[View without highlighting]
[Printable RTF version]
||Neutral Citation Number:  EWHC 2882 (Ch)
||Case No: 3878 and 3879 of 2011
IN THE HIGH COURT OF JUSTICE
||Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
B e f o r e :
MR JUSTICE BIRSS
|| IN THE MATTER OF ATRIUM TRAINING SERVICES LIMITED
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
AND IN THE MATTER OF KIMBERLY SCOTT SERVICES LIMITED
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
(1) ROBERT DEREK SMAILES
(2) STEPHEN BLANDFORD RYMAN
(as Joint Liquidators of ATRIUM TRAINING SERVICES LIMITED)
||(1) JOHN McNALLY
(2) GEORGE MACLEAN
(3) JOHN ALSTON DICK (in respect of 3878 of 2011 only)
||AND IN THE MATTER OF CONNOR WILLIAMS LIMITED
AND IN THE MATTER OF THE INSOLVENCY ACT 1986
||(1) ROBERT DEREK SMAILES
(2) STEPHEN BLANDFORD RYMAN
(As Joint Liquidators of CONNOR WILLIAMS LIMITED)
(3) CONNOR WILLIAMS LIMITED (in liquidation)
||(1) PAMELLA McNALLY
(2) VERONICA MACLEAN
(3) TARA BIRCH (NEE McNALLY)
(4) PAUL McNALLY
(5) DAVID MACLEAN
(6) CAROLINE MACLEAN
(7) TRACEY WILLIAMS
(8) JOHN ALSTON DICK
David Alexander QC and Stephen Robins (instructed by Mishcon de Reya) for Mr McNally and Mr MacLean
Simon Davenport QC and Daniel Lewis (instructed by Isadore Goldman) for the Liquidators
Lucy Frazer QC (instructed by Pinsent Masons) for the First to Sixth Respondents in the CWL action
Hearing dates: 17th, 18th September 2013
HTML VERSION OF JUDGMENT
Crown Copyright ©
Mr Justice Birss:
- Atrium Training Services Ltd was a nationwide recruitment business operating through a number of group companies in various locations throughout England, which sourced and provided "operatives" in a wide range of industry sectors including construction, health and teaching. At its peak it had a turnover of more than £120 million per year and placed about 5,000 operatives per week.
- In this action the liquidators of Atrium, Mr Smailes and Mr Ryman, contend that the respondents to the action, in particular Mr McNally a former director of Atrium and Mr MacLean, former company secretary, are liable for fraudulent trading contrary to s213 of the Insolvency Act 1986 and trading whilst insolvent contrary to s214 of the 1986 Act. There are other matters in issue but there is no need to set them out. A point at the heart of the dispute is the allegation that Atrium failed to pay about £45 Million in tax to HMRC between about 2003 and 2005. The liquidators contend that Mr McNally and Mr MacLean are liable and seek in excess of £50 million in damages. Mr McNally and Mr MacLean deny liability. Amongst other things they contend that there was no fraud and that any underpayment of tax was the responsibility of the group finance director, Mr English. There is also a closely related claim against the same respondents regarding a related company, Kimberly Scott Services Limited ("KSS"). The Atrium and KSS claims together can be referred to simply as the Atrium action. The liquidators bring a distinct action against shareholders of another company, Connor Williams Limited ("CWL"). The essential issue there is the allegation that Mr McNally and Mr MacLean transferred the business of KSS to CWL at an undervalue and wrongly paid dividends to the shareholders. The shareholders, Mr McNally and Mr MacLean all deny this allegation.
- The applications before me relate to disclosure. In the applications the liquidators are represented by Mr Simon Davenport QC leading Daniel Lewis instructed by Isadore Goldman. Mr McNally and Mr MacLean are represented by Mr David Alexander QC leading Mr Stephen Robins instructed by Mishcon de Reya. Six of the eight respondents to the CWL action are represented by Ms Lucy Frazer QC instructed by Pinsent Masons. In this judgment I will refer to the liquidators of Atrium, KSS and CWL as the liquidators. Recognising Mr MacLean was company secretary, I will refer to Mr McNally and Mr MacLean as the former directors. I will refer to Ms Frazer's clients as the family members since they are related to Mr McNally or Mr MacLean. No other parties are represented before me but the solicitors for the eighth respondent in the CWL action wrote to the court on 11 September 2013, indicating that they supported the application of the family members in the CWL action. However on the basis that any orders made also applied for the benefit of the eighth and seventh respondent (for whom Clifton Ingram act) they did not propose to attend the hearing in order to save costs and avoid duplication. This was a sensible course.
- The Atrium action began on 13th May 2011. In July 2011 Registrar Barber gave directions which included provision for statements of case, disclosure by 20th January 2012, witness statements and experts' reports and a trial not before 1st November 2012. The timetable slipped substantially and further orders for directions were made. On 18th April 2012 Registrar Barber gave fresh directions, with the former directors' defences to be served on 20th April 2012 (subject to an unless order), disclosure by all parties to take place on 8th June 2012 and a pre trial review in January 2013. The trial was then to take place in February 2013.
- The former directors served their defences in April and gave disclosure on 8th June 2012. Also on 8th June the liquidators' then solicitors Howes Percival served a disclosure list in their behalf. It quickly became clear that the liquidators' disclosure exercise had not been conducted correctly. What seems to have happened was that essentially every conceivable document from Atrium (or KSS) in the liquidators' possession had been listed, often by reference simply to boxes. The number of documents was vast. The former directors objected and applied for an unless order.
- The matter eventually came before Henderson J in November 2012. In the meantime and without telling Mishcon de Reya, Howes Percival had embarked on a massive fresh disclosure exercise examining the contents of hundreds of boxes of potentially relevant material and involving eight fee earners. The existence of the exercise emerged at the November hearing. Shortly before the hearing Isadore Goldman replaced Howes Percival as the liquidators' solicitors. In his judgment from the November hearing ( EWHC 3793) Henderson J recorded that he was being told that three more months would be needed for the exercise (which had started in August) to be completed.
