In Carey v Korda  WASCA 228, the Western Australian Supreme Court of Appeal (Court) has provided a timely confirmation that legal advisers engaged by receivers to provide advice in relation to a receivership are properly viewed as advisers to the receivers as principal, and not the mortgagor company.
The decision will no doubt be welcomed by insolvency practitioners, as it confirms that the legal advice, and the right to invoke the associated privilege, belongs to the receivers, not the mortgagor company.
This is important for receivers who will understandably wish to avoid sensitive, privileged communications with their lawyers ending up in the hands of the directors of the mortgagor company, particularly where the existing management is unhappy with the conduct of the receivership. This was precisely the concern which confronted the receivers in Carey v Korda.
Advice obtained by the receivers as principal, not agent
In Carey v Korda, receivers had been appointed to the Westpoint group of companies.
Some of the directors commenced an application for the production of certain documents from the receivers, including documents such as invoices relating to legal work undertaken by a law firm engaged by the receivers. The directors sought access to these documents on the basis that the legal advice had been obtained by the receivers as agents of the Westpoint companies.
The Court recognised the fundamental principle that a receiver acts as agent of the mortgagor company, although it found that the receivers were not acting as agent of the Westpoint companies in engaging the legal advisers in this case. Rather, the receivers had retained the solicitors as principals.
The key issue – who is the client?
According to the Court, the key question was – who should be regarded as the law firm’s client pursuant to the terms of the relevant legal retainer?
The Court analysed the specific retainer letters and noted that they were addressed to the receivers and recorded that the law firm has been asked to act on behalf of the receivers in respect of the receivership. The letters were also countersigned by the receivers themselves. Interestingly, the letters specified that the client's name was to be the Westpoint company (receiver and manager appointed). Notwithstanding this, the Court was still of the view that it was the receivers, as principals, who had retained the law firm (the reference to the Westpoint company as the client being a reference to the entity who was going to pay the legal fees, rather than the client).
It was clear that the work undertaken by the law firm extended to work:
- firstly, for the benefit or protection of the receivers personally; and
- secondly, for the receivers in their capacity as agents of the Westpoint companies in the conduct of the business of the companies or the disposition of assets.
The Court did not consider that the fact that some of the work fell into the second category impacted upon the privilege analysis. The Court was primarily concerned with the terms of the relevant retainer, which indicated that it was the receivers who were the clients of the law firm.
This is not to say that the receivers, having obtained advice as principal, would not thereafter be acting as agents for the mortgagor company in managing the companies and effecting the sale of the assets. It was accepted that when, for example, the receivers (directly or through their solicitors) negotiated with third parties and entered into contracts for sale etc, they would be acting as agents of the companies. It was just that the legal advice which informed the receivers in making those decisions was obtained by the receivers as principals, not agents.
This decision accords with the expectations of insolvency practitioners in practice. An alternative finding would have been most unwanted by insolvency practitioners, potentially exposing a receiver’s legal advice to review by the (often unhappy) directors and management of the mortgagor company.
Not only does the case represent a timely recognition of the continuing sanctity of the privileged nature of legal advice obtained by receivers during their appointment, but it also highlights the importance of properly documenting the terms of the specific legal retainer. Receivers and their lawyers should carefully formulate the terms of the relevant legal retainer to ensure that:
- it is addressed to the receivers themselves (preferably care of the receivers' accounting firm);
- it records that the law firm has been asked to act on behalf of the receivers and provide advice in respect of the receivership; and
- any acknowledgement contained in the retainer is signed by the receivers themselves.
Whilst these terms will not provide an absolute protection (as the Courts will look to the substance of the engagement), by ensuring that the formal terms of engagement reflect the outcome of the Carey v Korda case, receivers can minimise any risk that sensitive, privileged communications with their lawyers will end up in the hands of the mortgagor company (and its management).
To the extent that the receivers require the legal fees to be paid out of the assets of the mortgagor company, the mortgagor company should be referred to as a third party payor of the invoice (and not as the client).