HEATHER CAPITAL LIMITED (IN LIQUIDATION) AND PAUL DUFFY (AS LIQUIDATOR THEREOF) AGAINST BURNESS PAULL & WILLIAMSONS LLP
OUTER HOUSE, COURT OF SESSION
[2015] CSOH 150
CA208/14
OPINION OF LORD TYRE
In the cause
HEATHER CAPITAL LIMITED (in liquidation) and PAUL DUFFY (as liquidator thereof)
Pursuer;
against
BURNESS PAULL & WILLIAMSONS LLP
Defenders:
Pursuer: Lord Davidson of Glen Clova QC; Shepherd and Wedderburn LLP
Defenders: R W Dunlop QC, Paterson; CMS Cameron McKenna LLP
6 November 2015
Introduction
[1] The pursuer, a company in liquidation, was incorporated in the Isle of Man on 31 August 2005. Its business was to operate as a hedge fund, making investments on behalf of its own investors. Responsibility for investment decision-making was delegated to an investment committee comprising two of its directors, namely Mr Gregory King and Mr Santo Volpe. Guidelines issued by the investment committee indicated that companies involved in property-related lending, invoice discounting and financing commercial receivables were regarded as particularly suitable as borrowers. Prior to its winding up it received funds for investment in excess of £280 million.
[2] The pursuer avers that during its operation it and its investors were defrauded by the diversion of invested funds exceeding £90 million, under the guise of fictitious loans to various shelf companies. The mechanism of the fraud is said to have been the same in each case. Companies owned and/or controlled by Gregory King were incorporated in Gibraltar. The pursuer then entered into a number of credit facility agreements with these companies (referred to in the pleadings as “First Level SPVs”). Each agreement was secured by a debenture. The pursuer recorded loans to the various First Level SPVs in its books of account. In fact, the money was never paid to them. On the instructions of certain individuals, it was in fact paid out of the solicitors’ client accounts in which it had been deposited to third parties. In many cases the money was paid into the bank account of a London trader named Nicholas Levene. Mr Levene is currently serving a 13-year prison sentence, having pleaded guilty to 14 charges of fraud, false accounting and obtaining money by deception.
[3] The present action concerns funds amounting in total to £7.3 million which, according to the pursuer’s books of account, were lent to four Gibraltar companies called Bayhill Investments Limited (“Bayhill”), Brookhill Investments Company Limited (“Brookhill”), Hampsey Investments Limited (“Hampsey”) and Bellwood Limited (“Bellwood”). The defenders were instructed to act on behalf of the pursuer in respect of the provision of a template credit facility agreement and the making of the proposed loans to the four Gibraltar companies. The funds to be lent had been deposited in the defenders’ client account. On the instructions of an individual who, according to the pursuer’s averments, had no actual or apparent authority, the defenders’ banking partner, Mr Scott Wilson, transferred £3.3 million to a bank account in the name of Mr Levene, and £4 million to an account in the name of a company called Mathon plc. Nothing was sent to any of the four First Level SPVs. The pursuer now sues, on a variety of grounds narrated more fully below, for payment by the defenders of the sum of £7.3 million. The defenders deny liability to make payment of any sum to the pursuer. They contend, inter alia, (i) that, on the pursuer’s own averments, all of the sums comprising the £7.3 million were repaid to the pursuer and accordingly that the pursuer has failed relevantly to aver circumstances in which it has sustained any loss as a consequence of anything done by them; and (ii) that any obligation incumbent upon them has been extinguished by the operation of prescription. The case came before me for debate of these two issues.
The pursuer’s averments
[4] The following narrative is derived from the pursuer’s averments which must of course be taken pro veritate for the purposes of this opinion. Not all of them are admitted by the defenders. It should be noted that it is not averred that any of the individuals named in the narrative (other than Mr Levene) has to date been charged with any criminal offence.
