No privilege in legal advice in a transaction to defraud creditors

The English High Court in London Borough of Brent v Kane [2014] EWHC 4564 has held that legal advice taken in relation to various transactions which the claimant alleged had been made at an undervalue was not protected by privilege, as there was prima facie evidence that the purpose of the legal advice was to structure the transactions in order to allow the client to avoid or reduce the costs of a residential care home. 

Facts
The claimant in this case was the local Council who provided residential care to an elderly man with dementia (Mr Kane).  The Council claimed that Mr Kane’s sons had taken a transfer of a 50% interest in a property he owned at an undervalue for the purpose of either putting the assets beyond it reach 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. The Council sued Mr Kane's estate and his sons seeking to restore the position to what would have been if the transactions had not taken place.

The Council sought disclosure of documents held by the defendants’ solicitors, including legal advice, relating to the transaction. Although such documents would ordinarily attract legal advice privilege, the Council argued that privilege did not apply because of the fraud/iniquity exception in circumstances where the alleged purpose of the advice was to structure the transactions in a way that enabled his sons to take the assets while shifting the cost of Mr Kane’s care onto the tax payer. The Council argued that this purpose came within the fraud/iniquity exception so as to require disclosure of the documents.

Decision
The Court held that the iniquity exception is a well-recognised exception to the general rule as to privilege and ordered disclosure holding that the Council had made out a prima facie case that there was iniquitous conduct.  The Court stated that what was needed in this context 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". It noted that suspicion, assumption, surmise and conjecture would not be sufficient in this context.

In ordering disclosure the Court looked at "the whole chronology of events" over many years and, taken as a whole, the Court was of the view that 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 Council.

Comment
The decision illustrates the potential of a creditor to lift the cloak of privilege in legal advice given in respect of transactions where there is a transfer of assets from an insolvent person and there is prima facie evidence of an intention to avoid charges or defraud creditors.

For further information please contact Paula Mullooly at pmullooly@algoodbody.com

Date Published: 8 September 2015