Insolvency Update: Penalty Shootout! Corporations Act 1: Penalty Privilege 0

In the recent decision of Deane, in the matter of MSB Capital Holdings Pty Ltd (in liq) [2023] FCA 919 the Federal Court of Australia considered whether section 597(d) of the Corporations Act 2001 (Cth) (Act) abrogates (or overrides) penalty privilege in connection with the production of books and records ordered pursuant to an examination summons.

In this case, the joint and several liquidators of MSB Capital Holdings Pty Ltd (in liquidation) (Company) obtained an order for the issue of a summons pursuant to section 596B of the Act to a Mr Rowan Lyndon, requiring Mr Lyndon to be examined about the examinable affairs of the Company and to produce certain defined documents.  In the course of his examination, Mr Lyndon claimed the privilege against exposure to penalty as a basis for refusing to produce some of the documents referred to in the summons.

Downes J carefully considered the history and nature of the privilege against exposure to penalty (also known as penalty privilege) as well as the language, purpose and object of the provisions of Division 1 of Part 5.9 of the Act before concluding that penalty privilege is not available to resist a section 596B summons to produce books.

Background 

The Company was previously part of a group of companies that carried on the business of providing financial and investment services, including brokerage services.

Following a series of disputes in 2020, the Company was wound up in insolvency by order of the Court on 12 March 2021, and Shane Leslie Deane and Nicholas Giasoumi were appointed as joint and several liquidators of the Company (Liquidators).

Subsequently, on 15 February 2023, the Liquidators obtained an order for the issue of a summons pursuant to section 596B of the Act to a Mr Rowan Lyndon (Summons), requiring Mr Lyndon to be examined about the examinable affairs of the Company and to produce the documents listed in the Summons.

In the course of his examination before a Judicial Registrar, My Lyndon claimed that he was entitled to refuse to produce certain of the documents listed in the Summons because producing those documents would tend to expose him (Mr Lyndon) to being found liable for a penalty under the Act.

The Liquidators opposed this claim and argued that penalty privilege had been abrogated by section 597 of the Act, penalty privilege was therefore not available to Mr Lyndon, and Mr Lyndon was required to produce the books described in the Summons.

The Judicial Registrar then referred the question of whether section 597 of the Act abrogates penalty privilege for determination by a Judge.

The Issue

The reason for the dispute can be summarised as follows:

• Division 1 of Part 5.9 of the Act allows the Court to summon a person for examination about a company’s examinable affairs in certain circumstances, including where the Court is satisfied that a person has been or may have been guilty of misconduct in relation to the company.
• An examination summons can also require the examinee to produce at their examination any books in their possession that relate to the company or its examinable affairs.
• Section 597 of the Act then governs the conduct of an examination.
• Section 597 generally provides that an examinee must not, without reasonable excuse, refuse or fail to answer questions put in the examination or refuse or fail to produce books required by the summons.
• Section 597(12) then expressly states that a person is not excused from answering a question put in the examination on the ground that the answer might tend to incriminate the person or make the person liable to a penalty.
• However, section 597 does not expressly deal one way or the other with whether a person can refuse to produce books on the ground that those books might tend to incriminate the person or make the person liable to a penalty.

Section 597(12) clearly abrogates penalty privilege in relation to answering questions in a public examination.

The issue is therefore whether section 597 impliedly abrogates penalty privilege in relation to producing books under an examination summons.

The Decision

In dealing with this matter, Downes J helpfully broke the issue down into the following three questions:

• What is penalty privilege?
• Can penalty privilege arise in a public examination?
• Assuming penalty privilege can arise in a public examination, has it been abrogated by section 597 of the Act?

What is penalty privilege?

Downes J considered a number of the key decisions (including High Court authority) in relation to penalty privilege, in noting the following:

• Penalty privilege operates to excuse a person from being compelled to answer any question, or produce any document, if the answer of the production would tend to expose the person to a penalty.
• It is based on the principle that those who allege criminality or other illegal conduct should be required to prove it.
• The risk of exposure to a penalty does not have to arise from the same matter in which the privilege is claimed.
• However, penalty privilege is different to and distinct from the privilege against self-incrimination and has been described as a “lesser right or privilege” compared to the privilege against self-incrimination.
• In particular, penalty privilege is not a substantive rule of law, and only arises in judicial proceedings (unlike the privilege against self-incrimination which applies to non-judicial as well as judicial proceedings).

Does penalty privilege arise in a public examination and does it arise in this case?

Given that penalty privilege can only arise in judicial proceedings, Downes J then considered whether a public examination constitutes a judicial proceeding, making the following findings:

• There is ample authority to the effect that public examinations which are incidental to a court-ordered winding up constitute judicial or curial proceedings.
• Public examinations can also give rise to an exposure to penalties or forfeiture, and can involve compulsory disclosure of information where that disclosure would represent a departure from the principle that those who allege the commission or a crime or imposition of a penalty should prove it and should not be able to compel the defendant to provide proof against themselves.
• Given that all of these matters are satisfied in this case, it is clear that this is a case where penalty privilege would arise (unless it were abrogated by statute). 

Has penalty privilege been abrogated?

This was the most complex part of the decision.

After carefully considering the authorities and the statutory scheme, Downes J held as follows:

• As penalty privilege is not a substantive rule of law or an important common law immunity, it can be impliedly abrogated by statute and does not require clear words to that effect.
• An intention to abrogate a privilege may be more readily implied where to do otherwise would contradict or diminish the operation of the legislation and the achievement of its purposes.
• The only express qualification on the obligation to produce books under an examination summons is if there is a “reasonable excuse”.
• However, a claim for penalty privilege cannot be a “reasonable excuse” as to allow this would then defeat one of the key purposes of the statutory scheme, namely to permit the investigation of misconduct in relation to a company.
• The fact that section 597(12) expressly abrogates penalty privilege in relation to answering questions (and not in relation to producing books) does not mean that Parliament intended to allow penalty privilege to be raised to resist production of books in an examination.

Conclusion

Having regard to all of the above matters, Downes J was satisfied that section 597(7)(d) of the Act impliedly abrogates penalty privilege in connection with the production of books pursuant to a section 596B summons.

Lavan comment

This interesting decision serves as a useful reminder of the existence of the privilege against exposure to penalty and the scope of operation of the privilege.

However, it also confirms beyond doubt that penalty privilege cannot be raised as a ground to resist production of books under a section 596B summons.

If you have any questions about penalty privilege, or about public examinations, the experienced Lavan team are here to help.