Hot on the heels of the Court of Appeal’s decision in SFO v ENRIC earlier this month, legal professional privilege has once been under the microscope in a recent High Court case, The Financial Reporting Council Limited v Sports Direct International Plc  EWHC 2284 (Ch).
The Financial Reporting Council Ltd (“FRC“) is the regulatory body for statutory auditors and audit work, which is conducting an investigation of Grant Thornton UK LLP (“GT“).
The FRC is investigating concerns regarding the failure of GT to disclose a relationship between related parties in its audit of the financial statements of Sports Direct International Plc (“SDI”) for the year ending 24 April 2016. The relationship in question concerns the engagement of a delivery company owned by the brother of SDI’s director and majority shareholder, by one of SDI’s subsidiaries, Sportsdirect.com Retail Ltd.
The FRC has the statutory power to issue a notice requiring disclosure of certain documents in order to assist with an investigation. They issued SDI with such a notice. SDI did not comply on the grounds that the documents withheld from FRC were subject to legal advice privilege. The FRC therefore sought an order from the Court to compel SDI to disclose the withheld documents.
Documents sent in communication with a legal advisor
SDI withheld 19 emails and 21 attachments on the basis that they were part of lawyer-client communications. The attachments themselves were not privileged documents but they had been attached to emails requesting or receiving email advice. FRC argued that the attachments could not be withheld as they were not themselves privileged documents.
The question for the Court was whether a document can become privileged by virtue of the fact that it is attached to a privileged document. Somewhat unsurprisingly, the Court held that legal advice privilege does not extend to pre-existing, non-privileged documents and as such, SDI were compelled to provide the 21 attachments to the FRC.
Documents provided as part of the GT audit
SDI withheld some of the documents disclosed to GT for the purposes of conducting an audit on the basis that the documents were privileged. FRC argued that when SDI provided the documents to GT, they waived privilege in relation to those documents. Therefore, as FRC are GT’s regulator, this meant that SDI had also waived privilege in relation to any investigation by FRC of that audit.
The Court therefore needed to consider whether waiver of privilege extends to a regulated persons regulator. Ultimately, the Court held that a regulatory process is distinct from an auditing process and as such, privilege could not be waived in respect of the documents provided for the audit and requested by the FRC.
Preservation of privilege in regulatory investigations
Notwithstanding the arguments and decisions discussed above, the FRC argued that privilege only applies in judicial or quasi-judicial proceedings as privilege concerns withholding documents from a body performing judicial functions (i.e. a court or a tribunal). As a regulator performs a function prescribed by statute, the statutory duty to carry out an investigation will override the duty to maintain client privilege.
The Court agreed with FRC’s argument and held that where a regulator of a regulated person carries out a confidential investigation of that regulated person, disclosure of any documents relevant to the investigation will not infringe a client’s right of privilege. Notably, the documents will still be privileged documents; they just cannot be withheld from the regulator.
However, SDI has been given permission to appeal this issue to the Court of Appeal.