- A further development leading up to the November hearing was that the CWL action had been commenced.
- The order of Henderson J of 28th November 2012 provided that the Atrium action and the CWL action should be tried at the same time and the cases should be managed together. In the Atrium action the date for disclosure by the liquidators was set for 2nd April 2013. In the CWL action 2nd April was the date for disclosure by both sides. The order also provides that any document disclosed in one case will be disclosed to the parties in the other case. The February trial date was vacated and a 30 day trial set for the first available date after 4th October 2013.
- What happened next is explained in paragraphs 9 and 10 of a later judgment of Henderson J on 7th June 2013 ( EWHC 1562 (Ch)):
"9. Isadore Goldman then set to work, the solicitor with day to day conduct of the matter on behalf of the Liquidators being Mr David Gibbs. As I shall explain in more detail later in this judgment, he contacted Howes Percival in early December, but it was only on 3 January that the lists produced by Howes Percival were received in incomplete form, and it was not until 14 January that the boxes of documents were delivered. On 23 January, Mr Gibbs conducted an initial review of the boxes, and on 25 January a meeting took place with Mishcons at which Isadore Goldman put forward two methodologies for consideration, their preference being for one whereby an e-disclosure provider would be engaged to scan and upload the documents into a database, or "e-disclosure platform". There is a dispute, which I cannot resolve, whether agreement to proceed in this way was reached at the meeting, but it is at least clear that no objection was raised by Mishcons, and it was they who suggested the use of a company called Unified as the e-disclosure provider. Mr Gibbs then obtained quotations from three providers, including Unified, and on about 4 February 2013 Unified were selected.
10. It soon became clear to Mr Gibbs that it would be impossible for Unified (or any of the other providers whom he had approached) to complete the necessary work by 2 April 2013, and he intended to raise the question of an extension of time with Mishcons as early as 7 February. Unfortunately, however, a letter which he drafted on that date was never sent, and it was not until 7 March that Isadore Goldman wrote to Mishcons requesting their agreement to an extension. By that stage, Mr Gibbs had undertaken a spot check of the files with the help of junior counsel, and they had concluded that certain categories of documents should be excluded from disclosure on grounds of irrelevance. On that basis, the total number of boxes of documents for disclosure, including the boxes in the CWL proceedings, had been reduced from 545 to 149. Unified said that they could scan and code this material in not more than three months, so the extension requested was until 30 June 2013."
- So although the disclosure exercise using Unified's e-disclosure platform was underway, on 28th March 2013 Isadore Goldman sought an extension of time. This was heard by Henderson J on 22nd May 2013 and the judgment of 7th June was the result. Henderson J decided to grant the extension of time but only on "unless" terms in the Atrium action. In relation to the CWL action he made it very clear that whether or not the Atrium proceedings were to be struck out for non-compliance, good reason would have to be shown for any further extension of time in the CWL proceedings, and it would be likely that any further extension would be both short and also on stringent unless terms (paragraph 65). The trial was re-fixed for April 2014.
- In considering whether to impose an unless order in relation to the Atrium action, Henderson J considered whether the failure to comply with the previous order to conduct a proper search and produce disclosure by 2nd April 2013, was inexcusable. He said this:
"61. Mr Davenport submitted that the Liquidators' conduct since November 2012 could not possibly be characterised as inexcusable. They had done all that could reasonably have been expected of them to comply with the November order, and the problem is simply that none of the e-disclosure providers approached by Isadore Goldman were able to complete the exercise of uploading and coding the documents by 2 April 2012.
62. Mr Davenport elaborated these submissions orally, in an attempt to persuade me that the Liquidators and Isadore Goldman had done all they reasonably could to comply with the November order. But I do not agree. Even making every allowance for the difficulties facing the new team, I consider that Isadore Goldman should have displayed more initiative and urgency in getting a grip on the situation, in chasing Howes Percival, in arranging a meeting at the earliest opportunity (and certainly before Christmas) with Mishcons, in selecting and instructing Unified (or some other suitable e-provider) and in winnowing out the huge number of apparently irrelevant documents from the boxes. The need for urgency should have been all the more apparent, given the lamentable history of the disclosure exercise in the Atrium proceedings to date, and the fact that four deadlines for disclosure had already been missed. Mr Gibbs does not say in evidence how many people at Isadore Goldman were working on disclosure apart from himself, and it may well be that insufficient resources were devoted to the task. Further, the unexplained failure to send the letter of 7 February 2013 does not inspire confidence, and the delay in arranging the spot check until the end of February, in order to suit the diaries of Mr Gibbs and Mr Lewis, is again unfortunate. The end result is that the relevant boxes of documents did not actually reach Unified until 12 March 2013, only three weeks before the expiry of the four month extension granted in November.
63. I do not say that, if the matter had been approached with the necessary degree of urgency and initiative, it would have been possible to complete the disclosure exercise by 2 April 2013. I do, however, consider that Unified would have been able to complete a much greater proportion of their work, and that the extension now sought would have been correspondingly shorter."
- Henderson J decided to impose an unless order and said this:
"64. I accept that an unless order should normally be regarded as one of last resort, or perhaps more accurately as one of penultimate resort, since even after an unless order has taken effect it is always open to the party in default to seek relief from sanctions under CPR 3.9: see generally Marcan Shipping (London) Limited v Kefalas  EWCA Civ 463,  1 WLR 1864. I also accept that, before making an unless order, the court should always carefully consider whether the sanction imposed for non-compliance is appropriate in all the circumstances of the case. I consider, however, that the stage has been reached in the present case where it is appropriate to make such an order in the Atrium proceedings, and that the sanction for non-compliance should be for the claims in those proceedings to be struck out, subject to the right of the Liquidators to apply (if they can) for relief from sanctions. The main factors which have weighed with me in coming to this conclusion are: (a) the long and unsatisfactory history of disclosure in the Atrium proceedings before November 2012; (b) the deficiencies to which I have drawn attention in the Liquidators' attempts, through Isadore Goldman, to comply with the November order; and (c) the increased emphasis which the court is now obliged to accord to compliance with court orders under the amended overriding objective."
