Southern Equities Corporation Ltd (in liq) v Arthur Andersen & Co

[1997] SASC 6373

IN THE FULL COURT OF THE SUPREME COURT OF SOUTH AUSTRALIA

DOYLE CJ, MATHESON AND BLEBY JJ

Procedure - discovery and interrogatories - discovery and inspection of documents - production and inspection - legal professional privilege - appellant argued it was entitled to inspect documents in respect of which legal professional privilege was claimed pursuant to s285 subss(5) and (6) of the Companies (South Australia) Code. Statute confers a right of access upon the auditor of a company to the accounting and other records of the company for the purposes of an audit - observations as to the status of legal professional privilege as a fundamental doctrine of the common law - consideration of whether for the purposes of this case the statute abrogated the privilege either expressly or by necessary implication - held by reference to the nature and purpose of s285 that it did not - a statutory qualification of the privilege for a limited purpose does not remove the privilege for all purposes. Companies (South Australia) Code ss285,286; Supreme Court Rules 1987 Rule 58, referred to. State of SA v Barrett and Ors (1995) 64 SASR 73; State Bank of SA v Smoothdale (No 2) Ltd (1995) 64 SASR 224, applied. Mortimer v Brown (1970) 122 CLR 493, discussed. Baker v Campbell (1983) 153 CLR 52; Goldberg v Ng (1995) 185 CLR 83; Australian Federal Police v Propend Finance Pty Ltd (1997) 141 ALR 545; Hamilton v Oades (1989) 166 CLR 486; Nilsen Industrial Electronics Pty Ltd v National Semiconductor

Corporation (1994) 48 FCR 337, considered.

Procedure - discovery and interrogatories - discovery and inspection of documents - production and inspection - legal professional privilege - application for inspection of discovered documents - respondents claimed legal professional privilege - whether the privilege was vitiated by allegations of fraud - held that it was not as there was nothing in any of the relevant material before the court to suggest that the respondents had acted for an illegal or improper purpose - whether the privilege should be taken to have been waived in the interests of fairness. Statement of claim rendered material the state of mind of SECL - not sufficient by itself to warrant waiver - had to be shown that the relevant legal advice was either influential in the formation of that state of mind or was itself in issue in the action - nothing to suggest that this was the case - privilege not waived. Attorney General for the Northern Territory v Maurice (1986) 161 CLR 475; Ampolex Ltd v Perpetual Trustee Co (Canberra) Ltd (1995) 37 NSWLR 405; Hong Kong Bank of Australia Ltd v Murphy (1993) 2 VR 419; Thomason v The Council of the Municipality of Campbelltown (1939) 39 SR (NSW) 347, applied. Pickering v Edmunds (1994) 63 SASR 357; Goldberg v Ng (1995) 185 CLR 83, discussed.

Procedure - discovery and interrogatories - discovery and inspection of documents - discovery of documents - affidavit of documents - form and contents - observations as to the detail in which allegedly privileged documents should be described for the purposes of discovery. Kadlunga Proprietors v Electricity Trust of SA (1985) 39 SASR 410; Holmes v Deputy Commissioner of Taxation (1987) 19 ATR 1278; Alfred Crompton Amusement Machines LTD v Commissioners of Customs and Excise (1971) 2 All ER 843, considered.

ADELAIDE, 11-12 and 14 August 1997 (hearing), 23 October 1997 (decision)

#DATE 23:9:1997

#ADD 29:10:1997

Counsel for appellant: Mr R A Conti QC with Mr P J Brereton

Solicitors for appellant: Piper Alderman

Counsel for respondent: Mr T A Gray QC with Mr M C Hoffman

Solicitors for respondent: Fisher Jeffries

Order: appeal dismissed

DOYLE CJ

Background

In the action the plaintiff, Southern Equities Corporation Ltd (In Liquidation), ("SECL") sues its former auditors, Arthur Andersen & Co ("AA"). In a nutshell, in its Statement of Claim ("SC"), SECL alleges that AA was negligent in its audit of the accounts of SECL and other companies, referred to as the SECL group, in respect of the year ended 30 June 1988.

The audited accounts of SECL revealed an operating profit of $12.7M and a total sum available for distribution of $185.8M: SC para 703. The SECL group profit disclosed was $321.3M: SC para 705. SECL alleges that if the audit had been properly conducted it would have disclosed an operating loss by SECL of $286M and an operating loss for the SECL group of $411.1M: SC para 704.

It is alleged by SECL that SECL, "the members of SECL as a body collective", and the SECL group believed that the audited accounts truly and fairly stated the financial position of SECL and of the SECL group. It is alleged in the SC that on the basis of the audited accounts SECL incurred certain liabilities and paid a dividend, and that neither of these would have happened if the accounts had disclosed the true position. It is further alleged that acting on this belief SECL engaged in certain high risk projects, which resulted in heavy losses. SECL alleges that if the audit had been properly performed the losses would not have been suffered. Presented with accounts that truly and fairly disclosed the position, the shareholders would have insisted upon "a program of consolidation and realisation of assets". Moreover, it is alleged that SECL and the SECL group could not have obtained borrowed funds for the high risk projects if their accounts had shown the true position: SC para 778.

As is common in such cases, discovery has been a major undertaking, involving thousands of documents. SECL has declined to produce many documents on the grounds that:

"...such documents are privileged from production, being documents called into existence, prepared, and obtained for the sole purpose:

2.1 of the plaintiff obtaining legal advice; and

2.2. in anticipation of the plaintiff being a party to legal proceedings."

In certain other lists of documents it has objected to producing documents "on the ground of legal professional privilege".

AA issued an application for an order that all of these documents be produced for inspection. That application was dismissed by a Master. AA appeals against that decision.

The objections to the claim of privilege, and the grounds of appeal, are put on two main bases. I will now outline them.

In its Statement of Claim SECL complains that in respect of a number of identified transactions undertaken by SECL or members of the SECL group ("the relevant transactions") either a profit was inappropriately (having regard to relevant standards) recognised in the accounts, or that a provision for a loss should have been made (having regard to relevant standards) but was not. SECL claims that AA should not have expressed the opinion that the accounts prepared by SECL and the SECL group gave a true and fair view of the state of affairs and profit of SECL, and of the SECL group. SECL claims that AA should have identified the profits as not being genuine profits, and not properly able to be brought to account, and that AA should have identified the need for provisions to be made.

AA submits that the allegations in the SC are that the relevant transactions were a fraud or a sham or involved trickery, intended to enable false profits to be recorded. AA submits that the SC indicates that the relevant transactions "were vitiated by sham or otherwise involved trickery": Outline, para 4. As to some of the transactions, particularly one in which SECL claims that a provision should have been made, AA claims that a "representations letter" signed by officers of SECL is further evidence of fraud by SECL or members of the SECL group, designed to conceal the need for a provision to be made in the accounts.

AA therefore argues that legal advice given to SECL (hereafter I will refer separately to the members of the SECL group only when it seems necessary to do so) in connection with those transactions is not privileged, because the relevant communication was made for some illegal or improper purpose, as that term is explained by the authorities.

In this respect the argument advanced by AA rests upon the terms of the SC. AA argues that the allegations made in the SC about the relevant transactions are allegations of matters that take legal advice to SECL, in connection with the relevant transactions, outside the realm of legal professional privilege.

The second basis of AA's argument relates to the transactions engaged in by SECL, which SECL alleges could not have happened if the true position had been disclosed by the accounts.

AA submits that these allegations put in issue SECL's state of mind (that is, the corporate state of mind) about the accounts and, I suppose, the transactions dealt with in the 1988 accounts. AA points out that SECL claims that it entered into loss making transactions because it relied upon the 1988 accounts as presenting a true and fair picture, and because the shareholders and financiers, upon whom SECL relied, were likewise misled. In that way, AA argues, the SC puts in issue SECL's beliefs about the relevant transactions and their impact upon the 1988 accounts. That being so, AA argues, it is unfair for SECL to withhold legal advice it received about those transactions, because that advice is likely to throw light upon SECL's state of mind with reference to the relevant transactions.

On the basis, then, of the allegations made in the SC, AA argues that privilege never attached to the relevant communications or, alternatively, that any privilege has been waived by SECL pleading its state of mind as an issue.

A right of access under the Code

AA advanced a subsidiary argument. That was that in conducting the audit AA had a statutory right to inspect documents containing legal advice given to SECL about the relevant transactions. That being so, fairness required that AA now be able to inspect all documents which were provided to AA during the course of the audit, or that should have been provided to AA. In support of the statutory right of inspection, AA relied upon sub-sections (5) and (6) of s285 of the Code, and sub-sections (1) and (2) of s286. Those sub-sections provide as follows:

"s285 (5) [Right of access to records, and to require information] An auditor of a company has a right of access at all reasonable times to the accounting records and other records, including registers, of the company, and is entitled to require from any officer of the company such information and explanations as he desires for the purposes of audit.

(6) [Right of access to records of subsidiaries] An auditor of a holding company for which group accounts are required has a right of access at all reasonable times to the accounting records and other records, including registers, of any subsidiary and is entitled to require from any officer or auditor of any subsidiary, at the expense of the holding company, such information and explanations in relation to the affairs of the subsidiary as he requires for the purpose of reporting on the group accounts.

s286 (1) [Offence by officer of corporation] An officer of a corporation who refuses or fails without lawful excuse to allow an auditor of the corporation or of its holding company access, in accordance with the provisions of this Act, to any accounting records and other records, including registers, of the corporation in his custody or control, or to give any information or explanation as and when required under those provisions or otherwise hinders, obstructs or delays an auditor in the performance of his duties or the exercise of his powers, is guilty of an offence.

