2020-06-25
Legal Articles

Section 236 – an overview in anticipation

Home / Knowledge base / Section 236 – an overview in anticipation

Posted by Elizabeth Taylor on 25 June 2020

Elizabeth Taylor - Insolvency Lawyer
Elizabeth Taylor Consultant

Economic forecasts suggest that the UK is heading for the biggest recession in generations and as such insolvency professionals are gearing up for possibly the busiest period in their professional careers.  We have seen a sharp increase in enquiries from businesses seeking general guidance on a range of issues during the coronavirus pandemic.  Notwithstanding proposed changes to the wrongful trading provisions of the Insolvency Act 1986 as set out in the Corporate Insolvency and Governance Bill 2020, it has been made clear that directors’ general duties remain in place such that directors remain vulnerable to claims for misfeasance under Section 212 or breach of directors’ wider duties under sections 171-177 of the Companies act 2006.  The judiciary has also made it clear that the suspension of the wrongful trading provisions will not assist directors whose businesses had arguably passed the point of no return prior to the start of the lockdown.

The advice given by insolvency professionals to businesses during these unprecedented times (and which the directors will inevitably seek to rely upon in their defence to such claims) is therefore likely to come under close scrutiny by office holders. We are therefore taking this opportunity to take a fresh look at the provisions of Sections 236 and the extent to which this section can be used to obtain information and documentation from professionals.

Section 236

Section 236(2) provides that the court may summon to appear before it any person known to have in his possession any property of the company or any person whom the court thinks capable of providing information concerning the promotion, formation, business, dealings, affairs or property of the company.  The court has the power to require a person falling into either of the above categories to attend court for an examination, provide an account of their dealings and/or to produce any relevant documents in an affidavit or witness statement.  Professional advisors will fall into this category.

If a person fails to attend a hearing under section 236 or the court has reason to believe he has or is about to abscond, it has the power to issue an arrest warrant.

The court has an unfettered discretion as to whether to make the order for examination under Section 236 and should not do so if an order would be oppressive or unfair.  The order must be necessary in the interests of the winding up and the onus in establishing this is upon the office holder.  However, significant weight will be attached to the office holder’s views in this regard.  In Galileo Group Ltd [1998] Lightman J expressed the view that the purpose of Section 236 was to protect the interests of creditors in an insolvent liquidation and not to produce a windfall for shareholders.  This is therefore one of the factors that court will take into account in the exercise of its discretion.

It is good practice to make a request for voluntary disclosure of information prior to making an application to the court not least to save incurring unnecessary costs.  There is also a risk that to apply to the court without first seeking voluntary disclosure could be regarded by the court as oppressive.  This could result in the application being refused or the office holder being faced with an adverse costs order. We frequently receive requests from accountants and colleagues for clarification as to whether they are required to comply with such requests as they believe that the information sought is confidential to the client or subject to legal professional privilege.

All accountancy and legal professionals owe a duty of confidentiality to their client.  However, confidentiality alone is not a bar to compliance with section 236. 

The position is slightly different with banks.  There are no duties of confidentiality where information is sought in respect of the company’s accounts because the office holder makes the request as agent for the company, but banks may require an order under section 236 to overcome their duty of confidentiality to a third party.  In these instances, the courts have to undertake a balancing exercise between the duty of confidentiality to the third party and the importance of allowing the office holder to fulfil his statutory duty to investigate and trace funds belonging to the company.

Privilege is also not always a ground for objection to disclosure.  A solicitor or other professional is not able to rely on privilege in refusing to give disclosure if the insolvent company would have been under an obligation to provide the documents or information requested.  This would be the case where the documents on the solicitor’s file were in fact documents which belonged to the company such as for example statutory books and records. Similarly, if the company would have been in a position to demand that the professional provide the information or documents to it, the office holder as agent for the company would be in the same position such that privilege would not apply.

