23rd April 2015

Who bears the costs of insolvency practitioners’ requests for papers?


23rd April 2015

Who bears the costs of insolvency practitioners’ requests for papers?

This blog is mainly aimed at insolvency practitioner readers, although it may also be of interest to professionals who are frequently asked by insolvency practitioners to produce their files.

As lead insolvency partner at Paris Smith LLP I see a great many such requests. Some are more specific than others, some blunt and to the point, others prosaic, still others almost apologetic. The one thing they have in common, though, is that they purport to be sent in the exercise of the insolvency practitioner’s statutory powers to compel us to produce our clients’ files, or otherwise to assist with the provision of information which they need in order to fulfil their duties.

One such power exists under s.236 Insolvency Act 1986, and applies to the right of liquidators, administrators and one or two other classes of appointed insolvency practitioner, to apply to court for an order to compel any person who appears to be capable of giving relevant information, on paid of arrest and/or compulsory seizure should they unreasonably fail or refuse, to produce themselves to the court and/or documents to the office holder.

Compliance with such requests and/or the orders which may follow can be very costly to whomever is holding that information and/or documentation. As solicitors, in particular, we have very important duties of confidentiality, for example, primarily to our clients but also on occasion to third parties. Our files typically relate to a particular matter or transaction within which there may be multiple pieces of advice, guidance, representation which have grown up organically over time in response to our clients’ needs from day to day. These may not be easily separable and there is equivocal professional guidance given to solicitors as to how they are to approach such requests and applications. If our client has entered an insolvent procedure then typically, but not always, our duties of confidentiality will transfer to the office holder but to be sure that we are not breaching these, or any other, duties we will more often than not have to go through all our records, hard copy and electronic, which could very easily in some cases require many hours or even days of review, particularly where the instructions are very old.

It is in just such a context that we come across the case of Re Harvest Finance Ltd (in Liquidation), published today. This concerned, amongst other things, the question of who should pick up the cost of complying with orders which compel the production of solicitors’ files to liquidators. In this case the costs of compliance exceeded £40,000.

In truth, the judgment itself does not really offer us any great clarity. Although in the High Court, it is effectively a first instance decision in which one Judge seeks to prefer the approach of another Judge to a particular Insolvency Rule over a third, conflicting, Judge. It is also quite fact specific, and it needs to be noted that the Respondents’ costs of compliance (which were not awarded) were dealt with quite separately to their costs of the proceedings themselves (which to an extent were allowed). That said, reading in particular paragraphs 47 and 59 give a very strong flavour of the sort of behaviours the court expects from parties who come before it in this arena. The key points, for me, which I have distilled from the judgment are:

  1. Third parties to whom s.236 applies, but especially solicitors who are officers of the court, are under a public duty to cooperate, akin to having to answer a subpoena/witness summons, and as a matter of public policy citizens should not be paid for complying with such duties. This is not an absolute duty, however, and care must be taken to protect third party privilege, etc, by both the liquidator requesting the papers (as an officer of the court himself) and the respondent in addressing that request, both of whom must endeavour to be (and be seen to be) sensible, principled and precise. If either party fails to observe this they risk bearing the other’s costs or some part thereof, whether directly or indirectly, once a Judge crawls back over all the relevant correspondence; and
  2. There appears to be a jurisdiction for the court to order costs of actual compliance with s.236 orders for the production of documents (as opposed to the separate jurisdiction to award costs of the proceedings), in appropriate cases, as an expense of the liquidation (i.e. ranking ahead of the liquidators’ remuneration). Liquidators should not, therefore, assume that an arguably overaggressive or too far-reaching application will necessarily be without consequence, for themselves and for creditors, even if it is granted. It will often be a sensible compromise for the liquidation to make some sort of non-profit costs based contribution to solicitors who cooperate, so far as they are able, even though there is clearly no right to those costs as a matter of course.

There is a public interest here in protecting the integrity of solicitors’ files (to which, unlike files held by non-legally qualified intermediaries, legal professional privilege attaches) such that clients will feel safe to give full disclosure of their circumstances to their solicitors. If they do not do so, opportunities to serve the client’s best interests may well be missed, which may result in adverse financial consequences not only for the client but for society generally. There is likewise, however, a public interest in ensuring that when a company fails anyone responsible for that failure or some part of it, is brought to account by an insolvency practitioner to the extent that they caused damage and/or deficiency to creditors. This is a delicate balance, but one which can be achieved with sensible, professional cooperation, in which it obviously helps if the client recognises that the law imposes certain obligations in these circumstances and do not seek to instruct their solicitors to refuse cooperation unreasonably.

The counsel of perfection here is perhaps just that we all – without exception – adopt an eminently sensible approach. Liquidators must recognise that solicitors in particular have conflicting duties and matter related files which are not typically easily searchable, and be sensitive to that. Solicitors and liquidators must work together in a civilized manner to overcome such practical difficulties and avoid taking entrenched positions and/or manufacturing unnecessary recourse to the courts. Where possible, creative attempts should be made to limit the costs of compliance, e.g. by the provision of / access to sample files, perhaps engaging an independent person to assess the same, so that issues of third party privilege can be resolved for the benefit of all parties.

Should you have any cases or concerns, whether as an office holder, non-insolvency solicitor or other professional or third party holding papers, or as a client of a solicitor or other professional who has received such a request and seeks assistance with it, please get in touch with Mike Pavitt, armed with the names of all relevant parties up front, to see if we can help.