The Financial Reporting Council Ltd v Frasers Group Plc (formerly Sports Direct International Plc)

Hearing date: 28 July 2020

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

Introduction

This application raises the question whether 3 documents in the hands of the Respondent are privileged from production to the Applicant on the grounds of litigation privilege.

The Applicant is the Financial Reporting Council Ltd ( “the FRC”). The Respondent is now called Frasers Group plc, but until December last year it was called Sports Direct International plc, and I will refer to it, as the parties did, as “SDI”.

I heard the application on 28 July 2020, and gave a brief unreserved judgment at the conclusion of the argument in which I held that the relevant documents were not privileged. I did however offer the parties the opportunity to have a longer reserved judgment expressing my reasons in more detail, an offer which both parties said they wanted to take up. This judgment therefore explains in more detail why I reached the conclusion I did.

Background

A convenient introduction to the background can be found in the judgment of Arnold J, as he then was, on the first hearing of this application, The Financial Reporting Council Ltd v Sports Direct International plc [2018] EWHC 2284 (Ch), at [1]–[5] as follows:

“1. This is an application by the Applicant (“the FRC”) pursuant to Regulation 10 and Schedule 2, paragraph 2 of the Statutory Auditors and Third Country Auditors Regulations 2016, SI 2016/649 (“SATCAR”) and paragraph 10(b) of the FRC's Audit Enforcement Procedure (“AEP”) for an order requiring the Respondent (“SDI”) to provide the FRC with certain documents, as detailed below. This is believed to be the first application of its type to have reached the courts.

2. The FRC is a regulatory body with certain responsibilities for, among other things, the regulation of statutory auditors and audit work. Its functions include carrying out investigations into statutory auditors and audit work and imposing and enforcing sanctions. Its powers in this regard are derived from SATCAR and AEP. Schedule 2 to SATCAR provides the FRC with statutory powers of investigation, obstruction of, or failure to comply with, which may be remedied in the civil courts and/or constitute a criminal offence.

3. The FRC is presently conducting an investigation (“the Investigation”) into the conduct of Grant Thornton UK LLP (“GT”) and an individual at GT (“Subject A”) in relation to the audit of the financial statements of SDI for the year ending 24 April 2016 (“the 2016 Financial Statements”). The Investigation arose out of reports about SDI's subsidiary Sportsdirect.com Retail Ltd (“SDR”) engaging Barlin Delivery Ltd (“Barlin”) to provide delivery services to SDR's customers. The owner and a director of Barlin during the relevant period was John Ashley, the brother of Mike Ashley. Mike Ashley is the founder of SDI and a director and majority shareholder of SDI during the relevant period. It appears that Barlin was engaged as part of a structure adopted by SDR on the advice of Deloitte LLP in an effort to ensure that SDR paid VAT on its sales to EU customers in the UK rather than in the country of each relevant EU customer (“the Enhanced Structure”). The FRC is considering, among other things, the conduct of GT and Subject A in relation to the non-disclosure of the relationship between SDR and Barlin as one between related parties in the 2016 Financial Statements.

4. To this end, the FRC has exercised its power pursuant to paragraph 1(3) of Schedule 2 to SATCAR and rule 10(b) of the AEP to issue notices (“Rule 10 Notices”) to SDI requiring the provision of certain documents because they are likely to shed light on what GT understood SDI to have been advised in relation to the introduction of Barlin as part of the Enhanced Structure. The FRC contends that SDI has failed to comply with the Rule 10 Notices in certain respects, and therefore seeks an order of the court compelling compliance by SDI. SDI disputes that it has failed to comply with the Rule 10 Notices.

