Wragge Lawrence Graham & Co's dedicated insolvency litigation team bring you their monthly update on the cases and issues affecting the insolvency and fraud investigation industry.
In our August update the team take a look at three cases which confirm..
1. Disclosure of privileged documents can be justified if a litigant engages in a strategy of concealment and deceit
There has been yet another important decision in the long-running JSC BTA Bank v Ablyazov and others litigation (covered for different reasons in our June and July alerts). This time, the Commercial Court has heard an application by the Bank for disclosure of privileged documents relating to the assets of Mr Ablyazov and his business associate Mr Shalabayev, held by three firms of solicitors who either were or had been their legal representatives.
The Bank argued that the documents were subject to the iniquity exception to privilege; legal advice or litigation privilege does not arise where the advice or litigation is in furtherance of a fraud or crime or similar iniquity.
It was argued that Mr Ablyazov and Mr Shalabayev had pursued a strategy which involved:
- lying to and/or deliberately misleading the court and the Bank about assets held by Mr Ablyazov;
- dealing with assets in breach of court orders;
- lying and/or deliberately misleading the court and the Bank about those dealings;
- otherwise seeking to prejudice the Bank by putting assets beyond its reach.
The solicitors in question were unwittingly retained and used by Mr Ablyazov and Mr Shalabayev to further their iniquitous strategy and, as a result, it was argued that the relevant documents held by them did not attract legal professional privilege.
The court accepted that the evidence established a strong case that Mr Ablyazov was engaged in a strategy of concealment and deceit in relation to his assets, which would involve perjury, forgery and contempt.
In relation to that strategy the solicitors were not being employed in the ordinary course of professional engagement. This was an abuse of the normal relationship between solicitor and client and there could therefore be no privilege in the communications between them relating to Mr Ablyazov's assets.
The Respondent argued that requiring disclosure of privileged material could be in breach of Article 6 and Article 8 of the European Convention on Human Rights (ECHR). However, the court did not accept that its analysis of the situation was inconsistent with the ECHR.
Article 6 provides for the right to a fair trial and could not be invoked to protect communications in furtherance of a purpose which "is the very opposite of securing a fair trial". Article 8 engages the right to privacy. However, the abuse of the solicitor client relationship and the right of the Bank to recover assets to satisfy court orders obtained in its favour meant that any interference with Article 8 rights was justified and proportionate.
It was held that the communications caught by the iniquity exception were only those relevant to the asset strategy and therefore not all communications would be covered. Where communications had a dual purpose - the furtherance of iniquity and the proper conduct of litigation - privilege will only attach where the dominant purpose is the conduct of the litigation, independent of any iniquity.
The fact that providing disclosure of privileged 'asset strategy' documents would be a complex and expensive exercise would not prevent disclosure from being ordered - the court considered that the 'real prospect' of helpful material being disclosed made the exercise a proportionate one.
Mr Ablyazov also sought to rely on the privilege against self-incrimination. The court held that privilege did not extend to provide protection where the document/documents came into existence independently of any 'order, statute, or other instrument of law which compelled their production' - as was the case in this matter.
Things to consider
When seeking disclosure of documents from a third party to further the recovery of assets, insolvency practitioners should always consider whether there are any circumstances which would warrant looking behind the concept of privilege to defeat it. The courts will, however, always be mindful of proportionality when considering whether to extend privilege or defeat it on the basis of nefarious activities.
2. The need to look objectively at whether a company director was in breach of his duty to avoid conflicts of interest
We have been reminded recently that establishing whether a director is in breach of his duty to avoid conflicts of interest under the Companies Act is an objective test; establishing a breach does not depend on whether the director is aware that what he is doing is a breach of his duty or that he is acting in bad faith, but rather simply whether he is or is not in breach.
The case of Richmond Pharmacology Ltd v (1) Chester Overseas Ltd (2) Milton Levine (3) Larry Levine involved claims by Richmond for damages arising as a result of shares in the company being marketed for sale and confidential information being disclosed to third parties.
Richmond is a contract research organisation, Chester owns 44% of the issued share capital in Richmond (under the terms of a Shareholder Agreement (the 'Agreement')), Milton Levine and Larry Levine (the Levine brothers) acted as Chester's representatives and made all relevant decisions about its actions. The Levine brothers were also (for the relevant period) directors of Richmond.
Chester instructed a third party (NWCF) to market its shares in Richmond to third party prospective purchasers and in doing so NWCF disclosed confidential information, and also created the misleading impression that all of the shares in Richmond were for sale. As a result Richmond alleged it suffered a substantial loss of business and turnover and profits.
