FEDERAL COURT OF AUSTRALIA

Crosbie v McLachlan, in the matter of Radicle Projects Pty Ltd (in liq) [2013] FCA 1101

IN THE MATTER OF RADICLE PROJECTS PTY LTD (IN LIQUIDATION)

THE COURT ORDERS THAT:

1.    Paragraphs 4 and 5 of the Orders made by the Registrar on 23 April 2013 be set aside and in lieu thereof, there be no order as to costs.

2.    No order as to costs.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011 (Cth).

IN THE MATTER OF RADICLE PROJECTS PTY LTD (IN LIQUIDATION)

REASONS FOR JUDGMENT

INTRODUCTION

1    Pursuant to s 35A(5) of the Federal Court of Australia Act 1976 (Cth) (the FCA), the Applicants, the liquidators of Radicle Projects Pty Ltd (in liquidation) (Radicle), seek to review two cost orders made by a Registrar of the Court on 23 April 2013 (the Orders):

4.    The liquidators pay the legal costs incurred by Mr Jessup and Mr McLachlan in relation to the dispute about legal professional privilege, fixed in the sum of $18,500.

5.    The liquidators pay the legal costs incurred by Mr Jessup, Mr McLachlan and Mr Kelly in relation to their application for payment of costs and expenses associated with compliance with the summonses for examination dated 21 September 2012, fixed in the sum of $4,700.

2    Mr McLachlan and Mr Jessup, the First and Third Respondents, were directors of, inter alia, a Responsible Entity of managed investment schemes in which Radicle held significant interests. The Second Respondent (Mr Kelly) was engaged by Radicle, and then the Responsible Entity, to provide valuations of the managed investment schemes and related assets. The Responsible Entity, inter alia, purported to extinguish Radicle’s interests in the managed investment schemes following the appointment of the liquidators.

3    Pursuant to s 596B of the Corporations Act 2001 (Cth) (the Act), summonses were issued to the Respondents requiring them to produce certain documents and to attend for examination. McLachlan and Jessup asserted claims of legal professional privilege over a quantity of documents they were required to produce under the summonses issued to them (Privileged Documents).

4    Following the examination, the Respondents sought to recover from the liquidators the costs associated with the Privileged Documents and “other costs” associated with the examination. The Registrar made the Orders set out at [1] above. On the current review application, the liquidators submitted that they should not be required to pay McLachlan and Jessup’s legal costs associated with their claims in respect of the Privileged Documents.

5    With the consent of the parties, this matter was determined on the papers.

RELEVANT PRINCIPLES

6    The Court’s function on a review of a Registrar’s decision under s 35A(5) of the FCA is to rehear the case and decide the facts for itself, unfettered by the decision of the Registrar: West International Pty Ltd v Ultradrilling Pty Ltd (2008) 68 ACSR 108 at [6].

ORDER 4 – LEGAL PROFESSIONAL PRIVILEGE COSTS

7    Order 4 was an order making an award for the legal costs incurred by McLachlan and Jessup in relation to “the dispute about legal professional privilege” (the Privilege Dispute): see [1] above. For the reasons that follow, order 4 made by the Registrar will be set aside and in lieu thereof, there will be no order as to costs.

8    First, the facts. They were relevantly summarised by the Registrar:

4    None of the examinees were involved in the management of Radicle. … Advanced Horticultural Management Limited (“AHM”) was the responsible entity for two registered managed investment schemes located in South Australia and concerning apple orchards. Messrs McLachlan and Jessup were, at all relevant times, directors of AHM. In addition, there were a number of land-holding companies on which the relevant agricultural businesses were conducted. One of those companies was Rivercorp Land & Water Limited (“Rivercorp”). Radicle held units in each of the managed investments schemes, along with associated shares in Rivercorp (together, “Radicle’s investments”). Mr Kelly had been engaged to undertake a number of valuations relevant to Radicle’s investments.

5    During 2010, various notices were sent on behalf of AHM as responsible entity to Radicle concerning fees payable in respect of the managed investments schemes. AHM asserted that the relevant notices were not complied with and Radicle’s interests in the schemes were purportedly terminated. In addition, Rivercorp and the managed investment schemes were later restructured in such a way that has allegedly resulted in a reduction of Radicle’s interest in Rivercorp and a diminution in value of that remaining interest.

