Sutton v GE Captial Commercial Finance Ltd & Ors [2004] EWCA Civ 315

Case No A2/2003/1507 + 1507A

A2/2003/1508 + 1508A

[2004] EWCA Civ 315

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE

QUEEN’S BENCH DIVISION

MR JUSTICE McCOMBE

Venue Royal Courts of Justice

Date Friday 19 March 2004

Strand,

London, WC2A 2LL

Before

LORD JUSTICE CHADWICK

LORD JUSTICE RIX

Between

PAUL SUTTONAppellant

GE CAPTIAL COMMERCIAL FINANCE LIMITEDRespondent

(Transcript of the Handed Down Judgment of

Smith Bernal Wordwave Limited, 190 Fleet Street

London EC4A 2AG

Tel No: 020 7421 4040, Fax No: 020 7831 8838

Official Shorthand Writers to the Court)

Miss Geraldine Andrews QC & Nigel Dougherty (instructed by Stockler Brunton of 2/3 Cursitor Street, Chancery Lane, London EC4A 1NE) for Appellant in each appeal

Miss Catherine Newman QC (instructed by DLA of 3 Noble Street, London EC2V 7EE) for Respondent

Judgment

Lord Justice Chadwick : This is the Judgment of the Court, to which both members have contributed.

[1]These are appeals from orders made on 4 July 2003 on linked applications made(i) in proceedings brought by GE Capital Commercial Finance Limited (“GE”) to enforce guarantees given by Mr Paul Sutton and others for the liabilities of Anglo Petroleum Limited (“APL”), a company in administrative receivership, and

(ii) in proceedings brought by APL (acting or purporting to act by Mr Richard Sutton, a director) for the return of documents provided to GE by the APL receivers.

[2]The documents which are the subject of the second proceedings (“the BT documents”) were sent to the APL receivers by solicitors, Messrs Boyes Turner (“BT”), formerly acting for APL under cover of a letter dated 28 February 2003. The application made in the first proceedings (“the guarantee action”), by notice dated 2 June 2003, was for an order restraining GE, or the APL receivers, from using the BT documents – and, in particular, from adducing those documents as evidence in the guarantee action – on the grounds that (as alleged) those documents were, and always had been, “subject to legal professional privilege for the benefit of [APL] and/or Mr Paul Sutton”. The application made in the second proceedings (“the APL action”), by notice dated 12 June 2003, was for an order in substantially the same terms and on the same grounds. The judge dismissed both applications and refused permission to appeal from his orders.

[3]Applications for permission to appeal were made to this Court. Those applications were considered on paper by Lady Justice Arden. On 9 July 2003 she ordered that the application for permission to appeal in the guarantee action be adjourned for an oral hearing on notice, with the appeal to follow immediately if permission were granted. She refused the application for permission to appeal in the APL action. That application has been renewed before this Court. We have heard argument from counsel on the basis that both appeals were before us. In the course of the hearing we indicated that we were minded to grant permission to appeal. The judgment which we now deliver is a judgment on the appeals.

The underlying facts

[4]On 6 December 2000 APL entered into a debt factoring agreement (the “finance agreement”) with GE. The principal backer of APL, although not a director of it, is Mr Paul Sutton, a businessman living in Bermuda. His father, Mr Richard Sutton, is the sole director of APL.

[5]Under the finance agreement GE agreed to advance to APL a percentage of certain of APL’s invoiced debts as notified by APL to GE up to a facility limit of £4.2 million. Security for the advances was provided by an “all assets” debenture from APL and a corporate guarantee from APL’s parent company, Anglo Oil Limited (“AOL”). The debenture permitted GE to appoint administrative receivers in the event of default by APL. GE is thus the debenture holder and the principal creditor of APL. GE appointed administrative receivers of APL on 14 November 2001.

[6]The administrative receivership arose in the following circumstances. In early September 2001 APL was in breach of the finance agreement. It had obtained advances well in excess of its £4.2 million limit, in the sum of over £8 million. On 12 September 2001 GE gave notice of termination of the finance agreement and demanded immediate repayment. Over the next three weeks APL and Mr Paul Sutton participated in the negotiation of a compromise, which was made on 3 October 2001. APL agreed to repay the indebtedness in instalments over a short period and to provide further security; and Mr Sutton agreed to give a personal guarantee for some or all of APL’s liability under the finance agreement. A further guarantee was also provided by Anglo Oil Trading Limited, a subsidiary of APL (“AOT”). For the purpose of these negotiations APL retained Messrs Boyes Turner (“BT”) to act for it as its solicitors.

[7]There are issues as to the extent to which, if at all, Mr Paul Sutton was personally involved in that or an ancillary retainer. He certainly received advice from BT concerning the giving of his personal guarantee, although it is relevant to point out that the idea of a such a guarantee appears to have been introduced into the negotiations only on 26 September 2001. AOT was separately advised by another firm of solicitors, Messrs Betesh Fox.

[8]In the meantime a serious matter had been revealed by an investigation conducted by an auditor, Mrs Lyn Edwards, whom GE had instructed to look into the causes of APL’s indebtedness. She discovered that some £3 million of the debts notified by APL to GE related to apparently fictitious transactions with a possibly associated company called Sutton Oil (Bermuda) Ltd (“Sutton Oil”): it seemed that no oil had been delivered by APL to Sutton Oil and no debts were due from Sutton Oil to APL. This had been reported to GE by the time that it terminated the finance agreement on 12 September 2001. The finance agreement had contained express prohibitions on the factoring of any debts incurred by “associated companies” or in respect of goods which APL had not yet delivered.

