by Raghav Trivedi, Pupil Barrister
The High Court’s recent judgment in Lasytsya v Koumettou [2020] EWHC 660 (Ch) has produced crucial guidance in relation to (i) the factors to take into account when considering whether to grant a search and seizure order pursuant to Section 365 of the Insolvency Act 1986 (“IA 1986”) and (ii) the appropriate safeguards to be implemented when drafting such orders at a without notice hearing.
In this case I.C.C. Judge Jones found that the drafting of the relevant orders were inadequate and that there was absence of the safeguards now normally required in light of the guidance given.
Section 365 IA 1986 provides a search and seizure remedy by way of execution of a warrant in respect of property belonging to the bankrupt’s estate and/or books, papers or records relating to the bankrupt’s estate or affairs which are required to be delivered up to the office holder.
To assist insolvency practitioners in considering approaches to be taken to a Section 365 application I have distilled the key principles deriving from this judgment into bullet point form.
Should a Search and Seizure Order be made? (Para 22-25 of the judgment)
- This is a remedy of last resort;
- It is necessary to establish (i) a real risk of dissipation, destruction or disposal of property (ii) that value of the property is proportionate to the remedy and (iii) a balance will be achieved between protecting rights of third parties affected and the need to recover the property for the purposes of the bankruptcy;
- The remedy is different to an Anton Pillar order given the existence of the bankruptcy, resulting statutory duties and the fact a Section 365 order is limited to property in the bankrupt’s estate and to books, papers or records which relate to the bankrupt’s estate;
- The Court will be concerned with rights affected, namely the right to privacy, the right to protection against unjustified and arbitrary searches and seizures and the right to be heard in defence of a claim before the order is made;
- A trustee should not take full advantage of his legal rights if it is unfair to do so;
- A search and seizure order should only be made if necessary and in the interests of justice – what is required is a strong arguable case with clear evidence and the damage being prevented must be proportionate to the grant of the remedy; and
- Consideration must be given to the appropriateness of the remedy when other remedies also apply (e.g. private examination under Section 366 of the Insolvency Act 1986).
Incorporation of the Safeguards into the Order (Para 26 – 30 of the judgment)
- The need for specific safeguards will take into consideration the protection afforded by the fact the order will be executed under a warrant;
- There is a duty to identify and explain to the Court what is expected to occur when the order is enforced including who may be present and the potential risks such as medical issues;
- The position of third parties should be considered;
- Questions of confidentiality/legal privilege should be considered;
- The order should be understood by a layman and crystal clear as to what may be done under its terms, usually by inserting the wording of Section 365 into the order itself;
- There should be a penal notice to explain the possible consequences of breach;
- The supervising solicitor needs to be identified in the order whether by name or description (e.g. partner in litigation department) and consideration given to whether it should be an independent solicitor or the solicitor with conduct of litigation;
- The supervising solicitor should keep a record of the search and seizure and may be required to provide a report to the Court – terms to that effect should be in the order;
- The order needs to identify representatives from the solicitors’ firm (not more than two plus the solicitor with conduct of litigation with at least one female representative if a female occupier and/or children are present at the premises) to inform those at premises with terms of the order and their rights and obligations (e.g. right to seek legal advice). The order will require this to be explained before execution is carried out unless this is impractical;
- The order needs to identify what should happen to anything delivered by Tipstaff to the solicitors or others appointed for that purpose;
- It may be appropriate to specify in the order that, in the event of dispute over seizure, the items in issue should not be accessed or dealt with pending the Court’s direction obtained on the return date or within 14 days (whichever is earlier);
- The order should require solicitors/representatives to ensure that everything seized is listed in an appropriate manner (e.g. photographs or by dictation) and photographs are to be taken before leaving the premises;
- The order should consider the difficulties associated with electronic devices which the person in possession might need and may contain files and applications not within the scope of the order. Therefore, it may be appropriate to take an image of the data and those with such expertise may need to attend the premises;
- The order will need to be served along with a note of the hearing so that the bankrupt is aware of what was said at the hearing and to enable him to receive legal advice; and
- Consideration should be given to a return date as a Respondent or third party should not have to take positive streps to obtain a hearing and to ensure the matter is aired in open court.
In light of the above, the High Court has provided welcomed clarification of the principles to be applied in relation to Section 365 applications and the safeguards to be considered and built into an order made at a without notice hearing.
However, it does not seem that each safeguard needs to be implemented in every single case. The Judge did state that the safeguards will normally follow the above requirements but also stated that the safeguards applied depended upon the application and would be decided on a case by case basis.
It was also stated that whilst safeguards should be designed to protect those affected by the order, the extent that is possible would depend on the need to ensure the terms are consistent with the aims and purposes of the order.
Therefore, whilst it may be the default position to follow all of the above guidance that has been given by the High Court, there remains flexibility in drafting orders to reflect the circumstances of each case and implementing only those safeguards which conform to the aims and purposes of the order sought (e.g. to avoid tipping off a Respondent).
