Office holders Powers part 10

We have been considering in recent articles the powers to order a private examination under section 236 of the Insolvency Act 1986. This week and in the next few articles we consider further some of the considerations which apply in connection with such applications.

An important point to note regards legal professional privilege. When this credit crunch series has concluded, we will in the next series of articles be considering the present approach of the courts and the statutory requirements regarding money laundering which are also affected by considerations of legal professional privilege. In broad terms there is a public interest in people being able to obtain legal advice. That means in general that that advice and instructions given to obtain that advice are "privileged". What that means is that they are and remain confidential and cannot be referred to in court.

Privilege is a large and complicated topic which will have to be addressed further in a series of articles devoted particularly to that. However it is such a key part of the administration of justice that is important that it is understood, particularly because as will appear even lawyers are frequently apparently unsure as to its scope. Privilege is the privilege of the client not a lawyer. Thus the privilege can be waived by the client but not the lawyer. Thus in the conversation takes place between a client and the lawyer, the lawyer cannot decide that one should avoid the privilege and make the conversation "public", but the client can. What this means is that a lawyer must keep confidential information provided to him by the client, save in very exceptional circumstances.

This is linked to the obligation of lawyers not to mislead the court. For example, let us imagine a client who is charged with murder. During the course of a discussion with his lawyers, the client tells the lawyers that he did indeed commit the murder. However he tells the lawyers that he does not want this revealing, and he wants them to defend the case on the basis of him giving evidence that he did no such thing. In those circumstances, if the lawyers continued they would be in breach of their duty is not to mislead the court unless the defence they ran was consistent with their instructions. Thus in that circumstance it would be possible to run a defence on the basis that the prosecution had not proved its case, as long as they are not positively asserting that the defendant is innocent. To take an illustration, if prosecution failed to adduce evidence on a key part of the case, or the evidence adduced was for some reason unsatisfactory, it would be possible to challenge that not on the basis of innocence but on the basis of the prosecution not having proved its case. As can be imagined, that is a very difficult situation for lawyers to be in.

Privilege does not extend to an attempt to commit crime. Thus as opposed to saying to your lawyer that you have committed murder, if when seeking advice if you were to say to your lawyer that you propose to commit a murder a week on Tuesday and wanted some advice as to how to get away with it, the privilege would not apply.

In insolvency or bankruptcy lawyers often seem to forget the consequence of this and the effect of the privilege being that of the client. What that means is that if a company goes into liquidation, or an individual becomes bankrupt, the company's property or that of the individual vests in the liquidator or the trustee in bankruptcy accordingly. That means they are then the person entitled to the privilege. You would be surprised at how many lawyers fail to grasp this fundamental concept. For example, when solicitors are acting for a company in litigation (or otherwise) in financial difficulty, they often fail to realise that once the company is in liquidation then the liquidator will be entitled to all the details of the advice they have given. That means for example when a company is in fiercely fought litigation against another party in circumstances where if it loses it will go into liquidation that everything the lawyers have said and done in that litigation will become known to the liquidator who may well share this information with the majority creditor (i.e. the party who was recently on the other side).

What this means to section 236 applications is that if the liquidator wishes to question the solicitor for the company there is no question of legal professional privilege being raised by the solicitors either in relation to documents of the company or questions relating to the company's affairs. Insofar as these are privileged, the privilege is that of the company and hence the liquidator.