The court has no jurisdiction to direct a bankrupt to waive privilege in any document, the High Court has ruled (Leeds v Lemos [2017] EWHC 1825 (Ch)).

The High Court also confirmed that legal professional privilege is not the property of a bankrupt for the purposes of the Insolvency Act 1986 and does not automatically pass to their trustee. The Court of Appeal's recent judgment in Avonwick v Shlosberg [2017] EWCA Civ 1138 was considered and applied.

Insolvency Practitioners will need to be aware of their obligations to identify and preserve privilege in documents that come into their hands during the course of a bankruptcy. There are clear limits on how and when such documents can be used without the bankrupt's express consent.

Background

A bankruptcy order was made against Christos Lemos on 11 March 2015. Mr Lemos' trustees in bankruptcy then obtained documents from his former solicitors. These documents may have been subject to legal professional privilege belonging to Mr Lemos on his own or jointly with his wife.

Put very simply, privilege is a right to withhold disclosure of a document or other evidence. It may arise in a number of circumstances, including in the context of communication between a lawyer and their client or (in some cases) a third party. Where it arises, legal professional privilege belongs to the client.

The Trustees believed that these potentially privileged documents would be useful for evidence in proceedings (brought by a creditor) seeking to set aside certain transactions entered into by Mr Lemos prior to his bankruptcy.

The Trustees applied to court for directions as to whether:

(1) Privileged documents could be used in proceedings without Mr or Mrs Lemos' consent in such a way as to amount to a waiver of privilege; or, if not,

(2) Whether Mr Lemos could be ordered under sections 333 (duties of a bankrupt in relation to their trustee) or 363 (general control of the court) Insolvency Act 1986 to waive privilege in these documents.

Mr and Mrs Lemos were named as first and second respondents in the application.

Avonwick v Shlosberg

In November 2016 the Court of Appeal confirmed that privilege is a fundamental right, and that it does not constitute property within the meaning of the Insolvency Act 1986. While privileged documents may pass to a trustee in bankruptcy and be used by that trustee in the course of the discharge of their duties, the privilege in those documents should be preserved. The right to withhold disclosure of the documents remains with the bankrupt.

Prior to this case it had commonly been assumed that a trustee in bankruptcy would take the benefit of any legal professional privilege in documents relating to the bankrupt's estate or affairs. This assumption was based, in part, upon a 1971 non-insolvency case which established the principle that legal professional privilege passes to a successor together with title to the relevant property. This is known as the Crescent Farm principle.

Interpretations of Avonwick

Counsel for the Trustees argued that Avonwick confirmed that the Crescent Farm principle applies in bankruptcy where the documents are related to assets in the bankruptcy estate. This was based primarily upon the first instance decision. At first instance, Mr Justice Arnold concluded that the trustees in bankruptcy had acquired the benefit of the bankrupt's privilege with respect to documents where the bankrupt had sole privilege and which related to an asset in the bankruptcy. Counsel for the Trustees acknowledged that the Judge in Avonwick had expressed some doubt about reaching this conclusion and that the point had not been fully argued.

Counsel for Mr Lemos noted that the Court of Appeal in Avonwick had distinguished Crescent Farm on the basis that it was not an insolvency case. He submitted that Avonwick is binding authority for the position that there is no relevant provision in the Insolvency Act 1986 which has the effect of involuntarily depriving a bankrupt of his fundamental right of privilege. Counsel for Mrs Lemos adopted these submissions and expanded upon them, submitting that no amount of statutory vesting could divest Mr Lemos of his fundamental right to assert privilege in privileged documents.

The decision

Judge Hodge QC found in favour of the respondents and held that:

1. Avonwick is not authority for the application of the Crescent Farm principle in personal insolvency cases. The Court of Appeal decision overruled the conclusion of Mr Justice Arnold at first instance on this point;

2. Even if the Crescent Farm principle did apply to the automatic vesting of property in a trustee in bankruptcy it would not in any event assist the Trustees as any property recovered under a claim challenging transactions predating the bankruptcy does not constitute "property" for the purposes of the Insolvency Act 1986;

3. There should be no distinction between documents relating to bankruptcy assets and those relating to liabilities when considering the effect of the bankruptcy on privilege;

4. Privilege is a fundamental human right and the court has no jurisdiction to direct a bankrupt to waive it whether under sections 333 or 363 of the Insolvency Act 1986 or otherwise; and

5. Even if the court did have jurisdiction to direct a bankrupt to waive privilege, a very powerful case would have to be made before the court would make such an order. Judge Hodge QC noted that it was difficult to think of any circumstances in which such an order would be appropriate.

Permission to appeal was refused.

The impact of the decision for Insolvency Practitioners

Insolvency Practitioners will already have been reviewing their approach to potentially privileged documents in bankruptcy cases following the Court of Appeal's judgment in Avonwick. The judgment in Lemos does nothing to ameliorate the impact of this decision. In fact, it 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.

Trustees in bankruptcy will need to ensure that they are aware of their obligations to preserve privilege in the documents that come into their hands during the discharge of their duties. They will need to exercise extreme caution before sharing potentially privileged documents with creditors or other third parties.