The High Court has ordered international law firm Dechert 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.
Mr Justice Arnold found that the safeguards which had been put in place by Dechert did not provide “adequate protection”.
He said: “They simply do not address the key fact that the solicitors acting for Avonwick [the creditor] have already read a large quantity of Mr Shlosberg’s privileged documents and cannot put that knowledge out of their minds.”
One of the other factors the judge took into account was that in reviewing the documents, Dechert had “proceeded upon an understanding of the law which I have held to be mistaken”.
“I do not suggest that Dechert acted otherwise than in good faith,” he added.
Shlosberg v Avonwick Holdings Ltd & Ors  EWHC 1001 (Ch)  was 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.
Arnold J 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, but 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. These included the trustees engaging London law firm Moon Beever to advise in relation to conflicts of interest and instructing Dechert that no information should be shared with Avonwick without their express agreement.
However, after listing 11 relevant factors, Arnold J concluded that the safeguards were not sufficient. The factors included that Avonwick was “an adverse party to Mr Shlosberg in hostile litigation”; the documents had been reviewed in detail by Dechert over a substantial period of time; Dechert had not tried to set up any kind of information barrier – “on the contrary, the partner in charge of the litigation for Avonwick has led the review of the documents”; and that Avonwick wanted to make use of the knowledge that Dechert had acquired in the pursuit of its claim against Mr Shlosberg.
The judge said: “Taking all of these factors into consideration, I do not consider that Mr Shlosberg’s rights in respect of the privileged information would be adequately protected by granting an injunction restraining Dechert from using the privileged information unless a strict information barrier were created within Dechert and an entirely new team was assigned to act for Avonwick.
“The disruption and expense which this would cause Avonwick would be little short of the disruption and expense of instructing a different firm of solicitors, however, which is no doubt why the respondents have not proposed it. In those circumstances, I have concluded that an injunction should be granted requiring Dechert to cease acting for Avonwick.”
Dechert has not responded to a request for comment.