[9]The obligations under the compromise of 3 October 2001 were not met and on 14 November GE appointed Mr Raymond Hocking and Mr Simon Michaels, both partners in BDO Stoy Hayward, as administrative receivers of APL. On 28 January 2002 the guarantee action commenced against Mr Paul Sutton, AOL and AOT under their respective guarantees of APL’s indebtedness. A critical question has emerged in those proceedings as to whether, when Mr Paul Sutton gave his personal guarantee on 3 October 2001, he knew about the fictitious transactions between APL and Sutton Oil. He alleges that he did not, and on that ground submits that his guarantee is invalidated by this non-disclosure which he says radically altered the nature of the risk which he undertook as guarantor. GE alleges that he did know and that the matter of the fake transactions was discussed between GE and BT (albeit not in Mr Paul Sutton’s presence) at meetings which had taken place on 17 and 25 September 2001.

[10]On 23 April 2002 Mr Paul Sutton filed his defence to GE’s guarantee action claim against him in the sum of £1,807,470. He said nothing in that defence on the subject of the alleged non-disclosure in respect of the fictitious transactions. On 15 October 2002 GE applied for summary judgment in its action. It was in response to that application that, in his witness statement dated 13 December 2002, Mr Paul Sutton first raised his ignorance of the fictitious nature of the transactions with Sutton Oil. As a result the summary judgment application against Mr Paul Sutton is still pending.

[11]Mr Sutton’s witness statement led to a response from GE, whose representatives’ witness statements made the point that at the meetings in September 2001 BT, who was understood to be representing the Sutton family (including Mr Paul Sutton) as well as APL, was fully appraised of all relevant issues regarding APL’s debts. Mr Sutton responded in turn with a second witness statement dated 27 January 2003 in which he said that BT was retained by APL and not by him.

[12]That led GE, acting through its solicitors, DLA, to want to investigate the truth of what Mr Paul Sutton had said and his denial of knowledge of the fictitious transactions. As a result Mr Michaels wrote on 25 February 2003 to Mr Rice, a partner in BT with whom GE had been in contact at the September 2001 meetings, in the following terms:

“[APL] remains indebted to GE in a sum exceeding £1m. Raymond Hocking and I were appointed Joint Administrative Receivers of Anglo on 14th November 2001 by GE. In that capacity, we are investigating matters relating to that indebtedness and, in particular, the provision of the aforementioned security and guarantees. You have in your possession correspondence, emails, attendance notes, drafts and other documents which came into existence during the period from 11th September 2001 until the date of my appointment which relate to APL’s indebtedness to GE, the provision of security and of the guarantees by the aforementioned parties. In accordance with our powers under Sections 234-236 Insolvency Act 1986, we hereby request that you deliver up all such papers and documents to us including, without limitation, all communications between your firm and [APL], any director, officer, shareholder or employee of the company and Mr Paul Sutton and in particular the execution by Mr Sutton of a guarantee and compromise agreement both dated 3rd October 2001.”

[13]On 28 February 2003 BT delivered to the receivers their files representing “all of the papers which we are holding on behalf of the company”. On 4 March 2003 the receivers promptly sent on to Mr Boon, the partner acting for GE at DLA, the whole of what they had received from BT, without keeping any copies for themselves. DLA were also the solicitors acting for the receivers, but in their case a different partner was concerned. These documents contain the material which APL in its claim against GE says is privileged and in which Mr Paul Sutton says he also has a common interest privilege. Plainly not all of this material is privileged - for some of it is concerned with open meetings between the parties - but it is common ground that some at least of the material may for present purposes be assumed to be privileged, unless privilege has been waived; and that, were it to become necessary to identify any privileged material or resolve any dispute of detail, a separate hearing before a judge would be necessary.

[14]On 14 March 2003 Mr Boon of DLA telephoned Mr Rice of BT to ask him about Mr Paul Sutton’s role in APL and in the consequences of its default. Mr Rice discussed these matters with Mr Boon and in particular spoke about a meeting which he had held with Mr Sutton on 14 September 2001, in which Mr Sutton had given him instructions on behalf of APL. That meeting took place immediately before the meetings of 17 and 25 September 2001 and, unlike those meetings between representatives of the parties to the debenture and finance agreement, was between Mr Sutton and APL’s solicitors. Mr Rice was also asked about aspects of the documentary material handed over by BT at the receivers’ request, which included his notes of the meeting of 14 September. It is subsequently said in a letter written to Mr Sutton’s solicitors in these proceedings, Messrs Stockler Brunton, that in that telephone conversation Mr Rice had not realised that Mr Boon was acting for GE as distinct from acting for the receivers, and that since he has become aware of that fact he and his firm have declined to provide further information to DLA. It is not, however, suggested that any misapprehension was in any way fostered by Mr Boon, and the allegation of “sharp practice” made before the judge below has not been pursued. Mr Rice had been aware that DLA had been acting for GE in the negotiations as well as subsequently acting for the receivers.

[15]This then is the documentary and oral information which GE wished to deploy in its application for summary judgment against Mr Paul Sutton and which Mr Sutton and APL (through Mr Richard Sutton) say is or includes privileged material. GE submits that, above all, the notes of the meeting of 14 September 2001 indicate that Mr Paul Sutton gave instructions to Mr Rice at that meeting, was aware that APL’s real debtor book was lower than the debt owed to GE and that there was suspicion of financial misdealings within the company.

[16]Having obtained this material, GE sought to put it before the court through the fifth witness statement of Mr Alan Couzins, a senior manager in the employment of GE, which was made on 31 March 2003. The service of this witness statement called forth an immediate protest from Stockler Brunton, which in turn led to a rush of correspondence which debated issues of privilege and the role of the APL receivers and of BT as APL’s solicitors. Positions were reserved. On 28 April 2003 Mr Sutton made his third witness statement, in which he proffered his own explanation of his concerns as to misdealings within APL: not of fictitious transactions, but of “timing advantages” which would all come out in the wash. He said that it was precisely because he believed that the factored transactions were genuine that he had ultimately been willing to give his personal guarantee of APL’s liabilities.

