Zhang v McLeod[2022] QDC 295

DISTRICT COURT OF QUEENSLAND

Introduction

1. [1]
   The plaintiffs (respondent to this appeal) as liquidators of Premier Fasteners Pty Ltd (in liquidation) (‘the Company’) brought a claim against the defendant (the appellant) in the Magistrates Court for the recovery of an alleged preferential payment of $77,613.01.  It is alleged the appellant received the money either when the company was insolvent or the company became insolvent as a result of the transaction and it was a voidable transaction, recoverable by the liquidator pursuant to s 588FE of the Corporations Act 2001 (Cth) (‘the Act’).
2. [2]
   The appellant disputes that receipt of the money was a voidable transaction.  There is no issue the appellant received the $77,613.01, but pleads a good faith defence, relying on s 588FG(2) of the Act.

The issues in the principal proceeding

3. [3]
   On 10 May 2022 the respondent filed an application in the Magistrates Court seeking an order that the appellant disclose its legal file between him and his solicitor^[1] relating to the Company prior to 17 August 2019.^[2]
4. [4]
   The learned acting Magistrate ordered the appellant disclose the legal file, concluding the appellant had waived privilege over the file.
5. [5]
   The appellant appeals, seeking to set aside the order of the acting Magistrate on 16 May 2022. This order was stayed by Judge Burnett AM on 30 May 2022 pending the  appeal.

The appeal

6. [6]
   The appeal is brought by the appellant pursuant to s 45 of the Magistrates Courts Act 1921 alleging an error of law.  The power of the District Court to make orders on appeal are contained in r 766 of the Uniform Civil Procedure Rules (Qld) 1999 (‘the UCPR’).^[3]
7. [7]
   On an appeal from the Magistrates Court, the District Court has the same powers as the Court of Appeal to hear the appeal.^[4]   Pursuant to r 765(1) of the UCPR, the appeal is by way of rehearing.
8. [8]
   In Allesch v Maunz (2000) 203 CLR 172, [23] it was held:

"…the powers of the appellate court are exercisable only where the appellant can demonstrate that, having regard to all the evidence now before the appellate court, the order that is the subject of the appeal is the result of some legal, factual or discretionary error...”

The rehearing requires this Court to conduct a real review of the record of proceedings below, rather than a complete fresh hearing.^[5]  The appeal court is required to review the evidence and make up its own mind about the case.^[6]

9. [9]
   The appellant relies upon an error of law in the exercise of a discretion and relies on House v The King (1936) 55 CLR 499, where it was held at pg 504-505:

“It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so.”

The facts

10. [10]
    The Statement of Claim alleges the Company made payments totalling $77,613.01 to the appellant and at the time the transactions occurred the Company was insolvent or became insolvent as a consequence of the transactions.  The respondent relies on the fact the appellant issued a Creditor’s Statutory Demand (‘Statutory Demand’) for payment of the debt to the Company on 2 August 2019, following which he received payment from the Company.
11. [11]
    The appellant pleaded the statutory defence^[7] that:

    1. (a)
       he became a party to the transaction in good faith;
    2. (b)
       he had no reasonable grounds to suspect that the Company was insolvent at the time of the transactions or that it would become insolvent as a result of making the transactions; and
    3. (c)
       a reasonable person in his position would have had no such grounds for also suspecting.
12. [12]
    The issue before the Magistrates Court was whether the court should order disclosure of the appellant’s legal file with his lawyers relating to the transaction with the Company.
13. [13]
    The appellant claims the legal file was not disclosable on the grounds of legal professional privilege.

The privileged documents

14. [14]
    Rule 213(2) UCPR provides the party making a claim for privilege must, within seven days after the challenge, file and serve on the other party an affidavit stating the claim. This has not been done. 
15. [15]
    McMurdo J in Fletcher & Ors v Fortress Credit Corporation (Australia) 11 Pty Ltd & Ors [2014] QSC 303 at [41] held, having regard to UCPR r 5, if claims for privilege are otherwise satisfactorily established the noncompliance with r 213 did not warrant an order for production by which the privilege would be lost, especially where compliance with r 213 would be impractical.  Unlike in that case where there were thousands of documents, compliance in this case could not be said to be impracticable.
16. [16]
    The documents for which privilege is claimed are in the appellant’s list of documents in Sch 1 Pt 2.  The privileged documents are described as,

“Documents and correspondence passing between the defendant and defendant’s solicitors and representatives which came into existence for the purposes of this litigation.

