In a decision that will be welcomed by companies in regulated industries, the Chancellor of the High Court has upheld a bank’s claim of litigation privilege in respect of documents produced as part of an internal investigation, including transcripts of interviews with employees and ex-employees.

In Bilta (UK) Ltd v Royal Bank Of Scotland Plc & Anor [2017] EWHC 3535 (Ch), the liquidators of Bilta applied for disclosure of documents relating to RBS’s investigation of an alleged “missing trader” fraud involving the former directors of Bilta. RBS asserted that the documents were privileged because they had been prepared in contemplation of litigation. The internal investigation followed an earlier investigation into the fraud by HMRC. RBS had reclaimed input tax of £90m in relation to the allegedly fraudulent transactions, and in 2010 HMRC wrote to RBS to say that it was investigating and, while it did not allege any dishonesty on RBS’s part, it was possible that it would seek to recover the £90m and/or impose other penalties. RBS cooperated with HMRC’s requests for information regarding the transactions.

In 2012, HMRC wrote to RBS again to say it believed it had sufficient evidence to seek to recover the £90m, but wished to hear RBS’s views before proceeding. RBS again cooperated with HMRC’s requests for further information, but this time also appointed solicitors to conduct its own investigation. The solicitors took witness statements from 29 employees and ex-employees of RBS. Their final report was supplied to HMRC under cover of a letter which stated that privilege was not waived.

In order to succeed in its claim of privilege, RBS had to meet three criteria established in Three Rivers District Council v Governor & Company of the Bank of England (No 6) [2005] 1 AC 610:

  • litigation was in progress or in contemplation when the documents were created;
  • they were created for the sole or dominant purpose of conducting that litigation; and
  • the litigation was adversarial, not investigative or inquisitorial.

Andrews J had earlier held in Serious Fraud Office v Eurasian National Resources Corporation Ltd [2017] 1 WLR 4205 (ENRC) that privilege did not apply to transcripts of interviews which ENRC’s solicitors conducted with a view to preparing a report which would be shared with the SFO in order to convince the SFO not to bring criminal proceedings. If successful, then no litigation would ever materialise. Bilta argued that RBS was in an analogous position, since it intended to share its report with HMRC in the hope of persuading it not to reclaim the input tax.

Sir Geoffrey Vos rejected this argument, saying that there was a tension between ENRC and the Court of Appeal authority of Re Highgrade Traders [1984] BCLC 151, which did not appear to have been cited to Andrews J. However, it has since been confirmed that Re Highgrade Traders was cited to Andrews J throughout the trial. That case had held that litigation privilege attached to documents which were prepared for the purpose of establishing the cause of a fire in order to decide whether or not to resist an insurance claim. A document could be prepared in contemplation of litigation in circumstances where the document itself was likely to be determinative as to whether or not litigation materialised.

Sir Geoffrey Vos accepted that, from the time it received HMRC’s 2012 letter stating that there was enough evidence to proceed, RBS had been entitled to assume that an attempt to recover the input tax was highly likely and that the burden was on them to show why HMRC should not go ahead. The fact that, in line with its standard internal procedures, it had adopted a cooperative attitude in dealing with HMRC did not negate the adversarial nature of the situation in which it found itself. While RBS did wish to maintain a good relationship with HMRC and to fulfil its duties as a taxpayer, those purposes were subsumed under the primary purpose of resisting the expected claim. The Chancellor also commented that attempts to settle a prospective claim before it materialises should be considered as falling within the litigation context, not outside it.

In reaching his conclusion, Sir Geoffrey Vos stressed that the purpose of a document must always be established in the context of the specific facts of the case and, therefore, it should not be assumed that the conclusions reached in one case will apply in another case involving different facts. The interactions of the company with the investigating authority must be carefully examined in each case. Nonetheless, it will be of some comfort to companies in regulated industries to have confirmation from a source as respected as the Chancellor of the High Court that internal investigations can attract litigation privilege given the right facts – something that had been widely questioned after the ENRC decision.

However, companies should not go to the opposite extreme of assuming that all investigations will attract privilege, regardless of circumstances. A degree of caution is still appropriate. Firstly, both Bilta and ENRC are first-instance decisions, and it remains to be seen which approach will be favoured by other judges at first instance and indeed by the Court of Appeal, which is due to hear ENRC’s appeal against the decision of Andrews J in July. Secondly, Sir Geoffrey Vos described the 2012 letter from HMRC as a “watershed” with regard to RBS’s contemplation of litigation, suggesting that if RBS had commissioned its investigation after the first letter in 2010, the outcome might have been different. It would be unfortunate if this were to encourage companies to delay investigating allegations – and thus potentially any corrective action - for fear of losing privilege. It may be that this area of law would benefit from a review by the Supreme Court, should a suitable case present itself.