Following the decisions in The RBS Rights Issue Litigation[1] and Serious Fraud Office v Eurasian Natural Resources Corporation Limited[2] (“ENRC”), it was thought that the prospect of claiming legal professional privilege in English proceedings over interview memoranda generated during internal investigations was slim (see our client alert on those two cases (PDF: 172 KB)). However, a recent decision of the English High Court in Bilta (UK) Limited and Others v (1) Royal Bank of Scotland Plc (2) Mercuria Energy Europe Trading Limited[3] (“Bilta”) has refused the disclosure of interview memoranda on the basis of litigation privilege, providing a glimmer of hope for corporates who seek to protect such documents from disclosure.
Background
Bilta concerns what is commonly known as a missing trader intra-community (or “MTIC”) fraud in the UK market for European Union Allowances (“EUAs”) during mid-2009. EUAs, also called carbon credits, are tradeable units in greenhouse gases. The MTIC fraud alleged involved companies trading in EUAs failing to account to Her Majesty’s Revenue and Customs (“HMRC”) for the value added tax (“VAT”) which accrued on the trades. Instead, the companies paid the VAT received to third parties and then went into liquidation, precluding HMRC from recovering those VAT amounts.
The Royal Bank of Scotland (“RBS”) became involved in this alleged fraud through its (now former) subsidiary, Mercuria Energy Europe Trading Limited, which was at the relevant time known as RBS Sempra. RBS Sempra traded in EUAs, and the Claimants in Bilta alleged that RBS and RBS Sempra wilfully shut their eyes to an obvious fraud being perpetrated in the EUA market, as a result of which the Claimants’ creditors have lost out.
In addition to the civil claim brought by Bilta (UK) Limited, RBS faced a threatened assessment by HMRC (communicated by way of a letter dated 29 March 2012) to reclaim some £86 million in over-claimed VAT. In connection with this issue and as part of a response to HMRC’s threatened assessment, RBS instructed its lawyers to carry out an investigation and prepare a report for HMRC setting out why RBS did not believe that it had over-claimed VAT.
The Claimants in Bilta applied for disclosure of interview memoranda prepared by RBS’s lawyers during the investigation. The Claimants’ arguments relied heavily on the decision in ENRC, which held that interview memoranda that had been created following a factual investigation, the result of which was to produce a report to the Serious Fraud Office (“SFO”) seeking to persuade the SFO not to bring criminal charges against it, were not protected by litigation privilege. RBS on the other hand argued that the facts of this case demonstrated that the test for litigation privilege to apply was met, and that the documents should not be disclosed to the Claimants.
When Does Litigation Privilege Apply?
It is well established that litigation privilege applies when the following three elements are shown:
- Litigation must be in progress or reasonable contemplation;
- The documents or communications over which privilege is claimed must have been made for the sole or dominant purpose of conducting that litigation; and
- The litigation must be adversarial, not investigative or inquisitorial.[4]
In Bilta it was agreed by both sides that elements 1 and 3 of the test had been met by RBS; adversarial litigation was in reasonable contemplation, HMRC having threatened an assessment against RBS in the sum of approximately £86 million for over-claimed VAT. The question that the Judge, the Chancellor of the High Court Sir Geoffrey Vos, therefore had to decide was whether the sole or dominant purpose of the production of the interview memoranda was the adversarial litigation (as claimed by RBS) or whether there was another sole or dominant purpose (as claimed by the Claimants).
The Claimants contended that the interview memoranda were prepared as part of an investigation, the dominant purpose of which was to provide a full and detailed account of the relevant facts. RBS carried out this investigation, the Claimants said, to persuade HMRC not to make the threatened assessment, and also in response to RBS’s general duties and obligations as a tax payer, and in line with its internal Codes of Practice. In accordance with the decision in ENRC, this would mean that the documents were disclosable.
RBS accepted that it had general duties and obligations as a tax payer, and also that its internal Codes of Practice would require it to investigate allegations such as being involved in an MTIC fraud. However, since the receipt of the 29 March 2012 letter, RBS had reasonably believed that HMRC had decided to make an assessment against RBS in the sum of £86 million, but were prepared to allow RBS to provide comments in response prior to doing so. This was distinct from the position in ENRC, where a decision by the SFO to open an investigation into ENRC’s actions had not yet been taken. RBS therefore anticipated a claim against it, and all steps taken to investigate the matter after that date were for the dominant purpose of the defence of that litigation.
Judge’s Findings
The Chancellor found for RBS and held that the documents were not disclosable in the litigation. In his view, the 29 March 2012 letter from HMRC was akin to a letter before claim. To succeed in its assessment against RBS, HMRC had to surmount a relatively low hurdle, and the evidence both from RBS and its solicitors was that an assessment was highly likely to follow from the letter, regardless of the content of the response submitted by RBS following its investigations.
The Chancellor applied the decision in Re Highgrade Traders[5] (“Highgrade”), which found that assembling evidence to ascertain the strength of a party’s position is an ordinary part of litigation and is not separate from the litigation purpose. When litigation is threatened in relation to an alleged incident, investigations are not carried out for reasons of academic interest in knowing what has happened; it is because one needs to assess how one might respond to the litigation that is anticipated to follow. The Chancellor noted that there was a tension between the decisions in ENRC and Highgrade, and that the facts of the Bilta case were somewhat different to the facts in ENRC. ENRC had been found to be actively seeking to prevent litigation in carrying out its investigation, as opposed to preparing for it.
That RBS had a cooperative and apparently collaborative relationship with HMRC did not change the position in the Chancellor’s view. HMRC often seeks the views of large corporate tax payers prior to issuing assessments, but that did not mean that the investigation had not been carried out for the dominant purpose of the anticipated litigation with HMRC. The report provided to HMRC by RBS’s solicitors expressly did not waive privilege in the underlying material. The commercial reality on the facts was that HMRC was going to make an assessment, and that RBS was preparing for litigation to fight that assessment. The interview memoranda formed part of its preparation for that litigation and were accordingly protected from disclosure.
Conclusion
The decision in Bilta underlines that determinations as to the application of litigation privilege in internal investigations are heavily fact-sensitive. ENRC is being appealed to the Court of Appeal, but for the moment it still stands as support for the proposition that litigation privilege does not apply where the purpose of the investigation is to prevent litigation, rather than defend it. Bilta serves to highlight that not every internal investigation carried out prior to the commencement of civil or criminal proceedings will suffer from a lack of protection under the doctrine of litigation privilege under English law; it will all depend on the evidence that the party claiming privilege can put forward to show that (1) litigation was in reasonable contemplation and (2) the investigation was carried out with the dominant purpose of assessing the party’s position in that litigation.
Footnotes
[1] [2016] EWHC 3161 (Ch)
[2] [2017] 1 WLR 4205
[3] [2017] EWHC 3535 (Ch)
[4] Three Rivers District Council v Governor & Company of the Bank of England (No 6) [2005] 1 AC 610 at paragraph 102
[5] [1984] BCLC 151
Kelly Hagedorn is a partner in the Investigations, Compliance and Defense practice at Jenner & Block.
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