(2) [Offence by auditor of subsidiary] An auditor of a corporation who refuses or fails without lawful excuse to allow an auditor of a holding company of the corporation access, in accordance with the provisions of this Act, to any accounting records and other records, including registers, of the corporation in his custody or control, or to give any information or explanation as and when required under those provisions, or otherwise hinders, obstructs or delays and auditor in the performance of his duties or the exercise of his powers, is guilty of an offence.

Penalty: $10,000 or imprisonment for 2 years, or both."

That submission raises a number of issues. First, whether legal advice falls within the expression "other records". Secondly, whether the right of access and the obligation to allow access are themselves subject to and qualified by legal professional privilege. Thirdly, whether the right of access is limited to access for the purpose of performing an audit, and ceases once the audit was completed.

I consider that these matters can be put to one side.

The case was argued before the Court on the basis that AA was concerned with documents that it had not inspected as part of the audit. I am prepared to assume that AA could have required access to some at least of SECL's legal advice in relation to the relevant transactions, on the basis that the advice would provide "information and explanations" required by AA from officers of SECL. I am also prepared to assume that if that requirement had been made, and access provided, and if the material produced had been relied upon by AA, fairness would require that AA again be permitted to inspect the legal advice in question. In short, I am prepared to assume that in such a case there would be a statutory displacement of legal professional privilege, in the event of AA properly requiring access to the material, and I am prepared to assume further that fairness would then require that AA again be given access to the same material for the purpose of defending decisions made by AA on the basis of that material.

But, in my opinion, there is no reason to treat s285(5) as displacing legal professional privilege in respect of communications to which AA did not require access when conducting the audit. Nor, in my opinion, does the relevant principle of fairness require that privilege be deemed to be waived in relation to them.

The court heard quite brief submissions on the issue of whether documents containing legal advice to SECL on the relevant transactions are "other records" for the purposes of s285(5) and s286(1). I do not consider that they are. No authority was cited that has held that they are. In the context in which it appears, in my opinion the expression "other records" conveys the notion of something that records a transaction of the company in question, a decision that it has made, an entry in some register and so on, and not a mere communication of information to the company. I do not rule out the possibility that, in a particular situation, a document recording the communication of legal advice might be an "accounting record". That term is defined as follows by s5(1) of the Code:

"'accounting records' includes invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes, vouchers and other documents of prime entry and also includes such working papers and other documents as are necessary to explain the methods and calculations by which accounts are made up."

I can conceive of cases in which written legal evidence given to a company might be part of "such ... other documents as are necessary to explain the methods ... by which accounts are made up". But no case along these lines was made before us.

The Sulan Report

Mr Conti QC, counsel for AA, relied primarily upon the SC to support his submission that legal professional privilege did not attach to the discovered documents.

But he also called in aid certain paragraphs from an Interim Report Pursuant To Section 16(2) of The ASC Law on an investigation into the affairs of Bond Corporation Holdings Ltd [now SECL] And Associated Entities ("The Sulan Report"). That Report had been made available to the parties on a confidential basis. By s81(b) of the Australian Securities Commission Act, 1989 ("the ASC Act") it was admissible as prima facie evidence of "any facts or matters that the report states the Commission to have found to exist". The Sulan Report is an exhibit to an affidavit that was filed in court and was before the Master whose decision is under appeal.

Mr Conti QC referred the court to various paragraphs of the Sulan Report, and relied upon material there contained to support the submission that the relevant transactions were a fraud or a sham. I understand that the Sulan Report was relied upon before the Master. He, however, considered that the paragraphs to which he was referred were not findings but a record of submissions made.

In my opinion the court should not have regard to the Sulan Report.

By s82(3) of the ASC Act, counsel for SECL has a right to cross-examine persons who provided information upon the basis of which findings were made, unless the court considers that "it is not appropriate" to allow cross-examination: s82(4). Mr Gray QC, counsel for SECL, objected to the court relying upon the Sulan Report unless he had an opportunity to cross-examine a particular witness upon whose evidence certain findings were said to have been made. This problem was, I gather, raised before the Master but never resolved. It is simply not practicable for this court to embark upon a long enquiry into findings made by the Sulan Report. In my opinion, if the appellant wanted to be able to rely upon the Sulan Report, such problems should have been sorted out before the Master.

Although s81 of the ASC Act makes the report admissible, and s82 then confers a power to apply to cross-examine, subject to leave of the court, this cannot force a court, sitting on appeal, to embark upon a factual enquiry not pursued below.

I consider that the Sulan Report should not be used, unless Mr Gray's application to cross-examine is first satisfactorily dealt with. That cannot be done now. Accordingly, I decline to place any reliance upon the Sulan Report.

The form of discovery

The schedules by which discovery is made describe most of the documents by reference to their form (eg. letter, facsimile etc.), sender's name, recipient's name and date. Sometimes there is a short indication of the contents.

Discovery is not made in a manner that enables one to relate a given document to a particular relevant transaction, except to the extent that the date of a document might enable some conclusion to be drawn.

The appellant proceeded with its application for production, despite the problems that this causes. That is not to say that the appellant did not complain about the form of discovery. But, in the interests of expedition, the application for production went ahead, and so has the appeal to this court.

In my opinion the most that this court can now do is decide whether the Master was wrong in holding that the grounds upon which the claim of privilege might fail were not made out. The court is not in a position to determine which documents are not privileged from production. If the appellant's argument succeeds, the matter will have to be referred back to the Master for further consideration.

Applicable principles

I now come to the real issues.

I have said enough about the basis of the appellant's argument to indicate the area of debate. I now turn to the authorities that bear upon the three key issues - the unavailability of privilege in cases of illegal or improper purpose, the loss of privilege on the grounds of fairness, and what must be established to show that privilege is unavailable because of the presence of an illegal or improper purpose.

The rationale of legal professional privilege was stated, in terms referred to subsequently with approval, by Stephen, Mason and Murphy JJ in Grant v Downs (1976) 135 CLR 674 (at 685) as follows:

"...it promotes the public interest because it assists and enhances the administration of justice by facilitating the representation of clients by legal advisers, the law being a complex and complicated discipline. This it does by keeping secret their communications, thereby inducing the client to retain the solicitor and seek his advice, and encouraging the client to make a full and frank disclosure of the relevant circumstances to the solicitor. The existence of the privilege reflects, to the extent to which it is accorded, the paramountcy of this public interest over a more general public interest, that which requires that in the interests of a fair trial litigation should be conducted on the footing that all relevant documentary evidence is available."

That being the rationale, it is not surprising that there should be exceptions to the general rule against non-disclosure. The public interest in a fair hearing, and in a decision based upon all relevant evidence, is a strong one. A well established exception to the privilege from production is that communications between solicitor and client are not privileged, as Stephen J said in R v Cox and Railton (1884) 14 QBD 153 (at 165) if: "... intended to facilitate or to guide the client in the commission of a crime or fraud, the legal adviser being ignorant of the purpose for which his advice is wanted ...".

The case for an exception would be all the stronger if the solicitor was aware of the purpose.

The issue is, what sort of purpose of the client in seeking advice deprives the advice of its privileged character?

In Attorney-General v Kearney (1985) 158 CLR 500 the High Court made it clear that this exception is not to be construed narrowly. The actual decision there was that communications made to further a deliberate abuse of statutory power, the making of regulations for an extraneous purpose, were not protected by the privilege.

Gibbs CJ rested his decision on the public interest which the privilege is designed to secure - the better administration of justice (at 515). He said that the exception to the privilege was not confined to "cases of crime and fraud, even in the wide sense in which "fraud" has been used in this context" (at 514). Mason J and Brennan J agreed with the reasons of Gibbs CJ (at 517). Wilson J saw the key issue as whether a true professional relationship had arisen (at 524):

"...generally speaking, the public interest in the protection of alleged confidential professional communications will not be outweighed by the public interest in ensuring that all relevant evidence is admissible save when the professional relation is abused in a manner involving dishonesty that goes to the heart of the relationship."

Dawson J dissented. He considered that the case was to be decided by reference to principles of Crown privilege, or public interest immunity as it is now called. But he was inclined to treat the relevant exception to legal professional privilege as being more narrow, and not embracing the instant case (at 534). He expressed the exception as confined to cases of crime and fraud, despite the range of expressions to be found in the cases (at 528-529).

The High Court's decision in Waterford v The Commonwealth (1987) 163 CLR 54 emphasises the value and importance of the privilege, because it "... encourages resort to those skilled in the law and ... this makes for a better legal system": Mason and Wilson JJ at 64. The decision also makes it plain that if legal professional privilege applies, there is no place for a further balancing of the public interest in the disclosure of all relevant material: see, for example, Mason and Wilson JJ at 64-65, Brennan J at 74. Those former two judges made passing reference to the "well-recognised crime or fraud exception": at 64.

