Insolvency Forensic Discovery Recovery
Insolvency Forensic Discovery Recovery involves a combination of ownership and entitlement to information points to enable reconstruction of information for Liquidators, Administrators and Trustees in Bankruptcy.
The following is a series of short and snappy extracts from legislation and reported insolvency cases that can be selectively deployed in seeking to obtain information that an Insolvency Practitioner may need, to undertake his or her investigation duties to creditors.
The question is what information are you after and from whom? Starting from first principles, each of the sections below descends into a series of likely sources of information for Insolvency Practitioners who are seeking to reconstruct records and reconstitute knowledge so that they can administer the Insolvent Estate.
The ability to obtain information is split between rights available on ownership grounds and rights available on the basis of entitlement by other means.
The sources of information will likely be:
The ability to obtain information has been set out on the basis of the most likely and useful way to obtain the information but it is possible to rely upon grounds of entitlement in each case instead of ownership. However, where ownership rights are available they are likely to be a higher class of rights.
In seeking to obtain such records this toolkit will also consider how to potentially overcome the following conceivable obstacles:
The cornerstone the discovery process is Public Duty. This was notably set out in the case of Re J T Rhodes Ltd [1987] BCLC 77:
“Today we have no difficulty with the proposition that persons who have had what was perhaps no more than the misfortune to be involved in the affairs of an insolvent company owe a public duty to assist the liquidator to investigate the affairs of that company in the interests of creditors. This duty is particularly strong in the case of persons who were closely involved in the conduct of the company’s business. A liquidator comes to his task with no knowledge of the company’s affairs. The company’s books and papers are often inadequate to tell him the whole story. He will frequently need, and the public interest requires that he should have, the assistance of those who were involved in the conduct of its business.“
Company Records
Ownership
Insolvency Forensic Discovery Recovery:
- Section 234(2) of the Insolvency Act 1986 to obtain company records as it is property within the definition of Section 436 of the Insolvency Act 1986.
- Green v Chubb [2015] EWHC 221 (Ch): “As regards section 234 there is little or no argument that the court may order a person to deliver up books and records that belong to the company in question.”
Bankrupt’s Records
Insolvency Forensic Discovery Recovery:
Ownership
- Section 311 of the Insolvency Act 1986 to obtain the bankrupt’s financial records (including privileged documents) relating to the bankruptcy estate in his possession or under his control.
- Section 312 of the Insolvency Act 1986 to obtain the bankrupt’s financial records as they are property of the bankruptcy estate within the meaning in Section 283 of the Insolvency Act 1986 and Section 436 of the Insolvency Act 1986.
Entitlement
- Section 333 of the Insolvency Act 1986 is a bankrupt’s mandatory duty to cooperate with the Trustee in Bankruptcy.
Solicitors Files
Insolvency Forensic Discovery Recovery:
Ownership
- Walker Morris v Khalastchi [2001] 1 BCLC: “…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.”
- Joint files: Re Konigsberg (a bankrupt), ex parte the trustee v Konigsberg [1989] 3 All ER 289: “… joint clients cannot maintain privilege against each other…”
Entitlement
- Section 311(1) of the Insolvency Act 1986 to obtain privileged documents.
- Re Murjani (a bankrupt) [1996] 1 WLR 1498: “The availability of legal professional privilege in case of an order against a solicitor in respect of matters properly within the ambit of a section 366 order is accordingly circumscribed: it cannot extend to anything which the client can himself lawfully be required to reveal.”
- Hooper v Duncan Lewis (Solicitors) Ltd & Ors [2010] BPIR 591 – in Hooper it was held that the right to assert privilege was not the solicitors but that of the client.
