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Protecting your Privilege

What happens when a company goes into liquidation and the liquidator takes control of the email server? Can legal professional privilege be protected?

SME owners frequently use work email accounts to conduct their personal and business affairs, including to obtain privileged legal advice in relation to their directors’ duties.

The Federal Court considered such a matter in Matthews v Clifton [2014] FCA 15 (‘Clifton’).

In Clifton, the liquidator of two companies sought possession of the companies’ computers. The principals of the companies, and companies associated with them, asserted rights of confidentiality and privilege.

The proceedings centred on the use of the companies’ computers by two shareholders. Each had an email account on the server which they used to send and receive emails relating to the businesses. They also used these accounts for purposes unrelated to the affairs of those companies and contended that the server contained:

  • emails concerning their personal and business affairs;
  • information concerning the associated companies; and
  • information including the books and records of the associated companies.

The shareholders claimed that the information in the emails and books and records of the associated companies could not be considered property of the companies in liquidation, was confidential to the cross-claimants and, to the extent that they included communications with legal advisers, was subject to legal professional privilege.

The liquidator’s case was that no matter how confidential the material stored on the computers might be, as liquidator he was entitled to inspect all material recorded on the computers, as they were property of the companies.

In their claim, the cross-claimants relied principally on the concept of equitable protection of confidential information.

Despite the shortcomings in the specificity of the cross-claimants’ evidence, White J considered it appropriate to proceed on the basis that there were reasonable grounds to suppose that the computers did contain confidential material as:

  • it was possible for the Court to put in place a regime by which the material could be identified as confidential and privileged to protect the cross-claimants’ interests;
  • the cross-claimants had identified categories of documents said to have the requisite confidentiality;
  • the cross-claimants’ claim that the computers contained material in respect of which they had legal professional privilege was not implausible and not to be lightly ignored; and
  • the claim that the computers contained confidential material of a more general kind was not implausible as it is commonplace for the owners of family-owned companies to ignore the distinctions of legal identity in the day-to-day running of their businesses and in their personal affairs.

When considering the confidentiality of the information, the liquidator contended that the “Email and Internet Usage Policy” of the companies was a clear indication that emails sent on the server were not private and could be reviewed by the companies as employer, which extended to any subsequently appointed company officers (including liquidators).

White J held the policy did not mean the information ceased to have the required quality of confidence. This was because the shareholders were not only employees of the companies — they were the sole owners of the companies, and one of them was the sole director and managing director of each. White J considered it “artificial” to treat the director’s disclosure to the companies as akin to disclosure by an ordinary employee. The shareholders’ information on the computers was not available to the companies’ employees generally.

The cross-claimants claim for protection of their confidential information therefore succeeded.

Although the outcome of Clifton was favourable to the cross-claimants, SME owners (if they act early enough) have practical things they can do to protect the privileged nature of emails containing legal advice. These measures include using a private communication channel and separating personal and privileged emails from business emails for ease of identification.

Ultimately, if a director thinks that a company is close to insolvency or foresees a shareholder dispute and needs legal advice it is best not to use a work email to obtain legal advice. It is prudent to establish a private communication channel.

If it is too late, directors should claim privilege and ask to have a chance to identify and segregate any personal, privileged emails when a dispute or liquidation commences. In the event that the liquidator disagrees, there are options by way of court proceedings which can protect confidential and privileged information.

If you have any concerns or would like some advice – please contact us and a member of our team will be able to assist you.

This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.

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