In Carter v Northmore, Hale Davey and Leake and Others (1995) 183 CLR 121 there is a similar emphasis upon the fundamental importance of the privilege and upon the fact that if it applies, there is no scope for any further weighing of the public interest. There is again passing reference to crime and fraud as putting communications beyond the reach of the privilege, although Deane J (at 134) may have contemplated a wider area of exclusion from the privilege, and McHugh J referred (at 163) to "communications that are designed to facilitate future wrongdoing".

In Commissioner, Australian Federal Police v Propend (1997) 141 ALR 545 the Court held that legal professional privilege attached to a copy of a document provided to a lawyer for the purpose of obtaining legal advice, even though the original document was not privileged, if the copy was made solely for that purpose. The Court also had to consider how a claim of privilege might be resisted. In the course of doing so, reference was made to the grounds on which the claim might be resisted.

Brennan CJ said that the enquiry as to whether the privilege was unavailable was directed to the purpose for which the communication was made, and referred to "some illegal or improper purpose" (at 553). There had to be "reasonable grounds" for so believing (at 553).

Dawson J said that (at 559):

"...a communication made by the client for assistance in the commission of a crime or fraud lies outside any legitimate professional relationship".

He said that more than an allegation of crime or fraud was required. There had to be some prime facie evidence to support the claim (at 559).

Toohey J referred to "prima facie evidence of illegal or improper purpose" (at 569). Gaudron J referred (at 578-579) to:

"...communications to further illegal purposes, communications made for the purposes of frustrating the processes of the law, and communications made to further an abuse of public power...".

She said that there had to be evidence which raised "a prime facie case of illegal or other purpose falling outside the privilege", before the claim of privilege was at risk of being displaced. McHugh J treated as falling outside the privilege "Communications in furtherance of a fraud or crime" (at 587), and said that there had to be a prima facie case that the communication was so made to displace the claim of privilege. Gummow J, perhaps reflecting the issues in the case, referred to communications being part of "a criminal or unlawful proceeding or in furtherance of an illegal object." He said that when the claim of privilege is made to excuse production upon discovery, and is challenged, a prima facie case in support of the challenge had to be made out (at 602). Kirby J said that the issue was whether there was "a strong probability that there was disqualifying crime or fraud" (at 616).

I conclude from this reference to authority that the claim of privilege will fail only if there is material raising an arguable case that the relevant communications were made for the purpose of furthering or assisting a crime or fraud, and that fraud in this context embraces a range of legal wrongs that have deception, deliberate abuse of or misuse of legal powers, or deliberate breach of a legal duty at their heart. It is not enough, I consider, that one could simply say that a transaction constituted sharp practice, or fell below the normal standard of commercial probity. It is not enough, I consider, that one would regard a transaction on which advice was sought as artificial, or as deliberately structured to take advantage of the law on a topic. In light of the authorities, one cannot be more precise than that.

It is not necessary to show that the solicitor in question is implicated. What is in issue is the purpose of the client.

In the present case it is the terms of the SC that must be examined. If SECL alleges fraud in the relevant sense, that will deprive the communications of the protection of privilege. AA does not need to produce any evidence of its own. The allegation by the plaintiff that fraud in the relevant sense has been committed will suffice. It is not necessary for AA to show, as Mr Gray QC submitted, an unequivocal and particularised claim of fraud. But nor will it suffice to point to something in the SC that is vague or uncertain. I see no reason to construe the SC adversely to SECL. I agree that surmise and conjecture will not suffice.

In the end, it is a matter of understanding the allegations made, of assessing the sort of conduct in issue. That, it seems, is how the English courts approach the matter: see Barclays Bank PLC v Eustice [1995] 4 All ER
511.

The second basis upon which AA claims that privilege cannot be asserted, was stated by Jordan CJ in Thomason v The Council of The Municipality of Campbelltown (1939) SR(NSW) 347. The issue was whether the claimant for damages had, by issuing proceedings under the Workers' Compensation Act (NSW), intended to exercise an option to pursue her rights under that Act. That being the issue, Jordan CJ said (at 358-359):

"Hence, in effect, one of the issues in the case was what advice if any the plaintiff had received from her legal advisers as to her alternative legal rights. In these circumstances, since the fact and nature of the advice is an issue in the case, I am of the opinion that privilege cannot be raised to prevent the proof of the advice."

What is involved here is implied or imputed waiver of the privilege, the waiver being implied or imputed as a matter of fairness. The principle of implied or imputed waiver has been recognised by the High Court, as has its foundation upon a consideration of whether it could be unfair or misleading to allow the party claiming privilege to pursue a certain course of action while maintaining the claim of privilege: Attorney General (NT) v Maurice (1986) 161 CLR 475; Goldberg v Ng (1995) 185 CLR 83.

These principles were applied in Hongkong Bank of Australia Ltd v Murphy [1993] 2 VR 419. It was there held that by its Statement of Claim the plaintiff had raised as an issue its reliance upon certain representations and warranties when it entered into a certain transaction, and had raised also its lack of knowledge of certain events. Documents that were not privileged indicated that the plaintiff had received legal advice before it entered into the transaction. There were grounds for believing that the legal advice might bear upon the matters alleged by the plaintiff. Smith J said that on the pleadings, the communications between the plaintiff and its lawyers would be an issue in the case. He considered a number of the authorities. He concluded (at 439) that:

"In this case, if the plaintiff is permitted to rely on a claim of privilege for the documents in question, the fact-finding task of the court will be seriously compromised. There is a real possibility of the court being misled."

He held that privilege had been waived. He also rejected a submission that it should be left until trial to determine whether a waiver of privilege should be imputed. He said (at 438-439) that there was every reason to think that the plaintiff would maintain its allegations, and that it would be unfair to allow the matter to proceed to trial on the basis that the defendant did not have access to documents likely to be discoverable at trial. In my respectful opinion his approach is one that should be adopted in this case. That is, to consider the pleadings as they now stand, the likelihood of them changing, and the fairness of deferring a decision until trial if the decision, as things now stand, would be that waiver of privilege was to be imputed. A decision to a like effect is to be found in Ampolex v Perpetual Trustee Co (Canberra) Ltd (1995) 37 NSWLR 405. There, after referring to the same principles, Giles CJ Comm D said (at 411), with reference to the allegations in the relevant pleading:

"...having exposed to scrutiny their corporate states of mind, being states of mind to which their legal advice is likely to have contributed, GBG Nominees and Allied cannot withhold the advice from their opponent. I emphasise that the legal advice is likely to have contributed to the states of mind of GBG Nominees and Allied, as was plain from the dates and descriptions of the documents: were that not so, the principle may not have applied."

Another instance of the application of the same principles is to be found in Pickering v Edmunds (1994) 63 SASR 357.

I consider that there is no good reason to defer to trial a decision on the matters raised. There is no reason to think that SECL will make a significant change to its allegations.

On this aspect of the case, I proceed on the basis that the issue is whether SECL's pleading puts in issue its corporate state of mind in relation to the relevant transactions, and whether legal advice received by SECL is likely to have contributed to that state of mind.

Application of Principles

Mr Conti QC based his argument upon SECL's Statement of Claim (subject to his attempt to call in aid the Sulan Report), and to that I now turn.

The SC is a large and somewhat forbidding document - some 400 pages in length and 800 paragraphs long. It begins by pleading the circumstances and terms of AA's engagement, and the obligation that rested upon AA. It then pleads a number of transactions that SECL had entered into and dealt with in its annual accounts. As to these transactions, as I have already indicated, the complaint is that AA wrongly failed to require that a purported profit be reversed or wrongly failed to require that a provision for a loss be made or, if SECL refused to do whichever was appropriate, to qualify the audit report appropriately. The complaint against AA is, in essence, of a failure to comply with the obligations that it undertook, and of a failure to measure up to appropriate professional standards. The argument against the claim of privilege rests upon the allegations made about the relevant transactions. It will come as no surprise to learn that the relevant transactions are most complex, involving dealings between many bodies corporate, often related, incorporated in many different countries, the use of sophisticated and complex financing arrangements, and complex agreements at every turn.

Of necessity I have had to avoid plunging into the fine detail, and to try to focus upon the essence of the allegations made by SECL about the relevant transactions.

The Rome Land Transaction

The issue for AA, in conducting the audit, was whether the sale by SECL of its interest in a company which owned certain land in Rome, had resulted in a profit of some $74M that could properly be recognised in SECL's accounts.

The SC pleads various aspects of the transaction. It pleads details of AA's knowledge about the transaction, and things that it should have known. The allegations are that AA well understood that there was a real issue about whether the profit should be recognised, and that AA had detailed knowledge of the transaction. Indeed, the SC pleads that AA formed the view that the profit should not be recognised, but then, after detailed investigation and discussions, reversed its opinion (para 160).

The SC pleads that the profit was a "purported profit" and that it had the effect of "artificially inflating" SECL's reported profit (para 155). As I read this allegation, it is really a conclusion from other matters, not an allegation of fraud or deception in preparation of the accounts.

It then pleads facts by virtue of which the transaction "did not meet the criteria for profit recognition" contained in certain standards (para 156). These are facts not themselves suggestive of fraudulent dealings, but facts relevant to the assessment of the transaction. For example, para 156.1 pleads that "the significant risks and rewards associated with" the shares sold, had not passed outside the SECL group. Paragraph 156.4 pleads that a company which played a significant part in the transaction" had no independent capacity to complete the transaction", and para 156.5 pleads that that company was unlikely to complete its part of the transaction. This does not appear to me to plead any fraud or dishonesty, but simply facts from which, it is claimed, AA should have concluded that there was no profit that could properly be recognised.

