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June 2017 Credit Management magazine

The CICM magazine for consumer and commercial credit professionals


LEGAL MATTERS CARELESS TALK Peter Walker illustrates how the legal professional privilege appeared to have been overlooked in very complicated cross-border insolvencies, and how the judges of the Court of Appeal responded. CREDIT professionals who consult solicitors will not usually want their conversations with their lawyers used as evidence in a subsequent trial in court. Those conversations, normally noted in attendance notes, will be subject to legal professional privilege, so a debtor cannot demand to see those documents. The extent of this rule was reviewed in a complicated case involving people and companies from many parts of the world, In Shlosberg v Avonwick Holdings Ltd [2017] 2 WLR 1075 the judges of London’s Court of Appeal were asked to rule on whether a firm of English solicitors should continue to act for two of the parties. A bankrupt was concerned that the firm would reveal documents that should have been subject to legal professional privilege. The bankrupt was a Russian businessman domiciled in England. He was the beneficial owner of a company incorporated in St Vincent and the Grenadines. His family were the beneficiaries of a discretionary trust owning another company. Yet another company (‘Avonwick’) registered in the British Virgin Islands, then came onto the scene. It was beneficially owned by the wife of a Ukrainian businessman. The bankrupt, then not bankrupt – that was to come later – approached that businessman with an investment proposal concerning a Dutch company. The bankrupt was a Russian businessman domiciled in England. He was the beneficial owner of a company incorporated in St Vincent and the Grenadines. His family were the beneficiaries of a discretionary trust owning another company. There was a plan to delist its shares in London and to re-list them in Hong Kong with the prospect of increasing their value. To achieve this aim money was needed to repay bank loans. The bankrupt was prepared to lend half of the US$200 million needed, and the Ukrainian businessman was willing to lend US$ 100 million to the bankrupt to provide all the cash needed. Avonwick became the lender of the US$100 million borrowed by the bankrupt’s company, and he was the guarantor. The US$200 million was lent to a Liechtenstein company of the owner of the Dutch company; all very confusing! The Liechtenstein company then failed to repay its loan on the due date, so the bankrupt’s company did not repay the money it had borrowed from Avonwick. The bankrupt’s company responded by starting arbitration proceedings against the Liechtenstein company. It was resolved by a series of settlement agreements, but the Liechtenstein company was placed in liquidation. ENFORCING THE JUDGMENT This was followed by a statutory demand served by Avonwick on the bankrupt and on his company for over US$180 million being the loan of US$100 million and interest. There followed litigation, and different firms of solicitors represented the two defendants. The defendants refused to disclose certain documents relating to the arbitration, but they released some of them before the trial. The trial judge, Sales J, gave judgment for Avonwick, and awarded over US$195 million plus interest. He also awarded costs on an indemnity basis, the maximum possible. Credit professionals well know that a favourable court judgment is not the same as getting the money. 30 June 2017 The Recognised Standard

