In the recent decision of Bilta (UK) Ltd (in Liquidation) v RBS, a case that has ramifications for all firms regulated by the Financial Conduct Authority, the English High Court revisited the issue of whether documents created in the course of an internal investigation are privileged and subject to disclosure.
The court concluded that internal interviews and resultant interview notes were created for the dominant purpose of defending expected litigation on the part of HM Revenue & Customs (the relevant regulator) and were privileged from disclosure.
Bilta calls into doubt the general application of Mrs Justice Andrews' judgment in Serious Fraud Office v Eurasian National Resources Corporation (ENRC), which held that interviews with employees conducted as part of an internal investigation to deter a criminal prosecution by the SFO were not privileged and should be disclosed. ENRC was decided last May and is awaiting an appeal in the Court of Appeal (expected in July).
The background to Bilta
In March 2012, and after an investigation that lasted for more than two years, HMRC sent a letter to RBS alleging that RBS's participation in the trading of carbon credits was connected to VAT (value-added tax) fraud and threatened an assessment for overclaimed VAT of £86.2 million. At this stage, RBS instructed external lawyers to investigate the alleged fraud; these lawyers conducted interviews with key RBS employees and ex-employees and produced 29 interview transcripts and a report on their findings.
In separate litigation, liquidators for Bilta and associated companies are claiming compensation against RBS of at least £73m for RBS's (alleged) dishonest assistance. These claimants contend that representatives of RBS wilfully shut their eyes to the VAT fraud that was affecting the UK market and, in consequence, that instead of accounting to HMRC for VAT, the directors of the claimant companies were able to pay the VAT amounts fraudulently to third parties before they went into liquidation.
The claimants sought disclosure of the RBS interview notes and report. Relying on ENRC, they argued that RBS did not create the documents for the sole or dominant purpose of conducting litigation but rather (i) to inform itself of its position regarding HMRC's claim; (ii) to supply a full and detailed account of relevant facts concerning VAT deductions to HMRC in accordance with its duties and obligations as a taxpayer; and (iii) to persuade HMRC not to issue an assessment.
RBS asserted privilege over the documents, arguing that the dominant purpose and intention behind the interviews and the resultant documents was to resist HMRC's almost inevitable assessment when litigation ultimately commenced.
Dismissing the claimants' application for disclosure, the court held that even if the documents had been created for many purposes, the dominant purpose was to defend the bank against the expected litigation with HMRC and accordingly the dominant purpose test for litigation privilege was met.
The court made the following key points.
- HMRC's letter in March 2012 was a 'watershed' moment. The letter stated that HMRC believed that it had enough grounds to recover the VAT, referred to and analysed the relevant law and invited RBS to comment on the facts. RBS knew at this point that it was highly likely that an assessment would follow and its appointment of external solicitors strongly suggested that RBS anticipated a claim. HMRC's letter and the lawyer's report to HMRC were, therefore, analogous to a letter of claim and letter of response in commercial litigation.
- The exercise of determining the sole or dominant purpose in each case is a determination of fact. Although both ENRC and this case involved internal investigations by corporations 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."
- There is a tension between the decision in ENRC and the Court of Appeal's decision in Re Highgrade Traders on the question of whether the litigation purpose was the sole or dominant purpose. Preferring the approach in Highgrade, which said that a subsidiary purpose of investigating can be subsumed into the dominant purpose of preparing for anticipated litigation, the court held that one has to take a realistic, commercial view of the facts and "fending off the assessment was just part of the continuum that formed the road to litigation that was considered, rightly, as it turned out, to be almost inevitable".
- The collaborative and co-operative nature of RBS's interactions with HMRC after the March 2012 letter, which included meetings with HMRC and the provision of updates regarding the bank's investigation, did not preclude the investigation from being conducted for the dominant purpose of litigation.
This case offers some hope for regulated firms that want to conduct internal investigations and create resultant notes and reports when responding to regulator scrutiny. It suggests that wherever a financial institution conducts an internal investigation to resist a regulator's claim and defend litigation which it considers likely, the "dominant purpose test for litigation" is satisfied.
Different regulators such as the FCA or the Financial Reporting Council have their own approach to investigating allegations of wrongdoing and the 'watershed' moment that arose in Bilta when HMRC sent its letter in March 2012 may arise at a different stage or may never arise in the course of those other regulators' investigations. The simple opening of a file or notification by a regulator that it is investigating conduct is unlikely to satisfy the "dominant purpose test" on its own, but correspondence from a regulator that contains details about its investigation of potential wrongdoing may well do.
When the Court of Appeal decides ENRC later this year, it will have the opportunity to revisit 'litigation privilege' in the context of internal investigations. We hope that it will take a realistic and commercial view of the facts, endorsinng the approach favoured in Bilta, and confine ENRC to its facts.
* Richard Highley can be reached on +44 (0)20 7894 6470 or at firstname.lastname@example.org; Francesca Muscutt can be reached on +44 (0)20 7894 6189 or at email@example.com