However, paras 156.5 and 156.6 allege that a sale of shares that was a central part of the transaction was a "warehousing transaction" under which a certain company received "$20M for warehousing the Seabrook shares for the purpose of enabling the SECL group to recognise a profit". A similar allegation is made in para 157.4. There it is alleged that the same share sale was made "for the purposes of reporting a profit".

The reference to "warehousing" is capable of being read as an allegation of fraud or dishonesty. The expression "warehousing" is often used to refer to an arrangement under which shares in particular, but also other types of property, are held by a party apparently in the party's own right, but in truth for some other party.

However, in these paragraphs of the SC it is not at all clear that the reference to warehousing is a reference to dishonest or concealed arrangements between Kitool (the purchaser of the shares) and any other entity. In context, the allegation of warehousing is quite capable of being read as expressing a conclusion that Kitool was unlikely to complete the relevant share purchase, and that for that reason it could be called a warehousing transaction.

This view tends to be supported by earlier paragraphs of the SC. These deal in some detail with the manner in which AA assessed the Rome land transaction, and the things that it knew or should have known about it. I can find no trace of an allegation that the relevant transactions and arrangements were shams, nor of an allegation that there was a concealed arrangement under which the shares acquired by Kitool would revert to SECL. The tenor of the allegations is, as I have said earlier, that a proper assessment of the highly complicated transaction would have led to a conclusion that the profit should not yet be recognised. The allegation is not that there never would be a profit. In a sense, as Mr Gray QC argued, the thrust of the SC is that the risks and rewards associated with the shares in the company that owned the land had not passed.

Nor is it clear to me that the SC alleges that the whole series of events was set in train solely for the purpose of creating a "paper profit" that could be brought to account, the transaction never being intended to proceed.

That is not to say that the SC cannot be so read. I acknowledge the force of the argument by Mr Conti QC on this point. For example, paras 161, 162 and 163 refer to AA's "revised conclusion that there was a genuine sale entitling the SECL group to recognise a profit". The pleading is capable of meaning that the transaction was a sham, but once again, on balance, these paragraphs seem to me to allege rather that the facts of the transaction, the things done and not done, meant that the profit should not yet be recognised. I have given particular thought to para 157.4 which alleges that SECL:

"had only entered into the transaction with Kitool for the purpose of reporting a profit and for this purpose paid a $20M fee to Kitool ... for warehousing the Seabrook shares."

On its face, that appears to allege that the whole transaction was a sham, solely intended to create an illusion of a profit that would never be made. But in the end, looking at the pleading as a whole, I do not consider that I should so read it. To do so does not fit with the rest of the pleading.

In the end, I am not satisfied that the pleader has alleged the sort of fraud or dishonesty in relation to this transaction that is referred to in the cases set out above. Certainly, one wonders why all the complexity was necessary, but one must bear in mind that for taxation, financial and other reasons such transactions are often very complex. Even if the desire was to deal with the shares in a manner that would create a profit for the year in question, and even if there was an air of artificiality about aspects of the transaction, there is no fraud or wrongdoing in that. Fraud or wrongdoing would be present if sham or paper transactions were created to pretend that things that had not happened had happened, or if untruths were told about things that had happened, to give them a false complexion. These things are not alleged, although again the SC could be read as alleging that untruths were told or facts suppressed. But I am cautious about concluding that the transactions are infected with fraud or deception because the truth may not have been told about all aspects.

The application by AA is one that requires the court to hold a balance. Legal professional privilege is not to be displaced upon the basis of speculation about SECL's case. It is displaced only if the court is satisfied that the SC does allege fraud or wrongdoing. It is not a matter of prima facie evidence, but a question of the meaning or effect of the SC. The court's concern that the trial be conducted both fairly and efficiently means that it should not be too protective of the pleader, but I do not consider that it is right to say that because the pleading might be alleging fraud or impropriety (through sham transactions), privilege is lost. I consider that the court needs to be satisfied that this is the allegation. I am not so satisfied, even though I can see a risk that it may later emerge that the SC does in fact allege fraud or deliberate deception by SECL in relation to the Rome land transaction. If that were to happen, SECL would have to accept responsibility for the consequences, in view of the stance that it has taken before this Court.

I turn to the alternative basis upon which AA's application was argued.

I return to the SC.

In para 696 it is alleged that the SECL accounts, contrary to AA's report, did not comply with the requirements of the Code nor with the relevant accounting standards, and so did not give a true and fair view of the state of affairs of SECL. Para 697 pleads that the SECL accounts "were not true and fair" because of the treatment of the relevant transactions and certain other transactions. Then para 698 pleads that AA's failures and breaches of duty meant that:

"...SECL, the SECL group and the members of SECL as a body collective were misled in relation to the reported state of SECL and the SECL group's financial position and were not aware of the financial statements not being true and fair".

Paras 699-701 then plead, in effect, that if AA had properly performed its duty the accounts would have revealed the true position (and, by implication, one that was far worse); that SECL, the SECL group and the members of SECL would not have been mistaken about the state of the accounts; and that if the true position were known SECL would have "reviewed and curtailed its ongoing trading activities and expenditure". I set out at the start of this judgment the loss the SECL alleges should have been disclosed - a group loss of $411.1M compared with a disclosed group profit of $321.3M.

The SC then alleges, in effect, that SECL incurred liabilities that it would not have incurred if the accounts had stated the true position. The liabilities arose from a guarantee by SECL of a bond issue. It is alleged (para 753) that if the accounts had shown the true position the bond issue would not have proceeded because it would have been apparent that neither SECL nor the issuing subsidiary had the necessary financial resources.

Then it is alleged that SECL paid a dividend to shareholders which was, in truth, paid other than out of profits (para 771), and could not and would not have been recommended by the directors if the accounts showed the true position (para 772).

Finally, beginning at para 774, the SC pleads that SECL engaged in a number of "high risk non cashflow generating projects" (para 775) which resulted in heavy losses. It is alleged that these projects were engaged in because of the mistaken belief by "SECL, the members of SECL as a body collective and the SECL group" (para 774) about the financial position of SECL. It is alleged that if AA had performed the audit properly, the projects would not have been engaged in, because (para 778):

"SECL and the SECL group would:

778.1 necessarily have embarked on a program of consolidation and realisation of assets rather than one of expansion and investment in new projects;

778.2 have been unable to obtain funding to support the expenditure."

It can be seen from this that the allegation is that various entities had a mistaken belief about the state of SECL's affairs, and were led to make decisions, by the audited accounts.

Beliefs by "outsiders" involved in the bond issue can be put to one side. Their beliefs and conduct have nothing to do with legal advice tendered to SECL in relation to the relevant transactions. The same can be said of the shareholders in SECL, which group I take to be encompassed by the expression "the members of SECL as a body collective". But, Mr Conti QC argued, the allegations that I have summarised make relevant the belief of SECL about the state of its affairs as disclosed by its accounts. The allegation is, in effect, that the directors of SECL recommended a dividend, incurred obligations (the bond issue) and engaged in loss making ventures believing that the accounts of SECL group truly stated its position - a healthy one.

Mr Conti QC argued that any legal advice that SECL had received relating to the Rome Land transaction was likely to be material to the question of whether there was a profit that could properly be recognised in the year in question. He argued that SECL could not plead a mistaken belief on its part about its accounts, a belief contributed to by the treatment of the Rome Land transaction in those accounts, but deny the materiality of material that would, or was likely to, throw light on the proper treatment of the transaction in the SECL accounts.

Mr Gray QC resisted this line of argument. He argued that in the cases relied upon by AA the legal advice, as to which waiver of privilege was imputed, was made a direct or specific issue by the pleadings. Thus, in Thomason (1939) 39 SR(NSW) 347 the question of whether the plaintiff had made an election as between her rights was directly in issue, and legal advice on her rights was central to that point. In Hong Kong Bank of Australia v Murphy [1993] 2 VR 419 it was pleaded specifically that the plaintiff, relying on representations made to it, entered into transaction without knowledge or notice of a breach of trust by the other party. Moreover, unprivileged documents indicated that legal advice had been tendered to the plaintiff bearing on this matter (at 434-435). He submitted that in Ampolex (1995) 37 NSWLR 405 and Pickering v Edmunds (1994) 63 SASR 357 the subject matter of legal advice known to exist was pleaded directly into issue.

In the present case, Mr Gray QC argued, legal advice was remote to the issues pleaded, nor was it known whether there was any legal advice on point.

Mr Gray QC further argued that paragraphs of the SC such as paras 700 and 778 pleaded, in essence, that it was the shareholders in and financiers of SECL whose mistaken belief was critical. Had the shareholders known the true state of the SECL accounts, they would have required the directors to contract rather than to expand, to rationalise and to consolidate. If the financiers had known the true state of SECL's accounts, they would not have made funds available to SECL for the loss making projects.

These submissions were blended with arguments about attributing fraud on the part of the directors to SECL or to SECL's state of mind. It is argued that SECL, as a body corporate, is the victim of any fraud alleged, not the perpetrator. It is argued that the fraud of a director or officer, if alleged, is not to be attributed to SECL.

