Electronic Learning Systems International Pty Ltd, Re [1997] QSC 121 [1998] 2 Qd R 144

IN THE SUPREME COURT tG- /'11 GJ1Af'r\ S( ~-q J\'1.. 1 OF QUEENSLAND Appeal No 3128 of 1997 Brisbane Before the Hon. Justice Williams CATCHWORDS: Counsel: Solicitors: IN THE MA TIER OF "The Corporations Law" - and - IN THE MA TIER OF Electronic Learning Systems International Pty Ltd (in liquidation) (ACN 010 915 358) REASONS FOR JUDGMENT - WILLIAMS J Judgment delivered 15/07/1997 CORPORA TIONS LAW -s.596B and s.597 considered - examination of solicitor for company and its director - requirement to produce books and documents - claim for legal professional plivilege - claim of lien - onler for production confilmed. J Sullivan for appellant D Coulson for respondent Stokes & Panettiere for appellant Whitman & Co for respondent Hearing Date: 8 May 1997 . .. of research and private sh;; This judgment is to be copied for !he purpos~ . in an other way wit· . onl . ·It is not to be resold or us~a .for..re.publlcatlon y Y permission. .. 4 -- 1 of 13 -- " . IN THE SUPREME COURT OF QUEENSLAND Brisbane Appeal No 3128 of 1997 IN THE MA TIER OF "The Corporations Law" - and - IN THE MA TIER OF Electronic Learning Systems International Pty Ltd (in liquidation) (ACN 010 915 358) REASONS FOR JUDGMENT - WILLIAMS J Judgment delivered 15/07/1997 Electronic Learning Systems International Pty Ltd ("the company") was ordered to be wound up by the court by order made 13 December 1995, and Ivor Worrell and Rajendra Kuma Khatri were appointed liquidators. Submissions in the proceeding before me were made on the assumption that certain facts were established, though the material before me did not formally do so. It can be assumed that at all material times Graeme Charles Pitts was a director and shareholder of the company and probably the person primarily responsible for directing the mind and activities of the company. Probably his wife, Dianne Marie Pitts, was the only other director and shareholder, but that is not a matter of critical importance. There is litigation pending in the Federal Court to which the company and GC Pitts are defendants; Lanton Productions Pty Ltd is the plaintiff and the action is numbered G160 of 1992. -- 2 of 13 -- 2 The liquidators obtained an order from the Supreme Court dated 20 December 1996 pursuant to s.596B of the Corporations Law requiring GC Pitts, DM Pitts, Joseph Panettiere, Simon Colin Abubakar and Keith McCoy to attend before the Magistrates Court held at Brisbane "to be examined on oath or affirmation on any matters relating to the examinable affairs of" the company and further Panettiere and Abubakar were required to produce on the day appointed for their examination any books or records in their possession "as are or may be relevant to the promotion formation management administration or winding of, or otherwise relating to the examinable affairs of" the company. Panettiere is a solicitor and the principal of the firm Stokes & Panettiere. Abubakar IS a solicitor in his employ. According to Panettiere's affidavit he has in his possession "certain of the material set out in the Summons"; broad details of that material are set out later in the affidavit. He deposes that the "material came into my possession as a result of a retainer between myself and Graeme Charles Pitts ... and Electronic Learning Systems International Pty Ltd ... ". Nothing more specific is said in the material as to the retainer. Neither GC Pitts nor DM Pitts has yet been served with the summons to attend for examination pursuant to s.596B. Material placed before the magistrate, and the underlying assumption made by both sides before me, is that those persons are deliberately avoiding service. Panettiere's evidence is that he is owed approximately $30,000 in legal fees, and has lost contact with GC Pitts; steps Panettiere has taken to locate Pitts have been unsuccessful. Clearly one of the questions the liquidators must address in the course of their administration relates to the future conduct of the pending proceedings in the Federal Court by the company. No details of that proceeding were formally placed before me but submissions made generally indicated that the plaintiff's claim was a very large one, and if that is so judgment in favour of the plaintiff could have a significant impact on the winding -- 3 of 13 -- 3 up. For that reason it is clear that the liquidators need access to all documents and information relating to company's defence of those proceedings. The examination pursuant to s.596B would undoubtedly have .as one of its objects the obtaining of such material, but it would not necessarily be limited to that area of enquiry. Against that background the liquidators have waived legal professional privilege on behalf of the company with respect to communications, including advice, passing between Panettiere and the company. The liquidator's power to waive privilege in those circumstances has been the subject of some judicial consideration (see, for example, per Sackville J in Mercantile Credits Ltd v. Dallhoid Investments Pty Ltd (1994) 15 ACSR 230 at 238-9), and the general position appears to be that the source of the power to do so is found either in s.477(2)(a) or 477(2)(m) of the Law. I am satisfied that in the present case, given the circumstances to which I have already referred, the liquidators have the power to waive legal professional privilege on behalf of the company so far as advice given by Panettiere was concerned. When called before the magistrate in accordance with the terms of the summons Panettiere sought to withhold production of relevant documents on the ground that they were subject to a valid claim of legal professional privilege arising from his retainer by Pitts and the company. He further claimed a lien over all the documents because of the