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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Barclays Bank Plc & Ors v Eustice & Ors [1995] EWCA Civ 29 (06 July 1995)
URL: http://www.bailii.org/ew/cases/EWCA/Civ/1995/29.html
Cite as: [1995] WLR 1238, [1995] 1 WLR 1238, [1995] 2 BCLC 630, [1995] EWCA Civ 29, [1995] BCC 978, [1995] 4 All ER 511

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JISCBAILII_CASE_TRUSTS

BAILII Citation Number: [1995] EWCA Civ 29
NO 95/0187/E

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM: QUEENS BENCH DIVISION
(HIS HONOUR JUDGE JACK QC)

Royal Courts of Justice
Strand
London WC2
6th July 1995

B e f o r e :

LORD JUSTICE BUTLER-SLOSS
LORD JUSTICE ALDOUS
and
LORD JUSTICE SCHIEMANN

____________________

BARCLAYS BANK PLC
STEPHEN HOLLIS
MICHAEL GREETHAM
GRANT STEPHEN WATSON
CHRISTOPHER JOHN HOWARTH
v.
GEORGE PAUL EUSTICE
INEZ EUSTICE
CHARLES GEORGE EUSTICE
GILES PAUL EUSTICE

____________________

(Computer Aided Transcript of the Stenograph Notes of
John Larking, Chancery House, Chancery Lane, London WC2
Telephone No: 071 404 7464
Official Shorthand Writers to the Court)

____________________

MR P MORGAN QC and MS S WARD (instructed by Burges Salmon, DX 7829, Bristol) appeared on behalf of the Appellant.
MR A MANN QC and MR S DAVIES (instructed by Bond Pearce, DX 8521, Plymouth) appeared on behalf of the Respondent.

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

    LORD JUSTICE SCHIEMANN: On 21 June we dismissed an appeal against an order for discovery made by His Honour Judge Jack QC. These are my reasons for approving that course. The action in which that order was made was one in which the Plaintiff Bank sought, amongst other relief, a number of declarations pursuant to the provisions of s. 423 of the Insolvency Act 1986 to the effect that various transactions entered into by the defendants were void because they defrauded the creditor bank. In the interlocutory proceedings with which this appeal is concerned the Bank sought an order that the defendants should disclose all documents containing or evidencing communications between the defendants and their legal advisors relating to the transactions. The defendants claimed that these documents were privileged from disclosure on the basis of legal professional privilege. The judge ruled in favour of the bank and the defendants appeal against that order by leave of this court.

    The appeal raises two questions the first of which is of interest only to the parties but the second of which is of some general significance. The first question is whether the judge was entitled to find that the evidence disclosed a strong prima facie case in favour of making the s.423 order sought by the bank. The second question arises only if the answer to the first question is in the affirmative. It is this: Does legal professional privilege attach to documents containing or evidencing communications between the transferor and his legal advisors relating to transactions entered into by the transferor at an undervalue for the purpose of prejudicing the interest of persons making a claim against him? This is, so far as the researches of counsel go, the first time that this question has fallen for decision.

    Mr Morgan QC who appeared on behalf of the appellant concentrated his submissions on the second question which raises a point of law or policy rather than on the first which is purely factual. However, he did not concede that the present was a case where the evidence disclosed a strong prima facie case in favour of making an order under s. 123. It is common ground that, absent a prima facie case, legal privilege is available for the documents in question. It is therefore necessary to consider the factual position first. There was some argument as to whether the persons seeking discovery and inspection needed only to make out a prima facie case or whether they needed to demonstrate a strong prima facie case. Since, for reasons which will appear, I regard the present case as being a strong prima facie case I do not need to express an opinion on the point. The next section of this judgment sets out my reasons for concluding that there is here a strong prima facie case on the facts for the making of such an order. Having done so I shall move to consider the point of law of general significance.

    THE CASE FOR THE MAKING OF A S.423 ORDER

    Section 423 of Insolvency Act of 1986 provides in its first sub section that:

    "This section relates to transactions entered into at an undervalue; and a person enters into such a transaction with another person if

    (a) ...

    (b)...

    (c) he enters into a transaction with the other for a consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by himself."

    The third sub section says:

    "In the case of a person entering into such a transaction, an order shall only be made if the Court is satisfied that it was entered into by him for the purpose -

    (a) of putting assets beyond the reach of a person who is making, or may at some time make, a claim against him, or

    (b) of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make."