- The material parts of the order of Henderson J of 7th June 2013 in relation to the liquidators Atrium disclosure are:
"(1) unless the Liquidators comply with paragraph (2) below, the Liquidators claims against the Respondents in proceedings No 3878 of 2011 and No 3879 of 2011 ("the Atrium proceedings") shall be struck out without further order of this Court and the Respondents shall be at liberty to enter judgment for their costs, such costs to be subject of a detailed assessment if not agreed.
(2) In the Atrium Proceedings, the Liquidators shall by 4.00pm on 28 June 2013:
i) conduct a search for documents falling within CPR 31.6, in compliance with the requirements set out in CPR 31.7; and
ii) provide Mr McNally and Mr MacLean and Mr Dick with a list of documents identifying the documents located as a result of the search described above, in compliance with the requirements set out in CPR 31.10
(3) Requests for inspection (or copies) of documents shall be made by 4:00pm on 5 July 2013 and complied with by 4.00pm on 12 July 2013".
- The liquidators' disclosure exercise was completed using the Unified e-disclosure platform and the list was served within the required time along with a disclosure statement by the liquidators signed with a statement of truth. There are about 6,000 documents in the list, consisting of about 22,000 pages. This is a very large number of documents but there are vastly fewer documents now disclosed than the number of documents purportedly disclosed in the original Howes Percival exercise.
- Mr Gibbs explained how the exercise was conducted in his witness statement before me. After obtaining the materials from Howes Percival, attempting to agree a methodology with Mishcon de Reya, conducting a spot check and removing certain categories for irrelevance, the remaining hard copy documents were scanned and uploaded into the e-disclosure database of Unified. In addition two electronic sources of documents were uploaded. These were a hard drive of Mr English and the server of CWL. The server for the Atrium business is not available for reasons which do not matter as far as this application is concerned. There was an attempt to agree search terms with Mishcon de Reya (which has also led to disputes). Then the database was interrogated with search terms and an on-screen review for relevance was undertaken by Mr Gibbs and five barristers from 3 Hare Court. The documents identified as relevant were then "coded" by paralegals at Unified. Coding refers to the application of descriptions to the documents such as the date, author and so on. For the hard copy documents which had been uploaded the coding was a manual exercise undertaken by a paralegal looking at the document and determining where possible the document description, author, subject, date and to whom it is addressed. When this information was not apparent, it was not included. During the coding process Unified conducted a quality control exercise by which the data entered by the paralegals were tested against the actual document. The list was then produced essentially automatically by downloading the coding data into an Excel spreadsheet.
- At the same time and in the same way a list for the CWL action was produced.
- The e-disclosure database is now available for all parties to use. The legal teams for the former directors and the family members can access the database via a website. Standing back, reduction in the number of documents being listed compared with the vast volume of material in the original Howes Percival list, coupled with Mr Gibbs explanation for what has been done, demonstrates that a serious effort was made on the liquidators behalf to perform a proper disclosure exercise.
- Nevertheless, shortly after the lists were served Mishcon de Reya raised a large number of problems which were said to exist relating to the disclosure. They are set out in a letter of 5th July 2013. Despite the number of issues raised by the letter, in the end only two problems are relevant to this application: missing documents and the nature of the list.
- The first problem relates to missing documents. There are two categories of documents which are plainly relevant and which were in the liquidators' possession but were not in the list. These can be referred to as scripts and bank statements. The scripts are weekly reports of the amounts paid to individual operatives setting out gross pay for each operative and (where the individual was an employee) gave details of the deductions for PAYE and NIC or, when the individual billed through a service company (which KSS was intended to administer), details of gross pay and deductions of VAT and corporation tax. The bank statements are simply the company's bank statements.
- There is no question that the scripts and bank statements are relevant. Indeed the fact they were to be disclosed had been discussed in correspondence two weeks before the list was served. Isadore Goldman explained that a supplementary list would be provided and that was done on 10th September. It consists of a further 628 documents, including the missing scripts and bank statements. Mr Gibbs explained in his evidence on this application how the scripts and bank statements came to be missing from the original list. The liquidators always intended to disclose these documents and recognised their importance from the outset. The reason they were not included in the list was because of an error. Although it was not realised at the time, the scripts and bank statements were not in the documents used as the sources of documents to upload onto the Unified database. Thus the review of that database did not pick them up. That is why they were not listed. If they had been in the database they would have been picked up and listed. Their absence is not an indication that the database review itself was flawed.
- Once the problem had been identified Mr Gibbs worked out what had happened. The documents uploaded onto the Unified database were taken from the documents held by Howes Percival and the documents at the liquidators' storage facility known as TDM. Mr Gibbs ascertained that the scripts and bank statements were not in either collection. He also checked that they were not amongst the seemingly irrelevant documents which had been weeded out at an early stage. The scripts had been disclosed in the original Howes Percival list and it was thought that all such documents were in the possession of Howes Percival (and therefore would have been passed to Isadore Goldman) and so would have gone on to Unified. However the scripts were not there. Mr Gibbs double checked with Howes Percival and they did not have any further relevant documents.
- Mr Gibbs also inquired at the liquidators' offices to see if anything could be found there. Copies of the scripts and bank statements were located and they were scanned and uploaded to the e-disclosure database. The supplementary list was produced, including the missing scripts and bank statements.
- The reason that the documents held at the liquidators' offices had not been reviewed in detail was the following. Mr Gibbs had discussed whether any relevant documents were being held at the liquidators' office early on in the process. He spoke to Mr Meadows, an administrator at the office, on 25 January 2013 to enquire if they had any documents there. Mr Gibbs was told that the only documents held there were selected copies of certain originals held by Howes Percival or TDM. That was consistent with Mr Gibbs' understanding of the information provided by Howes Percival and so there was no reason to think it was worthwhile uploading or reviewing the documents at the office. Mr Meadows' evidence confirms this. Now that it has emerged that some documents at the offices were in fact the only copies of certain relevant documents which the liquidators actually possessed, they have now been disclosed in the supplementary list. Mr Gibbs explained that the omission from the list was an oversight and an innocent mistake.
