Shlosberg v Avonwick Holdings Ltd [2016] EWHC 1001 (Ch): privilege and an injunction requiring solicitors to cease acting

Disclaimer: This is not legal advice and is not to be relied upon as such. No liability is accepted by the writer for any reliance placed on the same. If you have a specific query then you should seek independent legal advice on the same.
 
Two observations in this case:

  • It appears that the Trustee in Bankruptcy might be unable to waive privilege (held solely or jointly) even when entitled to possession of privileged documents to administer the bankruptcy estate; and 
  • The ability of the Trustee in Bankruptcy to obtain privileged documents might arise by virtue of Section 311 not Section 312 of the Insolvency Act 1986

 

    1. This is an application by Mikhail Shlosberg, a bankrupt, for an order directing that the Second Respondent (“Dechert”) shall cease acting as solicitors for both the First Respondent (“Avonwick”) and the Third Respondents, Jeremy Mark Willmont and Emma Sayers of Moore Stephens LLP, his joint trustees in bankruptcy (“the Trustees”). As I shall explain, the application is made primarily in respect of Dechert’s position as solicitors for Avonwick, and only secondarily in respect of Dechert’s position as solicitors for the Trustees. The basis for the application is Dechert’s possession and review of a large quantity of documents which Mr Shlosberg contends are subject to legal professional privilege and/or are confidential. There is no dispute that many of the documents are privileged and confidential. The Respondents contend, however, that the benefit of the privilege has passed to the Trustees and that there is no real risk of any misuse of information confidential to Mr Shlosberg by Dechert. The application raises an important point of principle with respect to the devolution of legal professional privilege. For the sake of brevity, in the remainder of this judgment I shall refer to legal professional privilege simply as “privilege”.
    2. The application was originally argued before me on 25 February 2016. At that hearing, counsel for the Respondents argued, at least as I understood the argument, that the benefit of Mr Shlosberg’s privilege had passed to the Trustees purely because the Trustees had acquired title to the pieces of paper recording the privileged information as part of the bankrupt estate. Subsequently I prepared a draft judgment rejecting that argument which was circulated to the parties in advance of being handed down on 7 March 2016. In preparation for the hearing on 7 March 2016, counsel for the Respondents submitted a skeleton argument seeking permission to appeal relying upon draft grounds of appeal which raised different arguments and cited a number of authorities and commentaries which had not been cited at the previous hearing. For the reasons given in my judgment of 7 March 2016 ([2016] EWHC 416 (Ch)), I decided to reconsider my draft judgment in the light of the new arguments and authorities. Accordingly, the matter was re-listed for further argument on 22 April 2016. At the hearing on 22 April 2016, yet further new authorities were cited by both counsel. I have therefore considered the matter afresh.

Factual background
The principal parties

    1. Mr Shlosberg is a Russian businessman who is domiciled in England. He is the beneficial owner of Webinvest Ltd (“Webinvest”), a company incorporated in St Vincent and the Grenadines. Mr Shlosberg’s family are the beneficiaries of a discretionary trust which owns Castle Investment Fund Ltd (“Castle”). Avonwick is a company incorporated under the laws of the British Virgin Islands. It is beneficially owned by Eleana Gayduk. Mrs Gayduk is the wife of Vitaliy Gayduk, a Ukrainian businessman.

The Avonwick Loan

    1. In early 2010 Mr Shlosberg approached Mr Gayduk with an investment proposal relating to Vimetco NV (“Vimetco”), a Dutch company which operated aluminium plants. Vimetco was owned by Vi Holding NV (“Vi Holding”), which was owned or controlled by Vitaliy Machitski. Mr Machitski was, and Avonwick believes remains, a close friend of Mr Shlosberg. Mr Shlosberg informed Mr Gayduk that Mr Machitski was proposing to de-list shares in Vimetco in London and to re-list them in Hong Kong, where it was considered that the shares would be more highly valued. In order to achieve this, Mr Machitski needed to recover control of Vimetco from Vi Holding’s banks by repaying Vi Holding’s borrowings to secure release of the shares in Vimetco which had been charged as security.
    2. According to Mr Shlosberg, US$200 million was required for this purpose. Mr Shlosberg was willing to lend US$100 million to Mr Machitski, but needed a further US$100 million. Mr Gayduk agreed to lend Mr Shlosberg US$100 million so that Mr Shlosberg could invest the whole US$200 million in the project.
    3. Avonwick was selected to act as the lender in respect of the loan and Webinvest was selected to act as the borrower. A loan agreement was signed on 23 April 2010 and US$100 million advanced on 27 April 2010 (“the Avonwick Loan”). Mr Shlosberg personally guaranteed Webinvest’s obligations under the Avonwick Loan pursuant to a deed of guarantee dated 23 April 2010 (“the Guarantee”).
    4. Webinvest used the proceeds of the Avonwick Loan, together with another US$100 million lent by Castle (“the Castle Loan”), to finance the Vimetco project proposed by Mr Machitski by making a loan of US$200 million (“the Globoid Loan”) to Mr Machitski’s company Globoid Finance Establishment (“Globoid”), which was incorporated in Liechtenstein.

Globoid and Webinvest default

    1. The Globoid Loan was due to be repaid on 14 May 2012. The Avonwick Loan was due to be repaid a few days later on 17 May 2012. In the event, Globoid did not repay the Globoid Loan. In turn, Webinvest failed to repay the Avonwick Loan.

The Globoid Arbitration

    1. On 15 May 2013 Webinvest commenced an arbitration against Globoid under the ICC rules for the recovery of the Globoid Loan, claiming more than US$300 million including interest (“the Globoid Arbitration”).
    2. The Globoid Arbitration was subsequently settled through a series of agreements, and in particular agreements dated 23 and 24 June 2014 (“the Settlement Agreements”). On 16 January 2015 Globoid was placed in liquidation.

The Original Avonwick Proceedings

    1. On 9 April 2014 Avonwick served statutory demands on Webinvest and Mr Shlosberg for US$180,891,155.88 representing the principal of US$100 million plus accrued interest.
    2. On 30 May 2014 Webinvest applied for an injunction to restrain presentation of a winding up petition and Mr Shlosberg applied to set aside the statutory demand served on him. The asserted basis of these applications was that there had been a collateral oral agreement between Mr Gayduk and Mr Shlosberg on behalf of Avonwick and Webinvest respectively to the effect that payments of principal and interest by Webinvest in respect of the Avonwick Loan would only fall due when Webinvest itself had received corresponding payments from Globoid in respect of the Globoid Loan (referred to as the “pay if paid” agreement).
    3. Webinvest’s application came before Peter Smith J on 14 and 15 July 2014. Peter Smith J ordered an expedited trial of Avonwick’s claim for repayment of the outstanding sums due under the Avonwick Loan and Guarantee (“the Original Avonwick Proceedings”).
    4. Avonwick was represented in the Original Avonwick Proceedings by Dechert. Webinvest and Mr Shlosberg were represented by Fladgate LLP (“Fladgate”) until 16 December 2014.
    5. Webinvest and Mr Shlosberg refused to disclose any documents relating to the Globoid Arbitration or the Settlement Agreements in the Original Avonwick Proceedings. Accordingly, Avonwick sought specific disclosure of those documents. On 10 October 2014 HHJ Walden-Smith ordered the disclosure of the arbitration and settlement documents. Webinvest and Mr Shlosberg applied for permission to appeal to the Court of Appeal, but that application was refused, following which Webinvest and Mr Shlosberg finally disclosed documents relating to the Globoid Arbitration. Some (but, as it subsequently transpired, not all) of the documents relating to the Settlement Agreements were provided to Avonwick at around 8pm on 17 October 2014, the Friday before the trial commenced the following Monday.
    6. The trial of the Original Avonwick Proceedings was heard by Sales J, as he then was, from 20 to 29 October 2014. Judgment was handed down on 6 November 2014 ([2014] EWHC 3661 (Ch)).
    7. In his judgment Sales J found that the allegation of a collateral oral agreement was a dishonest defence advanced to stave off the enforcement by Avonwick of its rights under the Avonwick Loan Agreement and under the Guarantee. His assessment was that both the witnesses who had given evidence on behalf of Webinvest in support of such agreement, namely Mr Shlosberg and his associate Julia Mutieva, were dishonest witnesses.
    8. By an order dated 6 November 2014 Sales J gave judgment for Avonwick against Webinvest and Mr Shlosberg in the amount of US$195,159,649.03 and interest at a daily rate of US$42,774.72. He also awarded Avonwick its costs of the action on the indemnity basis. There has been no appeal against that order.

The Freezing Order

    1. On the same day as handing down judgment, Sales J granted Avonwick a worldwide freezing order against Webinvest, Mr Shlosberg and Castle (“the Freezing Order”), holding that there was a good arguable case that Castle was beneficially owned and controlled by Mr Shlosberg.
    2. In addition, having reviewed such documentation relating to the Settlement Arrangements as had been disclosed to Avonwick at that time, Sales J made the following findings:

“28. … The materials disclosed in relation to the settlement agreement are obscure and incomplete, but even on the best case advanced by the defendants it seems that the effective proceeds of a settlement of the Webinvest claim against Globoid in the sum of US$172 million, have been transferred to Castle, and not to Webinvest (the owner of the relevant contractual rights against Globoid), in circumstances where Castle proposes to pay on to Webinvest only half that amount to make it available to recovery by the claimant. No good explanation has been given on why the whole amount of the proceeds of sale should have been diverted to Castle rather than simply going to Webinvest (as owner of the relevant rights being compromised) and then being available for the claimant to execute against ….

29. Furthermore, on a less optimistic and generous interpretation of the various documents, contrary to the submissions of the defendants, it appears that there is a real risk that even half of the proceeds of the settlement sum of US$172 million which the defendants say will be available for Webinvest (and hence for the claimant) will in reality not be paid to Webinvest at all, leaving the claimant with nothing against which to execute the Judgment that it has obtained.”

Bankruptcy of Mr Shlosberg and winding up of Webinvest

    1. Neither Webinvest nor Mr Shlosberg has paid any sum in respect of the judgment obtained by Avonwick. On Avonwick’s petition, a bankruptcy order was made against Mr Shlosberg on 14 January 2015 and a winding up order was made against Webinvest on 27 February 2015. The Trustees were appointed on 20 January 2015 and Mr Willmont and Michael Finch (“the Liquidators”) were appointed as joint liquidators of Webinvest on 24 March 2015.
    2. The principal creditor of both Mr Shlosberg and Webinvest is Avonwick. In the case of Mr Shlosberg, it appears that Avonwick’s judgment represents at least 95%, if not more, of the debts owed by the bankrupt’s estate.

