Court of Session allows proof against Levy & Mcrae and Burness Paull
LLP in Heather Capital case as liquidators attempt to recover cash from
collapsed £280m hedge fund
Proof allowed in Heather Capital case. A RULING
in the latest hearing of the Heather Capital case by three judges at
the Court of Session has granted proof hearings against law firms
Levy & Mcrae and
Burness Paul LLP.
Heather Capital, run by Glasgow -born financier Greg King, raised £280million from investors but the fund collapsed in 2010.
Current and ex Levy & McRae partners including
suspended sheriff Peter Watson now face a claim of up to £28million from
Heather’s liquidator Paul Duffy.
Lord Doherty earlier ruled evidence should be heard
to decide the case but Levy & Mcrae launched an appeal, which has
now failed.
Watson was listed in court papers as the “eighth defender”.
In his ruling on July 22, Lord Doherty stated the
allegations related to claims of “links between the eighth defender and
companies controlled by Mr King”.
It said the allegations were “that in December 2008
an unexplained payment of £200,000 was made to the eighth defender from
the same client account into which £9.412million had been paid by” the
Levy & McRae partners.
Greg King, 48, is one of four men charged by police after the demise of Heather Capital’s lending arm Mathon Finance.
It’s alleged £90million was stolen when Heather went bust.
King, Andrew Sobolewski, 57, of Bridge of Weir,
Renfrewshire, Andrew Millar, 63, of Cambuslang, near Glasgow, and Scott
Carmichael, 44, of Thorntonhall, near Glasgow, were named in the
report on Mathon sent to the Crown Office.
The Crown Office said the report is still “under
consideration” nearly four years on from when Police Scotland first
referring the case to the Lord Advocate.
JUDGE, SUSPENDED:
Sheriff Peter Watson was suspended from
the office of part-time sheriff on 16 February 2015, in terms of section
34 of the Judiciary and Courts (Scotland) Act 2008.
“On Friday 13 February the Judicial
Office was made aware of the existence of a summons containing certain
allegations against a number of individuals including part-time sheriff
Peter Watson.
The Lord President’s Private Office
immediately contacted Mr Watson and he offered not to sit as a part-time
sheriff on a voluntary basis, pending the outcome of those proceedings.
Mr Watson e-mailed a copy of the summons to the Lord President’s Private Office on Saturday 14 February.
On Monday 16 February the Lord President considered the matter.
Having been shown the summons, the Lord
President concluded that in the circumstances a voluntary de-rostering
was not appropriate and that suspension was necessary in order to
maintain public confidence in the judiciary.
Mr Watson was therefore duly suspended from office on Monday 16 February 2015.”
EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
[2017] CSIH 19
CA207/14 and CA208/14
Lady Paton Lady Clark of Calton Lord Glennie
OPINION OF LADY PATON
in the cause
HEATHER CAPITAL LIMITED (in liquidation) and PAUL DUFFY (as liquidator)
Pursuer and Reclaimer
against
LEVY & McRAE and others
Defenders and Respondents
and
HEATHER CAPITAL LIMITED (in liquidation) and PAUL DUFFY (as liquidator)
Pursuer and Reclaimer
against
BURNESS PAULL LLP
Defender and respondent
Pursuer and reclaimer: Lord Davidson of Glen Clova QC, Tariq;
Shepherd & Wedderburn LLP
Defenders and respondents (Levy & McRae): Duncan QC, Brown;
Clyde & Co (Scotland) LLP
Defender and respondent (Burness Paull LLP): Dunlop QC, C Paterson;
Messrs CMS Cameron McKenna LLP
28 February 2017
Prescription and the extinction of obligations [1]
In these two actions raised in 2014, the liquidator of Heather Capital
Limited (HC) sues two firms of solicitors, Levy & McRae (LM) and
Burness Paull (BP). The grounds of action include implement of trust
obligations, and damages for alleged breach of contract, negligence,
breach of fiduciary duty and dishonest assistance.
[2]
The solicitors contend that, on a proper construction of the
liquidator’s own pleadings and without the need for evidence, it can be
seen that certain obligations have been extinguished by the passage of
time in terms of the Prescription and Limitation (Scotland) Act 1973.
Those submissions were successful in the BP action (a debate before Lord
Tyre), and partially successful in the LM action (a debate before Lord
Doherty).
[3] The liquidator reclaimed. LM and BP
cross‑appealed. The cases came before the Inner House on 15 and 16
November 2016.
[4] This opinion focuses upon obligations which are
subject to the 5‑year prescriptive period and the effect on the running
of that period of sections 11(3) and 6(4) of the 1973 Act. In a
separate opinion (with which I agree) Lady Clark rejects an argument
that there are insufficient relevant averments of any loss suffered by
the pursuer (HC).
Summary of conclusions reached
5‑year prescription: awareness of loss, sections 11(3) and 6(4)
[5] While it is possible that losses which were easily
identifiable by HC may have occurred in 2007, leading to the triggering
of the 5‑year prescription in 2007 (i.e. more than five years before the
actions were raised in 2014: see paragraphs [58] to [61] below), this
is a matter of dispute which cannot be resolved on the pleadings alone.
In any event, HC’s averments of reasonable diligence (ie section 11(3)
of the 1973 Act) and of error induced by the solicitors (ie section
6(4), with the proviso of “reasonable diligence”) are, in my opinion,
sufficient to entitle HC to a proof before answer in each case, all
pleas standing: see paragraph [62]
et seq below.
20‑year long negative prescription: section 7 [6]
As I have reached the view in each case that there should be a proof
before answer at large, all pleas standing, I consider it unnecessary
and premature for this court to give an opinion relating to the 20‑year
prescription: see paragraph [80] below.
Ultimate decision[7] As set out in the final
paragraphs of this opinion, I propose that the court should recall the
interlocutor of Lord Tyre dated 6 November 2015 and the interlocutor of
Lord Doherty dated 31 August 2016; in each case allow a proof before
answer at large, all pleas standing; remit to the Outer House to
proceed as accords; and continue meantime the question of the expenses
of the reclaiming motions.
Background: investment company affected by fraud
[8]
HC is an investment company incorporated in the Isle of Man in 2005.
On 7 July 2010, as a result of difficult economic conditions and cash
flow problems, a liquidator was appointed. In February 2011, the
liquidator received electronic documentation, and began a detailed
review of the company’s affairs. At a later stage, he was assisted by
staff from the Fraud Investigations and Dispute Service in Ernst &
Young LLP. In 2012, the liquidator and his team were able to confirm
that millions of HC’s funds were missing in circumstances suggestive of a
deliberate fraud perpetrated by HC’s two executive directors, Mr King
and Mr Volpe. Details of the mechanism of the alleged fraud can be
found in the Opinions of Lord Tyre, [2015] CSOH 150, and Lord Doherty,
[2016] CSOH 107. As summarised in an Isle of Man judgment, the scheme
resembled a “Ponzi” scheme in that apparent repayments to HC were in
fact funded in a circular way by HC itself: see paragraph 30 of the
judgment of His Honour Deemster Corlett,
Heather Capital Limited v
KPMG Audit LLC, 17 November 2015.
[9] A third party, Nicholas Levene, was a participant in
the scheme. He is currently serving a 13‑year sentence for fraud, false
accounting, and obtaining money by deception. To date, no proceedings
have been taken against Mr King or Mr Volpe. Both actions are at the
stage of debate. No evidence has been led. Accordingly allegations
against particular individuals (for example, Mr King and Mr Volpe) have
not been established.
The court actions[10] The
liquidator seeks to recover and ingather funds. He has raised various
court actions. The present actions in the Court of Session were raised
on 23 October 2014 (with amendments to the instance in March/April
2015).
[11] The action against BP (“the BP case”) contains the following conclusions, read short:
- Count and reckoning of BP’s intromissions from 1 March 2006 to 31
July 2006 with HC’s funds received into its client account, and payment
of any balance due.
- Failing count and reckoning, for payment of £7.3 million.
- Alternatively for payment of £7.3 million.
- Alternatively for declarator that BP, through Mr Scott Wilson
(then a partner), dishonestly assisted Mr King in committing breach of
his fiduciary duties owed to HC and in diverting from HC £7.3 million.
[12] The action against LM (“the LM case”) contains the following conclusions, read short:
- Count and reckoning of LM’s intromissions from 1 January 2007 to 30
June 2007 with HC’s funds received into their client account, and
payment of any balance due.
- Failing count and reckoning, for payment of £28.412 million.
- Alternatively for payment by way of recompense of £28.412 million.
- Alternatively for payment by way of reparation of £28.412 million.
- Alternatively for declarator that LM dishonestly assisted Mr
King in committing breach of his fiduciary duties owed to HC and in
diverting from HC £28.412 million.
[13] The summons in each case was served on the defenders on 23
October 2014. Each summons was subsequently amended (in LM’s action on
27 March 2015, in BP’s action on 28 April 2015) such that the instance
reads “HC and Paul Duffy” (rather than “Paul Duffy as liquidator of
HC”).
[14] The averments in Condescendence 5 in each action refer to the date of “actual knowledge of loss” as follows:
- The BP case:17 April 2012, when the true destination of funds was
confirmed by an e-mail from Scott Wilson, then a partner of BP.
- The LM case: 31 August 2012, when the true destination of funds
was confirmed by the production of the client ledger under an order in
terms of section 236 of the Insolvency Act 1986 (although senior counsel
for HC also accepted that the earliest possible starting point for the
five-year prescription was arguably February 2011, when the liquidator
received the electronic documentation:see too Condescendence 39; and
(paragraph [19] of Lord Doherty’s Opinion).
[15] Each summons was met with
inter alia a plea of prescription.
[16] In the BP case, the defender’s third plea is as follows:
“3. Any obligation incumbent upon the defender to make payment
having prescribed in terms of section 6 of the Prescription and
Limitation (Scotland) Act 1973, the defender should be assoilzied from
the second to fourth conclusions of the summons.”
HC’s response is a plea as follows:
“3. The pursuer’s claim not having prescribed, decree should be granted as concluded for.”
[17] In the LM case, the defenders’ sixth plea is as follows:
“6. Any obligation on the part of the defenders to make
reparation to the pursuer for breach of contract, fault or negligence or
assistance or fraud having been extinguished by the short negative
prescription, the defenders should be assoilzied.”
