- 3 mins read
The latest decision in the Shlosberg saga that has turned the issue of privilege and use of documents on its head - this time considering the practical implications of how office holders can use information they have obtained by compulsion for the purposes of their investigations.
The general facts of Shlosberg will be familiar to many (particularly those who attended Ashfords' recent Autumn Seminars). In short, the Liquidators of Webinvest Limited (the "Company") - Mr Shlosberg's former business - and Mr Shlosberg's Trustees in Bankruptcy sought directions from the court over how they could use certain documents and information they had obtained in the course of their investigations. Mr Willmont acted as both the joint-Liquidator of the Company and as Mr Shlosberg's joint-Trustee in Bankruptcy.
Three claims arose from the two insolvencies. The first was for conspiracy to deprive the Company of its main asset, a claim which had been brought by Avonwick Limited, the Company's principal creditor, and the Liquidators against Mr Shlosberg and several third parties. The second claim was for misfeasance and/or transactions at undervalue/preference type claims, and the third related to two London properties which the Trustees sought for the purposes of the estate.
In pursuing these claims, the Liquidators and the Trustees sought directions from the court over whether information obtained by the Trustees under compulsion - i.e. using their powers under s366 IA 1986 - could be shared with the Liquidators.
The Liquidators and Trustees also sought an order that documents disclosed to Avonwick by Mr Shlosberg in the conspiracy claim could be disclosed to the Liquidators, as well as permission to approve a "Privileged Material Segregation Protocol" to deal with the privileged material that has been the subject of earlier litigation.
The principal purpose of obtaining information by compulsion is to assist office holders in carrying out their functions. The Liquidators and Trustees argued sharing the information met this purpose firstly because the claim may have led to a surplus in the Liquidation - which would ultimately benefit the Bankruptcy estate. In arguing this case, the Liquidators claimed they did not need to show that there would be a surplus - only that the prospect of a surplus was "more than fanciful".
Secondly, the Liquidators and Trustees put forward a wider 'public interest' argument - i.e. that sharing the information would aid office holders in revealing dishonesty or malpractice on the part of bankrupts and/or directors of insolvent companies.
The judge agreed on both counts - but caveated his order with the warning that sharing information that had been compulsorily obtained could only be justified if one of these two conditions were met.
The judge also approved the requests that the Avonwick disclosure material be shared, as well as the suggested protocol for the privileged material.
The decision further develops the discussion this series of litigation has generated over how office holders can use the information obtained in accordance with their statutory powers. Office holders will now be permitted to share information obtained if one of the two grounds above is met - i.e. that there is a 'real prospect' that a surplus can be achieved, and/or whether doing so is in the public interest.
Although this extends some level of autonomy to office holders, it is likely directions from the court will still need to be sought in most situations. Although the decision means that in theory the court's permission should not be required in situations where there is the prospect of a surplus, the practical reality is that most comparable situations will likely be complicated and contentious. Office holders will need to carefully consider whether sharing information will increase the prospects of a surplus for the estate, and think about how that case can be made persuasively.
As regards the 'public interest' point, the judge held that, as the conspiracy claim and the misfeasance/antecedent transactions claims made allegations of a fraudulent scheme set up by the Bankrupt, permission should be granted. This ground will need to be reviewed on a case by case basis and, in practice, may again require the court's determination.