The Conspiracy Claim

    1. On 19 November 2014 Avonwick commenced proceedings against Castle (“the Conspiracy Claim”). At that time, Avonwick had been provided with some (but not all) of the documents making up the Settlement Agreements, and the proceedings sought relief solely against Castle under section 423 of the Insolvency Act 1986 (transactions defrauding creditors). Avonwick again instructed Dechert to act for it.
    2. Avonwick pressed for disclosure of the remaining documents relating to the Settlement Agreements. Following an order by Peter Smith J, these were eventually disclosed by Castle on 23 February 2015.
    3. On 8 May 2015 Avonwick obtained permission from Master Price to amend its claim to (a) join Webinvest and the Liquidators as additional claimants, (b) join Vi Holding, Globoid and Mr Machitski as additional defendants and (c) advance a claim for unlawful means conspiracy. As I understand it, no application was made for permission to serve the proceedings on Vi Holding, Globoid or Mr Machitski out of the jurisdiction at that stage.
    4. Although Mr Shlosberg was at the centre of the alleged conspiracy, Avonwick did not seek to join him to the Conspiracy Claim at that time. This was because section 285(3) of the 1986 Act imposes a stay on the commencement of proceedings against a bankrupt. On 16 May 2015 Ms Sayers, one of the Trustees, having obtained independent advice from Moon Beever, confirmed that the Trustees did not object to the stay being lifted. On 19 May 2015 Avonwick issued an application to lift the stay. On 14 August 2015 Webinvest issued a parallel application. On 2 September 2015 Avonwick and Webinvest applied to join Mr Shlosberg as a defendant and for permission to re-amend its claim not only so as to join Mr Shlosberg, but also so as to advance claims under section 238 and 239 of the 1986 Act (transactions at an undervalue and preferences). Avonwick’s applications were opposed by Mr Shlosberg. Avonwick also applied for permission to serve the proceedings on Vi Holding and Mr Machitski outside the jurisdiction.
    5. The claim which Avonwick sought to advance against Mr Shlosberg was that, as explained in more detail below, Mr Shlosberg had entered into a conspiracy with Mr Machitski/Globoid/Vi Holding to use unlawful means by (i) acting contrary to sections 238, 239 and/or 423 of the 1986 Act and/or (ii) procuring a breach by Webinvest’s directors of their fiduciary duties in entering into the Settlement Agreements.
    6. In the context of those applications, Mr Shlosberg asserted that the reason why Avonwick wished to join him to the proceedings was to provide a jurisdictional anchor to enable proceedings in this country to be brought against Vi Holding and Mr Machitski. Avonwick did not deny that this was one reason, but contended that another reason was in order to obtain a judgment which would survive Mr Shlosberg’s discharge from bankruptcy. It is common ground that Avonwick’s claim against Mr Shlosberg, if established, would be one founded on fraud and would therefore survive discharge. As counsel for Mr Shlosberg pointed out, it follows that Mr Shlosberg has a strong personal interest, distinct from any interest of his bankruptcy estate, in defending the claim, notwithstanding that the liability would also be provable in the bankruptcy.
    7. The applications ultimately came before HHJ Dight sitting as a judge of this Court on 8-11 December 2015. On 15 December 2015 he gave judgment in favour of Avonwick ([2015] EWHC 3832 (Ch)). Accordingly, he made an order joining Mr Shlosberg to the Conspiracy Claim, giving Avonwick permission to re-amend the claim and giving Avonwick permission to serve the proceedings out of the jurisdiction on Vi Holding and Mr Machitski.
    8. As now formulated, the Conspiracy Claim concerns the purpose and effect of the Settlement Agreements. In short, the claimants (Avonwick, Webinvest and the Liquidators) allege that the Settlement Agreements were part of a scheme put in place to render Webinvest judgment proof in the face of the very substantial claims asserted against it by Avonwick. Avonwick believes that the Settlement Agreements were part of an unlawful conspiracy between Mr Shlosberg on the one hand and Mr Machitski/Globoid/Vi Holding on the other hand to ensure that the value of Webinvest’s main asset would not be available to satisfy Avonwick’s claims against Webinvest, but would instead be diverted to Mr Shlosberg or companies owned or controlled by him.
    9. In more detail, the claimants allege that:

i) Webinvest agreed to transfer its rights against Globoid in respect of the Globoid Loan and Globoid Arbitration to Castle under the terms of an assignment agreement.
ii) Castle and Globoid then agreed to settle the Globoid Arbitration under the terms of a settlement deed in return for Globoid transferring a number of shares in Vimetco to Castle (“the Vimetco Shares”).
iii) Vi Holding agreed to purchase the Vimetco Shares from Castle under the terms of a share purchase agreement (“the SPA”) for US$172 million. This is despite the fact that the market value of the Vimetco Shares was in the region of US$12,071,659.
iv) In return for the assignment of rights against Globoid from Webinvest, Castle agreed (a) to make a set off under the Castle Loan in the amount of US$12,071,659 (being the alleged market value of the Vimetco Shares) and (b) to transfer to Webinvest the amount (or make a set-off under the Castle Loan and to discharge Webinvest’s debt for the amount) equal to one half of each payment received from Vi Holding for the Vimetco Shares under the SPA. In light of the rights of set-off afforded to Castle, there is no obligation on the part of Castle to pass any money it receives from Vi Holding to Webinvest. In other words, the effective proceeds from the sale settlement of the Globoid Arbitration would not be available to satisfy Avonwick’s claims against Webinvest.
v) In addition, Castle and Vi Holding entered into a deed of pledge (“the Deed of Pledge”) pursuant to which Vi Holding was granted security over the same Vimetco Shares that it was under an obligation to purchase. The “Events of Default” under the Deed of Pledge appear to have been deliberately designed and structured as a “poison pill” so that in the event Webinvest (or a liquidator or creditor of Webinvest) were to take any steps to pursue Castle, Vi Holding would no longer be obliged to pay the US$172 million.
vi) Accordingly, the effect of the Settlement Agreements has been to strip away the value of Webinvest’s principal asset, the Globoid Loan, leaving Webinvest as an empty shell and thwarting Avonwick’s right to obtain satisfaction of its judgment against Avonwick. Whilst, prior to the entry into the Settlement Agreements, Webinvest had a valuable asset in the form of rights to repayment from Globoid, the effect of the Settlement Agreements is that it has been stripped of this asset and left with no assets of any value with which to meet the claims of its creditors.

    1. HHJ Dight refused Mr Shlosberg permission to appeal against his decision. On 10 February 2016 Mr Shlosberg applied to the Court of Appeal for permission to appeal. That application is presently pending. In the meantime, the proceedings have been stayed.

Application for suspension of discharge

    1. On 15 December 2015 the Trustees issued an application for the suspension of Mr Shlosberg’s discharge from bankruptcy. It has been agreed that the discharge be suspended pending the determination of that application.

The genesis of the present application

    1. Shortly after their appointment, the Trustees retained Dechert as their solicitors. Shortly after their appointment, the Liquidators also retained Dechert as their solicitors. The responsible partner of Dechert, Adam Silver, has confirmed in evidence on the present application that no information barrier has been put in place within Dechert between those advising Avonwick and those advising the Trustees and the Liquidators. On the contrary, Mr Silver has personally led the Dechert teams advising all three sets of clients.
    2. Since their appointment, the Trustees have, acting by Dechert, exercised their powers, including their powers under section 311(1) of the 1986 Act, to require Mr Shlosberg to provide them with information about his affairs. Section 311(1) provides as follows:

“The trustee shall take possession of all books, papers and other records which relate to the bankrupt’s estate or affairs and which belong to him or are in his possession or under his control (including any which would be privileged from disclosure in any proceedings).”

    1. At an early point after Dechert’s retainer by the Trustees, Mr Shlosberg’s present solicitors (“Enyo”) raised concerns about Dechert acting for both Avonwick and the Trustees. On 13 March 2015 Dechert wrote to Enyo saying that dual representation by solicitors of an office holder and solicitor was acceptable and that certain safeguards had been put in place to protect Mr Shlosberg (as to which, see below). Dechert also stated:

“In view of the fact that Avonwick has already obtained a judgment against Mr Shlosberg for approximately US$200 million and Mr Shlosberg now benefits from the protection of a bankruptcy order it is difficult to envisage what other claims against Mr Shlosberg Avonwick could advance – so far as we are aware, none are intimated.”

    1. Subsequently, of course, Avonwick applied to join Mr Shlosberg to the Conspiracy Claim.
    2. On 17 March 2015 Enyo replied stating that they did not consider the safeguards proposed by Dechert were adequate and that, at minimum, any material received by the Trustees which would have been privileged in Mr Shlosberg’s hands prior to the bankruptcy should not in the first instance be provided to Dechert, but reviewed by an independent firm of solicitors for the purposes of determining whether it was in the interests of the estate in bankruptcy to provide that material to Avonwick.
    3. On 2 April 2015 Moon Beever wrote to Enyo saying that they had been appointed as independent solicitors to advise the Trustees with regard to any issue of conflict of interest, and that “in so far as your client considers that any information that he is to disclose to the Joint Trustees raises such an issue, then you may send that to us so that we can advise Joint Trustees”. What neither Dechert nor Moon Beever informed Enyo at that stage was that, as explained below, Dechert had already received and commenced reviewing a large volume of privileged documents which had not passed through Moon Beever.
    4. On 2 September 2015 Enyo was informed by Fladgate of enquiries being made of it by the Trustees. Fladgate provided Enyo with a copy of a letter from Dechert to Fladgate dated 29 July 2015 setting out a number of queries with respect to Mr Shlosberg’s affairs. That letter referred to the provision by Fladgate to the Trustees of three CDs containing PDF copies of a large quantity of documents (“the Fladgate CDs”).
    5. Mr Silver’s evidence with respect to the contents of the Fladgate CDs is as follows:

“51. The contents of the Fladgate CDs relate to the following matters:

(a) litigation in the county court regarding an attack on the Bankrupt’s cat;

(b) the statutory demands issued by Avonwick against the Bankrupt and Webinvest and the subsequent applications dated 30 May 2014 to restrain Avonwick from petitioning for the bankruptcy of the Bankrupt and to wind up Webinvest; and

(c) the claim brought by Avonwick against the Bankrupt and Webinvest in July 2014.

52. … this material is voluminous. I understand that the documents falling within categories (b) and (c) above (excluding correspondence and attachments passing between Fladgate and my firm and duplications) consists of about 44,130 pages. At 300 pages per file, this would be 148 lever arch files.”

    1. George Maling of Enyo stated in his evidence in support of the present application that it was apparent from Dechert’s letter to Fladgate of 29 July 2015 that “Dechert (and in particular Mr Silver, the lead partner acting for Avonwick) had reviewed the material in detail in the intervening period”. That statement was not disputed by Mr Silver in his evidence in reply. Indeed, Dechert’s familiarity with the contents of the Fladgate CDs was graphically demonstrated during the course of the hearing on 25 February 2016 when I asked a question about category (a) of the documents. Counsel for the Respondents was able to tell me straightaway that the claim had resulted in a judgment in favour of Mr Shlosberg against the owner of a dog in the sum of about £6,000 prior to the date of the bankruptcy, although that information did not appear in Mr Silver’s witness statement.
    2. On 20 October 2015 Enyo wrote to Dechert and Moon Beever expressing concern on behalf of Mr Shlosberg at what had transpired and demanding that appropriate steps be taken to protect his rights, including by Dechert ceasing to act. Dechert and Moon Beever replied in letters dated 28 October 2015 declining to take the steps demanded. Mr Maling stated that it was apparent from this correspondence that “Avonwick wishes to make use of at least some of the contents of the CDs supplied by Fladgate for [the] purposes of its … further claims against Mr Shlosberg”. Again, that statement was not disputed by Mr Silver. On the contrary, he expressly stated that some of the material “will be relevant to the Conspiracy Claim”.
    3. On 4 December 2015 Mr Shlosberg issued the present application.

The starting point

    1. In considering Mr Shlosberg’s application, the starting point is provided by two propositions relied upon by the Respondents, neither of which is contested on behalf of Mr Shlosberg. First, a party is entitled to be represented by the solicitor of his choice unless there are solid grounds for interfering with that entitlement.
    2. Secondly, there is nothing inherently objectionable about a solicitor acting for both a trustee in bankruptcy or liquidator and a major creditor of the bankrupt or insolvent company. On the contrary, it has been recognised that this may well be convenient because of the creditor’s familiarity with the debtor’s affairs and because of absence of any real likelihood of a conflict of interest between the trustee or liquidator and the creditor: see Re Schuppan [1996] 2 All ER 664 at 668 (Robert Walker J). Mr Willmont’s evidence is that, in his experience, it is a course which is frequently adopted.

