Litigation privilege in internal investigations: is litigation the dominant purpose?

Written on 19 Feb 2018

In a judgment reported recently, Sir Geoffrey Vos has given a potentially important judgment on legal professional privilege. He distinguished the present case from the controversial judgment of Andrews J in SFO v ENRC. It will be interesting to see if the Court of Appeal follows his reasoning when it considers ENRC’s appeal in July this year.

In Bilta (UK) Ltd (in liquidation) v Royal Bank of Scotland plc and Mercuria Energy Europe Trading Ltd, the judgment was on Bilta’s application for disclosure and inspection of documents. The focus was on transcripts of interviews with RBS staff. RBS opposed the application on the ground that the documents were subject to litigation privilege. As Bilta had conceded that adversarial proceedings were in contemplation at the time, the only question was whether the documents sought were created for the dominant purpose of those proceedings.

The overall claim

Bilta’s claim against RBS is for equitable compensation for alleged dishonest assistance and compensation for alleged fraudulent trading relating to alleged missing trader VAT fraud on trades in carbon credit. The claimants allege that as a result of RBS shutting its eyes to an obvious fraud and executing the trades, the former directors of the claimant were able to carry out the frauds through and to the loss of the claimant company.

Key dates/facts

In February 2010, HMRC first indicated to RBS that it was considering a VAT assessment on RBS of about £90 million plus, if appropriate, penalties. RBS provided information to HMRC over the course of 2010/11. Bilta argued later that interactions with HMRC were for a number of purposes, one of which was in order to comply with RBS’s policy to be open and transparent with tax law and tax authorities.

On 29 March 2012, HMRC wrote a formal letter stating that it had “sufficient grounds” to make a VAT assessment, but invited RBS to reply and to provide further information. The letter stated:

If HMRC remain of the view that any input tax should be denied following any reply and/or meeting with RBS, you will receive a further letter giving an appealable decision and you would have 30 days to request a review or appeal this.

Soon after receiving this, RBS transferred management of the issue to its internal litigation team and then to the tax litigation team of external solicitors (McGrigors, which later merged into Pinsent Mason). Pinsent Mason (PM) and RBS continued communicating with HMRC.
On 20 September 2012, HMRC issued a VAT assessment on RBS for £86,434,398 “on a protective basis as discussion upon the issues was continuing…” HMRC offered to extend the 30 day deadline for a formal appeal against the assessment if RBS could explain in writing why it needed more time.

On 28 January 2014, RBS sent the final “PM report” to HMRC. In the introduction, it stated “Pinsent Masons … have been instructed by [RBS] to assist with an investigation into the factual circumstances surrounding the onboarding of and trading relationship with …” [five emissions trading counterparties] and “[RBS] does not waive any legal professional privilege in providing this report to [HMRC].”

In December 2016, Bilta’s solicitors asked PM to explain the basis on which RBS had carried out its investigations into the VAT issue. PM replied that it was both as a result of RBS’s “general obligation to provide accurate information to the HMRC in respect of [VAT]” and in contemplation of litigation in the tax chamber of the First Tier Tribunal (FTT).

In September 2017, Bilta’s solicitors applied to court for an order including that RBS provide copies of the documents created after 29 March 2012 “during the course of the investigation that led to the PM report and any documents created after the PM report that formed part of the same investigation.”

The judge’s decision

Sir Geoffrey Vos decided that:

  • the question of dominant purpose is highly fact-specific;
  • the judgment in SFO v ENRC could be distinguished, as the context of a corporate’s interactions with the SFO is very different from that of a corporate’s interactions with HMRC;
  • the HMRC letter of 29 March 2012 was a “watershed moment”, like a letter of claim in civil proceedings, shortly after which RBS instructed external solicitors specialising in tax litigation;
  • the multiple purposes of RBS’s interactions and communications with HMRC – namely, the purposes of maintaining a good relationship with HMRC, providing information to HMRC in accordance with its duties as taxpayer, complying with its Codes of Practice and in order to persuade HMRC to change its mind – were “effectively subsumed under the purpose of defeating the expected assessment”;
  • RBS was not spending large sums on legal fees here in the hope that HMRC would be dissuaded from issuing an assessment“; (an arguably surprising conclusion)
  • “[attempting to fend] off the assessment was just part of the continuum that formed the road to the litigation that was considered, rightly, as it turned out, to be almost inevitable“; and
  • the fact that RBS behaved openly and collaboratively in the period between the HMRC letter and the PM report does not mean that … the interviews it conducted were not fully and primarily intended to provide the material to resist the expected assessment by a challenge in the FTT.”

The judge therefore dismissed the application on the basis that the documents and interviews with the witnesses were covered by litigation privilege, as they were brought into being for the sole or dominant purpose of the expected litigation in the FTT.

Does attempting to avoid litigation fall within the definition of dominant purpose?

One of the more controversial points in Andrews J’s judgment in the SFO v ENRC judgment was that documents created for the purpose of attempting to avoid anticipated litigation did not fall within the scope of litigation privilege.

The judge in Bilta v RBS considered this. At paragraph 66, he said: “Andrews J thought that attempts to settle prevented the litigation purpose being dominant on the facts of her case. I cannot accept … that one can properly draw a general legal principle from her approach to those facts.” He went on at paragraph 69 to say that, for RBS, avoiding anticipated litigation was “the inseparable purpose” from preparation for anticipated litigation.

Practice points and comment

The decision offers some good authority, from the most senior judge of the High Court, for corporates to argue contrary to the High Court decision in ENRC. But it is certainly not conclusive. At least until we have the judgment of the Court of Appeal in ENRC, there is a risk that the scope of privilege is as limited as Andrews J’s judgment in ENRC may indicate.

Unhelpfully, at times the Bilta judgment conflates the 2 main difficult points in the test for litigation privilege namely: when are adversarial proceedings reasonably in prospect; and what is the dominant purpose of the contested communication? Both questions are fact and context-specific and some of the facts/context might apply to both questions, but they should be considered separately (and in sequence).

The context of the challenge to privilege in Bilta was quite different to that in the ENRC case. First, in ENRC the SFO was acting in its capacity as a criminal prosecutor. In Bilta, HMRC wrote to RBS as a tax authority that was considering issuing an assessment and a civil penalty. Second, in Bilta the applicants had conceded that adversarial proceedings were already in contemplation, but in ENRC this was heavily disputed.

Following this judgment, an even more recent Court of Appeal case on privilege (R v Jukes) confirmed the difference between criminal and civil contexts.  In that case, the court applied Andrews J’s test in ENRC to a fatal accident at work where, on the face of it, there had been a breach of duty.   The Jukes case also emphasises the importance of putting evidence before the court of the states of mind of the various parties when assessing when adversarial proceedings first start to be in contemplation or reasonably in prospect.

It seems that a difference has opened up between criminal and civil proceedings. Will the courts provide guidelines on how privilege is to be dealt with in relation to the various different contexts that apply when different prosecutors/regulators/government bodies interact with corporates? Corporates need much better clarity about their dealings with such bodies, especially where there are expectations to self-report and/or duties to cooperate.

It seems that it is unrealistic for corporates to have a fixed policy or strategy for privilege in relation to internal investigations. Each investigation will need to consider the various factors that have arisen or might arise and take a risk-based decision on what is likely to be the best approach for the investigation as a whole.