Privileged and confidential IN AVONWICK V SHLOSBERG [2017] CH 210, MR JUSTICE serlespeakISSUE NO.21 ARNOLD REJECTED THE WIDELY HELD ASSUMPTION THAT A TRUSTEE-IN-BANKRUPTCY SIMPLY ‘STOOD IN THE SHOES’ OF THE BANKRUPT AS REGARDS HIS RIGHTS OF PRIVILEGE. I am pleased to introduce this new edition of Serlespeak on As the Court of Appeal determined in issues in the law of insolvency. upholding that decision, the trustee In my and Sophie Holcombe’s cannot use the bankrupt’s documents joint lead article, we discuss the “in a way which amounts to a waiver of scope of remedies under s.241, the privilege”. In a further decision made Insolvency Act, for transactions in the same proceedings, Re Webinvest Ltd (In Liquidation) [2017] EWHC 2446 at undervalue and preferences. (Ch), Arnold J has also considered the Taking up the theme of obligations of confidentiality to which an transactions at undervalue, officeholder is subject. Three significant Adrian de Froment in his article practical points emerge for officeholders considers the territorial reach of and their advisers from these decisions. claims under s.423. Moving on, First, trustees will need to exercise Ruth den Besten highlights the breadth of potential ramifications of greater caution before instructing the the Supreme Court’s judgment in Lehman, while Matthew Morrison petitioning creditor’s solicitors. This is focuses on the implications of the judgment in the Carlyle case because, if they review the bankrupt’s for directors’ duties when companies are in financial difficulties. As a matter of principle, though, it seems privileged documents, it will either Finally, James Mather examines aspects of an officeholder’s amount to a de facto sharing of their clear that the de facto blanket sharing of compulsorily obtained material through obligations in relation to privileged or confidential materials. contents with the creditor, or place them Hugh Norbury QC in a position of conflict of interest or duty the existence of a common officeholder insofar as the contents are of assistance (and undifferentiated teams) is unlawful to their other client. Instructing the and could lead to the court’s intervention. petitioning creditor’s solicitors will thus Third, the potential receipt of privileged require an election by the petitioner that (as opposed to merely confidential) Searching for it is content to be disabled from itself material calls for more stringent controls pursuing further action (including against where a trustee is also the officeholder deep pockets a related third party) with the assistance of another insolvency estate. No of those solicitors. de facto sharing of the bankrupt’s privileged material will be permitted. ONCE IT IS ESTABLISHED THAT AN INSOLVENT COMPANY Second, it was confirmed in PREVIOUSLY ENTERED INTO A TRANSACTION AT AN Re Webinvest that an officeholder can Nonetheless, Re Webinvest indicates in principle take appointments across that, where robust arrangements UNDERVALUE (S.238 OF THE INSOLVENCY ACT 1986) OR several related insolvency estates: are implemented, joint office-holding GAVE A PREFERENCE TO ONE OF ITS CREDITORS (S.239 whilst there is an inherent risk of arrangements remain possible. OF THE 1986 ACT) THE COURT WILL ORDINARILY SEEK TO conflicts of interest at the level of the The court approved a protocol, whereby RESTORE THE INSOLVENT COMPANY TO THE POSITION creditors to the various estates, these potentially privileged material would be IT WOULD HAVE BEEN IN HAD THE TRANSACTION OR can be dealt with as and when they independently reviewed for privilege arise. However, other difficulties can and held by a non-overlapping trustee if PREFERENCE NOT TAKEN PLACE (S.238(3) OF THE 1986 ACT). also arise. Where officeholders utilise held to be such. This suggests that, in all their powers of compulsion to obtain instances of overlapping officeholders Often this involves an order that the 241(2) provides that an order under materials, they may only use those involving a personal insolvency estate, counterparty to the transaction pay full s.238 or s.239 may impose an obligation materials for the purposes for which there will need to be a non-overlapping value for the benefit it received. Where on “any person whether or not he is the powers were conferred. trustee to receive privileged material in the counterparty is also insolvent, or a the person with whom the company in such circumstances. man of straw, such order may be of little question entered into the transaction...”