Attorney-Client Privilege Does Not Apply to Directors of Insolvent Companies

The Israeli Supreme Court has ruled that legal advice provided to a company’s directors by law firms retained by the company is not protected under attorney-client privilege. Furthermore, the trustee appointed to the company after its collapse is entitled to receive and read the products of this legal advice, including related correspondence exchanged via WhatsApp. 

After the collapse of IDB, a trustee appointed to the company filed a motion with the court to instruct external directors and the law firm retained by the company to forward to him all documents in their possession and control that pertain to the company and the legal advice given to the company, its board committees, and officers. Inter alia, the trustee demanded to receive email correspondence and correspondence exchanged between the various parties via WhatsApp.

The external directors objected to disclosing the information, arguing, inter alia, that the legal advice had been given to them personally and not to the company. Therefore, they argued, they hold the privilege and, accordingly, only they may waive that privilege. The external directors sought to rely, inter alia, on provisions of the Companies Law, which allow directors to receive professional advice at the company’s expense under special circumstances (section 266A). The external directors further argued that forwarding of the information constitutes a violation of their privacy, since some of the correspondence also contains personal and private information.

The Court’s Ruling

The Supreme Court rejected the external directors’ arguments and ruled that the legal advice was given to them within the framework of their roles in the company’s committees and in relation to the performance of their roles, while the company bore the costs. Therefore, such counsel cannot be considered “personal advice.” Accordingly, the privilege does not belong to the external directors but rather to the committees, which act as organs of the company. Consequently, the trustee who is subrogating for the company is entitled to receive these documents and data and to demand them from the company’s legal advisors. 

As to the external directors’ argument regarding section 266A of the Companies Law, the Supreme Court ruled that the purpose of section 266A is to help directors obtain and collect the information they need in order to perform their roles. This provision does not impart a status of “separate personal advice” to the legal advice given to them.

The Supreme Court also rejected the directors’ plea of violation of privacy, noting that they had “chosen” to inject personal matters into their correspondence about professional matters.

The Supreme Court also rejected the argument that the independent committee (of which the external directors were members) is not an organ of the company, and ruled that the committee draws its authority from the company’s board of directors. In this regard, the court clarified that, for a solvent company, an independent committee is indeed entitled to confidentiality protection from the company itself, since its purpose is to enable the committee to overcome possible conflicts of interest vis-à-vis the officers and controlling shareholder. However, for an insolvent company, in which management members are “ousted” from the company and the organs’ authorities are delegated to a trustee, the rationale justifying the confidentiality no longer exists.

The court noted, in passing, that in a situation in which personal legal advice is completely separate from the advice given to a company or to one of its organs, which is substantiated, inter alia, by the officer paying for it himself, it would be difficult to claim the company owns the legal advice and not the officer.

Personal Legal Advice

The significance of this ruling is that legal advice given by the company’s legal advisors to an external director (or to any director) during the performance of his role is not privileged information and a trustee appointed to a company because it collapsed can demand to receive all such legal advice (either from the director himself or directly from the company’s legal advisors). Directors will not be able to claim attorney-client privilege, nor potential violation of privacy, as a result of disclosure of their WhatsApp correspondence with the company’s legal advisors. The trustee, for his part, can make evidentiary use of this material and substantiate claims the directors failed to fulfill their obligations to the company and possibly also claims pertaining to the directors’ obligations to minimize the company’s exposure to an event of insolvency.

In light of the Supreme Court’s ruling, directors looking to receive legal advice within the framework of their roles (even for independent committees formed by the company), mainly in relation to matters pertaining to the company’s solvency or insolvency, should be meticulous about clearly separating (down to the level of document titles) advice given to them personally about their personal obligations to the company or to creditors, from the routine advice given to the board of directors or to any of its committees. Directors must also keep in mind that WhatsApp correspondence will not be deemed private correspondence within this context.

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The insolvency team at Barnea Jaffa Lande is at your service if you have any questions about this update or about any other issues.

Adv. Idan Miller heads the insolvency practice at Barnea Jaffa Lande.

Adv. Liron Dahan is an associate in the firm’s Litigation Department.