- The other important problem relates to the nature of the list itself, which is said not to comply with CPR r31.10 in that it fails to provide a short description of a given document so that it can be identified. I will deal with that separately below.
The parties' positions
- The former directors' position is that the liquidators are in breach of the 7th June order of Henderson J and so the action stands struck out. They have applied for judgment. The liquidators' primary position is that they are not in breach of the order. Moreover even if they are, the liquidators apply for relief against sanction on the ground the breaches are minor, unintentional, remediable (and have been remedied in the case of the missing documents) and has caused no prejudice. On the question of relief against sanction the former directors submit that there is no justification for that in this case. Among other things they refer to the change in the overriding objective CPR r 1.1(2) which was implemented in April 2013 to include reference to enforcing compliance with rules, practice directions and orders. They submit that under the prior practice no relief against sanction would be given to the liquidators in this case and, under the new more "robust" regime, no proper case for relief has been made out.
- The former family members have also raised problems with the disclosure provided to them. They contend that the list provided to them contains irrelevant documents, indicating that a proper search has not been done; that there are missing documents which are relevant to the CWL action, in particular the scripts; and they raise the same concern as the former directors about the nature of the list itself and its compliance with CPR r31.10. They seek an unless order compelling the liquidators to comply with CPR Part 31 within seven days.
- Although the correspondence and the evidence before me covered a good number of other issues relating to disclosure, at the hearing Mr Alexander focussed upon the missing documents and the nature of the list as the bases for his submission that the liquidators were in breach of the order. The other matters may play a part in any question of relief against sanction and case management generally.
Missing documents the unless order
- Mr Alexander submitted that an unless order represents a party's final chance to comply with his obligations (referring to the judgments of Ward and Auld LJJ in Hytec Information v Coventry City Council  1 WLR 1666). I accept that submission.
- When considering an unless order for disclosure Mr Alexander referred to the cases, some of considerable antiquity, in which the court had been reluctant to go behind the disclosure affidavit or statement at an interlocutory stage. He submitted that there were two categories of case involving unless orders for disclosure. One class was when the breach was admitted or it was plain and obvious that a breach had occurred. In such a class the sanction had been allowed to take its effect and the action struck out. In this class he placed Marcan Shipping (London) v Kafalas  2 AllER 365 and Plextek v Lockway (Judgment of James Munby QC sitting in the Chancery Division on 15th July 1997). In both cases the breach of the disclosure order was admitted, the sanction of the unless order took effect and no relief was granted. This is the class into which Mr Alexander submitted the present case fell.
- The other class consisted of cases in which no breach was admitted nor was a breach plain or obvious. The party alleging default could not provide clear evidence of default and will be inviting the court to infer that additional relevant documents exist which have not been disclosed. Typically the party allegedly in default will be denying the allegation of non-disclosure. In those cases the court will be reluctant to go behind the disclosure statement or affidavit and to succeed the party alleging default will have to go as far as establishing that the list of documents served is illusory or made in bad faith. In this category Mr Alexander placed Frankenstein v Gavin's House to House Cycle Cleaning  QB 62 (Court of Appeal) (not about an unless order), Realkredit Danmark v York Montagu  CPLR 272 (Court of Appeal), Morgans v Needham (unreported 28th October 1999, Court of Appeal) and Verjee v Miller  EWHC 2388 (Ch). In each of the last three cases referred to the court overturned a decision by a lower court finding a disclosing party in breach of an unless order for disclosure.
- It is worth explaining Realkredit in a little more detail. There the Court held that since a list had been served, prima facie the relevant order had been complied with. The remedy, if a party is dissatisfied with a list already provided, was an application for further disclosure. The question of compliance with the court order was not simply an exercise of the court's discretion. In the case before the court the list provided could not be called illusory. Tuckey LJ said this:
"I do not think that the conclusion I have reached will mean that unless orders for discovery are worthless. In many cases where they are made no list is served at all. Both counsel conceded, rightly in my judgment, that a court could infer lack of good faith where it was obvious from patent deficiencies in the list that it had been prepared in apparent but not real compliance with the obligation to give discovery."
- In Morgans and Verjee the court followed the same approach as in Realkredit.
- Although it is possible to classify the cases in the manner proposed by Mr Alexander, I do not find the classification to be a useful one for the purpose of deciding the case before me, beyond serving to emphasise the point that a vital question is whether the order has indeed been breached. For that one needs to examine exactly what the order obliges the party to do.
- None of the cases mentioned involve the alleged breach of an order like the order in the present case, which obliges the disclosing party to conduct a search for documents falling within CPR 31.6, in compliance with the requirements set out in CPR 31.7. A search compliant with CPR r31.7 is a reasonable search as defined in that rule and the criteria to be applied in determining whether a document is to be disclosed are laid down in r31.6. These two rules are as follows:
"Standard disclosure what documents are to be disclosed
31.6 Standard disclosure requires a party to disclose only
(a) the documents on which he relies; and
(b) the documents which
(i) adversely affect his own case;
(ii) adversely affect another party's case; or
(iii) support another party's case; and
(c) the documents which he is required to disclose by a relevant practice direction.
Duty of search
31.7 -(1) When giving standard disclosure, a party is required to make a reasonable search for documents falling within rule 31.6(b) or (c).
(2) The factors relevant in deciding the reasonableness of a search include the following
(a) the number of documents involved;
(b) the nature and complexity of the proceedings;
(c) the ease and expense of retrieval of any particular document; and
(d) the significance of any document which is likely to be located during the search.
(3) Where a party has not searched for a category or class of document on the grounds that to do so would be unreasonable, he must state this in his disclosure statement and identify the category or class of document.
