Summary

The recent English High Court decision in Bilta (UK) Ltd v Royal Bank Of Scotland Plc & Anor [2017] EWHC 3535 (Ch) (“Bilta”) addressed the scope of litigation privilege and cast doubt on some of the principles set out in the Serious Fraud Office v Eurasian National Resources Corporation Ltd [2017] 1 WLR 4205 (“ENRC”) as regards internal investigations and the status of documents created in those investigations.

Significantly, the High Court in Bilta rejected the principle set out in ENRC that documents created for a secondary purpose, namely to settle potential litigation, may not be deemed to have a dominant litigation purpose. Instead, the Court ruled that documents created in anticipation of litigation including for the “inseparable purpose of avoiding that litigation” could be covered by litigation privilege.

It is also of note that Bilta accepted that litigation was anticipated as HMRC had sent a letter to RBS refusing to pay input tax and inviting a response. Given those facts, it may be possible for companies to argue that they ‘anticipate criminal litigation’ at an earlier stage than the stage set out in the ENRC judgement.

ENRC is due to be appealed in the summer of 2018, and it looks likely, following the decision in Bilta by Sir Geoffrey Vos, Chancellor of the High Court, that the decision of Andrews J will be overturned. Sir Geoffrey Vos refused Bilta leave to appeal.

Introduction

The judgement of Andrew J in ENRC set a very high bar for when litigation privilege could be triggered in a criminal investigation. The court stated that “Criminal proceedings cannot be reasonably contemplated unless the prospective defendant knows enough about what the investigation is likely to unearth, or has unearthed, to appreciate that it is realistic to expect a prosecutor to be satisfied that it has enough material to stand a good chance of securing a conviction.”

Andrew J also ruled that even if a prosecution had been reasonably in contemplation, none of the documents in question were created with the dominant purpose of being used in the conduct of such litigation. In the judge’s view, the main purpose of the internal investigation was to establish if there was any truth to the whistleblower allegations, and to prepare for any future SFO investigation.

The judgement in Bilta adopted a more liberal interpretation of the litigation purpose test sufficient to support the privilege. And, although the Bilta judgement deals with an internal investigation by RBS in response to an HMRC tax assessment, it appears to have broader implications for internal investigations and the status of the documents created in such an investigation.

Background

The claimants, Bilta (UK Ltd) and various other associated companies in liquidation, sought disclosure of certain documents held by Royal Bank of Scotland plc (‘RBS’). RBS claimed that these documents were subject to litigation privilege.

Bilta’s claim arose from an alleged missing trader intra-community fraud. The trades involved in the alleged fraud were carried out by representatives of RBS and a second defendant. Bilta claimed that in executing the trades, RBS had shut its eyes to what was an obvious fraud and claimed compensation for dishonest assistance of at least £73 million and compensation in respect of alleged fraudulent trading.

The RBS documents that Bilta wanted to inspect as part of the litigation had been created during the course of an internal investigation RBS had carried out and included some twenty nine transcripts of interviews with key RBS employees and ex-employees. RBS commenced the investigation with the assistance of legal counsel in response to a letter HMRC sent to RBS on 29th March 2012 denying RBS £86 million in input tax, on the basis that RBS knew or should have known that the relevant transactions were connected with fraud.

Legal Test

The parties agreed that the test for whether litigation privilege could be claimed was that set out in Three Rivers District Council v Governor & Company of the Bank of England (No 6) [2005] 1 AC 610; namely that “(a) litigation must be in progress or in contemplation; (b) the communications must have been made for the sole or dominant purpose of conducting that litigation; and (c) the litigation must be adversarial, not investigative or inquisitorial.”

Bilta conceded that the evidence produced by RBS established that the documents were brought into being when litigation was in contemplation and that the litigation would be adversarial. The dispute centred on whether RBS had established that the documents were made for the “sole or dominant purpose of conducting that litigation”.

The Ruling

Sir Geoffrey Vos, Chancellor of the High Court in Bilta did not consider the ENRC case determinative and noted a tension between ENRC and the case of Re Highgrade Traders [1984] BCLC 151 (“Highgrade”) and that each case was fact specific.

Sir Geoffrey Vos stated: “Although both cases, that is ENRC and this case, involve internal investigations by corporates in the face of scrutiny by government authorities, one cannot simply apply conclusions that were reached on one company’s interactions with the Serious Fraud Office in the very different context of another company’s interactions with HMRC.”

The fact that RBS appointed external solicitors specialising in tax litigation within weeks of receipt of the HMRC letter suggested that RBS anticipated a claim and was gearing up to defend it. Sir Geoffrey Vos stated: “I pay due and proper regard to Andrews J’s decision (ENRC) but I am not sure, as I say, that it can be determinative. Moreover, I do not think that the facts that arise in this case arose in the case with which Andrews J was dealing.”

The High Court did not find that the “ostensibly collaborative and cooperative nature of RBS’s interactions with HMRC after the HMRC letter actually changes the position”. The cooperation with HMRC did not preclude the investigation being conducted for the dominant purpose of litigation.

In relation to a report prepared by RBS’ external counsel the court noted: “The [.] report represented the fruits of the solicitors’ investigation. It sets out the reasons why RBS thought that HMRC was not entitled to deny it input tax. It was supported by a detailed, legal and factual analysis. Indeed, as the claimants point out, the PM report drew on various aspects of the interviews that had been obtained but did so expressly without waiving privilege in the underlying material.”

The court considered that the most difficult issue it had to determine was whether or not litigation was the sole or the dominant purpose of the activities that RBS set in train following the HMRC letter. Sir Geoffrey Vos stated: “I am not sure that it much matters whether the litigation purpose was the sole or merely the dominant purpose.” The court referred to the case of Highgrade which suggested that a subsidiary purpose can be subsumed into the dominant litigation purpose.

The court added: “Andrews J [in ENRC] thought that attempts to settle prevented the litigation purpose being dominant on the facts of her case. I cannot accept, as I have said, however, that one can properly draw a general legal principle from her approach to those facts.”

The court noted that the fact that RBS behaved openly and collaboratively in the period between the HMRC letter and the lawyer’s report did not mean that RBS was not gearing up for the litigation, nor did it mean that the interviews it conducted were not fully and primarily intended to provide the material to resist the expected assessment.