The High Court rejects liquidators’ wide request for documents held by a group company and its lawyers in relation to a company in liquidation

Professional services firms will often find themselves in receipt of requests for information from liquidators in respect of companies in insolvency.

In Webb v Eversholt Rail Limited [2024] EWHC 2217 (Ch), the High Court dismissed an application made by liquidators pursuant to sections 235 and 236 of the Insolvency Act 1986 (“the 1986 Act”) essentially for failing to provide evidence of their “reasonable requirement” for the documents sought¹. The decision is a helpful reminder of the principles that the court will consider in exercising its discretion to grant section 235 and 236 orders under the 1986 Act, and a warning that courts will not grant expansive, unsubstantiated requests for information. The decision also reminds us that legal professional privilege belonging to other Group companies is not abrogated by sections 235 and 236 of the 1986 Act.

A reminder of the principles

The legal principles that apply to an application to court under sections 235 and 236 of the 1986 Act were not in dispute in this application. It was agreed that the court’s general and unfettered discretion as to whether an order under section 236 of the 1986 Act is made, is typically exercised with regard to the following principles:

1. the power is conferred to enable liquidators to discover the true facts concerning the affairs of the insolvent company so that they may be able to complete their duties as quickly and cost effectively as possible;
2. the exercise of the court’s discretion involves balancing the reasonable requirement of the liquidators to obtain information against the possible oppression to the person sought to be examined;
3. that balancing depends on the relationship between the importance to the liquidators of obtaining the information, and the degree of oppression to the person sought to be examined;
4. the views of liquidators should be afforded great weight by the court, but they are not decisive;
5. the case for making an order against individuals who have a statutory duty to cooperate with liquidators under s.235, is usually stronger than the case for making an order against a third party;
6. an order for the production of documents is less likely to be oppressive than one for an oral examination; and
7. an application to court is not necessarily unreasonable because it is inconvenient for the addressee of the application or causes him a lot of work or may make him vulnerable to future claims, or is addressed to a person who is not an officer or employee or contractor with the company, but all these will be relevant factors, together with many others².

Background

The application was made in respect of a company called Eversholt Rail (365) Limited (“365Co”). 365Co was a special purpose vehicle with three directors, who were also directors of its sister company, Eversholt Rail Limited ("ERL"), the first respondent. 365Co and ERL were part of the Eversholt UK Rails Group which owns and maintains railway engines and carriages that are leased to various train operating companies. 365Co had no employees and its operation was entirely dependent on services provided by ERL pursuant to a services agreement. Consequently, all of 365Co’s documents were held by ERL; 365Co’s documents were not separately filed, stored or segregated by ERL.

In August 2019, 365Co entered into creditors' voluntary liquidation and the applicants were appointed as joint liquidators. The liquidators’ applied to the court for an order against ERL and ERL's solicitors (“the law firm”), to deliver up "copies of all documents…in its possession custody or control relating to the business, dealings, affairs or property" of 365Co, including a summary of any advice given by the law firm³. The documents in the application were broadly described, and no time period (or limit) was proposed. Importantly, no explanation was given in the liquidators’ evidence as to why such a potentially enormous number of documents, covering a long period of time, was needed.

The Decision

Upon review of the correspondence relating to the various requests made of ERL for documents, the court found that the respondents had responded in a cooperative manner to all focussed requests for documents, and that the respondents had only resisted when posed with a request to deliver up absolutely everything “in relation to” 365Co⁴. 

The court stated that when exercising its powers pursuant to sections 235 and 236 of the 1986 Act, “the court will only compel a third party to disclose information and deliver up documents that are reasonably required” and that the court would need to see “compelling evidence to understand why a liquidator needs to reconstitute and thus see absolutely all of a company’s records”⁵. 

In this application, instead of explaining their “reasonable requirement” and providing “compelling evidence” for the order sought, the liquidators' evidence was largely devoted to explaining why it was "evident" that the respondents had further documents relating to 365Co’s affairs and why the liquidators were "entitled" to receive the company's records. The liquidators took the view that they should, by the application, be put in the same position they would have been in if 365Co had held its own records, rather than its records being held by another group company. However, the court determined that the liquidators had to "work within the confines of the circumstances of the company to which they have been appointed"⁶. The court described the application as “fundamentally misconceived”⁷. Faced with a wide-ranging application, no evidence to demonstrate the “reasonable requirement” for the court to exercise its discretion pursuant to the 1986 Act, and no evidence to explain why the liquidators felt unable to be more specific or targeted in their requests, the court dismissed the application against the respondents.

Privilege – joint privilege in respect of sister companies

The decision also touched on legal professional privilege. In asserting their right to all the legal advice given by the law firm, the liquidators relied on joint interest privilege between ERL and 365Co so that ERL could not assert privilege against 365Co, and therefore the liquidators. However, the Judge acknowledged that ERL and 365Co were sister companies and were not in a relationship of parent company and subsidiary, where joint interest privilege had been recognised. 

Further to this, the liquidators had not put forward any evidence that legal advice obtained by ERL had been habitually disseminated to 365Co. Considering the legal authorities before her, the Judge stated that the fact that 365Co might have been the subject of advice to ERL did not appear sufficient to give rise to joint interest privilege. The court therefore found that the legal privilege belonged to ERL and was not abrogated by sections 235 and 236 of the 1986 Act. 

Conclusion

The decision is a timely reminder that any application pursuant to sections 235 and 236 of the 1986 Act will be determined by balancing the reasonable requirement of the liquidators to obtain information against the possible oppression to the person sought to be examined, but the latter cannot be considered without evidence of the former. Whilst the court will give weight to the liquidators’ views, unsubstantiated blanket requests for information, akin to a fishing expedition, will be unlikely to succeed. Importantly, liquidators must show that information requested under the 1986 Act is reasonably required and in practice that will usually result in making focussed requests of the company in liquidation.

¹See para 78

²See para 13

³See paras 9 and 69

⁴See para 29

⁵See para 30

⁶See para 60

⁷See para 59