Legal professional privilege belongs to the client and the solicitor is under a duty to assert it until waived by the client

Typically, the documents that attract legal privilege are documents that are confidential, were created for the purpose of or when there was a prospect of litigation, have not been disclosed to other third parties other than on a confidential basis and are not in the public domain.  Such documents attract litigation privilege.  Legal advice privilege applies to any advice given by a solicitor to a client (even when there is no contemplation of litigation) as to the action a client should take in a given situation.  Privilege would extend to preparatory documents created by the solicitor prior to advising the client. An exception to this general principle is where the advice was given to enable the client to further a fraudulent purpose.

In the case of Harvest Finance Ltd v Cannons Law Practice LLP there were doubts as to whether a class of documents attracted privilege and so the court ordered that the documents be provided confidentially to the court for the court to decide. In that case the court held that even privileged documents should be disclosed where they were relevant to an allegation of fraud.

A director of a company cannot rely upon privilege against self-incrimination as a defence to a section 236 application because the courts have recognised that the purposes of sections 235 and 236 is to provide a statutory framework to enable insolvency office holders to deal with dishonesty and malpractice by directors.  It has therefore been recognised that it would be contrary to the intention of the statute if directors could rely upon privilege against self-incrimination to defeat a section 236 application.  Privilege against self-incrimination is therefore not available to anyone who is under a duty to co-operate with the office holder, including a professional advisor.  It was held in Saunders v United Kingdom [1998] that the use of evidence obtained under compulsion could not be used in later criminal proceedings as this would be contrary to the European Convention on Human Rights.  This means that it is even less likely that an objection to compliance with a Section 236 order on these grounds would be upheld.

It is very common for a professional practice on the receiving end of a Section 236 request to demand payment of its costs as a condition of compliance.   Although the courts have a discretion as regards the costs of compliance, they regard compliance with such a request as compliance with a public duty and as such generally the respondent will not be entitled to its costs.  That said, where there is a disbursement involved in the physical retrieval of a paper file common sense should prevail as it can often be cheaper for the office holder to pay this rather than become involved in protracted correspondence as to why he is not obliged to do so.

Section 366

Although bankruptcy falls outside the scope of this article, it is worth noting that whilst the wording of Section 366 is very similar to that of Section 236 there are some significant differences in how the section is applied.  Because a trustee in bankruptcy is regarded as legally identical to the bankrupt himself and effectively stands in the shoes of the bankrupt, a professional advisor should deliver up to a Trustee in Bankruptcy on demand all papers relating to the affairs of the bankrupt including any papers that would be privileged in the context of legal proceedings.

However, the right of privilege is not an asset that vests in a trustee in bankruptcy and as such where documents that are subject to litigation privilege are delivered up to a trustee, the bankrupt is not obliged to waive privilege in them.

Conclusion

The body of case law applicable to Section 236 is extensive there have been many conflicting decisions over the years.  For now, the law seems relatively settled but this could change when we start to see an increase in company failures and a reluctance on the part of advisors to disclose details of the advice that was given during this unprecedented period of lockdown.  Such reluctance is understandable when government guidance and support measures were being announced on an almost daily basis and advice given one day was often superseded by announcements made the following day.

About the author

Elizabeth qualified as a solicitor in 1992. She has a wealth of insolvency experience having specialised in the field for over 25 years.

Elizabeth Taylor

Elizabeth qualified as a solicitor in 1992. She has a wealth of insolvency experience having specialised in the field for over 25 years.

Recent articles

25 September 2020 Extension of the temporary provisions contained within the Corporate Insolvency and Governance Act 2020

On 24 September 2020 the government announced an extension to the temporary provisions contained within the Corporate Insolvency and Governance Act 2020 (CIGA 2020).

Read article
24 September 2020 Chancellor unveils new Job Support Scheme

Chancellor Rishi Sunak has just announced in the House of Commons, a successor to The Coronavirus Job Retention Scheme, (the “Furlough Scheme”) which, it has been confirmed, will end on 31 October 2020 as planned.

Read article
24 September 2020 Practical considerations for exiting lockdown successfully - CWCC Chamber Live Webinar Notes - 24 September 2020

An overview of practical considerations for directors and companies on exiting lockdown successfully.

Read article
Contact
How can we help?
01926 732512
CALL BACK