] and accordingly submitted that there is no reason why the interests of third parties who are likely to be affected by the execution of a judgment cannot be taken into account by the Court, in the exercise of its discretion. Slea made contrary submissions that the interests of Macquarie are irrelevant to the question of a stay.[15]
[13]Transcript of proceedings, Re Connective Services Pty Ltd (No 2) (7 February 2018) T29.
[14]Applicants’ submissions dated 12 February 2018 at [45] citing Joskovitz v Bonnich [1964] VR 654, 656; Maher [23].
[15]Transcript of proceedings, Re Connective Services Pty Ltd (No 2) (7 February 2018) T34.
Mr Haron’s interests, who is a defendant to the present proceedings and a shareholder and director of the Connective companies, were also said to be relevant, but no appearance was made on his behalf at the hearing.
Slea submits that the submission has misstated the relevant legal principles, as the consideration was whether the appeal itself would be rendered nugatory, not whether a ground would be. In other words, whether the result of the appeal would be rendered nugatory.[16]
[16]Transcript of proceedings, Re Connective Services Pty Ltd (No 2) (7 February 2018) T31, referring to Maher [24].
Slea, in response to the alleged damage that is said will be suffered by the Connective companies if a stay is not granted, submits that the parties are commercial, trading companies, and that disputes relating to commercial disputes are neither exceptional nor inherently damaging. Slea also emphasises that the allegations of misconduct that will be raised in the derivative proceeding have already been raised in the ongoing oppression proceeding, and no evidence was produced to show that those allegations, in the oppression proceeding, have occasioned the companies any commercial prejudice.[17]
[17]Transcript of proceedings, Re Connective Services Pty Ltd (No 2) (7 February 2018) T35.
Slea submits that the harm deposed to by Mr Atkins was considered in the application for derivative leave and was not found to be relevantly persuasive in that context, and the Court determined in the application for leave that the nature and importance of the issues raised in the proposed proceeding outweighed such assertions of commercial harm that were made by Mr Atkins. There was no objective evidence to support the assertions made, which Slea says are merely statements of opinion and inherently speculative.[18]
[18]Transcript of proceedings, Re Connective Services Pty Ltd (No 2) (7 February 2018) T35.
Slea submits that there is no sufficient evidentiary foundation for the argument made that, absent the stay, there would be irreparable commercial harm to the companies, such that the appeal would be rendered nugatory.
Consideration of damage to Macquarie and the Connective companies
The assertions of Mr Atkins are made without any evidence of publicity in relation to the grant of leave, or any commercial harm that has been suffered by the Connective companies.
Mr Atkins gave evidence that the company is prospering, despite being involved in the oppression proceeding since 2011. Mr Atkins did not point to any evidence of brokers withdrawing their custom or employees leaving. Without evidence, I am not satisfied that Mr Atkins’ opinions or forecasts are correct. To deprive Slea of the benefits of judgement requires more than conjecture and assertions.
Slea will be able to access privileged information
The second ground of additional prejudice alleged is that Slea would be able to access privileged information of Connective Services and Connective OSN for the purposes of the derivative proceeding, which will be relevant to the oppression proceedings.
The applicants submit that in running the derivative proceeding in the name of the Connective companies, Slea would be expected to access the companies’ privileged information regarding the matters the subject of the proceeding (particularly about the restructure and sale to Macquarie). The applicants submit that the same matters are in issue in the oppression proceeding where Slea’s interests are opposed to the Connective companies’ interest. To date, the legal advice has been protected by privilege in the oppression proceeding.
The applicants submit that the privileged information would be disclosed as soon as a defence is filed. The applicants contend that there is an almost inevitable risk that the directors will refer to legal advice, they received leading up to the restructure and transaction, in their defences to the derivative proceeding. The applicants argue that in the circumstances, where a director would invoke advice in their defence, that would amount to an issue waiver, of the kind identified in Liquorland (Australia) Pty Ltd v Anghie,[19] on the grounds that the state of mind of the directors relates directly to an issue in the litigation and that this state of mind was affected by legal advice received in relation to the transaction.
