Federal Court of Australia

Australian Securities and Investments Commission v Tzouvelis (No 2) [2023] FCA 1149

ORDERS

THE COURT ORDERS THAT:

1.    Senior National Judicial Registrar Legge reconsider her report dated 2 June 2023 in light of these reasons, and provide to the chambers of O’Callaghan J, marked “Confidential”, a copy of a further report by no later than 4:00pm on 14 November 2023.

2.    Costs reserved.

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

REASONS FOR JUDGMENT

O’CALLAGHAN J

Introduction

1    By an originating application filed on 24 October 2022, the Australian Securities and Investments Commission (ASIC) sought declarations pursuant to s 21 of the Federal Court of Australia Act 1976 (Cth) that 615 documents (the Relevant Documents) held on electronic devices seized pursuant to a search warrant executed at the home of the first respondent (Mr Tzouvelis) were not subject to legal professional privilege because there were reasonable grounds to believe that the documents recorded or evidenced communications made in furtherance of a requisite improper purpose.

2    On 9 May 2023, I delivered judgment in relation to that application in Australian Securities and Investments Commission v Tzouvelis [2023] FCA 431.

The judgment

3    The factual background to the proceeding is set out in my reasons at [10] and [33]-[62].

4    I identified these critical questions, both of which I answered in the affirmative:

(1)    Had ASIC established a prima facie case that the respondents, or any of them, acted in furtherance of the improper purpose of:

(2)    Did any of the Relevant Documents over which privilege was claimed contain or evidence communications between the respondents, or any of them, and their legal advisors in furtherance of, or as a step preparatory to, either or both of those purposes?

5    In answer to question 1(a), I found that ASIC had made out a prima facie case that the respondents acted with the improper purpose of diverting assets from Golden Financial to Premium to minimise the assets available to Golden Financial to pay the pecuniary penalty, including because:

(a)    a lump sum payment of twenty months’ worth of invoices for management fees totalling $821,212.37 was paid to Premium three weeks after the civil penalty proceeding was commenced; and

(b)    bank account details had been misleadingly “updated”.

6    In answer to question 1(b), I found that ASIC had made out a prima facie case that Mr Tzouvelis and the other respondents acted with the improper purpose of causing Golden Financial to file and serve misleading evidence and written submissions about its financial position in the penalty phase of the civil penalty proceeding, including because:

(a)    Mr Tzouvelis wrote to Mr Kypreos and Mr Donohue urging them to “explain to ASIC” that “what has been done [the creation of the $3m in equity] doesn’t look like a profit” because “the less we show the less the fine”, and that ASIC had to be told how “the Net Asset” issue was addressed “otherwise, as at 30 June 16, NSG has $3m available to pay a penalty”; and

(b)    The evidence filed by Golden Financial buried “any reference to the sum of $4,878,629.09 and any explanation of the capital distribution and/or corresponding debt forgiveness of $2,916,888”.

7    I therefore made the following orders (among others):

1.    Senior National Judicial Registrar Legge be appointed as a referee pursuant to s 54A of the Federal Court of Australia Act 1976 (Cth) to inquire and report in accordance with the Federal Court Rules 2011 (Cth) on the questions whether any of the documents referred to in exhibit YH-4 to the affidavit of Yu-chiao Hsueh affirmed 7 December 2022, in respect of which the first respondent claims legal professional privilege, contain or evidence communications between the respondents, or any of them, and their legal advisors in furtherance of, or as a step preparatory to, either or both of the improper purpose of:

(a)    diverting assets from the second respondent to the third respondent in order to minimise the assets available to it to pay a pecuniary penalty that ASIC was seeking against it in the civil penalty proceeding brought against it by the applicant in proceeding no. VID 585 of 2016;

(b)    causing the second respondent to file and serve misleading evidence and written submissions about the financial position of the second respondent in the penalty phase of proceeding no. VID 585 of 2016.

2.    The solicitors for the respondents provide in electronic form and marked “confidential” a copy of each of the documents referred to in exhibit YH-4 to the affidavit of Yu-chiao Hsueh affirmed 7 December 2022 to the chambers of Senior National Judicial Registrar Legge by no later than 4:00pm on 16 May 2023.