(Rule 31.10 makes provision for a disclosure statement)"
- Most of the cases cited above were decided under the old RSC discovery regime which was different. In Nichia v Argos  EWCA Civ 741 the Court of Appeal referred to standard disclosure and the reasonable search and emphasised the difference between this approach to disclosure under the CPR and the former approach to discovery under the RSC. The two cases referred to above which were decided under the CPR i.e. Marcan and Verjee, did not involve the question was what was a reasonable search under r31.6.
- Mr Davenport contended that his clients had complied with CPR Part 31 and in particular that the methodology employed by the liquidators' solicitors and explained by Mr Gibbs was a reasonable search within the meaning of CPR 31.7. He submitted that by limiting the search to what is reasonable there was necessarily a risk that certain documents may be omitted. Mr Davenport argued that as long as a reasonable search had been conducted, there was nothing in the CPR which provided that the fact a document could be shown to have been omitted renders the party in breach of the obligation to conduct a reasonable search. The mechanism to obtain further documents was an order for further disclosure.
- The starting point has to be the terms of the order in question. As I have said, that order referred to a search compliant with r31.7 for documents falling within r31.6 and to the provision of a list (r31.10) which identified the documents located as a result of the search. Thus the primary obligation on the liquidators under this order was to conduct a reasonable search and list the relevant documents which were found in that search. By "relevant" I mean in the sense of complying with r31.6. Such a search requires the party to identify and then collate potentially relevant documents, to review the collated potentially relevant documents in order to identify which ones are actually relevant and to produce and serve an appropriate list of those relevant documents. All of this is to be done in a reasonable manner, reasonableness depending on the factors in r31.7(2). A search not carried out in good faith would not be a reasonable search. However a search which was conducted in good faith and was fair and proportionate to the case in hand, given the number of documents involved, the nature and complexity of the case, the ease and expense of retrieval and the significance of any document likely to be located, would be a reasonable search and would be one which complied with the order.
- As Morgan J said in Digicel (St Lucia) Ltd v Cable & Wireless  EWHC 2522 (Ch) (a case not cited to me by the parties but referred to at 31.7.1 of the White Book) the rules do not require no stone to be left unturned (paragraph 46). As Morgan J also held in Digicel, the task of deciding what is a reasonable search is a task given to the court by the rules (paragraph 51 52) and is not simply a matter of reviewing the decisions of the solicitor as if the case was a judicial review of the decision making process.
- In my judgment in order to establish that the disclosing party is in breach of an order drafted in this way, by reference to these rules, it is not enough merely to show that the disclosing party did have within its control (within the meaning of r31.8) documents which fall within r31.6 but which were not mentioned in the list.
- In this case a list was served in time. To prove a breach of the order, it would have to be established that a reasonable search did not take place. That could be done on inference (c.f. Realkredit) but it is important not to lose sight of the nature of the inference which would have to be drawn. The deficiencies relied on have to be so significant that it can be said that a reasonable search simply had not happened.
- Mr Alexander submitted that Mr Meadows' evidence showed that the documents had been found as a result of the search (by Mr Meadows) and that the fact they had not been disclosed meant that there had been a clear breach of the order. I do not accept that. Mr Meadows' evidence was that Mr Gibbs had contacted him on 25th January 2013 with a view to collating documents for the purposes of disclosure. Mr Meadows was asked what documents were in his possession and following a search he explained that he had correspondence with solicitors in the case, copy bank statements and copy schedules (i.e. copy scripts). He confirmed he did not believe he had anything other than copies of documents elsewhere, i.e. at TDM or Howes Percival and gave reasons for his belief. Of course if there had been any reason to suppose at the time that Mr Meadows' view was in error and in fact the copies he had were the only copies in existence then plainly they should have been uploaded into the Unified database. However there is no basis for saying that that was an unreasonable view at the relevant time.
- A further point taken by the former directors was that the documents held at the office and identified as copies by Mr Meadows should have been included in the uploaded documents because the obligation to disclose applies to all copies of a document held by the disclosing party. I agree that the disclosure obligation applies distinctly to all copies of documents in a party's control, which I will call "original" copies, but it does not apply to copies made for the purposes of the dispute. As I understand the evidence before me, the copies held by Mr Meadows were not what I have called original copies, they were simply copies which had been created in the course of the proceedings or for the purposes of them.
- This is a substantial case involving very serious allegations. It justifies an extensive disclosure exercise from the point of view of proportionality. However even looking at the exercise with the benefit of hindsight, I can see no justification for saying that it was not a reasonable search. It was very extensive. It was plainly carried out in good faith. It was explained in detail in advance to Mishcon de Reya and indeed was based on a methodology which had been ventilated in court before Henderson J when the unless order was made. It was completed within the time specified by the order. It is true that two classes of relevant documents were missed but there is no suggestion that this was the result of bad faith and I am satisfied that the fact these two classes were missed does not support an inference that the exercise itself was not a reasonable search. In my judgment the liquidators are not in breach of the order of 7th June 2013 on that ground.
- I now need to deal with a third category of documents which were not in the list served on 28th June. The supplementary list served on 10th September contains three kinds of documents: scripts, bank statements and some other things. The other things represent about one third of the documents in the supplementary list. Mr Alexander submitted that this third class must be another group of documents which ought to have been disclosed in the main list and so also demonstrated a breach of the order. Mr Davenport explained to me on instructions that the explanation for this third class of documents in the supplementary list was to be found in Mr Meadows' statement. In other words as I understand it they are said to be more documents which had been missed for the same reason as the scripts and bank statements, i.e. copies of what were thought to be documents held at Howes Percival or TDM which would therefore be uploaded, but weren't. However as Mr Alexander rightly pointed out, the description of these documents in the supplementary list does not correspond to the words used in Mr Meadows' statement.