[19]Liquorland (Australia) Pty Ltd v Anghie [2003] VSC 73 (Byrne J) (‘Liquorland’).
The claims made against the directors in the derivative proceeding include that the Connective companies entered into the transactions for an improper purpose. Such a claim requires an assessment of the purpose for which the power was exercised by the director in the particular case. This requires a consideration of the subjective reasons and beliefs of the directors in respect of the conduct.[20]
[20]Applicants’ submissions dated 12 February 18 at [16] citing Permanent Building Society v Wheeler (1994) 11 WAR 187; Re Southern Resources Ltd (1989) 15 ACLR 770; Ford’s Principles of Corporations Law, 15th ed, [8.230]; Hindle v John Cotton Ltd (1919) 56 Sc LR 625, 630–631 (Viscount Finlay).
The applicants submit that the directors are accordingly expected to plead in their defences, the purposes for which they say they caused the companies to enter into the transactions. To the extent that the directors’ purposes were informed by legal advice received by the Connective parties’ boards, regarding the transactions, the fact of reliance upon such advice would need to be particularised.
The applicants argue that the directors may also invoke ss 1318 and 189 of the Corporations Act and seek to establish they acted honestly, or in reasonable reliance upon legal advice, and are, therefore, likely to plead matters raising their state of mind in entering into the transactions, as informed by legal advice received by Connective’s board, and may expressly defend, plead or particularise the legal advice received.
The applicants contend that, therefore, in the derivative proceeding, the directors’ pleaded defence will necessarily put in issue the purposes, for which they entered into the transactions, raising for consideration, their subjective belief or intention, that they exercised their powers for permissible purposes.
The applicants submit that pleading a state of mind as informed by legal advice results in a waiver of privilege over the relevant state of mind. The applicants refer to s 122 of the Evidence Act 2008, which reflects the common law test for waiver,[21] and submit that a party can waive legal professional privilege by merely filing a pleading or particulars,[22] as a result of the inconsistency in pleading reliance on the advice, whilst also seeking to shield it.
[21]Mann v Carnell (1991) 201 CLR 1, 13; Expense Reduction Analysts Group Pty Ltd v Armstrong Strategic Management and Marketing Pty Ltd (2013) 250 CLR 303 [32].
[22]Applicants’ submissions dated 12 February 18 at [22]–[24]; citing Vic Hotel v DC Payments Australasia [2015] VSCA 101; Macquarie Bank Limited v Arup Pty Limited [2016] FCAFC 117 [31].
Section 122 of the Evidence Act relevantly provides:
(2)…this Division does not prevent the adducing of evidence if the client or party concerned has acted in a way that is inconsistent with the client or party objecting to the adducing of the evidence because it would result in a disclosure of a kind referred to in section 118, 119 or 120;
(3)Without limiting subsection (2), a client or party is taken to have so acted if:
(a)the client or party knowingly and voluntarily disclosed the substance of the evidence to another person; or
(b)the substance of the evidence has been disclosed with the express or implied consent of the client or party.
The common law test for waiver was stated by the High Court in Mann v Carnell as follows:[23]
Legal professional privilege exists to protect the confidentiality of communications between lawyer and client. It is the client who is entitled to the benefit of such confidentiality, and who may relinquish that entitlement. It is inconsistency between the conduct of the client and maintenance of the confidentiality which effects a waiver of the privilege…
Waiver may be express or implied. Disputes as to implied waiver usually arise from the need to decide whether particular conduct is inconsistent with the maintenance of the confidentiality which the privilege is intended to protect. When an affirmative answer is given to such a question, it is sometimes said that waiver is “imputed by operation of law”. This means that the law recognises the inconsistency and determines its consequences, even though such consequences may not reflect the subjective intention of the party who has lost the privilege…What brings about the waiver is the inconsistency, which the courts, where necessary informed by considerations of fairness, perceive, between the conduct of the client and maintenance of the confidentiality; not some overriding principle of fairness operating at large.