Accountants Files
Insolvency Forensic Discovery Recovery:
Ownership
- Fairstar Heavy Transport NV v Adkins & Anor [2013] EWCA Civ 886: “…it is a legal incident of that relationship that a principal is entitled to require production by the agent of documents relating to the affairs of the principal”
- Chantrey Martin (a firm) v Martin [1953] 2 Q.B. 286: “In Leicestershire County Council v. Michael Faraday & Partners Ld.8 MacKinnon L.J. distinguished that case from cases such as Gibbon v. Pease9 in these words: “If an agent brings into existence certain documents while in the employment of his principal, they are the principal’s documents and the principal can claim that the agent should hand them over.””
Entitlement
- Section 235(3) of the Insolvency Act 1986 entitles a corporate insolvency office-holder (Liquidator or Administrator) to the cooperation of certain persons who have been employed under a contract for services.
- Section 236 of the Insolvency Act 1986 enables a corporate insolvency office-holder (Liquidator or Administrator) to obtain information reasonably required.
- Section 366 of the Insolvency Act 1986 enables a Trustee in Bankruptcy to obtain information reasonably required concerning a Bankruptcy Estate.
Bank Records
Entitlement
- There is usually little argument that bank records such as bank statements and source documents will be provided under the statutory powers arising from Section 236 of the Insolvency Act 1986 in the case of Liquidations and Administrations.
- There is usually little argument that bank records such as bank statements and source documents will be provided under the statutory powers arising from Section 366 of the Insolvency Act 1986 in the case of Bankruptcy.
Auditors Files
Entitlement
- Re British & Commonwealth Holdings Plc (Nos. 1 and 2) [1992] Ch. 342: “Buckley J. in In re Rolls Razor Ltd. [1968] 3 All E.R. 698, 700, in a passage cited by Slade J. in In re Castle New Homes Ltd. [1979] 1 W.L.R. 1075, 1086, and specifically approved by this court in In re Esal (Commodities) Ltd. [1989] B.C.L.C. 59, 64, 70, said: “The powers conferred by section 268 are powers directed to enabling the court to help a liquidator to discover the truth of the circumstances connected with the affairs of the company, information of trading, dealings, and so forth, in order that the liquidator may be able, as effectively as possible and, I think, with as little expense as possible and with as much expedition as possible, to complete his function as liquidator, to put the affairs of the company in order and to carry out the liquidation in all its various aspects, including, of course, the getting in of any assets of the company available in the liquidation.””
HM Revenue & Customs Files
Entitlement
- Section 18 of Commissioners for Revenue and Customs Act 2005 that permits disclosure to the taxpayer with consent.
- Section 182 of the Finance Act 1989 that permits disclosure with taxpayer consent.
Costs
- Re Harvest Finance Ltd (In Liquidation); Jackson and another v Cannons Law Practice LLP and others [2014] EWHC 4237 (Ch): “The existence of such a duty is potentially incompatible with the existence of an order to pay the costs of compliance. Rule 9.6(4), however, provides for payment of travelling expenses and“other costs falling upon him … at the court’s discretion””.
- Hunt v Katz & Ors [2017] EWHC 2756 (Ch): “Mr Tucker referred me to the decision of Registrar Jones in the case of Re Harvest Finance Ltd [2014] EWHC 4237 (Ch) as to the provision for the payment of the costs of compliance with a s.236 order. In that case, reference had been made to the decision of Vinelott J in the earlier case of Re Cloverbay Ltd [1989] BCLC 724. At para.30 the Registrar had observed that Vinelott J had made it plain that the court would only exercise its power to make such a conditional order in very exceptional circumstances.”
Data Protection & GDPR
- Exemptions generally will likely apply to Insolvency Practitioners by virtue of paragraph 5 of Schedule 2 of the Data Protection Act 2018.
The purpose of this page is to enable the stakeholders of the insolvency process to have transparency of the powers and rights of Insolvency Practitioners to obtain information so that they can undertake their role as Liquidator, Administrator or Trustee in Bankruptcy of an Insolvent Estate. It is not however legal advice and should not be relied upon as such and no liability is accepted in relation to any reliance placed upon the aforesaid.