Bayhill, Brookhill and Hampsey
[5] On 12 April 2006, Mr King instructed a Gibraltar lawyer, Melo Triay, to form new Gibraltar-registered companies and to email the details of these companies to Mr Wilson. On 16 April, Mr Wilson emailed draft credit agreements for Bayhill, Brookhill and Hampsey to Mr King and Mr Triay. He gave advice regarding the execution procedures to be followed and requested that debentures be drawn up and executed in accordance with the law of Gibraltar. On 18 April, the directors of Bayhill, Brookhill and Hampsey met in Gibraltar and executed a credit facility agreement with the pursuer, together with debentures as security for loans, in each case, of £2 million. Mr King and Mr Volpe signed the agreements and debentures on behalf of the pursuer. On 20 April, Mr John Caulfield emailed Mr Wilson to inform him that funds would be transferred to his client account the following day. Mr Caulfield was an employee of Mathon plc, a company related to the pursuer which carried on the business of providing bridging finance secured over heritable property. He was not a director or employee of the pursuer. On 21 April, three payments of £1.3 million, £1.1 million and £900,000 were made from the pursuer’s account with a private bank to the defenders’ client account.
[6] Also on 21 April 2006, Mr King sent an email to Mr Levene and Mr Volpe, but bearing to be an instruction to Mr Wilson, stating
“Scott – Please send £3.3 million to the account of Nick Levene, the details of which are listed below”. This email was forwarded to Mr Wilson by Mr Caulfield on 24 April, with the comment “Scott – Below is the email that should have been forwarded to you. Bank information where the payments have to be transferred are detailed. Gregory asked that you confirm to him and Nick Levene once the transfer has taken place”.
Mr Wilson then authorised the payment of £3.3 million from the defenders’ client account to the personal account of Mr Levene, and emailed Messrs Levene and King to advise that the transfer had been effected and to request acknowledgment of receipt. The following day, Mr Wilson emailed Mr Levene, copying in Mr King, specifying the proportions in respect of which the funds were “from” the three Gibraltar SPVs.
[7] On 3 May 2006, Mr Wilson sent documentation for Bayhill, Brookhill and Hampsey, including the debentures entered into between the pursuer and each of them, to Mr Andrew Ashworth, the managing director of Abacus Financial Services Limited, which provided management and administrations services to the pursuer. At this time Mr Ashworth was also a director of the pursuer. Mr Wilson did not mention that the funds advanced by the pursuer had been paid into a bank account in London in the name of Mr Levene. Abacus recorded the loans in the pursuer’s books of account as having been made to Bayhill, Brookhill and Hampsey respectively.
Bellwood
[8] On 11 July 2006, the directors of Bellwood executed a credit facility agreement with the pursuer, permitting loans up to a maximum amount of £4 million, and granted a debenture in favour of the pursuer. Copies of the documents were emailed to the defenders. On the same day, £4 million was transferred from the pursuer’s bank account to the defenders’ client account. On 12 July, Mr Caulfield emailed Mr Wilson as follows:
“Scott – Re the £4m received in your Client Account yesterday ex Heather Capital Limited on behalf of Bellwood Limited. I confirm that this sum should be forwarded to the undernoted today. [Mr Caulfield supplied the bank account details.] Account name Mathon plc.”
Mr Wilson then authorised the payment of £4 million from the defenders’ client account to the Mathon account specified. It is recorded in Mathon’s books of account as the repayment of a loan made by Mathon on 28 June 2006 to Mr Levene.
[9] On 3 May 2006, Mr Wilson sent documentation for Bellwood, including the debentures entered into with the pursuer , to Abacus. He did not mention that the funds advanced by the pursuer had been paid into a bank account in the name of Mathon. Abacus recorded the loan in the pursuer’s books of account as having been made to Bellwood.
