It is common for insolvency office-holders to be appointed over related estates, and indeed it is of course the case that IPs have a large number of appointments at any one time. In such circumstances, documentation is arguably ‘shared’ across estates by default. Alex Jay and Ryan Hooton examine document sharing between insolvent estates in the light of clarity provided by recent judgments.
We operate in a world where information (and so documentation) is a prized commodity, hence the growth of data protection legislation and indeed related enforcement agencies. Moreover, in any litigation context, the question of how information has come into the hands of a claimant (or indeed defendant) may well attract significant scrutiny from a well-advised opponent.
As a consequence, the issue of document sharing is one that is increasingly raised by office holders, particularly where the same office-holder is appointed over multiple estates. Arguably, it is more efficient (and in creditors’ interests) to have the one practitioner investigating what is essentially one transaction or issue between interrelated estates, than two practitioners investigating independently.
What, however, are the principles that should be adhered to when sharing documents between estates? What is allowed, and what should practitioners be wary of? Following the recent decisions arising in, and out of, the Avonwick v. Shlosberg litigation a number of principles can be identified. The relevant cases for this article are the first instance decision in Shlosberg v. Avonwick Holdings Ltd & Ors  EWHC 1001 (Ch) (the first instance privilege decision); the Court of Appeal decision in Avonwick Holdings Ltd v. Shlosberg  EWCA Civ 1138 (the Court of Appeal privilege decision); and the related first instance decision in Willmont & Anor v. Shlosberg  EWHC 2446 (Ch) (the Shlosberg documents decision).
Shlosberg documents decision
The use of common office-holders had been considered and approved in Capital Finance Ltd v. Food Holdings Ltd  UKPC 23,  BCC 371, where Lord Hoffmann delivering the judgment of the Judicial Committee of the Privy Council said at : ‘… It is not unusual for the same liquidators to be appointed to related companies, even though the dealings between them may throw up a conflict of interest. It avoids the expense of having different liquidators investigate the same transactions. The attitude of the court has been that any conflicts of interest can be dealt with by the court (on the application of the liquidators) when they arise: see Re Arrows Ltd  BCC 12; Re Maxwell Communications Corp plc  BCC 372.’
However, one of the questions that this throws up is in the context of document sharing between related (or indeed non-related) estates, where there is a common office-holder between the sharing and receiving estates. The point has arisen in previous cases, for example Re Esal (Commodities) Limited  4 BCC 475 – where the Court of Appeal indicated that it was permissible for office-holders appointed over a parent company to share material with its subsidiaries, but did not consider disclosure of compulsion material by those subsidiaries to sister companies or the parent, or the inevitable sharing that results from common office-holders). However, it had not been directly addressed until the Avonwick proceedings.
In the Shlosberg documents decision (also known as Re Webinvest Limited (in liquidation)), one of the joint trustees in the bankruptcy of Mr Mikhail Shlosberg also acted as joint administrator in the liquidation of Webinvest Limited, a company previously owned and controlled by Mr Shlosberg. The office-holder was also advised by the same lawyers across the estates.
Noting that the legal position concerning the proper use of documents across the two estates was unclear, the office-holder quite properly applied to the court for directions in relation to three categories of documents, namely (a) documents and information obtained under compulsion; (b) disclosure documents; and (c) privileged documents.
First, and following Parmalat, Arnold J saw no issue with the duality of the office-holder’s instruction, stating (at 83): ‘I should make it clear that I do not consider that any problem arises in this regard out of [the officeholder’s] position as both Trustee and Liquidator. If it is not lawful for the Trustees to disclose any Compulsion Material to the Liquidators, then it will not be lawful for the Liquidators to use that Compulsion Material for the purposes of the liquidation, such as by deploying the Material in the Conspiracy Claim and/or the Possession Proceedings.’
Looking at the first category of documents referred to by Arnold J, those obtained under compulsion (ie through deployment or threat of deployment of document gathering powers available to office-holders under ss235, 236 and 366 of the Insolvency Act 1986), the court determined that such documents can be shared between the estates, provided that the basis for doing so is either to benefit the winding up (in a corporate context) or the bankruptcy estate (in a personal context) or that it is likely to assist in the investigations being conducted into suspected dishonest transactions.
For the first basis, what amounts to a qualifying benefit? Following the reasoning in the Shlosberg documents decision, sharing material that may assist a potential dividend being received into the sharing estate would be sufficient. That remains the case even if the prospect of receiving a dividend is ‘unlikely’, as long as it is not ‘merely fanciful’ – a relatively low bar.