[17]Having received no satisfaction from GE in correspondence between solicitors - a correspondence which displayed some uncertainty on the part of Stockler Brunton as to whether BT had been acting for Mr Paul Sutton as well as APL - on 2 June 2003 Mr Sutton and the other defendants to GE’s action issued their application for an injunction to restrain GE from using the disputed material on the ground that it was privileged and for an order for its return. Mr Sutton’s ultimate position on this appeal appears to be that, although BT had not been retained by him during the original period from about 14 to 26 September 2001 or thereabouts, there came a time when, in the context of the latter-day proposal that he should give a guarantee of APL’s liabilities, BT acted as his lawyers in giving confidential advice to him with respect to his guarantee.

[18]Just over a week later, on 12 June 2003, Mr Richard Sutton, as director of APL, commenced an action in APL’s name. The claimant is stated as – “ANGLO PETROLEUM LIMITED (in administrative receivership) acting by its director Richard Alan Sutton”. The defendant is GE. APL also claims an injunction to restrain GE from using the disputed material and an order for its return, on the ground of privilege.

The judgment below

[19]Mr Justice McCombe gave judgment in respect of the applications in both actions on 4 July 2003. He found that BT were APL’s solicitors but did not act for Mr Paul Sutton. He continued – “Mr Sutton has clearly eschewed any contention that [BT] acted for him. Indeed he positively asserts the contrary no less than three times in his evidence in the first action… In this state of the evidence I am unable to see how Mr Sutton could assert any relevant legal professional privilege as asserted in the correspondence and in the application notices before me…Further, no evidence has been adduced by either Mr Sutton or his solicitors identifying any other relevant common interest privilege. The claim throughout has been to legal professional privilege alleged to be enjoyed by Mr Sutton himself…”

[20]As for the APL receivers’ position, the judge concluded that they were entitled under the debenture to any documents to which APL was itself entitled, including APL’s documents in the hands of their solicitors. They had no obligation to seek such documents through the medium of the court under sections 234 - 236 of the Insolvency Act 1986 when BT was willing to surrender them voluntarily. In such circumstances, a third party such as Mr Paul Sutton had no standing to invite the court to restrain or limit the use which the receivers might wish to make of such material, including waiver of any legal professional privilege.

[21]As for APL’s application, the judge acknowledged the offer made in court on behalf of Mr Richard Sutton to indemnify GE (by which, as the judge mentioned, counsel might have meant APL) for the costs involved in the second action. However, the judge had no evidence as to the receivers’ reaction, since they were not before the court. Moreover, he accepted GE’s objection to the offer, on the ground that there was no evidence as to Mr Richard Sutton’s means to indemnify APL against its potential liability under a cross-undertaking in damages. In any event, the receivers were entitled to have taken their “conscious decision to pass on the documents to GE” and thus to waive any privilege:

“The relevant property was charged by the debenture, the receivers’ appointment extends to that property, and their powers are amply sufficient so as to enable them to decide how to deal with that property.”

In such circumstances, there was nothing to be said in favour of granting an injunction at the suit of APL acting or purporting to act by its director.

The claim to privilege

[22]As we have already stated, it is plain that not all of the material in the BT documents could have been the subject of a claim to privilege from disclosure in litigation; in that some, at least, of that material records what took place at meetings attended by representatives of GE or its solicitors. It is not suggested (at least, not in the context of this appeal) that those meetings were held on “without prejudice” terms. The only privilege relied upon is that described as “legal professional privilege”. But it has been common ground on this appeal that it is at least arguable that some of the material in the BT documents would have been privileged from disclosure by APL in litigation; and that, were it to become necessary to identify what, amongst the BT documents, could have been the subject of a claim to privilege, a further hearing would be necessary. We were invited to address the issues raised on this appeal on the basis that, in relation to some of the BT documents, a claim to privilege could have been made out by APL.

[23]We have used the expressions “documents [which] would have been privileged from disclosure in litigation” and “documents [which] could have been the subject of a claim to privilege [from disclosure in litigation]” because it is important to keep in mind that disclosure of the BT documents is not sought from APL (or from Mr Paul Sutton). This is not a case in which “privilege” is raised as an objection to disclosure by a party in whose possession or under whose control there are material documents. What is sought is an order for the return of documents which are not in the possession or under the control of the person (or persons) who, if disclosure had been sought, say that they would have been able to resist an order for disclosure by a claim for privilege; together with an injunction restraining the use of the documents in litigation against him. The basis of the relief sought is, on a true analysis, confidence rather than privilege – as Lord Justice Nourse explained in Goddard and another v Nationwide Building Society

[1987] QB 670

, 684G-685F.

[24]The jurisdiction to order return of confidential communications arises in equity. As Lord Justice Nourse pointed out (ibid, 685A-B) the equitable jurisdiction is well able to extend to confidential communications which would not be privileged from disclosure in litigation – for example, “communications between priest and penitent or doctor and patient”. The jurisdiction to restrain use of the communications in litigation (or otherwise) is ancillary to the jurisdiction to order return. But the jurisdiction to restrain use of documents in litigation (or to order the return of copies) will not be exercised save in a case where the person seeking the order would be able to claim privilege from disclosure if the documents (and copies) were in his possession or under his control. “It cannot be the function of equity to accord a de facto privilege to communications in respect of which no privilege can be claimed” – (ibid, 685C).