The Levine brothers, in their capacity as Chester's representatives, requested confidential information from Richmond, which they passed on to NWCF. NWCF were instructed to be extremely careful with the information and only pass on the absolute minimum of data to potential buyers, and only then when a non-disclosure agreement was in place.
The chancery court held that Chester was in breach of the confidentiality provisions in the Agreement. The Agreement allowed Chester to disclose information to NWCF but such information could not be passed to third parties without the consent of the board, which had not been sought or given. It was not sufficient for NWCF to put in place non-disclosure agreements with potential buyers.
As directors of Richmond, the Levine brothers owed duties to it under section 175 of the Companies Act 2006. It was clearly possible that a situation might arise in which there was a conflict between Chester's interests as minority shareholder and the interests of Richmond. To the extent the Levine brothers (acting as Chester's representatives) caused Chester to commit a breach of the Agreement, they were in breach of their section 175 duty to avoid a situation in which they had, or could have, direct or indirect interests that conflict, or may possibly conflict, with the interests of the company.
The court confirmed that the test to establish whether there is a breach of the section 175 duty is objective and does not depend on whether the director is aware that what he is doing is a breach of his duty. The "honesty or otherwise of the fiduciary" is irrelevant and it is no defence to a claim for breach of duty that the directors acted in good faith or that they reasonably, but wrongly, thought that they were entitled to do what they did.
While the court did find that Chester had acted in breach of the shareholder obligations in the Agreement, and that the Levine brothers were in breach of their duty not to act in conflict with the interests of the company, no losses were attributable to those breaches. The claims against the Levine brothers were dismissed and Chester was ordered to pay nominal damages of £1.
Things to consider
While the court's decision on the section 175 breach of duty issue is nothing new, it is a useful reminder that the test to establish whether a director is in breach of his duty to avoid conflicts of interest is an objective one. It will not matter that the director really believed he had been acting in the best interest of the company and had done nothing wrong. Insolvency practitioners will of course have this in mind when considering directors' conduct following their appointment.
3. An English court can grant a freezing order in addition to a freezing order already granted by a foreign court
The unreported decision in the case of GFH Capital Ltd v Haigh confirms that it is possible to obtain a freezing order in England and Wales over assets located here, despite a worldwide freezing order having been granted by the principal foreign court elsewhere.
GFH Capital Ltd had issued a claim against Mr Haigh in Dubai for alleged invoice fraud. In those proceedings GFH had obtained a worldwide freezing order, which gave it permission to apply for an order in England. GFH subsequently began proceedings in England (under the Civil Jurisdiction and Judgments Act 1982) to reconfirm the Dubai freezing order.
Pending the full hearing GFH sought an interim freezing order, limited to assets within the jurisdiction of the English and Welsh courts - a property and bank accounts with two different banks. In addition they also sought disclosure of information from the banks, comprising:
- the identity of the account owners
- copies of identity documents
- the date the accounts were opened
- the 'history of dealing' with the accounts
- the destination of any payments made.
Mr Haigh and the banks were given two days' notice of the application.
The commercial court held that the fact Mr Haigh had only had two days' notice of the application did not prevent it from being successful. He had had an opportunity to challenge the Dubai freezing order and there were good reasons for granting a further interim freezing order;
- while the Dubai freezing order was binding on Mr Haigh it did not stop the banks from carrying out an instruction given by or on behalf of Mr Haigh;
- there had been some considerable delay in provision of the information required by the Dubai order. Notwithstanding the difficulties Mr Haigh faced as a result of him being in prison he should have given some of the disclosure sought; and
- there was a real risk that there were assets GFH was not yet aware of or could not yet identify.
On the issue of disclosure, the court held that an order could only be made in respect of specified documents that were likely to be in the possession, custody or power of the person against whom the order should be made.
GFH's application included requests for information rather than documents as well as for documents that could not really be regarded as 'particular documents'. The court therefore ordered disclosure of the account opening forms, signature mandates, copies of identity documents provided and bank statements - being clearly identifiable documents likely to be in the possession, custody or power of the banks in question.
Things to consider
When dealing with assets located both abroad and here, and when a worldwide freezing order is already in place from a foreign jurisdiction, claimants should always consider whether an interim freezing order should be sought from the English courts to ensure assets located in this jurisdiction remain secure.
This would also ensure that the asset could not be dealt with in any way without returning to court and therefore adds a further layer of protection over and above the worldwide freezing order already obtained. The added protection of taking such steps does, however, have to be balanced against the cost of obtaining such an interim order which can escalate very quickly.