[23]Mann v Carnell (1999) 201 CLR 1, 13 (citations omitted).
In Liquorland, Byrne J canvassed authorities relevant to issue waiver. His Honour, citing Hodgson J in Standard Chartered Bank of Australia Ltd v Antico, discussed the circumstances where there may be an issue waiver:[24]
“…If a party, by pleadings or evidence, expressly or impliedly makes an assertion about the content of confidential communications between that party and a legal adviser, then fairness to the other party may mean that this assertion has to be taken as a waiver of any privilege attaching to the communication.”[25]
…
“Unfairness” in the sense that this word is used in this area of law, is typically characterised as an inconsistency between the position of the client seeking a finding as to an issue upon which the privilege communication had a bearing and, at the same time, withholding the content of the communication from the opponent and the court.[26] This will usually involve the consideration of what is the precise issue and how it is said that the communication impacts upon that issue.
[24]Liquorland [19], [32].
[25]Standard Chartered Bank of Australia Ltd v Antico (1993) 36 NSWLR 87 (‘Antico’), 94–95.
[26]Mann v Carnell (1999) 201 CLR 1, 13.
Byrne J looked at the decisions of Hodgson J in Antico, and Wayne Lawrence Pty Ltd v Hunt, where Hodgson J accepted that belief was in issue, but declined to order production. His Honour said:[27]
It does not seem to me that the assertion of a belief must, in all circumstances, be taken as consenting to evidence being led of any legal advice or confidential communication that could be relevant to whether such a belief was held or the reasonableness of such belief. It seems to me that factors relevant to whether that consent is to be considered as having been given, or whether privilege is taken to have been waived, would include the significance of the belief to the case as a whole; the relevance of the reasonableness of the belief to the case as a whole; the probability or otherwise of the legal advice being relevant to the holding of that belief, or being relevant to its reasonableness; and in circumstances where the Court inspects the legal advice in question in order to make a decision, the extent to which the legal advice does in fact bear upon the holding of the belief or its reasonableness, and the extent to which the legal advice relevant to those matters is inextricably bound up with legal advice going to other questions as to which there has been no consent or waiver. It seems to me that, on the basis of all those matters at least, the Court has to make a judgment as to what is reasonable, and what is fair in the particular case.
[27]Wayne Lawrence Pty Ltd v Hunt [1999] NSWSC 1044 [12], from Liquorland [20].
Byrne J then considered the South Australian case of Southern Equities Corp Ltd (in liq) v Arthur Andersen & Co,[28] wherein Bleby J, with whom Matheson J agreed, said:[29]
In my opinion the cases show that it is not sufficient merely to demonstrate that a party's state of mind or knowledge is in issue in order to succeed on an application that documents privileged from production on the ground of professional privilege be produced. If that were the case, privilege would almost always be waived in cases of misrepresentation, negligence and misleading and deceptive conduct where questions of a plaintiff's reliance or state of mind was in issue, and a list of documents showed that at or about the relevant time the plaintiff had some sort of legal advice which might have had some bearing on the plaintiff's state of mind. There must be something more from which it can be shown that the legal advice in question was relevant in the formation of that state of mind or belief or that the advice itself in some way becomes an issue in the action. This may be apparent from the pleadings or from some other document which has been produced in the course of discovery; it may be revealed by answers to interrogatories, or it may be self-evident from the description of the document in question contained in the list of documents. In some cases it may not become apparent until a witness is giving evidence at the trial.
[28](1997) 70 SASR 166.
[29]70 SASR 166 from Liquorland [28] (emphasis added).
