CATCHWORDS e BANKRUPTCY - public examination of bankrupt charge against bankrupt - incriminating questions. Bankruptcy Act 1966, ss.14(5), 69(12) Companies (N.S.W.) Code s.541 Re: Kenneth John Gordon Qld E276 of 1987 PINCUS J. BRISBANE 15 APRIL 1988 discretion - pending to criminal disallow / IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION ) QLD E276 of 1987 BANKRUPTCY DISTRICT OF THE SOUTHERN ) DISTRICT OF THE STATE OF QUEENSLAND ) RE: KENNETH JOHN GORDON MINUTES OF ORDER JUDGE MAKING ORDER: PINCUS J. DATE OF ORDER: 15 APRIL 1988 WHERE MADE: BRISBANE THE COURT: bd sets aside the Deputy Registrar's directions of 8 March 1988 excusing the bankrupt from answering questions then proposed to be asked on the ground that they might tend to incriminate him; directs that the bankrupt not be excused by reason only of the fact that the answers may tend to incriminate him from answering questions as to: (i) the receipt by any person or company of moneys earned in connection with work done by the bankrupt relating to the sales tax arrangements mentioned in evidence; (ii) the amounts of money so received; (iii) the disbursement of moneys so received; (iv) matters deposed to in the High Court affidavit made by the bankrupt and mentioned in the evidence. Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules. IN THE FEDERAL COURT OF AUSTRALIA ) GENERAL DIVISION ) QLD E276 of 1987 BANKRUPTCY DISTRICT OF THE SOUTHERN ) ' DISTRICT OF THE STATE OF QUEENSLAND ) RE: KENNETH JOHN GORDON PINCUS J. 15 APRIL 1988 REASONS FOR JUDGMENT This 21S an application by Mr S.R. Eleftheriou, a person appointed to carry the duties of the Official Receiver and representative of the Official Trustee, for orders reviewing directions given by a Deputy Registrar in the course of a_ public examination of a bankrupt, Mr Gordon. The directions in question were given under s.69(12) of the Bankruptcy Act 1966, which reads as follows: "The bankrupt shall answer all questions that the Court, the Registrar or the magistrate puts or allows to be put to him and, unless the Court, the Registrar or the magistrate, as the case may be, otherwise directs, is not excused from answering any such question by reason only of the fact that the answer to it may tend to incriminate hin." In circumstances mentioned below, a Deputy Registrar, in effect, excused the bankrupt from answering questions falling within certain categories during the course of his public examination. He did so, it appears, on the ground that it was thought that the answers might tend to incriminate the bankrupt. What happened, in outline, was that the trustee was not allowed to ask questions about moneys earned by the bankrupt in work relating to a scheme for reducing sales tax, because that scheme had been alleged to be illegal and criminal charges were brought. This application for review is based upon s.14(5) of the Bankruptcy Act 1966 which reads as follows: "An order or direction made or given, or an act done, by a Registrar or a Deputy Registrar under this Act 1s subject to review on summary application to the Court." There was some discussion at the hearing as to the extent to which the exercise of a discretionary judgment by a Registrar or Deputy Registrar is open to attack under this provision, and it was submitted on behalf of the bankrupt that in cases of that kind the rule in House v. The King (1936) 55 C.L.R. 499 is applicable. It is unnecessary to determine that point, for I am of opinion that the Deputy Registrar erred in principle. The essential point may be stated at once: the Deputy Registrar appears to have applied to the exercise of his discretion under s.69(12) a rather rigid rule thought to be of the New South Wales Court of Appeal derived from the judgments in Oades v. Hamilton (1987) 12 A.C.L.R. 371; in my opinion, he did so erroneously. The bankrupt attained that status by a sequestration order made by Spender J. on 2 March 1987 and the Official Trustee became the trustee. Some years earlier, Gordon had made an affidavit, dated 10 August 1983, in proceedings in the High Court of Australia in Brayson Motors Proprietary Limited (in Liquidation) v. The Commissioner of Taxation for the Commonwealth of Australia; it appears to have been that litigation which ultimately produced the Full Court decision reported in (1984) 156 C.L.R. 651. It is convenient to set out in summary form part of the content of that affidavit: Gordon was then (in August 1983) a director of Denouf Pty Ltd, had been so since 1980 and prior to that represented the company in Sydney. After 1980 he represented one R.J. Hopkins in Sydney. Prior to September 1979, he met Messrs Peter and Paul Bray in Sydney and explained that he was acting for Corporate Management Pty Limited, a company associated with John Costello and