HC’s response is a plea as follows:
“3. The defenders’ averments being unfounded in fact, or
alternatively sections 6(4), 7 or 11(3) of the Prescription and
Limitation (Scotland) Act 1973 being engaged, their plea of prescription
should be repelled.”
[18] Debates took place: first, a debate before Lord Tyre in
the BP case; and secondly, a debate before Lord Doherty in the LM
case. By interlocutor dated 6 November 2015, Lord Tyre sustained BP’s
third plea and assoilzied BP from the second to fourth conclusions of
the summons (leaving the first and fifth conclusions extant, with no
further orders to date). In the LM case, Lord Doherty pronounced an
interlocutor dated 31 August 2016 in the following terms:
“ … sustains the defenders 1
st plea in law to
relevancy to the extent of refusing to admit to probation the pursuer’s
averment in article 39 of condescendence ‘Reference is made to section
11(3) of the Prescription and Limitation (Scotland) Act 1973’ together
with the corresponding words and figures ‘or 11(3)’ in the pursuer’s 3
rd plea-in-law;
quoad ultra leaves all pleas standing and allows to parties a preliminary proof before answer on prescription…”
Lord Doherty granted leave to reclaim.
Timeline[19] The following abbreviated timeline
is taken from HC’s averments, productions, and some undisputed parts of
the Opinions of the Lords Ordinary. There were no joint minutes
agreeing productions: counsel referred to and relied upon some
productions without objection, and the court was invited to do
likewise. Counsel chose to present the LM case before the BP case.
However as the events concerning LM occurred after the events concerning
BP, that chronological order is reflected in the timeline below.
[20] In the BP case:
- On 21 April 2006, HC transferred funds to its client account with
BP.Loans to four first level SPVs, namely Bayhill, Brookhill, Hampsey
and Bellwood, were anticipated and were recorded in HC’s books (Lord
Tyre paragraphs [3], [4] and [7];Condescendence 5).
- On 24 April 2006, after an email bearing to be from Mr King but
forwarded to Mr Scott Wilson of BP by John Caulfield, Mr Wilson
transferred £3.3 million from the client account directly into Mr
Levene’s personal account, not to any first level SPV (Condescendence
16-17; Lord Tyre paragraph [6]).In the email chain, Mr Levene indicated
that he would use the funds for “our IPOs”.
- On 3 May 2006, Mr Wilson sent documentation for Bayhill,
Brookhill and Hampsey to Mr Ashworth, managing director of Abacus (HC’s
management and administrative services).Mr Wilson did not mention
payment of the funds into Mr Levene’s personal bank account.Abacus
recorded the loans in HC’s books of account as having been made to
Bayhill, Brookhill, and Hampsey (Lord Tyre paragraph [7] and [17]).
- On 12 July 2006, Mr Wilson of BP transferred £4 million from
the client account to a company Mathon plc.The Bellwood documentation
was sent to Abacus.Mr Wilson did not mention payment of the funds into
Mathon’s account.Abacus recorded the loan in HC’s books of account as
made to Bellwood (Lord Tyre paragraphs [8], [9] and [17];Condescendence
24 et seq).
- In early 2007, HC’s auditors KPMG raised questions about what
appeared in HC’s books of account as loans to first level SPVs (Bayhill,
Brookhill, Hampsey, and Bellwood).KPMG identified concerns including
(i) inability to reconcile second level SPVs’ heritable securities with
the Land Registry;(ii) missing documentation;and (iii) concerns about
the enforceability of securities given by second level SPVs (Lord Tyre,
paragraph [10]).
- By a memorandum dated 17 March 2007, KPMG recorded these
concerns and indicated that further work and information was required
(Condescendence 5, page 8 of BP reclaiming print).
- In May and June 2007, amounts equivalent to loans thought to
have been made to the four SPVs were apparently “repaid” to HC via
Cannons, solicitors, Glasgow (Lord Tyre paragraph [10] et seq;Condescendence 27A and 27B).
- KPMG carried out additional work, including a “full scope audit
to 30 September 2007 to gain greater assurance over receipt of monies
in relation to the SPV loans and their subsequent reinvestment” and “an
audit of the nine month figures to 30 September 2007” (Lord Tyre
paragraph [14]).
- By letter dated 26 November 2007, Mr King advised the board of
HC that “some sort of fraud had been deliberately introduced with
invalid land registry details on a number of the loans”.He stated that
he had applied pressure to Mr Volpe and Mr Cannon, whereupon there had
been “full repayment of the loans with relevant interest” which meant
that “investors were secure” (Lord Tyre paragraph [12]).
- On 4 December 2007, HC obtained legal advice from Bird Semple
regarding the apparent repayment of the SPV loans (Condescendence 5,
page 9 of BP reclaiming print).
- By email dated 12 December 2007, Mr King supplied apparently
fabricated correspondence supporting his account of the repayment of the
first level SPV loans to HC (Condescendence 5, page 9 of BP reclaiming
print).
- In December 2007, having examined HC’s books, the auditors KPMG
expressed concerns, using language such as “the risk of fraud increased
to high”, “some form of fraud appeared to have been attempted”,
“increase[ed] audit procedures” and a statement that “We have been
unable to verify where funds advanced to the SPVs were invested.In
addition, we were supplied with false documentation in relation to the
SPVs, which appears to have been a deliberate attempt to mislead us”
(Condescendence 5, pages 9-11 of BP reclaiming print;Lord Tyre paragraph
[13]).
- On 6 June 2008, KPMG signed their audit report with
qualifications concerning the SPV loans (Condescendence 5, page 12 of BP
reclaiming print).
- On 5 September 2008 and 12 May 2009, KPMG signed the accounts
reports without audit qualifications (Condescendence 5, page 12 of BP
reclaiming print).
- On 7 July 2010, the liquidator was appointed to HC (Condescendence 1).
[21] In the LM case:
- On 4 January 2007, HC transferred £19 million to its client account with LM (Lord Doherty paragraph [5]).
- On 24 January 2007, HC transferred £9.412 million to its client account with LM (Lord Doherty paragraph [5]).
- The money was intended to be loaned to a first level SPV
Westernbrook Properties Ltd (WBP) for onward lending to second level
SPVs (Lord Doherty paragraph [5]).
- On 9 January 2007, LM transferred £19 million to a Panamanian
company (Niblick) owned and controlled by Mr Levene:the money was not
therefore transferred to WBP.The transfer was undocumented and without
security (Lord Doherty paragraph [5], and Condescendence 6 and 17, pages
20 and 44 of LM reclaiming print).
- By a memorandum dated 17 March 2007, HC’s auditors KPMG
“identified a number of concerns relating to the documentation provided
in respect of these loans”.Further work and information was required
(Condescendence 5, page 13 of LM reclaiming print).
- On 29 March 2007, LM transferred £9.142 million to Hassans,
solicitors, Gibraltar, under the reference “Rosecliff Limited” (a
company controlled by Mr King):the money was not therefore transferred
to WBP.The transfer was undocumented and without security (Lord Doherty
paragraph [5], and Condescendence 6 and 17, pages 20 and 44 of LM
reclaiming print).
- In April to June 2007, amounts equivalent to the loans thought
to have been made to WBP (including accrued interest) were “repaid” to
HC via Cannons, solicitors, Glasgow.The directors were unable to
ascertain the source of these repayments (Lord Doherty paragraph [7]).
- Approaches made by HC to Mr Volpe and Triay & Triay, a firm
of solicitors in Gibraltar, were met with a total lack of co-operation
(Lord Doherty paragraph [8]).
- At a board meeting on 6 September 2007, “KPMG could not approve
HC’s accounts … Santo Volpe had executed certain loans to SPV companies
where non‑standard procedures had been followed which meant that
inadequate security had been given for some loans … Gregory King stated
that the loans to the SPVs had been repaid in full in May 2007”
(Condescendence 5, page 13 of LM reclaiming print).
- By email to a non‑executive director of HC (Mr Bourbon) dated 7
September 2007, Mr McGarry of KPMG referred to the previous day’s board
meeting, and expressed concerns about the situation.He asked for
further information, namely “all possible evidence regarding the
movement of monies out of Heather Capital into these SPVs and onwards to
whatever purpose the funds were applied – ie, sight of bank statements,
payment/remittance instructions, certified extracts from solicitors
clients’ money accounts etc”.(It should be noted that, contrary to HC’s
averment in Condescendence 5 at page 13C‑D of LM reclaiming print, the
email did not restrict the inquiries requested to “explaining what
information was required from Santo Volpe”:the request was much broader.)
- In October 2007 the non‑executive directors of HC met with the
Isle of Man Financial Services Commission (FSC) to discuss “the issues”
(Lord Doherty paragraph [8]).A director also disclosed the suspicious
activity and Mr Volpe’s obstruction to the Isle of Man Financial Crime
Unit (FCU), who said they would investigate (Condescendence 5 page 14 of
LM reclaiming print).The auditors KPMG carried out an additional full
scope audit.
- By letter dated 18 October 2007, FSC wrote to the directors of HC setting out further information which they required.
- By letter dated 26 November 2007 Mr King advised the HC board that
“some sort of fraud had been deliberately introduced with invalid land
registry details on a number of the loans”.He stated that he had applied
pressure to Mr Volpe and Mr Cannon, whereupon there had been “full
repayment of the loans with relevant interest” which meant that
“investors were secure”.
- On 17 December 2007, KPMG signed the accounts and added a
completion note using language such as “The risk of fraud increased to
high as a result of the documentation issues surrounding the SPVs, where
some form of fraud appeared to have been attempted”.In their audit
report opinion, they stated “We have been unable to verify where funds
advanced to the SPVs were invested.In addition, we were supplied with
false documentation in relation to the SPVs which appears to have been a
deliberate attempt to mislead us.Given these loans were repaid in the
period, we consider that the effect of this is not so material and
pervasive that we are unable to form an opinion on the financial
statements [opting instead for express qualifications that loan and
security documentation could not be validated] … There is uncertainty as
to where the monies lent to the [SPVs] were then subsequently invested …
Investigations continue to determine what party (or parties) were
involved in and were accountable for these events, and whether any
action should be taken against them …” (Lord Doherty paragraph [9]).