After considering the authorities and the arguably differing positions, Byrne J stated:[30]
… I recoil from a principle which would have the consequence that a client litigant's plea of reliance in a negligent misstatement case, a misleading or deceptive conduct case or an estoppel case, ipso facto strips the privilege from legal communications which occurred about the time of the reliance. Furthermore, I am resistant to an argument that would have privilege waived in respect of any privileged document which might be relevant to the state of mind which has been pleaded into issue. To my mind, the putting in issue by the client of its relevant state of mind, whether it be one of reliance or otherwise, is merely the starting point for an examination of the waiver question. The chronological coincidence of the legal communication and the establishment of that state of mind does not of itself determine the question. The application of the test of unfairness, as expounded by the High Court, involves an examination of the precise nature of this pleaded state of mind and of the impact of the particular communication upon it. It is only where this examination shows that there will arise an unfair inconsistency between the position of the client setting up this state of mind and its maintenance of the privilege that waiver will arise and, then, only to the extent necessary to avoid the unfairness.
[30]Liquorland [41] (emphasis added).
In their written submissions, the applicants refer me to the following statements from the Commission of Taxation v Rio Tinto:[31]
…where issue or implied waiver is made out, the privilege holder has expressly or impliedly made an assertion about the contents of an otherwise privileged communication for the purpose of mounting a case or substantiating a defence. Where the privilege holder has put the contents of the otherwise privileged communication in issue, such as act can be regarded as inconsistent with the confidentiality that would otherwise pertain to the communication. …
…the question is not whether the Commissioner has put his state of mind in issue but whether he has directly or indirectly put the contents of the otherwise privileged communications in issue in the litigation, either in making a claim or by way of defence. Put another way, to adopt Allsop J’s language in DSE, has the Commissioner (being the privilege holder) made an assertion as part of his or her case 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?
[31](2006) 151 FCR 341 (‘Rio Tinto’) [52] [65].
The applicants also refer to the following from Council of the New South Wales Bar Association v Archer:[32]
It is not enough to bring about a waiver of client legal privilege that the client is bringing proceedings in which the content of the privileged communications could, as a reasonable possibility, be relevant and of assistance to the other party. For the client to do this is not inconsistent with the maintenance of privilege, and does not give rise to unfairness of the type in question. What would involve inconsistency and relevant unfairness is the making of express or implied assertions about the content of the privileged communications, while at the same time seeking to maintain the privilege. In this respect, it may be sufficient that the client is making assertions about the client’s state of mind, in circumstances where there were confidential communications likely to have affected that state of mind.
[32](2008) 72 NSWLR 236 [48].
And to the summary of principles on issue waiver and state of mind from the decision of Ward J (as her Honour then was) in NAB v Sheahan:[33]
•the fact that documents over which privilege is claimed are materially relevant to a pleading of state of mind is not alone sufficient to compromise the assertion of privilege.
•where a party raises a positive case in which that party’s state of mind is in issue (such as a case of undue influence or for rectification of a contract or to establish reliance on a representation or state of affairs) that behaviour is more likely to be considered inconsistent with the maintenance of privilege particularly where the state of mind is an understanding of legal rights.
…
•if, in explaining or justifying the state of mind, a party puts into issue the content of communications such as by identifying the “bases of satisfaction and exercises of discretion as the matters evidenced in the scheduled documents”, then such an assertion goes further than merely acknowledging their relevance to the issue and is inconsistent with the maintenance of privilege as “it necessarily lays them open to scrutiny”.
[33]In the matter of Idoport Pty Ltd (in liq) (recs apptd), Re; National Australia Bank v Sheahan [2012] NSWSC 58 [67] (citations omitted).
The applicants also refer to the following passage of Dixon AJA (with whom Mandie and Beach JJA agreed) in Vic Hotel Pty Ltd v DC Payments Australasia Pty Ltd[34] which concerned a claim for inducing breach of contract:[35]
I accept that merely putting a state of mind in issue will not, of itself, give rise to waiver of privilege in respect of legal advice that is relevant to the existence of the state of mind. But that is not this case. The state of mind that is put in issue concerns an understanding of legal rights, not simply knowledge of terms recorded in a contract.
[34][2015] VSCA 101.
[35]Vic Hotel Pty Ltd v DC Payments Australasia Pty Ltd [2015] VSCA 101 [46].