Documents subject to legal professional privilege passing between the defendant and the defendant’s solicitors and advisors.”

17. [17]
    The appellant’s solicitor has sworn on affidavit (UCPR r 213(2)) stating the claim to privilege as ‘those communications that were made for the purpose of legal action, or in contemplation of legal action.’^[8] The parties have been content to have this application determined on the appellant’s description of those documents.

The appellant’s submissions

18. [18]
    The appellant submits I should apply the reasoning of McMurdo J (as his Honour then was) in Fletcher at paragraphs [101] to [105], that the appellant had not directly or indirectly put the content of the otherwise privileged communication in issue in the litigation.
19. [19]
    The appellant noted, as held by McMurdo J in Fletcher, that the pleading of a good faith defence, by itself, is insufficient to waive privilege.  The appellant submits they have gone no further, nor revealed or asserted expressly, or by way of implication, the contents of their legal advice.  The appellant says they have not pleaded any belief or opinion as a matter of consequence of legal advice.^[9]
20. [20]
    The appellant submits^[10] that the context of issuing a Statutory Demand and receiving payment a few days later is not evidence that the appellant believed the Company was insolvent.
21. [21]
    The appellant submits legal professional privilege has not been waived and the learned acting Magistrate erred in concluding it had been.

The respondent’s submissions

22. [22]
    The respondent points to the fact that the appellant, by his solicitors, issued a Statutory Demand to the Company prior to payment of the debt and the purpose of the demand was to give to the creditor the benefit of a presumption of insolvency for the purpose of a winding up application. 
23. [23]
    The respondent submits:

“The key question on this appeal is whether the appellant’s pleaded defence puts the circumstances surrounding the issuing of the statutory demand (including principally an explanation as to why it was issued) and therefore the appellant’s state of mind in issue.”

24. [24]
    The respondent submits that issuing the Statutory Demand, particularly where a defence under s 588FG of the Act is pleaded, puts in issue the facts and circumstances surrounding the issuing of the Statutory Demand.
25. [25]
    The respondent submits that the fact that the appellant issued a Statutory Demand to the Company before it was paid is relevant to the appellant’s state of mind and whether he was acting in good faith.  The respondent submits:

“In advancing a positive case about state of mind a party impliedly waives privilege over those materials relevant to testing the state of mind.  The test to determine whether there has been waiver is one of inconsistency between the conduct and the retention of privilege.”

26. [26]
    The respondent relies upon decision of the Federal Court in Crisp v G.S.F Australia Pty Ltd, in the matter of Foodlife Inventory Holdings Pty Ltd (in liq) [2006] FCA 1682 where Young J held:

“[15] These submissions do not take into account the parallel principle that a party in litigation may expose its legal advice to discovery and production by making it relevant to an issue in the proceedings.  In this case, by raising the defence based on s 588FG, GSF has put in issue whether it acted in good faith and without suspecting insolvency when it pursued the recommended course of serving a statutory demand.  Having pleaded that matter into relevance, it has effectively exposed its legal advice on that very matter to scrutiny.  The position is compounded by the disclosure of some of the advice without disclosing all of the communications that took place between GSF and its solicitors.

[16] The principle of issue waiver, which has application where a party pleads its legal advice into issue and thereby impliedly waives privilege, is a long standing one…”

27. [27]
    The decision of Crisp in my view can be distinguished on the basis that in that case, GSF had chosen to disclose some of its legal advice in support of its defence of good faith in recovering the debt from Foodlife.
28. [28]
    The respondent relies on Davies v Nicol as Joint and Several Liquidators of Harris Scarfe Ltd v Chicago Boot Co Pty Ltd [2011] SASC 27, where Sullan J held at [105]

“While Mr and Ms Mance denied that the sending of the statutory demand led them to believe or suspect that Harris Scarfe was insolvent, as to the question of reasonable belief, the statement by Connolly J in Re K & R Fabrications^[11], is apposite;

‘A payment in response to a notice which warns of insolvency if payment not be made can scarcely be described as a payment which a man might make without having insolvency in view’.^[12]”

The pleadings

29. [29]
    It is necessary to set out the parts of the Statement of Claim filed on 27 April 2020 and Defence which this argument relies.
30. [30]
    The original Defence filed on 17 June 2020 did not formally admit the particulars in paragraph 4 above. 
31. [31]
    Paragraphs 3 and 4 of the Statement of Claim allege:

“3. The Company made payments totalling $77,613.01 to the Defendant (the Transactions).

