Legal privilege - human right or fraudster's shield?

12 minute read
20 November 2017

The recent decisions in Avonwick Holdings Ltd and others v Shlosberg and Leeds v Lemos have restricted the ability of trustees in bankruptcy to use privileged documents belonging to the bankrupt. What do these rulings mean for trustees?

The Trustee in Bankruptcy's purpose and powers

A Trustee in Bankruptcy (TIB) is appointed when a bankruptcy order is made against an insolvent individual. The TIB's statutory purpose is to realise the bankrupt's estate for the benefit of the bankrupt's creditors. The Insolvency Act 1986 and Insolvency Rules 2016 contain various powers to support the TIB in fulfilling this function, including the following:

  • The bankrupt's estate vests automatically in the TIB upon appointment.
  • A TIB has statutory powers to investigate the bankrupt's affairs and to compel the bankrupt to give information and produce documents. 
  • A bankrupt is under a duty to co-operate with the TIB by providing information.
  • A bankrupt commits an offence if, among other things, he or she fails to disclose to the TIB details of property within the bankruptcy estate, or conceals documents relating to their property with a view to defrauding creditors.

TIB's use of privileged material

s.311(1) Insolvency Act specifically provides that a TIB shall take possession of all books, papers and other records belonging to the bankrupt and relating to the bankrupt's affairs, including any which would be privileged from disclosure in any proceedings (i.e. including legally privileged documents). That appears to give a TIB wide-ranging power to investigate the bankrupt's affairs.

Further, there is a line of authorities starting with Crescent Farm (Sidcup) Sports v Sterling Offices to the effect that legal professional privilege enures for the benefit of a successor in title, such that a bankrupt's legal privilege in documents passes to TIBs, who may then "use" those privileged documents for purposes beneficial to the bankrupt's estate. 

Two recent cases however have called into question the application of this principle in bankruptcy, and restricted the use to which a bankrupt's privileged documents may be put by the TIB.

In Avonwick Holdings Ltd and others v Shlosberg, the Court of Appeal found that although a TIB may take possession of the bankrupt's documents, any legal professional privilege in those documents is not property that vests in a TIB, and neither does s.311 Insolvency Act 1986 allow the trustee to waive privilege unilaterally. That suggests that a TIB is in reality not in a position freely to use privileged documents which they may come into possession of for the purpose of realising the bankrupt's estate.

In Leeds & another v Lemos & others, the High Court was asked to consider the true meaning and effect of the Avonwick judgment and its implications for TIBs (not least since the Avonwick decisions left many important issues open to question). In that case, the applicant TIBs of the bankrupt, Mr. Lemos, sought directions from the court as to what use they could make of potentially privileged documents which they had obtained from the bankrupt's former solicitors. The TIBs believed that those documents might be useful evidence in proceedings under s.423 Insolvency Act in relation to unravelling certain transactions which they said the bankrupt entered into with the intention of defrauding creditors. The documents could therefore enable the TIBs to recover substantial sums for the benefit of the bankrupt's estate. Some of the documents in question were potentially covered by legal professional privilege, with the privilege 'belonging' either to Mr. Lemos alone, or jointly to him and his wife.

The High Court had to consider the effect of the Avonwick decision on earlier authorities and whether ss.333 and 363 of the IA (the obligation on the bankrupt to co-operate with the trustee, and the court's power to compel such compliance) could be used to order Lemos (who had by this time been discharged from bankruptcy) to waive his privilege in the documents.

The High Court held that, as a result of the decisions in Avonwick, the principle expounded in Crescent Farm (Sidcup) Sports v Sterling Offices no longer applied in bankruptcy cases, and subsequent cases confirming that the Crescent Farm principle applied in the case of property passing to TIBs had been wrongly decided.

The court also confirmed that "privilege is a fundamental human right and that the court has no jurisdiction to direct a bankrupt, still less a third party, to waive privilege in any documents". It continued "In my judgment, it is a matter going to jurisdiction rather simply than to discretion. But if I am wrong in that, it seems to me that, in principle, a very powerful case indeed would have to be made out before the court should properly order a bankrupt to waive legal professional privilege in relation to documents. As at present advised, I find it difficult… to think of any circumstances in which it would be appropriate to make such an order."

