Litigation privilege: High Court takes realistic approach in finding privilege applied to witness interviews conducted by administrators

In a recent decision, the High Court has refused to order the disclosure of transcripts of witness interviews conducted by administrators on grounds of privilege, and held that other documents relating to the administrators' investigation were irrelevant: NMC Health Plc (in administration) v Ernst & Young LLP [2024] EWHC 2905 (Comm).

It is well established that litigation privilege applies to documents created for the dominant purpose of obtaining legal advice or information/evidence in connection with litigation in reasonable contemplation. The present decision takes a realistic approach to the dominant purpose test in the context of interviews conducted by insolvency practitioners appointed following the discovery of a massive fraud and associated hole in the company's finances.

While each case will turn on its facts, the decision suggests that the court may be readily persuaded that witness interviews conducted at that stage were for the dominant purpose of evidence-gathering for potential proceedings. It is, however, a delicate balance for insolvency practitioners to strike. The court has a broad discretion as to whether to order disclosure or the examination of witnesses under its statutory powers, and will balance the requirements of the office holder against any possible oppression to the respondent. Where the court considers that the office holder has already decided to bring proceedings against a respondent, and is merely seeking information as to their potential defence, an order is more likely to be refused.

The decision is also of interest in finding that other documents created as part of the administrators' investigation into the fraud – as opposed to the underlying contemporaneous documents that informed that investigation, which had already been disclosed – were not relevant.

Background

The underlying claim is against a firm of accountants for alleged professional negligence in auditing the claimant company's financial statements between 2012 and 2018, and in particular in failing to spot that the claimant was the victim of a substantial fraud which led to it being placed into administration in 2020.

The present application concerned whether the claimant should be required to disclose:

• Around 140 witness interviews conducted by the claimant's administrators and five signed witness statements obtained by the administrators.
• Other documents relating to the administrators' investigation into the fraud.

The claimant objected to production of the first category on grounds of litigation privilege and the second on grounds of relevance.

Decision

The High Court (Picken J) refused to order disclosure of either category.

Relevance

Picken J noted that there was a clear distinction between contemporaneous documentation, which should be (and had been) disclosed, and documentation created after the event as part of the administrators' investigation. In relation to that latter category, it was accepted that the interviews and witness statements were relevant, but it did not follow that all documentation generated by the administrators was relevant.

The judge referred to a 2020 Hong Kong Court of First Instance decision, China Forestry Holdings Co Ltd (In Official Liquidation) v KPMG, which also involved an auditors' negligence claim for failure to detect fraud. The liquidators had shared with the defendant the relevant contemporaneous documents, so that the parties were equally able to analyse and make use of them. The judge rejected the suggestion that the liquidators' reports should also be disclosed, commenting that it was not relevant or necessary to know the view of the liquidators on the relevant allegations, which the court would have to examine and determine.

Picken J agreed with that principle, which he said also applied in this case, namely that documentation concerned with the liquidators' or administrators' investigations and views as to what may or may not have constituted the fraud were irrelevant.

The defendant had given various hypothetical examples of documentation that might exist, such as an email between employees of the administrators observing that what an interviewee said in an interview transcript differed from what had previously been said. However, this was pure speculation and did not affect the judge's conclusion on relevance.

The judge commented that, if the relevance hurdle were overcome, the disclosure exercise the liquidators would be required to conduct would be very substantial indeed. Accordingly, it was not a case where the court could simply give the applicant the benefit of the doubt in relation to relevance and require the material to be disclosed.

Litigation privilege

Picken J noted that the test for litigation privilege was common ground, namely that the document must have been prepared for the dominant purpose of obtaining legal advice or information/evidence in connection with legal proceedings that are in reasonable contemplation.

The claimant's evidence stated that lawyers had been instructed the day after the claimant went into administration because litigation was reasonably contemplated by the joint administrators at that date, and the purpose of their instruction was to advise in relation to actual and potential claims, including against the defendant in the present action. The evidence went on to say that it was obvious even before the administration that litigation was in prospect, as the claimant had been the victim of a massive fraud and its debts were far greater than its assets. The administrators’ main role would therefore be to investigate, defend and bring claims in order to maximise recoveries for creditors.

The evidence specifically stated that the interviews were conducted with the dominant purpose of evidence-gathering for litigation and the witness statements had been created for the dominant purpose of litigation.

The claimant relied on a 2008 decision of the Hong Kong Court of Final Appeal, Akai Holdings Limited In Compulsory Liquidation v Ernst & Young, in which a company's liquidators found little left to satisfy its sizeable debts. The only significant source of assets seemed likely to be claims against former management and auditors, which were unlikely to be enforceable except through litigation. Bokhary J found that the liquidators' dominant purpose in creating interview transcripts was to obtain legal advice in connection with litigation that was in active contemplation, and there was no evidence that any other purpose could have been dominant. Lord Hoffmann commented that a good deal of effort had been devoted to make the case seem more complicated, but the relevant question was "why the liquidators wanted to reconstitute the state of knowledge of the company" – if it was for the dominant purpose of obtaining legal advice in connection with anticipated litigation, then privilege attached.

In the present case the defendant pointed to certain correspondence that it said made it clear that, in the initial stages after the administrators' appointment, their dominant purpose was not the bringing of claims, whether against the defendant or anyone else. This correspondence indicated that the administrators were conducting an urgent investigation into the circumstances leading to the insolvency while taking steps to preserve the value of the company by continuing to trade, and that they had not yet given detailed consideration to whether the claimant might have claims against third parties.

Picken J said he could see some force in the defendant's submissions in respect of that correspondence. On balance, however, adopting the approach in Akai, and standing back to consider what the administrators' purpose must have been in conducting the interviews and obtaining the statements, he concluded that it would be "unreal" to conclude that the dominant purpose was anything other than evidence-gathering for potential claims.