Heather Capital Limited (in Liquidation) And Paul Duffy As Liquidator Thereof Against (first) Levy & Mcrae; (second) William Macreath; (third) Andrew Sleigh; (fourth) Angela Mccracken; (fifth) David Mckie; (sixth) Alasdair Gillies; (seventh) Gary Booth; (eighth) Peter Watson; And (ninth) Alastair Goodman
| Jurisdiction | Scotland |
| Judge | Lord Doherty |
| Neutral Citation | [2016] CSOH 107 |
| Date | 22 July 2016 |
| Docket Number | CA207/14 |
| Court | Court of Session |
| Published date | 22 July 2016 |
OUTER HOUSE, COURT OF SESSION
[2016] CSOH 107
CA207/14
OPINION OF LORD DOHERTY
In the cause
HEATHER CAPITAL LIMITED (in liquidation) and PAUL DUFFY as liquidator thereof
Pursuer;
against
(FIRST) LEVY & McRAE; (SECOND) WILLIAM MACREATH; (THIRD) ANDREW SLEIGH; (FOURTH) ANGELA MCCRACKEN; (FIFTH) DAVID MCKIE; (SIXTH) ALASDAIR GILLIES; (SEVENTH) GARY BOOTH; (EIGHTH) PETER WATSON; and (NINTH) ALASTAIR GOODMAN
Defenders:
Pursuer: Lord Davidson of Glen Clova QC, Tariq; Shepherd & Wedderburn LLP
Defenders: Duncan QC, Brown; Clyde & Co
22 July 2016
Introduction
[1] The pursuer is a company (“HC”) in liquidation and its liquidator. The liquidator was appointed on 7 July 2010 by order of the High Court of Justice of the Isle of Man (HC was incorporated in the Isle of Man). The defenders are a firm of Scottish solicitors and the partners or former partners of the firm. In this commercial action the pursuer seeks redress from the defenders on a variety of grounds. The matter came before me for a debate. The principal issue debated was whether the court could determine without further inquiry that each of the obligations upon which the pursuer founds has been extinguished by prescription. The defenders also maintain that certain of the pursuer’s averments are irrelevant.
[2] The debate took up two and a half of the three days which had been allocated for it. Notes of argument had been prepared in advance. These were supplemented with oral submissions, and there was reference during the course of the debate to productions which had been lodged in a joint bundle. However, there was no joint minute relating to the productions and no agreement renouncing probation in respect of them.
The pleadings
[3] The following is a summary of the pursuer’s averments. Some of them are disputed. Since they include allegations of impropriety against several people it is important to emphasise that they are averments and not established facts. Thus, for example, Mr King has not been the subject of any criminal proceedings. However, for the purposes of the debate the pursuer’s averments require to be taken pro veritate.
[4] HC and its investors were defrauded by the diversion of invested funds exceeding £90 million (including £28.412 million which HC had entrusted to the defenders) under the guise of fictitious loans to various shelf companies incorporated in Gibraltar. The mechanism of the fraud was essentially the same in each case. A number of companies, owned and/or controlled by a director of HC, Gregory King, were incorporated in Gibraltar. HC then entered into credit facility agreements with those companies (the “first-level special purpose vehicles” (“first-level SPVs”)), each agreement being secured by a debenture granted by the first‑level SPV. Mr King created the false impression that the first‑level SPVs had themselves entered into loan agreements with other special purpose Gibraltar companies (the “second-level SPVs”) and that the loans to the second-level SPVs had been secured against heritable property. On the information available to it, HC recorded loans to the first-level SPVs in its books of account. In fact, the money was never paid to them. It was instead paid out to third parties, undocumented and without security, out of various solicitors’ client accounts in which it had been deposited. Mr King and Santo Volpe (a co-director of HC) were co-conspirators in the fraudulent diversion of HC’s funds to third parties such as Nicholas Levene or companies owned and controlled by him or by Mr King, in contravention of the strategy and principles set out in HC’s investment particulars.
[5] On 4 January 2007 £19 million was transferred from HC’s bank account to the defenders’ client account. On 24 January 2007 a further £9.412 million was transferred from HC’s bank account to the defenders’ client account. The pursuer avers that HC was the defenders’ client; and that esto HC was not their client the defenders nevertheless received and held the payments on its behalf. So far as HC was concerned each of the two payments was to be loaned to a first-level SPV, Westernbrook Properties Limited (“WBP”), once loan and security documentation had been executed; and WBP was to on‑lend it to a second-level SPV once a loan agreement had been executed and security over heritable property obtained. In fact the monies were never paid to WBP. On 9 January 2007 the defenders paid the £19 million to Niblick Investments SA (“Niblick”), a Panamanian company owned and controlled by Mr Levene. On 29 March 2007 the defenders transferred the £9.412 million to a firm of Gibraltar solicitors, Hassans, under the reference Rosecliff Limited (a company controlled by Mr King). In each case at the time of transfer the transfers were “undocumented, without security, and contrary to the strategy and principles set out in HC’s investment procedures”.