Peter McCarthy. He told the Messrs Bray of a method of sales tax minimisation and that he had obtained counsel's opinion about it. He explained that the method involved a motor dealer's making a secured loan to a "wholesale company" and taking security to the extent of almost the whole purchase price of a vehicle. The vehicle would be sold at a figure being the difference between the amount of the security and what otherwise would have been the price. Gordon said: "In actual practice the advance is for 99% of the finance company payout, with the end result that you effectively pay sales tax at the rate of 15% of 1% of the payout price." After that, Gordon from time to time enquired to see whether the Brays intended to take up the scheme; he was told, prior to July 1980, that they did. About that time he told Mr Paul Bray that "we have changed the transaction" ina certain respect. He sent to the Brays drafts of agreements which were later entered into and explained to them, illustrating the method with blank forms, the detailed sequence of operations to give effect to the scheme. About 14 August 1980, Gordon went "to the premises of the plaintiff ... 'and settled with Mr Moffitt the transactions completed in the prior month". Moffitt was an accountant employed by what was described as the "Brayson Group of Companies". About November 1980, Gordon spoke to one of the Brays or their accountant and told them that R.J. Hopkins (mentioned above) was to take over the role of Denouf. That occurred and Gordon attended settlements on a monthly basis on behalf of Hopkins. There followed detailed explanations as to the method of settling, each month, transactions relating to the scheme. On 15 January 1988, an officer of the Federal Police swore an information that Gordon, between 1 June 1978 and 30 April 1984, conspired "with other persons, namely John Joseph Costello, Ronald James Hopkins and Eric Norman Walters, to defraud the Commonwealth by entering into an agreement to carry out a dishonest scheme for the reduction of sales tax payable to the Commonwealth ..." On 8 March 1988, the bankrupt's public examination commenced and Mr Matthews, counsel for the bankrupt, informed the Deputy Registrar of the charge just mentioned. It was said that the alleged co-conspirators had appeared before justices on the charge and were awaiting the setting of a date for the hearing of committal proceedings. Counsel for Gordon suggested that any questioning relating to the subject matter of the criminal charge be deferred until after the completion of "any hearings in respect of the charge". Counsel for the Official Trustee, Mr Hack, explained that he proposed to ask Gordon "certain questions about commissions earned by him by reason of his involvement ina firm of accountants, which firm of accountants it appears may have been involved in the criminal proceedings, the subject of which my learned friend speaks". Counsel for Gordon remarked that "if ... the accountancy practice was promoting a tax avoidance scheme and earning commissions therefrom, the earning of the commissions on the promotion of those schemes would be evidence going to the heart of the conspiracy ..." He submitted that "The accepting of commissions is evidence of having contracted with clients in respect of the promotion of an avoidance scheme". In the result, Gordon began to give evidence, on the same day. He said, in effect, that he had told the High Court in the proceedings mentioned above that commissions were paid, not to him, but to "an associate company of mine", but admitted that the affidavit to which I have referred contained a statement that he acted as a representative of Denouf Pty Ltd. He added that "Denouf had ... existing contractual arrangements with motor dealers in Sydney and I on a monthly basis visited those particular establishments to fill those contractual arrangements to do with sales tax". He agreed that those arrangements had to do with lowering the incidence of sales tax. According to Gordon, K.J. Gordon Pty Limited received a "fee", rather than "commission", for Gordon's role in the undertaking just mentioned. Gordon added that there was a "Gordon Family Trust" in relation to which he and his wife made the decisions as directors of Sondel Pty Ltd, the trustee of that trust. He said that loan funds were advanced hy Sondel Pty Ltd to the trust and that he met his personal expenses by using Sondel's bank account. He was then questioned about movement of certain moneys overseas and back again, and admitted that that was a device "to move funds offshore and bring them back into this country under another guise ... after taking legal and accounting advice". When asked whether the money in question was "earned by your involvement in the sales tax avoidance schemes promoted