Global menu

Our global pages

Close

Use of confidential documents by insolvency officeholders appointed in connected insolvencies

  • United Kingdom
  • Restructuring and insolvency

09-10-2017

Willmont & Others v. Shlosberg (also known as Re Webinvest Limited (in liquidation) / Re Shlosberg (in bankruptcy)) [2017] EWHC 2446 (Ch), Arnold J.

In a decision handed down on 9 October 2017, the High Court has provided clarification for insolvency practitioners regarding how they can properly use documents and information obtained under compulsion, and in particular the circumstances in which such documents can be shared with related insolvency estates.

Key Points

Where officeholders appointed over an insolvent estate hold documents and information obtained from third parties under their powers of compulsion (ss.235, 236, 366 Insolvency Act 1986), and the estate includes shares in subsidiary companies (whether or not those subsidiaries are themselves in insolvency proceedings), the officeholders can share material obtained by compulsion with the officeholders or directors of its subsidiaries if there is a prospect of a surplus in the subsidiaries which would benefit the shareholder. The prospect of a surplus must be more than fanciful, but solvency need not be likely. The judgment expresses a “provisional view” that no court permission is required for such sharing in these circumstances.

  • the fact that the disclosure of such material to third parties may facilitate discovery of dishonesty or other malpractice by bankrupts or company officers is not, of itself, sufficient to permit such disclosure, although it is a matter that may lead to the court granting permission.
  • where an individual insolvency practitioner is appointed over several connected estates, there is an inevitable sharing of information between the estates. This does not cause a problem, even where the sharing of information would not be permitted if the estates had been entirely separate. If, however, sharing would not have been permitted in those circumstances, only the estate that originally obtained the documents may deploy them in proceedings.
  • where an officeholder appointed in connected estates receives disclosure of documents in litigation proceedings in one estate, CPR 31.22 (which imposes restrictions on the use of disclosed documents) does not prevent that officeholder from reviewing the documents for the purpose of the proceedings in which they were disclosed, notwithstanding that the documents may include information relevant to other proceedings or the other insolvent estates.

Background

The case concerned the bankruptcy of Mikhail Shlosberg and the compulsory liquidation of Webinvest Limited, a company previously owned and controlled by Mr Shlosberg. Jeremy Willmont of Moore Stephens LLP is both one of the joint trustees in bankruptcy of Mr Shlosberg and one of the joint liquidators of Webinvest. The trustees and liquidators are investigating transactions entered into in the period shortly before the commencement of the insolvencies. Those investigations are, for the most part, conducted by the same individuals within Moore Stephens, and the trustees and liquidators are advised by the same solicitors, Dechert LLP.

In a previous case involving the same insolvencies, the Court of Appeal held that trustees in bankruptcy cannot waive the legal professional privilege of a bankrupt: Avonwick Holdings Limited v Shlosberg [2016] EWCA Civ 1138.

Where insolvency officeholders receive documents and information under the compulsory powers contained in the Insolvency Act 1986 (including where the use of those powers is only threatened), they owe a duty to the person who provided that material only to use it for the purposes for which the statutory powers were conferred. Perhaps the best-known example of this rule is the case of GE Capital Commercial Finance Limited v. Sutton [2004] EWCA Civ 315, in which the Court of Appeal held that administrative receivers who had disclosed documents obtained under their compulsory powers to their appointing debenture-holder had breached the duty.

In this case, it was common ground that Mr Willmont’s appointment as joint trustee and joint liquidator, and the use of the same solicitors by both estates, meant that compulsion material obtained by one estate was automatically shared with the other. The officeholders argued that this was not only permissible but desirable, given the very close connection between the estates and the transactions under investigation. Recognising, however, that the caselaw was unclear, they applied for the court’s directions. Mr Shlosberg opposed the applications.

The applications also raised a similar question relating to disclosure documents provided to the liquidators in proceedings in which they were engaged (against Mr Shlosberg, among others). Rule 31.22 of the Civil Procedure Rules states that where documents are disclosed to a party in litigation, the party can only use those documents for the purpose of the proceedings in which they are disclosed, unless certain conditions apply. Mr Shlosberg refused to allow inspection in the proceedings, arguing that the disclosure documents might contain material relevant to the bankruptcy, and that Mr Willmont and his solicitors would breach this rule because of their dual roles.

Common office-holders

The court’s starting point was to consider Mr Willmont’s position as common office-holder of connected insolvency estates, and to recognise that this practice has been approved at the highest levels (e.g. Parmalat Capital Finance Limited v Food Holdings Limited [2008] UKPC 23). The advantage of this practice is the efficiency of one set of office-holders investigating the same transactions, which assumes that information relevant to each estate will be, where appropriate, be pooled by the office-holders.