Mr Shlosberg’s claim to privilege

    1. At least as presented by counsel for Mr Shlosberg, Mr Shlosberg’s application is largely based on his contention that many of the documents copies of which were contained on the Fladgate CDs are subject to privilege to which Mr Shlosberg is entitled either solely or jointly with Webinvest.
    2. There is no dispute that the Fladgate CDs contain copies of a considerable number of documents which are subject to privilege. Nor is there any dispute that, prior to the bankruptcy of Mr Shlosberg and the winding up of Webinvest, the privilege was, in the case of documents within categories (b) and (c), a privilege to which Mr Shlosberg and Webinvest were jointly entitled. In the case of documents in category (a), the privilege was that of Mr Shlosberg alone.
    3. The Respondents contend, however, that the benefit of Mr Shlosberg’s privilege now vests in the Trustees as part of the bankrupt estate. Mr Shlosberg disputes this. This is the key issue between the parties on the present application.
    4. It should be noted before proceeding further that there is no evidence as to the extent to which (i) documents may have been electronically created and copied directly onto the CDs or (ii) Fladgate, as distinct from their former clients, may have a claim to ownership of some of the documents (at least qua pieces of paper). Both counsel addressed me upon the assumptions that (a) all of the documents had been printed or written on paper prior to the bankruptcy and (b) Mr Shlosberg owned all of the pieces of paper prior to the bankruptcy (even though it is quite possible that Fladgate owned some of them: see Halsbury’s Laws (5th ed), vol. 66, para. 583 and the authorities cited). I shall do likewise.

The burden of proof

    1. Given that the Respondents do not dispute that Mr Shlosberg was entitled to the privilege prior to his bankruptcy, but contend that the benefit of the privilege has been transferred to the Trustees as result of the bankruptcy, it seems to me to be plain that the Respondents bear the burden of establishing this.

The statutory provisions with respect to the vesting of the bankrupt’s estate

    1. Section 306(1) of the 1986 Act provides, so far as relevant, that “The bankrupt’s estate shall vest in the trustee immediately on his appointment taking effect…”.
    2. Section 283 defines the bankrupt’s estate as follows:

“(1) Subject as follows, a bankrupt’s estate for the purposes of any of this Group of Parts comprises—

(a) all property belonging to or vested in the bankrupt at the commencement of the bankruptcy, and

(b) any property which by virtue of any of the following provisions of this Part is comprised in that estate or is treated as falling within the preceding paragraph.

(2) Subsection (1) does not apply to—

(a) such tools, books, vehicles and other items of equipment as are necessary to the bankrupt for use personally by him in his employment, business or vocation;

(b) such clothing, bedding, furniture, household equipment and provisions as are necessary for satisfying the basic domestic needs of the bankrupt and his family.

This subsection is subject to section 308 in Chapter IV (certain excluded property reclaimable by trustee).

(4) References in any of this Group of Parts to property, in relation to a bankrupt, include references to any power exercisable by him over or in respect of property except in so far as the power is exercisable over or in respect of property not for the time being comprised in the bankrupt’s estate and—

(a) is so exercisable at a time after either the official receiver has had his release in respect of that estate under section 299(2) in Chapter III or a meeting summoned by the trustee of that estate under section 331 in Chapter IV has been held, or

(b) cannot be so exercised for the benefit of the bankrupt;

and a power exercisable over or in respect of property is deemed for the purposes of any of this Group of Parts to vest in the person entitled to exercise it at the time of the transaction or event by virtue of which it is exercisable by that person (whether or not it becomes so exercisable at that time).

…”

The definition of property

    1. Section 436(1) defines “property” as including:

“money, goods, things in action, land, and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent arising out of, or incidental to, property”.

    1. As counsel for the Respondents pointed out, the courts have repeatedly emphasised the width of this definition. Thus in Bristol Airport plc v Powdrill [1990] Ch 744 Sir Nicolas Browne-Wilkinson V-C said at 759D that “it is hard to think of a wider definition of property” than that contained in section 436(1). Similarly, in Re Landau (a Bankrupt) [1998] Ch 223 Ferris J said at 232A that the words “are about as wide as they could be”.
    2. In Re Celtic Extraction Ltd [2001] Ch 475 Morritt LJ stated at [26]:

“The word ‘property’ is not a term of art but takes its meaning from its context: see Nokes v Doncaster Amalgamated Collieries Ltd[1940] AC 1014, 1051; Kirby v Thorn EMI plc [1988] 1 WLR 445, 452. In the context of insolvency there is, as Lord Atkinson observed in Hollinshead v Hazleton [1916] 1 AC 428, 436, a well established

‘principle of public policy, which has found expression in the provisions of the Bankruptcy Codes of … England … as estimable and as conducive to the welfare of the community as any. It is this, that in bankruptcy the entire property of the bankrupt, of whatever kind or nature it may be, whether alienable or inalienable, subject to be taken in execution, legal or equitable, or not so subject, shall, with the exception of some compassionate allowances for his maintenance, be appropriated and made available for the payment of his creditors.’

Thus in successive statutes dealing with bankruptcy and insolvency the definition of ‘property’ has been progressively extended (Morris v Morgan …unreported) 31 March 1998; Court of Appeal (Civil Division) Transcript No 524 of 1998); though however wide the definition it is subject to the implied exclusion of rights of the bankrupt with reference to his body, mind or character (Heath v Tang[1993] 1 WLR 1421, 1423). …”

Property which does not form part of the bankrupt’s estate

    1. Even though section 283(1) provides that, subject to the limited exceptions contained in the remainder of section 283, and in particular subsection (2), “all property belonging to or vested in the bankrupt” forms part of the bankrupt’s estate, and thus vests in his trustee by virtue of section 306(1), as can be seen from the passage cited from Re Celtic Extraction, it is well established that there is an exception to this provision which does not appear on the face of the statute, but has been read into it by the courts. This concerns property which is “peculiarly personal” to the bankrupt.
    2. As Warner J explained in Re Rae [1995] BCC 102 at 111D-G (emphasis added):

“The relevant legislative purpose here is to my mind perfectly clear. Bankruptcy, putting it in the simplest terms, is a process whereby on the one hand all a debtor’s property, with certain specific exceptions, is vested in his trustee in bankruptcy for realisation and distribution of the proceeds among his creditors and, on the other hand, he is forever relieved of personal liability to those creditors. The specific exceptions exist either because the property is not appropriate for distribution among the bankrupt’s creditors, such as property of which he is only a trustee, or because, unlike an insolvent company, the bankrupt is a human being whose life must continue during and after insolvency. For this reason s. 283(2) excepts from the bankrupt’s estate the tools and other items of equipment necessary for his personal use in his employment, business or vocation and also the clothing, bedding, furniture, household equipment and provisions necessary for the basic domestic needs of the bankrupt and his family. For the same reason the court may not make under s. 310 an income payments order reducing his income below what appears to the court to be necessary for meeting his reasonable domestic needs and those of his family. For the same reason again the bankrupt is, within limits, allowed to keep damages awarded to him for injury to his person, such as damages for slander – see Ex parte Vine, Re Wilson (1878) 8 ChD 364. There is no example, however, either in the Act or in the many authorities that were cited to me, of the bankrupt being entitled to retain for his own benefit a purely financial or commercial asset capable of realisation for the benefit of his creditors and not necessary for his personal use in his employment, business or vocation.”

    1. Two main kinds of property have been recognised as falling within this exception. The first kind is personal causes of action. As Hoffmann LJ explained in Heath v Tang [1993] 1 WLR 1421 at 1423A-B:

“The property which vests in the trustee includes ‘things in action’: see section 436. Despite the breadth of this definition, there are certain causes of action personal to the bankrupt which do not vest in his trustee. These include cases in which ‘the damages are to be estimated by immediate reference to pain felt by the bankrupt in respect of his body, mind, or character, and without immediate reference to his rights of property’: see Beckham v. Dale (1849) 2 H.L.Cas. 579, 604, per Erle J. and Wilson v. United Counties Bank Ltd. [1920] A.C. 102. Actions for defamation and assault are obvious examples. The bankruptcy does not affect his ability to litigate such claims.”

    1. As counsel for the Respondents pointed out, however, damages for financial loss vest in the trustee even if they arise in connection with something that is personal. Accordingly, whereas the right to damages for pain and suffering arising out of negligent medical care remains with the bankrupt, the right to damages for financial loss caused by the same negligence vests in the trustee: see Ord v Upton [2000] Ch 352. The same is true in the context of claims for damages for harassment: see Hayes v Butters [2014] EWHC 4557 (Ch), [2015] Ch 495. (As Ord v Upton makes clear, because there is a single cause of action, the cause of action vests in the trustee, who will hold damages for pain and suffering on trust for the bankrupt; but this detail does not matter for present purposes.)
    2. The second kind of property that has been recognised as falling within the exception is personal correspondence. This was established by Haig v Aitken [2001] Ch 110, where Rattee J held at 118D-119A:

“In my judgment it is inconceivable that Parliament envisaged, by passing the Act, that the effect of bankruptcy should be that a bankrupt’s personal correspondence should be available for publication to the world at large at the behest of the trustee in bankruptcy. In my opinion, the concept of such a gross invasion of privacy is repugnant. I do not believe that Parliament intended it, any more than it intended creditors to have the right to damages for injury to his person or character. In my judgment, on its proper construction in the context of its apparent legislative purpose, the effect of the Act is that a bankrupt’s estate does not include the bankrupt’s personal correspondence which, like a right of action for damages for libel, is of a nature peculiarly personal to him and his life as a human being. … I reach this conclusion apart from the provisions of article 8 of the Convention, but I am confirmed in that conclusion by the fact that it seems to me at least strongly arguable that the construction of the Act contended for by the trustee in bankruptcy would indeed constitute an infringement of article 8.

I recognise, of course, that the personal correspondence may include letters relating to other property of the bankrupt that is included in the estate, of which it may be necessary for the trustee to have possession, in order properly to administer that estate. The situation is covered, in my judgment, by section 311(1) of the Act, which I have already read, and entitles the trustee to possession of documents relating to the bankrupt’s estate, even though such documents are not themselves comprised in the estate. Indeed, the very terms of section 311 to my mind contemplate the possibility that there may be documents, belonging to the bankrupt, which are not part of his estate and for which, therefore, express provision has to be made by section 311(1).”

The nature of privilege

    1. Privilege is a right to resist the compulsory disclosure of information, and in particular documents which contain legal advice or were created for the dominant purpose of obtaining information or advice in connection with actual or contemplated litigation: see B v Auckland District Law Society[2003] 2 AC 736 at [67] (Lord Millett) and Three Rivers District Council v Bank of England (No 6) [2004] UKHL 48, [2005] 1 AC 610 at [26] (Lord Scott of Foscote). It follows that it is purely a negative right.
    2. It is established on the highest authority that privilege is a fundamental human right: see R v Derby Magistrates’ Court ex p. B [1996] 1 AC 487 at 507-509 (Lord Taylor of Gosforth CJ) and R (Morgan Grenfell & Co Ltd) v Special Commissioner of Income Tax [2002] UKHL 21, [2003] 1 AC 563 at [39] (Lord Hoffmann).
    3. Counsel for Mr Shlosberg submitted that legal professional privilege is not property. Counsel for the Respondents accepted that it was not property in the conventional sense, but submitted that it was property within the definition in section 436(1). I shall consider this submission below.

