February 09, 2018
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In Bilta (UK) Ltd (in Liquidation) & Ors v Royal Bank of Scotland plc and Mercuria Energy Europe Trading Limited [2017] EWCH 3535 (Ch) (“Bilta v RBS”), the High Court upheld RBS’s claim of litigation privilege over documents prepared as part of an internal investigation, including transcripts of interviews with its employees.
The decision is significant since the court declined, on the facts, to follow the controversial decision in Director of the Serious Fraud Office v Eurasian Natural Resources Corp Ltd [2017] 1 WLR 4205 (“SFO v ENRC”) in which it was found that certain documents prepared in the context of an internal investigation and engagement with the SFO were not subject to litigation privilege. The Court of Appeal is due to hear an appeal in SFO v ENRC in July 2018.
The claimant companies applied for disclosure and inspection of documents held by RBS relating to the bank’s internal investigation into an alleged missing trader intra-community fraud which was thought to have impacted the U.K. market for European Union Allowances (EUAs). The fraud was thought to involve those companies trading in EUAs failing to account for accrued VAT to HMRC and instead paying it to third parties before going into liquidation. The claimants’ substantive claim was that in executing the trades, RBS and Mercuria, a former subsidiary of RBS, wilfully shut their eyes to what was a fraud. Accordingly, the claimants sought equitable compensation of at least £73 million for dishonest assistance and compensation in the same amount in respect of alleged fraudulent trading under s.213 of the Insolvency Act 1986.
RBS had claimed input tax of approximately £90 million in respect of trades implicated in the alleged fraud. In 2012, HMRC sent a letter to RBS stating it considered that it had sufficient evidence to recover the VAT, but that it would wait to hear RBS’s response before proceeding with an assessment in the First Tier Tribunal (Tax Chamber). In response to that letter, the bank commenced its internal investigation and appointed external tax litigation solicitors. In the course of that investigation, the solicitors prepared 29 transcripts of interviews with current and former RBS employees. The investigation concluded and a report was submitted to HMRC under a cover letter that stated privilege in the underlying materials was not waived.
English law recognises two principal forms of legal professional privilege. Legal advice privilege protects from disclosure confidential communications between a lawyer and client for the purposes of seeking or providing legal advice. Litigation privilege protects from disclosure confidential communications between lawyers or clients and third parties. English law imposes a narrow concept of the “client” for the purposes of claiming privilege and employees may fall into the category of third parties so that interviews with them will not benefit from the protection of legal advice privilege. Accordingly, it is becoming increasingly important, particularly in the context of internal investigations, to be able to establish that litigation privilege applies.
In order to establish its claim to litigation privilege and avoid disclosure of the documents, RBS had to meet the criteria established by Three Rivers District Council v Governor & Company of the Bank of England (No 6) [2005] 1 AC 610, namely that:
Conditions 1 and 3 were accepted by the claimants as having existed at the time that the relevant documents were created. Condition 1, which was at stake in SFO v ENRC, was therefore not central to this judgment. The case instead turned on whether the documents were created for the sole or dominant purpose of conducting litigation. That question is a question of fact to be decided on the circumstances of each case.
In SFO v ENRC, Andrews J rejected the submission that litigation privilege extended to documents created to obtain legal advice as to how to best avoid contemplated litigation. That was on the basis that “equipping yourself with evidence to enable you to conduct your defence free from the risk that your opponent will discover how you are preparing yourself, and to decide what evidence you are planning to call if the case goes to court, and what tactics to employ, is something entirely different from equipping yourself with evidence that you hope may enable you… to persuade him not to commence proceedings against you in the first place.” Accordingly, the court held that documents prepared with a view to persuading the SFO not to commence criminal proceedings were not prepared for the dominant purpose of litigation.
In Bilta v RBS, the claimants argued, relying on the findings in SFO v ENRC, that the dominant purpose of RBS’s investigation was not litigation but to cooperate with HMRC by supplying a full account and to persuade HMRC not to issue an assessment. However, Vos LJ rejected those arguments.
Vos LJ stated that the finding in SFO v ENRC judgment did not reflect the “commercial reality of the present position” in respect of RBS’s cooperation with and provision of the report to HMRC. The fact that, in this case, RBS had collaborated with HMRC in producing the report did not negate the adversarial circumstances in which “the overwhelming probability was that an assessment would follow the HMRC Letter.” The “commercial reality here was that RBS had to comply with its own protocols and statutory duties to cooperate with HMRC.” Accordingly, in circumstances where HMRC had already indicated that it considered it had sufficient evidence to proceed with an assessment, RBS’s investigation and provision of the report were steps consistent with the bank’s purpose of preparing for expected litigation and protecting its own position in respect of those proceedings.
The court found that HMRC’s 2012 letter was a “watershed moment” which was “similar in nature… to a letter before claim.” The report provided by RBS to HMRC was therefore “a close comparable to a response to a letter before claim in ordinary commercial litigation.” Further, Vos LJ stated that a general legal principle could not be drawn from Andrew J’s approach to the facts in SFO v ENRC to the effect that an attempt to settle or dissuade a party proceeding with a case would prevent litigation being the dominant purpose. Accordingly, to the extent that the RBS investigation and report might dissuade HMRC from proceeding to an assessment, that purpose was “a very subsidiary purpose.” Instead, taking a “realistic, indeed commercial, view of the facts,” in this case, “fending off the assessment was just part of the continuum that formed the road to litigation that was considered… to be almost inevitable.”
Accordingly, the court was satisfied that the documents and interview transcripts were prepared for the “sole or at least the dominant purpose of the expected litigation” and therefore held that interview transcripts and other documents were covered by litigation privilege.
The judgment in Bilta v RBS emphasises that the question of whether documents are created for the sole or dominant purpose of conducting litigation must be decided on the particular facts of each case. In that regard, following the judgments in both Bilta v RBS and SFO v ENRC, it remains difficult to establish clear guidelines as to the circumstances in which documents prepared the course of an internal investigation and engagement with an authority with power to bring proceedings will be regarded as having, nevertheless, been prepared with the dominant purpose of conducting litigation. Accordingly, companies will continue to have to consider the particular circumstances of any investigation that they are contemplating carefully before concluding whether or not any documents produced or interviews conducted will be privileged. We hope that the Court of Appeal later this year may bring some clarity to this matter.
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