Heather Capital Ltd v Levy and McRae & Ors [2015] ScotCS CSOH

OUTER HOUSE, COURT OF SESSION

[2015] CSOH 115

CA207/14

NOTE BY LORD WOOLMAN

In the cause

HEATHER CAPITAL LIMITED (IN LIQUIDATION)

Pursuers;

against

LEVY & McRAE AND OTHERS

Defenders:

Pursuer: Lord Davidson of Glen Clova QC; Shepherd & Wedderburn LLP

Defenders: Clark QC, J Brown; Simpson & Marwick

14 August 2015

Introduction

[1] Heather Capital Ltd (‘HC’) was incorporated in the Isle of Man in 2005. Prior to its liquidation in 2010 it had received investments exceeding $400 million. The present action has been raised in its name by the liquidator. The first defender is the firm of Levy & McRae. The other defenders are eight individuals, who were partners in the firm in the period from 1 January 2007 to 31 December 2008.

[2] The liquidator contends that the company was defrauded of a sum of about £90 million. The scheme involved the transfer of funds to companies incorporated in Gibraltar that were owned or controlled by one of HC’s directors, Gregory King. A firm of solicitors in Gibraltar, Hassans, acted in these transactions.

[3] According to the liquidator, in early 2007 HC’s auditors raised queries about these transactions. Subsequently, Mr King sought to conceal their true nature.

[4] One of the transactions concerned a company called Westernbrook Properties Limited. On 4 January 2007 the sum of £19 million was paid into the first defender’s client account. It was paid out 5 days later to an account with HSBC Private Bank in Monaco held by a Panamanian company. On 24 January the sum of £9.412 million was paid into the first defender’s client account. It was paid out on 28 March to the client account of Hassans.

[5] On 23 December 2008 a payment of £200,000 was made to the eighth defender, Mr Peter Watson, from Hassans’ client account.

[6] The liquidator pleads that HC was the client of the first defender at the material time. Accordingly, the defenders owed HC certain fiduciary duties, together with an obligation to exercise the knowledge, skill and care of reasonably competent solicitors.

[7] It is also important to notice the terms of the pursuer’s ninth plea-in-law. It states:

“the pursuer having suffered loss, injury and damage by reasons of the defenders’ dishonest assistance of Gregory King in the latter committing breach of his fiduciary duties owed to the pursuer … decree should be pronounced”

[8] The liquidator seeks to recover the sum of £28.4 million from the defenders. He intimated the claim on 23 June 2013. There followed extensive pre-action correspondence before the summons was served on 23 October 2014. During that period, the liquidator did not request clarification of the membership or constitution of the firm of Levy & McRae as it existed from time to time.

[9] The summons called on 10 February 2015. The defences were lodged a week later. They stated that three of the defenders had been wrongly convened, because they had been assumed as partners after June 2007. They are Mr Alasdair Gillies (1 July 2007), Mr Andrew Sleigh (1 December 2008), and Mr Gary Booth (1 January 2011).

[10] The defenders raised this matter at the preliminary hearing on 5 March, and the continued hearing on 8 May. They said it involved significant reputational damage to those three individuals. They asked for early disposal of this discrete issue.

[11] I fixed a hearing to take place on 13 August. About a week before the hearing, the liquidator enrolled a motion to allow a minute of amendment. It sought to add five further individuals as defenders, on the footing that they had been partners in the first defender in the period from 4 January 2007 to date.

[12] The liquidator gave the following reasons in support of his motion:

“The pursuer’s agents wrote to the agent for the defenders on 7 May 2015 and 7 July 2015. In those letters, the pursuer’s agent requested:

confirmation that the defenders had adequate insurance cover in place to meet the pursuer’s claim if it was successful;
copies of the partnership agreements for each defender that the defender’s agents maintain have been wrongly convened; and
details of each defender’s capital contribution to the firm

The defenders have failed to provide any of this information to the pursuer. The pursuer has identified a further 5 current and former partners of the firm who require to be convened.