5. The documents which are the subject of the application are as follows:

i) A fax which was sent by SDIs Head of Finance (Herbert Monteith) to a representative of GT (David Cox) on 15 July 2015 (“the Fax”)….

ii) Any documents which SDI disclosed to Grant Thornton in 2015 which record the advice Deloitte provided to SDI in or around 2015 regarding the distance and/or internet selling arrangements of SDI and/or its affiliates, the VAT implications of those arrangements and/or one or more of Etail Services Ltd, SDI (Brook EU) Ltd, SDI (Brook ROW) Ltd, SDI (Brook UK) Ltd and Barlin (“the Deloitte Material”). The Deloitte Material was the subject of a Rule 10 Notice dated 5 May 2017. The FRC contends that SDI has not complied with this Rule 10 Notice. SDI disputes this. The resolution of this dispute depends on whether or not the Rule 10 Notice required SDI to produce a group of “potentially responsive” documents which it has collated.

iii) [Certain documents referred to as “the Additional Documents”].”

I am now only concerned with the Deloitte Material and with the single question whether that material is the subject of litigation privilege.

As appears from the extract from Arnold J's judgment, the Deloitte Material was requested by the FRC from SDI by notice dated 5 May 2017. After considerable correspondence which it is not necessary to detail, the FRC brought this application by Application Notice dated 15 November 2017. The application was initially heard by Arnold J on 24–25 July 2018. He handed down judgment in September 2018, which is the judgment I have already cited from.

In his judgment Arnold J held that the reason put forward by SDI for not producing any of the Deloitte Material was not well-founded (at [13]–[19]). He then went on to consider the Additional Documents, in respect of some of which SDI asserted legal advice privilege. Having dealt with a question as to whether certain attachments were privileged, he rejected an argument that SDI had waived privilege (at [43]–[56]) but held that provision of the documents to the FRC would not infringe any legal advice privilege that SDI had (at [57]–[85]). This last issue has been referred to as “the infringement issue”

He therefore indicated (at [93]) that he would order SDI to disclose the Deloitte Material and the Additional Documents (the issue as to the Fax had fallen away). But when judgment was handed down on 11 September 2018, Mr Richard Lissack QC, who appeared for SDI (as he did before me), indicated in the course of his submissions on consequential matters that SDI was minded to assert a claim to litigation privilege over the Deloitte Material. The Order made by Arnold J therefore ordered SDI to disclose the Deloitte Material but contained an exception for any material as to which SDI asserted privilege, and gave directions for any such claim to privilege to be determined at a further hearing.

SDI then did assert such a claim, but it also appealed, with his permission, Arnold J's decision on the infringement issue to the Court of Appeal, and by a further Order made by consent on 16 October 2018 the further hearing of the question whether the Deloitte Material was privileged was stayed pending the decision of the Court of Appeal on the infringement issue. This was because if the Court of Appeal dismissed the appeal, SDI would be obliged to produce the material whether or not it was privileged.

The appeal on the infringement issue was heard at the end of January 2020 and judgment handed down on 18 February 2020: The Financial Reporting Council Ltd v Sports Direct International Ltd [2020] EWCA Civ 177. The Court of Appeal allowed the appeal. That meant that the privilege issue in relation to the Deloitte Material did have to be resolved after all. That is the question that has been argued before me, by Mr Mark Simpson QC, appearing with Ms Rebecca Loveridge, for the FRC, and by Mr Richard Lissack QC, appearing with Mr Adam Sher, for SDI. The hearing was, in the way that has by now become familiar, conducted as a fully remote hearing, and I am grateful to the parties and their legal teams for co-operating in this being conducted in an efficient and effective manner.

Facts

I heard no oral evidence and evidence was given by witness statements. The witnesses for SDI were as follows:

(1) Mr Herbert Monteith, who made a witness statement dated 23 April 2018 in opposition to the application. He was then Head of Finance (Interim) for SportsDirect.com Retail Ltd ( “SDR”), a subsidiary of SDI (see Arnold J's judgment at [3]). Mr Monteith had held that position since 2017, and before that had been Financial Controller for SDR. He is a qualified accountant.

(2) Mr Richard Burger, formerly a partner at Reynolds Porter Chamberlain LLP ( “RPC”), SDI's solicitors, who made a witness statement dated 23 April 2018 in...