    The second subsection gives the Court a discretionary power of making such order as it thinks fit for restoring the position to what it would have been if the transaction had not been entered into and protecting the interests of persons who are victims of the transaction.

    "Transaction" is defined in section 436 as including a gift, agreement, or arrangement.

    It is thus apparent that before an order can be made under the section the court must be satisfied

    1. That a transaction was entered into at an undervalue

    2. That it was entered into for a prohibited purpose

    The judge summarised the background in his judgment of 10.1.95 in words which are not criticised and which I gratefully adopt:

    "The background to the application is as follows. The Eustice family have farmed in Cornwall for some 170 years. In 1992 Paul Eustice was farming in partnership with his mother, Inez Eustice. Part of the land they farmed, Tregotha Farm, was held under a tenancy between himself as successor to his late father as freeholder and his mother and himself as tenants. Other land was held by Mr Eustice as freeholder. There was some 300 acres in all. Mr Eustice wished to acquire a further 200 acres from his uncle and to develop a strawberry farm. His bank, the National Westminster Bank, would not agree to fund the venture and he approached the Plaintiff bank, Barclays, whom I will call "The Bank". In November/December 1992 it was agreed between the bank and Mr Eustice that he should borrow £550,000 on a 20 year loan with a separate overdraft facility of £100,000. The bank took charges over his freehold land. He asserts that it was agreed that the project should be considered on a long term basis and that the overdraft facility could be increased if further funds were needed until the strawberry venture was established. There would be a limit imposed by the available security.

    By November 1993 further funds were needed. The bank was prepared to increase the overdraft facility to £150,000, but only on terms that the 20 year loan was converted to a 12 month facility and that agricultural charges were given over all the agricultural assets. Mr Eustice says that he protested against the bank's breach of its promises but had no option but to accept. He did so, he asserts, on the basis of an assurance from the bank that the bank would exhaust every alternative course before exercising any remedy under the agricultural charges.

    The accounts for the year ending 31 March 1994 showed a net loss of £116,028 and during 1994 the bank watched the progress of the business with care. On 9th June 1994 the bank agreed to increase the overdraft limit from £150,000 to £200,000. Their letter of that date sets out the terms on which this was offered. In accordance with those terms the bank reduced the limit to £150,000 by letter of 5th August, but on 25th August agreed to reinstate the £200,000 limit. The strawberry season was in progress over this period. In August Mr Eustice proposed to the bank the sale of certain inessential assets to raise some £300,000. By 16th December some £120,000 had been applied from this source to reduce the overdraft. On 5th October the bank sought and later obtained Mr Eustice's agreement to the appointment of Andersons, who are farming consultants, to prepare a report on the business. The context is found in the bank's letter of that day. This referred in particular to a projected overdraft of £185,000 at the end of December as opposed to approximately £105,000 projected for then as recently as August, and to an overdraft of £200,000 to £240,000 at the end of June 1995. It pointed out that there were no longer reserves of assets to finance future loss.

    On 10th November 1994 the Inland Revenue distrained goods on the farms to cover amounts due for PAYE and National Insurance contributions totalling £9,982.83 and served notice to that effect on Mr Eustice.

    In that month Mr Eustice himself sought the assistance of agricultural consultants named Baybrook Agriculture. On 18th November three agreements were entered into, as follows:

    (a) an assignment of the lease of Tregotha Farm by Mr Eustice and his mother to his sons, Charles and Giles Eustice;

    (b) an agreement granting a tenancy to his sons of the other land;

    (c) an agreement for the sale of listed agricultural assets by Mr Eustice to his sons. This included assets within the Inland Revenue's distraint.

    For the time being the bank was not informed of these agreements. Other than saying that they were "made as a result of consulting Braybrook Agriculture", Mr Eustice is silent as to their genesis or purpose. Although the point was not raised before me, it is clear that, at least so far as banking was concerned, the business continued to be run as before. I say that because the bank did not notice any change. If the income of the enterprises had stopped being paid into the same partnership account of Mr Eustice and his mother the bank would have noticed. Whether the sons now have separate banking facilities is not known to me. It was suggested to me on behalf of the bank that there are now no facilities. This was not contradicted.

    In late November 1994 Andersons produced their report. It put forward three options:

    - to continue to support and manage the business as at present, monitoring it
    closely, with a review at the end of each of the primary crop seasons, and in the event of significant shortfall and further depletion of the equity taking immediate action;

    - selling all the land except the 53 acres on which is the farm shop;

    - a managed programme of realisation of all the assets.