Without confirmation that the defenders have sufficient insurance cover, or evidence as to why the defenders do not incur personal liability (which depends on the circumstances of each case), the pursuer seeks to convene these partners and former partners to the action as they may be jointly and severally liable for the debts of the firm.” (emphasis added)

Liability of new partners

[13] The liability of new partners is governed by section 17(1) of the Partnership Act 1890:

“A person who is admitted as a partner into an existing firm does not thereby become liable to the creditors of the firm for anything done before he became a partner.”

[14] In their Joint Consultation Paper on Partnership Law (2000), the Law Commission and the Scottish Law Commission state in relation to Scots law (at 10.65):

“Where the business taken over is substantially the same as the old firm, and where that business is continued without interruption, there appears to be a general presumption that the new partnership takes over the whole liabilities as well as the assets.”

[15] Lord Hodge considered this point in Sim v Howat & McLaren [2011] CSOH 115 at [31]:

“The presumption does not arise unless there are facts and circumstances which bring it into play. The continuation of substantially the same business without interruption is necessary for the presumption.”

He suggested a number of other relevant facts and circumstances. They included whether the new partner had made a substantial capital contribution, whether he had paid or acknowledged any of the prior debts, and whether separate accounts were kept for the new and the old firm.

[16] Lord Hodge determined at paragraph [29] that the appropriate test was whether a new partner had “accepted liability either expressly or tacitly” for the claim.

[17] Who is responsible for averring those facts and circumstances? The answer is clear. In Thomson Balfour v Boag & Son 1936 SC 2 Lord Fleming stated (at p16) that “it was for the pursuers to prove” that a new partner had accepted liability for the debts of the old business.

[18] Similarly in Miller v Macleod 1973 SC 172 Lord Justice Clerk Wheatley stated (at p183):

“whether in the circumstances the pursuer has established by presumption or by proof of facts and circumstances that the new firm agreed to adopt the old debts and become liable for them. Of course, the establishment of the presumption itself is dependent upon sufficient facts being proved to sustain it, and this in my opinion entitles the Court to look at all the facts, whether they occurred before, at or after the establishment of the partnership.”

[19] In the present case, the liquidator does not offer to prove such facts and circumstances. Instead, he states in condescendence 1:

“the defenders have been called upon, but failed, to provide to the pursuer the evidence (including a copy of the relevant partnership agreement(s) and copies of the accounts showing capital contributions made by the partners joining the partnership after December 2008) that any new partners who joined the partnership of Levy & McRae have not, in fact, undertaken liabilities of the partnership which were in existence prior to them joining. Accordingly, all the defenders are properly convened.”

[20] In my view, that averment fails to satisfy the test identified by the Inner House. There are no averments that would allow the liquidator to lead evidence that the three individuals either expressly or tacitly agreed to take over the existing liabilities of the previous firm. It does not set out the basis upon which the three individuals are convened. Instead it inverts the normal rule that the pursuer must plead his case.

[21] Given the serious nature of the allegations and the size of the claim, the liquidator required to identify the basis upon which each defender had been convened. He also had to differentiate between the acts of those individuals who had been partners at the material time and those who had been assumed after 2007.

[22] I shall therefore sustain the defenders’ first plea-in-law to the extent of dismissing the case, so far as laid against the third, sixth and seventh defenders.

[23] In doing so, I observe that on 25 March, the defenders’ solicitors wrote three separate letters to the pursuer’s solicitors and stated:

“In terms of his partnership agreement, no obligation was imposed on [the relevant defender] in respect of acts or omissions prior to his assumption, nor did he provide any indemnity in respect of such matters.”

Minute of Amendment

[24] In the minute of amendment, the pursuer seeks (a) to alter the dates for the partners called as defenders to 4 January 2007 to date; and (b) to add five individuals, all of whom have been partners of Levy & McRae at some stage in that period. The relevant dates are as follows: Anne Bennie (2000 – 2008), Calum Anderson (1 July 2014) Laura Salmond (3 November 2014), Graham Craik (5 January 2015), and Stephen Hay 2007 (c6 months in late 2007).

