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Lawyers’ disclosure obligations in client bankruptcies and liquidations

30 June 2017 - By Paul Collins

Lawyers cannot legitimately refuse a request by the Official Assignee, or by a liquidator, for access to or disclosure of, an insolvent client’s privileged records or information. That is because the insolvent client’s privileges vest in the Assignee or liquidator and not the insolvent client or former client.

The enduring authorities in this area include, in relation to bankruptcy, Re Konigsberg (a bankrupt) [1989] 3 All ER 289 (Chancery Division), Wong v Official Assignee [1997] NZFLR 300 (HC) and, more recently, Leeds v Richards [2016] NZHC 2314, [2016] NZAR 1405. A recent authority in relation to company liquidations is McCullagh v Robt Jones Holdings Ltd [2015] NZHC 1462, 22 PRNZ 615.

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It should be noted, however, that the position in relation to bankruptcies was qualified recently in the United Kingdom, in Avonwick Holdings Ltd v Shlosberg [2016] EWCA Civ 1138. In that case the Court of Appeal took a narrower view about privilege in that context. Privilege is a fundamental human right and only vests in the administrator in bankruptcy to the extent that the legal advice relates to property in the bankrupt’s estate. It remains to be seen whether this approach will be adopted here.

A request to the insolvent party’s lawyer or former lawyer may be made informally by the Official Assignee or liquidator or may be required more formally by way of summons issued by the Assignee under s 165 of the Insolvency Act 2006, or by notice from a liquidator under s 261(2)(f) of the Companies Act 1993.

Failure to comply with the terms of a summons, without reasonable cause, is an offence under s 440(1)(c) of the Insolvency Act, punishable by imprisonment for a term not exceeding 12 months or to a fine not exceeding $5,000, or both. Failure to comply with a notice given by a liquidator is an offence punishable by a term of imprisonment not exceeding two years or a fine not exceeding $50,000, under s 373(3)(a) of the Companies Act.

In addition, the persistent refusal by a lawyer to comply with a lawful requirement by the Assignee or a liquidator could have professional consequences in the event of a complaint being made to the Lawyers Complaints Service.

On the other hand, disclosure of a client’s confidential information to the Assignee or a liquidator in response to a lawful request is an example of an exception to the usual requirement of strict confidentiality because disclosure is “required by law” and is mandatory under rule 8.2(d) of the Conduct and Client Care Rules.

In the experience of the New Zealand Law Society and the Lawyers Complaints Service, resistance by lawyers to lawful requests for disclosure of the content of insolvent clients’ files tends to be based on a misconception about the nature of privilege and confidentiality in that context.

While existing privileges continue to apply, the party entitled to assert or waive the privilege is the Assignee or liquidator, not the insolvent company or individual client. That includes privileges held by the bankrupt individual or insolvent company jointly with any other person. As with joint privilege generally, the Assignee or liquidator may waive privilege, without the waiver binding any other joint privilege holder, subject to an order to the contrary under s 66(1)(c) of the Evidence Act 2006.

These principles apply equally to regular bankruptcies, bankruptcies under the no asset procedures in Part 5 Subpart 4 of the Insolvency Act, company liquidations and companies in voluntary administration under Part 15A of the Companies Act.

Liens

The situation in relation to liens (which might conceivably be asserted over client records and documents) is set out in s 172 of the Insolvency Act which provides that a lien over a bankrupt person’s deeds and business records is rendered ineffective against the Assignee. Section 263 of the Companies Act is the equivalent provision in company liquidations.

Where privilege may continue to vest in the insolvent client

Where a client has sought legal advice from a lawyer about an impending bankruptcy or liquidation, the communications between the lawyer and the client may remain privileged to the client if it can be shown that the communication did not relate to the bankrupt’s “property, conduct or dealings” or, in the case of a company, its “books, records, or documents”. Legal advice to a director personally about insolvency issues, and the consequences of the liquidation for that person, would be likely to fall outside the power of compulsion by the liquidator.

However, exceptions to the general principle that confidences and privileges belonging to individuals or companies will vest in the Assignee or liquidator are likely to be applied narrowly if the result is to frustrate the statutory powers intended to promote the fair and efficient administration of a personal or corporate insolvency.


Paul Collins is an Auckland barrister practising from Shortland Chambers.

Last updated on the 30th June 2017