Confidentiality, secrecy and privilege matters in corporate insolvency and bank resolution
To be confidential, secret, and priviledged, or not to be? That is the question.
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 our latest book, Confidentiality, Secrecy and Privilege in Corporate Insolvency and Bank Resolution (The Hague, Eleven International Publishing, 2020), we closely studied these three themes. We chose systematic research from 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. This book is the first result of a joint research project, supported by the International Insolvency Institute (III) and the Conference on European Restructuring and Insolvency Law (CERIL).
Confidentiality, secrecy and privilege do not have their own definitions. In terms of their substance and application, they partly depend on descriptions in national rules and regulations, and they often function as a derivative of the matter at issue. Often this is a legal procedure. Corporate insolvency adds one more layer of difficulty in situations where legal relations are interrupted by confidentiality, secrecy or privilege. That is, the three themes are often interpreted and further developed in the context of two parties who are their adversaries in common litigation, whilst restructuring and insolvency have a multiparty context, often with one party on the one side (debtor) and many on the other (IPs and large group of creditors).
As an example: can a pre-insolvency debtor’s attorney-client privilege survive after commencement of insolvency proceedings? Or is the privilege passed on to the IP appointed? 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 an IP can assert or waive that privilege (Commodity Futures Trading Commission (CFTC) v Weintraub, 471 U.S. 343 (1985)). 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 (Leeds & Hellard v Lemos & ord  EWHC 1825 (Ch)).
This example demonstrates the effects of a conflict between disclosure and confidentiality, which is not unique to attorney-client privilege but extends to all stakeholders in insolvency proceedings across different jurisdictions. 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 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.
Another layer of complexity is added in a cross-border setting, where conflicts may also arise in regard to two or more jurisdictions. For example, the applicable law on attorney-client privilege may be the law of the court (lex fori), such as in England (PJSC Tatneft v Bogolyubov & Ors  EWHC 2437 (Comm)) and the US (People of State of New York v PriceWaterhouseCoopers LLP (N.Y. App. Div. May 23, 2017)), or it may be the law of the establishment of the lawyer, as in the Netherlands (Rechtbank Rotterdam 7 October 2019, ECLI:NL:RBROT:2019:7856 (Shell)).
In matters of resolution of financial institutions, the same dilemma also occurs. Resolution, in short, is an administrative regime to resolve financial institutions that are failing or likely to fail. Unlike proceedings available under general corporate insolvency laws, resolution serves the general public interests of maintaining financial stability and avoiding using taxpayers’ money (bailout). Next to a different aim, resolutions are 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. 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.
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 in individual cases 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.
This first book of this joint project has a limited aim, namely, arranging the very first collection of rules and court cases relating to confidentiality, secrecy and privilege. Yet these themes will acquire more depth in the legal environment in which they are used. Such an environment is very often purely national, e.g. a country’s legislation on procedural law and laws regarding the professions of lawyer or accountant. Starting from January 2021, CERIL has approved a new project (Working Party 13) on confidentiality, secrecy and privilege matters in relation to the EU Preventive Restructuring Directive 2019/1023. In this new project, the focus is on the EU Directive and its application in terms of debtors, IPs and creditors. We have conferees from several EU Member States and will conduct a comparative analysis of those national laws. In the coming two or three years, we plan to present several reports, which will be posted on the CERIL website. You are welcome to contribute cases or views you have to us or follow our developments!