[25]There are two other passages in the judgment of Lord Justice Nourse in Goddard v Nationwide Building Society which are pertinent in the present context. In the first (ibid, 685C-E), he said this:

“. . . the right of a party who desires protection to invoke the equitable jurisdiction does not in any way depend on the conduct of the third party into whose possession the record of the confidential communication has come. Thus several eminent judges have been of the opinion that an injunction can be granted against a stranger who has come innocently into the possession of confidential information to which he is not entitled: see Rex Co v Muirhead (1926) 136 LT 568, 573 per Clauson J; Printers & Finishers Ltd v Holloway [1965] 1 WLR 1, 7 per Cross J; and Butler v Board of Trade [1971] Ch 680, 690, per Goff J. This view seems to give effect to the general rule that equity gives relief against all the world, including the innocent, save only a bona fide purchaser for value without notice. It is directly in point in the present case and our decision necessarily affirms it.”

And, at 685E-F:

“. . . there is no discretion in the court to refuse to exercise the equitable jurisdiction according to its view of the materiality of the communication, the justice of admitting or excluding it or the like. The injunction is granted in aid of the privilege which, unless and until it is waived, is absolute.”

The latter point is made in the Opinion of the Privy Council, delivered by Lord Millett, in B v Auckland District Law Society

[2003] UKPC 38

[2003] 3 WLR 859

, 876G, at paragraph [71].

The issues on these appeals

[26]On the basis that, while the BT documents remained in the possession of BT or otherwise under the control of APL, a claim to privilege could have been made out by APL in relation to at least some of those documents, the principal issue on the appeal in the APL action is whether privilege – or, as I would prefer to put it, confidence – in those documents was waived when they were sent by the APL receivers to GE’s solicitors. If that issue would be answered in favour of APL in properly constituted proceedings, a second issue arises: is the APL action properly brought? That second issue arises, of course, in the circumstances that the action is brought without the authority of the APL receivers, but on instructions given by the sole director of APL, Mr Richard Sutton.

[27]The principal issue on the appeal in the guarantee action is whether a claim to confidence – and to the legal professional privilege which would protect confidential communications from disclosure in litigation – can be made by Mr Paul Sutton in relation to the BT documents (or to some of those documents) in the circumstances that (as he asserts) he was not the client of BT at the relevant time. The privilege which he asserts is that to which Mr Justice Rix (as he then was) referred in Hellenic Mutual War Risks Association (Bermuda) Ltd and another v Harrison (The “Sagheera”) [1997] 1 Lloyd’sRep 160, 167, under the description “common interest privilege”. There are, as it seems to us, three discrete, but inter-related, questions within that issue:(i) whether the circumstances in which the BT documents came into existence gave Mr Paul Sutton any right to confidence which equity would protect; if so,

(ii) whether the circumstances in which the BT documents came into existence would have given rise to a privilege from disclosure in litigation if those documents had been in the possession or under the control of Mr Sutton; and, if so,

(iii) whether Mr Sutton would have been entitled to restrain APL, in whose possession or under whose control the documents were, from disclosing them to GE’s solicitors in circumstances which waived his rights to confidence and privilege in the BT documents.

[28]If APL, acting through Mr Richard Sutton, is entitled to the relief which it claims in the APL action, then the issues raised on the appeal in the guarantee action become academic – save, perhaps, in relation to costs. If APL can restrain GE from using the BT documents in the guarantee action – and can require GE to return those documents (and any copies) – then it may be of little or no practical importance whether Mr Paul Sutton would have been entitled to the relief which he sought on his own application in the guarantee action. If APL obtains the relief which it seeks in the APL action, the BT documents (and any copies) in respect of which confidence and privilege subsist will be returned to APL. Once in the possession or under the control of APL, those BT documents will not be disclosed in the guarantee action without an order in the administrative receivership. That is because it is a necessary condition for success on the appeal in the APL action that the Court is persuaded that the APL receivers did not have power – or could have been restrained at the suit of APL from exercising the power - to disclose to GE those of the BT documents which would have been privileged from disclosure in litigation while they remained in the possession or under the control of APL. Was APL’s right to confidence in respect of the BT documents waived when those documents were sent by the APL receivers to GE’s solicitors?

[29]We turn, therefore, to the question whether APL’s right to confidence – and to the legal professional privilege which would protect confidential communications from disclosure in litigation – was lost when the BT documents were sent by the APL receivers to GE’s solicitors. In order to address that question it is necessary to have in mind the circumstances in which that occurred. They appear from the witness statement (his third) made by Mr Simon Boon on 13 June 2003. At paragraph 11 he explained that the “non-disclosure” defence to the claim on the guarantee was raised, for the first time, in witness statements served on behalf of the defendants to the guarantee action in December 2002, in response to GE’s application for summary judgment. He went to say this:

“I asked the Receivers to assist the Claimant in obtaining evidence relating to the provision to the Claimant in October 2001 of security and guarantees by the Defendants and Pimlico, another Sutton company, and in particular the execution by Mr Sutton of his Guarantee and Compromise Agreements dated 3rd October 2001. There is now produced and shown to me marked “SB4” a copy of the Receivers’ letter to Boyes Turner dated 25th February 2003 by which the Receivers sought the relevant evidence in accordance with their powers under Sections 224-236 Insolvency Act 1986. Upon receipt of the files from Boyes Turner, the Receivers then forwarded the files to my firm.”

The BT documents were sent to Mr Boon’s firm under cover of a letter dated 4 March 2004:

“I refer to your recent e-mail and enclose documentation received from Messrs Boyes Turner. I have not retained a copy and therefore should be grateful if you would return these papers to me in due course.”

