The Substance and the Gist - can a director waive privilege on behalf of a company in liquidation?

This week’s TGIF considers QBH Commercial Enterprises Pty Ltd (In liq) v Dalle Projects Pty Ltd & Ors [2018] VSC 171 in which the Court considered whether privilege can be waived by a director of a company in liquidation.

What happened?

QBH Commercial Enterprises (QBH) was placed into liquidation on 22 February 2018.

Shortly thereafter, a defendant to proceedings commenced by QBH filed an application for leave for that action to continue and, separately, for a declaration that privilege had been lost in legal advice provided to QBH by a law firm and two barristers.

The principles which apply to an application for leave are well-established and uncontroversial. The New South Wales Court of Appeal decision in Cassegrain[1] stands as a leading decision on the question which involves factors such as claim amount and complexity, the stage of the proceedings, the expense involved and the prejudice to creditors were the claim to continue.

Leave was granted by his Honour on a limited basis, that being to determine the question of whether privilege had been waived.

Circumstances of the waiver

The substantive dispute concerned the setting aside of an arbitral award. Two weeks after QBH’s liquidation, its sole director served a witness statement in opposition to an adverse costs order application against the director personally. In that statement, the director deposed to, amongst other things, the following matters:

• “Both [QBH’s lawyers] and [QBH’s barrister] advised me that we now had sufficient evidence and ground to set aside the award in the Supreme Court of Victoria”.
• “Both [QBH’s lawyers] and [QBH’s barrister] explained that our chances to have the award set aside were good based on the evidence…Being my legal representatives “I took their word for it””.
• “Before…proceeding, a meeting with counsel…occurred in his chambers. [QBH’s barrister] indicated that a high threshold or degree of proof would be needed to succeed… [QBH’s lawyers] and [QBH’s barrister] advised me that this threshold had been met and that we were in the right”.

No confidentiality to maintain

The thrust of the waiver argument was that the essential quality of confidentiality was absent such that there was no longer any privilege to assert.

It was submitted that the deliberate and conscious act of recording the substance and effect of the advice on the public record was inconsistent with the maintenance of privilege.

No power to waive

The decision turned on the ability of the director to waive privilege after QBH was placed into liquidation. This led to a consideration of sections 117, 118 and 122 of the Evidence Act 2008 (Vic) (the Act).

QBH’s lawyers and barrister did not contend the director’s conduct was such that the privilege remained protected or that the witness statement did not disclose the substance of legal advice. Rather, it was argued that the director had no power to waive privilege, such power having ceased once the liquidators were appointed, and that the liquidators had not consented to or impliedly approved the alleged waiver.

The decision

The Court agreed with QBH’s lawyers and barrister and found privilege had not been waived.

In reaching his conclusion, his Honour observed that:

• section 117 of the Act defines “client” to include “an employee or agent of a client”;
• prior to the liquidation, the director was an agent of QBH and could have, at that time, authorised the waiver of privilege;
• the effect of the winding up order is that the powers of the director cease, although not the office of the director; and
• as such, the director had no power to waive privilege and, even if the director remained as agent, the liquidator had not authorised the waiver as required by section 122(4).

As a consequence, the application for leave was granted but the declaration that privilege had been lost was refused.

Comment

When a liquidator is appointed, a director will lose his or her power to manage the company. They will not be able to waive privilege held by the company despite the fact they remain in office.

It should also be noted that the Court refused to accept that the liquidator had waived privilege – either through conduct or acquiescence – by not taking steps in response to the making of the witness statement.

This should provide comfort to liquidators, particularly with limited financial resources, that inaction in such circumstances (for example, not objecting to the tender of the witness statement) will not amount to an implied waiver.