Particulars

Refer to Schedule A hereto

4. At the time when the Transactions occurred the Company was insolvent, or became insolvent as a consequence of the Transactions.

Particulars

1. As at 30 June 2018 the Company only had $94,790.54 cash to meet current liabilities of $1,591,615.15.
2. As at 30 June 2019 the Company only had $21,894.51 cash to meet current liabilities of $1,342,902.82.
3. As at 23 January 2020 the Company had overdrawn its bank account by $4,077.72 to meet current liabilities of $841,672.10.
4. The Company’s financial statements at 30 June 2018 record a net loss of $1,144,025.12.
5. The Company’s financial statements at 30 June 2019 record a net loss of $108,157.95.
6. The Company’s financial statements for the period 1 July 2019 until 23 January 2020 record a nett loss of $146,788.37.
7. The Company was in breach of its banking covenants with NAB and Scottish Pacific Finance at least 3 August 2018.
8. The Company had no alternative funding arrangement available.
9. The Company was in breach of its statutory obligations to the ATO from May 2018.
10. The Company had repeatedly defaulted upon repayment plans with the Defendant.
11. The Defendant had issued a Creditor’s Statutory Demand to the Company.” (emphasis added)

32. [32]
    In paragraphs 7 and 8 the Amended Defence, filed on 31 August 2021 the appellant says:

“7. As to the Statement of Claim as a whole, the Defendant says that:

1. (a)
   At no relevant time has he either:

1. (i)
   had access to the books and records of Premier Fasteners Pty Ltd; or

2. (ii)
   Held any position by which he would have knowledge of the financial status of Premier Fasteners Pty Ltd.

2. (b)
   On 2 August 2019, the Defendant issued a Creditor’s Statutory Demand to Premier Fasteners Pty Ltd for the sum of $72,613.01 (“Statutory Demand”); (my emphasis) and

3. (c)
   Between about 5 August 2019 and 16 August 2019, Premier Fasteners Pty Ltd made payment to the Defendant in the sum of $72,613.01.^[13]

8. In the premises of the matters pleaded in paragraph 7 herein:

1. (a)
   The Defendant had no reasonable grounds to suspect that Premier Fasteners Pty Ltd was insolvent at the time of the Transactions, or that it would become insolvent as a result of making the Transactions;

2. (b)
   A reasonable person in the position of the Defendant would have had no reason to suspect that Premier Fasteners Pty Ltd was insolvent at the time of making the Transactions, or would become insolvent as a result of making the Transactions;

3. (c)
   The Defendant entered the Transactions in good faith; and

4. (d)
   The Defendant has a full defence to the Claim pursuant to section 588FG(2) of the Corporations Act 2001 (Cth).”

33. [33]
    There is no issue that the appellant issued the Statutory Demand and was paid the debt within a few days.

High Court authorities on waiver of legal professional privilege

34. [34]
    It was held in Mann v Carnell (1999) 201 CLR 1 by Gleeson CJ, Gaudron, Gummow      and Callinan JJ at page 13;

“Waiver of privilege at common law

[28] … Legal professional privilege exists to protect the confidentiality of communications between lawyer and client.  It is the client who is entitled to the benefit of such confidentiality, and who may relinquish that entitlement.  It is inconsistency between the conduct of the client and the maintenance of the confidentiality which effects a waiver of the privilege. 