I put this matter of attribution of fraud to one side. I do not consider that it arises under this head. The issue presently under consideration is whether SECL's pleading about its mistaken belief has made relevant in the case the beliefs of the directors and officers of SECL about the Rome Land transaction, and made these beliefs relevant in a way that makes it unfair to maintain a claim of privilege in respect of legal advice about the Rome Land transaction: Attorney-General (NT) v Maurice (1986) 161 CLR 475 at 481 Gibbs CJ, at 487-488 Mason and Brennan JJ; Goldberg v Ng (1995) 185 CLR 83 at 96 Deane, Dawson and Gaudron JJ. Fraud is not the issue. The issue is whether the corporate state of mind or belief about the accounts is alleged to be attributable to the negligence of AA and a cause of loss to SECL.

Nor do I accept the submission that the pleading about SECL's state of mind can be put to one side because of the pleading about the role played by SECL's shareholders and financiers. The "mistaken belief" of SECL (and the SECL group) about the financial position is frequently pleaded in the SC. The effect of the pleading is that SECL (which must mean the directors) incurred commitments, was able to and did recommend payment of a dividend, and engaged in risky projects, because it (meaning the directors) was misled and was mistaken. In each case, SECL was the proponent of the relevant action. If the SC is proven correct, one can safely conclude that true and fair accounts would have meant that the relevant conduct could not have or would not have occurred, because the shareholders would have required a programme of rationalisation and because funding would not have been provided by financiers. But, in my opinion, the conduct of SECL, and so its state of mind, remains, on the pleading, a very material matter. It can equally be said that SECL could not have and would not have acted as it did, but for the mistaken belief.

I return to the pleading in the SC relating to the Rome Land transaction. The essence of the pleading is that things that had happened (including the complex web of arrangements that made up this transaction) and things that had not happened (see, for example, para 153) had the effect that under the applicable accounting standards the profit should not be brought to account in the year in question. The pleading raises issues of what did and did not happen, the significance of those events in terms of accounting standards and (assuming that they led to the conclusion that the profit should not be recognised), the question of whether AA knew or should have known of the relevant events. The complaint against AA appears to be, in effect, a complaint that AA did not take account of facts about the transaction of which it knew or should have known (see, for example, paras 161 to 163). Then, it is pleaded, AA's default led to the profit of $74.1M being included in the accounts and costs. In turn, it is later pleaded that SECL did certain things because of its mistaken belief that the accounts truly and fairly stated its position.

For those reasons, I conclude that the SC does make material the state of mind of SECL in relation to the Rome Land transaction. Or, as it was put by Giles CJ Comm D in Ampolex (1995) 37 NSWLR 405 at 411, it has "exposed to scrutiny [the] corporate state of mind ...".

But it is necessary to go further. In what sense has it done so? Has it done so in a sense to which legal advice is likely to have contributed? Has it done so in a way that makes it unfair to maintain the claim of privilege?

The allegations in the SC, relating to the Rome Land transaction, are about the facts of the transaction (I mean events and arrangements made), about what AA knew or should have known, and about the appropriateness of recognising the profit at all or at least in the year in question. Scattered through the concluding part of the pleading are references to the genuineness of the transaction or elements of it (for example, para 166), references to the sale of the shares as a warehousing transaction (for example, para 156), references to the substance of the transaction (for example, para 157). I have already explained why I do not consider that it is shown sufficiently clearly that the SC alleges fraud, dishonesty or illegality. But I do consider that the SC makes allegations which go beyond the bare legal effect or structure of the arrangements. I regard the allegations, in particular from para 155 to para 170, as raising as an issue the overall effectiveness of, or ability of, the relevant arrangements, to give rise to a profit recognisable in accordance with appropriate standards as a profit of the year in question. I do not consider that the SC puts directly in issue SECL's belief about the validity or effectiveness of each step in the Rome Land transaction, nor its legal advice (if any) on those matters. But, when it is later alleged that AA's conduct in certifying SECL's accounts caused or contributed to a mistaken belief on SECL's part, the SC must be alleging that, as a result of AA's audit, SECL came to the belief, or was confirmed in a belief, that the Rome Land transaction had given rise to a properly recognisable profit.

The early part of the SC concerns how AA should have assessed the Rome Land transaction. The terms to which I have referred (genuine, warehousing, substance, purported etc) relate to the effect of steps or arrangements as they should have been understood by AA, not to the perception or belief of SECL about these steps or arrangements. Nor is it pleaded, as I said earlier, that SECL regarded the steps or arrangements as legal shams, as nullities intended to fabricate a false appearance from non-existent or legally ineffective arrangements, leading to a bogus or never to be realised project. It may well be that the pleader is alleging that the arrangements were made with a view to recording a profit, but if that could be done in accordance with the appropriate standard, then so be it. The pleader does not allege that this was an attempt to evade, as distinct from make use of, the requirements to be found in the appropriate standards. It does not allege concealed arrangements by SECL with others intended to contradict or undo the disclosed arrangements.

As I have said, the SC concerns how AA should have assessed the treatment of the transaction in SECL's accounts. But the fact that, as was necessary to raise the issue, as part of the audit SECL had included the profit in its accounts (paras 118 and 155), and the allegations about SECL's mistaken belief, appear to me to assert (by implication) that the directors believed that the profit was properly recognised and were confirmed in that belief by AA's audit.

That is a belief to which legal advice may well have contributed. It is a material aspect of SECL's pleading, because SECL's belief about its accounts is the link to the losses claimed.

I therefore conclude that legal advice to SECL about the propriety (in terms of accounting standards) of recognising the profit in the year in question is made material, and has been made an issue in the case. I do not suggest that SECL's solicitors were purporting to give accounting advice. I mean legal advice contributing to the decision that the profit should be recognised.

I do not consider that legal advice to SECL about the Rome land transaction generally has been made material or relevant. A transaction of this complexity must have required much legal advice about structure and terms and options. But if, as seems quite possible, there was advice directed to the proper accounting treatment of the apparent profit, that advice is relevant. If it shows that the directors should not have regarded the profit as appropriately recognised, it may tend to undermine the allegation about SECL's mistaken belief. If it points the other way, it might tend to confirm SECL's claim that the audit by AA confirmed a belief that SECL should have had in including the profit in its accounts. Either way, and there are other possibilities as well, SECL's belief about the accounting treatment of the transaction has been made material. That is a belief to which legal advice may have contributed. If it did, it would be unfair if that legal advice were not disclosed. In my opinion the unfairness would be particularly acute if the liquidator, through SECL, were to conduct the case on the basis of a mistaken belief on the part of SECL, while not disclosing advice to SECL's directors to the effect that the profit should not be brought to account. For those reasons, legal advice as to the ability of SECL to bring to account the profit on the Rome land transaction is advice as to which privilege is impliedly waived, because in view of the allegations in the pleadings it would be unfair to maintain the privilege.

For those reasons I conclude, in relation to the Rome land transaction, that the appeal should be allowed and the matter remitted to the Master.

It will then be necessary to consider whether there is discovered by SECL legal advice on the subject matter identified by me. I mention, so that it is not overlooked, that it is advice, if any, leading up to the adoption of the accounts by SECL (see para 89) and prior to the completion of the audit, that is made relevant by the SC. Later advice might be relevant. I cannot rule that out, but its terms and circumstances would have to be considered with care before deciding that it was relevant.

Other relevant transactions

The same conclusion must follow in relation to the other five transactions the subject of argument before us. The allegations that the accounts did not give a true and fair view (para 696 and following), the allegations of overstated profits (para 703 and following), the allegations of liabilities incurred and dividends paid because the audit was not properly performed (paras 706 and following), and the allegations of loss making projects engaged in under a mistaken belief about SECL's financial position (paras 774 and following) all relate in the same way to the alleged failures by AA in respect of the other five relevant transactions.

However, it is necessary to consider whether the first basis for denying privilege is made out in relation to the other transactions.

Sydney Hilton transaction

Once again, the substance of the allegation is that a profit made by Lawson Holdings Limited ("Lawson"), a subsidiary of SECL, on the sale of shares in a subsidiary, whose subsidiary in turn owned the Sydney Hilton Hotel, should not have been recognised in the accounts of SECL. Once again the allegations are that by reason of the terms of arrangements made, and things that had not been done (para 205):

"The Sydney Hilton transaction did not constitute a genuine sale as substantially all of the risks and rewards associated with the ownership of the shares in Mossbark were not transferred by Lawson to Noble".

There are allegations about the genuineness of the transaction (for example, para 207.9) and whether it was a genuine sale (for example para 208) and about purported profit (for example, para 212.1). But, once again, I understand these to be allegations about the legal effect of what was done, and the assessment of the transaction for accounting purposes, and not allegations of fraud or deception or of sham transactions.

I do not consider that there are allegations in the SC of fraud or wrongdoing by SECL of the type that remove the protection of privilege.

Emu Brewery transaction

A profit was brought to account on a sale to a subsidiary of FAI Insurances Ltd ("FAI") of the site of the Emu Brewery.

Again, it is alleged (para 247.1) that this was not an "irrevocable sale as substantially all of the risks and rewards associated with ownership of the property were not transferred to FAI....". There are similar allegations about the substance of the transaction, its genuineness, and about it being a "financing transaction" (para 247.8).

For the same reasons as I have given in relation to the earlier transactions, I do not consider that this is an allegation of fraud or dishonesty.