- It is fairly clear what has really happened here. The supplementary list was not served until 10th September, after the evidence for this application had been finalised. Mr Meadows' witness statement (of 15th August 2013) does not clearly explain what this third class of documents is, indeed it did not purport to do so in the first place. Neither does Mr Gibbs main (third) witness statement, which was dated 14th August. What I infer is being hinted at is that these extra documents came from the set at the office described by Mr Meadows, which had not been reviewed before for the reason Mr Meadows explained. The late production of this supplementary list has limited the ability of the former directors' legal team to respond to it and I am not prepared to decide what the origin of this third class of documents in that list actually is. However I can say that despite the degree of obscurity concerning those documents, it is manifest that their being listed at this stage in this way does not indicate a breach of the 7th June order either. The positive evidence from Mr Gibbs which explains the overall exercise which was conducted, the extent of the list which was served in the required time, and the explanation for the mistake about scripts and bank statements, including Mr Meadows' evidence, means that overall I am satisfied that the liquidators conducted a search for documents falling within CPR 31.6, in compliance with the requirements set out in CPR 31.7 and provided Mr McNally and Mr MacLean (and Mr Dick) with a list of documents located as a result. To that extent they have complied with the order.
The nature of the list
- I now turn to the other point taken by the former directors, the nature of the list which was provided on 28th June and whether it complies with CPR r31.10. It will be recalled that compliance with CPR r31.10 was part of the order of 7th June.
- The relevant parts of r31.10 are:
"Procedure for standard disclosure
31.10 (1) The procedure for standard disclosure is as follows.
(2) Each party must make and serve on every other party, a list of documents in the relevant practice form.
(3) The list must identify the documents in a convenient order and manner and as concisely as possible".
- So by r 31.10(3) the list must identify the documents in a convenient order and manner and as concisely as possible. Rule 31.10(3) is explained further in Practice Direction 31A para 3.2:
"3.2 In order to comply with rule 31.10(3) it will normally be necessary to list the documents in date order, to number them consecutively and to give each a concise description (e.g. letter, claimant to defendant). Where there is a large number of documents all falling into a particular category the disclosing party may list those documents as a category rather than individually e.g. 50 bank statements relating to account number _ at _ Bank, _20_ to _20_; or, 35 letters passing between _ and _ between _20_ and _20_".
- Mr Alexander submits that the liquidators' list fails to comply with r31.10(3) because the list fails to properly identify the documents in it. The submission is that the information provided is inadequate and is not compliant with the rules, and so the order has been breached on this basis.
- The list itself was produced by Unified's e-disclosure software. It consists of a table with a series of headings. After some columns of disclosure list numbers there are five columns of information: Subject/Filename; From/Author; Email To; Email CC; Document Type. Mr Shobbrook of Mishcon de Reya explains the problem in his witness statements. For 55% of the documents in the list, the "Subject/Filename" field is blank. For 421 documents the "author" field is blank and 238 have no date. Indeed two documents have nothing in any of the fields at all and are unidentified. Moreover a number of documents are identified with a single word: "spreadsheet" for 44 documents, "transcript" for 60 documents, "accounts" for 52, "report" for 29 and "table" for 23. The supplementary list served in September has the same problems and, as Ms Frazer submitted, so too does the list served in the CWL action.
- Mr Alexander submitted that with such limited information the June list and the September list are of no practical utility because they are insufficient to enable his clients or their solicitors to select documents for inspection. Ms Frazer made the same point for the CWL action.
- The answer from the liquidators is the following. Mr Davenport submitted that the list is compliant with the relevant practice direction, which is Practice Direction 31B relating to the disclosure of electronic documents. In this practice direction "Disclosure Data" is defined as "data relating to disclosed documents, including for example the type of document, the date of the document, the names of the author or sender and the recipient, and the party disclosing the document" (paragraph 5) and paragraph 31 is as follows:
"Provision of Disclosure Data in electronic form
31 Where a party provides another party with Disclosure Data in electronic form, the following provisions will apply unless the parties agree or the court directs otherwise
(1) Disclosure Data should be set out in a single, continuous table or spreadsheet, each separate column containing exclusively one of the following types of Disclosure Data
(a) disclosure list number (sequential)
(c) document type
(f) disclosure list number of any parent or covering document;
(2) other than for disclosure list numbers, blank entries are permissible and preferred if there is no relevant Disclosure Data (that is, the field should be left blank rather than state 'Undated');
(3) dates should be set out in the alphanumeric form '01 Jan 2010'; and
(4) Disclosure Data should be set out in a consistent manner".
- Mr Davenport submitted that the list was generated by Unified, who are experienced e-disclosure providers and is in the proper form in accordance with paragraph 31. The fields are the fields required by the PD and paragraph 31(2) states that if there is no relevant disclosure data in existence then the field should be left blank, which makes sense in the context of electronic disclosure.
- He recognised that this was capable of putting the receiving party in a position in which they could not know whether it was worth inspecting a document without actually looking at it but he submitted that this was much less burdensome than it might appear. Given the way the e-disclosure platform worked, there was no need to ask for inspection. The parties all had access to the relevant database, which contained all the documents in the list. The uploaded documents could all be accessed using the software. The database was also searchable and all the parties could undertake their own searches within the database to find documents they might be interested in.
- In my judgment Mr Davenport is correct in that if Practice Direction 31 is applicable to this exercise, then the list is indeed compliant with it and so is compliant with r31.10. However Mr Alexander and Ms Frazer did not agree that the Electronic Documents Practice Direction applies to this disclosure exercise at all. The simple reason is that the documents being disclosed were hard copy documents which were scanned into the database for the purposes of carrying out the disclosure exercise. They contended that what PD 31 applies to is the disclosure of electronic documents, which are defined in PD 31 paragraph 5 as follows:
"(3) 'Electronic Document' means any document held in electronic form. It includes, for example, e-mail and other electronic communications such as text messages and voicemail, word-processed documents and databases, and documents stored on portable devices such as memory sticks and mobile phones. In addition to documents that are readily accessible from computer systems and other electronic devices and media, it includes documents that are stored on servers and back-up systems and documents that have been deleted. It also includes Metadata and other embedded data which is not typically visible on screen or a print out;"
- I agree that the Practice Direction is concerned with electronic documents. A document which is held in the control of a party as a piece of paper is not an electronic document. Thus the Practice Direction would not ordinarily apply to the bulk of the disclosure in the Atrium case. If the liquidators had unilaterally taken it upon themselves to use an electronic disclosure approach of the kind they did, without prior notice to the other parties and were then using the terms of the Practice Direction as a means for covering up a serious inadequacy in their disclosure then they could expect little sympathy from the court. But that is not what happened in this case.
