The Court ordered a law firm to stop acting for the main creditor of a bankrupt individual in circumstances where it had reviewed documents privileged to that individual. The law firm, which also acted for the trustees in bankruptcy, claimed that the privilege had transferred to the trustees such that the individual could no longer assert privilege over the materials. In Mikhail Shlosberg v Avonwick Holdings Ltd & ors [2016] EWHC 416 (Ch), Arnold J rejected this argument, holding that privilege will only be transferred where the legal advice is about property which forms part of the bankrupt's estate. The mere fact that the legal advice is stored in property (i.e. documents) that is part of the estate is not sufficient to transfer the privilege over the advice itself. 

The background to this judgment is complicated, involving various finance arrangements and business deals between Russian and Ukrainian businessmen and webs of companies under their control, and a protracted series of proceedings in the Chancery Division. For present purposes, it suffices to note the following:

A partner at Dechert LLP (Dechert) acted for:

(i) the trustees in bankruptcy for Mikhail Shlosberg (Mr Shlosberg);

(ii) the liquidators of Webinvest Ltd (Webinvest), a company of which Mr Shlosberg was the beneficial owner; and

(iii) Avonwick Holdings Ltd (Avonwick), which is the creditor for around 95% of the debts owed by both Mr Shlosberg and Webinvest.

Dechert was first retained to act for Avonwick, to seek statutory demands against both Mr Shlosberg and Webinvest in relation to a USD 100 million loan made by Avonwick to Webinvest. The loan was personally guaranteed by Mr Shlosberg. After judgment was obtained, Avonwick obtained a bankruptcy order and a winding up order against Mr Shlosberg and his company. Once appointed, the trustees in bankruptcy and liquidators then instructed Dechert to act for them too.

Mr Shlosberg brought this application seeking an order that Dechert should cease acting for Avonwick. The basis for the application was that Dechert had in its possession, and had reviewed, a large number of documents which were either privileged and confidential to Mr Shlosberg or privileged and confidential to Mr Shlosberg and Webinvest jointly.

These documents were relevant to a further claim for unlawful means conspiracy which Avonwick had commenced against Mr Shlosberg and others, on which Dechert was also instructed. As this claim had been issued after Mr Shlosberg had entered bankruptcy, Avonwick had successfully applied to lift the stay on new proceedings being brought against him. Further, because of the fraudulent nature of the claims being made against Mr Shlosberg, those claims would survive his eventual discharge from bankruptcy.

The respondents did not dispute that the documents in question were subject to legal professional privilege but contended that, on bankruptcy, the privilege in the documents had passed from Mr Shlosberg to the trustees in bankruptcy. The trustees had waived the privilege, allowing the documents to be passed onto Avonwick.

Privilege and personal insolvency

The respondents noted that, under the Insolvency Act 1986, the trustees in bankruptcy had acquired ownership of all of Mr Shlosberg's property (subject to certain specific exceptions that are not relevant for present purposes, such as clothes and other personal effects) at the date of bankruptcy. "Property" is widely defined under the 1986 Act and, the respondents contended, should include the privilege attaching to the documents in question as well as the documents themselves.

Arnold J rejected this argument, holding that privilege does not pass when title to property recording the privileged information is transferred to the trustee in bankruptcy. Rather, privilege would only transfer to the trustee where the legal advice in fact related to a particular piece of property which now formed part of the bankrupt estate held by the trustee. On the facts, the trustees had not acquired the privilege because they had not acquired title to any property to which the legal advice related.

The judge considered that this decision was right as a matter of principle. For instance, a client can claim privilege over information even if the paper recording hard copy advice or servers holding soft copy advice belong to the solicitors. Arnold J also considered that previous authorities supported this point, where emphasis had been placed by the court on the nature of the information held by documents rather than the status of the document itself. By way of example, in Haig v Aitken [2001] Ch 110, Rimer J held that a bankrupt's personal correspondence was excluded from the estate, because of their peculiarly personal nature, notwithstanding that they were chattels in the possession of the individual when entering bankruptcy. 

Privilege and corporate insolvency

The position on privilege is different in the corporate insolvency context and was common ground between the parties in this case. Nonetheless, for completeness, it is useful to summarise it here.

In a corporate insolvency process, unlike personal insolvency, property is not automatically transferred from the company to the insolvency officeholder. Rather, the liquidator or administrator takes over control of the company and therefore takes the benefit of the privilege already belonging to the company.

On the facts in this case, some of the documents held by Dechert were jointly privileged to Mr Shlosberg and Webinvest. Mr Shlosberg could not therefore assert privilege as against the liquidators. However, because the privilege was jointly held as between Mr Shlosberg and Webinvest, the liquidators could not waive the privilege and disclose the documents to Court without the consent of Mr Shlosberg (which was obviously not forthcoming).

The Court's discretion to order solicitors to cease to act due to their review of privileged information

Arnold J was satisfied that, in the circumstances, it was appropriate to order Dechert to cease to act for Avonwick. Among other things:

(i) Avonwick had an adverse position to Mr Shlosberg;

(ii) Avonwick's ongoing claim (for unlawful means conspiracy) would survive Mr Shlosberg's discharge from bankruptcy;

(iii) Dechert had reviewed the privileged documents in detail and had done so deliberately;

(iv) Avonwick had made it clear that it intended to use the information, if possible, in pursuing its conspiracy claim against Mr Shlosberg; and

(v) the cost and disruption from Avonwick having to instruct new solicitors would be a little more than the otherwise necessary cost and disruption of creating a strict information barrier with Dechert.

Comment

This case highlights an interesting interplay between privilege and the different forms of insolvency processes. At the heart of bankruptcy (ie personal insolvency) is a transfer of property from the bankrupt individual to the trustee in bankruptcy. This case has clarified the test for when privilege over legal advice will also be transferred. In contrast, in liquidations and administrations (ie corporate insolvency), there is no such transfer. The liquidator (or administrator) simply takes over control of the company, its assets and liabilities, and the benefit of any privileged legal advice which the company has received. 

One issue that seems not to have been raised before Arnold J – and one that is relevant to both bankruptcy and administration/liquidation – is that insolvency officeholders have duties to act in the interest of creditors as a whole. In some cases, it will not be in the interests of creditors as a whole for the insolvency officeholder to waive privilege over the legal advice given to an insolvent individual or company. In this case, even if the right to assert privilege over the legal advice had been transferred, it may not have been in the interests of creditors as a whole to waive privilege to facilitate a claim brought by one creditor to increase his share in the insolvent estate. However, there may have been some difficulty with Mr Shlosberg raising such a breach of duty argument in his defence because this duty was owed to creditors, not to himself. 

The other interesting point to come out of this case relates to the multiple retainers taken on by Dechert. While it is neither unusual nor necessarily objectionable for a single law firm to act both for the insolvency officeholder and a major creditor of the insolvent individual or company, this needs to be managed carefully. Consideration needs to be given at the point of instruction as to whether separate teams should act for each client and whether information barriers should be set up in case the interests of an insolvent estate and its main creditor were to diverge. The fact that Dechert did not take these steps seems to have weighed heavily on Arnold J in favour of ordering it to cease to act for Avonwick.

While the trustees in bankruptcy in this case had appointed independent solicitors to advise them on any issue of conflict, this did not take place early enough and, crucially, only after Dechert had taken possession and had reviewed the privileged material.

Permission to appeal has been sought.