moneys outstanding for legal fees, and also asserted that as a ground for withholding production. Panettiere produced to the court, subject to his claim for a lien, the following documents: (i) Four files containing the court documents in relation to the action brought by Lanton Productions Pty Ltd in the Federal Court against the company, Pitts and others, being Federal Court proceedings No G160 of 1992; -- 4 of 13 -- 4 (ii) Five files contammg correspondence between Panettiere's firm and other parties and incidental parties to that action and also file notes of conversations between Panettiere and his legal staff and other parties and incidental parties to that action; (iii) Two trust account ledgers. When questioned as to other documents broadly described in his affidavit Panettiere stated that he objected to producing those documents "on the basis of I was the attorney for Mr Pitts and attorney for ELSI and on the ground of legal professional privilege." He asserted that some time ago he received instructions from Mr Pitts to make the claim of privilege, but conceded that he had been unable to contact Pitts to establish whether those instructions had altered. The documents made the subject of that claim of privilege are broadly described in Panettiere's affidavit as follows: "During the course of my retainer by Pitts and ELSI in the conduct of the Action a large number of documents were brought into existence for my firm for the sole purpose of giving legal advice to Pitts and ELSI. These documents include the following: (i) 2 Files containing the following - (a) Correspondence between my firm and Pitts and/or ELSI relating to the Action (b) File Notes of conversations between myself or my legal staff and Pitts relating to the Action ( c) Correspondence between myself and potential witnesses and witnesses in the Action (d) Diary Notes of conversations between myself or my legal staff with potential witnesses or witnesses in the Action (e) Instructions to my legal staff or between my legal staff and internal memoranda and notes within the office of my firm relating to the Action (f) Drafts and/or final statements and affidavits of witnesses and prospective witnesses relating to the Action (g) Briefs to Counsel in the Action -- 5 of 13 -- 5 (h) Correspondence between my firm and Counsel in the Action (i) Diary Notes of telephone conversations between myself or my legal staff and Counsel in the Action (ii) 6 Files containing copies of documents obtained on discovery during the course of the Action from the parties to the Action (iii) 6 Files containing copies of documents obtained on third party discovery (be it formal or informal in the Action) from various parties (iv) 8 Files containing documents handed to me by Pitts and which Pitts maintains is his sole property. The majority of these documents were created prior to the existence of ELSI and were provided to me by Pitts for the sole purpose of providing him with legal advice in the Action brought against him by Lanton. (v) 1 File containing documents belonging to McCoy and Associates. These documents carne into my possession either from Pitts during the course of the Action for the sole purpose of providing legal advice to him and/or ELSI or where provided to me by Keith McCoy for the sole purpose of providing legal advice to him on a third party discovery Application brought by Lanton in the Action." Panettiere asserted before the magistrate that legal professional privilege attached to each of the above documents in favour of Pitts or the company and that such privilege had not been waived by Pitts or the company. In addition to that claim of legal professional privilege Panettiere also claimed a lien over all that material. The magistrate marked the total of nine files produced to the court and not the subj ect of a claim of privilege as exhibits 1 and lA, and the two ledger accounts as exhibit 2. Counsel for the liquidators conceded both before the magistrate and before me that legal professional privilege can be claimed with respect to documents required to be produced pursuant to s.597 of the Corporations Law if such privilege properly exists; Re Compass Airlines Pty Ltd (1992) 8 ACSR 423 would appear to be sufficient authority for that proposition. -- 6 of 13 -- 6 The magistrate before whom the examination took place, after hearing submissions from counsel on each side, concluded that "Mr Panettiere should produce the documents for which he has claimed legal professional privilege to the court and the documents should be bundled and sealed and kept in the custody of the court until such time as Mr Pitts is examined." She reached that conclusion primarily because the privilege was vested in Pitts and it was for Pitts to decide whether to claim or waive privilege. It is distinctly probable that evidence from Pitts would be required before a final decision could be made as to which documents, if any, were subject to professional privilege in favour of Pitts as distinct from the company. With respect to the claim of lien counsel for the liquidators indicated to the magistrate that his clients were "prepared to undertake that they will not permit Mr Pitts, his legal representatives or any other person to inspect the documents nor be provided with any copies of any document or material which has been in the possession of Mr Panettiere so as to ensure the security of the solicitor's lien." The magistrate concluded that, particularly in the light of that undertaking, all the documents should be produced to the court. The record discloses that the orders made by the magistrate were as follows: "The orders I make in respect of these submissions are that the documents which are subject to a claim for legal professional privilege are to be produced to the court forthwith and to be sealed pending an