Introduction

In the recent decision of Shlosberg v Avonwick Holdings Ltd and others [2016] EWHC 1001 (Ch), the English High Court considered the nature and devolution of legal professional privilege in the context of bankruptcy. It was held that the trustee in bankruptcy might be unable to waive privilege even when entitled to possession of privileged documents to administer the bankrupt’s estate.

Background

Mr. Shlosberg, a Russian businessman, is the beneficial owner of Webinvest Ltd (“Webinvest”). In order to invest in a project, Webinvest entered into a loan agreement with Avonwick Holdings Ltd (“Avonwick”), under which Avonwick agreed to advance US$100 million to Webinvest. Mr. Shlosberg personally guaranteed Webinvest’s obligations under the loan agreement. Webinvest failed to repay the loan. Avonwick, acting by Dechert, commenced proceedings against Webinvest and Mr. Shlosberg for repayment of the debt. Judgment was entered in favour of Avonwick against Webinvest and Mr. Shlosberg in the total amount of approximately US$195 million. Neither Webinvest nor Mr. Shlosberg paid any sum in respect of the judgment. On Avonwick’s petition, a bankruptcy order was made against Mr. Shlosberg and trustees in bankruptcy (“TIB”) were appointed.

After having obtained permission from the court, Avonwick started proceedings against, among others, Mr. Shlosberg, for unlawful means conspiracy, which claim is founded on fraud and if established would survive the discharge of Mr. Sholosberg’s bankruptcy. Avonwick again instructed Dechert to act for it.

Shortly after their appointment, the TIB also retained Dechert as their solicitors. Upon the request of the TIB, Dechert obtained a large amount of privileged documents from the bankrupt’s former solicitors, which included confidential and privileged advice on resisting Avonwick’s claims. The bankrupt claimed that Dechert had inadequate internal safeguards to protect his privilege and sought an order that Dechert cease acting for Avonwick as claimants in the conspiracy proceedings against him.

Decision of the Court

Above all, the Court noted that there was nothing inherently objectionable about a solicitor acting for both a trustee in bankruptcy and a major creditor of the bankrupt. The solicitors will have some familiarity with the debtor’s affairs and there is usually no real likelihood of conflict of interest between the office holder and the creditors: Re Schuppan [1996] 2 All ER 664. In the present case, there is no dispute that many of the documents are privileged and confidential. Dechert contends, however, that the benefit of Mr. Shlosberg’s privilege has passed to the TIB as part of the bankrupt estate, by virtue of section 306(1) of the Insolvency Act 1986.

Subject to limited exceptions, all property belonging to or vested in the bankrupt forms part of the bankrupt’s estate, and thus vests in his trustee. However, property which is “peculiarly personal” to the bankrupt does not form part of the bankrupt’s estate. In Haig v Aitken [2001] Ch 110, Rattee J held that a bankrupt’s estate does not include the bankrupt’s personal correspondence which is of nature peculiarly personal to him and his life as a human being.

The Court conducted an extensive review of authorities on privilege. In Re Konigsberg [1989] 1 WLR 1257, Peter Gibson J, following Crescent Farm (Sidcup) Sports Ltd v Sterling Offices Ltd [1972] Ch 553, held that a successor in title to property succeeds to and is entitled to assert the privilege of a predecessor in title and so stands in the predecessor’s shoes to that extent. While the Court agreed with Peter Gibson J that the trustee can use information contained in documents which he has taken possession of, including privileged documents, in the discharge of his statutory functions, the Court considered that it did not necessarily follow that the trustees succeeded to the benefit of all privilege to which the bankrupt was entitled to. The Court was of the view that the trustee’s position was not analogous to that of a successor in title to a deceased person. Where a person has died, they cannot assert or waive privilege. The same is not true of a bankrupt.

Further, the Court considered that privilege is not a “property” within the meaning of Insolvency Act 1986. The only effect of privilege is to enable the beneficiary of the privilege to resist compulsory disclosure of information in court proceedings: B v Auckland District Law Society [2003] 2 AC 736. It is not a marketable right, it has no commercial value and it cannot be realized or distributed to creditors.

Even if privilege would otherwise amount to property, the Court agreed with the leading judgment given by Conrad JA in the Canadian case of Deloitte & Touche Inc v Bennett Jones Verchere (2002) 206 DLR (4^th) 280 that such privilege is peculiarly personal to the bankrupt. While there may be a physical record or document which records the communication, the essence of the document is still the confidential communication to which privilege attaches. The right to exercise privilege does not depend upon ownership of the paper on which the privileged information is recorded. It is not the ownership of the paper which matters, but the right to control the dissemination and use of the information recorded on the paper. However, despite that a trustee does not have the power to waive the bankrupt’s privilege, a trustee does have the power to obtain from the bankrupt possession of all documents in respect of the bankrupt’s assets and financial affairs even if they are privileged. Similar observations were also made by the Supreme Court of Queensland, Australia in the case of R v Dunwoody [2004] QCA 413.

In conclusion, the Court found that the TIB did not acquire the benefit of Mr. Shlosberg’s privilege, save for one category of documents. Taking into account that no information barrier has been put in place within Dechert between those advising Avonwick and those advising the trustees and the fact that a large quantity of documents have been reviewed in detail by Dechert, the Court held that it was appropriate to grant an injunction requiring Dechert to cease acting for Avonwick.

Conclusion

It is perhaps noteworthy that the English High Court endorsed the holding of Conrad JA in Deloitte & Touche that the fact disclosure is sought in a bankruptcy context, where creditors’ financial recovery might be enhanced by disclosure, is insignificant compared to the benefits derived from protection of a bankrupt’s solicitor-client privilege. The Court emphasized that the ability of individuals or corporations to obtain fully informed and reliable legal advice should not be compromised by threat of disclosure in the possible event of a bankruptcy. The case illustrates the importance of legal professional privilege and the reluctance of the court to disavow a bankrupt of legal privilege, in the absence of clearest words of statute.

However, one should note that there is no legal professional privilege in documents or communications which are themselves part of, or created in the furtherance of, the commission of a crime, or where the client has sought legal advice to guide or facilitate their commission of a crime: R v Cox and Railton (1884) 14 QBD 153. Because it cannot be supposed to be part of a solicitor’s professional business to advise a client how to commit a fraud or illegality: The Queen v Bullivant and Others [1900] 2 QB 163. In the present case, the Court found that most of the privileged documents obtained by Dechert concerned confidential and privileged advice on resisting Avonwick’s claims. The legal advice was therefore sought for a legitimate purpose, rather than in furtherance of a fraudulent design, and hence a protected one.

  

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2016