- By letter to HC dated 4 January 2008, KPMG gave serious
warnings about their inability to validate loan and security
documentation, and lack of evidence as to the purpose for which the
money advanced to SPVs was applied.In their words:
“ … Our report is designed to … avoid weaknesses that
could lead to material loss or misstatement. However,
it is your obligation to take the actions needed to remedy those
weaknesses and should you fail to do so we shall not be held responsible
if loss or misstatement occurs as a result … [Having explained
the disappearance of the funds and the apparent repayments, on which
legal advice had been received, KPMG warned] … these matters are
extremely serious … an attempted fraud appears to have been perpetrated …
We would recommend that the Board continue their investigation into
this matter and formally document their decision as to whether or not to
inform the criminal justice authorities …”
- By email dated 28 March 2008 Mr Bourbon, a non‑executive director,
weighed up the pros and cons of proceeding with further investigations
as follows:
“In my opinion there would be a significant cost racked up by David
McGarry (sorry David McG please do not take this the wrong way) in
reopening certain files and every likelihood that given the nature of
their own risk committee that even more detailed work would follow which
would ultimately present the same dead end that both David McGarry and
the non executive directors have already discovered. David was the one
who personally visited Glasgow and interviewed Frank Cannon for I
believe 90 minutes …
More importantly I think that neither the Board nor the
Administrator would be able to find a good justification for incurring
further costs when we already know that KPMG have accepted the situation
and are continuing to act as auditor, you have a copy of the Bird
Semple opinion, that the FSC’s in both IOM [Isle of Man] and Gibraltar
are satisfied with the position, that as all loan notes were fully
redeemed with interest no other Proper Authority has any appetite to
conduct an investigation and finally every investor has received a full
explanation and set of accounts and thus had the opportunity to vote
with their feet! In actual fact we have if anything a waiting list of
potential investors who wish to join …”
- On 6 June 2008, KPMG signed their audit report with qualifications concerning the SPV loans (Lord Doherty paragraph [9]).
- On 5 September 2008 and 12 May 2009, KPMG signed the accounts
reports without audit qualifications (Lord Doherty paragraph [9]).
- In 2009, the Serious Fraud Office in England and Wales opened
an inquiry into Mr Levene’s business affairs.He was subsequently charged
with fraud and pled guilty (Condescendence 4).
- On 7 July 2010, the liquidator was appointed to HC (Condescendence 1).
- On 5 November 2012, Mr Levene was sentenced to 13 years imprisonment (Condescendence 4).
Relevant legislation[22] The Prescription and Limitation (Scotland) Act 1973 provides
inter alia:
“
6 Extinction of obligations by prescriptive periods of five years
- If, after the appropriate date, an obligation to which this section
applies has subsisted for a continuous period of five years –
- without any relevant claim having been made in relation to the obligation, and
- without the subsistence of the obligation having been relevantly acknowledged,
then as from the expiration of that period the obligation shall be extinguished …
- Schedule 1 to this Act shall have effect for defining the obligations to which this section applies …
(4) In the computation of a prescriptive period in relation to any obligation for the purposes of this section –
- any period during which by reason of –
- fraud on the part of the debtor or any person acting on his behalf, or
- error induced by words or conduct of the debtor or any person acting on his behalf,
the creditor was induced to refrain from making a relevant claim in relation to the obligation …
shall not be reckoned as, or as part of, the prescriptive period:
Provided that any period such as is mentioned in paragraph (a) of
this subsection shall not include any time occurring after the creditor
could with reasonable diligence have discovered the fraud or error, as
the case may be, referred to in that paragraph …
11 Obligations to make reparation
- Subject to subsections (2) and (3) below, any obligation (whether
arising from any enactment, or from any rule of law or from, or by
reason of any breach of a contract or promise) to make reparation for
loss, injury or damage caused by an act, neglect or default shall be
regarded for the purposes of section 6 of this Act as having become
enforceable on the date when the loss injury or damage occurred …
(3) In relation to a case where on the date referred to in
subsection (1) above … the creditor was not aware, and could not with
reasonable diligence have been aware, that loss, injury or damage caused
as aforesaid had occurred, the said subsection (1) shall have effect as
if for the reference therein to that date there were substituted a
reference to the date when the creditor first became, or could with
reasonable diligence have become, so aware …
Schedule 1
Obligations affected by prescriptive periods of five years under section 6
1 Subject to paragraph 2 below, section 6 of this Act applies – …
- to any obligation based on redress of unjustified enrichment,
including without prejudice to that generality any obligation of
restitution, repetition or recompense …
(d) to any obligation arising from liability (whether arising from any enactment or from any rule of law) to make reparation …
(g) to any obligation arising from, or by reason of any breach
of, a contract or promise, not being an obligation falling within any
other provision of this paragraph.”
Submissions[23] Senior counsel’s submissions
relating to the 5‑year prescription and sections 11(3) and 6(4) are
noted below, in an abbreviated and paraphrased form.
Submissions for the liquidator (in both BP and LM cases) [24]
Lord Davidson QC submitted that HC’s averments were sufficient to
engage section 11(3); Lord Doherty’s approach to section 6(4) should be
preferred to Lord Tyre’s; BP and LM erred in their cross‑appeals in
contending that HC’s averments disclosed (i) actual knowledge on the
part of HC; and (ii) in the BP case, imputed knowledge on the part of
HC
via one of its directors (Volpe). They also erred in their
assertion that, on HC’s averments, there had been no conduct on the part
of BP and LM qualifying within section 6(4). In the result, each
action should go to a proof before answer, all pleas standing (
Jamieson v
Jamieson 1952 SC (HL) 44).
[25] It was neither necessary nor appropriate to plead evidence (
John Doyle Construction Ltd v
Laing Management (Scotland) Ltd 2004 SC 713 at pages 722‑723; Court of Session Practice Note No 6 of 2004 (Commercial Actions) paragraph 3(1);
Watson v
Greater Glasgow Health Board [2016] CSOH 93 at paragraphs 22‑23).
Section 11(3) and reasonable diligence [26] HC
averred sufficient reasonable diligence, including examining all
avenues; involving accountants; complaining to criminal authorities
and regulators; and investigations by non‑executive directors.
Evidence likely to be led was set out in an appendix to HC’s Note of
Argument. Mr King had concealed the true fraudulent scheme by his
diversionary “cover story” involving Mr Volpe and possible fraud at the
second level SPVs. But the level of reasonable diligence required was
no higher because HC had been warned of an element of fraud.
[27] The liquidator was appointed in 2010. He received the
documents electronically in February 2011, and began to examine them. It
took expert accountants and regulatory authorities such as the FCU
considerable time to work out what had happened. Standing the
complexity of matters, the difficulties being experienced by accountants
and regulators, and the fictional fraud actively propagated by Mr King,
it could not be suggested that the non‑executive directors of HC should
have uncovered matters more promptly. The auditors’ letter of 4
January 2008 had been taken out of context and given too much weight.
[28] Both Lords Ordinary had gone too far too fast. The BP
pleadings had been amended following upon the debate before Lord Tyre,
in particular enhancing the averments relating to reasonable diligence,
which were now in effect common to both actions. Both BP and LM were
entitled to proof, standing authorities such as
Peco Arts Inc v
Hazlitt Gallery [1983] 1 WLR 1315 at page 1323, and
Glasper v
Rodger 1996
SLT 44 at page 48. Nothing in HC’s pleadings or the productions
demonstrated that HC was aware that it had suffered loss. Senior
counsel referred
inter alia to the auditors’ qualifications and
caveats in HC’s accounts; Mr Bourbon’s email of 28 March 2008; Mr
McGarry of KPMG’s interview with the FSA; and KPMG’s sign‑off letter
dated 28 May 2008. The averments relating to awareness and reasonable
diligence were sufficient for a proof before answer.
Section 6(4) and error induced [29] Lord
Doherty’s reasoning was to be preferred. “Conduct” included an omission
or silence. In addition, in the BP case, Mr Wilson of BP had sent
Abacus (HC’s administrator) the formal documentation relating to
Bayhill, Brookhill, Hampsey and Bellwood, as if the transactions had
been successfully completed. That was a positive action, in addition to
silence.
[30] As for
onus, once HC established error induced, the onus shifted to the defender to prove the proviso in section 6(4): paragraph [10] of
Graham v
E A Bell & Co (Lord Hardie, unreported, 24 March 2000). The averments relating to section 6(4) were sufficient for a proof before answer.
Awareness of loss [31] Awareness of Mr King’s
cover story did not amount to awareness of the real loss. Neither the
letter of 4 January 2008, nor the settlement of the liquidator’s action
against the non-executive directors, demonstrated an awareness of loss.
[32] HC’s response to any argument based on
Gordon’s Trs v
Campbell Riddell Breeze Paterson LLP 2016
SLT 580 was as follows: (i) HC had not paid for the auditors’
additional investigative work (a feeder company, Sargon, paid); (ii) no
causal link between the defenders’ conduct and the alleged losses
existed: HC had not sued the defenders in respect of any investigative
expenditure, and that expenditure was unconnected to any breaches of
duty on the part of the defenders: it was part of Mr King’s cover
story.
[33] In the result, HC had been unaware of any loss until after the appointment of the liquidator.
Imputed knowledge [34] BP had knowledge of the
Bayhill, Brookhill, Hampsey and Bellwood transactions, but not of the
WBP transaction. BP’s knowledge was therefore irrelevant in the LM
case. In any event, BP’s knowledge should not be imputed to HC (Lord
Hoffmann at pages 703e to 704a of
El Ajou v
Dollar Land Holdings plc [1994] 2 All ER 685).
[35] Mr Volpe was a co‑conspirator (Condescendence 5). The
knowledge of a criminal director should not be imputed to the company (
Bilta (UK) Ltd v
Nazir (No 2) [2016] AC 1, Lord Neuberger paragraph [7]).
Result [36] In conclusion, senior counsel
submitted that both actions should be sent to a proof before answer, all
pleas standing.
Submissions for LM [37] Mr Duncan QC for LM
submitted that the liquidator’s reclaiming motion should be refused, and
LM’s cross‑appeal allowed. Lord Doherty’s interlocutor of 31 August
2016 should be recalled, LM’s pleas‑in‑law 1, 2 and 6 sustained, and
absolvitor granted (or alternatively if the “no loss” submission succeeded, dismissal).
Awareness of loss: section 11(3) [38] The 5‑year period began to run when HC was aware that it had suffered a loss (
Morrison & Co Ltd v
ICL Plastics Ltd 2014
SC (UKSC) 222). A loss was suffered when a loan was made and
inadequate (or no) security was given in return. It was irrelevant
whether or not the loss might subsequently be reversed (
Jackson v
Clydesdale Bank plc 2003 SLT 273 paragraphs [23] to [24];
Heather Capital Limited v
Burness Paull LLP [2015] CSOH 15 paragraph [26]).