Allied-Lyons transaction

This transaction involved the sale of shares in Allied-Lyons PLC, and a profit again, according to SECL, inappropriately brought to account.

Once again, it is alleged not to have been a genuine sale (para 284), and to have been in substance "a financing transaction" (para 285).

It is pleaded (para 297) that at one stage AA decided that:

"... The Allied-Lyons transaction could be called a 'sham' from a profit and loss stand point and was only off balance sheet because of technical considerations".

While that looks like a pleading of fraud, in the overall context I do not so regard it. It appears to me to be an allegation of an opinion about the proper effect, from an accounting point of view, of the facts of the transaction.

There is also an allegation that SECL provided to the Australian Stock Exchange legal advice contrary to the terms of representations made by SECL to AA, and that AA negligently failed to inspect that advice. We were told, however, that that advice had been made available for inspection. On the face of the pleading, I agree that privilege had been waived in respect of that legal advice.

Bond Media Options

The allegation is that AA should have required SECL to provide for losses of $40M. In brief, it is alleged that SECL had entered into a put option under which SECL could be required to purchase certain share options. It is alleged that it was very likely that the put option would be exercised because the acquisition price payable by SECL was well in excess of the value of the options. The result of the exercise of the put would be a loss of some $50M by SECL. It is alleged that AA knew or should have known the relevant facts (para 335), and that AA in breach of its duty failed to require the provision to be made.

There is no hint of fraud or dishonesty by SECL in that.

Mr Conti QC called in aid a letter of 16 September 1988 from SECL to AA, in which certain representations were made to AA for the purpose of the audit. The letter makes no reference to the put option. Mr Conti QC argued from that that if there was an intentional withholding of the put agreement, that must have been for an improper purpose. He argued that any legal advice about the obligation to disclose the put option could not attract legal professional privilege.

In my opinion, there is no substance in this point. The pleading against AA simply alleges that it knew or should have known about the put option. It refers (for example, para 377) to documents, to which AA had access, that disclosed the existence of the put option. The significance of the representations letter (as it was called) remains to be seen. But, in my opinion, Mr Conti QC cannot use it to create an allegation of impropriety by SECL that is not made in the SC.

The Bell Group

SECL, through a subsidiary, acquired shares in The Bell Group Limited ("TBG") for about $124M. The SC alleges that a provision should have been made in respect of that investment, and that certain items should have been treated as expenses of the year in question. These items arose in relation to capitalised interest, an alleged excess of the purchase price over the value of the shares, and a liability under an agreement to indemnify another shareholder should it sell its shares in TBG for less than a specified amount.

The allegation against AA (para 423) is that it failed to give proper consideration to these matters. There is no allegation of any fraud or dishonesty by SECL.

There is then a further allegation. The allegation is to the effect that Part A statements issued by SECL and a subsidiary understated the price paid for the TBG shares (paras 430 and 431). The stated (and allegedly understated) price is the price the subject of the earlier allegations. It is alleged that the references in the Part A statements to the price are false and misleading and a contravention of s44(1) of the Companies (Acquisition of Shares) Code (para 435). The failure to inform the NCSC of the contraventions of the Code is then alleged (para 438) as a further failure by AA.

In my opinion there is again no allegation of fraud or impropriety by SECL. The allegation is simply that SECL and AA each failed properly to identify the true purchase price. The failure relates to the treatment of shares acquired indirectly, and the effect of that.

Other matters

I have not found it necessary to deal with every contention put to the Court. In particular, the arguments about when fraud on the part of the directors should be imputed to SECL have not had to be resolved on my approach. Nor has it been necessary to resolve arguments about whether, if an auditor was given access to a privileged document while performing an audit, that privilege could be later reasserted to deny access to the audit for the purposes of legal proceedings.

Although it did not arise, I do not accept the submission that AA's claim based upon an allegation of fraud could not be upheld unless AA first served particulars of the alleged fraud upon each person allegedly implicated in the fraud. If SECL had alleged fraud (in the relevant sense), it can hardly complain if it is taken at its word. I can think of no reason why AA should have to notify other persons of allegations that SECL is found to have made against them. But, as I have said, in the end the matter does not arise.

I must say that I fear that some of the issues and matters that I have dealt with may yet return to plague the judge who hears the action. Although I have rejected AA's submissions that the SC alleges fraud and dishonesty in a manner that does not permit legal professional privilege to be asserted, I acknowledge the possibility that at trial the case may come out differently. As I have already said, if that happens SECL will have to face the consequences. It has soundly denied making the allegations that AA has claimed it made.

Conclusion

In my opinion the Master rightly rejected the argument upon which rested the claim that privilege cannot and does not attach to the documents in question - the argument that the SC alleged a fraudulent or illegal or improper purpose on the part of SECL in relation to reporting profit or in relation to not making provisions in respect of the relevant transactions.

In my opinion the Master erred in rejecting the argument that a waiver of privilege should be imputed, as a matter of fairness, in relation to legal advice tendered to SECL and its subsidiaries about whether it was proper for SECL or the relevant subsidiary to recognise a profit or not to make a provision in respect of the relevant transactions.

Discovery has been made in a form that makes it impossible to determine whether there is any such advice in respect of which privilege is claimed. The matter will have to be remitted to the Master for AA to make such further application as it may be advised.

Regrettably, it is possible that there will be difficulty in deciding whether legal advice does fall into the category identified by me, as distinct from falling into the area of legal advice about the form or structure of the relevant transaction. I have concluded that there is no imputed waiver of privilege as to such advice. Any such arguments will have to be dealt with as they arise, and probably by the Master inspecting the relevant documents (if any exist).

In view of all that, it will be necessary to hear the parties on the question of costs.

MATHESON J

I have had the great advantage of reading the judgments of Doyle CJ and Bleby J, and I am able to state my conclusions very briefly. I unhesitatingly agree with them both that the Court should not have regard to the Sulan report for the purposes of determining whether privilege exists, and that the appellant's argument that fraud or wrongdoing is alleged in the Statement of Claim fails. As to the appellant's alternative argument that a waiver of privilege should be imputed, I agree with Bleby J that there is insufficient information before the Court at the moment to justify the order for production that is sought.

I would dismiss the appeal.

BLEBY J

The background and circumstances giving rise to this appeal are adequately set out by the Chief Justice in his reasons. I need not elaborate on them. For the sake of convenience I will use the same abbreviations that the Chief Justice has used.

Legal Professional Privilege and the Companies (South Australia) Code

AA claims that it was entitled to inspect the documents in respect of which privilege was claimed by virtue of the provisions of s285(5) and (6) of the Companies (South Australia) Code ("the Code"). Those sub-sections read as follows:

"285. (5) An auditor of a company has a right of access at all reasonable times to the accounting records and other records, including registers, of the company, and is entitled to require from any officer of the company such information and explanations as he desires for the purposes of audit.

(6) An auditor of a holding company for which group accounts are required has a right of access at all reasonable times to the accounting records and other records, including registers, of any subsidiary and is entitled to require from any officer or auditor of any subsidiary, at the expense of the holding company, such information and explanations in relation to the affairs of the subsidiary as he requires for the purpose of reporting on the group accounts."

Section 286 of the Code makes it an offence for an officer of a corporation to deny the access of an auditor to such records and information, and also creates an offence for an auditor of a subsidiary company not to allow access to such material to the auditor of a holding company.

It was said that the provisions of s285 enabled AA to have access to otherwise privileged documents of the corporation, whether or not they had in fact been produced to the auditor for the purposes of the audit.

It was established in Baker v Campbell (1983) 153 CLR 52 that legal professional privilege is not merely a rule of evidence applicable in judicial and quasi-judicial proceedings, but is a basic doctrine of the common law (Murphy J at 88-89, Wilson J at 94, Deane J at 166-167 and Dawson J at 127-128). It was described in Goldberg v Ng (1995) 185 CLR 83 per Deane, Dawson and Gaudron JJ as "a substantive general principle". Being, as Gaudron J said in Australian Federal Police v Propend Finance Pty Ltd (1997) 141 ALR
545 at 574, "a basic doctrine of the common law, it is not abrogated by statute unless there is a clear indication that that was intended".

In Hamilton v Oades (1989) 166 CLR 486 at 495 Mason CJ said of an analogous privilege, the privilege against self-incrimination:

"The privilege against self-incrimination can only be abrogated by the manifestation of a clear legislative intention. The intention may none the less be demonstrated by reference to express words or necessary implication: Sorby (1983) 152 CLR, at p309; Police Service Board v. Morris (1985) 156 CLR
397. But the privilege is not lightly abrogated, and the phrase 'necessary implication' imports a high degree of certainty as to legislative intention."

Even though not expressly abrogated, abrogation of the privilege may still be made manifest by the character and purpose of the statutory provision and the public interest it is intended to serve. See Mortimer v Brown (1970) 122 CLR 493 per Walsh J at 498-499. That case concerned whether s250 of the Companies Act 1961 (Q), providing for the examination of former officers of a company in liquidation, had abrogated the privilege against self-incrimination. The court held, by reference to the purpose of the section, that it had abrogated the common law right.

Section 285 of the Code does not expressly abrogate the right to legal professional privilege. Does it do so by necessary implication?

