In Re Australian Property Holdings Limited (in liq) (recs & mgrs apptd) (No 2) [2012] VSC 576  Robson J considered applications by the defendants to stay the proceedings, which was refused, and to file limited defences, which was granted.

FACTS

Australian Property Custodian Holdings (“APCH”) commenced proceedings in the Supreme Court against seven of its former directors to recover $30 million that was paid out of its assets it held on trust as a fee to companies controlled by Mr Lewski [1].  ASIC  commenced action in the Federal Court against APCH and 5 of its directors who are also defendants in this proceeding alleging breaches of the Corporations Act (“the Act”).

APCH is the responsible entity of the Prime Retirement and Aged Care Property Trust, a managed investment scheme under the Act [5].  In 2006 the constitution of the Prime Trust was amended by the board of APCH to provide for a payment of a listing fee to APCH if units of the Prime Trust were listed on the ASX [7], which they were in August 2007[8] and APCH received $33m out of the assets of the trust. The Supreme Court proceedings were commenced by the liquidator on 5 March 2012 in the name of APCH [13] and a statement of claim was filed and served against all defendants for compensation under sections 1317H and HA or 1325 of the Act as well as a claim for equitable compensation[14]. ASIC commenced proceedings in the Federal Court on 21 August 2012 [15].

Both proceedings allege that APCH breached its statutory duties under the Act in amending the trust to the detriment of the unit holders [10] and both rely upon section 601FD [11].

DECISION

STAY OF PROCEEDINGS

The Supreme Court has an inherent power to stay proceedings in the interests of justice [19] (which is the overriding consideration [24]).  His Honour set out, at [21], the relevant principles regarding a stay found in McMahon v Gould as follows (absent citations):

(a) Prima facie a plaintiff is entitled to have his action tried in the ordinary course of the procedure and business of the court;

(b) It is a grave matter to interfere with this entitlement by a stay of proceedings, which requires justification on proper grounds;

(c) The burden is on the defendant in a civil action to show that it is just and convenient that the plaintiff’s ordinary rights should be interfered with;

(d) Neither an accused  nor the Crown  are entitled as of right to have a civil proceeding stayed because of a pending or possible criminal proceeding;

(e) The court’s task is one of “the balancing of justice between the parties” ;

(f) Each case must be judged on its own merits, and it would be wrong and undesirable to attempt to define in the abstract what are the relevant factors ;

(g) One factor to take into account where there are pending or possible criminal proceedings is what is sometimes referred to as the accused’s “right of silence”, and the reasons why that right, under the law as it stands, is a right of a defendant in a criminal proceeding ..;

(h) However, the so-called “right of silence” does not extend to give such a defendant as a matter of right the same protection in contemporaneous civil proceedings. The plaintiff in a civil action is not debarred from pursuing action in accordance with the normal rules merely because to do so would, or might, result in the defendant, if he wished to defend the action, having to disclose, in resisting an application for summary judgment, in the pleading of his defence, or by way of discovery or otherwise, what his defence is likely to be in the criminal proceeding ;

(i) The court should consider whether there is a real and not merely notional danger of injustice in the criminal proceedings ;

(j) In this regard factors which may be relevant include:

(i) the possibility of publicity that might reach and influence jurors in the civil proceedings ;

(ii) the proximity of the criminal hearing;

(iii) the possibility of miscarriage of justice eg by disclosure of a defence enabling the fabrication of evidence by prosecution witnesses, or interference with defence witnesses;

(iv) the burden on the defendant of preparing for both sets of proceedings concurrently;

(v) whether the defendant has already disclosed his defence to the allegations;

(vi) the conduct of the defendant, including his own prior invocation of civil process when it suited him;

(k) The effect on the plaintiff must also be considered and weighed against the effect on the defendant. In this connection I suggest below that it may be relevant to consider the nature of the defendant’s obligation to the plaintiff;

(l) In an appropriate case the proceedings may be allowed to proceed to a certain stage, eg, setting down for trial, and then stayed.

His Honour quoted the Court of Appeal in Trade World Enterprises Pty Ltd v Deputy Commissioner of Taxation (Cth) where their Honours stated stated in an application for a stay of civil proceedings where criminal charges pending the test is:

“..such a claimant establish, at least, that real injustice would result if the civil proceedings were not stayed or adjourned until the determination of the criminal proceedings.”

His Honour was not satisfied that Mr Lewski, the defendant who filed the lead submissions, or any other defendant had satisfied the burden to obtain a stay [75]. His Honour found there was no evidence that there was a reasonable possibility that ASIC would take criminal proceedings against Lewski [34].   He found a stay would prejudice APCH [44] in that the proceeds may be dissipated.  He rejected Lewski’s submission that the allegations of a breach of duty involved claims of dishonesty [50]. While he accepted that the failure to stay proceedings would impose an additional burden on Lewski there was no evidence that it would impose any financial strain upon him [56].