To add context to that, in the Shlosberg documents decision the sharing bankruptcy estate might have received a dividend from the receiving liquidation estate, but only if the liquidation estate made sufficient recoveries to pay off all creditors and leave a surplus that would be due to the bankrupt and thus the bankruptcy estate. Arnold J’s view was that this met the threshold here, as the prospects of recovery through a liquidation are often ‘uncertain’ and indeed ‘it is not unknown for apparently insolvent estates to turn out to be solvent after all.’
However, where the ‘benefit’ to the sharing estate is more tangential, extra care must be given. Sir Terence Etherton in the related Court of Appeal privilege decision noted that deployment of documentation in such a way as to reduce or even eliminate a creditor’s claim in the estate was not a proper exercise of a trustee in bankruptcy’s powers. That is because the statutory function of a trustee in bankruptcy is to ‘get in, realise and distribute the bankrupt’s estate’ (s305(2) Insolvency Act 1986). Reducing a creditor’s claim does not fall within that ambit. In a corporate context, a liquidator’s function is arguably more varied but in a broad sense includes collecting the company’s assets, realising and distributing them.
The same logic would appear to apply, in the obvious absence of a specific power or obligation actively to reduce the level of creditor claims in a liquidation, such that it would also appear to preclude reduction of a creditor’s claim as a valid basis on which a liquidator could share documents.
While the above principles apply ostensibly to compulsion documents, careful thought would also need to be given about deployment of non-compulsion material (eg such as a company’s books and records) for a purpose not considered in line with the office-holder’s duties. Given the Court of Appeal’s concern that an office-holder must act in accordance with their statutory function and duties, it is hard to see why that same logic would not apply to all material in the possession of a trustee or liquidator though their office.
Arnold J did however consider it appropriate for documentation to be shared between estates where the purpose of doing so was to assist in unearthing fraudulent transactions in order to bring proceedings for the benefit of their own estate. Further, disclosure to public authorities for the purposes of criminal investigations and directors’ disqualification proceedings was also permitted. While not expressly referred to in the judgment, by analogy the same principle may apply to regulatory proceedings but this would need careful thought.
However, Arnold J concluded that it did not follow that office-holders might share such material with any other third parties without the leave of the court, simply because they raise issues of dishonesty or malpractice. Again, this type of proposed document sharing would need to be carefully considered.
Another point considered in the Shlosberg document decision was the issue of material obtained by an office-holder as part of any litigation proceedings. Such material is usually subject to an implied undertaking that it will only be used for the purposes of the proceedings it was disclosed in, unless the document has been read or referred to at a public hearing, or the court gives permission (CPR 31.22).
There is no exception to that rule for insolvency office-holders, and this is an issue that is sometimes (wrongly) overlooked. Arnold J did observe that there is no real issue in the context of common office-holders, as experienced practitioners and lawyers would not use disclosure material improperly (see also below, re common office-holders). However, some caution should be exercised here, as even viewing material subject to the implied undertaking can amount to ‘use’ (see IG Index Ltd v. Cloete  EWCA Civ 1128).
The third category was material over which Mr Shlosberg had a claim to privilege which was not joint with Webinvest. In the Court of Appeal privilege decision, the court held that, save for the documents classified in the compulsion documents section above, the benefit of Mr Shlosberg’s privilege had not been transferred to the trustees, but was retained by Mr Shlosberg – as ‘privilege’ is not property that vests in a trustee in bankruptcy. Therefore any privileged documents cannot be shared between estates without the bankrupt’s consent.
The position is different in a corporate context: a liquidator takes control of a company, and could (subject to it being appropriate to do so) deploy a company’s privileged material including by waiving that privilege. A bankruptcy trustee of course does not ‘control’ the bankrupt per se, unlike a liquidator appointed over a company – hence the different approach.
The court has adopted a pragmatic approach to the issue of document sharing between insolvent estates, and office-holders should mirror that approach in their conduct of insolvencies. Where office-holders are appointed over any number of related estates, careful thought should be given to how they approach documentation at the earliest opportunity.
To ensure transparency, consider a document- sharing protocol that clearly sets out the office-holder’s approach. Such a protocol should set out the basis and reasons for sharing documents and provide some protection over any potentially privileged material. In particularly sensitive circumstances, the advice of conflict counsel should be sought.
Where documentation is obtained under powers of compulsion, an easy solution is for the requests to be made on behalf of all interrelated estates in order to avoid arguments about subsequent sharing. If there remains any doubt then applications should be made under the office-holder’s powers under ss236 and 366 of the Insolvency Act 1986 for determination by the courts.
This article first appeared in the Winter 2021 edition of RECOVERY and is reproduced with the permission of R3 and GTI Futures.
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