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Does a trustee in bankruptcy (TIB) acquire the benefit of the bankrupt’s legal professional privilege? Marcia Shekerdemian QC of Wilberforce Chambers considers the decision in Shlosberg v Avonwick Holidings Ltd.
Shlosberg v Avonwick Holdings Ltd and others  EWHC 1001 (Ch),  All ER (D) 76 (May)
The Chancery Division ruled that the claimant’s TIB had acquired the benefit of his legal professional privilege with respect to one of three categories of documents held by the second defendant solicitors, who were also acting for the claimant’s creditor (Avonwick). Both Avonwick and the claimant had been engaged in hostile litigation. In all the circumstances, no order was granted requiring the solicitors to cease acting for the trustees. However, an injunction was granted requiring the solicitors to cease acting for Avonwick.
This case involved consideration of an important point of principle, namely whether and to what extent a TIB is entitled to obtain documents which were subject to legal professional privilege in favour of the bankrupt, prior to his bankruptcy.
Arnold J had to consider whether the TIBs of a bankrupt, Mr Shlosberg (S), could claim the benefit of the privilege attaching to three categories of document. It was common ground that prior to his bankruptcy, S would have been entitled to the benefit of any privilege attaching to those documents.
The issue arose within the framework of an application by S for an injunction restraining the solicitors from acting for his TIBs and for his major creditor (who had live proceedings pending against him).
Arnold J decided that in two out of the three categories, privilege remained with S.
Until Shlosberg, it had always been assumed that a TIB simply stepped into the shoes of the bankrupt and that accordingly, the TIB simply acquired the benefit of any privilege formerly exercisable by the bankrupt in relation to documents relating to his estate or affairs (see for example Re Murjani  1 All ER 65, Re Ouvaroff  BPIR 712).
That assumption had never previously been questioned or tested or subjected to any detailed judicial analysis and scrutiny. This exercise was undertaken by Arnold J in Shlosberg. While strictly obiter, given the relative absence of any previous case law on point, it is likely that Arnold J’s judgment will be treated as providing powerful guidance on the question of what a TIB can and cannot lay his hands on.
In the judgment, Arnold J considered of the concept of ‘property’ under the Insolvency Act 1986 (IA 1986) and the operation of IA 1986, ss 283(4), 306(1), 311, and 436(1). He also carried out a review of the main authorities on privilege (including Three Rivers District Council v Governor and Company of the Bank of England  UKHL 48,  All ER (D) 176 (Nov)), on what is not property (including Heath v Tang; Stevens v Peacock  4 All ER 694 and Haig v Aitken  All ER (D) 1001) and on the application of the Crescent Farm principle (see below) within bankruptcy proceedings (including Re Konigsberg  3 All ER 289 and Re Omar  All ER (D) 560).
Arnold J’s conclusions on the question of privilege are surprising and troubling and are likely to have significant repercussions for TIBs and their investigative processes.
Permission to appeal has been granted, so watch this space.
The application before the court was made by S, an undischarged bankrupt. He sought an order that his former solicitors, should cease to act both on behalf of his joint TIBs and on behalf of his major creditor (Avonwick).
The application was made principally on the grounds that having acted as his solicitors prior to his bankruptcy, the solicitors would come into possession of certain of his documents which were subject to legal professional privilege, in circumstances where that privilege was not vested in the TIBs and where the TIBs could not otherwise claim the benefit of it. The context was hostile post-bankruptcy litigation between Avonwick and S.
The application came before Arnold J for hearing on 25 March 2016 and 22 April 2016 and a reserved judgment was handed down on 5 May 2016. S substantially succeeded in persuading the court that with regard to two out of the three categories of documents in question, privilege remained with him. As a consequence, an injunction was granted, ordering the solicitors to stop acting for Avonwick.
The facts and procedural background are pretty complex and I recommend that the judgment is read in full. What follows is a summary of the essential factual background and the key issues arising.
S was a Russian businessman domiciled in England. He was the beneficial owner of a company incorporated in St Vincent and the Grenadines (Webinvest Ltd). The first respondent, Avonwick, was a British Virgin Island company. Under a 2010 loan agreement, Avonwick lent $100m to Webinvest. S personally guaranteed that loan. Webinvest defaulted and Avonwick served statutory demands on Webinvest and S, for $100m, plus interest.
Separately, Avonwick also sued (by Part 7 claim form) for repayment of the sums due under the loan and guarantee (the original Avonwick proceedings). Avonwick was represented in those proceedings by the solicitors (the second respondent).
On 6 November 2014, Sales J awarded judgment against S and Webinvest in the High Court, in the principal sum of $195,159 plus interest.
On 19 November 2014, Avonwick (once more retaining the same solicitors) commenced proceedings against Castle Investment Fund Ltd (a trust vehicle for S’s family) seeking damages and other relief for conspiracy (the Avonwick conspiracy proceedings).
In due course, statutory demands were served both on S and on Webinvest, both of whom applied to restrain any further insolvency proceedings based on those demands.
They failed. In January and February 2015, bankruptcy and winding-up orders were made against S and Webinvest respectively. The third respondents were appointed as S’s TIBs and they subsequently retained the solicitors. The liquidators of Webinvest also retained the same firm as their solicitors.