    The report did not recommend which should be followed, but it pointed to disadvantages with the second.

    On 8th December 1994 the position was reached that the bank wished to discuss the report with Mr Eustice, but he did not wish himself to do so. He had instructed solicitors, Burgess Salmon, with whom he wished the bank to deal. The bank had not been provided by Mr Eustice's accountants with cash flow figures and details of debtors and creditors for October because he had given no information to his accountants. The bank took the view that Mr Eustice was taking a confrontational approach and that it must protect its position. It did not yet know of the transactions of 18th November. On the same day, 8th December, it called in its loans and made demands on Mr Eustice and his mother for a total of £758,476. On 9th December the bank appointed Mr Watson and Mr Haworth as receivers under its charges over the land. On 12th December Burgess Salmon wrote informing the bank of the assignment and tenancy agreements. On 21st December the Eustices disclosed to Burgess Salmon the existence of the sale agreement."

    WAS THE TRANSACTION ENTERED INTO AT AN UNDERVALUE

    1. The Sale Agreement

    The judge said this of the Sale Agreement whereby particular assets were sold to Charles and Giles Eustice.

    "Those assets include some but not all of the assets covered by the agricultural charges. They include some of those covered by the Inland Revenue's distraint. Points were made on behalf of the bank as to the valuation of particular items. But I am prepared to proceed on the basis that overall the figures represent their actual value but no more. The price, however, is to be paid by ten annual instalments commencing on 17th November 1995. There is no provision for interest. It is remarkable that, despite the bank's appointment of receivers under the agricultural charges on 16th December 1994, this agreement was not disclosed until 21 December. Mr Tamlin submitted I should conclude that it is a sham. I express no view on that. I am, however, satisfied that the agreement falls within Section 423(1)(c) because the provision for deferred payment renders the consideration received significantly less than the value of goods sold."

    2. The Tenancy Agreement

    As to this the judge said:

    "This provides for an annual rental of £93,000. There is no evidence to suggest that this is or is not a market figure. In the first year only £45,000 is to be paid and is to be paid in arrears on 17th November 1995. In the second year £93,000 is to be paid in arrears on 17th November 1996. In the third year £141,000 (that is £93,000 plus £93,000 less £45,000) is to be paid in arrears on 17th November 1997. These deferment provisions may render the transaction vulnerable. But what is, I consider, more likely to be fatal is its close similarity that before the Court of Appeal in Agricultural Mortgage Corporation plc v Woodward (1994) BCC 688. There a borrowing of £700,000 was secured on a farm which would have been worth over £1 million with vacant possession. The farmer fell into arrear and some £850,000 was due. Just before a deadline given by the mortgagee expired he entered into a tenancy agreement at a market rent with his wife. The intent was to preserve the farm from the bank. The effect was to reduce the value of the freehold of the farm to less than £500,000. The Court held that, because the wife would be placed in a `ransom position' as regards the mortgagee, viewing the transaction as a whole the benefits conferred by the farmer on his wife were significantly greater in value, in money or money's worth, than the value of the consideration given by her: The transaction fell within Section 423. I can see no ground for distinguishing the tenancy in the present case from that before the Court of Appeal. The bank appears to have an unanswerable case for it to be set aside."

    3. The Assignment of the Lease

    The judge said this of the lease of the 91 acres of Tregotha Farm to Mr Eustice and his mother made in 1990 and the assignment of that lease to the sons on 18th November 1994.

    "Following the death of his father Mr Eustice became the freeholder and landlord. The rent is £2,000 per annum payable in half- yearly instalments in arrear. The term is 15 years from 1st April 1979 and so expired on 31st March 1994. I was not addressed as to that and will proceed on the basis that the lease is still on foot either by holding over or in some other way. The assignment provides for the tenants to hold from year to year, which supports that approach. It simply vested the interest under the lease in the sons for a consideration of £1.

    When the bank took its charge over the freehold of Tregotha Farm it was unaware of the lease: It thought that it was dealing with Mr Eustice as freeholder of a freehold in hand. How this came about is not dealt with in the evidence. The charge describes Mr Eustice as "the proprietor" and his mother as "the occupier". There must however be a very real possibility that the bank is entitled to deal with Mr Eustice and his mother on the basis that Mr Eustice held an interest in hand rather than a reversion. If the bank is so entitled then either the sons have taken no interest as a result of the assignment or, if they have, the assignment must be liable to be set aside under Section 423 because of the ransom position identified by the Court of Appeal in Agricultural Mortgage Corporation plc v Woodward."