- It has been clear to Mishcon de Reya since January 2013 that Isadore Goldman proposed to conduct the disclosure exercise in the manner in which they actually did. In his June judgment Henderson J held in paragraph 9 (quoted above) that Isadore Goldman had put forward a methodology involving an e-disclosure provider scanning and uploading the documents into an e-disclosure platform to Mishcon de Reya on 25th January. Henderson J also held that it was at least clear that no objection was raised by Mishcon de Reya and he noted that it was actually Mishcon de Reya who suggested the use of Unified as the e-disclosure provider. It is clear from the June judgment that the fact that the exercise was being conducted by an e-disclosure provider with uploading and coding of documents as took place, was apparent. In paragraph 35 of his judgment Henderson J quoted and commented upon a letter of 1st March from Mishcon de Reya. In the passage quoted Mishcon de Reya themselves refer to the liquidators working within the terms of PD 31B and describe such an exercise as something which "would ultimately be beneficial not just to [the liquidators] in relation to completing disclosure but also in relation to all parties in preparing this case for trial." Henderson J endorsed the obvious common sense of this sentence.
- In these circumstances it would be absurd to say that PD 31B did not apply to this exercise, despite the fact that strictly speaking the underlying documents were not originally "Electronic Documents".
- Although I think the argument that the lists are of no practical utility is seriously exaggerated, I can see that for some of the documents in the Atrium list, the information provided in some of the fields for some documents is sparse. Indeed for two documents there is no information at all although Mr Gibbs explained that has been remedied. Given that the source documents for the Atrium list were almost entirely uploaded hard copy documents (the only other source was the hard drive of Mr English), the disclosure data is the product of the manual coding carried out by paralegals at Unified. Mr Gibbs explained that the limited descriptions in the list were the result of the fact that the information available to the Unified paralegals was itself limited (e.g. a hard copy spreadsheet with no title or author). In paragraph 87 of his third witness statement Mr Gibbs explained that the "subject/filename" field was only filled in if the document was originally in electronic form and the subject/filename was taken from the document's metadata. In addition to the point about the two documents with no information at all, Mr Gibbs witness statement dealt with three other minor points of detail and explained that for the remainder when information was not provided, he had been informed by Unified that that was because the relevant document did not contain the information or that the information was not legible in the document.
- As far as the Atrium list is concerned, there is no basis on which to say that Mr Gibbs' evidence or his information from Unified is wrong. The requirement to identify a document within r31.10(3) is not intended to require a party to create information which does not exist or cannot reasonably be ascertained. I conclude that the liquidators have taken reasonable and proper steps in good faith to identify the relevant documents in the list and I reject the submission that the Atrium list does not satisfy CPR r31.10(3).
- The same arguments about the inadequacy of the list in the CWL case were raised by Ms Frazer as had been raised by Mr Alexander about the Atrium list but the position of the family members in the CWL case is not identical to the position of the former directors in the Atrium action and needs to be addressed distinctly. Ms Frazer submitted that although the methodology proposed by Isadore Goldman on 25th January 2013 had been put to Mishcon de Reya for the former directors, it had not been put to Pinsent Masons for the family members. That is a legitimate observation but in my judgment it does not go far enough to make a material difference in the end because it is clear that by 23rd April 2013 the family members were aware of the methodology Isadore Goldman proposed to employ (paragraph 39 of Mr Gibbs' statement of 9th September 2013 in the CWL action). It clearly would have been better if the family members' legal team had been made aware of this methodology earlier and I note that one of the points raised by Pinsent Mason's (which I cannot resolve) is that they were not given a sufficient opportunity to discuss the disclosure exercise in advance. Nevertheless I reach the same conclusion about the fairness of applying the electronic disclosure practice direction in the CWL case as in the Atrium case for the same reasons. Given the circumstances (including the judgment of Henderson J in June) it would be absurd not to regard the electronic disclosure practice direction as applicable to the liquidators' disclosure.
- A further reason why it would be absurd not to apply PD 31B in the CWL case at least to some extent is that the source of documents in the CWL case includes the CWL server itself, i.e. consists of electronic documents within the meaning of that term in PD 31. The practice direction plainly applies to that.
- Since I find that PD 31B applies to the disclosure by the liquidators in the CWL case, the fact that some fields for some documents are blank is not an indication that the list is not compliant with r31.10.
- Finally however and in reply, having heard Mr Davenport's submissions emphasising how the manual coding exercise by Unified paralegals had been undertaken, Ms Frazer produced a document from the CWL disclosure to illustrate her submissions. It was a transcript of an interview with Mr McNally held on 17th September 2007. The document is described in the CWL list as "Transcript" but without a date. It is one of the documents which was uploaded and coded manually rather than a document from the CWL server. Ms Frazer's point is that the date is perfectly apparent on the front page of the document and so there is no good reason why the date field in the list should have been left blank by the Unified paralegals. I agree with Ms Frazer that there is indeed no good reason why the date field for this document is blank but I do not agree that advancing this document in this way helps. No proper inference can be drawn from a single document put forward in this way when it is one of a collection of about 6,500 documents in the CWL list. Indeed putting this document forward highlights the fact that the arguments hitherto about what the CWL list contains and the adequacy of the coding have been inferential and theoretical. I have not been shown any other documents in the list. I am not prepared to rule that there has been breach of an order in this way.
- I reject the submission that the CWL list does not comply with r31.10.