Claims for legal professional privilege

6    The summonses were initially made returnable before the Court on 26 October 2012 to enable the production of documents. The categories of documents sought from each examinee were extensive and their production complicated by claims for legal professional privilege sought to be maintained by Messrs McLachlan and Jessup (“the privilege claims”). It is important to note here that, in addition to being a director of AHM, Mr Jessup was also (and still remains) a partner at the law firm Piper Alderman.

7    At the first return date, certain documents were produced by each examinee on an open basis and without any accompanying objection to inspection by the liquidators (“the open documents”). In addition, the parties proposed consent orders providing for a process by which Messrs McLachlan and Jessup would substantiate their objections to the inspection by the liquidators of the documents over which they claimed legal professional privilege (“the privileged documents”). …

…

9    By affidavit sworn 7 November 2012, Mr McLachlan sought to set out the basis of objections made by both him and Mr Jessup in respect of the privileged documents. He made clear in his affidavit that he was making the objections on behalf of AHM, Rivercorp and three other companies of which he had been a director prior to their deregistration. Unfortunately, Mr McLachlan’s affidavit did not properly identify the individual documents in question or the basis upon which privilege was claimed in respect of each document. Instead, it set out several dozen general categories of documents over which privilege was asserted. The liquidators subsequently disputed the privilege claims and numerous correspondence passed between the parties’ lawyers concerning the privileged documents and the adequacy of Mr McLachlan’s affidavit.

10    The matter came to a head at mention convened by the Court on 22 November 2012. Further orders were made on that day requiring a supplementary affidavit to be prepared by Mr McLachlan’s lawyers. The supplementary affidavit was required to annex a detailed list of all the privileged documents including, among other things: the relevant (privilege) category for each document, the date of [the] document, the description of the document, including the subject matter of the communication, its author and recipients(s) and the identity of the party or entity claiming the privilege. The orders then required the liquidators to file and serve an affidavit annexing an amended version of the list of privileged documents, identifying any documents which remained contentious and which claim for privilege was challenged.

11    On 28 November 2012, Ms Mullins, solicitor for the examinees, filed her affidavit in compliance with the orders of 22 November 2012. Some 243 documents were individually described and categorised in the schedule annexed to her affidavit. Ms Mullins’ affidavit advanced matters considerably but did not entirely resolve the controversy.

12    By affidavit filed on 30 November 2012, Mr Winford, solicitor for the liquidators, identified certain documents over which the liquidators continued to contest the claim for privilege. Certain other documents in Ms Mullins’ list of privileged documents were identified as already having been produced and inspected as part of the open documents. When the matter came on before the Court for further mention that day, Ms Mullins accepted that privilege had been waived in respect of these earlier produced documents. In relation to the balance of the privileged documents, there remained a lack of clarity about the identity of the client to whom Mr Jessup, in his role as a solicitor, had provided legal advice in relation to the restructure of Rivercorp. (As previously explained, there were five corporate entities on whose behalf the privilege claim had been made). It was also unclear what role had been played by the corporate advisory firm M&A Partners in connection with the Rivercorp restructure and why that firm had been the apparent recipient of legal advice provided by Mr Jessup. As a consequence, additional orders were made requiring Messrs McLachlan and Jessup to clarify these outstanding matters in further supplementary affidavits due to be filed at the conclusion of the first day of the examinations the following week. Those affidavits were filed accordingly. Mr Jessup’s affidavit made clear that he had provided legal advice to Rivercorp and AHM, together with AMC No. 1 Pty Ltd, AMC No. 2 Pty Ltd and AMC No. 3 Pty Ltd (“the deregistered companies”). In addition, Mr Jessup’s affidavit explained that M&A Partners received legal advice prepared by him at the request of Mr McLachlan.

13    The examinations themselves were held on 3, 4 and 5 December 2012 and were wide-ranging in their scope. … At the conclusion of the examinations the dispute about the privilege claims had not yet been determined. In addition, the examinees sought orders from the Court fixing their costs and expenses associated with their response to the summonses and the agitation of the privilege claims.

(Emphasis added in italics. Bold in original.)