    4. Each side invited us to look at these three legal arrangements as one transaction consisting of three parts. That seems realistic.

    Mr Morgan QC who appeared for the Eustices made his submissions with elegant tenacity coupled with realism. He accepted that the comments of the judge in relation to the Sale Agreement could not be gainsaid. He accepted that it was unusual in agricultural tenancies to have rent payable in arrears yearly and that it was clear that during the year until 17 November 1995 not a penny was due to Mr Eustice by way of rent under the Tenancy Agreement. He accepted that it was probable, on the material before the court, that money by way of interest would be payable to the Bank before that date and that, if these transactions are to be taken at face value, there would be no assets available to Mr Eustice from which to pay that interest. He accepted that the Tenancy Agreement was determinable by the tenant giving 12 months notice which renders questionable the right of the landlord to receive in the future a rent allegedly in excess of the market rent. He accepted that there was no evidence before the judge or before us in support of the submission which I understand will be made on behalf of the defendants at the trial to the effect that £93,000 is substantially in excess of the market rent. He accepted that there was nothing to suggest that any rent payable under the lease of Tregotha Farm was above the market rent which might have made this a case where a negative premium for taking over the lessees obligations might be appropriate.

    Faced with the ransom point adumbrated in the Woodward case Mr Morgan sought to distinguish it by pointing out that there the value of the freehold after the transactions was less than the amount owing to the plaintiffs whereas in the present case, so he maintained, the transactions left the Bank no worse off than if they had not taken place. He submitted that the total indebtedness to the Bank as at November 1994 was £759,000 and indicated that there was material (not I think before the court) which suggested that the value of the land encumbered by the transactions of 18 November was £800,000 although unencumbered that value had been £1 million. So, he submitted, the fact that prior to those transactions the unencumbered value was significantly higher than £800,000 was nothing to the point: The bank still had enough to cover its debt and therefore the beneficiaries of the challenged transactions had no ransom value.

    There are two answers to this submission. The first is that so far as the issue of undervalue is concerned the late payment provisions are enough to lead to a strong prima facie case that the Sale Agreement and the Tenancy Agreement were concluded at an undervalue and therefore the ransom point is not needed. The second answer to the point lies in the fact that there was no realistic possibility of the Bank being able to realise the freehold in November 1994 and that the indebtedness was increasing daily. In consequence the probability was that at the time of any realisation by the bank of its security it would need to sell with vacant possession in order to be able to cover the indebtedness and the realisation charges. In those circumstances the transferees would be in a position to ask for a ransom from the bank before giving vacant possession. In consequence the ransom point has force in showing that the transferees were obtaining more than they were paying for.

    I consider the judge was right in the conclusion to which he came on undervalue. In effect what has happened here is that the partnership which borrowed from the Bank on the security of those assets has parted with those assets in return for some covenants. The recipients of the assets have received more than they have paid for because the price is only payable in the future and because if the Bank wishes to realise its security the recipients will have a certain ransom value. To put it no higher, there is a strong prima facie case that the transactions were entered into for a consideration the value of which is significantly less than the value of the consideration provided by the recipients and that therefore the undervalue test in s.423 is fulfilled.

    WAS THE TRANSACTION ENTERED INTO FOR A PROHIBITED PURPOSE?

    The next question is whether there is also a strong prima facie case that the transaction was entered into for the purpose of prejudicing the bank's interests.

    Mr Eustice claims that if only the bank had left him alone to run his business the bank would have been paid off by November 1996 and that if he wins this action that will still be the case. It is possible that this is right although there is nothing in the material to which our attention has been drawn which makes this conclusion likely. It may be that the reasoning of Mr Eustice is that the farm will be so profitable that there will be ample out of which to pay the bank. Even if this turns out to be the case there is nothing in the documents which obliges the sons to give to their father the profits from the farm enterprise (if they eventuate) save in so far as he is owed sums as landlord.

    Mr Morgan conceded that the effect of the transactions was to make it more difficult for the bank to get its money during 1995. That is manifestly correct. I have no hesitation in going further and agreeing with the judge that there is a strong prima facie case that the transactions were entered into for that very purpose. In those circumstances there is a strong prima facie case that they were entered into for the purpose of prejudicing the interests of the bank.