The correct approach to statutory construction in this context

    1. In Morgan Grenfell the House of Lords held that, in the light of the nature of privilege, it should not be regarded as being abrogated by a statute unless such abrogation was by express words or necessary implication. As to what was meant by “necessary implication” in this context, Lord Hobhouse of Woodborough said at [45]:

“A necessary implication is not the same as a reasonable implication… A necessary implication is one which necessarily follows from the express provisions of the statute construed in their context. It distinguishes between what it would have been sensible or reasonable for Parliament to have included or what Parliament would, had it thought about it, probably have included and what it is clear that the express language of the statute must have included. A necessary implication is a matter of express language and logic not interpretation.”

The speech of Lord Hoffmann, with whom the remainder of their Lordships agreed, was to similar effect.

    1. In the present case, the Respondents do not argue that privilege has been abrogated, but rather transferred to the Trustees. Counsel for Mr Shlosberg submitted that the involuntary transfer of privilege from the person entitled to it to someone else it was tantamount to abrogation.
    2. I do not consider that the principles stated by the House of Lords in Morgan Grenfell are directly applicable to the present issue, but I accept that the court should be cautious before concluding that a statutory provision has the effect of involuntarily transferring privilege from the beneficiary of the privilege to another person in the absence of express words.

The Respondents’ arguments in summary

    1. Counsel for the Respondents advanced four different arguments in support of the contention that the benefit of Mr Shlosberg’s privilege had vested in the Trustees. I would summarise these arguments as follows:

i) Prior to the bankruptcy, Mr Shlosberg owned the pieces of paper recording the privileged information. Title to those pieces of paper formed part of the bankrupt estate. Accordingly, the Trustees had acquired the benefit of the privilege as successors in title to that property.ii) The privilege itself formed part of the bankrupt’s estate either because it was “property” within the definition in section 436(1) since it was an “interest … arising out of, or incidental to, property” or because it was a “power exercisable over or in respect of property” within section 283(4).
iii) In the case of documents in category (a), the proceedings had resulted in a judgment for damages in Mr Shlosberg’s favour prior to the bankruptcy. The judgment debt owed to Mr Shlosberg was property within section 436(1). Accordingly, the Trustees had acquired the benefit of the privilege as successors in title to that property.
iv) In the case of documents in categories (b) and (c), prior to the bankruptcy, the privilege related to an “obligation” of Mr Shlosberg’s, namely the judgment in favour of Avonwick. That obligation had formed part of the bankrupt’s estate since it was property within section 436(1). Accordingly, the Trustees had acquired the benefit of the privilege as successors in title to that property.

    1. At one stage I thought that the Respondents were also advancing a fifth argument, namely that the Trustees were successors in title to Mr Shlosberg in a broad sense, but this was expressly disavowed by counsel for the Respondents.

Mr Shlosberg’s response in summary

    1. Counsel for Mr Shlosberg accepted that, where title to property passes to a trustee in bankruptcy as part of the bankrupt’s estate, then the benefit of privilege in documents recording the requesting and the giving of legal advice relating to, or documents created for the dominant purpose of proceedings concerning, that property passes to the trustee. He submitted, however, that this principle only applied where there was some property other than the documents recording the privileged information. He also submitted that privilege was neither property within section 436(1) nor a power exercisable over, or in respect of, property; or, if it was, the privilege was personal to Mr Shlosberg. Finally, he submitted that the High Court judgment was not property within section 436(1). Although he did not concede that the County Court judgment was property within section 436(1), he did not advance any argument to the contrary.

The authorities on privilege

    1. I was referred to a number of authorities on the devolution of privilege, particularly in the context of bankruptcy. I shall consider these in chronological order.
    2. In Crescent Farm (Sidcup) Sports Ltd v Sterling Offices Ltd [1972] Ch 553 the plaintiff had sold some land to the first defendant on terms that the plaintiff had an option to re-purchase the land in certain circumstances. The first defendant sold the land to the second defendant. Between contract and conveyance, the first defendant’s solicitors sent the second defendant’s solicitors copies of their instructions to counsel and of counsel’s opinion dealing with the first defendant’s title and the ability of the first defendant to sell to the second defendant. The plaintiff brought proceedings against the defendants for breach of contract, interference with contract and conspiracy, and sought disclosure of the instructions and opinion. Goff J held that the second defendant could assert privilege as it had received the documents as the first defendant’s successor in title to the land, and it was immaterial that it had received them prior to completion. He stated the applicable principle at 562F-G as follows:

“… in my judgment it is clearly established that legal professional privilege of a predecessor in title does enure for the benefit of his successor. This is so stated in Halsbury’s Laws of England, 3rd ed., vol. 12 (1955), pp. 42 and 49, and in my judgment correctly so. The point was first clearly settled in Minet v. Morgan (1873) 8 Ch.App. 361. It is unequivocally expressed in the second part of the headnote. The judgment does not say so quite specifically but, in my view, when analysed the case clearly so decided.”

For convenience I shall refer to this principle as “the Crescent Farm principle”.

    1. In Re Konigsberg [1989] 1 WLR 1257 a husband and wife had transferred the matrimonial home from their joint names into the wife’s sole name at a time when the husband was in financial difficulties. The wife discharged the mortgage which was in the husband’s sole name and discharged other debts of his. Subsequently the husband was made bankrupt and his trustee sought a declaration that the transfer of the matrimonial home was a voluntary settlement within section 42 of the Bankruptcy Act 1914 and void as against him. The wife opposed the application and relied on a letter from the solicitor instructed on the sale of the home. The trustee served an affidavit from the solicitor giving an account of his instructions. The wife applied to exclude the affidavit on the ground of privilege. Peter Gibson J rejected the application on two grounds, of which the second is relevant for present purposes. This was that the husband and wife had jointly retained the solicitor in relation to the transfer and that the husband’s entitlement to privilege had devolved on to the trustee. Accordingly, the wife could not assert the privilege against the trustee.
    2. The following passage from Peter Gibson J’s judgment at 1266C-1267F merits quotation in full:

“Mr. Lambie did not challenge the general proposition as applicable were the bankrupt to be suing Mrs Konigsberg. But, as he rightly pointed out, the crucial question is whether the trustee can be said to stand in the shoes of the bankrupt for the purpose of the rule or whether the trustee is to be treated as a third party. He submitted that the trustee was simply a third party and that one joint client, Mrs Konigsberg, could insist on the maintenance of the privilege (to the extent that she had not waived it) even if the other joint client was prepared to waive it. Rochefoucauld v. Boustead (1897) 65 L.J. Ch. 794 was cited as an illustration of that situation.

The trustee is no ordinary third party. In him are automatically vested all the assets of the bankrupt divisible among his creditors including the right to the property of the bankrupt transferred by a settlement voidable under section 42 of the 1914 Act. A successor in title to property succeeds to and is entitled to assert the privilege of a predecessor in title and so stands in the predecessor’s shoes to that extent (see Crescent Farm (Sidcup) Sports Ltd v. Sterling Offices Ltd [1972] Ch. 553) and so stands in the predecessor’s shoes to that extent. In Williams and Muir Hunter on Bankruptcy, 19th ed. (1979), p. 117, in relation to the examination of a solicitor under section 25 of the Act of 1914 it is said:

‘The solicitor’s position varies according to whether he is asked for information, or examined, as solicitor to the bankrupt or to some other person. In the case of the bankrupt, the relevant right of privilege must, over a great part (though not the whole) of its range, belong to and be exercisable by the trustee, against whom in that area privilege cannot be pleaded.’

The distinction that is drawn is between privilege relating to the bankrupt’s property divisible among his creditors on the one hand and to property not so divisible or to matters personal to the bankrupt on the other. Further the Law Society in 1970 promulgated to its members a ruling in relation to legal privilege of a bankrupt and that ruling is set out in Williams and Muir Hunter on Bankruptcy, 19th ed. (1979), pp. 873–876, and is still current. It includes:

‘(f) If the advice sought from or given by the solicitor related solely to some particular item of property or right of the client which as the result of his adjudication in bankruptcy is vested in the trustee, the benefit of the privilege would have passed to the trustee and privilege may not be a ground for refusing to disclose the advice to the trustee.’

Mr. Walker also referred me to sections 22 and 154 of the Act of 1914 which require the bankrupt to assist the trustee with information and documents relating to the property and disposals of the bankrupt. The former section may be inapplicable, as Mr. Lambie pointed out, because of the transfer in 1985, but he accepted the bankrupt came under an obligation under the latter section. He further accepted that the relevant privilege of the bankrupt had devolved on to the trustee. However, he drew my attention to the fact that under section 311(1) of the Insolvency Act 1986, otherwise largely reproducing section 48 of the Act of 1914, it is expressly stated that the books, papers and other records relating to the bankrupt’s estate or affairs, of which it is the duty of the trustee to take possession include any which would be privileged from disclosure in any proceedings. He submitted that that showed that prior to that enactment the trustee did not have that duty. In the absence of any earlier judicial decision on the point, that is not a safe conclusion to draw; the words could have been inserted for the avoidance of doubt. But in any event a new duty does not entail that the trustee did not previously have the right to obtain such privileged material when it affected the property of the bankrupt divisible among creditors. Mr. Lambie also referred me to the fact that the trustee is by section 48(2) of the Act of 1914 placed in the position of a receiver for the purposes of acquiring and retaining the property of the bankrupt. But I have already pointed out that the bankrupt’s property automatically vests in the trustee and I do not see how this provision helps to answer the question whether for the purpose of the rule in Shore v. Bedford, 5 M. & G. 271, the trustee is to be treated as a third party or as standing in the shoes of the bankrupt.

Important and desirable though I recognise it is to maintain the principle of legal professional privilege I can see no sufficient reason to treat the trustee as a third party for that purpose. The rule recognises that joint clients cannot maintain privilege against each other and as the privilege of the bankrupt has devolved onto the trustee who is entitled to obtain the privileged information from the bankrupt, in my judgment it is appropriate to treat the trustees as being in the shoes of the bankrupt for the purpose of privilege in proceedings against the joint client. It would be very odd if the trustee, entitled as he is to, and possessing the information, cannot use it in the performance of his duties in seeking to recover the bankrupt’s property.”

    1. It is common ground that in this passage Peter Gibson J based his decision upon the Crescent Farm principle, the relevant property being the husband’s interest in the matrimonial home. As counsel for the Respondents pointed out, the Crescent Farm principle was sufficient to deal with the issue in that case. Whether for that reason or not, it does not appear that any argument was advanced based on the definition of property in section 436(1) or based on section 283(4).
    2. In Re Cook [1999] BPIR 881 the Serious Fraud Office was investigating the bankrupt’s affairs. The bankrupt’s trustee authorised the bankrupt’s former solicitor to give every assistance to the SFO and to provide it with all relevant documents, but did not in terms waive privilege as the SFO had requested. The SFO served a notice on the solicitor under section 2 of the Criminal Justice Act 1987 requiring him to answer questions and furnish information. The bankrupt threatened proceedings against the solicitor if he disclosed privileged information. The solicitor applied to the court for directions. Stanley Burnton QC sitting as a deputy judge of this Court held that the trustee’s letter of authority constituted a waiver of privilege by the trustee in whom the benefit of the privilege had vested. At 884 he said this:

“As to the question whether the trustee had power to waive privilege, the law is I think clear. The power and the right to waive legal professional privilege in relation to the estate and affairs of a bankrupt pass to his or her trustee in the same way that his assets and the right to possession of the books papers and other records of the bankrupt relating to his or her estate and affairs pass to the trustee under s 311 of the Insolvency Act 1986: see Re Konigsberg [1989] 1 WLR 1257 and R v Molloy [1997] 2 Cr App R 283. It does not follow that the trustee has power to waive privilege in relation to matters which do not concern the estate or affairs of the bankrupt, such as a prosecution for assault which is not relevant to his or her assets, liabilities or financial transactions. For present purposes it is unnecessary and undesirable to seek to define the extent of the trustee’s power to waive privilege. The waiver contained in the letter of 17 September 1997 relates only to the affairs of the bankrupt, which clearly means his financial affairs, and is a waiver which it was competent of the trustee to give.”