The court held that only a clear statutory power allowing a TIB to waive a bankrupt's privilege would provide the court with jurisdiction to order compliance. Ss.333 and 363 IA did not provide that statutory power (as per the Avonwick decision) and so Mr. Lemos' privilege could not be waived.

What does this mean for TIBs?

This decision confirms the protection of a bankrupt's LLP in documents. Without the bankrupt's consent, the TIB will not be able to use such documents, even if they could be used to found proceedings which may be beneficial to all creditors. Privilege remains a fundamental human right. TIBs will therefore need to identify and preserve privilege in documents coming into their hands.

Impinging on TIB's ability to perform functions

As the applicants in the Lemos case argued, if TIBs cannot use the bankrupt's privileged documents without the bankrupt's consent, and the court cannot order the bankrupt to waive privilege, that has the potential to seriously restrict the ability of TIBs to discharge their functions to recover assets of the bankrupt's estate. In many cases a bankrupt may intentionally have hidden or dissipated assets. In such cases, legally privileged material may be the only evidence a TIB may have available in order to pursue claims to recover assets for creditors, and in those circumstances it is clear that a bankrupt will not be willing to provide consent to use the privileged material.

Removing the Crescent Farm principle from the bankruptcy arena creates a potentially serious lacuna. A TIB has a statutory right to take possession of the bankrupt's privileged material; and a bankrupt has a statutory duty to co-operate with the TIB – it seems perverse that the combined effect of those provisions does not permit a TIB to deploy privileged material in his hands for proper purposes connected with recovering assets for the bankruptcy estate; indeed, one might go as far to say that a bankrupt co-operating properly with his TIB should positively want to allow the use of material which would help restore assets to his bankruptcy estate, in order to repay some of his debts to creditors.

Whilst many will find the recognition of legal privilege as a "fundamental human right" reassuring, it is perhaps unpalatable that in many cases now this will be placed before the rights of creditors who may have lost many millions of pounds to the bankrupt (as demonstrated, for example, by the high profile bankruptcies of the likes of Madoff and Maxwell). This approach risks creating a fraudster's charter, as well-advised individuals seek to ensure their affairs are documented on solicitors' files which may not be capable of being used in proceedings under any circumstances.

These decisions also appear to be out of step with the developing regulatory landscape in relation to fraud, where the prevention and investigation of fraud is taking centre stage, and the use of legal professional privilege to withhold information in certain circumstances is not treated as acceptable. For example:

  • The Serious Fraud Office (SFO) encourages companies under investigation to waive privilege in their internal investigations as a mark of co-operation. In the SFO's investigation into Rolls-Royce PLC, Rolls-Royce's voluntary waiver of privilege was noted as part of its 'extraordinary cooperation' with the SFO, and was a contributing factor in allowing the company to settle by means of deferred prosecution agreements rather than criminal prosecution.
  • In May 2017, the High Court ordered ENRC to disclose to the SFO certain internal investigation documents created by solicitors, which ENRC claimed were privileged. In that case, the court concluded "there is a recognised public interest in the SFO being able to go about its business of investigating and prosecuting crime; and the sort of evidence which one would expect to be found in the Disputed Documents".
  • David Green KC, Director of the SFO, has said he will target companies "whose lawyers obstructed investigations by hiding behind the shield of professional privilege".
  • Other legislation, including the Proceeds of Crime Act, Bribery Act and Fraud Act, take an aggressive approach to combat fraud and include draconian measures against those who infringe them (e.g. restraint and confiscation powers, and severe penalties for committing or even failing to prevent bribery). These acts have helped place the UK at the forefront of the global anti-fraud community.

In stark contrast to the anti-fraud agenda being pursued in other areas, the recent decisions in Avonwick and Lemos have the potential seriously to undermine the TIB's powers and frustrate their ability to undertake effective countermeasures where a bankrupt's conduct has left creditors unpaid. This erodes the de-facto "governance" that the personal insolvency regime provides, to ensure that business affairs are conducted properly and fairly, and when this does not happen there is a means of redress.

For the time being TIBs will need to live with these curtailed powers and be wary of the use of a bankrupt's privileged documents. But perhaps it is time for further consideration of this issue, or even legislative review of the Insolvency Act to bring TIBs' powers in relation to privileged material in line with current anti-fraud measures.  

You may also be interested in our insight: When will internal investigations be protected by legal advice privilege?

Gowling WLG acted for the applicant TIBs in Lemos

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.

Related   Dispute Resolution