…

[29] Waiver may be express or implied.  Disputes as to implied waiver usually arise from the need to decide whether particular conduct is inconsistent with the maintenance of the confidentiality which the privilege is intended to protect.  When an affirmative answer is given to such a question, it is sometimes said that the waiver is “imputed by operation of law”.  This means that the law recognises the inconsistency and determines its consequences, even though such consequences may not reflect the subjective intention of the party who has lost the privilege…. What brings about the waiver is the inconsistency, which the courts, where necessary informed by considerations of fairness, perceive, between the conduct of the client and maintenance of the confidentiality; not some overriding principle of fairness operating at large.” (emphasis added)

35. [35]
    In Osland v Secretary, Department of Justice (2008) 234 CLR 275; [2008] HCA 37, the plurality held at [45]:

“Waiver of the kind presently in question is sometimes described as implied waiver, and sometimes as waiver ‘imputed by operation of law’.  It reflects a judgment that the conduct of the party entitled to the privilege is inconsistent with the maintenance of the confidentiality which the privilege is intended to protect.  Such a judgment is to be made in the context and circumstances of the case, and in the light of any considerations of fairness arising from that context or those circumstances. …” (Footnotes omitted.)

36. [36]
    In Expense Reduction Analysts Group Pty Ltd & Ors v Armstrong Strategic Management and Marketing Pty Limited & Ors (2013) 250 CLR 303 at 315, French CJ, Kiefel, Bell, Gageler and Keane JJ held at [30]:

“According to its strict legal connotation, waiver is an intentional act done with knowledge whereby a person abandons a right (or privilege) by acting in a manner inconsistent with that right (or privilege).  It may be express or implied.  In most cases concerning waiver, the area of dispute is whether it is to be implied.  In some cases waiver will be imputed by the law with the consequence that a privilege is lost, even though that consequence was not intended by the party losing the privilege.  The courts will impute an intention where the actions of a party are plainly inconsistent with the maintenance of the confidentiality which the privilege is intended to protect.” (emphasis added, footnotes omitted).

Relevant principles

37. [37]
    In GR Capital Group Pty Ltd v Xinfeng Australia International Investments Pty Ltd, Macfarlan JA held:

“[54] Accordingly, decisions that predate Mann v Carnell must be approached with caution. In particular, the proposition that relevance to a fact put in issue by the privilege holder is sufficient to give rise to a waiver (supported by decisions such as Thomason and Telstra: see [21], [26]-[27] above) is not correct.

[55] Post Mann v Carnell Federal Court authorities, such as DSE ([33] above) and Macquarie Bank ([44]-[45] above), direct particular attention to whether an express or implied assertion has been made “either about the contents of the confidential communication or which necessarily lays open the confidential communication to scrutiny”. This approach appears ultimately to derive from that of Hodgson J in Standard Chartered Bank v Antico ([24] above).” (emphasis added)

38. [38]
    Macfarlan JA after analysing authorities both pre and post the decision of the High Court in Mann v Carnell at [57] held,

“[57] I draw from these authorities the following propositions of present relevance:

1. (1)
   The test is one of inconsistency between the privilege holder’s conduct and its maintenance of the privilege, not one of general fairness or of relevance to an issue in the proceedings.

2. (2)
   Enquiring whether the privilege holder has made express or implied assertions about the contents of the confidential communications, and whether its conduct has therefore “laid open the communications to scrutiny”, assists in ensuring that the court’s focus is on inconsistency rather than simply relevance. If the privilege holder is understood to be asserting something about the contents of the communications, it is but a short step to conclude that it would be inconsistent for it to prevent those contents being scrutinised.

3. (3)
   On the other hand mere relevance of the content of the privileged communications to an issue raised in the proceedings by the privilege holder does not equate to inconsistency – something more is needed. It is of the essence of legal professional privilege that, if maintainable, it entitles a party to withhold potentially relevant documents from inspection by the other party.

4. (4)
   The determination of whether there has been an express or implied assertion about the contents of privileged communications giving rise to a relevant inconsistency is an evaluative decision to be made after consideration of the whole of the circumstances of the case. No hard and fast rules can be formulated. Those circumstances will include the degree of relevance of any advice to the issues in the proceedings, the centrality of the relevant issues in the proceedings and the likelihood of advice having been given, informed, as the High Court said in Mann v Carnell, by considerations of fairness.