FILING LIMITED DEFENCE

Regarding the application to file a limited defence relying upon privilege his Honour undertook an analysis of the case law, noting:

1. common law privilege against exposure to penalty may be successfully invoked in both penalty proceedings and other proceedings where a penalty is not sought but may otherwise expose a party to penalty in other proceedings that are on foot or anticipated[81]
2. a Court will not allow a party to insist upon a discovery of facts where that discovery may subject the party to a penalty even in some other proceedings [82];
3. in a penalty proceeding a defendant should not be required to disclose information or produce documents that may assist in establishing his liability to penalty[86].

The privilege extends to proceedings which are not penalty proceedings on the basis that a party to litigation ought not to be compelled to provide information or produce documents for inspection by the other party if the result will be to provide evidence against him which may be used to establish his liability to a penalty in other proceedings [86] however that would occur only in exceptional cases [87].  The defendant would be entitled to exercise the privilege in answering particular questions in the case of interrogatories or producing particular documents [95].

With respect to the filing of a defence his Honour gave considerable attention to Finkelstein J’s analysis  in ASIC V Mining Projects Group in which he stated:

… penalty privilege operates to relieve a defendant from the need to deliver a defence that complies with the pleading rules if the rules would override the privilege. To the extent that pleading rules purport to impose such an obligation they must give way to the privilege”.

There must be a valid privilege claims which is bona fide and reasonable [107].  If so the defendant may neither admit nor deny the allegations if he believed the allegation was true.  If he believed the allegations to be false he was obliged to plead a denial or not admit the allegation [108].

His Honour summarised the principles, stating, at [115]:

(a) In the case of self-incrimination privilege, the defendant must establish that the provision of information or the production of documents in the civil case leads to a real and appreciable risk of a criminal prosecution before the privilege can be invoked.

(b) In an action to recover a penalty it is not necessary for a defendant to establish that there is a risk the defendant will be subjected to a penalty by providing information to the plaintiff. The plaintiff is seeking the information for that very purpose.

(c) In civil actions, where no claim for penalty is made, the defendant must show that providing the information requested would tend to subject him to a penalty in separate proceedings before he can rely on the privilege

(d) The privilege against exposure to penalty is a common law right of privilege that may be availed of as of right and is enforced and protected by the Court.

(e) The privilege against the exposure to penalty may be relied on by a defendant to a civil procedure in which a penalty is not sought (“the non penalty civil proceeding”).

(f) The privilege against the exposure to penalty extends to the obligation upon a defendant to plead, give discovery and answer interrogatories in the non penalty civil proceeding

(g) As a general rule, the privilege does not entitle a defendant to a non penalty civil proceeding to obtain an order in limine excusing him or her from giving discovery or answering interrogatories.

(h) In exceptional circumstances, a defendant may be entitled to such orders in limine.

(i) By extension, in exceptional circumstances, a defendant may be entitled to orders in limine that he may deliver a defence that departs from the Rules of Court only insofar as to protect his privilege against exposure to penalty.

(j) Exceptional circumstances may exist where the defendant to the civil proceeding is also the subject of separate civil penalty proceedings alleging the same or similar conduct. 

(k) Where a defendant seeks to take the privilege against exposure to penalty in a defence, the proper course is to plead accordingly and – if challenged – the defendant will be required to justify that the privilege is taken in good faith and on reasonable grounds for the privilege to stand.

The practical consequences of the application of those principles are set out at  [117] where his Honour stated:

“..the defendant is not excused from filing a defence. He is, however, excused , in limine from complying with the rules relating to the content of the defence, but only to the extent that the rules would override the privilege. This requires a plea by plea examination of the requirements of the rules and their interaction with content of the privilege.”

 In applying the principles his Honour found:

1. in pleading  a defence in a non penalty proceeding  the onus is on the defendant  to establish that he has a bona fide and reasonable basis for exercising the privilege. If the defendant  establishes a bona fide and reasonable basis for exercising the privilege he may take the same approach to pleading his defence as that taken by a defendant in a penalty proceeding [118].
2. where a defendant in the non penalty proceeding believes he has good grounds to rely on the privilege in pleading his defence, then he should plead according to the rules, but take the privilege where appropriate. If the pleadings are then challenged by the plaintiff, then the proper course is for the defence and its justification in taking the privilege to be ruled on by the Court with the defendant bearing the onus of establishing a bona fide and reasonable basis for taking the privilege [119].
3. where a defendant pleads to accusations that effectively mirror those made in the concurrent civil penalty proceedings, the circumstances are exceptional and the existence of the civil penalty proceedings establishes that taking the privilege would be bona fide and reasonable and they are entitled to exercise the privilege when pleading a defence  [120] – [121] (see also discussion at [122] – [124].

 

ISSUE

Robson J undertook a very thorough analysis of the requirements in obtaining a stay and claiming privilege in a defence.  Regarding the former the burden is high. In this case his Honour found the evidence lacking. That perhaps is an understandable failing by the defendants as some of their concerns were potential actions in the future.  Those concerns may be real however they are also difficult to quantify.  In respect of claiming privilege the principles make clear that a defendant will not be required to condemn in a concurrent/pending/possible penalty proceeding through discovery, interrogatories or a defence.  The privilege is robust however its application is not a blanket coverage.  Great care needs to be taken in pleading to each allegation and decisions on whether to claim the privilege need to be made on a allegation by allegation basis.