“Repayment” of the loans
[10] Early in 2007, the pursuer’s auditors, who were the Isle of Man member firm of KPMG International Co-operative, raised questions about the propriety and recoverability of what appeared in the pursuer’s books of account as loans to the First Level SPVs. In response, Mr King created the false impression that the First Level SPVs had themselves entered into loan agreements with other Gibraltar companies (“the Second Level SPVs”) and that those loans were secured over heritable property. KPMG, however, identified a number of concerns relating to the documentation of these loans and recommended that further work be undertaken in relation to the First and Second Level SPVs. The issues raised by KPMG included (i) difficulties reconciling the names of supposed Second Level SPV borrowers and the properties against which loans were said to be secured with information available from the Land Registry; (ii) missing documentation; and (iii) concerns about the enforceability of security given by the supposed Second Level SPV borrowers.
[11] Mr King then took further steps to conceal the original fraud. Between April and June 2007, he instructed additional funds to be transferred from the pursuer to Mathon and to another company called Bathon Limited. On 1 and 10 May 2007, a total of £33,800,000 was transferred from the pursuer’s bank account to Mathon. On 11 June, £21,500,000 was transferred from the pursuer’s bank account to Bathon. The payments were referred to as “Drawdown”. Fictitious loans by Mathon and Bathon were created to give the appearance that these funds had been advanced to legitimate borrowers. In fact a substantial part of the funds was transferred to the client account of a Glasgow solicitors firm called Cannons Law LLP. Cannons were instructed by Mr King to send payments to the pursuer for amounts equivalent to the outstanding loans, plus interest, to inter alia each of the four First Level SPVs mentioned above. Sums of £4,086,900, £1,354,200 and £1,559,800 were received in the pursuer’s bank account on 14 May against the references “Hamsey”, “Brookhill” and “Bayhill Invs” respectively. Sums of £4,469,000 and £300,000 were received in the pursuer’s bank account on 12 and 14 June respectively, both against the reference “Bellwood”. The loans by the pursuer to Bayhill, Brookhill, Hampsey and Bellwood were thus “repaid”.
[12] On 26 November 2007, Mr King wrote to the pursuer’s board of directors admitting that “an element of fraud” had been introduced into the pursuer’s investment strategy. Mr King blamed the fraud on Mr Volpe, who had by then resigned as a director of the pursuer, and on Mr Frank Cannon, solicitor of Cannons Law LLP. Mr King represented to the directors that the loans to the four First Level SPVs had been repaid.
Audit of the pursuer’s accounts
[13] On 14 December 2007, the reports and financial statements of the pursuer as at 31 December 2006 and as at 30 September 2007 were approved by its board of directors and signed by KPMG as its auditors. KPMG recorded the additional steps taken to address their concerns about the loans to the First Level SPVs in a file note in connection with the audits for these periods, as follows:
“The above matters had the following impact on the audit:
Fraud risk
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.
This was addressed in our work by increasing audit procedures in the following areas:
- 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
- Full audit of Mathon and Bathon accounts to 30 September 2007.(All monies were invested in these companies as at 30 September 2007.)This audit was undertaken by their auditors, Gerber Landa & Gee, in accordance with ‘group’ audit instructions from us.As part of this work, they were instructed to perform a 100% circularisation and credit review of all significant loans.
…It was also decided by [initials of individuals concerned] to undertake an audit of the nine month figures to 30 September 2007, in order to audit the receipt of monies in relation to the SPV loans and their subsequent reinvestment to assist with signing the 31 December 2006 accounts.
Audit report opinion
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. We consider therefore that sufficient appropriate audit evidence has not been obtained in relation to the loans advanced to the SPVs in 2006 and 2007. 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 – instead we have issued an ‘except for’ qualified opinion.”
[14] On 17 December 2007, KPMG signed their audit opinion on the pursuer’s accounts for the 16 month period ended 31 December 2006 and the 9 month period ended 30 September 2007. The accounts included the following qualification:
“However, the evidence available to us was limited with regard to loans amounting to £38,950,000 advanced to a number of Gibraltar-incorporated special purpose companies (the ‘SPCs’). As further explained in note 5, there is uncertainty regarding the purposes to which these loans were applied. Loan and security documentation was provided to us, which purported to show that these monies had been on-lent to a number of further Gibraltar-incorporated special purpose companies. We could not validate this documentation.