    The judge put it this way:

    "I am satisfied that there is a strong case here that in entering these transactions the aim of the defendants, and I put it in plain language, was to prevent the bank getting its hands on the land and other assets. In paragraph 38 of his first affidavit, Mr Paul Eustice deposed:

    'The purpose of the transactions entered into on 18th November 1994 was solely to ensure to the best of my ability that my family was able to complete the agreement with the bank of November 1992. I wanted to ensure my family would still farm and progress new business until November 1996 without interference from the bank in accordance with the agreement in the event that contrary to the agreement, the bank sought to enforce its security.'

    I underline those last words. That, indeed, is what the bank has done.

    At paragraph 39 he deposed:

    'There is no intention on my part to prejudice the bank or any other creditors. It is my belief that if my family is permitted to continue the business without interference from the bank and consequential costs then the enterprise will be a success by November 1996 ensuring the protection of the bank's investment and rewarding the hard work of my own family.'

    The effect of that so far as the bank's position is concerned is, in short, this: that it was Mr Eustice's intention by the transactions to prevent the bank enforcing its security which would give him time and, if all went well, might enable him to pay off the bank.

    However, meanwhile, the bank would be unable to enforce its security interests. The rights which the bank would otherwise have to obtain possession of the land, to obtain the sale of the land, would be defeated. In my view there is a strong case that the situation falls within those sub-sub-sections of sub-section 3 of Section 423"

    I gratefully adopt the reasoning of Mr Evans-Lombe QC in Chohan v Saggar [1992] BCC 306 at p.321:

    "As Lord Oliver in the well known case of Brady v Brady (1989) AC 755 acknowledged, the word "purpose" is a word of wide content. But he went on to say that it must be construed bearing in mind the mischief against which the section in which that word appears is aimed. Here, the purpose or mischief against which the section is aimed, namely section 423, is the removal of assets by their owner, in anticipation of claims being made or contemplated, out of the reach of such claimants if those claims ultimately prove to be successful. It would defeat that purpose if it were possible successfully to contend that if the owner was able to point to another purpose, such as the benefit of his family, friends or the advantage of business associates, the section could not be applied. This passage was approved by the Court of Appeal in Royscott Spa Leasing v Lovett (unreported 16.11.93)."

    Once one accepts that there is a strong prima facie case that the bank's security has been transferred to members of the family at a time when action by the creditor was clearly anticipated by the debtor and that these transfers were at an undervalue and that what remains in the hands of the debtor barely if at all covers the debt there is in my judgment a strong prima facie case that the purpose of the transactions was to prejudice the interests of the creditor. I accept that there can easily be cases where part of the security is transferred at an undervalue and thus the security is reduced in value and yet still amply covers the debt. In such cases there may well be an argument that the transactions do not prejudice the interests of the creditor. The present case does not however fall into that category. On Mr Morgan's figures, the bank was left with a margin of 5% (£800,000 - £759,000) in circumstances where even this is reducing because of accruing interest charges. This is to be left in a situation which is significantly more precarious than one which provides for a margin of 30% (£1,000,000- £759,000). The fact that there will be costs of realising the security adds force to this consideration.

    For these reasons I agree with the judge that there is a strong prima facie case that the preconditions for making an order under s. 423 are fulfilled in the present case.

    THE SCOPE OF PRIVILEGE

    I turn therefore to the question of general interest in relation to the law governing discovery. We start for this purpose from the position that there is a strong prima facie case that Mr Eustice ("the transferor") entered into transactions at an undervalue and that his purpose in so doing was to prejudice the interests of the bank ("the claimant"). It is also common ground that these documents are relevant to the issues between the parties and therefore disclosable. The question which falls to be resolved is whether legal professional privilege attaches to documents containing or evidencing communications between the transferor and his legal advisors relating to transactions entered into by the transferor at an undervalue for the purpose of prejudicing the interest of persons making a claim against him. If it does then the documents need not be produced for inspection.

    In the resolution of this question there are two conflicting desiderata in the background.

    1. Discovery of every relevant document is desirable to help the court decide what happened and why. The right answer is more likely to be arrived at by the court if it is in possession of all relevant material.

    2. It is desirable that persons should be able to go to their legal advisers knowing that they can talk frankly and receive professional advice knowing that what each party has said to the other will not be revealed to third parties.

