In insolvency: Who ‘owns’ legal privilege?

Posted on: August 22nd, 2016

In Schlosberg v Avonwick, the Chancery Division has ordered a law firm to stop acting for the main creditor of a bankrupt after it had reviewed documents privileged to that individual. The law firm, which also acted for the trustees in bankruptcy, claimed the privilege had transferred to the trustees and as such the individual could no longer claim privilege. The Court rejected this argument and held that privilege will transfer only where the legal advice is about property which forms part of the bankrupt’s estate.

Why is this important to you as an Insolvency Practitioner?

Whether you are a trustee in bankruptcy or a liquidator, this case has implications on the way you deal with legal documents obtained as part of the insolvency process and, furthermore, how you go about instructing solicitors to assist. It draws a distinction between obtaining the physical documents in the possession of a bankrupt and the legal privilege contained within.

The case

In its simplest terms;

i. Avonwick lent £100m to Schlosberg’s company (Webinvest Ltd) and Schlosberg personally guaranteed the loan;

ii. Webinvest failed to repay the loan and Avonwick began legal proceedings against both Webinvest and Schlosberg;

iii. this lead to a petition for Schlosberg’s bankruptcy and the liquidation of Webinvest;

iv. a trustee in bankruptcy (the “Trustee”) and liquidator were appointed and both retained Avonwick’s solicitors as advisors;

v. Avonwick also began proceedings against another company, linked to the family of Schlosberg, as well as Schlossberg himself for conspiracy linked to the £100m initially lent;

vi. Schlosberg objected to the Trustee’s choice of solicitors, claiming that they would come into possession of documents subject to legal professional privilege or which were confidential. Schlosberg’s concern was that these documents would be used by Avonwick in the conspiracy proceedings.

(The full case can be found here)

The court’s decision

Privilege is not ‘interest’ within the meaning of section 436(1)… It is not a marketable right, it has no commercial value and it cannot be realised or distributed to creditors. Moreover, it does not arise out of, nor is it incidental to, property in the documents containing the privileged information. It is a right in respect of the information which arises out of the confidential relationship between the client and the lawyer, and it has nothing to do with the status of the documents as chattels. 

 

What the court is saying is; while the Trustee was entitled to the physical legal documents themselves, they are not entitled to the legal privilege of the bankrupt and the rights attached to that. They therefore did not have the right to waive that legal privilege and hand the documents onto another party or its solicitors, in this case Avonwick. Because the Trustees solicitors were the same as Avonwick’s, the court further ordered that those solicitors cease to represent Avonwick as they would not be able to sufficiently separate their two roles and prevent information gleaned from the legal documents obtained by the Trustee being used in Avonwick’s conspiracy proceedings.

What does this mean?

You, as an insolvency practitioner, and your solicitors now need to be more careful in handling legal documents obtained when acting as a trustee in bankruptcy or liquidator. The right to use legal documents to identify assets and to locate those assets is still there, but the right to disseminate the information in those documents to other parties, by waiving the insolvent’s legal privilege, is not. Where you appoint solicitors that already represent a creditor, care needs to be taken to ensure that there is no conflict between the two roles, especially where information is obtained during the insolvency process that could be prejudicial to the bankrupt/company in liquidation. You need to think carefully about who to appoint and, where there are separate proceedings between the creditor and the bankrupt/company in liquidation (or those linked to them), whether you should be appointing different solicitors to those appointed by the creditor.

Final thoughts

Permission to appeal has been granted, so this may not be the last we hear. Now that this ruling has been made, do not be surprised to see further cases come to court where bankrupts or companies in liquidation challenge an insolvency practitioner, or their solicitors, right to and use of certain documents. This decision could act as a potentially powerful shield to those wishing to prevent or frustrate certain information being used in pursuing debt collection.

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