Actual knowledge [39] When Mr King referred to
“some sort of fraud” on 26 November 2007, HC was inevitably aware that
it had suffered a loss in that it had advanced funds to an unknown
and/or unsuitable borrower in circumstances suggestive of fraud, for an
unknown purpose, without adequate security, and with an unverifiable
destination for the funds (cf the earlier email dated 7 September 2007
from Mr McGarry of KPMG). Further, the auditors’ letter dated 4 January
2008 unequivocally advised HC that it had suffered a loss. The extent
of the non-executive directors’ knowledge by that time was as detailed
in the defence to the liquidator’s Isle of Man action against them.
Lord Doherty erred in accepting that there was a distinction between
fraud at first level SPVs and fraud at second level SPVs, as the first
level SPVs were shell companies with no assets, and security for the
loans came from the heritable securities granted by the second level
SPVs.
[40] In any event, HC had been obliged to incur additional
cost and expense as a result of learning about the disappearance of the
funds. HC had to instruct its auditors to do extra work; pay for a
non‑executive director’s trip to Gibraltar to try to obtain information
from Triay & Triay; instruct a legal opinion from Bird Semple,
solicitors, about the apparent repayments. Those additional costs or
liabilities were clearly known to HC, and they triggered the 5‑year
prescription even if they might not have appeared to be a loss at the
time (
Gordon’s Trs v
Campbell Riddell Breeze Paterson LLP 2016 SLT 580).
Reasonable diligence: section 11(3) [41]
Lord Doherty was correct to exclude any reference to section 11(3).
The auditors had urged HC to make investigations (for example, Mr
McGarry’s email of 7 September 2007). The FSC had given similar advice
(FSC’s letter dated 18 October 2007). The non-executive directors were
told to find out “where the money went when it left HC”. In those
circumstances, clear and specific averments of steps taken by HC were
required before section 11(3) could be invoked (
Beveridge & Kellas WS v
Abercromby 1997 SC 88;
Heather Capital Limited v
Burness Paull LLP [2015]
CSOH 150, paragraph [30]). The lack of averment as to why inquiries
had been made of Triay & Triay, solicitors, and Cannons, solicitors,
but not of Burness Paull, solicitors (who acted in 4 out of the 12
transactions) whose partner Mr Scott Wilson would readily have disclosed
the necessary information – in particular the destination of the funds –
was fatal to HC’s case. BP was not questioned until 2012. HC’s
averments in Condescendence 39 disclosed that £28.412 million had been
“paid out to third parties, about whom no, or no proper, enquiries had
been made, undocumented, and without security”. Why had HC not asked LM
and BP where the money had gone? Bank records would have disclosed
this. The auditors told the non‑executive directors that they must find
out where the money went. But the solicitors were not asked. HC had
been put on major alert (Answer 39), and yet had not made basic
inquiries.
Imputed knowledge [42] LM did not rely on Mr
Volpe’s knowledge, but on BP’s (as HC’s agents). That knowledge was to
be imputed to HC, regardless of whether or not BP in fact communicated
it (
Chapelcroft Limited v
Invergordon Egg Producers Limited 1973 SLT (Notes) 37;
Adams v
Thorntons WS (No 3) 2005 1 SC 30;
Blackburn Low & Co v
Vigors (1887) 12 App Cas 531;
Muir’s Exrs v
Craig’s Trs 1913 SC 349;
Johnston, Prescription and Limitation (2
nd
ed) at paragraph 6.89). On HC’s own averments in the action against
BP, that knowledge would have led to their detecting and preventing the
alleged fraud months before LM were instructed.
Conclusion: In conclusion, Lord Doherty had been right to conclude that section 11(3) of the 1970 Act could not assist HC.
Error induced: section 6(4) [43] Mr Duncan QC
submitted that the onus of establishing reasonable diligence in terms of
the proviso to section 6(4) lay on HC: cf Lord Penrose in paragraph 36
of
Adams v
Thorntons WS 2005 1 SC 30; Lord Hope in
BP Exploration Operating Co Ltd v
Chevron Transport (Scotland) 2002 SC (HL) 19. Lord Doherty’s contrary opinion (that the onus lay on LM) placed too much weight on an
obiter observation of Lord Millett in the
BP Exploration case (an observation not taken up by either Lord Hope or Lord Clyde) and relied on too narrow a reading of the
dicta of Lord Penrose in
Adams v
Thorntons WS 2005 1 SC 30. The onus lay squarely on HC.
[44]
In their pleadings, HC focused on two alleged errors induced, namely
(i) error as to the destination of the funds and (ii) error in being
kept in ignorance of a possible claim against LM. However in relation
to (i) while HC might have been under the erroneous misapprehension that
the funds in question were destined for a particular first level SPV
Westernbrook Properties Ltd (WBP) (Lord Doherty’s Opinion paragraph
[5]), HC was disabused of that misapprehension by the letter of 4
January 2008 from its auditors KPMG, giving clear written advice to the
effect that nothing could be verified about where the funds had gone;
the source of the purported repayments was unknown; and further
investigations were required. (ii) As for the second alleged error,
that presupposed the existence of a duty to confess or a duty to tell on
the part of LM: but there was no authority for such an alleged duty (
Maharaj v
Johnson [2015] PNLR 27;
Bell v
Peter Browne & Co [1990]
2 QB 495). If such a duty existed, the underlying cause of action
would never prescribe. In any event, the directors had the necessary
knowledge by January 2008.
[45] Thus the attempt to invoke section 6(4) failed. Also
the attempt to invoke the proviso to section 6(4) failed as HC could not
demonstrate reasonable diligence (cf paragraph [41] above).
Conclusion [46] Lord Doherty was correct to
exclude the averments relating to section 11(3), but had otherwise erred
in the context of the short negative prescription. The interlocutor of
31 August 2016 should be recalled; LM’s sixth plea‑in‑law should be
sustained to the effect that the defenders should be assoilzied from any
claim for breach of contract, fault or negligence or assistance or
fraud.
Submissions for BP [47] Mr Dunlop QC for BP adopted Mr Duncan’s submissions. Further, he submitted that there was a concurrence of
injuria and
damnum in 2006, as the payments were made in 2006 (
Dunlop v
McGowans 1980
SC(HL)73). Yet the action against BP was not raised until October 2014
(with an amendment to the instance in the spring of 2015). Thus HC’s
claims so far as directed to breach of contract, reparation, negligence,
and dishonest assistance were extinguished by prescription in terms of
section 6 and Schedule 1 of the 1973 Act, unless sections 11(3) and 6(4)
applied.
Imputed knowledge [48] Mr Volpe was aware of
everything. As the averments concerning his complicity were inadequate,
HC could not rely upon the
dicta of Lord Neuberger in
Bilta (UK) Ltd v
Nazir (No 2) 2016 AC 1. HC was accordingly fixed with the relevant knowledge
via Mr Volpe (Condescendence 5 at page 8B of BP reclaiming print; Condescendence 16 at page 26; Condescendence 20 at page 29).
[49]
Esto the court took a different view, Mr Dunlop
submitted that everyone at HC knew that BP had actioned the payments.
It would have been an easy matter to ask BP where the money had gone.
In early December 2007 the auditors told HC that there was a problem.
It was irrelevant that repayments were apparently made in May‑June 2007,
or that Mr King told the board a cover story in November 2007.
Injuria met
damnum in 2006, and the 5‑year period began to run.
Reasonable diligence: section 11(3) [50] For
section 11(3) to assist HC, HC had to demonstrate an excusable state of
ignorance in 2009‑2010: but they could not do so. HC knew that BP had
actioned the payments. When Scott Wilson, the banking partner of BP,
was eventually asked in 2012 “to whom did you send the money”, he
immediately and truthfully advised that he had sent the money to the
destination he was told to send it, and gave full information. Had the
question been asked earlier, the information would have been
forthcoming. Against that background HC had not averred sufficient
reason for the application of section 11(3).
Section 6(4) and error induced [51] Mr Dunlop submitted that it was for HC to establish an error
induced by BP. HC
could not rely upon Mr King’s cover-up. On the averments, HC were
advised by KPMG in 2007 that there was a problem. It was irrelevant
that documentation had been sent to Abacus in 2006; or that in May‑June
2007 apparent repayments had been made; or that in November 2007 Mr
King told HC’s board a misleading cover story. HC could not claim that
any error on their part had been induced by BP: to do so would require a
principle in law that the 5‑year prescription would not start to run
until the solicitor
ex proprio motu volunteered information about
where the money had been sent. But there was no authority for such a
proposition. Lord Doherty was correct in his statement of the law in
Trustees of Rex Proctor & Partners Retirement Benefits Scheme [2015] CSOH 83 at paragraph [207] and Lord Tyre was correct to agree with him on that matter; see too
Maharaj v
Johnson [2015] PNLR 27.
[52] As for the proviso to section 6(4), i.e. demonstrating
reasonable diligence in discovering where the money went, HC could not
satisfy that test for the same reasons as those relating to section
11(3).
[53] On the averments, therefore, HC was unable to pray in aid section 6(4).
Conclusion [54] Lord Tyre had not erred. The court should adhere to his interlocutor of 6 November 2015.
Reply for the liquidator[55]
Inter alia, senior
counsel pointed out that HC had not averred that it had suffered loss
by incurring extra investigative costs as a result of any breach of duty
on the part of the defenders (contrast with the circumstances in
Gordon’s Trs v
Campbell Riddell Breeze Paterson LLP 2016 SLT 580). The
ratio in
Gordon’s Trs could not therefore assist the defenders.
DiscussionAwareness of loss and section 11(3) [56]
The actions were raised in 2014. As noted in paragraph [14] above, HC
avers that the date of “actual knowledge of loss” was 17 April 2012 (in
the BP case) and 31 August 2012 (in the LM case). Nevertheless, it is
not disputed that, as a matter of law,
damnum met
injuria when
large amounts of HC’s investment funds were diverted away from their
proper destinations into unknown hands for unknown purposes for a period
of time. As senior counsel for LM submitted, in the context of a claim
by a lender, loss is suffered when the lender advances funds and
receives in exchange a bundle of rights less valuable than that which
was anticipated, typically by reason of a defective or inadequate
security. The prospect that the borrower might nevertheless repay
notwithstanding the lack of security does not prevent the loss being
suffered. Thus, on a proper application of the 5‑year prescription to
the undisputed facts, and subject to section 11(3), the
terminus a quo
was agreed by counsel to be 2006 in the BP case (Lord Tyre, paragraph
21) and 2007 in the LM case (Lord Doherty, paragraphs 14 and 32).
