fraud dishonest assistance litigation privilege financial services bank vicarious liability

High Court considers legal privilege in case concerning fraudulent trading and dishonest assistance

The High Court held RBS and Natwest vicariously liable for traders assisting in fraud, despite lacking actual knowledge of the fraud. Read the full judgment for Bilta (UK) Ltd & Ors v Natwest Markets Plc & Anor [2020] EWHC 546 (Ch), which case concerned legal privilege amongst allegations of fraudulent trading and dishonest assistance.

The High Court held RBS and Natwest vicariously liable for traders assisting in fraud, despite lacking actual knowledge of the fraud. Read the full judgment for Bilta (UK) Ltd & Ors v Natwest Markets Plc & Anor [2020] EWHC 546 (Ch), which case concerned legal privilege amongst allegations of fraudulent trading and dishonest assistance.

This claim was brought by Bilta (UK) Limited (in liquidation) (“Bilta”) against the Royal Bank of Scotland plc & Anor. The case concerned an alleged carbon credit trading fraud which included a failure to declare VAT to HMRC leaving the companies with significant tax liabilities. The liquidators alleged that two traders of the Banks had dishonestly assisted Bilta’s directors’ breaches of their fiduciary duty.

Bilta sought disclosure from RBS to support their case, however RBS did not consent to the application and resisted on the basis that the requested documents were protected by litigation privilege.

Background

On 29 March 2012, HMRC commenced investigations and wrote to RBS indicating that there may be grounds to deny a VAT reclaim in respect of relevant trades carried out worth approximately £86 million. Upon receipt of this letter, RBS’ litigation counsel were involved and instructed a firm of specialist tax litigators who carried out the investigation which included conducting interviews of various employees which led to interview transcripts being produced. RBS’s external counsel produced a report which was provided to HMRC without waiving legal privilege. The report stated that HMRC’s assessment was time barred and that RBS did not know nor should have known that the transactions were fraudulent i.e. the Axel Kittel test.

Bilta accepted that litigation was contemplated from 29 March 2012 (when HMRC approached RBS). The issue to be determined was whether the documents prepared by RBS’ external investigation as part of the investigation which included the reports and transcripts of employee interviews were created solely for the purpose of conducting litigation and therefore attracted litigation privilege.

Reports attracting litigation privilege

RBS argued that as upon receipt of HMRC’s letter on 29 March 2012, they instructed specialist tax litigation lawyers, the sole purpose of producing the reports and transcripts were to defend HMRC’s claims and potential assessment.

Bilta argued that the purpose of the investigation was to build a clearer picture of the facts and that RBS had not established whether any litigation purpose was in fact the dominant purpose to therefore attract litigation privilege.

The Chancellor held that whilst it is necessary to establish the dominant purpose behind the creation of a document, where a communication has been created for two or more purposes, the Court may conclude that “these two apparent purposes are inseparable parts of a single purpose, whereupon it is necessary only to examine that overarching purpose“.

Bilta relied on the case of Serious Fraud Office -V- ENRC [2017] 1 WLR 4205, in which Andrews J. held that documents created with the specific purpose of showing them to a potential adversary in litigation, whether to persuade them to settle or not to bring proceedings in the first place, did not attract litigation privilege.

In this case, it was very likely that an assessment from HMRC (that could be challenged) would follow its investigations, and RBS contemplated and expected the same.  RBS had, therefore, taken steps to protect its position, which were only consistent with its overarching purpose of preparation for the litigation.  The difficult issue was to determine whether litigation was the sole or dominant purpose of the activities by RBS following receipt of the letter from HMRC. 

The Chancellor indicated that it did not matter whether it was the sole or merely the dominant purpose. Contemplating and taking steps to defend HMRC’s assessment was just part of the route to litigation which RBS considered almost inevitable and with which the Chancellor agreed.

What is litigation privilege?

Litigation privilege subsists in documents, including communications, which are confidential and which have been produced in circumstances where litigation is either in progress or where there is a reasonable prospect that it will happen, provided that the litigation is the dominant purpose for which the document was created. It ensures that a party in litigation is able to seek advice on the merits of their case and prepare its case but will not be required to disclose those details to their opponent.

What is dishonest assistance?

Dishonest assistance can arise in several ways and involves (1) existence of a trust i.e. a fiduciary duty; (2) breach of that trust; (3) assistance by a third party; and (4) dishonesty on the part of that assistant. 

Dishonest assistance and fraudulent trading

The Claimants alleged that RBS and Natwest had participated in the commission of missing trader intracommunity VAT fraud during 2009 through their trading with an intermediary called CarbonDesk Limited (“CarbonDesk”). It was found that the VAT fraud had in fact been perpetrated by the directors of the Claimants.

It was held that you need dishonesty, assistance and breach of trust or fiduciary duty. The test for dishonest was said to be objective and that the “assister” may not know all of the relevant facts. The burden of proof was held to rest with the Claimants on the balance of probabilities.

Where a chain of transactions can be established linking the actions of the Traders and RBS with the misappropriation or misapplication of the VAT monies by the directors of the Claimant companies then the necessary assistance would have been given.

Bank held vicariously liable for dishonest assistance

RBS and RBS SEEL were both held to be vicariously liable for dishonest assistance and knowingly being a party to fraudulent trading by the Claimant companies by reason of RBS’s trading with CarbonDesk from 26 June 2009 to 6 July 2009. The remainder of the claims were dismissed.

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