Court of Appeal finds trustees in bankruptcy could not waive bankrupt's privilege

In a recent judgment, the Court of Appeal has held that trustees in bankruptcy could not waive legal professional privilege of a bankrupt, even though (i) the trustees in bankruptcy were entitled to take possession of the documents in which the privileged information was contained and (ii) the Insolvency Act 1986 provides generally that trustees in bankruptcy can exercise any power in respect of a bankrupt's property that the bankrupt himself could have exercised: Avonwick Holdings Limited v Shlosberg [2016] EWCA Civ 1138.

The position is different, however, if trustees in bankruptcy take possession of property to which the legal advice relates; in such a case, it is well established that the benefit of the privilege will pass with the property. But that was not the case here.

The position is also different in the context of a corporate insolvency, where it is clear that a liquidator or administrator can waive the company's legal professional privilege. In a corporate insolvency, the property of the company does not vest in its liquidator or administrator; the liquidator or administrator is instead an agent of the company and can cause the company to waive its own privilege.

Gary Milner-Moore and Andrew Cooke, a partner and senior associate in our dispute resolution team, explore the key elements of the decision below.

Background

The appeal arose out of complicated litigation relating to the English bankruptcy proceedings of Mr Shlosberg, a Russian businessman. Mr Shlosberg was the beneficial owner of Webinvest Limited. Avonwick Holdings Limited successfully sued Webinvest for a debt which was guaranteed by Mr Shlosberg. Avonwick then successfully petitioned to put Webinvest into liquidation and to make Mr Shlosberg bankrupt. 

Under the Insolvency Act (the "Act"), Mr Shlosberg's trustees in bankruptcy were entitled to take possession of property, including documents containing legal advice, from Mr Shlosberg.  Some of the legal advice had been provided to Mr Shlosberg alone; some had been provided to Mr Shlosberg and Webinvest together and was therefore subject to joint privilege. Property in the documents also vested in the trustees.

The issues on appeal arose because Avonwick's law firm began acting also for both the liquidator and the trustees, through the same individual lawyers as were acting for Avonwick. Avonwick and the liquidator commenced further proceedings against, amongst others, Mr Shlosberg for conspiracy. The trustees supported that litigation – if Avonwick was able to recover in the conspiracy proceedings, that would reduce Mr Shlosberg's guarantee liability to Avonwick (increasing the distribution to Mr Shlosberg's other creditors).

Mr Shlosberg sought an order that the lawyers should cease to act for Avonwick on the basis that legal advice within the documents was subject to his legal professional privilege and, though available to Mr Shlosberg's trustees in bankruptcy, it should not be available to a law firm acting for Avonwick in a claim against him.

Decision

The Court of Appeal (Sir Terence Etherton MR, with whom Gloster and Sharp LJJ agreed) granted the order sought by Mr Shlosberg, holding that his privilege needed to be protected.

Much of the court's reasoning was devoted to construction of the Act and its effect on a bankrupt's privilege. Under the Act, the property of Mr Shlosberg and all rights that Mr Shlosberg could exercise in respect of that property vested in the trustees. The trustees argued that Mr Shlosberg's privilege in the documents had therefore transferred to them, that he could no longer assert the privilege and that the trustees could waive it so as to permit Avonwick to deploy the privileged material.

The court rejected that argument. It held that legal professional privilege was a right personal to Mr Shlosberg that did not vest in his trustees. Had Parliament intended the Act to impact Mr Shlosberg's fundamental human right to privilege, it would have used clear wording in the Act. The Act's general definitions of the property which would vest in the trustees were not sufficiently express to impact on Mr Shlosberg's right. There was a distinction between the obligation of Mr Shlosberg to deliver possession of documents to the trustees and his right to assert privilege in the contents of those documents. In reaching that conclusion, the Court of Appeal said the 1989 High Court decision in Re Konigsberg [1989] 1 WLR 1257 was wrongly decided on this point.

As to Mr Shlosberg's remedy, he had, in the High Court, obtained an order that the lawyers should not be permitted to act for Avonwick in the conspiracy proceedings. The Court of Appeal declined to overturn the injunction on the ground that the judge had discretion as to the type of relief to grant Mr Shlosberg in order to protect his fundamental right to privilege and it was not possible to conclude that the judge's exercise of his discretion was plainly wrong or outside the ambit of the proper exercise of judicial discretion.

Comment

It is not unusual in an insolvency context for a majority creditor who has petitioned for the appointment of trustees in bankruptcy, administrators or liquidators to nominate a preferred insolvency officeholder and then for that officeholder to instruct the majority creditor's lawyers.  There is not generally any conflict for the lawyers; indeed, there is often a common interest.  In this case, the common interest between Webinvest and Avonwick was apparent – they were joint claimants in the conspiracy proceedings.

However, the present decision demonstrates that creditors and insolvency practitioners should consider carefully what arrangements they may need to make when instructing lawyers or other agents who are also instructed by other parties with an interest in the insolvency proceedings – particularly where the privileged information of a bankrupt may be relevant.

As noted above, there is a clear distinction between the treatment of legal professional privilege in the personal bankruptcy and corporate insolvency contexts (the latter not being directly before the court in this case). So for example it was common ground in this case (as is particularly apparent from the first instance judgment) that decisions in relation to Webinvest's privilege, including whether to waive or assert the privilege, were a matter for its liquidators – save where Webinvest's privilege was held jointly with Mr Shlosberg (in which case, applying standard principles, Mr Shlosberg's consent to waiver would be required).