[57]
In those circumstances, senior counsel for HC accepted that the burden
lay upon HC to aver, and in due course establish, that HC had brought
itself within the terms of section 11(3). LM and BP contended that HC
was given “unequivocal advice that it had suffered loss” more than 5
years before the raising of the actions. HC in its pleadings denies
having been given such advice. Even if we take into account the terms
of the email of 7 September 2007 and/or the letter of 4 January 2008,
and indeed any other production to which we were referred (as distinct
from the averments or any documents agreed by parties), whether
individually or taken together, we are not persuaded that we can be
satisfied that HC was unequivocally advised more than five years before
raising the actions that it had suffered loss. We accept that HC’s
averments are to the effect that HC was given repeated warnings that a
very serious situation had arisen; that there had been questionable
activities and unknown uses of the company’s investment funds during a
period when the monies could not be traced, which “could lead to
material loss”; and that further investigation by the company should be
carried out. But it could equally be argued that HC was not in fact,
and could not with reasonable diligence have been, aware of any loss to
the company until the liquidator and his team managed to disentangle
matters and to identify a loss of millions of pounds that HC had indeed
suffered. Much may depend upon the evidence adduced in relation to
these matters.
[58] However even if HC can establish that it was not aware,
and could not with reasonable diligence have been aware, of any loss
represented by the diversion of the company’s funds, such an argument
might be fatally undermined by HC’s averments appearing to acknowledge
that, in 2006 and 2007, HC incurred liability for costs which would not
otherwise have been incurred but for the questionable events of those
years. In particular, on HC’s averments as they stand, it can be seen
that HC appears to have incurred liability for (i) fees charged by the
auditors KPMG in respect of additional work (including, for example, a
special full scope audit; a special nine month audit; and Mr McGarry
of KPMG conducting a long interview with the solicitor Mr Cannon); (ii)
the costs of a non‑executive director’s (Mr Bourbon’s) investigative
trip to Gibraltar to interview Triay & Triay about the suspicious
events; and (iii) the liability incurred in respect of the legal
opinion obtained from Bird Semple on the question whether the apparent
“repayments” could be treated as such, without the risk of being claimed
by a third party on the basis of a constructive trust. Applying the
recent guidance given by the Supreme Court in
Morrison & Co Ltd v
ICL Plastics Ltd 2014 SC (UKSC) 222 (as was done in
Gordon’s Trs v
Campbell Riddell Breeze Paterson LLP 2016
SLT 580), it is the defenders’ contention that HC’s pleadings in both
the LM case and the BP case disclose HC’s awareness in 2007 of those
costs (or one or other of them). The defenders submit that, as the law
currently stands, it is irrelevant that such expenditure might not have
been seen by HC’s non‑executive directors as a “loss” at the time. It
is also irrelevant that HC has not claimed damages for such losses in
the present actions: the averments relating to these apparent
additional costs are on record, and in the context of prescription, they
prima facie disclose liability for those losses being incurred by HC.
[59]
Nevertheless senior counsel for HC disputed the correctness of such an
approach: see paragraphs [32] and [33] above. It was said that another
party had paid the cost of additional investigative audit work. It was
contended that the costs were not being sued for, and were not
considered to be costs or expenses arising from any breach of duty on
the part of the current defenders. Thus it was submitted that HC had
not suffered any such loss in 2007.
[60] In my opinion, this disputed issue calls for a proof
before answer on the question of any loss suffered by HC as a result of
any additional costs and outlays incurred in 2007. If, after evidence
and submissions, it is established that HC did indeed incur costs or
outlays in 2007 which would qualify as “loss” caused by any breach on
the part of the defenders, and if it is established that HC was aware of
those costs, the averments in Condescendence 5 to the effect that HC
“could not with reasonable diligence have been aware that loss … had
occurred” would appear to be of little assistance to HC. An element of
HC’s loss would be the otherwise unnecessary expenditure referred to
above, of which HC was presumably fully aware in 2007. Applying
Morrison and
Gordon’s Trs, it
would arguably be irrelevant that the main bulk of HC’s loss was only
discovered some years later (in 2012, or at the earliest, February
2011).
[61] The fairness or unfairness of such an approach might be a matter for debate (cf
dicta of Lord Malcolm in
Gordon’s Trs, paragraphs
[21] to [24]; Scottish Law Commission Discussion Paper on Prescription
No 160, February 2016, Chapters 3 to 5, and in particular paragraphs
3.17 and 4.21;
Johnston, Prescription and Limitation (2
nd
ed) paragraph 6.94, final paragraph). But it is a matter requiring
exploration of both facts and law before any final view can be formed.
Error induced and section 6(4) [62] On the basis
of HC’s pleadings, properly construed, HC’s error was a compound one,
including in my opinion the following components:
- An erroneous assumption that solicitors would act in accordance with
their normal professional standards and practices, and would not, for
example, send a client’s funds to a third party who was not the intended
recipient in the transaction, about whom little was known, without any
clearcommercial rationale, without adequate documentation and security,
and without intimating to the client that the funds had in fact been
paid to someone other than the expected recipient (with whom all the
formal documentation and security had been completed).
- An erroneous assumption that the relevant funds had indeed been
paid to the appropriate first level SPVs (an assumption not necessarily
contradicted by the auditors’ reports of problems in 2007, as the
auditors were focusing upon the discrepancies and lack of documentation
at the second level SPVs).
- An erroneous conclusion that HC appeared to have suffered no
significant loss as a result of the funds being untraceable for a
period, followed by the apparent repayment of the funds or their
equivalent, with interest.
- HC’s conclusion (based to some extent upon the errors outlined
above) that all relevant avenues of investigation appropriate to an
investment company such as HC had been pursued, and that it was neither
necessary nor profitable for HC to investigate further, or to try to
ascertain exactly what had happened.
- HC’s lack of awareness that it might have a claim against its own solicitors BP and LM (cf Johnston, Prescription and Limitation (2nd ed) paragraph 6.108, second paragraph).
[63] “Conduct” is not defined in the 1973 Act. The approach to
section 6(4) adopted by the courts suggests that the word should not be
construed in a narrow or restrictive way: see for example Lord Hope
(paragraphs [29] to [33]), Lord Clyde (paragraphs [66] to [67]), and
Lord Millett (paragraph [100]) in
BP Exploration Operating Co Ltd v
Chevron Transport (Scotland) 2002 SC (HL) 19; Lord Drummond Young at paragraph [20] of
Dryburgh v
Scotts Media Tax Ltd 2014 SC 651; Lord Penrose at paragraph [68]
seriatim in
Adams v
Thorntons WS 2005 SC 30; Lord Emslie at paragraphs [75] to [78] of
ANM Group Ltd v
Gilcomston North Ltd 2008 SLT 835; Lord Doherty at paragraphs [44] to [46] of
Heather Capital Limited v
Levy & McRae [2016] CSOH 107; and
Johnston, Prescription and Limitation (2
nd
ed) paragraph 6.108. Adopting that approach, it is my opinion that
relevant conduct in the context of prescription may be active or
passive. It may involve positive action, but equally, in certain
circumstances, it may involve a silence or a lack of action. The
conduct need not be deliberate, or blameworthy, or careless, or be
carried out with any particular motive such as deception or
concealment: Lord Emslie in
ANM Group Ltd cit sup, paragraph [75];
Johnston,
paragraph 6.124. The conduct does not have to constitute a crime or a
breach of duty (whether contractual or delictual or fiduciary):
Johnston, paragraph 6.108, fourth paragraph. The conduct does not require to be the sole cause of the error: Lord Emslie in
ANM Group Ltd, paragraph [75];
Johnston, paragraph 6.107, second bullet point.
[64]
It follows from the above that the relevant question, in my opinion, is
simply whether any conduct on the part of the solicitors concerned,
viewed objectively, induced or contributed to inducing some or all of
the error as defined above, with the result that HC refrained (in the
broad sense explained in
BP Exploration) from making any claim against the solicitors.
[65] On a proper construction of HC’s pleadings, and for the
reasons set out in paragraphs [66] to [69] below, I consider that there
are sufficient relevant averments of error induced by the conduct of
BP, entitling HC to a proof before answer on the question of the
suspension of the 5‑year period
in terms of section 6(4). I also
consider that there are sufficient relevant averments of error induced
by the conduct of LM, entitling HC to a proof before answer on the
question of the suspension of the 5‑year period
in terms of section 6(4).
[66] In the BP case, the averments are to the effect that HC
erroneously assumed that the funds had been properly and regularly
transferred to the intended recipients namely Bayhill, Brookhill,
Hampsey and Bellwood, with all the necessary formal documentation such
as debentures duly completed and delivered. HC’s position is that BP’s
conduct contributed to that erroneous assumption, as on the averments BP
gave HC no indication that the funds had, unexpectedly, been
transferred to other destinations, unaccompanied by the necessary
documentation or security. Even if BP themselves were tricked or misled
into such actions by Mr King or Mr Volpe or anyone on their behalf, and
even if BP thought that they were properly carrying out clear
instructions from an appropriate source, it is in my opinion arguable,
depending on what facts are proved, that BP’s own conduct induced, or
contributed to inducing, the error on the part of HC.
[67] It will be seen that it is my opinion that silence on
the part of BP, or their lack of intimation to or communication with HC
(ie not telling HC that the funds had in fact been transferred to
destinations other than the intended recipients) could qualify as
“conduct” inducing error on the part of HC, as defined in paragraph [62]
above.
[68] Furthermore in the BP case, there was an additional
factor: it is averred that Mr Wilson of BP sent the completed formal
documentation relating to Bayhill, Brookhill, Hampsey and Bellwood to
Abacus, HC’s administrator, as if all had gone well and the transactions
with the four first level SPVs (Bayhill, Brookhill, Hampsey and
Bellwood), had been successfully and properly carried out, leaving HC in
possession of appropriate documentation and security. If established
as a fact, that would amount to a positive act, and if that act
contributed to HC’s error, it would be a relevant factor in terms of
section 6(4).
