Court of Appeal upholds injunction stopping Dechert from acting for two parties to case

Etherton: privilege is not property of a bankrupt which automatically vests in the trustee in bankruptcy

Etherton: privilege is not property of a bankrupt which automatically vests in the trustee in bankruptcy

The Court of Appeal has upheld an injunction that international law firm Dechert has to cease acting for the principal creditor of a Russian businessman because it is also acting for his trustees in bankruptcy and has access to thousands of documents that are covered by legal professional privilege.

Giving the unanimous decision of the court, the Master of the Rolls, Sir Terence Etherton, said it was clear that, on the proper interpretation of the Insolvency Act (IA) 1986, “privilege is not property of a bankrupt which automatically vests in the trustee in bankruptcy”.

Shlosberg v Avonwick Holdings Ltd & Ors [2016] EWCA Civ 1138 involved an application by Mikhail Shlosberg, a bankrupt Russian businessman domiciled in England, for an order directing that Dechert should cease acting for both Avonwick and his joint trustees in bankruptcy. The application was made primarily in respect of Dechert’s position as solicitors for Avonwick.

Its basis was Dechert’s possession and review of a large quantity of documents, many of which it was accepted were privileged; however, the respondents – Dechert, Avonwick and the trustees – argued that the benefit of the privilege had passed to the trustees and that there was no real risk of any misuse of confidential information by Dechert.

Avonwick lent Webinvest Ltd $100m, backed by a personal guarantee from Mr Shlosberg, Webinvest’s beneficial owner. This was not repaid and Avonwick eventually launched proceedings for $180m, including interest. This succeeded in 2014. In early 2015, Mr Shlosberg was declared insolvent and Webinvest wound up.

At first instance, Mr Justice Arnold said there was “nothing inherently objectionable” about a solicitor acting for both a trustee in bankruptcy or liquidator and a major creditor of the bankrupt or insolvent company.

However, the respondents had to establish that the benefit of Mr Shlosberg’s privilege had passed to the trustees. On the facts he found this proven with respect to only one of three categories of documents; this still left over 44,000 documents at issue.

The respondents relied on several safeguards put in place to protect Mr Shlosberg’s confidential information, but the judge found them insufficient, leading him to grant an injunction requiring Dechert to cease acting for Avonwick.

Avonwick and the trustees appealed, although Dechert – which acted for both on the appeal – did not itself.

Etherton MR rejected the argument that the documents and any privilege attaching to the information contained in them were property forming part of Mr Shlosberg’s estate which vested in the trustees on their appointment.

“I consider it is clear that, on the proper interpretation of the relevant provisions of IA 1986, privilege is not property of a bankrupt which automatically vests in the trustee in bankruptcy.

“Following the Morgan Grenfell case and the Simms case, the bankrupt can only be deprived of privilege if IA 1986 expressly so provides or it is a necessary implication of the express language of its provisions.”

The provisions cited by the appellants did not meet this test, he said – the definition of ‘property’ in section 436(1) and the treatment of a “power over or in respect of property” in section 382(4), in conjunction with the general provisions in sections 283 and 306 for the automatic vesting in the trustee of the bankrupt’s property comprised in his estate.

Section 311(1) allows the trustee to take possession of the bankrupt’s records which relate to his estate, including privileged ones.

However, Etherton MR said the trustee could only use such documentation and information in a way that would not amount to a waiver of privilege. Further, deploying the privilege was not within the duty and ancillary powers of the trustees.

Dismissing the appeal against the injunction too, Etherton MR said it was not possible to say Arnold J was wrong or acted outside his discretion.

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