by Costello and McCarthy", he denied that the money was earned by hin personally and said that a trust called the C. & G. Trust earned fees and commissions from the sales tax arrangement. He also said that a company described as "K.J. Gordon" received fees and commissions from the scheme - presumably meaning K.J. Gordon Pty Ltd, mentioned earlier. The C. & G. Trust fees and commission were channelled by a number of entities to the United States, the Bahamas and back again to Australia, in different names. He denied that the money so moved was his, and was earned by him "personally" in the sales tax scheme. One might comment that the trustee's task in disentangling these arrangements to ascertain what might be claimed to be included in the bankrupt's estate appeared to be no easy one. Counsel for the Official Trustee then asked Gordon, in effect, whether the place of Denouf Pty Ltd in the sales tax scheme was taken over by Ronald James Hopkins, and the answer was in the affirmative. Counsel asked whether Gordon acted as Hopkins' representative "in the similar capacity that you acted for Danouf CsicjJ" and the answer was again yes. Counsel asked whether "that part of it involved you with liaison with Sydney participants in this operation" and the answer was yes. The names of a number of Sydney participants were then mentioned and agreed to by Gordon. Counsel for the trustee then said: "How many Sydney participants in the group did you service?" At that point, counsel for Gordon objected, and after some discussion the witness withdrew. Counsel for the trustee explained that he wished to askfd Gordon to agree "that he acted as the agent or the representative of these entities, and that his task involved servicing the Sydney participants in the scheme, that is, going ... to their premises to work out some sort of method not the reconciliation, and that at the end of each month there was a divvy-up ... of the proceeds of this scheme as between the promoters, and the moneys in accordance with either a fixed percentage or a per deal amount were paid to entities associated with Mr Gordon as their share of its share of the commission." He went on to say that he wished to go into the source of those moneys over the years and mentioned a number of companies which were apparently thought to be payers to Gordon or entities controlled by him. Counsel said that he wished to have the witness "swear to the fact of receipt of moneys for a particular purpose, and then to show the amounts of money received, particular into Sondel, and then to show the distribution of those moneys on living expenses and such like of the witness". The Deputy Registrar remarked that the decision in Oades v. Hamilton was that "questions should not be asked which would interfere with the due administration of justice in criminal proceedings" and sald that was a "very broad statement". There followed some discussion of the possibility of restricting distribution of the transcript. The matter appears to have been argued on the basis that, the objection having been taken, the Deputy Registrar either had to "prohibit the line of questioning or allow it in full with no other restrictions on transcript". It is not easy to understand why that attitude was adopted. The objection taken by counsel for Gordon was that the questions intended to be asked might assist proof of the conspiracy case by enabling proof of "the fact of persons paying for the promotion of a sales tax minimisation or avoidance scheme", Certainly, the questions foreshadowed by counsel for the trustee related to that point. From the affidavit filed in the High Court and the answers already given by Gordon, it was clear enough that Gordon had freely admitted having taken part in the implementation of the scheme and that money had been paid and received for his participation. No explanation was given as to why it was thought to be particularly important not to give evidence as to precisely which entities made the payments and which received them. The Deputy Registrar's ultimate ruling was as follows: "The presence of the affidavit may have thrown one confusing element into the proceedings. I do not know how to handle it, to be honest. Upon the basis of Oades v. Hamilton I will not permit the line of questioning to proceed at this present time." There followed some discussion about whether questioning on the High Court affidavit should be allowed, and the Deputy Registrar extended his ruling to that subject. By way of clarification, the Deputy Registrar added that he would permit enquiries to the fact of receipt by Sondel but not the payer, or the nature of the payment, or the services in respect thereof insofar as it might be tied up with the subject matter of the prosecution. 