Shlosberg v Avonwick Holdings

The Court of Appeal dismissed the appeal and upheld Mr Justice Arnold’s order that Dechert cease acting for Avonwick in respect of matters relating to the bankrupt, Mikhail Shlosberg. The court held that legal professional privilege is a personal right and, on the proper construction of the Insolvency Act 1986 (in particular ss.311, 283, 306 and 436), privilege does not automatically become property of the bankrupt that vests in the trustee. Section 311(1) permits a trustee to take possession of privileged documents and to inspect them for the purposes of getting in and realising the estate, but it does not necessarily permit the trustee to waive the bankrupt’s privilege or to deploy privileged material in proceedings against third parties. The court further held that the judge did not err in the exercise of his discretion in ordering Dechert to cease acting for Avonwick given the risk to the bankrupt’s fundamental privilege and confidence.

This appeal arose from an application by the bankrupt, Mr Mikhail Shlosberg, seeking an order that Dechert LLP cease to act for Avonwick and the trustees because Dechert had seen and reviewed a large volume of documents, some subject to legal professional privilege, which the trustees wished Avonwick to use in related conspiracy proceedings.

Background and parties:

• Avonwick is the principal creditor of the bankrupt and of Webinvest (a company beneficially owned by the bankrupt).
• The Trustees (appellants) were the trustees in bankruptcy of Mr Shlosberg; Dechert acted for Avonwick, the Trustees and the liquidators of Webinvest on related matters.
• Documents subject to joint privilege of Mr Shlosberg and Webinvest had been provided to the Trustees on CDs and reviewed by Dechert.

Nature of the application: Mr Shlosberg sought an injunction preventing Dechert from acting for Avonwick in respect of his affairs on the basis that privileged information had been reviewed by Dechert and could be misused in the conspiracy proceedings.

Issues framed:

• Whether legal professional privilege attaching to documents of the bankrupt is property that vests in the trustee on appointment under the Insolvency Act 1986.
• Whether section 311(1) or other provisions of the Insolvency Act 1986 impliedly allow a trustee to waive or deploy privileged material obtained from the bankrupt.
• Whether the judge erred in his analysis of confidentiality and in granting the injunction that Dechert cease to act for Avonwick.
• Whether the order for costs should have been made jointly against Avonwick and Dechert.

Court’s reasoning and conclusion:

• The court emphasised the fundamental nature of legal professional privilege, drawing on authorities that privilege should not be overridden except by express words or necessary implication.
• On construction of the Insolvency Act 1986, privilege is not property that automatically vests in the trustee; neither the definition of "property" (s.436) nor the provision about powers over property (s.382(4)/s.283(4) as discussed) produce that necessary implication.
• Section 311(1) expressly requires the trustee to take possession of books and papers (including privileged ones), and it is necessarily implicit that the trustee may inspect documents to perform statutory duties. It is not necessarily implicit, however, that the trustee may waive privilege or deploy privileged material in proceedings against third parties. The Cork Report materials and parliamentary history supported that limitation.
• The court found the judge’s exercise of discretion to order Dechert to cease acting for Avonwick was within proper bounds given the absence of an effective information barrier, the volume and nature of privileged material reviewed, and the potential prejudice to the bankrupt’s rights.
• The Court refused permission to appeal against the judge’s costs order and concluded the appeal should be dismissed.

Appeal dismissed. The Court held that legal professional privilege is a personal right and does not automatically vest in a trustee in bankruptcy under the Insolvency Act 1986; section 311(1) permits the trustee to take and inspect privileged documents for the purposes of administering the estate but does not necessarily permit waiver or deployment of privileged material against third parties. Given the risk to the bankrupt’s privilege and confidence, the judge was entitled to order Dechert to cease acting for Avonwick and his exercise of discretion was not wrong.

Appeal from the High Court of Justice, Chancery Division, Bankruptcy Court (Mr Justice Arnold) (see judgment at [2016] EWHC 1001 (Ch)); appeal determined in the Court of Appeal, Civil Division, neutral citation [2016] EWCA Civ 1138.