3.    Senior National Judicial Registrar Legge provide to the chambers of O’Callaghan J, marked “Confidential”, a copy of the report referred to in order 1 by no later than 4:00pm on 16 June 2023.

8    On 2 June 2023, and pursuant to order 3 above, Senior National Judicial Registrar Legge (the referee) provided to my chambers a report titled “Confidential: Report of Referee Pursuant to the Orders of Justice O’Callaghan Made on 9 May 2023” (the report).

9    On 19 June 2023, ASIC sent an email to my chambers notifying the court that it sought to be heard in relation to the report.

10    I took that to be an application made under r 28.67 of the Federal Court Rules 2011 (Cth), which provides:

28.67    Proceeding on report

(1)    After a report has been given to the Court, a party may, on application, ask the Court to do any of the following:

(a)    adopt, vary or reject the report, in the whole or in part;

(b)    require an explanation by way of a further report by the referee;

(c)    remit on any ground, for further consideration by the referee, the whole or any part of the matter that was referred to the referee for inquiry and report;

(d)    decide any matter on the evidence taken before the referee, with or without additional evidence;

(e)    give judgment or make an order in relation to the proceeding or question.

(2)    A party must not adduce in the Court evidence given in an inquiry.

11    ASIC sought an order that I reject the report, in summary, because:

(i)    the referee had made errors of principle and law in applying the incorrect test for determining whether a communication is in furtherance of or as a step preparatory to an improper purpose; and

(ii)    the reasons contained in the report were inadequate.

12    The respondents opposed the application and submitted that I should adopt the report.

The referee’s report

13    The referee identified the critical question that she had been asked to answer as this:

Do any of the 615 identified documents over which privilege is claimed contain or evidence communications between the respondents, or any of them, and their legal advisors in furtherance of, or as a step preparatory to, either or both of those purposes?

14    She continued:

[That] … critical question has been referred to me for inquiry and report. I understand that, whilst this question arises in the context of a dispute as to legal professional privilege, the critical focus of my inquiry is whether any of the Relevant Documents contains or evidences the improper purpose. Consistently with this scope, I have not inquired and make no finding as to any other matter that may affect an assertion of legal professional privilege in respect of the Relevant Documents. For example, I have made no inquiry as to ‘dominant purpose’, confidentiality or any other relevant criteria of advice or litigation privilege. For completeness, I note also that I have made no inquiry or finding as to the capacity in which any of the communications contained or evidenced in the Relevant Documents was sent or received (for example, I have not sought to confirm whether the relevant author or addressee identified in a Relevant Document was an officer, employee or legal adviser of any, some or none of the respondents).

In assessing whether any of the Relevant Documents contains or evidences the improper purpose, I have had regard to each of the Relevant Documents, both on a standalone basis and in the context of the other Relevant Documents provided to me, and in the further context of O’Callaghan J’s reasons for judgment. Having regard to the nature of the Question referred to me and in light of his Honour’s findings as set out in his reasons for judgment, I have neither sought nor received evidence or submissions from the parties regarding the subject matter of the referral to me.

15    Under the heading “Findings”, the referee continued:

The Question referred to me is whether any of the Relevant Documents contains or evidences communications in furtherance of, or as a step preparatory to, either or both of the improper purposes identified in the Orders. Self-evidently, the critical focus of the Question is as to whether the Relevant Documents disclose an improper purpose in the sense described in the Orders. In this regard, I consider that an improper purpose is relevantly disclosed if it appears to be a purpose of the communication, whether or not it appears to be the sole or dominant purpose. On the other hand, I consider that no improper purpose is relevantly disclosed by:

a)    documents that contain or evidence communications in furtherance of, or as a step preparatory to, the mere transfer of any asset from the second respondent to the third respondent but without any indication of an attendant purpose of thereby minimising the assets available to it to pay a pecuniary penalty that ASIC; nor

b)    documents that contain or evidence communications in furtherance of, or as a step preparatory to, the mere filing and service of evidence and written submissions about the financial position of the second respondent in the penalty phase of proceeding no. VID 585 of 2016 but without any indication of an attendant design to mislead. In this regard, I have considered in my assessment that an improper purpose might relevantly be disclosed by a deliberate intent to mislead or a recklessness as to whether material filed and served may mislead.

I have also taken into account that a communication may be misleading either by what it expressly represents or by what it conceals.

