Now you see it, now you don’t - accessing company documents in a dispute

Hammond v Quayeyeware Pty Ltd 

Serving and former company directors have broad rights to access and make copies of confidential company records, under the Corporations Act 2001 (Cth), the company’s constitution and at common law.[1]  

In some circumstances, a director may be able to claim a joint or common interest privilege in legal advice provided to the company which affects them personally.[2]

Given the importance placed on the director’s statutory and common law rights of access to corporate information, when can a company refuse a director access to company records?

That question was considered in the Federal Court’s decision of Hammond v Quayeyeware Pty Ltd [2021] FCA 293.  The Court determined that when a company is in a dispute with a director, the director’s rights to access privileged communications of the company are restricted.  The company is entitled to seek legal advice without fear of the advice coming into the hands of the director, even after the conclusion of the dispute, provided confidentiality is maintained.

Clyde & Co’s JP Wood, Bradley Baker and Olivia Campana consider this case and how a corporation may effectively preserve the confidentiality of legal advice received in connection with a dispute with a director.

Background

Ms Hammond (the plaintiff) and Mr Hammond operated a business designing and selling sunglasses through the defendant company, Quayeyeware Pty Ltd (Quay), of which they were directors and shareholders. Ms Hammond marketed the business, including via social media and influencers.

In 2016 the Hammonds sold about 65 percent of their shares in Quay to Elevate Brandpartners Pty Ltd (Elevate) (a UK registered company). They retained the balance of their shareholding and remained directors, with 3 additional directors appointed by Elevate (Messrs Hamilton, Dean and McCormick).

In late 2017 Mr Hammond resigned as a director. He was replaced by Ms Hammond’s nominee, Mr Boyd (a chartered accountant).

Ms Hammond claimed that by late 2017 the flow of information she received as a continuing director had deteriorated significantly.

The Elevate Proceedings

In late 2018 the Hammonds incorporated Dream Bandits Australia Pty Ltd (Dream), which marketed and sold lingerie. This brought them into conflict with Quay (through its majority directors) and culminated in Elevate and Quay commencing proceedings against Dream, the Hammonds and Mr Boyd, alleging breach of contract, breach of director’s duties, trademark and copyright infringement and tortious interference in Quay’s contractual relations with an employee (the Elevate Proceedings).

The First Access Proceedings

In mid-2019 Ms Hammond and Mr Boyd commenced further proceedings against Quay, seeking orders compelling Quay to allow them access to financial and other records of Quay and asserting that they were being deprived access (the First Access Proceedings).

Quay ultimately granted access and the First Access Proceedings were dismissed.

Ms Hammond and Mr Boyd remained dissatisfied with the flow of information from Quay. Their concerns were amplified by the onset of the Covid-19 pandemic and its impact on Quay’s business.

In early May 2020 disagreement between the parties heightened: Ms Hammond’s solicitors sent letters to Quay’s solicitors in relation to director’s rights to records including written legal advice received by Quay in connection with the Elevate and First Access Proceedings (the Records).

Covid-19 related operational difficulties led to Quay seeking additional time to respond Ms Hammond’s solicitors, and in late May 2020 Ms Hammond commenced proceedings in the Federal Court of Australia, seeking a declaration as to her right as a director to access the Records.

Banks-Smith J handed down her judgement on 30 March 2021.

Positions of the parties

It was not disputed that the Records were confidential legal advice subject to legal privilege.

Ms Hammond argued that the Records were not privileged as against her, as she was a director seeking the documents for the purpose of performing her duties as a director and, in any event, the Elevate Proceedings and First Access Proceedings were at an end.

Quay contended that Ms Hammond was not entitled to the Records because she was acting in her personal capacity, such that her interests were adverse to those of Quay.

Her Honour assumed that Quay had sought the advice contained in the Records on the basis that it would be confidential and would not be disclosed to Ms Hammond. From this perspective, she was required to determine two key questions:

• Could Quay claim privilege against Ms Hammond from the time any confidential advice documents were created?
•  If so, were there intervening events such that any privilege could no longer be maintained?

Could Quay assert privilege against Ms Hammond?

Banks-Smith J considered that Quay was entitled to withhold privileged legal advice obtained for the purpose of the Elevate and First Access Proceedings, from Ms Hammond on the basis that: 

• the advice was confidential to Quay when created;
• Ms Hammond’s position in the litigation was hostile to Quay's interests, such that Quay sought confidential legal advice on the basis that Ms Hammond would not have access to it; and
• the public interest in the administration of justice prevailed over the public interest which required the production of evidence for the purpose of litigation.

Quay preserved the confidentiality of the advice in the Records by forming a sub-committee excluding Ms Hammond (and Mr Boyd) and by limiting the disclosure of the advice to those directors on the sub-committee.

In those circumstances, it was evident that the Records were never intended to be provided to Ms Hammond.

Had the privilege been lost?

Ms Hammond’s representatives asserted that any privilege attached to the legal advice did not survive the Elevate Proceedings and the First Access Proceedings.

Banks-Smith J considered that this was contrary to established authority that privilege, “survives the end of the case, the end of the solicitor-client relationship and even the death or dissolution of the party on whose behalf the [privileged] statement was obtained.”[3]

Banks-Smith J found that Quay had not waived privilege over the Records, including because:

• Quay had maintained its claim of privilege;
• there was no suggestion that any advice had been disclosed to Ms Hammond;
• the parties, by these proceedings, were involved in adversarial litigation as to which there was some overlap with the subject matter of the prior proceedings; and
• Quay and Ms Hammond always had their own lawyers.

On this basis, to the extent the Records were privileged, Her Honour declined to make orders giving Ms Hammond access to the Records.

Takeaway

The key learning for directors is that there are limits to a director’s rights to access company records.  Where a company is in dispute with a director, the company (by its other directors) is entitled to restrict the director’s access to legal advice, even after the conclusion of the dispute (provided that confidentially is maintained).

For companies and directors, the decision highlights the importance of understanding the scope of the director’s rights to access documents and putting practical measures in place to restrict that access where appropriate. 

Practically speaking, when a company is in dispute with a director, the remaining directors may take steps to ensure that privilege is preserved in their communications, and confidentiality is maintained.  Those steps may include :

• appointing a sub-committee of directors to deal with the dispute;
• obtaining legal advice from lawyers appointed by the sub-committee;
• limiting access to that advice to the sub-committee members;
• quarantining confidential documents which are or might be the subject of privilege; and
• observing strict document and information management practices, such as digital information barriers, to systemically protect the confidentiality of confidential communications (e.g. legal advice).