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“Starting Point Is That The Files Are the Property Of The Company”

Overview Of Liquidator’s Right To The Company Solicitors Files

Liquidator’s Right To Solicitors Files flows from the case of Walker Morris v Khalastchi [2001] 1 BCLC.

This was an application by a firm of solicitors, Walker Morris seeking court direction as to whether or not it should release its files to the Liquidator, Mr Khalastchi and the terms for the same.

The files in question concerned transactions in relation to avoidance of Capital Gains Tax in respect of the company that had gone into Liquidation.

The correspondence between Walker Morris and Mr Khalastchi concerning his request for the solicitors’ files developed. Walker Morris fleshed out their concern that Mr Khalastchi had replaced the previous Liquidators at the instigation of HMRC and sought an undertaking from the Liquidator that he would not release the contents of the files to HMRC.

The Liquidator’s solicitors robustly told Walker Morris that the privilege was the Liquidator’s to exercise at his discretion, not for them to intervene.

The Court had this to say: Liquidator’s Right To Solicitors Files

I infer that the applicants’ only real concern is to do what they can for their existing clients to reduce the possibility that the Inland Revenue will finance proceedings by the Company for repayment of the dividend, with the aim of recovering from the proceeds of the action the capital gains tax which it believes to be due. This application is thus made to protect third parties against a possibly legitimate claim being made against them by the Company, and not to advance any legitimate interest of the applicants either as creditors or as officers of the Court.

(1) The starting point is that the files are the property of the Company, and the Liquidator is entitled to possession of them. The applicants have no right whatsoever to withhold them.

(2) A liquidator’s duty is to investigate the affairs of the Company, and there is an obvious and urgent need for him to investigate the capital gains tax situation. The applicants’ conduct has already resulted in delay of nearly a year. Mr Khalastchi’s initial request should have been answered much more quickly, and the documents should have been handed over to him so that he could get on which his investigations, with a request for an undertaking that he should disclose nothing to the Inland Revenue pending the decision of the Court on this application; if such a request had been refused, an application for an interim direction could have been made.

(3) It is for a liquidator to decide whether to make a voluntary disclosure of the Company’s documents, whether privileged or not, to third parties. If he needs guidance as to where his duty lies, he can apply to the Court for directions. Otherwise, there is no reason for the Court to interfere unless there is reason to fear that he proposes to act in a manner which is not in the Company’s interests or is otherwise improper.

(4) I can see no way, and Mr Moss has been unable to suggest any way, in which the Company’s interests could be harmed by the disclosure of documents in these files, whether subject to legal professional privilege or not, or of information derived from these documents. That is because the Company has no assets and the addition of another claim by the Inland Revenue, however large, therefore cannot damage its position or that of its existing creditors.

(5) However paradoxical this may seem, it may be for the benefit of the Company and its creditors that the Inland Revenue’s claim if valid should be assisted, so that it is worth its while to finance proceedings to recover the dividend and thereby produce a fund which is sufficient to enable the creditors (including the applicants) to recover all or part of their debts. In that situation, Mr Khalastchi might well consider it to be in the interests of the Company and the creditors to disclose documents including privileged documents to the Inland Revenue. Mr Moss criticises this as “attempted asset creation”, but it seems to me that Mr Moverley Smith’s response, that an asset-creating liquidator deserves a pat on the back, is correct.

(6) It is also possible that he may consider that he has a legal duty to disclose some of the documents (although probably not privileged documents) or that, if he does not, the Inland Revenue will be able to exercise its powers to obtain them so that to withhold them would cause needless trouble and expense.

(7) It being thus clear that there are circumstances in which Mr Khalastchi could properly disclose documents to the Inland Revenue, his refusal to give an undertaking not to do so without an order of the Court is in my view entirely reasonable. There is no reason whatsoever to disbelieve his statement that he will review them “with the utmost propriety” before deciding whom to consult and what action to take. There is no reason to apprehend impropriety; Mr Khalastchi is entitled to decide for himself whether he needs to ask the Court for directions.

it was submitted that there was a danger that by collusively admitting the Inland Revenue’s claim when it ought not to be admitted, Mr Khalastchi may manufacture a claim against the applicants’ clients. I can see no such danger. The applicants’ clients would not be bound by an admission by Mr Khalastchi. They would only be liable if proceedings brought against them were successful; they would have every opportunity in any such proceedings to contend that his Inland Revenue’s claim was invalid and should not have been admitted. In any event there is again no justification for assuming that there is any risk of Mr Khalastchi ad-mitting the Inland Revenue’s claim collusively or otherwise improperly.

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Disclaimer: Liquidator’s Right To Solicitors Files

This page: Liquidator’s Right To Solicitors Files is not legal advice and should not be relied upon as such. This article Liquidator’s Right To Solicitors Files is provided for information purposes only. You can contact us on the specific facts of your case to obtain relevant advice via a Free Initial Consultation.

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