[69] In the LM case, the observations and conclusions in paragraphs [66] to [67] above apply,
mutatis mutandis, but
without the additional positive act of sending the completed formal
documentation to Abacus. I also agree with and adopt the reasoning of
Lord Doherty in paragraphs [42]
et seq of
Heather Capital Limited v
Levy & McRae [2016] CSOH 107.
[70] In the result, it is my opinion that it cannot be said
in either case, on the basis of HC’s averments, that HC is bound to fail
when seeking to rely upon section 6(4) (the test set out in
Jamieson v
Jamieson 1952 SC (HL) 44).
Reasonable diligence [71] The question of
reasonable diligence on the part of HC remains a live issue, certainly
in the context of the proviso to section 6(4), but possibly also in the
context of section 11(3), depending upon the answer to the question
whether HC suffered any loss as a result of additional costs and outlays
incurred in 2007 (see paragraph [60] above).
[72] I consider that HC’s averments are sufficient to
entitle it to a proof before answer on the question of reasonable
diligence. Bearing in mind the guidance given by Webster J in
Peco Arts Inc v
Hazlitt Gallery Ltd [1983] 1 WLR 1315 at page 1323, and applying that guidance
mutatis mutandis to
the present case, the issue becomes whether HC did what “an ordinary
prudent [company and its directors] would do having regard to all the
circumstances”. Although the word used in section 6(4) is “could”, it
is qualified by the phrase “with reasonable diligence”. Thus, as was
pointed out in
Peco Arts Inc:
“ …reasonable diligence means not the doing of everything
possible, not necessarily the using of any means at the plaintiff’s
disposal, not even necessarily the doing of anything at all, but it
means the doing of that which an ordinary prudent [company and its
directors] would do having regard to all the circumstances …”
That approach was adopted by Lord President Hope in
Glasper v
Rodger 1996 SLT 44 at page 48; see too
Johnston, Prescription and Limitation (2
nd ed) paragraph 6.100
et seq.
[73] Accordingly the relevant question is: what was
reasonable for HC and its directors in the particular circumstances of
the case?
[74] The averments in the BP case (Condescendence 48 and 5
as amended, and thus containing averments which were not before Lord Tyre) are as follows:
“48 … neither the board of directors of HC nor the liquidator
upon his appointment were aware, nor could they with reasonable
diligence have been aware or discovered, at any point prior to the
liquidator’s appointment, that HC suffered loss, injury or damage as
condescended on above …
5 … all avenues of enquiry were considered to have been pursued
by HC’s board of directors. These avenues included (i) John Bourbon
meeting with KPMG to discuss how the matter could be investigated
further in or around September 2007; (ii) John Bourbon attempting to
arrange various meetings with Santo Volpe to discuss the SPV loans and
obtain the information required by KPMG in or around September 2007.
Santo Volpe declined to meet with John Bourbon; (iii) John Bourbon
meeting Joseph ‘Melo’ Triay of Triay & Triay in Gibraltar to obtain
further information about the loans in September 2007. Joseph ‘Melo’
Triay refused to provide access to the books or records of the first
level SPVs on the basis that HC did not own or control the first level
SPVs. He falsely stated that Santo Volpe was the beneficial owner of
the first level SPVs and had not authorised the disclosure of
documents. Gregory King e-mailed Santo Volpe on 27 September 2007
stating that Joseph ‘Melo’ Triay had ‘played a blinder for us’; (iv)
John Bourbon, Andrew Beeman and Andrew Ashworth attending a meeting with
the Isle of Man Financial Services Commission to discuss the matter in
or around October 2007; (v) seeking to obtain further information from
Gregory King and Andrew Millar about the SPV loans, and (vi) sending a
‘Disclosure’ of [suspicious] activity to the Isle of Man Financial Crime
Unit in respect of Mr Volpe in or around October 2007 … These enquiries
amounted to reasonable diligence in the circumstances of this case.
These enquiries did not disclose the existence of a loss …”
[75] The averments in the LM case (Condescendence 39 and 5) are as follows:
“39 … the auditors had informed the relevant board of directors
of HC that no loss had occurred and confirmed the position in subsequent
years.
5 … all avenues of enquiry were considered to have been pursued
by HC’s board of directors, including discussing matters with the FSC
and making disclosure to the FCU; meeting with KPMG to discuss how the
issue could be further investigated; obtaining legal advice; and
seeking to obtain further information from
inter alia Gregory
King, Santo Volpe and Triay & Triay. These enquiries amounted to
reasonable diligence in the circumstances of this case. HC’s board of
directors, Abacus and KPMG believed that whilst there had been
irregularities with the securities granted by the Second Level SPVs and
as explained in the letter from Gregory King to the board of directors
of HC dated 26 November 2007 that ‘some form of fraud had been
deliberately introduced with invalid land registry details’, the funds
advanced had been repaid in full, with interest, and HC had not suffered
a loss. HC’s board of directors’ understanding was supported by KPMG’s
investigations. KPMG verified HC’s accounts as reflecting a true and
fair view of HC’s financial conditions. This remained KPMG’s position
in subsequent reports. In those circumstances, the board of directors
of HC were not, and could not with reasonable diligence, have been aware
that HC had suffered a loss until after the appointment of the
Liquidator. The true destination of these funds was confirmed on 31
August 2012. From the date of his appointment the Liquidator (assisted
by staff from the Fraud Investigations and Dispute Service at Ernst
& Young LLP) sought to reconstruct HC’s affairs and so account for
the losses HC and its investors sustained. This process of identifying
the destination of the funds commenced in February 2011. This included a
detailed review of electronic documentation recovered from various
sources. In around June 2012, the Liquidator’s team identified
documents which indicated that the payments to WBP had not been on lent
to the Second Level SPVs but had instead been paid to Niblick [a
Panamanian company owned by Mr Levene] and Hassans [Gibraltar, under
reference “Rosecliff Limited”, a company owned by Mr King]. This was
only confirmed on 31 August 2012, when [LM] produced copies of its
client ledger to the Liquidator as part of a response to a request for
information made by the Liquidator under section 236 of the Insolvency
Act 1986. The ledger produced showed that the funds paid to the
defenders by HC had been paid to Niblick and to Hassans … ”
[76] In my opinion, the averments in each action (which seek
to record a complex factual situation) are, in the particular
circumstances of each case, sufficient for a proof before answer on the
question of reasonable diligence. The context is that of prudent
company directors whose primary purpose was to operate a profitable
commercial concern. It is at least arguable that their paramount goals
and duties in the circumstances were to ascertain whether the company
had suffered an actual identifiable loss; to attempt as best they could
(with the assistance of their auditors) to understand what had
happened, particularly with a view to preventing repetition; to
reorganise staff and procedures as necessary to avoid repetition; to
continue running the business of the company with a view to making
profits; and to report any questionable or apparently criminal or
fraudulent activities to the appropriate public authorities such as the
Isle of Man Financial Services Commission (FSC) and the Isle of Man
Financial Crime Unit (FCU). While some might adopt the position that
the directors could and should have followed the advice given in Mr
McGarry’s email of 7 September 2007 (thus devoting staff and resources
to obtaining “all possible evidence regarding the movement of monies out
of Heather Capital into these SPVs and onwards to whatever purpose the
funds were applied – ie sight of bank statements, payment/remittance
instructions, certified extracts from solicitors clients’ money accounts
etc”), it is at least arguable that in circumstances where no
significant loss to HC had apparently been identified, the advisability
of devoting significant company time and resources to the company’s own
investigations with a view to ascertaining with greater certainty what
had occurred had to be weighed against the company’s primary purpose,
namely the making of profits for its investors and shareholders. When
weighing up these matters, it must be remembered that HC and its
directors are averred to have been actively misled by their own
executive director Mr King, whom on the averments they had no reason to
distrust. Furthermore, as averred, the auditors’ focus was upon
problems at the second level SPVs, and not upon any apparent diversion
of funds at the first level SPVs. Against that background, HC had to
assess whether and to what extent the resources of a commercial
investment company should properly be devoted to what appeared to be an
open-ended investigation of some complexity. In this context, I
consider that it is instructive to note that the liquidator, assisted by
a team from the Fraud Investigations and Dispute Service in Ernst &
Young LLP, did not discover certain critical facts about what had
happened to HC’s funds until 2012.
[77] In the result, it is my opinion that sufficient has
been averred to entitle HC to a proof before answer on the question of
reasonable diligence. I therefore agree with the conclusion reached by
Lord Doherty. Questions of onus in respect of the proviso to section
6(4) are best addressed once evidence has been led (cf
Johnston, Prescription and Limitation (2
nd ed) paragraphs 6.109 to 6.110; Lord Hardie at paragraph [10] of
Graham v
Bell, 24 March 2000 (unreported), referring to a shifting onus, depending on the evidence).
Imputed knowledge [78] As a proof before answer
at large is required, any question of imputed knowledge would also, in
my opinion, be more appropriately addressed once evidence has been led.
Decision and further procedure A proof before answer (not a preliminary proof before answer)[79]
In the light of the possible significance of any additional costs and
expenses incurred by HC in 2007 (paragraphs [58] to [61] above), it
might be thought that a preliminary proof before answer on that issue
would be an expeditious way forward. However there remain live issues
in relation to section 6(4) and the question of reasonable diligence:
the wording of section 6(4) is such that it is unaffected by the
ratio in
Morrison & Co Ltd v
ICL Plastics Ltd 2014
SC (UKSC) 222, in that for the purposes of assessing error induced in
terms of that subsection it is relevant that the creditor has been left
“entirely unaware that he might have a claim [against a particular
person], and he had never so much as considered claiming” (cf
Thorn EMI Ltd v
Taylor Woodrow Industrial Estates Ltd, Lord Murray, 29 October 1982, unreported, approved in
BP Exploration, 2002 SC (HL) 19 at paragraph [32], and referred to in
Johnston, Prescription and Limitation (2
nd
ed) paragraph 6.108 second paragraph). Thus even if the defenders
succeed in relation to section 11(3), it seems to me that the issues
concerning section 6(4) and its proviso of reasonable diligence would
require to be explored: and those issues cover much of the material in
the case. Similarly it is my opinion that a proof on the issue of
prescription alone, possibly (depending on the initial outcome) followed
by a proof before answer on the merits, would result in an unwelcome
duplication of evidence and expense.