10. Generalising the ruling, it appears to have been that any question relating to matters which the prosecution might be thought likely to desire to prove in the criminal case should he disallowed, on the authority of Oades' case. It may be that, soon after bankruptcy, prosecutions are launched - for example, for criminal fraud, stealing or the like - having to do with a major or perhaps the whole of the bankrupt's former commercial activities. It would seem to me inconsistent with the intention of s.69, read in the light of its history, to hold that in those circumstances, examination of the bankrupt must stop, perhaps for a long time. Here, if the directions given by the Deputy Registrar stand, the trustee cannot properly investigate payments made by others for the bankrupt's work. In my opinion, there 1s no prima facie rule that answers to incriminating questions under s.69 may not be compelled. An important object of the examination may be to investigate circumstances suggestive of the commission of bankruptcy offences. That is not in question, here, where the trustee disclaims any purpose, as to the questions in issue, of obtaining evidence of criminality. Counsel for Gordon mentioned that he held no brief in the trial, but was instructed that a principal part of the prosecution case was that - ",.. these documents were backdated. The D.P.P. did not accept apparently that they were monthly in arrears calculations, but they said that rather than that they are backdated and that is why it is a shan." 11. Apart from that, there was no information before the Deputy Registrar as to what the live issues in the criminal proceedings were likely to be. Unless one accepts the view that any fact which might be the subject of evidence in the prosecution cannot properly be asked about in the s.69 examination of the bankrupt, it is difficult to see any reason why the line of questioning had to be stopped. If the point of the prosecution was an alleged predating of documents, consideration could have been given, on objection being taken, to stopping questions directed to the subject. There was no suggestion that any of the questions would have been so directed. The intention of the legislature in enacting $.69(12), like its predecessors, was to give a discretion to excuse or not to excuse the bankrupt from answering questions the answer to which might tend to incriminate him. That protection for the bankrupt, provided in both federal bankruptcy statutes, was a substantial alleviation of the position which had developed earlier, namely that there was no relevant privilege applicable to such examinations: Rees v. Kratzmann (1965) 114 C.L.R. 63 at p.80. Judicial attitudes towards the application of the privilege against self-incrimination are sometimes strict and sometimes less so. It has been held, for example, that even in the absence of any express reference to the privilege, the presumption that any legislation was intended to respect the privilege may sometimes be tredted as rebutted: Police Service Board v. Morris (1984) 156 C.L.R. 397 at pp.408, 409. Again, 12. there is authority for discriminating, when determining the length of sentence, between those convicted persons who have and those who have not confessed their guilt, the latter, of course, receiving the heavier penalty: The Queen v. Shannon (1979) 21 S.A.S.R. 442. There are, at the other end of the spectrum, authorities which apply that principle strongly and some of the remarks in Qades v. Hamilton are in that class. The case concerned the construction of 3.541 of the Companies (N.S.W.) Code, permitting the Court to examine people in the course of its administration of wound-up companies. The critical provisions were sub-s.(8) and (12): " (8) A person attending before the Court for examination pursuant to an order made under sub-section (3) shall not refuse or fail to answer a question that he is directed by the Court to answer. Penalty: $10,000 or imprisonment for 2 years, or both... (12) A person is not excused from answering a question put to him at an examination held pursuant to an order made under sub-section (3) on the ground that the answer might tend to incriminate him but, where the person claims, before answering the question, that the answer might tend to incriminate hin, the answer is not admissible in evidence against him in criminal proceedings other than proceedings under this section or other proceedings in respect of the falsity of the answer." It will be noticed that sub-s.