A v B & Anor

Where a regulator requires an auditor to produce documents, the auditor’s entitlement to withhold material for legal professional privilege depends on the material being privileged as a matter of fact and law. It does not arise merely because the client asserts privilege, or because the auditor considers the assertion valid.

The auditor must determine how to respond to the statutory notice, subject to liability to the client if it wrongly fails to preserve an existing privilege. A dispute about the documents’ privileged status is ordinarily best resolved between client and auditor, with the regulator joined where appropriate. A general declaration about the procedural position is inappropriate where the substantive dispute is already before the court.

The Financial Reporting Council investigated the audit of a retailer’s 2018 financial statements and served statutory notices on the former auditor requiring production of documents. The retailer asserted legal professional privilege over some material supplied to the auditor on a limited-waiver basis.

The retailer sought a declaration that the auditor had to withhold any document over which privilege was asserted, or alternatively that the auditor could assess the validity of the claim. The auditor and the FRC opposed declaratory relief. A counterclaim separately addressed whether six documents were in fact privileged. The central issues were whether the proposed declaration was appropriate and how the statutory disclosure regime interacted with legal professional privilege.

1. Declaratory relief refused. The proposed declaration did not resolve the substantive dispute about whether the documents were privileged. That issue was already being determined through the auditor’s counterclaim. The procedural question did not itself concern the existence or extent of the legal right. The declaration was therefore neither necessary nor the most effective means of resolving the dispute ([2020] EWHC 1491 (Ch), [60]–[64]).
2. Effect of the statutory scheme. The FRC’s statutory entitlement to obtain information under the Statutory Auditors and Third Country Auditors Regulations 2016 is limited by legal professional privilege. The limitation applies whether the privilege belongs to the recipient of the notice or to a third party whose documents are held by that recipient. The entitlement to withhold depends on the document being privileged in fact and law, not on the client’s assertion or the auditor’s assessment alone ([65]–[71]).
3. Auditor’s role. The auditor is not merely ministerial. It has its own interest in complying with the statutory notice and may have relevant evidence about documents created or held by it. It must determine whether to disclose, while remaining liable to the client if it fails to preserve a privilege which the underlying auditor-client relationship requires it to maintain ([70], [72], [76]).
4. Practical procedure. If the auditor withholds material, the FRC may challenge that decision under the enforcement mechanism in Schedule 2. If the auditor proposes disclosure, the client may seek an injunction or other relief against the auditor, and the FRC may be joined where appropriate. Proceedings between the client and auditor ordinarily permit both parties to inspect the disputed material and make fully informed submissions ([71]–[79]).
5. The claim for the declarations sought by the claimant and the alternative declaration proposed by the first defendant was dismissed ([80]).