…
Except for the financial effects of such adjustments, if any, as might have been determined to be necessary had we been able to satisfy ourselves regarding the loans advanced to the SPCs, as detailed above, in our opinion the financial statements give a true and fair view, in accordance with International Financial Reporting Standards, of the state of the Company’s affairs as at 31 December 2006 and of its profit for the period then ended.
In our opinion, the financial statements have been properly prepared in accordance with the Isle of Man Companies Acts 1931 to 2004.
In our opinion the information given in the Directors’ Report is consistent with the financial statements.”
Note 5 stated:
“During the accounting period to 31 December 2006 £38,950,000 was advanced to 6 Gibraltar based special purpose companies (“the SPCs”); £41,269,250 was outstanding as at 31 December 2006, including amortised discount. The lending to the SPCs was effected using standard documentation between the Company and the SPC borrower. The SPCs have related party shareholders and directors – see note 10.
There is uncertainty as to where the monies lent to the SPCs were then subsequently invested. Loan and security documentation was produced in support of this onward investment by a firm of lawyers. This documentation purported to show that the monies had been on-lent to a number of further Gibraltar incorporated special purpose companies, owned by the underlying borrowers, and secured on property. This documentation could not be validated by the auditors.
Amounts equivalent to the outstanding balances on the loans to the SPCs (including accrued interest) were received in full during the period between April and June 2007. With the exception of an amount received from the Promoter (see below), the Directors have been unable to ascertain the source of these repayments which were made via lawyer’s client account. The funds received included an amount of US$5,333,100 from Sargon Capital Limited, the Promoter – see note 10 regarding related party transactions. The Directors are satisfied having taken legal advice that the funds that have been received have been properly applied in repaying the SPC loan balances and are free of any encumbrance.
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.
During the year procedures surrounding the operation of the Investment Committee were revisited and a variety of changes were made in order to strengthen controls in this area.”
The auditors’ report on the pursuer’s accounts for the nine-month period ended 30 September 2007 contained substantially the same qualification and note.
Subsequent events
[15] The pursuer does not aver that further steps were taken at that time to investigate any of the matters identified in the KPMG audit opinion or in the note to the accounts. On the contrary, it is averred that all avenues of enquiry were considered by the directors to have been pursued. Along with Abacus and KPMG, the directors believed that whilst there had been irregularities with the securities granted by the Second Level SPVs and that some form of fraud had been attempted, the funds advanced to the First Level SPVs had been repaid in full, with interest, and accordingly that the pursuer had suffered no loss.
[16] In 2010, the pursuer applied to the High Court of Justice in the Isle of Man for the appointment of a liquidator. According to a witness statement dated 26 February 2010 by Mr Ashworth, the application was for cash flow reasons rather than asset insufficiency. Mathon had gone into administration on 17 February 2010 and the pursuer wished to realise loans (and real property collateral) transferred to it by Mathon. The liquidator was appointed on 7 July 2010. The pursuer avers that
“it was only following [the] liquidator’s investigations into the affairs of [the pursuer] that the current loss, injury and damage was discovered”.
Actions for recovery of the sums sued for in this action were raised against Mr Triay’s firm in Gibraltar and against the pursuer’s non-executive directors in the Isle of Man; these actions have been discontinued. Proceedings against KPMG in the Isle of Man courts are continuing.
[17] According to the pursuer’s averments, the true destination of the funds which were to be advanced to Bayhill, Brookhill, Hampsey and Bellwood was first discovered on 17 April 2012, when an email sent by Mr Wilson was received by a member of the liquidator’s legal team, in the course of the liquidator’s attempts to reconstruct the pursuer’s affairs and account for the losses sustained by it and its investors. This, it is averred, is when the liquidator ascertained that the funds shown in the pursuer’s books as lent to Bayhill, Brookhill and Hampsey had been paid into an account in the name of Mr Levene, and that the funds shown as lent to Bellwood had been paid into an account in the name of Mathon.
