Update on legal professional privilege & bankruptcy

Published: 25/8/2017

On 17 July 2017 in Leeds & Anor v Lemos [2017] EWHC 1825 (Ch) (“the Lemos Decision”) the High Court confirmed and applied the Court of Appeal’s judgment in Shlosberg v Avonwick Holdings Ltd & Ors [2016] EWHC 1001 (Ch) (05 May 2016) (”the Shlosberg Decision”).

In doing so, the court clarified and confirmed that a trustee in bankruptcy is unable deploy a bankrupt’s privileged material in a way that would serve to waive the bankrupt’s privilege in those documents. It also confirmed that the court does not have jurisdiction to direct a bankrupt to waive privilege, regardless of the potential benefit to the estate or to the creditors of doing so or the subject matter of the documents.

The Shlosberg Decision

We have previously discussed the Shlosberg Decision (in which we acted for the successful party) in our article found here.

In summary, the Shlosberg Decision established that:

  • Legal professional privilege is not the property of a bankrupt for the purposes of the Insolvency Act 1986 (“IA 1986”) and the privilege remains with the bankrupt. It does not automatically pass to the bankrupt’s trustee in bankruptcy.
  • It no longer makes any difference that the privileged information relates to other property that has passed into the bankruptcy estate.
  • The trustee is entitled to use privileged information that has been obtained pursuant to section 311(1) of the Insolvency Act 1986 (“IA 1986”), but “only in a way that would not amount to a waiver of privilege”.
  • The position remains that the trustee is entitled to take possession of the bankrupt’s privileged papers which relate to the bankrupt’s estate or affairs.
  • The trustee has no entitlement to see documents which do not relate to the bankrupt’s estate or affairs.
The Lemos Decision

Christos Lemos had been made a bankrupt in 2015 and was discharged from bankruptcy in March 2017. A major creditor in his bankruptcy, his sister Joanna Lemos, issued proceedings pursuant to section 423 of the IA 1986.  In those proceedings, Joanna Lemos alleged that Christos Lemos had connections to a number of transactions relating to the ownership of a valuable property worth circa £16.5m that he and his wife lived in several years prior to his bankruptcy.

The trustees in bankruptcy had access to documents which they had obtained from Christos Lemos' former solicitors in the course of their role as office holders. There was a question as to whether the documents were subject to legal professional privilege belonging to Christos Lemos either alone or jointly with his wife. The trustees in bankruptcy believed that a number of those documents were likely to be useful as evidence for the purposes of the section 423 proceedings brought by Joanna Lemos. Accordingly, the trustees in bankruptcy sought directions in relation to the use that could be made of those documents:

  1. without the consent of Christos Lemos or his wife; or alternatively
  2. whether Christos Lemos could be ordered under section 333, or section 363 IA 1986 to waive privilege in these documents. 

The court was not persuaded by the trustees’ arguments and dismissed the application.

The impact of the Lemos Decision

The court in Lemos explained the effect of the Shlosberg Decision and its practical application. It reiterated that privilege is not property of a bankrupt which vests in the trustees in bankruptcy. Accordingly, the trustees in bankruptcy of Christos Lemos were, in the absence of any agreement by Christos Lemos, prevented from deploying the privileged documents that had come into their possession in a way that would act as a waiver of privilege.

 At paragraph 244 of the Lemos Decision, Judge Hodge QC stated that the decision of the High Court in Crescent Farm [1972] Ch.553, in which it was established that privilege held in relation to property would automatically pass to a successor in title to the property, had no application:

“…[I am] satisfied that it [Crescent Farm] has no application in the case of the passing of property to a trustee in bankruptcy; and that insofar as Mr Justice Peter Gibson held that it did, Re Konigsberg is wrongly decided. The decision itself can be justified on the first of the two grounds, that of waiver of privilege.”

However, Judge Hodge QC went on to clarify at paragraph 245 that:

“…as a result of the Court of Appeal's decision in Shlosberg, the Crescent Farm principle has no continuing application in bankruptcy cases.”

Insolvency Practitioners will already have been reviewing their approach to potentially privileged documents in bankruptcy cases following the Shlosberg Decision. The Lemos Decision goes further and confirms that the court does not have jurisdiction to direct a bankrupt to waive privilege, regardless of the potential benefit to creditors of doing so or the subject matter of the documents.

Conclusion

This area of legal professional privilege has recently seen significant clarification. The Lemos Decision provides clear direction on how the courts will consider privilege in the context of a bankruptcy, and how an individual’s privilege remains sacrosanct and a fundamental human right.  

The Shlosberg Decision was not the first case to make this point, as the overarching principle can be traced to several leading cases, such as: R v Derby Magistrates Court, ex p. B [1] , Special Commissioner and Another, Ex P Morgan Grenfell [2]  Secretary of State for the Home Department, Ex Parte Simms [3]. It will be interesting to see whether the unsuccessful applicants in Lemos appeal, and whether further Court of Appeal authority on this important point will be forthcoming. In the meantime, Insolvency Practitioners must continue to treat any documents that come into their possession which are privileged to the bankrupt very carefully in the absence of any clear waiver of privilege from the bankrupt.

Written by Legal Assistant Mevsim Kilinc.

 

 

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