We have not been shown a copy of the e-mail in which Mr Boon made the request for assistance. The letter of 25 February 2003, by which the APL receivers required BT to deliver its files was in the terms set out earlier in this judgment.

[30]It is plain, from the terms of the letter of 25 February 2003, that the BT documents were sought by the APL receivers in reliance on their powers under the Insolvency Act 1986 and for the expressed purpose of enabling the APL receivers to investigate matters relating to the indebtedness of APL to GE and the provision of security and guarantees in connection with that indebtedness. The documents were not sought – at least, not ostensibly – for the purpose of assisting GE and its solicitors to obtain evidence which would or might assist in rebutting the non-disclosure defence which had been raised in the guarantee action. It is plain, also, that the APL receivers sent the BT documents on to GE’s solicitors without giving any consideration to the contents of those documents or to the question whether it served the interests of APL that those documents be disclosed to the creditor by whom they had been appointed. It is pertinent to note(i) that the documents were sent on to GE’s solicitors within a day of their receipt by the APL receivers – 28 February 2003 was a Friday, 4 March 2003 was the following Tuesday - and

(ii) that, in their haste to comply with Mr Boon’s request, the APL receivers had no time to copy the documents which (as they had told BT) they required for the purpose of making their own investigations.

[31]The circumstances in which the BT documents were obtained by the APL receivers and then passed to GE’s solicitors raise two questions:(i) whether, if the documents were obtained under the statutory powers conferred by sections 234-236 of the Insolvency Act 1986 for the purpose of enabling the APL receivers to make their own investigations (as the letter of 25 February 2003 asserted), it could have been a proper exercise by the APL receivers of those powers (or any other powers) to send those documents to GE’s solicitors without giving any consideration to their contents or to the question whether disclosing the documents to GE served the interests of APL; and

(ii) whether, if the true purpose of the APL receivers in requesting documents from BT was to assist GE in its litigation against the guarantors (notwithstanding the assertion made in the letter of 25 February 2003), the APL receivers were exceeding the powers conferred on them by the 1986 Act or by the debenture under which they were appointed.

[32]The judge did not find it necessary to address those questions – although he set out the arguments at paragraphs 19 and 20 in the transcript of his judgment. He rejected APL’s claim to restrain use of the BT documents on the grounds(i) that APL had no legitimate interest in seeking that relief to protect Mr Paul Sutton and

(ii) that, in any event, the BT documents were the property of APL for it to deal with as it liked and proceedings could not be brought in the name of APL in respect of that property without the concurrence of the APL receivers. It will be necessary to consider whether the judge was right to take that view; but it is convenient to ask, first, whether, in dealing with the BT documents as they did, the APL receivers were acting within their powers.

[33]It is not in dispute that an administrative receiver is an “office holder” for the purposes of sections 234-236 of the 1986 Act. Nor is it in dispute that, on the application of the office holder, the court may require any person who has in his possession or control any property (including papers) to which the company appears to be entitled to deliver the property to the office holder – section 234(2) of the Act. But the powers conferred by sections 234-236 of the 1986 Act may only be invoked for a legitimate purpose, As Lord Millett put it in In re Pantmaenog Timber Co Ltd (in liquidation), Official Receiver v Wadge Rapps & Hunt and another

[2003] UKHL 49

[2003] 2 BCLC 257

, at paragraph 64:

“. . . the court, which has a discretion to make or refuse an order, should be astute to see that the powers conferred by the section are not abused. It would plainly be an abuse to use those powers for a purpose which is foreign to the functions of the applicant in relation to the company . . .”

[34]The functions of an administrative receiver are prescribed by the terms of the debenture under which he is appointed. The APL receivers were appointed under an all assets debenture dated 6 December 2000. Clause 8.4 of that debenture provided that any receiver appointed under it should be the agent of the Company (meaning APL) and in the same position as a receiver appointed under the Law of Property Act 1925. The receivers’ powers are set out in clause 8.5, and include, so far as material:

“8.5.1 to enter upon, take possession of, collect and get in the Mortgaged Property and for that purpose to have possession of all records, correspondence and documents relating to the Mortgaged Property; . . . 8.5.3 to carry on or permit the carrying on of all or any part of the business of the Company . . .; . . . 8.5.15 [to]exercise or permit the Company or any nominee of the Company to exercise any powers or rights incidental to the ownership of the Mortgaged Property, in such manner as he may think fit; . . . 8.5.24 to do all things necessary to make sure that the Company performs or observes all of its obligations to the Securityholder; . . . 8.5.29 to do all such other acts and things without limitation, as the Receiver may consider to be incidental to the lawful exercise of his powers and duties.”

In that context, GE is the “Securityholder” and “the Mortgaged Property” means the subject matter of the mortgages or charges set out in clause 2 of the debenture. It cannot be disputed that documents in the possession of BT – at least in so far as they are documents which belong to APL – are part of the Mortgaged Property for the purposes of the debenture. Clause 2.1.6 imposes a floating charge “on all the remainder of the undertaking, property rights and assets of the Company whatsoever and wheresoever, both present and future” not already subject to the fixed and floating charges imposed by earlier sub-clauses.

[35]In addition to the functions prescribed by the debenture under which he is appointed, an administrator has the general powers set out in schedule 1 to the Insolvency Act 1986 – see section 42(1) of that Act. It is not, we think, suggested that, in the present case, schedule 1 to the 1986 Act adds anything to the powers conferred by the debenture.