The pursuer’s case against the defenders
[18] The pursuer seeks an accounting for the money placed to the credit of its client account with the defenders in respect of the Bayhill, Brookhill, Hampsey and Bellwood loan transactions. It is averred that
- Mr Wilson (for whose actings the defenders are liable) acted in breach of trust (a) by transferring funds directly or indirectly to Mr Levene on the instructions of Mr Caulfield, who had no authority to give instructions on behalf of the pursuer; and (b) by compounding the false impression that the four loan transactions had completed by sending principal documents to Abacus without disclosing that the funds had been paid to a third party;
- The defenders breached a fiduciary duty incumbent upon them by virtue of their solicitor/client relationship with the pursuer by failing to warn the directors of the pursuers who were not complicit in Mr King’s fraud, and/or Abacus, that they had received instructions to make payments contrary to the terms of the credit facilities entered into between the pursuer and the First Level SPVs, and by failing to disclose that the documentation prepared, executed and forwarded to Abacus did not record any real transaction or provide any security;
- Mr Wilson acted in breach of contract, and separatim negligently, (a) in failing to advise the pursuer and/or Abacus that he had received instructions to divert funds held in the defenders’ client account for settlement of the credit agreements with the Gibraltar SPVs to a third party, and (b) in releasing the funds without confirming his instructions and satisfying himself both as to the identity and bona fides of the payee and as to the commercial rationale for the change of approach;
- The defenders provided dishonest assistance to Mr King in the perpetration of his fraud, by preparing documentation for loans to the First Level SPVs when (on the defenders’ own averments) they knew that the ultimate purpose was onward lending to Mr Levene; by disregarding the suspicious aspects of the instruction to pay funds into Mr Levene’s personal account; by transferring £3.3 million to Mr Levene and £4 million to an intermediary for Mr Levene without any documentation; and by failing to consider the necessity of making a suspicious activity report under the Proceeds of Crime Act 2002 or withdrawing from acting.
The first issue: has the pursuer sustained any loss?
[19] The first submission on behalf of the defenders was that the action should be dismissed as irrelevant on the ground that, on the pursuer’s own averments, no loss had been sustained as a consequence of any act on the part of the defenders. The funds paid out of the client account held by the defenders on behalf of the pursuer had all been repaid. This fact could not be ignored. There was nothing “purported” about the repayment; the monies were actually all repaid. The matter could be tested by considering what would have happened if in July 2007 the pursuer had sued Bayhill and the other companies for payment: they would have been met by the response “You have been repaid”. The defenders should be in no worse position than the four SPVs. What had caused the pursuer’s loss were the loans to Mathon and Bathon. The pursuer did not aver why these loans were made or why they could not be recovered; if the reason for the latter was insolvency of Mathon and Bathon, that was unfortunate for the pursuer but gave rise to no right of action against the defenders. The pursuer’s appropriation of the payments received from Cannons to the loans to Bayhill and the other companies was conclusive against it: cf National Commercial Bank of Scotland Ltd v Millar’s Tr 1964 SLT (Notes) 57; Capital Home Loans Ltd v Countrywide Surveyors Ltd [2011] 3 EGLR 153.
[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 funds 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 payments 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.
The second issue: prescription
[21] The losses in respect of which the pursuer seeks reparation are said to have been sustained on 24 April and 12 July 2006. It is accepted by the pursuer that those are the dates when there was a concurrence of injuria and damnum for the operation of prescription. The present action was raised in November 2014. On the face of it, the pursuer’s claim for reparation was extinguished more than five years before the raising of the action, in accordance with section 6 of the Prescription and Limitation (Scotland) Act 1973. The pursuers rely, however, upon both section 6(4) and section 11(3) of the 1973 Act to prevent the running, or to postpone the commencement, of the prescriptive period. It is common ground that the onus rests upon the pursuer to aver and prove circumstances in which the claim has not been extinguished by prescription. It is also common ground that the date of appointment of the liquidator is not relevant to the running of the prescriptive period.