[6] Early in 2007 HC’s auditors (KPMG Audit LLC (“KPMG”), the Isle of Man member firm of KPMG International Co-operative) raised questions about the propriety and recoverability of loans by HC to the first‑level SPVs. In a memorandum dated 17 March 2007 KPMG identified concerns relating to the documentation provided in respect of loans by the first-level SPVs to second‑level SPVs. KPMG suggested that further work should be undertaken and that additional information was required.
[7] After KPMG had flagged up concerns Mr King and Mr Volpe compounded the fraud by taking steps, from March 2007 onwards, to conceal the true use of the funds, and to create the false impression that the fictitious loans had been repaid to HC between April and June 2007 by the first-level SPVs. Between April and June 2007 Mr King instructed additional funds to be transferred from HC to Mathon Limited (“Mathon”) and Bathon Limited (“Bathon”). Fictitious loans were created by Mathon and Bathon to give the appearance that those funds had been advanced to legitimate borrowers. In fact the funds were transferred to Cannons Law LLP (‘Cannons’). Cannons were instructed by Mr King to send payments to HC for amounts equivalent to the purported outstanding loans to (all but two of) the first‑level SPVs. Cannons later stated to HC’s board of directors and KPMG that they had acted on behalf of the first‑level SPVs when making the repayments. This gave the false impression that the loans to the first‑level SPVs had been repaid whereas in fact the “loans” (including the “loans” to WBP) were “repaid” by using HC’s own funds.
[8] The board of directors of HC investigated the concerns raised by KPMG. A board meeting was held on 6 September 2007. Mr King and two non‑executive directors (John Bourbon and Robin James) were present and the company secretary, Andrew Ashworth, and David McGarry of KPMG were in attendance. Mr King advised that Mr Volpe had executed loans to SPV companies where non-standard procedures had been followed, inadequate security had been given for some loans, and relevant accounting records had not been obtainable from Cannons. Mr King stated that the loans to the SPVs had been repaid in full in May 2007. Mr Bourbon sought to meet Mr Volpe to investigate matters but Mr Volpe refused to co-operate. Later the same month Mr Bourbon met with Joseph Triay of Triay & Triay, Solicitors, Gibraltar to try and obtain information about the loans made by HC to the first-level SPVs. Triay & Triay refused to provide access to the books or records of the first‑level SPVs without Mr Volpe’s consent. Following a resolution at a board meeting of HC on 1 October 2007 Mr Bourbon, Andrew Beeman (another non‑executive director), and Mr Ashworth attended a meeting with the Isle of Man Financial Services Commission (the “FSC”) to discuss “the issues”. On 8 October 2007, Mr Bourbon emailed Mr Triay asking whether he had contacted Mr Volpe to obtain authority to release the documents which he had requested at the meeting in Gibraltar. On 10 October 2007 Mr Beeman made a disclosure of suspicious activity to the Isle of Man Financial Crime Unit (“FCU”). The subject of the disclosure was Mr Volpe, and it narrated the efforts made by the non-executive directors to seek further information about the SPVs and the obstacles they faced from Mr Volpe and Cannons. The FCU acknowledged the disclosure on 12 October 2007 and indicated that it would carry out its own enquiries. This process did not disclose the fact that HC’s funds had been diverted to Mr Levene, Niblick, Rosecliff Limited or Mr King and that HC had accordingly suffered a loss. On 18 October 2007, the FSC wrote to the directors of HC and asked to be kept informed of the situation. On 26 November 2007, Mr King wrote to HC’s board of directors admitting that “an element of fraud” had been introduced into HC’s investment strategy. Mr King blamed the fraud on Mr Volpe (who had by that time resigned as a director of HC) and Cannons. Mr King falsely represented that the fictitious loans had been repaid.
[9] KPMG qualified their audit opinion in the reports and financial statements for the 16 month period to 31 December 2006 and the 9 month period to 30 September 2007, both signed by KPMG on 17 December 2007. KPMG recorded the additional steps taken to address their concerns in a file note in connection with the audits for the periods ending 31 December 2006 and 30 September 2007 (the “Completion Note”), which stated:
“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...
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