Iniquity exception to privilege applied where documents were created by solicitor in connection with breach of director’s duties

The High Court has granted an application for the production and disclosure of documents, previously withheld by the defendants during proceedings, on the ground that the “iniquity exception” to legal professional privilege (“LPP”) applied. As such, the defendants were unable to rely on LPP and were required to disclose the documents to the claimant: Barrowfen Properties Ltd v Patel & ors [2020] EWHC 2536 (Ch).

The iniquity exception (also known as the “fraud exception”) operates to prevent LPP being asserted in relation to documents which were brought into existence for the purpose of furthering a criminal or fraudulent purpose. It is well-established that the exception applies whether or not the solicitor is aware of the wrongful purpose or is unwittingly used as an instrument of fraud.

In the present application, the claimant submitted that the first defendant had breached his duties as a director of the claimant in a manner which was, at worst, fraudulent and, at best, “sharp practice”, in bad faith or in breach of his duty to act without conflict of interest. The claimant therefore argued that LPP could not be asserted over otherwise privileged documents which had been created by the first defendant’s solicitors.

The court was satisfied that there was a strong prima facie case in relation to each of the allegations and that LPP could not, therefore, be claimed.

The decision provides useful guidance as to the scope of the iniquity exception, in particular its application to alleged breaches of a director's duties under the Companies Act 2006. The decision suggests that such breaches will fall within the scope of the iniquity exception to the extent that they involve fraud, dishonesty, bad faith or sharp practice, or where the director consciously or deliberately prefers his or her own interests over the interests of the company and does so “under a cloak of secrecy”. Conduct of a director which is, for example, merely negligent would appear not to fall within scope.

Background

The claimant (Barrowfen) brought claims against three defendants – Mr Girish Patel (GP) (a director of Barrowfen), Stevens & Bolton LLP (S&B) (solicitors to GP and the third defendant) and Barrowfen II Properties Ltd (Barrowfen II) (an investment vehicle incorporated by GP). Barrowfen alleged that, via a series of actions summarised below, GP had acted in breach of his duties as a director. It also alleged that S&B had acted for Barrowfen, such that S&B owed Barrowfen fiduciary and common law duties which Barrowfen claimed had been breached.

The Patel family (including GP, his three brothers and various of their children) together (directly and indirectly) controlled 100% of the shares in Barrowfen, which owned premises in Tooting, London. The board of Barrowfen delegated managerial responsibility to GP.

Sometime between 2010 and 2013, GP fell into disagreement with his family members. On 26 November 2013, GP's brother suggested that his nephew should be made a director of Barrowfen to break a perceived deadlock within the family.

GP's conduct thereafter was the subject of the proceedings. Barrowfen alleged that GP had:

• improperly removed one of his brother’s investment vehicles from Barrowfen’s register of members and denied that it was a shareholder;
• forged a letter, purportedly sent on behalf of his brothers, resigning from their positions as directors of Barrowfen;
• forged a resolution of the trustees of a trust which owned shares in Barrowfen, purporting to replace them as trustees;
• improperly written up Barrowfen’s register of members in a manner which allowed him to exercise the votes of certain shareholders; and
• designed and implemented a plan to place Barrowfen into administration in order to enable him to purchase the Tooting premises through a newly incorporated company controlled by GP for such purpose – Barrowfen II.

The claimant sought disclosure of S&B’s papers created in connection with GP's alleged conduct on the following bases:

• Joint privilege – that S&B also acted for Barrowfen and so S&B’s other clients under the joint retainer could not assert LPP as against Barrowfen where documents (including correspondence) were created pursuant to that joint retainer; and
• The iniquity exception – that neither GP nor Barrowfen II could assert LPP to protect against disclosure of otherwise privileged documents (including correspondence) that were created to further a purpose to which the iniquity exception applied.

Decision

The High Court granted the order for disclosure on both grounds.

Joint privilege

The deputy judge was referred to the established legal authorities on joint privilege and the issue of whether documents created pursuant to a joint retainer are ordinarily subject to disclosure, citing in particular The Sagheera [1997] 1 Lloyd's Rep 160 and BBGP Managing General Partner Ltd v Babcock & Brown Global Partners [2011] Ch 296.

S&B had acted for Barrowfen in 2014 and 2015. However, S&B’s position was that it was required to assert LPP over documents in its possession which were, or were arguably, privileged as against Barrowfen until the court made an order requiring their production. Subject to this duty, S&B’s position was neutral.

The deputy judge accepted S&B’s position. He went on to hold that, unless there was a clear reason to depart from the general rule, Barrowfen ought to be entitled to the disclosure and production of all documents created by S&B in the course of a joint retainer for Barrowfen, GP and S&B. On these facts, the deputy judge could find no reason to depart from the general rule on joint privilege.

Iniquity exception

To the extent that S&B had created and subsequently withheld documents from production pursuant to a separate retainer between S&B and GP or Barrowfen II, it was necessary for the deputy judge to consider the application of the iniquity exception.

The judge first considered the scope of the iniquity exception and in particular whether it extended beyond criminal acts and fraudulent misrepresentation. He found that the iniquity exception extends to fraud “in a relatively wide sense” including (quoting from BBGP) where the “wrongdoer has gone beyond conduct which merely amounts to a civil wrong; he has indulged in sharp practice, something of an underhand nature where the circumstances required good faith”.

Alleged breaches of GP's statutory duties as a director under the Companies Act 2006 would, held the deputy judge, fall within the scope of the iniquity exception to the extent that (by analogy with BBGP) such breaches involve “fraud, dishonesty, bad faith or sharp practice or where the director consciously or deliberately prefers his or her own interests over the interests of the company and does so 'under a cloak of secrecy'".

The deputy judge then considered the standard of proof which the allegations were required to meet in order to require disclosure. He distinguished between documents protected by legal advice privilege and those protected by litigation privilege. For documents protected by legal advice privilege, the relevant legal test was whether there was a “strong prima facie case” of fraud or some other iniquity (applying Addlesee v Dentons Europe LLP [2020] EWHC 238 (Ch), considered here). For documents protected by litigation privilege, the court held that a higher standard of a very strong prima facie case applied. Both tests set a lower threshold than the balance of probabilities.

The court was satisfied that, in relation to each of the five alleged breaches of duty, Barrowfen had either a strong or very strong prima facie case and therefore the iniquity exception was engaged. As the deputy judge put it:

“For a director to destroy part of a share register and to deny that a registered shareholder is a member of the company amounts without question to fraud (in the wide sense), dishonesty or bad faith.”

Putting it another way, there was a very strong prima facie case that GP had consciously or deliberately preferred his own interests over the interests of Barrowfen under a “cloak of secrecy”.

As a result, the court ordered GP, S&B and Barrowfen II to give disclosure to Barrowfen of all matter files and documents created for the purposes of giving or receiving legal advice or containing legal advice provided by S&B to GP or Barrowfen II in relation to the five claims.