9    It is against that background that the current application falls to be determined.

10    What then are the applicable principles to be applied? As a general proposition, the courts have been reluctant to allow examinees to recover their costs of legal representation: see, for example, Ex parte Waddell; In re Lutscher (1877) 6 Ch D 328; Re Appleton, French & Scrafton, Limited [1905] 1 Ch 749; Re Equiticorp Finance; Ex parte Brock (No 2) (1992) 27 NSWLR 391 at 397 and Surpion Pty Ltd (ACN 005 245 054) v M R Works Pty Ltd (recs and mgrs apptd) (2010) 80 ACSR 635 at 638. However, the courts have also recognised a limited exception to that general principle. In Surpion, Finkelstein J stated (at 683):

… when the examination may properly be characterised as “litigation” between the liquidator and the examinee, payment of the costs of representation of the examinee, payment of the costs of the representation of the examinee may be justified.

11    In support of that proposition, Finkelstein J cited In re Lutscher and Re Appleton, French & Scrafton, Limited. It is necessary to consider those authorities in some detail. In In re Lutscher, the examinee was the managing director of a company in which the bankrupt had once held shares. The examinee was summoned on the application of the trustee in bankruptcy and sought the costs of retaining two counsel who attended on his behalf to watch the proceedings. The Court disallowed those costs. Cotton LJ stated (at 332):

There can be no doubt he is entitled to his reasonable expenses, and the whole question is whether the expenses charged in this case were reasonable. Although a witness may be entitled to have counsel present to protect him, he must retain such counsel at his own expense. And a mere witness summoned under this section cannot be allowed costs which he would not have if summoned as a witness in any litigation.

12    Relevantly, James LJ stated (at 331):

He was summoned … he was bound to give evidence, and, considering the position he held towards them, the company thought it advisable to instruct counsel to attend his examination. That course appears to have been taken by them entirely of their own accord, no right to do so being given them by the Act. This is not the case of a man who is charged with having property in his possession belonging to a bankrupt and is summoned to give evidence respecting it. In such a case it might possibly be said that there was a litigation between him and the trustee, and that he was entitled to be protected by counsel. The circumstances of the present case are quite different.

(Emphasis added.)

13    In Re Appleton, French & Scrafton, Limited, a creditor and contributories of a company in a voluntary winding up examined two officers of the company as to certain alleged acts of misfeasance by them. Following their examination, at which the officers employed solicitors and counsel, a misfeasance summons was issued against them. The officers applied for, and were allowed, their costs of legal representation. Having regard to In re Lutscher, Warrington J considered that the facts of the case fell within the exception identified by James LJ, namely “an examination of persons against whom allegations were made with respect to the company’s property and against whom proceedings were intended to be taken”: at 756.

14    The reasoning in both In re Lutscher and Re Appleton, French & Scrafton, Limited has been adopted in the context of examinations concerning bankruptcies (prior to the introduction of s 81(14) of the Bankruptcy Act 1966 (Cth)): see Scott (Trustee), in the matter of Price (Bankrupt) [2011] FCA 1478 at [41]-[50]. For example, in Re Kusmenko, Ex parte Golovachenko v Wilson (1976) 14 ALR 673 at 680, Riley J considered that an order for costs should only be made where the examiner and the examinee had reached a stage where legal proceedings were “either actually in existence or in contemplation, in the sense of being actually determined upon”.

15    Accordingly, the question arises: did the Privilege Dispute have the character of litigation?

16    The liquidators submitted that it would be a “severe mischaracterisation” of the events that transpired in relation to the Privileged Documents to describe them as “litigation”. They submitted that there was “no application on foot which was opposed or determined” and that “there was never any dispute or contest in these proceedings, only steps taken by the [liquidators] to responsibly assess the claims made.” Further, the liquidators contended that expenses incurred by the Respondents were unnecessary, arising “as a consequence of the deficient manner in which they chose to produce the Privileged Documents and their failure to provide basic supporting information in relation to their claims”.

