Paper trail

Until recently, the law on disclosure in an insolvency context was unclear. However, the recent decision in Jackson and Money v Baker Tilly [2014] EWHC 1134 (Ch) clarifies the scope of disclosure under the Insolvency Act 1986 and has particular relevance for professional advisers whose clients are adjudged insolvent.

External scrutiny

Professional advisers accept that their client files will occasionally be subject to external scrutiny.
For example, regulators and auditors may wish to review an adviser's files, clients may ask for them
to be returned or transferred, police and other
law enforcement agencies may demand copies. Sometimes, advisers themselves may need to
rely on the files in court or be ordered to provide non-party disclosure under CPR 31.17.

However, professional advisers are far less alive to disclosure in an insolvency context, despite the far-reaching powers that exist.

When an insolvency practitioner (IP) is appointed to assume control of an insolvent's affairs, one of the first tasks is to collate records either belonging or pertaining to the insolvent.
IPs may issue numerous requests, including to former professional advisers, and often claim that sections 235 and 236 of the Insolvency Act 1986 (and section 366 in personal insolvency) require anyone associated with the insolvent to disclose
'all of their records'.

In corporate insolvencies, section 235 imposes a duty on certain third parties to provide information and attend interview upon request. The duty primarily extends to a company's officers, employees, advisers/agents (under a contract for services) and former administrators or liquidators. These third parties are required to provide information about 'the company and its promotion, formation, business, dealings, affairs
or property' and/or to attend for interview as the
IP may 'reasonably require'.

Section 236 is a complementary provision which extends this obligation to other third parties and provides a mechanism for court intervention in default. Under section 236, the pool includes anyone thought to be 'capable of giving information concerning the promotion, formation, business, dealings, affairs or property of the company'. In the absence of voluntary cooperation, an IP may apply for an order requiring their private examination at court, the production of a witness statement setting out their dealings with the company and/or delivery up of 'any books, papers or other records in [their] possession or under [their] control relating to the company'.

These provisions affect a huge swathe of individuals and organisations that may have been involved in a company's affairs prior to insolvency. Importantly, this has been held to include a company's former professional advisers, such as its solicitors and accountants. The scope of disclosable material is extremely wide and the court's powers draconian (for example, section 236(5) provides that a warrant for arrest or other seizure may
be issued).

When faced with a broad request under
sections 235 and 236, former professional advisers understandably prefer to avoid disclosure of
their client papers. In support of this approach,
Green v BDO Stoy Hayward LLP [2005] EWHC 2143 (Ch) is routinely cited, suggesting that IPs must particularise their disclosure requests in increasing detail in order to demonstrate a reasonable requirement for the information.

Needless to say, Green was decided in favour
of the respondent advisers (in that case, the company's auditors), not the applicant liquidator.

Judge Kitchin was very alive to the facts of the case, in particular:

1. the application for disclosure had been made
a long time after appointment;

2. there were no details of enquiries already made/the gaps outstanding in the liquidator's knowledge;

3. the auditors had actually had little involvement in the company's affairs;

4. the application had been drafted widely; and,

5. many of the documents were already in the public domain and, as such, a reasonable need for disclosure had not been made out.

Reasonable requirements

The application of sections 235 and 236 was recently considered in Jackson and Money v Baker Tilly. The underlying insolvent company, Alocasia Limited, had been incorporated as a vehicle to hold a substantial group capital loss within a wider tax avoidance scheme. For over five years while the scheme was in place, Alocasia's accounts were audited by leading firm of accountants, Baker Tilly.

The scheme eventually failed and Alocasia was assessed for tax in the sum of £4.68m. Alocasia was placed into liquidation and Messrs Jackson and Money were appointed joint liquidators.

Having received limited documentation upon appointment, the liquidators wanted to obtain additional records to understand what had led to Alocasia's insolvency. In light of Baker Tilly's long involvement as auditors, the liquidators wrote asking for disclosure of its files and other records.

Lengthy and detailed technical correspondence ensued, but not a single document was ever disclosed.

An application pursuant to section 236 was issued in September 2013 and judgment was handed down on 10 April 2014. Finding in favour of the liquidators, HHJ Mark Raeside QC revisited the leading authorities and emphasised the two-stage test for disclosure, namely:

1. whether the requested documentation was reasonably required; and

2. whether disclosure would be unreasonable, unnecessary and/or oppressive.

