Director excused from turning over books and records?

Deane, in the matter of MSB Capital Holdings Pty Ltd (in liq) [2023] FCA 919
Can the penalty privilege be claimed as a reason for a director not to turn over books and records?

Overview

In this case, the Court considered whether a company’s director could rely on penalty privilege as a basis for refusing to turn over the company’s books and records in the context of a summons issued under s 596B of the Corporations Act 2001. The Court ultimately ruled that the director could not rely on penalty privilege, as penalty privilege has been impliedly abrogated and is not able to be claimed in response to a summons to produce books under s 596B.

Background

On 12 March 2021, MSB Capital Holdings Pty Ltd (“MSB”) was wound up in insolvency, and Shane Deane and Nicholas Giasoumi of Dye & Co were appointed as its liquidators (the “Liquidators”).

On 15 February 2023, a summons was issued to one of MSB’s directors that he (1) be examined about the affairs of MSB; and (2) produce to the Court various books and records defined in the summons.

The director claimed privilege against exposure to penalty (otherwise known as the “penalty privilege”) in respect of certain documents required to be produced under the summons. The Liquidators argued that penalty privilege could not be claimed as it had been abrogated pursuant to s 597 of the Corporations Act.

The Court’s Decision

The Statutory Provisions

Under section 596 of the Corporations Act, the Court is empowered to summon a person for examination about a corporation’s affairs in certain circumstances, including if the Court is satisfied that person may have been guilty of misconduct in relation to the corporation.

Section 596D(2) permits a summons to require production at the examination of specified books that are in the person’s possession and relate to the corporation or any of its examinable affairs.

Section 597 concerns the conduct of an examination. Section 597(12) provides that a person is not excused from answering a question at an examination on the ground that the answer might tend to incriminate the person or make the person liable to a penalty. Section 597(12A) contains a qualification to s 597(12). It provides that, where a person being examined claims penalty privilege before answering a question at an examination, the answer is inadmissible in subsequent proceedings against the person being examined.

Under s 597(7)(d), a person who attends before the Court for examination must not, without reasonable excuse, fail to produce books that the summons requires him or her to produce.

In Gemmell v Le Roi Homestyle Cookies Pty Ltd (in liq), Ashley JA found (and Neave JA and Almond AJA agreed) that section 597(12) of the Corporations Act abrogates the penalty privilege expressly insofar as it could otherwise be raised by a person when answering a question put to them at an examination. However, that decision did not address the question of whether penalty privilege had been abrogated in relation to the production of books pursuant to a s 596B summons. This was the issue before Downes J in this case.

The Nature of Penalty Privilege

The privilege against exposure to penalty operates to excuse a person from being compelled to answer any question, or produce any document, if the answer or the production would tend to expose that person to a penalty.

Three factors will generally be present for a claim of penalty privilege to apply:

1. penalty privilege is claimed in curial (or judicial) proceedings;

2. the proceedings expose the claimant to penalties or forfeitures; and

3. penalty privilege is claimed as protection from compulsory disclosure of information, where requiring that disclosure would represent a departure from the principle that those who allege the commission of a crime or imposition of a penalty should prove it and should not be able to compel the defendant to provide proof against him or herself.

The second and third of these factors were present in this case even though the Liquidators did not seek any penalty in this proceeding, because there was “a sufficient risk of exposure to a penalty in other proceedings” that may exist in the future. With respect to the first factor, the Court found that this was a curial proceeding since the examination was incidental to a court-ordered winding up. Therefore, penalty privilege applied, subject to any question of implied abrogation.

For certain types of privilege which are substantive rules of law and important common law immunities, such as the privilege against self-incrimination and legal professional privilege, there is a rule that the privilege is not to be construed as having been abrogated in the absence of clear words or a necessary implication to that effect. Penalty privilege can be distinguished from the privilege against self-incrimination and legal professional privilege in that penalty privilege is not a substantive rule of law or an important common law immunity. Therefore, the rule above does not apply to penalty privilege. Determining whether penalty privilege has been abrogated is a matter of construing the relevant legislation.

Analysis

In this case, the requisite necessary implication to abrogate penalty privilege arises from the provisions of the statutory scheme. The source of the obligation to produce the books identified in a s 596B summons is contained in s 597(7)(d) of the Corporations Act, which stipulates that a person who attends before the Court for examination must not, without reasonable excuse, refuse or fail to produce books that the summons requires him or her to produce. Thus, there is a manifest statutory obligation to produce the books, with the only qualification being if there is a “reasonable excuse”.

The question of what constitutes “reasonable excuse” is to be determined from the terms and structure of the particular statute and the circumstances of each particular case. There is no guidance in the Corporations Act as to the meaning of the phrase “reasonable excuse”. In this case, Justice Downes concluded that a claim for penalty privilege is not a reasonable excuse within s 597(7)(d) of the Corporations Act for the following reasons.

First, it would defeat one of the purposes of the statutory scheme if a recipient of a summons to produce books could claim penalty privilege as a reasonable excuse for not complying with it. To find otherwise would be to bestow upon penalty privilege an importance that contradicts or diminishes the operation of the Corporations Act and the achievement of its purposes. That a summons can be issued in these circumstances, including for the production of books, is clearly inconsistent with the maintenance of the penalty privilege because a person who has been or may have been guilty of misconduct may be exposed to a penalty in connection with that misconduct.

Second, the existence of s 597(12) was either a neutral factor or did not support the argument that the privilege operated as an excuse in these circumstances. That is because s 597(12) recognises expressly what is implicit – that penalty privilege has been abrogated (specifically in relation to answers to questions). Section 597(12A) then provides a code for extending qualified protection to examinees when answering a question at an examination, but not in relation to the production of books. This conclusion was aligned with the approaches taken in Smith v Papamihail (1998) 88 FCR 80 and Controlled Consultants Pty Ltd v Commissioner for Corporate Affairs (1984–[1985] HCA 6), which involved the construction of analogous legislation.

Conclusion

Justice Downes concluded that s 597(7)(d) of the Corporations Act impliedly abrogates the penalty privilege in connection with the production of books pursuant to a s 596B summons, meaning that the director could not raise penalty privilege in relation to the production of books in response to the s 596B summons served upon him.

Judge: Downes J

Counsel for the Liquidators: Mr G Beacham KC
Solicitor for the Liquidators: Taylor David Lawyers

Counsel for the Examinee: Mr M Clarke
Solicitor for the Examinee: Lyndon Duhs Law