Through their solicitors, the TIBs sought to exercise their statutory powers, under IA 1986 s 311(1), to require S to provide them with information about his affairs.
S objected to the solicitors acting both for Avonwick and for the TIBs (notwithstanding that information barriers had been put in place to protect S).
The application was issued on 4 December 2015.
In the meantime, Avonwick sought permission to join S as an additional respondent to the Avonwick conspiracy proceedings, pursuant to IA 1986, s 258(3). That permission was granted on 15 December 2015 (Avonwick Holdings Ltd v Castle Investment Fund Ltd  EWHC 3832 (Ch),  All ER (D) 270 (Dec)).
S applied for an order that the solicitors should cease to act for the TIBS and for Avonwick, on the grounds that they would come into possession of a significant quantity of documents which he contended—in the case of category (a), (b) and (c) documents—were subject to legal professional privilege (to which he was entitled either solely or jointly with Webinvest) and/or were confidential.
The category (a) documents concerned some county court proceedings in which S (as claimant) had obtained judgment prior to his bankruptcy.
The category (b) documents related to the statutory demands served on S and Webinvest by Avonwick and to the subsequent attempts to restrain bankruptcy and winding up petitions.
The category (c) documents related to the original Avonwick proceedings.
There was no dispute that many of the documents were privileged and confidential. However, the respondents all contended that the benefit of that privilege had passed to the TIBs and that there was no real risk that the solicitors would misuse confidential information that was confidential to S.
It was common ground that:
The arguments focused on the question of whether the benefit of S’s privilege now vested in the TIB as part of the bankruptcy estate.
Given that it was accepted that S had been entitled to the privilege prior to his bankruptcy, the application was argued on the footing that it was for the respondents to prove that the benefit of that privilege had passed to them—in other words that S could not launch an objection based on privilege.
The respondents argued that there could be no objection on the grounds of privilege, essentially for four different reasons:
The third argument was conceded/not resisted. Accordingly, the matters in contention were the first, second and fourth arguments.
He held that privilege in the category (a) documents had passed to the TIBs (as was effectively common ground), but that the privilege in the category (b) and (c) documents remained with S.
The first argument failed:
The second argument also failed:
The fourth argument also failed:
As I said at the beginning of this paper, it had always been assumed that a TIB would be able to assert privilege in any circumstances in which, prior to his bankruptcy, a bankrupt would have been able to do so—provided that the documents in question concerned property within the bankruptcy estate or otherwise related to his estate or financial affairs.
That assumption had not previously been challenged or tested, nor had the genesis of that assumption previously been analysed.
This judgment ticks both of those boxes. Along the way, it provides useful clarification on the meaning of ‘property’, on the nature of the right to assert privilege and on the extent to which (if at all) a negative right or indeed a positive obligation can be characterised as property, having regard to the purpose of IA 1986, ss 306, 436(1) and 283(4), especially if that right/obligation cannot be monetised.
The practical consequence of this judgment is that it is now highly unlikely that a TIB will easily be able to get his hands on documents over which the bankrupt could have asserted privilege prior to the bankruptcy, unless those documents relate to or arise directly out of property which has vested in the TIB.
In Shlosberg, this was manifestly the case in relation to the category (a) documents. The benefit of county court judgment given in the proceedings in which S had obtained judgment plainly was property within the meaning of IA 1986, s 436(1), having regard in particular to the purpose of the legislation, not least because it could be realised and distributed. The TIBs had therefore acquired the benefit of that privilege as successors in title to the property (the judgment) itself.
Beyond this, plainly, the mere ownership of a document is, of itself—quite literally—not worth the paper it is written on and there is no correlation between the document and the information contained on it. In other words, privilege attaching to documents which do not arise out of vested property, but which are nonetheless directly relevant to the bankrupt’s financial affairs or other property will remain with the bankrupt, even though ownership of the piece of paper will vest in the TIB.
The touchstone is therefore the nature of the ‘thing’ (for want of a better expression) that underlies the document. If that ‘thing’ is property within the meaning of IA 1986, s 436(1) (something realisable or a marketable right), then the TIB will be able to claim the benefit of any privilege in any document relating to that property, but not otherwise.
IA 1986, s 333 (a bankrupt’s absolute duty to provide such information to his TIB as the latter may reasonably require) and IA 1986, s 366 (a TIB’s right to apply for an order for the provision of documents and information (including in court and on oath)) are not considered in the judgment. Whether the operation of these sections will prove to have been modified or tempered as a consequence of this judgment remains to be seen.
If asked by his TIB (informally, or on oath in the context of a IA 1986, s 366 examination) what his solicitors advised with regard to (say) a transaction, would the bankrupt be entitled to refuse to answer that question on the grounds of privilege, whether or not that advice was contained in a document? I suggest not.
Would it make any difference if that advice was contained in a document?
Marcia is a leading practitioner in insolvency, company and partnership law as well as commercial litigation. Her work encompasses both domestic and international matters. She has appeared in the Grand Court of the Cayman Islands and in the Isle of Man.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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First published on LexisPSL Restructuring and Insolvency
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