NORTH OF THE BORDER UPDATE
This article has been contributed to the blog by Steven Golick and Patrick Riesterer. Steven Golick is a partner in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP and Patrick Riesterer is an associate in the insolvency and restructuring group.
The Ontario Superior Court of Justice (Commercial List) was recently asked to interpret the scope of a trustee’s rights to require production of documents in the context of a bankruptcy and the impact of privilege on the trustee’s rights. As a general rule, a bankrupt cannot assert privilege as a basis for refusing to provide any documents to a trustee in bankruptcy. The impact of this rule on advisors of a company that becomes bankrupt is not clear. Does a person waive its right to assert privilege over certain documents when the person is appointed chief restructuring officer (CRO) of an insolvent company and that company subsequently becomes bankrupt? Further, does a secured creditor waive its right to asset privilege over certain documents when the documents are disclosed to a person who is subsequently appointed CRO of an insolvent company and that company becomes bankrupt? The trustee asked the court to decide these questions in Re TNG Acquisition Inc.
Nex (formerly known as TNG Acquisition Inc.) made its first filing under the Companies’ Creditors Arrangement Act (CCAA) in August 2006 and exited in December 2006. On Nex’s exit from CCAA, Tech Data became a secured creditor of Nex.
In September 2007 Tech made a demand on its loan. On September 27, 2007 Nex commenced litigation against Tech Data.
Shortly thereafter, Nex commenced a second proceeding under the CCAA. Tech Data had retained Prowis as its advisor prior to the commencement of CCAA proceedings and asked Prowis to act as CRO of Nex during the proceedings. Prowis was appointed CRO by court order with a mandate to assist Nex with liquidating its assets.
After the majority of Nex’s assets had been sold, the CRO resigned, Nex was assigned into bankruptcy and a trustee in bankruptcy was appointed to facilitate a more efficient distribution of the proceeds of sale.
Following its appointment, the trustee in bankruptcy took carriage of the litigation and asked Prowis to produce a number of documents pursuant to section 164 of the Bankruptcy and Insolvency Act (BIA). Section 164(1) of the BIA provides as follows:
Where a person has, or is believed or suspected to have, in his possession or power any of the property of the bankrupt, or any book, document or paper of any kind relating in whole or in part to the bankrupt, his dealings or property, or showing that he is indebted to the bankrupt, he may be required by the trustee to produce the book, document or paper for the information of the trustee, or to deliver to him any property of the bankrupt in his possession.
The trustee took the position that Prowis was required to produce all documents that belonged to or related to Nex, including (a) documents relating to communications between Prowis and its solicitor after Prowis was appointed CRO and (b) documents Prowis obtained prior to its appointment as CRO in relation to its mandate as advisor of Tech Data with respect to Nex. Prowis asserted solicitor-client privilege with respect to (a) and Tech Data asserted litigation privilege with respect to (b) and refused to produce the documents. The trustee sought an order from the Court requiring Prowis to produce them.
The Trustee’s Argument
The trustee argued that a CRO is an officer of the Court. In accepting the appointment as CRO, Prowis had assumed fiduciary obligations to Nex, all of Nex’s creditors and the Court. The CRO is therefore not in a position to assert solicitor-client privilege over documents, particularly where the production of those documents could increase the recovery to the estate. The CRO has a responsibility to Nex and all of its creditors to maximize the value of Nex’s assets. Further, neither the CRO nor Tech Data are in a position to assert common interest litigation privilege because both knew that Prowis and Tech Data’s interests would become adverse once Prowis was appointed CRO. The trustee concluded that any common interest litigation privilege between Prowis and Tech Data had dissolved on the appointment of Prowis as CRO.
The Court’s Decision
The Court observed that privilege exists, among other things, to guarantee the efficacy of adversarial litigation by creating a “zone of privacy” to certain matters relating to pending or ongoing litigation. It is up to the trustee (or any person attacking privilege) to prove that privilege does not apply.
The Court agreed that a CRO is an officer of the Court, but disagreed with the trustee’s interpretation of the responsibilities of the CRO. Specifically, the Court found that the roles and responsibilities of a trustee in bankruptcy are markedly different from those of a CRO. A trustee in bankruptcy has extensive duties to an estate pursuant to the BIA. The CRO, on the other hand, is created by Court order and has a mandate limited to what is set out in that order.
In this case, Prowis had a limited mandate to facilitate the sale of Nex’s assets. The documents sought by the trustee were (a) documents relating to advice Prowis received from its solicitor with respect to dealings with creditors during the insolvency and (b) documents relating to the period prior to the appointment of Prowis as CRO, when it was acting as advisor to Tech Data.
The first set of documents consisted of advice to Prowis with respect to creditors’ rights. Because these documents related to claims a creditor could make against Prowis, solicitor-client privilege applied in favour of Prowis, not of Nex.
The second set of documents could also be used by the estate or another creditor to advance claims against Tech Data, including by Nex in the proceedings against Tech Data that it had commenced prior to its insolvency. Since the CRO had a very limited mandate that did not include overseeing Nex’s legal proceedings against Tech Data, Prowis and Tech Data were not adverse and there was no basis for finding that privilege had been waived or that privilege had otherwise dissolved.
Upon review of the documents, the Court found that the documents in (a) were appropriately subject to solicitor-client privilege, and the documents in (b) were appropriately subject to common interest litigation privilege.
The Court stated that any suggestion that section 164 of the BIA overrides legitimate claims of privilege vastly overstates the powers available to a trustee in bankruptcy under that section.
The Court’s decision in Re TNG Acquisition Inc. is a welcome clarification of the meaning of section 164 of the BIA and the impact of accepting an appointment as CRO on the right to claim privilege. It would be unfortunate if a person accepting an appointment as CRO could not seek advice from a solicitor with respect to the consequences of acting in such capacity without being at risk of waiving privilege.
The Court’s decision is also helpful in clarifying the protection that is afforded a consultant engaged by a secured creditor, in circumstances where the consultant later becomes the CRO of the debtor. However, the mandate of the CRO in this case was somewhat limited. The decision does not address the consequences of a CRO accepting a more comprehensive mandate. The question of whether the communications would be protected in such event remains an open question.