17    Unsurprisingly, the Respondents took a different view. They submitted that:

6.    [T]he Privilege Dispute took the character of litigation because:

6.1.    the Privilege Dispute required two hearings …;

6.2.    some 11 pieces of correspondence were exchanged between the parties on the Privilege Dispute;

6.3.    the Respondents had to prepare a five-page list of 37 categories of documents over which the Respondents claimed privilege (the “Privileged Documents”) which described each category in detail and specified the ground upon which the claim was made;

6.4.     the [liquidators] refused to accept the 37 categories and demanded itemised lists of the Privileged Documents, verified by affidavit;

6.5.    the Respondents had to prepare a 16-page spreadsheet itemising and categorising 243 documents in detail. In terms of categorisation of documents, that list did not depart from the 37 categories of documents initially identified. The information provided by the itemised list that was additional to the 37 categories was minimal;

6.6.    the Respondents had to swear four affidavits in New South Wales and South Australia; and

6.7.    the above resulted in the Respondents’ solicitors spending some 137 hours on the Privilege Dispute alone, excluding the time spent on arguing the costs of the Privilege Dispute.

7.    The vast majority of the Privileged Documents were produced by Alan Jessup. In issuing the Summons upon Mr. Jessup, the [liquidators] asked a solicitor to produce documents relating to his legal advice to his client. The [liquidators] knew or ought to have known that a large proportion of Mr. Jessup’s documents would be the subject of a legitimate privilege claim.

8.    On the third day of the Examination, the [liquidators] abandoned their objections to the privilege claims.

(Emphasis in original.)

18    The Respondents are correct. The Privilege Dispute was a dispute with the character of litigation.

19    Where an application by a liquidator is opposed, it may take on the character of a suit between parties: see Smith, in the matter of Peko Rehabilitation Project Pty Ltd (Receiver and Manager Appointed) (in liq) [2011] FCA 1448 at [15]. The liquidators’ submission that there was “no application on foot which was opposed or determined” is rejected. Here,  the liquidators made an application for inspection of the Privileged Documents, which was resisted by McLachlan and Jessup on the basis of their claims of legal professional privilege. A significant amount of correspondence passed between the solicitors for the liquidators and the Respondents regarding the basis for those claims. However, the issue could not be agreed and the liquidators requested that the “contest” in relation to the privilege claims be listed for hearing before the Court.

20    Accordingly, the Privilege Dispute was, in substance, litigation between the liquidators and the Respondents before a judicial officer (the Registrar) who had authority to resolve that dispute: see Surpion at 639. Although the Registrar was ultimately not required to resolve the Privilege Dispute, had the liquidators continued to contest the privilege claims, it would have been necessary to do so.

21    The question which then falls for consideration is where the liability for the costs incurred by McLachlan and Jessup in relation to the Privilege Dispute should fall. In my view, each side had a measure of success: see [12] of the Registrar’s reasons for decision extracted at [8] above. In addition, the way each side went about resolving the Privilege Dispute was less than satisfactory. If a claim for legal professional privilege is to be made, then the party making the claim must identify as early as possible the relevant (privilege) category for each document, the date of the document, the description of the document, including the subject matter of the communication, its author and recipients(s) and the identity of the party or entity claiming the privilege: National Crime Authority v S (1991) 29 FCR 203 at 211-212; C v National Crime Authority (1987) 78 ALR 338 at 343; Warman International Ltd v Envirotech Australia Pty Ltd (1986) 11 FCR 478 at 489-490; R v The Coroner; Ex parte Alexander [1982] VR 731 at 736; Sankey v Whitlam (1978) 142 CLR 1 and McNicol SB, Law of Privilege (The Law Book Company Limited, 1992) pp 10-11.

22    How a party claiming legal professional privilege does that will vary between cases. However, the substance of the exercise does not change. Put simply, a blanket objection will not work. The Respondents knew that but took a long time to get to the point that they were obliged to reach. In this regard, it is relevant to note that Jessup, who produced the majority of the Privileged Documents, is a partner of a national law firm (see [6] of the Registrar’s reasons for decision extracted at [8] above). Jessup should have been well acquainted with the principles relevant to a claim for legal professional privilege. If the matters addressed in the affidavits ultimately filed by or on behalf of the Respondents had been filed earlier, I suspect that at least part of the debate would have fallen away much earlier.

