Confidentiality, secrecy and privilege are not unfamiliar topics to lawyers, yet the three themes have never been comprehensively explored in the field of insolvency. In the book ‘Confidentiality, Secrecy and Privilege in Corporate Insolvency and Bank Resolution’, which was published at the end of last year by the Eleven International Publishing in The Hague, Shuai Guo and I closely studied the three themes. We chose for our research the different perspectives of relevant stakeholders including debtors, insolvency practitioners (IPs), courts and insolvency authorities, creditors, bidders/acquirers, clients, banks, resolution authorities and other agencies. Since the book’s publication – but I guess unrelated to it – Dr. Shuai Guo is assistant professor/lecturer of law at Beijing’s China University of Political Science and Law
Definitions
The three themes of confidentiality, secrecy and privilege do not have their own definition. In terms of their substance and application, they partly depend on national rules and regulations, and they often function as a derivative of the matter at issue, usually a legal procedure. Corporate insolvency adds one more layer of difficulty in situations where legal relations are interrupted by confidentiality, secrecy or privilege. Is, for instance, confidentiality full swing an IP’s right, or is it in some way based on or derived from a debtor’s statutory or contractual rights? Another complexity arises in a cross-border context, where international regulations rarely provide an adequate standard to unify divergent interpretations of confidentiality, secrecy and privilege.
The three themes are often developed in the context of two parties who are adversaries in common litigation. Restructuring and insolvency proceedings, however, usually take place in a multiparty context, often with one party on the one side (debtor) and many parties on the other (large group of creditors). In such a sensitive and unregulated area, we have chosen for our study a deliberately limited aim, namely, arranging the very first collection of rules and court cases relating to confidentiality, secrecy and privilege, approached from the different perspectives of relevant stakeholders. These themes develop more depth and complexity in the legal environment in which they are used – very often a national environment, for example, a country’s legislation on procedural law, and its laws regarding the professions of lawyer or accountant.
Succession v human rights
One of the much-debated issues is the survival of attorney-client privilege in insolvency proceedings. This issue demonstrates a typical example of potential confidentiality, secrecy and privilege matters in insolvency. At the time of filing an insolvency petition, the debtor is under an obligation to make disclosures relating to its financial affairs and details of assets and liabilities as required by the relevant statutes. We found that in many jurisdictions this means full disclosure. But the question is whether this duty also obliges the debtor to disclose communications that are otherwise protected by attorney-client privilege, or that were made in confidence. There are two schools of thought on this question that examine the extent to which initiation of insolvency proceedings affects pre-insolvency legal relations.
One opinion strongly favours court-appointed IPs exercising control over privilege in order to ensure they obtain all necessary information. This is particularly applicable in cases where an IP is deemed, based on what is termed “the succession theory”, as the successor to the debtor and to the debtor’s privileges, meaning they can assert or waive that privilege. For example, a landmark US Supreme Court case, Commodity Futures Trading Commission (CFTC) v Weintraub, held that a trustee of a corporation has the power to waive the attorney-client privilege. The reason behind this rests on the legal norm that, because a corporation is a separate inanimate entity, privilege is exercised by its agents, namely its management, officers or directors. When an IP is appointed in an insolvency proceeding, the IP assumes the functions of former officers or directors and becomes the new agent of the corporation, and is able to succeed the pre-insolvency attorney-client privilege.
Another opinion holds that attorney-client privilege is a fundamental human right and cannot be said to pass to an IP as part of the debtor’s estate. This is particularly the case for individual debtors who should not be deprived of attorney-client privilege as a basic human right. For example, in a more recent UK case Leeds & Hellard v Lemos & ord, the court held that legal professional privilege does not automatically vest in a trustee in the bankruptcy of an individual; legal professional privilege is a fundamental human right and express statutory powers would be necessary to deprive the bankrupt debtor of that right, or circumstances where the debtor waives their privilege or consents to the use of the privileged documents. In other words, an IP cannot alone assert or waive a debtor’s pre-insolvency attorney-client privilege.
From this human rights perspective, the debtor’s duty to disclosure does not include confidential communications with his or her attorney. This reflects a principal conflict illustrated throughout our study, namely, disclosure v confidentiality. In order to prevent a bankrupt debtor from utilising such a privilege to avoid investigations and conceal assets from discovery, measures need to be taken. US courts have adopted a “balancing approach” on a case-by-case basis, for example, in the In re Bazemore case, whereby the trustee can waive privilege when such wavier is beneficial to the debtor. Nevertheless, in our book, we question the ability of a third party (trustee) to waive a privilege. Alternatively, our research suggests solutions such as voluntary wavier by debtors, compelling statutory disclosures and exploring other sources such as third-party stakeholders for information.
Disclosure v confidentiality
The above examples demonstrate the fundamental conflict between disclosure and confidentiality, which is not unique to attorney-client privilege but extends to all stakeholders in insolvency proceedings. For corporate debtors, this conflict is often manifested as the debtors’ duty to disclose information to IPs and courts and the need to protect their confidential information, such as trade secrets, research and commercial information, and private personal data. For IPs, creditors and bidders/acquirers, the conflict lies in their powers to obtain information from debtors and an additional duty not to randomly disclose the information to third parties. For courts, there is the conflict of the general principle of public access to courts and court transparency versus the special need to keep certain information in confidence that courts acquire in insolvency proceedings. For professional service providers, like attorneys and banks, the ethics rule on professional secrecy may also be incompatible with the requests from IPs or courts to disclose certain information about their clients.