examination of Mr Pitts pursuant to his summons. The documents which are not subject to a claim for legal professional privilege have already been produced to the court as exhibits numbered 1, 1A and 2. These exhibits can be treated in the usual way by the liquidators subj ect to the restrictions in their undertaking." Before me it was contended, correctly in my view, that the effect of the magistrate's order with respect to exhibits 1, 1A and 2 was that the liquidators and their legal advisers could make use of those documents in the course of the examination, and could make copies -- 7 of 13 -- 7 of them or make extracts from them, .provided that such copies or extracts were not made available to Pitts. Panettiere has appealed to this court from the order of the magistrate pursuant to Rule 82 of the Corporations (Queensland) Rules 1993. That rule provides for an appeal to a judge "from any decision or order made or given by a court directed to hear the examination", being an examination pursuant to s.596B of the Law. The order was made on 27 March 1997, and the appeal filed on 7 April 1997 which was outside the five day limited provided for by the rule. The delay was explained by the unavailability of the record, and no opposition was mounted by counsel for the liquidators to an order enlarging time. The appeal should be heard on the merits. The rule permits further evidence to be adduced on the hearing of the appeal, but the only additional evidence placed before me was an affidavit from the solicitor for the liquidators annexing some correspondence in September 1996. That was the only material additional to that which was before the magistrate. By the appeal Panettiere seeks to have the order of the magistrate set aside; the respondent liquidators merely ask that the appeal be dismissed. Before the magistrate the liquidators contended that Panettiere, as solicitor for Pitts, could not properly maintain a claim of legal professional privilege with respect to many of the documents referred to in his affidavit. I have the clear impression from perusing the description of documents that many, if not most, of them would not satisfy the appropriate test for legal professional privilege, but of course it is impossible to be definite without knowing more about the particular documents involved. The claim made by Panettiere is that legal professional privilege attaches to the documents in favour of "Pitts and/or the company". He is not in a position to make a claim in that form. Panettiere can longer make a claim for privilege on behalf of the company. At -- 8 of 13 -- 8 the very least it is necessary to separate out the documents into those which are the company's and those which belong to Pitts. That division cannot be made by simply by considering the retainer. If the advice was given to the company then it is the company's prerogative to maintain or waive privilege. If advice was given to Pitts personally then it is his prerogative to maintain or waive privilege. Complications may arise if there was some common interest. Counsel for the liquidators submitted that there were authorities (Shore v. Bedford (1843) 5 Man and G 271, 134 E.R. 567 and Re Konigsberg (1989) 3 All E.R. 289) which supported the proposition that one joint client cannot claim privilege against another joint client with respect to communications by a solicitor to both. But it may be, as contended for by counsel for the appellant, that the ratio of those cases is limited to the situation where there are proceedings between those two parties. It is neither possible nor necessary for me to resolve that question now. That must be done in the light of each particular document and after considering the circumstances in which each particular document came into existence. I do not doubt that in the absence of the client a solicitor may be duty bound to claim privilege, particularly where there has been some previous instruction to that effect. That may well remain the position even though the retainer no longer strictly exists. Returning to the description of the documents as provided by Panettiere in his affidavit I have real difficulty in seeing how, for example, documents obtained on discovery in the course of the pending action from other parties could be the subject of a claim of legal professional privilege by or on behalf of Pitts. That would also apply to the documents obtained on "third party discovery". That must particularly be so where, at worst, the documents were obtained on behalf of both Pitts and the company, both of whom were defendants, and where the company has waived any claim of privilege. -- 9 of 13 -- " 9 Further, the eight files described in paragraph (iv) could hardly be the subject of a claim for legal professional privilege, It is clear that the sole purpose for which they came into existence was not, for the giving or obtaining of legal advice. It may well be that those documents are the property of Pitts, but if they are relevant in the sense that they relate to the examinable affairs of the company then Panettiere may well be liable to produce them pursuant to the summons. Again it is not sufficient, as is asserted in that paragraph, that the "majority of these documents were created prior to the existence" of the company. What of the minority? If they are company documents then it may well be that the liquidators are entitled to them and no claim of professional privilege can be maintained against the liquidators. Further, so far as the documents "belonging to McCoy and Associates" are concerned it would seem that McCoy gave evidence before the magistrate as to the nature of the documents. There are at least good grounds for contending that on the evidence of McCoy no privilege attaches to those documents as they fail the sole purpose test. My review of the documents