TGIF 19 July 2019: Firm Restraint: Bankrupt stalls examination to restrain liquidators’ solicitors from acting

This week’s TGIF considers a recent application for injunctive relief by a bankrupt to restrain liquidators who initiated his examination from continuing to retain their lawyers, given the firm had previously represented the examinee.

What happened?

On 8 August 2016, Richard Nash became bankrupt, on his own petition, and was later served with a summons for examination and orders for the production of books and records.

The summons, issued at the request of the liquidators of Timbercorp Finance, prescribed the relevant period for examination from 1 July 2006 to the date of the Summons and more than 23,000 documents were produced by Mr Nash, and other related examinees, before the examinations began.

Almost six months after the examinations commenced, Mr Nash obtained a non-binding ruling from the Law Institute of Victoria Ethics Committee that, in respect of the liquidators’ solicitors, a conflict of interest existed on the basis of confidential information obtained by that firm in previous matters in which it advised Mr Nash.

However, the ruling expressed that it was a matter for the Court as to whether that firm should be restrained from acting for, or advising, the liquidators and the examination was adjourned – nine months after it had been served - so injunctive relief could be issued.

Prior involvement of the firm 

The evidence adduced on the application revealed that the firm retained by the liquidators had previously acted for Mr Nash, and a company in which he had been director and shareholder, in both contentious and non-contentious matters between 2001 and 2009.   However, none of the solicitors acting on the examinations had been employed by the firm during that time and all hard copy files had since been destroyed.

What did remain within the possession of the firm was 112 electronic records and an affidavit was served which exhibited a schedule that itemised those files.  Critically, the deponent of that affidavit was the partner of the firm who had conduct of the examination proceedings.

Furthermore, on the second day of the hearing for injunctive relief, counsel for Mr Nash tendered an email his client had received, sent by the firm retained by the liquidators and, crucially, copied to others within that firm working on the examination, which exhibited a spreadsheet setting out information in relation to payments of commission to Mr Nash in one of the previous matters the firm of solicitors acted on.

Mr Nash argued that the Liquidators’ solicitors should be restrained on three alternative grounds:

• the possible misuse of confidential information;
• a breach of the duty of loyalty; and
• the perception of conflict was contrary to the administration of justice.

The Decision

Much of the judgment focused on the possible misuse of confidential information and whether that ground had been satisfied so as to justify the restraint which was sought.

The Court agreed with Mr Nash that the firm retained by the liquidators had his confidential information in their possession.  This information included “getting to know you factors”, that a practitioner learns about their client through an engagement, which, it was argued, could be put to use in forming strategy and questioning.

Whilst none of the solicitors working on the examination possessed information of that nature (given they had not worked on any previous matter), the Court inferred they had read the evidence on the application including the list of electronic files exhibited to the affidavit (and the files themselves for the deponent) as well as the email and spreadsheet tendered during the hearing.  

Further, the Court also agreed that, given the breadth of the examination period outlined in the summons (approximately 13 years), and the class of books produced, there was a real risk that the content of the confidential documents (being the electronic files & spreadsheet) would be relevant to the examination of Mr Nash to his disadvantage.

That factor was determinative in reaching the conclusion that each of the solicitors working on the examination – save for one Senior Associate who had not been copied to the relevant email with the spreadsheet - could no longer remain involved as the Court could not be satisfied there was not a real risk of misuse of that confidential information.

However, the Court was not minded to restrain the firm from continuing to act and ordered that undertakings be provided and information barriers implemented to eliminate any risk of the confidential information of Mr Nash being misused.

With respect to the alternative grounds pressed by Mr Nash, the Court found that:

• no duty of loyalty survived the termination, by Mr Nash, of his former solicitors’ retainer such that this did not disqualify them from acting for the liquidators; and
• provided the liquidators no longer used those solicitors exposed to the confidential information, there was no basis to restrain the firm from continuing to act so as to protect the integrity of the judicial process (particularly if undertakings were provided and information barriers implemented).

Comment

This judgment provides a helpful overview of the principles which guide the exercise of the court’s discretion on an application to restrain a firm from acting against a former client.  What is critical will be whether any information possessed has the requisite character of confidentiality, whether there is a sufficient nexus between the information and the manner in which it could be misused and whether there is a real risk of misuse.

In this case, the provision of undertakings and implementation of information barriers was sufficient so as to eliminate that risk.  However, the evidence led on the application resulted in most of the solicitors who had worked on the examinations being excluded from further involvement.

The decision also clarifies that an examinee is not prevented from challenging the continued engagement of solicitors retained by a liquidator on the basis that they are a mere witness – as opposed to a party – summoned by the Court. What qualifies the examinee to approach the Court for injunctive relief is the Court’s inherent jurisdiction, in respect of its officers, and the power to protect against a legal practitioner disclosing confidential information of a former client.