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05 September 2017
In Leeds v Lemos ( EWHC 1825 (Ch)) the High Court considered and applied the principle that the right to waive privilege is not property of a bankrupt which is capable of being vested in the trustee in bankruptcy, thus confirming the Court of Appeal decision in Shlosberg v Avonwick Holdings Ltd ( EWCA Civ 1138) and rejecting the application of the Crescent Farm principle in bankruptcy cases. The Leeds decision prevented the trustees in bankruptcy from using potentially privileged documents as evidence to support a claim under Section 423 of the Insolvency Act 1986.
Christos Lemos was the subject of a bankruptcy order on March 11 2015. One of his sisters (Joanna Lemos, who was a major creditor in his bankruptcy) then issued proceedings under Section 423 of the Insolvency Act (transactions defrauding creditors) against Mr Lemos (the first respondent) and Kalliopi Lemos (his wife and the second respondent) on the grounds that the transfer of the respondents' London home to an offshore trust prior to his bankruptcy should be set aside, as it constituted an attempt to defraud creditors.
Mr Lemos's trustees in bankruptcy sought directions from the High Court in relation to using potentially privileged documents that they had obtained from his former solicitors under Section 311 of the Insolvency Act (acquisition by trustee of control) during the proceedings brought by Mr Lemos's sister. The respondents objected to such use of the documents and asserted that privilege belonged to Mr Lemos alone or to Mr Lemos and his wife.
The issues to be decided by the court were as follows:
A key English common law principle is the ability to withhold evidence from production to a third party or the court on the basis of privilege. One category of privilege is legal professional privilege, which applies to confidential communications between lawyers and their clients made for the purpose of seeking or giving legal advice (privilege belonging to the client in this case).
As regards the application of privilege to trustee relationships, prior to the Avonwick judgment, the position had been that trustees acquire the benefit of any legal professional privilege that had previously been exercisable by the beneficiary over documents relating to the beneficiary's estate along with the title to the property (ie, the trustee effectively becomes a successor in title to both the assets and the related documents). This is otherwise known as the Crescent Farm principle. While Crescent Farm was not an insolvency-related case, this principle was adopted in Konigsberg (A Bankrupt), Re ( 1 WLR 1257) in the context of bankruptcy. However, Crescent Farm examined the assertion, rather than waiver, of privilege.
The Avonwick decision has since suggested that the Crescent Farm principle may no longer apply to bankruptcy cases. In Avonwick the court found that where documents relating to the liabilities of the bankrupt are concerned, although privileged documents do pass to a trustee on bankruptcy for the trustee to use for management of the estate, the trustee must protect the privilege: the right to waive privilege remains with the bankrupt. This judgment was founded on the belief that an individual's right to privilege is a fundamental human right, entrenched in common law. The court found that the only circumstance in which privilege could be waived by the court is where there is an express statutory power to waive it (so in this case, there would need to have been an applicable provision within the Insolvency Act concerning waiver of privilege). The court found that there is no reference in the Insolvency Act (either expressly or as a necessary implication of the express language) to privilege being the property of the bankrupt that is automatically vested in the trustee. For example, Section 311 provides only that a trustee can obtain documents in order to get into, realise or distribute the bankrupt's estate, but does not confer on the trustee an express power to waive privilege over those documents.
However, the Crescent Farm principle was not wholly overturned by Avonwick as the judge at first instance found that privilege in documents relating to the assets of the bankrupt did vest in the trustees in bankruptcy. This was not considered further by the Court of Appeal as the documents in question were not deemed significant.
The High Court in Leeds applied and confirmed Avonwick, finding for the respondents on the basis that the court did not have the ability to waive privilege as the Insolvency Act did not grant the court the requisite statutory powers to decide whether to waive privilege if it was interpreted properly (Sections 333 and 363 could not be deployed in order to require the respondents to waive privilege and it was decided that a Section 423 claim is not recovery of "property" within section 436 of the Insolvency Act). The court further noted that even if it had jurisdiction, it could not imagine a scenario where an order to waive privilege would be appropriate.
The court went on to discuss the application of the Crescent Farm principle to documents relating to the assets of the bankrupt and confirmed that the Crescent Farm principle has no application in bankruptcy, even in relation to documents relating to the assets, on the basis that this would be inconsistent with the observations and reasoning of the Court of Appeal in Avonwick. It further noted that the Konigsberg decision was wrong in applying the Crescent Farm principle to bankruptcy.
The practical effect of the clarification by this case of the position in relation to insolvency cases is that it is now more difficult for a trustee in bankruptcy to seek to use potentially privileged documents where the privilege belongs to the bankrupt. It appears that the trustee is now limited to two options:
Further, steps must be taken by trustees in bankruptcy to identify potentially privileged documents and to protect that privilege. For example, in practice, this could mean that a privileged document referring to a previously unknown asset cannot be used to further the investigation of that asset. Caution should also be exercised before sharing any potentially privileged documents with third parties (eg, creditors and funders).
Lastly, the position remains uncertain regarding liquidators of a company; the court in Leeds made clear in its decision that it had not considered the position of liquidators.
For further information on this topic please contact Laura Evans or Andy McGregor at RPC by telephone (+44 20 3060 6000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
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