In circumstances where the Connective parties received legal advice in connection with the transactions, and even in the absence of an express reference to legal advice in a defence, the applicants submit that there is a real risk that the directors’ pleadings regarding their state of mind will put in issue legal advice concerning that state of mind, particularly any legal advice relevant to informing the directors’ understanding of their legal rights.
As the directing mind of the company, the directors may be considered to either hold joint privilege or common interest privilege in legal advice received by the Connective parties in relation to the Macquarie restructure and transaction with the company.
The applicants argue that under the common law, common interest privilege may be waived by either holder of the privilege,[36] and that s 124 of the Evidence Act 2008 permits a joint privilege holder to adduce evidence of legal advice in a proceeding to which the other joint privilege holder is a party.[37]
[36]Farrow Mortgage Services Pty Ltd (in liq) v Webb (1996) 39 NSWLR 601; J D Heydon, Cross on Evidence, 10th ed, 2015 [25265].
[37]See Great Southern Managers Australia Ltd (Receivers and Managers Appointed) (in liq) v Clarke (2012) 36 VR 308, where this section was applied.
Regardless of the precise characterisation of the nature of the privilege held by the Connective parties and their directors, the applicants submit in the circumstances, where the Connective companies (controlled in the litigation by Slea), issuing proceedings against their directors, the companies are unlikely to object to any waiver of privilege by the directors, and arguably cannot readily do so.
Further the applicants contend that once privilege is waived in this manner, it cannot be ‘undone’ and Slea, as well as third parties, could obtain the advice and deploy it in the oppression proceeding or for other purposes.
The applicants contend that there is a real risk of privilege being challenged by Slea given past conduct in the proceedings.[38]
[38]Transcript of proceedings, Re Connective Services Pty Ltd (No 2) (7 February 2018) T17.
In support of this proposition, the applicants refer to the judgment of Kirby J in Ampolex v Perpetual Trustee:[39]
… a stay or an order equivalent to a stay would, in my opinion, be needed, to preserve the utility of the subject matter of the litigation, namely the confidentiality of the legal advice in respect of which Ampolex claims privilege. Once that advice is disclosed, particularly if disclosed to all parties in a public trial, the genie cannot be returned to the bottle. The privilege is effectively lost. It cannot be retrieved.
[39]Ampolex v Perpetual Trustee (1996) 137 ALR 28 (‘Ampolex’) [7].
The applicants contend that pleading into issue legal advice, or expressly pleading legal advice, would not come within the circumstances recognised by the doctrine of limited waiver, and therefore privilege would be waived for all purposes and as against all persons.[40]
[40]Asahi Holdings (Australia) Pty Ltd v Pacific Equity Partners Pty Ltd (2014) 312 ALR 406; Black & Decker Inc v Flymo Ltd [1991] 3 All ER 185 (Hoffman J).
In the event there is issue waiver of the legal advice, and the application for leave to appeal and any appeal is successful, the applicants submit that the Connective parties will have been irreversibly prejudiced by the loss of privilege over their legal advice in their conduct of the oppression proceeding, and perhaps more broadly, such as in relation to tax affairs. The applicants say that they should not be put in the ‘invidious position in the oppression proceeding where they are snookered in a sense into waiving privilege and advice which is otherwise maintained and not challenged.’[41]
[41]Transcript of proceedings, Re Connective Services Pty Ltd (No 2) (7 February 2018) T28.
Slea offers to undertake that in the conduct of the derivative proceeding it will not seek production of material for which a valid claim of privilege has been made, pending the outcome of the application for leave to appeal or any appeal, in order to ensure there is no loss of privilege by reason that the directors file defences that rely upon legal advice. Slea submits that the undertaking would safeguard the interests of the applicants, without the proceedings being brought to a standstill.
Mr Crennan, one of Her Majesty’s counsel, on behalf of the applicants, submits that the undertaking is wholly inadequate to protect the Connective companies’ privileged information from disclosure to Slea, and disclosure more broadly. Mr Crennan submitted that the undertaking could not prevent the privilege being lost to the world.