Possible solutions
When these conflicts occur, different solutions may be sought. First, legislators can enact statutory rules to clarify the requirements for disclosure or non-disclosure. For instance, Section 107(b) of the US Bankruptcy Code allows debtors to petition to a court to protect their “trade secrets, confidential research, development or commercial information”. Second, judges are empowered with the discretion to make decisions, and they have the role of balancing different values and trying to reach a fair outcome. Third, private solutions could also be put in place, for example, bidders are required to sign a confidentiality agreement to prohibit them from disclosing information they obtain in bidding procedures.
Yet, the status quo rules may be incomplete in either statutes or case laws and need more clarification. In a cross-border setting, conflicts may also arise in regard to two or more jurisdictions. Taking attorney-client privilege again as an example, the applicable law on privilege may be the law of the court (lex fori), such as in England (see PJSC Tatneft v Bogolyubov & Ors) and the US (People of State of New York v PriceWaterhouseCoopers),or it may be the law of the establishment of the lawyer, as in the Netherlands (see Rechtbank Rotterdam 7 October 2019). The fragmented rules require further study into private international laws or a future attempt to harmonise insolvency law rules concerning confidentiality, secrecy, and privilege matters.
Insolvency v resolution
For those who are not familiar with the term “resolution”, simply put, it is an administrative regime to resolve financial institutions that are failing or likely to fail. In response to the latest global financial crisis in 2007 to 2008, many jurisdictions have adopted special resolution regimes for financial institutions, following the Financial Stability Board’s (FSB) Key Attributes of Effective Resolution Regimes for Financial Institutions. Unlike proceedings available under general corporate insolvency laws, resolution serves the general public interests of maintaining financial stability and avoiding using taxpayers’ money (bailout) and is carried out by administrative resolution authorities instead of courts. These resolution authorities can transfer the debtor’s assets and dismiss creditors’ claims without the latter’s consent.
Despite these striking differences, we put resolution under the general umbrella of insolvency. This classification was confirmed in the European Union Bank Recovery and Resolution Directive (BRRD) 2014/59/EU, which amended the previous Directive 2001/24/EC on the Reorganisation and Winding Up of Credit Institutions (CIWUD) and interpreted resolution as a special reorganisation proceeding at Article 117. Resolution authorities, in this sense, take dual duties as courts in respect of administering the process, and insolvency practitioners in respect of managing a debtor’s businesses and restructuring its assets and liabilities. In terms of confidentiality, secrecy and privilege, similarities can be drawn between general corporate insolvency proceedings and special bank resolution proceedings. For example, questions might be raised about whether a resolution authority can be deemed as the successor to the previous officers or directors of the bank and succeed the pre-resolution attorney-client privilege, so as to assert or waive such privilege to obtain information from a failing bank’s attorney. Under the US’s resolution laws, the Dodd-Frank Wall Street Reform and Consumer Protect Act, attorney-client privilege is transferred to the receiver/resolution authority at Section 5390(a)(1)(A) of the US Code, which complies with the succession theory.
Another issue that is unique in bank resolution cases relates to the special secrecy requirements imposed on banks, namely, banks should keep their clients’ information in confidence. In resolution cases, banks are debtors and are obliged to provide information to resolution authorities for the purpose of orderly resolution. However, this may conflict with banks’ duty of professional secrecy. The Single Resolution Mechanism Regulation in the EU resolves this problem by ensuring that professional secrecy is not an obstacle to supplying information by treating disclosure to the resolution authorities as non-infringement of secrecy.
Future research
Our project was generously funded by the International Insolvency Institute (III, www.iiiglobal.org) and the Conference of European Restructuring and Insolvency Law (CERIL, www.ceril.eu). It can be ordered at https://www.boomdenhaag.nl/en/webshop/confidentiality-secrecy-and-privilege-in-corporate-insolvency-and-bank-resolution.
Both organisations have expressed interest, based on the present results, in specialised projects, such as an international-oriented study of confidentiality, secrecy and/or privilege in bank resolution proceedings, including cross-border cases, with a comparative and global view from Europe, Asia and North America. Another prospective project that has been suggested is a domestic-oriented study of confidentiality, secrecy and privilege in European restructuring and insolvency proceedings, focusing on the EU Preventive Restructuring Directive 2019/1023 and a comparison of rules on the topic in several EU Member States.
The authors believe that this publication may serve a further objective in that it provides preliminary research for additional research projects and other publications. Guaranteeing these central values in corporate insolvency and bank resolution is certainly worth it.
Case references
CFTV v Weintraub, 471 U.S. 343 (1985)
Leeds & Hellard v Lemos & ord [2017] EWHC 1825 (Ch)
In re Bazemore, 216 B.R. 1020 (Bankr. S.D. Ga. 1998)
PJSC Tatneft v Bogolyubov & Ors [2020] EWHC 2437 (Comm)
People of State of New York v PriceWaterhouseCoopers LLP (N.Y. App. Div. May 23, 2017).
Rechtbank Rotterdam 7 October 2019. ECLI:NL:RBROT:2019:7856 (Shell).
This is a slightly adapted version of a regular column Bob Wessels is writing for Global Restructuring Review (GRR) on the topic of cross-border restructuring and insolvency in a European context. The column this time was co-authored by Shuai Guo. GRR is a subscription-only publication and the column appeared in GRR in November 2020. See globalrestructuringreview.com