Other points in the CWL case
- Two other objections were taken to the disclosure in the CWL case. It was submitted that the list provided contained irrelevant documents and it was submitted that relevant documents had not been disclosed which should have been. The argument is that in both respects the liquidators are in breach of the order and so an unless order should be imposed requiring them to serve a list complaint with CPR 31 within seven days, failing with the action should be struck out.
- The submission about irrelevant documents was advanced entirely by reading the information in the list and submitting that based on that information and without examining the underlying documents, which so far the family members' legal team have not done, they must be irrelevant. The argument was also supported by relying on the fact that the number of documents in the CWL list was higher than the number of documents in the Atrium list, which was said to be surprising given the narrow focus of the issues in the CWL case as compared to the Atrium case.
- In response Mr Davenport relied on Mr Gibbs' evidence about how the disclosure exercise had been conducted and emphasised that the approach had involved a lawyer reviewing each document (on screen) to assess it for relevance (again by relevance I mean compliance with r31.6). Mr Davenport did not engage with the particular categories of documents relied on by Ms Frazer and submitted that without going to the trouble of looking at the actual documents themselves it was not possible to resolve the debate. On the point about the numbers of documents in the two lists, Mr Davenport told me that the fact the CWL server was a source of disclosure, whereas the Atrium server was not a source in the Atrium case, accounts for the fact that there are more documents in the CWL list than in the Atrium list. It is no indication of relevance or irrelevance.
- I do not say that it would never be possible to approach a question like this in the manner proposed by the family members but I am not persuaded that I should do so in this case. In order to justify an unless order in a case like this it is necessary to show the party is in breach of the previous order and that that breach is inexcusable (Hytec). To be satisfied of that I would need to be taken to the documents concerned in order to see exactly what they were and understand each side's submissions about it. It would be incumbent on the party alleging that the documents are truly irrelevant to bring proper examples before the court and make out its case. That has not been done. I reject the family members' argument about breach of the order which is put on that basis.
- Finally I turn to the argument that the liquidators have failed to disclose relevant documents in the CWL case. This is about the scripts. What happened when the supplementary list was produced in the Atrium case which included the scripts was that the list was sent to both the former directors' solicitors (Mishcon de Reya) and the family members' solicitors (Pinsent Mason) but the list itself was provided as a list in the Atrium case. Given the order in November 2012, any disclosure in the Atrium case is to be disclosed to the parties in the CWL case (and vice versa) and that is why the list was sent to both firms, but the position in correspondence adopted by Isadore Goldman for the liquidators is that the supplementary list is a list in the Atrium proceedings only.
- I should start by recording that I reject the submission that whatever has happened in relation to scripts amount to a breach of the disclosure order in the CWL case. That was an order for standard disclosure and so is in substance the same as the unless order in the Atrium case (albeit there is no unless provision in the CWL order). Since the matter of the scripts does not reveal a breach the Atrium order, so there cannot have been a breach of the CWL order either.
- Nevertheless the argument about whether the scripts are relevant and should formally be disclosed in the CWL case is still live, albeit it is hard to see what practical effect this can have given the November order. Neither side devoted any significant effort to arguing the point. Ms Frazer submits the scripts are relevant because they relate to the value of KSS (because they relate to the tax liability of KSS) and the value of KSS is itself an issue in the CWL proceedings because the case is about whether the KSS business was transferred to CWL at an undervalue. It is not disputed that the scripts relate to the tax liabilities of KSS but the liquidators submit the sums due to HMRC from Atrium and KSS have been fixed by decisions and determinations and the CWL Respondents' defence does not advance a positive case in relation to these decisions and determinations. I prefer Ms Frazer's submissions. The absence of a positive case does not mean a point is not in issue and does not mean documents relevant to it (in the r31.6 sense) need not be disclosed. Accordingly the liquidators will need to disclose the scripts formally in the CWL proceedings. However I will not impose an unless order on them in that regard.
- It is clear that a number of case management directions need to be made to ensure that this action remains on track. Apart from anything else there is an outstanding strike out application brought by the former directors, directions for which are to be made at the conclusion of these applications. I will hear the parties about that. Furthermore there are a number of case management orders which I think need to be considered arising from these applications. The ones which occur to me at present are:
i) I am minded to require the liquidators to conduct a review of any documents in both Atrium lists and the CWL list which have only a single word description and use their reasonable endeavours to fill in the blanks in the information. There is nothing inherently wrong with a single word description if it is accompanied by other data. The fact a document is called "email" is not unhelpful if one is told the subject, date, to whom and by whom it was sent. However as the evidence shows there are a number of documents in the lists in respect of which the only information present is a single word such as the "transcript" example above. Mr Frazer's transcript example shows that for at least one of those, it would in fact have been possible to include more information, at least a date, which would help considerably. From Mr Shobbrook's evidence the number of documents in the main Atrium list in this class is about 200. This is something which could be got on with irrespective of the strike out application and is not a reason to delay the legal teams for the former directors or the family members using the e-disclosure platform to get on with looking at the documents.
ii) The documents in the CWL list which the family members contend are irrelevant to them merit some consideration. I have rejected the family members' argument that the presence of these documents amounts to a breach of the disclosure order. Given that neither side has, so far as I am aware, taken the trouble to look at the underlying documents, as a practical matter I think it would probably be more cost effective and proportionate for the liquidators' side to do that exercise first. They only need to review the documents alleged to be irrelevant in Ms Frazer's skeleton argument. If any documents do turn out on further consideration by the liquidators' advisers to be documents which need not be listed, the documents can be identified as such at minimal further cost and the family members need not be concerned with those.
- I find for the liquidators on this application. I will declare that they were not in breach of the 7th June order. The Atrium action was not struck out. It is and always has been in being. There is no need to consider the matter of relief against sanction. I will dismiss the former directors' application in the Atrium case. I will also dismiss the family members' application in the CWL case for an unless order. I will hear the parties as to what further case management directions are required to ensure that this action remains on track for the trial in April 2014.
Copyright Policy |
Donate to BAILII