Directors’ communications with their solicitors: perhaps not as privileged as you think (Part 2)

18 November 2020

In the recent case of Barrowfen Properties Ltd v (1) Girish Dahyabhai Patel (2) Stevens & Bolton LLP (3) Barrowfen Properties II [2020] EWHC 2536 (Ch), the High Court extended the iniquity exception to breaches of a director’s statutory duties.

To put the content of this blog in context you may wish to read a previous blog on privilege and the inequity exception, this is available here.

Facts

The claimant, Barrowfen Properties Ltd (“the Company”), is a property company with shares owned by various family members. The First Defendant was the Company’s managing director for many years, but from 2010 onwards family relations broke down and in 2016 he ceased to be a director.  

Allegations were made by the remaining directors, on behalf of the Company, and by some of the shareholders that the First Defendant had acted in breach of his duties to the Company by, amongst other things, attempting to gain sole control of the Company and attempting to transfer Company assets into another company owned and controlled by him (the Third Defendant).

Stevens & Bolton LLP, the Second Defendant, is a firm of solicitors which had been retained by the First Defendant and the Company, acting through the First Defendant as a director of the Company.

The Claim and Application

The Company brought a claim against the three Defendants and alleged that the Second Defendant had acted in breach of its fiduciary duties and its common law duty of care to the Company and that it had dishonestly assisted the First Defendant to commit breaches of his fiduciary duties.  

During the disclosure process, the Company made an application under the CPR challenging the Defendants’ right to withhold disclosure of documents which contained legal advice given by the Second Defendant to the First Defendant on two grounds: (a) on the basis that the documents were created by the Second Defendant in the course of a joint retainer with the First Defendant and the Company and, therefore, that neither client could claim legal professional privilege against the other to avoid having to disclose documents between themselves and the jointly retained solicitor and (b) under the iniquity exception.

The Second Defendant submitted that it was neutral on this application, but it was under a duty to preserve client privilege until the Court ordered otherwise.

Outcome

Privilege in a Joint Retainer

The Court held that where solicitors were retained under a joint retainer, neither client could claim legal professional privilege against the other to avoid having to disclose documents between themselves and the jointly retained solicitor. Therefore, the default position was that the Company was entitled to disclosure and production of all privileged documents created by the Second Defendant in the course of the joint retainer and the Defendants were not entitled to withhold or redact any of those documents on the grounds of legal professional privilege.

 

Iniquity Exception

The iniquity exception is a well-established rule that where a person consults a solicitor in furtherance of a criminal purpose then, whether or not the solicitor knowingly assists in the furtherance of such purpose, the communications between the client and the solicitor do not attract legal professional privilege.

The Court had to consider two aspects of the iniquity exception: (a) whether its scope extended beyond furtherance of a criminal purpose to breaches of a director’s statutory duties, and (b) the standard of proof to which the Court must be satisfied before ordering disclosure/production of documents.

The Court found that the iniquity exception was engaged where allegations were brought against the First Defendant that he had breached his duties set out in sections 172, 173, 174, 175 and 177 of the Companies Act 2006 and where those allegations involved fraud, dishonesty, bad faith, or sharp practice, or where the director consciously or deliberately preferred his/her own interests over the interests of the company and did so "under a cloak of secrecy".

In respect of the standard of proof, the Judge stated that the appropriate standard of proof was whether there was a “strong prima facie case” of fraud or other iniquity. He added that deciding whether there was a “prima facie case” (however strong) did not require the Company to satisfy the Court that on the balance of probabilities the First Defendant was guilty of fraud or other misconduct, but that the threshold had been “comfortably exceeded” and that the case was one which fell “at the very end of the continuous spectrum”.

The Judge found that there was a “strong prima facie case” that the First Defendant had acted as alleged and that those actions amounted to a breach of his statutory duties to the Company and, therefore, held that the iniquity exception was engaged.

Consequently, the Company’s application was granted and the Second Defendant was ordered to produce all matter files and documents created in the course of its retainer with the First Defendant and the Company, including those created for the purposes of giving or receiving legal advice and containing legal advice.

 

Comment

The Barrowfen case has extended the application of the iniquity exception from circumstances where a defendant consults a solicitor in furtherance of a criminal purpose, to circumstances where a defendant consults a solicitor and allegations of breach of a director’s statutory duty which involve fraud, dishonesty or bad faith are brought against that director.

In practice the scope of the application of the iniquity exception is still narrow and the courts will be careful only to displace assertions of legal professional privilege in exceptional circumstances.

However, this case shows that companies, their bona fide directors and shareholders can rest assured that if a director acts fraudulently (and this is defined in a relatively wide sense), and there is a “strong prima facie case” of fraud or other iniquity, the assertion of legal professional privilege cannot be used to avoid having to disclose/produce key documents. In disputes between shareholders and/or directors, the ability to invoke the iniquity exception could prove a potent weapon.

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