This decision applies whether the person entitled to the privilege is the auditor under investigation or the audited entity. The judgment provides welcome confirmation to companies that communications with their professional advisers will continue to be protected by privilege, even when being sought by regulators.
Background
The FRC commenced an investigation into the conduct of Grant Thornton UK LLP and an individual at Grant Thornton UK LLP (collectively 'Grant Thornton') relating to their audit of Sports Direct International PLC's ('Sports Direct') financial statements for the year ending 24 April 2016 ('the relevant period').
The investigation arose out of reports that a subsidiary of Sports Direct, Sportsdirect.com Retail ('SD Retail'), had engaged Barlin Delivery Limited ('Barlin') to provide delivery services to SD Retail's customers. The owner and a director of Barlin during the relevant period was John Ashley, the brother of Mike Ashley. Mike Ashley was the founder of Sports Direct, a director, and a majority shareholder of Sports Direct during the relevant period.
The relationship between Sports Direct Retail and Barlin was not disclosed in the financial statements for the relevant period prepared by Grant Thornton. The FRC exercised its powers pursuant to paragraph 1(3) of Schedule 2 to SATCAR and Rule 10(b) of the Audit Enforcement Procedure (collectively the 'Rule 10 Notices') and requested Sports Direct produce certain documents to assist the FRC investigation.
The High Court Decision
Sports Direct complied with the Rule 10 Notice save with the exception of 40 documents. Sports Direct argued that, by virtue of Schedule 2 paragraph 1(8) of SATCAR, they were not compelled to deliver the 40 documents to the FRC because they were subject to legal professional privilege ('privilege'). As such, the FRC sought an order from the High Court.
The Court was asked to resolve three issues relating to Sports Direct's claim to privilege:
- Whether privilege applies to documents purely by virtue of those documents having been attached to emails passing between Sports Direct, or its subsidiaries, and its lawyers (described as the ' Communication Issue');
- Whether Sports Direct waived privilege by sending copies of documents to Grant Thornton, for the purpose of an audit, extended to the FRC (described as the 'Waiver Issue'); and
- Whether production of the documents to the FRC would infringe any privilege of Sports Direct (described as the 'Infringement Issue').
Sports Direct successfully defended the Waiver Issue, but the Court found in favour of the FRC on the Communication Issue and the Infringement Issue.
The Court expressed that the Infringement Issue was the most important and far-reaching issue raised and the most difficult to resolve. The Court held that documents belonging to an auditor's client do not lose their legal professional privilege if such documents are disclosed to the FRC during their investigation into the auditor's conduct. In so deciding, the Court ordered Sports Direct to produce the documents the FRC sought.
The Court of Appeal Decision
Sports Direct appealed both the Communication Issue and the Infringement Issue.
In terms of the Infringement Issue, Sports Direct argued that the High Court was wrong to regard the judgment in R (Morgan Grenfell & Co Ltd) v Special Commissioner of Income Tax and another [2002] UKHL 21, [2003] 1 AC 563 as establishing a principle that the production of documents to a regulator is, in some circumstances, not an infringement of the legal professional privilege of a regulated person.
The Court of Appeal agreed with Sports Direct and reversed the High Court's decision. The Court of Appeal considered sub-paragraphs 1(8) and (9) to Schedule 2 of SATCAR where it limits the FRC's power to demand delivery of certain documents during its investigation.
As for the Communication Issue, the Court of Appeal was unconvinced, confirming the High Court's decision that non-privileged attachments to otherwise privileged emails do not themselves become privileged. An email, together with its attachments, does not constitute a single communication.
Comment
This judgment will be greeted with a sigh of relief by financial institutions, and their clients, as it confirms the primacy of privilege.
The decision reaffirms the Court's reluctance to override privilege. It has been described many times as a fundamental human right; a client should be able to confess all to their lawyer (R v Derby Magistrates' Court ex p. B [1996] a AC 487).
Privilege can only be abrogated or overridden where there is clear statutory intention, or necessary implication, to create an exclusion (which requires careful analysis) or communication with a criminal intent.
Furthermore, it confirms that non-privileged attachments to otherwise privileged emails do not themselves become privileged.
However, perhaps we ought to hold our breath a little longer, Sports Direct is appealing to the Supreme Court on the Communication Issue and the FRC is appealing on the Infringement Issue.
Author: Jonathan Hopkins.
