In a recent decision, the High Court held that legal advice taken in relation to certain transactions was not protected by privilege, as there was prima facie evidence that the purpose of the advice was to structure the transactions in a way that avoided the client’s liability to pay local authority care charges and/or as a transaction defrauding creditors: London Borough of Brent v Kane [2014] EWHC 4564 (Ch).
It has long been established that advice sought or given in furtherance of a crime, fraud or other equivalent conduct is not protected by legal professional privilege. This is known as the fraud/iniquity exception. The present decision is of interest as a relatively rare application of the principle. Andrew Cooke and Maura McIntosh consider the decision below.
Background
The case concerned an alleged transaction at an undervalue entered into by an elderly man with dementia (Mr Kane) who was receiving care from his local council. The council alleged, in summary, that Mr Kane’s sons had taken a transfer of a 50% interest in a property he owned in an attempt to avoid charges for his care, which was a breach of the relevant social services legislation as well as a transaction defrauding creditors under section 423 of the Insolvency Act 1986. The council sued Mr Kane and his sons in relation to the undercharged care contributions.
In the proceedings, the claimant applied for disclosure of documents held by the defendants’ solicitors, including legal advice, relating to the relevant transactions. Although such documents would ordinarily attract privilege, the claimant contended that privilege did not apply because of the fraud/iniquity exception. The alleged purpose of the advice was to structure the transactions in a way that shifted the burden of Mr Kane’s care onto the public purse while enabling the sons to take the assets. This purpose, the claimant argued, was sufficiently iniquitous to require disclosure of the documents.
Decision
The court ordered disclosure, finding that the iniquity exception applied.
Reviewing the authorities, the deputy judge (Mr S Monty QC) said that although the case law referred to crime or fraud or dishonesty, it was plain that the term “fraud” was used in a relatively wide sense. Examples from previous case law included a scheme to effect transactions at an undervalue for the purpose of prejudicing the interests of creditors (Barclays Bank v Eustice [1995] 1 WLR 1238). What was needed was that the wrongdoer had gone beyond conduct that amounted to a civil wrong, but had indulged in “sharp practice, something of an underhand nature where the circumstances required good faith, something which commercial men would say was a fraud or which the law treats as entirely contrary to public policy”.
Here, the deputy judge said, there was prima facie evidence that there may have been transactions at an undervalue and/or an attempt to put Mr Kane’s assets beyond the reach of the claimant. That went beyond mere suspicions or assertions and was sufficient to justify the order sought.
Comment
Although cases on the iniquity exception are relatively rare, the principle was recently considered in the context of litigation privilege in JSC Bank v Ablyazov and others [2014] EWHC 2788 (see post). This may signal a bit of an upswing in the willingness of the courts to apply the exception in appropriate circumstances, though clearly each case will turn on its facts.
The decision is likely to be of particular interest to insolvency practitioners, given the potential for lifting the cloak of privilege in legal advice received by a transferee of assets from an insolvent person where there is prima facie evidence of an intention to defraud creditors. It is not clear whether the same principle might apply where it is alleged that transactions have taken place which are subject to challenge under other provisions of the Insolvency Act, such as preferences or transactions at an undervalue.