Privilege series part 4: It was a privilege – considerations in insolvency proceedings

Our blog series on privilege considers issues encountered by practitioners across a range of dispute resolution specialities. This blog explores privilege issues concerning privilege in insolvency proceedings.

Officeholders often come into possession of various categories of documents and information over which legal professional privilege (in one of its many guises) may be asserted.

Documents belonging to a company or bankrupt

The position differs between corporate and personal insolvencies.

As regards companies, any privilege in documents vests in the company itself and this privilege automatically vests in the officeholder upon appointment. An officeholder acts as agent of the company and is both entitled to (a) recover and review any company documents and, importantly, (b) has power to waive privilege in order to rely upon  those documents.

Privilege in the bankruptcy context is more nuanced as whilst a trustee in bankruptcy can recover and review privileged documents the debtor’s privilege in the documents does not transfer to them. This was held by the Court of Appeal in Avonwick v Shlosberg  (“Avonwick”) and the High Court decision in Leeds v Lemos (“Lemos”) one year later.

These two decisions confirm that privilege attaching to information and documents of a bankrupt is not property that automatically passes to the trustee on appointment. They rejected both the earlier decision in Re Konigsberg and the long established “Crescent Farm principle” in bankruptcy cases that privilege enured for the benefit of the successor.

The Court of Appeal in Avonwick confirmed:

1. Privilege is not property of a bankrupt under ss284 or 436 Insolvency Act 1986 (“IA86”) and did not automatically vest in the Trustee in Bankruptcy (“TiB”); and
2. Whilst under s311(1) IA86 the TiB could use privileged documentation for the statutory purpose of realising the bankrupt's estate (e.g. part of the investigations to identify and locate assets that could be recovered for the benefit of the creditors), s311 did not authorise the use of those documents in subsequent proceedings against the bankrupt. Such use would require a waiver of privilege. Privilege is a fundamental right that cannot be easily abrogated and it was not in the TiB’s power to waive privilege.

Avonwick does not, importantly, drive a coach and horses through a TiB’s ss311 or 366 IA86 powers to obtain delivery up of books and papers. A bankrupt still has a duty to cooperate with his TiB and deliver up his property including documents which might be protected by privilege. In practical terms a TiB can still request delivery up of and subsequently read solicitors’ files, but the use of those documents and information has been substantially limited unless the bankrupt is willing to waive privilege.

Privileged documents can still be used by a TiB to exercise their primary functions to investigate and realise the bankrupt’s estate and affairs (indeed the solicitors’ files may yield previously unknown assets and/or hidden assets and open lines of enquiry). The delivery up power still therefore has some utility but the TiB cannot for example deploy a privileged document in proceedings against a third party to prove the estate’s interest as this would amount to a waiver of privilege.

The Lemos case applied the Avonwick ruling and re-asserted that privilege was a fundamental human right and, further, that the court had no jurisdiction to direct a bankrupt to waive privilege in documents, whether under ss333 or 363(2) IA86 or otherwise.

The iniquity exception

Privilege issues also arise where a bankrupt may have sought legal advice specifically for the purpose of seeking to avoid their obligations under the IA86 and/or to hide assets or enter into sham arrangements or generally frustrate their creditors. The courts will not allow privilege to act as a shield in this scenario. The general rule (following Al Sadeq v Dechert & Ors) is that there is no legal professional privilege if the communication or document in question came into being as part of or in furtherance of a criminal or fraudulent design. The iniquity exception has been discussed in more detail by my colleague in a previous blog in this privilege series.

In Williams v Mohammed the court ordered disclosure of an attendance note made by the bankrupt’s solicitor in which he had recorded advice to the bankrupt on ways to avoid disclosure of his assets to the TiB. The court held that it was enough that advice had been sought for the iniquitous purpose of concealing assets, even if the advice did not in fact lead to a fraud or other iniquity.

Joint privilege

Another interesting issue that may arise in insolvency is that of a joint retainer where one party is made bankrupt and/or insolvent but the other is not.

The key principle is that no privilege is in operation between the joint parties to the retainer. Where privilege arises under a joint retainer, the parties do not enjoy protection against each other; each may use privileged documents against the other parties to the retainer. As to waiver of jointly held privilege, this was also considered in Avonwick and it was held the ability to waive joint retainer privilege is similarly joint; it cannot be waived unilaterally.

Documents disclosed in proceedings

Officeholders, like any other party to litigation, are bound by the CPR and therefore the rules against collateral use in CPR 31.22 i.e. documents can only be used for the purposes of the proceedings in which they were disclosed except where the document has been read to or by the court, or referred to, at a hearing which has been held in public (and even in this case the court can restrict or prohibit further use of the document) or the court gives permission or the party who disclosed the document (and, if different, the person to whom the document belongs) agrees.

The question of waiver of privilege was considered in Re Bedborough, in the context of an application for specific disclosure of privileged documents passing between the bankrupt’s spouse and her legal advisers. This was on the basis that the bankrupt’s wife had referred to legal advice she had received from solicitors in her witness statement opposing the TiB’s application to set aside a declaration of trust as a sham, and a transaction at an undervalue or a transaction defrauding creditors. The wife’s witness statement referred to the advice she had received but did not exhibit a copy. The court dismissed the specific disclosure application – a mere reference to advice (in and of itself) was insufficient to waive privilege.

Further information

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