In the recent Bilta (UK) Ltd (in Liquidation) v RBS the English High Court revisited, but did not follow, one aspect of last year’s SFO v ENRC case - casting doubt on its general application.
In Bilta, the parties accepted that litigation was reasonably in anticipation when the documents were produced. So the case concerned the second limb of the test for litigation privilege – that is, were the communications made for the sole or dominant purpose of conducting litigation?
The background to Bilta concerns a letter RBS had received from HMRC indicating that HMRC intended to make an assessment against RBS for over-claiming VAT. In response, RBS’s external lawyers conducted an internal investigation and produced a report to HMRC.
Bilta’s liquidators, relying on ENRC, argued the documents underlying the report, which included transcripts of interviews, were not created with the dominant purpose of preparing to conduct litigation. Rather, Bilta argued, they were created for the purposes of informing RBS of its position and to provide a detailed account of the relevant facts to HMRC to persuade it not to take action against the bank. Moreover, even if the witness interviews and resultant notes had multiple purposes, Bilta argued it was clear that conducting litigation was not the dominant purpose.
But the Court held such purposes were subsidiary to the dominant purpose of defending the expected litigation with HMRC, and so the dominant purpose test for litigation privilege had been met. In this, the Court noted that the letter from HMRC indicating for the first time (following an investigation lasting over 2 years) that it was minded to deny RBS nearly £90m by way of input VAT was a ‘watershed moment’ – comparable to a letter before action in commercial litigation. From that point on, RBS was gearing up for litigation.
Some interesting headline points emerge from the judgment.
- The court suggested, obiter, that there was a ‘tension’ between the decision in ENRC and the decision of the Court of Appeal in Re Highgrade Traders, which had established that the subsidiary purpose of preparing documents for a factual investigation may well be subsumed into the dominant purpose of preparing for anticipated litigation.
- The court made clear that the exercise of determining the sole or dominant purpose in each case is a determination of fact. A realistic, commercial view should be taken of the facts. Helpfully, the court noted:
‘Although both cases [ENRC and Bilta/RBS] 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 engaged in ‘ostensibly collaborative and cooperative’ interactions with HMRC following the receipt of the HMRC letter, and provided updates on the progress of its investigation, did not preclude the investigation being conducted for the dominant purpose of the litigation. RBS knew that ‘the overwhelming probability was that an assessment would follow the HMRC letter’ and the cooperative discussions between RBS and HMRC did not change that.
- The court regarded the HMRC letter as being equivalent to a letter before a claim because it analysed the relevant law and applied the law to the facts as HMRC had understood them before asking for RBS's comments. There is no easy cross-over to FCA investigations but, based on this reasoning, the simple opening and notification of an FCA investigation would not, in itself, be equivalent. Whether steps taken during the course of the investigation might subsequently meet that hurdle will be a question of fact in each case. Whilst the safe view remains that the thresholds are only hit at a later stage in the enforcement process, Bilta now provides ammunition for arguing that the test may be met earlier.
Bilta is a helpful clarification but it did not address all the issues raised by ENRC. For example, the finding in ENRC that a criminal investigation by the SFO should not, without more, be treated as adversarial litigation for the purpose of litigation privilege was not considered. But the Court of Appeal will get its opportunity to consider the full scope of litigation privilege when ENRC comes before it later this year. For now, Bilta suggests that ENRC may not be of wider application and there is an appetite, at least amongst first instance judges, to confine it to its facts.
The author wishes to acknowledge the assistance of Charles Smye.