    This second desideratum has recently been expressed thus by Bingham LJ in Ventouris v Mountain [1991] 472 at p.475 and I gratefully adopt his words:

    "The doctrine of legal professional privilege is rooted in the public interest which requires that hopeless and exaggerated claims and unsound and spurious defences be so far as possible discouraged, and civil disputes so far as possible settled without resort to judicial decisions. To this end it is necessary that actual and potential litigants, be they claimants or respondents, should be free to unburden themselves without reserve to their legal advisers, and their legal advisers be free to give honest and candid advice on a sound factual basis, without fear that these communications may be relied on by an opposing party if the dispute comes before the Court for decision. It is the protection of confidential communications between client and legal adviser which lies at the heart of legal professional privilege ......................... Without the consent of the client, and in the absence of iniquity or dispute between client and solicitor, no inquiry may be made into or disclosure made of any instructions which the client gave to the solicitor or any advice the solicitor gave the client whether in writing or orally."

    It will be noted that in the last sentence cited Bingham LJ referred to the "absence of iniquity". In so doing he was recognising the effect of a line of cases which have established that advice sought or given for the purpose of effecting iniquity is not privileged.

    The present appeal is concerned essentially with the question whether the effecting of transactions at an undervalue for the purpose of prejudicing the interests of a creditor can be regarded as "iniquity" in this context. "Iniquity" is I believe, without having done any research on the point, Bingham LJ's word. The case law refers to "crime or fraud" (R v Cox & Railton 1884 14 QBD 153 at p. 165 ,"criminal or unlawful" (Bullivant v A-G for Victoria [1901] 196 at p.201), and "all forms of fraud and dishonesty such as fraudulent breach of trust, fraudulent conspiracy, trickery and sham contrivances"(Crescent Farm (Sidcup) Sports Ltd v Sterling Offices Ltd [1972] CH 553 at p.565). The case law indicates that "fraud" is in this context used in a relatively wide sense. Thus in Gamlen Chemical Co.(UK) Ltd v Rochem Ltd (Unreported 7 Dec 1979 Court of Appeal (Civil Division) transcript No.777 of 1979) Goff LJ cited and approved a passage in the judgment of Goulding J in the court below where he had said in the language of an age which has passed:

    "For servants during their employment in breach of their contractual duty of fidelity to their master, to engage in a scheme secretly using the master's time and money, to take the master's customers and employees and make profit from them in a competing business built up to receive themselves on leaving the master's service, I would have thought that commercial men and lawyers alike would say that is a fraud."

    On the other hand the courts have shown themselves reluctant to extend the concept indefinitely and have warned against an indiscriminate setting aside of legal privilege. Thus in the Gamlen case Lord Justice Goff stated:

    "The Court must in every case, of course, be satisfied that what is prima facie proved really is dishonest and not merely disreputable or a failure to maintain good ethical standards and must bear in mind that legal professional privilege is a very necessary thing and is not likely to be overthrown, but on the other hand the interests of victims of fraud must not be overlooked. Each case depends on its own facts."

    In the Crescent Farm case the court was not willing to extend the concept to the tort of inducing a breach of contract.

    One of the factors which the court will often find relevant and which may be decisive in a particular case is the purpose for which the advice is sought. Is it sought to explain the legal effect of what has already been done and is now the subject of existing or imminent litigation? Or is it sought in order to structure a transaction which has yet to be carried out. In the former class of case the court will be more hesitant to lift the cloak of privilege than in the latter.

    As Lord Wrenbury said in O'Rourke v Darbyshire [1920] AC 581 at p.632:

    "Not every document relevant to the issue of fraud but documents which are not upon some other ground privileged, are exposed to production (sic). For the present purpose it is sufficiently accurate to say that documents relating to the conception and carrying out of the alleged fraud are not, but documents arising in professional conference as to defence against the alleged fraud are protected".

    Thus the court would be reluctant - it is not presently necessary to decide the point- to force a legal adviser to give evidence or produce documents as to what a client had said when seeking advice as to how to respond to a criminal charge which had been preferred against him. That, normally at any rate, would be unjustifiably to invade the Defendant's rights to silence and would be against the public interest to which Bingham LJ referred in the passage I have cited.

    I regard the present case however as being essentially one about advice sought on how to structure a transaction.

    I accept that it must have been obvious to the defendants that the bank might, once it learned of the challenged transactions, start proceedings. It was faintly submitted on behalf of the defendants that therefore advice as to structuring the transactions was to be regarded as advice coming into existence for the dominant purpose of being used in contemplated proceedings. That submission I reject. The dominant purpose was to stop the bank from interfering with the defendants' use of what they regarded as family assets.

