Litigation privilege upheld in tax investigation case

​In Bilta v RBS the court held that notes of interviews made in the course of an investigation were covered by litigation privilege. How did this case differ from SFO v ENRC?

Summary

In Bilta v Royal Bank of Scotland PLC and another the court considered the much discussed ENRC judgment (for a full commentary see here), but concluded that litigation privilege did apply to documents, including interview notes, created by RBS in the course of an internal investigation. The case emphasises that the application of litigation privilege to documents created during an internal investigation when there is the threat of proceedings from a government authority will always be a matter of fact.  Nonetheless, the facts helpfully illustrate what will strengthen a claim to privilege.

Introduction

In mid-2009 RBS, through an indirect subsidiary, engaged in carbon credit trades. The company recovered from HM Revenue and Customs (HMRC) the input VAT on the trades in the amount of £86,247,879. HMRC then became aware of widespread fraud in the supply chain and commenced an investigation. RBS cooperated and provided HMRC with documents and information between 2010 and 2011. On 29 March 2012, HMRC issued a letter to RBS (the “HMRC letter”). HMRC expressed its initial view that there were grounds to deny RBS’s input claim on the basis that it “knew or should have known that it was participating in a transaction connected to fraud” and requested further information. After receiving the letter, RBS instructed external lawyers. An evidence gathering investigation was undertaken and employee interviews carried out with the aim of producing a report to respond to the HMRC letter. The final report was submitted to HMRC. It stated that “RBS does not waive any legal professional privilege in providing this report”. RBS subsequently appealed the assessment to the First Tier Tribunal (Tax Chamber).

The claimants issued a claim for dishonest assistance against RBS. The claimants sought disclosure of the transcripts of interviews conducted in the investigation, which RBS asserted were subject to litigation privilege.

The arguments

Applying the test for litigation privilege per Three Rivers No. 6, three things must be proved:

  1. litigation was in progress or in contemplation
  2. the communications in question must have been for the sole or dominant purpose of conducting that litigation, and
  3. the litigation must be adversarial, not investigative or inquisitorial.

The claimants conceded at the outset that the first and third conditions were met here. The issue to be decided was therefore whether documents created as part of the internal investigation were made for the sole or dominant purpose of conducting that litigation. Counsel for the claimants argued that the documents were not created for the litigation. In doing so, he relied considerably on Andrews J.’s approach to documents created as part of the fact find investigation in the ENRC matter. She had held, inter alia, that even if (criminal) proceedings had been in ENRC’s reasonable contemplation, the documents in question were created for the dominant purpose of fact-finding. The review ENRC carried out was primarily focused upon “compliance and remediation” and the documents were therefore not protected by litigation privilege.

Relying on the Court of Appeal judgment in Re Highgrade Traders [1984] BCLC 151 where it was held that the dual purposes of a report obtained by an insurer “were quite inseparable”, counsel for RBS argued that “assembling evidence to ascertain the strength of the position was not separate from the litigation purpose”.

ENRC distinguished?

In giving his judgment in favour of RBS, Sir Geoffrey Vos noted that determining the dominant purpose will turn on the particular facts of the matter. Interactions between a company and one authority in one context could not be applied analogously to a different context (where different enforcement procedures and facts may apply).

The judge held that a subsidiary purpose can be subsumed in the dominant purpose of preparing for litigation, finding that the court could not “properly draw a legal principle from Andrews J’s approach to those facts” (in ENRC). He also noted that there was “something of a tension” between the ENRC and Highgrade judgments (which he noted was not directly cited to the judge in ENRC. However, it has since been indicated to us that Highgrade was in fact cited to Andrews J at the trial.) An appeal of the ENRC decision is due to be heard on 03 July 2018.

Points to note

  • The Judge considered the HMRC letter marked a “watershed moment” in the interaction between the company and HMRC, likening it to the issuing of a letter before claim. Each government authority has distinct powers which will affect the analysis of when this watershed moment is reached. RBS took various steps upon receipt of this letter that marked its anticipation of litigation and it could evidence these steps.

  • Issuance of the HMRC letter prompted RBS to instruct specialist tax litigation lawyers. The judge relied heavily on this instruction, which described the work as in connection with “a dispute with HMRC”, as evidence that RBS anticipated a claim and was taking steps to defend itself.  Instruction of an accountancy firm would be unlikely to imply the same mind-set on the part of the company.

  • It was held that cooperation and regular dialogue and meetings between a company and an authority also does not imply that an investigation is not being conducted for the dominant purpose of litigation.  This finding is important, as the judge held that cooperating with an authority did not mean that litigation was not in contemplation and the dominant purpose of the work.

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