to which the claim of legal professional privilege has been made is not exhaustive, but it is sufficient to demonstrate the real probability that many, perhaps most, of the documents in question could not properly be made the subject of such a claim by· or on behalf of Pitts. The liquidators would have an immediate entitlement to inspection of those documents not properly the subject of such a claim by Pitts. But it appears that the liquidators are, at least for the time being, happy with the order made by the magistrate, namely that all of those documents should be sealed and kept in the possession of the court until such time as Pitts is brought before the magistrate for his examination. At that time it would be possible to advance the matter by having Pitts clearly identify those particular documents which he asserted were privileged. It would then be -- 10 of 13 -- 10 possible to make a formal ruling on the claim with respect to each document. In the meantime, and bearing in mind the conduct of Pitts in avoiding appearing for examination, the preferable course is to have all the documents kept in the possession of the court but sealed. The appellant, Panettiere, has not demonstrated that the magistrate was in error in so ordering. I now tum to the question of the lien. Section 597(10) of the Law provides that where a court "directs a person to produce any books and the person has a lien over the books, the production of the books does not prejudice the lien". Counsel for the appellant submitted that the distinction between s.597(10) and s.530B(1) is significant. The latter section provides that a person is not entitled, as against the liquidator of a company, to retain possession of books of the company or to claim or enforce a lien on such books, but such a lien is not otherwise prejudiced. Whilst the difference in wording is noteworthy, it is my view that the primary task is to construe s.597(10). Counsel for the liquidator submitted that the lien survives the insolvency of the solicitor's client and that is true; if that were not the case then both s.530B(1) and s.597(10) would be unnecessary. The question is not whether the lien survives the winding up, but the relevance of the lien to the production pursuant to s.597(10). The very wording of s.597(1 0) strongly suggests that, despite the lien, the books must be produced. That was clearly the view of Young J in Re Equiticorp Finance Ltd; ex parte Brock (1992) 6 ACSR 725 at 731, where he said: "Where the company concerned owns the books, it would seem to me that the liquidator is entitled not only to take them into his possession as part of the property of the company, but also to have them produced on an examination under s.597. This order may be made notwithstanding any lien; see Harrison v. Lederman (1978) y.R. 590. Where the documents are not the property of the company but relate to the company, a similar order may be made; see e.g. Harrison's case at 595." -- 11 of 13 -- 11 Harrison was concerned with s.249(3) of the Companies Act 1961, the wording of which was fairly similar to that now found in s.597(10). The court in Harrison followed an earlier decision in Re Gleebs Pty Ltd (1933) v.R. 295. In that case Mann A.C.J. relevantly said at 296: "I see no reason for giving to the word 'produce' in s.176 of the Companies Act 1928 any meaning other than it usually bears in this Court and the effect is that the auditor can be called on to produce at any reasonable time and place, which would probably be his office, all the books he has of the company. Section 176 means simply that his lien, except in so far as its utility is diminished or destroyed by the mere production of the documents, is to be preserved to him, and that he retains his right to possession of the documents. That may be in some cases an empty right, and this may be such a case." The learned judge recognised that one rationale for that conclusion was that the rights of third parties, the creditors of the company, now came into consideration. But there is even older authority to similar effect. Section 115 of the English Companies Act 1862 provided that the solicitors of a company may be compelled, on a summons obtained the official liquidator, to produce documents relating to the company, without prejudice to their lien for costs. Lord Hatherley L.C. held that the Act conferred a discretion on the judge as to ordering production, which discretion was to be exercised according to the facts of the case. Again that learned judge recognised that considerations of the rights of creditors and shareholders intruded onto the right of the holder of the lien. The report goes on at 217: "His Lordship could not, in fact, read the section in any way except saying that production might be ordered, but must be without prejudice to any lien; though in many instances, of course, this would render the lien valueless." (In Re South Essex Estuary and Reclamation Company: ex parte Paine and Layton (1869) 4 L.R. Ch. App. 215) -- 12 of 13 -- • t , 12 All of that authority leads me to conclude that where the documents are relevant to the subject matter of the examination they must be produced to the court, notwithstanding the lien and the liquidator has full rights to deal with the documents as documents produced to the court. Where appropriate notes or copies may be made of the contents of the documents. That will almost inevitably destroy the effectiveness of the lien to some extent but that is the consequence of the statutory provision. In this case the liquidators have given an undertaking that will, as far as possible, preserve the solicitor's lien. In all the circumstances the magistrate's decision with respect to the documents the subject of the claim of lien was correct. It follows that the appeal should be dismissed with costs. -- 13 of 13 --