Having regard to the matters outlined above, I have reviewed each of the Relevant Documents. Following that review, I consider that none of the Relevant Documents contains or evidences communications between the respondents, or any of them, and their legal advisors in furtherance of, or as a step preparatory to, either or both of the improper purposes.

In view of the conclusion I have reached in response to the Question, and subject to any further direction from the Court, I do not consider it necessary or appropriate to record any more expansive commentary or explanation regarding the content of the Relevant Documents.

Submissions

16    ASIC submitted that I should reject the report and resolve the matter by either remitting question 2 for further consideration by the referee or reviewing the Relevant Documents.

17    It submitted that the referee committed “an error of principle and law” because she required the communications to contain an “indication of an attendant purpose”, which it was contended was “inconsistent with authorities that recognise that a document or communication can be in furtherance of an improper purpose without there having been any statement of the improper purpose”.

18    It was said in that regard that the principle that a document or communication can be made in furtherance of the improper purpose “even if the lawyer does not know of the fraudulent or improper purpose” would have no work to do if a requirement of the “fraud exception” is that the communication itself contains an indication of the improper purpose. The written submission continued, as follows:

The Court had already found that there was a prima facie case that the respondents acted with the improper purpose of diverting assets from Golden Financial to Premium to minimise the assets available to Golden Financial to pay the pecuniary penalty. The proper task for the Referee was to determine whether any of the Relevant Documents contain or evidence communications which furthered (or were prepared for the purpose of or as a step preparatory to) transactions between Golden Financial to Premium which Justice O’Callaghan had found were (prima facie) for the improper purpose.

For example, given the Court’s finding in answer to question 1(a), if a document recorded a communication made on a prima facie basis in furtherance of a transaction which diverted assets from Golden Financial to Premium, then ASIC contends that the answer to question 2 in respect of that document would be “yes” unless there was some basis to be satisfied that it was not for an improper purpose (for example, if it was apparent that a particular payment from Golden Financial to Premium was for some other proper purpose).

Contrary to this approach, by requiring that the communications themselves convey the improper purpose, which had already been established, the Referee applied an erroneous test and fell into legal error.

19    ASIC also submitted that, for the same reasons, the referee applied the incorrect legal test with respect to the second improper purpose by excluding communications made “without any indication of an attendant design to mislead”.

20    ASIC submitted that it was “inherently unlikely” that any author planning or undertaking an improper transaction would “reference” an improper purpose directly (or even indirectly) in the communication, and that being so, the approach favoured by the referee should not be adopted.

21    Next, ASIC submitted that the test for whether a communication was made in furtherance of an improper purpose is to be established on a prima facie basis, citing AWB Limited v Cole (No 5) (2006) 155 FCR 30 at 89 [218] (Young J) (a paragraph that I set out in my reasons).

22    ASIC also submitted that the report “provides no explanation of the basis for the factual finding that ‘none of them contains or evidences communications in furtherance of, or as a step preparatory to, either or both of the improper purposes’”. It was said that, as a result, the report:

does not satisfy the requirement, recognised in CPB Contractors Pty Ltd v Celsus Pty Ltd (No 2) (2018) 268 FCR 590, at [67], that a referee’s report must sufficiently disclose the referee’s reasoning process ‘so that the Court can be satisfied that the conclusions are based upon such an intellectual exercise’.

23    It was further contended that:

[w]hile it can be accepted that the Referee must take care not to disclose to ASIC information that is subject to legal professional privilege, the reasons in the report are wholly inadequate because they do not enable the Court to be satisfied that the findings involve proper consideration and a process of logic, nor do they enable an understanding of the improper purpose against which the documents were assessed.

24    It was submitted that the referee should have given a “general indication as to the contents of the documents, including whether they concern matters other than the transactions that were in issue before [me]”, together with information about “the general subject matter of the documents, or at least what the subject matter does not concern”, including for example by preparing a schedule listing each of the Relevant Documents which records why they are not in furtherance of either of the improper purposes.