Slea submits that the wider risks asserted by the applicants are speculative and far-fetched, and do not establish a proper basis for a stay. Mr O’Bryan, on behalf of Slea, contends that he would be very surprised if a defence would descend to legal advice, but said that if it did, and if the evidence on which reliance is placed in support of that denial is also set out in the pleadings, that it would probably operate as a waiver, however Slea would not press the waiver pending the outcome of the appeal.[42]
[42]Transcript of proceedings, Re Connective Services Pty Ltd (No 2) (7 February 2018) T33.
Further, Slea submits that each of the following contentions made by the applicants is wrong:
(a) The privilege is lost for all purposes;[43]
(b) The advice may then be accessed and adduced into evidence by Slea in the oppression proceeding;[44]
(c) It may also be accessed by another party, for example taxation authorities.[45]
[43]Applicants supplementary submissions dated 12 February 2018 at [34] and [38].
[44]Applicants supplementary submissions dated 12 February 2018 at [38].
[45]Applicants supplementary submissions dated 12 February 2018 at [38].
Slea refers to Goldberg v Ng,[46] and submits that it is not the case that implied or ‘imputed waiver must completely destroy the privilege. Like an express waiver, it can be limited so that it applied only in relation to particular persons, materials or purposes.’[47]
[46](1995) 185 CLR 83 (‘Goldberg v Ng’).
[47]Goldberg v Ng, 96 (Deane Dawson and Gaudron JJ); See also Re Stanhill Consolidated Ltd [1967] VR 749, 750–753 (Menhennitt J).
Secondly, Slea submits that it would be a breach of the undertaking offered for Slea to seek to access any relevant privileged documents and adduce them in evidence in the oppression proceeding. In the event that appeal results in the grant of leave to bring a derivative proceedings being overturned, the derivative proceedings (including pleadings) will become a nullity given the absence of leave. In such circumstances, there could be no implied waiver of privilege arising from the defences because the defences would no longer have any legal effect.
Thirdly, Slea submits that the assertion that third parties could seek production of the legal advice on the basis of the defences filed in the derivative proceeding is fanciful, and in any event, an implied waiver would not operate in favour of a stranger to the derivative proceeding. In the case of a stranger to the litigation, Slea submits that there would not exist the necessary inconsistency (and relevant unfairness) in the maintenance of the confidentiality of the privileged communications that brings about the waiver viz-a-viz the other party.[48] The directors’ defences in the derivative proceeding could not be characterised as conduct that is inconsistent with the directors objecting to the production of the legal advice to a third party. It is submitted that the point does not make sense under the concept of waiver of privilege, and that it is almost impossible to think of how those principles are applicable to the world.[49]
[48]Cf Vic Hotel Pty Ltd v DC Payments Australasia Pty Ltd (2015) 321 ALR 191 [52]–[53] (Dixon AJA, Mandie and Beach JJA agreeing).
[49]Transcript of proceedings, Re Connective Services Pty Ltd (No 2) (7 February 2018) T42.
By further reply submissions, the applicants contend that the revised undertaking offered by Slea would not address the real risk that the Connective parties will be irreversibly prejudiced by the loss of privilege, and that no undertaking from Slea could address the prejudice, as once privilege is waived, persons other than Slea may access that information.
Slea says that the premises underpinning the applicants’ submissions are doubtful, as it is not incumbent of the directors to plead a positive case in defence. In the event they choose to allege an alternative purpose for the restructure and sale, other than the alleged improper purpose, such allegations would not necessitate a reference to legal advice, and proper particulars would not require disclosure of evidence. The mere reference by the directors to their state of mind would not result in implied waiver of privilege in any legal advice they received.[50]
[50]Macquarie Bank Ltd v Arup Pty Ltd [2016] FCAFC 11 [28].