(12) absolutely removes the privilege and does not remove it subject to a discretion. The examinee had been charged with offences connected with the affairs 13. of the company, which was in the course of being wound up. The difficulty appeared to be that matters about which the liquidator wished to enquire in the course of his administration - the making of preferential payments and recovery of the company's property - overlapped with the issues in the criminal proceedings. It was not argued that the examination was for any reason "other than to obtain information necessary and proper for the expeditious winding up" of the company - p.379. Clarke J.A., at p.380, pointed out that the Court had power to stay proceedings in the interest of justice. At p.384 his Honour drew a distinction between those cases in which the examinee has been charged and those in which he has not. In the former case, his Honour asserted, the accused is "Statutory exceptions apart, entitled to all the protection afforded by well-established priciples of the criminal law". He thought it followed that "the exposure of a person charged with a criminal offence to questioning which may lead to the furnishing of incriminating answers in respect of matters at the heart of a criminal charge may cause significant prejudice to the examinee, and constitutes a real interference in the administration of criminal justice." As to the qualification "statutory exceptions apart", his Honour remarked at p.385 that he did not - ... find any indication in the legislation that a person charged with a crime should be deprived of the rights and safeguards, including immunity from interlocutory processes such as discovery and interrogatories, to which all accused persons are otherwise entitled." 14. I find it difficult, with respect, entirely to accept that. It must have been obvious to the draftsman of $.541 that attempts by a liquidator to recover a failed company's property and criminal proceedings against alleged malefactors in relation to the affairs of the company may be lengthy and concurrent. There would have been no difficulty, had that been the legislature's true intention, in adding a qualification that the express requirement to answer questions though they might tend to incriminate should not apply where charges had actually been laid, a3 opposed to being merely expected. The statute considered by the Court of Appeal contains no such qualification; nor does the provision with which I am concerned. Mahoney J.A. in Qades' case agreed with the considerations upon which the order proposed by Clarke J.A. was based: p.372. His Honour took the view that there was power to give such directions regarding the examination as to avoid injustice. Mahoney J.A. did not think that the protection of the examinee from relevant prejudice required that the examination not touch the matters the subject of the criminal charges. Priestley J.A., on the other hand, said nothing 1n support of the suggestion of the presiding judge that certain questions might be asked about matters the subject of criminal charges and held that - ",.. this Court should make orders having the effect of upholding the appellant's right not to be asked questions in any examination held under 3.541 concerning criminal offences with which he has been charged." 15. That opinion, however, is at variance with the view of Clarke J.A., restricting protection to incriminating answers "which go to the heart" of the charges. Priestley J.A. found difficulty in reconciling the High Court's expressions of view in Hammond v. The Commonwealth of Australia (1982) 152 C.L.R. 188 with Mortimer v. Brown (1970) 122 C.L.R. 493. Hammond's case is a difficult one to apply here, both because of the existence of room for doubt as to precisely what it decided, so far as relevant to the present case, and because of uncertainty as to the reason for decision. As to the latter point, a majority of the judges appear to have rested their conclusion, at least partly, on constitutional ground: see pp.201.7, 203.5 and 206.1. It is now clear that Parliament may interfere with the privilege against self-imcrimination: Sorby v. The Commonwealth of Australia (1983) 152 C.L.R. 281 at pp.298.3 and 308. It is convenient to defer analysis as to precisely what was, relevantly, decided until some earlier authorities are noticed. In re Paget £19273 2 Ch. 85, the English Court of Appeal held following earlier authority that, in a public examination under the English Bankruptcy Act 1914, the debtor was not entitled to refuse to answer questions on the ground of self-incrimination. The same view was expressed by Windeyer J. in Rees v. Kratzmann (1965) 114 C.L.R. 63 at p.80. Then in Mortimer v. Brown (above) it was held that in a public examination in relation to a company 16. being wound up under the then companies legislation, the fact that answers might tend to incriminate the witness might sometimes be taken into account in exercising the discretion whether to compel an answer; In re Paget was referred to (see p.502). It was further said that certainty that an answer would incriminate - ",.. would not itself provide a sufficient reason for disallowing the question, since questions will normally be directed to the investigation of all relevant facts in order that it may be ascertained whether or not there has been fraud or concealment of material facts. I think it is the intention disclosed by this section that any questions which will be of real assistance towards the fulfilment of that purpose should be answered." The reasons from which this quotation is taken, those of Walsh J., went on to say, in effect, that the Court would look at the bearing the particular question had upon the investigation with which the Court was concerned and whether "the harm that may be done to the individual will outweigh any benefit to be obtained One view of Hammond's case is that it qualified the clear exposition of the law in Mortimer v. Brown in an important respect, namely in ruling out altogether any question bearing upon amatter in respect of which the witness has been criminally charged. Toohey J. in Huston v. Costigan (1982) 45 A.L.R. 559 explained Hammond's case (at p.563) as depending on "the fact that if the plaintiff were required to answer questions designed to establish that he was guilty of the offence with which he had been charged, there would be a real risk that the administration of justice would be interfered with". I draw attention to the word 17. "designed". A wider view of Hammond's case, being that which attracted Priestley J.A. in Oades'' case, treats it as making the law as laid down in Mortimer v. Brown inapplicable to incriminating questions relating to the facts involved in criminal charges which are already on foot. If that is so, the law has, in my respectful opinion, developed in an unfortunate way. Mortimer v. Brown says that even questions which are certainly incriminating may be allowable; if the distinction advocated by Priestley J.A. is accepted, then highly incriminating answers may be required as long as no charges have been laid, but, if they have, incriminating questions on the subject matter of the charges may not be asked - in the latter case, without regard to their importance, from the point of view of administration of the winding up or in bankruptcy, and without regard to whether answering could really do harm to the defence in the criminal case. For the purposes of decision of the present matter, 1t is unnecessary to say any more about Hammond's case than that i1t does not, inmy view, take away the discretion to require an answer with respect to a matter forming an element in a criminal charge which has been laid, where there is no ground for thinking that giving an answer would do real harm to the witness in the criminal proceedings. Here, the prospect of Gordon's being acquitted because of lack of proof that he took an active part in the tax scheme appeared to be nil; he swore in the High Court that he did so. Nothing was put before the Deputy Registrar to suggest that the questions could cause harm to Gordon outweighing any 18. benefit to be obtained - to adapt the test mentioned in Mortimer v. Brown at p.503. The Deputy Registrar's direction was, in my opinion, incorrect, in that he should not have disallowed questions as being of the descriptions mentioned by counsel for the trustee, on the basis of the mere assertion that answering might prejudice the criminal defence. It may be, of course, that questions bearing in other ways upon the criminal charge may properly be disallowed on the Mortimer v. Brown test. In the hope that it may be of assistance, I would summarise my views as to the propriety of such questions as follows: 1. Questions whose purpose appears to be to obtain evidence to assist in proof of the charge which has been laid should be disallowed. 2. In exercising the discretion whether to disallow incriminating questions, the fact that a charge has been laid against the witness and is not merely in prospect should be taken into account in his favour. 3. In exercising that discretion, the harm that may be done to the witness by requiring an answer should be balanced against any benefit likely to accrue as to disclosure or recovery of assets, elucidation of the causes of the bankruptcy or otherwise relating to the bankruptcy. 19. I should add that no point was taken by the trustee that the bankrupt's objections were not well taken because not on oath. + certify that this and the 19 preceding Paves ara a true copy of the reasons for judgment herein of His Honour Mr. Justice Pincus A Snares Associate Dated |5 April 1993 Counsel for the applicant: Ms S.M. Kiefel Q.C. with Mr P.E. Hack Solicitors for the applicant: Australian Government Solicitor Counsel for the respondent: Mr T Matthews Solicitors for the respondent: Messrs Henderson Trout Date of Hearing: 23 March 1988