[36]Clause 8.5.24 of the debenture empowered the APL receivers “to do all things necessary to make sure that the Company performs and observes all of its obligations to the Securityholder”. Those obligations included an obligation, imposed on APL by clause 3.1.13 of the debenture, to provide such information regarding its affairs “as the Securityholder may reasonably request.” They included, also, the obligations to provide information imposed by the finance agreement made between GE and APL on 6 December 2000, in conjunction with which the debenture was granted. That agreement incorporated GE’s Standard Conditions for Invoice Discounting (Edition A/98). Condition 16 set out “Our Information Requirements”. Condition 16.3 required APL to allow any employee, representative or agent of GE to enter APL’s business premises “to verify, check and be provided with copies of all Accounting Records, orders, correspondence and other such documents as we require”. Condition 16.5.4 required APL to provide, by way of monthly return, “any other information we may ask for”.

[37]We are not persuaded that clause 8.5.24 of the debenture provides GE with assistance in the present case. The obligations to provide information imposed by the finance agreement and the Standard Conditions for Invoice Discounting must be read in context. The context is the operation of the invoice discounting (or factoring) arrangements for which the finance agreement provides. It could not have been the intention of GE and APL that obligations to provide information imposed in the context of ongoing factoring arrangements would enable GE to call for confidential and privileged communications recording advice given to APL by its solicitors – a fortiori where that advice was given in respect of APL’s rights and obligations vis a vis GE. Nor could it have been intended that information contained in communications of that nature was information which GE, as the Securityholder, might “reasonably request” under clause 3.1.13 of the debenture.

[38]In our view it is not open to serious doubt that, if the true purpose of the APL receivers in requesting documents from BT was to assist GE in its litigation against the guarantors (notwithstanding the assertion made in the letter of 25 February 2003), the APL receivers were exceeding their powers. If that were the true purpose of the request, it cannot be said that, in requiring delivery up of the BT documents, the APL receivers were engaged in the task of taking possession of, collecting and getting in those documents as part of the mortgaged property; or of carrying on the business of APL. If that were the true purpose of the request, the APL receivers were not seeking to serve any interest of APL or its creditors generally; they were seeking only to serve the interests of GE. Nor can reliance be placed on the power “to exercise any powers or rights incidental to the ownership of the Mortgaged Property”, or the power “to do all such other things as the Receiver may consider to be incidental to the lawful exercise of his powers and duties”. Those powers are conferred on the receiver to enable him to perform his functions of getting in, protecting, and realising the mortgaged property for the benefit of APL and its creditors; not for the purpose of assisting GE in litigation against a third party.

[39]We return, therefore, to the question whether, if the documents were obtained under the statutory powers conferred by sections 234-236 of the Insolvency Act 1986 for the purpose of enabling the APL receivers to make their own investigations (as the letter of 25 February 2003 asserted), it could have been a proper exercise of those powers for the APL receivers to send those documents to GE’s solicitors without giving any consideration to their contents or to the question whether disclosing the documents to GE served the interests of APL. In our view that question, also, must be answered in the negative.

[40]The circumstances in which an administrative receiver may properly disclose privileged communications, obtained under statutory powers, to the creditor by whom he has been appointed were considered by Mr Justice Harman in In re a Company, No 005374 of 1993

[1993] BCC 734

. He said this (ibid, at page 735B-C):

“. . . the duty of confidence imposed upon those who obtain information by the use of sec. 236 of the 1986 Act can, if the court is satisfied that either it is for the purposes of the office which the office-holders who seek to disclose the information hold, or is otherwise justified by the balance of considerations of how justice is properly to be attained, be waived by the court. That I base upon the decision of Millett J in Re Esal (Commodities) Ltd (No.2) [1990] BCC 708, and in particular para. 1 and 2 of the headnote.”

[41]The same point was addressed, a few months later, by Lord Cameron, sitting in the Outer House of the Court of Session, in First Tokyo Index Trust Ltd v Gould and others (unreported, 30 September 1993). In that case the applicants (petitioners) were the joint liquidators of the company, First Tokyo Index Trust Ltd. They had obtained documents from the respondents under the statutory powers. They sought the permission of the court to disclose those documents – and the transcripts of private examination - to the debenture holder, Swiss Bank Corporation. Permission was refused. Lord Cameron drew attention to the special nature of the powers conferred by sections 234-236 of the 1986 Act; he said this:

“. . . [those] powers . . . are given to the Court in order to enable the liquidator to better discharge his functions as such and not to enable a prospective litigant to improve the prospects of litigious success by giving him rights which other litigants lack. To grant leave in order to enable the Bank to have disclosed to them even those documents limited to the extent suggested by counsel for the petitioners, would do just that and would not be for the purpose of the liquidation.”

[42]It can be seen, therefore, that – if disclosure of the BT documents to GE’s solicitors for the purpose of assisting GE in its litigation against Mr Paul Sutton and others was not a proper exercise of the APL receivers’ powers under the debenture – the position is not changed by the fact that the BT documents were obtained by a request made (or purportedly made) under sections 234-236 of the Insolvency Act 1986. The overriding question is whether disclosure of the BT documents to GE’s solicitors was made in the performance by the APL receivers of their functions as administrative receivers of APL. It has not been suggested, by or on behalf of the APL receivers, that they gave any consideration to that question; in particular, it has not been suggested that the APL receivers gave any consideration to the contents of the BT documents or to whether disclosure of those documents to GE would enable them the better to discharge their functions as administrative receivers of APL. The facts point strongly to the conclusion that they did not do so. Rather, they simply did as they were asked by GE’s solicitor, Mr Boon, without giving any thought to the interests of APL.

[43]We hold, therefore, that APL’s right to confidence – and to the legal professional privilege which would protect confidential communications from disclosure in litigation – was not lost when the BT documents were sent by the APL receivers to GE’s solicitors. In the circumstances which we have described the disclosure of those documents to GE’s solicitors was outside the powers of the APL receivers; and an unauthorised disclosure cannot have had the effect of waiving APL's rights to confidence and privilege. Whether the APL action is properly brought?.