4. (5)
   Having considered all those circumstances, the court must decide whether it would be inconsistent with the privilege holder’s conduct for it to maintain privilege. The line between relevance to an issue and inconsistency in this context may be very fine and therefore one on which views might well differ.” (emphasis added)

Qld authorities

39. [39]
    Legal professional privilege, as it relates to a plea of good faith pursuant to s 588FG of the Act, was considered by McMurdo J (as his Honour then was) in Fletcher. His Honour held at page 23:

“[101] The plaintiffs’ argument emphasises what is said to be an unfairness in the Fortress defendants advancing a case as to their own states of mind (as referred to in those paragraphs of the Defence) whilst at the same time withholding the production of documents which are directly relevant to that case. They say that once the Fortress defendants pleaded, for example, that they acted in good faith, they conducted their case in a way which was inconsistent with the withholding of information and documents relating to their communications with their legal advisers which might well disprove their case. They submit that it has been held that the pleading of a “good faith” defence under s 588FG of the Corporations Act 2001 (Cth) effects a waiver of privilege, for which the argument cites Crisp v GSF Australia Pty Ltd, Re Foodlife Inventory Holdings Pty Ltd (in liq).

[102] The plaintiffs’ argument identifies the tension between the maintenance of legal professional privilege and the disclosure by a party of all of its directly relevant material. To the party which must litigate an issue upon which relevant material is withheld from it, the operation of the privilege could seem unfair. But that is a tension which the law resolves in favour of the maintenance of the privilege. As Deane J said in Attorney-General of the Northern Territory v Maurice, the purposes served by the principle of legal professional privilege are “not to be sacrificed even to promote the search for justice or truth in the individual case or matter …”.

[103] It follows that a waiver of the privilege is not effected by the party entitled to the privilege simply conducting litigation in a way which makes the privileged documents relevant to an issue. Instead, a waiver of the privilege is effected by the inconsistency between the maintenance of the confidentiality which is protected by the privilege and conduct of that party which discloses, or purports to disclose, that which was confidential.  Thus in Commissioner of Taxation v Rio Tinto Limited, the Full Court of the Federal Court (Kenny, Stone and Edmonds JJ) said:

“Where … waiver is made out, the privilege holder has expressly or impliedly made an assertion about the contents of an otherwise privileged communication for the purpose of mounting a case or substantiating a defence. Where the privilege holder has put the contents of the otherwise privileged communication in issue, such an act can be regarded as inconsistent with the confidentiality that would otherwise pertain to the communication.”

Crisp v GSF Australia Pty Ltd applied Commissioner of Taxation v Rio Tinto Limited, as that judge was bound to do. Importantly in that case, the party claiming privilege had not only pleaded that it had acted in good faith, but also disclosed by its evidence some of its legal advice in support of that plea.

[104] In none of the parts of the Defence to which the plaintiffs refer in this argument is there anything pleaded as to the content of a communication between Fortress and its lawyers. The fact that the Fortress parties admit that they had legal advice and contend that they acted in good faith and without knowledge of the various matters alleged, such as the insolvency of OA, is insufficient to waive their privilege. This is because they have not gone further and revealed or asserted, expressly or by implication, the contents of their legal advice. For example, they have not alleged that they held a certain belief or opinion as to a matter in consequence of legal advice which they received about that matter. The question is not whether the Fortress parties have put their state of mind in issue but whether they have directly or indirectly put the contents of the otherwise privileged communications in issue in the litigation.

[105] Therefore the plaintiffs’ argument of a waiver of privilege in relation to the 2008 transaction documents, based as it is upon the contents of the Defence in the paragraphs to which I have referred, must be rejected.” (citations omitted, emphasis added)

40. [40]
    Burns J (McMurdo P and Philippides JA agreeing) considered the issue of legal professional privilege and held in The Queensland Local Government Superannuation Board v Allen [2016] QCA 325: 