[25] The minute does not include any substantive averments to indicate the basis upon which these individuals are said to have taken over prior liabilities. Accordingly, for the same reasons as given in relation to Messrs Gillies, Sleigh and Booth, I refuse to allow receipt of the minute.

[26] The pursuer has had ample opportunity to investigate the position. Standing the very serious nature of the allegations, and the absence of a proper basis for seeking to add the five individuals as partners, I hold that it is not in the interests of justice to follow that course.

Disclosure of the Insurance Position

[27] The pursuer seeks an order requiring the defenders to answer questions about the insurance position. First, will the policy cover the claim? Second, have the defenders notified a claim to insurers? Third, have the insurers accepted the claim?

[28] At the May hearing, the pursuer’s then senior counsel accepted that he was not entitled to ask for that information. Lord Davidson, however, explained that the application had been made to elide the difficulty of identifying the correct defenders. If the claim is covered by insurance, then that issue is much less important.

[29] There is no Scottish authority in point. In England the matter has been considered in the context of the court’s powers under the Civil Procedure Rules. In West London Pipeline & Storage Ltd v Total UK Ltd [2008] EWCH 1296 (Comm), David Steel J refused to allow disclosure, although he also stated at [30]:

“The trend is strongly towards a more open approach to litigation. Albeit the potential for prejudice to the defendant and his insurers must be borne in mind, in the modern age of ‘cards on the table’ the question is readily posed why should not the one factor which may be key to a claimant’s view of the merit of pursuing a claim, namely what is the limit of cover and will the costs eat it up anyway, be known?”

[30] In XYZ v Various [2013] EWHC 3643 (QB) Thirwall J ordered very limited disclosure to demonstrate that the defendant had sufficient insurance to fund its participation to the end of the trial. The Court of Appeal has indicated that the matter is not free from doubt: Dowling v Griffin [2014] EWCA Civ 1445.

[31] Lord Davidson suggested that I could use the wide powers contained in rule of court 47 to order disclosure. I decline to do so. The details of insurance are a private matter between the insured and insurers. There are major questions involved in disclosure, including the likelihood that it would encourage speculative “deep pocket” litigation: West London at [30].

Further Procedure

[32] I shall allow a further period of ten weeks for open adjustment, with the qualification that all substantive adjustment should be completed within eight weeks.

[33] That lengthy period is justified by three factors. First, there have been recent extensive adjustments to the pleadings. Second, a hearing is due to take place before the Supreme Court of Gibraltar on 24 September in respect of a Letter of Request to recover the files of Hassans.

[34] Third Lord Tyre has reserved judgment following a recent debate in similar proceedings raised by the liquidator against Burness Paul. Mr Clark said that the decision may have a significant bearing on the present action, as the arguments on prescription and loss are very similar.

[35] Having regard to that third factor, I shall also fix a diet of debate. Mr Clark estimated that it would last three days. Apart from the plea of prescription, the defenders mount eleven separate challenges to the relevancy of the pursuer’s averments.

[36] If the defenders are successful and obtain dismissal, that may save each party a considerable sum of money. Mr Clark estimated that a proof before answer would last about six weeks and cost each side several hundred thousand pounds.

Request for a witness statement from Peter Watson

[37] The pursuer asks the court to ordain Mr Watson to provide a witness statement to explain the circumstances in which the sum of £9.5 million was paid to Hassans and the purpose of the payment of £200,000, made to him from Hassans’ client account on 23 December 2008. The pursuer seeks the statement to make his own averments “more pointed”.

[38] I would be slow to order one witness to produce a statement in advance of the other statements. I find no compelling reason in this case to depart from the normal rule that there should be a simultaneous exchange of witness statements. I therefore refuse the application.