Bankruptcy

The Crescent Farm principle (that legal professional privilege of a predecessor in title enured to the benefit of his successor) had no application in the case of the passing of property to a trustee in bankruptcy. If the judge in Shlosberg v Avonwick Holdings Ltd [2016] All ER (D) 76 (May) had taken the view that privilege passed to a trustee in bankruptcy in respect of asset documents, then that decision had effectively been overruled by the later decision of the Court of Appeal in that case, and, insofar Re Konigsberg [1989] 3 All ER 289 had held that view concerning the application Crescent Farm principle, it had been wrongly decided. Further privilege was a fundamental human right and the court had no jurisdiction to direct a bankrupt to waive privilege in any documents. So held the Chancery Division in dismissing, for the most part, an application by the former trustees in the bankruptcy of the first respondent (Mr L) for directions concerning the use of documents held by solicitors who had acted for Mr L in other proceeding, and for an order, pursuant to section 366(1) of the Insolvency Act 1986, requiring them to deliver up any further documents in their possession relating to his affairs.

Background

On 11 March 2015, the first respondent (Mr L) was adjudged bankrupt. He was discharged from bankruptcy in March 2017. The second respondent (Mrs L) was Mr L’s wife. The applicants (the trustees) were the former trustees in bankruptcy.  

A dispute arose between the trustees and the respondents over the former’s ability to make use of certain potentially privileged documents (the documents) that they had obtained from Mr L’s former solicitors (Withers), who had acted on his behalf in proceedings brought against him by his sister concerning sums allegedly owed to her. The trustees considered that the documents were likely to be useful as evidence in proceedings, under section 423 of the Insolvency Act 1986 (the Act), relating to transactions defrauding creditors. Those proceedings would be to set aside certain transactions, which Mr L had entered into many years prior to his bankruptcy, relating to the ownership of a house in Hampstead, London, worth some £16.5m. The house was presently registered in the joint names of a Bermudian trustee company and one of its directors, who, together with the respondents, contended that the property was held on trust for Mrs L alone. The trustees contended, among other things, that the house was an asset of the bankruptcy and vested in them, under section 306 of the Act.

The trustees applied for: (i) directions in relation to the use that could be made of the documents; and (ii) an order, pursuant to section 366 (1) of the Act, requiring Withers to deliver up any further documents in their possession which related to Mr L’s affairs or for an appropriate member of the firm to submit a witness statement containing an account of such affairs.

The application raised fundamental questions as to the true meaning and effect of the decision by Arnold J in Shlosberg v Avonwick Holdings Ltd [2016] All ER (D) 76 (May), and the decision of the Court of Appeal in [2016] All ER (D) 141 (Nov) (the leading judgment of which had been given by the then Master of the Rolls), affirming Arnold J’s decision.

Arnold J had held that the trustees had acquired the benefit of the bankrupt’s privilege in one category of documents (category A or asset documents) held by solicitors who had acted both for the major creditor in the bankruptcy and for his trustees in bankruptcy. The Court of Appeal did not accept the contention that privilege was a species of property that passed to a trustee. It noted the importance of the policy that trustees in bankruptcy should be able to get in, realise and distribute the bankrupt’s estate in accordance with the statutory scheme, but it ultimately concluded that, when looking at privilege in relation to documents concerning liabilities of the bankruptcy, that policy was trumped by the competing policy that a litigant should be able to consult a lawyer in privacy.

The court ruled:

Issues and decisions

(1) The court considered the meaning and effect of Avonwick. In particular, whether the principle formulated by Goff J in Crescent Farm (Sidcup) Sports Limited v Sterling Offices Limited [1971] 3 All ER 1192  (the Crescent Farm principle), namely that legal professional privilege of a predecessor in title enured to the benefit of his successor, applied in bankruptcy. Further, whether the second ground for Peter Gibson J’s decision in Re Konigsberg [1989] 3 All ER 289 (that the trustee in bankruptcy was a successor in title to the bankrupt in respect of all the assets of the bankrupt divisible among his creditors), which was considered by the Court of Appeal in Avonwick, was still good law.

The trustees submitted that the decisions in Avonwick confirmed that a bankrupt’s privilege in documents that related to assets of the bankrupt’s estate, continued to devolve upon the trustee in bankruptcy and, accordingly, the trustees were able to make use of Mr L’s solely privileged documents that related to his assets in any proceedings. The trustees asked five questions concerning the effect of the Avonwick decision (see [159] of the judgment).

The respondents submitted, relying on Avonwick, that trustees in bankruptcy were not permitted to deploy in proceedings, such as those relating to property, any documents which were subject to the bankrupt’s sole or joint privilege, without the consent of the bankrupt and, in the case of any jointly privileged documents, the consent of Mrs L also. Further, that the court had no power to order L to consent to the use of the privileged documents. Accordingly, the respondents argued that trustees in bankruptcy could not be allowed to use the documents in any way which would amount to a waiver of Mr L’s privilege and could not require him to waive his privilege in the documents so as to enable them to be used by the trustees.

