Trains: Dispute over SPV’s demise
The High Court has refused to order that a leading City law firm hand over all the information and documents it holds in relation to a client’s sister company.
Insolvency and Companies Court Judge Burton held that the application from the liquidators of the sister company was “so wide and unsupported by any evidence to explain” why they needed so much that the application against Norton Rose Fulbright (NRF) “must fail”.
The applications pursuant to sections 235(2)(a) and 236(3) of the Insolvency Act 1986 were made by Eversholt Rail (365) Ltd (called ‘365Co’ in the ruling) against Eversholt Rail Ltd (ERL) and NRF.
The first two are both part of the Eversholt UK Rails Group, which owns and maintains railway engines and carriages that are leased to various train operating companies.
365Co was a special purpose vehicle which held some of the group’s train fleet. In 2019, it was placed into a creditors’ voluntary liquidation, with the applicants, insolvency practitioners at PwC, appointed as liquidators.
Judge Burton said the liquidators had “persistently failed to apprehend that when exercising its powers pursuant to sections 235 and 236 of the Act, the court will only compel a third party to disclose information and deliver up documents that are reasonably required”.
The court would require “compelling evidence” to understand all of a company’s records met this test, or why the request was not more specific, and none was provided here.
There was no evidence of conduct on the part of ERL to suggest it would withhold, conceal or destroy relevant information, the judge said, adding that it had been “cooperative from the start”, only refusing to accede to “far-reaching and inadequately explained requests”.
The application against ERL was “fundamentally misconceived”, she went on. The liquidators’ counsel had asked rhetorically why they should not be in the same position that they would have been in if 365Co had held its own records.
“The answer is straightforward: the liquidators are not in the position they would like to be in, because that was not how the ERL Group operated. They must work within the confines of the circumstances of the company to which they have been appointed.”
The failure to explain why all the documents was reasonably required meant the application against ERL failed. This included requests for any legal advice or legal services provided by ERL’s in-house lawyers or procured from NRF “relating to 365 business”.
The application against NRF similarly focused on the liquidators’ “entitlement as opposed to their reasonable requirement”, Judge Burton observed.
NRF had been clear to the liquidators and their solicitors, DLA Piper, that ERL was its client, although DLA had argued that 365Co was also NRF’s client, or at least de facto client. But there was no evidence provided to support this assertion.
The liquidators sought to claim joint interest privilege but could not point to any category of documents to which it would apply.
Privilege was not abrogated by sections 235 and 236, Judge Burton said, while even with the limited areas in which the court was prepared to recognise a joint interest for the purposes of privilege, ERL and 365Co “were not in a relationship of parent company and subsidiary”.
Rather, they were sister companies and the services agreement between them expressly provided that it did not create a cooperative entity between them or make one the agent of the other.
“Secondly, as matters stand, no evidence has been put before the court of legal advice obtained by ERL being habitually disseminated to 365Co.
“The fact that 365Co might have been the subject of advice given by NRF to ERL does not appear, from the authorities cited to me, to be enough to give rise to joint interest privilege.”
Judge Burton concluded: “Ultimately, regardless of the potential merits of any argument that could be raised regarding common or joint interest privilege, as with ERL, the breadth of the order sought against NRF is currently so wide and unsupported by any evidence to explain the liquidators’ reasonable requirement to see all the documents falling within it, that the application against NRF must fail.”
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