The applicants submit that the distinction between the consequences of an express and implied waiver, as sought to be drawn by Slea, is not relevant when addressing the consequences of the waiver.[51]
[51]Applicants’ submissions dated 16 February 18 at [5] ‘no distinction is drawn in s 122 of the Evidence Act 2008 (Vic), nor in the leading authorities (Mann v Carnell (1999) 201 CLR 1) between the consequences of express and implied waiver.’
The applicants submit that Slea’s argument that if the grant of leave is overturned, by reason that the proceeding would be a ‘nullity’, is conceptually flawed, and the outcome of a proceeding in which a party has acted inconsistently with the maintenance of the privilege does not factor in the analysis.
Further, the applicants argue that Slea’s assertion that an implied waiver would not operate in favour of a stranger to the derivative proceeding is contrary to authority. The commencement of the proceedings risks a complete waiver of privilege over the Connective parties’ legal advice, which the applicants submit would enable third parties to access the advice. The authorities considering limited waiver provide that where it could be objectively understood that the privileged information may pass into the public domain, the waiver of privilege is complete.[52]
[52]Asahi Holdings (Australia) Pty Ltd v Pacific Equity Partners Pty Ltd (No 2) (2014) 312 ALR 403 [80], [82].
The applicants cite Asahi Holdings (Australia) Pty Ltd v Pacific Equity Partners Pty Ltd (No 2):[53]
The disclosure of the information contained in the insurer’s EA report for its use by the insurer was entirely antithetical to that confidential purpose and thus was “inconsistent with the maintenance of the confidentiality which the privilege is intended to protect”: Mann [29]. In those circumstances, an implied waiver of privilege occurred. In my view, the waiver was complete and not merely limited to the insurer. That is because as Gordon J reasoned at [16]–[17] of Cadbury Schweppes Pty Ltd v Amcor Ltd (2008) 246 ALR 137, by reference to the observations made by Branson, Sundberg and Allsop JJ in Liberty Funding Pty Ltd v Pheonix Capital Ltd (2005) 218 ALR 283, once the privilege holder provides the privileged information to another person and cannot control its further dissemination by that person, the privilege is destroyed. The representations made by Corrs to the insurer (see [20]) some 3 months after the disclosure did not alter that result.
[53](2014) 312 ALR 403 [82].
In circumstances where an undertaking is offered by Slea, it may be that the circumstances are dissimilar to those contemplated by Gordon J in Cadbury Schweppes Pty Ltd v Amcor Ltd[54] as the privileged documents would not need to be provided to Slea, pending determination of the appeal.
[54](2008) 246 ALR 137.
Like Slea, the applicants also referred to Goldberg v Ng. They submitted that the case stands for the proposition that the focus of the analysis is the conduct of the privilege holder and not the identity of the person asserting waiver:[55]
… However, we do not read the judgments in [Attorney-General (NT) v Maurice (1986) 161 CLR 475] as suggesting either that a claim for waiver of legal professional privilege made in a proceeding before a court or quasi-judicial tribunal must be based upon conduct occurring in that proceeding or, for that matter, upon conduct occurring in, or in anticipation of, any proceeding before a court of other tribunal.
[55](1995) 185 CLR 83, 98.
The applicants also refer to Abigroup Ltd v Akins[56] and Ampolex Ltd v Perpetual Trustee.[57]
[56](1997) 42 NSWLR 623.
[57](1996) 137 ALR 28.
Bainton J in Abigroup Ltd v Akins refers to a discussion of Goldberg v Ng from State Bank of South Australia v Smoothdale (No 2) Ltd.[58]Bainton J held that the majority judgment ‘determines that in deciding whether there is an imputed waiver of legal professional privilege the governing consideration is whether fairness requires that the privilege should cease irrespective of the intention of the holder of the privilege.’[59]
[58]State Bank of South Australia v Smoothdale (No 2)Ltd (1995) 64 SASR 224 (King CJ).
[59]Abigroup Ltd v Akins, 636, referring to Goldberg v Ng.
