Blog: Care home fees avoidance - the limits of legal privilege?

In these financially challenging times the issue of how one funds nursing home care becomes ever more pressing for those in need of care as well as local authorities who have to consider whether a recipient of care has disposed of assets - often the residence of the recipient - in such a way as to avoid the local authority looking to those assets to fund any care package, writes Scott Blair .

One area which to date has not been explored in this context in Scotland is the extent to which a local authority could seek to recover any file held by any solicitor instructed to provide advice to the care recipient.

The point to bear in mind is that transfer into any form of settlement, including a discretionary trust, is potentially vulnerable to the local authority’s enforcement powers, including use of bankruptcy remedies. The existence of the settlement and the issue of intention behind the reason for the transfer of the property are crucial. If it is seen as a deliberate deprivation the transfer will fail to achieve its objective. A potentially powerful weapon in the armoury of the local authority solicitor is the possibility of the recovery of the file of the solicitor related to any transfer. This may reveal the true nature of dominant purpose of the gift or other transaction at undervalue. The solicitor who dealt with the transfer will know the true purpose if they gave advice before it was made.

Ordinarily, such files would be covered by legal professional privilege but there are some indications in the case law that the file may be recoverable if there is prima facie proof of fraud see for example Barclays Bank Plc v Eustice 4 All ER 511. If the court considers, always balancing the need for clients to speak frankly to their legal advisers (which could include bona fide inquiry and advice about the possible implications of a transfer and possible scope for local authority challenge, even if not done with avoidance in mind), it could come to the view that the purpose of the transaction may have been to avoid means testing, the court could order disclosure of the solicitors file to ascertain whether this really was the case.

More recently in the specific context of care home fees recovery of the file was ordered in Brent LBC v Kane EWHC 4564 (Ch); B.P.I.R. 576. There a Temporary High Court Judge held that it was appropriate to order the disclosure of legal advice given in connection with various transactions alleged to have been made at an undervalue, even though such advice would ordinarily have attracted legal professional privilege, because the evidence supported a prima facie case that the transactions had been carried out for iniquitous purposes. For further discussion of the case see for example Co. L.J. 2015, 60(Mar/Apr), 5 ; Eld. L.J. 2015, 5(2), 190-196 and P.C.A. 2015, 20(4), 20-21.

In terms of the factual background, there the applicant local authority applied for an order requiring the second and third respondents (K) to disclose documents relating to transactions it alleged had been made at an undervalue. There the first respondent (D), who was K’s late father, had owned a property jointly with his wife (M). At the date of her death, sums were owed to the local authority in respect of residential care. The local authority also provided residential care to D from 2007 until his death in 2013, but since 2009 had received no payment for that care. In 2007, D had granted K enduring powers of attorney. Thereafter, K effected a transfer of 25 per cent of D’s property to each of them. K also purported to grant two mortgages over the property. The property was later sold. The local authority brought proceedings against D’s estate and K, alleging that the transfer of 50 per cent of the property to K, the purported grant of the mortgages to K, and the sale of the property, were all transactions carried out for the purpose of avoiding payment for the residential care provided to D. Pursuant to the iniquity principle, the local authority sought the disclosure of all information and/or documents which D and K had a right to inspect, including legal advice, which was held by K’s solicitors or any other person who had assisted K, and which pertained to or was material to (i) the drawing and execution of the powers of attorney granted to K; (ii) the administration of M’s estate; (iii) the purported mortgages granted to K; (iv) the transfer of the property to K; (v) the sale of the property.

K argued that there should be no disclosure as the documents sought were clearly privileged and the rule relating to privilege covering legal advice was absolute. They submitted that the Barclays Bank plc case which had discussed the principle of iniquity, was not good law, and that even if it was good law, there was no prima facie evidence that the transactions had been entered into for iniquitous purposes.

The judge held that it was clear that there were exceptions to the general rule that communications between a solicitor and client attracted legal professional privilege. The iniquity principle was a well-recognised exception.

The evidence demonstrated that there was a prima facie case that there had been transactions at undervalue which were designed to prejudice the local authority’s interests and put assets beyond its reach. Of note, all of the transactions had been made at a time when D lacked capacity to make decisions for himself, namely after the powers of attorney were granted.

They had also been made at a time when K knew that it was likely that D might need to go into residential care, and in circumstances in which they were aware, from the fact that M had also been in residential care, that the amount that D would be charged for such care would depend on his financial situation. Further, M’s will had been dealt with in an extraordinary way, bypassing the probate process, the payment of debts, and the requirements of Revenue and Customs.

There was also no evidence of K making large loans to D, as they alleged, or of any agreement that any such loans would be secured against the property. No explanation for the purported mortgages had been advanced. In those circumstances, the evidence supported a prima facie case of sharp practice or something underhand, making it appropriate to order disclosure of the relevant documents.

Of course from what is noted there are a range of considerations which assisted recovery. There was on the face of it no good explanation for some of the transactions. As noted simply raising the possibility of future local authority action is not in itself evidence of an improper motivation at a time when it is not foreseeable that care might be needed. File notes reflecting advice given may in fact assist in that regard. If one could show in fact that acts had been taken under or in terms of any disposal and which was real in effect, that could assist in resisting recovery. Likewise where as a whole matters, appear regular (as opposed to here where there were, for example, issues over dealings with HMRC), that could assist.

Of clear importance here was that the transactions had arisen when (i) it was likely that residential care might be needed and (ii) the donor lacked capacity when the disposal under the powers of attorney were made. Again all of this suggests that the earlier the disposal is done and when the donor clearly has capacity, that may well be capable of assisting in resisting an application for recovery by raising the inference that any disposal was not done for avoidance purposes.

There is no recent Scottish authority on this issue but what authority there is, is from the Court of Session and I would suggest that a similar outcome might obtain in a Scottish care fees case.

In Micosta S.A. v Shetland Islands Council 1983 SLT 483 at 485, the First Division noted that on a review of authority, legal professional privilege might be lost where fraud or some other illegal act was alleged against a party and his solicitor has been directly concerned in the carrying out of the very transaction which is the subject matter of the inquiry. Of note, the solicitor need not be personally implicated in the fraud or illegality. The wrong need not be criminal-see McCowan v Wright (1852) 15D. 229.

It is also the case that there needs to be direct involvement of the solicitor in the carrying out of the act. The provision of just advice is not enough to justify recovery. However a solicitor will provide both advice and related conveyancing that is perhaps an unlikely scenario.

It should be borne in mind that recovery of a file could be sought pre-litigation by way of an application to the Sheriff or Court of Session under s. 1 of the Administration of Justice (Scotland) Act 1972. To date, I am unaware of such a step having been taken. However it is perhaps only a matter of time before hard-pressed local authorities consider this route.