Litigation privilege in liquidations

The recent Court of Appeal decision in Rawlinson and Hunter Trustees SA & others v Akers & another [2014] serves to emphasise that third party reports commissioned by liquidators to enable them to consider whether litigation should be commenced ...

… in order to make recoveries for the benefit of creditors will not always attract litigation privilege. What is required is that the sole or dominant purpose of the production of the report is the obtaining of information or advice in connection with litigation against a particular person or class of persons, where such litigation is a real likelihood.

In this case, a firm of accountants had been asked by the liquidators of a company to prepare five separate reports/pieces of advice. These reports had then been seen (but not copied) by the Serious Fraud Office who had relied on them when seeking search warrants against two individuals. The individuals claimed that the searches that were carried out were unlawful and sought a third party disclosure order against the liquidators who had commissioned the reports. The liquidators asserted that they could not disclose the reports because they were protected by litigation privilege. However, the judge at first instance had concluded that the reports were not privileged because the liquidators had been unable to prove that the reports were prepared for the sole or dominant purpose of obtaining of information or advice in connection with litigation that was either underway or contemplated.

The Court of Appeal emphasised the need for litigation to be reasonably in prospect – more than a mere possibility – at the time of commissioning advice before litigation privilege can attach. It also emphasised that it is not enough that one of the purposes of commissioning advice was in connection with contemplated litigation; it was necessary for it to be the dominant purpose of seeking the advice. The first duty of the liquidators was to establish what, if any, assets or liabilities existed within the company and what, if any, steps were open to the liquidators to collect in the assets or reduce or discharge the liabilities. With this duty in mind, showing that the sole or dominant purpose of commissioning the reports was for anything other than enabling the liquidators to comply with this, their principal, duty (rather than for obtaining information or advice in connection with litigation) was a big challenge.

In response to the liquidators' argument that the liquidation in question was of an inherently litigious nature, and thus litigation was always a real prospect, the Court said that it cannot be right, even with a liquidation of this nature, to assume that everything that a liquidator does is in contemplation of litigation. What is required is that litigation between the liquidator and a particular person or class of persons was a real likelihood rather than a mere possibility.

With these points all in mind, the Court of Appeal agreed with the judge that the liquidators had failed to provide sufficient evidence to prove that the reports they obtained were commissioned for the dominant purpose of obtaining information or advice in connection with contemplated litigation and so the liquidators were required to disclose the reports.

The lesson for liquidators is that they cannot assume that any advice or information obtained as part of the usual liquidation process will be protected from disclosure by litigation privilege. If liquidators want to maximise the chances of being able successfully to claim litigation privilege they should ensure that they have identified a specific person (or class of persons) against whom they are considering bringing a claim, and they should consider obtaining separate, specific advice in relation to the potential claims rather than seek advice as part of a broader exercise of identifying the companies' assets and liabilities.