Section 11(3)
[22] I consider first the pursuer’s case based upon section 11(3). Subsections (1) and (3) of section 11 provide as follows:
“(1) 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.”
It has now been settled by the decision of the majority of the Supreme Court in David T Morrison & Co Ltd v ICL Plastics Ltd 2014 SC (UKSC) 222 that in order for prescription to begin to run for the purposes of section 11(3), the creditor need only be actually or constructively aware of the occurrence of loss, and not also that the loss was caused by an actionable act, neglect or default.
[23] With regard to the operation of section 11(3), the pursuer’s pleadings on record focus on the appointment of the liquidator in February 2010, in support of an assertion that the pursuer was not aware, and could not with reasonable diligence have been aware, that the loss with which this action is concerned had occurred until some time after the liquidator’s appointment, and at the earliest in or about February 2011. I did not understand that position to be maintained at the debate. Rather, it was contended, the occurrence of the loss was not and could not with reasonable diligence have been identified until receipt of Mr Wilson’s email on 17 April 2012 explaining that the funds had not been paid to the four First Level SPVs, but had instead been transferred to third party accounts. This vital piece of information had not previously emerged. Everybody, including KPMG, had proceeded upon the belief that the loans to the SPVs had been real. The questions raised by KPMG did not reveal the true nature of Gregory King’s fraud because they were concerned only with where the money had gone after it had been received by the First Level SPVs (which it never was). It would not do for Mr Wilson to say “If you had asked me, I would have told you”, while escaping liability by having remained silent. The liquidator had not been appointed because of suspected fraud. By about February 2011, suspicions were emerging, but both the pursuer and the liquidator had been sent in the wrong direction by Mr Wilson’s 2006 emails and by KPMG’s conclusions. There were sufficient averments to entitle the pursuer to proof. In response to the defenders’ argument, discussed below, regarding actual awareness of Mr Volpe of the true destination of the funds, it was not admitted either that he had had such awareness or that he was not aware of the fraud. Admitting receipt of an email was not the same as admitting the content as factually correct.
[24] The defenders’ primary position was that there was no postponement of commencement of the prescriptive period because the pursuer, through the medium of its director Mr Volpe, had known from the outset that no funds were paid to the four SPVs. Reference was made to the terms of the emails founded upon by the pursuer, which were copied to Mr Volpe. It was accepted that where a director was accused of dishonest conduct, there was no good policy reason, in the context of an action by the company against a third party, to attribute that director’s state of mind to the company: see Bilta (UK) Ltd v Nazir (No 2) [2015] 2 WLR 1168 (UKSC), Lord Toulson and Lord Hodge at para 207. But in the circumstances of the present case that principle applied only to Mr King’s state of mind: the pursuer did not aver that Mr Volpe was a party to the fraud, and his knowledge of the true destination of the funds was sufficient to start the prescription clock.
[25] Reading the pursuer’s pleadings as a whole, I am not minded to regard them as an acceptance either that Mr Volpe knew that the funds were not being paid to the SPVs or, if so, that he was not complicit in the alleged fraud. The fraud averred by the pursuer is elaborate and in circumstances where no criminal proceedings (other than the prosecution of Mr Levene) have taken place, the issue of participation in the fraud remains unresolved. I would not, without inquiry, hold that Mr Volpe had the requisite state of mind and that this could be imputed to the company so as to start prescription running as soon as the payments were made.