    1. I would comment on this reasoning as follows. First, it is not clear to me what Mr Burnton QC meant by saying that privilege passes to the trustee “in the same way that his assets and the right to possession of the books papers and other records of the bankrupt relating to his or her estate and affairs pass to the trustee under s 311 of the Insolvency Act 1986”. The bankrupt’s assets pass to the trustee by virtue of section 306(1), not section 311(1). Section 311(1) requires (and thereby implicitly empowers) the trustee to take possession of the bankrupt’s documents, including any which would be privileged, but it does not transfer anything to the trustee. Secondly, R v Molloy is not directly in point, since it was concerned with the devolution of privilege upon the death of the person entitled to the privilege to his personal representatives and then the person entitled to his estate (as to which, see further below). Thirdly, although Mr Burnton QC purported to apply Re Konigsberg, he did not identify the property to which the privileged information related. He appears to have regarded it as sufficient for this purpose that the privilege related to the bankrupt’s financial affairs. Fourthly, Mr Burnton QC appears to have accepted that privilege relating to personal matters would not vest in the trustee.
    2. In Re Omar [2000] BCC 434 the administrators of the estate of the late Dr Omar had commenced two actions against his former mistress Diana and others seeking to recover assets of the estate. The first action, in which Diana was legally represented, had proceeded to judgment. The second action was a claim for fraud against Diana and others which was ongoing. Shortly after the second action had been commenced, Diana had been made bankrupt on her own petition. An order had been made for Diana’s private examination. Diana’s trustee in bankruptcy had obtained possession of all the papers held by Diana’s previous solicitors. The trustee applied to the court for a direction that he be permitted to provide any documents he had received, including documents in respect of which Diana claimed privilege, to the administrators for the purposes of (i) the private examination and (ii) the second action.
    3. On the application it appears that there were two issues which arose for decision. The first was whether the proposed uses of the documents, and in particular the use in the second action, was for the proper purposes of the bankruptcy. The second was whether the fraud exception to privilege applied. Jacob J answered both questions in the affirmative.
    4. Although Jacob J said (at 436D-E) that, pursuant to section 311(1), the trustee had taken possession of “papers in respect of which Diana claimed privilege, or more accurately, would have claimed privilege if they had not passed to the trustee”, and referred (at 438A-B) to “documents which, but for the bankruptcy, would be the subject of privilege”, I do not understand him to have decided that the benefit of the privilege had passed to the trustee. On the contrary, he seems to have proceeded on the basis that, although it was no answer to the trustee’s claim for possession of the documents, Diana would continue to be entitled to maintain her privilege, and in particular to do so in the second action, unless the fraud exception applied. He expressed his conclusion at 440B as follows:

“Thus, if the matter had stood as simply between the administrators and Diana, I would have required disclosure. That being so, there is no reason for the court to say that the trustee should not do that which he thinks is best in the administration of his office.”

For completeness, I note that there is no reference in the judgment to either Re Kongisberg or Re Cook.

    1. In Surface Technology plc v Young [2002] FSR 25 Mr Young was an inventor who had obtained a patent. He had set up two companies to exploit his invention, Ultraseal Guernsey and Ultraseal UK. Administrative receivers were appointed in respect of Ultraseal UK by its bank. The receivers sold the business and assets of Ultraseal UK to Norman Hay who sold them to Surface Technology. Thereafter a dispute arose as the ownership of intellectual property rights relating to the business which had been carried on by Ultraseal UK. This led to Surface Technology and Norman Hay commencing three sets of proceedings against Mr Young, Ultraseal Guernsey and another company which were consolidated. The defendants instructed a firm of solicitors which specialised in intellectual property work and which had previously acted for Ultraseal UK and other members of the same group from 1988 to 1996. During that period the solicitors had opened 31 files. 16 had been destroyed and two could not be located. Of the remaining 13 files, the solicitors considered that they had been instructed solely by Ultraseal Guernsey in relation to one matter, solely by Ultraseal UK in relation to five matters and jointly by Ultraseal Guernsey and Ultraseal UK in relation to seven matters.
    2. The claimants applied for an order that the solicitors should cease acting for the defendants. The claimants contended that, as successors in title to Ultraseal UK, they were entitled to the benefit of the privilege attaching to the files, solely so where Ultraseal UK was the sole client and jointly so where Ultraseal UK and Ultraseal Guernsey were joint clients. They also contended that they were entitled to the benefit of obligations of confidence on the same basis. During the hearing it was agreed that the judge would not decide whether or not the solicitors should cease to act, but rather would determine the claimants’ claims to privilege and confidentiality, which would enable the solicitors to consider their position.
    3. Pumfrey J held that, under the agreement between the receivers and Norman Hay, the claimants had acquired all the assets of Ultraseal UK apart from certain cash assets, and in particular the goodwill and intellectual property. On that basis, he upheld the claimants’ claims to privilege, applyingCrescent Farm and Re Konigsberg. He stated at [19] that the former case was authority for the proposition that:

“.. the successor in title to identified property is entitled to assert the privilege of the vendor at least in respect of documents prepared for the purpose of obtaining legal advice in relation to the property transferred and in relation to the advice given.”

He went on at [22] to say that this principle had been followed in the latter case, and added at [24]:

“It seems to me that in this passage [sc. the final paragraph quoted above] Peter Gibson J. is not basing his decision on the right of the trustee to obtain the information. What this passage does is to point to the anomaly which would arise if the trustee could call for the privileged information, which he undoubtedly could, but could not assert the privilege.”

    1. Deloitte & Touche Inc v Bennett Jones Verchere (2002) 206 DLR (4th) 280 is a decision of the Court of Appeal of Alberta, Canada. The case concerned a company called Bre-X which was in bankruptcy. The applicant was the company’s trustee in bankruptcy. The respondent was a firm of lawyers which had acted as corporate and securities counsel to the company prior to its bankruptcy. The applicant applied for a declaration that it had the power to waive the company’s privilege in respect of advice given by the respondent. The applicant contended that the information was very important to the administration of the estate. The application was dismissed by the judge and the applicant’s appeal was dismissed.
    2. The leading judgment was given by Conrad JA, with whom Wittmann JA agreed. I would summarise her reasoning as follows. First, she considered the nature of solicitor-client privilege, noting that it was a fundamental civil and legal right. In this part of her judgment, she held (at [22]) that the applicant’s position was not analogous to that of a successor in title to the client where the client dies.
    3. Secondly, she considered the powers of a trustee in bankruptcy and noted that there was no provision in the Canadian Bankruptcy and Insolvency Act which empowered the trustee to waive the bankrupt’s privilege. In this regard, she drew a contrast between the Canadian legislation and section 311(1) of the 1986 Act:

“26. [Section 311(1)] expressly permits the production of privilege documents, unlike the Canadian statute where neither production of privileged documents nor waiver of privilege is mentioned. A cursory review of Halsbury’s Laws of England, vol. 3(1), 4th ed (London: Butterworths, 1980) and vol 3(2) 4th ed (London: Butterworths, 1980), and British case authorities reveals that even where the privileged document is expressly producible notwithstanding the privilege, the provision merely entitles the trustee to take possession. The protection afforded by solicitor-client privilege, however, is not displaced and the section does not confer any authority to waive the privilege upon the trustee.

27. The British legislation may be contrasted with comparable American provision. The Bankruptcy Code, 11 U.S.C. § 542(e) provides:

542(e) Subject to any applicable privilege, after notice and a hearing, the court may order an attorney, accountant, or other person that holds recorded information, including books, documents, records, and papers, relating to the debtor’s property or financial affairs, to turn over or disclose such recorded information to the trustee.

The American legislation recognizes that the privilege protects communications from disclosure and cannot be waived by the trustee.

28. The Canadian legislation is silent regarding solicitor-client privilege, and thus it is necessary to determine whether the documents must be produced notwithstanding the privilege. Keeping in mind the importance and purpose of the privilege, it is my view that, absent specific language such as that contained in the British statute, once the privilege attaches disclosure of the communication cannot be compelled. … “

    1. Thirdly, she held that the bankrupt’s privilege did not pass to the trustee:

“30. … In addition to excluding any reference to solicitor-client privilege, Parliament does not confer all of the bankrupt’s property and personal rights in the trustee. Section 2(1) of the BIA defines ‘property’ to include:

Money, goods, things in action, land and every description of property, whether real or personal, legal or equitable, and whether situated in Canada or elsewhere, and includes obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, in, arising out of or incident to property;

The ‘property’ that vests in the trustee includes almost ‘every conceivable type of asset’: Chetty v Burlingham Associates Inc(1995), 121 DLR (4th) 297 (Sask. C.A.) at 300. Some types of property, however, are specifically excluded (e.g. property held in trust for another person, pursuant to s. 67(1)) or do not fall within the confines of the definition.

31. Notably, personal property and personal rights are very different and the cases interpreting the BIA distinguish between the two. For example, ‘things in action’, such as a cause of action for custody or divorce, are matters personal to the bankrupt and are not captured by s. 2(1) of the BIA: Gano v Alberta Motor Association Insurance Co (1997), 209 A.R. 118 (Q.B.). Tax refunds for the support of disabled persons are the ‘property of bankrupt’: Re Neufeld (Bankrupt) (1993), 144 A.R. 182 (Q.B.). Nor does a cause of action for damage to the reputation of a bankrupt vest in a trustee: Egan v Grayson (1956), 8 D.L.R. (2d) 15 (Alta. S.C.); Rahall v McLennan(1996), 190 A.R. 183 (Q.B.). In my view, solicitor-client privilege is a personal right, at least as fundamental and individual as damages to reputation, which falls into a category of interests which are not transferred to or conferred upon a trustee by the BIA. As noted by Yoine Goldstein in ‘Bankruptcy as it Affects Third Parties: Some Aspects’ [1985] Meredith Mem. Lect. 198 at 227: ‘I can think of nothing more attached to the person and nothing less pecuniary than a communication to a person bound by professional secrecy.

32. The distinction between property rights and personal rights, such as privilege, however, is far from absolute. For example, the BIA dictates that trustees take possession of all property of the trustee, including books, records and documents. The trustee argues that if a privileged communication has been reduced to writing (for example, in the form of an opinion letter) the tangible letter is property that must be produced. But the very essence of the solicitor-client privilege (the personal right of the bankrupt) protects the privileged communication from being communicated. …

33. Section 16 of the BIA and other related provisions are neither sufficiently broad nor explicit enough to empower the trustee to take possession of and use privileged communications, advice or opinions which may fall under the BIA’s definition of ‘property’. Certainly a privileged communication is not property divisible amongst creditors such as contemplated in s. 67. In short, while there may be a physical record or document which records the communication, the essence of the document is still the privileged communication, a personal right and not property contemplated by or falling under the BIA. The personal right of privilege attaches to the document and, in my view, that personal right, retained by the bankrupt, precludes disclosure of the communication to the trustee whatever form the communication takes. ..

