Axa Equity & Law Life Assurance Society Plc v National Westminster Bank Plc

JurisdictionEngland & Wales
JudgeMorritt,Brooke,May L JJ
Judgment Date07 May 1998
CourtCourt of Appeal (Civil Division)
Date07 May 1998

Court of Appeal (Civil Division).

Morritt, Brooke and May L JJ.

Axa Equity & Law Life Assurance Society plc & Ors
National Westminster Bank plc & Ors

R N Thomas QC (instructed by Norton Rose) for the appellants.

Charles Hollander QC and T Adam (instructed by Barlow Lyde & Gilbert for the respondent.

The following cases were referred to in the judgment of Morritt LJ:

Arab Monetary Fund v Hashim (No. 5)UNK [1992] 2 All ER 911

Bankers Trust Co v ShapiraWLR [1980] 1 WLR 1274

Mercantile Group (Europe) AG v AiyelaELR [1994] QB 366

Norwich Pharmacal Co v C & E CommrsELR [1974] AC 133

P v T LtdWLR [1997] 1 WLR 1309

Panayiotou v Sony Music Entertainment (UK) LtdELR [1994] Ch 142

RCA Corp v Reddingtons Rare RecordsWLR [1974] 1 WLR 1445

Société Romanaise de la Chaussure SA v British Shoe Corp LtdUNK [1991] FSR 1

Procedure — Evidence — Jurisdiction to make order for discovery against non-party — Whether investors had claim against auditors as responsible for listing particulars — Whether third parties mixed up in alleged tortious acts — Whether order for discovery would infringe “mere witness” rule — Financial Services Act 1986, s. 150, 152.

This was an appeal by investors from a judgment of Rimer J refusing to make orders for discovery against among others a company and two banks which lent to it.

The company, Resort Hotels plc, owned and managed hotels. The banks were the principal lenders to the company and its auditors were Coopers & Lybrand. In 1991 the company made a public issue of debenture loan stock in which the plaintiffs invested. Coopers were instructed to carry out certain works in connection with the listing particulars, including preparation of a working capital report and work in relation to a statement of indebtedness and extracts from the company's audited financial statements. In 1993 the company defaulted in payment of the interest due on the stock and in 1994 it went into administrative receivership. The managing director from 1989 to 1991, F, was subsequently convicted of a number of offences of knowingly making misleading, false or deceptive statements and of forging or falsifying documents. During F's trial, criticisms were made of Coopers' work preparing financial information in that a bridging loan of £7m made by National Westminster Bank plc to the company did not feature in the working capital report. The criticisms suggested that the assets of the company had been overstated by at least £11m.

The investors issued a writ against Coopers seeking damages for negligence or breach of duty under s. 150 of the Financial Services Act 1986 in connection with the audited accounts and listing particulars. The investors then issued a writ against the company, the banks, F and his solicitors seeking discovery of documents in the possession of the defendants relating to the preparation by Coopers of the company's accounts and the listing particulars for the purpose, it was said, of establishing whether a case could be brought against Coopers, who were subsequently joined as a defendant at their own request and objected to the relief sought.

Rimer J refused the discovery application holding that since the investors had identified Coopers as alleged wrongdoers and had issued a writ against them and the defendants against whom they sought discovery were, in principle, compellable to give evidence at any trial, the discovery order sought against them infringed the mere witness rule explained by Hoffmann LJ in Mercantile Group (Europe) AG v AiyelaELR [1994] QB 366. The case did not fall within theNorwich Pharmacal Co v C & E CommrsELR[1974] AC 133exception to the mere witness rule. Rimer J considered the investors' claim under s. 150 of the Financial Services Act 1986 to be very weak. The investors appealed.

Held, dismissing the appeal:

1. It was arguable that Coopers were responsible for parts of the listing particulars under s. 152 of the 1986 Act. Consideration of the instructions to Coopers and the documents provided by them in the knowledge of the purpose for which they were required indicated a good prima facie case that the part of the particulars relied on as being false was authorised by Coopers. The information provided was factual and not advise given in a professional capacity so that liability could not be excluded by s. 152(8). There was also a good arguable case in negligence that Coopers were responsible for the statements relied on and authorised them. The investors were not purchasers in the market but subscribers pursuant to and, as they claimed, in reliance on the listing particulars.

2. It was possible for the investors to plead a good cause of action against Coopers. They had sufficient information to ensure that there was a trial of the case they sought to make against Coopers if they chose to do so.

3. The banks were not “mixed up in” the transaction from which the liability of Coopers was alleged to arise within the meaning of Norwich Pharmacal Co v C & E CommrsELR [1974] AC 133 and Mercantile Group (Europe) AG v AiyelaELR [1994] QB 366. An order for discovery against them would also infringe the mere witness rule.

4. The company was sufficiently mixed up in the transactions but the order sought against it would also offend the mere witness rule and for that reason should be refused. ( Norwich Pharmacal Co v C & E CommrsELR [1974] AC 133 and Mercantile Group (Europe) AG v AiyelaELR [1994] QB 366 applied.)


Morritt LJ:

1. By his order made on 2 February 1998 Rimer J refused the application of the plaintiffs (“the investors”) for orders for discovery of documents against, amongst others, National Westminster Bank plc, Midland bank plc (“the banks”) and Resort Hotels plc (“the company”). The application was not made in the course of a pending action pursuant to RSC, O. 24 but in reliance on the jurisdiction of the court recognised by the House of Lords in Norwich Pharmacal Co v C & E CommrsELR[1974] AC 133. The documents are required in connection with proceedings brought by the investors against Coopers & Lybrand for damages for negligence or pursuant to s. 150 of the Financial Services Act 1986 arising from their investment of £19.3m in an issue of 12.375 per cent first mortgage debenture stock, redeemable in 2016, made by the company in November 1991. Rimer J concluded that the orders sought did not come within such jurisdiction. The investors submit that the judge was wrong. Coopers contend that even if the judge were wrong in that respect he was right to refuse the relief sought because the case the investors seek to make against Coopers is not sufficiently strong and the relief sought not sufficiently specific.

2. The company owned, operated and managed hotels, restaurants and public houses. During the relevant period down to the debenture stock issue the banks were the principal lenders to the company, Coopers were its auditors and the 14th plaintiff (“BZW”) its financial advisers. The directors of the company wished to convert short and medium term bank debt into long term debt at a fixed rate of interest and for a fixed period. Accordingly they determined to create and issue the debenture stock to which I have referred. BZW coordinated the preparation of the necessary listing particulars and entered into a placing agreement with the company. As agent for the company BZW instructed Coopers to carry out certain work in connection with the listing particulars. In summary that work included the provision of a working capital report and work in relation to a statement of indebtedness and extracts from the company's audited financial statements. Listing particulars incorporating the product of that work were duly registered with the registrar of companies and formed the basis for the application of the company that the stock to be issued should be admitted to the official list of the International Stock Exchange of the UK.

3. On 26 November 1991 the investors (other than BZW) subscribed £19.3m for the issue of such stock. Two years later the company failed; dealings in its shares were suspended in July 1993, it defaulted in payment of the interest due on the stock in December 1993 and went into administrative receivership in June 1994. In March 1997 Mr Feld, the managing director of the company during its financial...

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