23    In the end though, the fault does not lie solely with the Respondents. The liquidators’ solicitors had an obligation to assist in seeking to reach that objective as quickly, inexpensively and efficiently as possible: s 37M read with s 37N(2) of the FCA. (It should be noted that ss 37M and 37N of the FCA impose obligations upon parties to a civil proceeding and their lawyers. Those obligations do not extend to non-parties. The Respondents, as examinees, were not parties in the relevant sense: see, for example, Burns Philp & Co Ltd v Bhagat [1993] 1 VR 203 at 212; Re Westgate Wool Co Pty Ltd (in liq) (2006) 206 FLR 190 at [37].) The resolution of any privilege dispute requires cooperation and dialogue. Numerous letters between solicitors adopting what might be described as the “moral high ground” are not usually of great assistance in resolving these kinds of disputes. They were not of assistance in the present case. Moreover, as the Respondents submitted, the liquidators knew or ought to have known that a large proportion of Jessup’s documents would be the subject of a legitimate privilege claim. Finally,  the liquidators only informed the Court that they no longer pressed for production of the balance of the documents the subject of the Privilege Dispute at the last possible moment – after the examinations had concluded.

24    For those reasons, in the present case there should be no order in relation to these costs. The costs should lie where they fall.

ORDER 5 – OTHER COSTS

25    Order 5 was an order making an award for the costs of the Respondents’ application to seek conduct money, costs and expenses in producing documents and the costs of arguing the costs of the Privilege Dispute. The Respondents submitted that by reason of their success in obtaining orders 1, 2 and 3 from the Registrar (which are not the subject of the liquidators’ application for review), the Respondents are entitled to the benefit of this order.

26    The liquidators sought a review of this order. The liquidators submitted that they should not be required to pay the costs claimed by the Respondents (which they contended were costs for gathering the documents in answer to the summonses, attending examinations, and “protecting” the Privileged Documents). The liquidators submitted that because the Respondents were subject to a statutory compulsion to attend for examination, to which the compulsion to produce documents was ancillary, the Respondents had no entitlement to these costs. Further, the liquidators submitted that unless the examination had occurred unnecessarily for the purposes of s 597B of the Act (and there was no such suggestion), an examinee does not have a general entitlement to recover its legal expenses: see Re Equiticorp; Moore-McQuillan v SA Police (No 2) (2000) 207 LSJS 336 at [6] and Surpion at 638. In particular, the liquidators submitted that given the nature of the costs claimed – items comprising various administrative tasks by solicitors such as the drafting of emails to their clients and preparing submissions – the Respondents should not be entitled to recover the costs.

27    First, the applicable principle. A person required by law to come before a court and give evidence has an obligation as a citizen to comply and is not entitled to compensation: Re Equiticorp at 396-397. However, it is possible for the court to make a condition of an order for examination under s 597 of the Act to make an order for expenses, if justice requires. The circumstances where such an order may be made are limited to out of pocket expenses for travelling, accommodation and through missing work in attending the examination: Re Equiticorp at 397. There may be circumstances where it is appropriate to allow compensation for searching for documents: Re Equiticorp at 397. However, where a witness is compelled to attend under s 597 of the Act, compensation does not generally extend to costs incurred in a witness conferring with his or her staff or associates or with his or her legal advisers or otherwise obtaining information from others that might be used in evidence in the examination: Re Equiticorp at 397.

28    What then were the expenses the subject of this order? The items of expense were highlighted in green in Sch C to the Respondents’ submissions to the Registrar. I have reviewed the items. On the face of what appears to be an itemised bill from a solicitor, each item would appear to fall within that otherwise excluded category of expenses – legal costs incurred by the Respondents’ legal advisers. The tasks listed include not only what would appear to be research about legal professional privilege and the applicable conduct money but administrative tasks including drafting emails and the like.

29    In my view, neither the circumstances of the issue of the examination summonses or the particular expenses claimed justify a departure from the general rule that a person required by law to come before a court and give evidence has an obligation as a citizen to comply and is not entitled to compensation. Order 5 of the Orders made by the Registrar will be set aside.

COSTS

30    Although the liquidators have been successful in setting aside paragraphs 4 and 5 of the Orders made by the Registrar, each party will bear their own costs of the current review application. As has been explained, neither party is free from blemish.

Associate:

Dated:    24 October 2013