Consideration of privilege
It is clear from the authorities that mere reference to the directors’ state of mind would not necessarily result in implied waiver of privilege in any legal advice they received;[60] rather an ‘examination of the precise nature of this pleaded state of mind and of the impact of the particular communication upon it’, would be required.[61] A waiver of privilege arises in circumstances where a party acts inconsistently with the maintenance of privilege.
[60]Macquarie Bank Ltd v Arup Pty Ltd [2016] FCAFC 11 [28].
[61]Liquorland [41] (emphasis added).
The conduct of the proceedings may result in a waiver of legal privilege. However, this is not the inevitable conclusion of the directors filing defences in the derivative proceeding. On the evidence before me, there does not seem to be any unfairness in maintaining the claim of privilege as against Slea or any other third party. In these circumstances, the risk that an issue waiver may arise is not a special circumstance justifying a stay.
Commercial prejudice caused by the involvement of Liberty
The third ground of prejudice alleged by the applicants is the association of Liberty and Slea. There are certain contractual arrangements in place, disclosed at trial, which show that Liberty is funding Slea in bringing the relevant proceedings, and has had involvement in the litigation. It is submitted that Liberty’s involvement would cause additional commercial prejudice to the Connective companies if judgment were executed.
Under the arrangements, Slea is required to disclose any documents, discovered by the applicants, to Liberty. The applicants submit that there is a real likelihood that that right would be exercised, in the derivative proceeding, and Connective companies’ documents would be available to Liberty.
The applicants submit that in the event the grant of leave is overturned, there is a real risk the Connective companies will have suffered irreversible prejudice by having a commercial competitor access internal and confidential documents.
Slea submits that this submission should be rejected for the reasons that the events in issue concern a non-confidential transaction that occurred some five to six years prior. Any documents concerning the transaction are unlikely to be confidential and are unlikely to provide Liberty with a commercial advantage.
Secondly, Slea submits that any legitimate concerns that the applicants have can be dealt with by confidentiality undertakings over discovered documents, which is a course adopted by the parties to date, and no reason is given as to why that would be an inappropriate course of action in the derivative proceeding.
Prejudice to Slea
The applicants contend that Slea will not suffer prejudice from a stay of execution pending determination of the appeal, and that such a stay would be for a relatively short amount of time, particularly given the time that has now elapsed since the hearing of the stay application, and the indication of the Court of Appeal that the leave application will be heard in the near future.
In response to submission by Slea that there is a risk that the limitations statute would begin to apply if the commencement of the derivative proceeding is further delayed, the applicants say that any concerns relating to the effect on limitation periods could be addressed by agreement between the parties.
Slea submits that there is prejudice, as the effect would be to bring the litigation between the parties to a standstill, including the oppression proceedings, which began in 2011 and has been delayed for various reasons since that time. Further, Slea says that the hearing of the derivative leave application has been delayed for over a year as a result of related now-abandoned claims of breach of confidence brought by the applicants and that any further delays should be avoided.
Slea submits that interlocutory steps in the derivative proceedings could be undertaken in the absence of a stay. Slea argues that there is no good reason why the litigation cannot continue notwithstanding the application for leave. If the appeal is successful the usual cost consequences will follow.
In Slea’s submissions it is in the interests of the parties, and the administration of justice, that the litigation be progressed as expeditiously as possible.[62]
[62]Transcript of proceedings, Re Connective Services Pty Ltd (No 2) (7 February 2018) T37.
Conclusion
I note that, notwithstanding that the application for leave has been filed, neither party argued that I should refer the matter to the Court of Appeal.
Special circumstances are required to be shown to exist before a stay will be granted to deny the successful party of the fruits of the litigation. For the above reasons, I do not find that such special circumstances exist to take this case out of the ordinary in order to justify a stay.
In circumstances where Slea has offered an undertaking to address concerns of waiver, and to pay costs indemnified in respect of this proceeding, on the evidence before me, there is no reason why the applicants could not substantially be put back in the same position if the appeal is successful and the grant of leave overturned.
I refuse the application.
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