Trust issues and the 20‑year long negative prescription [80]
On the view which I have reached, I consider that it would be premature
and inappropriate to explore any trust issues at this stage, prior to a
proof before answer. If the 20‑year prescription applies to a trust
obligation, such a trust obligation has not yet been extinguished by
prescription. If any trust obligation is affected by the 5-year
prescription (a matter which may be in dispute), the conclusion reached
in the present opinion means that the extinction or otherwise of such an
obligation will form part of the proof before answer at large. It is
therefore unnecessary to consider trust matters at this stage.
Ultimate decision [81]
For the reasons given above, I propose that we allow the reclaiming
motions; refuse the cross‑appeals; recall the interlocutors of the
Lords Ordinary; in each case allow a proof before answer at large, all
pleas standing; remit the cases to the Outer House to proceed as
accords; and meantime continue any question of the expenses of the
reclaiming motions and cross-appeals.
EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
[2017] CSIH 19
CA207/14 and CA208/14
Lady Paton Lady Clark of Calton Lord Glennie
OPINION OF LADY CLARK OF CALTON
in the cause
HEATHER CAPITAL LIMITED (in liquidation) and PAUL DUFFY (as liquidator)
Pursuer and Reclaimer
against LEVY & McRAE and others
Defenders and Respondents
and
HEATHER CAPITAL LIMITED (in liquidation) and PAUL DUFFY (as liquidator)
Pursuer and Reclaimer
against
BURNESS PAULL LLP
Defender and respondent Pursuer and reclaimer: Lord Davidson of Glen Clova QC, Tariq;
Shepherd & Wedderburn LLP Defenders and respondents (Levy & McRae): Duncan QC, Brown;
Clyde & Co (Scotland) LLP Defender and respondent (Burness Paull LLP): Dunlop QC, C Paterson; Messrs CMS Cameron McKenna LLP
28 February 2017
Summary[82] In a separate Opinion, Lady Paton
sets out the context of the two actions in which the liquidator of HC
sues two firms of solicitors, LM and BP. Lady Paton considers in detail
whether issues relating to prescription focused in the pleadings can be
resolved without proof. I agree with her reasoning and decision which
she sets out in her opinion.
The relevancy of the averments of loss by HC[83] I
have chosen to consider in some detail a different but connected issue
which arises in the cross appeals on behalf of LM and BP as to whether
there are sufficient relevant averments of any loss suffered by HC to go
to proof.
[84] The factual averments in relation to loss made by HC in
the actions against LM and BP are different but neither counsel for LM
or BP submitted that any argument relied on by them depended on any
factual averments, specific to one case, to distinguish the position of
the respondents in relation to the averments of loss. In their
submissions to this court, the challenge to the averments of loss was
dealt with in oral submission only by counsel for BP
. These
submissions were also given prominence by counsel in the BP case when
presenting the case to Lord Tyre. Counsel for LM adopted the oral
submissions made by counsel for BP and the written submissions by
counsel for LM were consistent with that. I consider, therefore, that
this dispute can best be examined in the context of the submissions and
pleadings in the BP case.
Submissions by Counsel for BP
[85]
Counsel for BP directed attention to Articles 5, 27A and 27B of the
averments by HC. He submitted that there are express averments by HC
that the sums loaned to various companies namely Bayhill, Brookhill,
Hampsey and Bellwood were repaid by companies Mathon and Bathon during
April and June 2007. Said sums were treated as repayments of said loans
in HC’s financial statements. It is wrong to describe the repayments
as “purported” as set out in the pleadings by HC. What is averred is
not purported but actual payments. Relying on
National Commercial Bank v
Millars Trustee 1964 SLT (Notes) 57 and
Capital Homes Ltd v
Countrywide Surveyors Ltd
[2011] 3 EGLR 153, counsel submitted that properly interpreted what is
averred by HC is appropriation by HC and consequent extinction of the
debt, that is, monies advanced in respect of the Bayhill, Brookhill,
Hampsey and Bellwood transactions. Counsel also referred to
Heather Capital Limited (in liquidation) v
KPMG Audit LLC
(unreported). He submitted in that litigation against the auditors of
HC, there is an acceptance on behalf of HC that there was repayment.
[86] Counsel was critical of the reasoning of Lord Tyre in
his considerations of the criticisms of the relevancy of the pleadings
about loss. Lord Tyre stated in paragraph 20:
“I reject this contention. The authorities referred to are
clearly distinguishable because they are not concerned with fraudulent
conduct. According to the pursuer’s averments in the present case, the
loans to Mathon and Bathon were fictitious. Their effect was that money
went round in a circle and left the pursuer no better off than it had
been after the fund recorded as destined for Bayhill, Brookhill, Hampsey
and Bellwood had been paid out. The apparent ‘repayment’ was
accordingly nothing of the sort. It was no more than an attempt to
conceal the frauds alleged by the pursuer to have occurred when
instructions were issued and accepted by the defenders to make payment
to persons other than Bayhill and the others. The defenders are not
being sued for repayment but for damages for loss caused by the
facilitation of fraud, and are not therefore, in my view entitled to be
treated in the same way as one of the SPVs would have been, if sued
after receipt of the funds from Cannons. The pursuer’s case, which I
regard as relevantly made, is that the loss sustained when the funds
were originally diverted was not recovered by the subsequent attempt at
concealment.”
[87] Counsel submitted that Lord Tyre erred in distinguishing the authorities of
National Commercial Bank of Scotland and
Capital Home Ltd
on the basis that they were not concerned with fraudulent conduct.
There are no averments by HC in relation to Mathon or Bathon’s
involvement in any fraud. On the averments, any loss is the loss of
Mathon or Bathon, not HC. Actual money in excess of 7 million was
actually paid by Mathon and Bathon to HC and this equated to the sum
released by BP from the client account. There are no averments that HC
required to repay Mathon and Bathon and indeed any such requirement to
repay would have prescribed. Counsel further submitted that the Lord
Ordinary erred in drawing support for his conclusion from the fact that
BP is being sued for damages and not repayment as this overlooks a major
part of the case advanced by HC which is based on breach of trust for
which HC are seeking repayment.
Submissions by Counsel for LM[88] The written submissions by counsel for LM pray in aid
National Commercial Bank of Scotland Ltd and
Capital Home Loans Ltd
in support of the contention that the averments made are predicated
upon a false proposition that HC never received any repayment of the
sums it advanced to the company Westernbrook. It is averred that
Cannons, solicitors on behalf of Westernbrook, repaid the sums in full
and this was recorded in the books of HC. It is averred that HC
delivered an executed discharge and the directors of HC took legal
advice as to the entitlement to treat the funds received in that
manner. Cannons received the money from a company Bathon. On the
averments of HC, any loss suffered is a loss to Bathon as it was Bathon
who made repayment on behalf of the company Westernbrook. It is further
submitted that if the loss averred is a loss attributable to HC, it
arises from the decision by HC to lend to Bathon which is not the basis
of the action pursued against LM.
Submissions by Counsel for HC[89] Counsel for HC
did
not attempt in oral or written submissions to focus the issues in
dispute about loss by reference to any detailed analysis of the
pleadings. In relation to the criticisms about the averments of loss by
HC in both cases, he submitted that Lord Tyre gave a correct and sound
analysis at paragraph 20 of his opinion. He founded upon that. Lord
Tyre correctly concluded that the cases relied on by counsel for LM and
BP are distinguishable in that in both cases a complex fraud of a
similar nature is averred by HC. Counsel submitted that both Lord Tyre
and Lord Doherty were correct to reject the submissions that no loss had
been relevantly averred by HC.
Decision and reasons in relation to the relevancy of the pleadings about loss[90]
Counsel for BP invited the court to focus on Articles 5, 27A and 27B
but I consider that is too narrow a focus. The pleadings in said
Articles require to be seen in the context of the full case pled and
developed by HC in order to understand the nature of the fraud. It is
averred in Article 4 of condescendence that:
“During the period of its operation, HC and its investors were
defrauded by the diversion of invested funds exceeding £90 million,
under the guise of fictitious loans to various shelf companies
incorporated in Gibraltar. This sum includes the sum sued for in the
present action. The mechanism of the fraud was essentially the same in
each case,. A number of companies, owned and/or controlled by Gregory
King, were incorporated in Gibraltar. HC then entered into a number of
credit facility agreements with these companies (the ‘First Level
Special Purpose Vehicles’ (or the ‘First Level SPVs’)), each agreement
secured by a debenture. On the information available to it, HC recorded
these loans in its books of account as loans to the First Level SPVs in
question. In fact, the money was never paid to them. It was instead
paid out of the client accounts in which it had been deposited,
undocumented and without security, to third parties (typically on the
basis of instructions from persons with no authority to give them, for
example John Caulfield). In most cases, the third party recipient was a
man named Nicholas Levene or companies owned and controlled by him.
None of it was consistent with the strategy and principles set out in
the investment particulars. In 2009, the Serious Fraud Office opened an
inquiry into Mr Levene’s business affairs, as a result of which he was
charged with, and pleaded guilty to, fourteen counts of fraud, false
accounting and obtaining money by deception. On 5 November 2012, he was
sentenced to thirteen years’ imprisonment…”
Further specification of the allegations including alleged
wrongful acts and omissions by BP, are set out in Articles 5-31 of
condescendence. Article 5 sets out averments about loans, alleged to be
fictitious, to Bayhill, Brookhill, Hampsey and Bellwood and the steps
taken to create the false impression that the fictitious loans had been
repaid between April and June 2007 by these companies. In Articles 27A
and 27B there are specific averments about payments, using HC
funds transferred from HC to Mathon and Bathon, to make “repayments due” from Bayhill, Brookhill, Hampsey and Bellwood.
[91] In relation to the averments of loss, in summary HC offer to prove
inter alia;
that HC money was paid into their client account at BP; a false
impression was created that secured loans had been made to and repaid by
four companies namely Bayhill, Brookhill, Hampsey and Bellwood; no
money was paid out of the HC
client account by BP to these
companies; instead BP wrongfully paid in excess of £7 million without
any security to a third party, Mr Levene; there are no averments by HC
that any repayment was made by Mr Levene or on his behalf; there is a
general denial of the respondents’ averment in answer 5 that the monies
paid out by HC and forming the basis of the claim were in fact repaid to
HC.
[92] In support of his submission that the pleadings about loss were irrelevant, counsel relied mainly on
National Commercial Bank of Scotland and
Capital Home Loans Limited. I do not consider that these cases support the submission made. The pleadings in both actions raised by HC
are grounded in averments based on the relationship between HC and their solicitors, LM and BP
. I
am not persuaded that relationship equates to the relationship of
banker (lender) and customer (debtor) and the special rules which may
apply in such a relationship.