[44]As we have indicated, the judge took the view that proceedings could not be brought in the name of APL in respect of the BT documents without the concurrence of the APL receivers. In effect, he held that the appointment of administrative receivers with powers to bring and defend legal proceedings in the name and on behalf of the company – see paragraph 5 in schedule 1 to the 1986 Act – suspended the powers which the directors of the company would otherwise have under the articles of association.

[45]The relationship between the powers of receivers and the powers of directors, in the context of proceedings brought in the name of the company, were considered by this Court in Newhart Developments Ltd v Co-operative Commercial Bank Ltd

[1978] QB 814

. Lord Justice Shaw pointed out, (ibid, at page 819E-F) that the power to bring proceedings in the name of the company conferred on receivers (in that case, by the terms of the debenture) was no more than an enabling power; the provision conferring that power “does not divest the directors of the company of their power, as the governing body of the company, of instituting proceedings in a situation where so doing does not in any way impinge prejudicially upon the position of the debenture holders by threatening or imperilling the assets which are subject to the charge”. Lord Justice Shaw went on to say this (ibid, at page 821B-D):

“What, of course, the directors cannot do, and to this extent their powers are inhibited, is to dispose of the assets within the debenture charge without the assent or concurrence of the receiver, for it is his function to deal with the assets in the first place so as to provide the means of paying off the debenture holders’ claims. But where there is a right of action which the board (though not the receiver) would wish to pursue, it does not seem to me that the rights or function of the receiver are affected if the company is indemnified against any liability for costs (as here). I can see no principle of law or expediency which precludes the directors of a company, as a duly constituted board (and it is not suggested here that they were not a duly constituted board when they took the step of instituting this action) from seeking to enforce the claim, however ill-founded it may be, provided only, of course, that nothing in the course of the proceedings which they institute is going in any way to threaten the interests of the debenture holders”

. It is clear, we think, that the reference, in the last sentence of that paragraph, to “the interests of the debenture holders” is to the interests of the debenture holders as such – that is to say, to their interests in the assets subject to the charge.

[46]It cannot be said, in the present case, that the institution of proceedings in the APL action goes in any way to threaten the interests of GE, as debenture holder, in the assets subject to the debenture. In so far as the BT documents are assets subject to the debenture, the order sought in the APL action is for the return of those documents to APL; not for the return of those documents to Mr Paul Sutton. And, if those documents are returned to APL, there can be no impediment which denies the APL receivers the right to examine and make use of those documents for the purposes for which they were sought in the letter of 25 February 2003; that is to say, for the purpose of “investigating matters relating to the indebtedness [of APL to GE] and, in particular, the provision of . . . security and guarantees by various parties, including Paul Sutton, . . . in consideration of GE’s agreement to continue the facility . . .”.

[47]Further, if – after examining the documents – the APL receivers were to identify some proper reason why, in the interests of APL, disclosure of those documents should be made to GE, they could, as it seems to us, apply to the Companies Court for an order that they are entitled to make that disclosure, notwithstanding that the documents would otherwise be the subject of confidence – see the observations in In re a Company, No 005374 of 1993

[1993] BCC 734

, 735B-C, to which we have already referred. On an application of that nature, Mr Paul Sutton would (at least, prima facie) have a right to intervene and be heard. The important distinction between an application of that nature and the present application is that the Companies Court would have the advantage of submissions on behalf of the APL receivers as to why they had reached the conclusion that disclosure of those documents to GE served the interests of APL or was otherwise a proper exercise of their powers in the discharge of their functions as administrative receivers of APL.

[48]For those reasons we reject the submission, advanced on behalf of GE, that the APL action is not properly brought. We should add this. The claimant in the APL action is the company, APL, not Mr Richard Sutton. The proceedings were commenced by a solicitor acting on instructions given (or purportedly given) by the company acting through its director. On a true analysis the challenge made by GE, as defendant to the APL action, is to the authority under which the solicitor purports to act on behalf of the company. It has long been established that it is not open to a defendant to raise a challenge to the authority of the claimant’s solicitor by way of defence to the action. The proper course is to apply to strike out the proceedings, joining the solicitor to that application – see the observations of Mr Justice Warrington in Richmond v Branson & Son

[1914] 1 Ch 968

, 972, 974, approved in Russian Commercial and Industrial Bank v Comptoir d’Escompte de Mulhouse and others

[1925] AC 112

, 130, 148.

[49]The rule is not absolute. In Daimler Company Limited v Continental Tyre and Rubber Company (Great Britain) Limited

[1916] 2 AC 307

, proceedings had been commenced in the name of a company at a time when all the directors were enemy aliens “and as such incapable of exercising any of the powers vested in them as directors of a company incorporated in the United Kingdom”. After pointing out that, in those circumstances, the directors were incapable of authorising solicitors to commence the proceedings, Lord Parker of Waddington (with whom the other members of the House agreed) said this, at page 337:

“It follows that this action was instituted without authority from the company, and in my opinion the Court having notice of the fact should have refused relief. It is true that a question whether the plaintiff’s solicitor has or has not been validly retained is in general brought before the Court by motion to which the solicitor is made a party. But when the Court in the course of an action becomes aware that the plaintiff is incapable of giving any retainer at all, it ought not to allow the action to proceed. It clearly would not do so in the case of an infant plaintiff, and I can see no difference in principle between the case of an infant and the case of a company which has no directors or other officers capable of giving instructions for the institution of legal proceedings. This is more especially so when, by reason of all the shareholders (with one exception) being the King’s enemies, no agent or other officer capable of giving such instructions can be validly appointed.”