[26] The defenders’ first alternative submission is that the pursuer obtained the requisite actual or constructive awareness in early 2007 when its auditors raised concerns regarding the propriety and recoverability of the loans. The fact that the pursuer was led, some months later, to believe that the problem had been addressed did not erase the initial emergence of concern. The possibility that a loss which has been sustained can be remedied does not prevent or interrupt the running of prescription: Jackson v Clydesdale Bank 2003 SLT 273, Lord Ordinary (Eassie) at para 28. By March 2007 the board as a whole, and not just Mr Volpe, had actual or constructive awareness of the loss.
[27] The defenders’ final submission was that in any event there were insufficient averments to postpone vesting until at least November 2009, ie five years before the action was commenced. The auditors’ report made clear that the company was not being given a clean bill of health: reference was made to investigations continuing. The matter called out for such further investigation. There was nothing on record to explain why nothing further was done. Specifically, there was no explanation of why the pursuer, if exercising reasonable diligence, could not have asked Mr Wilson the question at an earlier date that he was asked in 2012.
Decision
[28] In order to apply the provisions of section 11(3) to the averments of the pursuer in this case, it is convenient to ask three questions. Firstly, when did the loss occur? I have already noted the answer to that question: the pursuer avers that the loss occurred when Mr Wilson instructed the transfers of funds to accounts in the name of Mr Levene and Mathon.
[29] Secondly, when did the pursuer become actually aware that the loss had occurred? In my opinion, the pursuer’s position is once again clear: neither it nor the liquidator became so aware until receipt of the email from Mr Wilson in April 2012 advising that the funds had been transferred to those accounts. Whether any individual whose state of mind could be attributed to the company became so aware at any earlier date would, in my view, be a matter for proof.
[30] Thirdly, when, if different, could the pursuer with reasonable diligence have become aware that the loss had occurred? Or, putting the question in the context of the case, has the pursuer averred circumstances in which it could not, with reasonable diligence, have become aware more than five years before November 2014, that the funds had been paid to accounts in the name of Mr Levene and Mathon, and not to the four SPVs? In my opinion, it has not. As was pointed out by Millett LJ in Paragon Finance plc v D B Thakerer & Co [1999] 1 All ER 400 at 418, a case concerning an English limitation statute, the question is not whether the pursuer should have become aware sooner but whether they could with reasonable diligence have done so. By the end of 2007 all of the directors of the pursuer were in possession of information from its auditors – and, indeed from Mr King himself – that a fraud had, at the very least, been attempted. The auditors had issued a qualified opinion and indicated that further investigations would take place. The pursuer’s averment that “all avenues of enquiry were considered to have been pursued by [the pursuer’s] board of directors” does not address the question of whether the loss could, with reasonable diligence, have been discovered. It is not averred that the information obtained from Mr Wilson in 2012 could not or would not have been obtained earlier if he had been asked for it earlier. No explanation is offered for why this could not have been done by the company or, latterly, by the liquidator within five years after the transfers of funds in 2006. I conclude that the pursuer has failed to aver circumstances in which it could not, with reasonable diligence, have become aware of the loss until a date less than five years before the present action was raised.
Section 6(4)
[31] Section 6(4) provides, so far as material:
“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
(ii) 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.”
[32] In relation to the applicability of section 6(4), the pursuer avers that the defenders never advised either the company or the liquidator about a possible claim against them. An obligation to do so was incumbent upon them as an aspect of the overall duties they owed to the pursuer. Any period prior to the raising of this action should not be reckoned as part of the prescriptive period, due to the pursuer having been erroneously induced by the defenders’ conduct to refrain from making a claim. The error was induced by (i) sending the funds to a third party, undocumented and unsecured, and (ii) not advising the pursuer, Abacus or the liquidator at any time of “the true sequence of events which led to the loss of the HC funds deposited in the defenders’ client account”. During submissions, reliance was placed upon Dryburgh v Scotts Media Tax Ltd 2014 SC 651, in which it was held that the error of the sole director of a company as to the existence of a right of action against him by the company for breach of fiduciary duty had to be attributed to the company for the purposes of section 6(4), thereby preventing prescription from running against the company. The present case was said to be on all fours. The general purpose of section 6(4) was to excuse delay caused by the conduct of the debtor. Just as the director in Dryburgh owed fiduciary duties to the company, so here the defenders owed a fiduciary duty to the pursuer. That duty did not cease to be relevant when the defenders’ retainer fell: Mr Wilson was not thereby absolved of his duty to tell the truth to the pursuer about the destination of the funds.