[50] Legal professional privilege is “more than an aspect of civil and criminal procedure and more than a rule of evidence”; it is a rule of substantive law. It may be “availed of by a person to resist the giving of information or the production of documents which would reveal communications between a client and his or her lawyer made for the dominant purpose of giving or obtaining legal advice or the provision of legal services, including representation in legal proceedings”. There is no differentiation in legal effect between the two categories of legal professional privilege and, as such, either may be invoked to resist the disclosure of a document in the course of a proceeding where to do so would reveal a communication falling under either category. The principle underlying legal professional privilege is that “a person should be entitled to seek and obtain legal advice without the apprehension of being prejudiced by subsequent disclosure of confidential communications”. Without the privilege, the administration of justice “would be greatly impeded or even rendered impossible”. It rests not only on the confidence reposed by the client in the legal adviser but the necessity, in the interests of justice, of protecting those communications from disclosure….” (footnotes omitted)

…

Summary of applicable principles

[69] The decisions just examined inform the following summary of the principles applicable to a determination as to whether legal professional privilege has been impliedly waived:

1. (a)
   a person may waive privilege without intending that result; the test is objective and privilege may be waived regardless of the subjective intention of the privilege holder;

2. (b)
   privilege will be waived where the conduct of the privilege holder is inconsistent with the maintenance of confidentiality in the communication which the privilege would otherwise protect;

3. (c)
   the focus is on the conduct of the privilege holder, not the party attempting to destroy the privilege;

4. (d)
   whether there is relevant inconsistency is to be evaluated in accordance with the context and circumstances of the case and in the light of any considerations of fairness arising from that context and those circumstances;

5. (e)
   the privilege will not be lost merely because there has been a reference by the privilege holder to the privileged communication in a pleading or an affidavit, although it will be lost if the advice is reproduced in full in the pleading or affidavit;

6. (f)
   whether a limited disclosure of the existence, and the effect, of legal advice is inconsistent with maintaining confidentiality in the terms of the advice as a whole so as to amount to an implied waiver with respect to the whole of the advice will again depend on the context and circumstances of the case;

7. (g)
   in such cases, the context can include the nature of the matter in respect of which the advice was received, the evident purpose behind making the relevant disclosure and the legal and practical consequences of limited rather than complete disclosure;

8. (h)
   where there has been disclosure of a privileged communication contained in the document, and the document deals with a single subject-matter, it will be unfair to allow a party to use part of the document and claim privilege as to the remainder; at least so far as the document concerns the same subject-matter.” (emphasis added)

Discussion

41. [41]
    I note particularly Boddice J statement in David E Lee Medical Pty Ltd v APW Proprieties (Symphony) Pty Ltd [2011] QSC 400 at [15] where is honour held,

“A finding of waiver of a claim to legal professional privilege is not to be lightly made, particularly in circumstances where, as here, there was a claim for disclosure of the file as a whole, not limited to documents relevant to the transaction in dispute in the proceedings.” 

42. [42]
    The respondent concedes if the issuing by the appellant of the Statutory Demand goes no further than the fact and does not otherwise put in issue the facts and circumstances of the issuance, privilege is not waived over the legal file of the appellant.^[14]
43. [43]
    The respondent points to the significance of issuing a Statutory Demand.  Whilst the debt was undisputed there may be circumstances where a Statutory Demand is served in which there is no real spectre of insolvency to a party such as the appellant.^[15]
44. [44]
    The learned acting Magistrate noted the waiver in Crisp’s case followed upon the issue of a Statutory Demand.  The learned acting Magistrate found the appellant waived privilege based on the conventional tests that there was inconsistency between the appellant’s conduct and the retention of privilege. In my view, there was error in not distinguishing the decision of Crisp and finding that by pleading the issuing of the Statutory Demand, without more, triggered an implied waiver. I am also of the view there was error in concluding that the positive pleading of the Statutory Demand by itself distinguishes this matter from the decision in Fletcher.
45. [45]
    The appellant submits and I accept that since the appellant had not directly or indirectly put the content of the otherwise privileged communication in issue in the litigation, the receipt of legal advice is not inconsistent with the maintenance of the confidentiality which the privilege is intended to protect.
46. [46]
    I conclude the learned acting Magistrate erred in finding legal professional privilege had been waived.

Orders

1. Appeal allowed.
2. The orders made by the learned acting Magistrate on 10 May 2022 be set aside.
3. The matter be remitted to the Magistrates Court
4. The respondents to pay the appellants costs of the application before the Magistrates Court on 10 May 2022, the costs of this appeal, and the reserved costs of the stay application before Judge Burnett AM on 30 May 2022 on a standard basis.