The circumstances in the Daimler case were unusual. In the later case, Russian Commercial and Industrial Bank, Viscount Cave (ibid, 130) explained that decision on the ground that “the alleged plaintiff was incapable of giving any retainer at all”.

[50]For the reasons which we have set out, that is not this case. It may be that, in this case, the APL receivers – acting properly within their powers – can override the power of the sole director to institute proceedings in the name of the company. But they have not yet sought to do so; and it is not self evident that, if they sought to do so, they would be bound to succeed.

[51]We should make it clear that nothing that we have said should be taken to suggest that the costs of bringing the APL action should fall on assets which are charged to GE. It is, we suspect, a necessary feature of cases, such as this - where all the assets of the company are charged to the debenture holder, who does not consent to the action being brought – that the director will have to find outside funds. Further, nothing that we have said should be taken to suggest that the defendant would not be entitled to seek an order that the claimant company provide, from outside funds, security for its (the defendant’s) costs. But those considerations do not lead to the conclusion that the action is not properly brought.

[52]It follows that we allow the appeal in the APL action.

The appeal in the guarantee action

[53]As we have said, if (as we hold) APL can restrain GE from using BT documents in the guarantee action – and can require GE to return to it (or, to the APL receivers) those documents (and any copies) – then it may be of little or no practical importance whether Mr Paul Sutton is entitled to the relief which he seeks on his own application in the guarantee action. But, in our view, the question can be disposed of shortly.

[54]It is first necessary to consider whether the circumstances in which the BT documents (or some of them) came into existence gave Mr Sutton any right to confidence which equity would protect. As to that the evidence, is that BT, although not retained by Mr Paul Sutton as his solicitors, were giving him (as well as APL) legal advice as to his obligations under the guarantee.

[55]The judge made no actual finding to the contrary; although he was inclined to accept GE’s rolled up submission that a critical letter was “not… a letter by Mr Sutton’s solicitors to him communicating advice” [emphasis added]. He held, in effect, that whether or not communications between BT and Mr Sutton were made in confidence, Mr Sutton could not assert legal professional privilege in respect of those communications because BT were not his solicitors. At paragraphs 27 and 28 of his judgment he said this:

“I do not ignore in this context Boyes Turner’s letter of the 1st October 2001 to Mr Sutton. . . . In the letter, Mr Rice, of Boyes Turner, explains to Mr Sutton the principles of arrangements reached between DLA for GE and himself concerning the compromise arrangements. He sets out details of the security and collateral, and the requirements for Mr Sutton’s personal guarantee. He explains the salient provisions of the guarantee and that he had failed to secure a particular revision that he had tried to negotiate in the guarantee in favour of the proposed guarantors. [Counsel for GE] submits that this letter is no more than a report by APL’s solicitors to APL itself, through its authorised contact, Mr Sutton, upon the arrangements made with GE’s solicitors. It is not, she submits, a letter by Mr Sutton’s solicitors to him communicating advice. I am inclined to agree with that submission, but I do not base my decision upon it. My decision on this point is based on the simple ground that Mr Sutton positively denies that Boyes Turner ever acted for him at all.”

We do not think that it would have been open to the judge to find, on an interlocutory application and on the material before him, that BT had not given Mr Paul Sutton advice in confidence.

[56]In our view the application has to be approached on the basis that it is, at the least, arguable that BT did give Mr Paul Sutton some confidential advice. And, as Lord Justice Nourse pointed out in Goddard and another v Nationwide Building Society

[1987] QB 670

, 685A-B, the equitable jurisdiction to protect confidence extends to confidential communications which would not be privileged from disclosure in litigation. We hold that, whether or not the circumstances in which the BT documents came into existence would have given rise to a privilege from disclosure in litigation if those documents had been in the possession or under the control of Mr Paul Sutton, Mr Sutton would have been entitled to restrain both BT and APL (for so long as the documents remained in their possession or under their control) from disclosing those documents to GE without an order of the court.

[57]It does not follow, of course, that the court would not have made an order for disclosure. The true analysis, as it seems to us, is that (absent any objection to disclosure on the part of APL) the court would have ordered disclosure of the documents for use in litigation, notwithstanding the documents contained confidential advice given to Mr Paul Sutton, unless Mr Sutton could make good a claim to legal professional privilege.

[58]If APL had failed in its appeal in the APL action, it would have been necessary – if Mr Paul Sutton were to succeed in his appeal in the guarantee action – for him to establish that he was entitled to rely on legal professional privilege (or, as it was described in the Sagheera, common interest privilege). That element would be essential if the court were to be persuaded to order, at the suit of Mr Paul Sutton, that the BT documents be returned to APL (or the APL receivers) or to restrain GE from making use of them in the litigation – for the reasons explained in Goddard.

[59]But that is not the position if (as we hold) APL succeeds in its appeal in the APL action. The position, then, is that the BT documents must be treated as if they were in the possession or under the control of the APL receivers – who, as we have said – have no power to disclose those documents to GE unless, after examining the documents, they identify some proper reason why, in the interests of APL, disclosure should be made. If the APL receivers apply to the Companies Court for an order that they be at liberty to disclose the BT documents to GE, Mr Paul Sutton should have an opportunity to be heard. If that court were otherwise minded to make such an order, it would (as it seems to us) need to address the issue whether Mr Sutton has some privilege (independent of, or in addition to, that of APL itself) which he can assert. It is not necessary to address that issue on this appeal.

[60]It follows that we allow the appeal in the guarantee action also.

Order

Appeals allowed. Extension as to time limits granted. Reporting restrictions on Mr. Justice McCombe’s judgment continues, but no reporting restrictions on judgment of court of appeal handed down today. (Order does not form part of the approved judgment)