[33] Counsel for the defenders referred to the observation of Lord Penrose in Adams v Thorntons 2005 SC 30, at para 36, that in order for section 6(4) to provide protection the creditor must be able to establish (i) that he was in error, (ii) that the error was induced in one or other of the ways identified, and (iii) that he has not become disabled from relying on the error by operation of the proviso. It was submitted that the pursuer’s pleadings did not satisfy any of these requirements. To treat the sending of funds to the wrong person as the “error” for the purposes of section 6(4) was to conflate the cause of action with the error for the purposes of protection from prescription. No words or conduct on the part of the defenders inducing inaction on the part of the pursuers was averred. Mere silence was not enough: see Johnston, Prescription and Limitation (2nd ed, 2012), para 6.126, applied in Trustees of the Rex Procter & Partners Retirement Benefits Scheme v Edwards [2015] CSOH 83, Lord Ordinary (Doherty) at para 207. It was not averred that the defenders had acted on behalf of the pursuer after 2006; no authority had been cited for the proposition that a fiduciary duty subsisted thereafter to inform the pursuer that it had a right of action against them. There had been no such duty. In any event, there was no explanation of why the pursuer could not with reasonable diligence have discovered the error.
[34] In my opinion the submissions on behalf of the defenders are well founded. The pursuer does not aver that Mr Wilson told it at any time that the funds had been transferred to the four SPVs: it is merely averred that he failed to tell the pursuer that the funds had been transferred to third party accounts. The “error” founded upon is therefore the transfer of funds itself. In my view, that is to confuse the ground of action with protection from prescription. Section 6(4) is concerned with an error that induces the creditor to refrain from making a relevant claim. The formulation presupposes the existence of the claim and requires something else to induce the creditor’s erroneous failure to instigate proceedings. No such error is identified in the pursuer’s case. I respectfully agree with the view expressed in Johnston and by Lord Doherty that by using the phrase “words or conduct”, the Act requires something more than mere silence on the part of the debtor.
[35] I also reject the proposition that the defenders were under a fiduciary duty, continuing after their agency had terminated, to inform the pursuer that a right of action might lie against them. As was pointed out by senior counsel for the defenders, the existence of such a duty would prevent the prescriptive period from ever starting to run, where the defender denied liability. That would be absurd. The present case is not analogous to the situation in Dryburgh, where the state of mind of a director in breach of fiduciary duty was properly to be attributed to the company of which he was sole director. The nature of the duty is different, and there is in any event no reason to attribute to the pursuer the state of mind of its former legal adviser.
[36] Finally, even if I had held that the pursuer had relevantly averred an error induced by the defenders’ words or conduct, I would have held that the pursuer has failed to aver circumstances in which it is not disabled from relying on the error by the operation of the proviso to section 6(4). For the same reasons as I have held that the pursuer has failed adequately to address the issue of reasonable diligence for the purposes of section 11(3), I would have held that it has failed to aver circumstances in which it could not with reasonable diligence have discovered the error before the claim was extinguished by operation of prescription.
Disposal
[37] Neither party invited me to allow a preliminary proof on the issue of prescription. I have, nevertheless given careful consideration to whether there are matters relevant to the operation of either section 11(3) or section 6(4) which ought not to be determined without inquiry into the facts. I have concluded that there are not. My decision is based solely upon the pursuer’s pleadings. The onus, as I have said, rests upon the pursuer to aver and prove circumstances entitling it to protection from prescription under one or other provision. In my opinion it has failed to do so. In these circumstances I shall sustain the defenders’ third plea in law and grant decree of absolvitor.