It could only do so in relation to "accounting records and other records" and "such information and explanations" as an auditor may desire for the purposes of the audit. "Accounting records" defined as follows:

"'accounting records' includes invoices, receipts, orders for the payment of money, bills of exchange, cheques, promissory notes, vouchers and other documents of prime entry and also includes such working papers and other documents as are necessary to explain the methods and calculations by which accounts are made up".

It may be that a document ordinarily subject to legal professional privilege contains or forms part of a company's "accounting records", although that may perhaps be a rare situation. Likewise, I consider that it would be a rare situation where a privileged document comes within the description of "other records" for the purposes of the section. It may do, but it is not necessary to decide that for present purposes. An auditor may nevertheless require "such information and explanations as he desires for the purposes of the audit". In relation to a particular transaction, the information and explanation may be sufficient, for the purposes of the auditor, if it reveals that that transaction was entered into upon or after taking legal advice. It may not be necessary to reveal the nature of the legal advice in order to satisfy the auditor. The document containing the advice would not lose its privilege from production merely by that process. Sometimes it may be necessary to produce the legal advice as part of the information or explanation to satisfy the auditor's requirements. Whether there is such an obligation need not be decided for present purposes. I am prepared to presume that such advice is required to be produced. I am also prepared to proceed on the unlikely assumption that some of the accounting records and other records required to be produced to an auditor are documents which would otherwise be privileged from production.

It is clear from the terms of the section itself that the purpose of the auditor having access to such documents is to enable the auditor to complete the audit in accordance with the requirements of the Code so that he or she can certify that the accounts give a true and fair view of the matters required by the Code to be reported, and that the requirements of sub-ss (3) and (4) of the section have been carried out. I am prepared to assume that the subsections allow the auditor to have access to documents that would otherwise be privileged from production on the ground of legal professional privilege, but that is obviously to a limited range of persons and for limited purposes, namely the purposes of the audit.

If the document was never in fact required to be produced for the purposes of the audit, there is nothing to suggest in the section that the privilege attached to the document has been removed. Removal of the right to privilege should not be inferred merely because production of the document could have been but was not required for the limited purpose of the audit, a purpose which has long since passed.

In State of SA v Barrett & Ors (1995) 64 SASR 73, an action was brought by the State of South Australia as successor to the State Bank of South Australia against former directors of the bank for alleged breach of duty whilst holding office as directors. The directors sought production of documents the subject of legal professional privilege upon the footing (which many cases acknowledge) that as directors they had the right to inspect the documents in order to discharge their duties and obligations as directors. The claim was not dependent upon their having seen the documents. Indeed, the inference from the report is that they had not. Their claim was based on their right as directors to have access to the documents. However, the authority showed that the right to inspect was not a general right, but would only be enforced for the purposes of the discharge of their duties. Once they ceased to be directors, they had no further such right. The documents could not be required to be produced for their inspection in their capacity as litigants at the suit of the bank. So here, assuming for present purposes that the auditors had a right of access to privileged documents for the purposes of their audit, that was the only and limited purpose for which they had access by virtue of the Code. The auditors are now in the same position as the former directors of the State Bank.

If the document was produced then it was plainly produced for a limited purpose and to a limited range of people. Given the nature of the right to legal professional privilege and its purpose, any removal or qualification of the privilege to be implied from the section should go no further than is necessary to achieve the purpose of the Act. There would appear to be no doubt that a statutory qualification of the privilege for a limited purpose does not remove the privilege for all purposes. In State Bank of SA v Smoothdale (No 2) Ltd (1995) 64 SASR 224, statements of expert witnesses had been prepared for use by a subsidiary company of the plaintiff in earlier litigation in New South Wales. Pursuant to a direction of the New South Wales court the signed statements had been delivered to the opposing party in that litigation. The defendant in the proceedings sought to have those statements produced in the subsequent proceedings in this Court. It was acknowledged that the statements were privileged at the time they were made. After discussing a number of authorities, this Court held that production of the statements pursuant to a court order, even though the documents thereby lost their confidentiality, did not amount to an express waiver of the privilege generally, but only for the specific situation or purpose for which they were produced. The documents could not be disclosed for a collateral purpose. It was also held, resolving a conflict between two judgments at first instance of the Federal Court of Australia in Nilsen Industrial Electronics Pty Ltd v National Semiconductor Corporation (1994) 48 FCR 337 (Olney J) and Complete Technology Pty Ltd v Toshiba (Australia) Pty Ltd (1994) 53 FCR 125 (Hill J) that production pursuant to the order of the court did not impute waiver to any greater extent than was necessary to accomplish the purposes of the order of the New South Wales court and the practice note pursuant to which the order was made. Accordingly, even if privileged documents in this case were produced to the auditors for the purpose of conducting their audit, that in itself does not entitle them to production in subsequent litigation for a collateral purpose. However, that must be subject to the qualification discussed below that if the state of mind or state of knowledge of either the company or the auditor were shown to be in issue in the proceedings, and it could be shown that knowledge of the contents of the privileged document could have affected that state of mind or knowledge, then principles of fairness would then dictate an implied waiver of the privilege. However, that is a different question altogether from whether the right to privilege is affected by s285 of the Code.

In my opinion s285 of the Code does not expressly or impliedly remove the privilege, and this applies whether or not the documents have been produced for the purpose of the audit.

The Sulan Report

I respectfully agree that for the reasons given by the Chief Justice, the Court should not have regard to the Sulan Report for the purposes of determining whether privilege exists.

Illegal or Improper Purpose

For the reasons given by the Chief Justice I agree that there is nothing contained in the Statement of Claim or in any other relevant information before the Court to suggest that any of the transactions described in the Statement of Claim and referred to in argument were for an illegal or improper purpose such as to deprive the plaintiff of its right to privilege from production of any documents relevant to such transactions.

Imputed Waiver as a Matter of Fairness

There is no doubt that a number of cases have established that legal professional privilege will be considered to have been waived in circumstances where, by virtue of the nature of the issues arising in the case, it would be unfair for the party claiming the privilege to continue to rely on it.

Once again, I am happy to adopt the Chief Justice's description of the relevant issues arising on the Statement of Claim. It is clear that the Statement of Claim has put in issue the state of mind of SECL as to its belief concerning the truth and fairness of the accounts. However, in order to determine whether the privilege has been waived, it is necessary to take a closer look at the cases to ascertain the limits of imputed or implied waiver in these circumstances.

In Thomason v The Council of the Municipality of Campbelltown (1939) 39 SR (NSW) 347, the plaintiff brought an action under the Compensation to Relatives Act (NSW) arising out of the death of her husband. She had previously instituted proceedings under the Workers' Compensation Act (NSW). That Act conferred on a claimant a right to proceed for compensation under the Act or for damages independently of the Act but not both. The application under the Workers' Compensation Act which had been signed by the plaintiff contained a statement that, after being advised by her solicitor as to the legal rights of herself and her child independently of the Workers' Compensation Act, she elected to claim the benefits prescribed by that Act. The genuineness of her election to claim under the Workers' Compensation Act was called in question in the common law proceedings. The application which she had signed was tendered, and that referred specifically to the legal advice which she had obtained. It was held that as a matter of fairness the privilege attaching to that advice was waived so that she could be cross-examined about it and the solicitor who advised her called to give evidence. The plaintiff's state of knowledge of the two alternatives allowed by the law was directly called in issue. Jordan CJ, speaking on behalf of the New South Wales Court of Appeal said, at pp358-359:

"[I]t was necessary under the second plea for the defendant to prove, if it could, what knowledge the plaintiff had as to her legal rights; and this was knowledge which she was not likely to possess unless she derived it from a legal adviser. Hence, in effect, one of the issues in the case was what advice if any the plaintiff had received from her legal advisers as to her alternative legal rights. In these circumstances, since the fact and nature of the advice is an issue in the case, I am of opinion that privilege cannot be raised to prevent the proof of the advice."

By her application for workers' compensation, the plaintiff acknowledged having received legal advice, and the nature of that advice was directly relevant to her state of mind in purportedly exercising the option which the law gave her. The important point, for present purposes, however, is that the fact that she had had legal advice was quite apparent from the document pleaded into issue in the case.

Attorney-General for the Northern Territory v Maurice (1986) 161 CLR 475 was a case where, in an application under the Aboriginal Land Rights (NorthernTerritory) Act 1976 the applicants had lodged and distributed to other parties what was described as a "claim book" in which particulars of the claim and certain material in support of it was set out. Some of the source materials used in the preparation of the book were subject to legal professional privilege. The mere fact that, during the course of the proceedings, the claimants had made some incidental reference to the contents of the claims book was held not to constitute an implied waiver of the privilege attaching to the source documents. In explaining the nature of the waiver, Mason and Brennan JJ in their joint judgment, at pp487-488 said:

"An implied waiver occurs when, by reason of some conduct on the privilege holder's part, it becomes unfair to maintain the privilege. The holder of the privilege should not be able to abuse it by using it to create an inaccurate perception of the protected communication. Professor Wigmore explains:

'[W]hen his conduct touches a certain point of disclosure, fairness requires that his privilege shall cease whether he intended that result or not. He cannot be allowed, after disclosing as much as he pleases, to withhold the remainder.' (Wigmore, Evidence in Trials at Common Law (1961), vol. 8, par. 2327, p.636) In order to ensure that the opposing litigant is not misled by an inaccurate perception of the disclosed communication, fairness will usually require that waiver as to one part of a protected communication should result in waiver as to the rest of the communication on that subject-matter: see Great Atlantic Insurance Co. v. Home Insurance Co. [1981] 1 WLR 529; [1981] 2 All ER 485."

