Legal Professional Privilege And The Corporations Act.
It is a bleak day for a company when a receiver knocks on the door. A receiver is a person appointed to take the control of a company's assets, (and usually control of the company itself) away from its directors and officers. In most cases receivers are appointed by a secured lender under the terms of a loan contract, such as a charge or mortgage, as a way of getting the loan repaid.
Although such receivers are appointed by the lender, the loan contract almost always states that they act as the agent of the borrower. It is an odd sort of agency. Normally agents have to act in the best interests of their principal, but that is definitely not the case with receivers. The borrower pays the receiver's fees and expenses, but the receiver's main job is to get in and sell the assets of the borrower so that the money can be repaid to the lender. It is a little like having to engage a tax agent to ensure that you pay as much as possible to the ATO.
Late last year the Western Australian Court of Appeal handed down the latest in a series of decisions in which the director of several companies in receivership tried to use this agency relationship against the receivers.
Although the companies were largely unsuccessful on this occasion, the cases have explained and clarified some of the rights and obligations of both receivers and the companies they control. In the process they may have made life significantly more complicated for insolvency practitioners and their legal advisors.
In 2006 Perpetual Nominees Limited ("Perpetual") appointed receivers to a number of companies in the Westpoint Group. Mr Norm Carey was a director of most of those companies. He told the receivers that he would be suing them for a number of things, such as unauthorised entry to premises and failing to get the best price when selling assets.
The Corporations Act obliges receivers to keep financial records that "correctly record and explain" transactions they enter into while they are controlling a company. Directors and shareholders of the company have the right to inspect those records. These provisions appear in section 421 of the Act.
In 2010 Mr Carey referred to section 421 when he sued the receivers to make them provide him with detailed schedules of the work done by them since 2006, and the itemised invoices of the lawyers engaged by the receivers to advise and represent them.
This request covered a lot of information – the lawyer's invoices alone ran to 2000 pages. The receivers offered to give Mr Carey summaries of their worksheets and their lawyer's invoices, but were concerned that giving detailed records to Mr Carey could reveal parts of the legal advice they had been getting from their lawyers, some of which was about how to deal with legal action by Mr Carey.
Perpetual argued that Mr Carey could not use his rights of inspection in section 421 to get documents to help him in other legal actions against the receivers. The judge disagreed, and said that Mr Carey was entitled to inspect the documents for that purpose, and that he was entitled to the detailed records, not just the summaries.
But the judge also found that the receivers were entitled to claim legal professional privilege (LPP) over the records created and inspected under section 421.
LPP allows people to refuse to disclose documents that are created mainly for the purpose of giving or obtaining legal advice, to ensure free and open communication with their lawyer.
LPP can cover documents which haven't been created for this purpose if their contents will reveal privileged information. The receivers claimed that their worksheets, and their lawyers' itemised timesheets, fell into this category. Although they were created for the purpose of getting paid, rather than giving legal advice, in some cases the narrations in the invoices were said to reveal the advice which the lawyers had confidentially given to the receivers.
Second trial and appeal
So another set of legal proceedings were commenced to deal with the receiver's claim for LPP. Mr Carey's lawyers attacked the claim in several ways.
They said that because the receivers were the agents of the companies, and the lawyers were engaged by the receivers, the lawyers were in fact acting for the companies. If the companies were the clients it was for them to assert LPP, not the receivers.
They also argued that because the companies were being charged for the lawyer's services, they had the right to get those bills itemised and assessed by the Supreme Court, so they were entitled to see the itemised bills anyway, which meant that LPP must not be relevant to them. Another argument put forward was that if the receivers could claim LPP, they had waived it when they caused the companies to pay the invoices.
Outcome & comment
These arguments failed both when they were first raised, and on appeal. Due to the peculiar nature of the receiver's agency, and the clarity of the retainer agreement between the receivers and their lawyers, it was found that the lawyers were definitely not acting for the companies, and that payment of legal fees by the companies did not waive LPP.
But the receivers did suffer one significant setback. The Court of Appeal found they had not put forward enough evidence to prove that the material they were being asked to produce would reveal communications between them and their lawyers for the provision of legal advice or services; in other words although they were entitled to claim LPP they hadn't put forward enough evidence to do so.
The Court of Appeal said that the receivers could have another go at putting forward evidence to support their claim for LPP, but given the time and resources already spent on this exercise, they might not have considered this to be an unmixed blessing. Some readers might struggle to find sympathy for lawyers and insolvency practitioners when they have to deal with this sort of scrutiny, but it can be the unsecured creditors and shareholders of the company who really pay the price.
To read the judgements follow the links below:
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