. The court cautioned that material or no use to the insolvent company’s It is, therefore, permissible for claimants can only be shared across the creditors. Section 241 of the 1986 Act, to bring claims against persons who estates where the officeholders have JAMES MATHER appeared for the however, allows claimants to be more were not themselves party to the considered the particular material applicant in Avonwick v Shlosberg led imaginative in respect of the orders they transaction, but who merely received a and concluded that there is a proper by Philip Marshall QC. seek and the persons against whom benefit from the transaction. purpose to that sharing. On the facts, they claim. This poses the question: what the court nonetheless said that no Section 241(1)(d) provides that the constitutes a benefit? Some guidance difficulty arose from the position of court can “require any person to pay, in was given in Re Oxford Pharmaceuticals an officeholder in that case who was respect of benefits received by him from Ltd [2009] EWHC 1753 at [84] and [85]. common to both the bankruptcy the company, such sums to the office- Mark Cawson QC (sitting as a judge estate and a related liquidation. holder as the court may direct”. Section of the High Court) said that an order CONTINUED CONTINUED Unless the connected third party can demonstrate good faith the fact that they provided value for the benefit received will not assist… against a third party under s.241(1)(d) of the benefit would be direct and the is defined broadly in s.435 of the 1986 Section 241(2)(b) provides: “such an the 1986 Act was not available unless the shareholder may be vulnerable to an Act. If the counterparty to a transaction order... shall not require a person who third party “was in possession of assets order under s.241(2). The court further at an undervalue repaid an outstanding received a benefit from the transaction applied in making the preference or, at warned against seeking to recover from directors loan, and that director was or preference in good faith and for value least, had otherwise personally benefited a third party in circumstances where a relative of one of the directors of to pay a sum to the office-holder, except in monetary terms from the payment in an order against the counterparty was the insolvent company, it would be where that person was a party to the some direct and tangible way”. As such, available. presumed that the director who had transaction...”. As such, it will always be the benefit received by the third party been repaid received any benefit more straightforward to seek recovery More problematic is the scenario where, must be both direct and tangible. The otherwise than in good faith. The from the counterparty to the transaction. following a preference or transaction at court is likely to approach this question presumption that the third party acted That said, in the search for a defendant an undervalue, the counterparty to the taking a realistic and commercial otherwise than in good faith will also with deep pockets, creditors of an transaction re-pays one of its creditors approach (Damon v Widney Pic [2002] arise if the person had “notice of the insolvent company should not overlook (a third party) or enters into a full value B.P.I.R. 465). relevant surrounding circumstances the persons who ultimately took the transaction with a customer (again, a and of the relevant proceedings” benefit of the transaction. The practical application of such third party). Could that third party be said (s.241(2A)(a)). guidance gives rise to further questions. to benefit from the transaction? Had the Could it be said that a shareholder of undervalue transaction or preference Unless the connected third party can a company receives a benefit if his/ not taken place the third party would demonstrate good faith the fact that they her company is the counterparty to a not have been repaid or would not provided value for the benefit received transaction at an undervalue? More have had the opportunity to enter into will not assist: an order can still be made tenuously, could it be said that a a lucrative contract. It is questionable, against them pursuant to s.241. It is beneficiary of a trust receives a benefit if however, whether such benefit could be arguable, however, that a third party a company wholly owned by the trust is characterised as a direct benefit from the who provided full value has not received the counterparty to the transaction at an offending transaction. a direct monetary benefit since on its undervalue? face the transaction will be financially A person receiving a benefit from the neutral. The transaction may have other In Re Oxford Pharmaceuticals the court transaction will be protected if they incidental benefits, such as increasing refused to make an order pursuant to can demonstrate that they acquired the third party’s turnover, but arguably s.241(2) against the shareholder of the the benefit ‘in good faith and for following Re Oxford Pharmaceuticals company that received a preference value’ (s.241(2)). This may assist the such incidental benefit may not be since it was neither necessary nor categories of third parties considered sufficient to justify an order under s.241.