Mason and Brennan JJ were assuming, as a necessary condition of the waiver, that it could be shown that there existed legal advice and that there had been some partial reliance placed upon it.

Gibbs CJ also implied that there would have to have been some disclosure that privileged material had been referred to or used. He said (at p481):

"The decisions in which this question has been considered seem to me to be particular applications of the rule that in a case where there is no intentional waiver the question whether a waiver should be implied depends on whether it would be unfair or misleading to allow a party to refer to or use material and yet assert that that material, or material associated with it, is privileged from production. Thus it has been held that the privilege in respect of a document is not waived by the mere reference to that document in pleadings (Roberts v. Oppenheim (1884) 26 Ch.D. 724; Buttes Oil Co. v. Hammer [No. 3] [1981] QB 223, at pp252, 268) or in an affidavit (Lyell v. Kennedy
(1884) 27 Ch.D. 1, at p24; Infields, Ltd. v. P. Rosen & Son [1938] 3 All ER 591, at p597; Tate & Lyle 'International Co. Ltd. v. Government Trading Corporation', The Times, 24 October 1984), although the position will be different if the document is reproduced in full in the pleading or affidavit: Buttes Oil Co. v. Hammer [No. 3] [1981] QB, at p252."

Deane J was also conscious of the need for there to be an assertion that privileged material had been used before the question of waiver could arise. He said (at pp492-493):

"Waiver of legal professional privilege by imputation or implication of law is based on notions of fairness. It occurs in circumstances where a person has used privileged material in such a way that it would be unfair for him to assert that legal professional privilege rendered him immune from procedures pursuant to which he would otherwise be compellable to produce or allow access to the material which he has elected to use to his own advantage. Thus, ordinary notions of fairness require that an assertion of the effect of privileged material or disclosure of part of its contents in the course of proceedings before a court or quasi-judicial tribunal be treated as a waiver of any right to resist scrutiny of the propriety of the use he has made of the material by reliance upon legal professional privilege."

Dawson J also referred (at pp497-498) to the need for there to be a particular disclosure before the privilege could be waived.

In Hong Kong Bank of Australia Ltd v Murphy [1993] 2 VR 419, one of the issues arising on the pleadings was the knowledge of the plaintiff as to whether a particular assignment constituted a breach of trust by one of the defendants, and whether the plaintiff had relied on a representation allegedly made by the defendant as to the legality of the assignment. The plaintiff's state of knowledge of the legality of the transaction was an issue raised on the pleadings, although there was no reference in the pleadings to the fact that the plaintiff had had legal advice in relation to the transaction. It was apparent, however, from other documents which had been discovered, and it was not disputed by the plaintiff, that such legal advice existed and was relevant. At p436 Smith J cited, with approval, a passage from an unreported case to the effect that it is only where the client directly or indirectly puts in issue the substance of the privileged communication that the privilege is lost, and then only in so far as is necessary to do justice between the parties. Once again, it was clear that the question of waiver only arose once it was clear that there was reliance on a privileged communication.

In Pickering v Edmunds (1994) 63 SASR 357, Duggan J held that privilege had been waived in respect of legal advice affecting one of the parties' state of mind, when the existence of and reliance on that legal advice had been directly raised on the pleadings.

Another case where the principle is discussed is Goldberg v Ng (1995) 185 CLR 83. That was a case where a former client had sued a solicitor for certain monies alleged to be due and payable to the client. Before serving the proceedings, the client had also complained to The Law Society of New South Wales about the solicitor's conduct. For the purpose of the anticipated proceedings at the instance of the former client, the solicitor had prepared some statements which he supplied to his own solicitor, and which were also supplied to relevant officers investigating the matter for the Law Society. After investigation the Law Society dismissed the complaint. In the proceedings between the client and solicitor the client subpoenaed the Law Society to produce the documents, alleged by the solicitor to be privileged. The question of whether or not there had been a waiver of the privilege was decided in circumstances where the nature of the documents had been disclosed, as had the nature of the reliance on them.

Finally, in Ampolex Ltd v Perpetual Trustee Co (Canberra) Ltd (1995) 37 NSWLR 405, Giles CJ Comm D said at p411:

"The principle to which Ampolex appealed has recently been affirmed and applied in Benecke v National Australia Bank (1993) 35 NSWLR 109. It is ultimately founded on the fairness considered in Attorney-General for the Northern Territory v Maurice (1986) 161 CLR 475. Confining attention to the allegation made by GPG Nominees and Allied (the alternative of the allegation made by Ampolex may raise other considerations, and I prefer to put it aside), having exposed to scrutiny their corporate states of mind, being states of mind to which their legal advice is likely to have contributed, GPG Nominees and Allied can not withhold the advice from their opponent. I emphasise that the legal advice is likely to have contributed to the states of mind of GPG Nominees and Allied, as was plain from the dates of and descriptions of the documents: were that not so, the principle may not have applied."

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.

In this case, it is clear from the Chief Justice's analysis of the Statement of Claim that the state of mind of SECL concerning the adequacy of the accounts is a relevant issue. However, mere exposure to scrutiny of the corporate state of mind as to a belief in the existence or otherwise of a profit, and whether the accounts truly and fairly stated the position, does not necessarily assume the existence of legal advice as to the nature of the various transactions or that such advice could have had any bearing on the relevant state of the corporate mind. There is nothing in the pleadings or in any other information placed before this Court to suggest that relevant legal advice existed which could have had a bearing on that state of mind. The only information before the Court comprises the several lists of documents themselves which, whilst identifying particular documents and their date, give no indication as to which of the many transactions they might relate, or whether they contain the sort of information which could be at all relevant in informing the corporate mind. In my opinion, something more than that is needed before a court can impute waiver of the substantive right to privilege that SECL has.

That is not to say, of course, that some of the documents listed may not have been relevant and may not yet be the subject of an imputed waiver of legal professional privilege. However, in my opinion there is insufficient information before the Court to justify the order for production that is sought, and I would therefore dismiss the appeal.

It may well be, however, that some of the documents in question were relevant to the formation of the corporate state of mind. Where a party has in fact had access to privileged legal advice in forming its state of mind or belief, it will not always be apparent from the pleadings or other material that it has done so. Sometimes it may not be revealed until cross-examination of a witness at the trial. It could, of course, make a crucial difference to the outcome, and it is better that such matters be revealed at an early stage rather than at trial. Revelation at trial will cause surprise, and possibly substantial disruption to the trial in a variety of possible ways. In order to prevent that occurring it behoves a party claiming privilege to disclose or describe documents properly according to the exigencies of the issues raised on the pleadings or through other documents.

We were provided with copies of extracts from the relevant lists of documents in respect of which production was sought. The first, thirteenth, fourteenth and fifteenth lists of documents each make the bald statement that portions of the documents listed have been concealed "on the ground of legal professional privilege". The documents in the lists include various memoranda, internal reports, reports to the SECL Board and minutes of board meetings, including board meetings of SECL itself. The origin of the documents is not always described. The purpose and subject matter is not disclosed, and there is no statement as to the basis on which privilege for the concealed portions is claimed.

The claim for privilege in the sixteenth list of documents is made in general terms, without discriminating between individual documents, in respect of a list of some 604 particular documents. It is merely said that the documents were "called into existence, prepared, or obtained for the sole purpose of the plaintiff obtaining legal advice or in anticipation of the plaintiff being a party to legal proceedings". The documents, from their description, suggest that some may include legal advice and may not merely be documents prepared for the purpose of or in anticipation of legal proceedings. The list does not disclose which document falls into which category of privilege claimed.

What is required of a list of documents is set out in Rules 58.01, 58.07 and Form 16 of the Supreme Court Rules.

We have heard no argument from the parties as to the adequacy of the present description either of the documents in question or of the nature of the privilege claimed. It may well be that the present lists are inadequate in that regard. In any case there needs to be sufficient description of the document to disclose the fact that it is of such a nature as to fall within the head of privilege. That could well include sufficient description to disclose whether privilege may have been waived. What the description should be will depend in each case on the pleadings and nature of the claim. White J said in Kadlunga Proprietors v Electricity Trust of SA (1985) 39 SASR 410 at 414 and 415:

"[I]t is both necessary and desirable that the description of a particular document for which protection is claimed should be sufficient to disclose quite readily (without disclosing contents) whether or not it is in fact a document to which the head of privilege relied upon can extend...

What is required in properly describing discovered documents will vary from case to case depending on the nature of the document and the particular ground of privilege claimed. In this case it is especially important to include the date of preparation of the protected documents as part of their description."

See also remarks to similar effect by Davies J in Holmes v Deputy Commissioner of Taxation (1987) 19 ATR 1278 at 1286 and Eveleigh J in Alfred Crompton Amusement Machines Ltd v Commissioners of Customs and Excise [1971] 2 All ER 843 at 847-848. [The decision was reversed on appeal but on other grounds. See [1972] 2 QB 102 and [1974] AC 405.]

However, whether an order for further and better discovery should be made is a matter for the judge or master hearing such an application, if made, having in mind the type of issues raised on the pleadings, and being alive to the possibility of imputed waiver.

At the moment, however, it would appear that the necessary conditions for ordering production of any of the material contained in the lists of documents have not yet been met.