25    At the hearing, Ms E Levine of counsel, who appeared with Ms E Smith of counsel, made the following additional submissions in support of the proposition (set out at paragraph [18] above) that “if a document recorded a communication made on a prima facie basis in furtherance of a transaction which diverted assets from Golden Financial to Premium, then ASIC contends that the answer to question 2 in respect of that document would be ‘yes’ unless there was some basis to be satisfied that it was not for an improper purpose (for example, if it was apparent that a particular payment from Golden Financial to Premium was for some other proper purpose)”.

26    Ms Levine elaborated on that written submission, as it applied to the first improper purpose, in oral argument as follows:

to the extent the conduct is occurring, transfers of these assets in the relevant timeframe, [i]s itself in pursuit of an improper purpose. It’s not occurring for a legitimate purpose. The conduct itself is occurring so as to divert assets. It’s … was not necessary for the learned registrar to have found anything further on the question of diverting assets to minimise the assets available. To the extent trailing commissions were transferred, they were transferred for an improper purpose. That’s, on a prima facie basis, the court’s finding as to the first improper purpose and the same for the management fees.

27    As to the second improper purpose (causing the filing and service of misleading evidence and submissions in the civil penalty proceeding), Ms Levine made this submission in the course of this exchange with me:

HIS HONOUR: So if a client gave the lawyer a document that the client knew was a forgery and said, “Here, file this or serve this” and the lawyer being innocent of the fact of the forgery does file it and does serve it, how would you know from an inspection of documents, without more, that the poor lawyer, unbeknownst to her or him, had acted in furtherance of a fraud?

MS LEVINE: To the extent that the – we’re given a concrete example here, for instance, on ASIC’s case, to the extent that – this is just an example, of course. ASIC hasn’t seen the documents and

HIS HONOUR: No, of course not.

MS LEVINE: so such a document may or may not exist. But as an example, if a lawyer – going to the second improper purpose, the causing the filing and service of misleading evidence and submissions – if a lawyer sent an affidavit – one of Mr Tzouvelis’ LPP affidavits, say, the first one going to the – which contained information as to the financial position, provided some amendments as to the section dealing with the financial position or more broadly even simply said, “Here are my amendments to this document” which the court has found on a prima facie basis is misleading because it doesn’t properly address the financial position. But in ASIC’s submission that would be in furtherance of the scheme which is to file and serve that misleading document. The lawyer doesn’t need to know anything about it, but the lawyer is acting in furtherance of that objective in assisting a client to finalise that misleading document or prepare that misleading document or put it in admissible form. In ASIC’s submission, nothing more is required.

28    The respondents submitted that the referee had not erred in any respect.

29    As a result of exchanges between me and counsel, I ordered that the parties file further written submissions on the question of the standard to be applied to what may be described in short as the “in furtherance” question. Those submissions were duly filed.

30    ASIC’s submission was directed to making good the proposition that the application of the prima facie standard to the requirement that the communication be “in furtherance” is supported by authorities spanning over 50 years. It relied on the following cases: Commissioner of the Australian Federal Police v Propend Finance Pty Ltd (1997) 188 CLR 501 at 514 (Brennan CJ), 534 (Toohey J) and 574 (Gummow J); Butler v Board of Trade [1971] 1 Ch 680; AWB Limited v Cole (No 5) (2006) 155 FCR 30; Selak v National Tiles Co Pty Ltd [2023] VSC 446; Pigozzo v Mineral Resources Ltd [2022] FCA 1166 at [151] (Feutrill J); Fletcher v Fortress Credit Corporation (Australia) II Pty Ltd [2014] QSC 303 at [54]; Deppro Pty Ltd v Hannah [2009] 1 Qd R 1 at 8 [21] (Daubney J); Gurtler v Finance Now Pty Ltd [2007] FCA 477 at [57] (Finn J); and Andrianakis v Uber Technologies Inc [2022] VSC 196 at [199(c)] (Matthews AsJ).

31    To those cases may be added Attorney-General (NT) v Kearney (1985) 158 CLR 500 at 516 (Gibbs CJ), 517 (Mason and Brennan JJ) and 525 (Wilson J).

32    The respondents, for whom Mr JWS Peters AM KC appeared, with Mr MJ Hooper of counsel, made this submission:

The respondents submit that the prima facie test does not apply to the factual inquiry as to the element of “furtherance”.

The respondents accept that in the context of what is generally described as the ‘fraud exception’ to privilege, illegality or fraud is not required to be proved on the balance of probabilities and only upon a lesser “prima facie” standard, for the reasons set out in the High Court cases addressed below.