35. In my view, there is no attempt in the legislation to displace the common law confidentiality rights enjoyed by a bankrupt with respect to its communications with solicitors. The privilege itself is not property under the BIA. Nor is the right to waive a power attaching to property divisible amongst creditors under s. 67. The essence of the privilege, whatever its form, is the confidential communication to which privilege attaches. An explicit delegation would be required in order for trustees to have a categorical right to waive privilege for bankrupts … “

    1. Fourthly, she held that it would not be justified to create an exception to privilege for trustees in bankruptcy. In this regard, she said:

“47. In my view, the fact disclosure is sought in a bankruptcy context, where creditors’ financial recovery might be enhanced by disclosure, is insignificant compared to the benefits derived from protection of a bankrupt’s solicitor-client privilege. Insolvent entities and persons in financial difficulty frequently need legal advice, perhaps even more so that those who enjoy financial stability. The ability of these individuals or corporations to obtain fully informed and reliable legal advice should not be compromised by threat of disclosure in the possible event of a bankruptcy. In my view, creditors may benefit more from the provision of good legal advice to persons on the brink of insolvency than they would from disclosure of solicitor-client communications between these debtors and their lawyers.

48. It is not helpful to simply say that in the public’s interest trustees obtain all information that will help maximize asset recovery without also recognizing the public interest in solicitor-client privilege. Frequently, contrary public interests may compete with the public interest in solicitor-client privilege, but most often, the public interest and in the rationale for solicitor-client privilege prevail. … “

    1. LoVecchio J agreed with the majority that a trustee did not have the power to waive the bankrupt’s privilege, but he held that a trustee did have the power to obtain from the bankrupt’s solicitor possession of all documents respecting the bankrupt’s assets and financial affairs even if they were privileged. In the context of dealing with the latter question, he commented on section 311(1) of the 1986 Act as follows (footnote omitted):

“88. This legislation highlights that we are really dealing with two different issues: the trustees obtaining physical possession of the file and waiver. I do not accept that merely because the trustee may obtain possession of the solicitor’s file, this alone would give the trustee the power to waive the privilege. That is a different issue …

89. In addition, even though the trustee is entitled to possession of these privileged documents, their use would be limited to the affairs and property of the bankrupt. The trustee must not use these documents to said third parties in any action against Bre-X or any other party.

90. Put simply, the focus of the trustee in examining the solicitor’s files, privileged and non-privileged, must be the property and affairs of the bankrupt. Further, the trustee, as an officer of the court, must strictly ensure the sanctity of the solicitor-client privilege of Bre-X. In other words, the trustee must not disclose the contents of these privileged communications to any third party. … “

I will return to the point made by LoVecchio J below.

    1. R v Dunwoody [2004] QCA 413 is a decision of the Supreme Court of Queensland, Australia. Mr Dunwoody was sued by his neighbours, who obtained judgment in their favour. He was represented during the proceedings by a firm of solicitors called Wallace & Wallace. During an adjournment of the trial, he took advice from another firm of solicitors called Cleary Hoare about restructuring his business. After judgment, he obtained advice about an appeal from a third firm of solicitors called MurphySchmidt. Shortly afterwards, Mr Dunwoody sold two properties and transferred the proceeds to an offshore trust. He was then made bankrupt on his own petition.
    2. Subsequently Mr Dunwoody’s trustees in bankruptcy required Mr Dunwoody, Wallace & Wallace, Cleary Hoare and MurphySchmidt to produce documents. Mr Dunwoody produced certain documents without claiming privilege, but did claim privilege in respect of one document (the “category 1A documents”). Wallace & Wallace and MurphySchmidt produced documents without claiming privilege or being instructed by Mr Dunwoody to waive privilege (the “category 1B documents”). Cleary Hoare refused to produce documents, claiming privilege (the “category 2 documents”).
    3. Mr Dunwoody was charged with disposing of property with intent to defraud creditors. During the committal proceedings Cleary Hoare produced the category 2 documents to the court in answer to a summons and Mr Dunwoody claimed privilege. The trial judge ruled that privilege in respect of the category 1A, 1B and 2 documents had been waived (or perhaps more accurately, in the case of the category 2 documents, that no privilege attached on the ground of fraud). Mr Dunwoody was convicted. He appealed on the ground that the judge was wrong in ruling that privilege had been waived.
    4. The leading judgment was given by McMurdo J. Before considering privilege in each of the three categories of documents, she first considered whether Mr Dunwoody had retained his entitlement to privilege following his bankruptcy. The prosecution conceded that privilege was personal to a bankrupt and did not pass to the trustee in bankruptcy. McMurdo P appears to have some doubts as to whether the concession was rightly made, and therefore she gave some consideration to the question. She briefly surveyed the position in England, New Zealand, Canada and the USA before turning to Australia. At [18] she interpreted Re Konigsberg (a decision she misattributed to Goff J) as establishing that in England a bankrupt’s entitlement to legal professional privilege vests in the trustee as the bankrupt’s successor in title. At [19] she referred to a number of Canadian authorities, but not Deloitte & Touche. At [24] she referred to a number of single judge decisions of the Federal Court of Australia which supported the prosecution’s concession. She expressed her conclusion at [25] as follows (footnote omitted):

“Whether legal professional privilege remains with the bankrupt is perhaps not beyond doubt. Legal professional privilege is essentially a concept personal to the bankrupt, it is not property. It can only be removed by statute where there are the clearest words or by necessary implication. I am not inclined to take a view contrary to that currently taken by Federal Court judges experienced in the bankruptcy jurisdiction, especially in the light of the respondent’s concession. Mr Dunwoody was not precluded from claiming legal professional privilege because of his bankruptcy.”

    1. Garvin Trustees Ltd v The Pension Regulator [2015] Pens LR 1 concerned the insolvency and pension scheme deficit of a company called Desmond & Sons Ltd which had entered into members’ voluntary liquidation and then been dissolved. The directors and controlling shareholders in the company at the time of its insolvency had been Denis Desmond, Annick Desmond and Donal Gordon. The Pensions Regulator had issued a contribution notice seeking contributions of £900,000 and £100,000 respectively by Mr Desmond and Mr Gordon to the pension scheme. Mr Desmond and Mr Gordon contended that they should not be required to contribute to the scheme, while the trustee of the scheme contended that they should be required to contribute greater amounts. The matter was referred to the Upper Tribunal, and directions were given for disclosure. Mr Gordon applied to the Upper Tribunal for a direction as to whether he was obliged to claim privilege over documents in his possession. Mr Gordon’s evidence was that, as the liquidation was nearing its conclusion, the liquidators had agreed to him taking possession of the company’s records, some of which were privileged, without imposing any conditions on such possession. The Regulator and the trustee contended that either the documents were not privileged, or the privilege had been waived, on various grounds, one of which was that the benefit of the privilege had vested in the Crown as bona vacantia and the Crown had waived the privilege. Mr and Mrs Desmond contended that the documents were privileged.
    2. The company had been registered in Northern Ireland. Article 605(1) of the Companies (Northern Ireland) Order 1986 provides:

“When a company is dissolved, all property and rights whatsoever vested in or held on trust for the company immediately before its dissolution (including leasehold property, but not including property held by the company on trust for another person) are deemed to bebona vacantia and –

(a) accordingly belong to the Crown, and

(b) vest and may be dealt with the same manner as other bona vacantia belonging to the Crown.”

    1. Tribunal Judge Timothy Herrington held at [36] that “the wording of Article 605 is sufficiently wide to include as bona vacantia vested in the Crown a right to assert legal professional privilege which still persisted at the time of the dissolution of the Company”. He went on to consider the Crown’s position in relation to the privilege, and in that context he observed:

“38. [The Crown’s] response [to an inquiry made by Mr Gordon’s solicitors] brings into clear relief the position of the Crown in relation to bona vacantia. Although it becomes both legal and beneficial owner of the property and rights concerned it is more akin to a custodian to whom assets are given for safekeeping. Like all custodians, it will not seek to act on its own initiative, save as it is permitted to do so by the legislation and it knows that it is free to dispose of property without repercussions if it decides to exercise that power. In relation to a right which is not capable of being turned to account, such as the right to privilege, it is clear that its policy is to do nothing, so the Crown will neither assert not waive the right. That is entirely consistent with the statutory scheme: the Crown has no power to act on behalf of the company concerned because the company no longer exists and [has] no right of its own to assert privilege. If any person has an interest in the right being asserted then the appropriate course is for an application to be made to restore the company to the register and then the person who is entitled to assert it can do so.

39. It is therefore clear that the Crown is not a successor in title to the Company in the same way that the executors of a deceased person’s estate are successors in title to the deceased and can, as the authorities show, assert any privilege which the deceased was entitled to maintain…. “

    1. As counsel for Mr Shlosberg pointed out, given that the company had ceased to exist, then its privilege had either to cease to exist or to be transferred to someone else. Furthermore, Article 605 expressly vests not only property, but also “all … rights whatsoever” in the Crown, whereas there is no comparable language in the 1986 Act vesting all the rights of the bankrupt in the trustee.

Commentaries

    1. Counsel for the Respondents relied upon a number of commentaries in support of his arguments. With respect to the learned authors of the commentaries, I do not propose to lengthen this judgment still further by considering the relevant passages in detail. I will confine myself to the following observations.
    2. First, the commentaries are replete with statements like “privilege may be claimed by a party or his successor in title”. As a general statement, this is unexceptionable; but it is not of great assistance without an explanation of what is meant by the expression “successor in title” in this context. As explained above, it is clearly established that the benefit of privilege in documents recording the requesting or giving of legal advice relating to, or created for the predominant purpose of litigation concerning, specific property passes together with title to that property. As Re Konigsberg shows, this principle applies in the context of bankruptcy. But one has to be careful when making statements like “a trustee in bankruptcy is a successor in title” for this purpose. A trustee certainly can be a successor in title for this purpose, but it does not necessarily follow that a trustee succeeds to the benefit of all privilege to which the bankrupt was entitled.
    3. Secondly, some of the commentaries appear to equate the position of a trustee in bankruptcy with that of the personal representatives of a deceased person. But in my view it cannot be assumed that they stand in the same position. Where a person has died, they cannot assert or waive privilege. The same is not true of a bankrupt. Furthermore, the personal representatives will normally acquire title to all of the deceased’s property. Thus, although it is well established that, generally speaking, the benefit of the deceased’s privilege will pass to the personal representatives, it may be possible to explain this through application of the Crescent Farm principle. Since the question was not explored in argument before me, I shall say no more about it.
    4. Thirdly, none of the commentaries to which I was referred considers all of the authorities which have been cited to me. (Conversely, the commentaries do refer to a number of authorities that were not cited, which I assume are less relevant.)
    5. Finally, I would add that it is apparent from Deloitte & Touche and Re Dunwoody that a number of academic articles have been written on the subject of privilege in the context of bankruptcy, but I was not referred to any of these.

