Preserving a bankrupt’s rights of privilege (Avonwick Holdings Ltd v Shlosberg)

Does legal professional privilege attaching to information and documents of a bankrupt devolve to his trustee in bankruptcy? James Mather, barrister at Serle Court, examines the Court of Appeal’s answer to this question in Avonwick Holdings v Shlosberg.

Original news

Avonwick Holdings Ltd and others v Shlosberg [2016] EWCA Civ 1138

The Court of Appeal dismissed an appeal by the bankrupt respondent’s principal creditor and trustees in bankruptcy against an order that the trustees’ solicitors stop acting also for the creditor in respect of any matter relating to the respondent or his affairs. The trustees had passed documents to their solicitors which belonged to the respondent and were subject to legal professional privilege. The trustees argued that they had acquired the benefit of the privilege and could waive it to allow the creditor to deploy the information in proceedings against the respondent. However, the Court of Appeal held that the privilege attaching to information and documents of a bankrupt was not property which vested in the trustees in bankruptcy under the Insolvency Act 1986 (IA 1986).

What was the background to the case?

The respondent, Mr Shlosberg, is a Russian businessman domiciled in England against whom his principal creditor Avonwick Holdings (Avonwick), after a substantial trial, obtained a judgment in November 2014 in the sum of $195m plus interest. Mr Shlosberg failed to pay the debt and was bankrupted on Avonwick’s petition in January 2015.

Avonwick was represented in the proceedings against Mr Shlosberg by solicitors who were also appointed to act as legal advisers by Mr Shlosberg’s trustees in bankruptcy (trustees).

The trustees exercised their powers under IA 1986, s 311(1) to obtain privileged and confidential documents in the hands of Mr Shlosberg’s former solicitors. The trustees passed those documents on to their solicitors, who read them in detail. The solicitors imposed no information barriers between those acting for Avonwick and those acting for the trustees.

In May 2015, Avonwick applied to join Mr Shlosberg to further CPR Part 7 proceedings, asserting a cause in action in conspiracy against him which, if found to exist, would survive his discharge from bankruptcy. Mr Shlosberg subsequently obtained an order from Arnold J ([2016] EWHC 1001 (Ch), [2016] All ER (D) 76 (May)) restraining the solicitors from acting for Avonwick. For further reading on that decision, see News Analysis: Trustees in bankruptcy and privilege—a spanner in the works?

What was the basis of Arnold J’s decision?

It has frequently been said that a trustee in bankruptcy ‘stands in the shoes’ of the bankrupt as regards his rights of privilege. This has never had any basis. There is authority (albeit resting on slim foundations) for the notion that, to the extent that the trustee obtains title to specific property in succession to the bankrupt, he also obtains ancillary rights of privilege in relation to the property concerned.

Arnold J, proceeding on the basis of this general principle, held that (save in relation to a limited category of documents concerning other litigation) there was no identifiable property obtained by the trustees to which the rights of privilege they claimed could be said to relate. In particular, they could not rely on being successors in title to the pieces of paper on which privileged advice was contained, because the rights of privilege attached to the information contained in the documents and not the physical pieces of paper. Observing that the operative principles were not well settled, Arnold J granted permission to appeal on the question of whether rights of privilege had transmitted to the trustees.

What were the issues before the Court of Appeal?

The central issue was whether the benefit of Mr Shlosberg’s privilege in the documents supplied to the trustees had vested in them, together with the right to waive that privilege.

There was also an issue as to whether, even if the privilege had vested in the trustees, waiving it by divulging the contents of the documents to an individual creditor so as to aid its own litigation against the bankrupt (in circumstances where it was said that the effect of the litigation, if successful, would be to reduce the overall deficit in the bankruptcy estate) was within the purposes of the bankruptcy.

What did the Court of Appeal decide, and why?

The Court of Appeal upheld Arnold J’s order injuncting the solicitors from acting for Avonwick, but did so on a considerably wider basis than that adopted by Arnold J. The court took as the starting point the repeated recognition in authorities at the highest level that privilege is a fundamental right. While rights of privilege can be abrogated by statute, such abrogation requires either express words or necessary implication. The court rejected the argument that rights of privilege constituted property within the meaning of the IA 1986. It also rejected the argument that an abrogation of rights of privilege was implicit in IA 1986, s 311(1), which expressly provides that privilege is not a basis for the bankrupt to refuse to supply documents relating to the estate to the trustee. The court held that, while a trustee could use such documents for the purposes of the bankruptcy office, he had to do so in a manner which preserves their privilege.

It also held that, even if Mr Shlosberg’s rights of privilege in the documents had been lost, to supply them to an individual creditor in order to aid its own litigation against the bankrupt would not be a purpose of the bankruptcy, even if the incidental effect of that litigation (where successful) would be to reduce the liabilities of the estate.

To what extent is the judgment helpful in clarifying the law in this area?

In my view, the decision leaves the law in this area clear. If the correct position comes as a surprise to some, that is because an erroneous position crept into the textbooks long ago and has—perhaps surprisingly—not been fully examined until now. Upon examination, it is not difficult to see that the assumption which used to prevail is unprincipled and incompatible with privilege as a fundamental right. It would have been for Parliament to abrogate a bankrupt’s rights of privilege, but it did not choose to do so in enacting the IA 1986.

What are the practical lessons that those advising can take away from the case?

Trustees and their advisers now need to be aware of their obligations with regard to the preservation of a bankrupt’s rights of privilege and will need to change their practices accordingly. This case is a telling example of how long-held assumptions can, on examination, prove to be unfounded.

James Mather appeared with Philip Marshall QC for Mr Shlosberg in this case.

Interviewed by Robert Matthews.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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What vests and doesn't vest in the trustee in bankruptcy—checklist

2016: Key Restructuring & Insolvency cases

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First published on LexisPSL Restructuring and Insolvency

 

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