Reminder to directors: Legal advice to the company may be subject to your claim for legal professional privilege, unless…

It is not uncommon for directors to have to face legal actions from a variety of parties. Given that the contents of certain documents can potentially have serious legal ramifications, especially if relied upon in any litigation or settlement negotiation, an understanding of legal professional privilege and its scope is extremely important for any existing or former directors.

In Equititrust Ltd (in Liq) (Receivers appointed) (Receivers and Managers Appointed) v Equititrust Ltd (in Liq) (Receiver appointed) (Receivers and Managers Appointed) (No.3) [2016] FCA 738 the Federal Court considered a claim made by a former director for legal professional privilege in respect of a range of documents  which had been produced by Equititrust which contained legal advice.  Of particular interest is the judicial guidance given by Justice Markovic on the particular circumstances where the directors' privilege applies, and the scope of that privilege.

Background

KPMG served a Notice to Produce Documents on Equititrust for production of 940 legal advices.  The directors of Equititrust took the position that any privilege in those advices was a joint privilege.  Equititrust waived its legal professional privilege in a number of the legal advices provided to it by McCullough Robertson.  As a result, arrangements were put in place whereby the directors had first access to those documents so they could if they wanted, assert a claim for privilege in the documents prior to access being granted to KPMG. 

One of the former directors maintained a claim for privilege over 625 of the 940 documents (Disputed Documents).  The former director applied to the Federal Court for an order affirming his claim for legal professional privilege on the basis of joint privilege and common interest privilege with Equititrust.

What is "joint privilege" and "common interest privilege"?

Legal professional privilege protects confidential communications between a legal advisor and client from disclosure.

Joint privilege (the principle of shared or similar interest) arises where two or more persons join in communicating with a legal advisor for the dominant purpose of obtaining legal advice. Joint privilege protects those communications to which it applies from disclosure to third parties.  The joint nature of the privilege means that all whom it belongs must agree to waive it.  It is sufficient therefore as against third parties, if only one if the interested parties claims the privilege, though all must concur in waiving it.

A number of Australian authorities have held that directors may have a claim for joint privilege with the company in any legal advice provided to the company by its external lawyers, despite the absence of a formal retainer between the directors and the external lawyers, or lack of payments by those directors for the advice provided.

On the other hand, common interest privilege arises when two or more persons have a common interest in a particular matter which is the subject of legal advice so that if one of the parties obtains legal advice which is privilege and provides it to the other party, the other party can also claim legal professional privilege.  Common interest privilege is not applicable if the individual interest of the parties are "selfish and potentially adverse to each other".  To assert this type of privilege, a director is required to demonstrate that he or she and the company both have a common interest in the outcome for which the advice is sought, which is often a difficult task.

The privilege is limited only to legal advice relating to the directors personally

Justice Markovic held that 11 of the Disputed Documents were held to be subject to legal professional privilege on the basis of the director's joint privilege or common interest privilege.

In reaching her conclusion, Justice Markovic observed in relation to the claim for joint privilege that:

• the fact that the legal advices were addressed to a director personally or "the Directors" did not mean that those advices were being provided to this particular director on the basis of joint privilege;
• the fact that the director may have been involved in seeking the legal advice did not, on its own, establish any joint privilege because it is common for a director to seek or receive legal advice on behalf of the company; and
• other than certain Disputed Documents which advised on the directors' duties, there was no evidence that the director had any personal concerns about various matters addressed in the Disputed Documents, such as legal advice to Equititrust on stamp duty issues, its Australian Financial Services Licence or amendments to Equititrust's constitutions.

With respect to the question of common interest privilege, Justice Markovic emphasised that:

• commonality of interest is a prerequisite for common interest privilege to apply; the mere fact that the legal advice was communicated to Equititrust and to the directors does not mean the directors had a common interest privilege in that advice; and
• the fact that the company can only act through its directors who are the "guiding mind of the company" does not give rise to a common interest. 

When will privilege apply to directors?

This judgment confirms that while directors may be entitled to a claim for legal professional privilege over legal advice received by the company, that claim (whether on the basis of joint privilege or common interest privilege) is subject to limits.

In particular, the legal advice claimed to be privileged must be related to the director personally in some way (eg. relate to the duties of directors in their capacity as directors) and not simply relate to the operation and activities of the company.

The distinction between advice given purely to the company and advice given to the company which may also include advice to the directors in their personal capacities will be determined on a case-by-case basis in light of the legal and factual context. Considering the many circumstances in which former directors may be subject to legal challenges (notably insolvent trading proceedings where creditors may seek to gain access to relevant legal advices, for example, from the liquidators of the company in liquidation), it is necessary for any board members to be aware of their rights in order to take proper and timely steps to safeguard their personal interests.