March 16, 2020

Privilege Against Self-Incrimination Refined for Partnerships

The Full Federal Court of Australia[1] has clarified resoundingly the law of privilege against self-incrimination and/or exposure to penalties (the Privilege) as it applies to partnerships.

 The partnership of an accounting firm sought to resist the production of its audit files, review files and working papers in a shareholder class action regarding the collapse of a construction company. The accounting firm made a blanket claim of the Privilege on behalf of all of its Australian partners, including partners who had no involvement in the audits of the construction company (the Audits). 

Background

The representative applicant in the class action purchased shares in the construction company in 2011 and 2012, just before the company went into liquidation on 28 May 2012 as a result of alleged accounting irregularities. The applicant claims that it suffered losses as a result of relying on statements made by the accounting firm in its preparation of the Audits and share prospectus. Further, the applicant says that the accounting firm failed to conduct the audits in compliance with the appropriate auditing standards and engaged in misleading and deceptive conduct under the Corporations Act, ASIC Act and the Australian Consumer Laws (ACL) concerning representations made in respect of the construction company's financial position and performance. The class action was bought against all of the accounting firm's partners at the time of the alleged wrongdoing.

Claims for Privilege

The accounting firm claimed the Privilege and refused to comply with orders for discovery and produce its audit file and other relevant documents in the proceeding on various grounds:

  • The applicant's pleadings alleged that the accounting firm's partners had contravened various criminal and civil penalty provisions of the Corporations Act, the ASIC Act and the ACL.
  • The partners involved in the Audits (Involved Partners) were permitted to claim the Privilege and accordingly they could not be compelled to discover documents that could potentially imperil the Privilege.
  • The partners not involved in the Audits (Uninvolved Partners) were jointly and severally liable for any penalty that may be imposed on the partners involved in the Audits, due to the operation of s14 of the Partnership Act 1958 (Vic), and similar provisions in other Australian States (the Offence and Penalty Provisions), which provides:

    "…where by any wrongful act or omission of any partner acting in the ordinary course of the business of the firm or with the authority of his or her co-partners … any penalty is incurred the firm is liable therefor to the same extent as the partner so acting or omitting to act”

The accounting firm's argument therefore was that the Uninvolved Partners were exposed to the same risk of prosecution or penalty as the Involved Partners and accordingly the partnership as a whole could not be compelled to discover the audit file and other relevant documents in order to avoid imperiling the Privilege.

Decision at First Instance

The primary judge, Justice Moshinsky, considered the principles regarding the Privilege:

  1. No one is bound to answer any question or produce any document if the answer or the document would have a tendency to expose that person to the imposition of a civil penalty or to conviction for a crime.

  2. Both privileges (against self-incrimination and against exposure to a penalty) are distinct, but for practical purposes are alike and based upon the same principle.

  3. The Privilege is personal and is not available to artificial legal entities such as corporations.

  4. Generally, one person cannot claim the Privilege on the ground that the answer or document would tend to incriminate another person.

  5. A valid claim will be made out if the claimant can establish that providing the document would give rise to a "real and appreciable" risk of prosecution.

In considering the accounting firm's claims for the Privilege, Moshinsky J upheld the claim that the Privilege was available to the Involved Partners. However, his Honour determined that the Uninvolved Partners did not have a "real and appreciable" risk of prosecution, that any prospect of the Uninvolved Partners being prosecuted was theoretical rather than real, and therefore that the Privilege is not available to them in these circumstances. In relation to the civil penalty provisions, the alleged conduct was outside of the limitations period and therefore there was no real and appreciable risk of exposure to penalties due to civil contraventions.

The accounting firm appealed these findings to the Full Federal Court.

Parties' Submissions on Appeal

The appeal hinged upon the Offence and Penalty Provisions alleged in the applicant's pleadings. The accounting firm contended that the partnership was a "person" within the meaning of the Offence and Penalty Provisions. Thus, all members of the partnership were alleged to have contravened the Offence and Penalty Provisions and all were exposed to potential prosecution or civil penalties.

In particular, the accounting firm focused on the provisions of the Partnership Act and alleged that in terms of section 14 of that Act, each partner was liable for the wrongful acts or omissions of the Involved Partners and each was responsible for any civil or criminal penalty incurred by the Involved Partners because of their wrongful acts. 

The applicant submitted that there was no real and appreciable risk that the Uninvolved Partners would be subject to criminal liability or civil penalties. The allegations in the pleadings related to the conduct of the partners responsible for the Audits and there was no basis on which the Uninvolved Partners could be liable for the wrongful conduct of the Involved Partners.

In respect of the applicability of the Partnership Act, the applicant stated that the submission was misconceived as criminal liability was personal, and the elements of the offence must be proven against each partner individually. The applicant submitted that the accounting firm's interpretation of section 14 of the Partnership Act would be unworkable as it would mean that a "tax partner in the Perth office can go to jail for the conduct of [an involved partner] in the Brisbane office – despite never having known about it – not even having met [the involved partner and] having nothing to do with the audit part of the firm".

Determination of Appeal 

The Full Federal Court dismissed the accounting firm's appeal with costs, upholding Moshinsky J's finding that there was no real and appreciable risk that the Uninvolved Partners may be subject to criminal liability or civil penalties. The Court found that the accounting firm's wholesale reliance on the provisions of the Partnership Act was misconceived because it confused the personal criminal liability of one partner for an offence with another partner's liability to pay, or contribute to the payment, of any pecuniary penalty imposed on a partner. The Court found that the use of the word "liable" in section 14 of the Partnership Act refers to liability for compensation, not criminal responsibility or civil liability which results in a penalty. The Court determined that criminal responsibility on the one hand, and the financial liability of a partnership to satisfy payment of a penalty on the other hand, are two separate and distinct concepts. The Privilege could not attach to the financial liability to satisfy a penalty because it does not involve the attribution of personal, criminal responsibility.

Consequently, because the Privilege cannot be extended to the Uninvolved Partners, they can be compelled to discover the audit file and other documents relevant to the proceeding.

Conclusion

The decision has provided clarity around the privilege against self-incrimination and the privilege against exposure to a penalty as it applies to the members of a partnership. The Full Federal Court made it clear that to claim either of these privileges, a partner must be able to show that they are personally at risk of criminal prosecution or civil penalty proceedings. This finding is bound to have a significant impact on other class actions to which accounting or auditing partnerships are parties, as the partnership, and partners uninvolved in the engagements the subject matter of the proceedings, cannot claim these privileges in order to avoid producing the audit file for scrutiny.

If you would like to discuss these issues further, please contact Janette McLennan and Kerry Spies.