The Insight Group Ltd and Another v Kingston Smith (A Firm)

JurisdictionEngland & Wales
JudgeMr Justice Leggatt
Judgment Date18 December 2012
Neutral Citation[2012] EWHC 3644 (QB)
Docket NumberCase No: HQ10X04309 & QB/2012/0296
CourtQueen's Bench Division
Date18 December 2012

[2012] EWHC 3644 (QB)

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

Royal Courts of Justice

Strand, London, WC2A 2LL

Before:

Mr Justice Leggatt

Case No: HQ10X04309 & QB/2012/0296

Between:
(1) The Insight Group Limited
(2) InsightSoftware.Com Limited
Claimants
and
Kingston Smith (a firm)
Defendant

David Halpern QC and Rupert Allen (instructed by Jirehouse Capital) for the Claimants/Appellants

Christopher Parker QC (instructed by Fishburns LLP) for the Defendants/Respondents

Hearing date: 30 November 2012

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.

Mr Justice Leggatt Mr Justice Leggatt

A. INTRODUCTION

1

Since the Limited Liability Partnerships Act 2000 came into force, it has become increasingly common for professional firms which used to practise as partnerships to transform themselves into limited liability partnerships (LLPs). Unlike a partnership, an LLP is a corporate body with a legal personality separate from that of its members. In the absence of agreement, an LLP has no liability to third parties for any contract made or wrongful act done by its members before the LLP was formed. A claim which is founded on such a contract or wrongful act (for example, a claim alleging professional negligence) must therefore be brought against the members of the old partnership, and not the LLP.

2

If a claim is mistakenly brought against an LLP which should have been brought against the former partnership, and before the error is recognised the limitation period for starting a new action has expired, can the error be corrected by substituting the former partnership for the LLP as the defendant to the claim? That is the principal question raised by this appeal.

The Proceedings

3

This action was begun on 11 November 2010. The defendant named in the claim form was Kingston Smith LLP ("the LLP"), a firm of chartered accountants. Prior to 1 May 2006 its members had practised as a partnership under the name of Kingston Smith ("the Firm").

4

The brief details of the claim given in the claim form state that:

"The Claimants seek damages for losses arising from negligent advice given and/or acts committed by the Defendant and its agents in the course of its duties as an accountant and professional advisor to the Claimants."

As appears from the particulars of claim dated 15 April 2011, almost all the allegedly negligent acts were in fact committed before the LLP had come into existence by members of the Firm.

5

On 11 April 2011 the claimants applied for an order to substitute the Firm as defendant in place of the LLP. Such an order was made the same day by Master Leslie without a hearing.

6

On 26 May 2011 the Firm applied to set aside the order. That application was heard in January 2012 by Master Fontaine who gave Judgment on 10 May 2012. By her Order dated 10 May 2012, the Master set aside the order for substitution. That left the LLP as the defendant. As the claimants accepted that they had no viable claim against the LLP, their whole claim was consequently struck out.

7

This is the claimants' appeal against the Order of Master Fontaine, brought with permission of Eady J.

The Claims

8

As pleaded in the particulars of claim, the second claimant, which is a subsidiary of the first claimant, is in the business of developing and selling accounting software. Until 1997 the second claimant was the owner of the intellectual property rights in the software ("the IPR"). In 1997, allegedly on the advice of the defendant, the IPR were transferred to Designsoft, a company incorporated in Nevis. Designsoft was wholly owned by Shamrock LLC, another Nevis company. Designsoft and Shamrock are together referred to in the particulars of claim as "the Nevis Entities".

9

Unknown to the claimants, the Nevis Entities were struck off the register of companies in Nevis on 1 November 1999 for non-payment of annual registration fees. Under the laws of Nevis a company which has been struck off may be restored to the register within three years. However, that was not done in this case. In consequence, on 1 November 2002 the Nevis Entities commenced a process of winding-up leading to their dissolution. There was a further period of three years during which the directors had power to transfer assets before the companies were dissolved. That also did not happen. On or about 29 April 2005, a corporate reorganisation took place under which the IPR were purportedly transferred by Designsoft to the first claimant. However, the purported transfer was ineffective (as it was made by the company and not the directors). At the end of the three year period, on 1 November 2005, Designsoft was automatically dissolved and the IPR became bona vacantia.

