Litigation privilege: an essential tool in administrators' armour

In a recent ruling (NMC Health PLC (in Administration) v Ernst & Young LLP [2024] EWHC 2905 (Comm)), the High Court declined to order disclosure of witness statements and transcripts of interviews conducted by administrators during their initial investigations, citing litigation privilege.

Litigation privilege

Litigation privilege protects communications between a client and their lawyer, as well as communications with third parties, on the basis that:

• litigation must be in progress or in contemplation
• the communication has been created predominantly for the purpose of litigation
• the litigation is adversarial in nature, not merely investigative or inquisitorial[1]

A document subject to litigation privilege is shielded from disclosure in any subsequent litigation. 

Background

NMC Health PLC (NMC), once a leading healthcare provider, was placed into administration in April 2020, following the revelation of significant financial irregularities, including hidden debts surpassing $6.6bn.

The administrators of NMC initiated legal proceedings against Ernst & Young LLP (EY), alleging audit negligence over a period of seven years. The claim centred on the assertion that EY's audits failed to detect significant financial irregularities, which contributed to NMC's financial collapse.

The key dispute was in relation to documents that were prepared by the administrators of NMC during their initial investigations, including five witness statements and transcripts of around 140 interviews conducted. EY sought disclosure of those documents.

Decision

The High Court was tasked with determining if the witness statements and interview transcripts prepared by NMC’s administrators needed to be disclosed to EY as part of the litigation process.

The administrators argued that the documents were protected by litigation privilege. The primary purpose of creating these documents was to investigate and gather evidence for potential legal proceedings. Furthermore, it was evident that litigation was anticipated even before the commencement of the administration, given that NMC had been the victim of substantial fraud, and its liabilities significantly exceeded its assets.

EY, on the other hand, argued that when the transcripts of witness interviews and witness statements were created, the administrators were not contemplating a claim nor were they in a position to bring one. Counsel cited statements made in correspondence shortly after the administrators’ appointment which they argued showcased the same, as follows:

“the administrators have not, as yet, given detailed consideration as to whether NMC may have claims against third parties but are conscious of (i) the objectives of an administration under paragraph three of Schedule B1 on the Insolvency Act 1986 and (ii) the essential duty of administrators to collect and protect the assets of the company.”

EY argued that this statement demonstrated that the administrators had not, at the time of the documents’ creation, determined whether NMC might have claims against third parties. Instead, they argued the administrators were simply investigating the factors contributing to the insolvency and taking measures to maintain the company's value by continuing operations. Consequently, no litigation privilege could attach to the relevant documents.

Dismissing EY’s application, the court concluded that there could be no other purpose for the documents’ creation other than for the administrators to gather evidence for the purpose of potential legal proceedings and that it would be “unreal” to deduce otherwise. The High Court therefore confirmed that the documents satisfied the necessary criteria and were protected under litigation privilege.

Impact on officeholders

This decision has significant implications for insolvency officeholders and on the potential scope of litigation privilege. For insolvency practitioners, it provides useful confirmation that documents created in the early stages of their appointment, where they are investigating potential causes of action but have not yet concluded that any claims exist, will be protected by litigation privilege. This will ensure that administrators can effectively fulfil their duties (including investigating claims and maximising returns to creditors) without the risk of sensitive information being exposed to opposing parties.

The ruling also underscores the court's realistic approach to the ‘dominant purpose’ test, recognising that documents created during an investigation by administrators are often intended for use in litigation, further clarifying the scope of litigation privilege. However, insolvency officeholders are advised to declare in their proposals that they are carrying out investigations to determine if any actions can be pursued, which will bolster their prospects of successfully relying on litigation privilege later, if required.

Protecting privilege: key steps

Other key steps to take to ensure the protection of litigation privilege include:

• As soon as litigation begins to be likely, start labelling your communications “Privileged and Confidential” to prevent inadvertent disclosure.
• Clearly document the purpose of any communication or document, ensuring it is predominantly for litigation. Communications about matters secondary to conduct of the litigation should be dealt with separately.
• Maintain detailed records of all interactions with legal counsel and third parties involved in the litigation process.
• Limit the distribution of privileged documents to essential personnel only and provide training on the importance of maintaining privilege.

By taking these proactive measures, administrators can safeguard sensitive information and effectively navigate the complexities of privilege and communications during the administration process.