Heather Capital Limited And Another Against Levy & Mcrae And Others And Heather Capital Imited And Another Against Burness Paull Llp
| Jurisdiction | Scotland |
| Judge | Lady Clark Of Calton,Lord Glennie,Lady Paton |
| Neutral Citation | [2017] CSIH 19 |
| Court | Court of Session |
| Published date | 28 February 2017 |
| Year | 2017 |
| Date | 28 February 2017 |
| Docket Number | CA207/14 |
EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
[2017] CSIH 19
CA207/14 and CA208/14
Lady Paton
Lady Clark of Calton
Lord Glennie
OPINION OF LADY PATON
in the cause
HEATHER CAPITAL LIMITED (in liquidation)
and PAUL DUFFY (as liquidator)
Pursuer and Reclaimer
against
LEVY & McRAE and others
Defenders and Respondents
and
HEATHER CAPITAL LIMITED (in liquidation)
and PAUL DUFFY (as liquidator)
Pursuer and Reclaimer
against
BURNESS PAULL LLP
Defender and respondent
Pursuer and reclaimer: Lord Davidson of Glen Clova QC, Tariq;
Shepherd & Wedderburn LLP
Defenders and respondents (Levy & McRae): Duncan QC, Brown;
Clyde & Co (Scotland) LLP
Defender and respondent (Burness Paull LLP): Dunlop QC, C Paterson;
Messrs CMS Cameron McKenna LLP
28 February 2017
Prescription and the extinction of obligations
[1] In these two actions raised in 2014, the liquidator of Heather Capital Limited (HC) sues two firms of solicitors, Levy & McRae (LM) and Burness Paull (BP). The grounds of action include implement of trust obligations, and damages for alleged breach of contract, negligence, breach of fiduciary duty and dishonest assistance.
[2] The solicitors contend that, on a proper construction of the liquidator’s own pleadings and without the need for evidence, it can be seen that certain obligations have been extinguished by the passage of time in terms of the Prescription and Limitation (Scotland) Act 1973. Those submissions were successful in the BP action (a debate before Lord Tyre), and partially successful in the LM action (a debate before Lord Doherty).
[3] The liquidator reclaimed. LM and BP cross‑appealed. The cases came before the Inner House on 15 and 16 November 2016.
[4] This opinion focuses upon obligations which are subject to the 5‑year prescriptive period and the effect on the running of that period of sections 11(3) and 6(4) of the 1973 Act. In a separate opinion (with which I agree) Lady Clark rejects an argument that there are insufficient relevant averments of any loss suffered by the pursuer (HC).
Summary of conclusions reached
5‑year prescription: awareness of loss, sections 11(3) and 6(4)
[5] While it is possible that losses which were easily identifiable by HC may have occurred in 2007, leading to the triggering of the 5‑year prescription in 2007 (i.e. more than five years before the actions were raised in 2014: see paragraphs [58] to [61] below), this is a matter of dispute which cannot be resolved on the pleadings alone. In any event, HC’s averments of reasonable diligence (ie section 11(3) of the 1973 Act) and of error induced by the solicitors (ie section 6(4), with the proviso of “reasonable diligence”) are, in my opinion, sufficient to entitle HC to a proof before answer in each case, all pleas standing: see paragraph [62] et seq below.
20‑year long negative prescription: section 7
[6] As I have reached the view in each case that there should be a proof before answer at large, all pleas standing, I consider it unnecessary and premature for this court to give an opinion relating to the 20‑year prescription: see paragraph [80] below.
Ultimate decision
[7] As set out in the final paragraphs of this opinion, I propose that the court should recall the interlocutor of Lord Tyre dated 6 November 2015 and the interlocutor of Lord Doherty dated 31 August 2016; in each case allow a proof before answer at large, all pleas standing; remit to the Outer House to proceed as accords; and continue meantime the question of the expenses of the reclaiming motions.
Background: investment company affected by fraud
[8] HC is an investment company incorporated in the Isle of Man in 2005. On 7 July 2010, as a result of difficult economic conditions and cash flow problems, a liquidator was appointed. In February 2011, the liquidator received electronic documentation, and began a detailed review of the company’s affairs. At a later stage, he was assisted by staff from the Fraud Investigations and Dispute Service in Ernst & Young LLP. In 2012, the liquidator and his team were able to confirm that millions of HC’s funds were missing in circumstances suggestive of a deliberate fraud perpetrated by HC’s two executive directors, Mr King and Mr Volpe. Details of the mechanism of the alleged fraud can be found in the Opinions of Lord Tyre, [2015] CSOH 150, and Lord Doherty, [2016] CSOH 107. As summarised in an Isle of Man judgment, the scheme resembled a “Ponzi” scheme in that apparent repayments to HC were in fact funded in a circular way by HC itself: see paragraph 30 of the judgment of His Honour Deemster Corlett, Heather Capital Limited v KPMG Audit LLC, 17 November 2015.