General observations

    1. Before turning to consider the Respondents’ arguments in detail, I would make some general observations.
    2. As I see it, the starting point is section 311(1). This shows that, in enacting the 1986 Act, the legislature addressed its mind to the question of privilege. It did not provide that the bankrupt’s privilege should pass to his trustee, however. Rather, it provided that privilege is not a bar to the trustee’s exercise of his powers to obtain documents relating to the bankrupt’s estate or affairs. If anything, that suggests that the bankrupt may retain his privilege. As counsel for the Respondents pointed out, however, the trustee may take possession of documents belonging to a third party. Counsel for the Respondents suggested that it followed that the privilege may be that of a third party. That may be so, but the point does not arise in the present case and it is not necessary to decide whether it is correct.
    3. I agree with Peter Gibson J in Re Konigsberg that it appears to be implicit in section 311(1) that the trustee can use information contained in documents which he has taken possession of pursuant to section 311(1), including privileged documents, in the discharge of his statutory functions. I respectfully disagree with Pumfrey J in Surface Technology v Young that it would therefore be anomalous if the trustee could not assert (or waive) the privilege. I agree with LoVecchio J in Deloitte & Touche that there is a difference between using information contained in privileged documents otherwise than for the purpose of proceedings and using it for the purpose of proceedings.
    4. This takes me on to a more general question, which is the extent to which the trustee needs to be able to assert or waive the bankrupt’s privilege in order properly to discharge his duties. Counsel for the Respondents implied, even if he did not explicitly submit, that it was essential for the trustee to be able to do this. But comparison with the position in Canada and Australia as explained in Deloitte & Touche and Re Dunwoody suggests that this is not so. Furthermore, it should be borne in mind that, in this jurisdiction, the trustee will often be able to rely upon the Crescent Farmprinciple.

The Respondents’ first argument: successor in title to the pieces of paper

    1. The Respondent’s first argument is based on title to the property in the documents recording the privileged information i.e. the pieces of paper viewed as chattels. As discussed above, it is not disputed that, prior to the bankruptcy, Mr Shlosberg owned the documents. The Respondents contend that title to the documents vested in the Trustees as part of the bankrupt estate pursuant to section 306(1), and therefore the Trustees acquired the benefit of the privilege.
    2. I do not accept this argument. The argument involves treating the Crescent Farm principle as applicable to the property in the documents recording the privileged information. In my judgment it is clear both on principle and on the authorities that the Crescent Farm principle does not depend on acquisition by the successor in title of property in the documents recording the privileged information, but on acquisition by the successor in title of some other property to which the legal advice or litigation related.
    3. As a matter of principle, the right to exercise privilege cannot depend on ownership of the paper on which the privileged information is recorded. Thus a client can claim privilege even if the paper is owned by the solicitor. Conversely, the client does not lose privilege if the solicitor gives away, sells or destroys the file. It is not ownership of the paper which matters, but the right to control the dissemination and use of the information recorded on the paper. The client has that right even if the information is not recorded on paper at all, but only electronically.
    4. Furthermore, the Respondents’ contention would have the result that a trustee always acquired the benefit of privilege to which the bankrupt was entitled regardless of the subject matter of the advice or litigation. So even if the advice related to a claim for assault or defamation or divorce, the bankrupt’s privilege would transfer to the trustee. Counsel for the Respondents argued that this did not follow, because if the subject matter of the advice or litigation was “peculiarly personal” to the bankrupt, the privilege would not be transferred. But this argument depends on the nature of the information, not on ownership of the pieces of paper.
    5. The decision of Rattee J in Haig v Aitken supports this analysis. He was not, of course, dealing with a claim to privilege. But it is clear from his decision that the trustee does not acquire title to the bankrupt’s personal correspondence. Accordingly, whether the trustee acquires ownership of the bankrupt’s documents depends on the nature of the documents, and in particular the nature of the information recorded therein, and not upon the status of the documents as chattels.
    6. Furthermore, as counsel for Mr Shlosberg submitted, there is a strong analogy between the right of privacy which was under consideration in that case and privilege. Both are personal rights protected by the European Convention on Human Rights. Indeed, it appears that privilege is protected under Article 8 of the Convention as well as Article 6: see Foxley v United Kingdom (2001) 31 EHRR 25.
    7. Turning to the authorities on privilege, neither Crescent Farm nor Re Konigsberg nor Surface Technology were decided upon the basis of the ownership of the documents. Rather, they were decided upon the basis of the ownership of the property to which the advice related. As discussed above, the precise basis of the decision in Re Cook is unclear, but it does not appear to have been based on ownership of the documents. Nor was Re Omar decided upon that basis. Although the Crescent Farm principle does not appear to have been considered in either Deloitte & Touche or Re Dunwoody, I consider that the reasoning in those decisions is inconsistent with the benefit of privilege depending on ownership of the documents. Finally, Garvin Trustees was based upon the terms of Article 605.
    8. Accordingly, I conclude that the Trustees did not acquire the benefit of the privilege as a result of acquiring title to the documents recording the privileged information. I incline to the view that they did not even acquire title to those documents; but since that issue does not arise, it is not necessary for me to reach a conclusion with respect to it.

The Respondents’ second argument: privilege is either property within s 436(1) or a power over property within s 283(4)

    1. The Respondents’ second argument is that the benefit of the privilege vested in the Trustees because privilege is itself either property within section 436(1) or a power over, or in respect of, property within s 283(4).
    2. The first way of putting this argument focuses upon the words “every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property” in section 436(1). Counsel for the Respondents submitted that privilege was an interest arising out of, or incidental to property, the property in question being the documents recording the privileged information.
    3. Counsel for Mr Shlosberg submitted that privilege was not an “interest” within the meaning of section 436(1). It is therefore necessary to consider the authorities on the meaning of “interest” in section 436(1). Again, I shall consider them in chronological order.
    4. In Bristol Airport the Court of Appeal held that a lease of an aircraft was an interest arising out of or incidental to the aircraft. Although the lease was merely a contract, that contract was a specifically enforceable one, giving the lessee an equitable right in the aircraft: see Browne-Wilkinson V-C at 759E-G.
    5. In Re Rae Warner J held, after considerable hesitation, that the phrase “every description of interest” included an interest which was not enforceable in a court of law, but which was nonetheless marketable and so capable of being turned into money, because the words were fairly capable of being construed in that way and to do so would give effect to, rather than frustrate, the statutory purpose identified in the passage quoted in paragraph 58 above: see 113D-G. Accordingly, he held that licences under the Sea Fish (Conservation) Act 1967 were property within section 436(1).
    6. In Re Hemming [2008] EWHC 2731 (Ch), [2009] Ch 313 Richard Snowden QC sitting as a deputy High Court Judge (as he then was) held that a residuary legatee’s composite right to compel due administration of the estate and to have the residue (if any) paid to him as and when the administration was complete was property within section 436(1) action because it was a chose in action. In the alternative, he held that the residuary legatee’s interest in the assets which would form the residuary estate was an interest within the statutory definition because it gave the legatee the right (albeit that the precise nature of that right was unclear) to receive the residue as and when ascertained and it was incidental to property which the legatee owned, namely the chose in action consisting in the right to compel administration of the estate: see [62].
    7. In the light of these authorities, I accept the submission of counsel for Mr Shlosberg that privilege is not an “interest” within the meaning of section 436(1). Although privilege is enforceable in a court of law, its only effect is to enable the beneficiary of the privilege to resist compulsory disclosure of information in proceedings. 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.
    8. The Respondents’ second way of putting the argument focuses upon the words “property, in relation to a bankrupt, include[s] … any power exercisable by him over or in respect of property”. Counsel for the Respondents submitted that privilege was a power exercisable over, or in respect of, property, the property in question again being the documents recording the privileged information.
    9. Counsel for Mr Shlosberg submitted that privilege was not a power exercisable over, or in respect of, property within the meaning of section 283(4).
    10. I was not referred to any authority on the interpretation of section 283(4). Accordingly, I must construe it without the benefit of such guidance, but in accordance with the statutory context and purpose. It seems to me that the purpose of section 283(4) is to ensure that the trustee has the same powers in respect of property forming part of the bankrupt’s estate as the bankrupt did, and thereby to ensure that the trustee is in as good a position as possible to realise such property and to distribute the proceeds amongst the creditors.
    11. In the context of disclosure in proceedings, privilege can be described as a power exercisable over, or in respect of, documents, but even in that context it is not a power over, or in respect of, documents as chattels, but a power exercisable over the information that they contain. Privilege is not a power which would assist the trustee to realise the value of the documents recording the privileged information or to distribute the proceeds. Accordingly, I accept the submission of counsel for Mr Shlosberg that privilege is not a power exercisable over, or in respect of, property within the meaning of section 283(4).
    12. Counsel for Mr Shlosberg also submitted in the alternative that, even if privilege would otherwise amount to property within section 436(1), or a power over property within section 283(4), it was excluded from the ambit of those provisions by the exception for property which was peculiarly personal to the bankrupt discussed above. He relied in support of this submission on Deloitte & Touche and, to a lesser extent, Re Dunwoody. (As he accepted, however, this is subject to the operation of the Crescent Farm principle as in Re Konigsberg.)
    13. Counsel for the Respondents submitted that the exception for property which was peculiarly personal to the bankruptcy was only applicable where the subject-matter of the advice or litigation was peculiarly personal to the bankrupt. Thus the exception would apply where the advice or litigation concerned, say, a claim for assault, defamation or divorce, but not where it concerned the bankrupt’s financial affairs.
    14. If it was necessary to do so, I would hold that privilege was peculiarly personal to the bankrupt and thus excluded from section 283(1) and (4). I consider that the reasoning of Conrad JA on this point is persuasive (save that, as discussed above, it is clear that, at least in this jurisdiction, the trustee has the power to obtain possession of privileged documents). I do not accept that the exception would only apply where the subject matter of the litigation was peculiarly personal to the bankrupt. In my view the application of the exception would depend on the nature of the right of privilege, rather than upon the subject-matter of the advice or litigation to which the privilege relates.

The Respondents’ third argument: successor in title to the County Court judgment

    1. The Respondents’ third argument is based on the fact (which, as noted above, is not formally in evidence, but which counsel for Mr Shlosberg did not dispute) that the claim which was the subject of the documents in category (a) had resulted in a judgment for damages in favour of Mr Shlosberg prior to the date of the bankruptcy.
    2. Counsel for the Respondents accepted that the subject-matter of the litigation was peculiarly personal to Mr Shlosberg, but submitted that the judgment debt in favour of Mr Shlosberg was not peculiarly personal, and was property within section 436(1) which vested in the Trustees. In support of this submission, he relied upon the following passage in the judgment of Aldous LJ in Ord v Upton at 360B-C:

“… the parties agree that if at the time of the bankruptcy, the bankrupt had in his bank a sum which included money paid as damages for a libel, that sum would vest in his trustee because the right to the money formed part of his estate and therefore was available to pay off the bankrupt’s creditors. That was to be contrasted with an action personal to the bankrupt, such as a libel action, which was not settled before the end of the bankruptcy. In such circumstances the cause of action would remain with the bankrupt as would any damages awarded after discharge.”

    1. It can be seen that, in this passage, Aldous LJ is merely recording a point which was common ground between the parties. Counsel for Mr Shlosberg did not submit, however, that this statement of law was inaccurate.
    2. Given that the judgment vested in the Trustees, counsel for the Respondents submitted that it followed, applying the Crescent Farm principle, that privilege in the relevant documents also vested in the Trustees. I confess to some doubt as to whether this necessarily follows; but since counsel for Mr Shlosberg did not argue to the contrary, I will accept counsel for the Respondents’ submission.

