Bankruptcy and the vesting of privilege

Vesting of Bankrupt’s Privilege in Trustee in Bankruptcy

The recent Court of Appeal decision of Avonwick Holdings Limited v Shlosberg has sought to clarify the extent to which legal professional privilege of a bankrupt vests in a trustee in bankruptcy upon appointment. The case relates to the bankruptcy of Mr Mikhail Shlosberg, his trustees in bankruptcy (Trustees) and Avonwick Holdings Limited (Avonwick) (the largest bankruptcy creditor of Mr Shlosberg).

The Facts

In broad terms, the appeal arose in relation to an order requiring a firm of solicitors to cease acting for Avonwick in respect of any matter relating to Mr Sholsberg, or his affairs. The solicitors in question were acting for Avonwick and for the Trustees. The Trustees had passed documents to the solicitors belonging to Mr Shlosberg that were subject to legal professional privilege. The Trustees wanted to permit Avonwick to make use of the privileged documents for the purposes of bringing conspiracy claims against Mr Shlosberg (and others).

The Issues

The issues at the centre of the appeal were (inter alia) whether:

• Privilege fell within the definition of property in section 436 (1) Insolvency Act 1986 (Act) which vested in the Trustees
• It was Parliament’s intention that the words “including any which would be privileged from disclosure in any proceedings” in section 311 (1) of the Act entitled trustees to use privileged documents for their statutory purposes.

The Decision

The Court of Appeal did not accept that the privilege was property which automatically vested in the Trustees for the purposes of sections 283 and 436 of the Act.

The Court of Appeal considered that a bankrupt can only be deprived of privilege if the Act expressly so provides, or, it is a necessary implication of the express language of its provisions. The only provisions relied upon by the Trustees in this case were the definition of “property” in section 436 of the Act, in conjunction with the general provisions of sections 283 and 306 of the Act, for the automatic vesting in the trustee of a bankrupt’s property comprised in the estate.

The Court of Appeal considered that all these provisions are in general terms and do not expressly treat privilege as property of the bankrupt which automatically transfers from the bankrupt to the trustee upon appointment and that neither was that a necessary implication of the provisions.

Section 311 (1) of the Act provides that a trustee shall take possession of all books, papers and other records which relate to the bankrupt’s estate or affairs and which belong to him, or, are in his possession, or, under his control (including any which would be privileged from disclosure in any proceedings).

The Court of Appeal held that pursuant to section 311 (1) of the Act a trustee could use privileged documentation and the information contained in it for the statutory purpose of realising the bankrupt’s estate. However, it had to be used in a way that would not amount to waiver of privilege.

The Practical Implications for Trustees

It would seem that a trustee can still secure information/documentation which is privileged to the bankrupt with a view to realising the bankrupt’s estate and identifying whether:

• There are identifiable claims in relation to the bankruptcy which can be brought
• Any antecedent transactions have taken place which can be challenged by the trustee, as part of the statutory purpose of realising the bankrupt’s estate.

However, the trustee cannot use the privileged information acquired in any such proceedings to be brought, to the extent that it amounts to waiver of the bankrupt’s privilege, attaching to that information/documentation.

Thus it is essential that trustees obtain clarification of the nature of documentation they are proposing to rely upon within proceedings, in advance, in order to ascertain whether or not they are subject to the bankrupt’s legal professional privilege.