    The first main submission made by Mr Morgan was based on the decision of Scott J in Arbuthnot Leasing International Ltd v Havelet Leasing Ltd (no. 2) [1990]BCC 636. In that case Scott J was prepared to accept that an intention to put a debtor's assets out of the reach of a creditor was not necessarily a dishonest motive but held that even so it could suffice for the purposes of s. 423. Mr Morgan relied on this and went on to submit that the case law had in effect confined the possibility of lifting the privilege to cases where there was dishonesty.

    I reject this submission. Scott J was not concerned with whether legal professional privilege should be lifted. His use of the word dishonest was not in that context. In any event he was merely indicating that he was prepared to accept something which he did not need to decide and which had been submitted by the losing party. Moreover, as I have indicated, various words other than "dishonest" have been used in the course of the cases in which privilege has been in issue. However to me the most important consideration is that we are here engaged not in some semantic exercise to see what adjective most appropriately covers the debtor's course of conduct but in deciding whether public policy requires that the documents in question are left uninspected. I do not think it does. Adopting the approach of Vinelott J in Derby v Weldon, discovery followed by inspection would not here result in an unjustified interference with the defendants' property or right to privacy.

    The second main submission made by Mr Morgan was based on the analysis of Stephen J in R v Cox and Railton (1884) 14 QBD 153 which is often cited in cases concerned with privilege. Stephen J said this at p.165:

    "The question is, whether, if a client applies to a legal adviser for advice intended to facilitate or guide the client in the commission of a crime or fraud, the legal adviser being ignorant of the purpose for which his advice is wanted, the communication between the two is privileged?"

    At p.167 he quotes Lord Brougham in an early case as saying:

    "If, touching matters that come within the ordinary scope of professional employment legal advisers receive a communication in their professional capacity ....from a client...or..commit to paper in the course of their employment on his behalf matters which they know only through their professional relation to the client they .... Will not be compelled to disclose the information.."

    Then Stephen J said the following on the same page:

    "The reason on which the rule is said to rest cannot include the case of communications criminal in themselves, or intended to further any criminal purpose, for the protection of such communications cannot possibly be otherwise than injurious to the interests of justice.....Nor do such communications fall within the terms of the rule. A communication in furtherance of a criminal purpose does not 'come into the ordinary scope of professional employment'"

    Mr Morgan submitted that the cloak of privilege should only be lifted if either the solicitor was a party to the "crime" or the client uses the solicitor's advice or assistance for a criminal or fraudulent purpose not contemplated by the solicitor so that the solicitor is an unwitting accomplice to the client's fraud or crime. He submitted that no one had alleged that the solicitors in question were engaged in crime and that the defendants and the solicitors had jointly and openly engaged in a purpose which was both overt and lawful namely seeking and giving advice as to how to remove Mr Eustice's assets out of the temporary reach of the bank without rendering the transactions liable to be set aside under s.423.

    Mr Morgan relied on the observations of Bushe CJ in an Irish case R v Haydn where he said at p.381:

    "If any man should confide to a professional person, that he had a treasonable or felonious intention, and wished to know how he might execute it so as to escape punishment, it would be too much to say that such communication which might make the man consulted guilty of misprision, was privileged; but if a man meditates an act which, exceeding certain limits, would become criminal, and confined within certain bounds would be perfectly justifiable, the person asking the advice must be considered as seeking how he may avoid and not how he may commit a crime, and it is impossible that an attorney should be obliged to disclose such communication."

    Mr Morgan also relied on what Lord Sumner said in O'Rourke v Darbyshire [1920]AC 581 at page 613:

    "No one doubts that the claim for professional privilege does not apply to documents which have been brought into existence in the course of or in furtherance of a fraud to which both solicitor and client are parties. To consult a solicitor about an intended course of action, in order to be advised whether it is legitimate or not, or to lay before a solicitor a fact relating to a charge of fraud, actually made or anticipated, and make a clean breast of it with the object of being advised about the best way in which to meet it is a very different thing from consulting him in order to learn how to plan, execute, or stifle an actual fraud."

    These submissions were attractively presented but I reject them. For reasons given earlier in this judgment we start here from a position in which, on a prima facie view, the client was seeking to enter into transactions at an undervalue the purpose of which was to prejudice the bank. I regard this purpose as being sufficiently iniquitous for public policy to require that communications between him and his solicitor in relation to the setting up of these transactions to be discoverable.