The Respondents’ fourth argument: successor in title to the High Court judgment

    1. The Respondents’ fourth argument is based on the fact that the claim which was the subject of the documents in categories (b) and (c) had resulted in a judgment against Mr Shlosberg prior to the date of the bankruptcy. (Although there was an antecedent liability of Mr Shlosberg to Avonwick under the Guarantee, counsel for the Respondents rightly accepted that that had merged in the judgment, and thus it is the judgment which matters.)
    2. Counsel for the Respondents submitted that the judgment was an “obligation” within the meaning of section 436(1), and hence property which vested in the Trustees. Given that the judgment vested in the Trustees, counsel for the Respondents again submitted that it followed, applying theCrescent Farm principle, that privilege in the relevant documents also vested in the Trustees.
    3. Counsel for Mr Slosberg submitted that a judgment against the bankrupt was not property within section 436(1) since it was not an obligation owedto the bankrupt, but an obligation owed by the bankrupt.
    4. I was not referred to any authority on the interpretation of “obligation” in section 436(1). Accordingly, I must construe it without the benefit of such guidance, but in accordance with the statutory context and purpose. So far as the statutory purpose is concerned, I take that to be the purpose identified in the passage from Re Rae quoted in paragraph 58 above. As for the statutory context, counsel for the Respondents relied upon sections 315 and 382 of the 1986 as supporting the Respondents’ interpretation.
    5. Section 315 provides that the trustee may disclaim any “onerous property”. Section 315(2) defines “onerous property” for this purpose as follows:

“(a) any unprofitable contract, and

(b) any other property comprised in the bankrupt’s estate which is unsaleable or not readily saleable, or is such that it may give rise to a liability to pay money or perform any other onerous act.”

    1. In my judgment this does not assist the Respondents. All it shows is that a contract to which the bankrupt is a party is property within section 436(1). That is not surprising, since contractual rights can be realised for the benefit of creditors. It does not show that a contractual obligation of the bankrupt is an “obligation” within section 436(1). Still less does it show that a judgment against the bankrupt is an “obligation”.
    2. Section 382 deals with bankruptcy debts and liabilities. The details of the provisions do not matter. I accept that a judgment against the bankrupt is a liability for this purpose, and that therefore the creditors amongst whom the trustee must distribute the proceeds of realisation of the bankrupt’s estate include the judgment creditor. It does not follow that the judgment is an “obligation” within section 436(1).
    3. Returning to the statutory purpose, I cannot see how this would be served by interpreting section 436(1), and hence section 306(1), as extending to judgment debts against the bankrupt. They cannot be realised for the benefit of creditors.
    4. Accordingly, I do not accept the Respondent’s fourth argument.

Conclusion

    1. For the reasons given above, I accept the Respondents’ third argument, but not the first, second or fourth arguments. Accordingly, I conclude that the Trustees acquired the benefit of Mr Shlosberg’s privilege with respect to the category (a) documents, but not the category (b) or (c) documents.

Webinvest’s claim to privilege

    1. It is common ground that:

i) Fladgate were jointly instructed by Webinvest and Mr Shlosberg in relation to the Original Avonwick Proceedings and were effectively jointly instructed in relation to the insolvency proceedings which led up to the order of Peter Smith J dated 15 July 2015.
ii) The benefit of Webinvest’s privilege now vests in the Liquidators.
iii) Because the privilege is a joint one, Mr Shlosberg cannot assert the privilege against Webinvest (or now the Liquidators).
iv) A joint privilege can only be waived jointly by all the parties entitled to it, and not unilaterally by one of those parties. Thus Webinvest (nor now the Liquidators) cannot waive privilege to which Mr Shlosberg is jointly entitled without Mr Shlosberg’s consent.
Mr Shlosberg’s claim to confidentiality

    1. Having regard to my conclusion with respect to privilege, it is unnecessary to give separate consideration to Mr Shlosberg’s claim to confidentiality. Counsel for the Respondents accepted that the Trustees owed Mr Shlosberg a duty of confidence, but contended that it was a limited duty which could be relaxed or overridden in certain circumstances. Counsel for Mr Shlosberg did not dispute this, but took issue with counsel for the Respondents as to the circumstances in which this would be appropriate. It is not necessary for present purposes to consider the difference between them, which would involve consideration of authorities such as Re Esal Commodities Ltd (No 2) [1990] BCC 708.

Safeguards relied upon by the Respondents

    1. The Respondents rely upon a number of safeguards which they have put in place to protect Mr Shlosberg’s confidential information. These are as follows:

i) As noted above, the Trustees have engaged Moon Beever to advise in relation to conflicts of interest.ii) The Trustees have instructed Dechert that no information should be shared with Avonwick without the Trustees’ express agreement.
iii) The Trustees have stated that they will not provide documents to Avonwick unless they are satisfied that there is a proper purpose in doing so in the interests of the estate.
iv) Avonwick has released Dechert from any obligation to inform Avonwick about materials provided to Dechert by the Trustees.
v) Avonwick has agreed not to use any documents it receives in future from the Trustees for any claim against Mr Shlosberg without the permission of the Court.

Remedy

    1. Mr Shlosberg finds himself in a situation where a large quantity of documents which are subject to privilege to which he is entitled, albeit jointly with Webinvest (or now the Liquidators), are not only in the possession of, but also have been reviewed in detail by, the solicitors acting for an adverse party in litigation, namely Avonwick. Mr Shlosberg contends that, in those circumstances, the appropriate remedy is for Dechert to be ordered to cease acting for Avonwick. The Respondents contend that Mr Shlosberg is adequately protected by the safeguards which have been put in place as outlined above. In the alternative, the Respondents contend that Mr Shlosberg would be adequately protected by an injunction restraining misuse of the information in question.
    2. Counsel for the Respondents relied upon the following statement of principle by Lightman J in Re a Firm of Solicitors [1997] Ch 1 at 13:

“The grant of an injunction and the form of any injunction are discretionary, regard being had to the perceived threat to the client’s rights: see Lock International Plc. v. Beswick [1989] 1 W.L.R. 1268, 1281. Where there has been the previous relationship of solicitor and client and the solicitor at the date of his proposed new retainer possesses relevant confidential information, in the ordinary course the court will in my view grant an injunction restraining the solicitor acting, as in In re A Firm of Solicitors [1992] Q.B. 959. (The contrast in this respect between the court’s approach in the case of this confidential relationship and other confidential relationships is brought out by the judgment in G.D. Searle & Co. Ltd. v. Celltech Ltd. [1982] F.S.R. 92.) But, in the case where without any such previous relationship a party’s solicitor illegitimately becomes possessed of confidential information of the other party to the suit or dispute, in the ordinary course the court will merely grant an injunction restraining the solicitor making use of that information: it will not prohibit his continuing to act: see English & American Insurance Co. Ltd. v. Herbert Smith [1988] F.S.R. 232 and Goddard v. Nationwide Building Society [1987] Q.B. 670.”

  1. As I read this passage, Lightman J was setting out the relief which was normally likely to be appropriate in the two types of cases, but he was not suggesting that it could never be appropriate to grant an injunction to restrain the solicitor from acting in the second type of case. The exercise of the court’s discretion must depend upon all the relevant circumstances. Thus in Ablitt v Mills and Reeve (Times Law Reports, 25 October 1995) Blackburne J did grant an injunction to restrain solicitors from acting in a no previous relationship case. In that case the solicitors had received papers mistakenly returned to them by the clerk to counsel on the opposing side which included copies of counsel’s opinions, had appreciated the mistake and had nevertheless, on instructions from their client, proceeded to read the papers. In Stiedl v Enyo Law LLP [2011] EWHC 2649 (Comm), [2012] PNLR 4 at [42]-[43] Beatson J, as he then was, did not accept the submission that the ordinary course should only be departed from where there were “unusually powerful factors”. In Ford v Financial Services Authority [2012] EWHC 997 (Admin) at [36] Burnett J, as he then was, held that the starting point recognised in the authorities as a useful guide, but it was not a straightjacket or a substitute for an evaluation of all factors that might inform the exercise of discretion.
  2. In my assessment, the factors which are relevant to the exercise of the court’s discretion in the present case are as follows. First, there is the position of the parties. Avonwick is an adverse party to Mr Shlosberg in hostile litigation.
  3. Secondly, there is the nature of the claim. Avonwick’s claim against Mr Shlosberg is for unlawful means conspiracy. As noted above, it is common ground that this is akin to a claim for fraud, and accordingly a claim which will survive Mr Shlosberg’s discharge from bankruptcy.
  4. Thirdly, there is the quantity of documents involved: even excluding documents in category (a) and inter partes correspondence, there are over 44,000 pages.
  5. Fourthly, there is the fact that the documents have been reviewed in detail by Dechert over a substantial period of time.
  6. Fifthly, there is the fact that Dechert did not review the documents inadvertently, but deliberately. I do not suggest that Dechert acted otherwise than in good faith, but they proceeded upon an understanding of the law which I have held to be mistaken.
  7. Sixthly, as noted above, there has never been any attempt by Dechert to set up any kind of information barrier. On the contrary, the partner in charge of the litigation for Avonwick has led the review of the documents.
  8. Seventhly, I am concerned that on 13 March 2015 Dechert wrote to Enyo stating in effect that there was no prospect of Avonwick making any further claim against Mr Shlosberg, yet following Dechert’s review of the documents Avonwick applied to join Mr Shlosberg to the Conspiracy Claim. The Respondents’ evidence does not explain this volte face.
  9. Eighthly, there is the fact that it is clear that Avonwick wishes, if possible, to make use of the knowledge that Dechert have acquired from their review of the documents in the pursuit of its claim against Mr Shlosberg.
  10. Ninthly, I do not regard the safeguards which have been put in place by the Respondents as adequate protection for Mr Shlosberg. They simply do not address the key fact that the solicitors acting for Avonwick have already read a large quantity of Mr Shlosberg’s privileged documents and cannot put that knowledge out of their minds.
  11. Tenthly, requiring Avonwick to instruct new solicitors would be disruptive and expensive in addition to interfering with its entitlement to be represented by the solicitors of its choice. On the other hand, the Conspiracy Claim is at a relatively early stage.
  12. Eleventhly, there is the position of Webinvest. Counsel for the Respondents submitted that no practical purpose would be served by requiring Dechert to cease acting for Avonwick when they could continue acting for Webinvest. I do not accept this. Webinvest is a distinct party to Avonwick with a separate interest even though Avonwick is its major creditor.
  13. Taking all of these factors into consideration, I do not consider that Mr Shlosberg’s rights in respect of the privileged information would be adequately protected by granting an injunction restraining Dechert from using the privileged information unless a strict information barrier were created within Dechert and an entirely new team was assigned to act for Avonwick. The disruption and expense which this would cause Avonwick would be little short of the disruption and expense of instructing a different firm of solicitors, however, which is no doubt why the Respondents have not proposed it. In those circumstances, I have concluded that an injunction should be granted requiring Dechert to cease acting for Avonwick.
  14. Although, as noted above, Mr Shlosberg also sought an order requiring Dechert to cease acting for the Trustees, at present I do not consider that this is justified. The Trustees are not parties to the Conspiracy Claim. Moreover, by virtue of section 311(1) of the 1986 Act, Mr Shlosberg’s privilege is no bar to the Trustees taking possession of the documents in question to the extent that they relate to his estate or affairs. As discussed above, in so far the Trustees are entitled to take possession of the documents, it must follow that they are entitled to use the information contained in the documents in the discharge of their statutory duties. Since this aspect of the matter was not fully argued at the hearings, however, I will if necessary hear further argument on it.

Disclaimer:

The aforesaid is not legal advice and is not to be relied upon as such. No liability is accepted by the writer for any reliance placed on the same. 
If you have a specific query then you should seek independent legal advice on the same.

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