But there is no similar rationale in support of the test of furtherance also being decided on a threshold lower than the balance of probabilities. It would be an odd result if the prima facie test applied at each stage – and would not properly acknowledge the importance of the substantive right to privilege, and the balance struck by the crime / fraud principle between protection of the privilege and preventing the privilege being misused to hide forms of wrongdoing.

The test of furtherance involves a simple question of fact to be addressed in each case, once a prima facie case of improper purpose has been made out: see Re Moage Ltd (In Liquidation) (1998) 82 FCR 10 at 19. Did the document further the improper purpose or not?

As such, furtherance is to be decided on the usual standard of proof. In this proceeding ASIC seeks final relief by way of declarations, and the standard of proof is the balance of probabilities.

Legal principles governing adoption of referee reports

33    Pursuant to s 54A(3) of the Federal Court Act, if a report of a referee under s 54A(1) is provided to the court, the court may deal with the report as it thinks fit, including by doing the following: adopting the report in whole or in part; varying the report; rejecting the report; or making such orders as the court thinks fit.

34    As Katzmann J said in Gulf Conveyor Systems Pty Ltd v Gulf Integrated Systems Solutions Pty Ltd [2020] FCA 1245 at [16]-[17]:

… if the referee’s report reveals some error of principle, absence or excessive jurisdiction, patent misapprehension of the evidence or perversity or manifest unreasonableness in fact finding, that would ordinarily be a reason for rejection … In this context, patent misapprehension of the evidence means a lack of understanding of the evidence and not the weight attributed to it; and perversity or manifest unreasonableness means a conclusion that no reasonable tribunal of fact could have reached.

But in general, the referee’s findings of fact should not be re-agitated before the Court. The Court will not reconsider disputed questions of fact where there is factual material sufficient to entitle the referee to reach the conclusions he or she did, particularly where the disputed questions are in a technical area in which the referee has expertise. It is not enough for an aggrieved party to point to errors of fact which would be amenable to correction by an appellate court.

(Citations and internal quotations omitted).

Consideration

35    I do not accept the respondents’ submission that the question of “furtherance” is to be decided on the balance of probabilities. No authority was cited in support of that proposition. On the contrary, all the cases (see those cited at paragraphs [30]-[31] above) stand for the proposition that the prima facie standard applies. The referee in this case was thus obliged to adopt that standard in addressing the questions posed.

36    Further, I do not accept ASIC’s submission that the adoption or application of that standard means that provided that a document prima facie matches the description of a document that concerns the subject matter of one or other of the prima facie improper purposes, that without more means that privilege cannot attach to the document, “unless it was apparent” that “there was some basis to be satisfied that it was not for an improper purpose”.

37    Contrary to ASIC’s submission, there must be something “apparent” from the document or documents (as the referee recognised, whether read separately or as a whole) that evidences “furtherance” of requisite improper purpose. The test does not, as ASIC suggests, operate only to shield from production documents that “apparently” further a purpose “other than” a requisite improper purpose.

38    The true question, in each case, must depend upon “the adequacy or otherwise of the evidence presented to provide the necessary level of satisfaction of the alleged improper purpose”. See Re Moage Ltd (In Liquidation) (1998) 82 FCR 10 at 19 (Mansfield J). And that level of satisfaction will, of course, “vary according to the facts of each case”. Commissioner of the Australian Federal Police v Propend Finance Pty Ltd (1997) 188 CLR 501 at 546 (Gaudron J). As Mansfield J said in Re Moage Ltd at 19:

The expression “in furtherance of” the improper purpose has been used … in many … cases dealing with this issue. In the authorities provided to me, and in the short time available to research the question, I have not found much judicial consideration of the full extent of its scope. That may simply reflect the proposition that the categorisation of a particular document as being in furtherance of an identified purpose is a question of fact necessarily to be addressed in each individual case.

39    So, what to do?

40    I have given that question anxious consideration. Ultimately, I think the preferable course is to ask the referee to reconsider her report in light of these reasons. I say that because the report does not, in terms, say that she applied the prima facie test to her review of the documents.

41    I will make an order accordingly.

Associate:    

Dated:    28 September 2023

SCHEDULE OF PARTIES