English High Court holds that alleged breaches of a director’s statutory duties can engage the ‘iniquity exception’, which disapplies legal professional privilege under certain conditions.

In Barrowfen Properties v Girish Dahyanhai Patel & Ors.,[i] the English High Court held that the ‘iniquity exception’ to legal professional privilege will become engaged if:

• An applicant can establish a “strong prima facie case” that a respondent director has breached at least one of their statutory directors’ duties.[ii]
• Either of the following is true:
  • Those allegations involve fraud, dishonesty, bad faith, or sharp practice.
  • The director consciously or deliberately preferred their own interests over the interests of the company, and did so “under a cloak of secrecy”.

The court held that the appropriate standard of proof in such circumstances (“a strong prima facie case”) is a lower threshold than both (i) the balance of probabilities, and (ii) the summary judgment test (no real prospect of success).

Facts

The claimant applied to challenge the defendants’ assertion to withhold the disclosure of certain documents in the substantive proceedings on the basis of legal professional privilege, which were created pursuant to a joint attorney-client retainer between (i) the claimant, first and third defendants, and (ii) the second defendant (being their legal advisers). This application was brought in the context of a complex intra-family dispute dating back to 2013 regarding the control of the claimant company and various family trusts (being shareholders in the claimant).

In its substantive claim, the claimant alleged various breaches by the first defendant of his duties as a director of the claimant company, including the making of improper amendments to the register of members, alleged forgery of various resignation letters, and schemes to improperly force the claimant into administration for personal gain. As against the second defendant (a firm of solicitors retained to advise the claimant, first defendant, and third defendant), the claimant alleged breaches of fiduciary duties and common law duty of care, dishonest assistance to the first defendant, deceit, and unlawful means conspiracy.

The claimant brought the application on two grounds:

• Joint attorney-client retainer: Neither client is entitled to assert legal professional privilege against the other where documents and/or communications are created pursuant to a joint attorney-client retainer.
• The ‘iniquity exception’: A party may not assert legal professional privilege to protect the disclosure of otherwise privileged documents and/or communications that were created for the purpose of furthering a criminal or fraudulent purpose.

Judgment

Mr. Leech QC (sitting as a judge of the Chancery Division) granted the claimant’s application for the following reasons.

Joint Retainer

The judge first briefly considered the settled legal position regarding the disclosure of documents created pursuant to a joint attorney-client retainer. In light of the clear authorities, the judge held that, absent an explanation justifying the departure from the general rule, the default position ought to be that the claimant was entitled to the disclosure and production by the defendants of all privileged documents and/or communications created pursuant to the joint attorney-client retainer.

Iniquity Exception

The judge then turned to the legal principles underlying the ‘iniquity exception’, considering both its scope and the necessary standard of proof that must be established on the facts.

As to its scope, the court noted that it is well-established that the iniquity exception is not limited to criminal acts or fraudulent misrepresentations; rather, fraud “in a relatively wide sense” is sufficient to engage the exception [33]. As such, the court followed the dicta of Norris J in BBGP v Babcock,[iii] who held that the iniquity exception applies in cases in which “… the wrongdoer has gone beyond conduct which merely amounts to a civil wrong; he has indulged in sharp practice, something of an underhand nature where the circumstances required good faith, something which commercial men would say was a fraud or which the law treats as entirely contrary to public policy” [33].

In the context of alleged breaches of a director’s statutory duties under ss. 172-175 and 177 Companies Act 2006, the judge found that the iniquity exception would be engaged (by analogy with BBGP v Babcock) if such allegations involve “fraud, dishonesty, bad faith or sharp practice or where the director consciously or deliberately prefers his or her own interests over the interests of the company and does so ‘under a cloak of secrecy’” [35].

As to the relevant standard of proof required to engage the iniquity exception, the court followed the standard applied by Master Clark in Addlesee v Dentons,[iv] in which it was held that the appropriate standard to engage the exception was “a strong prima facie case”, which “sets a lower threshold than balance of probabilities; and, of course, lower than the summary judgment test of showing that the defendant has no real prospect of success” [cited at 36].

