Shlosberg v Avonwick Holdings Limited

Bankruptcy – legal professional privilege – successor in title – s. 486 Insolvency Act 1986

The petitioner lent the bankrupt’s company, Webinvest Ltd, US$100m which it lent on to a Liechtenstein company. The bankrupt guaranteed Webinvest Ltd’s obligation to repay the petitioner. The Lichtenstein company defaulted on its loan, which led to Webinvest Ltd also defaulting. Webinvest Ltd settled its claim against the Liechtenstein company. The petitioner successfully petitioned for the bankrupt’s bankruptcy on the guarantee and a winding up order in relation to Webinvest Ltd.

The petitioner also proceeded against Webinvest Ltd and the bankrupt, alleging the settlement with the Liechtenstein company was part of an unlawful conspiracy to prevent Webinvest Ltd’s assets falling into the petitioner’s hands. The same firm represented the petitioner and the bankrupt’s trustee. The bankrupt applied for an order that the firm cease to act because the trustee held material over which the bankrupt was entitled to assert privilege. The petitioner contended that the bankrupt no longer benefited from privilege as it had vested in the trustee, and the trustee had agreed to waive it in favour of the creditor.

The court rejected that submission. The Judge applied Crescent Farm (Sidcup) Sports Ltd v Sterling Offices Ltd [1972] Ch 553. Legal professional privilege does not automatically inure for the benefit of the bankrupt’s successor in title, instead the trustee needed to acquire property to which the legal advice related in order to succeed to the privilege. It was not sufficient to have simply acquired the documents recording the privileged information. Further, privilege was not an interest under section 486(1) of the Insolvency Act 1986 and therefore could not vest in the trustee under that provision.

The trustee could not claim that he had acquired privilege in relation to several classes of documents and so the court granted an injunction requiring the firm to cease acting for the petitioner.

Although there is nothing inherently objectionable about a solicitor acting for both the trustee in bankruptcy and a creditor, caution should be exercised when the creditor is involved in separate litigation against the bankrupt and the trustee might have access to documents that would be privileged as against the creditor.