[93] In any event, even if the special rules do apply, it is
difficult to understand how the principles relating to appropriation of
debt payments in a creditor/debtor relationship have relevance to the
averments in this case. I note that according to the averments, the
creditor is HC and the debtor, who received the money, is Mr Levene;
the Bayhill, Brookhill, Hampsey and Bellwood companies owed no money to
HC as BP did not pay money to them but to Mr Levene; HC make no
averments that the debtor, Mr Levene, repaid any money to HC or that
anyone else repaid money on his behalf. I do not consider that the
averments to the effect that payments to HC were credited as repayments
by said companies to HC in the accounts of HC assist BP in their
submissions. The context of the case pled by HC
is to the effect
that HC offer to prove that the “repayment” was a fiction as no sums
had been paid to said companies Bayhill, Brookhill, Hampsey and
Bellwood; said companies were not liable for any repayment; HC were
unaware that further money borrowed from them by other companies (Mathon
and Bathon)had been used to pay sums to them purportedly on behalf of
secure debts owed to them by Bayhill, Brookhill, Hempsey and Bellwood.
Further I consider that in both actions, where complex averments are
made in the context of multiple transfers through different companies, I
am unable to conclude on the pleadings alone, without evidence, that
there is no loss. Whatever the basis of the claim made by HC
culminating in Article 47 of condescendence, I consider that HC has made
relevant averments of loss.
[94] In reaching that conclusion, I have taken into account the submission made about the case of
Heather Capital Limited (in liquidation) heard in the High Court of Justice of the Isle of Man. Counsel for BP
referred
to
the judgment of His Honour Deemster Corlett delivered 17 November 2015
and invited the court to consider the position adopted by HC in that
case. Paragraph 16 states:
“It is common ground that the making
of circular loans did not itself lead to any net loss for Heather
because it received back what it lent out. Any loss was therefore
avoided or Heather has to give credit for gains in the form of
recoveries of the repayments of the earlier loans which completely
offset its losses under the later circular loans. Accordingly, the
liquidator accepts that KPMG is entitled to credit in respect of the
repayments made…”
I do not consider that the apparent concession in that case is without qualification and an acceptance that HC
suffered
no loss at all. In any event, I consider that a decision requires to
be made on the basis of the pleadings by HC in the actions before this
court. If there is an inconsistency in the position of HC and the
liquidator, I consider that this is a matter to be explored in evidence
and cannot be resolved at this stage.
[95] In relation to the LM case, I note that the averments
relate to different facts and circumstances and involve different
companies and different personnel. I consider, however, that the same
structure of averments in the pleadings which I identify in paragraph
[91] is apparent. Counsel did not seek to persuade the court that there
were any averments in the LM
case which made any difference to
the submissions about the relevancy of the pleadings about loss compared
with the BP case. In the LM case, the main focus in the debate before
Lord Doherty related to issues about prescription. Counsel for LM dealt
very briefly with some additional issues relating to relevancy which
included a submission that the averments made by HC that it had
sustained a loss were irrelevant. Lord Doherty considered it possible
to deal briefly with these submissions and in paragraph 61 concluded:
“... I am not satisfied that if the pursuer proves its averments it will fail to prove that it has suffered a loss.”
[96] For the reasons given, therefore, I am of the opinion
that Lord Tyre in the BP case and Lord Doherty in the LM case were both
correct to conclude that HC had made relevant averments of loss and that
the cross appeals should be refused.
EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
[2017] CSIH 19
CA207/14 and CA208/14
Lady Paton
Lady Clark of Calton
Lord Glennie
OPINION OF LORD GLENNIE
in the cause
HEATHER CAPITAL LIMITED (in liquidation) and PAUL DUFFY (as liquidator)
Pursuer and Reclaimer
against
LEVY & McRAE and others
Defenders and Respondents
and HEATHER CAPITAL LIMITED (in liquidation) and PAUL DUFFY (as liquidator)
Pursuer and Reclaimer
against
BURNESS PAULL LLP
Defender and respondent
Pursuer and reclaimer: Lord Davidson of Glen Clova QC, Tariq;
Shepherd & Wedderburn LLP
Defenders and respondents (Levy & McRae): Duncan QC, Brown;
Clyde & Co (Scotland) LLP
Defender and respondent (Burness Paull LLP): Dunlop QC, C Paterson;
Messrs CMS Cameron McKenna LLP
28 February 2017
[97] I have had the advantage of reading in draft the
opinions to be given by Lady Paton and Lady Clark of Calton. I agree
with them and, for the reasons they give, I too would allow parties a
Proof Before Answer of all their averments on record preserving all
pleas.
[98] I would wish to add two comments of my own.
[99]
The main focus of the debate in each case was whether the pursuer, HC,
had made sufficient and relevant averments of “reasonable diligence” for
the purposes of section 11(3) and the proviso to section 6(4) of the
1973 Act. In both cases the Lord Ordinary held that HC had not said
enough and in sufficient detail to justify sending the matter to a Proof
Before Answer. The matter could be determined on the pleadings. Lady
Paton has explained why we take a different view. But I have a more
general concern about this approach.
[100] In his note of argument in the LM case, under reference to cases such as
John Doyle Construction Ltd v
Laing Management (Scotland) Ltd 2004 SC 713 at pages 722 - 723 and
Watson v
Greater Glasgow Health Board
[2016] CSOH 93 at paragraphs 22-23, Lord Davidson QC was at pains to
remind us that the purpose of pleading is to give fair notice of the
assertions of fact sought to be established in the evidence as well as
to identify the essential propositions of law on which a party founds.
Elaborate pleading is unnecessary in any action, not just in a
commercial action. The purpose of the pleadings is to give notice of
the essential elements of the case. The pleadings should set out the
bare bones of the case. They are not the place to set out in full the
evidence intended to be adduced. In the present cases that appears to
have been overlooked. To that extent I have some sympathy with Lord
Davidson’s submission. The Closed Record in the BP action, as it
appears in the Reclaiming Print, runs to some 59 pages, while that in
the LM action extends to 93 pages. This has happened, so it seems to
me, because in their pleadings parties have indulged in a process akin
to trial by pleading. The defenders have made averments of fact
intended to undermine the pursuer’s case on reasonable diligence; the
pursuer has responded by making further averments addressed to those
points; this in turn has caused the defenders to make further averments
or raise further questions; the pursuer has tried to answer by making
yet further averments; and this is constantly repeated until parties
are finally exhausted. The process resembles one of cross examination
and response, a process for which pleadings are quite unfitted. I do
not seek to apportion blame. In a case such as this, the temptation to
pile pressure on to the pursuer by pleading a wealth of detail is
difficult to resist; and a pursuer who does not respond in kind runs
the risk of being thought to have no answer to the points which have
been raised. Difficulty arises when the matter comes to debate on the
question of whether, for example, the pursuer has made sufficiently
relevant and specific averments that it “could not with reasonable
diligence have been aware” that loss had occurred (section 11(3)) and
that it could not “with reasonable diligence have discovered” the fraud
or error induced by the debtor which induced it to refrain from making a
relevant claim at an earlier stage (section 6(4), proviso). Points are
made in argument about the failure to take certain steps or to follow
up on the particular line of enquiry; and the Lord Ordinary is invited
to form a view that what was done was insufficient or that the reasons
given for not doing it are inadequate. Such an invitation should, in my
view, be resisted save in the most obvious case. The judgments which
the court is being asked to make are essentially value judgments,
assessments of the reasonableness or otherwise of a party’s conduct.
Such judgments should seldom if ever be made on the basis of the
pleadings without hearing evidence. It may seem obvious, on paper, that
something ought to have been done or that a line of enquiry ought to
have been pursued; but when evidence is led it might seem less obvious,
or there might be good reasons for not taking that course. It is not
the function of pleadings to set out every reason why each relevant
individual took or did not take any particular step. In many cases
issues of credibility and reliability might arise, the evidence may be
far more nuanced than it is possible to convey on paper, explanations
may be given more fully and persuasively than can come over in the
pleadings, and some of the criticisms may, in light of all the evidence,
be seen to be informed by hindsight. I should emphasise that I make
these observations without reference to any of the particular points
decided in the particular cases with which we are here concerned. But
it does seem to me that the cases with which we are concerned illustrate
the danger of the court being drawn into deciding cases on detailed
averments of fact when it would be more appropriate that all the
evidence be heard before any decision is made.
[101] The
other comment I would wish to make concerns the question of whether the
claims advanced in both actions on the basis of the existence of a trust
are subject to the 5‑year prescriptive period in section 6 of the 1973
Act or are subject to the 20-year long negative prescription in section
7. This matter was discussed by Lord Doherty in the LM action at
paragraphs [25]-[31]. He concluded that the obligation of a trustee to
produce trust accounts is an imprescriptible obligation; that the
liability to make payment of the sum found due in an accounting for
trust funds is subject only to the long negative prescription; and that
the obligation of a trustee to restore the value of trust property paid
away in breach of trust is also subject only to the long negative
prescription. The matter was not discussed by Lord Tyre in the BP case
for reasons which are slightly unclear – matters appear to have
proceeded in that debate on the basis that all obligations were subject
to the 5-year prescriptive period and that the only issues in that
respect concerned the pursuer’s case on sections 6(4) and 11(3) – but it
was not suggested before us that the point is not live in that action
too. Detailed submissions on the point were made by Mr Duncan QC on
behalf of LM and adopted by Mr Dunlop QC on behalf of BP. Lord Davidson
QC responded on behalf of HC. I, for one, was grateful for their
submissions. It emerged in the course of those submissions, as it had
to some extent at the debate in the LM case, that not only was there a
dispute as to the law to be applied in a case of accounting and/or
breach of trust but there was also a dispute as to whether the
circumstances of the present cases gave rise to a relationship of trust
at all or, alternatively, a trust of a kind intended to be excluded from
the 5-year short negative prescription. In light of this, it seems to
me that it would be desirable that all of the relevant facts be
determined before the issues are decided. For that reason, and for the
reasons given by Lady Paton in paragraph [80] of her opinion, I am
persuaded that it would be premature to attempt to decide these points
at this stage.
https://scottishlaw.blogspot.co.uk/2017/03/court-of-session-allows-proof-against.html