Applying these principles to the alleged breaches by the first defendant of his statutory duties, the court considered evidence that the first defendant:

• Improperly amended the claimant’s register of members to exclude, and fraudulently vote on behalf of, various shareholders
• Forged a fellow director’s letter of resignation
• Forged a letter of resignation of certain trustee shareholders of the claimant company (purporting to show the first defendant as having been appointed as replacement trustee
• Designed and implemented a plan to place the claimant into administration so that the first defendant could purchase (acting through the third defendant) real property belonging to the claimant (being the claimant’s principal asset)

Taking each in turn, the judge was satisfied “that there is a very strong prima facie case that [the first defendant] removed the relevant pages or records showing that [the prejudiced shareholder] was the registered holder of 60,000 shares in [the claimant] before he sent the register to [the second defendant] on 14 April 2014 and that he then took steps to prevent or delay the register being rectified” [49]. In light of this, the court found that the claimant “has a very strong prima facie case that those actions amounted to a breach of [the first defendant’s] statutory duties” [51]. The judge was also satisfied that there was a “strong prima facie case” that the first defendant wrote up the register of members in a way that enabled him to improperly vote on behalf of certain shareholders, and did so in a manner designed to maintain his personal control over the claimant company [77].

The judge confirmed he was satisfied “that the iniquity exception is engaged in relation to these breaches of duty”, as the destruction by a director of part of a register of members “amounts without questions to fraud (in the wide sense, dishonesty or bad faith. Put another way, there is a very strong prima facie case that [the first defendant] consciously or deliberately preferred his own interests over the interests of [the claimant] ‘under a cloak of secrecy’” [55]. The judge also found the iniquity exception engaged in relation to the first defendant’s improper writing up of the register, concluding that “this falls within the scope of the exception as, at the very least, conduct which is ‘sharp practice, something of an underhand nature where the circumstances required good faith’” [79].

As to the resignation letters, the judge also found that the claimant had a “very strong prima facie case” [62] that the director resignation letter in question was forged, and a “strong prima facie case” [71] that the trustee resignation letter in question was forged. Using identical language to that already referred to in respect of the first defendant’s ‘sharp practice’ vis-à-vis the register of members, the judge was consequently satisfied that the iniquity exception was engaged (see [66] & [73]).

Finally, the judge also found a “strong prima facie case” [88] that the first defendant designed and implemented a scheme to improperly place the claimant company into administration for his own benefit. The iniquity exception was once more found to be engaged, as “a director of a company who deliberately attempts to exploit a corporate opportunity by implementing a secret plan to put it into administration and acquire its principal asset is not acting honestly or in good faith” [94].

For these reasons, the court granted the application and held that:

• The iniquity exception was engaged as a result of strong prima facie evidence of numerous breaches by the first defendant of his statutory duties as a director of the claimant company, each involving elements of fraud, dishonesty, bad faith, or sharp practice, or evidence that the first defendant consciously or deliberately preferred his own interests over the interests of the claimant and did so “under a cloak of secrecy”.
• The claimant was entitled as of right to disclosure and production of all privileged documents created by the second defendant pursuant to the joint attorney-client retainer between (i) the claimant, first and third defendants, and (ii) the second defendant (as their legal advisers).
• In light of these findings, the defendants should therefore disclose to the claimant all privileged documents between (i) the first and third defendants, and (ii) the second defendant, in relation to the claimant’s pleaded claims.

Comment

This case shows that legal professional privilege cannot be deployed in the English courts to shield the disclosure of otherwise privileged documents created in the course of dishonest or sharp practice (that falls short of serious or clearly fraudulent behavior) by a company director. To engage the iniquity exception, it is sufficient for an applicant to establish only a “strong prima facie case” of breach by the respondent director of their statutory directors’ duties involving sharp practice, bad faith, dishonest, fraudulent, or self-interested behavior (under a “cloak of secrecy”). Given the relatively low standard of proof required to engage this exception, this type of application may be made more often, where directors are involved in wrongdoing and seek to withhold key documents on grounds of privilege.

[i] Barrowfen Properties Ltd v (1) Girish Dahyabhai Patel (2) Stevens & Bolton LLP (3) Barrowfen Properties II Limited [2020] EWHC 2536 (Ch).

[ii] ss. 172-175 & s. 177 Companies Act 2006.

[iii] BBGP Managing General Partner Ltd v Babcock & Brown Global Partners [2011] Ch 296.

[iv] Addlesee v Dentons Europe LLP [2020] Ch 243.