Although there is potential for conflicts of interest in such cases, in light of the distinct duties owed by the office-holders to the separate creditors of each estate, the previous authorities have recognised that such conflicts can be dealt with if and when they arise.

Compulsion Material

In relation to material obtained from third parties under the officeholders’ compulsory powers, the officeholders submitted that it was permissible for such material to be shared between the bankruptcy and liquidation estates, without the permission of the court, on two bases:

  • first, as the shares in Webinvest are an asset in the bankruptcy estate, the disclosure of compulsion material by the trustees in bankruptcy to the liquidators of Webinvest is in the interests of the bankruptcy, as there is a prospect of a surplus in the liquidation of Webinvest (and thus a dividend to the bankruptcy estate).
  • second, the disclosure is likely to assist in the investigations being conducted within both estates into suspected dishonest transactions effected by Mr Shlosberg and his associates.

On both grounds, Arnold J gave the court’s permission for compulsion material to be shared. As regards the general principles asserted by the officeholders:

  • on the first ground, Arnold J accepted the officeholder’s submission that there was a prospect that was more than “merely fanciful” that there could be a surplus in the liquidation of Webinvest (even though such a surplus appears unlikely), and expressed the “provisional view” that, in those circumstances, the trustees do not require the court’s permission to share compulsion material.
  • in the light of his findings on the facts, the judge did not need to consider the question of whether sharing would have been permissible if there had been no prospect of a surplus in the winding-up, but expressed some doubt that it would have been.
  • on the second ground, having considered further written submissions from Mr Shlosberg, the judge held that, although the discovery and remedying of dishonesty or other malpractice by bankrupts and officers of insolvent companies was a basis on which compulsion material could be disclosed to public authorities without court permission, such permission is required before disclosure can be made to other third parties.

Sharing of material where there are common officeholders

Arnold J stressed that he did not consider that Mr Willmont’s dual role as trustee and liquidator created any problem in the context of compulsion material. This is on the basis that although that dual role may inevitably lead to compulsion material being shared between the estates, the interests of the parties which provided the material can be protected by limiting the officeholders’ use of the material. As the judge put it: “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 proceedings.”

Disclosure Material

As regards disclosure material, the judge dismissed the concerns expressed by Mr Shlosberg and confirmed that the inspection by Mr Willmont and his solicitors of disclosed documents, for the purpose of the proceedings in which they were disclosed, will not breach CPR rule 31.22, notwithstanding the dual roles of Mr Willmont and the solicitors and the possibility that the documents could be relevant to the bankruptcy.

Commentary

Although (as the court noted) it is frequently the case that common officeholders are appointed over several companies within a group, and although the authorities recognise that one of the advantages of such arrangements is that there can be joint investigations and a pooling of information, there has been little consideration of the treatment of compulsion material in these circumstances. In Re Esal (Commodities) Limited (1988) 4 BCC 475 the Court of Appeal indicated that it was permissible for officeholders 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 officeholders.

The position is complicated by a confusion in the authorities regarding when officeholders require the court’s permission before disclosing compulsion material to third parties. Whereas Re Esal clearly suggests that no permission is needed before documents can be provided to subsidiaries, other authorities suggest that officeholders require permission for any sharing with third parties (e.g. Lombard North Central Plc v. Bradley [2002] EWHC 121 (QB) at paragraphs 23(4) and (5)).

Whilst the court’s decision in Willmont v. Shlosberg goes some way to clarify these questions, and will be welcomed by insolvency practitioners, uncertainty remains as to when compulsion material can properly be shared between connected insolvencies where the receiving party is not a potentially solvent subsidiary of the disclosing party. In view of the facts of the case (in particular, (i) that the liquidators of Webinvest held no compulsion material, so that the question of disclosure by them to the trustees was academic, and (ii) that there was a prospect of a surplus in Webinvest) the court did not have to consider these issues.

The clear and pragmatic finding that no problems arise in relation to compulsion material simply as a result of a single officeholder being appointed to connected estates is helpful. Nonetheless, if such an officeholder wishes to make use of any material in an estate other than that to which it was originally produced, he or she may still need to apply to court. In order to avoid the need for an application, officeholders in those circumstances should consider requesting documents from third parties on behalf of all the connected estates.

The other points dealt with in the judgment (relating to disclosure material and documents privileged to the bankrupt) were less controversial. Although Mr Shlosberg opposed the relief sought by the officeholders on those points there was little substance in his arguments, and the court’s findings will come as little surprise to practitioners.


Jamie Leader, Andrew Black and Camilla Eliott Lockhart of Eversheds Sutherland’s Restructuring team acted for the liquidators of Webinvest Limited.

 

For more information contact

< Go back

Print Friendly and PDF
Subscribe to e-briefings