• "The primary duty of a liquidator... is to collect its assets with a view to discharging its liabilities to the extent the assets permit. To perform that function, that liquidator needs information, and the companies legislation has for many years given the liquidator power to obtain it from those who can be expected to have relevant information," Shierson and another v Rastogi [2003] 1 WLR 586 per Peter Gibson LJ.

• "Office-holders applying for relief under section 236 are to establish a reasonable requirement for information (a matter on which the onus is on the office holders, but on which the views of the office holders themselves are normally entitled to a good deal of weight)," Sasea Finance Ltd v KPMG [1998] BCC 216 per Robert Walker J.

• "The power of the court to make an order under section 236 is not limited to documents which can be said to be needed 'to reconstitute the state of the company's knowledge', even if that may be one of the purposes most clearly justifying the making of an order," British and Commonwealth Holdings Plc v Spicer and Oppenheim [1993] AC 426 per Lord Slynn

• of Hadley.

• "... a reasonable requirement. That is what they have to show, not absolute need... Nor are the liquidators under a duty to make out that requirement in detail," Sasea Finance Ltd v KPMG [1998] BCC 216 per Robert Walker J.

In relation to Green, HHJ Mark Raeside QC observed: "It was suggested that the authority
of Green v BDO was binding authority on me as
a matter of law, which was to the effect that if liquidators were short on material that was not
a proper reason... I reject that as a matter of law
and, in my judgment, the case of Green v BDO is
not authority for that proposition, and such a proposition would run contrary to the Act and
the cases I have set out above which bind me."

The judge concluded that Green was a "fact-sensitive case on appeal" and that on the facts a reasonable requirement had been demonstrated.

Balancing act

The second stage of the test for disclosure was to analyse what (if any) factors weighed against making an order. The judge again cited various decisions:

• "It is plain that this is an extraordinary power and that the discretion must be exercised after a careful balancing of the factors involved: on the one hand the reasonable requirements of the administrator to carry out his task, on the other the need to avoid making an order which is wholly unreasonable, unnecessary or 'oppressive' to the person concerned," British & Commonwealth Holdings Plc v Spicer and Oppenheim [1993] AC 426 per Lord Slynn of Hadley.

• "An application is not necessarily unreasonable because it is inconvenient... or causes him a lot of work or may make him vulnerable to future claims, or is addressed to a person who is not an officer or employee of or a contractor with the company in administration, but all these will be relevant factors, together no doubt with many others," British & Commonwealth Holdings Plc v Spicer and Oppenheim [1993] AC 426 per Lord Slynn of Hadley.

• "The risk of oppression may arise from one or more of a variety of factors of which the most important are any exposure of the witness to self-incrimination (in respect of civil or criminal liability) and the disruption, stress and expense likely to be caused to the witness in complying with the order," Re Bank of Credit and Commerce International SA and Morris & Ors v Bank of America National Trust & Savings Association & Ors [1997] BCC 561 per Robert Walker J.

• "Confidentiality and/or privilege arguments are not a bar and appropriate safeguards can be imposed," Re Brook Martin & Co (Nominees) Limited [1993] BCLC 328 per Vinelott J.

Reviewing the facts, HHJ Mark Raeside QC concluded: "I am not affected per se by the
amount of work being asked of these respondents. They are, of course, a professional firm. I have quoted in some detail the very helpful letter dated 19 March 2014 setting out the extent of the documents that they have. I am satisfied that they have control of those documents. As one would expect from a firm as well known as this and as professional as this, they are categorised under quite a detailed set of sub-headings, of which they have now provided. That gives me some real confidence that the exercise they can carry out is achievable, it is not oppressive or indeed unnecessary."

Sections 235 and 236 impose a duty on former professional advisers (among others) to give disclosure of a broad range of documents and to attend for interview if requested. The provisions are not without limitation; requests should only be made for materials that are reasonably required and in circumstances where significant hardship will not be caused to the party giving information.

However, the evidential burden placed on IPs is not a high one, and so professional advisers should comply with requests in a meaningful way. SJ

 

 

Christopher Burt is a solicitor at Moon Beever. He acted for the applicants Messrs Jackson and Money