[9] A third party, Nicholas Levene, was a participant in the scheme. He is currently serving a 13‑year sentence for fraud, false accounting, and obtaining money by deception. To date, no proceedings have been taken against Mr King or Mr Volpe. Both actions are at the stage of debate. No evidence has been led. Accordingly allegations against particular individuals (for example, Mr King and Mr Volpe) have not been established.
The court actions
[10] The liquidator seeks to recover and ingather funds. He has raised various court actions. The present actions in the Court of Session were raised on 23 October 2014 (with amendments to the instance in March/April 2015).
[11] The action against BP (“the BP case”) contains the following conclusions, read short:
1. Count and reckoning of BP’s intromissions from 1 March 2006 to 31 July 2006 with HC’s funds received into its client account, and payment of any balance due.
2. Failing count and reckoning, for payment of £7.3 million.
3. Alternatively for payment of £7.3 million.
4. Alternatively for declarator that BP, through Mr Scott Wilson (then a partner), dishonestly assisted Mr King in committing breach of his fiduciary duties owed to HC and in diverting from HC £7.3 million.
5. Expenses.
[12] The action against LM (“the LM case”) contains the following conclusions, read short:
1. Count and reckoning of LM’s intromissions from 1 January 2007 to 30 June 2007 with HC’s funds received into their client account, and payment of any balance due.
2. Failing count and reckoning, for payment of £28.412 million.
3. Alternatively for payment by way of recompense of £28.412 million.
4. Alternatively for payment by way of reparation of £28.412 million.
5. Alternatively for declarator that LM dishonestly assisted Mr King in committing breach of his fiduciary duties owed to HC and in diverting from HC £28.412 million.
6. Expenses.
[13] The summons in each case was served on the defenders on 23 October 2014. Each summons was subsequently amended (in LM’s action on 27 March 2015, in BP’s action on 28 April 2015) such that the instance reads “HC and Paul Duffy” (rather than “Paul Duffy as liquidator of HC”).
[14] The averments in Condescendence 5 in each action refer to the date of “actual knowledge of loss” as follows:
(i) The BP case: 17 April 2012, when the true destination of funds was confirmed by an e-mail from Scott Wilson, then a partner of BP.
(ii) The LM case: 31 August 2012, when the true destination of funds was confirmed by the production of the client ledger under an order in terms of section 236 of the Insolvency Act 1986 (although senior counsel for HC also accepted that the earliest possible starting point for the five-year prescription was arguably February 2011, when the liquidator received the electronic documentation: see too Condescendence 39; and (paragraph [19] of Lord Doherty’s Opinion).
[15] Each summons was met with inter alia a plea of prescription.
[16] In the BP case, the defender’s third plea is as follows:
“3. Any obligation incumbent upon the defender to make payment having prescribed in terms of section 6 of the Prescription and Limitation (Scotland) Act 1973, the defender should be assoilzied from the second to fourth conclusions of the summons.”
HC’s response is a plea as follows:
“3. The pursuer’s claim not having prescribed, decree should be granted as concluded for.”
[17] In the LM case, the defenders’ sixth plea is as follows:
“6. Any obligation on the part of the defenders to make reparation to the pursuer for breach of contract, fault or negligence or assistance or fraud having been extinguished by the short negative prescription, the defenders should be assoilzied.”
HC’s response is a plea as follows:
“3. The defenders’ averments being unfounded in fact, or alternatively sections 6(4), 7 or 11(3) of the Prescription and Limitation (Scotland) Act 1973 being engaged, their plea of prescription should be repelled.”
[18] Debates took place: first, a debate before Lord Tyre in the BP case; and secondly, a debate before Lord Doherty in the LM case. By interlocutor dated 6 November 2015, Lord Tyre sustained BP’s third plea and assoilzied BP from the second to fourth conclusions of the summons (leaving the first and fifth conclusions extant, with no further orders to date). In the LM case, Lord Doherty pronounced an interlocutor dated 31 August 2016 in the following terms:
“ … sustains the defenders 1st plea in law to relevancy to the extent of refusing to admit to probation the pursuer’s averment in article 39 of condescendence ‘Reference is made to section 11(3) of the Prescription and Limitation (Scotland) Act 1973’ together with the corresponding words and figures ‘or 11(3)’ in the pursuer’s 3rd plea-in-law; quoad ultra leaves all pleas standing and allows to parties a preliminary proof before answer on prescription…”
Lord Doherty granted leave to reclaim.
Timeline
[19] The following abbreviated timeline is taken from HC’s averments, productions, and some undisputed parts of the Opinions of the Lords Ordinary. There were no joint minutes agreeing productions: counsel referred to and relied upon some productions without objection, and the court was invited to do likewise. Counsel chose to present the LM case before the...
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