Insolvency, fraud and privilege
In almost every
company insolvency, someone suggests (often quite loudly) that the directors
have been guilty of fraud or misconduct. Sometimes the allegation may be
serious, and the authorities investigate. One rich source of evidence may be
the legal advice given to the company – it may be the smoking gun, proving that
the directors knew exactly what they were doing. But can the prosecutors use
it?
Legal advice
from a lawyer is absolutely privileged from disclosure in most circumstances. That
can be the reason why canny directors route sensitive management and compliance
discussions through their solicitor – that’s very common in competition law discussions,
for instance.
The
privilege belongs to the client, not the lawyer, and the client can waive it.
That is an important point in connection with insolvency, where the client is
often the company. What if the liquidator or administrator waives privilege and
provides the advice to the prosecutor or regulator, to be used against the directors who
took the advice? I have been there myself, when my advice on financial services
compliance was later used by the SFO to help convict the directors, in what
turned out to be a fraud – of course I had not been told the half of it.
But the
legal distinction between advice to the company and advice to the directors is
a fine one, especially when dealing with issues of fraud or regulatory
compliance. It’s the directors who may go to jail, even if the company pays the
lawyer’s bills. Can the liquidator really pull the rug out from under the
directors by turning over the legal advice to the prosecution?
No, the
court has said in R. (Stewart
Ford) v The Financial Services Authority in October 2011. It held that joint interest legal professional
privilege applied to the legal advice. Even where the lawyer’s retainer is
in the name of one party – the company – others may be able to rely on the
privilege if they had a joint interest in the advice. For joint privilege to
arise, the facts must demonstrate that all those sharing the privilege, and the
lawyer, knew, or ought to have known, that they enjoyed legal professional
privilege with the others. To claim privilege, the director had to show:
i) That he communicated with the lawyer for
the purpose of seeking advice in an individual capacity;
ii) That he made clear to the lawyer that he
was seeking legal advice in an individual capacity, rather than only as a
representative of the company;
iii) That those sharing the joint privilege (the
other directors and the company) knew or ought to have appreciated the legal
position;
iv) That the lawyer knew or ought to have
appreciated that he was communicating in an individual capacity.
v) That the communication with the lawyer
was confidential.
The directors succeeded, and the FSA were
barred from relying on two crucial emails from the lawyer which had been handed
over by the administrators.
The lawyers who gave the advice were my old
firm Irwin Mitchell. Interestingly, the authors of the two legal textbooks on the
subject were leading counsel on opposite sides in the case!