    If that view be correct, then it matters not whether either the client or the solicitor shared that view. They may well have thought that the transactions would not fall to be set aside under s.423 either because they thought that the transactions were not at an under value or because they thought that the court would not find that the purpose of the transactions was to prejudice the bank. But if this is what they thought then there is a strong prima facie case that they were wrong. Public policy does not require the communications of those who misapprehend the law to be privileged in circumstances where no privilege attaches to those who correctly understand the situation.

    These cases can indeed throw up difficult problems of policy and one sees frequent references in the case law to the desirability of deciding each case on its facts. The evidence in the present case reveals a strong prima facie case of what the sidenote to s.423 refers to as "transactions defrauding creditors". The evidence which is sought to be inspected may help the plaintiffs overcome a detriment to which they ought not to have been exposed and to which they were exposed by the action of the defendants. Mr Morgan, when asked to identify the prejudice which inspection might cause to his client could do no more than indicate that material might emerge which would indicate to the plaintiffs various weaknesses in the defendants' position. In those circumstances I do not consider that the public interest requires these communications to be kept secret. If the strong prima facie case turns out to be correct then the defendants have deliberately indulged in something which I would categorise as sharp practice.

    I do not consider that the result of upholding the judge's order in the present case will be to discourage straightforward citizens from consulting their lawyers. Those lawyers should tell them that what is proposed is liable to be set aside and the straightforward citizen will then not do it and so the advice will never see the light of day. In so far as those wishing to engage in sharp practice are concerned, the effect of the present decision may well be to discourage them from going to their lawyers. This has the arguable public disadvantage that the lawyers might have dissuaded them from the sharp practice. However it has the undoubted public advantage that the absence of lawyers will make it more difficult for them to carry out their sharp practice. In my judgment the balance of advantage is in permitting inspection of the material as ordered by the judge. I would dismiss the appeal.

    THE RESPONDENTS' NOTICE UNDER ORDER 59 RULE 6(1)(a)

    The judge followed the decision of Vinelott J in Derby v Weldon that:

    "The Plaintiffs are not entitled to disclosure of any documents which fall under a different head of privilege: Legal advice obtained and documents coming into existence for the dominant purpose of being used in pending or contemplated proceedings."

    The order under appeal provided that discovery should

    "include all documents containing or evidencing communications between the defendants and their legal advisors relating to the tenancy agreement and the assignment in their respective possession, custody or power (excepting documents to which a bona fide claim of privilege is made on the ground that the same were obtained or created for the dominant purpose of being used in pending or contemplated proceedings)"

    It is common ground that the order should also have referred to the sale agreement. The order of the court will reflect that.

    It was submitted on behalf of the plaintiffs that the words in brackets were too wide. The original cause for the Respondents' notice which encapsulated this ground was a fear that the plaintiffs solicitors might consider that all the documents referring to the transactions might be subject to what is known as litigation privilege because the transactions were set up at a time when litigation was contemplated. There was ground for that fear at the time but now that this judgment has been delivered it is obvious that such an attitude by the solicitors would be indefensible.

    The plaintiffs nevertheless submitted that the order instead of referring to documents obtained or created for the "dominant purpose of being used in pending or contemplated proceedings" should have referred to the "sole purpose". In my judgment the reference to dominant purpose correctly reflects in the circumstances of the present case what justice and public policy require and I would not propose altering the judge's order in this respect.

    LORD JUSTICE ALDOUS: I agree.

    LORD JUSTICE BUTLER-SLOSS: I also agree.

    Order: Application by the bank to adduce additional evidence is dismissed. Appeal in respect of the injunctions is withdrawn. The appeal in respect of discovery is dismissed. The Judge's order on discovery do stand, save that there will be discovery by the appellants within 48 hours of the handing down of the reasons for dismissing the appeal, or 14 days from today's date, whichever is the sooner. Costs of the appeal to be paid by the appellants, not to be enforced without leave of the court. Legal aid taxation of the appellants' costs. The court determined that it is just and equitable that provision for the Court of Appeal costs be made out of public funds. That there is no present liability to satisfy any part of the Court of Appeal costs. The Court of Appeal costs to be paid by the Legal Aid Board but the order to be suspended for a period of 10 weeks in order to give the Legal Aid Board the opportunity for the Area Director to give notice of objection.


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