10

The particulars of claim assert claims against the defendant in two capacities. In each case the claims are formulated as claims for breach of a duty of care owed in contract and in tort.

11

First, it is said that the defendant audited the accounts of the second claimant for each financial year from 1999 to 2006. It is alleged that, in auditing those accounts, the defendant should have checked the status of the company which owned the IPR to the software which the second claimant was marketing, and should have advised the second claimant that the Nevis Entities had been struck off and that the IPR were at risk of being lost. It is alleged that the defendant was negligent in failing to do this and in giving unqualified audit reports on the accounts.

12

Second, it is said that throughout the same period the defendant provided "fiduciary or administrative services" which included administering the Nevis Entities. It is alleged that, as part of this responsibility, the defendant had a duty to ensure that the annual registration fees of the Nevis Entities were paid and, if the fees were not paid, to warn of the consequences. These services are said to have been provided, and the relevant duties owed, to the "Clients". The "Clients" are defined in the particulars of claim as the claimants along with an Isle of Man discretionary trust known as The Chatham Trust, which is said to have been the ultimate beneficial owner of the claimants and the Nevis Entities, and another company in the group called Cotterford Limited. The Chatham Trust and Cotterford are said to have assigned their claims to the claimants. The particulars of claim allege that the defendant was negligent in failing to give proper advice as to the status of the Nevis Entities from before they were struck off in 1999 until they were dissolved on 1 November 2005.

13

The losses claimed consist principally of the costs of recovering the IPR after they became bona vacantia, estimated at over £300,000, and an alleged residual diminution in the value of the IPR, estimated at between US$500,000 and US1 million as at June 2010. There is also a small claim, estimated at £15,000, for the costs of the ineffective reorganisation in 2005.

The Impact of the Limitation Period

14

The particulars of claim thus make allegations of negligence which span a long period, from 1999 to 2006. It is clear that by 11 April 2011, when the order substituting the Firm for the LLP as the defendant in this action was made, the limitation period had expired for starting a new action in relation to some of the claims asserted in the particulars of claim.

15

Under the Limitation Act 1980 (sections 2 and 5), the limitation period for actions founded on tort and contract is in each case six years from the date on which the cause of action accrued. In the case of an action founded on contract, the cause of action accrues when a breach of contract occurs. A cause of action founded on the tort of negligence, however, does not accrue until the claimant has suffered loss as a result of the negligent act or omission.

16

As at 11 April 2011, therefore, when the order for substitution was made, the limitation period had expired for suing on any cause of action which accrued before 11 April 2005. That included, at least, any claim founded on a breach of contract which occurred before that date.

17

However, it appears from the particulars of claim that, apart from the costs of the corporate reorganisation on 29 April 2005, no loss resulted from the alleged negligence of the Firm until 1 November 2005 when the Nevis Entities were dissolved and the IPR became bona vacantia. On this basis, at least arguably the right to sue in tort accrued on 1 November 2005 and the limitation period for bringing claims in tort therefore expired on 1 November 2011, almost seven months after the order for substitution was made. In addition, when the order was made, the claimants were still in time to claim damages for loss caused by any breach of contract committed after 11 April 2005.

18

The power of the court to add or substitute a party to proceedings is governed by Part 19 of the Civil Procedure Rules. It is common ground that for the purposes of substitution each cause of action must be looked at separately and that a party can in principle be substituted in respect of one cause of action and not others: see Adelson v Associated Newspapers Ltd [2008] 1 WLR 585, 605 at paras 63 and 66; O'Byrne v Aventis Pasteur MSD Ltd [2008] 1 WLR 1188, 1208 at para 63.

19

Different rules apply depending on whether or not the limitation period has expired. The requirements are more restrictive if the limitation period has not yet expired. Although that may at first sight seem paradoxical, it is explained by the fact that at that stage a fresh action can be started. If instead of starting a fresh action an application is made to add or substitute a new party in the existing action, CPR r.19.2 applies. Rule 19.2(4) states that:

"The court...

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