three cases of counsel, of solicitor and of attorney. The rule has been much developed since then, but in Bolton v Corporation of Liverpool [1833] 1 My and K 88 Lord Brougham affirmed in the style of his time, that otherwise ‘No man will dare to consult a professional adviser with a view to his defence or to the enforcement of his rights.’ Lord Nicholls of Birkenhead in R v Derby Magistrates Court noted that the accused had been publicly acquitted of murder, so had ‘a legitimate interest in not disclosing material which would point in the opposite direction.’ He was entitled to claim the privilege. In the Avonwick case there were other factors such as sections 283(4) and section 436 of the Insolvency Act. The question was whether or not the property in the documents as being part of the bankrupt’s estate vested in the Trustees in Bankruptcy. Section 436, for example, defined property very widely. Sales J granted a worldwide freezing order against the bankrupt, his company, and the company owned by the bankrupt’s discretionary trust. It was all too much for the bankrupt, who then became officially bankrupt. A winding-up order was made against his company. Avonwick was not satisfied, and commenced proceedings against the company owned by the bankrupt’s discretionary trust under section 423 of the Insolvency Act 1986. This provision relates to ‘transactions defrauding creditors’. To further its case Avonwick obtained disclosures of the remaining documents relating to the arbitration. Avonwick then added many of the other companies and people involved in the loan transactions, but it initially did not include the bankrupt. Section 285(3) of the Insolvency Act imposes a stay on the commencement of proceedings against a bankrupt. All such barriers were eventually overcome. There was then an interruption. Firstly, shortly after their appointment the trustees in bankruptcy had appointed a firm of solicitors. In accordance with section 311(1) of the Insolvency Act they required the bankrupt to provide information concerning his affairs. DUEL REPRESENTATION That is very clear, but Avonwick had appointed the same firm. The bankrupt’s solicitors were concerned about this dual representation, and were not satisfied that the safeguards put in place by the firm were sufficient to protect the bankrupt. In this aspect of the affair the bankrupt became the claimant and Avonwick became the defendant. The judges of the Court of Appeal consequently had to decide whether to prevent the firm of solicitors acting both for the trustees in bankruptcy and for the principal creditor. This is important because the firm of solicitors would have documents about the legal advice given to a client. This information is subject to legal professional privilege, and should not be disclosed to anyone other than the client. There is a potential problem when the firm is effectively acting for two parties with differing interests. The principles were reviewed by the Law Lords in a murder case, R v Derby Magistrates Court, Ex p B [1996] AC 487. The appellant did not want his former solicitor to produce certain documents in committal proceedings against his stepfather. The appellant had firstly admitted to a murder, then retracted his story, and finally claimed that his stepfather was the murderer. He was acquitted, but some years later the stepfather was charged with the crime. The appellant gave evidence, but refused to allow the disclosure of notes made by his solicitors at the time he was making the original statements. The Law Lords referred to the decision in Wilson v Rastall [1792] 4 Term Rep. 753, where it was decided that in those days the privilege was confined to the PRIVILEGE AS A FUNDAMENTAL RIGHT In response the Master of the Rolls in the Court of Appeal, Sir Terence Etherton MR, noted various previous judgments including one in the Alberta Court of Appeal in Canada. In Deloitte & Touche Inc v Bennett Jones Verchere [2001] 206 DLR (4th) 280 the judges considered similar Canadian statutory provisions, and concluded that privilege was a personal right, personal to the bankrupt, and was not property. In R v Dunwoody [2004] 212 ALR 103 the judges of the Supreme Court of Queensland, Australia, added that the right can only be removed by statute. In the UK the provisions of section 311(1) of the Insolvency Act 1986 could possibly have been such a removal. It gives the trustee in bankruptcy the power to take possession ‘of all books, papers and other records’ relating to ‘the bankrupt’s estate or affairs’ and which belong to him or her or which are under his or her control ‘(including any which would be privileged from disclosure in any proceedings)’. Sir Terence Etherton MR was not convinced. He referred to the decisions in the Derby Magistrates and in other cases, which kept ‘in focus the status of privilege as a fundamental right.’ He also referred to the decision of Stanley Burton QC sitting as a deputy judge of the Chancery Division in the case In re Cook [1999] BPIR 881. The deputy judge ruled that the bankruptcy trustee could authorise a solicitor, who had formerly acted for a bankrupt, to provide information to the Serious Fraud Office, i.e. a waiver of the privilege. Sir Terence Etherton MR did not follow the case, and said that, through no fault of his own, the deputy judge’s reasoning and decision was incorrect. He concluded in the Avonwick case that nothing waived the bankrupt’s privilege. He approved the ruling to that effect in the lower court, in that he confirmed the injunction requiring the firm of solicitors to cease acting for the creditor in respect of any matter relating to the bankrupt or his affairs. This was another complication in already complicated litigation. It is, however, good to know that any notes made by solicitors in a meeting with clients, perhaps including credit professionals, will remain confidential and subject to legal professional privilege. The Avonwick case, on the other hand, illustrates that in complicated cases mistakes can be made. If, however, solicitors already representing a creditor should be appointed, care must be taken to ensure that there is no conflict of interest between the two roles. The question was whether or not the property in the documents as being part of the bankrupt’s estate vested in the Trustees in Bankruptcy. Section 436, for example, defined property very widely. The Recognised Standard June 2017 31

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