The Crescent Farm principle had no application in the case of the passing of property to a trustee in bankruptcy. As a result of the Court of Appeal’s decision in Avonwick, that principle had no continuing application in bankruptcy cases. Insofar as Peter Gibson J had held that it had, Re Konigsberg had been wrongly decided. If Arnold J in Avonwick had taken the view that privilege passed to a trustee in bankruptcy in asset documents, then that decision had effectively been overruled by the Court of Appeal. Insofar as he had taken that view, it was inconsistent with the Court of Appeal’s later reasoning and observations, because it did not attach sufficient importance to the need to protect legal professional privilege. Arnold J’s decision was no authority for the application of the Crescent Farm principle in personal insolvency cases and it was no endorsement, on an authoritative basis, of Peter Gibson J’s approach in Konigsberg. The effect of the application of the Crescent Farm principle to an involuntary transfer of assets to a trustee in bankruptcy was, as the Master of the Rolls had recognised, to amount to an abrogation of the right of privilege. Insofar as Arnold J had taken the view that Re Konigsberg applied in bankruptcy, even to assets documents, then that decision was inconsistent with the later observations and reasoning of the Court of Appeal in Avonwick, and it should not be followed. The Court of Appeal in Avonwick had, in fact, overruled the second ground for Mr Justice Peter Gibson’s decision in Re Konigsberg. Whilst Arnold J’s decision on the category A documents had not been expressly overruled, that decision had not been challenged on appeal to the Court of Appeal. On a true reading and analysis of the Court of Appeal’s decision in Avonwick,  the Crescent Farm principle had no application in bankruptcy even in relation to assets, as well as to liability, documents. There should be no distinction between the two classes of documents. The Master of the Rolls, on a true reading of his judgment concerning , had been intending to convey that, merely because the privilege was held by the bankrupt, the trustee did not automatically step into his shoes. That observation had not been expressly directed to, and should not be confined as extending only to, liability documents. It extended to documents even if they affected assets of the bankrupt (see [221], [232], [233], [238], [240]-[245] of the judgment).

Arnold J’s decision in Avonwick was not determinative of the issues to be decided on the present application. The Crescent Farm principle did not apply in respect of bankruptcy and, Re Konigsberg, insofar as it had decided that it did, had been wrongly decided (see [221], [244] of the judgment).

Avonwick Holdings Ltd v Shlosberg [2016] All ER (D) 141 (Nov) applied; Konigsberg (a bankrupt), Re, ex p Trustee v Konigsberg [1989] 3 All ER 289 not followed; Shlosberg v Avonwick Holdings Ltd [2016] All ER (D) 76 (May) not followed; Crescent Farm (Sidcup) Sports Ltd v Sterling Offices Ltd [1971] 3 All ER 1192 distinguished; Bishopsgate Investment Management Ltd (in provisional liquidation) v Maxwell; Cooper v Maxwell; Mirror Group Newspapers plc v Maxwell [1992] 2 All ER 856 considered; R v Derby Magistrates’ Court, ex p B [1995] 4 All ER 526 considered; R v Secretary of State for the Home Department, ex p Simms [1999] All ER (D) 751 considered; R (on the application of Morgan Grenfell & Co Ltd) v Special Comr of Income Tax [2002] All ER (D) 239 (May) considered.

(2) Whether, if the Crescent Farm principle did not apply, sections 333 and 363 of the Act could be used by the trustees in bankruptcy. Further, whether, as a matter of principle, Mr L could be ordered to waive his privilege in any documents that had been released to the trustees in bankruptcy or which were still held by Withers. Section 333 of the Act required the bankrupt to give to the trustee such information as to his affairs. Section 363 (2) provided that an undischarged bankrupt or a discharged bankrupt whose estate was still being administered under the Act, ‘shall do all such things as he may be directed to do by the court for the purposes of his bankruptcy or, as the case may be, the administration of that estate’.

Privilege was a fundamental human right and the court had no jurisdiction to direct a bankrupt, still less a third party, to waive privilege in any documents. The right to privilege was such a fundamental principle that only an express power to waive privilege in section 363(2) of the Act itself would confer jurisdiction upon the court to order such a waiver. It was a matter going to jurisdiction, rather simple, than to discretion (see [278]-[280] of the judgment).

Accordingly, apart from the terms of an order directed to Withers in relation to any remaining documents, the application should be dismissed. It would not be appropriate to stand it over for the court then to embark upon the process of identifying those documents in respect of which there might be no privilege at all or in respect of which the iniquity exception could properly be invoked. The appropriate course was to dismiss the balance of the application and to leave to it the trustees in bankruptcy, if they wished to make individual applications in respect of specific identified documents, to do so. The present application had been formulated on a generic, rather than a specific document, basis and, in those circumstances, it would not be right to allow the trustees in bankruptcy to have a second bite of the cherry within the context of the present application (see [281], [282] of the judgment).

Bishopsgate Investment Management Ltd (in provisional liquidation) v Maxwell; Cooper v Maxwell; Mirror Group Newspapers plc v Maxwell [1992] 2 All ER 856 considered; Ouvaroff (a Bankrupt), Re [1997] BPIR 712 considered; Horton (as trustee in bankruptcy of Michael Gerard Henry) v Henry [2016] All ER (D) 50 (Oct) considered.

Felicity Toube QC and Tony Beswetherick (instructed by Gowling WLG (UK) LLP) for the trustees.

David Lord QC and Sebastian Kokelaar (instructed by Richard Slade & Company) for Mr L.

Marcia Shekerdemian QC (instructed by TLT LLP) for Mrs L.

The third respondent did not appear and was not represented.

Carla Dougan-Bacchus Barrister.