The right to claim privilege over documents and communications is an important right which protects parties from an obligation to disclose those documents and other communications to third parties. Privilege takes a number of forms, the one this article is concerned with is contained in Section 118 of the Evidence Act 1995 (Cth.) (“the Act”) which provides that confidential communications made for the dominant purpose of providing legal advice are protected from disclosure.
Privilege can be waived by certain actions and if it is waived then the documents/communications are no longer protected from disclosure. One of the questions commonly asked by insolvency practitioners is whether a reference to legal advice in a report to creditors will result in a waiver of client legal privilege. This question was considered in the case of Southern Cross Airlines Holdings Ltd (in liq) v Arthur Anderson & Co (a firm) (1998) 84 FCR 472. Southern Cross was applied in NRMA Ltd v Morgan (No 2) [1999] NSWSC 694 and cited in Strarch International Pty Ltd (in liq) v Loh (2005) 219 ALR 547.
Southern Cross
In Southern Cross, the first respondent, Arthur Andersen, sought an order, inter alia, for the liquidator of Southern Cross Airlines Holdings Ltd (“Southern Cross”) to produce legal advice which he obtained and which he referred to in a report he made to creditors.
The solicitors for Arthur Andersen alleged that the liquidator had waived legal professional privilege due to the following passage which was in a report to creditors: –
“The relationship between Apogee and the Company is a complex one and I have uncovered a number of documents which the ASC and I believe are not genuine. My solicitors have advised me that the Company has potential claims against Apogee and certain members of its management pursuant to Section 205 of the Corporations Law, and in relation to the sum of US$500,000 which was paid to Apogee and its management.”
The liquidator succeeded in resisting the application on two grounds:-
- The disclosure of the ‘effect’ of the advice did not waive legal professional privilege; and
- The disclosure of the existence of the advice to parties who shared a common interest in the advice did not waive legal professional privilege
The Law
Since this case was reported, there have been amendments to the Act however; sections 122(4) and (5) which Drummond J referred to are substantively the same and are now incorporated in sections 122(2), (3) and (5) of the Act.
The relevant statute provides generally that a person has waived privilege if the substance of the evidence has been disclosed with the express or implied consent of the party.
Disclosing the ‘effect’ versus the ‘substance’ of an advice
In considering this issue, Drummond J put an emphasis on the words “substance of”. His Honour said:
“I do not accept that such a brief general summary of the advice obtained by the liquidator concerning the potentiality for claims… in his report is sufficient to amount to a disclosure of “the substance of” that advice”.
As a matter of language, his Honour stated that there is a clear difference between the substance of an advice-containing document and the effect of that document. Disclosure of the effect of the document may occur where only the conclusion reached has been disclosed. Disclosure of the substance, however, could not occur without disclosure of both the conclusion and the critical (but not all the) steps by which that conclusion was reached.
Drummond J concluded that the reference in the report to creditors did not amount to a disclosure of the substance of the advice and would not result in a waiver of legal professional privilege.
Disclosure to parties sharing a common interest
While his Honour came to the above conclusion, he also went further in stating that even if the report did disclose the substance of the advice, the liquidator would not have waived privilege due to section 122(5)(c) of the Act which allows a disclosure to a person who had a common interest.
His Honour considered that for section 122(5)(c) to apply, all that is required is that there be a disclosure by a person entitled to claim legal professional privilege to another with whom the privileged claimant had at the time of the disclosure, a common interest relating to the action.
A liquidator exercises his powers for the benefit of creditors and is required to keep them informed of the progress of the liquidation. In the circumstances, if a liquidator makes a report to creditors which includes possible avenues of recoupment of funds on behalf of the company, a disclosure that a liquidator has good grounds for pursuing claims against a third party are considered to be disclosures to persons (i.e. creditors) who have a “common interest” under section 122(5)(c).
In relation to the common interest privilege, the case of Farrow Mortgage Services Pty Ltd (in liq) v Webb (1996) 39 NSWLR 601 was referred to where Sheller JA stated that a: –
“mere common interest in the outcome of litigation will be sufficient to enable any party with that interest to rely on it.”
Since a liquidator and the creditors each have an interest in the proper administration of the company, including the successful outcome of litigation brought by the liquidator with a view to obtaining funds available for the purposes of the liquidator’s administration, including the payment of a dividend to creditors, each has a common interest in the subject matter of advice as to the prospects of such litigation. As a result it was held that this common interest was sufficient to ensure that the communication of any such privileged advice between a liquidator and creditor would not destroy the privilege.
Holding onto your privilege
Insolvency practitioners should be extremely careful when drafting Reports to Creditors and other documents which contain any reference to legal advice. Notwithstanding the cases referred to, disclosure of such advice, particularly if the advice is lengthy or deals with multiple issues, may serve to increase the risk and costs of an administration or liquidation or open an insolvency practitioner to criticism. It is a challenge to balance the obligations of disclosure while protecting privilege. As such, it may be prudent to seek competent legal advice before disclosing the existence or content of legal advice within reports to creditors or to other parties.